Agreed. But I would still like to see some figures that would show the exposure of owner occupied housing versus investment housing. Every article you read automatically equates those foreclosure rates to people losing their shelter, whereas in the case of rental properties it may be the case that nobody is going anywhere and the tenant is just changing the name of the payee on the rent check.
It all sounds dire but how much is going to put people on the street vs how much it is going to cost people who plowed money into that REIT.
The quantification is critical here. Millions of homeowners losing their homes is a national social crisis. Tens of thousands of investors losing their real estate portfolios is just an example of the miracles of capitalism, don't buy high and sell low is the lesson there. Those of us on the sidelines can only wince and say 'man that has got to smart' but fundamenally not care.
I say this because in case after case politicians and economists tend to project everything as if its primary impact was on middle class taxpayers when in fact they are at little to zero exposure. When Reagan made the decision that everyone would be made whole when the S&L crisis blew up and ignored the insurance limits he basically said that every taxpayer in America was on the hook for rich people making bad decisions, (because the insurance limits in place would have covered the vast majority of depositers). A similar decision was made when Greenspan determined that Long-Term Capital Manangement was "too large to fail" back in 1998.
It is astonishing how many millionaires and billionaires will flaunt their libertarian beliefs in the miracle of markets when that market is creating wealth for them, but find new faith in the government fisc when their bad decisions cause their portfolios to go south.
Yes, the impact of ARMs will be felt nationwide. Prices didn't skyrocket in Omaha, NE, bec. there was not the speculator activity, but rest assured those people also got ARMs. An Omaha realtor told me he has 2x the foreclosures, and inventory is up, about double. Prices have not dropped yet, but I know they will. I tried to warn my family in Omaha, but they either ignored my advice or got mad.
I use Omaha as an example, because it's under the radar. I searched the newspaper archives, but the local paper is so poorly written, and has nothing original. They only have copies from AP and Reuters. The only housing story came from the news channel, and it featured a woman saying no one had come by to look at her house in about a month.
John Talbott's Sell Now explains we'll have a recession, and failure of the banks and GSEs. Any reason this can't happen?
The government has increasingly created the moral hazard regarding risk taking.
It starts with tax policy where we take from the successful companies and subsidize the weak ones. I say let the weak companies fail and reduce the taxes on the rest of us.
How about assets... Look at coastal property in Florida, the cost of hurricanses is subsidized by the rest of us through bailouts and governmental restrictions on insurance rates. So why not build there? And sure we can build below sea level in New Orleans, the government will build big levees to protect our property and then bail us out if the levees break. Do the property owners pay for the protection of those levves or the bail out... NO! The rest of us do.
zeph, you figure Greenspan's plug for ARMs when it looked like housing might falter in 03, was desperately good government --following the mandate of 'stable prices and employment', or like Bruce Webb says, not foolish but protecting the interests of the wealthy?
Those post chairman speaking engagement fees I thought were desperately high, you?
Thank you Powayseller. That is the kind of specificity I am looking for. But then again to say 2x without specifying the base doesn't really get to the meat of the question. Doubling from what rate of foreclosures? Compared to the historical average? And how many of these foreclosures are recent buyers tempted to get into the market because of overgenerous loan terms but who really have little to no actual money invested?
If I get into a home on an interest only loan with closing costs rolled in and a minimal down my only real risk exposure is to my credit rating. The bank takes back my house and I am back to renting.
How many owner occupiers have used their home equity as a piggy bank to the extent that they will not be able to keep up payments? If your lenders have extended you $300,000 in credit on a $400,000 house that drops in value to $250,000, and you have a secure job and no need to move you actually have them over the barrel.
There is an old concept in banking dating back to the middle ages. If you owe the bank $1000 the bank owns you. If you owe the bank $100,000,000 you own the bank. It all comes down to who is carrying the ultimate risk.
The history of medieval banking is pretty instructive here. Banking families got obscenely rich lending to Popes and Kings only to get ruined a generation or two down the line when the next Pope or King decided to stop paying. Needless to say a civil suit wasn't exactly an option.
Estate tax "reform" has been sold by tales of family farms being lost. Yet the US Farm Bureau has not been able to come up with a single example of a farm being lost for that reason alone. I just wonder how much of that dynamic is in play in the housing bubble/ARM resetting story.
If I get into a home on an interest only loan with closing costs rolled in and a minimal down my only real risk exposure is to my credit rating. The bank takes back my house and I am back to renting.
I wouldn't be so sure of that. In 2005, one of my friends bought home in Las Vegas that was foreclosed upon. The home was financed 100%.
Now the 2nd TD holder - whose entire $70,000 mortgage lien was wiped out in the foreclossure - is suing her for $101,000 ($70K + costs)
With the new BK laws, the only way out is for her to quit her job and go on unemployment before she files for bankruptcy.
With these new BK laws, walking away from homes could get really ugly for a lot of people.
I believe most states allow deficiency judgements, so if the foreclosure sale fails to cover the debt the lender can come after your other assets and income.
Bankruptcy would be the only way to unilaterally not repay your debts legally. It should be difficult to skip on your obligations after you have spent the money you borrowed. Bankruptcy was too easy before and some people were gaming the system to use bankruptcy as a method of theft.
California has generally protected the consumer borrower by not allowing deficiency judgements in most circumstances. If the lender takes your home in foreclosure that's all they get from you (there are exceptions to this).
Calmo, What Greenspan said back then was that consumers would have saved money in the recent past had they used adjustable rate loans. It was a very true statement. People interpreted that statement as a recommendation of ARMs.
I have been using ARMs for about 20 years and have saved piles of money compared to fixed rates. Over time I have found that fixed rates cost as much as 200 bps extra. That is a very high premium for the lock in of the rate level. I prefer to float at a lower average rate, and over time save money despite the ups and downs.
Bruce - Copy Rob'ts request above re: SS except maybe the 12 y/o version needs to be dumbed down for me.
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On foreclosures... I agree that a lot of the damage we'll hear about in the press will be highly visible fairly high valued assets of direct or 'indirect' speculators. By indirect speculator I mean the owner still lived in the home but whose decision to extend & take chance was at least partially driven by expectations of future windfall. I'm thinking of places like San Diego, OC, San Fran, DC, Naples, etc.
However that isn't where the action has been so far. Nor is it the ARM resets or interest rates tripping them... its income and the locations hardest hit are places like Michigan & Indiana.
Funny financing - like equity extraction via ARMs - probably played a role but it wasn't to speculate... It was to make up for falling income, a 'temporary stop gap' that dragged on too long.
I see it all the time in my travels. In fact I can tell you right now where the next intense rounds will be... near Newton IA, Searcy AR & Herrin IL. Read why here. I know people in all three of those plants.
