About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

28 comments:

  1. 1
    DrShort says:

    Very well done.

    But despite how dire that make the situation sound, it didn’t even really touch on the impact of credit default swaps. It’s even worse than that made it out to be. There was a very interesting Frontline episode a couple of weeks ago that did a great job summarizing the problem.

    Going forward, I think regulators will start requiring capital reserves, stress tests and much greater transparency regarding investments. Much like a homeowner’s insurance company is required to set aside enough funds to pay for the occasional earthquake or hurricane, financial institutions will be required to set aside funds to cover the kinds of situations we’re in now. There’s a need to create a financial firewall to stop the domino effect of default.

    In other words, easy credit is gone for a very long time.

  2. 2
    Lanny Poffo says:

    The Result of The Crisis of Credit Visualized (humorous):

    http://www.youtube.com/watch?v=B9r01fqmLWw

    Lanny

  3. 3
    Scotsman says:

    That’s pretty well done, considering the complexity of the situation. I’ll be sending it along to friends and family.

    Dr. Short- I think the “financial firewall” you seek is called full disclosure and realistic (income based) valuations. I don’t think there will be much of an over correction, but there is no magic salve that will prevent us from going all the way to a sustainable bottom. The game is over.

  4. 4
    DrShort says:

    By Scotsman @ 3:<blockquote

    Dr. Short- I think the “financial firewall” you seek is called full disclosure and realistic (income based) valuations.

    I’m talking more than that:

    + Something needs to be done about the rating agencies. They completely missed Enron. And they really missed the risk of the CDOs. Without their “investment grade” ratings on the mortgage backed securities, this crisis never would have happened.

    + The models used to evaluate the risk of the CDOs were based on all sorts of assumptions. Things like housing prices don’t decline and that the risk of default of a person in CA isn’t correlated with the risk of default in WA. Change these assumptions (even slightly) and the evaluation of riskiness changes greatly. Financial institutions and rating agencies need to model not only “rosy” scenarios, but worst case ones also.

    + An institution should not be allowed to sell a credit default swap without putting aside capital to cover potential losses.

    + An institution should only be allowed to buy a credit default swap if it owns the underlying bond. No longer should a CDS be a gambling instrument if it’s going to be us taxpayers that pay all the losses.

    I think about all the regulations that came after Enron (like Sarbanes Oxley) and can only imagine we’ll see some pretty stiff new regulations after this.

  5. 5
    Scotsman says:

    RE: DrShort @ 4

    I don’t disagree, but I think that a simple emphasis on full disclosure, essentially giving all parties involved in a transaction access to all of the relevant information, forcing banks and others to carry all transactions on their books, at realistic current market values, takes care of most if not all of the underlying issues that got us where we are today. It doesn’t have to be more Sarbanes Oxley type stuff, just some basic accounting principles and timely reporting requirements. The more straight forward, the more effective, since we all know the devil hides in the details. And as you suggest, realistic reserve requirements would put some reigns on the action.

  6. 6
    John says:

    Just read another article about AIG on NY Times website. One thing that stands out is the author says if the government didn’t save AIG, the entire Western banking system would have collapsed. It doesn’t get much scarier than that.

    http://www.nytimes.com/2009/02/28/business/28nocera.html

  7. 7
    Jonny says:

    here’s a better visualization of our financial state:

    http://www.youtube.com/watch?v=F54rqDh2mWA

  8. 8
    Eric Arrr says:

    There’s a major defect with the way the crisis is portrayed in this visualization, as well as in the generally accepted version of events:

    This is not a sub-prime mortgage crisis. It is a mortgage crisis.

    Financially “secure” people with high credit scores were every bit as culpable for this mess, if not more so, than the “sub-prime” borrower depicted in this video as an irresponsible couple with too many kids.

    Bad loans occurred at all strata of the housing market and at all income levels. The incomes of more creditworthy borrowers may be larger and more stable, but just the same, these buyers abused the system with adjustable loans, low down payments, naked speculation, jumbo properties, multiple properties, etc., etc., etc.

    I’m tired of hearing this referred to as the “sub-prime” mortgage crisis, and I’m tired of the notion that sub-prime borrowers are especially to blame.

  9. 9
    Ray Pepper says:

    What an excellent video Tim. I sent it to our entire data base of buyers and sellers.

    A great find that easily answers the questions asked by many of us at 500 Realty.

  10. 10
    DaveyDave says:

    I always wanted to know what a subprime family looked like… Tattoos, booze, smoking and no birthcontrol apparently.

  11. 11

    “I’m tired of hearing this referred to as the “sub-prime” mortgage crisis, and I’m tired of the notion that sub-prime borrowers are especially to blame. ”

    Maybe the lenders should bear a tiny bit of blame too? ( Sarcasm on)

  12. 12
    cheepseats says:

    Eric@8

    I thought it was called the “sub-prime” crisis because of the type of loan that was taken, not the type of person who took the loan. I think it just works in the video to portray a stereotype. I, for one, at least realize that all walks abused the subprime option. But IMO, if only “traditionally qualified” buyers had received these subprime loans, this situation would be drastically less dire.

