The Mortgage Bust Goes On

[JayB]

No one saw this one coming.

 

"WASHINGTON, D.C. -

 

A record-high 19% of high-cost mortgages originated during the past two years will end in foreclosure, a consequence of the growth in risky mortgage products, according to new data compiled by an industry group.

 

The nonpartisan Center for Responsible Lending predicts 2.2 million households in this mortgage segment, known as subprime borrowers, either have lost their homes or hold mortgages doomed for foreclosure in the next few years. This estimate comes a week after a grim survey from Fitch Ratings, which studies residential mortgage securities, showing a 16-fold increase in past-due subprime loans in the third quarter of 2006, compared with 1998.

 

Subprime borrowers, who typically pay interest rates 2% to 3% higher than those with good credit, currently account for a quarter of all mortgage originations."

 

 

http://www.forbes.com/2006/12/19/mortgage-lenders-bust-biz-cz_ms_1219bust.html?partner=links

[cj001f]

JayB-

This seems to be along the lines of the options backdating scandal (what if you had a scandal, but no stock prices were pummeled).

 

What if you had a bust but nobody noticed?

[tvashtarkatena]

What if you had a bust but nobody noticed?

 

Then you'd be one sad, ignored transexual.

[sexual_chocolate]

And the figures seemingly do not reflect interest-only loans and arms, but only sub-primes.

[Mr_Phil]

I was clicking on mortgage brokers today and noted that now a 40 year loan is an option.

 

WTF?

 

Stupid loans helped drive up housing prices.

Edited December 20, 2006 by Mr_Phil

[JayB]

JayB-

This seems to be along the lines of the options backdating scandal (what if you had a scandal, but no stock prices were pummeled).

 

What if you had a bust but nobody noticed?

 

That's been very interesting. Both the options-backdating scandal and the GNMA corruption scandal occurred on a scale that makes the Enron debacle look like someone snagging a couple of cents out of the "Need a Penny, Take A Penny. Got a Penny, Give a Penny" tray at the local 7-11, but no one seems to have noticed. In the case of GNMA, I would have thought that people would have been especially incensed given connections between that particular institution and the US government, especially the "implicit guarantee" that most market participants believe will leave taxpayers on the hook for any large-scale implosion. Here you had mega-malfeasance complete with a much more convincing evidence of the company buying political cover on Capitol Hill, yet zero reaction.

 

There are some minor political reasons why this hasn't been noticed much, but the primary reason is that none of these events has been part of any major financial implosion that hit the investing public in the shorts, and the general public is not anxiously scanning the landscape for a scapegoat to pin the responsibility for their financial losses on. When things start to go critical in the subprime mortgage backed securities market, and especially in the most irrationally exuberant housing markets, look for the self-exculpatory language and the manic fingerpointing to begin, then the righteous indignation all around "How on earth could I have known that a stated-income, no-doc, pay-option, I/O libor-indexed ARM was the least bit risky!?," followed by the Mortgate exec perp-walk before whatever sub-committee convenes to sort things out.

 

I think that at this point pretty much every single aspect of the US mortgage market needs a serious overhaul. The mortgage/real-estate business in the US today resembles the stock market of the 1920s, and it's kind of amazing that things had to get this ripe before it occurred to anyone that there was anything amiss.

[sexual_chocolate]

I was clicking on mortgage brokers today and noted that now a 40 year loan is an option.

 

WTF?

 

Stupid loans helped drive up housing prices.

 

a 40 year isn't necessarily a "bad" option. a forty year fixed keeps payments predictable, and can increase your cash flow, especially in an investment property. It can also get you into properties that otherwise wouldn't pencil out in the short term.

 

ARMs and interest only loans I think are potentially the really dangerous and volatile ones (as people are starting to find out). But even these can be used to your benefit, IF you have a clear picture of what your goals are. If you had gotten into an arm 5 years ago in seattle on a $400,000 house at 4.5% and were selling now, you'd probably be looking at around 30 grand more in your pocket, along with the considerable appreciation you would have realized (which would be there regardless of your loan choice).

