Housing: Subprime Machine and Impact on Communities
Submitted by
CalculatedRisk on Fri, 03/23/2007 - 8:31am (141 comments)
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OT: someone linked the Cramer video yesterday and look where it ended up today:
Money News: Financial, Economy, Stock Market & Real Estate Stories - USATODAY.com
not good for market confidence the gig is up when j6pk figures out markets are rigged!
I love this part "Renters moved in". OMG a renter, you don't say. Well there goes the neighborhood. We can't have renters in our community, what if someone was to find out. Is it just me or did RE agents try to make renters out to be "second rate" to sell homes?
Roger Smith, the ex-CEO at GM mad a great observation about 'automation'...
"it allows you to make junk faster"
Anyone who has ever run a highly automated process knows that process has to be understood FAR better than a manual or 'semi-automatic' process. Every single possibility needs to be considered... either as a 'hard wired' response or as an adaptive control loop.
Even then, before going 'live' you need to model, prototype, run pre-production live simulation before you actually 'go live'. The up front cost to do all this is frequently astronomical - the cost to not do it even higher.
And even with all that the pookie frequently hits the floor and runs out into the street the first few times you push the button (been there). Engineers wear hard hats, big rubber boots & splash aprons working in this environment for a very good reason.
It is no surprise 'automated underwriting' which I'd guess is considerably more complex from an input control perspective is fairing so poorly.
Very sharp observation.
Indeed, if a person puts 10% down - who cares what's his credit score? If he puts 0% down, does his credit score really represents his ability and willingness to pay the debt?
The probelm is that 80% LTV was replaced by 100%LTV (and now 95% LTV.)
95% is still too high.
In many cases the 5% are being receieved as a gift, or as a loan for some loan shark or some fraud that is involving a lick-back from the seller himself.
5% is better than 0% down but is not enough for making the buyer get enough "skin in the game". Home ownership is a good thing but when the interest-only and 5% down means that the buyer does not actually own any part of his home and is being mortgage to the gills the advantages of "home ownership" are washed.
There must be a return to the good old 20% down a number that shows also that the buyer is capable to save for this down payment. The 20% down is the best indicator of the buyer credit worthiness and a best proof that he will strive hard to protect his investment.
The 20% down also mean one more thing: Buyers will start thinking about the price of homes and not just the monthly payment his is the most important aspect of returning sanity to the housing market.
Please write letters to congress and to media along these line: sanity and affordability in housing will be done by correcting prices and return of the 20% down payment.
Was reading that Loan City was the leader in automated lending software, coming from San Jose that makes sense.
Great Point Dryfly!
Right, make 20% down the law. For God's sake we can't have the not-wealthy buying homes, HORRORS!
Anthony, relitters say "renters moved in" because renters don't pay relitter commissions. To say "absentee landlord-speculators who allow transient renters to trash the place because they bought at fire-sale prices moved in" would be to find yourself on the buttered side of the bread.
Clearly the relative importance of the credit score increased for no other reason than that it was easiest to process and parse.
If a loan applicant signs th eFederal form allowing the lender to request his/her tax records, can they be sent to the lender electronically? It would seem it would have been fairly easy to incorporate that into the softwarte as well.
My favorite part of the article...
New Century Financial, second to HSBC in subprime lending last year and now on the brink of bankruptcy, promised mortgage brokers on its Web site that with its FastQual automated underwriting system, Well give you loan answers in just 12 seconds!
Heck that's almost as fast as 'Rock, Paper, Scissors'... the question is which gives better results?
Anthony Fleming: Funny isn't it! they would rather have someone who can't keep up with the home maintance, have a high likely hood of going BK rather then someone who pays the rent on time.LOL
Renters also do not believe the mantra of the homeownership religon, which bothers some folks who needs to be reassured that those high mortgage payments are ok.
Right, make 20% down the law. For God's sake we can't have the not-wealthy buying homes, HORRORS!
Hey banker - I got an even better idea... and faster to implement. Let's buy the all the 'non-wealthy' new homes and do it with YOUR money.
It would be pretty easy to automate too... they ask, our program says 'yes' and you give them your money. Even I could write that code.
FirstFed (FED) new 8-K monthly report:
Feb '06 originations $215
Feb '07 originations $79
Tanta,
Wrong again. There is an entire industry of realtors who make money leasing/finding rentors. Sometimes the renter pays the commission, sometimes the property owner. Just sayin'.
dryfly, I swear I'd actually volunteer to work on an automated underwriting project if you'd be part of the team. People just laugh at my "splash apron."
The thing I liked about the NYT piece was the recognition that human underwriters can get browbeaten into signing off on bad loans:
Samir Rohatgi, a vice president at MindBox, said that old system of manual underwriting actually encouraged loan officers working on commission to grant bad loans.
Those people were feeling pressure because of the way their companys performing, so the decisions are sometimes biased, he said.
Of course, this suggests that the machine can't be programmed to have the same results, which I find a laughable assumption. Especially since it's so much easier for a regulator or an auditor to find bad human underwriting--right there with the UW's signature on the bottom of the Loan Committee Report--than it is to find the problem in the "black box."
Furthermore, the other side of browbeating your humans is the cop out: no human has to take responsibility for the bad loans, because "the machine did it." It's a lot of fun until HAL wants to know why you're heading for the escape pod.
The next big regulatory battle is, I think, making the "black box" available for inspection. The cries of horror of the owners of the "trade secrets" will be loud enough to be heard in outer space.
Banker:
With your connection into the financial world how about starting a private equity fund that lends 100%LTV RE loans to folks with low credit scores. Since this fund would not have anything to do with Federal or State gov't then the risk/reward would be yours.
Dryfly,
No need, let them do it with their own money. What is the percentage of defaults again? I think we should block the whole idea of ownership unless you've accumulated 20% down. While we're at it, lets' do the same for cars. Yeah, that's the ticket.
If a loan applicant signs th eFederal form allowing the lender to request his/her tax records, can they be sent to the lender electronically?
The old IRS 8821/4506 had the problem in that regard. The new IRS 4506-T (T = transcript) allows you to get electronic records very quickly. Another excuse bites the dust.
Banker, I don't think those kinds of renters are the ones the neighbors worry about.
Ron,
Why would I do that? The embedded industry works too well now. I'd have no competitive advantage.
The thought process at work in the comments of this blog seems to be that only perfection is acceptable. All else is either fraud or crooked etc. There is simply no industry that doesn't go through events/crisis like the mortgage/homebuilding biz is going through now. None, zero, ever.
People/companies try to implement new ideas constantly. Some work and we're all better off, some don't and we take a step backward. On balance over time things get better is my experience. What seems to be being proposed here is that only risk free innovation is acceptable. Well, that creature will never exist.
I'll take capitalism's lurches every time.
In many cases the 5% are being receieved as a gift, or as a loan for some loan shark or some fraud that is involving a lick-back from the seller himself.
Traditional underwriting for high-LTV loans always had rules about source of funds. It's not all that hard to require a minimum 5% of borrower's own funds. You can spend the additional time and money to verify that the funds aren't a gift or a loan. But that gets back to the point I was making in an earlier thread that you'll have to go back to a world where it takes longer and is more expensive to make certain loans.
Banker seemed to think that was insane, so I don't know what his point is today.
The thought process at work in the comments of this blog seems to be that only perfection is acceptable. All else is either fraud or crooked etc. There is simply no industry that doesn't go through events/crisis like the mortgage/homebuilding biz is going through now. None, zero, ever.
Way to knock down a strawman!
