9 ms·

> 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

by 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.

by apo 7y ago

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.