Subprime Lending Up 86% In 2006
Danielle DiMartino at the Dallas News has an update on subprime lending. ” For two days running, the articles in the top right-hand corner of The Wall Street Journal’s Personal Journal section have left me scratching my head. The first was on the explosive growth of 10- to 15-year fixed-rate, interest-only mortgages – in essence, an expensive lease.”
“The second was on the return of margin loans; not to buy stocks, but to pay for anything from real estate to boats, jets, fine art, tax bills and children’s tuition. Is this what cash-hungry consumers turn to when they can’t cash out any more home equity?”
“I got yet more confirmation from John Lonski, chief economist at Moody’s: Subprime mortgages, those made to borrowers with the weakest credit profiles, skyrocketed in the first two months of this year. According to Mr. Lonski, the issuance of RMBS backed by subprime mortgages grew by an annualized rate of 86 percent in January and February.”
“Of course, the theory is that regulators will step in to gain the upper hand on lending standards before things get out of hand. But lenders of all stripes, whether they are lending against a portfolio or a home, seem to always be one step ahead of regulators.”
The LA Times. “The nation’s top bank regulator issued an alarm Thursday about mortgages with artificially low starting payments, telling participants at a Los Angeles conference that borrowers needed better warnings that their bills inevitably would jump.”
“‘After the limited initial period ends, the monthly payment for the holder of a nontraditional mortgage must increase, even if interest rates stay flat, and the size of that increase can be very substantial,’ Comptroller of the Currency John C. Dugan said.”
“Dugan’s remarks was the latest salvo by regulators who have proposed tighter restrictions on the use of exotic mortgages that are advertised as making homes more affordable.”
The Boston Herald looks at how that’s working out. “Shady mortgage operators have been flooding unbelievably easy credit into Boston’s neighorhoods. Behind the real estate trend are some very suspect mortgage companies from California and elsewhere that will give you a mortgage, whatever your history. Enough bad debt and bankruptcies to sink the Titanic? No problem.”
“If the statistics aren’t bad enough, the horror stories are even worse. There’s the poor Fields Corner homeowner who lost her two-family home, not once, but twice, to foreclosure.”
“Undaunted after Citizens Bank foreclosed on her $159,000 mortgage in 2002, she bought it back again, this time for a bargain $310,000. A well-known ’subprime’ lender provided a no-money-down loan. That lasted all of 14 months, until the Bullard Street home was foreclosed upon earlier this month, the second time in five years, John Anderson points out.”
“‘The last two days we had 28 more defaults,’ Anderson said. ‘They are just piling in, right and left.’”
The Denver Post has this up today:
‘Colorado lenders and brokers have led the nation in risky mortgage schemes, luring homeowners to dangerous low-rate and interest-only loans. Now we lead the nation in foreclosures.’
‘The danger signs were clear last summer: Denver ranked fourth in the nation in interest-only loans, and more than two-thirds of homebuyers were borrowing more than 80 percent of the price of their homes. About 43 percent of all loans in 2004 were interest-only - double the national numbers.’
‘But bubbles burst. Now, with interest rates going up, and principle payments coming due, a remarkable number of homeowners have mortgages they can’t afford.’
‘Plus, home construction was outpacing population growth, a gap that had economists worried that too many Coloradans were overextending themselves.’
Here’s a good chart from Newsweek showing statistics on the risky housing markets in the country. Denver is really bad in the risky loans department, but not the worst. DC is. It’s a good chart for all the major bubble cities, check it out.
We are slowly sailing towards the perfect storm. The main question is, how fast is the storm moving towards the boat?
I know it’s the norm in here to show little sympathy for those who sign such loans. But I can tell you that Fields Corner, Dorchester is full of people who are undereducated, English-as-second-language, etc. And I am hearing that these out-of-state mortgage-loanshark companies are preying on these populations. It’s one of those things that crosses the line from capitalist to predatory. We need regulation in this area, and we need it YESTERDAY. The stories just starting to come in to credit counseling are heartbreaking, and it’s going to get a lot worse in the next 3 to 5 years.
