What are your thoughts on the U.S. raising rates to stamp out inflation before have to cut rats due to a slowdown in thier economy. It seems this is the course Mexico is taking.
Banker, do you mean to be asking that question of CR on the thread below this one?
I ask this only because you would be the first person in living memory who wanted to know what I think the Fed is likely to do. I would be flattered, if I didn't think it was probably an error.
You'd have to ask me on a different thread, though, because I am in the mood to be the Topic Cop today. Perhaps when CR wakes up he will put out another post for you Fed-obsessives to play on (hint!, CR, hint!).
Back in 2005, I originated the following DU approved loans that I could not believe!
580 fico, 64% full doc income DTI, 2 months reserves, 74% LTV, owner occupied, cash out refis and these were NOT Exp approval......Thirty year fixed rates at normal agency rates. These loans were priced normally.
Now some of my peers might have done these loans subprime at a higher rate, prepay, adjustable, and loads of Yield.
I suspect many of the subprime loans could have gone alt-a or maybe agency
In regard to the FED, in my opinion, the regulators need to raise margin requirements to curb inflation, the inflation scare was manufactured to disguise the weakness in the economy and has magnified the issue.
Excess and out of control speculation is the primary problem, the regulators created this mess to mop up the garbage in the subprime markets.
Now, they have a problem that has been the great enabler, and the unwind will present new challenges in attempting to maintain stability in the financial markets. The longer they fail to react, the greater the disruptive nature of the unwind.
The FED has backed itself into a box with no easy solution, the markets will soon unwind the problem if the FED does not.
Tanta - was that the limit of Mudd's comments on applications? If so, he isn't getting the 50% from there - more likely to be a Loan Performance analysis like your first graph. Looking at that first graph, it would seem that 2/3rds would qualify FHA - all the over 620s. What we don't know, and would have to guess at, are DTIs, Reserves, any particular problems relating to mortgages that might make things look worse than the raw FICO would indicate, etc. Eg., if most of those 80-90 LTV >620 FICO borrowers had no reserves and really high DTIs, they wouldn't qualify, even though it looks like they would based on LTV and FICO. I'm not sure what you can get from the second graph - they are all univariates, and you need the cross-tabs to know if a loan might work or not.
But the most important thing to remember about LP is that they cover something like 60% of the subprime market, and are generally thought to cover the higher end segment of it. An important thing to remember when looking at any stats coming out of LP.
I'm not going to let you guys get away with this today. This is not a Fed topic. I put some energy into this post because some people were very interested in the subject yesterday, and want to chew on it. This is not one of my filler posts where I don't care what the comment topics are because the post topic isn't important enough to worry about.
So quit, or I get out my magic Halo wand and start editing your comments to make you all sound like Doomster or Capitalist Pig, which will just subject you to ridicule.
The thread below this one on the homebuilders is still active, and I doubt CR would care if you turned it into a Fed discussion.
Maybe some of these minority borrowers (report from CRL) could explain part of the 50 percent, at least to the point where some could have qualified for near-prime, and probably prime at the margin. (I think the study examined racial disparities in apr only among those getting subprime loans, rather than in a sample of all types of borrowers.) It would be a real shame if that one channel could fill the pool, though.
You're right, mort_fin, that you can't get 50% out of Mudd's remark. There was also a Syron quote about that I haven't managed to locate--my filing sucks lately. I'll post if I hunt it down.
I have some better data on subprime pools than that Fitch thing, but until they become publically available on the web or I get permission from the source to post them, I'm stuck. I hate to make an argument based on material I can see and others can't, because nobody should trust anybody doing that on the internet. Of course the Fitch thing doesn't prove dog about the 50% claim; I'm just saying that it is hardly inconsistent with it.
Another thing I want to look at--I'm working on it, and I'll take help if anyone's got it--is FICO trends. If in fact the subprime pools' average FICOs are getting into 620-659 territory, and recent subprime originations grew at huge rates (which they did, no question), there is a question about whether subprime simply cannot keep going by limiting itself to its traditional clientele. This would suggest that it is "taking over" more of the Alt-A/near-prime space to keep its securitization machine going. I would think we'd need to know more about the composition of the "FICO pool" to answer that question.
That is much I am ignorant of, but this I am expert in.
Tying to herd folks in a blog is akin to herding cats of kindergarten children, frustrating without any the sense if accomplishment of the former.
IMHO whatever the Fed does is the wrong thing, but better than the alternative. So end of that conversation.
Proving that folks put mortgagees at risk because of not steering them to agency is logical for several reasons, one of personal greed, the low level products produce more profit and easier to qualify.
The latter, assuming that you tell a fellow that he does not qualify for anything unless he improves his savings base or score, means that the existence of sub prime has the effect of herding folks into subprime when they would have eventually qualified for better.
Vader, you are surely right about cat-herding. That's why I'm trying to keep a sense of humor about it. Were I to really get my hopes up, I'd just end up disappointed. Who wants to be all pissy on a sunny Sunday morning?
I suspect one of the mechanisms at play here is the "focus on the payment" thing. In other words, you have a borrower who could qualify for an agency fixed rate, at $1800 a month. "Can qualify" here means that the borrower really can carry that payment. But the broker says, "on the other hand, I can get you a loan with a $1200 monthly payment." The borrower, not realizing that this is three-card monte, thinks, well, hell, why shouldn't I take the lowest payment?
One reason why people think mortgage brokers exist is to get them the best possible deal is because mortgage brokers claim to exist in order to get people the best possible deal. We have to bear that in mind.
Beating dead horse here (mostly because I am have lots to learn about loan origination) - but one thing that could shed some light on how these loans were steered is which routes were paved with the most gold.
I.e. -if it were possible in this time frame to pair the # of subprime vs. FHA loans (vs. alt-a-prime) originated with a chart of average fees collected for each category of origination. OK, end of wishful thought..
Oh Vader, we have enough respect to tanta if she does want us to mention you know who we would nt.
So on Topic:
I can figure out the Fitch table - too much info w/o a clear conclusion.
in any case I wonder if the new FHA law in congress is going to solve the problems at least in part. I am amzed that no one is taking care of the real issue which is home prices. Instead they plan to raise FHA limits.
risk C: let's wait for another thread I am not sure I understand all that you wrote.
Don't give up on the topic policing. I don't have anything of substance to add, but this is an absolutely essential topic - if a substantial number of the subprime borrowers turn out to have been slamdunked into failure when they could have succeeded, it will have huge implications for the politics of government intervention, the design of the intervetnion, and the chance of success of one if it occurs. Wish I had something to contribute.
Alo, that's really the $64,000 question, and that info is generally speaking so proprietary that it would take a subpoena to pry somebody's cold dead fingers off it.
I think such subpoenas may be coming. Not just private litigators who see a class action here; Rep. Frank doesn't seem to have much of a sense of humor on this subject.
You can pretty much guarantee that there are not excessive fees and points on an FHA loan. That's because of a lot of things, but mostly because FHA allows closing costs to be rolled into the loan. It therefore has strict calculations about what those closing costs can be; you just can't get away with taking "fake" discount points from the borrower. ("Bona fide" discount points reduce the interest rate. A classic predatory loan is one where the borrower pays three points (usually rolled into the loan, because they don't have that kind of cash up front), but the rate they get isn't properly discounted.)
I still believe, personally, that FHA has lost a lot of "market share" lately because brokers don't get paid enough (in their terms) for FHA loans, given the work you have to put into originating them.
Upping the FHA loan limit will do nothing, in my mind, except prop up unsustainable home prices and increase the risk to the FHA pool. Its loan limits are, actually, based on OFHEO averages (its maximum loan is 87% of the conforming limit). To raise that max loan amount is precisely to take above-average loan sizes, and that's not what FHA was designed to do.
I think it's been pretty much decided that appraisals, especially subprime, are highly suspect as the fees were plenty of incentive to shoehorn the borrower into inflated properties - widespread according to many appraisers.
These borrowers stretched to make the teaser rates that were far below the WAC in the charts.
Add in flippers and speculators
Quite certain there were plenty of HELOCs to cure the CC debt that likely isn't factored in to CLTV here.
Consider this and then add a 25% price decline to the mess.
I expect very few workouts to work out. I like any workout arrangement that has no government funding connected to it.
The money that came out of thin air is all gone in fees and bonuses. I just hope the bondholders find some way to screw the wall st warehouses.
H. Clinton is the biggest pusher for raising FHA limits saying that NYorkers (notice how her accent changed in the last wto years:-) and in the west can not use FHA due to low limits.
These borrowers stretched to make the teaser rates that were far below the WAC in the charts.
That, I'm not so sure about. I see nothing that says this is original loan terms but current WAC. I would expect this chart to be showing me initial loan terms and initial WAC.
Consider this and then add a 25% price decline to the mess.
Again, barely, I don't see these pools showing high concentrations of bubble-market loans at the highest end of the valuations. So are these the ones really getting the 25% haircut? I don't know the answer to that without more data, but I still think we're continuing to conflate a lot of things: Alt-A, jumbo OA, and subprime. Sure, the categories merge into each other at the edges, but if you're telling me that values were as inflated in conforming markets as in bubble markets, you're telling me news. The whole whining about upping the agency loan limits is coming from people who want to see the agencies get into bubble markets, not from people who think they're already there. Look at those average loan amounts in the Fitch chart.
Steerage occurred but to a select subset of applicants: those with good credit yet financial illiteracy (the young, the elderly, minorities). Great post Tanta.
Tanta, Consider this, something that I have been suggesting since 2005...
I am certain the stock market and most observers are accutely myopic. The tip of the iceberg is now right in front of us and many looking at the tiny fraction sticking up where they can see it (in the rear view mirror) still think they see the whole thing.
CA, AZ, NV loan failures are only getting started as we can see from your Fitch charts that show the balances going up. Delinquency rates are rocketing higher. Many of the bubble markets are only beginning to show price leveling or declines. We are now on the iceberg and any fixes need to factor in the next big wave of big money losses. Historical charts are meaningless here. We need predictive charts.
Way to early to propose a fix. This is a marathon and "leaders" are preparing for a 100yd dash...
Yal, just so you know, I don't personally care if Jesus H. Christ come back to fix my DIV/0! problems is backing the increase to the FHA program loan limits. I certainly don't care if Hillary's backing it. I think it's a stupid idea whoever is behind it. Equal-opportunity bi-partisan both-sides-of-the-aisle dimwittery.
The reason why some of us are very fond of this blog is that we're really more interested in figuring out what the issues are, and what seems like a good response to them, than we are in advocating for either political party. I will merely observe that if anyone thinks the FHA proposal is problematic just because Hillary is in favor of it, that person is also a nitwit. I didn't get all spastic about the proposed federal version of the NJ anti-predatory legislation just because Spencer Bachus happens to support it. It is not often that Bachus and I are on the same side of an argument, but it's fine with me if it happens.
The forecasts reflect firings at construction companies and manufacturers, economists said. Fewer jobs threaten to limit consumer spending, which has been sustaining the expansion. Other reports this week may show manufacturing and services were little changed in April, suggesting the economy wasn't picking up speed following the slowest pace of growth in four years.
"Equal-opportunity bi-partisan both-sides-of-the-aisle dimwittery." That describes a lot of what we are seeing even from parties with what I believe are a genuine interest in redressing what can be redressed, and doing so in the public interest.
