Rapid Growth And Uncertain Collateral
A housing bubble report from Wall Street to Washington. Bloomberg, “The largest U.S. banks have lowered their standards for some of the riskiest lending in a sign that weak underwriting is returning to levels seen before the 2008 financial crisis, according to a regulator’s report. The banks have continued to erode standards, especially in large corporate loans, consumer loans and in leveraged lending, according to an annual Office of the Comptroller of the Currency survey of examiners. ‘As banks continue to reach for volume and yield to improve margins and compete for limited loan demand, supervisors will focus on banks’ efforts to maintain prudent underwriting standards,’ said Jennifer Kelly, the OCC’s chief national bank examiner. She said the trends are ‘very similar’ to those from 2004 through 2006.”
“Tuesday’s report said such lending showed the most loosening among commercial products, with 48% of banks that engage in the lending easing their standards. A particular area of concern is commercial real estate, as examiners cited rapid growth and uncertain collateral.”
The Daily Caller. “The government is offering cheaper mortgages to first-time homebuyers, a risky move that could pave the way for another financial crisis, a mortgage foreclosure lawyer told The Daily Caller News Foundation. The new rules, announced by Fannie Mae and Freddie Mac last week, allow lenders to offer mortgages with a minimum downpayment of 3 percent — down from 5 percent.”
“‘I think it’s setting up the ability for another crisis to come,’ Adam Deutsch, senior associate at New Jersey firm Denbeaux & Denbeaux Law told TheDCNF. ‘If a homebuyer does not have the savings to deposit 5 percent of their home purchase, it is a safe assumption they will not have a savings contingency to cover unexpected costs of homeownership, such as a leaky roof or replacement water heater.’”
From Al Jazeera. “Aisha McKnight-Baron couldn’t believe her ears. Turned down by Bank of America for a home mortgage, McKnight-Baron was stunned to learn from her real-estate agent that she could still qualify for a loan. The lender was Angel Oak Home Loans. The company offered a loan program that targeted the millions of people like her with credit problems who, since the 2008 financial crisis, have been unable to secure a traditional mortgage.”
“For McKnight-Baron, a plastic surgeon in Atlanta, the subprime loan was a lifesaver. ‘The rate is a bit higher, but [Angel Oak] considered my circumstances, and I’ll be able to refinance,’ said McKnight-Baron.”
The Associated Press. “Six years after the collapse of Lehman Brothers, the lessons of the financial crisis may already be fading from collective memory. Just last week: Congress acted to loosen the regulation of the high-risk investments that ignited the 2008 crisis. Housing regulators cut minimum down payments on home loans. The Institute of International Finance declared it ‘worrisome’ that global indebtedness, as a share of world economic output, has reached record levels. All this comes as subprime auto loans for financially stretched buyers are surging.”
“And the so-called too-big-to-fail banks that needed a taxpayer bailout in 2008 now loom even larger than before the crisis: America’s five biggest banks account for 44 percent of bank assets, up from 38 percent in 2007, according to SNL Financial. Despite its overall finding that threats are moderate, Treasury’s research office warned of ‘excessive risk-taking during an extended period of low interest rates.’”
“The Treasury Department announced on Dec. 4 that homeowners in their sixth year of payments on a modified mortgage will get a $5,000 principal reduction to help them build equity and handle possible financial trouble. The assistance, which could total $5 billion, is part of the Home Affordable Modification Program, or HAMP, which began in 2009 to stem the flood of foreclosures after the housing crash.”
“As the interest rate on many of these loans rises to 3 percent in the sixth year and 4 percent in the seventh year from 2 percent in the first five years, officials say the $5,000 reduction will help curb additional defaults. The program made about 1.4 million modifications by the end of September and 961,648 of the loans are still active. Thirty percent of the loans, or 419,401, defaulted after the modification.”
“In making the $5,000 payouts, HAMP isn’t distinguishing between borrowers who might need the support and those who don’t. A homeowner who got a modification five years ago because of a job loss could be financially stable today and still get the payoff.”
“‘If people still need this kind of help, five years down the road, then they are simply not in a home they can afford,’ said Mark Calabria, director of financial regulation studies at the Cato Institute research group in Washington and a former senior staffer on the Senate Banking Committee. ‘The Republican leadership in Congress wants to end the program, and we’re way beyond the point where people could argue there’s a housing crisis.’”
