Thursday, Aug 27, 2009
Next wave of US mortgage problems starts soon
Business Insider: Coming Soon: The Alt-A Mortgage Reset Bomb
Nice charts showing subprime resets are past but Alt-A haven't really begun.
Posted by mountain goat @ 08:54 PM (1113 views) Add Comment
44 Comments
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1. mountain goat said...
Sorry totally off topic but it's getting late and it's important to honour the dead: Ted Kennedy’s Top Drunk Moments. Cheers Teddy.
2. flashman said...
The Alt-A mortgage resets are not as bad as they seem. Sub prime was implicated in the CDO fiasco but Alt-A mortgages tend to stay on bank balance sheets and are spread out amongst enough banks, so that not too many of them will end up in trouble. Unlike the CDO/sub prime area, there is far greater transparency with Alt-A's (because they are on balance sheets and not bundled into CDO's). Consequently there is far less fear of the unknown. Another plus for alt-A mortgages is that many of them have actually reset at a lower rate and the mortgagees who have survived thus far, tend to be the strong ones.
3. mountain goat said...
Flashman - it does seem to have very different issues. For one thing negative equity. "As Karen Weaver of Deutsche Bank observes, Alt-A mortgages are already mostly underwater. The combination of resets plus severely underwater status will likely exacerbate defaults and foreclosures." There is also the culture of strategic defaults developing. But we shall have to wait and see if this blows up like subprime did.
4. flashman said...
mg: For sure there are still risks but the underwater thing is a bit of a red herring. Most Alt-A mortgagees would avoid default even when underwater because this type of borrower jealously guards their credit rating. There is also a possibility that US prices will rise because they are way ahead of us in the HPC cycle. Any rise in US house prices would make the whole Alt-A reset thing go away. I am considering dusting off my green card and buying a house in the US (I used to live there).They are such good value and I am sure I'm not alone in thinking like this
5. mountain goat said...
Flashman - I lived there too for three years, Providence RI. I couldn't wait to leave but that had more to do with me being in an unhappy stage of my life rather than that I disliked Americans. Even then I felt sorry for people for the amount of debt they were in, and that was 10 years ago. So personally I would wait to see how the debt deflation thing sorts itself out. Those 2 Trillion Alt-A resets are a case in point. I think the world has changed, in terms of access to credit. But you do your research and seem confident that the worst is over? Which part of USA are you interested in if I may ask? Holiday home and/or investment?
6. flashman said...
mg: My wife is American (she's on the piss now and I'm looking after the kids, modern man that I am) but fortunately she prefers our little corner of England. I had a decent time in America but I don't think I would ever live there again. I would buy a crash pad in Manhattan because I love it and my wife has all her friends in that neck of the woods. I honestly don't know if it's all over or not but the truth is that I don't care any more. I have been out of property for a couple of years and for some reason it doesn't make me feel good. I feel like a traitor but I am off to the Dordogne on Sunday to find a plot (it is bloody cheap) and I am house hunting here as well. If it does all go wrong (it might), I will be happier having some land and property than cash in a dodgy bank.
I still believe the UK will experience a proper HPC but I'm done waiting and my wife is more than done waiting
7. devo said...
6. flashman said... I am off to the Dordogne on Sunday to find a plot (it is bloody cheap) and I am house hunting here as well.
I think this may prove to be a wise decision for many reasons; not least because the HPC if and when it comes will be difficult to take advantage of in conventional terms.
8. flashman said...
devo: I didn't think of it in those terms but you could well be right. I have an uneasy feeling about being in cash and I have learned to follow my gut
9. mountain goat said...
Flashman best of luck. I think I know what you mean. I feel like I am always looking over my shoulder, in terms of wealth preservation. I think I love not owning a house though, even if I could afford to buy one I liked cash. Being an owner seems a burden, not being an owner, a freedom. But perhaps that is an unusual attitude found only in someone who doesn't live in the country they were born and raised in?
10. flashman said...
Thanks mg. Where were you born? My wife will be back soon, so I'd better get the kids off the sofa and make their toothbrushes look like they've been used. It's been nice chatting to you
11. mountain goat said...
Yes likewise FM. South Africa.
12. Housey Housey said...
This is the time to get in. You may fool yourself that renting gives you freedom but I have paid out over £60,000 in rent over the last few years so have nothing that belongs to me out of that. Had I been paying a mortgage then a proportion of that would have been mine now instead of that I have been paying for someone else's investment and future security. That's not good.
13. bidin'matime said...
