Check out the informative The Mortgage Lender Implode-O-Meter which tracks "mortgage lender going bust." Great Site
New bill targets appraisal, mortgage fraud (Rocky Mountain News).
Flipping Frenzy. Indeed! As documented by Flippers in Trouble which was recently freatured in the Sacraemento Bee.
Also check out Dr. Housing Bubble. Solid!
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Kudos to patch at the Southern Maryland Housing Bubble News blog for the mention in Business week!
ReplyDeletehttp://www.businessweek.com/
magazine/content/07_04/b4018055.htm
http://www.washingtonpost.com/wp-dyn/content/article/2007/01/13/AR2007011300029.html
ReplyDeleteKirstin Downey tackles the unsavory issue of option ARMs. some good regional stats in this one, finally.
I have a question that is sort of off-topic, but maybe someone knows the answer.
ReplyDeleteIn answer to the question of "why did lenders make these crazy, terrible loans?", the answer is often that they basically sold off the loans as quickly as they made them. This partially answers the question, but still leaves open the question, "but then who would want to buy those loans?" I suspect in part it's the governments of our trading "partners" who insist on having their central banks buy our debt in any amount to avoid buying our exports in eachange for theirs. But another thought also occurred to me- maybe the banks DO make money?
Let's say you are a bank, and finance the purchase of a property that is really worth $200,000 at an actual purchase price of $400,000. The buyer is a would-be flipper or other moron who is going to be making several years of interest-only payments, let's say at $1250 a month (I made that up). The buyer doesn't have to worry about any adjustment in rates for five years.
After five years, the buyer has paid something under $75,000 in real terms. Now let's say the buyer can't make the payments anymore.
The bank has loaned $400,000, and gotten back under $75,000. In a total housing crash, it can still sell the house for $200,000. That means it is still owed more than $125,000 on the loan. But if it works out some deal with the erstwile failed flipper to call off the hounds for a new loan of $150,000 (with the flipper still losing the house of course), then the bank could still walk away having made money on the loan.
I don't know how banks work, but I am wondering if something like that is possible, i.e., the bank making so much money on the interest payments + sale of home + bankruptcy settlement that it still makes money even as the flipper is ruined.
Thanks to anyone who waded through that.
A Redskins fan
Yes folks, step right up and buy now or forever be priced out. With friends like Lance who needs enemies? For your consideration:
ReplyDelete"The New York Times reported last week that “about 2.2 million borrowers that took out sub-prime loans from 1998 to 2006 are likely to lose their homes”. That translates into about 10 million people! But that, of course, is just the beginning of the bloodbath. The real fun begins when the whole, ugly ball-o-corruption starts to unwind and we get an insider’s-view of a system that is rotten to the marrow. The housing industry is saturated with fraud; the banks, the mortgage lenders, the Fed and the homeowners themselves have all played a major role in this sordid confidence game.
Consider this, for example:
In 2006 the Mortgage Brokers Association for Responsible Lending (MBARL) said that “Liar’s Loans” (those based on what you TELL the bank you are earning, rather than what you are REALLY earning) “shot up to an estimated 62% of mortgage originations…A recent sampling of 100 stated income loans by an auditing firm in Virginia (based on IRS records) found that 90% of the income statements were exaggerated by 5% or more, WHILE ALMOST 60% OF THE STATED AMOUNTS WERE EXAGGERATED BY MORE THAN 50%”!?! (Dan Dorfman New York Sun)"
joe "six pack" bought those crummy mortgages! the bank just bundled them and sold them off in traches to wall street. wall street then puts this slime into pension funds portfolios. the banks never intended to collect the money. they intended to sell the bundled loans...IF YOU DID NOT INTEND TO COLLECT ON A LOAN YOU WOULD LOAN MONEY TO ANYONE. the nightmare cometh!
ReplyDeleteAnon 3:21 --
ReplyDeleteA few questions:
1) How does 2.2 million equate to 'about 10 million people'? I don't think it means 2.2 mil per year.
