John Preston

DAP: The Bad Idea That Won't Die

sorry...forgot to finsh this sentence:

To say that DAP/NO DOWN PAYNENT structured mortgage financing leads to default is like saying that since many bank robbers drink coffee, coffee causes people to rob banks......

DAP: The Bad Idea That Won't Die

There is not one shred of evidence that the DAP is a prime culprit in the current housing/mortgage mess.

To say that DAP/NO DOWN PAYNENT structured mortgage financing leads to default is like saying that since many

In the future, near or not, there will be a true public study...some genius of an economist or other academic...will do a post-mortum, if you will... on the many mortgage files that went bad...

The resulting facts will show that over-leveraging on household income (high debt to income ratios) , together with job instability and eroding household income (high debt ratios getting higher due to declining income) were the prime factor.

When income goes declines or goes away....down payment or no down payment.......delinque... and default occur...

This whole financial mess ....mortgages/housing.... about over valuing income, and the resulting asset valuation problems!

Home Price and Income Ratio Chart

In 1983, while working at a Savings and Loan, I read an article about the mythical "media home" / "media income" ....trying to point out that it was impossible to have housing appreciation beyond this relationship.

Housing values outpaced income then.....and it will alsways out pace it.

Why?

One reason is cash....1 in10 buyers nationally pays cash....in some markets, its 2 in 10 ( Such as my primary market in Prescott AZ). When borrowers put down excessive amounts at the time of purchase, it distorts the relationship.

A second reason is "off book income"... perhaps incomes are really higher...???

A third reason is that median income is a national number....the median income for renters will be lower than the median income for homebuyers/homeowners....

And finally....income management....many homeonwers will sacrifice....live tighter to the belt,so to speak...

This was never a sound "metric"!

Why Are Foreclosure Rates Much Higher in California, Arizona, Nevada and Florida?

Niels

Very god observation....its not as sexy as the "subprime-liars loans"..."greedy participants"..."stupi... homeonwers"..perspectives...but it is more accurate....

You wrote: "Housing is very, very tightly related to the job market. And where the job market is hot, so were the housing prices. This was a case of wishful thinking that the jobs would follow the housing. And we know it doesn't. Job creation is a factor of resource costs, availability of customers, cost of doing business.



On Jan 28 01:03 PM NielsG wrote:

> Obvious. Those states are the warmest to live in. People WANT to
> live there. And the rise in prices there was fueled as much by desire
> to be in a place as any other. People wagered their futures to live
> there.
>
> The problem is, just because a place is NICE to live in, doesn't
> mean there will be jobs enough or high enough pay to support a given
> population.
>
> Housing is very, very tightly related to the job market. And where
> the job market is hot, so were the housing prices. This was a case
> of wishful thinking that the jobs would follow the housing. And we
> know it doesn't. Job creation is a factor of resource costs, availability
> of customers, cost of doing business.
>
> And who in their right mind would want to build a business in a place
> where employees have a very high expectation of high salaries, where
> the property taxes are high, in the face of global competition with
> India and China?
>
> N

Still Blowing Sunshine... But Not Quite as Much

The expansion of the credit guidelines, which everyone missed when it began in the late 1990's, lay at the heart of the problem in housing.

Many, many economists missed the mark during the ensuing years, which lead to the current problem. This manipulation ofr the housing market was not obvious to many professional observers.

The FDIC did a study in late 04/early 05....which can be found at www.fdic.gov/bank/anal.... Obviously, their conclusions were off a bit.

My point is that many knowledgeable individuals look at the market...study data...and reach conclusions about what they see.

Howeve, there are variables that even the best miss. One of them is change...

In the 1980's, I worked for a Savings & Loan. After the deregulation, they aggressively took advantage of the new latitudes and positioned the institution to be inflation proof...interest rate proof...they were safe. The only thing that they did not consider was RE-REGULATION...

When re-regulation occurred as a result of the S&L crisis...an institution with a 15-times capital ratio (3-times was consider OK at that time) was wiped out in about 18 months.

I cannot defend "shilling" for any position on housing...bull or bear....but I will say that a broader, more informed understanding of the facts and the issues is paramount...and change...for the sake of change, may not necessarily be the best course.

