An Overview of the Housing/Credit Crisis

A couple people forwarded me a link to a 116-page pdf titled An Overview of the Housing/Credit Crisis And Why There Is More Pain to Come that is worth checking out.

Here’s a look at the table of contents:

  • Overview of the Great Mortgage Bubble
  • Causes of the Great Mortgage Bubble
  • Consequences of the Bursting of the Great Mortgage Bubble
  • The Outlook for Home Prices is Grim
  • Economic Weakness Creates an Additional Headwind for Home Prices
  • There Are Only a Few Bits of Good News
  • What Does the Future Hold?
  • A Primer on Option ARMs
  • A Primer on HELOCs and Closed-End Seconds
  • A Closer Look at Mortgage Loans That Were Securitized: Quantity and Quality
  • A Closer Look at Mortgage Loans That Were Securitized: Defaults
  • Where Did the Securitized Mortgages End Up? A Primer on ABSs and CDOs
  • The Opportunity in Distressed Debt

All in all it’s a great paper that I recommend for anyone that is still confused about how we ended up here and why this was never a “normal housing cycle.”

0.00 avg. rating (0% score) - 0 votes

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.

42 comments:

  1. 1
    Sniglet says:

    This document does a good job about describing the housing market, but I think that is only part of the picture. What we have really had is a credit bubble that infected virtually every asset class there was, be it commodities, stocks, or real-estate.

    Looking at real-estate in isolation can lead to very innacurate conclusions as to both the possible solutions and longer-term prognosis.

    Of course, I would refer people to my (very own) in-depth podcast on deflation to get another perspective of what is happening to the economy.

    http://surkanstance.blogspot.com/2009/01/deflation-101-podcast.html

  2. 2
    harbord says:

    Tim: Great paper, thanks for posting.
    I think Ardell should have a gander, and anyone of a similar mindset. I’m forwarding on to some 6%’ers still trying to pass the kool aid.
    The larger Alt-A/Option Arm tsunami, coupled with extrinsic economic chaos makes Eula predictions seem viable.
    I think there are at least 3 subsets of sellers:
    REO’s/Foreclosures
    Those that can’t make the nut and have to abandon ship
    Those who can make the nut, but want to rent to retain/build wealth
    I think we are going to see a lot of the 3rd try to sell and get out.
    Despite the claims of the NAR, folks are waking up to the realization that we are in the early stages of a protracted bear market in housing.

    Question for S-Crow (or anyone else)
    If you do a short sale, will your lender allow you to make payments on the negative balance?

    My train of though is a lot of mildly underwater people with good math skills might look selling, renting out a cheaper place, and making payments on what they owe to preserve their credit while improving their cash flows.

    I’m looking for confirmation in MLS listings increasing this spring. People are going to come to the realization that bubble pricing levels are a thing of the past. Plus, pre bubble buyers with equity cushions can underprice their competition.

    Rents will be squeezed by investors mopping up cheap forclosures with lower break even points.

    Now on to the bailout: No matter how much of our cash is tossed at it, it will only have a neutral to negative effect. When was the last time government intervention had a positive impact on your finances?

  3. 3

    MAINSTREAM MEDIA’S SOLUTION TO A 32% HOUSING GLUT IN AMERICA

    Add more [overpopulation].

    See the horrifying proof:

    http://finance.yahoo.com/tech-ticker/article/204158/The-American-Economy-What-the-Jobs-Housing-Numbers-Really-Mean?tickers=%5Edji,%5Egspc,XHB,SPY,DIA,QQQQ,IVZ

    This brainless same old, same old flawed economic model of growing ourselves out of the depression is what caused the depression; and its obvious to me and most Americans, adding more growth in population caused our problem today and adding even more will destroy America.

    All of the present stimulus money should go to creating good paying and longterm industrial base jobs with manufacturing in America again, that will get present American population out buying the 32% excess, in time [building roads, keeping teachers working, Medicaid help, etc, are not longterm jobs].

