Still, despite the adverse conditions, "I guess we are a bit surprised at how fast this has unraveled," said Zimmerman. While it's "not a secret that subprime collateral has performed pretty disastrously so far," he said, "I must say we were a bit surprised by the magnitude with which" the loans "deteriorated this year."
Yeah, who woulda thunk writing low-doc, no-downpayment high-interest loans in a peaking market might prove to be a bad idea? This finance stuff is really complex...
Still, despite the ever optimistic conditions, "I guess we are a bit surprised at how fast this turkey has shriveled," said Tanta. While it's "not a secret that putting too much sage in the stuffing has performed pretty disastrously so far," she said, "I must say we were a bit surprised by the magnitude with which" the sweet potatoes "deteriorated after overboiling."
I don't get away with that crap. And dammit, UBS shouldn't get away with that crap, either.
Happy Thanksgiving, all! CR, you're still the best!
"With home price appreciation slowing and interest rates higher than they were in prior years, the opportunities for subprime borrowers to refinance their loans are also decreasing, Liu said."
Try home prices depreciating and most recent subprime borrowers are underwater.
Well, being surprised means they expected otherwise, i.e. a deterioration of a lesser magnitude. What's wrong with that? (Aside from questioning their judgement.)
I just knew I should have copyrighted every variation of "surpised/speed/fast/deteriorating/unravelling." I'd be rich.
Look, why are all these people being described as experts if they are all surprised by all the same things? I understand differences of opinion and individual perceptions of timeframe but this is like the housing data revisions systemic bias. Can we get an expert to comment "our technical analysis unit determined unjustified risk in the subprime MBS sector and moved the portfolio before the fundamentals deteriorated last year." These are the people we should be quoting.
"Yeah, who woulda thunk writing low-doc, no-downpayment high-interest loans in a peaking market might prove to be a bad idea? This finance stuff is really complex..."
Writing those loans is still a good idea. My company is making a fortune financing real estate buys based on "stated, no docs, interest only 100%" loans. And our investors/buyers are mostly protected because one: they don't actually have any cash invested, two: it is relatively rare that real estate will actually depreciate markedly (outside of true bubble markets), and three worse comes to worse they can simply walk away from the house. Sure their credit score takes a ding, but in the final analysis they really don't have any skin in the game.
This is just too funny:
"That may spell trouble for borrowers who in previous years would have been able to refinance their loans, or possibly sell their homes for a profit, in order to get out of financial difficulty with their mortgages."
No it spells trouble for those people who bought those loans in the secondary market. The notion that these investors are staring at the ceilings sleepless worrying that the end borrower will end up homeless is ludicrous. Dude you may not get your expected rate of return. Deal with it. Back in the day that was called risk/reward.
The ability of investors to project their problems back on workers/borrowers is amazing. "No we only care about the JOBS! No we only want you to have a roof over your heads!"
Sub-prime borrowers start out sub-prime for a reason. And their downside risk is pretty much ending up sub-prime. The fact that certain investors didn't end up getting rich by lending money at high rates to sub-prime borrowers isn't going to make me lose sleep. We broker the loan, we don't have a gun to your head forcing you to loan the money, still less to force that other guy to buy the loan in the secondary market. That's capitalism baby.
The three secrets to real estate: "Exposure, exposure, exposure". And not every buyer is unzipped.
Can we get an expert to comment "our technical analysis unit determined unjustified risk in the subprime MBS sector and moved the portfolio before the fundamentals deteriorated last year."
Reminds me that Toll Bros executives (and I'm sure less prominent players too) moved their portfolio in advance of the fundamentals deteriorating. Only some of us had that in mind as we watched that CEO housing conference.
Do we need that expert to tell us that the Tanta-chef is stuffing that turkey with grass clippings?
Not us CR readers.
our investors/buyers are mostly protected because one: they don't actually have any cash invested,
This is so cool. So you have investment programs where I can enjoy high interest sub-prime returns with no money invested? Who then is providing the money? Someone is holding a bag and now you speak authoritatively as an insider that it isn't the people investing in sub-prime income streams.
I wonder if the foreign investors buying the MBS Bruce brokers also have that 'capitalism baby' spirit? I wonder how easily his firm is going to find it to make a fortune if the buyers of the junk discover it really is junk and push back? I mean they are the ones with the real skin in the game - not the home buyer.
Time will tell.
Listening to all the liquidity talk one might suspect there is an infinite appetite for this stuff. But I doubt it - 'large appetite' and 'infinite appetite' aren't even in the same universe. This RE credit binge has run on for a long time and we might think there is no end - my guess is there is an end. If the 2006 class continues to perform as reported we might see this end damn soon.
Happy American Thanksgiving to CR and all from a Canadian neighbour!
CR, once again thanks for the time and effort you put into this blog, particularly your excellent graphs and clear-headed quantitative analysis. It's much better and more insightful than most writing in the mainstream financial media.
Re Bruce Webb: I don't blame Bruce and businesspeople like him who've taken advantage of the Federally facilitated lowered lending standards. He's playing within the rules and making good money doing it. I instead place the blame for the potentially catastrophic monster global credit bubble on government and regulators who have a formal duty to the public to ensure a sound, healthy and wisely-managed economy and financial system. It's the Clintons, Bushes and Greenspans who are to blame, not the Webbs.
Yup - like everyone else, thanks CR for a nice job.
Looking forward to seeing your take on Black Friday's sales. I've got a son who will be on the front lines all day tomorrow - working shop floor retail at Mall of America. Hope he's ready, it will be his first 'Black Friday'.
The horror.
FWIW - I've put my foot in mouth over on Thoma's site saying I think the holiday spending will hold up fine - not because everything economic is in great shape - but rather because it is soooooo easy to get credit & people just don't care or don't think about its consequences.
Until the credit is taken away by regulators or old fashioned 'moral hazard'... it will keep on. But boy when that day of reckoning comes its gonna suck.
If you can get past the usage of "wide" and "tight" as nouns, the following piece from the PIMCO website may lend some additional signifance to the UBS conference call:
Part of my sensitivity to the usage of "wide" and "tight" undoubtedly stems from the fact that they are such apt descriptors of my pants after this afternoon's meal. ;>)
Robert Coté: The reference to surprise is most likely a rhetorical device to give strengthening spin to the factual statement and cover butt at the same time. Compare also, forecasting rain later in the afternoon and then being surprised when it already rains at noon. It is far easier forecasting the shape of trends than pinpointing them in time, especially when events don't unfold on their own, but are helped or countermanded by agents beyond the forecaster's control.
We sit here comfortably without any responsibility for our musings, assuming for the time being that even honest experts can forecast only that much.
At work I'm regularly asked my expert opinion on technical matters where I have only that much understanding about the underlying facts, and I would take offense at people questioning my expertise when I don't quite hit the nail on the head, or it turns out I'm off by some factor.
In the end, it does not really matter that much what weasel words are being used. The essence of acknowledging unfavorable events is being conveyed.
Robert Cote: "This is so cool. So you have investment programs where I can enjoy high interest sub-prime returns with no money invested? Who then is providing the money?"
Bring me a 760 credit score and we'll get you right in. In a pinch a 720. Or a 620 if you are looking to move into owner occupied. I don't promise you a return. But I will promise you a loan. All you have to do is make the assumption that appreciation in your particular market is on balance somewhere north of your interest rate. And you can be in a pretty crappy real estate market and not have your property appreciate above the cost of mortgage interest and property taxes. If you are owner occupied figure in the discount for rent and the mortgage deduction.
As to who is providing the money? Really no one. Or rather God who supplied the dirt, and whoever paid the money to physically build the house. Once the dirt and the house are there nominal money will flow.
"I wonder if the foreign investors buying the MBS Bruce brokers also have that 'capitalism baby' spirit? I wonder how easily his firm is going to find it to make a fortune if the buyers of the junk discover it really is junk and push back? I mean they are the ones with the real skin in the game - not the home buyer."
Lloyd's has "Names". If you really want to get in the reinsurance business in a really large scale you put your money into Lloyd's of London. Wolters Kluwer Financial Services – Page Not Found
"Names" have unlimited joint liability and God forbid you buy in a day before a horrible disaster. Because you could lose everything. On the other hand Warren Buffet is a multi-billionaire because he is into re-insurance.
Somewhere between Lloyds and Berkshire Hathaway is us. And in that space is Fannie Mae, Ginnie Mae, and Freddie Mac. Oddly enough capitalists have spread the risk. Good luck on the push back. Because you will have to get through the entire world capital market to get back to us.
