« A Meddle Too Far | Main | Obama: Generational War! » Loan Delinquency07 Nov 2007 03:43 pm
Here's your chart of the day, courtesy of Senator Schumer, Rep. Maloney and the Joint Economic Committee. Sure does make you glad that Alan Greenspan was out urging everyone to get ARMs a few years back. No spike in defaults as a result or anything; certainly no kind of secondary fallout roiling financial markets and causing tons of people to lose their homes. Comments (31)
Did Greenspan (or anyone else) say that default rates would be equal for fixed and adjustable mortgages? And do we know how much of the differences in the graph are caused by the mortgage structure, rather than systematic differences in the groups of borrowers? And aren't there other things that matter besides default rates anyway? You're post has a very smug tone, but I can't figure out quite what your point is. 
The X-Axis contains two 1998s, two 2001s and two 2004s. A bit sloppy.
As far as I can tell, in the subprime market, the fixed rate defaults are running slightly lower, than they were in halcyon days of 2000 (otherwise known as the best economy EVAH), and adjustable rate defaults are running slightly higher. I don't see the big deal there.
I read the Greenspan quote, and as I suspected he was not, in fact, 'urging everyone to get ARMs' - just making some observations on costs and benefits.
They (and you) forgot to add a giant BUSH TAKES OFFICE line.
They (and you) forgot to add a giant BUSH TAKES OFFICE line. Would that go in the first "2001" on the chart or the second "2001"?
Whichever 2001 gets the "Bush Takes Office" line, it's pretty clear that Yglesias won't be adding it to the chart. It looks like delinquencies fell sharply under Bush and have only now risen back to Clinton levels for some classes of mortgages. Although, in fairness, I believe the prime fixed rate market dwarfs the others, so there probably really isn't any trend.
"as a result"? Are you a moron? There's a causal connection between the borrowing habits of subprime mortgage borrowers and the opaque pronouncements of the Fed chief? The predominant reason people "are losing their homes" is that they've decided to walk away from their homes because the homes aren't worth what they paid for them. If you borrowed $450,000 at 7.5% to buy a house, and the value of the house has now fallen to $405,000, would you still pay? Would it matter if the interest rate were increasing or falling? No, not for most subprime borrowers. It's not a tragedy, not even for the banks. It's just a financial bet that didn't pay off.
I read the Greenspan quote, and as I suspected he was not, in fact, 'urging everyone to get ARMs' - just making some observations on costs and benefits. Yes, that's what Al always says when he's trying to salvage his reputation. He always manages to gloss over how his words get played up in the press, and if he's called on that, he'll mumble something about how his remarks were taken out of context. Because even though he's spent pretty much his working career in the Beltway and in government, he's just a babe in the woods, completely unacquainted with how people might parse his words in pursuit of their own agendas. It's another sign of his apolitical purity, doncha know.
"If people are stupid enough to listen to an Ayn Rand disciple, maybe they deserve what they get." So people of less than average intelligence who take the advice of the man most respected (deservedly or not) on financial matters in the last few decades deserve to suffer for doing so. I guess they should have chosen to be smarter. Essentially, you are saying that those who lack intelligence should suffer. I prefer to think that those who are endowed with intelligence and positions of public trust should not knowingly lead those who trust them astray, but I'm silly that way.
"Bush takes office"; not "Bush elected"
I agree the message is unclear - what amount The
BTW, it is unclear to me that a rise in defaults, resulting from increased lending a few years back, is really problematic. Yes, it is bad for those who have defaulted (although what's the alternative - that they would not have tried to buy a house and instead just paid rent the past few years? That makes them better off how, exactly?). But I think it is important to look at a larger scale to see all the people who purchased houses and obtained mortgages over the past few years that would not have done so had lending been much tighter. I mean, contrast (a) a situation in which 100 people bought houses and obtained mortgages, of whom 10 default, and (b) a situation in which 150 people bought houses and obtained mortgages, of whom 20 default. Sure, situation (b) has a higher default rate. But at the end of the day, 130 people end up owning a home in situation (b) and only 90 people end up owning a home in situation (a). Does this offset the higher default rate in situation (b)? How does one make that evaluation? I don't know how the example compares with where we are today, but it is simply not a matter of "higher defualt rate = bad".
