patrick.net

Perma-renter,

Good Bill Gross link. Good to see him own up to his role in all of this. Yes, these "loans" were basically at-the-money call options. As long as they weren't under water, not many were going to walk away.

As Peter P has often said, "All that was needs to happen is for prices to simply not rise" (or words to that effect) for this entire thing to unravel. The difference is, we were discussing it openly as early as 2004. BG admits to being wrong on FFR as well but for him to do any finger pointing over the lack of underwriting standards is beyond belief.

But if house prices didn’t rise, the call option would fall out of the money, and the put option – the right to default on the full principal value of the loan – would go into the money.

This is the reality that banks are facing, and I believe it is goes far beyond the typical FB. A friend's brother moved out of state and bought another house. They were having trouble selling the old place and finally came to the point of considering the possibility of "jingle mail" (CA non-recourse loan). Finally got the bank to agree to a short sale. When good people (or at the very least people with little/no home equity) start doing bad things... we are all in deep &%$#@!

"moved out of state and bought another house"

Ahh... the old double down, rolling bubble, call/put strip straddle option... play eh'? Yes of course. In this version the buyer plays a "split hand" after being dealt two jacks! While this can have an element of danger (especially to the lenders) it can add a certain... thrill to your adventures in specuvesting. Now, whichever home continues appreciating that's the one you keep current on the payments!

No, kidding. It's just frustrating there was so much liquidity sloshing around that everyday Americans were being lured (or allowed themselves to be lured) into thinking having 2 mort. payments was perfectly normal. Again as others have pointed out, this is a lot of the reason there was so much "demand" out there.

Yeah, we've touched on this before, but since when did it become the norm to buy your new home before selling the old one? Let's hope that bit of "baby" hooey goes out the window along with the rest of the bubble-associated "bath water" crap.

Here is a link to another blog I read regularly, where they discuss the appropriate valuation model to use for a home:

http://economistsview.typepad.com/economistsview/2007/11/the-problem-wit.html

Notice that a home is *not* worth exactly what the DCF based on its rents indicates, there is also a part of its valuation determined by the expected appreciation (or depreciation) rate. In CA, the long term rate has been ~6%, which explains the inflated home prices here. But now we are seeing the reversion to the mean.

Have home prices anywhere dropped to 130-140 times rents? Sacramento? Bakersfield? If so, those are probably good long term investments.

@skibum,

Still, it's interesting to revisit b/c with each passing day the effect takes on different (and more dire) dynamics. From 2002-2005 you could say this "straddling effect" created more demand. From peak of mkt. on I'd say these very same homes are adding to supply.

Without qual'd buyers in the mix and dwindling appetite for MBS you have to wonder where the tipping point for that particular aspect is? How many REO's have to sit on a lender's bal. sheet before they're forced to liquidate at fire sale prices?

Maybe I should have said "alledgedly bought another house" as I am not quite sure if that is the case.... at any rate, the outcome has the same effect on Kalifornistan :-( So the folks at Pimco are rambling about "put options"; would be interesting to see when this idea was first put forth in the blogosphere (we are on to you Bill Gross and company!)

It is not clear to me if Paul McCulley is joking or not right here... someone needs to tell him about the part where you check "Yes, this residence will be owner occupied" on the mortgage application.
The sufficient condition will be a combination of house price deflation and lower interest rates that re-incites animal spirits towards housing as an asset class. Which means not fair, but cheap. So cheap, perhaps, that I, who’ve never owned more than one house, might decide that a second one might not just be a fun idea, but a good speculative put.

EBGuy,

I didn't mean to sound like I was coming down on anybody but I have to share skibum's "good riddance" policy. There was a time when being new to an area, new to the job and having little or nothing down was simply not going to cut it.

Obviously I don't know their circumstances but it looks apparent the dual payments are a strain. If they haven't sold their previous where did the money for a down come from? And of course, is renting really all that awful?

Meanwhile,
With today's all-too-typical of late stock market beating, we are dangerously close to a full-on market correction (10% off the peak ~ 12,600 for the Dow). And nearly every MSM outlet has some "piece" about the impending recession. My, how things have changed...

