Robert, at some level, the traditional prime lender's definition of "willingness to repay" simply had a silent "without renegotiating it" tacked on the end. That's all.
We're in a situation where people just have to renegotiate debts, and calling them "unwilling to repay" is not, in my view, helping any.
tanta,
This is one of the very few places I;'m willing to disagree with your take on the situation. That means I'm probably wrong but here goes.
I don't think the modern borrower has much in the way of the first "C" character as applies to creditworthiness. Call it generational amnesia as it has been a quarter century since Morning In America. You and I get the cold pit of the stomach feeling at the prospect of the consequences of failing to live up to debt obligations. These borrowers are used to rolling negative residual values into their next two lease. A little financial pain as opposed to great pain on works on people who know what pain is in the first place.
Well it is an interesting exercise to say what ought to be done and what ought to happen and what people ought to do. However, as almost always in the real world, things just happen, one thing after another, and what happens as people stumble forward is what dictates the outcome. People adjust to reality ad hoc, they don't do what intelligent people say they ought to do ahead of time with foresight.
Well, this was most enlightening. But there is a strong tendency in this country to demonize the poor ( and worship the wealthy). I think the prime borrowers who no longer have the subprime escape hatch will still blame the subprime "inferiors" for their problems. "they messed it up for us". It is part of the psychology of people under stress to scape goat - and then, as I said there's the perrenial domonizaiton of the poor. How could there be anything wrong with consuming to the max using any available means? That's the culture now. Things have changed indeed since the 60s when the three Cs were seriously executed. I don't know - but I doubt you'll get serious self examination and soul searching from the bulk of prime borrowers. Victims I tell you!!!
When I learnt the three C's, they were Character, Capacity and Collateral.
Certainly "Character" was quite a traditional alternate term for "Creditworthy."
I stopped using it about two or three weeks into my first job in the mortgage business. It seemed to me then, and still does today, that there were some really dangerous assumptions underlying the equation of "fastidious bill-payer" with "person of character."
In some ways this does, actually, set up the whole subprime demonization problem: Americans, with our puritan past and our long historical conflation of economic success with moral worth, can't stop seeing "people who can't pay their bills" as "people without character."
I wrote a post a while ago--I'll have to dig it out--about the extent to which I prefer not to hang out with the people I prefer to make loans to. As a mortgage lender, some smug self-righteous geek who spends his free time balancing his checking account (a pointless activity I personally haven't engaged in in more than a decade) and mailing checks with overnight mail to assure they get there not ten minutes after the due date is my kinda borrower. If I had to go out for drinks with people like that I'd never have survived to write about it.
Having a "spotless" credit record is a nice thing, and I'm happy for everyone who has never managed to pay a late fee. I've paid a few in my day, largely because life occasionally offered me more interesting things to think about than where I put the stamps I think I remember having purchased. So big damn deal.
Anyone who wants mortgage lenders to go back to being the self-appointed arbiters of "character" can count me out. Do you remember the days when we asked mortgage applicants if they planned on having babies? How many? Did they use contraception? Were they going to marry? When?
If you're too young to remember this kind of behavior, that's because the major pieces of fair lending regulation passed in the seventies and eighties put a stop to it. If you wish to tell me that this is what caused "the subprime mess," you're not going to convince me. We never had any business trying to discern "character." It never led us anywhere except discrimination or the kind of self-congratulatory WASP exceptionalism that ultimately wrecks the economy much more than a handful of free-livin' subprime borrowers ever will.
Of course "disorderly conduct" is not one of the holy trinity of "traditional" default drivers (job loss/illness/divorce). I added it because I don't feel the need to somehow make these default drivers "sympathetic" or "no fault" or something. There may not be that many people who get behind on their mortgage payments because they went on a tear one weekend and ended up facing 90 days in the county jail, but if there are and I could do a reasonable workout loan for them, I wouldn't hesitate. I've seen way more "criminal" conduct than that.
My other post worth reading, Making Sense of my World: Low Interest Rates - As Destructive as Usury?, gives a step by step look at the degree to which people become less able to improve their financial position through responsible household budgeting due to low interest rates. The leverage of reducing interest payments because of increasing payments is pitiful and hopeless when interest rates are low.
But I'd be awfully nervous about even "selective" loosening until house prices get back to earth.
Well, so would I. If you aren't nervous right now, you aren't paying attention.
I still think it might be possible to use the intervention to help control the house price correction. Not to stop it, but to try to line up the right people in the right order at the exits. Certainly you could argue that we're past that point.
But if I read one more article about how the GSEs should stop lending and hoard capital because now is not the time for them to be taking risks, I might lose my mind. (I do hope someone would notice . . .)
Take another look at this post. It is absolute non-sense that mortgage lending is complicated. We have allowed the banks to complicate things to hide their grossly irresponsible practices.
Mortgage lending is not complicated. Hiding what ought to be against the law and ought to be legislated as fraud is complicated.
People seem to forget that Bush associated consumption with patriotism and that instead of asking people to ration and sacrifice for the war he asked them to spend, spend, spend. The plan seemed to have been inflation through the banking system as war financing from the very beginning. So, if his was a plan how did it go so horribly awry? The war has gone on too long and has cost too much money and this whole idea that consumption works better than sacrifice hasn't played out so well. I'm sticking with this thesis for now primarily because it makes so many people so very uncomfortable.
Society has held that homeownership is a "public good", and in fact the evidence of peaceful, productive suburban life in America seems to support this belief. The reach for more and more subprime "customers" was therefore seen as a "good thing" by most.
The question is whether the "public good" idea is still valid. IMO, we took away many of the good-producing elements of homeownership, and there is only one way to get them back: we must devalue homeownership first:
-in favor of accumulating savings.
-in favor of living within our means.
-in favor of equitable government policy (towards non-homeowners).
The market is taking care of the above two. It will ultimately produce a cohort of homeowners that saved 20% for a downpayment and qualified on 33% of current documented income. Imagine the change in behavior, positive "public good" change, that this will produce.
Government, meanwhile, will work at cross purposes: by reducing rewards to savers (Fed interest rate cuts), clinging to no-equity lending (FHA), and otherwise continuing to promote reckless borrowing (with the likes of rate freeze plans).
In every government bailout plan you will hear the implicit message: "ownership good, at any cost; renting bad."
Excellent post!
At first I thought, "good point," then "uh-oh, she's rambling with too many points", but finally, "She really outlined the roots of the mortgage crises thoroughly."
Deborah, as far as I can tell from a rapid scan of your post--hey! one one failure to read past the first paragraph deserves another!--you are advocating a permanent credit crunch.
I don't think the modern borrower has much in the way of the first "C" character as applies to creditworthiness.
Rob't you're hanging around the wrong people or live in the wrong community if those are your common experiences.
I see lotsa and lotsa 'first C' in the near-prime & sub-primers in my world. People killing themselves to repay and trying like crazy to hang on to beat up old middle class homes.
I personally have never met a 'dead beat' though I will concede the stereo-type you suggest probably exists somewhere.
And realize - I am completely surrounded by folks (myself included) who would comprise near-prime or sub-prime. And while my world isn't as populous as yours I cover a pretty big swath of earth, Canada to Mexico & Rockies to Great Lakes, in my travels. I see nothing but the desire to re-pay by most all these 'sub-primers' even when it isn't in their obvious immediate economic self-interest to do so.
In fact it is somewhat amazing they are so doggedly trying to repay on such tired old dwellings... but then I guess they are 'home' and not an 'investment'.
People adjust to reality ad hoc, they don't do what intelligent people say they ought to do ahead of time with foresight.
and that nice distinction between intelligent people and ad hoc adjustin people (this B an instance of post hoc adjusting...take my word for it you intelligent wannabees).
Could be "intelligence" is assigned to people pretty much in the same way that "reality" is assigned to them: through the TV.
You figure Shiller got his inspiration for comparing this mess to the Great Depression from watchin TV? The man is lite on football and heavy on history...making him an obvious long shot for bein "intelligent" beside his football cheering colleagues...who just know the Pats are gonna win.
But I'd be awfully nervous about even "selective" loosening until house prices get back to earth.
Well, so would I. If you aren't nervous right now, you aren't paying attention.
That's part of the 'selective' I would gather - not letting people have easy money to buy stuff they can't afford or repay. On the other hand not being as tight toward transactions that make economic sense to both debtor & lender.
I think they once referred to that as 'underwriting' but then I've never been good with words.
If you were ever to do a follow up - I'd love to see a 'where do we go from here'.
Universal health care. Raise the minimum wage to a living wage. Invest in high-density affordable housing developments. Do something about college tuition inflation. Allow laundry in the back yard.
There is no way to go anywhere simply with financing mechanisms. I am "reactive" rather than "proactive" in a sense because I'm just part of the financing world. We aren't supposed to be driving the economy. Um. You know.
I'm still attached to the idea that people would save more money if they made more money. Call me a revolutionary.
Sometimes I wonder why, but I have had a steady job only 2 years out of the last 6.
My bills and mortgage are current.
Of course the big argument today is to celebrate my step son's birthday with a $40 meal for 5 persons or hold it back for unexpected bills.
Christmas this year for me and wife will be to buy her a warm coat.
The 25 inch TV died in the family room and was replaced by an old 20 inch.
So yea, if that is character, I have it. But don't think I am not envious of my neighbor, whose bill collectors call me to trace him, but has some really neat toys.
Excellent summary. 15 years ago, when I was a mortgage broker, I used to get rate sheets faxed to me by the subprime lenders (then "B paper") of the era (Long Beach Bank, etc..). The terms were laughable relative to prime loans(then "A paper"). 70% LTV, interest rates that were 2% higher, a six month cash reserve requirement. I never closed a subprime loan because the borrower had to have the perfect storm of bad credit, equity and large cash reserves.
The point about subprime loans propping up the RE market is a critical one that is over looked by the media. Without loose subprime loan standards the valuation boom in the white hot markets of CA, NV, AZ and FL would not have occured, at least not to nearly the same degree. IMO there are just a disportionately larger number of subprime people in those states, no I don't which to argue that opinion.
