“A Problem Of Underwriting Quality”
Bloomberg reports on home loans. “Defaults on adjustable-rate mortgages made this year to the riskiest borrowers and packaged into bonds surged 25% in October to the highest level for new loans in five years, Friedman Billings Ramsey Group Inc. said.”
“Defaults on this year’s sub-prime loans in the $2-trillion asset-backed securities market were 30% higher in October than the 2000-to-2006 average for loans of the same age, the firm said.”
“Subprime loans from 2006 aren’t just performing badly. The loans, in particular those used to back mortgage bonds, could prove to be one of the worst-performing groups yet, according to UBS.”
“‘I guess we are a bit surprised at how fast this has unraveled,’ said Tom Zimmerman, head of ABS research for UBS. While it’s ‘not a secret that subprime collateral has performed pretty disastrously so far,’ he said, ‘I must say we were a bit surprised by the magnitude with which’ the loans ‘deteriorated this year.’”
“There are a few contributing factors that explain why 2006 subprime loans are performing worse than those from earlier years, Liu said. One factor is what’s called risk layering, for example, giving interest-only loans to borrowers who are not showing full documentation of their income.”
“‘The biggest picture is the risk layering is getting worse,’ Liu said. ‘That is a problem of underwriting quality.’ The rate of subprime loan delinquencies of 60 days or more has climbed to about 8 percent, up from about 4.5 percent a year ago.”
From Ken Harney. “If the IRS wants to spot large numbers of people who are stiffing the tax collectors, it might want to consider auditing a fast-growing segment of the home-mortgage market.”
“Geosegment Systems asked a representative national sample of 2,140 mortgage brokers active in the limited documentation field and came up with some eye-opening answers. While 63 percent of brokers said they knew their self-employed clients had ‘unreported income’ that they wanted to keep off the record, 71 percent said their borrowers’ applications were dependent on additional income ‘from a household member with poor credit.’”
“Forty-five percent of the brokers in the study said a ’significant’ reason for their clients to avoid full documentation is that they are ’self-employed’ but have not filed tax returns. Forty-three percent said their clients ‘can’t qualify under standard [debt-to-income] ratios.’”
“1 out of 12 said they knew that their low-doc stated-income borrowers were unemployed. Unemployed? To Tom Popik, author of the study, responses like these suggest ‘there are significant risk factors’ for lenders.”
“‘I guess we are a bit surprised at how fast this has unraveled,’ said Tom Zimmerman, head of ABS research for UBS.
It never ceases to amaze me how these overpaid “experts” continue to get it so wrong.
I second that - “experts” ?
Subprime borrowers got that way for a reason. Credit scoring systems are not perfect and often make serious mistakes, but in general are the best we have. Just because the going price for a wood and stucco box is $500K does not mean these FB’s can actually pay their obligations. 20% down will be the norm in a few years, and subprime will be relegated to used car dealers with automatic shutoff devices in their cars for when the borrower fails to make their weekly payment.
The money blinds these people…
They get in, make their rip, help others get their rip, then make excuses on the way down. Most people are ’sheep’ so they follow them without doing their own due diligence.
Readers of Ben’s blog as well as mine KNEW this was going to happen for well over a year or so now.
Have a great weekend!
SoCalMtgGuy
http://www.housingbubblecasualty.com
I’m certainly no expert but I think the tightening of credit is the canary we should all be looking for as opposed to price drops, medians, etc.
I say this because I think there are a couple of givens.
1. The Fed will always resort to money pumping as the last if not first resort in case of emergency.
2. There will always be another GF stupid enough to overpay for a house.
With those two givens, until the time comes when a mortgage originator can no longer pass the buck to someone down the line, everything else is just the noise of GFs playing musical flipper house.
I call this theory, theory number 1.
Exactly, we need to see lenders and buyers of MBS’s taking some hit’s. It’s seems to be happening now, next year it should really get ugly, lot’s of resetting ARM’s in a high inventory enviroment.
I agree Sammy. If I did research that poorly for my job, I’d get my ass lit on fire. Sounds like this guy just calls a few people and asks how they’re doing. Doesn’t go and out and check it out for himself.
Reminds me of the stories on this and other blogs about when some of these research guys went into the field in FL and saw with their own eyes how sh*t was falling apart, they were “amazed” and “stunned”.
I can’t imagine being a senior manager of that company and having exposure not asking that guy wtf was happening and why wasn’t he all over it. But that’s me.
“at how fast this has unraveled”
So, they were expecting this to crater.
Just not this fast.
“Subprime loans from 2006 aren’t just performing badly. The loans, in particular those used to back mortgage bonds, could prove to be one of the worst-performing groups yet, according to UBS.”
