Dissident Thoughts

DT commentary on the UK elections : I’m taking the bold bet that Tories will pull around 50-75 seats. There are seats where Reform is pulling 4x as many votes as the Tory candidate In one constituency Reform won a seat from the Conservatives with 17,000 votes compared to the Conservatives' 3,200. The only seat so far called for the Tories, Reform is coming in at #2 Is is possible this election will put the Liberal Democrats as one of the two major parties for the first time since 1910. There is a stain on Tory label. The more votes Reform wins, the more evidence we have supporting the idea that UK voters are ditching Tories for lack of execution on their 2019 mandate rather than the substance party platform from 5 years ago (Brexit, anti-immigration, protectionism). This is going to be good for the Dollar longer term. Live results: https://www.bbc.com/news/election/2024/uk/results

From @DissidentThoughts, Happy Independence Day to the USA! 🇺🇸 https://youtu.be/JYqfVE-fykk

Joe Biden should lead an insurrection https://t.me/marketfeed/509056

holy shit lol

Trump Would Put December Fed Cut In Doubt; Maybe Even Cause A Hike Former IMF Chief Economist Maurice Obstfeld said it would be hard for the Fed to justify a rate cut in December if Trump wins the November elections. In an interview with Market News, Obstfeld said the inflationary consequences of Trump’s ideas will cause the Fed to wait and see what the fiscal programme ends up looking like. So far, Trump has said he’d like to lower taxes, increase tariffs on all imports and significantly penalise Chinese imports. Indeed, Obstfeld told Market News that if Trump implemented all that he’s talked about, the Fed might need to even hike rates. https://marketnews.com/mni-interview-dec-fed-cut-doubtful-if-trump-wins-obstfeld

this is terrifying

Cheapest Consumer Financing Freddie’s new product would provide an easier way to homeowners to access the enormous home price appreciation seen in the past few years. While this product was approved for Freddie Mac, Fannie Mae would also likely follow a successful launch. Fannie is the other major government sponsored enterprise in the industry and holds a single family portfolio that is slightly larger than Freddie’s, so their offering could also potentially provide trillions in home equity lending. Given that 65% of Americans own their home, a robust home equity loan market greatly increases the availability of competitively priced loans to homeowners. Americans have historically been very open to borrowing, so this could lead to bigger spending booms and also bigger busts. Household wealth data suggest home equity loans would be particularly attractive to seniors, who have substantial amounts home equity and likely limited income. Note that Freddie suggests that the product could also lower the prepayments of Agency MBS, as some owners would choose a second mortgage rather than a cash out refinancing. The proposal has been approved but the product may take years to fully build out. 4/4

$1.8 Trillion In Home Equity Freddie’s new product could broaden the ability of homeowners to borrow against home equity and reduce the interest rates on those borrowings. Freddie was approved to purchase 20 year closed-end second mortgages, but only in cases where it already owns the first mortgage and not to exceed a maximum total LTV (loan-to-value) of 80%. This would begin the process of creating a robust secondary market for second mortgages. Lenders would be more willing to originate second mortgages when they can sell them to Freddie, who in turn can add a guarantee and sell them to investors. An increase in competition among lenders should also result in lower second mortgage rates, though the rates will always be higher than first mortgages because they are second liens (they carry more risk because, if the property is foreclosed upon, there may not be enough money left to pay off the second mortgage). Homeowners taking out a second mortgage would still keep their low rate first mortgage. Data from Freddie suggests that there could be a maximum of $1.8t in lending, though the actual participation would likely be much lower. Freddie holds $3t in mortgage balance with a LTV of 52%, implying their borrowers have around $3t in home equity against $6t in collateral. If they all took second mortgages to reach a maximum of 80% LTV, homeowners could access $1.8t in loans, which would create $1.8t in new money. The exact level of participation would likely depend on future interest rates, but in any case rates on second mortgages are much lower than interest rates on other consumer loans like credit cards. At the very least homeowners could save on interest expense by repaying their credit card balances using a home equity loan. Note that interest on home equity loans are tax deductible if the loan is used improve the home, though that requirement may be difficult to enforce. 3/4

Trapped Equity Homeowners have enjoyed a tremendous surge of over $10 trillion in home equity since 2020, but they have not been able to easily access it. Home equity can typically be accessed by taking out a brand new mortgage (“cash out refinancing”) or by taking out another mortgage in addition to the first. A cash out refinancing would require the old mortgage to be repaid with the new mortgage, which may be at a much higher rate. For example, a home purchased for $100 in 2020 with a 20% down payment that is now worth $150 today would have about $70 in equity. In a cash out refinancing the homeowner would take out a new mortgage at 80% of the home value. The $120 in proceeds would be split with with $80 going towards repaying the old mortgage and the remaining $50 to the homeowner. Cash out refinancing would be unattractive if the old mortgage was taken out at rates much lower than the new mortgage, and such is the case today when most mortgages predate the pandemic at low rates. Homeowners could also take out a second mortgage to access their equity, but that product has not been widely available. A second mortgage could be in the form of a revolving line of credit (“HELOC”), or a closed-end home equity loan. HELOCs are largely offered by banks, who have been increasingly stringent in part due to tighter regulations. HELOCs outstanding reached a peak of $600b in 2009 and have now fallen to just $250b. Banks and non-banks both offer closed-end second lien mortgages, but that market is also small. Second mortgages are not GSE guaranteed so they would have be securitized through the private label RMBS market, which evaporated after the 2008 financial crisis. Lenders are reluctant to make second mortgages in part because they cannot easily sell them. These structural impediments have limited the availability of second mortgages, but that may change with the approval of Freddie’s new product. 2/4