The Subprime Mortgage Crisis: Some Thoughts - Page 5

Vader · 12-10-07, 10:51 PM

Quote:

Originally Posted by SFLRN

Most financial organizations that issued these loans are feeling the effects. Thousands of employees are being laid off from companies that relied on these securities too heavily. The American home owner wasn't sodomized. Many people chose to live beyond their means and did so using a loan format they knew would be expensive down the road. In the event that they were deliberately misled then they should have the right to go to trial; however, many of the individuals who took out these loans are just as responsible as the people who issued them. They could have chosen a a fixed rate format, instead many decided to live beyond what they could afford by having a low "teaser" rate.

Spoken like a true republican greedmonger. Tell me ... did you get rich by selling reposessed houses? Did you make a fortune by causing the American housing market to go down the toilet?

Maybe you're just a spokesman for the republinazi greedmongers who are systematically trying to steal the very breath from the lungs of the middle class.

Either way, I don't really give a damn. As far as I am concerend you're a representative of the criminals who created "teaser" rates to aid in the theft of the homes of the middle class.

You should be ashamed of yourself sir. In my eyes, you are no longer an American, you're a republinazi sodomite and you do not deserve to be in this country.

oldreliable67 · 12-10-07, 11:01 PM

Quote:

Originally Posted by Goldenboy219

Say a set SPMBS was to be purchased for 100k. If 25% of this market is to be known for default, i would guess you could purchase these "notes" much less then what the face value is.

I understand the securities market differentiates slightly from that of the bond market, but I know that repayment is based on the face value of the "note".

I was unaware though that a short position could be taken in the form of debt. If it can, wouldnt it have already paid high returns???

Short positions are quite common in the debt markets, mostly and especially in those securities that are the most liquid (trade high volumes daily) and can thus be readily borrowed in the repo market for delivery in completing a short sale. US gov'ts are the best example, trading many billions every day.

Most subprime obligations are not that liquid; a few are, but not a lot. Consequently, short positions in the SP market are most typically effected using various kinds of credit derivatives.

SFLRN · 12-11-07, 02:33 PM

Quote:

Originally Posted by Vader

Spoken like a true republican greedmonger.

I am not a Republican. I am a Libertarian (in the political and party sense). I do not believe government has any business in bailing out those who gave out the loans or those who took on the debt. If government makes this a habit (with much larger bailouts especially) then people are more inclined to take these sort of risks. Eventually, someone else will have to pay for that risk-taking. However, I am not against litigation for homeowners who were illegally misled.

Quote:

Originally Posted by Vader

Tell me ... did you get rich by selling reposessed houses? Did you make a fortune by causing the American housing market to go down the toilet?

Most of the people who became wealthy off of this loan format are now starting to see the securities they bought go down significantly. However, If I were a Hedge Fund Manager or an Investment Banker do you really think I would have the time to post on a debate forum?

Quote:

Originally Posted by Vader

Maybe you're just a spokesman for the republinazi greedmongers who are systematically trying to steal the very breath from the lungs of the middle class.

Either way, I don't really give a damn. As far as I am concerend you're a representative of the criminals who created "teaser" rates to aid in the theft of the homes of the middle class.

You should be ashamed of yourself sir. In my eyes, you are no longer an American, you're a republinazi sodomite and you do not deserve to be in this country.

This post, although marginally entertaining, does not directly deal with any of the points I made. Many people chose to buy houses that would have been un-affordable for them under a regular rate (it would otherwise not make much sense to buy a home with such a format when you could afford to own it with a fixed rate). They reaped the benefits of owning homes that were generally outside of their means, and they should also have to bear the consequences for their decisions. Simply put, the sub-prime mortgage crisis is a result of people using new financial formats to finance a life-style they couldn't afford. People should not be bailed out of their large credit card bills, and neither should they be bailed out of paying higher rates.

bhkad · 12-22-07, 12:22 PM

Continuation from Reid thread.

http://www.debatepolitics.com/breaki...post1057489465 (Reid Now Says Iraq Surge Has Helped)

Quote:

Originally Posted by winston53660

Actually before Bush 43 that is true about people living above the poverty line. And now since Bush 43 millions of people are in fear of losing their homes due to predatory lending. It reminds me of Silverado Savings and Loan.

Quote:

Originally Posted by winston53660

Pot thy name is kettle. Look at the poverty rates and look and the foreclosures now today and look at the numbers of uninsured.

There is a point where the government should back out of the citizen's affairs.

This is not the Nanny State but many people want it to be.

The President has proposed a 5 year freeze on introductory rates but the NAACP says that's not going to help those who already messed up.
Are we saying there should be a double set of laws?

One for smart and white people and one for dumb and black people?

That's the way it looks.

