If you look at these loans, your point of view (for data purposes) will always be static. In that the data is always in flux but depending on when, and what, you use to capture the moment in time can be misleading.
It is like watching a bunch of logs floating down the river towards a predetermined point, perhaps miles away. Some get snagged but work free eventually. Others get waterlogged to the extent that they sink. Some catch a current and go where they are supposed to.
what you see from the bank of the river is not the eventual outcome. The closer you stand to where the logs were released, the better you will feel about the logs all making it to the finish line.
I learned early on in my accounting life that numbers lie and the same statstic(number) can say two different things based on the way it was presented. Here it seems there are many different ways to look at the same data set, and yet none of them are completely accurate. Like many things, only 20/20 hindsite at the end tells us what really happened.
Any idea just how inoperative the projections have been rendered?
Also, I don't suppose they publish state-by-state data? I would love to see CA, FL, NV broken out in particular, and I would also guess that their 15% would happen with those states alone. 2005 numbers with 10% ultimate failures have also got to look suspicious by now, too.
One of the things this illustrates is the difference in general orientation you can get between people who mostly analyze static pools (like RMBS analysts) and people who mostly analyze dynamic loan portfolios (like bank lenders or FHA analysts).
I came into this business having worked for a portfolio lender, and so my mind has always worked more comfortably in "portfolio" mode rather than the "pool" mode. I understand pool analysis, but I get frustrated when people try to draw conclusions from it that it just won't support.
To get back to the question of DAPs, there are three really critical questions to ask: do these loans end up in FC more often than non-DAP loans in their original vintage, do they end up in "distressed sales" short of FC more often, and how many of past DAP vintages refied during the boom into a conventional loan, which would take them out of the FHA portfolio and thus make them look like "successes," even though they might not ultimately be.
Those questions simply cannot be answered by looking at FHA claims statistics. You need a researcher going in and using other kinds of data and long-term studies to do that. And that, as far as I know, we do not have.
To get back to the question of DAPs, there are three really critical questions to ask: do these loans end up in FC more often than non-DAP loans in their original vintage, do they end up in "distressed sales" short of FC more often, and how many of past DAP vintages refied during the boom into a conventional loan, which would take them out of the FHA portfolio and thus make them look like "successes," even though they might not ultimately be.
this obviously doesn't answer all your questions, but there's some data in the tables at the back:
Here it seems there are many different ways to look at the same data set, and yet none of them are completely accurate.
I really don't think that's what mort_fin is trying to tell us. It isn't that these alternative measures are not "accurate." The FC Inventory measure is what it is; the problem isn't that the data isn't counted right or the fraction is "inaccurate." The problem arises only when we try to make the FC Inventory number "mean" the same thing that the cumulative lifetime default measurement means.
Or when we take perfectly accurate measurements that are relatively volatile year to year and try to make them show a "trend."
I don't mean to jump on your word "inaccurate," but there's so much tinfoil hattedness going on about mortgage stats, especially "government stats," these days, that I think it is very important to distinguish between stats that are perfectly accurate, on the one hand, and stats that are relevant in context on the other.
The trouble we had in the thread that started this whole exercise was not that we were being given inaccurate stats, but that we were being given the wrong stats for the particular purpose that person wanted to use them for (making claims about DAP loan failure rates and what the necessary insurance premium should be).
Thanks for an excellent introduction to the subject!
You state:
"In this business you have two and only two options: highly uncertain knowledge when its useful, or very precise knowledge long after its useful."
Epidemiologists face somewhat similar issues when trying to predict whether, for example, a new cancer drug will likely be successful in sustaining remissions over the long haul.
There are obvious distinctions between the two data sets, but in both of them the uncertainty in predicting outcomes varies over time in a non-linear fashion.
Therefore, in peer-reviewed medical studies each study assigns different data sets a "kappa" that denotes how much certainty they bring to each analysis presented.
Are such quantifiers of uncertainty quotients routinely published with mortgage data as well? It would seem to be quite helpful.
JP, 'how inoperative' is, of course, hard to say (did you expect to hear anything else????). But it's possible to take some wild stabs. If you click on that link to the actuarial study there is a link to the projections. It shows that the forecast is based on the OFHEO house price index falling by 3% from 2007 to 2008, going flat from 08 to 09, and then starting to rise again. At this point I'd be stunned if the OFHEO index drop wasn't at least 5% (but we won't know that for sure until early in 09) and if prices of houses start rising before 2010 it will be because the price of everything is way up. I think most analysts are predicting an OFHEO price drop of at least 10% before things turn around. In the "Fund sensitivities link" from the same place you can see that if house prices stay flat for 3 years instead of 1, they project losing about $1.3 billion on the 2007 book, instead of just $400 million. Assuming that is all because of increased claims (some of it could be differences in interest rates, severities, fee collections, but the tables don't break the change down into components, and increased claims would be by far the biggest effect) and assuming that loss severities are around 40%, that extra $900 million in credit cost implies about $2.2 billion in loans going bad, on a little over $300 billion in originations. So just prices going flat for a couple of years implies an increase in lifetime claims somewhere around two/thirds of a percentage point (very roughly). If prices fall by 7 percentage points more than they had projected, and then go flat for a couple of years, I would expect a much larger impact.
Way too much info. You have someone who is living with mom has $100 in the bank, just got out of school with 20,000 in deferred student loans. She just got a job as an admin assistant. Her boyfriend that lives with her and her parents works at Walmart with no Healthcare and does not even have a bank account. Neither has any credit or it is marginal at best. They go get an FHA loan with seller paid cc and a DAP. Now they got an $850/mo payment phone cable and all the other fun stuff that comes with home ownership. You want to blame the DAP program? There are a lot of folks that make rent payment every month who have a demonstrated ability to handle a program like this. You can look at stupid stats all you want - my point is most of these folks were set up for failure from the get go. The situation above is all too real. A banker cannot deny someone the right to make an application for a loan. The underwriter has to approve it if it meets FHA guides. $100 in the bank never had a payment in their lives - please quit blaming Joe homeowner and start blaming the no common sense underwriting on these loans. These are young kids whose lives are getting screwed. They cant even save $100 and we give them the responsibility of $1000 a month and we throw in the experience of a foreclosure for free! The difference with people that put down the actual money needed? It is kind of a forced demonstrated ability to save without the use of underwriting guidelines. DAP has a demonstrated real need in the marketplace - ESPECIALLY NOW. We need to look at ability to pay - oh by the way if the economy tanks and Joe and Lisa loose their jobs? Don't blame the client, the banker, the agent and the dap for the mortgage going bad - When people lose their job and the value of real estate drops bad, bad things are going to happen. Nuff said
Matt - No, there's really nothing like a "kappa" that gets attached to these studies.
BTW - it is worth noting that a lot of the statistical techniques applied to mortgages were stolen wholesale from the biostatistics literature, and the quality control engineering literature. They are all variations on the theme of 'survival analysis' as the optimistic biostatisticians call it or as the pessimistic engineers call it 'failure analysis.'
Manufacturing Sales
Unemployment Rate
Net Foreign Investment
International Reserves
External Trade
Current Account
Budget Balance
NAHB Housing Market Index
Producer Price Index
Merchandise Imports
Thanks for a fairly lucid post on an arcane but relevant subject. Little by little, it becomes clearer that it's anything but clear.
On not altogether unrelated note, earlier this week I had to send a memo to corporate manager here to explain why his latest project would likely end in tears. I used the expression "see: details,(devils in)". He didn't find that funny.
Further for JP - HUD usually doesn't break things out by state. But it's important to remember that HUD did very little business in California in 2007 (before loan limits were increased) and was under-represented in the other bubble states, like FL and AZ. FHA has been relatively concentrated in the midwest and non-Florida south (GA and the Carolinas, for instance). The big drops in price in CA and FL will hurt them less than you might expect. But if GA and NC start falling for real, watch out. The falls in Michigan have been most painful for them, I would assume.
I'm searching for a link - believe I originally came across it recently here at CR in comments - to an excellent documentary on economic theory, history of capitalism - can't remember the title or find a PBS or BBC link.
Anyone know what I'm referring to / able to supply a link?
And me prohibited from caffeinated coffee. And on a Saturday no less. Appuse anyway. Very clear and conxcise. I particularly appreciate the timeline vs. percentages that capture the concept of "aging out of the pool."
I'm gonna hate myself for asking but it needs to be asked. Lots and lots of the recent vintage home purchases are/were multiple note mortgages. 80/20s whatever. If one gets reported as in process CCC or PPP how does that effect analysis? Let's face it someday soon entire cities like Victorville are gonna wake up and realize that it is stupid to pay any second mortgage.
The big drops in price in CA and FL will hurt them less than you might expect.
Right, that should have been obvious. (I'm just back from vacation, still have hiking on the brain.) Nevertheless, I find it hard to believe that NC is going to be immune. I know that Charlotte has been (relatively) stable, but I really doubt that "it's different here" applies.
I don't mean to jump on your word "inaccurate," but there's so much tinfoil hattedness going on about mortgage stats, especially "government stats," these days, that I think it is very important to distinguish between stats that are perfectly accurate, on the one hand, and stats that are relevant in context on the other.
Its the age old battle between 'accuracy' and 'precision'. Its fairly easy to generate a 'precise' statistic but that number might not be 'accurate' in that it doesn't faithfully describe or represent the the real condition of the outcome you are interested in.
You see that ALL the time in mfg & technology where the numbers might look real good (parts inside the tolerance limits) but the damned machine still doesn't work the way you intended.
My guess is the measurements are harder to get right & make sense of in mortgages & finance than for piece part metrology.
Rob Dawg - your simple question 'how does that affect the analysis' raises so many interesting complications. In terms of interpreting the stats, it probably doesn't. You generally see stats reported for 'first lien mortgages' and if you see second lien stats they are broken out separately. That's true for things like FHA claims or MBA foreclosure inventory statistics, but for reporting on pools of loans it is sometimes the case that a pool has both firsts and seconds, and the reporting is just an undifferentiated mass. In that case, you probably end up with pretty high delinquency statistics and pretty low foreclosure statistics, since the common wisdom at least is that holders of the second don't bother to initiate foreclosure, as they don't expect a recovery, so delinquent seconds can linger for a long long time if the borrower stays current on the first.
If your question is a broader 'hey, do all these seconds we've seen over the last couple of years make failure more likely?' I'd have to say the answer is yes. A likely cause for failure of first lien mortgages in places where prices have gone up and not yet come back down is the borrower's ability to extract equity with a second even after the first was originated, so all these borrowers with "apparent equity" based purely on what was known at loan origination don't really have any equity. Another way to think of that is that models are estimated off data from a time when seconds were uncommon, so price increases translated into equity increases. The proliferation of second lien lending eats into that implicit assumption in the models.
80/20s whatever. If one gets reported as in process CCC or PPP how does that effect analysis?
Second mortgages rarely get foreclosed. Therefore they are rarely reported as foreclosed.
In any case of multiple liens, only one lender can foreclose. FC is taking title to the RE, and they can't both do that. Basically, the first lien lender forecloses and FC "extinguishes" (the legal term) the junior lien.
It is possible for the second lien lender to FC, but it has to either buy out the first mortgage, or, once it takes title to the property, continue to pay the first lien payment (to keep the first lien lender from FCing on it). First liens don't get "extinguished" if a second lien holder forecloses. This is why they don't do it very often.
So what you see reported on second lien pools or portfolios is a whole bunch of "charge-offs" and a tiny sliver of FCs. The vast majority of those charge-offs will be because the first lien lender foreclosed (or there was some workout like short sale or DIL).
Years ago there was a TV ad by Cher working-out hard. She says "if you could get this body from a jar everybody would have it"
So to mort_fin's great column.
If you could get expert knowledge off a website everybody could be rich.
I think that you have to know what question you want answered before you go to the statistics.
Its not that a set of data is adequate or inadequate. But the guys who did the heavy hauling to present the data did so for their own purposes.
If your purpose is similar to theirs then the data set may be adequate. If it is not similar then good luck.
I have never seen someone comb over data and adapt them to his need as well as Brad Sester does in his China economic observations.He certainly did not get that ability out of a bottle.
Anyways you have to know what question you want answered. From what we have seen, even the biggest boys around didn't ask the right questions about securitized mortgage bundles
How often are these OFHEO projections with accompanying detailed appendices released? Is this a twice yearly thing and can I be placed on a list so that I receive it by email the day it comes out?
These OFHEO projections you cite seem fantastically optimistic to me, bordering on the "not serious".
Do they have any fiduciary responsibility to have some rational relationship between what is likely and what they PRETEND will be a likely pricing outcome?
Thanks again. This is not "too much info" at all.
Not all complex issues can be solved by sound bites and facile analysis; your commentary here is quite useful indeed!
Thanks for a great post, the ability to communicate any complex concepts of statistical analysis to a broad audience is rare, and the patience (and willingness) to do so rarer still.
Augggh, 'accuracy' vs. 'precision' - in risk analyses it is 'approximately accurate' vs 'meaninglessly precise.
These OFHEO projections you cite seem fantastically optimistic to me, bordering on the "not serious".
I'll let mort_fin answer questions as long as we have him around. But I have to say something about this one.
We are specifically talking about FHA here. Not subprimes, not 80/20s, not jumbos, not Alt-A. As we've already heard here, FHA did not do that much lending in the bubble markets during the boom.
For FHA, the OFHEO measure (based on conforming dollar loans, not heavily weighted to bubble markets) isn't such a bad measure to use. If you think the numbers look tiny compared to, say, the Case-Shiller numbers for the big bubble markets, well, that's the difference between such markets.
There's plenty of reason to examine carefully how FHA used those OFHEO numbers last year to project defaults. But I don't think they were necessarily "fantastically optimistic" for a lot of FHA markets.
Also, FHA loans are much higher LTV than conventional loans. (Conventional loans might have equally high or even higher CTLVs, but that's a different matter at this level of analysis). So what looks like a "modest" drop in home prices has a bigger effect on an FHA portfolio than it might on a conventional portfolio, since FHA loans start with higher LTVs and thus go underwater faster. Therefore I don't instantly conclude that an FHA analysis with "modest" price declines in it means the affect on projected defaults isn't significant.
Matt - I don't think I'd want to label a projection of the OFHEO index an "OFHEO projection" unless the projection were done by OFHEO (which it isn't). The FHA actuarial study is done once a year. The Omnibus Budget Reconciliation Act of (I think) 1992 mandates HUD to do a yearly study, but doesn't mandate when that study is done. In past years the study has been done in the fall, Sept. or Oct, based on data from about 6 months earlier. This year, for some unspecified reason, it was done in June, based on data from 10 months earlier. Sometimes there is a big press release when the study is released, but I don't remember seeing one this year. Offhand I don't know how you'd know when it comes out - I don't think HUD has a mailing list for this, but I'm not sure.
The projections of the OFHEO index are made by Global Insights, the big economic forecasting firm created by the merger of DRI and WEFA. HUD has used Global Insights to make their house price and interest rate forecasts for as long as I can remember. In August 2007 a fall of -3% was what most people, except for maybe Roubini and CR, were predicting - it wasn't at all unusual for the time it was done.
Thank you both for the replies. The "complications" from multiple liens were as i expected but I needed to hear it from the experts in the same language as the original post to be sure.
Mort (in the comments) adds: ...assuming that loss severities are around 40%, that extra $900 million in credit cost implies about $2.2 billion in loans going bad, on a little over $300 billion in originations. So just prices going flat for a couple of years implies an increase in lifetime claims somewhere around two/thirds of a percentage point (very roughly).
Yes and no. Mortgage lending capital is leveraged. An additional 2/3rds of a percent of the outstanding loan balances is a huge portion of the actual invested capital.
Tana (in the comments) adds: Second mortgages rarely get foreclosed. Therefore they are rarely reported as foreclosed ... So what you see reported on second lien pools or portfolios is a whole bunch of "charge-offs" and a tiny sliver of FCs.
Shhhh, what if all the FBs in the Inland Empire hear you? Anyway, the implications tie back into the problem of leverage. Recording a 100% (or more) of the 20% second position calling it a "charge off" seriously erodes the invested capital base increasing leverage in a time that deleveraging is a major impetus. No wonder there is a scramble for fresh capital infusions.
dryfly- don't you think total home ownership and house prices would continue to drop significantly in a world of 30% down and good credit to get a mortgage? I agree it would be a nice, safe place to be for the economy, and I would sleep better at night if we were there; but the transition could/will be very messy. It is the fear that that might be where we are heading that makes me picture massive bank failures, systematic collapse, and a new economic system.
Augggh, 'accuracy' vs. 'precision' - in risk analyses it is 'approximately accurate' vs 'meaninglessly precise.'
energyecon | Homepage | 08.16.08 - 11:36 am | #
Which raises the next question... if these financial folks are going to copy biomed & mfg 'failure mode analysis stats'... are they then going to implement some kind of 'validation' & 'verification' processes? As we know there is as big a difference between those two as there is between 'accuracy' and 'precision'.
Yes and no. Mortgage lending capital is leveraged. An additional 2/3rds of a percent of the outstanding loan balances is a huge portion of the actual invested capital.
Context, context, context.
FHA is an insurer, not a mortgage investor. It has no capital invested in these mortgages, and it is not levered. Mort_fin is talking here about losses to FHA.
dryfly- don't you think total home ownership and house prices would continue to drop significantly in a world of 30% down and good credit to get a mortgage?
