MaxedOutMama
Thursday, February 22, 2007
A House Of Cards
Over at Calculated Risk they have been arguing about whether Yellen of the Fed understands what she is talking about when she discusses the impact of the housing market and troubles in the mortgage market going forward.
She probably doesn't, and that is because absolutely no one not involved at the ground level of this market seems to have any understanding of what is happening. Subprime lending has gone splat, Alt-A is now going splat, and housing demand is going to take a hit because of tightening lending standards, which will prevent many borrowers who were essentially in short-term loans from refinancing.
To get an intuitive understanding of the reality disconnect, try this Voice of San Diego article (hat tip The Housing Bubble Blog). The article juxtaposes a RealtyTrac person's view with the Jay Brinkmann's view. Jay Brinkmann is the vice president in charge of research for the MBA.
The problem:
Alt-A loans can still currently be sold to investors at a profit. But not for long. Knocking out the lowest quality 7 or 9% of purchasers rated by credit quality will reduce demand by that much, which will pull prices down more in 2007. Any Alt-A loans that are interest-only and/or negative amortization will start to default at reset unless the borrowers can pay down the loan to collateral ratio enough to meet refinancing requirements. Worse yet, if every originator out there is chasing the Alt-A borrowers to survive, they will start writing Alt-A loans with increasingly reckless terms. They are still writing these as stateds. Unless and until Alt-A are written with more verification of ability to repay other than by sale of the home, these Alt-A loans will continue to become more risky as well. Believe it or not, the insanity hasn't ended. It has only shifted, since a good FICO score will now get you an option ARM with an initial payment as low as 1/4 of 1% of the loan principal. The Ponzi scheme is still running on borrowers with higher credit scores.
The single dynamic controlling this market is not FICO scores but the failure to qualify borrowers for long-term mortgage loans at amortizing rates. A FICO score of 812 doesn't protect a borrower with $100,000 yearly income from defaulting on a 100% LTV loan in the amount of $750,000 with a two year reset. (At 6% for an I-O loan, which is below market, this borrower would be left with around $1,500 in monthly income for all other expenses other than PITI, no matter how good a tax accountant he or she has.) Appreciation does. These loans were all made on the assumption that price appreciation would allow the borrowers to refinance or sell without defaulting, and now, for at least half of them, that's not going to happen.
The amount of such loans in each geographic area is strongly related to the income/price ratios in that area. Where home price appreciation vastly outstripped the payment ability of borrowers, we will see escalating defaults for years. What will correct this cycle is when the loss the lienholder will be forced to take on foreclosure will force the lienholder to rework loans so that the borrowers can pay them, even if the lienholder is taking a real year-by-year loss on the resulting payment schedule compared to T-bills. We're quite far from that right now, but it is coming.
The world isn't going to end. California and Florida aren't going to fall into the sea. But the extent of this credit problem has yet to be felt in the economy, and it will be a pretty intense shock. The last thing you want to do right now is to buy all these "bargains" in finance companies and home builders. Everyone who has listened to CW over the last year is taking a bath now, and it will get worse for some time.
There is no way Fed governors can probably wrap their minds around the kind of insanity that has predominated in mortgage lending for the last few years. They get to their positions by being rational, data-dependent individuals, not psychiatrists. Only psychiatrists could really explain the type of loans that were written over the last few years in such large numbers. This has been a collective delusion which will go down in history.
She probably doesn't, and that is because absolutely no one not involved at the ground level of this market seems to have any understanding of what is happening. Subprime lending has gone splat, Alt-A is now going splat, and housing demand is going to take a hit because of tightening lending standards, which will prevent many borrowers who were essentially in short-term loans from refinancing.
To get an intuitive understanding of the reality disconnect, try this Voice of San Diego article (hat tip The Housing Bubble Blog). The article juxtaposes a RealtyTrac person's view with the Jay Brinkmann's view. Jay Brinkmann is the vice president in charge of research for the MBA.
The problem:
New data for San Diego County reveals that 67 percent of loans made in the first 11 months of 2006 were interest-only or negatively amortized. That means borrowers pay low introductory payments until a reset period comes a few years later, significantly increasing their monthly mortgage payment. Of that 67 percent, 30 percent were negative-amortization loans, a threefold increase since January 2004 and 30-fold jump since January 2003, according to FirstAmerican Loan Performance.Current CW is that the problem is limited to subprime loans (not true):
Subprime loans are made to borrowers with damaged or weak credit who wouldn't have otherwise qualified for a mortgage. About 14 percent of the loans outstanding in California as of September are subprime, according to the Mortgage Bankers Association.Mr. RealtyTrac guy voices reality:
Unexpected levels of delinquencies on this type of loan have worried investors who back subprime lenders. Earnings losses have sent some such lenders into bankruptcy, while others are starting to tighten standards and more strictly enforce underwriting guidelines.