Quote:

December 19, 2007
State NAACP says President Bush is not doing enough on sub-prime mortgages

Members of Virginia's chapter of the NAACP are upset with President Bush's plan to freeze sub- prime mortgage rates.

President Bush has proposed freezing introductory mortgage rates for five years.

NAACP leaders say the president's "bail out" plan is "too little too late" for the majority of black borrowers.

They say research indicates minority borrowers pay higher annual- percentage- rates than non- minorities with equal income and credit risks.

King Khalfani is the director of the state NAACP. He said, "The president's so- called solution does nothing to help people who have been late on just one payment. For those hurt the most by predatory lending the proposal is useless."

WDBJ7 Roanoke News and Weather NRV Lynchburg Danville | State NAACP says President Bush is not doing enough on sub-prime mortgages

Vader · 12-23-07, 04:31 PM

Quote:

Originally Posted by metreon

Even as a non-homeowner, I have sympathy for people who got stuck, but there never has been, nor likely will be, a cure for irrational optimism. People need to understand that over the last 50 years there has been a dramatic decline in the affordability of homes.

Media hype of "stable" home ownership per capita implies stable affordability, but the hype leaves out: (1) dramatically larger numbers of multiple income buyers needed to make payments, (2) the number of owners who are simply investors has risen from 6% of the market 20 years ago to 25% of the market today, (3) banks continually introduce new financial products which deftly obscure rising inaffordability, allowing more and more people to get into homes who would otherwise not be able to buy. Ultimately, the basis of affordibility now is increasingly pegged to expected appreciation as well as the possibility of new financial instruments which can harness two or more incomes to both dilute the burden of the cost of home appreciation, and ironically, fuel the growth of that appreciation.

I view affordability as not just the ratio of monthly payment to monthly income, -- it makes more sense to look at the the total purchase price as a ratio to one's income and compare that to historical norms. If the median cost of homes in the 1950's is compared to median income then, homes were only about double the median income. Today, the median cost of homes is 4 times median income, and in major urban areas that difference has grown to a staggering 5-15 times median income.

Part of the problem probably grew from the increasing numbers of two-income buyers, based mostly on the natural coupling of people in matrimony, bidding up the market. In the 1950's, although matrimony was more common, two-income buyers were much rarer. Now, the cost of housing builds that statistical reality into the cost, making it nearly impossible for all but the wealthiest individuals to buy, or at least buy rationally. One has to ask though, now that two-income buyers are the new norm, where is the next step in "multiple incomes" to come from that will continue fueling housing appreciation? Polygamy perhaps? A joke of course, - more likely banks will devise yet more financial products allowing couples to partner with other investors, thereby insuring individuals are served smaller and smaller shares in equity and sense of ownership. In very expensive locations like New York City or San Francisco, such experiments already exist.

Here is a longitudinal example of the basic affordability problem: my father immigrated to the U.S. in 1950, and within three years bought a 4 brm, 2 bath, 3 level detached home with large yard for about $12,000 on an income of about $5500 (close to median) in a suburb of Washington, D.C. That same home now is estimated to be worth $640,000 in a suburb where the median income is only $53,000. The home is valued at 12, not 2, times the median income. I would argue that represents a large decline in affordability, despite the fact multiple incomes and financial instruments may create the illusion of affordability by keeping monthly payments within monthly income. It is not what one pays per month that counts, but what the total cost is to income. Home affordability has been steadily declining, not rising over the decades.

Bailing out buyers and banks to try and stabilize a bubble only delays the inevitiable.

Bailing out buyers is appropriate because the home-lending market is ripe with corporate predators who wouldn't hesitate to put a family of five on the street on Christmas day.

Bailing out lenders is INNAPROPRIATE because the lenders are responsible for the state of the market; therefore, **** THEM. They do not deserve help.

donsutherland1 · 02-20-08, 07:21 AM

In the opening part of this post, I noted, "As the housing bubble swelled with price-to-rent premiums exceeding historic valuations by more than 30% in numerous major markets, lenders and investors gave less and less thought to fundamental constraints such as risk and valuation. By 2006, almost two-thirds of all mortgage loans were made to individuals who previously would not have qualified for such loans."

Today, data is coming in that shows both that the lending practices likely continued to deteriorate as the housing bubble swelled and that loans were being made to people who simply could not afford them. CNN reported:

Many of these loans [subprime mortgages] are defaulting well before their rates increase.

Defaults for subprime loans issued in 2007 - none of which have reset yet - hit 11.2 percent in November. That represents perhaps 300,000 households, and is twice the default rate that 2006 loans had 10 months after being issued, according to Friedman, Billings Ramsey analyst Michael Youngblood.

Defaults are spiking well before resets come into play thanks to the lax lending environment of the past few years. Many borrowers were approved for mortgages that they had little chance of affording, even at the low-interest teaser rates...

