“Isn’t It A Little Late To Be Concerned With Subprime?”
Readers suggested a topic on subprime loans and responsibility. “A member of the Fed’s Board of Governors is coming to Tucson next Thursday. ‘Economic Outlook and Developments in Mortgage Markets’ series presents Susan Bies, member of the Board of Governors of the Federal Reserve System. The lecture and reception following are free and open to the public.’”
“‘I’m tempted to go and raise the following questions during the Q&A period: 1. Isn’t it a little late to be concerned about subprime lending now? 2. Why didn’t the Fed take the punchbowl away three years ago?’”
Another had this link. “Is she going to warn about the perils of subprime borrowing? ‘Federal Reserve Governor Susan Bies said on Thursday looser underwriting standards were partly responsible for recent rises in late mortgage payments and that lenders should tighten risk management practices.’”
“Bies noted that banking regulators had advised lenders last September to beware of the risks associated with nontraditional loans. She said supervisors ‘are concerned that current risk-management practices may not fully address the entire set of risks inherent in nontraditional mortgages — risks that could be heightened by current market conditions.’”
Another noted, “Home prices are dancing on a rotten, collapsing floor of subprime debt.”
A reply, “Well I’ve been saying that if the landing seems soft it’s because the floorboards are rotten.”
The Hartford Courant. “Executives at Mortgage Lenders Network have always been upbeat and optimistic about the company’s future, but on Thursday they sat sober-faced, determined to save their company from the biggest setback in its 10-year history.”
“Mortgage Lenders is the latest company to get caught in a downdraft in the ’sub-prime’ mortgage industry, which has been slammed with rising delinquencies and defaults. Mortgage Lenders is not a bank, so it must secure lines of credit from financial institutions.”
“The companies providing the lines of credit started getting nervous in late December about the problems across the subprime industry. Mortgage Lenders was having a harder time selling loans to wary investors. And two months earlier, in October, Mortgage Lenders was forced to sell hundreds of millions in loans at a loss because they had been closed at rates well below what the market was averaging, President Mitchell Heffernan said.”
“‘They saw that, and it all started to snowball,’ Heffernan said.”
From Bloomberg. “Mortgage Lenders Network said ‘human error’ caused it to lend $600 million at below-market rates, fueling losses that led to the closure of its biggest unit.”
“‘The economics of the market went upside-down,’ Heffernan said. ‘We could continue to go down the path of funding loans at a loss or we could exit the market completely.’ The company furloughed about 900 of its 1,800 employees for two weeks.”
The Tribune Review. “Pennsylvania’s Department of Banking is taking action to head off a trend the state can’t be proud of, one of the nation’s highest mortgage foreclosure rates. The department has told mortgage bankers and brokers they are subject to license suspensions, revocations and nonrenewals if consumers are mistreated, such as enticing them to agree to a mortgage they can’t afford.”
“‘The policy statement is good for the industry,’ said Michael Flynn, president of the state Mortgage Bankers Association’s Southwest Chapter. ‘Laying out guidance is a good thing, but where’s the enforcement?’”
The Rocky Mountain News from Colorado. “Attorney General John Suthers, teaming with a couple of legislators, is promoting a bill aimed at cracking down on the fraud that results in unjustified housing loans and subsequent foreclosures.”
“We hope the bill does some good. After all, Colorado is said to have a disproportionate share of foreclosures. Still, we can’t help but feel that it’s as much political grandstanding as substantive reform. As one critic says, going after appraisers is just ‘nibbling around the edges.’”
“The fact is there are already plenty of laws, federal and state, aimed at fraud in the mortgage business. But prosecutors at both levels of government have been reluctant to take on the cases - despite repeated pleading.”
“Former Sen. Bill Armstrong, who’s been in the mortgage business, believes the new laws will do little good because they don’t go to the root of the problem. ‘It’s nothing but political hot air,’ he says.”
“The larger problem, he argues, is government-guaranteed housing loans.”
“‘Our government encourages people to get into deals they can’t afford,’ he says. In order to expand home ownership, the VA and the FHA put people into houses with little or no down payment. It may be a legitimate public policy, he says, but if you accept it, you’ll have to accept the high foreclosure rates as well.”
“‘If it weren’t for the government guarantees very few of these loans would get made,’ Armstrong argues. The policy encourages plenty of scam artists who are eager to help foolish borrowers leap into the quicksand.”
“John Head, an attorney familiar with the industry, says enorcement is lax because the lending agencies quickly sell the loans and they end up on Wall Street as part of an investor’s portfolio, an investor who has no idea default is likely. Once the loan is upstream the original lender doesn’t care what happens. Head suggests the federal government should change its policies so that if there’s a default on a loan, it gets charged back to the original lender.”
