Credit Crisis: All In Our Heads Or All Too Real?


Citigroup’s $18.1 billion-dollar writedown has to make you wonder what’s real and what’s fear. What am I talking about?

Okay, all these write downs that we’ve been hearing about over the last few quarters are all about the performance of subprime mortgages, or are they? There is still no real price discovery on these securities. We still don’t know if all these write downs will be realized over time.

I asked one of the better analysts out there if all the programs designed to save homeowners from default factor into this. I’m talking about the “teaser freezer” from Treasury Secretary Henry Paulson, where all these lenders are supposedly agreeing to freeze certain subprime teaser rates.

Then there's the “FHA Secure” program, where more people are being refinanced into FHA loans. And all these promises from all these lenders that they are working with all these troubled borrowers. Well, the analyst says that the loan modification programs are having a very marginal impact on the pricing of the securities precisely because of what I said before.

The plain fact is that nobody wants to buy the securities, and therefore the market prices are below the actual credit performance of said securities. Of course, maybe it is real. Just yesterday California mortgage lender Downey Financial reclassified $99 million of loans as NPA (non-performing asset) thanks to a loan modification program. They’re now classifying those loans that were modified as NPAs. This is a new indication that trouble in the California loan market is accelerating.

But while we’re talking about what’s in our heads, a writer to the blog asked an interesting question: Given that so much in the housing market is based on confidence (or lack thereof nowadays), if the economy goes into an official recession, does that put the kibosh on buyers getting back into the spring market, and therefore push prices down further and faster than expected? Does the psychological impact of a real recession just deepen the troubles that got us there in the first place?

It’s worth a thought.

Questions? Comments?