It will be interesting to see how the effect of these mortgages blowing up will affect mortgage interest rates, in the face of the FED lowering short term rates. If the MBS market starts getting pickey or demanding a greater risk premium, will that negate any FED lowering of rates? If the banks and brokers can’t easily sell the risky loans, will credit dry up and shrink the pool of potential buyers?
“The loans, in particular those used to back mortgage bonds, could prove to be one of the worst-performing groups yet, according to UBS.”
Soon we’ll see how many pension fund managers have been drinking the NAR’s koolaid; we’ll likely see some early retirements, IMHO.
Early reitrement for the pension fund managers and no retirement for the pension plan members
interesting question. When the FED was raising rates the 10 and 30 year stayed low, which was due to FCB recycling dollars via GSE and gov’t debt. If the FED does lower overnight lending rates we might see a reverse, were the 10 and 30 year go up due to credit spreads and problems within the mortgage industry.
Are you saying these fine people were lying on their loan applications? Blasphemy!! No FUC@IN way!! That kinda stuff don’t happen here.
“I’m shocked, Shocked! to discover that there is Fraud going on in this establishment!”
round up the usual suspects
There is a photo here on Ben’s photo gallery of a vacant subdivision called the Estates at Lincoln Crossing. 138 homes standing for almost a year. 90 sold to Flippers, 80 still owned by the builder and 8, (yes
sold to acutal owner occupants. Total residents today: about 25. The other 110 are still vacant.
The latest and greatest: MORTGAGE FRAUD. Five houses have sold in the last month for $200,000 over market value (market is $550,000). All have used 100% financing, different lenders, but often the same buyer/borrower. The Sacramento Bee newspaper reports all the sales and it is getting very easy to spot this activity. Strangely, the sellers may be just as guilty of fraud, if they signed the escrow instructions and the lender was defrauded. In three cases, this may be the homebuilder.
You will be pleased to know someone has made calls and documents have been supplied to the FBI, Placer County DA, Lincoln Police Dept., State of CA Dept or Real Estate, and the State Office of Appraisal Oversite. This idiots are are going to be in very big trouble in about 30 days. This story will be sent to the Sacramento Bee newspaper when the time is right, but it will be posted on Ben’s Blog the week before.
You heard it here first.
Good job. We need to expose every one of these Casey’s when you find out about them.
Great job, JR. Now don’t go ingesting any polonium-210; eat at McDonalds if you don’t know your guests.
I appreciate what you’re doing, JR. These kinds of fraud need to be reported immediately and the underwriting debacle is also going to hit all of us. I think we really need to contact our new members of Congress and urge them to put some reforms in place NOW not only to stem the bleeding, but make these clowns responsible for the inevitable outcome of their loose lending rather than just letting another taxpayer bailout pay for what is essentially institutionalized incompetence.
Excellent work, JR.
Keep it up, now if someone was just as motivated to help the IRS do their jobs between stated income loan apps and income tax returns that would be another stake in the heart of the bubble.
“For example, say a married couple earns $10,000 a month, but one spouse had filed for bankruptcy or lost a house in a previous marriage. Most lenders would want to know about that to underwrite the new mortgage and charge an interest rate high enough to cover the added risk. But with a low or no-doc loan application, only the spouse with good credit scores would count as the borrower of record.”
So, when this blissful couple gets divorced, the lousy-credit one will either claim 50% of the profit, if there is likely to be any, or 0% of the loss. “Your honor, I had no idea he/she was buyin’ that house. None at all.”
A spouse who is not a borrower on the loan can remain on title and usually does. This spouse will sign the new grant deed and other documents as required by the title insurance company.
Read yesterday that hedge funds as a group have underperformed the major indices this year. This is probably news to HFA and other assorted trolls who post here from time to time chest thumping. Wonder how many of them are in this MBS market without adequate hedging?
I saw something that blew my mind the other night on the News Hour (Jim Lehrer). Hedge funds getting involved in microfinance. How do they plan to make money on that?
http://www.pbs.org/newshour/bb/business/july-dec06/bangladesh_10-13.html
Yeah, I looked at one of those micro finance sites and the only potential I saw was for massive fraud.
TxChick57 - Q: Hedge funds getting involved in microfinance. How do they plan to make money on that?
Waaahoo - A: massive fraud.
Ya’ll never heard of pay day loans? That’s microfinance.
My wife and I were on a Southwest roadtrip and stopped to do laundry in Hurricane, (pronounced hir-i-kin, for some reason) Utah and took a walk around and came across a pay day post dated check loan store that proudly had listed an article from a SLC paper that had the various rates charged throughout the state and they were the cheapest @ 365% a.p.r., vs the most expensive @ 912% a.p.r.
