Most of the discussion about the subprime business has been victim focused namely J6P but the otherside is the entity's that have lent money to the wholesale lenders and discovered that they are quickly become bagholders and suddenly want their funds back or have stopped providing money to IB and others.
What I like about this is that market forces has acted quickly to protect their capital and as a byproduct putting a hold for now on many of these creative lending models.
In this instance regulators have done nothing to assist either the orginal wholesale investors nor J6P but only protecting the middleman in this operation.
Well, ron, you have to concede that this particular middleman--the depository--is the bank regulator's only supervisory responsibility.
Federal bank regulators worry about consumers only to the extent that Congress passes consumer-protection laws and tells the regulators to enforce them. The same thing is true at the state level.
But we have laws on the books--FACTA is always my favorite example--that have been out there for years (since 2003 in FACTA's case) but are not yet enforced because Congress delegated the rule-making to the regulators (Fed and FTC in the case of FACTA), who have not yet written the rules, let alone started implementing them.
The big FACTA missing piece is the "risk based pricing notice" which was supposed to alert consumers to the fact that the rate or points charged to them were based on their FICO (or other facts in the credit report). Over three years since passage of FACTA, and over two years since the original implementation date, there are still no such disclosure rules promulgated by the Fed and the FTC.
So, you know, they're getting right on these issues of rapid change in the mortgage market: Congress didn't notice risk-based pricing until late 2003, and by early 2007 the regulators haven't yet figured out how to enforce the law. The Borg can win pretty easily at this rate.
Thanks, Tanta, for educating in the details of an industry that I have known to be fraudulent for four years.
"helped fuel growth in homeownership"
Yeah calling Home Debtorship "homeownership" changes the fact? America's economic Propagandists are shameless liars.
As to the "increased competition," it has been for Fraud and not for the benefits of "consumers." Who can defraud and manipulate the most, or the best!
The real story of America over the past dozen years has been Exponential Growth in FRAUD, which is now very pervasive. It is so pervasive that it is considered normal.
Gross stats sometimes hide very ugly reality. Approx. 1/3rd have no mortgage or insignificant amount; another third have very manageable mortgages, and the last third have mortgages that are beyond their ability once the economy goes into recession. The last third will be under water once the home prices succumb to the Mean Reversion. Just imagine tens of millions of Home Debtors in deep troubles, and under deep water, at the worst times for the US economy since the 1950s.
Jas, I'm begging us all to think harder about the "competition" issue.
If you are a depository or nondepository who decides it's cheaper and more profitable to fire all your loan officers, close down your retail operations, and "originate" loans strictly on a wholesale basis, you have just "outsourced" your customer-contact business function to a bunch of brokers. How can you then consider them your competition?
Furthermore, it makes sense to do this not just because the business is cyclical--brokers don't get paid salaries and bennies during the low-volume lean times when the refis go away. They are also less regulated than you are. A lot of folks made the mistake of thinking that that meant that the broker took the "regulatory risk."
That, of course, is nonsense. We've just gotten a clear lesson in how you can't put the risk back to the broker: they don't have any money to take it back with.
Insofar as there are plenty of nondepository wholesalers--including the new cool Wall Street-owned ones--there is competition for the banks. But their competitors are using the same wholesale business model. So "competition" isn't going to fix the "intermediation" problem; it depends on it.
Seems the regulators liked these new lending models based on the belief they would boast home ownership rates. My point was basically the investor class whoever that is were the ones that pulled the plug.
Thanks for the great post always learn from your efforts.
Here's where I think the action is. You might call it A TALE OF TWO BAGS.
Bag One (not to be confused with The Cat in the Hat's Thing One) is the subprime mess.
Braunstein's testimony is intended to make absolutely certain that she/The Fed is not caught holding that bag. In contrast to what I originally thought, and with the help of your post, Tanta, her testimony is intended to squarely position the Fed as the good guy in the subprime mess.
And if that's the only bag (translation: soft-landing, Goldilocks, something about flatulence and silk), we need go no further.
Bag Two is why this blog exists:
Ya got trouble, my friend, right here,
I say, trouble right here in River City.
Trouble defined as the conjunction of a significant and sustained slowdown in consumer spending and Fannie and Freddy needing a bailout.
I think the issue here is that the brokers are accessing lending from for example Deutche, Barclays and HSBC and so forth. For an American bank that surely is direct competition? Also the originators like New dont access banks as such necessarily but instead get access to capital markets, who because of their wonderful techniques, can price risk more cheaply than traditional methods.
This is a very similar situation to what the UK was faced with in the 1980's. It was hard to get a loan in the UK that was not a traditional loan type. For example my first house had no bathroom and the Realtor expressed great surprise i got a mortgage at all for such a house and for such an amount and so quickly. It was arranged very very quickly by a broker and an American bank who was prepared to do the deal based on 90% valuation and 3.5 earnings. A more conservative uk bank would not lend on a house without a bathroom - it has to be sold quickly if i default - and would lend at say 2.5/3 and would only do 80%. Later via the same broker i got other loans with Bear stearns and city bank which were very different kinds of loans to that which you could get in main street. Meanwhile progressively the other UK banks began to offer the same products as for example interest only loans. It seemed they only did this because of the competition for lending.
There is also according to Bernanke/Tanta the issue of a national bank being supervised by the fed while others are not and therefore they cannot compete with what the broker offers.
Newcomers can offer the crazy deals to build market share so in that sense they are competing for share with established banks who are not inclined to change practices so quickly.
I agree with Arbogast. Especially after listing to BB today. He squirmed a bit on the subject of the responsibility of the Fed and seemed to side step the issue as if the fed could not have upped the ante on the issue.
Saying that the increased use of these mortgages was due to a "pent up demand", is like saying the increase demand for gold pans during the gold rush was due to a previously unfilled "pent up demand".
These were products that were seen as a means to an end. That end not being permanant homeownership, but for the one common and constant demand: The demand for MONEY.
People don't want more roads to have roads, but for where they can take you. The demand for these mortgages was the same as the demand for Tulips, not for the flower's sake but for what it could get you.
I'm not sure what Braunstein's background is, but I know what her current job is: she's in the "disclosure" side. The Federal Reserve has all kinds of authority to make regulations about how lenders disclose things--and when--that are based on statutes, not supervisory responsibilities. In other words, Congress passes a law with some generality, which specifically gives the Federal Reserve the responsibility and authority to promulate regulations that implement the law. Generally, the DoJ is given the responsibility and authority for enforcement of those laws.
So even depositories who are not supervised by the Fed (because they are supervised by OCC or OTS or FDIC or whatever) are subject to the Fed's regulations. And when they do one of their "Interagency" things, that means they all wrote the regs jointly. The Nontraditional Mortgage Guidance is an "Interagency" document. That's why it took so long to get it written--it's just like any other committee work.
Braunstein is part of the Fed that comes up with rules for written disclosures to consumers. She is by nature inclined to see the problem as an information shortage that can be fixed by handing the borrower some piece of paper--often one drafted by lawyers, which really helps on the "accessibility" front. The idea here is that you can do certain things, but only if you disclose it fully up front.
For instance, TILA and HOEPA do not actually outlaw some kinds of high-cost lending. They force some additional restrictions on high-cost lending, but largely what they do is require more disclosures. So it's OK in some circumstances to gouge a customer, as long as you give them a disclosure that says so. My own view is that if people were that financially literate and numerate they'd pick up the problem when reading their notes, and that more legalistic disclosures don't help, but the Fed likes to think otherwise.
I'm trying to get past "more information will solve the problem."
The only mention of Alt-A I can find in her tetimony is in a footnote : "....Alt-A, or "near-prime," which is designed for borrowers with good credit records who do not meet standard guidelines for documentation requirements, debt-to-income ratios, or loan-to-value ratios."
I saw an article the other day that referred to ALt-A the same way.
But my understanding is that this the way Alt-A used to be defined. A FICO score of above 720 was generally needed for both prime and Alt-A., but Alt-As lacked some documentation, DTI, etc.
Now it seems subprime is everything below 620-640 or so, and anything between that and 720 is called Alt-A. In other words, Alt-A now refers to both the old category of prime-FICO-but-lacking-something, and a new category of what would formally be called high-end subprime. But the powers that be, seem to think things are still the same as they were 15 years ago.
How firm were these boundries in the past?
Roubini has said that 50% of mortgages last year were virtually subprime, 20% subprime plus 20% Alt-A gets you to 40%...
CR If you listened to yesterday's congressional testimonies on subprime, it was pointed out on more than one occassion that the losses in subprime caused net gains for the brokers, etc. I think they meant that the addition of these unqualified buyers to the league of "homeowners" caused higher prices and the higher prices caused higher fees, much in excess of what they would have been otherwise.
Bob, there isn't much of a past for Alt-A. So it's not that there used to be a clear distinction that got muddied up; it's more a case that a big wild varied heterogenous market is trying to be captured with two terms, "subprime" and "Alt-A."
