A “Watershed Moment” For Subprime Loans?
Readers suggested a topic about the changes in the subprime lending world this past week. “My topic suggestion, with all the bad news in the sub-prime sector will we ever see a return to more conventional lending with the old school lending practices or are these garbage liar no doc, no money down things here to stay?”
One said, “I think liar loans etc. are here to stay, because there is no way to support current home prices without them. At least in Europe, with a return to lending standards of 15 years ago, the housing market would crater.”
A reply, “That’s not what will determine liar loan viability. Investor appetite for these loans, and the price they’re willing to pay, will determine their staying power and usage. Housing prices will be the secondary effect, one way or the other.”
One looked at the secondary market. “Take a look at the MBS bonds. The MBS buyers don’t care if you lose $50k on your house. They do care if they lose $50k. I expect an overcorrection. We’re already seeing the sub-primes demanding 5% and 10% down payments and taking the hit in the turn rate.”
One pointed to the industry panic. “The government’s War on Subprime continues, and the kingpins are running for the hills. No kingpins, no local dealers, no new future subprime debt addicts.”
From Bloomberg. “Shares of U.S. mortgage lenders plunged after New Century Financial Corp. and HSBC Holdings Plc said losses from bad home loans are piling up faster than they expected. ‘It’s kind of a watershed moment where the magnitude of the problems really is starting to come to the surface,’ said Brian Horey, general partner at Aurelian Partners, which has sold short shares of New Century. ‘If you could fog a mirror, you could get a loan.’”
The Orange County Register. “Stock of Irvine’s New Century Financial lost more than one-third of its value Thursday, as investors digested news that it will restate past earnings, make fewer loans this year and report a fourth-quarter loss. Analyst Richard Eckert said investors are upset the company will restate earnings for the first three quarters of last year.”
“‘Restating earnings is like telling your investors you lied to them,’ Eckert said.”
“Standard & Poor’s said Friday that it downgraded its credit rating of Irvine’s New Century Financial Corp. and might downgrade it further. The agency cited New Century’s increasing buy backs of bad loans from investors and the possibility that the company breached certain agreements with creditors, ‘which would pose a liquidity challenge.’”
“Roy Jacobs & Associates announces that it has filed a class action lawsuit on behalf of purchasers of the common stock and other securities of New Century Financial Corp.”
“During the Class Period defendants knew but failed to reveal that New Century was being forced to buy-back substantially more loans than originally had been expected. Despite knowing of the surge in forced loan repurchases, the defendants failed to properly account for them. In addition, the Company failed to write-down the value of the loans reacquired, even though these troubled loans had materially declined in value.”
From Brokers Universe. “In some quarters it’s being called a liquidity crisis, the likes that haven’t been seen in the subprime sector since 1998. On Friday, National Mortgage News Online reported that Merrill Lynch was making margin calls on certain warehouse customers, asking these non-depositories for more capital.”
“We’re also told that some Wall Street firms are getting ready to trim back their warehouse lending operations. Which Wall Street firm will be the first to run screaming from the industry, shouting, ‘What have I done? What have I done?’”
“Lenders Direct CEO Mike McQuiggan had this to say about the subprime carnage: ‘I see our industry in true recession right now. It’s touching everybody.’ LD closed its wholesale platform on Thursday.”
“One source who’s been in the industry for 30 years told us that loan buybacks could affect, at worst, 10% of subprime production this year. If B&C lenders fund $600 billion, that would be $60 billion.”
The Street.com. “The recalcitrant agencies, Moody’s, Fitch and Standard & Poor’s, have quietly abetted (blessed) the mushrooming of very aggressive subprime lending that has allowed the Wall Street firms selling these mortgage products to prosper.”
“This week’s Grants Interest Rate Observer calls attention to a 13-month-old, $350 million asset-backed pool of mortgages, MABS 2006-FRE1. Foreclosures now stand at 9%, delinquencies at 10.5% and real estate owned at 3.5%.”
“In other words, about 23% of the loans are problematic, and neither Fitch nor S&P has downgraded the issue. No doubt investors in MABS 2006-FRE1 (hedge funds, brokerages, institutions, etc.) mark the issuance to par (since it has not been downgraded).”
“Among other mortgage lenders, Fremont General Corp. fell 3 percent, Accredited Home Lenders Holding Co. declined 5.3 percent and American Home Mortgage Investment Corp. dropped 5.4 percent.”
“‘It’s not that they didn’t understand the risks,’ said interest rate strategist Kevin Jackson. ‘These guys saw the opportunity to originate products that were more risky for more return, and now it’s backfiring on them.’”
From Inman News. “HSBC began to discover its losses — began — from playing on the American subprime freeway. This is the first indication of trouble in piggyback second mortgages. Until now, the Street has confessed only to trouble with subprime loans, and only those made in 2006, saying terms offered then had become too easy.”
“Nice try. 2006 was just the first year with flattening home prices. Loans made in earlier years had no tougher underwriting; they were merely protected by rising home prices. Not for long.”
“Appearing soon: gradual but horrifying knowledge that ‘A’-quality first mortgages were infected by the illusion of the Street’s risk distribution. If in 1999 we sent to any human FHA underwriter a loan application with no borrower savings, a gift of down payment, $10,000 in credit-card debt, stable employment, decent credit, rent history at $800, and a proposed new payment of $1,500, that loan would have been declined every time.”
“Since 2001, that loan and all of its Fannie and Freddie and private MBS cousins have been approved by Street-calibrated software. Approved every time.”
The LA Times. “As much as $800 billion of adjustable-rate mortgages will reset to higher payments this year, and 1 of 11 home loans is both adjustable and sub-prime, according to the Mortgage Bankers Assn.”
“‘There could be a good chunk of borrowers with nowhere to go to get loans,’ said industry analyst Zach Gast. ‘It means a lot of people are going to lose their homes.’”
Thw Wall Street Journal. “Antonio Papa, a construction worker, took out an option ARM with a 1 percent introductory rate in 2005 on a second home he owns in Jupiter, Fla. The rate jumped to 5.6 percent in September 2005 and has since climbed to 7.5 percent.”
“‘I was looking to refinance to have more stability,’ he says. He has decided to hold off because his option ARM carries a prepayment penalty that would force him to pay six months’ of interest if he refinances within the first three years.”
“Michelle Thompson in North Glenn, Colo., pulled out $30,000 when she refinanced her mortgage last year. She would like to refinance again, but when she went to apply for a new loan, she discovered that her mortgage debt exceeded the home’s value.”
“Charlotte Keyes in Shawnee, Kan., refinanced her mortgage two years ago, pulling out $32,000 to consolidate her debt. With the rate on her loan set to rise to roughly 10%, Ms. Keyes is looking to refinance. She owes more than the home is worth.”
“With ARMs, ‘the tag line you always hear…is you can refinance with no problem,’ says A.W. Pickel, a mortgage banker in Overland Park, Kan. ‘But it is a problem.’ The appraisal for Ms. Keyes’s last loan was inflated, he adds.”