    Adding more population growth just weakens an already destroyed labor market; and the added people will just be living in cardboard homeless sheters anyway. How can they get a job to buy the excess homes, when there aren’t any jobs?

    What’s Diane smoking?

  4. 4
    jon says:

    The suggestion of creating more “long term” jobs, as if there was such a thing with today’s rate technological change, will simply create even more supply. The reason we have high unemployment is not because we are not making enough stuff. Rather it is that people have decided that for the time being they will get by with less stuff, so companies respond by not hiring or even laying off employees, while the people who still have jobs keeping putting their savings into money market funds, and the government is borrowing that money and using it to buy votes, with a small percentage going towards infrastructure.

    Perhaps a temporarily shortened work week would make sense. In the long run, that makes the country less efficient, but at a time like this, the country is temporarily less efficient anyway, and it may make sense to spread the pain around. Once people see stability, they will be willing to return to previous levels of consumption again, and then the jobs will come back and the work week can be restored.

  5. 5
    EconE says:

    By jon @ 4:

    Perhaps a temporarily shortened work week would make sense. In the long run, that makes the country less efficient, but at a time like this, the country is temporarily less efficient anyway, and it may make sense to spread the pain around. Once people see stability, they will be willing to return to previous levels of consumption again, and then the jobs will come back and the work week can be restored.

    I’m following you on this one….but I think you may be putting the cart in front of the horse. If people are on 4 day workweeks for a period of time, I can only assume that their budget is stretched with a 20% loss of income. What was that 20% allocated to before? One can’t save more on a 20% income drop I would assume.

    What happens if the people on 4 day workweeks (over)tighten their collective belts and spend even less? Could that possibly lead to a 3 day workweek? Could it be the start of a vicious cycle?

    How can they return to previous levels of consumption, which was originally based upon 100% of pay, when they are only making 80% of what they used to? What exactly is the stability they are looking for? They may see what they personally define as stability but it doesn’t replace the lost 20% income that although they maybe willing to spend, they can’t, because the money just isn’t there.

    It’s like the chicken and the egg. What comes first? Consumption or Jobs?

    I’m wondering when they’ll (.gov) get really esoteric with their actions…and what those actions might be.

    Am I “on-topic” here Tim?

    I guess I could be rigidly “on-topic”

    It’s not so much the mortgages that “worry” me. It’s the fact that due to the money spent in our bubble economy (Trillions in Helocs combined with the velocity of money)…corporations actually thought that people were flush. Hence, the enormous LBO’s this decade.

    Sure…housing is an 800lb gorilla in the room….however….I think they are currently storing a whole bunch of 800lb gorillas out of sight in the basement, only to let them up (deal with them) at a later date. Perhaps there is an elephant or two down there also.

  6. 6
    Scotsman says:

    “Sure…housing is an 800lb gorilla in the room….however….I think they are currently storing a whole bunch of 800lb gorillas out of sight in the basement, only to let them up (deal with them) at a later date. Perhaps there is an elephant or two down there also. ”

    That’s putting it mildly. More like zombies, I think.

    Got your note- wow! Life is strange.

  7. 7
    jon says:

    “What happens if the people on 4 day workweeks (over)tighten their collective belts and spend even less? Could that possibly lead to a 3 day workweek? Could it be the start of a vicious cycle?”

    With unemployment at 10%, that means that there was a 5 or 6 percent level of excess capacity given the current demand. Shortening the work week is simply an alternative to laying people off, the potential of a vicious cycle is the same for shortening as it is for laying off. In some cases, companies are just using the opportunity to get rid of some employees now that were not a good fit, but they didn’t want to go through the hassle of terminating them. But in other cases the people are just excess resource.

    The question is which way keeps people’s skills at the highest level, while also freeing up people to find a better fit for their capabilities.

    Stability will happen when inventory drops and prices go back to the cost of new production.

