US house prices in freefall -- redux

[Ben Kenobi]

Lenders today have tighted standards to the point that many otherwise qualified borrowers simply cannot get a loan. They may have obtained an ARM a couple of years ago thinking they would take advantage of the lower rate it offered and then refinance into a conforming loan when the rate was due to adjust. They may have done everything that they should have to make this happen according to what they were seeing two years ago, but now the credit markets have tightened to the point that they cannot get ANY loan. So their ARM adjusts 3% and their payment goes up $400 a month and they are in trouble.

Sounds to me a reasonable reaction to what's been happening since 2000.

Now let's all stand around and tell these people they never should have got a home in the first place.

They would have qualified in 2000, but would they have qualified in times when credit was tighter? You can't use 2000 as your baseline, and doing what was done in 2000 won't be enough now.

Now...there is no doubt that their was a lot of abuse in the system. That stuff tends to clear in the first year of a bubble burst and for the most part it has. Most of the totally unqualified borrowers are back on the streets and the non-owner properties are in bank posession. Now we are moving into the territory where the otherwise qualified borrower is starting to get hammered.

Again, this is to be expected. I don't understand why you are so surprised that raised standards on credit makes otherwise qualified borrowers now ineligible. That's what has happened to me as well. In 2000, I wouldn't have a thing to worry about, but this year I have to work extra hard if I want to qualify.

Now, if the lenders were allowed to "mark to model" instead of "mark to market" then you would see a HUGE and IMMEDIATE difference in what is going on.

You are assuming that the model can more accurately price securities then the market, which is not the case. You wouldn't be calling for mark to model in a boom, because models are more inaccurate then the market, and you will be increasing the risk associated with the securities if they are priced to model.

Marking to model means to price the security on your balance sheet according to its expected performance as opposed to its current market value.

Yes, and in this case market value is the better gage for the securities, rather then the assumptions of the lenders. If the lenders could make perfect predictions as to where the market is headed, they wouldn't have gotten themselves in this bind.

I will tell you for a fact...I this one change were made, then the credit crunch is over today.

And the problem of securities being overpriced will still exist. The increase in risk means their prices needed to come down and stay down until the market has dealt with everything. The last thing that is needed is to price them high again.

[Ben Kenobi]

The only solution is for government and industry to work together and take a common sense approach. This does not necissarily mean that the government has to throw money at the problem. There does need to be some serious looks taken at the laws that contributed to this.

What's going to happen is that the big brokers are going to get bailed out, and then broken up just like AT and T, so that the good parts of the business can do well, and the bad parts will fail.

Anyone who's working for the big brokers better be prepared for some major upheaval.

'Working together' was the solution when they were willing to make the restructuring changes necessary. Now they are asking for a handout, and there will be some serious consequences if they are bailed out.

[DanS]

Originally posted by PLATO
What is needed is not a bailout, but some common sense.

The markets continue to insist tht Mortgage backed securities are "marked to market". This means that the lenders are having to write down well performing loans simply because the market for them is down. As they write these down, they are having to raise associated capital to cover these write downs. The lenders needs to maintain these capital ratios is what is causing the credit crunch.

Now, if the lenders were allowed to "mark to model" instead of "mark to market" then you would see a HUGE and IMMEDIATE difference in what is going on. Marking to model means to price the security on your balance sheet according to its expected performance as opposed to its current market value. MBS are to an extent an illiquid asset and have always been difficult for the market to establish a fair market price. It is ludicrous that the accounting changes of a few years ago (Thanks Enron!) have had this effect.

I will tell you for a fact...I this one change were made, then the credit crunch is over today.

I think the market is telling us at high decibels that those models aren't worth a bucket of warm spit.

Why don't you tell us why we should follow mark-to-myth, when most monetary worth is determined by the market in our economy? The worth of everything from oil to real estate, stocks to derivatives, is determined by the markets.