Meanwhile,

The New York Federal Reserve, acknowledging "heightened pressures" in money markets that are expected to last through the rest of the year, said it plans to conduct a series of repurchase agreements aimed at boosting liquidity in the credit markets. The announcement from the New York Fed, which carries out monetary policy set by the U.S. Federal Reserve, essentially puts in writing many of the steps the Fed often takes at this time of year.

The Fed said it would inject $8 billion into the banking system on Wednesday. The amount of money is somewhat larger than in past years at this time.

skibum :

The trolls are also not visiting us anymore ! It's been a while since the regular scheduled appearance of FR asking "Where is the crash ?" and TOS has simply disappeared.

The chatter around me is increasing about recession. Everyone is now an expert on the falling dollar and rising gold. People also mention the return of inflation ! A lot has changed. A lot, I would say.

Oh and BTW, no one is saying the housing market will recover next spring !

Sen. Schumer Urges Scrutiny
Of FHLB Loans to Countrywide
By JAMES R. HAGERTY
November 26, 2007 2:15 p.m.

Sen. Charles Schumer, a New York Democrat, urged regulators to examine potential risks posed by a sharp increase in lending by the Federal Home Loan Bank of Atlanta to Countrywide Financial Corp., the nation's biggest mortgage lender.

In a letter sent today to Ronald Rosenfeld, chairman of the Federal Housing Finance Board, which regulates the 12 regional home loan banks, Sen. Schumer said: "I am concerned that the loans being pledged by Countrywide to secure these advances (borrowings) may pose a risk to the safety and soundness of the FHLB system as a whole." He called for a review of the Atlanta bank's policies for evaluating collateral and of the loans pledged by Countrywide to secure its advances. (See the full text of Schumer's letter.)

The home loan banks, created by Congress in 1932 to prop up failing banks and provide money for housing, have taken on a larger-than-usual role over the past few months in providing funds for mortgage lending. They have stepped up their secured loans, or "advances," to mortgage lenders to fill a void created in August, when investors' fears of default risk shut off mortgage lenders' ability to raise money through commercial paper or other short-term borrowings in the capital markets.

Countrywide has replaced that funding mainly by tapping the Atlanta bank, where its borrowings totaled $51.1 billion as of Sept. 30, up 77% from three months earlier. Countrywide, though based in Calabasas, Calif., deals with the Atlanta home-loan bank because Countrywide owns a savings bank based in Alexandria, Va., part of the Atlanta bank's territory. (See a related article.)

Countrywide's borrowings from the Atlanta bank as of Sept. 30 accounted for more than a quarter of the home-loan bank's total assets of $190.72 billion. Countrywide has put up about $62.4 billion of mortgages as collateral for those advances.

Daris Meeks, a spokesman for Mr. Rosenfeld of the finance board, declined to comment on the senator's letter. Last week, Mr. Meeks said the finance board carefully monitors lending and collateral policies of the home loan banks.

A spokesman for the Atlanta home loan bank couldn't be reached immediately for comment. Officials of that bank last week said they had remained prudent in their lending.

Countrywide representatives didn't respond immediately to a request for comment.

Sen. Schumer, a member of the Senate Banking Committee, said he was concerned about the quality of the collateral partly because many of the loans held as investments by Countrywide are so-called pay-option adjustable-rate mortgages, or option ARMs. These loans allow borrowers to make minimal payments in the early years, resulting in far higher ones later.

StuckinBA,

Please make sure to let all of your recent converts that the band wagon is getting a might crowded and we're not letting just anyone on board. We need to make sure they are bringing "something" to the party. If they've made a recent purchase (2004 on) with anything other than a fixed and conforming loan, they need to admit they were part of the problem.

If they've made use of their HATM they need to admit they were totally impulse purchases. I'm not saying we're not adding new memberships it's just that we have to have, ahem, certain standards.

