Shopping at Amazon?
Wait! If you click on the Amazon banner link at the top of the page first, HCN will get a percentage of anything you purchase for 24 hours!
Open predictions
Our local book authors
User login
Who's online
There are currently 43 members and 161 guests online.
Currently online
- Sebastian
- Whiskey
- Bruce in Tennessee
- gabyjan
- Rob Dawg
- Comrade Kristina
- Mike in Long Island
- Cobradriver
- kratovil1
- traderwalt
- JP
- Black Star Ranch
- Eric
- silvertoes two
- black dog
- mr_clueless
- ResistanceIsFeudal
- Windward.Broach
- merchants of fear
- bearly
- GrandOldTurkey
- Mert717
- burnside
- Blackhalo
- Firemane
- BelieverJeff
- shill
- Nanoo-Nanoo
- nova
- CalculatedRisk
- Anonymous Bosch
- Outsider
- yjacket
- gruntled
- RayOnTheFarm
- Tom Stone
- Vonbek777
- dr munch
- Lurking Lawyer
- Lobbyist Ben Dover
- sscripko
- skk
- 12th Percentile
tanta,
it would seem that the mortgage companies and banks are simply prolonging the inevitable, they are not properly reserving for future losses and thus are setting themselves up for a reckoning day which could easily magnify the problem later as the credit markets evolve & work into the next cycle.
More and more of these loans are seemingly kept on the books due to the refusal to sell into the current malaise thinking that credit markets will improve when the cycle suggests the opposite. Credit continues to tighten and hampers their ability to continue to originate.
Also, the latest move by the ratings agencies demanding more coverage for the lower rated tranches would seem significant going forward. How would this melt-up and effect the higher rated tranches in your opinion?
regarding the above, this is a take on reserves-
Lending's next tsunami? | loans, alt, percent - Business - The Orange County Register
risk capital, I just can't see how the economics of securitization continue to work out if these things have to be significantly more overcollateralized at issue in an environment of slowing prepayments. In other words, I suspect the main impact on the higher rated tranches is an approximate pricing of LIBOR minus a quarter or two. That ought to work.
A zero-down mortgage made to unqualified buyers on a house worth thousands less than the appraisal in a depreciating market is a financial cluster bomb waiting to explode.
The FHA bailout proposal would force the U.S. taxpayer to insure these financial cluster bombs.
I hate it when I disagree with Tanta. It means I'm about to get me a very public "education."
As someone with a passing familiarity with Casey Serin (and the likes of Jeff of SDCIA fame) I firstly disagree that the dozen plus subprime mortgages he's defaulted on so far means he's overreported in the pool. No, the eight houses were removed as shelters and investments from the supply. The demand was equally distorted by a similar multiple. The demand for money and mortgage types were additionally distorted. This isn't one idjit getting counted dozens of times. The impact on all these issues would have been the same had he been two twenty individuals. The same number of empty houses, the same number of defaults.
When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.
This says something far more troubling. It presumes that the 13% we see now are somehow distinguishable from the other 87%. Were that true the 87% are being screwed on purpose. They should have been placed in Alt-a or prime. That is such a horrific condemnation of the mortgage industry even I refuse to accept the premise. The true process goes like this; this pool of borrowers can be expected to default at a 0-1% rate are prime. These 0.5-3% get graded alt-a. Etc. 13% says that model, whatever it was is horribly broken. When something is broken you stop using it until it is fixed. Okay, this isn't a car where you pick up a loaner but you at least slow way down until you change the tire.
IMO the clogged garbage disposal of 13% doesn't get fixed by cutting what goes down to 87% of pervious especially when one of the exit pipes (refinancing) has been shut off by the plumbers.
Thanks for the link, Risk Capital. I've said some unflattering things about the OC Register--and meant them--so let me be the first to say that's a good article.
I do, though, have to say that at some level I have real respect for Indy Mac's position here. This is at the level of being a long-term participant in the mortgage industry, wherein one actually, you know, did take some risk. We were like that in the old days; it was called holding a loan to maturity. You know. Titans of capitalism who deserved their capital-gains tax breaks because they were actually exposing themselves to some risk.
Besides, there used to be some expectation, as I think Perry is saying, that we were in this business and therefore knew how to engage in it. So, yes, there's something refreshing about someone saying look, you can try to both weather the cycle and fix up the loans you've got. You don't have to have a business model that is predicated on all loans ending up in a hedge fund or a CDO that can now offer shares to the public; how lovely. You do not also have to have a servicing model that is predicated on being a mere pass-through operation.
Mostly, of course, I tend to think that your first loss is your best loss, and I am always suspicious of people who seem merely to be letting the HFS pipeline age ungracefully while waiting for the market to "rationalize." In the current context, a "rational" market isn't going to help these folks.
So what? So this isn't a business for amateurs. I remain convinced that there are still a lot of amateurs trying to engage in it, so the ugliness won't be over any time soon.
