The Second Wave
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The following link is a Sixty Minutes feature, video and transcript. There are no surprising revelations for bubbleheads, but for those who think the real estate market is nearing the bottom, they may want to rethink their position. Seattle is not immune to national trends.
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A Second Mortgage Disaster On The Horizon?
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......"We had the greatest asset bubble in history and now that bubble is bursting. The single biggest piece of the bubble is the U.S. mortgage market and we're probably about halfway through the unwinding and bursting of the bubble," Tilson explains. "It may seem like all the carnage out there, we must be almost finished. But there's still a lot of pain to come in terms of write-downs and losses that have yet to be recognized."
Whitney Tilson, investment fund manager
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Whitney Tilson's Bio
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The following link is a Sixty Minutes feature, video and transcript. There are no surprising revelations for bubbleheads, but for those who think the real estate market is nearing the bottom, they may want to rethink their position. Seattle is not immune to national trends.
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A Second Mortgage Disaster On The Horizon?
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......"We had the greatest asset bubble in history and now that bubble is bursting. The single biggest piece of the bubble is the U.S. mortgage market and we're probably about halfway through the unwinding and bursting of the bubble," Tilson explains. "It may seem like all the carnage out there, we must be almost finished. But there's still a lot of pain to come in terms of write-downs and losses that have yet to be recognized."
Whitney Tilson, investment fund manager
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Whitney Tilson's Bio
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Comments
Talk about overthinking and overanalyzing took a whole 2 minutes to read through the article to discover that WHOLY WOW, the analyst so talented as to discover this thing called Alt-a and OptionA, is the next Warren.
This topic has been beat to death for a year now.
Anything new?
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As indicated in my original post, there is nothing new here for dedicated bubbleheads. However, it is apparent the MSM doesn't think the subject has been "beat to death", which is an interesting point to be considered all by itself. Also, perhaps there are others that visit this site that have not yet acquired your expansive backgound knowledge and insight?
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And the cleverness of all this also separates sub-prime and AltA/Option loans. I have not seen a single buyer PN/Deed through county that was sub-prime and a 30yr fixed. They were all AltA/OA.
And that amount would be...?
According to the graphs posted at this Calculated Risk posting (see below), active subprime ARM rate changes peaked in Sept 2008. Active Alt-A ARM rate changes peak in Nov 2009. Given that Alt-A people (who are not sub-prime by definition) are defaulting on their teaser rates right now (which will eventually result in increased foreclosures), the supposition that we are a long ways yet from seeing the bottom in the real estate market has a lot of credibility . We are not going to see bottom until sometime after the beginning of 2010.
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Subprime and Alt-A: The End of One Crisis and the Beginning of Another
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Given that most of these loans are 5 year ARMs, that means they were made in 2004/2005
Interesting to compare this with the Zillow report on homeowners who are under water by vintage of mortgage
Purchase Year Median Owner Equity Median Owner Equity (Pct) Median Down Payment (Pct) Buyers With Negative Equity (Pct)
2003 $70,137 42.2% 10.1% 7.7%
2004 $44,320 25.5% 10.0% 18.4%
2005 $16,580 9.0% 10.0% 37.4%
2006 $6,292 3.4% 10.0% 44.8%
2007 $12,182 6.6% 10.0% 37.9%
2008 $34,449 19.0% 10.0% 16.9%
Between 2004/2005 it averages about 28% of homeowners who have negative equity - so if the Alt-A borrower equity distribution looks similar to the overall US distribution - we would be talking about slightly more than 1 in 4 of these borrowers who would have trouble refinancing before their reset because they are underwater. But just over 70% could refinance.
Alt-A distribution is probably worse than the average - and eyeballing some of the likely Alt-A "Centers" like LA and SF the split looks more like 40/60 for underwater/have equity. So its bad, but as Mukoh pointed out many of these buyers probably can refinance
deejayoh,
Serious question...
If they could not afford to purchase the home with a reasonable loan package during the 'fast and loose' period we just went through; how do they now requalify during the middle of a credit crisis, as lenders are getting back to traditional qualifaction parameters?
As for the banks, when someone who is 10% underwater wants to refinance calls up, they can either agree to extend the IO payments and they both win, or they can force the house onto the market and a new buyer will come back with a 30% smaller mortgage at a lower rate.
You are assuming they could not qualify. Did you apply for a loan with a broker in the last 5 years? I did. and brokers would try to put me in alt-a type loans even though I qualified for more stringent loans. Why? because it was a) easier (no paperwork) and b) more profitable in terms of fees from the lender. Plenty of that went on. You are assuming it is all the other way -people were underqualified. The fact (and is the only thing close to a fact in this discussion) that 70%+ of borrowers from 2004/2005 have equity suggests that there were many overqualified buyers who were put into alt-a loans.
I don't know the actual numbers - and neither does anyone else in this discussion - but the general view seems to be that every borrower on that curve is effed - and I think the truth is something far more moderate
DJO,
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I think you hit on something that causes confusion when discussing these type issues. The term "Alt-A" is used rather loosely. The term "Alt-A" is sometimes used to indicate a categorization of borrower and sometimes it is used as a type of loan.
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Mortgage Orb
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It appears there is some confusion in many corners of the mortgage banking world about Alt-A lending. For the sake of clarification, let's define what Alt-A lending is by eliminating what it is not.
