Systemic What?
Not local, but certainly relevant. Danielle DiMartino from the Dallas Morning News put together a nice primer on how the mortgage market poses a systemic risk to our entire financial system..
From the Dallas Morning News:
Systemic risk is on the bubble
The mortgage market remains a mystery to virtually every American.
For starters, the sheer size is inconceivable; it's hard to get your mind around a fast-growing $8.7 trillion market. Even saying it's more than twice the size of the U.S. Treasury market doesn't put things into perspective for the layman.
Try this bit of context, then: The mortgage market is so big that it has the ability to introduce systemic risk into our financial system.
Systemic risk is risk that affects an entire financial market or system, not just specific participants. As such, it's impossible to escape systemic risk through diversification.
Sound too alarmist? Consider a few facts:
•The collateral backing mortgages is stretched precariously thin – one in 10 homeowners has zero-to-negative home equity.
•Recent estimates put one-quarter of all mortgages underwritten last year in the subprime, or riskiest, category. That's well above the 13 percent average share for the decade through 2005.
•Even after adjusting the rate downward to account for Hurricane Katrina, mortgage delinquencies ended last year at 4.55 percent, an 18-month high. And subprime delinquencies are pushing 12 percent.
•Despite historically low borrowing costs, households spent a record amount of after-tax income at year-end to pay required principal and interest payments.
•In the next two years, about a quarter of all outstanding mortgages – or more than $2 trillion worth – will reset at higher rates.
•A record 62 percent of commercial banks' earning assets are mortgage-related.
Let me just add a few more in case those didn't raise your eyebrows..
• 43% of first-time home buyers did so with no down payment in 2005.
• The median down payment for those first-time buyers was 2% (on a $150,000 home).
• ARMs accounted for almost 40% of mortgages originated in 2004 and 2005.
• $600 Billion in equity was cashed out through refinancing in 2004.
• $834 Billion in equity was cashed out through refinancing in 2005.
Caveat Emptor!
Grim
From the Dallas Morning News:
Systemic risk is on the bubble
The mortgage market remains a mystery to virtually every American.
For starters, the sheer size is inconceivable; it's hard to get your mind around a fast-growing $8.7 trillion market. Even saying it's more than twice the size of the U.S. Treasury market doesn't put things into perspective for the layman.
Try this bit of context, then: The mortgage market is so big that it has the ability to introduce systemic risk into our financial system.
Systemic risk is risk that affects an entire financial market or system, not just specific participants. As such, it's impossible to escape systemic risk through diversification.
Sound too alarmist? Consider a few facts:
•The collateral backing mortgages is stretched precariously thin – one in 10 homeowners has zero-to-negative home equity.
•Recent estimates put one-quarter of all mortgages underwritten last year in the subprime, or riskiest, category. That's well above the 13 percent average share for the decade through 2005.
•Even after adjusting the rate downward to account for Hurricane Katrina, mortgage delinquencies ended last year at 4.55 percent, an 18-month high. And subprime delinquencies are pushing 12 percent.
•Despite historically low borrowing costs, households spent a record amount of after-tax income at year-end to pay required principal and interest payments.
•In the next two years, about a quarter of all outstanding mortgages – or more than $2 trillion worth – will reset at higher rates.
•A record 62 percent of commercial banks' earning assets are mortgage-related.
Let me just add a few more in case those didn't raise your eyebrows..
• 43% of first-time home buyers did so with no down payment in 2005.
• The median down payment for those first-time buyers was 2% (on a $150,000 home).
• ARMs accounted for almost 40% of mortgages originated in 2004 and 2005.
• $600 Billion in equity was cashed out through refinancing in 2004.
• $834 Billion in equity was cashed out through refinancing in 2005.
Caveat Emptor!
Grim
33 Comments:
Those few facts scare the hell out of me. I think if any RE agent can look at those facts and still be able to say with a straight face that it is a good time to buy they should have their license revoked.
Why aren't more realtors reading this blog? :)
I thiink they are lurking. ;)
RIDICULOUS & DANGEROUS IDEA ABOUT
THE FUTURE COURSE OF THE HOUSING BUBBLE
Jim Stack, who believes that there is, or has been, a Housing Bubble in the US and that it shows the signs of having begun to pop, says:
“Who’s to say the housing bubble will follow the path of previous bubbles?
There could be a soft landing, particularly if the new Fed chairman starts to panic and cuts interest rates.”