I firstly disagree that the dozen plus subprime mortgages he's defaulted on so far means he's overreported in the pool.
I don't mean that he's "overreported." I simply mean that he is only one person. In a hypothetical pool of 100 loans, where 13 of them are delinquent, and each loan belongs to a different individual, you have 87 current homeowners and 13 defaulted homeowers. Put Casey in the pool with his 8 defaulted loans, and you have 87 current homeowners and 6 defaulted homeowners. If there's a Casey-who-has-not-yet-blown-up in the pool, you might have 80 current homeowners and 6 defaulted homeowners.
That's all I meant; you can't necessarily get from % of bad or good mortgages to # of people with a bad or good mortgage. The problem, Robert, is that you and I already know that this is a stunningly stupid rhetorical move, so you're already onto the more interesting problem. I'm still swatting at much simpler logical flies.
"So what? So this isn't a business for amateurs. I remain convinced that there are still a lot of amateurs trying to engage in it, so the ugliness won't be over any time soon."
Wholeheartedly, agree.
That said, it seems that we are now bringing a new set of amateurs into the picture, ie retail.
And don't forget tanta, those risk warnings and disclosures, those are just "boilerplate".
Tanta, congratulations on another good piece. To pull out some of the implications:
1) The expected result of tightening of lending standards for the poorest quality current borrowers is to prevent struggling borrowers who had loans in the credit tiers above from refinancing and buying themselves some time.
2) Before, "subprime" has often been the last resort of troubled borrowers. When it becomes a relatively common initial entry point into the market, the expected result is that we will see quicker defaults in those loans (they have no back-up financing).
3) The only thing that prevented 2) from being more apparent is that galloping equity appreciation provided a means for struggling subprime borrowers to refinance and take equity out to pay their mortgages and other debt before default.
4) The expected result of an effective halt to home appreciation in a market is to "freeze" poorer quality loan portfolios, so that future returns and losses suddenly become more contingent upon the ability of the borrowers to actually repay the loans, rather than the ability of the borrowers to refinance.
5) Portions of the mortgage industry that were heavily dependent upon origination fees, rather than servicing income or loan repayment, will tend to see a sudden shift from profit to loss, further tightening credit standards.
In other words, the usual exit before default was either sale of the home or refi (prime to Alt-A, Alt-A to subprime). The expectation is that now only the better collateralized prime loans will be refinanced into Alt-A and that only the better collateralized Alt-A loans will be refinanced into subprime. Those high CLTV subprimes are going to default unless the borrower can genuinely afford the scheduled payments.
Unless these expectations (which are based on decades of industry experience) are wrong, it is literally impossible for a significant "subprime" problem to be confined to "subprime" portfolios and securitizations.
and we may be seeing the bottom of the cascade, as many years worth of failing but not yet utterly failed mortgages, substantial numbers of which started out "prime" and many of which accreted a fair amount of consumer debt balances along the way, sift down into the subprime bucket, from which there is now a nasty line at the exit.
A delinquent prime borrower is, ipso facto, a member of the subprime customer base.
So in other words, "prime" loans that become impaired, traditionally make their way into a "subprime" classification? Does this happen because the favorable terms offered to formerly "prime" borrowers are taken off the table as their debt increases and they try to refinance, or is it simply a "rebranding" of what the loan is called?
If the "rebranding" question is correct, than none of the terms (prime, subprime, alt-a) make sense, other than to tell you the state of the loan at one moment in time.
I repeat my original thesis that the issue here is actaually lax underwriting procedures; subprime is just the marginal case that went off the cliff first. There are plenty of suprime loans from over the last ten years or so that will continue to perform, because they had a good basis, so to speak. The "iceberg effect" of subprime has mostly been caused by originators realizing that they could get away with murder down there.
That all said, the whole concept of taking unsecured credit and going and securing it with your mortgage leaves me shaking my head. Is it a coincidence that the holders of unsecured credit came up with that, or am I being too paranoid?
My feeble low-res mind has difficulty thinking in such terms. I can resonate to Messr. Coté's point that the 13% are in fact distinct, but consideration of hapless individuals strains my limited capacity for compassion. All I want to know is, Is loan default correlation increasing with the default rate? Then we're screwed. How screwed depends on the magnitude of the effect. A lot of media confusion may result from the journalist's need to ground reports in stories, but the oppressed mass has emrgent properties of its own.
"That all said, the whole concept of taking unsecured credit and going and securing it with your mortgage leaves me shaking my head. Is it a coincidence that the holders of unsecured credit came up with that, or am I being too paranoid?"
And, there lies the AMT problem.
I don't really have anything to add today but my thanks. I stop to look at CR at least twice everyday and the main source of my disappointment in the blog comes when there is not a new post.
Both Tanta and CR provide insights that other media outlets have neither the ability nor inclination to give, but are invaluable in helping improve my understanding.
The drumbeat of of rhetoric that surrounds this particular issue is sadly lacking in thoughtful analysis as everyone seems to be rushing to proclaim or disclaim crisis. Today that seems to be the case with all too many issues. Anything that injects a broader perspective is a welcome tonic.
