As a borrower with a 700+ FICO, I'll tell you exactly how I ended up in Alt-A, in early 2002.
The median home price in Palo Alto, where I live was (and still is), well in excess of one million dollars. (My home is way, way below the median--it was one of the least expensive houses in the entire city.)
But you can't stay prime for super-jumbos, no matter how much you put down nor how much your income is, nor how good your credit score is.
I had 20% down and plenty of income to cover, but none of that matters if the size of the loan is too big. I would have been an easy prime borrower if I had been looking 75 miles from my office, but I'm alt-a because near my office is so expensive.
Now, how people got into ARMs is a different matter. But Alt-A doesn't necessarily mean "relatively bad credit", it can also mean, "large loan".
Tanta,
A question about Condotels? We have too many of these types of properties here on the coast. Does this type of collateral automatically fall under subprime or ALT-A?
Outsider, it could be DTIs of 60%, non-owner-occupied high-rise condotels, recent mortgage lates (which might mean the FICO is 700 only because it would have been 800 if the borrower hadn't started getting behind on the mortgage being refinanced). Lots of things.
Or, of course, it could be that the subprime securitizers have to throw a startling amount of prime loans into these pools to make the numbers work.
Or, of course, it could be predation: borrowers with decent credit and equity getting subprime interest rates because they don't know any better.
Why do you think I broke down and posted some pretty charts? CR seems to be off lollygagging somewhere, and I can't keep you guys captive to this blog with just long Nerd posts . . .
Please VFSV no offence intended but I have tried few time to read your blog and I just don't get what you want to say. take a look at CR for how a simple presentation of key facts (like CR and Tanta are doing) is an important part if you want unsophisticated people like me to understand what you have to say - which I am sure is important.
You don't have to have put down 20% to have a current CLTV of less than 80%; you just have to not have refinanced in the past three years and live in or near a bubble.
Our current LTV is between 23 and 28%, just for local price appreciations. So if we had refied into an ARM three or four years ago, especially if we also shortened the term, we would certainly be classified as Alt-A now.
I'll give you odds that several of those blue people did a MEW and/or changed the term of the loan ca. 2002-2003.
Tanta, if you're not financing as primary residence, the loan grade always kicks down. That's why so many lied on the application. Speculators are always worse risk.
Doing a bit of number crunching from chart #2, there is a total of $273 of subprime MBS with 2007 resets. Of that, worthless garbage almost sure to default, namely FICO less than 660 and LTV of 97%+ is about $65 billion.
Given the costs of foreclosure and reselling a very weak market I would guess wipes out 50% on average's claimed "value," then this means about $15 billion of losses if we conservatively guess that less than half of borrowers with low ficos, high interest rates, loans resetting to higher rates AND negative equity default.
I wouldn't be surprised if 75%+ of these worst of the worst subprimes go into default in 2007. After all, the overall rate which includes many low LTV and high FICOs is about 15% and rapidly rising. In that case just this small chuck of mortgage results in losses of $24.3 billion.
For the $65 billion in garbage loans, we're talking about people with a history of not paying bills on time, who are in way over their heads, who have less than 0 equity, and who of course were either not told about resets, or were told "you can just refinance before it happens."
This $15-25 billion of losses of course is just from one small part of the MBS subprime pool. Overall losses of $100-150 billion in 2007 are not far fetched. Yet where are the write-offs for these seriously impaired assets? The only really big write-offs I remember have been the brokers who have gone bust (big write-offs for shareholders), ML writing off a few hundred million from Ownit, and HSBC's big write-off of about $10 billion.
We are so headed into a credit crunch. The strong employment numbers last month, plus the increasing interest rate and appreciation of the yen, mean that neither the Fed nor the BoJ can help.
I also think the fed govs feel bad for getting Bush reelected by dropping rates to 1% and starting the whole bubble, and they don't want to repeat their mistake by getting another Republican in 2008 by priming the pump and heading off the needed 1982-type credit crunch deflationary recession that should start around Q1 2008. Listening to some of their remarks, it is clear that a big chunk of them, if not a majority, are extreme inflation hawks.