You make a comment about there not being more subprime customers now. But, in a synergistic way, loose sub prime criteria have created more customers in two forms. Form 1 is the Real Estate Speculator (not the true equity investor which is what I am). Form 2 is the loan fraud operator. Without the zero down investor loans that loose subprime products offered, those two customers would exist in far fewer numbers. From viewing individual foreclosure cases (and I review hundreds of them a month), it is my guesstimate that 15% of current defaults in my State are directly the result of loan fraud or speculation. It would not surprise me to learn that a third of all subprime defaults are from speculators and loan fraud.
Wow! Another in a series of brilliant posts! Brava!
It's worth considering what role the booming secondary market played in creating the bubble. From about 2001 on, Securitization became so profitable that the big Wall Street banks were literally clamoring for more loans to dump into their pools.
When the supply of subprime purchase-money borrowers started to dry up just before the crash, the big securitization sponsors went on a spree of mortgage-originator acquisitions. They wanted to "protect the conduit" of subprime loans available for securitization.
No-one really cared about the eventual tangent of the underlying loans, because (they thought) they were cashing out via a securitization within a couple of months of origination.
It will be quite interesting to see whether securitization sponsors end up having their feet held to the fire over losses in their pools. I guarantee that there's hardly a defaulted loan that meets the reps and warranties the sponsor made in its pooling agreement (the independent appraisal rep and the reasonable reasonable investigation of borrower's ability to repay rep are two that strike me as especially troublesome), and the sponsors know it (when they did the deal, they relied on reps from originators other upstream parties who, for the most part, don't exist any more). As bondholders find themselves taking control of securitization trusts, expect to see a bevy of actions by trustees and bondholders-in-possession against sponsors.
The thing for me is, vader, that if after 6 years of all that character you break down and blow it on a new cool TV and the coats, and this creates a problem for a few months with your mortgage payment, does this make you a "deadbeat" or just, well, human? Could we find it in our hearts to forgive you, or are you now the Person Without Character on whom we can blame the mess of the economy?
I'm as disgusted with overconsumption as the next high-class intellectual, but for heaven's sake, do we need the New Puritanism?
Universal health care. Raise the minimum wage to a living wage. Invest in high-density affordable housing developments. Do something about college tuition inflation. Allow laundry in the back yard.
Well in my world we at least have one of the five - you can hang your laundry anywhere you like.
Ttehank you Tanta,I would like to state that I have actually encountered true deadbeats,having spent more than a decade in risk management.they are somewhat rarer than honest AND competent Attorneys s.I also agree that highly selective loosening of credit will be necessary for a recovery.I have lived through several Cycles,and have seen the same thing,credit gets too loose,then too tight and spends little time in the sensible range.And finally,the Demonization of the poor and brown.I see this already occuring and it disgusts me.Social disruption always follows economic disruption and given the current state of our nation extreme abuses would not be surprising.As Ghandi said when asked what he thought of Western Civilization "It would be a good idea"
Tanta -
Excellent post. Although I admit to being quite ignorant about the internal workings of the system (albeit a bit less ignorant after reading your post), I have a question. My wife got into her first house back in the early 80's by taking over payments on an "assumable" loan. I wonder what happened to all the check boxes on "assumable" loans since then? She was able to get into a house with less than stellar credit, build up her equity and credit score, and walk away having made a few bucks. The previous owners walked away from a situation they couldn't deal with, without the stigma of a foreclosure/bankruptcy - and the lending institution kept getting payments on the loan. Why was this mechanism abandoned, - and might returning to assumable loans be a tiny part of the solution to the current fix?
Excellent piece. Though, with all due respect, a bit beside the point.
Turn a discerning, experienced eye (such as yourself, Tanta) on virtually any part of the housing/lending/securitization industries and you'll find part of the roots of the problem.
I prefer to leave simplistic or rigidly ideological finger-pointing to those who played a role in creating this credit/insolvency crisis. At least they're not just wasting their time; they rightly fear financial and reputational losses and, in some cases a stay in the penitentiary.
The global root of the problem -- regardless of the specifics -- is the abandonment of a very simple concept: The risk/reward tradeoff.
Those interested in avoiding the sort of flopping and twitching that Japan's property markets have experienced for 17 years now will ignore pleas to socialize these losses.
Universal health care. Raise the minimum wage to a living wage. Invest
in high-density affordable housing developments. Do something about
college tuition inflation. Allow laundry in the back yard.
We need more George Baileys in the world.
I follow on Blue Steels comment - whatever happened to 'assumeables'?
My first house we sold in the early 80s high interest rate phase and it was assumed by the borrower. It was a better loan than they could get because they had 'things' going against them - imperfect credit, multi-racial couple in a decidedly hostile environment, etc. They took over our loan and 25 years later still own the house, raised a brood of kids (sent away to college)... and are considered 'anchors' of that community (not everything is getting worse in the world). It worked for them - at least to get a clean record from which they moved higher up the prime ladder.
Is that going to be an option going forward or not? I understand lenders have made it harder to assume loans. Also, with all the icky products out there would people even want to assume some of that stuff?
great post. question: how does what happens to these risky loans down the line effect their initial availability? meaning, does the fact that they will eventually be bundled together and sold as less risky securities help hide the original bad approvals? and if so, was there a directive to loosen standards from above?
This post really hits home for me as I am living in Stockton, California and watching the train wreck firsthand. Foreclosures are skyrocketing, sold prices have dropped at least 25%, and our local economy is tanking. I watched in disbelief as median house prices rose to 8 times annual income, and I knew this was gonna end badly, but I had no idea how badly. What concerns me most is that we aren't anywhere near the end of this mess, and I don't see how our community is going to survive. Business owners all say "things are a little slow", but once prodded and commiserated with, they finally confess that they have never seen it this bad. Having been a small retailer since the early '80's, I have seen recessions, and this is truly far worse than I had ever imagined.
That said, I'd like to point out that in my 47 years, I had never met anyone who'd been foreclosed on, and now I personally know three families who just walked away. In one of the situations, they just overbought (750K house on 80K income). The other two families MEWED their way to financial disaster. It's common behavior now.
"Mortgage underwriting isnt really that difficult"
this could be a post in itself. If that's true, then why is so difficult to find a good UW? If I need to hire an accountant I can look for someone with an accounting degree, but there's no underwriting university. I have to go by referral. It's a very specialized skill and even thought the pay isn't bad (although it can be pretty boring) the talent pool is limited.
One of the consequences of boom and bust cycles in the industry is not having the talent to grow during a boom and how to keep good people during a bust. In Some ways the issues we're dealing with now are related with promoting temps and csr's to UW without adequate training.
after 6 years of all that character you break down and blow it on a new cool TV and the coats, and this creates a problem for a few months with your mortgage payment, does this make you a "deadbeat" or just, well, human?
it's like they say: the trouble with people is that they're only human.
One thing you should know is that except for FHA and VA loans, fixed rate loans are not originated as assumable. Only ARMs are.
However, you know those popular "hybrid ARMS"? The 5/1, 7/1? Those are not assumable until the 5 or 7 years are up. It says so in the note.
What "not assumable" really means in this context is, of course, "not assumable" at the current terms. Any lender can approve an assumption of a fixed rate loan if it wants to: the note does not prohibit assumptions, it simply gives the lender the right to refuse to allow them.
So an ARM loan written on a standard (Fannie/Freddie note) can be assumed at the existing terms by a new qualified borrower. If the loan's rate is fixed, the lender can require that the rate be raised as part of the assumption. Obviously, that takes a lot of the attraction out of the assumption.
There is possibly going to be some litigation over this. Back in the 80s when assumptions were more common, there was enough question about the enforceability of "due on sale" clauses in mortgage notes that lenders really didn't have much choice but to allow assumptions, even when they'd rather do a new purchase loan (to get that rate up to market).
The general consensus in the last 20 years has been that DOS clauses are sufficiently enforceable that borrowers cannot force lenders to accept assumptions. (The assumption involves transfer of title to the assumptor; that's "sale" of the property; the note says the whole loan balance is due on sale. Therefore an assumption is an exception to enforcement of DOS.)
FHA has chugged along still making assumable fixed rate mortgages this whole time, proving once again that the best way to be positioned to "innovate" is to keep doing it the way you always did.
Having been a small retailer since the early '80's, I have seen recessions, and this is truly far worse than I had ever imagined.
chickenlittle - it's like the farm crisis here in the midwest in the mid-80s. All the character in the world can't overcome those kinds of problems. All 'character' can do is give you personal strength and determination to start over, hopefully a little wiser.
Hopefully you make it - if so console & comfort others who aren't as fortunate, there's really not much else you can do other than give to food shelves & Loaves & Fishes, Salvation Army, etc.
chickenlittle - it's like the farm crisis here in the midwest in the mid-80s. All the character in the world can't overcome those kinds of problems. All 'character' can do is give you personal strength and determination to start over, hopefully a little wiser.
I think it's the rate of decline that some are worried about. My part of the country (western NY) has been in steady decline since manufacturing moved out in the '70s, but that's taken decades to happen. Those who haven't fled, have had time to dig in and get comfortable with new strategies. It wasn't a CRASH. I think California is experiencing a sort of crash.
FHA has chugged along still making assumable fixed rate mortgages this whole time, proving once again that the best way to be positioned to "innovate" is to keep doing it the way you always did.
My first loan was FHA - the one the new buyer assumed. It was a very good loan for a kid just out of college living in a somewhat depressed Midwest factory town with high unemployment... that would have been me. I had decent future income potential but almost no credit history and questionable collateral quality (another beat up old Midwestern home)... but the price was right (only 1.5 times my salary at the time... throw in my wife's part time job and it was 1:1).
For you people hitting your head on the coasts - there are still a lot of places like this out in the Heartland where you could buy at 1:1. They make pretty good places to 'start over' though you will have to make your own excitement.
dryfly said: "...They took over our loan and 25 years later still own the house, raised a brood of kids (sent away to college)... and are considered 'anchors' of that community (not everything is getting worse in the world). It worked for them - at least to get a clean record from which they moved higher up the prime ladder..."