Sure - but for a lot of the country housing is still cheaper than renting (like where I live)... throw in mandatory high down payments and it just makes the situation harder for a LOT of people.
I know that is contrary to the experience in Cali, NYC and such - but all across the central US (some 40% of the population) that situation still applies.
I am not saying a down payment is a bad idea - its a VERY GOOD IDEA - but it shouldn't be necessarily mandated UNLESS you want to categorically discourage home ownership... which in my mind is as stupid as categorically PROMOTING home ownership.
I really think the lenders need to go back to fundamental underwriting - the numbers will tell them what the right mix of down payment & income/credit history IF they make the numbers talk AND decide to listen to what they say.
I think that is where mort_fin's post comes in. Understand the numbers first.
dryfly asks "Which raises the next question... if these financial folks are going to copy biomed & mfg 'failure mode analysis stats'... are they then going to implement some kind of 'validation' & 'verification' processes?"
Where's the fee income from that????
Seriously, they all have these processes. I'm sure that includes the rating agencies. Make of it what you will.
The timeline required to evaluate a vintage has been very frustrating. Product development may think a program is fantastic and then seemingly overnight it blows up.
Fellow just posted on another thread that help-u-sell franchiser went b/k
"the brand itself will survive this bankruptcy -- no question about that," and "franchisees should not be impacted by corporate's issues."
You will hear something like that repeated 50 times or more during the downturn. Every time, it will be a lie.
Franchisers fail when they borrow more money than they can repay with new franchisee fees coming in the door. The root problem, aside from overborrowing, is that franchisees are failing.
The franchise concept worked in a hyper consumer market but it fails in a normal or down consumer market.
Many of these franchisees themselves are over-leveraged. They paid cash for their first store and then convinced the local bank to loan them money to start the second, third, etc. Another big hurt for local banks.
Which raises the next question... if these financial folks are going to copy biomed & mfg 'failure mode analysis stats'... are they then going to implement some kind of 'validation' & 'verification' processes?
Well, you know, I find this whole part of the discussion truly frustrating.
"Financial folks" were not, heretofore, tasked with the responsibility for monitoring the extent to which mortgage lending met "social goals." That was supposed to be the government or think tanks or something.
To mort_fin's example: mortgage lenders track mortgages because that's what they make or lose money on. They do not do longitudinal sociological studies of borrowers over time through three different mortgages or home sales over fifteen years to answer the question, "Is homeownership sustainable" or "a social good" or whatever. Mortgage lenders care about their own loans, and if LuAnne refinances away from me before she defaults, she has a problem but I don't, is how lenders see this. The other lender has a problem.
And why wouldn't they?
Frankly, a whole lot of the bullshit that was passed around in the boom--even by respectable economists like Austan Goolsbee--was because there weren't actually government or think tanky/academic long-term studies of homeownership success rates out there, so these folks just latched onto the mortgage default stats that are available. I hate to have to be a shill for the industry again today, but it's tedious to be blamed for someone else's improper use of your measurements.
The Federal Reserve and HUD and places like that need to be working on sophisticated measurements and analytical modes, across pools and portfolios and with the addition of other kinds of data (property transfer records, BK records, etc.) that can answer some of the questions that public policy makers need to have answered.
I hate to be a capitalist pig and everything, but since when do we expect mortgage lenders to produce measurements of "homeownership sustainability"? That has always been a political and economic agenda and its boosters need to do their own homework. We're not going to get very far asking mortgage porfolio analysts to take over that job just because the politicians have failed to see that it gets funded in a more appropriate place.
You are all focused on a problem I refer to as "the extent and implications of the collapse of credit". I recommend that you consider it carefully and appreciate it's implications. After you do that, after you recognize the extent of the damage done by "allowing the free market" to run things, you might want to consider what we do next.
Our GNP is based upon the value of what we can sell in the form of goods and services. Or it used to be. We "globalized" and "off-shored" our very ability to produce goods, and we have become a "service economy". Gee, that sounds nice, everyone in America appreciates good service.
Small problem folks: to whom are we selling those services ? The answer is to ourselves. In fact, haven't we been "off-shoring" quite a few of our more inconvenient service jobs to places like India ? In an economy like that, you may shuffle a lot of dollars around, but you are not making any money.
Why ? Because America is not making things - goods - anymore. We are importing them. We are paying people outside our country to make our goods, and we are shuffling around money amongst ourselves to be serviced.
The last set of services we profitably sold to folks outside our country was primarily in the form of placing, machinating, repackaging, leveraging, repackaging, pooling, insuring, and creating derivatives and traunches of derivatives .... of mortgages. My friends, that market has pretty well dried up.
So, I encourage you to explore the extent of the most immediate problem we face. It is important to understand that our "let the free market decide things for itself" mentality resulted in massive fraud. It is important to understand how much of America's "wealth" is tied up in Level III assets. It is important to understand the problem is so bad that FASB accounting rules had to be changed so that no business would actually have to tell the truth about the extent of their exposure to Level III assets. It is a truly serious problem.
But when you get through it.... when you have fought through all the clouds of confusion as to "just how much did the banks {and shadow banks loose} and how much more will they loose before real estate bottoms". Don't forget the next problem.
The Federal Reserve and HUD and places like that need to be working on sophisticated measurements and analytical modes, across pools and portfolios and with the addition of other kinds of data (property transfer records, BK records, etc.) that can answer some of the questions that public policy makers need to have answered.
LOL... but will those answers fit in a 30 second election advertisement sound byte? If not then what's the point in that?
I actually agree 100% w/ what you say there - the point is that policy directives and mortgage market economic realities ARE joined at the hip whether we like it or not - the measures, processes and resultant outcomes need to be mutually sustainable or we will have what we have now - a mess.
Understanding the numbers (both what they mean & how they are derived) is a starting point. I appreciate what you both have done.
So to add to that - what happens next? [Since the policy folks are probably NOT going to do their homework nor adequately fund others to do it for them]...
Tanta suggests that someone should be doing long term studies of homeownership sustainability. But at least one excellent study has been done http://www.nonprofithousing.org/2005conference/Reid_Paper.pdf
Katz-Reid looked at low income first time homebuyers in the 1990's and found that over half were renters again within 5 years. Presumably, most of them did not become renters via foreclosure, but instead via selling the house and moving to a rental. At this point, there are data sets that follow mortgages, but not mortgages, and datasets like the one Katz-Reid used, that follow people but not mortgages. It would be nice to have something that follows both.
That's a great analysis. I have a stupid question, though. If you uber-nerds are capable of such rational number crunching, how did you let this disaster happen?
Seriously. Was it incompetent management? Timid risk managers? Willful blindness? Greed?
I am so impressed by the intelligence of these uber-nerd postings and the mathematical wiz-kids on Wall st, but I can't get my arms around the seemingly willful rejection of actual data pointing to disaster.
Charities giving down payments made sense to me and then I heard that sellers were "directing" funds through "charitable" institutions. It didn't take too long before I thought of various problems that might arise.
"someday soon entire cities like Victorville are gonna wake up and realize that it is stupid to pay any second mortgage."
Interesting notion. A problem is that the lien remains. I suppose that can make sense if your first payment is reasonable. I presume this approach can make sense for HELOCs in severely underwater situations.
If you uber-nerds are capable of such rational number crunching, how did you let this disaster happen?
Well, some of us tried telling Alan Greenspan to shut up and sit down, but it didn't work.
How about this question: now that we've got the "disaster," why do I spend my days dealing with people nattering on and on about "foreclosure prevention," as if one FC "prevented" in 2008 by doing a FHA refi or a write-down mod, which is highly likely to just move the eventual loan failure into 2009 or 2010, makes any sense?
Congress is doing just about everything short of outlawing FC, and I expect that next, to "reduce FCs." But that doesn't make homeownership sustainable for people who bought in the bubble and it won't make excess housing inventory go away and it won't magically produce equity for everybody. The quants know this. Are you going to ask me why we aren't "preventing" it? Barney Frank doesn't take my calls either.
Katz-Reid looked at low income first time homebuyers in the 1990's and found that over half were renters again within 5 years. Presumably, most of them did not become renters via foreclosure, but instead via selling the house and moving to a rental. At this point, there are data sets that follow mortgages, but not mortgages, and datasets like the one Katz-Reid used, that follow people but not mortgages. It would be nice to have something that follows both.
mort_fin | 08.16.08 - 12:35 pm | #
I actually see that in practice in my world. I live in an old Mississippi River river town... most houses are REAL cheap and a lot of them around me are rentals. Typically the long term cost of ownership is well under the short term cost of renting... so why do many of these 'low to middle income' people choose to rent if they'd have more cash in pocket if they bought?
The answer is pretty obvious to those of us on the ground - their income streams are too unreliable & they frequently either have periods of unemployment OR move to find new work. People know this - at least people around me do.
It is a 'Poisson distribution' kinda thing - the probability of an eventual income stream disturbance makes owning for many a riskier activity than renting over the longer term. They know they are unlikely to be able to get out of the way of that income disruption before the house is lost.
If you look at the neighborhood as a 'snapshot in time' you would come to the conclusion ownership is almost always FAR better for them (more cash in pocket today)... its only when you live there for 25 years like I have and have watched the 'flux' over time that you realize that 'truth' is either a half-truth at best or just plain false.
Paul,
Ah, I have it. You are ultrashort the stock market, and you want me to support your position. The alternatives you propose are mere short term considerations, and, I'm sorry, I held an honest concern, I expressed it, and if you want hype for your market position, you need to pay me.
This is why I come to this site - very, very informative, cogent, and I come away truly informed. I appreciate the efforst of Tanta, CR and their group of "Ubernerds"
You are making this a better informed country!!!
THANKS!!!
Gawd do I love my iPhone
My eight year old thinks I'm watching her skate
Mrs Dawg thinks I'm a saint for doing this
Little do they know I'm ubermerding
Thanks again Mort et Tanta
As I keep saying, who is gonna finance the REOs? Potential purchasers are not gonna be squeaky clean. If nobody finances them we are in a deep death spiral--down to say, 10-20 cents on the dollar. To the point where ordinary folks can pay cash. Either that or the houses will sit there year after year rotting away. That does happen you know. Ruins are interesting to look at, but I'm sure that the people living in and near them didn't enjoy it at the time.
We are in a "pre-ruin" state right now. It is possible to avoid ruining the housing stock, but somebody would have to be thinking about it in that way.
After the black plague, there were lots of ruins, because the population fell so drastically, and the houses of that time needed lots of upkeep. Thatch-changing and all that.
Some with the fall of Rome--big fall in population.
Also, you see ruins where there's been a big earthquake or volcano and the people couldn't recover for one reason or other.
I would like to think that we can think our way out of a paper bag. We haven't had a population fall, we haven't had a plague, volcano, war (here) or earthquake. All we have had is some really screwy finance errors.
Now the banks have all these REOs and not a clue how to move them.
Talking about how people are better off being renters may be true, but the banks are not seeking renters for the REOs. Someone else is supposed to do that. How, if they can't get financing? (Maybe their regs prohibit that.)
BTW - Tanta's opposition to the DAP is fine with me. What we need in this market right now is a 20%+ requirement for all mortgages.
I agree with Lawyerliz. The banks haven't a clue what to do with all the foreclosed properties. They will sell them in bulk at discount prices to bottom feeders. That should be fun to watch.
No - I think it's better to modify the loans and stick it to the bondholders.
"If the draft budget for the upcoming fiscal year is approved, the base pay for the sheriff, chief deputy, lieutenant and jail commander will be increased 11.7 percent.
Sheriff Eavenson is asking for more."
"Last year the sheriff turned down a 7.1% increase and accepted 5.3% in line with what was offered to his employees."
Look like the sheriff's altruism wavered this year.
This is how it starts. Wage inflation for those who cannot be outsourced.
The message from all these signals is that the squeeze on banks is not going away anytime soon.
Compounding the pain are settlements over auction rate securities with the office of the New York attorney-general.
As investors and companies are finally allowed to sell what they thought were cash-type holdings - but which since February have been turned into insolvent long-term debt by the credit crunch - banks are left clogging up their balance sheets with yet more debt.
The link between falling home prices and the ensuing pain for bank, consumer and corporate balance sheets is tightening the credit tap. It is a squeeze pushing vulnerable consumers and companies towards the realm of bankruptcy.
Sheriff: Brothers Arrested After Ax Attack On Patrol Car Denver News, Colorado News, Weather, Sports & Traffic | FOX 31 Denver - KDVR
Sheriff's Sgt. Jason Oehlkers said the deputies arrived to a yard littered with dead squirrels at the brother's Jamestown's home about 45 miles northwest of Denver. The deputies were checking on 45-year-old Michael Mundy, after his employer said he hadn't gone to work Thursday.
Oehlkers said the two deputies and an animal control officer were met by Mundy waving a cane at them, and then by his brother, 44-year-old brother David Mundy, who was also upset.
Oehlkers said David Mundy picked up an ax from their yard and struck the windshield and headlight of the deputies' car. Deputies tried to restrain him with a Taser, but one of its two prongs missed and he got away, Oehlkers said.
Deputies shot Michael Mundy with a bean bag shotgun after he pointed his cane at them, making them think he had a weapon, Oehlkers said.
God love yahs fur trying, but yur preaching to the choir, and even they don't know the tune.
Harry,
I've been trying to make your point for some time. There is a time limit on the value of exploring details. Or as better stated during the last 15 seconds of the attached - watch out for the greater fool; especially given that the last fool you watched had the benefit of acting lessons:http://www.minyanville.com/mvtv/
Re: "Whether you are looking at a static pool with a single vintage or a dynamic portfolio with multiple vintages, you are tracking loans, not borrowers or properties, and you are tracking prepayments of those loans. You simply do not know whether that prepayment was a refinance or a sale of the home; you dont know what that borrower did after the prepayment. "
... We perform a stress test based on the key assumptions in the above analyses to determine whether we would receive our contractual payments on these securities in adverse credit environments.
Our most severe default rate for our worst quartiles and severity assumptions for all quartiles are 70% and 65%, respectively, for these securities. As disclosed on Table 18, even in our most severe stress test scenarios, our potential losses are only 3% of our total non-agency mortgage-related securities, backed by first lien subprime loans. However, current mortgage market conditions are unprecedented and actual default and severity experience could differ from our expectations. Furthermore, different market participants could arrive at different conclusions regarding the likelihood of various default and severity outcomes.
Sorry.... apparently my comments angered someone. My firewall has been overcome with attacks and my safe system is reporting multiple errors. It was just my honest opinion, but apparently that is no longer allowed.
I'll be back if/when I can clean out the mess.
DEMETRIUS\tThere is no following her in this fierce vein:
\tHere therefore for a while I will remain.
\tSo sorrow's heaviness doth heavier grow
\tFor debt that bankrupt sleep doth sorrow owe:
\tWhich now in some slight measure it will pay,
\tIf for his tender here I make some stay.
Act 4, Scene 4
The liquid drops of tears that you have shed
\tShall come again, transform'd to orient pearl,
\tAdvantaging their loan with interest
\tOf ten times double gain of happiness.
\tGo, then my mother, to thy daughter go
\tMake bold her bashful years with your experience;
MERCUTIO\tNo, 'tis not so deep as a well, nor so wide as a
\tchurch-door; but 'tis enough,'twill serve: ask for
\tme to-morrow, and you shall find me a grave man. I
\tam peppered, I warrant, for this world. A plague o'
\tboth your houses! 'Zounds, a dog, a rat, a mouse, a
\tcat, to scratch a man to death! a braggart, a
\trogue, a villain, that fights by the book of
\tarithmetic! Why the devil came you between us? I
\twas hurt under your ar
Lawyerliz said:
Now the banks have all these REOs and not a clue how to move them.
Talking about how people are better off being renters may be true, but the banks are not seeking renters for the REOs. Someone else is supposed to do that. How, if they can't get financing? (Maybe their regs prohibit that.)
I started thinking this thought a month ago. I rarely think that women say, "I want to be a prostitute", but sometimes the economic situation becomes as such that they turn the the unavoidable. Right now banks can say, "I don't want to be a landlord."... but at some point they are gonna turn a bit desperate.
Tanta:
It appears to me that part of the debate about downpayments is whether one considers home ownership a right or a privilege.
I take the latter position. It is interesting that Bush and Greenspan essentially took the former view
The Federal Reserve and HUD and places like that need to be working on sophisticated measurements and analytical modes...
Disagree. Have we not by now had enough experience to realize models provide a false sense of security? Modeling hits the heisenberg wall immediately - the more you model -> the more you believe your models -> the more you act on the model -> the more you taint the very thing you're trying to model.
Go in the other direction - simplify the crap out of the system and eliminate the need for models. Move to mandatory heavy down payment approach, and keep the risk where it belongs, on the person trying to use someone elses money.
This also has the side effect of greatly limiting The State's opportunities to indulge in "too big to fail" loss socialization.
LawyerLiz-I doubt 10c-20c/dollar, since even if you use hardmoney lenders charging 20%, investors can make money on rentals at what, 50c/dollar? (so long as we are using yr2000 dollars, of course)
Re: The Federal Reserve and HUD and places like that need to be working on sophisticated measurements and analytical modes...
