I didn't provide the link to the S&P text because you have to be a registered user, plus have two years' experience navigating S&P's stupid website, in order to get to it.
However, if there are candidates out there, I'll throw the link into the comments.
Purchase mortgages and appraisals were fairly safe when borrowers made non-trivial down payments. If you're putting 50 grand of your own cash into the deal you want the best price you can get. Take someone who had no hope of being a homeowner, but who desperately wanted to be, tell them they can get in with no money down if they buy with you, and the desperate buyer will go along with just about any manipulation of the numbers.
Exactly, mort_fin. But I have always believed that "nontrivial" was relative to the borrower's own assets.
We've all seen "affordable housing" loans come through with down payments of $5,000 instead of $50,000, but they ended up performing just as well or better.
There is the question of the source of that money. A person who makes $15 an hour and sets aside $100 a month for 50 months to save up for a down payment is, in my view, investing a non-trivial amount. Of course I still want MI on the loan and strict qualifying standards, because that is still going to be a high-CLTV loan. But I trust this borrower, frankly, to worry about the safety of that $5,000 investment, given how hard it was to come by.
But making a loan to someone who makes (or claims to make) $8,000 a month and who puts down $5,000? Or considering these $50,000 down payments perfectly safe when they came from the proceeds of selling the "starter home" in a hot market? I think we're learning a little bit about "easy come, easy go."
My logic could still be decaffeinated, but if once wise users of credit are suddenly found to be using credit unwisely when offered new credit products it strongly suggests that this crisis was primarily driven by the lenders, and less so by the borrowers.
i.e. if people who actually understood how things were supposed to work could no longer work it out the products were faulty.
Hardly a newsflash, I know. But IMO it's confirming.
Well, no, I don't think that's "blindingly obvious" to a lot of people.
We get bouts of arguments on this blog all the time about this. My take is that when lenders only offer reasonable credit terms, and turn down requests for unreasonable terms, people can rack up nice FICOs. They won't stay nice if your friendly neighborhood banker lets you run wild.
Same deal with appraisals: people want to argue that they should be done away with, and let "the market" decide what the value is based solely on what people will pay.
Well, if you've got the cash, you can pay anything you want for a piece of RE. If you're borrowing, someone most certainly should be checking to see if you've lost your mind.
Wow! Paradigm shift. If you take low rated clients and place them in poor finance products, they perform poorly. But if you take high rated clients and place them in poor finance products, they perform...poorly. Can't be right. Need to fire the public and get a new one (preferably with more money).
Not to be too Uner-nerdy, but the demise of FICO was caused by auto correlation, IMO.
High FICO's, by and large, meant you ran up credit card balances and paid them off, all the while never being late on a payment.
So who had high FICO's? Well, some people that financed overspending with credit cards, and then paid off the credit cards with 100% CLTV arm re-fi MEW. FICO never penalized you for borrowing too much against your home (since the scoring agencies don't know your home value or even your incomes); and instead rewarded you for doing so with higher credit card spending limits.
High FICO's enabled high FICO's. That's autocorrelation, and the ratings agencies, hedge funds, lenders, CDO insurers, and everyone else that touched mortgages missed that simple connection. Or at least they pretended to miss it while they booked their respective fees.
The funny thing is, FICO is even more important to the credit card folks. And that's one of the many remaining shoes to drop (Oh-shit, a bad metaphor).
David, I think your point is important. It's just that it isn't the cash-out refis that are particularly killing these securities (at the moment. Every dog has his bad metaphor day.)
I mean, we knew that what lenders call "debt pyramiding" is a problem. We just seem to have failed to notice that historical purchase-transaction patterns could change. Whoopsie.
The first-time homebuyers who are blowing up in a purchase-money loan have never had the chance to fluff up their FICOs with a cash-out rescue.
In the fog of war, the Street due diligence teams' weapon of choice is now an AVM (automated valuation model) instead of a human appraisal. Moreso with declining markets and no human experience in that realm.
Interesting dynamic. A model dispassionately calculates sustainable path of house "values", whereas "market price" is determined by an emotional buyer with excess liquidity & a desperate need for leveraging assets to make up for stagnant wages. The appraiser goes with price instead of value to feed their family.
When the liquidity & appreciation conditions vaporize, the micro-Minsky moment arrives a la Wiley Coyote for securities valued on housing market "prices" instead of market "value".
Try this. I buy a home for 1,000,000 in California. I could have put down 200k but did a 100% LTV loan because my credit is great. I can easily afford the monthly payment, but I have decided to go into foreclosure because my house is now worth 800K and going down. I would rather take a hit to my credit rating than lose 200-300K. (Note: this is hypothetical, but one post last week talked about people walking away from homes in Pebble Beach, CA).
Bill, you forgot that those folks who could have put down $200-300 grand but took 100% financing instead were doing so because they were going to make a killing in a hedge fund investment.
So people with low FICOs are people who got in over their head, and people with high FICOs are people who haven't gotten in over their head (yet). Sounds like a job for Obviousman. Did S&P think that having a high FICO meant you had a magic checking account that never ran out of money?
Well, good. There's nothing I hate more than being obvious. Let alone blindingly so.
I spent a summer interning for a big credit card collections group (in their marketing group, try not to hate me) and did some qualitative research with people who were deep in CC debt.
I can't tell you how many times I heard people express the idea that the credit card company wouldn't have lent them the money if the they wouldn't be able to pay it back.
Now that's ignorance of the highest order, but they weren't BSing. And I'll argue that understanding (or failing to understand) how to use a credit card wisely is several orders of magnitude simpler than working out the details on one of your UberNerd posts.
So, while there are a lot of bad eggs out there (not surprisingly they tend to be less interested in showing up for interviews or focus groups) who might 'run wild' if they aren't restrained by wizened geezers with green lampshades and wire rims, many people just aren't capable of making informed decisions about complex financial products.
What S&P has just discovered is the "FICO Break Point," or the point at which a person who has been prudent in the past can be driven to his or her knees with a sufficiently insane set of loan terms.
That's Randall Forsyth's headline in Barrons this a.m. I am going to have to do some research on Asset-backed commercial paper, to wit:
"In that, it appears some of the problem lies with asset-backed commercial paper "conduits" and so-called structured investment vehicles. These ABCP conduits and SIVs are used to fund the purchase of assets such as trade receivables, auto loans, credit cards, whole mortgage loans, as well as securities such as corporate debt, residential mortgage-backed securities and CDOs, according to a Bear Stearns report.
The ABCP conduits and the SIVs then are able to issue high-grade commercial paper to finance these assets, which are less the prime quality. ABCP now comprises over half the $2 trillion-plus commercial paper market, up from 20% in 1998, according to MacroMavens' Stephanie Pomboy. And, money market funds own 27% of all CP outstanding, she also notes.
According to the Bear report, some $38 billion-$43 billion RMBS and CDOs could be liquidated from ABCP conduits. Got that? In other words, a load of these assets is backing ABCP and may have to be sold into a less than receptive market."
This is the seed of the problem with the BNP Paribas funds (which are not hedge funds, but juiced money market funds).
I didn't realize the delinquency spike was so concentrated in purchase, and particularly in FTHB.
Is this true for Alt-a as well?
Maybe the cash-out folks won't miss payments until reset; so that shoe will drop soon too (okay, its an octupus, you see, and he has footware, eight really, and they are dropping, one by one).
I can't tell you how many times I heard people express the idea that the credit card company wouldn't have lent them the money if the they wouldn't be able to pay it back.
I just don't think that is a particularly odd way for people to think.
I can remember the first time I agreed to commit many millions of my employer's dollars on some bulk mortgage deal. I had the usual "oh shit what if I blow this" shakes, and one of my colleagues said, "Look, you would not have been given the authority to do this if management and the board of directors didn't think you could."
What was I supposed to do? Say, well, management and the BOD could be inattentive morons? In many many ways, in many many contexts, we are all conditioned to think that others are evaluating our abilities by the risks they are allowing us to take.
On the soft guidelines - I think their role in this mess is much larger than we might think. Soft really translates into how far can I bend this rule and still convince Wall Street to buy it? And once that deal gets bought, over time, discipline goes out the door in a lot of other areas of that lender, broker, and investment house. I mean, how serious can you be when you are touching a deal wearing shorts and flip-flops?
On purchases, I have always compared the DP to total income. That ratio is a better indicator of "skin in the game" than total assets as they could disappear anytime. If they have the cash, require a chunk of it in the deal and it will perform just like your wage earner who saved for a few years.
Maybe the cash-out boys are paying the payment from the cash-out ?
It would be intresting to check if people are withdrawing on their HELOc the exact amount day before their payment - hoping that at some point they will be saved by rsisng r/e prices.
Clyde,I find yur defense of AVM's interesting,have you looked at the assumptions they make,and tested the accuracy against a few individual properties? as far as human appraisals go,are you comparing the AVM values against "drive by" or full appraisals.remember that when you refuse to pay more than $250 for an appraisal on a $500k loan...and insist on a 24 hr turnaround you are real likely to get what you ordered and paid for.a "happy meal" report.AVM's,like drive by's take no account of the cnditin of the interior,the landscaping,or the neighbors meth lab which you can smetimes smell if you personally inspect a property...oooohh meth labs...how to turn your investment into a superfund site with one bad tenant.
Well one reason for the historicly better performance of purchase loans rather than cash outs is negative borrower selection. It is certainly common for somebody facing economic difficulty and uncertainly that is more visible to them than to a lender to REFI. But only in the last couple of years would it have occured those who were nervous about their finances that the solution was to go out and buy a house.
