I think I saw the research that the person who buys the home can default on the loan and those who refrain from buying are usually not defaulting, at least for a length of a study.
This may sound naive I know, but isn't the point of putting 20% down or paying PMI to give the lender some cushion to protect them in the event that the borrower defaults? I know the presumption is that housing prices always go up, but if a home isn't kept up or, gasp, prices don't keep going up, there can be a significant cost to the lender to resell the home which that 20% down hopefully offsets.
IMO, a bird in the hand (that 20% downpayment) is worth at least a pair of FICOs in the bush.
"Question: For people who can't scrape together a 20% down payment, private mortgage insurance helps them get a home of their own. But what about the large segment of the population who can afford 20% down but don't want to pay it?
I'm in contract on a vacation home. Both I and my wife work white-collar managerial jobs in New York, so we have more than enough to buy the place outright. But we're lumped together with those that can't make 20% down and are forced to pay some 1%-2% more for PMI..."
Sort of undercuts that part of the bears' argument that all those people who made low downpayments either can't genuinely afford a house or will default on the one they're living in.
Answer: Your remarks make perfect sense and I agree wholeheartedly that treating someone of your rank the same as a lower-class, bottom-feeder is irrational and, frankly, insulting; I strongly recommend you pay cash for the house and teach the lenders a lesson.
For the eleventy-hundreth time Seb: the plural of anecedote is not data.
All it confirms is that people tend to think their circumstance are universal. Is there really a "large segment of the population who can afford 20% down but don't want to pay it?"
It's also a good thing that those of us who are fortunate to be white-collar managers in New York never get financially over-extended, sick, die, get laid off, demoted, or transferred.
And certainly those high-class folks would never dream of walking away from a large loan in which they had no equity in such cases of severe distress. I'm sure they would pay off the house in cash first, then put the kidney transplant on the credit card.
Sort of undercuts that part of the bears' argument that all those people who made low downpayments either can't genuinely afford a house or will default on the one they're living in.
I doubt this is an all-or-nothing situation. Some % of people that bought 0-down could afford 20%, others cannot. Without knowing the breakdown between these groups it's hard to say how representative this couple is of the norm.
The same can be said of the reliance on non-amortized and negatively amortized loans. Some of the people using them could afford a fully amortized payment, but some can not. The question is, since these loans have been available to qualified buyers for many years, why did their overwhelming gain in popularity coincide with a time when incomes were not tracking price gains?
The buyer in this article seems to underestimate his own risk to the lender. But that is to be expected since very few of the people that go into foreclosure anticipated that outcome when they signed the loan.
Honestly, it seems like a case of sour grapes that this "high wealth white collar professional" is getting lumped in with low net worth borrowers. The same thing happened over the past few years as highly qualified buyers were forced to compete in bidding wars with financially reckless subprime borrowers.
This is just disingenuous. This Campbell fellow is exactly the type who would make a rational economic decision and walk away from an underwater property. Making a 100% loan to him is analogous to making a 100% loan to Donald Trump. His true odds of defaulting on a 100% mortgage in the current market are probably higher than most subprimers.
"Making a 100% loan to him is analogous to making a 100% loan to Donald Trump. His true odds of defaulting on a 100% mortgage in the current market are probably higher than most subprimers."
Completely agree. He gets the house, it starts bleeding equity in the current market, he walks away - and without PMI the lender is screwed.
The PMI is to cover the added RISK of a loss, plan and simple. Look at it as a small fee to use the 10% to make double-digit returns in the stock market.
This particular "bear" has wasted thousands of keystrokes arguing that a whole lot of those low or no down loans went to speculators who would not have been speculating if it had involved their own money. It's all those "but subprime helps the poor!" boosters who have been trying to convince you that every high-risk loan has been going to someone who is totally flat broke.
Certainly, there is a presumption that people borrow money because they don't have the cash, and many--approximately 99.8% or so--of mortgage loan underwriting rules are based on the assumption that borrower liquid assets total less than the loan amount. So, really, the supposition that high LTV loans mostly go to people who couldn't pay cash isn't all that odd. Most low LTV loans go to people who couldn't pay cash. This will surprise you, but a lot of that small slice of the population who can pay cash don't have high FICOs. They don't have FICOs at all. They, well, pay cash.
In fact, most loans of any sort go to people who couldn't pay cash, with the exception of convenience credit card users and carry traders. One reason that residential mortgage loans are not convenience lines of credit or margin accounts is that, um, they're residential mortgage loans.
Robert's sad little story proves that those who wish to speculate with OPM are still alive and well. How that negates the "bear" case is beyond me.
Tanta said: "...Robert's sad little story proves that those who wish to speculate with OPM are still alive and well. How that negates the "bear" case is beyond me..."
Of course it doesn't "negate" the bear case, it's just another small dilution of it. I've never assumed that things were rosy everywhere, yet the bears don't seem to be equally objective, seeing more "proof" of how "awful" things are with every negative headline.
Another example of this lack of objectivity is how virtually every analyst or housing industry spokesman is permanently, universally wrong, blind or deceitful, reviled by the housing bears at every opportunity...until they make a bearish forecast, at which point they magically become more credible and their quotes become part of the proof of the bearish argument.
