Everyone is excited that average 30-year fixed mortgage rates broke the 7% barrier this week. Here's the latest from Freddie Mac:
It's understandable that mortgage rates are going up, but it's a little hard to understand why they're going up so much. But they are. All those people who've spent the past few years complaining about how expensive it is to live in big cities are about to have their wishes come true. All they have to do is wait patiently through the upcoming housing bust and then wait some more for interest rates to go down. Plus, by the time this happens they'll be farther along their career path and making more money. Then they'll finally be able to afford a house in LA or New York, assuming they're still interested.
Maybe. Possibly. But that's my best guess.
"It's understandable that mortgage rates are going up, but it's a little hard to understand why they're going up so much."
Buying fixed rate 30 year mortgages during times of inflation and rates hikes demands a premium, I suppose. I'd definitely want one if I was going to buy that debt.
"All they have to do is wait patiently through the upcoming housing bust and then wait some more for interest rates to go down."
I don't think either of these things is a given. There won't be a rush of people to sell their homes that are locked in at 2.5%, knowing that their next house will be at 6-7% so it should be a really small market. And, if interest rates were a beach ball being held under water, letting go of it makes it rise to level. Interest rates have been really low for a really long time (even during good economies). So much so, that I'm not sure we remember what "normal' is or was. If it stays "normal' for 10-15 years, that's a LONG wait for your opportunity to refinance at a lower rate if that was your plan all along. I mean, they LITERALLY may not be below 3% again in our lifetime...
I live in Los Angeles county, and our household's combined salaries put us in the top quintile of income. Unless home prices go down by 50-60%, then we're never going to be able to buy here. For most people in markets like this, you have no hope of home ownership, unless your income is in the top 5%, or if you're willing to pay $1M for a run down 1200 sq ft. condo.
I'm not trying to be snarky at all (just want to put that out there as it's easy to misconstrue intention), but I'm always curious about stuff like this. Have you considered moving? I'm sure it'd be tough, but better for the offspring, no?
I'm not trying to be snarky at all, but did you even think once that maybe it something to do with good employment and good schools. Just asking.
I suppose it's all personal preference. To me, good employment and good schools should easily translate into good home ownership. Please understand that I'm not implying those people don't have good employment or good schools, I just feel like they're missing out on the rewards that are associated with those things. To each their own...
Among the list of things I don't get is this.
Most people, including me, don't think that banks borrow money to turn around and loan it to me, if they do, then mortgage rates track other rates, its only logical.
However, if home lending is a traded equity security (the whole reason for the 2008 crash, see Michael Lewis's book the Big Short), wouldn't home loans be more stable, and based on what investors expect as a rate of return?
Borrowing money (in the form of savings accounts and CDs) and turning it around to lend to people for mortgages is EXACTLY what banks do.
Now, the financial bigwigs figured out how to bundle mortgages, which were easily tradable because of the standardization of mortgages encouraged, if not enforced, by FHA, FNMA, and GNMA (among others), and trade those bundles.
THEN they created synthetic derivatives of those bundles. Which is when things got really interesting.
So, mortgages are both a floor wax AND a dessert topping.
Your notion that this should make things more stable is interesting. Is that what happened in 2008? Were things more stable?
I feel like everyone doesn't know, forgets, or just doesn't want to admit that lenders were compelled by the government to figure out a way to qualify poor (as in not good) borrowers in the first place. This article blames the right and the left, so I'll go with it...
https://fee.org/articles/how-the-federal-government-created-the-subprime-mortgage-crisis/
If you were interested enough to read that article, you should check out The Big Short.
Lending to some borrowers who might not have had such good credit was only part of it, and really not the main part.
The key difference was by 2008 the whole process had been deregulated through (1) banks and savings and loans no longer holding on to loans but merely servicing them, with (2) the loans themselves bundled into securities and sold on the market.
