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jk
07-22-06, 04:37 PM
the article below begins:

July 23, 2006
<nyt_headline version="1.0" type=" "> Re-refinancing, and Putting Off Mortgage Pain </nyt_headline>

<nyt_byline version="1.0" type=" "> </nyt_byline>By VIKAS BAJAJ and RON NIXON
<nyt_text> </nyt_text> It is the latest twist in the gravity-defying world of the high housing prices and exotic low-rate mortgages: As monthly payments on adjustable-rate mortgages are starting to balloon, many Americans have found a way to put off the day of reckoning.
They are refinancing with new adjustable-rate mortgages that keep monthly payments low — for now, that is, though their payments will likely rise even higher in the future.


http://www.nytimes.com/2006/07/23/business/23mortgage.html?hp&ex=1153627200&en=48d3badc80108762&ei=5094&partner=homepage

they are rolling over into new ARMs with new intro teaser rates. these are likely a bit higher than their prior teaser rate but still puts off the day of reckoning. also, they're still taking out equity if its there to be had.

Jim Nickerson
07-22-06, 04:57 PM
I believe inflation is good when one has to pay back loans, i.e. one pays back with inflated dollars. If inflation is going up, but if the FOMC is going to chicken out with fighting it with on-going rate increases, is it possible all these ARMs may turn out not to be a bad deal?

JD_
07-22-06, 08:24 PM
Why not just delay the eventual day of reckoning to beyond the grave? I just read an article about a 74-year-old who refinanced to a 30 year mortgage at age 70. Asked whether he was worried about repaying the loan by age 100 he said:

‘It doesn’t bother me at all. It’s not something I ever thought I would live to complete.’

Have to love the new debt repayment strategy. Don't pay it, die with it!

blazespinnaker
07-22-06, 08:28 PM
Love the pic that came with that article:

EJ
07-22-06, 08:51 PM
Why not just delay the eventual day of reckoning to beyond the grave? I just read an article about a 74-year-old who refinanced to a 30 year mortgage at age 70. Asked whether he was worried about repaying the loan by age 100 he said:

‘It doesn’t bother me at all. It’s not something I ever thought I would live to complete.’

Have to love the new debt repayment strategy. Don't pay it, die with it!
That's how the baby boomers are going to survive their lack of retirement planning... by bequeathing their debts to their kids. The hard core approach is the negative amortization morgage, or NegAmMort (http://en.wikipedia.org/wiki/Negative_amortization) in the business. This is why the whole matter of debt and credit really comes down to morals. There is always a way to make money off people who are willing to take on ever more debt, and the banks are only too glad to oblige. The kids, of course, don't inherit the house, the bank does AND after the orignal owner already paid for a good part of it.

"I am not exactly certain how to start this essay. I’m kind of in a position analogous to writing Hitler’s biography in late 1940. We know at this point he’s a miserable excuse for a human being, but we don’t have the evidence discovered in the last four and a half years of the war as to how sick he truly was.

The negative amortization loan is in a very similar situation. It's a miserable excuse for a loan, causing a lot of damage, but we don't yet know how much. With most housing market gurus finally agreeing with what I've been saying for the last year, talking about a need for a readjustment in real estate prices, we are pretty certain that there’s going to be a drastic re-evaluation of the home market soon. We are missing the data of exactly how bad it’s going to be."

How they work (http://www.searchlightcrusade.net/posts/1126189276.shtml)

In aggregate, these loans represent a risk to the banking system, according to the lawyers for the banks that sell them:

"The Agencies recognize that many of the risks associated with nontraditional mortgage loans exist in other adjustable-rate mortgage products, but our concern is elevated with nontraditional products due to the lack of principal amortization and potential accumulation of negative amortization. The Agencies are also concerned that these products and practices are being offered to a wider spectrum of borrowers, including some who may not otherwise qualify for traditional fixed-rate or other adjustable-rate mortgage loans, and who may not fully understand the associated risks."