Thanks again.
If the "rebranding" question is correct, than none of the terms (prime, subprime, alt-a) make sense, other than to tell you the state of the loan at one moment in time.
That's all they've ever meant. Credit quality is fluid, just as income, assets, home equity, everything else is. It is, as far as I can tell, only fairly recently that these terms--"prime," "subprime"--have been used as if they described a permanent characteristic of a borrower or a loan, instead of a relative ranking at any given point in time within a very complex set of variables. We use them as a category to describe what the loan was at origination, but that's all that means.
We understand, at some level, that things can be graded on a curve, and that you can get an A with a score of 86 or an F with a score of 79, depending on the calibration of the test to the test-takers. We just forget that this applies to such things as credit categories.
"Prime" means that a given pool of loans with this designation will experience no more than a certain level of losses. That's all. That's how a housing boom can make "prime" borrowers out of a bunch of people with no debt management skills. It's also how a housing bust can make "subprime" borrowers out of a bunch of people who have never missed a payment in their lives. Anybody who doesn't understand this doesn't understand what a "credit crunch" is, and is going to be sorely badly terribly hurt by the whole thing.
This also gets us back to that question of the utility of FICO scores. FICO scores are useful in mortgage lending only insofar as they are calibrated over time with mortgage performance. The point about the mortgage book absorbing everyone else's delinquent consumer credit is a point about how a given FICO range might make sense for a credit card but not for a mortgage loan. What I think is going to happen here is a major "recalibrating" of the "traditional" FICO buckets in mortgage-land. We'll still use them, but we'll have to adjust the cut-offs, as long as we're willing via the refi machine to be everyone else's exit strategy.
Tanta, congratulations on another good piece: add me to the pool
CR : Housing recovery !!(?)
`Chickens' Buy Home Depot in U.S. Home Rebound Play (Update2) - Bloomberg.com
That all said, the whole concept of taking unsecured credit and going and securing it with your mortgage leaves me shaking my head. Is it a coincidence that the holders of unsecured credit came up with that, or am I being too paranoid?
I don't know that I'm ready to blame the makers of unsecured loans for this business of transferring it neatly onto the secured lenders' books. Certainly it can start there; I can't tell you how many times over the years I had some nitwit from retail lending over at my desk wanting to know if the mortgage side would do a cash-out refi to fix up a delinquent unsecured loan problem. From the bank's perspective, it's an improvement of the position, because it's not just moving the debt from one line of business to the other, it's increasing the security of the debt.
But you think this rah-rah about "the American Dream" is new? We have been in the business of convincing people to use mortgage debt to finance god knows what for decades. It's cheap, it's amortized affordably, it's tax-advantaged. As long as you could tell yourself that the debt in question was a decent investment--college, small business start-up, whatever--you could justify it. Certainly if it was an emergency thing, and you could keep the mortgage loan for someone's shelter going by improving their cash-flow by taking on their high-rate credit cards after some nasty life event, like divorce or job loss or illness or whatever, it also made sense.
Somehow, lately, we're talking about a lot of flat-screen TVs and leopard-print chairs. So while we've strayed a bit from the original justification of the cash-out mortgage refi, we have to concede that we started it.
Tanta, thank you for another informative post.
We use them as a category to describe what the loan was at origination, but that's all that means.
So what would you call a delinquent "prime" loan? Does it become subprime by the nature of its delinquency?
You can see what I'm getting at here. When I hear the terms "prime" and "subprime", I always took that to be what the loan was called when it was originated (one moment in time). But if the very terms bandied about by industry to describe a loan are relative depending on the state of the loan at any given moment, than the terms are useless. For example, if a subprime loan at origination is kept current during a period when the market around it is deteriorating, could this loan now be called "prime"? Shouldn't all loans made in 2003-2005 have been called "prime" back then, since there were very few defaults?
You've indicated a lot of potential problems with interpreting delinquency. I think the dynamic pool one is the least important, as most of the investment bank research that I see quoted on subprime reports static pool figures - eg, 2006 subprime cohorts. I think the biggest one is the fact that mortgages don't equal borrowers, and that most borrowers go through multiple mortgages. I always like to illustrate that one with a simple example.
You have two borrowers that purchase with subprime mortgages. One goes to foreclosure, the other refinances and then goes to foreclosure. The foreclosure rate among borrowers is 100%, while the foreclosure rate among mortgages is 67%. Given that more than half of subprime mortgages are refis, and the average length of a subprime mortage is between 2 and 3 years, and we've all heard stories about people being told that they could just refi at the reset date on a 2/28, this has got to generate a huge difference between the rate of mortgage failure and the rate of borrower failure.