Sorry, here’s the link to the Business Week article:
http://bwnt.businessweek.com/housing/2006/index.asp
Oscar - I lived in Boston during the last real estate bust - several mainstream banks got caught red lining - denying credit to anyone in specific neighborhoods - big fines had to be paid. Anyhoo, the real scandal only erupted when it was discovered, and publicly disclosed, that many shlock-house predatory lenders to whom people turned for credit, just like the ones described in Ben’s post, were WHOLLY-OWNED SUBSIDIARIES of the “mainstream” banks. Miserable bastards. They’re doing it again….
Your post suggests one answer to my question; Where do sub prime lenders get their funds for these risky loans? Someone, somewhere must start the ball rolling with cash. So how does the cash flow work that allows for this type of “scheme”. These guys are writing big checks at closings. How do they make their if the borrowers end up walking away?
Can anyone explain this to someone disinclined to think like a swindler?
They get their money from lot’s of places - a mainstream bank, sometimes, or from “individual investors.” Ben posted a story yesterday about some little old ladies who appear to have lost their life savings by pooling money for sub-prime loans in Vegas.
I’m not the group historian on lending scams, but there are many variations. If the scammer has his own skin in the game, his own money, what he usually wants is to foreclose on the property and sell it. For example, $100,000 house gets $80,000 loan that includes $15,000 in “processing fees.” Borrower defaults, shark takes house and sells for 90K, eats his “loss” and former homeowner moves to church shelter. Another variation involves kahoots with “appraisers,” who inflate the value of the house to justifiy the loan. The inflated price is compensated for by the “processing fees,” which can be huge. Again, lender forecloses, sells and eats his “loss.”
The variations are endless, but a bank-backed shlock-house predator will profit through fees and high rates, despite assumed foreclosure losses - as long as the operation is run by professionals, who understand the drill.
Watch any lender DENY a minority a loan and the cries of “Racism!” will be heard loud and clear.
There is no winning.
Not that the banks aren’t greedy, but regulation is what targetted these people in the first place!
Denver has primarily white/caucasian population. You can’t really pin this on race, it’s more about income/education/social status. There are plenty of poor uneducated whites who fall prey for these things. If you lived in Denver recently, you’d see many “we buy houses” scams, and so on.
Civil rights have nothing to do with subprime lending.
Let’s have Jessie Jerkson or the Rev. Al give them counseling. Just vote for Algore, Nagin, or Kerry this time around and the other Democrat pols and you will be saved. Just like Mary Baker Eddy to the rescue.I love this Blog. It’s fun.
that’s ugly- even 05 J6p should know
Substitute the word “stock” for the word “real estate” in any of these news stories and flash back to the year 2000.
Good point. But get this: the leverage in the stock market at the peak was about 2%. That is, margin debt outstanding represented only 2% of the value of the US stock market in 2000. Contrast that with the leverage underpinning RE today — 40% of loans made last year alone were made with no money down. I’m guessing that the loan to value ratio in RE today is probably close to 90% for most homes bought over the last three years.
The downside is going to be brutal.
The person losing their home twice should have learned something from the first time. No sympathy from me for that. I am sure there was some huckster that took big time advantage. But they should have asked for more help from independent sources (ie, free legal advice for the low income folks, church affiliation, etc.)
Whats there to learn? In my mind, this woman probably got a free ride for 12 months. I doubt these types of loans require any downpayment. Bankruptcy means nothing.
Its been a no lose scenario for housing speculators. Zero dollars gets you almost unlimited upside potential. If I didn’t have any assets, I’d have considered doing it myself (not really, I have morals). If the shit hits the fan, its the bank (or Asian bagholder?) that takes the hit.
The problem with this type of lending to me is that it really shows people how little value our currency has and it truly is just “faith based”. Unfortunately when it all goes down there might not be much faith left. But so far, hardly anyone complains about the REAL INFLATION that has occurred. I guess our media has also gone lame.
(not really, I have morals).
Sucker.
yes, the problem is that these people are gambling with other people’s money; there is NO way they can loose and they usually know it (although maybe they don’t understand the details).