Negative Equity the Driving Force Behind Subprime Defaults

Let's see...Chicken or egg?????? Was negative equity the problem which created defaults, or was it the over-leveraged income and declining household spenable income.....whcih created defaults which lead to negative equity?????

Income was over leveraged and when incomes declined, there was no wiggle room....tbw, Fannie AUS would actually issue its best approvals, 100% LTV, minimal reserves, at 64.99%, and that was at the end of 2007...some USER336770 is accurate in his re-iteration of a point I consitently make....which I will explore in an upcoming submission...

Ass for Robert Shiller, he made his case 4 uears ago for addressing housing prices, and warned that a dramatic fall in prices would lead to widespread systemic risk....read his wealth affect study....sucks to be right....

Sheila Bair - World's Worst Regulator - to Stay at FDIC

Tom

Where do I begin.....

First, as we now know, the housing/mortgage crisis has crippled the economy....spending, both for expansion (construction...busine... investment...etc) and for consumption, has slowed.

Second, jobs are now going way at an accelerated pace.

Third, steps 1 & 2 are a cycle, and they repeat and repeat and repeat.

Robert Shiller, and others, have linked housing to to consumption....since 70% or more of the GDP is consumer driven, fixing housing becomes a priority to stabilizing the broader economy...

Let' see....Case-Shiller HPI is down 30%+....the dow is down 30%+....consumption is down 3.4% +/- (Shiller predicted a 10% change in housing = a 1% change in spending, btw).

Some sharp economist is going to study this period in the near future, from the deliquent homeowners perspective, and find that their household incomce declined by 30%+.

30%+ seems to be the problem...

When unemployment hits 10%....and it will, we may all wish that housing had been fixed, and that the modification process had been done right.

As for Sheila Bair....she got far more right than anyone else in Washington or Wall Street......

My Three Point Plan to Improve Housing: Modification Is Not Enough

Setting aside the NO DOC and STATED INCME LOANS, which were perhaps 15%-20% of lending the past 6-8 years, housing prices reflected "income"....granted, income leveraging in the FNMA underwriting system went too far .... but prices were reflective of income....

I contend that income has eroded....and that the over-leveraging of income by FNMA took away the safety net....the was no error factor....

Any homeowner in trouble that I have met with in the past 18 months has experienced a decline in household income of 25-75%..... if your income is stable....you're fortunate...

I also contend that the income decline is affecting 2-3 times the number of households thatare affected by unemployment....

Ultimately, incomes have to go up to stabilize and grow the economy....good or bad, for jobs to improve, and income to grow, and spending to re-ignite the economy, housing must be stabilized....


On Jan 07 01:35 PM John Lounsbury wrote:

> It is fundamental that housing prices match income levels. My analysis
> (article coming) is that housing has anywhere from 15% to possibly
> 30% further to fall to match hisorical relationships between incomes
> and house prices.
>
> This fundamental fact will not keep government from trying to cushion
> the adjustment and millions of overextended and under water mortgagess
> from defaulting. At best, government action will have a marginal
> benefit. At the worst, government action will keep a bubble partially
> inflated and sucker in more victims.
>
> Government stimulus should be directed toward creating broader economic
> activity. In this way, average income levels should rise. A 10% rise
> in average income would translate to an increase of about the same
> amount in the affordable house price. In my opinion, this is a better
> way to stabilize house prices than trying to support unaffordable
> levels.
>
> nobull, D. McHattie - - -
>
> I feel you have the basic idea, but couldn't resist adding my views.
>
>

My Three Point Plan to Improve Housing: Modification Is Not Enough

As the economy burns to the ground...and it is burning, we should be wary of wanting to push housing down.

Everyone seems to think that housing is somehow an independent segment of the economy....

Wealth effect studies, one by Robert Shiller and one by Raphael Bostic, Stuart Gabriel and Gary Painter, link housing optimism more directly to consumption in the general economy......

They correlate consumer spending to the "feel good" effect of housing optimism....roughly, a 10% change in housing wealth equates to a 1% change in spending....

Figures are bearing this out....If you believe in the Case-Shiller Index (I do not), then the 30-35% total decline in housing values correlates to the 3.25% (I forget the exact number) decline in consumer spending....and I am sure that this will correlate to jobs....

