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Mortgage Market Reopens to Risky Borrowers

wsj.com

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Re: Mortgage Market Reopens to Risky Borrowers

#11

Post by xenocyon »

rayiner wrote: post #6
apo wrote: post #2

> Some $2.5 billion worth of subprime loans, those with FICO credit scores below 690, ended up in mortgage bonds in the first quarter of 2019. That is more than double a year earlier and the highest level since the end of 2007, according to Inside Mortgage Finance. There was $1.9 billion worth of subprime mortgage bonds in the second quarter. Statements like this are hard to evaluate without knowing the denominator:…

The problem is that most journalists are innumerate. As Matt Yglesias notes, "many reporters and editors don't really understand what they're doing. Reputable colleges hand out degrees to people who have almost no understanding of quantitative methods." [1] These journalists see the numbers as garnishes on a narrative point. They're not trying to put the numbers in some sort of mathematical context to draw sound conc…

Calling the absolute numbers re subprime loans a "garnish" is subjective at best and wrong at worst. Even if the subprime-to-prime ratio hasn't changed much, a large increase in the ballooning subprime total may still be newsworthy in its own right.

Re: Mortgage Market Reopens to Risky Borrowers

#13

Post by whiddershins »

For all the negative rhetoric around subprime loans, they enabled me and others I knew who were young and self employed to own homes.

They aren’t always bad, they aren’t always crazy balloon loans or predatory instruments. Sometimes they allow someone who has an alternative life circumstance to not be excluded.

Re: Mortgage Market Reopens to Risky Borrowers

#14

Post by ChuckMcM »

rayiner wrote: post #6
apo wrote: post #2

> Some $2.5 billion worth of subprime loans, those with FICO credit scores below 690, ended up in mortgage bonds in the first quarter of 2019. That is more than double a year earlier and the highest level since the end of 2007, according to Inside Mortgage Finance. There was $1.9 billion worth of subprime mortgage bonds in the second quarter. Statements like this are hard to evaluate without knowing the denominator:…

The problem is that most journalists are innumerate. As Matt Yglesias notes, "many reporters and editors don't really understand what they're doing. Reputable colleges hand out degrees to people who have almost no understanding of quantitative methods." [1] These journalists see the numbers as garnishes on a narrative point. They're not trying to put the numbers in some sort of mathematical context to draw sound conc…

Exactly this, and then there are people who exploit this in order to skew perceptions as described in "Proofiness: How you're being fooled by the numbers."[1]

[1] https://www.amazon.com/Proofiness-Youre-Being-Fooled-Numbers...

Re: Mortgage Market Reopens to Risky Borrowers

#15

Post by qroshan »

js2 wrote: post #7
apo wrote: post #2

> Some $2.5 billion worth of subprime loans, those with FICO credit scores below 690, ended up in mortgage bonds in the first quarter of 2019. That is more than double a year earlier and the highest level since the end of 2007, according to Inside Mortgage Finance. There was $1.9 billion worth of subprime mortgage bonds in the second quarter. Statements like this are hard to evaluate without knowing the denominator:…

I don't understand this criticism of the article. The point of the article is that lending standards are starting to loosen. The article provided a handful of numbers and one anecdote. The article title and first sentence are: Mortgage Market Reopens to Risky Borrowers. Strict lending requirements that were put in place after financial crisis are starting to erode. The risky mortgage is making a comeback. Supporting…

"The most in a decade" is where all the shenanigans of the article lie.

Let's say Peak 2006, Sub-Prime Loan was $600B

Let's say the average, natural Sub-Prime Loan is $100B

After the crash, may be the market over-corrected way to much and slowly crawling back to it's natural $100B.

With this perspective, the narrative becomes totally different. The lending standard is still too tight and still way below what the natural / average economy support. Remember there has to be a balance between exuberance and over-cautious. A journalist should find out, what the happy medium is

That's why numerical literacy is important

Re: Mortgage Market Reopens to Risky Borrowers

#17

Post by opportune »

whiddershins wrote: post #13

For all the negative rhetoric around subprime loans, they enabled me and others I knew who were young and self employed to own homes. They aren’t always bad, they aren’t always crazy balloon loans or predatory instruments. Sometimes they allow someone who has an alternative life circumstance to not be excluded.

Yeah, subprime lending often makes a lot of sense for the person taking out the loan.

If the rents are high relative to expected mortgages/recurring costs in your area, it will pay itself off very quickly (minus the risk of default you open yourself off to). And it allows you to lock in a monthly payment for potentially decades, which has a massive amount of value by itself.

It also makes a lot of sense if you have reasonable expectation of a large amount of income growth / expense decrease that will free up cash flow. For example, if a household member is finishing up school or in training for a more lucrative field (like an MD in residency) it might make sense to be house poor for a small period of time to lock in rates, take advantage of a nice buying opportunity, etc. Or if you are about to be released from child support / settlement obligations, and thus will experience some increased cashflow, could also make sense.

It's not fair to assume that everyone with poor credit or lack of capital for a downpayment is a bad person to lend to, HOWEVER, in the general case it's probably true that in the absence of impending changes in household finances, an inability to get good credit or accumulate savings is a negative signal. And unless you are a small lender, your subprime loans probably aren't discriminating against people who are about to increase income/decrease expenses while building better credit, and people who just suck with money.

Re: Mortgage Market Reopens to Risky Borrowers

#18

Post by mrfredward »

throwaway_law wrote: post #10
ErikAugust wrote: post #3

Earlier quoted context omitted.

"That made him an appealing borrower to an unconventional lender, according to Tom Jessop, a loan consultant at New American Funding. Mr. Jessop arranged a $675,000 loan on the $1.1 million property, leaving the lender with a significant buffer should Mr. Licht default." Also, this is a TERRIBLE example of a pending subprime crisis. A guy borrows $675K on a $1.1 million property.

>Also, this is a TERRIBLE example of a pending subprime crisis. A guy borrows $675K on a $1.1 million property. Well isn't the point that you/they are making that determination on equity alone? As we saw in 2008 all that equity can disappear in a blink of an eye. Equity has no bearing on ability to repay. So before deciding if this is a good or bad loan wouldn't we need to know his outstanding debt to income ratio? A…

A loan at 95% loan to value is risky because a decline in the home's value for any reason, even just price fluctuations in a normal economic cycle, could put the loan underwater, and the bank would get less than the loan amount in foreclosure. At 61% loan to value (the example above), it would take some sort of catastrophe not covered by the home owner's insurance for the bank to not get the principal back, even if the borrower never makes a mortgage payment. Depending on local laws, the bank might be out some legal and administrative fees.

Re: Mortgage Market Reopens to Risky Borrowers

#20

Post by dawhizkid »

apo wrote: post #2

> Some $2.5 billion worth of subprime loans, those with FICO credit scores below 690, ended up in mortgage bonds in the first quarter of 2019. That is more than double a year earlier and the highest level since the end of 2007, according to Inside Mortgage Finance. There was $1.9 billion worth of subprime mortgage bonds in the second quarter. Statements like this are hard to evaluate without knowing the denominator:…

I didn't realize 690 was the cut off for "subprime." I thought that was generally considered "ok/good" but not really that bad.
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