Banker:
I forgot you were a higher authority,
please forgive me and don't trash all CR posters just based on my
lack of judgement regarding your knowledge and insight into the financial world.
Tanta,
What I think is insane (actually I said arrogant, but build your strawmen as you see fit) is the idea that "taking longer...and more exopensive" is something that can be dicated and have a reasonable outcome. Let the market decide what the appropriate risk premiums and approaches are (Not the Czarina)and punish fraud appropriately.
My point today can be read a few comments above. Thanks.
Ron,
I'm no higher authority (where'd you get that?). I was simply answering your query. The rest of my response was tagreted toward most of the commenters, not just you. I wasn't trashing anyone (ok, maybe Tanta), just disagreeing.
Is that permitted here? if not I'll be on my way.
banker: my inital question was more of a joke you seem a little on the edge, sorry if I came off the wrong way I always have enjoyed your posts and look forward to them in the future.
No need, let them do it with their own money.
LOL! Its okay to buy homes & cars for poor people, just not with YOUR money. OPM is always the best source for things like that.
So typical.
So if its not YOURS, whose money is it? If I'm not mistaken the money the sub-primes give away isn't THEIR money either, 'cause they don't have any money... else there'd still be some there to repurchase the kicked back bogus loans.
Fact is the money could be MY MONEY via my pension funds & such and I'd never know... and since reporting is a bit less than transparent I'd only find out when the fund I owned failed as the bogus loans weren't repaid.
And besides, the failure rate is acceptable... what is the rate anyway... right? Well then you and your whole industry won't mind eating that tab if its such a small problem, correct? I say take it directly out of banker & brokers earnings & equity... pound of flesh and all.
Lenin once said 'capitalists will sell you the rope you will hang them with'... except even Lenin underestimated bankers... it appears they will LONE you the money for the rope first.
The sentiment on Bloomberg today seemed to be that the subprime worries are over.
Ron,
Sorry about the misread, my humor meter clearly misfired. Thanks for the follow up (By the way, I AM a higher authority on fried clams and doo-wop tunes)
Since when is verifying what someone actually makes before lending them $500,000 considered "perfection", as opposed to simple "responsibility to shareholder assets" or how about "common sense" or "due diligence"?
I don't want to see excessive tight-arsing in mortgage lending, but still...
Ahh, a variation on the concern troll. Banker, you suck.
"Right, make 20% down the law. For God's sake we can't have the not-wealthy buying homes, HORRORS!"
-Banker
This is a false choice. The non-wealthy could easily buy homes with 20% down, the prices would just be lower. Of course, lower prices cuts into the commissions of all the middle men and women.
The thing I liked about the NYT piece was the recognition that human underwriters can get browbeaten into signing off on bad loans....
Of course, this suggests that the machine can't be programmed to have the same results, which I find a laughable assumption.
It was no different at the chemical plant... that's why the stuff runs out the door there too. 1% Murphy's Law and 99% Peter Principal.
What I think is insane (actually I said arrogant, but build your strawmen as you see fit) is the idea that "taking longer...and more exopensive" is something that can be dicated and have a reasonable outcome. Let the market decide what the appropriate risk premiums and approaches are (Not the Czarina)and punish fraud appropriately.
My point today can be read a few comments above. Thanks.
Banker,
One of the arguments I made in the wake of the dot.com bust and that I would make again today is that speculative bubbles endanger free markets. A serious crisis in housing could lead to legal constraints that limit the effiency of the finance industry, and in the wake of a major speculative bust (assuming one happens) it's going to be harder to argue against more regulation or intervention.
IMO this possibility of reduced efficiency is one of the greatest dangers that a speculative bubble poses. I suspect that Wall Street and the finance industry largely ignore or otherwise misunderestimate this threat.
There could be a big price to pay.
Banker and many others sing the praises of many of these.....um... let's say "exotic" loan products and how beneficial they are to the poor and downtrodden (forgive me if I am skeptical about sincerity here) while at the same time talking about the wonders of the market. I always chuckle to myself when I read these two sentiments together knowing that Banker's opinions are irrelevant. The investors and depositors (the market that is) will tell the Banker what loan products will and will not be available. And "the market" is just starting to bring the hammer down. I look forward to the mental gyrations in reconciling these two beliefs.
It's obviously time for
"Myth #3: Rent is Wasted money."
"Wasted" in comparison to what?
http://www.viewfromsiliconvalley.com/id316.html
Thanks!
The crunch will happen when we find out if Banker believes in 'true' capitalism or corporate socialism where profits are private rewards and costs are public responsibility.
When I see that, I will become a true believer. Otherwise it is religious mumbo jumbo designed to enrich a class while entrancing another class.
In any case, if markets are based off of human emotion, then why not regulate them just as lust is regulated by the government to encourage one view of the human condition, monogamy as opposed to polygamy.
dryfly: excellent post regarding OPM.
dryfly, I just hope one day you might be able to understand Karl Marx and V.I. Lenin. Meanwhile just keep on reading. It took me a long time.
Right, make 20% down the law. For God's sake we can't have the not-wealthy buying homes, HORRORS!
Banker: Thought experiment for you: Imagine a world where 20% down was still the norm. Do you really think houses would be anywhere near as expensive as they are now? Do you think median prices would be 5X median income (or more in many markets). I suspect not. I suspect that prices would be closer to 2X income. That would make it easier for the not-wealthy to buy homes and we wouldn't saddle the next generation with the prospect of having to pay 5X (or more) income to buy a home.
People/companies try to implement new ideas constantly. Some work and we're all better off, some don't and we take a step backward. On balance over time things get better is my experience. What seems to be being proposed here is that only risk free innovation is acceptable.
Well smart guys like you should have no problems in using your own money and raising some more, and taking all the risks you want.
Let the market decide what the appropriate risk premiums and approaches are (Not the Czarina)and punish fraud appropriately.
The market wants to play with OPM - if you believe in that crap you spout, take your money and write a personal loan to that 100% LTV flipper.
The scheme to make private profits and social risks is complex and hard to grasp. So you think you are smart?
Well, then no more of that Fed liquidity, smart guy. Write private notes and bills. And then sees how far your smartness goes.
dryfly, I just hope one day you might be able to understand Karl Marx and V.I. Lenin. Meanwhile just keep on reading. It took me a long time.
Broker - neither Marx nor Lenin are my heros. I hope you understand that the road to 'socialist utopia' (read this as severe sarcasm) starts with unregulated laissez faire capitalism. I hope someday you understand THAT. It took me quite a while as well.
Hint - all things in moderation is a very good starting point.
Banker, I thought 20% down was standard until recently. It seemed to work.
I don't see how it would prevent poor people from owning. If you can sign for a mortgage 3 times your income, then you can accrue a down payment in 5 years just by saving 10% of your income annually.
Or is asking people to save 10% of their income too much? To my mind, it selects for a group of people who are unlikely to default on their payments.
It was a decent article. But, I dont know if you can blame automated underwriting for problems in the marketplace. Certainly it impacts the sheer volume of loans that can be processed, but you still have to put in rules on how to determine if you are going to accept a loan. The decisioning is still based on underwriting standards decided by executives at the companies, regardless of whether it is underwritten by hand or automatically.
Ahh, a variation on the concern troll. Banker, you suck.
Brooklynite
Well I might as well fess up Brookly, that you hooked me on this.
Now, you might not recognize yourself as a troll (nor me as a trollable...which I am in spades) but don't release me now that I'm your first catch.
Just because Banker is able to catch more bites is no reason to be disappointed with just one bite so far. [Beginner's Luck.]
