Russ, I've been waiting for the Fed to put out the Kennedy-Greenspan numbers for MEW, but $18B doesn't sound right. Mortgage debt increased $148.6B in Q4 as compared to $193.8B in Q3.
Kennedy-Greenspan calculated MEW at $113.5 in Q3, so my guess is MEW is still is in the $60B to $80B range for Q4 (just a guess).
It's really quite telling that the MSM is able to get quotes from economists and economic advisors at the big firms, talking about "20%" or "30%" odds of a recession by the end of this year.
Nobody (outside of goldbugs, Roubini, and bloggers) ever forecasts odds of a recession over 50%. It's like saying "Don't ask us to invest your money with us."
Even without MEW, refinancings can improve cash flow. We are in the process of refinancing 3 properties-freeing up $250/mo. Now that the bloom is off the aggressive alt-As and sub-prime borrowers, the mortgage bankers are rediscovering boring ole prime borrowers and offering us nice loans. We pay attention to the small print are are sensitive to fees. As I've mentioned too many times, we could never refinance our rentals before.
As risk returns to the market, I can see the cost of money decreasing for a lot of people. We are little players: for the big buy and hold real estate investors, this could add up to a lot of cash flow.
If I divide the quarterly increase in total household debt by quarterly DPI, the ratio ranges from 9.1% to 14.6% between 2002 Q1 and 2006 Q3. It was only down to 9.4% in 2006 Q3. These numbers are even higher than MEW/DPI shown in your graph. This means that each year, households borrow about 1/8 as much as they earn after taxes. But both series are absolutely mind boggling.
MEW is money pumped into the economy, and it has a multiplier effect. If MEW stalls, the economy will tank.
It's really quite telling that the MSM is able to get quotes from economists and economic advisors at the big firms, talking about "20%" or "30%" odds of a recession by the end of this year.
Nobody (outside of goldbugs, Roubini, and bloggers) ever forecasts odds of a recession over 50%. It's like saying "Don't ask us to invest your money with us."
Economists were predicting ~3% GDP growth the quarter before the 2001 recession began.
I think maybe it's because a lot of economists are more in the business of validating sales pitches than actually predicting the economy.
Also, here's a front page Barron's headline from Sept 2000:
Can Anything Stop This Economy? Despite Recent Signs of a Slowdown, Expect the Economy to Remain Robust, with No Recession in Sight
Where is the creation of wealth? Stripping assets to be on par with others? A sad commentary on the future of American values. We have simply put the enivatable on stasis for a time to harvest riches created by others.
Nobody (outside of goldbugs, Roubini, and bloggers) ever forecasts odds of a recession over 50%. It's like saying "Don't ask us to invest your money with us."
Ya think? probably my aging mind,but i seem to recollect a good deal of discussion on this subject over the last couple of years both on various blogs and with ordinary folks who had a modicum of sense and some life experience.spillover is inevitable,this is an extremely complex,interdependent global marketplace and no change of this magnitude can be isolated.
Steve, Anirvan Banerji was also talking recession in '96 when he was working with Geoffrey Moore at Columbia. Of course, Moore was talking recession too, but it didn't happen.
Moore was a brilliant guy. Anyway, Banerji is a very good economist, but just as fallible as the rest of us.
We don't do much of that here anymore. Mostly we seem to just pass "wealth" around to each other.
MEW is money pumped into the economy, and it has a multiplier effect. If MEW stalls, the economy will tank.
Of course, in more normal times MEW wouldn't matter because there just wasn't much of it going on.
When did the idea of home equity loans really start? I'm thinking it was sometime in the mid to late 80's - but then it was only something the high-rollers did. I'm thinking it didn't really start to take off in the mainstream (as in, "You should be buying your car with a home equity loan so you can write off the interest") until the mid to late 90's. Somehow the economy used to do just fine without MEW, but now there are a lot of people who are addicted to it.
I don't believe either one of them called for a recession in '96. They predicted a slowdown in that time period (and they were right), but they never gave the recession signal.
I agree that they are fallible. I'm not suggesting Moore's, and now ECRI's, methods can't possibly be wrong, but they do have a very good track record.
Steve, you are absolutely correct in saying that they have a very good track record. No problem there, but they can be wrong, and my view is that Banerji is wrong this time around.
In '96, Banerji released an unpublished paper concerning a prime rate indicator, who's title escapes me at the moment. The fact that it was unpublished may be why you're not aware of it. Anyway, the paper made the recession call. Sorry.
When did the idea of home equity loans really start? I'm thinking it was sometime in the mid to late 80's
It is all surely related to inflationary expectations. We know there will be high inflation. We know our money and our debts will be devalued. We know our wages will increase.
Steve, I read the articles to which you linked. It's fascinating because I didn't know that ECRI was in business in 1990. That may explain why Moore and Columbia became embroiled in a very bitter intellectual property dispute at about the same time the paper came out.
Anyway, somewhere in my files I probably have a copy of the paper. I specifically remember corresponding with Banerji about it. It is my recollection that they made the call. Maybe they didn't, but I specifically remember the paper.
The paper, by the way, came from the institute at Columbia, not ECRI, which could give ECRI a technical "out" concerning whether or not they made the call in '96.
ECRI was formed in 1996, but the team (Moore, Banerji, and Achuthan) was together long before that. I think that's why most people will still say that ECRI called the last two recessions, even though technically ECRI didn't exist during the '90 recession.
"Here's something to think about: Now that many Wall Street firms own subprime (wholesale) funders would they force their very own companies to buy back early payment defaults?..."
FRom the amended agreement, an emergency cash infusion;
"Michael J. Sonnenfeld, Fieldstone's President and CEO, stated "The recent severe deterioration of the market for subprime loans has sharply reduced our liquidity and has required us to reduce our merger price in exchange for immediate added liquidity prior to completing our proposed merger with C-BASS."
Can I ask here about the use of the word "spread"?
Spread makes it sound like a chain reaction of sorts: subprime problems leading to alt-A problems. I can certainly see that in the long term--through a credit crunch and general lack of move-up buyers.
In the short term, how can subprime foreclosures cause alt-A foreclosures? If we soon see alt-A delinquency rates rising, isn't that due to an underlying cause--namely, loose lending standards--that happens to be the same as subprime, but logically is separate?
Professor, excellent point. I hate the "spread" meme. As far as I can determine, the folks who use it the most are not using it in the only way it makes sense--your "long term" view. In fact, some people seem to like the term "spread" precisely because it obscures the bigger picture forces (homebuyer fallout, lack of cheap refinancing) that will put the squeeze on overleveraged borrowers. It seems to be more comforting to imagine that the Alt-A book is just some normal healthy bunch of mortgages who were inadvertently nearby when some subprime loans sneezed without using a tissue. This is a convenient view for people who have been insisting for years that you can keep "Alt-ing" the guidelines as much as you want, but as long as the borrower has a FICO over 620, it's still prime. If you don't want to admit that that was a bit of a delusion, you might choose to comfort yourself with the idea that your perfectly safe "Alt" loans just got infected by those bad subprimes.
You could understand the apparent "spread" as a question of the same underlying phenomenon--loose underwriting (I would add "and mispricing")--affecting both books of business, but lagged for Alt because its generally higher FICOs and generally more high-demand collateral give it more time, as it were. What looks like "spread" is just Alt's delayed entry into the problem pool.
Unfortunately, "Alt-A: It Lasts A Little Longer Than Subprime!" is not a great marketing slogan.
"The actual interest rate is very likely fixed for 30 years, and can probably be locked in at around six or 6.50 percent.
