Housing Bubble Bursting?

[Greg Bell]

Hard to borrower money for that REFI to stop a forclosure..

The following is the list of actions that the FDIC is requiring of Fremont but could be applied to nearly every lender sub-prime or not:


Bank’s analysis of a borrower’s debt-to-income ratio include an assessment of the borrower’s ability to meet his or her overall level of indebtedness and common housing expenses, including, but not limited to, real estate taxes, hazard insurance, homeowners’ association dues, and private mortgage insurance.
In any case in which a loan would result in a debt-to-income ratio greater than 50 percent, the Bank’s policy should set forth specific mitigating factors (e.g., higher credit scores, significant liquid assets, mortgage insurance) that will permit the Bank to determine that the borrower possesses the demonstrated ability to repay the loan.
Bank must verify the borrower’s income, assets, and liabilities, including the use of recent W-2 statements, pay stubs, tax returns, or similarly reliable documentation, and verify that the borrower remains employed.
Provisions which require that when the Bank uses risk-layered features, such as reduced documentation loans or simultaneous-second lien mortgages, the Bank shall demonstrate the existence of effective mitigating factors that support the underwriting decision and the borrower’s repayment capacity, which mitigating factors cannot solely be based on a higher interest rate.
Bank shall develop, adopt, and implement a policy governing communications with consumers t0 ensure that the borrowers are provided with sufficient information to enable them to understand all material terms, costs, and risks of loan products at a time that will help the consumer select products and choose among payment options.
All communications with consumers, including advertisements, oral statements, and promotional materials, provide clear and balanced information about the relative benefits and risks of the products, and that such communications shall be provided in a timely manner to assist consumers in the product selection process, not just upon submission of an application or at the consummation of the loan.

 

[moh malekpour]

http://www.marketwatch.com/news/sto...41AB-BAF7-116BBF929245}&siteid=yhoo&dist=yhoo

Losses are creeping up on so-called Alt-A loans, which are considered less risky than subprime mortgages, but may have lower credit quality than "prime" loans.
That's sparked concern among investors in companies such as IndyMac Bancorp (NDE : IndyMac Bancorp Inc, Impac Mortgage Holdings ,Countrywide Financial, and even General Motors

But as the Alt-A business grew, more of these loans were offered to less creditworthy borrowers, creating what Mark Adelson, head of structured finance research at Nomura Securities International, calls "Alt-B" products.
"The Alt-A market has absorbed and disguised a portion of the subprime space," he said. "You can debate how to define these loans, but many have ended up being an Alt-A product with subprime deficiencies."

IndyMac, the largest Alt-A mortgage lender, has slumped 32% so far this year. Impac, a smaller rival, is down almost 40%.
Michael Perry, chief executive of IndyMac, said earlier this month that the company's stricter underwriting standards have helped it avoid the heavy losses experienced in the subprime sector.
Still, he said he was disappointment with the outlook for 2007 and noted that IndyMac would keep costs under control to compensate.
Countrywide Financial shares have fallen 14% this year. About 15% of the company's mortgage origination in 2006 was Alt-A loans, lower than some rivals, according to Inside Mortgage Finance.
More than three quarters of the loans IndyMac originated last year were Alt-A mortgages. Over 90% of Impac's loans were Alt-A in 2006, Inside Mortgage Finance reported recently.

 

[Randolph Kinney]

I'm pretty sure that correspondent agreements could be negotiated having terms that, if followed, would lead to a delivery of loans without recourse, just because of subsequent default on the part of the borrower.

I wonder if some of these brokers didn't negotiate shrewdly enough, or were they just willing to take easy off the shelf agreements with warranties up the ying yang, using Ch 11 as a parachute?

We have funding lenders and we have mortgage wholesalers. Both deal with mortgage brokers. It appears neither one was interested in protecting the downstream buyer of those mortgages but only provided warranties that were asked for or demanded by same. Most are depending on the their warehouse investment banker to provide the funds to keep on lending in spite of buyback demands. When the warehouse banker cuts off credit, that is when operations cease.

Now it is a case of dividing up what's left and if it is not enough, absorbing the losses.

Do you suppose the downstream buyer of paper is going to demand additional warranties and even an insurance bond to protect themselves? Or do you believe they are going to be sucker punched again with the promise of higher yield with higher credit scores?

 

[Steve Owen]

Steve,
They are not comparing the tech stocks with homes as you think they are. They are comparing tech stocks with sub prime stocks.

I'm aware of that. My point is that even with sub-prime, there is an asset backing up the security. In the case of many of the tech stocks, the companies had no earnings, no history of earnings, and no assets. When one bright fellow pointed out the high (almost infintesimal) PE ratio, one stock analyst said something like "you are buying talent." That's when I knew the whole thing would come crashing down, and it was months before it actually happened.

Sure, I wouldn't want to own any of these stocks right now, but I still think the comparison to the tech bubble is overblown (but, maybe not the comparison to Enron).

 

[JSmith43]

Do you suppose the downstream buyer of paper is going to demand additional warranties and even an insurance bond to protect themselves? Or do you believe they are going to be sucker punched again with the promise of higher yield with higher credit scores?

The company I work for is rather large and has scores of wholesale and correspondent relationships with investors that bundle the loans and sell them to the end investors.

As far as I can tell by reading the product/UW update memos and reading in between the lines, some of the loan product models have performed roughly as planned and these investors are now bragging about being one of the few standing with such and such UW terms for such and such loan product.

