Given the deterioration in underwriting standards, models predicated on prior experience have little value when compared to the data of the last two or three years.
This is EXACTLY what I have been worried about. I am not sure that the comparisons people keep using to past Puget Sound real-estate booms/busts are all that relevant since the lending standards are so much different today than in the past. From everything I have been able to read so far it seems as if our local real-estate market is in a much more fragile state than at any previous time raising the odds that a downturn could be much more pronounced than previous experience suggests.
Moreover, the degree to which lending standards have deteriorated is not immediately obvious. It's not just sub-prime loans that are the problem, it's the quality of loans in ALL segments that has worsened.
Actually I see ARMs (and their bastard cousin, the teaser rate) as the real problem--since rates have gone up in the past couple years it means nearly three quarters of the loans will experience some degree of rate shock, which is going to be the trigger event for sales under duress and/or delinquency (and thus foreclosures) for many borrowers. All of the other loan features (neg am/IO/lack of income/...) will exacerbate the problem, but the rise in rates is what creates the fundamental affordability gap for the largest group of people. I shudder to imagine would happen if over two thirds of the properties that were bought or refinanced in the last 2 years were put back on the market under duress.
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I see ARMs (and their bastard cousin, the teaser rate) as the real problem--since rates have gone up in the past couple years it means nearly three quarters of the loans will experience some degree of rate shock
I am much more worried about which types of loans are more likely to result in less equity, and under-water owners, rather than any kind of rate shock. You can always sell if you don't like your newly increased monthly payments so long as you have equity.
Thus, the loans which allow/encourage diminishing equity will be the greatest culprits in driving a down-turn.
The elimination of this product from a former leader of the subprime world is a positive step to reducing the effects of exploding ARMs on borrowers who often leveraged themselves to the hilt borrowing on a short-term teaser rate.
I wonder if others will follow suit and how quickly it will happen. If you've seen the effects of ARM resets and their role in foreclosure you have to think this is a step in the right direction for the industry.
Believe it or not, but Jim Cramer is advising people to "walk away" from their homes if they find themselves significantly under water, even if they are not struggling financially.
This just goes to my point that the massive proliferation of interest only and negative amortization loans among prime borrowers leaves the real-estate market MUCH more fragile. If you don't have any skin in the game (i.e. equity) there is little reason to stick around in a home that is worth far less than the mortgage. A trashed credit rating is a small price to pay for unloading a dead asset.
Believe it or not, but Jim Cramer is advising people to "walk away" from their homes if they find themselves significantly under water, even if they are not struggling financially.
This just goes to my point that the massive proliferation of interest only and negative amortization loans among prime borrowers leaves the real-estate market MUCH more fragile. If you don't have any skin in the game (i.e. equity) there is little reason to stick around in a home that is worth far less than the mortgage. A trashed credit rating is a small price to pay for unloading a dead asset.
Ardell was suggesting the same exit strategy a few months ago.
Ardell was suggesting the same exit strategy a few months ago.
I shudder to think what will happen to the real-estate market if people start taking this advice (i.e. to walk away from homes that are worth less than the mortgage). With record numbers of owners with very little equity, it would only take a small amount of depreciation to push a large number of people under water.
If even 50% of the people with neg-am/IO loans in the Seattle area walked away in the next five years, we would be in for a world of hurt.
Moody's Investors Service described some so-called Alt A mortgages as no better than subprime home loans, saying it will change how it rates related securities after failing to predict how far delinquencies would rise.
The ratings firm said today its expectations for losses on Alt A mortgages will rise between 10 percent and 100 percent, depending on whether a loan pool has a lot of debt extended to borrowers with low credit scores and little money for down payments. It's also raising loss expectations when borrowers don't fully document their incomes.
``Actual performance of weaker Alt-A loans has in many cases been comparable to stronger subprime performance, signaling that underwriting standards were likely closer to subprime guidelines,'' Marjan Riggi, Moody's senior credit officer, said in a statement. ``Absent strong compensating factors, we will model these loans as subprime loans.''
Moody's said in a separate statement that its expectations for losses on ``option'' adjustable-rate mortgages, part of the Alt A market, would rise even farther. Initial minimum payments on the loans fail to cover the interest borrowers owe, creating growing balances and possible payment spikes. ...
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Comments
This is EXACTLY what I have been worried about. I am not sure that the comparisons people keep using to past Puget Sound real-estate booms/busts are all that relevant since the lending standards are so much different today than in the past. From everything I have been able to read so far it seems as if our local real-estate market is in a much more fragile state than at any previous time raising the odds that a downturn could be much more pronounced than previous experience suggests.
Moreover, the degree to which lending standards have deteriorated is not immediately obvious. It's not just sub-prime loans that are the problem, it's the quality of loans in ALL segments that has worsened.
Actually I see ARMs (and their bastard cousin, the teaser rate) as the real problem--since rates have gone up in the past couple years it means nearly three quarters of the loans will experience some degree of rate shock, which is going to be the trigger event for sales under duress and/or delinquency (and thus foreclosures) for many borrowers. All of the other loan features (neg am/IO/lack of income/...) will exacerbate the problem, but the rise in rates is what creates the fundamental affordability gap for the largest group of people. I shudder to imagine would happen if over two thirds of the properties that were bought or refinanced in the last 2 years were put back on the market under duress.
[/quote]
I am much more worried about which types of loans are more likely to result in less equity, and under-water owners, rather than any kind of rate shock. You can always sell if you don't like your newly increased monthly payments so long as you have equity.
Thus, the loans which allow/encourage diminishing equity will be the greatest culprits in driving a down-turn.
Option One Eliminates 2/28 Loan
This just goes to my point that the massive proliferation of interest only and negative amortization loans among prime borrowers leaves the real-estate market MUCH more fragile. If you don't have any skin in the game (i.e. equity) there is little reason to stick around in a home that is worth far less than the mortgage. A trashed credit rating is a small price to pay for unloading a dead asset.
http://housingdoom.com/2007/07/30/cramer-says-walk-away-from-underwater-homes/#comments
Ardell was suggesting the same exit strategy a few months ago.
I shudder to think what will happen to the real-estate market if people start taking this advice (i.e. to walk away from homes that are worth less than the mortgage). With record numbers of owners with very little equity, it would only take a small amount of depreciation to push a large number of people under water.
If even 50% of the people with neg-am/IO loans in the Seattle area walked away in the next five years, we would be in for a world of hurt.
Moody's Says Some `Alt A' Mortgages Are Like Subprime
Moody's Investors Service described some so-called Alt A mortgages as no better than subprime home loans, saying it will change how it rates related securities after failing to predict how far delinquencies would rise.
The ratings firm said today its expectations for losses on Alt A mortgages will rise between 10 percent and 100 percent, depending on whether a loan pool has a lot of debt extended to borrowers with low credit scores and little money for down payments. It's also raising loss expectations when borrowers don't fully document their incomes.
``Actual performance of weaker Alt-A loans has in many cases been comparable to stronger subprime performance, signaling that underwriting standards were likely closer to subprime guidelines,'' Marjan Riggi, Moody's senior credit officer, said in a statement. ``Absent strong compensating factors, we will model these loans as subprime loans.''
Moody's said in a separate statement that its expectations for losses on ``option'' adjustable-rate mortgages, part of the Alt A market, would rise even farther. Initial minimum payments on the loans fail to cover the interest borrowers owe, creating growing balances and possible payment spikes. ...
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