But, as detailed as your post is, it only touches on half the trouble with the "if 13% fail then 87% succeed" meme. There are at least two big problems with that assertion, even if mortgage failures and borrower failures were more or less 1 to 1. One is the fact that so many subprimes mortgages terminate in a prepayment, and you don't know if that prepay is from a refi or a sale of the property. Long before the boom in subprime, it was established that a lot of low income first time homebuyers go back to being renters within 3 or 4 years of purchase. (see Reid, Carolina Katz Achieving the American Dream: A Longitudinal Analysis of the Home Ownership Experiences of Low Income Households Center for Social Development Working Paper 05-02, George Washington University, which I think is available on the University's website). Just because the mortage didn't foreclose doesn't mean that you know it's a successful homeowner at the other end. The other problem is the (sometimes implied, sometimes explicit) suggestion that 'but for' the subprime market, they wouldn't be homeowners. But most subprimes are refis, and how many of those refis were either used to buy SUVs and vacations, or were used for equity stripping predation, versus the number used to keep some temporarily strapped borrower in a home? And how many of the purchase subprimes went for first time home buyers, as opposed to move ups? And how many first time purchase loans went to borrowers that would have qualified prime but were steered into subprime, and how many went to borrowers who were supbrime this year, but would have improved their credit to prime status (and gotten much better terms) if they had waited a year or two and worked on their credit?
Goolsbee and company are smart enough to know this, or could have known this if they spent just a few minutes thinking about the issues before putting pen to paper.
that last anonymous was me. Thanks, halo.
mort_fin, thanks for the elaborations. I wanted to bring up the static pool problem only because some of our readers, who have been turned into mortgage-related-information-junkies via a certain amount of irresponsible blog posting on my part, do confront rating agency reports that freak them out, because they aren't used to seeing static pool reporting on seasoned deals.
Max, as to what I would call a "delinquent prime loan"? That gets us around to issues like the one ed brings up about shoddy underwriting, or MOM's point about whether the (initial, at least) losses being taken these days are mostly the borrowers' or mostly the lenders'. What I mean is, I might call a given pool of prime loans with a certain percentage of delinquent loans in it simply seasoned prime. There are always some losses (unless, perhaps, you believe in this odd new category of "super prime" we have heard about lately). Or I might say that it is no longer legitimate to call it a prime pool, since it has clearly started to perform like subprime.
It's like that EPD problem we keep talking about. There have always been EPDs in this business. There have never been people who call themselves sane lenders who have EPD rates over 1.00%. In the last few years some lenders had EPD rates of 10%. However you define the "natural" EPD rate, 10% ain't it.
So with pool losses or default measures. If a pool of loans is approaching or exceeding a foreclosure rate of 2.00% or so, and the housing cycle has only started to head down, you don't have a "prime" pool. I don't care what you called it when it had that "new pool" smell investors love so much.
Tanta you are a jewel.
But the facts are that the business press who are pushing crisis are themselves using numbers in dishonest ways. As an example it is meaningless to report that foreclosures are up 266% in a given area. If 30,000 foreclosures suddently jumps to 80,000 in any given market you have a serious crisis. If 3 foreclosures goes to 8 in that same market, maybe not so much.
Using the 13%/87% as the proper measure of the stress may not capture it, but there is a lot of fault to go around, in particular precentage changes are being used in all kinds of misleading ways and are seldom related back to the baseline.
Please keep instructing us, its like a graduate seminar in lending, but there is still a lot of Chicken Littleness running around this story. The sky may be falling or we may just be having a hard rain. On balance though the business press is not doing us any favors here, in particular by aggregating data that really needs to be broken out by market.
snidely whiplash
"Then we're screwed."
Don't say we or we"re baby. You may be screwed but that doesn't mean that everyone is in the same boat as you are, on the same side puking their guts up as you are, or even in the boat.
"the usual exit before default was either sale of the home or refi (prime to Alt-A, Alt-A to subprime)."
Is this why sub-prime is "contained" ?
Most alt-a first re-fi to subprime before he give up the keys ?
Tanta, You have hit the nail on the head. this is the real problem:
"We have been in the business of convincing people to use mortgage debt to finance god knows what for decades. It's cheap, it's amortized affordably, it's tax-advantaged. As long as you could tell yourself that the debt in question was a decent investment--college, small business start-up, whatever--you could justify it. Certainly if it was an emergency thing, and you could keep the mortgage loan for someone's shelter going by improving their cash-flow by taking on their high-rate credit cards after some nasty life event, like divorce or job loss or illness or whatever, it also made sense.
Somehow, lately, we're talking about a lot of flat-screen TVs and leopard-print chairs. So while we've strayed a bit from the original justification of the cash-out mortgage refi, we have to concede that we started it."
Max wrote: "Shouldn't all loans made in 2003-2005 have been called "prime" back then, since there were very few defaults?"
Max, no. See Mort_fin's comment; traditionally, life_of_homeownership studies of subprime lending have shown that maybe 1 out 5 or 1 out 6 subprime borrowers eventually lose their homes, but not with the original loan. They often go through 2, 3 or 4 refis before finally being forced out of the home. In the meantime, the industry has made a lot of money off them.
