‘Residential Construction Officially In Recession’
Some housing bubble reports from Wall Street and Washington. “Cracking down on exotic mortgages that have exploded in popularity in recent years, U.S. regulators told banks Friday that they’ve got to make sure that borrowers can actually pay back the full amount of the mortgage.”
“‘The agencies are concerned that some borrowers may not fully understand the risks of these products,’ the five banking regulators said in a statement Friday. In particular, banks were told not to offer loans that would require the borrower to sell the home or to refinance the loan in order to make the full payment. Such ‘collateral-dependent’ loans are typically prohibited as unfair or deceptive.”
“Exotic loans should generally not be offered to borrowers with limited or no down payment, the regulators said.”
“‘The agencies expect a borrower to demonstrate the capacity to repay the full loan amount that may be advanced,’ the regulators said, including any additional interest or principal that may accrue.”
“Wall Street analysts ahead of final guidance warned that the rules would temper consumer demand for the ‘affordability products’ that are also favored by investors in the $6.5 trillion market for mortgage-related securities.”
“‘It seems likely the rules will have sufficient bite to cause some adjustments in the types of loans being offered in the mortgage marketplace,’ analysts at UBS Securities LLC said in a Tuesday note. ‘That could have some serious repercussions for lenders, as well as for homeowners seeking to refinance their affordability loans.’”
The Christian Science Monitor. “The biggest trouble lies with the adjustable loans that begin with artificially low interest rates. An analysis estimated that $368 billion in adjustable-rate mortgages originated in 2004 and 2005 are at risk of default because of this pattern.”
“‘This translates into 1.8 million families that are at risk as a result of the possibility of default and another 500,000 that are likely to go into foreclosure,’ Allen Fishbein of the Consumer Federation of America said last week at a Senate hearing on nontraditional mortgages.”
“Experts on both the pessimistic side and the optimistic side agree on one thing: The impact of the ARM adjustments will occur over several years. ‘It’s a time release,’ says Christopher Cagan, who did the risk analysis at First American Real Estate Solutions. ‘It’s not a single impact like Pearl Harbor.’”
From Bloomberg. “Consider the bloated inventory of homes for sale and compare the performance to previous housing slumps, says Joe Carson, director of global economic research at AllianceBernstein.”
“‘Since the start of 2005, the inventory of unsold new homes has climbed 29 percent, while the stock of unsold existing homes is up a staggering 82 percent,’ Carson says. ‘During the sharp, protracted housing downturn of the early 1990s, these inventories actually declined, helping to cushion prices.’”
“Cancellations are rising, and they aren’t being captured in the aggregate statistics because of the way the survey is designed. Hence, sales are being overstated and inventories understated.”
“‘Once a sales contract is signed, there’s no way of recording the cancellation or putting the home back in inventory,’ says Dave Seiders, chief economist at the National Association of Homebuilders in Washington. ‘Builders keep track of gross and net sales; we don’t have a net sales number from Commerce.’”
“The Census Bureau, which is one of the Commerce Department’s statistical agencies, counts an initial new home sale: Sales go up and the ‘for sale’ inventory is reduced. If the sale is canceled, it isn’t reflected in revisions to previous months. What happens? When the home is ‘resold,’ statisticians ignore that transaction.”
“The effect of higher cancellations is ‘to overstate the overall level of sales and understate the level of inventories,’ Carson says. What makes the current situation so worrisome is the ‘unprecedented inventory overhang, encompassing new and existing markets and many of the largest metropolitan areas,’ Carson says. ‘Its sheer size raises the odds that prices will fall more and longer nationwide than they did in the 1990s.’”
From MarketWatch. “Banc of America Securities said Friday it expects pending home sales to decline between 3% and 4% in August from the previous month after its monthly survey of real estate agents revealed disappointing traffic trends.”
“‘Lower pending contracts in August should lead to weaker existing closings in September and October, as contracts precede closings by 30 to 60 days,’ wrote analyst Daniel Oppenheim.”
“A.G. Edwards analyst Gregory Gieber estimates the inventory overhang of new homes in the 190,000 area. ‘Hence, before one can even start to think about any improvement for home builders with regard to pricing and profitability, a large inventory drop is required and that in turn will likely require yet additional gross margin declines of a meaningful magnitude,’ Gieber said.”
“‘Residential construction is officially in recession, as the home-building stocks predicted long ago,’ wrote Merrill Lynch North American Economist David Rosenberg in a report Friday.”
‘the ‘affordability products’ that are also favored by investors in the $6.5 trillion market for mortgage-related securities.’
I guess it should be clear now why these loans exist.
’statisticians ignore that transaction. ‘We don’t double count,’ says Steven Berman, the survey statistician for the residential branch of the Census Bureau’s manufacturing and construction division.’
I’m glad we finally cleared the air on this issue.
So do I understand this correctly? A new house is “sold” in March 2006 but the sale is cancelled, and the house is still sitting on the market today. According to the Census Bureau, this house is for all intents and purposes “sold” and not contributing to the level of unsold inventory. This would, of course, is not a problem for their numbers since, as we all know, the cancellation rate is low and cancelled houses are resold immediately. NOT!!