When I started my first housing bubble blog, I could only guess what ’subprime’ meant. But even a lay-person should have been able to see what was going on with reports like this coming out:
‘We’re coming out with a ’stated Social Security program’, deadpanned Dan Rawitch,..igniting a delayed wave of laughter in his audience of listeners.’
‘Though joshing, Rawitch was making a serious observation about the headlong rush by lenders to market a slew of new, and more liberal, loan products intended to open up new flows of business, at a time when ‘traditional’ originations are shrinking by as much as 40 percent.’
‘One revived category is the ’stated income’ loan, where customers ’state’ their income amounts, without delivering the normal documented proof.’(T)he 40-year mortgage is really just a response to the fact that the market is shrinking.’ Lenders are trying to figure out ‘how to get that next customer into the game.’ One firm ‘will pretty much originate [any]loan if an investor will buy it.’
‘Appraisers themselves are writing anonymous letters to regulators telling them that they are being pressured by lenders to come in with agreed upon values..and if they don’t come up with the value they’re off the job.’
‘(T)he second-biggest provider of financing for U.S. housing, said that it will expand its interest-only payment option to more adjustable-rate home loans to meet demand from borrowers.’
‘(Its) designed for borrowers who fully understand that the monthly payment will rise following the interest-only period,’ Freddie Mac said in the statement. ‘they are popular with consumers who are stretching financial resources and might not be able to repay the loans when interest rates rise.’
ben,
the new buzz word in the industry is “non-prime”, as sub prime is a dirty word.
all this hoopla about legislation is just that. we discussed last year that the end to this lending orgy was going to happen when the market recognized the risk, not when some silly state legislation was enacted.
boulder bo,
I have always enjoyed your insights into the lending world. What’s going on out there? Is the funding for this junk finally drying up? Give us your take.
so glad that i’m on the periphery of this thing. there are 600,000 participants in the industry, many of whom are hired guns (salespeople) and paper pushers. most are in a state of denial, simply following orders and plodding along, unaware of the gravity of the situation. i firmly believe that the word sub-prime will be a historical footnote and the only “non-prime” lending will be done by the larger lending institutions (citi, chase, wamu, etc) that have the capabilty to hold the paper if they have to. there will be plenty of burned investors of this toxic mortgage goo and they’ll be on the sidelines for a long time, imho.
most are in a state of denial, simply following orders and plodding along, unaware of the gravity of the situation.
Many folks don’t care to know that the world is round.
Another new buzz word: “strategic financing” (no longer “creative financing” or “affordability products” … as someone else said, those terms are sooo last year)
http://blogs.ocregister.com/lansner/archives/2007/01/insider_qa_with_local_lender_1.html#comments
Prices will come down. Resistance is futile.
Typical OC
My favorite quote was –
“Good for you to leverage the difficulties in the current market to your advantage”
How about you go back to school for class–
CEO 101–DUMB things to say in bull$hit meetings to make yourself seem smart.
How about “Prime-Lite”…
Prime-Lite- all the risk of sub-prime without that bitter aftertaste.
Prime-Lite- Because verman are people too.
Prime-Lite- We dont know “no”.
I just heard an ad on my sports-talk station the other day by a law firm seeking clients who had been tricked into a toxic or option-ARM mortgage. I wonder how many of them were “tricked” into the terms on their credit cards…
–
“Isn’t It A Little Late To Be Concerned With Subprime?”
In our system fraud is allowed until things get bad and complaints are widespread. Both bubbles, in stocks and housing, were driven by fraud that was allowed. Obviously, there are people who win big in the process.
It is the System, Stupid!
Jas
Fraud is a predictable component of the US business cycle. This is explained at length here…
http://www.bestprices.com/cgi-bin/vlink/0140238565BT.html
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I have read almost all good books, including Galbraith’s, on the subject of Anglo-American fraud (my area of expertise). There is very thin monogram by Galbraith titled, The Economics of Innocent Fraud! And the subtitle is: Truth For Our Time!!
BTW, I am a conservative (I apologize for voting for Baby Bush in 2000), but Galbraith is so much superior to Friedman that it not even a contest.
Jas
It’s not just American fraud mind you. Today you always have to factor in what is going on in other countries. The world doesn’t just stops to the USA. You have to include the Chineese, the Russian, the South American, the Arab, the African, the Japaneese fraud in the global. And if you think about these countries, it’s even more scary. Compared to these countries USA is still! a fairly honest system, almost a paradise. Sad, sad, sad. It’s what saves the US. The total chaos and anarchy in the rest of the world.
–
I agree. My focus on Anglo-American fraud is due to the fact that its influence on the rest of the world is great. The best example of the BAD COPY OF AMERICA is none other than my country of birth — India. Bankrupters of India are taking the pages out of the playbook of American Bankrupters, aka bankers.