I am a very large bite...worthy of so many other nibbles that, well, just suck so horribly. I shall not be summarily dismissed as a "variation on a concerned troll". I shall not be said to "suck" or...be sucked into these little nibblers.
But trolling ahead we find:
Ahh, a variation on the concern troll. calmo, you suck.
Brooklynite
So how could we get back to a 20% down, saving culture? Well, we've got things like college savings plans and IRAs and Roth IRAs. Why not downpayment IRA-like thingy that lets people save up that 20% downpayment? Maybe it would be like a Roth IRA where post-tax dollars go in, but gains are tax free. Maybe parents could start one for their kids when they are born. There are a lot of possibilities.
I dont know if you can blame automated underwriting for problems in the marketplace.
I do. The whole process was set up like a video game. At first effort, persistence and attention to detail got you to the next level but then people learned shortcuts and cheat codes. In the mortgage origination these were called stated income and LTV appraisals that hit the numbers.
I dont know if you can blame automated underwriting for problems in the marketplace.
I do. The whole process was set up like a video game. At first effort, persistence and attention to detail got you to the next level but then people learned shortcuts and cheat codes. In the mortgage origination these were called stated income and LTV appraisals that hit the numbers.
LOL!
The bears are angry today! I can certainly understand why.
"I think we should block the whole idea of ownership unless you've accumulated 20% down. While we're at it, lets' do the same for cars."
Good idea. The prices for both would plummet and everybody would be better off. Well, at least the buyers would be better off - not to mention the taxes you would save.
The decisioning is still based on underwriting standards decided by executives at the companies, regardless of whether it is underwritten by hand or automatically.
That assumes two things...
(1) Assumes that the executives can effectively communicate the desired strategy sufficiently well so as to be able to translate them into effective, consistent & actionable standards at the operational level.
My experience has been that this is where the break down often occurs... translating strategy into actionable tactics.
Executives want more orders & production. They want less waste and less risk. The underlings are given little or no direction on how to balance the two. It applies equally to automated & manual systems alike.
2) Assumes there are no 'intangibles' that a human underwriter can discern that an automatic system just can't. That was my point above about process prototyping & all. Any automated system MUST take into account those intangibles and make them tangible.
Sometimes it is just easier to recognize there are things the machine can't 'economically' measure or do.
This is one of the reasons Japanese semi-automation (or 'flexomation' as I've heard it called) produces such superior quality compared to American complete automation.
My guess is that in the end underwriting will be more like 'flexomation'... computer aided but not computer controlled. It will be hailed as a miracle breakthrough in innovation. In reality they will have discovered the wheel. Again.
Calmo - Banker does, indeed, suck. It's the same old tired bullshit, which others above have had more patience to adress substantively.
I get sick of reading the false choice: Think of the poor people!
Just as all of the benefits of lower interest rates accrue to those who already owned homes, so too did all the "benefits" of these exotic mortgage bombs.
And for the record, i am not a troll . . . on THIS site. I do take great pleasure in occasionally trolling on wingnut sites however. But I use aliases for trolling, it's more fun.
Banker remains a douchebag.
Let me make a couple of observations about that traditional 20% down.
In those old days of borrowers with equity, loans still occasionally defaulted and foreclosed. The three biggest culprits--aside from the odd borrower who just spent his way to BK--were job losses, divorce/death of breadwinner, and illness or injury that either overloaded expenses or eliminated income or both.
Query: does the current economy provide more or less risk in the form of job losses, divorce, and medical catastrophe? Is is plausible that savings patterns of the past can be expected to be reestablished, given the answer to the previous question? I asked a while ago, and I'll ask again: given that we all agree that borrowers should have skin in the game, how are we going to make sure that young FTBs ever manage to accumulate the skin? In a day and age when the mortgage tax deduction is a sacrament and the EITC is blasphemy?
Further, those nice 80% loans that rarely defaulted were 30-year fixed rate loans. People don't take ARMs just because of the lower qualifying payments, you know. The lower qualifying payments are there because lenders wish to entice people into ARMs, and will discount the initial rate to accomplish it. Why do investors want ARMs? Who is making what bet on the economic future? Why is it so expensive for lenders to hedge long term fixed rates? How much "belt tightening" are "we" all ready to put up with to get cheap fixed rates that lenders can afford to hold, rather than securitize, so that it will no longer be OPM?
I'm about to make a Jimmy Carter sweater joke, but maybe I should just stop.
I'm with Banker. It appears to me that the market is doing precisely what it should, hammering those players (and the holders of their equity) that can't properly underwrite (either manually or in automatic fashion) for risk. To the extent that they either couldn't do it well or, more likely, held out on cutting capacity in hopes of being one of the survivors, they are taking their appropriate lumps.
dryfly, your pension is unlikely to see much of a dent, alas for your sense of self-righteous indignation. Between the overcollateralization, the spread accounts and the insurance wraps, bond-holders are unlikely to ever see an interruption of either principal or interest. The originators obviously aren't in that happy position, but well, life sucks. As per above, the market is crushing and will continue to crush those that can't do the required job in the required fashion.
(continued)
Right, make 20% down the law. For God's sake we can't have the not-wealthy buying homes, HORRORS!
It is the 100% loan that drove home prices up for everyone - rich and poor.
It is the Real-estate craze that drove everyone to want a bigger and bigger house.
By teaching people to save they would live within their means.
What is your idea ? That we give them 100% LTV loans on a bigger house, have them ignore it's price and at that point have them pay 10% a year (or more) for life in order to keep the house ?
Is this going to make people richer or poorer?
I say : have them learn to save until they have 20%. Have them have skin in the game so that they look for house within their means.
This will keep prices down for them and others.
Imagine I want to consume based on a stock I own - I have to sell and this drive down the price.
But if I have a home it is enough for 1 guy in the zip to bid a house higher (with 100% LTV loan) and the whole zip can now take out a HELOC
Now everyone consume based on this one guy who overbid on a house ?
Does this makes any sense? Maybe we should all jut quit our day job and ask for bigger loans to buy bigger and most expensive homes ? as long as the guy next door will do the same we can always take a HELOC and pay the mortgage with it
This way we will never be poor.
BG, it may be that the market will punish some of then players.
But will will "the market" do to disgorge ill-gotten gains from unscrupulous brokers, lenders, and bond-sellers? What can "the market" do to recover dividends and inflated salaries, bonuses, and option sales?
What can "the market" do about the hundreds of thousands of FB's who will be heading to foreclosure and bankruptcy, and the resulting damage to their communities?
There never has been a truly "free market" system in this country, at least not in our lifetimes. There has been a lot of regulation of banking, from underwriting standards to anti-usury laws, etc.
Those standards have been relaxed or ignored in recent years, and the pain from it will be deeply felt. Meanwhile, a few have made off with huge bags of money. The market cannot address all things; that's why we have a government.
"Now everyone consume based on this one guy who overbid on a house"
Or, like me - I used my HELOC to expand my business, provided jobs to 22 more people in my community, quickly (6 months) paid the debt, increased my own income, and now considering a rinse and repeat.
I wonder if Banker has totally drank the Wall Street Koolaid and put his own money into some of the wonderfull hedgefunds that have sprung up in the last couple of years?
If so, he may find out again what tall gearing looks like underwater. I always find it humerous to see folks whose paychecks depend on the answer spinning their position. Banker- did the market operate when DBL went under? I am sure you attended some of the predator's balls and maybe sold RC of OC some high yield instruments? Or were you guys pulling the floor out from under the gamblers and buying those bonds really cheap? Kinda like several of Wall Street's finest have done with their warehouse loans?