Because they cannot loose, they will simply take the most expensive home they can get. It’s the same in my country (Netherlands) - especially with young (and usually well-educated) people. The worst that can happen is that they face bankruptcy and start for the next round of the RE game within a few years. In my country a government fund usually pays the remaining mortgage money if the home has to be sold at a loss, so bankruptcy is an exception for very extreme cases.
We need something like a minimum, legally enforced, 20% downpayment from the owner/occupier to cure this madness.
Reminds me of our President.
Boston TV new’s ran a last story last night showing how people were going to a Brockton pawn shops to hock their personal possession in order to get their money to fill their gaz tank.
If they can’t fill the gaz tank to get to work, they’re sure aren’t gonna be current on the mortgage note.
Lotsa Fender Strats sittin’ on the wall. Used guitars anybody?
I read about the same thing happening in Dallas. This push to monetize “real assets” (i.e. stuff, crap, whatever…) is what makes me think the secret inflation the Fed has been hiding just might actually go away when the economy / consumer finally cracks. A push to sell will surely lower prices for used and new goods. We’ll see soon enough.
I hope the price of gas goes to 4$ per gallon, then there won’t be as many traffic jams on my way to the golf course and my favorite trout stream after work. Plus we’ll see more car pooling just what the left wants. The bubble will lose more air quicker.
And those of us who require a 20 mile commute to even afford to rent will go broke quicker. Why would anyone want the price of a necessity like gas to become more expensive? This is like saying, “I hope real estate goes to 400k average.”
There will be so many F*CK’D borrowers out there that we couldn’t read about all of them. The perpetrators should be hung in a mass galley, with electrodes strapped to the genitals for some sizzle, noise, and entertainment. Unfortunately, won’t ever happen. They committed the perfect crime, and we are left holding the bag.
This ‘news’ shouldn’t surprise anybody.
There are going to be more F’d people out there than you can imagine. You can finance a car from 5-12 years now. People are going to be upside down on their portfolios, their cars, and their houses…..but they will ‘look good’ doing it.
I’ll say it again…watch out in 2007. That will be the ‘year’ of reckoning for this bubble.
SoCalMtgGuy
#1) The perpertrators are the bankrupt borrowers, they bid up the prices, and OH BY the way signed the contracts. In society to day the public is the loser..but in UCC Uniform commercial Code world you own babe.
#2) As for our Fiat banking system fraught with legalese to miscontrue every thing not leanred in school, I hope we fry these guys tooo………But unfortunately they will be the smae people to SOLVE the problems, and first to line their pockets, with whatever new money the govenrment comes up with!
yes, the banksters and the RE mob filled their pockets on the way up and they will fill them even more on the way down because they have all the money - while a large chunck of the middle class only has debt.
So when does it hit the stock market and consumption spending all together?
Maybe we will have a depression. Maybe the illegals will go home. Mexico has oil, maybe they will hire us to cut their lawns…or feed their donkeys or something.
It is indeed going to be a depression, but Mexico and the rest of the world will be right in there with us. It’s a worldwide bubble. In fact, many countries are more bubbly than we are. Greenspan spent his entire term at the Fed turning the world into one big casino. He did it by ensuring that even the most insane speculations became profitable, time after time. Gradually gamblers took over the world. Gradually they squandered our future.
“It’s a worldwide bubble.”
So how long till the next World War?
Um, it’s already started. Afghanistan, Iraq, Iran (next), Sryia… and while the US is flexing its hegemony, China is going to think it has a right too, also, and step up its pressure on Taiwan.
maybe it already started. If you use the same calculations for inflation, GDP, unemployment etc. that were used 20 years ago, the US economy has been declining for several years already with the worst unemployment after the Great Depression and inflation over 10%.
it’s just because of all the fraud and lies from the FED and the BLShit agency that people don’t see what is happening.
From that LA Time article:
On March 31, Golden West had $665.7 million of so-called deferred interest on its books, up from $90.1 million a year earlier.
————————————–
WHOA !!!!!!!!!!!!! A 500% increase over the year before is a cycle? Ya right.
what is deferred interest?