The 1.95 percent is how the minimum payment is calculated. For example, on a $300,000 loan, the minimum payment would be calculated as if the interest rate is 1.95 percent. This would make the minimum payment $1,101.
But if the actual interest rate on a $300,000 loan is 6.50 percent, the monthly interest is equal to $1625. Making the minimum payment $524 less than the interest charged. The borrower's balance will increase every month. This is negative amortization."
Suppose some hit the 110% limit and adjust to the fully indexed rate. And the borrowers are struggling with the payment, and ask to refinance to in effct extend the period of relative low payments.
What is to prevent the Bank from doing this as a means of postponing the foreclosure?
Thanks Tanta, I have been afraid I was missing some subtlety that was behind the "spread" terminology. (For instance the whole tranche business about who's in line to get paid by whom first, which I sort of understand but not enough to be sure I'm not missing something)
Hapsburger I think I would have put your suggested chain of events in the long-term category, and in any case I guess it's not clear (a) how often that is happening (i.e. whether it's really enough to be what people see as the mechanism for substantial problem spreading) and (b) whether the new refi is actually alt-A. But given how many people can't even make their first payments, you're probably right that I shouldn't think of it as long-term.
If anything the mess actually spread FROM prime TO sub-prime. It is all about over-spending :
the idea that prime borrowers were somehow immune from overspending or overcommitting is particularly funny. Theyre some of the worst. You even read about the truly rich (like Larry Ellison) getting into too much spending. Insane.
The sub-prime, alt-a, prime nomenclature make it all sound so scientific.
With the 'spread' to alt-a/prime, I think we can discard the myth that risk can be primarly be measured by FICO score and focus more on the real culprit - how much 'skin' the borrower has in the game.
When you buy stock on margin, you need to post collateral and are subject to margin calls.
With a teaser rate loan and a second I can go long a house for a year (with only small montlhy maintenance payment), with no risk of margin call.
And when the year ends and the full indexed rate hits, and I'm upside down on the loan, and the underlying is now at 80, it begins to make better sense to mail the keys.
And that might be true whether I be FICO 550 or FICO 750+.
As i see these indexes they are a measure market professionals have of the risk of recession in commercial property. The index suggests it is pretty high.
Tanta and the professor. There is one disease analogy that covers the situation.
Lets say that is is the flu, and all are at risk. Then when the flu season hits, the least resistant die off first followed by the more resistant.
In a real contagion, death would spread from those most unable to pay for medical care to those more able and so forth. FWIW, this is exactly what happened in the plagues of old, the rich moved to the country away from it and the poor died.
The disease here is inability to pay debt out of current income. The first will be the least unable to pay, followed by groups whose ability to pay falters due to loss of reserves, job, divorce, health. In this sense, the malady spreads as a disease and the analogy is correct.
"Income Based Lending: Lending decisions should be based on income. There is really no reason for a person to live in a home that costs more than 2 1/2 times their yearly income (unless they use family money)."
"and I wonder what ever happed to Home Price = 10-12 years of rent which is a good yard stick in my book."
Boy, me too. When I bought a little (and I mean little) income property back in the mid-80s, that was the rule. But pricing based on the income a property could produce was replaced by pricing predicated on its supposed future value. Well, that sort of thing only lasts so long, as we're seeing.
I live in a very bubblicious portion of the California coast, and by comparing home rents to home prices and applying the 10-12x earnings crieria generously, I get that housing prices are twice what they historically should be.
Another component of this is that if we are living in a risk free world then i can borrow from Mr big and lend out at Mr big rate plus a small extra and make money.
As risk rises i need more and more extra to cover my wall of worry.
Sub prime loans have extra loadings to cover the worry.
But in times of stress then prime loans (which are the only loans now available) have the these same loadings to cover the wall of worry.
What if you are prime and will never default and your lender is distressed and needs to raise money fast and nobody will buy your mortgage at your fixed rate of interest? Did you read the small print? Can it be sold (definately) can you get a new rate imposed from the new lender? Will you now default?
vader,
I like your infectious disease analogy. I also like your pointing out that the rich left London for the country-side...and survived...during the plague years and the poor could not and had a higher incidence of death.
Assuming you were talking about Elizabethan and Jacobean England...which I always assume everyone is talking about.
In any case, this analogy still is what I call academic in the sense that it excludes mens rea: the flu did not have it in for its victims; it simply did what it was designed to do.
We are seeing in Washington today a ton, an imperial ton, of mens rea. And we have certainly seen in the financial world a contempt for rules and regulations that leads to the kind of abuses that have caused the mortgage melt-down.
So I would like to put a human face on the flu. That's more the kind of drama that the Elizabethans and Jacobeans supported and produced.
Oh, you say, arbogast is up to his old tricks. Bashing Greenspan.
Not so much, my friend.
Read the following paragraph from Stephen Roach (no arbogast he):
It didnt have to be this way. Were it not for a serious policy blunder by Americas central bank, I suspect the US economy could have been much more successful in avoiding the perils of a multi-bubble syndrome. Former Fed Chairman Alan Greenspan crossed the line, in my view, by encouraging reckless behavior in the midst of each of the last two asset bubbles. In early 2000, while NASDAQ was cresting toward 5000, he was unabashed in his enthusiastic endorsement of a once-in-a-generation increase in productivity growth that he argued justified seemingly lofty valuations of equity markets. This was tantamount to a green light for market speculators and legions of individual investors at just the point when the equity bubble was nearing its end. And then only four years later, he did it again this time directing his counsel at the players of the property bubble. In early 2004, he urged homeowners to shift from fixed to floating rate mortgages, and in early 2005, he extolled the virtues of sub-prime borrowing the extension of credit to unworthy borrowers. Far from the heartless central banker that is supposed to take the punchbowl away just when the party is getting good, Alan Greenspan turned into an unabashed cheerleader for the excesses of an increasingly asset-dependent US economy. I fear history will not judge the Maestros legacy kindly. And now hes reinventing himself as a forecaster. Figure that!
And, thus, we are left with the question, Why? Why did Alan Greenspan decide that there was a "new paradigm"? Why did he tell the American public to take out adjustable mortgages? Why did he keep interest rates so low for so long?
An unhappy childhood? A deteriorating marriage? Problems with his kids? Nightmares of Ayn Rand chasing him with a rubber check?
Of course, maybe it doesn't matter. Maybe figuring out the infectious agent (returning to Vader's analogy) of the plague was unimportant. And, then again, maybe the entire history of modern medicine has been based on asking, Why?
Boy, it makes me feel good when people agree with me. Take Randall Forsyth, who sits in for Alan Abelson every now and then to write the Up and Down Wall Street column in Barron's.
Randall threatens Greenspan with jail time:
Up & Down Wall Street
In Praise of Folly
By Randall W. Forsyth
When Alan Greenspan fired off his recession forecast heard 'round the world a couple of weeks ago, he delivered it to an audience of investors in Hong Kong via a video linkup from halfway around the world. Could it be that the former Federal Reserve Chairman might not feel so cozy and secure, given what's befallen ex-central bankers in the region?
Back in 2005, the former Thai central bank governor was fined $4.6 billion for his role in the financial crisis resulting from the crash of the baht. Rerngchai Marakanond was found by a civil court to be guilty of "grave negligence" in squandering Thailand's currency reserves in a futile attempt to prop up the baht.
The 1997 Asian currency crisis also led to the arrest of Korea's central bank governor at the time, Kang Kyong Shik, for "gross economic negligence." He was imprisoned for three months in 1998, while awaiting trial. Prosecutors made Kang appear in court in prison garb, handcuffed and in ropes, adding to his humiliation.