Insofar as there were the old days, "subprime" used to be a lot more like "hard money" lending. High rates, but also very low LTVs and incredible appraisal due diligence. If you wanted to learn how to read an appraisal, you asked a subprime lender. It was all they had, after all.
"Alt-A" grew out of the jumbo market as much as the "near-prime" market. In my view, Alt-A drove the housing bubble much more directly than subprime. Subprime drove the MEW bubble. They started to overlap a lot when they started fighting over the same cash-out refi borrowers. Believe me, when Alt-A lenders started offering 90% cash-outs (traditional prime limit was 75%), I freaked. Then the subprimers started offering 100% cash-outs. (They had, certainly, in the 90s offered HELOCs up to 125%, and got burned to a crisp over it. But it's one thing to put a smaller 125% HELOC over a lower-rate larger first lien. It's another thing entirely to refinance 100% of the value of your home at the high rate. Christ.)
So, anyway, the answer is that we're watching history in the making. That's why we haven't yet "decided" what these terms mean.
So as I look at my rate sheets today, it is still possible to get 100% stated loans, just a little higher credit scores and a few more months reserves.
Everyone from AHM to US Bank reworked their Alt-A matrix. But in the last week there has not been any new guide updates. It will be curious to see if and when we get round 2 or if that is it for the short term.
Subprime guys are working on new programs to roll out to replace to old.
As long there is money to be made and it is legal, lenders will create the product for it.
Might explain why my 6 yr old got a Visa application. Maybe her allowance will qualify as "stated income". She has been an owner/operator of a lemonade stand for over 2 years.....
--
"Jas, I'm begging us all to think harder about the "competition" issue."
Actually, I have already thought thru -- Competition, devoid of morality (or in an amoral society that we have been led into), brings the general conduct to the Lowest Common Denominator! Not unlike a high school tramp.
Ethics are central to prosperous societies and as ethics fall so do the societies. Within the broader white society ethics in America were much higher than at the present. Today, fraud and deception are the surest path to economic success, much more so than at any time in the past that I have knowledge of. Rockefeller was no Robber Barron compared to Bill Gates, who is a Crooks (his wealth is rooted in Scam Options accounting fraud). Most Americans dont know what fraud is. BTW, Rockefeller was an accountant. Let us not forget that Adam Smith was a moral philosopher.
Hi Everyone;
I found that I agreed with several parts of the original posting, but reach at times different conclusions.
Words Are Important, so let me explain my points in detail.
In the section of the article as quoted below:
SB: "This has resulted in increased competition and a wide variety of mortgage products and choices for consumers, in a market in which mortgage brokers and mortgage finance companies compete aggressively with traditional banks to offer new products to would-be homeowners. [My emphasis]"
Tanta: "In what strange world are mortgage brokers competitors of banks?"
I beleive the "competitors" reference is clearly the "finance companies" which are not "Depositories" and largely not subject to the same regulations as depositories. These finance companies (Country Wide, etc) exist because of the securitization of mortgages. The role of Brokers is as the article indicates Not one of Disintermediation (Haven't heard that term since the 90's!) but one of intermediation. It matters not a whit whether the mortgage is wholesales or retailed, Brokers have changed the way individuals seek mortgages. Some Brokers simply represent mortgage products designed and offered by originators (Depositories and Finance Companies. The Mortgage Brokering business is very competitive as well. WHile they are still paid as 'Agents' smoe of the larger, more savvy brokers have in fact have gone to different originators with their own design for mortgage product. Brokers have at that point created "New product". While the contracts are still with the originator, and they get paid as an 'agent'they have also greatly blurred the line between themselves and regulators and bear some of the risk/reward responsibility. I think this is a key point in SB's testimony.
The bottom line here is still: Mortgages are originated by well regulated Depositories, relatively un-regulated Finance Companies. In the recent period, mortgage securitization has significantly reduced the risk to these originators and Brokers (some of whom also design the offering) such that competition has led to the introduction of several new mortgage products with more broad range of variable terms and conditions. Many of these new products targeted persons who may not have qualified for more traditional mortgage terms and conditions.
The data support this point.
SB: "In 1994, fewer than 5 percent of mortgage originations were subprime, but by 2005 about 20 percent of new mortgage loans were subprime.
Did these products "fuel homeownership". That's debatable at best, but the data do show that 9-11% are First Time Buyers and many others are "Move-Up" buyers. I'm sorry - I don't have data on how many, but both are "Purchase Business".
These new Mortgage products also fueled re-financing activities and most importantly "Cash-Out Refinance" activities.
So - What went wrong? I don't think we have conclusive data at this
Credibility in the financial institutions is at risk.
Two years ago, no one at the Fed loudly forwarned of the risks of these products. Instead you had Greenspan suggesting that you were a fool to pay for a traditional 30 year fixed.
So when we ask Bernanke today about "spill-over" his answer is that he doesn't see any (RIGHT NOW).
"Well, at 5000 feet, jumping from a plane without a parachute isn't dangerous to your health. At 1000 feet we still don't see any health deterioration in the skydiver aside from some indication of slight shock. However shock is rarely fatal and we don't expect that the shock will have any long term adverse effects on his health. At 500 feet, we still see no evidence of anything that would indicate that jumping from a plane without a parachute is fatal. Although there is perhaps some risk of hitting the ground, we haven't seen it yet."
How about a discussion on where it looks like we're going and not where we are now?
CR, like brokers, Banks are in the real estate market today for the fees and so they are competitors. They don't want to hold onto loans, they want to keep their assets free for making new loans or investing in other types of assets. I can't see it any other way. One of my siblings is an attorney at one of the big three law firms in NYC. All she does all day is turn loans into securities -- she pools and tranches them and sells them. It started up big time in 2000. In the 1990s over 70% of the value of homes was equity -- that equity was not available for investing and US entities wanted to invest overseas to grow their customer base. So somehow the idea of securitizing homes started up and somehow at the same time home prices doubled (increasing demand via subprime lending drove prices up)and ergo money was free to invest overseas and also, China, which has currency that is not tradeable, found a place to invest all those dollars they had earned but couldn't spend in China.
WHile they are still paid as 'Agents' smoe of the larger, more savvy brokers have in fact have gone to different originators with their own design for mortgage product. Brokers have at that point created "New product".
I'd like to see an example or two of what you're talking about. I suspect that it isn't what people like me tend to think of with the term "mortgage product." It's probably yet one more way to juggle an eligibility matrix with a rate sheet on some existing product like hybrid ARM, neg am ARM, IO, etc., so that the broker can make more marginal loans and/or get paid more for them.
In any case, the "exotic" products that are now under regulatory scrutiny were not invented by mortgage brokers. They've been around for a long time. They just got offered to the wrong group of borrowers, with insufficient underwriting standards and other kinds of due diligence. This happened because the big "innovations" were on pricing, not product design.
Anyone who wants to tell me that "competition" has improved risk-based pricing is free to do so. How did we manage to compete the risks down to a level that undercuts the banks? Did someone invent a new way to eliminate risk, which has now driven down the cost of credit? Well, the answer is yes, that's the national-technological-securitization thing. But of course it has nothing to do with competition, unless you're talking about competing to see who can find more substitute bagholders fastest.
All the disclosure in the world means nothing if borrowers don't understand what they are signing. That's why this is the most chilling comment from yesterday's hearing:
"I don't think there is one borrower in a thousand that understands the papers that they sign." -- John Robbins, chairman, Mortgage Bankers Association (as reported by the WashPost)
To all you renters out there -- now is a great time to pressure landlords for MULTI-YEAR lock ins. My landlady just signed a lease for four years, where I can get out with 2 months notice, while she is committed for 4 years at the current price plus $25 a month ($300 a year) at the end of the first two years. LOCK IN LONG TERM NOW -- if there was ever a time to push your advantage it is now. We sold when we last moved and we decided to take the $250,000 we would normally use for a home and invest it instead -- I'm a long term OMB and Fed watcher and I knew home prices would drop. For two years it was painful watching home prices raise and getting low interest, but now that money is paying our rent on a 2100 sq ft house.
i was directed to this blog by a friend, after i told her of our predicament.
we're renting right now, in LA, from a couple who bought their home in '04. They also have 2 other properties, one in Arizona and the other somewhere in the midwest. The one in Arizona was also purchased in '04.
2 months ago, the husband calls us to ask us if we want to buy the house we're renting. They have one of these newfangled loans that lets them pay a minimum amount that doesn't even cover interest. Anyway, it shot up because, he said, the principal exceeded some trigger value. Now their payments (mortgage+taxes+ins) wer twice what we were paying them in rent. Hence the offer to sell to us. We politely thanked him and reminded him of the lease terms.
2 weeks ago, he calls us to tell us that he hasn't paid the mortgage for the last two months. He's trying to return the house to the bank without going through foreclosure. The reason: house values here have dropped to the same level as when he purchased the home, and his mortgage broker cannot find re-financing for him.