I am very interested in this discussion, but not in any political fringes of it. Political solutions are only going to be developed from an accurate understanding of the situation.
From what I have seen in banks that do their own agency originations, no brokers involved, and keep the servicing, FNMA standards dropped even as "subprime" non-financial standards rose. The Flex series and the MyCommunity loans will qualify some extraordinary loans.
I don't find the claim that 50% of this stuff could have gone agency at all unbelievable.
Beginning in 2005, FNMA originators were writing very high DTI loans and very high (sometimes greater than 100%) CLTV loans. I know because I had to change field validations for some of my banks!!!
I think the major difference is that there was less risk-layering overall, but even if you read broker forums, you will still see brokers expressing amazement at some of the loans they can get through DU. Nor is it just low FICO, low doc, high CLTV and high DTI's. I-O, hybrid - it's all there.
I don't know that the general public understands how little difference there is overall in these underwriting standards. Because of the way FNMA works, I think brokers with lax controls against fraud get kicked a lot faster. The broker fees paid in other quarters for loans were better, and I also think many brokers got so used to writing with "nonprime" companies that they didn't even realize that they could get some of this stuff through DU. Based on my experience, I don't think there is much real discrimination against minorities. I think areas with low financial literacy and low bank contacts, are likely feeding grounds for brokers with low ethical standards.
As for Mikhail's example loan, I have seen some very similar posted recently on broker forums.
For those interested, you can download the current MyCommunity matrix here(pdf).
Note the 100% financing, interested party contributions, I-O periods, amortizations up to 40 years, and temporary interest rate buydowns. CLTV max 105% with MyCommunity Seconds.
FWIW, I think FNMA has gone a bit overboard due to competition and will have to pull back a bit in the future. MyCommunity Seconds make me cringe a bit in some cases.
Isn't it possible some relatively well qualified buyers "chose" an exploding ARM for themselves based on the frenzy surrounding them? They may have been so convinced that they would own the property only a short time, that the value would just go up, up, up. After all, you could hardly turn on the TV, the internet or open a magazine without being told about the road to riches through real estate. And the riches were supposed to accrue not in decades but in just months, or a year or two. The exploding ARM was the perfect vehicle to speculate in the real estate market. I have known a couple of "normal" people that went out and bought 5 or more houses just because it was the thing to do. The country was truly gripped by a mania (is?).
So, should these loans never have been offered as a choice to a buyer who could qualify for something better? And by better, I mean better in your eyes or my eyes, because they may have thought that 1% rate was just dandy.
In my opinion, no, these type of loans should not be offered to most borrowers- even if they think they want one.
Judging from that table, its really the CLTV/no-doc combo that caused the 2006 problems. The industry's solution has been to rachet down CLTV's, and this extended to Alt-a recently.
But aren't these guys making heroic assumptions from 12 months of data on the 2006 vintage? I mean, talk about a slim reed!
Its entirely possible that the CLTV/no-doc 2006 delinquency experience was caused predominantly by flippers. Interrupted in mid-flip and caught with no equity, they had no choice but to mail in the keys.
But Tanta, don't you think that for most non-flipper purchases, at the end of the day, its going to be DTI's that make them or break them? CLTV's don't cause delinquencies, they cause severity. Its not being able to make the payment that causes most borrowers to fall behind.
And yet, the industry is RAISING DTI's on 80% CLTV loans (if Bear Stearn's latest guideline change is any indication).
Perhaps as the 2003/2004 vintage ARM's reset, we'll see the DTI correlations in the data. Only by then, the industry will be closing the barn door after the horse is long gone.
I like everybody on this site but please do not blame
LoanBrokers for the current mess. All these loans would have been fine were it not for the INSANE PRICES of homes. Lets argue about what/who made the prices so insane.
Lots of interesting questions raised in this thread! Thank you for digging into the numbers.
The question about values being inflated in conforming markets as well as 'bubble' markets is interesting. The easy answer is, of course: no. Yet, I remember reading things two years ago about the market I'm in (Minneapolis area) that predicted there would be no sales slowdown or price decreases here because we never had a 'bubble'. Well: wrongo. We've have both. I've read articles listing the number of downtown condos (admitedly not a big percentage of Mpls area housing) on, or going on, the market, and they show a 2 or 3 year supply -IF you assume absorption at the record rates of 2005. If you assume rates from a few years earlier there could be at least 8 years worth and possibly more.
I also have wondered about the amazing number of mushrooming storefront mortgage companies over the last few years. Might that be where the possible 'steerage' comes from? Cowboy mortgage companies, as it were? And if so, might regulation or very strict licensing limit that stuff? Or would that just hand a de-facto monopoly to the big guys?
Question:
I have a purchase My community program. Everthing seems ok but the client borrowed $5,000 dollars from a friend. What I need to figure out is can she deposit the check in her account and it will be ok as far as the underwriter been ok with the money been borrwed from a friend. NOw with My commuinty does the money have to only come from family members and does the money needed to close does it need to be season and source. If it does need to be season and source how long.
Answer from mortgagemessiah:
You deposit the money but don't tell them it's borrowed
I think Deb hit the nail on the head for the FICO inflation question in subprime.
The number of high FICO's picking subprime to keep the monthly carrying costs at a minimum until the house could be sold was much higher than anyone can imagine.
The number of people buying multiple...many in double digits....houses I think would surprise us all.
deb, I'm personally all in favor of "suitability standards" legislation for mortgage brokers (and lenders, too). That means, in essence, that the originator has some level of fiduciary responsibility to the borrower not just to get him a loan, but to get him a loan only if it is consistent with protecting the borrower's interests, not just the lender's.
Further, I want a crack-down on brokers qua brokers. In other words, if the little bastards cannot establish that they offer every qualified borrower a prime program if that borrower so qualifies, then send them to jail. (Hell with yanking their license; until we get national licensing dbs they just move over the state line.)
Still, I think perhaps a lot of what you're describing is in Alt-A, not subprime. Not that that's good news, of course. It's one of the reasons why I think Alt-A is gonna blow, too.
David, I agree whole-heartedly that DTI is the issue. It's just that DTI is as much a matter of rate as it is loan amount. I want someone to establish (we mortals can only guess) that these loans are true subprime loans with fair subprime rates, because if they aren't, and if we could modify or refi that rate down 300 bps, it could lower the carrying costs enough to make the loan workable. And if--again, if--we are talking about some loans with 80% CLTV, there is some room to capitalize back payments if we can get them on track going forward.
I'm not suggesting this as a cure-all, and I don't think anyone is. But I do know that the MI companies, for instance, will go to the mat on this if there's any chance it's true. They will not pay claims on an insta-foreclosure if there is any evidence that the borrower 1) qualified for a workout but 2) wasn't offered it. I do not believe the MIs are particularly stupid about what "qualifies" for a workout. Believe me. If those loans are flippers or other fraudsters, the MIs will just refuse to pay the claims on the basis that the loan was misrepped to them when they wrote the policies.
As always in this business, there are too many competing interests for any single-minded conspiracy (or single-minded effective solution) to form.
At a recent forecast conference Mr. Seiders [National Association of Home Builders economist ] noted that ARM production now accounts for just 11% of the market compared to 40% a few years ago...
However, MBA shows ARM share of the activity at 18%.
DH - " Lets argue about what/who made the prices so insane."
OK. Lenders & loan brokers were ultimately responsible for higher prices. If the lending industry had not made dumb loans the buyer pool would have dried up in early 2004 and prices would have declined a tiny bit then and gone to steady state at a sustainable price point. The goverment is also partly to blame for fueling the buying with tax incentives into an asset that produces nothing but shelter.
I like everybody on this site but please do not blame LoanBrokers for the current mess. All these loans would have been fine were it not for the INSANE PRICES of homes. Lets argue about what/who made the prices so insane.
Oh, puh-leeze. I have jumped the case of every known participant in the mortgage and housing markets. I have bashed lenders and depositories, ridiculed warehouse lenders and Wall Street funders, and cast aspersions on appraisers, closing agents, and realtors. I have accused mortgage loan underwriters of drinking bong water and speculated on the possibility that your average retail loan officer can roll his IQ with a pair of dice.
You think I'm going to lay off brokers? Not in this lifetime.
There is no abstract market force that drove housing prices up. There were many concrete actual business practices and capital allocations that did that. You cannot talk about this subject without getting down to how all the participants played their parts. If you want to just rag on the Fed, you're on the wrong blog. (We can rag on the Fed, but not exclusively. That simply becomes tedious.)
Well there is another type of mortgage fraud that needs to be taken into account in this 50% pool. It is not predatory fraud, the borrower knows what he is doing, it is not actual fraud because the last thing this category of borrower can afford is a default, the investment scheme behind counts on doing it over and over.
I guess you could call it risk fraud. For all kinds of reasons, some financial but quite a bit political, residential lending and particularly government backed lending has been focused on owner-occupied. Which means that you can only finance one home in any given area (you can get financing for second homes elsewhere). This puts the investor in the market for rental property in a bind. In the right market buying that house and converting it into a rental might make perfect financial sense for all participants in the transaction, but there was a sharp gap between the rates and terms of going owner-occ and commercial.
Well the temptation was simply to fudge, to keep your existing house and its existing conventional prime loan and use owner-oc fsub-prime inancing to buy the property anyway. So within that 50% pool you would have to control for the number of people who already owned a house and a simple examination of FICO and income isn't going to reveal this particular type of fraud. A certain category of investor was using stated/stated or no-doc not because their income and credit wouldn't get them into a regular loan but because it already had.
The fact that FICO scores were improving over time in sub-prime may simply reflect the increasing willingness of lenders and borrowers to enter into what seemed a harm-free way of writing loans at good LTVs. Because in a strong market a 100%LTV is pretty much like free money and being held back from that by rules that effectively said "Only one per customer" was ultimately too frustrating, there simply was too much money just laying on the table.
Of course in the end everyone learns why you have underwriting rules to start with, but it was a fine ride while it lasted and in certain pockets of the country still is.
As an example I live in a still largely working class small city that had the weakest real estate prices in the county. Now due to some large public and private investments and some changes in zoning the whole town looks to be set for gentrification in a big way. People who don't mind blinking while signing that guarantee of owner occupancy form are going to make a lot of money. Me, I am too lazy and have no particular desire to be rich. Then again my condo unit appreciated 20% last year and I plan to enjoy the ride while it lasts by doing nothing at all.
But the point is there is a component of sub-prime that is neither victims of predators, or people whose eyes were bigger than their stomachs and so over-leveraged, or flat out speculators who simply banked on appreciation but instead hard-headed investors who exploited a wide open hole in the industry t
2nd chart pretty clearly shows that 620 is the magic FICO score. The correlation between FICO score and mortgages that Default by Month 12 is stronger than any of the other criteria prevented.
Second would be Piggybacked loans. These loans seem far more likely to Default.
Documentation levels don't seem to play as big a role as one would think. Maybe all the 'liar loan' bashing is unwarranted.
Bruce, if you go back to the Ranieri comments I posted below, you will see that he explicitly claims to be talking only about owner-occupants. I cannot prove him wrong, nor can you.
Also, didn't you used to be one of those mortgage lenders who made these loans? I seem to remember you trying to convince me last year that this was a great strategy, and that your "financial backers" could handle it easily. You seem to have changed your outlook. Did you also give up being a lender? I'm curious.
