Why You Should Hate the Treasury Bailout Proposal (1 Viewer)

[Saintman2884]

I just heard guys that Bush's team and the Democrats have come to a deal that would set up strong congressional oversight and key limits to mortgage bailouts.

Yahoo just reported it.

I will send the link to you shortly

 

[dapperdan]

btw, in Mauldin's example, I believe he makes a mistake by saying $100 million, when he means $100 billion. I think, not sure. It's a little confusing.

Also, another problem with these tranches, is that they aren't broken out by geography. If, for example, you wanted to eliminate California and Florida real estate within your RMBS purchase, to the best of my knowledge, there is no way to do that. So the worst gets assumed when pricing these securites.

 

[st.tammany]

SImple question that I've yet to receive an answer for;

"Why are people defaulting?"

 

[Saintman2884]

http://news.yahoo.com/s/ap/20080922/ap_on_bi_ge/financial_meltdown

 

[wamland]

Yeah, let's trust Bush.......

"A critical - and radical - component of the bailout package proposed by the Bush administration has thus far failed to garner the serious attention of anyone in the press. Section 8 (which ironically reminds one of the popular name of the portion of the 1937 Housing Act that paved the way for subsidized affordable housing ) of this legislation is just a single sentence of thirty-two words, but it represents a significant consolidation of power and an abdication of oversight authority that's so flat-out astounding that it ought to set one's hair on fire. It reads, in its entirety:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."​

http://www.huffingtonpost.com/2008/09/22/dirty-secret-of-the-bailo_n_128294.html

 

[dapperdan]

SImple question that I've yet to receive an answer for;

"Why are people defaulting?"

Too much horse for the jockey.

 

[wamland]

Too much horse for the jockey.

People bought houses who should have never been approved. Little to nothing down/ no credit check/ no job/ no nothing and then they are given a 200k + loan. The interest rate of said loan is not fixed and wham they can no longer afford their house. What a surprise. The people who originated their loan had in turn bundled up many of these junk (sub-prime) loans and sold them to larger banks/lenders.

No oversight/no problem, as long as the market and interest rates are going along fine.

 

[dapperdan]

SImple question that I've yet to receive an answer for;

"Why are people defaulting?"

I would add, when these subprime instruments came out that allowed 100% financing WITH Stated Income, that's a really bad combination.

I know from personal experience, that I walked away from writing several subprime loans where the borrowers were essentially trying to dictate how they wanted to do business. They'd talked to several brokers before they got to me, learned the game, and then were simply pitting one broker against the other to get the best price. I've seen quite a bit of talk on this board about how the potential homebuyers were duped. From my personal experience, very, very few homebuyers were duped. They knew what they were getting into, and were actively willing to lie about their incomes on state income loans to get into a home. Where the homeowners may have gotten surprised, though, is that very few in the mortgage business expected the music to stop as abruptly as it did.

For those homeowners that used a state-income subprime, say 2 year ARM, there is no recourse for them. Period. They're going to be foreclosed. 1. They don't make the income that they stated, so now that they've got to go full-doc they can't come close to making the debt to income ratios. Also, the debt to income ratios have tightened considerably. 18 months ago you could qualify, with good credit, some assets, on a 100% full doc loan up to a 65.99% debt to income ratio. That's been cut to a max of 55.99%, with a 97% LTV (through FHA); and this ratio is going to come down again, very soon, I believe at the beginning of October.

2. The adjustable rate on their subprime loan is based on a) an index plus b) margin. Many of these ARMs were written with the 1 year Libor rate as the underlying index. At the time, it was no big deal, as libor and treasuries were very close in rate, and traded pretty much parallel to each other. Not anymore. The spread between libor and treasuries has gotten huge. If you've got a LIBOR based ARM, you're really screwed.

3. LTV. If you got a 100% LTV loan in 2006 or 2007, you've probably got a 115% to 125% LTV loan today. Even with perfect credit, and lots of money in the bank, the odds of simply being able to refinance are extrenely slim.

 

[dapperdan]

People bought houses who should have never been approved. Little to nothing down/ no credit check/ no job/ no nothing and then they are given a 200k + loan. The interest rate of said loan is not fixed and wham they can no longer afford their house. What a surprise. The people who originated their loan had in turn bundled up many of these junk (sub-prime) loans and sold them to larger banks/lenders.

No oversight/no problem, as long as the market and interest rates are going along fine.

Well, I think you're over-generalizing quite a bit.

I don't know of any lender, any subprime lender at the time, that would not pull a credit report. Also, I don't know of any lender that would lend to someone with no job.

Also, the issue is not interest rates. Interest rates have nothing to do with the current problems.

 

[bclemms]

This guy is annoying but he makes a hell of a case.
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[efil4stnias]

I would add, when these subprime instruments came out that allowed 100% financing WITH Stated Income, that's a really bad combination.

I know from personal experience, that I walked away from writing several subprime loans where the borrowers were essentially trying to dictate how they wanted to do business. They'd talked to several brokers before they got to me, learned the game, and then were simply pitting one broker against the other to get the best price. I've seen quite a bit of talk on this board about how the potential homebuyers were duped. From my personal experience, very, very few homebuyers were duped. They knew what they were getting into, and were actively willing to lie about their incomes on state income loans to get into a home. Where the homeowners may have gotten surprised, though, is that very few in the mortgage business expected the music to stop as abruptly as it did.