Yesterday, a gal from the city drops by and tacks a notice on the front door (can't be removed by us, she says), giving us 30 days to vacate the property before "further action is considered." The landlord claims he doesn't know what's happenning - his lender will not return his calls or talk to him (he doesn't even know if they are in business).
My questions to this crew:
1. I have the lenders name. How do I get to talk to someone there to accept our rent payment while they dispose of the property. We need time to find another rental here.
Our lease has a clause that the landlord will not sell during the term. Does this apply to foreclosure (probably not, but thought I'd ask).
Our lawyer friend says to stay put, send an note to the owner telling him we will stop paying rent, copy the lender & the city, and see what happens while taking the time to look for other places to rent.
Here's the strange bit: A similar thing is happenning to another rental home 3 doors down! That house is being sold on the market, at significantly lower than comparables. That family is also looking for another rental.
I'm not really sure what you folks can help me with, but I just wanted to vent a bit - let you know that there are people suffering because of this recent real estate mania...
LA should have a tenants' rights group somewhere who can assist you with the specifics for your state, county, and city. You should be able to find it with Google, or ask your lawyer friend.
I appreciate the vote of confidence in the blog, but we aren't lawyers and we don't give legal advice, and you really should be wary about taking advice from anonymous bloggers and commenters. They haven't all got the sense the Calculated Risk crowd does (and honestly I'm not sure about all the commenters, as I'm sure the other commenters will agree).
Amelia, not advice, you don't know me, I'm just thinking out loud here. Really, really, not advice.
I was just daydreaming that unless there are reall strong rent controls and you are covered there's no reason to pay rent. There may even be several great reason to not pay. Theoretically you don't have a valid lease because almost certainly your landlord is claiming owner occupancy and such. The bank will show you the loan docs part where your landlord violated terms and your lease is not valid but pay up until things get straightened out. Straightened out for the bank means the sherrif kicking you out and then try to get your money back. Don't want no complaints from the experts here about what's legal or allowed, I'm just thinkin' out loud. So cancel any checks, pay nothing more, keep living there using the money to find a new place. Just thinkin' out loud.
In a foreclosure, a renters biggest problem is that the lender will have to name the tenent in the suit in order to foreclose. If I were you I certainly would not stop paying or do anything that could put you at fault but I would find an attorney familiar with this this situation as you do not want to be named in the suit against your landlord. I was very sure to structure my lease (I'm the tenent but I wrote the lease) so that I could not get into this situation as I anticipated landlords not paying their mortgage. Also renters today must go to town hall (I did) to make certain the landlord can afford to lease without going backwards. We turned down many rentals before we found our present one because we didn't want a landlord who was not being keep whole by our rent.
"In 1994, fewer than 5 percent of mortgage originations were subprime, but by 2005 about 20 percent of new mortgage loans were subprime."
Ah yes which begs the question: how many of those loans are truly owner occupied? The key here being that just because a loan is written owner-occ doesn't mean that it is. Now this is clearly mortgage fraud, as is mis-stating income or assets on a stated/stated loan. But I can't think of a particular local agency that would possbily be in a position to check. More to the point the only person whose financial interest is being served by knowing the house is owner-occupied is the guy holding the securitized instrument. And realistically how could be unpackage it and check even if he wanted to.
Which in turn sheds light on this:
"It is hard to build a MEW market with a bunch of renters."
Well no it isn't. You just have to find a compliant originator who is willing to work with the five or six major institutions to write loans. While not pressing you too hard on why on paper you seem to be moving every six months and failing to notify the lender to shut down that owner occupied HELOC. Given the right combination of rental and housing markets and a little willingness to wink at statutes for mortgage fraud you can combine sub-prime and MEW and grow your total net worth astonishingly fast. It is an old principle called "Playing with other people's money"
But boy is it sensitive to maintaining access to credit. And oddly enough the FHA and the VA are kind of sensitive about how much they are looking to guarantee and want to have the security of knowing the house is owner-occupied. A lot of talk about sub-prime revolves around people with bad credit as opposed to people who have fully extended their credit. Just because your net worth is in the millions and you have a 770 FICO doesn't mean you can go conventional to pick up that ninth house.
If you can work the system, you can buy residential investment properties with real income and assets that wouldn't remotely secure regular financing. And of course the best feature is that the ultimate risk is bundled and shipped out of town, leaving nobody behind with a financial interest to check.
You could not do anything remotely like this prior to sub-prime. Local savings and loans, banks, and credit unions generally know their markets and in most places know their customers. If they see a portfolio of owner-occupied loans piling up in a neighborhood they know well is largely rentals you can bet they will look into that.
This is Real Estate. Lots of really good people. But also a lot of operators who will take any opening you give them. Believe me on that one, I have been on both sides of the Planning and Permit Counter.
Sub-prime was a huge opening. The only question is how much of the 5% to 20% shift was authentically owner-occupied and how much investors driving through that new hole.
I don't know but my suspision is that the breakdow
I don't know but my suspision is that the breakdown will vary a lot by market and the hotter the market the more the shift will be to investors. Foreclosure in Las Vegas may be a whole different thing than foreclosures in Peoria.
By 2004 there was a whole industry whose sole financial interest was in getting the loans written. And two investor classes that were eager to get in: one to extract the equity and the other to have serviced mortgages. There just wasn't anyone left to provide adult supervision, the bubble simply carried everyone to happy new heights. Until it slowed and mortgages begin to underperform. And people started looking at their exposure.
An investment model where both net worth and consumption income are both based on continual purchases and sales along with attendent re-fis at intervals to cash out is extraordinarily sensitive to both rates of appreciation and having access to willing lenders. A chill among either can easily develop into a cold in the other.
Its just a theory, but timing alone suggests that the cooling in the hotter, higher priced markets and smaller and then larger sub-prime lenders folding over the last six months are not unrelated.
Increased foreclosures does not automatically occupiers losing a house. Not if that house is a rental. It doesn't even mean the previous owner actually lost money. If you can get a loan with a LTV of 100% and have easy access to HELOCs to cash out accumulated equity you can have a nicely performing asset right to the point that you walk away. And nobody should be crying for the guy holding the securities. He was gladly pocketing the extra couple points of return.
So how much of this is predatory and how much is a mildly illegal business model that could not survive an appreciation slowdown? I don't know, but I expect we will be finding out.
All this talk about "loan products" is a joke as far as I'm concerned. I learned about Time Value of Money principles when I had to take Intermediate Accounting in order to sit for the CPA exam. All the these so called loan products do is shift principal around between time period and force the numbers in the interest and payment columns to adjust accordingly. Anyone who asks for an amortization schedule before signing a loan document would quickly see the problem with a bait and switch tactic by a broker. The problem is that J6Pack doesn't have a grasp of TVM in even the remotest sense. Let alone the foresight to ask for an amort schedule. The brokers know this and grift off of it through arbitrage to the wholesale lenders. Without the appropriate risk premium being ignored, these scumbag brokers would never be earning 10 to 20k / month in some other industry...most are not smart enough.
I too am located in SD. I am just as upset as you that I didn't give up Electrical Engineering and start flipping houses or simply become a broker. Hell, I know a guy who just simply became an appraiser after a few weeks study and started pulling 20k+ a month.
What has been entertaining though, is in the Digital Signal Processing news group, we've been getting various Wall Street types coming through. All wanting help on the mathematics to price out various derivative products. Maybe I should move to NY and start giving training courses?
Seems there is far more profit in juggling numbers than actually "doing something".
Are you renting and worried about what might happen if the landlord gets foreclosed on? You should be concerned, because once the bank forecloses, they can kick you out.
It's surprising to hear that in this tenant-friendly state, but that's what Jim Burmeister, eviction attorney here in Carlsbad, has confirmed.
How will you know that your landlord is in trouble?
Once the landlord has missed a few payments, the bank will post a notice of default on your front door. That's when the process begins, and you have at least 111 days before the bank can take the house. So you have some breathing room, but a couple of things will occur to you:
I missed the boat because I was 2000 miles away in Chicago prior to moving to SD in Sept 04 right at the height of the lunacy. I had a vested interest in figuring out what the hell was going on here when I knew that the incomes could not support the median home price based on having just conducted a job search there the year before. Something was really off and I ended up at the original Piggington site by Rich Toscano and that's how I became an RE Bear.
Oh I don't think there is a disconnect anymore. I know exactly what was happening now. It's quite obvious and the reason for the existence of all these economic and housing blogs. The problem is that J6Pack is only just now beginning to understand what has been happening. That's called information asymmetry and it's what the RE shills were counting on for sometime to come. Well, that time has ended now that the grim reapers of the subprime slime have come to call on them and there is no money to buy back the loans. Oh well, too bad, you're out of business now New Century; Accredited Home Lenders, Fremont, Own-It, and on and on.
