• Welcome to AppraisersForum.com, the premier online community for the discussion of real estate appraisal. Register a free account to be able to post and unlock additional forums and features.

Housing Bubble Bursting?

Status
Not open for further replies.
This thread is much more gratifying to read and participate when it's more discussion and less posting of news articles we've already read.

Scott,

Prepay speeds? Sorry I missed that from a couple of weeks ago but I do not think anyone really knows.

What we do know is that virtually all of these subprimes carry 2 year minimum prepay penalties (often waived if you refi with the same lender, and obviously not in play where prohibited by law). So you asked what the impact will be if this speeds up or slows down.

Answer: I do not know. I would suggest, however, that there will be fewer prepays if refi volume decreases. And, given the impact of these penalties when rates are likely higher than they were at origination, I expect that would happen.

We do know that the further the borrower gets into the loan, the lower the rate of default. So, if you see prepays decrease without refis, that will mean defaults will be decreasing as well as the borrowers hold on to their properties longer.

Brad
Click to expand...

Jeez I hope somebody there knows something or your loan performance assumptions are going to be seriously tested. In all seriousness I'm quite sure some people there are tracking this very closely but you in your position may not be privy to it. Different job.

I think you will find you are very much mistaken about decreasing defaults as portfolios age. Granted, there will be an immediate spike in defaults as the poorly underwriten deals suffer first payment defaults and other first year woes but think of the possible causes of default and how the probability of occurance accumulates over time. The longer the time the larger the accumulated probablity of default. Meanwhile those that can, like your LA law partner, will refi or payoff to a more favorable loan thus concentrating the pool of potential defaults. You'll see.
 
Last edited:
Randolph,

Yes, I agree that growth may well be revised downward but I am not sure it will be by much.

At this level of growth, 2-2.5%, it will be easy to slip into a recession. I note your concern about it being deep but I am not that concerned. I think we are really just bumping along.

Now, so I do not get accused of just trying to paint a rosy picture, I'll talk about a newsletter I read yesterday (PIMCO) that said that prices would have to drop 20% at current mortgage rates to get affordability back to 2003 levels. What I do not know is why 2003? The run up started at least back in 2002 (probably before since the bubble talk started before mid 2002). So, this guy is pegging prices to payment levels (I agree as do Smith and Smith from the Claremont Colleges). He is supposed to be one of those crack bond forecasters (soory the name escapes me).

What was most interesting though was his prediction that if housing began to seriously impact overall growth (right now the most common estimate of the economic drag is 1%), he thinks that the fed will begin to dramatically lower rates. He is looking at 160 bps of lowering!

If his track record is good (I'm told it is), that means a big run up in bond prices as well- his primary point.

So, if the payment levels must bve lower to provide affordability, my question will be back to what level? I am not at all on board with 2003, but could be convinced perhaps that would have to return to the point at which the peak was reached if income growth is seriously impacted due to economic conditions.

Brad
 
Granted, there will be an immediate peak in defaults as the poorly underwriten deals suffer first payment defaults an other first year woes but think of the possible causes of default and how the probability of occurance accumulates over time. Longer the time longer the accumulated probablity of default.
Click to expand...
once higher rates kick in, ARM's will squeeze the blood out of these turnips and if subprime options are limited by the lack of players (i.e.- New Century, etc. are history), then equity will reign supreme in the lender's world. So if your home value is lowered, your ability to finance the full amount or ANY amount not less than the MV of the house leaves you without option.
A stock analyst on Nightly Business News pointed that out last night. He argued the subprime loans are not a mere blip on the economic screen but are a serious problem. In fact, so serious because people who find their homes have lost 5, 10, 20% of its value will find they cannot refinance. And then what? You cannot sell for the same reason. You pay the new payment amount or walk away. I think a lot will HAVE TO walk away.
 
Brad, the data is in on 4Q GDP, 2.5% with housing subtracting 1.2% from growth with almost a 20% decline in home construction.

What we know already is that 1Q for new home construction is a bust, more so than 4Q.

Existing home sales don't add or subtract that much from GDP, something like 15% of the activity contributes to GDP.

Taken together, fixed investments subtracted 1.5 percentage points from growth. Inventories subtracted 1.2 percentage points from growth.

Corporate profits declined for the first time in five quarters, falling by $4.9 billion, or at a 0.3% quarterly rate, after rising $61.5 billion, or 3.9%, in the third quarter.

Business investments dropped 3.1%, the largest decline in four years, while investments in equipment and software fell 4.8%.

Consumer spending was the main driver of the economy, rising 4.2%, unrevised.

Housing affordability is a big problem. That is why it is so mysterious that existing home sales should be increasing at the same time new home sales are falling precipitously even with massive concessions by builders.
 