Phantom income. The poor saps who took out these negative amortization loans did not pay any the full amount of interest that is due, they simple deferred it to a later date. However, the bank gets to count it as income. Because at some later date this amount will be paid in full, ohh and there is a Santa and an Easter Bunny.
ohh and there is a Santa and an Easter Bunny.
are you saying…wait a minute.
crispy,
I agree the “phantom income” from deferred interest is a farce. I wonder when people default on their loans and lose their house, who is going to pay this “phantom income”? These former homeowners will probably be broke or long gone.
At this point, do these lenders/banks will probably have to make major readustments to the negative side of their earnings for this “phantom income” that they never actually realized. It wouldn’t surprise me if some try to hide it via “creative accounting”. Can someone say “SOX … part deux!!??”
Is this like SYNthetic leases at Enron???
It’s an asset (cough) they’ll likely be writing down in the near future.
WOW - what % is this to their Net Capital ( book net worth less goodwill) …if they have been buying stock backl and have a minus “paid in capital” they could have 1 foot in the door of insolvencey already!
There may be some regulation we need. I’m all for regulation if it improves confidence in the markets.
But what I’d rather see is solid financial education. Anyone who signs for a house without knowing how money works is asking for trouble.
Good luck with that as easy AL caouldn’t even define money or how it works.
Congressman Ron Paul asked him why the Money measure - M3 - has been
growing for the past several years. WHY, If Inflation, which Greenspan
claims to be trying to control, is caused by growth in the Money Supply, why
has the FED allowed M3 to grow unchecked since 1992?
Greenspan replied, “… We have a problem trying to define exactly what
MONEY is…the current definition of MONEY is not sufficient to give us a
good means for controlling the Money Supply…”
Congressman Paul asked “Well, if you can’t define Money, how can you
control the Monetary System?”
Greenspan replied “That’s the problem…”
LOL!
Let me finish that:
Greenspan replied “That’s the problem… I need to wait until after everyone agrees on the proper course of action so that I can be blameless afterwards, all the while speaking in such a confusing but clever sounding manner that people will think I have known what I was talking about all along.”
“Also, the root causes of future underlying risk factors may not balance without further mitigation of tendencies which we do not yet have the tools to provide a complete anaylsis of… at this time.”
Ron Paul is awesome — my favorite congressman and the only true libertarian, that I am aware of, in Congress. He writes regularly for lewrockwell.com and his archived articles are easy to retrieve.
Ron Paul is a freak. Trust me on that one….
If YOU say he’s a freak then more than likely he’s not. He can’t be any more freaky than lets say, Hillary, Condi, Delay, Newt, Gore or any other asshat politician that’s bumbled their way through the cesspit of DC. Tell us again why DC is not going to go down?
Do they still close off certain streets to traffic in DC when things get bad (gang wars, murders etc) like they did in the 80’s. Man that was a trip.
Washington D.C. reminds me of a diamond wrapped in a turd.
DC is not going to “go down” because DC is different everyone wants to live here real estate goes up 20% a year government will never go out of business it’s a new paradigm and we’re close to the beach and the mountains and Atlantic CIty. And yes Ron Paul is just like the rest of ‘em so why the hell you askin’ the question?
Greenspan was right - today economic science cannot define broader money, and M3 is not within the direct control of the Fed. If you think the Fed can simply “disallow” the M3 from growing you are misguided.
As you know, the broader M3 is a creation of the private financial sector. The Feds can only affect it by stiffening/loosing the rates and reserve requirements, but they don’t “make” M3 money directly - it’s all up to the banks.
The rapid growth of M3 in recent two decades is probably due to significant banking deregulation of the 80’s, so I don’t see how libertarians have any moral ground to pin this on the bad evil government. Secondly, the effect of M3 on prices is unknown, because the M3 money itself is unknown. For example, some economists contend that M3 is not money at all in a true, money-as-liquidity sense, and tend to agree with them.
