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Is the Housing "Bust" real?

We're hearing a good bit of noise surrounding the end of the super-boom in housing and the high default rates in the "subprime" mortgage sector, but what does it all mean? Over at Tech Central Station, Desmond Lachman thinks it is a big deal:

In maintaining their rosy economic outlook, most Wall Street analysts choose to ignore Fed Chairman Ben Bernanke's recent reminder that a protracted decline in home prices could have a material impact on consumer spending. According to Mr. Bernanke's congressional testimony last week, the Federal Reserve estimates that household consumption could be negatively impacted by as much as 9 cents for every dollar that home prices decline on a sustained basis. And considering that housing wealth, which is the main source of household wealth, presently amounts to 150 percent of GDP, and that household consumption still accounts for around 70 percent of GDP, the prospect of a protracted period of declining home prices is not something one wants to cavalierly brush aside.

Contrary to what many on Wall Street would have us believe, the prospect of a protracted period of declining home prices now seems to be anything but a remote possibility. Indeed, with home prices already falling and with increased inventories of unsold homes rapidly mounting, it is difficult to see how home prices do not start falling at an accelerating rate over the next few months in order to clear a saturated market. This would seem to be all the more so the case as a tightening in mortgage lending standards and as the resetting of adjustable rate mortgages further crimp housing demand at the very same time that a marked increase in home foreclosures leads to more houses returning to an already glutted market.

Perhaps an even greater overlooked risk to the US economy than slowing consumer expenditure is the prospect of a full blown "credit crunch" in the financial sector that would seriously curtail bank lending to the economy as a whole. Sadly, this prospect too now seems to becoming an ever increasing likelihood. In his congressional testimony last week, Chairman Ben Bernanke owned up to the very real possibility that the financial sector's losses from sub-prime mortgage lending could very well reach as much as US$100 billion.

Read the whole article at the link above. While I respect Desmond Lachman's analysis, the idea that the total "losses" on subprime mortgages could total $100 billion is rather hyberbolic.

These are home mortgages we are speaking about. The mortgage company has the HOUSE and the land upon which it sits as collateral, and they WILL take it if they have to foreclose. The legal proceedings do have some cost to them, of course, but this is usually more than offset by the difference between the market value of the property and the amount of the defaulted debt. The only way they could "lose" so much money is if the properties were fraudulently overvalued at the time the loans were made. While this undoubtedly happens in some circumstances, it would have to be quite widespread to run up such losses.

Neither does the high default rate necessarily ruin the housing market.

These homes are nearly all in the "starter home" category, and usually in less desirable neighborhoods. The surplus Desmond fears is illusory, because lower end properties can be rented if not sold, and everyone must live somewhere; meanwhile, the upwardly mobile still want to trade up.

If some lenders and hedge funds overextended themselves imprudently in the hope of a big payday, why should we feel the need as taxpayers to cover their losses any more than we would cover the guy who lost his shirt at blackjack in the casino? This is what the market does: the incompetent's assets will be bought by the efficient at a steep discount, but they will bring a greater return on those assets and more will benefit than will suffer.

Our central banks - represented by the FRB - as well as the European Central Bank, have stepped up to cover the possible shortfalls caused by fear and speculation.

The worst possible scenario is one where the US government perceives a "crisis" and undertakes to "help" us out of it. Let the market reward the winners and punish the losers, for thusly we will inspire winners and discourage losers, and the taxpayer might for one moment hold onto "the bread which he has earned," as Jefferson put it.

We are only experiencing a "downturn in housing" because of the irrationally exuberant rise in prices over the previous few years. Over the longer term, housing is rising no less than its average appreciation.


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Comments (37)

Hi, Jim. Part of the proble... (Below threshold)

Hi, Jim. Part of the problem was so many unethical mortgage companies offering loans with terrible terms to high credit risk persons. Actor Dustin Diamond from SAVED BY THE BELL nearly lost his home even though he made all the payments on time to a balloon payment clause that he didn't know about. He had a high medical debt due to a sick child, and took out a high risk loan when normal banks turned him down for a home loan.

And too many persons get daily calls from loan sharks who offer to remortgage a home on their own terms, which means that you probably lose your home to them.

