Lending Conditions Have “Deteriorated Dramatically”
Some housing bubble reports from Wall Street. Bloomberg, “Mortgage Lenders Network USA Inc. stopped making new loans through its wholesale arm, becoming the third mortgage company in a month to curtail operations as housing sales slowed and defaults by borrowers rose.”
“‘The economics of this market are not good, and it deals with the performance of loans, and to a lesser extent the value of homes,’ Executive Vice President James Pedrick said.”
“Lenders including Ownit Mortgage Solutions Inc. and Sebring Capital Partners LP, which also specialize in ’sub-prime’ mortgages, were among companies that closed operations and cut staff in 2006 as loans to high-risk customers soured.”
“Nationwide, late payments on sub-prime loans rose during the third quarter to 12.56 percent of the total, the most since the first quarter of 2003, the U.S. Mortgage Bankers Association said.”
“Closely held MLN is the 15th-biggest issuer of sub-prime mortgages, with $3.3 billion of loans in the third quarter, according to National Mortgage News.”
The Hartford Courant. “Mortgage Lenders Network, currently building a sprawling new headquarters in Wallingford, said Tuesday that it is changing the focus of its business and will cut 100 jobs in Connecticut. In addition to the layoffs, Pedrick said ‘a few hundred’ workers, mostly outside Connecticut, would be furloughed for two weeks.”
“In a letter to brokers Friday that was obtained by The Courant, Mortgage Lenders said its sources for funds for making loans through other brokers have dried up. ‘Until we see credit quality and margins return to acceptable levels we have determined that MLN needs to pause’ from outside broker originations, Mortgage Lenders’ CEO, Mitchell Heffernan, said.”
“Unlike competitors, Mortgage Lenders increased its lending last year. Lending conditions, however, have ‘deteriorated dramatically’ in the past two months, the company said Tuesday.”
The Pittsburg Tribune Review. “National City Corp. eliminated about 50 mortgage loan jobs at Allegheny Center, North Side, on Tuesday, the first workday of the new year, informing employees as they showed up for work.”
“The layoffs came after National City completed the $1.3 billion sale of its subprime mortgage business, First Franklin, of San Jose, Calif., to Merrill Lynch on Saturday. First Franklin originated about $18 billion in subprime loans, which are loans to homebuyers with financial problems, handled by National City.”
“Not included in the deal was another National City unit at Allegheny Center, called Preferred Advantage, which also originated subprime loans. Because it was not included in the sale to Merrill Lynch, National City decided to close the unit Tuesday. As a result, National City cut ‘less than 50′ jobs, said spokesman William Eiler.”
The LA Times. “When Ownit filed for Chapter 11 bankruptcy protection last week, its chief executive and sole director, William Dallas, expressed regret at how the company’s destiny had spun out of his control.”
“The private company, which made higher-cost mortgages for borrowers with imperfect credit scores and income gaps, relied on Wall Street to fund its loans, buy them and sell them off as securities. Last month, as defaults on the risky loans rose, the Wall Street firms seized millions of dollars of Ownit’s capital to compensate for losses and then shut off the money spigot entirely, Dallas said.”
“Ownit’s demise is an example of wider troubles among independent sub-prime lenders, which, unlike more diversified banking companies, depend heavily on Wall Street for loans and services. ‘This is going to end badly’ for the industry, Dallas predicted.”
“Ownit’s most important partners, the ones that abandoned it, as Dallas sees things, were JPMorgan Chase, which provided cash to fund its loans, and Merrill Lynch, which supplied a major line of credit for Ownit and processed its loans into bonds for sale to investors.”
“Issuance of sub-prime mortgage bonds jumped from less than $13 billion in 1995 to $594 billion in 2005, according to analyst Michael Youngblood at Friedman, Billings & Ramsey Inc., with a slight dip, to $521 billion, expected in 2006.”
“Consultant David Olson said people were finally waking up to the risks of foolish credit practices that had enabled dodgy borrowers to repeatedly refinance using loans with artificially low starting payments, or to take out ’stated income’ mortgages.”
“Ownit specialized in 100% financing of home purchases to borrowers with low credit scores, often stretching the repayment time to 40 or 45 years. Analyst Matthew Howlett at Fox-Pitt, Kelton, noting that sub-prime loans made in 2006 were becoming delinquent at a near-record pace, said investors expected Ownit to be among the companies hardest hit by bad loans.”
“Ownit had agreed that buyers of its loans could force it to repurchase the mortgages if borrowers began missing payments in the early months. The potential liability made it impossible for Dallas, a 30-year veteran of the industry, to sell his company. Dallas said that as a last resort, he and Ownit’s majority owner, CIVC, offered to effectively give Ownit to Merrill Lynch if it would keep the lender in business.”
“He said he was still not sure why that offer was rejected. ‘I do not think this is the result they wanted,’ Dallas said.”
The Associated Press. “Shares of Lennar Corp. slipped after the homebuilder said it will post a loss in the fourth quarter on continued weakness in the housing market. The preannouncement is a blow to investors hoping the housing market is poised to recover from a slide that has lasted more than a year.”
“The bulk of the loss will come from accounting charges totaling as much as $500 million to reduce the balance sheet value of land and options to acquire land. Excluding the charges, Lennar will still fall short of prior forecasts.”
“Analysts said the charge to devalue land will be the biggest ever. A Wachovia analyst said he’d assumed $125 million in land devaluation charges, while Morgan Stanley analyst Robert Stevenson said the charge is twice the size he anticipated.”
“Construction activity showed further weakness as spending on homes dropped for a record eighth consecutive month. The Commerce Department reported Wednesday that building activity edged down 0.2 percent in November. That followed declines of 0.3 percent in October and 0.8 percent in September.”
“The weakness was led by a 1.6 percent plunge in home construction, which followed an even bigger 1.7 percent drop in October.”
“The slump in housing has been a big drag on the overall economy, trimming 1.2 percentage points off growth in the July-September quarter, when the economy slowed to a lackluster 2 percent growth rate. The slump in October and November indicates housing will remain a serious drag in the final three months of the year.”
‘Nationwide, late payments on sub-prime loans rose during the third quarter to 12.56 percent of the total, the most since the first quarter of 2003, the U.S. Mortgage Bankers Association said.’
Correct me if I am wrong, but isn’t this a normal default rate for seasoned subprime loans?
NMN has this today:
‘The performance of adjustable-rate subprime mortgages originated in 2006 is rapidly deteriorating and ‘higher default and loss rates may ensue,’ according to researchers at Friedman, Billings, Ramsey & Co.’
Seems I’ve read that sub-p’s run a 12% historic default rate. The underlying (emphasis on lying) assumption by MLN’s business model was that these loans would somehow perform at prime loan rates - and the competition to write them ‘forced’ their hands into poor practices. Bull. They simply lowballed the risks and swam naked too long. Tide’s running and they’ve been swept out to sea.
And swimming naked in the open sea with all their lowballed risks bobbing in the swell, ARM resets are coming on like a school of hungry barracudas….
Ah! The smell of buybacks are in the air!
“I love the smell of buybacks in the morning.”
It smells like…creative destruction.
I believe it is, but that statistic is looking at all subprime loans nationwide, not those produced by any particular brokerage. As noted, the default rate is the highest only since 2003 (so 2004 and 2005 had lower default rates, which makes sense since the booming appreciation probably let thes borrowers sell or refinance if they got in trouble during those years resulting in fewer defaults).
I think that the problem that MLN and Ownit ran into is that their loans were hitting this default rate well before the loans were seasoned, and were still subject to repurchase obligations. The stories we’ve seen express concern that the subprime loans originated in 2006 seem to be performing much worse than other subprime loans originated in prior periods, and no one knows how high the default rate will eventually go on these.
That’s because lenders were combing the bottom of the barrel for FB’s who were still willing to buy! You had to be a pure fool to buy last year! Those with any sense and credit are staying out of the market until numbers come back to reality. I can’t wait until more of these fools go under! It is going to get really interesting when these idiots go back to their subprime lenders and try to refinance their risky mortgages! The look on their faces will be priceless!
In addition to money being lent to plain vanilla FB’s, this was also the period that the morgage fraudsters were perfecting their criminal activities.
This may be the normal default rate for subprime loans, but there were never so many high LTV/low documention loans made before. At least in the past, a subprime borrower had at least 20% equity on a refi, put at least 10% down for a purchase. Now the oddball deal is one where there is equity or a downpayment. Those servicers are going to earn their money trying to squeeze payments out of the turnip that is subprime borrower.
90% deterioration.
Credit Managers’ Confidence Plummets
The monthly Credit Managers Index stands at its lowest level since April 2003.
Stephen Taub, CFO.com
January 03, 2007
Confidence in the economy among corporate credit managers has apparently been slipping for quite a while. The evidence: the monthly Credit Managers Index, which fell for the fifth consecutive month in December, now stands at its lowest level since April 2003.
What’s more, on a year-over-year basis, nine of the 10 components that comprise the index fell. The drop has been driven mostly by deterioration in the services sector, according to The National Association of Credit Management, which has conducted the monthly survey of the business economy from the standpoint of commercial credit and collections since January 2003.
advertisement The data “strongly suggests” a slowing economy, according to NACM, which pointed out that seven of the 10 components that comprise the index declined in the most recent month.
For the CMI survey, the association asks about 500 trade credit managers to rate favorable and unfavorable factors in their monthly business cycle. Favorable factors include sales, new credit applications, dollar collections, and amount of credit extended. Unfavorable ones include rejections of credit applications, accounts placed for collections, dollar amounts of receivables beyond terms, and bankruptcy filings.
While the scores of credit managers in the manufacturing sector, buoyed by increased sale, have risen in the past two months, primarily on sales, service-sector scores fell for the third straight month, dragging down the overall index. In fact, eight of the 10 components comprising the service sector fell, according to the association.
A CMI score of more than 50 reflect a view that the economy is expanding, while a reading below 50 suggests a declining economy. On a year-over-year basis between last year and the year before, the total CMI Index fell 3.6, from 58.3 to 54.7, as nine of the 10 components fell.
Not so Happy New Year: Another Sub-Prime Lender Cuts its Workforce By Steve Christ
Baltimore, MD * Jackson, WY * Missoula, MT Thursday, January 4th, 2007
The New Year got off to rough start for the employees of Mortgage Lender’s Network (MLN) yesterday, when the Connecticut-based sub-prime lender announced that it was no longer in the business of funding or originating loans.
MLN announced that some 1,440 employees or nearly 80% of its workforce would immediately be placed on “temporary furlough” as the company continues to struggle under the weight of “deteriorating market conditions.”
