First, it's my understanding that this segment is a very small part of the overall home mortgage market. I forget the %'s I've heard, but they were definitely under 5%. That is why most analysts I respect have laid out arguments as to why they think the chances of this spreading to an overall credit crunch in the US are close to non-existent.
Second, it's not just low income people that use this mortgaging source. Many people at all income levels in the US screw up their credit rating. when they are young, just not paying attention to credit cards for example. my impression is a lot of the people having these mortgages are fairly high income, certainly above average, and willing to roll the dice. In my own experience, I know a number of families with low incomes who own their homes. Obviously this is not a big sample size, but those families are incredibly conservative in the way they manage their money--with no exceptions. They wouldn't think of buying a home without at least 20% down.
But I really don't know. It would be interesting if this person had quoted any data sources for his comments and forecasts, so we could look at it and analyze for credibiliity.
Bloomberg item:
Political pressure on the government and regulators to intervene has increased as defaults on subprime loans rose to a four-year high and foreclosures on all home loans rose to a record in the last quarter of 2006. As many as 2.4 million Americans may lose their homes because of the collapse of the subprime loan industry, said the Center for Responsible Lending, also part of the coalition, in testimony to Congress last month.
my bold You can't be me, I'm taken
I can't believe this is a minor blip - this a a staggering crisis. You can't be me, I'm taken
this is a generic principle that we sometimes have trouble with in the US. we tend to want to leave choices to the individual, giving them that freedom to make a choice, and count on them to choose right or suffer the consequences.
an example from another area is in investing. many years ago we had very limited regulation regarding investments. some people invested in private companies, not on a stock exchange, and in some cases they were not sophisticated enough to understand the business and made poor investments, and in other cases they were outright swindled. so legislation and regulations were put in to prevent this, and it certainly had to be changed. but you have some unintended consequences, and today to make investments in private firms, private equity, venture capitalists, one has to be able to prove his financial sophistication, and prove he has quite a bit of money--I think it's $5 million in financial (not including your home) assets. Now this legislation was needed and solved a serious problem. but it does mean that for some of these risky, but potentially very lucrative, private investments, you have to be rich to participate. and i would say that if you look at the big picture, it is the right thing to have done.
carry this down to home ownership. a reaction to all of this might be something like requiring a 20% downpayment to by a house, and make that a law. years ago banks wouldn't take less than 20%, so obviously it can be done. but, other side of the coin, there are young families, upwardly mobile, from middle class or lower class backgrounds, that will find that they will have to wait longer than they might like to get their first home. today they can decide that they are going to work their tails off now, and hope they don't get real bad luck, and just make it work with a new home and 5% or less down. so we may end up taking away from them that ability to decide on their own, and take the risk if they want.
and this may be the better decision from a society viewpoint. if anywhere near 2.4 million people lose their home, I would think it should be changed.
but just trying to point out the two edged sword aspect of this, and in conjunction with what I perceive as American ideals of one should be able to make their own choices, one should be able to decide to take risks.
Their choices are made in a media environment that does little to encourage savings, and a business environment that is only interested in fufilling quotas regardless of the consequences to their clients.
I agree on th two-edged sword, but the blade is very dull on one side.
I think you would agree that offering a crate of whiskey or a box of bottled water to a teenage party, and expecting them to make the right choice or suffer the consequences, is hardly Freedom of Choice.
There is an ideal world of freedom in which people make rational judgements, but in the real world it is intersected by marketing. Marketing, by its very nature, is against Freedom of Choice. Marketing wants to limit your choice. Marketing wants you to buy 'this one' not any other one.
This - to me - is one of the great paradoxes of Capitalism. You can't be me, I'm taken
I actually see, in the broader picture, marketing differently. Marketing is the tool that gives me the consumer all of the choices that I have. So take cars for example. Magazine and TV ads make me aware of all the choices I have. and it's up to me to choose from amongst them.
in sub prime, marketing keeps the consumer aware of the competitive offers among vendors of subprime--who might have the best terms.
but then again, to your point, on subprime it probably makes the overall prospects of owning your own home more appealling, and keeps that thought in your head. so in that sense it's negative, and your parallel to the case of whiskey for a teenage party is a good one.
