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Atl-A: Lending's next tsunami?
Submitted by
CalculatedRisk on Sun, 05/13/2007 - 8:11am (38 comments)
"eerie"
"History doesn't repeat itself, but it does rhyme."
-- Mark Twain
Or maybe...
"There appears to be something wrong with our bloody ships."
Vice Admiral Sir David Beatty @ Jutland
rt
tsunami?
Did anyone assign "tsunami" a role in the drinking game?
Analysts say delinquencies are rising in the Alt-A sector for the same reasons as subprime: too many loans made with little or no down payments combined with little or no proof of income.
Which is just another way of saying that we expected these loans to prepay and they didn't. Part of me is thrilled that at least some segment of the first-time-homebuyer public is starting to think twice about volunteering to buy these overpriced houses from these people. "Alt-A" has needed for a long time to get renamed for what so much of it is--a bridge loan dressed up like long-term financing--and now perhaps we're ready to get there.
Tanta,
""Alt-A" has needed for a long time to get renamed for what so much of it is--a bridge loan dressed up like long-term financing--and now perhaps we're ready to get there."
Could you explain this further for the non-mortgage nerds out there? Thanks -
Robert Coté, my exact thought! Do we have a list of drinking words?
Tanta, a bridge loan seems exactly correct. I wonder how many home borrowers would use Alt-A if they were called "Bridge"? There is nothing worse (for the borrower) to have a bridge loan turn into long term financing - and that appears to be happening more and more.
Best to all.
Remember, in a tsunami, the FIRST thing that happens is all the water rushes out...
"Its only when the tide goes out that we see who's swimming naked"
-Warren Buffett
Dr. Deflation, I'm just saying that the only reason you make a 100% loan to someone who could give you their income verifications but won't, even if it means they pay a higher rate, is because you both--borrower and lender--expect the loan to "perform" in some way other than being repaid over time out of the borrower's income. In other words, you count on relatively quick payoff, either by refinance or sale. If you were counting on "durability" of the borrower, you would have verified "durability," which requires someone to cough up some docs, someone to appraise the property as if the local market could possibly slow down, someone to structure the loan so it doesn't explode at the end of year two.
There is a tradition in lending that you don't make a 30-year loan unless you are prepared to be paid back over 30 years, as that is the right of the borrower in a loan without a call option.
On the other hand, you have a hard time qualifying borrowers for huge loans if you don't push the term out well past the date you might need your money back. You therefore "toxify" your loan products by nominally keeping the 30 year (or even longer) term and nominally keeping the no-call feature of a residential mortgage loan, but embedding an "accelerated maturity" or a "hidden call option" by throwing in some nasty reset or recast or balloon payment.
I've seen a lot of assertions in our comments recently about the extent to which homebuyers are rate-sensitive. I am in an industry in which borrowers have been cheerfully taking loans with huge rate add-ons for stated income, high LTV, non-warrantable condos, you name it. Borrowers are rate-sensitive only when they think the loan is not temporary financing.
The reason I put it the way I did is because there are "speculators," and then there are people who are living in the home they purchased on a speculative basis. The problem isn't solely confined to the non-owner-occupied. However, you can make the same point by observing that residential home mortgages are starting to perform like some sectors of short-term commercial debt. They aren't supposed to do that.
Borrowers are rate-sensitive only when they think the loan is not temporary financing.
BINGO! Borrowers checked their brains at the door when appreciation rates were running double digits.
How come the Alt-A correction is "eerie" similar to sub-prime when, compared to it, it unravels at "snail's pace"?
How come the Alt-A correction is "eerie" similar to sub-prime when, compared to it, it unravels at "snail's pace"?
Oh, come on, ask any good director of slasher films. It's always eerier to film the the psycho sequences in slo-mo.
Another variant on the drinking game: every time someone talks about Alt-A, you take a sip out of the stirring straw. When the subject shifts to subprime, you take a sip out of the drinking straw. Anybody with booze left by the time we get to "super prime" has to stick his head in the pitcher.
Why do we worry so much ?
