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Saturday, September 26, 1981

Tuesday Open Thread

This is your open thread for today. Please post random links and off-topic discussions here.


Mikhail said...

I found yesterday's local NPR show "Weekday", dealing with the real-estate market, interesting.

The "experts" seemed to agree that there has been a bubble in many parts of the country, and they noted the unprecedented explosion in exotic loans. However, I was surprised by how clueless some of these pundits seemed to be about some subjects. They seemed to think that the lenders making these exotic loans were good at managing risks, and were unlikely to wind up in trouble themselves. It didn't occur to anyone to point out that many of these mortgages are being spun off into secondary markets where many of the investors are pretty clueless as to the real risk of what they are buying.

We are in completely uncharted territory here: many of the investors (e.g. hedge funds, pension funds, central banks) buying mortgage ABSes are newcomers to this space and have no real understanding of these assets. The banks will lend to ANYONE because there are suckers willing to take the mortgage off their hands. The demand for these dodgy mortgage securities is tremendous because investors are struggling to find ANYTHING that yields more than treasuries, causing risk premiums to almost vanish on even junk rated assets.

This is what struck me about the experts on the Weekday program: very few people seem to understand how deep this problem of run-away credit goes, and how ominous the implications are for the whole economy.

By the way, I was also annoyed at how the Weekday guests all felt the Seattle market was safe even though they agreed the rest of the country was in trouble. I wish someone would have cited statistics about the percentage of sales in the Puget Sound that are of the exotic loan variety, that would have put things in perspective.

S Crow said...

Regarding the NPR program yesterday:

Sorry, long response, but worth the read...

I called in and tried to get on during the last half hour, but didn't.

The point I was going to make was to counter the idea suggested that people will be able to refinance out of trouble via a fixed rate mortgage.

Contrary to that belief, many people CANNOT refinance into a fixed rate 30yr term. Presumably, if they could, they already would be in that program. If they have any equity, they are required as a condition of loan approval to have escrow pay off the car loan(s), IRS lien, Credit Cards, DSHS lien (child support etc),and the like. Typically AND IN LOCK STEP with the report out by Fannie Mae this past Spring, consumers are increasing their debt loads encumbered on their home by a minimum of 5% or more. Move to a fixed rate? Increase their payments by $400 or more a month? Not going to happen. The whole point of the refinance is to reduce the EXISTING STRAIN the consumer is currently experiencing.

So, thinking this through, consumers refinancing within the above scenario/profile, are not going from their existing I/O ARM to a 30 yr fixed. They are moving into a more tenuous program OR moving to an I/O fixed for 10 yr program, which is what we are closing every week at our office.

Lastly, to answer Mikhails suggestion about the number of non-traditional financed purchased deals in our area....

I think you would hear a lot of silence on the NPR program if I rattled off the statistics of what our escrow office is closing. Starting with the 2005 stats of 71% of the purchase deals we closed last year were 100% nothing down transactions (this is not a typo). And in every one of those 100% deals, the sales price was jacked up over the list price to offset the seller paid closing costs on behalf of the buyer.

Does the average reader know what that does to the housing prices?

Prices spiral up ARTIFICIALLY and solely due to the type of financing the borrower "qualified" for. And every one of the owners homes that sold for over list price to a 100% borrower NEVER TOLD you that the price was not necessarily BID UP, but was sold to a 100% financed buyer. Then Harry thinks Sally sold her home for (listed at $490) $500K, so Harry, using Sally's home as a comp, lists his home for $510K, and Viola! Here comes a 100% borrower who buys Harry's place for $525K! See how this works? What's worse? How about a 100% borrower who is involved in a bidding war, gets the home, and then jacks up the price further so seller pays for buyers closing costs under the buyers 100% program. Has this happened? You bet it has.

In my opinion this is one of the larger stories that nobody is reporting on.

S Crow said...

Please don't misunderstand. My response does not say everyone is in dire straights. That's not the case.

But, I do think enough people are in over their heads, that it WILL IMPACT the real estate market here locally. How much? Time will tell.

Mikhail said...

S Crow nailed it on the head, when he pointed out that the Weekday program made it seem like re-financing was some panacea for people in trouble.

I also fell over when I heard them talk about how these exotic mortgages made sense in markets where there was lots of appreciation potential like Seattle. I just couldn't believe that these same folks were excoriating the abuse of these dodgy mortgages throughout the country, yet felt they were perfectly fine for Washington.

We must be very special here.

Mikhail said...

S Crow,

The statistics you mention for mortgages in your own office are fascinating. Do you know if there are similar aggregate numbers for the Puget Sound area? I have seen numbers talking about the percentage of sub-prime loans that were "exotic" for our area, but I haven't seen data showing the total numbers of loans that were no money down, 100% interest, etc.

It would be VERY interesting to see this data for our region, and how it has trended over time.

By the way, how have the statistics changed in the last few years in your own office? What percentage of loans were no money down, or 100% interest, in 1997 or 2002?

S Crow said...

First, to clarify for readers confused about escrow: our escrow company closes home purchase and refinance transactions. We are not a lender or mortgage company. We have only been in the market for three years, so, unfortunately, we do not have a long term track record for statistics.

For obvious reasons, Title Companies who dominate the market do not disclose their numbers both in our market and across the country. A few seem to have their own hands full these days with kickback allegations continuing on and on.

I do know that PIMCO research analysts have indicated that 82% of all originations in California in '05 were non-traditional mortgages and I read or viewed a chart/graph somewhere that in the Puget Sound region, roughly 60% or so of our purchase originations were non-traditional mortgages.

Maybe The Tim (blog administrator)can recall?

NotMyRealName said...

However, I was surprised by how clueless some of these pundits seemed to be about some subjects. They seemed to think that the lenders making these exotic loans were good at managing risks, and were unlikely to wind up in trouble themselves. It didn't occur to anyone to point out that many of these mortgages are being spun off into secondary markets where many of the investors are pretty clueless as to the real risk of what they are buying.

You should go back and listen a second time. The show's guests mentioned the secondar markets for mortgages. Also, the host asked a question that was emailed in concerning what would happen to the secondary markets for non-traditional mortgages when appreciation slowed.

The guests answered that the secondary markets would still be there, but the risk premiums associated with non-traditional mortgages would increase.

How I read this is that as appreciation slows, the cost of a non-traditional mortgage will increase. This has the real possiility of putting the squeeze on people who are in adjusting loans and can't refinance at a lower cost.

synthetik said...

I just spoke with one of my clients in South Florida.

he said "yeah, it's a real buyers market here!"


John Doe said...

If you're interested in learning the methodology for how the OFHEO calculates risk for loans on the secondary markets (Fannie Mae and Freddy Mac only I believe):

It's really dry, though, beware!

If you really want a good read, read this:

What is not mentioned in the risk paper is risk is calculated low or no doc loans.

Fannie Mae purchased $56 billion of low doc loans in 2006 up 14% YOY and Freddie Mac purchased $21 billion of low doc loans in 2005 up 40% YOY.

The paper states that an immediate 5% drop in prices would represent a $955 million dollar net loss for Fannie Mae. This represents about 2.5% of their core capital.

All of these estimates assume accurate appraisal. However, the average LTV was 75% in 2005, so there is some cusion built in at least for most loans. 15% had LTV's > 90%, which has been steadily decreasing since 1995. I found this very suprising and assumed it would have increased. I wonder if this is "flight of capital" from the '01 stock market crash?