For those homeowners that used a state-income subprime, say 2 year ARM, there is no recourse for them. Period. They're going to be foreclosed. 1. They don't make the income that they stated, so now that they've got to go full-doc they can't come close to making the debt to income ratios. Also, the debt to income ratios have tightened considerably. 18 months ago you could qualify, with good credit, some assets, on a 100% full doc loan up to a 65.99% debt to income ratio. That's been cut to a max of 55.99%, with a 97% LTV (through FHA); and this ratio is going to come down again, very soon, I believe at the beginning of October.

2. The adjustable rate on their subprime loan is based on a) an index plus b) margin. Many of these ARMs were written with the 1 year Libor rate as the underlying index. At the time, it was no big deal, as libor and treasuries were very close in rate, and traded pretty much parallel to each other. Not anymore. The spread between libor and treasuries has gotten huge. If you've got a LIBOR based ARM, you're really screwed.

3. LTV. If you got a 100% LTV loan in 2006 or 2007, you've probably got a 115% to 125% LTV loan today. Even with perfect credit, and lots of money in the bank, the odds of simply being able to refinance are extrenely slim.

exactly. Liar loans...and anyone involved with them ( be it the broker or customer ) knew what they were doing save maybe a small portion who were never told or never asked why they didnt have to provide ANY form of earnings verification/ savings account info etc . Heck I was drug thru the mud on my first home in 2001 because I had deposited a lump sum in my savings account 3 months before I started looking for a home. And yet folks 2 years later were waltzing into brokerages and banks with nary a piece of paper and walking out with a loan for as much if not more, than what I was asking for.

 

[JimEverett]

I think interest rates have something to do with it since a good percentage of the people defaulting are doing so becuase their ARM has increased.

And thanks for that link/post - a lot in there.

 

[Rohan]

Dan, here is John Mauldin's website:

http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/default.aspx

Separately, though, I'd push back on your contention that no one without a job got loans in this bubble. You must be familiar with the term "Ninja Loan" (aka No Income, No Job, no Assets)? Ninja loans were 75% of WaMu's option-ARM portfolio at the end of '07.

http://seattletimes.nwsource.com/html/businesstechnology/2008192640_wamu21.html

 

[st.tammany]

Well, I think you're over-generalizing quite a bit.

I don't know of any lender, any subprime lender at the time, that would not pull a credit report. Also, I don't know of any lender that would lend to someone with no job.

Also, the issue is not interest rates. Interest rates have nothing to do with the current problems.

Okay so lets say what you're saying is the main underlying cause for all of the problems.

How many of these were there?
When did the first rash of these become evident?
They must know when the last round of these foreclosures is coming simply by knowing how many subprime mortgages were made nationwide.

I've heard that this issue will lead into the Prime market, the credit card market and the Auto loan market. When will that become evident?

 

[wamland]

Well, I think you're over-generalizing quite a bit.

I don't know of any lender, any subprime lender at the time, that would not pull a credit report. Also, I don't know of any lender that would lend to someone with no job.

.

I am over-generalizing but a simple google search will get you plenty of no credit check lenders...

http://www.google.com/search?q=mort...s=org.mozilla:en-US:official&client=firefox-a


<script language="JavaScript"> <!-- function google_ad_request_done(google_ads) { var s = ''; var i; if(google_ads.length == 0) { return; } s += 'Ads by Google
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'); return; } google_ad_client = 'pub-3754405753000444'; //2007-08-28: EA-Finance Loans P1 google_ad_channel = '9738495193'; google_ad_output = 'js'; google_max_num_ads = '10'; google_ad_type = 'text'; google_feedback = 'on'; google_hints = ' credit check mortgage,mortgage,no,credit,check,unverifiable,income,history,business,payment,lender,broker,down'; google_ad_region = 'test'; google_skip = '2'; // --> </script> <script style="display: none;" language="JavaScript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"></script>
<!-- google_ad_section_start --> "There are many reasons you may need a no credit check mortgage. Some of the most popular reasons you may need such a mortgage are having no verifiable income, or having a great income, but poor credit score or no credit history. If you have your own business, especially if it’s fairly new, you may have a very high income, but you may not have either the income history or documentation required by most mortgage lenders. The same is true if you did very well in investments at an early age or are a professional athlete early in your career. What are you supposed to do? Unless you have enough cash on hand to actually purchase a property outright, you’re going to need a mortgage. Unfortunately, many mortgage lenders won’t give you the time of day unless you can verify your income and credit history. If you don’t have either, you’ll be out of luck.
Fear not, there is hope if you want a mortgage but don’t want to get a credit check first. It won’t be as easy as running to your neighborhood bank or mortgage broker, but you’ll be able to get that mortgage and purchase your house. You will probably have to do more legwork to find a mortgage lender that is willing to loan money to you without performing a credit check."

http://ezinearticles.com/?Get-a-No-Credit-Check-Mortgage&id=592119

Also, I know when I bought my home there were several lenders that were trying to push me into more house than I could afford. My favorite line was....

"You might might be able to afford it now but you do expect to make more money over the life of the loan, don't you?"

I quickly got a fixed loan for a home in my price range and watched several friends get "no-interest"/ARM,'s or other loans for homes in the 350k range (DC/Maryland) that they can no longer afford.