One said, “I think liar loans etc. are here to stay, because there is no way to support current home prices without them. At least in Europe, with a return to lending standards of 15 years ago, the housing market would crater.”
This statement is true, except ultimately, the flood of foreclosures hitting the market will tank the market anyway. Old school lending standards may have been a bit tight in some cases but were there for a puropse and maintained stability.
“The statement is true…”
In a manner of speaking, yes. And that manner is that while subprime loans will always be with us, they are rapidly shrinking to their historical market share (near 0%).
Even if underwriting did not tighten (which it is), the real reason you will not see much sub prime lending going on is the investors who buy the RMBS backed mortgage bonds will be demanding very high rates of return (they already are moving that direction for existing paper). So think about the 500 FICO buyer who now wants 100% 80/20 financing for $750,000: His rate will be 12%+. Even on an interest only basis, that is $90,000/yr. Add taxes, insurance, HOA, and bonds and it will be over $100,000. I don’t care how drunk these borrowers are with stupid lender Kool-aid, it is just not going to happen on the scale it was.
Exactly! Subprime lending may always be with us, except I predict that we will soon see a reversion to normal credit market behavior. This means high risk borrowers are kept of the market by underwriting, as it is most likely illegal to charge a sufficiently high interest rate to cover the default risk. Or is it now against the law to discriminate by underwriting on the basis of credit rating?
Paladin-
They need to severely restrict the no-doc/stated loan business. Even if they charge 12%, what does it matter when the straw buyer simply disappears?
True. So the sub prime market will be burning on both ends: Underwriting and pricing.
Paladin, Who are the likely weakest sub-prime lenders in your opinion, in order? The curtain is going to close on some of them soon as the money guys took away the punch bowl for new money and they’re suffering a cash crunch absorbing the note getting returned…
‘the investors who buy the RMBS backed mortgage bonds will be demanding very high rates of return (they already are moving that direction for existing paper)’
Paladin, do you have some references for this? I think you’re on the right track, but am unsure what it will take to really kill demand for this paper. I worked in secondary marketing and wonder how risk is really presented and sold. I’d love to see some charts indicating the demand side of this equation.
Mortgage Back Pooled Rates & Pricing:
https://www.markit.com/information/affiliations/abx
Click on this Mortgage Pool. The graph shows how dramatically the market has changed since Jan. 1.
ABX-HE-BBB- 06-2
Well, I am totally convinced that if 20% down, no more then 33% of total income allowed to service debt loans came back the housing market would just explode. If they are on their way back, they will have to be phased in over a period of years.
That said, I understand that if investors no longer buy up the no doc/garbage loans then they will stop making them. So, if they do disappear, I would say, “Look out below” in the housing market. It will push it into a real tailspin, and that will be “all she wrote” for 10 years in residential housing. It will take that long to shake out all the inventory and get the prices back to where people can really afford them.
I don’t really know; I can see how it could happen, but it would spell financial disaster for a large portion of the county. Perhaps if the MBS market stopped buying them, Fannie and Freddie would have to step up and start to buy non-confoming loan products. Something would have to be done, because, as I said above, it would be a finacial disaster for a large percentage of the population.
If this happened, I would expect to see housing prices drop, in the period of 1-2 years, by 50% in some markets. It would speed the correction to a pace that would be very comfortable for almost everyone involved.
A “reversion to mean” in subprime would obviously crush the demand side.
How many debtors will default on their obligations? How many creditors will have reasonable shot at recourse, other than taking possession of an overinflated depreciating asset with significant maintenance costs?
A 50% drop in 1-2 years would be comfortable? Certainly not for the FB and GF crowd. People would be jumping out of their 2nd story McMansion windows.
If we’re lucky.
That would add to less demand. LOL
“That would add to less demand.”
But it would also add another home to the 2.7 million vacant ones currently on the market
“But it would also add another home to the 2.7 million vacant ones currently on the market”
I am ready to do my part and help with that one. Don’t even want a “done-good” button, just a house priced along the historic mean.
“It would speed the correction to a pace that would be very comfortable for almost everyone involved.”
Bang-bang control would be the most rapid approach path back to the economy’s long-term growth path. Unfortunately, bang-bang potentially has other implications (as in “bang-bang, you’re dead”).
“This statement is true, except ultimately, the flood of foreclosures hitting the market will tank the market anyway. Old school lending standards may have been a bit tight in some cases but were there for a puropse and maintained stability.”
Yes, it meant that price increases had to be in line with income. Prices had to be in line with buyers’ ability to save for that 20% down, property taxes and full P+I payment, rather than waiting a year, saving more, and finding yourself even more “priced out” than last year.
And I believe lenders are required to “buy back” loans that go bad, which they will only be able to “afford” to a certain point. They’ll start to care again whether a buyer is really qualified, whether the buyer has the income to actually pay back the loan. All of which went out the window over the last few years.
The problem is that many fly-by-night mortgage brokers sold a ton of liar’s loans, then closed up shop. There’s nobody to buy back those loans. What about when New Century or Novastar go bankrupt? The MBS bagholders will eat those bad loans.
And once the MBS bagholders get burned, the demand for this paper will disappear, and so will the “liar loans”. The banks certainly won’t want those loans on their balance sheets.
“The problem is that many fly-by-night mortgage brokers sold a ton of liar’s loans, then closed up shop. There’s nobody to buy back those loans.”
I am not quite sure that is accurate. When those brokers applied for the warehouse line of credit (or) applied to be a correspondent broker, they had to personally guarantee. So the protection of the corporate veil does not apply in these cases.
As I have mentioned before, there is going to a ton of litigation over this. The bagholders are going to sue the New Century’s and Option One’s, who will inturn sue the principals of the now-defunct brokerages. Or the bagholders will just sue everyone, jointly and let the solvent defendants fight the insolvent ones for setoff.
Perfect. Let them all stay busy fighting each other. Result: No time to put new loans in the pipeline.
I’m not sure how much help this would be. I doubt that very many of these brokers have assets whose values come anywhere near the liabilities that the defaulting mortgages that they have written represent..
I want to see crooked mortgage lenders in prison.
s/lenders/brokers
Yes, it is true that prices need to be in line with incomes. As prices, continue to drop, and more loans go bad, lending guidelines will continue to “tighten” (move back to previous normal guidelines that we have had for 30 years and threw out these last few years.)
It is all driven by the investors and what they will buy and pay for mortgage securities. Yield will rise more, which raises rates. This also reduces the number of people who can qualify. So, there is a narrowing of people who can afford to buy (reducing demand) and who can afford to refinance their own house as rates climb and guidelines tighten.
As was mentioned earlier, stated income loans have propped up prices to unsustainable levels (because they cannot afford with their true incomes.) Reduction in amount of stated income loans will hurt the RE markets more than any other factor.
