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Harm
Interesting article. The one thing that baffles me is that with the flattening of the yield curve, we should see tighter lending standards right? But so far the lending continues to be extreemely loose. Is this because the banks just continue to flip all the loans to fannie & co.? With the profit margin so lean it doesn't makes sense to me, unless the banks are just going for a large volume of loans to make money and damn the long term risk.
With the profit margin so lean it doesn’t makes sense to me, unless the banks are just going for a large volume of loans to make money and damn the long term risk.
BINGO! SactoQt, I thought you said you didn't understand this yield curve business --sounds like you've got a good handle on it to me ;-).
My guess is another reason that standards are staying loose is pure competition --if everyone else (especially online lenders) are doing it, how can banks/S&Ls afford not to? Another factor is the "you first" syndrome. No one wants to be the first lender to tighten standards and possibly get blamed for "triggering" a crash. I think they're playing a wait-and-see with regards to the Fed, Congress and long-term interest rates.
Peter P
2005 Jul 12, 3:40am
Remember NAAVLPeeps you do not own anything, you are owned.
Very true, negative amortization means that one will owe more and more. It is worse than renting, which is on par with interest only. :)
This whole "rear-view mirror/side windows - leading/trailing indicators - tea leaves" sub-thread got me thinking. A lot of the time we're arguing from different viewpoints because we pay attention to different evidence/indicators. Sometimes we see the same indicators, but come to completely different conclusions about them.
I think this topic deserves it's own thread, therefore...
"I See Debt People"
Harm
The 'you first' syndrome you mention seems all too likely. Scary when you think about it, the banks are essentially playing russian roulette with the economy.
...the banks are essentially playing russian roulette with the economy
Yup. "Chicken" sounds even more like it.
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Are the GSEs (Fannie Mae, Freddie Mac & Ginnie Mae) “too big to fail�
From the lender's perspective, in the 35+ years of their collective histories, the GSEs (Government-Sponsored Enterprises) have successfully eliminated pretty much all of the risk in the mortgage lending market. Or, more accurately, what they've done is to SHIFT the risk. They've done this by progressively buying up more and more of the nation's home mortgages and reselling them to investors around the world as MBSs (Mortgage-Backed Securities). They now collectively hold/guarantee almost half of the outstanding mortgage debt in the U.S. In 1992, they held less than $200 billion, but today they hold over $3 Trillion in mortgage debt. Most of the rest are bundled up as private MBS/CMOs and sold to hedge funds, asian CBs, and pension funds. (Source: NLIHC)
As a direct result, banks, credit unions, S&Ls and other mortgage lenders today are little more than mortgage ORIGINATORS, not mortgage holders. This might help explain the explosive proliferation of speculative mortgages and loose lending standards a-la "NAAVLPs (Negative-Amortization Anal Voodoo Loan Products --hat tip to Surfer-X)."
How/why did this happen? Who/what drove this massive "paradigm shift" in mortgage risk over the last decade or so? If marginal/speculative homebuyers default on their mortgages en masse, who will ultimately pay the price? Will it be Fannie, Freddie & Ginnie? Will it be the large domestic and international MBS investors (U.S. mutual/pension/hedge funds, Bank of China, Japan)? Or, will it be up to the American taxpayer to bail out the GSEs and their investors if (when) they default? SHOULD the taxpayer bail out the GSEs? (Google "LTCM" and "PBGC" and "moral hazard" to learn more about previous large-scale federal bailouts.)
HARM
#housing