http://us1.institutionalriskanalytics.com/pub/IRAMain.asp I'll paste the end of it the interview. Ends strong: The IRA: At least it used to be. The FT reported a while back that the 2006 production was the reverse, with borrowers defaulting on mortgages before credit cards or auto loans. Rosner: No, the mortgage still is the last thing to go into default. The borrowers we've see default already are those with no other resources. Where I think we see the next leg and what I am watching carefully now is that we are seeing the drawdown of committed but undrawn lines of credit by distressed borrowers who are taking cash out of the line to pay first their primary mortgage and then revolving lines of credit. At some point we reach a terminal period where they default on their credit card and then their primary mortgage. I'm not sure it does not go in the other order, but we'll see. That is the reason, I believe, that we've seen a little bit of a slowdown, a respite from a massive spike in defaults, because the borrower who is Alt-A and prime largely, even with the decline in home values, still has access to credit. Consumers do not give up spending of their own volition. They do so only after they have exhausted all other options. The IRA: Suggesting that we could be headed to a huge uptick in default experience in unsecured and mortgage loans in the not too distant future? Rosner: Yes, we will see the drawdown of HELOCs until they are exhausted, resulting in an eventual upsurge in defaults on mortgage-related and revolving credit. The IRA: It is funny you raise this issue because we have been watching the slow decline in Exposure at Default which we calculate for all US banks using The IRA Bank Monitor. There are only two reasons for such a broad, secular trend; either people are using available lines or banks are reducing exposure by cutting unused lines. Rosner: Right, it is pretty hard for a lot of the banks to reduce consumer lines, both from a contractual perspective and from an operations management perspective. I would be very wary of institutions that have HELOC exposure. For the time being, I would be less concerned with the credit card companies. And then there is the situation in commercial real estate, where the wheels are starting to shake and even fall off the wagon. The IRA: So let's go overseas for a second. We know you have to get packed and head back to the airport. Rosner: In the UK, we have already seen a 10% decline in commercial real estate values. And my contacts in that market expect to see a further 10% decline from there. In that context, when you hear reports of further new build in the US commercial market, that only confirms my belief that we will see our market fall as well. For the large international Basel II institutions, none of this is good news. The same global banks with exposure to the US residential and commercial markets also have exposure to the burgeoning problems in the Spanish real estate market, Irish housing problems, UK housing problems, and Italian housing problems. The IRA: So do we detect the first signs of interest rate ease in the EU? Rosner: Definitely. I think we are at the front end of the day when you want to be long the dollar and short the Euro. The Spanish mortgage market funds in the repo market, not via deposits. I think that at some point there is going to be significant tension in Europe because the Germans and the French are not going to want to finance Spanish mortgage collateral. This could be the catalyst for a crisis in Europe. Do I think that it will spell the end of the Euro? No. Do I think that it will create a period of uncertainty? Yes. The IRA: You mean that German and French banks will no longer want to finance Spanish real estate speculation for the benefit of UK retirees? Rosner: Yes, especially if you remember that the Germans are already going to be licking a lot of wounds. The good news is that the German Landesbanks have no more than 25% of their float to the public. The bad news is that the German federal government is going to have to bail out the state governments. The IRA: Some of our sources say that the Landesbanks are something like 5x the problems at UBS (NYSE:UBS). Rosner: Correct. My understanding is that there is one institution with about $50-60 billion in exposure and another has $80 billion. So there is no way that the German government will have sufficient bandwidth to help support the Spanish banks. The IRA: Maybe Spain becomes the next Iceland? Rosner: We should differentiate between Northern Europe and the rest of Europe. Where the rest of Europe moves west to get their exposures, Northern Europe mostly moved east. While they have significant exposures to problematic mortgage markets, they don't have the type of exposures to structured assets and so their exposures are not leveraged. The IRA: To change gears a bit, what is your reaction to the Paulson proposal? Rosner: As usual, I think the proposal is largely misunderstood. To me this is more about Paulson creating a legacy rather than expecting the regulatory reform agenda to move forward in an election year. The most glaring part that was missing was rating agency oversight. The rating agencies were at the center of the problem with structured assets and continue to be at the center of the problem. Either the SEC must be given new powers to regulate the rating agencies or we need a new regulator, but the silence on this count in the Paulson proposal was striking. The IRA: Forgive us if we are not surprised. Any final thoughts before you head back to Paris? Rosner: The housing market woes in the US will not be over before 2010, regardless of what legislative initiatives come out of Washington. The fundamental reason why we are having these problems in the US is that real wages and incomes have not kept pace with home prices since the 1960s and that's what drove demand for these affordability products. Unless the Congress wakes up and let's home prices correct so that we restore some balance between wages and affordability, this problem will remain for years to come. The IRA: That implies a 40-50% cut in home prices from peak levels and an insolvent US banking system. Rosner: Yes, long term trends in home prices suggest that we will revert to the peak levels of the previous cycle. That implies that we are going back to the pre-1991 peak home price levels. The IRA: Yikes. Then you agree with our view that the US government may be forced to take over some of the largest banks? Rosner: Yes, well, we won't call it nationalization, but in economic terms that is the substance of the situation. One of the striking comments I hear in Europe is that at least with Northern Rock, the Financial Services Authority in the UK screwed up the first time, but then admitted the mistake and publicly nationalized the bank. With Bear, Stearns, the US has nationalized the bank and appointed JPMorgan as conservator, but then US regulators tell the public and the Congress that it was not nationalization. The IRA: The Fed seems to be incapable of admitting that they screwed up, whether on structured assets or Bear Stearns. I've never heard anyone at the Fed admit, for example, that their active push to allow banks to migrate more and more business over the counter and off exchange has vastly increased systemic risk. Rosner: The difference between Fed's prior to the Greenspan and the Bernanke Fed is that the former did not see themselves as part of the President's Cabinet The IRA: Exactly, Bernanke seems completely co-opted by Paulson and the Goldman Sachs mafia that runs the Treasury. Both Bernanke and Geithner seem so weak and lacking in market experience that is almost sad to watch them testify next to banksters like Steel and Paulson. Rosner: Correct and that is a very dangerous path for the United States. The IRA: We'll leave it there. Travel safe Josh. Questions? Comments? info@institutionalriskanalytics.com
OK, but the affordability is the weak also in UK, Spain, or other countries as in US. As a conclusion from the discussion I see that there's going to be a GLOBAL HOUSING troubles. And GLOBAL FUNDING troubles. Anyway, I still think that Europe is somewhat better as the securitization market was smaller and thus artificial demand for 2nd, 3rd, ... house was smaller and house prices grew less rapidly. And for funding I also see Europe slightly better - few banks still fund themselves from deposits. But yes, the affordability is worrying!