And worse comes to worse we will have the house. Which we will rent.
People are awful at predicting non-linear systems. Long ago CR mentioned the virtuous cycle, vicious cycle. The various feedback loops will lead to non-linear behavior so you should expect everybody to continually be behind the curve on their estimates. I also consider the speed of movement in variables a second order signal indicating that the scale of the situation is larger than most people expect. When some of the variables have moved at historic speed, it might be an indication that the system is stretched far beyond stable limits.
4shzl,
Thanks for the link.
In fact, structured credit demand increasingly acts as the marginal price determinant of credit risk today.
The price of credit risk is now being driven by unregulated insurance. I have a feeling the first real stress test will be challenging.
Today is a day for the present though.
Happy Thanksgiving everybody. I am thankful for all the great information around here. Thank you everybody, and especially CR.
And worse comes to worse we will have the house. Which we will rent.
That will be interesting considering the 'negative premium' to rent in lots of bubble markets. If I'm not mistaken rent covers about half to two thirds of the payment cost at current home prices & interest rates... not to mention the >100% LTVs out there.
Those foreign buyers are gonna love that. Or does your firm eat the deviations?
I find it a little hard to believe Bruce Webb is invovled in any business beyond his own mind. His theory of zero risk seems a 21st century version of alchemy. As soon as he's floated these risk-free bonds, he can get back to turning base metals into gold... Clearly, he's privy to the great secrets of unlimited wealth!
Bruce, glad to hear that you have got the "entire world capital market" ready to fall on its sword to save you if things go south. Good luck with that.
I am an attorney. I would send you my card, because you (or your employer) are going to need it, but I prefer my clients to have at least one foot planted in reality.
We broker the loan, we don't have a gun to your head forcing you to loan the money, still less to force that other guy to buy the loan in the secondary market.
And worse comes to worse we will have the house. Which we will rent.
What I don't understand is if you are a loan broker then how could the home ever come back to you or your firm?
What I don't understand is if you are a loan broker then how could the home ever come back to you or your firm?
Not to beat up on Bruce - but I was wondering the same thing.
Does his company write & keep the loans then sell a seperate set of securities collateralized against the loan & ultimately the property to generate the capital (for the loan)? In which case they would have the house & rent if it was foreclosed.
Or do they package the loans into bundles & directly sell them - the role I would normally ascribe to a 'broker'... in which case somebody ELSE holds the loan & the risk & gets the house/rent upon foreclosure.
The devil is in the details & I can't even guess them.
But it is possible Bruce's company has little risk from the loan itself if it is securitized & passed on to somebody else. Then others have the skin in the game.
HOWEVER Bruces' company would still have potential INCOME risk from loss of sales & commissions & fees if those products suddenly fell from favor in the secondary market due to unacceptable loan performance.
I'd love to see the details of some of these business models... from afar that is.
I'm completely flummoxed by Bruce's responses. I wanted in on his nearly riskless no money down investment with subprime rates of return and he offers me the other side of the deal; paying not collecting. For some strange reason he doesn't think there's any risk to his business model from either end. I see gobs of buyback demands at just about the same time his latest package is priced on the seondary market for less than his costs.
Someone is holding a bag here and the guy who is filling the bags is clueless.
As far as I can tell, Bruce doesn't have anything to do with brokering loans. He seems to be some sort of agent for RE buyers. I would imagine that ends up involving him in some details of the financing, like making phone calls and arguing with loan processors, but it doesn't sound to me that he's lending money. That's all detail stuff, the realm of God, Lloyd's, Berkshire Hathaway, the GSEs--mythic names to drop in the corner Mortgage Bar that make you sound like you know how this cynical "game" works. I have no more idea than anyone else whether he really means it or is just yanking our chains. It's only of any interest whatsoever (to me at least) to the extent that such attitudes do--or at least, did--exist, whether they were personally adopted by Bruce or not, and they, well, sold a lot of RE.
cm said, "We sit here comfortably without any responsibility for our musings, assuming for the time being that even honest experts can forecast only that much."
I was never paid to "forecast" big picture economic musings (nobody has ever cared what I thought about God, Lloyd's, or Buffett). I was paid, from time to time, to put my signature on deals in which my employer would part with a couple of thousand bucks and get a recorded mortgage in return, or my employer would part with a big pile of recorded mortgages and get several million bucks in return. The appropriate "f-word" was not "forecast," it was--hang on kids, we're climbing into the Wayback Machine--"fiduciary." There were, in actuality, not merely those shareholders needing me to do the right thing; there were those little old ladies with their five-year CDs and the taxpayers who guaranteed my charter and the kid in the mailroom who would lose his job if the mortgage portfolio tanked. I seem to remember that we were, actually, playing for real money. Apparently I've conflated that with some other memory. Or perhaps a dream.
Did I ever say, "Nope. Not signin' that. You can't make me"? In fact, yes. Did it ever work? From time to time. Mostly whoever needed the deal to go through just found a Senior Vice President (I never got past VP) to boldly go where no Tanta had gone before. I cannot say with any certainty, of course, which of us was right to do what. Fiduciarying is no more exact a science than forecasting. I just observe that there was a time when not only some of us had "skin in the game," we had flesh, bone, blood, nerves, and at least a couple major organs in the game. Then we quit, because we could no longer stand to bleed for no purpose whatsoever or to be mere financial institution equivalents of parking lot speedbumps--never stopping any bad idea, just slowing it down--so we became "consultants" before we bottomed out as "blog commenters." Nonetheless, having been there for at least part of the time, your Tanta understands herself to have been at least part of the problem and hopes herself to have also been at least part of the solution. If Bruce really thinks that I don't occasionally dream about homeless people, or thrifts with padlocks on the front door, or working stiffs with suddenly empty retirement accounts, then I guess he does know more about God than I do.
Well I really am not delusional, and really do have a job in the industry
Our operation is a little more complicated than just lending money. We'll do that too, and at that point the risk is shifted to the buyer.
But what we do is a total investment package. We take our clients and assist them with credit repair, which in most cases means establishing a budget which stops the major cash flow bleeding. Once your income and outgo are relatively stabilized we work on getting you into a house, or upgrading your current house, or buying your first rental, or just as often a combination, updrading to a bigger house and keeping your old house as an investment. Now given the wide variety of new instruments out there that will allow you to go stated and still get 100%LTV in your credit rating is high enough, generally we can get you a loan. Which if we left you right there would just make us another predatory lender.
But we don't. We manage those investment properties for you. Generally when you buy a rental property through us it comes with a renter and a property manager already in place. And a financial plan to handle whatever level of negative cash flow that investment is carrying while we let appreciation do its work. Not everyone can work with us. If you are going to insist on cashing out your equity every two years to buy toys we will regretfully say "Good luck with all that" and show you the door. But if you keep your head down and a reasonable balance between income and outgo you can accumulate some remarkable levels of net worth in a short period of time. It just takes some discipline, and of you don't have it you can contract with us to supply it. Our model is a little stricter than some people would be comfortable with. For example generally we take over the bill paying function and have full access to your account statements. If you are busting your budget we will know it. A little Big Brotherish but in any normal real estate market successful.
Would this model work in Phoenix? Or Las Vegas? Not only no but hell no. If you are in a true bubble market you have a pretty good chance of getting hosed. But most people don't live in a bubble market, and in a lot of places you can get a lot closer than dryfly's 66% of costs in rent.
There is risk in everything but as a general rule houses sell for more now than they did ten years ago. Maybe not a lot more, and maybe not more than they did two years ago, but more. You can capture that appreciation and we do.
Generally the people that need more exotic mortgage instruments need them because their earning and spending habits are such that they simply don't qualify for a conventional loan. And if they squeeze into a house with a 100LTV neg-am ARM and continue their spending habits then certainly at some point their loan is going to readjust and boom - living in the car. But I find that a lot of commenters on housing sites like to generalize from that case. I suggest that most pe
I suggest that most people are just not in that situation.
In my area if Boeing gets a chill traditionally the region gets a cold. But now we have Micosoft and a whole raft of other tech companies and a constant push on housing prices as people get priced out of Seattle and Bellevue. Suburban sprawl may (is) be bad for the environment, bad for the fish, bad for commute times (ours are some of the worst in the country), but it is a boon for people who own or can acquire existing housing stock.
I am used to mockery. I used to be ridiculed just about everywhere I posted on Social Security. I was just as delusional on that as I apparently am here. Back then. These days what I have been posting on Social Security for years suddenly is a little more accepted.