I owned a house for 26 years and have rented for the last 4 yrs - have to say I too enjoy renting very much - couldn’t afford to buy the house I live in... No DIY, no worrying about what people think of my kitchen, choice of decor, or what a future buyer will think of the place etc etc.
As for gut feelings, mine are usually wrong - I make my living out of reasoned analysis and that has always served me much better than my guts...
House prices must fall in relation to earnings. Earnings don’t look set to rise any time soon. It may be a long wait (I’m in no particular hurry, but I sympathise with those who are), but eventually prices will fall.
14. flashman said...
bidin'matime: I hate renting and the word landlord makes me cringe. I never though about the word until I rented. Imagine in 2009 have a 'lord' collecting rent from you. My gut feeling is not connected to house prices. I am sure they will fall. My 'gut' decision to buy is based on me having an aversion to renting, being able to buy the house I want and not least because I fear for cash just as much as I do for house prices. I do not think I am making the 'right' decision because it very much depends on personal circumstances
15. str 2007 said...
Flashman
Sympathise with you there.
I hate renting aswell.
Honestly, the checks you need to go through to get a house in the first place and then be inspected 6 mnths later by some lettings agent numpty. I find the whole experience totally humiliating and feel absolute sorrow for those that have no choice.
Further I was interrogated on earnings, as you may well be aware the idea of self employment is to make money but not 'earn/pay yourself' money. So that raised eyebrows, despite the fact I could have bought the house I'm renting without a mortgage.
Although in a good area the 3 bed semi we're renting is pretty much as 'inexpensive' as you can get. I therefore feel extremely sorry for young couples (late 20's early 30's) who have been forced out of owning there own homes by a bunch of landlords.
We even had a flier round from the local Lib Dem Lady the other day opposing new building in the area. I pointed out that the area she was canvassing support for her views was also fields 10 years ago and what right did she have to deny the next generation a home. I've been promissed a reply but as yet haven't heard back from Sandra Gidley MP.
Flashman
I was also considering a French plot, one of my drivers bought 2 No. 1/2 acre plots with permission for £35k about 18 months ago in the Dordoigne.
16. Gloommonger said...
I also believe a correction is coming, but if inflation followed by higher interest rates trigger a HPC then surely the cost of borrowing will offset the lower prices. It will still take 20 years to pay the mortgage off!
17. nomad said...
Can someone put into words this "fear for cash". I too am renting while putting the cash from our 2007 sale in one year deposit bonds - lowest rate on one chunk is 4.3% until next May. Add this to the minus inflation rate and it's not bad - but is it secure?
Inflation will eventually be a problem, but if I keep on my toes taking advice from this site (Newcastle at 5%) and elsewhere we should at least keep up while house prices decide when to fall to a proper level. What they are certainly not going to do is race back up.
If, somehow, deposit money is hived off by the bankers/government which has been hinted at by some of the more radical bloggers, then it really will be a "Mad Max" world where your best bet will be a piece of land with a big wall around it. And don't forget the peashooters!
18. flashman said...
hi str. Yes, I remember your comment about being vetted for your suitability to pay someone’s mortgage for them! It's a bloody cheek. I think you also railed against the inspection as well. Fortunately I was out when we had an inspection because I would consider an assault charge to be a badge of honour
I am doing a gourmet cycling trip around the Dordogne with some pals and three of us have our phones and notepads ready for a plot search. A decent plot with easy utility hook ups only costs about 25K to 50K so it is not too much of an extravagance. My parents did a canny think when we were young which was to buy a really cool holiday home. Even when we were horrible teenagers or students we still wanted to holiday with Mum and Dad because of the pool and it was a cool place to bring girlfriends. They admitted that they did it so that their children would keep going on holiday with them for a long time. I want to create a similar set up for my kids
19. bluebeach said...
Great posts chaps.... it's good to hear a different view point and to put your quality of life considerations before profit / loss.... it has made me think deeply... Thanks
20. mountain goat said...
Just to fill in on why I enjoy renting. My landlord is a service provider, not my lord. Before I move in I check the service he offers and his price. He has the greatest risk because his asset being rented is worth a lot, so a credit check of me seems reasonable. If things break I expect him to negotiate the dodgy world of fix-it-men and fix things. If he doesn't come up to scratch or I don't like the neighbours, I am off. So since he is tied down to a property (that isn't easy to sell these days) and I am not, who is the most free, who is the lord?
21. Bubba Sparks said...
Very interesting posts. As a seasoned renter, my biggest aversion to buying a house is handing over a large chunk of cash, but I am a tight northener. Agree with MG that is nice to put most of the risk with someone else, although the missus does get apoplectic when we get a letter telling us that the house was a bit messy when the inspection was done. Like most of the posters on this thread, however, my decision to rent is a lifestyle choice, rather than an attempt to see the future and maximise every penny. No doubt in a few years time Mrs Bubba's itch for a herb garden will be overwhelming, but until then I can enjoy living in a house that would be beyond our means to purchase...
