It was another exceptionally unsettled week in U.S. financial markets, with interest rates moving higher in dramatic fashion. Nonetheless, for the week, the equity rally continued with the Dow adding 3% and the S&P500 increasing 2%. Economically sensitive issues surged, with the Transports jumping 8% and the Morgan Stanley Cyclical index advancing 5%. The Morgan Stanley Consumer index added 2%, while the Utilities dropped 2%. The broader market gained, with the small cap Russell 2000 increasing 3% and the S&P400 Mid-Cap index adding 2%. Technology stocks rallied strongly, with the NASDAQ100 rising 4% and the Morgan Stanley High Tech and Semiconductor indices jumping 5%. The Street.com Internet index surged 10% this week and the NASDSAQ Telecommunications index jumped 9%. Biotechs gained 5%. The performance of financial stocks, however, was unimpressive, with the S&P Bank and AMEX Securities Broker/Dealer indices posting only marginal gains. With bullion dropping $2.80, the HUI Gold index sank 8%. The dollar index added about 1% this week.
The "one way bet" U.S. credit market saw an abrupt change of fortunes this week, with stunned traders and investment managers watching a decent year evaporate into thin air. Two-year Treasury yields jumped 60 basis points to 3.04%, which Bloomberg stated was the "biggest weekly loss in at least 24 years." Five-year Treasury yields surged 60 basis points to 4.22%, with 10-year yields rising 56 basis points to 4.87%. The long-bond saw its yield rise 42 basis points to 5.29%, with its spread to Fed funds jumping 42 basis points to 329. It was a rout as well for mortgage-back and agency securities, with Fannie Mae benchmark yields and the implied yields on agency futures contracts jumping 58 basis points. Hedging mortgages and mortgage securities certainly played a key role, as selling only begets more selling with higher yields increasing the average expected life of mortgages ("convexity" selling) in an environment with a steep yield curve. One day a trader is buying call options on bond contracts to hedge mortgage prepayment risk, only to have a reversal in interest rates force the same trader to quickly dump his calls and aggressively purchase put options to protect against rising rates and lengthening duration. Tricky game.
There has also been large corporate issuance of late, and plenty more in the pipeline to be hedged. Aggressive selling also hammered the eurodollar market, with the implied yield on the June 2002 contract jumping 60 basis points to 2.82% and the December 2002 eurodollar contract surging 78 basis points to 3.86%. The benchmark 10-year dollar swap spread widened 7 to 67. It was an ugly week all around with simply stunning volatility, in what has all appearances of a bursting of a speculative Bubble. The most ominous aspect of this week's turn of events was reading numerous references to a "lack of liquidity." How quickly liquidity can vanish in such a distorted marketplace
In the past, we have noted how, individually, higher interest rates, wider spreads or a declining dollar are not overly burdensome for U.S. financial markets. In combination, however, rising yields, widening spreads and a sinking dollar can prove immediately problematic. After this week's significant jump in yields - with the general dislocation and resulting losses for the "leveraged speculating community" - the performance of the dollar takes on added importance. It is also worth watching agency spreads closely, with the presumption that this market has been a focal point for leveraged speculation. At the minimum, the sharp reversal in rates and extreme volatility are just more things the derivatives players have to worry about.
Canadian 10-year government bond yields surged 52 basis points to 5.39%, while European bonds suffered their worst week since December 1999. Benchmark UK 10-year government yields jumped 28 basis points to 4.66%, while 10-year German bund yields rose 24 basis points to 4.55%. Japanese bond yields rose four straight sessions, suffering their worst week since August. According to Bloomberg, Australian bonds suffered their worst week "since at least 1990," with yields on the benchmark 10-year government bond surging 54 basis points to 5.64%. Benchmark 10-year New Zealand government bond yields jumped 35 basis points to 6.38%. Argentine bonds were hammered again this week, with yields on the government's benchmark bonds surging 180 basis points to yield 36%.
From this week's Emerging Market Financing Report from the IMF: " the gross volume of fundraising by emerging markets on international capital markets fell sharply, with quarterly issuance at levels last seen at the time of the Russia/LTCM crisis. The fall off reflected the drought in emerging bond markets, with bond issuance more than halving from the previous quarter's levels, while syndicated loan commitments were essentially flat, falling slightly from the levels of the previous quarter. Equity placements continued to remain at depressed and negligible levels." The report stated that "net private market financing for emerging markets (is) set for the worst year since the early 1990s."