Congress needs to tighten up the rules and regulations on this home loan industry and protect consumers and the economy from the damage that the unethical operators have caused.

Congress needs to ... (Below threshold)
Congress needs to tighten up the rules and regulations on this home loan industry and protect consumers and the economy from the damage that the unethical operators have caused.

How 'bout if Congress just makes up a pamphlet to send out to the stupid people to tell them not to be stupid?

Hooson's just another liberal who thinks Congress is here solely to protect us from our own stupidity.

Actor Dustin Diamond from SAVED BY THE BELL nearly lost his home even though he made all the payments on time to a balloon payment clause that he didn't know about.

Well, he's an actor - that explains most of the problem. How is it he didn't know about the balloon payment clause? Did he not examine/read the contract he signed?

Maybe Congress should pass a law that says everyone, under threat of fine and jail time, must read the whole contract before they sign. There'll be a separate legal document appended to every contract that declares that the signer read the contract and the contract addendum before they signed said documents. That way there will be one more legal document that someone has the opportunity not to read before they sign.

And too many persons get daily calls from loan sharks who offer to remortgage a home on their own terms, which means that you probably lose your home to them.

No kidding? And we wonder why there is so much spam and the Nigerian bank scam still works. Because people are suckers. If it sounds too good to be true, it probably is.

Finally, I want Congress to pass a law that says people like Hooson can't post on blogs - to protect me from having to read their nanny-state-protect-everyone-from themselves drivel.

Hooson:Actor D... (Below threshold)


Actor Dustin Diamond from SAVED BY THE BELL nearly lost his home even though he made all the payments on time to a balloon payment clause that he didn't know about.

Call the Whaaaaabulance! Screw'em and when done sign him up for a remedial reading course at the nearest community college.

Congress needs to tighten up the rules and regulations on this home loan industry and protect consumers and the economy from the damage that the unethical operators have caused.

How about congress quit passing unneeded earmarks within bills, and how about they take all the money already wasted on earmarks and reimburse those with poor credit and management skills... personally. From their OWN FORTUNES. And NOT ON MY DIME!

But I do have an idea... how about congress pass a law that outlaws cheap assed Chinese scooters with bad wheel bearings? The damn things are now known to cause brain injury that leads to nanny-state thinking.

Yeah! What marc said too.</... (Below threshold)

Yeah! What marc said too.

Of course it isn't real. </... (Below threshold)

Of course it isn't real.

Of all the proposed regs I'... (Below threshold)

Of all the proposed regs I've seen, the one that makes the most sense is one that says the salient points of the contract, including APR, balloon payments, date and time that payments increase on an ARM, etc., all get spelled out on one page in plain English.

As to the rest of this, we have several problems at play. One is that the current economy has been propelled by consumer spending ... and consumers were willing to spend in part because they received large credit limits on credit cards and because they were confident in their home values. Remove that confidence, and you take away the urge to spend, and raise the prospect of inflation.

Another problem is that in major metro areas, home were valued so high that the only way to qualify for mortgages for some people was to take out these risky loans ... and lenders were all too eager to comply.

Where we ALSO run into trouble is that in the old days, if you were close to defaulting on your loan, you'd call up the bank and, especially if it was a neighborhood bank, you could often work out some sort of deal to tide you through if you hit tough times. Today ... well, with the mortgage-backed securities and loans that get sold and resold, you run into a problem because people don't know whom to call to work out new deals if they need them, and none of the players can give accurate information about the proper contact.

Finally, you're going to run into a lot of banks, etc., losing their shirts; if a home forecloses for far less of its value, the bank is still going to try to recover the remaining value from the borrower ... and if borrowers declare bankruptcy en masse, we've got a problem.

That said, you also have people like me. I could have bought a couple years ago, or a year ago, but I thought homes were overvalued and I didn't like the mortgage terms available for a home that met my minimum standards ... and I wasn't willing to revise my standards downard. So, rather than take one of those mortgages, I sat tight in my rented apartment. And now ... I hope to see home prices go lower. And lower. Then ... I'll buy.

I wonder how many other people had similar thoughts?


Ive been in the mortgage bu... (Below threshold)

Ive been in the mortgage business for almost 20 years, and its a bit unnerving to see everything thats going on.