That's not really so remarkable, but what happened next was. Because interest rates in general dropped so low, bundled loans were not really paying that much. So, for example, lets say the bundle was a bunch of 4% mortgages, well, they would pay 4% minus the risk of any defaults, balanced by recoveries through foreclosures.
But then somone (again, the book does it better) decided to break up the 4% mortgages into tranches, let's say, 3. One tranch would pay 6%, but in exchange that tranche might be redeemed (bought out through refinancing or foreclosure) first. A second tranche would pay 4%, and consist of the next set of loans, and finally, to balance out the 6%, a third tranche of 2%, consisting of most stable.
Here, "stable" just meant consistently paying, obviously not defaulting.
But the problem was that the buyers of the 6% traches only thought that they were taking a slightly bigger risk, they didn't realize that if 1/3 of the loans went into arrears or were foreclosed on, their risk was 100%.
Lewis goes into great detail how the investors buying these mortgages didn't really get the whole "tranche" thing. As a result, instead of what usually happens during a real estate downturn, some homeowners get burned, some banks get sort of burned, in 2008 you had an entire group of investors, major investors like Lehmann, holding on to what they thought were secure mortgage backed securities that went from 100 cents on the dollar to worth zero extremely quickly.
And these investors thought the mortgaged backed securities were less volatile than stocks. That was a big surprise.
That's why the crisis moved so rapidly from individual people through the whole financial sector.
Today's extremely more stringent loan standards should help. I have not followed it but I would also hope that there are some limits on the tranche securitization process.
Nice comment Yikes. The argument that the Government caused the housing bubble is a typical right wing/big money lie. FHA required would-be borrowers to meet much higher standards than the commercial lenders who were in a race to the bottom. As a consequence FHA only insured 3% of new mortgages in 2007 compared to 14% in 2001. Moreover, FHA insured mortgages were much less likely to end in foreclosure compared to other loans.
This "big-gov't dun it" lie has been repeatedly exposed. It is a hideous denial of responsibility by the financial industry that has never paid a price for the crimes they committed.
@SC-Dem
Why would FHA be the only thing you're concerned about? The article literally describes how Freddie and Fannie forced lower lending standards. The argument isn't based on the FHA...
"This "big-gov't dun it" lie has been repeatedly exposed." If this is true, please respond directly to :
"...the GSEs found it harder and harder to find creditworthy borrowers. So in response, Fannie and Freddie had to reduce their underwriting standards. In other words, they dove deep into the subprime mortgage market."
The government didn’t ask banks to laugh in the faces of investigators and say “that’s why they call them liar loans” when they were told loans that they made were fraudulent. The government didn’t tell them to stonewall investigations into the fraudulent loans.
If I sound bitter it’s because I am.
I'm sorry you're bitter and I'm not saying that banks had no responsibility. I'll never get over the frustration of the recipients of bailout money getting bonuses!!!
https://www.investopedia.com/terms/t/tarp-bonuses.asp
Having said that, I still don't see how the stops what I consider the first domino in this process...
There was no government agency that encouraged fraud. The banks knew the loans they were making were fraudulent. They did nothing to stop it even when government entities tried to get them to do so. In fact, they did everything in their power to encourage and continue the fraud.
But I suppose you might be right that the government assumed the banks would act honestly and in good faith. Best to assume everyone in the financial world has criminal intent and will act as dishonestly as possible.
"The banks knew the loans they were making were fraudulent. They did nothing to stop it even when government entities tried to get them to do so. In fact, they did everything in their power to encourage and continue the fraud."
Could you elaborate on this? I'm not sure what you're referring to. I mean, I know that loan officers were doing every loan that they could. I know that "stated income" and zero/low down payments loans were very popular, but they were program. It sounds like you're referring to something specific that I must not be aware of though.
Thanks
Great response and I'm aware of that (in general, not as specific as you got). However, in the end, the issue was that people defaulted. If they didn't get such "easy money", they wouldn't have been in a position to do that.