2) What, really, does the ball-o-corruption unwinding mean to prospective homeowners? If I had to guess, I'd say it'd lead to over-regulation and it'd suddenly be very hard for people to get loans. That might be bad.
Anyway, I'm not sure, but I'd like to mention it.
Redskins,
ReplyDeleteGood analysis. One thing to keep in mind though is that one person's loan is another's investment. I.e., The $400,000 loan on a house eventually gets resold to an investor such as you or me. The investor might buy the whole loan or the loan might be bundled with other loans and sold in shares. Yes, some banks might hold these shares as investments, but they wouldn't necessarily even be the same loans that they wrote. From what I understand, in today's market (vs. one say 40 years ago ... i.e., prior to the underwriting standards that made loans "standardized" and thus like "currency" to be bought and sold), banks now make their money initiating and servicing loans. So, when a loan defaults, it's the investor that gets stuck ... BUT since most debt is bundled, bad debt ratios are already estimated and accounted for in calculating what the loan will make. The end result is that like credit card bad debt, risk is spread so widely that lacking a TOTAL default on all loans, default losses are so spread around to be almost painless. Think of it like insurance (because of the pooling aspect in today's market). A few Katrinas are not good for those who are the ultimate insurers (and btw it's NOT the insurance companies ... just like the banks don't hold the loans ...), but overall because risk is spread, the market can adjust as needed before anyone "goes out of business" and additional calculated costs just end up getting borne by new policy holders ... i.e., the new insurance policies reflect the newly adjusted costs of doing business. Carrying that analogy over to mortgages, if we have higher than anticipated defaults on the mortgages issued in the last 5 years (and the key is "higher than anticipated" since all other defaults are ALREADY priced in), then the result will just be higher interest rates or initiation fees for NEW mortgage takers. I hope this helps you understand why you shouldn't be expecting the banks (or even current investors) to feel any pain if foreclosures go up.
This is truly unbelievable!:
ReplyDeletehttp://washingtondc.craigslist.org/nva/rfs/262136810.html
Lance,
ReplyDeleteHowever, you have to think of where those bundled loans are going -- mostly institutional investors. If the default rate on these bonds go up, their value goes down, and most bond people are *very* sensitive to the risk of losing money. (Otherwise they'd buy stocks) So the spreading out of the risk also means that if things do go bad, the ill effects of it will be spread across the whole economy. (Makes sense - the upside of diluting risk also means more of the economy is exposed to it) So, while the whole economy may not be headed to the abyss, an extended downturn in the housing market, and an accompanying spike in the default rate, could lead to big downturns in the investment industry, perhaps overregulation (you can always count on congress to overreact when a few hundred thousand people lose their houses), and so on. I don't know enough about the issues with other countries assuming boatloads of US debt, but mortgage lenders (on the back end) are also in that business, and apparently the US debt business is looking kinda fluky now anyway, so... who knows? I have a feeling that if the downturn keeps up, which I think it will, there'll be some unanticipated effects of it somewhere.
kevinr said:
ReplyDelete"2) What, really, does the ball-o-corruption unwinding mean to prospective homeowners? If I had to guess, I'd say it'd lead to over-regulation and it'd suddenly be very hard for people to get loans. That might be bad."
Yep,if the default rate is going to be much higher than was anticipated when the loans were written, the result will be politically over-regulation and financially higher interest rates and initiation fees for future loans ... Making financed houses/condos more expensive and difficult to qualify for. However, I'm not convinced that the default rate will be higher than what was anticipated. The tools lenders have out there nowadays to separate the bad debt risk from the credit worthy borrowers are very sophisticated. It's my guess that those estimating the 2.2 million foreclosures that Robert keeps announcing are basing their estimates on past percentages of innovative mortgages that have gone bad. That would be incorrect since past innovative mortgages would have been issued without the benefit of the new screening tools. THAT and the fact that the economy keeps roaring away with unprecedented wealth creation for a vast swath of the population really means that the foreclosures will end up being few in the end ... Probably far fewer percentagewise than at any time in the past other than perhaps the last 5 years when foreclosures were impossible given that anything on the market sold within 2 days of going on the market. In sum, we should be fine. News 4 last night had a good segment about where house prices are going. By and large they agreed with us that it is out-lying areas and condos that have gone down in value. They also stated that house prices in the District (i.e., when you don't count condos) have NOT gone down but rather either stayed steady or even gone up year on year.