According to the IMF, total net new emerging market financing - bond and equity issuance, and bank loans - sank to $27.2 billion in the third quarter compared to $50.1 billion in the second quarter, and $50.3 billion for last year's comparable quarter. The situation has deteriorated markedly during the past four months, with new financings of $12.8 billion in July dropping to $8.7 billion in August, $5.6 billion in September, and only $1.5 billion in October. When we contemplate the complexities of the inflation/deflation debate, let's keep in mind that while the U.S. wallows in monetary excess, much of the world is starved for new finance. Larry Kudlow notwithstanding, sinking global commodity prices are not the consequence of a Fed failure to provide adequate liquidity. The dilemma has been that liquidity has had a distinct preference for playing where it perceives it can benefit from an inflationary bias (i.e. the U.S. credit market instruments prior to this week).
Nov. 12 (Bloomberg) - "Commercial mortgage lending rose 32 percent in the third-quarter, spurred by falling interest rates, according to the Mortgage Bankers Association of America. Lending on commercial properties such as apartment buildings and office complexes was $18.7 billion in the three months ended Sept. 30, compared with $14.1 billion in same period of 2000 and $17.7 billion in the second quarter, the trade group's survey of U.S. lenders found... 'Indications are that volumes for the fourth-quarter were approaching or exceeding pre-September 11 levels.'"
Nov. 12 (PRNewswire) -- E*TRADE Bank the nation's largest pure-play branchless bank, today announced its latest milestone: funding more than $4 billion in mortgage originations through E*TRADE Mortgage, one of the nation's largest online mortgage originators. 'This latest milestone of funding $4 billion in mortgage originations, within four months of reaching the $2 billion mark, demonstrates our momentum '"
Broad money supply (M3) jumped $37.5 billion last week, increasing the eight-week surge to a remarkable $240.6 billion. Savings deposits increased $24 billion and Repurchase Agreements jumped $15 billion last week. Money supply is up $813 billion year-to-date, 13.4% annualized over 44 weeks. While perhaps the thought is utter lunacy, it would be interesting if a newfound cautious U.S. Credit market began to watch monetary data. The Investment Company Institute reported money market mutual fund assets increased $36 billion last week to $2.302 trillion. Money market assets have surged $174 billion during the past nine weeks and $441 billion (27% annualized over 45 weeks) so far this year. The Mortgage Bankers Association's weekly mortgage application index increased 1.7% to a new record last week (dollar volume up 238% from one year ago). The index of applications to refinance increased 6% to a new record, now accounting for 79% of all new mortgages. The dollar volume of mortgage refis is up almost 800% from this time last year. Purchase applications dropped 10%, giving back almost half of the previous week's surge. Purchase application dollar volume is running about flat to year ago levels. After this week, it would appear that households have been a big winner in the mortgage refi game at the expense of financial intermediaries.
From David W. Berson, chief economist at Fannie Mae: "The surge in refinancings and record purchase activity this year will combine to create a new all-time high of $1.94 trillion in originations for 2001. This record won't last long, however, as the even greater refinance volumes projected next year will offset the modest decline in purchase activity to bring total originations to $2.10 trillion for 2002. It took 217 years for the mortgage market in the U.S. to get to $1 trillion in annual originations - it will take only another 9 years to get to $2 trillion." Fannie Mae's October numbers are out, with outstanding mortgage-backed securities growing at an annualized rate of 18.9% and its retained mortgage portfolio expanding at 12.3%. There is unprecedented growth in the pipeline, with a record $33.6 billion of "retained commitments" to buy mortgages during October (double September's volume). Perhaps originators have been "warehousing" new mortgages, up till this week enjoying the generous Fed-orchestrated spreads and hoping to garner some "free money" capital gains from the Fed's aggressive accommodation. They've been stung. It was a particularly painful week for such speculations, with a massive pipeline of mortgages to hedge. It would have been a nightmare as well for those hedging mortgage-back securities and other fixed income instruments. How Fannie and Freddie can hedge their $1.3 trillion dollar balance sheets is beyond our comprehension, but if they are ever forced to take aggressive hedging actions there is no doubt it will result in market dislocation. They're much too big, and one of these days we'd expect home prices would stop inflating, homeowners would have exhausted much of the "equity" available for extraction, and the average life of the GSE mortgage portfolios would lengthen significantly.