Also, as they weren't really into these loans with their own money (no money down, negative amortization, had already pulled a bunch of cash out on refinances to buy boats and vacations, etc.) they were incentivized to walk away and try again with the lower prices.
"Today's extremely more stringent loan standards should help." For sure, I'd think. We'll, see, I guess.
I’m unable to reply to your question in the last thread. Here is something I wrote several years ago and have reposted periodically. It’s rather long, sorry:
I’m sure most here are aware of Paul Krugman’s column back in 2005 predicting the housing bubble coming to an end (“That Hissing Sound” http://www.nytimes.com/2005/08/08/opinion/08krugman.html). Krugman was largely correct in predicting the end of the bubble, but he was wrong in one part: “So the news that the U.S. housing bubble is over won't come in the form of plunging prices; it will come in the form of falling sales and rising inventory, as sellers try to get prices that buyers are no longer willing to pay.” But, as we know prices did plunge a couple of years latter.
Why didn’t the bubble deflate rather than burst? It’s my opinion that a big reason was S&P’s bogus ratings which spurred a fraudulent real estate scheme known as an “Inflated Price Transaction”. In early 2006 I received a letter from a real-estate agent outlining what he believed were fraudulent transactions. He provided a list of homes that had recently sold in his area. All were listed for several months and failed to sell at the original listing price. The listing price was decreased, and almost immediately after the decrease the home sold at the original listing price. This made no sense to him. Shortly after receiving his letter I got a call from another agent. She had been offered to participate in a scheme in which her client, legitimately selling their house and lowering the price after receiving no offers at the original listing price, would sell the house at the full original asking price, but with the difference between the original price and the lowered price kicked back to the agent using a “secret addendum” to the contract. She refused. She said she was tempted but she thought it illegal and asked if it was. I assured her it was and she told me that she knew other agents were doing it, and actually holding meetings to train each other how to do it. She provided a copy of the contract that had been provided to her from the proposed buyer, and I used the name to see if that “buyer” had later purchased a house. He did. In fact he “bought” 5. All in the same area, and all closed escrow on the same day. All were stated income 100% financed pay option ARM loans. All had been houses that fit the description outlined above. The buyer had, of course, been a straw buyer, likely paid a flat fee. I figured the broker, between his commission for selling the house, making the loan, YSP, and other fees made several hundred thousand dollars on the transactions. When contacted, the bank refused to cooperate (“Ha, ha, ha, why do you think they call them liar loans”). What I found out was that these transactions were rampant throughout the sate and at least some other states. I heard from an FBI agent that almost an entire condo development in San Diego was so “sold”. Of course, the loans defaulted very quickly. The agent indicated that he too had been laughed at when he asked banks to cooperate with investigations. This was really shocking to him because in the past it was always banks that had contacted the FBI to report suspected fraud.
What this meant was that just about every mortgage loan during that time, whether for a home purchase or a refinance, was based on fraud. Loans are made based on appraisals and “comparable sales”, that is, what other houses in the area are selling for. Except the amount the houses were “selling” for was a lie. People who actually bought at that time were purchasing at artificially inflated prices. And maybe they had no neighbors because the people who purchased in their neighborhood didn’t exist.
The banks wouldn’t cooperate with investigations because they had sold the loan. The reason they were able to do this was because S&P gave packages of these crap loans high ratings. The loans were purchased, but I believe that everyone knew the ratings were bunk and it was only a matter of time before they blew up. Basically they were all playing a game of hot potato.
Note that Donald Trump decided to launch a mortgage loan business in April 2006. It went bankrupt very quickly
https://en.wikipedia.org/wiki/Trump_Mortgage
Good stuff and thanks for the reply. It's funny, I remember hearing of some very "shady" stuff back then, but it was all program, so I didn't think much of it.
