Tag Archives: mortgages

From subprime mortgage issues to superprime mortgage issues

Posted on by

The most recent financial uncertainty includes mortgages in a superprime era:

Photo by Expect Best on Pexels.com

This is quite the turnaround. After 2008, banking the rich was often touted as a far better model. Even the biggest banks began aiming more of their consumer lending and wealth management at relatively better-off customers, and they scaled back on serving subprime customers. Wealthy customers seldom default, they bring lots of cash and commercial banking business and pay big fees for investments and advice, the thinking went.

But when interest rates shot up last year, it exposed weaknesses in the strategy. It isn’t that the rich are defaulting on loans in droves. But the most flush depositors with excess cash last year started taking their cash and seeking out higher yields in online banks, money funds or Treasurys. On top of that, startups and other private businesses started burning more cash, leading to deposit outflows…

A major way that the better-off do borrow from banks is to buy homes, and often in the form of what are known as jumbo mortgages. Jumbos are for loan amounts over $726,200 in most places, and over $1,089,300 in high-cost cities such as New York or San Francisco. Jumbo mortgages bring wealthy customers with lots of cash. They also are typically more difficult to sell to the market, in part because they aren’t guaranteed by government-sponsored enterprises such as Fannie Mae or Freddie Mac. So banks often sit on them. But the value of these mortgages, many of which are fixed at low rates for the foreseeable future, have dropped as interest rates have risen.

To be sure, not all banks that focus on wealthier individual clients are under intense pressure. Shares of Morgan Stanley and Goldman Sachs, are down less than half as much this month as the nearly 30% decline for the KBW Nasdaq Bank index. But those banks are more diversified and focus more on the steadier, fee-generating parts of the wealth business, such as stock trading and asset management, than on mortgages or deposits.

I interpret this to mean that there is less money – or lower rates of return – to be made on big mortgages. Wealthy people will want to buy real estate, particularly because it is often assumed that the value of real estate will be good long-term, but the money does not generate the amount of money banks want.

If mortgages are too “boring” or do not generate enough money, could we be headed to an era where banks do not want to do mortgages? Money for mortgages could come from elsewhere.

The reasons behind a low housing inventory

Posted on by

Why are there few homes to purchase in the United States? Here are several reasons:

Photo by Pixabay on Pexels.com

One reason inventory is so low nationally is that many homeowners were able to lock in record low interest rates in 2020 and 2021. Mortgage rates have skyrocketed since then—the rate for a 30-year fixed mortgage reached 6.7% on March 9, nearly double that of a year ago, according to Freddie Mac. That means that homeowners who bought or refinanced with low interest rates are reluctant to sell their homes and buy another with a mortgage with a much higher interest rate.

The low inventory makes house hunting an even more painful and emotionally charged process than usual, because buyers are finding that there just aren’t that many options. They have to choose between paying a high price for the inventory that is available, or waiting—potentially for a long time.

There are factors at play that make some markets especially brutal. In January, according to Redfin, the places out of the top 100 most-populated metro areas in the country with the lowest inventory were Rochester, N.Y. (1.2 months’ supply); Buffalo, N.Y. (1.4 months’); and Allentown, Penn. (1.5 months’). Rounding out the top ten were Grand Rapids, Mich.; Worcester, Mass.; Greensboro, N.C.; Hartford; Boston; and Montgomery County, Penn…

One other reason that there’s low inventory? The influx of investors who have bought properties, including single-family homes, to rent. Investors bought 24% of all single-family homes in 2021, up from around 15-16% each year going back to 2012, according to a Pew Stateline analysis.

Add to this that many places in the United States are short units of affordable housing.

I have not seen many hints that this is a short-term problem or one that will be addressed soon. The mortgage rate issue will take time to see through. The housing crunch in particular markets may require hyperlocal policies as well as changing national conditions. Investors will continue to act in the market. The construction that is taking place is often aimed at higher ends of the market.

What I am still surprised at: how come no national politician is making this a centerpiece of a campaign? Imagine a politician promoting homeownership opportunities, new housing starts, seeking ways to boost construction, and wanting to help people achieve the American Dream. This could appeal to both sides of the aisle. This would not necessarily require major changes to national policy beyond a consistent message, helpful incentives, and a desire to help address the foundational issue of housing that many face.

