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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

#31

Post by hammock »

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'd agree that the US housing and derivatives markets are in a much better position than in 2007-2008

Could they have been worse?

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

#32

Post by dzdt »

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 original post makes this claim without any citation. I don't think it is correct. Recent stress-test reports on Fannie and Freddie show that, even making provisions for future bailouts in the stressed scenario, the agencies are profitable to the government. [1] Instead of costing $150 billion per year, since the agencies were nationalised they have returned $60 billion to the government.

[1] https://www.bloomberg.com/view/articles/2016-08-08/fannie-an...

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

#33

Post by fweespeech »

Domenic_S wrote: post #27
fweespeech wrote: post #22

Earlier quoted context omitted.

> 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 4…

You do realize the other link is a stated income / no doc loan right?

http://www.bloomberg.com/news/articles/2015-01-28/get-ready-...

> Angel Oak is willing to buy loans with credit scores as low as 500, though the average has been about 670, just below the 680 level some use as a cut-off for subprime on a scale of 300 to 850, Hsu said. The company makes sure borrowers can afford the payments and requires at least 20 percent down payments, he said.

660 is subprime.

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

#34

Post by ThrustVectoring »

chollida1 wrote: post #21
komali2 wrote: post #10

Earlier quoted context omitted.

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 o…

The 100x is more because companies weren't really able to sell these contracts. Instead, they'd make another one with the opposite position to mitigate their risk. In case of default, there'd be a lot of offsetting payments.

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

#35

Post by sokoloff »

Domenic_S wrote: post #27
fweespeech wrote: post #22

Earlier quoted context omitted.

> 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 4…

> 660 FICO is not sub-prime by any standard

Experian buckets 740-830 as "super prime" and 680-739 as "prime". I'm not aware of any credit agency that buckets 660 as "prime" (or better).

Some mortgage originators consider 670-690 and no 30-day lates in the last year as "near prime".

660 is indeed "sub-prime", IMO.

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

#36

Post by lmm »

huherto wrote: post #23
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.

IIRC from reading the book a year or two ago, one of them's bosses were hounding him for the premiums he was paying on the insurance-like contracts he bought, which was something like $25m/year. When the crash happened they bought in ~$1b. Had there not been a crash he would have got nothing (the contracts would never have paid out) and that $25m/year would have been money down the drain.

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

#37

Post by bradleyjg »

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…

Why does the government need to be involved in mortgage lending at all? Is there a specific market failure inherent in it people can point to that calls for government intervention to overcome (akin to the public good failure for e.g. roads)?

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

#38

Post by mcnees287 »

ThrustVectoring wrote: post #34
chollida1 wrote: post #21

Earlier quoted context omitted.

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 o…

The 100x is more because companies weren't really able to sell these contracts. Instead, they'd make another one with the opposite position to mitigate their risk. In case of default, there'd be a lot of offsetting payments.

I think the comment is referring to the fact that one can write CDS on top of an underlying instrument. So, if I have $100 million in MBS, other parties, or even myself, can write CDS contracts that reference my $100 million MBS.

What I have just done is to create more exposure than the underlying MBS. The MBS is still only $100 million, but the total outstanding contracts on the pool (MBS + CDS) is now much larger.

What you are talking about is related to offsetting contracts, which is different.

AIG was left holding the bag for most of these. They are one of the few who did not offset like you are saying.

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

#39

Post by __derek__ »

formula1 wrote: post #30
topspin wrote: post #11

Earlier quoted context omitted.

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…

> 500k 800 sq ft bungalows

For what it's worth, this describes a significant portion of the single-family housing stock in Seattle.

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

#40

Post by soperj »

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…

Pretty much everyone is saying that interest rates are going up in the US and are going to go up soon. Alan Greenspan just came out today saying people are going to be surprised how quickly they go up.
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