[Kidlicious]

Originally posted by Ben Kenobi
Is the government responsible for the foreclosures?
Why then are they bailing out people for poor personal decisions? The government didn't put a gun to these people's heads and force them to buy.

Secondly, you seem to be locked into this dichotomy between 'homeless' or 'house owner'. There are plenty of responsible people out there who have decided to rent or buy and apartment because they knew they couldn't afford a house in the first place. Why would someone who's foreclosed on a house not be able to rent an apartment for a fraction of the cost?

Are they too good to settle for what many other people have no choice but to do?

You're injecting a heavy does of your morality into this. I'm not concerned with that. I don't see any reason for someone to be homeless in a modern society while their home is simply demolished. Such a situation can only be the result of one or more of three things; greed, morality and insanity.

[Kidlicious]

Originally posted by PLATO
There are plenty of fairly new government regulations that are quite clearly major contributors to this crisis as well. In general, the markets function much more efficiently in the absence of heavy government oversight.

Since the 80s the trend has been to let the financial sector do what it wants to do to make as much money as it can, even at the expense of the public. This is our history. I lived it. That's what caused all this mess.

I'm not sure what regulations you are refering to, but the issue isn't about whether regulation is heavy or light. The issue is whether or not you are more concerned with profits or people.

Going forward is what matters. So what are we going to do now, just let the **** hit the fan, or are we going to fix this mess?

[Kidlicious]

Originally posted by PLATO
Now, if the lenders were allowed to "mark to model" instead of "mark to market" then you would see a HUGE and IMMEDIATE difference in what is going on. Marking to model means to price the security on your balance sheet according to its expected performance as opposed to its current market value. MBS are to an extent an illiquid asset and have always been difficult for the market to establish a fair market price. It is ludicrous that the accounting changes of a few years ago (Thanks Enron!) have had this effect.

I will tell you for a fact...I this one change were made, then the credit crunch is over today.

What accounting changes are you refering to? You could never account for an asset based on it's expected performance.

edit: Man, that's crazy. You're saying that lenders should be able to make up what their assets are worth. You can't say what the performance of those assets will be.

[Kidlicious]

Mark to model

http://www.amex.com/servlet/AmexFnDi...y&titleid=3916

To price a position or portfolio at prices determined by using a financial model to interpolate between or among the market prices readily available. A mark to model is less reliable than a mark to market, because it depends on the realism of the assumptions in the model and may attribute a degree of liquidity to the instruments being priced that may not be present. With many complex financial instruments, where no ready market is available, a mark to model is the only practical valuation technique.

[Patroklos]

banks aren't taking care of them, theives are stripping them, and vagrants are squating on them. Many will have to be demolished.

Exaggerate much?

Look out everybody, MILLIONS of homes are going to be demolished, AHHHHHHHH!!!!!

Kid

[Rufus T. Firefly]

Originally posted by PLATO


No. There is a difference between bailing people out and realistic credit standards.

Lenders today have tighted standards to the point that many otherwise qualified borrowers simply cannot get a loan. They may have obtained an ARM a couple of years ago thinking they would take advantage of the lower rate it offered and then refinance into a conforming loan when the rate was due to adjust. They may have done everything that they should have to make this happen according to what they were seeing two years ago, but now the credit markets have tightened to the point that they cannot get ANY loan. So their ARM adjusts 3% and their payment goes up $400 a month and they are in trouble.

Now let's all stand around and tell these people they never should have got a home in the first place.

By all means, let's. A person who got an ARM, and who's "plan" (I use the term loosely) for the eventual adjustment to a higher rate was simply to assume a better loan would be available and take it when the time came, is a person who never should have been given the mortgage in the first place.

That's not to absolve the mortgage industry, which I'm sure actually encouraged -- maybe even suggested -- the "plan," and probably provided assurances (though not in writing, of course) that it would work just fine.

I can understand, and sympathize with, people who actually had it sorted and then experienced an unpredictable reversal of fortunes. But, honestly, anybody who borrows that much money on the assumption that they can just keep kiting the loan along indefinitely deserves what they get.

