I actually think the 2001-2009 economy was a dysfunctional economy due to an underlying energy crisis. So the headline GDP growth numbers looked good but the underlying numbers were always suboptimal in the context of the first boomers turning 65 in 2011 AND we now know they were a healthy generation and the most productive members didn’t start retiring until long after 2011. Also the Bush Tax Cuts led to a record low revenue as a percentage of GDP and defense spending grew as a percentage of GDP and those two elements were the exact opposite of the Clinton economic boom. I could go on and on pointing out anomalous economic data and at some point it’s not nitpicking like Republicans are doing today and it’s all evidence for a very dysfunctional economy.
There were a lot of presumptions about payments causing defaults, but even in the press, by early 2008 stories were stating surprise that a lot of borrowers were defaulting even on low teaser rates. If you look at cohorts, you can see how market conditions affected defaults. 2005 cohort defaults were low for 2 years, 2006 for a year, 2007 were high out of the gate. They all rose as prices fell. Papers I draw on say it was mostly just negative equity and other factors were less important than usual.
See if you can compare the purchasing price difference between a standard FNMA or FMAC loan compared with the loan terms offered through the RMBS conduits. The lower rates and lower cash requirements combined with more aggressive DCR’s, lower transaction costs, etc., while holding income constant results in much higher prices in the conduit programs. Not everyone moves so only a portion of those loans will apply to new occupants. The rubs come when a larger proportion (relative to the agency loans) of the conduit borrowers can’t actually afford to make the payments. The other part is granular for the relative impacts of the segmented details in the macro data. They may wash in the end but could explain optical price bubbles in the interim. Just a gut guess.
I think that statement re affordability is a bridge too far. Underwriting for private label from 2000 to 2006 went from 0% to 18% IO loans, Low Doc from 23% to 42%, Silent 2nd mortgages from 1% to 26.5%. Clearly these borrowers became more cash-strapped. By the summer of 2007, early 2006 vintage subprime was reaching 20% and second lien mortgages (much higher FICO, 15%). They bailed at the first whif that they couldn't do (likely another) cash-out refi. REOs (as I documented before) quickly built-up as the stigma of "walking away" increased, but part of the catalyst (along with slowing migrations) seems lax underwriting in the private markets. Home buyers with lower LTVs and able to afford their new homes wouldn't have bailed so quickly otherwise.
But keep in mind that when those 2006-2007 vintages were originated, home prices were flat at best. They were not part of a price spike. And at that time, home prices were actually declining from the top down. From mid 2006 to mid 2007 prices of the most expensive homes in the richest zip codes declined about 10% while low end prices held firm. So where I would start to poke at your point here is to say that the worst underwritten subprime loans weren’t driving up prices and defaults on those loans weren’t the trigger that started the price collapse. But I do agree that once prices started to collapse, defaults on those loans came fast and hastened some of the ensuing fall.
That's fair and now I think I'm only quibbling. I did see on on FRED that building permits plummeted in the Las Vegas MSA (an area we've highlighted before) from March 2006 thru the rest of that year, and that was before the real onslaught of REO.
one more data point coming from data I kept from the largely sub-prime servicer SPS: LTVs were already 40% (not including lost interest) by 2007 and 45% by 1Q of 2008. Clearly, the "value" component of the LTV was also highly overstated.
I actually think the 2001-2009 economy was a dysfunctional economy due to an underlying energy crisis. So the headline GDP growth numbers looked good but the underlying numbers were always suboptimal in the context of the first boomers turning 65 in 2011 AND we now know they were a healthy generation and the most productive members didn’t start retiring until long after 2011. Also the Bush Tax Cuts led to a record low revenue as a percentage of GDP and defense spending grew as a percentage of GDP and those two elements were the exact opposite of the Clinton economic boom. I could go on and on pointing out anomalous economic data and at some point it’s not nitpicking like Republicans are doing today and it’s all evidence for a very dysfunctional economy.
Ahh… thanks
There were a lot of presumptions about payments causing defaults, but even in the press, by early 2008 stories were stating surprise that a lot of borrowers were defaulting even on low teaser rates. If you look at cohorts, you can see how market conditions affected defaults. 2005 cohort defaults were low for 2 years, 2006 for a year, 2007 were high out of the gate. They all rose as prices fell. Papers I draw on say it was mostly just negative equity and other factors were less important than usual.
Based on the testimony?
Based on research from the federal reserve and price trends. Prices started to drop first in the richest zip codes.
See if you can compare the purchasing price difference between a standard FNMA or FMAC loan compared with the loan terms offered through the RMBS conduits. The lower rates and lower cash requirements combined with more aggressive DCR’s, lower transaction costs, etc., while holding income constant results in much higher prices in the conduit programs. Not everyone moves so only a portion of those loans will apply to new occupants. The rubs come when a larger proportion (relative to the agency loans) of the conduit borrowers can’t actually afford to make the payments. The other part is granular for the relative impacts of the segmented details in the macro data. They may wash in the end but could explain optical price bubbles in the interim. Just a gut guess.
Payment affordability wasn’t an important trigger for defaults or declining prices.
I think that statement re affordability is a bridge too far. Underwriting for private label from 2000 to 2006 went from 0% to 18% IO loans, Low Doc from 23% to 42%, Silent 2nd mortgages from 1% to 26.5%. Clearly these borrowers became more cash-strapped. By the summer of 2007, early 2006 vintage subprime was reaching 20% and second lien mortgages (much higher FICO, 15%). They bailed at the first whif that they couldn't do (likely another) cash-out refi. REOs (as I documented before) quickly built-up as the stigma of "walking away" increased, but part of the catalyst (along with slowing migrations) seems lax underwriting in the private markets. Home buyers with lower LTVs and able to afford their new homes wouldn't have bailed so quickly otherwise.
That’s all reasonable and true.
But keep in mind that when those 2006-2007 vintages were originated, home prices were flat at best. They were not part of a price spike. And at that time, home prices were actually declining from the top down. From mid 2006 to mid 2007 prices of the most expensive homes in the richest zip codes declined about 10% while low end prices held firm. So where I would start to poke at your point here is to say that the worst underwritten subprime loans weren’t driving up prices and defaults on those loans weren’t the trigger that started the price collapse. But I do agree that once prices started to collapse, defaults on those loans came fast and hastened some of the ensuing fall.
That's fair and now I think I'm only quibbling. I did see on on FRED that building permits plummeted in the Las Vegas MSA (an area we've highlighted before) from March 2006 thru the rest of that year, and that was before the real onslaught of REO.
one more data point coming from data I kept from the largely sub-prime servicer SPS: LTVs were already 40% (not including lost interest) by 2007 and 45% by 1Q of 2008. Clearly, the "value" component of the LTV was also highly overstated.