BrooklynInDaHouse, while subprime lenders did more reduced doc in 2005-2006 than they ever used to, they still didn't hold a candle to the Alt-A stuff. Actually, when you start looking at Alt-A pools, you see that doc type is a huge factor.
I know you hate the reliance on FICO scoring, but the Fitch data clearly shows that 620 is the bullet-proof number when it comes to defaulting within 12 months. Is this different in the Alt-A arena?
Subprime was the greese for property owners to do cash out refi's. Many of these had fixed rate loans but they converted to low teaser rate ARM type, IO etc to get cash out for whatever purpose and figured that RE always goes up so there was more were that came from.
Now this has nothing to do with credit scores, GSE's rather its all about getting the home ATM machine working which the subprime teaser rate financing promised and delivered.
The other issue is RE/mortgage Fraud which would be more dificult with conventional loans etc, the subprime lending environment encourged this type of activity which again has nothing to do with credit scores or GSE availability rather both Fraud and cash out refi were the major drivers of this lending boom.
Brooklyn, the thing the Fitch chart here doesn't show is absolute numbers of early defaults. In other words, it shows that over these selected vintages, the average FICO of early default loans is getting higher. What it doesn't show you is that the early default rates for the 05-06 vintages are so much higher than for the early ones. In other words, at the same time the average FICO was improving, the loans were going EPD in much larger numbers. That is the sense in which Fitch concluded that FICO alone has become a less reliable indicator. Actually, they concluded that the best correlation in this pile o' loans was CLTV and presence of piggyback.
So I'm not trying to misuse their chart by claiming it shows something it wasn't intended to show. Certainly "traditional" underwriting put the prime/subprime cutoff at 620. Fair, Isaacs itself claims that 620 represents a signficant cut-off in terms of predicted delinquencies. The GSEs traditionally use 620 as their cutoff for standard programs.
So that begs for an answer: how could the FICOs in a subprime vintage be high enough to get an average of 625?
It occurs to me that a 'standard' approach where one attempts to alter one variable while holding others constant may not work well here. The issue appears to be system behavior, not whether any one factor was necessarily the primary cause of (and hence can be blamed for) a perceived negative outcome.
It seems more likely that something like an ecology model where various inputs may be altered in combination would work better; i.e., money flows through a given economic system in much the same was as energy and matter flow through a marshland; how it is distributed, what feeds on what, determines who succeeds and whether or not there is net growth or decay in the system as a whole.
Human greed and stupidity are constants, what changed was some feature of the network, an additional resource or alteration of constraint(s). My own vote would be that (a) new methods of securitization (distribution of risk constraint + growth incentives for large-scale species such as investment banks) and (b) automation of underwriting represented an increase in resources that should have been met with strengthened regulation/policy (constraints) if the intent was to reduce the potential for increased system instability; that regulation/policy could not be accomplished in the existing political environment extant at the time.
It may sound too fanciful to characterize the housing/mortgage melt-up as an algal bloom, a red tide, but as I look at the charts CR and Tanta post it increasingly appears that way to me and I can't help wondering what a network chart might look like.
Average Joe, Ranieri is talking about really occupied, not fake occupied. He says that explicitly. I believe him to be a sophisticated and well-enough informed market participant that he would be aware of the occupancy fraud problem and trying to account for it. I know it isn't clear to those outside the biz, probably, but Lew Ranieri invented a lot of this shit, and he is on committees these days with God. That doesn't make him infallible, but it certainly suggests that he gets good inside dope. For what it's worth.
RW, thanks for the splendid comment. I think we have a largely overdetermined phenomenon here, which is one reason I get impatient with "the single answer to the problem" approach, particularly when it is suggested that the most important deterministic variable is the intelligence level of the party who is by definition the least informed (the borrower/buyer). Certainly the system we have now will only continue to work with a fair amount of ignorance/greed/stupidity on the borrower/buyer's part. This implies that the more sophisticated--and equally greedy--participants have an interest in the borrower/buyer remaining informationally-challenged. One way you can do that, it seems to me, is to continue to develop more and more highly-complex products that are very, very difficult to compare or measure. I keep using the "Borg" metaphor: once we figure out Wall Street and Wall Street-inspired lenders' tactics, they adapt and we're confused again.
The ecological metaphor is fascinating to me because I have argued, in the past, that the mortgage business was once a fairly sleepy simple boring low-margin reasonable-volume business in which you could make a fair profit but you'd never get your mug on the cover of Time or be able to afford a Rolex.
Then Wall Street noticed us. And what an "opportunity" we presented to be "assisted" into the "next stage" of business "evolution" with their generously-provided "expertise."
I'd say, tell it to the Indians, but that'd be redundant.
Thanks for the response..and forgive my ignorance...but I know I am not the only one wondering...how he would or could know the difference, other than driving out to see if someone is living there. If he can tell via some other way (i.e. by some statistical measure or a review of loan docs etc) then who/why didn't those buying the loans see the "fake" occupied indicator. (Or perhaps they are or can and will be throwing otherwise current yet fraudulent loans back on the originator?)
Joe, a whole lot of that "fake occupied" stuff was certainly obvious to the originator; it involved either collusion or willful ignorance. I mean, even an underwriter of average intelligence and wakefulness can notice that you claim to be turning a $650,000 suburban home into a rental in order to move into a $200,000 condo two miles down the road.
If you're a servicer, you notice that the mailing address for the monthly statement doesn't match the property address. Or you notice that the monthly statement gets returned by the post office because the home is vacant. Really, this kind of stuff can be found. The point is that most of it is already blowing up, in the early defaults. What we're trying to look at now are the ones that are beginning to go bad only as they approach their rate resets.
Let me say again, as I've said before, that a loan with an 80% CLTV is not a speculator loan. It doesn't matter whether it's owner-occupied or not, and it doesn't matter whether the borrower intends to flip it or not. If you put 20% of your own cash on the table, you're an investor. That is considered reasonable leverage.
So the speculator problem is in the 100% or almost 100% CLTV stuff. Whatever else the loan might have, it has no equity to start with.
Yal, FHA always requires a down payment. The reason that FHA LTVs can go up to and over 100% is that you are allowed to roll closing costs into the loan. So a 103% FHA loan probably has a 2% down payment but 5% closing costs.
That is, if you are an owner-occupant. FHA allows some investor loans, but not at those LTVs it doesn't. In order to get a 103% investor loan from FHA, you gotta be committing fraud.
By the way, the traditional justification for allowing investment property loans in FHA was to give people who live in these moderately-priced neighborhoods the opportunity to buy rental properties; in other words, to avoid leaving access to investment-property financing only to the rich or to corporations. I am not claiming that's worked out all that well, just that that was the idea. Certainly you do find urban neighborhoods in which individuals have taken over from absentee landlords, and the neighborhood has improved a great deal. It's like doing those multi-unit loans: putting a low-to-mod income borrower in an urban 4-flat means the occupants of these structures get a shot at being the landlords. You still have three rental units; you just converted one to an owner-occupied unit. FHA is supposed to be doing stuff like that, not providing subsidized financing to the professional RE investment class. Those folks can go to banks and get CRE loans, and they should.
"mikhail, what was the DTI before the new loan? Do you remember?
Tanta | 04.29.07 - 8:44 am | # "
Tanta, I didn't originate these borrowers prior loans so I'm unsure what their prior DTI's had been; however, I do remember that in 2005 the DU engines started becoming aggressively high as 64% DTI for
What I mean, mikail, was, did the cash-out refi at 74% LTV with the 67% DTI improve the borrower's position? In other words, did we start with a borrower with 70% LTV and 75% DTI, who took out enough cash to bring the LTV up to 74% but the DTI down to 67%?
Each individual loan is different, and one thing you don't necessarily know here (but the GSEs do) is wether the GSEs already own the loan being refinanced. The AUS also does look at things like how long that borrower has owned that home, and where that nasty debt load seems to have come from. For instance, if I had a long-time homeowner who got into a nasty debt mess with at least some of it being medical bills (you can see that on the credit report), and I could improve their position by advancing a little more cash, I might be willing to do it. After all, if I let them keep going with that 75% DTI, I'll end up with some REO pretty soon. If there's a chance they can make it with 67%--and it will depend a lot on their mortgage payment history--it could be worth it.
In other words, I was asking if the cash-out was being used to pay down or pay off some debts the borrower already had.
IMHO Greed had overwhelmed all other senses. Greenspan created the bubble when he lowered to 1% and bubble stoked greed. When greed is unchecked you get a bigger bubble. Eventually all bubbles burst causing lots of pain.
Normally people were buying houses to live, but in 2004-2006 people were buying to get rich. Yes, people chose $1,200 payment in an exploding ARM vs. $1,800 payment in a normal loan because they were greedy and stupid. 20-30% guaranteed appreciation per year beats extra 2% on your mortgage rate. They wanted to live big. House is not an American dream. Living big is an American dream. Of course brokers and bankers also got greedy and used borrower's stupidity to full extent. "Fiduciary duty" has no appeal when the greed has overcome society.
Tanta - your statement on FHA is true only in the most technical of senses. Since FHA allows the down payment to come from the seller (who of course turns around and jacks up the price), and allows closing costs to be rolled into the loan, you get in effect no down payment loans with LTVs over 103.
I personally know 3 mangers of 3 different mortgage brokers; 1 in Atlanta, 1 in Vegas and another in Michigan (Please don't hold this against me). Theyve all told me straight up they try steering people into what they call "Affordability" loans or what I'd call toxic because this is where the money is, hooking them most of the time with the lower initial monthly payment. It is easy for them because a lot of people budget on a month to month basis without considering the long term consequences.
So to me its not surprising that 50% of these borrowers couldve qualified for agency loans, but were sold into something else. This is a capitalistic society and I cannot blame the brokers for trying to make the most money they can just as any other salesman would, but I do feel sorry for the people who were duped, mislead or lied to by some of the snakes in this industry.
Most of what is written here is over my head, but IMHO we should just let the market run its course prosecute the people who committed crimes and let the losers learn from their mistakes. Sadly I believe government will introduce new regulations, criminals will just walk away and the taxpayers will end up bailing out the losers. What a great country.
The sleepy lagoon of mortgage lending becomes Jurassic Park? I like it (the analogy that is, not the outcome); Hmmmm, that probably makes the investment banks giant brachiosaurs, happily converting massive quantities of living vegetation into dung, but who is T Rex?
Tempting to blame the accommodative policies of the Fed for creating all the extra oxygen required too but, at least as I hear it, Stephanie Pomboy of Macromavens has argued that the Fed controls barely 25% of money/credit creation in the US these days.
I was tempted to add (c) breakdown of depression era banking-brokerage barriers to my list of key factors -- having the same person who lends you money be the one who is selling something to you seems to be one of the most fundamental conflicts of interest I can imagine -- but figured that element fit logically into the policy response (or lack thereof) factor so I left it out.
In a (possibly vain) attempt to return to the topic of the thread I would like to ask what would a relatively healthy mortgage lending system look like at equilibrium and what factors are most likely to destabilize equilibrium? I'm sure it's obvious I am not a mortgage professional but the reason I ask is that it occurs to me that that money velocity could also be a factor? That is, pursuing the red tide analogy a bit further, the 'bloom' was amplified by a much larger supply of 'nutrients' per unit time (rate) than the system could normally handle so total credit availability may not be the only issue? Hope that makes sense and/or is not too primitive a question.
Oh, sunsetbeachguy, thank you so much, not just for the link but for your comment thereon.