That story is (another) one of the many reasons for my bullishness. Twenty+ years ago, I was sub-prime, too, and so were all my peers. As people grow older their careers advance, they accumulate assets, they have new opportunities afforded them by the attachments and connections they've made, and they get smarter.
Forget breaking-down the composition of the mortgage market by prime, Alt-A, sub-prime, region, etc. Break it down by the age of the borrower. I think that would inform the discussion about the mortgage market in a whole new way.
I spent 20+ years in the "sub prime" space before it was called sub prime, from autos, consumerr finance to 1st & 2nd mortgages. Such lending can and should be done. But each loan has to be underwritten. That means looking at the bureau report, getting reasons for the blemishes,verifying income not just by looking at pay stubs but calling the employer. Only then can you evaluate the ability of the borrower to have a reasonable chance of repaying the loan. Notice, I don't mention FICO scores. My own judgement is that they are a very bad predictor for non prime borrowers. The came into use in the mistaken belief that they were a proxy for real underwritting. They were also9 used because they permitted "automated" underwriting. I'm sorry but as the present debacle shows, it doesn't work. Oh yes, there were far more turn downs than approvals. Which is the way it should be. You do the borrower or yourself as the lender no favors for putting people in to loans they have no reasonable hope of paying.
My recollection is that the old loan assumption died with a federal law in the 1980s that allowed home mortgage lenders to enforce due on sale clauses despite state law to the contrary.
Lenders of course, when presented with an assumption, always said they would enforce that clause since that required the person trying to assume the existing loan to get a new loan and to pay the required points and fees and often a higher interest rate.
It just wasn't "fair" to the bankers to let someone assume a 4% loan when new loans were being written at a higher rate, or so the bankers convinced Congress.
When I entered the mortgage business, UWs were the spoiled babies of the mortgage department. They were.
In those days we closed our own loans (I started in a thrift). We had "closers" who examined title commitments, calculated all payoffs, coped with mineral leases and encroachments, wrote their HUDs, issued their checks, balanced it all, and personally sat down with borrowers at tables at which this thing called a "closing" occurred.
Those women--they were almost exclusively women--worked at least as hard and needed at least as many skills as the underwriters, but they made signficantly less.
We also had "loan processors"--almost exclusively women--who had more skills than your average "para-underwriter" has today. They analyzed credit reports and read purchase contracts. They understood the varieties of "stable income" and requested the exact documentation needed (they knew when you need a 1065 and when you can get by with a 1040). They did absolutely everything needed with a loan package except lean back in your chair, scratch your chin, and make an important decision.
That last bit we left up to underwriters, who, in my thrift, were at least 50% male and whose salaries were the highest in the whole shop ('cept for the loan officers, of course, who were nearly exclusively male).
So we got rid of the closers (all that is outsourced to title companies and attorneys). We got rid of the processors (if you don't get docs, you don't need anyone to "process" docs). We put laptops in front of the loan officers that approve most of their loans with an AUS.
Eventually, "underwriter" as a job function fell to the level of the old processor and closer jobs. Men got out, by and large. It also became a high-stress job once it changed from being rewarded for its conservatism to being beaten up for not getting with the program. Most of the really good underwriters I know quit because they just weren't paid enough to deal with the sales managers wandering through with ball bats. A lot of them became loan officers or brokers. Why not? You make more money that way.
One result of this is that there's very little generational transmission going on of underwriting skills. I learned most of what I know from a few crusty old farts who took the time to teach me the craft. That, and the habit we had of passing weird files around the office so everyone could see them, on the grounds that exposure to relatively rare deals is good for the whole staff. That kind of training-by-doing got flushed out in the "productivity metric" bonanza. If there are still canny old underwriters around who are willing to train the puppies, they're not allowed to do it because some consultant requires x number of approved files per day or no "incentive pay."
That story is (another) one of the many reasons for my bullishness.
I'm not all that bearish Seb... I just think we're gonna have a shit storm and a lot of folks will need to do laundry. But that's why they make washing machines....
David Pearson wrote "Society has held that homeownership is a "public good", and in fact the evidence of peaceful, productive suburban life in America seems to support this belief."
This NY Times article is interesting as the writer surmises that property ownership by ancestors contributed to the success of prominent African Americans today.
"little generational transmission going on of underwriting skills"
Agreed. Is it a strange that this info is supplied by "oral tradition" and not by a standard curriculum? It's like the boom and bust of each cycle prevents the establishment of the establishment of professional standards. I'd love to see these processes automated (just getting rid of the typewriter has done wonders) but without a knowledgable human being involved in the process (the ghost in the machine) it's too easy to rig.
As for the rubber stamp "para-underwriters" how likely would they be willing to "get with the program" if it meant losing some sort of accreditation.
The law that made unuthorized assumptions callable was the Garn St. Germain Act. Assumable loans still exist, but only represent a tiny fraction of the market, as they are priced at a premium. Assumable loans will never return, IMO.
Tanta, your anti-moralistic, counter-culture outlook colors your proposed solutions too much. Sometimes the stern-faced, granite jawed killjoys are right. One (wo)man's credit crunch is another's sound money economy.
FWIW, I don't like drinking with them either, which is why I never drink alone.
I am new to this site, having only discovered it earlier this holiday weekend. It is fabulous. And, until I read this post, I never knew about the original purpose for "subprime" lending.
I have two questions which may have been explored on this site in the past.
(1) Isn't one of the big causes for the current credit fiasco the seeming near-total decoupling of lending from banking? After all, if it's not your money you're lending out why be so picky about who you lend it to?
(2) Isn't one of the turbochargers for this past real estate runup the mid-90s change in tax law that gave homeowners a huge tax break on gain from a mere two-year window of ownership? My impression is that this tax policy triggered a huge chunk of the dreadful granite and stainless steel remodels in the past half dozen years which, in turn, pushed up the prices in established neighborhoods.
You really really know your stuff don't you, Tanta. Thanks a lot ! I particularly got a sense of "grokking" as I followed your argument about the step-down aspect of subprime availability for prime mortgages.
It's the "progressive" media types who have created the stereotype of the "subprimate," the better to make a show of their agonizing solidarity with the downtrodden.
While I see your point with this statement
"Forget breaking-down the composition of the mortgage market by prime, Alt-A, sub-prime, region, etc. Break it down by the age of the borrower. I think that would inform the discussion about the mortgage market in a whole new way."
I would tend to disagree and say that the "age of borrower" is exactly the problem. It would be an interesting study, but just think about all the late 30, early 40 somethings losing their McMansions. These are the peak earning years for these people, a big financial hit here is a blow not soon recovered from.
I hope with all my might you are right and this all isn't as bad as some people say.
Uh, no. Some of us are lowly renters and don't itemize. Some of us are savers and our interest income is taxed as ordinary income. Some of us even pay for our own health insurance. Most of us pay our bills on time. Last I checked, we don't get any middle-class welfare benefits such as the home mortgage interest deduction, and congress isn't clamoring to save us from our mistakes. What programs do you have in mind for us Tanta? I'm changing my handle to Ben Dover.
I don't miss stuff like rotary-dial phones, but clotheslines I miss. I have a clear, wonderful (30 year-old) memory of the smell of clean sheets dried from a summer breeze on an old-fashioned clothesline.
And you'll appreciate this, too. My current washing machine? Maytag, probably 35 years old, bought used from a high-school Home-Ec class.
Great post, Tanta -- the importance of rising property values in creating the current crisis is hard to overstate.
In 1996, Denver was one of the most affordable metro areas in the country; by 2001, it had become one of the least affordable. Fortunately, our double digit appreciation leveled off since then, and we are not in as much trouble as California, Arizona, and Las Vegas. Even so, both older neighborhoods and new subdivisions that had lots of 100% LTV purchases over the past 2 years are getting hammered by lower demand and falling values.
Beyond that, one factor that should be considered is the historic ratio of housing costs to wages. If memory serves, several years ago Atrios had a chart showing the ratios from the 1780's to the present -- what stood out was that current housing costs are a bigger portion of income than they ever have been in the past. Historically, housing expenses were 15-30% of monthly income; now, it's 30-50% or more, even with two income households.
Another factor in the property value bubble deflation -- housing costs are not determined by property values, but the cost of money. Atrios made the case that when interest rates went to historic lows, it immediately translated into higher property values. If people can afford a $2k monthly payment, that translates to a $280k mortgage at 6%; when rates were 5% or less, that $2k per month bought $320k or $350k of mortgage. With negative amortization Option ARMs, it paid for $700k California haciendas.
The cheap money policies of Alan Greenspan were the root cause of property value inflation since 2000; the introduction of the Option ARM and the decoupling of risk pricing from high LTV loans made the current train wreck inevitable, as soon as values stopped rising.
And you'll appreciate this, too. My current washing machine? Maytag, probably 35 years old, bought used from a high-school Home-Ec class.
From the days when Maytag actually made the parts. The stuff was so over engineered it made tanks look flimsy. You don't really want to see the sausage being made now. However clothes lines still work where allowed.
I worked at a mortgage lender for a few years and definitely remember hearing the sales force comment with wonder at what banks were buying. I literally quote from memory, "Hey, I wouldn't lend to someone with a 70% back ratio, but they must know something I don't." I'm still at a loss as to how to explain why a bank would design a product that would purposefully ask for less information. If they saw a reason to be flexible on income/asset rules (which I still think was a good idea in principle) why a NINA? Why not ask what it is and give a higher-rate, higher-ratio loan after a careful risk assessment? It would certainly avoid the self-selection bias of borrowers that end up in the shaky loan programs. And stated loans were obviously just an invitation to fraud, intentional or not.
I'm still convinced that a solid government-regulated appraisal system (or even a government run) is going to be the ultimate answer. Appraisals are rough to do and quite subjective, yes. But if you were an appraiser in the past 10 years you couldn't help but notice an incentive to inflate, especially when it seemed perfectly legitimate to (judging by comparable house sales in areas). Loan officers wouldn't refer their borrowers to you if you came back with houses that were on the low end of the price scale. And I can't imagine banks knew what they were dealing with when the sheer diversity of appraisal companies and appraisers in each of their supposedly homogenous loan pools.