Its more of a credit squeeze than a crunch, as good borrowers(Those with good credit, strong income, assets, etc) will always be able to borrow. Fannie, Freddie, and Guvvies will always have money. A crunch would mean that no credit is available. IT IS available, and even now, there are people getting loans that probably would be better off as renters.

The US still suffers from the desire for instant gratification, aso some dont want to sacrifice and save for 2-3-4 yrs so they can put 20% down on a home. They want the nicest cars, the newest electronics, etc, all the while they arent buying it, they are purchasing it on credit. People that cant save enough to put down at least 10% AND have car loans AND have their cards with balances over 70% of their limit ARE BAD RISKS. Some will handle it, but others will ring those cards up as they furnish their new home, and then want someone, the govt, to bail them out of their bad decisions. We are all a result of our choices and actions, and the mortgage industry is now suffering MORE from the choices of borrowers, than anything else. Not being able to put at least 5% down, preferably 10% on a conventional loan should mean you dont get the house.

If people would have taken out fixed rate loans, and had 20% equity, what trouble would they be in?? Will anyone do a study and see how many 80 or less LTV fixed rate loans head to foreclosure?

There are all kinds of 'facts' out there right now, but this is all too new for anyone to really now what's going on, or what will happen.

Some of the numbers Ive heard are that well over 95% of mortgages are paid on time, that the sub prime market is not quite 10% of US mortgage market share, that about 8% of sub primes have delinquencies, and about 2% of sub prime loans are heading to foreclosure.

SO, less than 1% of homes nationally are heading to foreclosure, and the govt should bail them out because most were either ignorant or stupid?

This exaggerated crisis is like the moonbats claiming min wage isnt enough for a head of household to live on, when so very few HOH actually make min wage. Sure, lets pass laws that benefit less than 1% of the nation, and hurt 10% or more. The moonbats want to blame the mortgage industry for all of these problems, instead of the borrowers, who accepted the loan terms. They seldom take personal responsibility.

The industry loosened credit standards as the economy rebounded after the 2002 economic slowdown that came on the heels of all of the corp accounting scandals from the 90's coming to light. The housing boom of 03-06 made a lot of people a lot of money, from the farmers, who sold land to builders, to the Best Buys of the world, who helped fill those homes with new 'stuff'.

Ive had agents or builders come to me and say I dont care how you do it, get these guys a loan. Ive had borrowers come to me and say I dont care how you do it, I want this house, get me a loan. Id estimate virtually every borrower knew exactly what they were doing, they just made a poor decision.

A mortgage closing takes anywhere from 30 mins to an hr. Most every form needs to be signed or initialed. The note and the rider specifically describe payment adjustments should it be anything other than a fixed rate loan. Why sign the docs if you dont understand them?

Yup, there are some scubag lenders out there, just like there are scumbag Realtors, scumbag builders, scumbag politicians, scumbag teachers, union bosses, etc. The borrower bears responsibility for anything they sign, initial, or otherwise accept or acknowledge.

This less than effective Congress will try to enact some BS legislation that will harm the housing industry and borrowers for years, because some chose to roll the dice and kept spending, and now they are losing their homes because they cant afford all of the 'stuff' they had to have.

Just like there is a buying opportunity when stock prices dip, this housing issue will lead to some great buying opportunities, and the cycle will start all over again.

Hard to blame the industry for giving people what they demand. Its a free market system. Just like many got caught with Priceline.com stock they bought at $150 a share, these guys rolled the dice, and lost.

People have a right to be stupid, and govt has no responsibility to bail them out because they are stupid.

Hoist by balloonSave... (Below threshold)

Hoist by balloon
Saved by the bell.

JimA $100 billion lo... (Below threshold)

A $100 billion loss could be absorbed and not create significant problems for the domestic economy because risk is distributed today rather than it being concentrated as it was in 1987/1988.

As for those borrowers who entered into risky loans, I have little or no sympathy for them. Pennywit makes an excellent point....renters have been perceived as fools for not "building equity" over the years. They look pretty smart right now. There's an old saying in the in investment business: Opportunity loss creates heartburn; real loss creates heart attacks.

Great post.You are... (Below threshold)

Great post.