” This also reduces the number of people who can qualify. So, there is a narrowing of people who can afford to buy (reducing demand)”
Absolutely. The loose qualify standards created ‘Artifical Demand” that never should of existed. It turned into a drunken party that now will have to pay for the hangover.
I think liar loans etc. are here to stay, because there is no way to support current home prices without them.
We see this time and time again… people assuming that “current home prices” are the immovable object, and that everything else must change to support them. WRONG. Again, risk is risk; investors must have an expectation of making money, not losing it.
TJ, I wholeheartedly agree. I mentioned about a week ago a coworker of mine who believes that we all have to live with $600K mortgages. That is just insane. Based on the old fundys, it would require a $200K annual income. What a joke! That would put you, what, in the top 2% of all earners in the US. People just don’t understand loans, value of things, and the just plain real/true cost of something. These people, inc. my coworker, think $600K grows on trees. Also, these homes aren’t even worth, but a 1/4 of that. Homes are so overvalued in some places you are just flat out getting robbed when comparing the cost of the land and the cost of materials and labor. Oh well, I guess people also believe that in 25 years a starter home will cost a cool mil or 2.
I know these types of people. They all expect to sell for a profit when their ARM resets. That’s why $600K means nothing to them.
Again, risk is risk; investors must have an expectation of making money, not losing it.
… unless the investor is a central bank or a PO Box address in the Cayman Islands
Greenspan’s redistribution of wealth, from CEO crooks to the people crooks.
tj - exactly right. Investors are in the business of making a return on their investment, not donating money to prop up asset prices.
I think liar loans etc. are here to stay, because there is no way to support current home prices without them.
We see this time and time again… people assuming that “current home prices” are the immovable object, and that everything else must change to support them. WRONG. Again, risk is risk; investors must have an expectation of making money, not losing it.
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I like the way you put that, TJ. Well said!
Yes the politicos may well WANT to prop up house prices. Alot of idiots out there were spraining their elbows patting themselves on the back for their great acumen in buying a house that’s more than doubled in value. When prices are tending down, they’ll be trying to sic their congressmen on sombody to blame for their upsidedown mortgage. (Because it COULDN’T simply be that they paid more than the house is worth) Neg-am teaser rates are simply not supportable over any kind of medium to long term, and the prices enabled by them can’t be propped up by anything or anybody. The fed lowering it’s rates to keep house prices up would be like sending the little Dutch boy to New Orleans.
“Old lending standards” … Amen. Now everyone will suffer from the lack, flaw underwriting from the banks for their short, hasty profits in the name of greed. May they rot in hell.
The Orange County Register. “Stock of Irvine’s New Century Financial lost more than one-third of its value Thursday, as investors digested news that it will restate past earnings, make fewer loans this year and report a fourth-quarter loss. Analyst Richard Eckert said investors are upset the company will restate earnings for the first three quarters of last year.”
Luckily the rest of the OC economy will not be affected by the subprime meltdown.
Yes lucky indeed! I doubt the issue of subprime loans will survive the massive losses heading down the pike to defaults, so the whole issue may be moot. Just another reason NOT to buy now. This Ponzi scheme will come apart at the seams once the mortgage market is either regulated, or more likely self corrects (over corrects?).
“Just another reason NOT to buy now.”
I sold my BA home in 2004 and am happily renting. For the next house, I refuse to “compete” against another buyer(s) armed with no downpayment, no savings, credit card debt, etc. I’m just biding my time.
Ditto. Found a new house last year that we both loved; had been on the market six months. But overpriced relative to what it will cost to build in 2007-08. Another couple swooped in and bought it for only $5K off asking. No matter how much my wife and I loved that house, we would not have paid that price. There’s love, and there’s stupid. Stupid costs too much.
Stupid costs too much.
Love it!!!
Chip, There was a really nice apartment I wanted to buy in Kalorama - an nice neighborhood about a mile north of the White House. Price came down $25K to $300K but just too high for what it was. It took 6 months to settle. I think its really worth $225K
Me too, Lisa. I sold in 2003, went overseas for a couple of years, and saw no need to buy at the peak of the market (I thought) when I came back in 2004. Have been patiently biding my time since then. The hard part was getting my wife onboard, but she has seen the light and is willing to rent for as long as it takes for sanity to return to the market.
RE has been a rigged game dominated by the greedy, reckless, and stupid with incomprehensible amounts of credit at their disposal. No prudent person is going to play by those rules. Now reality is starting to impose itself, but I’m waiting for the Perfect Storm to largely play itself out before I make my move, when the creditworthy remnants will emerge from the rubble to buy up prime properties - for living in, not “investments” - at firesale prices.
Neil, bro, pass the popcorn.
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“‘‘But it is a problem.’ The appraisal for Ms. Keyes’s last loan was inflated, he adds.”
It has been my thesis that when the refi game ends, due to price declines, the economy will tank. We are very close to that point when fewer and fewer people will be able to refi. Bad news will keep getting worse by the month (as the data is reported).
Jas
I am a software engineer and have not seen much of a raise now in 7 years. Offshoring pressures have pretty much capped what we can ask for in my industry and I believe the same is true in many others. I was reasing a few weeks ago that San Diego’s once revered biotech industry is now suffering from offshoring… So really debt is all America has left to live on. There must be a mathematical model somewhere for this and I would love to see the results.
“…and I would love to see the results.”
Here ya go:
Income - Spending = A Negative Number (on average)
Or as one comedian said years ago, “Bills = Income + $40. Adjusted for inflation, I guess that would make the equation, Bills = Income + $250.
Comedy aside, GH you make a good point. For the most part with wages virtually stagnant and even worse when factoring in inflation, basically most of America is just living off of a debt. I know I harp on debt in this country and I know we probably could all cut back a little, if not more for some, in all areas of consumption in our lives. However, it appears that everything, but wages increase at a rate that allows most to get a head.
I realize that saavy investing and cutting back spending, as well as, searching for good deals can really help, for most people one big expense can wipe you out, i.e. new roof or major surgery.
I guess now that I am on such a rant, the real culprit is that we all want it all and we wanted it yesterday. Some of the older posters have heard my story, so I will not rehash. Bottom line is this, I don’t think many people are left, esp. in the big bubble areas, who are willing to downsize in order to make ends meet. They would rather live paycheck to paycheck and live in the 5K sq. ft. McMansion and have the tripped out Escalades, rather than drive the 15 yr. old beater and rent 2 miles from work.
Just my $000.02 worth and of course skewed, living in South Ornage County.
The biggest cutbacks need to be in taxes. Most people’s biggest exspense.