Outside the company’s Rocky Hill, Conn. office, hundreds of teary-eyed employees were seen leaving the complex with nothing but boxes of belongings in their hands.
The news amounted to a stunning reversal of fortune for the privately held multibillion-dollar company. In fact, the company had recently broken ground for a new $100 million Connecticut headquarters and also announced plans for major expansions into the Phoenix, Atlanta, and Philadelphia markets.
Primarily a wholesaler, the company specialized in funding sub-prime loans to the broker end of the business. But the slowdown in the housing market led to a string of defaults and late payments that ultimately forced the lender to cease its wholesale operations, which accounted for about 90% of its loans.
In a press release, CEO Mitchell Heffernan said, “Until we see that credit quality and margins return to acceptable levels we have determined that MLN needs to pause from wholesale broker originations.”
This cutback is just the latest sign of trouble in the sub-prime mortgage business.
Last week another sub prime giant, Ownit Mortgage Solutions Inc., filed for Chapter 11 bankruptcy protection. Earlier in the month the company had laid off some 800 employees nationwide when it announced that it was closing its doors immediately and had no money to pay its employees.
The bankruptcy filing revealed that Merrill Lynch & Co., JPMorgan Chase & Co., Credit Suisse First Boston and other mortgage purchasers were demanding that Ownit buy back more than $165 million in loans on which borrowers had missed payments.
But the pain in the industry hardly ends there. Numerous other sub-prime lenders have closed their doors, including Harbourton Mortgage Investment Corporation (HMIC), which ceased operations on December 20.
Like Ownit, Harburton was forced to take action when it was unable to satisfactorily resolve mortgage repurchase claims asserted by investors that had purchased mortgage loans from HMIC.
Even beyond that, numerous sub-prime companies are also reportedly on the auction block, including Irvine-based Option One Mortgage, a unit of H&R Block Inc., and ACC Capital Corp., the private holding company for Ameriquest Mortgage Co. and affiliates.
Sadly, for those still employed in the business it is just a sign of things to come. Issuance of sub-prime mortgage bonds jumped from less than $13 billion in 1995 to $594 billion in 2005, according to analyst Michael Youngblood at Friedman, Billings & Ramsey Inc., with a slight dip to $521 billion expected in 2006.
Given those monumental figures it is only a matter of time before more of these risky loans begin to go into default, forcing their originators to buy them back.
The banking debacle continues.
Question: Does anyone have an estimate of the number of sub-prime mortgage lending companies currenty doing business?
In one of the previous posts, there is someone who is tracking the top 20 subprimes in the US…four of which have bitten the dust in the past two months (includes ownit).
The link was on New Century Lending’s website.
Top 10 Subprime Mortgage Originators:
Rank Organization Market Share (Q3 06)
1 Wells Fargo 13.2%
2 New Century 7.9%
3 HSBC Finance 7.2%
4 CitiMortgage 6.3%
5 Countrywide 5.8%
6 Fremont Invest. 5.6%
7 Washington Mut. 4.5%
8 First Franklin 4.4%
9 Ameriquest 3.8%
10 Option One 3.7%
The top ten represent only 72% of the market. Think of the possibly thousands of smaller operators with more potential for disaster representing the other 28%. Not a pretty picture…
Interesting that Wells Fargo tops that list of subprime originators, and by such a large percentage. Its loans (because it’s a bank subject to federal regulations) will be hit hard by the new mortgage lending guidelines issued by the OCC et al, though who knows how long it will take to see the effects.
Wells bought a broker dealer a few years back as another channel to sell the paper and mutual funds. The brokers, all independent, basically told Wells to F’off because they were not going to jeopardize their relationship with the clients (all very wealthy) for a few extra percentage points on commissions. Wells ended up selling the unit back to the original owners at a discount.
Does this only represent origination, or also holding the notes? I was under the impression that the bulk of risky loans were packaged and sold as MBS so the risk to originator was only early loan default.
“I was under the impression that the bulk of risky loans were packaged and sold as MBS so the risk to originator was only early loan default.”
True, but a higher default rate, even later in the life of the packaged loans, will negatively impact the ability of that originator to sell future loans. So originators may be forced to buy-back older loans inorder to retain access to the MBS market … OR, shut thier doors.
Or, cease being a conduit lender and become a balance sheet lender, which would necessitate massive capital investment into the industry. I would assume that only a few of these lenders would actually will have the credibility to do so.
The good news is that if some become balance sheet lenders, they will actually pay attention to credit risk as opposed to ignoring it and trying to sell the notes ASAP to get them off the books.
Well, in that case Wells Fargo is in a much better position than the others on this distinguished list since they hardly rely on selling sub-prime loans to continue as a going concern. They’ll take a top-line hit for sure and that’s it - assuming they actually sold off their sub-prime loans. If not, banking regulators may send the US Marshals with padlocks when their loan loss reserves tip the wrong way…
Taking into account almost a $Trillion of subprime mortgages were issued in 2005 and 2006 with predictions of between 12.5% to 20% (per CRL) default rates the top ten have upper end gross exposure ranging from $7.4 billion (Ameriquest) to $26.4 billion (Wells Fargo). I gotta believe half of the names on the list will be BK by 2008 if not sooner.
You’re assuming the loans go to ZERO instantly. There are still plenty of knife catchers and liquidity left to snatch the first year’s crop of REOs up to limit the losses at the lenders. BKs are unlikely for member banks. We’ll see reserve requirement relaxation to stabilize the financial markets, for large institutions at least. Many Home-loan-only lenders could vanish IMO.
This post has a list of “the top 25″ taken from 2Q06 MBA data (no percentages, though).
“Another One”, financial reality blog, December 31, 2006.
http://tinyurl.com/yjtza7
Thats four gone in one month - MLN, Serbring, Own-it and HMIC. Who is next?
who ever is next only leads to the inevitable demise of the god almighty dollar
Let’s make a betting pool
Cool and we can sell the pool as a BBS Betting Backed Security
or BS for short
LOL!
Looks like we have the first indications of an epidemic on our hands. Someone call the CDC in Atlanta–Financia Contagia Virilia Housius has been identified in the US.
http://en.wikipedia.org/wiki/Epidemics
P’cola, you are too funny.
The next sub prime to fall? My money is now on New Century. They have done four loans at $770,000 on Hillwood Loop, Lincoln in the last 60 days. The market values for the homes is maybe $575,000. I notified them a month ago (when I saw their first loan) abut this fruad and they actually openend an investigation. They re-read the appraisal, interviewed some people and found everything to be alright and CLOSED the investigation with no action taken!!
Yesterday, I CC’d them in a very direct e-mail to Fitch, S&P, & Moodys. Today, New Century reopened the investivgation. Amazing. They are going to lose over $800,000 on four loans!!
There are so many “cash out, 100% financed, fraud based transactions” that these lenders are now feeding off each others toxic sale comps. Yet they ignore the 10 FB’s going into bankruptcy and foreclosure RIGHT NEXT DOOR for $200,000 LESS than the New Century loan amount.
Today, driving into work I thought: “How do so many idiots get in charge of so much money?” And then…..deja vu: The last time I said that was in 1990, right before the Resolution Trust Company was formed for all the S&L lenders. The tsunami is coming, the water is receding and you better get off the beach to high ground ASAP.
Paladin, you must be mistaken. Pat Robertson called for a tsunami in 2006. No Tsunami in 2007.
Although a possible “mass killing” late in 2007?
Where ? In Irak ? It’s already the case.
Excellent work Paladin!
I’m trying to grasp the root cause of this situation I keep reading its investors accepting high risk. Isn’t the fact that the govt is involved in backing loans FNMA,GNMA,FHLMC,VA,FHA a very large part of this so lenders don’t care about risk?
Aren’t the govt loan guarantees cutoff at the conforming limit? and loans above that are not guaranteed? at least with fnma?
Crash, I don’t think the sub prime loans have any implied govt backing. It is the yield premium the RMBS buyers want, since quality loans have such low yields. Usually, with housing, you always have reasonable protection of the principal amounts of the loan….until now. The eight sub prime loans on Hillwood Loop are a combined $1,500,000 over the market values. And the market values are based on very very slow sales. Other than the sub prime loan sales, the builder has sold about 10 other homes to arms length buyers. He has been trying to get rid of them for 6 months. No takers, thus the risky moves we are now seeing. He still has about 20-30 homes left out of 40 he started with in May.
And here is the interesting part: 138 homes in the subdivision, and only 35 are occupied after one year. Brutal. There are about 70 FB’s from April (ordered in 2005), and they can’t dump their houses. The builder has cut prices $200,000 (off $750,000) and only sold 10. So it appears a new greater fool is now king: The mortgage fraud buyer and his greater fool lender.
This subdivision and much of Lincoln, CA will be in turmoil for years, sorting out this mess. Vacant homes in lawsuits, foreclosures on Section 8 tenants, tax and utility liens, bankrupties into 2008, etc.
Yes, the sub prime loans do have gov’t backing, Fannie and Freddie, andthe loan guidelines change Jan. 31, 2007. The lenders don’t care — as they transfer the risk to the gov’t — taxpayers.
Last Nov 15th OFHEO released new rules for fixing the conforming limit, effectively freezing the limit on the way down. This should have the effect of Fannie & Freddie eating into the Jumbo market, not sub-prime and Alt-A, as house prices fall.
“Conforming loan limit to stay put if home prices fall”, by Rex Nutting, MarketWatch, November 15, 2006.
http://tinyurl.com/ymc5cx
Interesting. So Ruth, Fannie and Freddie guarantee the subprime loans in the mbs pool? So if it defaults they buy it back or make them whole?
Thank you, Paladin, for your tireless efforts. Just wait - the counties will have to discover that there is money to be made in prosecuting these people. Then you will see action.
~Misstrial
http://www.jtscommunities.com/index.php?mvcTask=inventory&id=fe149fa7f44969b91375a74e427e9354
There is the link to the builder site. Homes listed for under $520k - humm what exactly is NEW researching?
http://sacrealstats.blogspot.com/2006/07/report-on-estates-at-lincoln-crossing.html
Above is another link to a blog with pics of the development, check out the last picture. These homes are all the same, so no real reason for huge value swings.
Paladin, have you considered setting up a blog to record your battles with the REIC? I think you’ve mentioned some other exploits in the past and I’m sure many here would enjoy reading about them.
Paladin - How can someone verify this info? You can email me directly at stock_regulator@yahoo.com.
Thanks
Paladin maybe you can do a short video on u tube documenting what has (or not) been done about these eight houses after your emails? Maybe you can introduce each house with a picture and a corresponding 3×5 card with all of the pertinent financial data for each one.