The Federal Home Loan Bank (FHLB) system this week reported that it expanded total assets by $26.3 billion, or 16% annualized, during the third quarter to $691.2 billion (on which it earned a paltry $440 million of net income for the quarter!). Total mortgage loans increased 40% in nine months to $22.6 billion. Total FHLB assets (generally advances to its 7,897 member banks to fund mortgage lending, and mortgage securities) have increased 98% during the past 15 quarters (1998 through Q3 2001), with total "Big Three GSE" assets ballooning almost $1.1 trillion (117%) over the same period to $2.03 trillion. "Big Three" total assets increased $85.5 billion (18% annualized) during the third quarter and $324 (19%) billion over the past year.
Freddie Mac released its third quarter housing price survey that included a quote from their principal economist Amy Crews Cutts: "Home prices in the third quarter grew at a much better-than-expected rate, bolstered primarily by very low mortgage rates. Housing is proving to be a good, sound investment even in these troubled times." Nationally, home prices appreciated at a 6.6% annualized rate during the third quarter, (down from the second quarter's 8.1%), with prices up 8.3% year over year. All eight regions continue to demonstrate rising housing prices, with homes in New England and Middle Atlantic posting annualized price gains of 12.5% and 11.1% for the quarter. Home prices in New England have gained almost 12% over the past year, with 5-year gains jumping to 56.3%. Twelve-month Middle Atlantic housing inflation is put at 10%, with 5-year gains of 38.8%. South Atlantic prices are up 9% y-o-y, 35.4% for 5 years. West North Central prices are up 7.7% y-o-y, 39.7% for 5 years. Pacific prices are up 11.2% y-o-y, 49.5% for 5 years. East North Central prices are up 6.1% y-o-y, 33.4% for 5 years. Mountain prices are up 7.4% y-o-y, 33.7% for 5 years. West South Central prices are up 6.5% y-o-y, 30.2% for 5 years. East South Central prices are up 5.9%, 27.6% for 5 years. It has been an extraordinary nationwide inflation.
From California's Fiscal Outlook report prepared by the Legislative Analyst's Office: "The current recession and declining stock market values are having devastating impacts on California's budget outlook, largely due to shortfalls in revenues after increasing 22 percent in 1999-00, revenues decelerated to 8% growth in 2000-01, are projected to fall 12 percent in 2001-02 - the deepest one-year decline in the post World War II period. This abrupt revenue fall-off is pushing the state into a major deficit for the first time since the early 1990s. Specifically, we estimate that: California will end 2001-02 with a deficit of $4.5, compared to the $2.6 billion reserve assumed in the 2001-02 Budget Act. The 2002-03 budget year faces a shortfall of $12.4 billion and potentially even more if the recovery we are assuming for the next spring is delayed." It is appropriate to recognize that it was the 30% plus two-year (1999-2000) surge in state revenues that set the stage for the unfolding crisis.
Over the past months, risk instruments throughout the U.S. credit system have come under increasing stress. We have witnessed a dramatic collapse in telecom debt, acute weakness throughout the junk bond market and corporate debt area generally, the forced withdrawal of many corporations from the commercial paper market, and festering problems in the enormous, if not transparent, market for CDOs (collateralized debt obligations) and other "structured" products. We have watched extraordinary price instability in a wide variety of markets, including those for DRAM, California electricity, natural gas, crude oil, Silicon Valley real estate, emerging market debt instruments, U.S. interest rates and global financial markets generally. Such destabilizing price volatility combined with surging credit losses creates a most treacherous environment for highly geared financial intermediaries (note the California utility debacle and the near collapse of Enron with its $64 billion of assets and untold off-balance sheet exposure). Of late, and despite extreme household mortgage borrowings, inevitable problems have also begun to surface in the key consumer debt area (Providian!), with negative consequences for the huge asset-backed security marketplace and U.S. economy.
But at the same time, myriad precarious developments in the U.S. credit system have, in terms of a systemic crisis, to this point been largely mitigated by the idiosyncratic nature of the contemporary U.S. financial system. Just as we saw the NASDAQ collapse ironically buttress the general boom throughout the U.S. Credit market, we have more recently witnessed that deteriorating conditions in risky debt securities only exacerbate the Bubble in Treasury, agency, mortgage-back, and top-tier corporate and asset-backed securities. It is critical to not misinterpret the seeming resiliency of the U.S. credit system as much more than a maladjusted mechanism that is being sustained largely by unprecedented money supply growth and mortgage lending excess. Don't mistake market dynamics in this most unusual environment for true underlying fundamentals. There is today an incredible amount riding on the continued extreme monetary expansion emanating from one particular misbegotten sector of the U.S. credit system - mortgage finance. With this in mind, this week's dismal U.S. credit market performance, and the drubbing in the agency market in particular, take on considerable significance.
