Is the RBA planning to monetise sub-prime mortgage losses?

First some definitions to get you on the page:

Here's the thing. If the RMBS market is the strongest it has ever been, why in the world does the RBA need to buy self-securitised mortgages from the banks? Can't banks just sell all their mortgage risk onto SPVs and through to institutional investors? Apparently not, and why? Because investors don't want to buy impaired, unrateable mortgages, they only want the good stuff.

So what happens to the "bad" mortgages if the banks can't repackage and sell them? They silently accrue on the banks balance sheet raising their weighted risk profile, impacting their reserve ratios and increasing their capital requirements. So, if they keep accruing they would ultimately reduce the banks lending ability, reducing the availability of credit and bring the whole housing Ponzi crashing down.

So what do they do? Change the rules, of course. They allow banks to "self-securitise" their unrateable and otherwise unsaleable mortgages and offload them to the RBA, which is set to establish a $300B, new, so called Committed Liquidity Facility in 2015 to "insure" this toxic RMBS paper that the banks need to offload.

So, here are a few questions:
1) Where does the $300B come from if not printed out of thin air?;
2) What happens to the losses associated with the already $200B of self-securitised RMBS packages ALREADY with the RBA? and
3) Just where did that $8.5B of Smokin' Joe Hockium go, if not to make good the losses already realised on the $200B worth of toxic RMBS at the RBA?

Some context:

I could be wrong, but I think this housing Ponzi has come to consume the entire economy as there is no alternative to Real Estate for conservative investors seeking yield and the government, RBA and Banks are all colluding together to ensure it doesn't crash in a heap.

In short, I reckon the RBA, as the RMBS buyer of last resort, is / will be monetising the sub-prime mortgage losses of the banks to ensure they can keep writing mortgages.

By the way, I did some analysis of the meaning of that $200B of toxic RMBS sitting at the RBA:

Does that mean that 4.21% of Australians are currently living in a house financed by the RBA?

Is that the new role of the central bank under the Libs? To support unsustainable house prices by financing and insuring the toxic mortgages of the banks so the banks can keep lending with impunity ... by monetising those toxic mortgages?

 

SURELY...Does this mean, if Australian big 4 banks go down, then we the tax payers will have to pay the debt that the Reserve Bank has on its books for for under water houses.

Another huge windfall for the banks.. No risks, more profits, lend like a drunken sailor? Another hot balloon bubble?

Regards Errol 43

Come on OC, Explain to us in laymans terms, what the hell is going on.

 

I sure hope the RBA is printing money out of thin air.
If the AUD falls to $0.60US, then my silver investment won't look so bad.

 

Well there's a couple of commentators in the USA that say that the Central Banks' role is to create tenants out of house owners. This is what's behind Sinclair and others calls to Get Out of The System. Being that your mortgage will inevitably default when the marker is called in by your bank. (lots of examples on the webs where people have been evicted by sudden bank claims - one on SS a while ago about the banks doing the same to commercial RE).

Thanks for the thread Gino.

 

errol,


No such animal back in the olden days, and I wonder at the need.

The banks balance sheets are showing good and improving 'Provisions for Bad and Doubtful Debts', one of the main reasons for the banks increasing profits. Those provisions are usually very conservative (over funded), and cover much more than ever gets to be needed. It is in fact a good place for the banks to 'hide' profits, and reduce tax.

I suppose (Big 4) some banks may make unwise loans sometimes, but in general those banks ARE conservative in their valuations and financing limits.

Like I said, I have no experience in this new thing. maybe it is just a part of the planning for SHTF Day, just in case, don't really know.

OC

 

I note that Steve Keen seems to have thrown in the towel on the ability of the housing market to significantly correct itself.

 

Finally! We've reached the new paradigm!
Sell your gold and stock up on shoeboxes in Paddington, people! This time it really WAS different!

 

Honestly, I don't know.