The real story of the past dozen years is FRAUD made in the USA.
Jas
It’s entropy, Marc. You can have order, but only at the cost of increased disorder elsewhere.
Unfortunately I have to agree.
Remember how we laughed when Baghdad Bob was letting loose, with lie after lie, on tv, about how the vaunted Iraqi army had beaten the coalition forces, as they were in fact, closing in on Baghdad?
Gotta say, it doesn’t seem all that different from the lies we accept from our leadership on all levels of government, just not as blatant…
I figure if you are considering it, there is a 1-2 month window on buying physical gold bullion, before it makes a bold move to the upside.
This week has shown, how gold can move up, as oil is heading down, a true flight to quality, in my opinion~
Great post, aladinsane. I have made the same observation before. S**t flows downhill and when you look at what is coming from the so called “leadership” at the top, this lying, thieving mode of operation is true “trickle down” and has infected business and government at all levels.
Buy silver. It’s even more cheap and in this type of market it will do even better.
You are correct, fraud is allowed….that’s why people from all over the world come here to the USA…not for freedom but for knowing that they can get away with screwing someone and getting rich off of it.
For this reason, the system will NEVER be corrected because the folks running the show will NEVER allow it to be changed. They’ll get things under control until complaints slow down and then slowly ramp up again. The bastards up top are making MILLIONS from both good and bad markets. It’s artificially stimulated and their money traps are set both ways.
This is the price you pay to live in a system like this. And if you’re lucky, you’ll catch money too..otherwise, just be happy with your 401Ks, IRAs, and other scam retirement tools they push so much all the time.
Oh and housing…biggest scam of all.
–
My favorite comments over the past 8 years:
It is the Debt, Stupid!
It is the System, Stupid!
American System — A System of the Crooks, by the Crooks, and for the Crooks!
Be Safe!
Jas
Well try the Turkish, Indonesian, Russian, Chineese banking system. That’s what makes you lucky and blessed in the US. Think the system is corrupt and rotten here ? It is by the way. But elsewhere it’s even more horrendous and terrible. That’s what saves the UK, the USA and the West in general.
–
Look, I agree with all this. The problem is that Anglo-American system WAS far more honest, thanks to Puritanical heritage, and now it has caved in to FRAUD. That is my main point.
Jas
Well. I must disagree in part with you. The United States Revolution and Independance started with a massive paper fraud. There are periods in the history of the US, fairly long ones, that this was not the case. We are certainly in one of those today.
http://www.larouchepub.com/other/2006/3343mayflower.html
The Pilgrims fled to the new world to escape persecution from the Church of England and the London Privy Council, which were tools of the Venetian-centered oligarchical interests dominating Europe. Today, oligarchial interests and financial elites have all but taken over our political and economic life. This is the real story of the Pilgrims, which is far more inspiring than the “canned” version most of us learned in High School history. Compare these men of courage and principle, to our present leaders.
“On Dec. 18, 1620, the ship Mayflower arrived at Plymouth harbor. On the next day, her passengers began to go ashore. Within five months, 51 of those original 102 colonists would be dead, including the colony’s first governor, John Carver, together with his wife and children. During most of the next ten years, the colony suffered through periods of famine, disease, near starvation, and repeated attempts by King James I’s Privy Council, and the leadership of the Church of England, to destroy the colony. But they persisted, and their example inspired others. And the friendship and help which they provided to the Puritans, first at Salem in 1628, and later to John Winthrop, helped secure the creation of a new commonwealth on the shores of America.”
My favorite quote from the article above:
In 1581, the Magistrates of the University of Leyden, which had been founded by William of Orange in 1575, issued a declaration which said, “Liberty has always consisted in uttering our sentiments freely; and the contrary has always been considered the characteristic of tyranny. Reason, which is the adversary of all tyrants, teaches us that truth can be as little restrained as light.”
That business about ‘Human Error’ at MLN is BS. They had two choices - close down, or make loans under market rate to gain market share for a few more months of crazy money making. They did the latter the whole time sticking it to the investors/loaded fees/fleecing company/stealing shit etc.
Thats how you ’shut down’ a company in america. First you run up all available credit, get behind on rent, take the last dollar out of register, stiff employees on last paycheck, then BK.
Its even VERY VERY common for small companies to ask people to work for free at the end! I had that happen to me, I walked. f em. The guys who stayed to work for free never got paid, poor slobs.
just think, the 100’s of gov workers in housing stats etc will get raises as the borrowers and lenders die a slow death
I’m curious flaff, what’s your job? And are you claiming the industry which you ply your trade is free of corruption?
Because in case you haven’t noticed, a lot of the government scammers are in bed with corporations.
