
Risky Mortgage Bonds Are Back and Delinquencies Are Piling Up - ninninhall
https://www.bloomberg.com/news/articles/2019-11-04/risky-mortgage-bonds-are-back-and-delinquencies-are-piling-up
======
H8crilA
Mortgage debt will probably not be a problem in this cycle. People have this
bias to remember most recent event, but it's rarely the same thing twice in a
row: [https://imgur.com/a/0dT7iHK](https://imgur.com/a/0dT7iHK)

Corporate debt may be:
[https://imgur.com/a/b54hMSg](https://imgur.com/a/b54hMSg)

And frankly with the amount of outstanding US govt debt and underfunded
pension & healthcare liabilities the USD may either get dethroned and devalued
or sent into the negative interest rates purgatory like Japan is currently
living in. Japan cannot possibly ever raise rates, at 2% rates 100% of their
tax take will go towards paying the interest on their 250% national debt.

Add to that the history of Smoot-Hawley and the general outlook of the 1930s
...

~~~
mc32
So if the USD becomes weak, who out there could be in a position to become
stronger? I don’t see any candidate. Euro growth is weak. CN bookkeeping’s
suspect...

~~~
landryraccoon
> CN bookkeeping’s suspect...

IMO Americans are biased to overweight this. It doesn't matter as long as
China can keep up appearances better than other countries for long enough.
Investors will happily invest in a bubble believing that they are smart enough
to get out before everyone else if things go south.

Bad bookkeeping doesn't keep the NBA and Activision from kowtowing to China, I
don't see why it would keep people from investing there either.

~~~
awinder
1\. Yeah plenty of non-Americans think this too, _maybe_ if you said
“westerners” it’d be defensible, but it’d still be wrong.

2\. The nba & activision are selling goods to China, or maybe they put a
little money into real assets to reach that audience. They’re not investing in
Chinese financial instruments which is what the entire thread is about

~~~
landryraccoon
If China has enough real money to bend the NBA and Activision doesn’t that
imply that the bookkeeping isn’t fake - CN’s success is real, not imagined?

~~~
mc32
No, it’s like a car dealership not extending credit to someone with bad credit
but who will gladly take a bank check.

~~~
landryraccoon
I don't see the distinction. If they have Activision, Apple, Tesla and Disney
as customers why wouldn't banks, financial markets and investors trust them? I
would argue they already do, I highly doubt China has trouble floating debt or
attracting foreign investment right now.

------
djrogers
FTA: "There are more than $27 billion of outstanding bonds backed by non-
qualified mortgages now, a small fraction of the approximately $10 trillion
mortgage-bond market. In 2007, there were around $1.8 trillion of bonds backed
by loans to non-prime borrowers."

I'm gonna need to see a lot more than a tiny fraction of investors / loan
makers dealing with non-QM bonds before I'd say that 2007-era silliness has
come back.

This looks a lot more like some banks filling in the gaps in the QM market
than anything else.

~~~
sp332
The crisis was caused by lying about the kind of risk hidden in collateralized
bundles of debt. That doesn't seem to be an issue this time. It's just about
the inherent dangers of lots of people moving in to homes they can't afford to
pay for.

------
api
I'm a founder and have been getting spammed hard-core lately for small
business loans. There are many companies offering 5-6 digit business loans and
revolving lines of credit to basically anyone who can fog glass, and there are
salespeople and spammers _pushing_ them. I'd say I average 2-3 e-mails or cold
calls per day. Feels like they're trying to stuff loans down my throat.

I've spoken to other founders and small business owners and they say similar.
I've also heard anyone who can fog glass can get a car loan.

It reminds me a lot of how people were being basically nagged and cajoled into
taking out huge mortgages in the early 2000s. There seems to be a lot of
demand again for debt mystery meat to make debt sausages.

