Barrons looks at the lending side of the real estate bubble
Barrons takes a good look at the changes in lending that fed the real estate mania, and in my opinion, will be a factor the feeds the demise of it.
Coming Home to Roost
THE RED-HOT U.S. HOUSING MARKET MAY be fast approaching its date with destiny. Indeed, inside the mortgage trade, much anxiety is being focused on a looming "reset problem." Over the next two years, monthly payments on an estimated $600 billion of mortgages to borrowers with checkered or no credit histories -- the "sub-prime" market -- may zoom as much as 50% higher, as the two-year teaser rates on hybrid adjustable-rate loans expire and interest payments hit their fully indexed levels.
In the past, such resets caused little disruption. For one thing, the sub-prime market was strikingly smaller. Only $97 billion of such mortgages were originated in 1996, compared with a mammoth $628 billion last year and $540 billion in 2004, according to the trade publication Inside B&C Lending. Sub-prime loans outstanding now account for more than 10% of the total U.S. mortgage debt of $8.4 trillion.
Moreover, the reset triggers on sub-prime mortgages have dramatically shortened, with the loosening in underwriting standards. During the past two years, "affordability" products, as the industry has dubbed them, have migrated from prime to sub-prime borrowers.
...
Surging property values in much of the country in the past four years helped bail out many sub-prime borrowers, letting them refinance their loans as painful resets loomed. Many borrowers not only refinanced old debt at attractive teaser rates, but also sucked additional equity out of their homes with cash-out refinancings, to pay off higher-rate credit-card debt. Meanwhile, delinquency rates and credit losses remained artificially low. A tapped-out borrower always could sell his home into a soaring real-estate market to pay off his mortgage debt and regroup.
But now the refi window may be closing for the sub-prime crowd. The Fed's hikes in short-term interest rates have pushed up fully indexed ARM rates. At the same time, evidence is mounting that home-price appreciation is slowing or, in a few areas, reversing. And the secondary market in mortgage-backed securities, which provides some 90% of the liquidity in the sub-prime market, is starting to balk at the easy lending practices in this sector.
Various doomsday scenarios are being posited. A New York hedge-fund manager heavily playing the short side of sub-prime mortgage securities foresees a coming spiral in delinquencies, foreclosures and credit losses from tapped-out sub-prime borrowers facing monthly payments they can't meet. A deadly feedback loop impends in which forced home sales will diminish collateral values, which, in turn, will foster yet more delinquencies and forced sales. Before the crisis runs its course, the deflationary contagion will infect all manner of homes, from high-end to starters, says this bear.
Caveat Emptor,
Grim
Coming Home to Roost
THE RED-HOT U.S. HOUSING MARKET MAY be fast approaching its date with destiny. Indeed, inside the mortgage trade, much anxiety is being focused on a looming "reset problem." Over the next two years, monthly payments on an estimated $600 billion of mortgages to borrowers with checkered or no credit histories -- the "sub-prime" market -- may zoom as much as 50% higher, as the two-year teaser rates on hybrid adjustable-rate loans expire and interest payments hit their fully indexed levels.
In the past, such resets caused little disruption. For one thing, the sub-prime market was strikingly smaller. Only $97 billion of such mortgages were originated in 1996, compared with a mammoth $628 billion last year and $540 billion in 2004, according to the trade publication Inside B&C Lending. Sub-prime loans outstanding now account for more than 10% of the total U.S. mortgage debt of $8.4 trillion.
Moreover, the reset triggers on sub-prime mortgages have dramatically shortened, with the loosening in underwriting standards. During the past two years, "affordability" products, as the industry has dubbed them, have migrated from prime to sub-prime borrowers.
...
Surging property values in much of the country in the past four years helped bail out many sub-prime borrowers, letting them refinance their loans as painful resets loomed. Many borrowers not only refinanced old debt at attractive teaser rates, but also sucked additional equity out of their homes with cash-out refinancings, to pay off higher-rate credit-card debt. Meanwhile, delinquency rates and credit losses remained artificially low. A tapped-out borrower always could sell his home into a soaring real-estate market to pay off his mortgage debt and regroup.
But now the refi window may be closing for the sub-prime crowd. The Fed's hikes in short-term interest rates have pushed up fully indexed ARM rates. At the same time, evidence is mounting that home-price appreciation is slowing or, in a few areas, reversing. And the secondary market in mortgage-backed securities, which provides some 90% of the liquidity in the sub-prime market, is starting to balk at the easy lending practices in this sector.
Various doomsday scenarios are being posited. A New York hedge-fund manager heavily playing the short side of sub-prime mortgage securities foresees a coming spiral in delinquencies, foreclosures and credit losses from tapped-out sub-prime borrowers facing monthly payments they can't meet. A deadly feedback loop impends in which forced home sales will diminish collateral values, which, in turn, will foster yet more delinquencies and forced sales. Before the crisis runs its course, the deflationary contagion will infect all manner of homes, from high-end to starters, says this bear.
Caveat Emptor,
Grim
7 Comments:
I'm new to this blog but I really enjoy it. Especially since it looks like I'll be moving because I've run out of space in my NYC apartment.
Looking at a previous entry about searching tax records was very helpul for me. I noticed a new site, Zillow.com makes finding this and other info pretty easy though they don't have a lot of NJ data in there yet. Grim, maybe this qualifies as a new link off your site?
If these folks ever start to list houses for sale (and I'm sure this must be their strategy), I would think it would make some serious waves for the real estate industry. And no, I don't have anything to do with Zillow, I just need to find some affordable housing!
Ugh.
That Barrons article just made me lose my appetite.
I would love to hear from some of the finance folks on here about what the larger implications of this occuring really are...
While I like the Zillow interface and agree it's an easy way to find data, I'd prefer my readers used their own brain to perform a basic valuation of a property instead of relying on zestimates.
Why? Because they don't describe how they came up with that number, and without that information, how does anyone know if it's accurate or not?
I looked up several properties on Zillow that I am very familure with and the data was outdated. It's like being missed informed in a rapidly changing environment.
"In the past, such resets caused little disruption. For one thing, the sub-prime market was strikingly smaller. Only $97 billion of such mortgages were originated in 1996, compared with a mammoth $628 billion last year and $540 billion in 2004, according to the trade publication Inside B&C Lending. Sub-prime loans outstanding now account for more than 10% of the total U.S. mortgage debt of $8.4 trillion.
It looks like FB's by the thousands. This will lead to some kind of oversight whether the RE people like it or not.
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Drove down to Maryland over the weekend.. We took 1/13 through Delaware to get down to the eastern shore. There is an amazing amount of new construction in Delaware.. KB, Lennar, Beazer, Toll, Hov, Pulte, and a handful of smaller local builders. Huge new developments every few miles with plenty of land for hundreds of thousands of homes, all within spitting distance of 1 & 13..
grim
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