‘Skin-In-The-Game’ Proved To Be A Good Slogan
A reader suggested a topic on housing loans. “Are U.S. mortgage lending standards already headed back towards subprime, so soon after the subprime-caused Fall 2008 financial collapse?”
From MarketWatch. “The real-estate rebound has boosted the value of luxury homes. As a result, many borrowers are taking out home-equity lines of credit to seek the thrills they missed during the housing bust. ‘The jumbo borrower is more likely to pull out money for a recreational purchase—a boat, a third car, a sports car, improvements on a second home,’ said David Hall, president of Troy, Mich.-based Shore Mortgage.”
The Washington Informer. “In the aftermath of more than 2.5 million foreclosures, the Federal Housing Administration (FHA) is now offering a homeownership program that will put previously troubled borrowers on a fast-tracked return to the home ownership market. The new program known as ‘Back to Work – Extenuating Circumstance’ cuts the standard three-year waiting period to only 12 months. The Back to Work program is now available nationwide through FHA-approved lenders. Once participating lenders determine that mortgage applicants meet all eligibility and policy criteria, the same 3.5 percent minimum FHA down payment requirement will apply.”
“‘We understand that families occasionally experience financial difficulties that are simply beyond their control,’ said Charles Coulter, HUD’s Deputy Assistant Secretary for Single Family Housing. ‘As part of FHA’s ongoing mission, we want to make sure that qualified borrowers are not being unnecessarily shut out of the market.”
American Banker. “In 2011, financial regulators issued a proposed rule on ‘qualified residential mortgages’ — as required by the Dodd-Frank Act — but the plan generated enough criticism to send them back to the drawing board. At issue were what parameters the government should set for defining mortgages that require risk retention by the mortgage securitizer and mortgages that don’t. With a recently issued revised proposal, federal regulators have effectively admitted defeat and, in adopting ‘qualified mortgage’ parameters, ceded the job to the Consumer Financial Protection Bureau.”
“The intent of risk retention, or ’skin-in-the-game’ as it was called ad nauseam during Dodd-Frank’s drafting, is to ensure that securitizers of residential mortgages (and other asset classes) don’t package junky loans into securities and sell them to unsuspecting buyers. To prevent this, securitizers would be required to hold 5% of the credit risk of the loans backing the securities they sell. The 5% figure was an arbitrary number plucked out of the air in congressional hearing rooms. ‘Skin-in-the-game’ proved to be a good slogan for those hyping Dodd-Frank.”
“Defining the QRM was ill-fated from the get-go. Asking the government — which is always torn between its desire to facilitate homeownership and its fear that banks will fail — to set underwriting standards is a bad idea. For government officials, boosting homeownership invariably trumps all.”
“Making matters worse, QRM design is a multi-regulator effort involving the banking agencies, the Federal Housing Finance Agency, the Department of Housing and Urban Development, and the Securities and Exchange Commission, some of which have undermined underwriting standards in the past. On this recent attempt, regulators tried something different. They deferred to the CFPB, an agency that Congress, presumably by design, left off of the QRM rule-writing team, and adopted its qualified mortgage definition as the definition for QRM. What could be easier than simply pulling a ready-made definition off another regulator’s shelf?”
“Unfortunately, the CFPB did not design the Qualified Mortgage with safety and soundness in mind. Instead, its definition enshrines a ‘one-size-fits-all’ mortgage that ignores the nuanced needs of American consumers and avoids terms, such as balloon payments, that the bureau finds distasteful. Qualified Mortgage standards don’t include down-payment requirements and set a debt-to-income cap of 43%. The QM definition does not serve the same purpose as QRM was supposed to and thus is inapt.”
“Nevertheless, QRM regulators have embraced that definition and any future amendments to it. As a result, in the words of SEC Commissioner Daniel Gallagher in his dissenting statement, ‘The QM designation, so to speak, is the new NRSRO [credit rating agency] triple-A rating.’”
“Instead, its definition enshrines a ‘one-size-fits-all’ mortgage that ignores the nuanced needs of American consumers and avoids terms, such as balloon payments, that the bureau finds distasteful. Qualified Mortgage standards don’t include down-payment requirements and set a debt-to-income cap of 43%.”
A ‘one-size-fits-all’ approach will naturally tend to reward deadbeats and punish anyone with good credit ratings. Anyone with a good long-term credit history is advised to proceed with extreme caution!