Just for yucks... look what a little under $650K will buy you in Iowa. The market here isn't exactly as rich as say OC... lol.
Schiff says that Greenspan is really trying "to help keep the housing bubble, and by extension the U.S. economy, expanding. Greenspan knows that the only way most home buyers can afford these ridiculously high prices is with ARMs. Without them, housing prices would collapse. He also knows how important (refinance) money is to the U.S. consumer. Since long-term interest rates cannot fall low enough to facilitate another wave of fixed-rate refinancings, he is trying to encourage homeowners to refinance one last time: fixed to ARM.
Maybe too heavily. I was (and still am) under the impression that the Fed chair was speaking out of his traditional compass, and that the next thing he might recommend would be GM trucks.
"zeph, you figure Greenspan's plug for ARMs when it looked like housing might falter in 03, was desperately good government"
calmo, when greenspan started talking up arms before the election; at the time I thought it was all political.... helping out W after giving H W a kick in the ass.
Now I think it was mainly to try and take back some control over mortgage lending which was being more and more controlled by asian CBs.(conundrum issue)
The trap was laid with excessive pump priming: tax cuts, lower rates, and cheap labor overseas. Yes, cheap labor...globalization has pushed rates down.
Spend, spend, to your dear wallet's limit. Credit and debt has been the name of the game. And now, privatization rears its true head: foreclosure. But real ownership was never meant for the poor or the aspiring middle class. The poor's ranks grow. The middle class dwindles. And for those in the upper middle...who thought they had a chance to be hmmmmmm millionaires, the gate may be closing.
I have always been amused at people's risk averse preference for fixed rate loans.
Simple it's risk vs reward. The proper balance isn't the same for every person.
Say I can afford up to a certain payment but not above that amount - above it I risk losing all - foreclosure & BK. So what if I save a little by taking out an ARM if the risk is later (say in 3-5 years) I cross over the line & lose all.
That is EXACTLY the world many working class folks are in. They have jobs whose incomes barely rise - stay almost the same for decades. They know EXACTLY how many pennies they have left over & budget right to that amount as best they can.
They will try to keep a small slush fund to cover 'uncertainties'... and they have uncertainties galore... illness, car maint., etc. Plus they usually aren't the best money managers to begin with. Any saving is likely to be spent somewhere else & not saved. Given those conditions it is crazy to take on the added risk of an ARM when they can lock in & get by with a fixed rate even if it means more initially... If they can't afford a property with a fixed rate they can't afford it with an ARM either... only they won't learn that until later when they get pinched.
ARMs & variable products certainly have their place - they are especially good for people with significant resources & complex asset allocations. If the rates are in their favor they save money but if not they can easily absorb the rate increase without real pain or dig up some other assets they have squirreled away and just pay off the damned thing or refinance as they invariably have the credit rating to do that.
For many people they don't have any of those options. Buying down risk up front with fixed rate they know they can afford is worth the premium & more.
The failure of Greenspan's testimony was suggesting - even if it was accidental & not intended - that ARMs were a good deal for the general public. It is NOT a good deal for that segment that lives pay check to pay check. And we often forget that this is by far the biggest segment out there.
Robert: "I wouldn't be so sure of that. In 2005, one of my friends bought home in Las Vegas that was foreclosed upon. The home was financed 100%.
Now the 2nd TD holder - whose entire $70,000 mortgage lien was wiped out in the foreclossure - is suing her for $101,000 ($70K + costs)
With the new BK laws, the only way out is for her to quit her job and go on unemployment before she files for bankruptcy.
With these new BK laws, walking away from homes could get really ugly for a lot of people.'
Well I guess I am an 11 year old because I don't even get the narrative here. Was your friend an owner occupier? And did she take out a $70,000 second on top of her $100,000 first? And who underwrote that loan? And suing is one thing, recovery another.
And zephyr:" I believe most states allow deficiency judgements, so if the foreclosure sale fails to cover the debt the lender can come after your other assets and income." Well maybe so, and I would be happy to have some real estate attorneys weigh in here, but I don't think this is true of first mortgages. Now those people who trust in the "you can borrow up to 150% of your equity" entreaties you get in the mail every day may buy into enforceable loans, but there is a big difference between a mortgage and a lien on your house.
"I have always been amused at people's risk averse preference for fixed rate loans."
Well I am amused every month when I get my mortgage statement calling me to hand over my 5.0% 15 year fixed payment. I missed the very bottom, I could have gotten 4.75% if I refied in March instead of June, but so be it.
I understand the reality, a lot of people got overextended, real people and real kids are going to lose homes, but I am just wondering at where the real exposure is.
Well I guess I am an 11 year old because I don't even get the narrative here. Was your friend an owner occupier? And did she take out a $70,000 second on top of her $100,000 first? And who underwrote that loan? And suing is one thing, recovery another.
Sorry that I was unclear as to all the particulars. My fault.
It was investment property (not O/O), purchased with an 80% first mortgage and a 20% second mortgage at the time of closing. The loan was "stated income" - big surprise, right?
Most people don't know how the case law on the new BK laws is going to unfold. There's a "means" test that could prevent people with solid incomes ("means") to BK their liabilities as they did in the past.
Anyway, she's being sued for $101,000 by the 2nd mortgage holder (a big instititional lender). How ever this lawsuit turns out, do you think John and Mary Q. Public are prepared to spend tens of thousands of dollars defending a lawsuit?
:" I believe most states allow deficiency judgements, so if the foreclosure sale fails to cover the debt the lender can come after your other assets and income." Well maybe so, and I would be happy to have some real estate attorneys weigh in here, but I don't think this is true of first mortgages.
I'm not an attorney, but I think I can answer this. Lenders cannot get a deficiency judgment on owner-occupied purchase money loans. Once an owner-occupant refinances the mortgage, the loan is no longer "purchase money" and a deficiency judgment could be obtained. With investment properties (non-owner occupied properties), a deficiency judgement can always be sought - regardless of whether the mortgage loan was purchase money or not.
But a simple refinance (retiring one loan in favor of another) should not expose you to any more liability beyond the equity in the house. Layering an equity loan on top of your mortgage would. In the jargon there is a bunch of difference between a "re-fi" and a "second" and between a "second" and a "home equity loan".
I respect CR a great deal but I still have the same question as the day I first arrived here. In a housing bubble who is actually carrying the bulk of the risk?
I respect CR a great deal but I still have the same question as the day I first arrived here. In a housing bubble who is actually carrying the bulk of the risk?
I understand your question Bruce - it is a good one - not sure CR or anyone can answer it for sure.
But don't underestimate the risk to individual homeowners who bought more than they could afford - there are more of them out there than we realize... my wife has a number of friends/co-workers who have $400K homes, little equity and approximately an $80,000 combined income... Even with a fixed rate loan it won't take much of a bump to get them in trouble. There are lotsa people like this who priced their lives for 'perfection'.