The phrase "skin in the game" is the first thing that comes into my head. Many states have laws that limit recourse on purchase money loans. These limit the risk to the buyer, but elevate the risk to the lender. I am sure borrowers who have other meaningful assets would take advantage of such laws to, in effect, hand a loss to the lender. In states with such laws, prudent lenders will advance higher LTVs for refinances than for purchases.
If you think about this rationally, an older borrower buying a vacation home is by far and away more likely to walk away from a vacation home which has become a money pit than a subprime borrower purchasing a primary residence. The vacation home is a want and not a need, and the older borrower has little time to recover from a loss on the vacation home. If the older borrower wasn't willing to put the money down to buy the house, will the older borrower be prepared to use that money to pay off the mortgage on the house? I'd argue that it is not likely. Of course, ECOA mandates that no one discriminate against a borrower due to age, so we will unfairly penalize the younger borrower for the risk that this older borrower presents.
I would argue that there is a higher risk to 100% LTV loans for purchase of a vacation home to an older prime borrower than in a 100% LTV primary residence loan to a decently qualified subprime borrower. The subprime candidate will be less likely to take advantage of a walkaway opportunity because it would limit his or her chances to buy a home for much longer in the future. The net opportunity cost to such a borrower of a walkaway is far higher over the rest of his life than to a borrower such as Campbell. The subprime borrower really NEEDS credit; Mr. I'd Rather Keep My Cash In The Bank only DESIRES credit.
Consciousness of one's utter virtue and respectability are not bankable assets that can be used to offset portfolios, and therefore mortgage lending guidelines take no account of them.
Donna said: "I hate whining from people who can afford vacation homes."
Me, too, but their (profligate, wasteful, "more money than brains") spending is part of what supports the market, and anyone who's trying to gauge housing solely by the spending and assets of "Joe Six-Pack" is missing a significant market-driver.
Online Shrink, having worked for a bank I'd be willing to predict that Mr. Campbell is the sort who chews out the teller who asks him for ID, as bank rules require, because they should know who he is, dammit.
It's odd that an apparently high-paid professional who is capable of using words like "research" and "actuarial" and so forth cannot see that whatever a mortgage insurer is, it isn't a "middleman" by any known definition of that term. On Freudian grounds, this leads me to believe that Mr. Campbell is a white-collar manager for a carpet wholesaler.
Wow, you can tell the economy hasn't had too large a correction for awhile when 2x a white-collar income is supposed to be a sure thing for the life of a loan.
An attitude like that just screams, "I am living slightly below my means but I have no rainy day fund!" So the lender wants to make sure you actually have positive equity when you lose 50% of your income next year? Duh!
Tanta: Online Shrink, having worked for a bank I'd be willing to predict that Mr. Campbell is the sort who chews out the teller who asks him for ID, as bank rules require, because they should know who he is, dammit.
DEAD ON!!! I burst out laughing when I read the question he sent in, because I was imagining the conversation about the pricing on his loan application. (And to anyone reading this who doesn't know anything about banking, if your bank doesn't have tellers check ID, get your money out of there before it disappears. There are lots of cool ways to rob banks nowadays, and the more successful strategies do not require walking in there with a gun. That's so, so outmoded.)
if you could've afforded the 20% down, don't you think you would've paid it.
the reaon you didn't was because it wouldn't dropped either your savings or your investments.
on the other hand, if your investments are guaranteed to produce a higher return than the 6-10% for the home loan, you wouldn't want to pay it down but rather keep the spread. However, if this is a meaningful difference to you, then maybe you really can't afford to put the 20% down!
i don't really know anything, i'm just speculating here.
"Another example of this lack of objectivity is how virtually every analyst or housing industry spokesman is permanently, universally wrong, blind or deceitful, reviled by the housing bears at every opportunity...until they make a bearish forecast, at which point they magically become more credible and their quotes become part of the proof of the bearish argument.:)"
So Sebastian, please tell us who beside Ivy Zelman has accurately forecasted the path of housing for the last 18 months? David Lereah, Alan Greenspan, the NAHB, any of the homebuilding analysts that were urging everyone to buy last fall, all the guys who had buys on NFI LEND, and NEW in January (except, of course, for your analyst who got you in and out in the only 3 days in February in which one could have made money in the stock)? I'm interested to see your list of analysts (outside of the blogosphere) who got it right.
The question has exactly the same economic dynamics as "why should company executives hold resticted stock rather than options is the same" and "why did so many troubled S&Ls take on incredible risks before they failed in the late 1980s?" -
Playing "heads I win, tails you lose" with other people's money is a failsafe recipe for excessive gambling.
The question has exactly the same economic dynamics as "why should company executives hold resticted stock rather than options" and "why did so many troubled S&Ls take on incredible risks before they failed in the late 1980s?" -
Playing "heads I win, tails you lose" with other people's money is a failsafe recipe for excessive gambling.
I'm afraid everyone in this thread has missed an important point in Mr. Campbell's argument regarding those who "have more than enough to buy the place outright". The article of course didn't speak to this, but I feel qualified to type as I personally know many Mr. Campbells.
Mr. Campbell did not need to waste money on PMI as the down payment could easily have been funded through the HELOC on his primary.