A couple of comments here: (a) this chart is just showing the beginning of the current meltdown. Many of the ARM's, interest-only and negative interest loans taken out in 2005, 2006, and 2007 have yet to go into their re-adjustment phase. In fact, the first wave is just now starting to kick into their adjustment period (hence the uptick in foreclosures). Wait until you see this chart in another 12 months. (b) This is based on percentage of foreclosures. As such, it does not take into account the magnitude of having so many new and additional homeowners since 2000 and prior (the Clinton years), I could care less about percentages, than I do about percentage of Americans (which remained much flatter than percentage of homeowners, which rose dramatically). If you look at it that way, you will see how pervasive this mess is going to get, and how it is going to impact the economy as a whole. (c) Of course foreclosure declined in a time of rising home prices, falling interest rates and new homeowners. You essentially added a bunch of new homeowners to the population. increasing the denominator, and thereby decreasing the percentages. In addition, troubled homeowners could refinance their way temporarily into a situation they could afford (by getting out of say, a fixed loan they could not afford into an ARM in 2005 they could afford (which happened to have a balloon or adjustment phase kicking in 2007)). But at the time, everyone was told they could refinance themselves out of the 2007 predicament.
However, a more interesting question would be this: did the increase in inequality (causing the wealthy to run-up the prices for assets by buying second homes as well as investment speculation) coupled with loose credit (allowing poorer people to continue to live in those areas affected by the rapid rise in asset values from all the loose money from those at the top) cause the bubble we see today?
what's pathetic about this is that it was the best of all possible times to get a 30 fixed (cause rates were so low), getting an ARM was just silly unless it was absolutely the only way to get into a house (in which case you knew you were rolling the dice).
I really don't think Greenspan's comments are important nor does it seems like the author has a solid grasp on what's happening. ARMs are NOT the problem - they are a useful tool for borrowers who want to minimize the amount they pay for their home. The delinquincy rate overall has spiked in recent years not because there was a clamoring for people to get ARMs but because lenders collectively decided to ignore risk and started distributing loans for amounts that substantially exceeded their means of repaying. A spike in ARM delinquincy should be a given when there's an economic downturn affecting the housing market, since these loans contain the maximum risk exposure. The ARMs aren't the problem. Risky lending is. Greenspan wasn't (to my knowledge) twisting lenders' arms to offer increasingly risky terms to buyers - they did that on their own.
what's pathetic about this is that it was the best of all possible times to get a 30 fixed (cause rates were so low), getting an ARM was just silly unless it was absolutely the only way to get into a house (in which case you knew you were rolling the dice). That's precisely right. But why take personal responsibility when you can blame some obscure and one-off remarks from the chairman of the Federal Reserve? Essentially, you are saying that those who lack intelligence should suffer. Yes, it's called life. If I touch a hot stove, it's not too bright of me, but hopefully I learn from the experience and don't repeat the mistake. Human nature being what it is, I will probably look for someone to blame.
The WSJ's Holman Jenkins raised a broader question in August: whether government policies to encourage low-income home ownership (which is part of the reason for the rate of subprime defaults now) were even beneficial to low-income households. Citing research by Carolina Katz Reid, his conclusion was that, in many cases, they aren't. Some excerpts from Jenkins's column:
1. Greenspan didn't say everyone should get an ARM, just that they were attractive for some people. (Given the incredibly low fixed rates available, even that seems strange). 2. MY didn't say that Greenspan's comments caused anything. Maybe implied something ...
As a mtg industry analyst... I disagree with Brad@5:20 that the chart shows foreclosure rates. What does this chart actually show; i.e, what is the metric for 'Delinquency?' 30 days/(1 payment) past due? 60+?? 90+ dpd is generally considered default terroritory.
ARM products are the mtg industry's self-advertisement: the thinking is that if your adjusted rate gets too high, you'll refinance. Interest only programs work in roughly the same way, except more so; I seriously doubt over 5% of IO notes will mature according to original terms; another program tailor-made for refinancing. With one caveat: real-estate valuation...or more precisely, overvaluation. In mtg risk assessment, it always comes down to value. Collateral. When borrowers can't keep up with payment increases and can't refinance to get lower payments, the result is more foreclosures, which will in turn drive down market prices, which will in turn screw even more people out of refinancing to a lower int rate, ad infinitum.