Did you ever decide if a high proportion of cash buyers could signal a market bottom?
It might signal a market bottom if it weren’t for the extraordinary behind-the-scenes government-sponsored interventions in play to support housing prices.
Unless these behind-the-scenes market props stay in place forever, I don’t believe a high proportion of cash buyers will signal a market bottom. Instead, they signify an extension of the mania, including prices above fundamental levels for an unprecedented period of time.
Any other questions?
Any other questions?
So as long as there is government intervention, there will be no bottom?
Seems reasonable. The government does have infinite money to throw at the problem, after all.
I can’t predict how long government intervention can forestall a bottom. For starters, there is the question of means to continue propping up housing, given other critical spending priorities.
And then there is the question of whether the will exists to continue the market support, regardless of the means to do so.
Finally, there is the question of for how long ongoing intervention can potentially overcome market forces. We have already seen since early May 2013 the limits of the Fed’s ability to keep a lid on long-term interest rates through QE3 purchases of Treasury bonds. Why would one expect government intervention in the housing market to remain effective indefinitely? Is housing somehow different than bonds?
Anyone who can accurately predict the duration and effect of these contingencies has far greater insight into the efficacy of government intervention schemes than I have.
Aug. 29, 2013, 2:40 p.m. EDT
Nearly half of homes are purchased in cash
The real-estate recovery is being driven by all-cash buyers
By Quentin Fottrell
More Americans are buying homes in all-cash deals, according to several recent studies. But real- estate experts say this increase may not be a good sign for the health of the housing market.
All-cash purchases accounted for 40% of all sales of residential property in July 2013, up from 35% during the previous month and 31% in July 2012, according to data from real-estate data firm RealtyTrac released Thursday. That’s the second highest rate since the survey began in January 2011 – second only to 53% in March 2012.
All-cash purchases accounted for 40% of all sales of residential property in July 2013, according to a new study. But experts caution that this increase may not be a good sign for the health of the housing market. MarketWatch’s Jim Jelter reports (Photo: Getty Images)
Another report by Goldman Sachs last week was even more strongly in the cash-is-king camp, estimating that cash sales now accounted for 57% of all residential home sales versus 19% in 2005. Walt Molony, a spokesman for the National Association of Realtors, says that the association’s estimates of the share of the market made up by all-cash buyers are lower than the others, at 31% in July, but that they’re still at an all-time high.
The cities with the biggest month-over-month jumps in the number of all-cash sales, according to RealtyTrac included Dallas (up 82%), St. Louis (up 66%), Los Angeles (up 32%), plus Seattle and Phoenix (an increase of 21%, respectively). This helped boost overall sales of U.S. residential properties, which sold at an annualized pace of 5.5 million in July 2013, a 4% increase from the previous month and a rise of 11% from a year ago.
While cash buys help explain the surge in home sales over the last year, some experts say it’s an unsustainable trend – and one that should be greeted with caution. “The rise in cash sales is not a good long-term trend for the housing market,” says Daren Blomquist, vice president at RealtyTrac. Although RealtyTrac doesn’t identify who has cash-in-hand, experts say wealthy Americans and downsizing retirees account for some of these all-cash deals. Investors who are keen to make a profit by buying low and renting those properties – or flipping them – also drive up the number of all-cash deals, he says. None of these three groups – flippers, retirees and the wealthy – are big enough to sustain the market in the long run, he says. If it remains dominant in the long run, cash buying “will have a chilling effect on home sales and prices,” Blomquist says.
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There is an old saying about “burning the furniture to keep the house warm”.
The Bernancko is about out of fuel, time for some pain.
Most of us that were posting here at Ben’s site years ago were way ahead of the PTB:
http://www.youtube.com/watch?v=9QpD64GUoXw
Bring on the pain…….
“The Bernancko is about out of fuel, time for some pain.”
People have been saying that for years already, even as the Fed steadfastly pumps $85 bn a month in QE3 into the bond market.
In a bad sign for U.S. residential real estate investors, market analysts are beginning to apply common sense to the interpretation of historically unprecedented levels of all-cash purchases.
Watch out below when common sense leads to a case of cold feet.
In a bad sign for U.S. residential real estate investors, market analysts are beginning to apply common sense to the interpretation of historically unprecedented levels of all-cash purchases.