So if I understand this right--I'm not a regular reader of the OC Register, you understand, being one of those snotty right-coasters--this guy is looking for mortgage professionals to write stuff for him for free. And for no pay, you don't get to be "hostile"? Holy Jumpin' Jack Flash, there are mortgage people who will accept this level of exploitation without being able to let loose with some snark?? We are doomed, oh, we are doomed, my beloved business.
I'm frankly just amazed that a Real Reporter is sufficiently able to read for tone to pick up on Tanta's little edge. Don't be expecting me to rewrite my media policy any time soon.
Mort_fin, yeah, yeah, but you know where you end up once you start actually trying to explain FHA loan amount calculations. You do it.
Something a la Tanta over at the Calculated Risk blog, would be good, although you don't necessarily need to take her tone (it can be a little hostile). But you should be at least as experienced and insightful.
WTF?
This is when tracheas start getting ripped out.
Who the F is this guy to bad mouth people gratuitously like that?
FYI SF Chronicle about buyer Refi problems around CA & a Paul Mikhail cited as an example
P. Mikhail told him he he would get a 2% rate and that his payment would be fixed for 5 yeasr...the most it would increase would be about$10,000 over 5 years...In fact, the buyer said his principal is increasing at a rate of about$10,000 a year...
when called Mikhail apologized and replied that is what were told by the lenders....
Just to be absolutely clear, you're saying that Ranieri knows the true borrower status... full doc, no piggybacks, owner-occupied, etc.?
Here in SoCal the stories of twenty-something mortgage brokers making six-figure incomes were everywhere, so again, I have no doubt that many people were steered into the best possible loan... for generating fees.
p.s.: Deb, please update HBB with your latest observations -- we miss you!
tj, I'm saying the percent of true owner-occupied properties can be estimated by someone who is taking into account the amount of fraud going on, and who has access to information from servicers. Servicers do know a lot about these things. So does everybody who had to buy back a loan in the last six quarters. I'm just saying it's not a secret any longer.
I am not saying these numbers are correct just because Ranieri says so. I'm saying that if anyone is in a position to get the inside dope, it's him. That's all. You can take that with all the salt in your cellar. I hope to get my hands on whatever data he's got, and I promise I'll post it if I find it.
Needless to say those expecting to hide behind plausible deniability got some splainin to do (since Ranieri, and therefore presumably others, knows who did what to whom)
....the only problem is, no one in a position to do anything about it is asking for an explaination. Maybe on a macro level...but not an individual case by case level.
Seems a little enforcement on existing violations (be it legal, civil, or financial) would go a long way to "solve" the problem.
Therein lies the real problem though, those who can, don't want to, not right now anyway, since they (or their friends) would be caught in the middle.
Seems those with money involved want their money back before the one who owes it to them is put in a position to be unable to pay it back.
Everyone knows the solution. They are just waiting for it to crash on it's own or go away, since any effort to do what should have been done in the first place, strict lending standards, will be seen as the "cause" of the problem.
Off topic I know, but your faith in Ranieri's knowledge highlights the crux of this whole housing bubble issue. There are no mysteries. Everyone already knows the situation we are in, how we got there, and who is responsible and on what level. But no one can or will do anything to solve it since the "solution" is what we are all hoping to avoid.
CR,
what is your idea about some analysis into euro area housing bubble as well//
spanish new household formation is almost 50% that of US??
from economist:
Helped by low interest rates since it joined the euro in 1999, Spain has been erecting houses at an astonishing rate. Last year it built 800,000, reckoned to be more than France, Germany and Italy combined. Economists in Madrid forecast that the house-building boom will keep slowing until the new-build rate more closely matches the rate of new household formation, around half a million a year. House-price rises are already slowing, albeit not brutally. They peaked at about 18% a year in late 2003, and are now running around 7%, with some expecting them to slow further. Around the outskirts of Madrid there are new property developments where work appears to have stalled. The Bank of Spain has said in recent years that house prices were 35% overvalued.
Car valuations matter because an increasing number of consumers are "upside down" on their auto loans, meaning they owe more than the car is worth. In the first quarter of 2007, 29 percent of consumers were upside down on their vehicles, Kelley Blue Book reports. Additionally, on average, people traded in cars on which they still owed more than $3,600. And what do many of these buyers do with that loan balance when they want another car?
They roll that negative equity -- the $3,600 and often much more -- into yet another vehicle loan.
"It is a pandemic," says Jack Nerad, executive market analyst for Kelley Blue Book.
Life is hard; its harder if youre stupid.
- John Wayne
I would venture to say that if these same people had it to do over again with a RE loan pre bubble with all the disclosures explained to them in full they would have still taken the same loans.
We have an administration that is very proud of privatization and has little negative to say about the sanctioned looting performed by government contractors in Iraq and during Katrina recovery. We have a populace that has been trained for years to laugh at the statement, "I'm from the government and I'm here to help". People have been trained to expect unacceptable operations because "What else can you expect?" We have an administration that allowed the student loan operation to become a steering operation. So why do you think that the government would have objected to the looting of the housing sector by unscrupulous lenders? What will it matter anyway in the end? There were no laws against it. After all, what laws, let alone ethics, governs where a loan is steered? For example, who is going to jail in the student loan steering operation?
In the first quarter of 2007, 29 percent of consumers were upside down on their vehicles, Kelley Blue Book reports
Damn, I never borrowed anything to buy a car, I was always coming with 100% cash. In college, I had no car at all. Now, I have 2 cars, one of them is as luxury as you can imagine. Still, 100% cash. It just takes some patience...
Tanta:The reason why some of us are very fond of this blog is that we're really more interested in figuring out what the issues are, and what seems like a good response to them, than we are in advocating for either political party.
Vote Free Lunch Party 2008!
Unsustainable Systems Rock!
As long as I win the debate, I don't care how much data I need to overlook, because nothing beats other people thinking I'm Right. Give me the credit for my wins and others the accountability for my mistakes.
From a loan originator's stand point it is far, far, easier to take someone with good credit, but somewhat laborious income documentation and put them quickly in to a subprime loan rather than battle it out with a prime underwriter to qualify that same borrower prime.
This idea was taken to the extreme where you could quickly use 12 months bank statements to qualify someone subprime rather than wrestle through tax returns, etc. So loan originators were 1. lazy and didn't want to deal with prime underwriting 2. wanted loans to go faster which the lax subprime underwriting allowed and 3. wanted more lender juice on the loan for selling them a higher quality loan.
This last point bears particular mention because loan originators would routinely be paid YSP on the back of subprime loans that qualified below the floor rate on the subprime rate sheets.
For example if the floor on a subprime rate sheet is 5.5% but because the borrower has excellent credit, low LTV, and other positives that would subtract from the par rate on a rate sheet, they could easily qualify for a 5%. But since the floor was 5.5% that .5% turned in to 1 point YSP for the originator.
There were too many compelling reasons to put prime eligible people in to subprime loans.
"Conclusion
After analyzing the underlying loans of the three ABX series we found that it is difficult to look at the
traditional characteristics such as FICO and LTV to gauge default risk. While remittance report data
seems to vary from vendor to vendor, consumers may have also learned the nuances of increasing
their FICO score shortly before applying for a mortgage loan. It is also likely that at the sub-prime
level there is not much of a difference between a 600 and a 650 FICO. One of the reasons that LTV
may be slightly misleading is the use of silent second loans to cover the down payment on a home.
In these transactions the first lien mortgage lender does not know that the borrower took on an
additional loan for the homes down payment, which underestimates the borrowers stated LTV ratio.
The blurred lines between prime, alt-A, alt-B and sub-prime loans also make mortgage loan
comparison difficult. As the landscape of the mortgage market has changed, it may be more relevant
to analyze the type of loan issued, the health of the housing market, and whether the borrower was
able to provide full documentation to support the loan to determining risk. Overall, an attribute snap
shot is not nearly enough information to make an accurate assessment on a loan. Instead, market
participants must, at the very least, understand historical underwriting practices, geographic
concentrations, documentation practices, and payment trends in making sound investment decisions."
There may be some therapy programs that can help you with that. For your own sake, seek help!
Numura also not drinking the cool aid
I sure wish someone could find Nomura's correspondent underwriting guidelines online. I'd like to know what kind of stuff they've been buying. They are, actually, in the business of buying Alt-A mortgage loans, you know. At least they were last I knew.
On a slight tangent... how can you tell appart those people who had good credentials and got steered into a bad loan product and those who had equaly good credentials but chose the lesser product because they were gambling to flip a house or re-fi later to save some cash on the short term?
When I bought my house I insited and was very clear I wanted a fixed rate... that's what I got. Most of my highly educated colleagues second-guessed that decision often quoting how much more is this mortgage costing me. Now you're telling me that they are potential victims because they could have qualified for the better product?
That is the problem with ANY widespread bailout. Any generalization has too many caveats. I say it is time for lawyers to enjoy their own bubble with RE lawsuits.
About six months ago, on this or a similar blog, I commented that when my wife and I bought our first home in 1967 the "rules" were to look for a home costing no more that 2.5 to 3 times your annual income and to put 20% down out of your own pocket.
That was in the days before bank credit cards so the only other debt we had was a month's worth of gas fill ups and a couple of department store charge cards for clothing, or dishes, or something. (We had paid $1,800 cash for our new VW.)
I asked not why we didn't return to those standards, but what were the current comperable standards.
After my comment I was lambasted from all side essentially for being "out of it". I didn't understand modern mortgage finance; I was against helping people realize their dreams; etc. etc.
Yes, I understand the current mortgage market has helped people buy their first homes, and more expensive homes, and vacation homes. But I still wonder if they are really any better off then if those people who did understand modern mortgage finance had not helped them.
What are your thoughts on the U.S. raising rates to stamp out inflation before have to cut rats due to a slowdown in thier economy. It seems this is the course Mexico is taking.
Banker, do you mean to be asking that question of CR on the thread below this one?
I ask this only because you would be the first person in living memory who wanted to know what I think the Fed is likely to do. I would be flattered, if I didn't think it was probably an error.
Actually Tanta, I also want to know what do you think the Fed would do ?
No, you don't. No one does. Especially the Fed.
You'd have to ask me on a different thread, though, because I am in the mood to be the Topic Cop today. Perhaps when CR wakes up he will put out another post for you Fed-obsessives to play on (hint!, CR, hint!).
Agency has some LOW Fico/low LTV/High DTI LOANS..
Back in 2005, I originated the following DU approved loans that I could not believe!
580 fico, 64% full doc income DTI, 2 months reserves, 74% LTV, owner occupied, cash out refis and these were NOT Exp approval......Thirty year fixed rates at normal agency rates. These loans were priced normally.
Now some of my peers might have done these loans subprime at a higher rate, prepay, adjustable, and loads of Yield.
I suspect many of the subprime loans could have gone alt-a or maybe agency
mikhail, what was the DTI before the new loan? Do you remember?
My apologies tanta for not being on-topic.
In regard to the FED, in my opinion, the regulators need to raise margin requirements to curb inflation, the inflation scare was manufactured to disguise the weakness in the economy and has magnified the issue.
Excess and out of control speculation is the primary problem, the regulators created this mess to mop up the garbage in the subprime markets.
Now, they have a problem that has been the great enabler, and the unwind will present new challenges in attempting to maintain stability in the financial markets. The longer they fail to react, the greater the disruptive nature of the unwind.
