Thursday, May 05, 2005

"Headline Scenarios..Could Get Ugly" MBA Prez

The next president of the Mortgage Bankers Association likens the current situation to surfing. " Bodysurfers call it 'the Wedge.' The vectors behind the Wedge, some manmade and some natural, converge to create an opportunity for either incredible achievement or devastating injury."

"Ladies and gentlemen, welcome to the state of the secondary market in 2005. We have some major vectors interacting to create our own unpredictable waves, and it's all coming to a head right now. It can come crashing down around us, or offer us one of the most beautiful rides we've ever taken. The relationship between originators and secondary market purchasers, between mortgage bankers and the GSEs, is at a critical juncture."

She says everything but 'massive defaults'. "We loan money to people who would not have qualified 30 years ago. That means risk. You know that risk is based on a lot of factors. It's based on the borrower's credit, loan to value and property type. Higher risks are reflected in the rates. Unfortunately, the complex reasons behind the correlations are likely not to be heard. We need to be ready to combat a knee-jerk reaction: calls for more regulation based on the headline scenario."

"We're definitely not in a business as usual year for the secondary markets. Things are going to happen. I can see the waves setting up offshore."

11 Comments:

At 9:08 AM, Blogger deb said...

"Adjustable-rate mortgages (ARMs) and interest-only products accounted for 63 percent of mortgage originations in the second-half originations of 2004"
(from the MBA site)

Wow! We keep hearing the stat that around 34% of mortgage aps are for ARMs. Now in the fine print, we see they make up 63% of loans! Maybe borrowers apply for fixed, then switch to and ARM during the process. This is shocking.

We had been told that hot areas of CA are seeing 80-85% ARMs. Does that mean our rate is even higher?

 
At 9:26 AM, Blogger goleta said...

In light of coming rate increases, the only reason anyone would want ARMs that I can think of is they are buying the properties purely out of speculation and plan to sell them before the rate goes up. I know I only want 15 or 30-year fixed rate if I want to live in a house.

 
At 9:28 AM, Anonymous Anonymous said...

Because prices are so high, everyone has to go with a ARM (mostly IO), at a time when Fixed rates are still near 40 year lows.

Just goes to show that we don't need Fixed rates to increase to burst this bubble, because they don't seem to be an issue any longer. IO and Payment Option mortgages can't go any lower, and they will be rise due to the Feds raising of short term rates.

If it wasn't for these IO type loans this market who have been over a long time ago.

 
At 9:40 AM, Anonymous Anonymous said...

Man, if that doesn't say it all, I don't know what does !

"We have some major vectors interacting to create our own unpredictable waves, and it's all coming to a head right now. It can come crashing down around us, or offer us one of the most beautiful rides we've ever taken. The relationship between originators and secondary market purchasers, between mortgage bankers and the GSEs, is at a critical juncture."

The thing to realize is that there are now two sides to this situation: the homeowners not being able to afford their purchases and the MBS people not being able to keep their side together.

A problem with either is going to be a major event.

 
At 9:42 AM, Anonymous Anonymous said...

63%? that's ok... not to worry because if this percentage goes any higher or if people start looking at this as a bad thing and lose confidence, the methodology will simply change... a change in definition will occur just like in the monthly existing home sales number... so no worries... just a bit of a transitional year... nothing but blue skies all around...

 
At 9:48 AM, Blogger Ben Jones said...

(Just goes to show that we don't need Fixed rates to increase to burst this bubble, because they don't seem to be an issue any longer. IO and Payment Option mortgages can't go any lower, and they will be rise due to the Feds raising of short term rates)

Excellent point. Thanks.

 
At 10:04 AM, Anonymous Anonymous said...

All I have to say is that, when the crash hits, I hope the government doesn't bale these idiots out with our tax dollars!

 
At 10:56 AM, Anonymous Loren said...

In surfing the "best" waves are usually produced by a hurricane.

To carry the analogy even farther, there are very few people who can ride those waves without getting killed, and even the experts usually lose out if they play the game long enough.

It's a good time to be out of the water.

 
At 11:21 AM, Blogger Thomas said...

Ironic that the MBA pres should use the Wedge at Newport as an example, as not a few houses there have no-shit tripled in price since 1998, and houses are selling for nearly 400 times monthly rents. (I'm renting a three-bedroom house for $2300 that would probably be listed for about $950,000.)

The thing with the Wedge is that you need to know when to get out. If you duck back into the wave after the initial drop, you're fine. If you try to ride the thing all the way down the line, you wind up getting slam-dunked onto dry sand and getting your knee turned into a pretzel. Which hurts.

The parallel with the present RE market is uncanny.

 
At 11:55 AM, Anonymous Anonymous said...

>All I have to say is that, when the crash hits, I hope the government doesn't bale these idiots out with our tax dollars!

In principle I agree. However, what I'm beginning to see is that we may have a choice between bailing these idiots out, and having them out rioting in the streets. Looks like there's a lot of them.

I'm actually beginning to think it may be smarter to watch the exciting conclusion from outside the US.

 
At 7:24 PM, Blogger Ben Jones said...

11:55 Anon,
How about Costa Rica? I bet those surf hounds Loren and Thomas would agree!

 

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