Right, Paul, but the HELOC on his primary would still have cost him more than the 100% loan at 6.25% that he wants. If he won't pay MI, he won't pay 6.50% on 80% and 8.50% on 20%.
His problem is that he doesn't want to pay any kind of "risk premium" at all--MI, higher rate, opportunity cost, whatever. His claim is that since he could buy the property outright in cash, he should therefore qualify for a loan with no downpayment.
Heck, I know plenty of portfolio bankers who would cheerfully make him such a loan, as long as he signed a pledge agreement on that money he isn't spending. I suspect he doesn't want to tie up $50,000 in a bank CD he can't withdraw until the LTV on his loan hits 20%, but that is always an option.
I wouldn't be surprised if this guy's premise (that PMI is net cost for his situation) is actually wrong. It was explained to me once (by a senior loan officer at a bank I was doing Y2K software work for) that from the bank's perspective PMI is less about risk than liquidity--it is much easier for them to sell a loan that conforms to a PMI standard. Reduced liquidity implies less value to the bank (since they're forced to hold it in portfolio), which in turn means they need to charge a higher rate to make the same profit. It may well be that the market rate of PMI, which is pooled across millions of loans, is cheaper than the premium rate the bank would have to charge on a handful of portfolio loans.
The other distinct possibility is that these supposedly wealthy and saavy (white collar managers with plenty of cash to throw around) are a complete work of fiction.
Wouldn't be the first time someone made something up to fill a column on a deadline on the cheap...
As he is writing this question in to someone who does not have any financial interest in doing business with him the correct response is:
"Waah, Waah, Waah, the world isn't designed to give me whatever I want whenever I want on my own terms... Quit your whining you over-privileged sack of garbage. I have no idea how people like you get formed but somewhere your parents should be hanging their heads in shame. Of course you've reached an age where you have to be responsible for your own actions, so I'd like you to get away from me because being around empty-headed, self-centered dolts like you makes me want to vomit."
Such skepticism of the ethics and integrity of our great journalistic institutions shall not be tolerated. Why to suggest that someone at Marketwatch would even consider such a thing calls into question the very foundation of our free society. Please do not speak such blasphemous and hurtful words again.
I am a little insulted. I put 10% down in 1994. I have only 6 years left on my mortgage as I have been prepaying. I had the PMI removed once I had 20%.
Actullay, if you had 20% to put down as a borrower and you didn't want to put those funds down; I as a lender would think you would be a risk!! Why you say? Is this really a 2nd home? or is it a flip? or for a family member? Remember; when things get though people always walk away from properties other than their primary!!!
Brian said: "...I'm interested to see your list of analysts (outside of the blogosphere) who got it right..."
I don't trust, follow or read any analysts, since you never know what their biases or conflicts of interest might be. There's no substitute for looking at the data first-hand and making your own independent appraisal.
My point was that the bears can't have it both ways. If the forecasts of housing analysts were lousy before when they were bullish, why are their forecasts any better now that they're bearish? What if they're wrong this time, too, and housing is getting ready to pick up?
Sebastian, you have no point, other than the poker you continually try to stick in our eyes for your own amusement. Clearly, most of us have grown tired of that game; why do you persist in bringing nothing to the table?
Sebastian,
If housing is getting ready to pick up, why don't you buy all the housing you can with OPM? And give us the data; i.e., addresses or parcel numbers, of the properties you bought. Then we'll have a real-world test of your "own independent appraisal".
You guys start the weekend a little early? Thanks for the credit.
Can't dissagree with 20% down on a 2nd home, with 6-10% transaction costs, and still shakey market for another 5-10%, their barely covered if he leaves it clean.
Sorry about the abuse of the stat guys, normally 67% of them don't wander far away from home, a small mountain range next to the Applacians (the Statisticians), with all the inbreeding and all, most are well within the standard deviation, with a small margin of error.
Anybody remember "Monty Python and the Holy Grail"? Remember when King Arthur encounters the Black Knight? And the eventually dismembered Black Knight refuses to acknowledge his situation? I've always wondered what his name was--but now I know: he was Sir Sebastion, arguments and "evidence" lopped off one by one...
the dude has options when it comes to not paying PMI. like not getting a 'mortgage'. a lien against cash in the bank is all he needs. pretty much what tanta said.
heck, the one i got had no fees. and i got it 120 ltv, when i didnt have any credit history. no appraisals, no junk fees, no etc. at closing i did pay the title/property recording fees, etc. the only thing is that the loan is 2% over the cd rate. a couple years ago after old greenie chopped rates, the cd rate was abysmal, but i think the rate on the loan (variable) was 3.5 or somewhere like that. i'm still not sure how i feel about loaning myself money and giving the bank a 200 bps spread, but it was simple and worked for my situation.
A better question is, why should someone who is putting 20% down get the same rate as someone putting less or nothing down?
If you were lending your personal money would you require a higher rate if someone put nothing down?
if you have so much money, why not put some down?
are you really such a jackass that this needs to be explained to you like a child?
Sorry, late to the party, but I have to step on a stupidity.
"The plural of anecdote is not data," goes the line.
Bull.
Take your data. Pull out a single point and examine it - expand it to see the story wrapped around it - and lo and behold you have an anecdote.