  8. 8
    EconE says:

    RE: Scotsman @ 6

    If that’s putting it mildly….let me try to describe it more graphically.

    The elephants are covered in napalm and the gorillas are playing with matches.

    :^)

  9. 9
    S-Crow says:

    Harbord-

    RE: Short Sales

    If I understand you correctly, you are asking if a lender that approves a short sale will take payments on the outstanding balance from the borrower (seller) that owes the money. I’m guessing, but It probably depends if the lender (s) makes a repayment schedule with the borrower after closing or writes off the debt and severs any binding relationship. Presuming that a lender makes an agreement with the borrower (I think a remote possibility) that has the capacity and desire (highly unlikely) to pay any outstanding debt in future months/yrs., the borrowers credit is already trashed so it would take an unusually moral and ethical borrower to do this.

  10. 10
    Kary L. Krismer says:

    I’ve heard of situations where the owner hasn’t made a payment for months while the bank fails to consider offers on the property and does nothing.

  11. 11
    S-Crow says:

    Kary,

    Very true. There are scores of people living in their homes for free right now. Right or wrong, it is what it is.

  12. 12
    Kary L. Krismer says:

    I hadn’t thought about this, but if the house is actually in foreclosure–with the notice of trustee’s sale sent, the bank is extremely unlikely to accept payments because it can affect that process. So that could affect some or even most short sales.

  13. 13
    Jonness says:

    “The larger Alt-A/Option Arm tsunami, coupled with extrinsic economic chaos makes Eula predictions seem viable.”

    The thing I enjoy most about Eula is he has the courage to speak his mind, even if his predictions are unpopular. It makes it even better when it starts coming true. I hope he ultimately turns out to be wrong about where the final bottom turns out to be though. I’m by no means ruling out the possibility. Things keep getting scarier as this continues to unfold.

    What are your opinions of how Obama’s mortgage rescue will affect the upcoming Alt-A/Option ARM resets? I suspect some will refinance. But it doesn’t help when you’re underwater.

  14. 14
    Andy says:

    This is great, Tim please forward to J. Scott and Windermere immediately for realtor review and analysis
    Also forward to all mortgage brokers + Appraisers

  15. 15
    Andy says:

    RE: S-Crow @ 9

    The people that defaulted on their obligations are immoral
    A real man pays his debts; people that speculated are nothing more than degenerate gamblers
    The debt should be paid off, the lender should be made whole
    While many believe that personal resposibility is not important, I am one that believes that this is paramount..

  16. 16
    Herman says:

    By Andy @ 15:

    The people that defaulted on their obligations are immoral
    A real man pays his debts; people that speculated are nothing more than degenerate gamblers
    The debt should be paid off, the lender should be made whole
    While many believe that personal resposibility is not important, I am one that believes that this is paramount.

    Yes, but isn’t it the lender’s reponsibility not to lend him more than he could afford to pay back? Isn’t it the Realtors(R) reponsibility to keep him from buying into a bubble? Isn’t is society’s reponsibility to provide a stable economy, predictable outcomes, a safety net, and shelter him from undue hardship?

    It seems like the responsibility is spread around and he should not have to bear it all himself. Once he eats his 5%, 10% or 20% stake in the loan, he has done his part.

    The lender must bear the additional losses of the borrower until he has lost his business, and then he has done his part.

    The wealthy controlling-class who created this ruinous society must bear the remainder; the excess losses of both.

    The Realtors(R) can keep their fees. They earned them before the bills came due. They win.

  17. 17
    Ben says:

    Andy,

    There is a difference between a recourse and non-recourse loan.

    When I sign a contract with the bank that says “I give you mortgage payments until the debt is paid, and if I fail to make payments you get the house” it means that the bank is giving you the option in your contract to give them the house in lieu of the debt. If the bank did not want this deal it should not make it. The bank was greedy and stupid and should pay the price.