One of the problems with the removal of the s&ls from the mortgage system was who has subsequently entered the space. In other words, a mass of folks who may or may not have the stomach to see their bonds fall to 50 cents on the dollar for B and 85 cents for A, with almost no buyers beyond some value vultures. Does anyone seriously think that a hedge fund under the redemption gun is going to do anything other than dump? I should think that the Amaranth bust would be terrifying, since they bought the position from another smaller fund under the assumption that they would make even more money as the trade would reverse. Unfortunately, their margin call came in before their position went green.
Now who holds all of the mortgage backed bonds? Almost none of which are older than five years, and a ton of which are but a year or two old?
We shall see how far the damage goes, and time will tell when the speculation dies down and the folks with the green eyeshades assess things based on what the market will pay after all of the happiness and bushwa have blown away.
The minute folks start telling me not to panic, I get the heck away from whatever they say will be just fine. That techwreck looked just fine from the sidelines, but the folks who had helocs maxed on their luxury houses to maximize their returns didn't get a return- they got a margin call, followed by a mandatory sell and a nice perpetual loss they are still carrying forward. Oh, and btw it really sucks to be 71 and have to go back to work to pay for the house mortgage and home equity loan. One of my neighbors did this faceplant, so I got to hear it in real time.
I really and truly hate, and I mean it, to see flame wars in the comments to a blog.
I have flamed against Banker (a little, and with cause, I believe), but now is the time to stop.
If I were to criticize Banker, it would be to say that there is a difference between the up's and down's of a capitalist system and mens rea.
Perfection is one thing. A pervasive criminality is another.
Cheap money is arriving on our shores as if someone, somewhere had a monetary diuretic and pointed the result at us (Japan?).
Someone, somewhere is telling our population (or used to be telling) that money is cheap and incredibly valuable...as long as you buy an "asset" with it.
These someone, somewhere types are making a ton of money off a Ponzi scheme. That's criminal. That's not capitalism.
Banker, are there any crooks out there? How much have they crapped up the system? Is it all part of capitalism, sainted capitalism?
Anthony funny, ha ha. Reflexive class prejudice against renters is one of the things that makes renting such a great enduring arbitrage proposition. It's like when gypsies go to the butcher and touch the meat, devaluing it for everyone but themselves. The cognitive dissonance will be fun to see as more sophisticated dominant-class types give it a whirl. ('...and those PIMCO fund managers, eeew, they give off that icky smell!!')
Oh, and btw it really sucks to be 71 and have to go back to work to pay for the house mortgage and home equity loan. One of my neighbors did this faceplant, so I got to hear it in real time.
Thoughtful post. Thanks, helps keep my head straight on all this.
Amato,
What you did was good.
Credit for expending your biz should be available to people who want to expend their biz on the merits of such future expension.
You should not have to rely on R/E appriciation so that you can borrow and expend your biz.
I don't want to think what can occur in an environment where biz fail (they sometimes do) and biz owner home is lost because biz failed to expend.
Moody's Cuts Mortgage Bond Series 16 Levels, Says Fund Diverted
By Christine Richard
March 23 (Bloomberg) -- Moody's Investors Service cut its ratings on a series of mortgage-backed bonds 16 levels after learning U.S. Mortgage Corp., the servicer of some of the loans, diverted almost $6 billion away from the payment of the bonds.
A series of bonds issued by MASTR Alternative Loan Trust 2002-3 were cut from Aa2, the third-best investment grade, to Caa3, the third-worst junk rating, Moody's said. Another series was lowered from A2 to C, a 15-level drop. The ratings cuts follow a report from the trustee of the mortgage bonds, Wells Fargo Bank N.A., which took over servicing of the portfolio after U.S. Mortgage filed for bankruptcy, Moody's said.
This is a very unusual situation that Aa2 bonds would suffer losses,'' said Nicolas Weill, chief credit officer in Moody's structured finance group.The servicer has committed some significant irregularities and there's a forensic investigation ongoing to see what happened.''
The two lowest-rated series of bonds have begun to take losses, and ``at this stage, the likelihood of any significant recoveries seems remote,'' Moody's said.
Moody's said the diversion totaled about $5.92 billion. ``Additional losses might be reflected in future remittance reports,'' Moody's added.
The loans were backed by 15-year and 30-year fixed-rate mortgages. These mortgages rank between prime and subprime in terms of risk, and include mortgages on which borrowers don't make a down payment or don't provide documentation of their income, Moody's said.
The mortgage bond issue also includes two series of triple- A rated securities, according to Moody's. One series was cut to Aa2, a two-level reduction, while the other series remains AAA because it's guaranteed by bond insurer MBIA Inc.
Moody's said U.S. Mortgage Corp. filed for bankruptcy in December.
To contact the reporters on this story: Christine Richard in New York at Crichard5@bloomberg.net
Banker, you are either with us or against us! Make up your mind! In regard with down payments maybe Tanta can tell us how much FHA, VA, and the rest of the gang require. Then I`ll tell you a horror story about VA REPOs.
But what Amato is talking about is a different animal.
Amato could get a small business line of credit from the bank, too. And he could pledge his home equity as collateral (I'm using "his" here as a generic pronoun) to get a favorable rate. Fine.
I don't think anyone here is arguing with that proposition.
Broker, I love it!!!
"you are either with us or against us!"
You are starting to sound like our president, have you ever thought of running for office?
Just study wikipedia on propoganda and you are ready to go!!!
Propaganda - Wikipedia, the free encyclopedia
The servicer has committed some significant irregularities
Interesting term for "stealing money." I guess they had to bomb the security in order to save it.
Business loans or lines of credit are a nightmare, mate. At least for a small fish like me: Heinous paperwork, high fees and high rates. With the HELOC I paid $0 in fees, got a smokin' low rate (with the ADDED bonus of tax deductibility), and filled out virtually no paperwork.
Amato,
Well, that's great for you, but don't you see why that makes little sense? the true risk is not being reflected because of this shoddy record.
And for the record, if you get audited, that interest deduction would be disallowed on a personal return . . . it would be allowed, in the same way as any other business loan would, if you file a business tax return. But HELOC interest is only deductible for actual home improvements, as I understand it.
Shoddy record should be shoddy underwriting. Weird how you can be thinking about two things and the wrong one comes out the fingers.
Allenm: nice post. Why do I harp so much on mortgage loans to young people? Well, starting the 30-year payment clock at the age of 45 can create some retirement issues, no?
Amato, thanks for the beautiful illustration of the point I was trying to make yesterday. Glad you got out of that C&I nightmare and found a McBank to give you a Happy HELOC.
"With the HELOC I paid $0 in fees, got a smokin' low rate (with the ADDED bonus of tax deductibility), and filled out virtually no paperwork."
Amato,
As long as you pay back the loan, great. I don't think anyone on this blog has a problem with people taking out loans and PAYING THEM BACK.
But I appeal to your reason. If you "filled out virtually no paperwork" for your loan, is it possible some (many?) are doing the same with little intention or means to pay it back?
I got a HELOC a couple of years back. Went full doc. Wasn't that hard to do. Got a better rate as well. To me, copying some bank statements and tax returns was worth it. As a business person, I'd think you would be into saving costs where you could, too, but maybe not.
dryfly, your pension is unlikely to see much of a dent, alas for your sense of self-righteous indignation. Between the overcollateralization, the spread accounts and the insurance wraps, bond-holders are unlikely to ever see an interruption of either principal or interest.
All I can say is 'we will see'. I'm not comforted at all by words like 'overcollateralization' and 'insurance wraps' in a world with declining asset valuations & hedge funds leveraging 20:1.
Convince me again - with data - that my indignation is overly self-righteous.
