From the Wall Street Journal:
As the housing sector cools, the mortgage market faces an awkward question: Who takes the hit when loans go bad?
A generation ago, nobody asked. Banks made loans and suffered the consequences when borrowers didn’t pay. Today, a complex Wall Street machine buys and sells mortgages and packages the loans into securities that are diced and sliced and sold again to investors world-wide.
Although the $9.1 trillion mortgage market has been relatively calm as the housing market has slowed, players on Wall Street and beyond are starting to grapple over bad loans, especially in the market for borrowers with scuffed credit — so-called subprime customers.
Under contracts that govern the exchange of mortgages, lenders often must take back loans that default very early in their lives or that come with underwriting mistakes, such as flawed property appraisals. As the housing boom fizzles, cases of bad underwriting are popping up and more mortgages are defaulting early. That has investment banks and other mortgage buyers invoking these contract provisions and pressing lenders to repurchase mortgages that get sold to third parties, creating big losses for some lenders.
In response, some of the loan originators are tightening their underwriting standards. Investors and lenders also are doing more financial sleuthing to sniff out problems in loans.
…
“In a rising market, even a bad loan is a good loan,” said Nate Redleaf, a research analyst with Imperial Capital LLC, a Beverly Hills, Calif., investment bank. “You could be sloppy and it didn’t matter. Now people really have to do their jobs. They have to be more vigilant.”
…
Credit Suisse estimates early defaults more than doubled on subprime loans that didn’t require income documentation between the first quarter of 2004 and the first quarter of 2006.
The current round of loan buybacks began in late 2005 and picked up steam in 2006. It probably will continue for several more quarters if mortgage delinquencies keep rising. “When you see foreclosures rise, you often see buybacks rise,” said Doug Duncan, the Mortgage Bankers Association’s chief economist. He expects a modest increase in delinquencies in the next year or two.
Mortgage delinquencies have been at historically low levels, and the perceived riskiness of mortgage-backed securities — as measured by their yields compared with all-but-risk-free Treasury bonds — has been relatively stable. Overall delinquency rates on mortgages edged up in the second quarter from a year earlier, with the biggest increases in adjustable-rate loans, according to the Mortgage Bankers Association.
What’s buyback? Does it mean if a bank sells back security it has to buy it back?
Yes, I believe it typically happens in the case of an early default (for example, 90 days) or an underwriting issue.
jb
“Under contracts that govern the exchange of mortgages, lenders often must take back loans that default very early in their lives or that come with underwriting mistakes”
How early is early?
Thats the question that popped into my head when I read this. How on earth can these mortgages be defaulting so early.
jb
a “bubble mortgages”
During the great depression, banks didnt allow pl to have access to there money. If banks fail can this happen again? If you have cash what do you do with it…keep it under your mattres? Convert to gold? convert to another currency?
I believe early would be if the loan went bad in the first three months. I am not in this market directly but keep an eye on it. For a loan to go bad in the first three months I would assume fraud would have to be present.
Check out this Cl posting
http://newjersey.craigslist.org/rfs/215370967.html
http://money.cnn.com/2006/10/09/real_estate/arms_nightmare/index.htm?postversion=2006100911
from pat’s above attached article (cnn)… it reminds of something, somedays, i forget… longterm mortgage rates arent moving and they are quite low still. this means, even as risks increase, and markets flatten or decline, the uniformed buyer can ‘afford’ the monthly bills of some pretty serious mortgages. that will further slow this painful unwinding. if we had even a 3% jump in rates, this whole monster would purge itself…but that isnt so likely.
JB: “How on earth can these mortgages be defaulting so early.”
Mortgage brokers making up income, and no one verifying it. Stated income loans. In some cases the very first mortgage payment is more than the borrowers’ monthly gross income. No lie. It goes 30,60,90, NOD.
I find this article delusive. The real problem is high LTV’s in an environment in which the appreciation doesn’t bail the lender out.
If the borrower can afford the first two years of payments, there is no problem with writing 100%s in a market going up at least 9% a year. The lender gets paid even if the borrower defaults, because the home can be resold. Foreclosure rates are very low, because everyone can sell ahead of foreclosure. As soon as appreciation even flattens, those 100%s turn into turkeys and the neg-ams turn into exploding whale carcasses. The homeowner can’t sell, and the mortgage holder has to agree to a short sale or go the foreclosure route. Foreclosure losses average around 30%.
Bank holidays? Highly unlikely.
jb
MOM,
You hit the nail on the head. The only way these loans work are if the market continues to rise. That is the foundation of these loans. Flat/falling prices, they are doomed.
“In the past two years, homeowners took out 1.3 million ARMs with teaser rates below 2 percent, according to Cagan’s research.”
Total dollar amount????
That Short Hills 2br condo?
How much without the JumboTron?
Off topic, but interesting. Would anyone like to make any macro-predictions based on this? Slots at the Meadowlands?
