12 ms·

Mortgage Market Reopens to Risky Borrowers

203 points by spking 7y ago

apo 7y ago
> Some $2.5 billion worth of subprime loans, those with FICO credit scores below 690, ended up in mortgage bonds in the first quarter of 2019. That is more than double a year earlier and the highest level since the end of 2007, according to Inside Mortgage Finance. There was $1.9 billion worth of subprime mortgage bonds in the second quarter. Statements like this are hard to evaluate without knowing the denominator: the total value of new mortgage bonds in each period. All too often, an author who should know better throws the reader a scrap like the following sentence: > The market for unconventional home loans is still tiny compared with the rest of the mortgage market as well as its precrisis past, when unconventional borrowing peaked at more than $1 trillion. But this still doesn't convey what percentage of the loans are to sub-690 FICO borrowers. I see this all the time and wonder to what extent it has contributed to mistrust of the traditional media. If we find out that the percentage in 2019 is 1% but in 2007 it was 56%, that casts the entire story in a different light.
- ErikAugust 7y ago
  "That made him an appealing borrower to an unconventional lender, according to Tom Jessop, a loan consultant at New American Funding. Mr. Jessop arranged a $675,000 loan on the $1.1 million property, leaving the lender with a significant buffer should Mr. Licht default." Also, this is a TERRIBLE example of a pending subprime crisis. A guy borrows $675K on a $1.1 million property.
  - deleted 7y ago
    [deleted]
  - throwaway_law 7y ago
    >Also, this is a TERRIBLE example of a pending subprime crisis. A guy borrows $675K on a $1.1 million property. Well isn't the point that you/they are making that determination on equity alone? As we saw in 2008 all that equity can disappear in a blink of an eye. Equity has no bearing on ability to repay. So before deciding if this is a good or bad loan wouldn't we need to know his outstanding debt to income ratio? And neither Equity, or ability to repay (debt/income ratio) has anything to do with subprime lending or a subprime lending crisis. Subprime generally means enticing debtors with interest rates below prime, with a loan that will adjust to above prime (and many times even into a single balloon payment at the end which statistically almost no American can make). No one should qualify for such loans on the basis "you may be able to refinance again at the end to avoid the balloon payment", if you don't have the cash on hand to pay the balloon payment, you shouldn't qualify for these types of loans.
    - mrfredward 7y ago
      A loan at 95% loan to value is risky because a decline in the home's value for any reason, even just price fluctuations in a normal economic cycle, could put the loan underwater, and the bank would get less than the loan amount in foreclosure. At 61% loan to value (the example above), it would take some sort of catastrophe not covered by the home owner's insurance for the bank to not get the principal back, even if the borrower never makes a mortgage payment. Depending on local laws, the bank might be out some legal and administrative fees.
    - rconti 7y ago
      1. SOME of the equity can disappear in the blink of an eye. The lender has a nice cushion when the buyer puts down 40%. That's hardly considered risky, which is why this is a terrible example. 2. Subprime refers to the class of borrower, typically based on their less-than-ideal credit scores. The term does not mean that the bank is offering a rate below the prime interest rate to "trick" potential borrowers into taking on debt.
      - throwaway_law 7y ago
        >The term does not mean that the bank is offering a rate below the prime interest rate to "trick" potential borrowers into taking on debt. Its not a trick, just something the Borrower's en mass did not understand. They just understood the initial low payments, anyway as I replied above, leading to the mortgage crisis over 90% of subprime loans were ARMS that started off below prime and gradually increased. I did use the word "generally" because its not all, but I think 90%+ is a good use of generally.
        ryacko 7y ago
        It is safe to say that most people don’t understand algebra. In theory the banks didn’t put a proper interest rate on the loan, since interest rates are mainly to compensate for the risk of lending to the borrower. Although it doesn’t matter since the banks bundled the mortgages together, sold them to each other, and were bailed out.
  - JackFr 7y ago
    It's only worth $1.1 million when someone pays that.
    - kube-system 7y ago
      Yes, that's how everything is valued. This is why transaction data is used to determine valuations of just about anything.
- tjpaudio 7y ago
  I believe the news here is a resurgence of growth in a mortgage type that has otherwise been declining or stagnant the last 10 years, not so much an alarm about the current state of affairs. So what you said is correct and all, but I think you miss the point.
- rayiner 7y ago
  The problem is that most journalists are innumerate. As Matt Yglesias notes, "many reporters and editors don't really understand what they're doing. Reputable colleges hand out degrees to people who have almost no understanding of quantitative methods." [1] These journalists see the numbers as garnishes on a narrative point. They're not trying to put the numbers in some sort of mathematical context to draw sound conclusions. They may not even realize that there is a difference between using numbers for garnish and deriving meaning from numbers. [1] https://www.theatlantic.com/politics/archive/2007/12/innumeracy/47581 https://www.theatlantic.com/politics/archive/2007/12/innumer....
  - xenocyon 7y ago
    Calling the absolute numbers re subprime loans a "garnish" is subjective at best and wrong at worst. Even if the subprime-to-prime ratio hasn't changed much, a large increase in the ballooning subprime total may still be newsworthy in its own right.
    - fuzz4lyfe 7y ago
      >Even if the subprime-to-prime ratio hasn't changed much, a large increase in the ballooning subprime total may still be newsworthy in its own right. Wouldn't the news there be that the total number of mortgages have grown dramatically? Unless you have a narrative to push that is.
      - xenocyon 7y ago
        The question is how large the dollar risk of default is.
  - ChuckMcM 7y ago
    Exactly this, and then there are people who exploit this in order to skew perceptions as described in "Proofiness: How you're being fooled by the numbers."[1] [1] https://www.amazon.com/Proofiness-Youre-Being-Fooled-Numbers/dp/0143120077 https://www.amazon.com/Proofiness-Youre-Being-Fooled-Numbers...
  - 7y ago
- js2 7y ago