Yikes~
tx,
I have some money in a managed fund of hedge funds, despite the fees.
I didn’t intend the investment to outperform when the market is going well. I originally put the money up in mid-2001, because I thought my pension fund was over-allocated in equities and I wanted a counterbalance.
TxChick — HFA’s response is notably missing. I guess he is too busy fleecing old ladies with blue hair out of their life’s savings to bother responding…
Do we live in a STUPID time of greed! I would like to see all involved in this mess to be some part of the loss that will occur with each bad decission made by these brokers and regulators that allowed this to happen. WE all pay by their greed. HIGHER HOME PRICES,HIGHER TAXES AND HIGHER COST OF BORROWING as lenders want to recover their losses.
So now we’re going to hear more ranters on both side of the political spectrum looking for more regulation in the mortgage market, and looking for more laws to try to fight this problem, when the reality is that this isn’t the mortgage industry’s fault, it is the Federal Reserve’s fault for 93 years of playing with funny money. When a counterfeiter creates new money, their #1 goal is to get rid of it — same with the FRB. They had to find people to get rid of the money to enter the economy for the added liquidity (ie, falling value of existing currency). Don’t blame the messenger, blame the one writing the message: easy credit is good for you, hah.
More regulations on this industry will not stop the original poisoned fruit — if anything, it will only make the new money created go to more and more powerful insiders, so all of us will see rising output costs before we see rising input income. Deregulate the mortgage industry and STOP printing all that new money. Even better, dump the FRB entirely and let’s return to a stable, free market money system.
Widespread fraud isn’t the mortgage industry’s fault?!? Wow, I want you to be the judge at *my* trial!
“this isn’t the mortgage industry’s fault?
So they should be absolved from blame because they were/are negligent, or stupid, or crooked?
I agree that the Fed created a lot of money. However, the lenders and MBS investors are the ones who calculate risk they are willing to take. They calculated that it would be OK to lend to people without seeing if they could repay the loan.
There is plenty of blame to go around. I’m of the mind that the Fed wanted this money to go into business investing. But the REIC co-opted the money to create an asset price bubble. The Fed didn’t change their policies because consumers kept spending and that kept the economy moving.
P.S. a non-fiat currency system would prove less stable in today’s global economy. But that’s another topic.
But we simply couldn’t HAVE today’s economy with gold based monetary system.
RIght. It would be much more stable. Although, tax rates would go up because governments couldn’t debase the currency to diminish their obligations.
To paraphrase the bumpersticker:
“YEE-HAW IS NOT AN UNDERWRITING POLICY”
“1 out of 12 said they knew that their low-doc stated-income borrowers were unemployed.”
I was going to say we can end the blog now I’ve heard anything but then I realized there is a large population of unserviced dead people clamoring for homes taht they haven’t made loans to yet.
Talk about your crappy wooden sh!tboxes.
lol
This is probably a political non-starter, but perhaps one of the lending reforms should be prohibiting any borrower who has filed for unemployment benefits in the past 6 months? I’m not saying 24 months or even 12 months, just the most recent half year. Just a thought.
Hey I would vote for that one.
But you have all the people crying who have been on unemployment, and the construction guys, especially in the northern states, go on unemployment every year in the winter like clockwork (it’s crazy to do anyone’s roof when it’s always slowing, and pouring concrete in frozen weather is impossible without keeping the entire process temp. controlled over weeks)
The lending reforms will be unecessary once easy money stops. It really hasn’t yet, but people’s ability to add more debt has hit a wall.
“1 out of 12 said they knew that their low-doc stated-income borrowers were unemployed.”
I was going to say we can end the blog now I’ve heard anything but then I realized there is a large population of unserviced dead people clamoring for homes that they haven’t made loans to yet.
hehehe…
The Maine State Housing Authority in conjunction with FHA/HUD had a program on home ownership for “sub-prime” borrowers which included “guidance” on the importance on taking one’s trash and garbage out to the street for the municipal collection.
Not sure too many of the people accustomed to Section 8 living got the message, as many of the FHA/HUD foreclosures I did inspections on, had basements literally filled to the brim with refuse and reeking of animal excrement.
People were so fookin’ lazy they couldn’t walk 50′ to the curb or open a door to let a dog out.
And Mr. Zimmerman is “surprised” at how fast this unraveled.
Tsk…tsk..
Of course most of these people were the Section 8 crowd, wh
Did the phone ring?
