‘When A Bubble Bursts, The Smaller The Better’
MarketWatch reports on home loans. “Homeowners don’t fully understand the risks associated with taking on alternative mortgages that allow interest-only payments or that eat into the equity in a home, federal officials told senators. The FDIC found that exotic loans were more prevalent in the housing markets with the biggest price increases, and suggested that the loans were both a cause of and a reaction to the housing boom.”
“‘The greater availability of flexible mortgage structures probably allowed price increases to outstrip growth in incomes to a greater extent than would otherwise have been the case,” said Sandra Thompson, at the FDIC.”
“About 75% of borrowers who have a payment-option loan make only the minimum payment, said Kathryn Dick, deputy comptroller of the currency. About a fifth of home buyers owe more than their home is worth, said Sen. Paul Sarbanes.”
“Wells Fargo CEO Dick Kovacevich said Monday that the nation’s housing slowdown is a positive development. ‘We were getting into bubble territory,’ Kovacevich said. ‘As everyone knows, when a bubble bursts, the smaller the bubble, the better it is.’”
“Kovacevich said the bank has avoided controversial mortgage products such as option ARMs. ‘You’re taking risks we believe are inappropriate,’ he said of the mortgage industry.”
“Washington Mutuals COO, Steve Rotella, said that the current environment in the banking industry is ‘difficult’ and is expected to remain ‘very difficult’ on the revenue side for some time.”
“WaMu has reduced the number of mortgages it underwrites in the subprime area of the mortgage market, where borrowers have less-than-perfect credit scores. ‘You know, we’ve seen increasing delinquencies in that business in general..which is not unexpected, given the maturation of the portfolio but also the health of the market right now,’ he said.”
“WaMu has also sold ‘the vast majority,’ roughly 70%, of its option-ARM mortgages, which are considered among the most susceptible to defaults, to the secondary market. ‘So, clearly, if there were a significant, major national decline in housing, it would have an impact on us,’ Rotella said. ‘but we feel we’ve taken the actions to mitigate that.’”
From Realty Times. “Question: I read your column about false advertising and want to share my story and ask for advice. We own a home in California and a loan agent contacted us and we ended up refinancing this loan to a new loan with negative amortization with a rate of 1.45 percent.”
“After making the first two payments, we noticed that our mortgage balance was increasing by $2,000 each month. There is a prepayment penalty of 15 percent in the first year, ten percent if we refinance in year two, and five percent in year three. Can you please advise us as to how to get out of this situation?”
“Answer: Well, this is a tough one. Your letter is a perfect example of a homeowner taking out a complex mortgage program without having any idea of what it is or how it works.”
“The thing that puzzled me about your letter was that fact that you could have afforded to continue to pay the interest on your previous loan. Why did you refinance a 5.50 percent mortgage, which is well under current market rates?”
“Whether or not the loan agent completely and willfully misled you is up for question. What’s clearer is that you signed up for a loan without really knowing anything about it.”
‘WaMu has reduced the number of mortgages it underwrites in the subprime area of the mortgage market, where borrowers have less-than-perfect credit scores.’
As these firms bail out of the subprime market, there is no mention of serving the ‘affordability market’ that they went on and on about during the boom. And by ending these loan programs, the pool of qualified buyers shrinks even more.
If you guys only knew the amount of crap that went on the past 5 years.
This is JUST the tip of the iceberg. The brokers/underwriters/managers/corporations made their quick and easy money by finding ways to give people money so they could get paid.
NOW we will start seeing the results of the past 5 years.
I have touched on it many times on my blog…but what most of these finance people never saw is what was going on in the trenches…in the offices, on the phones, and how business was being done.
Everybody wanted to get paid…and doing loans gets people paid…so that is what everybody did. The corporate guys talked tough about ‘loan fraud’ but if they only knew…
Stay Tuned…
SoCalMtgGuy
http://www.housingbubblecasualty.com
If you guys only knew the amount of crap that went on the past 5 years.
I think most of Ben’s regulars already do.
If you think not, please share.
It’s a problem of where to begin.
Great work on your blog socalmortdude! Are you going to help clean up this mess in the industry? The “mortgage squad” is your next calling.
Anyone who has read this blog or your blog knows, SoCalGuy. But that’s only a tiny fraction of America, unfortunately.
The article below really hits it on the nose about how ignorant 90% of America is about what is going on around them. http://finance.yahoo.com/columnist/article/richricher/9775
Very sobering article, a wake up call to take steps to improve your economic/financial situation thru getting ahead in the world of work instead of relying on a hopeless muddled Government to sort things out for you.
People who get suckered into things like this have nothing but their own greed and stupidity to blame. This guy says he didn’t realize his loan would go up $2000/mo. I guess he should have read the paperwork before signing it.
Interesting to see the comment by Paul Sarbanes. I predicted last year that in the denouement of this tragedy we’d see Congress stampeding to the barn door, locks in hand.
If you guys only knew the amount of crap that went on the past 5 years
As far as I’m concerned, the FEDS ought to be lookin’ into applying RICO rackeeterring statutes for all that’s transpired-
like Wells Fargo havin’ all it’s originations appraised by, a company called ValueIt, which was a susidiary owned and created by its’ high echelon executives.
