This is a classic statement. It is exactly what is wrong with the financial system currently. we need bankers to start focusing on credit worthiness again and stop this origination at all costs in order to capture fees. I really hope A Bank/Broker (Please not the whole system) goes under from all this credit risk coming at them through the backdoor. This will teach them (Banks) not to be soooo tupid about credit worthiness.
I guess taking the punchbowl away after the party is officially over and the hangover's already kicking in can still produce objections. He's obviously a "hair-o-the-dog" kind of partyer...
Paul Financial was the shop that was offering Alt-A jumbos with a starting rate of 1/2 of 1% interest, if I recall correctly.
One can see why he would not want credit "limited".
Yes, Yal, subprime is alive. It's generally being underwritten more carefully now though. Generally. Subprime mortgages can be safely originated without generating blowups providing you don't offer toxic mortgages, you do verify ability to repay, and you evaluate collateral properly.
mama, how do you evaluate collateral in today's market? Price in a 20% decline over the next 2 years? A 20% downpayment isn't sufficient since there's a 25% loss on foreclosure sale. Then consider the existing borrowers' debtloads, current cautionary climate in the secondary markets etc etc.
Subprime loans are a non-starter in this housing recession, except for perhaps the GSEs, HUD... where the risk gets passed along to the taxpayers.
There was a ready market for alt a at .5%interest. I don't beleive there is now. This is how markets work. When things are good,they are not as good as they seem. And when things are bad,they are not as bad as they seem.
I've put in a bid on a house in a stable neighborhood in AZ that I'll likely blade, that's 23% below what a similar property was asking for a year ago, 15% below what it sold for 7 months ago, 5% below what the ask is on this house and likely will be accepted.
If I really didn't want the lot and was more cutthroat I could bid 15% below and they'd take it.
There was an interesting FDIC newsletter that MOM put me on to for remedial reading that had a few interesting things to say on the credit cycle. One of which was that asset valuations are a leading cycle, while credit is typically a lagging cycle (unless regulated). And that lending standards are also a lagging item in the credit cycle.
In other words, as I understand it, credit is generally loose in the beginning of a credit cycle, leading to a boom in asset values as items are considered undervalued for the cost of borrowing to buy them. The lag in increased credit rates reacting to this spike in asset values keep the momentum of asset increases going and keeps relative lending loose as equity builds, loan volume spikes and default rates are driven low. Once the assets are peaking in value the credit rates and lending standards finally catch up, leading to rate overshoot, which leads to crashing asset values and increased default rates. This all leads to, you guessed it, further increases in credit rates and tighter standards as the lenders and banks get pounded.
Central banks and regulators are supposed to try to mitigate and dampen the peaks and valleys of this credit cycle by increasing rates and oversight on standards on the up-swing, while forcing a decrease of rates on the down.
However, this cycle to me doesn't seem to have gone by that script. There didn't seem to be rate/oversight increases on the way up to dampen overshoot and maintain loan quality, while now the Fed and friends seem to be again standing by and letting natural reactionary tightening of rates and standards happen well after the the bull has left the stable, making sure the fall is going to be a rough one.
Barely asked how do you evaluate collateral in today's market? Price in a 20% decline over the next 2 years? A 20% downpayment isn't sufficient since there's a 25% loss on foreclosure sale. Then consider the existing borrowers' debtloads, current cautionary climate in the secondary markets etc etc.
OK, that's definitely true in some markets. It's not true in others. Lenders do have the freedom to state what they will lend based on not just appraised value but future expectations (within limits, of course). And lenders have the freedom to adjust rates to compensate for increased risk.
The expected risk in an area in which the median home price is 3.4 of median income is dramatically different from the risk in a market in which the median home price is 8.8 of median income. You have to adjust LTVs, rates and terms based on some reasonable assessment of market risk.
Remember, well underwritten loans do not default very often (subprime or otherwise), so you are not going to face as much market risk in a well-spread pool as you would expect.
I think this only looks disastrous to us because of the contrast with the "mirror-fogging" underwriting standards which have prevailed recently.
"Subprime" means two things as the words is commonly used. It describes predatory asset-based lending of the type that HOEPA was meant to constrain, and it also describes the practice of lending to borrowers with poorer credit records. However, borrowers with poorer credit records may actually have underlying reasons for those poor credit records that make them relatively good risks going forward. That type of subprime lending will continue.
