[HN Gopher] More Subprime Borrowers Are Missing Loan Payments
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More Subprime Borrowers Are Missing Loan Payments
Author : prostoalex
Score : 134 points
Date : 2022-05-19 15:33 UTC (7 hours ago)
(HTM) web link (www.wsj.com)
(TXT) w3m dump (www.wsj.com)
| yumraj wrote:
| I was just thinking about this today.
|
| Given the very low interest rates in 21-22 and high prices, a
| certain percentage of folks would have purchased with a
| convertible mortgage.
|
| Assuming the standard 5-1 and the fact that rates are rising very
| fast, should we expect a repeat of 2008 in 2026-2027?
| dragonwriter wrote:
| > Given the very low interest rates in 21-22 and high prices, a
| certain percentage of folks would have purchased with a
| convertible mortgage.
|
| Convertible mortgages became popular as an alternative to
| either fixed or nonconvertible ARMs when rates were high as a
| way to preserve the option of locking in on a rate drop without
| going through a refi. Convertibles don't offer a lot when rates
| are low--if you want to be able to lock in a low rate and rates
| are already low, you get a fixed.
|
| Between that, changes in qualification rules, and memories of
| the collapse leading into the Great Recession, ARMs of all
| types have shrunk to a very small share (<5%, IIRC) of
| residential mortgages, and newer ARMs tend to have rate caps.
|
| > Assuming the standard 5-1 and the fact that rates are rising
| very fast, should we expect a repeat of 2008 in 2026-2027?
|
| Probably not because of adjustments on existing mortgages. If
| there is sustained stagflation, then the fact that people can't
| pay their _fixed-rate_ mortgages given other necessary expenses
| may produce a similar collapse, though.
| incomingpain wrote:
| >Given the very low interest rates in 21-22 and high prices, a
| certain percentage of folks would have purchased with a
| convertible mortgage.
|
| The 'certain percentage' actually went over 50% of new
| mortgages, excluding refinancing.
|
| >Assuming the standard 5-1 and the fact that rates are rising
| very fast, should we expect a repeat of 2008 in 2026-2027?
|
| You would think so but no. We should expect it in 2022
| primarily harming the large cities.
| x86_64Ubuntu wrote:
| I thought 2008 was because 'D' grade mortgages were repackaged
| into 'AAA' grade securities. When the 'D' grade folks missed
| payments and defaulted, it brought everything down because
| their securities had tainted so much of the landscape.
| Finnucane wrote:
| That was one factor. There was no single cause, but a fragile
| interconnected web of factors.
|
| But yes, subprime loans were carved up and repacked in a way
| to make them look like AAA bonds. The banks that created
| these bonds knew that the loans in the bonds were crap; they
| knowingly lied to investors about it. The ratings agencies
| stamped all the bonds without any due diligence. Other banks
| piled on more derivative products on top of those bonds,
| essentially gambling on whether those bonds would go bad.
|
| There was a slime-trail of fraud, laziness, and greed all the
| way back the original loan itself.
| yardie wrote:
| 2008 was a lot of 'AAA' grade securities not being able to
| find a greater fool to keep the profit train running. A lot
| of financial instruments were basically repacking and
| reselling loans with a bit of interest on top. Once there
| were no more new buyers it was a cascade of margin calls.
|
| Subprime was a very small cause of the GFC but it was the
| tipping point that brought the house down.
| UncleOxidant wrote:
| I thought adjustable rate mortgages were pretty much dead after
| '08? Why would anyone get an ARM when rates were in the 3%
| range for a 30 year fixed mortgage (as they were for several
| years until recently)?
| bgirard wrote:
| Say you take a 7 ARM at 2% instead of 3% for a 700k mortgage.
| You're saving $50,000 in interest during the first 7 years.
| That's 7% of your mortgage. Then 7 years of inflation can
| knock down your principle further which might be pretty high
| over the next 7 years.
|
| It can make sense if you're financially secure enough to take
| on the risk.
| Kerrick wrote:
| Also worth noting: not all ARMs have a balloon payment. For
| example, I bought most of my farm on a 20yr ARM with a 20yr
| amortization. As interest rates rise I will have higher
| payments, but there's no moment when the music stops and the
| rest of the principle immediately comes due.
| gnopgnip wrote:
| Something like 60% of homeowners would come out ahead
| financially with an ARM. You can save tens of thousands of
| dollars in interest before the rates adjust. Many people sell
| or refinance before the rates adjust, or soon after. The rate
| early on is a little more important because that is when the
| principal is highest, but in practice this isn't a huge
| factor. Only about 35% of the original principal is paid off
| after 10 years for a 5% mortgage. Even if rates go up and you
| stay there for 15-30 years, you could come out ahead because
| of how much lower the interest was for the first 5-7 years.
| But it depends on how much rates go up.
|
| But the long tail is some people being priced out of their
| home as their payment rises, and it could have been
| prevented. So 90-95% of mortgages in the US are fixed rate.
| lkjfdslkjf222 wrote:
| Don't know numbers off hand but we had a <4% rate ARM because
| it was the lowest rate and we liked the flexibility of paying
| it off asap (or if something happened, paying it off over 30
| years) versus a 15-year fixed.
|
| Plenty of other reasons. Others have bad credit or otherwise
| get significantly lower payments on an ARM compared to fixed.
|
| I guess there are other reasons, but ARMs are definitely not
| dead. I don't know the numbers or where to get them though.
|
| What are more dead are the "balloon payment" residential
| mortgages where they may amortize over 30 years but the
| principal is due in 5 or 10 years.
| paulmd wrote:
| > Don't know numbers off hand but we had a <4% rate ARM
| because it was the lowest rate and we liked the flexibility
| of paying it off asap (or if something happened, paying it
| off over 30 years) versus a 15-year fixed.
|
| you can pay off a 15-year mortgage in less than 15 years -
| the lien will be released, etc whenever the principal is
| paid. Everything depends on the specifics of your contract
| of course but it would be extremely unusual to have a
| mortgage where this is not allowed.
|
| fixed vs ARM purely depends on how the interest rate is
| determined, that's it. In principle ARM should be a bit
| lower than a fixed rate financed at the same time - but if
| the prime rate goes up then your rate goes up too, where
| with a fixed it's locked-in forever. Fixed will have a
| higher interest rate because someone has to assume that
| risk of an increase in the prime rate, where with an ARM
| that someone is you.