Mohegan Tribal Gaming Authority and Downs Racing, LP Announce Casino Grand Opening Date of Mohegan Sun at Pocono Downs
The Mohegan Tribal Gaming Authority (the Authority), and its subsidiary, Downs Racing, L.P. (known as Mohegan Sun at Pocono Downs), announced today official plans to be the first racetrack in Pennsylvania to open a casino. Officials announced that Tuesday, November 14th would be the grand opening date for the 1083 slots in the Phase I facility. This date is pending the receipt of all approvals by the Pennsylvania Gaming Control Board, which includes successful completion of two pre-opening test events.
I put down 10% on a condo preconstruction in harrison nj. Completion 2007. If prices continue to fall Im thinking about defualting on contract lossing my deposit and buying a house any thoughts.
Did you buy it to live there, or to flip?
jb
Harrison is quite a rough town, no?
Seattle flipper in trouble:
http://seattlerei.blogspot.com/2006/10/purge-continues.html
http://today.reuters.com/news/articlenews.aspx?type=businessNews&storyid=2006-10-09T182327Z_01_N09284873_RTRUKOC_0_US-MARKETS-HOUSING-GREENSPAN.xml&src=rss&rpc=23
WASHINGTON (Reuters) – The U.S. housing market appears to be emerging from its recent travails and the “worst may well be over,” former Federal Reserve Chairman Alan Greenspan was quoted as saying on Friday.
“I suspect that we are coming to the end of this downtrend, as applications for new mortgages, the most important series, have flattened out,” Greenspan said at an event in Calgary, Canada, sponsored by BMO Financial Group, according to a transcript BMO made available.
“There is a good chance of coming out of this in good shape, but average housing prices are likely to be down this year relative to 2005. I don’t know, but I think the worst of this may well be over,” he added.
Applications for U.S. home mortgages jumped in the latest week bolstered by increases in refinancing and new home purchases as long-term rates decreased, according to data from the Mortgage Bond Association.
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Greenspan, the former Fed chief’s comments suggest a more sanguine view of the U.S. housing market than that offered by current Fed chairman Ben Bernanke, who said last week that the housing market was currently undergoing a “substantial correction.”
Some bond market participants in London said on Monday that Greenspan’s remarks helped drive bond prices down further and yields higher, and obscured concerns surrounding the news that North Korea said it safely and successfully conducted an underground nuclear test over the weekend.
U.S. bond markets were closed on Monday in observance of the Columbus Day holiday.
Greenspan said the fall of communism, not sharp interest rate cuts by the Fed, was behind the housing boom in the early part of the decade. Cheap labor flooding into the West after the fall of the Berlin Wall had a disinflationary effect, causing bond yields to fall and house values to rise, he said.
On another topic, the former Fed chair said that China is unlikely to quickly adopt a flexible exchange rate regime as it transitions to a market economy from a centrally planned one. Continued…
Dee
I assume you are talking about riverview at harrison. They have recently taken to offering them to realtors, they had not needed to up until recently, so they are not all sold out.
KL
Just caught this in my travels, apparently the real estate slowdown won’t be affecting Jersey City. At least if you believe people who absolutely have to count on the real estate slow down not affecting Jersey City.
http://www.therealdeal.net/issues/OCTOBER_2006/1159652899.php
If anyone can help, right now I’m looking for the number of new housing units built in NJ since 2000. If it is broken down annually, that would be a big plus.
Here’s the money quote from the article referenced above:
“But Jersey City Councilman Steven Fulop is more sanguine.
“It’s a unique market dynamic,” said Fulop, who represents the downtown and waterfront districts. “We are somewhat insulated from what else is going on in the housing market.””
You heard that right, “It’s different here.”
Don’t forget about Bergen County being “bubblewrapped”.
jb
Lindsey, here are the numbers of “Monthly New Privately-Owned Residential Building Permits” by county (you have to go county by county, then click on the drop down to see the year you want):
http://censtats.census.gov/cgi-bin/bldgprmt/bldgsel.pl
Bergen County:
http://censtats.http://censtats.census.gov/cgi-bin/bldgprmt/bldgsel.pl
Lindsey:
http://censtats.census.gov/cgi-bin/bldgprmt/bldgsel.pl
Lindsey,
Here is the data for all of NJ (including municipalities). It may take a little work to put it all together.
http://tinyurl.com/ezbkx
I’ve seen first hand the prices drop and inventory rise in jersey city. The only thing that is insulated about jersey city is Steven’s senses. Jersey City will have one of the biggest housing gluts in the nation.
I assume you are talking about riverview at harrison. They have recently taken to offering them to realtors, they had not needed to up until recently, so they are not all sold out.
KL
Did you buy it to live there, or to flip?