National Mortgage Professional. “November was an unhappy month in the 2014 housing calendar, according to a pair of new data reports. ‘Following strong new home sales in October, our data shows November sales volume dropped significantly,’ said Mike Fratantoni, chief economist at the MBA. ‘Average loan size increased to almost $307,000 in November from roughly $300,000 in October, indicating that builders are having greater success with higher priced homes and difficulty at the entry level, as first-time buyers continued to face tight credit conditions.’”
“Separately, RealtyTrac’s U.S. Foreclosure Market Report for November found a total of 55,906 U.S. properties started the foreclosure process in November, a decrease of one percent from the previous month but a six percent increase from a year ago, the first year-over-year increase following 27 consecutive months of year-over-year decreases.”
From Builder Magazine. “It was four years ago that I wrote my last By George! Column in October of 2010. As we know, cheese gets moved when you look away or don’t pay attention. One of the first things I did was go back to the last piece I wrote to see how we have progressed from those dark days of 2010. Sadly, much of the piece read like I wrote it last week. I have included the piece at the end of this one.”
“A release from Freddie Mac on December 8, 2014, about attitudes among renters about renting and homeownership. The essence is that although 91% of renters view homeownership as something to take pride in, only 39% expect to purchase a home in the next three years. However, 45% of renters say they live paycheck to paycheck and will probably never be able to buy.”
“Whether we like it or not, our housing situation is looking more and more like the 1920’s than the 1990’s. Then, only 40% of the population owned a home and 60% rented. Many of those who rented paid a significant portion of their income toward rent and never could save enough to purchase. Sounds more like where we are going, based on the trend lines of the past couple of years.”
“But, what I think should be considered currently is the thought that we may have had way more of a structural shift in the underlying factors that drove homeownership and the home building and residential development industries in the period from 1945-2007 than many have realized or chosen to accept. The implications of such a shift for company business models, product, land values, and who participates in the industry are significant and not always to the good. However, with every disruptive change comes both the opportunity to thrive in the new environment and the risk of sudden extinction.”
Re-posting from earlier today:
”Mortgage fraud remains a national problem as loan applications have seen misrepresentations increase on an annual basis for three consecutive years, according to data from LexisNexis Risk Solutions.’
‘Nearly three-fourths of all mortgage loans reported in 2013 involved some kind of fraud or misrepresentation, the Atlanta-based company said. Comparatively, this figure was 69% in 2012 and 61% the year before.’
“The results of this study clearly demonstrate that the mortgage industry is making progress in combating fraud in some areas, such as appraisal fraud, but still has a lot of work to do in other areas, such as misrepresentation on credit documentation, which leapt from 5% in 2012 to 17% in 2013,” Coyle said.’
‘One out of every eight suspicious home loans nationwide exist in Florida, according to the annual LexisNexis Mortgage Fraud Index, which puts our state once again at number one for mortgage schemes.’
‘But the report indicates that the rate of fraud has fallen a bit. Florida’s index of 529 is more than five times the expected rate of fraud, but it’s the first time in years that the state’s fraud index has been less than seven times the expected rate.’
‘Mortgage fraud is rising nationally and remains more active in Nevada than in almost every other state, a new report shows. Overall, Nevada had the second-highest rate of mortgage fraud last year, according to LexisNexis. The company gave Nevada a mortgage fraud index tally of 221, meaning its rate of fraud was more than twice the expected rate, based on loan-origination volume.’
‘Nevada has held the No. 2 ranking since 2010.’
Important:
Every one of the articles is looking in the rearview mirror. They’re covering their asses. What they’re pimping is already playing out right now.
“The Institute of International Finance declared it ‘worrisome’ that global indebtedness, as a share of world economic output, has reached record levels. All this comes as subprime auto loans for financially stretched buyers are surging.”
Since the canary in the coal mine died in 2007 and now lies on the cage floor in a pile of bones, I guess people think it’s safe to enter the mine again.
“All this comes as subprime auto loans for financially stretched buyers are surging.”
Zero down on a $65,000 truck? No problem!
Exactly! And after the crater and oil surges again I’d be more than happy to take that depreciating hunk of metal off their hands for 8K or less.
