Twisted ARMs

On March 6, 2007, In Bubble, Credit Bubble, Debt, Lending Standards, Speculation, By Chuck Ponzi

Ever explained to someone that the housing bubble in California is just a blowoff of speculative demand, only to be rebuffed by some pseudo edumuhcashun truthiness about how so many people want to live here, blah blah blah, great weather, blah blah blah, people make a lot of money here, blah blah blah, construction costs, blah blah blah, land use restrictions, blah blah blah and so on blather?

Would you just love to stick something in their face that breaks it down scientifically and proves them all wrong?  Something that shows exactly how much these variables changed the cost of living here?  Wouldn’t you love to get your hands on exactly that piece of information?  Wouldn’t you love to prove in graphs and numbers that the variables they just mentioned had little to no effect on prices, while it was exactly the proliferation of ARMs that did it?

Wouldn’t you love that piece of work to include formulas such as this:

Function of home price appreciation variables

And written by a professor of finance at a California university? 

What if I told you that exactly such a paper exists that delves into California’s history of home prices discussion that includes a detailed explanation of what caused the home price explosion?  It does exist.

Here’s a rundown of the conclusions:

California’s Housing Bubble Explained

Well, have I whetted your appetite enough to sit through 30 minutes of mind-tearing edumuhcashun to get to the data behind the pretty little graph I pounded out?

Here it is.

 
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Regulators “You can Do Better”

On March 2, 2007, In Bubble, Credit Bubble, Debt, By Chuck Ponzi

Continuing the ongoing saga of the subprime implosion, Federal Regulators have gotten into the play of our Spring Smackdown by strongarming mortgage lenders into qualifying based on fully amortizing payments.

Can you say Ruh roh Shaggy?

Regulators are concerned lenders are issuing mortgages to borrowers with little proof that they can repay their loan and do not fully understand the risk of increasing payments, the document states.

Subprime borrowers could find themselves unable to afford monthly payments after the initial “teaser” rate expires and make payments for taxes and other expenses if lenders do not hold such costs in escrow, the document states.

Subprime borrowers also face the risk of “losing their home,” the document states.

That pretty much describes most of Southern California.  When our affordability dipped below 6%, and much of the wealthy already live here (we’re not attracting a higher percent of millionaires than are already here), the area’s housing will stop in its tracks if documented income were required on a fully amortizing basis.

Dead Cold.

More than 80% of the loans made recently in SoCal were of the adjustable rate ilk, and I’d venture a guess than more than just a smidgen of those are due to affordability of the monthly payment.  Fully amortizing loans are currently touted as stone age devices not worthy of a modern world.  All part of the “it’s different this time” argument that is so quickly spouted by the clueless.  Just look at history if you want to know what affordability is going to look like.  Because, frankly, if the loans of yesteryear are reintroduced, so are the prices.  Incomes have not kept up with basic inflation, much less the out-of-control prices of Southern California.

The positive to all of this speculation squashing is that it will flush homes back to banks and back on the market at reduced prices.  Individuals will lose out, but the overall will be better.  Risk will once again be priced in.

 
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SB385 – Non Traditional Mortgage Guidance

On February 27, 2007, In Credit Bubble, Debt, Lending Standards, By Chuck Ponzi

Lawmakers - Founding FathersAnyone wondering when California was going to adopt the guidance for non traditional mortgages?  Not too long from now would be my assertion.

The California Senate bill SB385 has been submitted on the 21st.  We’ll see if it hits any snags… although I doubt it.

According to the Federal Reserve, the guidelines are intended to:
1.  Ensure that loan terms and underwriting standards are consistent with prudent lending practices, including consideration of a borrower’s repayment capacity;
2.  Recognize that many nontraditional mortgage loans, particularly when they have risk-layering features, are untested in a stressed environment. These products warrant strong risk management standards, capital levels commensurate with the risk, and an allowance for loan and lease losses that reflects the collectibility of the portfolio; and
3.  Ensure that consumers have sufficient information to clearly understand loan terms and associated risks prior to making a product or payment choice.

(more…)

 
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Contrarian Indicators: Business Week

On February 9, 2007, In Contrary Indicators, Debt, SubPrime, By Chuck Ponzi

For many perusing the site, you’ll appreciate what a strong contrarian indicator mainstream media can be. For the rest of us, the mainstream media often acts as a blubbering beaurocratic beheamoth. No offense intended, just stating the obvious.

It is for this reason that by the time ideas come to print, they are often outdated and decidedly deceptive. Just such a cover comes our way. (Hat tip and thanks to JMF of immobilienblasen, or “real-estate bubble” for non-German speakers, for bringing this to my attention)

The article “It’s A Low, Low, Low, Low-Rate World: Money is cheap. And some experts say it could stay that way for years. That’s creating opportunity—and brand new risks” is here.

This is the cover of the current issue of Business Week:
How accurate you might ask, has the mainstream media been in predicting so far in the housing bubble? Consider, for example, the cheerleading piece Time magazine published in June 2005, at the near exact top of the housing bubble:
Not surprisingly, when you go to BusinessWeeks homepage, you’ll see this little one (the arrows are mine)
If you don’t see the irony in how the 2 issues impact each other, here it is:
1. Rates are low and credit available because there is low percieved risk. Risk is perceived as low because housing prices were rising.
2. Housing prices are supported by low rates and available credit. If rates go up, housing prices will go down. They are “priced to perfection”

Reminds me of something Alan Greenspan said:

Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low-risk premiums.

 
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