HOLY MOLY
I have a great idea — all the people who aren’t officially “unemployed,” according to the government, should be allowed to move into all these officially “sold” houses!!!!!!!!!
How do you know they aren’t already?? I’ve heard some stories.
big gov =useless
can’t even count
big gov = useless = vote against all incumbents. Every single one — don’t exemt the one who brings pork to your ‘hood. Only way to see real results.
The only thing clear to me is that these loans were given to too many people who should have never been given a loan, for waaay too much money.
Once the spigot gets turned off to unqualified borrowers, the price drops will accelerate. I believe that since the RE Shill papers are now putting these stories on the front page (like the LA TIMES article today) this is signalling the CYA and crackdown phase of lending. Probably another milestone in getting this housing market crash going.
I agree!! The cause of this housing bubble has everything to do with the credit bubble. Now that regualors are tightening their grip on these exotic loans it will further reduce the ability to sell houses at these crazy prices due to a smaller supply of potential buyers. This, hopefully, is just a start to even further tightening. Finally, someone is starting to step forward and tell banks they need to be accountable for their loans. I believe the current news stories are just a crack in the dam that is getting ready to break. It is going to be an interesting time the next couple of years!!!
When I was a kid, I heard a song about the Great Depression. I remember the lyrics — “stocks are going up up up, buying on margin, up, up, up”
It’s like déjà vu all over again.
Calling them “affordability products” is a symptom of a bigger problem: creative financing being used to get people into houses they can’t afford. If someone can’t afford to make a nominal interest payment plus a good portion of principle each month, they can’t afford the house. As long as exotic mortgages are being used like this, foreclosure rates will stay high. And I do place blame on the borrower as well as the bank. The fact that payments will increase is no secret. It’s not spelled out in fine print, its written very plainly where anyone would see it. People must be signing loan docs without ready ANY part of what they sign. Do they really think thats a good way to buy a house?
Concur, It used to be ‘buyer beware’ but now at least in California we are a FULL DISCLOSURE state. Which means that the terms must be written out in plain language in a large enough font to be seen. It is not required that the buyer actually understand those terms. This is the job of the broker and loan officers to make sure they understand these terms. When the flood of litigation comes out that the buyers did not understand what they were signing we are going to see a lot of back and forth on who is responsible for that. Bottom line is: even in a full disclosure state the ‘buyer must beware’ and ‘understand’ what he/she is signing!!! It could have been the intoxicating smell of money that clouded their brain.
I definitely had this wrong. I thought cancellations are what caused the downward revisions, but apparently, they are in addition to those.
One thing that isn’t clear to me, are these homes from cancellations showing up in the existing homes inventory, or not at all?
“…are these homes from cancellations showing up in the existing homes inventory, or not at all?”
Great question. That is the subject of current debate on the blog. One of the more authoritative posters said that they do not, but I’m waiting for a more detailed explanation of that.
I wonder what forced the commerce dept. to explain its statistic’s derivation. Where did the heat come from? Was it the builders? Investors?
The new homes sales statistic really was the only positive turd bobbing up and down in the rising tide of housing market despair. Mocking market reality. Taunting it…
Yes, but remember that if they had used the original numbers from July, the August sales numbers would be negative, not positive. They were still negative about 17%, YOY, which is a better comparison due to seasonal/monthly differences. That new home sales report was one of the most disgusting examples of spin we’ve seen recently (other than the garbage which Gary Watts spews forth on a constant basis).
Gary Watts only has credibility with morons (e.g., Realtors (TM) ). I put the Census Department in a much different league than some Cal State graduate turned real estate guru.
Cynical-to-the-max, I believe that in the end, only after the elections are over will the smoke clear and the mirrors be discernable. Then it will hit the fan and ya’ll better have your battle-gear on. End of nicey-nice.
damn straight. If I were 26 or younger I’d be signing up for the Coast Guard right about now.
So does the confession that cancellations are booked as sales lay to rest the euphoria over that higher-than-expected level of new home sales data blip from a couple of days ago?
Furthermore, does the cancellation of house that is RE-negotiated count as NEW sale??
“‘Residential construction is officially in recession, as the home-building stocks predicted long ago,’ wrote Merrill Lynch North American Economist David Rosenberg in a report Friday.”
Hah! Good thing that homebuilder share prices are immune to such information. They have reached a permanently low plateau, from which no further declines are possible.
“Good thing that homebuilder share prices are immune to such information. They have reached a permanently low plateau, from which no further declines are possible.”
Best comment yet on the irrational behavior of HB stock prices during the past couple of months!
Jim Cramer is the modern-day Irving Fisher!!!
“a permanently low plateau”
LOL - I like that.
The Economist thinks the recession may soon extend beyond residential construction. (Isn’t it nice how our friends across the pond always revel in dissecting the sources of our discomfiture?)
——————————————————————————————–
The economy
Going down?