  I don't understand this criticism of the article. The point of the article is that lending standards are starting to loosen. The article provided a handful of numbers and one anecdote. The article title and first sentence are: Mortgage Market Reopens to Risky Borrowers. Strict lending requirements that were put in place after financial crisis are starting to erode. The risky mortgage is making a comeback. Supporting facts are: - "Borrowers took out $45 billion of these unconventional loans in 2018, the most in a decade, and origination is on track to rise again in 2019." - "Unconventional loans are largely being extended by nonbank mortgage lenders. But big banks have found another way in ... Some $2.5 billion worth of subprime loans, those with FICO credit scores below 690, ended up in mortgage bonds in the first quarter of 2019. That is more than double a year earlier and the highest level since the end of 2007." Then there's the single anecdote about a borrower with a sub-690 FICO. Is sub-690 arbitrary? Yes. Is this borrower an example of an egregious loan? No. But is this someone who could not have gotten a loan previously? Yes. It supports the article. The article is fair in its assessment: - "Big banks’ mortgage arms are still avoiding riskier borrowers, leaving them to nonbank lenders. Still, the increase in unconventional loans shows that lenders are looking farther afield for customers." Let me put it another way: at what point should the WSJ write an article like this? The 2008 financial crises cratered the economy after previous lending standards became lax. We put regulations in place to prevent that from happening again. Those regulations are starting to be weakened again. I want to know that.
  - qroshan 7y ago
    "The most in a decade" is where all the shenanigans of the article lie. Let's say Peak 2006, Sub-Prime Loan was $600B Let's say the average, natural Sub-Prime Loan is $100B After the crash, may be the market over-corrected way to much and slowly crawling back to it's natural $100B. With this perspective, the narrative becomes totally different. The lending standard is still too tight and still way below what the natural / average economy support. Remember there has to be a balance between exuberance and over-cautious. A journalist should find out, what the happy medium is That's why numerical literacy is important
    - darawk 7y ago
- throwaway_law 7y ago
  > The market for unconventional home loans is still tiny compared with the rest of the mortgage market as well as its precrisis past, when unconventional borrowing peaked at more than $1 trillion. And the number of defaulted loans/foreclosures was tiny compared to the total toxic (sorry, not letting them re-brand toxic loans as unconventional) assets. However, that tiny number of defaults/foreclosures, was enough to overturn the entire economy...but for Bush's $1T+ bailout followed by Obama's $1T+ bailout, banks and wall street would have crumbled, instead the got to consolidate with their new taxpayer cash on hand. The banks and wall street recovered, of course homeowners and American working class taxpayer never did, so its time to run the whole scam again and get those devious working class American's who escaped 2008 unharmed.
  - zaroth 7y ago
    FYI, the foreclosure rate spiked from a historical rate around 0.5% to around 2.3%, which is actually a massive increase.
- dawsmik 7y ago
  The FICO score is only one consideration. The biggest problem with the loans in 2007 was lack of verification of income and buyers qualifying on a mortgage amount that would eventually go up. A 650 FICO borrower with a good job, downpayment and an affordable monthly payment is a pretty good risk.
  - rockinghigh 7y ago
    My assumption is that someone with a score less than 700 probably had late payments on some of their debt.
    - mtanski 7y ago
      FICO score for mortgages is not the same score as the modern FIDO score. The mortgage score is often what's called FICO v2 and the modern one is something like v10. They've even branded their different old versions as Insurance score, Auto score, Mortgage score and those industries kind of stick with it. To illustrate why this matters. My modern FICO score is something like high 700s, low 800s (depending on credit data vendor). My V2 score is like 690. How did that happen? Turns out when I moved out from my last house (5 years ago) and canceled my internet with Time Warner they failed to charge me $31 which was always set to auto-play. I actually settled 5 months after the move when TW sent me to collections. The shady collection agency promised to remove it off the record if I paid (they didn't). Instead, it shows up as a 5 year old, $31 late payment, paid in full. How did I find out, while looking to refinance at these current rates. I'm getting this sorted out now. Both TransUnion and Experian got it fixed in a few business day.... fucking Equifax cannot get their shit together 3 weeks later. For me it's a hassle, annoyance and wasted time. But as you can see it can impact real people and the score methodology is pretty dumb. It's insane that a 5 year old, paid in full debt for $31, that's not even my fault drags my credit score down ~100 points (that's what it is once corrected) and prevents from getting a refi. Doesn't matter that all my other credit cards are always paid in full, no late payments on mortgage, car, insurance ... which all add up to several magnitudes more then $31 over the 5 years.
    - deleted 7y ago
      [deleted]
- dawhizkid 7y ago
  I didn't realize 690 was the cut off for "subprime." I thought that was generally considered "ok/good" but not really that bad.
  - selimthegrim 7y ago
    I guess they’ve tightened the screws a bit - in principle
- lostphilosopher 7y ago
  > wonder to what extent it has contributed to mistrust of the traditional media. Is anyone's experience that "non traditional media" or news sources are more mathematically rigorous? I understand that all media has bias, lots of content is written by non experts, and presenting data (especially statistical data) is really hard and rarely done well. But any "alternative" or "non mainstream" news source I've seen is _way_ worse at those things than traditional mainstream sources like NYT, WP, Economist, Foreign Policy, NPR, 538, etc. Even while those sources still make noticeable blunders. (Curious because I've seen this statement before.)
  - rco8786 7y ago
    Yea agreed. It’s almost a straw man of sorts where there’s this proverbial “they” that gets it right and uses rigorous standards that the traditional media falls short of. But I’ve yet to find these sources of information in the wild.
- Goronmon 7y ago
  I see this all the time and wonder to what extent it has contributed to mistrust of the traditional media. I'd say it's more likely that people are mistrustful of the media because the media will say things they either don't like or don't agree with personally, rather than a specific concern about articles lacking certain context on complicated topics.
  - TomMckenny 7y ago
    Exactly so. That and continuous denunciation of the free press by a certain category of new politicians. Actually, this article differs in no way from similar articles written since printed news was invented. Which of course means that all the other criticisms, including imprecision, are still valid. It just means that it is not the source of the recent spike in media dislike.
