patrick.net

Strategist says

Banks are not willing to take the risk of loans right now, because rates are too low. What do we do?

You mean rates are too low to cover the defaults?
Then why is the government guarantying mortgages at these rates? HERESY.

In a normal free market, banks set loan rates so they are compensated for their risks.

If they are too low, the obvious solution is to raise them.

The reason you can't accept lower credit scores is the higher default rate of this borrower.

The reason you must require a down payment is that the buyer must have some "skin in the game" and have an incentive not to abandon the house and deliberately default.

The reason you can't lend more than 80% of the house value is that the house itself is the collateral for the loan. In a case of sudden drop in house values (which has happened) makes it risky to the lender. Assume the house has dropped 40% in value and the borrower defaults for example.

A huge amount of capital was destroyed recently because of subprime mortgages and loose lending standards. This should not be repeated.

The needs of people who want to buy a house they can't afford don't outweigh learning from recent mistakes and financial catastrophes.

Strategist says

The housing recovery as you all are aware is stalling. [...] We cannot afford to go right back into a severe recession. It will cost us all too much.

On which planet do you live, I wonder? Housing prices are up like 10% yoy.
Does that qualify as 'stalling'?

Prices are well on their way to go back to the top of the bubble. In some areas, they are already above that. Do we really need more weak hands to buy real-estates now?

Somewhere along the line, "housing recovery" has come to mean "going back to the insanity of the bubble". If 2008 didn't convince you of the stupidity of pumping easy credit, then what will?

clambo says

This is bad idea.

The worst is that the US Taxpayers will be on the hook for any future disasters caused by this.

just Repeating what Bubba Clinton did back in 1999.

Heraclitusstudent says

Somewhere along the line, "housing recovery" has become come to mean "going back to the insanity of the bubble". If 2008 didn't convince you of the stupidity of pumping easy credit, then what will?

This is the same clowns who will eventually blame someone else as
it blows up...

Strategist says

And yet prices never stop increasing. Most of coastal California will one day be like Manhattan, because the world wants to be near coastal California.

in the 70s to year 2000 one can certainly claim high desire for SoCal Beach homes like Malibu and Santa Barabara... but now days .. Not so much with
SFBA being more expensive than LA ....

What ?

Yep... So Cal isnt as expensive as in the past... This isnt New York City and never will be. Economy is much different and land is still plenty....

than there is the other half of CA north of SF....

clambo says

The reason you can't accept lower credit scores is the higher default rate of this borrower.

The reason you must require a down payment is that the buyer must have some "skin in the game" and have an incentive not to abandon the house and deliberately default.

The reason you can't lend more than 80% of the house value is that the house itself is the collateral for the loan. In a case of sudden drop in house values (which has happened) makes it risky to the lender. Assume the house has dropped 40% in value and the borrower defaults for example.

A huge amount of capital was destroyed recently because of subprime mortgages and loose lending standards. This should not be repeated.

The needs of people who want to buy a house they can't afford don't outweigh learning from recent mistakes and financial catastrophes.

Risking another meltdown to "help housing to help the economy" is not just foolish but risky

Strategist says

but because the ultra tight conditions are preventing qualified buyers

You're smoking something a lil' to strong for you to handle if you think lending standards are too tight right now.

While not as loose (read: fraudulent) as they were during the peak of the bubble back in 2006 they're still pretty loose compared to the way they were back in the 90's and 80's and prior decades.

Strategist says

Price will be determined my the market.

When a market requires govt. support, either politically via favorable regulation or direct monetary support by giving money to the banks to relend to the average person (which is pretty much a give away to the bankers BTW since they make money of the loans and essentially get the money for free), which is what you're arguing for BTW then you can't claim its a 'free market'.

Of course 'free markets' don't actually and never really have never existed, even under laissez-faire economic policies. Generally the only people I see arguing for them are 'econ 101' types who for some reason stopped their economic education as soon as they left the introductory course despite there being a 'econ 102, 104, 110, etc' for a reason. Well that and politicians and banker/Wall St shills but everyone knows they lie right? Right?

tts says

While not as loose (read: fraudulent) as they were during the peak of the bubble back in 2006 they're still pretty loose compared to the way they were back in the 90's and 80's and prior decades.

Right and now they want to make them looser because they need to "stimulate demand"

Mel Watt for president! Deval "Ameriquest" Patrick for VP!

Welcome to Fraudmerica.

Blurtman says

Mel Watt for president! Deval "Ameriquest" Patrick for VP!