And this is by like the second largest mortgage lender in the country.
The conflict of interest boggles the mind.
Where the f*ck are the class action lawsuits against these sleazebags?
Many original financial institutions like WaMu and Wellsfargo sold most of their risky mortgages. Does anyone know for a fact who bought these MBS? Are they predominately foreigners? If so, when FB’s default, the US financial institution and the US economy should be OK because those that get hurt are foreigners and not US consumers. What is your thought?
Would not be personally surprised if hedge funds bought some of these at a discount to par, trying to arb the default prediction game.
in a word or more appropriately an acronym…
REMIC
“What’s clearer is that you signed up for a loan without really knowing anything about it.”
I think a whole book could be written about that statement.
Time will prove that the 30yr fixed rate mortgage should be the only way to finance a primary residence.
unless your over 40 then it should be 15 yr
my humble home is paid off and the only way to brag now is to say ” I RENT”
> unless your over 40 then it should be 15 yr
Given the current prices, darn few peole could afford to make payments on a 15 year loan. The monthly payment on a 6% $400K 15 year loan is $3375 - and that is without taxes, etc. Wow.
The haircuts that prices are going to take over the next few years is going to be breathtaking - just like the rise in prices.
My SWAG is regression to 2002-2003 prices (non-inflation adjusted) in bubble areas. i.e the second leg of the runup in prices evaporates.
That makes you an optimist.
“Given the current prices, darn few peole could afford to make payments on a 15 year loan. The monthly payment on a 6% $400K 15 year loan is $3375 - and that is without taxes, etc. Wow.”
There is a very problematic premise in your argument. It is that people who can’t handle a $3,375 payment ought to be buying a $400K house. Why, instead, shouldn’t these folks buy a $300K house or just rent a house? Where can you buy a house for $400k the equivalent of which cannot be rented for $3,000 or less per month? Not in the Southeast, that’s for sure.
Like Flatffplan, I believe in 15 year mortgages, particularly if you’re over 40. We structured ours that way and got out of debt completely, looking at it as enforced savings. Now we owe zero and rent, waiting patiently for the market to tumble far enough so that we will want to buy back in.
my swag!
Ill take 1995-6 price level. IF we get lucky!
Better idea: Get a 30 year, make payments as if it’s a 15 or a 20. This way you’re in less danger if you lose a job or have a huge medical expense. These days, a shorter term doesn’t buy you much off the interest rate anyway.
Playing stupid is no excuse. If you don’t know what the hell your signing hire someone who can expalin it to you.
There is simply no excuse for incompetent behavior.
“… hire someone who can expalin it to you.”
Your average Joe Soccermom probably believes the nice loan officer in a suitcoat and tie is just that someone, especially given the handsome commission.
Sad, but probably true. To me all it takes is a couple seconds of conversation with loan brokers and it becomes clear that most are cheesy, and of far less than spectacluar intelligence. Basically used car salespeople, only the loan guys are selling a much bigger lemon. SoCalMtgGuy, Loon Officer, Sensible Lender, and nnvmtgbrkr are excluded from this generalization!
Cheesy…that’s the perfect adjective to describe lots of mortgage brokers. I moved to South Florida a little over a year ago from SoCal and some of the mortgage broker radio commercials here are unbelievable…lots more so than in SoCal. Richard Ruble…”The Rainmaker”, or some chick that is the “Queen of Mortgages”, or the dude with a Jersey accent that is the “The MAN!”. Un-freakin believable…they all promise (right on the radio) that they can put ANYONE in a loan…No Doc, recent BK, etc. etc. I can’t believe that they aren’t investigated and prosecuted.
OUt in Scal The Re radio ad’s don’t use weird titles to Describe themselves, but nevertheless there continues to be a heavy non-stop barrage of RE loan products being pitched over the AM radio waves. Such come-on’s as “we can get you out of BK” or “lower your monthly pmts” and so on.
Whenever I meet a guy wearing a suit and tie, I hold onto my wallet.
If I’m wearing a suit, and can see my reflection in the mirror, I hold on to my wallet!
“Time will prove that the 30yr fixed rate mortgage should be the only way to finance a primary residence.”
Again. After we (again) learn the lessons of the 1920s, when I/O was the way to go.
Maybe there’s a version of the old saw that goes, “In most families, there’s a sucker born every generation.”
Maybe the US won’t be financially independent enough in the future to have 30-years fixed without large prepayment penalties. How would you choose then? In Germany, it’s either variable with possibility to refinance or fixed with big penalty for doing so. The first is for people working in the private sector, the second more for civil servants and the like.
KBH on the tape. Reported Q3 results. Net orders fell off a cliff in Q3 06 compared to Q3 05. revenues up sequentially though no earnings disclosed due to option timing probe. How convenient. They could have given us gross margins, since option costs are a G&A item. My guess is that revs are up but margins way down due to incentives….
But how’s it trading? I’m trying to dump a bunch of JDSU into this R/S news.