There is no disputing that the Fed commands the U.S. Credit system, as it aggressively cuts rates and provides general liquidity assurances to the marketplace. Yet, the exorbitant nature of contemporary "reliquefication" processes is possible only with the extraordinary monetary expansion capabilities of the government-sponsored enterprises. A massive and enterprising "leveraged speculating community" has also secured an indispensable partnership with the Fed and GSEs, affording it the opportunity to profit from any hint of lower overnight interest rates. Financial crisis was transformed from a predicament inducing trepidation to an opportunity inciting "animal spirits." Indeed, "crisis" became a misnomer - a relic from a bygone, "pre-partnership" era. Financial historians will surely see this as quite an aberration; we view it as no less than a breakdown in the market mechanism. Traditionally, lower Fed rates would work to boost expectations for rising business profitability, stimulating monetary expansion through the process of heightened bank lending financing (now more profitable) corporate investment. The financial world has changed tremendously over this long cycle. In reality it's become borderline unrecognizable.
Today, the Fed's "magic" operates overwhelmingly through inciting consumer refinancing booms, fueling real estate inflation, and fostering additional speculative leveraging throughout the U.S. financial sector. We have always been very uncomfortable with these mechanisms, and our nerves have not been calmed or our concerns swayed by recent runaway excess. Specifically, these mechanisms are dangerously dysfunctional, as they repeatedly stoke and exacerbate Credit Bubble excess in the financial system as well as the economy. Moreover, we see little redeeming value created in the process, outside of fueling of a liquidity-driven stock market recovery. Firstly, the contemporary "reliquefication" process is largely devoid of stimulating effects to sound business investment, with business sector profits playing lowly "second fiddle" to speculative financial "profits." Secondly, enormous additional consumer debt (and continued over-consumption) is obviously unsound, and policies that so clearly exacerbate a conspicuous real estate Bubble are a case of central bank negligence. Thirdly, any monetary process that incites additional speculation and leveraging in the distorted and dangerously over-leveraged U.S. financial system is both inappropriate and, by the very unstable nature of "hot money" flows, destined for failure and, possibly, spectacular failure.
We have often contemplated the ramifications for the day when this protracted period of declining interest rates would have finally run its course. It is, after all, our contention that without the extraordinary monetary expansion resulting from the mortgage lending boom and related speculative "hot money" flows, the U.S. Credit Bubble would be left to face dire straits. A Credit system dependent on mortgage finance and leveraged speculation becomes acutely vulnerable to higher market rates. It is today, then, more than reasonable to consider the possibilities that the Fed is finally Hitting The Wall, simply having exhausted its wherewithal to further nurture the Credit Bubble. We may not be there yet, but we're getting closer. Even in the unlikely event of a speedy recovery for the Credit market, this week has imparted a heavy body blow. The market appears to have seen enough, going from liquidity and speculation-induced euphoria to perhaps fear of liquidity-induced consequences. Now that would be a sea change.
I am intrigued by Chairman Greenspan's response this week to the question, "Do you feel with the country in its current economic state that interest rate reductions are still a feasible method of boosting the economy?" Greenspan: "If I answered that in a way which you think you understand what I said, I made a mistake (laughs and more laughs from the crowd). Remember, the purpose of monetary policy is to address the structure of financial markets - that's what we do. And the fairly dramatic decline that the Federal Open Market Committee has initiated since the beginning of this year has very clearly had marked impacts within the financial structure. We have, for example, seen a major reliquefication of corporate balance sheets; there's been a huge increase in longer-term corporate debt repaying short-term liabilities which has essentially moved American business into a far better position to move forward once the uncertainties which I alluded to earlier start to come down. So the notion that people have that monetary policy changes one little notch and the economy goes up clearly has never been the case and indeed is not the case today. But all evidence that we can adduce does suggest that monetary policy is about as effective as it's always been given the changing economic structure which is reflected in very complex, changing models which we employ for evaluating monetary policy.