 

Using arms or inrterest onlys without a clear picture of one's goals though seems to be a recipe for some potential stresses in the future.

 

 

[sexual_chocolate]

and for those calling for an overhaul of the current lending system, what would your recommendations be? I personally like the options available, and came about due to demand. you all wouldn't like the feds over-regulating and over-reaching, would you?

[rbw1966]

JayB--did you get my PM?

[willstrickland]

No one saw this one coming.

 

Bwahahaha. LOL 707 LOL.

[JayB]

and for those calling for an overhaul of the current lending system, what would your recommendations be? I personally like the options available, and came about due to demand. you all wouldn't like the feds over-regulating and over-reaching, would you?

 

I'd like to see something along the lines of the regulations that govern the securities industry which, despite the bad rap, are actually well thought out and reasonably well enforced - at least at the retail level - though they could also be improved a bit.

 

The basic rules that come into play there are all about insuring suitability and full disclosure. Before you can even trade stocks, you have to disclose your total liquid assets, investing experience, etc - and someone has to review that information and approve you for a certain level of trading. Pretty much anyone can trade stocks, but if you want to open a margin account, or get into options trading, much less commodity or currency futures you need to have assets and experience that are commensurate with the risks that you are taking before you get the clearance to work with those kinds of instruments.

 

I'd like to see something similar for exotic mortgages. At the very minimum, anyone selling a mortgage needs to fully disclose how he or she will be compensated for what they are doing, and who is compensating them, and insure that the people that they are selling the loan to fully understand the characteristics of the loan that they are getting into. At a minimum this means printing out a table showing them a chronology of their payments, disclosing all pre-payment penalties, and in the case of neg-am loans, showing them a table that shows what happens to their payments when the LTV hits a certain threshhold. I'm all for letting people make bad choices, so long as they do so with their eyes open.

 

There are quite a few other elements of the real estate business that need to be cleaned up so that market participants have accurate information. The buying/selling, and appraisal processes are especially flawed and rife with massive conflicts of interest, but thats another topic.

[JayB]

No one saw this one coming.

 

Bwahahaha. LOL 707 LOL.

 

I'll go one step further and state that this has not been the most clearly telegraphed, abundantly forecasted development in the financial markets in recent history.

 

Good thing this isn't only the tip of the iceberg.

 

 

 

[LandShark]

Whatever, you can put all the regulations you want in place, but the bottom line is that there are a lot of people out there that are just plain stupid at managing their money, which is why they have bad credit to begin with. You can show them amortization table up the asshole, but they'll still sign on the bottom line when the monthly payment comes down to something that doesn't make them vomit. Either outlaw specific types of loans or educate the American consumer. Disclosure requirements won't help much.

[JayB]

I was clicking on mortgage brokers today and noted that now a 40 year loan is an option.

 

WTF?

 

Stupid loans helped drive up housing prices.

 

a 40 year isn't necessarily a "bad" option. a forty year fixed keeps payments predictable, and can increase your cash flow, especially in an investment property. It can also get you into properties that otherwise wouldn't pencil out in the short term.

 

ARMs and interest only loans I think are potentially the really dangerous and volatile ones (as people are starting to find out). But even these can be used to your benefit, IF you have a clear picture of what your goals are. If you had gotten into an arm 5 years ago in seattle on a $400,000 house at 4.5% and were selling now, you'd probably be looking at around 30 grand more in your pocket, along with the considerable appreciation you would have realized (which would be there regardless of your loan choice).

 

Using arms or inrterest onlys without a clear picture of one's goals though seems to be a recipe for some potential stresses in the future.

 

 

Appreciation seems to be a constant and a given in this analysis.

Interesting.

[JayB]

Whatever, you can put all the regulations you want in place, but the bottom line is that there are a lot of people out there that are just plain stupid at managing their money, which is why they have bad credit to begin with. You can show them amortization table up the asshole, but they'll still sign on the bottom line when the monthly payment comes down to something that doesn't make them vomit. Either outlaw specific types of loans or educate the American consumer. Disclosure requirements won't help much.