$42 bid on Island. Nothing trading.
Whats the deal with the reverse stock split? Are they tired of looking at a $2 price?
Dunno, but at $16, I’m not interested.
Here is the Wiki definition :
http://en.wikipedia.org/wiki/Reverse_Stock_split
better then getting delisted. Basically it is a kiss of death for a company.
“My guess is that revs are up but margins way down due to incentives….”
Good catch, garcap! The revenues will turn out to be a scam, as they are probably based off the sticker sale price, not the adjusted price after subtracting off the value of $100K’s worth of incentives. But that was good enough for Wall Street to limit KB’s loss on the day to only 3%.
53% YOY drop in net orders in U.S. … but if you throw in France operations, it was “only” 43%. Yippee! Seriously, though, this is just one more nail in the coffin. Home builders have traded up on every piece of bad news the past few weeks because of the belief lower rates will usher in a new housing boom (or at least temper the bust). Guess we’ll have to see how this latest barrage of crap from the sector is handled on Wall Street.
KBH is No. 3 on my list to implode and No. 2 on my short list. Way to go guys! Congratulations on another sucksessful quarter!
Just wait until the option scam catches up with Karatz. This is one of many factors which will bring about the reverse splitz or maybe the shitz.
Many have talked about buying HB stocks now that they have come down. IMHO, they haven’t come down nearly far enough.
Schwab had a mass e-mail today telling clients specifically to avoid the homebuilders.
“Whether or not the loan agent completely and willfully misled you is up for question. What’s clearer is that you signed up for a loan without really knowing anything about it.”
Oh, for the good old, honest, ethical American business model, when a typical mortgage lender would tell you when you would be better off sticking with your existing mortgage.
The problem is, most consumers still naively believe that’s how American corporations still work, when in truth it’s more like a bunch of sharks swimming through chum(ps).
It is hard to find people who actually gice a rats @ss about your interests. Most are in just for a check so they can go buy more junk. Have you ever heard of the value of “shame”. Well in the big cities you basically lose this critical human value. The typical lender figures they will never see you at the local coffee house or really have to deal with you again. The local person might help you out so they don’t have to listen to their friends tell them about how they screwed you over.
To tell you the truth, I found a couple of honest loan agents last year. I was thinking about refinancing, and both of them told me straight-out that I would not only be paying a higher rate, but I’d also be looking at about $2k in closing costs.
I wish I had used one of these guys when I had applied for my home loan. Oh, well. Live and learn. At least I’m not needing to refi an I/O or an ARM.
I work in the same building as a mortgage company and last year I too had a casual conversation with one of the brokers. When I said that prices were not justifiable he replied that indeed, there are times to rent and times to buy. Now was a good time to rent he said. Shortly thereafter he left and I’ve not seen him since. After several years in the biz perhaps he’d had it, just like SoCal. Then again, maybe he retired with all those fat fees he’s collected!
Maybe he WAS our friend SoCalMtgGuy!
Why do these people think that they have to pay the minimum. I assume that they could pay even more than the regular payment without suffering a penalty. That seems like an easy solution. They should just keep paying at least as much as for their previous loan.
Yes, Bill, that is the obvious answer. I get calls all the time like the one described. When they ask me what to do, and I tell them to make at least the I/O payment. Normally I can tell by their muted reaction to my response that they can’t afford the I/O option. Can you see the deep dukey we’re in here? (And no, these aren’t return clients. I did a total, no lie, of 2 Op ARMs over the last two years. Both borrowers knew what they were getting into and had LTV’s of less than 75%)
Maybe the answer is sitting in their driveway.
Agreed.
“The thing that puzzled me — Why did you refinance a 5.50 percent mortgage, which is well under current market rates?”
Let’s see … there is a new Hummer and Audi in the drive. Behind the fence is the new boat. The garage is hiding the two new jet skis.
Last week you they showed the digital movies from the 2 week European vaction.
Don’t worry though, they are sitting on $3880.00 cash savings.
I fear it’s even worse than this though.
We all like to scoff at these people and point to their hummer’s and vacations etc.
but I have met many people who ill-advisedly took out HELOCs to pay for groceries and braces for their child and regular living expenses. I know others who have taken out a HELOC to pay their mortgage.
There’s a lot of pathetic greedy buttheads out there. And there’s a lot of nice decent but money-foolish people out there too.
I don’t really see the difference between so-called greed and incompetence. Incompetence is the greed of laziness and sloth. Screwing up is screwing up. Why hold people to lower standards than you would hold yourself?
$3880! Damn. I didn’t know it was so much! Now I can make another 1.25 mortgage payments and have a couple of lattes at Starf@cks.
I know others who have taken out a HELOC to pay their mortgage.
That’s an oxymoron, Clouseau.
hilery will offer to transfer, via TAX from savers- they’ll call it the homeowner recovery act
NEW DEAL 4 on the wayyyyyyyyyyyyyy
I don’t think she is electable. JMHO
You would have to be on willie nelsons bus inhaleing fumes to elect her.
Depends on the alternatives. If it’s Cheney vs Hilary; I’m betting on the gal.