|
| Taking an ARM vs a fixed is a bet on whether rates are
| going to stay the same or decrease, vs increase. And boy if
| you thought 2020-2021 rates weren't going to increase at
| some point in the future, uh... it's not every day you have
| a once-in-a-century pandemic that nukes the economy and
| drives demand for money almost to zero.
|
| I'm not quite sure what you're saying about balloon
| payments either, the balloon payment happens at the end of
| a balloon mortgage, with the intention that values will
| have gone up so you can refinance at that point - but of
| course, what if they don't?
| fdjjjkffkk2 wrote:
| Eh, I think we're talking past each other because none of
| what you said really applies to what I think I'm saying.
|
| A 30year ARM gives you a lot more flexibility then a
| 15-year anything. I mean, you can pay off the 30 year in
| 30 years or 15 years or 5.
|
| Regarding the balloon payment-- not sure what you're
| missing here. Residential mortgages with balloon payments
| aren't really offered any more because of huge risk of
| default when the balloon payment is due.
| addaon wrote:
| > Taking an ARM vs a fixed is a bet on whether rates are
| going to stay the same or decrease, vs increase
|
| It's also taking a bet on how long you're going to keep
| the mortgage. When a bank offers a lower rate for a 7 ARM
| vs 30 fixed, they're assuming that you will keep the
| mortgage for more than 7 years. If you pay it off fully
| before then, you win the bet.
| bluGill wrote:
| He wasn't worried about paying off the 15 year mortgage
| in 10 years. He was worried about getting a 15 year
| mortgage and then sometime happening so he couldn't
| afford to pay it off in 15 years. With a ARM you get the
| flexibility of lowering your payments to the minimum -
| which will pay it off in 30 years if bad times happen,
| while getting the lower interest rates of a 15 year loan
| (for the first X years, then who knows), and if you may
| the 15 year loan payment it is paid off in 15, while if
| bad times come you drop to the 30 year repayment amount
| and have more money to deal with whatever.
|
| It can be a very good idea for someone who plans to pay
| off their mortgage early. If all goes well it is no worse
| than a 15 year mortgage, but when (really, if is
| unlikely) something bad happens you have more
| flexibility. Of course if interest rates go up you will
| get burned, which is why I go with a 30 year fixed rate
| that I pay off. I could probably afford payments on a 15
| year loan, but I'm not willing to risk it.
| grahamperich wrote:
| With rates climbing to 5%+ in the last couple months, a 3%
| ARM (with the hope they could refi to a low interest 30yr
| fixed before the ARM becomes adjustable) may have been
| attractive for some..
| dmitrygr wrote:
| Because ARMS were in the 2.x% range.
|
| I talked a number of people out of ARMs in '21 and '22 by
| explaining 2008 to them (they were 7-8 years old at the time,
| so do not remember). It is scary how bad most people are at
| understanding exponential growth and just how much worse 5%
| is than 3%
| bgirard wrote:
| It's not exponential. And even though 5% is 66% higher than
| 3%, the monthly payment is $5,368 instead of $4,216 on 1m
| which is 27% higher. Sure you pay twice as much interest
| over 30 years.
| sokoloff wrote:
| How is a compounding loan (such as a mortgage) not
| exponential?
| karpierz wrote:
| Because you're paying it off faster than it grows. It
| would be exponential if you were allowed to simply let it
| sit without paying it down, but that would break the
| contract and get you foreclosed.
| NovemberWhiskey wrote:
| It's absolutely exponential - it's just that the base is
| barely over one and the exponents involved are not very
| large.
| caeril wrote:
| Same reason very intelligent fund managers are buying 10y
| TSYs yielding 2.8% despite inflation giving them a NEGATIVE
| 5.2% real yield:
|
| Everyone thinks that 5 years out, everything will be rosy.
| The metalworker saving 0.6% on a 5/1 ARM vs a fixed 30yr is
| using the same mental gymnastics that J. Poindexter on
| Goldman's bond desk is, that central banks are omniscient,
| omnipotent, and will always magic away the risk inherent in
| our decisions.
| mgkimsal wrote:
| I went through 2 ARMs between 2013 and 2021. In both cases
| the 7 year ARM was at least 1.5 % below the traditional 30
| year I could get. Between lender rebates and such, in both
| cases we had essentially $0 out of pocket and in both cases a
| moderately. In the last couple years, the ARMs I looked at
| were less than a single % from a traditional 30 year. I had
| last 3% ARM was adjusting in mid 2023, and I refi'd to a 30
| year @ 2.75% last October. Holy tamole things have changed
| since then!
| scarface74 wrote:
| Alternate anecdote: I refinanced our house in 2020 and
| financed points and my interest rate is fixed at 1.87% for
| 15 years.
| bogomipz wrote:
| Why would someone have opted for for an adjustable rate
| mortgage that adjusts after 5-7 years when they could have
| locked in a historic low rate for 30 years?
| localhost wrote:
| In my case it's because I don't anticipate being in the house
| longer than the rate lock period
| bogomipz wrote:
| Out of curiosity did you get a 5 o 7 year? What was the
| differential between adjustable and fixed?
| fundad wrote:
| The article's subhead lists everything but mortgage: car loans,
| personal loans and credit card debt. That's where the growth
| has been. I remember hearing about 7 year car loans being a
| risky way to sell more more car loan for the same monthly
| budget.
|
| There was also record high amounts paid back in 2020. I'd like
| to know if they adjust for that or just more fear-mongering by
| big banks, admitedly I'm too cheap to read further to find out.
| treis wrote:
| ARMs were not the problem in 08. The problem in 08 was interest
| only loans and/or balloon payments. Borrowers were intending to
| refinance before those deadlines hit but got stuck once values
| stopped rising. So they faced payments of 10s of thousands
| and/or their monthly payment was going to double or triple once
| they had to start paying principle down.
|
| In contrast, if your arm resets from 3% to 7% it's like a 50%
| increase in mortgage payments. That sucks, but manageable given
| that your salary likely inflated along with your payment.
| hbosch wrote:
| >That sucks, but manageable given that your salary likely
| inflated along with your payment.
|
| Can I reside in a world where my salary doubles if my
| mortgage rate doubles? It sounds very nice.
| sokoloff wrote:
| That's not the most analogous comparison; the most
| analogous comparison would be "where my rate of salary
| increase follows the changing interest rate on my
| mortgage".