Bottom Line: Trees don't grow to the sky and neither do home prices.
Az cowboy
I had never heard of adverse posession before, but having just read about it, it sounds like stealing. I do not know if you thought that a long lease is adverse posession, but it certainly is not. My landlady owns the property and we are renters and that is all we want to be. She was smart enough to have a 15 year loan on the property. She tried to sell it and could not break even but by that time she was in her 3rd year. We have been here two years. Look at an amortization table to see how much equity you get to keep on a conventional 15 year loan after five years. Our rent breaks her even in out of pocket costs each year, but she is getting to pocket half the money in the form of equity -- after 5 years the bank only gets about half. This is win win for her and for us. At first she didn't realize it and only wanted to rent it out for a year, but I drew up a spreadsheet for her to show her how it works, and she took it to her tax guy and he agreed. Across the street from us is a couple, highly educated (University economics professor) who took out another kind of loan and can't sell and can't break even on the rent. With quite a bit of effort we found someone who could actually afford to rent and benefit from it. It is likely that ten years from now our landlady will own her home free and clear and we will have bought it for her, happily -- win win. If we were to buy it from her for what she paid with a conventional mortgage we would be going backwards. If we were to buy it with cash, we would still have to pay half of what we pay in rent in taxes and repairs, and we would lose the income on the cash. Like I said it is a great match and the deal is to find someone who wins from renting and then you have to explain to them why it is a win even if they can't break even on a sale.
Just for comparison. In Spain the difference is that the originators are the same guys that issue the securities. Mortgage brokers are playing the same role, and I suspect with similar consequences.
March 28 (Bloomberg) -- U.S. Treasuries fell after the government's auction of two-year notes drew fewer bids from foreign investors than last month's sale, raising concern that overseas buyers may be pulling back from government securities.
But in any case, what Iran is building can not be described as "Civilians Infrastructure"
The need to stop what Iran is building is real and it does not matter if we like Bush or not or if what we think now (or thought 4 years ago) about the need to go to war in Iraq.
I'm a NY foreclosure atty. There are many legal differences between NY and other states (NY is a judicial forc state) but there are fewer practical ones. A mortgage trumps a lease. So if your landlord is being foreclosed on, the bank will kick you out. They have to so they can list the REO for sale. In NY you would be listed as a defendant in the forc action, just because you are in the house, regardless of whether you have a lease or are paying rent. If the landlord is in foreclosure and can't/won't reinstate, there is no reason to continue paying rent. It's money down the drain. He won't bother to spend the money or time to evict you because the foreclosure will move just as fast as the eviction and he has no incentive. Save the money and start looking. Also, no point in a long term lease or trying to negotiate with the Bank to stay in after the foreclosure. That's not the way they operate. They need to have the property vacant so they can begin marketing.
Jwm,
I'd say there are also quite a few mortgage brokers who would spit out their coffee if they saw an amortization schedule.
Quick Audit War Story:
Getting a confirm on a capital lease, for the balance of, say $50,000. The guy at the lease company told my colleague, "Nope, I have 10 payments left of $6,000 each. Son, that's a balance of $60,000. Believe me. I've been doing this for 20 years.
Worried: curious about your house without a bathroom...outhouse?
Amelia: what part of LA? I've heard co-workers discussing topics such as: how much can they raise the rent per year in order to cover higher payments, etc. Good luck.
I am an attorney, and while I am involved in real estate law, I have not done landlord/tenant law for quite some time. No attorney-client relationship exists between us, and you should get advice from a lawyer that will represent you. That being said, here is my take.
What does the notice say? And who is it from? You mentioned that it was from (delivered by) the city and says you have 30 days to vacate, but that doesn't make a lot of sense. Normally, 30 day notices to vacate are from the landlord (which this does not appear to be) to terminate a month-to-month tenancy, and these are allowed to be removed. An NOD is usually from the bank or the title company handling the foreclosure (although it could be posted by a sheriff or someone else) but it wouldn't usually talk of vacating the premises. If it is an eviction notice AFTER a foreclosure, then those are typically 3-day notices to quit (i.e., vacate) and would identify the bank as the owner of the property.
As to your questions.
The bank is not entitled to any rent from you as they do not own the property (they only have a lien against the property). The lien (the deed of trust) could have an assignment of rents clause in it, but the bank would have to give you notice to send them the rent. So, only the landlord is entitled to the rent, but I would consider not paying the rent (at least up to the amount of your deposit, since you are unlikely to get that back). One possible way to do this and still have a pretty good chance of avoiding an eviction (in the unlikely case that the landlord works out a way to keep the property) is to set up a separate bank account (with the account stated to be for the benefit of the landlord) and timely deposit the rent into that account. You will want to notify your landlord in writing (and keep a copy) of what you are doing. Judges rarely evict tenants who have the means to pay (and the separate account will show that you were not withholding money due to inability to pay).
No, a provision in a lease stating that the landlord won't sell the property does not prevent any foreclosure or cause a breach of the lease. Technically, the foreclosure will (in all likelihood) wipe out the lease. Absent some agreement (subordination, attornment, etc.), the foreclosure of a senior lien wipes out all junior liens. Whether a lien is senior or junior depends upon when it was recorded (first in time is senior).
Yes, I would start withholding rent and looking for a new place. See my comments to #1 above.
Talk to the family 3 doors down and see if they have any better understanding.
I hope this helps you with your decisions. Again, the deal with the notice is leaving me a little puzzled, though. Also, if you want to make sure that you get any notices that are recorded (e.g., NOD, etc.) against the property, you can file a simple document with the county recorder requesting that they mail a copy of all such docum
inquiringMind: It was an 1887 house. In those days people would wash in the kitchen in a tub in front of the stove that was heating the water. Old habits i guess die hard:-)
Take a look at the unit labor costs versus CPI chart. An interesting trend seems to be showing up ... may be a disappointment to the deflationists, and Bernanke watchers.
But that was a comment before it sank like a stone, but maybe not the most perceptive one.
Was it the surety of the remark that doomed this little stone?
Were some readers wondering how thoroughly Jas knows his history or just his ability to gauge fraud and deception at any time in the past?
Was Jas's intent to instill in the readership some methodology to economic success? Ok, maybe to confirm among the readership that the world be fraudulent and deceptive (should that be a deceptive difference) place?
Ok, so lots of us let it sink, thinking it possibly deceptive and not particularly perceptive.
Fraud: Maybe Jas has a point? In the western world 50 years ago you could in many places leave the house unlocked, or have a key some place handy. But it is not just 'them' who have become more dishonest. People seem now to become more self serving before they are serving of others. How many people fiddle their insurance claims? Drawing unemployment benefit was incredibly shameful but now its an entitlement that you paid for that you are silly if you do not apply for. All in all the needs of the community for order and joy are replaced by the greed of the individual to the point that people feel like suckers for not wanting to join in. So many people here are casting the first stone at the subprime late comers to the party as if they are themselves entirely blameless. No doubt most of these stone throwers are sitting on a big pile of dosh generated from price appreciation.
Hey! Dont get me wrong. I have my pile, But maybe he is without sin should be the first to cast the first stone?
"borrower demand for loans they obviously do not understand, and that are not anywhere close to being in their best interest, gets created."
So please prove that most borrowers did not understand the parameters of their 2/28 loan. Or is it you know better than we on how to make our financial decisions.
"I would argue, the "disintermediation" of national markets, technology, and securitization, which rely to a large extent on the intermediation of brokers, can function as much as supply creating demand than the other way around."
Again, a ridiculous argument. Are you suggesting all the loans created in the last few years were somehow conjured up by brokers and others, that borrowers did not participate in the decision, that somehow the borrowers were ethered up to think they wanted to buy that house, wanted to consolidate the mess of bills they created and all woke up one morning with a mortgage they didn't remember agreeing to?
You, like many others, are trying to find blame for a furious cycle of lending that is finally burning out. It was what it was. So what. Yea there are bad players out there in the mortgage business--what a shock. But the business remains because investors have money to put at risk for the right return, borrowers have interests that justify taking risks to borrow it. Most make out fine, some don't. When the the risks outweigh the reward or potential benefit, the players will leave the table and come back when the ROI is right.
By the way, brokers do compete against lenders to the extent that many of the wholesale lenders you speak of do not originate thru a retail channel. Most banks would love to see brokers go away so they could take on the business directly and CHARGE MORE for it.
Brokers are a pain in my rear, but they do something I cannot; originate loans cheaply.
Most of the discussion about the subprime business has been victim focused namely J6P but the otherside is the entity's that have lent money to the wholesale lenders and discovered that they are quickly become bagholders and suddenly want their funds back or have stopped providing money to IB and others.
What I like about this is that market forces has acted quickly to protect their capital and as a byproduct putting a hold for now on many of these creative lending models.
In this instance regulators have done nothing to assist either the orginal wholesale investors nor J6P but only protecting the middleman in this operation.