“‘We’re coming out with a ’stated Social Security program’, deadpanned Dan Rawitch,..igniting a delayed wave of laughter in his audience of listeners.’
I’ll only get excited when they come out with a stated IRS return.
“I’ll only get excited when they come out with a stated IRS return.”
Dude — For millions this has been the reality for quite some time.
“Head suggests the federal government should change its policies so that if there’s a default on a loan, it gets charged back to the original lender.”
If this were to happen (which it probably won’t), prices wouldn’t hold up for 15 minutes. Banks would go back to requiring 20% down, pristine credit, 6 months cash in the bank, full P & I payments. Subprime wouldn’t exist anymore. Neither would piggy back loans. IO. Negative Amortization.
Only if they held the boards of directors directly liable in the case of bankruptcy. Otherwise they would just set up shell corps.
the sad thing is that most of the companies involved ARE just shells, paying their owners and sometimes their employees huge sums of money (probably more than actual cash flow) for work that is based on fraud. Unfortunately, when the company goes bankrupt because of bad loans, all the money has been transferred to the criminals and cannot be touched. Same story with the appraisers and RE agents involved. Just my observation from Europe, but I guess it’s exactly the same over there.
It’s the same over there. What is done in the US, is done across the world. It’s the “Monkey see monkey do.” principle. And since the US is the alpha monkey. Everybody copies the big monkey. Europe has always been like that. Well almost. Except “Old Europe”.
“Head suggests the federal government should change its policies so that if there’s a default on a loan, it gets charged back to the original lender.”
Hahaha! Why waste all that good legislative red tape? The MARKET will take care of this problem when F’d investors file lawsuits by the score on a “prudent lending” theory. These securitization agreements are likely littered with dozens of warranties — The F’d investors will be like “Ok, do we pick from Column A, or Column B?”
“The company furloughed about 900 of its 1,800 employees for two weeks.”
WTF does that mean, go get drunk come back and get fired?
Oh my gosh, RJ, do you have to be so negative? They won’t get “fired” when they return. They will get “right-sized”. That is the new sterile term in the corporate world to indicate “a group of people having their daily livelihood stripped from them.” I can just see me with my wive. “Don’t worry honey. I didn’t get fired. I got right-sized. That should make you feel better. Now, how do we apply for food stamps?”
*Note: The above dialog was a dramatization. As renters we have a nice cushion in case of right-sizing by corporate America. The squirrels are safe from us for a good long time. But those pigeons, I would eat them just out of scorn.
Very funny! But it’s better to get drunk and high first. It’s probably what happened with the ooopsies errors at MLN.
“Mortgage Lenders Network said ‘human error’ caused it to lend $600 million at below-market rates, fueling losses that led to the closure of its biggest unit.”
How did you make a mistake that like that without catching it sooner ? Are subprime lenders that poor at math and business management ?
‘We could continue to go down the path of funding loans at a loss or we could exit the market completely.’
You’re telling me you can’t adjust your funding model and not make loans at a loss ? I’m at a loss for words.
“Mortgage Lenders Network said ‘human error’ caused it to lend $600 million at below-market rates, fueling losses that led to the closure of its biggest unit.”
That’s their CYA way of saying “we made an oopsies and were too dumb to realize it”.
The subprime market is estimated at 600 billion dollars. Wonder how many 600 million oopsiessss! out there ? 400$ to 500 billion of the 600 billion at risk ? Ain’t that funny. Funny assets, funny debts and funny money.
Head suggests the federal government should change its policies so that if there’s a default on a loan, it gets charged back to the original lender.”
That would be the death knell to the housing bubble. The bubble was made possible by an unholy trinity of crooked mortage brokers, realtors, and appraisers, all aiding and abetting each other in leading FBs down the primrose path. The key element was the mortage brokers’ willingness to make irresponsible loans, greedily taking their cut up front with no regard to the longer-term consequences once these soon-to-be non-performing loans were fobbed off on “investors” in mortage backed securities. Realtors steered the unwary and stupid into “deals” they couldn’t afford, and unscrupulous appraisers hit whatever number their cohorts in fraud and deception demanded.
Now that the bubble is fast unwinding, foreclosures are soaring, and FB tales of woe are hitting the front pages, politicians will be scrambling - very belatedly, and solely out of political expediency - to punish or prevent the worst abuses of the past few years. When you yank out one leg of the stool - be it the mortage brokers ability or willingness to make irresponsible loans or the appraiser’s willingness to falsely inflate a house’s value without fear of consequences - the realtor, the slimiest of the troika, will no longer be able to match up FBs with greedy sellers to finance overpriced houses with 100% borrowed money, since “investors” and lending institutions have finally started to wise up. Credit requirements will be tightened, drastically, while inventory (and foreclosures) are soaring. The net effect: Creditworthy bubble-sitters with big down payments will be desperately courted by panicked sellers and starving realtors.
