Clarifying Mortgage Mess

[Scribe]

Quote from wallstprodigy:

This question is pretty much for anyone who would know the answer, mortgage broker or not.

What exactly is the problem with this whole mortgage mess? Is it that there are no people trying to get mortgages because rates are to high? Or is is that they simply can not approve anyone for a mortgage and customers are trying to get more money then what they can afford?


1) The mortgage lenders made low-interest loans to people that should have gotten high interest loans.

2) The lenders didn't care because they sold the loans to "investors". These "investors" then repackage and sold most of the loans to dumber "investors".

3) Now that the "investors" in step 2 have realized what was happening in step 1 and are stuck with junk debt they have said "screw you" and won't buy the loans. If they don't buy the loans then the lender can't go back to step 1 and make more bad loans.

4) No cheap money = fewer interested borrowers.



The hilarious part of this is every surviving lender is now saying they will stick to "conforming" loans which can be bought by Fannie and Freddie. If there was any money in this they wouldn't have all been doing no-doc interest only liar loans to the pizza delivery guy that couldn't be sold to the GSEs. On top of that the housing market is weak. It is like every ice-cream store in the world announces they are only going to sell the vanilla flavor (and it is 20 below outside). How many will stay in business doing that?

That is why the people with $$ on the line are desperately trying to lift the government caps on the GSEs and $417k loan limit so they can dump these bad loans to Fannie/Freddie and make some new bad loans. When it finally busts Fannie and Freddie you and I will bail them out because they are "too big to fail." The guys at Goldman will still get their bonuses. Then the foreclosure bailout will keep the hard-working victimized pizza boy in the $575,000 house next door.

Before this is over many lenders will be broke, sued and probably highly regulated.

 

[Midas]

They are going back to conforming loans because the is no bid for anything that can not be sold to Fannie or Freddie (which are gov. sponsored)

With no bid it is hard to determine value of the mortgages lenders are holding.

Large commercial and investment banks are requiring more collateral for mortgage lenders warehouse lines of credit (where they hold the loan until they sell it into the secondary market otherwise known as a margin call in the securities bus.)

Without a warehouse line of credit you can not write loans, and with out bids in the secondary market lenders have nobody to sell their mortgages to. (double whammy)

In just a few months virtually all sub-prime and alt-a lenders have gone under.....(basically all "non-agency paper" lenders)...........It is a total disaster. The baby has been thrown out with the bath water.

What next you ask?

Back to FHA and VA loans (the original subprime programs), Fannie Mae and Freddie Mac eligible loans, and private hard money lenders.

 

[Spectre2007]

pyramid scheme with musical chairs, when the music stops not many chairs left to sit in.

'crowded trades' ...money will flee crowded trades.

 

[Smart Money]

Quote from traderdragon2:

Now take these numbers and look at bubble areas like SoCal.

Median salary is around 55K
835K average price of a detached home
With only 5% down, you still need over 40 grand down

At 5.75% fixed, a 795K mortgage, is gonna cost you $4639 a month, not including taxes which adds $835 a month = $5474/month

Even with dual median incomes, you cant afford the median home here. You have to get a condo, which is a joke in my opinion, since you lose most of the benefits of owning a home.

When a home is 55 times the median salary, you have serious problems. This bubble just priced several generations right out of the market.

Who is going to keep buying to support these prices? Salaries need to quadruple, or prices need to be slashed like crazy. Market will go nowhere for at least a decade it seems. With rent at half price, and home appreciation dead or negative, I cant believe anyone will buy now.

From what I could tell from my location in a flyover state, people were doing it by trading up. they bought during the last downturn, or they bought a shack, rode it up in value, then traded up, and kept doing it. Kinda wonder if a regular guy couldn't move out there, but something modest during a downturn, sell at a peak, wait for a crash, rent, and then repeat over a period of 25 years or so. Then at the end, sell at a peak, and move to a "flyover state" and use the money to live like a king. Proceeds from some of those million dollar homes would take you very far in my neck of the woods.

SM

 

[aeliodon]

Quote from Mr Pain:

When I got out of college I was a mortgage originator. The Rules were pretty simple, you could use 28% of your income for PITI, principle, interest, taxes and insurance and 36% for PITI plus all other debt, car loans, credit cards student loans etc….

If you made 60k a year and had no or low debts, you could spend $1400 per month on PITI. That equates to around a $170k mortgage at 6.25 % if you could put 5% down. Using the nonsense going on with sub prime loans, reverse amotorisation etc… they would get you a $320,000 mortgage and no money down.

This total breakdown in lending standards resulted in the real-estate boom. Folks could now afford 2x as much so what happened, prices doubled. Using the old 28/36 standard, you could only afford more if you made more so real-estate values were somewhat tied to income level rises.

If the lending standards are reintroduced, the real estate market won’t recover until incomes rise enough to offset the old price rises. This can happen through inflation or just time. People won’t sell because they won’t be able to get a mortgage for what they can buy the same house for unless they have big down payments. New buyers won’t be able to buy at all as they will never get mortgages for the inflated house prices.

The real winner in all this was the lenders who now collect interest on much more money. This was all a big scam that was just a way to get you to pay and owe more. Now the market is flat and will remain so for many years. I will buy mortgage company stocks in 1 year; everyone who is going to fail will be gone then. I will also start buying 2 families in 1 year, first for rentals, then for condo conversions.