- sjg007 7y ago
  Less than 690 is subprime? I would’ve thought closer to 640...
  - SilasX 7y ago
    740 can be subprime if you have a short credit history. Source: me.
quotemstr 7y ago
What could possibly go wrong?
whiddershins 7y ago
For all the negative rhetoric around subprime loans, they enabled me and others I knew who were young and self employed to own homes. They aren’t always bad, they aren’t always crazy balloon loans or predatory instruments. Sometimes they allow someone who has an alternative life circumstance to not be excluded.
- opportune 7y ago
  Yeah, subprime lending often makes a lot of sense for the person taking out the loan. If the rents are high relative to expected mortgages/recurring costs in your area, it will pay itself off very quickly (minus the risk of default you open yourself off to). And it allows you to lock in a monthly payment for potentially decades, which has a massive amount of value by itself. It also makes a lot of sense if you have reasonable expectation of a large amount of income growth / expense decrease that will free up cash flow. For example, if a household member is finishing up school or in training for a more lucrative field (like an MD in residency) it might make sense to be house poor for a small period of time to lock in rates, take advantage of a nice buying opportunity, etc. Or if you are about to be released from child support / settlement obligations, and thus will experience some increased cashflow, could also make sense. It's not fair to assume that everyone with poor credit or lack of capital for a downpayment is a bad person to lend to, HOWEVER, in the general case it's probably true that in the absence of impending changes in household finances, an inability to get good credit or accumulate savings is a negative signal. And unless you are a small lender, your subprime loans probably aren't discriminating against people who are about to increase income/decrease expenses while building better credit, and people who just suck with money.
  - bachmeier 7y ago
    > And it allows you to lock in a monthly payment for potentially decades, which has a massive amount of value by itself. Well, that might be a good thing when house prices are appreciating at a crazy rate, but it also locks you in when the housing market and/or the economy crashes. If you're renting, you lose your job and you're stuck with your lease for maybe another six months (assuming you don't break it). Once you buy a house, you're stuck with it until you can sell it or foreclosure, even if the price goes down or you lose your job.
notTyler 7y ago
There are commercials and ads everywhere on how easy it is to get a mortgage from Rocket / Guaranteed Rate etc. Ever since that started happening I kind of assumed this was coming down the pipe.
SilasX 7y ago
Negative yielding bonds that people only buy in hopes of unloading onto a bigger sucker?[1] Pre-crisis level of subprime lending? Time for the financial equivalent of going to the Winchester to wait for this to blow over. [1] https://news.ycombinator.com/item?id=20760222 https://news.ycombinator.com/item?id=20760222
- driverdan 7y ago
  > Pre-crisis level of subprime lending? Nope, not there yet.
opportune 7y ago
Is anybody else making the supposedly foolish decision to time the housing market? I am financially ready to purchase my first home, currently living in the bay area, but I think right now just looks like a bad time. - A lot of housing price growth is seemingly "priced in" since rents for condos/apartments significantly lower than total monthly ownerships costs (mortgage+hoa+insurance+taxes+etc.), even with 20% down. - The major high paying tech companies are expanding mostly outside of the area. The fresh batch of big tech companies, outside of Airbnb, have an unclear path forward. - Subprime lending, interest rates, the current PEs of REITS etc. seem to indicate an impending housing contraction. So interestingly, dumb money (the consumer lending market) is pricing in growth while the smart money is indicating a contraction... - A lot of VC backed companies are looking bubbly, so if you are at an actually profitable tech company in the area, your relative purchasing power for housing would likely improve if the bubbly companies went under.
- tjr225 7y ago
  I ended up buying, but in a low cost of living area. In spite of the high wages possible equity it still seems risky/unfeasible to enter Seattle's housing market right now. First I would have to get lucky that a 400k house/condo would appear on the market. Then I would have to come up with 40k for small down payment on the cheapest house/condo in the metro area. Assuming I wasn't outbid by a developer or someone with more money than myself, I'd then have a nearly 2k a month mortgage - in addition to any maintenance/repair costs we might(will) incur. If I or my wife lost either of our jobs that would be a stretch, and we have pretty good jobs. Our family is all 2500 miles back east. Too much to lose. Maybe someday.
  - toomuchtodo 7y ago
    You made the right decision. Pickup a condo cheap when a dip happens, but you’re insulated from a downturn. Patience is an investor’s best friend. This is how I built my real estate portfolio over the last decade.
- unstatusthequo 7y ago
  I am staying far clear of buying until reason regains control. Feels bubbly. Winter is coming.
ARZ3 7y ago
So, next thing like in "Big Short" in 22 months?
fencepost 7y ago
Is some of this in the category of "looking for new business areas as signs of possible recession loom?" Between the yield curve inversion coverage and concerns about trade war impacts I could easily see concerns and people trying to get things started while it's possible to do so.
JackFr 7y ago
With respect to MBS pass throughs, 'conventional' means securitized through Fannie or Freddie. The opposite of 'conventional' isn't 'unconventional' its Ginnie Mae.
tathougies 7y ago
As someone who is interested in buying a home. This scares me. We have lots of money saved for our down payment, but I don't want to end up in a bidding war with someone who isn't as good financially, and then end up purchasing for more than the house is really worth. Also, cheap money inflates the prices of homes anyway. Grumble grumble... we will have to stay disciplined and be honest with ourselves as to what the home is truly worth to us.
- pickle-wizard 7y ago
  I bought my house in Austin 4 years ago in a pretty hot market. The advice I can give is don't let yourself get emotional. If you get outbid on a house, there will always be another one you can bid. I ended up putting in offers on 8 houses before I didn't get out bid.
  - JMTQp8lwXL 7y ago
    I've been watching one particular neighborhood within my city (to be more specific, a specific section within a neighborhood), and it's had about 4 sales in the past 3 years. I can only imagine how many of those were investors were deep pockets, and if I'll ever have my day to compete with them. In the meantime, I'll continue building my down payment fund. The neighborhood is predominantly aging Boomers, so it's possible in a decade there will be increasing sales volume, providing a better opportunity to get in.