I pay way more in rent annually than in taxes. You must be an active trader (huge tax haircut) or spend a lot (sales tax). Income tax is a single line item, but many pay as much in take-out food per year as on all fed taxes, including payroll (which, btw, drops off over 96,000, meaning this bs about the rich paying more in marginals is just so much bs… plus the fact that they don’t pay more on unearned income taken as capital gains or cash payments from munis)
Yeah, if you buy new cars and boats (esp foreign cars w/ tariff), run up big restaurant bills and make a lot of liquor purchases, trade stocks and commodities actively outside your retirement accounts, or if you drank the kool-aid and run your own bubble business where you have to pay SET … yeah, taxes might be a big haircut.
We Rent! –
That looks a bit too simple for an academic economist to take it seriously. Please go back to the drawing board and come back when you have found a more obfuscatory formulation.
Sounds like a critique of econometrics that one of my physics professors had taped to his door. The satirist took a simple equation and made multiple substitutions for 1 until the equation had taken on a suitably abstruse flavor.
Globalization is playing a large roll in all of this. Americans while losing their manufacturing base to offshoring have been handed credit to offset the loss of good wages. Taxes have also increased across the board in order to shore up the citizens that have fallen thru the cracks. Without the credit and taxes the American people would never have let them get away with it. As long as Americans could maintain the same standard of living using credit they just lived their lives day to day pay check to pay check. It’s time to pay the Piper.
Throw in the costs of maintaining a military presence in 100 countries and a totally out of control health care system and it truly is the end of PAX AMERICA.
Don’t forget pork, pork for everyone at all levels of government!
The system was designed for this by the lenders. Don’t you think they know? Liability to the landlord in a number of ways has always been good for one party. History is merely playing itself out. So what if the middle class serfs suffer. The upper class always knows how to spend the money.
Charles DIckens’ literary model:
“Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
David Copperfield. Chap. xii.
Don’t forget, you have to bring your own coal for the fire too.
Jas, keep in mind so much of the economy, not the manipulated by banksters part, is psychological. As RE gets worse and worse people are going to get real mad. As things unravel for many the bad news will feed on itself and even become more and more self fulfilling for many families. As has been said before, when everyone says RE sucks, then you know we are getting close.
__
We agree.
I have mainatined that there are always limits to how far can one hold up an economy via manipulation. All such experiments end badly.
Jas
/maximum cynicism/: on /tinfoil hat/: on
OCDan: Could you point out to me the portion of the world economy that is not manipulated by the banksters?
/cynicism/: off >/hat back on hook in bomb shelter/
Appearing soon: gradual but horrifying knowledge that ‘A’-quality first mortgages were infected by the illusion of the Street’s risk distribution.
“As to new financial instruments, experience establishes a firm rule … that financial operations do not lend themselves to innovation. What is recurrently so described and celebrated is, without exception, a small variation on an established design, one that owes its distinctive character to the aforementioned brevity of the financial memory. The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version. All financial innovation involves, in one form or another, the creation of debt secured in greater or lesser adequacy by real assets. … All crises have involved debt that, in one fashion or another, has become dangerously out of scale in relation to the underlying means of payment.” -
-John Kenneth Galbraith, A Short History of Financial Euphoria
from memory, elsewhere in the book:
“every generation thinks they are the first to have discovered the magic of leverage”
Wow, that is a nice quote.
And, ironically, I wanted to share a website I found via the google that focuses on what is aluded to in the quote as “..financial operations…innovation.”
housingderivatives.typepad . com/
I don’t know anything about it (and sorry if it’s been posted before), but it has potential to be interesting, given recent developments.
Thanks, anon!
Here’s the link, for those too lazy to copy & paste
:
http://housingderivatives.typepad.com/
The S&P Case-Shiller index pages are available from that link.
Interesting reading. Has anyone studied that system to the extent required to determine if the S&P CS indices are corrected for inflation? I read through quite a bit of it and found no mention of inflation weighting.
The liar loan is just a symptom of the credit bubble, which will end. All credit bubbles end. Don’t take my word for it.
“The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The credit expansion boom is built on the sands of banknotes and deposits. It must collapse. There is no means of avoiding the final collapse of a boom brought about by credit expansion.” -Ludwig von Mises
… and the bigger the boom, the bigger the bust. Hellooooo depression.
I’ve made this book recommendation before and here goes again…
I’m a student of oral history, it allows me to better gauge how things really were for the common man, me., not a whole lot different than the discourse we have on here. I’ve learned much
from all walks of life, (refreshingly inteligent, for some reason?) and we all have our stories to tell~
The book is called “Ten Lost Years” by Barry Broadfoot, a Canadian that went all over Canada in the early 1970’s, asking people of the right age, their experiences in the great depression. He’d have his tape recorder at the ready and the stories would spill out. Some are a paragraph, some are a few pages long.
It was a different time than today, for sure, but this book gives the best “feel” for this epic time, now 4 long generations removed from us.
Snag a used copy for $3.49 from amazon.com. It was quite a hit in Canada, some 300,000 copies were sold, over the years.
Thanks for the book recommendation. It reminds me…
Over the last few years on this blog the topic periodically comes up about what to invest in, I have gotten very good advice here. But now it appears it is time to think back to the advice given to me a long time ago from someone who lived through the depression.
“Invest in things that cannot be taken away from you like your education.”
Oh and what an education we are all getting from reading this blog!
aladinsane, thanks. recommendations for good stuff are always appreciated.
thanks, just ordered it on amazon. Looking forward to it.
If you interested in stories from ‘common’ people about the great depression you might like to listen to some of the interviews Studs Terkel did.
Hard Times: An Oral History of the Great Depression
Another interesting read is Needleman’s “Money and the Meaning of Life”….he’s a theologian and historian, and looks at how the puritan/protestant ethic lost half of the meaning of money, and how that’s made modern America’s approach to money secretive, compulsive, and guilt-ridden.
-aladinsane
I’m about half way through with my recently purchased copy, and it is indeed a sordid account of hardship. However many of these folks interviewed who starved were likely near the bottom of the economic totem pole during good times too. I’d bet that morbid obesity wasn’t a character feature of the poor in those days.
The U.S. unemployment rate was roughly 25% during the depression, so that would mean adding 20% to the structural 5% that exists today among the working population. People with essential, functional or important jobs would likely remain employed during another depression, but so many today are ready groomed for hardship since they have few problem solving abilities, the result of specialization and the division of labor.
You are so right about survival skills and problem solving. Back in the 80’s I was visiting my brother in Owensburg, Ky (I think). A tornado came through and trashed a lot of the town, felling trees and blocking roads. After the storm my brother and I started clearing limbs from the road, directing traffic, and generally getting things going. I was absolutely amazed at the number of people who WATCHED and didn’t pitch in. They seemed to be in another world where someone would come and solve their problems and help them. They didn’t even think that they could help themselves or others. I carry that picture to this day, the total lack of interest in their own survival and the expectation that others would do it for them. On the humorous side, we were directing traffic and telling people that the streets were impassable; they wouldn’t believe us and insisted on driving through. Okay. 20 minutes later back they came. Darwin was right.