    If I invest money in a bank, and that bank lends that money to somebody with a 540 credit score with no money down, the bank is not being responsible to me.

    In Australia if you don’t pay your mortgage, the bank takes the house, sells it, and you still owe them the remainder until you can pay it off. And guess what – people don’t walk away there.

    I never understood this argument that I am hearing from Andy. If the bank cannot handle people walking away, then the bank is run by idiots who deserve to lose their jobs.

  18. 18
    David Losh says:

    This is funny.

    What a ridiculous over view.

    Is this a sixth grade class project?

    No, it’s a sales pitch for you to buy debt.

    How smart would that be?

    Why would any one pay debt today?

  19. 19
    David Losh says:

    RE: Kary L. Krismer @ 12

    I had a client who never got a Notice of Default in the six months the house was on the market. I have a short now that the bank just wants to modify the loan. It looks by market conditions that my current client paid $340K, we listed at $309K, lowered to $299K and are now at $285K. I’ve been told we need to be at $240K.

    The lender is in no hurry to send out the Notice of Default. There are four other properties in his cul de sac of about twelve houses in default. Another house has been foreclosed, resold, and now the buyer can not rent the house because it would be against the Home Owner Association By Laws. Already they have three houses for rent out of the twelve, which is 25%. Two of the houses are vacant.

    It’s in South Everett and there are new construction homes selling for $289K to $309K with 4% thirty year fixed financing through Sterling Savings Bank which also has the construction loans.

  20. 20
    Marc says:

    Ben & Andy,

    Not to justify people walking away from their homes, but a certain clarification is in order. In Washington most lenders (i.e., something north of 90% of lenders) elect to grant loans in exchange for a deed of trust as opposed to a mortgage. The main differences are that deeds of trust can be non-judicially foreclosed which is a much swifter process that the judicial foreclosure required to collect on a mortgage. Secondly, the lender on a deed of trust is free to voluntarily give up the right to proceed non-judicially and to proceed judicially instead in order to be eligible to get a deficiency judgment against the borrower IF the home does not bring sufficient proceeds at the foreclosure sale to pay off the entire debt.

    Accordingly, no one should feel sorry for a lender who elects to waive the right to collect a deficiency by foreclsoing non-judicially. It’s a business decision they can choose to make and, if they do, they have to live with the consequences.

  21. 21
    Irene Dorang says:

    This is a really interesting report. Just a note, on page 59 they say that Option Arm resets will surge in 2010 and 2011, but on 66 they note that the Option Arms are recasting a lot faster due to negative amortization, so the surge is actually expected to peak in 2009, gradually slow down during 2010 and drop off significantly by beginning of 2011, as shown on pg 66, instead of peaking in mid/late 2011, as shown on pg 59.

    It looks like like they counted the same undesirable event twice by giving it two different time frames, which, considering how much bad news was in there to start with, seems a bit like overkill. Great information overall though.

  22. 22
    Andy says:

    Herman,

    I dont want to help my neighbor, that maxed out his HELOC and bought more than he/she could afford
    I earn for me, not you – anytime a person takes out a loan that they don’t have the ability to pay back, its all on them – the banks should do what they need to do to get a recovery (throw the delinquents out); real estate agents are animal sales people (no hope from them to con a sale for their former idiot clients)
    The government and society have no need to regulate this, its YOUR own resposibility
    If prices are too high, you dont buy
    Speculators should be allowed to burn; roast, in fact
    Dont cry to panzi obama to pay you loans and way of life by eating off the top 3% that pay 60% of this nations taxes…
    We need a flat tax in this nation, flat in that every man woman and child pay the EXACT SAME amount….
    Hows that for social responsibility? No one should EVER have to subsidize another person. This is a free society..
    The market will correct, my friend, expect declines till homes in this area are worth what they were in 1995….

