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Back in the 70's & 80's, there were plenty of people who were upside down and owed more than their home was worth - perhaps more then than today...
Back in the 70's & 80's & late 90's there were plenty of people who lost jobs and couldn't afford their mortgage payments...
And I'm quite certain that in earlier decades, these dynamics were in play then too...
ARMS and balloon payments are nothing new, but the bulk of loans in the 70s and 80s were still fixed loans. In fact, one of the things that drove the economy in the late 70s and early 80s was the unqualified assumable loan -- that ended up causing headaches for the secondary market, but there was usually a good deal of equity to recover costs. What was more troublesome were those that allowed their loans to be assumed and wrapped a second while acquiring a new loan and buying another house. It became a glorified rental, but it was easier to recoup costs on a rental than a defaulted loan.
In the 90s, we saw lenders relax debt-income ratios because people were making so much more money. I heard of loans to borrowers with debt-income ratio of up to 50 percent. That was unthinkable in the 80s! Unfortunately this became part of the nasty potion the set us up for our current mess ...
In terms of long-term real estate outlooks, the sub-prime fallout is much more menacing because of the combination of massive home prices increases combined with relatively flat wage increases over the last 5 years. Investors are way over-extended. Many of them are my clients and are in tears, because the rental market absolutely sucks right now (directly related to the lack of wage increases and the overwhelming supply of vacant rental homes, specifically in the Phoenix market). If you bought a home in the past 18 mos., you're upside down and it's unlikely you have the savings or future earnings to cover the adjustment.
You can't refinance a bad loan when you're upside down, and now lenders are suddenly behaving more responsibly, so you have to have a very high credit rating to even get a new loan these days.
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Banks 'set to call in a swathe of loans'
By Ambrose Evans-Pritchard
Last Updated: 7:25am BST 26/06/2007
The United States faces a severe credit crunch as mounting losses on risky forms of debt catch up with the banks and force them to curb lending and call in existing loans, according to a report by Lombard Street Research.
Bear Stearns headquarters in New York
The group said the fast-moving crisis at two Bear Stearns hedge funds had exposed the underlying rot in the US sub-prime mortgage market, and the vast nexus of collateralised debt obligations known as CDOs.
"Excess liquidity in the global system will be slashed," it said. "Banks' capital is about to be decimated, which will require calling in a swathe of loans. This is going to aggravate the US hard landing."
Charles Dumas, the group's global strategist, said the failed auction of assets seized from one of the Bear Stearns funds by Merrill Lynch had revealed the dark secret of the CDO debt market. The sale had to be called off after buyers took just $200m of the $850m mix.
"The banks were not prepared to bid over 85pc of face value for CDOs rated "A" or better," he said.
"God knows how low the price would have dropped if they had kept on going. We hear buyers were lobbing bids at just 30pc.
"We don't know what the value of this debt is because the investment banks shut down the market in a cover-up so that nobody would know. There is $750bn of dubious paper out there in the form of CDOs held by banks that have a total capitalisation of $850bn."
advertisementUS property writer Paul Muolo described the Bearn Stearns crisis as the “subprime Chernobyl”, saying the bank had created a “cone of silence”.
Abandoned by fellow banks, Bear Stearns has now put up $3.2bn of its own money to rescue one of the funds, a quarter of its capital.
This is the biggest bail-out since the Long-Term Capital Management crisis in 1998, which Bear Stearns refused to join at the time. Bear Stearns is now alone, a case of rough justice being served.
Lombard Street’s warning comes as fresh data from the US National Association of Realtors shows that the glut of unsold homes reached a record of 8.9 months supply in May. Sales of existing homes slid to an annual rate of 5.99m.
The median price fell for the 10th month in a row to $223,700, down almost 14pc from its peak in April 2006. This is the steepest drop since the 1930s.
The Mortgage Lender Implode-Meter that tracks the US housing markets claims that 86 major lenders have gone bankrupt or shut their doors since the crash began.
The latest are Aegis Lending, Oak Street Mortgage and The Mortgage Warehouse.
“There isn’t a recovery about to happen,” said Ara Hovanian, head of the building group Hovanian Enterprise.
Nouriel Roubini, economics professor at New York University, said there were now concerns about “systemic risk fall-out” from the Bear Stearns debacle as investors look more closely at the real value of CDOs.
“These highly illiquid securities have been priced so far on unrealistic and distorted credit ratings as the ratings industry has been complicit,” he said.
“They have not been rerated in a way that is consistent with rising subprime default rates. “That is why Wall Street is in a panic. “Losses will be massive once these assets are correctly priced to market.”
Lombard Street said the Bear Stearns fiasco was the tip of the iceberg. The greatest risk lies in the “toxic tranches” of lower grade securities held by the banks.
Much-trumpeted claims that banks had shifted off the riskiest credit exposure on to the asset markets was “largely a fiction”, said Mr Dumas. The worst of the US property crisis has yet to hit since there is an overhang of $2,000bn of mortgages with adjustable rates which have yet to be reset. Many borrowers could see payments jump by half, or even double.
At the same time, a spike in 10-year US bond yields by 0.65 percentage points over the last six weeks has drastically repriced the cost of fixed mortgages, knocking away a key prop for the US housing market.
“With defaults at their highest in the 37 years that records have been kept, it could be a long hot summer,” said Mr Dumas.