Tom, I'm willing to defend AVMs as a due diligence tool, but not as a replacement for original full appraisals in the underwriting of the deal.
What I use AVMs for is a way to sort out a big pile of appraisals into "sounds reasonable" and "needs more review." That is, with properties in the up to $650K or so range. My own experience is that in most markets, AVMs go wacky at the high end. Makes sense, as that's your "least frequently traded" class.
In point of fact, though, my AVM might make your appraised value seem awfully damned low. So I pull out your 1004 and see that you smelled meth and your interior inspection showed too much indoor target practice for the drywall to stand. That actually bumps you up on my "approved appraiser" list. If I let your value stand, that should bring the next AVM on this home back into line.
But of course you can be stupid with AVMs. We have such a fine track record going with stupid it's no wonder nobody trusts the AVMs, either.
By abandoning "soft guidelines" lenders were probably conforming to shareholder's desires to be more efficient. Computerize and automate everything to add a few cents to the EPS. And then many automated systems are poorly implemented due to budget and timing constraints to conform with shareholder expectations also.
Add in staff turnover of IT departments due to HR wage guidelines which treat employees like commodities. This is even though there have been studies that show some comuter prorammers are up to 100 times more eficient than other programmers. But everyone gets a 0-7% raise, HR policy you know.
Another factor, I think, has got to be FICO inflation due to "credit repair". Seems to me people have become more savy in the past 10 years about fixing their credit. Even if it means hammering the agencies with requests until they finaly miss a deadline and have to remove bad items?
Removing "soft guidelines" must be, at least in part, lawyer driven to avoid discrimination suits? Just guessing... but now, you don't even meet your mortgage broker in person right?
Did anyone see this post in LA Land: 'The darkest moment' for some real estate pros | L.A. Land | Los Angeles Times
Among the examples; appraiser Michael Mathis (pictured) sees his income drop from mid-six figures to less than $75,000″ and wonders how hell pay for renovations on a 9,000 square foot house; the Long Beach mortgage broker who cant refinance his own house and has been holding off paying property taxes on his own home; and the Guatemalan day-laborer who sees work drying up: I used to get four, five calls a day, he says. Now I go four, five days without a call.
How is an appraiser of residential homes making mid 6 figures? Thats absolutely ridiculous: no eduction requirement, no special skills and this fools gold economy is paying these guys that much money. The same guys who have been shown to basically be rubber stamps approvals for ridiculously overpriced homes? This tell you exactly why this is a bubble and not just good old regular appreciation. Glad those smart guys on Wall Street followed these appraisals as well
You may take some cynical amusement from that. What are a huge chunk of these repurchase for violation of rep and warranty demands based on?
Soft guidelines. It's not that the tape said 90% CLTV but the file shows 100%. It's that you pay some punk like me to wade through the "soft guidelines" and the loan files to find that a second appraisal should have been ordered but wasn't, or two appraisals were ordered and they took the highest rather than lowest value, or the second appraisal was a "drive by" instead of "interior inspection" type, or the AVM had to have a confidence score of 65 and didn't, or what have you.
So when the IBs want to put loans back, they discover a compelling need to read "soft guidelines."
Maybe the cash-out folks won't miss payments until reset; so that shoe will drop soon too (okay, its an octupus, you see, and he has footware, eight really, and they are dropping, one by one).
David Pearson | 08.11.07 - 10:58 am |
All this is ultimately caused by the underlying mortgages turning sour. We've only gone through 13% of all ARM resets (across all classes) with the bulk of sub-prime starting in October. What happens when we're at 25%, 50%, 65% of the arm resets. What will the default rates be then, liquidity squeeze be then, credit crunch be then. Only 13% through and we're feeling pain now. It's like a 9 round boxing match and we're already wobbling.......still in the 2nd round.
Oh ya,...that Fed liquidity injected yesterday everyone is talking about...those were 3 days repos. The banks have to pay them back on Monday. Going to be a helluva day Monday....and we're only 13% thru the tunnel of pain.
"There was a vague sense among us that with a buyer and a seller out there behaving like Econ 101 says they behave, the sales price--and the comparable sales prices--would ground a purchase appraisal in some kind of "reality." It's not that all refi appraisals are bad, but that they are, as I've said before, inevitably a kind of "mark to model." Purchase appraisals are supposed to be "mark to market."
Disagree. The purchase benefit at leat from a pricing standpoint, has been more of a marketing tool the last 7 years than anything else. From a sub prime point of view, purchase money loans generally carried better prospects--borrowers had better scores typically and were putting money into the property-- than did the refi borrowers who were invariably coming to us because they had issues of some sort and/or wanted take money out of the property.
Additionally, purchase money transactions had much higher conversion ratios, which in our business, especially the sub prime business, is the holy grail of profitability.
As far as appraisals go, there has always been more risk with purchase money loans because your ae often times creating a market price with a purchase. We always were much more consevative with refi apparaisal because we were "mark to market" on those. Purchase money appraisals were normally at the very top end of the market or creating the new market price. Using appreciation analysis and market trends were a substantial part of the process, so that would be more "mark to model"
You are going to continue to get arguments from people about this "blindingly obvious" biz, Tanta.
Just because the oz/penny cost of a HUGE mac is better than a bigMac(tm), common nutrition knowledge dictates you shouldn't eat one all by yourself(sharing isn't a bad idea) and certainly not on a regular basis - MacDonalds says they simply offer a choice - I know they really shouldn't, killing the fat goose that lays the golden egg as it were, but just because they do doesn't mean you should.
Just because Happy Hour offers booze at $1/shot ( still MUCH more expensive that drinking at home ), common knowledge about the effects of alcohol suggests you shouldn't down 6 in 30 minutes ( well, perhaps when you are 17, but you really ought to grow out of it, if it hasn't killed you ). I suppose with booze you've got an excuse, the loss of judgement after a few biz.. but really, at least, you should have handed over your keys, donned ( well purchased at least ) your condom and so on before ploughing on.
I say the borrowers are just as much to blame as the lenders. This argument is going to go on and on.
From the housingbubble blog, perhaps from someone in a fiduciary capacity:
"Today we found out that one of JPMs Institutional MM funds (clients was holding CDOs that were hiding behind their AAA rating. Almost two years ago we had specifically asked in writing if this mmf had any CDO exposure and were told no. We got a were sorry but call this morning."
So now we have money market funds with both CDOs (50% backed by mortgages) & AssetBacked Commercial Paper (50% of the CP market). Looks like I am going to have a little talk with my brokerage on Monday.
The security descriptions in those money market reports are woefully deficient. We need enhanced disclosure for fixed income instruments (security type, deal number the tranche comes from, whether it has been securitized once already, whether it gets marked to model or market, Weighted Average Life, Weighted Average Life assumptions, etc.)
There are a three dozen AVM models out there. The bank regulators are having each bank hire a consultant to compile property value history for each zip code, run all that data through each AVM, and then pick the 3 models that predict historical trends for each county the best. If you are a extremely good credit, you only get run through 1 AVM when you apply for a loan. If you are just below pristine, your application will "cascade" to the next 2 AVMs as a double-check on the 1st AVM. The FDIC makes the bank do an annual recalibration of which AVMs are the best fit for each county.
The bigger banks with big tech budgets push this to the front-end of their businesses, i.e. a teller telling you that if you can wait 120 seconds, she can tell you if you have been approved for a refinance on the spot. If you have a low-LTV loan, the AVM can save the consumer a couple of hundred bucks on appraisal costs.
But most of non-premier banks use AVMs on the back-end for due diligence functions, essentially doing autopsies on appraisals. Declining markets have sped acceptance among the dealers, and the rating agencies are right behind them.
If we are all going to compete with Wells & BofA, we are going to have to spend the dough to push it to the front-end sooner rather than later.
That is how I see this going down. In non-recourse states such as CA, I believe a lot of prime MBS are going to default. Most people that are 100-300k in the hole with little hope of recovery and no exposure to a deficiency judgement are simply going to walk.
For these reasons, the FED has to save asset values. Lowering the Fed rate is the first step. That is if the bond and commodity markets allow them to.
I agree somewhat with the borrower's are just as much to blame as anyone. Certainly some borrowers trying to pull a fast one were.
But I have a hard time believing that especially in the sub-prime market. Education is the responsibity of the borrower, but just where are they going to get it? I've said before that basic financial education belongs in the high schools but that won't happen because the CC industry would be screwed when students move on to college with all the resulting offers for easy cards.
Look at it this way - if parents don't teach a 2 yr old to not touch a hot burner, who's fault is it when the kid gets burned?
All this talk about MMF is making me really glad that our down payment money (ill gotten gains from our 2005 home sale ) is sitting in a treasury only MMF. Just moved the business savings from a non-fdic MMF to FDIC savings acct. Gave up a percent in interest to do it, but I wasn't sleeping well...
From personal exerience at the end of June: We moved our tiny HELOC to Suntrust from ditech. I like ditech a lot, but we are close to paying off the HELOC. Anyhow, Suntrust valued our home higher than I think we could have received at the very top of the peak amd immediately offered us double the ditech line. We have great FICO scores, don't have any CC debt, and aren't using the increased line. We should have the balance down to zero by January, we are responsible and have a good deal of home equity at reasonable valuation, but their valuation was off the charts.
Aree on the MMFs, move to safer ground because you only lose 1 point, but mortgage backed anything could lose 25-100% of value. Based on the post above where a fund reported belatedly they had exposure, and infrequent reporting on fund asets in any case, just move your cash assets. Don't go to 100% cash in a panic though.