“If it’s Cheney vs Hilary”
*HE* isn’t electable as well.
I belong to neither party and dislike both. Cheney cannot run. His health is too poor to even keep up the pace of a campaign, much less convince party regulars to support him.
Plus shooting people is not a plus (even if it’s a lawyer).
No way for the Hildebeast
“The Billary” is good at trading commodities (remember that wild streak of luck that netted her $100K on the first roll of the dice) but not so good at making the voters feel all warm and fuzzy inside as her hubby was (is).
I have thought about this a lot. Is Hillary electable today? No way! Most people woukld rather elect a ground hog. But what about in Nov 2008 with a raging recession and a foreign relations diasater as a back drop?
Here is what I have wondered about so much - what would she do in that situation? Help out the little guy? Save the banks? Who knows???? Being the not so closeted socialist that she is - probally the former. But to quote someone else ‘there is no reccession that a well intentioned government can’t turn into a rhino of a depression’. The 30’s were so bad in part due to two well intentioned but counter-productive govt actions a) Hawly-Smoot & b) Debtor Relief Act which suspended forclosures for a while. The ultimate results of both was to turn a very nasty world-wide recession into the Depression. Dried up foreign trade and domestic lending all in two fell swoops.
Hillary isn’t Bill. She’s a Republican turned Democrat (albeit a long time ago). Nevertheless, she did *not* grow up in the sticks like Bill did. She’ll target the middle class alright - but she won’t have trouble selling out the poor for the rich, though. I suspect Bill did the same - but only after searching real hard for a third alternative that would help the wretched as well.
As you say, in the end - who knows? My reading is that Bill was a shrewder politician by far - it wasn’t just his prodigious memory - he had very high emotional EQ. Hillary doesn’t measure up on either front. OTOH, she likely doesn’t have any alpha-male issues.
Please, God, give the Dems a choice other than Hillary. Her snarl irritates me as much as Bush’s smirk!
I’m independent and I’ll probably wouldn’t vote for Hillary. Republicans lost lot of repect in recent years but they are sure win if Democrat puts Hillary in 08.
I would indeed vote for a groundhog if it meant no new laws and no new wars. We have more than enough of both, at present.
President Rice and her Vice President Watts willlaugh at this entitlement proposal.
You are so funny.
The Republicans are going to nominate a Black Woman for President?? Real funny Cote.
Couple of good links for ya. Stucco, watch out for #2 there:
http://money.cnn.com/2006/09/21/real_estate/still_overvalued_housing/index.htm?source=yahoo_quote
http://biz.yahoo.com/seekingalpha/060921/17282_id.html?.v=2
There’s a sucker born every minute.
“From a technical perspective, it might pay to become a contrarian and buy U.S. homebuilder shares, following a 50% Fibonnaci retracement from the all-time high of 1,120.”
Gisella, honey, how much did we pay for that Fibonacci last week — the rigatoni — was it $11.20? Holy cripes. C’mere an’ look at this.
Is it that bottom fishers for builder stocks think all the bad news is already priced in, that they don’t read the news, or that they don’t think there is any connection between falling new home prices & land prices versus the value of these stocks? Leaves me scratchin’ …
“‘In Berkeley, it seems some are coming down (in price) a little bit and staying on the market a little longer,’ Oakland resident Forrest Bell said.”
“The hardest-hit real-estate market segment was new homes, whose median price fell 11.6 percent to $574,000 last month, down from $649,000 a year ago. Pulte Homes is offering a week’s free vacation and up to $99,000 in incentives to buyers at its 17 Bay Area developments.”
“‘The sales pace dropped off and our production didn’t drop off as quickly , so we found we had some inventory we didn’t want to have at the end of the year,’ said Merry Sedlak, of Pulte at its Bay Area headquarters in Pleasanton.”
4:36pm 09/21/06 KB Home Q3 orders 5,989 vs 10,467 - MarketWatch
4:35pm 09/21/06 KB Home Q3 backlog 23,878 units vs 27,744 units - MarketWatch
4:36pm 09/21/06 KB Home Q3 deliveries 9,523 vs 9,812 - MarketWatch
4:34pm 09/21/06 KB Home Q3 First Call rev est $2.61B - MarketWatch
Back to reality as the speculative demand dissapears.
http://immobilienblasen.blogspot.com/2006/09/kb-homes-kbh-earning-plus-options.html
Bet Sarbanes has been lurking!
I sincerely hope not. Hopefully they realize that any type of fiscal remedy is money poorly spent and just delays the invevitable.
“just delays the invevitable”
but, but, but…that’s what we in the U.S. are without doubt the very best in the world at! …delaying the inevitable
now…where did I put that new credit card?
Yes, I’m surprised it isn’t in the preamble.
“We the People of the United States, in Order to form a more perfect”…ah, heck, I’ll finish the rest later! Cowabunga, dudes, let’s catch some gnarly waves!
UCSB grad no doubt.
“‘The greater availability of flexible mortgage structures probably allowed price increases to outstrip growth in incomes to a greater extent than would otherwise have been the case,” said Sandra Thompson, at the FDIC.”