(Oh and I so screwed up on that "They won't find WMD in Iraq" assertion back in late 2002. There are all kind of things "everybody knows" that end up just not true at all. Is housing overpriced? Is it due for a correction? Well yes. On the other hand any number of people have been predicting a meltdown for a couple of years now. It has been just around the corner for I don't know how long.)
It sounds like Bruces is just a boiler room shill fighting with the other shills over who gets the knife set, the Cadillac, or the door. Good luck on it.
How is that possible? These homes are priced over the top of the market, it's not like someone sneaking some $60,000 homes in under $90,000 mortgages.
It seems the only time we hear about these things is when someone got really greedy, like this scheme, or the guy in Indianapolis who duped half his home town in West Virginia.
But that begs the question of how many people are playing the game but showing enough discretion to stay under the radar?
Are all those involved in this going to avoid criminal charges? Are they planning to skip town, or are they just idiots?
The whole thing just seems to make a complete joke of all the checks and balances.
Well, I have to say I'm a bit more concerned about what's going to happen to subprime borrowers than Bruce is. His post does raise some interesting questions about where most of the risk is concentrated. It seems if I want to get into this game (without buying a house), the usual route would be to buy into a hedge fund. From there on, I know very little about what's being done with my money. The hedge fund may then buy various tranches of MBS, and the hedge fund manager is going to be challenged trying to estimate the risk in these derivative instruments, if he tries at all. The bottom line, as Bruce alludes to, is that there are many layers between the investor and what they're investing in. This reminds me of Enron; an old, well-developed market suddenly and miraculously becomes much more profitable based on financial innovations, which tend to obfuscate what's actually going on, thereby causing risk to be underestimated.
8% and the big years for resets will be '07 and '08. Gonna get ugly. Would it make senss for some FBs to stiff just the holder of the piggyback loan? My (limited) understanding is that with 20% price declines (likely IMHO) they get bumpkiss in a foreclosure. Is a nonperforming loan better than taking a writeoff?
Owners lose their homes to `rescuers'
Foreclosure scams grab titles, equity
By Lingling Wei
Dow Jones Newswires
Published November 24, 2006
NEW YORK -- Having tried for months to refinance their home and take it out of foreclosure, Alejandro and Martha Balderas thought they had finally found their white knight: a mortgage and real estate investment company that offers "foreclosure rescue services."
The company, Platinum Investment Group, promised the Chicago couple a loan against their house so that they could pay off their mortgage and stay in their home.
The couple, in their early 40s, signed on in April 2005, only to find out soon afterward that they had signed over their home to Platinum, which then sold it. Unable to keep paying "rent" to the company, they are now threatened with eviction. A lawyer representing Platinum did not return requests for comment.
Tanta, you nearly made me snort leftovers on the keyboard with your comment about hitting bottom as ablog commenter.
I read all the above comments, and Mr. Webb's business still strikes me as falling into the "if it sounds too good to be true, it probably is" catagory. Generally I hear that line on the news when the consumer reporter is telling about the latest fraud scheme to hit northern Utah. I hope Mr. Webb is honest and his business is legitimate but I wouldn't bet the ranch on it.
Bruce writes a post in which he claims he's a lender with no risk because his "buyers" take it all.
He also writes a post that leaves me with the impression that he originates loans as "stated income" while he has previously, in his role as credit counselor, gone all "Big Brotherly" and verified his "client's" income, assets, and expenses. It doesn't seem to occur to Bruce that once you know how much money a borrower makes, you can't handle their loans under a "stated income" program any longer, because to do so gets you in that icky place called "misrepresentation of material fact" (which can cost ya money) or "making a false statement to a federally-insured lender" (which can land ya in pokey). But here he is, out on the net, using what purports to be a real name, claiming that he does this sort of thing with no risk. Perhaps he doesn't understand the issues. Perhaps he's exaggerating a bit. Perhaps he just doesn't write well. (He ought to be worried that somebody who reads CR and still has a MARI/MIDEX account will call his bluff, but he doesn't seem to be.) My guess is that this garden-variety fraud has become so much a fact of life for "players" like Bruce that they've managed to convince themselves there's nothing wrong with it.
We are beginning to wrap our minds around RE price declines. We haven't started trying to wrap our minds around what the unmasking of the fraud problem is going to mean. There's an overdue conversation about the true costs of "risk management" that's going to harsh a whole bunch of folks' buzz.
Bob, regarding that article you found in the Tampa Trib--
Like countless of my colleagues, I have seen many Settlement Statements in my day that show a line item as "Payoff: $300,000." Occasionally they're brighter than that and the label is "Payoff #12-345 $299,862.32." In either case, if I can't find a payoff statement with a matching account number on it in the loan file, I do that obscure due diligence underwriter's trick of throwing the damn thing back where it came from.
Good lenders can get taken in by good fraudsters. But most of this crap could be caught by a moderately enlightened cub scout. You're dealing with a bunch of people who just didn't want to know.
The ever-witty Prof. Galbraith has a section in his indispensable book, The Great Crash - 1929, relating embezzlement to the business cycle. In it, he opines that the size of "the bezzle" expands rapidly when rising asset prices can be used to obscure underlying malfeasance. My view is that the ebbing tide (to borrow Mr. Buffett's metaphor) in real estate is just now dropping below the wasteline of many bathers -- and that your next trip to beach will provide sights that are, well, unmentionable.
As for Bruce: he took a dare from the other guys in the boiler room about being able to blow smoke "anytime, anywhere." Better luck next time, fella.
I don't think Bruce is as necessarily as stupid as he sounds. My impression of what he is doing is the following. Bruce convinces some buyer with a good credit score and no assets that buying lots of rental real-estate and letting Bruce manage the same, for a fee, will make the buyer rich in a few years. If real-estate appreciates fast enough, then the scheme works. If it doesn't, then the buyer goes bankrupt. As Bruce notes, since the buyer had zero assets to start with, he isn't risking much, as long as he didn't commit fraud on his loan applications. Meanwhile, Bruce gets all sorts of commisions with no risk. The loan money ultimately comes from the usual place--the net creditors of society. Are the net creditors stupid? Not necessarily. If the loans can be resold to Fannie Mae and there is no problem of fraud, then the ultimate bag-holder is Fannie Mae, which means the US taxpayer when this whole ponzi scheme collapses.
Yeah, I guess it's hard to tell in some cases where the line is between complacency and complicity.
I just can't understand how some of these big these schemes, like the one from Tampa, can work without the profiteers going to jail. Or does the bank holding the final, grossly inflated loan wind up holding the bag by itself? If there are no criminal charges, there will definitely be a lot of civil litigation.
But still, I think the big, exposed schemes are probably just the tip of the iceberg. How many smaller versions are there where those involved just take $25,000 on a few deals?
I became what some would call a bubble-head about a year and a half ago, and I'm still hearing things that just boggle my mind. Meanwhile, the markets determined the problem's solved.
On the Tampa article - amazing, completely amazing. Maybe those extra thousands were necessary to pre-pay hurricane insurance.... [/rim shot]
But in all honesty there is a justification sometimes for taking a loan larger than the offer price to buy if real work needs to be done - living in an almost 100 year old middle western wreck I can understand that... Its not uncommon in my neighborhood for banks to require homes be reroofed prior to lending money - to protect the collateral. But almost no one (buyer or seller) has the free cash and don't want to borrow any more prior to final close... Solution: roll it and other fixes up into the purchase agreement financing - either as one loan or layered loans.
BUT DO IT UP FRONT... the paper work has to reflect all that AND in the end be able to show the lender the work.
I got a feeling the Tampa folks did a 'job' but no 'work'.
Our economy is based around this credit cycle which means paper pushing is the primary job description. Fees, and more fees is the rally cry for recent MBA grads, if Bruce and other didn't create these deals or unique investments what would they do? Greed and fear move markets, nothing new here, move along folks.
dryfly: Yup, read it yesterday night. Must have happened yesterday, i.e. today in Europe. While I haven't been looking forward to it, I have expected it. (The trend, not the specific rate or the date.)
Unfortunately, matters of personal finance and instrument trading are far lower on my scale of mindshare preferences than their practical importance should indicate, so I can hardly ever bring myself to take practical advantage of any insights and speculations.
Mr Liu: "With home price appreciation slowing and interest rates higher than they were in prior years, the opportunities for subprime borrowers to refinance their loans are also decreasing, Liu said. That may spell trouble for borrowers who in previous years would have been able to refinance their loans, or possibly sell their homes for a profit, in order to get out of financial difficulty with their mortgages."
This is not true because subprime mortgage rates have not moved up much and given the size of the Average subprime loan (under 200k) they will not face major issues...