Sep 28th 2006 | WASHINGTON, DC
From The Economist print edition
Why the housing slump may spell recession
THREE years ago Rose Hill estates was a dairy farm in Loudoun County. Now it is in the front line of America’s housing slump. The rolling fields are dotted with cut-price McMansions. The asking price for new houses, complete with gourmet kitchens and “extended libraries”, has been slashed by 20%. But business is slow. The pace of home sales in the county has halved since last year while the stock of unsold homes has doubled. “The region is glutted with new houses,” says Lenn Harley, an estate agent. “The market is dead.”
http://www.economist.com/world/na/displaystory.cfm?story_id=7971153
“The effect of higher cancellations is ‘to overstate the overall level of sales and understate the level of inventories,’ Carson says. What makes the current situation so worrisome is the ‘unprecedented inventory overhang, encompassing new and existing markets and many of the largest metropolitan areas,’ Carson says. ‘Its sheer size raises the odds that prices will fall more and longer nationwide than they did in the 1990s.’”
This sounds like a methodological flaw whose unintended consequence is to bake a collapse into the cake at the end of the bubble. Eventually, Main Street perceptions will catch on to the fraudulent gap between official statistics and ground-level reality, and nobody will want to try to catch a falling knife. Why would you want to rig a statistical methodology to trigger crashes? It is a puzzlement.
So the solution to the inventory problem is for the HB’s to sell ONLY houses that have not been “SOLD” previously and cancelled. Hell, they can sell all their inventory then cancel it and all the inventory disapears. Excellent!
With ideas like that you will go far in the Real Estate industry. Have you considered taking a job as chief spokesman for the industry?
‘Its sheer size raises the odds that prices will fall more and longer nationwide than they did in the 1990s.’”
More brilliant analysis from the pundits…how many times has this been posted on Ben’s blog in the past year and a half?
Maybe they are reading our blogs now in order to come up with next weeks quote. How about this one pundits:
We knew this was coming, but we were so giddy with greed that we would say anything to keep the money machine rolling forward. It appears now our pockets are full and Americas are empty so this will be my last statement before I retire. If you bought a home with an affordability mortgage in the last couple of years you are a FB-Good Luck and Good Night!!
“Maybe they are reading our blogs now in order to come up with next weeks quote.”
Shakes — there is no “maybe” about it. The powers-that-be in this industry now read Ben’s blog just like the MSM regular-news types read Drudge after he broke the Lewinsky story. It’s a whole different world. MSM is relegated to post-fact voyeurism and is institutionally incapable of correctly predicting much of anything, including, it appears, hurricanes.
The reason the statistics are rigged is the same as for Social Security. They figure that when the masses figure out what’s going on, they’ll be long gone.
Jerry — you got it.
The federal regulatory agency is just offering guidance and suggestions with no enforcement. The lenders should at least go over several possible scenarios with examples of dollar amounts. It’s clear that the average (and below average) borrowers have no idea what they are buying unless they were to walk through examples. Unfortunately, in most cases, the lenders are just reading some technical language, saying that everything will be fine and asking the borrower to sign on the dotted line. Maybe they even ask if the borrower has questions. However, it takes at least a little understanding to ask questions.
“Maybe they even ask if the borrower has questions.”
And maybe only one main question comes up: “What will my monthly payment be?”
Answer: “Your monthly payment on your $300,000 loan is only $63 dollars, sir! And you can refiance with us again (since your such a valued customer, and we care about you) for a mere $300 fee. We’ll get you right back into that $63/month payment after you take out **all that equity** your house will earn over the next year. Congratulations! You’re now a “savvy borrower”.
Does anyone else chuckle when some agency from our federal governement offer guidance on fiscal matters? Physician, heal thyself.
Actually, I think regulators definitely have a lot of means of persuasion, even if there aren’t clear means of enforecement, per se.
I think this is definitely being seen as a crack down, if only a moderate one.
Basically, they seem to be saying that loans have to qualified based on a worse-case scenario. In the case of an option ARM, based on the payment AFTER a period of negative amoritization and with a jump in interest rates. The banks were clearly not doing this.
I think it will have a real effect on markets like CA, AZ, NV and FL that have depended on these loans.
This could well accellerate the bust. And it has the added benefite of making me feel easier about all my puts on mortgage lenders and homebuilders.
Federal regulators cannot enforce what type of loans a bank makes. If the bank is chartered and FDIC Insured when the regulators come in for their semi-annual loan reviews, those loans that do not conform will not get as strong a credit rating. The bank will then have to hold more capital to make those loans and will thus be less profitable.
The federal regulatory agency is just offering guidance and suggestions for the lenders with no enforcement. The lenders should at least go over several possible scenarios with examples of dollar amounts with each borrower. It’s clear that the average (and below average) borrowers have no idea what they are buying unless they were to walk through examples. Unfortunately, in most cases, the lenders are just reading some technical language, saying that everything will be fine and asking the borrower to sign on the dotted line. Maybe they even ask if the borrower has questions. However, it takes at least a little understanding to ask questions.
All of this reporting of the mis-reporting of statistics means that the situation is even worse than it “appears”. We don’t have a grip on a the size of the “marginal” borrower, the one’s with resets occuring and with marginal “staying power”.