Life is good.
Money supply is up(in China):
China Money Supply Rises 17.1%, Exceeding Target (Update2) - Bloomberg.com
and housing in the US is already under recovery:
`Chickens' Buy Home Depot in U.S. Home Rebound Play (Update2) - Bloomberg.com
Ellen Zentner, an economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York: "Housing will not start turning around until mid-year"
And we are when mis Zentner ? 6 weeks from mid year ? so the turn around is just around the corner -right we just "hit bottom" in 5 weeks....
Robert Coté, my exact thought! Do we have a list of drinking words?
I brokered the job to the wickedly creative people who hang out at my blog. The results will show up here: Sub-Prime Dringing Game.
"Now emerging"? "Eerie"? "Snail's pace"?
WTF?
The problems in Alt-A were obvbious in early March! More than two months ago!
Jeez, on one of the first days of the NCAA basketball tournament (first week of March) I was in a sports bar, watching my alma mater (first NCAA tourney game in 19 years) getting trounced by Memphis, when a stranger walked up and said hello. He was a fellow alumnus, the only other person in the bar rooting for the overmatched green 'n' white of the University of North Texas -- and it turned out that he was an account executive with a wholesale lender. He was pissing and moaning back then, nine or 10 weeks ago, about the tightened underwriting requirements in Alt-A, and how Alt-A volume had dwindled in a matter of three or four weeks.
Heck, Christopher Cagan, an analyst at First American CoreLogic, predicted the Alt-A meltdown 14 months ago, and he said the Alt-A foreclosure problem would be worse than the subprime foreclosure mess.
This has been emerging for months, quicky and not at a snail's pace, and it's not eerie -- it was predicted in detail more than a year ago by Cagan, who is a mathematician and not even an economist.
It's a cliche to repeat Renault's cynical comment about gambling in "Casablanca," so consider this paragraph a cliche. You can fill in the rest in your imagination.
and housing in the US is already under recovery:
Yal
I know you're just being sarcastic, but the spin on that bloomberg story is amazing.
The logic is that even though the housing market is in a funk, people will spend $$$ on home improvments.
The obvious question is: why would you be fixing up a new house? Especially a house that you may now be treading water on?
If they didn't like the trim work or countertops, why did they buy the house?
who is a mathematician and not even an economist.
Them's fightin' words pardner. Why do you think there aren't any jokes about three armed mathematicians? "On the other other hand..." [rimshot]
Seriously, IMO we are so far out of the realm of econometric models that we only have mathematics left. Think about it. If you were to have asked an economist in mid 2004 what would be the consequences of a 13.9% default rate in sub-prime loans 18 months from then they would have told you their models cannot predict such out of the extremes events.
Heck, Christopher Cagan, an analyst at First American CoreLogic, predicted the Alt-A meltdown 14 months ago, and he said the Alt-A foreclosure problem would be worse than the subprime foreclosure mess.
Median asking price for a CFC REO in Sacramento: $290,000
Median asking price for a house on the MLS in Sacramento: $340,000
If you factor in a 20% write-off on the REO, we are firmly in former Alt-A/Prime land here in Sacto.
According to Sac Flippers in Trouble, Sacramento has sellers facing $200k losses on their properties:
Sacramento Area Flippers In Trouble
No comfort being Alt-A vs prime vs subprime, when these people are getting upside down!
"Borrowers are rate-sensitive only when they think the loan is not temporary financing."
These words should be on the CR masthead.
I really enjoy "Flippers in Trouble". Total financial carnage. It's like a Schwarzenegger movie without the blood.
