The Near Death of Securitization
Some Light Sunday Reading...
I opened my inbox today to find the following post at: http://www.nakedcapitalism.com/2008/06/death-of-securitized-mortgages.html .
The post substantiates my position on the emergence of Private Money as the new Asset Class that will finance mortgages for the foreseeable future. Initially I felt that this would apply only to Subprime Mortgages, but as we have seen, the ripple effect into Alt-A and A mortgages is being felt deeply in the areas where home prices far outstripped median incomes.
I saw some interesting data from 2006 at: http://bigpicture.typepad.com/comments/2007/02/geographic_dist.html . It shows graphically the areas where housing prices radically deviated from the long term relationship a median home price of approximately 2.6X median income to over 10x in many areas. It is interesting to see that the conservative Midwest states did not buy in to the bubble as much as the coasts. This cannot all be related to bad weather in winter...
Only the availability of teaser rates and Option Arm Structures, in combination with low or no down payments and the non-existent underwriting standards of ARM type loans could keep inflating the bubble we have experienced. Because of lax underwriting, many couples in California have ended up with house payments that actually represent 60% or more of their combined gross incomes (I's say this is pretty gross!).
If you look at it analytically 60% of combined gross incomes for a house payment is unsustainable except in the rare case where the couple never loses their jobs, get continual inflation indexed pay increases, never get sick or divorced and have a nice inheritance to look forward to since with this level of home expense, they are unlikely to be able to adequately save or invest for retirement and may never pay off the home they live in.
In any case, the "securitization issue" has created many unintended consequences, not the least of which is the near impossibility of negotiating a meaningful loan modification ( a topic near and dear to my heart which I have written on at length in my entry on "Negotiating a Loan Modification Agreement" at http://secondstartamerica.com .
The reality is that little will change without some form of Socialization which would most likely be in the form of a bailout or government mandated mass markdown of mortgage principal amounts. The lenders and investors that made the loans will resist to the last man or woman executive standing and the costs to taxpayers of any combination of these scenarios will be mind numbing.
It will be interesting to see how the post election drama plays out because every trick in the book has been used to keep the deflation we have seen orderly. If investor sentiment turns bearish enough, no regulator on the planet can keep the market from cleansing itself and that would be something to see, but not experience.
Private Money Lending, with the old fashioned emphasis on low loans to value and cross collateralization will result in fewer more expensive loans and push prices further down. It will also result in sustainable markets for the future.
For now, buyers and sellers must gradually accustom themselves to the new realities in the marketplace. True, highly qualified and well financed, fully documented buyers will get financing from portfolio lenders. Anybody else will have a much tougher time getting their financing completed. Many sellers will face the neccesity of offering seller financing with the attendant risks to the seller.
Savvy investors will quickly realize the possibilities for Private Money Lending.
I opened my inbox today to find the following post at: http://www.nakedcapitalism.com/2008/06/death-of-securitized-mortgages.html .
The post substantiates my position on the emergence of Private Money as the new Asset Class that will finance mortgages for the foreseeable future. Initially I felt that this would apply only to Subprime Mortgages, but as we have seen, the ripple effect into Alt-A and A mortgages is being felt deeply in the areas where home prices far outstripped median incomes.
I saw some interesting data from 2006 at: http://bigpicture.typepad.com/comments/2007/02/geographic_dist.html . It shows graphically the areas where housing prices radically deviated from the long term relationship a median home price of approximately 2.6X median income to over 10x in many areas. It is interesting to see that the conservative Midwest states did not buy in to the bubble as much as the coasts. This cannot all be related to bad weather in winter...
Only the availability of teaser rates and Option Arm Structures, in combination with low or no down payments and the non-existent underwriting standards of ARM type loans could keep inflating the bubble we have experienced. Because of lax underwriting, many couples in California have ended up with house payments that actually represent 60% or more of their combined gross incomes (I's say this is pretty gross!).
If you look at it analytically 60% of combined gross incomes for a house payment is unsustainable except in the rare case where the couple never loses their jobs, get continual inflation indexed pay increases, never get sick or divorced and have a nice inheritance to look forward to since with this level of home expense, they are unlikely to be able to adequately save or invest for retirement and may never pay off the home they live in.
In any case, the "securitization issue" has created many unintended consequences, not the least of which is the near impossibility of negotiating a meaningful loan modification ( a topic near and dear to my heart which I have written on at length in my entry on "Negotiating a Loan Modification Agreement" at http://secondstartamerica.com .
The reality is that little will change without some form of Socialization which would most likely be in the form of a bailout or government mandated mass markdown of mortgage principal amounts. The lenders and investors that made the loans will resist to the last man or woman executive standing and the costs to taxpayers of any combination of these scenarios will be mind numbing.
It will be interesting to see how the post election drama plays out because every trick in the book has been used to keep the deflation we have seen orderly. If investor sentiment turns bearish enough, no regulator on the planet can keep the market from cleansing itself and that would be something to see, but not experience.
Private Money Lending, with the old fashioned emphasis on low loans to value and cross collateralization will result in fewer more expensive loans and push prices further down. It will also result in sustainable markets for the future.
For now, buyers and sellers must gradually accustom themselves to the new realities in the marketplace. True, highly qualified and well financed, fully documented buyers will get financing from portfolio lenders. Anybody else will have a much tougher time getting their financing completed. Many sellers will face the neccesity of offering seller financing with the attendant risks to the seller.
Savvy investors will quickly realize the possibilities for Private Money Lending.
Posted by LanceNewton at 6/29/2008 1:52 PM 
Categories: Finance,Opinion,Residential Mortgages,Private Money Lending
Categories: Finance,Opinion,Residential Mortgages,Private Money Lending
Lance-
In response, I think this issue and the corrections we can expect represent an enormous opportunity to savvy IRA investors who can fill the void. Additionally, seller financing can once again represent a viable option-and an alternative to the non-recourse loan that is required for IRA investors. I look forward to sharing information about opportunities for Self Directed IRA investing.
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