Nationally certified appraisers were a step in the right direction, but any model that competes to appraise is going to be inherently flawed if it's not a monopoly; you're going to be incentivized towards inflating prices because your purchasers are commission-driven, and there's a multi-year lag time before the loans you inflate begin to default enough for a bank to stop using you (enough time for other newer companies to take the place.) I wouldn't forbid a secondary appraisal market from surfacing (for banks that thought the government's appraisal system was too conservative) but a system that eliminates competitive incentive to inflate home-value prices would certainly help guard against valuation bubbles.
if you want more detailed explanations of mortgage stuff... I recommend you read "The Compleat UberNerd" collections by Tanta.
you can find them by looking on the CalculatedRisk homepage... there is a link for them all at the top of the page
(it's in the grey bar between "About CR and Tanta" and "Email for Cr|Email for Tanta"
There are some smart cookies around here... (I'm not one of them, I read everyday, but rarely have anything of use to post) I've learned more here in 1 year than I would have ever thought possible!
the banks knew something significant that the mortgage lender did not: that the loans could be securitized for large profits and the risk unloaded elsewhere.
As for your suggestion... I'm not sure that i would be for mandatory govt only appraisals... then you get political tinkering (imagine... houses really will only go up in value since property tax is based on property values)
the free market can resolve this problem IF markets are allowed to take losses.
the losses will quiet the desire for mortgage securitizations. inability to unload risky debt into MBS would force banks to hold the loans on their books. This of course would make them an interested party in the loan. This of course would make them more vigilant about those to whom they lend.
problem solved. (it is already solving itself)
Instead we have a Frankenstein system of offloading risk and combine that with subsequent govt guarantees and now possible bailout of the losers... this creates a "no risk" mirage... encouraging risky behaviour.
we bought our home in wpb for $27000 in 71 and got the homestead exemption which capped property taxes at 3% a year and the appraised value.the appraisal now is $99000 for taxes.i saw on the net a house same developement same lot size same model home built in the same year two streets over close for $282000 it seems the market did not proceed in an orderly manner.like you said first they used subprime to strip equity from the elderly homeowners then they used it on new buyers now it's a big mess, but for the incompent and corrupt leadership of the bushes george and jeb, leaving people stuck with a pig in a poke and people are still taking the bait
(2) Isn't one of the turbochargers for this past real estate runup the mid-90s change in tax law that gave homeowners a huge tax break on gain from a mere two-year window of ownership? My impression is that this tax policy triggered a huge chunk of the dreadful granite and stainless steel remodels in the past half dozen years which, in turn, pushed up the prices in established neighborhoods.
flaminia | 11.25.07 - 2:10 pm
Flaminia-
I've been reading this blog since Feb. and this aspect has hardly been discussed.
I agree that it should be discussed-- the takeoff in RE prices starts in 1996, not in 2001.
I guess I'm more referring to something along the lines of what already exists with FHA appraisers.
I'm just seeing a multi-year lag between the loan origination and the time a bank recognizes an inflated appraisal which combined with economic pressure to inflate prices on appraisal companies, causes inevitable unsustainable price increases across the board. These eventually infect prime loans that can no longer sell or refi when in trouble, and therefore is creating negative externalities to the entire industry, not just to the banks that foolishly hold these loans. A industry-wide standard for pricing homes would lessen the propensity to inflate and would limit this effect.
On a different note, has the impact of lowered property taxes been fully priced into the muni-bond markets? I'd imagine there's some risk-adjustments to do on non-guaranteed municipal bonds as their projected cash flows start to dry up, no?
Inflation adjusted median home prices rose from $125,000 in 1997 to $152,000 in 2001. In 2006, the median home price was $240,000. However, this does not tell the whole story because the price of real estate is only one part of the problem. In 2005, homeowners harvested $750 billion in NET equity, two thirds of which were used for credit card debt and home renovations. Those were unrealized gains. Data is from the Federal Reserve. It wasnt so much a housing part as a debt party.
Note: IMCO the "market" didn't get us into this mess, and it's a cop out to say that it did. Implicit guaranteeing by the govt, absurd interest rates set by the quasi-gov fed and lunatic, OPM buying by govt. run investment shops got us into this mess.
Second note: I'm incredibly ignorant. Hey, at least I recognize it.
I did a lot of reading on social aspects of the Depression once upon a time. Before it hit, the poor and out-of-work were demonized by the prosperous employed: anyone who really wanted to, could succeed; so if you didn't, it was because you didn't want to work, or were defective in some way (the latter was applied especially to European immigrants). You were a bum.
When the prosperous began losing their jobs and resources in great quantity and began hanging out on the street scratching for a few dimes, those who were still employed called them bums. There next came a vast identity crisis; after much turmoil, the groupthink became 'F*ck this; I'm the same as I ever was. We been screwed!'
And then everybody started going after Wall Street and the evil bankers. The financial establishment was hated through the 30s and beyond. As were industrialists, slumlords, you name it. All the former stars of the economy that everybody looked up to.
I'm expecting this again, Fox News or no Fox News.
Two explanations why "assumable loans" and "resi mortgage underwriter" are unlikely to ever return:
1) In late 80 and early 90 one of the main conduits of criminal fraud in obtaining loand was through the "assumability" clause. In fact FBI produced a position paper about it, since there were business models getting created for the sole purpose of exploiting the "assumability loophole" in some loans. I learned about this when one of my neighbours went to a federal prison. Trying to come up with complex regulation of who and how can assume the loan (and related enforcement apparatus) was deemed impractical. The consesus was just to charge premium for assumability that would automaticaly make the criminal schemes obsolete.
2) The very existence of subjective "underwriter" person makes the lender open to lawsuits against red-lining on racial grounds. I've seen a paper prepared by BofA branch in Long Beach,CA that detailed such lawsuits agains them by some organisation defending the rights of the black people (during the racial riots in LA related to the Rodney King case.) One of the conditions of obtaining a settlement was that BofA would switch to a underwriting sytem based purely on statistical analysis.
Probably nobody is going to read this anyway, but what the heck.
Bob Dobbs,
The evil rich theme was popular in the 30's. That's the plot for so many Marx Bros., 3-Stooges, Mae West, etc. films (I'm an intellectual). It was popular to make fun of the rich and pompous....very funny too.
"When I learnt the three C's, they were Character, Capacity and Collateral. Character and FICO score are not the same thing at all."
Yep, that was before the ACORNs of the world. Fair credit worries were as much a catalyst for FICO and other credit new wave analysis as much as the need for speed.
Started this post at 8 o'clock in the morning, finished at 5:15 PM,... well I was called away for a while, but it's still very long, and of course well worth the effort to read. The thoughtful responses seem to confirm the longer the post the fewer the rabble.
One thing that troubles me is people in my industry trying to blame things that are not at all the problem. Technology, automation and innovative produts are not the cause of our current situation.
As for subprime, it was never fully defined in the first place, but a good many of these early loans were for people who had bad credit. They were mostly full doc loans and likely met most other traditional guidelines.
What happened was, because of overheated appreciation of real property, investors took extra risk by loaning money to people who were under qualified in many different ways; LTV, income, credit and occupancy. When you started to combine many of these attributes , called layering, things started to unravel as appreciation started to slow.
Even if assumable loans were allowed again no one is going to assume a loan with little or no equity. Zero percent down, I/O and HELOCing all make assuming unattractive.
"A humming RE market keeps those cash-out appraisals plausible."
And "plausible" is the right word here. Not "correct" or "reasonable."
I'm going to get all copy-editor on you though, for your inconsistant use of diaereses. You shouldn't mix naiveté and naïve. What would Zoë from Zaïre think?
Thank you Tanta for explaining subprime to a non-RE professional.
It appears to be increasingly certain that the problem known as Peak Oil will become obvious by the end of the decade. If so, all the suburban build-out that requires commuting to employment will get severely marked down. That in turn implies that residential RE valuations will continue to decline indefinitly.
....willingness to repay debt...
This IMO is where the lender's models are no longer in sync with reality.
Robert, at some level, the traditional prime lender's definition of "willingness to repay" simply had a silent "without renegotiating it" tacked on the end. That's all.
We're in a situation where people just have to renegotiate debts, and calling them "unwilling to repay" is not, in my view, helping any.
No debt since 1998. Never wanted to be a slave to the credit machine.
tanta,
This is one of the very few places I;'m willing to disagree with your take on the situation. That means I'm probably wrong but here goes.
I don't think the modern borrower has much in the way of the first "C" character as applies to creditworthiness. Call it generational amnesia as it has been a quarter century since Morning In America. You and I get the cold pit of the stomach feeling at the prospect of the consequences of failing to live up to debt obligations. These borrowers are used to rolling negative residual values into their next two lease. A little financial pain as opposed to great pain on works on people who know what pain is in the first place.
When I learnt the three C's, they were Character, Capacity and Collateral. Character and FICO score are not the same thing at all.
I'll buy most of this. But I'd be awfully nervous about even "selective" loosening until house prices get back to earth.
Well it is an interesting exercise to say what ought to be done and what ought to happen and what people ought to do. However, as almost always in the real world, things just happen, one thing after another, and what happens as people stumble forward is what dictates the outcome. People adjust to reality ad hoc, they don't do what intelligent people say they ought to do ahead of time with foresight.
Well, this was most enlightening. But there is a strong tendency in this country to demonize the poor ( and worship the wealthy). I think the prime borrowers who no longer have the subprime escape hatch will still blame the subprime "inferiors" for their problems. "they messed it up for us". It is part of the psychology of people under stress to scape goat - and then, as I said there's the perrenial domonizaiton of the poor. How could there be anything wrong with consuming to the max using any available means? That's the culture now. Things have changed indeed since the 60s when the three Cs were seriously executed. I don't know - but I doubt you'll get serious self examination and soul searching from the bulk of prime borrowers. Victims I tell you!!!
When I learnt the three C's, they were Character, Capacity and Collateral.