It is sad that so many people buy into the false informatio
The reason people get into trouble with their sub-prime mortgage is they cannot make the monthly payment. It doesn't matter if the rates have not moved up much or that the loan amount is less than 200K (I remember when that amount bought a lot of house but never mind). They can't refinance to get a few months worth of house-payment cash in the checking account, they can't sell to get out from under the mortgage and they don't earn enough to make the payments the old fashioned way. That leaves bankruptcy (oops new law to deal with) or simply walking away from the house. Either way, these are hard choices.
Bruce, who is going to hold the bag when collatoral behind your loans goes down 50% and rents on these properties goes down 50% as well? It can't happen. Think agai
I would appreciate it if someone could enlighten me on the % of defaulting subprime loans that end up with the house being sold or foreclosed. If that is fairly high it could materially weaken real estate markets. However, defaults that are remedied, rented to the occupiers or the debt renegociated would have no impact.
I agree with you, but I am making the point that the Avg Loan Size of 200k and small increase in Subprime mortgage rates, will offer many outlets for the subprime borrower AND the reset payment shock will not be as significant...
Security Sescurity, Social Security, Fiat security, what's the difference? My only hope is that when I turn 72 1/2 ( the retirement age for people in my demographic) that the benefits come with a "free" Franklin Stove in which to burn my lifetime supply of Franklin delivered monthy. Cripes, Bruce Webb's homepage is a piece of gobbledegook. Essentially it boils down to "I can't be out of money, I still have some checks left."
My conclusion:
Tanta = Good Tanta
Bruce = Evil Tanta
In fairness, Bruce's analysis of SS is pretty much right on... GIVEN HIS BASE ASSUMPTIONS.
It says if the international fiat money system we have now holds up AND our society remains as productive & competitive vis-a-vis the world as it historically has been & our current over-consumption (deficits) get back in check... Given all that, there will be no problem with SS meeting the needs of future retirees, even boomers.
Given all that and the 'cost model' most likely to occur going forward... (the one that has occurred most often looking backward, the so called 'low cost model')... then the numbers hold together and if anything SS is OVER funded.
In short, it uses as a base reasoning the same logic the private retirement industry uses to justify its future solvency - growth.
IIn private models if we have sufficient growth, it provides the returns necessary to cover retirees withdrawls. Likewise if we have sufficient growth then we can continue to tax sufficiently to pay the bonds backing retiree claims.
Same problem, same solution, different execution.
But I too have issues with Bruce's SS solvency assertions... But my problem is with both private & public retirement models, not just SS.
There are a lot of 'ifs' that I'm not comfortable with just accepting as is... and our budget deficit is only one of the problems I see - I think our competitiveness & productivity is the biggest issue & will dramatically reduce our ability to support ourselves in the future regardless of whether we go 'public' or 'private'.
In short if we keep hollowing out our ability to produce 'stuff of value the world will want' we won't be able to remain competitive on a global basis... and that's a problem because most 'stuff' is now global & priced globally.
And all the talk about 'intangibles' is cute - but we still eat, drive cars, live in & heat/cool houses and need health care - all tangible & increasingly global.
But the very same concerns I have with SS are also concerns I have with any private model of retirement I've seen offered up by anyone... and none more so than the 'gov't privatized SS' proposed by the current crop of Republicans.
So when you look at Bruce's website - you have to ask yourself... do you accept that the system we have now holds together or not? If you do accept that the system holds together then Bruce's numbers for SS hold up fine.
But if you don't see our economic system holding up... then SS and every other retirement scheme reduces to just that... schemes. Many of the private ones (like 401Ks) are the worst.
Rob't - in some ways Bruce's SS views are a lot like YOUR VIEWS on 'Peak Oil'... 'unconventional' but certainly rational when based on their core assumptions & looking at past track records (SS hasn't ever gone broke just like we haven't run out of oil - yet).
We'll just have to see what happens. Meanwhile I'm not making plans for either (SS or cheap oil) to be available in my later years. Nice if they are but not betting my future on either. Good thing I know how to grow my own food & cut wood for heat.... might not want to have to do it but at least I can.
I once remember an intangible called IT competitiveness, we had back a ways. It disappeared. The reason is that an intangible does not need much in capital investment to be taken and used by a competitor. A room with a few PCs can be used to teach system admin, web programming, regular old programming, help folks get certifications. That room can be anywhere in the world where there is electricity. Total cost, maybe 10 grand at most and the salary of a teacher or two. Less if the PCS are donated and the software is open sourced.
I teach tech level Linux on 5 year old PCs, using open source software, for $150 a class. This is in the US. I could teach web programming and graphics on the same equipment with no additional capital cost.
Imagine similar classes in India, China or anywhere in the world and the entry level IT is not exclusive US and if the entry level is not exclusive, then nothing up the food chain is. Just a matter of time.
The Japanese perfected Just in Time and Quality ideals based on US research.
In short, intangibles do not have a very long life span.
The Japanese perfected Just in Time and Quality ideals based on US research.
Exactly. And they did it on the cheap - basically nothing invested except sweat equity & if your sweat is almost free so is the benefit.
That was why the buzz word in the late 70s & early 80s was 'Quality Is Free'... something GM & Ford took issue with for obvious reasons (their 'sweat equity' was gold plated, i.e. not free).
So much of all of this - whether Bruce's SS assertions, the 'risk free' loan business model & RE in general, privatized retirement models or our 'intangibles focused' economic future - is based on assumptions & personal articles of faith and impossible to prove out.
Its all 'angels on the head of a pin' sort of circular logic. I just hope there is some 'there' in there somewhere.
But just in case there isn't - I think I'll split some wood this afternoon.
The federal government and the banking industry will square off next week in the Supreme Court against all 50 states and the District of Columbia in a mortgage-lending case that could have broad implications for business regulation.
The case, Watters v. Wachovia Bank, focuses on the lending industry. But the broader question it addresses is whether federal regulators can essentially tell state regulators to go away. It's a debate over what is called "preemption." How the court resolves the dispute could affect many other industries.
I'd love to hear tanta & CR weigh in on this one... as I am pretty much clueless to the issues & likely outcomes & long-term effects...
dryfly: I would have expected to find "seed corn" somewhere in your essay ...
In fact there is a double whammy -- hollowing out of the productive base, and discouraging people from entering productive careers, as there is no perception of a viable career there.
A report from the Arizona Republic. The number of people losing their homes to foreclosure or falling behind on their mortgages in metropolitan Phoenix is near a two-year high, the latest and most tragic sign of the Valleys housing market slowdown.
People are losing their homes at a nearly record rate, not only in the West Valley, where foreclosures have traditionally been high, but also in pricey neighborhoods in the East Valley, where credit-card debt levels are higher than average.
A lot of people with rising mortgage payments due to adjustable loans cant refinance now because their credit and debt situation has changed, said (realtor) Margie OCampo de Castillo in Phoenix. They are faced with finding a way to sell their home fast or lose it. Economists say that nearly 40 percent of all home loans in metropolitan Phoenix are adjustable-rate mortgages, or ARMS.
Household debt has climbed to 132 percent of disposable income. It is the first time since the Great Depression that Americans are spending more than they make and saving next to nothing. Some Valley homeowners piled on debt by taking out second mortgages to buy investment houses. Some of those investment properties are now in foreclosure.
Can Bruce Webb enlighten me on a specific market where the model of buying a housing unit at current price and interest rates, then renting the same unit will generate neutral cash flow?
Please include repairs, maintenance, taxes and insurance into any examples.
I'm just a lowly CPA and need actual numbers. I'm not a high flying money manager.
Still, despite the adverse conditions, "I guess we are a bit surprised at how fast this has unraveled," said Zimmerman. While it's "not a secret that subprime collateral has performed pretty disastrously so far," he said, "I must say we were a bit surprised by the magnitude with which" the loans "deteriorated this year."
How stupid is that?
Yeah, who woulda thunk writing low-doc, no-downpayment high-interest loans in a peaking market might prove to be a bad idea? This finance stuff is really complex...
Happy Thanksgiving everyone!
CR, your blog always rocks! Great post today! HAPPY THANKSGIVING!
Still, despite the ever optimistic conditions, "I guess we are a bit surprised at how fast this turkey has shriveled," said Tanta. While it's "not a secret that putting too much sage in the stuffing has performed pretty disastrously so far," she said, "I must say we were a bit surprised by the magnitude with which" the sweet potatoes "deteriorated after overboiling."
I don't get away with that crap. And dammit, UBS shouldn't get away with that crap, either.