“Forty-five percent of the brokers in the study said a ’significant’ reason for their clients to avoid full documentation is that they are ’self-employed’ but have not filed tax returns.”
“1 out of 12 said they knew that their low-doc stated-income borrowers were unemployed.”
Proving once (or twice) again that honesty is a quality people value only in other people.
So they’re stiffing Uncle Sam and you think they’ll pay you? Boy this is alot of seriously stupid money looking for a place to fall.
This is the drum that needs to be beaten repeatedly.
All you investigative journalists, State Comptroller’s and IRS agents.
Audit every SS# attached to a stated income loan. You have got their own affadavits to hang them with.
Go get ‘em.
Oddly enough, Jim, I do have a couple of notes from people who never file income tax returns and who pay me with complete regularity. Do you suppose I report the interest income I receive from those particular individuals? I’ll leave that to your imagination.
“So they’re stiffing Uncle Sam and you think they’ll pay you? Boy this is alot of seriously stupid money looking for a place to fall.”
Are you trying to insult me here? If so, making sense would help your cause.
I don’t think it was an insult to you, just the lenders your were commenting on.
Darn.. It’s noon here on the East Coast and I missed that $500 dollar condo… There was a mad rush of buyers and riots broke out. Those who did not win got mad and torchedthe building. No condos
Bummer.
“”f the IRS wants to spot large numbers of people who are stiffing the tax collectors, it might want to consider auditing a fast-growing segment of the home-mortgage market”"
Uh Oh, I knew that was going to happen. Eventually the IRS will be auditing some of these people and when they do, I have a feeling that will be nail in the coffin for some people that are going to owe huge sums of money even though they are walking away. As you know there is no filing for bankruptcy from the IRS.
Income taxes are dischargeable under certain circumstances. Not if there was fraud or evasion involved though.
Math stuff, I love it. “Layered risk.” Sounds innocent enough let’s use a simple example. Say the potential FB has some credit issues and the lender has a long history of dealing with each of those problems. Something like this:
Chance of default based on past performance data:
Prior BK 10%
History of late pays 5%
No doc 5%
High LTV balance 5%
Looks like the layered loan would have a 25% chance of default and the loan is priced accordingly right? Nope, more like 50% as they aren’t independent variables. That’s not even counting the change in likelyhood for any of the components in a tightened lending environment. The last few years of easy money has skewed the risk curve as the riskiest loans have been buried in the re-fi data.
as usual insightful post.
Read the 2nd to last paragraph….”Self Employed”…”No Tax Returns”…
The amount of un-declared income in my valley (IMO) is beyond belief….It is the “ONLY” way the standard of living is maintaind at least by the majority….
IRS auditors get to work!
Maybe the Dems will not have to raise taxes just go after the tax cheats.
Tax enforcement has declined markedly under Dubya. But probably most of the people shirking on their taxes are people who voted for him, so I think he’d rather sign a bill increasing taxes on Joe W-2 than get the IRS doing its job. Remember the IRS is part of the Executive branch.
The IRS reports:
Enforcement revenues – the monies we get from our collection, examination, and document matching activities – increased by 10% to a record $47.3 billion.
http://www.irs.gov/newsroom/article/0,,id=150358,00.html
This was a 2005 report. And:
The IRS increased its enforcement revenues by nearly 40 percent from $33.8 billion in 2001 to $47.3 billion in 2005.
Money recovery is up, numbers of audits are way up, sole proprietors are still massive under-reporters. I guess I’m a “show me the money” measurer of enforcement success, however. Let’s hope they can gouge another 10% increase
“‘I guess we are a bit surprised at how fast this has unraveled,’ said Tom Zimmerman, head of ABS research for UBS. While it’s ‘not a secret that subprime collateral has performed pretty disastrously so far,’ he said, ‘I must say we were a bit surprised by the magnitude with which’ the loans ‘deteriorated this year.’”
Anyone who has been reading this blog for a while is not surprised.
True not surprised here.
But it hasn’t really unraveled yet. They are still making these crappy loans. When they tighten credit, you can say it has unraveled.
When they overtighten credit and the Federal bail out to restart the mortgage industry is in progress.
It scares the *ell out of me how bad this is going to get. The S&L fiasco was nothing compared to this lunacy.
Neil
To me this is the most disturbing aspect of our home financing scheme as presently constituted - the rise of the “self-employed” mortgage broker industry as the arbiter of home mortgage origination.
Under the old regimen when home mortgages were obtained through the traditional local savings and loan association, borrowers underwent a veritable anal examination before a mortgage was granted, including a 20% down payment, near perfect credit rating, verified bank balances, steady employment, and a rock solid home appraisal to establish sound equity in the home to be financed.