  13. 13
    Eric Arrr says:

    cheepseats@12,

    “Sub-prime” refers to the creditworthiness of the borrower, not the type of loan that was taken.

    A borrower with an 800 credit score is considered superprime, but give him a $600k adjustable mortgage, zero or negative equity, and flat or falling home prices, and I guarantee you that loan is going as bad as two or three subprime loans put together.

  14. 14
    Kary L. Krismer says:

    By Eric Arrr @ 8:

    Financially “secure” people with high credit scores were every bit as culpable for this mess, if not more so, than the “sub-prime” borrower depicted in this video as an irresponsible couple with too many kids.

    To the extent that is true it probably goes to what I was saying about credit scores being lousy tools for judging who should get a mortgage. Having 4 credit cards with $10,000 limits and $5,000 owing on each one would give you a great credit score, but who in their right mind would want to give a $400,000 loan to someone who has to carry $20,000 of credit card debt?

  15. 15
    Kary L. Krismer says:

    By Eric Arrr @ 13:

    cheepseats@12,

    “Sub-prime” refers to the creditworthiness of the borrower, not the type of loan that was taken.

    A borrower with an 800 credit score is considered superprime, but give him a $600k adjustable mortgage, zero or negative equity, and flat or falling home prices, and I guarantee you that loan is going as bad as two or three subprime loans put together.

    I’d disagree. It is the type of loan, and if I recall correctly, there were a few people that qualified for better loans who were put into subprime loans because the broker made more money.

    As to the second part, the loan being variable would be the worst part. Contrary to popular belief people are not going to walk away from their homes simply because they didn’t put much money down and prices fell. It would need something more than that., like the loss of income.

  16. 16
    EconE says:

    By Kary L. Krismer @ 15:

    By Eric Arrr @ 13:

    cheepseats@12,

    “Sub-prime” refers to the creditworthiness of the borrower, not the type of loan that was taken.

    A borrower with an 800 credit score is considered superprime, but give him a $600k adjustable mortgage, zero or negative equity, and flat or falling home prices, and I guarantee you that loan is going as bad as two or three subprime loans put together.

    I’d disagree. It is the type of loan, and if I recall correctly, there were a few people that qualified for better loans who were put into subprime loans because the broker made more money.

    As to the second part, the loan being variable would be the worst part. Contrary to popular belief people are not going to walk away from their homes simply because they didn’t put much money down and prices fell. It would need something more than that., like the loss of income.

    So are you saying that “superprime” borrowers didn’t take out “prime” Neg-Am” loans where they were only qualified at the teaser rate?

    These borrowers won’t walk away. Neg-am is toxic for the most part (and probably for most borrowers that used this loan product. These borrowers will lose their homes when the payment more than doubles when that 600k/$1667 a month neg-am loan recasts at the 110-120% LTV.

    If you can only afford a mortgage payment of $1667, how are they going to rewrite a (potentially) 660-720k loan that fully amortizes? 720k would be $2000/mo at 0% interest. At 6%, it’s over $4,000.

    Good luck with that.

  17. 17
    Sniglet says:

    I agree that things are “bad”, and will get MUCH worse. Unfortunately, I don’t think that additional government regulation, or new “rules” of accounting or ratings are going to help prevent future manias.

    As I’ve said before, whatever new regulations the government passes today will prove useless 40 or 60 years hence when people have begun to feel invulnerable again. New politicians will be elected on platforms specifically dedicated to removing “red-tape” and silly government economic intervention. As society waxes bullish again they will start to behave in riskier and riskier ways, latching onto whatever new technology is taking the world by storm, believing that they are in a new era.

    Also, don’t forget that this current mess largely stemmed from mis-guided government interference (e.g. subsidized mortgage via tax deductions and governmental special entities like Fannie/Freddie, supper low central bank interest rates, etc). Heck, the governments even regulate the ratings agencies, creating monopolies for them.

    It’s hard to see how even MORE of the same will help.

    In any event, new laws or regulations won’t help, and will have been repealed or ignored by the time the next mania occurs which will improvrish our great-great-grand-kids.

  18. 18
    Kary L. Krismer says:

    By EconE @ 16:

    So are you saying that “superprime” borrowers didn’t take out “prime” Neg-Am” loans where they were only qualified at the teaser rate?

    I think I said just the opposite to the extent I addressed that. Some people did get sub-prime loans that would have qualified for better loan packages. Just because you have a decent credit score that doesn’t mean you can’t be mislead by an unscrupulous mortgage originator.