You are one that deems the purchase of a home as one of the biggest financial transactions of their life and treats it accordingly.

Upside to the housing boom were that rents were pretty stable for several years due to supply and demand, so, in many areas, renting was more attractive and cheaper than owning.

Fanni and Freddie have allowed millions to buy homes, which many would have been unable to if not for the secondary mortgage market.

Bottom line to me is that most young adults today have very little financial knowledge, wisdom, or discipline, and they are now paying the price for their desire for instant gratification.

You on the other hand should make out very well come as prices, AND rates drop as we head towads the end of the year. Good luck!

I agree this is overblown, ... (Below threshold)

I agree this is overblown, but the markets don't know how to quantify the risk, so they'll be choppy while the defaults get digested.

These loans are collateralized with real estate, as noted above. House prices have slid, but not to such a degree of significant impairment in most markets.

The foreclosure sales will mostly cover the debt, and the mortgage holders are largely repaid.

The problem comes when investors no longer want to fund new mortgages because they can't be sure of the default/underwriting risk. The market will correct for that--underwriting standards have already improved dramatically.

Home is where the heart is.... (Below threshold)

Home is where the heart is.

I agree with both of GianiD... (Below threshold)

I agree with both of GianiD's posts, completely.

I do a lot of real estate law in NC, and in the last few years, the quality of borrowers getting low downpayment, no doc/low doc (proof of income), balloons, ARM's etc. got lower and lower over time.

The last blown up loan I saw recently was a woman who just moved here, no income (job as new Realtor), no spouse on loan, qualifying for $400k. Ridiculous. Her lender's lucky it didn't close.

How many of the de... (Below threshold)

How many of the defaults were in the Million dollar plus range, Giani?

I wouldn't be able to afford my house today, because of the massive run-up in prices.

Irresponsible spending and marginal credit, in combination, are the problem. That points to consumers,not the businesses catering to them.

There are defaults througho... (Below threshold)

There are defaults throughout all price ranges. I do a lot of loans down the Jersey Shore, and agents are saying there are a lot of delinquent loans there, mostly owned by non owner occupants. A $260 home in 02 became a $780 home in 06, which is now a $650 home.

Speculators are what drove prices up, and they were playing with someone else money much of the time. Now, they're losing. Crap happens.

Maybe 5% of owner occupants that bough hoes over last few years bit off more than they can chew, by doing zero down loans, and then ringing up their cards, and now they want the gubmint to bail their asses out.

People ultimately bear responsibility for themselves, unless of course there is a (D) after the politicians you support. Then its someone elses fault.

I think the practices Paul ... (Below threshold)

I think the practices Paul mentions in the first comment are rather prevalent among unscrupulous "mortgage brokers" - independents who write loans and then sell them to institutions for a commission - but not by the institutions themselves (who have a strong interest in loans continuing to perform). I have no problem with regulations ensuring full disclosure of loan terms and their possible meanings, especially the one-page summary idea posted by pennywit above.

The bottom line is that the responsibility for making a good loan is the institution's. Those who fail to do this will be plagued with defaults, depressing their equity and likely leading to takeovers by outfits with stronger management. That's a good thing.

Borrowers are also responsible for understanding terms and conditions and keeping up their payments. Even though the subprime market is experiencing problems, remember that the great majority of those who got the opportunity to buy a home are following through.

Neither side of these transactions deserves a taxpayer-funded "bailout" because of their poor decisions. Let the markets work their magic.

Hi again, Jim. The funny th... (Below threshold)

Hi again, Jim. The funny thing is that banks operate under so many carefully crafted federal regulations, while regulations have failed to cover full disclosure, interest rate limitations, or other important consumer protections for some "new wave" mortgage companies, payday loan, car title loan, and many other unscrupulous lenders to higher risk persons seeking various types of loans. Years ago these "grey area" lenders did not exist. It is a new phenomenon within the last few years, and Congress needs to bring all of these "grey area" lenders under uniform regulations that regulate banks, credit cards and other legitimate money lenders.

I also agree with you that a taxpayer bailout is probably not a good idea. Congress would better serve the public interest by bringing all lending institutions under the same uniform federal regulations that control legitimate lenders. That act alone would help resolve many of the difficulties that those that seek loans find themselves in including some interest rates of payday loans that run up to 300%, or outrageous balloon payment clauses that set up mortgage users to fail.