Is it manageble? Perhaps it is but, in the face of a void in data, people are (eventually) going to assume the worse case (human nature being what it is). When that occurs, no one is going to believe NAR and other real estate “cheerleaders” at all.
The world of investing revolves around confidence. Confidence is based on knowledge. When people find themselves not only in a knowledge void but in a situation where “experts” appear not only wrong but having “betrayed” them, we are in a world of hurt.
Jag, exactly. And since prices are so high, the betrayal is of a very large magnititude. The consequences are staggering.
How hard could it be to add the cancellations back in? This is the census bureau.
Or for that matter, why not record a “close” as a “sale”? Isn’t that the actual “sale”?
I wonder if the sales staff for home builders collect their commission at the time of the ’sale’, or at the time of the ‘close’. I would hate to think they had to hand back 30% of those commision checks with all the cancellations taking place.
Because that would mean that Countrywide and all the other lenders could only count earnings after they have received all the interest on their neg amortization loans. Haven’t you gotten on board with the NEW phrase: COUNT ALL CHICKENS AS THOUGH THEY HAVE HATCHED
my wife and I had a good time last night.
better buy stock in Pampers, cuz we’re gonna have a million babies 9 months from now…
Chilidogg. Well said, Well said!!!
Shakes
“U.S. regulators told banks Friday that they’ve got to make sure that borrowers can actually pay back the full amount of the mortgage.”
I’m confused, why should a bank need to be “told” to make sure a borrower can pay back a loan. I know the banks just sell off the BS paper, but who the hell is buying this garbage?
U.S. regulators told banks Friday that they’ve got to make sure that borrowers can actually pay back the full amount of the mortgage.”
You’re doing a hell of a job, Brownie!!!
or have we forgotten the FEMA appointee who was praised a few days after Katrina hit.
The US banking industry has sunk to an all time low when US regulators have to instruct the bank to make sure they get loans back. What words can one use to describe…pitiful, pathetic. The situation in 1929 was ten times better than today. Unbelievable.
Well said, P’cola.
1929: down payment required on stocks: 10%
2006: down payment required on housing: 1% or less.
Hey, P’P I think your numbers make some sense.
his numbers are way off.
how many people in 1929 leveraged 6x their annual earnings to buy stocks?
The shrewd banks and lending institutions may not actually care if they get the loans repaid or not - they have repackaged and sold them as securitized debt instruments or bought “cover” on them. And who are the actual end users? Entities like the pension funds of local government workers in Florida and Cal, who are desperate (greedy) for the extra yield.
The smaller lenders see the bigger guys doing it and figure the leaders know what they’re doing (issuing I/O arms), only the smaller guys aren’t as savvy as laying off the risk. In a shakeout the strong generally emerge stronger - this may be a partial explanation of why the mega-lenders and mega HB-stocks are doing OK - if they can survive they know all the small-time lenders and developers are toast and no competition going forward. I can remember back to the RE shakeout in 1973-74 at the beginning of the big period of stagflation. The small-time developers mostly busted and new ones didn’t emerge from that debacle until the early-mid 1980s.
You are exactly right Paul; the mega banks have deep pockets; moreover, they have unbelievable influence on the political dimension; they write and re-write the rules after all.
david cee, actually the quote was “Brownie, you’re doing a heckuva job”
Global Language Monitor named “Brownie, you’re doing a heckuva job” as U.S. President George W. Bush’s most memorable phrase of 2005.
Although the president did not originate any new words this year, he had several notable statements, Payack said, citing the following:
– “See, in my line of work you got to keep repeating things over and over and over again for the truth to sink in, to kind of catapult the propaganda,” Bush said in explaining his communications strategy last May.
http://tinyurl.com/c83qz
WOW, Imagine that! What a concept! Pay back a loan that you ask for. Sounds like someone really had to think long and hard to come up with that comment. Now it’s a matter of determining who it is that has a loan that they can’t afford. That should be easy. Follow the NoD letters. The FBs may have a bit of a problem once the goalposts get moved. ReFi won’t work since they won’t be able to meet the simple minimum requirement.
That’s precisely why it has taken so long to come up with the new regulations. Expect them to get watered down - A LOT - before release. They don’t want the obvious outcome of their proposed actions and congress will push back HARD.
This thing is reminding me more and more of the car selling industry - replacing that ‘new car feeling’ with appreciation. The car sales force has no interest in whether or not the buyer honors the loan - just make the sale,baby! Mortgage lending has become the same - make the sale, sell the paper, who’s on first. It has been reduced to the level of scam, gold front tooth optional.
It’s about fr!$#in time; pull the rug out from under these SOBs.
“….U.S. regulators told banks Friday that they’ve got to make sure that borrowers can actually pay back the full amount of the mortgage…..”
If this statement isn’t in the running for one of the all time great “Closing the barn door after the horse is gone” comments, I’m going to be very disappointed …..
‘U.S. regulators told banks Friday that they’ve got to make sure that borrowers can actually pay back the full amount of the mortgage.’
