Lenders ‘Pump Up The Volume And Keep The Party Going’
Inman News reports that one mortgage firm isn’t letting up. “Countrywide Financial reported operational highlights for March, saying that mortgage loan funding totaled $40 billion, an increase of 10 percent from the prior year period. Adjustable-rate loan fundings for the month of March were $19 billion. Home equity loan fundings for March rose by 22 percent from March 2005 to $4.2 billion.”
“Nonprime loan fundings in March were $3.3 billion. Consolidated pay-option loan fundings for the month were $7.2 billion, as compared to $6.6 billion in March 2005. Interest-only loan volume was $8.3 billion for the month of March 2006, compared to $6.4 billion for the same period a year ago.”
“Moreover, I am told that some sellers are telling buyers that if they insist on complete documentation then other buyers will take their place.”
Other buyers like homeless people in Florida?
I think he is talking about sellers of the loans. It really is a dangerous time if the MBS players are denying documentation to downstream purchasers.
This little face off between regulators and lenders promises to be one of the more interesting spectacles over the next few months.
If too many borrowers start defaulting, and the secondary market buyers start seeing a lot of fraud borrowings, then they will start putting the bad loans back to the mortgage bankers that originated them. Soon, the bankers’ warehouse lines get clogged, and their origination volume must decline. The real danger is with the bankers, not with Freddie and Fannie.
Fannie & Freddie aren’t supposed to have these type loans at all. They swear that they don’t and here we find such an egregious example their entire portfolio is suspect. They’ve only got 2% equity for their loans and we just find out one customer is 500% fraud. So, Freddie finds out who they resold these stinkers to and reimburses them and then sends the loan back “expecting” to be reimbursed. In the mean time no one is collecting interest and all future lending is going to cost twice as much to investigate and insurance goes up and investors demand premiums. No, Freddie and Fannie are toxic.
“Examiners will scrutinize loan documentation, pricing, loan-to-value ratios, and overall underwriting standards”
Talk about trying to put the genie back in the bottle….
“Gee Mrs. Smith, I know your husband is dead. But we ( the government) are going to do ain intense examination of his body in an affort to save him. And WHEN WE FIND OUT, what went wrong, then we can make sure it doesn’t kill him- again.
Another fine example of the best oxymoron in the world-I’M FROM THE GOVERNMENT AND HERE TO HELP.
I believe the regulators can make it tough on lending institutions, concerning the loans they hold. They can force higher reserve requirements if they determine that reserve is inadequate to cover the risk of the loan portfolio. It’s up to the lender to try and prove otherwise. How will they accomplish this with “no doc” loans?
Ben is correct. It will be a spectacle. Some banks/lenders will become insolvent as values back up and they begin seeing a significant number of defaults…
Decreasing lending standards at the peak of the bubble is a recipe for a hard landing. Why? You are lending to the least qualified (worst quality) of buyers at the highest prices.
While tightening lending standards at this point would surely drop sales volume and prices, it wouldn’t inject an incredible amount of risk into the marketplace.
Nice news mash-up using the Countrywide announcement to highlight the Inman piece. Love the synergy.
Caveat Emptor!
grim
Somebody a while back used tha analogy of steriods to our current credit system (Roach, or Noland or McCulley I think). There comes a point when the damage is irreversable, but you still need to stop before you outright die. The hard part is that it works so well while it’s working.
“used the analogy of steriods”
Here in the O.C it’s Financial Crack Cocaine.
No wonder so many tipsy drivers on Jamboree Road these days.
“To that end Reich said regulatory examiners are now ‘digging deeper’ into loan portfolios to learn the level of risk lenders are facing. Examiners will scrutinize loan documentation, pricing, loan-to-value ratios, and overall underwriting standards.”
I wonder if they will scrutinize sufficiently to catch all the homeless borrowers who own five or more houses?
After the subprime market is dried up, the next big wave will be illegal immigrants. They are going to keep the market going for a long time, 12 million of them.
