February 26, 2007

HousingPANIC Stupid Question of the Day


The buyers of "prime" debt these past few years (hedge funds, China, etc) thought they were buying stable well-researched loans, because they were 80/20 (or so they thought).

The problem (as the bag holders will now find out) is that they homedebtor who took out the loan actually put 0% down. He got a second or piggyback loan from another lender for the other 20%.

So Prime actually equals Subprime in many cases. Maybe the majority of cases.

My question is, why isn't this being reported, and why do "analysts" state that they don't expect the Subprime meltdown to spill over to Prime, when we all know that they're one and the same?

40 comments:

Python said...

Yes, that's the one I'm waiting for. Can't wait to hear their spin. "shocked" they'll say, "who knew?" Well, I'll tell you who knew: those of us who were paying attention while the PTB were busy misdirecting the next group of "huddled masses".

Anonymous said...

We all ask that question.

I say one simple word: FEAR

These multi-million dollar guys have always treated mortgages and T-Bills the same, as very low risk investments - that's it - no need to worry, no need to waste time researching them.

Now the first one to blink sets off a panic - since they all do (now) see the elephant in the living room.

Tony1790 said...

I think the main difference is most of the prime rate borrowers are "better" borrowers, fico score, etc and less likely to let their credit be ruined, more responsible, etc

Having said that, the 80/20 prime borrower doesn't have any skin in the game just like the subprime 80/20 borrower and both will walk away from the house much faster than someone who put down 20% of their own money, of course that's if there are any of those kinds of borrowers left that would/could put 20% down.

Subprime fiasco will spread to prime and could bring a lock up of the banking system temporarily.

Tony

Mort said...

Typical backpedaling. No, there's no problem at all. Well, there might be a small, itty bitty problem. Well, yes, subprime is melting down, but it won't affect the rest of the mortgage market...

Anonymous said...

The 2nd t.d. is in jeopardy at this point in most markets. The 1st t.d. will not suffer substantial losses unless values drop beyond 20%

Anonymous said...

never looked at it that way. maybe the media - hope this doesn't sound TOO naive - just honestly hasn't looked at it that way either.

personally i thought that an 80/20 was considered sub prime. if not it surely should be.

if you add the 80/20 to the other sub prime what percentage of total loans ends up being subprime???

Anonymous said...

Hey, headline today: Alan Greenspan warns of a looming recession!

How long before they repossess his presidential Medal of Freedom????

Anonymous said...

The other angle to this is that someone who is "prime" for a $300K loan is subprime for a $500K option arm. Lots of people couldn't get the home they wanted with a standard 30yr fixed so they went subprime for the exotic alternative. So their FICO is high but they don't have the cash flow to handle the reset-level payments.

Anonymous said...

being it true that "markets can stay irrational longer than one can remain solvent" and housing buyers and sellers in panic modes, perhaps equates to fair prices, not

Anonymous said...

photo reminds me of my last divorce!

honica jewinski said...

The first lien holder always gets paid in full FIRST in the event of forclosure or short sale. They are always aware of a second lien because they are recorded on the deed of trust at the time of closing. Anyone buying these first liens will be aware as well as I'm sure they do another title search on all packaged loans.

Lisa said...

I may be wrong, but I believe if you've done an 80/20 or 80/15/5, and have very good credit, it's an Alt A loan. I think Prime is 80% mortgage only. If someone gets a HELOC after the purchase, then yes, that's a Prime that really isn't a Prime anymore.

I wish piggyback loans would go away altogether. The lender in 2nd position is a total bagholder if the borrower gets behind, also can determine whether a short sale is allowed. If not, forclosure here we come.

FUNNOMINAL said...

The first mortgagee should be indifferent as to whether the mortgagor has a 2nd (subordinate) mortgage elsewhere or has his own money in the 20%.
Most important is whether the borrower needs to sell the house due to inability to meet the monthly debt requirements and whether the market value upon resale is less than the 80% needed to satisfy the primary mortgagee.
I doubt much of anything in the housing market can be considered 'prime' at this point.
I would like to know how 'kamikazee' (sp?) it is for lenders of all sorts to be pulling in the carpet at this point in a dramatic fashion. Lenders need fresh money to bail themselves out of prior mistakes. If the credit to the mortgage market is entirely shut down then there will be severe trouble.
As they say, "when they raid the whore house, even the 'nice' girls get arrested".

Anonymous said...
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The Thinker said...

Why are they the same Keith? A first mortgage is entitled to first dibs on the foreclosure proceeds. Why should it matter to the first mortgage bank if a second loan was used to obtain the 20% down payment? Even today, the bank wont have much trouble recouping their 80% in foreclosure. It's the second bank, the one who loaned the 20% down payment that stands to loose big.

Anonymous said...

The 20% shouldn't matter. They've already provided the money. The bondholders who HOLD the 20%...they should be worried.