 

I think the tables are about as far as anyone's realistically going to get when it comes to educating the American consumer, a goodly percentage of of whom believe that real-estate - unlike every other asset class - only goes up in all places, at all times, and never mean-reverts.

 

[Mr_Phil]

I was clicking on mortgage brokers today and noted that now a 40 year loan is an option.

 

WTF?

 

Stupid loans helped drive up housing prices.

 

a 40 year isn't necessarily a "bad" option. a forty year fixed keeps payments predictable, and can increase your cash flow, especially in an investment property. It can also get you into properties that otherwise wouldn't pencil out in the short term.

 

ARMs and interest only loans I think are potentially the really dangerous and volatile ones (as people are starting to find out). But even these can be used to your benefit, IF you have a clear picture of what your goals are. If you had gotten into an arm 5 years ago in seattle on a $400,000 house at 4.5% and were selling now, you'd probably be looking at around 30 grand more in your pocket, along with the considerable appreciation you would have realized (which would be there regardless of your loan choice).

 

Using arms or inrterest onlys without a clear picture of one's goals though seems to be a recipe for some potential stresses in the future.

 

 

Appreciation seems to be a constant and a given in this analysis.

Interesting.

 

You mean it's not?!? OMG!?!

 

Here's an interesting analysis of housing prices. This was predicated on a 30-year loan. A 40-year loan simply bumps up housing prices, as mortgage-to-the-hilt buyer with a 40 year loan can offer more than a similar buyer with a 30 year loan. Zero-Principle loans and Negative Amortization loans again just add to this.

 

For example, see the shift in prices in Jay's chart in the mid-40's? That coincides with creation of Fannie Mae and the popularization of 30 year loans after the war. Easier loans, housing prices go up.

 

When this comes down, it's going to get ugly. And the Gov't will probably end up bailing everybody out (again).

 

Who is one of the largest sellers of Negative Amortization loans? Our own Washington Mutual.

[willstrickland]

and for those calling for an overhaul of the current lending system, what would your recommendations be? I personally like the options available, and came about due to demand. you all wouldn't like the feds over-regulating and over-reaching, would you?

 

No more "stated income, no doc" type loans. No neg-am loans. No interest only loans. No "zero down" loans.

 

All these masquerade as providing "affordabililty". I'd argue they do just the opposite by bringing unqualified new buyers and speculators into the market through easy credit, which (all else equal) increases the prices by artificially boosting demand. It also decreases the avg % equity, putting increased risk into the credit system (whether banks, MBS holders such as pension funds, etc) .

 

It's essentially ponzi finance, which always ends badly. Is your 3/2 in the Seattle burbs really worth 40% more now than it was two years ago when inflation is only running ~ 4.5% with flat wage growth and housing has historically tracked inflation and/or wage growth, or has it been a "greater fool" scenario? Does it provide you with 40% more/better shelter or 40% more pride in ownership? No, it only provides 40% more debt and the hope that there is a greater fool when you need to offload it and that the ponzi merry go round hasn't come to a halt.

 

Sacramento is a prime example down here. They're seeing 15%-30% declines from the peak already. Check it out:

 

http://flippersintrouble.blogspot.com/

[sexual_chocolate]

I was clicking on mortgage brokers today and noted that now a 40 year loan is an option.

 

WTF?

 

Stupid loans helped drive up housing prices.

 

a 40 year isn't necessarily a "bad" option. a forty year fixed keeps payments predictable, and can increase your cash flow, especially in an investment property. It can also get you into properties that otherwise wouldn't pencil out in the short term.

 

ARMs and interest only loans I think are potentially the really dangerous and volatile ones (as people are starting to find out). But even these can be used to your benefit, IF you have a clear picture of what your goals are. If you had gotten into an arm 5 years ago in seattle on a $400,000 house at 4.5% and were selling now, you'd probably be looking at around 30 grand more in your pocket, along with the considerable appreciation you would have realized (which would be there regardless of your loan choice).

 

Using arms or inrterest onlys without a clear picture of one's goals though seems to be a recipe for some potential stresses in the future.

 

 

Appreciation seems to be a constant and a given in this analysis.

Interesting.

 

Interesting assumption. Based on...?