~~~
blakes
Same experience here. Constant small business loan offers. Not as many as you,
mostly we get mail offers. At least 1-2/week.

~~~
H8crilA
Many people are warning about the growth in corporate credit, even Jerome
Powell admits that it's not rosy there. Fully 45% of BBB rated bonds (lowest
and largest in investment grade spectrum) should be junk rated today if judged
by leverage ratios alone:

Morgan Stanley, The Nature of the BBBeast
[https://www.sec.gov/spotlight/fixed-income-advisory-
committe...](https://www.sec.gov/spotlight/fixed-income-advisory-
committee/morgan-stanley-nature-of-the-bbbeast.pdf)

And then you have non-systemic but ridiculous things like Brex which issues
credit _on revenue data alone_. Revenue is meaningless, Moviepass had great
revenue. And those robocalls you're mentioning. Try a Google search on
"revenue based credit" on a mobile phone from the US and read what are the ads
saying ...

------
the_watcher
> Fitch says such documentation may offer only partial verification, and these
> borrowers could have unstable income because, for example, they own small
> businesses.

This sounds more like "small business owners are underserved by QM products
and more risk-tolerant investors are filling the void," much more so than the
"it's 2007 all over again" tone of the headline and parts of the piece.

~~~
toomuchtodo
Correct. Non-QM volume isn't substantial enough to be systemic.

------
julienb_sea
Investors knowingly chasing risk with these junky bonds is perfectly fine. In
2008, investors were defrauded by ratings agencies and bond creators who
masqueraded junk mortgages as gold plated, at massive scale.

------
aSplash0fDerp
Chasing yields in the age of efficiency is going to lead to another global
hangover that defies common finacial wisdom, guaranteed.

Business models that exploit consumers seem to be some of the only plays with
any movement or staying power during the current innovation wave, but
prosperity fueled by debt can only go so far.

We'll see how the "decade of sustainability" (2020-2030) pans out, but if
greed turns to desperation, its definitely going to get messier/wreckless/more
complicated.

------
aazaa
> The strength of the housing market has helped support the bonds for now.
> Home-price appreciation has slowed over the past year, but the average U.S.
> house value still rose more than 2% in August from a year earlier, according
> to S&P CoreLogic Case-Shiller data....

It's odd when articles like this don't specify whether the increase they're
reporting was inflation-adjusted or not. It makes a big difference. If not
inflation adjusted, then 2% represents almost no increase given the trailing
12 month CPI change of about 1.7%.

------
jfasi
> Lenders have bundled more than $18 billion worth of these loans into bonds
> this year that they then sold to investors...

Compare this to the ~$17 trillion of mortgage backed securities that existed
prior to the financial crisis. $18 billion is peanuts, and hardly a systemic
concern.

------
drocer88
[https://www.calculatedriskblog.com/2019/10/fannie-mae-
mortga...](https://www.calculatedriskblog.com/2019/10/fannie-mae-mortgage-
serious-delinquency.html) _" I expect the serious delinquency rate will
probably decline to 0.4 to 0.6 percent or so to a cycle bottom."_

Real story: problem housing debt near normal, takes slight tack upward.

------
rolltiide
Risky mortgages and delinquencies were only a problem because:

the lenders* themselves had borrowed too much

the lenders didn’t know they had borrowed so much

the ratings agencies were not judging the merit of the investments that
lenders had invested in

*by lender I mean the ultimate party reliant on payments from the mortgage borrower

much was done to add transparency and safeguards to that specific issue, so
just because lending standards are loose again doesn't mean there is systemic
incestuous exposure to losses and collateral calls to the world’s most
financially important institutions

happy trading

------
neonate
[http://archive.is/gz8zK](http://archive.is/gz8zK)

------
richardknop
I bought some gold today. Unrelated to this but I have recently decided to
have 10% of my portfolio in gold as a safe guard.

~~~
Vadoff
Gold/Silver also tanked with the 2008 recession though.

~~~
richardknop
My bet is on 10k gold after next recession. I guess I’m a gold bug. But it’s
still only 10% of my portfolio so I’m well diversified imho

~~~
DuskStar
Why gold and not 22 LR or 556 NATO?

At least for me, there's not a huge gap between "all the other investments
crater to the point that my 10% in gold is useful" and "oh boy looks like
things are collapsing now", if that makes any sense.

