You, as an individual, can buy a small $100,000 slice of a Ginnie Mae.  China is one of the big buyers (higher yield than US T-Bills).  I am unsure of the sophisicated methods of reducing risk (they are there) and layering defaults. (One can buy the last xx% of value in a portfolio, so that mortgage losses hit those that hold the upper layers).

Hope this helps,

Alan

BTW, Housing bubble burst is good for New Orleans.  Should drive down cost of materials and we will get migrant construction workers.

I think his idea was that people in or around the international business community was more caught up in this thing than others.

(I think it was "Irrational Exuberance" by Robert Shiller.  I see that I talked about the book here back in March.)

If These Are Bubbles, Where Is All That Hot-Air Money Coming From?

November 25, 2006  by Katy Delay

Securitization is a fabulous tool invented by the financial industry to survive and evolve under existing banking regulations.  As they were first envisioned, these transactions had -- and still have -- great potential as a safety net to insure healthy lender risk.  Unfortunately, and probably through lack of experience, the financial community has let them evolve into a monstrous money-making machine. Here's how it works.

1.  A bank receives deposits, and its function is to lend that money out at a profit.  (We won't go into fractional reserve banking here, although this multiplies the problem when things go awry.  For now, however, let's just assume the bank lends a fixed multiple of what it takes in.)

2.  The bank (or other type of financial institution with access to funds) finds good borrowers with at least a decent credit score to whom they lend the money for purchases, say for a house, a car, or whatever the borrower fancies.

3.  Instead of following up on the repayments through their own loan department like they used to, the banks now transfer those loans to an agency that will fulfill this task.  At the same time, they package the loans according to the degree of risk, and then they sell the loans to the general marketplace.

4.  The buyers of these packaged loans can then buy "insurance" to cover the risk, from individuals and companies who want to assume that risk for a price (a piece of the interest action) and who are supposedly able to come up with the cash should a default occur.  So far so good.

5.  The bank now no longer has any loans on the books, so it is free to make a second set of loans based on the same fractional-reserve multiple of the deposits it holds -- but this time in effect using 100% of the loan-package buyers' funds to do so, i.e. so far, this is still a good thing; but as we'll see, it's good only up to a point.

6.  As you can imagine, this doubling, tripling or quadrupling of loans allows for an expansion of the lending industry; and the market pool of good borrowers (and the good borrowers' credit appetite) eventually maxes out.  To palliate this inconvenience, and since the bank is no longer shouldering the risk from its own loans, the bank now lowers the bar for borrowing so that those with a lower credit score may become borrowers. This expansion has presently extended into what some believe is dangerous territory; but this is only half of the problem.

7.  The other half occurs when the buyers of these packaged loans either do so with what is called leveraging, i.e. they buy on credit themselves; or they sell these loans to others who do the leveraging.  Hedge funds, for example, have sometimes been a source of unwisely leveraged funds that are not yet under industry control.  And hedge funds are very popular these days.

8.  According to Doug, much of the credit risk involved at this higher level is also "insured" in the same manner as in Stage 4, only this time the insurers never actually pay for the loans they are "insuring."  As with real "insurance," they only need to pay in case of default.  And this so-called "credit derivative" process is repeated over and over again, in effect allowing the loan-package insurers to borrow to the degree of the "insurance" market's willingness to take on risk.

http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=60572

 John

Ron Patterson

Some neighborhoods which had been undesirable in the past have been able to use their new boom-equity to give themselves makeovers, to bootstrap themselves a bit.  It would be sad to see those sink back post-boom.

A majority (slim perhaps) of homeowners have not moved in the last 6 years or extracted cash via refinancing their home. (One can refinance at a lower % and keep same balance, a prudent move).

They owe less today, are closer to payoff and have an asset that has appreciated substantially.  They are in better shape than 6 years ago.  Their debt/equity is about half what it was just 6 years ago.  Housing prices can decline 50% and they are still "OK".

"The other half" (probably <50%) bought at higher prices, with lower down payments or have used their house as an ATM machine.  A good % of these will be in trouble in a stable economy.  Add a downturn (caused by housing & energy) and the % in trouble climbs.  Add to these the "investment" buyers.

IMHO, it only takes 10% of the market either in foreclosure, panic sellers, or "have to" sellers to crater a market.  Perhaps less than 10%.  And if buyers get the idea that their own home is not the "American Dream", at least right now, buying pressure can be reduced.

Best Hopes,

Alan

The percent ratio remained constant, but the 'value' grew, making the owner that much richer. Or to look at it a bit differently, the debt grew, backed by an asset which had doubled in price while it depreciated in terms of its physical condition, and increased its owner's tax burden (real estate assessments went up, after all, as did the tax bill).

That 'value' is the source of my 11 trillion dollars, the difference in the worth of those houses between roughly 2000 and 2005 - magically, houses being lived in became ever more valuable for the simple fact they existed. And newly built houses became ever more valuable for the simple fact they were built, leading to more building of ever more valuable properties. America is a great country - nowhere else in the world does the real estate market work that way, unless it is in the grip of a speculative fever, which always ends in a speculative bust. As it did in Fairfax, VA in the later 1980s, for a non-3rd world example.

I think the expression for that sort of math then was 'stupid.' This was also when the Bush family was handling the S&L crisis (remember that? - corrupt banking practices leading to the greatest financial bail-out in history - how easily America can surpass itself these days, with minimal effort) - on both sides. That is, Bush I as the president who handled the clean-up, and a child or two of his with their fingers in the S&L self-dealing pie, before the RTC bail-out.

"Saw this, thought of you."

(That actually happened once. I heard it on Paul Harvey.)

Ron Patterson