Reference?
“Reference?”
I had in mind the post that you will find just above:
I guess your answer also depends on the ability of the PTB to endlessly kick the can down the road. If they can keep on kicking it forever, then perhaps a market bottom is already in place.
Finally, there is the question of for how long ongoing intervention can potentially overcome market forces.
They can kick the can for a very long time, but not without consequences.
Did the thought ever occur to your corrupt mind that transfer of excess empty houses from lender balance sheet to private equity balance sheet signals desperation?
You serial liar.
What determines policy is this: http://www.opensecrets.org/bigpicture/reelect.php
And economic conditions do a lot to influence the re-election rates.
What if it crashes before 2016? Will that help or hinder Hillary Clinton’s election prospects?
the next potus will be handed another mess as the can keeps getting kicked down the road.
the next potus will be handed another mess as the can keeps getting kicked down the road.
And the next POTUS will continue to kick the can even further down the road.
the next POTUS
assuming there IS one.
“With a home-equity line of credit, homeowners can draw on the value of their homes as needed, usually at a variable interest rate. It is different from a home-equity loan, which is taken as a lump sum, usually at a fixed interest rate.” —MarketWatch
Wonder what happens when Jumbo Joe is late on a payment?
UPDATE 2-U.S. proposes relaxed “skin in the game” mortgage rules
Aug 28 (Reuters) - Six U.S. regulatory agencies released a reworked proposal on Wednesday that requires lenders maintain a stake in the loans they bundle and sell as securities, part of efforts to limit the type of underwriting practices which fueled the housing bubble.
http://www.reuters.com/article/2013/08/28/usa-housing-regulations-idUSL2N0GT0UA20130828
http://www.youtube.com/watch?feature=player_embedded&v=iW5qKYfqALE
From the article: “The new rules are aimed at preventing banks from writing risky loans with impunity.”
If government weren’t in the business of bailing out banks and backstopping Wall Street, this issue of writing bad loans would be quickly self-correcting.
“If government weren’t in the business of bailing out banks and backstopping Wall Street, this issue of writing bad loans would be quickly self-correcting.”
But doesn’t making the loans federally guaranteed solve the problem, by putting U.S. taxpayers on the hook for principle guarantees in case subprime underwriting standards lead to another future wave of foreclosures?
All I can really say is, “Wow.” Government, i.e. the taxpayer is set up as the patsy, and profit is guaranteed for Wall Street. That’s what all the political contributions over the years get you.
It does solve Wall Street’s problem, by fully offloading risk onto the taxpayer. But then they risk making themselves irrelevant, as they fashion themselves into a feudal lord, collecting tribute from the peasantry, via the federal government power structure.
I wonder now…. why not just get Wall Street out of it? They are literally just the parasitic element, the feudal lord, fantastically expensive, not adding any value. I wonder how much each FIRE sector job costs under this scheme. Government, i.e. the taxpayer is taking all the risk anyway, why firehose money at the FIRE sector for the privilege?
“They are literally just the parasitic element, the feudal lord, fantastically expensive, not adding any value.”
Obviously they add plenty of value in the form of financial backing of congressional and presidential candidates. And the top investment banks provide ideal training grounds for future top jobs at the Treasury Department.
The full power of the US central bank and federal government are behind supporting house prices. And enticing more and more people to buy them by relaxing QM/QRM further and further.
So… they’re trying to overcome a mass deleveraging event caused by too much mortgage debt… by creating more mortgage debt?
Huh.
“…they’re trying to overcome a mass deleveraging event caused by too much mortgage debt… by creating more mortgage debt?”
AKA the ‘hair of the dog’ hangover cure…
Instead, they said on Wednesday that mortgages that meet a minimum standard already adopted by the U.S. Consumer Financial Protection Bureau (CFPB) will be exempt from the risk retention rules.
That standard includes loans that have no risky features such as interest-only payments or loan terms exceeding 30 years, and go to borrowers who do not have high debt loads.
So a bank has to retain 5% of I/Os and Neg-ams. That puts a lid on the worst of the damage, since sub-primes probably won’t be able to pay the full amortized amount each month.
Subprime is contained…again.
Will it be contained to $200 bn…again?