The FED has backed itself into a box with no easy solution, the markets will soon unwind the problem if the FED does not.
Tanta - was that the limit of Mudd's comments on applications? If so, he isn't getting the 50% from there - more likely to be a Loan Performance analysis like your first graph. Looking at that first graph, it would seem that 2/3rds would qualify FHA - all the over 620s. What we don't know, and would have to guess at, are DTIs, Reserves, any particular problems relating to mortgages that might make things look worse than the raw FICO would indicate, etc. Eg., if most of those 80-90 LTV >620 FICO borrowers had no reserves and really high DTIs, they wouldn't qualify, even though it looks like they would based on LTV and FICO. I'm not sure what you can get from the second graph - they are all univariates, and you need the cross-tabs to know if a loan might work or not.
But the most important thing to remember about LP is that they cover something like 60% of the subprime market, and are generally thought to cover the higher end segment of it. An important thing to remember when looking at any stats coming out of LP.
I'm not going to let you guys get away with this today. This is not a Fed topic. I put some energy into this post because some people were very interested in the subject yesterday, and want to chew on it. This is not one of my filler posts where I don't care what the comment topics are because the post topic isn't important enough to worry about.
So quit, or I get out my magic Halo wand and start editing your comments to make you all sound like Doomster or Capitalist Pig, which will just subject you to ridicule.
The thread below this one on the homebuilders is still active, and I doubt CR would care if you turned it into a Fed discussion.
Maybe some of these minority borrowers (report from CRL) could explain part of the 50 percent, at least to the point where some could have qualified for near-prime, and probably prime at the margin. (I think the study examined racial disparities in apr only among those getting subprime loans, rather than in a sample of all types of borrowers.) It would be a real shame if that one channel could fill the pool, though.
You're right, mort_fin, that you can't get 50% out of Mudd's remark. There was also a Syron quote about that I haven't managed to locate--my filing sucks lately. I'll post if I hunt it down.
I have some better data on subprime pools than that Fitch thing, but until they become publically available on the web or I get permission from the source to post them, I'm stuck. I hate to make an argument based on material I can see and others can't, because nobody should trust anybody doing that on the internet. Of course the Fitch thing doesn't prove dog about the 50% claim; I'm just saying that it is hardly inconsistent with it.
Another thing I want to look at--I'm working on it, and I'll take help if anyone's got it--is FICO trends. If in fact the subprime pools' average FICOs are getting into 620-659 territory, and recent subprime originations grew at huge rates (which they did, no question), there is a question about whether subprime simply cannot keep going by limiting itself to its traditional clientele. This would suggest that it is "taking over" more of the Alt-A/near-prime space to keep its securitization machine going. I would think we'd need to know more about the composition of the "FICO pool" to answer that question.
That is much I am ignorant of, but this I am expert in.
Tying to herd folks in a blog is akin to herding cats of kindergarten children, frustrating without any the sense if accomplishment of the former.
IMHO whatever the Fed does is the wrong thing, but better than the alternative. So end of that conversation.
Proving that folks put mortgagees at risk because of not steering them to agency is logical for several reasons, one of personal greed, the low level products produce more profit and easier to qualify.
The latter, assuming that you tell a fellow that he does not qualify for anything unless he improves his savings base or score, means that the existence of sub prime has the effect of herding folks into subprime when they would have eventually qualified for better.
Proving that could be interesting.
Vader, you are surely right about cat-herding. That's why I'm trying to keep a sense of humor about it. Were I to really get my hopes up, I'd just end up disappointed. Who wants to be all pissy on a sunny Sunday morning?
I suspect one of the mechanisms at play here is the "focus on the payment" thing. In other words, you have a borrower who could qualify for an agency fixed rate, at $1800 a month. "Can qualify" here means that the borrower really can carry that payment. But the broker says, "on the other hand, I can get you a loan with a $1200 monthly payment." The borrower, not realizing that this is three-card monte, thinks, well, hell, why shouldn't I take the lowest payment?
One reason why people think mortgage brokers exist is to get them the best possible deal is because mortgage brokers claim to exist in order to get people the best possible deal. We have to bear that in mind.
Beating dead horse here (mostly because I am have lots to learn about loan origination) - but one thing that could shed some light on how these loans were steered is which routes were paved with the most gold.
I.e. -if it were possible in this time frame to pair the # of subprime vs. FHA loans (vs. alt-a-prime) originated with a chart of average fees collected for each category of origination. OK, end of wishful thought..
Oh Vader, we have enough respect to tanta if she does want us to mention you know who we would nt.
So on Topic:
I can figure out the Fitch table - too much info w/o a clear conclusion.
in any case I wonder if the new FHA law in congress is going to solve the problems at least in part. I am amzed that no one is taking care of the real issue which is home prices. Instead they plan to raise FHA limits.
risk C: let's wait for another thread I am not sure I understand all that you wrote.
Tanta:
Don't give up on the topic policing. I don't have anything of substance to add, but this is an absolutely essential topic - if a substantial number of the subprime borrowers turn out to have been slamdunked into failure when they could have succeeded, it will have huge implications for the politics of government intervention, the design of the intervetnion, and the chance of success of one if it occurs. Wish I had something to contribute.
IMHO there is another issue that would push subprime, that is cash out. Not only do you get a lower payment but you could get money back in subprime.
Alo, that's really the $64,000 question, and that info is generally speaking so proprietary that it would take a subpoena to pry somebody's cold dead fingers off it.
I think such subpoenas may be coming. Not just private litigators who see a class action here; Rep. Frank doesn't seem to have much of a sense of humor on this subject.
You can pretty much guarantee that there are not excessive fees and points on an FHA loan. That's because of a lot of things, but mostly because FHA allows closing costs to be rolled into the loan. It therefore has strict calculations about what those closing costs can be; you just can't get away with taking "fake" discount points from the borrower. ("Bona fide" discount points reduce the interest rate. A classic predatory loan is one where the borrower pays three points (usually rolled into the loan, because they don't have that kind of cash up front), but the rate they get isn't properly discounted.)
I still believe, personally, that FHA has lost a lot of "market share" lately because brokers don't get paid enough (in their terms) for FHA loans, given the work you have to put into originating them.
Upping the FHA loan limit will do nothing, in my mind, except prop up unsustainable home prices and increase the risk to the FHA pool. Its loan limits are, actually, based on OFHEO averages (its maximum loan is 87% of the conforming limit). To raise that max loan amount is precisely to take above-average loan sizes, and that's not what FHA was designed to do.
I think it's been pretty much decided that appraisals, especially subprime, are highly suspect as the fees were plenty of incentive to shoehorn the borrower into inflated properties - widespread according to many appraisers.
These borrowers stretched to make the teaser rates that were far below the WAC in the charts.
Add in flippers and speculators
Quite certain there were plenty of HELOCs to cure the CC debt that likely isn't factored in to CLTV here.
Consider this and then add a 25% price decline to the mess.
I expect very few workouts to work out. I like any workout arrangement that has no government funding connected to it.
The money that came out of thin air is all gone in fees and bonuses. I just hope the bondholders find some way to screw the wall st warehouses.
H. Clinton is the biggest pusher for raising FHA limits saying that NYorkers (notice how her accent changed in the last wto years:-) and in the west can not use FHA due to low limits.
These borrowers stretched to make the teaser rates that were far below the WAC in the charts.
That, I'm not so sure about. I see nothing that says this is original loan terms but current WAC. I would expect this chart to be showing me initial loan terms and initial WAC.
Consider this and then add a 25% price decline to the mess.
Again, barely, I don't see these pools showing high concentrations of bubble-market loans at the highest end of the valuations. So are these the ones really getting the 25% haircut? I don't know the answer to that without more data, but I still think we're continuing to conflate a lot of things: Alt-A, jumbo OA, and subprime. Sure, the categories merge into each other at the edges, but if you're telling me that values were as inflated in conforming markets as in bubble markets, you're telling me news. The whole whining about upping the agency loan limits is coming from people who want to see the agencies get into bubble markets, not from people who think they're already there. Look at those average loan amounts in the Fitch chart.
Steerage occurred but to a select subset of applicants: those with good credit yet financial illiteracy (the young, the elderly, minorities). Great post Tanta.
Tanta, Consider this, something that I have been suggesting since 2005...
I am certain the stock market and most observers are accutely myopic. The tip of the iceberg is now right in front of us and many looking at the tiny fraction sticking up where they can see it (in the rear view mirror) still think they see the whole thing.
CA, AZ, NV loan failures are only getting started as we can see from your Fitch charts that show the balances going up. Delinquency rates are rocketing higher. Many of the bubble markets are only beginning to show price leveling or declines. We are now on the iceberg and any fixes need to factor in the next big wave of big money losses. Historical charts are meaningless here. We need predictive charts.
Way to early to propose a fix. This is a marathon and "leaders" are preparing for a 100yd dash...
Yal, just so you know, I don't personally care if Jesus H. Christ come back to fix my DIV/0! problems is backing the increase to the FHA program loan limits. I certainly don't care if Hillary's backing it. I think it's a stupid idea whoever is behind it. Equal-opportunity bi-partisan both-sides-of-the-aisle dimwittery.
The reason why some of us are very fond of this blog is that we're really more interested in figuring out what the issues are, and what seems like a good response to them, than we are in advocating for either political party. I will merely observe that if anyone thinks the FHA proposal is problematic just because Hillary is in favor of it, that person is also a nitwit. I didn't get all spastic about the proposed federal version of the NJ anti-predatory legislation just because Spencer Bachus happens to support it. It is not often that Bachus and I are on the same side of an argument, but it's fine with me if it happens.
Employment Gain Smallest in Two Years: U.S. Economy Preview
Employment Gain Smallest in Two Years: U.S. Economy Preview - Bloomberg.com
The forecasts reflect firings at construction companies and manufacturers, economists said. Fewer jobs threaten to limit consumer spending, which has been sustaining the expansion. Other reports this week may show manufacturing and services were little changed in April, suggesting the economy wasn't picking up speed following the slowest pace of growth in four years.
Oh No. I could not care less Hillary or not.
I just want people to know where to direct their letters and am sure Hillary is not the only one. she is just the one I heard advocating it.
"Equal-opportunity bi-partisan both-sides-of-the-aisle dimwittery." That describes a lot of what we are seeing even from parties with what I believe are a genuine interest in redressing what can be redressed, and doing so in the public interest.
I am very interested in this discussion, but not in any political fringes of it. Political solutions are only going to be developed from an accurate understanding of the situation.
From what I have seen in banks that do their own agency originations, no brokers involved, and keep the servicing, FNMA standards dropped even as "subprime" non-financial standards rose. The Flex series and the MyCommunity loans will qualify some extraordinary loans.
I don't find the claim that 50% of this stuff could have gone agency at all unbelievable.
Beginning in 2005, FNMA originators were writing very high DTI loans and very high (sometimes greater than 100%) CLTV loans. I know because I had to change field validations for some of my banks!!!
I think the major difference is that there was less risk-layering overall, but even if you read broker forums, you will still see brokers expressing amazement at some of the loans they can get through DU. Nor is it just low FICO, low doc, high CLTV and high DTI's. I-O, hybrid - it's all there.