I think the Fed has to act to defend assett prices.
Otherwise it appears that municipalities Banks and individuals across the land are going to go bust. Without a consuming consumer the economy is toast.
Countrywide and any lender deemed fit will get a line of credit to buy out failing lenders while providing mortgages at affordable costs.
It is unthinkable that this can be allowed to cascade ever onwards without definate action.
This is a world event. The world will do what is necessary.
I am out of my league often here, but then to watch Cavuto demo an easy pie chart, interview two brokers with softball questions, and say everything is hunky dory makes me want to bang my head with a hammer.
This analogy doesn't work for me. They give charters to banks, not burger joints or bars.
McDonald's and TGIF make more money the more you eat and drink. We all know that.
Banks lose their shirts the more loosey-goosey loans they make.
We wouldn't be having this conversation had the chickens not come home to roost.
People expect lenders to act in the lender's own best interest. How were they supposed to know that lenders didn't know what their own interests were?
McD's doesn't care if you drop dead from a heart attack because they don't pay your health care costs. Lenders who thought someone else picked up FC expenses are learning different.
it's fine with me to hate on fitch, and certainly thier model was silly, but at the end of the day, they don't appear to have done a worse job rating than anyone else, so who gives a fuck?
plus, what's the point of making fun of these models now? nobody brought this up when it mattered and nobody's going to stop using them now.
Additionally, purchase money transactions had much higher conversion ratios, which in our business, especially the sub prime business, is the holy grail of profitability.
You prove my point. Pre-loan approval, AVMs are currently used instead of appraisers for borrowers with pristine balance sheets, like yourself, or for low-LTV properties.
What I left out is that AVMs are the #1 tool for detecting fraud in appraisals in subprime and altA. Unfortunately, most banks use it to find that fraud after the loan is made. Eventually, when mortgage operations get their tech budgets back, AVMs will be run at loan application. Bank on it. Appraisers will be the backup.
The Street is finding that AVMs can deal with the confusion of declining values and conflict-of-interest better than humans.
what's the point of making fun of these models now? nobody brought this up when it mattered
Uh, lots of us questioned these models when it mattered. One thing we didn't have was the agencies admitting in print what those models exactly were doing. So it was a little hard to jump on them back when they didn't cop to their risk-weighting.
What's the point? Well, I for one want to continue to see residential mortgage financing available to people on terms that are safe enough and reasonably-enough priced. Going back to see where these models went wrong can help policy-makers to avoid under-reaction or overreaction.
I certainly hope everyone is thinking about Social Security privatization right now. The same people are using this kind of modeling to tell you you'd be better off with your money in the stock market. I'm told financial education is important. I think it's worthwhile for average citizens to be educated about just how some of these models work.
"All this talk about MMF is making me really glad that our down payment money (ill gotten gains from our 2005 home sale ) is sitting in a treasury only MMF. Just moved the business savings from a non-fdic MMF to FDIC savings acct. Gave up a percent in interest to do it, but I wasn't sleeping well...
If MMFs start blowing up, good gravy"
MMF's don't blow up - they simply break the buck....
Doesn't breaking the buck sound so much nicer than blowing up lol...
well i think that just proves my point. maybe people questioned the model but that didn't stop them from relying on it. it's really comforting that everyone was just blindly using a model when they didn't know what it was doing. what good is questioning it if u use it anyway? i'll go hide under my bed until the next inevitable disaster.
Excellent point. Well, TGIF certainly is required by law not to serve the underage and undersober(sic) and if/when the liability suits against McD ( like the ones against cigarette manufacturers and earlier ones against automakers ) prevail the charter they exist under in society will become a trifle more explicit. But, in the meantime, even if they are breaking a civil restraint or criminal law, doesn't mean one doesn't share the blame with them for anything that happens to you since the issues with fatty foods and overdrinking are well known..
I think I'd have more empathy if we were talking about Papa New Guinea natives landing in LA, or people off the slums of Bombay or from a Brazilian favela buying up in Atlanta ( or from the depopulating honest prairies of South Dakota ) but we are talking in the main of people who've grown up and are steeped in the culture and social mores of the USofA.
I've beaten this dead horse once too often today I expect so I won't any more. TODAY at least.
-K
People expect lenders to act in the lender's own best interest. How were they supposed to know that lenders didn't know what their own interests were?
but the decisions are being made by executives and worker-bees, not the charterered lender itself. This is a fundamental flaw in any laissez-faire society . . . if you're able to quasi-legally grift 30 years' wages when the getting is good, you can walk away from the table and leave the mess for someone else.
What are they going to do Monday? - Are they going to go with seven day MBS repos?
Flight to government securities - The flight should continue. Investors are reading that even MMFs aren't immune. It's almost funny that a day after I (and apparently many) move all my significant cash into govi secs, the Fed has to intervene. I wouldn't be surprised if the Fed is meeting this weekend.
This is only the beginning (As Stuart identified above) - Many here KNOW that RE valuations will revert to the mean metrics. Do we have a long way to fall! Am I missing something or are participants failing to extrapolate the impact of what is going on? It seems that there is enough info out there to model (sorry) the impact (e.g. foreclosures, loan losses, RE valuation declines, consumer spending).
I suspect this is going to unfold in waves - foreclosures, credit contraction, losses, more foreclosures, RE valuation declines, etc.
wouldn't it be awesome if the fda questioned how drugs worked, but didn't really care to figure it out and let them go to market anyways? and then in a couple years when people start to die, they'll say 'boy the fda fucked that up. but i'm sure they'll learn from their mistake and fix it. i'll continue to trust them
I have to say I think all the recriminations and rationalizing is pointy-headed bureaucratic CYA. This whole mess can be summed up as caused by OPM, other people's money.
When the buyer was speculating with 100% LTV (or more), and the originator was the loan, and the loan buyer was further re-selling the loan, and the secondary buyer was a hedge-fund manager or staffer at some pension plan the whole system was fundamentally flawed in its design.
There were no feed-back loops at any point with someone saying, whoa, I'm not putting MY money into that. The feed-back loops that did exist were among the hangers-on trying to extract their handling fee and push the product to the next greater-fool. Indeed, there was a race to the bottom in standards as each player competed with others at their level in the scheme.
Back to WDCRob's point, which is not as blindingly obvious as he feared (witness sk's rebuttal).
I almost defaulted on my student loan back in 1989. Two years later, I was turned down, at the cash register (with a dozen impatient Christmas shoppers standing behind me in line) for an "instant approval" department store credit card when I was buying a $110 coat. Around the same time, my bank invited me to apply for overdraft protection and then turned me down. Essentially, they thought that if I wrote a check for $50 more than I had in my account, I wouldn't pay it back.
I assume that a lot of home buyers and homeowners have had similar experiences. They had applied for credit lines of less than $500 and then been denied.
Now they apply for a $300,000 mortgage. What are they supposed to think? That the lender is going to be less careful with the underwriting decision on a $300,000 loan than the department store was with a $110 loan?
Many, many of us have been turned down for credit. It is Skinnerian conditioning to expect a lender to turn us down for a loan for hundreds of thousands of dollars if there is doubt that we can repay it. It's unreasonable to expect the everyday home buyer to understand that his or her interests aren't necessarily aligned with those of mortgage brokers, lenders, investment banks, rating agencies, loan pool trusts, servicers, and investors in MBS.
As Tanta says, it's reasonable for a borrower to assume that the lender has sound judgment about the borrower's ability to repay.
i may personally hate the fact that the rating agencies exist and have any influence at all, but i do think they have a smart business model, which is essentially exploiting how stupid the vast majority of institutional bond buyers are, and how they don't really understand what they're buying a lot of the time, especially with mbs.
"but i do think they have a smart business model, which is essentially exploiting how stupid the vast majority of institutional bond buyers are, and how they don't really understand what they're buying a lot of the time"
Cause HOKEY-JESUS we all know those stock buyers are the most intelligent bunch!!!!
Tell that to the AHM, LEND, NEW, LUM and NFI pre-reverse split.
Bond buyers put their faith in the rating agencies, even though the rating agencies had nothing to lose but "reputation" if the deals blew up. Given the barriers to entry to being a rating agency, there are even limits to how much "reputation risk" is operative.
Home buyers put their faith in lenders who they assumed would lose money if they made loans that they weren't sure the borrowers could handle. I don't think most homebuyers ever imagined that the lenders think of loan proceeds as OPM. I wouldn't call us "UberNerds" if I thought our level of curiosity about the world of finance was typical.
Yet my own sense is that a very common opinion is that bond investors are really smart cookies and homebuyers are dummies. It is possible that both groups were both scammed and too willing to be scammed, but we seem to prefer it to be one or the other.
it is a very common perception of bond buyers that they're very smart cookies.
"Equities in Dallas? HAHAHAHAH, loser"
but if you asked most of them how CLTV or doc-type should be risk-weighted when modeling CDR or something, i'm not sure they would've had a good answer before all this blew up.
the fact is, those smart cookies bought those BBBs and the estimates i've seen of how safe alt-a BBBs are now are not pretty.
CA is a full recourse state if you re-fi or get a HELOC, but fortunately nobody in CA ever did either of those loans
When the feces comes in contact with he oscillating device I'd be interested to see how often the banks actually pursue this option beyond obviously fraudulent cases. I sort of doubt it will happen due to political considerations.