Rick Sharga of RealtyTrac said he's noticed the link between the lenders' stricter regulations and the rate of foreclosure activity. "I think the two go hand-in-hand," Sharga said.Any time you have a lot of mortgages that are written with terms that essentially force a refinance within a few years, you have an unstable credit market. Such loans can only be written in large numbers while prices are escalating rapidly. As soon as conditions worsen, Mr. Sharga is right - defaults escalate. And when they do, lenders find that they can't sell off their risk, so they tighten their guidelines, which prevents some borrowers from refinancing, which increases defaults, which causes credit tightening.... Now note Mr. Major Mortgage:
Mortgage analysts don't have enough evidence that the risk associated with these loans warrants such dramatic responses, said Jay Brinkmann, vice president of research and economics at the Mortgage Bankers Association. He said the subprime lenders' moves are anticipatory, responding to concerns from their investors, who fear that defaults will increase dramatically.This is complete nonsense. There is nothing "anticipatory" about these moves - they are related to last year's sharp escalation in defaults and forced repurchases from investors by the originators. If the originators can't get those forced repurchases down, every one of them is going to fall into bankruptcy. They are pretty much all now claiming to be writing Alt-A instead of subprime - and that isn't going to work either.
Alt-A loans can still currently be sold to investors at a profit. But not for long. Knocking out the lowest quality 7 or 9% of purchasers rated by credit quality will reduce demand by that much, which will pull prices down more in 2007. Any Alt-A loans that are interest-only and/or negative amortization will start to default at reset unless the borrowers can pay down the loan to collateral ratio enough to meet refinancing requirements. Worse yet, if every originator out there is chasing the Alt-A borrowers to survive, they will start writing Alt-A loans with increasingly reckless terms. They are still writing these as stateds. Unless and until Alt-A are written with more verification of ability to repay other than by sale of the home, these Alt-A loans will continue to become more risky as well. Believe it or not, the insanity hasn't ended. It has only shifted, since a good FICO score will now get you an option ARM with an initial payment as low as 1/4 of 1% of the loan principal. The Ponzi scheme is still running on borrowers with higher credit scores.
The single dynamic controlling this market is not FICO scores but the failure to qualify borrowers for long-term mortgage loans at amortizing rates. A FICO score of 812 doesn't protect a borrower with $100,000 yearly income from defaulting on a 100% LTV loan in the amount of $750,000 with a two year reset. (At 6% for an I-O loan, which is below market, this borrower would be left with around $1,500 in monthly income for all other expenses other than PITI, no matter how good a tax accountant he or she has.) Appreciation does. These loans were all made on the assumption that price appreciation would allow the borrowers to refinance or sell without defaulting, and now, for at least half of them, that's not going to happen.
The amount of such loans in each geographic area is strongly related to the income/price ratios in that area. Where home price appreciation vastly outstripped the payment ability of borrowers, we will see escalating defaults for years. What will correct this cycle is when the loss the lienholder will be forced to take on foreclosure will force the lienholder to rework loans so that the borrowers can pay them, even if the lienholder is taking a real year-by-year loss on the resulting payment schedule compared to T-bills. We're quite far from that right now, but it is coming.
The world isn't going to end. California and Florida aren't going to fall into the sea. But the extent of this credit problem has yet to be felt in the economy, and it will be a pretty intense shock. The last thing you want to do right now is to buy all these "bargains" in finance companies and home builders. Everyone who has listened to CW over the last year is taking a bath now, and it will get worse for some time.
There is no way Fed governors can probably wrap their minds around the kind of insanity that has predominated in mortgage lending for the last few years. They get to their positions by being rational, data-dependent individuals, not psychiatrists. Only psychiatrists could really explain the type of loans that were written over the last few years in such large numbers. This has been a collective delusion which will go down in history.
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That is the singularly most frightening post I've seen written here since I've been reading. You and other blogs have done a phenomenal job of showing the writing on the wall. The initial sings have ben there for a while but now the house of cards really is coming down. THanks.
MC
MC
# posted by 
: 6:35 PM
: 6:35 PM
I like to look for mens rea.
You, MaxedOutMama (who I adore incidentally), seem to take a more, shall we say, clinical or academic view: "mass delusion", "only a psychiatrist knows for sure".
Do you sincerely believe that John Q. Public is delusional?