  23. 23
    Kary L. Krismer says:

    RE: Andy @ 22 – Andy, you might want to look at the piece I did this week on the type of loans in foreclosure.

    http://blog.seattlepi.nwsource.com/realestate/archives/163834.asp

  24. 24
    EconE says:

    RE: Andy @ 22

    Hows that for social responsibility? No one should EVER have to subsidize another person.

    Wow. You go from “people who don’t pay their debts are immoral” to well…a pretty extreme stance.

    What do you suggest? A ‘Logans Run’ type of society?

    What should we do with the hungry? How about the disabled? The elderly?

    Kill ’em?

    Do you have elderly parents or grandparents? Do they receive ANY Medicare or Social Security? Well, by golly…CUT IT OFF! Really…had those old people only eaten every other day throughout their lives rather than every day, they should have plenty of money to cover their needs. Right?

    Do you(or any parents, children, etc.) have health insurance?

    Perhaps you’d (they’d) like to drop it.

    Every time you (or yours) go to the Dr., someone who is healthier than you (or your relatives) is SUBSIDIZING YOU.

    Go ahead and complain about what you can’t change, but WRT health insurance…you can change that.

    You don’t have to purchase health insurance, nor are you required to have a policy.

    Then, pay your medical bills out of pocket (like many uninsured do) and compare the costs to what your insurance company pays.

    We’re all paying for the mistakes of the past whether we like it or not.

    Get used to it.

  25. 25
    Jonness says:

    “You don’t have to purchase health insurance, nor are you required to have a policy.

    Then, pay your medical bills out of pocket (like many uninsured do) and compare the costs to what your insurance company pays.”

    I went this route most of my life. The bummer is, with no insurance, you get charged twice as much because you never get the insurance adjustment for the max they agree to pay for the service. It seems like just another way to gouge the poor or force those who are relatively healthy to buy insurance even if they could otherwise save money buy foregoing it.

  26. 26
    Kary L. Krismer says:

    I’ve typically gone with very high deductible insurance, so that I’m covered for something catastrophic, and so that I get the billing discount. They don’t care whether the insurance is paying in order to give you the discount.

  27. 27
    Andy says:

    The problem with the system is the jerks that take advantage of it
    As soon as has there is a little pain, oh, let me run to the doctor…
    If social security and medicare were never here, people would have saved and/or kept healthy
    Also, the added capital that is not taxed would have been YOURS, NOT UNCLE SAMs
    Did you know that there was NO INCOME TAX in this nation till about 1913
    We need to get back to basics, a free society, no handouts – people either sink or swim..
    There should be an immediate end to all entitlements – once people realize there is no help, they save or do what they need to – WITHOUT encumbering others – Personal Responsibility!
    Damn Cry Baby Baby Socially Liberal Boomers got us to this mess.
    Thanks for the debts – enjoy your social security + medical care so you can live 1 more year; as soon as my generation gets in, we’ll cut it all off

  28. 28
    Andy says:

    RE: Kary L. Krismer @ 23

    We need 10000% more foreclosure filings, I find the propping up of this bastard housing market as pure evil. All people that cant pay their debts should be allowed to fail!!!! Why subsidize the losers – I want to own that Medina mansion for what its REALLY worth; probably >$300K; Lets let these people fail, hell, they can rent – yeah, renting is not bad..I’ve been saving for years, if I lost my down payment b/c I was speculating, its my loss; not my neighbors to pay for… Down with the baby boomer speculators!

    http://www.youtube.com/watch?v=bEZB4taSEoA

    My man Santelli is telling it how it is….EconE

  29. 29
    Kary L. Krismer says:

    Andy, did you even read my piece at SREP? The people being foreclosed are not the ones you’re describing.

  30. 30
    EconE says:

    RE: Andy @ 27

    Once again, you go from one extreme to another.

    The first two lines of your statement I completely agree with.

    The rest, not so much.

    I hope for your sake that you never have a disability or a disabled relative because by your standards, we should just let them sink.