See you at the firesale
Good summary Sammy .
What surprises me is that so many people bought the concept of making loans based on real estate going up ,never mind if the borrowers could qualify .
By what I have seen so far ,you can be unemployed and get a low down sub-prime loan still to this very day .
I really don’t think people understand how the sub-prime lending pushed the prices up by faulty short term demand .
I refuse to purchase real estate as long as my competition is a foreclosure bound buyer or a flipper/speculator that doesn’t have to qualify .
At the bank where I work, an employee (not in home loan dept) recently asked me about buying a house. I told him not to buy now, but he did anyway. He could not use his wife’s income because of bad credit, so he over stated his income by 100%+ on this loan through a broker. It is 100% financing, on a house priced at $550,000. It is a true subprime loan with artificially low initial payments to get him qualified using overstated income, high accrual rate, prepayment penalty.
Doing only “prime” loans, I thought this market was done in 2003, based on income levels and reasonable underwriting standards. In SoCalif, all price increases since mid 2003 are due to 100% financing, stated income, and artificially low initial payment loans (Option ARMs.)
“In SoCalif, all price increases since mid 2003 are due to 100% financing, stated income, and artificially low initial payment loans (Option ARMs.)”
This was exactly my guess, but it is great to hear it from someone inside the lending biz…
how is it that the price increases during that time are not inflation?
Sensible, I hope your co-worker feels a pain he had heretofore not even been able to imagine. Maybe then he will remember it.
“At the bank where I work, an employee (not in home loan dept) recently asked me about buying a house. I told him not to buy now, but he did anyway. He could not use his wife’s income because of bad credit, so he over stated his income by 100%+ on this loan through a broker. It is 100% financing, on a house priced at $550,000. It is a true subprime loan with artificially low initial payments to get him qualified using overstated income, high accrual rate, prepayment penalty.”
So a person employed in the financial industry decides to commit fraud on loan paperwork, and then enters into a mortgage contract that he has no chance of satisfying once the grace period expires? I hope the IRS attaches him for life.
I think you should be happy that the US doesn’t yet have a National Mortgage Guarantee like the Netherlands. This government-backed guarantee pays the difference if a home has to be sold at a loss and the owner does not have the money (if they are clever, they don’t have any money of course and purchased with 0% down). In Netherlands about 70% of mortgages are covered by this guarantee, making a collapse of the housing bubble big fun for clever FB’s and a little less fun for the taxpayer.
Does the Netherlands have a housing industry currently being estimated at $23 trillion? I fear such stupidity but the size of our debt precludes such a grand scheme from ever being possible. The saddest part of this mess is that the $9 trillion of national debt and the war in Iraq will probably turn out to be the greatest friends we responsible renters have. These commitments box the government in and will keep them from having the ability to even contemplate such a massive plan.
Where did you get that number ? That’s what I am saying all along. If a smallish country, a large part under the sea level, is worh 23 trillion dollars in real estate, the whole place wil really be in the hole. 23 trillion for Holland ? Not surprised.
Marc, $23T is for the US residential RE.
Pheww! But you never know today. I remenber that in Tokyo, Japan one skyscraper was worth in the 90’s, more than all real estate in California. Wonder what it’s worth today ?
nhz . In the past lending cycles low down loans were covered by insurance called PMI . If a lender was self-insured they better be pretty solvent . Somehow lenders started allowing low down loans that were not insured as well as people not needing to qualify . You better believe that PMI companies would turn down people who didn’t qualify and not allow inflated appraisals because they are conserative .
So somehow with this big surge in the sub-prime lending and passing off the packages to the secondary market ,the money makers decided they would drop the standard low down loan PMI insurance .I understand that the new in thing to do was to go on a 80/20 to avoid PMI insurance . It’s still 100% financing to the borrower .
They all did this for their”fees”. It’s that simple.
I posted on my blog a story from today’s Asbury Park Press that says Realtors are going back to their real jobs because the market has slowed down. (It’s the second post down.)
http://shorebubble.blogspot.com/
10.8% were RE jobs in 05
mean is 6.5
Realtor’s going back to their old jobs? Wow, that’s a lot of street corners waiting to be reoccupied!
Is there a Realtor/hooker joke that isn’t funny? If there is, I have yet to read it.
Interesting website:
http://www.flippingfrenzy.com/
“VA and the FHA put people into houses with little or no down payment.”
From my limited understanding, the VA and FHA programs are only a small part of sub-prime…it’s the private market that has been packaging most of these monsters.
And the investment community has been more than happy to buy them.