Popper is known for repudiating the classical observationalist/inductivist account of scientific method by advancing empirical falsification instead; for his opposition to the classical justificationist account of knowledge which he replaced with critical rationalism, "the first non justificational philosophy of criticism in the history of philosophy"
It appears to me that part of the debate about downpayments is whether one considers home ownership a right or a privilege.
Well owning a car can be considered a right (you can buy a car to fit your budget and who would deny that right to you?) but driving that car is a privilege.
The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster by Nouriel Roubini February 5, 2008
Eleventh, the worsening credit crunch that is affecting most credit markets and credit derivative markets will lead to a dry-up of liquidity in a variety of financial markets, including otherwise very liquid derivatives markets. Another round of credit crunch in interbank markets will ensue triggered by counterparty risk, lack of trust, liquidity premia and credit risk. A variety of interbank rates TED spreads, BOR-OIS spreads, BOT Tbill spreads, interbank-policy rate spreads, swap spreads, VIX and other gauges ofinvestors risk aversion will massively widen again. Even the easing of the liquidity crunch after massive central banks actions in December and January will reverse as credit concerns keep interbank spread wide in spite of further injections of liquidity by central banks. Twelfth, a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue leading to a cascading and mounting cycle of losses and further credit contraction. In illiquid market actual market prices are now even lower than the lower fundamental value that they now have given the credit problems in the economy.
It's good that this information is coming out. I live in Idaho and everyone here is still in TOTAL denial, although Idaho is number 15 in the nation....
I deal with hard money lenders sometimes. There are not enough of them to make a sizable enough dent. And they don't, collectively have enough money. And the lower prices go, the more reluctant they will be to loan. Since it's their money, or a close business associate's money, not some distant, who cares about it opm.
"Everybody's got an interest in sustainability of homeownership,..."
Careful, now. I live in a city with millions of renters. We would love to see prices come tumbling down even more. Many of us are productive members of society who are reluctant to take on debt, contemplate soon moving to the suburbs to raise our kids (not me) or see true division of labor efficiencies by living in a building with hundreds of apartments.
While we're on the (underlying) subject of downpayment assistance, and criticisms of Democrats like B. Frank's interference with the "free market", let's not forget one of the largest, longest-standing welfare programs: TAX DEDUCTIBILITY OF MORTGAGE INTEREST. Of course, you won't hear much protest from the renters who are fucked by this scheme, since they are not well-organized at the moment. But make no mistake, most of you retirees do not want to contemplate the alternatives to Frank, Pelosi, and Obama, you know, the ones which foisted the New Deal on FDR and the like.
"It is growing increasingly likely that the Treasury will recapitalize Fannie and Freddie in the months ahead on the taxpayer's dime, availing itself of powers granted it under the new housing bill signed into law last month. Such a move almost certainly would wipe out existing holders of the agencies' common stock, with preferred shareholders and even holders of the two entities' $19 billion of subordinated debt also suffering losses. Barron's first raised the possibility of a government takeover of Fannie ..."
I want to teach kids to cook,'' said Walter, 27, who founded Cupcake Kids! in New York to provide birthday parties and cooking classes for children.The goal is to have this be my full-time job and make enough to live.''
Wall Street professionals are trying new careers, and fetching smaller salaries, amid the elimination of 76,670 investment jobs in the Americas following the global credit crunch that started a year ago, according to data compiled by Bloomberg.
The rising cost of crude oil has led to an increase in the cost of liquid asphalt, which has risen from $3.45 a gallon Aug. 1, 2007, to $8.07 per gallon Aug. 1 of this year, Welch said
I dont see any dirt roads being paved ... in 20 years unless we get a tax increase or some help somewhere, Welch said.
There are doubts that the ongoing USD rally has covered a bit too much ground, too quickly (EURUSD dropped 8.1% in 4 weeks).
We see decent chances 30% to 40% that sterling will rise or hold its ground to the dollar early in the week, to later succumb to the pretty strong trend at play. The strong USD-weaker commodities prices trend will continue to reverse until commodities prices reach a sustainable support level. Due to various factors, there will invariably be an overshooting of the rational commodity price levels just like there were on the move in the opposite direction. Look for sterling to close the week weak following the UK GDP announcement.
It is critical to understand that financial markets are still crippled by severe distortions where too much investor money is concentrated in few investment options. The same forces that were at play a few weeks ago pushing crude prices beyond rational or fundamental levels are at play again but in the opposite direction. Our theory of how these forces developed originates with widespread investor Fear.
The way I see it is the American lifestyle is going to change. Taxes, taxes, taxes are going to go up drastically. No two ways about it, you guys owe one fuck of a lot of money. Your dept is huge, you have no money. You spread your crap to the rest of the world, you have to pay, get used to it! The neocon, holly god almighty chosen people shit is over! You Americans pissed it all against the wall thinking your nukes and tech guarantee the world owes you everything. Well a nuke is a nuke, they all hurt. I was watching the Olympics last night, here we go, the good old USA, USA, USA chant at the fastball tournament. Yep the same old beer belly, buck tooth good old boys in the crowd. I almost puked up my vodka and orange, good thing the cannabis kept me together. Keep those dip shits at home, please. No wonder so many counties and ethnic groups are gunning for your ass.
Then you send Condoleezza to set Putin straight, haahahaha, Vladimir is laughing at your asses, he is one bad mofo, Make my day dip shits says Vladimir. He is going to screw with your heads, he has energy, energy is power. USA is an importer, suck his pipe, haahahahaha. Real estate is your least worry.
Just saying.
To all those claiming that a "bailout" is required because the end result of "letting the chips" fall where they may will cause untold damage to J6P I say I support a "bailout" IF AND ONLY IF
The executive level is wiped out at all major institutions that are in any way helped by a bailout.
The government (meaning the people( gets equity in all major financial institutions.
Bond-holders take a hair-cut.
Common and preferred share-holders are wiped out or at a minimum severely diluted.
Laws on the book are enforced and the Glass-Steagal act is un-repealed.
ANY banking institution that is allowed access to the discount window is allowed a maximum of 10:1 leverage.
No off-balance SIVs
All derivatives and CDOs are publicly tracked OTC.
But since no bailout since the 1930s in the US has resulted in any changes AFTER the fact I say f**k them all and let the chips fall where they may.
Yep, you got it right. This has been my call for over a year. ZIRP.
These clowns will declare victory over inflation at the drop of a hat and start another round of rate cuts. I mean gas is now 'only' $3.60 down from$4. Woopie!
Reminds me of Gerry Ford's whip inflation now campaign. WIN buttons for the hoi ploi. Jimmy 'peanuts' Carter's the 'moral equivelent of war' which some termed MEOW.
The guys at the printing press will inflate. When have they not?
I'm getting my own paper and go to the FED. I want to use those presses. Ever heard of freedom of the press?
The Canak above is somewhat correct. But one may not impune a whole country for the felonies of the of our corrupt politcos and their paymasters.
This will not end well. It will not be a watershed moment. We are looking at a sea change. Declining tides beach all boats.
Pronunciation: ˈträⁿsh
Function: noun
Etymology: French, literally, slice, from Old French, from trenchier, trancher to cut more at trench
Date: 1930
a division or portion of a pool or whole; specifically : an issue of bonds derived from a pooling of like obligations (as securitized mortgage debt) that is differentiated from other issues especially by maturity or rate of return
tranche
Definition from Wiktionary, a free dictionary
See also Tranche
* 1 English
o 1.1 Noun
+ 1.1.1 Related terms
+ 1.1.2 Translations
* 2 French
o 2.1 Pronunciation
o 2.2 Noun
o 2.3 Verb
o 2.4 External links
Singular
tranche
\t\t
Plural
tranches
tranche (plural tranches)
A slice, section or portion.
(finance) One of a set of classes or risk maturities which comprise a multiple-class security, such as a CMO or REMIC. A class of bonds. Collateralized mortgage obligations are structured with several tranches of bonds that have various maturities.
2004, George W. Bush, speech following tsunami disaster:
First of all, we provide immediate cash relief to the tune of about $35 million. And then there will be an assessment of the damage, so that the relief is -- the next traunch of relief will be spent wisely.
I've been wondering why we use a french word for our little slices of heaven. Did some evil french financial wizard invent this, possibly contemporaneous with the guillotine?
I'm a recovering CDO salesperson, and I joined the group because I feel like shit and have nothing else to do during the recession .... anybody fuc-ing care.. huh?
agreed, the next inhabitant of the white house may regret their electoral victory because the job will be one huge mess.
i have never understood why the dems went for the first rebate check...why not let the financial mess go splat on dubya's watch?
sure as God made green apples, if the big slide accelerates and hits bottom 2 months or more into obamas watch many on the right, and even some on the left will give him the credit (blame)
This is the kind of shit I have to read, while no one buys my CDOs:
artin Feldstein, a professor at Harvard University and an adviser to Republican presidential candidate John McCain, said it was hoped the economic stimulus package would boost consumer confidence and lead to higher levels of production and employment.
"The evidence is now in, and that optimism was unwarranted," Feldstein wrote in an opinion piece in the Wall Street Journal earlier this month.
He said recent statistics show only between 10 percent and 20 percent of the rebate dollars were spent, while the program added nearly $80 billion to the national debt.
HELP OR HARM?
Treasury Secretary Henry Paulson has argued the stimulus effort helped the economy, and he said he wants to give the tax rebate checks more time to boost growth.
This pisses me off when these blogs have to reach some predetermined response value, as if in a telethon raising cash for some charity.
Come on you little brats, we can make 200 posts; anything will do, cupcakes, cookies, squirrels, truck stop gab, asphalt, anything goes in the push to 200. This calls for an inspirational video: No, maybe not; that is self control, and that is the inspiration here.
"The Paradise Syndrome" is a third season episode of Star Trek: The Original Series, and was broadcast October 4, 1968. It is episode #58, production #58, written by Margaret Armen and directed by Jud Taylor.
Overview: An alien device on a primitive planet erases Captain Kirk's memory, and he begins a life as one of the natives.
As the asteroid approaches, the planet's sky begins to darken and the weather begins to pick up force that blasts the terrain with fierce winds. The elders tell Kirk he must go to the "temple" and stop the storm before "the ground begins to tremble". Kirk makes his way to the obelisk, but doesn't remember how to get inside. He pounds his fists against the sides of the obelisk, shouting, "I am Kirok! I have come! I am Kirok!", but nothing happens.
Re: Percentage of Total Credit Exposure to
Risk Based Capital
HSBC Risk Based Capital rockets to 700% (600
08Q1) -- is that right? Wow, Holy Mother Of Tanta! They also have 22.5% less
Trading Revenue as a Percentage of Gross Revenue; they seem to have problems with forwards and 1 to 5 year interest rate positions, not to mention the next shoe dropping, which is all about gold derivatives and futures losses.
This is the next shoe, what think?
Re: Aug. 16 (Bloomberg) -- HSBC Holdings Plc, Europe's biggest bank by market value, will seek to control costs by exercising more caution in lending and hiring, the South China Morning Post reported, citing Vincent Cheng, chairman of its Asian unit.
The outlook for the second half of the year is ``very challenging,'' the newspaper cited Cheng as saying. Slower growth in the region and faster inflation will prompt the bank to monitor expenses more carefully, the Post added.
Decline in net income
HSBCs net income fell 29% y-o-y to US$7.72 billion (or US$0.65 per share) in 1H 08 from US$10.9 billion (or US$0.94 per share). The banks profitability declined due to the rise in loan impairment charges, mainly in the US, and decrease in profit from its Hong Kong operations. The banks pre-tax profit declined 28% to US$10.25 billion in 1H 08 from US$14.16 billion in 1H 07. Pre-tax profit in Europe rose to US$5.18 billion from US$4 billion but fell to US$3 billion from US$3.33 billion in Hong Kong over this period. In the rest of Asia-Pacific and Latin America, pre-tax profit increased to US$3.62 billion from US$3.34 billion and US$1.27 billion from US$1 billion, respectively, during the period 1H 07 to 1H 08. Reggie Middleton's Boom Bust Blog
Britain's beleaguered pub, bar and hotel operators are set for further misery following a decision by HSBC to stop lending money to certain companies in the leisure sector or extend their overdrafts.
My last for 200 comments because it has commentators in it.........The minds of men were gradually reduced to the same level,the fire of genius was extinguished....The name of poet was almost forgotten;that of orator was usurped by the sophists. A cloud of complilers,of commentators darkened the face of learning,and the decline of genius was soon followed by the coroption of taste.This dimingtive stature of mankind was daily sinking below the old standard..........Gibbo
I'm starting to make mistakes,it must be time to go.I'm reading a book right now as I surf "City of Thieves" which oddly is not about Wall St. or Washington.
"Financial folks" were not, heretofore, tasked with the responsibility for monitoring the extent to which mortgage lending met "social goals." That was supposed to be the government or think tanks or something.
But Tan Man tells us this is why he got into the business!
Thanks for your response re the motives and responsibilities of the banks. It causes me to think hard about the different business cultures present here.
There are folks here with way more experience and scholarship here than me, but I found the cross discussion between manufacturing and finance really interesting.
It strikes me that I don't know what legal standard mortgage loans have to meet re consumer safety if any.
I vaguely remember liability for sellers of goods who fail to meet 'warranty of fitness for a particular purpose' when they sell something.
Also, very basic tort law is hard on manufacturers who sell something that blows up in purchasers faces, or otherwise fails to function as promised in a dangerous way.
Countrywide and others were selling financial toxics in the marketplace.
Somehow, given who bought and paid for the UCC, I doubt that they face the sort of liability manufacturing would, despite misrepresenting risk and causing harm.
Depending on how bad this gets, what the public outcry demands, a science fiction writer might suggest that this will change.
Or not. the banks do run the world, or at least that's my working theory.
Or when 'homeownership sustainability' was generally considered difficult to separate from 'mortgage sustainability.'
I think you are missing my point.
Unless we outlaw refinancing or upgrading into a new home in just a few years after you bought your first one, we are always going to have a situation in which you cannot make "sustainability of THIS mortgage" proxy for "sustainability of ownership of ANY home."
Even insofar as the sustainability of mortgage lending involves the sustainability of homeownership, what about the builders? The RE brokers? The municipalities who rely on property tax receipts? Everybody's got an interest in sustainability of homeownership, but no one party can make the whole analysis from their own little databases.
My point is simply that mortgage analysts can bring to bear the best possible statistical methods in the universe, and they're still just looking at mortgages. To ask about homeownership sustainability is to also ask about prices, transaction costs, tax structures, jobs in affordable housing markets, patterns of migration, etc. All I'm saying is that if it is a political goal, then public money needs to be spent on backing up the claims made for boostering homeownership. To think you can get the data you need just from mortgage lenders is goofy.
As I understand it, the borrowers were not the only "victims" of reckless lending. There were also investors who provided the capital and won't be getting it all back, much less with interest. Those people have the legal and political firepower to get justice, in many cases.
Not justice for the borrowers, but for themselves.
Swedish Chef, I am not trying to argue that lenders should have no liability for harmful practices.
I am just saying that you aren't going to get Countrywide or anyone else to run 15-year longitudinal studies on first-time homebuyers across all the refis and sales and so on, in representative MSAs, placed in the context of wages, savings, overall debt, employment, and other factors over those fifteen years, to tell us whether for most people homeownership is all it's cracked up to be, financially.
And I don't know why anyone would expect that.
Drug manufacturers are liable if you take their medicine and die (supposedly), and they're responsible for analyzing their "failure rates." But they are not responsible for the public health research in this country. They are not asked to do multi-generational studies to measure the economic and quality of life impacts on society as a whole of having a decent antacid on the market.
I think this is because we understand "public health" to be more than just "drug effectiveness." And we think it is appropriately funded by government money because it is, well, a "public" issue, not a private one.
I was simply responding to what I thought was a suggestion that we could answer these big public questions if only these mortgage lenders would fix up their stats a little better.
Another crazy dreamer, eh? I bet that gets as much attention as trying to get an E&P company to address the systematic upward bias in production forecasts presented to Wall St (missing on the low side five years running...sigh)
Coming Sunday in the Dallas Morning News:
Dallas Fed chief speaks his mind
"Richard W. Fisher, president and chief executive of the Federal Reserve Bank of Dallas, has a reputation as one of the nation's leading inflation hawks. He has cast his ballot against the majority in every interest rate decision this year. He's even argued that rates should be higher, despite the economic downturn. In a wide ranging interview with reporters and editors at The Dallas Morning News this week, Mr. Fisher discussed inflation, as well as his views on everything from the economic outlook to the cost of wire hangers at your local dry cleaner." (Can't wait for that news.)
No criticism here. This mess has me in awe and I'm trying to think about it. You once wrote about the industry exchanging salaried underwriters for 'eat what you kill' sales people. I think that's the problem.
John Stark,
Here's hoping that the pissed off investors will achieve some collateral benefit for defrauded borrowers. The complex issues of personal responsibility here are at least as bad as for tobacco, but bottom line, some percentage of this stuff was clearly toxic and knowingly sold. Responsibility of the borrower to do due diligence is another question. I'll be curious to see how this plays out.
Divorce is rarely an easy process. But falling home values and sluggish real estate sales are combining to make it particularly difficult right now.
Couples aren't fighting over who gets to keep the house. They're scrambling to get away from the burden of it. It's too soon to see the trend reflected in official statistics; the most recent marriage and divorce numbers compiled by the National Center for Health Statistics date back to 2005 -- just when real estate markets started to turn down from their boom years. But lawyers and financial planners anecdotally say they are seeing more clients stay married -- if only for the time being -- simply because they cannot afford to break up.