One random note to add here…the banking, automobile and insurance industries have put us on a debt treadmill by making us believe we need to own cars… ---- GIVE UP YOUR CARS whenever possible….oh, and it helps the environment too

Why do you hate freedom and America?

eburbed-

I'm with you, Amen!

I didn't buy a car until 4 years ago (used VW). Prior to that was 13 years in Chicago with no car. I believe the extra money allowed me to buy my first condo (back when you needed a down payment) which allowed me to buy my house (20% down) which I sold in 2005. Those saved dollars in retrospect are probably worth hundreds of thousands in today's dollars.

No regrets on any of the above!

"Sen. Schumer, a member of the Senate Banking Committee, said he was concerned about the quality of the collateral partly because many of the loans held as investments by Countrywide are so-called pay-option adjustable-rate mortgages, or option ARMs. These loans allow borrowers to make minimal payments in the early years, resulting in far higher ones later."

Why is he concerned? Countrywide has demonstrated that it has everyone else's interests at heart. It has even modified some of its loans, and is cooperating with governor Schwarzenegger. Our popular governor is fool proof and would never pander to special interests, he's even told us so. There is no way that our governor would lend his endorsement to any company who would let his public hold the bag on worthless collateral.

Thanks to HousingTracker.

Inventory still climbing / holding steady (depending on how you compare). Very unseasonal.

Prices dropping. Well, that we can blame it on being seasonal. Maybe not. Because it's down YOY as well !

skibum Says:
With today’s all-too-typical of late stock market beating, we are dangerously close to a full-on market correction

I wouldn't be too sure it is quite "full-on" correction yet. A cow-orker of mine was on IM today with his son, who works at a small ('only' $2B). The son told the guy to sell anything that he can get a good price on, because next year is going to be really bad.

My reaction was, "your son works at a hedge fund... and he is telling you this __TODAY__???"

Things are slowing down...

New thread: 1000% hedge fund wins subprime bet

I read today that over 16% of home equity loans are over 60 days past due. And this was a acros the full spectrum of credit quality...this was not just the lower tiers. This smells like so much trouble, and here's why: even if housing prices stopped their descent today, and just stayed flat, there would be no additional equity for these folks to extract. So the banks will take a hit in 2 ways: no new home equity originations, and some losses due to the ones which won't be repaid.

Devil's in the details. If what they do is leave the payments fixed at the low rate while the unpaid balance balloons at a (reasaonble) market rate, then I'm OK with it, although you gotta wonder if you're already upside-down in a house why you'd just sit there while the hole gets deeper. If, on the other hand, they're gonna let these idiots and greedy speculators have below-market fixed-rate loans at 3%, then I and everyone else who did not overpay, did not borrow more than we can pay back, and that got a fixed-rate loan are gonna be royally pissed off. I mean, where's my 3% 30-year fixed-rate loan? I don't get one because I was conservative enough to lock in 5.25%? It's time to break out the pitchforks and torches.

This Paulson proposed bailout plan will fail all on its own. It will bailout a small sliver of the subprime homeowners, but not stop price declines and all the rest of the complex housing and credit market mess. Consumers and the markets are expecting a miracle...they won't get one...the banks haven't even completely figured out how to implement this plan.

My husband was a mortgage broker for 2 years. We can't lump everyone into the same "mold" and stereotype the whole industry. Before my husband had his own business as a broker, he worked for one of the bigger companies doing mortgages. The whole reason he got into doing it for himself is that he hated the way most lenders "talk over people's heads" so that they don't really understand what they're getting into and put stuff into the contract that they know nothing about because they don't know how to read it. He wanted to be more than that - real to the customer. He would show up to do signings and meet customers wearing shorts, a polo shirt, and sandals, because he didn't want them to see him as another one of those stuffy salesmen. He got alot of business that way and made some good money, yes, but more importantly, he helped many people out of very bad financial situations and into good ones that would help them get out of debt. If you do it for the right reasons, it's not so bad. Don't lump them all together into one stereotype - it's just not fair to all the ones that are doing the right thing. Just like stereotyping Catholic priests as all of them being pedophiles - its just not true.