Welcome to Fraudmerica.

Yep Mell is in charge of the housing market

Strategist says

Affordability rates in Orange County are very high compared to historical levels.

I don't disagree that monthly payments are more affordable. But you still have the issue of the down payment on a very high base. A person making even a high-normal salary is going to have a hard time saving a couple of hundred thousand dollars to put 20% down and pay all the closing and moving costs, as well as have the reserves necessary to qualify for a regular loan. There's FHA, but in many areas in OC, the loan limit makes it very difficult to find a house that's under that threshold. Take Irvine, for example. There just isn't a lot of inventory that would fall under the FHA threshold. Which brings a person back to having to qualify for a jumbo loan. The monthly payments aren't the problem because low interest rates keep the monthly cost affordable. Why should we care how the monthly cost of home ownership is broken down? If it costs $2,500 a month for 30 years, most people don't care if $500/month goes to principal and $2000 goes to interest or vice versa. At the end of the 30 years, the house is paid off whether the previous owner sold it for a high amount or the bank earned a lot of interest on the debt to purchase the house. The downside of the high price is the savings required to get into the game. It's a big barrier.

If prices were more a reflection of local incomes then it would be more realistic that people would be able to save the 20% plus closing, moving, reserves.

Prices did what they did because people were able to replace wages with financing. If they don't keep that up then spending power goes down. The only other options are to deflate housing prices or increase wages. loosening financing rules to bring the average person's purchasing power back in line with house prices seems like the most likely solution to me. Not saying it's a good thing, but we all know that real estate prices cannot go down. Wage inflation to the middle classes wouldn't be appreciated by powers that be either. So that just leaves financing.

Heraclitusstudent says

Yet the goal of loosening standards is precisely that: to replace wages with credit.

Exactly.

clambo says

turtle, the problem of people not quailfying is either 1. the house they want is too expensive 2. their income is too low. If they can't afford the house, it is not the role of government to help them buy something they cannot afford, even if it is a house.

And I am not for one minute suggesting that it should be the role of government. However, they've made it their role. Personally, I would prefer that house prices be a reflection of incomes. But I'm realistic enough to see that it will never happen. If it were allowed to happen, we'd have a lot of losers. If you deflated the housing market, people wouldn't be able to sell. Those who depended on their houses as a means of funding retirement would be wiped out. Banks would be house rich (foreclosures) and money poor. If you increased wages, that too would have to come from somewhere, most likely people too powerful to ever let it happen. So, to make it so we have the fewest number of losers, it goes back to financing. Now ma and pa can retire off the sale of their houses, banks are happy because their balance sheets look good, no one has to pay anyone more in wages, and the average Joe gets his dream house. Winning!

clambo says

The reason you can't accept lower credit scores is the higher default rate of this borrower.

This is bogus. The average credit score for a mortgage loan in the 90s and the 00's before the housing boom really got going was lower than it probably is now. The laziness of the media to analyze things has made people think "subprime" is the enemy, but subprime buyers can have capacity to pay and collaterizable property just like everyone else, just with lower credit. For that lower credit, you compensate for a higher predicted default rate with a higher interest rate.

Subprime was a perfectly sound lending model until the banks started chipping away at the other two Cs, capacity to pay and collateral, and stopped properly analyzing their portfolios. Alt-A is called subprime, but it meant the bank only looked at credit score, and didn't look at the other two Cs, so it was nothing like traditional subprime.

Tishman Speier is subprime. The TBTF's are subprime.

Heraclitusstudent says

Strategist says

Banks are not willing to take the risk of loans right now, because rates are too low. What do we do?

You mean rates are too low to cover the defaults?

Then why is the government guarantying mortgages at these rates? HERESY.

I meant rates are still too low due to fed pumping up the money supply. Eventually rates WILL rise, and when that happens the value of the loans the banks hold will take a big hit. Banks are not willing to take that almost guaranteed loss. It has nothing to do with defaults.
The value of a bond or a loan portfolio is inversely proportional to interest rates.

turtledove says

Strategist says

Affordability rates in Orange County are very high compared to historical levels.

