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In an article from the AP I saw the following beginning:" WASHINGTON - The heads of Fannie Mae and Freddie Mac said Tuesday the mortgage finance giants are developing new types of loans to help distressed borrowers with high-risk mortgages keep their homes at a time of rising foreclosures."  This is extremely concerning.  I am actually shocked to see the entry of rational people into an obviously irrational market. 

Flexible terms are not what is behind the default rates here.  There are way too many people in homes who certainly do not deserve to be there and can't afford it.  There are three basic problems that are happening in the market and I will cover each one.  The three problems are over paying, bad underwriting and bad products.   

Negative ammortization is one thing but overvalued properties are a whole different item.  First and foremost the recent market was driven by low rates and since most people are famaliar with rates and prices know that they are in an inverse relationship.  People were paying too much because the payment looked ok.  Unfortunately like many car buyers they bought a payment instead of the bottom line.  Rates are rising therefore prices ARE falling.  That is not a maybe, a suggesting or a possibility.  PRICES ARE FALLING.  So jumping in now to support an artificially inflated market will only make it more painful and longer lasting.  No one ever said the government would do the right thing so here they are jeopardizing us all.  Right after cutting off NEW (NEWC.PK) they suddenly want to help?  Wrong answer what's happening is still going to happen if Freddie and Fanny want to bear some of the brunt, oh well the economy will suffer proportionally.

Bad underwriting is the second huge problem happening here.  Many of these buyers are in Alt-A loans.  These are called LIAR loans or stated income loans.  Suprisingly people who said they made a certain amount of money didn't.  I know hard to believe but no doc loans are stupid and it's coming back to bite those who performed so foolishly.  I was reading another article and read the amazing fact that borrowers only had to qualify on the teaser payment and not even including the taxes and insurance.  So if they had a teaser payment of $700 a month they only had to qualify on that forget the extra $400+ in taxes and insurance and when the payment resets to a normal $1200 the real payment will be $1600 not the $700 which the slacker underwriters approved.  I was shocked to see that there were actual underwriters doing this.  What standard was this?   Was your cat putting a paw print on all the mortgages for approval?  There is no way to fix this.  The reality is they can't afford it and either it gets sold or foreclosed on.  There is no "help them keep the house they can't afford" option.  But you know how the government wants to step in and take over when they failed to realize the mess that was being created.  If you have any doubt that underwriters share a lot of blame look up "First Payment Default" and see what you find.  Amazingly enough there are borrowers for actually fail to make their FIRST PAYMENT.  Seriously if you buy something and fail to make one payment it's either fraud or underwriting by a 3 year old cat.   

Problem number three is bad products.  These payment option arms creating negative ammortization are horrid and shouldn't even be suggested.  40 year mortgages are bad enough but payment option (pay the principle and interest or just interest or something less creating negative amortization).  The Alt-A loan nonsense is as I documented above.  Teaser rates are another scam product.  Additionally these 80-10-10 or 80-15-5 were some more bad decisions.  So you have people making payments they can't make on two mortgages without PMI and you wonder why the companies and the feds are crying out for a savior.  I am going to try to figure out what percentage of loans are out there on the 80-10-10 or 80-15-5 programs so I can determine a little better the problem of overpayment in this situation.  Oh and the bloodbath hasn't even started yet.  The largest number of subprime resets begins this fall and with the recent rising of consumer prices without any correction in the market the Fed will have to raise rates. 

In Summary it's only getting worse and there won't be any escape if the fed decides to support bad businesses.  The fall will still happen only it will be worse and last longer than if the markets just did their thing.  Sadly though with all the political grandstanding and the likehood of mortgage lenders "contributing" to presidential campaigns the outcome is getting more and more clear by the day.

-Until more economics rises up to bite us.
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Spoken like a true conspiracy theorist!
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It is a conspiracy -- a kind of unorganized conspiracy of greed and ignorance. Now throw in the political grandstanding, and we have a tale of Shake-spear-ian proportions. Comedy or tragedy? I think it's both.

Sj 

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Thanks for the comment TMFBent.  I would agree that it's a tragic comedy however currently doesn't involve murder or (certain types of family realations).  That we are aware of.  The long unwind needs a sound track and I propose Who Made Who.   
I was going to write something that may have been considered incivil to Tradestocky but I decline because of the superpleasant TMiller at the fool.  Hey look I learned so many lessons from your email Tmiller and I am behaving so much better.  Thank you for helping all of us and making this a nicer world.
Thanks everyone and until I post again...
Chris
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Opinions don't kill people, people kill people with opinions!
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You left out the appraisers. A group of people carefully educated to determine a homes worth based upon your answer to the question:

How much are you looking to borrow?

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Hey Steve,
You are right I failed to highlight the problem caused by unethical appraisers who really are too tied up in the deal to do the right thing.  Appraisers work for who ever hires them and those working on the sell side can wreak havoc.  People were expecting these massive appreciations annually and appraisers who didn't deliver weren't going to be working.  The ethical ones have a solid backing and will just do the right thing but it's hard to be right when everyone else is getting paid.  A fairly large issue that I haven't heard anyone talk about is the appraisers who have been going around and appraising homes for equity requirements to drop PMI.  So home many homes are now not properly covered for the banks over the work of certain appraisers?  What happens if we go into recession and prime borrowers start getting stretched but now the homes have no equity and the bank starts getting some of those back.  The number of homes that have been given 20% equity strictly by appraisal over the last 24 months would be an interesting number that I'd like to see.  Thanks again for the feedback.
-Chris
Oh TMiller... It would appear that Tradestocky is being off-topic or at least inappropriate... TMiller anyone anyone... TMiller
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I talked with a principal from Bearing Asset Management recently. Don't know if you guys are familiar with The Austrian School of economics (I wasn't), but it's a very hands-off-government, anti-Keynsian type of approach.

One of the big Austrian websites is mises.org

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TMFKopp,

        Thanks for the link.  I am more of a Austrian light armchair economist.  I believe in the states need to provide protective and productive support but I don't think that should restrict trade.  The support should be limited to activities that protect private property rights, allow for the enforcement of contracts and provide an stable economy.  Complete and total free markets can result in what China is doing with copyright infringement and that is harmful to development.  I believe strongly in the invisible hand if allowed to move will do so in opossition to Keynes.  I'm not on the supply side of economics because I believe that it leads to rent seeking behaviors.  


        The Austrian school is a bit complex and I'm not sure I totally grasp it becuase it's rooted in psychology rather than math.  I agree with the theory of small government (because beaucracy is a cost center and never adds value), obviously protection of private property but I can't get behind individualism (hence the light).  Yes it's true that only an individual can act but group think plays a role (think iPods).  I also find the subjectivism too abstract for my liking because it indicates that individuals have individual value scales that cannot be known and I think they can be known via extrapolation from groupings.  I think this is best explained via rewards cards and the like.  I am definately more on the Austrian Side than any other but being an analytical the psychology makes me cringe a bit.
        
        I love that site and will spend some time reading that material.  Thanks for the link value added as always. 


-Chris
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