I know it happens, my Aunt was one of those folks who bought a spec condo in Indian River county FL, then wasn't willing to sell at a slight profit during the early days of this stuff, then wouldn't sell at a slight loss. Now my cousin has a retirement condo even though she won't retire for 20 years.
I guess my point was that if this is the price action in a stable neighborhood, what's it like out in the land of sticks and stucco where you're trying to compete against REO and short sales? I suspect your reply.
What always makes the crash worse in FL is the property taxes for non resident 2nd home buyers
MOM is right,that .5 rate was one of Paul's products.their office is right down 101 from me and i had their reps come by several times a week.they had some extremely ahhh...innovative products and underwriting.and i think they are pretty much out of business now.seeing Peter Paul pontificate on the loan biz is bizarre,somewhat like GW discussing the finer points of the bill of rights.
Let's raise the reserve requirement to 10% and have have the fed raise to 13% and have no public bailouts whatsoever. If they do all that then they can be as reckless as they want.
MOM writes, "The expected risk in an area in which the median home price is 3.4 of median income is dramatically different from the risk in a market in which the median home price is 8.8 of median income."
At the extreme of the 8.8:3.4 ratio, probably so. But note that until recently (and perhaps still) the highest foreclosure rates were in the Midwestern states that were purported not to be part of the bubble because home prices hadn't risen so much relative to median incomes. It seems not to occur to many that, had it not been for the red-hot markets in the obvious bubble areas, home prices might have already been plunging in the non-bubble areas.
If people whose income has dropped far below the median (perhaps to zero?) move out of the area in search of work, the resulting increase in ratio of supply to demand can drive prices much lower even if the median income of the remaining still-employed residents doesn't fall in proportion.
The fact that 3.4 times income has historically been a typical price range doesn't mean that prices can't drop to, say, 1.7 times income.
This is a classic statement. It is exactly what is wrong with the financial system currently. we need bankers to start focusing on credit worthiness again and stop this origination at all costs in order to capture fees. I really hope A Bank/Broker (Please not the whole system) goes under from all this credit risk coming at them through the backdoor. This will teach them (Banks) not to be soooo tupid about credit worthiness.
Is there a credit problem ?
we all thought that once the sub-prime borrower is out the tarde-up borrower will have no one to sell to.
But the market seems to be doing fine - if you trust NAR. it is only down what 10% with prices almost not going down .
I think the real numbers of the decline are much larger as we would expected or if NAR is to be trusted the sub-prime credit is alive and well.
Too funny. You can't make some of this stuff up.
I guess taking the punchbowl away after the party is officially over and the hangover's already kicking in can still produce objections. He's obviously a "hair-o-the-dog" kind of partyer...
Paul Financial was the shop that was offering Alt-A jumbos with a starting rate of 1/2 of 1% interest, if I recall correctly.
One can see why he would not want credit "limited".
Yes, Yal, subprime is alive. It's generally being underwritten more carefully now though. Generally. Subprime mortgages can be safely originated without generating blowups providing you don't offer toxic mortgages, you do verify ability to repay, and you evaluate collateral properly.
mama, how do you evaluate collateral in today's market? Price in a 20% decline over the next 2 years? A 20% downpayment isn't sufficient since there's a 25% loss on foreclosure sale. Then consider the existing borrowers' debtloads, current cautionary climate in the secondary markets etc etc.
Subprime loans are a non-starter in this housing recession, except for perhaps the GSEs, HUD... where the risk gets passed along to the taxpayers.
There was a ready market for alt a at .5%interest. I don't beleive there is now. This is how markets work. When things are good,they are not as good as they seem. And when things are bad,they are not as bad as they seem.
I've put in a bid on a house in a stable neighborhood in AZ that I'll likely blade, that's 23% below what a similar property was asking for a year ago, 15% below what it sold for 7 months ago, 5% below what the ask is on this house and likely will be accepted.
If I really didn't want the lot and was more cutthroat I could bid 15% below and they'd take it.
There was an interesting FDIC newsletter that MOM put me on to for remedial reading that had a few interesting things to say on the credit cycle. One of which was that asset valuations are a leading cycle, while credit is typically a lagging cycle (unless regulated). And that lending standards are also a lagging item in the credit cycle.