Prepay rates are dropping on a lot of the subprime MBS, and when that happens, generally you have to start recognizing your bad loans.
Screwed is an imprecise term, as Kevin points out. I use it in an "exploding implied correlation" sense, not in a creditor-centric "now little Nell has to boof me or I'll evict her and tie her to the tracks" sense. And if the implied correlation balloon goes up, I'm afraid we are indeed all together, borrowers & lenders, gnawing on each other's corpses in the leaky shark-infested boat, ol' pal.
...subprime credit, in general, is composed of a lot of borrowers who have defaulted on debts in the past.
Yes, and given human nature, are therefore more easily inclined to default again should the circumstances not favor them economically (i.e., no equity and/or rising payments).
OK, I am going to (try to) add something.
The 87% that are making it through their subprime loan, or who knows, maybe 70% or 80% when all is said and done, are not necessarily going to be better off or at least as well off as they could otherwise be.
For many of the people now applying for home purchase loans and getting turned down, it will be the best thing that never happened to them.
As the market corrects, and it is correcting, a return to normalcy might actually allow people to buy a home that they can afford.
Also, I need to thank (most) of the rest of the commentators. As good as Tanta's post is, the discussion really adds a lot.
Lindsey, I'm only here to provoke you all. That's the beauty of the blog, compared to the press. Most times, all I want to accomplish in the post is to sort out the simpler problems first, and define a few of the terms. Then it's dive into the comments for the actual productive discourse.
And I cannot agree with you more. The subprime industry has always talked up its "risk-based pricing" as if it were this kind of "fairness": prime borrowers pay low rates and subprime borrowers pay high rates, so prime borrowers aren't paying higher rates to "subsidize" subprime borrowers. This sort of rhetoric appeals to a certain class of prime borrowers. As long as everyone is paying the "true cost" of his own credit, then let the ol' free market rip.
The thing does get a bit complicated when you suggest that it is not necessarily in the subprime borrower's best interest to pay the "true cost" of his credit, as long as the option exists to not borrow the money in the first place. Had we not been rolling around in an orgy of consume-and-beat-those-terrorists and "ownership society" rhetoric in the last few years, we might have figured this out sooner.
Tanta said: "One excellent counter to the argument that homeownership is always a better deal for lower-income
wage-earners is the problem of immobility of labor: its a lot harder and more expensive to move to where the jobs are if you own a home."
For more on this issue, see my colleague Amy Hoak's story on MarketWatch:
Cooling housing markets sour job candidates on relocation - MarketWatch
REAL ESTATE
Moving a mountain
Cooling housing markets make job candidates reluctant to relocate
By Amy Hoak, MarketWatch
Last Update: 12:02 AM ET May 11, 2007
CHICAGO (MarketWatch) -- Convincing job candidates to relocate can be a challenge even when the housing market is strong. But with homes in many markets around the country taking longer to sell and prices either flat or declining, employees being asked to relocate are starting to balk in greater numbers.
"If you're in a market where prices have declined significantly, that's a huge challenge for folks who bought at the top of the market," said Kathy Morris, director of global consulting for Prudential Relocation.
snidely whiplash
And if the implied correlation balloon goes up, I'm afraid we are indeed all together, borrowers & lenders, gnawing on each other's corpses in the leaky shark-infested boat, ol' pal.
I'm not a borrower or a lender ol' pal I'm the undertaker.
Like you I am sceptical. However my scepticism is about you. You have been riding this one trick pony ad naseum. Could it be that you may profit handsomely if the housing market tanks?
Moose, you charming critter, who is "you"?
Tanta,
I really enjoy your highly educational/insightful posts.
A few weeks ago, you had a post mentioning it would be difficult to 'work out' mortgages which had been resold, because it is impractical to contact all the owners.
Do you have any insights on whether inflation is a viable bail out strategy, and how most MBS holders would see it?
It seems to me the trade-offs of inflation for the MBS holder are complicated. Bond holders in general dislike inflation. However, inflation with corresponding wage increases might prevent fixed-rate home loans from going into default. But, it seems it would further undermine variable rate loans. Meanwhile, if the fed cuts rates, causing inflation to increase, it also has the effect of reducing monthly payments on new loans (or does it, since the fed rate is short term, while home loans are long term?).
I don't claim to understand the issues, but I do wonder whether a hedge fund holding a bunch of underperforming MBS is likely to be rooting for or against inflation right now.
Capital! Neither a borrower nor a lender be, as Ben said, also eschew investment-grade debt and particularly ABS in your nest egg, remain beta-neutral but not dollar neutral, shun the dollar and higher-yielding currencies, carefully vet your counterparties when hedging everything in the world, and one's chops will drip gobbets of juicy vol of vol as one tears at moose carrion with feral curving cuspids. *Hannibal Lechter yum-yum noise *
Thank-you, Tanta, for the excellent explanation. My only comment is a response to this:
"...Just dont use the percentage of non-delinquent mortgages alone to prove anything unproblematic about the health of the consumer or the wisdom of homeownership."