With cat like quickness, the Feds have put a stop to this lending, just as the party is ending. When did they announce these ‘guidelines’ were coming? I believe it was late spring 2005.
Well, maybe not ‘put an end to’. From the Reuters link:
‘ The OCC’s Dugan said in an April speech that regulators do not suggest ‘by any means’ that there should be a ‘wholesale clamp-down’ on such mortgages.’
I love the new guidelines:
Guidline No. 1 Make sure you get the f*@k&ng money back!!!!!
Guidline No. 2 See Guideline No. 1
It is too late to save the sheeple but if this is really what I think it is, the credit crunching impact will weigh heavily on housing demand and prices. Builders can hang out their white flags now; it’s over; they are toast!
And their new home sales statistics are lies.
Bring in the Greek correction team!
:-)!
‘U.S. regulators told banks Friday that they’ve got to make sure that borrowers can actually pay back the full amount of the mortgage.’
Problem is the Banks just keep saying the same thing to the Guberment….”Make Me…Neener Neener Nah Nah”….p
‘U.S. regulators told banks Friday that they’ve got to make sure that borrowers can actually pay back the full amount of the mortgage.’
Yes, it’s too little, way too late. Still, the guidelines are pretty strong (stronger than I expected), and they do have teeth. (Or else why would the lending institutions be so angry about them?) They also make for fun reading (if you are house market-obsessed). Especially fun is when the regulators address the “comments” made in recent months by lenders who see nothing wrong with qualifying people for Option Payment mortgages at the lowest possible payment. According to the guidelines, those days are numbered.
Also of interest: The regulators say they will go after licensed mortgage brokers via the states (i.e., state regulators will be forced to adopt the same guidelines).
The cornerstone of the guidelines, according to my brief reading of them, is this: To qualify for any mortgage (IO, Option Payment, choose your poison), you have to be able to pay the fully amortized amount. That, frankly, is all I ask for these days (and yes it’s disgusting that it hasn’t been that way for some time).
If anyone else wants to take the time to read the guidance, it might make for a good thread. What impact will the guidelines have, if any, and when? If anyone knows how big of a stick the OCC/FDIC etc. actually wields over these matters, that would be great to know.
“‘This translates into 1.8 million families that are at risk as a result of the possibility of default and another 500,000 that are likely to go into foreclosure,’ Allen Fishbein of the Consumer Federation of America said last week at a Senate hearing on nontraditional mortgages.”
Holy smokes. I’ve heard a lot of the talking heads touting the recent housing data points. Do they even read material like this?
It sure doesn’t seem that way.
The FDIC in its spring report on the coming recession stated that 70% of Americans now own homes versus historical 64%. The FDIC report stated that they expected home ownership to go back to 64% because of foreclosure. Or to put it another way 10% of all homeowners will go into foreclosure.
I wish they wouldn’t use the word “own”
“70% of the population is owned” would be more appropriate.
What about homeowers?
After I read that comment I couldn’t breath for a couple of seconds. The magnitude of that knocked the wind out of me.
Anyone know what that translates to as a percentage of total American families? (How many “families” are there in America?)
Cue regional “experts” to extol how their region is different and there will be no foreclosures there, and housing is just fine because everyone wants to live in this region.
I’ve been looking at the same 9 foreclosures in my zip on foreclosure.com since first coming on this blog 7 months ago. I don’t think it’s because everyone wants to live here. Au contraire, I think it’s cuz no one (or relatively few) want to live here….I’m wondering if we’ve even had 50 new homes built in my town since I arrived 4.5 years ago.
Several towns north of us have seen record building and have been experiencing an increase in foreclosures. Nothing too crazy but I’m watching to see if those numbers explode when this area finally sees the slowdown.
About 105 million:
Census projections of number of households 1995 - 2010
Seminal Events?
http://www.xanga.com/home.aspx?user=russwinter&nextdate=9%2f29%2f2006+23%3a59%3a59.999
yes, another major bubble inflection point on the way down. faster and steeper.
Russ,
Your site is always a good read. Thank you!
I always enjoy reading your commentary. And I agree, the OCC really might have delivered a death blow to truly toxic lending.
“The concern that consumers may not fully understand these products would be exacerbated by marketing and promotional practices that emphasize potential benefits without also providing clear and balanced information about material risks,” the regulators said.
I think borrowers understood these pefectly! They all thought they were Real Estate Geniuses! They fantasized about being Donald Trump, dating Supermodels, and having their own airplanes.
I really don’t like regulation. Why not just build some debtor’s prisons instead?
While many of us see the obvious disconnect in $50K earners buying $800K homes, believe it or not, many of these people honestly don’t get it. Most people I know are not flippers, nor do the set out to get rich in real estate. It just kinda hits them over the head.
Not sure what others have experienced at loan doc signing, but I’ve had them bring papers witht the signature lines highlighted and with sticky-note arrows pointing to where we need to sign. Basically, the notary would say, “this is the note…sign here and here.” Now, who would need sticky notes and highlighters if they were reading all the documents?