As Dresdner Kleinwort's global strategist Albert Edwards, once wrote, if central bank chiefs are to be held accountable for negligence, should Greenspan be worried?
That question was raised anew as the bubbling subprime mortgage crisis erupted last week. As several acerbic observers pointed out, there could be no more damning indictment of Sir Alan's role than his own words.
In a speech to the Fed's Community Affairs Research conference in April 2005, The Maestro sang the praises of "technological advances" that "have resulted in increased efficiency and scale within the financial services industry. Innovation has brought about a multitude of new products, such as subprime loans," he continued, adding that technology had allowed lenders to size up the creditworthiness of borrowers more cheaply.
"Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today, subprime mortgages account for roughly 10% of the number of all mortgages outstanding, up from just 1% or 2% in the early 1990s."
...three years ago, Greenspan was touting ARMs for Everyman. "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage," he told the Credit Union National Association in 2004. "To the degree that households are driven by fears of payment shocks, but are willing to manage their own interest-rate risks, the traditional fixed-rate mortgage may be an exp
The idea that one man is responsible for what happened cannot be true.
Collectively a group of people both within and outside that system must have created the illusion that failed or the design with purpose that we now see unfolding
Vader, what annoys me about the flu metaphor is that flu is, well, an act of God (or Mother Nature, whatever you wish to believe about these things). People get flu from each other just by being around each other, and being around other people is "the human condition." (Trust me; I've been on immunosupressant medication for a year now, forcing me to severely limit my casual contacts with other people who can be carriers of diseases that they're healthy enough not to suffer from. It is not typical human behavior to hide from people in this fashion; when Howard Hughes did it out of some crazy germ phobia, we called him, well, crazy.)
So, in other words, the flu metaphor can kind of get the lenders off the hook: anybody can get flu, rich or poor, etc. If we need a disease model, let me volunteer the chemotherapy model: I take these drugs meant to arrest the cancer, and one of their side-effects is to suppress my body's immune system. So I'm in this weird situation where I'm gaining on the cancer, but suddenly vulnerable to actually dying from a simple cold. It's not that I'm more likely to be exposed to germs, necessarily; it's that if I am so exposed, I'll get sicker than a person with a normal immune system would.
So all the various exotic mortgages were like a kind of chemo: meant to "cure" the basic problem of unaffordable home prices, but leaving all those consumers immunocompromised financially, so that the little financial stresses (the flu) are now deadly, where they used to be just an annoyance, maybe a few days of lost income. Given this metaphor, those who keep saying "housing weakness doesn't cause recession" are making their mistakes by assuming that homeowners have normal immune systems.
CR:
back in Dec you provided this information regarding turnover rate of existing SFH.
"One of the rarely told stories of the housing boom was the jump in turnover of existing homes. This graph shows sales normalized by the number of owner occupied units. This shows the extraordinary level of sales for the last few years, reaching 9.5% of owner occupied units in 2005. The median level is 6.0% for the last 35 years."
Is there enough information on the Jan and Feb numbers to get an idea about the lastest turnover rates?
Regarding that chart, can you explain to me how MEWs can be less than zero?
This is the quaint concept of paying off the mortgage. Some pople still do it.
What was never clear to me in the discussions about the lack of savings is does paying down debt count as saving? I think not. Hopefully, when we get out of this debt induced spending binge, we may see private debt level off and maybe start decreasing.
Another anecdote. Wife and I were looking at the return on our money market account verses the interest spent on the HELOC we got to finish our basement (full disclosure: and buy the 42" flat screen). She decided to close the money market account and pay down the HELOC. Savings and debt both decreased.
It's hard for me to accept this "firewall" theory that the problems were mainly subprime and will stay there, because we have had housing busts before when guidelines were stricter.
When people at any income or credit level are "upside down" on houses, it will create immobility issues for them, and a psychological "load" to carry.
Haven't you ever known co-workers stuck with a house (or two) in old cities where they lived? And heard them grouse about long distance problems they can't see, as they call contractors to inspect and bid on repairs, while they worry if they are getting reipped off? Or chase rent checks from slow paying tenants? Or nervously wait out the months, paying on a house that is empty?
Multiply that by a million people or more. It will have effects, but not fun and cheery ones like the "wealth effect".
Yours the better analogy! With the addition that the profession that was in charge is guilty of malpractice.
Though I believe the disease is a decline in incomes with debt substitution for income. The mortgage thing to me is just a manifestation of the underlying disease. For example, stated income is common in credit card apps, lending to children and glorification of debt in TV ads.
Russ, Robert, Yes, I saw the Northern Trust chart and I've discussed MEW with them before. As Kasriel notes, there are as many ways to calculate MEW, as there are analysts! I doubt the Kennedy-Greenspan method will show as large a drop as NT.
I used to have my own approach - but I thought I'd wait for the Fed this time.
Ron, the existing home numbers are out next - so I'll take a look at the numbers. That graph was annual, not monthly. So it might be too early in the year to estimate '07 - especially since Jan and Feb are weak sales months (it's hard to tell what is happening).
One perspective is that "mistakes were made". The core of this position is that Central Banks do not know how their policies will affect the gross economy. This would suppose that none of these circumstances had ever happened before and that these Central Banks can therefore be excused.
""What was never clear to me in the discussions about the lack of savings is does paying down debt count as saving? I think not. ""
Well, not exactly true. Taking a broad look at the problem we are in...in the past, when most loans were paid down through the years, owning a home was the most efficient means of saving. That was because saving is the hardest thing to do for most people. They spend what they bring home. So the trick was to take it out of the check before it is spent. Before 401k's etc, the only way for most housholds to build alot of wealth was through the purchase and thus paydown of a house. It was a form of forced saving. Otherwise people just would do it. This through the years gave the impression that owning a house was a great investment, rather than realizing it was just the most common way people were forced to save. When it came time to retire and move down, or when people inherited assets from mom and dad, it was usually in the form of a paid off house. They took the value of the house, subtracted the price paid, and assumed it was all profit. People forgot all the money they spent day to day on the house, and calculated the return of owning realestate without considering carrying costs. It wasn't the return of realestate that was a good investment, it was the way you had to buy and pay it off that made it the only way people would accumulate wealth.
When people were allowed to have 401ks, roths, etc relatively recently, they saw the stock market as the place to invest (it was again the forced savings that has built the wealth, not the stock market per se, as historically, in the last decade, the market hasn't done that great in the form of actual returns on investment-as I have explained before).
After the 2000 bubble burst, people went back to the old standby realestate that worked for mom and dad, and margined heavily. Ironically, the true way to build wealth, through the forced paydown of the margined debt, was thrown aside for neg-ams and IO's.
I have learned personally that those who build wealth will simply so by spending less than they make, and the actual return they make on where the money goes will mean less for most than they think.
Like dieting. Eat less, move more. No matter how many diet books, weight loss programs, etc they try to sell you. It all comes down to the same formula. If you don't eat less and move more, you aren't going to lose weight. Period.
The subprime blowup has had another "spill-over" effect on the way new construction is advertised. I used to flip through the weekend Real Estate section in the Washington Post and see pictures of McMansions that costs 800k+ with a "$2000 a month!!" in large print and then an asterisk down to the fine print below with 2/28 interest only or neg am. Flipping through today I see that type of advertising is almost entirely gone. Either their lenders aren't offering those products anymore or the builders are fearing lawsuits. Khov did have one crazy alt-A example, but it wasn't plastered all of their houses.
The new home market dynamics will be entirely different with homebuilders actually competing with each other on price instead trying to advertise the lowest monthly payment with a suicide loan.