You’ll like “Hard Times” by Studs Terkel, then. Same concept, interviewed Americans of all walks of like (and I mean all) who lived through the depression. Read it last year after looking in vain for books to teach me how to weather the coming storm (most Great Depression books spend too much time on hand-wringing about the spiral of job losses/spending drops and not enough on how people actually survived).
My sentiments exactly. When this whole credit bubble, which actually casued the housing bubble, finally collapses, LOOK OUT! I am not sure it will be as bad as the great depression, but it will be a lot worse than a recession. So many jobs are RE related it isn’t even funny. So many people are running the household on debt, it is even funny. When credit dries up things will be tough. Better have some cash and def. no debt because the banksters will start charging rates that make today’s rates look enticing and would cause a mafioso to blush.
OCDan,
The reason I believe it’ll be a “Greater Depression” is that the country and it’s citizens are arguably in worse shape:
* The US government wasn’t an “Empire of Debt”
* Our economy was not consumer-driven and service-oriented
* People actually possessed basic craft skills, etc.
* Half of the working population wasn’t dependent on the government for a check
* Nobody counted on the government for rescues and bailouts
And that’s just for starters.
“People actually possessed basic craft skills, etc.”
My father was a mechanic in the Korean War, working on tanks and jeeps. He taught me how to work on a car. When I blew the engine on my first car (’74 vw beetle) I had to replace the engine. Then later I had a 66 mustang and did most of the major engine work on that myself as well.
So, in a pinch, I can goto Pep Boys and buy the things I need and fix my 1997 Chevy Lumina. Its on it last legs, but it gets me the 1 mile to my work and the 7 miles to my daughter’s school, and back. But what is most notable, is that when I go into Pep Boys I don’t see any young kids with their fathers buying parts and fixing up old cars. All of the kids today have to have a new car, and a nice one at that.
So OC Dan, what I am saying is that I agree. During the Depression, the society was more of an agrarian one and people did know trades. If we have a depression this time, I think the info society is going to screw a lot of people due to their lack of basic survival skills like home repair, auto mechanics, farming, hunting, etc.
Reminds me of the Hitchhiker’s Trilogy, when Arthur Dent discovers that his only skill, as such, is sandwich-making.
The next few years will be a good time to have cash, no debt, good credit and good job skills.
It will be interesting to see how many retain good credit and which job skills remain in demand.
R.N.’s will be in huge demand, especially male R.N.’s such as myself in the Orthopedic surgery arena.
And yes, I also have the skills to change the oil, brakes, etc. on both of my vehicles. And if there are plumbing or electrical issues in the house, no problem. I had 15 years experience as Chief Engineer on Commercial Fishing Vessels in Alaska, before changing careers to nursing after my 3 children were born.
And yes, I also have the skills to change the oil, brakes, etc. on both of my vehicles. And if there are plumbing or electrical issues in the house, no problem. I had 15 years experience as Chief Engineer on Commercial Fishing Vessels in Alaska, before changing careers to nursing after my 3 children were born.
Nursing, fishing & mechanical skills are all very good to have during tough times. Good for you!
Must have been a fun time working in commercial fishing in AK (when you don’t have kids & don’t have to worry too much about staying alive and being home). Very tough job, and shows a good work ethic, IMHO.
Thanks for the pat on the back. I’m in Ventura, Ca. and am looking forward to this whole bubble mania to end!! I liked it when my old neighbors took care of their properties before they sold to GF’s who cannot even afford to have someone care for the lawn or do it themselves.
Krills,
You into sportfishing? Just asking, because my husband fishes with some of the guys from a Ventura County sportfishing club.
BTW, he used to work on the sportfishing boats back in the 80s and early 90. Still helps some owner/operator friends from time to time, if they’re short a deckhand or second.
Good point Jerry. I have told my wife the same things and we are working towards those goals ourselves.
From the WSJ article:
“In recent years, many homeowners refinanced repeatedly — to get a better rate, lower their payment, consolidate debt or pull out cash……”
Let’s have a look at these 4 reasons to refinance repeatedly….
1. To get a better rate: Nope, not since 2003.
2. To lower their payment: Nope, see #1.
3. To consolidate debt: Nope, longer term debt burden, no relief.
4. To pull out cash: Yessireee!! We have a winner !!!!
–
How many Americans have the logical ability to disprove the propaganda, as you have shown above, and not fall for it? If a lie is repeated thousand times…
3. To consolidate debt: Nope, longer term debt burden, no relief.
————————-
While **you** might understand this, don’t think for a moment that J6 did.
Can’t tell you how many people have told me that they were refinancing to “get rid of their debt”. I just keep my mouth shut these days — just nod and smile.
The only way a lender or buyer can justify an exotic loan is if property appreciation is 10% + year over year with no fear that the property will depreciate. Now, properties are depreciating 20%+ year over year. Lenders may be greedy, but they ain’t that dumb. Think about it. Homes that were selling for $800,000 in 2004-2005 are now selling for $600,000. How can any lender be so stupid as to not notice such a drop? The information is readily available. I am a cynic, but I’m not so hardened that I can imagine banks and lenders raping their future in order to make some very short term profits.
Yes, the banks and lenders know that if they tighten lending standards property values will fall. Of course they don’t want that to happen, since that blows away any “equity” in the properties they’ve loaned on. But what choice do they have? They have no choice!
How can any lender be so stupid as to not notice such a drop?
Maybe they subscribe to the Gary Watts newsletter?
“…since that blows away any “equity” in the properties they’ve loaned on…”
This is the connection which MSM commentary suggests many have not grasped: THE SUBPRIME IMPLOSION WILL BLOW AWAY ALL EQUITY, NOT JUST EQUITY FUNDED BY SUBPRIME.
This is why I am certain that high level Fed officials are stewing over how to bail out the situation without raising any eyebrows. Failing to bail out the FBs who used subprime will result in a massive home equity loss across the full 70% of US households who are homeowners. Too bad the priced out renters are all so poor, or the bailout could kick renters in the teeth in order to shore up home equity.
THE SUBPRIME IMPLOSION WILL BLOW AWAY ALL EQUITY, NOT JUST EQUITY FUNDED BY SUBPRIME.
Bravo, Stucco!
Something to consider, though…
Fully 35% of homeowners have no mortgage, and I would hazard that these people are either rich or are elderly and don’t ever plan on moving. The rich vote effectively with their dollars, and the elderly vote effectively with their numbers. I doubt either is interested in funding a bailout.
BTW, how would you hide a multi-trillion dollar bailout, especially in a country that’s already effectively bankrupt?
Any multi-trillion bailout TJ, would for all intents and purposes bankrupt the country. I know we believe we are already bankrupt, but by this I mean the total destruction of the economy. If the gubmint tries something this massive you can forget gold and ammo, just head for Canada because things will get very messy. Look, taxes take in what roughly 1.5-2 trillion a year. You would basically have to double that to cover the amount of bailouts that might be needed. Fuhgettabouit! We will be toast if that happens. Even if Helicopter Ben decided to run the presses, who would buy our currency? You talk about worthless paper now, wait until you see that stuff, you might as well put Mickey Mouse or me as the picture on the dolar bill for all its worth.
