Mini-crisis for mortgage-backed securities has passed

I've never been a fan of Gretchen Morgenson's style of writing for The New York Times. Yes, she does report quite a number of useful facts, but she does it with a style that actually hides or misrepresents more than she enlightens. A good case in point is her latest article out today entitled "Crisis Looms in Market for Mortgages" which does educate the reader about quite a few of the ins and outs of the mortgage-backed securities market, but leaves out a lot of key facts, not the least of which is that she has come to the party too late and the actual mini-crisis has already passed. Sure, there is still quite a mess to clean up, but any potential for systemic risk is now behind us. Yes, there are plenty of critics who insist that the worst is yet to come, but you can always find such perma-bears in any kind of market, and a little bit of objective, fair, and balanced reporting would have made the article much more credible, although it would have then required a new title: "Mini-Crisis in Mortgage Market Has Passed."

She does make quite a few really good points, but then does a very poor job of tying them toegther to arrive at her conclusion that a big crisis remains looming.

It is indeed true that there was a speculative "bubble" in residential real estate, with quite a number of people being given credit that they simply didn't deserve. That form of lending is essentially over. Between the Federal Reserve, Freddie Mac, and others, credit standards have been shifted from being ultra-loose or even nonexistent, back to normal. There may still be some pockets of ultra-easy credit left, but even Wall Street is giving those guys the cold shoulder.

What isn't true and isn't acknowledged in the article is that Wall Street still has quite an appetite for quality mortgages, and mortgage rates for qualified buyers are still quite readily available. The weekly survey by Freddie Mac finds the average 15-year fixed mortgage rate to be down to 5.86%. Sure, it is down because demand is down, and borrowers are not being granted as liberal credit, but all of that is a good thing, and the availability of the lower lending rate for quality borrowers is something that the article does not acknowledge. If Wall Street were really panicking, the mortgage rate would be sky-high, but obviously it isn't, and in fact it has declined over the past few weeks, further evidence that the mini-crisis has passed rather than a huge crisis looming.

The article indirectly acknowledges that the concerns over the mortgage problems at New Century Financial (NEW) are a month old, yesterday's news, hardly the criteria that should be used for a "looming" crisis.

One important fact that the article fails to mention is that nobody even needs these so-called "lenders." They don't really "loan" money in the traditional sense, but are primarily intermediaries between the borrowers and the ultimate sources of the money being loaned. In other words, their focus is origination of mortgages. They got into problems because they got greedy and decided to actually hold some of the MBS bonds for extra profit. Wall Street firms made the same mistake, but on a relatively smaller scale. Then they also got hit with bad mortgages that were pushed back to them by Wall Street and other holders of the MBS bonds. The important thing to keep in mind is that traditional banks are also in this new mortgage origination business. The non-bank "lenders" are simply another form of competition and, frankly, there have been too many competitors chasing a limited amount of business, so problems arose. Weeding out so many of these ecess and weak competitors will simply leave us with a much more healthy mortgage origination business, one that traditional banks will be comfortable with and one which Wall Street will be more than happy to do business with and continue to package quality mortgages into MBS bonds that pension funds and insurance companies and hedge funds will be more than happy to invest in. This is not a recipe for a "looming" crisis. This is simply a rational adjustment phase after a period of irrational excess.

The financial system is still awash in liquidity, which actually prevents anything more than short mini-crises, a fact that the article does not mention.

The tone of the article suggests that if housing prices were to decline, any crisis would be magnified. What nonsense. Lower housing prices would simply increase the buying opportunities for borrowers for whom high prices were previously an obstacle. Equilibrium will be reached between supply and demand. That is a good thing and is the opposite of a crisis.

A fatal flaw with the article is that its central thesis is that housing is like the tech stock boom and bust of 2000. Sure, there are some parallels, but the existence of some parallels does not imply that all aspects are identical. Put simply, any purchase of a tech stock was by definition speculation, whereas for housing only a subset of purchases were purely speculation. People don't buy tech stocks to live in them or even to live off their dividends. Sure, people would like to see the value of their homes appreciate (except when it comes time to paying taxes), but the primary "value" of a house is as a place to live. Whereas with tech stocks there is no price level where true "value" can be firmly established, even the average homeowner appreciates the fact that for given credit standards, there is a limit to the quantity or quality of housing that they can afford. You don't buy so many "shares" of a house, but rather you decide which house you can afford to buy.

It is true that quite a number of Wall Street firms have gotten burned and taken profit hits due to their freewheeling participation in the MBS bond market, but that is all yesterday's news and mostly been resolved. Sure, there is more mopping up to do, but Wall Street's appetite for deals is just as insatiable as it ever was.

If anything, the key fact missing from the article was the lack of an acknowledgment that our financial system is far more robust than it was, say, back in 1998. If there was really going to be a big-deal crisis in the MBS market, it would have already happened, probably months ago.

Another fact that the article failed to acknowledge is that the people who actually manage the mortgages are increasingly sensitive to defaults, so they have an incentive to do "workouts" where they may relax onerous conditions on existing mortgages (e.g., limiting rate adjustments) to actually allow the borrowers to make good and avoid default. In today's housing market, there is less benefit to foreclosing on technicalities. To be sure, we are going to see ongoing foreclosures, but there is no evidence any massive wave of foreclosures to come. The article commits the journalistic sin of speculating on the future rather than focusing on balanced reporting and objective analysis.

Management at The Times is probably thrilled with this slash and burn example of yellow journalism that does more to incite passion and readership, even if truth and facts and objectivity are casualties.

I much preferred reading the article back on March 1 by Jenny Anderson and Vikas Bajaj entitled "Soothing Words and a Stock Market Rebound" which does a fairly decent job of explaining mortgage-backed securities (MBS) that are used to finance many home mortgages, including how Wall Street itself participated in the financing of subprime mortgages using MBS bonds. That was a quality piece of journalism, the kind that Ms. Morgenson should aspire to.

-- Jack Krupansky