If I volunteer my own analogy, it seems to me the best is that of a genetic disease. If an older sibling has a genetic disease, there is a higher chance that one born afterwards will exhibit it. But that's just because learned something about the underlying genetic structure with the first one, and the conditional probabilities for the second one are considerably changed by that information.
But in no sense would you say the disease "spread" from one to the other.
Such a persuasive metaphor Tanta: current application of financial instruments designed to support current "stable prices" [this means house prices, not OER], --the chemo therapy that is behind the hollow insider phrases, "disintermediation of risks", "resilient economy"...but is making us vulnerable to the common cold, the common risks of everyday life...like even considering a job that a Mexican might do for a fraction, because that is not going to make a dent in the mortgage payment.
Glad to hear some progress with the cancer --my heart goes out to you.
If you want to be really amused, consider that, at one point while my oncologist was off on some medicalese explanation of the risk/benefits of chemo, I had to interrupt to say, "OK, I think I get this. Imagine that 'home prices' are cancer, and 'Option ARMs' are chemotherapy . . . let's posit stagant wage growth equivalent to the rate of chemo-induced anemia, and calculate that one year's property tax increase is equivalent to one bout of the flu. Now, that gives us . . . do you have a white board? Are you still listening to me?"
"Stearns also said there has been an inflation in credit scores, known as FICO scores. He said some consumers with a maximum of $3,000 in credit had a FICO of 700, which generally is considered a good score. Such a first-time buyer had no proven history of making a house payment, he said. In his own business, he said customers that went into default tended to have credit scores greater than 700."
Even if it's anecdotal, that's pretty eye-opening. 700 is prime/alt-a territory and an average mortgage-borrowers score, as opposed to some obvious credit risk. This businesswire article has IndyMac issuing a press release downplaying its subprime exposure:
In that article, their worrisome subprime mortgages (below FICO 620)only made up 3% of their 2006 loan originations. Their average 2006 mortgage loan had an average FICO of 701.
The national average credit score is 678. 720 and above is considered a great credit score.
All this is if the original Stearns article is accurate. I don't see any reason why want to be misleading: he is in both lending and foreclosing so he'll get his business either way.
P.S. I wish you the best of luck with your ongoing treatments, Tanta. I am in genuine awe of your intelligence and ability to executive-summarize things I couldn't otherwise comprehend. I can't have a housing bubble conversation with someone without mentioning your name- I am one of your biggest fans! -Tom
I can't wait until the banks realize that FICO does not equal financial savvy. So many people don't understand the loans they are in, they only understand the monthly payment they were told to pay.
does paying down debt count as saving? I think not
Of course it does. Saving = income - consumption. Your cash exposure (+ or -) is irrelevant.
Suppose some hit the 110% limit and adjust to the fully indexed rate. And the borrowers are struggling with the payment, and ask to refinance to in effect extend the period of relative low payments.
What is to prevent the Bank from doing this as a means of postponing the foreclosure?
The fact that the amount owed exceeds the value of the house, and the former is increasing while the latter is decreasing. The bank is better off disposing of the property ASAP.
Thanks, guys, for the fine thoughts. I do believe that a sense of humor, fueled by coffee and chocolate, can achieve a great deal. Fortunately, I work in the mortgage business, where there are jokers to the left of me and jokers to the right of me. I will never want for material.
Ed, your Experian score is a FICO score. "FICO" here is generic; "Experian" is the name brand. All the different credit repositories produce "FICO" scores, not just Fair, Isaacs (who invented them).
The best analogy to what is happening to the mortgages is the one that Fleckenstein uses: it is rot. It spreads through the root and it has spillover effects over the otherwise healthy prime leaves above.
IM, some argue "not only the otherwise healthy prime leaves above" but the perfectly all paid for and gleaming new house that has even all its taxes paid. This house could be in a neighborhood that has a few derelicts. Or that neighborhood could all be fully paid for and gleaming too, but the region be priced way high compared to others not so perfectly gleaming. These people argue that all housing is not immune from the inventory build nor the shortage of qualified buyers.
Well, I feel disarmed by anyone calling me sweetie, Tanta and take that as a big hint to change my socks...maybe even a bath.
I dont like the term "spread" either, when used in this context, but Ive always managed to endure it, because in a way, it still manages to capture a reality. That is, when subprime falters first, it kills off demand through tighter credit, and adds to supply through increased foreclosure, and ultimately has the effect of decreasing market prices, which is where the spread comes in. If prices remain up, then alt-A can always refi, since they are likely to have some $ sitting around that they can bring to the table if necessary. But if prices head further down, it gets harder and harder to stave off the mortgage reset and/or recast pain.
Isn't that chart the MEW for 3Q? Thought 4q was only about $18 billion?
Russ, yes - that is only through Q3.
I'll correct the text.
Best Wishes.
Russ, I've been waiting for the Fed to put out the Kennedy-Greenspan numbers for MEW, but $18B doesn't sound right. Mortgage debt increased $148.6B in Q4 as compared to $193.8B in Q3.
Kennedy-Greenspan calculated MEW at $113.5 in Q3, so my guess is MEW is still is in the $60B to $80B range for Q4 (just a guess).
Best Wishes.
It's really quite telling that the MSM is able to get quotes from economists and economic advisors at the big firms, talking about "20%" or "30%" odds of a recession by the end of this year.
Nobody (outside of goldbugs, Roubini, and bloggers) ever forecasts odds of a recession over 50%. It's like saying "Don't ask us to invest your money with us."
Even without MEW, refinancings can improve cash flow. We are in the process of refinancing 3 properties-freeing up $250/mo. Now that the bloom is off the aggressive alt-As and sub-prime borrowers, the mortgage bankers are rediscovering boring ole prime borrowers and offering us nice loans. We pay attention to the small print are are sensitive to fees. As I've mentioned too many times, we could never refinance our rentals before.
As risk returns to the market, I can see the cost of money decreasing for a lot of people. We are little players: for the big buy and hold real estate investors, this could add up to a lot of cash flow.
http://
Whose Mortgage Crisis?
If I divide the quarterly increase in total household debt by quarterly DPI, the ratio ranges from 9.1% to 14.6% between 2002 Q1 and 2006 Q3. It was only down to 9.4% in 2006 Q3. These numbers are even higher than MEW/DPI shown in your graph. This means that each year, households borrow about 1/8 as much as they earn after taxes. But both series are absolutely mind boggling.
MEW is money pumped into the economy, and it has a multiplier effect. If MEW stalls, the economy will tank.
It's really quite telling that the MSM is able to get quotes from economists and economic advisors at the big firms, talking about "20%" or "30%" odds of a recession by the end of this year.
Nobody (outside of goldbugs, Roubini, and bloggers) ever forecasts odds of a recession over 50%. It's like saying "Don't ask us to invest your money with us."
Economists were predicting ~3% GDP growth the quarter before the 2001 recession began.
I think maybe it's because a lot of economists are more in the business of validating sales pitches than actually predicting the economy.
Also, here's a front page Barron's headline from Sept 2000:
Can Anything Stop This Economy? Despite Recent Signs of a Slowdown, Expect the Economy to Remain Robust, with No Recession in Sight
Where is the creation of wealth? Stripping assets to be on par with others? A sad commentary on the future of American values. We have simply put the enivatable on stasis for a time to harvest riches created by others.
That graph tells an enticing story... I suspect that 2007 will look a lot like 2000-2001. Which will be a disaster for the economy.
Nobody (outside of goldbugs, Roubini, and bloggers) ever forecasts odds of a recession over 50%. It's like saying "Don't ask us to invest your money with us."