Happy Thanksgiving, all! CR, you're still the best!
Some smart people, those Swiss. Whoda thunk it? Massive failures on the part of marginal customers buying over-priced goods on funny credit terms.
"With home price appreciation slowing and interest rates higher than they were in prior years, the opportunities for subprime borrowers to refinance their loans are also decreasing, Liu said."
Try home prices depreciating and most recent subprime borrowers are underwater.
Well, being surprised means they expected otherwise, i.e. a deterioration of a lesser magnitude. What's wrong with that? (Aside from questioning their judgement.)
I just knew I should have copyrighted every variation of "surpised/speed/fast/deteriorating/unravelling." I'd be rich.
Look, why are all these people being described as experts if they are all surprised by all the same things? I understand differences of opinion and individual perceptions of timeframe but this is like the housing data revisions systemic bias. Can we get an expert to comment "our technical analysis unit determined unjustified risk in the subprime MBS sector and moved the portfolio before the fundamentals deteriorated last year." These are the people we should be quoting.
"Yeah, who woulda thunk writing low-doc, no-downpayment high-interest loans in a peaking market might prove to be a bad idea? This finance stuff is really complex..."
Writing those loans is still a good idea. My company is making a fortune financing real estate buys based on "stated, no docs, interest only 100%" loans. And our investors/buyers are mostly protected because one: they don't actually have any cash invested, two: it is relatively rare that real estate will actually depreciate markedly (outside of true bubble markets), and three worse comes to worse they can simply walk away from the house. Sure their credit score takes a ding, but in the final analysis they really don't have any skin in the game.
This is just too funny:
"That may spell trouble for borrowers who in previous years would have been able to refinance their loans, or possibly sell their homes for a profit, in order to get out of financial difficulty with their mortgages."
No it spells trouble for those people who bought those loans in the secondary market. The notion that these investors are staring at the ceilings sleepless worrying that the end borrower will end up homeless is ludicrous. Dude you may not get your expected rate of return. Deal with it. Back in the day that was called risk/reward.
The ability of investors to project their problems back on workers/borrowers is amazing. "No we only care about the JOBS! No we only want you to have a roof over your heads!"
Sub-prime borrowers start out sub-prime for a reason. And their downside risk is pretty much ending up sub-prime. The fact that certain investors didn't end up getting rich by lending money at high rates to sub-prime borrowers isn't going to make me lose sleep. We broker the loan, we don't have a gun to your head forcing you to loan the money, still less to force that other guy to buy the loan in the secondary market. That's capitalism baby.
The three secrets to real estate: "Exposure, exposure, exposure". And not every buyer is unzipped.
Can we get an expert to comment "our technical analysis unit determined unjustified risk in the subprime MBS sector and moved the portfolio before the fundamentals deteriorated last year."
Reminds me that Toll Bros executives (and I'm sure less prominent players too) moved their portfolio in advance of the fundamentals deteriorating. Only some of us had that in mind as we watched that CEO housing conference.
Do we need that expert to tell us that the Tanta-chef is stuffing that turkey with grass clippings?
Not us CR readers.
our investors/buyers are mostly protected because one: they don't actually have any cash invested,
This is so cool. So you have investment programs where I can enjoy high interest sub-prime returns with no money invested? Who then is providing the money? Someone is holding a bag and now you speak authoritatively as an insider that it isn't the people investing in sub-prime income streams.
I wonder if the foreign investors buying the MBS Bruce brokers also have that 'capitalism baby' spirit? I wonder how easily his firm is going to find it to make a fortune if the buyers of the junk discover it really is junk and push back? I mean they are the ones with the real skin in the game - not the home buyer.
Time will tell.
Listening to all the liquidity talk one might suspect there is an infinite appetite for this stuff. But I doubt it - 'large appetite' and 'infinite appetite' aren't even in the same universe. This RE credit binge has run on for a long time and we might think there is no end - my guess is there is an end. If the 2006 class continues to perform as reported we might see this end damn soon.
All, Happy Thanksgiving. And thanks for participating on these threads. I've learned so much from so many - thank you all!
All my best.
Happy American Thanksgiving to CR and all from a Canadian neighbour!
CR, once again thanks for the time and effort you put into this blog, particularly your excellent graphs and clear-headed quantitative analysis. It's much better and more insightful than most writing in the mainstream financial media.
Re Bruce Webb: I don't blame Bruce and businesspeople like him who've taken advantage of the Federally facilitated lowered lending standards. He's playing within the rules and making good money doing it. I instead place the blame for the potentially catastrophic monster global credit bubble on government and regulators who have a formal duty to the public to ensure a sound, healthy and wisely-managed economy and financial system. It's the Clintons, Bushes and Greenspans who are to blame, not the Webbs.
Yup - like everyone else, thanks CR for a nice job.
Looking forward to seeing your take on Black Friday's sales. I've got a son who will be on the front lines all day tomorrow - working shop floor retail at Mall of America. Hope he's ready, it will be his first 'Black Friday'.
The horror.
FWIW - I've put my foot in mouth over on Thoma's site saying I think the holiday spending will hold up fine - not because everything economic is in great shape - but rather because it is soooooo easy to get credit & people just don't care or don't think about its consequences.
Until the credit is taken away by regulators or old fashioned 'moral hazard'... it will keep on. But boy when that day of reckoning comes its gonna suck.
If you can get past the usage of "wide" and "tight" as nouns, the following piece from the PIMCO website may lend some additional signifance to the UBS conference call:
PIMCO - U.S. Credit Perspectives - December 2006 - Credit Innovation and Opportunities
Part of my sensitivity to the usage of "wide" and "tight" undoubtedly stems from the fact that they are such apt descriptors of my pants after this afternoon's meal. ;>)
Robert Coté: The reference to surprise is most likely a rhetorical device to give strengthening spin to the factual statement and cover butt at the same time. Compare also, forecasting rain later in the afternoon and then being surprised when it already rains at noon. It is far easier forecasting the shape of trends than pinpointing them in time, especially when events don't unfold on their own, but are helped or countermanded by agents beyond the forecaster's control.
We sit here comfortably without any responsibility for our musings, assuming for the time being that even honest experts can forecast only that much.
At work I'm regularly asked my expert opinion on technical matters where I have only that much understanding about the underlying facts, and I would take offense at people questioning my expertise when I don't quite hit the nail on the head, or it turns out I'm off by some factor.
In the end, it does not really matter that much what weasel words are being used. The essence of acknowledging unfavorable events is being conveyed.
Robert Cote: "This is so cool. So you have investment programs where I can enjoy high interest sub-prime returns with no money invested? Who then is providing the money?"
Bring me a 760 credit score and we'll get you right in. In a pinch a 720. Or a 620 if you are looking to move into owner occupied. I don't promise you a return. But I will promise you a loan. All you have to do is make the assumption that appreciation in your particular market is on balance somewhere north of your interest rate. And you can be in a pretty crappy real estate market and not have your property appreciate above the cost of mortgage interest and property taxes. If you are owner occupied figure in the discount for rent and the mortgage deduction.
As to who is providing the money? Really no one. Or rather God who supplied the dirt, and whoever paid the money to physically build the house. Once the dirt and the house are there nominal money will flow.
"I wonder if the foreign investors buying the MBS Bruce brokers also have that 'capitalism baby' spirit? I wonder how easily his firm is going to find it to make a fortune if the buyers of the junk discover it really is junk and push back? I mean they are the ones with the real skin in the game - not the home buyer."
Lloyd's has "Names". If you really want to get in the reinsurance business in a really large scale you put your money into Lloyd's of London.
Wolters Kluwer Financial Services – Page Not Found
"Names" have unlimited joint liability and God forbid you buy in a day before a horrible disaster. Because you could lose everything. On the other hand Warren Buffet is a multi-billionaire because he is into re-insurance.
Somewhere between Lloyds and Berkshire Hathaway is us. And in that space is Fannie Mae, Ginnie Mae, and Freddie Mac. Oddly enough capitalists have spread the risk. Good luck on the push back. Because you will have to get through the entire world capital market to get back to us.
And worse comes to worse we will have the house. Which we will rent.
People are awful at predicting non-linear systems. Long ago CR mentioned the virtuous cycle, vicious cycle. The various feedback loops will lead to non-linear behavior so you should expect everybody to continually be behind the curve on their estimates. I also consider the speed of movement in variables a second order signal indicating that the scale of the situation is larger than most people expect. When some of the variables have moved at historic speed, it might be an indication that the system is stretched far beyond stable limits.
4shzl,
Thanks for the link.