|
| It's not that your $100K salary should go to $200K if your
| mortgage goes from 3% to 6%, but rather that your $100K
| salary should go to $106K instead of just $103K if your
| mortgage goes from 3% to 6%.
|
| Similarly, if your mortgage fell from 3% to 2%, you'd be
| pretty close to even if next year's salary went to $102K
| and likely in bad shape if it instead went to $67K.
| ziddoap wrote:
| > _but manageable given that your salary likely inflated
| along with your payment._
|
| Which, anecdotally, has not been true for myself or any of my
| colleagues (barring the ol' job switch raise). Wage
| stagnation is an extremely common problem in many countries
| and industries. Those that have gotten or negotiated for
| raises aren't getting raises that account for the record-
| setting inflation (at least in my country, which is seeing
| the highest rates of inflation in 30+ years)
| vmception wrote:
| 2008 was an accounting and leverage problem.
|
| Every product in 2008 was completely viable which is why the
| Federal Reserve bought everything.
|
| Only 7% of the borrowers defaulted by then, there wasnt mass
| irresponsibility on the people with mortgages as suggested,
| this alone blew up some institutions because they were
| leveraged nearly 50x and one month of missed mortgage payments
| would cause a massive drawdown on their portfolio.
|
| Without leverage, a portfolio where 93% is going to pay a lot
| in interest over 5-30 years is a good portfolio.
|
| So there is no reason to get uncomfortable or anxious by seeing
| the words "subprime" "CDOs" or more, as it comes down to
| whether the accounting is done properly and the leverage is
| low. Which, I believe is being done. The "big crash" always
| comes from a different and unexpected (or less expected) angle,
| where some completely different sector has too much leverage
| and flimsy accounting.
| tootie wrote:
| And as much as Dodd-Frank was watered down, the orderly
| liquidation provisions survived and that means regulators
| have full authority to stop a situation like Bear Sterns or
| Lehman collapsing and taking down a sector of the economy
| with them.
| jjoonathan wrote:
| Yes, a disappointing fraction of armchair generals are
| fighting the last war.
|
| What are the big speculative candidates for next crash?
| Contagion from the Chinese real estate market?
| sveme wrote:
| As suggested in that famous substack post [1], a venture
| capital crisis? I guess everyone on this site is fucked
| then.
|
| [1]https://pivotal.substack.com/p/minsky-moments-in-
| venture-cap...
| SkyMarshal wrote:
| Good article but weird chart, "Bond Markets Over Time".
| Both axes are reversed to make it look like something is
| increasing (y-axis) over the size of the opportunity
| (x-axis), when instead he's making the point that Alpha
| (y) decreases as size of opportunity (x) increases.
| brazzy wrote:
| Cryptocurrencies.
|
| In the runup to the 2008 crisis, a commonly heard mantra
| was "yeah, subprime lending is fucked up, but it's a small
| fraction of the economy, it can't cause that much damage".
| Turned out that it could, via the CDO shenanigans.
|
| I would not at all be surprised if someone has already
| cooked up a similar leveraged dependency from the "real
| economy" to crypto markets.
| SkyMarshal wrote:
| It depends entirely on how much cryptocurrencies are
| being used as collateral for leverage, which was the main
| factor that amplified the GFC. MBS's and MBS-based CDO's
| were used as collateral for massive amounts of leverage
| (up to 30:1 for the commercial banks, and 100:1 for
| Fannie & Freddie). Since the housing market had never
| crashed, that collateral was considered reliable enough
| for significant amounts of leverage. Turns out it wasn't.
|
| But cryptos have never been considered remotely that
| reliable by the broader financial system. Thus there is
| probably little to no leverage using cryptos as
| collateral. Crypto is currently crashing, but it will
| only take down itself and not 30 to 100 times as much
| leverage with it.
| komaromy wrote:
| I'd be more open to this if we hadn't already seen wild
| swings in the crypto market (BTC is down ~50% from its
| 12-month peak) without much in the way of broader
| implications.
| vmception wrote:
| Yeah the contagion is important and it also needs to be
| several trillion dollars in value.
|
| Given that the Federal Reserve wants unemployment numbers
| to rise, they're specifically trying to make share capital
| worth less, and borrowing capabilities cost more, making
| revenue-poor corporations stop being so optimistic. so I
| would just expect lower valuations with much lower revenue
| multiples (or price to equity ratios), for that reason
| alone.
|
| Slowed growth in China is always a threat because thats a
| key revenue driver for many large western companies. Then
| sure, there is the leverage and accountability problem with
| Chinese real estate, but I don't get the impression that
| contagion is that big because nobody thinks that is a safe
| bet and also avoid too much exposure to the domestic
| chinese lenders involved. The rumors behind Tether just
| aren't big enough to matter for this, could only be a
| slight sting to the commercial paper market and a moderate
| "finally" for the crypto market as a tether implosion would
| probably increase confidence there after steep selloffs.
|
| Oil/gas volatility is probably going to have some
| casualties.
| jjoonathan wrote:
| Yeah, the commodities markets are opaque to me and
| between food and energy it sounds like they have a major
| test on the way this winter.
|
| Re: Chinese real estate, the contagion mechanism I've
| heard the most about isn't West->East investment, it's
| East->West investment that gets pulled to survive a bear
| market. I have no idea if it's big enough to matter.
| mywittyname wrote:
| > Oil/gas volatility is probably going to have some
| casualties.
|
| The Oil Glut of the 2010s killed off all but the
| strongest players in this sector. So I doubt it will be a
| pillar that collapses. If anything, they will probably do
| very well in the near-term.
| vmception wrote:
| the producers won't have the issue, I was thinking just
| speculators that have over/unexpected exposure to the
| wrong direction of the oil/gas derivatives market
| r00fus wrote:
| The last war is continuing to be fought by big finance to
| remove any of the (even partial/basic) regulations and
| remediations that were put in place.
| antisthenes wrote:
| Generally speaking there aren't fears of a hard crash.
|
| The main concern is stagflation due to rising energy
| prices. It seems like the market is now finally starting to
| price in the externalities of abating climate change, which
| results in higher energy prices across the board (which in
| turn raises prices of everything else, with inflation due
| to QE piled on top of it).
|
| This means that output roughly stays the same, but there
| are more dollars competing for it.
| dv_dt wrote:
| imho, labor shortages and productivity drops due to a Covid
| policy causing mass long Covid cases.