Bank Lawyer's Blog (http://www.banklawyersblog.com/3_bank_lawyers/2006/01/proposed_guidan.html)

jk
07-22-06, 09:15 PM
ej: "...bequeathing their debts to their kids."

the house with the unpaid mortgage worth more than the house itself just goes back to the bank. i've also heard there are now 50 yr mortgages available. frankly, i don't worry about paying off my mortgage - i've lived in my home 27 yrs and just refinanced again a few yrs ago. [4.875% for 30 years - i don't plan to make any early payments.]

people talk about our indebting future generations but i'm not sure this makes sense. yes, the national debt goes up, but talk about negative amortization! the national debt is not going to be paid; it will be carried. debt service is an issue, i suppose, but it will be paid if necessary by being amortized, i.e. the u.s. issues more debt to pay the interest on the previous debt. hmmm.. that's when we issue the new currency, to get all those zeroes off the bills.

more seriously, do you think we have to start worrying about the eventual imposition of capital controls to prevent people from moving assets abroad?

blazespinnaker
07-22-06, 11:35 PM
Hmmm .. perhaps some of these are reverse mortgages? Nothing wrong with that, I think.

Jim Nickerson
07-23-06, 02:12 AM
the house with the unpaid mortgage worth more than the house itself just goes back to the bank. i've also heard there are now 50 yr mortgages available. frankly, i don't worry about paying off my mortgage - i've lived in my home 27 yrs and just refinanced again a few yrs ago. [4.875% for 30 years - i don't plan to make any early payments.]

jk, now to me this is "putting your money where your mouth is." I think that is the saying. You obviously have made a serious bet, unless you live in a shack, that it is inflation that is in our futures, and not deflation. What would have to happen for you to get worried over your house loan? or that might make someone else with a similar house loan, but with perhaps less savings than you may have, worry?

I took out an equity mortgage almost 3 years ago, just because I thought it was a cheap loan, and though I had only a short term need for some of the loan--like 30 days--I took it with full intention of probably taking 15 years to pay it back at 6% with anticipated inflated dollars, and at the moment I still think it was the correct move to have made. I could pay the balance off tomorrow if I had to do so. My thinking was something could happen unexpectedly--which I could not imagine what--that would necessitate me having to get a mortgage, but I expected rates would subsequently go up and up, which they have so far. So I too have a bet that inflation is the future, not deflation.


more seriously, do you think we have to start worrying about the eventual imposition of capital controls to prevent people from moving assets abroad?

I have no idea, but lets assume on this forum a consesus developed that suggested within a few years, capital controls were possbile. My question: how would one reasonably move assets abroad without hiring as "assets protection lawyer?" Would this be something only people with more than a couple of million dollars would be in a position to consider, or would such be practical say if one only had a couple of hundred thousand dollars of lquid assets?<!-- / message -->

SeanO
07-23-06, 03:26 AM
I believe some of this is ultimately self regulating. My last 5 residential transactions were all held up by review appraisals, asset verifications and other lender checks that were non-existent a year ago. 14 properties sold at foreclosure sale on Friday in northern California , and of those 11 went back to the bank. While there will certainly be some lenders that are slow learners, housing credit has tightened and will continue to tighten. Perhaps it's too little too late, I don't know.

Isn't the credit risk on mortgage's hedged using derivatives? Does anyone here know enough about that to conjecture whether bad housing debt could ultimately result in an LTCM like crisis?

jk
07-23-06, 11:31 AM
You obviously have made a serious bet, unless you live in a shack, that it is inflation that is in our futures, and not deflation. What would have to happen for you to get worried over your house loan? or that might make someone else with a similar house loan, but with perhaps less savings than you may have, worry?
you're right, jim. what lets me not worry about the debt are offsetting assets i could always use to pay it off. otherwise my concern about the debt would be proportional to any concern i might have about my income stream. i think my work income is pretty secure, so i don't worry there either.