The 80% loan is the same whether or not there is a 20% piggyback....for the most part. They are a little less secure in that the person has had to shell out interest payments for the 20%...so they are less solvent (maybe).

What happens if the person had PMI and the PMI goes bankrupt? Then the people who thought they were covered are in trouble.

Democrat said...
This comment has been removed by a blog administrator.
Anonymous said...

Greenspan is trying to cover his ass,looks like he knows what is coming

brokersleaveyoubroke said...

The thinker said:
Even today, the bank wont have much trouble recouping their 80% in foreclosure.

Typically, people who get kicked out of a house don't exactly leave it in "move in" condition. The bank has to hire someone to remove trash, clean up and fix up the house. They sell it below comps to get rid of it before they have to pay for maintainance. If the house had any equity it wouldn't be in forclosure to begin with. Throw in realtor fees and banks almost always lose on a forclosure. If you want an eye opener just look at some HUD repos being sold "as is". Hint: bring a haz-mat suit and a gas mask.

The Thinker said...

Hey brokersleaveyoubroke, we aren't talking about crack-house repos, we are talking about WineLofts here. What exactly needs to be done to a new-construction townhouse that was purchased as an investment and never occupied?

Anonymous said...

so where will all these foreclosed on people live? Hmmm, might it be rentals? And what happens when the demand for rentals increases? Anyone, anyone in class? Why rents go up.

And when rents go up, what happens to the "should I rent or buy decision"? Anyone? Bueller? Fry? Answer is, owning becomes more attractive

And class, finally when owning becomes more attractive and demand for homes increases, what happens to prices? Well you know the rest.

But keep on thinking your rents will never go up and prices will drop for the next 10 years if you must.

Anonymous said...

Of course the 80% lender cares if the borrower put down 20% of his own money or borrowed it. The loan-to-value is not the only concern.

The borrower who got a piggyback has no skin in the game so is far more likely to walk from the house. And, why do you think the 80% is protected? A sale of a foreclosed property today (even a never-lived-in wine loft) would not necessarily move at a 20% discount to the acquisition price at the market peak.

Annon126 said...

Brokersleaveyoubroke, so far the lenders are moving very quickly to get out from under the failed loan, so don't look for below comps sales.

Also the higher end houses are typically in good shape, there's just no equity.

Keith, I wouldn't worry just yet about the first lien holders. The second lien holder are going to be holding the bag... I'm working on a short sale with a second mortgage of about 20k and I'm going to offer them $500, cause they'll get totally wiped out at the foreclosure sale. I'm also going to try and short the first ($160k) by $15k. BTW the second is HSB... :)

Anonymous said...

"so where will all these foreclosed on people live? Hmmm, might it be rentals?"

Nope. They "bought" because they were too poor to rent. Good luck finding a bank that'll loan money to let losers rent beyond their means. Meanwhile, there are tens of thousands more condos in the pipeline, coming to a rental market near you. But if you're looking for the next bubble you could try homeless shelters and cardboard box companies.

Anonymous said...

To the anonymous that taught the 'class' on "what will happen to the foreclosed people" and that they will all rent and lead rents to go up.

1. Their foreclosed on home will be added to the market, probably as a rental. Thats a one for one trade off.

2. Some will double up by living with roommates, parents, or other family members.

3. Some will be homeless.

4. There are lots of ongoing construction adding to the housing market all the time, condos, singles, all kinds.

Lots of foreclosed houses never leads to increased rental prices. In fact, just the opposite.

So teacher, go back to school and then come back and tell us how things will play out.

Anonymous said...

they bought cuz they were too poor to rent? I think this earns the "STUPIDEST STATEMENT OF THE WEEK" award. I know it's only Monday but there's no way anything couldpossibly be more ridiculous than what you wrote.

Anonymous said...

"so where will all these foreclosed on people live? Hmmm, might it be rentals? And what happens when the demand for rentals increases? Anyone, anyone in class? Why rents go up."

Not really, because many flippers and fraudsters bought more than one property. The majority never lived in those properties. Case in point, there's a realtwhore who supposedly received some stupid realty medal for selling $17 million (well, taking orders in a speculator's market), but she is in trouble with two condos she bought in Miami Beach at the peak. Her property taxes are very late (about $16k) and I suspect that both of her condo flips are about to go into foreclosure. She paid $560k for one of them (2 bed, 2 bath) in 2005, and has been trying to rent it for $4k per month, since nothing is selling right now. No takers. I love when realthwores get screwed.

Anonymous said...

it's been said here before, class educating anon:

rent is paid with REAL money
(or at least as close to real money as we can get and still use US dollars :-(

Real money from real earnings with paychecks from some form of work or valuable service (we hope)

Recent mortgage payments are "signed up for" or "qualified for" with BS numbers, and the optimistic view that no matter how negative the cash flow is, the home price / equity growth / refinance in a year or so / market value will always "make the numbers work."