It just seemed so obvious that the first person that couldn't make their payment would throw their keys at the bank (especially since they probably had a stated income loan with negative amortization). At that point, the jig would be up and everyone's fearlessness and ability to keep refinancing their endlessly new equity would dry up. It all seemed bad enough (especially since it was sanctioned), but that's quite a scheme they were perpetrating with the kickbacks.
In the end, I remember making around 45k with my wife at home with our 3 children. My buddy who was a lender called and asked me if I wanted to move into our million dollar neighborhood. He was teasing me, but he wanted to share a new loan that they had available. If you had a 700+ credit score, you could get a stated income loan with 0% down up to $1M. He said all I had to do was turn in income docs for 45K and write on a piece of paper that I tutored for 300k a year and that I could live in a million dollar house for a year for free. Never make a payment, save cash, and wait for the bank to evict me... At that point, I began planning for the obvious and eventual fallout that was to come. Crazy days, indeed!
Thanks again and good night (assuming you ever read this)! haha
Your friend was kidding on the square.
Also, a lot of people bought houses like that and rented them out, keeping the cash and not paying the mortgage. I could go on all night enumerating the various scams I saw.
That neg-am, no doc, pay option ARM was hard sold throughout the industry. People were talked into refinancing their homes with it. Lenders paid brokers large Yield Spread Premiums to sell them. Three per cent and more. And bonuses if they sold a lot. People just didn’t get what was going on and many lost their homes based on it.
"Your friend was kidding on the square."
100%. He knew I'd never do anything like that, but certainly realized that others would and saw the dangers in it, for sure.
"People were talked into refinancing their homes with it." and "People just didn’t get what was going on and many lost their homes based on it."
I definitely would agree that I'm sure that there were victims. However, from what I saw:
- There were way more complicit borrowers than victims. They were happy to lie along with the loan officer stating that they, indeed, were "tutoring and making 300k a year" when they knew that they weren't. I'm not sure who's more complicit in that situation, the liar signing their name to the lie or the "professional" that's allowing it knowing it's highly unlikely to be true. However, by nature, that's exactly what "stating income" is, isn't it?
- I've never felt badly for (most) of the people that lost their "homes" because most of them had as little into it as if they were renting. I mean that in the sense that they purchased with extremely low/no down payments, the loans were often negative am, they often lived for months and months without making payments to stockpile money for the next down payment or future rents, and they'd probably already refinanced and gotten boats, furniture, vacations, etc. that would never be paid back by anyone.
- It was GREAT for young people. Suddenly, 23 year olds that would "never" be able to afford a home could buy and stay in the area when it wouldn't have been a possibility otherwise. It's sad to see a big, old tree fall in the forest, but it also opens up a world of possibility for the saplings that are suddenly getting sun.
In the end though, it was CRAZY times that I hope we've learned from. I definitely think that lending standards and insanely low rates we've had will help us stay at a level which will help us avoid a fallout like that again.
Out of curiosity, were you doing loans back then? I'd stopped in 1997, so I missed out on a LOT of money! haha. Everyone that I had worked with absolutely killed it right after I left.
I was an investigator with the Department of Real Estate. They were crazy times. There was plenty of what you saw but also lots of innocent people tricked into taking out those loans when they weren’t needed. By law, real estate agents are fiduciaries but so many were acting only in their own best interests. And then even that wasn’t enough and the inflated price transaction was invented. It was a feeding frenzy. I suppose there may have been some people who didn’t know what was going on but I can tell you the banks sure did. They didn’t care.
There are a group of people I felt really sorry for. Suppose in 2006-2007 you finally saved enough for a down payment and bought a home. None of that fancy shmancy stuff for you, you put your 20% down and got a 30 year loan. The comps in the neighborhood were 650k. So that’s what you paid. But unknown to you those comps were false and the houses were actually selling for $600k and even that might have been false. And the people buying those houses weren’t living in them. And pretty soon your neighborhood is half vacant. And vultures swoop in trashing those houses for copper wire and stuff. And that nice school for your kids that was supposed to open doesn’t. And then, when the dust settles, and interest rates go down you can’t refinance to take advantage of it because your house is now worth $300k.
