A Risk Manager's Perspective on Causes of the Subprime Mortgage Crisis

Incisive analysis of the interworkings of human behavior and risk management by David Rowe of Kamakura Corp. in his article Dangerous Adaptation: The Evolution of Risk. It's a quick read on the adaptability of the human wallet, er, mind. - David

Brace for Higher Rates: Fannie & Freddie Move From the Skids to the Chopping Block

Seldom does the marketplace ring a bell when mortgage rates are about to rise.  This time, there is a bell, and it's ringing quite clearly. This article from the Financial Times proves it's even audible across the pond!: White House seeks wind-down of Fannie and Freddie. -David

Finally, Banks Walk the Walk; Outrun Gov't Talk

The reality of loan modifications is finally coming to be. A great friend successfully renegotiated a large reduction in his mortgage after staying on top of the bank's modification dept. for several months - - unrelentingly! Now, banks appear to finally be catching their stride of preventing much more costly foreclosures by enabling modifications of their own - - even when the reach of our gov't's programs exceed their grasp. More: Surprise! Banks offer more modifications than Obama plan - Aug. 30, 2010 - David

He Called the Bust; Now He Sees a Rally for California

Here's a forecast you don't see every day, published in the Finanial Times: Paulson sees California homes rally. 

Whether you believe his specific numbers or not, it's interesting to consider the reasoning of one of the few hedge fund managers who correctly called (and profited from ) the housing bust.  20% increase vs.last year?  Sounds good to me! - David

Meltdown Post Mortem Ad Nauseum

The Fed continues to be grilled over whether it caused the mortgage meltdown via low interest rates, or allowed it via lax bank supervision.  Here's the latest:  Fed Transcripts Stoke Debate on Rates - NYTimes.com. 

So what's the answer?  They allowed it via lax bank supervision.  Those insisting the Fed caused the mortgage meltdown via encouraging low short-term interest rates don't understand (or don't want the public to understand) basic macroeconomics, and like to imply that the Fed has more influence on mortgage rates than it does.

Extreme Home Foreclosure Trouble - WSJ.com

This is a little sad, but it's a fair reflection of one of the biggest elements of the mortgage crisis.

Extreme Home Foreclosure Trouble - WSJ.com

While the intentions are no doubt positive when Extreme Makeover Home Edition does it's thing, the result has been quite similar to when mortgage lenders did their thing a few years ago: putting families in homes they couldn't afford. OUCH! - David

Untruth of the Day: Treasury Official Says Housing Goals Not to Blame for Fannie, Freddie Failures - WSJ

An Asst. Treasury Secty has proclaimed to the Mortgage Bankers Association that Fannie Mae and Freddy Mac didn't fail because the government mandated they relax lending standards in order to meet affordable housing goals. Nope, they failed because Fannie and Freddie relaxed lending standards in order to generate more loans and make more money!

Treasury Official Says Housing Goals Not to Blame for Fannie, Freddie Failures - WSJ

Methinks the Asst. Treas. Secty doth protest too much. Fannie, Freddy, and lenders in general

Jumbo mortgage market is beginning to thaw - latimes.com

In a very well-timed article (see my immediate past blog post), the LA Times reports that the the Jumbo mortgage market is beginning to thaw.  There isn't much movement yet, and in fact the article quotes what all would-be jumbo mortgage borrowers already know, namely that "For now, the jumbo market remains limited to the volume of loans that banks are willing and able to keep on their books. But there is hope for a return to private outside funding." 

That private funding is exactly what's needed,

US banks take hit to clear home loan books - Financial Times

US mortgage lenders and investors are beginning to realize what the real estate industry has known for a long time: short sales are MUCH less costly than foreclosures.  Despite this reality, banks and their loan servicing arms have traditionally embraced with the well-understood foreclosure model, particularly in states like California where trustee sales speed the process considerably.  Still, foreclosure sales are often fire sales, with homes often requiring considerable repairs and generally better suited for investors than homeowners. 

A short sale, on the other hand, usually involves a homeowner for whom things haven't gone as hoped, but still desiring to protect their credit.  It requires a great deal of cooperation between buyer, seller, the Realtors of each, servicer, and lender/investor.  The lender/investor's cooperation, typically the missing link in achieving a successful short sale, is made all the more difficult by the existence of second mortgages on the property, particularly if the first and second loans are held by different parties.

But short sales really are the right way to go if lenders and investors are ready to get serious about solving their mortgage portfolio problems - - and putting homes in the hands of owners who can afford them - - anyime soon. - David

FT.com - Cleaning up toxic mortgage assets a slow task

Nearly all new mortgage lending is coming through government-sponsored entities (GSE's) like Freddie Mac and Fannie Mae.  These entities cap the level of individual mortgages, such that the low end of the market is supported.  But what about the higher end - - homes requiring larger "jumbo" mortgages?  That money comes from private investors, and those sources dried up when the mortgage crisis hit.  Why haven't private sources re-entered the marketplace?  Because they haven't figured out what to do with their existing portfolios yet!  One factor in particular is the struggle from the holders of first and second mortgages.  As this Financial Times article explains, second mortgage holders are no longer willing to allow first mortgage holders to exercise their "first in line" rghts when it comes to loan modifications and collections, slowing the process for all. - David