Clyde,I have been out planting Iris,but I do have a couple more comments on AVM's.AVM's not only break down at the high end,they also break down when fraud is prevalent.I think the use of AVM"s at the front end to sort out anomalous appraisals is a smart move...However lenders have used the threat of AVM's to force down the price of appraisals,and have almost always gone to the cheapest and fastest appraiser...which has encouraged appraisal mills where one supervising appraiser may have 30 "trainees" doing the work,if they are not actually fabricating the appraisal.More than one Appraiser has expressed shock when i have opened the conversation by saying "i want a real appraisal,what do you charge for that?"Tanta will your consider a special wednsday rockblog in honor of those Hedgies that discovered leverage,and removed all risk from investments? I have been planting Iris,and singing "there's a hole in the bucket maria" to myself for the last hour,softly so as not to scare the skunk family that lives in the culvert,I am considerate of the feelings of skunks,and have been since i won a peeing contest with one at the age of 20.
Re. the Fed defending high asset prices: Isn't it the "high asset price" that got us in this mess in the first place?
How would "defending" it solve the underlying problem?
Do we want another go- around of this same problem , continually, ad nauseum, for ever and ever?
Will the world be willing to pitch in from now on and continue to help defend our high asset prices by buying up the stinking underlying paper that "supported" our high asset prices?
How exactly would they defend these prices and who would they get to help them do it? It took an extraordinary amount of fraud and neglect to get these prices to the level they're at now. Now that the fraud and neglect is being uncovered on a daily basis, who would step in and allow it to continue?
Sorry, but the idea that the Fed should (or even could) "defend asset prices" that are insanely high is patently ridiculous.
Forget the moral hazard arguments; nothing short of hyperinflation would even stand a ghost of a chance, and you just don't want to go down that road. That's one of those cures that's worse than the disease.
p.s.: That said, it'll probably happen for reasons unrelated to housing.
"Home buyers put their faith in lenders who they assumed would lose money if they made loans that they weren't sure the borrowers could handle."
Boy, aint that the truth. Back in 1995 when we bought our first starter home, we were approved at 2.5x our yearly income. We tried to buy a 2 family and were not successful even tho it had an income producer. They were strict. We did buy a single family that fell within their guidelines.
Now in 2007 the bank (no mortgage brokers involved) approved us for 40% of our yearly income (that would be 40% HTI since for us it's the same as DTI). The number stunned me. I knew there was no way we could pay that. We bought lower than that, and still I have sleepless nights.
But the shocker for us was -- we assumed there was some magic formula that the bank had to determine what we could pay. I mean, like you said, why would they loan us $$ we couldn't repay? They don't even sell their loans. They service them. It's a head-scratcher. Another tentacle of trust broken, crushed to ashes like so many smoldering logs in the woodstove...
I worked for a few years in the private placement debt group of a major Hartford based insurance company. Back then late 80's, privates were covenant-heavy individually negotiated loans. Some LBO stuff, some mundane, some very creative. However, the pressures of an asset gathering institution to grow is obvious. They insurance side gathered assets by selling insurance or the equivalent of CDs. We had to put that money to work. We had no official volume quota, but it was the hidden agenda.
The covenant-lite debacle occurred because people had cash they had to put to work. If you objected to the terms, The Street just said OK, we'll let somebody else buy it. Just a story of minimal risk adversion.
This credit crunch is surprising to me because it has so rapidly spread to areas that 3-4 months ago I never would have thought of. Mortgage backs, CDOs sure. But blowing up quant equity hedge funds is amazing. It's going to be an interesting next few weeks.
Off topic - but did anyone notice that the $500 mil credit loss that Citibank was taking is now magically $700 mil? (according to FT)
Geoff | 08.11.07 - 4:49 pm | #
David Pearson,
Back to the "event" that occured 3 days in a row....
I've come up with a guess...
Ace G forgot to eat his bran muffin and could'nt pooo, 3 days in a row
This credit crunch is surprising to me because it has so rapidly spread to areas that 3-4 months ago I never would have thought of. Mortgage backs, CDOs sure. But blowing up quant equity hedge funds is amazing. It's going to be an interesting next few weeks.
JBA, what things do you think took place in those 3-4 months with quant equity hedge funds?
speaking of appraisals, i have noticed some lenders are charging "appraisal review fees" on all new loans. gee, why on earth would they do that???
Because they are absolute complete and total dicks.
That kind of shit infuriates me. We make borrowers pay for the appraisal. We charge people a 100 bps origination fee. You would think that would cover looking at the effing thing. I have no problems with making a fair profit. I have huge problems with an industry that pressures appraisers to produce junk and then charges borrowers for the double-layer of review that makes necessary.
Maybe some day we'll wake up and we can start charging borrowers "smell the coffee" fees.
At this point, the FED has to defend asset prices because they don't have a choice. Everyone sitting in cash waiting for the collapse better be prepared for the probability of three percent treasury bills as all CB's lower their rates. That is pretty much how former Federal Reserve governor Wayne Angell sees it happening.
alright! i think calling people "dicks" is coming back in style. "dick" is a solid classic, but i prefer "dickhead", it just has that certain je ne sais quois. "dickweed" is also acceptable, it tends to catch people off guard.
that would be a nice side effect of everybody in the mortgage food chain trying to screw eachother all the time; when it all falls apart and people get burned, they bring out all the old school insults that have fallen by the wayside in the boom times...
the rating agency conf calls were a perfect opportunity but i don't remember anyone busting out anything interesting.
Quincy k: "At this point, the FED has to defend asset prices because they don't have a choice. Everyone sitting in cash waiting for the collapse better be prepared for the probability of three percent treasury bills as all CB's lower their rates. That is pretty much how former Federal Reserve governor Wayne Angell sees it happening.
Inflate or die."
So any suggestions for those of us not up to our eyeballs in debt?
also, instead of saying "No, really?" on the front page, Tanta could have said "No shit Sherlock". really, we should all try to speak in the slang terms of bacon dreamz's childhood, they were so much better. Gnarly!
those equity neutral funds were just cruising along picking of their 1-2% per month. All of a sudden in the past 6 weeks their models failed, just like the rating agencies. Shit happened. The once in a 100 years disconnect happened again. Liquidity is a bitch, she always disappears when you need her...
JBA, sorry I misread your grammar. Thought you saw some kind of loosening 3-4 months ago. I am trying to figure that out. It appears to me that H1 2007 for CLO world was like 2006 for mortgage world, with the covlite loans and all...
3% Tbills? Are we planing on winning WWIII quickly then starting a Marshall Pla II bubble?
3% Tbills in this enviornment would mea n explosive inflation, a cratered US$ AND STILL WOULDN'T SOLVE THE PROBLEM.
The problem is people used all sorts of synthetic products without thinking beyond the fees.
I know that we can't just go back to the dark ages of financial engineering, but do we really need cubed CDOs of left handed credit card users?
"I know that we can't just go back to the dark ages of financial engineering, but do we really need cubed CDOs of left handed credit card users?"
I want this printed and framed on my desk at work. HA!
I'd suggest T-shirts for the Ubernerds, but since I have to order them from the Chinese sweatshop by the 10,000 lot, what would I do with the other 9,837 of them?
Please corret me where I am wrong and forgive me for not reading all of the preceding 94 comments, but it seems to me that all the rating agencies are talking more about how we got where we are than where we are going. So, where are we going wrt underwriting and all that other boring stuff that pays Tanta's bills?
At this point, the FED has to defend asset prices because they don't have a choice. Everyone sitting in cash waiting for the collapse better be prepared for the probability of three percent treasury bills as all CB's lower their rates. That is pretty much how former Federal Reserve governor Wayne Angell sees it happening.
Inflate or die.
Quincy k
this is what a anverage j6p thinks.
he has no idea about the fall of usd, fall of RE prices.
and the politicians will say what j6p wants to hear, yet as all politicians it will be a lie, and once they are elected, they will do whqat they have to do. they digg up a hole now, they must crawl into it ...
clintons are in cash, cheney and gwb are also in cash, and fed does what it needs to save the sysem
No, you are not "first." I am first.
I didn't provide the link to the S&P text because you have to be a registered user, plus have two years' experience navigating S&P's stupid website, in order to get to it.
However, if there are candidates out there, I'll throw the link into the comments.
Purchase mortgages and appraisals were fairly safe when borrowers made non-trivial down payments. If you're putting 50 grand of your own cash into the deal you want the best price you can get. Take someone who had no hope of being a homeowner, but who desperately wanted to be, tell them they can get in with no money down if they buy with you, and the desperate buyer will go along with just about any manipulation of the numbers.
rock blogging! we must have Saturday rock blogging! Can I make a suggestion, given the recent liquidity events?
YouTube -
Exactly, mort_fin. But I have always believed that "nontrivial" was relative to the borrower's own assets.
We've all seen "affordable housing" loans come through with down payments of $5,000 instead of $50,000, but they ended up performing just as well or better.
There is the question of the source of that money. A person who makes $15 an hour and sets aside $100 a month for 50 months to save up for a down payment is, in my view, investing a non-trivial amount. Of course I still want MI on the loan and strict qualifying standards, because that is still going to be a high-CLTV loan. But I trust this borrower, frankly, to worry about the safety of that $5,000 investment, given how hard it was to come by.
But making a loan to someone who makes (or claims to make) $8,000 a month and who puts down $5,000? Or considering these $50,000 down payments perfectly safe when they came from the proceeds of selling the "starter home" in a hot market? I think we're learning a little bit about "easy come, easy go."
You want dessert before you have to eat your spinach? I think not, young man.