Well, ron, you have to concede that this particular middleman--the depository--is the bank regulator's only supervisory responsibility.
Federal bank regulators worry about consumers only to the extent that Congress passes consumer-protection laws and tells the regulators to enforce them. The same thing is true at the state level.
But we have laws on the books--FACTA is always my favorite example--that have been out there for years (since 2003 in FACTA's case) but are not yet enforced because Congress delegated the rule-making to the regulators (Fed and FTC in the case of FACTA), who have not yet written the rules, let alone started implementing them.
The big FACTA missing piece is the "risk based pricing notice" which was supposed to alert consumers to the fact that the rate or points charged to them were based on their FICO (or other facts in the credit report). Over three years since passage of FACTA, and over two years since the original implementation date, there are still no such disclosure rules promulgated by the Fed and the FTC.
So, you know, they're getting right on these issues of rapid change in the mortgage market: Congress didn't notice risk-based pricing until late 2003, and by early 2007 the regulators haven't yet figured out how to enforce the law. The Borg can win pretty easily at this rate.
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Thanks, Tanta, for educating in the details of an industry that I have known to be fraudulent for four years.
"helped fuel growth in homeownership"
Yeah calling Home Debtorship "homeownership" changes the fact? America's economic Propagandists are shameless liars.
As to the "increased competition," it has been for Fraud and not for the benefits of "consumers." Who can defraud and manipulate the most, or the best!
The real story of America over the past dozen years has been Exponential Growth in FRAUD, which is now very pervasive. It is so pervasive that it is considered normal.
Jas
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Mortgage Distribution:
Gross stats sometimes hide very ugly reality. Approx. 1/3rd have no mortgage or insignificant amount; another third have very manageable mortgages, and the last third have mortgages that are beyond their ability once the economy goes into recession. The last third will be under water once the home prices succumb to the Mean Reversion. Just imagine tens of millions of Home Debtors in deep troubles, and under deep water, at the worst times for the US economy since the 1950s.
Jas
Jas, I'm begging us all to think harder about the "competition" issue.
If you are a depository or nondepository who decides it's cheaper and more profitable to fire all your loan officers, close down your retail operations, and "originate" loans strictly on a wholesale basis, you have just "outsourced" your customer-contact business function to a bunch of brokers. How can you then consider them your competition?
Furthermore, it makes sense to do this not just because the business is cyclical--brokers don't get paid salaries and bennies during the low-volume lean times when the refis go away. They are also less regulated than you are. A lot of folks made the mistake of thinking that that meant that the broker took the "regulatory risk."
That, of course, is nonsense. We've just gotten a clear lesson in how you can't put the risk back to the broker: they don't have any money to take it back with.
Insofar as there are plenty of nondepository wholesalers--including the new cool Wall Street-owned ones--there is competition for the banks. But their competitors are using the same wholesale business model. So "competition" isn't going to fix the "intermediation" problem; it depends on it.
Bravo Tanta!! My only question would be your theory on why Braunstein decided to word her testimony in this way...what's between the lines here?
tanta:
Seems the regulators liked these new lending models based on the belief they would boast home ownership rates. My point was basically the investor class whoever that is were the ones that pulled the plug.
Thanks for the great post always learn from your efforts.
Very fine post, Tanta. It clarified things for me.
Test
Here's where I think the action is. You might call it A TALE OF TWO BAGS.
Bag One (not to be confused with The Cat in the Hat's Thing One) is the subprime mess.
Braunstein's testimony is intended to make absolutely certain that she/The Fed is not caught holding that bag. In contrast to what I originally thought, and with the help of your post, Tanta, her testimony is intended to squarely position the Fed as the good guy in the subprime mess.
And if that's the only bag (translation: soft-landing, Goldilocks, something about flatulence and silk), we need go no further.
Bag Two is why this blog exists:
Ya got trouble, my friend, right here,
I say, trouble right here in River City.
Trouble defined as the conjunction of a significant and sustained slowdown in consumer spending and Fannie and Freddy needing a bailout.
How will Bernanke avoid holding Bag Two?
I think the issue here is that the brokers are accessing lending from for example Deutche, Barclays and HSBC and so forth. For an American bank that surely is direct competition? Also the originators like New dont access banks as such necessarily but instead get access to capital markets, who because of their wonderful techniques, can price risk more cheaply than traditional methods.
This is a very similar situation to what the UK was faced with in the 1980's. It was hard to get a loan in the UK that was not a traditional loan type. For example my first house had no bathroom and the Realtor expressed great surprise i got a mortgage at all for such a house and for such an amount and so quickly. It was arranged very very quickly by a broker and an American bank who was prepared to do the deal based on 90% valuation and 3.5 earnings. A more conservative uk bank would not lend on a house without a bathroom - it has to be sold quickly if i default - and would lend at say 2.5/3 and would only do 80%. Later via the same broker i got other loans with Bear stearns and city bank which were very different kinds of loans to that which you could get in main street. Meanwhile progressively the other UK banks began to offer the same products as for example interest only loans. It seemed they only did this because of the competition for lending.
There is also according to Bernanke/Tanta the issue of a national bank being supervised by the fed while others are not and therefore they cannot compete with what the broker offers.
Newcomers can offer the crazy deals to build market share so in that sense they are competing for share with established banks who are not inclined to change practices so quickly.
Is Sandra another political hack? What was her background before current position?
I agree with Arbogast. Especially after listing to BB today. He squirmed a bit on the subject of the responsibility of the Fed and seemed to side step the issue as if the fed could not have upped the ante on the issue.
Rediculous,
Saying that the increased use of these mortgages was due to a "pent up demand", is like saying the increase demand for gold pans during the gold rush was due to a previously unfilled "pent up demand".
These were products that were seen as a means to an end. That end not being permanant homeownership, but for the one common and constant demand: The demand for MONEY.
People don't want more roads to have roads, but for where they can take you. The demand for these mortgages was the same as the demand for Tulips, not for the flower's sake but for what it could get you.
I'm not sure what Braunstein's background is, but I know what her current job is: she's in the "disclosure" side. The Federal Reserve has all kinds of authority to make regulations about how lenders disclose things--and when--that are based on statutes, not supervisory responsibilities. In other words, Congress passes a law with some generality, which specifically gives the Federal Reserve the responsibility and authority to promulate regulations that implement the law. Generally, the DoJ is given the responsibility and authority for enforcement of those laws.
So even depositories who are not supervised by the Fed (because they are supervised by OCC or OTS or FDIC or whatever) are subject to the Fed's regulations. And when they do one of their "Interagency" things, that means they all wrote the regs jointly. The Nontraditional Mortgage Guidance is an "Interagency" document. That's why it took so long to get it written--it's just like any other committee work.
Braunstein is part of the Fed that comes up with rules for written disclosures to consumers. She is by nature inclined to see the problem as an information shortage that can be fixed by handing the borrower some piece of paper--often one drafted by lawyers, which really helps on the "accessibility" front. The idea here is that you can do certain things, but only if you disclose it fully up front.
For instance, TILA and HOEPA do not actually outlaw some kinds of high-cost lending. They force some additional restrictions on high-cost lending, but largely what they do is require more disclosures. So it's OK in some circumstances to gouge a customer, as long as you give them a disclosure that says so. My own view is that if people were that financially literate and numerate they'd pick up the problem when reading their notes, and that more legalistic disclosures don't help, but the Fed likes to think otherwise.
I'm trying to get past "more information will solve the problem."
"promulate" = promulgate. Sorry.
Tanta,
The only mention of Alt-A I can find in her tetimony is in a footnote : "....Alt-A, or "near-prime," which is designed for borrowers with good credit records who do not meet standard guidelines for documentation requirements, debt-to-income ratios, or loan-to-value ratios."
I saw an article the other day that referred to ALt-A the same way.
But my understanding is that this the way Alt-A used to be defined. A FICO score of above 720 was generally needed for both prime and Alt-A., but Alt-As lacked some documentation, DTI, etc.
Now it seems subprime is everything below 620-640 or so, and anything between that and 720 is called Alt-A. In other words, Alt-A now refers to both the old category of prime-FICO-but-lacking-something, and a new category of what would formally be called high-end subprime. But the powers that be, seem to think things are still the same as they were 15 years ago.
How firm were these boundries in the past?
Roubini has said that 50% of mortgages last year were virtually subprime, 20% subprime plus 20% Alt-A gets you to 40%...
CR If you listened to yesterday's congressional testimonies on subprime, it was pointed out on more than one occassion that the losses in subprime caused net gains for the brokers, etc. I think they meant that the addition of these unqualified buyers to the league of "homeowners" caused higher prices and the higher prices caused higher fees, much in excess of what they would have been otherwise.
Bob, there isn't much of a past for Alt-A. So it's not that there used to be a clear distinction that got muddied up; it's more a case that a big wild varied heterogenous market is trying to be captured with two terms, "subprime" and "Alt-A."