In fact, structured credit demand increasingly acts as the marginal price determinant of credit risk today.
The price of credit risk is now being driven by unregulated insurance. I have a feeling the first real stress test will be challenging.
Today is a day for the present though.
Happy Thanksgiving everybody. I am thankful for all the great information around here. Thank you everybody, and especially CR.
It's always more fun to share with everyone
And worse comes to worse we will have the house. Which we will rent.
That will be interesting considering the 'negative premium' to rent in lots of bubble markets. If I'm not mistaken rent covers about half to two thirds of the payment cost at current home prices & interest rates... not to mention the >100% LTVs out there.
Those foreign buyers are gonna love that. Or does your firm eat the deviations?
I find it a little hard to believe Bruce Webb is invovled in any business beyond his own mind. His theory of zero risk seems a 21st century version of alchemy. As soon as he's floated these risk-free bonds, he can get back to turning base metals into gold... Clearly, he's privy to the great secrets of unlimited wealth!
Bruce, glad to hear that you have got the "entire world capital market" ready to fall on its sword to save you if things go south. Good luck with that.
I am an attorney. I would send you my card, because you (or your employer) are going to need it, but I prefer my clients to have at least one foot planted in reality.
We broker the loan, we don't have a gun to your head forcing you to loan the money, still less to force that other guy to buy the loan in the secondary market.
And worse comes to worse we will have the house. Which we will rent.
What I don't understand is if you are a loan broker then how could the home ever come back to you or your firm?
What I don't understand is if you are a loan broker then how could the home ever come back to you or your firm?
Not to beat up on Bruce - but I was wondering the same thing.
Does his company write & keep the loans then sell a seperate set of securities collateralized against the loan & ultimately the property to generate the capital (for the loan)? In which case they would have the house & rent if it was foreclosed.
Or do they package the loans into bundles & directly sell them - the role I would normally ascribe to a 'broker'... in which case somebody ELSE holds the loan & the risk & gets the house/rent upon foreclosure.
The devil is in the details & I can't even guess them.
But it is possible Bruce's company has little risk from the loan itself if it is securitized & passed on to somebody else. Then others have the skin in the game.
HOWEVER Bruces' company would still have potential INCOME risk from loss of sales & commissions & fees if those products suddenly fell from favor in the secondary market due to unacceptable loan performance.
I'd love to see the details of some of these business models... from afar that is.
I'm completely flummoxed by Bruce's responses. I wanted in on his nearly riskless no money down investment with subprime rates of return and he offers me the other side of the deal; paying not collecting. For some strange reason he doesn't think there's any risk to his business model from either end. I see gobs of buyback demands at just about the same time his latest package is priced on the seondary market for less than his costs.
Someone is holding a bag here and the guy who is filling the bags is clueless.
As far as I can tell, Bruce doesn't have anything to do with brokering loans. He seems to be some sort of agent for RE buyers. I would imagine that ends up involving him in some details of the financing, like making phone calls and arguing with loan processors, but it doesn't sound to me that he's lending money. That's all detail stuff, the realm of God, Lloyd's, Berkshire Hathaway, the GSEs--mythic names to drop in the corner Mortgage Bar that make you sound like you know how this cynical "game" works. I have no more idea than anyone else whether he really means it or is just yanking our chains. It's only of any interest whatsoever (to me at least) to the extent that such attitudes do--or at least, did--exist, whether they were personally adopted by Bruce or not, and they, well, sold a lot of RE.
cm said, "We sit here comfortably without any responsibility for our musings, assuming for the time being that even honest experts can forecast only that much."
I was never paid to "forecast" big picture economic musings (nobody has ever cared what I thought about God, Lloyd's, or Buffett). I was paid, from time to time, to put my signature on deals in which my employer would part with a couple of thousand bucks and get a recorded mortgage in return, or my employer would part with a big pile of recorded mortgages and get several million bucks in return. The appropriate "f-word" was not "forecast," it was--hang on kids, we're climbing into the Wayback Machine--"fiduciary." There were, in actuality, not merely those shareholders needing me to do the right thing; there were those little old ladies with their five-year CDs and the taxpayers who guaranteed my charter and the kid in the mailroom who would lose his job if the mortgage portfolio tanked. I seem to remember that we were, actually, playing for real money. Apparently I've conflated that with some other memory. Or perhaps a dream.
Below, she continued:
Did I ever say, "Nope. Not signin' that. You can't make me"? In fact, yes. Did it ever work? From time to time. Mostly whoever needed the deal to go through just found a Senior Vice President (I never got past VP) to boldly go where no Tanta had gone before. I cannot say with any certainty, of course, which of us was right to do what. Fiduciarying is no more exact a science than forecasting. I just observe that there was a time when not only some of us had "skin in the game," we had flesh, bone, blood, nerves, and at least a couple major organs in the game. Then we quit, because we could no longer stand to bleed for no purpose whatsoever or to be mere financial institution equivalents of parking lot speedbumps--never stopping any bad idea, just slowing it down--so we became "consultants" before we bottomed out as "blog commenters." Nonetheless, having been there for at least part of the time, your Tanta understands herself to have been at least part of the problem and hopes herself to have also been at least part of the solution. If Bruce really thinks that I don't occasionally dream about homeless people, or thrifts with padlocks on the front door, or working stiffs with suddenly empty retirement accounts, then I guess he does know more about God than I do.
Well I really am not delusional, and really do have a job in the industry
Our operation is a little more complicated than just lending money. We'll do that too, and at that point the risk is shifted to the buyer.
But what we do is a total investment package. We take our clients and assist them with credit repair, which in most cases means establishing a budget which stops the major cash flow bleeding. Once your income and outgo are relatively stabilized we work on getting you into a house, or upgrading your current house, or buying your first rental, or just as often a combination, updrading to a bigger house and keeping your old house as an investment. Now given the wide variety of new instruments out there that will allow you to go stated and still get 100%LTV in your credit rating is high enough, generally we can get you a loan. Which if we left you right there would just make us another predatory lender.
But we don't. We manage those investment properties for you. Generally when you buy a rental property through us it comes with a renter and a property manager already in place. And a financial plan to handle whatever level of negative cash flow that investment is carrying while we let appreciation do its work. Not everyone can work with us. If you are going to insist on cashing out your equity every two years to buy toys we will regretfully say "Good luck with all that" and show you the door. But if you keep your head down and a reasonable balance between income and outgo you can accumulate some remarkable levels of net worth in a short period of time. It just takes some discipline, and of you don't have it you can contract with us to supply it. Our model is a little stricter than some people would be comfortable with. For example generally we take over the bill paying function and have full access to your account statements. If you are busting your budget we will know it. A little Big Brotherish but in any normal real estate market successful.
Would this model work in Phoenix? Or Las Vegas? Not only no but hell no. If you are in a true bubble market you have a pretty good chance of getting hosed. But most people don't live in a bubble market, and in a lot of places you can get a lot closer than dryfly's 66% of costs in rent.
There is risk in everything but as a general rule houses sell for more now than they did ten years ago. Maybe not a lot more, and maybe not more than they did two years ago, but more. You can capture that appreciation and we do.
Generally the people that need more exotic mortgage instruments need them because their earning and spending habits are such that they simply don't qualify for a conventional loan. And if they squeeze into a house with a 100LTV neg-am ARM and continue their spending habits then certainly at some point their loan is going to readjust and boom - living in the car. But I find that a lot of commenters on housing sites like to generalize from that case. I suggest that most pe
I suggest that most people are just not in that situation.
In my area if Boeing gets a chill traditionally the region gets a cold. But now we have Micosoft and a whole raft of other tech companies and a constant push on housing prices as people get priced out of Seattle and Bellevue. Suburban sprawl may (is) be bad for the environment, bad for the fish, bad for commute times (ours are some of the worst in the country), but it is a boon for people who own or can acquire existing housing stock.
I am used to mockery. I used to be ridiculed just about everywhere I posted on Social Security. I was just as delusional on that as I apparently am here. Back then. These days what I have been posting on Social Security for years suddenly is a little more accepted.
(Oh and I so screwed up on that "They won't find WMD in Iraq" assertion back in late 2002. There are all kind of things "everybody knows" that end up just not true at all. Is housing overpriced? Is it due for a correction? Well yes. On the other hand any number of people have been predicting a meltdown for a couple of years now. It has been just around the corner for I don't know how long.)
It sounds like Bruces is just a boiler room shill fighting with the other shills over who gets the knife set, the Cadillac, or the door. Good luck on it.