Now back to zephyr's point... on 'moral hazard'... should those folks even been trying to support a $400K home on those incomes? Should we feel sorry for them if they lose their home? They clearly over-reached.
I think there will be a lot of discussion like this in the months & years ahead.
If you're curious how the counties surrounding Denver are being impacted by foreclosures, I posted an analysis on my blog. I also broke down Boulder County by city. Comments appreciated!
It is astonishing how many millionaires and billionaires will flaunt their libertarian beliefs in the miracle of markets when that market is creating wealth for them, but find new faith in the government fisc when their bad decisions cause their portfolios to go south.
Please elaborate...Who is making bad decisions million/billionaire Libertarians or the government?
...This does not even make sense??
In California, there are two ways to foreclose on a property judicial and non-judicial. With a judicial foreclosure, one takes it to court, but a judicial foreclosure is rarely used because it takes to the other side of forever to get possession of the property. Also, it is possible to get a deficiency judgment using a judicial foreclosure.
With a non-judicial foreclosure, a Notice of Default is filed. The owner has three months to come up with a cure. If not a Notice of Trustees Sale is filed. Twenty one days later the property is sold at action for cash on the spot. A deficiency judgment is not possible with a non-judicial foreclosure.
If the former owner will not leave the property after the sale, the former owner has to be evicted through the legal process.
Now, the former owner may or may not have cancellation of debt income taxed as ordinary income.
The question of where the "real exposure" to the foreclosure risk resides is a very interesting one.
Since many who will be foreclosed upon never should have been allowed to buy the homes in the first place (Robert Campbell's friend was an "investor" buying with a stated-income loan and 80/20 (i.e., 100%) financing), their risk is limited to how much the lenders and IRS (which rightly treats forgiveness of debt as income) decide it's worth the trouble to try to gouge out of their income and other assets. But (financially speaking) from dust they came, and to dust they shall return -- they won't lose much because they never really had it.
The people who refi'd out the "equity" and spent it on toys will simply end up having to pay for the toys with the sweat of their brows. First-time or move-up buyers who bought in at the inflated prices will be horribly hurt only if they bought with teaser-rate ARMs or are forced to sell by personal circumstances.
As prices collapse back to '90s levels, the amounts recovered by the mortgage lenders on loans of the last few years will be zero for second-mortgage holders and perhaps 75% for first-mortgage holders (but below 50% in CA where prices quadrupled). So the biggest losers will be among the lenders, especially those holding the mortgage-backed securities (MBSs) that contain the subprime loans and second mortgages.
What we don't know is who they are. I suspect a lot may be held by hedge funds and by Japanese insurance companies made desperate for yield by their nation's zero-interest-rate policy (the "ZIRP"). As this unfolds, newspaper articles about their enormous losses will be frequent. Let's hope US banks, pension funds and insurance companies aren't too deep into this stuff.
And thank you Barry. If I understand you right there is a legal route that would allow lenders to attempt to squeeze blood out of a stone, but in practice most lenders prefer to go the non-judicial route and just cut their losses via a Trustee's sale. And given that even in a fixed rate loan most of the payments in the early years are interest, the accumulated gains from those interest payments plus selling even into a relatively flat market means little risk of actual loss. Which is to say that lending to a owner occupier is a lot less risky than investing direct.
And "The economist". The S&L debacle was illuminating. The Reagan Administration made two initial decisions. One was to lift the amount of deposit insurance from $10,000 per account to $100,000. The second was to lift the tight restrictions on Savings and Loans that had essentially limited them to lending on single family housing. The combination was deadly. S&L's agressively sought money with high interest rates to invest in high flying real estate deals. In the process risk/reward went out the window, you were earning 17% on your deposit and yet your principal was secured by the Federal Government. All any rational investor had to do was to keep your investment into any one account under $100,000. But people got lazy, rather than manage their accounts in ways that would totally eliminate downside risk, they let their accounts baloon. And if you look at the universe of investors that have cash investments in the multiple $100,000's you are talking very rich people indeed.
When the S&L's blew up the legal and rational solution would have been to limit all payouts to the $100,000 maximum. Instead the federal government insisted on making everyone whole. Investors who were dragging down double digit interest payments ostensibly because their investments were carrying risk got to keep their accumulated earnings and get their principal covered besides. The result was a massive transfer of income from the middle class to the wealthy, all of course sold with the message that it was a bailout for the middle class. Well friends relatively few middle class people had exposure over $100,000 per account.
People who made stupid decisions by putting their money in Keating's hands should have lost every dollar over the legally insured limit. The market should have been allowed to work to punish those who ignored risk in the risk/reward ratio. But they were rich and so got bailed out. On my dime.
dryfly: "the risk to individual homeowners who bought more than they could afford"
"Quality" of properties certainly does not have only one dimension, people look for different things, and price correlates to any given measure of quality only so much, but overall I'd say the guy making a bigger offer than you has the first pick, and you can choose among what he didn't like.
So to a very rough approximation, you can sort (available) housing units on a decreasing quality scale, and disposable funds/ability to borrow (hence ability to make offers) on another at a given point in time, and match them up.
That should go a long way in explaining the phenomenon.
economist: Bruce has responded already, but another way of looking at it is that people tend to crow about the virtue of laissez-faire when they are confident the riding is good, but cry for mommy (favorable regulation) quickly when things get tough for them. Like the neighborhood bully when hitting on a group of kids he cannot "handle".
That should go a long way in explaining the phenomenon.
cm - all the lender cares about is will they get paid. If not its foreclosure regardless of the 'quality' of the dwelling.
A person, who bought a $400K home on two peoples income that combined only adds up to $80K, is over-reaching... All you have to do is a hypothetical budget to realize this.
This story is being repeated all across this country but it is a slow motion disaster... like a flood.
As Dr Who always reminds us, it might take a job loss event or sky-rocketing interest rate hike before foreclosures pick up enough to be noticeable.
So be it - most of these at-risk folks aren't going anywhere too soon since a significant number of folks like my wife's co-workers won't be able to refi at rates low enough to save themselves... its just a matter of time before they get squeezed out of their home, voluntarily or involuntarily.
Even on purchase money first loans for owner-occupied homes, most states do allow deficiency judgments by use of judiciary forclosures (ie going to court). This is a more cumbersome process than non-judiciary forclosure.
I believe that as practical matter most lenders settle for the proceeds of forclosure and do not pursue deficiency judgments on owner occupied first loans. The extra expense and time is probably not worthwhile in most cases since the foreclosed borrower is unlikely to have sufficient other assets to cover the deficiency.