I may have missed something along the way, but I don't remember when the "purpose" of monetary policy became addressing "the structure of financial markets." What a "slippery slope" the Greenspan Fed has slid, with interminable interventions and manipulations fabricating today's distressingly grotesque "free market" financial system. So, is it now the Fed's call to address the market structure, which we read as picking and choosing what market segment it would like to benefit - today viewing it advantageous for the consumer to take on the significant additional mortgage debt that creates liquidity for corporations, having over-borrowed (for stock buybacks and often ill-advised spending) during the boom, to pay down short-term liabilities? And it is apparently the Fed's preference to reduce the income of prudent savers to increase the profits to those speculating on "spread" trades or other leveraged positions. Somewhere along the line, this has all run terribly amuck - making a mockery out of the concept of "free markets." Adam Smith's "invisible hand" is now just The Hand. Actually, I think I can read into Mr. Greenspan's New Age monetary policy "purpose" almost the makings of pathetic justification for what he must increasingly recognize as a momentous policy failure. This is Greenspan's "last hurrah" and there's going to be a lot of explaining to do
From his aggressive response to the 1987 stock market crash that set the stage for the late '80s junk bond and real estate fiascos, to the panicked policy response to the subsequent early 1990's bust, that then sowed the seeds for history's greatest leverage speculations, stock market manias, and economic Bubbles; to the extraordinary 1995 Mexico bailout that set the stage for the spectacular and regrettable speculative blow-offs in emerging markets including SE Asia, Russia, Turkey and Latin America, to the unprecedented 1998 LTCM/market bailout and "reliquefication" that incited one of history's most destructive Bubbles in the telecom/Internet/technology sector, to the Y2K nonsense, to this past year's panicked NASDAQ bust "reliquefication," the Greenspan Fed has been much too anxious to accommodate the financial markets. In each instance, the Fed chose to err on the side of over-stimulating the credit system and inflating the markets. In all cases, such operations were conducted as if there were no costs associated with reckless credit and speculative excess. The Greenspan Fed found it expedient to covet the "fast crowd," the aggressive non-bank financial intermediaries and leveraged speculators. And the greater the excesses, the more vociferous the propaganda espousing the New Paradigm, the productivity miracle, the technology revolution, and the efficiency of the U.S. financial sector. "Credit" became a four-letter word never to be uttered in public.
Whether they recognized it or not - and I will give Mr. Greenspan the benefit of the doubt in believing that, perhaps as time went on, he saw no alternative - the process regressed into mindlessly fostering the next larger Bubble imbued with only greater credit and speculative excess sufficient to "paper over" the losses and distortions from the inevitable collapses of previous Bubbles. This is well-known terrain, but the key point today is to recognize that we may now be swiftly approaching the end of the line. Our analysis certainly finds us in the late innings of "The Big One," with the current U.S. consumer/mortgage boom the last desperate gasp that will conclude this protracted and historic cycle. We are also not surprised that the Credit market has come to fear that the Fed has once again "overdone it." I hope this analysis proves incorrect, but when the mortgage/real estate boom runs its inevitable course there are simply no other potential Bubbles remotely of the dimensions necessary to sustain the Great Credit Bubble. This week as I read in the LA Times (and elsewhere) of the unusual dislocations associated with a virtual mortgage refi panic (with significant consequence for both the real economy and financial system), I recalled analogous circumstances over the years that proved seminal culminations of excess and, importantly, accurate harbingers of approaching market dislocations. Frenetic activity in the U.S. credit market in late 1993, spending and speculative excesses in Mexico in 1994, Thailand 1996, Russia 1997, Brazil 1998, and NASDAQ/tech 1999 quickly come to mind. If the current period proves a key inflection point for the mortgage finance Bubble, we have some very challenging times in store for the U.S. economy and financial system. Of course the Fed, Treasury and "powers that be" will do everything within their immense powers to try to subjugate these forces.
As I write this piece, I am struck by the parallels between year-2000's first quarter technology speculative blow-off and current wild excesses throughout the consumer mortgage finance area (at both the household and financial market level). While the technology Bubble had been expanding for years, the frantic period of "terminal" speculative excess actually came to pass concurrent with an abrupt deterioration in underlying business conditions. Today, the widening divergence between the degree of household credit excess and underlying consumer fundamentals is uncomfortably reminiscent of the severe dislocation of security prices from underlying technology fundamentals that preceded the bursting of the NASDAQ Bubble. We will not predict that the end is at hand, but it does appear quite close, especially after this week's surge in market rates. The signal is how outrageous it's all become and, at the same time, by how often we are being told that everything is just fine. A collapsing junk bond market and an abrupt withdrawal of new finance for the telecom/Internet sector ushered in the bursting of the NASDAQ Bubble. Will a similar waning of liquidity develop in agency and mortgage-back securities commence the bursting of the real estate Bubble?
