Sub-Prime Crises Overhyped Baloney?

[SossMan]

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What's in trouble is *all* non-agency conforming mortgage lending, not just subprime.

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Could you elaborate on this. This doesn't seem to be the case to me.


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I wasn't actually just talking about mortgage lending going forward - a lot of Alt-A mortgages have been originated under extremely dubious standards and as those loans get sorted out, the housing market will stay terrible for a while. In fact Alt-A as we knew it doesn't really exist any more - just about every lender is out. People mix up terms a lot, so they refer to all "bad" loans as subprime (hence the trouble is contained to the subprime portion), but when they try to calculate the percentage of the mortgage market that is subprime, they use the industry term, which is largely based on fico (generally below 600-620 or so) and the loan program that one qualified under (mainly a function of fico, but there was some predation going on).

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Anecdotal evidence for sure but I'm getting numerous constant offers to refinance from mortgage companies I've never heard of. Perhaps they all eventually sell the loans to FNM but I have my doubts. I have to believe that the big banks like Bank of America are doing mortgages without FNM but could be convinced otherwise.

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They don't have to sell those loans to fannie or freddie - as long as they are guaranteed by them. You can package those loans in a mortgage pool (called agency passthroughs) and sell them in a liquid agency MBS market. Right now, no one, not BofA, not Countrywide, not Citi, has any economic reason to sell conforming loans any other way. It's not so much relying on GSEs as much as simply selling loans at the highest possible price.

You can see this dislocation in the conforming/jumbo spread (difference in rates between conforming loans and jumbo loans that would otherwise be conforming but for size). For 30-year fixed, it's at 80-90 bps (almost 1 percent!). Note that jumbo loans should be *better* credit overall than otherwise conforming loans because fixed foreclosure costs lead to less severe loss in the event of default. Granted, worse convexity (borrowers prepay more optimally with larger loan balances, so the prepayment option embedded within the loan is effectively worth more for the borrower with a larger loan) means the actual yield difference is much less (don't have an OAS calc in front of me, but maybe 50bps? what I mean isn't a difference in OAS, but rather the equivalent difference in mortgage rate with loan size held the same; does anyone have access to mortage analytics?) but still very significant and unusually high. And this discrepancy is due purely to no one else wanting to take on mortgage credit risk at anywhere near the same price charged by the GSEs

And the offers you're getting in the mail are either for conforming loans or predatory scams. The percentage of homeowners that can benefit from refinancing into a non-agency mortgage (and haven't in the past 4 years) is low enough that there's no way that it justifies the cost of advertising.

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ummm, yeah. ^^ What he said.

[chiachu]

Could someone very briefly explain why this subprime crisis would cause a lender to go bankrupt? If people cant pay their mortgage and it is foreclosed by the lender... wouldnt the lender sell the house to recuperate most of their losses? Im sure im missing something here, and am curious as to what.

[kimchi]

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Could someone very briefly explain why this subprime crisis would cause a lender to go bankrupt? If people cant pay their mortgage and it is foreclosed by the lender... wouldnt the lender sell the house to recuperate most of their losses? Im sure im missing something here, and am curious as to what.

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I'm not sure about the US, but in the UK 110% mottgages were popular. A lender giving 550K for a 500K property would be shafted for 150K in a negative equity foreclosure situation if all they can get is 400K back after a 20% housing slump.

[tolbiny]

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Could someone very briefly explain why this subprime crisis would cause a lender to go bankrupt? If people cant pay their mortgage and it is foreclosed by the lender... wouldnt the lender sell the house to recuperate most of their losses? Im sure im missing something here, and am curious as to what.

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Lots of people foreclosing at the same time -> lots of houses on the market at the same time -> drops the price of housing. When you consider that these houses were bought during the biggest runup in house prices ever they have a long way to fall.

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Oh boy...

[Phone Booth]

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Could someone very briefly explain why this subprime crisis would cause a lender to go bankrupt? If people cant pay their mortgage and it is foreclosed by the lender... wouldnt the lender sell the house to recuperate most of their losses? Im sure im missing something here, and am curious as to what.

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The same reason why anyone goes bankrupt - their lenders wanted their money back and they couldn't pay back without liquidation. All these mortgage losses were merely predicted to occur, but they didn't have enough to withstand mark-to-market losses (as in the value of those loans declining due to the market expecting large losses from them) occurring in their pipeline. Since they are relying on credit to hold these loans that they funded, when credit gets pulled by nervous lenders, they would be forced to sell those loans into a dry market at a large loss. Note also that they have other operating costs (payroll, rent, etc) and simple reduction in mortgage origination volume, even without these losses, has hurt their bottom line significantly.

[DcifrThs]

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Could someone very briefly explain why this subprime crisis would cause a lender to go bankrupt? If people cant pay their mortgage and it is foreclosed by the lender... wouldnt the lender sell the house to recuperate most of their losses? Im sure im missing something here, and am curious as to what.

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Lots of people foreclosing at the same time -> lots of houses on the market at the same time -> drops the price of housing. When you consider that these houses were bought during the biggest runup in house prices ever they have a long way to fall.

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if you are referring to the US runup in housing prices you're wrong.

the US is barely above the average (or median, can't remember from the article) of house price increases among varying countries (like 25 or so, italy and britain are near the top).

also, fyi, the japanese runup was higher from 88-90.

Barron

[tolbiny]

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Could someone very briefly explain why this subprime crisis would cause a lender to go bankrupt? If people cant pay their mortgage and it is foreclosed by the lender... wouldnt the lender sell the house to recuperate most of their losses? Im sure im missing something here, and am curious as to what.

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Lots of people foreclosing at the same time -> lots of houses on the market at the same time -> drops the price of housing. When you consider that these houses were bought during the biggest runup in house prices ever they have a long way to fall.

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if you are referring to the US runup in housing prices you're wrong.

the US is barely above the average (or median, can't remember from the article) of house price increases among varying countries (like 25 or so, italy and britain are near the top).

also, fyi, the japanese runup was higher from 88-90.

Barron

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I meant within the US, I could be wrong about that to though.

[tolbiny]

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the US is barely above the average (or median, can't remember from the article) of house price increases among varying countries (like 25 or so, italy and britain are near the top).

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Isn't this to be expected if value is related to scarcity? The population density of the US is ~ 1/8th of that of the United Kingdom (wiki has the US as 172 in population density ranking).

Edit: Clearly this is skewed to a large degree by Alaska, but the US would still be behind a large number of developed countries.

[Phone Booth]

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if you are referring to the US runup in housing prices you're wrong.

the US is barely above the average (or median, can't remember from the article) of house price increases among varying countries (like 25 or so, italy and britain are near the top).

also, fyi, the japanese runup was higher from 88-90.

Barron

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I've been thinking about this for some time - people have been talking about the US housing bubble for a while, but it's really a global housing bubble that is certainly unprecedented in breadth and scale. It's not just US, Britain and Spain, it's also India and China. In all these countries, credit has become easier than ever, but affordability has actually gone down as prices soared. I don't think any one market is quite as bad as the Japanese RE bubble in the late 80's but what are the implications for the global economy going forward?