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Alt-A lending isn't synonymous with making a loan to a borrower with impaired credit. Simply put, Alt-A lending is all about making a loan to someone whose application metrics don't necessarily fit inside an investor's guidelines. This doesn't necessarily mean that the borrower is a greater risk to a lender than another borrower whose financial situation does fit inside lending guidelines.....
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Just a question, but how much is this salary growth? We're in a recession, and shedding jobs. That's a lot of negative wage growth. Also, hasn't wage growth in general has been stagnant during the Bush years? Some Americans are much better off since 2004, but it's difficult to believe that group forms a majority.
According to http://www.census.gov/prod/2008pubs/acs-09.pdf,
the average Washington income was $54,149 in 2006 and 55,591 in 2007, or 2.6% for 1 year. So it didn't keep up with inflation for that year, but that doesn't matter for the point I was making. We are considering a fixed group of people and their alt-A mortgages. These mortgages are not indexed, so even if it is just inflation the money still helps pay the mortgage. Also, that 2.6% is the population average. Individuals will see higher on average as they move up the wage ladder, while retirees move off and young people move into the group at a lower income on average.
I think it does matter for several reasons.
A) you are making the assumption that owners of a house purchased in 2006 hold the same mortgage today as they did when they first bought. Anecdotal evidence suggests many of those homes have seen "equity" extraction.
C) Also, you've unintentionally (I think) cherry picked a slightly better year for incomes than the average since 2000.
D) Finally, it's too early for the inflation effect to really help these people. When someone has stayed in the same home for 20 years, inflation makes their mortgage look really cheap. In two years time the effect is so marginal that it will only benefit those on the knife edge of being able to keep their homes. My guess is that people within a few dozen dollars a month of keeping their homes won't be the ones pushing this market down. It's the other guys.
The subprime borrowers were the borrowers who previously would've only been able to qualify for FHA, if at all. Most subprime loans were I/O loans, done as 80/20's for borrowers with sub-660 credit scores. Most subprime loans were also 2 or 3 year ARM's.
Those will be done resetting next month for the most part. Almost all subprime lenders went out of business in December and January 2 years ago.
Now for Alt-A, your typical borrower was a +660 FICO borrower, but usually had some issue that would keep them from qualifying for normal conventional prime financing. Usually a stated income loan with verified assets, I/O, maybe an option ARM.
However, the majority of Alt-A borrowers took out 5 year ARM's or better. So those 5 year ARM resets on Alt-A loans will be spread out over the next 3 years.
Alt-A vs. subprime was really just industry jargon. Subprime was basically the loans to people who would've never qualified before and shouldn't have been given anything but an FHA insured loan. Alt-A was for people who could've qualified, but not without jumping thru some hoops or having a decent down payment and more than likely would've ended up getting an FHA loan for their first purchase of a home.
Mr. Mortgage did quite a write up on this issue a week or so ago
http://www.doctorhousingbubble.com/opti ... lt-a-wave/
Excellent article, DJO. Well worth the read IMO.
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The one chart indicating that option ARMs will recast at a peak of $36 billion in the first quarter of 2011, with an average monthly payment increase of 80%, is a real eye-opener! How can that be good in a market with declining real estate prices? People are going to walk if they are underwater, en masse! ---- Am I looking at this situation wrong?
Would love to see some great stats on what % of these SUPER SECOND WAVE loans have already been refied, gone back, foreclosed, renegged and or got modified. Have not been able to find it.
Local bank/lenders have interesting figures, not public though.
For what it's worth, the chart below is what I was referring to in my previous post. It is from the article to which DJO posted a link -
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If you read the fine print, loans that are paid off early (refied?) have been excluded.
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I don't know how much that will help. During the past few years, demand has been artificially high above what the true demand for housing is. Houses are standing empty, and there simply aren't enough immigrants and teens/college grads replacing the elderly in the next couple years to make a dent in that demand.
Additionally, demand may be artificially low for the next few years as grads move back with their folks, elderly move in with their children, and other less common "households" are formed. These ARMS are going to hurt, but they aren't by any stretch of the imagination the only hurt going down.
Rather than thinking of them like a bullet to the abdomen, I'd compare them to a bullet to the forearm. Not fatal, but quite painful and potentially fatal if you've already received enough other injuries. And the US housing market is already a dead man walking today.
Whoever said that housing needed to be a "market". Housing by definition is where you live, not a friggen commodity.
Whoever said that wheat needed to be a "market". Wheat is by definition is food, not a friggen commodity.
Whoever said that stocks needed to be a "market". Shares are by definition ownership in a company, not a friggen commodity.
Whoever said that automobiles needed to be a "market". Cars are by definition transportation, not a friggen commodity.
Sorry about that, but I thought I'd try to be 3x as enlightening by posting three things that also clearly aren't meant to be priced by markets. I'm actually not sure why you decided to argue housing is not a commodity when no one else on this thread was arguing that point, and I'm also confused why you would put quotation marks around the word market...
Anything (literally anything) can be priced appropriately in an open market, but not everything is a commodity. Housing needs a market to find the correct price, but due to the fact that no two houses are the same it cannot be considered a commodity. However, the replacement cost of a house is determined by what is essentially a commodity market (lumber, concrete, rebar, copper wiring and sheetrock are all commodities; labor is not but it is generally treated as such). So, please try again to explain why a decline in demand coupled with excess supply means that market forces cannot drive down the price of housing.
Oh, I forgot...housing doesn't need a market.
Why wouldn't you have a "market" for "assets"?