29.9.08

ANTICIPATING THE TROUBLES. My copy of John R. Talbott's The Coming Crash in the Housing Market has a purchase date of October 2003, and I'm writing Book Review No. 41 about it only now. He starts his analysis with a surprise: foreclosure rates were rising more rapidly than house prices as early as the 1990s. He then explains, in accessible language, the dynamics of a rational expectations hyperinflation as well as some of the third-party actors, including lenders and the non-governmental organizations whose behavior turns the housing market into something other than the textbook price-takers' market. The fundamentals -- increased leverage and government-insured mortgages that give risk-takers a put option -- are there for all to see. In 2003, few people would have believed this scenario, from page 75.
There will be no comparables in the neighborhood because nothing will be selling. Bankers will have to go back to very realistic valuations, probably based on square footage and historical pricing. Valuations will further be damaged by the banks' own activity as they dump foreclosed properties on the market at huge discounts to the mortgage amount. Banks really do not want to hold bad loans on their books, because it only reminds them of managerial errors of the past. They are infamous for buying high and selling low when it comes to foreclosures.
On the other hand, if Congress does not bail them out, they might have to wind up their portfolios in a less panicked way. And perhaps a failure of the Congress to act will resolve the uncertainty. But that might be asking too much. Mr Talbott notes the failure of the insurers, including the government-backed organizations, to do their due diligence. The easy course was to ride the bubble and try not to sneeze.

One chapter is titled "How Bad Can It Get?" See page 125.
Over $750 billion of mortgages outstanding are covered by private mortgage insurance. These are the riskiest of mortgages because the homeowner typically puts less than 20 percent down at time of purchase, thus necessitating the need [c.q.] for private insurance. And yet, only two PMI companies are of a size to withstand any sizeable losses -- AIG and GE Credit -- and they control only approximately 30 percent of the total market for PMI.
Oops.

The paragraphs that follow contemplate trouble at Fannie and Freddie. "[T]here is no pessimistic scenario I can describe that will adequately depict the ensuing disaster." (Page 127).

The subtitle is 10 Things You Can Do Now to Protect Your Most Valuable Investment.
  1. Decrease Your Exposure to Residential Real Estate.
  2. Move from a High-Priced Area to a Lower Priced Area.
  3. Manage Your Debt Leverage Better.
  4. Hedge Your Exposure to Residential Real Estate.
  5. Plan Now in Case of a Major Transition Event.
  6. Examine Other Contingency Plans.
  7. Maintain Adequate Insurance.
  8. Investigate Bankruptcy Protections Now.
  9. Become More Civically Involved.
  10. Reassess Your Life's Priorities.
Some of these will be harder to implement now that the shakeout is upon us, but these are worth reading.

(Cross-posted to 50 Book Challenge.)

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