Will Home Loan Reform Have To Wait?
Readers want to know what effect lending regulations will have on the housing bubble. “What are the chances of the Fed tightening lending regulations on home loans. Since most of our elected reps. are bought and paid for by corp. America I doubt any tough measures will be enacted unless people who have these loans start feeling some pain from lower house prices and rsing interest rates.”
A reply, “The chances are slim now, because the new mortgages haven’t been proven yet to be bad, reform will have to wait until the data show that those loans lead to more foreclosures and depress the housing market even more than strict mortgage regulations.”
The Chicago Tribune. ” There was a period, not so long ago, when the mortgage-refinancing business was so boffo that loan originator Leigh Friedman didn’t have time to return phone calls from prospective clients. Not anymore. ‘When somebody calls, you get back to them very quickly,’ said Friedman, a 10-year veteran.”
“‘Some consumers are just interested in the lowest rate and the lowest closing costs,’ Friedman said, acknowledging that the ubiquitous ads for lenders who tout incredibly low interest rates and no closing costs have added to the competition. ‘What I tell them is, it’s not just about rate, it’s about service. But service just isn’t on their lips,’ Friedman said.”
“And, though they’re generally shy about talking about it, more are quietly willing to negotiate fees. The real estate boom also generated a boom in mortgage-industry practitioners. Today, Illinois has about 17,500 loan originators, up from 3,000 in 1993. Their numbers reached 25,000 until last year. ‘A lot of people fell out of the business who shouldn’t have been there,’ said Donna Angarone, a loan originator for 21 years. And she says the numbers are shrinking daily, as Chicago-area refinancings dwindle and the industry watches nervously to see whether the bellwether spring home-sales season takes off.”
And from the Tampa Bay area. “The reports seem to confirm that the housing market has cooled. In February, sales of existing single-family homes, here in Florida, went down 20%. But the people who are buying, are using something called an ‘interest only mortgage,’ It’s helping buyers get into that dream home.”
“Mortgage broker Jennifer Ewonaitis has advice for home buyers are try to buy too much home. ‘That’s where the interest only loan comes in. It enables home buyers to to get into a more expensive home. And it’s exactly how it sounds. For a limited time, 5-10 years for example, the buyer pays just the interest. But, down the line, that buyer has to start paying off the principal.’”
“‘The average loan amount is about $160,000 right now and if you’re looking at a 30 year fixed at about six.25 %, then your interest only payment on that is going to be about $154 a month less than a standard 30 year fixed principal and interest…so it’ll go up about $154 or it can go up more than that.’”
An I/O 10/30 is -not- just $154/mo. You pay I/O for 10 years and then you pay Interest and ALL 30 years’ of principal in 20 years.
That would be a good payment plan if you knew that home prices and wages were going to inflate over the next 10 years. Maybe Ben Bernanke can help these FBs out? Of course, that would be bad news for all of us priced-out renters who took seriously the New York Times’ suggestion that there has never been a better time to rent, but good for illegal immigrants who bought on the no-doc I/O Option ARM payment plan. I guess it gets down to a question of whom the Fed would rather reward: High inflation would reward profligates / FBs / gamblers / lenders with no underwriting standards, while low inflation / mild deflation would reward savers / renters / conservative investors / prudent lenders. Judging from the negative US savings rate and the bogus economic model that claims high Asian savings rates created the conundrum, there is some risk that BB will favor profligacy, as it is the less painful short-term course of action.
Unfortunately, as Volcker knew, it would also lead to much bigger problems down the road. At some point, some Fed chairman has to take away the punchbowl, and it becomes much harder to do so with each passing day that systemic credit risk is allowed to grow without check.
there is some risk that BB will favor profligacy, as it is the less painful short-term course of action. Unfortunately, as Volcker knew, it would also lead to much bigger problems down the road.
Good conclusion — profligacy it is. The most characteristic and exampled legacy of Greenspan’s tenure is that he always chose the short-term fix to leave the underlying problem to fester in the long term.
“Monetary inflation and higher interest rates for everybody!”
dammit I botched the italics — when are they going to fix that bug
She’s pointing out the difference between the fully amortized payment and the I/O counterpart. She’s still a little off (the deifference in payment is closer to $152.