22. flashman said...
mg: I admit that your views on renting are rational and mine are mostly irrational. The truth is that I have a moral objection to most landlords. House price, credit and interest rate distortions have allowed too many predatory and unsuitable types into the btl world. Housing is a basic human need and I don't think the government should have allowed these distortions to affect an asset class that is inextricably linked to quality of life and choice. The only qualification most btl'ers had is the nerve to commit fraud on their mortgage application and a boatload of bravado. Unfortunately these people have been rewarded for this fraud and bravado at the expense of the more circumspect. I appreciate that there are also many decent landlords.
23. str 2007 said...
Flashman
Yes it's my thought aswell re: holiday home.
We went on holiday to St.Ives in Cornwall last year and I must admit that takes some beating for 3 boys to have holidays as they can progress from the 'family' beech to the 'surfing' beech as they get older.
Of course there is quite a premium for having such a handy holiday cottage and you won't get much change out of £300k. But, you will likely get a reasonable return.
The Dordoigne on the other hand certainly offers a lower entry level, but with more input (build, distance, language) and I imagine lower returns as a percentage.
I could handle a 4 hour drive to cornwall for the weekend off season, but not likely to head to the Dordoigne for less than a week though.
Still, I think I'd best concentrate my efforts on my UK house frst !
Having said that maybe the bargains are more likely to appear in France before they do here.
It does bug the hell out of me though that a 1/2 acre plot in France costs £30k and here would cost anything upto £1m before you've laid a brick. We're only about 1/3 the size of France not a 1/30th.
24. flashman said...
nomad: "Can someone put into words this "fear for cash". "
It is a very large subject but I will limit myself to talking about government attitudes. The governments of the major economies regard savers as the enemy. They want you to revive the economy by spending and they are considering several policies that penalise savings. The Japanese lost decade is often quoted and most regulators consider that it was the intractability of savers that prevented the government policies from working. I worry that savers might be turned over by new legislation from desperate governments and I want to be on the right side of any new legislation
25. flashman said...
str: I don't expect any return from a French purchase (it would be a crap investment) but I really liked the building experience and I plan on passing the house on to my children. It's a pure lifestyle choice
I love getting in the car and driving off to France. It’s a chance to ditch the wife’s diesel and burn some serious petrol. You could stick me on a plane to the Bahamas and I would yawn but give me 300 bph and a line of Polar trees and I am in heaven
26. str 2007 said...
Flashman
Fully agree, you can't beat a good road trip and at least you can put your foot down in France and if there's a speedtrap round the corner the last 20 cars to have passed in the opposite direction would have flashed their lights to warn you, not like the PC to55ers over here.
My 2 encounters with the Gendam (spelling) were on a FireBlade, the ist time I was gently beckoned on a motorway to slow down a bit (I was cruising at 120mph) virtually a prison sentence here. On the next occasion I approached a Blue Car with Orange light on top (French RAC surely I thought) again in 3 figures. The Gendam on that occasion pulled to left and stuck his arm out of the window and waved me past.
BTW 300bhp and any sort of Roadside tree don't mix. (What is that with 300bhp BTW).
For a really good road trip you'd be best of taking to the German Eiffel Mountains for a long weekend with the family. Beautiful scenery. Oh and did I mentioned a little stretch of public road you enter near a little village called Adenau.
That'll be the Nurburgring Nordschleiffe if you hadn't guessed.,
27. bidin'matime said...
MG - my view of the landlord is the same as yours - except mine is a little old lady in her 80's - she lives locally and has her own odd-job man, so no trouble at all. The agent can be a bit @rsy, but we are 'ideal tenants' (no kids, no pets, not too many bad habits..) so when we complained about a snooty woman who inspected on one occasion we were told she wouldnt be sent again..!
As for 'fear for cash', failing the scenario that Nomad suggests, (in which case we are all in trouble..) my view is that, so long as the cash is held for property purchase, it's value can only go up in the medium term.
28. flashman said...
str: I've heard that those mountains are nice. I've never seen them but I might well do that next summer. Thanks for the tip. I drive a car that was intended for my wife but I fell in love with it so it's now mine. It’s a Saab 9-5 aero estate with something called a Hirshe option. Apparently it increased the bhp from 260 to 300bhp and the torque is apparently well over 400nm. The Hirshe thingy also gives you exotic looking red brakes etc so hopefully I'll avoid the trees. It attracts no attention whatsoever but is way faster and more comfortable than my old, supposedly more exotic car. I wouldn't admit to being such a petrol head if it hadn't scrolled off!