Just a thought. Keep up the good work!
Don’t worry — the PPT stands ready and waiting to impose quarantines in order to stem the effects of financial contagion.
Bubbles function mathematically a lot like a virus. Modern financial markets are most of the time like festering viruses. It this case it’s a virulent form of brain cancer. The brain was dead a long time ago. You wil have to irridiate with gamma rays. It’s very difficult remove the tumour without killing the patient. Ah bah ? Print some more money, increase the decrease the dose till everything craks or booms. There is no antidote to the virus except waiting. Take a lot of liquids and eat chicken soup.
I believe the next will be New Century (#2). This will cause a stir. Consider its stock: In December, 2005 over $60.00. September 28, 2006 $39.50. Today $31.30. Investors have seen their money halved in a year. Since last July, there appear to have been around $25 million in insider transactions, mostly option exercises and sales (eyeball estimate only). Between the Fed notes today and the general housing prognosis, something’s gotta give. I’m betting it’s NEW.
Out of curiosity - is the zero down / zero move in loan (typically referred to as the 80/20 plan) considered a sub prime loan? If this avenue of credit dries up - it would be a disaster for the Austin housing market. About 1/3 of our loans for new homes are of the 80/20 variety. If this product gets curtailed, then we’re in trouble.
Also - is the Alt A mortgage the same as an 80/20 mortgage?
Thanks,
Roger
“…Austin housing market” Austin?? One third?? Try 80% in SoCal. This is what is going to break the back of the sellers and the market in general in SoCal during 07 kiddies. When this source of credit begins to dry in LA and OC, watch the fireworks ensue…it will be F**king ugly.
JWM…80% is about right.
A recent article gave Central Valley (CA) towns currently using 80/20’s at a 75% rate. Ugly is definitely right.
Sounds just fine to me. Prices will have to adjust to what people can actually pay for. If this is market “deterioration, ” I am all for it.
Knowing the SoCalif market very well, reduction of 80/20 lending will hurt the market hard, if and when it happens. My bank does not do them, but I still see them being done.
Without 80/20s, prices must fall in the hood, because I know for a fact that’s how most of the $400,000+ houses there have been bought the past couple years.
Of course it will. The only reason this bubble didn’t pop 3 years ago was due to loose lending. Without it, this market would’ve peaked late ‘04. Insane lending gave the market legs for another year and half the way I see it.
sensible, this 80/20 loan would be sub-prime if the borrower had lousy credit, right?
My experience is simply that “sub-prime” is a term of art. It can reference either the borrower who’s FICO score is below a certain threshhold, or the loan which references the type of return it receives (A paper, A- paper, down the line).
One of the reason it is confusing, is that prime borrowers often take sub-prime loans. Historically this wasn’t thought to be that much of a problem– afterall prime borrowers received the best rates/pts and generally didn’t have a lot of packed fees.
But as prices have disproportionately escalated, prime borrowers have used sub-prime financing in order to stretch into a home.
I am not a mortgage guy, or a bond guy, but that is how I try to reconcile it. Feel free to correct me experts!
it will be F**king ugly
Just like the houses people are building!
When I sold my house 3 years ago and the Bay Area market kept booming, I asked the agent who sold my house, who has this kind of money? She said they don’t have the money. 1st mortgage. 2nd mortgage. 5% down at most. IO loan.
Absolutely, once this exotic financing is more difficult to get, the pool of buyers will shrink even more. Just in time for Spring.
Don’t talk bad about the spring buyers. They might get hurt feelings and not show up.
Good one!
If you were really a “buyer” who thought prices would go up in the spring…..wouldn’t you be a lot more active now?
All we seem to read about are the “dead” markets…no one showing up to open houses. Were I in the market and anticipating the need to compete with other buyers for properties I wouldn’t wait for spring (and competition) to come along.
Why wait? The problem is there are NO BUYERS. There probably aren’t sufficient buyers at 30% off current prices.
I thought a 80/20 loan was a conventional/bridge loan for those buying one house before selling their existing. Doesn’t the 20 get paid off once you sell your first house?
The 80/20 loan I am referring to is where you take an 80% fixed rate mortgage with a 20% “piggy back” loan. The piggy back loan is usually at a very high rate (like 14% in today’s market). The piggy back loan serves as a down payment and lets person move in for no money down. It’s widely advertised in most of the new subdivisions - “no more rent, move in today, your rent deposit is your downpayment”.
I am wondering if this loan is also considered a subprime loan.
No, an 80/20 is not the same as a subprime. Subprime generally means lending money to people with very bad credit scores, or too low an income to qualify for a standard 30yr mortgage. They carry a higher interest rate (after the interest-only period) because the buyers have a credit score below what qualifies them for a prime rate mortage. It’s these types of loans that enable a minimum wage earner to buy a $500K home with no money down before going bankrupt.
“It’s these types of loans that enable a minimum wage earner to buy a $500K home with no money down before going bankrupt”
The irony is, this type of buyer with abysmal credit and no financial prospects was a week out of work from declaring BK anyhow, so how reluctant will they be to file? All they need is some help filling out the forms. This will be like the early ’90s on super-steroids…
It can be a subprime, it all relies on the borrower’s FICO score.
what is a subprime fico score? under 660 is what i have heard can someone pleae elaborate
I thought the reason they did the 20 part of the loan to eliminate the PMI (insurance payment).
Yes, and because the borrower doesn’t have the full 20% in cash to put down.
There is a lot of mis-info on the 80/20 here
One day i will offer an elaborate write up for Ben to post on his blog about the lending business but, for the specific question about 80/20, here goes….
The primary reason for 80/20 is to avoid pmi. Any time you borrow more than 80% of your home value wth a CONFORMING LOAN/NOT SUBPRIME, you pay an insurance to the lender called pmi (the amount varies but, say about 80/month on a 100k loan). So, by limiting your first mortgage to 80 ltv you avoid paying pmi and then take a small second to make up the difference. It can be and 80/10/10—> 80%first , 10% second and 10% down…doesnt always have to be 80 20. New year brought tax changes, pmi is now tax deductible(in most cases, depending on income). Now there is no real incentive for 80/20. Since second mortgages have higher rates than first, you will probably be better off just doing one loan and paying the pmi. 80/20 is therefore not really a subprime product at all since you are using a conforming loan to avoid pmi on the first. Subprime loans never charge pmi, thus there is no reason to split the loans.
The 80/20 dnt really do anything to accelerate teh bubble, it has been done forever and it didnt really help anyone buy a home that couldnt 10 years ago. Also, interest can be a form of the 80/20 but most are not.
Toxic lending (pay option arms, interest only, some subprime with wild jumps in rate) are the primamry lending contributions. Borrower Greed is number one on my list, especailly since everyone who bought is old enough to remember the stock bubble (shame on them). If i had to rank the reasons, it would go like this
1 borrower greed
2 shady lending practices/ lack of due diligence
3 realtors and there endless pile of vile
4 all the rest
With number 1 head and shoulders above the rest. Ignorance is no excuse in law, niether should it be with personal finance.
Wow, very interesting to hear you talk so frankly about the situation. Thanks for sharing.
Well im no saint but, i had very little to do with the run-up. I have never done purchase loans (though i could). i do mostly refi and bill consolidation seconds. Never done the option arm or interest only loan, though i have access to the product. Homeowners generally take out some type of mortgage every 3-5 years. I want them to come back to me. Why be one and done with them when they can make you money throughout your career. Thats why the crazy loans never made any sense to me.
“The primary reason for 80/20 is to avoid pmi.”
Who pays the “insurance premium” on the 20 percent, especially when a conundrum has made risk premiums obsolete?
“Borrower Greed is number one on my list, especailly since everyone who bought is old enough to remember the stock bubble (shame on them).”
I believe Borrower Greed is number one on most lenders’ lists, since it implicitly exonerates them of culpability for loaning money to help people buy homes they cannot afford. But the reality is that your typical Joe Soccer Mom (financially unsophisticated) home buyer missed the memo which announced that loan underwriting standards have been abolished. Thus the borrower’s working hypothesis is, “They would not lend me the money if they did not think it would get repaid.” This is especially true for the kind of borrowers who believe the NAR’s stopped-clock mantra that now is a good time to buy a home.
Who pays the “insurance premium” on the 20 percent, especially when a conundrum has made risk premiums obsolete?
The 20% loan could actually be considered in the “subprime realm”. Risk v. reward is carried in the rate. Pmi is for Fannie Mae/ Freddie Mac conventional type loans. By putting the 20% down ona home you have, in effect negated the risk since theoretically any home can be sold for 80% of market value rather easily. So, when you borrow more than 80, you are essentially self-insuring you for the lender. If you default, it is the insurers problem not the lender.
“Risk v. reward is carried in the rate.”
Please refer back to my comment about the conundrum.
Looks like last Nov 15th is my lucky day. Here’s an article promoting 80/20 as a way to avoid PMI. The author presents nothing about any possible downside or risk.
“100% Mortgage Financing – A Way To Avoid Private Mortgage Insurance”, by Carrie Reeder, Best Syndication, November 15, 2006.
http://tinyurl.com/yk82z3
The 80/20 dnt really do anything to accelerate teh bubble, it has been done forever and it didnt really help anyone buy a home that couldnt 10 years ago
I can’t help but challenge this statement. Like I/O’s, these loans may have existed but were not widely advertised or available to anyone that could fog a mirror ten years ago. Here in CA if you didn’t have a significant down payment you couldn’t get a house; unless, of course, you had VA and bought cheap. IMO they definitely contributed to the bubble.
True but i was speaking in the context of the conversation of this paricularly long blog. There are those in the know that could pick apart alot of what i said. I was trying to illustrate that the relative importance of the 80/20 in contributing to the run-up was negligble. When i bought my home, i put 2.5% down using the fha which was only 2500. Seller kicked it back to me in a deal we made to give him full asking price (i had no money then and had to use trickery..yes i know thats illegal). This was 9 years ago. Point is, anyone who wanted a home could get in with basically nothing. Alot of the posters were assimilating subprime and the 80/20 as large oilers of the machine. While i dont disagree that nothing down loans absolve people of alot of risk, i dont think as much of it went on as people here think. in order to go zero, absolute zero down, you had to have at least somewhat decent credit any probably some assetts. Even if you had to put 2.5% down, people would have beg borrwed and stole to get it. i think we would still have the same problem. Greed was the lube in this job.
no, the 20% part is a second mortgage. ususally int only with floating int rate.