By the same token, it's not appropriate to use the percentage of delinquent mortgages to "prove" anything problemmatic about the health of the consumer or the wisdom of homeownership.
Sebastia
Tanta, great post as usual. Very interesting insight on the "subprime delinquency is the last refuge of prime/AltA scoundrels", which explains both the contagion effect and why subprime may have masked problems in the other categories for the last couple of years.
On another point it seems to me that as a macro indicator debt-to-income ratios are more predictive (and descriptive) than delinquency rates, in part because of all the complexity (and gaming) of defining "delinquent". Some bloggers have done a great job of exploring this but I haven't seen it discussed in the MSM, perhaps because it's to obtuse to make a good headline. I'm wondering however if there you have any data that will tie DTI to deliquency rates, particularly when comparing geographies (i.e. can we use DTI in a particular county to predict delinquencies and foreclosures ).
Immobility is as big a problem for the companies as it is for the workers, and it can negatively impact the economy as a whole. It's another form of malinvestment, since (human) resources do not get allocated efficiently.
Talbot's "The Coming Crash in the Housing Market" addressed this topic pretty well way back in early 2003.
Could it be that you may profit handsomely if the housing market tanks?
Any time something moves -- whether up or down -- somebody profits. Why not us?
However, inflation with corresponding wage increases...
The latter doesn't automatically follow the former anymore. It's called "globalization", or as Roach calls it "global wage arbitrage".
"That's how a housing boom can make "prime" borrowers out of a bunch of people with no debt management skills. It's also how a housing bust can make "subprime" borrowers out of a bunch of people who have never missed a payment in their lives."
Ya know, this is really interesting stuff even though most of it is over my head. Thanks for writing so much, so well and with such insight. I am getting the drift here that subprime vs. prime is not about 'us' and 'them'... and you make a very direct point: maybe helping that virtuous 87 percent of sinners stay in a home they should not be in and will possibly lose money on is not a good thing at all. And maybe simple-minded use of such stats is, well, simple minded.
You could have saved a lot of typing and readers time by just saying that the math of mortgage economics does not support (as least long-term) high delinquency rates for any type of paper -- sub prime or otherwise. But, of course, that does not fit into the agenda here, where listening to one's self talk (in this case "type") is the highest priority.
Obviously, arguing that if 75% of sub prime borrowers are doing "ok" then we can absorb the 25% who are not is both problematic and without merit.
Defining high delinquency is complicated since many variables exist, but the bottom line is lending must be a mutually beneficial experience or it is not a profitable enterprise. Now of course, I am defining a successful borrower/homeowner as someone who is not in an adverse financial situation solely brought on by the mortgage that they decided to take on. While I am a huge proponent of home ownership, I do not think it's for everyone all the time or for some people any of the time.
That said, I don't think anyone of the pro sub prime crowd is saying making that case. Lots of borrowers are have accessed the mortgage market only because of non prime lending. That is a good thing. All you have to do is look to what Fannie and Freddie are doing (sub prime lending) to realize there is a market for this and it will be served.
What I do know is the people who take on the risk (investors, insurers and borrowers) of a mortgage transaction will not engage in the transaction if there is not a reasonably good chance of success. Mistakes are made regrettably fraud exists, but one cannot throw the baby out with the bath water
For the same reasons one cannot count on delinquency data to buttress their arguments for sub prime, one cannot even begin to construct an argument on what borrowers in financial trouble should not have received financing.
Sub prime lending is a complicated subject that deserves a comprehensive discussion -- not simplistic and tendentious accusations and assertions
Mortgage professional,
Why is that a 'good thing"... I see no case for that at all.
the bottom line is lending must be a mutually beneficial experience or it is not a profitable enterprise
Riiight. That's what Don Corleone always said too.
Tanta: what a superb post this was -- one of the most useful I've seen on this site or any other. :>)
Tanta,
Let me be the first (not really) to tell you that you are well versed when it comes to the mortgage world. That being said here is something you haven't heard, you are the most fucking boring writer I can think of. I really could benefit from your infinite wisdom but honestly you are such a boring writer that I can't make it all the way through your articles. Here is a tip, cut out about 25 of the 30 paragraphs you write for each fucking topic and get to the point quicker. This way people will want to read every sentence and you can gain some real notoriety for all of your work. I hope that you aren't so good at dishing out the criticism that you can't take it on the flip side. Cheers.
Oh and by the way, the comment that someone made about you beating the dead horse on this topic does lead one to believe that you have a vested interest in some sort of market failure. That being said I am not some mortgage industry junkie who wants bs lending...that is simply not the case. What I am more interested in hearing is not your monday morning quaterbacking, I am interested in hearing your solutions to the problems plauging the industry. And no I don't want to hear the bs of let's not give mortgages out to people with spotty credit. Let me tell you something on that topic, investors will always have an appetite for high yielding mortgage paper. Let's put it to you this way, average Joe still worries about the stock market because of the HUGE possibility of losing his entire principal investment. That is why high yield debt paper will always go on because people know there is a marginal chance of losing it all. Hence B/C paper will always be a vital industry because Wall Street needs it and so do the public. So instead of pissing on the ashes here, let's talk solutions so we can learn and not just bitch.