- TheIronYuppie 7y ago
  In many ways, if you can wait, this is good for you. It means at some point in the fairly near future, people will take advantage of this, the lenders will realize they made a terrible mistake, a crash will happen, and prices will deflate a lot. Save even harder now :)
adanto6840 7y ago
My question is, who is to say that X "FICO Score" correlates to anything too meaningful -- or that the score itself has not become harder or easier to obtain? Perhaps the data exists on this, but to my unresearched mind there's a lot of "fudging" potential within it all by itself. For instance, maybe the current 'borrower state' that gets you a 690 previously would have given you a 725; or maybe it's the opposite. I understand how averages work, but is there any oversight or auditing done on the rating agencies and the ratings themselves? It just seems ripe for 'gaming' at that level IMO; if banks need to sell financial products and they buy the ratings from the agencies, surely they can lean on an agency to 'fudge' numbers one direction or the other (I'm speaking in aggregates here)? Anecdotally, every time I look at my credit score I cringe -- I've never carried much debt, have always paid it off on time or early, and yet my credit score stays somewhat low, seemingly because I largely don't participate in "the system". Furthermore, every time I've ever applied for credit I end up with scores (and offers of credit) far in excess of the numbers I see when I either get my 'free credit report' from the 3 agencies, and they're similarly different than the numbers I see if I pay to see my reports from the 3 agencies. I don't know, it just seems like a "chicken-egg" problem to me, and one where the rating agencies are perhaps incentivized in a way that does not align with the "economy" as a whole -- and is instead much more closely with their high-value customers (lenders). I also feel like there's so much "missing data", which could probably tell quite the tale, for instance, if someone such as Google was to begin a 'ratings agency'. Half of my finds that to be a scary thought, the other half of me thinks that we'd probably end up with objectively better outcomes, both economically and probably, in many cases, even individually too.
- adanto6840 7y ago
  Hrm -- I'd love to be enlightened! I didn't word it very well, but my questions are primarily: What oversight is there on the ratings agencies themselves? How do we know the distribution of scores is the same today as 10 years ago (and proportionate to credit-worthiness)? Is there anything that prevents credit-ratings companies from under/over valuing the credit-worthiness for large swaths of the population? Is there historic data available to correlate "consumer credit score" to distressed notes -- and can that be done in a forward-looking manner, to exclude credit score 'fudging' as a factor, and to better be able to know that it's apples-to-apples comparison historically speaking. Otherwise, could it not simply be that borrowers previously known as higher-quality borrowers are simply being rated more poorly/cautiously, for instance? I'm not saying that is the case, but I've always felt that the incentives seemed strange. Are credit rating agencies paid (by lenders) based upon their prediction accuracy?
throwaway38501 7y ago
Throwaway account for reasons that will be clear. Few years ago, used to be have a 820+ credit score, earning £30k a year, had one barely used credit card that was always fully paid off, I would struggle to get approval for loans or overdraft, etc. My depression and anxiety came back, got into reckless behaviour and drugs for a while, three credit cards, payday loans, random holidays on credit for no reason, down to 400s or so now. My banking app has started aggressively suggesting mortgages to me since last month, every time I open the app. To those worried I'm turning things around, cut down on drugs quite a bit, payday loans all paid off, £2k left in credit card debt and will start earning £60k a year once I start my new job next month.
luxuryballs 7y ago
Man I wish someone would give me a “risky deal” I am totally good for it but I just don’t have a decent enough down payment. Paying $2000/mo for rent sucks.
- zifnab06 7y ago
  I bought my place at a ~5% interest rate for 3% down (about 20k). I'll have PMI for a few years but...well, it's nicer than renting.
- crazyivan2008 7y ago
  I didn't have the credit score to qualify for a mortgage 5 years ago, and the house we were renting was being sold. We found a private lender and paid $150k for a nice little home in the Austin suburbs - $20k down and 7.9%.. I know, it's a crazy high rate but I'm so grateful that the guy trusted us. My credit score is now > 760 and we're closing this week on a 10-year refinance at 3.5%.
rossdavidh 7y ago
So, is it just me, or have we as a society/economy learned absolutely nothing from the Fiscal Crisis?
jayyeh 7y ago
Coincidentally chatted with an expert in this space recently and he talked about the feast and famine cycles for the mortgage lending business. The sentiment was that we are definitely feasting and there wasn't much indication of a near term change to famine. Somewhat tangential comment but feels like it is in line with OP article...
bransonf 7y ago
Off topic, but ?mod=rsswn in the url allows me to access any article for free on WSJ.
- banglaman 7y ago
  Thanks for the tip
xivzgrev 7y ago
Eventually the piper needs to be paid. If people are taking more measured risks in search of growth vs outlandish, then eventually we will see a gradual contraction vs sharp correction. They will expand bit by bit into risky waters, get hurt a little, but and pull back, but not so sharply. Or maybe everyone is just fooling themselves that this time will be different
vagab0nd 7y ago
We were planning to start (our first) small business, which would require locking in some capital. I'm worried about the future of the economy, and have been thinking about putting it off. I know a lot of people say don't time the market, but I feel this is a bit different from timing the market in the context of investing. What should I do?
- thehappypm 7y ago
  There's always a million reasons not to do something. Vague economic fears should rank low on the list.
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datavirtue 7y ago
Banks have worked with the credit reporting companies to factor out medical debt and medical debt default/collections from FICO scores. I recently did a refinance and not only did they not say anything about lingering medical collections they didn't mention about $10k in back taxes that were obviously on my tax returns. I remember getting raked over the coals on this stuff fifteen years ago. They always required me to pay off any outstanding taxes or past collections back then.