| bitwize wrote:
| Quasi-on-topic anecdote: Amazon used to (and may still) sell
| these DVD bundles, like 8-12 movies to a pack. There would be a
| few classics (Ghostbusters or something) mixed in with arrant
| garbage. The hope was you'd buy the pack for the classics and
| maybe watch the garbage later because you have it so why not.
|
| I used to call this sales strategy "Amazon Subprime". I still
| think that's one of my cleverest jokes, but unfortunately you
| might only laugh if you know how the 2008 housing crisis actually
| started... and the people who do know that are not great in
| number.
| yardie wrote:
| Most people believe 2008 was caused by single mothers (as an
| example) "buying a home they couldn't afford." The reality is
| it was the upper-middle class, non finance professionals just
| thinking they were savvy. When your doctor, dentist, or general
| contractor gives you financial advice you should run the other
| way!
|
| I see this playing out now with cryptocurrency. Suddenly,
| everyone is an expert on Bitcoin!
| adamsmith143 wrote:
| > The reality is it was the upper-middle class, non finance
| professionals just thinking they were savvy.
|
| But also lots of highly educated Ivy League Finance folks who
| thought they were smarter than the were. Hence Bear Stearns,
| Lehman Brothers, AIG, Merill Lynch, etc.
| mywittyname wrote:
| These people bankrupted two long-time pillars of in
| industry in a matter of months. That's impressive.
| bee_rider wrote:
| This fall into the class of pun that is both completely
| perfect, and also incredibly situational. If I have a pun like
| this, either the situation to use it will never come up, or if
| it does I will become too excited and flub the delivery.
|
| Bravo getting this one out there.
| quux wrote:
| https://archive.ph/SL4Q4
| sbarbarian wrote:
| The subprime space is really interesting vs mortgages. Like
| others mention, the due diligence these providers run for these
| is minimal.
|
| The business model has been so successful in recent years because
| there have been such large numbers of applicants. Even though
| they approve only a fraction, the sheer volume means their
| business is booming. This all translates into not having to dig
| any deeper than credit scores.
| ryanSrich wrote:
| How are people with a subprime score even getting a loan? When I
| took out a mortgage in 2015 and then again in 2017 they
| scrutinized my entire life. I have no idea how we've regressed
| back to 2008 after years of very strict regulations.
| yardie wrote:
| From the article: car loans, credit, and person loans (payday
| loans). Mortgages are highly regulated since 2008's financial
| crisis. Those subprime lenders exited the mortgage business and
| jumped into high interest used car loans. And I'm right there
| with you on the anal probing I had to practically get to
| qualify for a mortgage.
| adrr wrote:
| Wondering if it is hitting the installment tech companies
| like Affirm and Afterpay.
| [deleted]
| nimbius wrote:
| worth mentioning: the auto lending market in the US is a 1.6
| trillion dollar time bomb and has been ever since Cash for
| Clunkers saw two rounds of federal funding.
|
| the average period for an auto loan in the US is over 64
| months. any disruption to the paycheck-to-paycheck living of
| 64% of americans could have a catastrophic effect on the
| ability to service this debt.
| tmaly wrote:
| Should federal reserve bailout the auto loan market?
| avs733 wrote:
| and the auto loan business is shady a.f.
|
| We ended up invovled with the state A.G.'s office
| investigating our dealer. They 'accidentally' put a typo in
| my wife's SSN when pulling the credit report. That
| justified a higher interest rate - which they offered us
| without explaining why.
|
| We weren't super worried because we were going to pay the
| car off in a couple months anyways, we just wanted the
| financing to shift some cap gains taxes to a different
| year. Then we got a letter in the mail from the lender
| explaining why our interest rate was so high.
|
| We called the dealer - and almost no questions asked they
| offered to send us a check for the difference. Red flag
| raised we filed a complaint with the state A.G., and it
| turns out it was a common practice at that dealership.
| driverdan wrote:
| NEVER finance through a dealership. They will never give
| you the best rates. Often they will get a rate and add
| their own points on top or include additional fees. Even
| promotional interest rates don't make sense because
| they're always offered with an alternative discount. The
| discount + a traditional loan works out cheaper than 0%
| interest.
| JumpCrisscross wrote:
| > _NEVER finance through a dealership_
|
| Never is a strong word. Dealerships make their money on
| financing. Refinancing afterwards is straightforward.
| Negotiating poorly on the dealership's financing, using
| that to win points on other fronts ( _e.g._ price,
| maintenance commitments, trade-in value, _et cetera_ )
| and then repaying the loan a month later, once you've
| lined up your preferred financing, is perfectly
| acceptable and often worth the time and trouble.
| gigatexal wrote:
| Agreed. And here credit unions are your friend.
| brianwawok wrote:
| Get a quote. Get multiple quotes. Several times in my
| life the dealer had APRs of < 1% APR, which was better
| then available elsewhere.
| vlucas wrote:
| Never say never. If you have great credit, you can get
| some awesome manufacturer incentives.
|
| - I got a 0% APR loan on a new Ford via Ford Motor
| Finance in 2016 and didn't even have to put much cash
| down.
|
| - I got a 0% APR loan on a new Hyundai Palisade in 2021
| (yes, even after COVID!) by paying for almost half the
| car in cash as a down payment.
|
| No other finance channel would have ever offered me 0%
| APR.
| gigatexal wrote:
| You paid half the car off on the lot? That's not a great
| use of cash. I mean in most markets. In most markets cars
| depreciate not appreciate like they have and the stock
| market rises not falls like it has. So I guess good move!
| conductr wrote:
| True but consider cars aren't a significant purchase for
| many people. At least to justify the maneuvering to
| maximize gains. Is it really opportunity cost if you
| didn't have another use for the cash and could replenish
| it fairly quick?
| phkahler wrote:
| >> NEVER finance through a dealership.
|
| They have this awesome thing called negative equity
| financing. It might have a better name now, but they will
| pay you X for your old car which is less than you owe and
| then finance the difference with your new loan. In other
| words, your loan balance on the new vehicle may be higher
| than its value but this is glossed over by focusing
| strictly on monthly payments and "what you can afford".
| Re-read that, this is not a practice they'd use on people
| with bad credit because to repo the car will not get them
| their money back. It's a rip-off for people with good
| credit and more dollars than sense.