The whole QM/QRM concept is a Trojan Horse. It sounded good initially, but ultimately it’s politicians, financed by the businesses they regulate, that write the rules.
Seems like getting money back from companies to which you funnel public money is a kickback.
“The proposed new Qualified Residential Mortgage rule, released jointly by six government agencies, was cheered by both consumer advocates and mortgage industry members–who typically don’t see eye-to-eye on much–largely because it eliminates much stricter down payment rules that the previous version of QRM would have created.
Under the CFPB’s QM rule, borrowers must provide income documentation that they can repay the loan, and that their debt-to-income ratio does not exceed 43 percent, among other requirements. It does not, however, have any rules requiring lenders to ask for a set down payment amount.
QRM would have required lenders to demand a 20 percent down payment from borrowers. The rule was intended to prevent unqualified borrowers from taking out a mortgage they can’t handle, but housing advocates and mortgage industry members argued that it instead prevented too many qualified and responsible low- to middle-income borrowers from taking out a mortgage.
http://www.cbsnews.com/8301-505145_162-57600462/government-relaxes-mortgage-down-payment-rules/
The National Association of Realtors President Gary Thomas called it a “a victory for homebuyers and the future of homeownership in this country.”
The NAR pronouncements imply that they are working hard for the American family, but their interest extends no further than the commission.
Uh…didn’t Uncle Sam target subprime lending programs at low income and minority communities during the boom times?
The Dramatic Racial Bias of Subprime Lending During the Housing Boom
Emily Badger
Aug 16, 2013
Reuters
Through a strange kind of logic – the sort that makes sense if you’re a large bank at the height of the housing boom – high-income black households were actually the perfect customers for subprime loans. Black communities had long been ignored by banks, creating a void in the market for anyone pedaling these relatively new financial products. And subprime loans, while risky, were tremendously profitable (for the banks) when the homeowners didn’t foreclose, thanks to their higher fees and interest rates.
Give a black family that could probably qualify for a prime loan a subprime one instead, and the lender likely wins.
In the wake of the housing crash (and even before), banks have been widely accused of doing just this, and the practice has even become the subject of some damning discrimination lawsuits. But here is some data on exactly how skewed things really were: In 2006, at the height of the boom, black and Hispanic families making more than $200,000 a year were more likely on average to be given a subprime loan than a white family making less than $30,000 a year.
Banks that once ignored minority communities were targeting them now to make money.
“To me, I see that information and I kind of scratch my head,” says Jacob Faber, a PhD Candidate in New York University’s Department of Sociology who uncovered that gaping disparity studying nationwide mortgage data from that period. One explanation suggests that minority borrowers, particularly those living in communities where bank branches had long refused to go, were simply not financially sophisticated enough to know these loans were wrong for them. “I’m thinking, so for this financial literacy argument to really work, we also have to say that incredibly wealthy blacks and Latinos are less financially savvy than arguably pretty poor white households.”
…
Minority Homeownership Initiatives
HUD is an avid supporter of increased minority homeownership. The Office of Fair Housing and Equal Opportunity carefully monitors the programs of other HUD offices, as well as the work of GSEs (government sponsored enterprises) to ensure that policies are being followed to progress toward an increase in numbers of minority homeowners. Policies and procedures are examined to be sure they do not discriminate or bring about a negative impact against minorities in pursuit of homeownership.
…
It occurs to me that had poor minorities continued to rent during the bubble, they would have been in superior financial shape than having what little wealth they had sucked from them, then being left with not merely nothing, but more debt. Less than nothing.
Often think about that reality however it applies to everyone.
I have to guess that many of the poor minority group members who were targeted by the “We’re the government, and we’re here to help you” programs had no clue they were getting set up like bowling pins.
People of all income, ethnic and age groups should realize that if the government says they are designing a program to help you, that is the exact opposite of what will happen. Whether through incompetence or the desire to control you or outright take your money, these programs will not help you. Stay away!
“Unfortunately, the CFPB did not design the Qualified Mortgage with safety and soundness in mind. Instead, its definition enshrines a ‘one-size-fits-all’ mortgage that ignores the nuanced needs of American consumers and avoids terms, such as balloon payments, that the bureau finds distasteful.
Actually what this means is the CFPB is not allowing balloon payments which are bad for consumers. You have to really read with a jaundiced eye here - the American Banker is not going to have the best interests of consumers at heart.