Certainly "Character" was quite a traditional alternate term for "Creditworthy."
I stopped using it about two or three weeks into my first job in the mortgage business. It seemed to me then, and still does today, that there were some really dangerous assumptions underlying the equation of "fastidious bill-payer" with "person of character."
In some ways this does, actually, set up the whole subprime demonization problem: Americans, with our puritan past and our long historical conflation of economic success with moral worth, can't stop seeing "people who can't pay their bills" as "people without character."
I wrote a post a while ago--I'll have to dig it out--about the extent to which I prefer not to hang out with the people I prefer to make loans to. As a mortgage lender, some smug self-righteous geek who spends his free time balancing his checking account (a pointless activity I personally haven't engaged in in more than a decade) and mailing checks with overnight mail to assure they get there not ten minutes after the due date is my kinda borrower. If I had to go out for drinks with people like that I'd never have survived to write about it.
Having a "spotless" credit record is a nice thing, and I'm happy for everyone who has never managed to pay a late fee. I've paid a few in my day, largely because life occasionally offered me more interesting things to think about than where I put the stamps I think I remember having purchased. So big damn deal.
Anyone who wants mortgage lenders to go back to being the self-appointed arbiters of "character" can count me out. Do you remember the days when we asked mortgage applicants if they planned on having babies? How many? Did they use contraception? Were they going to marry? When?
If you're too young to remember this kind of behavior, that's because the major pieces of fair lending regulation passed in the seventies and eighties put a stop to it. If you wish to tell me that this is what caused "the subprime mess," you're not going to convince me. We never had any business trying to discern "character." It never led us anywhere except discrimination or the kind of self-congratulatory WASP exceptionalism that ultimately wrecks the economy much more than a handful of free-livin' subprime borrowers ever will.
Of course "disorderly conduct" is not one of the holy trinity of "traditional" default drivers (job loss/illness/divorce). I added it because I don't feel the need to somehow make these default drivers "sympathetic" or "no fault" or something. There may not be that many people who get behind on their mortgage payments because they went on a tear one weekend and ended up facing 90 days in the county jail, but if there are and I could do a reasonable workout loan for them, I wouldn't hesitate. I've seen way more "criminal" conduct than that.
Just reading the first paragraph, well, that is the whole problem.
Mortgages have never really been complicated, imho. They ought to always have required 25% down payment.
The absurdity of adjusting qualifications based on the interest rate is the problem.
In my post Making Sense of my World: Subprime, Spending and Lending Laws I give a template for responsible lending that ought to be law. We can argue how it might be tinkered with, but it is the responsible, economically strong model.
My other post worth reading, Making Sense of my World: Low Interest Rates - As Destructive as Usury?, gives a step by step look at the degree to which people become less able to improve their financial position through responsible household budgeting due to low interest rates. The leverage of reducing interest payments because of increasing payments is pitiful and hopeless when interest rates are low.
But I'd be awfully nervous about even "selective" loosening until house prices get back to earth.
Well, so would I. If you aren't nervous right now, you aren't paying attention.
I still think it might be possible to use the intervention to help control the house price correction. Not to stop it, but to try to line up the right people in the right order at the exits. Certainly you could argue that we're past that point.
But if I read one more article about how the GSEs should stop lending and hoard capital because now is not the time for them to be taking risks, I might lose my mind. (I do hope someone would notice . . .)
Me again...
Take another look at this post. It is absolute non-sense that mortgage lending is complicated. We have allowed the banks to complicate things to hide their grossly irresponsible practices.
Mortgage lending is not complicated. Hiding what ought to be against the law and ought to be legislated as fraud is complicated.
People seem to forget that Bush associated consumption with patriotism and that instead of asking people to ration and sacrifice for the war he asked them to spend, spend, spend. The plan seemed to have been inflation through the banking system as war financing from the very beginning. So, if his was a plan how did it go so horribly awry? The war has gone on too long and has cost too much money and this whole idea that consumption works better than sacrifice hasn't played out so well. I'm sticking with this thesis for now primarily because it makes so many people so very uncomfortable.
Tanta,
Society has held that homeownership is a "public good", and in fact the evidence of peaceful, productive suburban life in America seems to support this belief. The reach for more and more subprime "customers" was therefore seen as a "good thing" by most.
The question is whether the "public good" idea is still valid. IMO, we took away many of the good-producing elements of homeownership, and there is only one way to get them back: we must devalue homeownership first:
-in favor of accumulating savings.
-in favor of living within our means.
-in favor of equitable government policy (towards non-homeowners).
The market is taking care of the above two. It will ultimately produce a cohort of homeowners that saved 20% for a downpayment and qualified on 33% of current documented income. Imagine the change in behavior, positive "public good" change, that this will produce.
Government, meanwhile, will work at cross purposes: by reducing rewards to savers (Fed interest rate cuts), clinging to no-equity lending (FHA), and otherwise continuing to promote reckless borrowing (with the likes of rate freeze plans).
In every government bailout plan you will hear the implicit message: "ownership good, at any cost; renting bad."
Excellent post!
At first I thought, "good point," then "uh-oh, she's rambling with too many points", but finally, "She really outlined the roots of the mortgage crises thoroughly."
It's the best explanation I've read.
Deborah, as far as I can tell from a rapid scan of your post--hey! one one failure to read past the first paragraph deserves another!--you are advocating a permanent credit crunch.
Whatever. As you say, it's simple.
I don't think the modern borrower has much in the way of the first "C" character as applies to creditworthiness.
Rob't you're hanging around the wrong people or live in the wrong community if those are your common experiences.
I see lotsa and lotsa 'first C' in the near-prime & sub-primers in my world. People killing themselves to repay and trying like crazy to hang on to beat up old middle class homes.
I personally have never met a 'dead beat' though I will concede the stereo-type you suggest probably exists somewhere.
And realize - I am completely surrounded by folks (myself included) who would comprise near-prime or sub-prime. And while my world isn't as populous as yours I cover a pretty big swath of earth, Canada to Mexico & Rockies to Great Lakes, in my travels. I see nothing but the desire to re-pay by most all these 'sub-primers' even when it isn't in their obvious immediate economic self-interest to do so.
In fact it is somewhat amazing they are so doggedly trying to repay on such tired old dwellings... but then I guess they are 'home' and not an 'investment'.
From intelligent James above
People adjust to reality ad hoc, they don't do what intelligent people say they ought to do ahead of time with foresight.
and that nice distinction between intelligent people and ad hoc adjustin people (this B an instance of post hoc adjusting...take my word for it you intelligent wannabees).
Could be "intelligence" is assigned to people pretty much in the same way that "reality" is assigned to them: through the TV.
You figure Shiller got his inspiration for comparing this mess to the Great Depression from watchin TV? The man is lite on football and heavy on history...making him an obvious long shot for bein "intelligent" beside his football cheering colleagues...who just know the Pats are gonna win.
tanta - outstanding piece of work. One of your best so far.
If you were ever to do a follow up - I'd love to see a 'where do we go from here'.
Just a hint.
But I'd be awfully nervous about even "selective" loosening until house prices get back to earth.
Well, so would I. If you aren't nervous right now, you aren't paying attention.
That's part of the 'selective' I would gather - not letting people have easy money to buy stuff they can't afford or repay. On the other hand not being as tight toward transactions that make economic sense to both debtor & lender.
I think they once referred to that as 'underwriting' but then I've never been good with words.
If you were ever to do a follow up - I'd love to see a 'where do we go from here'.
Universal health care. Raise the minimum wage to a living wage. Invest in high-density affordable housing developments. Do something about college tuition inflation. Allow laundry in the back yard.
There is no way to go anywhere simply with financing mechanisms. I am "reactive" rather than "proactive" in a sense because I'm just part of the financing world. We aren't supposed to be driving the economy. Um. You know.
I'm still attached to the idea that people would save more money if they made more money. Call me a revolutionary.
Sometimes I wonder why, but I have had a steady job only 2 years out of the last 6.
My bills and mortgage are current.
Of course the big argument today is to celebrate my step son's birthday with a $40 meal for 5 persons or hold it back for unexpected bills.
Christmas this year for me and wife will be to buy her a warm coat.
The 25 inch TV died in the family room and was replaced by an old 20 inch.
So yea, if that is character, I have it. But don't think I am not envious of my neighbor, whose bill collectors call me to trace him, but has some really neat toys.
Excellent summary. 15 years ago, when I was a mortgage broker, I used to get rate sheets faxed to me by the subprime lenders (then "B paper") of the era (Long Beach Bank, etc..). The terms were laughable relative to prime loans(then "A paper"). 70% LTV, interest rates that were 2% higher, a six month cash reserve requirement. I never closed a subprime loan because the borrower had to have the perfect storm of bad credit, equity and large cash reserves.
The point about subprime loans propping up the RE market is a critical one that is over looked by the media. Without loose subprime loan standards the valuation boom in the white hot markets of CA, NV, AZ and FL would not have occured, at least not to nearly the same degree. IMO there are just a disportionately larger number of subprime people in those states, no I don't which to argue that opinion.
You make a comment about there not being more subprime customers now. But, in a synergistic way, loose sub prime criteria have created more customers in two forms. Form 1 is the Real Estate Speculator (not the true equity investor which is what I am). Form 2 is the loan fraud operator. Without the zero down investor loans that loose subprime products offered, those two customers would exist in far fewer numbers. From viewing individual foreclosure cases (and I review hundreds of them a month), it is my guesstimate that 15% of current defaults in my State are directly the result of loan fraud or speculation. It would not surprise me to learn that a third of all subprime defaults are from speculators and loan fraud.
Wow! Another in a series of brilliant posts! Brava!
It's worth considering what role the booming secondary market played in creating the bubble. From about 2001 on, Securitization became so profitable that the big Wall Street banks were literally clamoring for more loans to dump into their pools.
When the supply of subprime purchase-money borrowers started to dry up just before the crash, the big securitization sponsors went on a spree of mortgage-originator acquisitions. They wanted to "protect the conduit" of subprime loans available for securitization.
No-one really cared about the eventual tangent of the underlying loans, because (they thought) they were cashing out via a securitization within a couple of months of origination.