So, when housing gets beat down, ultimately, spending declines, jobs go away....and this cycle can spiral out of control....continuing to repeat the process.....

Radical trends....up or down....are never good.......




On Jan 07 09:52 AM nobull wrote:

> I vote for that.
> Enough of this nonsense. Let prices correct. Plenty of buyers will
> step in.

Was Subprime Lending Just as Dishonest as Madoff?

Not so brilliant....the general economy....investment advisors....educationa... counselors....all of these...and more... require THE FOUR RULES ABOVE....

FIrst of all, subprime lending began years ago...I met my first subprime lender in 1981...so any performance history should have been known...

Second, I saw no doc/stated income loans beginning in 1984...so these ALT loans are not new....and their performance history should be known....

Third...in 2006, my subprime clients had higher credit scores than did my conforming/GSE clients....and several of my Subprime lenders said that their average credit score was in the 650 range...

Fourth, all aspects of theeconomy require new customers and money regularly to function.....

The root of the housing problem is in the lack of consistency in credit guidelines...what ever the rules ... we need to keep them consistent...

The Case for Higher Interest Rates and Lower Home Prices

First, we have a math problem....

a 1% change in rates ... using your example....is an 8.5% change in payment...for purposes of easy calculation...1% change in rates affects the the cost of housing by a (rounded) factor of 10%....

so, using your example, and doing the math....the housing cost would change 10.8%.....Not 18.2%

Take a $300,000 home mortgage at 4.5%, that pays $1,520.06 monthly...

And the same payment at 5.5% (41,520.06) generates a mortgage amount of $267,715.65......not $246,000

I agree that rates do not need to go down to stimulate houing....low rates reflect a corpse of an economy....market driven increasing rates indicates health and vibrance....

We need to get back to a true market in houisng...if possible.....one where buyers and sellers make deals...

For 15+ years, the lending community (frrom the top...GSE's/Congress/R... Street... manipulated the credit process and distorted housing values.....

Now the same group is manipulating the market value of housing by dumping and running away from the scene of the crime....

Would lenders, without bailout money, be so quick to discount REO's ....

Would lenders, without bailout money to pay bills...run from their primary business of LENDING MONEY?????

The Great American Ponzi Scheme (Part I)

so, you think te economy is not a ponzi scheme....what ever you do earn a living....is predicated on someone coming in and engaging....todays works...tomorrows money...

is it so different than a ponzi.....

Let's Use the 30-Year Treasury Bond to Reignite the Mortgage Market

The idea of "portable mortgages" is not new....periodically, it gets some publicity, and then fades to black.....no one really needs this...it sounds great, but is not practical int eh real world...where we all have to play....Besides, mortgage money is not really priced on a 30 year model....mortgage money is priced on

Extremely low rates matter only if there is no wage growth....or asset appreciation.....if you want to keep your salary fixed for 30 years...go for it...

Lastly, blaming mortgage brokers for the current problems is like blaming the cabbie who drives you to the airport...and things get messed up....you fly to LA and your baggage ends up in NY....good or bad, in personal financial sales, individual contact is a vital part of the process...until the actual providers are wiilling to staff the nation, intermediaries will be needed.....and yes...there are bad cabbies and bad mortgage brokers and bad...what ever it is you (the reader) do....

Damage Report 2008: Household Wealth Down $10 Trillion

"since the early 1990s – back in the day when no one had heard of option ARMs, interest only or NINJA mortgages."

Does anyone understand that the option ARM has been around since the early 1980's..and that NINJA has too...????? Maybe we should find new villans..

The problem is more about a breach of public trust by the large financial institutions,Wall Street and lax or poorly focused regulatory oversight...and now the drastic pullback in consumer spending and the resulting cuts in wages...

its not loan programs...they are simply repayment plans....

Mortgage Modifications Don't Necessarily Offer Relief

Actually, Larry,

if the housing situation is abated properly,

consumer spending would, hopefully, rise,

which creates jobs, hopefully,

and as the hosuing goes up in value, home-buyers in waiting will begin to engage, hopefully...

and then builders will begin to build,..hopefully..

The economy needs hope to function...its not all math