Amato "The bears are angry today! I can certainly understand why."
While I would prefer to see a more rapid correction in the RE marketplace (and with the stocks that occupy that space) so that the entire economy doesn't suffer for longer than necessary, I have patience. Most of my puts don't expire till Q4 and later. A few more quarterly reports should allow wall st to witness how subprime financial woes manage to creep.
So silly to see how there's all this debate about containment when all that separates a lot of borrowers in a few FICO points. ARMs reset, collateral value declines below market value, credit standards tighten up and -- whoosh...
McBank and Happy HELOC!
I nominate that for Best of Thread.
Yeah, being nice and "civility" is laudable and all, but sometime satire and ridicule are the right tools for the job.
Whenever I come across the smug bulls saying everything is fine and those who're concerned about the housing market and it's affect on the economy are just idiots/chicken little/bitter, I think about the fishing industry.
For years and years and years there was severe overfishing. But there are lots of fish in the sea, so any small decline in the catch is just some inefficient fisherman, and they'll get crushed by the market.
When people started voicing concerns, and saying there should be limits and maybe even reductions in the catch, the smug industry response was "stop being a worry-wart, everything's fine". And everyone continued over-fishing merrily, even as signs of strain started to appear more often.
Then one day the stocks collapsed. It turns out there aren't really that many fish in the see. And all the fishermen sat on the docks complaining about how the government misled them, didn't do good science, and should now compensate them.
There still aren't enough fish to revive the fishing industry, and the rest of us are still 'compensating' the fishing industry for their losses.
I guess as a responsible citizen who didn't partake in the Great Housing Bubble, I should start saving to pay my share of the 'compensation' to liars who took out mortgages they had no intention of repaying, gamblers who got caught with their flips down, and rich bankers/brokers/hedge fund managers who enabled and promoted the whole scam.
After all, why should those bulls have to pay when the house of cards comes tumbling down? They couldn't see anything strange from behind their profits.
Amato, I am pretty sure you are smarter about this sort of thing than the vast majority of the population. I have to say it is gutsy and money-where-your-mouth-is bullish to risk your house on a business venture. I am all for well-run capitalist markets (note: this may require some regulation due to humans failing to live up to the assumptions of efficient market theory). After all, the Dutch only really got going with their trade empire in the 17th century after they invented the financial instruments to disperse risk (like those first shares in the Dutch East India Company). They also proceded to have the tulip mania. However, it is my opinion that a well-run capitalist society should not require people risk their homes for a good business venture. I would wager fewer people are willing to risk the lose of a house than say a $1000 share.
This is just pitiful and unbelievable that they could be this much asleep at the wheel;
Moody's Cuts Ratings on a Mortgage Bond 16 Levels (Update1) - Bloomberg.com
MTHood,
I take back my statement about VIRTUALLY no paperwork. I actually filled out ZERO paperwork since all I did was talk to a voice on the phone who did that for me!
LOL!!
They then sent a notary to my home where I signed the paperwork.
Also, I AM CHEAP and my "no doc" rate was EXACTLY that of the "full doc" rate.
NOW KEEP IN MIND - The first note on my house plus the HELOC amounted to less than 50% LTV.
I LOVE THIS COUNTRY!
Business loans or lines of credit are a nightmare, mate. At least for a small fish like me: Heinous paperwork, high fees and high rates. With the HELOC I paid $0 in fees, got a smokin' low rate (with the ADDED bonus of tax deductibility), and filled out virtually no paperwork.
I concur. However the only thing worse that banks making it tough on small biz guys to get a loan is when banks give MY money to same small biz guys without ample verification & promise of first born.
Or for that matter my pension fund buys stocks in said banks - I want no part of that either.
When I hear stories like the one Amato just described - regardless whether it worked THIS time - it makes me want to sell all my bonds & shares and buy gold coins & bury them in my back yard next to the stake I chain the pit bull to.
BTW Amato, I'm a small biz guy too. I wouldn't own shares in a bank that would lend to me. Its the 'Marxist' is me.
Red Pill, from where I come from, ONLY having to risk your HOUSE on a good business venture is a GODSEND!
UNBELIEVABLE!!!
THIS IS TRULY THE GREATEST COUNTRY ON EARTH.
NOT PERFECT, BUT STILL THE GREATEST ON EARTH!
"it allows you to make junk faster"
Yes indeed. QC in manufacturing aside, the reject bin at subprime industries is filling up nicely. BTW, can I take some of those home? You know, for the dog.
jim r,
That was an interesting story you posted on the downgrade for U.S. Mortgage-related bonds, but why did you feel the need to replace every spot in the article that read "million" with "billion" in your cut & paste? What was the purpose of that, exactly?
BG, are you sure jim did that? I notice the Bloomberg online piece is already on update 1, and does not specify what it updated.
Tanta, your implication may be correct. That may well be a Bloomberg screw-up and I will apologize to jim r if that happened through no fault of his. In either case, though, the article as posted above is incorrect.
Amato,
You win this round, my friend.
But alas, you have fired my competitive spirit. I will best you, worthy foe.
I just conversed with a fine, reputable firm which will loan me much money with no paperwork AND (knowing nod) no pesky notary -- signatures are so stone age.
And they will loan me 100% LTV! And my rate is 0.5%! And they assured me I can refinance at any time and my rate will never rise.
Your move, my estimable adversary.
Why can't we just borrow in Yen at 1-2% and buy houses in Yen? How much fun would that be?
It is clear there was overcapacity in the subprime and mortgage lending market, which led to a sharp decline in lenders/originators.
What about the HB sector? Is there overcapacity there too, given the growing glut of empty new homes? And, they are still building...
Tanta, addressing one of your comments above, I think you're beating up a straw-man. The model "black box" is perfectly open to the only people who should have access to it the owners and the regulators.
F'rex, OCC can climb into the guts of any model it so chooses, and has issued papers on what it finds acceptable and not when it does so. I was last at one of their conferences just over a year ago. Should the models be open to the public? No more so than should the design for a Toyota Camry a dual-core Athlon, the script for the next Russell Crowe movie or the formulation for Tysabri. If the public sees an interest in setting regulatory standards, that's fine. (As stated, they already do.) But the models are intellectual property and may or may not confer a competitive edge, and should be regulated no more onerously in terms of open scrutiny than other such property.
(continued)
All this yearning for the golden age of 20% down. You guys are aware, I hope, that in the stable and non-bubbly 1950's, about half the mortgage market was either FHA at 5% or 10% down, or VA with nothing down? And there weren't any foreclosure meltdowns or ginormouse price runups (except for right after the end of the war when the boys all came home). We're in this bubble mess because down payments were relaxed at the same time that DTI's were relaxed (or abolished - liar's loans).
I'm the biggest proponent of zero down being a disaster that you'll find, but you don't need to go all the way back to 20% to make things good again. 5% to 10% down with real underwriting and things will get pretty normal.
Observations from vader.
'bout 30 years ago a deal was stuck/imposed by the elites. Let the market rule and it would be wonderful. OK I got screwed by it. Income dropped 75%. Wife has to work. The only steak I've had lately was marked down and about to go out of date. Kids may not see college.
OK so if good for the country, then ok. But not so. Country is worst off.
World wide, the result is the same. Now leftward jolt is happening. Countries nationalizing private cos. Oil Rich leftee in our neighborhood, almost one next door in Mexico.
Basically, no matter what the theory is, free markets failed the political test. Sans the great run up in debt and the line about assets replacing income, the leftward jolt would have taken the US.
Tanta - banker - et al?