I had a co-worker do a 80 / 20 loan a few years back, to avoid paying PMI. As far as I know it was a prime type loan. He later mentioned that he paid off the 2nd mortgage real quick.
Subprime refers to the credit rating of the borrower only, and means a FICO less than 660. Nothing to do with the structure of the loan. Alt-A means it is good credit, but no-doc, low-doc or otherwise non-standard.
This is a flaw in the definition of “subprime,” IMO. What is it called if a borrower with a prime credit rating borrows so much that it is virtually certain he will go into foreclosure — “incipient subprime”?
I refer to them as “Future Bankruptcies” or the “Full Employment for Me” folks.
“Out of curiosity - is the zero down / zero move in loan (typically referred to as the 80/20 plan) considered a sub prime loan?”
It depends. Suppose the household buying the home has an income of $50K, and no deep well of financial wealth (e.g., dad was a corporate CEO or something like that). If they used this 80/20 loan you mentioned to buy a $150K home, then that would probably not constitute sub prime. If the same household used the 80/20 to buy a $500K home, guess what?
Right Getstucco ,the 80/20 can be risky . Also how can any one say that the fact that the loans aren’t insured by PMI make them less risky . PMI companies have harder underwriting and they look at appraisals closer . I’m saying that PMI was also avoided because PMI companies would not of approved alot of these loans . Also to bad alot of these loans didn’t have insurance on them with the foreclosures coming up .
“Also to bad alot of these loans didn’t have insurance on them with the foreclosures coming up .”
I thought they were baptized with exotic forms of insurance in the derivatives markets as part of the securization process?
I know what they should do to prop the bubble.
They should give you money to take a mortgage. A new negative interest rate mortgage is the next product coming soon.
NEGIN mortgages will soon be replacinfg I/O mortgages.
‘This is going to end badly’ for the industry, Dallas predicted.”
It already has for your employees you slimy bastard!
So this guys company screws over people and places them in $hity loans and then HE goes to the LA Times and tries to spin it like he was Screwed by the big boys on Wall Street - Payback is a bitch Mr Dallas!
Unfortunately, Mr. Dallas is probably laughing all the way to the bank. His spin job is sickening though. That is what annoys me so much when this kind of implosion takes place. Dallas is out spinning the story as if he had no idea all these loans would go south. Does the public believe this crap? It should not be a surprise to anyone. It is not hard to determine what will happen when you loan a half-million dollars to credit losers.
Great point. I am personally afraid these oozing a$$ canchers will somehow get bailed out by the taxpayers for their insane greed.
I recall just a few years ago when I tried to talk to my credit union advisor about buying home with our paltry down payment, despite a good job and credit. He looked me in the eye and told me to save for a year and come back if I still wanted a home. A decent guy. It is a shame that ethical lenders have share the profession with such slimers.
Yep, guys like Mr. Dallas have made heaps and heaps of cash during this bubble, and they will get to keep it all despite their reckless business practices. I think the builder CEOs are on the same track; run the company into the ground and if it goes completely under then who cares because they have a half-billion sitting in an offshore account. Indeed, with the exception of the lenders on this blog and the rare guy like your advisor, banking has become fairly reprehensible, IMO. It is no longer about relationships and finding ways to make things happen so that both parties prosper. Instead, it is only about maximizing their short term profits. Of course this also extends to much of America today.
Are these examples of a corporate 5-year timeline?:
Years 1 to 3: BS business model and phony revenue
Years 4 and 5: Spin like crazy as you cash out stock options and leave company with severance package.
Year 6: Company crashes and burns. Dumb investors (gov?) left holding bag.
Actually if you look at much of big business in America nowadyas this is how it is done, Premature. in essence, you have posted the new business model for 21st century America. Sadly, it is no longer about long-term financial planning and growth. It is ALL ABOUT how fast can I make a ton of easy bucks, protect that money and then get out. Who cares if everyone loses the retirement money, I’ve got mine, screw all of you! It is sad to say, but if this is the way that CEOs will continue to run companies, it will surely only be a matter of time before the economy blows up.
On a related aside, that Home Depot guy getting a 1/5 of a billion for retiring is %^I(&^&*(^(^*( joke. What did this guy do to deserve that kind of package? If he found the cure for cancer or fountain of youth, maybe, but running Home Depot, come on.
The economic models are all outta whack in this current market. What is amazing is that I don’t think we have ever seen/lived through anything like this before, except those who remember the depression. Sadly, this will only continue to get worse as the jokers continue to go out of business and run off to Aruba/Caymens with the cash!
“Are these examples of a corporate 5-year timeline?:
Years 1 to 3: BS business model and phony revenue
Years 4 and 5: Spin like crazy as you cash out stock options and leave company with severance package.
Year 6: Company crashes and burns. Dumb investors (gov?) left holding bag.”
==================================
Same thing happened during the dot com bubble. The insiders knew their companies weren’t worth $100 a share. The money men told them to keep talking about eyeballs and page views and doing phony deals. They made out like bandits !
The public is SO SO stupid !
Isn’t it eyeballs that give GOOG its lofty valuation? Or is it the endless series of dog-and-pony shows for new lines of business? Or the high return on the cash that they have parked in interest-bearing investments?
Yes…his other companies aren’t coming to the rescue of his turd, or its employees. How convenient.
Mr. Dallas is a robber baron of days gone by. Total friggin slimeball but par for the course today in Fascist Amerika.
Anything to help business, right?
Dallas said that as a last resort, he and Ownit’s majority owner, CIVC, offered to effectively give Ownit to Merrill Lynch if it would keep the lender in business.”
“He said he was still not sure why that offer was rejected.
but the business comes w/ a coffee pot, 6 desk chairs, 4 computers…stupid CIVC
correction;
Stupid Merrill Lynch
No stupid you and stupid me and stupid everybody.
It’s you who is going to pay when the sh-t hits the fan. These “enfants de pute” from Merill Lynch or from Golman Sachs utimitaly will go and get the little buddies the politicians to pay for all the mess. That’s what they did with the S&L fiasco 25 years ago. And that’s what they will be doing again and again and again.
I call the Eveready Bunny principle of financial markets and the bookies that operate these crooked joints.
“Consultant David Olson said people were finally waking up to the risks of foolish credit practices that had enabled dodgy borrowers to repeatedly refinance using loans with artificially low starting payments, or to take out ’stated income’ mortgages.”
And what did all these Warton and NYU grads think was going to happen when hundreds of billions were loaned to people who don’t care about how many checks they bounce at the local grocery store?
I made a similar statement above. So much for the Ivy League education. I may be better off with my state university degree. Makes me wonder if the Ivy League b-schools even have ethics classes. There is no way those on Wall St. ever expected these loans to perform. They are lying through their teeth.
Makes little difference to the Wall Street Financial Gangsters if the sub-prime market goes belly up. If they lose on the sub-prime business, they simply manipulate other financial areas to get back the losses. For instance, instead of earmarking, say, an average 6% yearly pay-off for 401k holders by stock market manipulation, (big bucks in that pool) they lower the earmark to 4% or 5%. The other 1% or 2% covers the losses.
Very few seemed to get what Bush was up to when he pushed to privatize Social Security and let the Financial Gangsters of Wall Street handle everything. Privatizing social security would simply be another treasure chest, like the 401k’s, which the Financial Gangsters of Wall Street could loot with impunity. (A) You don’t think the crooks of Wall Street make those $60 million bonus payouts for being honest! (B) Look who Bush appointed when sad sack ass kisser John Snow got the boot. None other than one of the Wall Street Gangsters. Paulson.
Gee, I wonder what happened to that pathetic loser John Snow? Probably sucking on a bottle of scotch to drown his woes. Oh, sorry! He’s heading up another corporation which, I think, has something to do with mortgages. Nepotism isn’t the word for it. Incest fit much better.
I am no fan of Wall Street and the crooks there but to somehow come up with the idea that Bush had some Machiavellian dastardly plan in proposing allowing workers to take a portion of their SS tax and invest it is pure B.S. As a young(ish) worker I am THRILLED with ANY plan that gets me out of the “screw the younger generations by taxing them to death and sending the money to oldsters who worked less hours for less years and didn’t pay in squat Social Security” but expect to get big $$$ checks every month with COLA’s for three or so decades after they retire.
yeah. I agree with that. I totally don’t expect to see a SS check when I retire. I’ll risk the Wall Street shenanigans anytime. At least, I have a chance.
oh, don’t worry, you sure will get your check when you come of age. the only question will be, how much.?
Mike,
What in the world do you think private pension funds do with the money they get to invest? Do you have clue?
They all do, basically, the same thing. The own a diversified portfolio of stocks and bonds and sometimes a few “exotic” investments.
Guess what? That’s exactly what an individual can do in a private account for themselves. Now they couldn’t have done it as easily or cheaply years ago but now, with index fund products with low (.25 basis point) fees (or less), anyone can mimic what Calpers, the largest annuity providers and any major pension fund manager does.
The only difference is, instead of getting a 1-2% return on the money (as in Social Security) the return will likely be at least 4 times higher in a reasonably prudent, diversified, investment program.
What in the world is wrong with that? If you don’t want to take that “risk”, fine. Don’t take it. You trust the government.
But why shouldn’t individuals who DON’T TRUST THE GOVERNMENT be FORCED to continue to accept a return that is a PROVEN FAILURE and be allowed to opt out?
Since individuals can mimic, cheaply, the same investment choices that pension and annuity concerns have used reasonably safely throughout history, why not let the individual have control over their resources?
It isn’t a “conspiracy” Mike. Its something that makes sense for a lot of people who don’t believe the government has the skills to do much well, the least of which is to intelligently manage money for successful investment purposes.
jag,
Do you honestly thing the average Joe Sixpack has the intelligence, knowledge, time and energy to invest his/her money in the markets????
Did you see what happened in the dotcom bust? How about the housing bubble?
What happens when these people reach the ripe old age of 75 (or whatever) and have managed to save $5,000? Who bails them out then? And don’t think that we can just leave them to die on the streets. That’s the deusional thinking of the “Darwinian capitalist” crowd. Heads would roll, buildings would burn, all hell would break loose until they got what they needed to survive.
It’s best for all of society if everyone is “guaranteed” a basic stipend to live out their last few years. If you want to invest for yourself, you’re always free to do that via the many investment vehicles available now (401-Ks, IRAs, etc.)
Amen Mike. Wall Street is loaded with slimeballs that will rob everyone blind if given half a chance. Bush is insane to even consider privatizing (i.e. destroying) social security. It will Enron the programs. But I don’t think chimp gives a damn what happens to everyone.
Well stated!