Government cannot solve all issues. But bringing uniform lender rules to lender businesses would be a simple solution that would help ease much of this current crisis.

If I don't make my car paym... (Below threshold)

If I don't make my car payments, can I get the Federal government to bail me out? Of course not. They same applies to my mortgage.

Loan terms are printed on the contract. If you don't read the contract and question any terms, then I shouldn't have to watch the Feds spend my tax dollars on your stupidity. If you don't like the deal, then there are other lenders who you can negotiate with.

I think the "payday" and "c... (Below threshold)

I think the "payday" and "car title" loans are a separate issue, albeit one which reminds us why usury laws aren't necessarily a bad idea.

Creative financing ideas like adjustable rates and balloon payments enable people to buy houses who otherwise might not be able. However, many of these techniques do involve substantial risks down the road, and buyers need to understand them.

Sure, anyone should read every clause in any contract before they sign it, but the reality is that many or most do not, or aren't able to understand much of it. A summary of loan terms, including especially any atypical ones, delineating the risks would not be an onerous burden for the lender to produce, and might help some borrowers make a more informed decision. I can't see that as a bad thing.

To quote:"These are ... (Below threshold)
Le Messurier:

To quote:
"These are home mortgages we are speaking about. The mortgage company has the HOUSE and the land upon which it sits as collateral, and they WILL take it if they have to foreclose. The legal proceedings do have some cost to them, of course, but this is usually more than offset by the difference between the market value of the property and the amount of the defaulted debt. The only way they could "lose" so much money is if the properties were fraudulently overvalued at the time the loans were made. While this undoubtedly happens in some circumstances, it would have to be quite widespread to run up such losses."

Your naivte is quite stunning. Being "fraudulently overvalued" is hardly the problem. 100 and 95% loans were very common in the boom; Investors leveraged one house purchase upon another and then another to get in on the ever rising prices, adjustable rate mortgages, even with a decent down payment, end up being unaffordable when the rates go up. There is little and even negative equity in these homes. Banks don't want the houses back. Too many bad loans on their balance sheets will destroy a bank. They can't make new loans because all their cash is going into their loan-loss reserves. This is not a simple downturn in the housing market anymore, and as I thought it was. We now have a real credit crunch as well. This is the first credit crunch in decades that is of any size. Our bankers and finance people don't really have the gut feeling on how to deal with one. It hasn't happened in their experience so they have a hard time coping. Give them a good old recession and that they can handle any time. What the end result of all this will be I'll leave to the sages,but your understanding of the present housing dive is unrealistic.

Of course banks don't want ... (Below threshold)

Of course banks don't want the properties - they are only collateral. But it is indeed the lenders' responsibility to ensure the loans they write are adequately collateralized to cover their risk.

If they are not, somebody screwed up. The markets have a foolproof system for punishing screw-ups. Taxpayer assistance is not required.

I have exactly no sympathy for speculators who got caught with their pants down, but they represent a very small portion of the defaults.

The central banks didn't put the extra cash into the system because there is "a real credit crunch" now. They did it to avert one, which might result from rapidly dropping confidence. It's a symbolic gesture - the money would have come into the system anyway, only more slowly - which appears to have worked in the short term.

I'm going to toss a couple ... (Below threshold)

I'm going to toss a couple more nuggets out there.

In the market where I live, the increase in housing prices in the last five-ten years has been insane; pulling together a 20 percent down payment for people making less than around $70-80 grand a year, would be extremely difficult. Maybe not impossible, but certainly incredibly difficult, especially since the $200,000 houses very quickly became $400,000 or $500,000 houses. So, if somebody here on a modest $50-60k annual income started throwing in everything he could to get a $200k house on a 20 percent down payment, the houses he could afford would very quickly more into the $400k range, leaving him with a 10 percent down payment at best.

And the market still hasn't corrected enough here, if you ask me. The other day, I drove past a condo building under construction. I called them to ask about prices ... and the woman quoted me $850k ... for a one bedroom!!

Now, I will grant this was a good building in a good section of downtown. I will also grant that this was an incredibly nice apartment with all the amenities you can think of. And I will grant it was 900 square feet. But, still. $850k for a one bedroom!!!