What you do not know of the anecdote is whether it's typical or an out-lier. You don't know where in the curve it lies, nor even what the curve in which it lies looks like.
But dismissing it as though it's completely unimportant is blind idiocy.
Nice post. I am regularly driven insane by people who cannot distinguish between using people's self-reports to get at what their underlying assumptions are, and using people's self-reports as "data" to prove something about the way the world is. Perhaps the problem is that I have been a mortgage underwriter, where the goal is, as MOM puts it, to look for real "bankable assets," not people's certainty of their own rectitude. That isn't necessarily cynical: you don't have to believe that the people who proclaim their own worthiness the loudest often are hiding something. It can be the perfectly non-cynical point that good people can have cash-flow problems, too.
I think our friend Sebastian often misses the point because he likes to provide us with his own analogues to Mr. Campbell's. He's always telling us how responsible he is with his own credit, as if we needed to know that "not everybody" is overleveraged. Of course we don't need to know that, and not even Sebastian can be dumb enough to think we do, or that if we did, we should rely on the self-reports of blog commenters. I have an acquaintance who conducts social science research regarding rates of transmission of STDs. You won't believe this, but people's self-reports are notorious for not being accurate about their sexual behavior.
What is endlessly fascinating to me is Mr. Campbell's curious appeal to "actuarial analysis." His argument, stripped of its misunderstanding of the actual data available (we do actually do multi-variate analysis), is that he is "not typical" and therefore should not be treated the way a typical borrower would be. Amusingly, he assumes that a defauter can be described in "typical" terms. Of course there is a sense in which every performing borrower is unique; in the same way, every non-performing borrower is unique. Mr. Campbell wants, basically, his own loan program: the one designed for people in his highly-specific situation. He wants the pricing on that program to be based on the historical experience of default of people in his exact highly-specific situation. It doesn't matter in the slightest whether Mr. Campbell's "situation," as self-reported, is realistic or not. He will never find a lender who will make him a loan on "acutarial" grounds. He might find a lender who will make him a loan on the "probably won't hurt, the guy's got some cash" grounds, but there's the point. He will get the loan he wants only if the lender doesn't behave in a way that Mr. Campbell argues it should. Nobody's got time or money to design "micro-products" with associated "micro-research" to support them. We lenders will continue to use those generalizations about the world in an attempt to keep the cost of credit to something reasonable.
It's a fascinating mind-set to examine, and we can always count on Sebastian to pop in and derail it all back to some argument over "a
Tanta said: "I am regularly driven insane by people who cannot distinguish between using people's self-reports to get at what their underlying assumptions are, and using people's self-reports as "data" to prove something about the way the world is....
Tanta, I feel your pain. However, the most-insidious thing about the bearish arguments here isn't that the bearish anecdotes are accepted as data. There genuinely is hard data that is bearish about housing. I don't deny it, never have.
The point isn't that there's nothing "bad" happening, the point is that it isn't representative of the whole. The entire bearish argument is based on the unsupported assumption that the problems of the minority will somehow spread like a virus and cause severe damage to the majority, and that isn't a valid assumption.
You might just as well argue that a subprime-related foreclosure in El Centro is going to bring financial ruin to Bill Gates, or that it's going to "kill" the Seattle housing market. It's far more likely that it will bring financial ruin to other people in El Centro, and have no affect whatsoever on Bill Gates or the Seattle housing market.
The only time serious housing "trouble" occurs, and the historical economic data backs this up, is when unemployment substantially worsens, like during a recession.
When recession hits and major job-loss occurs, millions of people in multiple sectors, in multiple income-ranges and in most states of the country are severely affected. That's not what's happening, and anyone who looks at the total economy instead of fixating on housing-only data in only the "worst" areas would see this.
And when they did, they'd realize that the "housing bust" and "housing bust will drag the economy into recession" arguments don't pass the laugh-test.
I think I saw the research that the person who buys the home can default on the loan and those who refrain from buying are usually not defaulting, at least for a length of a study.
CFC might be the bank they're looking for. Plenty of real estate for the buyer with cash.
This may sound naive I know, but isn't the point of putting 20% down or paying PMI to give the lender some cushion to protect them in the event that the borrower defaults? I know the presumption is that housing prices always go up, but if a home isn't kept up or, gasp, prices don't keep going up, there can be a significant cost to the lender to resell the home which that 20% down hopefully offsets.
IMO, a bird in the hand (that 20% downpayment) is worth at least a pair of FICOs in the bush.
"Question: For people who can't scrape together a 20% down payment, private mortgage insurance helps them get a home of their own. But what about the large segment of the population who can afford 20% down but don't want to pay it?
I'm in contract on a vacation home. Both I and my wife work white-collar managerial jobs in New York, so we have more than enough to buy the place outright. But we're lumped together with those that can't make 20% down and are forced to pay some 1%-2% more for PMI..."
Sort of undercuts that part of the bears' argument that all those people who made low downpayments either can't genuinely afford a house or will default on the one they're living in.
Sebastia
Answer: Your remarks make perfect sense and I agree wholeheartedly that treating someone of your rank the same as a lower-class, bottom-feeder is irrational and, frankly, insulting; I strongly recommend you pay cash for the house and teach the lenders a lesson.
For the eleventy-hundreth time Seb: the plural of anecedote is not data.