[Ben Kenobi]

You're injecting a heavy does of your morality into this. I'm not concerned with that. I don't see any reason for someone to be homeless in a modern society while their home is simply demolished. Such a situation can only be the result of one or more of three things; greed, morality and insanity.

How is renting an apartment the same as homelessness?

[Imran Siddiqui]

[q=PLATO]Lenders today have tighted standards to the point that many otherwise qualified borrowers simply cannot get a loan.[/q]

This is quite true and something I don't see many on Ben's side actually dealing with. This is a major problem in trying to get into recovery. If lending institutions won't lend, then you are looking at a fairly lengthy recession until lending institutions feel confident actually given loans to qualified borrowers (and, of course, that'd just be the beginning of recovery).

[Theben]

Originally posted by Patroklos




Exaggerate much?

Look out everybody, MILLIONS of homes are going to be demolished, AHHHHHHHH!!!!!

Kid

Actually, he's right. there's an excellent review in Bill Moyer's Journal discussing the impact on Cleveland and one neighborhood in particular. And one result is that no one is taking care of them. And with the price of metals being at a high, theives are literally gutting the buildings so that all that is left is the wooden frames and siding. Many are worth less than the property they sit on.

On the ground in some American towns and cities the figures related by financial news service Bloomberg on July 10 — Foreclosures Rose 53% in June, Bank Seizures Tripled — are manifestly visible. Correspondent Rick Karr journeyed to Slavic Village, one of the hardest hit neighborhoods in the nation when it comes to the spate of foreclosures caused by the subprime mortgage crisis. There, more than 1,000 homes stand vacant and decaying in a neighborhood that once thrived with families living the American dream of home ownership.

Cleveland city leaders have been dealing with the subprime mortgage fallout for several years and can enumerate the ways it has cost their city:

Lost property tax revenues
Foreclosures are straining Cleveland's police and fire budgets, too, as drug dealers and addicts gravitate to abandoned homes
In 2007 and 2008 the City of Cleveland will have spent $12 million demolishing foreclosed and abandoned homes.
The number of homeless students in Cleveland's public schools has increased by 40% over the last year.

Also as Kid noted the subprime mess started in the 70's with the oil shock. It left an anti-regulatory climate that enabled the republicans along with complicit Democrats to deregulate the banking industry. Cleveland officials had noticed they were having problems with the subprime mortgages in 1995, and inacted a city law in 2001 to end predatory lending. But the republican state govt overturned it.

A bailout wouldn't be so bad if it was attached to conditions forbidding the companies in question from ending predatory lending practices.

http://www.pbs.org/moyers/journal/07182008/profile.html if you want to read more.

[Dinner]

Re: Re: Re: Re: I got mine.

Originally posted by PLATO


No Oerdin, I have to tell you. It is very unusual that the holder of the second would bail like that. Not unheard of, but it is very unusual.

Not in my state body. Neither the primary nor the secondary can go after the borrower for any excess amount. It is illegal in my state. They can either have the property or they can try to rework the loan but if they get the property then the borrower walks. To appease the big lenders the primary gets first whack and only if they house sells for more then the 1st will the 2nd get a damn thing (other then a tax write off for the lose).

[Ben Kenobi]

This is quite true and something I don't see many on Ben's side actually dealing with.

What is there to deal with? It's a natural reaction. Once bitten twice shy.

This is a major problem in trying to get into recovery. If lending institutions won't lend, then you are looking at a fairly lengthy recession

So far it isn't a recession. You can say it's slump, but just because things slow down doesn't bring you into recession.

until lending institutions feel confident actually given loans to qualified borrowers (and, of course, that'd just be the beginning of recovery).

Yes, and it would mean that a bottom had been reached. What more is there to do then to give it time?

[Guynemer]

The wife and I were talking about buying some land in the wilderness of the Appalachian foothills an hour SE of Columbus and building a cabin for home and/or vacation and/or retirement. Hopefully, land prices were keep going down.