Not as much of an apples to apples comparison as one might think: I/O loans usually have a slightly higher interest rate than the fully amortized (assuming no buydown).
I’d say mortgage reform is as likely as SS refrom, Medicare reform, or campaign reform. Our political system is so paralyzed and corrupt it can only react to dire emergencies. It’s not an emergency yet.
That’s a good point. But regulation doesn’t require congress to do anything, just as easing lending standards didn’t. These cycles tighten up from fear, IMO, somewhere in the financing stream. And it has become apparent in the last two weeks that the Asian lenders are pulling back.
The Asian pullback could be the leading edge of an emergency, as could problems in the Icelandic economy (which has a small-country version of debt problems which the US economy faces…Gotta love the disclaimer, which could have been applied equally well to the Thai baht crisis which erupted in 1997…)
“An Icelandic financial saga
Storm in a hot tub
Mar 30th 2006
From The Economist print edition
A Nordic nation’s debt problems are unlikely to spread far beyond its shores
On February 21st Fitch, a rating agency, cut its outlook on Icelandic sovereign debt to negative from stable, drawing attention to a current-account deficit that ballooned to 15% of GDP in 2005 and fast-rising foreign debt. Since then, the krona has tumbled, the government has scrapped a couple of bond auctions because investors wanted too high a yield, and American money-market investors have refused to roll over some short-term debt issued by the country’s main banks. On March 30th the central bank raised interest rates by three-quarters of a point, to 11.5%. More increases are surely on the way.”
Ben and GetStucco, good points. The current “lax lending” problem will get dramatically resolved in the usual way, i.e. after a couple of high-profile bond defaults, and a bunch of huge MBS holders get none of their principal back. Remember the S&L / junk bond crisis? There is such a thing as a credit cycle, and it always plays out. What will bother me most about the outcome, as usual, is the massive and predictable bailouts at taxpayer expense.
Government attempts to tighten or loosen credit standards via regulation are unlikely to have much impact. Government’s resources would be better channeled towards simply educating the general public on basic finance, so the average citizen becomes a more informed consumer.
1)The drying up of the supply of the easy money, increase in the number of foreclosures for people who should never have been homeowners in the first place, a couple of news reports on flippers who lost everything when the housing market tanked and the inevitable “60 Minutes” special on poor, misguided homeowners who somehow ended up owing more on their mortgages than when they originally refinanced will all lead to some congressional cavalier causing a big stir in order to base yet another campaign on “reform”.
2)Words like “realtor”, “loan officer”, “lender”, “investor” will sound as exciting as “gonorrhea”.
3)Home improvement shows will mysteriously disappear from cable, late night infomercials will again be the stopming ground for those amazing cleaning thingies demonstrated by British expats (who always seem top be from the north of England….. why is that?).
4)A couple of banks will tank/get bought out, speculative cash will return en masse to the stock market (it has started already), Hollywood will make a “Wall Street/Boiler Room” movie centered on housing and everyone will look back and think “How stupid those people were….. What were people thinking in the mid 2000s?”
5) Banks will have to write off large amounts of bad housing-related debt, 70% of the exotic loans will be shown to be non-performing liabilities and the REO departments will be working day and night trying to offload the homes the banks will be holding.
6) When all of the above has happened and EVERYBODY knows or knows someone who knows of a person who was unable to sell their home/make their mortgage payments the lending institution bigwigs will reach an epiphany. At this point a lightbulb will illuminate and some major player will assert: “Maybe it’s time to re-evaluate our eagerness to get everyone and their pet poodle approved for a loan”.
Now if I can only figure out how to say all that using quatrains.
There is no problem with making everyone a home owner, there is at the present prices
“Our political system is so paralyzed and corrupt it can only react to dire emergencies.”
With the successful outcome of the Katrina response.
Here’s another article from the Chicago Tribune about the looming re-sets.
http://www.chicagotribune.com/business/sns-yourmoney-0416mortgages,1,605149.story?coll=chi-business-hed
But the people who are buying, are using something called an ‘interest only mortgage,’ It’s helping buyers get into that dream home.”
Hmmm, something called an interest only mortgage, my, that must be something brand new.
Do these journalist live in a cave or something???
Yeah, IOM–I’ve heard of it. It’s just like a really long lease. Plus a few minor details–nothing to worry about.