Sounds as though our message is trickling up…
So they are now figureing this out? Seems like the govt is always a couple years behind on the real world.
No - they knew. They just didn’t give a shite. Too much money being made.
“About a fifth of home buyers owe more than their home is worth, said Sen. Paul Sarbanes.”
20% of the country’s homeowners are underwater? Is that a typical number, or just slightly worse than average? And does it reflect the most recent information about falling prices (e.g., on Toscano’s blog, there is a news story documenting that even the OC, the last great bastion of bubble denial, has reported a decline in the median)?
I would like clarification on that too? 20% of this years buyers or 20% of ALL homeowners? If it is 20% of all owners (or I guess supposed owners) then this is a huge, huge disaster. I have a hard time believing the later.
“I would like clarification on that too? 20% of this years buyers or 20% of ALL homeowners? If it is 20% of all owners (or I guess supposed owners) then this is a huge, huge disaster. I have a hard time believing the later.”
That is what makes a masterful politician. He threw it to his staffers to come up with a jello word and they did. Not even close to accidental phrasing. Never, ever, believe that a senator said something accidentally, unless it was at the moment the flash went off and he had the panties in his hands.
LOL! Thanks Chip!
“20% of the country’s homeowners are underwater”
I would bet “a fifth of home buyers” means current buyers (not all ho-moaners). Anyone know from what source Sen. Paul Sarbanes got this statistic? (And isn’t he the “Sarbanes” in the “Sarbanes-Oxley Act”?)
Paul Sarbanes, yes he is. Miserable peice of law that is, too, though my friends investing on the London stock exchange are gleeful at how it dried up lots of new US listings. Not that they benefit directly, just schadenfreude on their part.
Friend of mine from high school was an aide/lawyer for Oxley, as well, and as he harangued me a few years ago about how much great stuff this law was gonna do, I had to bite my tongue so as not to disrupt a pleasant, sociable event.
Several of my family members have had small-bank stock held for decades basically sold out from under them in huge reverse splits (several hundred to one) ostensibly to simplify accounting. Indeed. Yes, money saved by getting below the 300 holders that make you have to spend a fortune on SOX accounting/ reporting requirements. No more listing, lots less reporting and transparency. Whoops, THAT wasn’t the intention of the law, was it?
Too bad I can’t vote the guy out this year (Sarbanes). Oh wait, he’s leaving anyway. Maybe he’ll get a nice cush spot at one of the big accounting firms he’s brought so much business to.
Maybe he means that 20% of all (current) homebuyers get in with 100%+ financing? (Also a disaster scenario, IMO).
Maybe he means that 43.7% of all statistics are made up on the spot.
It’s actually 43.6765% -
, and SOX was a major pain last year for the company I worked for, and for our division. Nice idea.
Pain in the ass!
“Wells Fargo CEO Dick Kovacevich said Monday that the nation’s housing slowdown is a positive development. ‘We were getting into bubble territory,’ Kovacevich said. ‘As everyone knows, when a bubble bursts, the smaller the bubble, the better it is.’”
How about the converse? Does everyone know that the larger the bubble, the worse it is? Because I have it on good information (from Robert Shiller, no less) that this is the largest bubble in US history, bar none.
Kovacevich has also said that he feels comfortable with Wells’ exposure to real estate, which is huge in both absolute terms and relative to other large banks, given that there is no national real estate market, and diversification nationwide will protect them if a certain overvalued pockets implode. Not sure how true that is today given that every Mrs. Soccermom and Mr. Sixpack seems to be a moonlighting real estate tycoon.
The most recent bubble will always be the biggest bubble due to inflation.
“WaMu has also sold ‘the vast majority,’ roughly 70%, of its option-ARM mortgages, which are considered among the most susceptible to defaults, to the secondary market.”
One factoid I’ve learned recently is that usually the bank has to hold the first tranche when mortgages are securitized. In other words, WM would be on the hook for the first x number of defaults.
This is an issue that has not been explained fully by the banks.
The bank holding the first tranche is often true but may be less of a big deal than you think. A typical (but by no means universal) structure might be something like Bank takes the losses up to 5%, a junior piece takes the next 35%, and a senior piece takes the last 60%. If you expect a 10% foreclosure rate and a 30% loss on each foreclosure you expect to lose 3%. Speaking very roughly here (you’d need a Monte Carlo simulation model with an explicit recognition of non-linearity and optimality to get the right answer) that “first 5% piece” is really only worth about 2%. So with a $100 million mortgage pool, the bank is keeping a tranche fair valued at about $2 million (book valued at $5 million), that will get wiped out if things are bad and might be worth almost $5 million if times are good (San Diego loans made in 2002, for instance, when prices go up 20% a year for several years and foreclosures are near 0). In fair value accounting terms, it’s a very small slice, and they hold a lot of capital against it. In some ways, the biggest risk is in the junior piece, which loses 0 in most cases, but starts to get hammered in a slide, and which is probably valued somewhere near the book value of the mortgage principle.