[sexual_chocolate]

and for those calling for an overhaul of the current lending system, what would your recommendations be? I personally like the options available, and came about due to demand. you all wouldn't like the feds over-regulating and over-reaching, would you?

 

No more "stated income, no doc" type loans. No neg-am loans. No interest only loans. No "zero down" loans.

 

Really? So you'd like to see loans limited by a regulating agency as opposed to consumer knowledge? I'd rather this type of regulation be left to cigarette smoking and such, with a rather important caveat: Balance the risk. Repeal the recent bankruptcy law changes, and let the lending institutions feel the sting of their poor lending choices. Pretty simple: Harry has a history of not paying back his loans? Don't Lend To Him!

 

All these masquerade as providing "affordabililty". I'd argue they do just the opposite by bringing unqualified new buyers and speculators into the market through easy credit, which (all else equal) increases the prices by artificially boosting demand. It also decreases the avg % equity, putting increased risk into the credit system (whether banks, MBS holders such as pension funds, etc).

 

It's essentially ponzi finance, which always ends badly. Is your 3/2 in the Seattle burbs really worth 40% more now than it was two years ago when inflation is only running ~ 4.5% with flat wage growth and housing has historically tracked inflation and/or wage growth, or has it been a "greater fool" scenario? Does it provide you with 40% more/better shelter or 40% more pride in ownership? No, it only provides 40% more debt and the hope that there is a greater fool when you need to offload it and that the ponzi merry go round hasn't come to a halt.

 

"worth" and "value" in terms of dollars is a pretty strange relationship sometimes, don't you think? I don't think it's really about "40% better" or any such concept, it's the old supply and demand function. what were the average prices in sacramento before the drop? what was the average income? rental vacancy rate? population growth? was the drop skewed by a certain housing sector, a certain area? what types of mortgages did people hold? etc etc. i really don't know what will happen in seattle in the next 2, 5, 8, 15 years; does anyone? maybe a decent indicator is comparing incomes to house costs based on a fixed 30 year monthly payment, and how sustainable that relationship is? compared to other major metropolitan areas, seattle still has "affordable" houses, no?

 

 

 

[JayB]

I was clicking on mortgage brokers today and noted that now a 40 year loan is an option.

 

WTF?

 

Stupid loans helped drive up housing prices.

 

a 40 year isn't necessarily a "bad" option. a forty year fixed keeps payments predictable, and can increase your cash flow, especially in an investment property. It can also get you into properties that otherwise wouldn't pencil out in the short term.

 

ARMs and interest only loans I think are potentially the really dangerous and volatile ones (as people are starting to find out). But even these can be used to your benefit, IF you have a clear picture of what your goals are. If you had gotten into an arm 5 years ago in seattle on a $400,000 house at 4.5% and were selling now, you'd probably be looking at around 30 grand more in your pocket, along with the considerable appreciation you would have realized (which would be there regardless of your loan choice).

 

Using arms or inrterest onlys without a clear picture of one's goals though seems to be a recipe for some potential stresses in the future.

 

 

Appreciation seems to be a constant and a given in this analysis.

Interesting.

 

Interesting assumption. Based on...?

 

The IF/AND statement that's at the heart of your example.

 

The notion that clear goals have any bearing whatsoever on outcomes is also quite touching. There are literally hundreds of thousands of people who combined exotic financing with exquisitely clear goals and are nonetheless hopelessly upside down, without a prayer of refinancing their way out of the jam that they in, who parlayed their clear goals into foreclosure and financial ruin.

 

Attempting to predict the future performance of any particular asset class, and using that to guage the probability of generating a profit is like trying to use avalance forecasting to tell whether or not it's safe to cross a particular slope. Ultimately it all comes down to the balance of risks and probabilities. In my mind, anyone acquiring residential property at todays prices as an "investment property" is doing something roughly akin to walking underneath a tottering cornice on a wind-loaded slope overlaying an ice layer five hours after sunhit while the temps are rocketing upwards. That doesn't mean that there aren't people who won't make it across, but at the moment the balance of risks and probabilities are not working in favor of anyone who wants to traverse this path.