That's got to rate a 9 on the oh crap o meter.
This is the whole reason it's a big deal, because it's going to eat it's way up the food chain like cancer and when the big dogs don't lend money, well that's no big deal right?
Well actually when your savings rate is negative and when you're whole economy is rife with debt and when some won't eat well if they can't borrow, it's actually a fairly big deal.
__________________
At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide.
~Abraham Lincoln Lyceum Address
Last edited by conraddobler; June 26th, 2007 at 03:22 PM.
If you were stupid enough to get a interest only or adjustable rate loan then man up and take it.
People knew this was coming and they gambled with the market thinking they could sell and make a profit before their rates went up. There are no victims in this. These people knew what they were getting into and they know that when you gamble sometimes you lose.
__________________ "I carry a gun because a cop is too heavy".
The secondary market has all but disappeared, which at least will change how lenders do business with the customer. It used to be you had to give money away as fast as possible, and the cheaper money get, the harder it was to give away. Why do they care about credit risks? They're just going to bundle those with more stable loans in a bulk sale on the secondary market. Lenders didn't have to live with the risks they took. Until now.
If you were stupid enough to get a interest only or adjustable rate loan then man up and take it.
People knew this was coming and they gambled with the market thinking they could sell and make a profit before their rates went up. There are no victims in this. These people knew what they were getting into and they know that when you gamble sometimes you lose.
If you were stupid enough to get a interest only or adjustable rate loan then man up and take it.
People knew this was coming and they gambled with the market thinking they could sell and make a profit before their rates went up. There are no victims in this. These people knew what they were getting into and they know that when you gamble sometimes you lose.
NO NO NO NO NO NO a thousand times NO!
People keep thinking this is about the borrowers suffering, IT's NOT!
Who cares they were renters before they got to have a nice house for a while and they'll be renters again, it's not the end of their world. Well I do feel for them losing their down payment..... oh wait they DIDN'T HAVE ONE.
However it's the end of the BANKS world as in they have now rediscovered risky loans can bite them and they turtle up in those cases, stop lending, no more money.
Credit cards stop giving teaser rates, the signifigant amount who roll balances over on them can't and see their rates go from 3% to 19%.
Car loans get more expensive, gasp, some will have to have a down payement.
This is all fine and good but when your economic model is easy credit no down and you convert to not today with your credit pal, that's a pretty harsh smack in the face to the whole economy.
The whole set of assumptions people make is based on rates averaging out to x when the goes to x+5 that's a problem for ALL of us because we all interact in the economy.
Property tax receipts fall, public schools suffer, layoffs, economic contraction, interest rates rise, businesses fail, the whole economy shifts from tailwinds to headwinds, it's a big deal no matter who you are unless you don't interact in the economy much or have some safe government job.
__________________
At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide.
~Abraham Lincoln Lyceum Address
Last edited by conraddobler; June 26th, 2007 at 03:43 PM.
Property tax receipts fall, public schools suffer, layoffs, economic contraction, interest rates rise, businesses fail, the whole economy shifts from tailwinds to headwinds, it's a big deal no matter who you are unless you don't interact in the economy much or have some safe government job.
It will be interesting to watch this if the price of oil continues upward. A lot of municipalities have been caught off guard because they've underbudgeted their gas expenses. It was really bad on 2005.
It will be interesting to watch this if the price of oil continues upward. A lot of municipalities have been caught off guard because they've underbudgeted their gas expenses. It was really bad on 2005.
Sigh. You haven't provided much plucky comic relief lately
It will be interesting to watch this if the price of oil continues upward. A lot of municipalities have been caught off guard because they've underbudgeted their gas expenses. It was really bad on 2005.
The part about "cats and dogs playing with eachother" really has me spooked!!!
People keep thinking this is about the borrowers suffering, IT's NOT!
Who cares they were renters before they got to have a nice house for a while and they'll be renters again, it's not the end of their world. Well I do feel for them losing their down payment..... oh wait they DIDN'T HAVE ONE.
However it's the end of the BANKS world as in they have now rediscovered risky loans can bite them and they turtle up in those cases, stop lending, no more money.
Credit cards stop giving teaser rates, the signifigant amount who roll balances over on them can't and see their rates go from 3% to 19%.
Car loans get more expensive, gasp, some will have to have a down payement.
This is all fine and good but when your economic model is easy credit no down and you convert to not today with your credit pal, that's a pretty harsh smack in the face to the whole economy.
The whole set of assumptions people make is based on rates averaging out to x when the goes to x+5 that's a problem for ALL of us because we all interact in the economy.
Property tax receipts fall, public schools suffer, layoffs, economic contraction, interest rates rise, businesses fail, the whole economy shifts from tailwinds to headwinds, it's a big deal no matter who you are unless you don't interact in the economy much or have some safe government job.
All that happened in Austin area in the late 1980's. NCNB was nicknamed No Credit for Nobody. There were 1000's of foreclosures. All the Savings and Loans went broke. Many loan officers went to jail. Everybody else moved to Virginia. By 1991 the economy was booming again. By the end of the decade there were surpluses in the state treasury. Except for a brief period after 9/11 things haven't slowed down since. You just never know.
__________________
5-11 with 'em. 5-11 without 'em.
