A new credit bubble gets ready to burst • Hacker News Board

Re: A new credit bubble gets ready to burst

#21

Post by lordnacho » Sun, Jun 02, 2019, 7:08 PM UTC

IshKebab wrote: post #14

nugget wrote: post #9

Earlier quoted context omitted.

I just looked up Zerodown. How does their model account for the foreclosure risk if there's a real estate recession?

Much higher interest rates presumably. I don't think there's any fundamental reason why you shouldn't be able to buy a house without a deposit. A deposit just shows you can be sensible with money, and therefore the loan is much lower risk for the bank. But if a bank is willing to take on the high risk in return for very high interest rates there's no particular reason why it shouldn't be possible. It may end up being…

> A deposit just shows you can be sensible with money, and therefore the loan is much lower risk for the bank.

Is is lower risk, but it's not because it's some weird moral test.

The reason is that the lender only loses money once the value of the house has declined by the amount of the deposit. Say you buy a house with 20% down. If you sell the house at 80% of the value, you've wiped out your deposit but the bank loses nothing.

On the flip side if the house goes up and you sell for 120% you've doubled your money, but the bank isn't any better off.

Re: A new credit bubble gets ready to burst

#22

Post by RandomInteger4 » Sun, Jun 02, 2019, 7:09 PM UTC

subpixel wrote: post #10

RandomInteger4 wrote: post #4

Is this why I've been seeing signs advertising something like "learn how to flip houses like a PRO! Call 555-555-5555" popping up around my little suburban town? Also bank managers hitting up my elderly relatives for home equity loans again. It feels very much like we're in 2002-2005-ish again.

I suspect that if you call the house flipping number someone will try to sell you a course or seminar, not loan you money.

My point was that I'm seeing signals that we're repeating history. Why do these home flipping courses pop up? You think they just come out of thin air? No. It means that there are market conditions that would allow an entrepreneur to sell their information.

What do we know about the pre-crash market in association with these signals? We know that (1) these things sound like a get rich quick scheme and (2) that they legitimately were a get rich quick scheme, because they actually worked up until the crash where many people were left holding the bags (houses that could no longer be flipped given the post-crash market conditions).

Re: A new credit bubble gets ready to burst

#23

Post by Hnrobert42 » Sun, Jun 02, 2019, 7:10 PM UTC

I question the credibility of an “article” which calls people names, e.g. Wall Street wiseguys.

Re: A new credit bubble gets ready to burst

#24

Post by Waterluvian » Sun, Jun 02, 2019, 7:10 PM UTC

temp129038 wrote: post #7

If SF, I'm seeing ads all over for 1) Brex (corporate credit cards for startups) and 2) Zerodown (pitching no down payment for homes). It would be quite something if tech and not banks caused the next great recession.

Zero down payment isn't even legal in Canada and anything less than 20% down and you must purchase mortgage insurance. I'm amazed that 0% is allowed in the US after 2008.

Re: A new credit bubble gets ready to burst

#25

Post by [deleted] » Sun, Jun 02, 2019, 7:13 PM UTC

RandomInteger4 wrote: post #5

cascom wrote: post #3

The huge difference here is leverage. The typical bank in the US is levered ~5-12x which means, many of these "shadow banks" are unlevered, this creates an entirely different dynamic

Are there any ways to hide leverage?

[deleted]

Re: A new credit bubble gets ready to burst

#26

Post by dd36 » Sun, Jun 02, 2019, 7:14 PM UTC

belorn wrote: post #17

lbotos wrote: post #13

Earlier quoted context omitted.

Isn't the root of the problem this: > To fund all this loan-making, the shadow banks have turned to insurance companies, pension funds, university endowments and wealthy investors, offering them a chance to buy into a diversified pool of loans that offer returns ranging from 6 percent to 13 percent, depending on the level of risk they are willing to assume. If some hedge funds and "wealthy investors" want to take on…

The root issue of credit card bubbles is not that hedge funds and investors may loose on risky investments, but that those same investors are so interconnected with society that society has to bail them out if they end up loosing it all.

Also that the executives can bail before it gets too bad.

Re: A new credit bubble gets ready to burst

#27

Post by 0xffff2 » Sun, Jun 02, 2019, 7:20 PM UTC

Waterluvian wrote: post #24

temp129038 wrote: post #7

If SF, I'm seeing ads all over for 1) Brex (corporate credit cards for startups) and 2) Zerodown (pitching no down payment for homes). It would be quite something if tech and not banks caused the next great recession.

Zero down payment isn't even legal in Canada and anything less than 20% down and you must purchase mortgage insurance. I'm amazed that 0% is allowed in the US after 2008.

Mortgage insurance is required for nearly all sub 20% down mortgages in the US too. Most banks won’t do straight 0% down either, but will do ~3%. A notable exception to both of the above are VA loans, which will finance 100% with no PMI, but VA loans are only available to a very small segment of the population.

Re: A new credit bubble gets ready to burst

#28

Post by skybrian » Sun, Jun 02, 2019, 7:21 PM UTC

bastawhiz wrote: post #20

lbotos wrote: post #13

Earlier quoted context omitted.

Isn't the root of the problem this: > To fund all this loan-making, the shadow banks have turned to insurance companies, pension funds, university endowments and wealthy investors, offering them a chance to buy into a diversified pool of loans that offer returns ranging from 6 percent to 13 percent, depending on the level of risk they are willing to assume. If some hedge funds and "wealthy investors" want to take on…

What shape would the regulation for the latter look like? Should policy holders or pensioners have the ability to veto these investments? I don't want someone to lose their pension over a poor investment by a greedy fund manager. But I also can't think of how you'd draw a line where the investment is "too risky", or rather "too high of a risk to justify the effects on the persons who would be affected if the investme…

In principle, it seems like it would be pretty easy to limit pensions to a short list of conventional investments specified by a regulator, such as the sort of thing normally allowed in a 401k.

The line would be fairly arbitrary but I don't see why that would make it particularly hard to implement?

Re: A new credit bubble gets ready to burst

#29

Post by chiph » Sun, Jun 02, 2019, 7:25 PM UTC

> And household debt has grown no faster than household income and is concentrated in households best able to pay it back.

I'm not so sure about this - what I'm thinking is that the next (current?) bubble is in auto lending. I'm seeing tons of advertisements saying "We will lend up to 72 months with very little down". With the average new car priced around $37500 that's a payment in the mid $500's for someone with good credit. And I suspect the people doing this only have an average credit score so theirs will be higher.

Re: A new credit bubble gets ready to burst

#30

Post by miketery » Sun, Jun 02, 2019, 7:25 PM UTC

RandomInteger4 wrote: post #5

cascom wrote: post #3

The huge difference here is leverage. The typical bank in the US is levered ~5-12x which means, many of these "shadow banks" are unlevered, this creates an entirely different dynamic

Are there any ways to hide leverage?

Yes, by inflating asset values.