What a boring post.
Awwwwww....isn't that cute...Wally has a crush on Tanta. Quick question, who is the pitcher and who is the catcher?
the bottom line is lending must be a mutually beneficial experience or it is not a profitable enterprise
"Riiight. That's what Don Corleone always said too."
Not sure I get your point.
Mortgage professional,
Why is that a 'good thing"... I see no case for that at all.
wally | 05.13.07 - 8:33 pm | #
From a consumers perspective, homeownership can be the biggest and best opportunity to obtain financial freedom. Most people are not going to amass a ton of assets during their lifetime and most will retire with little more than social security. Ignoring the short-term tax benefits of home ownership for a minute, long term home ownership benefits are critical to ones potential net worth and financial flexibility over time.
The security of dictating your own terms on your housing expense is also crucial. While long term leases exist, most often consumers are at the mercy of a landord's whim(there are areas where rents increases are capped but rarely are these areas a place one would picture living).
These financial benefits increase a consumers financial strength which helps them be a more active participant in the economy as a whole.
Non prime loans a better equiped to handle folks that have single life events such as major illness or business failures or divorce. Non prime loans enable some consumers to avoid bankruptcy which is positive for them long-term and obviously good for the economy in general. Non prime loans give people some breathing room, some extra time, and a second chance to prove themselves.
I will not speak to the social and philosophical benefits of owning a home, or keeping a home, but those things cannot be ignored.
I have seen non prime loans save marriages, businesses and peoples self-respect.
Shorter Mortgage Professional: It would be more efficient if you made my point instead of your own.
Shorter Big Hit: It's exciting to take risks. It's a real bore to have to understand what they are.
Shorter Tanta: I'm not trying to talk the market down. I'm not even trying to bore it to death. By "the market," I don't mean any of you personally.
Mortgage Professional said:
What I do know is the people who take on the risk (investors, insurers and borrowers) of a mortgage transaction will not engage in the transaction if there is not a reasonably good chance of success. Mistakes are made regrettably fraud exists, but one cannot throw the baby out with the bath water.
Isn't that precisely the problem? That the people who took on the risk did so WITHOUT appropriately considering the chances of success? As Tanta points out, the "hard numbers" here are anything but hard, but whatever they are, don't they indicate a failure rate that is systemic? I don't think anybody's saying "Down with subprime lending!" The point is that in real life, the "rational investor/lender/consumer" of free-market theory is all too likely to become IRrational when motivated by greed.
Also, for those of you who have been flinging around four-letter words recently, might I encourage you to stop? After all, this is a family blog, and someone's six-year-old might read such things and be scarred for life. . .
I take Mortgage Professional's point about the utility of sub-prime for people with one-time bad events. That can be true for either purchase money in his example or refis in Tanta's. Of course if this it truly what the market is for, it should be full of hyper attentive lenders and careful underwriting, to go beyond simple FICO reading and determine those whose financial difficulties are unlikely to be repeated. We all know how well that resembles the bat wielders working in subprime.
I suspect that most of the people in the subprime market are there because they have persistant difficultiy managing their credit and living within their means. Somebody who has trouble with 20k of credit card debt is generally somebody that shouldn't be counted upon to keep up the payments on a 350K mortgage. The main "benefit" that these borrowers have secured is the ability to borrow more money secured by ever rising equity. They don't reap the benefit of "no more rent increases" simply because they keep refinancing for ever greater amounts.
There's no particular reason to believe that people who have a proven history of not living within their means will change when they get a mortgage. It's like the woman who thinks that her cheating boyfriend will settle down is she marries him. I wouln't say that it NEVER happens, but most of those marriages end in divorce, and both of 'em would have been in better shape if they'd never married. I suspect that at the end of the day, most of the new people in the housing market would have been in better shape if they'd been forced to develop the discipline to buckle down, live within their means, pay off debts, and save for a downpayment. Really, only the bubble in the RE market has created the illusion that most subprime mortgages are a good thing.
Tanta,
Thanks for finally writing something that doesn't rival the size of the bible. Look all I am saying is that you have great knowledge but you need to take a writing class or two so that you can keep it interesting. I know it is tough to keep it interesting all the time but I have been reading your stuff for some time and let me tell you you have a VERY high boring factor. That still doesn't negate the fact that you are usually somewhat right, so keep the ideas coming. Just don't bitch all the time, talk solutions. Seriously, anyone can be a monday morning quarterback....
Seriously, anyone can be a monday morning quarterback....
And on the internet, anyone can be a literary critic. Even people whose idea of literary criticism amounts to statements like "you are the most fucking boring writer I can think of."