| troupe wrote:
| That isn't always the case. After getting up to leave
| several times when they said they couldn't sell it to me
| for my offer, they got within $40. I was prepared to pay
| cash for it. Then they offered 0.9% financing which I
| took on the assumption that inflation would be greater
| than 0.9%. Turned out to be a reasonable assumption.
| scarface74 wrote:
| I've always gotten better rates from the dealer. That's
| after checking with the credit union and Capital One.
| Thads both with CarMax (multiple times) and a new car
| dealer.
| tomrod wrote:
| You can repossess a car a lot quicker than a house, so
| there is less of an issue than mortgages.
| cshokie wrote:
| Widespread repossession and resale would probably damage
| the resale value for all used cars.
| abeyer wrote:
| resale value for all used cars could use some damage
| right now
| jaywalk wrote:
| Chill out, let me get mine traded in first before that
| happens.
| lazide wrote:
| Sounds like the type of thinking that won't get you that
| quarterly sales bonus!
|
| Seriously though, just like mortgage originations pre
| '08, anyone who had qualms about that kind of thing left
| that industry a long time ago, or never joined.
| frumper wrote:
| These lenders make money on bad and even failed loans.
| Why sell a car once when you can sell it 3 or 4 times.
|
| "buyer of the 1999 Oldsmobile Intrigue at Auto World Auto
| Sales in February.
|
| A 26-year-old single mother of three, she needed a car to
| get to her new job as a home healthcare aide. She agreed
| to pay $3,899 -- roughly double book value -- and put
| down $1,200 cash on the deal.
|
| As the due date for her first installment approached,
| Fields realized she'd need a few extra days to scrape
| together the $220 payment. The dealership wouldn't wait.
| It repossessed the car a week after the payment was due"
|
| https://www.latimes.com/business/la-xpm-2012-aug-15-la-
| fi-bo...
| JumpCrisscross wrote:
| > _auto lending market in the US is a 1.6 trillion dollar
| time bomb_
|
| It _was_ a time bomb. Cars are easier to seize than houses.
| Given the present shortages, re-selling them at close to
| the loan balance shouldn 't be an issue.
|
| It's still a tale of personal tragedy. I know people on the
| new-car-every-two-years bandwagon who will get screwed when
| they have an income interruption. But it's not a broader
| risk, at least not at this time.
| nimbius wrote:
| while it seems that way initially the reality is more
| complex. waves of repossession means waves of employees
| who cant get to work anymore. repossessions arrive on
| your credit history as a major blemish, meaning you cant
| get credit for a new car. your credit card interest goes
| up as a result, unemployment ticks steadily up as well
| until the market reacts parasitically, and eventually the
| car you picked up for loan balance cant go for even a
| fraction of that because of the surprise 1.6 trillion
| dollar recession you triggered.
|
| its more palatable to subsidize these dicey loans (as we
| did in 2008) then come to jesus with the grim reality of
| following the letter of the lender instead of the spirit
| of the loan.
| conductr wrote:
| So you're saying it's all a house of cards? (/s ... kind
| of)
| adolph wrote:
| > It was a time bomb. Cars are easier to seize than
| houses. Given the present shortages, re-selling them at
| close to the loan balance shouldn't be an issue.
|
| Will there still be vehicle shortages if a significant
| number of cars are seized for resale and potentially a
| significant number of would be buyers are not able to
| obtain loans?
| ActorNightly wrote:
| Most likely yes, considering the major supply chain
| interruptions with the craziness that is going on in
| China, oil uncertainty with issues in Russia, e.t.c.
|
| There is also the issue of raw materials, which can be
| reused.
| zamadatix wrote:
| I'll bite, what does 3 billion in federal funding for car
| loans from more than two 64 month cycles ago have to do
| with it?
| dbreunig wrote:
| It doesn't. Dude's riding his hobbyhorse into a wall.
|
| Most cars that left the road were the oldest and
| heaviest. New cars bought under that program tended to be
| economy cars and are already a decade+ old. To suggest
| that it took inventory off the road affecting today's
| markets doesn't hold water.
|
| The biggest issue is that car companies make more money
| off reselling the loan than they do off the car. Years
| ago we tried to buy a Subaru in the NYC metro area in all
| cash and were continuously turned away. Dealers didn't
| make money off the cash sale, they were spiff'ed off the
| loan. We had to take the loan and then pay it off in
| order to get the car.
|
| Since then it's gotten worse. Expensive cars (luxury,
| trucks) are sold with 72 month loans and are underwater
| shortly after purchase. It's been a race to the worst
| terms and empowering the worst purchases to the worse
| equipped buyers. I'm continuously amazed it's gone on as
| long as it has.
| throwaway0a5e wrote:
| >Most cars that left the road were the oldest and
| heaviest.
|
| Pure fantasy.
|
| Old commuter cars and family haulers were what was
| removed. Stuff like 90s Suburbans and F150s got turned in
| at a much lower rate than things like Cavaliers and
| Tauruses.
|
| Remember, times were not great back then, trucks and SUVs
| are useful vehicles. You're not gonna get a lot of people
| who have old ones trading them in on a Camry because
| that's a net downgrade in capability. And the SUV craze
| was new enough that the trucks and SUVs that had been
| bought frivolously were still mostly worth enough to be
| unaffected.
|
| >To suggest that it took inventory off the road affecting
| today's markets doesn't hold water.
|
| It definitely put the used car market into a state it
| could have not otherwise gotten into. Whether it ever
| "recovered" is a matter of opinion. Many people say the
| private party shitbox market has never been the same but
| I personally think that's rose tinted glasses.
| rrrrrrrrrrrryan wrote:
| Ironically, luxury car dealerships will have no problem
| taking your cash. There are lots of people that are rich
| enough to insist upon buying a new car with cash, but
| those people generally don't drive Subarus.
| chucksta wrote:
| There are no affordable used cars now, or at least not
| nearly as many as there would have been, driving up price
| and the need for a loan.
| zamadatix wrote:
| 72 million passenger cars have been sold in the US since
| the program so I don't follow how the <0.7 million
| scrapped in 2009 (valued to be worth less than 3 billion
| dollars back then) for newer cars have a noticeable
| impact on any of this 1.6 trillion dollar loan market 13
| years later.
| woodruffw wrote:
| Under 700k cars were exchanged as part of the "cash for
| clunkers" program, or roughly one out of every 400 the
| cars on American roads. Emphasis on _exchanged_ : most
| people went out and bought new cars with the rebate.