    Hopefully such buyers still have a decent credit rating and can qualify to refinance under some of the programs (or even proposals) floating around out there.

  19. 19
    Sniglet says:

    So are you saying that “superprime” borrowers didn’t take out “prime” Neg-Am” loans where they were only qualified at the teaser rate?

    I think the problem is that the term “subprime” has been quite abused. In some contexts people refer to any kind of negative amortization or pay-option loan product as “subprime”. In other cases, the term “subprime loans” is ued ONLY to refer to loans made to people who have poor credit scores, regardless of the type of product used.

    The reality is far muddier. In the bubble years these “toxic” loan products were popular even to people who had great credit (i.e. since it allowed them to borrow more than they otherwise could with traditional loans). There are even “subprime” borrowers who wound up with fairly safe mortgage products (although these people are in a decided minority seeing as how there was pretty much nothing a conventional mortgage that a subprime borrower could qualify for would be able to pay for).

    I like the term used on Calculated Risk: “We’re all subprime now”.

  20. 20
    EconE says:

    You apparently didn’t read what I wrote Kary.

    I said NOTHING about sub-prime. I don’t care about the few high-fico people that were mislead into a bona-fide “sub-prime” loan.

    I’m talking TOXIC loans.

    There were ALT-A and PRIME neg am loans where the purchaser was qualified at the teaser rate.

    Would you care to run my numbers that I posted and tell me how a person with a decent credit rating will be able to refinance.

    Please don’t skirt the issue. Just directly address my scenario above with the “Prime” borrower and the “Prime” Neg-Am loan.

  21. 21
    Kary L. Krismer says:

    I’m not sure there were any prime negative amortization loans. There were a few companies out there that tried to sell agents on the merits of such loans, but other than politely listening to their talk I never investigated it further, and never suggested that a client go that route. I’ve never been a fan of variable interest rate loans either, or 80/20s.

    I don’t even remember which companies offered negative amortization loans, other than World Savings (now part of Wochovia).

  22. 22
    Sniglet says:

    I’m not sure there were any prime negative amortization loans

    Well, we know for a fact that many negative amortization loans were not made to subprime borrowers. You may recall the statistic we have mentioned before that the number of 2006 negative amortization and 100% interest loans for the Seattle area were far in excess of the total number of subprime loans written for the same period. Some of those loans may have been Alt-A, but many of them clearly were to borrowers who had better than subprime credit.

  23. 23
    Kary L. Krismer says:

    RE: Sniglet @ 22 – But was there a breakout on 100% and negative amortization? And also I think we’re going back and forth a bit on terminology–I have no doubt some prime borrowers obtained sub-prime loans.

    As to negative amortization (or more specifically option payment) loans, those could have been fairly well suited for people with sporadic income even if they had great credit, such as real estate agents and bankruptcy attorneys! It would sort of be similar to what I did on my truck loan–set it up on 5 year and pay it on a 3 year schedule. Although I never needed to cut back the payment, it was nice knowing I could. A straight wage earner, however, getting on option payment loan would be an entirely different matter.

  24. 24
    Ray Pepper says:

    RE: Kary L. Krismer @ 21

    AHHH. I still love MY Neg Am Loans. (I have 4 remaining). Wa Mu had the greatest. 40 year option arm. They work quite well in an APPRECIATING environment or when very little is borrowed (under 150k). World Savings and Wa Mu were the Kings of the NEG AM. The key is cash flow from the rental.

  25. 25
    Ray Pepper says:

    Oh……and how can I forget…Countrywide had a very popular Pick a pay option arm

  26. 26
    2kt says:

    There’s nothing wrong with option-ARM loans. The problem is not with a loan, but with poor underwriting. Option-ARM can be a good loan for rental and in the past was given to people dependent on commission/bonus income (sales, financial companies, etc.) As always baby goes out with bathwater when things go bad. Speaking of 2006 ARM loans, at the time that paper had about 6.5%-7.5% full ammo rates, full rates are now at 4.25%-5.25% range (depending on FICO) and minimum payment now covers interest and pays small portion of a principal. Negative ammortization on such loans ended in Q3 of 08, Mr. Sniglet.

  27. 27
    Another Tim says:

    It was nice the video at least mentioned the easy credit from the Fed. One important piece was left out however.
    http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=print

  28. 28
    melonrightcoast says:

    “In other words, easy credit is gone for a very long time. ” DrShort

    One would think so, but the government has other ideas. For example, the FHA home loan programs require only 3% down, which in my mind, is crazy since that is one of the reasons why so many people are walking away from their homes … they aren’t going to loose any/much money.

    And now the government has a new loan program (TALF?) to lend money to businesses and individuals for, well, it sounds like whatever they need.

    When is BO and Geithner going to admit that we don’t just have a “housing and credit” problem, but a country that is too addicted to debt, and have abused debt, and now ALL of us are in a world of hurt?

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