Good explanation. Thanks.
mort_fin — in earlier postings, it was noted that mortgage holders generally are on the hook to buy back bad loans if they default in the first year. If it’s logical to assume that the most recent loans have been the most likely to default, then wouldn’t these banks be at increasing relative risk?
Also, what is a plausible worst-case scenario, and how does it play out, relative to the foreclosure rate percentage and, more importantly, the percentage of loss on each foreclosure? Thx.
It’s usually not a buyback for the first year. Especially in subprime world, every deal is different but I’ve heard a buyback for missed payments in the first 3 months or first 6 months is typical. Real missed payments in the first 3 months are extremely rare, except for blatant fraud (overappraising by 10%-20% not blatant fraud, overappraising by 100%-200% blatant fraud). An article in National Mortgage News a couple of months ago indicated that at least one lender had a lot of buybacks because they screwed up the processing; they didn’t get the notices out to borrowers with the new payment address until it was too late and they got burned because the borrowers were all sending their first payments to the wrong address, but let’s set that one aside. A lender with a blatant fraud problem might get seriously hurt by early buybacks, but in most cases the things that look like a big deal - “Option One had 20 times (or whatever) the typical rate of early buybacks” - usually means that instead of .04% early buybacks they had .8% early buybacks. Unless a lender signed an usually bad deal (buybacks for a year) or has a serious fraud problem early buybacks won’t be a killer.
No one knows how bad it can get. At a conference I was at a while ago an academic called it “the Star Trek problem” - how can you know the risk level when you’ve gone where no one has gone before? FHA in the 1980’s insured loans with 3% down payments to borrowers who were probably in the 620-700 FICO range (FICO’s weren’t common then, so that’s just a guess as to what the credit files would have produced) with DTI’s into the 30’s%. In TX, LA, even for the worst years - loans written 1 to 3 years before the oil bust, lifetime foreclosure rates didn’t pass 25% (5% a year for several years) and losses on defaults averaged under 40%. How bad are the neg am option loans and how will they behave? The early ones 2002-2003 were usually conservative on some dimensions (so I’ve heard second hand but can’t claim to know for sure) - you could get one IF you put down at least 20% OR your FICO score was over 720 and you put down at least 10%, but my understanding is that by 2004-2006 some lenders were still conservative but others would give a neg am to anything that fogged a mirror. How many are of the first sort and how many of the second? No one seems to know.
And will California in 2006-2008 fall farther than TX in the 1980’s or not quite so far? My guess is CA now will do a little better than TX then, but I suspect that most of Ben’s readers would regard me as quite the optimist.
And then there’s fraud. There can always be a buyback for fraud (if it can be proven). There are a lot of fraudulent loans, but is a lot 5% or 25%? And how many of them can be proven. I fear the fraud percent is on the high side, but I suspect the proveable fraud percent isn’t all that high.
I wouldn’t worry (much) about AAA senior pieces of MBS - if someone else is covering the first 40% of the losses, you’d need to see something like an 70% foreclosure rate with 60% losses on each foreclosed loan before you started to get hurt. For the riskier pieces I’d worry.
But it is worth remembering that somewhere around a third of the homes in the country don’t have a mortgage, and half the rest have at least 50% equity (or at least the owners thought they had 50% equity in spring 2005 when the American Housing Survey went out). Maybe 25% or more of recent buyers have taken out “exotic” loans, but there are still a lot of owners who bought several years ago and didn’t refi or HELOC themselves into a hole. For recent buyers foreclosure rates could get pretty high, and I don’t know how high, but three-quarters of owners are at low risk of foreclosure, but might see their paper profits evaporate before their very eyes (BTW - I’m in that boat )
Mort_Fin — thanks very much for the thorough reply.
here are the details from h&r block
early payment default
first payment default up to 3,82%
secound payment default up to 7,35%
third payment default up to 11,66%
http://immobilienblasen.blogspot.com/2006/09/update-conference-call-hr-block-hrb.html
What do you mean by junior and senoir pieces?
Josh
The people who got this loan thought they were getting a 1.45% rate. The rate probably lasted for one month, which is typical, then adjusted to full index plus margin. Many people just do not understand that the “teaser” rate establishes the low payment, but that the actual rate is above other loan types. The broker got a big fee for the outrageous prepayment penalty. They also probably have a big margin on this loan, which also gave the broker a huge fee. Unfortunately, this type of thing is not uncommon. I see lots of these people at my bank (we do not do Option ARMs) who have these loans and want to get out of them because the rate, which changes monthly, is high 6% range to over 7%. What I find is that they usually cannot afford event the interest-only “option”, so they have a big monthly negative amortization. And they are stuck with the loan, even if they pay the prepayment penalty (my bank does not have a prepayment penalty.)
Washington Mutual is smart to get rid of these loans, because they know how risky they are. They sold 70% of them to reduce their risk. Compare that a more conservative bank, like the one where I work, which does not do 100% financing, or Option ARMs, and has big restrictions on stated-income,… and……keeps all of our loans…..and has a delinquency rate one tenth of the state average…..and has no real estate-owned foreclosures…..