I believe some of this is ultimately self regulating. My last 5 residential transactions were all held up by review appraisals, asset verifications and other lender checks that were non-existent a year ago. 14 properties sold at foreclosure sale on Friday in northern California , and of those 11 went back to the bank. While there will certainly be some lenders that are slow learners, housing credit has tightened and will continue to tighten. Perhaps it's too little too late, I don't know.

Isn't the credit risk on mortgage's hedged using derivatives? Does anyone here know enough about that to conjecture whether bad housing debt could ultimately result in an LTCM like crisis?
i think there's risk in freddy and fannie. they securitize a lot of mortgages and then sell them [i'm not sure if they make any guarantees about those securities]. but they also hold huge portfolios of mortages that they've kept on their own books. the other institutions at risk are the mortgage insurers. i've been short mgic [mtg] for some time waiting for the defaults to hit.

i think if freddy and fanny blow up there will be a huge shock wave. it's not clear whether like ltcm this will threaten the financial stability of the whole system. i was about to say that their positions were simpler than those of ltcm, but then i remembered that they have huge derivative books trying to hedge their interest rate exposure, so the counterparties to those positions will also be put at risk.

maybe someone knows more about these issues and can pick up the baton here....

BK
07-23-06, 11:39 AM
Can anyone name a period in the history of man-kind when a Housing Boom wasn't followed by some Banks going bust???

I'm fairly certain that there has never been a period of Real Estate Booms that was not followed by some problems with Banks. Of course, if I mention the idea that Banks can go belly up at a cocktail party or family function - I demonstrate that I know NOTHING about finance or history - the general public KNOWS that Banks never go belly up.

jk
07-23-06, 12:04 PM
Can anyone name a period in the history of man-kind when a Housing Boom wasn't followed by some Banks going bust???

I'm fairly certain that there has never been a period of Real Estate Booms that was not followed by some problems with Banks. Of course, if I mention the idea that Banks can go belly up at a cocktail party or family function - I demonstrate that I know NOTHING about finance or history - the general public KNOWS that Banks never go belly up.

gary shilling has recommended shorting the regional bank etf, rkh. i suppose another issue raised is whether the fdic/fslic will bail out people who might have over 100k [or have they raised the limit?] in one of the bankrupt banks.

SeanO
07-23-06, 03:19 PM
gary shilling has recommended shorting the regional bank etf, rkh. i suppose another issue raised is whether the fdic/fslic will bail out people who might have over 100k [or have they raised the limit?] in one of the bankrupt banks.

In northern California the lenders I see having the most foreclosures are First Franklin (National City), Washington Mutual, and Countrywide. These also seem to be the most aggressive. As I mentioned above, what remains unclear is how much downside they can handle, and where the downside ultimately lands if it has been hedged with derivatives. I wouldn't short the regionals just based on their home loan exposure without knowing that first. And on timing remember that while foreclosures are rising they are still at historically low levels so it will likely be a while before we see the impact (6 months min).

EJ
07-23-06, 07:16 PM
you're right, jim. what lets me not worry about the debt are offsetting assets i could always use to pay it off. otherwise my concern about the debt would be proportional to any concern i might have about my income stream. i think my work income is pretty secure, so i don't worry there either.



i think there's risk in freddy and fannie. they securitize a lot of mortgages and then sell them [i'm not sure if they make any guarantees about those securities]. but they also hold huge portfolios of mortages that they've kept on their own books. the other institutions at risk are the mortgage insurers. i've been short mgic [mtg] for some time waiting for the defaults to hit.

i think if freddy and fanny blow up there will be a huge shock wave. it's not clear whether like ltcm this will threaten the financial stability of the whole system. i was about to say that their positions were simpler than those of ltcm, but then i remembered that they have huge derivative books trying to hedge their interest rate exposure, so the counterparties to those positions will also be put at risk.

maybe someone knows more about these issues and can pick up the baton here....