Depends on the region. In the most bubbly areas, SoCal, SoFla, etc. FHA/VA are a very small part of the total. In the middle of the country, like Colorado, Ohio, and North Carolina (OK, NC isn’t the middle of the country, in one axis), FHA/VA are nearly half of the non-prime, non-jumbo loans. And until about a year ago, most subprimes required some cash from the borrower (not much necessarily, but some closing costs at least), while FHA doesn’t (VA, BTW, does require some closing cost cash from the borrower, and has a much lower foreclosure rate than FHA). It isn’t surprising that a Colorado newspaper is railing about FHA loans.
‘(Its) designed for borrowers who fully understand that the monthly payment will rise following the interest-only period,’ Freddie Mac said in the statement. ‘they are popular with consumers who are stretching financial resources and might not be able to repay the loans when interest rates rise.’
I call these people “loan hoppers”…take the low interest-only or teaser rate for two years, then pray to God that you can refinance into another low interest-only or teaser rate when the original loan resets. Wash, rinse, repeat.
Ben, et al. Thought you might enjoy my email dialog with the head of Option One’s Loan Servicing Department. You can read it at:
http://tinyurl.com/wuq2q
I think the PR campaigns and increased poltical contributions will begin for all these sub primers. They can see the hand writing on the wall and they have no choice but to go on the offensive.
Unfortunately, they will face the same litigation as big tobacco, years of endless litigation and sob stories from broken families and lost homes.
It’s my understanding that they were still making them qualify on the low down VA and FHA programs ,so I don’t think they are high risk like the sub-prime market was . Further, the VA and FHA had loan limits so they weren’t putting those loans on this high end market that is so vunerable to crashing .
Maybe someone can comment on if they had VA or FHA “stated income loan product “,in the last 5 years .
FHA/VA don’t have stated income programs, and “payment shock” is much smaller on FHA/VA ARMs than on subprimes. Where FHA had subprime beat on the risk dimension was cash from borrower. As I noted above, until about a year ago there were very few subprimes that didn’t require at least some cash from the borrower at closing. Thanks to the continuing evolution of this dynamic marketplace, I think subprime new beats FHA on every risk dimension.
Thanks for confirming what my take was on it was .
Also, VA is completely self supporting. They issue VA bonds and charge the VA borrower an insurance premium to cover any default and foreclosure costs. NEVER has the VA program cost the U.S. Government any money. They are completely self supporting and take care of their own messes, if and when they arise.
Nope - there are no “VA bonds.” I think there are VA debentures (I know there are FHA debentures) covering the window between claim and REO sale. And VA being self-supporting is a relatively recent occurrence. There was no VA fee until 1980, give or take a couple of years, and only in the GW Bush admin was the fee raised high enough to cover the costs. Go to the OMB website and find a US Budget Credit Supplement spreadsheet from FY 2002 or before. There are appropriations to cover the VA housing program budget.
Once the people that loaned the money (the “Investors”) stopped paying attention to the capability of the borrowers to ever repay the loan out of working income (as opposed to appreciation) you had a pyramid scheme taking place - and it has to collapse. The people holding this paper are generally rich and well-educated. They, most likely, can read the terms of the loans (i.e., ARM resets), compare them to the income levels of the borrowers, and then figure out that virtually none of these loans will NEVER be paid back off of working income. Given that, these loans are no different from commodity speculation - and should be assigned the same risk. Unfortunately, from what I’ve gathered from this blog, the RMBS pool is considered “low risk”, like T-Bills - yes there will be a few defaults in bad times, but that’s priced in, and otherwise the loans will do fine.
This is insane. I work for a large company and hope to get a decent pension, but we may have a huge bunch of money tied up in these “low risk” investments, as lots and lots of others do. Even without a recession, this collapse is going to make the S&L debacle look like a cake-walk.
Gotrocks …I agree with you my friend . I have repeatedly tried to bring up the fact that it’s not fair to the investors in the secondary market to be victims of loan fraud as far as I’m concerned ,especially when the funds are coming from pension plans . These loan packages and the appraisals are bogus ,thanks to the wonderful sub-prime lender mortgage scum that know how to just make a package look pretty .
Thanks Wizzard - I’m getting beat up on another thread for not embracing the Canadian health care system (I’m not really attacking it, I’m just saying that it’s different, with different priorities).
On this topic, wouldn’t it be prudent for the end-of-the-line investors to hire some people like Paladin. Just this weekend he turned over a request (on this blog) to look at a transaction - it looks simple to me.
These investors, even in the “80″ part, of the “80/20″ loans are looking to get only 30 to 40% of their PRINCIPAL back when the loans default and go through foreclosure (when depreciation, damage, and transaction costs are discounted). For a 500k loan, that means a loss of 300k+. So Paladin-types would prevent a loss of that magnitude in maybe a few hours of work. This seems to me to be a very wise use of investor money.