~~~
richardknop
It’s a very risky bet for sure. But there is a very small possibility central
banks will go back to gold standard to instil confidence during a Great
Recession when markets fall by 50+% in a very short time.

~~~
DuskStar
Personally, I'd take central banks heading back to the gold standard as a
massive signal that things were about to get worse, not better. It'd be like
having your oncologist suggest enrollment in a phase-one study - they aren't
doing that because the outlook of a patient in a phase-one study is _good_ ,
but because the alternative is _worse_ , and now they're reduced to trying for
a hail mary.

~~~
richardknop
Gold is able to support entire global GDP and also growth. It all depends on
the price. With current gold price a return to gold standard would be a
disaster and would bring on the greatest recession of our lifetimes.

But at about 10k price gold standard starts to make sense. The idea is that
during the next big crises central banks will have no tools to use (we are
close to 0 in the US and in negative rates across the world) to support a
recovery so a radical move will be needed to bring back confidence in the
financial system.

A return to gold standard at a much higher gold price (calculated based on the
world GDP and GDP growth) would be a very drastic move central banks could go
for if situation got very dire but it might be the only choice they will have
since we haven't really normalised the financial system after the 2008 crises
and during the next crises we will be at 0 interest rates.

And if there is a choice between 556 nato rounds and going back to gold
standard and returning back to some sort of stability for the world economy,
gold would be much preferred to the anarchy and shots being fired.

~~~
DuskStar
I'm not saying that a return to a gold standard _couldn 't_ work - just that I
think it would be extremely unlikely to work. And I'd greatly prefer "move to
gold standard" over "society collapses", too. It's just I don't think I _get_
to choose.

------
RickJWagner
Make riskier loans to people without strong collateral

\--- OR ---

Have safer investments with mortgages

(It's one or the other. Which is best?)

------
Vysero
So should I pull out on all my stocks and stuff everything into bonds then?

~~~
maximente
since jan 2 2019 S&P 500 is up from 2510 => 3074 so if you read a doom porn
article and liquidated on 12/30 you missed out on insane growth spurt

this is no different. you have to factor in potential lost growth when you go
risk averse mode; it's against our loss aversion bias but has to be done when
thinking long term.

~~~
Vysero
I think the general trend has been an increasingly healthy stock market since
around 09 correct? That was 10 years ago, how much longer can this balloon
rise? Currently I am about 70/30 stocks/bonds perhaps I should just stay put
considering I really don't know.

~~~
maximente
don't take this personally, but you don't sound ready to invest in stocks.

losing huge amounts of money is going to happen. there's nothing you can do to
avoid it, other than not invest in stocks. the tradeoff is that it always
comes back higher.

being risk averse will actually cost you hundreds of thousands of dollars in
the long term. research cFIRESim and plug the numbers in yourself: the
portfolios most likely to survive long retirements with money left are those
with higher stock %s (i'm talking 90% plus).

you can't get enough growth with materially high bond %s to survive long
periods of withdrawing. satisfying your risk averse reptile brain will
actually generally lead to you drawing 100% of your savings down, which isn't
great if you aren't earning via something else.

if you are interested in material long term growth, e.g. enough to outpace
inflation, you have to accept the fact that you will lose enormous amounts of
cash virtually overnight. your other options are to lose your wealth due to
inflation/aversion to risk. it's regrettable, but that's the situation we are
in with targeted 2%+ inflation.

best of luck!

~~~
Vysero
So you just hope to god that nothing bad ever happens in your life that would
require you to pull your money out? That sounds incredibly foolish to me
considering the chances of something going terribly wrong in your life are
incredibly high. People get diagnosed with brain cancer every single hour of
every single day. Better hope it doesn't happen when the markets down I guess.

------
apta
Yet again, an interest based economy is going to end up collapsing and ruining
the lives of many.