I don't disagree that monthly payments are more affordable. But you still have the issue of the down payment on a very high base. A person making even a high-normal salary is going to have a hard time saving a couple of hundred thousand dollars to put 20% down and pay all the closing and moving costs, as well as have the reserves necessary to qualify for a regular loan. There's FHA, but in many areas in OC, the loan limit makes it very difficult to find a house that's under that threshold. Take Irvine, for example. There just isn't a lot of inventory that would fall under the FHA threshold. Which brings a person back to having to qualify for a jumbo loan. The monthly payments aren't the problem because low interest rates keep the monthly cost affordable

Down payments are the problem, especially in a high priced city like Irvine. The problem can be attributed to tight loan condition which requires large down payments especially for jumbo loans. I would imagine most buyers of high priced homes are move up buyers who have accumulated equity in a previous home, making it easier for them to come up with a large down payment. This will eventually change, but when? I have no idea.

turtledove says

clambo says

turtle, the problem of people not quailfying is either 1. the house they want is too expensive 2. their income is too low. If they can't afford the house, it is not the role of government to help them buy something they cannot afford, even if it is a house.

And I am not for one minute suggesting that it should be the role of government. However, they've made it their role. Personally, I would prefer that house prices be a reflection of incomes. But I'm realistic enough to see that it will never happen. If it were allowed to happen, we'd have a lot of losers. If you deflated the housing market, people wouldn't be able to sell.

It won't happen because people will always be willing to pay more for a more desirable area. The most wealthy, the kings of the jungle, will get first pick, and they have the means, usually cash to buy anything they want. They don't want the Mid-West, they want Newport Beach. These areas will forever outperform the rest.

Strategist says

I would imagine most buyers of high priced homes are move up buyers who have accumulated equity in a previous home, making it easier for them to come up with a large down payment.

That's why the move-up market is also somewhat dead right now. Many of the typical move-up buyers don't actually have the equity to do it.

Time to invest in more stuffed animals...

http://www.zerohedge.com/news/2014-05-15/subprime-20-125-ltv-loans-are-coming-back

Strategist says

Banks are not willing to take that almost guaranteed loss. It has nothing to do with defaults.

Banks, not the fed, set the rate at which they make mortgages.

corntrollio says

Subprime was a perfectly sound lending model until the banks started chipping away at the other two Cs, capacity to pay and collateral, and stopped properly analyzing their portfolios.

You say that like the capacity to pay, at the country aggregate level, is independent of the economy, and like the economy is independent of the loans they are making.

This is the problem with 'Capacity to pay' analysis: on the way up, the economy is good and many people can pay, then the market reverses, lending dries up, the economy tanks and people are laid off by the millions. The analysis turns out completely wrong.

Lending standards are a self-fulfilling prophecy - until the SHTF.

Strategist says

I would imagine most buyers of high priced homes are move up buyers who have accumulated equity in a previous home, making it easier for them to come up with a large down payment.

The idea of move up buyers gaining equity thanks to prices rising permanently faster than inflation is a pure ponzi scheme.

It happens until the 'elevator' is way too high for first time buyers to jump in.

This is obvious. But for some bizarre reason some (gullible) people think the elevator should keep going up forever.

Actually what will happen is a big giant bird will hover over and fart gold coins. They'll simply spray out in large clouds, sprinkling down for all. I heard it on the radio.

Whoever disliked my comment has no sense of humor. booooh!

Heraclitusstudent says

You say that like the capacity to pay, at the country aggregate level, is independent of the economy, and like the economy is independent of the loans they are making.

This is the problem with 'Capacity to pay' analysis: on the way up, the economy is good and many people can pay, then the market reverses, lending dries up, the economy tanks and people are laid off by the millions. The analysis turns out completely wrong.

The Capacity to Pay analysis applies to both prime and subprime. In fact, it might be the case that a subprime loan requires a higher capacity to pay to offset bad credit. So if the shit hits the fan, it's just as likely to affect prime as subprime. Low income families can have prime loans, as long as they have capacity to pay and their property has adequate collateral -- the houses are just cheaper than high income families' houses.

The difference in prime vs. subprime (again, talking about traditional subprime, not the garbage sold during the boom that was called "subprime" by the media because they are too stupid to interview people) is typically credit score and interest rate to compensate for credit score. If you don't understand how subprime works, you should read the articles by the late Tanta at Calculated Risk on subprime and Alt-A, and probably every article by Tanta, really:

http://www.calculatedriskblog.com/2007/11/what-is-subprime.html

http://www.calculatedriskblog.com/2008/08/reflections-on-alt.html

Residential mortgage lending never, of course, limited itself to considering creditworthiness; we always had "Three C's": creditworthiness, capacity, and collateral. "Capacity" meant establishing that the borrower had sufficient current income or other assets to carry the debt payments. "Collateral" meant establishing that the house was worth at least the loan amount--that it fully secured the debt. It was universally considered that these three things, the C's, were analytically and practically separable.