Under today’s regimen there seems to be a total disconnect between origination/funding and underwriting. Brokers are incentivized to make as many transactions as possible to generate fee income while the underwriting process is compromised by the willingness to fudge the numbers in order to get the loan approved and funded. Risk is passed on to largely unsuspecting investors who are hungry for yield.
Frankly the whole system scares me to death.
borrowers underwent a veritable anal examination before a mortgage was granted, including a 20% down payment, near perfect credit rating, verified bank balances, steady employment, and a rock solid home appraisal to establish sound equity in the home to be financed.
I thought about buying in 1991 - 1992 but you have described perfectly the process that you had to go through. The approval process could take several months and you could count on closing no less than 3 months after signing a contract. I found it so intrusive (have a privacy fetish) that it was as good an excuse as any to continue renting.
while the computers are being sold from underneath their fingers, subprime investors continue to try to book business on a daily basis. indy mac bank has advertised two “feature products” this month. one program is for a borrower “one day” out of bankruptcy and the other is the new and improved “subdivision loan” for those builders having trouble financing speculative land purchases. could there be two worse markets to target in the real estate implosion. it is a total disconnect imho.
Well put, JB…You sum up the situation perfectly.
What’s really scarey is when you have a 20YO biz which fails because of the circumstances you noted.
And there isn’t one damn thing in your power that you can resort to prevent it’s occurance, other than to sell your integrity to the lowest bidder.
JB posts ” Frankly the whole system scares me to death. ”
Me Too! The whole damm thing is a pig plie. Everything you wrote is true. This will go down as a LOAN FRAUD disaster as much as a housing decline.
This is off topic, but I was talking to a buddy last night and he said he and a couple friends were going to start trying to flip homes in Dallas (south of 635 in between 75 and the tollway). I did not want to sound like a know it all, but I told him that I thought the boom was coming to an end and flipping homes was propably going to be harder than previous years. He basically blew me off and said thay could make a ton of money doing it. My question is - Is there still money to be made flipping homes in Dallas? I know this is impossible in the newer areas since appreciation is minimum here, but do the older neighborhoods still hold any potential?
Thanks,
Joe
Tell him to lever up and go buy as many houses as he can buy. Tell him also, that now is a great time to buy and that real estate only goes up - remember they are not making anymore land.
Then report back in a year and let us know what happened.
Thanks
Yep. That’s the way to do it. Also make sure they use pay option loans in order to minimize cash outflow between the time of property acquisition and sale. All sophisticated investors use pay option loans. That’s the secret of how to make the big bucks!
I remember an article a couple of months back (on Ben’s of course) that I believe had a reporter (Texas?) interviewing DL, which featured him using his famous “not making anymore land” line. The reporter then advised David that there was enough available land in the state of Texas alone, for every man woman and child in the United States to have a half acre, and still not use it all up. His reply was ….. “well, there still not making any more land…”
I thought that was the best Q&A exchange to date. DL happily shoveling manure, and not realizing the reporter had a big fan to switch on and splatter the pile back in his face.
Hey Joe - I’ve mentioned a buddy of mine who started doing just that in DFW in late 05 (he’s focusing on the Colleyville / Grapevine area). Similar sentiment: Won’t listen, thinks all will be well. He has now bought ~6 houses, and only 1 sold so far. He’s not hurting yet, but “anxious” is a good word to describe his state of mind. I second Crispy’s comments: Let him have at it.
Hey Joe - I’ve mentioned a buddy of mine who started doing just that in DFW in late 05 (he’s focusing on the Colleyville / Grapevine area). Similar sentiment: Won’t listen, thinks all will be well. He has now bought ~6 houses, and only 1 sold so far. He’s not hurting yet, but “anxious” is a good word to describe his state of mind. I second Crispy’s comments: Let him have at it.
You can make a little money flipping if you buy distressed properties. Otherwise, they’re pretty much screwed after all the fees involved.
1. Too much land in Texas. They can keep building new houses forever
2. Very high property taxes keep prices down (3.25%)
3. The good jobs are spread all over DFW, so there is no real prime location like in LA or NYC. It’s a vast surburban sprawl that’s growing in all directions.
Don’t get involved by giving advice FOR or AGAINST if you want to keep this person as friend. Simply shrug, smile and say, “That stuff is too complicated for me but I wish you luck.” My son lost a long time friend recently who was going to buy (and did buy) a property in Big Bear, Ca. My told him the top of THIS boom was in where property is concerned in California. His friend and partner bought a house for $460,000 (with an interest only mortgage of course because he intended to flip it) and now they are $70,000 + underwater if he adds in the realtorwhore’s commission. One of the quickest ways to lose a friend is to say, “I told you so.”
