Thanks for posting. Great video, good watch at lunch time. It’s a circumspect but very realistic speech by Dr. Susan Bies, a Federal Reserve Board member.

Some points to underscores (with my editorials).
– 1 out of 6 loans are made to Subprime ARM borrowers. Does not address fixed rate subprime or conventional market (which I think will be in trouble also).
– MBS market developed in 1990s so that credit risk is borne by MBS market.
– Mortgage industry bacame fragmented into lenders, securitizers, servicers.
– “People tend to think of their homes as a way to build wealth.” (therefore they are not saving thus have no staying power when prices drop).
– Lenders not requiring proof of income — no testing and validation.
– Lenders not using good underwriting practice such as debt to income ratio.
– Transaction based mentality. Lenders must generate transactions to earn income.
– 2/28 mortgages have high deliquency rate. Interest payments double in 2 years.
– Borrowers did not understand that payments could double.
– Fragmented mortgage business means that there’s a transaction based mentality. Lenders don’t earn anything if there’s no transaction.
– Improper appraisal of properties.
– Investor appetite in real estate as exploded. 7-8% is normally investment properties. Abnormally low interest rates caused investor purchases to reach 25% to 40% of sales, in some markets.
– Statistics don’t reflect cancellations. Sales cancellations have exploded.
– There’s extra supply of houses for sale by people who are waiting to list.
– Record level of vacant homes.
– People with ARMs are mislead that they can refinance after teaser rate. Borrowers did not realize that there are prepayment penalties.
– If houses don’t appreciate there’s “equity stripping” when time comes to refinance. Prepayment penalties may cause borrowers to bring cash to refinance.
– Early payment defaults. Lenders have to buy back early default mortgages from MBS. Early delinquencies have risen dramatically and that’s a sign of deterioration of asset quality. People don’t normally default early. Defaults normally peak 2 years into the mortgage.
– Early delinquencies for 2006 pivots up to 10% of subprime ARM mortgages.
– In 2006 lenders made loans they shouldn’t have made while chasing origination earnings. (even higher early delinquencies will occur in the next couple of years).
– Not enough or no regulations of the mortgage industry.
– Fed writes regulations, Reg Z, doesn’t have enforcement authority.
– Credit allocation should remain market based. Don’t want to hamstring innovation.
– Compensation to brokers is tied to closing a mortgage. Need detections mechanics to manage risk.
– You should save and then buy, not buy then pay it off.
– While the savings rate is negative but net worth is going up more. (I wonder what will happen if housing and the stock market crash. Was talking to an old man today who wants to net $100k out of is SD to retire in Pahrump. I’m afraid he won’t get to retire at all).