BTW, the notaries become VERY testy if you actually try to read what you are signing, saying, “these are just standard documents, you don’t need to read them…you’ll get a copy at closing.” Seriously, WTF?
I have had them say that to me as well!! I look them straight in the eye and tell them “They may be a standard form to you but to me they are a contract that I am agreeing to and I will not sign until I have read and understand the terms!!” They seem to backoff rather quickly!! Maybe I was taught differently then most. Yes when it comes to small things like a software disclosure statement I click YES I agree to these terms without reading, but a house or condo is a huge purchase that can have dire consequences if the terms are different then what you thought were going to be on the paper. Have we been innondated with release forms, disclosure statements and other forms to the point we are too busy or complacent to reading these documents?
I did the same — told them that I don’t sign anything until AFTER I’ve read it.
Sounds dorky to admit this, but I actually used to read all those software disclosure statements before agreeing to them.
“affordability products”
Translation: Suicide Loans
“Exotic loans should generally not be offered to borrowers with limited or no down payment, the regulators said.”
Yep! That’ll get lenders and brokers to tighten up. NOT!
(Calling them “affordability products” is a symptom of a bigger problem: creative financing being used to get people into houses they can’t afford.)
Or, more accurately, in the same houses they would have been able to afford if the bubble hadn’t bid up the price, but with an unaffordable debt.
Kind of like how if we increase the money supply by 20 times or so, we could all live like millionaires!
I love that old SNL skit with Dan Akroyd as president Carter on the weekend update saying his solution to the inflation problem would be to make everyone a millionaire.
http://snltranscripts.jt.org/78/78dcarter.phtml
Great one, Santa!
Very entertaining - those old SNL days bring back memories…my parents would make me watch it in the basement (on the crappy B&W set) because I would laugh so hard.
And who can forget Dan Ackroyd (as Jimmy C) in, “The Pepsi Syndrome”. An all-time classic.
No doubt about that one! Here’s the transcript for anyone interested in the Pepsi syndrome!
http://snltranscripts.jt.org/78/78ppepsi.phtml
wasn’t there a skit where Akroyd did Carter, his solution to inflation was throwing money into the fireplace?
“‘…. In particular, banks were told not to offer loans that would require the borrower to sell the home or to refinance the loan in order to make the full payment. Such ‘collateral-dependent’ loans are typically prohibited as unfair or deceptive….”
The day authorities start enforcing this principle will be the day that sales in all bubble areas drop 90%. I.e. not going to happen. Talk is cheap.
“In particular, banks were told not to offer loans that would require the borrower to sell the home or to refinance the loan in order to make the full payment. Such ‘collateral-dependent’ loans are typically prohibited as unfair or deceptive….”
Hmmm…I wonder if a light bulb just went on in some underemployed California lawyer’s head. California Business & Professions Code section 17200 allows a person to sue a business for “unfair, unlawful, or fraudulent” business practices. As a corporate defense lawyer, I hate that section — it’s so vague that even the California courts of appeal are pleading with the legislature to explain what “unfair” actually means, so they don’t have to make a subjective judgement based on what’s become an unbelievably convoluted standard (two competing ones, actually — the different appellate districts disagree). And the law has been tightened to require that the plaintiff show that he was actually damaged by the unfair practice, but…
I wonder: Could a bold attorney singlehandedly put a stop to “affordability products” (which in California appear overwhelmingly to be used in precisely the prohibited “collateral dependent” fashion), with a Section 17200 action alleging an unfair and fraudulent business practice?
Hm. I think I smell a trade journal article.
Good point Thomas.
We need some class actions against banks and lenders. This will actually help the bubble unwind faster while really causing banks and lenders to tighten up.
Thomas,
Do we hear a volunteer?
hear=have, sorry.
Hmph. It seems this kind of claim would be preempted by federal law. Back to the drawing board.
Thomas,
Please DO go back to the drawing board on this one. And get your lawyer buddies involved. The publicity alone would be enough to make some Americans stop and think about these stupid loans they’ve been using that only serve to drive up the price of homes.
Today, the major lenders had the audacity to say that the proposed guidelines would make houses “less affordable” for Americans. Talk about SPIN and LIES.
The buck stops with the banks. If they hadn’t promoted and allowed this crap, homes would still be affordable.
“‘It’s a time release,’ says Christopher Cagan, who did the risk analysis at First American Real Estate Solutions. ‘It’s not a single impact like Pearl Harbor.’”
It’s not like Pearl Harbor — it’s a time bomb.
“It’s not like Pearl Harbor — it’s a time bomb.”
How many more descriptions are there for this damn bubble. The mind boggles
banks were told not to offer loans that would require the borrower to sell the home or to refinance the loan in order to make the full payment
It’s not even clear how this would work. Selling the property would make the “full payment” affordable inasmuch as the payment would be zero. Refinancing might make the payment decrease, but only if interest rates are decreasing.
it’s killing my biz- and I’m focussed on service contractors
gps tracking
Flat,
What’s killing your biz? The regulations???