Argument: increase the value of federally-backed mortgages, finance more McMansions

Posted on by

With a headline of “Rising Loan Limits Are a New Federal McMansion Subsidy,” the editorial board of the Wall Street Journal does not approve of recent mortgage changes:

Photo by Andrea Piacquadio on Pexels.com

The Federal Housing Finance Agency (FHFA) said Tuesday it will increase the maximum size of mortgages that Fannie and Freddie will cover—known as the conforming loan limit—to $1,089,300 in high-cost areas from $970,800 this year and $765,600 in 2020. The conforming loan limit in other areas will rise to $726,200, from $510,400 two years ago…

Instead, the Administration wants to prop up housing demand and prices by raising the guarantee limit. This will please the Realtors and affluent, especially in California areas where the median home price exceeds the new limit, such as Orange County ($1.2 million), San Francisco ($1.3 million) and San Jose ($1.7 million).

Sorry to state the obvious, but anyone who can qualify for a million-dollar mortgage doesn’t need the government to subsidize it with a guarantee. The average 30-year interest rate on a jumbo loan is 6.8%, which is similar to a government-backed mortgage.

Borrowers with jumbo loans tend to have higher incomes and credit scores. But these mortgages are getting riskier as borrower monthly payments have risen faster than incomes. Layoffs are increasing in higher-paying fields like tech, and a recession could result in foreclosures. The FHFA is expanding the taxpayer liability at an especially risky time…

The more the government intervenes in the housing market, the more damage it does.

There is a lot here that relates to work I have done. A few thoughts in response:

  1. The final line is interesting. Is the assumption that the federal government should not be very involved or involved at all in the housing market? One journalist reported this quote from a European finance official a few years ago: “Most countries have socialized health care and a free market for mortgages. You in the United States do exactly the opposite.” This government intervention was instrumental in helping to create suburbs and promote homeownership.
  2. This move might help people in more expensive housing markets. Does one have to be rich to access housing in Orange County or San Jose or is this needed because the housing prices are so high there?
  3. The headline mentions McMansions but the word is not used in the editorial. Is the term shorthand for expensive homes? Or, commentary on the kinds of homes people with this level of resources purchase? Is the Wall Street Journal against McMansions? (If I had to guess based on my work looking at the use of McMansion in the New York Times and the Dallas Morning News, the WSJ would fit somewhere in between these two sources.)

How many suburbanites settle for a “bridesmaid suburb”?

Posted on by

I discovered the term “bridesmaid suburb” used in an Australian context:

Photo by David McBee on Pexels.com

A “bridesmaid suburb” is a second-choice postcode and could become a strategic buying trend as ballooning interest rates bite into borrowing capacity…

“Buyers will still have to consider alternatives or the bridesmaid suburbs to their first preference, possibly not because of price but because of diminished borrowing capacity.

”Bridesmaid suburbs are adjacent to higher-profile neighbouring suburbs. They cost less to buy into but share many similarities to the first-pick suburb next door, including access to public transport routes, schools and major shopping hubs…

“A bridesmaid suburb can still allow you to secure a lifestyle with comparable amenities and appeal, and only a short drive down the road.”

While this is used in Australia- a quick Google search suggests this term has been around there for several years – I wonder if it might also apply to suburbs in the United States. Are there many homeowners who would have preferred to live in the most desirable suburb but could not afford it and so settled in nearby communities? There are several assumptions at work here:

  1. Many people want to live in the most desirable suburbs. If supply and demand is the only factor at work, more people wanting to live in desirable suburbs drives up home prices so much that there is not enough housing. Additionally, my own sense of American suburbs is that some of the most desirable and exclusive suburbs also intentionally limit their housing supply to help maintain their character and status. Are there such suburbs that always stand out above any other location in the region and where most people would want to live?
  2. Suburban homeowners want to max out their borrowing capacity and get the most they can – a more expensive home – through their mortgage. People can borrow up to a certain point decided by lenders, but how many go all the way to the maximum allowed?
  3. The exact community in which you live matters less than the clusters of suburban communities you can access. It is less about a particular zip code and more about a cluster of adjacent zip codes. Suburbia offers driving access to a lot of communities so perhaps you do not have to live in a particular place to enjoy the benefits. At the same time, communities that appear similar on certain factors can be quite different in terms of character and everyday experiences.

The growing $100+ million in debt for the most expensive home in Los Angeles

Posted on by

Subprime lending helped bring about the housing crisis of the late 2000s but it is also utilized by very wealthy actors, such as in the case of a home valued in the hundreds of millions:

Photo by Pixabay on Pexels.com

The first loan, which a source close to the project said also refinanced existing bank debt, was $82.5 million with a minimum interest rate of 11%. It included an agreement that should the house sell for more than $200 million, Hankey would get $3.5 million of the sale.