Actually taxes from the gov’t State, local and fed total about 5 trillion a year or half to a third of GDP depending on whose lie you believe today. Kind of makes you wonder how they could possibly have to run deficits.
Exactly, there won’t be a bailout of FBs because that will trigger hyperinflation which is end game for all of us: haves and have nots alike. No, we’re going to get severe credit contraction and deflation as a result. The Fed may try to fire up the printing presses but it will be an exercise in futility relative to the destruction of credit that occurs. This is exactly what happened in Japan.
I think the Fed may try a bailout thru inflation. They will lower rates and print more money in an attempt to prop up the property asset bubble. Will that money find it’s way to RE or equities?
“Will that money find it’s way to RE or equities?”
It could find its way into a renewed speculative interest in building and investing in vacant ghost tract McMansion developments in the southwest desert. Which is only one of many reasons this is a doomed plan. I find it very hard to believe a former Princeton econ dept chairman would believe a printing press could somehow fix the situation, as we already have 2.7m vacant homes on the market, and respiking operations will only encourage more speculative excess. Is this really hard to understand? In all fairness, he has some big boots to fill, at least if you go back in time forty years…
“(William McChesney Martin, Jr.’s) most famous quote about his central banking philosophy was, “The job of the Federal Reserve is to take away the punch bowl just when the party starts getting interesting,” referring to the need to raise interest rates when the economy is at its most active.
Externally, Martin was perceived as being the dominant decisionmaker at the Fed. Throughout his tenure, he defended the right of the Fed to take actions that would sometimes conflict with what the President wanted. He regularly asserted that the Fed was responsible to Congress and not to the White House.”
http://en.wikipedia.org/wiki/William_McChesney_Martin,_Jr.
My parents own their home outright, and they vote.
You’d better believe they’d take umbrage at a bailout. “Upset” doesn’t even begin to cover it.
But the purpose of the bailout would be to prop up the value of homes (like your parents’). Why would they take umbrage at a wealth transfer that worked out to their advantage?
Maybe because they realize that a bailout will kill the potential their children’s future prosperity not to mention their grandchildren.
Not only that, most older people (who own their own homes) are on a relatively fixed income. If the FBs get bailed out, inflation will skyrocket (prices for things which we NEED — like healthcare, food, water, energy, etc.) — chances are the seniors will get all fired up, because they can barely keep up with (real, not govt) inflation as it is.
Don’t worry! From what I hear we will be bombing Iran soon. We won’t have to worry about inflation then!
“Fully 35% of homeowners have no mortgage, and I would hazard that these people are either rich or are elderly and don’t ever plan on moving.”
No matter; these folks get no vote in the market until they die or retire in Arizona, at which point they will have to face post-subprime willingness-and-ability-to-pay prices. Which is maybe 50% below bubble peak willingness-and-ability-to-pay prices.
“BTW, how would you hide a multi-trillion dollar bailout, especially in a country that’s already effectively bankrupt?”
Run the printing presses at full tilt, and stop publishing M3 figures?
…and that differs from current circumstances how?
They’re already doing that and it’s not working. Maybe they need more printing presses along with lowering the Fed rate to 0%
We can be like Zimbabwe with 1000% inflation per month.
We all know that the current credit bubble dwarfs in size the amount of bills in circulation. Thus, running the printing press will do no good, and a lot of harm (see post above about using the potrait of mickey mouse for the bills). Didn’t the other day a Fed governor say that they can only provide liquidity, but not cash?
I know GS, you are just playing devil’s advocate.
TJ
You have a good point. The voters whom actually vote are older and the ones most likely to be part of that 35%. A bailout will be proposed and then held in comittee as congress realizes they cannot vote either way and stay in office. It will die in commitee with a lot of press on who was to blame.
Got popcorn?
Neil
No bailout? Remember S&Ls? RTC? More in inflation adjusted costs to the American taxpayer than World War II? How many voters remember this? How many American voters think Iraq was related to 9/11? Hello?
Screw the renters. Why, they are UnAmerican. They should be buying and borrowing with stated income, neg ams and IOs. What’s the matter with them. They will cause a recession for the Fbs. Put them in debter’s prison. Ten lashes with the cat across the cannon.
Comment by clearview.. I guess you are not clear yet. Federal reserve,private like federal express, created paper money from nothing and “loans” it out to who ever will sign. How’s this not a winning hand? Wise up and do your research! Taking off the rose colored glasses and it will become “clear” to you.
Gosh, Jerry, that was soooo tactful.
Comment by clearview.. I guess you are not clear yet. Federal reserve,private like federal express, created paper money from nothing and “loans” it out to who ever will sign. How’s this not a winning hand? Wise up and do your research! Taking off the rose colored glasses and it will become “clear” to you.
I am a simple man. I admit it. However, I believe the problem, in its basic form, is how I stated it. Economics is like gravity. The underpinning mathematics are complex, yet a small child knows that what goes up must come down, and the higher something goes up, the harder the fall.
Home mortgage lenders know that property prices are falling, and they know that in order to avoid being splattered they must reduce the “height” of their risk. So, they will begin requiring borrowers to cough up down payments that will cover any depreciation in the property.
If you believe my simple concept is wrong, please feel free to explain, without insults, why.
Jerry, it’s a winning hand as long as there are borrowers requesting more debt to be manufactured. When the debt stops growing, because nobody can afford to borrow even at 0%, it’s game over. The compound interest formula requires continuous growth in debt and therefore, borrowers. We have exported our fractional reserve centralized banking system throughout the world in order to service the formula.
The U.S. has also allowed, by some estimates, 20-25 million immigrants to enter our country “illegally”, cheap laborers who request more debt and pay interest. Notice how accomodating our mortgage lending and banking systems have been to the illegals.
Clearview’s simple explanation is brilliant. Banks know that the weak hands will fall, but the fact of the matter is that they MUST keep pushing debt, increasing the pool of debtors and servicing the compound interest formula.
And Jerry, if you are an such an expert on the Fed, you’d know that the Fed doesn’t “create money” nor does it make loans to “anybody who will sign”.
If you don’t understand why and how this money system “scam” was set up by lowering the standards , guidelines, and underwriting for mortgages using for the “first” time no downs, no doc’s. teaser 1% start ups, toxie loans, negatitive adjustables with high “pre-payments for the first 3 to 5 years so borrow’s could not re-fin or go to a fix rate, then ther is nothing I can add or say.It is true borrows should have been more carefully but the lenders should never have lowered or made these sub-prime, toxie loans. If by doing so many qualified under the new rules and got into their homes. Now I will ask you a question? Are they better off now knowing they will be put out on the street with no place to go and with a bad credit rating?