Illegals can buy houses they have been for quite some time now. Fannie or Freddie has a specific program to address that need and it’s been around for awhile now. The only reason they are not buying now at least here is because it’s too damn expensive. It’s hard to raise a family in a 300k 800 sqft shack selling oranges on the corner
LOL! Especially with their fat wallets from field work and day laboring. 12 million illegals will only fill 2 million houses at best!
I am not quite sure about houses, but they sure do pack them apartments…
Puting that many In one Apt or home, can you Imagine how much of that hard earn money Ends up In mexico never to be used here, Billions?
That’s billions of dollars no longer circulating In America plus the lose of City, State, and Federal tax money.
Exactly it’s going to be interesting to see which way congress is going to finally fall on this. Actually this may make an interesting weekend topic
The news gets more fantastical everyday.
I’ve been praying for a hard, fast landing. Looks like I might get my wish.
The corruption on every level is mind-bending.
Do you realize that it is exceddingly (to the point of ludiciousness) that you would not be negativly impacted by a hard fast landing in housing prices? Beyond the obvious lines (construction and real estate), this would have reprocussions in government, entertainment, retail, technology, travel, and all services focused on those industries. When the south seas bubble and Mississppi bubbles popped France and England suffered for decades. The only think that kept us out of a similar fate when the stock bubble popped here was the rapid liquidity wave that inflated the housing bubble.
Are you a repo man or a bankruptcy attorney?
That’s classic
?
“Are you a repo man or a bankruptcy attorney?”
I thought that was funny as all hell.
Uh…
So what should he be hoping for? That prices stagnate at unrealistic levels for decades until inflation catches up? Or that housing prices continue apprciating at 20% per year?
We’ve seem to have gotten ourselves in a predicament where there’s no easy out. There’s going to be hard times ahead, it’s just a matter of whether it’s going to be short and especially painful or a slow, drawn-out death of 1,000 cuts.
Just leave the splinter to fester and start gangrene. You certainly don’t want to cause pain by extracting it now while the wound is fresh.
People seem to think that there is some magic button that will make this mess all go away with no suffering. They watch TV and listen too much to politicians. The only people promising painless solutions are liars.
When will the purchasers of MBS securities, wake up and start demanding reasonable risk premiums? Or, are they simply counting on exercising buy-backs for loans that go bad?
What volume of buy backs would it take to collapse this implicit insurace scheme?
It would seem that news like this would cause them to start taking notice.
They keep wages down and drive house prices up. That’s their contribution to the US economy. In addition, they pick vegies to occupy schools and hospitals. That’s very nice trade. This country is really paved with gold. No wonder middle class in this country feel squeezed. Oil prices, uncounted inflation, sky-high property taxes, illegal immigrants, falling schools… on and on.
Sad, but true.
We keep hearing about illegals being here to work, they’re so hard working, they do jobs Americans refuse to do, etc. But if they’re working so hard HOW THE HELL CAN THEY FIND ALL THIS TIME TO PROTEST??? Maybe, just maybe, many of them are not actually here to work.
I’ll add to that. A reporter (at the protest in Phx yesterday)asked some “students” why they were protesting…most didn’t have a clue, they just giggled and the one who thought he did, said that “it’s like that wall in Germany”.
All the while waving the Mexican flag.
I got a suggestion…why not go protest in Mexico for their “rights”. Oh yeah, probably not a good idea. They’d get shot.
Yea just got thru watching Lou Dobbs roast some dude about the same thing. What really amazes me and maybe I’m a little naive but if you have all these “illegal” immigrants protesting. If they are illegal why isnt someone rounding them up. I can’t quite get around that yet. I’m sure there’s a reasonable explanation. I’m just not bright enough to catch it I guess.
“If they are illegal why isnt someone rounding them up.”