One could say the same about war. Armies are manipulated as a group to achieve strategic and tactical ends, but the immediate consequences are individual - if you are one of the inevitable casualties. You can't be me, I'm taken
The Economist A recent report by analysts at Credit Suisse estimates that 80% of subprime loans made in 2006 included low "teaser" rates; almost eight out of ten Alt-A loans were "liar loans", based on little or no documentation; loan-to-value ratios were often over 90% with a second piggy-bank loan routinely thrown in. America's weakest borrowers, in short, were often able to buy a house without handing over a penny. Lenders got the demand for loans that they wanted--and more fool them. Amid the continuing boom, some 40% of all originations last year were subprime or Alt-A. But as these mortgages were reset to higher rates and borrowers who had lied about their income failed to pay up, the trap was sprung. A new study by Christopher Cagan, an economist at First American CoreLogic, based on his firm's database of most American mortgages, calculates that 60% of all adjustable-rate loans made since 2004 will be reset to payments that will be 25% higher or more. A fifth will see monthly payments soar by 50% or more. (...) The greatest difficulties threaten borrowers whose house is worth less than their mortgage. Just under 7% of all American homeowners had this "negative equity" at the end of December 2006 estimates Mr Cagan, using a sample of 32m houses. Among recent homebuyers, the share is even higher: 18% of all people who took mortgages out in 2006 now have negative equity. A quarter of all mortgages due to reset in 2008 are in the same miserable state (see chart 2).
A recent report by analysts at Credit Suisse estimates that 80% of subprime loans made in 2006 included low "teaser" rates; almost eight out of ten Alt-A loans were "liar loans", based on little or no documentation; loan-to-value ratios were often over 90% with a second piggy-bank loan routinely thrown in. America's weakest borrowers, in short, were often able to buy a house without handing over a penny.
Lenders got the demand for loans that they wanted--and more fool them. Amid the continuing boom, some 40% of all originations last year were subprime or Alt-A. But as these mortgages were reset to higher rates and borrowers who had lied about their income failed to pay up, the trap was sprung. A new study by Christopher Cagan, an economist at First American CoreLogic, based on his firm's database of most American mortgages, calculates that 60% of all adjustable-rate loans made since 2004 will be reset to payments that will be 25% higher or more. A fifth will see monthly payments soar by 50% or more.
(...)
The greatest difficulties threaten borrowers whose house is worth less than their mortgage. Just under 7% of all American homeowners had this "negative equity" at the end of December 2006 estimates Mr Cagan, using a sample of 32m houses. Among recent homebuyers, the share is even higher: 18% of all people who took mortgages out in 2006 now have negative equity. A quarter of all mortgages due to reset in 2008 are in the same miserable state (see chart 2).
One thing that isn't irrelevant is that analysts are always planning for the last crisis, never the next. And the last crisis in subprime was prepay risk, and between jobs 7 years ago I got to see the inside of one of these places as they went belly-up (did due-diligence work for G/S at a place called GreenTree/Conseco Finance).
I can just see the flunkeys tranching these things saying: "hmmm, interest rates are going to increase, so prepay risk is minimal." Add to this the natural bias of supply-sider neo-lib flunkeys that the economy will always be bright (and many finance people here think this, especially the younger ones) and I bet the duration of these loans was far overestimated.
And of course the longer tranches are now worthless (well, in truth they always were).
I keep hearing about how this knocks into the real estate market; I've yet to see anything substantial on the bond market (truth be told this is likely my fault, I don't read FT or the urinal) but I bet the People Bank of China was holding a lot of those longer duration mortgage-backed securities... Fai de bèn a Bertrand, te lou rendra en cagant