Originally, concerns about these loans focused on the fact that that most homeowners wouldn't survive such pricey resets. In late 2006, the Center for Responsible Lending (CRL), predicted that 2.2 million subprime ARM borrowers would lose their homes in the following two years due to reset shock.

For instance, in both 2006 and 2007, well over 40 percent of subprime borrowers were awarded mortgages with either little or no documentation of their ability to pay. With these so-called "liar loans," borrowers did not have to show proof of either earnings or assets.

And even when borrowers did go on the record about their earning power, it didn't bode well. Both 2006 and 2007 ushered in a large proportion of loans with high debt-to-income ratios (DTI), which indicates the percentage of gross income required to pay debt. In 2007 subprime originations, the DTI hit 42.1 percent, up from 41.1 percent in 2006. Borrowers were simply taking on more debt that they could afford...

Despite their quality, subprime mortgages were as profitable as any other for lenders like Countrywide (CFC, Fortune 500) and Wells Fargo (WFC, Fortune 500), who were able to quickly securitize the loans and sell them in the secondary market. The loans sold easily because they carried the promise of high yields. Thus, lenders transferred the risk to the investors.

"As long as you could sell the loan, you made the deal," Duncan said.

Lenders needed the fees that these loans generated because their finances were weakening. Their cost of borrowing money was rising, while competitive pressures were keeping mortgage interest rates low.

"Lending had been highly profitable through the second quarter of 2005," said Youngblood, "but by 2006 many lenders were running into red ink."

So, they revved up lending to increase short-term profits. And, to outside analysts, there appeared to be nothing wrong with loan quality.

"There were very few overt changes in industry underwriting guidelines," said Youngblood. What did change, he said, was that lenders were making more exceptions to their standard practices.

If borrowers had reasonable credit scores but short work histories, they might be approved for loans that would have been turned down in the past. An inability to prove income from, say, a part-time business, might be tolerated.

"These exceptions generally amounted to no more than 5 percent [of subprime loans] before 2006," said Youngblood, "but they represented the majority of these loans issued in 2006 and 2007."

The reason for that shift: Lenders depended on independent mortgage brokers for much of their business, and the brokers were pushing them to approve subprime loans because they delivered big profits for the brokers.

Another point that was made was that lenders and borrowers both used the rising housing prices associated with the burgeoning bubble to rationalize their transactions:

...lenders and investors expected that housing prices would continue to rise and any borrowers who might face payments difficulties would readily be able to refinance under more favorable terms.

But what if the rise in housing prices slowed or even reversed? That scenario was seldom, if at all, considered by even some of the market’s most sophisticated financial institutions. Yet, to embrace such a posture required the fantastic assumption that housing prices could only head in one direction. That has never been the case in the U.S. or elsewhere. In all markets—equities, commodities, homes, etc.,—whenever prices have gotten far out of line with valuation fundamentals, either price increases slowed dramatically until over time the prices again reflected valuation fundamentals or “corrections” during which prices fell inevitably occurred.

The CNN article reaffirmed that such rationalization took place. The article explained:

During the boom, rapid price appreciation meant borrowers built up home equity quickly. That minimized defaults, since owners could draw from that equity to pay their bills - including their mortgages - through home equity loans, lines of credit or cash-out refinancings.

As noted previously, I believe the federal government should refrain from bailing out lenders or borrowers unless the situation reaches the point where it poses a genuine risk of a significant and prolonged economic shock (as opposed to a modest but temporary slowdown). Right now, It should work actively to contain the contagion associated with the unwinding of the housing bubble, but avoid intervening to stop the unwinding. Once the bubble deflates--and it will, as there is a floor that probably lies at a given multiple of fair value rents--stability in this economic sector will be achieved. Moreover, in the absence of a bailout (which still has not occurred to the credit of the federal government), there will be no moral hazard to feed unrealistic expectations that the federal government would become a lender of last resort.

At the same time, the Federal Reserve should consider the probability of a possible subprime mortgage-induced credit crunch, along with myriad other economic risks within its purview. Unfortunately, it appears that the Federal Reserve has been giving too little weight to a creeping inflation problem that coincides with an economic slowdown. The sets the nation up for the longer-term hazard of a fairly quick inflationary recovery and then possibly a much more painful slowdown afterward in which inflation has to be squeezed out of the economy.

donsutherland1 · 03-06-08, 01:17 PM

In message #21 in this thread back in November, I noted that Fed Chairman Ben Bernanke recommended that Freddie Mac and Fannie Mae be allowed to temporarily invest in jumbo mortgages above their $417,000 limit. I opposed the Bernanke propsoal suggesting that it was unwise for such firms to be increasing their risk exposure at a time when they were under increasing financial pressure and expressed concern that "the Bernanke proposal would put added pressure on an entity that is already experiencing a decline in profits. Hence, odds of taxpayer dollars being required to address the increased financial costs associated with Fannie Mae's investing in non-conforming jumbo mortgages would be high."