Jeebus. Actually I've already got SRB done, I'm just withholding it until you all whine enough.
If you don't eat your meat how can you have any pudding?
My logic could still be decaffeinated, but if once wise users of credit are suddenly found to be using credit unwisely when offered new credit products it strongly suggests that this crisis was primarily driven by the lenders, and less so by the borrowers.
i.e. if people who actually understood how things were supposed to work could no longer work it out the products were faulty.
Hardly a newsflash, I know. But IMO it's confirming.
I think maybe I've just stated the blindingly obvious. Time for coffee.
Don't play hard to get Tanta!
SRB pleaaaaaaaasssseeeeeeeeee
Well, no, I don't think that's "blindingly obvious" to a lot of people.
We get bouts of arguments on this blog all the time about this. My take is that when lenders only offer reasonable credit terms, and turn down requests for unreasonable terms, people can rack up nice FICOs. They won't stay nice if your friendly neighborhood banker lets you run wild.
Same deal with appraisals: people want to argue that they should be done away with, and let "the market" decide what the value is based solely on what people will pay.
Well, if you've got the cash, you can pay anything you want for a piece of RE. If you're borrowing, someone most certainly should be checking to see if you've lost your mind.
Wow! Paradigm shift. If you take low rated clients and place them in poor finance products, they perform poorly. But if you take high rated clients and place them in poor finance products, they perform...poorly. Can't be right. Need to fire the public and get a new one (preferably with more money).
"This combination of multiple risk factors for a single loan is the principal driving force behind the deteriorating performance of the 2006 vintage."
Bad wine will ruin the purse.
Need to fire the public and get a new one
"If we only had borrowers who were smarter than we are, this wouldn't of happened."
Tanta,
Not to be too Uner-nerdy, but the demise of FICO was caused by auto correlation, IMO.
High FICO's, by and large, meant you ran up credit card balances and paid them off, all the while never being late on a payment.
So who had high FICO's? Well, some people that financed overspending with credit cards, and then paid off the credit cards with 100% CLTV arm re-fi MEW. FICO never penalized you for borrowing too much against your home (since the scoring agencies don't know your home value or even your incomes); and instead rewarded you for doing so with higher credit card spending limits.
High FICO's enabled high FICO's. That's autocorrelation, and the ratings agencies, hedge funds, lenders, CDO insurers, and everyone else that touched mortgages missed that simple connection. Or at least they pretended to miss it while they booked their respective fees.
The funny thing is, FICO is even more important to the credit card folks. And that's one of the many remaining shoes to drop (Oh-shit, a bad metaphor).
David, I think your point is important. It's just that it isn't the cash-out refis that are particularly killing these securities (at the moment. Every dog has his bad metaphor day.)
I mean, we knew that what lenders call "debt pyramiding" is a problem. We just seem to have failed to notice that historical purchase-transaction patterns could change. Whoopsie.
The first-time homebuyers who are blowing up in a purchase-money loan have never had the chance to fluff up their FICOs with a cash-out rescue.
In the fog of war, the Street due diligence teams' weapon of choice is now an AVM (automated valuation model) instead of a human appraisal. Moreso with declining markets and no human experience in that realm.
Interesting dynamic. A model dispassionately calculates sustainable path of house "values", whereas "market price" is determined by an emotional buyer with excess liquidity & a desperate need for leveraging assets to make up for stagnant wages. The appraiser goes with price instead of value to feed their family.
When the liquidity & appreciation conditions vaporize, the micro-Minsky moment arrives a la Wiley Coyote for securities valued on housing market "prices" instead of market "value".
AVMs remove some of that current asymmetry.
Try this. I buy a home for 1,000,000 in California. I could have put down 200k but did a 100% LTV loan because my credit is great. I can easily afford the monthly payment, but I have decided to go into foreclosure because my house is now worth 800K and going down. I would rather take a hit to my credit rating than lose 200-300K. (Note: this is hypothetical, but one post last week talked about people walking away from homes in Pebble Beach, CA).
Bill, you forgot that those folks who could have put down $200-300 grand but took 100% financing instead were doing so because they were going to make a killing in a hedge fund investment.
Those Folks are not getting redemptions and their 200 to 300 grand might evaporate
So people with low FICOs are people who got in over their head, and people with high FICOs are people who haven't gotten in over their head (yet). Sounds like a job for Obviousman. Did S&P think that having a high FICO meant you had a magic checking account that never ran out of money?
Tanta...
Well, good. There's nothing I hate more than being obvious. Let alone blindingly so.
I spent a summer interning for a big credit card collections group (in their marketing group, try not to hate me) and did some qualitative research with people who were deep in CC debt.
I can't tell you how many times I heard people express the idea that the credit card company wouldn't have lent them the money if the they wouldn't be able to pay it back.
Now that's ignorance of the highest order, but they weren't BSing. And I'll argue that understanding (or failing to understand) how to use a credit card wisely is several orders of magnitude simpler than working out the details on one of your UberNerd posts.
So, while there are a lot of bad eggs out there (not surprisingly they tend to be less interested in showing up for interviews or focus groups) who might 'run wild' if they aren't restrained by wizened geezers with green lampshades and wire rims, many people just aren't capable of making informed decisions about complex financial products.
What S&P has just discovered is the "FICO Break Point," or the point at which a person who has been prudent in the past can be driven to his or her knees with a sufficiently insane set of loan terms.
What a public service.
Even After $1 Trillion Goes Poof, It Ain't Over
That's Randall Forsyth's headline in Barrons this a.m. I am going to have to do some research on Asset-backed commercial paper, to wit:
"In that, it appears some of the problem lies with asset-backed commercial paper "conduits" and so-called structured investment vehicles. These ABCP conduits and SIVs are used to fund the purchase of assets such as trade receivables, auto loans, credit cards, whole mortgage loans, as well as securities such as corporate debt, residential mortgage-backed securities and CDOs, according to a Bear Stearns report.
The ABCP conduits and the SIVs then are able to issue high-grade commercial paper to finance these assets, which are less the prime quality. ABCP now comprises over half the $2 trillion-plus commercial paper market, up from 20% in 1998, according to MacroMavens' Stephanie Pomboy. And, money market funds own 27% of all CP outstanding, she also notes.
According to the Bear report, some $38 billion-$43 billion RMBS and CDOs could be liquidated from ABCP conduits. Got that? In other words, a load of these assets is backing ABCP and may have to be sold into a less than receptive market."
This is the seed of the problem with the BNP Paribas funds (which are not hedge funds, but juiced money market funds).
Tanta,
I didn't realize the delinquency spike was so concentrated in purchase, and particularly in FTHB.
Is this true for Alt-a as well?
Maybe the cash-out folks won't miss payments until reset; so that shoe will drop soon too (okay, its an octupus, you see, and he has footware, eight really, and they are dropping, one by one).
I can't tell you how many times I heard people express the idea that the credit card company wouldn't have lent them the money if the they wouldn't be able to pay it back.
I just don't think that is a particularly odd way for people to think.
I can remember the first time I agreed to commit many millions of my employer's dollars on some bulk mortgage deal. I had the usual "oh shit what if I blow this" shakes, and one of my colleagues said, "Look, you would not have been given the authority to do this if management and the board of directors didn't think you could."
What was I supposed to do? Say, well, management and the BOD could be inattentive morons? In many many ways, in many many contexts, we are all conditioned to think that others are evaluating our abilities by the risks they are allowing us to take.
Am in agreement with your thoughts, Tanta.
On the soft guidelines - I think their role in this mess is much larger than we might think. Soft really translates into how far can I bend this rule and still convince Wall Street to buy it? And once that deal gets bought, over time, discipline goes out the door in a lot of other areas of that lender, broker, and investment house. I mean, how serious can you be when you are touching a deal wearing shorts and flip-flops?
On purchases, I have always compared the DP to total income. That ratio is a better indicator of "skin in the game" than total assets as they could disappear anytime. If they have the cash, require a chunk of it in the deal and it will perform just like your wage earner who saved for a few years.
s this true for Alt-a as well?
This report is Alt-A.
David,
Maybe the cash-out boys are paying the payment from the cash-out ?
It would be intresting to check if people are withdrawing on their HELOc the exact amount day before their payment - hoping that at some point they will be saved by rsisng r/e prices.
Clyde,I find yur defense of AVM's interesting,have you looked at the assumptions they make,and tested the accuracy against a few individual properties? as far as human appraisals go,are you comparing the AVM values against "drive by" or full appraisals.remember that when you refuse to pay more than $250 for an appraisal on a $500k loan...and insist on a 24 hr turnaround you are real likely to get what you ordered and paid for.a "happy meal" report.AVM's,like drive by's take no account of the cnditin of the interior,the landscaping,or the neighbors meth lab which you can smetimes smell if you personally inspect a property...oooohh meth labs...how to turn your investment into a superfund site with one bad tenant.
Well one reason for the historicly better performance of purchase loans rather than cash outs is negative borrower selection. It is certainly common for somebody facing economic difficulty and uncertainly that is more visible to them than to a lender to REFI. But only in the last couple of years would it have occured those who were nervous about their finances that the solution was to go out and buy a house.
Tom, I'm willing to defend AVMs as a due diligence tool, but not as a replacement for original full appraisals in the underwriting of the deal.
What I use AVMs for is a way to sort out a big pile of appraisals into "sounds reasonable" and "needs more review." That is, with properties in the up to $650K or so range. My own experience is that in most markets, AVMs go wacky at the high end. Makes sense, as that's your "least frequently traded" class.