If your cutting it that close on a mortgage that you can’t afford another 154 bucks a month for a fixed rate ,than maybe you shouldn’t be buying the house . Thats not enough of a discount IMO.
That’s the truth
“The reports seem to confirm that the housing market has cooled. In February, sales of existing single-family homes, here in Florida, went down 20%. But the people who are buying, are using something called an ‘interest only mortgage,’ It’s helping buyers get into that dream home.”
It will just as easily help these buyers into the financial nightmare known as foreclosure. This piece sounds like it was written by a toddler.
OT, I know, but some parallels to the 1920s:
The value of farmland falls 30 to 40 percent between 1920 and 1929. (compare to the RE declines we now face)
Organized labor declines throughout the decade. The United Mine Workers Union will see its membership fall from 500,000 in 1920 to 75,000 in 1928. The American Federation of Labor would fall from 5.1 million in 1920 to 3.4 million in 1929. (Labor union membership currently in steep decline also)
Over the decade, about 1,200 mergers will swallow up more than 6,000 previously independent companies; by 1929, only 200 corporations will control over half of all American industry. (Although the contraction will not be as great, anyone notice the spate of M&A activity right now?)
The middle class comprises only 15 to 20 percent of all Americans. (I am typically dubious about “shrinking middle class” claims, but…)
The stock market begins its spectacular rise. Bears little relation to the rest of the economy. (1924)
The construction boom is over. (1928)
Between May 1928 and September 1929, the average prices of stocks will rise 40 percent. Trading will mushroom from 2-3 million shares per day to over 5 million. The boom is largely artificial. (11,300+ with PEs at higher-than-traditional levels across the board (21 vs. 15))
Backlog of business inventories grows three times larger than the year before. Public consumption markedly down. (Not yet, due to credit bubble)
Automobile sales decline by a third in the nine months before the crash. (Sound familiar? GM, Ford?)
Recession begins in August, two months before the stock market crash. During this two month period, production will decline at an annual rate of 20 percent, wholesale prices at 7.5 percent, and personal income at 5 percent. (We may recognize the tide going out too, before the tsunami rolls in… Just get off the beach!)
A BIG DIFFERENCE is the fact that our current-day Fed has already engaged in an expansion of the money supply, likely to abate the deflationary effects. But what about inflation?
Right on. I might add that tax rates fell from 65% to 25% in the 20’s and third world debt (Dawes plan for Germany) was eventually defaulted on. Margin debt was 50% on the NYSE and you could make a side bet through a bucket shop and get 10% margin. Sounds like index future and options to me. In the 20’s you needed 25% -35% down payment on a house. Today? this thing could get a lot worse then many of you on this blog talk about.
Here is government at its finest. Rather than reprimanding the governors of the Federal Reserve for their horrific easy money policies, they try to blame the people who took advantage of monetary policy. If you know that money will be worth less tomorrow and you can get it cheap today, why not go out and sucker those who don’t do their research?
More laws won’t fix the problems of bubbles being created by stupid investors — the only thing that will solve the bubble problems is to stop printing money out of control, and return to a currency that is backed by real assets rather than faith and credit of an empire.
You should realize that the laws that are written never take into account the consumers — the titles might, but the actual law is there to protect and paternalize those closest to the lawmakers and enforcers.
It’s not like we need Congress to tighten things up on the lending front–if that were the case, it’s true we’d be waiting forever. But federal regulators (OCC, FDIC, Office of the Thrift, etc.) have already issued new lending guidelines as of Dec. 05 and we’re all now waiting to see what their final word is, since the public comment period (i.e. mortgage industry whine-fest) has ended. We’ll see what they settle on–I hope they hang tough and reign this thing in.
Here are questions to ask yourself: Would you knowingly have your capital in the mortgage backed securities markets? If you could would you instruct your retirement accounts to stay away from anything MBSec? Do you beleive anything coming out of those markets?
People with fixed low rates are going to hold onto them like gold. People with exotics are going to default like crazy. People with MBSecs are going to be stuck with 4% notes in a 6% bond market and 7% inflation. What’s a 4% note worth in a 8% inflation? Half. That’s where the money is going to evaporate.
Agreed. Lokk at many money market accounts; they are based on FNM MBS holdings.