I do think we will stay on autopilot with moderate growth until consumers finally surrender and cut back spending this Xmas.
Tanta - I AM wondering how CLTV of 80% or less and over 700 FICO ended up in subprime.
I suspect that this has a lot to do with how competitive the mortgage origination markets were. Subprime originators were earning fat margins and investing the proceeds in more customer service staff and automated underwriting and loan processing.
Because of the resulting speed and convenience, many brokers steered borrowers to subprime originators.
Additionally, don't count out the fact that there were a great deal of predatory lenders out there that were tricking people into paying more than they would otherwise have to pay to borrow money
Looking at the report behind the link, I noticed that it predicts a nominal increase in resale home values between Q1 and Q2 and Q3 this year, from 212K to 218K to 221K. Who here thinks that's going to happen?
Even if it does occur as predicted isn't a real increase about 40% of this is inflation and because bigger houses get sold in spring and summer since big families try not to disrupt the school year.
Also I'd love to see the same chart as chart 2 but for Alt-A, showing the breakdown of FICOs and LTVs.
The numbers Tanta put up in this post have just about singlehandedly moved me from my previous moderate pessimism about the housing market to extreme pessimism.
You don't have to have put down 20% to have a current CLTV of less than 80%; you just have to not have refinanced in the past three years and live in or near a bubble.
This chart claims to report original FICO and CLTV.
Tanta, if you're not financing as primary residence, the loan grade always kicks down. That's why so many lied on the application. Speculators are always worse risk.
Ed, there are jillions of non-owner-occupied loans in prime conforming, prime jumbo, and Alt-A pools. It's possible to get prime financing terms when you have an LTV of 80% and a FICO north of 700.
I don't know what you mean by "speculator" in this context. I have found that most "speculators" have no equity. If they do, well, hell. Give 'em a loan. You see my point? Why would this necessarily be subprime?
bailey, the funny part of all this is that it takes a techno-moron like me longer to steal graphics from Fannie Mae and make Blogger upload them and fight with the damned html-page layout problems than it does firing off some long wordy nerdy thing.
Tanta,studies have shown that minorities still get shafted when getting mortgages.so a number of these folks with FICO's above 700,and cltv's of 80% are likely to be african american or latino.It doesn't seem to matter much if they go to the local bank or ask cousin miguel to do the loan.points are sweet,and trash comes in all colors.
Nice comments, Dork:)...seriously, that is some informative analysis. What stood out for me in the charts was in chart 1 we have just about $600 billion of Alt-A and subprime that will reset in 2007. That is going to be a serious haircut to these borrowers' discretionary spending...
It would be interesting to also see debt-to-income and prepayment penalty stats on these loans. Even with a credit crunch in subprime, that huge chunk of high FICO and low LTV would be great candidates for a advantageous refi at current rates, assuming the owners can afford their houses at all.
And the disappearance of the good loans out of the subprime MBS would add a prepayment risk to the default shock.
'slime-prime' loans .... Is that a new slang term for subprime used by mortgage bankers? Geez, what happened to gyp'em loans
Tanta, perhaps you could write a uberposting on the slang terms used by mortgage bankers so when we apply for mortgages, we can come across as knowledgeable loan applicants [Hey, with your neg-am uberpost, we could even teach some of those loan officers if they try to fast-talk us into a neg-am loan :D]
Very nice post, Tanta.
The volume of refis does seem to be tailing off somewhat.
Tanta - I AM wondering how CLTV of 80% or less and over 700 FICO ended up in subprime.
Is that a rhetorical question or do you have any ideas?
As a borrower with a 700+ FICO, I'll tell you exactly how I ended up in Alt-A, in early 2002.
The median home price in Palo Alto, where I live was (and still is), well in excess of one million dollars. (My home is way, way below the median--it was one of the least expensive houses in the entire city.)
But you can't stay prime for super-jumbos, no matter how much you put down nor how much your income is, nor how good your credit score is.
I had 20% down and plenty of income to cover, but none of that matters if the size of the loan is too big. I would have been an easy prime borrower if I had been looking 75 miles from my office, but I'm alt-a because near my office is so expensive.