Or do you believe that John Q. Public can be manipulated by lies and deceptions to do things that are not in his/her best interest?
Let's look at a slightly larger picture: trade relations with China.
China lends us the money to buy its goods, which happen to be made with slave labor. Are the Chinese delusional? Are the individuals who are profiting handsomely from artificially low interest rates in the US delusional?
Mens rea, MaxedOutMama. That's where the action is. Not notional delusion on the part of some poor sucker living in San Diego.
You, MaxedOutMama (who I adore incidentally), seem to take a more, shall we say, clinical or academic view: "mass delusion", "only a psychiatrist knows for sure".
Do you sincerely believe that John Q. Public is delusional?
Or do you believe that John Q. Public can be manipulated by lies and deceptions to do things that are not in his/her best interest?
Let's look at a slightly larger picture: trade relations with China.
China lends us the money to buy its goods, which happen to be made with slave labor. Are the Chinese delusional? Are the individuals who are profiting handsomely from artificially low interest rates in the US delusional?
Mens rea, MaxedOutMama. That's where the action is. Not notional delusion on the part of some poor sucker living in San Diego.
# posted by : 9:06 PM
: 9:06 PM
John Q. Public, Jane Doe, and Average Joe aren't the delusional ones. Mr. Major Mortgage is obviously living in lala land at the moment. An unpleasant note of reality is beginning to percolate through stockholders in NFI, NEW and the like....
Consider how much leverage John Q. Public and Average Joe now have compared to the lender in areas in which taking the property back is going to inflict unbearable losses on these companies.
John Q. Public, Jane Doe and Average Joe may have taken risks, but they were the ones who got the payout as long as the market held out. The ones holding the bag are the investors, the originators and the lenders. They are the ones who now have to find a way not to drive John Q. Public, Jane Doe and Average Joe into the ground....
Btw, all the states in which the really wacky loans predominate are the states in which consumer law gives the most protection to the borrower! Consider it the revenge of the worker bee, and laugh a bit.
Consider how much leverage John Q. Public and Average Joe now have compared to the lender in areas in which taking the property back is going to inflict unbearable losses on these companies.
John Q. Public, Jane Doe and Average Joe may have taken risks, but they were the ones who got the payout as long as the market held out. The ones holding the bag are the investors, the originators and the lenders. They are the ones who now have to find a way not to drive John Q. Public, Jane Doe and Average Joe into the ground....
Btw, all the states in which the really wacky loans predominate are the states in which consumer law gives the most protection to the borrower! Consider it the revenge of the worker bee, and laugh a bit.
Consider how much leverage John Q. Public and Average Joe now have compared to the lender in areas in which taking the property back is going to inflict unbearable losses on these companies.
John Q. Public, Jane Doe and Average Joe may have taken risks, but they were the ones who got the payout as long as the market held out. The ones holding the bag are the investors, the originators and the lenders. They are the ones who now have to find a way not to drive John Q. Public, Jane Doe and Average Joe into the ground....
This surely is a novel treatment of the debtor class. A tear welling up in the corner of our eye as we contemplate the ghastly plight of the lender, all the while forced to avert our gaze from the muscular silhouette of the borrower, rampant.
Somehow I think having your home go into foreclosure is slightly worse than banking a $10 million bonus at Goldman Sachs. I may be wrong, I admit it, but it's my best guess.
John Q. Public, Jane Doe and Average Joe may have taken risks, but they were the ones who got the payout as long as the market held out. The ones holding the bag are the investors, the originators and the lenders. They are the ones who now have to find a way not to drive John Q. Public, Jane Doe and Average Joe into the ground....
This surely is a novel treatment of the debtor class. A tear welling up in the corner of our eye as we contemplate the ghastly plight of the lender, all the while forced to avert our gaze from the muscular silhouette of the borrower, rampant.
Somehow I think having your home go into foreclosure is slightly worse than banking a $10 million bonus at Goldman Sachs. I may be wrong, I admit it, but it's my best guess.
# posted by : 2:42 AM
: 2:42 AM
What I'd like to know is who are the ultimate investors and how will they react when they finally wake up. Yesterday Reuters announced that foreign buyers once again increased their agencies holdings (Fannie and Freddie senior debt), by $3.55 billion in the previous week. How long can this be maintained?
# posted by : 3:14 AM
: 3:14 AM
ed in texas
What the ultimate investors will do is in progress. These loans are not being held by the lenders, but have been repackaged and sold as MBS's (mortgage backed securities) by the large investment houses (think Merrill Lynch). When I did my recent lookover of my 401k, I found that what was supposed to be govmt bonds was in fact MBS funds. I dumped the whole pile, on the premise that last man to the cashier's booth doesn't get paid. There's a lot more of that out there, I recommend people read the prospectus's closer.