I have a bunch of $$$ in Paypal’s Money Market. Care to take a look at their holdings and give an assessment of how much exposure there is?
https://www.paypal.com/en_US/pdf/moneymarket_2005.pdf
The Master Portfolio, starting on page 13 or so, looks like it’s all invested in short-term stuff, which is what one would expect from a “money market fund”. Looks like the longest-term stuff is maybe one year.
As their short-term stuff matures, they’ll re-invest it at a higher rate.
I wouldn’t sweat it.
It’s well diversified in terms of sources, unlike some I”ve seen. The money market in my wife’s 401-K was almost exclusively Fannie-Mae and Freddie-Mac debt.
Thanks for the thoughts, guys.
another lender looking for bk protection:
http://www.reviewjournal.com/lvrj_home/2006/Apr-15-Sat-2006/business/6875916.html
from one of the investors:
The mortgage loans are supposed to be for 60 percent or less than the value of the real estate being offered as collateral, she said. With real estate prices soaring, “they should be able to sell off all of the loans and get all of the money,” she reasoned.
sure honey…
What we are seeing in the recent failings, layoffs and BK’s of lenders is only the beginning. Soon this will occur in the HB’s and then RE firms and finally large banks.
I have 2 clients with large investments in their funds. Called both this morning. They’re not happy. One did not know til I called. The other found out couple days ago when his broker called to say auditors were in looking over books(last Tues.). By Friday, broker called to say all non-essential personnel were fired immediately. This included all brokers. WOW!!
This company advertises yields in the 14-16% range. Told clients years ago this scares the living hell out of me. Good luck!
Typically it’s not something to be scared of and in actuality is a damn good way to invest your money even in bubble markets. The lady in the article was spot on. These types of companies make tons of money and 14% to 16% interest is typical return on any money invested with them.
These is not your “traditional” lender used by Tweedle Dee / Tweedle Dum. These lenders lend on deals typically commercial for short terms at high rates that a traditonal bank or mortgage company will not touch. The typical ma and pa homebuyer will never ever have a need. The bubble has no effect on these guys they are usually already in the property at 50 to 60 cents on the dollar. They do not mess around when they have to foreclose on a deal. Even if the market has dropped 30% they can still sell the deal at a profit. Thats what the lady was referring too. This had nothing to do with the bubble but all about the managements greed and mismanagement.
I was looking at QRAAX, they invest only a portion of the money and th rest goes into bonds. from what I remember, they seem to have really cut back on the amount of MBS/GNMA they invest in. interesting.
I hope this wasn’t posted, but how are the boomers going to save the housing market?
“A new Federal Reserve study has shaken economists’ forecasts by suggesting the U.S. economy will have to decelerate much more over the next decade than most now expect.
The study, to be published in July, finds that the retirement of the Baby Boom generation will force far-reaching adjustments in the way the economy works. Forecasts for everything from growth and employment to corporate profits and interest rates will have to be recast.”
http://www.bloomberg.com/apps/news?pid=10000103&sid=acqbH7wK9LK8&
bill bonner has a whole chapters on demographics in his book “financial reckoning day.”
“Since most of our elected reps. are bought and paid for by corp. America”
Say it isn’t so about our beloved republikans! Fox News keeps telling us how much integrity and character republikans have.
Republicans and Democrats are like two hairy ass checks surrounding the same bunghole: predatory capitalism. Both parties are on the make and on the take, devoid of any core principles or beliefs beyond an obsession with conning 51% of the sheeple who actually go out to vote (something like a third of the electorate) into voting for Tweedle Dee over Tweedle Dum. There’s not a dime’s worth of difference between the two parties — both are bought and paid for by Corporate America.
Yah we don’t want to start a tinkling contest to see who is more beholden to corporate interests, who’s taken more lobbyist money, etc. Both parties are way too far in the pocket of Big Money to have us as their first priority.
Why would Congress clean up the mortgage biz?
Use to be a term called ursury.
Notice how in the bankruptcy reform bill, the politico’s never said to the credit card companies-we’ve had enough of your fine print and 25% default rates. Get rid of them.
But, oh no…just increase your minimum payment fee from 2 to 4%.
The racketeering fix is in in the mortgage O biz. Congress and the appraisal profession is bought lock stock and barrel.