That's not true.
Here's an article from September 2000 written by Anirvan Banerji, director of research at ECRI, announcing that we could be headed for a recession.
Here's Anirvan Banerji in March of 2001 saying that a recession was unavoidable.
Ya think? probably my aging mind,but i seem to recollect a good deal of discussion on this subject over the last couple of years both on various blogs and with ordinary folks who had a modicum of sense and some life experience.spillover is inevitable,this is an extremely complex,interdependent global marketplace and no change of this magnitude can be isolated.
Steve, Anirvan Banerji was also talking recession in '96 when he was working with Geoffrey Moore at Columbia. Of course, Moore was talking recession too, but it didn't happen.
Moore was a brilliant guy. Anyway, Banerji is a very good economist, but just as fallible as the rest of us.
Where is the creation of wealth?
We don't do much of that here anymore. Mostly we seem to just pass "wealth" around to each other.
MEW is money pumped into the economy, and it has a multiplier effect. If MEW stalls, the economy will tank.
Of course, in more normal times MEW wouldn't matter because there just wasn't much of it going on.
When did the idea of home equity loans really start? I'm thinking it was sometime in the mid to late 80's - but then it was only something the high-rollers did. I'm thinking it didn't really start to take off in the mainstream (as in, "You should be buying your car with a home equity loan so you can write off the interest") until the mid to late 90's. Somehow the economy used to do just fine without MEW, but now there are a lot of people who are addicted to it.
mp,
I don't believe either one of them called for a recession in '96. They predicted a slowdown in that time period (and they were right), but they never gave the recession signal.
I agree that they are fallible. I'm not suggesting Moore's, and now ECRI's, methods can't possibly be wrong, but they do have a very good track record.
Steve, you are absolutely correct in saying that they have a very good track record. No problem there, but they can be wrong, and my view is that Banerji is wrong this time around.
In '96, Banerji released an unpublished paper concerning a prime rate indicator, who's title escapes me at the moment. The fact that it was unpublished may be why you're not aware of it. Anyway, the paper made the recession call. Sorry.
Anyway, I apologize for butting in here.
Recession was avoided in 1995-96 because of Sweeps which basically got rid of the banks reserve requirment. Mish did a good article outlining this.
Anthony, do you have a link to Mish's article? I'd like to read it. Thanks.
mp,
Here's that discussion on the prime rate that you mention. It forecasted a slowdown (which influenced Greenspan to cut rates), but doesn't call a recession.
Here's another article that specifically states that Moore and Co. didn't call a recession in 1995.
I'm not saying you're making this up, but I can't even find any references to the paper.
mp,
Here's that discussion on the prime rate that you mention. It forecasted a slowdown (which influenced Greenspan to cut rates), but doesn't call a recession.
Here's another article that specifically states that Moore and Co. didn't call a recession in 1995.
I'm not saying you're making this up, but I can't even find any references to the paper.
It is all surely related to inflationary expectations. We know there will be high inflation. We know our money and our debts will be devalued. We know our wages will increase.
What fool is not going to borrow to save?
Steve, I read the articles to which you linked. It's fascinating because I didn't know that ECRI was in business in 1990. That may explain why Moore and Columbia became embroiled in a very bitter intellectual property dispute at about the same time the paper came out.
Anyway, somewhere in my files I probably have a copy of the paper. I specifically remember corresponding with Banerji about it. It is my recollection that they made the call. Maybe they didn't, but I specifically remember the paper.
The paper, by the way, came from the institute at Columbia, not ECRI, which could give ECRI a technical "out" concerning whether or not they made the call in '96.
mp,
ECRI was formed in 1996, but the team (Moore, Banerji, and Achuthan) was together long before that. I think that's why most people will still say that ECRI called the last two recessions, even though technically ECRI didn't exist during the '90 recession.
Steve, the reason I said that ECRI was in business in 1990 is because that's what the CFO article says, or at least implies.
Anyway, I have my memories which, God knows, may be faulty. Maybe we can agree that the Columbia institute may have made the call, but ECRI didn't.
Steve, the reason I said that ECRI was in business in 1990 is because that's what the CFO article says, or at least implies.
I hear ya. You will often see in print that ECRI predicted the last two recessions because Moore's team at ECRI was the same team at Columbia.
Anyway, I have my memories which, God knows, may be faulty. Maybe we can agree that the Columbia institute may have made the call, but ECRI didn't.
I'll agree that's possible.
On that note, I'm done for the night. Cheers.
Housing market slowdown affecting auto sales:
freep.com | | Detroit Free Press
Pimco on the spread of problems;
Pimco Says Subprime Woes May Spread to Alt-A, Jumbo (Update1) - Bloomberg.com
Another lender down;
Topic Galleries -- baltimoresun.com
"Here's something to think about: Now that many Wall Street firms own subprime (wholesale) funders would they force their very own companies to buy back early payment defaults?..."
another page
Ya gotta love how proactive these agencies are;
Business & Financial News, Breaking US & International News | Reuters.com
Amended Fieldstone agreement;
MarketWatch.com
FRom the amended agreement, an emergency cash infusion;
"Michael J. Sonnenfeld, Fieldstone's President and CEO, stated "The recent severe deterioration of the market for subprime loans has sharply reduced our liquidity and has required us to reduce our merger price in exchange for immediate added liquidity prior to completing our proposed merger with C-BASS."
China increases key interest rate
Business Week Online > File Not Found
In anticipation of FED rate reduction they are alreasdy selling 30-yr fixed rates at 1.95% : Realty Times - Mortgage Solicitation Letters
Can I ask here about the use of the word "spread"?
Spread makes it sound like a chain reaction of sorts: subprime problems leading to alt-A problems. I can certainly see that in the long term--through a credit crunch and general lack of move-up buyers.
In the short term, how can subprime foreclosures cause alt-A foreclosures? If we soon see alt-A delinquency rates rising, isn't that due to an underlying cause--namely, loose lending standards--that happens to be the same as subprime, but logically is separate?
Professor, excellent point. I hate the "spread" meme. As far as I can determine, the folks who use it the most are not using it in the only way it makes sense--your "long term" view. In fact, some people seem to like the term "spread" precisely because it obscures the bigger picture forces (homebuyer fallout, lack of cheap refinancing) that will put the squeeze on overleveraged borrowers. It seems to be more comforting to imagine that the Alt-A book is just some normal healthy bunch of mortgages who were inadvertently nearby when some subprime loans sneezed without using a tissue. This is a convenient view for people who have been insisting for years that you can keep "Alt-ing" the guidelines as much as you want, but as long as the borrower has a FICO over 620, it's still prime. If you don't want to admit that that was a bit of a delusion, you might choose to comfort yourself with the idea that your perfectly safe "Alt" loans just got infected by those bad subprimes.
You could understand the apparent "spread" as a question of the same underlying phenomenon--loose underwriting (I would add "and mispricing")--affecting both books of business, but lagged for Alt because its generally higher FICOs and generally more high-demand collateral give it more time, as it were. What looks like "spread" is just Alt's delayed entry into the problem pool.
Unfortunately, "Alt-A: It Lasts A Little Longer Than Subprime!" is not a great marketing slogan.
No, they're not Yal, read the whole article:
"The actual interest rate is very likely fixed for 30 years, and can probably be locked in at around six or 6.50 percent.
The 1.95 percent is how the minimum payment is calculated. For example, on a $300,000 loan, the minimum payment would be calculated as if the interest rate is 1.95 percent. This would make the minimum payment $1,101.