Swedish Chef,
With all due respect, I have a suggestion with respect to the appropriate legal standard that ought properly be applied to mortgage loans- or more accurately to the entire process of the derivative mess.
I appreciate that you are engaged in an analysis that entails the application of long forgotten anti-trust rules - and - sincerely, I empathize. Allow me to suggest that you consider the application of another seemingly long forgotten rule: to wit: caveat emptor. If the buyer does not bear the burden of investigating the pig in the poke, then someone is issuing a guarantee.
No criticism here. This mess has me in awe and I'm trying to think about it. You once wrote about the industry exchanging salaried underwriters for 'eat what you kill' sales people. I think that's the problem.
As a guy who has been an 'eat what you kill' salesguy in the industrial sector for almost 25 years it is ALWAYS the problem IF you want your sales people's activities & motivations to dovetail with the organizations motives & interests.
It is very hard to make the two fully compatible UNLESS somebody w/out direct interest in the transaction is doing the 'underwriting' to make sure it works for the organization as well as it works for the salesguy. We all know who the salesguy is looking out for...
I'm confused about the reference in the first graph to homeownership rate. This story is about rate problems, but then you don't explain what this is; even if it seems obvious to you. Please explain your description of this.
Swedish Chef,
No, not enough. On your own terms, you are inserting a "current market" mentality into your analysis. As a matter of public policy, it is necessary that you assess the issue from the vantage of the buyer's responsibility. If the buyer of the 6th traunch of the 87th derivative of my mortgage ..... failed to inspect the CONTRACT.... and you want to help him.... then you need to find out who or which government was insuring that sale. With all due respect....
Anonymous - there is no "homeownership rate" There is a "homeownership success" rate. The point here is that people like Austan Goolsbee have made comments along the lines of "if 15% of mortgages are failing, then 85% of borrowers must be succeeding." But you can't go from one to the other. The charts show an example with 30% of mortgages failing lifetime (less than that for several 'to date' measures) but fewer than 50% of initial borrowers remaining successful homeowners.
Tanta wrote How about this question: now that we've got the "disaster," why do I spend my days dealing with people nattering on and on about "foreclosure prevention," as if one FC "prevented" in 2008 by doing a FHA refi or a write-down mod, which is highly likely to just move the eventual loan failure into 2009 or 2010, makes any sense?
Ok - fair enough. I tend to identify with the borrowers so anything that helps them - even it temporarily - gets my attention.
Foreclosures are going to happen - Barney Frank et al notwithstanding.
The problem has always been trying to balance the need to get people out of houses they could never afford against the larger damage to the economy. Such a balance is very hard to achieve. I don't have any answers, but all the prior arguments about mods and bailouts making mortgages more expensive are non-sense. The "private" markets have abandoned the mortgage markets anyway. The US govt is the only game in town anymore. It's time to swallow hard and forgive debt en masse.
Remember 3rd world debt forgiveness - it's time for some 1st world debt forgiveness. Only really radical action has a hope of changing the game.
The fact that the brokers are now buying back auction rate securities is a clear example that it can be done. It times like this - all options are on the table.
I know, it seems impractical. So did a bailout of the ARS market by the brokers seem impractical a few months ago.
It wasn't the Chris Martenson crash course (watched that last night) but a real documentary - historical film footage, Hayek, Keynes, history of last 150 years of economic "theory". 6-parter I think.
Good examples of such capital structure arbitrage are unfolding as we speak.
According to FitchIBCA, mezzanine structured finance CDOs typically contain a 3-5 year reinvestment period during which new collateral can be substituted for original collateral that prepays or defaults. As a result, since CDOs that were created in 2003 faced high early prepayment and default rates recently they have
taken on risk from the 2005 and 2006 subprime vintages, which are so far performing worse than the original 2003 vintage.
Figure 25 shows how vintage substitution is forcing the 2003 and 2004 vintage CDOs to take on additional risk from the 2005 and 2006 vintage RMBS.
As the 2003, 2004, 2005, and 2006 vintage RMBS season further, performance is expected to worsen. Hence, Fitch expects RMBS and CDO downgrades to arise later in 2007.
FitchIBCA, Rating Stability of Fitch-Rated Global Cash Mezzanine Structured Finance CDOs with Exposure to U.S. Subprime RMBS, Apr. 2, 2007, at 5.
Paul,
I'm not suggesting that - given the bailouts - that have been granted so far we not "necessary" to keep our entire economic system from failing. Further, I appreciate the suggestion that it's only fair to spread the lack of wealth. I am sincerely impressed by the collective knowledge as to minutely who passed on which risk to whom. But let me ask you something Paul.... where does it stop ? Who gets bailed out last ? We are spending $10 Billion/week in Iraq - how many billion on each of the FED's alphabet soup answers to the credit crisis. Paul, who pays the bill ?
Thanks for that addition, I just looked at the chart and wondered why the bottom column was an aggregate homeownership rate
It is the homeownership rate of that pool of ten loans. In the beginning, 10/10 own homes, by the end 3/10 own homes. It doesn't match up with the FC rate because two of those borrowers "voluntarily" sold their homes and did not buy another.
Sparks - who gets bailed out last? The owners of the mortgage-backed securities get stuck with 20 cents on the dollar. They bought the risk. They take the loss. It's going to happen anyway.
So that means your pension fund (if you even have one) will go broke. The hedge funds will collapse and their investors will take a bath. The Chinese and Arabs who were chasing yield will learn a valuable lesson in risk management. Americans will have to live within their means because credit will dry up. The world will get smaller because the assets that blew up the bubble will be worth much less. It sucks, but foreclosing on every single property headed there today will have the same result.
However, I'm still curious about collateral substitution, and I'm sure that's a little off topic, just as this is;
Moody's Loss Sensitivities measure the number of notches that the rating on a Moody's-rated structured finance security would likely move downward if the loss expectations assumed for the transaction's underlying collateral pool were presumed to be substantially higher at issuance than those actually used to rate the transaction.
The new Moody's report is called "Assumption Volatility Scores and Loss Sensitivities in the U.S. ABS Vehicle Sector. The May 13th report that introduced the new risk measures is called "Introducing Assumption Volatility Scores and Loss Sensitivities for Structured Finance Securities.
The "collapse of credit" is a devastatingly serious problem. But, as painful as it is, it is more than the elimination of the hope expressed in the "ownership" society. It's more than the loss of jobs in the 'appraisal community', the 'realtor's', the 'mortgage brokers'.... shall I go on ? It is painful - painful - painful.... and the truth of the matter is that it is full of pain.
It is necessary that we look at how bad it is. It it devastatingly sad that people we know will sincerely suffer from it. Maybe it is necessary that we personally experience some of the pain that this collapse has visited on "the others" in our communities. Actually, at least I believe, all that is necessary for us to come to grips with where we really are and - more importantly - who we really are.
However, I'm still curious about collateral substitution
You're way out in left field there.
CDOs are collateralized by other bonds--mortgage-backed securities. CDOs are actively managed--they can buy and sell underlying collateral through the life of the CDO.
MBS are collateralized by mortgage loans. 99.99% of first mortgage MBS cannot be managed--they cannot buy or sell or otherwise substitute new mortgages for what they originally had in the pool. (If they do, they lose their preferential tax treatment as REMICs.) HELOC pools do involve loans moving in and out (they are ABS, not MBS), but that's because some lines of credit never get drawn down at all, and so a HELOC with a balance can be substituted in for one that has no balance.
Mortgages are collateralized by real estate. And there is no substitution there. E*TRADE tried that a while ago with a "portable mortgage" (you could sell the old house and buy the new house under the same old loan) but it fell flat. Our RE market in this country doesn't work well that way.
Confusing CDOs with the rest of the world is not a helpful thing.
Why thank you; I once that thought that about you as well, but then I started reading your posts and have become a better person, more rounded and more willing to absorb the excellent material which is offered here daily (and at night as well).
To wit, those posts were in left field and related in a weird way as examples; I realize they were poor examples for an apples-to-apples comparison, but as I said, I'm curious about substitution of collateral. I just thought it might set off some spark for a forest fire of outrage ... oh well.
Ok, I'll prove to you the depths of my ignorance on this stuff:
What happens when Luanne walks away from her house and screams, "screw you all"!
What happens to the pool without Luanne being in this party, does she stay on as a statistic in a government chart, or is she replaced by a new pool guest?
Hey Sparks. The alternative to the collapse of credit as you call it, is to pursue Tanta's foreclose 'em all solution. It is an equally reasonable approach. It maximizes the recovery of the MBS owners. I haven't seen anyone model this out (maybe I'm not paying close enough attention and Mr Roubini has done it). How many people will be out of their homes and what affect will this have on the rental market? In this new world folks who have been foreclosed will never again (nor should they) get a mortgage.
This will reduce the available pool of potential home buyers and will theoretically result in additional downward pressure on home prices.
Maybe the pain of that scenario is less than modifying every unconventional mortgage to 30 year fixed at say 60 cents on the dollar. Yes, yes moral hazard.
Ok, one last time, then off to a leisure filled afternoon.
Re: "Interpreting the numbers from a dynamic pool of mortgages (loans constantly flowing into the system) is harder than interpreting a static pool (always looking at the same set of loans). "
What makes a pool static and thus can substitutions occur within a static pool?
Why is a static pool with substitutions not dynamic?
If static bongwater from an old bong is poured into a new more efficient bong, will the old bongwater impact the dynamic stability of the new bong?
The lead article in the 8/4/08 issue of The New York Times by Vikas Bajaj, Housing Lenders Fear Bigger Wave of Loan Defaults, comes as no surprise. Bajajs reporting illuminates a problem that has been apparent for a long time: foreclosures will be greater than recent estimates (now, even homeowners with good credit are finding themselves caught up in the morass) and price declines are likely to be deeper.
What is not immediately as obvious is that this bigger-than-expected wave of defaults will likely push the bottom out further. Its hard to see it occurring in most markets before 2010.
I am loving your charts!
FNORD
So another post that made my brain say "Ouchie."
If you look at these loans, your point of view (for data purposes) will always be static. In that the data is always in flux but depending on when, and what, you use to capture the moment in time can be misleading.
It is like watching a bunch of logs floating down the river towards a predetermined point, perhaps miles away. Some get snagged but work free eventually. Others get waterlogged to the extent that they sink. Some catch a current and go where they are supposed to.
what you see from the bank of the river is not the eventual outcome. The closer you stand to where the logs were released, the better you will feel about the logs all making it to the finish line.
Oh, then there are varibles. Such as a lot of rain or drought.
Then again I may have missed the whole point.
No, I think you got the whole point.
I learned early on in my accounting life that numbers lie and the same statstic(number) can say two different things based on the way it was presented. Here it seems there are many different ways to look at the same data set, and yet none of them are completely accurate. Like many things, only 20/20 hindsite at the end tells us what really happened.
Thanks mort_fin, that was a great post.
I suspect that has now been rendered inoperative.
Any idea just how inoperative the projections have been rendered?
Also, I don't suppose they publish state-by-state data? I would love to see CA, FL, NV broken out in particular, and I would also guess that their 15% would happen with those states alone. 2005 numbers with 10% ultimate failures have also got to look suspicious by now, too.
Nova, certainly you got the point.
One of the things this illustrates is the difference in general orientation you can get between people who mostly analyze static pools (like RMBS analysts) and people who mostly analyze dynamic loan portfolios (like bank lenders or FHA analysts).
I came into this business having worked for a portfolio lender, and so my mind has always worked more comfortably in "portfolio" mode rather than the "pool" mode. I understand pool analysis, but I get frustrated when people try to draw conclusions from it that it just won't support.
To get back to the question of DAPs, there are three really critical questions to ask: do these loans end up in FC more often than non-DAP loans in their original vintage, do they end up in "distressed sales" short of FC more often, and how many of past DAP vintages refied during the boom into a conventional loan, which would take them out of the FHA portfolio and thus make them look like "successes," even though they might not ultimately be.
Those questions simply cannot be answered by looking at FHA claims statistics. You need a researcher going in and using other kinds of data and long-term studies to do that. And that, as far as I know, we do not have.
Thank you Mort,you write with clarity.
To get back to the question of DAPs, there are three really critical questions to ask: do these loans end up in FC more often than non-DAP loans in their original vintage, do they end up in "distressed sales" short of FC more often, and how many of past DAP vintages refied during the boom into a conventional loan, which would take them out of the FHA portfolio and thus make them look like "successes," even though they might not ultimately be.
this obviously doesn't answer all your questions, but there's some data in the tables at the back:
http://www.regulations.gov/fdmspublic/ContentViewer?objectId=090000648062870f&disposition=attachment&contentType=pdf
Here it seems there are many different ways to look at the same data set, and yet none of them are completely accurate.
I really don't think that's what mort_fin is trying to tell us. It isn't that these alternative measures are not "accurate." The FC Inventory measure is what it is; the problem isn't that the data isn't counted right or the fraction is "inaccurate." The problem arises only when we try to make the FC Inventory number "mean" the same thing that the cumulative lifetime default measurement means.
Or when we take perfectly accurate measurements that are relatively volatile year to year and try to make them show a "trend."
I don't mean to jump on your word "inaccurate," but there's so much tinfoil hattedness going on about mortgage stats, especially "government stats," these days, that I think it is very important to distinguish between stats that are perfectly accurate, on the one hand, and stats that are relevant in context on the other.
The trouble we had in the thread that started this whole exercise was not that we were being given inaccurate stats, but that we were being given the wrong stats for the particular purpose that person wanted to use them for (making claims about DAP loan failure rates and what the necessary insurance premium should be).
Thanks for an excellent introduction to the subject!
You state:
"In this business you have two and only two options: highly uncertain knowledge when its useful, or very precise knowledge long after its useful."
Epidemiologists face somewhat similar issues when trying to predict whether, for example, a new cancer drug will likely be successful in sustaining remissions over the long haul.
There are obvious distinctions between the two data sets, but in both of them the uncertainty in predicting outcomes varies over time in a non-linear fashion.
Therefore, in peer-reviewed medical studies each study assigns different data sets a "kappa" that denotes how much certainty they bring to each analysis presented.
Are such quantifiers of uncertainty quotients routinely published with mortgage data as well? It would seem to be quite helpful.
Thanks!
Matt Dubuque
tony.buzan@hotmail.com
JP, 'how inoperative' is, of course, hard to say (did you expect to hear anything else????). But it's possible to take some wild stabs. If you click on that link to the actuarial study there is a link to the projections. It shows that the forecast is based on the OFHEO house price index falling by 3% from 2007 to 2008, going flat from 08 to 09, and then starting to rise again. At this point I'd be stunned if the OFHEO index drop wasn't at least 5% (but we won't know that for sure until early in 09) and if prices of houses start rising before 2010 it will be because the price of everything is way up. I think most analysts are predicting an OFHEO price drop of at least 10% before things turn around. In the "Fund sensitivities link" from the same place you can see that if house prices stay flat for 3 years instead of 1, they project losing about $1.3 billion on the 2007 book, instead of just $400 million. Assuming that is all because of increased claims (some of it could be differences in interest rates, severities, fee collections, but the tables don't break the change down into components, and increased claims would be by far the biggest effect) and assuming that loss severities are around 40%, that extra $900 million in credit cost implies about $2.2 billion in loans going bad, on a little over $300 billion in originations. So just prices going flat for a couple of years implies an increase in lifetime claims somewhere around two/thirds of a percentage point (very roughly). If prices fall by 7 percentage points more than they had projected, and then go flat for a couple of years, I would expect a much larger impact.
Way too much info. You have someone who is living with mom has $100 in the bank, just got out of school with 20,000 in deferred student loans. She just got a job as an admin assistant. Her boyfriend that lives with her and her parents works at Walmart with no Healthcare and does not even have a bank account. Neither has any credit or it is marginal at best. They go get an FHA loan with seller paid cc and a DAP. Now they got an $850/mo payment phone cable and all the other fun stuff that comes with home ownership. You want to blame the DAP program? There are a lot of folks that make rent payment every month who have a demonstrated ability to handle a program like this. You can look at stupid stats all you want - my point is most of these folks were set up for failure from the get go. The situation above is all too real. A banker cannot deny someone the right to make an application for a loan. The underwriter has to approve it if it meets FHA guides. $100 in the bank never had a payment in their lives - please quit blaming Joe homeowner and start blaming the no common sense underwriting on these loans. These are young kids whose lives are getting screwed. They cant even save $100 and we give them the responsibility of $1000 a month and we throw in the experience of a foreclosure for free! The difference with people that put down the actual money needed? It is kind of a forced demonstrated ability to save without the use of underwriting guidelines. DAP has a demonstrated real need in the marketplace - ESPECIALLY NOW. We need to look at ability to pay - oh by the way if the economy tanks and Joe and Lisa loose their jobs? Don't blame the client, the banker, the agent and the dap for the mortgage going bad - When people lose their job and the value of real estate drops bad, bad things are going to happen. Nuff said
Matt - No, there's really nothing like a "kappa" that gets attached to these studies.
BTW - it is worth noting that a lot of the statistical techniques applied to mortgages were stolen wholesale from the biostatistics literature, and the quality control engineering literature. They are all variations on the theme of 'survival analysis' as the optimistic biostatisticians call it or as the pessimistic engineers call it 'failure analysis.'
