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patientrenter
ParticipantThanks for the info, DaCounselor. This process is more complicated, and the range of possible outcomes more uncertain, than I think many people realize.
Patient renter in OC
ParticipantGary and temeculaguy, thanks for those. Really hits the spot… as satisfying as a nice cold beer on a hot day.
Patient renter in OC
ParticipantGary and temeculaguy, thanks for those. Really hits the spot… as satisfying as a nice cold beer on a hot day.
Patient renter in OC
ParticipantRemnant of deleted double post
ParticipantRemnant of deleted double post
ParticipantHLS, maybe we don’t disagree. I suppose I am really just expressing my opinions about who should bear blame. Please excuse me while I rant!
I think professionals who made a living out of packaging and moving loans to the final investor consciously chose unsustainable levels of immediate personal gain over long term prudence and any sense of duty to the investors. In this group I would count the mortgage brokers, loan originators, the banks creating derivatives (like the MBSs and CDOs), the hedge fund and some other money managers, some law firms, rating agencies, monolines, and so on.
I think the final investors had a duty to do their own due diligence, and were provided adequate warning of the need for this in the form of their own expectation of returns higher than risk-free rates. They failed utterly.
So I hope the investors get no bailout, nor any generous settlements from the professionals (per the caveat emptor principle.) I hope the professionals suffer an appropriate loss of reputation, and penalties for any (presumably limited) fraud or conspiracy to commit fraud. And many borrowers who are now defaulting were not poor innocent victims, but instead greedy co-conspirators in a fraudulent scheme to engage in a one-sided transaction, using fraudulent loan applications. It was a one-sided transaction because they planned to keep most of the profits if home prices appreciated, and leave most of the losses with the lenders if home prices went down.
Thanks for recounting elements of loan securitization. I was familiar with only the very broad outlines of this. Yes, the loan originators bore a (tiny) portion of the risk because early defaults went back to them, and later fraudulent ones are supposed to also. But they won’t be actually paying most of the losses – they don’t have enough money, and the later losses will be much bigger. Although their share of the pain has grown big enough to sink many of them, that sharing of the risk was too tiny to incent them to underwrite the loans carefully in the first place. The investors are holding well over 90% of the risk.
Yes, lenders providing the riskier loans were supposed to be compensated for the risk by higher interest rates. But I think the risk premiums charged were completely inappropriate to the level of risk. When 2/3 of new loans are in a form like stated income, or little money down, or super-low early payments, and the money being borrowed for each home is 4 times what is was 10 years ago, and incomes are only 50% higher, then it’s obvious that historical calculations of the loan risk premium are just not relevant. Unfortunately, I suspect the people who effectively decided the risk premiums were not true agents of the investors, but rather people who made money shoveling more loans through the system. It’s still ultimately the investors’ fault for accepting risk at lousy prices. I hope they’ve learned their lesson.
End angry rant!
Patient renter in OC
ParticipantHLS, maybe we don’t disagree. I suppose I am really just expressing my opinions about who should bear blame. Please excuse me while I rant!
I think professionals who made a living out of packaging and moving loans to the final investor consciously chose unsustainable levels of immediate personal gain over long term prudence and any sense of duty to the investors. In this group I would count the mortgage brokers, loan originators, the banks creating derivatives (like the MBSs and CDOs), the hedge fund and some other money managers, some law firms, rating agencies, monolines, and so on.
I think the final investors had a duty to do their own due diligence, and were provided adequate warning of the need for this in the form of their own expectation of returns higher than risk-free rates. They failed utterly.
So I hope the investors get no bailout, nor any generous settlements from the professionals (per the caveat emptor principle.) I hope the professionals suffer an appropriate loss of reputation, and penalties for any (presumably limited) fraud or conspiracy to commit fraud. And many borrowers who are now defaulting were not poor innocent victims, but instead greedy co-conspirators in a fraudulent scheme to engage in a one-sided transaction, using fraudulent loan applications. It was a one-sided transaction because they planned to keep most of the profits if home prices appreciated, and leave most of the losses with the lenders if home prices went down.
Thanks for recounting elements of loan securitization. I was familiar with only the very broad outlines of this. Yes, the loan originators bore a (tiny) portion of the risk because early defaults went back to them, and later fraudulent ones are supposed to also. But they won’t be actually paying most of the losses – they don’t have enough money, and the later losses will be much bigger. Although their share of the pain has grown big enough to sink many of them, that sharing of the risk was too tiny to incent them to underwrite the loans carefully in the first place. The investors are holding well over 90% of the risk.
Yes, lenders providing the riskier loans were supposed to be compensated for the risk by higher interest rates. But I think the risk premiums charged were completely inappropriate to the level of risk. When 2/3 of new loans are in a form like stated income, or little money down, or super-low early payments, and the money being borrowed for each home is 4 times what is was 10 years ago, and incomes are only 50% higher, then it’s obvious that historical calculations of the loan risk premium are just not relevant. Unfortunately, I suspect the people who effectively decided the risk premiums were not true agents of the investors, but rather people who made money shoveling more loans through the system. It’s still ultimately the investors’ fault for accepting risk at lousy prices. I hope they’ve learned their lesson.