The question is fine, but the answer is ree-dee-culous. This sort of thinking is very dangerous because it gives a totally false hope of salvage to a precarious situation for many. “If the new Fed chairman starts to panic,” it would be positive for sustenance of the Housing Bubble? I don’t want to single out Mr. Stack, because there are many a commentators and laypersons who think this way.
The sad part is that like Pavlov’s dog (now here is a term whose usage has gone down drastically) the financial newsletter writers and econmeisters alike make this connection without any foundation. The historical fact is that during the bubble mentality, the rapidly rising rates don’t hurt the rise in housing prices and during the falling housing prices the rapidly lowering rates don’t help. I witnessed, firsthand, the former in Silly.con Valley in early 1980s and the latter in Southern Californica in early 1990s.
Bubbles have minds of their own. When they change their mind, i.e., psychology of the active participants, it is not easily reversed.
Any sings of “the new Fed chairman” panicking will be bad for all sorts of asset markets. With the degree of leverage in the economy, there is no room for error, let alone panicky behavior, Mr. Chairman. You have been had (by being put into such a precarious position by tricky Al, who timed things perfectly for himself). Greenspan can count to 14 Fed meetings and work backwards as to when to begin the process to “remove accommodation.” What a guy! Two more bullets left for you, Benny. Have fun!!
grim
Steep declines in mortgage rates in 1991 did nothing to help the housing collapse that was taking place..
Home Buyers Holding Off Despite Low Interest Rates
By THOMAS J. LUECK (NYT)
Published: October 27, 1991
DESPITE a steep decline in interest rates that has brought fixed 30-year mortgage loans to below 9 percent for the first time since 1977, home buyers are holding back across most of the nation in what experts say are stubborn fears that job cuts and other recessionary pressures will persist.
Elsewhere in the nation, home sales have declined steadily at the very time that interest rates have dropped most sharply.
grim
I try to steer clear of politics in my work. However this opinion piece from the notoriously conservative WSJ editorial page is important. To not acknowledge that there is a wide swath of NJ that thinks in this manner is a mistake. I otherwise have no comment or opinion.
==================
REVIEW & OUTLOOK
Corzine the Canary
March 29, 2006; Page A18
Jon Corzine, New Jersey's new Governor, isn't the first politician not to follow through on a campaign promise. But rarely is such dishonesty later presented as a virtue. The question for voters to contemplate is whether this is also an indication of what to expect if Democrats gain control of Congress in November.
Mr. Corzine won the Trenton statehouse last year by running as a tax cutter who'd raise property tax rebates by 40% over four years. "I'm not considering raising taxes. It's not on my agenda. We have a very high-rate tax structure. I'm not considering it," the then-U.S. Senator had vowed in October.
Well, last week Governor Corzine removed the Steve Forbes mask and submitted a record $30.9 billion budget that increases state spending by 9% and includes $1.5 billion in new levies. He wants to raise the already high state sales tax by 16% and extend it to services; hike taxes on cigarettes, alcohol and expensive cars; and create a new state water tax. And just so Garden State entrepreneurs don't feel left out, his budget would impose a corporate tax surcharge and a commercial property transfer tax. "There are no immediate plans," joked one local paper, "to tax the air we breathe -- not this year, at least."
And what about his pledge to more than double property tax rebates in a state where the average homeowner's tax bill has risen by $1,300 in the past four years? That's on ice for now, and perhaps until he's running for re-election. "I'll be the first to acknowledge that some things have to wait," said Mr. Corzine in his budget address.
His spending plan would give homeowners about 30 bucks extra, which would hardly cover the property tax hikes that have averaged 7% annually of late. New Jersey already has the highest property taxes in the country, and the new Governor wants to extend its lead.
While voters might feel misled by this 180-degree turn, Mr. Corzine is winning praise from fellow Democrats as a "straight shooter" brave enough to make "hard choices." Former Governor Jim Florio said, "I think this is an intellectually honest budget." Senator Robert Menendez, who was appointed to serve the remainder of Mr. Corzine's term, commended the Governor for submitting the "most honest, fiscally responsible budget in years."
These Democrats have an odd definition of truthfulness, but then Mr. Florio himself pushed through huge tax increases in the early 1990s after saying he wouldn't. It cost him re-election, though that was when the New Jersey GOP still had a pulse. Like Mr. Corzine, former Democratic Governor James McGreevey also campaigned on a promise to lower tax burdens. The day after winning office in 2001, he declared, "I am ruling out a tax increase," yet he went on to raise the state's top marginal rate by 41% and make New Jersey's top income tax rate the fifth-highest in the country.
