Those who cannot remember the past are doomed...

It is indeed a worrying sign. I wonder who is actually holding the final mortgage notes? Does not look like it is banks due to high capital requirements.

If securitized, the loans would have been sold to a Trust who would hold the notes which are managed by a loan servicer under pretty strict rules that limit ability of borrower to negotiate as I recall. But maybe post-crisis securitization rules are more flexible?

Add to this problem the high number of investor-held units whose owners also have less incentive to hold on to an asset that may be under water and you could have a real crisis looming. I suspect prices would have to decline quite a bit though for this to be an issue but the truth is that no one even knows how many investor units there are in the market and how much leverage they have on them.

Ximon, Who are the ultimate investors in subprime, if you know? I do not think it is banks anymore.

I was on the commercial side but as I recall from 10 years ago, banks owned lot of RMBS as rules encouraged owning bonds rather than mortgages. Also, institutional investors of all kinds preferred RMBS for its slightly higher yields at the same credit rating. A lot went overseas.

Today, I am not sure but don't think rules have changed all that much. Any thoughts?

Pension funds were also big investors. I read recently that a number of multi-billion dollar settlements in just the last few years will flood these investors with cash, which many will reinvest once again in mortgage-backed securities.

As Ive whined on about (though not lately) for nearly 10 years, until we restore Glass Steagall, and then give the banks that are too big to fail 2 to 3 years to break off the parts that wont meet the act, another meltdown is guaranteed.
Dodd Frank was crap. Restore Glass Steagall.

truthskr10,
As far as I can tell we are going in the opposite direction - instead of strengthening the banking laws the newest excuse appears to be that they are too stringent for the poor little Banks. So the solution is to relax restrictions so that the big banks can drive trucks through the loopholes. And I agree that another meltdown is someone guaranteed which was kind of my whole purpose of this post.

Sub prime loans before the financial crisis didn't require income verification. When that happens I will start to worry.

Actually no income verification loans existed long before subprime loans and the mortgage market was okay.

FHA loans require only 500 fico score and have in some cases 55% DTI.

Truth/30, I do not think banks are holding the subprime risk on their balance sheet as the capital requirements are too stringent for this type of risk. There is nothing to prevent shadow banking and private lending funds from risky lending except consumer protection laws. Banks are fairly safe now due to high capital requirements and I do not thing more regulation is needed to prevent them from blowing up.

As of last year IRS liens and civil judgements are no longer on the credit report unless complete information on the person is indicated which in most cases won't occur. This means one's fico score has improved. So if a person who had a tax lien no longer has it and their score is now 500, he can get a loan. Before this new ruling his score may have been 450.

Something else to worry about.

@300_mercer
Banks never held the subprime mortgages on their balance sheets; that was the main reason why everything collapsed; they took no responsibility for them.

steetsmart, They had plenty of this risk on their balance sheet via CDO's and via warehoused subprime loans they could not sell. That was the source of the majority of the losses in 2008-10 in addition to Commercial Real Estate loans. For the loans they securitized, they paid massive fines.

https://en.wikipedia.org/wiki/List_of_writedowns_due_to_subprime_crisis

A cdo is like a promise to pay investors. My point being that the big banks took no responsibility for defaulted loans, hence the bailout was needed.

Now banks are in fact responsible for their loans.

streetsmart, What you are saying makes no sense. Banks got bailed out as they lost too much money from sub-prime and commercial real estate.

Banks created "moral hazard" by shielding themselves from risk through a variety of balance sheet and off-balance sheet accounting treatments. This allowed them to take more risk than they should have which allowed them to generate higher returns and jack up their share prices, that is until it all caught up with them. It wasn't just that the banks made risky loans. It's that they shifted this risk to investors and committed fraud in the process.

Ximon, While what you are saying is certainly true and potential fraud was the reason for huge fines, banks also had plenty of direct subprime risk on their books via CDO tranches and warehouse loans.

Yes 300. Banks were left holding the bag when the markets collapsed so quickly although some saw it coming and made a lot of money hedging the market.

It was actually worse from a risk management point of view as many banks were also holding subprime related exposure and commercial real estate full capital stack for investment purposes.

That was the problem at Lehman Brothers.

AIG was guaranteeing top rated cdo / subprime tranches for 50bps.

UBS was buying the same for 50-100 bps yield over Libor.

Merrill was holding higher rated CDO tranches for years before the crisis as they underpriced the tranches they sold.

Lehman was really an outright bet where they at least had the upside. Naturally, the size was too big relative to equity and liquidity in commercial real estate - you probably know Archstone deal.

I mean Lehman’s equity and liquidity position.

@300

Of course the banks lost too much money.

So you think that doing subprime loans with no accountability had nothing to do with the precipitation of the financial crisis. It seems that this thread was started because of concern about lending standards starting to ease.

The financial crisis was triggered by the bursting of the housing bubble. As housing prices declined major financial institutions that had borrowed and invested in subprime mortgage back securities reported significant losses.

"The financial crisis was triggered by the bursting of the housing bubble".