In point of fact, though, my AVM might make your appraised value seem awfully damned low. So I pull out your 1004 and see that you smelled meth and your interior inspection showed too much indoor target practice for the drywall to stand. That actually bumps you up on my "approved appraiser" list. If I let your value stand, that should bring the next AVM on this home back into line.
But of course you can be stupid with AVMs. We have such a fine track record going with stupid it's no wonder nobody trusts the AVMs, either.
A few comments:
By abandoning "soft guidelines" lenders were probably conforming to shareholder's desires to be more efficient. Computerize and automate everything to add a few cents to the EPS. And then many automated systems are poorly implemented due to budget and timing constraints to conform with shareholder expectations also.
Add in staff turnover of IT departments due to HR wage guidelines which treat employees like commodities. This is even though there have been studies that show some comuter prorammers are up to 100 times more eficient than other programmers. But everyone gets a 0-7% raise, HR policy you know.
Another factor, I think, has got to be FICO inflation due to "credit repair". Seems to me people have become more savy in the past 10 years about fixing their credit. Even if it means hammering the agencies with requests until they finaly miss a deadline and have to remove bad items?
Removing "soft guidelines" must be, at least in part, lawyer driven to avoid discrimination suits? Just guessing... but now, you don't even meet your mortgage broker in person right?
Did anyone see this post in LA Land:
'The darkest moment' for some real estate pros | L.A. Land | Los Angeles Times
Among the examples; appraiser Michael Mathis (pictured) sees his income drop from mid-six figures to less than $75,000″ and wonders how hell pay for renovations on a 9,000 square foot house; the Long Beach mortgage broker who cant refinance his own house and has been holding off paying property taxes on his own home; and the Guatemalan day-laborer who sees work drying up: I used to get four, five calls a day, he says. Now I go four, five days without a call.
How is an appraiser of residential homes making mid 6 figures? Thats absolutely ridiculous: no eduction requirement, no special skills and this fools gold economy is paying these guys that much money. The same guys who have been shown to basically be rubber stamps approvals for ridiculously overpriced homes? This tell you exactly why this is a bubble and not just good old regular appreciation. Glad those smart guys on Wall Street followed these appraisals as well
"Soft guidelines" are still there, trust me.
You may take some cynical amusement from that. What are a huge chunk of these repurchase for violation of rep and warranty demands based on?
Soft guidelines. It's not that the tape said 90% CLTV but the file shows 100%. It's that you pay some punk like me to wade through the "soft guidelines" and the loan files to find that a second appraisal should have been ordered but wasn't, or two appraisals were ordered and they took the highest rather than lowest value, or the second appraisal was a "drive by" instead of "interior inspection" type, or the AVM had to have a confidence score of 65 and didn't, or what have you.
So when the IBs want to put loans back, they discover a compelling need to read "soft guidelines."
Maybe the cash-out folks won't miss payments until reset; so that shoe will drop soon too (okay, its an octupus, you see, and he has footware, eight really, and they are dropping, one by one).
David Pearson | 08.11.07 - 10:58 am |
Could it be. . . tentacles?
All this is ultimately caused by the underlying mortgages turning sour. We've only gone through 13% of all ARM resets (across all classes) with the bulk of sub-prime starting in October. What happens when we're at 25%, 50%, 65% of the arm resets. What will the default rates be then, liquidity squeeze be then, credit crunch be then. Only 13% through and we're feeling pain now. It's like a 9 round boxing match and we're already wobbling.......still in the 2nd round.
Oh ya,...that Fed liquidity injected yesterday everyone is talking about...those were 3 days repos. The banks have to pay them back on Monday. Going to be a helluva day Monday....and we're only 13% thru the tunnel of pain.
"There was a vague sense among us that with a buyer and a seller out there behaving like Econ 101 says they behave, the sales price--and the comparable sales prices--would ground a purchase appraisal in some kind of "reality." It's not that all refi appraisals are bad, but that they are, as I've said before, inevitably a kind of "mark to model." Purchase appraisals are supposed to be "mark to market."
Disagree. The purchase benefit at leat from a pricing standpoint, has been more of a marketing tool the last 7 years than anything else. From a sub prime point of view, purchase money loans generally carried better prospects--borrowers had better scores typically and were putting money into the property-- than did the refi borrowers who were invariably coming to us because they had issues of some sort and/or wanted take money out of the property.
Additionally, purchase money transactions had much higher conversion ratios, which in our business, especially the sub prime business, is the holy grail of profitability.
As far as appraisals go, there has always been more risk with purchase money loans because your ae often times creating a market price with a purchase. We always were much more consevative with refi apparaisal because we were "mark to market" on those. Purchase money appraisals were normally at the very top end of the market or creating the new market price. Using appreciation analysis and market trends were a substantial part of the process, so that would be more "mark to model"
You are going to continue to get arguments from people about this "blindingly obvious" biz, Tanta.
Just because the oz/penny cost of a HUGE mac is better than a bigMac(tm), common nutrition knowledge dictates you shouldn't eat one all by yourself(sharing isn't a bad idea) and certainly not on a regular basis - MacDonalds says they simply offer a choice - I know they really shouldn't, killing the fat goose that lays the golden egg as it were, but just because they do doesn't mean you should.
Just because Happy Hour offers booze at $1/shot ( still MUCH more expensive that drinking at home ), common knowledge about the effects of alcohol suggests you shouldn't down 6 in 30 minutes ( well, perhaps when you are 17, but you really ought to grow out of it, if it hasn't killed you ). I suppose with booze you've got an excuse, the loss of judgement after a few biz.. but really, at least, you should have handed over your keys, donned ( well purchased at least ) your condom and so on before ploughing on.
I say the borrowers are just as much to blame as the lenders. This argument is going to go on and on.
-K
From the housingbubble blog, perhaps from someone in a fiduciary capacity:
"Today we found out that one of JPMs Institutional MM funds (clients
was holding CDOs that were hiding behind their AAA rating. Almost two years ago we had specifically asked in writing if this mmf had any CDO exposure and were told no. We got a were sorry but call this morning."
So now we have money market funds with both CDOs (50% backed by mortgages) & AssetBacked Commercial Paper (50% of the CP market). Looks like I am going to have a little talk with my brokerage on Monday.
The security descriptions in those money market reports are woefully deficient. We need enhanced disclosure for fixed income instruments (security type, deal number the tranche comes from, whether it has been securitized once already, whether it gets marked to model or market, Weighted Average Life, Weighted Average Life assumptions, etc.)
Tom,
There are a three dozen AVM models out there. The bank regulators are having each bank hire a consultant to compile property value history for each zip code, run all that data through each AVM, and then pick the 3 models that predict historical trends for each county the best. If you are a extremely good credit, you only get run through 1 AVM when you apply for a loan. If you are just below pristine, your application will "cascade" to the next 2 AVMs as a double-check on the 1st AVM. The FDIC makes the bank do an annual recalibration of which AVMs are the best fit for each county.
The bigger banks with big tech budgets push this to the front-end of their businesses, i.e. a teller telling you that if you can wait 120 seconds, she can tell you if you have been approved for a refinance on the spot. If you have a low-LTV loan, the AVM can save the consumer a couple of hundred bucks on appraisal costs.
But most of non-premier banks use AVMs on the back-end for due diligence functions, essentially doing autopsies on appraisals. Declining markets have sped acceptance among the dealers, and the rating agencies are right behind them.
If we are all going to compete with Wells & BofA, we are going to have to spend the dough to push it to the front-end sooner rather than later.
Bill-
That is how I see this going down. In non-recourse states such as CA, I believe a lot of prime MBS are going to default. Most people that are 100-300k in the hole with little hope of recovery and no exposure to a deficiency judgement are simply going to walk.
For these reasons, the FED has to save asset values. Lowering the Fed rate is the first step. That is if the bond and commodity markets allow them to.
sk,
I agree somewhat with the borrower's are just as much to blame as anyone. Certainly some borrowers trying to pull a fast one were.
But I have a hard time believing that especially in the sub-prime market. Education is the responsibity of the borrower, but just where are they going to get it? I've said before that basic financial education belongs in the high schools but that won't happen because the CC industry would be screwed when students move on to college with all the resulting offers for easy cards.
Look at it this way - if parents don't teach a 2 yr old to not touch a hot burner, who's fault is it when the kid gets burned?
All this talk about MMF is making me really glad that our down payment money (ill gotten gains from our 2005 home sale
) is sitting in a treasury only MMF. Just moved the business savings from a non-fdic MMF to FDIC savings acct. Gave up a percent in interest to do it, but I wasn't sleeping well...
If MMFs start blowing up, good gravy!
Quincy k,
Disagree. Fed's let Calif sink prices sink before and they will do it again. And again. Walking away allows prices to get back to reality.
Well, I don't trust those computerized AVMs.
From personal exerience at the end of June: We moved our tiny HELOC to Suntrust from ditech. I like ditech a lot, but we are close to paying off the HELOC. Anyhow, Suntrust valued our home higher than I think we could have received at the very top of the peak amd immediately offered us double the ditech line. We have great FICO scores, don't have any CC debt, and aren't using the increased line. We should have the balance down to zero by January, we are responsible and have a good deal of home equity at reasonable valuation, but their valuation was off the charts.
Aree on the MMFs, move to safer ground because you only lose 1 point, but mortgage backed anything could lose 25-100% of value. Based on the post above where a fund reported belatedly they had exposure, and infrequent reporting on fund asets in any case, just move your cash assets. Don't go to 100% cash in a panic though.