203 points by spking 7y ago

apo 7y ago

> Some $2.5 billion worth of subprime loans, those with FICO credit scores below 690, ended up in mortgage bonds in the first quarter of 2019. That is more than double a year earlier and the highest level since the end of 2007, according to Inside Mortgage Finance. There was $1.9 billion worth of subprime mortgage bonds in the second quarter. Statements like this are hard to evaluate without knowing the denominator: the total value of new mortgage bonds in each period. All too often, an author who should know better throws the reader a scrap like the following sentence: > The market for unconventional home loans is still tiny compared with the rest of the mortgage market as well as its precrisis past, when unconventional borrowing peaked at more than $1 trillion. But this still doesn't convey what percentage of the loans are to sub-690 FICO borrowers. I see this all the time and wonder to what extent it has contributed to mistrust of the traditional media. If we find out that the percentage in 2019 is 1% but in 2007 it was 56%, that casts the entire story in a different light.

ErikAugust 7y ago
"That made him an appealing borrower to an unconventional lender, according to Tom Jessop, a loan consultant at New American Funding. Mr. Jessop arranged a $675,000 loan on the $1.1 million property, leaving the lender with a significant buffer should Mr. Licht default." Also, this is a TERRIBLE example of a pending subprime crisis. A guy borrows $675K on a $1.1 million property.
- deleted 7y ago
  [deleted]
- throwaway_law 7y ago
  >Also, this is a TERRIBLE example of a pending subprime crisis. A guy borrows $675K on a $1.1 million property. Well isn't the point that you/they are making that determination on equity alone? As we saw in 2008 all that equity can disappear in a blink of an eye. Equity has no bearing on ability to repay. So before deciding if this is a good or bad loan wouldn't we need to know his outstanding debt to income ratio? And neither Equity, or ability to repay (debt/income ratio) has anything to do with subprime lending or a subprime lending crisis. Subprime generally means enticing debtors with interest rates below prime, with a loan that will adjust to above prime (and many times even into a single balloon payment at the end which statistically almost no American can make). No one should qualify for such loans on the basis "you may be able to refinance again at the end to avoid the balloon payment", if you don't have the cash on hand to pay the balloon payment, you shouldn't qualify for these types of loans.
  - mrfredward 7y ago
    A loan at 95% loan to value is risky because a decline in the home's value for any reason, even just price fluctuations in a normal economic cycle, could put the loan underwater, and the bank would get less than the loan amount in foreclosure. At 61% loan to value (the example above), it would take some sort of catastrophe not covered by the home owner's insurance for the bank to not get the principal back, even if the borrower never makes a mortgage payment. Depending on local laws, the bank might be out some legal and administrative fees.
  - rconti 7y ago
    1. SOME of the equity can disappear in the blink of an eye. The lender has a nice cushion when the buyer puts down 40%. That's hardly considered risky, which is why this is a terrible example. 2. Subprime refers to the class of borrower, typically based on their less-than-ideal credit scores. The term does not mean that the bank is offering a rate below the prime interest rate to "trick" potential borrowers into taking on debt.
    - throwaway_law 7y ago
      >The term does not mean that the bank is offering a rate below the prime interest rate to "trick" potential borrowers into taking on debt. Its not a trick, just something the Borrower's en mass did not understand. They just understood the initial low payments, anyway as I replied above, leading to the mortgage crisis over 90% of subprime loans were ARMS that started off below prime and gradually increased. I did use the word "generally" because its not all, but I think 90%+ is a good use of generally.
      - ryacko 7y ago
        It is safe to say that most people don’t understand algebra. In theory the banks didn’t put a proper interest rate on the loan, since interest rates are mainly to compensate for the risk of lending to the borrower. Although it doesn’t matter since the banks bundled the mortgages together, sold them to each other, and were bailed out.
- JackFr 7y ago
  It's only worth $1.1 million when someone pays that.
  - kube-system 7y ago
    Yes, that's how everything is valued. This is why transaction data is used to determine valuations of just about anything.
tjpaudio 7y ago
I believe the news here is a resurgence of growth in a mortgage type that has otherwise been declining or stagnant the last 10 years, not so much an alarm about the current state of affairs. So what you said is correct and all, but I think you miss the point.
rayiner 7y ago
The problem is that most journalists are innumerate. As Matt Yglesias notes, "many reporters and editors don't really understand what they're doing. Reputable colleges hand out degrees to people who have almost no understanding of quantitative methods." [1] These journalists see the numbers as garnishes on a narrative point. They're not trying to put the numbers in some sort of mathematical context to draw sound conclusions. They may not even realize that there is a difference between using numbers for garnish and deriving meaning from numbers. [1] https://www.theatlantic.com/politics/archive/2007/12/innumeracy/47581 https://www.theatlantic.com/politics/archive/2007/12/innumer....
- xenocyon 7y ago
  Calling the absolute numbers re subprime loans a "garnish" is subjective at best and wrong at worst. Even if the subprime-to-prime ratio hasn't changed much, a large increase in the ballooning subprime total may still be newsworthy in its own right.
  - fuzz4lyfe 7y ago
    >Even if the subprime-to-prime ratio hasn't changed much, a large increase in the ballooning subprime total may still be newsworthy in its own right. Wouldn't the news there be that the total number of mortgages have grown dramatically? Unless you have a narrative to push that is.
    - xenocyon 7y ago
      The question is how large the dollar risk of default is.
- ChuckMcM 7y ago
  Exactly this, and then there are people who exploit this in order to skew perceptions as described in "Proofiness: How you're being fooled by the numbers."[1] [1] https://www.amazon.com/Proofiness-Youre-Being-Fooled-Numbers/dp/0143120077 https://www.amazon.com/Proofiness-Youre-Being-Fooled-Numbers...
- 7y ago
js2 7y ago