As someone once said, I think on Saturday Night Live back when it was funny, "It's a breath mint AND a toilet bowl cleanser!" Automated Underwriting has squeezed an enormous amount of costly effort out of the origination process, and left open the possibility that borrowers will see a chunk of that savings. There are borrowers who carefully shop, compare APRs for 30 yr FRMs from a variety of sources, and yell like hell when an extra junk fee appears at closing. I have no doubt that these people have saved a bundle thanks to automated underwriting, although I'd be hard pressed to document it. There are also people who blithely do whatever the nice sounding man in the suit tells them. I have no doubt that they have not seen the gains from autimation.
Automated underwriting, done carefully by institutions with sane risk management (I KNOW I'm limiting the field substantially here) is perfectly capable of triaging the applicants, and figuring out just how much QC is needed on various types of loans, and identifying squirrely originators in the first few months of doing business. Automated underwriting, done by ignorant twits desiring market share at all costs, leads to unmitigated disaster.
Can we all just get along?
(continued from above)
As to the moral hazard that a model might be faked or tweaked to produce the results marketing/sales would like it to produce, well, you said it yourself: you can fake the process either manually or automatically, or maybe just disregard the legitimate answers the model gives you or the legitimate objections the underwriter raises. That is not an automation problem, obviously. That is a bad-management-practices problem, and nothing short of the sort of market discipline being meted out to the weaker players right now is ever going to mitigate it.
(continued)
(continued from above)(again)
As to the income issue, that too can be modeled. Not too difficult to run stated incomes against both geographic ranges and BLS percentile income figures (NAIC) to flag suspicious or completely nonsensical claims. I do that right now, albeit is a lower PTI environment that what you're looking at with mortgages. And Equifax even offers a freakin' off-the-shelf product if you can't be bothered to DIY. This isn't a model problem, it's a lazy "the last two years of performance can be straightline extrapolated" problem. One of the yutzes who replied to me on another thread started blathering about other techniques, apparently in the vein of starting a statistical penis-length contest. No thanks, it misses the point entirely. You can beat the average underwriter handily with even plain-vanilla stuff like logistic regression and an appropriate dataset. To wit, it needs to cover not just two years of exceptional credit performance, but multiple business cycles and a decent credit-range of paper. Given that one simple requirement, the machine wins. And then, of course, you need to listen to it instead of pricing to capture market share in a shrinking market. :^)
Mort_fin is right. And it isn't going to do anyone any good to get that 20% down thing in their teeth like a terrier who won't give up a chew toy. It isn't the magic pill any more than "adding 50 bps to the rate and blowing off all the documents with no money down" was the magic pill on the other side.
But as ac notes above, go a little too risk-crazy, and you'll get your regulation. You might just get it from people who are happy to decide that 20% is the simple solution to a simple problem.
But perhaps I underestimate the attention span and general intellectual complexity of our elected representatives. After all, Ted Stevens understands how the internet works . . . wow, this glue smells funny . . .
The problem with this iteration at it's core was the substitution of asset appreciation for income. All the problems arise from this. If homes were static in price and not seen as an asset. The drive to profit from it would be a lot less.
I support home ownership and buy into the better citizen thing, but there are studies out and questions being asked if this is a good thing.
For example, renting makes for better allocation of capital and the ability to move where the jobs are.
Adding to BG's comment, OFHEO can look at Fannie and Freddie's black boxes, the Finance Board can look at the Home Loan Banks black boxes, etc.
Of course, no one gets to look at the REITs' or the hedge funds' black boxes.
mort_fin, I doubt you and I disagree on all that much. I've never really objected to AU in theory or even a lot of it in practice. Actually, I think DU and LP work pretty well. But that's a relatively homogeneous pool of risk with outer limits (conforming dollars, eligible GSE counterparties) that are outside the parameters of the AUS.
To assume that AUS works as well in Alt or subprime strikes me as a weird assumption. It is in any case in need of some data.
I still insist that what got "passed through to the consumer" is mostly speed, not dollars. Have I seen loans in due diligence with an AUS approval and a $250 underwriting fee? I have. I need data before I buy the cost-saving to consumer part. The cost-saving to lender part, I believe to be fact. I know just dozens of contract underwriters who used to have permanent jobs with bennies.
So? So that's the way the free market works. My objection is when the Fed uses this "speed" thing as a "benefit to the borrower." I think our belief that the 12-second approval is a "benefit" is like our belief that Ajax cleans like a white tornado. There's a debate about whether such a claim could even be considered to live in the "factual" world.
MTHood, I think dryfly's "scissors, paper, rock" is better than Happy HELOC, btw.
I did the 20% down thing because I could and it was cheaper in the long run to me. Of course I was 33 before I bought my first house.
Now the % down thing is not a real issue in my mind, if houses are considered consumables. Its when the present value of some obscene future profit is considered to be fact that it is not a good thing.
Ohio Plans Bonds to Bail Out Homeowners Strapped by Mortgages
Ohio Plans Bonds to Bail Out Homeowners Strapped
"Ohio, which had the highest foreclosure rate among the 50 U.S. states at the end of 2006, plans to issue $100 million in taxable municipal bonds next month to help homeowners refinance mortgages they can't afford.
Proceeds of the bond issue by the Ohio Housing Finance Agency will provide financing for about 1,000 loans with a fixed rate of about 6.75 percent, said Robert Connell, the agency's director of debt management. "
The problem with capitalism in the US is that the winners buy the government in order to keep on winning.
As to the income issue, that too can be modeled. Not too difficult to run stated incomes against both geographic ranges and BLS percentile income figures (NAIC) to flag suspicious or completely nonsensical claims.
But what is the point of doing that?
Of course you can build a model that "flags" nonsensical claims, and I don't object at all. Of course, I'm the sort on whose desk the file gets dropped, after your fancy system "flags" it, and now a human with some expertise has to decide what to do next. So fine, these things can help establish the QC queue.
That's not the same thing as saying we should just let all the borrowers make up their incomes up front, so that we have to keep building better and better mousetraps to catch them with.
Why cant they just automate the 4506-T and be done with it? The rest would be businesss or people trying to avoid taxes. Businesses you go through humans, the rest let them not get a home. Either you are part of the system or you aren't.
A stated wage earner loan makes zero sense.
Tanta - there's no reason to think that you can't build an Alt-A AUS or a subprime AUS or a zero down AUS once you have a boat load of data over a reasonably long time period. And the way you get that boat load of data is by doing a few of them, based on extrapolation from the data you've got, and carefully keeping that data around. The problem with the last few years has been extrapolation without the data behind it - if risk went up 20% when LTV went from 90 to 95, let's assume that risk goes up another 20% when we go from 95 to 100! If risk to stated income self employed borrowers with 30 year FRMs needs 50 bp in compmensation, let's assume that stated income W2 borrowers with 2/28's need the same!
A good modeler would have told the higher ups that this was a bad idea. Whether we're in hot water because of bad modelers or deaf higher ups I'll leave to the historians.
But what is the point of doing that?
I think that's easy enough to answer. Most borrowers, ultimately, aren't either fraudsters or outright liars. If I can pass through, say, 80% of apps with some confidence that the income claims and associated PTI/DTI ratios aren't BS, I need fewer actual underwriters who actually have to dig into the dirt. And that means:
A) In an uncompetitive market or one where I just developed the tech, more profits for moi.
-or-
B) In a mature or competitive market, the savings eventually get passed along to the borrowers.
Incidentally, it also means that such underwriters as I do keep on staff can possibly devote more time to the truly marginal calls and increase their own expertise thereby.