Now, how people got into ARMs is a different matter. But Alt-A doesn't necessarily mean "relatively bad credit", it can also mean, "large loan".
Tanta,
A question about Condotels? We have too many of these types of properties here on the coast. Does this type of collateral automatically fall under subprime or ALT-A?
(sarcasm)Boy that $100 million (from the previous post) will sure help. (/sarcasm)
Outsider, it could be DTIs of 60%, non-owner-occupied high-rise condotels, recent mortgage lates (which might mean the FICO is 700 only because it would have been 800 if the borrower hadn't started getting behind on the mortgage being refinanced). Lots of things.
Or, of course, it could be that the subprime securitizers have to throw a startling amount of prime loans into these pools to make the numbers work.
Or, of course, it could be predation: borrowers with decent credit and equity getting subprime interest rates because they don't know any better.
mikal, the GSEs will not touch a condotel with a 10-foot pole. They are always Alt-A or subprime.
Vesulius, this isn't a chart of jumbo or Alt-A. It's a chart of subprime.
OT: Has Steve reminded CR to do the jobless claims update today?
AC, I believe not. Steve must be elsewhere. I was surprised by degree of the NSA rise, but it may well be due to spring break claims.
Why do you think I broke down and posted some pretty charts? CR seems to be off lollygagging somewhere, and I can't keep you guys captive to this blog with just long Nerd posts . . .
(a) Jumbos
(b) speculators carrying a second home
(c) shell game by the broker
But, ed, if speculators carried second homes (or anything else) with 20% down, who'd care?
There are jillions of prime jumbo programs out there for people with decent FICOs.
Tanta,
Thanks for the pretty charts.
Could it be that they're just considering all ARMs as subprime now?
Don't forget Myth #5: "Priced Right"
http://www.viewfromsiliconvalley.com/id320.html
You can track the weekly DQ data for,
Santa Clara County:
http://www.viewfromsiliconvalley.com/id125.html
San Mateo County:
http://www.viewfromsiliconvalley.com/id157.html
Santa Cruz County:
http://www.viewfromsiliconvalley.com/id156.html
Thanks!
Please VFSV no offence intended but I have tried few time to read your blog and I just don't get what you want to say. take a look at CR for how a simple presentation of key facts (like CR and Tanta are doing) is an important part if you want unsophisticated people like me to understand what you have to say - which I am sure is important.
You don't have to have put down 20% to have a current CLTV of less than 80%; you just have to not have refinanced in the past three years and live in or near a bubble.
Our current LTV is between 23 and 28%, just for local price appreciations. So if we had refied into an ARM three or four years ago, especially if we also shortened the term, we would certainly be classified as Alt-A now.
I'll give you odds that several of those blue people did a MEW and/or changed the term of the loan ca. 2002-2003.
Tanta, if you're not financing as primary residence, the loan grade always kicks down. That's why so many lied on the application. Speculators are always worse risk.
Doing a bit of number crunching from chart #2, there is a total of $273 of subprime MBS with 2007 resets. Of that, worthless garbage almost sure to default, namely FICO less than 660 and LTV of 97%+ is about $65 billion.
Given the costs of foreclosure and reselling a very weak market I would guess wipes out 50% on average's claimed "value," then this means about $15 billion of losses if we conservatively guess that less than half of borrowers with low ficos, high interest rates, loans resetting to higher rates AND negative equity default.
I wouldn't be surprised if 75%+ of these worst of the worst subprimes go into default in 2007. After all, the overall rate which includes many low LTV and high FICOs is about 15% and rapidly rising. In that case just this small chuck of mortgage results in losses of $24.3 billion.
For the $65 billion in garbage loans, we're talking about people with a history of not paying bills on time, who are in way over their heads, who have less than 0 equity, and who of course were either not told about resets, or were told "you can just refinance before it happens."
This $15-25 billion of losses of course is just from one small part of the MBS subprime pool. Overall losses of $100-150 billion in 2007 are not far fetched. Yet where are the write-offs for these seriously impaired assets? The only really big write-offs I remember have been the brokers who have gone bust (big write-offs for shareholders), ML writing off a few hundred million from Ownit, and HSBC's big write-off of about $10 billion.