|
| Plus, all of this was over a decade ago. It's irrelevant
| on both axes.
| throwaway0a5e wrote:
| I agree it's not relevant today but "1/400" is a really
| dishonest way of framing "removed the bottom of the
| market"
|
| All the cheap beater cars that people just getting on
| their financial feet would have bought evaporated
| overnight.
| pueblito wrote:
| Only 28% of sales are to first time buys, and 25% of sales
| are all-cash. Sales of affordable houses under $250k are down
| 30% YoY
| thebean11 wrote:
| > Sales of affordable houses under $250k are down 30% YoY
|
| ..because those houses are selling for over $250k now?
| arcticbull wrote:
| In part because of continued pressure on prices because
| of zoning, and in part because people commit chart crimes
| not adjusting for inflation.
| jimt1234 wrote:
| Also, did the Trump Administration relax a bunch of
| regulations around predatory loans? I recall the auto and
| payday loan industries were very happy.
| MAGZine wrote:
| Part of Dodd-Frank, which was created in response to the 2008
| financial crisis, was repealed in 2018.
|
| https://en.wikipedia.org/wiki/Economic_Growth,_Regulatory_Re...
| vlozko wrote:
| I'm not sure how that's directly related to the issue of
| subprime borrowers but in my recollection this was a good
| change. It was a regulation that was costly and difficult for
| smaller banks to constantly adhere to while larger banks
| already had the capability to do this. Much like how the
| mortgage moratorium policy ended up forcing smaller landlords
| to sell to larger property holding companies, this particular
| bit of regulation was causing many smaller banks to sell
| themselves to larger ones.
| [deleted]
| gernb wrote:
| If you want to be depressed, go to Los Angeles and tune into a
| radio station that caters to people living in poor
| neighborhoods. Every 3rd or 4th ad is for a loan shark.
| bregma wrote:
| Because there is money to be made.
| tootie wrote:
| I got denied a mortgage despite have assets in excess of the
| value of the house I wanted due to insufficient income (wasn't
| working at the time).
| giantg2 wrote:
| The scrutiny may be higher, but the amounts they are approving
| people for is insane. Like who thinks it's a good idea to
| approve someone with an $80k income for a $450k mortgage?
| scarface74 wrote:
| I'm not aware of any mortgages that allow that debt to income
| ratio for a mortgage. Unless it's a rental and then the down
| payment requirements are insane.
| NovemberWhiskey wrote:
| A little while ago, when 3% loans were still a thing, a
| $450K loan over 30 years was a $1,900/month expense. An
| income of $80K with a $1,900/month in debt is a 29% DTI
| which is _comfortably_ below the DTI limits for a
| conforming loan (43-45%).
|
| Even at 5.5%, it's still "only" 38% DTI ratio.
| babypuncher wrote:
| I was making $80k when I bought my house and was shocked when
| my bank told me I could buy a $450k home. I bought something
| for $260k instead.
| giantg2 wrote:
| That was my situation as well.
| fshbbdssbbgdd wrote:
| The relevant ratio for mortgage underwriting is monthly
| income to monthly payment obligations. This means that the
| highest available mortgage amount depends on the interest
| rate. You get a very different answer if rates are 2.5%
| instead of 5.0%. That means a person with $80k is getting
| approved for a much smaller loan today than six months ago.
|
| Rules of thumb like "mortgage amount should be less than 3x
| income" don't make much sense because they ignore the
| interest rate.
| avs733 wrote:
| those numbers have also been in use for quite a while and
| have not adjusted for the inflation of other parts of basic
| living expenses.
| lazide wrote:
| Also, do the math on what happens if interest rates do
| anything but go down - it instantly means a huge swath of
| buyers can't anymore and the market dries up.
| giantg2 wrote:
| "Rules of thumb like "mortgage amount should be less than
| 3x income" don't make much sense because they ignore the
| interest rate."
|
| They're fine as a _rule of thumb_. The individual should
| still run their own numbers to see if _their_ limit is
| higher or lower.
|
| Even at 2.5% interest, I have a hard time seeing anyone
| being able to _responsibly_ buy a $450k house on $80k
| income. They might be able to swing it, but they 'll be
| screwed as soon as a large unexpected expense comes up.
| Even a 2% property tax will eat close to 10% of their gross
| income. There's no way they could save for an emergency
| fund or _properly_ fund a retirement account.
| fshbbdssbbgdd wrote:
| At 2.5% interest, the monthly payment on a 450k home is
| $1,778.
|
| At 9% interest, the monthly payment on a 240k home is
| $1,931. Mortgage interest rates were higher than this
| throughout the 1980's. They got as high as 18% which
| would yield a $3,617 monthly payment.
|
| This means that the person who followed the "3x your
| income" rule in the 1980's has a harder time paying the
| bills than the person who bought the home for 450k with a
| low interest rate.
|
| This is a badly-formed rule because it ignores a key
| variable - the interest rate. Sometimes, it will prevent
| someone from buying a home they can afford. Other times,
| it will cause them to buy a home they can't afford.
| There's no need for such a rule, because mortgage payment
| calculators that take into account the interest rate are
| easily available. It's like picking a shoe size based on
| how much you weigh instead of measuring how big your feet
| are. If it gives you the right answer, that's out of
| sheer luck.
|
| Of course, it's necessary to also take into account
| factors like taxes and other expenses which vary from
| place to place and person to person, but a simple
| mortgage payment calculator is a good place to start.
| giantg2 wrote:
| And mortgage calculators can ignore many other variables,
| or would require additional research to fill them in.
| They also ignore a key factor - the person's income. It
| calculates cost, not affordability.
| lotsofpulp wrote:
| >There's no way they could save for an emergency fund or
| properly fund a retirement account.
|
| I assume that is simply the way 80%+ of people in the US
| expect to live since it has been their reality for
| decades.
| carabiner wrote:
| Margin loans. They let you bypass mortgage borrower
| requirements and are behind many "cash offers" on houses.
| Borrow and spend $400k in 45 minutes:
| https://www.mrmoneymustache.com/2021/01/29/margin-loan-
| ibkr-....
|
| Can't find a link to it, but someone on WSB wrote a long report
| on how margin loans will be behind the next housing crash.
| tedd4u wrote:
| I think subprime just means you just get offered a higher
| mortgage rate. You still have all the documentation mandates.