You mean the National Guard that was meant to protect our country but instead is over in Iraq of Afghanistan? Or U.S. Customs that is spending millions a year to pick up Cubans but isn’t given anything but insignificant funding as far as our actual borders (I have 2 fam members involved in this so I’ve got some insight)
I hear what your saying and I understand the crux of the argument. But come’on you got 500k standing downtown at city hall and you can’t go grab a few thousand to show that you are trying.
obviouslly if the government cared about what the american people (citizens) want they’d round up the illegals and deport them. if the government cared, our troops would be on the border.
can there be any doubt that they have other plans for us? surely this isn’t stupidity or cowardice of our leaders. no, they have long term goals for the people who founded america…and they aren’t good.
Seems the people on this blog have a good grasp of what’s to come, IMHO. Good for the uber-wealthy and Mexican/other foreign-Americans, not good for working American-Americans.
Countrywide is not scared of a downturn it’s been there done that for them. They know how to survive. They are pro’s at it. The top man there has been doing it a long time and he know’s how to play the game. I remember reading an article during the last downturn about him and thinking he would never make it and he was insane. He proved me wrong and is now one of the biggest players.
In reality the banks can’t back off if they do they are dead in the water and they know it they went too far and there is no return. Reigning in the greed now equates to one big bite out of the bankers ass and they will do everything they can to avoid it. During the next few months I expect to see some real loosey goosey stuff. It’s in their best interest for survival to fight the naysayers and regulators and fight they will. I have been noticing the lax lending standards for awhile now. It almost seems like the lower the fico score the higher the LTV.
Absolutely legit analysis, Mr.IS eom.
This alone tells me that the hard landing won’t come for quite some time. People will continue to buy (although at a slower pace) with weak loan requirements. This will keep prices from crashing for at least two more years. A 10% price reduction will hurt many but not enough for a hard landing.
i agree. i wonder though, how long can this process perpetuate itself? is there not a breaking point? that’s the question…
wow, pushing even more risky paper
thet jawboning from the gov is really working well- like everything gov does
Realty Times also has an article that argues a falling stock market will reignite real estate. http://realtytimes.com/rtapages/20060411_stockoutlook.htm
That’s their pipe dream. DIA and SPX just made back to their levels 5 years ago. NASDAQ is still more than half off from its 2000 peak. Housing is dead in the water now and will be for at least 5 years.
I really wish people would quit making sh#t up and face the facts.
People act like money just squeezes out of the stock market. If the market really falls it just means that most people will be able to sell their shares for less money. That means less money available upon sale of the same assets. Unless there is a huge uptick in volume there won’t be any more money flowing from the transactions.
It’s not like there is a big pile of money sitting around on Wall Street just waiting to be spent somewhere.
I think the falling prices of Beanie Babies will also prop up the real estate market. The only problem is the incredible leverage of the real estate bubble. It’s hard to get a loan to buy beanie babies on spec.
So, just keep investing wisely, Cash is king when liquidity is being withdrawn. You’ll have an awesome downpayment ready when your price targets are finally met. The time to buy is when all those currently urging you to buy are 180 and telling you real estate is a horrible investment.
Speaking of withdrawing liquidity. BOJ reducing reserves from 30Tyen to 6Tyen.
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http://mdn.mainichi-msn.co.jp/business/news/20060411p2g00m0bu032000c.html
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http://sg.biz.yahoo.com/060331/15/3zrsi.html
We will look back at this bubble and realize that it was the lack of mortgage lending oversight and the exotic mortgages that got us into trouble, not the low interest rates.
Exactly. It’s the lax lending standards/exotics which caused the massive price run-ups and the resultant speculation. The low mortgage rates gave it a small head-start, but it’s the “free money for all” that made it shoot through the roof.
If you do the calculations (figure the difference in payments using 7% and 5%), you will see low interest rates had very little to do with this. Problem is, low interest rates are a sign of too much money chasing too few borrowers. **That** is the problem, and why they had to continuously relax standards to find more and more gullible borrowers to make their (MBS investors’) paltry returns.
If we see massive defaults, then we should finally see some risk premium. That will tighten the standards and give us the crash that NEEDS to happen.
Exactly. Who cares if interest rates are 5% or 8%, when all you have to pay is 1% — and when expect double-digit annual appreciation from here to eternity?