But if the actual interest rate on a $300,000 loan is 6.50 percent, the monthly interest is equal to $1625. Making the minimum payment $524 less than the interest charged. The borrower's balance will increase every month. This is negative amortization."
Tanta,
Bank has a portfolio of neg-am ARMS.
Suppose some hit the 110% limit and adjust to the fully indexed rate. And the borrowers are struggling with the payment, and ask to refinance to in effct extend the period of relative low payments.
What is to prevent the Bank from doing this as a means of postponing the foreclosure?
Markit Homepage
Thanks Tanta, I have been afraid I was missing some subtlety that was behind the "spread" terminology. (For instance the whole tranche business about who's in line to get paid by whom first, which I sort of understand but not enough to be sure I'm not missing something)
Hapsburger I think I would have put your suggested chain of events in the long-term category, and in any case I guess it's not clear (a) how often that is happening (i.e. whether it's really enough to be what people see as the mechanism for substantial problem spreading) and (b) whether the new refi is actually alt-A. But given how many people can't even make their first payments, you're probably right that I shouldn't think of it as long-term.
If anything the mess actually spread FROM prime TO sub-prime. It is all about over-spending :
the idea that prime borrowers were somehow immune from overspending or overcommitting is particularly funny. Theyre some of the worst. You even read about the truly rich (like Larry Ellison) getting into too much spending. Insane.
Tanta,
Might you have anything in your RE primer bag that covers how PMI works in a foreclosure setting?
How does the neg-am loan feature combined with falling asset value affect the risk of the PMI issuer and the lender?
And what about the case where there is a piggy-back loan or silent second mortgage and no PMI?
To Worried:
I don't understand the CMBX graphs and what they represent.
What took place arounf Feb 26 that shot the indices up beyong their initial value on Oct 2006 ?
Can you explain ?
CR, the Northern Trust came out with the 4q MEW chart here, see fourth chart in this post.
Winter (Economic and Market) Watch » Indentured Servants and Hitting the Retail Wall
Good points Professor.
The sub-prime, alt-a, prime nomenclature make it all sound so scientific.
With the 'spread' to alt-a/prime, I think we can discard the myth that risk can be primarly be measured by FICO score and focus more on the real culprit - how much 'skin' the borrower has in the game.
When you buy stock on margin, you need to post collateral and are subject to margin calls.
With a teaser rate loan and a second I can go long a house for a year (with only small montlhy maintenance payment), with no risk of margin call.
And when the year ends and the full indexed rate hits, and I'm upside down on the loan, and the underlying is now at 80, it begins to make better sense to mail the keys.
And that might be true whether I be FICO 550 or FICO 750+.
Yal
http://www.securitization.net/pdf/Nomura/CMBX_23Mar06.pdf
What took place arounf Feb 26 that shot the indices up beyong their initial value on Oct 2006 ?
As i see these indexes they are a measure market professionals have of the risk of recession in commercial property. The index suggests it is pretty high.
Hopefully somebody can tell me i am incorrect
I think someone did post earlier that the CMBX rises for default risk, and the ABX falls.
Yes that is correct up is increasing risk
Most of the indexs begin rising end jan and into feb. I think this link makes it clear why
Calculated Risk: JPMorgan CEO: Recession Signs
Tanta and the professor. There is one disease analogy that covers the situation.
Lets say that is is the flu, and all are at risk. Then when the flu season hits, the least resistant die off first followed by the more resistant.
In a real contagion, death would spread from those most unable to pay for medical care to those more able and so forth. FWIW, this is exactly what happened in the plagues of old, the rich moved to the country away from it and the poor died.
The disease here is inability to pay debt out of current income. The first will be the least unable to pay, followed by groups whose ability to pay falters due to loss of reserves, job, divorce, health. In this sense, the malady spreads as a disease and the analogy is correct.
another new concept:
"Income Based Lending: Lending decisions should be based on income. There is really no reason for a person to live in a home that costs more than 2 1/2 times their yearly income (unless they use family money)."
Mortgage Lending Crisis - washingtonpost.com
and I wonder what ever happed to Home Price = 10-12 years of rent which is a good yard stick in my book.
To Russ Winter,
Thanks for putting up the most current MEW chart.
Regarding that chart, can you explain to me how MEWs can be less than zero?
Maybe I don't fully understand how that specific chart is constructed, but I would sure like to hear your explanation.
"and I wonder what ever happed to Home Price = 10-12 years of rent which is a good yard stick in my book."
Boy, me too. When I bought a little (and I mean little) income property back in the mid-80s, that was the rule. But pricing based on the income a property could produce was replaced by pricing predicated on its supposed future value. Well, that sort of thing only lasts so long, as we're seeing.
I live in a very bubblicious portion of the California coast, and by comparing home rents to home prices and applying the 10-12x earnings crieria generously, I get that housing prices are twice what they historically should be.
Another component of this is that if we are living in a risk free world then i can borrow from Mr big and lend out at Mr big rate plus a small extra and make money.
As risk rises i need more and more extra to cover my wall of worry.
Sub prime loans have extra loadings to cover the worry.
But in times of stress then prime loans (which are the only loans now available) have the these same loadings to cover the wall of worry.
What if you are prime and will never default and your lender is distressed and needs to raise money fast and nobody will buy your mortgage at your fixed rate of interest? Did you read the small print? Can it be sold (definately) can you get a new rate imposed from the new lender? Will you now default?
I get that housing prices are twice what they historically should be.
After taxes and HOA, my landlords are earning a blistering 4.5% ROI from my place. I earn 5.25% on a 9-month CD at my credit union.
Now that's what I call a carry-trade.
vader,
I like your infectious disease analogy. I also like your pointing out that the rich left London for the country-side...and survived...during the plague years and the poor could not and had a higher incidence of death.
Assuming you were talking about Elizabethan and Jacobean England...which I always assume everyone is talking about.
In any case, this analogy still is what I call academic in the sense that it excludes mens rea: the flu did not have it in for its victims; it simply did what it was designed to do.
We are seeing in Washington today a ton, an imperial ton, of mens rea. And we have certainly seen in the financial world a contempt for rules and regulations that leads to the kind of abuses that have caused the mortgage melt-down.
So I would like to put a human face on the flu. That's more the kind of drama that the Elizabethans and Jacobeans supported and produced.
And the human face is...
...the envelope please...
Alan Greenspan!
Oh, you say, arbogast is up to his old tricks. Bashing Greenspan.
Not so much, my friend.
Read the following paragraph from Stephen Roach (no arbogast he):
It didnt have to be this way. Were it not for a serious policy blunder by Americas central bank, I suspect the US economy could have been much more successful in avoiding the perils of a multi-bubble syndrome. Former Fed Chairman Alan Greenspan crossed the line, in my view, by encouraging reckless behavior in the midst of each of the last two asset bubbles. In early 2000, while NASDAQ was cresting toward 5000, he was unabashed in his enthusiastic endorsement of a once-in-a-generation increase in productivity growth that he argued justified seemingly lofty valuations of equity markets. This was tantamount to a green light for market speculators and legions of individual investors at just the point when the equity bubble was nearing its end. And then only four years later, he did it again this time directing his counsel at the players of the property bubble. In early 2004, he urged homeowners to shift from fixed to floating rate mortgages, and in early 2005, he extolled the virtues of sub-prime borrowing the extension of credit to unworthy borrowers. Far from the heartless central banker that is supposed to take the punchbowl away just when the party is getting good, Alan Greenspan turned into an unabashed cheerleader for the excesses of an increasingly asset-dependent US economy. I fear history will not judge the Maestros legacy kindly. And now hes reinventing himself as a forecaster. Figure that!