If you ask me prices need to come down a little more. Perhaps even a lot more. At least from a buyer's perspective.

One more nugget. I strikes me that things like ARMs are best used by smart, creditworthy homebuyers who know their needs and/or plans. If a person, for example, is in a profession in which he knows he moves every 4-6 years, then it strikes me that a 7/1 ARM may actually make sense provided that he's using it to buy a house he could otherwise afford.

And so forth.

One thing I haven't seen comment on here: What about the effect on mortgage-backed securities?



I'd like to know what some ... (Below threshold)

I'd like to know what some of these lenders have been smoking. $400k with no income??? I've got a decent solo income, but I get shivers about taking out a loan over $250k.


ARMs and Balloons are appli... (Below threshold)

ARMs and Balloons are applicable in certain situations, maybe a young lawyer or accountant a yr or 2 from becoming a partner, or someone that KNOWS here is a finite period in which they'll have home/loan.

ALL ARMs come with mandated disclosures, people just choose either not to read them, or they dont care, they just want the house/loan.

Cant legislate intelligence.

Probably more of a cash flo... (Below threshold)

Probably more of a cash flow problem, rather than a real loss in assets, but that can ruin a company also if too many notes are called in at the wrong time.

I'm doing what Pennywit is ... (Below threshold)

I'm doing what Pennywit is doing... sitting tight until these ridiculously high prices come down. I rent my house for 40% less than it would cost for a mortgage payment with ideal terms. Not a single house has sold in my subdivision in 10 months and there are 8 houses for sale (out of 70).

I'd have to say that there are a lot of people taking the wait and see approach to buying.

Le MessurierI'm go... (Below threshold)

Le Messurier

I'm going to take exception to some of your comments but I agree with main point about exceptionally high loan to value ratios being the problem today.

This country has experienced two very severe "credit crunches" in the last nine years.

In August 1998 credit markets were temporarily paralyzed by the Russian debt default and an incident of fraud in the securitization conduit. I remember this vividly because short term credit was simply unavailable for A- and BBB borrowers for approximately one month.

The 9/11 attacks created a crisis in short and long term credits that saw no relief until around December. During this time, the fed poured liquidity into the market, but to no avail. If I remember correctly, MBNA broke the logjam with a successful offering in late November or early December.

Pennywit and cindermutha</p... (Below threshold)

Pennywit and cindermutha

You both are doing the smart thing. If you your intuition warns you away from borrowing any amount that you are uncomfortable with then trust your intuition.

Renters can walk away from a rental agreement anytime and their maximum loss is in most cases the deposit they surrender. Walking away from a mortgage is much more problematic.

I lived in Texas in 1987. During the 1980's, of the ten largest banks in the nation, three were located in Texas. Those three banks do not exist today. All three became insolvent. I had friends that sold houses in Houston in 1988 who had to write a check at closing to cover the mortgage deficiency. They literally had to pay to get out of their homes.

Paying rent and saving the difference until you can truly afford a home is good thinking.

HughSQuote:... (Below threshold)
Le Messurier:


"This country has experienced two very severe "credit crunches" in the last nine years."

On the contrary, I stand by my statement regarding credit crunches. See here: http://www.prudentbear.com/articles/show/2083

Paying rent and sa... (Below threshold)
Paying rent and saving the difference until you can truly afford a home is good thinking.

... or getting a seller desperate enough to pay your break-lease fee ...

I think something else you have is people out there are bing kind of stupid. There are programs out there for for those who have trouble meeting a conventional, private-industry mortgage, particularly if those individuals are buying their first homes.

The FHA is always a possibility for first-time homebuyers, and if you know where to look, you can find a nonprofit that offers low-rate mortgages. And I have to ask: are sellers really that opposed to rent-to-own agreements?


Le Messurier Your a... (Below threshold)

Le Messurier
Your article was impressive, but I stand by my statement. I'll concede only if the length and duration of a "credit crunch" is the defining factor.