My ex-neighbor is disgusted with the option Arm loan, what used to be an affluent neighborhood with defense Lawyers and Psychiatrists is now inhabited by the lawyers defendants and the “shrinks’ patients, he says everyone can afford this now.
Wow. That lending guidance is great. I can’t say enough. Read the PDF. I know, it’s filled with “should” instead of “shall”, but the banking industry is officially put on notice to clean up its act (for at least the near term). The bankers I know take this kind of guidance very seriously. Sorry for the long post.
http://www.federalreserve.gov/BoardDocs/Press/bcreg/2006/20060929/attachment1.pdf
P. 10 (actual text of guidance):
“Given the potential for heightened risk levels, management should carefully consider and appropriately mitigate exposures created by these loans. To manage the risks associated with nontraditional mortgage loans, management should:
• Ensure that loan terms and underwriting standards are consistent with prudent lending practices, including consideration of a borrower’s repayment capacity;
• Recognize that many nontraditional mortgage loans, particularly when they have risk-layering features, are untested in a stressed environment. As evidenced by experienced institutions, these products warrant strong risk management standards, capital levels commensurate with the risk, and an allowance for loan and lease losses that reflects the collectibility of the portfolio; and
• Ensure that consumers have sufficient information to clearly understand loan terms and associated risks prior to making a product choice.”
P. 12 (actual text of guidance):
“In addition, for products that permit negative amortization, the repayment analysis should be based upon the initial loan amount plus any balance increase that may accrue from the negative amortization provision.7 Furthermore, the analysis of repayment capacity should avoid over-reliance on credit scores as a substitute for income verification in the underwriting process. The higher a loan’s credit risk, either from loan features or borrower characteristics, the more
important it is to verify the borrower’s income, assets, and outstanding liabilities.
“Collateral-Dependent Loans – Institutions should avoid the use of loan terms and underwriting practices that may heighten the need for a borrower to rely on the sale or refinancing of the property once amortization begins. Loans to individuals who do not demonstrate the capacity to repay, as structured, from sources other than the collateral
pledged are generally considered unsafe and unsound.8 Institutions that originate collateral-dependent mortgage loans may be subject to criticism, corrective action, and higher capital requirements.
“Risk Layering – Institutions that originate or purchase mortgage loans that combine nontraditional features, such as interest only loans with reduced documentation or a simultaneous second-lien loan, face increased risk. When features are layered, an institution should demonstrate that mitigating factors support the underwriting decision
and the borrower’s repayment capacity. Mitigating factors could include higher credit scores, lower LTV and DTI ratios, significant liquid assets, mortgage insurance or other credit enhancements. While higher pricing is often used to address elevated risk levels, it does not replace the need for sound underwriting.
“Reduced Documentation – Institutions increasingly rely on reduced documentation, particularly unverified income, to qualify borrowers for nontraditional mortgage loans. Because these practices essentially substitute assumptions and unverified information for analysis of a borrower’s repayment capacity and general creditworthiness, they should be used with caution. As the level of credit risk increases, the Agencies expect an institution to more diligently verify and document a borrower’s income and debt reduction capacity. Clear policies should govern the use of reduced documentation. For example, stated
income should be accepted only if there are mitigating factors that clearly minimize the need for direct verification of repayment capacity. For many borrowers, institutions generally should be able to readily document income using recent W-2 statements, pay stubs, or tax returns.
“Simultaneous Second-Lien Loans – Simultaneous second-lien loans reduce owner equity and increase credit risk. Historically, as combined loan-to-value ratios rise, so do defaults. A delinquent borrower with minimal or no equity in a property may have little
incentive to work with a lender to bring the loan current and avoid foreclosure. In addition, second-lien home equity lines of credit (HELOCs) typically increase borrower exposure to increasing interest rates and monthly payment burdens. Loans with minimal or no owner equity generally should not have a payment structure that allows for delayed or negative amortization without other significant risk mitigating factors.
Introductory Interest Rates – Many institutions offer introductory interest rates set well below the fully indexed rate as a marketing tool for payment option ARM products. When developing nontraditional mortgage product terms, an institution should consider the spread between the introductory rate and the fully indexed rate. Since initial and subsequent monthly payments are based on these low introductory rates, a wide initial spread means that borrowers are more likely to experience negative amortization, severe payment shock, and an earlier-than-scheduled recasting of monthly payments. Institutions should minimize the likelihood of disruptive early recastings and extraordinary payment shock when setting introductory rates.
Lending to Subprime Borrowers – Mortgage programs that target subprime borrowers through tailored marketing, underwriting standards, and risk selection should follow the applicable interagency guidance on subprime lending.9 Among other things, the subprime guidance discusses circumstances under which subprime lending can become predatory or abusive. Institutions designing nontraditional mortgage loans for subprime borrowers should pay particular attention to this guidance. They should also recognize that risk-layering features in loans to subprime borrowers may significantly increase risks for both the institution and the borrower.