Yes. It’s the only way some people will/can learn.
Jerry,
I understand the scam. I’ve been reading this blog for 6 months. What an education!
You and I are on the same page. I think what you’re trying to say is the sub-prime lenders and borrowers are going to be bailed out by the feds. There is a debate on that very issue throughout this column.
Here is a link to the current bailout plan by mortgage lenders, this is from a few weeks ago, sorry if it has already been posted.
http://www.realestatejournal.com/buysell/mortgages/20070131-simon.html
This link from 2001 goes along with my link above to give you a little history. Note the lenders in both links are the same.
“…the banking industry moved full speed ahead in its quest for the holy grail: the abolition of federal regulations barring banks from entering the securities business. This rule, embodied in the Glass-Steagall Act of 1933, was not an arbitrary exercise of government power. It was an attempt to restore stability to the financial world after the 1929 stock market crash–the culmination of a speculative boom fueled in large part by bank lending for margin-account stock purchases…As bank holding companies and securities firms move into new areas of business, many of them have ended up in some of the most unsavory parts of the financial services industry. Once they shunned poor customers, but now they are flocking to what is euphemistically known as sub-prime lending: the business of providing money at exorbitant interest rates to low-income borrowers with less than perfect credit ratings. Over the past year consumer advocates have been highlighting the growing sub-prime lending role of companies such as Citigroup and Bank of America, which obtain capital for these activities from underwriting carried out by the likes of Lehman Brothers and Merrill Lynch. Citigroup’s purchase of Associates First Capital, a large sub-prime lender that has been the subject of a great deal of criticism for its business practices, has heightened the controversy. Some sub-prime lending falls into the category of predatory lending: fraudulent (or at least deceptive) marketing of high-interest mortgage loans, mainly to elderly customers who often end up losing their homes.”
Also note from the above link that the homeowners who are really screwed and not bail outable are the ones whose mortgages have been sold as investments securities. What a recipe for disaster.
http://www.corp-research.org/archives/feb01.htm
Jannifl, Good post. I never thought about the connection of banks today in this sub prime business, and the fact that these same banks got in over their heads during the Great Depression in the securities business.
This WSJ story was interesting. It talked about lenders willing to allow borrowers to short sell their homes and forgive the debt.
Don’t banks and lending institutions have stockholders? I mean, if I held stock in a bank, and I read that the bank was going to allow home owners to skip out of their loans, I’d sell the stock.
I am so simple minded.
As long as someone is willing to buy their product (Option ARMs to poor credit), they will make the product and sell it.
The buyers for their product are in the process of getting their heads handed to them. Soon, there will be no buyers, and thus, no lenders will be willing to make the loans.
“…The appraisal for Ms. Keyes’s last loan was inflated, he adds.”
An inflated appraisal - not in LA or Miami or LV - but in Shawnee, Kan.
Lordy…
This is everywhere.
But if I could get over the mass of flippers in Arkansas, I can get over an inflated appraisal in Kansas.
Got popcorn?
Neil
“Readers suggested a topic about the changes in the subprime lending world this past week.”
IMO, this article was a watershed moment (if not the watershed moment):
http://economist.com/finance/displaystory.cfm?story_id=E1_RQNQDRG
(Not sure you can see that one w/o a subscription, but here is a taste…)
Mortgage lending
Subprime subsidence
Dec 13th 2006 | NEW YORK
From The Economist print edition
Parts of America’s mortgage market are in turmoil. Some on Wall Street see this as an opportunity. Others are biting their nails
MORTGAGE lending is hardly the raciest business, but it has its moments. “It’s a bit like the definition of combat: 59 minutes of boredom followed by a minute of sheer terror,” says Michael Youngblood, an analyst at Friedman, Billings, Ramsey, an investment bank. “And we seem to be going through another one of those minutes now.”
What has set pulses racing is subprime lending—mortgages extended at higher than normal rates to those with weak credit histories. In America, where it is most advanced, this market is under a lot of strain, and so, by extension, is the giant asset-backed securities market that is linked to it. The market for prime mortgages (those extended to higher-quality borrowers) is faring better, though it, too, is showing signs of weakness, exacerbated by cooling house prices. Might these troubles, some wonder, be the canary in the mine, warning of a looming credit crunch as investors, for years free with their money, recoil from risk?
Dang. My mail didn’t come today, so I didn’t get it.
Look back to your December mail. Find the edition of The Economist with Putin’s photo on the cover.
‘The perceived risk of owning low-rated subprime mortgage bonds surged today after the two largest U.S. lenders reported growing problems stemming from the loans, an index of credit-default swaps suggests. ‘People are observing that New Century and HSBC are saying that their loan performance is worse than expected and translating that into a broader statement,’ said Andrew Chow, who manages $6 billion in asset-backed bonds and their derivatives.’
‘ Trading volume centered on an index in the previous ABX series linked to 20 BBB- bonds from the first half of 2006, which fell about 2 percent to 86, according to Peter Fitzpatrick, co- head of asset-backed credit-default swap trading at broker GFI Group Inc. in New York. ‘If it’s not the record, it’s pretty close,’ he said.’
“translating that into a broader statement,”
Here is the broader statement which my translation has yielded:
“An across-the-board drop in unaffordable market values for residential housing will be the next shoe to drop after the demise of the subprime loans which supported them.”
And my translation of your translation is:
“And that drop in market values for housing will translate into greater downward pressure on the securities (MBSs) which are backed by residential real estate — which will cause greater downward pressure on…”
You get the picture.
I do get the picture, which is that of a self-reinforcing downward spiral…
The only bottom of which is reached when incomes vs. interest rates vs. home prices makes some sort of financial sense.
my, my…did I read the word “carnage”?
Not only did the sub-P mortgage sleazebags lend to garbage, but I can guarantee that in most instances, the physical condition of the collateral and the economic obsolescences impacting the locations are 10X worse.
Meaning the housing stock backing these loans is fookin’ Grade A trash!
Might as well burn’em down and start from scratch.
Only possible buyer’s will be renovation vultures payin’ pennies on the dollar.
The beancounters ain’t got a clue.
“Meaning the housing stock backing these loans is fookin’ Grade A trash”
First time I’ve seen anyone mention this excellent point hd74man. From what I’ve been reading, much of the new housing stock is also trash. Guess that makes it 100% trash backed by trash, or trash squared.
Recipe for a RE Porty Melt:
1 slice astronomical prices
1 slice flat wages
1 slice credit crunch
place in frying pan between 2 buttered slices of change in investor psychology. Turn up heat until Porty holder wants to jump from the frying pan into the fire.
Also on the menu: RE Clubbed Sandwich. Same ingredients served cold in 2008.