| No more NINA or NINJA[1] loans.
|
| [1]
| https://corporatefinanceinstitute.com/resources/knowledge/cr...
| jrumbut wrote:
| The amounts that mortgage originators will hand out are still
| pretty incredible.
|
| I bought a house a few months ago. The mortgage payment is
| right around what the more conservative rules of thumb
| suggest is affordable.
|
| After the lender had all my information I asked, out of
| curiosity, what was the maximum they'd lend me. They came
| back with a number that was more than triple what I ended up
| borrowing and suggested there was room to go higher if that
| was something I was interested in.
|
| Perhaps subprime borrowers face lower limits but it's still
| possible to take a risk stretching your budget to buy a
| house. That may be OK or even good but I'm concerned the
| perception is that lenders won't approve a mortgage that will
| be very difficult to keep up with when they absolutely will.
| scarface74 wrote:
| Why is everyone talking about mortgages when the article talks
| about everything _but_ mortgages?
|
| > _Borrowers with limited or troubled credit histories are
| defaulting on credit cards, car loans and personal loans_
| wmeredith wrote:
| Because people see the word "subprime" and think of mortgages.
| aaroninsf wrote:
| Comment on "ARMs did not cause the 2008 crash."
|
| Absolutely true; the question about whether they may cause an
| imminent one is still a good question. Rhymes-not-echoes, etc.
|
| Google cruft suggests that the number of ARMs was < 5% five years
| ago but has climbed recently, e.g.
|
| https://www.nbcnews.com/business/business-news/adjustable-ra...
|
| from April says: "The adjustable-rate mortgage share of
| applications last week was over 9 percent by loan count and 17
| percent based on dollar volume."
|
| I would welcome informed comment on what the total outstanding %
| of loans by count and total volume data looks like,
|
| and in particular, insight as to whether the amounts are likely
| to trigger market disequilibrium...
| 2Gkashmiri wrote:
| so....... good time to wait for the next crash and buy the dip?
| adamsmith143 wrote:
| Time in the market beats timing the market. You almost
| certainly aren't going to buy back in at the right time.
| bluGill wrote:
| Who knows? If you want predictions of the future you need to
| talk to a religious leader: they are the ones who deal in
| confident predictions of the unknowable future.
|
| There are signs anyone can read about the future, but nobody
| really knows exactly what they mean or how it will work out. If
| house prices continue to increase, but at half the rate of
| inflation: get in now. If house prices go down then wait. Just
| to make this more difficult, where are you living now: unless
| you can continue to live rent free in your parent's basement
| (I'm sure someone reading this is actually doing that), then
| you need to consider the cost of rent while waiting: even if a
| house goes down in value, it may still be worthwhile as an
| investment because most of the payment is coming from rent.
| Then there is the cost of maintenance which might be
| significant. There is the cost of moving: if you rent you can
| break the contract and leave a lot faster than if you have to
| sell a house in a now bad location first.
|
| If you think I covered even half of the considerations in a
| couple short paragraphs you are very naive.
| lkjfdslkjf222 wrote:
| With what? Dollars that are dipping 8% a year?
| 2Gkashmiri wrote:
| interestingly US $ to indian rupee is growing more wider at
| around 77.8 INR to 1 US$. by that projection, indian rupee is
| falling so either invest in gold or US$ to beat "indian
| inflation"... does that make sense?
| newaccount2021 wrote:
| vmception wrote:
| Yes exactly. You can handle inflation for 6 months to 2 years
| onlyrealcuzzo wrote:
| If the hypothesis is that home prices are going down - then
| dollars are not going down the same amount WRT house prices.
| ryanSrich wrote:
| Home prices are not going down. The math just doesn't work.
| The demand outweighs the inventory by several orders of
| magnitude the last time I checked. Rate hikes and inflation
| won't have much of an impact.
| lazide wrote:
| Demand is driven by ability to finance. People buy the
| maximum home they can 'afford' (really, that they'll be
| loaned most of the time).
|
| That is determined mostly by loan servicing costs to
| income ratios. What happens when interest rates go up?
|
| Hint: what people can 'afford' changes. And it doesn't
| get better.
|
| Prices on the market of course won't dip right away,
| because most sellers don't have to sell right away, and
| most owners won't have to sell at all. It takes inventory
| backlogging and houses sitting on the market a few years
| (usually) before sellers get desperate and start being
| willing to compete on price. Short sales and foreclosures
| can force the issue sometimes, but since people REALLY
| want to avoid those, they also tend to be lagging.
|
| In rich neighborhoods, often the sellers will just pull
| the listing and wait, both to avoid drops in nearby
| property values based on comps (neighbors will hate them,
| and that matters in places like that), and because they
| have the capital to wait out a downturn and don't want to
| take the haircut.
|
| The poor/shitty areas though, once the dam breaks it is
| quite impressive. I've watched it happen a few times now.
|
| This is why real estate is often considered illiquid and
| hard to value.
| sokoloff wrote:
| There are 100 buyers for every home (charitably assuming
| "several" is only 2) or 1000 buyers for every home (a
| more reasonable reading that "several" is minimum of 3)?
| That doesn't sound right at all.
| onlyrealcuzzo wrote:
| There are only 409k homes for sale:
| https://fred.stlouisfed.org/series/ACTLISCOUUS
|
| The home ownership rate is ~65%:
| https://fred.stlouisfed.org/series/RHORUSQ156N
|
| Theoretically, there are close to 30M HH that want to own
| a home, but don't.
|
| That's close to 100:1.
|
| More practically, probably only a 1/3rd of them are
| remotely qualified to buy something they'd want to own,
| and only a 1/3rd probably actually want to own & are
| currently interested in houses at this price.
|
| That could still be >10 buyers for every house.
| rory wrote:
| Several base 2 orders of magnitude :)
| drzoltar wrote:
| Actually, I'm worried about techies specifically. It's (was)
| surprisingly easy to count RSUs as income collateral, especially
| since the last 5 years have shown such a consistent source of
| income. Now that many RSUs are in the gutter, combined with an
| ARM, I don't get how some techies will make ends meet especially
| in places like the Bay Area. Anyone know the actual magnitude of
| this problem though?
| nkingsy wrote:
| I was explicitly told by a mortgage broker in January that
| RSU's don't count in income calculations.
|
| Made the difference between me qualifying and not (for a 10%
| down jumbo, which was admittedly a stretch).