All it confirms is that people tend to think their circumstance are universal. Is there really a "large segment of the population who can afford 20% down but don't want to pay it?"
It's also a good thing that those of us who are fortunate to be white-collar managers in New York never get financially over-extended, sick, die, get laid off, demoted, or transferred.
And certainly those high-class folks would never dream of walking away from a large loan in which they had no equity in such cases of severe distress. I'm sure they would pay off the house in cash first, then put the kidney transplant on the credit card.
Yeh, Sebastian, a one person anecdote (from what appears to be a complete moron) nullifies our arguments.
This one from you just takes the cake.
Sort of undercuts that part of the bears' argument that all those people who made low downpayments either can't genuinely afford a house or will default on the one they're living in.
I doubt this is an all-or-nothing situation. Some % of people that bought 0-down could afford 20%, others cannot. Without knowing the breakdown between these groups it's hard to say how representative this couple is of the norm.
The same can be said of the reliance on non-amortized and negatively amortized loans. Some of the people using them could afford a fully amortized payment, but some can not. The question is, since these loans have been available to qualified buyers for many years, why did their overwhelming gain in popularity coincide with a time when incomes were not tracking price gains?
The buyer in this article seems to underestimate his own risk to the lender. But that is to be expected since very few of the people that go into foreclosure anticipated that outcome when they signed the loan.
Honestly, it seems like a case of sour grapes that this "high wealth white collar professional" is getting lumped in with low net worth borrowers. The same thing happened over the past few years as highly qualified buyers were forced to compete in bidding wars with financially reckless subprime borrowers.
This is just disingenuous. This Campbell fellow is exactly the type who would make a rational economic decision and walk away from an underwater property. Making a 100% loan to him is analogous to making a 100% loan to Donald Trump. His true odds of defaulting on a 100% mortgage in the current market are probably higher than most subprimers.
"Making a 100% loan to him is analogous to making a 100% loan to Donald Trump. His true odds of defaulting on a 100% mortgage in the current market are probably higher than most subprimers."
Completely agree. He gets the house, it starts bleeding equity in the current market, he walks away - and without PMI the lender is screwed.
ablair said: "For the eleventy-hundreth time Seb: the plural of anecedote is not data."
You're absolutely right, I couldn't agree more.
Unfortunately, on this blog bearish anecdotes are considered data and bullish anecdotes are considered anecdotes...or outright fiction.
Sebastia
But they're ENTITLED, dammit. They are successful people and therefore we owe them a bit extra.
The PMI is to cover the added RISK of a loss, plan and simple. Look at it as a small fee to use the 10% to make double-digit returns in the stock market.
Come on, Sebastian, make it harder for us.
This particular "bear" has wasted thousands of keystrokes arguing that a whole lot of those low or no down loans went to speculators who would not have been speculating if it had involved their own money. It's all those "but subprime helps the poor!" boosters who have been trying to convince you that every high-risk loan has been going to someone who is totally flat broke.
Certainly, there is a presumption that people borrow money because they don't have the cash, and many--approximately 99.8% or so--of mortgage loan underwriting rules are based on the assumption that borrower liquid assets total less than the loan amount. So, really, the supposition that high LTV loans mostly go to people who couldn't pay cash isn't all that odd. Most low LTV loans go to people who couldn't pay cash. This will surprise you, but a lot of that small slice of the population who can pay cash don't have high FICOs. They don't have FICOs at all. They, well, pay cash.
In fact, most loans of any sort go to people who couldn't pay cash, with the exception of convenience credit card users and carry traders. One reason that residential mortgage loans are not convenience lines of credit or margin accounts is that, um, they're residential mortgage loans.
Robert's sad little story proves that those who wish to speculate with OPM are still alive and well. How that negates the "bear" case is beyond me.
Tanta said: "...Robert's sad little story proves that those who wish to speculate with OPM are still alive and well. How that negates the "bear" case is beyond me..."
Of course it doesn't "negate" the bear case, it's just another small dilution of it. I've never assumed that things were rosy everywhere, yet the bears don't seem to be equally objective, seeing more "proof" of how "awful" things are with every negative headline.
Another example of this lack of objectivity is how virtually every analyst or housing industry spokesman is permanently, universally wrong, blind or deceitful, reviled by the housing bears at every opportunity...until they make a bearish forecast, at which point they magically become more credible and their quotes become part of the proof of the bearish argument.
Sebastia
Unreasonable expectations of special treatment are commonly associated with narcissistic personality disorder.
And did anyone notice how he used "white-collar managerial jobs" and "useless middleman" practically in the same breath?
I hate whining from people who can afford vacation homes.
The phrase "skin in the game" is the first thing that comes into my head. Many states have laws that limit recourse on purchase money loans. These limit the risk to the buyer, but elevate the risk to the lender. I am sure borrowers who have other meaningful assets would take advantage of such laws to, in effect, hand a loss to the lender. In states with such laws, prudent lenders will advance higher LTVs for refinances than for purchases.