“Is there still money to be made flipping homes in Dallas? I know this is impossible in the newer areas since appreciation is minimum here, but do the older neighborhoods still hold any potential?”
Why dont you join him and find out. LOL Believe me all of your friends will jump onto a sinking ship right before it sinks.
Word of advice, just agree with your buddy. They will never listen to you and you will keep a friend.
One more word of advice, and remember this saying throughout life for everything. Whatever everyone knows, isnt worth knowing. In other words if everyone is jumping into stocks, real estate, commodities, its not worth doing because its close to a top. The trick is to find something that very few people are doing or buying and do that. When your neighbors start telling you how to invest your money, run dont walk to the nearest exit.
No it is worth knowing so you can take the opposite side of the trade.
This doesn’t work. Timing is crucial. If you’d taken “the opposite side of the trade” a few years ago (when the lemming rush was well under way) you’d have lost it all.
Timing sure is crucial, and it comes down to days and weeks, not just years. Ask anybody who has been short homebuilder stocks the last couple of months, as the bubble was clearly unwinding.
Well it may not work for you but it has been good for me anyway.
Yesterday I was talking with a construction fellow who is about to get married. He told me they were thinking about buying a home to rent out as an investment. I told him to be sure the cash flow would cover the mortgage, knowing that in this area it covers 50% or maybe less. He replied, ‘the bank wouldn’t make the loan if the rent didn’t cover the payment, would they?’
It never ceases to amaze me how many people have faith that financial institutions have their best interest at heart. Maybe they have so little confidence in their ability to crunch the numbers themselves? But in the case of an investment property, its pretty straightforward to figure out what it can realistically rent for and what the total monthly payments will be.
Well, historically the borrower and lender’s interests were on the same side of the fence as far as foreclosure goes, so this was a valid expectation.
Now, of course, the act of lending has been decoupled from the action of collecting (the payments), so the system has gone to hell.
Exactly, IL NC IN CA!
It’s why so many people are over their heads this time, IMHO. The rules changed and nobody told the borrowers about it.
Once upon a time, the lenders actually wanted to GET THEIR MONEY BACK (gasp!). This would obviate the need for the borrower to be able to actually pay off the loan, with interest. Nice relationship, and it worked. Too bad the mtg originators and newbie brokers got in the middle of things. They risk nothing, so they can qualify a person making $80K (stated, of course) for a $500K loan. Insanity…
He replied, ‘the bank wouldn’t make the loan if the rent didn’t cover the payment, would they?’
*boggle*
“What everyone knows - isn’t worth knowing.” Great saying and sage advice. I’ll file that next to my other favorite piece of advice. “There’s his truth - her truth - and the real truth.” That was spoken by my mother about 50 years ago when a couple we knew were in the midst of a bad slanging match divorce and each was telling stories about the other one.
Thanks Bob, I have no desire to flip homes and never did. I like working on my own home, but that is it. My buddy is one of the guys always trying to make the quick buck. He usually makes me laugh with his hair brain ideas. I just hate to see him do something stupid now that he has two little kids.
” My buddy is one of the guys always trying to make the quick buck. He usually makes me laugh with his hair brain ideas. I just hate to see him do something stupid now that he has two little kids.”
Joe, we all have friends like that, looking for the easy buck. Guys like him end up in divorce and die early. The real money comes from working hard investing in the right places and being original.
When someone laughs at you or ridicules you for an idea, its usually a good idea.
In the meantime, the best thing to do is just keep quiet. I made the mistake of telling friends that houses were in a bubble and would be coming down. They still laugh at me for selling my house and renting. I dont really care, we live within our means, we take vacations every 3 months, and we can afford some nice toys.
If I had to do it over again, I wouldnt say anything to anybody. Now, I keep everything to myself except when I run into like minded individuals.
I wonder how these MBS (mortgage backed securities) effect the people that own them. As people default on their loans I’d imagine more investors will stay away from them, making banks more responsible for what they loan. This is one area of investing I’m not very familiar with.
The Federal government will buy all of these garbage loans thru Fannie Mae and Freddie Mac. They consider it making housing more “affordable” when in reality they are helping drive prices thru the roof and putting people in the streets.
I’m from the government and I’m here to help you. LMAO
Someone I know is buying a house and getting a loan from a subprime lender. The price is $560,000, with no down payment, stated income. She is stating an income of 250% of her actual income and the 100% financing is interest only first loan of 80% of price, and interest only second loan for 20% of the price. (another person is helping with the payments.) My advice was to wait for prices to drop further in SoCalif. That this kind of lending is still happening is hard to believe, but true.