Lots of stuff is going bye bye such as CW 80/20.....all of them....as of 3/15. That was per a report on Yahoo news service of some sort. I have a high enough connection there to check, if I really cared about it or doubted the veracity of the reports.

Regarding your questions: I don't think they can be sucker punched for at least another 60 to 90 days The scratch and dent sub prime options are scant for brokers having to repurchase even well performing loans. Higher rates for the best sub prime stuff while the riskiest products are being cut back. I can't give you a really good read on sub-prime since I ignore it much of the time. Consider my comments herein to be 50% musings.

Randolph, I'm thinking of switching my 401k funds into short term bond/cash reserves fund. Do you think it will start another panic? Kind of like a butterfly flapping it's wings in a rain forest

 

[Randolph Kinney]

How high is the water?

http://www.nytimes.com/2007/03/11/business/11mortgage.html?_r=2&th&emc=th&oref=slogin&oref=slogin

Investment manias are nothing new, of course. But the demise of this one has been broadly viewed as troubling, as it involves the nation’s $6.5 trillion mortgage securities market, which is larger even than the United States treasury market.


Hanging in the balance is the nation’s housing market, which has been a big driver of the economy. Fewer lenders means many potential homebuyers will find it more difficult to get credit, while hundreds of thousands of homes will go up for sale as borrowers default, further swamping a stalled market.


Traders and investors who watch this world say the major participants — Wall Street firms, credit rating agencies, lenders and investors — are holding their collective breath and hoping that the spring season for home sales will reinstate what had been a go-go market for mortgage securities. Many Wall Street firms saw their own stock prices decline over their exposure to the turmoil.

“I think there is no doubt that home sales are going to be weaker than most anybody who was forecasting the market just two months ago thought. For those areas where the housing market was already not too great, where inventories were at historically high levels and it finally looked like things were stabilizing, this is going to be unpleasant.”

Like worms that surface after a torrential rain, revelations that emerge when an asset bubble bursts are often unattractive, involving dubious industry practices and even fraud. In the coming weeks, some mortgage market participants predict, investors will learn not only how lax real estate lending standards became, but also how hard to value these opaque securities are and how easy their values are to prop up.

Owners of mortgage securities that have been pooled, for example, do not have to reflect the prevailing market prices of those securities each day, as stockholders do. Only when a security is downgraded by a rating agency do investors have to mark their holdings to the market value. As a result, traders say, many investors are reporting the values of their holdings at inflated prices.

Meanwhile, investors wait to see whether the spring home selling season will shore up the mortgage market. If home prices do not appreciate or if they fall, defaults will rise, and pension funds and others that embraced the mortgage securities market will have to record losses. And they will likely retreat from the market, analysts said, affecting consumers and the overall economy.

 

[Randolph Kinney]

Randolph, I'm thinking of switching my 401k funds into short term bond/cash reserves fund. Do you think it will start another panic? Kind of like a butterfly flapping it's wings in a rain forest

I think some investors beat you to the run for cash liquidation in the last 2 weeks. The flapping of wings has started, some even "hear" butterfly wings and some "see" butterfly wings. Chaos theory at its finest.

Personally, I ascribe to the hedge fund group think and herd theory. It appears that lots of liquidation was occurring and a retreat to cash and treasury securities. It is sort of like hearing a rumble, feeling the ground shake and a dark plume of smoke arise from a hole in the ground. You don't want to know what is causing all that, just run from it as fast as you can.

 

[James E. Manning]

Roger:

I must admit I don't know what you are talking about half the time and that IS the point!

I converted into cash four weeks ago. I think you are too late.

I believe in keeping it simple. I can see where you have to be careful with what you say considering the relationship you have with your employer.

 

[JSmith43]

Roger:

I must admit I don't know what you are talking about half the time and that IS the point!

I converted into cash four weeks ago. I think you are too late.

I believe in keeping it simple. I can see where you have to be careful with what you say considering the relationship you have with your employer.

My 401K is only down 3% since the correction. It's hardly worth a worry. I just wanted to incorporate that metaphor about the butterfly flapping it's wings in the rain forest.

 

[Pamela Crowley (Florida)]

http://www.atimes.com/atimes/global_economy/hi09dj01.html

America's unreal estate problem
By Max Fraad Wolff

American "castles" (homes) are middle-class walls of separation from poverty and want. As goes the house, so goes the family's ability to fend off tough times and leverage past wealth for new opportunities.

Borrowing to bridge low-income periods, college and university costs, medical expenses, bail, renovations, retirement and unemployment are all common. This is the proper frame of discussion for the impending debt/depreciation storming of the castle.

Housing prices, refinancing, building and improvement have mushroomed in the US. Many Americans have made significant gains in home-asset value - at least on paper. There is no longer debate that things have gone way beyond anything that might be sustained. Such debates are silly and are better handled by psychologists than economists. As an economist, I will defer to those equipped to comment from real knowledge and experience.

(I added the bold because it 'amused' me.)

In the past five years the average house in the US has increased in price by 57%. Over the same period real gross-domestic-product growth was 15%. The most optimistic White House Estimate of real after-tax compensation increased by 8%. [3] Unreal-estate price increases are just that. Brace yourself for a dose of reality that will fall heavily on the shoulders of those Americans least able to bear the load.