[sexual_chocolate]

The IF/AND statement that's at the heart of your example.

 

The notion that clear goals have any bearing whatsoever on outcomes is also quite touching. There are literally hundreds of thousands of people who combined exotic financing with exquisitely clear goals and are nonetheless hopelessly upside down, without a prayer of refinancing their way out of the jam that they in, who parlayed their clear goals into foreclosure and financial ruin.

 

Attempting to predict the future performance of any particular asset class, and using that to guage the probability of generating a profit is like trying to use avalance forecasting to tell whether or not it's safe to cross a particular slope. Ultimately it all comes down to the balance of risks and probabilities. In my mind, anyone acquiring residential property at todays prices as an "investment property" is doing something roughly akin to walking underneath a tottering cornice on a wind-loaded slope overlaying an ice layer five hours after sunhit while the temps are rocketing upwards. That doesn't mean that there aren't people who won't make it across, but at the moment the balance of risks and probabilities are not working in favor of anyone who wants to traverse this path.

 

Yes, for you, it sounds like real estate would not be ideal. i would imagine that with your expertise, you are realizing gains in other market sectors. i am happy for you! good luck and good fortunes in everything you do.

[JayB]

I'd extend the "not ideal" classification to a considerably broader segment of the population than myself, but whatever.

 

On to another subject. Pardon me for this digression, which will no doubt seem a tad churlish coming on the heels of your well-wishes, but your comments here suggest that you are involved in attempts to invest in real estate to turn a profit. This seems to be profoundly incongruous with your oft-stated beliefs, your innermost convictions about the nature of right and wrong, and hardly a necessary activity given the range and scope of the opportunities that this country provides to sustain oneself. I'm hardly a paragon of uprightness myself, and there aren't many folks who are able to cruise through life without compromising their ideals in some fashion or another from time to time, but I really can't imagine earning my income by voluntarily engaging in activities - every single day - that were a complete contravention of my most deeply rooted principles. Am I completely off base here, or is this something that you have to contend with?

[archenemy]

I agree with SC here.

 

I have been very successful over the last seven years doing exactly as he outlines. I made a clear plan and followed it. I made adjustments along the way as necessary--shifting with the market as it changed. It is possible for the mere mortal to do well with a little bit of planning, a good dose of dicipline, and a hell of a lot of luck.

[sexual_chocolate]

I'd extend the "not ideal" classification to a considerably broader segment of the population than myself, but whatever.

 

On to another subject. Pardon me for this digression, which will no doubt seem a tad churlish coming on the heels of your well-wishes, but your comments here suggest that you are involved in attempts to invest in real estate to turn a profit. This seems to be profoundly incongruous with your oft-stated beliefs, your innermost convictions about the nature of right and wrong, and hardly a necessary activity given the range and scope of the opportunities that this country provides to sustain oneself. I'm hardly a paragon of uprightness myself, and there aren't many folks who are able to cruise through life without compromising their ideals in some fashion or another from time to time, but I really can't imagine earning my income by voluntarily engaging in activities - every single day - that were a complete contravention of my most deeply rooted principles. Am I completely off base here, or is this something that you have to contend with?

 

If your interest was sincere, you wouldn't seem so churlish.

[WapitiBob]

 

"In my mind, anyone acquiring residential property at todays prices as an "investment property" is doing something roughly akin to walking underneath a tottering cornice on a wind-loaded slope overlaying an ice layer five hours after sunhit while the temps are rocketing upwards. That doesn't mean that there aren't people who won't make it across, but at the moment the balance of risks and probabilities are not working in favor of anyone who wants to traverse this path."

 

If you go at it blindly you may be right but you're blanket statement is untrue.

 

Find two houses that have sold in Bend in the last 6 months that sold for a higher price previously.

Just two.

I've lived here for almost 50 years and houses are selling for more than they did 2 years ago, or 10 years ago or 30 years ago for that matter.

The avg. mtg. is held for 4 1/2 years. rarely is a mtg. payed off. Only fools put 30% down on a 30 yr. mtg. and pay 30% of their income every month on that mtg. just to do it all over again a few years later.