How exciting for you! Maybe you can afford one soon!
ReplyDeleteIf montly payments go up...
ReplyDeletePrices will go down.
Americans are spending far too much of their gross to afford more.
" the nightmare cometh! "
Aye, it doth.
Neil
Lance,
ReplyDeleteI believe you're under estimating the basic greed on the part of those writing and granting exotic loans. The system was keyed up to lend (give) money away practically for free. With so much cash sloshing around looking for a place to go, it was easy to sell mortgage backed securities of sub-prime borrowers.
Bond purchasers are starting to look more closely though at the make-up of the mortgages in the securities they purchase. This will begin to choke of the supply of cash (at least the turn over rate) to the sub-prime lenders. This whole process should, rightly, start to make it more difficult to get loans.
Rates don't necessarily have to rise, but it would be nice if bond purchasers started demanding much stricter lending practices on the mortgages that make up those bonds...
My $0.02.
mytwocents said:
ReplyDelete"Bond purchasers are starting to look more closely though at the make-up of the mortgages in the securities they purchase. This will begin to choke of the supply of cash (at least the turn over rate) to the sub-prime lenders. This whole process should, rightly, start to make it more difficult to get loans."
And who will this hurt? Those who have locked in their purchase price and loan? ... Or those waiting it out for a better price ... and in the process setting themselves up to get broadsided with expensive --- or even unavailable --- credit terms? They're not seeing the forest for the trees .. Price is everything to them.
"The tools lenders have out there nowadays to separate the bad debt risk from the credit worthy borrowers are very sophisticated. It's my guess that those estimating the 2.2 million foreclosures that Robert keeps announcing are basing their estimates on past percentages of innovative mortgages that have gone bad."
ReplyDeleteI'd love to believe you, but markets pros (stocks, bonds, hedge funds) are allegedly pretty smart guys with a lot of sophisticated tools. And they still take a bath every 10 years or so, on some thing or another.
I'm not saying what will or won't happen, but "these guys are smart" doesn't really
mean it's very likely they're right.
Lance,
ReplyDeleteIt will hurt sub-prime borrowers and first time purchasers who have not saved for a down payment.
It will also hurt speculators who are trying to borrow excessive amounts of cash to fund a flip of 3 or 4 properties simultaneously.
When these borrowers are significantly reduced from the demand side, the sales volume will drop - and it's already down significantly with only a minimal of lending standard tightening. This will further the decline or flattening in nominal home prices.
It will also hurt the tremendous number of people who are using ARMs if interest rates do go up - yes an if and not necessarily a given.
To a lesser extent, it will also hurt those with moderate down payments in the last 3 years. With 5 or 10% down, and a traditional mortgage, people are looking at losses of equity and most likely real losses if they have to sell.
So, that's who gets hurt in my opinion.
I'm no doomsday sayer. Looking at past market cycles, housing appears to go flat for years to allow incomes to catch up. Still, this particular cycle seems to have swung more dramatically. So I expect it will dip further before leveling for a few years.
My $0.02.
MyTwoCents said...
ReplyDelete"Lance,
It will hurt sub-prime borrowers and first time purchasers who have not saved for a down payment."