The text of Senator Chuck Schumer in yesterday’s hearing

“This committee has a broad mandate to study and make recommendation about the economic policy. We frequently seek the view of Federal Reserve Chairman and we carry out that mandate. Chairman Bernanke, we live in an interesting time and you face a number of important challenges in setting a course for monitory policy that will achieve a multiple goals of high employments, balance economic growth, and reasonable price stability. Those challenges are all more complicated of what turning out to be an emerging crisis for homeowners all over the country, the sub-prime mortgage market fall out. Today is the first time that we will hear Chairman Bernanke say that the wave of default that we are witnessing in the Sub-prime market “cast serious doubt on the adequacy of the underwriting standards for these loans. And today we will take his words as the further indication that there must the response on Federal Level.
When so many mortgage brokers are able to deceive our most vulnerable families in to the loans that they can never afford without anyone betting an eye. That part of the housing finance system is broken.
I will be introducing a bill that would establish a bill of national regulatory system for all mortgage brokers including those of non-bank companies. To me it makes no sense that there should be one standard for banks and another standard for non-banks. We will also establish a suitability standard for borrowers so they can never issue a loan to the borrower who cannot afford. The wave of sub-prime foreclosures that we have seen so far could well be the tip of the iceberg and we all know what these foreclosures do to families that fall victim to the them. It is on the front page of our national papers every day, here is a story about the New York Times. New York is astounding and troubling.
Now, the question of course, that is as what you have two hats here as Federal Reserve Chairman: one is what Federal Reserve should do with the sub prime market and we are going to ask some questions about that. You mentioned again a little about it in your statement which I welcomed and second of course is the sub is the systemic risk that this might cause and they are two separate issues and you made clear that we need to do something about the former but the verdict is out on how the later is going to create a systemic risk. What I worry about is the leering on the risk of sub prime market request in our broader economy. Another words, if it was just one issue and everything else were honky dory, you would not worry much about the systemic risk but there is a negative personal saving record, high debt level, trade imbalances, and vulnerability to sharp currency depreciation if the rest of the world forecloses on us and you add the sub-prime problem here that who knows might spread to prime market, might not, it creates some problems. Just these families teased in to unsuitable sub-prime loans are signing over their economic security, the nation is at risk for mortgaging away our economic future if we don’t deal with these problems and start investing in our future growth. There are times when the direction of monitory policy is clear. This is not appearing to be one of those times. It looks like the Fed become more neutral about the Federal direction of monitory policy and I think this is prudent for number of reasons: first, the typical American Family has been left behind so far in the recovery from 2001 recession, productivity growth has been strong but workers earning has not been kept up with the growth, profit has risen sharply, so is the salary and bonus of top management but middle class family hasn’t seen their pay checks keep up with health care premium, college costs, gas prices. Just to name of few expenses, squeezing families today. It would be cruel and injustice if this recovery would have been cut short before workers began to reflect their productivity and family real income would closely follow the trajectory of economic growth. Another reason to be open to easing the monitory policy is the concern of the housing market adjustment is far from over. Recent housing data has offered little encouragement that market might be stabilizing. So, it is still too early to tell that worst is over for the housing market. I personally don’t thing that the worst is over for the housing market because of all the problems we are reading in the sub prime market and those will clearly get worse in term of their effect on average families. Just to mention a few statistics here, for 52000 families foreclosed on their homes last year in New York alone and this is a serious problem. Trouble stands for the lack of over sight has lead to Wild West mentality amongst scrupulous lenders and frankly exploitation of the large number of financially unsophisticated borrowers. It is bad that entire corporations built on this faulty business plan investors who funded those schemes would be out of business or out of money and those failure would lead to some adjustments in the market but real tragedy here is that 2.2 million homeowners face the real possibility of losing their homes because they were mislead or just plain swindled by modern day bandits.
This committee would be very interested in your testimony, Chairman Bernanke and your answer to our questions about the cause and consequences of trouble of sub prime market and their effect on overall economy, problems in the housing market are the forefront of my concern about overall economic outlook but as I mentioned, there are other issues which we will also focused upon. New congress is beginning to take real step to get budget deficit under control at the wake of the budget access in the last 6 years. Those accesses that brought us large trade deficit, low natural national savings and amounting debts from the rest of the world. I hope Chairman Bernanke would agree with me that current trade deficit is unsustainably large. It is critically important we take steps to bring it down. I look forward to your testimony on our economic outlook and to the discussion of how we can meet our economic challenge we face and finally how we can better protect millions of American families from being robbed in this lawless wild west of exotic home loans sometimes called liar loans”

Do you know what is the real name of liar loans and who is doing most of them?
 
Last edited:
moh malekpour said:
Hank,
I am expecting some one like yourself to put some of those positive articles on here for us to read and enjoy. Why don't you? the field of web is wide open and I would love to read them if you post them. please try. We need some.
Click to expand...

Are you a politician? Answering a question with a question.
 