For example, in 1998 the structured finance conduit was severely jammed as a result of the Russian debt default. No securitizations, which, as you know, are the terminating end of the funding mechanism for everything from credit card debts to mortgages, were completed. The effect was a log jam of unclosed credit transactions that essentially backed up into the homes of borrowers just as a clogged septic tank would release into a residence. Sorry for the metaphor, but for borrowers dependant on this market it was terrifying and damaging.

Fully drawn bank revolvers could not off load debt to warehouse lines that off loaded their debt to securitized assets. This was a real credit crisis solved only by the political will of the Alan Greenspan.

In 2001, the Bank of New York clearinghouse for derivative transactions was literally destroyed in the attacks. I know for a fact that Citibank accrued over a month of unclosed derivative transactions as a result of the destruction of the BONY offices. This created a paralyzing credit crisis for middle market and larger borrowers that securitized accounts receivables, mortgages and other receivables.

My evidence is anecdotal, but as a long time practitioner of corporate finance I can tell say that it was in all respects a credit crunch. Liquidity was not available for a period of months.

Remember outfits like ACORN... (Below threshold)
dickmr Author Profile Page:

Remember outfits like ACORN hounding executives to give low income people loans...they forced credit for the uncreditworthy and now they will reap the opposite. They always accuse of predatory lending...hey ACORN, now you'll have NO lending.. ha ha Whats next..a crisis when illegals are chased home, and Bank of America is left with consumer credit on those credit cards with no identification required? The sky is not falling unless the poor are now all banding together to try and not pay their mortgages. In that case I say the foreclose and get some smarter clients.

Another thing that helps to... (Below threshold)

Another thing that helps to keep the market from total collapse is our population increases. In the 90's, we added 30 million people. We're on a pace to match or beat that this decade. Immigrants, legal and illegal, plus our net birth rate is producing a lot of people who need a place to live. The pressure of that 30 million on the lower end of the market helps to keep up demand that ripples up the housing market.

For years Banks and others ... (Below threshold)
Robert the Original:

For years Banks and others would write a mortgage to hold on their books for interest income, now they sell them.

The originator now is in it for quick points and fees and to make it look good for a week until the sale. In the former days, the lender had more concern for the quality of the loan over time. That loan officer would be measured by the quality of his portfolio of loans including those that cratered 5 years in. This is why credit standards have declined.

In theory, today the ultimate holder of the loan should have equal concern for the underlying credit, but they don't. These holders are the government (through agency backing) and large syndicates with investors who consider rate only, or the payout rate of an asset the quality of which they have no idea.

All the real players are in it for the transaction fee and the points, not the interest income.

The game today is to add on as many lending people as you can during the booms, to maximize fee income, and to hell with the future - damn the torpedoes, full speed ahead.

So I have seen many deals so bad that they rely on asset appreciation or continued low rates, otherwise the loan MUST fail. And the originator might well overlook a few things in order to get that big fat origination fee.

And by the time of the tenth sale or so, it is too late to tell anyone that the borrower is gambling like hell that he can flip a vacation property before the bubble crashes or rates go up. And they probably wouldn't care if you did.

So the bailout if it comes, will be for these ultimate holders of loans - bozos that they are - not the borrowers.

Absolutely, Robert - the bi... (Below threshold)

Absolutely, Robert - the big losses being talked about are the stocks and securities of firms which end up owning the paper, and these are the people who would benefit from any bailout, not the defaulting homeowners.

You are also correct they don't care about the individual loans in their portfolios, so long as the default rate stays within the predicted range.

Jim,Yup. By the t... (Below threshold)
Robert the Original:


Yup. By the time delinquencies rise in said company and they realize they're sitting on a steaming pile of their own making, it is too late and they are doomed. No way out.

And this is the case today, reality has set in and one can no longer write any ol' 0% down adjustable crap loan, and know that some chump will buy it.

And money is still available for solid loans, so one can't actually say that we are in a full-bore credit crunch.

Call it a bad-credit crunch.

The key terms of home loans... (Below threshold)

The key terms of home loans are disclosed on a specific form for the purpose.

People don't read it. I've had people claim to me that they were 'defrauded' by a mortgage broker who gave them a loan that didn't match what they claimed they had been told. When they have faxed me the application, disclosures and closing docs, 100% of the time, in bold letters will be the disclosure to them of the terms they pretend to me not to have know about.

100% of the time, their signature is below.






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