I don't know that the general public understands how little difference there is overall in these underwriting standards. Because of the way FNMA works, I think brokers with lax controls against fraud get kicked a lot faster. The broker fees paid in other quarters for loans were better, and I also think many brokers got so used to writing with "nonprime" companies that they didn't even realize that they could get some of this stuff through DU. Based on my experience, I don't think there is much real discrimination against minorities. I think areas with low financial literacy and low bank contacts, are likely feeding grounds for brokers with low ethical standards.
As for Mikhail's example loan, I have seen some very similar posted recently on broker forums.
For those interested, you can download the current MyCommunity matrix here(pdf).
Note the 100% financing, interested party contributions, I-O periods, amortizations up to 40 years, and temporary interest rate buydowns. CLTV max 105% with MyCommunity Seconds.
FWIW, I think FNMA has gone a bit overboard due to competition and will have to pull back a bit in the future. MyCommunity Seconds make me cringe a bit in some cases.
Isn't it possible some relatively well qualified buyers "chose" an exploding ARM for themselves based on the frenzy surrounding them? They may have been so convinced that they would own the property only a short time, that the value would just go up, up, up. After all, you could hardly turn on the TV, the internet or open a magazine without being told about the road to riches through real estate. And the riches were supposed to accrue not in decades but in just months, or a year or two. The exploding ARM was the perfect vehicle to speculate in the real estate market. I have known a couple of "normal" people that went out and bought 5 or more houses just because it was the thing to do. The country was truly gripped by a mania (is?).
So, should these loans never have been offered as a choice to a buyer who could qualify for something better? And by better, I mean better in your eyes or my eyes, because they may have thought that 1% rate was just dandy.
In my opinion, no, these type of loans should not be offered to most borrowers- even if they think they want one.
Tanta,
Judging from that table, its really the CLTV/no-doc combo that caused the 2006 problems. The industry's solution has been to rachet down CLTV's, and this extended to Alt-a recently.
But aren't these guys making heroic assumptions from 12 months of data on the 2006 vintage? I mean, talk about a slim reed!
Its entirely possible that the CLTV/no-doc 2006 delinquency experience was caused predominantly by flippers. Interrupted in mid-flip and caught with no equity, they had no choice but to mail in the keys.
But Tanta, don't you think that for most non-flipper purchases, at the end of the day, its going to be DTI's that make them or break them? CLTV's don't cause delinquencies, they cause severity. Its not being able to make the payment that causes most borrowers to fall behind.
And yet, the industry is RAISING DTI's on 80% CLTV loans (if Bear Stearn's latest guideline change is any indication).
Perhaps as the 2003/2004 vintage ARM's reset, we'll see the DTI correlations in the data. Only by then, the industry will be closing the barn door after the horse is long gone.
I like everybody on this site but please do not blame
LoanBrokers for the current mess. All these loans would have been fine were it not for the INSANE PRICES of homes. Lets argue about what/who made the prices so insane.
Lots of interesting questions raised in this thread! Thank you for digging into the numbers.
The question about values being inflated in conforming markets as well as 'bubble' markets is interesting. The easy answer is, of course: no. Yet, I remember reading things two years ago about the market I'm in (Minneapolis area) that predicted there would be no sales slowdown or price decreases here because we never had a 'bubble'. Well: wrongo. We've have both. I've read articles listing the number of downtown condos (admitedly not a big percentage of Mpls area housing) on, or going on, the market, and they show a 2 or 3 year supply -IF you assume absorption at the record rates of 2005. If you assume rates from a few years earlier there could be at least 8 years worth and possibly more.
I also have wondered about the amazing number of mushrooming storefront mortgage companies over the last few years. Might that be where the possible 'steerage' comes from? Cowboy mortgage companies, as it were? And if so, might regulation or very strict licensing limit that stuff? Or would that just hand a de-facto monopoly to the big guys?
Is this how to do a loan?
Question:
I have a purchase My community program. Everthing seems ok but the client borrowed $5,000 dollars from a friend. What I need to figure out is can she deposit the check in her account and it will be ok as far as the underwriter been ok with the money been borrwed from a friend. NOw with My commuinty does the money have to only come from family members and does the money needed to close does it need to be season and source. If it does need to be season and source how long.
Answer from mortgagemessiah:
You deposit the money but don't tell them it's borrowed
http://forum.brokeroutpost.com/loans/forum/2/119948.htm
I think Deb hit the nail on the head for the FICO inflation question in subprime.
The number of high FICO's picking subprime to keep the monthly carrying costs at a minimum until the house could be sold was much higher than anyone can imagine.
The number of people buying multiple...many in double digits....houses I think would surprise us all.
deb, I'm personally all in favor of "suitability standards" legislation for mortgage brokers (and lenders, too). That means, in essence, that the originator has some level of fiduciary responsibility to the borrower not just to get him a loan, but to get him a loan only if it is consistent with protecting the borrower's interests, not just the lender's.
Further, I want a crack-down on brokers qua brokers. In other words, if the little bastards cannot establish that they offer every qualified borrower a prime program if that borrower so qualifies, then send them to jail. (Hell with yanking their license; until we get national licensing dbs they just move over the state line.)
Still, I think perhaps a lot of what you're describing is in Alt-A, not subprime. Not that that's good news, of course. It's one of the reasons why I think Alt-A is gonna blow, too.
David, I agree whole-heartedly that DTI is the issue. It's just that DTI is as much a matter of rate as it is loan amount. I want someone to establish (we mortals can only guess) that these loans are true subprime loans with fair subprime rates, because if they aren't, and if we could modify or refi that rate down 300 bps, it could lower the carrying costs enough to make the loan workable. And if--again, if--we are talking about some loans with 80% CLTV, there is some room to capitalize back payments if we can get them on track going forward.
I'm not suggesting this as a cure-all, and I don't think anyone is. But I do know that the MI companies, for instance, will go to the mat on this if there's any chance it's true. They will not pay claims on an insta-foreclosure if there is any evidence that the borrower 1) qualified for a workout but 2) wasn't offered it. I do not believe the MIs are particularly stupid about what "qualifies" for a workout. Believe me. If those loans are flippers or other fraudsters, the MIs will just refuse to pay the claims on the basis that the loan was misrepped to them when they wrote the policies.
As always in this business, there are too many competing interests for any single-minded conspiracy (or single-minded effective solution) to form.
another page
At a recent forecast conference Mr. Seiders [National Association of Home Builders economist ] noted that ARM production now accounts for just 11% of the market compared to 40% a few years ago...
However, MBA shows ARM share of the activity at 18%.
Calculated Risk: MBA: Mortgage Applications Decrease
Are 33+% of ARM applications being rejected?
DH - " Lets argue about what/who made the prices so insane."
OK. Lenders & loan brokers were ultimately responsible for higher prices. If the lending industry had not made dumb loans the buyer pool would have dried up in early 2004 and prices would have declined a tiny bit then and gone to steady state at a sustainable price point. The goverment is also partly to blame for fueling the buying with tax incentives into an asset that produces nothing but shelter.
Buyers were lemmings, led by the REIC.
I like everybody on this site but please do not blame LoanBrokers for the current mess. All these loans would have been fine were it not for the INSANE PRICES of homes. Lets argue about what/who made the prices so insane.
Oh, puh-leeze. I have jumped the case of every known participant in the mortgage and housing markets. I have bashed lenders and depositories, ridiculed warehouse lenders and Wall Street funders, and cast aspersions on appraisers, closing agents, and realtors. I have accused mortgage loan underwriters of drinking bong water and speculated on the possibility that your average retail loan officer can roll his IQ with a pair of dice.
You think I'm going to lay off brokers? Not in this lifetime.
There is no abstract market force that drove housing prices up. There were many concrete actual business practices and capital allocations that did that. You cannot talk about this subject without getting down to how all the participants played their parts. If you want to just rag on the Fed, you're on the wrong blog. (We can rag on the Fed, but not exclusively. That simply becomes tedious.)
"your average retail loan officer can roll his IQ with a pair of dice."
Well, at best, maybe 1 time in 6... usually less than that.
Well there is another type of mortgage fraud that needs to be taken into account in this 50% pool. It is not predatory fraud, the borrower knows what he is doing, it is not actual fraud because the last thing this category of borrower can afford is a default, the investment scheme behind counts on doing it over and over.
I guess you could call it risk fraud. For all kinds of reasons, some financial but quite a bit political, residential lending and particularly government backed lending has been focused on owner-occupied. Which means that you can only finance one home in any given area (you can get financing for second homes elsewhere). This puts the investor in the market for rental property in a bind. In the right market buying that house and converting it into a rental might make perfect financial sense for all participants in the transaction, but there was a sharp gap between the rates and terms of going owner-occ and commercial.
Well the temptation was simply to fudge, to keep your existing house and its existing conventional prime loan and use owner-oc fsub-prime inancing to buy the property anyway. So within that 50% pool you would have to control for the number of people who already owned a house and a simple examination of FICO and income isn't going to reveal this particular type of fraud. A certain category of investor was using stated/stated or no-doc not because their income and credit wouldn't get them into a regular loan but because it already had.
The fact that FICO scores were improving over time in sub-prime may simply reflect the increasing willingness of lenders and borrowers to enter into what seemed a harm-free way of writing loans at good LTVs. Because in a strong market a 100%LTV is pretty much like free money and being held back from that by rules that effectively said "Only one per customer" was ultimately too frustrating, there simply was too much money just laying on the table.
Of course in the end everyone learns why you have underwriting rules to start with, but it was a fine ride while it lasted and in certain pockets of the country still is.
As an example I live in a still largely working class small city that had the weakest real estate prices in the county. Now due to some large public and private investments and some changes in zoning the whole town looks to be set for gentrification in a big way. People who don't mind blinking while signing that guarantee of owner occupancy form are going to make a lot of money. Me, I am too lazy and have no particular desire to be rich. Then again my condo unit appreciated 20% last year and I plan to enjoy the ride while it lasts by doing nothing at all.
But the point is there is a component of sub-prime that is neither victims of predators, or people whose eyes were bigger than their stomachs and so over-leveraged, or flat out speculators who simply banked on appreciation but instead hard-headed investors who exploited a wide open hole in the industry t
2nd chart pretty clearly shows that 620 is the magic FICO score. The correlation between FICO score and mortgages that Default by Month 12 is stronger than any of the other criteria prevented.
Second would be Piggybacked loans. These loans seem far more likely to Default.
Documentation levels don't seem to play as big a role as one would think. Maybe all the 'liar loan' bashing is unwarranted.
Bruce, if you go back to the Ranieri comments I posted below, you will see that he explicitly claims to be talking only about owner-occupants. I cannot prove him wrong, nor can you.
Also, didn't you used to be one of those mortgage lenders who made these loans? I seem to remember you trying to convince me last year that this was a great strategy, and that your "financial backers" could handle it easily. You seem to have changed your outlook. Did you also give up being a lender? I'm curious.
BrooklynInDaHouse, while subprime lenders did more reduced doc in 2005-2006 than they ever used to, they still didn't hold a candle to the Alt-A stuff. Actually, when you start looking at Alt-A pools, you see that doc type is a huge factor.
Tanta, i just looking at the outcomes..
I know you hate the reliance on FICO scoring, but the Fitch data clearly shows that 620 is the bullet-proof number when it comes to defaulting within 12 months. Is this different in the Alt-A arena?
Subprime was the greese for property owners to do cash out refi's. Many of these had fixed rate loans but they converted to low teaser rate ARM type, IO etc to get cash out for whatever purpose and figured that RE always goes up so there was more were that came from.