Non-Owner-Occupied Investor Loans – Borrowers financing non-owner-occupied investment properties should qualify for loans based on their ability to service the debt over the life of the loan. Loan terms should reflect an appropriate combined LTV ratio that considers the potential for negative amortization and maintains sufficient borrower equity over the life of the loan. Further, underwriting standards should require evidence that the borrower has sufficient cash reserves to service the loan, considering the possibility of extended periods of property vacancy and the variability of debt service requirements associated with nontraditional mortgage loan products.”
In other words, Washington Mutual and Wells Fargo, I’m looking in your direction.
“Institutions that originate collateral-dependent mortgage loans may be subject to criticism, corrective action, and higher capital requirements.” Can someone explain in layman’s terms what they mean by “criticism” and “corrective action”?
corrective action - inability to originate mortgage loans, shutting down the bank, fines, prison
higher capital requirements - more reserves, meaning less money to lend out
criticism - double secret probation, having the federal government having their own shop at your office
This is especially significant since the Feds gave a preview of this guidance to the banks, and the banks screamed and yelled about it. My understanding is that the Feds issued this guidance with no changes to the preview.
The banks know this guidance to be significant.
Excellent summary. Hits all the major points. Thanks for posting.
I agree, I read over it. Some of the disclosures ought to really p*ss off the schisters. For example, premiums for low documentation loans have to be disclosed to the borrower. Meaning, you have to tell the borrower that by going to a no doc loan over a full doc means you have just added .50 - 1.00 point to the rate. Those ads that I hear where the president of the mortgage company doesn’t want to burden the borrower by asking for tax returns, paystubs, etc., now have to tell the prospect that it will cost them more.
Borrowers getting option ARM’s should see a chart of what happens to their loan over the next 5-8 years and compare it to a 30 year mortgage, 5/1 ARM, IO payment, etc. What happens to the payment if the rate increases 1%, 2%, 5%.
It looks like borrowers may also have to qualify for option ARM’s based on their ability to make the fully adjusted payment.
The feds are also not impressed that just because someone has a high credit score shouldn’t offset the fact that they are not demonstrating their ability to repay a loan (i.e. - stated income, no doc, no ratio) at a high LTV.
Like all guidelines and laws though, they mean nothing if they aren’t enforced. Time will tell if these mean anything.
“The bankers I know take this stuff very seriously”.
Incessant Din-
I’m hoping that you know more than one banker and that he isn’t the one nerdy do-gooder banker in the whole of the USA.
And thanks for the PDF!
More than a handful. My mom has worked at four banks, including one that was recovering after some shenanigans (before she got there), that led to “remedial action”.
Come to think of it, mom’s only worked at 3 banks, one of them was a local bank that morphed into a regional power, so I double-counted. But I’ve met quite a few executives (she’s on the corporate side, not a branch), and I know how they react to “criticism” from auditors and examiners.
Bankers go through phases. In the mid 90s in SoCal, they were, for the most part, extremely straight-laced. I saw with the tech bubble, that the amount of money flowing around was loosening them up. That’s a bad sign, and probably motivated a lot of them to start finding new revenue streams. Also, hedge funds and derivatives are the new black hole for helping make stuff add up.
The Fed, OTS, and FDIC require them to limit risks, and derivatives are seen as the most obvious solution to some. Too bad, I thought our system was doing alright with slow and mostly positive growth.
BTW, my mom is still very straight-laced. I’ll ask her about what she thinks of the latest guidance this weekend. She’s been ambivalent about whether or not there’s a full blown bubble in housing, but I think she’s already seen the writing on the wall. For a while, she wanted me to buy a home, but when I told her how much I was saving and how much I was contributing to retirement accounts, that pacified her
Another great excerpt, not from the actual guidance, so less binding, but notable for establishing “intent”, so that lenders know they are serious, and are not going to put up with any more shenanigans:
“Regarding interest-only loans with extended interest-only periods, the Agencies note that since the average life of a mortgage is a function of the housing market and interest rates, the average may fluctuate over time. Additionally, the Agencies were concerned that excluding these loans from the underwriting standards could cause some creditors to change their market offerings to avoid application of the guidance. Accordingly, the final guidance does not exclude interest-only loans with extended interest-only periods. Finally, regarding the assumption for the amount that the balance may increase due to negative amortization, the Agencies have revised the language to respond to commenters’ requests for clarity. The basic standard, however, remains unchanged.”
In other words, “We know some people will look for loopholes. We looked for them ourselves, and we want to let you know that we expect you to stop throwing money away, starting now… Don’t make me come back there.”
Prediction -
Cancellations up even more for October than September, sales down even more for October than September.
This guidance WILL have an impact.
I hope you are right!! That UCLA farce of a report made me about want to vomit yesterday! Flat prices for 6 - 16 years! What a crock! Aren’t flat prices the “nightmare” scenario everyone here in CA was talking about last year? No more ATM or refinancing!! Bye, bye FBs!!
Psst..Psst..Hey You, the sweaty one ! Mr. Banker man, Over here…In the Alley. I have this friend with several 1st rate apartments and villas available in the Rio de Janeiro area. The false passports and the usual travel papers can be made availabe for a small token sum, say like your total body weight in Canadian Maple Leafs or SA Krugerrands.. plus your 1st born as a deposit. ha ha ha