If seems like the same type of people that overpays or will buy in a high priced market are the same sort that want these low down sub-prime liar loans . Maybe they figure that they will get the easy money while the getting is good before lenders make people qualify .
This is the first time I recall the MSM mentioning what has been discussed here.
Stated Income Borrowers are either cheating on their taxes (federal crime) or overstating their income on a mortgage application (also a federal crime).
This is a perfect opportunity for a prosecutor or tax auditor to go and get publicity ala Spitzer and get elected as Governor (ala Spitzer).
There are knuckleheads perma-bulls on OCR’s RE blog that claim the median income of Orange County, CA is $200K but all traditional measures of income, like Tax Returns, Census Survey and NAHB/Wells Fargo surveys don’t capture the real median income in OC.
His perma-bull point leads to the conclusion that nearly everyone in OC is a tax cheat. There has got to be a bunch of low hanging fruit for the IRS in any bubble market.
Putting people on no-down payment ,stated income loans, is the worst thing that I have ever seen in all my life . It use to be that you had to put 25 to 30% down if you could not fully prove your income…. What happened ? Are these lenders nuts ? Even hard money lenders would not be this foolish .
The arguement appears to be that since virtually no one could REALLY afford todays prices, this is necessary in order to have any business at all.
The reality is that without these absurd loans the bubble would have capped at 1999 prices and we would not be in this mess. Apparently, since one lender started doing it, the others found they could not compete and jumped in as well, and so it all went and here we are today. There are so many places this could have been caught and stopped with existing fraud laws and some basic common sense, but all along the way everyone with a hand in the cookie jar passed the buck.
“1 out of 12 said they knew that their low-doc stated-income borrowers were unemployed. Unemployed? To Tom Popik, author of the study, responses like these suggest ‘there are significant risk factors’ for lenders.”
Also significant risk factors for buyers, as prices will have to drop considerably once loans to unemployed buyers suddenly go out of fashion, and loan officers once again require a downpayment and a decent credit rating in order to qualify.
The way I understand it, Fannie Mae buys a lot of these fraudulently made loans (as well as the loans with negligent underwriting) repackages them and sells them into the CMBS market. However, I believe they are holding hundreds of billions of $’s of them on their books as well. IMO, the real risk to the system is that Fannie Mae will go BK requiring a govt bail out.
No no no.
CMBS == Commercial MBS == Commercial conduit loans.
RMBS == Residential MBS == Residential mortgages.
The RMBS market is huge and full of different types of gadgets ranging from simple mortgage pass through certificates to complicated CMO’s (Colateralised Mortgage Obligations). It’s a big and diverse market and people need to appreciate that.
Seriously, alot of people spouting off about about loan’s really don’t know what they are talking about (myself included
).
The real danger is to people who bought subprime RMBS, and especially anyone associated with the “credit enhancement” on those RMBS.
Fannie Mae and Freddie Mac do not deal in sup-prime loans. While they are exposed to trash loans, they don’t go out activly searching for them or funding them. They deal in conforming loans which exist inside of set parameters of LTV, documentation and FICO scores.
Outside the conforming market exisits the “non-conforming” market. This is sub-prime loans of every stripe *and* Alt-A loans. Alt-A loans are big loans to people with good credit. They would be conforming loans (wrt LTV and FICO) except that they are too big.
Your description is fairly accurate. However, the Alt-A market does consist of both Jumbo loans and Agency size conforming loans. An Alt-A becomes “non-conforming” by the documentation a borrower provides to prove income and assets. For a mortgage to qualify as Agency conforming from a documentation perspective, the borrowers income, assets, employment, etc. must be verified. The “Alt” means alternative documentation, which today usually amounts to stated income and stated assets, although “no-income/no-asset” loans do exist in todays marketplace. These are the “liar loans” so successfully deployed by Casey Serin. The “A” in Alt-A refers to the credit of the borrower and usually means a FICO score above 680. Fannie and Freddie are not exposed to these types of loans. Alt-A and sub-prime loans are sold in the RMBS/ABS markets to a myriad of investors. The riskiest portions of the capital structure in these deals are typically purchased by managers of CDO’s (collateralized debt obligations). The CDO sells debt to investors to finance the purchase of these “assets” which difuses the risk further. Today, the CDO manager may not even retain any slice of the CDO and just clips fees from the transaction. Hence, the holders of the ultimate risk are far removed from the original lending decision. This game only stops when CDO managers are unable to sell the debt in a CDO. The structures of these transactions prolong the ultimate outcome efficiently, but don’t eliminate it. Sub-prime mortgages are deteriorating rapidly. Alt-A mortgages are just beginning to show the strain. These borrower’s dates with destiny are approaching, but it is like watching a train wreck in slow motion. Grab a cold one, kick back, and enjoy the show.