If you think about this rationally, an older borrower buying a vacation home is by far and away more likely to walk away from a vacation home which has become a money pit than a subprime borrower purchasing a primary residence. The vacation home is a want and not a need, and the older borrower has little time to recover from a loss on the vacation home. If the older borrower wasn't willing to put the money down to buy the house, will the older borrower be prepared to use that money to pay off the mortgage on the house? I'd argue that it is not likely. Of course, ECOA mandates that no one discriminate against a borrower due to age, so we will unfairly penalize the younger borrower for the risk that this older borrower presents.
I would argue that there is a higher risk to 100% LTV loans for purchase of a vacation home to an older prime borrower than in a 100% LTV primary residence loan to a decently qualified subprime borrower. The subprime candidate will be less likely to take advantage of a walkaway opportunity because it would limit his or her chances to buy a home for much longer in the future. The net opportunity cost to such a borrower of a walkaway is far higher over the rest of his life than to a borrower such as Campbell. The subprime borrower really NEEDS credit; Mr. I'd Rather Keep My Cash In The Bank only DESIRES credit.
Consciousness of one's utter virtue and respectability are not bankable assets that can be used to offset portfolios, and therefore mortgage lending guidelines take no account of them.
Donna said: "I hate whining from people who can afford vacation homes."
Me, too, but their (profligate, wasteful, "more money than brains") spending is part of what supports the market, and anyone who's trying to gauge housing solely by the spending and assets of "Joe Six-Pack" is missing a significant market-driver.
Sebastia
Online Shrink, having worked for a bank I'd be willing to predict that Mr. Campbell is the sort who chews out the teller who asks him for ID, as bank rules require, because they should know who he is, dammit.
It's odd that an apparently high-paid professional who is capable of using words like "research" and "actuarial" and so forth cannot see that whatever a mortgage insurer is, it isn't a "middleman" by any known definition of that term. On Freudian grounds, this leads me to believe that Mr. Campbell is a white-collar manager for a carpet wholesaler.
I think the guy who wrote in with the question needs to read this book called Never Saw It Coming: Cultural Challenges to Envisioning the Worst
Amazon.com: Never Saw It Coming: Cultural Challenges to Envisioning the Worst (9780226100326): Karen A. Cerulo: Books
It's the antidote to The Secret which he's probably been reading.
Wow, you can tell the economy hasn't had too large a correction for awhile when 2x a white-collar income is supposed to be a sure thing for the life of a loan.
An attitude like that just screams, "I am living slightly below my means but I have no rainy day fund!" So the lender wants to make sure you actually have positive equity when you lose 50% of your income next year? Duh!
Ahhh, yes...
The new HTT loans...
(Holier Than Thou)
Tanta, you troublemaker, you.
Tanta: Online Shrink, having worked for a bank I'd be willing to predict that Mr. Campbell is the sort who chews out the teller who asks him for ID, as bank rules require, because they should know who he is, dammit.
DEAD ON!!! I burst out laughing when I read the question he sent in, because I was imagining the conversation about the pricing on his loan application. (And to anyone reading this who doesn't know anything about banking, if your bank doesn't have tellers check ID, get your money out of there before it disappears. There are lots of cool ways to rob banks nowadays, and the more successful strategies do not require walking in there with a gun. That's so, so outmoded.)
if you could've afforded the 20% down, don't you think you would've paid it.
the reaon you didn't was because it wouldn't dropped either your savings or your investments.
on the other hand, if your investments are guaranteed to produce a higher return than the 6-10% for the home loan, you wouldn't want to pay it down but rather keep the spread. However, if this is a meaningful difference to you, then maybe you really can't afford to put the 20% down!
i don't really know anything, i'm just speculating here.
Sebastian wrote:
"Another example of this lack of objectivity is how virtually every analyst or housing industry spokesman is permanently, universally wrong, blind or deceitful, reviled by the housing bears at every opportunity...until they make a bearish forecast, at which point they magically become more credible and their quotes become part of the proof of the bearish argument.:)"
So Sebastian, please tell us who beside Ivy Zelman has accurately forecasted the path of housing for the last 18 months? David Lereah, Alan Greenspan, the NAHB, any of the homebuilding analysts that were urging everyone to buy last fall, all the guys who had buys on NFI LEND, and NEW in January (except, of course, for your analyst who got you in and out in the only 3 days in February in which one could have made money in the stock)? I'm interested to see your list of analysts (outside of the blogosphere) who got it right.
Are piggyback loans that hard to come by now? That has been the standard way to avoid pmi.
Lord, yes, the kind of startling losses on second liens has kind of put a crimp in the market. You can get them, but they are now very expensive.
Sebastian,
Can we cuddle?
Nigel
The question has exactly the same economic dynamics as "why should company executives hold resticted stock rather than options is the same" and "why did so many troubled S&Ls take on incredible risks before they failed in the late 1980s?" -
Playing "heads I win, tails you lose" with other people's money is a failsafe recipe for excessive gambling.
Sorry, let me correct my post:
The question has exactly the same economic dynamics as "why should company executives hold resticted stock rather than options" and "why did so many troubled S&Ls take on incredible risks before they failed in the late 1980s?" -
Playing "heads I win, tails you lose" with other people's money is a failsafe recipe for excessive gambling.
I'm afraid everyone in this thread has missed an important point in Mr. Campbell's argument regarding those who "have more than enough to buy the place outright". The article of course didn't speak to this, but I feel qualified to type as I personally know many Mr. Campbells.