Now this has nothing to do with credit scores, GSE's rather its all about getting the home ATM machine working which the subprime teaser rate financing promised and delivered.
The other issue is RE/mortgage Fraud which would be more dificult with conventional loans etc, the subprime lending environment encourged this type of activity which again has nothing to do with credit scores or GSE availability rather both Fraud and cash out refi were the major drivers of this lending boom.
Tanta,
Was Ranieri only talking about "owner occupied" loans, or loans on houses that were actually owner occuppied.
Bruce seems to point out that they aren't the same (as the increase in vacant houses seems to indicate) and that I pointed out a few posts above.
Or am I missing something.
Brooklyn, the thing the Fitch chart here doesn't show is absolute numbers of early defaults. In other words, it shows that over these selected vintages, the average FICO of early default loans is getting higher. What it doesn't show you is that the early default rates for the 05-06 vintages are so much higher than for the early ones. In other words, at the same time the average FICO was improving, the loans were going EPD in much larger numbers. That is the sense in which Fitch concluded that FICO alone has become a less reliable indicator. Actually, they concluded that the best correlation in this pile o' loans was CLTV and presence of piggyback.
So I'm not trying to misuse their chart by claiming it shows something it wasn't intended to show. Certainly "traditional" underwriting put the prime/subprime cutoff at 620. Fair, Isaacs itself claims that 620 represents a signficant cut-off in terms of predicted delinquencies. The GSEs traditionally use 620 as their cutoff for standard programs.
So that begs for an answer: how could the FICOs in a subprime vintage be high enough to get an average of 625?
It occurs to me that a 'standard' approach where one attempts to alter one variable while holding others constant may not work well here. The issue appears to be system behavior, not whether any one factor was necessarily the primary cause of (and hence can be blamed for) a perceived negative outcome.
It seems more likely that something like an ecology model where various inputs may be altered in combination would work better; i.e., money flows through a given economic system in much the same was as energy and matter flow through a marshland; how it is distributed, what feeds on what, determines who succeeds and whether or not there is net growth or decay in the system as a whole.
Human greed and stupidity are constants, what changed was some feature of the network, an additional resource or alteration of constraint(s). My own vote would be that (a) new methods of securitization (distribution of risk constraint + growth incentives for large-scale species such as investment banks) and (b) automation of underwriting represented an increase in resources that should have been met with strengthened regulation/policy (constraints) if the intent was to reduce the potential for increased system instability; that regulation/policy could not be accomplished in the existing political environment extant at the time.
It may sound too fanciful to characterize the housing/mortgage melt-up as an algal bloom, a red tide, but as I look at the charts CR and Tanta post it increasingly appears that way to me and I can't help wondering what a network chart might look like.
Apologies for using "existing" and "extant" in the same phrase.
Average Joe, Ranieri is talking about really occupied, not fake occupied. He says that explicitly. I believe him to be a sophisticated and well-enough informed market participant that he would be aware of the occupancy fraud problem and trying to account for it. I know it isn't clear to those outside the biz, probably, but Lew Ranieri invented a lot of this shit, and he is on committees these days with God. That doesn't make him infallible, but it certainly suggests that he gets good inside dope. For what it's worth.
RW, thanks for the splendid comment. I think we have a largely overdetermined phenomenon here, which is one reason I get impatient with "the single answer to the problem" approach, particularly when it is suggested that the most important deterministic variable is the intelligence level of the party who is by definition the least informed (the borrower/buyer). Certainly the system we have now will only continue to work with a fair amount of ignorance/greed/stupidity on the borrower/buyer's part. This implies that the more sophisticated--and equally greedy--participants have an interest in the borrower/buyer remaining informationally-challenged. One way you can do that, it seems to me, is to continue to develop more and more highly-complex products that are very, very difficult to compare or measure. I keep using the "Borg" metaphor: once we figure out Wall Street and Wall Street-inspired lenders' tactics, they adapt and we're confused again.
The ecological metaphor is fascinating to me because I have argued, in the past, that the mortgage business was once a fairly sleepy simple boring low-margin reasonable-volume business in which you could make a fair profit but you'd never get your mug on the cover of Time or be able to afford a Rolex.
Then Wall Street noticed us. And what an "opportunity" we presented to be "assisted" into the "next stage" of business "evolution" with their generously-provided "expertise."
I'd say, tell it to the Indians, but that'd be redundant.
Tanta,
Thanks for the response..and forgive my ignorance...but I know I am not the only one wondering...how he would or could know the difference, other than driving out to see if someone is living there. If he can tell via some other way (i.e. by some statistical measure or a review of loan docs etc) then who/why didn't those buying the loans see the "fake" occupied indicator. (Or perhaps they are or can and will be throwing otherwise current yet fraudulent loans back on the originator?)
Hope the topic police would not mind.
If "home ownership is such a great idea whu does goverment tax policy encourge to have large mortgage which means 0 equity ?
shouldn't policy change to encourge equity ?
Joe, a whole lot of that "fake occupied" stuff was certainly obvious to the originator; it involved either collusion or willful ignorance. I mean, even an underwriter of average intelligence and wakefulness can notice that you claim to be turning a $650,000 suburban home into a rental in order to move into a $200,000 condo two miles down the road.
If you're a servicer, you notice that the mailing address for the monthly statement doesn't match the property address. Or you notice that the monthly statement gets returned by the post office because the home is vacant. Really, this kind of stuff can be found. The point is that most of it is already blowing up, in the early defaults. What we're trying to look at now are the ones that are beginning to go bad only as they approach their rate resets.
Let me say again, as I've said before, that a loan with an 80% CLTV is not a speculator loan. It doesn't matter whether it's owner-occupied or not, and it doesn't matter whether the borrower intends to flip it or not. If you put 20% of your own cash on the table, you're an investor. That is considered reasonable leverage.
So the speculator problem is in the 100% or almost 100% CLTV stuff. Whatever else the loan might have, it has no equity to start with.
Isn't FHA Reason D'etre is 100% LTV - "no DP" ????
Yal, FHA always requires a down payment. The reason that FHA LTVs can go up to and over 100% is that you are allowed to roll closing costs into the loan. So a 103% FHA loan probably has a 2% down payment but 5% closing costs.
That is, if you are an owner-occupant. FHA allows some investor loans, but not at those LTVs it doesn't. In order to get a 103% investor loan from FHA, you gotta be committing fraud.
By the way, the traditional justification for allowing investment property loans in FHA was to give people who live in these moderately-priced neighborhoods the opportunity to buy rental properties; in other words, to avoid leaving access to investment-property financing only to the rich or to corporations. I am not claiming that's worked out all that well, just that that was the idea. Certainly you do find urban neighborhoods in which individuals have taken over from absentee landlords, and the neighborhood has improved a great deal. It's like doing those multi-unit loans: putting a low-to-mod income borrower in an urban 4-flat means the occupants of these structures get a shot at being the landlords. You still have three rental units; you just converted one to an owner-occupied unit. FHA is supposed to be doing stuff like that, not providing subsidized financing to the professional RE investment class. Those folks can go to banks and get CRE loans, and they should.
"mikhail, what was the DTI before the new loan? Do you remember?
Tanta | 04.29.07 - 8:44 am | # "
Tanta, I didn't originate these borrowers prior loans so I'm unsure what their prior DTI's had been; however, I do remember that in 2005 the DU engines started becoming aggressively high as 64% DTI for
What I mean, mikail, was, did the cash-out refi at 74% LTV with the 67% DTI improve the borrower's position? In other words, did we start with a borrower with 70% LTV and 75% DTI, who took out enough cash to bring the LTV up to 74% but the DTI down to 67%?
Each individual loan is different, and one thing you don't necessarily know here (but the GSEs do) is wether the GSEs already own the loan being refinanced. The AUS also does look at things like how long that borrower has owned that home, and where that nasty debt load seems to have come from. For instance, if I had a long-time homeowner who got into a nasty debt mess with at least some of it being medical bills (you can see that on the credit report), and I could improve their position by advancing a little more cash, I might be willing to do it. After all, if I let them keep going with that 75% DTI, I'll end up with some REO pretty soon. If there's a chance they can make it with 67%--and it will depend a lot on their mortgage payment history--it could be worth it.
In other words, I was asking if the cash-out was being used to pay down or pay off some debts the borrower already had.
IMHO Greed had overwhelmed all other senses. Greenspan created the bubble when he lowered to 1% and bubble stoked greed. When greed is unchecked you get a bigger bubble. Eventually all bubbles burst causing lots of pain.
Normally people were buying houses to live, but in 2004-2006 people were buying to get rich. Yes, people chose $1,200 payment in an exploding ARM vs. $1,800 payment in a normal loan because they were greedy and stupid. 20-30% guaranteed appreciation per year beats extra 2% on your mortgage rate. They wanted to live big. House is not an American dream. Living big is an American dream. Of course brokers and bankers also got greedy and used borrower's stupidity to full extent. "Fiduciary duty" has no appeal when the greed has overcome society.
Tanta:
I think you are being flattered over at OC Register's Mortgage blog.
Maybe it is time to recycle the anti- big paid media post.
Mortgage Insider : The Orange County Register
"So the speculator problem is in the 100% or almost 100% CLTV stuff."
Laying out a couple of thousand bucks to 'reserve' a $400,000 condo is a lot like that. It is quite a call option.
Tanta - your statement on FHA is true only in the most technical of senses. Since FHA allows the down payment to come from the seller (who of course turns around and jacks up the price), and allows closing costs to be rolled into the loan, you get in effect no down payment loans with LTVs over 103.
http://www.gao.gov/new.items/d0624.pdf
I personally know 3 mangers of 3 different mortgage brokers; 1 in Atlanta, 1 in Vegas and another in Michigan (Please don't hold this against me). Theyve all told me straight up they try steering people into what they call "Affordability" loans or what I'd call toxic because this is where the money is, hooking them most of the time with the lower initial monthly payment. It is easy for them because a lot of people budget on a month to month basis without considering the long term consequences.
So to me its not surprising that 50% of these borrowers couldve qualified for agency loans, but were sold into something else. This is a capitalistic society and I cannot blame the brokers for trying to make the most money they can just as any other salesman would, but I do feel sorry for the people who were duped, mislead or lied to by some of the snakes in this industry.
Most of what is written here is over my head, but IMHO we should just let the market run its course prosecute the people who committed crimes and let the losers learn from their mistakes. Sadly I believe government will introduce new regulations, criminals will just walk away and the taxpayers will end up bailing out the losers. What a great country.
Tanta,
FHA shouls thus be providing rent-help to people who show they can save. This is much better than giving manoy to "investors"
"Normally people were buying houses to live, but in 2004-2006 people were buying to get rich." so true:
Expired
The sleepy lagoon of mortgage lending becomes Jurassic Park? I like it (the analogy that is, not the outcome); Hmmmm, that probably makes the investment banks giant brachiosaurs, happily converting massive quantities of living vegetation into dung, but who is T Rex?
Tempting to blame the accommodative policies of the Fed for creating all the extra oxygen required too but, at least as I hear it, Stephanie Pomboy of Macromavens has argued that the Fed controls barely 25% of money/credit creation in the US these days.
I was tempted to add (c) breakdown of depression era banking-brokerage barriers to my list of key factors -- having the same person who lends you money be the one who is selling something to you seems to be one of the most fundamental conflicts of interest I can imagine -- but figured that element fit logically into the policy response (or lack thereof) factor so I left it out.
