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A new credit bubble gets ready to burst

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Re: A new credit bubble gets ready to burst

#51

Post by refurb »

Waterluvian wrote: post #31
0xffff2 wrote: post #27

Earlier quoted context omitted.

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.

Interesting, thanks. I'm curious if it's that most banks "won't do" or "legally cannot do"?

“Won’t do it”.

PMI doesn’t protect the buyer, it protects the bank. If the buyer stops making payments and housing prices are dropping, the bank could be screwed.

Re: A new credit bubble gets ready to burst

#52

Post by WC3w6pXxgGd »

Creating government regulations in the hope of stopping massive bubbles from forming/bursting is like putting a band-aid on cancer. Just like with cancer, you need to look at the source of the issue: the Federal Reserve. The Fed creates bubbles through

1. Control of the Federal Funds Rate.

2. Inflation.

3. The purchase of bonds and assets from both public and 'private' corporations. Note: private is in quotes since it can no longer truly be considered a private corp when govt gets involved.

To still, in 2019, be asking government regulators to solve issues formed by other bureaucratic branches shows that not enough people have learned from history.

Re: A new credit bubble gets ready to burst

#53

Post by SilasX »

vageli wrote: post #36
SilasX wrote: post #34

Earlier quoted context omitted.

Well, yes, the down payment does reduce the bank's loss in some cases, but it does also function as a "moral test" in the sense the parent meant. Every mortgage application asks if someone else is contributing to the down payment. That wouldn't matter unless there were a difference in risk classes between the two groups of people, so it's not purely a matter of a better loan-to-(initial-)value ratio. Edit: looks like…

> Well, yes, the down payment does reduce the bank's loss in some cases, but it does also functional as a "moral test" in the sense the parent meant. > Every mortgage application asks if someone else is contributing to the down payment. That wouldn't matter unless there were a difference in risk classes between the two groups of people, so it's not purely a matter of a better loan-to-(initial-)value ratio. Don't they…

I just googled the issues related to mortgage downpayment gifts, and it looks like you're correct. This is the best summary of issues I've found and it doesn't mention anything about being higher risk in and of itself:

https://www.accunet.com/buying-a-home/can-my-down-payment-co...

From that page, the bank wants to make sure it's not a loan or a side-payment from one of the parties to the transaction.

Still, I'd be really, really surprised if there weren't a correlation between "fraction of DP as gift" and "default rate", but I don't have anything concrete to cite ATM.

Re: A new credit bubble gets ready to burst

#54

Post by formercoder »

mikeash wrote: post #38
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?

All they have to do is bundle these mortgages together with safer ones and sell the resulting bundle as a security. The market will accurately assess the risk of the combined product and set prices accordingly. Because of the way this spreads out risk and incentivizes smart, objective analysis of the products, this is guaranteed to work well.

The default risk must be uncorrelated though or else you get no gains from diversification. This was a big part of how CDOs justified the security of a AAA tranche, when in reality everything was correlated because bad loans were made to everyone.

Re: A new credit bubble gets ready to burst

#55

Post by dsfyu404ed »

chiph wrote: post #29

> 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 go…

There's been a lot of apprehension around auto lending for a long time. I'm not sure what a crash would look like though.

Re: A new credit bubble gets ready to burst

#56

Post by SilasX »

jasode wrote: post #33
not_a_moth wrote: post #11

Really seems like Wall Street is in love with the term "shadow banking", because it implies "can't regulate it". Yet we know exactly who the participants are, the types of firms, and their practices. Step 1 to better regulation of creative rent seeking is to stop treating it like it's nebulous.

>Really seems like Wall Street is in love with the term "shadow banking", Actually, the hedge fund and private equity fund people hate that term because it implies something nefarious is happening. In reality, the new post-2008 crisis bank regulations in both Europe and USA to ensure stability causes a new phenomenon to emerge: Non-banks lending money to companies that banks are not allowed to lend to. Every economis…

None of that helps unless the PE firm can actually get that 8% return. The chase for yield during the recent (last ~15 years) "global savings glut" has been pretty disastrous.

Re: A new credit bubble gets ready to burst

#57

Post by dsfyu404ed »

mikeash wrote: post #38
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?

All they have to do is bundle these mortgages together with safer ones and sell the resulting bundle as a security. The market will accurately assess the risk of the combined product and set prices accordingly. Because of the way this spreads out risk and incentivizes smart, objective analysis of the products, this is guaranteed to work well.

>All they have to do is bundle these mortgages together with safer ones and sell the resulting bundle

Sounds strikingly familiar...

Re: A new credit bubble gets ready to burst

#58

Post by TuringNYC »

lbotos wrote: post #13
not_a_moth wrote: post #11

Really seems like Wall Street is in love with the term "shadow banking", because it implies "can't regulate it". Yet we know exactly who the participants are, the types of firms, and their practices. Step 1 to better regulation of creative rent seeking is to stop treating it like it's nebulous.

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…

Hedge funds usually manage other people’s money in addition to their own, in fact, pension money is the most common source of other money that hedge funds manage.

Re: A new credit bubble gets ready to burst

#59

Post by venantius »

chiph wrote: post #29

> 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 go…

My theory 2 years ago was that the likes of Uber, Lyft et al. would cause more and more people to buy new cars that couldn't really afford it. Should demand for ride sharing ever stall or fall off, the continued increase in people entering the "gig economy" workforce in such a levered manner would be catastrophic to the auto loan industry.

Re: A new credit bubble gets ready to burst

#60

Post by mikeash »

formercoder wrote: post #54
mikeash wrote: post #38

Earlier quoted context omitted.

All they have to do is bundle these mortgages together with safer ones and sell the resulting bundle as a security. The market will accurately assess the risk of the combined product and set prices accordingly. Because of the way this spreads out risk and incentivizes smart, objective analysis of the products, this is guaranteed to work well.

The default risk must be uncorrelated though or else you get no gains from diversification. This was a big part of how CDOs justified the security of a AAA tranche, when in reality everything was correlated because bad loans were made to everyone.

Fortunately, there’s no reason to ever expect that defaults would be correlated. There’s just no phenomenon that could cause it.
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