Greenspan didn't urge anyone to get an ARM, directly. He just happened to bring it up during his testimony for no real reason, in regard to nothing, in response to a question nobody asked. And I'm the king of Sweden. The statement itself was dumb. Drool cup head protector level dumb. Of course ARM's would have been a good deal during the previous ten years. In fact they would have been a good deal over the previous 22 years, an entire generation, because interest rates were in a secular downtrend during that period One doesn't have to be a chartist or a market technician to appreciate that markets move in broad cycles When the biggest market of all, the credit market, has been in a trend for a generation prudence would suggest that the trend is likely to change. Greenspan after this by the way started a period of raising the Fed set interest rate with the aim of raising all interest rates. Get your mind around that. He wasn't just some academic reporting some interesting topic. He was the frickin Maestro who was soon going to start raising rates.He knew at the time that such a course was not just probable, it was inevitable. They guy is a sociopath. Why did he want to get the last suckers into the game. It's a long story but in a nutshell the mortgage mania was the epicenter of the global credit/liquidity flood, which Greenspan's Fed nurtured and lead, which was making the rich very much richer through the inflation of financial assets It was fun while it lasted.
So people of less than average intelligence who take the advice of the man most respected (deservedly or not) on financial matters in the last few decades deserve to suffer for doing so. People of less than average intelligence are reading the statements of Alan Greenspan? Amazing.
Interesting how a jump in the delinquency rate is a leading indicator of an oncoming recession.
My uninformed opinion on Greenspan and the Fed in the 2000's in general is that after 9/11 and the internet bubble, they tried their hardest to find a way to add liquidity to the market to keep the economy going. Here is what Washington and free-traders are not telling you. The Fed is having a more difficult time increasing economic activity through the tried and true methods (i.e. -providing banks with more cash, which they would then lend out to businesses to spur investment, which would in turn, spur consumer income through an increase in jobs). However, since gloabilization took hold, suddenly, money being borrowed was not going to build a factory in Indiana, it was going to finance a factory in China. This is what is so damming about the coming economic collapse. We have deindustrialized so much that monetary policy no longer spurs economic activity, only fiscal policy (i.e - government spending). And as anyone will tell you, deficit spending is only delaying the future, versus private investment, which is beneficial to the future, since it is self-sustaining.
So the doubling of 19982, 2001, and 2004 means: 1)The graph is stretched at those times and each is a half-year? 2)The years are mis-labeled? Should be 1995 to 2007? 3)The years are mis-labeled? Should be 1998 to 2010 because MY has really good Magic Eight Ball? 4)This is actually a graph of favorite care bear by color per capita: http://juliansanchez.com/notes/archives/2007/11/care_bear_stare.php 5)The graph is totally meaningless? One hopes MY will elucidate soon.
Subprime mortgages are hardly the only mortgage problem as 'Alt A' mortgages will be just as bad in terms of total losses. Mortgages are hardly the only credit market problem. Trillions of dollars in other securitized debt are going down also. The biggest macro economic story since the dawn of "morning in America" lies in this chart. http://www.pimco.com/NR/rdonlyres/A0D85792-BC9A-430E-8AA2-1114B3E3FC2C/607/TotalCreditDebtChart.gif Note that the last peak in the 30's was the result of the shrinking of the GDP because of the depression while some of the debt remained on the books. There has never in world history been such an orgy of debit creation as we experienced since 1980. Nothing even approaches it. It's a worldwide phenomenon. Yes the world changes and even the meaning of money has changed. Still, there is no way to look at that chart and not understand that the very foundation of economics has changed profoundly yet invisibly. All the trends in wealth and income distribution and political power are explained by that chart if can burrow under the surface. In 1980 it took $1 in credit to produce 1$ in GDP growth. In 2006 it took around $7 in credit to produce $1 in GDP growth. An ever increasing amount of credit is necessary to support the old credit. Traditionally this is called a Ponzi scheme.
Homer not so wisely said: ... Essentially, you are saying that those who lack intelligence should suffer. Yes, it's called life. No Homer, that's called life in the jungle. Here in civilized society we try to watch out for our brothers and sisters. Especially if they aren't as smart as us or as educated about risks. Personal responsibility is important but is no excuse to take advantage of people. Caveat emptor has its place but only the selfish, greedy, and lucky-til-now believe it should be the standard in all areas of life.
>>"Essentially, you are saying that those who lack intelligence should suffer. " >"Yes, it's called life. If I touch a hot stove, it's not too bright of me, but hopefully I learn from the experience and don't repeat the mistake. Human nature being what it is, I will probably look for someone to blame." Believing that the less intelligent will suffer, and will hopefully learn from it is fine. Believing that they should suffer is disgusting.
Comments closed November 21, 2007. |
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Heads in the Sand
If people are stupid enough to listen to an Ayn Rand disciple, maybe they deserve what they get.
Posted by Jim W | November 7, 2007 3:59 PM