In a (possibly vain) attempt to return to the topic of the thread I would like to ask what would a relatively healthy mortgage lending system look like at equilibrium and what factors are most likely to destabilize equilibrium? I'm sure it's obvious I am not a mortgage professional but the reason I ask is that it occurs to me that that money velocity could also be a factor? That is, pursuing the red tide analogy a bit further, the 'bloom' was amplified by a much larger supply of 'nutrients' per unit time (rate) than the system could normally handle so total credit availability may not be the only issue? Hope that makes sense and/or is not too primitive a question.
Oh, sunsetbeachguy, thank you so much, not just for the link but for your comment thereon.
So if I understand this right--I'm not a regular reader of the OC Register, you understand, being one of those snotty right-coasters--this guy is looking for mortgage professionals to write stuff for him for free. And for no pay, you don't get to be "hostile"? Holy Jumpin' Jack Flash, there are mortgage people who will accept this level of exploitation without being able to let loose with some snark?? We are doomed, oh, we are doomed, my beloved business.
I'm frankly just amazed that a Real Reporter is sufficiently able to read for tone to pick up on Tanta's little edge. Don't be expecting me to rewrite my media policy any time soon.
Mort_fin, yeah, yeah, but you know where you end up once you start actually trying to explain FHA loan amount calculations. You do it.
"little" ?
(snort)
Something a la Tanta over at the Calculated Risk blog, would be good, although you don't necessarily need to take her tone (it can be a little hostile). But you should be at least as experienced and insightful.
WTF?
This is when tracheas start getting ripped out.
Who the F is this guy to bad mouth people gratuitously like that?
Sorry for the negative tone, but what an asshole.
FYI SF Chronicle about buyer Refi problems around CA & a Paul Mikhail cited as an example
P. Mikhail told him he he would get a 2% rate and that his payment would be fixed for 5 yeasr...the most it would increase would be about$10,000 over 5 years...In fact, the buyer said his principal is increasing at a rate of about$10,000 a year...
when called Mikhail apologized and replied that is what were told by the lenders....
wally, I thought you'd like that. Hope you weren't drinking anything hot when you snorted.
Tanta is blowin' up! Can a Tonight Show appearance be far behind?
Tanta,
Just to be absolutely clear, you're saying that Ranieri knows the true borrower status... full doc, no piggybacks, owner-occupied, etc.?
Here in SoCal the stories of twenty-something mortgage brokers making six-figure incomes were everywhere, so again, I have no doubt that many people were steered into the best possible loan... for generating fees.
p.s.: Deb, please update HBB with your latest observations -- we miss you!
tj, I'm saying the percent of true owner-occupied properties can be estimated by someone who is taking into account the amount of fraud going on, and who has access to information from servicers. Servicers do know a lot about these things. So does everybody who had to buy back a loan in the last six quarters. I'm just saying it's not a secret any longer.
I am not saying these numbers are correct just because Ranieri says so. I'm saying that if anyone is in a position to get the inside dope, it's him. That's all. You can take that with all the salt in your cellar. I hope to get my hands on whatever data he's got, and I promise I'll post it if I find it.
Fair enough Tanta,
Needless to say those expecting to hide behind plausible deniability got some splainin to do (since Ranieri, and therefore presumably others, knows who did what to whom)
....the only problem is, no one in a position to do anything about it is asking for an explaination. Maybe on a macro level...but not an individual case by case level.
Seems a little enforcement on existing violations (be it legal, civil, or financial) would go a long way to "solve" the problem.
Therein lies the real problem though, those who can, don't want to, not right now anyway, since they (or their friends) would be caught in the middle.
Seems those with money involved want their money back before the one who owes it to them is put in a position to be unable to pay it back.
Everyone knows the solution. They are just waiting for it to crash on it's own or go away, since any effort to do what should have been done in the first place, strict lending standards, will be seen as the "cause" of the problem.
Off topic I know, but your faith in Ranieri's knowledge highlights the crux of this whole housing bubble issue. There are no mysteries. Everyone already knows the situation we are in, how we got there, and who is responsible and on what level. But no one can or will do anything to solve it since the "solution" is what we are all hoping to avoid.
CR,
what is your idea about some analysis into euro area housing bubble as well//
spanish new household formation is almost 50% that of US??
from economist:
Helped by low interest rates since it joined the euro in 1999, Spain has been erecting houses at an astonishing rate. Last year it built 800,000, reckoned to be more than France, Germany and Italy combined. Economists in Madrid forecast that the house-building boom will keep slowing until the new-build rate more closely matches the rate of new household formation, around half a million a year. House-price rises are already slowing, albeit not brutally. They peaked at about 18% a year in late 2003, and are now running around 7%, with some expecting them to slow further. Around the outskirts of Madrid there are new property developments where work appears to have stalled. The Bank of Spain has said in recent years that house prices were 35% overvalued.
Car valuations matter because an increasing number of consumers are "upside down" on their auto loans, meaning they owe more than the car is worth. In the first quarter of 2007, 29 percent of consumers were upside down on their vehicles, Kelley Blue Book reports. Additionally, on average, people traded in cars on which they still owed more than $3,600. And what do many of these buyers do with that loan balance when they want another car?
They roll that negative equity -- the $3,600 and often much more -- into yet another vehicle loan.
"It is a pandemic," says Jack Nerad, executive market analyst for Kelley Blue Book.
It is also financial lunacy. And making matters worse are risky lending practices similar to what we've been seeing in the mortgage industry.
Michelle Singletary - Cars Worth Less Than the Loans - washingtonpost.com
Life is hard; its harder if youre stupid.
- John Wayne
I would venture to say that if these same people had it to do over again with a RE loan pre bubble with all the disclosures explained to them in full they would have still taken the same loans.
We have an administration that is very proud of privatization and has little negative to say about the sanctioned looting performed by government contractors in Iraq and during Katrina recovery. We have a populace that has been trained for years to laugh at the statement, "I'm from the government and I'm here to help". People have been trained to expect unacceptable operations because "What else can you expect?" We have an administration that allowed the student loan operation to become a steering operation. So why do you think that the government would have objected to the looting of the housing sector by unscrupulous lenders? What will it matter anyway in the end? There were no laws against it. After all, what laws, let alone ethics, governs where a loan is steered? For example, who is going to jail in the student loan steering operation?
Damn, I never borrowed anything to buy a car, I was always coming with 100% cash. In college, I had no car at all. Now, I have 2 cars, one of them is as luxury as you can imagine. Still, 100% cash. It just takes some patience...
I guess I'm just an old schooler
Tanta:The reason why some of us are very fond of this blog is that we're really more interested in figuring out what the issues are, and what seems like a good response to them, than we are in advocating for either political party.
Vote Free Lunch Party 2008!
Unsustainable Systems Rock!
As long as I win the debate, I don't care how much data I need to overlook, because nothing beats other people thinking I'm Right. Give me the credit for my wins and others the accountability for my mistakes.
Just found this PDF, it is relatively recent even though the date on the first page is 2006 it actually looks at some of the 2007 ABX HE issuances.
It broke down the relative performance to the different originators. This stuff brings out my inner Tanta.
http://www.securitization.net/pdf/Nomura/ABX_19Apr07.pdf
From a loan originator's stand point it is far, far, easier to take someone with good credit, but somewhat laborious income documentation and put them quickly in to a subprime loan rather than battle it out with a prime underwriter to qualify that same borrower prime.
This idea was taken to the extreme where you could quickly use 12 months bank statements to qualify someone subprime rather than wrestle through tax returns, etc. So loan originators were 1. lazy and didn't want to deal with prime underwriting 2. wanted loans to go faster which the lax subprime underwriting allowed and 3. wanted more lender juice on the loan for selling them a higher quality loan.
This last point bears particular mention because loan originators would routinely be paid YSP on the back of subprime loans that qualified below the floor rate on the subprime rate sheets.
For example if the floor on a subprime rate sheet is 5.5% but because the borrower has excellent credit, low LTV, and other positives that would subtract from the par rate on a rate sheet, they could easily qualify for a 5%. But since the floor was 5.5% that .5% turned in to 1 point YSP for the originator.
There were too many compelling reasons to put prime eligible people in to subprime loans.
Thanks Cal.
Numura also not drinking the cool aid :
"Conclusion
After analyzing the underlying loans of the three ABX series we found that it is difficult to look at the
traditional characteristics such as FICO and LTV to gauge default risk. While remittance report data
seems to vary from vendor to vendor, consumers may have also learned the nuances of increasing
their FICO score shortly before applying for a mortgage loan. It is also likely that at the sub-prime
level there is not much of a difference between a 600 and a 650 FICO. One of the reasons that LTV
may be slightly misleading is the use of silent second loans to cover the down payment on a home.
In these transactions the first lien mortgage lender does not know that the borrower took on an
additional loan for the homes down payment, which underestimates the borrowers stated LTV ratio.
The blurred lines between prime, alt-A, alt-B and sub-prime loans also make mortgage loan
comparison difficult. As the landscape of the mortgage market has changed, it may be more relevant
to analyze the type of loan issued, the health of the housing market, and whether the borrower was
able to provide full documentation to support the loan to determining risk. Overall, an attribute snap
shot is not nearly enough information to make an accurate assessment on a loan. Instead, market
participants must, at the very least, understand historical underwriting practices, geographic
concentrations, documentation practices, and payment trends in making sound investment decisions."
and sepcificaly those ABX are too high:
"ABX 2006-01, despite trading at the tightest implied spread, has the highest LTV, ARM and
interest only percentages of the three ABX series."
Tanta: Ben may want your help on Fed funds rate.
Bernanke Is Wrong on Inflation, Goldman, Merrill Say (Update4) - Bloomberg.com
This stuff brings out my inner Tanta
There may be some therapy programs that can help you with that. For your own sake, seek help!
Numura also not drinking the cool aid
I sure wish someone could find Nomura's correspondent underwriting guidelines online. I'd like to know what kind of stuff they've been buying. They are, actually, in the business of buying Alt-A mortgage loans, you know. At least they were last I knew.
On a slight tangent... how can you tell appart those people who had good credentials and got steered into a bad loan product and those who had equaly good credentials but chose the lesser product because they were gambling to flip a house or re-fi later to save some cash on the short term?
When I bought my house I insited and was very clear I wanted a fixed rate... that's what I got. Most of my highly educated colleagues second-guessed that decision often quoting how much more is this mortgage costing me. Now you're telling me that they are potential victims because they could have qualified for the better product?
That is the problem with ANY widespread bailout. Any generalization has too many caveats. I say it is time for lawyers to enjoy their own bubble with RE lawsuits.
About six months ago, on this or a similar blog, I commented that when my wife and I bought our first home in 1967 the "rules" were to look for a home costing no more that 2.5 to 3 times your annual income and to put 20% down out of your own pocket.
That was in the days before bank credit cards so the only other debt we had was a month's worth of gas fill ups and a couple of department store charge cards for clothing, or dishes, or something. (We had paid $1,800 cash for our new VW.)
I asked not why we didn't return to those standards, but what were the current comperable standards.
After my comment I was lambasted from all side essentially for being "out of it". I didn't understand modern mortgage finance; I was against helping people realize their dreams; etc. etc.
Yes, I understand the current mortgage market has helped people buy their first homes, and more expensive homes, and vacation homes. But I still wonder if they are really any better off then if those people who did understand modern mortgage finance had not helped them.