What the ultimate investors will do is in progress. These loans are not being held by the lenders, but have been repackaged and sold as MBS's (mortgage backed securities) by the large investment houses (think Merrill Lynch). When I did my recent lookover of my 401k, I found that what was supposed to be govmt bonds was in fact MBS funds. I dumped the whole pile, on the premise that last man to the cashier's booth doesn't get paid. There's a lot more of that out there, I recommend people read the prospectus's closer.
# posted by : 4:42 AM
: 4:42 AM
The single dynamic controlling this market is not FICO scores but the failure to qualify borrowers for long-term mortgage loans at amortizing rates
Yup, that pretty muchs sums it up.
-Jim A
Yup, that pretty muchs sums it up.
-Jim A
# posted by : 5:31 AM
: 5:31 AM
Anon - no, I'm cheering for most of the borrowers on this one. I guess I can't cry about Casey Serin or his ilk going into foreclosure - but I certainly am not going to feel sorry for the losses sustained by investors, lenders and originators, except for the individual Uninvolved Greater Fools who suddenly find out that their pension funds are evaporating....
I would like to see Congress pass a law giving favorable tax treatment to some types of write-downs that are in the borrower's interest. My biggest worry is that the larger financial interests will succeed in foisting this off to the individuals who can least bear the loss and had the least involvement in generating the whole fiasco.
The reason why I am writing about this is to try to give people who might get stuck with the tab some idea of what to avoid. I don't trust most of the politicians at this point, and I do believe that they will succumb to industry pressures rather than take care of the broader public interests.
None of this, absolutely none, is academic to me. If this is not handled well we will all pay a high price in the future.
I would like to see Congress pass a law giving favorable tax treatment to some types of write-downs that are in the borrower's interest. My biggest worry is that the larger financial interests will succeed in foisting this off to the individuals who can least bear the loss and had the least involvement in generating the whole fiasco.
The reason why I am writing about this is to try to give people who might get stuck with the tab some idea of what to avoid. I don't trust most of the politicians at this point, and I do believe that they will succumb to industry pressures rather than take care of the broader public interests.
None of this, absolutely none, is academic to me. If this is not handled well we will all pay a high price in the future.
And I'm still getting Realtor ads hung on my doorknob. How I have to buy NOW or Narnia Will Be Overthrown And Perish In Fire And Water!
"A STEAL AT $800K!"
"NO MONEY DOWN! LOW PAYMENTS! 1% OPTION ARM!"
"PRICES HAVE NOWHERE TO GO BUT UP!"
"DON'T BE LEFT BEHIND!"
The Headless Unicorn Guy
"A STEAL AT $800K!"
"NO MONEY DOWN! LOW PAYMENTS! 1% OPTION ARM!"
"PRICES HAVE NOWHERE TO GO BUT UP!"
"DON'T BE LEFT BEHIND!"
The Headless Unicorn Guy
# posted by : 9:22 AM
: 9:22 AM
"Don't be left behind - go bankrupt with the rest of us!!!!"
Do you know how many brokers and realtors have a few houses themselves?
Do you know how many brokers and realtors have a few houses themselves?
Don't be left behind...
M-o-M, I think it appropriate that one of the housing bubble blogs is titled "Housing Armageddon".
Do you know how many brokers and realtors have a few houses themselves?
Oh, I know. That's why they're still pimping Real Estate Investment, i.e. unload the lemons on the suckers and run laughing all the way to the bank.
In my situation, I should have my current place paid off sometime in early 2008; a year or two to let my cash recover, and I might be in the market for a Craftsman-era bungalow repo. Classic house, on real land, with NO HOA!
The Headless Unicorn Guy
M-o-M, I think it appropriate that one of the housing bubble blogs is titled "Housing Armageddon".
Do you know how many brokers and realtors have a few houses themselves?
Oh, I know. That's why they're still pimping Real Estate Investment, i.e. unload the lemons on the suckers and run laughing all the way to the bank.
In my situation, I should have my current place paid off sometime in early 2008; a year or two to let my cash recover, and I might be in the market for a Craftsman-era bungalow repo. Classic house, on real land, with NO HOA!
The Headless Unicorn Guy
# posted by : 1:40 PM
: 1:40 PM
That would be great. I pity all the people trapped in the half-filled condos. I can't imagine what HOA is going to end up being in a few years.
The condos always take it in the teeth.
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The condos always take it in the teeth.
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