Insofar as there were the old days, "subprime" used to be a lot more like "hard money" lending. High rates, but also very low LTVs and incredible appraisal due diligence. If you wanted to learn how to read an appraisal, you asked a subprime lender. It was all they had, after all.
"Alt-A" grew out of the jumbo market as much as the "near-prime" market. In my view, Alt-A drove the housing bubble much more directly than subprime. Subprime drove the MEW bubble. They started to overlap a lot when they started fighting over the same cash-out refi borrowers. Believe me, when Alt-A lenders started offering 90% cash-outs (traditional prime limit was 75%), I freaked. Then the subprimers started offering 100% cash-outs. (They had, certainly, in the 90s offered HELOCs up to 125%, and got burned to a crisp over it. But it's one thing to put a smaller 125% HELOC over a lower-rate larger first lien. It's another thing entirely to refinance 100% of the value of your home at the high rate. Christ.)
So, anyway, the answer is that we're watching history in the making. That's why we haven't yet "decided" what these terms mean.
So as I look at my rate sheets today, it is still possible to get 100% stated loans, just a little higher credit scores and a few more months reserves.
Everyone from AHM to US Bank reworked their Alt-A matrix. But in the last week there has not been any new guide updates. It will be curious to see if and when we get round 2 or if that is it for the short term.
Subprime guys are working on new programs to roll out to replace to old.
As long there is money to be made and it is legal, lenders will create the product for it.
Might explain why my 6 yr old got a Visa application. Maybe her allowance will qualify as "stated income". She has been an owner/operator of a lemonade stand for over 2 years.....
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"Jas, I'm begging us all to think harder about the "competition" issue."
Actually, I have already thought thru -- Competition, devoid of morality (or in an amoral society that we have been led into), brings the general conduct to the Lowest Common Denominator! Not unlike a high school tramp.
Ethics are central to prosperous societies and as ethics fall so do the societies. Within the broader white society ethics in America were much higher than at the present. Today, fraud and deception are the surest path to economic success, much more so than at any time in the past that I have knowledge of. Rockefeller was no Robber Barron compared to Bill Gates, who is a Crooks (his wealth is rooted in Scam Options accounting fraud). Most Americans dont know what fraud is. BTW, Rockefeller was an accountant. Let us not forget that Adam Smith was a moral philosopher.
Jas
Hi Everyone;
I found that I agreed with several parts of the original posting, but reach at times different conclusions.
Words Are Important, so let me explain my points in detail.
In the section of the article as quoted below:
SB: "This has resulted in increased competition and a wide variety of mortgage products and choices for consumers, in a market in which mortgage brokers and mortgage finance companies compete aggressively with traditional banks to offer new products to would-be homeowners. [My emphasis]"
Tanta: "In what strange world are mortgage brokers competitors of banks?"
I beleive the "competitors" reference is clearly the "finance companies" which are not "Depositories" and largely not subject to the same regulations as depositories. These finance companies (Country Wide, etc) exist because of the securitization of mortgages. The role of Brokers is as the article indicates Not one of Disintermediation (Haven't heard that term since the 90's!) but one of intermediation. It matters not a whit whether the mortgage is wholesales or retailed, Brokers have changed the way individuals seek mortgages. Some Brokers simply represent mortgage products designed and offered by originators (Depositories and Finance Companies. The Mortgage Brokering business is very competitive as well. WHile they are still paid as 'Agents' smoe of the larger, more savvy brokers have in fact have gone to different originators with their own design for mortgage product. Brokers have at that point created "New product". While the contracts are still with the originator, and they get paid as an 'agent'they have also greatly blurred the line between themselves and regulators and bear some of the risk/reward responsibility. I think this is a key point in SB's testimony.
The bottom line here is still: Mortgages are originated by well regulated Depositories, relatively un-regulated Finance Companies. In the recent period, mortgage securitization has significantly reduced the risk to these originators and Brokers (some of whom also design the offering) such that competition has led to the introduction of several new mortgage products with more broad range of variable terms and conditions. Many of these new products targeted persons who may not have qualified for more traditional mortgage terms and conditions.
The data support this point.
SB: "In 1994, fewer than 5 percent of mortgage originations were subprime, but by 2005 about 20 percent of new mortgage loans were subprime.
Did these products "fuel homeownership". That's debatable at best, but the data do show that 9-11% are First Time Buyers and many others are "Move-Up" buyers. I'm sorry - I don't have data on how many, but both are "Purchase Business".
These new Mortgage products also fueled re-financing activities and most importantly "Cash-Out Refinance" activities.
So - What went wrong? I don't think we have conclusive data at this
Credibility in the financial institutions is at risk.
Two years ago, no one at the Fed loudly forwarned of the risks of these products. Instead you had Greenspan suggesting that you were a fool to pay for a traditional 30 year fixed.
So when we ask Bernanke today about "spill-over" his answer is that he doesn't see any (RIGHT NOW).
"Well, at 5000 feet, jumping from a plane without a parachute isn't dangerous to your health. At 1000 feet we still don't see any health deterioration in the skydiver aside from some indication of slight shock. However shock is rarely fatal and we don't expect that the shock will have any long term adverse effects on his health. At 500 feet, we still see no evidence of anything that would indicate that jumping from a plane without a parachute is fatal. Although there is perhaps some risk of hitting the ground, we haven't seen it yet."
How about a discussion on where it looks like we're going and not where we are now?
W
CR, like brokers, Banks are in the real estate market today for the fees and so they are competitors. They don't want to hold onto loans, they want to keep their assets free for making new loans or investing in other types of assets. I can't see it any other way. One of my siblings is an attorney at one of the big three law firms in NYC. All she does all day is turn loans into securities -- she pools and tranches them and sells them. It started up big time in 2000. In the 1990s over 70% of the value of homes was equity -- that equity was not available for investing and US entities wanted to invest overseas to grow their customer base. So somehow the idea of securitizing homes started up and somehow at the same time home prices doubled (increasing demand via subprime lending drove prices up)and ergo money was free to invest overseas and also, China, which has currency that is not tradeable, found a place to invest all those dollars they had earned but couldn't spend in China.
Tanta,
Thanks for the answer. So I guess it always was a vague category.
WHile they are still paid as 'Agents' smoe of the larger, more savvy brokers have in fact have gone to different originators with their own design for mortgage product. Brokers have at that point created "New product".
I'd like to see an example or two of what you're talking about. I suspect that it isn't what people like me tend to think of with the term "mortgage product." It's probably yet one more way to juggle an eligibility matrix with a rate sheet on some existing product like hybrid ARM, neg am ARM, IO, etc., so that the broker can make more marginal loans and/or get paid more for them.
In any case, the "exotic" products that are now under regulatory scrutiny were not invented by mortgage brokers. They've been around for a long time. They just got offered to the wrong group of borrowers, with insufficient underwriting standards and other kinds of due diligence. This happened because the big "innovations" were on pricing, not product design.
Anyone who wants to tell me that "competition" has improved risk-based pricing is free to do so. How did we manage to compete the risks down to a level that undercuts the banks? Did someone invent a new way to eliminate risk, which has now driven down the cost of credit? Well, the answer is yes, that's the national-technological-securitization thing. But of course it has nothing to do with competition, unless you're talking about competing to see who can find more substitute bagholders fastest.
Zliar loan tip of the ice berg: Blogger: Blog not found
All the disclosure in the world means nothing if borrowers don't understand what they are signing. That's why this is the most chilling comment from yesterday's hearing:
"I don't think there is one borrower in a thousand that understands the papers that they sign." -- John Robbins, chairman, Mortgage Bankers Association (as reported by the WashPost)
To all you renters out there -- now is a great time to pressure landlords for MULTI-YEAR lock ins. My landlady just signed a lease for four years, where I can get out with 2 months notice, while she is committed for 4 years at the current price plus $25 a month ($300 a year) at the end of the first two years. LOCK IN LONG TERM NOW -- if there was ever a time to push your advantage it is now. We sold when we last moved and we decided to take the $250,000 we would normally use for a home and invest it instead -- I'm a long term OMB and Fed watcher and I knew home prices would drop. For two years it was painful watching home prices raise and getting low interest, but now that money is paying our rent on a 2100 sq ft house.
hello all
i was directed to this blog by a friend, after i told her of our predicament.
we're renting right now, in LA, from a couple who bought their home in '04. They also have 2 other properties, one in Arizona and the other somewhere in the midwest. The one in Arizona was also purchased in '04.
2 months ago, the husband calls us to ask us if we want to buy the house we're renting. They have one of these newfangled loans that lets them pay a minimum amount that doesn't even cover interest. Anyway, it shot up because, he said, the principal exceeded some trigger value. Now their payments (mortgage+taxes+ins) wer twice what we were paying them in rent. Hence the offer to sell to us. We politely thanked him and reminded him of the lease terms.