MyTwoCents, I know you are counting on "having saved for a down payment" to put you above the maelstrom of financial difficulties that most other buyers will face, but I can't agree. Large downpayments were a necessity back when lenders had only very incomplete information on the person borrowing from them. You'll note that they NEVER demanded down payments from governments, sovereigns or others whose creditworthiness was beyond reproach. With today's tools downpayments are far less necessary than they were in the past. People's creditworthiness can be established to a far greater degree of certainty than it could even as recently as 5 years ago. AND, as has been the practice for at least 10 years back, the less credit-worthy are charged higher interest rates (actually, MUCH HIGHER interest rates) which in the agregate insure the lender against bad debt. (I.e., Poor credit people are made to carry their own weight.) Many lenders have centered their operations around what is a very high profit business --- lending to borrowers with poor credit. Capital One is a bank that grew from nothing in no short order targetting people with poor credit. Twenty years ago these people would have simply been screened out and denied credit and the rest of us would have been required to put down large down payments and pay extra interest to cover those few credit risks that did slip through the net. Today, the net is so tight, that they can instead be taken out of the general mix and charged enough to cover the extra risks they bring with them ... Lemonade has been made out of lemons! Thus leaving the rest of us with lower interest rates AND the ability to borrow with little or nothing down. If there is a financial maelstrom as you are envisioning, the fact that you have a downpayment to put down will mean nothing ... absolutely nothing. Now, if you have cash to make purchases, such as Va_Investor, then you will be in a very strong position. Since in the maelstrom you envision credit will be either unavailable or come with very high interest costs, then those who can avoid borrowing altogether will have a significant edge in buying.
Lance,
ReplyDeleteThen this is where we disagree:
You say that the requirements for down payments have dissappeared because of much greater transparency of individual consumer credit worthiness.
I believe that the requirements for down payments have dissappeared due to much greater competition among lenders in an environment rich with cash to lend.
The ease with which banks/lenders unloaded their mortgages onto the bond market meant they didn't care about lending standards. They earned their closing costs and junk fees and were on to the next borrower.
If the secondary market changes enough that banks have to start holding onto these loans, when their interests are directly at stake, the old requirements will begin to come back. Maybe not as drasticly, due to greater borrower transparency as you suggest, but they will come back.
My $0.02.
"Large downpayments were a necessity back when lenders had only very incomplete information on the person borrowing from them. You'll note that they NEVER demanded down payments from governments, sovereigns or others whose creditworthiness was beyond reproach."
ReplyDeleteYou pretty much just make this stuff up as you go along don't you?
I hope so... that is actually a more attractive idea than to think that you tried to figure this out and this is the best you could do.
Ignoring the fact that you are completely wrong about, "governments, sovereigns or others," lets just discuss that you seem to think the average first-time home buyer, sub-prime borrower, or amature investor, falls into the category of people, "whose creditworthiness [is] beyond reproach."
anon 11:59 said:
ReplyDelete"lets just discuss that you seem to think the average first-time home buyer, sub-prime borrower, or amature investor, falls into the category of people, "whose creditworthiness [is] beyond reproach."
Sorry, but this is definitely true except for the "sub-prime borrower part". The average credit score is way up there. bad debt --- like crime --- is caused by a few individuals. In the past, the inability to easily pick them out from the rest meant that we all had to endure more onerous qualifications (and put larger down payments.) The means to identify them now has changed all that. And btw, the average first time home buyer is NOT a sub prime borrower. Sub prime borrowers ARE the bad risk borrowers. Are you thinking most loans to first time buyers are sub prime loans? We talked about that stat earlier. I don't remember the exact number but it was something like about 1 - 5% of all new loans ... I.e., minimal ... And certainly not enough to cause the great depression the BH are hanging all their hopes on. I still can't for the life of me understand why rather than just working for the house they want, they instead sit around hoping bad on others so that we as a country can have a depression and they with "their larg downpayments" can come in a swoop up other people's homes for pennies on the dollar. Wouldn't just be easier to do like the rest of us and work hard, sacrifice on other things, and buy the house on your own merit?
"And certainly not enough to cause the great depression the BH are hanging all their hopes on."
ReplyDeleteStrawman...
"I still can't for the life of me understand why rather than just working for the house they want, they instead sit around hoping bad on others so that we as a country can have a depression and they with "their larg downpayments" can come in a swoop up other people's homes for pennies on the dollar. Wouldn't just be easier to do like the rest of us and work hard, sacrifice on other things, and buy the house on your own merit? "
I still can't understand why people ever try to get a good price on ANYTHING. They should all rush out and buy a vastly overpriced asset at what will prove to be its peak price over the next several years! That is what Lance did, and he couldn't be wrong could he?