I wonder what the conditions WaMu had to agree to in order to off-load these neg-am loans and get them off their books. Do you think that hedge funds and the like who bought them were willing to take on the risk, or do you think that they had certain buy-back clauses that forces WaMu to repurchase loans that go into default?
“do you think that they had certain buy-back clauses that forces WaMu to repurchase loans that go into default?”
They definitely do. There was something in the WSJ recently about how loans were being sent back to the banks when borrowers missed the first payment (the banks insist this is usually an administrative problem.)
I would like to know more about the whole procedure. Basically, a bank like WaMu sends the loans to an underwriter like JP Morgan who creates the bonds. The bonds are divided into tranches. All the losses are first taken by the first tranche, which is called the first-loss tranche (I think.) So the tranches have different ratings.
What isn’t clear to me is who is holding that first-loss tranche, WaMu or JP Morgan. Given that Wall St firms usually seem very adept at avoiding risk, I’m assuming WaMU holds it. So if in a group of 500 loans, WaMu has to cover the first 50 that default, it’s hard to see how they really off-loaded any risk.
Would very well be institutional investors that couldn’t wait to get their hands on some of these. Think hedge funds, pension funds, etc. They buy and the bank probably (I’m speculating) has to set aside a portion of the sold mortgages in reserves. Used to see the funds stepping over each other to “get a little love”.
Every deal I’m sure is different, I’m guessing there are some buyback clauses, some cases in which the bank needs to take the first dollars of risk, and other cases in which the bank was able to sell all tranches of a loan pool with none of these strings attached.
The point that people are missing in this cycle is that securitization has expanded greatly this time around. Generally speaking, those selling and underwriting the loans are the farthest away from taking the risk of holding the paper. Brokers get paid a fee, banks get paid a spread when the loans are sold (subject to various levels of strings attached), and the buyer of the note takes the brunt of the default risk.
Inherently, this has allowed money to flow more freely than ever before. If the secondary market for Option Arms was weaker, and WaMu couldn’t sell the loans, they absolutely would have made less of those loans and/or tightened underwriting standards.
Watch the secondary market dry up as defaults rise, and underwriting standards tighten, and down payments come back into vogue . . .
75% paying the minimum. 75 freaking percent. Just stop and think about that for a minute. The amount of negative amortization interest being added to principal every month around the country, given that 3/4 of option ARM borrowers are making the minimum only, must be staggering. Ugh…
ttp://interestrateroundup.blogspot.com/
Yep, The numbers are mind boggeling, but I’m not surprised by the 75%, many folks have no idea what the total cost of anything is. I know damn well it’s not taught in our public school system here in South Carolina, and the parents, well no need to say more. 2007 is going to be an interesting year and by 2008 the general public(that’s underwater) will be looking for a “new,new deal” come election time.
More “motivated” sellers for me ! I’m so happy !
“75% paying the minimum.”
That is what makes this very, very sweet rental I’m in that much cozier. No rush, no rush at all. Watch ‘em fall and buy right. In all my life, I’ve never come close to having the luxury of so much time to make the right purchase at what for now involves no penalty whatsoever.
Just finshed watching “The Smartest Guys in the Room” Highly recommend it and its message for all those that got caught up in the real estate bubble. Welp speculators here is your medicine:
http://tinyurl.com/n5tq4
Is this link correct? I didn’t see a video named that.
I am not sure if this is true, but here’s a blog from a 24 years old flipper,
about to be foreclosed on 5 houses.
Flippers owning 5, 10, 12 properties are not uncommon in California. This bust will be big.
http://iamfacingforeclosure.com/24/honest-for-sale-by-owner-sign
UFB!
I think I posted this guy’s Craigslist ad on here a few day ago.
He has admitted committing mortgage fraud on this blog.
He’s also on serious drugs with that Dallas place.
Seems like a troll. Why you do you believe he’s real?
I checked the Dallas County Appraisal District. He owns the Dallas house, that’s for sure.
i checked the domain for his website and it’s registered in his name
Man, that guy makes me violent. I beat him up a little on his blog but the nerve . . . . .
He still thinks he can walk away from this debacle with cash and the mortgages cleared. He’s still planning to “stay in the real estate business.” Hasn’t learned a thing and wants other people to bail him out. Unbelieveable. This is why I am so prejudiced against people that age.
Boy do I know! I see these smug little bastards all over our college town. One 22 year old down the block from us just “bought” a $500,000.00 townhouse, said it was a sweet deal. He’s going to flip it for $595,000.00 I may sound like an A-hole but some of life’s lesson’s are best learned the hard way! I really hope some pain comes their way , but some how I’m sure they be bailed.
The bank denied his last loan and he said “that was the last straw, now I had to start paying mortgages and I am behind.” The bank denying his loan was actually a GOOD thing - got him to tumble his own house of cards. He should bless that bank for waking him up to reality.
I have NO, none, nada, non, whatever no is in Italian sympathy for this guy. Even his looks make me want to wring his neck. Punk!!
“Punk!!”
I wonder if he’s going to prison?
Maybe A&E can do a mullet special with bounty hunter “Dog” and filp this house?