Mr. Campbell did not need to waste money on PMI as the down payment could easily have been funded through the HELOC on his primary.
Right, Paul, but the HELOC on his primary would still have cost him more than the 100% loan at 6.25% that he wants. If he won't pay MI, he won't pay 6.50% on 80% and 8.50% on 20%.
His problem is that he doesn't want to pay any kind of "risk premium" at all--MI, higher rate, opportunity cost, whatever. His claim is that since he could buy the property outright in cash, he should therefore qualify for a loan with no downpayment.
Heck, I know plenty of portfolio bankers who would cheerfully make him such a loan, as long as he signed a pledge agreement on that money he isn't spending. I suspect he doesn't want to tie up $50,000 in a bank CD he can't withdraw until the LTV on his loan hits 20%, but that is always an option.
I was being silly Tanta. I won't quit my day job.
Never mind me, Paul. Being silly is my day job. So it's instinctive to expect everyone else to play straight man.
I wouldn't be surprised if this guy's premise (that PMI is net cost for his situation) is actually wrong. It was explained to me once (by a senior loan officer at a bank I was doing Y2K software work for) that from the bank's perspective PMI is less about risk than liquidity--it is much easier for them to sell a loan that conforms to a PMI standard. Reduced liquidity implies less value to the bank (since they're forced to hold it in portfolio), which in turn means they need to charge a higher rate to make the same profit. It may well be that the market rate of PMI, which is pooled across millions of loans, is cheaper than the premium rate the bank would have to charge on a handful of portfolio loans.
With a non-recourse loan, 20% down equates with more buyer risk, 0% down means zero buyer risk. Less buyer risk costs more.
Translation: "I'm special, charge me less for no reason whatsoever".
The narcissitic comments are spot on.
The other distinct possibility is that these supposedly wealthy and saavy (white collar managers with plenty of cash to throw around) are a complete work of fiction.
Wouldn't be the first time someone made something up to fill a column on a deadline on the cheap...
As he is writing this question in to someone who does not have any financial interest in doing business with him the correct response is:
"Waah, Waah, Waah, the world isn't designed to give me whatever I want whenever I want on my own terms... Quit your whining you over-privileged sack of garbage. I have no idea how people like you get formed but somewhere your parents should be hanging their heads in shame. Of course you've reached an age where you have to be responsible for your own actions, so I'd like you to get away from me because being around empty-headed, self-centered dolts like you makes me want to vomit."
RP,
Such skepticism of the ethics and integrity of our great journalistic institutions shall not be tolerated. Why to suggest that someone at Marketwatch would even consider such a thing calls into question the very foundation of our free society. Please do not speak such blasphemous and hurtful words again.
Can you tell the drugs are kicking in?
Wow,
I like Sichelman's answer almost as much as the one I suggested.
It boils down to: Don't you have an old-boy network? That's how everyone I know does it.
I am a little insulted. I put 10% down in 1994. I have only 6 years left on my mortgage as I have been prepaying. I had the PMI removed once I had 20%.
Actullay, if you had 20% to put down as a borrower and you didn't want to put those funds down; I as a lender would think you would be a risk!! Why you say? Is this really a 2nd home? or is it a flip? or for a family member? Remember; when things get though people always walk away from properties other than their primary!!!
Brian said: "...I'm interested to see your list of analysts (outside of the blogosphere) who got it right..."
I don't trust, follow or read any analysts, since you never know what their biases or conflicts of interest might be. There's no substitute for looking at the data first-hand and making your own independent appraisal.
My point was that the bears can't have it both ways. If the forecasts of housing analysts were lousy before when they were bullish, why are their forecasts any better now that they're bearish? What if they're wrong this time, too, and housing is getting ready to pick up?
Sebastia
Sebastian, you have no point, other than the poker you continually try to stick in our eyes for your own amusement. Clearly, most of us have grown tired of that game; why do you persist in bringing nothing to the table?
Sebastian,
If housing is getting ready to pick up, why don't you buy all the housing you can with OPM? And give us the data; i.e., addresses or parcel numbers, of the properties you bought. Then we'll have a real-world test of your "own independent appraisal".
Geoff: "Sebastian, you have no point.."
Nothing personal, he's practicing for his new role as NAR chief economist.
You guys start the weekend a little early? Thanks for the credit.
Can't dissagree with 20% down on a 2nd home, with 6-10% transaction costs, and still shakey market for another 5-10%, their barely covered if he leaves it clean.
Sorry about the abuse of the stat guys, normally 67% of them don't wander far away from home, a small mountain range next to the Applacians (the Statisticians), with all the inbreeding and all, most are well within the standard deviation, with a small margin of error.
Its Friday, I'll of course, be Sippn!
Anybody remember "Monty Python and the Holy Grail"? Remember when King Arthur encounters the Black Knight? And the eventually dismembered Black Knight refuses to acknowledge his situation? I've always wondered what his name was--but now I know: he was Sir Sebastion, arguments and "evidence" lopped off one by one...
the dude has options when it comes to not paying PMI. like not getting a 'mortgage'. a lien against cash in the bank is all he needs. pretty much what tanta said.
heck, the one i got had no fees. and i got it 120 ltv, when i didnt have any credit history. no appraisals, no junk fees, no etc. at closing i did pay the title/property recording fees, etc. the only thing is that the loan is 2% over the cd rate. a couple years ago after old greenie chopped rates, the cd rate was abysmal, but i think the rate on the loan (variable) was 3.5 or somewhere like that. i'm still not sure how i feel about loaning myself money and giving the bank a 200 bps spread, but it was simple and worked for my situation.