I think it’s time for a very serious analysis of the exposure of conventional banks and lenders to the subprime debacle. It’s time to look at how over-leveraged or exposed your neighborhood bank is to loan buybacks or defaults, and how much your local credit unions have hanging fire on personal loans, car loans, HELOCS and second mortgages. It’s past time to think about whether your favorite broker has exposed your portfolio and assets to loan defaults, but it’s not too late to consider whether they have the ability to take a large hit and stay solvent. This makes the difference between whether you will get back any of your diminished portfolio or whether your entire portfolio might collapse or disappear along with the entire brokerage.
All of this is crucial to your decisions as to where to park your money for a while until a safe zone re-emerges. Smart traders don’t trade excessive volatility, and you shouldn’t either.
I think last week sent a real tremor through Wall Street. I think the analyists in the big houses are in their offices this weekend doing exactly these types of calculations and working on recommendations for possible emergency actions next week. More importantly, I think management will finally be willing to listen to the conclusions and warnings of the analysts, or at least to give them permission to develop alternatives. If something else happens, or if the bad news increases next week, the big houses will be prepared to move and you don’t want to be in a contrary position.
Not to worry — the PPT stands waiting in the wings with fire hoses in hand…
Is that what they’re holding in their hands? It’s kind of hard to tell from this angle.
PS - there is no PPT
PPT is a tongue-in-cheek reference to the President’s Working Group on Financial Markets. If you insist there is no PPT, then I guess you will also agree the idea there is a newspaper called the Washington Post is a crazy fabrication of the internet.
http://www.washingtonpost.com/wp-srv/business/longterm/blackm/plunge.htm
It is well-established that the President’s Working Group has no actual ability to effectuate any curative action. They are advisors in theory, but very much a paper tiger in practice:
“In a crisis, a lot of deference is paid to the Fed,” a former member of the Working Group said. “They are the only ones with any money.”
There is nobody standing by to actually DO anything to prevent a drop. There are automatic cut-offs built into the NYSE now which halt trading when certain limits are met. Those limits have been adjusted since 1997 when the article was written (I understand the circuit-breakers now kick in at 10% of the previous day’s close, ergo you cannot have more than 10% loss per day across the board and the market cannot lose more than 50% in one week - in theory), but that’s all that’s really there to “save” the investors from the risks they voluntarily took.
Not to worry — the PPT stands waiting in the wings with fire hoses in hand…
connected to tankers full of gasoline.
I spoke to a Bankruptcy Attorney thursday for a couple of hours,we agreed that a 40% drop in the median for sonoma county over the next 2-3 years is conservative.She told me the consensus opinion of BK attorneys is that we are heading into another great depression.here in sonoma county we are all jumbo loans…Hard money started drying up in december,affordable subprime money is drying up,and I predict that Jumbo loan money will be next,availability of $ at affordable rates will drop faster than the tide at Inchon.as far as the “A” paper,these ratings are a bad joke,i spent a dozen years in risk management,and the best pools may warrant a “BB” rating,at best.Effing whiz kids and their new paradigms come along every few years,remember the “Laffer Curve”?Ah well they will be saying something like “brother,can you paradigm” along with the rest of us.
She told me the consensus opinion of BK attorneys is that we are heading into another great depression.
The whispers are gaining in volume and frequency…
Not everyone works for the RE industry. I’m looking forward to lower rents, which will allow me to spend more disposable income. Depression is what I get when watching the faux news on cable.
“Depression is what I get when watching the faux news on cable.”
Why whisper? It is a simple observation of the direction the market will go once the credit spending contracts. It is as inevitable as the tide and just as irresistable.
People keep hoping that “something” will happen to turn it around. I tell you this: there is a very short list of things which might turn things around for the US. These include: nanotech-based immortality - if life is prolonged greatly or forever, then suddenly the garbage the real estate brokers were spouting for the past five years about “not making any more land” will be very, very true. It might also include contact with aliens, world war, or some other tech which I can’t even imagine.
You tell me how probable any of those are.
The real question is who is holding the “20″ in the 80/20? The situation described on this blog — a wipeout of the 20 in foreclosure when the borrower couldn’t handle the ARM reset on the 80 — took place in Metro Chicago, where we haven’t even seen a big loss in value yet.
Bottom line, with fees it doesn’t take much of a decline in value to wipe out the “20.” We could have that much of a loss everywhere for 100% financing deals in 2004, 2005 AND 2006.
My view — the lenders saw rising values and figured they’d just milk people with bad credit for interest and fees, foreclose, resell and start the process again. Without the rising values, you get a wipeout.
HSBC held a lot of the “20’s”. Read the WSJ article from Thursday. Much of their risk was the seconds.
WT Economist ….. I share your view that the lenders felt that appreciation would offset the risk of these sub-prime loans .The forcelosure rates were low up until the end of 2005 .
In my lifetime I have observed the secondary market in prior lending cycles so I only have that observation to add to the analysis .
I have seen the secondary market back off within a short amount of time when that market thinks that yields might go down . The secondary market is profit minded and will not continue to make sub-prime loans if that market perceives that it might have loss or lower yields that expected .
When people say that the sub-prime loans will continue to exist because the market will crash otherwise don’t seem to understand that investors in the secondary market don’t care if the market crashes ,these are investors that are only concerned about yield .
In prior lending cycles before 2000 the market for sub-prime loans was at about 30% or under loan to value . That money was put up by private investors and the protection was the equity position being at low loan to value . If the property went into foreclosure the sale of the home would cover the loan amount (very little risk ) ,
The current sub-prime loans were low down stated income at higher rates but without the equity cushion of 30% or more (big mistake ). It doesn’t matter if you charge a higher interest rate to a sub-prime borrower ,if that borrower doesn’t qualify for the loans they will go into default with time .
While I think there will be funding for low down loans in the future ,I think it will only be for people with good credit that qualify ,or lenders will require insurance for any loan under 80 % .
So all those lenders and realtors that were telling people that they could just refinance out of their dogsh-t loans ,didn’t tell these people that funding might not be available . They sold these people these loans based on a premise of a lie about available funds in the future .
Sub-prime lending (especially the low down payment type ) will die a quick death now IMHO . The only sub-prime lending that will remain will be the low loan to value ratio type of sub-prime lending .It’s the only way it can go IMHO (of course until the next big housing boom of 2080),
Wish you’d all consider joining our coalition. Go to http://coalitionpetition.blogspot.com/ and sign the petition.
Mortgage underwriting has always been a pendulum and it has a really wide swing. Yes, it’s due for a swing in the other direction. Hopefully just enough to cure the industry of it’s ills.
“Yes, it’s due for a swing in the other direction. Hopefully just enough to cure the industry of it’s ills.”
Wrecking balls dropped from a high elevation seldom slow to a soft landing only inches away from the houses at which they are aimed…
No, I dont agree that Mortgage underwriting has always been a pendulum with a really wide swing . I think that in the last 5 years the pendulum went in a wide swing to crazy easy underwriting . I think the mortgage lenders were pretty conservative from the the Great Depression onward .
The low down sub-prime lending is a very new cycle in lending in my opinion .