So for every scenario in which the borrower was complicit and I felt little sorrow for the borrower there were others where innocent people had their lives upturned.
Quick question: I'm guessing you're over thirty, probably over forty ... and you've never heard of being underwater? Why don't you do your own research instead of asking others to spend their time spoonfeeding you for free?
@iamr4man
I couldn't respond to your last comment either...
There were definitely hard knock stories. People got carried away and made financial decisions because they felt the "gotta get in now or I'll never be able to", for sure. Interesting insights. Thanks again.
@Scentofviolets
".. and you've never heard of being underwater?"
Are you misreading something? Of course I know what under water means. I literally have no idea what you're talking about.
I was a bit sloppy twice.
I don't consider taking deposits and loaning them out "borrowing" of course that is exactly what banks do. What I meant was banks borrowing at the fed funds rate or prime rate and then turning around and lending that out.
See my post below as to securitization, but as to that, if the loans are sold as a security there is even less reason that the rate should be that volatile, or am I missing something? The main reason rates would clime so quickly would be that lenders had to borrow the money to lend at ever higher rates.
Maybe its just, as a lender, you get worried when houses appreciate 20% because as a lender you are really, really counting on the home price to not decline by 20%, as that is a major part of your security. I would be curious if every time home prices when up sharply that was followed by a correspondingly sharp rate increase to hedge against a correction.
The majority of capital used to fund a mortgage does not come from funds borrowed from the Fed at the Prime rate. This is accurate. It is involved, though, as banks make sure they can cover all withdrawals every day. Some days there are a lot of deposits, other days there are a lot of withdrawals. Sometimes banks borrow from the Fed to make everyone happy. So they are related, yes.
Fractional Reserve Banking is interesting.
Fact free speculation follows:
IMO, home prices might drop 10%, (30% in the frothiest markets like luxury homes in Austin, LA and SF). Whether that qualifies as more affordable is debatable.
“wait patiently through the upcoming housing bust and then wait some more for interest rates to go down.”
House prices are pretty sticky on the downside, sellers hang on for years rather than accept a loss. And prices bounce back quicker than you’d expect, after 2009 prices were back within 2 years in desirable markets like SF, LA, Seattle, Austin… took much longer in a few markets where overbuilding happened on a massive scale (Las Vegas, Phoenix, Stockton, Florida).
Comparing home prices to median income, they just won’t be coming back to what most people call affordable for a very long time. Decades. By then everything will be completely different.
The world is swimming in liquidity, with manufacturing becoming so efficient and competitive, inflation can only show up in asset prices. Stocks/bonds/real estate will go up and up over the long term trends. Plus politicians/central bankers just won’t let asset prices come down, ever.
This isn’t just going to affect home buyers/sellers. If you have an ARM or a HELOC your payments will be going up if they haven’t already.
Rising interest rates impact both the for sale and for rent marketplaces. For a buyer, higher interest rates means loans are less affordable.
For renters, higher rates means less new construction, higher debt service costs for landlords with variable rate debt, and likely higher 'market pricing' opportunities for landlords with fixed rate debt.
It's understandable that mortgage rates are going up, but it's a little hard to understand why they're going up so much.
Are the recent increases in rates really all that much, in context?
When inflation's running at 8% or thereabouts, paying 7.2% on a mortgage is arguably pretty reasonable. Indeed, the bank's practically paying you to borrow! Not a bad deal.
I realize inflation's not expected to remain this high for the next three decades. But still...
(And of course, when demand for mortgages falls sufficiently far, we'll see rates come back down, unless lenders are content with sharply lower volume.)
I'm late to this post and expect zero people to read this comment, but my goodness, Kevin, get over yourself. You don't want to live in a big city? Fine! Great! But some of us do, and if they built more homes where people want to live they would be more affordable!
Goodness gracious, sometimes you really need to get over yourself.
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