Irvine Housing Blog

No wrong again,

It was “OWNERS EQUIVALENT RENT” that caused the problem, It’s the same problem we had in 1989 and the first bank bail out in the early 1990’s .

And it’s the same problem we will have in the future.

OK Sure inflation would have been much higher, but this was better ???

Most of the abuse began in the 2000’s. From the dawn of time through the very early 2000’s loan underwriting was prudent and responsible to a degree. Computers (FNMA’s DU, FHLMC’s Loan Prospector) using theoretical models and credit scoring allowed the underwriting “sniff test” to be removed from the approval stream. Add to it automated valuation models (AVM’s) and you could potentially remove the human element from loan review. This all began after the dot com implosion. As many loan agents working in that era will tell you, “If DU says it’s approved, it’s approved”. The problem of course is that a chimp could get death row inmates a loan using the software tools at the time. 

The final dousing of kerosene on the bonfire was the roll out of HELOC’s and Option ARM’s. Cheap easy money funneled through richly compensated loan hacks (in retrospect…) was set for disaster.

When we surrender our decisioning rights as humans to our computer overlords, don’t expect good things to result. When you compensate poorly trained and ethically challenged money pimps to dole out 1% cost of funds by the firehose, it can’t be said that the poor caused this problem. Housings downfall was a self inflicted wound as people intentionally, not by accident, jumped off a high tower created with their own two hands.

My .02c

Soylent Green Is People.

The cause of the problem isn’t the extra 5 points of home ownership, that was just a symptom.

That represents less than an 8% increase in demand over a period of 9 years if I read the graph right.  New homes, condos, and apartment to condo conversions could cover that increase in demand without breaking a sweat.

It’s very simple. The people running the financial industry realized that if they could just free themselves from all sorts of govt regulations, they could lever up and produce huge profits and bonuses. So over a few decades, they gradually pwned the govt (political campaign funds, retired politicians and wives given lucrative board positions, etc) and the financial system ( ex. Encouaging execs to go into public service, getting Greenspan appointed, etc). Then they levered up, made huge profits, and paid themselves huge bonuses. Sure; it all crashed later, the banking corporations lost a ton of mine, but what do the former execs care? They either retired uberwealthy ling ago, or they just quit the bank and join a hedge fund or something, leaving the taxpayer to pay off the debts. No one had to give up his past bonus money.

As someone once said, if you give someone in Las Vegas $10,000 of a strangers money and tell him that if he gambles it and he keeps 100% of the profits on each hand and 0% of the losses- what do you think he is going to do? It’s that simple.

It’s all about incentives:

Subprime lenders are incentivized to create “computer models” that approve everyone for no money down and mediocre credit so that the loan officers can get their commissions.

They can bundle these crummy loans and sell them off to Wall Street as CDO’s (no longer Collateralized Mortgage Obligations…they are sprinkled with auto loans, etc.. to negatively correlate risk!) so that the Wall Street peeps can make THEIR commissions.

The subprime lenders get $104 for every $100 in loans and don’t keep any of the risk on their books!

The subprime lenders pay the rating agencies to give those bundles loads of crap AAA or other investment grade rating. If they don’t, no prob. There’s another rating agency who will!

This multiplier effect creates gobbs of money to loan to more and more customers, driving demand through the roof. Now everyone wants to buy these CDO’s. They’re a can’t miss!

Wait, now lets allow Credit Default Swaps to make unlimited bets on the viability of these CDO’s! Thank you, Mr. Greenspan.

I’m deciding on my Halloween costume. Should I go as a really scary subprime mtg…or an absolutely horrifying CDS?

I agree with most all of the comments above.  What really gets to me is that our leaders still have not learned.

“This was no oversight. Republican Senator Robert Corker and others proposed an amendment that would have added both a minimum down-payment requirement and consideration of credit history along with the establishment by regulators of a “prudent underwriting” standard. This amendment was defeated.”