Maybe we can turn to the other point in CRs original post - the damage this stuff does to communities. I don't think it's the case that high risk lending is OK if it's not fraud and properly priced, precisely because of the damage it does to the surrounding areas. I don't have a clue as to what the right limit is, but I suspect we've exceeded it.
CR provides a link to today's Charlotte Observer, but the link to the whole series is 404 Not Found
I would really advise that people look at the link Detailed data in Southern Chase neighborhood. It's an amazing picture of a subdivision where 70% of the new home buyers used FHA zero down. Orange and yellor show the foreclosures. It's not to be missed.
No, this is not possible.
Amato,
And from where do you come from? I guess my perspective is a bit different since I just finished an advanced degree in engineering with some savings (more than most from what I read) only to find I could not afford the median priced house in my neck of the woods without a crazy loan. Not being adverse to math, I could calculate that the loans only made sense assuming some pretty startling appreciation. In talking to a number of people about this issue I find the opinions differ dramatically depending on one main factor: did you own or try to buy a home before or after the bubble. It certainly makes people giddy having "wealth" dumped in their lap based basically on when they were born and matured into their careers. Of course, I matured into my career at the peak of the bubble. Does it make me a bad person to want the housing market to get crushed?
Its a tragedy and its just beginning, Mayor Judith H. Rawson of Shaker Heights, a mostly affluent suburb, said of the evictions and vacancies, a problem fueled by a rapid increase in high-interest, subprime loans"
Whatever model is being used to speed up the loan process needs to do a better job then the software used during the past 5 years. Seems these models work great when the RE appreciation is headed up but once it moves down then we get a breakdown.
I meant that underestimating "the attention span and general intellectual complexity of our elected representatives." is not possible. But, seriously, pictures on the evening news of orphans and children thrown into the street is going to generate regulations. Everytime. Guaranteed.
Arghh... "orphans and children" should have been "widows and orphans". I should just go home.
"MTHood, I think dryfly's "scissors, paper, rock" is better than Happy HELOC, btw."
Hey, if we all lived in the same burg, I'd quietly buy you, dryfly, CR and a number of the other regulars an adult beverage of choice - under the assumption that you stay put and keep the banter going.
Question on ARMs and teasers: in yesterday's hearing the CFC guy said that the benefit of teaser ARMs to subprime borrowers is to give them 2-3 years of easy payments, so that they can prove their history, get a better FICO, better prime and refinance into, say, a 30yr FRM. Setting aside that some of us don't like the fact that you need to get into debt to prove your creditworthiness, what is fundamentally flawed about his argument and what should/will we eventually do with 2/28 and 3/27s?
probert - it's not fundamentally flawed, just flawed in implementation. If interest rates didn't change, that would work just fine. But half the time they stay more or less flat, 25% of the time they go down, and 25% of the time they go way up (like the last couple of years). I doubt that broker's carefully spelled out the fact that they were taking a big bet on interest rates by doing this.
Setting aside that some of us don't like the fact that you need to get into debt to prove your creditworthiness, what is fundamentally flawed about his argument and what should/will we eventually do with 2/28 and 3/27s?
And how does this math work? Once who could only afford the teaser rate of 1-2% is now going to be able to afford the fixed at 5-6%?
That makes sense only if the teaser is close to the fixed.
With home sales slowing and prices dipping in some areas, many desperate home sellers may face a so-called short sale, which is when the house is sold for less than the mortgage. Homeowners who have refinanced, however, face a different situation. A refinanced loan is considered a recourse loan, meaning the lender can come after the borrowers personally for payment of any difference between the mortgage and the sales price.
Its just like on a car loan, says Bradford L. Hall, an Irvine CPA. You can hand over the keys to your car to the dealer, but you still have to pay off the loan.
Many lenders opt not to take a homeowner to court to recover the money. Instead lenders write off the loss and send the IRS a Form 1099 for the so-called deficiency.
The IRS treats the shortfall as income so the borrower will not only be out of a house, but will owe income taxes on the difference. And it is taxed at the ordinary income rate, not the typically lower capital gains rate. It adds insult to injury, says Bour, the mortgage broker.
R provides a link to today's Charlotte Observer, but the link to the whole series is 404 Not Found I would really advise that people look at the link Detailed data in Southern Chase neighborhood. It's an amazing picture of a subdivision where 70% of the new home buyers used FHA zero down. Orange and yellor show the foreclosures. It's not to be missed.
Jesus mort - that's ugly. I lived in Iowa at the front end of the farm crisis and it was like that - foreclosures all over. My neighbors with three kids & a live in mother-in-law lost their home... wrenching hardly describes it.
Are we heading to that? If so I don't think folks fully grasp what it does to the social fabric.
Very interesting analysis by Prof. Hamilton:
Bubble, bubble, toil, and trouble
Indeed, when one calculates an ordinary least squares regression of the 2006:Q4 mortgage delinquency rate for state i (denoted di) on the 2001-2005 price appreciation (denoted pi) for the 48 contiguous U.S. states, the correlation turns out to be negative and quite statistically significant
Brookly, I just wanted to make you take a second look at "trolls" (which I don't think Banker is) and see that maybe trashing a commenter as a troll or one who sucks (should that be different) is, well, not much help --like you don't think Banker is much help...and so although you may think you are putting Banker in his place (under the bridge), and maybe even protecting us, (the innocent and fleecable), the effect is that you are the troll trashing any and all opinions different from some preconceptions that are unassailable.
Can we accept Banker's background and see his opinions in that context? Isn't it valuable to have such a different pov here? Wouldn't it be interesting to hear from a serious trader in CDOs right about now?
Aren't you the least bit glad that I'm not just chimin in "Absolutely, Brookly!"?
Hope you disagree somewhat with this.
Community damage. I am beginning to wonder how much damage we can take- Phoenix MLS: Residential:
43,547 homes currently active. Ummm with thousands more in the foreclosure pipeline and thousands of spec houses being finished.
anybody want a cheap Benz- only driven by a realtor on sundays during the boom?
Steve - great link, thanx.
vader:
The problem with capitalism in the US is that the winners buy the government in order to keep on winning.
vader | 03.23.07 - 5:49 pm |
I would add a very simple point: treason.
Today, the winners are indeed buying the government, but they are doing it in collusion with the Japanese Finance Ministry directly against the interest of the American people.
That's the rub. Governments have been bought before, but when they are bought with cheap currency from a foreign country intent on destroying our industrial base through currency manipulation, that's treason.
A couple more observations. Civilization is a delicate thing. The idea that one should pay one's debts is a delicate thing.
Lets say that you are a proper citizen and pay your debts, but you neighbors don't. Or you see great injustice in the present system. Under stress, debt payment may become the exception rather than the rule.
Along that line, what happens to the delicate civilization of the US when there is a consider number of families living in modern day Hoovervilles or otherwise lost hope of the future. Will they go quietly into the night or will they react in a destructive manner.
arbo - you might like this article from the economist...
Chinese interest rates are still far too low...
BOJ isn't the only problem, maybe not even the biggest problem. All of Asia is making sure their currency competes with the yuan. They have to.
Interesting perspective here on a worldwide asset shortage. Helps me understand why the appraisal on our rental houses is 40% higher than 120 x monthly rent. If it does not open to the asset shortage article, scroll down.
Morgan Stanley - Global Economic Forum
Along that line, what happens to the delicate civilization of the US when there is a consider number of families living in modern day Hoovervilles or otherwise lost hope of the future. Will they go quietly into the night or will they react in a destructive manner.
^^^^^*^
...better store up some canned food & a few cases of KY Jelly.
I'll take capitalism's lurches every time.