FDIC reports
In other words, as I understand it, credit is generally loose in the beginning of a credit cycle, leading to a boom in asset values as items are considered undervalued for the cost of borrowing to buy them. The lag in increased credit rates reacting to this spike in asset values keep the momentum of asset increases going and keeps relative lending loose as equity builds, loan volume spikes and default rates are driven low. Once the assets are peaking in value the credit rates and lending standards finally catch up, leading to rate overshoot, which leads to crashing asset values and increased default rates. This all leads to, you guessed it, further increases in credit rates and tighter standards as the lenders and banks get pounded.
Central banks and regulators are supposed to try to mitigate and dampen the peaks and valleys of this credit cycle by increasing rates and oversight on standards on the up-swing, while forcing a decrease of rates on the down.
However, this cycle to me doesn't seem to have gone by that script. There didn't seem to be rate/oversight increases on the way up to dampen overshoot and maintain loan quality, while now the Fed and friends seem to be again standing by and letting natural reactionary tightening of rates and standards happen well after the the bull has left the stable, making sure the fall is going to be a rough one.
Err.. Whoops, wrong link. This is the PDF to the FDIC newsletter MOM put me on to.
article
Barely asked how do you evaluate collateral in today's market? Price in a 20% decline over the next 2 years? A 20% downpayment isn't sufficient since there's a 25% loss on foreclosure sale. Then consider the existing borrowers' debtloads, current cautionary climate in the secondary markets etc etc.
OK, that's definitely true in some markets. It's not true in others. Lenders do have the freedom to state what they will lend based on not just appraised value but future expectations (within limits, of course). And lenders have the freedom to adjust rates to compensate for increased risk.
The expected risk in an area in which the median home price is 3.4 of median income is dramatically different from the risk in a market in which the median home price is 8.8 of median income. You have to adjust LTVs, rates and terms based on some reasonable assessment of market risk.
Remember, well underwritten loans do not default very often (subprime or otherwise), so you are not going to face as much market risk in a well-spread pool as you would expect.
I think this only looks disastrous to us because of the contrast with the "mirror-fogging" underwriting standards which have prevailed recently.
"Subprime" means two things as the words is commonly used. It describes predatory asset-based lending of the type that HOEPA was meant to constrain, and it also describes the practice of lending to borrowers with poorer credit records. However, borrowers with poorer credit records may actually have underlying reasons for those poor credit records that make them relatively good risks going forward. That type of subprime lending will continue.
Alec - in some parts of FL the distressed bid rate is running 60-65% of 2005 sales price. It happens.
I know it happens, my Aunt was one of those folks who bought a spec condo in Indian River county FL, then wasn't willing to sell at a slight profit during the early days of this stuff, then wouldn't sell at a slight loss. Now my cousin has a retirement condo even though she won't retire for 20 years.
I guess my point was that if this is the price action in a stable neighborhood, what's it like out in the land of sticks and stucco where you're trying to compete against REO and short sales? I suspect your reply.
What always makes the crash worse in FL is the property taxes for non resident 2nd home buyers
MOM is right,that .5 rate was one of Paul's products.their office is right down 101 from me and i had their reps come by several times a week.they had some extremely ahhh...innovative products and underwriting.and i think they are pretty much out of business now.seeing Peter Paul pontificate on the loan biz is bizarre,somewhat like GW discussing the finer points of the bill of rights.
Let's raise the reserve requirement to 10% and have have the fed raise to 13% and have no public bailouts whatsoever. If they do all that then they can be as reckless as they want.
MOM writes, "The expected risk in an area in which the median home price is 3.4 of median income is dramatically different from the risk in a market in which the median home price is 8.8 of median income."
At the extreme of the 8.8:3.4 ratio, probably so. But note that until recently (and perhaps still) the highest foreclosure rates were in the Midwestern states that were purported not to be part of the bubble because home prices hadn't risen so much relative to median incomes. It seems not to occur to many that, had it not been for the red-hot markets in the obvious bubble areas, home prices might have already been plunging in the non-bubble areas.
If people whose income has dropped far below the median (perhaps to zero?) move out of the area in search of work, the resulting increase in ratio of supply to demand can drive prices much lower even if the median income of the remaining still-employed residents doesn't fall in proportion.
The fact that 3.4 times income has historically been a typical price range doesn't mean that prices can't drop to, say, 1.7 times income.