Excellent post.

This was all a big scam that was just a way to get us all to pay and owe more. Profits have been privatized and now the costs will be socialized thru bailouts and inflation. That's the Wall Street way.

 

[Vinny1]

Quote from aeliodon:

Excellent post.

This was all a big scam that was just a way to get us all to pay and owe more. Profits have been privatized and now the costs will be socialized thru bailouts and inflation. That's the Wall Street way.

Plus the cities and towns were able to justify increasing property taxes since homes were appreciating.

 

[drsteph]

Quote from Mr Pain:

When I got out of college I was a mortgage originator. The Rules were pretty simple, you could use 28% of your income for PITI, principle, interest, taxes and insurance and 36% for PITI plus all other debt, car loans, credit cards student loans etc….

If you made 60k a year and had no or low debts, you could spend $1400 per month on PITI. That equates to around a $170k mortgage at 6.25 % if you could put 5% down. Using the nonsense going on with sub prime loans, reverse amotorisation etc… they would get you a $320,000 mortgage and no money down.

This total breakdown in lending standards resulted in the real-estate boom. Folks could now afford 2x as much so what happened, prices doubled. Using the old 28/36 standard, you could only afford more if you made more so real-estate values were somewhat tied to income level rises.

If the lending standards are reintroduced, the real estate market won’t recover until incomes rise enough to offset the old price rises. This can happen through inflation or just time. People won’t sell because they won’t be able to get a mortgage for what they can buy the same house for unless they have big down payments. New buyers won’t be able to buy at all as they will never get mortgages for the inflated house prices.

The real winner in all this was the lenders who now collect interest on much more money. This was all a big scam that was just a way to get you to pay and owe more. Now the market is flat and will remain so for many years. I will buy mortgage company stocks in 1 year; everyone who is going to fail will be gone then. I will also start buying 2 families in 1 year, first for rentals, then for condo conversions.

I agree with your assessment on the timing of mortgage equities and find your ideas on 2 family housing intriguing.

Excellent post, thank you.

One important thing to consider from an economic standpoint is how much the structure of the US economy depends upon worker flow to keep wages low. Lose your job here, no big deal, just go to another job over there and sell your house, buy a new one, incur transaction fees, etc...

Now, if there is no bid, you are stuck in your area (unless you foreclose - then you are quite free, but at a cost) and this may tend to increase wages. TPTB don't want that, so you can expect some relief if it occurs, but don't count on it being anything but a lagging indicator.

Quite glad that I was modest purchasing my first home. I knew that this would end badly, but like most of us, had no idea when or how. Losing 20% on 100k hurts, but its only 20 grand. Losing 20% on 1,000,000 hurts much, much worse.

 

[Trader5287]

Quote from Vinny1:

Plus the cities and towns were able to justify increasing property taxes since homes were appreciating.

What a fken nightmare that is -- all the city/town revals that have been done at insane valuations.

So what do you do if you get a huge upward reval - go in and fight it and blow your foot off by getting a lower valuation? Or just pay up to preserve an insanely high valuation in case you want to sell?

One guy I know has the opposite problem -- real nice place - should sell easily BUT his property value somehow dropped from 380 to 280K and he wants 340. Buyers wont pay more than the Town valuation in this market.

Then you have the old people and fixed incomers - that have no plans to sell who are destroyed by higher valuations.

 

[teixman4]

Indeed this is a good thread. But concerning the forex link where links the subprime with leverage through carry and trade, I think that in the exemple the author has not taken into account that MBS pays not only interest. Usually any mortgatge implies payment of interest and some portion of the principal of the morgatge. Second, not all delinquencies are linked with prices paid at the peak of the house market. Although the probability of deault in mortgatge markets is concentred between the second and the fourth year after the beginning of the loan, there are also other payment defaults linked with loans given in advance. In these cases, the recovery value of the loan is higher.

 

[Murray Ruggiero]

Quote from Mr Pain:

When I got out of college I was a mortgage originator. The Rules were pretty simple, you could use 28% of your income for PITI, principle, interest, taxes and insurance and 36% for PITI plus all other debt, car loans, credit cards student loans etc….

If you made 60k a year and had no or low debts, you could spend $1400 per month on PITI. That equates to around a $170k mortgage at 6.25 % if you could put 5% down. Using the nonsense going on with sub prime loans, reverse amotorisation etc… they would get you a $320,000 mortgage and no money down.

This total breakdown in lending standards resulted in the real-estate boom. Folks could now afford 2x as much so what happened, prices doubled. Using the old 28/36 standard, you could only afford more if you made more so real-estate values were somewhat tied to income level rises.

If the lending standards are reintroduced, the real estate market won’t recover until incomes rise enough to offset the old price rises. This can happen through inflation or just time. People won’t sell because they won’t be able to get a mortgage for what they can buy the same house for unless they have big down payments. New buyers won’t be able to buy at all as they will never get mortgages for the inflated house prices.

The real winner in all this was the lenders who now collect interest on much more money. This was all a big scam that was just a way to get you to pay and owe more. Now the market is flat and will remain so for many years. I will buy mortgage company stocks in 1 year; everyone who is going to fail will be gone then. I will also start buying 2 families in 1 year, first for rentals, then for condo conversions.

I agree with you, that why housing prices doubled, to most people all that really mattered was the monthly payment, even if it was done with mirrors.