2 weeks ago, he calls us to tell us that he hasn't paid the mortgage for the last two months. He's trying to return the house to the bank without going through foreclosure. The reason: house values here have dropped to the same level as when he purchased the home, and his mortgage broker cannot find re-financing for him.
Yesterday, a gal from the city drops by and tacks a notice on the front door (can't be removed by us, she says), giving us 30 days to vacate the property before "further action is considered." The landlord claims he doesn't know what's happenning - his lender will not return his calls or talk to him (he doesn't even know if they are in business).
My questions to this crew:
1. I have the lenders name. How do I get to talk to someone there to accept our rent payment while they dispose of the property. We need time to find another rental here.
I'm not really sure what you folks can help me with, but I just wanted to vent a bit - let you know that there are people suffering because of this recent real estate mania...
amelia, listen to your lawyer friend.
LA should have a tenants' rights group somewhere who can assist you with the specifics for your state, county, and city. You should be able to find it with Google, or ask your lawyer friend.
I appreciate the vote of confidence in the blog, but we aren't lawyers and we don't give legal advice, and you really should be wary about taking advice from anonymous bloggers and commenters. They haven't all got the sense the Calculated Risk crowd does (and honestly I'm not sure about all the commenters, as I'm sure the other commenters will agree).
Good luck.
Amelia, not advice, you don't know me, I'm just thinking out loud here. Really, really, not advice.
I was just daydreaming that unless there are reall strong rent controls and you are covered there's no reason to pay rent. There may even be several great reason to not pay. Theoretically you don't have a valid lease because almost certainly your landlord is claiming owner occupancy and such. The bank will show you the loan docs part where your landlord violated terms and your lease is not valid but pay up until things get straightened out. Straightened out for the bank means the sherrif kicking you out and then try to get your money back. Don't want no complaints from the experts here about what's legal or allowed, I'm just thinkin' out loud. So cancel any checks, pay nothing more, keep living there using the money to find a new place. Just thinkin' out loud.
In a foreclosure, a renters biggest problem is that the lender will have to name the tenent in the suit in order to foreclose. If I were you I certainly would not stop paying or do anything that could put you at fault but I would find an attorney familiar with this this situation as you do not want to be named in the suit against your landlord. I was very sure to structure my lease (I'm the tenent but I wrote the lease) so that I could not get into this situation as I anticipated landlords not paying their mortgage. Also renters today must go to town hall (I did) to make certain the landlord can afford to lease without going backwards. We turned down many rentals before we found our present one because we didn't want a landlord who was not being keep whole by our rent.
"In 1994, fewer than 5 percent of mortgage originations were subprime, but by 2005 about 20 percent of new mortgage loans were subprime."
Ah yes which begs the question: how many of those loans are truly owner occupied? The key here being that just because a loan is written owner-occ doesn't mean that it is. Now this is clearly mortgage fraud, as is mis-stating income or assets on a stated/stated loan. But I can't think of a particular local agency that would possbily be in a position to check. More to the point the only person whose financial interest is being served by knowing the house is owner-occupied is the guy holding the securitized instrument. And realistically how could be unpackage it and check even if he wanted to.
Which in turn sheds light on this:
"It is hard to build a MEW market with a bunch of renters."
Well no it isn't. You just have to find a compliant originator who is willing to work with the five or six major institutions to write loans. While not pressing you too hard on why on paper you seem to be moving every six months and failing to notify the lender to shut down that owner occupied HELOC. Given the right combination of rental and housing markets and a little willingness to wink at statutes for mortgage fraud you can combine sub-prime and MEW and grow your total net worth astonishingly fast. It is an old principle called "Playing with other people's money"
But boy is it sensitive to maintaining access to credit. And oddly enough the FHA and the VA are kind of sensitive about how much they are looking to guarantee and want to have the security of knowing the house is owner-occupied. A lot of talk about sub-prime revolves around people with bad credit as opposed to people who have fully extended their credit. Just because your net worth is in the millions and you have a 770 FICO doesn't mean you can go conventional to pick up that ninth house.
If you can work the system, you can buy residential investment properties with real income and assets that wouldn't remotely secure regular financing. And of course the best feature is that the ultimate risk is bundled and shipped out of town, leaving nobody behind with a financial interest to check.
You could not do anything remotely like this prior to sub-prime. Local savings and loans, banks, and credit unions generally know their markets and in most places know their customers. If they see a portfolio of owner-occupied loans piling up in a neighborhood they know well is largely rentals you can bet they will look into that.
This is Real Estate. Lots of really good people. But also a lot of operators who will take any opening you give them. Believe me on that one, I have been on both sides of the Planning and Permit Counter.
Sub-prime was a huge opening. The only question is how much of the 5% to 20% shift was authentically owner-occupied and how much investors driving through that new hole.
I don't know but my suspision is that the breakdow
(continued from 3:34
I don't know but my suspision is that the breakdown will vary a lot by market and the hotter the market the more the shift will be to investors. Foreclosure in Las Vegas may be a whole different thing than foreclosures in Peoria.
By 2004 there was a whole industry whose sole financial interest was in getting the loans written. And two investor classes that were eager to get in: one to extract the equity and the other to have serviced mortgages. There just wasn't anyone left to provide adult supervision, the bubble simply carried everyone to happy new heights. Until it slowed and mortgages begin to underperform. And people started looking at their exposure.
An investment model where both net worth and consumption income are both based on continual purchases and sales along with attendent re-fis at intervals to cash out is extraordinarily sensitive to both rates of appreciation and having access to willing lenders. A chill among either can easily develop into a cold in the other.
Its just a theory, but timing alone suggests that the cooling in the hotter, higher priced markets and smaller and then larger sub-prime lenders folding over the last six months are not unrelated.
Increased foreclosures does not automatically occupiers losing a house. Not if that house is a rental. It doesn't even mean the previous owner actually lost money. If you can get a loan with a LTV of 100% and have easy access to HELOCs to cash out accumulated equity you can have a nicely performing asset right to the point that you walk away. And nobody should be crying for the guy holding the securities. He was gladly pocketing the extra couple points of return.
So how much of this is predatory and how much is a mildly illegal business model that could not survive an appreciation slowdown? I don't know, but I expect we will be finding out.
renter -
I'd be interested in your thoughts on "adverse possession".
Tanta, Et al,
All this talk about "loan products" is a joke as far as I'm concerned. I learned about Time Value of Money principles when I had to take Intermediate Accounting in order to sit for the CPA exam. All the these so called loan products do is shift principal around between time period and force the numbers in the interest and payment columns to adjust accordingly. Anyone who asks for an amortization schedule before signing a loan document would quickly see the problem with a bait and switch tactic by a broker. The problem is that J6Pack doesn't have a grasp of TVM in even the remotest sense. Let alone the foresight to ask for an amort schedule. The brokers know this and grift off of it through arbitrage to the wholesale lenders. Without the appropriate risk premium being ignored, these scumbag brokers would never be earning 10 to 20k / month in some other industry...most are not smart enough.
Jwm In SD,
I too am located in SD. I am just as upset as you that I didn't give up Electrical Engineering and start flipping houses or simply become a broker. Hell, I know a guy who just simply became an appraiser after a few weeks study and started pulling 20k+ a month.
We truly missed the boat
What has been entertaining though, is in the Digital Signal Processing news group, we've been getting various Wall Street types coming through. All wanting help on the mathematics to price out various derivative products. Maybe I should move to NY and start giving training courses?
Seems there is far more profit in juggling numbers than actually "doing something".
amelia
Are you renting and worried about what might happen if the landlord gets foreclosed on? You should be concerned, because once the bank forecloses, they can kick you out.
It's surprising to hear that in this tenant-friendly state, but that's what Jim Burmeister, eviction attorney here in Carlsbad, has confirmed.
How will you know that your landlord is in trouble?
Once the landlord has missed a few payments, the bank will post a notice of default on your front door. That's when the process begins, and you have at least 111 days before the bank can take the house. So you have some breathing room, but a couple of things will occur to you:
bubbleinfo.com » Page not found
For What it's worth sorry.
Napolean,
I missed the boat because I was 2000 miles away in Chicago prior to moving to SD in Sept 04 right at the height of the lunacy. I had a vested interest in figuring out what the hell was going on here when I knew that the incomes could not support the median home price based on having just conducted a job search there the year before. Something was really off and I ended up at the original Piggington site by Rich Toscano and that's how I became an RE Bear.
At the beginning of 2003 I felt things were a little "off". Yet somehow it just seems to keep chugging along. I don't get it either.
I read these sites, I look around, and yes, there seems to be a GIANT disconnect somewhere.
Oh I don't think there is a disconnect anymore. I know exactly what was happening now. It's quite obvious and the reason for the existence of all these economic and housing blogs. The problem is that J6Pack is only just now beginning to understand what has been happening. That's called information asymmetry and it's what the RE shills were counting on for sometime to come. Well, that time has ended now that the grim reapers of the subprime slime have come to call on them and there is no money to buy back the loans. Oh well, too bad, you're out of business now New Century; Accredited Home Lenders, Fremont, Own-It, and on and on.