And I’m not even talking about the fraud element - just the Walmart workers using stated loans to get 500k houses. Simply take a look at the paper and see if the borrower can pay back the loan (without re-fi’s or appreciation). If the borrower can - fine, if the borrower cannot, reject. If the data is insufficient (i.e., stated), then ask for more info (i.e., non-stated).
I’m just a third-rate engineer and can figure that much out myself.
GR, The principal loss is not usually that great on the 80% part. Let’s say the $500,000 house has an 80/20 $400,000/$100,000 loan. The true value is $450,000 and it declines 30% over the next two years to $315,000…….oh wait, you are correct. The $400,000 principal amount, after costs, exenses and wiping out the second, probably nets the bag holder $300,000. Wow, funny how that works. MBS buyers, are you listening???? You will be taking a 25% hit to PRINCIPAL. Try to make that up on volume…..
Case in fact on a 2003 sub prime pool. They are dipping into principal now, and these are old loans made during periods of appreciation:
Approximately 20.8% of the pool for series 2003-BC8 is more than 60 days delinquent (including loans in Bankruptcy, Foreclosure and Real Estate Owned). The OC amount is currently $1,827,672 below its target amount of $5,417,847. In five of the past six months, the excess spread has not been sufficient to cover the monthly losses incurred. Monthly losses have averaged $395,332 for the past 3 months. Cumulative losses as a percent of the original collateral balance are 0.92%.
From http://theroxylandr.wordpress.com/2007/01/11/downgrade-spree-on-mortgage-papers/
not sure about the US, but in Europe a large chunk of this paper is held by big pension funds (for government workers or big corporations). The Dutch pension fund ABP (including their hedgefunds) is one of the biggest RE investors worldwide. The people who are responsible for buying all this RE paper couldn’t care less if the loans go bad, it’s not their money and in some cases (e.g. with the huge Dutch pension fund for government workers) all losses will be paid for by the taxpayers anyway. Over the last 15 years or so these funds produced nice capital appreciation figures thanks to the RE stuff, which enables their managers to demand extremely high salaries. And I’m sure that when things go bad they have their golden parachutes ready.
Adios and Kaput pensions funds. Very comforting to know that a lot of pension funds are smack in the real estate bubble. Thanks for the reminder. Tomorrow I think I will be buying a couple more ounces of gold and silver.
Sub-prime is so last year, ALT-A is the hot subject. If you think the sub-prime market is bad, just wait for the ALT-A, no doc, investor market to unravel.
What’s ALT-A?.. heard the term…need a definition. Thanks!
Alt A is short for alternative A credit. Alt-A is your no doc, no ratio type of loans. They are loans for borrowers with good credit scores but are unable/unwilling to show their income. A no doc loan is the loan product of choice for flippers because they can buy properties at 95% LTV and they do not have to list income, assets, employment, or properties owned. All you need is a certain credit score and enough tradelines, and viola, you can buy properties. No ratio is when you verify employment, but you do not verify income. Assets must be verified via the no ratio program. Obviously, this kind of product can be abused if you don’t verify income, employment, or assets.
For example, if you have followed the Dawn Molen story in Tampa, the realtor/mortgage broker, who put together investors with real sellers. The one where the “investor” would pay the seller more than the expected sales price and the “investor” would pocket the difference. The financing vehicles that were used by one of the investors were the no doc and no ratio loans. I know this for a fact.
You can do full doc Alt-A loans, but it primarily used for low documentation programs. It has recently added stated income product as well, and pricing is better than the no ratio product, although you have to pass a “reasonability” test for income. Most of these loans are some form of interest only, 40 year term, and adjustable rate product. These products have been instrumental in fueling the local (Tampa) market, especially in condominium projects. It will be interesting to see the fallout in the next 1-3 years.
You mean to tell me they would make a 5 % down loan with no information but a credit score ? We are in real trouble people .
Not only 5% down, but they don’t care where it comes from. It could come from a credit card balance transfer, as long as you have a 660 fico and have enough tradelines, you can get a no doc loan.
And what is the size in dollars of this market ? Supprime represents 600 billion. What’s the amount in dollars of this one ?
Looks like Ben’s BLOG has a new friend:
http://ml-implode.com/
Nice photo on this blog too. Looks like a A-bomb or is it an H-bomb ? No it’s an M-bomb. M for morrgage.
Mort-gage. ”Mort” in french means dead.
Today’s Washington Post has a big article on sub-prime front page of the business section. The article should be in the RE section. But the Post is one of the biggest RE cheerleaders around.
http://www.washingtonpost.com/wp-dyn/content/article/2007/01/13/AR2007011300029.html
“Consumers haven’t caught up with the dynamics of the market,” said Allen Fishbein, director of housing and credit policy at the Consumer Federation of America.