And, thus, we are left with the question, Why? Why did Alan Greenspan decide that there was a "new paradigm"? Why did he tell the American public to take out adjustable mortgages? Why did he keep interest rates so low for so long?
An unhappy childhood? A deteriorating marriage? Problems with his kids? Nightmares of Ayn Rand chasing him with a rubber check?
Of course, maybe it doesn't matter. Maybe figuring out the infectious agent (returning to Vader's analogy) of the plague was unimportant. And, then again, maybe the entire history of modern medicine has been based on asking, Why?
Boy, it makes me feel good when people agree with me. Take Randall Forsyth, who sits in for Alan Abelson every now and then to write the Up and Down Wall Street column in Barron's.
Randall threatens Greenspan with jail time:
Up & Down Wall Street
In Praise of Folly
By Randall W. Forsyth
When Alan Greenspan fired off his recession forecast heard 'round the world a couple of weeks ago, he delivered it to an audience of investors in Hong Kong via a video linkup from halfway around the world. Could it be that the former Federal Reserve Chairman might not feel so cozy and secure, given what's befallen ex-central bankers in the region?
Back in 2005, the former Thai central bank governor was fined $4.6 billion for his role in the financial crisis resulting from the crash of the baht. Rerngchai Marakanond was found by a civil court to be guilty of "grave negligence" in squandering Thailand's currency reserves in a futile attempt to prop up the baht.
The 1997 Asian currency crisis also led to the arrest of Korea's central bank governor at the time, Kang Kyong Shik, for "gross economic negligence." He was imprisoned for three months in 1998, while awaiting trial. Prosecutors made Kang appear in court in prison garb, handcuffed and in ropes, adding to his humiliation.
As Dresdner Kleinwort's global strategist Albert Edwards, once wrote, if central bank chiefs are to be held accountable for negligence, should Greenspan be worried?
That question was raised anew as the bubbling subprime mortgage crisis erupted last week. As several acerbic observers pointed out, there could be no more damning indictment of Sir Alan's role than his own words.
In a speech to the Fed's Community Affairs Research conference in April 2005, The Maestro sang the praises of "technological advances" that "have resulted in increased efficiency and scale within the financial services industry. Innovation has brought about a multitude of new products, such as subprime loans," he continued, adding that technology had allowed lenders to size up the creditworthiness of borrowers more cheaply.
"Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today, subprime mortgages account for roughly 10% of the number of all mortgages outstanding, up from just 1% or 2% in the early 1990s."
...three years ago, Greenspan was touting ARMs for Everyman. "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage," he told the Credit Union National Association in 2004. "To the degree that households are driven by fears of payment shocks, but are willing to manage their own interest-rate risks, the traditional fixed-rate mortgage may be an exp
ensive method of financing a home."
Arbogast
The idea that one man is responsible for what happened cannot be true.
Collectively a group of people both within and outside that system must have created the illusion that failed or the design with purpose that we now see unfolding
Vader, what annoys me about the flu metaphor is that flu is, well, an act of God (or Mother Nature, whatever you wish to believe about these things). People get flu from each other just by being around each other, and being around other people is "the human condition." (Trust me; I've been on immunosupressant medication for a year now, forcing me to severely limit my casual contacts with other people who can be carriers of diseases that they're healthy enough not to suffer from. It is not typical human behavior to hide from people in this fashion; when Howard Hughes did it out of some crazy germ phobia, we called him, well, crazy.)
So, in other words, the flu metaphor can kind of get the lenders off the hook: anybody can get flu, rich or poor, etc. If we need a disease model, let me volunteer the chemotherapy model: I take these drugs meant to arrest the cancer, and one of their side-effects is to suppress my body's immune system. So I'm in this weird situation where I'm gaining on the cancer, but suddenly vulnerable to actually dying from a simple cold. It's not that I'm more likely to be exposed to germs, necessarily; it's that if I am so exposed, I'll get sicker than a person with a normal immune system would.
So all the various exotic mortgages were like a kind of chemo: meant to "cure" the basic problem of unaffordable home prices, but leaving all those consumers immunocompromised financially, so that the little financial stresses (the flu) are now deadly, where they used to be just an annoyance, maybe a few days of lost income. Given this metaphor, those who keep saying "housing weakness doesn't cause recession" are making their mistakes by assuming that homeowners have normal immune systems.
CR:
back in Dec you provided this information regarding turnover rate of existing SFH.
"One of the rarely told stories of the housing boom was the jump in turnover of existing homes. This graph shows sales normalized by the number of owner occupied units. This shows the extraordinary level of sales for the last few years, reaching 9.5% of owner occupied units in 2005. The median level is 6.0% for the last 35 years."
Is there enough information on the Jan and Feb numbers to get an idea about the lastest turnover rates?
Regarding that chart, can you explain to me how MEWs can be less than zero?
This is the quaint concept of paying off the mortgage. Some pople still do it.
What was never clear to me in the discussions about the lack of savings is does paying down debt count as saving? I think not. Hopefully, when we get out of this debt induced spending binge, we may see private debt level off and maybe start decreasing.
Another anecdote. Wife and I were looking at the return on our money market account verses the interest spent on the HELOC we got to finish our basement (full disclosure: and buy the 42" flat screen). She decided to close the money market account and pay down the HELOC. Savings and debt both decreased.
Robert, MEW could be less than zero because of mortagage amortization or pay-downs.
It's hard for me to accept this "firewall" theory that the problems were mainly subprime and will stay there, because we have had housing busts before when guidelines were stricter.
When people at any income or credit level are "upside down" on houses, it will create immobility issues for them, and a psychological "load" to carry.
Haven't you ever known co-workers stuck with a house (or two) in old cities where they lived? And heard them grouse about long distance problems they can't see, as they call contractors to inspect and bid on repairs, while they worry if they are getting reipped off? Or chase rent checks from slow paying tenants? Or nervously wait out the months, paying on a house that is empty?
Multiply that by a million people or more. It will have effects, but not fun and cheery ones like the "wealth effect".
Tanta
Yours the better analogy! With the addition that the profession that was in charge is guilty of malpractice.
Though I believe the disease is a decline in incomes with debt substitution for income. The mortgage thing to me is just a manifestation of the underlying disease. For example, stated income is common in credit card apps, lending to children and glorification of debt in TV ads.
Russ, Robert, Yes, I saw the Northern Trust chart and I've discussed MEW with them before. As Kasriel notes, there are as many ways to calculate MEW, as there are analysts! I doubt the Kennedy-Greenspan method will show as large a drop as NT.
I used to have my own approach - but I thought I'd wait for the Fed this time.
Ron, the existing home numbers are out next - so I'll take a look at the numbers. That graph was annual, not monthly. So it might be too early in the year to estimate '07 - especially since Jan and Feb are weak sales months (it's hard to tell what is happening).
Best Wishes.
One perspective is that "mistakes were made". The core of this position is that Central Banks do not know how their policies will affect the gross economy. This would suppose that none of these circumstances had ever happened before and that these Central Banks can therefore be excused.
There are, of course, other perspectives.