I originally was going to live then I thought about the taxes and main fee and thought it would be better to flip but I seems neither is a good idea, I didnt know they were taking other realtors. before they were only selling through there own office. I dont want to lose my deposit but it seems better than holding bag on overpriced condo that would not cash flow if I decide to rent it out. If homes fall low enough I may be better to lose dep and buy a house that may have gone down 15-20% off 2005 prices. Basically it would be a wash.
Any advise?
Spelunker Says:
October 9th, 2006 at 4:44 pm
I’ve seen first hand the prices drop and inventory rise in jersey city. The only thing that is insulated about jersey city is Steven’s senses. Jersey City will have one of the biggest housing gluts in the nation.
You think it will rip apart the new construction located in the less desirable places in Hoboken?
It’s a unique market dynamic,” said Fulop, who represents the downtown and waterfront districts. “We are somewhat insulated from what else is going on in the housing market.””
He must be spending too much time at Barry’s Tavern, in Bradley Beach, with the mayor!!
Thanks Pat and rentininnj
I found the NJ builder’s association site, but I like to go with the “official” numbers when I can.
Hi Dee
Not sure if this helps but my own personal experience with that development is this. The plan is to have a community inside a community, with retail etc right in the development. Which sounds like a great concept, because this area doesnt have anything like that or close to that, but… last year when I was approached by a client interested in purchasing I was only able to give them the phone number of the on-site office which all sales were going thru. He got on a waiting list. Another client who was on the waiting list , got a letter last october, but declined at that time instead chose to purchase a sfh. Now they have solicted the help from realtors – offering commisions for sales. Last year I had to hand them buyers for nothing. So I assume they have had some cancellations.
KL
“Hi Dee
Not sure if this helps but my own personal experience with that development is this. The plan is to have a community inside a community, with retail etc right in the development. Which sounds like a great concept, because this area doesnt have anything like that or close to that, but last year when I was approached by a client interested in purchasing I was only able to give them the phone number of the on-site office which all sales were going thru. He got on a waiting list. Another client who was on the waiting list , got a letter last october, but declined at that time instead chose to purchase a sfh. Now they have solicted the help from realtors – offering commisions for sales. Last year I had to hand them buyers for nothing. So I assume they have had some cancellations.”
KL
Thanks for input but my question is if prices fall low enough before this thing is built is it worth losing dep and purchase a sfh or two fh. I maybe better off losing dep than coming out of pocket every month to make up diff if I rent it. When I signed up last year there was alot of excitment about project. they are also building a stadium and harrison metro center. In a healthly market this thing would be a go. But if market slides further next year I could be losing my shirt. I alraedy own a condo but this new develpoment would double my mortage.
I dont want to lose dep but it seems they are having trouble selling their units. BTW they are having a block party Oct 15 you can register at http://www.riverparkatharrison.com
Dee
My info is anecdotal, second hand, and assumptions, which all should have only a very very small part of your decision. You need to find out if you can how many cancellations they’ve had how many are left to sell – what price are they looking to sell them at…. what price are you buying yours at, some developments will still do well, others will fail miserably. I remember winding river in Sayreville, in the early 90’s another great concept, but started at the end of a boom, and the original owners lost there shirts, builder never finished, the place looked like hell, signs of protest on the lawns, walk-aways.. Of course it looks great now! 15 years later. Can you wait??
How will you feel if it does great after you’ve lost your deposit, would it be worse than you’d feel if it does bad when you’ve kept it??
Tough decision
KL
“My info is anecdotal, second hand, and assumptions, which all should have only a very very small part of your decision. You need to find out if you can how many cancellations they’ve had how many are left to sell – what price are they looking to sell them at…. what price are you buying yours at, some developments will still do well, others will fail miserably. I remember winding river in Sayreville, in the early 90’s another great concept, but started at the end of a boom, and the original owners lost there shirts, builder never finished, the place looked like hell, signs of protest on the lawns, walk-aways.. Of course it looks great now! 15 years later. Can you wait??
How will you feel if it does great after you’ve lost your deposit, would it be worse than you’d feel if it does bad when you’ve kept it??
Tough decision”
Thanks 4 input 9 out of 10 I will stick it through. I did my reseach before investing. They are supposed to redevelop the water front on the harrison and newark side, with the devils stadium and the mertostar stadium in the works it may be worth the pain now. even if after a year I basically break even and sell, I cant be mad at that. There also supposed to put a Route 280 extension and new Path Station at Harrison the light rail just started up a few months ago. All these factors added up made for a wise investment. Im goin to stay in the deal but I was interesting gettin another option Thanks
KL
KL-
Just to update you re: an unrelated topic. You had asked for an update re: the apt I was looking to rent for my mom. Well, we were able to get a great deal by signing directly with the owners of the apt who had not rented out their unit (the one we wanted in the first place but were told by the real estate agent that it was already rented out). Also, the real estate agent’s unit is still unrented and now it looks like she is selling it. So, alls well that ends well.
AFE
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