Alec,
It is Huricane season and this year will be strong. While warren is going to loose on the insurance biz I he will make money on Home Depot/Lowe just because all those that come to pile up on ply wood and later for the repair work...
just being sarcastic again....
asking price per Sq ft keeps going down in 4 counties:
http://bp1.blogger.com/_OjftCEBUcYQ/Rkc259s1bLI/AAAAAAAAAeQ/c5kmmW1IEz0/s1600-h/asking_price_levels.PNG
and more flippers are in trouble:
http://bp2.blogger.com/_OjftCEBUcYQ/Rkc26Ns1bNI/AAAAAAAAAeg/iY0HKnPKgpI/s1600-h/flipper_market_share.PNG
Sacramento Real Estate Statistics
Only a matter of time before "Prime" gets hit, too. Perhaps "Super Primes" will be the only ones unaffected? Nah.
p.s.: I find it quite funny that an analyst for a Tokyo outfit should be calling a bottom.
and housing in the US is already under recovery:
Again?
Yal,
Thanks for posting the price-per-square-foot graphs. They clearly make a point that gets lost in the dust of so many "housing bust" claims: average price is a meaningless term but average price per square foot means a lot.
And, here come the discounts-
Mortgage Woes Force Banks To Take Hits to Sell Homes - WSJ.com
"eerie", "snail's pace"...you take things out of context better than journalists. the analyst's point was it's the same disturbing pattern but not as quick and dramatic. Loan buybacks, which I'll save for the next story, also are hitting the Alt-A boys, but, once again, not at same scale. Maybe they're better prepared for the fight. For example, Impac CEO said of the $180 million in outstanding buyback demands at end of 2006, he's brought that down to $90 million or so. Of course, all we have are the words of these execs.
"Its only when the tide goes out that we see who's swimming naked"
My guess is that there will be lots of naked people there, and that most of them will look more like Ruth Ginsberg and Dick Cheney than like Brad Pitt and Angelena Jollie.
eerie", "snail's pace"...
Alt-A has much higher loan amounts then subprime. If alt-A goes bad at the same rate as subprime I have to believe many banks would be in trouble.
The option arm loans - are they mostly subprime and Alt-A?
In fact Option arms were offered to everyone. I recall one lunatic martgage broker who came to my house few years ago (I was interested to refinance and he was around). He was madly pushing me into option arm even after I explained that full amortized payment is only 20% of my paycheck. He was offered me to pay even less than that while being quite uncomfortable when I asked about negative amortization.
I understand why speculation was so high. With that option arm I would afford to buy 4 more houses like mine
So it must be a lot of prime borrowers?
When questioned about the rate risks of their (mostly 5/1) ARMs, a number of people responded to me, with a perfectly straight face, that they "won't stay in the house" more than 5 years. When poked further, what if you can't refi or afford a trade-up with higher rates, that's where the hand-waving or displays of denial started. That was must have been about 5 years ago, and I have since learned not to bring up the topic anymore. (There has also been considerably less talk about real estate in the office.)
It's not just the lenders expecting prepay, borrowers too.
When questioned about the rate risks of their (mostly 5/1) ARMs, a number of people responded to me, with a perfectly straight face, that they "won't stay in the house" more than 5 years.
They are right - they won't be in the house much longer than five years if they have a 5/1.
Trying to short Indy Mac? No shares available.
"If you were to have asked an economist in mid 2004 what would be the consequences of a 13.9% default rate in sub-prime loans 18 months from then they would have told you their models cannot predict such out of the extremes events."
Robert Coté DOW 13000
They are right - they won't be in the house much longer than five years if they have a 5/1.
LMAO!
For example, Impac CEO said of the $180 million in outstanding buyback demands at end of 2006, he's brought that down to $90 million or so.
Note to analysts: in this situation you might want to ask how this was accomplished. I have personally been involved in such negotiations where the loan buyer agreed to accept long-term or even life-of-loan indemnification in lieu of outright immediate repurchase. This is possible if the loans in question are in violation of contract, but are still performing (if weakly). The result will be (should be) a large reserve on the seller's books to cover that indemnity. Another possibility is that the seller refunds the premium paid on the loans, without having to repurchase the loan itself.
I don't know if that's what happened in Impac's case or not, but one should always ask whether the repurchase negotiation came with a price tag.
Bad news on Alt-A loans along with a report of the housing market turning around because home depot is buying more faucets. I predict another up day for the Alt-A lenders.
ocbear,
Why not buy some IMB puts instead?