Niami came back a little over a year later and borrowed an additional $8.5 million at the same rate, paying a loan fee of $82,500. He also agreed to more onerous terms: giving Hankey a percentage of the profits if the house sold for $100 million to $200 million.

Two months before the loans were due, Niami came back for a third helping, and got an additional $15 million at the same interest rate. There were no changes to the profit-sharing arrangement, but this time the developer had to cough up a $1-million application fee.

The total: a whopping $106 million that Crestlloyd defaulted on when it all came due on Oct. 31, 2020 — and it’s growing with interest and penalties. But Hankey is not the only lender owed by Crestlloyd, according to a title report provided by the receiver.

There is a lot of money wrapped up in this house and it is unclear whether those involved will get what they hoped for. Almost regardless of what happens in the short-term, this house will live on in future memories because of its price-tag and location. Will it end up being a cautionary tale/disaster or an eventual success in a land of mega-mansions and wealthy residents?

Because this is one of the most expensive properties around, would the fallout from the subprime lending receive more attention or less attention compared to the consequences of subprime loans in the late 2000s? How long would it take to sort out debt and payments in court? While there are wealthy actors involved, a lot of money could be lost and even the wealthiest would feel a loss of $50-100 million on a single house.

Sustaining McMansion purchases with low interest rates

Posted on by

If architecutural critiques of McMansions do not dissuade potential buyers, enticing interest rates might prove persuasive. One Southern California mortgage broker explains:

Photo by Andrea Piacquadio on Pexels.com

Maybe you, too, can afford a Southern California McMansion. How about paying just interest, not principal, at a rock bottom 1.875% mortgage rate for the first three years?

For a $1.5 million loan on a $2 million home, your house payment is locked down at $2,344. Assuming monthly property taxes of $2,083 (1.25% annual property tax rate) and $250 for monthly homeowners’ insurance, your total house payment is $4,677…

If rate and payment uncertainty gives you too much heartburn, you can find longer interest-only lock terms of five, seven or 10 years in the 2% to 3% interest rate range on 30-year mortgages.

Even 30-year jumbo fixed rates are super cheap. I’ve found rates as low as 2.375% for Inland Empire properties, where jumbos start at $548,250. In Los Angeles and Orange counties, where jumbos start at $822,375, rates are as low as 2.625%.

Why buy a McMansion? Because it is relatively cheap due to low interest rates. As the commentary notes, renting a McMansion could be significantly more costly than buying. Since Americans like large houses and this is an expensive real estate market, a large McMansion at reasonable rates may look like a good deal.

At the same time, the idea of even cheaper interest rates for just three years should cause some pause. What happens if interest rates go up? This sort of approach sounds like some of the mortgage options of the 2000s that helped lead to difficulties for some in keeping up with their mortgage.

Another way that McMansions could continue to be an attractive financial option in the future is if their relative value drops compares to other homes. If fewer people want such a home, this might depress values to a point where others who value space or like other McMansion features might be able to get a bargain.

Percentage of delinquent FHA loans keeps rising

Posted on by

The economic and social consequences of COVID-19 might be just beginning. A new report suggests a number of FHA mortgage holders are behind in payments:

More than 17% of the Federal Housing Administration’s almost 8 million home loans nationwide were delinquent in August, according to a new study from the American Enterprise Institute.

“Rising FHA delinquency rates threaten homeowners and neighborhoods in numerous other metro areas across the country,” American Enterprise Institute researchers said in the just released report. “It would be expected that these delinquency percentages will increase over time…

The increase in late FHA loan payments is even greater than the rise in the number of overall mortgage delinquencies since the start of the pandemic…

A new study by the Federal Reserve Bank of Dallas warns that highly indebted FHA borrowers are at risk of losing their homes when payment forbearance programs end.

More people falling significantly behind on their mortgages – plus other issues related to housing – could have ripple effects on a number of actors:

  1. Americans who need housing. If you cannot afford your mortgage or rent, what viable options do you have?
  2. Mortgage providers. If a lot of mortgages go into default or foreclosure, what does this mean for these large financial actors?
  3. Local governments and communities. With larger numbers of people without housing and limited housing, what happens? What happens to local tax revenues?
  4. Housing investors and people with resources. Does this mean they can take advantage of opportunities?

The memory of the burst housing bubble just over ten years ago lingers. While few predicted a worldwide pandemic and the resulting impact on housing, we could know within a few months whether this will lead to another housing crisis.