It will be quite interesting to see whether securitization sponsors end up having their feet held to the fire over losses in their pools. I guarantee that there's hardly a defaulted loan that meets the reps and warranties the sponsor made in its pooling agreement (the independent appraisal rep and the reasonable reasonable investigation of borrower's ability to repay rep are two that strike me as especially troublesome), and the sponsors know it (when they did the deal, they relied on reps from originators other upstream parties who, for the most part, don't exist any more). As bondholders find themselves taking control of securitization trusts, expect to see a bevy of actions by trustees and bondholders-in-possession against sponsors.
The thing for me is, vader, that if after 6 years of all that character you break down and blow it on a new cool TV and the coats, and this creates a problem for a few months with your mortgage payment, does this make you a "deadbeat" or just, well, human? Could we find it in our hearts to forgive you, or are you now the Person Without Character on whom we can blame the mess of the economy?
I'm as disgusted with overconsumption as the next high-class intellectual, but for heaven's sake, do we need the New Puritanism?
Universal health care. Raise the minimum wage to a living wage. Invest in high-density affordable housing developments. Do something about college tuition inflation. Allow laundry in the back yard.
Well in my world we at least have one of the five - you can hang your laundry anywhere you like.
Ttehank you Tanta,I would like to state that I have actually encountered true deadbeats,having spent more than a decade in risk management.they are somewhat rarer than honest AND competent Attorneys s.I also agree that highly selective loosening of credit will be necessary for a recovery.I have lived through several Cycles,and have seen the same thing,credit gets too loose,then too tight and spends little time in the sensible range.And finally,the Demonization of the poor and brown.I see this already occuring and it disgusts me.Social disruption always follows economic disruption and given the current state of our nation extreme abuses would not be surprising.As Ghandi said when asked what he thought of Western Civilization "It would be a good idea"
Tanta -
Excellent post. Although I admit to being quite ignorant about the internal workings of the system (albeit a bit less ignorant after reading your post), I have a question. My wife got into her first house back in the early 80's by taking over payments on an "assumable" loan. I wonder what happened to all the check boxes on "assumable" loans since then? She was able to get into a house with less than stellar credit, build up her equity and credit score, and walk away having made a few bucks. The previous owners walked away from a situation they couldn't deal with, without the stigma of a foreclosure/bankruptcy - and the lending institution kept getting payments on the loan. Why was this mechanism abandoned, - and might returning to assumable loans be a tiny part of the solution to the current fix?
Thanks again for such excellent explanations.
Excellent piece. Though, with all due respect, a bit beside the point.
Turn a discerning, experienced eye (such as yourself, Tanta) on virtually any part of the housing/lending/securitization industries and you'll find part of the roots of the problem.
I prefer to leave simplistic or rigidly ideological finger-pointing to those who played a role in creating this credit/insolvency crisis. At least they're not just wasting their time; they rightly fear financial and reputational losses and, in some cases a stay in the penitentiary.
The global root of the problem -- regardless of the specifics -- is the abandonment of a very simple concept: The risk/reward tradeoff.
Those interested in avoiding the sort of flopping and twitching that Japan's property markets have experienced for 17 years now will ignore pleas to socialize these losses.
Universal health care. Raise the minimum wage to a living wage. Invest
in high-density affordable housing developments. Do something about
college tuition inflation. Allow laundry in the back yard.
We need more George Baileys in the world.
I follow on Blue Steels comment - whatever happened to 'assumeables'?
My first house we sold in the early 80s high interest rate phase and it was assumed by the borrower. It was a better loan than they could get because they had 'things' going against them - imperfect credit, multi-racial couple in a decidedly hostile environment, etc. They took over our loan and 25 years later still own the house, raised a brood of kids (sent away to college)... and are considered 'anchors' of that community (not everything is getting worse in the world). It worked for them - at least to get a clean record from which they moved higher up the prime ladder.
Is that going to be an option going forward or not? I understand lenders have made it harder to assume loans. Also, with all the icky products out there would people even want to assume some of that stuff?
TIA.
great post. question: how does what happens to these risky loans down the line effect their initial availability? meaning, does the fact that they will eventually be bundled together and sold as less risky securities help hide the original bad approvals? and if so, was there a directive to loosen standards from above?
My first house we sold in the early 80s high interest rate phase and it was assumed by the borrower.
My first house we sold in the early 80s high interest rate phase and it was assumed by the NEW BUYER.
Grrrrrr!!!
This post really hits home for me as I am living in Stockton, California and watching the train wreck firsthand. Foreclosures are skyrocketing, sold prices have dropped at least 25%, and our local economy is tanking. I watched in disbelief as median house prices rose to 8 times annual income, and I knew this was gonna end badly, but I had no idea how badly. What concerns me most is that we aren't anywhere near the end of this mess, and I don't see how our community is going to survive. Business owners all say "things are a little slow", but once prodded and commiserated with, they finally confess that they have never seen it this bad. Having been a small retailer since the early '80's, I have seen recessions, and this is truly far worse than I had ever imagined.
That said, I'd like to point out that in my 47 years, I had never met anyone who'd been foreclosed on, and now I personally know three families who just walked away. In one of the situations, they just overbought (750K house on 80K income). The other two families MEWED their way to financial disaster. It's common behavior now.
Love the post. In regards to your comments:
"Mortgage underwriting isnt really that difficult"
this could be a post in itself. If that's true, then why is so difficult to find a good UW? If I need to hire an accountant I can look for someone with an accounting degree, but there's no underwriting university. I have to go by referral. It's a very specialized skill and even thought the pay isn't bad (although it can be pretty boring) the talent pool is limited.
One of the consequences of boom and bust cycles in the industry is not having the talent to grow during a boom and how to keep good people during a bust. In Some ways the issues we're dealing with now are related with promoting temps and csr's to UW without adequate training.
after 6 years of all that character you break down and blow it on a new cool TV and the coats, and this creates a problem for a few months with your mortgage payment, does this make you a "deadbeat" or just, well, human?
it's like they say: the trouble with people is that they're only human.
Assumptions may well come back.
One thing you should know is that except for FHA and VA loans, fixed rate loans are not originated as assumable. Only ARMs are.
However, you know those popular "hybrid ARMS"? The 5/1, 7/1? Those are not assumable until the 5 or 7 years are up. It says so in the note.
What "not assumable" really means in this context is, of course, "not assumable" at the current terms. Any lender can approve an assumption of a fixed rate loan if it wants to: the note does not prohibit assumptions, it simply gives the lender the right to refuse to allow them.
So an ARM loan written on a standard (Fannie/Freddie note) can be assumed at the existing terms by a new qualified borrower. If the loan's rate is fixed, the lender can require that the rate be raised as part of the assumption. Obviously, that takes a lot of the attraction out of the assumption.
There is possibly going to be some litigation over this. Back in the 80s when assumptions were more common, there was enough question about the enforceability of "due on sale" clauses in mortgage notes that lenders really didn't have much choice but to allow assumptions, even when they'd rather do a new purchase loan (to get that rate up to market).
The general consensus in the last 20 years has been that DOS clauses are sufficiently enforceable that borrowers cannot force lenders to accept assumptions. (The assumption involves transfer of title to the assumptor; that's "sale" of the property; the note says the whole loan balance is due on sale. Therefore an assumption is an exception to enforcement of DOS.)
FHA has chugged along still making assumable fixed rate mortgages this whole time, proving once again that the best way to be positioned to "innovate" is to keep doing it the way you always did.
Having been a small retailer since the early '80's, I have seen recessions, and this is truly far worse than I had ever imagined.
chickenlittle - it's like the farm crisis here in the midwest in the mid-80s. All the character in the world can't overcome those kinds of problems. All 'character' can do is give you personal strength and determination to start over, hopefully a little wiser.
Hopefully you make it - if so console & comfort others who aren't as fortunate, there's really not much else you can do other than give to food shelves & Loaves & Fishes, Salvation Army, etc.
Good luck.
chickenlittle - it's like the farm crisis here in the midwest in the mid-80s. All the character in the world can't overcome those kinds of problems. All 'character' can do is give you personal strength and determination to start over, hopefully a little wiser.
I think it's the rate of decline that some are worried about. My part of the country (western NY) has been in steady decline since manufacturing moved out in the '70s, but that's taken decades to happen. Those who haven't fled, have had time to dig in and get comfortable with new strategies. It wasn't a CRASH. I think California is experiencing a sort of crash.
FHA has chugged along still making assumable fixed rate mortgages this whole time, proving once again that the best way to be positioned to "innovate" is to keep doing it the way you always did.
My first loan was FHA - the one the new buyer assumed. It was a very good loan for a kid just out of college living in a somewhat depressed Midwest factory town with high unemployment... that would have been me. I had decent future income potential but almost no credit history and questionable collateral quality (another beat up old Midwestern home)... but the price was right (only 1.5 times my salary at the time... throw in my wife's part time job and it was 1:1).
For you people hitting your head on the coasts - there are still a lot of places like this out in the Heartland where you could buy at 1:1. They make pretty good places to 'start over' though you will have to make your own excitement.
dryfly said: "...They took over our loan and 25 years later still own the house, raised a brood of kids (sent away to college)... and are considered 'anchors' of that community (not everything is getting worse in the world). It worked for them - at least to get a clean record from which they moved higher up the prime ladder..."
That story is (another) one of the many reasons for my bullishness. Twenty+ years ago, I was sub-prime, too, and so were all my peers. As people grow older their careers advance, they accumulate assets, they have new opportunities afforded them by the attachments and connections they've made, and they get smarter.
Forget breaking-down the composition of the mortgage market by prime, Alt-A, sub-prime, region, etc. Break it down by the age of the borrower. I think that would inform the discussion about the mortgage market in a whole new way.