~Misstrial
“Makes me wonder if the Ivy League b-schools even have ethics classes.”
I have taught, and continue to teach, those ethics classes. A few years back, a colleague in the Economics department passed me a study done on “honesty” among undergraduates (don’t have the reference nearby, sorry). The experiment was to leave a folder in a classroom before a class at the University. I believe there was some cash, or something otherwise valuable, in the folder, along with various class notes, etc.
If the following class was a philosophy, religion or Theology class, the folder was almost always turned in. If the following class was a business or economics class, the folder was almost never turned in.
They may care - in fact, I’m sure most do care. But - they just DON’T HAVE the money. It’s really simple.
Judging by their insane pay schemes and sunny economic forecasts, Wall Streeters in general have no feel for what lower income communities are going through nor any real understanding of how it will affect them in the end. Such is the price of ignorance. And Wall Street will pay dearly for it.
Just has dinner with a Realtor friend and overheard a conversation:
Realtor to her good Loan Agent friend: “She has to get a new loan or sell the place right away. She has not been able to get a loan can you help her.”
I did not even ask. I think I know the answer.
A few weeks ago we had an OwnIt transaction waiting and waiting and waiting to be funded. It was a purchase and we knew something was terribly wrong. The mortgage brokers and agents were screaming at escrow (surprising?) that we were not closing due to our incompetence or something along those lines. Finally, when the news came out about Merrill Lynch pulling all credit for OwnIt Mortgage, we swiftly let the parties know of the failure of the transaction was due to escrow receiving NO MONEY DUE TO MARKET CONDITIONS IN THE SUB-PRIME BORROWER MARKET. Multiply our transaction imploding by scores across the country in similar boat.
The responses to escrow: “Huh? Wha??? My borrower’s qualify! How come we didn’t get notification earlier” ……you get the picture.
S-Crow, haven’t seen you around lately. Curious to know how your end of the business is holding up these days. I think this recent sub-prime implosion is going to kill the spring bounce so many are betting on. Honestly, who is left to buy once they stop lending to dead beats?
CA Guy,
I’ll agree in principal but I think that to a degree it’s kind of a stereotype. The Sub-Prime lenders were actually “manufacturing” dead beats! They took people with great FICO scores and reasonable incomes and leveraged BOTH to the hilt! If not on their “primary” residence then certainly on their 2nd/vacation/specuvestment home. I imagine that the sales pitch was that with “this kind of appreciation” int. rates don’t matter! (Or something like that)
DinOR I couldn’t agree more. One of the telling stst that will eventually come out of all this, is how many upstanding, good-credit people are going to get burned. When signing the HELOC to fund that around the world vacation, pay off all the CCs, buy other investment properties, all they saw was the monthly payment and that RE always goes up. They also banked on continued raises at work. Only problem is that when your raise doesn’t even keep up with inflation, how do you expect to keep up with an ARM on the house and the HELOC? I am not making an excuses for these people, just pointing out the mindset they had!
To me sub-prime lenders going down should be big news in main stream media . The media should have articles explaining why this new development will freeze up the RE market . In fact, the MSN should be explaining why the prices where able to go so high in RE markets to begin with .
Why doesn’t the public know about the faulty lending practice that made it possible for cr-p buyers and speculators to outbid good buyers in real estate . Had I know that this sort of lending was taking place I would of remained a renter for years .
Market value is what a willing and “able “buyer will bid . While a sub-prime buyer might be willing ,they are not really able to maintain a long term loan when payments adjust up . These borrowers and speculators never really qualified . The loans were based on real estate going up and bailing out the unqualified .So I contend that it was a false market demand wise because of the faulty lending and that’s why it has to correct .The economy could be doing great and these sub-prime buyers still can’t afford their payments ,so its a joke that experts say the economy is good so real estate should bottom out and surge this year .
Even if real estate inflates you have the same problem with the new sub prime buyers not being able to hold long term . This sort of lending is all based on real estate always goes up and corrects the faulty lending .
To me if you told the public that often times they were outbid by speculators and buyers who could not really afford the payments they would have to change their thinking about this RE market and realize that it was the scam of the century .
Wiz, unfortunately so many in the MSN are in bed with these hucksters, they would never do a story on this. Look at what Paladin has had to do just to get some sniffing going on in his/her area. For many people today it is all about the dollar. Just give me mine and I’ll look the other way.
And if you don’t think this mentality has infected every area of life then look no further than example 1A this morning…in sports news, Nick Saban just bailed on HIS CONTRACT with Miami to take over at Alabama. Doesn’t anyone honor his/her word anymore? Where is Diogenes when we need him? Guess is his still looking for that honest person!
Your right and the public will remain in the dark for a long time .
Housing Wizard-
You asked the question: “Why doesn’t the public know about the faulty lending practises that made it possible for cr-p buyers and speculators to outbid good buyers in real estate?”
And then answered it yourself in your next sentence: “Had I known that this sort of lending was taking place, I would have remained a renter for years.”
Let’s face it, most people right now in the US think that the people who are buying can actually afford these homes. It’s beyond comprehension to most that lending has completely lost it’s standards ( to the extent that a memo had to be posted to lenders a few months back admonishing them to only lend to people who could be reasonably expected to be able to pay back the loan! Duh!)
When did you become convinced that this market was going to implode? Was it by any chance when you found out about these lending practises? Thought so!
If they want *anybody* to go out and buy a house this year, they have got to keep this bit of info out of the publics’ understanding .
Hence, MLN’s stopping lending was presented yesterday on CNBC as a problem of “high interest rates”, not shoddy lending practises.
The more people understand the REAL problem, the fewer who’ll be inclined to go out and buy a house.
Housing Wizard-
You asked the question: “Why doesn’t the public know about the faulty lending practises that made it possible for cr-p buyers and speculators to outbid good buyers in real estate?”
And then answered it yourself in your next sentence: “Had I known that this sort of lending was taking place, I would have remained a renter for years.”
Let’s face it, most people right now in the US think that the people who are buying can actually afford these homes. It’s beyond comprehension to most that lending has completely lost it’s standards ( to the extent that a memo had to be posted to lenders a few months back admonishing them to only lend to people who could be reasonably expected to be able to pay back the loan! Duh!)
When did you become convinced that this market was going to implode? Was it by any chance when you found out about these lending practises? Thought so!
If they want *anybody* to go out and buy a house this year, they have got to keep this bit of info out of the publics’ understanding .
Hence, MLN’s stopping lending was presented yesterday on CNBC as a problem of “high interest rates”, not shoddy lending practises.
The more people understand the REAL problem, the fewer who’ll be inclined to go out and buy a house.
Very well said, Wiz!!!
can anyone explain why the big boyz won’t take hits ?
wm,boa etc……… they all havembs portfolios w sht in them , don’t they?
The big boys, if they are big enough, will get a nice government bailout, directly or indirectly.
You guys are getting it all wrong - first - the public is probably eating up this garbage by Mr.Dallas - having everyone look one way when the real action is somewhere else - and too top if off - NO ONE QUESTIONS IT…besides those in this blog??….give the spin doctor’s a hand - they can even make death look like a good thing - “well, he was alway tired and the cost to keep him alive was eating away at their savings”….beautiful…America will be known for its Artistic flair in flinging mounds of horse sh*t……
Dirty,
agree with you and why isn’t anyone asking why, with relatively low unemployment, a reasonably decent economy, are people DEFAULTING like mad?
If the economy was obviously tanking it would be understandable but this quirk, defaults without clear economic problems, seems to point clearly to the fact that these loans (if not initially completely fraudulent) had no business being funded under any rational consideration.
jag,
Right, exactly. Prior to feeding at the trough of cheap money defaults in this country were confined to; the mine just got played out, the plant closed etc. Those are easy to understand. When defaults are accelerating from coast to coast w/a strong economy what does that tell us?
DinOR and Jag it tells me that this country has been built on cheap/easy credit since…..Reagan! There I said it! Mid- 80s to 90-91, I was in college and all the CC companies showed up on campus. The older students had never seen that before, at least not in the same waves we began seeeing. One cannot blame Reagan completely. Blame is not the point, here.
However, my point is this: in the last 25 years no country in history has ever seen the massive exponential growth of credit that this country has. When one looks at the federal, state, county, and local gubmints, as well as, corporate, mom and pop business, and personal debt, what we have is one big monster of debt that will either be: A) repaid, unlikely, B) continue to grow, probably or C) not be repaid, i.e. bankruptcy, which is highly likely.
Therefore, we can conclude that most of this economy is driven by the manufacture of debt, not real valuable goods and services.
Spot on, OC Dan! IMO, since 1982, we have been living in a sort of credit bubble. We’ve just seen the hyperbolic, final blow-out the past 5 years. Fascinating to think what will happen next.
The potential liability made it impossible for Dallas, a 30-year veteran of the industry, to sell his company. Dallas said that as a last resort, he and Ownit’s majority owner, CIVC, offered to effectively give Ownit to Merrill Lynch if it would keep the lender in business.”
Wow. He couldn’t even give away the company. It’s like old dominoe effect. Unfortunately in a line up of 100 dominoes only the first 5 have fallen…in slow motion.
But Toll, LAY,Liareah, the LA Times, etc. have all claimed we are at the bottom. It was only a 3 month RE crash. The greed and lack of any ethics continues to astound. There better be some big name people doing the perp walk after this thing unfolds.
Pretty similar to Enron’s crown jewel the wholesale energy trading business.
They gave it away to UBS for about 25% of the 1st 5 years of profit after UBS owned the unit.
They cannot give them away, Ameriquest and Option One are still “for sale”.
The story there is that ML has been repackaging the mortgages as MBS and selling them; a bunch are gonna come home for buyback. ML wanted Ownit to be toast when the feeding frenzy starts as a throwout (i.e. here, eat them instead). Probably some legal exposure on ML’s part.
If you were treading water like mad would you accept and anvil from your buddy?
Found the posting below where someone compared the history of the sub-prime car loan business a couple of years ago to what his happening to the current real estate sub-prime business. Some clear similarities. Of course, I think it is stretching it to blame the situation GM and Ford are facing on the sub-prime loan business (might have something to do with Honda, Toyota, etc.). Nevertheless it is an interesting comparison.
_________________________
Real Estate & Subprime Lenders
I was in secondary subprime automobile business for twenty years …. at the peak of subprime auto financing boom, almost anyone regardless of credit history could purchase the vehicle of choice with very small cash down payment. It was too much money chasing high yields and ROI that fueled the secondary auto finance boom of the nineties.