29. mountain goat said...
Flashman - have you read the recent writings of Doug Casey on wealth preservation? He is American but practical advice applies here too I think. He is convinced that currency controls are around the corner. Owning a foreign property was one of his suggestions.
http://www.caseyresearch.com/displayCwcPrint.php?id=15
He likes cars too... http://www.thedailycrux.com/content/2572/Doug_Casey
30. bluebeach said...
BMT @24 said.....
so long as the cash is held for property purchase, it's value can only go up in the medium term.
can you expand please
31. flashman said...
mg: thanks, I'll give that a read
32. mountain goat said...
bidin'matime - yes landlords do need their own odd-job man or be dependent on similar services from a letting agent. Failing that they probably get ripped off a lot with bad service a lot of the time.
33. flashman said...
mg: just read the first link. It's very much in accord with the thoughts I hinted at @ 21. A good article.
34. mountain goat said...
fm there is a follow up one on owning property abroad and other suggestions. But I only have the email, since I am subscribed to his free email "conversations". Can't find it on the web yet, it is also called "Doug Casey on Protecting Your Cash"
35. Bidin'matime said...
Bluebeach - your cash is worth what you can buy for it, so if what you want to buy falls in price, then the cash is worth more. We may well see food and consumer durables rise in price, so if the cash is, say, a pension fund, then beware, but if it is to buy a house, then the CPI becomes irrelevant - indeed, the more the CPI rises, the less spare income people have to pay the mortgage, so the sooner and more likely house prices will return to their long term relationship with incomes.
And, of course, if inflation takes off, then they will have to raise IRs, so applying further pressure to house prices. The simple fact is that the ratio must return to 'normal', ie around house prices 3.25 x incomes (and will fall below this in the trough) and incomes are not set to rise, so prices are almost certain to fall further in £ terms.
36. bidin'matime said...
(please excuse if this appears twice now - the original seems to have disappeared..)
Bluebeach - your cash is worth what you can buy for it, so if what you want to buy falls in price, then the cash is worth more. We may well see food and consumer durables rise in price, so if the cash is, say, a pension fund, then beware, but if it is to buy a house, then the CPI becomes irrelevant - indeed, the more the CPI rises, the less spare income people have to pay the mortgage, so the sooner and more likely house prices will return to their long term relationship with incomes.
And, of course, if inflation takes off, then they will have to raise IRs, so applying further pressure to house prices. The simple fact is that the ratio must return to 'normal', ie around house prices 3.25 x incomes (and will fall below this in the trough) and incomes are not set to rise, so prices are almost certain to fall further in £ terms.
37. nomad said...
bluebeach @27. I assume BMT is referring to the resumption of HPC. As long as this is happening and you are in the market for property, the value of your cash will increase regardless of the interest attached.
Thankyou for the replies FM and BMT. The thought of 7 million savers joining the rioting anarchists is not a comfortable one.
38. nomad said...
BMT sorry to talk over you like that - I thought you may have left this topic.
39. str 2007 said...
Flashman
If you do embark on the journey check out Ben Lovejoys web site. There's alot of important info there to help you stay safe and get the most from the trip.
Might even be tempted to join you in my Golf R32 ;-).
40. flashman said...
I'd beat you on the straights but you'd take me on the bends. Imagine that, an HPC petrol heads outing!
41. str 2007 said...
Totally up for an HPC Petrol Heads outing especially if it's to Germany. The missus would be up for a trip to the Nordshleiffe aswell with the kids.
BTW of a 13 mile lap there's only the last 1/2 mile that is straight. But sewing all those bends together is quite a beautiful experience. Pretty special roads all the way there aswell if you take the scenic route.
42. mountain goat said...
My VW camper won't keep up but it will enjoy being home in das Mutterland
43. flashman said...
str: Its amazing what you can learn from this site. I am genuinely excited about visiting the parts of Germany you suggested. I emailed that website to my wife and she likes the idea. I'm always up for a petrol head meet
mg: You might be slower but we cant make a cup of tea in ours. I used to be a VW nut in my youth. I had all sorts of souped up bugs. 1641cc or 1835cc with twin Kadrons. Great days.
The kids are finally asleep and The Tudors is coming on so auf wiedersehen
44. str 2007 said...
Flashman
Good Good let me know when you fancy a trip
MG
The enroute picnic will be at your place ;-)
str2007@o2.co.uk