Tanta,
Have you followed any of the news on the fraud schemes? Some seem to be essentially ponzi schemes. There's a good story on it in the Tampa Tribune that Ben at http://thehousingbubbleblog.com/
had linked to.
How is that possible? These homes are priced over the top of the market, it's not like someone sneaking some $60,000 homes in under $90,000 mortgages.
It seems the only time we hear about these things is when someone got really greedy, like this scheme, or the guy in Indianapolis who duped half his home town in West Virginia.
But that begs the question of how many people are playing the game but showing enough discretion to stay under the radar?
Are all those involved in this going to avoid criminal charges? Are they planning to skip town, or are they just idiots?
The whole thing just seems to make a complete joke of all the checks and balances.
Well, I have to say I'm a bit more concerned about what's going to happen to subprime borrowers than Bruce is. His post does raise some interesting questions about where most of the risk is concentrated. It seems if I want to get into this game (without buying a house), the usual route would be to buy into a hedge fund. From there on, I know very little about what's being done with my money. The hedge fund may then buy various tranches of MBS, and the hedge fund manager is going to be challenged trying to estimate the risk in these derivative instruments, if he tries at all. The bottom line, as Bruce alludes to, is that there are many layers between the investor and what they're investing in. This reminds me of Enron; an old, well-developed market suddenly and miraculously becomes much more profitable based on financial innovations, which tend to obfuscate what's actually going on, thereby causing risk to be underestimated.
8% and the big years for resets will be '07 and '08. Gonna get ugly. Would it make senss for some FBs to stiff just the holder of the piggyback loan? My (limited) understanding is that with 20% price declines (likely IMHO) they get bumpkiss in a foreclosure. Is a nonperforming loan better than taking a writeoff?
Owners lose their homes to `rescuers'
Foreclosure scams grab titles, equity
By Lingling Wei
Dow Jones Newswires
Published November 24, 2006
NEW YORK -- Having tried for months to refinance their home and take it out of foreclosure, Alejandro and Martha Balderas thought they had finally found their white knight: a mortgage and real estate investment company that offers "foreclosure rescue services."
The company, Platinum Investment Group, promised the Chicago couple a loan against their house so that they could pay off their mortgage and stay in their home.
The couple, in their early 40s, signed on in April 2005, only to find out soon afterward that they had signed over their home to Platinum, which then sold it. Unable to keep paying "rent" to the company, they are now threatened with eviction. A lawyer representing Platinum did not return requests for comment.
Owners lose their homes to `rescuers' Foreclosure scams grab titles, equity - Chicago Tribune
The greed and moral decay in our society is amazing.
Tanta, you nearly made me snort leftovers on the keyboard with your comment about hitting bottom as ablog commenter.
I read all the above comments, and Mr. Webb's business still strikes me as falling into the "if it sounds too good to be true, it probably is" catagory. Generally I hear that line on the news when the consumer reporter is telling about the latest fraud scheme to hit northern Utah. I hope Mr. Webb is honest and his business is legitimate but I wouldn't bet the ranch on it.
Thanks CR, you run the best blog I have found.
It's funny, Bob, that you brought up fraud.
Bruce writes a post in which he claims he's a lender with no risk because his "buyers" take it all.
He also writes a post that leaves me with the impression that he originates loans as "stated income" while he has previously, in his role as credit counselor, gone all "Big Brotherly" and verified his "client's" income, assets, and expenses. It doesn't seem to occur to Bruce that once you know how much money a borrower makes, you can't handle their loans under a "stated income" program any longer, because to do so gets you in that icky place called "misrepresentation of material fact" (which can cost ya money) or "making a false statement to a federally-insured lender" (which can land ya in pokey). But here he is, out on the net, using what purports to be a real name, claiming that he does this sort of thing with no risk. Perhaps he doesn't understand the issues. Perhaps he's exaggerating a bit. Perhaps he just doesn't write well. (He ought to be worried that somebody who reads CR and still has a MARI/MIDEX account will call his bluff, but he doesn't seem to be.) My guess is that this garden-variety fraud has become so much a fact of life for "players" like Bruce that they've managed to convince themselves there's nothing wrong with it.
We are beginning to wrap our minds around RE price declines. We haven't started trying to wrap our minds around what the unmasking of the fraud problem is going to mean. There's an overdue conversation about the true costs of "risk management" that's going to harsh a whole bunch of folks' buzz.
Jim, I'm sorry about your leftovers. I take Thanksgiving leftovers very seriously.
Bob, regarding that article you found in the Tampa Trib--
Like countless of my colleagues, I have seen many Settlement Statements in my day that show a line item as "Payoff: $300,000." Occasionally they're brighter than that and the label is "Payoff #12-345 $299,862.32." In either case, if I can't find a payoff statement with a matching account number on it in the loan file, I do that obscure due diligence underwriter's trick of throwing the damn thing back where it came from.
Good lenders can get taken in by good fraudsters. But most of this crap could be caught by a moderately enlightened cub scout. You're dealing with a bunch of people who just didn't want to know.
Tanta and Bob,
The ever-witty Prof. Galbraith has a section in his indispensable book, The Great Crash - 1929, relating embezzlement to the business cycle. In it, he opines that the size of "the bezzle" expands rapidly when rising asset prices can be used to obscure underlying malfeasance. My view is that the ebbing tide (to borrow Mr. Buffett's metaphor) in real estate is just now dropping below the wasteline of many bathers -- and that your next trip to beach will provide sights that are, well, unmentionable.
As for Bruce: he took a dare from the other guys in the boiler room about being able to blow smoke "anytime, anywhere." Better luck next time, fella.
I don't think Bruce is as necessarily as stupid as he sounds. My impression of what he is doing is the following. Bruce convinces some buyer with a good credit score and no assets that buying lots of rental real-estate and letting Bruce manage the same, for a fee, will make the buyer rich in a few years. If real-estate appreciates fast enough, then the scheme works. If it doesn't, then the buyer goes bankrupt. As Bruce notes, since the buyer had zero assets to start with, he isn't risking much, as long as he didn't commit fraud on his loan applications. Meanwhile, Bruce gets all sorts of commisions with no risk. The loan money ultimately comes from the usual place--the net creditors of society. Are the net creditors stupid? Not necessarily. If the loans can be resold to Fannie Mae and there is no problem of fraud, then the ultimate bag-holder is Fannie Mae, which means the US taxpayer when this whole ponzi scheme collapses.
Tanta,
Yeah, I guess it's hard to tell in some cases where the line is between complacency and complicity.
I just can't understand how some of these big these schemes, like the one from Tampa, can work without the profiteers going to jail. Or does the bank holding the final, grossly inflated loan wind up holding the bag by itself? If there are no criminal charges, there will definitely be a lot of civil litigation.
But still, I think the big, exposed schemes are probably just the tip of the iceberg. How many smaller versions are there where those involved just take $25,000 on a few deals?
I became what some would call a bubble-head about a year and a half ago, and I'm still hearing things that just boggle my mind. Meanwhile, the markets determined the problem's solved.
On the Tampa article - amazing, completely amazing. Maybe those extra thousands were necessary to pre-pay hurricane insurance.... [/rim shot]
But in all honesty there is a justification sometimes for taking a loan larger than the offer price to buy if real work needs to be done - living in an almost 100 year old middle western wreck I can understand that... Its not uncommon in my neighborhood for banks to require homes be reroofed prior to lending money - to protect the collateral. But almost no one (buyer or seller) has the free cash and don't want to borrow any more prior to final close... Solution: roll it and other fixes up into the purchase agreement financing - either as one loan or layered loans.
BUT DO IT UP FRONT... the paper work has to reflect all that AND in the end be able to show the lender the work.
I got a feeling the Tampa folks did a 'job' but no 'work'.
Our economy is based around this credit cycle which means paper pushing is the primary job description. Fees, and more fees is the rally cry for recent MBA grads, if Bruce and other didn't create these deals or unique investments what would they do? Greed and fear move markets, nothing new here, move along folks.
Tanta: As we are already way on a side track, anything that involves forming or reasoning about specific expectations of the future is "forecasting".
On this whole financing & foreign investors theme... anyone notice the dollar today?
Dollar Declines to 19-Month Low Versus Euro, Breaches $1.30
Now that is some bad left-overs.
dryfly: Yup, read it yesterday night. Must have happened yesterday, i.e. today in Europe. While I haven't been looking forward to it, I have expected it. (The trend, not the specific rate or the date.)
Unfortunately, matters of personal finance and instrument trading are far lower on my scale of mindshare preferences than their practical importance should indicate, so I can hardly ever bring myself to take practical advantage of any insights and speculations.