Unfortunately, among the provisions of the economic stimulus package enacted into law was authorization to temporarily increase the conforming loan limit to allow Fannie Mae and Freddie Mac to purchase or guarantee jumbo mortgages originated between July 1, 2007, and Dec. 31, 2008 that exceeded the existing $417,000 limit. Even worse, the National Association of Realtors is seeking to make the expanded lending limit permanent.

Today, Fortune reported:

Fannie Mae (FNM) plunged 12% to a 12-year low after a default notice at Carlyle Capital left the financial sector swooning... The default at Carlyle Capital adds to worries that troubled hedge funds will be forced into fire sales of mortgage-backed securities, forcing prices down further. That would be bad for big holders of the securities such as Fannie, Freddie and other big financial institutions.

I am not surprised that investors hammered Fannie Mae's shares in the wake of such news. Indeed, Fannie Mae's and Freddie Mac's risk exposure may already be greater than would have been the case had that provision not been included in the stimulus package. In general, a strategy that encourages companies to spend more money when they are facing mounting losses is not viable.

Looking farther ahead, I am increasingly concerned that there will be federal intervention to bail out or inject funds in one or both of those organizations should they face insolvency or a period of impaired lending capacity. Today, the U.S. Treasury Department denied such rumors. However, I have little confidence that Congress or the White House would resist pressures to intervene should one or both of those institutions face a severe erosion in their financial capabilities, much less going concern questions.

With the U.S. likely to run a near-record to record federal budget deficit for the 2008 Fiscal Year, such a move would be particularly ill-timed. It would place added pressure on the depreciating U.S. dollar (now trading near 73.00 on the DXY basket of 6 major currencies and below $1.53 per Euro), which is a function of fiscal and trade imbalances, interest rate differentials, and U.S. economic prospects. It would also skew investor, lender, and borrower risk perceptions toward laying a foundation for a new bubble in an economic sector that has been bubble-prone. Such a potentially disastrous course should be avoided.

donsutherland1 · 04-17-08, 12:09 AM

Earlier in this thread (http://www.debatepolitics.com/econom...houghts-3.html (The Subprime Mortgage Crisis: Some Thoughts), I mentioned a Bernanke proposal that Fannie Mae and Freddie Mac be permitted to increase their lending limits so as to invest in non-conforming jumbo mortgages. At the time, I argued that such a position did not make much economic sense given the increasing financial strains being experienced by Fannie Mae and Freddie Mac. Needless to say, such a "reform" was adopted.

Now TheWall Street Journal has revealed a newly released study by Standard & Poor's that points to an enormous potential risk exposure associated with Fannie Mae and Freddie Mac. The newspaper noted:

According to the S&P study, the taxpayer risk from Fan and Fred, combined with that of other government-guaranteed agencies, "yields a potential fiscal cost to the government of up to 10% of GDP." With total U.S. GDP estimated at somewhere north of $14 trillion, that would put the Fan and Fred bailout cost at about $1.4 trillion... This "fiscal burden" would be so large, in fact, that S&P figures it could even jeopardize the AAA credit rating of the U.S. government.

Although the kind of catastrophic losses suggested by the S&P study are probably a low probablity-very high impact risk, the more aggressive investment criteria that was given to both Fannie Mae and Freddie Mac has likely increased the probability of possible losses to be borne, in part, by taxpayers. In general, the new criteria are tantamount to allowing a firm facing cash flow difficulties to increase its leverage.

aegyptos · 04-17-08, 07:24 AM

When push comes to shove both parties rush to bail out the bankers. The right course would have been to do nothing and let the various improvident banks fail and the borrowers and speculators be foreclosed. Less damaging than this reform will prove to be. Our government really really doesn't work any more. They can't perform even the simplest task with any level of competance let alone intervene in markets.

The US government has a triple A credit rating? Only because they own the printing press.

donsutherland1 · 05-06-08, 08:58 AM

An update on Fannie Mae...

Today, CNN reported:

Fannie Mae reported it lost $2.2 billion, or $2.57 a share, in the first quarter, compared to a earnings of $961 million, or 85 cents a share a year earlier. Analysts surveyed by earnings tracker Thomson First Call had been forecasting a loss of 81 cents a share.

The loss was larger than even the most pessimistic forecast, which was for a loss of $2.40 a share.

CNN also noted, "Fannie also announced that the Office of Federal Housing Enterprise Oversight (OFHEO), the federal regulator that monitors its activity, has loosened some of the regulatory restraints on it... The latest move on capital requirements could make tens of billions of additional dollars available for home loans."

Such moves to expand Fannie Mae's lending operations in the face of its growing financial difficulties make little economic sense. Instead, such measures likely increase the risk that at least some share of Fannie Mae's losses could ultimately be passed on to taxpayers.