Hussman Weekly Market Comment: The Second Wave Begins
I should also note some features of the resets we are now beginning to observe. It is tempting to think that with Treasury yields fairly low, mortgage resets might be fairly benign in terms of their impact. The problem is that these Option ARM and Alt-A structures were specifically designed as “teasers” – allowing loans to be made without documentation of creditworthiness, in return for post-reset interest terms that were generally higher than a documented lender would have paid. The mortgages certainly do not reset at Treasury bill yields or even at standard spreads over LIBOR. Instead, they reset to a “premium” spread above those rates. That “yield spread premium” is precisely what the homeowners agreed to in return for the undocumented loan, and is particularly obnoxious at the point of reset if the mortgage itself is underwater (loan amount in excess of home value). Given that these mortgages were written during the last stages of the housing boom, at the highest prices, it is reasonable to assume they now sport very high loan-to-value ratios.
Similarly, Option ARM mortgages typically have very permissive payment schedules prior to the reset date, which have allowed homeowners to essentially live in these houses (at least temporarily) with fairly discretionary payments. The data suggest that most of these borrowers have allowed their mortgages to “negatively amortize,” allowing the loan balances to grow larger even as property values have depreciated. Once again, the resets on these are problematic for borrowers with questionable creditworthiness, who bought the homes largely in anticipation of price appreciation. For these borrowers, the transition from discretionary payments to more demanding terms is unlikely to be smooth.
- Wells Fargo And The Rousseau Story
Found via Naked Capitalism. In March 2000, Norman and Oriane Rousseau put 30 percent down to buy a house at 580 Wilshire Place, Newbury Park, CA. In the following years they were solicited to refinance their loan. In October 2007 they met with the loan...
- A Banker Speaks, With Regret - By Nick Kristof
If you want to understand why the Occupy movement has found such traction, it helps to listen to a former banker like James Theckston. He fully acknowledges that he and other bankers are mostly responsible for the country’s housing mess. As a regional...
- Ny Times Op-ed: I Saw The Crisis Coming. Why Didn’t The Fed? - By Michael J. Burry
I have often wondered why nobody in Washington showed any interest in hearing exactly how I arrived at my conclusions that the housing bubble would burst when it did and that it could cripple the big financial institutions. A week ago I learned the answer...
- Wsj: First, Let's Stabilize Home Prices - By R. Glenn Hubbard And Chris Mayer
We are in a vicious cycle: falling housing values cause losses on securities, which reduce bank capital, thereby tightening lending and causing house prices to fall further. The cycle has spread beyond housing, but housing is the place to fix it. Housing...
- The Psychology Of The Housing Mess - By Richard H. Thaler And Cass R. Sunstein
With the housing collapse, human decisions — whether on Wall Street or on Main Street — played a critical role. So it's instructive and, indeed, essential that we understand the human decision-making of today's crisis so that we don't...