Hank Henry said:
Are you a politician? Answering a question with a question.
Click to expand...
Hank,
No, I am not a politician. You asked me a question and I answered that why don’t you put those positive articles here for us to see. Your question was as if I was looking for negative articles while there were equally positive articles out there. I am asking you Where are those articles that you are referring to? Where did you look for those articles and how did you find them? Please give me the source of those articles or just post them here. I look at business sites, economic sites, real estate sites and newspapers business or real estate sections. If you look at those readily available sources and find positive articles about the housing market or loans, you should post them here as you tell me that there are some or you can tell me the sources that you know which have those positive articles. I am asking you to prove what you telling me that there are equal positive articles about housing and mortgage markets out there everyday. That they say the housing market and sub-prime mortgage market are booming right now. Please do it. I am waiting for your positive articles about those subjects.
You can check out the NAR web site. That is the only place that I don't look for my articles but you may get lucky to see something there that is positive and cheers you up.
 
Last edited:
California Investigates Sub prime Mortgage Industry

http://www.bloomberg.com/apps/news?pid=20601087&sid=anGiev.gfQDc&refer=home

I don’t know if I should consider these articles about swindled bandits good news or bad as they are exposing the crook lenders to public and pressing the government to do something about them. All I know, some of them brought big business to California and now, they are taking away. Thanks to sub prime and liar loans originators.

California Attorney General Jerry Brown opened an investigation of the subprime mortgage industry, which made the state the largest U.S. market for high-risk home loans.

Gareth Lacy, Brown's spokesman, said yesterday that the attorney general has an active investigation under way. Lacy wouldn't say which companies may be targeted or how far the probe has progressed.

``I think it's appropriate for the attorney general to take a look, especially if there's been abuses in lending practices,'' state Senator Mike Machado, a Democrat from Stockton, California, said in a telephone interview. ``There's a lack of scrutiny over the practices and the brokers engaged in originating some of these loans.''

Half of the 20 biggest U.S. subprime lenders, including No. 2 New Century Financial Corp., which is trying to avoid bankruptcy, are located in California, according to the newsletter Inside Mortgage Finance. The industry is under scrutiny by regulators after delinquencies on subprime mortgages rose to 13.3 percent last quarter, the highest since September 2002.

About 13 percent of the U.S.'s subprime loans are in California, according to the Washington-based Mortgage Bankers Association. Predatory lending practices and improper disclosure of terms may violate state consumer-protection and fair-lending laws, Machado said.
Click to expand...
 
Last edited:
FICO - 620 or less

How big of a market is the subprime market or FICO credit score of 620 or less?

One estimate is over 30 million people today fit that description. That is a very large amount of the working population. These people are spenders of most of their money with very little or no savings and they need credit to keep up their spending. It is no wonder then, many credit card companies, finance companies and mortgage companies benefit from having so many people in this particular range of credit rating at very high interest rates. These creditors know that a significant portion of these people will not pay or cannot pay at some point.

So how much of an impact will tightening of credit standards have on this pool of borrowers? How much impact will it have on their spending habits? Are these people really in trouble with their debt?

One example is Harley Davidson motorcycles or hogs are being financed with subprime loans: 20% of their hogs loans are subprime. The 30-day delinquency rate on such loans has increased from a 3.6% between Q1 of 2005 and Q2 of 2006 to 5.18% in Q4 of 2006, an almost doubling of delinquency rates in two quarters.

Next, notice that subprime credit cards are now in the tens of millions since their growth has mushroomed in the last six years. The first default usually occurs on their credit card debt. It is easier to somehow refinance credit card debt than trying to avoid foreclosure on a home after default; lenders don't consider refinancing a home a practical solution for a borrower with bad and worsening credit.

Again, there are now tens of millions of subprime auto loans in the US. And there is now evidence that such subprime auto loans are also under distress. See the article, http://www.bloomberg.com/apps/news?pid=20601087&sid=a7etPDiLQq4s Subprime Defaults May Spread to Auto Bonds, S&P Says.

Next, defaulting on a home is more likely and earlier – for those who own a home - than defaulting on an auto loan because most individuals in the US need a car to drive to work.

The economy has benefited from the amount of spending and credit issued to subprime borrowers over the past four years. However, the noose it tightening around the credit neck of subprime borrowers. They are falling behind in their payments. New spending by these borrowers are declining rapidly.

Can GDP sustain the 4Q 2006 growth absent new subprime borrowing? Will the defaults of subprime debt cause additional problems to surface in businesses that holds that debt and what magnitude?

No one really knows but it is folly to suggest that subprime people don't have a significant impact on GDP, for good or for bad.
 
Status
Not open for further replies.
Find a Real Estate Appraiser - Enter Zip Code

Copyright © 2000-, AppraisersForum.com, All Rights Reserved
AppraisersForum.com is proudly hosted by the folks at AppraiserSites.com
Back
Top