Same thing occurred in recent housing boom ….. the induced inflation causes speculation, the speculation necessitates greater risk in a weaker market, the weaker credit consumer is always “in demand” for credit …. once the flood gates are opened to weaker credit risks, the secondary credit consumer artificially pushes market prices higher and higher by artificial demand! The secondary markets are and were a part of the tools used to push real property higher to contain the desinflationary forces ….
When the secondary auto lenders started to go bust around 2000, it first started with one or two, then became exponential until most were gone, never to be heard from again ….
Same thing will occur housing markets …..
The artificial demand for used automobiles created by secondary subprime financing supported much higher trade-in values, the higher trade-in values then supported demand for new vehicle sales ….. look whats happening to the auto manufacturers without the artificial subprime supports, the automobile bubble and record “new vehicle” sales is bursting …. and will prolly, in the long run bankrupt GM and Ford …..
There are many, many tricks being used to fend off the K cycle and desinflation!
Same thing happened in manufactured housing, too. Lots of chattel (home-only) loans with teaser payments. As soon as the teaser payments expired, folks looked at their loan balances, looked at what they could get for their places, and mailed the keys to the bank. If this happens again, it will be UG-LY!
Mac-Attack,
And OR was the epi-center for that meltdown! A buddy of mine was tasked w/selling off the repo’d inventory and the are just NOW getting off the $15-35 per sq. ft. floor! Prices have finally firmed but remember OR is one of the most mfr. home friendly states in the Union.
Nice post…..
I’m tired of hearing all of this about speculative bubbles! All I want to know is how can I get rich quick?
I have some beautiful swamp land in Bulgaria, prices GREATLY REDUCED!!!
You should the swamps near Tchernobyl in Ukraine.
At night they glow and the frog have 8 eyes.
Yes, kinda … If you have a iron stomach, reserves, patience, and a LOT of luck… Try puts / shorting the worst of the real estate industry. Maybe the HBs, or the subprimes. What makes it trying is you will have a very fuzzy crystal ball looking into the future, and what the investor’s interpretation of the events will be.
By taking your time and wait that the sh-t hits the fan.
You can always send your résumé to Golman Sachs ?
“Some clear similarities.”
Clearly some big differences, too. For example, while an SUV purchased with a subprime loan may cost over 1X a household’s income, a home purchased with a subprime loan may cost over 10Xs a household’s income. And to the best of my knowledge, a family cannot live in an SUV.
“a family cannot live in an SUV”
Have you seen the new Tahoe???
Saw a Hummer trying to navigate through a sea of BMWs at a Whole Foods Market parking lot yesterday during yuppy rush hour, total comedy.
PS, lainvestorgirl - the LA Times just called and said my letter would published. I have to say, I’m a little surprised.
OK, let me amend that: “A family cannot live in a small SUV.”
GS,
True… but here in Southern California, only the daughter drives a small one. I passed into work this morning a brand new Ford McMansion on wheels. Ghad… its not over yet.
Neil
You can live in your car, but you can’t drive your house. You can live in your car, but you can’t drive your house. You can live in your car, but you can’t drive your house. You can live in your car, but you can’t drive your house. You can live in your car, but you can’t drive your house. You can live in your car, but you can’t drive your house. You can live in your car, but you can’t drive your house. You can live in your car, but you can’t drive your house. You can live in your car, but you can’t drive your house.
WHat is really sad is that all this toxic crap has made home buying nothing more than going to the used car dealership. And to think, I thought home ownership was the American Dream, the crown jewel for most people’s portfolio. WOW! Now it has become nothing more than dealing/haggling with jokers in plaid suits with polyester pants and cheap cigar hanging out of there mouth. The thought of seeing these guys running to the back room to see if you qualify at whatver interest rate. The last great product that America actually produced, the HOME, has now gotten as cheaply thought of as everything else here. What a country!
Same thing elsewhere. Your unbeatable US marketers have popularised the concept in many places.
I’m 100% cash right now…. just waiting and waiting. Hey, it’s nice getting 5% bank interest right now and not having to worry about the declining value of my formerly 700K house. I’m renting all the way to the bank!
Horatio
You’re probably better off than most but the problem is your 5% interest and my 5% CD interest, isn’t covering the loss in the now “not-so-almighty” dollar. A 14% devaluation this year against a lot of european currencies does a lot of damage to a $100,000 CD earning only 5%. Less after taxes. And there’s a lot more downside dollar devaluation to come. Cross your fingers that some of these anti-USA countries don’t start switching from dollars bank accounts to Euro’s or some other non-confetti money bank accounts. Or the anti-USA oil producing countries, which is most of them, get tired of seeing their payments made in dollars lose money and switch to another currency.
“A 14% devaluation this year against a lot of european currencies does a lot of damage to a $100,000 CD earning only 5%.”
Especially if you’re saving up to buy a house in Europe. How many US sellers increase their $ denominated home prices to offset currency devaluation?
You could, you know, open a Euro account. Or GBP. It’s not as easy as going to the nearest bank in your hometown, but lots of my contracting friends have done it (since the mobile ones sometimes get paid in Euros when they work there). There’s a lot more paperwork involved, a mountain I promise you, but it’s possible.
The hard part is finding a bank that will take you; many (perhaps a large majority) overseas banks will outright refuse to open an account for a US citizens who is resident in the US, no matter ho many hoops you are willing to jump through, citing the regulatory aggravation that the US government might bring upon them. And the interest rates they pay you can stink, but in the last few months that didn’t really matter, did it?
The subprime lending is one thing. Those CDs are the basis that banks/lenders use for the fractional reserve to create loans. Banks will be going Bankrupt as well. It is just a matter of time. If you think prices on homes can go down, you have to realize that lenders will be going bust as well. Money still doesn’t grow on trees. It originates in the form of debt/credit. Credit is debt, plain and simple. When that can’t be paid, those who are holding the paper will be bust.
Here is a thought. What if we try and figure out why they are anti-USA and clean up our friggin act? Or…we can just let the market forces take their course and destroy the U.S. dollar and our economy with it.
Can’t argue with the free market, can we? Can’t regulate it, because that would be baaad.
What if we try and figure out why they are anti-USA and clean up our friggin act?
We already know why; fat chance anything’s going to change, though.
Let’s make a betting pool, LOL
I got a awesome comment to share in Ben’s Blog - this morning in my neck of the woods - 2 regular t.v. commentators were mentioning the latest housing numbers and both mentioned that most economist don’t forsee any “serious economic slow-down” even with housing being abit of a concern in certain parts of the country…[getting to point]…thanks to Ben’s Blog - I jumped out of my chair and dialed the 1-800 you can call and add comments or discussions. They always look for those who rebuttle their feelings (makes them look big to belittle the caller)…so 15 minutes listening to musiak..I get the screener…HOLLY..got throu…well I came up with acouple of good points people have made in this Blog (sounding smarter then I truly am)…and I hit them on the big one of the $$trillions of refinance that will put thousands in a DEEP hole, silence came first by the screener - then a quick - we had that comment already and hung up on me…..I watched the entire program this morning, no mentioned of my facts…and the really sad thing is - some callers asked nervously about getting into a market that has dropped 5-10% and all these financial Wizards could spew out is…if you don’t, you’ll be sorryyyyyy! Thanks Ben - this brainwashing is the essense of what recks in the housing sector “The Great illusionist”…my paper in Economics went like this….(so proud of myself)…The illusion has become real, the more real it becomes the more desperate they want it”….Capitalism at it’s finest!!….American was built on trust - like the many great empire’s before it - their eventual fall from grace started when those within this empire questioned this belief….
The definition of bad journalism is not effectively identifying one’s source. Its sort of a prime-directive of journalism that you source your material.
As far as I’m concerned the financial media got an “F” during the dot com boom because they repeatedly and aggregiously cited analysts who worked for investment banks. (The very same banks that underwrote the IPO’s). It was shockingly poor journalism and it was deeply disturbing to see the press vilify the analysts after the crash without sharing the blame themselves.
Today we have the media citing the opinions of “Economists” who actually work directly for industries with a vested interest in steering public opinion towards the belief that real-estate has hit a ’stable plateau’. That’s another shocking “F” for these so-called journalists. These guys shouldn’t even be able to graduate from a decent J-school with such appalling sourcing.
If an article doesn’t differentiate between an “Independent Economist” vs. “Industry Economist” the journalist who wrote the piece is a complete and utter hack according to this most basic rule of good journalism. And yes, I know: this applies to CNN, NBC, and almost all major publications. But this problem has become so epidemic in journalism today that it has essentially allowed for rampant corporate control of the media.
Industry Economists (like David Lereah) should never be quoted without a disclaimer that he is paid directly by the industry about which he is giving his opinion.
Its so fundamental that its sad that it even needs to be said.
The only medium I’ve seen responding to the bubble in a big way is — TLC. A few months ago, you could’ve found a flipper show where people were doing a flip and there was a question at the end of how much they’d make. Now, there’s a show called Property Ladder, which actually displays DOM and carrying costs. The only two shows I’ve seen, one where an imbecile nearly destroyed a Craftsman in Los Feliz, and the other, where an ernest but gullible couple flipped a house in Sac, both got out by the hairs of their chinny-chin-chins. In Sac, the couple is seen sutting at the coffee table staring blankly, as the boyfriend announces that 77 other houses are for sale in the same square mile. True, not a big victory for the media, but a pleasant change nonetheless.
Always thought Property Ladder was one of the great comedies of our time. Love it when Kirsten asks the flippers what they want to accomplish, how much they plan to spend, and how long it’s going to take. Her struggle to keep a straight face is priceless. The touch of sarcasm in the announcer’s voice… gotta love it.
Been watching this program since it began and was amazed by the mistakes and how forgiving the market was. Now, things they are a changin’.
Nice post sohonyc!
I have thought this myself, and tried to reconcile it with the “liberal bias” of the media we seem to hear so much about.
There is some great Mark Twain quote I once read about “getting your opinions where you get your corn pone” or something like that.. It is simply absurd that anyone would think it otherwise.
This is the closest I’ve found, not sure if it’s what you’re after:
I am persuaded that a coldly-thought-out and independent verdict upon a fashion in clothes, or manners, or literature, or politics, or relition, or any other matter that is projected into the field of our notice and interest, is a most rare thing–if it has indeed ever existed.
- “Corn-pone Opinions”
Check twainquotes.com. Great site.
They didn’t filter the comments on The New York Times blog, there’s still hope:
http://news.blogs.nytimes.com/?p=120
You are making too much noise. Be quiet and serve your corporate overlords!
Thank You!
Name names!!! What is the name of the show, which city as well. People need to know that they being done a diservice here, since a lot of people read this blog.