That, I think, is very hard for people today to understand. The major accomplishment of last five to eight years, mortgage-lendingwise, has been to entirely erase the C distinctions and in fact to mostly conflate them. For the last couple of years, for instance, you would routinely read in the papers that "subprime" meant loans made to low-income people. Or it meant loans made to people who couldn't make a down payment or who borrowed more than the value of their property--that is, whose loans were very likely to be under-collateralized. This kind of characterization of subprime always struck us old-timer insiders as bizarre, but it seems to have made sense to the rest of the world and it stuck. After all, the media didn't really care about or even notice this thing called "subprime" until it began to be obvious that it was going to end really really badly. It therefore seemed perfectly obvious to a lot of folks that it must primarily involve poor people who borrow too much.

Those of us who were there at the time tend to remember this differently. In the old model of the Three C's, a loan had to meet minimum requirements for each C in order to get made. We didn't do two out of three. The only lenders who ever did one out of three were precisely those "hard money" lenders, who cared only about the value of the collateral. This was because they mostly planned on repossessing it. Institutional lenders' business plan still involved making your money by getting paid back in dollars for the loans you made, not by taking title to real estate and selling it.

The difference between a prime and a subprime lender was simply how low you set the bar for one of the C's, creditworthiness. Unless you were a hard-money lender, you expected to be paid back, so you never lowered the bar on capacity: everybody had to have some source of cash flow to make loan payments with. Traditional institutional subprime mortgage lenders were even more anal-compulsive about collateral than prime lenders were, a fact that probably surprises most people. Until very recently, historically speaking, institutional subprime lending involved very low LTVs and probably the lowest rate of appraisal fraud or foolishness in the business.

That isn't so surprising if you think about the concept of "risk layering," which is also an industry term. In days gone by, with the three C's, you didn't "layer" risk. If the creditworthiness grade was less than "A," then the capacity grade and the collateral grade had to be "summa cum laude" in order to balance the loan risk. It wasn't until well into the bubble years that anybody seriously put forth the idea that you could make a loan that got a "B" on credit and a "B" on capacity and a "B" on collateral and expect not to lose money.

...
"Classic" subprime lending worked because, while it always charged borrowers a higher interest rate, it found a way to restructure payments such that the borrower's overall prospects for making regular payments improved. ... It certainly wasn't always successful, but its intent was exactly to enable people to catch up on an arrearage and then actually begin to retire debt.

Heraclitusstudent says

Strategist says

Banks are not willing to take that almost guaranteed loss. It has nothing to do with defaults.

Banks, not the fed, set the rate at which they make mortgages.

Banks can lend at any rate they choose. But who will take a 6% rate when 4% is available. The Fed is willing to buy lots of MBO's at that rate.
We are not in a normal market. We are in two possible markets: Screwed up, or Fucked up. Take your choice.

controlio, subprime defaulted at a much higher rate than the others.

So, banks will avoid such people who have low scores which means below 720.

High credit scores are like dates with young chicks; some get them, some don't.

People who always expect the govt. to "do something" about the over-priced house "problem" are all actually the root of the problem.

Strategist says

The Fed is willing to buy lots of MBO's at that rate.

We are not in a normal market.

that is the problem-the fed and Fannie and Freddie create massive distortions in the market

smaulgld says

Strategist says

The Fed is willing to buy lots of MBO's at that rate.

We are not in a normal market.

that is the problem-the fed and Fannie and Freddie create massive distortions in the market

They sure do. I think a distorted market will continue for the next 2 years.

clambo says

controlio, subprime defaulted at a much higher rate than the others

Subprime was *supposed* to default at a higher rate than prime, and that's why you compensate for that higher default rate with a higher interest rate. That's by design, and that's why bondholders of subprime loans ask for higher interest rates too. It's also the whole point of subprime lending, which can be very profitable for people who know what they're doing.

You are again confusing traditional subprime, which is well-underwritten, with the poor underwriting practices during the boom associated with non-prime/non-subprime loans. Anything that was not A paper (prime) or B and C paper (subprime) was likely poorly underwritten. The media calls everything that is not A paper "subprime," but that's because they don't know any better and never talked to someone like Tanta.

Alt-A actually had higher default rates than subprime in many cases:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aeWSvfvHw3cQ

clambo says

So, banks will avoid such people who have low scores which means below 720.