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Thanks for a fairly lucid post on an arcane but relevant subject. Little by little, it becomes clearer that it's anything but clear.
On not altogether unrelated note, earlier this week I had to send a memo to corporate manager here to explain why his latest project would likely end in tears. I used the expression "see: details,(devils in)". He didn't find that funny.
Further for JP - HUD usually doesn't break things out by state. But it's important to remember that HUD did very little business in California in 2007 (before loan limits were increased) and was under-represented in the other bubble states, like FL and AZ. FHA has been relatively concentrated in the midwest and non-Florida south (GA and the Carolinas, for instance). The big drops in price in CA and FL will hurt them less than you might expect. But if GA and NC start falling for real, watch out. The falls in Michigan have been most painful for them, I would assume.
Please forgive an OT question:
I'm searching for a link - believe I originally came across it recently here at CR in comments - to an excellent documentary on economic theory, history of capitalism - can't remember the title or find a PBS or BBC link.
Anyone know what I'm referring to / able to supply a link?
Thanks.
wow
read it once...will re-read it again.
VERY interesting. And I appreciate the depth.
great Saturday AM reading with coffee!
NAHB 2006 to Present
NAHB: The NAHB/Wells Fargo Housing Market Index (2007 - Current)
We're at an all-time low.
Thanks for the wild stabs.
And me prohibited from caffeinated coffee. And on a Saturday no less. Appuse anyway. Very clear and conxcise. I particularly appreciate the timeline vs. percentages that capture the concept of "aging out of the pool."
I'm gonna hate myself for asking but it needs to be asked. Lots and lots of the recent vintage home purchases are/were multiple note mortgages. 80/20s whatever. If one gets reported as in process CCC or PPP how does that effect analysis? Let's face it someday soon entire cities like Victorville are gonna wake up and realize that it is stupid to pay any second mortgage.
The big drops in price in CA and FL will hurt them less than you might expect.
Right, that should have been obvious. (I'm just back from vacation, still have hiking on the brain.) Nevertheless, I find it hard to believe that NC is going to be immune. I know that Charlotte has been (relatively) stable, but I really doubt that "it's different here" applies.
Yep, my anecdotal contribution is that I haven't closed an FHA in years, in S. Fla. The "programs" at Countrywide were "better".
And I did note that so many young people felt they had to buy a house upon being married. Up until 10-15 years ago, that just wasn't so.
Mort_fin, Tanta:
Please Please - give us the highlight, some sub headline. Most of us don't even knoiw what this is about.
I don't mean to jump on your word "inaccurate," but there's so much tinfoil hattedness going on about mortgage stats, especially "government stats," these days, that I think it is very important to distinguish between stats that are perfectly accurate, on the one hand, and stats that are relevant in context on the other.
Its the age old battle between 'accuracy' and 'precision'. Its fairly easy to generate a 'precise' statistic but that number might not be 'accurate' in that it doesn't faithfully describe or represent the the real condition of the outcome you are interested in.
You see that ALL the time in mfg & technology where the numbers might look real good (parts inside the tolerance limits) but the damned machine still doesn't work the way you intended.
My guess is the measurements are harder to get right & make sense of in mortgages & finance than for piece part metrology.
Rob Dawg - your simple question 'how does that affect the analysis' raises so many interesting complications. In terms of interpreting the stats, it probably doesn't. You generally see stats reported for 'first lien mortgages' and if you see second lien stats they are broken out separately. That's true for things like FHA claims or MBA foreclosure inventory statistics, but for reporting on pools of loans it is sometimes the case that a pool has both firsts and seconds, and the reporting is just an undifferentiated mass. In that case, you probably end up with pretty high delinquency statistics and pretty low foreclosure statistics, since the common wisdom at least is that holders of the second don't bother to initiate foreclosure, as they don't expect a recovery, so delinquent seconds can linger for a long long time if the borrower stays current on the first.
If your question is a broader 'hey, do all these seconds we've seen over the last couple of years make failure more likely?' I'd have to say the answer is yes. A likely cause for failure of first lien mortgages in places where prices have gone up and not yet come back down is the borrower's ability to extract equity with a second even after the first was originated, so all these borrowers with "apparent equity" based purely on what was known at loan origination don't really have any equity. Another way to think of that is that models are estimated off data from a time when seconds were uncommon, so price increases translated into equity increases. The proliferation of second lien lending eats into that implicit assumption in the models.
80/20s whatever. If one gets reported as in process CCC or PPP how does that effect analysis?
Second mortgages rarely get foreclosed. Therefore they are rarely reported as foreclosed.
In any case of multiple liens, only one lender can foreclose. FC is taking title to the RE, and they can't both do that. Basically, the first lien lender forecloses and FC "extinguishes" (the legal term) the junior lien.
It is possible for the second lien lender to FC, but it has to either buy out the first mortgage, or, once it takes title to the property, continue to pay the first lien payment (to keep the first lien lender from FCing on it). First liens don't get "extinguished" if a second lien holder forecloses. This is why they don't do it very often.
So what you see reported on second lien pools or portfolios is a whole bunch of "charge-offs" and a tiny sliver of FCs. The vast majority of those charge-offs will be because the first lien lender foreclosed (or there was some workout like short sale or DIL).
Thanks for the numbers. Even Keynes would like this post.
I can't help thinking though... what would happen if we just required 30% down, no downpayment assistance, good credit, blah blah blah.
Allow securitization, sure, but no derivates despite the temptation.
What's the worst thing that could possibly happen?
Years ago there was a TV ad by Cher working-out hard. She says "if you could get this body from a jar everybody would have it"
So to mort_fin's great column.
If you could get expert knowledge off a website everybody could be rich.
I think that you have to know what question you want answered before you go to the statistics.
Its not that a set of data is adequate or inadequate. But the guys who did the heavy hauling to present the data did so for their own purposes.
If your purpose is similar to theirs then the data set may be adequate. If it is not similar then good luck.
I have never seen someone comb over data and adapt them to his need as well as Brad Sester does in his China economic observations.He certainly did not get that ability out of a bottle.
Anyways you have to know what question you want answered. From what we have seen, even the biggest boys around didn't ask the right questions about securitized mortgage bundles
I can't help thinking though... what would happen if we just required 30% down, no downpayment assistance, good credit, blah blah blah.
Allow securitization, sure, but no derivates despite the temptation.
What's the worst thing that could possibly happen?
Uncle Billy Doesn't Spin | Homepage | 08.16.08 - 11:15 am | #
The 'worst' that would happen is most folks would continue to rent - not the end of the world if that is what you want.
We've made it a policy to do the opposite - FWIW - so that won't happen until policy directives change.
Thanks Mort_Fin-
A question and a comment here.
Do they have any fiduciary responsibility to have some rational relationship between what is likely and what they PRETEND will be a likely pricing outcome?
Thanks again. This is not "too much info" at all.
Not all complex issues can be solved by sound bites and facile analysis; your commentary here is quite useful indeed!
Matt Dubuque
Well dry, then let's get to it. Then this would free mort from having to try to do all the unflimflamming.
Everybody's talking about policy lately like they started to do with departments of government: "We'll have to see what Treasury does this week."
In a way it's nice, though, because it makes one feel like they are government, which is the way it's supposed to be.
mort_fin,
Thanks for a great post, the ability to communicate any complex concepts of statistical analysis to a broad audience is rare, and the patience (and willingness) to do so rarer still.
Augggh, 'accuracy' vs. 'precision' - in risk analyses it is 'approximately accurate' vs 'meaninglessly precise.
Fellow just posted on another thread that help-u-sell franchiser went b/k
Help-U-Sell franchiser files for bankruptcy | Real Estate and Technology News for Agents, Brokers and Investors | Inman News
These OFHEO projections you cite seem fantastically optimistic to me, bordering on the "not serious".
I'll let mort_fin answer questions as long as we have him around. But I have to say something about this one.
We are specifically talking about FHA here. Not subprimes, not 80/20s, not jumbos, not Alt-A. As we've already heard here, FHA did not do that much lending in the bubble markets during the boom.
For FHA, the OFHEO measure (based on conforming dollar loans, not heavily weighted to bubble markets) isn't such a bad measure to use. If you think the numbers look tiny compared to, say, the Case-Shiller numbers for the big bubble markets, well, that's the difference between such markets.
There's plenty of reason to examine carefully how FHA used those OFHEO numbers last year to project defaults. But I don't think they were necessarily "fantastically optimistic" for a lot of FHA markets.
Also, FHA loans are much higher LTV than conventional loans. (Conventional loans might have equally high or even higher CTLVs, but that's a different matter at this level of analysis). So what looks like a "modest" drop in home prices has a bigger effect on an FHA portfolio than it might on a conventional portfolio, since FHA loans start with higher LTVs and thus go underwater faster. Therefore I don't instantly conclude that an FHA analysis with "modest" price declines in it means the affect on projected defaults isn't significant.
Matt - I don't think I'd want to label a projection of the OFHEO index an "OFHEO projection" unless the projection were done by OFHEO (which it isn't). The FHA actuarial study is done once a year. The Omnibus Budget Reconciliation Act of (I think) 1992 mandates HUD to do a yearly study, but doesn't mandate when that study is done. In past years the study has been done in the fall, Sept. or Oct, based on data from about 6 months earlier. This year, for some unspecified reason, it was done in June, based on data from 10 months earlier. Sometimes there is a big press release when the study is released, but I don't remember seeing one this year. Offhand I don't know how you'd know when it comes out - I don't think HUD has a mailing list for this, but I'm not sure.
The projections of the OFHEO index are made by Global Insights, the big economic forecasting firm created by the merger of DRI and WEFA. HUD has used Global Insights to make their house price and interest rate forecasts for as long as I can remember. In August 2007 a fall of -3% was what most people, except for maybe Roubini and CR, were predicting - it wasn't at all unusual for the time it was done.
Mort et Tanta,
Thank you both for the replies. The "complications" from multiple liens were as i expected but I needed to hear it from the experts in the same language as the original post to be sure.
Mort (in the comments) adds:
...assuming that loss severities are around 40%, that extra $900 million in credit cost implies about $2.2 billion in loans going bad, on a little over $300 billion in originations. So just prices going flat for a couple of years implies an increase in lifetime claims somewhere around two/thirds of a percentage point (very roughly).
Yes and no. Mortgage lending capital is leveraged. An additional 2/3rds of a percent of the outstanding loan balances is a huge portion of the actual invested capital.
Tana (in the comments) adds:
Second mortgages rarely get foreclosed. Therefore they are rarely reported as foreclosed ... So what you see reported on second lien pools or portfolios is a whole bunch of "charge-offs" and a tiny sliver of FCs.
Shhhh, what if all the FBs in the Inland Empire hear you? Anyway, the implications tie back into the problem of leverage. Recording a 100% (or more) of the 20% second position calling it a "charge off" seriously erodes the invested capital base increasing leverage in a time that deleveraging is a major impetus. No wonder there is a scramble for fresh capital infusions.
dryfly- don't you think total home ownership and house prices would continue to drop significantly in a world of 30% down and good credit to get a mortgage? I agree it would be a nice, safe place to be for the economy, and I would sleep better at night if we were there; but the transition could/will be very messy. It is the fear that that might be where we are heading that makes me picture massive bank failures, systematic collapse, and a new economic system.
mort_fin - Thank you very much for the work on this post. It is very interesting and well written.
Augggh, 'accuracy' vs. 'precision' - in risk analyses it is 'approximately accurate' vs 'meaninglessly precise.'
energyecon | Homepage | 08.16.08 - 11:36 am | #
Which raises the next question... if these financial folks are going to copy biomed & mfg 'failure mode analysis stats'... are they then going to implement some kind of 'validation' & 'verification' processes? As we know there is as big a difference between those two as there is between 'accuracy' and 'precision'.
Maybe that's NEXT weekend's 'uber post'...
Yes and no. Mortgage lending capital is leveraged. An additional 2/3rds of a percent of the outstanding loan balances is a huge portion of the actual invested capital.
Context, context, context.
FHA is an insurer, not a mortgage investor. It has no capital invested in these mortgages, and it is not levered. Mort_fin is talking here about losses to FHA.
dryfly- don't you think total home ownership and house prices would continue to drop significantly in a world of 30% down and good credit to get a mortgage?
Sure - but for a lot of the country housing is still cheaper than renting (like where I live)... throw in mandatory high down payments and it just makes the situation harder for a LOT of people.
I know that is contrary to the experience in Cali, NYC and such - but all across the central US (some 40% of the population) that situation still applies.
I am not saying a down payment is a bad idea - its a VERY GOOD IDEA - but it shouldn't be necessarily mandated UNLESS you want to categorically discourage home ownership... which in my mind is as stupid as categorically PROMOTING home ownership.
I really think the lenders need to go back to fundamental underwriting - the numbers will tell them what the right mix of down payment & income/credit history IF they make the numbers talk AND decide to listen to what they say.
I think that is where mort_fin's post comes in. Understand the numbers first.
Hamburger,
Here you go.
Crash Course Chapter 16: Fuzzy Numbers - consumer price index | Crash Course Videos at Chris Martenson - consumer price index, cost of living, data manipulation, deficit, economic statistics, economy,, GDP, growth rate, hedonics, Inflation, Medicare, rece
also read Fleckenstien's book on
Greenspan.
dryfly asks "Which raises the next question... if these financial folks are going to copy biomed & mfg 'failure mode analysis stats'... are they then going to implement some kind of 'validation' & 'verification' processes?"
Where's the fee income from that????
Seriously, they all have these processes. I'm sure that includes the rating agencies. Make of it what you will.
Thanks for the excellent post!
The timeline required to evaluate a vintage has been very frustrating. Product development may think a program is fantastic and then seemingly overnight it blows up.
"the brand itself will survive this bankruptcy -- no question about that," and "franchisees should not be impacted by corporate's issues."
You will hear something like that repeated 50 times or more during the downturn. Every time, it will be a lie.
Franchisers fail when they borrow more money than they can repay with new franchisee fees coming in the door. The root problem, aside from overborrowing, is that franchisees are failing.
The franchise concept worked in a hyper consumer market but it fails in a normal or down consumer market.
Many of these franchisees themselves are over-leveraged. They paid cash for their first store and then convinced the local bank to loan them money to start the second, third, etc. Another big hurt for local banks.
Which raises the next question... if these financial folks are going to copy biomed & mfg 'failure mode analysis stats'... are they then going to implement some kind of 'validation' & 'verification' processes?
Well, you know, I find this whole part of the discussion truly frustrating.
"Financial folks" were not, heretofore, tasked with the responsibility for monitoring the extent to which mortgage lending met "social goals." That was supposed to be the government or think tanks or something.
To mort_fin's example: mortgage lenders track mortgages because that's what they make or lose money on. They do not do longitudinal sociological studies of borrowers over time through three different mortgages or home sales over fifteen years to answer the question, "Is homeownership sustainable" or "a social good" or whatever. Mortgage lenders care about their own loans, and if LuAnne refinances away from me before she defaults, she has a problem but I don't, is how lenders see this. The other lender has a problem.
And why wouldn't they?
Frankly, a whole lot of the bullshit that was passed around in the boom--even by respectable economists like Austan Goolsbee--was because there weren't actually government or think tanky/academic long-term studies of homeownership success rates out there, so these folks just latched onto the mortgage default stats that are available. I hate to have to be a shill for the industry again today, but it's tedious to be blamed for someone else's improper use of your measurements.
The Federal Reserve and HUD and places like that need to be working on sophisticated measurements and analytical modes, across pools and portfolios and with the addition of other kinds of data (property transfer records, BK records, etc.) that can answer some of the questions that public policy makers need to have answered.
I hate to be a capitalist pig and everything, but since when do we expect mortgage lenders to produce measurements of "homeownership sustainability"? That has always been a political and economic agenda and its boosters need to do their own homework. We're not going to get very far asking mortgage porfolio analysts to take over that job just because the politicians have failed to see that it gets funded in a more appropriate place.
You are all focused on a problem I refer to as "the extent and implications of the collapse of credit". I recommend that you consider it carefully and appreciate it's implications. After you do that, after you recognize the extent of the damage done by "allowing the free market" to run things, you might want to consider what we do next.
Our GNP is based upon the value of what we can sell in the form of goods and services. Or it used to be. We "globalized" and "off-shored" our very ability to produce goods, and we have become a "service economy". Gee, that sounds nice, everyone in America appreciates good service.
Small problem folks: to whom are we selling those services ? The answer is to ourselves. In fact, haven't we been "off-shoring" quite a few of our more inconvenient service jobs to places like India ? In an economy like that, you may shuffle a lot of dollars around, but you are not making any money.
Why ? Because America is not making things - goods - anymore. We are importing them. We are paying people outside our country to make our goods, and we are shuffling around money amongst ourselves to be serviced.
The last set of services we profitably sold to folks outside our country was primarily in the form of placing, machinating, repackaging, leveraging, repackaging, pooling, insuring, and creating derivatives and traunches of derivatives .... of mortgages. My friends, that market has pretty well dried up.
So, I encourage you to explore the extent of the most immediate problem we face. It is important to understand that our "let the free market decide things for itself" mentality resulted in massive fraud. It is important to understand how much of America's "wealth" is tied up in Level III assets. It is important to understand the problem is so bad that FASB accounting rules had to be changed so that no business would actually have to tell the truth about the extent of their exposure to Level III assets. It is a truly serious problem.