If a lender forecloses and there is a deficiency, the uncollected amount (including foreclosure expenses of the lender) is considered forgiven debt for tax purposes and is taxable income to the forclosed borrower.
zephyr wrote, I have been using ARMs for about 20 years and have saved piles of money compared to fixed rates. Over time I have found that fixed rates cost as much as 200 bps extra. That is a very high premium for the lock in of the rate level. I prefer to float at a lower average rate, and over time save money despite the ups and downs.
But over roughly the last 20 years there's been a secular decline in nominal interest rates.
dryfly: I meant to illustrate that when there are more contenders than "desirable" properties, people will overcommit whenever overcommiting loans are accomodated.
I could buy any of a good number of properties around here, but whatever is consistent with my risk tolerance I'd rather not touch. Others are more confident and are willing to overcommit (by my standards) on properties that I thus cannot have. I cannot compete against people who are willing to get substantially larger loans on let's say the same income.
So all I can do is overcommit as well, buy something inferior (and "relatively" overcommit as well), or not buy at all.
30 yr fixed rates have declined about 500 bps over the last 20 years (only about 25 bps per year). Fixed rate borrowers have refinanced periodically to benefit from the decline. Even without the secular decline ARMs are cheaper over the long run.
The average duration of ownership is about 7 years. The average duration of a mortgage is much less. Given this, even with a secular rise in interest rates of the same 25 bps per year, ARMs would be cheaper for the average homeowner.
I have no stake in what people choose to do - I am just pointing out the added cost of using fixed rate loans. The simple fact is that people are willing to pay extra all the time in order to avoid the risk of potentially paying extra on an unplanned basis.
The simple fact is that people are willing to pay extra all the time in order to avoid the risk of potentially paying extra on an unplanned basis.
And locking in to pay a little extra is the smart thing to do IF the result of that unplanned extra is losing the property... for many working class home owners that is exactly the risk.
ARMs, Neg Ams, IOs all have their place - but only for those who can afford champagne, not for those on a beer & pretzel budget. The b & p crowd need to pay as you go - in cash if possible - most all of the time and even then be careful. They just don't have the cushion for mistakes & bad luck that wealthy buyers have.
So all I can do is over-commit as well, buy something inferior (and "relatively" over-commit as well), or not buy at all.
I understand what you are saying - understand exactly - my point was the lender doesn't care about your (or my wife's co-worker) dilema... all they care about is that they get paid. And for many of those over-committed they won't be able to do that... maybe not now but eventually it is going to catch up with them.
I believe there will be less home price appreciation so they can't sell out with a gain, higher rates overall so refi won't make sense either & little or no increase in incomes so they won't be able to grow out of their leveraged position... for many the squeeze will become increasingly severe... those who truly over-committed won't make it.
The only good news I can see is I believe these people are a minority... while many will feel the squeeze, most will not get crushed.
But it could still suck & do damage to the economy. I lived through the ag crisis and a minority of farms were in trouble then also... something like 25% initially... and it raised hell with the whole community. That was a local problem... Midwest. This current mess is more national and will have a wider impact I believe.
BTW it was a combination of high land costs (frequently leveraged) from an earlier 'boom time' followed by a period of income decline that precipitated the ag crisis... The land price run up was in the late 70s & early 80s but the shit didn't hit the fan until mid to late 80s. It took a while for the troubles to catch up. Sounds familiar eh?
dryfly: I was merely trying to make a commentary on the "overcommitted" thing, not argue against your statement. My point was that many can buy only by overcommitting (and hoping for the best). One perception problem is survivor bias -- today many of those who overcommitted long ago and were made whole by an overall favorable environment look good (i.e. they actually got the best), and this is cited as evidence by nagging spouses and friends that concerns about risk are exaggerated.
Very interesting discussion, I learned a lot. But when the Black Angel of Death of the Housing Bubble swings his scythe who loses his head?
This fundamental question still remains unanswered. For the occupying owner I think dryfly gets it right "while many will feel the squeeze, most will not get crushed"
And despite my raising the S&L precedent I don't think deimos has it right: "We all are, since the gov will print money to make the obvious losers whole." I don't see it, this wasn't corporate America, this wasn't the billionaires moving in. This was the hot money working. Excess dollars from Taipei and Hong Kong and Amsterdam were put in play and depending on the exact timing either paid off or didn't.
My personal view is that the bubble is deflating. Admittedly at different rates in different places, and in some places new steam is being injected. But enough people have been raising enough red flags that enough people are beginning to hold back.
CR may have done his job too well to get the credit he deserves.
Certainly plenty (majority or minority I'm not sure) of states allow lenders to seek a deficiency judgement. One question is whether the mortgage issuers are obligated to pursue deficiency judgements. It ismy understanding that under some methods of mortgatge securitization they are. (This is to prevent the bank from colluding with the borrower to defraud the MBS purchaser) The big problem is that most borrowers will have already have sold off large portable assests (the Hummer and the Boat) before they got to foreclosure. So we're talking about household contents, seizure of their checking account, etc: small potatos if they're upside down by 50k.
One way or another, I think alot of money will go poof and disappear. To the extant that banks sometimes keep a percentage of their loans, and they sometimes have MBSs as part of their assets, how many will have trouble maintaining minimum reserves? I don't think it's likely, but a "bank holiday" in say, 2008 can't be dismissed as an absurdist fantasy.
Even with a secular rise the ARMs are cheaper in the long run (see my previous post on this).
Yes the decline is steeper if you start at the rate peak 25 years ago. However, just two years before that in 1979, the rates were about equal to the rates in 1986. There was a brief surge in 80 and 81. In the 20 years before 1979 the rates rose by about the same 25 bps per years as they have declined in the last 20 years - from a level that was lower than today.
The 1970s and 1980s were an aberration, largely influenced by the baby boom cohort entering adult life and the job market. I expect further aberrations in each age bracket as the boomers move through. Soon it will be retirement.
Zeph
before u continue to rant about everybody else in the country subsidizing coastal property in the hurricane zone ...how bout us in the coastal regions also subsidizing you folks in tornado alley..or the flood zone of the mighty Miss 1000 miles inland..or the earthquake zones of the west..or the volcano areas of the west ala Mt St Helens..or the Winter storms of the far North..mudslides in the mountains 1000 miles from the coast..severe thunderstorms in areas well away from the coast..ETC!!!get the picture???
No one anywhere in the US is immune to some form of ravage of nature..so lay off the hurricane rant pal
Agreed. But I would still like to see some figures that would show the exposure of owner occupied housing versus investment housing. Every article you read automatically equates those foreclosure rates to people losing their shelter, whereas in the case of rental properties it may be the case that nobody is going anywhere and the tenant is just changing the name of the payee on the rent check.
It all sounds dire but how much is going to put people on the street vs how much it is going to cost people who plowed money into that REIT.