The marginal price is being set by the imbecile who thinks the 1% is all the interest that’s accruing.
“If we see massive defaults, then we should finally see some risk premium.”
I hope so.
but, like i’ve said many times on this blog, i don’t believe lenders are that dumb or careless. they know how to calculate risks.
they must be giving loans to anyone who can fog a mirror because they’re expecting the gov’t to bail them out if the borrow can’t repay.
i still say it’s a scam, and i predict the taxpayers will bear the brunt of the burden.
i should also add the fannie/freddie nonsense is a form of bailing the lenders out… it’s like a pre-bail. so yeah, why should they care, they’ve sold the worthless loan to the gov’t, it’s their problem now.
The lenders aren’t dumb at all. They know that once they’ve sold the loans off to Fannie/Freddie (or their private counterparts) who then bundle and re-sell as MBSs/CMOs to FCBs, pension & mutual funds, their role in the matter in concluded.
Privatize profits, socialize risk –the perfect risk-shifting strategy.
Looking around on foreclosure.com I noticed that of the 40 defaults for the zipcode where I’m interested in buying only 3 loan dates predated the year 2001 and 28 out of the 40 the loans originated between 2003 and 2005. It not surprizing to me that those who bought during the height of the bubble here in SD seem to be going down the fastest.
Why is that surprising. People were jumping at deals like they were giving away free 100 dollar bills. With no thought to the future. One example was when I saw a story posted here about musicians working clubs getting IO loans for some prety steep payments back east. They should have asked their west coast counterparts about what happens when the gig is up. I’ve seen some pretty popular folks at one time one step away from using skate boards for trsnsportation around here
I think the one thing that will temper this irresponsible lending will be the increased forclosure rate. LA has shown a 63% increase in people entering forclosure through the first quarter of this year. That’s the reason you have this whole tug of war thing going on. The more that sheople see that these loans will land them in foreclosure the less appealing they will be. You will always have stupid people that will sign up for these loans, but the borderline stupid people will now think twice. IMO the momentum is gone. It’s showing up in decreased sales and growing inventories. I don’t see that desperation to get into RE at any price that I’ve seen in the last three years.
I agree LA….But, like the UCLA forcast said; the whole underpinning for the California economy is residential real estate based…If it unwinds in a significant way, the job market will suffer greatly and the consumer will follow….Then, watch out…
I think the one thing that will temper this irresponsible lending will be the increased forclosure rate
scdave-Nobody gives a shite. The street level L/O’s have made their dough the last 4 years, and they’ve dumped their bucks in a Swiss or Cayman Island Bank account.
I’ll bet most of the high rollers have packed it in and are living in France somewhere.
The ones who are gonna get stuck are the domestic REIT’s and pension funds who are holding the MSB’s and stock in FNMA and FDMC. Gonna be a bloodbath for CALPERS.
The ones who are gonna get stuck are the domestic REIT’s and pension funds who are holding the MSB’s and stock in FNMA and FDMC. Gonna be a bloodbath for CALPERS.
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Yep.
That reminds me — I need to move my old CALPERS lifeguard retirement into a nice safe fund. Ideas?
Whew, I’m hoping your wrong hd74man. Calpers is supporting a lot of folks.
HD74;…..I think the one thing that will temper this irresponsible lending will be the increased forclosure rate….
Sorry pal…This was not my quote…It was LArenter…I responded to LA’s comment…I quess it was cocktail hour for you…No problem…
I think the blog may have addressed in the past, but would appreciate a new discussion please:
Why are we now (last 3 years) seeing such loose lending practices? I think it is the Fed that sets the bank’s rate of reserves/load ratio, which tends to regulate loan risk. Greenspan was in there when lending was saner and Greenspan was there when lending became loose 4 years ago, so can’t be Fed policies?
Don’ Know Nothing;….these buyers are the only dogs left in the Kennel….losen your underwriting if you want to make loans…
“Why are we now (last 3 years) seeing such loose lending practices?”