But when you get through it.... when you have fought through all the clouds of confusion as to "just how much did the banks {and shadow banks loose} and how much more will they loose before real estate bottoms". Don't forget the next problem.
Note -
'...a lot of people who defend the DAPs are not arguing in good faith about the performance of these loans.'
Performance? Performance?
Who cares about loan performance when something much more important is on the line, like the next sale or commission check.
Such people aren't arguing about anything but their own self-interest. Faith, good or bad, has absolutely nothing to do with it.
Some of us call it Ubercynicism.
The Federal Reserve and HUD and places like that need to be working on sophisticated measurements and analytical modes, across pools and portfolios and with the addition of other kinds of data (property transfer records, BK records, etc.) that can answer some of the questions that public policy makers need to have answered.
LOL... but will those answers fit in a 30 second election advertisement sound byte? If not then what's the point in that?
I actually agree 100% w/ what you say there - the point is that policy directives and mortgage market economic realities ARE joined at the hip whether we like it or not - the measures, processes and resultant outcomes need to be mutually sustainable or we will have what we have now - a mess.
Understanding the numbers (both what they mean & how they are derived) is a starting point. I appreciate what you both have done.
So to add to that - what happens next? [Since the policy folks are probably NOT going to do their homework nor adequately fund others to do it for them]...
Tanta suggests that someone should be doing long term studies of homeownership sustainability. But at least one excellent study has been done
http://www.nonprofithousing.org/2005conference/Reid_Paper.pdf
Katz-Reid looked at low income first time homebuyers in the 1990's and found that over half were renters again within 5 years. Presumably, most of them did not become renters via foreclosure, but instead via selling the house and moving to a rental. At this point, there are data sets that follow mortgages, but not mortgages, and datasets like the one Katz-Reid used, that follow people but not mortgages. It would be nice to have something that follows both.
"data sets that follow mortgages, but not mortgages,"
Someday I'll preview before I post. You know what I meant.
That's a great analysis. I have a stupid question, though. If you uber-nerds are capable of such rational number crunching, how did you let this disaster happen?
Seriously. Was it incompetent management? Timid risk managers? Willful blindness? Greed?
I am so impressed by the intelligence of these uber-nerd postings and the mathematical wiz-kids on Wall st, but I can't get my arms around the seemingly willful rejection of actual data pointing to disaster.
"If you uber-nerds are capable of such rational number crunching, how did you let this disaster happen?"
The question presupposes that the quants were in charge. As the lawyers say, you assume facts not in evidence.
Charities giving down payments made sense to me and then I heard that sellers were "directing" funds through "charitable" institutions. It didn't take too long before I thought of various problems that might arise.
Thanks for the explanation of the numbers.
Hey paul-look at that great model of democratic government you were taught in school and then look at what we've got,...
"someday soon entire cities like Victorville are gonna wake up and realize that it is stupid to pay any second mortgage."
Interesting notion. A problem is that the lien remains. I suppose that can make sense if your first payment is reasonable. I presume this approach can make sense for HELOCs in severely underwater situations.
If you uber-nerds are capable of such rational number crunching, how did you let this disaster happen?
Well, some of us tried telling Alan Greenspan to shut up and sit down, but it didn't work.
How about this question: now that we've got the "disaster," why do I spend my days dealing with people nattering on and on about "foreclosure prevention," as if one FC "prevented" in 2008 by doing a FHA refi or a write-down mod, which is highly likely to just move the eventual loan failure into 2009 or 2010, makes any sense?
Congress is doing just about everything short of outlawing FC, and I expect that next, to "reduce FCs." But that doesn't make homeownership sustainable for people who bought in the bubble and it won't make excess housing inventory go away and it won't magically produce equity for everybody. The quants know this. Are you going to ask me why we aren't "preventing" it? Barney Frank doesn't take my calls either.
Katz-Reid looked at low income first time homebuyers in the 1990's and found that over half were renters again within 5 years. Presumably, most of them did not become renters via foreclosure, but instead via selling the house and moving to a rental. At this point, there are data sets that follow mortgages, but not mortgages, and datasets like the one Katz-Reid used, that follow people but not mortgages. It would be nice to have something that follows both.
mort_fin | 08.16.08 - 12:35 pm | #
I actually see that in practice in my world. I live in an old Mississippi River river town... most houses are REAL cheap and a lot of them around me are rentals. Typically the long term cost of ownership is well under the short term cost of renting... so why do many of these 'low to middle income' people choose to rent if they'd have more cash in pocket if they bought?
The answer is pretty obvious to those of us on the ground - their income streams are too unreliable & they frequently either have periods of unemployment OR move to find new work. People know this - at least people around me do.
It is a 'Poisson distribution' kinda thing - the probability of an eventual income stream disturbance makes owning for many a riskier activity than renting over the longer term. They know they are unlikely to be able to get out of the way of that income disruption before the house is lost.
If you look at the neighborhood as a 'snapshot in time' you would come to the conclusion ownership is almost always FAR better for them (more cash in pocket today)... its only when you live there for 25 years like I have and have watched the 'flux' over time that you realize that 'truth' is either a half-truth at best or just plain false.
Paul,
I was going to make a sarcastic comment, but I will withhold it. Allow me a few moments to formulate an honest response.
Paul,
Ah, I have it. You are ultrashort the stock market, and you want me to support your position. The alternatives you propose are mere short term considerations, and, I'm sorry, I held an honest concern, I expressed it, and if you want hype for your market position, you need to pay me.
This is why I come to this site - very, very informative, cogent, and I come away truly informed. I appreciate the efforst of Tanta, CR and their group of "Ubernerds"
You are making this a better informed country!!!
THANKS!!!
Sorry Sparks. You misinterpret my position. I'm a bleeding heart liberal renter who has no skin in the game. My 401(k) and IRA holdings are trivial.
I'd just rather stick it to the bondholders than the borrowers and let the chips fall where they may.
Gawd do I love my iPhone
My eight year old thinks I'm watching her skate
Mrs Dawg thinks I'm a saint for doing this
Little do they know I'm ubermerding
Thanks again Mort et Tanta
As I keep saying, who is gonna finance the REOs? Potential purchasers are not gonna be squeaky clean. If nobody finances them we are in a deep death spiral--down to say, 10-20 cents on the dollar. To the point where ordinary folks can pay cash. Either that or the houses will sit there year after year rotting away. That does happen you know. Ruins are interesting to look at, but I'm sure that the people living in and near them didn't enjoy it at the time.
We are in a "pre-ruin" state right now. It is possible to avoid ruining the housing stock, but somebody would have to be thinking about it in that way.
After the black plague, there were lots of ruins, because the population fell so drastically, and the houses of that time needed lots of upkeep. Thatch-changing and all that.
Some with the fall of Rome--big fall in population.
Also, you see ruins where there's been a big earthquake or volcano and the people couldn't recover for one reason or other.
I would like to think that we can think our way out of a paper bag. We haven't had a population fall, we haven't had a plague, volcano, war (here) or earthquake. All we have had is some really screwy finance errors.
Now the banks have all these REOs and not a clue how to move them.
Talking about how people are better off being renters may be true, but the banks are not seeking renters for the REOs. Someone else is supposed to do that. How, if they can't get financing? (Maybe their regs prohibit that.)
Howsabout some really big picture thinking?
Little do they know I'm ubermerding
Ubermerding? That sounds like a German-French hybrid for something not very nice...
And thanks for the really great post.
My secy bought a house and then sold it for a 70k profit, which they promptly spent. And they are renting. Which they probably should be.
@sparks:
Friendly vibes back at you.
I'm at work now.
Bye
DH thanks
Ubermerding is when some poor soul who doesn't know what he/she is getting into & tries to read one of Tanta's longer posts finds themself doing.
mort_fin over my head but thank you too
BTW - Tanta's opposition to the DAP is fine with me. What we need in this market right now is a 20%+ requirement for all mortgages.
I agree with Lawyerliz. The banks haven't a clue what to do with all the foreclosed properties. They will sell them in bulk at discount prices to bottom feeders. That should be fun to watch.
No - I think it's better to modify the loans and stick it to the bondholders.
Can someone tell me why the danged yields are going lower, but mortgage rates are going up?
http://www.treasurydirect.gov/instit/annceresult/press/preanre/2008/R_20080814_1.pdf
Gawd do I love my iPhone
Try blogging with it. Pretty soon, CR will be posting from the trail.
From the 'there is no wage inflation camp.
"If the draft budget for the upcoming fiscal year is approved, the base pay for the sheriff, chief deputy, lieutenant and jail commander will be increased 11.7 percent.
Sheriff Eavenson is asking for more."
"Last year the sheriff turned down a 7.1% increase and accepted 5.3% in line with what was offered to his employees."
Look like the sheriff's altruism wavered this year.
This is how it starts. Wage inflation for those who cannot be outsourced.
"Bell Bottom Blues."
This is off topic but nonetheless related:
On Wall Street: Painful lessons in the meaning of the term 'credit crunch
FT.com / Markets / On Wall Street - On Wall Street: Painful lessons in the meaning of the term 'credit crunch'
At the very least, borrowing from the central bank was still below prevailing and elevated money market rates. Both Citi and AIG sold long-term bonds this week at levels way above Treasury yields.
The message from all these signals is that the squeeze on banks is not going away anytime soon.
Compounding the pain are settlements over auction rate securities with the office of the New York attorney-general.
As investors and companies are finally allowed to sell what they thought were cash-type holdings - but which since February have been turned into insolvent long-term debt by the credit crunch - banks are left clogging up their balance sheets with yet more debt.
The link between falling home prices and the ensuing pain for bank, consumer and corporate balance sheets is tightening the credit tap. It is a squeeze pushing vulnerable consumers and companies towards the realm of bankruptcy.
Tanta, mort-fin,
God love yahs fur trying, but yur preaching to the choir, and even they don't know the tune.
This the squirrel and asphalt crowd and these folks don't care about the mechanics of mortgage fraud.
Asphalt prices put paving projects on hold in New Hanover County
Asphalt prices put paving projects on hold in New Hanover County - WECT TV6 - WECT.com - Wilmington, NC news and weather -
Right now, liquid asphalt is about $800 a ton, which is up about $200 just since July 2008.
Sheriff: Brothers Arrested After Ax Attack On Patrol Car
Denver News, Colorado News, Weather, Sports & Traffic | FOX 31 Denver - KDVR
Sheriff's Sgt. Jason Oehlkers said the deputies arrived to a yard littered with dead squirrels at the brother's Jamestown's home about 45 miles northwest of Denver. The deputies were checking on 45-year-old Michael Mundy, after his employer said he hadn't gone to work Thursday.
Oehlkers said the two deputies and an animal control officer were met by Mundy waving a cane at them, and then by his brother, 44-year-old brother David Mundy, who was also upset.
Oehlkers said David Mundy picked up an ax from their yard and struck the windshield and headlight of the deputies' car. Deputies tried to restrain him with a Taser, but one of its two prongs missed and he got away, Oehlkers said.
Deputies shot Michael Mundy with a bean bag shotgun after he pointed his cane at them, making them think he had a weapon, Oehlkers said.
ASG was an excellent troll for an asshat!
Harry Carpfish CPA writes:
Tanta, mort-fin,
God love yahs fur trying, but yur preaching to the choir, and even they don't know the tune.
Harry,
I've been trying to make your point for some time. There is a time limit on the value of exploring details. Or as better stated during the last 15 seconds of the attached - watch out for the greater fool; especially given that the last fool you watched had the benefit of acting lessons:http://www.minyanville.com/mvtv/
Don't think that last post worked. I'll try it again.
AUDIO & VIDEO | Hoofy & Boo | Money Talk | Toddo TV | Depew Tube-Minyanville
Re: "Whether you are looking at a static pool with a single vintage or a dynamic portfolio with multiple vintages, you are tracking loans, not borrowers or properties, and you are tracking prepayments of those loans. You simply do not know whether that prepayment was a refinance or a sale of the home; you dont know what that borrower did after the prepayment. "
Federal Home Loan Mortgage Corp
http://www.secinfo.com/dVA59.tw.htm
... We perform a stress test based on the key assumptions in the above analyses to determine whether we would receive our contractual payments on these securities in adverse credit environments.
Our most severe default rate for our worst quartiles and severity assumptions for all quartiles are 70% and 65%, respectively, for these securities. As disclosed on Table 18, even in our most severe stress test scenarios, our potential losses are only 3% of our total non-agency mortgage-related securities, backed by first lien subprime loans. However, current mortgage market conditions are unprecedented and actual default and severity experience could differ from our expectations. Furthermore, different market participants could arrive at different conclusions regarding the likelihood of various default and severity outcomes.
Anonymous writes:
Can someone tell me why the danged yields are going lower, but mortgage rates are going up?
Anonymous,
Zombies need blood.
Sorry.... apparently my comments angered someone. My firewall has been overcome with attacks and my safe system is reporting multiple errors. It was just my honest opinion, but apparently that is no longer allowed.
I'll be back if/when I can clean out the mess.
Ubermerding = what happens when it hits the fan. It's everywhere!
A Midsummer Night's Dream
Act 3, Scene 2
DEMETRIUS\tThere is no following her in this fierce vein:
\tHere therefore for a while I will remain.
\tSo sorrow's heaviness doth heavier grow
\tFor debt that bankrupt sleep doth sorrow owe:
\tWhich now in some slight measure it will pay,
\tIf for his tender here I make some stay.
King Richard III
Act 4, Scene 4
The liquid drops of tears that you have shed
\tShall come again, transform'd to orient pearl,
\tAdvantaging their loan with interest
\tOf ten times double gain of happiness.
\tGo, then my mother, to thy daughter go
\tMake bold her bashful years with your experience;
Kinda slow, huh?
Re: Default Statistics, Or Mortgage Math Is Hard
Romeo and Juliet
Act 3, Scene 1
MERCUTIO\tNo, 'tis not so deep as a well, nor so wide as a
\tchurch-door; but 'tis enough,'twill serve: ask for
\tme to-morrow, and you shall find me a grave man. I
\tam peppered, I warrant, for this world. A plague o'
\tboth your houses! 'Zounds, a dog, a rat, a mouse, a
\tcat, to scratch a man to death! a braggart, a
\trogue, a villain, that fights by the book of
\tarithmetic! Why the devil came you between us? I
\twas hurt under your ar
Sparks, I thought your zombie remark was cute.
Lawyerliz said:
Now the banks have all these REOs and not a clue how to move them.
Talking about how people are better off being renters may be true, but the banks are not seeking renters for the REOs. Someone else is supposed to do that. How, if they can't get financing? (Maybe their regs prohibit that.)
I started thinking this thought a month ago. I rarely think that women say, "I want to be a prostitute", but sometimes the economic situation becomes as such that they turn the the unavoidable. Right now banks can say, "I don't want to be a landlord."... but at some point they are gonna turn a bit desperate.
So I noticed that Tanta used the word "pwn3d" in a recent post and now there are World of Warcraft ads appearing on the site. Interesting.
Tanta:
It appears to me that part of the debate about downpayments is whether one considers home ownership a right or a privilege.
I take the latter position. It is interesting that Bush and Greenspan essentially took the former view
The Federal Reserve and HUD and places like that need to be working on sophisticated measurements and analytical modes...
Disagree. Have we not by now had enough experience to realize models provide a false sense of security? Modeling hits the heisenberg wall immediately - the more you model -> the more you believe your models -> the more you act on the model -> the more you taint the very thing you're trying to model.
Go in the other direction - simplify the crap out of the system and eliminate the need for models. Move to mandatory heavy down payment approach, and keep the risk where it belongs, on the person trying to use someone elses money.
This also has the side effect of greatly limiting The State's opportunities to indulge in "too big to fail" loss socialization.
Thank you, mort_fin and Tanta.
Great Explanation.
LawyerLiz-I doubt 10c-20c/dollar, since even if you use hardmoney lenders charging 20%, investors can make money on rentals at what, 50c/dollar? (so long as we are using yr2000 dollars, of course)
Re: The Federal Reserve and HUD and places like that need to be working on sophisticated measurements and analytical modes...
Popper is known for repudiating the classical observationalist/inductivist account of scientific method by advancing empirical falsification instead; for his opposition to the classical justificationist account of knowledge which he replaced with critical rationalism, "the first non justificational philosophy of criticism in the history of philosophy"
Karl Popper - Wikipedia, the free encyclopedia
It appears to me that part of the debate about downpayments is whether one considers home ownership a right or a privilege.
Well owning a car can be considered a right (you can buy a car to fit your budget and who would deny that right to you?) but driving that car is a privilege.
The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster by Nouriel Roubini February 5, 2008
Eleventh, the worsening credit crunch that is affecting most credit markets and credit derivative markets will lead to a dry-up of liquidity in a variety of financial markets, including otherwise very liquid derivatives markets. Another round of credit crunch in interbank markets will ensue triggered by counterparty risk, lack of trust, liquidity premia and credit risk. A variety of interbank rates TED spreads, BOR-OIS spreads, BOT Tbill spreads, interbank-policy rate spreads, swap spreads, VIX and other gauges ofinvestors risk aversion will massively widen again. Even the easing of the liquidity crunch after massive central banks actions in December and January will reverse as credit concerns keep interbank spread wide in spite of further injections of liquidity by central banks. Twelfth, a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue leading to a cascading and mounting cycle of losses and further credit contraction. In illiquid market actual market prices are now even lower than the lower fundamental value that they now have given the credit problems in the economy.