Here we go, more of the “I’m a victim mentality”. This whole mess has me constantly weighing my emotions. I hate the REIC for their greedy ways but I also hate the common joe that does nothing to help himself and then cries, “poor me”. The same people that so haughtily tell me, “renting is throwing money away” will be the same people whose victimization is retold in countless articles in the next few years.
“A pox upon both of your houses”, I say. There are no victims in this mess, except those that chose not to participate and have to pay to help clean it all up.
Mortgage-Trapped
Homeowners With New Exotic Loans Aren’t Always Aware Of the Risk Involved
By Kirstin Downey
Washington Post Staff Writer
Sunday, January 14, 2007; Page F01
At 64, and looking toward his retirement next year, Willie Lee Howard agreed to refinance his duplex in Northeast Washington, thinking that a fixed-rate loan would help stabilize his finances.
What Howard got instead was a mortgage he did not understand. Baffled by the loan documents he was mailed after the closing, he consulted an AARP lawyer and learned that he now had an interest-only loan, a new and controversial kind of mortgage. Howard was told that under its terms, his mortgage balance will rise instead of fall and that he will need to refinance in 10 years, when he may be too old to work.
“This is a bunch of junk they done to me,” said Howard, a construction worker.
——————————————————————————————–
Did they hold a gun to Willie Lee’s head to force him to sign those closing documents? And as long as the loan was sufficiently confusing
to warrant a consultation with an attorney, wouldn’t it have made a bit more sense to first consult, then decide whether to go through with the deal?
I look at this article as the first raindrop in a coming deluge of similar victim stories to come.
Agreed GS,
When I read this stuff I always remember that these sob-story people can say whatever they want to the media - NOW. Even as much as we all despise the tactics of many of the loan officiers, I find it nearly impossible to believe that he didn’t know that his “fixed rate” loan, was, in fact, non-conventional. Even a third-grader should be able to figure out that much. And if he cannot read - then he has no business signing the docs - he should have someone else help him.
I’m convinced that he was coached for the story, and I wouldn’t be surprised if he simply was trying to cash-out and now has buyers remorse.
Most of these people will flat out LIE to try and blame someone else. Most pulled out a ton of cash and spent it like drunken sailors and are now mad that home prices are not up 20%…
Given the sad state of the political landscape, the collective wailing of sobbing home-debtors who claim “a bunch of junk was done to them” is likely to be seen through the eyes of the newly Democratic congress as a great opportunity to help a new victim class and also court the REIC’s future campaign contributions. I can’t say what form it will take, but my taxpayer-funded-bailout warning system is flashing RED ALERT!
‘great opportunity to help a new victim class and also court the REIC’s future campaign contributions’
Yea, politicians like Katherine Harris (R)
http://tinyurl.com/ygqng2
The US Index Debt Fund, which includes MBS and ABS in its holdings, has had several down days recently. It is one of the mainstays of 401K’s. The Stable Value Fund invests in short term loans and contracts and should be safe from an asset crash.
Ben:
Great move linking to your own archive! I think that the history captured in your archives could make for a lot of interesting posts.
I started poking around and think I found my first post on the original blogspot blog.
I used my first name and described my home buying history.
http://thehousingbubble.blogspot.com/2005/04/its-gold-rush-in-reverse.html#comments.
Poster since April 29th, 2005.
Oh, yeah and your blog still rocks!
It’s starting to seem like *everywhere* has “one of the highest foreclosure rates in the country.”
Yeah, but don’t worry; It’s different everywhere.
Like in the UK where it is far worse.
People that end up with sub prime credit due to mortgage default will be very welcome as they are what keep the credit card industry alive. Banks like Capital One rely on this market for their repeat business. The people that end up defaulting on their mortgages will cause a surge of new sub prime business for CC companies like Cap One and others. This in turn will give the collection agencies more new business as well. This entire credit bubble bursting will definitely help out some industries along the way.
I’ve been struggling to come up with a micro-analogy to the sub-prime mess. Here’s my first shot: A 10 year old kid comes to you with his bicycle and asks you to lend him $125 for a year, and as collateral, you can hang on to his bicycle. You look at the bike and you say: “but it’s only worth $100”. He says don’t worry about it, it will be worth $125 next year, since it was worth only $80 last year. You know that the kid has no income to speak of and can never pay you back the $125 unless he (or you) sells the bike – and then only if the bike continues to appreciate in value.
The question to you is: Do you make the loan? And if so, do you then consider it a low-risk loan, (i.e., in the same category as loaning $125 to a responsible teenager who works at McDonalds)?
Feel free to clean up my analogy, as I’m trying to make this sub-prime mess understandable to the non-bloggers.
Kiddy finance 101.