I would enjoy watching the flipper being handcuffed by Dogs voluptuous wife
OOOOHHH! I like it…. Cross “Cops” with
“Flip this House,” and you have reality TV where the police and FBI hunt down deadbeat flippers.
Don’t forget the appraiser who jacked up the appraisal value, the loan officer who looked the other way when the flipper got the 5th “owner occupied” mortgage and the real estate agent who help put the whole deal together. They could have multiple cameras going at the same time with them jumping back and forth between the guilty parties.
But he thought real life was just like on X-Box…when you get blown up you just hit the reset button and play again :)…too much Ritalin and Mountain Dew, IMHO
Why don’t help out our boy and bid on his place in TX? $30 in upgrades. She’s a beaut’!
Check out this comment on his blog:
“Um, I’ve read your entire blog. If I were you, I’d consult a lawyer regarding your admissions of mortgage fraud. Heck, if I were you, I’d take this blog down immediately. Lying about being an owner-occupier on a loan app isn’t just a lie, it’s a crime. And you’ve admitted it for the entire world to see. I mean, how you feel if you were one of your lenders and you read this blog? Liar’s loans? Just because “everyone does it,” and mortgage brokers told you to lie about income doesn’t mean it’s okay, doesn’t mean that people don’t get sued and prosecuted for it.
I appreciate your honesty in the blog, but do yourself a favor and take this blog down before some angry renter out there who blames the housing bust on flippers like you decides to look up your county records and send this blog address to all your lenders.”
And then this comment:
“It may be too late for that. Google probably already has the page in its cache, and the wayback machine has also already probably snapped the site image as well.”
And TXchick has it saved and printed. I’ll be checking Pacer from time to time to see if this worm has filed chapter 7 and if he does, I’ll be sending the admission to the lenders and the Chapter 7 Trustee for his case.
That is so great. Really put the screws to this entitled a-hole. He deserves maximum pain.
TxChick — I think that for many of us, your pursuing this apparently blatant commission and admission of mortgage fraud, and posting updates here, will be super-satisfying. Sort of a “Ben’s Most Wanted.” Glad you had the guts to post it like it is, on the perp’s site. With his youthful good looks, I think he’d be a prime “wife” candidate if he went to prison.
Hmmm….it like blaming the beanie baby craze on people who overpay for dozens of beanie babies.
There’s comedy, there’s high comedy, then there’s the comments on that kid’s blog. Holy crap that slays me! I especially love Txchick’s pledge to haunt his inevitable bankruptcy filing by notifying the trustee of his admissions.
TRich — TxChick has honorary cojones — she’ll do it, for sure.
Wow. And my guess is that there are at least 10,000 Caseys in California alone.
If you read the blog carefully, he occasionally says (and I’m paraphrasing): “I want to avoid BK and get us out of this mess.” He says “us” and not “me.” My suspicion is that mommy-dearest co-signed his loan apps and will either be A) cashing out her retirement funds to cover his deficits, B) declaring bankruptcy along with her shithead son, or C) checking out the rental market in Tijuana.
Somehow I just can’t find it in my heart to pity either of them.
Jonathan Lansner, on his OCRegister blog, posted a report that option-ARM mortgages had (for the unspecified period measure) lower default rates then traditional loans.
Well, yeah — as long as you’re looking at the option-ARMs that haven’t re-set yet, which most of them still haven’t. Of course the default rates would be lower — the borrower hardly has to pay anything. Most of the interest is being capitalized — so far.
I suspect the numbers Lansner was using pre-dated the first big wave of option-ARM resets, which is just kicking in now (and therefore won’t show up in the notoriously-laggard statistics for a couple of months or so). When the numbers start reflecting adjusted option-ARMs, instead of the ones whose borrowers are blithely paying the minimum teaser-rate payment, Katy bar the door.
“Well, yeah — as long as you’re looking at the option-ARMs that haven’t re-set yet, which most of them still haven’t.”
And as long as you ignore the humungous increase in the share of Option ARMs for new bubble-zone buyers over the period (after 2000) concurrent with the greatest wave of real price appreciation in US real estate history. That time WAS different…
Thomas — good point.
Quote from Robert Kiyosaki……”Donald Trump and I co-authored a book, to be published next month about what individuals can do to address the massive problems facing this country”
——————————————————————————-
These are the clowns that piss me off! Selling the bullshit on the way up and then again on the way down to line their pockets….and unfortunately, there seems to be no shortage of idiots paying money for these books and seminars. What’s happening to this country?
(this will sort out Ben’s long-time posters/lurkers from the poseurs)
TxChick and Robert Cote are also collaborating on a book, but I’m not yet at liberty to mention the title.
Hi Chip,
I may be a little slow on this. Are you pulling the leg or is this for real?
Sorry for the late reply — I’m definitely pulling your leg!
While Trump is entirely too smug for anyone, Kiyosaki actually give good advice in his books about positive cashflow, vs. the speculation of appreciation. If everyone actually had listened to him, there would have been no bubble. I take it you haven’t actually read his (admittedly odd) books?