It's good that this information is coming out. I live in Idaho and everyone here is still in TOTAL denial, although Idaho is number 15 in the nation....
sorry, more informaiton, Idaho is number 15 for foreclosures.
I deal with hard money lenders sometimes. There are not enough of them to make a sizable enough dent. And they don't, collectively have enough money. And the lower prices go, the more reluctant they will be to loan. Since it's their money, or a close business associate's money, not some distant, who cares about it opm.
Listening to Springsteen, City of Ruins.
Lawyerliz, your comment way upthread about what can be done, and probably won't, caught my feeling also.
Waste.
"Everybody's got an interest in sustainability of homeownership,..."
Careful, now. I live in a city with millions of renters. We would love to see prices come tumbling down even more. Many of us are productive members of society who are reluctant to take on debt, contemplate soon moving to the suburbs to raise our kids (not me) or see true division of labor efficiencies by living in a building with hundreds of apartments.
While we're on the (underlying) subject of downpayment assistance, and criticisms of Democrats like B. Frank's interference with the "free market", let's not forget one of the largest, longest-standing welfare programs: TAX DEDUCTIBILITY OF MORTGAGE INTEREST. Of course, you won't hear much protest from the renters who are fucked by this scheme, since they are not well-organized at the moment. But make no mistake, most of you retirees do not want to contemplate the alternatives to Frank, Pelosi, and Obama, you know, the ones which foisted the New Deal on FDR and the like.
Try harder norma. We all deserve to be in the top 10.
From the next Barron's:
"It is growing increasingly likely that the Treasury will recapitalize Fannie and Freddie in the months ahead on the taxpayer's dime, availing itself of powers granted it under the new housing bill signed into law last month. Such a move almost certainly would wipe out existing holders of the agencies' common stock, with preferred shareholders and even holders of the two entities' $19 billion of subordinated debt also suffering losses. Barron's first raised the possibility of a government takeover of Fannie ..."
(via Denninger.)
Great work mort_fn and thanks! Also thanks to Tanta.
Did Tanta and mort_fn go to the same school?
When I read the blog title, I thought it said Default Statistics, On Morgan Stanley Math Is Hard...
Wall Street's Jobless Try Cupcakes, Cheap Haircuts, Maybe Omaha
Wall Street's Jobless Try Cupcakes, Cheap Haircuts, Maybe Omaha - Bloomberg.com
I want to teach kids to cook,'' said Walter, 27, who founded Cupcake Kids! in New York to provide birthday parties and cooking classes for children.The goal is to have this be my full-time job and make enough to live.''
Wall Street professionals are trying new careers, and fetching smaller salaries, amid the elimination of 76,670 investment jobs in the Americas following the global credit crunch that started a year ago, according to data compiled by Bloomberg.
Oh, yeah, you can make a lot of money with cupcakes.
These imbeciles had charge of gobs of money?
Rising asphalt costs could cause funding shortfall for Florence County road projects
Rising asphalt costs could cause funding shortfall for Florence County road projects | SCNow
The rising cost of crude oil has led to an increase in the cost of liquid asphalt, which has risen from $3.45 a gallon Aug. 1, 2007, to $8.07 per gallon Aug. 1 of this year, Welch said
I dont see any dirt roads being paved ... in 20 years unless we get a tax increase or some help somewhere, Welch said.
Damn it!
There are doubts that the ongoing USD rally has covered a bit too much ground, too quickly (EURUSD dropped 8.1% in 4 weeks).
We see decent chances 30% to 40% that sterling will rise or hold its ground to the dollar early in the week, to later succumb to the pretty strong trend at play. The strong USD-weaker commodities prices trend will continue to reverse until commodities prices reach a sustainable support level. Due to various factors, there will invariably be an overshooting of the rational commodity price levels just like there were on the move in the opposite direction. Look for sterling to close the week weak following the UK GDP announcement.
It is critical to understand that financial markets are still crippled by severe distortions where too much investor money is concentrated in few investment options. The same forces that were at play a few weeks ago pushing crude prices beyond rational or fundamental levels are at play again but in the opposite direction. Our theory of how these forces developed originates with widespread investor Fear.
Only 13 visitors online? This blog is MINE I tell you, MINE.
So, everyone watching the professional olymps. Amateurs have ben banned from the games for decades.
Badmitton? You must be kkkkidding.
Al Oeter was a GOD! Wooskateers from then on.
Tolka reklama. Smacks of Tamara Press circa 60's.
Come on, guys and ladies...it's "tranche", not "traunch"....geez...
i think the word tranch means slice in french
in france the word is spelled traunch
Dear nit,
Pari passu to you too. Some of us speak bad frog.
To get rid of nits, try Rits.
The way I see it is the American lifestyle is going to change. Taxes, taxes, taxes are going to go up drastically. No two ways about it, you guys owe one fuck of a lot of money. Your dept is huge, you have no money. You spread your crap to the rest of the world, you have to pay, get used to it! The neocon, holly god almighty chosen people shit is over! You Americans pissed it all against the wall thinking your nukes and tech guarantee the world owes you everything. Well a nuke is a nuke, they all hurt. I was watching the Olympics last night, here we go, the good old USA, USA, USA chant at the fastball tournament. Yep the same old beer belly, buck tooth good old boys in the crowd. I almost puked up my vodka and orange, good thing the cannabis kept me together. Keep those dip shits at home, please. No wonder so many counties and ethnic groups are gunning for your ass.
Then you send Condoleezza to set Putin straight, haahahaha, Vladimir is laughing at your asses, he is one bad mofo, Make my day dip shits says Vladimir. He is going to screw with your heads, he has energy, energy is power. USA is an importer, suck his pipe, haahahahaha. Real estate is your least worry.
Just saying.
8 of 8
congrats.
Canackcurrentlygrowingcanabis,
You have amazing vision about the U.S. So, don't be so angry about how little Americans can see about what's coming.
To all those claiming that a "bailout" is required because the end result of "letting the chips" fall where they may will cause untold damage to J6P I say I support a "bailout" IF AND ONLY IF
The executive level is wiped out at all major institutions that are in any way helped by a bailout.
The government (meaning the people( gets equity in all major financial institutions.
Bond-holders take a hair-cut.
Common and preferred share-holders are wiped out or at a minimum severely diluted.
Laws on the book are enforced and the Glass-Steagal act is un-repealed.
ANY banking institution that is allowed access to the discount window is allowed a maximum of 10:1 leverage.
No off-balance SIVs
All derivatives and CDOs are publicly tracked OTC.
But since no bailout since the 1930s in the US has resulted in any changes AFTER the fact I say f**k them all and let the chips fall where they may.
Hey Canak? You can't even spell your own name correctly?
The Canuck buck seems to be ,er deflating?
So, we have too many depts. Youse mean debts?
How many nukes you got, eh?
Youse guys will be our next states before it is all over.
Put an egg in your vodka orange. Or suck eggs. Your choice.
Hey canak,
You guys have 'stuff'. We require 'stuff'. We can do a leveraged buyout or a hostile takeover. Your choice.
54-40 or fight. Last look you still have Tory enclaves. Give em up!
Ross, you bone rack, put down the keyboard, get out of your mommies basement and kiss a girl.
If it wasn't for us Americans, all you Canucks would be speaking French today.
Woops, yep canack, haahahah, canuck.
Kasriel is calling for a rate cut.
Recession Now Putting Our Forecast Where Our Mouth Has Been
Looks like we have our catalyst for the next gold rally.
@ DH
Yep, you got it right. This has been my call for over a year. ZIRP.
These clowns will declare victory over inflation at the drop of a hat and start another round of rate cuts. I mean gas is now 'only' $3.60 down from$4. Woopie!
Reminds me of Gerry Ford's whip inflation now campaign. WIN buttons for the hoi ploi. Jimmy 'peanuts' Carter's the 'moral equivelent of war' which some termed MEOW.
The guys at the printing press will inflate. When have they not?
I'm getting my own paper and go to the FED. I want to use those presses. Ever heard of freedom of the press?
The Canak above is somewhat correct. But one may not impune a whole country for the felonies of the of our corrupt politcos and their paymasters.
This will not end well. It will not be a watershed moment. We are looking at a sea change. Declining tides beach all boats.
El Cliffo
If it wasn't for the American Indians and Black slaves, we would be Americans also, whew, by the skin of our teeth.
Ross writes: Declining tides beach all boats.
Nice. I plan to steal this.
earlier in the week FFDIC posted a link referencing a consent decree from the 11th circuit...i might be remembering this wrong...
but in any case the courts decree was gruesome against vinyard bank
first on the list was something like fire you current dumb-ass CEO, advertise for a new one and check with us for advice and consent before you hire.
this may be how the comptroller, the Fed and FDIC deal with the financial institutions in crisis
prop up the insolvent, demand new leadership and keep the boat afloat no matter what!!??
in other words, maybe we wont see 90 plus bank failures in the next year no matter how many institutions are on the WATCH list!?
Pronunciation: ˈträⁿsh
Function: noun
Etymology: French, literally, slice, from Old French, from trenchier, trancher to cut more at trench
Date: 1930
a division or portion of a pool or whole; specifically : an issue of bonds derived from a pooling of like obligations (as securitized mortgage debt) that is differentiated from other issues especially by maturity or rate of return
Learn more about "tranche"
Yep but, its all bullshit, we see through it, no where to hide, game over, no where to hide, they are f*#ked.
tranche
Definition from Wiktionary, a free dictionary
See also Tranche
* 1 English
o 1.1 Noun
+ 1.1.1 Related terms
+ 1.1.2 Translations
* 2 French
o 2.1 Pronunciation
o 2.2 Noun
o 2.3 Verb
o 2.4 External links
Singular
tranche
\t\t
Plural
tranches
tranche (plural tranches)
Related terms
* traunch
( note, mine traunch rhymes with launch
as above tranch and traunch are alternative spellings and an e at the end is commonly noted.
quote: thomas jefferson
i have nothing but contempt for any man who knows only one way to spell a word
DH writes:
Kasriel is calling for a rate cut.
Error 404--Not Found TYPE=interior
Looks like we have our catalyst for the next gold rally.
DH | 08.16.08 - 11:39 pm | #
Did the Chinese say we can haz rate cutz? If the recent agency 'backstop' was any indication - my guess is 'no'.
Next we'll be asking if we can haz tax cutz... else they threaten to abandon treasuries too.
Next Prez is gonna have a ball I tell ya - who would want that job?
2004, George W. Bush, speech following tsunami disaster:
First of all, we provide immediate cash relief to the tune of about $35 million. And then there will be an assessment of the damage, so that the relief is -- the next traunch of relief will be spent wisely.
traunch - Wiktionary
I've been wondering why we use a french word for our little slices of heaven. Did some evil french financial wizard invent this, possibly contemporaneous with the guillotine?
Hey, CanuckCurrentlyTrollingonCannabis:
enc
Hi,
I'm a recovering CDO salesperson, and I joined the group because I feel like shit and have nothing else to do during the recession .... anybody fuc-ing care.. huh?
Dryfly
agreed, the next inhabitant of the white house may regret their electoral victory because the job will be one huge mess.
i have never understood why the dems went for the first rebate check...why not let the financial mess go splat on dubya's watch?
sure as God made green apples, if the big slide accelerates and hits bottom 2 months or more into obamas watch many on the right, and even some on the left will give him the credit (blame)
This is the kind of shit I have to read, while no one buys my CDOs:
artin Feldstein, a professor at Harvard University and an adviser to Republican presidential candidate John McCain, said it was hoped the economic stimulus package would boost consumer confidence and lead to higher levels of production and employment.
"The evidence is now in, and that optimism was unwarranted," Feldstein wrote in an opinion piece in the Wall Street Journal earlier this month.
He said recent statistics show only between 10 percent and 20 percent of the rebate dollars were spent, while the program added nearly $80 billion to the national debt.
HELP OR HARM?
Treasury Secretary Henry Paulson has argued the stimulus effort helped the economy, and he said he wants to give the tax rebate checks more time to boost growth.
Ok, this blog belongs to me now Ross
many deposited the money or paid down debt and the banks aint loanin money like they used to...
others dug a hole in the back yard
MLM
CanuckwatchingtheCirque, Hahahahaha
Korvu writes:
Ok, this blog belongs to me now Ross
and 14 other visitors!!!
2 Visitors Online
tis within my grasp
This pisses me off when these blogs have to reach some predetermined response value, as if in a telethon raising cash for some charity.
Come on you little brats, we can make 200 posts; anything will do, cupcakes, cookies, squirrels, truck stop gab, asphalt, anything goes in the push to 200. This calls for an inspirational video: No, maybe not; that is self control, and that is the inspiration here.
Moohawhahahahahahaaa
"The Paradise Syndrome" is a third season episode of Star Trek: The Original Series, and was broadcast October 4, 1968. It is episode #58, production #58, written by Margaret Armen and directed by Jud Taylor.
Overview: An alien device on a primitive planet erases Captain Kirk's memory, and he begins a life as one of the natives.
As the asteroid approaches, the planet's sky begins to darken and the weather begins to pick up force that blasts the terrain with fierce winds. The elders tell Kirk he must go to the "temple" and stop the storm before "the ground begins to tremble". Kirk makes his way to the obelisk, but doesn't remember how to get inside. He pounds his fists against the sides of the obelisk, shouting, "I am Kirok! I have come! I am Kirok!", but nothing happens.
YouTube -
Also See: Derivatives Signal Fed Loans Fail to Boost Lending (Update1)
Derivatives Signal Fed Loans Fail to Boost Lending (Update1) - Bloomberg.com
186 and holding:
Das Boot - Emergency dive scene
YouTube - Das Boot - Emergency dive scene
OCCs Quarterly Report on Bank Trading and Derivatives Activities
First Quarter 2008
http://www.occ.treas.gov/ftp/release/2008-74a.pdf
FFDIC,
Nice!
Re: Percentage of Total Credit Exposure to
Risk Based Capital
HSBC Risk Based Capital rockets to 700% (600
08Q1) -- is that right? Wow, Holy Mother Of Tanta! They also have 22.5% less
Trading Revenue as a Percentage of Gross Revenue; they seem to have problems with forwards and 1 to 5 year interest rate positions, not to mention the next shoe dropping, which is all about gold derivatives and futures losses.
This is the next shoe, what think?
Re: Aug. 16 (Bloomberg) -- HSBC Holdings Plc, Europe's biggest bank by market value, will seek to control costs by exercising more caution in lending and hiring, the South China Morning Post reported, citing Vincent Cheng, chairman of its Asian unit.
The outlook for the second half of the year is ``very challenging,'' the newspaper cited Cheng as saying. Slower growth in the region and faster inflation will prompt the bank to monitor expenses more carefully, the Post added.
Computers let you make more mistakes than any other invention in history-with the possible exception of handguns and Tequila!
Decline in net income
HSBCs net income fell 29% y-o-y to US$7.72 billion (or US$0.65 per share) in 1H 08 from US$10.9 billion (or US$0.94 per share). The banks profitability declined due to the rise in loan impairment charges, mainly in the US, and decrease in profit from its Hong Kong operations. The banks pre-tax profit declined 28% to US$10.25 billion in 1H 08 from US$14.16 billion in 1H 07. Pre-tax profit in Europe rose to US$5.18 billion from US$4 billion but fell to US$3 billion from US$3.33 billion in Hong Kong over this period. In the rest of Asia-Pacific and Latin America, pre-tax profit increased to US$3.62 billion from US$3.34 billion and US$1.27 billion from US$1 billion, respectively, during the period 1H 07 to 1H 08.
Reggie Middleton's Boom Bust Blog
Britain's beleaguered pub, bar and hotel operators are set for further misery following a decision by HSBC to stop lending money to certain companies in the leisure sector or extend their overdrafts.
Life is one big minefield and the only place that isn't a minefield is the place where they make the mines!
Just imagine if there were no hypothetical circumstances!
Not everything they say is a lie,but anything they say could be a lie!
My last for 200 comments because it has commentators in it.........The minds of men were gradually reduced to the same level,the fire of genius was extinguished....The name of poet was almost forgotten;that of orator was usurped by the sophists. A cloud of complilers,of commentators darkened the face of learning,and the decline of genius was soon followed by the coroption of taste.This dimingtive stature of mankind was daily sinking below the old standard..........Gibbo
I'm starting to make mistakes,it must be time to go.I'm reading a book right now as I surf "City of Thieves" which oddly is not about Wall St. or Washington.
Come on, failure is not an option here, we need 200; WTF is wrong here?
I'm willing to play 198, and ask if
default ever showed up again?
Nice post, MF!
Now we can move on to competing hazard survival models, KS curves, Gini coefficients, SMM and CPR!
always come back the next morning...FFDIC frequently posts links to gems after 2 am
and hey Pitchforks,Torches&Pikes world writes:
"Just imagine if there were no hypothetical circumstances!"
good one!!
---think taht makes 200 hahahahahah
"Financial folks" were not, heretofore, tasked with the responsibility for monitoring the extent to which mortgage lending met "social goals." That was supposed to be the government or think tanks or something.
But Tan Man tells us this is why he got into the business!
After all, that's what "EncycloCentral.Com" tells us:
Encyclocentral - Article not found.. Surely they wouldn't pass off fluffy nonsense.