I think the Fed has to act to defend assett prices.
Otherwise it appears that municipalities Banks and individuals across the land are going to go bust. Without a consuming consumer the economy is toast.
Countrywide and any lender deemed fit will get a line of credit to buy out failing lenders while providing mortgages at affordable costs.
It is unthinkable that this can be allowed to cascade ever onwards without definate action.
This is a world event. The world will do what is necessary.
I am out of my league often here, but then to watch Cavuto demo an easy pie chart, interview two brokers with softball questions, and say everything is hunky dory makes me want to bang my head with a hammer.
MacDonalds says they simply offer a choice
Just because Happy Hour offers booze at $1/shot
This analogy doesn't work for me. They give charters to banks, not burger joints or bars.
McDonald's and TGIF make more money the more you eat and drink. We all know that.
Banks lose their shirts the more loosey-goosey loans they make.
We wouldn't be having this conversation had the chickens not come home to roost.
People expect lenders to act in the lender's own best interest. How were they supposed to know that lenders didn't know what their own interests were?
McD's doesn't care if you drop dead from a heart attack because they don't pay your health care costs. Lenders who thought someone else picked up FC expenses are learning different.
it's fine with me to hate on fitch, and certainly thier model was silly, but at the end of the day, they don't appear to have done a worse job rating than anyone else, so who gives a fuck?
plus, what's the point of making fun of these models now? nobody brought this up when it mattered and nobody's going to stop using them now.
Additionally, purchase money transactions had much higher conversion ratios, which in our business, especially the sub prime business, is the holy grail of profitability.
What's a conversion ratio?
Do oyu guys know how the current ranking of mortgage delinquency indicators is?
Is it like:
???
Thanks, O-Joe
M-F,
You prove my point. Pre-loan approval, AVMs are currently used instead of appraisers for borrowers with pristine balance sheets, like yourself, or for low-LTV properties.
What I left out is that AVMs are the #1 tool for detecting fraud in appraisals in subprime and altA. Unfortunately, most banks use it to find that fraud after the loan is made. Eventually, when mortgage operations get their tech budgets back, AVMs will be run at loan application. Bank on it. Appraisers will be the backup.
The Street is finding that AVMs can deal with the confusion of declining values and conflict-of-interest better than humans.
what's the point of making fun of these models now? nobody brought this up when it mattered
Uh, lots of us questioned these models when it mattered. One thing we didn't have was the agencies admitting in print what those models exactly were doing. So it was a little hard to jump on them back when they didn't cop to their risk-weighting.
What's the point? Well, I for one want to continue to see residential mortgage financing available to people on terms that are safe enough and reasonably-enough priced. Going back to see where these models went wrong can help policy-makers to avoid under-reaction or overreaction.
I certainly hope everyone is thinking about Social Security privatization right now. The same people are using this kind of modeling to tell you you'd be better off with your money in the stock market. I'm told financial education is important. I think it's worthwhile for average citizens to be educated about just how some of these models work.
Recent of Marc Baber:
Bloomberg News
"All this talk about MMF is making me really glad that our down payment money (ill gotten gains from our 2005 home sale
) is sitting in a treasury only MMF. Just moved the business savings from a non-fdic MMF to FDIC savings acct. Gave up a percent in interest to do it, but I wasn't sleeping well...
If MMFs start blowing up, good gravy"
MMF's don't blow up - they simply break the buck....
Doesn't breaking the buck sound so much nicer than blowing up lol...
well i think that just proves my point. maybe people questioned the model but that didn't stop them from relying on it. it's really comforting that everyone was just blindly using a model when they didn't know what it was doing. what good is questioning it if u use it anyway? i'll go hide under my bed until the next inevitable disaster.
re: no bank charter for McD or TGIF
Excellent point. Well, TGIF certainly is required by law not to serve the underage and undersober(sic) and if/when the liability suits against McD ( like the ones against cigarette manufacturers and earlier ones against automakers ) prevail the charter they exist under in society will become a trifle more explicit. But, in the meantime, even if they are breaking a civil restraint or criminal law, doesn't mean one doesn't share the blame with them for anything that happens to you since the issues with fatty foods and overdrinking are well known..
I think I'd have more empathy if we were talking about Papa New Guinea natives landing in LA, or people off the slums of Bombay or from a Brazilian favela buying up in Atlanta ( or from the depopulating honest prairies of South Dakota
) but we are talking in the main of people who've grown up and are steeped in the culture and social mores of the USofA.
I've beaten this dead horse once too often today I expect so I won't any more. TODAY at least.
-K
People expect lenders to act in the lender's own best interest. How were they supposed to know that lenders didn't know what their own interests were?
but the decisions are being made by executives and worker-bees, not the charterered lender itself. This is a fundamental flaw in any laissez-faire society . . . if you're able to quasi-legally grift 30 years' wages when the getting is good, you can walk away from the table and leave the mess for someone else.
Tanta and CR - Fantastic place you have!
Great posts -
What are they going to do Monday? - Are they going to go with seven day MBS repos?
Flight to government securities - The flight should continue. Investors are reading that even MMFs aren't immune. It's almost funny that a day after I (and apparently many) move all my significant cash into govi secs, the Fed has to intervene. I wouldn't be surprised if the Fed is meeting this weekend.
This is only the beginning (As Stuart identified above) - Many here KNOW that RE valuations will revert to the mean metrics. Do we have a long way to fall! Am I missing something or are participants failing to extrapolate the impact of what is going on? It seems that there is enough info out there to model (sorry) the impact (e.g. foreclosures, loan losses, RE valuation declines, consumer spending).
I suspect this is going to unfold in waves - foreclosures, credit contraction, losses, more foreclosures, RE valuation declines, etc.
wouldn't it be awesome if the fda questioned how drugs worked, but didn't really care to figure it out and let them go to market anyways? and then in a couple years when people start to die, they'll say 'boy the fda fucked that up. but i'm sure they'll learn from their mistake and fix it. i'll continue to trust them
I think it's clear consumers need a little more financial education:
Market Factors: Bonds and Illegal Steroids
I have to say I think all the recriminations and rationalizing is pointy-headed bureaucratic CYA. This whole mess can be summed up as caused by OPM, other people's money.
When the buyer was speculating with 100% LTV (or more), and the originator was the loan, and the loan buyer was further re-selling the loan, and the secondary buyer was a hedge-fund manager or staffer at some pension plan the whole system was fundamentally flawed in its design.
There were no feed-back loops at any point with someone saying, whoa, I'm not putting MY money into that. The feed-back loops that did exist were among the hangers-on trying to extract their handling fee and push the product to the next greater-fool. Indeed, there was a race to the bottom in standards as each player competed with others at their level in the scheme.
Back to WDCRob's point, which is not as blindingly obvious as he feared (witness sk's rebuttal).
I almost defaulted on my student loan back in 1989. Two years later, I was turned down, at the cash register (with a dozen impatient Christmas shoppers standing behind me in line) for an "instant approval" department store credit card when I was buying a $110 coat. Around the same time, my bank invited me to apply for overdraft protection and then turned me down. Essentially, they thought that if I wrote a check for $50 more than I had in my account, I wouldn't pay it back.
I assume that a lot of home buyers and homeowners have had similar experiences. They had applied for credit lines of less than $500 and then been denied.
Now they apply for a $300,000 mortgage. What are they supposed to think? That the lender is going to be less careful with the underwriting decision on a $300,000 loan than the department store was with a $110 loan?
Many, many of us have been turned down for credit. It is Skinnerian conditioning to expect a lender to turn us down for a loan for hundreds of thousands of dollars if there is doubt that we can repay it. It's unreasonable to expect the everyday home buyer to understand that his or her interests aren't necessarily aligned with those of mortgage brokers, lenders, investment banks, rating agencies, loan pool trusts, servicers, and investors in MBS.
As Tanta says, it's reasonable for a borrower to assume that the lender has sound judgment about the borrower's ability to repay.
i may personally hate the fact that the rating agencies exist and have any influence at all, but i do think they have a smart business model, which is essentially exploiting how stupid the vast majority of institutional bond buyers are, and how they don't really understand what they're buying a lot of the time, especially with mbs.
bacon-
"but i do think they have a smart business model, which is essentially exploiting how stupid the vast majority of institutional bond buyers are, and how they don't really understand what they're buying a lot of the time"
Cause HOKEY-JESUS we all know those stock buyers are the most intelligent bunch!!!!
Tell that to the AHM, LEND, NEW, LUM and NFI pre-reverse split.
God, they were smart people.
It's an interesting comparison.
Bond buyers put their faith in the rating agencies, even though the rating agencies had nothing to lose but "reputation" if the deals blew up. Given the barriers to entry to being a rating agency, there are even limits to how much "reputation risk" is operative.
Home buyers put their faith in lenders who they assumed would lose money if they made loans that they weren't sure the borrowers could handle. I don't think most homebuyers ever imagined that the lenders think of loan proceeds as OPM. I wouldn't call us "UberNerds" if I thought our level of curiosity about the world of finance was typical.
Yet my own sense is that a very common opinion is that bond investors are really smart cookies and homebuyers are dummies. It is possible that both groups were both scammed and too willing to be scammed, but we seem to prefer it to be one or the other.
Should read-
Tell that to the AHM, LEND, NEW, LUM per-halt and NFI pre-reverse split.
risk capital, take it from one who knows: never try to correct a comment error.
tanta-
yes, yes indeed, point taken.
it is a very common perception of bond buyers that they're very smart cookies.
