Saturday, August 11, 2007

We're Nowhere Near the End of This

OK -- the week is over and it's time to

1.) Look back on what happened,
2.) Try and figure out what might happen.

What happened

Bottom line: there are a ton of problems in the credit market that aren't going away anytime soon. The main reason for that comment comes from Countrywide Financial's report on Thursday. Countrywide is the largest mortgage lender by volume. That means they have a ton of stature and clout in the market. The problem is simple: they can't find liquidity for their mortgages right now. They had to place $1.8 billion of loans into their investment portfolio and devalue both investments by between 14% and 20% when the transferred those assets. The devaluation tells me that buyers are pretty scared about the whole mortgage mess right now.

Add to this the news that BNP stopped withdrawals from some of its funds a Goldman Sachs fund lost over 20% since the beginning of the year, Washington Mutual agreeing with Countrywide's assessment of the credit markets, and the central banks pumping liquidity into the market, and you have a recipe for increased volatility and concern.

And in case you thought that wasn't enough:

But, he adds, the full weight of resets on adjustable-rate mortgages have yet to been felt. From the beginning of 2007 through the middle of 2008, over $1 trillion ARMs will reset, many from low "teaser" rates. Then the extent of the declines in home prices and the financial fallout will be apparent, Magnus observes.

The news has continued to come out in a very negative vein. And it's the big players who are making the announcements. That is all the more concerning. When the mortgage mess first started in last 2006/early 2007 it was the smaller players making the announcements. While this was disconcerting, it wasn't earth shattering. Now the big boys are saying, "boy is it rough out there". That should concern everybody.

What's going to happen

Expect more of last week for the foreseeable future. Volatility will be around for some time. More funds are going to announce problems, deals will get shuttered, and blow-ups are possible. It's going to get nasty.