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America’s housing system still has not been properly reformed

economist.com

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Re: America’s housing system still has not been properly reformed

#21

Post by chollida1 »

komali2 wrote: post #10
chollida1 wrote: post #4

I'd agree that the US housing and derivatives markets are in a much better position than in 2007-2008. Atleast people who are getting mortgages now have some form of documentation, and risk manages are being asked to do their jobs. The crisis now is that, and this is just my opinion, low rates are here to stay. with the amount of money in the system, people are being priced out of homes and as time goes on the amount…

I'm still confused by the CDS bit. Is there a good eli5 article on it? I've already checked the eli5 subreddit and couldn't find anything specifically on the mechanism that allowed shorting.

Sure.

The short answer is.....

You(party A) and party B have a contract.

You want to eliminate the risk that Party B goes bankrupt and can no longer pay you.

You go to party C who will take small payments from you each month/quarter and in return they will pay you if party B goes bankrupt.

Now the important things to note are:

1) The amount you pay party C is based on how you and party C analyze the bankruptcy risk of party B.

2) The amount that party C pays you when the CDS is triggered doesn't necessarily have to have any relation to your original contract with party B. ie party B might be making a one time payment of $1 million to you but nothing stops you from taking out $10 million in CDS protection on party B.

3) The trigger for a CDS may not necessarily be the failure of party B to pay, ikt might be related to their credit rating, ownership changes, or really any term you can negotiate.

4) you can write a CDS when you aren't even involved in the original party A to party B transaction. This is what happened in teh big short where Michael Burry had no involvement in the Mortgage back securities, but had several banks writhe him a CDS that payed out if the original mortgage backed security had a certain percentage of its mortgages fail.

This is where things really went off the rails as companies like AIG wrote the CDS protection for a whole lot more MBS(Mortgage backed securities) than they could possibly ever cover, because their models predicted that there really wasn't any way they could fail in the manner they did. Suddenly a single MBS could have 100x its value in CDS default protection written on it. This leverage is how the 2008 bailout got so big.

Re: America’s housing system still has not been properly reformed

#22

Post by fweespeech »

ssharp wrote: post #17

The last crisis was also heavily related to sub-prime mortgages. How much has sub-prime lending been mitigated? Before the last crash, you could get "no paperwork" mortgages, you'd just to have a little higher interest rate. Lenders would also squeeze people into ARMs so their initial rates were really low and then would go up after the adjustment period. And nobody cared about things like PMI because prices were goi…

> The last crisis was also heavily related to sub-prime mortgages. How much has sub-prime lending been mitigated?

http://www.qualifiedhomeloans.com/campaigns/statedincomeloan...

http://www.forbes.com/2010/07/02/return-liar-loans-personal-...

No. Its still essentially the same with no paperwork mortgages with higher interest rates and ARMs. Very little changed other than a few regulations that might stop a systemic collapse of large banks.

> Thankfully, I live in an area that didn't see the enormous run up of house values. The crash affected our housing and we still had the normal negative effects of a big recession. Housing prices have certainly recovered by now and I do wonder how much of it is still smoke and mirrors. But in markets like Florida and Arizona where house prices got really out of control, have those areas also recovered? That would be more shocking to me.

http://www.tradingeconomics.com/united-states/case-shiller-h...

The market as a whole is almost back to where it was in 2008.

Re: America’s housing system still has not been properly reformed

#23

Post by huherto »

chollida1 wrote: post #4

I'd agree that the US housing and derivatives markets are in a much better position than in 2007-2008. Atleast people who are getting mortgages now have some form of documentation, and risk manages are being asked to do their jobs. The crisis now is that, and this is just my opinion, low rates are here to stay. with the amount of money in the system, people are being priced out of homes and as time goes on the amount…

Nice comment. Food for thought.

How big was the risk that they took ? Surely they knew that the market was insane. But would they have lost a lot of money if the market was insane for a long time ? I saw the movie but I don't remember a lot of the details. I was just trying to follow.

Re: America’s housing system still has not been properly reformed

#24

Post by gjem97 »

mcnees287 wrote: post #12
gjem97 wrote: post #9

Can anyone provide any background/documentation on the claim "Now 65-80% of new mortgages are stamped with a guarantee from Uncle Sam that protects investors from the risk that homeowners default"? I don't really doubt that it's true, I'd just like to learn more about what that is and how it works.

Meaning, the mortgages (default risk) are guaranteed by the government, either explicitly (FHA) or implicitly through a government sponsored interprise (Fannie and Freddie). After the housing crisis the private market (mostly banks) left very quickly. FHA and the GSEs stepped in and took their share.

Does the FHA issue bonds? (Turns out this stuff is nigh impossible to Google.)

Re: America’s housing system still has not been properly reformed

#25

Post by martincmartin »

roymurdock wrote: post #20

The linked article seems to be a bombastic summary of a longer, more neutral, and better-supported article [1]. Strangely enough, they were published on the same day and apparently are both featured in the print edition? It seems like The Economist is doing A/B testing to see what draws more outrage from its readers: "Nightmare on Main Street" or "Comradely Capitalism"? The linked article is confusing and uninformati…

The linked article is an editorial, the other article the news article. The Economist calls their editorials "leaders," which I agree is confusing. But its standard practice to publish both an editorial and a news/information piece in the same issue.