Actually, it seems clear to me that he clearly misunderstands the purpose of PMI. He seems to think that PMI is there to help the borrower:
"Where's the market pressure to satisfy borrowers like me for whom mortgage insurance doesn't add any value?"
It's not there to add value for you. It's there to add value for the lender.
I often say "Where's the market pressure to satisfy drivers like me for whom car insurace doesn't add any value?"
A better question is, why should someone who is putting 20% down get the same rate as someone putting less or nothing down?
If you were lending your personal money would you require a higher rate if someone put nothing down?
if you have so much money, why not put some down?
are you really such a jackass that this needs to be explained to you like a child?
Sorry, late to the party, but I have to step on a stupidity.
"The plural of anecdote is not data," goes the line.
Bull.
Take your data. Pull out a single point and examine it - expand it to see the story wrapped around it - and lo and behold you have an anecdote.
What you do not know of the anecdote is whether it's typical or an out-lier. You don't know where in the curve it lies, nor even what the curve in which it lies looks like.
But dismissing it as though it's completely unimportant is blind idiocy.
Hey Kirk, great to see you back.
Nice post. I am regularly driven insane by people who cannot distinguish between using people's self-reports to get at what their underlying assumptions are, and using people's self-reports as "data" to prove something about the way the world is. Perhaps the problem is that I have been a mortgage underwriter, where the goal is, as MOM puts it, to look for real "bankable assets," not people's certainty of their own rectitude. That isn't necessarily cynical: you don't have to believe that the people who proclaim their own worthiness the loudest often are hiding something. It can be the perfectly non-cynical point that good people can have cash-flow problems, too.
I think our friend Sebastian often misses the point because he likes to provide us with his own analogues to Mr. Campbell's. He's always telling us how responsible he is with his own credit, as if we needed to know that "not everybody" is overleveraged. Of course we don't need to know that, and not even Sebastian can be dumb enough to think we do, or that if we did, we should rely on the self-reports of blog commenters. I have an acquaintance who conducts social science research regarding rates of transmission of STDs. You won't believe this, but people's self-reports are notorious for not being accurate about their sexual behavior.
What is endlessly fascinating to me is Mr. Campbell's curious appeal to "actuarial analysis." His argument, stripped of its misunderstanding of the actual data available (we do actually do multi-variate analysis), is that he is "not typical" and therefore should not be treated the way a typical borrower would be. Amusingly, he assumes that a defauter can be described in "typical" terms. Of course there is a sense in which every performing borrower is unique; in the same way, every non-performing borrower is unique. Mr. Campbell wants, basically, his own loan program: the one designed for people in his highly-specific situation. He wants the pricing on that program to be based on the historical experience of default of people in his exact highly-specific situation. It doesn't matter in the slightest whether Mr. Campbell's "situation," as self-reported, is realistic or not. He will never find a lender who will make him a loan on "acutarial" grounds. He might find a lender who will make him a loan on the "probably won't hurt, the guy's got some cash" grounds, but there's the point. He will get the loan he wants only if the lender doesn't behave in a way that Mr. Campbell argues it should. Nobody's got time or money to design "micro-products" with associated "micro-research" to support them. We lenders will continue to use those generalizations about the world in an attempt to keep the cost of credit to something reasonable.
It's a fascinating mind-set to examine, and we can always count on Sebastian to pop in and derail it all back to some argument over "a
"anecdotes." Halo's preview function is a real treat this morning.
Tanta said: "I am regularly driven insane by people who cannot distinguish between using people's self-reports to get at what their underlying assumptions are, and using people's self-reports as "data" to prove something about the way the world is....
Tanta, I feel your pain.
However, the most-insidious thing about the bearish arguments here isn't that the bearish anecdotes are accepted as data. There genuinely is hard data that is bearish about housing. I don't deny it, never have.
The point isn't that there's nothing "bad" happening, the point is that it isn't representative of the whole. The entire bearish argument is based on the unsupported assumption that the problems of the minority will somehow spread like a virus and cause severe damage to the majority, and that isn't a valid assumption.
You might just as well argue that a subprime-related foreclosure in El Centro is going to bring financial ruin to Bill Gates, or that it's going to "kill" the Seattle housing market. It's far more likely that it will bring financial ruin to other people in El Centro, and have no affect whatsoever on Bill Gates or the Seattle housing market.
The only time serious housing "trouble" occurs, and the historical economic data backs this up, is when unemployment substantially worsens, like during a recession.
When recession hits and major job-loss occurs, millions of people in multiple sectors, in multiple income-ranges and in most states of the country are severely affected. That's not what's happening, and anyone who looks at the total economy instead of fixating on housing-only data in only the "worst" areas would see this.
And when they did, they'd realize that the "housing bust" and "housing bust will drag the economy into recession" arguments don't pass the laugh-test.
Sebastia