| drzoltar wrote:
| To clarify I'm not sure it counts directly to income, but it
| starts to be taken into account when there is substantial
| salary and other investment funds, especially if you are
| right on the border of the salary/loan ratio. Someone else
| mentioned it's more like collateral
| desmosxxx wrote:
| Probably depends on the broker and market. We bought in the
| bay area and RSU were counted as income (and fairly certain
| 1:1 by some lenders). And in some other areas they wont look
| at them at all is my understanding.
| Androider wrote:
| For mortgages, lenders will entirely or heavily discount RSUs
| for income calculations.
|
| However not discouraged by that fact, some tech folks are known
| to instead have taken out regular non-mortgage variable rate
| loans with their RSUs as collateral. So there are folks, who
| bought a house "all cash" with loans backed by stock collateral
| that is now worth much less. Those types of loans also have a
| double-digit APR, which might have been fine if you thought you
| could flip your house for 30-100% in the near future. In the
| current housing marking it is like putting everything on black
| at a casino, it might work out, but it might be also be a
| complete catastrophe.
| arcticbull wrote:
| > Those types of loans also have a double-digit APR, which
| might have been fine if you tought you could flip your house
| for 30-100% in the near future.
|
| Nah not all of them. Margin loans were as low as 0.5% APR,
| and currently not much higher than that.
| JumpCrisscross wrote:
| > _lenders will entirely or heavily discount RSUs for income
| calculations_
|
| Multiple lenders, when I was shopping for a mortgage in
| October, encouraged me to take a variable-rate ARM with a
| balloon payment when I mentioned my options. (I declined,
| opting for a 15-year standard instead.) For the lender, as
| long as you can refinance in 5 years, the risk is minimal.
| For a borrower, this structure could easily wipe out one's
| savings.
| dhosek wrote:
| Those of us who've lived through more than a few years of
| working life value stock options and RSUs and anything else at
| zero until it's transformed into cash.
| scarface74 wrote:
| I've had to go through the mortgage process three times in the
| last two years when my income was based on a prorated two year
| signing bonus and a back heavy RSU vesting schedule over 4
| years [1].
|
| The first time for a refinance and the second time for HELOC.
| Both times they would only consider my base. Luckily I lived in
| a relatively low cost of living area and we weren't talking
| about that much by todays standards - a $300K refinance and a
| $160K HELOC a so my base pay was enough.
|
| The third time when I tried to get an investment property, my
| DTI was too high to qualify based on solely my base. If they
| had counted my RSU grants even considering the 30%+ YTD
| decline, it would have been more than enough. I ended up doing
| a no income documentation loan and paying down the loan by a
| point. I also had to put 30% down.
|
| For the second one, they still questioned why my stated income
| for 2022 was much lower than my actual income for 2021. I had
| to re-explain my compensation structure.
|
| [1] How do you say which BigTech company you work for without
| saying which BigTech company you work for.
| ActorNightly wrote:
| Techies have zero excuse for any sort of financial trouble. Not
| only has the job market has been insane (and still is for the
| most part), the amount of money you make, even with previous
| RSU distributions should allow anyone in the field to save
| enough money to ride out a recession.
|
| There is however a definite problem of people across all income
| levels living way above their means.
| notyourwork wrote:
| > It's surprisingly easy to count RSUs as income
|
| This is irresponsible in my opinion. (I'm sure some disagree.)
| Personally, I took the conservative approach where during my
| home purchase we made sure our income could afford a mortgage.
| Our RSU's are a bonus and when they come we can pay down our
| mortgage faster, go on fun vacations, or do all sorts of other
| things.
|
| Currently, I'm on pace to pay off my 30-year mortgage in 8-10
| years by putting half of my RSU's towards my mortgage on top of
| the monthly payments.
| arcticbull wrote:
| > Currently, I'm on pace to pay off my 30-year mortgage in
| 8-10 years by putting half of my RSU's towards my mortgage on
| top of the monthly payments.
|
| This is not a great idea if you have a 30-year fixed mortgage
| with an APR below inflation. You're better off not paying it
| off, and instead setting aside the cash you would have used.
| Even in like a Series I bond which is currently paying 9%
| APR.
|
| Money loses value every year, and it's losing value faster
| than your mortgage is going up in cost. Therefore, why would
| you pay it off today using money that's worth more, when you
| can pay it off in the future using money that's worth less?
|
| Especially if you can park your money in something that
| tracks inflation.
|
| Paying off your mortgage early is one of those things folks
| are always told is good - it's really not.
|
| That's a free 9%+ return on capital. You're giving up free
| double-digit returns by paying off your mortgage early.
| notyourwork wrote:
| You're sort of ignoring the point which is I get to chose
| how to allocate my money by not factoring my RSU's into my
| upper limit for what I can afford. I can keep my RSU's as
| they vest, or I can pay ahead on my mortgage or a
| combination of things.
|
| If you're in tech and paying your mortgage depends on your
| salary and your RSU's you are not being financially
| responsible.
| arcticbull wrote:
| Now all that I'm with you on!
| danans wrote:
| > Paying off your mortgage early is one of those things
| folks are always told is good - it's really not.
|
| It only makes sense if there is a legitimate fear that
| someone might otherwise waste the money on frivolities -
| for many people saving and the self control it requires is
| very challenging.
| digisign wrote:
| It was great in the old days of high interest rates, not
| so much at low ones.
| [deleted]
| wanda wrote:
| Article is essentially paywalled, I'm not in finance and I'm not
| well-informed (and by my own admission I don't go out of my way
| to _be_ well-informed), so forgive me if these questions are
| covered or stupid, but my questions when reading the headline
| are:
|
| 1. Are these subprime loans packaged in CDOs or any other kind of
| highly-rated derivative instruments?
|
| 2. If so, how exposed are the banks this time? What are current
| leverage limits?
|
| 3. Are there swaps on these instruments, and if so, are these
| positions being taken by the banks that are selling the CDOs?
|
| 4. If so, how exposed are the insurance firms?
|
| In short, are the conditions in place for a similar event to
| 07/08? Has any meaningful regulation been introduced that extends
| beyond the mortgage market?
|
| Looking beyond conventional lending, what is the scale of
| cryptocurrency lending? As I understand it, there's not much in
| the way of regulation when it comes to cryptocurrency, and I feel
| like that's probably a recipe for disaster somewhere in the
| future.
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