Fannie Mae's Franklin Raines remains hard at work selling his notion of the doubling of total "residential investment" from "the current $11 trillion to between $22 and $25 trillion" by the year 2010. This week he was invoking the legacy of Abraham Lincoln's eternal optimism; last week it was promulgating economic theory as justification for an historic real estate Bubble. From Raines: "There is also a supply-side argument. A new book by economic theorist Hernando De Soto suggests that attracting more capital to housing is actually good for capital markets. De Soto's book, 'The Mystery of Capital,' asks a provocative question: Why has Capitalism triumphed in the West but not anywhere else? And his simple answer is that Western nations tend to operate with a more advanced, standardized system for assigning ownership and value to property. And it is against that value that capital can be raised. Let me read you a key passage from his book. De Soto writes that, 'the single most important source of funds for new businesses in the United States is a mortgage on the entrepreneur's house. These assets can also provide a link to the owner's credit history, an accountable address for the collection of debts and taxes, the basis for the creation of reliable and universal public utilities, and a foundation for the creation of securities (like mortgage-backed bonds) that can then be rediscounted and sold in secondary markets. By this process the West injects life into assets and makes them generate capital."
I do commend Mr. Raines' research team for surely burning the midnight oil to hone his sales pitch. As they undoubtedly recognize, it will be an increasingly tough sell. This does, though, bring back unfond memories of all the tiring propaganda as to the virtues of "venture capital" and "private equity financing" during the pinnacle of the technology Bubble. The always inventive Wall Street "analysts" and the GSEs can come up will all the clever cover they want, but they have quite a challenge in masquerading a Big Fat Ugly and Obnoxious Real Estate Bubble into the Muscular, Handsome and Debonair Prince of Capitalism. Besides, it is the very nature of finance that anything done in gross excess is dangerous. I do share Mr. Raines' view as to the critical role mortgage finance plays in the U.S. economy, and this is precisely why this real estate Bubble is so regrettable. The system's soundness should have been coveted and not exploited. Quoting Mr. Raines: "At the same time, we are still hearing voices suggesting that instead of supplying more capital to housing, we should supply less. Their argument is that by being so attractive to investors, housing is diverting capital from other, more productive uses. In the real world, however, increasing the flow of capital to housing is a good thing." We sure notice these individuals spending their days within the Beltway (Raines, Greenspan, O'Neill, etc.) curiously avoid using the word "credit." Mr. Raines erroneously uses the term "capital," when unprecedented mortgage lending excess has nothing to do with "capital," and everything to do with the parlous gross over-expansion of Credit. The bottom line is that Mr. Raines is repeating precisely the critical mistake made by so many technology executives - the extrapolation of the "terminal stage" of excess far into the future. The key difference is that Mr. Raines' misjudgment is not only impairing the U.S. financial system and further distorting its maladjusted economy, but it is also placing the U.S. taxpayer wrongly in harm's way.
Besides, I just never get that warm feeling that the folks at Fannie Mae are playing straight with us. The Wall Street Journal a couple weeks back exposed some of the games the company uses to spruce up its Credit performance - performance that it trumpets ad nauseam to the marketplace. We have as well always questioned their calculation of "loan to value" (their measure of protection against potential losses), where they liberally include credit insurance as collateral "value." In what is true financial alchemy, homeowners can now on an annual basis extract enormous "equity" from their mortgages with apparently no detrimental impact to Fannie's "loan to value." Quoting Mr. Raines: " the average homeowner has become more sophisticated about managing his home equity wealth as it grows, and our housing finance system has been making it far easier to do that. Where it used to take a month or more to refinance your mortgage, for instance, it now can take a matter of days. This has been great for the economy. And because property values have continued to grow, homeowners can tap their equity wealth without increasing their overall debt burden. For example, if you look at the average cash-out refi in our portfolio in the first half of this year, the borrower drew out $33,000 in cash and still lowered her loan-to-value ratio from 75% at origination, to 71 percent after refinancing." Like magic how can everyone always be a winner at this game? There are huge costs to pay for such egregious excess, and perhaps we began to see the beginning of this process this week.