What I think though, is that they (APRA/RBA/BIS) have taken some lessons from the 2008 GFC sub-prime fiasco and have mapped out a process for ring fencing these sub-prime mortgages within the bowels of the RBA so they can be monetised (financially annihilated) as and when they blow up. It appears to be a big insurance system, where the RBA makes whole any sub-prime losses experienced by the banks in the RMBS repo process so there is no impairment of asset value.

It looks like they have kicked the can down the road ... but pretty damn hard.

 

If so, at least they are thinking of it all, and planning and preparing.

Like we are!

OC

 

This sort of thing is what I've been worried about with the Fed buying the $85 Billion/month worth of mortgage backed securities in the US. Because there are so many foreclosed homes in the US, who is the ultimate owner of them? The mortgage holder, after a bank who bundled it into a mortgage backed security, a security of which the government now owns? Ultimately the end game is the Federal Government becomes the largest landowner in the country - paid for on the backs of future taxpayers labour, to be distributed to whichever client the government decides is most worthy.

And if it's happening here, how many houses will Canberra or the Reserve Bank ultimately own? Can they all be knocked down and Soviet apartments be built in their place (extreme outcome of course).

 

Yes, that is what I thought also.

On one level, it might protect Australians from bail-ins and the like, but on another level, they are really hurting the prudent and cautious people out there who don't want to gamble in a housing casino or who aren't "in the market" yet, don't understand the manipulations or who are still too young to participate.

Unless one is a big believer in central planning, then you have to think that the more they meddle the worse they will ultimately make it.

I listened to Tony Delroy on ABC radio last night and he was conducting a talk back session with a financial advisor. One lady called in to complain about the impossibility of living off her savings now with an ever diminishing interest rate. She was lamenting the fact that she was being forced into risky investments to find yield against her will. Another act of state violence against the individual.

 

Actually I think that under the repo arrangement, the banks are obliged to buy back their previously self-securitised RMBS packages, at a marginally higher price. However, the CLF will make them whole on any losses.

edit: You are right though. It appears to be another form of Quantitative Easing doesn't it.

Here's a Zerohedge article that got me thinking about what the heck is going on.
http://www.zerohedge.com/news/2013-...dow-banking-self-securitization-central-banks

 

Gino,


"She was lamenting the fact that she was being forced into risky investments to find yield against her will."

The lady is very unwise!

OC

 

I think you mean that she is unwise not to willingly yield to a greater force. Perhaps so.

Speaking of a greater force, I just sized up the significance of the $300B CLF of the RBA to support the sub-prime mortgage market in Australia and it is in effect ($300B in a $1T economy) around 30% of the size of the national economy.

That is, the RBA is committed to monetising the sub-prime mortgage losses of the major banks up to 30% of the size of the total economy. Just like that. And just like that they could increase that to 40%, 50% or more as it suits them.

Who voted for that?

Edit: But wherein lies the wisdom in action? A similar question, I guess, to wherein lies the wisdom in action if one is getting raped?

 

I believe that the RBA knows what is coming, and preparing for it.

SHTF Day will need instant action.

JMO



OC

 

Gonzalo Lira has played this scenario out in his Strategic Planning group, based on comments slipping from the mouths of current Central bankers and how it has played out in the past.

SHTF Day will be on a Thursday or Friday
Action will occur over the weekend
Reaction from the public will happen Mon/Tues when they realise the real world affect of these actions

 

GL has a new post on his site about every 3 or 4 months.

 

Yeah.. he's almost exclusively moved his focus to his subscription only; "Strategic Planning Group".
was no point posting a link as no one could open it here

Very rarely posts for "free" these days

 

The size of this CLF is staggering .. . $300B ... and the more I think about it the more mind-boggling it becomes. For instance, it equates to:

=> $12,875 per person (in Australia); or
=> $19,736 per person of working age; or
=> $25,862 per "working" person ; or
=> $30,456 per non-government employee.

Some impressive numbers.

Edit: I was prompted to consider the likelihood and impact on the sub-prime sector of a significant credit/deflation event from this discussion.