Knowing that track record, New Jersey voters may be getting what they deserve if they were dumb enough to believe Mr. Corzine. But this tax flip-flop seems to take place wherever Democrats take power these days. Former Virginia Governor (and possible Presidential aspirant) Mark Warner also promised not to increase taxes during his campaign in 2001, only to raise them later.
And now Democrats on Capitol Hill are promising they'll also cut taxes if they're elected to run Congress next year. Republicans have certainly given Democrats an opening by their failure to govern. But voters who might otherwise choose Democrats for a change might think twice if they conclude that Mr. Corzine is the canary in the coal mine of real Democratic tax intentions.
Why aren't more realtors reading this blog? :)
I thiink they are lurking. ;)
There are realtors reading this blog and I have mentioned I am a realtor in some of my posts, I am also a potential buyer, who was burned in the last bubble -pop of 89-97 This blog is informative to all who read. I'd like to see a couple Lawyers on here myself.
KL
Those are some frightening statistics.
I'm just glad we're not in a bubble.
Forget more realtors, lawyers, or whatever. I wish I could get my fiancee to pay more attention to this site. The nesting instinct is going to bankrupt us if this bubble doesn't start deflating before W'day.
KL,
have read your comments and wish you were my realtor! Kudos to you for having such integrity in a vicious profession. You will prevail.
I would love to hear from more bankers? What are they thinking?
The bankers are too busy pleading with the Office of the Comptroller of the Currency for lending standards to remain lax. Seems that their punchbowl is being taken away.
http://www.fdic.gov/regulations/laws/federal/2005/05comguide.html
Some phenomenal responses to the recent request for comments. The banks seem to be making up all sorts of "stories" proclaiming the benefits of stated income and option arm loans..
There is one reply in particular that I urge everyone to read. It is by Mr. Michael Blomquist.
He is not a banker, but a realtor and mortgage broker. His comments are incredibly eye opening. This guy deserves a handshake, pat on the back, or a drink.. You pick.
http://www.fdic.gov/regulations/laws/federal/2005/05c20guide.pdf
Read it.
grim
grim,
Says page not found. Get out the tinfoil hats folks.
I found it. Gotta ad.pdf to grim's link. Boy, that guy has added up all the bad #s.
Michael Blomquist said.
1990 Real Estate Bubble / Securitizations / S&L Crisis / Irrational exuberance
I have been a real estate and mortgage broker for 14 years and have witnessed the aftermath of
the 1990 real estate bubble/crash and S&L crisis. The size of the 1980's real estate bubble is
miniscule compared to the current bubble. The 1980s bubble was created with more strict
guidelines and much higher interest rates, but still resulted in much insolvency. Stated income
loans, securitizations and 100% financing was relatively non-existent. Relative to income, home
prices were much more affordable then compared to now........
This guy is spot on. Your right grim we should take this guy out for a drink. He is a voice of reason in this insane asylum.
Corzine needs to make more cuts to the state government--no doubt about it. What is also true, however, is that he inherited the results of at least a decade of fiscally irresponsible leadership--and it was democrats who were in charge when a fair share of the mess was created. Nevertheless, The Wall Street Journal will scream bloody murder as well, I assume, if it is Democrats who inherit the same, and try to get honest about the fiscal mess, from the current Republican establishment in Washington.
I can only wish that more intellectual conservatives would be more committed to fiscal conservativism and, thus, honest about the Republican betrayal of that value.
Corzine needs to make more cuts to the state government--no doubt about it.
LOL! Thats funny!
"There is one reply in particular that I urge everyone to read. It is by Mr. Michael Blomquist.
He is not a banker, but a realtor and mortgage broker. His comments are incredibly eye opening. This guy deserves a handshake, pat on the back, or a drink.. You pick.
Read it.
grim"
Grim: outstanding - if you saw my "Pin?" quote, I think we have a clear path toward our goal of eventual doom [I am not kidding, although it is hard to write this without smirking].
NOT GOOD NEWS - I am not happy to see these disclosures.
You should have a permanent link this this item on your homepage, so that it doesn't get buried in the threads as everything does.
You should also provide commentary and give it it's own thread.
It's too important to bury.