"Equities in Dallas? HAHAHAHAH, loser"
but if you asked most of them how CLTV or doc-type should be risk-weighted when modeling CDR or something, i'm not sure they would've had a good answer before all this blew up.
the fact is, those smart cookies bought those BBBs and the estimates i've seen of how safe alt-a BBBs are now are not pretty.
...and don't get me started on managing to an index.
'i'd like to sell agencies and buy super seniors today, but...my index...
CA is a full recourse state if you re-fi or get a HELOC, but fortunately nobody in CA ever did either of those loans
When the feces comes in contact with he oscillating device I'd be interested to see how often the banks actually pursue this option beyond obviously fraudulent cases. I sort of doubt it will happen due to political considerations.
"Glad we got some real-time empirical data to prove that. Sorry about your global financial crisis."
Oh Tanta - you are the best Saturday morning ever!
deb-
If MMF's start blowing up, your FDIC will be SOL.
We are to the point now that if Merril, BS, MS or any top five bank goes down the whole system would probably go down.
Clyde,I have been out planting Iris,but I do have a couple more comments on AVM's.AVM's not only break down at the high end,they also break down when fraud is prevalent.I think the use of AVM"s at the front end to sort out anomalous appraisals is a smart move...However lenders have used the threat of AVM's to force down the price of appraisals,and have almost always gone to the cheapest and fastest appraiser...which has encouraged appraisal mills where one supervising appraiser may have 30 "trainees" doing the work,if they are not actually fabricating the appraisal.More than one Appraiser has expressed shock when i have opened the conversation by saying "i want a real appraisal,what do you charge for that?"Tanta will your consider a special wednsday rockblog in honor of those Hedgies that discovered leverage,and removed all risk from investments? I have been planting Iris,and singing "there's a hole in the bucket maria" to myself for the last hour,softly so as not to scare the skunk family that lives in the culvert,I am considerate of the feelings of skunks,and have been since i won a peeing contest with one at the age of 20.
Re. the Fed defending high asset prices: Isn't it the "high asset price" that got us in this mess in the first place?
How would "defending" it solve the underlying problem?
Do we want another go- around of this same problem , continually, ad nauseum, for ever and ever?
Will the world be willing to pitch in from now on and continue to help defend our high asset prices by buying up the stinking underlying paper that "supported" our high asset prices?
How exactly would they defend these prices and who would they get to help them do it? It took an extraordinary amount of fraud and neglect to get these prices to the level they're at now. Now that the fraud and neglect is being uncovered on a daily basis, who would step in and allow it to continue?
Off topic - but did anyone notice that the $500 mil credit loss that Citibank was taking is now magically $700 mil? (according to FT)
Sorry, but the idea that the Fed should (or even could) "defend asset prices" that are insanely high is patently ridiculous.
Forget the moral hazard arguments; nothing short of hyperinflation would even stand a ghost of a chance, and you just don't want to go down that road. That's one of those cures that's worse than the disease.
p.s.: That said, it'll probably happen for reasons unrelated to housing.
"Home buyers put their faith in lenders who they assumed would lose money if they made loans that they weren't sure the borrowers could handle."
Boy, aint that the truth. Back in 1995 when we bought our first starter home, we were approved at 2.5x our yearly income. We tried to buy a 2 family and were not successful even tho it had an income producer. They were strict. We did buy a single family that fell within their guidelines.
Now in 2007 the bank (no mortgage brokers involved) approved us for 40% of our yearly income (that would be 40% HTI since for us it's the same as DTI). The number stunned me. I knew there was no way we could pay that. We bought lower than that, and still I have sleepless nights.
But the shocker for us was -- we assumed there was some magic formula that the bank had to determine what we could pay. I mean, like you said, why would they loan us $$ we couldn't repay? They don't even sell their loans. They service them. It's a head-scratcher. Another tentacle of trust broken, crushed to ashes like so many smoldering logs in the woodstove...
speaking of appraisals, i have noticed some lenders are charging "appraisal review fees" on all new loans. gee, why on earth would they do that???
I worked for a few years in the private placement debt group of a major Hartford based insurance company. Back then late 80's, privates were covenant-heavy individually negotiated loans. Some LBO stuff, some mundane, some very creative. However, the pressures of an asset gathering institution to grow is obvious. They insurance side gathered assets by selling insurance or the equivalent of CDs. We had to put that money to work. We had no official volume quota, but it was the hidden agenda.
The covenant-lite debacle occurred because people had cash they had to put to work. If you objected to the terms, The Street just said OK, we'll let somebody else buy it. Just a story of minimal risk adversion.
This credit crunch is surprising to me because it has so rapidly spread to areas that 3-4 months ago I never would have thought of. Mortgage backs, CDOs sure. But blowing up quant equity hedge funds is amazing. It's going to be an interesting next few weeks.
Off topic - but did anyone notice that the $500 mil credit loss that Citibank was taking is now magically $700 mil? (according to FT)
Geoff | 08.11.07 - 4:49 pm | #
burp...
blip...
non-issue distraction
imo
David Pearson,
Back to the "event" that occured 3 days in a row....
I've come up with a guess...
Ace G forgot to eat his bran muffin and could'nt pooo, 3 days in a row
Seriously though ....?
This credit crunch is surprising to me because it has so rapidly spread to areas that 3-4 months ago I never would have thought of. Mortgage backs, CDOs sure. But blowing up quant equity hedge funds is amazing. It's going to be an interesting next few weeks.
JBA, what things do you think took place in those 3-4 months with quant equity hedge funds?
speaking of appraisals, i have noticed some lenders are charging "appraisal review fees" on all new loans. gee, why on earth would they do that???
Because they are absolute complete and total dicks.
That kind of shit infuriates me. We make borrowers pay for the appraisal. We charge people a 100 bps origination fee. You would think that would cover looking at the effing thing. I have no problems with making a fair profit. I have huge problems with an industry that pressures appraisers to produce junk and then charges borrowers for the double-layer of review that makes necessary.
Maybe some day we'll wake up and we can start charging borrowers "smell the coffee" fees.
At this point, the FED has to defend asset prices because they don't have a choice. Everyone sitting in cash waiting for the collapse better be prepared for the probability of three percent treasury bills as all CB's lower their rates. That is pretty much how former Federal Reserve governor Wayne Angell sees it happening.
Inflate or die.
alright! i think calling people "dicks" is coming back in style. "dick" is a solid classic, but i prefer "dickhead", it just has that certain je ne sais quois. "dickweed" is also acceptable, it tends to catch people off guard.
that would be a nice side effect of everybody in the mortgage food chain trying to screw eachother all the time; when it all falls apart and people get burned, they bring out all the old school insults that have fallen by the wayside in the boom times...
the rating agency conf calls were a perfect opportunity but i don't remember anyone busting out anything interesting.
Quincy k: "At this point, the FED has to defend asset prices because they don't have a choice. Everyone sitting in cash waiting for the collapse better be prepared for the probability of three percent treasury bills as all CB's lower their rates. That is pretty much how former Federal Reserve governor Wayne Angell sees it happening.
Inflate or die."
So any suggestions for those of us not up to our eyeballs in debt?
also, instead of saying "No, really?" on the front page, Tanta could have said "No shit Sherlock". really, we should all try to speak in the slang terms of bacon dreamz's childhood, they were so much better. Gnarly!
probert,
those equity neutral funds were just cruising along picking of their 1-2% per month. All of a sudden in the past 6 weeks their models failed, just like the rating agencies. Shit happened. The once in a 100 years disconnect happened again. Liquidity is a bitch, she always disappears when you need her...
JBA, sorry I misread your grammar. Thought you saw some kind of loosening 3-4 months ago. I am trying to figure that out. It appears to me that H1 2007 for CLO world was like 2006 for mortgage world, with the covlite loans and all...
3% Tbills? Are we planing on winning WWIII quickly then starting a Marshall Pla II bubble?
3% Tbills in this enviornment would mea n explosive inflation, a cratered US$ AND STILL WOULDN'T SOLVE THE PROBLEM.
The problem is people used all sorts of synthetic products without thinking beyond the fees.
I know that we can't just go back to the dark ages of financial engineering, but do we really need cubed CDOs of left handed credit card users?
"I know that we can't just go back to the dark ages of financial engineering, but do we really need cubed CDOs of left handed credit card users?"
I want this printed and framed on my desk at work. HA!
I'd suggest T-shirts for the Ubernerds, but since I have to order them from the Chinese sweatshop by the 10,000 lot, what would I do with the other 9,837 of them?
Nice post thanks,
Wow, how weird- the high cltv (see 100%) purchase loans are having problems.
Ya think.
Please corret me where I am wrong and forgive me for not reading all of the preceding 94 comments, but it seems to me that all the rating agencies are talking more about how we got where we are than where we are going. So, where are we going wrt underwriting and all that other boring stuff that pays Tanta's bills?
At this point, the FED has to defend asset prices because they don't have a choice. Everyone sitting in cash waiting for the collapse better be prepared for the probability of three percent treasury bills as all CB's lower their rates. That is pretty much how former Federal Reserve governor Wayne Angell sees it happening.
Inflate or die.
Quincy k
this is what a anverage j6p thinks.
he has no idea about the fall of usd, fall of RE prices.
and the politicians will say what j6p wants to hear, yet as all politicians it will be a lie, and once they are elected, they will do whqat they have to do. they digg up a hole now, they must crawl into it ...
clintons are in cash, cheney and gwb are also in cash, and fed does what it needs to save the sysem