A lot of these questions are addressed in my interview with Martin Mayer. Editing and getting the thing done is taking a lot longer than I expected (did I mention I've co-authored a book to be published in October by Wiley... http://www.americasbubbleeconomy.com) but basically Fannie and Freddie are a mess, although they've gotten better over the past couple of years, at least with respect to no longer investing in crazy things they had no business getting involved in, such as derivatives related to the Swiss currency market and other equally outlandish nonesense, according to Mayer. Their big exposure is in the subprime market, and no one is confident that their credit risk expsosure is effectively hedged there, including Mayer, as interest rates rise. And if rates rise quickly because something goes seriously wrong in the currency markets over, say, the war in the Middle East, all bets are off.

Noticed this currency controls question is its own thread now, will respond to that issue there...

metalman
07-23-06, 08:58 PM
In northern California the lenders I see having the most foreclosures are First Franklin (National City), Washington Mutual, and Countrywide. These also seem to be the most aggressive. As I mentioned above, what remains unclear is how much downside they can handle, and where the downside ultimately lands if it has been hedged with derivatives. I wouldn't short the regionals just based on their home loan exposure without knowing that first. And on timing remember that while foreclosures are rising they are still at historically low levels so it will likely be a while before we see the impact (6 months min).

Sean, you're the expert re RE. how's this for a thesis...

now the banks are very aggressive about taking properties in foreclosure rather than extending terms to homeowners because home prices have been appreciating so they expect a profit in the resale.

but at some point... maybe in 6 mo... they find they got a fat portfolio of properties thought 6 mo. before they can sell at a nice profit, but in 6 mo. they discover together that there is no profit because prices are declining. will they then dump these houses on the market all around the same time? seems like the short op with the agressive mortgage companies is just before they all come to that realization...

SeanO
07-25-06, 01:49 AM
Sean, you're the expert re RE. how's this for a thesis...

now the banks are very aggressive about taking properties in foreclosure rather than extending terms to homeowners because home prices have been appreciating so they expect a profit in the resale.

but at some point... maybe in 6 mo... they find they got a fat portfolio of properties thought 6 mo. before they can sell at a nice profit, but in 6 mo. they discover together that there is no profit because prices are declining. will they then dump these houses on the market all around the same time? seems like the short op with the aggressive mortgage companies is just before they all come to that realization...

A few thoughts:

1. Very few properties had been going back to to the bank until very recently (most were purchased by outside bidders), so despite my earlier post, we are probably more than 6 months away from such an event.

2. When a property did go to the bank, you are correct that there was a good chance they would profit, though that's quickly changing.

3. While the homeowner in foreclosure may disagree, I think banks have been anything buy aggressive. Most homes aren't sold until well after a year since the homeowner missed their fist payment. Yet in CA, the bank can take the property to sale in less than 120 days.

4. While the number of properties going back to the bank has made a "hockey-stick" turn up wards from recent levels, I believe the total number of foreclosures is still too low in most markets to create any real problem for the banks.

5. Profit or not, the bank will want to maximize the return. These properties are now assets on their books. That said they have ZERO interest in managing or maintaining these properties so it's an even higher priority to minimize holding periods.

6. I do believe banks will start to discount properties to unload them. But I seriously doubt that it will happen in any recognizable wave. It will simply be a normal response to days on market increasing and their desire to minimize holding periods.

7. As I mentioned in another post I'd use caution shorting these guys for this reason alone. We are not yet seeing national foreclosure activity that I would consider alarming. I understand that some markets have skyrocketed, and perhaps some local players will be hurt. To really effect the regionals, however, we still need to see a large increase in foreclosure activity.

The one place I'm seeing what appear to me to be staggering losses is in piggyback loans. This is the 20% portion of an 80/20 100% financing package that is used to avoid mortgage insurance (PMI). We are now beginning to see quite a few of these loans made in early to mid 2005 get completely wiped out when the 1st mortgage forecloses. I imagine the PMI vendors are happy to not be involved.

Hope that helps.

blazespinnaker
07-25-06, 06:02 PM
Check out this graphic:

http://tinyurl.com/kxh2e

Incredible. Makes you wonder that perhaps this will be a hard landing after all!

Will we plateau or will the trend continue? Stay tuned...