  This is unbelievable to me. I would like to see the actual wording of this amendment and a list of those that opposed it. How many of these will get re-elected again?

  “Here’s my proposal to bring Congress’s penchant for imprudent lending to a quick end: All congressional pension assets should be invested in funds backed solely by the high- risk loans mandated by federal housing legislation. I have a feeling that things would change fast.”

  Not only funny, genius, this is the best idea I’ve heard yet.

Irvine Renter, the problem with your argument, if I understand it correctly, is that this meltdown went way, way, way beyond subprime, so standards were but a small part.

Low rates and easy credit made everyone be able to “afford” more expensive houses, until they couldn’t, even those who were “prime” borrowers.

I think a better correlation is where 30-yr rates went in the 2000’s.

Was HELOC abuse caused by CDOs, or the bubble creating fantasy wealth, upon which people borrowed even deeper upon? Yes, Greenspan was the problem, but because of his low rates, and as we are about to see, his ARM advocacy, which will be the next meltdown when these all resent. Reportedly, 89% of ARM owners are underwater.

True, Greenspan was clueless about CDOs - he recently said in a CNBC interview that despite his deep background in math, he doesn’t understand them - but if the mortgagees paid their bills, the CDOs wouldn’t have been an issue. It’s like a person with HIV getting AIDS and dying of pneumonia and blaming that darn pneumonia. We must regulate pneumonia!

I would also remind you where the securitization of mortgages began:

http://en.wikipedia.org/wiki/Mortgage-backed_security#History

And guess who held the most of these securities as the bubble burst:

If Fannie and Freddie pooling mortgages didn’t help pump up the bubble, why are they and the Fed so adamant that they do so now? To keep prices inflated, of course.

Lenders used to own mortgages for 30 years, and they were careful. But now loans are a product, so who the hell cares, dump it, and besides, the FDIC insures deposits, so let’s party.

I’d say securitization in general is a problem, yes, but when the government gets involved, it’s no longer a market.

IR -

On a serious note - what will happen in available monthly cash IF interest rates go back to mean or higher over the next 10 years? 

I’m afraid that I pay $600K for a good deal property with a 4 3/8 30 year fixed, and then sell in 10 years with interest rates at 7 or 8 or more percent for a 30 year fixed.  This tells me that I could only break even in 10 years!!  And, really it is only break even b/c I have paid my property down to 450K! 

I don’t see how values will go down indefinitely… we have been in a 20 to 30 year cycle of slowly declining rates.  We could easily find ourselves in a 20 year cycle of slowly rising or god forbid rapidly rising rates due to commodity inflation and all of the money printing. 

I so no escape for housing prices… :(

My .02

BD

IR- put more simply what happens to pricing in terms of value if rates double? 

This is what will happen to current borrowers. 

BD

Timely article on this subject:

Correcting Krugman

It is a long argument as to why Paul Krugman (and me) are wrong

32 Vienne 92606 is having a bidding war this Saturday, 9/18.

If you want to be a participant in the next housing price crash, go there and make an offer of $1 above the current $549k price.

Let’s see how **motivated** the seller really is.

WSJ has an interesting article on the GSEs and shadow inventory:

Reluctant Realtors: Fannie, Freddie
http://online.wsj.com/article/SB10001424052748704652104575494123756247944.html

NBR today used the term “unsold real estate” rather than “shadow inventory” in one of their segments.

Thank you for that article, SanJose. I’ve been wondering about that. The Fed shouldn’t be a black hole. Absolute power corrupts absolutely.

Well, OC was effective little by welfare reform since most of the welfare program in the county was WIC or free and reduce lunch programs in places like Santa Ana and Anaheim. Some asian immirgants in Westminster or Garden Grove tended to be on welfare longer since they came here as middle age and older with little job skills that are useful even at the lower job market in OC but La had a lot more folks on tradional welfare progrmas, so I don’t see a pike of homeownership with welfare reform in the county, in fact the county homeownership since the early 1980’s is below the national average since housing tends to be more expensive here long before the bubble.