Too much of an eng/tech geek I guess.
Mr Liu: "With home price appreciation slowing and interest rates higher than they were in prior years, the opportunities for subprime borrowers to refinance their loans are also decreasing, Liu said. That may spell trouble for borrowers who in previous years would have been able to refinance their loans, or possibly sell their homes for a profit, in order to get out of financial difficulty with their mortgages."
This is not true because subprime mortgage rates have not moved up much and given the size of the Average subprime loan (under 200k) they will not face major issues...
It is sad that so many people buy into the false informatio
Zar
The reason people get into trouble with their sub-prime mortgage is they cannot make the monthly payment. It doesn't matter if the rates have not moved up much or that the loan amount is less than 200K (I remember when that amount bought a lot of house but never mind). They can't refinance to get a few months worth of house-payment cash in the checking account, they can't sell to get out from under the mortgage and they don't earn enough to make the payments the old fashioned way. That leaves bankruptcy (oops new law to deal with) or simply walking away from the house. Either way, these are hard choices.
CR thanks for hard work !!!!!
Bruce, who is going to hold the bag when collatoral behind your loans goes down 50% and rents on these properties goes down 50% as well? It can't happen. Think agai
I would appreciate it if someone could enlighten me on the % of defaulting subprime loans that end up with the house being sold or foreclosed. If that is fairly high it could materially weaken real estate markets. However, defaults that are remedied, rented to the occupiers or the debt renegociated would have no impact.
Jim,
I agree with you, but I am making the point that the Avg Loan Size of 200k and small increase in Subprime mortgage rates, will offer many outlets for the subprime borrower AND the reset payment shock will not be as significant...
Zar
"I don't think Bruce is as necessarily as stupid as he sounds."
FWIW- If you click on Bruce's "homepage", you'll see his position on how security security is solvent.
Aargh. "social security"
I am as stupid as I type.
Security Sescurity, Social Security, Fiat security, what's the difference? My only hope is that when I turn 72 1/2 ( the retirement age for people in my demographic) that the benefits come with a "free" Franklin Stove in which to burn my lifetime supply of Franklin delivered monthy. Cripes, Bruce Webb's homepage is a piece of gobbledegook. Essentially it boils down to "I can't be out of money, I still have some checks left."
My conclusion:
Tanta = Good Tanta
Bruce = Evil Tanta
In fairness, Bruce's analysis of SS is pretty much right on... GIVEN HIS BASE ASSUMPTIONS.
It says if the international fiat money system we have now holds up AND our society remains as productive & competitive vis-a-vis the world as it historically has been & our current over-consumption (deficits) get back in check... Given all that, there will be no problem with SS meeting the needs of future retirees, even boomers.
Given all that and the 'cost model' most likely to occur going forward... (the one that has occurred most often looking backward, the so called 'low cost model')... then the numbers hold together and if anything SS is OVER funded.
In short, it uses as a base reasoning the same logic the private retirement industry uses to justify its future solvency - growth.
IIn private models if we have sufficient growth, it provides the returns necessary to cover retirees withdrawls. Likewise if we have sufficient growth then we can continue to tax sufficiently to pay the bonds backing retiree claims.
Same problem, same solution, different execution.
But I too have issues with Bruce's SS solvency assertions... But my problem is with both private & public retirement models, not just SS.
There are a lot of 'ifs' that I'm not comfortable with just accepting as is... and our budget deficit is only one of the problems I see - I think our competitiveness & productivity is the biggest issue & will dramatically reduce our ability to support ourselves in the future regardless of whether we go 'public' or 'private'.
In short if we keep hollowing out our ability to produce 'stuff of value the world will want' we won't be able to remain competitive on a global basis... and that's a problem because most 'stuff' is now global & priced globally.
And all the talk about 'intangibles' is cute - but we still eat, drive cars, live in & heat/cool houses and need health care - all tangible & increasingly global.
[continued]
But the very same concerns I have with SS are also concerns I have with any private model of retirement I've seen offered up by anyone... and none more so than the 'gov't privatized SS' proposed by the current crop of Republicans.
So when you look at Bruce's website - you have to ask yourself... do you accept that the system we have now holds together or not? If you do accept that the system holds together then Bruce's numbers for SS hold up fine.
But if you don't see our economic system holding up... then SS and every other retirement scheme reduces to just that... schemes. Many of the private ones (like 401Ks) are the worst.
Rob't - in some ways Bruce's SS views are a lot like YOUR VIEWS on 'Peak Oil'... 'unconventional' but certainly rational when based on their core assumptions & looking at past track records (SS hasn't ever gone broke just like we haven't run out of oil - yet).
We'll just have to see what happens. Meanwhile I'm not making plans for either (SS or cheap oil) to be available in my later years. Nice if they are but not betting my future on either. Good thing I know how to grow my own food & cut wood for heat.... might not want to have to do it but at least I can.
I once remember an intangible called IT competitiveness, we had back a ways. It disappeared. The reason is that an intangible does not need much in capital investment to be taken and used by a competitor. A room with a few PCs can be used to teach system admin, web programming, regular old programming, help folks get certifications. That room can be anywhere in the world where there is electricity. Total cost, maybe 10 grand at most and the salary of a teacher or two. Less if the PCS are donated and the software is open sourced.
I teach tech level Linux on 5 year old PCs, using open source software, for $150 a class. This is in the US. I could teach web programming and graphics on the same equipment with no additional capital cost.
Imagine similar classes in India, China or anywhere in the world and the entry level IT is not exclusive US and if the entry level is not exclusive, then nothing up the food chain is. Just a matter of time.
The Japanese perfected Just in Time and Quality ideals based on US research.
In short, intangibles do not have a very long life span.
The Japanese perfected Just in Time and Quality ideals based on US research.
Exactly. And they did it on the cheap - basically nothing invested except sweat equity & if your sweat is almost free so is the benefit.
That was why the buzz word in the late 70s & early 80s was 'Quality Is Free'... something GM & Ford took issue with for obvious reasons (their 'sweat equity' was gold plated, i.e. not free).
So much of all of this - whether Bruce's SS assertions, the 'risk free' loan business model & RE in general, privatized retirement models or our 'intangibles focused' economic future - is based on assumptions & personal articles of faith and impossible to prove out.
Its all 'angels on the head of a pin' sort of circular logic. I just hope there is some 'there' in there somewhere.
But just in case there isn't - I think I'll split some wood this afternoon.
Here's another 'banking & regulation' story that will loom large over the next few months...
Case Tests Federal Supremacy Over Banks
The federal government and the banking industry will square off next week in the Supreme Court against all 50 states and the District of Columbia in a mortgage-lending case that could have broad implications for business regulation.
The case, Watters v. Wachovia Bank, focuses on the lending industry. But the broader question it addresses is whether federal regulators can essentially tell state regulators to go away. It's a debate over what is called "preemption." How the court resolves the dispute could affect many other industries.
I'd love to hear tanta & CR weigh in on this one... as I am pretty much clueless to the issues & likely outcomes & long-term effects...
dryfly: I would have expected to find "seed corn" somewhere in your essay ...
In fact there is a double whammy -- hollowing out of the productive base, and discouraging people from entering productive careers, as there is no perception of a viable career there.
But we have rehashed this over and over ...
Thread from housingbubbleblog:
A report from the Arizona Republic. The number of people losing their homes to foreclosure or falling behind on their mortgages in metropolitan Phoenix is near a two-year high, the latest and most tragic sign of the Valleys housing market slowdown.
People are losing their homes at a nearly record rate, not only in the West Valley, where foreclosures have traditionally been high, but also in pricey neighborhoods in the East Valley, where credit-card debt levels are higher than average.
A lot of people with rising mortgage payments due to adjustable loans cant refinance now because their credit and debt situation has changed, said (realtor) Margie OCampo de Castillo in Phoenix. They are faced with finding a way to sell their home fast or lose it. Economists say that nearly 40 percent of all home loans in metropolitan Phoenix are adjustable-rate mortgages, or ARMS.
Household debt has climbed to 132 percent of disposable income. It is the first time since the Great Depression that Americans are spending more than they make and saving next to nothing. Some Valley homeowners piled on debt by taking out second mortgages to buy investment houses. Some of those investment properties are now in foreclosure.
Can Bruce Webb enlighten me on a specific market where the model of buying a housing unit at current price and interest rates, then renting the same unit will generate neutral cash flow?
Please include repairs, maintenance, taxes and insurance into any examples.
I'm just a lowly CPA and need actual numbers. I'm not a high flying money manager.