Underwriting processes are more than just about credit score. As you can see in Table 5, Alt-A loans underwritten in 2006 and 2007 had extremely high default rates even when the borrowers had high credit scores -- look at that huge default rate for credit scores of 740+, which completely results from poor underwriting practices and failure to observe the 3 Cs:

http://research.stlouisfed.org/publications/review/10/01/Sengupta.pdf

The reason is that financial analysis can better model traditional properly underwritten subprime, whereas Alt-A and other non-prime/non-traditional subprime lending programs have a lot of unknown variables that make them hard to model.

clambo says

People who always expect the govt. to "do something" about the over-priced house "problem" are all actually the root of the problem.

This is irrelevant to the point I made -- I said that you didn't understand the subprime market, and it's clear that you don't. Nothing in what I said or in the links that I posted suggested more government intervention -- you just pulled that out of your ass as a non-sequitur.

I know about the "three Cs"

Other posters here want the government to do something, of course govt. intervention in housing has been a disaster.

The number banks want today is 720.

clambo says

Other posters here want the government to do something, of course govt. intervention in housing has been a disaster.

I'd be happy with less intervention too, but the "housing crisis" (which was not a crisis at all except for banks) was caused by private banks lending money under stupid terms that didn't make business sense. If you look at any chart, you can see that agency loans (i.e. Fannie/Freddie) went down during the worst boom years, and private non-agency loans went way up. As you can see, in 2006-2007, these private non-agency loans were incredibly poorly underwritten, such that Alt-As, just as one example, had horridly worse default rates compared to previous years.

The reality is that more foreclosures and short sales and less HAMP and similar programs would have been good for the housing system. Getting more people who don't deserve to stay in their houses (and can't afford them) out of them, would have ensure that more paying customers would have been able to get houses going forward. Instead, cities, counties, and states passed legislation to make foreclosures harder, and legislation was based to make the banks extend and pretend so that people would continue to have low or no equity going forward.

What we really needed to do to get back to a normal market was clear out the shit, but instead we kept a lot of the shit in the system, and are now seeing a market where first-time buyers and organic move-up buyers are largely non-existent compared to normal markets.

Strategist says

Banks can lend at any rate they choose. But who will take a 6% rate when 4% is available. The Fed is willing to buy lots of MBO's at that rate.

The fed is not buying the MBO the banks are not making.

4% loans are not available for a lot of people. This is what we are talking about.
If the banks only want to lend at 6%, and if the borrower cannot afford this, then they shouldn't buy. This is really simple.

There is just not enough houses in many places right now, hence the high prices. Someone has to be priced out, one way or an other, regardless of lending standards. The worse thing would be to distort lending so the weakest borrower are not the one that are priced out.

Why can't individuals just create money out of thin air to buy a house, instead of a bank creating money out of thin air, and enslaving citizens under a mortgage?

Blurtman says

Why can't individuals just create money out of thin air to buy a house, instead of a bank creating money out of thin air, and enslaving citizens under a mortgage?

Because when individuals do it, it's fraud.

Iosef V HydroCabron says

Blurtman says

Why can't individuals just create money out of thin air to buy a house, instead of a bank creating money out of thin air, and enslaving citizens under a mortgage?

Because when individuals do it, it's fraud.

That's just marketing. It's still fraud when banks do it. With a proper mar com campaign, when citizens do it, it can be regarded as similarly legitimate.

APOCALYPSEFUCKisShostikovitch says

corntrollio says

Alt-A actually had higher default rates than subprime in many cases:

The underwriting rationales for these notes had nothing to do with matching the instrument to the risk profile of the borrower.

In an enormous proportion of cases, like a third I think I remember from one study, of the borrowers hung with sub-prime were eligible for conventional financing. The fucking brokers convinced them all they could do for them was sub-prime - because they got better commissions for hanging this splintery cross around their necks.

All of these notes should be investigated and cases in which underwriting malfeasance has damaged the borrower, the broker should be decapitated and stump-fucked by animals or volunteers or the victims or anyone who wants to participate in the dispensing of justice.

That is what many unscrupulous brokers were doing. The statute of limitations is saving their butts.

Iosef V HydroCabron says

Blurtman says

Why can't individuals just create money out of thin air to buy a house, instead of a bank creating money out of thin air, and enslaving citizens under a mortgage?

Because when individuals do it, it's fraud.

Odd that- when government does something wrong or immoral they can make it legal and therefore "right"