Yes that was the beginning. But it was the contagion, the high concentration of risk by the biggest banks in the world, each trying to get their share of the high yields in the securitization market, that created the global credit crisis. If it was just a normal housing crisis, it would not have bankrupt major financial firms and spread throughout the global markets requiring massive bailouts.

Those that ignore the past are doomed to repeat it.

It's also that sub-prime mortgages played a large part in CAUSING the bubble. Rising housing markets are always supported by readily available financing. When you have strippers in Florida owning 5 condos all with ninja loans, what do you think the result is going to be?

Streetsmart,
Google no income verification mortgage and you find a whole bunch of links to places like this:
http://www.failla.com/ny-residential-loans/no-income-check-programs/
Are you starting to worry yet?

Streetsmart
"My point being that the big banks took no responsibility for defaulted loans, hence the bailout was needed."

Bailout was needed as the banks has too much skin in the game (see wiki link for sub-prime losses), which was not required by the law but they took the sub-prime risk anyway.

30, your analogy of strippers reminds me of the shoe shine boys and hat check girls investing in the stock market in the 1920"s and later the government policies of the last 20-30 years that encouraged middle and lower income people to purchase homes in order to share in the experience of the American Dream. But it was really about making money for banks, brokers and developers.

@ximon

Even though it was really about making money for banks, etc, it doesn't mean it was mutually exclusive. It is good for minorities and lower income people to be able to buy homes.

@300, yes that too, they knew if they had too much skin in the game it could be beneficial, just the way Donald Trump understands that so when he defaulted on his Riverside South project in the early 1990's on the Upper West Side, Chase took him in as a partner.

That said if the banks had accountability when doing the subprime mortgages, how many do you think would have gotten done. I know I foresaw it, and refused to do those loans because as a little guy I felt I would not have much immunity when the whole thing collapses. For instance back then when submitting a loan to Chase (Chase worked with mortgage brokers then) and Chase gets back and says please leave the income and employment information blank, it gets scary.

The point about securitization is that if done correctly, it efficiently allocates risk among investors. So if you wanted low risk you bought AAA bonds and if you wanted high risk, you bought bonds rated BB and below. The problem was that 1) these ratings were in retrospect bogus and 2) banks used these ratings to avoid taking reserves against them and 3) banks doubled down on this risk by trading in these bonds for their own portfolios rather than acting merely as agents for their clients. They also held onto these assets too long trying to accumulate larger and larger pools of loans so they could sell the bonds at a later date for higher prices.

Sub-prime mortgages did not cause the financial crisis. It was caused by banks who mismanaged their risk and due to mismanagement on a massive scale, caused systemic risk to the entire financial services industry. It wasn't the number of sub-prime loans that wrecked the economy, it was the concentration of such loans on the books of a small number of major "too big to fail" financial firms.

Streetsmart, I am not sure that its "good for minorities and lower income people to be able to buy homes". They take on much more risk than wealthier people in part because they have less cushion to work with in case things go sideways. Perhaps if mortgage products were better designed to assist lower-income people to better manage this risk but I am not aware of any products that are that flexible. Some people for many reasons are better off as renters and can get into big trouble by thinking that they need to buy.

Ximon, That is a very good destription. If the investors in sub-prime were long only funds exclusively rather than banks themselves, we would not have financial crisis as the size of sub-prime probably would not have grown as much due to enough investor demand and banks could easily absorb the losses from the risk in transit. Because of much higher capital standards for banks (call it 2-3 times capital needed relative to pre crisis), we do not have to worry about financial crisis due to mortgages. It will be some thing else.

I can't believe I just spent half an hour writing a post and streeteasy just ate it again.

I agree 300 that the next financial crisis will not be caused by mortgages or in fact real estate in general. But whatever causes the next financial crisis, I feel certain it will collapse the real estate market in NYC as NYC real estate is too intertwined with the global financial markets.

what are the updates on the nyc real estate market? seems like a mini-dip?

There is clearly a dip in high prices - say more than $2k per square ft properties - but in my opinion $1200-1500 per sq ft condo marked is fine. Streeteasy condo index shows a 1percent rise which is below inflation. So overall, it may be flat to down. Streeteasy condo index does not consider new construction sale, which is where most declines are and most media stories talk about these.

thank you 300 - what are your thoughts now, 3 months later? the "Fall Market" appears stale.

High $ per sq ft prices - say more than $3k per sq ft - will remain under pressure for a while due to supply but “affordable” segment in $1200-1600 fully finished is just fine as there is no new supply. Too early to say anything about fall market.

https://www.npr.org/2019/12/09/785527874/student-loans-a-lot-like-the-subprime-mortgage-debacle-watchdog-says

Looking forward to another Michael Lewis book; the prologue to The Big Short was chilling to the extent that he said that he was shocked at how short the cycle of history repeating itself in finance turned out to be (Liars Poker chronicled 1989 S&L debacle, while The Big Short chronicled 2008 subprime debacle). Where there is a moral hazard, finance whizzes will find a way to exploit it for sure. Regulators are always a step behind, busy trying to prevent a duplication last crisis, whereas finance whizzes are already on to the next. With DJT’s agenda of loosening regulations on financial institutions, we don’t even have regulators trying to prevent duplication of the last crisis. Financial predators have free rein.

The next crash will be a doozy.