I don't understand this criticism of the article. The point of the article is that lending standards are starting to loosen. The article provided a handful of numbers and one anecdote. The article title and first sentence are: Mortgage Market Reopens to Risky Borrowers. Strict lending requirements that were put in place after financial crisis are starting to erode. The risky mortgage is making a comeback. Supporting facts are: - "Borrowers took out $45 billion of these unconventional loans in 2018, the most in a decade, and origination is on track to rise again in 2019." - "Unconventional loans are largely being extended by nonbank mortgage lenders. But big banks have found another way in ... Some $2.5 billion worth of subprime loans, those with FICO credit scores below 690, ended up in mortgage bonds in the first quarter of 2019. That is more than double a year earlier and the highest level since the end of 2007." Then there's the single anecdote about a borrower with a sub-690 FICO. Is sub-690 arbitrary? Yes. Is this borrower an example of an egregious loan? No. But is this someone who could not have gotten a loan previously? Yes. It supports the article. The article is fair in its assessment: - "Big banks’ mortgage arms are still avoiding riskier borrowers, leaving them to nonbank lenders. Still, the increase in unconventional loans shows that lenders are looking farther afield for customers." Let me put it another way: at what point should the WSJ write an article like this? The 2008 financial crises cratered the economy after previous lending standards became lax. We put regulations in place to prevent that from happening again. Those regulations are starting to be weakened again. I want to know that.
- qroshan 7y ago
  "The most in a decade" is where all the shenanigans of the article lie. Let's say Peak 2006, Sub-Prime Loan was $600B Let's say the average, natural Sub-Prime Loan is $100B After the crash, may be the market over-corrected way to much and slowly crawling back to it's natural $100B. With this perspective, the narrative becomes totally different. The lending standard is still too tight and still way below what the natural / average economy support. Remember there has to be a balance between exuberance and over-cautious. A journalist should find out, what the happy medium is That's why numerical literacy is important
  - darawk 7y ago
throwaway_law 7y ago
> The market for unconventional home loans is still tiny compared with the rest of the mortgage market as well as its precrisis past, when unconventional borrowing peaked at more than $1 trillion. And the number of defaulted loans/foreclosures was tiny compared to the total toxic (sorry, not letting them re-brand toxic loans as unconventional) assets. However, that tiny number of defaults/foreclosures, was enough to overturn the entire economy...but for Bush's $1T+ bailout followed by Obama's $1T+ bailout, banks and wall street would have crumbled, instead the got to consolidate with their new taxpayer cash on hand. The banks and wall street recovered, of course homeowners and American working class taxpayer never did, so its time to run the whole scam again and get those devious working class American's who escaped 2008 unharmed.
- zaroth 7y ago
  FYI, the foreclosure rate spiked from a historical rate around 0.5% to around 2.3%, which is actually a massive increase.
dawsmik 7y ago
The FICO score is only one consideration. The biggest problem with the loans in 2007 was lack of verification of income and buyers qualifying on a mortgage amount that would eventually go up. A 650 FICO borrower with a good job, downpayment and an affordable monthly payment is a pretty good risk.
- rockinghigh 7y ago
  My assumption is that someone with a score less than 700 probably had late payments on some of their debt.
  - mtanski 7y ago
    FICO score for mortgages is not the same score as the modern FIDO score. The mortgage score is often what's called FICO v2 and the modern one is something like v10. They've even branded their different old versions as Insurance score, Auto score, Mortgage score and those industries kind of stick with it. To illustrate why this matters. My modern FICO score is something like high 700s, low 800s (depending on credit data vendor). My V2 score is like 690. How did that happen? Turns out when I moved out from my last house (5 years ago) and canceled my internet with Time Warner they failed to charge me $31 which was always set to auto-play. I actually settled 5 months after the move when TW sent me to collections. The shady collection agency promised to remove it off the record if I paid (they didn't). Instead, it shows up as a 5 year old, $31 late payment, paid in full. How did I find out, while looking to refinance at these current rates. I'm getting this sorted out now. Both TransUnion and Experian got it fixed in a few business day.... fucking Equifax cannot get their shit together 3 weeks later. For me it's a hassle, annoyance and wasted time. But as you can see it can impact real people and the score methodology is pretty dumb. It's insane that a 5 year old, paid in full debt for $31, that's not even my fault drags my credit score down ~100 points (that's what it is once corrected) and prevents from getting a refi. Doesn't matter that all my other credit cards are always paid in full, no late payments on mortgage, car, insurance ... which all add up to several magnitudes more then $31 over the 5 years.
  - deleted 7y ago
    [deleted]
dawhizkid 7y ago
I didn't realize 690 was the cut off for "subprime." I thought that was generally considered "ok/good" but not really that bad.
- selimthegrim 7y ago
  I guess they’ve tightened the screws a bit - in principle
lostphilosopher 7y ago
> wonder to what extent it has contributed to mistrust of the traditional media. Is anyone's experience that "non traditional media" or news sources are more mathematically rigorous? I understand that all media has bias, lots of content is written by non experts, and presenting data (especially statistical data) is really hard and rarely done well. But any "alternative" or "non mainstream" news source I've seen is _way_ worse at those things than traditional mainstream sources like NYT, WP, Economist, Foreign Policy, NPR, 538, etc. Even while those sources still make noticeable blunders. (Curious because I've seen this statement before.)
- rco8786 7y ago
  Yea agreed. It’s almost a straw man of sorts where there’s this proverbial “they” that gets it right and uses rigorous standards that the traditional media falls short of. But I’ve yet to find these sources of information in the wild.
Goronmon 7y ago
I see this all the time and wonder to what extent it has contributed to mistrust of the traditional media. I'd say it's more likely that people are mistrustful of the media because the media will say things they either don't like or don't agree with personally, rather than a specific concern about articles lacking certain context on complicated topics.
- TomMckenny 7y ago
  Exactly so. That and continuous denunciation of the free press by a certain category of new politicians. Actually, this article differs in no way from similar articles written since printed news was invented. Which of course means that all the other criticisms, including imprecision, are still valid. It just means that it is not the source of the recent spike in media dislike.
sjg007 7y ago
Less than 690 is subprime? I would’ve thought closer to 640...
- SilasX 7y ago
  740 can be subprime if you have a short credit history. Source: me.