Let's not confuse the frankness of an opinion with its usefulness. You are simply telling me that I didn't write what you wanted to read in snippets you care to consume, and you feel sufficiently entitled to getting what you want to allow yourself to be both insulting and condescending about it ("you are usually somewhat right").
Forgive me for being amused rather than angry or defensive by your idea that you are being so incisive by not liking this post and actually saying so, in frank language unencumbered by hyperintellectual verbosity. Welcome to the internet. You can get sophomores to roll their eyes in the throes of deadly ennui by posting the TV listings, let alone anything longer or more analytic than that.
My position is that writing a long post is only an invitation for readers to spend their attention spans on it, not a demand. I suppose you can understand the comment section as a kind of RSVP, where you are encouraged to decline the invitation on the grounds you've got something better to do. Fair enough. But most people merely decline an invitation to an event they find insufficiently entertaining; they don't suggest that the host cancel the party.
Tanta:
What did you mean by this:
"see Greenspan and Kennedys major data problems"?
undercover, Greenspan and Kennedy had to spend a long time, a ton of resources, and a 50-page paper just to get to an estimate of MEW. Then they had to work on the question of where it went and how it might impact past, current, or future consumption.
In large measure, the data problems included separate universes--depositories, non-depositories, securities, whole-loan porfolios, etc.--that report differently on loan originations. Just separating out the fact that a loan is an "origination" to the party who made it, the party who bought it from that party, and the party who bought it from that party, which can all happen in the same year, is a challenge.
Then you have to sort out big category problems. No lenders are required to report on the exact use of funds received in a refinance. Lenders who report for HMDA purposes will report the "purpose" of "home improvement" for certain loans, but "home improvement" is not defined strongly. So that could mean real capital improvement--which is not considered "equity withdrawal"--or it could mean people buying new gutters, which is maintenance and repair, which is considered consumption. Same with "debt consolidation." If you are paying off a HELOC that was originally used to finance true improvement, you aren't paying off "past consumption." If you're paying off credit cards used to buy a new TV, you are. But the data that is available doesn't allow you to sort that out directly; you have to go to a lot of other sources.
That's why you get such wide divergence in the estimates of MEW that flows through to GDP. The data available can support a lot of different estimates.
Thanks for your reply. My experience is that most of the housing and mortgage data contain serious problems. Unfortunately, I don't see much hope that the data will improve any time soon.
I suppose on the internet, you can be an absurdly entertaining writer (Tanta) on the most boring subject ever (Mortgages) and then be criticized for being the most ****ing boring writer. Tanta, I think you should start vblogging, Jim Cramer style and call it Mad Mortgage. That'll tell'em
"an absurdly entertaining writer (Tanta) on the most boring subject ever (Mortgages)"
Bingo!
Tanta,
Don't get me wrong either. I understand that by writing a blog, you are not explicitly inviting anyone to read the entire piece. The usefullness of your knowledge is limitless, but I am trying to be honest to let you know that your points are drowning in a sea of repeated jargon. My other point was that though you put up posts, you seemingly never talk about solutions and always take about what's wrong. I think if you invested even a tenth of your brain power in talking about a serious plan that could be put into place to fix the problem then you would be actually doing some good. I mean seriously if you aren't going to help fix the problem you are almost as useless as these mortgage execs who sit around and twiddle their thumbs. FYI, if you actually did cut out about 25 out of your 30 paragraphs you might get to go out on a Saturday night and experience life rather than spending a huge amount of time writing about every single problem in the mortage industry. The problem with blogs can sometimes be the fact that people can bitch, so all they do is bitch. I wish blogs provided more solutions based posts rather than just a round table of bitching. But hey, that's my opinion and at least I can express that openly too.
VxqNZ4 pzzyarzzithx, [url=http://zgmrbgsmnubu.com/]zgmrbgsmnubu[/url], [link=http://mefvbacnmevc.com/]mefvbacnmevc[/link], http://yzfkjmqpgkhx.com/
H7qdi7 nwffwixnnipy, [url=http://naetopajeezo.com/]naetopajeezo[/url], [link=http://fffuclxqtanv.com/]fffuclxqtanv[/link], Sorry. Page not found.
3UZGRA inygbcdfobie, [url=http://zhkhxdpfrifb.com/]zhkhxdpfrifb[/url], [link=http://egarjoshgbqf.com/]egarjoshgbqf[/link], http://jdnvmiyqksyg.com/
HAMj7O lddkvwjdwkjd, [url=http://gsjmxbflwccd.com/]gsjmxbflwccd[/url], [link=http://mvawrxcemupo.com/]mvawrxcemupo[/link], http://mbrygysfhvja.com/
KTUHPX vlwezgwdftrh, [url=http://pbodhtdyjgwv.com/]pbodhtdyjgwv[/url], [link=http://qeyxyrhgdtot.com/]qeyxyrhgdtot[/link], http://qxcklkqkwqvs.com/