The quantification is critical here. Millions of homeowners losing their homes is a national social crisis. Tens of thousands of investors losing their real estate portfolios is just an example of the miracles of capitalism, don't buy high and sell low is the lesson there. Those of us on the sidelines can only wince and say 'man that has got to smart' but fundamenally not care.
I say this because in case after case politicians and economists tend to project everything as if its primary impact was on middle class taxpayers when in fact they are at little to zero exposure. When Reagan made the decision that everyone would be made whole when the S&L crisis blew up and ignored the insurance limits he basically said that every taxpayer in America was on the hook for rich people making bad decisions, (because the insurance limits in place would have covered the vast majority of depositers). A similar decision was made when Greenspan determined that Long-Term Capital Manangement was "too large to fail" back in 1998.
It is astonishing how many millionaires and billionaires will flaunt their libertarian beliefs in the miracle of markets when that market is creating wealth for them, but find new faith in the government fisc when their bad decisions cause their portfolios to go south.
Yes, the impact of ARMs will be felt nationwide. Prices didn't skyrocket in Omaha, NE, bec. there was not the speculator activity, but rest assured those people also got ARMs. An Omaha realtor told me he has 2x the foreclosures, and inventory is up, about double. Prices have not dropped yet, but I know they will. I tried to warn my family in Omaha, but they either ignored my advice or got mad.
I use Omaha as an example, because it's under the radar. I searched the newspaper archives, but the local paper is so poorly written, and has nothing original. They only have copies from AP and Reuters. The only housing story came from the news channel, and it featured a woman saying no one had come by to look at her house in about a month.
John Talbott's Sell Now explains we'll have a recession, and failure of the banks and GSEs. Any reason this can't happen?
The government has increasingly created the moral hazard regarding risk taking.
It starts with tax policy where we take from the successful companies and subsidize the weak ones. I say let the weak companies fail and reduce the taxes on the rest of us.
How about assets... Look at coastal property in Florida, the cost of hurricanses is subsidized by the rest of us through bailouts and governmental restrictions on insurance rates. So why not build there? And sure we can build below sea level in New Orleans, the government will build big levees to protect our property and then bail us out if the levees break. Do the property owners pay for the protection of those levves or the bail out... NO! The rest of us do.
We need to stop subsidizing foolish behavior.
zeph, you figure Greenspan's plug for ARMs when it looked like housing might falter in 03, was desperately good government --following the mandate of 'stable prices and employment', or like Bruce Webb says, not foolish but protecting the interests of the wealthy?
Those post chairman speaking engagement fees I thought were desperately high, you?
Thank you Powayseller. That is the kind of specificity I am looking for. But then again to say 2x without specifying the base doesn't really get to the meat of the question. Doubling from what rate of foreclosures? Compared to the historical average? And how many of these foreclosures are recent buyers tempted to get into the market because of overgenerous loan terms but who really have little to no actual money invested?
If I get into a home on an interest only loan with closing costs rolled in and a minimal down my only real risk exposure is to my credit rating. The bank takes back my house and I am back to renting.
How many owner occupiers have used their home equity as a piggy bank to the extent that they will not be able to keep up payments? If your lenders have extended you $300,000 in credit on a $400,000 house that drops in value to $250,000, and you have a secure job and no need to move you actually have them over the barrel.
There is an old concept in banking dating back to the middle ages. If you owe the bank $1000 the bank owns you. If you owe the bank $100,000,000 you own the bank. It all comes down to who is carrying the ultimate risk.
The history of medieval banking is pretty instructive here. Banking families got obscenely rich lending to Popes and Kings only to get ruined a generation or two down the line when the next Pope or King decided to stop paying. Needless to say a civil suit wasn't exactly an option.
Estate tax "reform" has been sold by tales of family farms being lost. Yet the US Farm Bureau has not been able to come up with a single example of a farm being lost for that reason alone. I just wonder how much of that dynamic is in play in the housing bubble/ARM resetting story.
Bruce Webb,
I wouldn't be so sure of that. In 2005, one of my friends bought home in Las Vegas that was foreclosed upon. The home was financed 100%.
Now the 2nd TD holder - whose entire $70,000 mortgage lien was wiped out in the foreclossure - is suing her for $101,000 ($70K + costs)
With the new BK laws, the only way out is for her to quit her job and go on unemployment before she files for bankruptcy.
With these new BK laws, walking away from homes could get really ugly for a lot of people.
Bruce Webb,
OT. I know you've done your homework on the Social Security mess because I've read your posts on other discussion boards.
I would really appreciate it if you would explain your informed position sometime so that a 12-year old kid could understand it.
I believe most states allow deficiency judgements, so if the foreclosure sale fails to cover the debt the lender can come after your other assets and income.
Bankruptcy would be the only way to unilaterally not repay your debts legally. It should be difficult to skip on your obligations after you have spent the money you borrowed. Bankruptcy was too easy before and some people were gaming the system to use bankruptcy as a method of theft.
California has generally protected the consumer borrower by not allowing deficiency judgements in most circumstances. If the lender takes your home in foreclosure that's all they get from you (there are exceptions to this).
Calmo, What Greenspan said back then was that consumers would have saved money in the recent past had they used adjustable rate loans. It was a very true statement. People interpreted that statement as a recommendation of ARMs.
I have been using ARMs for about 20 years and have saved piles of money compared to fixed rates. Over time I have found that fixed rates cost as much as 200 bps extra. That is a very high premium for the lock in of the rate level. I prefer to float at a lower average rate, and over time save money despite the ups and downs.
Bruce - Copy Rob'ts request above re: SS except maybe the 12 y/o version needs to be dumbed down for me.
::::::
On foreclosures... I agree that a lot of the damage we'll hear about in the press will be highly visible fairly high valued assets of direct or 'indirect' speculators. By indirect speculator I mean the owner still lived in the home but whose decision to extend & take chance was at least partially driven by expectations of future windfall. I'm thinking of places like San Diego, OC, San Fran, DC, Naples, etc.
However that isn't where the action has been so far. Nor is it the ARM resets or interest rates tripping them... its income and the locations hardest hit are places like Michigan & Indiana.
Funny financing - like equity extraction via ARMs - probably played a role but it wasn't to speculate... It was to make up for falling income, a 'temporary stop gap' that dragged on too long.
I see it all the time in my travels. In fact I can tell you right now where the next intense rounds will be... near Newton IA, Searcy AR & Herrin IL. Read why here. I know people in all three of those plants.
Just for yucks... look what a little under $650K will buy you in Iowa. The market here isn't exactly as rich as say OC... lol.
I lean on this view:
Fed chief pushing ARMs
Schiff says that Greenspan is really trying "to help keep the housing bubble, and by extension the U.S. economy, expanding. Greenspan knows that the only way most home buyers can afford these ridiculously high prices is with ARMs. Without them, housing prices would collapse. He also knows how important (refinance) money is to the U.S. consumer. Since long-term interest rates cannot fall low enough to facilitate another wave of fixed-rate refinancings, he is trying to encourage homeowners to refinance one last time: fixed to ARM.