This has to stop.
Awesome. Next time, try to get thru the call screener with a fact or two, and get on the program. I’ve been on a number of local (Southeastern Virginia) real estate programs. They are all infomercial, where they put down $5K or so with the local radio station and get a host and an hour of airtime.
They can spin… make no mistake. I emailed one from my bubbleboy account and .. man, it’s crazy. They were making jokes about me. The sad thing is, I’m generally one of the only callers. I don’t hang around for my free stainless steel toaster tho.
I think I’ve been on the air 4 or 5 times now. I try to get in as many negative points as possible. “Home prices are out of line with incomes” and “inventory is going thru the roof as speculators rush for exits” and things like that.
This blog is the only oasis of up to date sanity I have found on this subject.
No soft landing for the subprime loan business. More like “controlled flight into terrain” or maybe lithobraking.
Were they ever in controlled flight?
I imagine the soft landing looking somewhat similar to the jet we saw ‘land’ on the 89th floor of the World Trade Center.
“Underwater landing…”
Underwater landing is exactly it. This whole scenario is Airport ‘77 remade at a grander scale. No wonder it has been so awful and slow to unfold.
Tha movie still gives me nightmares. To this day I have a phobia of looking at aerial veiws of deep water, especially if you can see features of the ocean floor *shudder.*
“lithobraking”
I love that one!!!
I don’t know what to say about all this, except you could see it coming from a mile away. It was only a matter of time. And this is just the tip of the iceberg as far as the lending side goes. All the banks that were financing the MLNs of the world are going to take losses and have to report them. It should be pretty interesting.
And as credit tightens, it will affect house prices, driving them down more. Its a vicious circle.
I am so happy to be renting !
As usual in similar situations, I cannot tell whether the “experts” the MSM quotes are truly surprised at how quickly things are headed south, or if they are just pretending for CYA purposes…
More on Lennar.
http://tinyurl.com/ynj3mg
“The weakness was led by a 1.6 percent plunge in home construction, which followed an even bigger 1.7 percent drop in October.”
A 1-2% drop in construction is pretty serious, neh? Why does the number “40%” keep popping into my mind?
From the tone of these articles the Fat Lady has not only sung for 2007 but has a good case of diarrhea to boot.
and CNN is still reporting only that mortgage applications are up!!!!
Can news organizations be sued for malpractice?
Maybe because these low credit score borrowers or underwater homeowners aren’t qualifying for these cheesy loans anymore, they are applying with multiple mortgage brokers? Could the uptick in applications be a sign of panic setting in due to ARM resets, as the FB’s attempt to refi? Or are these applications to purchase?
Of course they are up. Tens of thousands of panicked Interest Only/Option/ARM holders facing imminent rate increases, declining home values, and realizations they cant afford their mortgages.
I bet mortgage applications skyrocket in 2007.
We know for a fact that everybody who applied to Ownit had to apply twice.
and the 4 week average is still down, but is that the headline, noooo of course not.
OK… Prediction Time.
I predict that before this is all done the whole subprime and no doc load practice will be vanished, either by wholesale mortgage companies that refuse to market MBSes containing such because of their horrific losses or because it is put into legislation.
I also predict that some major players are going to take earnings hits for the next 5 years because of their exposure to bad mortgages. We have to remember that we are very early in the subprime mortgage game. Most of those loans are only a couple years old, many haven’t had their rates reset yet and house appreciation only stopped 6 months ago. Some of those loans will go on for the next 5, 10 years and the asset depreciation behind them could be tremendous.
I think what we are seeing now is just the very tip of the iceberg. The very tip. The only problem is that we can’t steer the ship away from what lies below. Too late.
It’s interesting, the slowdown in housing scares the MBS market, which grows more conservative, which reduces the funds for housing purchases, which causes a further contraction in the housing market.
This is a classic example of a vicious circle.
As a future homebuyer, I find the circle quite virtuous.
Good point, Peter — the glass looks more than half full if you focus on affordability.
I like to think of it as a virtuous circle, as it will eventually lead to prices coming back to reality and letting me (and others) finally purchase my first house at a reasonable price.
I want to own a house, but I have put that goal on hold for a few years now (I was not in a financial position to buy until a few years ago) because I saw that house prices did not make sense and I remember my mom buying her condo in So Cal in 1990 and being underwater until around 1997. I didn’t want to go through that, and I didn’t want to overpay for a house and be financially strapped to just make the payments, and I certainly was not going to use a toxic loan.
So, I have waited (sometimes patiently, sometimes not) and will continue to wait until prices once again are in line with fundamentals. And that virtuous circle will (hopefully, for me) speed up the process of reverting to the mean.
“I remember my mom buying her condo in So Cal in 1990 and being underwater until around 1997.”
Did you miss the memo that said that this time is different?
GS: I got the memo (who could miss it, what with Bob Toll, DL, LAY, and all of the other REIC cheerleaders spouting it ad nauseum and the MSM “reporting” and repeating it). I simply chose to ignore it, as I tend to believe the words of Sir John Templeton: “The four most expensive words in the English language are ‘This time it’s different.’”
words of Sir John Templeton Ludwig von Mises
http://en.wikiquote.org/wiki/Ludwig_von_Mises
Subprime lending only works (marginally) in a rising market. The market is sinking.
Even granting that subprime mortgages may have a propensity to go bad more quickly than historic averages (ya think?), we’re still in early innings. Now that getting out from under by simply selling isn’t in the cards anymore, expect this to get REALLY bad.
Wallstreet is saying these losses are covered by existing reserves. It will be interesting to see if they are correct.
Just like Social Security is covered by a Trust Fund with a lockbox on it to make sure nobody steals the money?
Just as the market can stay insane longer than the sane can stay solvent, the Losses can grow longer than the losers can stay solvent.
“Ownit’s most important partners, the ones that abandoned it, as Dallas sees things, were JPMorgan Chase, which provided cash to fund its loans, and Merrill Lynch, which supplied a major line of credit for Ownit and processed its loans into bonds for sale to investors.”
Success has many fathers, but failure is an orphan.
Alright every renter and smart home owner it is time to climb the hillside and watch the train wreck unfold. Remember to pass the popcorn and beer down the line.
Actually, I’m starting to believe it would be best to just leave the country, fianancially speaking.
A pretty large percentage of my retirement savings have. A friend of mine noted with sadness that we were engaging in “capital flight.”
jim-
I believe you’ve invested in the “next bubble” though. Still, as you said, it’s basically capital flight, though the profits return to the US.
Yeah, well I certainly wouldn’t put ALL my eggs in that basket. Certainly not long term. As a demographic phenomena, BabyBoomer retirement is likely to hit the Nannystates of Europe worse thant it hits the U.S.
As well as demographic problems we have seen a double digit inflation of the money supply in the past few years, fully comparable to that of the 70s. But instead of causing wage inflation it has inflated Wall Street and RE. All that money has simply boosted the PRICES of stocks while doing little to improve the profits of companies. Similarly, it has increased the prices of houses and the leverage of borrowers, while doing little to improve the affordability of housing.
AT least walk your money out of the country.
I understand Ben Jones has a link to everbank where you can trade your soon to be rubble dollars for another currency or gold.
This says it all. This is a tame example too. Straight from a mortage lender’s online calculator.
ARM vs. Fixed Rate Mortgage Results
A Fully Amortizing ARM could save you $78.90 per month. An Interest Only ARM could save you as much as $199.05 per month.
A $100,000.00 Fixed Rate Mortgage with a term of 30 years at 6.250% has a monthly payment of $615.72. If you were to finance this mortgage with a Fully Amortizing ARM at 5.000% the monthly payment would be $536.82, saving you $78.90 per month. An Interest Only ARM at 5.000% has a $416.67 monthly payment. This could save you $199.05 per month over a Fixed Rate Mortgage.
ARM vs. Fixed Rate Mortgage
Fully Amortizing ARM Interest Only ARM
Initial savings on monthly payment $78.90 $199.05
Payment savings first year $946.80 $2,388.60
Payment savings for four years $2,690.64 $8,054.52
With your current assumptions, your total payments will be lower for the fixed rate mortgage after 12 years and 0 months. If you expect to sell your home or refinance before 12 years and 0 months, you may be better off with an ARM.*
*This only applies to the Fully Amortizing ARM vs. Fixed Rate Mortgage.
Results Summary
Fixed Rate Mortgage Fully Amortizing ARM Interest Only ARM
Loan amount $100,000.00 $100,000.00 $100,000.00
Term 30 years 30 years 30 years
Interest rate 6.250%
Fixed for 30 years. 5.000%
Rate is fixed for 12 months and then is adjusted by 0.25% every 12 months, up to a maximum of 12.000%. The highest rate actually charged was 12.000%. 5.000%
Rate is fixed for 12 months and then is adjusted by 0.25% every 12 months, up to a maximum of 12.000%. The highest rate actually charged was 12.000%.