quotemstr 7y ago

What could possibly go wrong?

whiddershins 7y ago

For all the negative rhetoric around subprime loans, they enabled me and others I knew who were young and self employed to own homes. They aren’t always bad, they aren’t always crazy balloon loans or predatory instruments. Sometimes they allow someone who has an alternative life circumstance to not be excluded.

opportune 7y ago
Yeah, subprime lending often makes a lot of sense for the person taking out the loan. If the rents are high relative to expected mortgages/recurring costs in your area, it will pay itself off very quickly (minus the risk of default you open yourself off to). And it allows you to lock in a monthly payment for potentially decades, which has a massive amount of value by itself. It also makes a lot of sense if you have reasonable expectation of a large amount of income growth / expense decrease that will free up cash flow. For example, if a household member is finishing up school or in training for a more lucrative field (like an MD in residency) it might make sense to be house poor for a small period of time to lock in rates, take advantage of a nice buying opportunity, etc. Or if you are about to be released from child support / settlement obligations, and thus will experience some increased cashflow, could also make sense. It's not fair to assume that everyone with poor credit or lack of capital for a downpayment is a bad person to lend to, HOWEVER, in the general case it's probably true that in the absence of impending changes in household finances, an inability to get good credit or accumulate savings is a negative signal. And unless you are a small lender, your subprime loans probably aren't discriminating against people who are about to increase income/decrease expenses while building better credit, and people who just suck with money.
- bachmeier 7y ago
  > And it allows you to lock in a monthly payment for potentially decades, which has a massive amount of value by itself. Well, that might be a good thing when house prices are appreciating at a crazy rate, but it also locks you in when the housing market and/or the economy crashes. If you're renting, you lose your job and you're stuck with your lease for maybe another six months (assuming you don't break it). Once you buy a house, you're stuck with it until you can sell it or foreclosure, even if the price goes down or you lose your job.

notTyler 7y ago

There are commercials and ads everywhere on how easy it is to get a mortgage from Rocket / Guaranteed Rate etc. Ever since that started happening I kind of assumed this was coming down the pipe.

SilasX 7y ago

Negative yielding bonds that people only buy in hopes of unloading onto a bigger sucker?[1] Pre-crisis level of subprime lending? Time for the financial equivalent of going to the Winchester to wait for this to blow over. [1] https://news.ycombinator.com/item?id=20760222 https://news.ycombinator.com/item?id=20760222

driverdan 7y ago
> Pre-crisis level of subprime lending? Nope, not there yet.

opportune 7y ago

Is anybody else making the supposedly foolish decision to time the housing market? I am financially ready to purchase my first home, currently living in the bay area, but I think right now just looks like a bad time. - A lot of housing price growth is seemingly "priced in" since rents for condos/apartments significantly lower than total monthly ownerships costs (mortgage+hoa+insurance+taxes+etc.), even with 20% down. - The major high paying tech companies are expanding mostly outside of the area. The fresh batch of big tech companies, outside of Airbnb, have an unclear path forward. - Subprime lending, interest rates, the current PEs of REITS etc. seem to indicate an impending housing contraction. So interestingly, dumb money (the consumer lending market) is pricing in growth while the smart money is indicating a contraction... - A lot of VC backed companies are looking bubbly, so if you are at an actually profitable tech company in the area, your relative purchasing power for housing would likely improve if the bubbly companies went under.

tjr225 7y ago
I ended up buying, but in a low cost of living area. In spite of the high wages possible equity it still seems risky/unfeasible to enter Seattle's housing market right now. First I would have to get lucky that a 400k house/condo would appear on the market. Then I would have to come up with 40k for small down payment on the cheapest house/condo in the metro area. Assuming I wasn't outbid by a developer or someone with more money than myself, I'd then have a nearly 2k a month mortgage - in addition to any maintenance/repair costs we might(will) incur. If I or my wife lost either of our jobs that would be a stretch, and we have pretty good jobs. Our family is all 2500 miles back east. Too much to lose. Maybe someday.
- toomuchtodo 7y ago
  You made the right decision. Pickup a condo cheap when a dip happens, but you’re insulated from a downturn. Patience is an investor’s best friend. This is how I built my real estate portfolio over the last decade.
unstatusthequo 7y ago
I am staying far clear of buying until reason regains control. Feels bubbly. Winter is coming.

ARZ3 7y ago

So, next thing like in "Big Short" in 22 months?

fencepost 7y ago

Is some of this in the category of "looking for new business areas as signs of possible recession loom?" Between the yield curve inversion coverage and concerns about trade war impacts I could easily see concerns and people trying to get things started while it's possible to do so.

JackFr 7y ago

With respect to MBS pass throughs, 'conventional' means securitized through Fannie or Freddie. The opposite of 'conventional' isn't 'unconventional' its Ginnie Mae.

tathougies 7y ago

As someone who is interested in buying a home. This scares me. We have lots of money saved for our down payment, but I don't want to end up in a bidding war with someone who isn't as good financially, and then end up purchasing for more than the house is really worth. Also, cheap money inflates the prices of homes anyway. Grumble grumble... we will have to stay disciplined and be honest with ourselves as to what the home is truly worth to us.