Grim writes:
"There is one reply in particular that I urge everyone to read. It is by Mr. Michael Blomquist. He is not a banker, but a realtor and mortgage broker."
Blomquist really sent a torpedo into the beast -- an excerpt from his letter:
"I have seen lenders approve buyers when over 100% of their GROSS income was required just to service the minimum payments on an option ARM. Needless to say these approvals were under stated (inflated) income guidelines. Let it be noted that the borrower did originally provide their income documents, but was told they were not needed. When the borrower questioned about the new income, he was told that this was acceptable and everyone was doing it."
It's a good thing we're not in a bubble.
As you wish.
Blomquist gets the front page..
jb
"And then what? Affordability is already dismal even with low rates. Okay, so lets assume this strategy works; cut rates and save the bubble. What comes next? More rate cuts? Maybe go to zero percent like Japan? Start printing money and sacrifice the dollar? This just isn’t sustainable. You can’t cut rates to help affordability forever. At some point you need to pay the piper."
Nice post. Further, get this straight - in the near future, LOWERING RATES WILL NOT BE AN OPTION. We are facing a SS and Medicare tsunami coming down the pick. No one wants to do anything about it, so that means higher taxes and more debt. We NEED the pacific rim to continue to buy our debt, and they sure arent going to do it a 2%. Our fiscal policy will soon choose our monetary policy. Something to keep in mind.
When will the class action lawsuits swarm this industry?
lawyers should be smacking their lips.
It's really bad.
It' money, It's your life and it's your obligation if you sign the dotted line with one of these risky exotic loans just to get in.
If yuo can;t afford it with a traditional loan bid less or walk away.
Stated income loans are not bad if you put down 20,30,40,50%.
There only bad is when the buyer has absolutely Nothing in the game and does not respect personal responsibility.
How can anyone be alowed to buy something with NOTHING DOWN?
Bring back sanity and 20% down again.
Why should I have to compete agaisnt some imbecile that has no money and made zero sacrifice.
Like the ARM and IO, the Stated loan has turned from being a specialty product into a mainstream affordability product.
While I don't have any issue with the concept of stated income, I have many issues with how they are currently being used.
They were never, ever, intended to let people lie about incomes to qualify for a loan (which, by the way, is fraud).
grim
How does a "stated income" loan work, someone goes into a bank and says "I make a million dollars a year" and they get a giant loan?
Seems wreckless and insane on its face.
Thank you Chicago for posting the Corzine article.
BTW,
I will once again state why IOs were originally conjured. My brother-in-law was in th eroom when this darling was fleshedout at Fannie-Mae. The corporate migrator. Here for 2-4 years then moved. The joke here is what does IBM stand for? I've been Moved. Transaction costs were an obstacle to this kind of buyer. So now we are down to a level where this becomes an affordability vehicle. Abuse of the loan type, clearly not what it was intended
"I try to steer clear of politics...however..."
LMAO.
just got this email from the local shill(REALTOR) he serves the queens market:
"Dear ########,
If you're considering buying your own home, now would be an excellent time to do it because the market is slow and home prices are down. In short, we're definitely in a buyer's market.
So if you want some solid market information as well as sincere advice and effective help searching for the right home, please call or email me any time. Or visit my website and check out the first-time homebuyer's section. Thank you for your time -- and keep in mind that all my home buyer services won't cost you anything because they're paid for by the home seller!
Sincerely
P.S. If you know anyone who would like a free homebuyer's kit that outlines my fiduciary responsibilities to buyer clients -- including Disclosure, Loyalty, Confidentiality, Obedience and Accountability -- please let me know."
I love the smell of desparation in the morning
"P.S. If you know anyone who would like a free homebuyer's kit that outlines my fiduciary responsibilities to buyer clients -- including Disclosure, Loyalty, Confidentiality, Obedience and Accountability -- please let me know."
IMO he may regret outlining his "fiduciary duties" so explicitly after the house of cards collapses and his clients start looking for someone to sue.
Watchout for re brokers harassment. just start going to open houses and sign in. You will be bombarded with desperate slimey sales calls.
Like the ARM and IO, the Stated loan has turned from being a specialty product into a mainstream affordability product.
While I don't have any issue with the concept of stated income, I have many issues with how they are currently being used.
They were never, ever, intended to let people lie about incomes to qualify for a loan (which, by the way, is fraud).
These loans should not be used by w-2 employees - they were meant for business owners and 1099 income, etc
KL
Exactly KL..
jb
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