Bottom Line: Trees don't grow to the sky and neither do home prices.
Az cowboy
I had never heard of adverse posession before, but having just read about it, it sounds like stealing. I do not know if you thought that a long lease is adverse posession, but it certainly is not. My landlady owns the property and we are renters and that is all we want to be. She was smart enough to have a 15 year loan on the property. She tried to sell it and could not break even but by that time she was in her 3rd year. We have been here two years. Look at an amortization table to see how much equity you get to keep on a conventional 15 year loan after five years. Our rent breaks her even in out of pocket costs each year, but she is getting to pocket half the money in the form of equity -- after 5 years the bank only gets about half. This is win win for her and for us. At first she didn't realize it and only wanted to rent it out for a year, but I drew up a spreadsheet for her to show her how it works, and she took it to her tax guy and he agreed. Across the street from us is a couple, highly educated (University economics professor) who took out another kind of loan and can't sell and can't break even on the rent. With quite a bit of effort we found someone who could actually afford to rent and benefit from it. It is likely that ten years from now our landlady will own her home free and clear and we will have bought it for her, happily -- win win. If we were to buy it from her for what she paid with a conventional mortgage we would be going backwards. If we were to buy it with cash, we would still have to pay half of what we pay in rent in taxes and repairs, and we would lose the income on the cash. Like I said it is a great match and the deal is to find someone who wins from renting and then you have to explain to them why it is a win even if they can't break even on a sale.
Amazing:
IIS 7.0 Detailed Error - 404.0 - Not Found
Yal,
That represents the very tip of the coming tsunami (mixed metaphor alert!) of scapegoating that is about to occur.
A disastrous war, now about to be compounded by a futile attack on Iran's civilian infrastructure.
A financial system in shambles.
A worthless currency.
An empty husk of a manufacturing base.
...
Yeah, I think people will be looking pretty hard for scapegoats.
Prepare the spits, comrades, we've got Pigmen to roast!!!
Be sure to peel 'em before you eat 'em, those Brooks Brothers coats taste like shit.
Just for comparison. In Spain the difference is that the originators are the same guys that issue the securities. Mortgage brokers are playing the same role, and I suspect with similar consequences.
Treasuries Fall After Decline in Foreign Bidders During Auction
March 28 (Bloomberg) -- U.S. Treasuries fell after the government's auction of two-year notes drew fewer bids from foreign investors than last month's sale, raising concern that overseas buyers may be pulling back from government securities.
[chortle]......[snort].........April 6th, hey?....
arbogast,
I don't think anything will occur in April 6th.
But in any case, what Iran is building can not be described as "Civilians Infrastructure"
The need to stop what Iran is building is real and it does not matter if we like Bush or not or if what we think now (or thought 4 years ago) about the need to go to war in Iraq.
I'm a NY foreclosure atty. There are many legal differences between NY and other states (NY is a judicial forc state) but there are fewer practical ones. A mortgage trumps a lease. So if your landlord is being foreclosed on, the bank will kick you out. They have to so they can list the REO for sale. In NY you would be listed as a defendant in the forc action, just because you are in the house, regardless of whether you have a lease or are paying rent. If the landlord is in foreclosure and can't/won't reinstate, there is no reason to continue paying rent. It's money down the drain. He won't bother to spend the money or time to evict you because the foreclosure will move just as fast as the eviction and he has no incentive. Save the money and start looking. Also, no point in a long term lease or trying to negotiate with the Bank to stay in after the foreclosure. That's not the way they operate. They need to have the property vacant so they can begin marketing.
this prety much sums it up:
Stories published November 3, 2004Las Vegas Sun
and this is lovely story as well:
On further review: Home prices fell in February (phillyBurbs.com) | Business Columnist
CR you would like this one (I prefer the previous one:-)
Jwm,
I'd say there are also quite a few mortgage brokers who would spit out their coffee if they saw an amortization schedule.
Quick Audit War Story:
Getting a confirm on a capital lease, for the balance of, say $50,000. The guy at the lease company told my colleague, "Nope, I have 10 payments left of $6,000 each. Son, that's a balance of $60,000. Believe me. I've been doing this for 20 years.
Worried: curious about your house without a bathroom...outhouse?
Amelia: what part of LA? I've heard co-workers discussing topics such as: how much can they raise the rent per year in order to cover higher payments, etc. Good luck.
Amelia:
I am an attorney, and while I am involved in real estate law, I have not done landlord/tenant law for quite some time. No attorney-client relationship exists between us, and you should get advice from a lawyer that will represent you. That being said, here is my take.
What does the notice say? And who is it from? You mentioned that it was from (delivered by) the city and says you have 30 days to vacate, but that doesn't make a lot of sense. Normally, 30 day notices to vacate are from the landlord (which this does not appear to be) to terminate a month-to-month tenancy, and these are allowed to be removed. An NOD is usually from the bank or the title company handling the foreclosure (although it could be posted by a sheriff or someone else) but it wouldn't usually talk of vacating the premises. If it is an eviction notice AFTER a foreclosure, then those are typically 3-day notices to quit (i.e., vacate) and would identify the bank as the owner of the property.
As to your questions.
I hope this helps you with your decisions. Again, the deal with the notice is leaving me a little puzzled, though. Also, if you want to make sure that you get any notices that are recorded (e.g., NOD, etc.) against the property, you can file a simple document with the county recorder requesting that they mail a copy of all such docum
inquiringMind: It was an 1887 house. In those days people would wash in the kitchen in a tub in front of the stove that was heating the water. Old habits i guess die hard:-)
"Today, fraud and deception are the surest path to economic success, much more so than at any time in the past"
I like how your most perceptive post sank like a stone without a comment, Jas.
Take a look at the unit labor costs versus CPI chart. An interesting trend seems to be showing up ... may be a disappointment to the deflationists, and Bernanke watchers.
http://tinyurl.com/2h9qlp
But that was a comment before it sank like a stone, but maybe not the most perceptive one.
Was it the surety of the remark that doomed this little stone?
Were some readers wondering how thoroughly Jas knows his history or just his ability to gauge fraud and deception at any time in the past?
Was Jas's intent to instill in the readership some methodology to economic success? Ok, maybe to confirm among the readership that the world be fraudulent and deceptive (should that be a deceptive difference) place?
Ok, so lots of us let it sink, thinking it possibly deceptive and not particularly perceptive.
I'm not surprised at the denial, which is why Jas's comment sank like a stone.
There's plenty to say but I've learned that there's much point. Plenty of increase in fraud if you want to see it.
Fraud: Maybe Jas has a point? In the western world 50 years ago you could in many places leave the house unlocked, or have a key some place handy. But it is not just 'them' who have become more dishonest. People seem now to become more self serving before they are serving of others. How many people fiddle their insurance claims? Drawing unemployment benefit was incredibly shameful but now its an entitlement that you paid for that you are silly if you do not apply for. All in all the needs of the community for order and joy are replaced by the greed of the individual to the point that people feel like suckers for not wanting to join in. So many people here are casting the first stone at the subprime late comers to the party as if they are themselves entirely blameless. No doubt most of these stone throwers are sitting on a big pile of dosh generated from price appreciation.
Hey! Dont get me wrong. I have my pile, But maybe he is without sin should be the first to cast the first stone?
"of predatory lending, which is a subset of subprime lending"
This is a ridiculous and utterly uninformed statement.
"borrower demand for loans they obviously do not understand, and that are not anywhere close to being in their best interest, gets created."
So please prove that most borrowers did not understand the parameters of their 2/28 loan. Or is it you know better than we on how to make our financial decisions.
"I would argue, the "disintermediation" of national markets, technology, and securitization, which rely to a large extent on the intermediation of brokers, can function as much as supply creating demand than the other way around."
Again, a ridiculous argument. Are you suggesting all the loans created in the last few years were somehow conjured up by brokers and others, that borrowers did not participate in the decision, that somehow the borrowers were ethered up to think they wanted to buy that house, wanted to consolidate the mess of bills they created and all woke up one morning with a mortgage they didn't remember agreeing to?
You, like many others, are trying to find blame for a furious cycle of lending that is finally burning out. It was what it was. So what. Yea there are bad players out there in the mortgage business--what a shock. But the business remains because investors have money to put at risk for the right return, borrowers have interests that justify taking risks to borrow it. Most make out fine, some don't. When the the risks outweigh the reward or potential benefit, the players will leave the table and come back when the ROI is right.
By the way, brokers do compete against lenders to the extent that many of the wholesale lenders you speak of do not originate thru a retail channel. Most banks would love to see brokers go away so they could take on the business directly and CHARGE MORE for it.
Brokers are a pain in my rear, but they do something I cannot; originate loans cheaply.