People will pay what they can afford to rent, or they will leave. Not buy.

Here endeth the lesson.

Frank said...

"they bought cuz they were too poor to rent? I think this earns the "STUPIDEST STATEMENT OF THE WEEK" award. I know it's only Monday but there's no way anything could possibly be more ridiculous than what you wrote."

Actually, I know people in Scottsdale who did option-arm loans and are paying $1,000/month to "buy" a house that would cost $2,500 to either rent or "buy" on a REAL loan. So, those people really are too poor to rent the same house, and are going to be foreclosed very soon once the loan converts to real payments.

So, the "too poor to rent" comment is very valid, and in fact someone here pointed out that rent is paid with REAL MONEY while these option-arm, piggyback, and other bogus loans are FUNNY MONEY.

Joey Wadd said...

so where will all these foreclosed on people live? Hmmm, might it be rentals?

Good question... Around here you need three months rent in ready cash AND good credit/ references to move into a rental. If the FB has three months rent ($3,600 at least) why don't they just make a payment and keep their house?

Where will they live? I could care less... But rent will not go up beyond what the fundementals (wages and basic living expenses) will allow. You can bet on that.

Anonymous said...

the thinker,

what makes you think all foreclosures are winelofts? even houses in nicer neighborhoods are left in shambles at foreclosure. i've looked at many of them and you would need a minimum of $10,000 just to make them livable again.

anyone who thinks that rents are going up must be out of their mind. the landlords would rather keep the rental rate the same than raise it by $100 and go with no tenant for a month or two. everytime i have had a landlord try to raise the rent on me, i told them i was moving out. they always backpeddle. the most expensive places like sf and nyc are rent controlled anyways.

alan'sbuttboy said...

"So where will all these foreclosed on people live? Hmmm, might it be rentals?"

Look for FEMA to put lots of those Katrina single-wides to good use. That and flea-bag motel rooms paid for by Uncle Sammy (aka you and me). Then there are always the folks who will pitch tents on government land (get ready to fight Mexicans already squatting there) or live in their Hummers.

All the while their chavvy kids will be stealing from honest people who were smart enough to avoid this idiocy.

Natural Eyebrows said...

Just last year I was in court evicting a guy who was concerned that the constable might arrive before he (the tenant) could take title to the same property. He was buying the same house that he was being evicted from. No real money, just funny money available. My client would have been happy to get rid of him and the house both. (I don't remember if the sale closed.)

I've heard of deals where the 80% lender and the 20% lender were the same institution. Anything to make a deal.

I agree the first mortgagee takes a bath in foreclosure. It's not as easy as it looks.

Shakster said...

When 2.1 million excess homes turns into six million that might just solve the Buying is better than renting problem,or Rents ,and Homes prices are in a race to the bottom there Teacher.Fire ALARM!!!!!

Anonymous said...

Lately, I've been seeing mortgage pitches in the paper that read like this:

"No first/last/security deposit!!! Buy a home, no money down!"

'Nuff said.

Bad credit? No money? Buy a home.

Try that pitch with a landlord and see how far it gets you.

Anonymous said...

Of course it will eat into "Prime".

The only difference, as far as I can see, between prime and subprime is FICO score.

Like all those people with 800 FICOs and a 150K/yr jobs can really afford those 600-million dollar homes.

What a joke. This housing market is one complete, scary joke.

RayNLA said...

Kieth,

That looks like David Lereah's foot!

You think he is cross dressing while attending one of Donald Trump's Real Estate conventions down in Florida?

Frank said...

"No first/last/security deposit!!! Buy a home, no money down!"

'Nuff said.

Bad credit? No money? Buy a home.

Try that pitch with a landlord and see how far it gets you."

SO TRUE!!! If I've said it once, I've said it a million times: The past few years saw tons and tons of no-doc, no-income-verification loans, meaning it was EASIER to get a mortgage than an apartment - there isn't a landlord in the world who will give you a lease without income verification! My experience is they typically not only verify your current income, but also call previous employers to verify stability.

So I guess the people who couldn't qualify for an apartment went out and got the no-doc, no-verification teaser-rate option-arm loans. And now that they're going to have foreclosure on their credit, even getting an apartment will be tough. Mom & Dad, here we come....

Joey Wadd said...

Look for FEMA to put lots of those Katrina single-wides to good use. That and flea-bag motel rooms paid for by Uncle Sammy (aka you and me).

Here in NoCal the flea-bag hotels along Hwy 101 are full of folks who cannot come up with first/last/deposit for a place to live. The hell of it is the rate they pay ($900+)for one room is the same as an apartment. The local paper stated that the occupancy rate was 50% for hotels here. Unheard of for this time of year with constant rain, they are NOT tourists.

Anonymous said...

but what if its true, that they bought because they were to poor to rent, could this ponzi bank scheme be governmental, thus rue the implosions in taxes