End angry rant!
Patient renter in OC
ParticipantHLS, we’ll have to agree to disagree.
I think your point is that the people involved in supplying the loans were in the best position to see that they were offering comparatively lousy returns for the risk, and that they allowed their profit motive to get in the way of alerting the buyers (of the loans/loan securities). My point is that even the dumbest buyer knew that they were getting higher returns than Treasuries, and any person expecting to get those higher returns should peresonally bear most of the responsibility for understanding and accepting the risks that went with that.
I guess I bring a bias to this that I’ll explain. I like the caveat emptor rule for almost everything, barring fraud. If I want to buy a car, I think first about whether I want to take the risk of buying a used car. I know it may be cheaper than new, but I know the experts I hire to check it out might not catch everything. If I can’t deal with that uncertainty, I buy a new car. I just find it hard to deal with people blaming others for their problems, and I don’t like the moral hazard it introduces to the system when principals in a transaction turn to intermediaries and others to absorb responsibility.
Patient renter in OC
ParticipantHLS, we’ll have to agree to disagree.
I think your point is that the people involved in supplying the loans were in the best position to see that they were offering comparatively lousy returns for the risk, and that they allowed their profit motive to get in the way of alerting the buyers (of the loans/loan securities). My point is that even the dumbest buyer knew that they were getting higher returns than Treasuries, and any person expecting to get those higher returns should peresonally bear most of the responsibility for understanding and accepting the risks that went with that.
I guess I bring a bias to this that I’ll explain. I like the caveat emptor rule for almost everything, barring fraud. If I want to buy a car, I think first about whether I want to take the risk of buying a used car. I know it may be cheaper than new, but I know the experts I hire to check it out might not catch everything. If I can’t deal with that uncertainty, I buy a new car. I just find it hard to deal with people blaming others for their problems, and I don’t like the moral hazard it introduces to the system when principals in a transaction turn to intermediaries and others to absorb responsibility.
Patient renter in OC
ParticipantAnd Rydex has a fund for Aussie dollars. Ticker symbol is fxa.
Patient renter in OC
ParticipantAnd Rydex has a fund for Aussie dollars. Ticker symbol is fxa.
Patient renter in OC
Participantbob007, home prices in the long run will be determined by one set of factors, but they can be blown off course by different factors over shorter horizons, like the next 2-10 years, for example.
I tend to think that long-term prices will be determined by how well Southern California can use its natural and cultural resources to compete for top-notch mobile global talent, and by the growth of that talent.
But in the next 2-10 years, any long-term trend could be dominated by an old-fashioned, more local, supply-demand cycle. And if a credit crunch is going to drive us into a downturn for the next few years, then these last few weeks at least contained some important milestones. Whether any of those is a unique tipping point, I don’t know. A concerted private-public bail-out could change everything, but that may or may not happen.
Patient renter in OC
Participantbob007, home prices in the long run will be determined by one set of factors, but they can be blown off course by different factors over shorter horizons, like the next 2-10 years, for example.
I tend to think that long-term prices will be determined by how well Southern California can use its natural and cultural resources to compete for top-notch mobile global talent, and by the growth of that talent.
But in the next 2-10 years, any long-term trend could be dominated by an old-fashioned, more local, supply-demand cycle. And if a credit crunch is going to drive us into a downturn for the next few years, then these last few weeks at least contained some important milestones. Whether any of those is a unique tipping point, I don’t know. A concerted private-public bail-out could change everything, but that may or may not happen.
Patient renter in OC
ParticipantHLS, I think bob007 was dead on when he said that home loans originated in the last few years generally offered very low extra returns to start with.
Sure, you could choose to lever up those returns – and the risk – by borrowing to buy more home loans or their derivative assets, but that’s possible with any asset. That doesn’t change the return or risk of the underlying asset. We don’t say that equities offer a 25% long-term rate of return just because buying them with lots of borrowed money would have gotten you that return over the last 50 years.
And although I think the rating agencies did a poor job of rating the securities backed by recently issued home loans, I would lay 90% of the responsibility for underestimating the risk, and driving the whole process in the direction it took, squarely on the investors. It was greedy investors looking for higher returns than offered by Treasurues that decided, of their own volition, to invest in bonds backed by home loans. They did this even though anybody, sophisticated or not, could see that the prices of the homes, and the generosity of the loans, were becoming ridiculous.
If you were selling something, and buyers made it clear they didn’t care about the quality of what you offered, wouldn’t you too eventually cur corners? It’s the buyers’ fault. They were a little dumb, but mostly greedy.
Patient renter in OC
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