Pure capitalism can be pretty evil. So the excesses of capital are properly moderated by the government. A pure capitalist might repossess the house on the first late payment. The foreclosure system injects some viscosity into the process and encourages the capitalist to exercise some level of forbearance.
The pure capitalist may well lie, cheat steal and do anything possible to accumulate wealth. The government keeps the asymmetrical power held by those with great wealth from oppressing those without.
So we are not talking about whether the capitalist is regulated. Only how.
On the other hand, the problem with government intervention is that new rules may not cure the disease. IMHO, the disease is various forms of fraud perpetrated by the players in the system. It happens in every asset bubble since time immemorial. And the blame is easily shared between the pushers of the sub-prime loans and the consumers. The saddest stories are those of unsophisticated people extracting equity from the home with a bad loan pushed by an apparently unscrupulous lender. The analogy to a drug pusher is inescapable. Unfortunately, it is impossible to know the truth.
How about video taping the closing session and saving it as part of the loan file?
A stated wage earner loan makes zero sense.
In some circumstances it does. We bought a house in 2004 after 2 years of negative and 1 year of negligible income. The loan was granted based on offer letter outlining the terms of my consulting engagement. Booked as a stated loan.
I lurk on the landlord ad rent-to-own forums too sometimes. Private note writes love the fact they can start a foreclosure on the first missed payment. They don't view it as any different than evicting for non-payment of rent. They don't screw around for 6 months or more like a big institution.
Bubble, bubble, toil, and trouble
Good link and consistent with my never ending flood of anecdotal evidence. However, having just closed today, I have an interesting tidbit from the loan officer. He is thinking that lots of prime and alt-a borrowers with ARMS from 2004 (Omaha high point) are hitting their resets. He is getting tons of calls. He thinks a number of them will not keep their houses.
Those of us in the office who follow housing have talked about how the Omaha west side is filled with people who are house poor.
Community damage. I am beginning to wonder how much damage we can take- Phoenix MLS: Residential.
Again, I'll go back to Colorado Springs when it was the foreclosure capital of the country-probably the world. Thousands of people were upside down on the mortgages and waited it out and eventually did well. It was bad, but the community recovered. A lot of the greatest price appreciation is in communities with good demographics. Prices are insane in these bubble markets, but the bust will not be the end of the life as we know it. The real estate bust in Colorado Springs was a good opportunity for a lot of people to own real estate.
Traditional underwriting for high-LTV loans always had rules about source of funds.
Tanta,
I'd still love for you to do an UberNerd post about "traditional" source of funds rules vs. what you've seen recently.
tj, I'll do what I can; I want to do a final post on MI credit guidelines.
The short version of that is any time you see a loan with "stated assets" (SISA, NINA), that doesn't just mean the lender is not verifying the amount of the borrower's liquid assets. It means, since you aren't looking at a series of bank statements, you aren't verifying the source or age of those assets. If you tell me you saved up your down payment, but then you give me three months' worth of bank statements that show your savings account going from $200 to $200 to $50,000, I might question you on the true source of those funds. Similarly, when you see on the broker boards those deals where they're looking for a lender who will "use the broker's credit report"? They don't want the wholesaler to run a new credit report, because it might just show a very recently opened (or drawn down) line of credit, which is the true source of the down payment. You will hear brokers claiming that they just want to save the borrower the cost of ordering a credit report supplement. You will, of course, laugh your ass off at someone charging 300-500 bps in front-and-back fees trying to save the borrower $35.
So it's less that people changed their source of funds guidelines, although some did. It's that stated asset loans, and use of stale-dated credit reports, defeat the purpose of such guidelines.
Note for AUS issue: with DU and LP, at least, you can't get away with a stale-dated credit report; the system will "demand" a current one. Not every AUS does that, I think, but it should.
you can't get away with a stale-dated credit report; the system will "demand" a current one
Speaking of which, you ever run across much "gaming"? That is, running multiple bureaus to select the most favorable even though it might be regionally weak?
And the way you get that boat load of data is by doing a few of them, based on extrapolation from the data you've got, and carefully keeping that data around.
Exactly. And I agree entirely that you have a very complicated problem of deaf executives, dumb modelers, and blind regulators conspiring against you. That's why, at the end of the day, I think there has to be regulatory threat. By the time "the market" solves a problem, it can be a bit late.
Let me clarify what I, at least, see as the "black box" problem. Sure, the regulators can see into it. So they know what the actual algorithm is. As Anonymous points out, that algorithm could be smarter or dumber. But how would you measure that? Against a database of loans over a long period of time with features comparable to the black box loans? Who has such a database?
Of course Fannie and Freddie's black boxes are open to OFHEO. So are their giant databases on which the historical modeling was based.
Are you telling me that OFHEO or the Fed can march into, oh, GMAC-RFC's offices and demand access to the servicing records, so that actual performance of their loans can be validated against whatever is in AssetWise's black box? Can a shareholder in GMAC, or a buyer of a GMAC-issued security do that? Of course not.
That's why it all works on rep and warranty. And that's why when I see high volume repurchases, I say to my little self that Mr. Market is "validating" the black box in an interesting sort of way.
Speaking of which, you ever run across much "gaming"?
Only when someone's dumb enough to allow single files. If a given AUS doesn't require a tri-merge, I'd be inclined to pass on it.
tanta - I was, of course, Anonymous (thanks, halo!). Of course OFHEO can't march into GMAC - that's why I noted that there were a lot of black boxes that were open to regulators, but a lot that aren't.
and since it seems that you are still reading this old thread, if you get into the subject of verifying assets for down payments, I would love it if you would spend a paragraph on the FHA "gift" issue raised in the Charlotte Observer, where FHA does verify the source of the assets, and says that it's perfectly fine with them if the source of the assets is the seller, so long as it's money-laundered through a non-profit.
Why didn't I guess that was you?
Happy to oblige. I hate those programs with a bleeding passion.
Must comment as continues:
"Banker"? Seems to me banker has a burr in his side since first post here; which was unheard of in the gentlemanly,savvy discussions on this site previously. Banker seems to me to be an ex-so-called investment type involved in junk bonds and/or derivatives.
Free markets and unbridled capitalism with Ph.Ds. and financial paper casino wizards? LTCM debacle, which almost brought U.S.+++ financial markets to their knees always comes to my mind.
LTCM debacle, which almost brought U.S.+++ financial markets to their knees always comes to my mind.
It should, ca, but not for the reasons you think. LTCM fell ultimately because it didn't have the liquidity to ride out volatility in fundamentally sound long-term positions, and the profits picked up on the cheap by the banks that came to the rescue pretty well proves the soundness of their underlying strategies, if not their touching belief that the market must go your way right now because you think it should. Said snapping up of mostly sound assets is, IMHO, happening once again and for basically the same reasons in the sub-prime market. YMMV, but that's what makes for interesting conversations, eh?
As Anonymous points out, that algorithm could be smarter or dumber. But how would you measure that? Against a database of loans over a long period of time with features comparable to the black box loans?
I'd say this is another problem that appears much larger than it actually is. You (and therefore presumably the regulators) can get their hands on basically unlimited pools of loans with a given set of characteristics and ultimate outcomes by going to the bureaus and pulling archive data. If your model is aimed at a population with characteristic set X, you should be able to put together a good proxy for X at some given point in recent history by talking to TU, EXP or EFX (or preferably all three, of course.) The trick there is that you'll be missing deal structure, but you should be able to estimate that by looking at the tradeline characteristics of the mortgages those folks actually took out and where/when they purchased.
This isn't easy, of course, but it doesn't require the Manhattan Project either.