Initial monthly payment $615.72 $536.82 $416.67
Payment after four years $615.72 $581.98 $479.17
First year totals:
Interest
Principal
Payments
$6,216.80
$1,171.84
$7,388.64 $4,966.50
$1,475.34
$6,441.84 $5,000.04
$0.00
$5,000.04
Four year totals:
Interest
Principal
Payments
$24,395.25
$5,159.31
$29,554.56 $20,855.15
$6,008.77
$26,863.92 $21,500.04
$0.00
$21,500.04
Total interest $121,656.04 $155,649.04 $258,500.04
Total payments $221,656.04 $255,649.04 $258,500.04
Ending balance $0.00 $0.00 $100,000.00
Payment schedule
——————————————————————————–
Fixed Rate Mortgage ARM Fully Amortizing Interest Only ARM
Year Payments Balance Payments Balance Payments Balance
$100,000.00 $100,000.00 $100,000.00
1 $7,388.64 $98,828.16 $6,441.84 $98,524.66 $5,000.04 $100,000.00
2 $7,388.64 $97,580.95 $6,630.24 $97,031.38 $5,250.00 $100,000.00
3 $7,388.64 $96,253.51 $6,808.08 $95,522.37 $5,499.96 $100,000.00
4 $7,388.64 $94,840.69 $6,983.76 $93,991.23 $5,750.04 $100,000.00
5 $7,388.64 $93,337.01 $7,156.80 $92,431.48 $6,000.00 $100,000.00
6 $7,388.64 $91,736.61 $7,327.08 $90,836.17 $6,249.96 $100,000.00
7 $7,388.64 $90,033.26 $7,494.36 $89,197.91 $6,500.04 $100,000.00
8 $7,388.64 $88,220.36 $7,658.52 $87,508.61 $6,750.00 $100,000.00
9 $7,388.64 $86,290.84 $7,819.20 $85,759.58 $6,999.96 $100,000.00
10 $7,388.64 $84,237.21 $7,976.28 $83,941.25 $7,250.04 $100,000.00
11 $7,388.64 $82,051.50 $8,129.40 $82,043.08 $7,500.00 $100,000.00
12 $7,388.64 $79,725.19 $8,278.32 $80,053.42 $7,749.96 $100,000.00
13 $7,388.64 $77,249.27 $8,422.80 $77,959.21 $8,000.04 $100,000.00
14 $7,388.64 $74,614.07 $8,562.60 $75,745.80 $8,250.00 $100,000.00
15 $7,388.64 $71,809.36 $8,697.24 $73,396.85 $8,499.96 $100,000.00
16 $7,388.64 $68,824.26 $8,826.60 $70,893.67 $8,750.04 $100,000.00
17 $7,388.64 $65,647.14 $8,950.32 $68,215.09 $9,000.00 $100,000.00
18 $7,388.64 $62,265.66 $9,068.04 $65,336.96 $9,249.96 $100,000.00
19 $7,388.64 $58,666.67 $9,179.28 $62,231.78 $9,500.04 $100,000.00
20 $7,388.64 $54,836.21 $9,283.80 $58,867.90 $9,750.00 $100,000.00
21 $7,388.64 $50,759.36 $9,381.12 $55,208.89 $9,999.96 $100,000.00
22 $7,388.64 $46,420.27 $9,470.88 $51,212.65 $10,250.04 $100,000.00
23 $7,388.64 $41,802.07 $9,552.60 $46,830.48 $10,500.00 $100,000.00
24 $7,388.64 $36,886.85 $9,625.80 $42,005.83 $10,749.96 $100,000.00
25 $7,388.64 $31,655.45 $9,690.12 $36,672.79 $11,000.04 $100,000.00
26 $7,388.64 $26,087.57 $9,744.96 $30,754.53 $11,250.00 $100,000.00
27 $7,388.64 $20,161.56 $9,789.84 $24,161.12 $11,499.96 $100,000.00
28 $7,388.64 $13,854.37 $9,824.28 $16,787.03 $11,750.04 $100,000.00
29 $7,388.64 $7,141.49 $9,847.80 $8,508.12 $12,000.00 $100,000.00
30 $7,385.48 $0.00 $9,027.08 $0.00 $12,000.00 $100,000.00
——————————————————————————–
Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment advice. We can not and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.
All the discussion has been about sub-prime.
But if the price declines are significant, you’ll get losses in conforming prime loans too. There are those with bad credit. And those who are going to have bad credit.
“And those who are going to have bad credit.”
AKA incipient subprime.
IMO there’ll be lots of problems with the highest quality loans.
Picture this: You’re a relatively young couple, make good money, and stretched (i.e., went toxic) for your California dream home. Two years later you’re both putting in overtime and sacrificing to cover the increased payments on your $750K mortgage for a now-$400K house. Do you slave another 20+ years just to get back to even — forget about college for the kids or retirement — or “jingle mail” it, take the credit hit, and move forward??
p.s.: I certainly don’t condone this course of action, but I definitely see it happening.
The definition of bad journalism is not effectively identifying one’s source. Its sort of a prime-directive of journalism that you source your material.
—————————————————————————–
Great post Sohonyc….
In my mind, this incompetent journalism gets to the heart of one of the biggest problems we face in this country and which has provided many of the REIC hacks immunity from being challenged on their constant misinformation and misdirection. I’m still waiting in vain for that prime time TV interview where the interviewer challenges a David Lereah type directly on his predictions with hard facts and accountability to previous predictions.
I’m not sure if my theory on bad business journalism holds any water but I tend to think that most business jounalists find it more convenient to accept pre-packed news stories directly from groups like the NAR than to do the grunt work of investigative reporting themselves? Or maybe the calibre of business jounalism has gotten so poor?
Can I just say real quick here that I consider a 80/20 with no down or low down as a risky loan if it doesn’t have PMI insurance on it . The borrower has little money down ,little skin in the game and the lender has no equity in case of foreclosures . These loans might not have as low of credit scores as the sub-prime loans have but they are still very risky for lenders ,( especially without the PMI .)
Only the 20 part, which is a relativly small loan amount, thus limiting exposure for any one borrower. The 80 usually goes to one bank and the 20 sold to another. SO if homeowner goes belly up on just the first mortgage, lender only has to sell for 80% of value to recover costs (they dont give a fark about the second len holder). If borrwer goes belly up on second only, then lender has to decide wether or not to foreclose. Its best just to work something out as foreclosing is cost prohibitive in this situation. The second has a higher rate than the first. Think of it like 7-11. For every 100 snicker bars i sell, 10 will be stolen. So you have to make enough on the ones you sell to cover your losses.
Folks, you must consider this. If the dollar tanks 50%, the $50,000 you have in your savings account is now worth $25,000. Actually it isn’t really worth anything but the paper and ink it’s printed on because there’s nothing to back it up (like gold) but I’m sure you know what I mean. On the other hand, the guy who is slowly destroying the United States one piece at a time (Bush) and the person who laid the foundation of the destruction (Greenspan) only lose 50% of their millions. If they have $20 million net and lose 50%, they still have $10 million. You can still live quite well on $10 million. You cannot even pay cash for an SUV or a work truck with $25,000.
Of course, it’s a 100% guarantee that people like Bush and the rest of the Bush Crime Family, and Greespan, etc, have their money in other places besides the USA where it doesn’t depreciate as much as the dollar.
Actually, that isn’t fair. Bush and his family are sacrificing just as much as ordinary americans. Just look at the Bush Little Princess’s who are both of military age, out in Iraq risking their lives and sacrificing for their country with the rest of their countrymen and women………..what a joke. I think the nearest they got to Iraq was a trendy club in Southern Spain.
Careful there, Mike. You are at severe risk of tempting Gekko to post.
“money in other places”
Oil, that is…,
black gold, Texas tea.
Mike,
Fire-brand this in your brain:
Bush, Cheney, Clinton, Greenspent, ET. Al.,….will never have to eat a steak that is thin. Ever. Or their children, ever. Now, go get a Double Cheeseburger from McDonald’s from the $1.00 menu and use their facility’s toilet paper to wipe your ass, take lots of extra napkins, saves on paper towels at home.
“The more you eat…the more you sh*t” …Woody Guthrie
Well the 20% is certainly considered risky and is (purportedly) priced for it. The idea is that by carving off the safe(er) 80% as a seprate loan, the borrower doesn’t have to pay high interest on the entire amount. But there are two problems with this theory. Firstly, as you point out the borrower has little skin in the game, especially in no recourse states. Secondly, appreciation has become SO insane that the 80% can’t really be considered “safe” in case of foreclosure. In conventional times, 80% LTV probably represents the price of the house ~4-5 years ago, not just last year.
Look at this way: people have been using the 80%/xx% loans to save money versus paying PMI. WHY exactly is it cheaper? Both mortgage companies and insurance companies reduce the risk of individual losses by pooling many transactions and thie aggregation means that the few that fail are paid for by the many that don’t. But the insurance does that pricing calculation in house, while pricing by the mortgage brokers is set by those who buy MBSs from them. With all the anecdotal evidence that we hear about appraisal fraud and liar loans, I can’t help but believe that the risk is being significantly underpriced by those MBS purchasers.
“I can’t help but believe that the risk is being significantly underpriced by those MBS purchasers.”
I guess you are not a big fan of the Efficient Market Hypothesis, then?
An economist and a mathematician are walking down the street. The mathematician says,”Hey look, a $100 bill just sitting there on the sidewalk.”
The economist says “That couldn’t be a $100 bill. Since $100 is worth much more than the labor to pick it up, if it was a $100 somebody would have picked it up already.”
Sometimes supply and demand don’t move at the same speed.
No mathematician, walking with his head in the clouds, could possibly have noticed a $100 bill on the sidewalk.
> people have been using the 80%/xx% loans to save money versus paying PMI. WHY exactly is it cheaper?
It was cheaper in the past, because interest on the second mortgage was tax-deductable and PMI was not. This has been corrected now.
Bloomberg’s comments on MLN
http://www.bloomberg.com/apps/news?pid=20601087&sid=aTpglnM_rtRM&refer=home
Okay, how exactly is greed Bush’s fault? The fact that people actually believe that he is some sort of evil genius (while at the same time saying that he’s dumber than toast) who has dreamed up this great scheme to destroy the nation is amazing - he didn’t need to do anything to destroy the nation: greedy companies and an equally greedy and stupid population were more than willing to do that without him. Companies that pay useless CEO’s tens of millions of dollars when firing them (Home Depot, Disney, etc), companies that outsource all the good jobs and replace what is left with illegals, companies that engage in all the assorted fraud involved in this whole “housing boom” while lying with a straight face as they run with their loot when the whole thing crashes down. Meanwhile, the stupid public was willing to believe all this, hoping to “cash in” and “get rich quick” without having to work since some other sucker will buy your house for more, and cheap stuff made overseas is good (even if it means your job is gone), and so on - live for the moment, me, me, ME, I DESERVE whatever I WANT NOW!! and so on - the cry of the new American people.
No, this was not Bush’s fault, though Greenspan definitely deserves credit (haha) for crediting this nightmarish credit bubble and turning a “mere” long-drawn out recession into something far worse.
GEKKO — Care to chime in here?
Another one bites the dust !
SECURED FUNDING GOES DOWN!:
http://bakersfieldbubble.blogspot.com
OK, this is getting to point of panic. What is going on ? Everyone looking at the same data and pulling the plug at the same time or what ?
The failures of all these sub prime mortgage companies has to be getting to the point of crisis. These companies are going down because of trouble somewhere. Where is the source of that trouble ?
What I meant to say is that we are not seeing the full story yet. The sub prime lenders are falling like dominos but not saying much. Something big is happening somewhere.
Perhaps someone has finally determined that there just might be some risk in lending $500K to a $25K/year bartender — with a FICO of 540?
Interesting that Wells Fargo tops that list of subprime originators, and by such a large percentage. Its loans (because it’s a bank subject to federal regulations) will be hit hard by the new mortgage lending guidelines issued by the OCC et al, though who knows how long it will take to see the effects.
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This is interesting. I know someone who has a Wells Fargo loan-she said “if I can buy a house, anyone can”. Now I know why she used them.
Scary, up to now, I thought Wm and Countrywide were the top sub-prime lenders.