Maybe too heavily. I was (and still am) under the impression that the Fed chair was speaking out of his traditional compass, and that the next thing he might recommend would be GM trucks.
"zeph, you figure Greenspan's plug for ARMs when it looked like housing might falter in 03, was desperately good government"
calmo, when greenspan started talking up arms before the election; at the time I thought it was all political.... helping out W after giving H W a kick in the ass.
Now I think it was mainly to try and take back some control over mortgage lending which was being more and more controlled by asian CBs.(conundrum issue)
I think that Greenspan was just making an observation of fact - not a pitch.
People do pay a high premium for the security of a fixed rate. That is to say, they pay a lot extra to avoid having to pay extra.
I have always been amused at people's risk averse preference for fixed rate loans.
The trap was laid with excessive pump priming: tax cuts, lower rates, and cheap labor overseas. Yes, cheap labor...globalization has pushed rates down.
Spend, spend, to your dear wallet's limit. Credit and debt has been the name of the game. And now, privatization rears its true head: foreclosure. But real ownership was never meant for the poor or the aspiring middle class. The poor's ranks grow. The middle class dwindles. And for those in the upper middle...who thought they had a chance to be hmmmmmm millionaires, the gate may be closing.
Anyone check the bankruptcy rate lately?
I have always been amused at people's risk averse preference for fixed rate loans.
Simple it's risk vs reward. The proper balance isn't the same for every person.
Say I can afford up to a certain payment but not above that amount - above it I risk losing all - foreclosure & BK. So what if I save a little by taking out an ARM if the risk is later (say in 3-5 years) I cross over the line & lose all.
That is EXACTLY the world many working class folks are in. They have jobs whose incomes barely rise - stay almost the same for decades. They know EXACTLY how many pennies they have left over & budget right to that amount as best they can.
They will try to keep a small slush fund to cover 'uncertainties'... and they have uncertainties galore... illness, car maint., etc. Plus they usually aren't the best money managers to begin with. Any saving is likely to be spent somewhere else & not saved. Given those conditions it is crazy to take on the added risk of an ARM when they can lock in & get by with a fixed rate even if it means more initially... If they can't afford a property with a fixed rate they can't afford it with an ARM either... only they won't learn that until later when they get pinched.
ARMs & variable products certainly have their place - they are especially good for people with significant resources & complex asset allocations. If the rates are in their favor they save money but if not they can easily absorb the rate increase without real pain or dig up some other assets they have squirreled away and just pay off the damned thing or refinance as they invariably have the credit rating to do that.
For many people they don't have any of those options. Buying down risk up front with fixed rate they know they can afford is worth the premium & more.
The failure of Greenspan's testimony was suggesting - even if it was accidental & not intended - that ARMs were a good deal for the general public. It is NOT a good deal for that segment that lives pay check to pay check. And we often forget that this is by far the biggest segment out there.
Robert: "I wouldn't be so sure of that. In 2005, one of my friends bought home in Las Vegas that was foreclosed upon. The home was financed 100%.
Now the 2nd TD holder - whose entire $70,000 mortgage lien was wiped out in the foreclossure - is suing her for $101,000 ($70K + costs)
With the new BK laws, the only way out is for her to quit her job and go on unemployment before she files for bankruptcy.
With these new BK laws, walking away from homes could get really ugly for a lot of people.'
Well I guess I am an 11 year old because I don't even get the narrative here. Was your friend an owner occupier? And did she take out a $70,000 second on top of her $100,000 first? And who underwrote that loan? And suing is one thing, recovery another.
And zephyr:" I believe most states allow deficiency judgements, so if the foreclosure sale fails to cover the debt the lender can come after your other assets and income." Well maybe so, and I would be happy to have some real estate attorneys weigh in here, but I don't think this is true of first mortgages. Now those people who trust in the "you can borrow up to 150% of your equity" entreaties you get in the mail every day may buy into enforceable loans, but there is a big difference between a mortgage and a lien on your house.
"I have always been amused at people's risk averse preference for fixed rate loans."
Well I am amused every month when I get my mortgage statement calling me to hand over my 5.0% 15 year fixed payment. I missed the very bottom, I could have gotten 4.75% if I refied in March instead of June, but so be it.
I understand the reality, a lot of people got overextended, real people and real kids are going to lose homes, but I am just wondering at where the real exposure is.
Bruce,
Sorry that I was unclear as to all the particulars. My fault.
It was investment property (not O/O), purchased with an 80% first mortgage and a 20% second mortgage at the time of closing. The loan was "stated income" - big surprise, right?
Most people don't know how the case law on the new BK laws is going to unfold. There's a "means" test that could prevent people with solid incomes ("means") to BK their liabilities as they did in the past.
Anyway, she's being sued for $101,000 by the 2nd mortgage holder (a big instititional lender). How ever this lawsuit turns out, do you think John and Mary Q. Public are prepared to spend tens of thousands of dollars defending a lawsuit?
Not me.
Bruce,
I'm not an attorney, but I think I can answer this. Lenders cannot get a deficiency judgment on owner-occupied purchase money loans. Once an owner-occupant refinances the mortgage, the loan is no longer "purchase money" and a deficiency judgment could be obtained. With investment properties (non-owner occupied properties), a deficiency judgement can always be sought - regardless of whether the mortgage loan was purchase money or not.
Thank you Robert. That helped.
But a simple refinance (retiring one loan in favor of another) should not expose you to any more liability beyond the equity in the house. Layering an equity loan on top of your mortgage would. In the jargon there is a bunch of difference between a "re-fi" and a "second" and between a "second" and a "home equity loan".
I respect CR a great deal but I still have the same question as the day I first arrived here. In a housing bubble who is actually carrying the bulk of the risk?
I respect CR a great deal but I still have the same question as the day I first arrived here. In a housing bubble who is actually carrying the bulk of the risk?
I understand your question Bruce - it is a good one - not sure CR or anyone can answer it for sure.
But don't underestimate the risk to individual homeowners who bought more than they could afford - there are more of them out there than we realize... my wife has a number of friends/co-workers who have $400K homes, little equity and approximately an $80,000 combined income... Even with a fixed rate loan it won't take much of a bump to get them in trouble. There are lotsa people like this who priced their lives for 'perfection'.
Now back to zephyr's point... on 'moral hazard'... should those folks even been trying to support a $400K home on those incomes? Should we feel sorry for them if they lose their home? They clearly over-reached.
I think there will be a lot of discussion like this in the months & years ahead.
If you're curious how the counties surrounding Denver are being impacted by foreclosures, I posted an analysis on my blog. I also broke down Boulder County by city. Comments appreciated!