Altering mortgages to account for climate change threats

Posted on by

A new Federal Reserve report considers how the consequences of climate change might affect mortgages:

The housing market doesn’t yet factor in the risk of climate change, which is already affecting many areas of the U.S., including flood-prone coastal communities, agricultural regions and parts of the country vulnerable to wildfires. In California, for instance, 50,000 homeowners can’t get property or casualty insurance because of the increased risk to their homes.

Yet for now, no mortgage lender, portfolio manager or buyer of mortgages takes into account climate-induced floods, except to determine if a house sits in a 100-year floodplain at the time the mortgage is issued, said Michael Berman, a former official with the U.S. Department of Housing and Urban Development and former chairman of the Mortgage Bankers Association.

Once lenders and housing investors do start pricing in such risks, “There may be a threat to the availability of the 30-year mortgage in various vulnerable and highly exposed areas,” Berman wrote in a recent San Francisco Fed report. He predicts lenders could “blue-line” entire regions where flood risks are high — a reference to redlining, the practice of refusing mortgages to minorities…

Said Cleetus: “My biggest fear, honestly, is that the markets will get out ahead of our policies, and we see a situation where property values do start to decline, and small communities that rely on a lot of property tax revenue won’t be able to deal with it.”

It will be interesting to see who (1) pursues this as a competitive advantage and (2) how federal policy plays into this. In a quest to get ahead of the rest of the market, could someone come up with a unique mortgage for areas with more climate change risk? Discussions about whether federal money should be used in places prone to natural disasters has been going for decades (see Hurricane Sandy or discussions about resilient cities).

Much of the article focuses on how the lack of mortgages in certain areas would lead to decreased property values and then a downward spirals as communities would not be able to generate as much tax revenue. This could also work the other way: imagine communities where only the really wealthy can live because they do not need traditional mortgages. They could come in and gobble up real estate with lowered values. Either way, the result could be increased inequality in affected areas.

17% of millennial homebuyers regret the purchase (but perhaps 83% do not??)

Posted on by

A recent headline: “17% of young homebuyers regret their purchase, Zillow survey shows.” And two opening paragraphs:

Seventeen percent of millennial and Generation Z homebuyers from ages 18-34  regret purchasing a home instead of renting, according to a Zillow survey.

Speculating as to why, Josh Lehr, industry development at Zillow-owned Mortech, said getting the wrong mortgage may have driven that disappointment. For example, the Zillow survey showed 22% of young buyers had regrets about their type of mortgage and 27-30% said their rates and payments are too high.

The rest of the short article then goes on to talk about the difficulties millennials might face in going through the mortgage process. Indeed, it seems consumer generally dislike obtaining a mortgage.

But, the headline is an odd one. Why focus on the 17% that have some regret about their purchase? Is that number high or low compared to regret after other major purchases (such as taking on a car loan)?

If the number is accurate, why not discuss the 83% of millennials who did not regret their purchase? Are there different reasons for choosing which number to highlight (even when both numbers are true)?

And is the number what the headline makes it out to be? The paragraph cited above suggests the question from Zillow might be less about regret in purchasing a home versus regret about owning rather than renting. Then, perhaps this is less about the specific home or mortgage and more about having the flexibility of renting or other amenities renting provides.

In sum, this headline could be better. Interpreting the original Zillow data could be better. Just another reminder that statistics do not interpret themselves…

How a bank could still make money offering negative interest rate mortgages

Posted on by

A bank in Denmark explains how they can make money by offering mortgages with interest rates below zero:

Jyske Bank has had to do a lot of clarifying; there’s a widespread misconception that the bank is actually paying borrowers to take their money. First of all, the bank is not actually paying anyone; it is simply forgiving part of the loan each time a payment is made. A mortgage borrower is likely to end up paying Jyske back a little more than they borrowed, factoring in fees and charges associated with arranging the mortgage loan.

And the bank can afford to do this without losing money because it borrows at negative interest rates as well…

Despite being in “historic remortgaging,” Høegh said the negative interest rates don’t actually make it any easier for home buyers to get a loan, but makes it easier to get a bigger loan – a lower rate means a higher disposable budget.

As long as the borrower is paying more in interest than the mortgage cost the bank, there is money to be made.

I might be showing my ignorance here but it leads to a few more questions:

1. Does this change how much volume in mortgages banks and lenders need to make in order to make money?

2. Would an extended period of such mortgages lead to inflated housing values because people can pay more for homes?

3. These changes might not be so bad in a fairly stable housing market but I wonder if there would be more issues in a high-demand or high-price market.

It looks like we would have a ways to go before negative rate mortgages come to the US but it would be interesting to see what happens if they do come.