I suppose next you'll tell us the Easter Bunny isn't real.
Tanta,
Thanks for your response re the motives and responsibilities of the banks. It causes me to think hard about the different business cultures present here.
There are folks here with way more experience and scholarship here than me, but I found the cross discussion between manufacturing and finance really interesting.
It strikes me that I don't know what legal standard mortgage loans have to meet re consumer safety if any.
I vaguely remember liability for sellers of goods who fail to meet 'warranty of fitness for a particular purpose' when they sell something.
Also, very basic tort law is hard on manufacturers who sell something that blows up in purchasers faces, or otherwise fails to function as promised in a dangerous way.
Countrywide and others were selling financial toxics in the marketplace.
Somehow, given who bought and paid for the UCC, I doubt that they face the sort of liability manufacturing would, despite misrepresenting risk and causing harm.
Depending on how bad this gets, what the public outcry demands, a science fiction writer might suggest that this will change.
Or not. the banks do run the world, or at least that's my working theory.
Or when 'homeownership sustainability' was generally considered difficult to separate from 'mortgage sustainability.'
I think you are missing my point.
Unless we outlaw refinancing or upgrading into a new home in just a few years after you bought your first one, we are always going to have a situation in which you cannot make "sustainability of THIS mortgage" proxy for "sustainability of ownership of ANY home."
Even insofar as the sustainability of mortgage lending involves the sustainability of homeownership, what about the builders? The RE brokers? The municipalities who rely on property tax receipts? Everybody's got an interest in sustainability of homeownership, but no one party can make the whole analysis from their own little databases.
My point is simply that mortgage analysts can bring to bear the best possible statistical methods in the universe, and they're still just looking at mortgages. To ask about homeownership sustainability is to also ask about prices, transaction costs, tax structures, jobs in affordable housing markets, patterns of migration, etc. All I'm saying is that if it is a political goal, then public money needs to be spent on backing up the claims made for boostering homeownership. To think you can get the data you need just from mortgage lenders is goofy.
Swedish chef:
As I understand it, the borrowers were not the only "victims" of reckless lending. There were also investors who provided the capital and won't be getting it all back, much less with interest. Those people have the legal and political firepower to get justice, in many cases.
Not justice for the borrowers, but for themselves.
Swedish Chef, I am not trying to argue that lenders should have no liability for harmful practices.
I am just saying that you aren't going to get Countrywide or anyone else to run 15-year longitudinal studies on first-time homebuyers across all the refis and sales and so on, in representative MSAs, placed in the context of wages, savings, overall debt, employment, and other factors over those fifteen years, to tell us whether for most people homeownership is all it's cracked up to be, financially.
And I don't know why anyone would expect that.
Drug manufacturers are liable if you take their medicine and die (supposedly), and they're responsible for analyzing their "failure rates." But they are not responsible for the public health research in this country. They are not asked to do multi-generational studies to measure the economic and quality of life impacts on society as a whole of having a decent antacid on the market.
I think this is because we understand "public health" to be more than just "drug effectiveness." And we think it is appropriately funded by government money because it is, well, a "public" issue, not a private one.
I was simply responding to what I thought was a suggestion that we could answer these big public questions if only these mortgage lenders would fix up their stats a little better.
The Dallas Dirt:
Texas' jobless rate jumps to 4.7%
Texas' jobless rate jumps to 4.7% |
News for Dallas, Texas | Dallas Morning News
| Dallas Business News
Penney's 2Q profit falls 36%
Penney's 2Q profit falls 36% |
News for Dallas, Texas | Dallas Morning News
| Dallas Business News
New office tower planned in Dallas' Park Lane project
New office tower planned in Dallas' Park Lane project |
News for Dallas, Texas | Dallas Morning News
| Dallas Business News
dryfly,
Another crazy dreamer, eh? I bet that gets as much attention as trying to get an E&P company to address the systematic upward bias in production forecasts presented to Wall St (missing on the low side five years running...sigh)
Coming Sunday in the Dallas Morning News:
Dallas Fed chief speaks his mind
"Richard W. Fisher, president and chief executive of the Federal Reserve Bank of Dallas, has a reputation as one of the nation's leading inflation hawks. He has cast his ballot against the majority in every interest rate decision this year. He's even argued that rates should be higher, despite the economic downturn. In a wide ranging interview with reporters and editors at The Dallas Morning News this week, Mr. Fisher discussed inflation, as well as his views on everything from the economic outlook to the cost of wire hangers at your local dry cleaner." (Can't wait for that news.)
Tanta,
No criticism here. This mess has me in awe and I'm trying to think about it. You once wrote about the industry exchanging salaried underwriters for 'eat what you kill' sales people. I think that's the problem.
John Stark,
Here's hoping that the pissed off investors will achieve some collateral benefit for defrauded borrowers. The complex issues of personal responsibility here are at least as bad as for tobacco, but bottom line, some percentage of this stuff was clearly toxic and knowingly sold. Responsibility of the borrower to do due diligence is another question. I'll be curious to see how this plays out.
OT but not:
Tough Housing Market Complicates Divorce
Divorce is rarely an easy process. But falling home values and sluggish real estate sales are combining to make it particularly difficult right now.
Couples aren't fighting over who gets to keep the house. They're scrambling to get away from the burden of it. It's too soon to see the trend reflected in official statistics; the most recent marriage and divorce numbers compiled by the National Center for Health Statistics date back to 2005 -- just when real estate markets started to turn down from their boom years. But lawyers and financial planners anecdotally say they are seeing more clients stay married -- if only for the time being -- simply because they cannot afford to break up.
{snip}
energyecon - see, all that toxic lending has boosted the marriage success rate!
Swedish Chef,
With all due respect, I have a suggestion with respect to the appropriate legal standard that ought properly be applied to mortgage loans- or more accurately to the entire process of the derivative mess.
I appreciate that you are engaged in an analysis that entails the application of long forgotten anti-trust rules - and - sincerely, I empathize. Allow me to suggest that you consider the application of another seemingly long forgotten rule: to wit: caveat emptor. If the buyer does not bear the burden of investigating the pig in the poke, then someone is issuing a guarantee.
No criticism here. This mess has me in awe and I'm trying to think about it. You once wrote about the industry exchanging salaried underwriters for 'eat what you kill' sales people. I think that's the problem.
As a guy who has been an 'eat what you kill' salesguy in the industrial sector for almost 25 years it is ALWAYS the problem IF you want your sales people's activities & motivations to dovetail with the organizations motives & interests.
It is very hard to make the two fully compatible UNLESS somebody w/out direct interest in the transaction is doing the 'underwriting' to make sure it works for the organization as well as it works for the salesguy. We all know who the salesguy is looking out for...
mort_fin,
That puts the 'moral' in moral hazard alrighty!
Couples aren't fighting over who gets to keep the house. They're scrambling to get away from the burden of it.
Somebody's been reading my blog again (note the date):
Sunday, July 30, 2006
Divorce 2008 Style
Guy talks to his coworker in 2008 about his recent divorce:
"Man, I just finalized."
"Tough times. I know, I've been there. How'd it turn out?"
"It was vicious right to the end. She got nothing and I got the house."
"Sh!t! You got screwed. You needed a better lawyer."
"I know. Trouble is hers was a former Realtor®."
[Nodding] "You never had a chance."
the moral in moral hazard or the con in conjugal?
sparks,
If buyers start being too wary from being burned too many times, the marketplace can dry up entirely.
People can revert to only dealing with friends and family, and we are back with tribalism.
Ok, enough public policy.
Chef out.
Sorry Dawg, no props given as none due - that was a random Yahoo finance trawl - though clearly you do have a finger on the pulse in some ways.
I'm confused about the reference in the first graph to homeownership rate. This story is about rate problems, but then you don't explain what this is; even if it seems obvious to you. Please explain your description of this.
Swedish Chef,
No, not enough. On your own terms, you are inserting a "current market" mentality into your analysis. As a matter of public policy, it is necessary that you assess the issue from the vantage of the buyer's responsibility. If the buyer of the 6th traunch of the 87th derivative of my mortgage ..... failed to inspect the CONTRACT.... and you want to help him.... then you need to find out who or which government was insuring that sale. With all due respect....
Anonymous - there is no "homeownership rate" There is a "homeownership success" rate. The point here is that people like Austan Goolsbee have made comments along the lines of "if 15% of mortgages are failing, then 85% of borrowers must be succeeding." But you can't go from one to the other. The charts show an example with 30% of mortgages failing lifetime (less than that for several 'to date' measures) but fewer than 50% of initial borrowers remaining successful homeowners.
Swedish Chef,
Its a question of whether you are applying the law or econo/politics. It's your call, my friend... best of luck.
Mort,
Thanks for that addition, I just looked at the chart and wondered why the bottom column was an aggregate homeownership rate
Tanta wrote How about this question: now that we've got the "disaster," why do I spend my days dealing with people nattering on and on about "foreclosure prevention," as if one FC "prevented" in 2008 by doing a FHA refi or a write-down mod, which is highly likely to just move the eventual loan failure into 2009 or 2010, makes any sense?
Ok - fair enough. I tend to identify with the borrowers so anything that helps them - even it temporarily - gets my attention.
Foreclosures are going to happen - Barney Frank et al notwithstanding.
The problem has always been trying to balance the need to get people out of houses they could never afford against the larger damage to the economy. Such a balance is very hard to achieve. I don't have any answers, but all the prior arguments about mods and bailouts making mortgages more expensive are non-sense. The "private" markets have abandoned the mortgage markets anyway. The US govt is the only game in town anymore. It's time to swallow hard and forgive debt en masse.
Remember 3rd world debt forgiveness - it's time for some 1st world debt forgiveness. Only really radical action has a hope of changing the game.
The fact that the brokers are now buying back auction rate securities is a clear example that it can be done. It times like this - all options are on the table.
I know, it seems impractical. So did a bailout of the ARS market by the brokers seem impractical a few months ago.
DH,
It wasn't the Chris Martenson crash course (watched that last night) but a real documentary - historical film footage, Hayek, Keynes, history of last 150 years of economic "theory". 6-parter I think.
Thanks anyway - I'll keep looking..
So what are your thoughts on substitutions?
Re: Where Did the Risk Go? How Misapplied
Bond Ratings Cause Mortgage Backed
Securities and Collateralized Debt Obligation
Market Disruptions
http://www.hudson.org/files/publications/Hudson_Mortgage_Paper5_3_07.pdf
Good examples of such capital structure arbitrage are unfolding as we speak.
According to FitchIBCA, mezzanine structured finance CDOs typically contain a 3-5 year reinvestment period during which new collateral can be substituted for original collateral that prepays or defaults. As a result, since CDOs that were created in 2003 faced high early prepayment and default rates recently they have
taken on risk from the 2005 and 2006 subprime vintages, which are so far performing worse than the original 2003 vintage.
Figure 25 shows how vintage substitution is forcing the 2003 and 2004 vintage CDOs to take on additional risk from the 2005 and 2006 vintage RMBS.
As the 2003, 2004, 2005, and 2006 vintage RMBS season further, performance is expected to worsen. Hence, Fitch expects RMBS and CDO downgrades to arise later in 2007.
FitchIBCA, Rating Stability of Fitch-Rated Global Cash Mezzanine Structured Finance CDOs with Exposure to U.S. Subprime RMBS, Apr. 2, 2007, at 5.
DH,
Found it. Commanding Heights on PBS - 19 chapters.
Sorry for the interruption to the topic/conversation. Carry on.
Paul,
I'm not suggesting that - given the bailouts - that have been granted so far we not "necessary" to keep our entire economic system from failing. Further, I appreciate the suggestion that it's only fair to spread the lack of wealth. I am sincerely impressed by the collective knowledge as to minutely who passed on which risk to whom. But let me ask you something Paul.... where does it stop ? Who gets bailed out last ? We are spending $10 Billion/week in Iraq - how many billion on each of the FED's alphabet soup answers to the credit crisis. Paul, who pays the bill ?
I sure hope Swedish Chef read my last post.
Thanks for that addition, I just looked at the chart and wondered why the bottom column was an aggregate homeownership rate
It is the homeownership rate of that pool of ten loans. In the beginning, 10/10 own homes, by the end 3/10 own homes. It doesn't match up with the FC rate because two of those borrowers "voluntarily" sold their homes and did not buy another.
Sparks - who gets bailed out last? The owners of the mortgage-backed securities get stuck with 20 cents on the dollar. They bought the risk. They take the loss. It's going to happen anyway.
So that means your pension fund (if you even have one) will go broke. The hedge funds will collapse and their investors will take a bath. The Chinese and Arabs who were chasing yield will learn a valuable lesson in risk management. Americans will have to live within their means because credit will dry up. The world will get smaller because the assets that blew up the bubble will be worth much less. It sucks, but foreclosing on every single property headed there today will have the same result.
Thanks Tanta, that makes it clear.
However, I'm still curious about collateral substitution, and I'm sure that's a little off topic, just as this is;
Moody's Loss Sensitivities measure the number of notches that the rating on a Moody's-rated structured finance security would likely move downward if the loss expectations assumed for the transaction's underlying collateral pool were presumed to be substantially higher at issuance than those actually used to rate the transaction.
The new Moody's report is called "Assumption Volatility Scores and Loss Sensitivities in the U.S. ABS Vehicle Sector. The May 13th report that introduced the new risk measures is called "Introducing Assumption Volatility Scores and Loss Sensitivities for Structured Finance Securities.
The "collapse of credit" is a devastatingly serious problem. But, as painful as it is, it is more than the elimination of the hope expressed in the "ownership" society. It's more than the loss of jobs in the 'appraisal community', the 'realtor's', the 'mortgage brokers'.... shall I go on ? It is painful - painful - painful.... and the truth of the matter is that it is full of pain.
It is necessary that we look at how bad it is. It it devastatingly sad that people we know will sincerely suffer from it. Maybe it is necessary that we personally experience some of the pain that this collapse has visited on "the others" in our communities. Actually, at least I believe, all that is necessary for us to come to grips with where we really are and - more importantly - who we really are.
However, I'm still curious about collateral substitution
You're way out in left field there.
CDOs are collateralized by other bonds--mortgage-backed securities. CDOs are actively managed--they can buy and sell underlying collateral through the life of the CDO.
MBS are collateralized by mortgage loans. 99.99% of first mortgage MBS cannot be managed--they cannot buy or sell or otherwise substitute new mortgages for what they originally had in the pool. (If they do, they lose their preferential tax treatment as REMICs.) HELOC pools do involve loans moving in and out (they are ABS, not MBS), but that's because some lines of credit never get drawn down at all, and so a HELOC with a balance can be substituted in for one that has no balance.
Mortgages are collateralized by real estate. And there is no substitution there. E*TRADE tried that a while ago with a "portable mortgage" (you could sell the old house and buy the new house under the same old loan) but it fell flat. Our RE market in this country doesn't work well that way.
Confusing CDOs with the rest of the world is not a helpful thing.
Re: You're way out in left field there.
Why thank you; I once that thought that about you as well, but then I started reading your posts and have become a better person, more rounded and more willing to absorb the excellent material which is offered here daily (and at night as well).
To wit, those posts were in left field and related in a weird way as examples; I realize they were poor examples for an apples-to-apples comparison, but as I said, I'm curious about substitution of collateral. I just thought it might set off some spark for a forest fire of outrage ... oh well.
Ok, I'll prove to you the depths of my ignorance on this stuff:
Hey Sparks. The alternative to the collapse of credit as you call it, is to pursue Tanta's foreclose 'em all solution. It is an equally reasonable approach. It maximizes the recovery of the MBS owners. I haven't seen anyone model this out (maybe I'm not paying close enough attention and Mr Roubini has done it). How many people will be out of their homes and what affect will this have on the rental market? In this new world folks who have been foreclosed will never again (nor should they) get a mortgage.
This will reduce the available pool of potential home buyers and will theoretically result in additional downward pressure on home prices.
Maybe the pain of that scenario is less than modifying every unconventional mortgage to 30 year fixed at say 60 cents on the dollar. Yes, yes moral hazard.
Pick your poison.
Ok, one last time, then off to a leisure filled afternoon.
Re: "Interpreting the numbers from a dynamic pool of mortgages (loans constantly flowing into the system) is harder than interpreting a static pool (always looking at the same set of loans). "
Ok, it's a wrap; everyone in the pool!
This was great Mort_Fin. Now I feel like I have to rework my tripe I wrote at the Airport last week.
Thanks M_Fin, simplistic complications made simply more complicated...
204th!
Last!
OMG I just pooped my pants.
I'm ubermerding!
These are the opinions of Robert Sheridan, CEO of Sheridan & Partners, a Chicago-area real estate & development company. Their site is Robert Sheridan & Partners - Real Estate Loss Mitigation Strategies
A Bad Thing for Housing Gets Worse
The lead article in the 8/4/08 issue of The New York Times by Vikas Bajaj, Housing Lenders Fear Bigger Wave of Loan Defaults, comes as no surprise. Bajajs reporting illuminates a problem that has been apparent for a long time: foreclosures will be greater than recent estimates (now, even homeowners with good credit are finding themselves caught up in the morass) and price declines are likely to be deeper.
What is not immediately as obvious is that this bigger-than-expected wave of defaults will likely push the bottom out further. Its hard to see it occurring in most markets before 2010.
Read the article here:
Housing Lenders Fear Bigger Wave of Loan Defaults - NY Times