Silver Fern Homes - Boulder, Colorado Real Estate
click on "research blog"
Bruce Webb said
It is astonishing how many millionaires and billionaires will flaunt their libertarian beliefs in the miracle of markets when that market is creating wealth for them, but find new faith in the government fisc when their bad decisions cause their portfolios to go south.
Please elaborate...Who is making bad decisions million/billionaire Libertarians or the government?
...This does not even make sense??
In California, there are two ways to foreclose on a property judicial and non-judicial. With a judicial foreclosure, one takes it to court, but a judicial foreclosure is rarely used because it takes to the other side of forever to get possession of the property. Also, it is possible to get a deficiency judgment using a judicial foreclosure.
With a non-judicial foreclosure, a Notice of Default is filed. The owner has three months to come up with a cure. If not a Notice of Trustees Sale is filed. Twenty one days later the property is sold at action for cash on the spot. A deficiency judgment is not possible with a non-judicial foreclosure.
If the former owner will not leave the property after the sale, the former owner has to be evicted through the legal process.
Now, the former owner may or may not have cancellation of debt income taxed as ordinary income.
Selling house at a loss could have nasty tax implications
The question of where the "real exposure" to the foreclosure risk resides is a very interesting one.
Since many who will be foreclosed upon never should have been allowed to buy the homes in the first place (Robert Campbell's friend was an "investor" buying with a stated-income loan and 80/20 (i.e., 100%) financing), their risk is limited to how much the lenders and IRS (which rightly treats forgiveness of debt as income) decide it's worth the trouble to try to gouge out of their income and other assets. But (financially speaking) from dust they came, and to dust they shall return -- they won't lose much because they never really had it.
The people who refi'd out the "equity" and spent it on toys will simply end up having to pay for the toys with the sweat of their brows. First-time or move-up buyers who bought in at the inflated prices will be horribly hurt only if they bought with teaser-rate ARMs or are forced to sell by personal circumstances.
As prices collapse back to '90s levels, the amounts recovered by the mortgage lenders on loans of the last few years will be zero for second-mortgage holders and perhaps 75% for first-mortgage holders (but below 50% in CA where prices quadrupled). So the biggest losers will be among the lenders, especially those holding the mortgage-backed securities (MBSs) that contain the subprime loans and second mortgages.
What we don't know is who they are. I suspect a lot may be held by hedge funds and by Japanese insurance companies made desperate for yield by their nation's zero-interest-rate policy (the "ZIRP"). As this unfolds, newspaper articles about their enormous losses will be frequent. Let's hope US banks, pension funds and insurance companies aren't too deep into this stuff.
And thank you Barry. If I understand you right there is a legal route that would allow lenders to attempt to squeeze blood out of a stone, but in practice most lenders prefer to go the non-judicial route and just cut their losses via a Trustee's sale. And given that even in a fixed rate loan most of the payments in the early years are interest, the accumulated gains from those interest payments plus selling even into a relatively flat market means little risk of actual loss. Which is to say that lending to a owner occupier is a lot less risky than investing direct.
And "The economist". The S&L debacle was illuminating. The Reagan Administration made two initial decisions. One was to lift the amount of deposit insurance from $10,000 per account to $100,000. The second was to lift the tight restrictions on Savings and Loans that had essentially limited them to lending on single family housing. The combination was deadly. S&L's agressively sought money with high interest rates to invest in high flying real estate deals. In the process risk/reward went out the window, you were earning 17% on your deposit and yet your principal was secured by the Federal Government. All any rational investor had to do was to keep your investment into any one account under $100,000. But people got lazy, rather than manage their accounts in ways that would totally eliminate downside risk, they let their accounts baloon. And if you look at the universe of investors that have cash investments in the multiple $100,000's you are talking very rich people indeed.
When the S&L's blew up the legal and rational solution would have been to limit all payouts to the $100,000 maximum. Instead the federal government insisted on making everyone whole. Investors who were dragging down double digit interest payments ostensibly because their investments were carrying risk got to keep their accumulated earnings and get their principal covered besides. The result was a massive transfer of income from the middle class to the wealthy, all of course sold with the message that it was a bailout for the middle class. Well friends relatively few middle class people had exposure over $100,000 per account.
People who made stupid decisions by putting their money in Keating's hands should have lost every dollar over the legally insured limit. The market should have been allowed to work to punish those who ignored risk in the risk/reward ratio. But they were rich and so got bailed out. On my dime.
dryfly: "the risk to individual homeowners who bought more than they could afford"
"Quality" of properties certainly does not have only one dimension, people look for different things, and price correlates to any given measure of quality only so much, but overall I'd say the guy making a bigger offer than you has the first pick, and you can choose among what he didn't like.
So to a very rough approximation, you can sort (available) housing units on a decreasing quality scale, and disposable funds/ability to borrow (hence ability to make offers) on another at a given point in time, and match them up.
That should go a long way in explaining the phenomenon.
economist: Bruce has responded already, but another way of looking at it is that people tend to crow about the virtue of laissez-faire when they are confident the riding is good, but cry for mommy (favorable regulation) quickly when things get tough for them. Like the neighborhood bully when hitting on a group of kids he cannot "handle".
That should go a long way in explaining the phenomenon.
cm - all the lender cares about is will they get paid. If not its foreclosure regardless of the 'quality' of the dwelling.
A person, who bought a $400K home on two peoples income that combined only adds up to $80K, is over-reaching... All you have to do is a hypothetical budget to realize this.
This story is being repeated all across this country but it is a slow motion disaster... like a flood.
As Dr Who always reminds us, it might take a job loss event or sky-rocketing interest rate hike before foreclosures pick up enough to be noticeable.
So be it - most of these at-risk folks aren't going anywhere too soon since a significant number of folks like my wife's co-workers won't be able to refi at rates low enough to save themselves... its just a matter of time before they get squeezed out of their home, voluntarily or involuntarily.
Even on purchase money first loans for owner-occupied homes, most states do allow deficiency judgments by use of judiciary forclosures (ie going to court). This is a more cumbersome process than non-judiciary forclosure.
I believe that as practical matter most lenders settle for the proceeds of forclosure and do not pursue deficiency judgments on owner occupied first loans. The extra expense and time is probably not worthwhile in most cases since the foreclosed borrower is unlikely to have sufficient other assets to cover the deficiency.
If a lender forecloses and there is a deficiency, the uncollected amount (including foreclosure expenses of the lender) is considered forgiven debt for tax purposes and is taxable income to the forclosed borrower.
Re: Who is the ultimate bag holder?
We all are, since the gov will print money to make the obvious losers whole.
zephyr wrote, I have been using ARMs for about 20 years and have saved piles of money compared to fixed rates. Over time I have found that fixed rates cost as much as 200 bps extra. That is a very high premium for the lock in of the rate level. I prefer to float at a lower average rate, and over time save money despite the ups and downs.