Ok. So why have coupon passes been occuring imore than often lately? If the fed and treasury decide to turn of the spigot I guarantee you that M3 would fall. Tell my why the FED has been accepting MBS’s as collateral for open market operations over the last two years? Do you think monetizing the real estate market is acceptable? You respond that Greenspans response is an acceptable answer in terms of a fiat currency regime. I find that incredibly misguided. Methinks you should look up what Aristotle said about fiat currencies. Bad evil gov=bad evil banks always and forever!
This isn’t surprising. People not smart enough to keep their credit clean are the biggest group of “greater fools” left.
When they’re gone, look out below!
I have a nauseous feeling in the pit of my stomach that our central planners will end up packaging together a bailout to spread the pain of the upcoming credit bubble collapse across the tax base. The lenders and borrowers who created this mess will have no blood left, as it was all spent buying junk from Big Box Mart, heating the McMansion and keeping the Hummer’s gas tank full.
THAT’s a HUGE fear of mine. Basically, the government will say “here is poor Sally. She lost her home twice. We must protect the American Dream. We must protect Sally. So we will give tax credits to people who have been foreclosed upon, we will make all costs of homeownership tax deductible (upkeep, closing costs, etc.) and we will pay for this by raising income taxes for EVERYONE, because everyone should live the American Dream.”
Of course, this will be MASSIVE redistribution from from smart and lucky people who did not participate in this mess toward dumb and unlucky people who did. Why should we reward stupidity and luck?
During the Depression, a bunch of states passed “mortgage moratoriums” that prohibited foreclosure. The Supreme Court (which had just been threatened with packing by FDR) cobbled together some nonsense to hold that this didn’t violate the Obligation of Contract Clause of the Constitution, and voila! Debtors who’d overextended themselves during the boom years of the ’20s were home free. (Of course, that prevented the banks from liquidating bad loans, which kept things locked up a la Japan’s banks since 1991, but what who cares about economics anyway?)
Don’t think it couldn’t happen again.
I actually hope for an IRS moratorium as a result of BK borrowers who are 1099′d for their “profit” from the banks REO sale. Then a revision of the BK laws to allow “writing off IRS liens”. An end to indentured servitude risk.
S&L bailout #2.
I had that fear too. I actually think it is the most likely scenario now.
This will not happen without the pain coming first. So first MUST come the deflation or they will not act. Remember these are government agents/politicians we are talking about… they cannot ACT, only REACT. So… enter deflation. Prices drop. Enter bailout. Prices skyrocket.
Keep your credit clean and your cash handy and buy after the drop but before the bailout.
You’ll end up holding all the cards at the other taxpayer’s expense.
THAT’s how you make money the old-fashioned way.
“Well, democracy sometimes sucks, doesn’t it?” (c) Plato.
and I’m very sure it will be the same in Europe.
In the Netherlands we already have a kind of government bailout fund (has been operating for years) called NHG, that applies to over 75% of the new mortgages. The fund gets some money from a small extra charge on the mortgage, but because it is a government backed institution the actual rates paid by the homeowners are lower than the average market rate - so they are still cheaper off.
Basically, when your mortgage gets underwater and you have to sell at a loss for whatever reason and don’t have the money, the fund will pay the difference so you can never end with debt. Great isn’t is? There is only upside in the Dutch housing market.
There are people who have mortages at 10-15x their income who
with no money down who also get this government protection (it requires some little tricks, but stell).
The ‘government bailout’ part is not explicit yet but assumed by everyone. In case the housing market starts declining the fund will quickly run out of money (even before the average decline hits 10%) and homeowners will demand a full bailout.
This bailout could probably bankrupt the government - at the same time that they are getting bankrupt because the HMD eats most of the income tax money.
I couldn’t resist submitting this link (I’m going hell for this):
http://www.destinationwebcam.com/Bosa_Grande/Bosa_12.htm
Take a look at the “Never Tell Me I Can’t Do It” video (the one with the parachuters) and look towards the last minute of the 4 minute video. We now see BOSA’s new target customer…Where’s the short yellow bus?
I’m going to hell for this
That’s alright, I will be running the place and will make sure you get a good seat.
Hey, I love South Park. Bad taste is often funny.
I might humbly suggest that is not the case here.
Goodness gracious, this is absolute madness!