Sebastia
I spent 20+ years in the "sub prime" space before it was called sub prime, from autos, consumerr finance to 1st & 2nd mortgages. Such lending can and should be done. But each loan has to be underwritten. That means looking at the bureau report, getting reasons for the blemishes,verifying income not just by looking at pay stubs but calling the employer. Only then can you evaluate the ability of the borrower to have a reasonable chance of repaying the loan. Notice, I don't mention FICO scores. My own judgement is that they are a very bad predictor for non prime borrowers. The came into use in the mistaken belief that they were a proxy for real underwritting. They were also9 used because they permitted "automated" underwriting. I'm sorry but as the present debacle shows, it doesn't work. Oh yes, there were far more turn downs than approvals. Which is the way it should be. You do the borrower or yourself as the lender no favors for putting people in to loans they have no reasonable hope of paying.
But that was then.....
My recollection is that the old loan assumption died with a federal law in the 1980s that allowed home mortgage lenders to enforce due on sale clauses despite state law to the contrary.
Lenders of course, when presented with an assumption, always said they would enforce that clause since that required the person trying to assume the existing loan to get a new loan and to pay the required points and fees and often a higher interest rate.
It just wasn't "fair" to the bankers to let someone assume a 4% loan when new loans were being written at a higher rate, or so the bankers convinced Congress.
then why is so difficult to find a good UW?
When I entered the mortgage business, UWs were the spoiled babies of the mortgage department. They were.
In those days we closed our own loans (I started in a thrift). We had "closers" who examined title commitments, calculated all payoffs, coped with mineral leases and encroachments, wrote their HUDs, issued their checks, balanced it all, and personally sat down with borrowers at tables at which this thing called a "closing" occurred.
Those women--they were almost exclusively women--worked at least as hard and needed at least as many skills as the underwriters, but they made signficantly less.
We also had "loan processors"--almost exclusively women--who had more skills than your average "para-underwriter" has today. They analyzed credit reports and read purchase contracts. They understood the varieties of "stable income" and requested the exact documentation needed (they knew when you need a 1065 and when you can get by with a 1040). They did absolutely everything needed with a loan package except lean back in your chair, scratch your chin, and make an important decision.
That last bit we left up to underwriters, who, in my thrift, were at least 50% male and whose salaries were the highest in the whole shop ('cept for the loan officers, of course, who were nearly exclusively male).
So we got rid of the closers (all that is outsourced to title companies and attorneys). We got rid of the processors (if you don't get docs, you don't need anyone to "process" docs). We put laptops in front of the loan officers that approve most of their loans with an AUS.
Eventually, "underwriter" as a job function fell to the level of the old processor and closer jobs. Men got out, by and large. It also became a high-stress job once it changed from being rewarded for its conservatism to being beaten up for not getting with the program. Most of the really good underwriters I know quit because they just weren't paid enough to deal with the sales managers wandering through with ball bats. A lot of them became loan officers or brokers. Why not? You make more money that way.
One result of this is that there's very little generational transmission going on of underwriting skills. I learned most of what I know from a few crusty old farts who took the time to teach me the craft. That, and the habit we had of passing weird files around the office so everyone could see them, on the grounds that exposure to relatively rare deals is good for the whole staff. That kind of training-by-doing got flushed out in the "productivity metric" bonanza. If there are still canny old underwriters around who are willing to train the puppies, they're not allowed to do it because some consultant requires x number of approved files per day or no "incentive pay."
Yuck.
That story is (another) one of the many reasons for my bullishness.
I'm not all that bearish Seb... I just think we're gonna have a shit storm and a lot of folks will need to do laundry. But that's why they make washing machines....
Oh and clothes lines.
One result of this is that there's very little generational transmission going on of underwriting skills.
That's so true it's painful. The office environment you describe had loads of skill sets. Not so today.
David Pearson wrote "Society has held that homeownership is a "public good", and in fact the evidence of peaceful, productive suburban life in America seems to support this belief."
This NY Times article is interesting as the writer surmises that property ownership by ancestors contributed to the success of prominent African Americans today.
OP-ED CONTRIBUTOR; Forty Acres and a Gap in Wealth - New York Times
"little generational transmission going on of underwriting skills"
Agreed. Is it a strange that this info is supplied by "oral tradition" and not by a standard curriculum? It's like the boom and bust of each cycle prevents the establishment of the establishment of professional standards. I'd love to see these processes automated (just getting rid of the typewriter has done wonders) but without a knowledgable human being involved in the process (the ghost in the machine) it's too easy to rig.
As for the rubber stamp "para-underwriters" how likely would they be willing to "get with the program" if it meant losing some sort of accreditation.
The law that made unuthorized assumptions callable was the Garn St. Germain Act. Assumable loans still exist, but only represent a tiny fraction of the market, as they are priced at a premium. Assumable loans will never return, IMO.
do we need the New Puritanism?
Tanta, your anti-moralistic, counter-culture outlook colors your proposed solutions too much. Sometimes the stern-faced, granite jawed killjoys are right. One (wo)man's credit crunch is another's sound money economy.
FWIW, I don't like drinking with them either, which is why I never drink alone.
20% down, 3x income 4Ev@!1!!
Cheers,
prat
I am new to this site, having only discovered it earlier this holiday weekend. It is fabulous. And, until I read this post, I never knew about the original purpose for "subprime" lending.
I have two questions which may have been explored on this site in the past.
(1) Isn't one of the big causes for the current credit fiasco the seeming near-total decoupling of lending from banking? After all, if it's not your money you're lending out why be so picky about who you lend it to?
(2) Isn't one of the turbochargers for this past real estate runup the mid-90s change in tax law that gave homeowners a huge tax break on gain from a mere two-year window of ownership? My impression is that this tax policy triggered a huge chunk of the dreadful granite and stainless steel remodels in the past half dozen years which, in turn, pushed up the prices in established neighborhoods.
You really really know your stuff don't you, Tanta. Thanks a lot ! I particularly got a sense of "grokking" as I followed your argument about the step-down aspect of subprime availability for prime mortgages.
-K
It's the "progressive" media types who have created the stereotype of the "subprimate," the better to make a show of their agonizing solidarity with the downtrodden.
Sebestian,
While I see your point with this statement
"Forget breaking-down the composition of the mortgage market by prime, Alt-A, sub-prime, region, etc. Break it down by the age of the borrower. I think that would inform the discussion about the mortgage market in a whole new way."
I would tend to disagree and say that the "age of borrower" is exactly the problem. It would be an interesting study, but just think about all the late 30, early 40 somethings losing their McMansions. These are the peak earning years for these people, a big financial hit here is a blow not soon recovered from.
I hope with all my might you are right and this all isn't as bad as some people say.
"My new mottowe are all subprime now"
Uh, no. Some of us are lowly renters and don't itemize. Some of us are savers and our interest income is taxed as ordinary income. Some of us even pay for our own health insurance. Most of us pay our bills on time. Last I checked, we don't get any middle-class welfare benefits such as the home mortgage interest deduction, and congress isn't clamoring to save us from our mistakes. What programs do you have in mind for us Tanta? I'm changing my handle to Ben Dover.
Tanta for President. Or Secretary of HUD, at the very least.
dryfly mentioned "Oh, and clothes lines."
I don't miss stuff like rotary-dial phones, but clotheslines I miss.
I have a clear, wonderful (30 year-old) memory of the smell of clean sheets dried from a summer breeze on an old-fashioned clothesline.
And you'll appreciate this, too. My current washing machine? Maytag, probably 35 years old, bought used from a high-school Home-Ec class.
Those were the days.
S.
Great post, Tanta -- the importance of rising property values in creating the current crisis is hard to overstate.
In 1996, Denver was one of the most affordable metro areas in the country; by 2001, it had become one of the least affordable. Fortunately, our double digit appreciation leveled off since then, and we are not in as much trouble as California, Arizona, and Las Vegas. Even so, both older neighborhoods and new subdivisions that had lots of 100% LTV purchases over the past 2 years are getting hammered by lower demand and falling values.
Beyond that, one factor that should be considered is the historic ratio of housing costs to wages. If memory serves, several years ago Atrios had a chart showing the ratios from the 1780's to the present -- what stood out was that current housing costs are a bigger portion of income than they ever have been in the past. Historically, housing expenses were 15-30% of monthly income; now, it's 30-50% or more, even with two income households.
Another factor in the property value bubble deflation -- housing costs are not determined by property values, but the cost of money. Atrios made the case that when interest rates went to historic lows, it immediately translated into higher property values. If people can afford a $2k monthly payment, that translates to a $280k mortgage at 6%; when rates were 5% or less, that $2k per month bought $320k or $350k of mortgage. With negative amortization Option ARMs, it paid for $700k California haciendas.
The cheap money policies of Alan Greenspan were the root cause of property value inflation since 2000; the introduction of the Option ARM and the decoupling of risk pricing from high LTV loans made the current train wreck inevitable, as soon as values stopped rising.
Instead of the three Cs, the mortgage industry went for the three Fs -- find 'em, fuck 'em and forget 'em.
And you'll appreciate this, too. My current washing machine? Maytag, probably 35 years old, bought used from a high-school Home-Ec class.
From the days when Maytag actually made the parts. The stuff was so over engineered it made tanks look flimsy. You don't really want to see the sausage being made now. However clothes lines still work where allowed.
Instead of the three Cs, the mortgage industry went for the three Fs -- find 'em, fuck 'em and forget 'em.
Peter Principle | 11.25.07 - 3:37 pm | #
With similar results... the financial equivalent of 'paternity suits' and 'social disease'... foreclosures and SIV positive funds everywhere.
I worked at a mortgage lender for a few years and definitely remember hearing the sales force comment with wonder at what banks were buying. I literally quote from memory, "Hey, I wouldn't lend to someone with a 70% back ratio, but they must know something I don't." I'm still at a loss as to how to explain why a bank would design a product that would purposefully ask for less information. If they saw a reason to be flexible on income/asset rules (which I still think was a good idea in principle) why a NINA? Why not ask what it is and give a higher-rate, higher-ratio loan after a careful risk assessment? It would certainly avoid the self-selection bias of borrowers that end up in the shaky loan programs. And stated loans were obviously just an invitation to fraud, intentional or not.