Here’s a bit of Mr. Caseys’ article from 2010 at the bottom of the last link:
“Smartly delivering value to the buyers who are able and willing to buy is pretty important, too. I know that most builders have worked at value engineering and cost reduction strategies over the past couple of years. They have forced costs down as the selling prices have dropped. Yet, when I talk to people in a variety of markets, I am getting a feedback that it is not always the least expensive or the smallest homes that are selling.”
“Fire up the DeLorean, Doc Brown; what is going on here? I thought that the conventional wisdom was that starter and inexpensive homes was the holy grail of the new building reality.”
Also posted earlier today:
‘With house prices rising across many markets in the United States, it’s starting to look like the housing market is on the path to healing. Unfortunately, when we look at one metric, it’s also starting to look like the housing bubble is back.’
‘At $305,000 in October 2014, the median selling price of a new home is now up $42,400 from its pre-Great Recession peak of $262,600 in March 2007 and up $100,800 from its post-Great Recession low of $204,200 in October 2010. That’s an increase of 49.4 percent in just four years.’
‘Now, let’s look at the other component in this equation. Here is a chart showing what has happened to median household income since 1984′
‘As you can see, nationwide statistics show that housing became increasingly unaffordable in the late 1980s, rising from a median multiple of 3.4 in 1984 to 4.4 in 1988 and 4.2 in 1990. There was a slight downward readjustment after the recession in 1990 and during the period between 1991 and 2000, housing remained relatively affordable with the median multiple remaining between 3.7 and 3.9. This is largely because median household income kept pace with rises in the value of homes. This began to change during the first decade of the new millennium; increases in median housing prices outpaced increases in median household income, resulting in the median multiple rising to 5.1 in both 2006 and 2007. According to Demographia, the national market for new family homes would be considered severely unaffordable at this level.’
‘As we all know, housing prices readjusted significantly downward during and after the Great Recession, with the multiple hitting a low of 4.2 in 2009. Since then, save for 2012, the national median multiple has continued to rise, hitting the highest level that it has been at in two decades during 2014 when it hit 5.2 in July 2014.’
‘Demographia’s analysis of the median multiple suggests that these high multiples are unsustainable; families simply cannot afford to continue to buy homes in markets where price increases substantially outstrip growth in household income. The Great Recession proved this as median house prices fell to more affordable levels. Interestingly, it looks like housing market history is repeating itself.’
And they all sit around and wonder why potential entry level buyers, aren’t buying.
3%- does that include condo hotels on boats?
you can sail away
remember?
Am I really that surprised? Yeah the confidence allegedly grows, but it cannot hold for much longer. Empty houses are piling up and there is no government strategy to deal with it. This was maybe a merry year for us, but it is over and the future is unknown. Your real agent.
“For McKnight-Baron, a plastic surgeon in Atlanta, the subprime loan was a lifesaver.”
Wait, what, prices are so out of whack a plastic surgeon needs a subprime loan to afford real estate in Atlanta?
Maybe its a typo and she’s a cleaning lady at a plastic surgery clinic or something like that?
If its not a typo thats gotta be some kind of bubble peak indicator. Whats next, TBTF bank CEO needs a subprime loan to buy a shack?
Good afternoon bear pit
Stocks are up again on the algos digesting the fomc minutes. We have went from considerable time to patient in regards to interest rates rising.
Does this sound like BS to anyone else?
Cheer up Poet. Commodities and housing in the midst of a MegaCrater is a good thing.
Don’t you like falling prices?
Of course it is bs but they wanted to spike the dollar today to slow down the recovery in oil so they made that bs change. Be interesting what they come up with tomorrow. of course, the spiked dollar makes are goods less competitive in the world and makes profits earned overseas in other currencies worth less. Both should be hurting the stock market not helping it but this is offset by zero interest rates forever.
Remember….. a “recovery” in oil is falling prices to dramatically lower and more affordable levels.
You’re right. Oil is recovering nicely.
He’ll never get it through his extra thick skull.
“In making the $5,000 payouts, HAMP isn’t distinguishing between borrowers who might need the support and those who don’t. A homeowner who got a modification five years ago because of a job loss could be financially stable today and still get the payoff.”
Rather than discriminating in favor of wealthy homeowners, why not also give away $5K in free money to renters? Renters know how to spend free money and stimulate the economy even better than debt - strapped homeowners know how to spend it.