pickle-wizard 7y ago
I bought my house in Austin 4 years ago in a pretty hot market. The advice I can give is don't let yourself get emotional. If you get outbid on a house, there will always be another one you can bid. I ended up putting in offers on 8 houses before I didn't get out bid.
- JMTQp8lwXL 7y ago
  I've been watching one particular neighborhood within my city (to be more specific, a specific section within a neighborhood), and it's had about 4 sales in the past 3 years. I can only imagine how many of those were investors were deep pockets, and if I'll ever have my day to compete with them. In the meantime, I'll continue building my down payment fund. The neighborhood is predominantly aging Boomers, so it's possible in a decade there will be increasing sales volume, providing a better opportunity to get in.
TheIronYuppie 7y ago
In many ways, if you can wait, this is good for you. It means at some point in the fairly near future, people will take advantage of this, the lenders will realize they made a terrible mistake, a crash will happen, and prices will deflate a lot. Save even harder now :)

adanto6840 7y ago

My question is, who is to say that X "FICO Score" correlates to anything too meaningful -- or that the score itself has not become harder or easier to obtain? Perhaps the data exists on this, but to my unresearched mind there's a lot of "fudging" potential within it all by itself. For instance, maybe the current 'borrower state' that gets you a 690 previously would have given you a 725; or maybe it's the opposite. I understand how averages work, but is there any oversight or auditing done on the rating agencies and the ratings themselves? It just seems ripe for 'gaming' at that level IMO; if banks need to sell financial products and they buy the ratings from the agencies, surely they can lean on an agency to 'fudge' numbers one direction or the other (I'm speaking in aggregates here)? Anecdotally, every time I look at my credit score I cringe -- I've never carried much debt, have always paid it off on time or early, and yet my credit score stays somewhat low, seemingly because I largely don't participate in "the system". Furthermore, every time I've ever applied for credit I end up with scores (and offers of credit) far in excess of the numbers I see when I either get my 'free credit report' from the 3 agencies, and they're similarly different than the numbers I see if I pay to see my reports from the 3 agencies. I don't know, it just seems like a "chicken-egg" problem to me, and one where the rating agencies are perhaps incentivized in a way that does not align with the "economy" as a whole -- and is instead much more closely with their high-value customers (lenders). I also feel like there's so much "missing data", which could probably tell quite the tale, for instance, if someone such as Google was to begin a 'ratings agency'. Half of my finds that to be a scary thought, the other half of me thinks that we'd probably end up with objectively better outcomes, both economically and probably, in many cases, even individually too.

adanto6840 7y ago
Hrm -- I'd love to be enlightened! I didn't word it very well, but my questions are primarily: What oversight is there on the ratings agencies themselves? How do we know the distribution of scores is the same today as 10 years ago (and proportionate to credit-worthiness)? Is there anything that prevents credit-ratings companies from under/over valuing the credit-worthiness for large swaths of the population? Is there historic data available to correlate "consumer credit score" to distressed notes -- and can that be done in a forward-looking manner, to exclude credit score 'fudging' as a factor, and to better be able to know that it's apples-to-apples comparison historically speaking. Otherwise, could it not simply be that borrowers previously known as higher-quality borrowers are simply being rated more poorly/cautiously, for instance? I'm not saying that is the case, but I've always felt that the incentives seemed strange. Are credit rating agencies paid (by lenders) based upon their prediction accuracy?

throwaway38501 7y ago

Throwaway account for reasons that will be clear. Few years ago, used to be have a 820+ credit score, earning £30k a year, had one barely used credit card that was always fully paid off, I would struggle to get approval for loans or overdraft, etc. My depression and anxiety came back, got into reckless behaviour and drugs for a while, three credit cards, payday loans, random holidays on credit for no reason, down to 400s or so now. My banking app has started aggressively suggesting mortgages to me since last month, every time I open the app. To those worried I'm turning things around, cut down on drugs quite a bit, payday loans all paid off, £2k left in credit card debt and will start earning £60k a year once I start my new job next month.

luxuryballs 7y ago

Man I wish someone would give me a “risky deal” I am totally good for it but I just don’t have a decent enough down payment. Paying $2000/mo for rent sucks.

zifnab06 7y ago
I bought my place at a ~5% interest rate for 3% down (about 20k). I'll have PMI for a few years but...well, it's nicer than renting.
crazyivan2008 7y ago
I didn't have the credit score to qualify for a mortgage 5 years ago, and the house we were renting was being sold. We found a private lender and paid $150k for a nice little home in the Austin suburbs - $20k down and 7.9%.. I know, it's a crazy high rate but I'm so grateful that the guy trusted us. My credit score is now > 760 and we're closing this week on a 10-year refinance at 3.5%.

rossdavidh 7y ago

So, is it just me, or have we as a society/economy learned absolutely nothing from the Fiscal Crisis?

jayyeh 7y ago

Coincidentally chatted with an expert in this space recently and he talked about the feast and famine cycles for the mortgage lending business. The sentiment was that we are definitely feasting and there wasn't much indication of a near term change to famine. Somewhat tangential comment but feels like it is in line with OP article...

bransonf 7y ago

Off topic, but ?mod=rsswn in the url allows me to access any article for free on WSJ.

banglaman 7y ago
Thanks for the tip

xivzgrev 7y ago

Eventually the piper needs to be paid. If people are taking more measured risks in search of growth vs outlandish, then eventually we will see a gradual contraction vs sharp correction. They will expand bit by bit into risky waters, get hurt a little, but and pull back, but not so sharply. Or maybe everyone is just fooling themselves that this time will be different

vagab0nd 7y ago

We were planning to start (our first) small business, which would require locking in some capital. I'm worried about the future of the economy, and have been thinking about putting it off. I know a lot of people say don't time the market, but I feel this is a bit different from timing the market in the context of investing. What should I do?

thehappypm 7y ago
There's always a million reasons not to do something. Vague economic fears should rank low on the list.

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datavirtue 7y ago

Banks have worked with the credit reporting companies to factor out medical debt and medical debt default/collections from FICO scores. I recently did a refinance and not only did they not say anything about lingering medical collections they didn't mention about $10k in back taxes that were obviously on my tax returns. I remember getting raked over the coals on this stuff fifteen years ago. They always required me to pay off any outstanding taxes or past collections back then.