I'm still convinced that a solid government-regulated appraisal system (or even a government run) is going to be the ultimate answer. Appraisals are rough to do and quite subjective, yes. But if you were an appraiser in the past 10 years you couldn't help but notice an incentive to inflate, especially when it seemed perfectly legitimate to (judging by comparable house sales in areas). Loan officers wouldn't refer their borrowers to you if you came back with houses that were on the low end of the price scale. And I can't imagine banks knew what they were dealing with when the sheer diversity of appraisal companies and appraisers in each of their supposedly homogenous loan pools.
Nationally certified appraisers were a step in the right direction, but any model that competes to appraise is going to be inherently flawed if it's not a monopoly; you're going to be incentivized towards inflating prices because your purchasers are commission-driven, and there's a multi-year lag time before the loans you inflate begin to default enough for a bank to stop using you (enough time for other newer companies to take the place.) I wouldn't forbid a secondary appraisal market from surfacing (for banks that thought the government's appraisal system was too conservative) but a system that eliminates competitive incentive to inflate home-value prices would certainly help guard against valuation bubbles.
flaminina:
welcome.
to answer your questions:
1. yes
2. yes.
if you want more detailed explanations of mortgage stuff... I recommend you read "The Compleat UberNerd" collections by Tanta.
you can find them by looking on the CalculatedRisk homepage... there is a link for them all at the top of the page
(it's in the grey bar between "About CR and Tanta" and "Email for Cr|Email for Tanta"
There are some smart cookies around here... (I'm not one of them, I read everyday, but rarely have anything of use to post) I've learned more here in 1 year than I would have ever thought possible!
Blue:
the banks knew something significant that the mortgage lender did not: that the loans could be securitized for large profits and the risk unloaded elsewhere.
As for your suggestion... I'm not sure that i would be for mandatory govt only appraisals... then you get political tinkering (imagine... houses really will only go up in value since property tax is based on property values)
the free market can resolve this problem IF markets are allowed to take losses.
the losses will quiet the desire for mortgage securitizations. inability to unload risky debt into MBS would force banks to hold the loans on their books. This of course would make them an interested party in the loan. This of course would make them more vigilant about those to whom they lend.
problem solved. (it is already solving itself)
Instead we have a Frankenstein system of offloading risk and combine that with subsequent govt guarantees and now possible bailout of the losers... this creates a "no risk" mirage... encouraging risky behaviour.
we bought our home in wpb for $27000 in 71 and got the homestead exemption which capped property taxes at 3% a year and the appraised value.the appraisal now is $99000 for taxes.i saw on the net a house same developement same lot size same model home built in the same year two streets over close for $282000 it seems the market did not proceed in an orderly manner.like you said first they used subprime to strip equity from the elderly homeowners then they used it on new buyers now it's a big mess, but for the incompent and corrupt leadership of the bushes george and jeb, leaving people stuck with a pig in a poke and people are still taking the bait
Really an excellent post. One of your best to date.
(2) Isn't one of the turbochargers for this past real estate runup the mid-90s change in tax law that gave homeowners a huge tax break on gain from a mere two-year window of ownership? My impression is that this tax policy triggered a huge chunk of the dreadful granite and stainless steel remodels in the past half dozen years which, in turn, pushed up the prices in established neighborhoods.
flaminia | 11.25.07 - 2:10 pm
Flaminia-
I've been reading this blog since Feb. and this aspect has hardly been discussed.
I agree that it should be discussed-- the takeoff in RE prices starts in 1996, not in 2001.
Re: Yearning
I guess I'm more referring to something along the lines of what already exists with FHA appraisers.
I'm just seeing a multi-year lag between the loan origination and the time a bank recognizes an inflated appraisal which combined with economic pressure to inflate prices on appraisal companies, causes inevitable unsustainable price increases across the board. These eventually infect prime loans that can no longer sell or refi when in trouble, and therefore is creating negative externalities to the entire industry, not just to the banks that foolishly hold these loans. A industry-wide standard for pricing homes would lessen the propensity to inflate and would limit this effect.
On a different note, has the impact of lowered property taxes been fully priced into the muni-bond markets? I'd imagine there's some risk-adjustments to do on non-guaranteed municipal bonds as their projected cash flows start to dry up, no?
I've been reading this blog since Feb. and this aspect has hardly been discussed.
I agree that it should be discussed-- the takeoff in RE prices starts in 1996, not in 2001.
It's been brought up plenty - and very little debate about it - meaning its pretty much agreed by about everyone that it played a role.
Inflation adjusted median home prices rose from $125,000 in 1997 to $152,000 in 2001. In 2006, the median home price was $240,000. However, this does not tell the whole story because the price of real estate is only one part of the problem. In 2005, homeowners harvested $750 billion in NET equity, two thirds of which were used for credit card debt and home renovations. Those were unrealized gains. Data is from the Federal Reserve. It wasnt so much a housing part as a debt party.
Dry,
I've noticed that whenever I bring up taxes of any kind, the thread dies.
I've noticed that whenever I bring up taxes of any kind, the thread dies.
lama | 11.25.07 - 6:05 pm | #
Ya that happens - my sis is a recovering tax attorney... we talk a lot. Maybe we can get her involved... three of us can have our own little party.
Probably why no invites me to 'real parties' anymore...
YtoL,
OMG, a market based solution?
That's like crazy and stuff.
Note: IMCO the "market" didn't get us into this mess, and it's a cop out to say that it did. Implicit guaranteeing by the govt, absurd interest rates set by the quasi-gov fed and lunatic, OPM buying by govt. run investment shops got us into this mess.
Second note: I'm incredibly ignorant. Hey, at least I recognize it.
Cheers,
prat
I did a lot of reading on social aspects of the Depression once upon a time. Before it hit, the poor and out-of-work were demonized by the prosperous employed: anyone who really wanted to, could succeed; so if you didn't, it was because you didn't want to work, or were defective in some way (the latter was applied especially to European immigrants). You were a bum.
When the prosperous began losing their jobs and resources in great quantity and began hanging out on the street scratching for a few dimes, those who were still employed called them bums. There next came a vast identity crisis; after much turmoil, the groupthink became 'F*ck this; I'm the same as I ever was. We been screwed!'
And then everybody started going after Wall Street and the evil bankers. The financial establishment was hated through the 30s and beyond. As were industrialists, slumlords, you name it. All the former stars of the economy that everybody looked up to.
I'm expecting this again, Fox News or no Fox News.
Two explanations why "assumable loans" and "resi mortgage underwriter" are unlikely to ever return:
1) In late 80 and early 90 one of the main conduits of criminal fraud in obtaining loand was through the "assumability" clause. In fact FBI produced a position paper about it, since there were business models getting created for the sole purpose of exploiting the "assumability loophole" in some loans. I learned about this when one of my neighbours went to a federal prison. Trying to come up with complex regulation of who and how can assume the loan (and related enforcement apparatus) was deemed impractical. The consesus was just to charge premium for assumability that would automaticaly make the criminal schemes obsolete.
2) The very existence of subjective "underwriter" person makes the lender open to lawsuits against red-lining on racial grounds. I've seen a paper prepared by BofA branch in Long Beach,CA that detailed such lawsuits agains them by some organisation defending the rights of the black people (during the racial riots in LA related to the Rodney King case.) One of the conditions of obtaining a settlement was that BofA would switch to a underwriting sytem based purely on statistical analysis.
Probably nobody is going to read this anyway, but what the heck.
Bob Dobbs,
The evil rich theme was popular in the 30's. That's the plot for so many Marx Bros., 3-Stooges, Mae West, etc. films (I'm an intellectual). It was popular to make fun of the rich and pompous....very funny too.
"When I learnt the three C's, they were Character, Capacity and Collateral. Character and FICO score are not the same thing at all."
Yep, that was before the ACORNs of the world. Fair credit worries were as much a catalyst for FICO and other credit new wave analysis as much as the need for speed.
Damn, that tax talk did kill this thread.
Started this post at 8 o'clock in the morning, finished at 5:15 PM,... well I was called away for a while, but it's still very long, and of course well worth the effort to read. The thoughtful responses seem to confirm the longer the post the fewer the rabble.
One thing that troubles me is people in my industry trying to blame things that are not at all the problem. Technology, automation and innovative produts are not the cause of our current situation.
As for subprime, it was never fully defined in the first place, but a good many of these early loans were for people who had bad credit. They were mostly full doc loans and likely met most other traditional guidelines.
What happened was, because of overheated appreciation of real property, investors took extra risk by loaning money to people who were under qualified in many different ways; LTV, income, credit and occupancy. When you started to combine many of these attributes , called layering, things started to unravel as appreciation started to slow.
Tanta, you're a revolutionary.
Conjure Bag says 'Hi!'
Excellent post. I am confused if this is historical reference or forward thinking.
This gives me pause. Only, because I am blonde and because ask if we really do learn from mistakes made.
I know it sounds kinda wierd. But this is my sense, anyway
Thanks
Tanta:
Great job! After reading your post I better understand why we're in a credit crunch and how subprime fits in. Thoughtful and well written.
Thank you!
..Frank
Even if assumable loans were allowed again no one is going to assume a loan with little or no equity. Zero percent down, I/O and HELOCing all make assuming unattractive.
"Yep, that was before the ACORNs of the world."
Yep, there's those evil brown people again -- forcing mortgage bankers to make loans to people flipping condos in Florida. O the suffering humanity.
Wow Tanta, excellent stuff!
I would like to see some of your so-called "rambling" in the pages of the WSJ, NYT and WP
"A humming RE market keeps those cash-out appraisals plausible."
And "plausible" is the right word here. Not "correct" or "reasonable."
I'm going to get all copy-editor on you though, for your inconsistant use of diaereses. You shouldn't mix naiveté and naïve. What would Zoë from Zaïre think?
Thank you Tanta for explaining subprime to a non-RE professional.
It appears to be increasingly certain that the problem known as Peak Oil will become obvious by the end of the decade. If so, all the suburban build-out that requires commuting to employment will get severely marked down. That in turn implies that residential RE valuations will continue to decline indefinitly.
To those interested in more detail, I recommmend
The Oil Drum | Discussions about Energy and Our Future
Errol in Miami