I predict lots of work for law school interns and accountants doing discovery by the cabnet-full playing pin the suit on the bag-holder.
Funny how Wall Street remains the largest investor today in this space (Alt-A/Subprime Acquisitions of their former clients). In fact many deals are being downgraded because of toxic underwriting guidelines of yesterday’s lending environment, however many more are being upgraded. The buy-backs are getting tougher and they are going after $$$ due as a result of a credit or prepay trigger part of the borrower option embedded in this collateral from inception. Let’s face it, it the midst of adversity there is opportunity! Check out how technology coupled with new middle of the road guidelines (not stretched or toxic like interest-only or pay option ARM paper) will produce a diamond in the rubble from the bubble(CMC Trust). Borrowers that tell the truth are going to be placed in products that stand the test of time and meet the demands of the New Secondary Market for Alt-A and Subprime - Europe. Yes- they still have a huge appitite to provide aggregation facilities and buy the paper (sometimes from the Wall Street conduits). The survivors know how to master technology to properly hegde credit and prepay risk and the flavor of where to go for the last available space for true arbitrage in this flat yield curve environment. If the street becomes “short” (as it claims to the outside), it is in 2006 paper…the 2007-2010 markets with all the corrections implemented prepare us for a bright future in alternative lending and let’s the cream rise to the top.
“1 out of 12 said they knew that their low-doc stated-income borrowers were unemployed. Unemployed? To Tom Popik, author of the study, responses like these suggest ‘there are significant risk factors’ for lenders.”
I have been too busy today to read the blogs and just scanned my favorite blog and thus emphasize the above quote. If it has been highlighted before in comments, forgive me.
Having said that, WTF?!!!
Unemployed?
Shame, shame. On both parts of that transaction.
Novasold
The unemployed borrowers were actually receiving money from
the cash back deals. Just pure frauds.
“IMO, the real risk to the system is that Fannie Mae will go BK requiring a govt bail out.”
Fannie Mae has reported earnings in 3 years. In fact they havent had one filing in that time as they are spending billions on accounting problems. If this were any other company they would have been delisted and forced into bankruptcy. The government is already covering it up, so you’ll never see fannie go bankrupt.
The government is already covering it up, so you’ll never see fannie go bankrupt.
Yeah, right. You don’t just sweep trillion dollar defaults under the rug.
Fannie is still profitable and not BK. The accounting issues have to deal with accounting for derivatives. Each quarter they don’t file, the mess gets worse.
IMHO It’s down to the point where they should give up on ever having statements for 2003-2006 and should just do “fresh start” accounting as if they came out of BK.
I’d like to see the IRS announce that anyone who files for a no-doc loan will be subject to an audit in the next 12 months.
Who wants to bet that no-doc loan demand will shrivel to basically zero if the IRS was smart enough to audit all these no-doc borrowers?
But if no one can then afford to buy a Toll, Ryland, DR Horton home without applying for a no-doc loan, where will the home buyers come from? Why these home building stocks have rallied is beyond me, not to mention companies such as Countrywide Financial….
Where would the home buyers come from? Well the homebuilders would be forced to do the normal thing that they did in the 90’s - they would drop prices, instead of all this bs incentive crap and homebuilder lending crap.
I’d like to see the IRS announce that anyone who files for a no-doc loan will be subject to an audit in the next 12 months.
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I second that!
Banquet of Consequences:
http://wallstreetexaminer.com/blogs/winter/?p=113#more-113
The good news in this is that Wall Street will no longer be able to deny the ramifications of the underwriting disaster of 2001-05 once the real foreclosure tsunami hits in 2007.
What happen to the old rule of thumb 2 1/2 times your income rules when it came to your mortgage? How about using one income in case someone loses your job, sickness or god forbid a divorce. We know mortgage brokers are not allowed to ask a young couple if they plan on having children or at least take the daycare expenses in a count when they are planning a budget. We also know that folks in expensive cities have always been renters, New York has had renters for ever…Who thought it was a good idea to be mortgaged to the hilt..As a social worker turned Realtor. Most of my business is done as a real estate counselor, advocate and provider of current education material. It works for me and my referrals keep coming. Our clients are asking for sound advice, we owe them that! Remember, you can run, but can not hide.
“‘I must say we were a bit surprised by the magnitude with which’ the loans ‘deteriorated this year.’”
Why am I not surprised that Zimmerman is surprised?