They are going back to conforming loans because the is no bid for anything that can not be sold to Fannie or Freddie (which are gov. sponsored) With no bid it is hard to determine value of the mortgages lenders are holding. Large commercial and investment banks are requiring more collateral for mortgage lenders warehouse lines of credit (where they hold the loan until they sell it into the secondary market otherwise known as a margin call in the securities bus.) Without a warehouse line of credit you can not write loans, and with out bids in the secondary market lenders have nobody to sell their mortgages to. (double whammy) In just a few months virtually all sub-prime and alt-a lenders have gone under.....(basically all "non-agency paper" lenders)...........It is a total disaster. The baby has been thrown out with the bath water. What next you ask? Back to FHA and VA loans (the original subprime programs), Fannie Mae and Freddie Mac eligible loans, and private hard money lenders.
pyramid scheme with musical chairs, when the music stops not many chairs left to sit in. 'crowded trades' ...money will flee crowded trades.
From what I could tell from my location in a flyover state, people were doing it by trading up. they bought during the last downturn, or they bought a shack, rode it up in value, then traded up, and kept doing it. Kinda wonder if a regular guy couldn't move out there, but something modest during a downturn, sell at a peak, wait for a crash, rent, and then repeat over a period of 25 years or so. Then at the end, sell at a peak, and move to a "flyover state" and use the money to live like a king. Proceeds from some of those million dollar homes would take you very far in my neck of the woods. SM
Excellent post. This was all a big scam that was just a way to get us all to pay and owe more. Profits have been privatized and now the costs will be socialized thru bailouts and inflation. That's the Wall Street way.
Plus the cities and towns were able to justify increasing property taxes since homes were appreciating.
I agree with your assessment on the timing of mortgage equities and find your ideas on 2 family housing intriguing. Excellent post, thank you. One important thing to consider from an economic standpoint is how much the structure of the US economy depends upon worker flow to keep wages low. Lose your job here, no big deal, just go to another job over there and sell your house, buy a new one, incur transaction fees, etc... Now, if there is no bid, you are stuck in your area (unless you foreclose - then you are quite free, but at a cost) and this may tend to increase wages. TPTB don't want that, so you can expect some relief if it occurs, but don't count on it being anything but a lagging indicator. Quite glad that I was modest purchasing my first home. I knew that this would end badly, but like most of us, had no idea when or how. Losing 20% on 100k hurts, but its only 20 grand. Losing 20% on 1,000,000 hurts much, much worse.
What a fken nightmare that is -- all the city/town revals that have been done at insane valuations. So what do you do if you get a huge upward reval - go in and fight it and blow your foot off by getting a lower valuation? Or just pay up to preserve an insanely high valuation in case you want to sell? One guy I know has the opposite problem -- real nice place - should sell easily BUT his property value somehow dropped from 380 to 280K and he wants 340. Buyers wont pay more than the Town valuation in this market. Then you have the old people and fixed incomers - that have no plans to sell who are destroyed by higher valuations.
Indeed this is a good thread. But concerning the forex link where links the subprime with leverage through carry and trade, I think that in the exemple the author has not taken into account that MBS pays not only interest. Usually any mortgatge implies payment of interest and some portion of the principal of the morgatge. Second, not all delinquencies are linked with prices paid at the peak of the house market. Although the probability of deault in mortgatge markets is concentred between the second and the fourth year after the beginning of the loan, there are also other payment defaults linked with loans given in advance. In these cases, the recovery value of the loan is higher.
I agree with you, that why housing prices doubled, to most people all that really mattered was the monthly payment, even if it was done with mirrors.