Re: America’s housing system still has not been properly reformed

#26

Post by mcnees287 »

cylinder wrote: post #16

The fact that we were not able to ban mortgage securitization after the crisis is appalling. IMO this is the root of the problems. Make banks hold their loans on their balance sheets! I also think the point about banks having capital buffers is laughable and not logical. It's like claiming we've solved chronic migraines because we have a stash of Tylenol. The cause has not been eliminated. And let's say there's a cri…

It sounds like a reasonable theory on its face. However, the outcome of this is likely that banks will stop making loans all together. If they were to offer mortgages at all, it certainly would not be a 30 year fixed rate product.

It's not correct to say that banks can sell off all of their risk through securitization. They do in fact retain some of the risk. Though most has been transferred.

The buffer is (in theory) in excess of the losses. So, after a crises a bank would be left with the buffer and be able to continue to operate as a going-concern. The question is how to set the buffer and how big ?

Re: America’s housing system still has not been properly reformed

#27

Post by Domenic_S »

fweespeech wrote: post #22
ssharp wrote: post #17

The last crisis was also heavily related to sub-prime mortgages. How much has sub-prime lending been mitigated? Before the last crash, you could get "no paperwork" mortgages, you'd just to have a little higher interest rate. Lenders would also squeeze people into ARMs so their initial rates were really low and then would go up after the adjustment period. And nobody cared about things like PMI because prices were goi…

> The last crisis was also heavily related to sub-prime mortgages. How much has sub-prime lending been mitigated? http://www.qualifiedhomeloans.com/campaigns/statedincomeloan... http://www.forbes.com/2010/07/02/return-liar-loans-personal-... No. Its still essentially the same with no paperwork mortgages with higher interest rates and ARMs. Very little changed other than a few regulations that might stop a systemic co…

You can't read that Forbes link and say "no" if you know a little bit about finance:

> Wall Street Funding of America [...] circulating offers to make low-doc loans to borrowers with credit scores as low as 660 FICO, as long as the borrower was self-employed, seeking no more than 60% of the value of a home and had six months of mortgage payments in reserve.

660 FICO is not sub-prime by any standard, and it requires 40% down AND substantial reserves. That risk profile is great, and 180 degrees away from the old stated-income loans.

Anecdata: I've opened 4 mortgages since the crash, 1 with a big bank and 3 with smaller lenders. Every one of them required substantial and verified documentation, and my FICO is just under 800.

Lending is nowhere close to the craziness it used to be!

Re: America’s housing system still has not been properly reformed

#28

Post by mcnees287 »

gjem97 wrote: post #24
mcnees287 wrote: post #12

Earlier quoted context omitted.

Meaning, the mortgages (default risk) are guaranteed by the government, either explicitly (FHA) or implicitly through a government sponsored interprise (Fannie and Freddie). After the housing crisis the private market (mostly banks) left very quickly. FHA and the GSEs stepped in and took their share.

Does the FHA issue bonds? (Turns out this stuff is nigh impossible to Google.)

Yes. FHA and the GSEs pool mortgages from banks, stamp them with their guarantee, and then sell the loan pools as MBS to investors.

(Most) banks, especially small ones, are unwilling to sell and hold a fixed rate 30 year mortgage. There's way too much risk, price volatility (driven by rates) and uncertainty about what will happen over a 30 year time period.

Banks only do a 30 year mortgage because they know they can sell it to FHA or the GSEs.

Re: America’s housing system still has not been properly reformed

#29

Post by Domenic_S »

HillaryBriss wrote: post #13

> Partly because the state charges too little for the guarantees it offers, taxpayers are subsidising housing borrowers to the tune of up to $150 billion a year, or 1% of GDP. The current environment offers housing borrowers money at a price below the market. The simplest bet with this cash (buying a house and holding) has probably been overdone in the market. House prices are quite high now. Still, small but crafty…

Buy and hold is fine, but that's a strategy like buying Blue Chip stocks. Early 2000s real estate was like the options market -- super short term.

If you can hold a house 10 years, chances are very, very good you won't be underwater at the end.

Re: America’s housing system still has not been properly reformed

#30

Post by formula1 »

topspin wrote: post #11
formula1 wrote: post #2

To sum it up, despite there being regulations on CDOs the real problem still exists. That problem is that loans are easy to get the gov stamp. Thos makes it easy for new home owners to get loans. And this makes it easy for sales people to sell the loans. Much of this opinion article is based on an other article [0] which seems less doom and gloom and more about the shift to a majority of state sponsored loans. This i…

This in itself its own issue in that capitalism isn't doing what it should be when everything is subsidized by the gov. Thus $500k 800 sq ft bungalows. You show me a chronic bubble and I'll show you a 'market' riven with subsidies, tax incentives, government secured debt and pencil whipping regulators. Healthcare, education, housing.... Yet when the bubble pops and the too-big-to-fails have to be 'recapitalized' all…

"Thus 500k 800 sq ft bungalows"

This may sound cynical but that is one of the fair markets that likely will not fall. These are luxery that are likely only to be bought and sold to people looking for vacation spots or a crashpad. Much more likely to be paid off than a 4 bedroom in the midwest bought by a hardworking train engineer and his wife working part time in a restaurant.

"We've self influcted a system wherevy the greater fools are those found holding worthless CDOs"

I really appreciate the hot potato analogy! Exactly what I was thinking.

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