  31. 31
    EconE says:

    By Andy @ 28:

    I want to own that Medina mansion for what its REALLY worth; probably >$300K;

    ROFLMFAO

    Feel entitled much?

  32. 32
    Kary L. Krismer says:

    By EconE @ 30:

    RE: Andy @ 27 -I hope for your sake that you never have a disability or a disabled relative because by your standards, we should just let them sink.

    I hope he’s able to trap raccoons, because if the real estate market gets to where he wants it, that’s what we’ll all need to be able to eat.

  33. 33
    EconE says:

    RE: Kary L. Krismer @ 32

    Exactly Kary.

    I wonder if he wants waterfront for that $300k? Or would he have to step up to $320k for that?

    Perhaps you should write up a bid for him on that parcel out on the end of Hunts Point. Better make it for 100k so there’s some money left over to build a house.

    ;^)

  34. 34

    Andy,
    My dad fought in World War II. He parachuted onto Normandy, and fought in the Battle of the Bulge.
    He ‘s 86, and retired after working in the same place for 40 years.He gets a very small pension, which has been eroded by inflation. Without social security, he wouldn’t be able to pay the 4500 dollars property tax on his modest house,and despite medicare, he still has to pay about 350 dollars per month for health insurance.
    But you’d just cut him off, because your generation is going to solve all of America’s problems ?

  35. 35
  36. 36
    The Tim says:

    RE: deejayoh @ 35 – I can’t seem to get that link to work.

    edit: N/M, seems to be working now.

  37. 37
    Andy says:

    RE: Ira Sacharoff @ 34 – Ira, let daddy dearest live with you and stop forcing my generation to pay for him; by the point of your tax gun…If my family needed something, they could live with me – I would never ask others to help me with my own obligations; HOWEVER, I don’t want to pay for him (your Daddy); as a former military guy, I’d march him and ask why he did not save…for those wonderful 40 years – Probably blew it on you…

    EconE, you are obviously a poor family man; if I had a disabled family member, I would help them; BUT NOT YOURS. If they are not my blood, fuggitabboutit; I dont want you to pawn off your problems on me..

    What you guys advocate is the thesis of a beggar; get control of you lives, don’t depend on others like ticks…

    Save, care for your OWN family, and hold personal responsibilty paramount..

    By the way, Kary, your writing is very boring and puts me to sleep. I could not get past the first paragraph…lol

    And by the way, I think 6000 sq foot waterfront Medina mansions will eventually bottom at $300K or less…hhahahaha

  38. 38
    Kary L. Krismer says:

    By Andy @ 37:

    By the way, Kary, your writing is very boring and puts me to sleep. I could not get past the first paragraph…lol

    Well no need to let your opinions be affected by silly little things like facts. ;-)

    But I suspect it was the third paragraph that you had trouble with–the one that started to call into question your beliefs.

  39. 39
    EconE says:

    A poor family man. I love it.

    Andy…you are nothing but a petulant child.

  40. 40
    Andy says:

    And you are obviously an old crusty has-been cantaloupe…

  41. 41
    Kary L. Krismer says:

    In Andy’s defense, it is actually possible that the house described could be worth only $300,000 to him. That’s what supply and demand are all about. As prices drop, it’s not just people wanting more of an item, it’s also more and more people wanting an item . So for Andy, $300,000 could be what he thinks the house described would be worth to him, and what it would take to get him to make an offer on such a property.

    I don’t have much of a demand curve for diamonds, for example. And quite frankly, there are a lot of houses that I simply would not want to live in, so absent perhaps having an interest in a rental, the price on such houses would need to be very attractive for me to want to buy one.

  42. 42
    EconE says:

    RE: Andy @ 40

    That would be “curmudgeonly old cantaloupe”, thank you.

    And I sure do love me some cantaloupe!

    ;^)

Leave a Reply

Use your email address to sign up with Gravatar for a custom avatar.
Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Please read the rules before posting a comment.