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I’m no economist, but here’s my take. The lax standards are a result of low investment returns in many asset classes. As the central banks lowered rates, investors had to look at other fixed-rate and/or “safe” vehicles in which to invest. The mortgage market is usually considered to be very safe because it is actually backed by something tangible (real estate). There really is a “global savings glut” which shows in the large amounts of money chasing investments around the world; and why we see bubbles in so many areas (stocks, bonds, metals, real estate, etc.).
IMHO, it is the result of money flowing up. After a while, the disparity between rich and poor manifests itself in asset bubbles because the rich have more disposable income to save/invest. Then, we get a recession/depression of sorts because spending at the middle/bottom stops or slows dramatically as the majority of the population has less money to spend. Then, we get money redistributed to the poorer classes (via things like the New Deal and higher taxes on the rich), and the cycle starts anew.
I can’t believe some of the overpriced homes I see on Realtor.com. Particularly unbelievable is how divergent the price/value relationships are from listing to listing. To their credit, some of the sellers - particularly the builders, seem to be offering decent values. But then there’s just a spate of sellers who just don’t get it and have taken last spring’s fabtasy prices and marked them up by 5%. They’d probably have gone with +10%, but they’ve apparently tipped their hats to their agents banter about “normalization”.
Put a fork in them come July.
Here in Westchester, I have yet to see anyone offering decent value in their asking prices. Everyone seems to have taken last year’s prices and added 10% or more. And according to our realtor, the market has “already corrected.”
But Westchester is different. As for the fact that inventory on Realtor.com in zip 10536 has doubled to 110 homes since mid January, well, err, well…please ignore the man behind the curtain.
The market is far from being corrected. The market hasn’t even begun to correct. There’s someone here who described it perfectly-A Perfect Storm
The market has not corrected , and the lenders are still making the low qualify loans bad loans . This all has to stop now . I order it to stop now .
Homes to illegal immigrants? How do they expect to collect in a foreclosure. They most likely will just disappear, never to be found since documentation is scarce. This may appear dumb, but this doesn’t compute in my mind. But then, I think logically, and this market has become illogical. Like debt=wealth - better go and get me a Hummer and a BIG McMansion right in the heart of the Bay area, so that I will really be wealthy.
Yea, it makes very little since but freddie and fannie are big players in that. It used to be you had to provide docs to show where your money was coming from and you had to have an average balance. To keep the drug trade from owning the country but with these programs they allow for mattress money, phone call verifications for jobs etc. etc. Fannie/Freddie’s portfolio’s is filled with this type of stuff. It’s almost easier for an illegal alien to get a loan than a citizen. The bad part about this is they started these programs long before the current round of voodoo/exotic loans. There’s a reason they are hiding the books and if someone ever gets in the books they will not find a pretty situation.
“Federal regulators fear that lenders are attempting to maintain profit levels by easing lending standards at a time when they should be tightening them.
You can bet these chucks ain’t usin’ top flight appraisers either.
Like rats on the Titantic-they’re eating everything…even the garbage.
Hmmm, sounds to me like a statement that could be construed as an insult by the Rodent Anti-Defamation League.
Yes and their honorary President is David Lereah…
Oh well……….THE BIGGER THE BOOM THE BIGGER THE BUST !
I’d have to agree.
“Consolidated pay-option loan fundings for the month were $7.2 billion, as compared to $6.6 billion in March 2005. Interest-only loan volume was $8.3 billion for the month of March 2006, compared to $6.4 billion for the same period a year ago.”
To the anti-bubble people, this might seem like a win: “Woo-hoo! The par-tay is still going, they just brought in more spiked punch!”
But, with news like this, I’m thinking more and more that when this thing *really* falls, it’s going to fall HARD.
Right, it appears everyone rushed the door trying to get the last buck before the cycle turns. Builders are doing the same thing.
Thinking about it a bit more, this news actually gives me the heeby-jeebies, the hibly-jibblies, *and* the screaming meemees…now where did I leave my bomb shelter, my rations, and my gold bars?