""What was never clear to me in the discussions about the lack of savings is does paying down debt count as saving? I think not. ""
Well, not exactly true. Taking a broad look at the problem we are in...in the past, when most loans were paid down through the years, owning a home was the most efficient means of saving. That was because saving is the hardest thing to do for most people. They spend what they bring home. So the trick was to take it out of the check before it is spent. Before 401k's etc, the only way for most housholds to build alot of wealth was through the purchase and thus paydown of a house. It was a form of forced saving. Otherwise people just would do it. This through the years gave the impression that owning a house was a great investment, rather than realizing it was just the most common way people were forced to save. When it came time to retire and move down, or when people inherited assets from mom and dad, it was usually in the form of a paid off house. They took the value of the house, subtracted the price paid, and assumed it was all profit. People forgot all the money they spent day to day on the house, and calculated the return of owning realestate without considering carrying costs. It wasn't the return of realestate that was a good investment, it was the way you had to buy and pay it off that made it the only way people would accumulate wealth.
When people were allowed to have 401ks, roths, etc relatively recently, they saw the stock market as the place to invest (it was again the forced savings that has built the wealth, not the stock market per se, as historically, in the last decade, the market hasn't done that great in the form of actual returns on investment-as I have explained before).
After the 2000 bubble burst, people went back to the old standby realestate that worked for mom and dad, and margined heavily. Ironically, the true way to build wealth, through the forced paydown of the margined debt, was thrown aside for neg-ams and IO's.
I have learned personally that those who build wealth will simply so by spending less than they make, and the actual return they make on where the money goes will mean less for most than they think.
Like dieting. Eat less, move more. No matter how many diet books, weight loss programs, etc they try to sell you. It all comes down to the same formula. If you don't eat less and move more, you aren't going to lose weight. Period.
The subprime blowup has had another "spill-over" effect on the way new construction is advertised. I used to flip through the weekend Real Estate section in the Washington Post and see pictures of McMansions that costs 800k+ with a "$2000 a month!!" in large print and then an asterisk down to the fine print below with 2/28 interest only or neg am. Flipping through today I see that type of advertising is almost entirely gone. Either their lenders aren't offering those products anymore or the builders are fearing lawsuits. Khov did have one crazy alt-A example, but it wasn't plastered all of their houses.
The new home market dynamics will be entirely different with homebuilders actually competing with each other on price instead trying to advertise the lowest monthly payment with a suicide loan.
At some point people will have to think about chnaging this:
Wikipedia
If I volunteer my own analogy, it seems to me the best is that of a genetic disease. If an older sibling has a genetic disease, there is a higher chance that one born afterwards will exhibit it. But that's just because learned something about the underlying genetic structure with the first one, and the conditional probabilities for the second one are considerably changed by that information.
But in no sense would you say the disease "spread" from one to the other.
thank you 'worried'.
Such a persuasive metaphor Tanta: current application of financial instruments designed to support current "stable prices" [this means house prices, not OER], --the chemo therapy that is behind the hollow insider phrases, "disintermediation of risks", "resilient economy"...but is making us vulnerable to the common cold, the common risks of everyday life...like even considering a job that a Mexican might do for a fraction, because that is not going to make a dent in the mortgage payment.
Glad to hear some progress with the cancer --my heart goes out to you.
Actually, the problem does spread:
Warning on 'silly' loans - Business - Business - theage.com.au
To Australia.
Insider Q&A on foreclosures and more
Mortgage Insider : The Orange County Register
You're such a sweetie, calmo.
If you want to be really amused, consider that, at one point while my oncologist was off on some medicalese explanation of the risk/benefits of chemo, I had to interrupt to say, "OK, I think I get this. Imagine that 'home prices' are cancer, and 'Option ARMs' are chemotherapy . . . let's posit stagant wage growth equivalent to the rate of chemo-induced anemia, and calculate that one year's property tax increase is equivalent to one bout of the flu. Now, that gives us . . . do you have a white board? Are you still listening to me?"
I had one puzzled oncologist there for a while.
From the article:
"Stearns also said there has been an inflation in credit scores, known as FICO scores. He said some consumers with a maximum of $3,000 in credit had a FICO of 700, which generally is considered a good score. Such a first-time buyer had no proven history of making a house payment, he said. In his own business, he said customers that went into default tended to have credit scores greater than 700."
Even if it's anecdotal, that's pretty eye-opening. 700 is prime/alt-a territory and an average mortgage-borrowers score, as opposed to some obvious credit risk. This businesswire article has IndyMac issuing a press release downplaying its subprime exposure:
Indymac Provides Update
In that article, their worrisome subprime mortgages (below FICO 620)only made up 3% of their 2006 loan originations. Their average 2006 mortgage loan had an average FICO of 701.
The national average credit score is 678. 720 and above is considered a great credit score.
All this is if the original Stearns article is accurate. I don't see any reason why want to be misleading: he is in both lending and foreclosing so he'll get his business either way.
Tanta:
Believing as I do that a sense humor will work mightily to offset immune system deficiencies, I have confidence in your full recovery.
:>)
P.S. I wish you the best of luck with your ongoing treatments, Tanta. I am in genuine awe of your intelligence and ability to executive-summarize things I couldn't otherwise comprehend. I can't have a housing bubble conversation with someone without mentioning your name- I am one of your biggest fans!
-Tom
I can't wait until the banks realize that FICO does not equal financial savvy. So many people don't understand the loans they are in, they only understand the monthly payment they were told to pay.
I went to freecreditreport.com and they gave me my Experian score, which was 794 out of 830. How does that relate to a FICO score?
Average Joe:If you don't eat less and move more, you aren't going to lose weight.
A creature that consumes more than it produces grows fat and unhealthy.
Yes, appreciate your savvy and wit in analysis here.
Hope all the fruits, vegetables, nuts, chocolate, and water push the poisons out of your system and heal you fully.
The power of the good Force(s) of the Universe be with you and heal you fully.
However, disagree strongly re your views on the illegal invasion, but best for all to keep that issue elsewhere.
does paying down debt count as saving? I think not
Of course it does. Saving = income - consumption. Your cash exposure (+ or -) is irrelevant.
Suppose some hit the 110% limit and adjust to the fully indexed rate. And the borrowers are struggling with the payment, and ask to refinance to in effect extend the period of relative low payments.
What is to prevent the Bank from doing this as a means of postponing the foreclosure?
The fact that the amount owed exceeds the value of the house, and the former is increasing while the latter is decreasing. The bank is better off disposing of the property ASAP.
Thanks, guys, for the fine thoughts. I do believe that a sense of humor, fueled by coffee and chocolate, can achieve a great deal. Fortunately, I work in the mortgage business, where there are jokers to the left of me and jokers to the right of me. I will never want for material.
Ed, your Experian score is a FICO score. "FICO" here is generic; "Experian" is the name brand. All the different credit repositories produce "FICO" scores, not just Fair, Isaacs (who invented them).
The best analogy to what is happening to the mortgages is the one that Fleckenstein uses: it is rot. It spreads through the root and it has spillover effects over the otherwise healthy prime leaves above.
IM, some argue "not only the otherwise healthy prime leaves above" but the perfectly all paid for and gleaming new house that has even all its taxes paid. This house could be in a neighborhood that has a few derelicts. Or that neighborhood could all be fully paid for and gleaming too, but the region be priced way high compared to others not so perfectly gleaming. These people argue that all housing is not immune from the inventory build nor the shortage of qualified buyers.
Well, I feel disarmed by anyone calling me sweetie, Tanta and take that as a big hint to change my socks...maybe even a bath.
I dont like the term "spread" either, when used in this context, but Ive always managed to endure it, because in a way, it still manages to capture a reality. That is, when subprime falters first, it kills off demand through tighter credit, and adds to supply through increased foreclosure, and ultimately has the effect of decreasing market prices, which is where the spread comes in. If prices remain up, then alt-A can always refi, since they are likely to have some $ sitting around that they can bring to the table if necessary. But if prices head further down, it gets harder and harder to stave off the mortgage reset and/or recast pain.