But over roughly the last 20 years there's been a secular decline in nominal interest rates.
dryfly: I meant to illustrate that when there are more contenders than "desirable" properties, people will overcommit whenever overcommiting loans are accomodated.
I could buy any of a good number of properties around here, but whatever is consistent with my risk tolerance I'd rather not touch. Others are more confident and are willing to overcommit (by my standards) on properties that I thus cannot have. I cannot compete against people who are willing to get substantially larger loans on let's say the same income.
So all I can do is overcommit as well, buy something inferior (and "relatively" overcommit as well), or not buy at all.
30 yr fixed rates have declined about 500 bps over the last 20 years (only about 25 bps per year). Fixed rate borrowers have refinanced periodically to benefit from the decline. Even without the secular decline ARMs are cheaper over the long run.
The average duration of ownership is about 7 years. The average duration of a mortgage is much less. Given this, even with a secular rise in interest rates of the same 25 bps per year, ARMs would be cheaper for the average homeowner.
I have no stake in what people choose to do - I am just pointing out the added cost of using fixed rate loans. The simple fact is that people are willing to pay extra all the time in order to avoid the risk of potentially paying extra on an unplanned basis.
The simple fact is that people are willing to pay extra all the time in order to avoid the risk of potentially paying extra on an unplanned basis.
And locking in to pay a little extra is the smart thing to do IF the result of that unplanned extra is losing the property... for many working class home owners that is exactly the risk.
ARMs, Neg Ams, IOs all have their place - but only for those who can afford champagne, not for those on a beer & pretzel budget. The b & p crowd need to pay as you go - in cash if possible - most all of the time and even then be careful. They just don't have the cushion for mistakes & bad luck that wealthy buyers have.
So all I can do is over-commit as well, buy something inferior (and "relatively" over-commit as well), or not buy at all.
I understand what you are saying - understand exactly - my point was the lender doesn't care about your (or my wife's co-worker) dilema... all they care about is that they get paid. And for many of those over-committed they won't be able to do that... maybe not now but eventually it is going to catch up with them.
I believe there will be less home price appreciation so they can't sell out with a gain, higher rates overall so refi won't make sense either & little or no increase in incomes so they won't be able to grow out of their leveraged position... for many the squeeze will become increasingly severe... those who truly over-committed won't make it.
The only good news I can see is I believe these people are a minority... while many will feel the squeeze, most will not get crushed.
But it could still suck & do damage to the economy. I lived through the ag crisis and a minority of farms were in trouble then also... something like 25% initially... and it raised hell with the whole community. That was a local problem... Midwest. This current mess is more national and will have a wider impact I believe.
BTW it was a combination of high land costs (frequently leveraged) from an earlier 'boom time' followed by a period of income decline that precipitated the ag crisis... The land price run up was in the late 70s & early 80s but the shit didn't hit the fan until mid to late 80s. It took a while for the troubles to catch up. Sounds familiar eh?
dryfly: I was merely trying to make a commentary on the "overcommitted" thing, not argue against your statement. My point was that many can buy only by overcommitting (and hoping for the best). One perception problem is survivor bias -- today many of those who overcommitted long ago and were made whole by an overall favorable environment look good (i.e. they actually got the best), and this is cited as evidence by nagging spouses and friends that concerns about risk are exaggerated.
Very interesting discussion, I learned a lot. But when the Black Angel of Death of the Housing Bubble swings his scythe who loses his head?
This fundamental question still remains unanswered. For the occupying owner I think dryfly gets it right "while many will feel the squeeze, most will not get crushed"
And despite my raising the S&L precedent I don't think deimos has it right: "We all are, since the gov will print money to make the obvious losers whole." I don't see it, this wasn't corporate America, this wasn't the billionaires moving in. This was the hot money working. Excess dollars from Taipei and Hong Kong and Amsterdam were put in play and depending on the exact timing either paid off or didn't.
My personal view is that the bubble is deflating. Admittedly at different rates in different places, and in some places new steam is being injected. But enough people have been raising enough red flags that enough people are beginning to hold back.
CR may have done his job too well to get the credit he deserves.
Certainly plenty (majority or minority I'm not sure) of states allow lenders to seek a deficiency judgement. One question is whether the mortgage issuers are obligated to pursue deficiency judgements. It ismy understanding that under some methods of mortgatge securitization they are. (This is to prevent the bank from colluding with the borrower to defraud the MBS purchaser) The big problem is that most borrowers will have already have sold off large portable assests (the Hummer and the Boat) before they got to foreclosure. So we're talking about household contents, seizure of their checking account, etc: small potatos if they're upside down by 50k.
One way or another, I think alot of money will go poof and disappear. To the extant that banks sometimes keep a percentage of their loans, and they sometimes have MBSs as part of their assets, how many will have trouble maintaining minimum reserves? I don't think it's likely, but a "bank holiday" in say, 2008 can't be dismissed as an absurdist fantasy.
zephyr wrote, 30 yr fixed rates have declined about 500 bps over the last 20 years (only about 25 bps per year).
Yes, but that's looking at 20 years in particular. If you go out a bit further
, the decline is quite a bit more.
Even without the secular decline ARMs are cheaper over the long run.
That's not the question. The question is, what is the cost difference if there's a secular increase, which seems quite possible?
Even with a secular rise the ARMs are cheaper in the long run (see my previous post on this).
Yes the decline is steeper if you start at the rate peak 25 years ago. However, just two years before that in 1979, the rates were about equal to the rates in 1986. There was a brief surge in 80 and 81. In the 20 years before 1979 the rates rose by about the same 25 bps per years as they have declined in the last 20 years - from a level that was lower than today.
The 1970s and 1980s were an aberration, largely influenced by the baby boom cohort entering adult life and the job market. I expect further aberrations in each age bracket as the boomers move through. Soon it will be retirement.
Demography is Destiny.
"Demography is Destiny."
If you are correct about that, and I do believe you are, then we are in for another nice little run-up after this current slow-down.
The next surge in housing demand will make the last ten years look mild by comparison.
But first we will have a cyclical correction for a few years at most, and then hold on to your hat.
Zeph
before u continue to rant about everybody else in the country subsidizing coastal property in the hurricane zone ...how bout us in the coastal regions also subsidizing you folks in tornado alley..or the flood zone of the mighty Miss 1000 miles inland..or the earthquake zones of the west..or the volcano areas of the west ala Mt St Helens..or the Winter storms of the far North..mudslides in the mountains 1000 miles from the coast..severe thunderstorms in areas well away from the coast..ETC!!!get the picture???
No one anywhere in the US is immune to some form of ravage of nature..so lay off the hurricane rant pal
JP