We are so headed into a credit crunch. The strong employment numbers last month, plus the increasing interest rate and appreciation of the yen, mean that neither the Fed nor the BoJ can help.
I also think the fed govs feel bad for getting Bush reelected by dropping rates to 1% and starting the whole bubble, and they don't want to repeat their mistake by getting another Republican in 2008 by priming the pump and heading off the needed 1982-type credit crunch deflationary recession that should start around Q1 2008. Listening to some of their remarks, it is clear that a big chunk of them, if not a majority, are extreme inflation hawks.
I do think we will stay on autopilot with moderate growth until consumers finally surrender and cut back spending this Xmas.
Tanta - I AM wondering how CLTV of 80% or less and over 700 FICO ended up in subprime.
I suspect that this has a lot to do with how competitive the mortgage origination markets were. Subprime originators were earning fat margins and investing the proceeds in more customer service staff and automated underwriting and loan processing.
Because of the resulting speed and convenience, many brokers steered borrowers to subprime originators.
Additionally, don't count out the fact that there were a great deal of predatory lenders out there that were tricking people into paying more than they would otherwise have to pay to borrow money
Looking at the report behind the link, I noticed that it predicts a nominal increase in resale home values between Q1 and Q2 and Q3 this year, from 212K to 218K to 221K. Who here thinks that's going to happen?
Even if it does occur as predicted isn't a real increase about 40% of this is inflation and because bigger houses get sold in spring and summer since big families try not to disrupt the school year.
Also I'd love to see the same chart as chart 2 but for Alt-A, showing the breakdown of FICOs and LTVs.
The numbers Tanta put up in this post have just about singlehandedly moved me from my previous moderate pessimism about the housing market to extreme pessimism.
You don't have to have put down 20% to have a current CLTV of less than 80%; you just have to not have refinanced in the past three years and live in or near a bubble.
This chart claims to report original FICO and CLTV.
Tanta, if you're not financing as primary residence, the loan grade always kicks down. That's why so many lied on the application. Speculators are always worse risk.
Ed, there are jillions of non-owner-occupied loans in prime conforming, prime jumbo, and Alt-A pools. It's possible to get prime financing terms when you have an LTV of 80% and a FICO north of 700.
I don't know what you mean by "speculator" in this context. I have found that most "speculators" have no equity. If they do, well, hell. Give 'em a loan. You see my point? Why would this necessarily be subprime?
Hazel. Sure you can, but pictures are nice too!
bailey, the funny part of all this is that it takes a techno-moron like me longer to steal graphics from Fannie Mae and make Blogger upload them and fight with the damned html-page layout problems than it does firing off some long wordy nerdy thing.
Oh, the sacrifices I make!
Tanta,studies have shown that minorities still get shafted when getting mortgages.so a number of these folks with FICO's above 700,and cltv's of 80% are likely to be african american or latino.It doesn't seem to matter much if they go to the local bank or ask cousin miguel to do the loan.points are sweet,and trash comes in all colors.
Nice comments, Dork:)...seriously, that is some informative analysis. What stood out for me in the charts was in chart 1 we have just about $600 billion of Alt-A and subprime that will reset in 2007. That is going to be a serious haircut to these borrowers' discretionary spending...
It would be interesting to also see debt-to-income and prepayment penalty stats on these loans. Even with a credit crunch in subprime, that huge chunk of high FICO and low LTV would be great candidates for a advantageous refi at current rates, assuming the owners can afford their houses at all.
And the disappearance of the good loans out of the subprime MBS would add a prepayment risk to the default shock.
Hey Tanta,
Mail Tribune - Default dilemma - April 12, 2007
'slime-prime' loans .... Is that a new slang term for subprime used by mortgage bankers? Geez, what happened to gyp'em loans
Tanta, perhaps you could write a uberposting on the slang terms used by mortgage bankers so when we apply for mortgages, we can come across as knowledgeable loan applicants
[Hey, with your neg-am uberpost, we could even teach some of those loan officers if they try to fast-talk us into a neg-am loan :D]
That you Scott