15 ms·
More Subprime Borrowers Are Missing Loan Payments
- scarface74 4y agoWhy is everyone talking about mortgages when the article talks about everything but mortgages? > Borrowers with limited or troubled credit histories are defaulting on credit cards, car loans and personal loans
- wmeredith 4y agoBecause people see the word "subprime" and think of mortgages.
- rco8786 4y agoAnd because the person who wrote the headline is well aware of that fact.
- scarface74 4y agoMy quote showing it had nothing to do with mortgages, was the subheading. They weren’t attempting to bury the lede.
- drzoltar 4y agoActually, I’m worried about techies specifically. It’s (was) surprisingly easy to count RSUs as income collateral, especially since the last 5 years have shown such a consistent source of income. Now that many RSUs are in the gutter, combined with an ARM, I don’t get how some techies will make ends meet especially in places like the Bay Area. Anyone know the actual magnitude of this problem though?
- notyourwork 4y ago> It’s surprisingly easy to count RSUs as income This is irresponsible in my opinion. (I'm sure some disagree.) Personally, I took the conservative approach where during my home purchase we made sure our income could afford a mortgage. Our RSU's are a bonus and when they come we can pay down our mortgage faster, go on fun vacations, or do all sorts of other things. Currently, I'm on pace to pay off my 30-year mortgage in 8-10 years by putting half of my RSU's towards my mortgage on top of the monthly payments.
- arcticbull 4y ago> Currently, I'm on pace to pay off my 30-year mortgage in 8-10 years by putting half of my RSU's towards my mortgage on top of the monthly payments. This is not a great idea if you have a 30-year fixed mortgage with an APR below inflation. You're better off not paying it off, and instead setting aside the cash you would have used. Even in like a Series I bond which is currently paying 9% APR. Money loses value every year, and it's losing value faster than your mortgage is going up in cost. Therefore, why would you pay it off today using money that's worth more, when you can pay it off in the future using money that's worth less? Especially if you can park your money in something that tracks inflation. Paying off your mortgage early is one of those things folks are always told is good - it's really not. That's a free 9%+ return on capital. You're giving up free double-digit returns by paying off your mortgage early.
- notyourwork 4y agoYou're sort of ignoring the point which is I get to chose how to allocate my money by not factoring my RSU's into my upper limit for what I can afford. I can keep my RSU's as they vest, or I can pay ahead on my mortgage or a combination of things. If you're in tech and paying your mortgage depends on your salary and your RSU's you are not being financially responsible.
- arcticbull 4y agoNow all that I'm with you on!
- danans 4y ago> Paying off your mortgage early is one of those things folks are always told is good - it's really not. It only makes sense if there is a legitimate fear that someone might otherwise waste the money on frivolities - for many people saving and the self control it requires is very challenging.
- digisign 4y ago
- nkingsy 4y agoI was explicitly told by a mortgage broker in January that RSU's don't count in income calculations. Made the difference between me qualifying and not (for a 10% down jumbo, which was admittedly a stretch).
- drzoltar 4y agoTo clarify I’m not sure it counts directly to income, but it starts to be taken into account when there is substantial salary and other investment funds, especially if you are right on the border of the salary/loan ratio. Someone else mentioned it’s more like collateral
- desmosxxx 4y agoProbably depends on the broker and market. We bought in the bay area and RSU were counted as income (and fairly certain 1:1 by some lenders). And in some other areas they wont look at them at all is my understanding.
- Androider 4y agoFor mortgages, lenders will entirely or heavily discount RSUs for income calculations. However not discouraged by that fact, some tech folks are known to instead have taken out regular non-mortgage variable rate loans with their RSUs as collateral. So there are folks, who bought a house "all cash" with loans backed by stock collateral that is now worth much less. Those types of loans also have a double-digit APR, which might have been fine if you thought you could flip your house for 30-100% in the near future. In the current housing marking it is like putting everything on black at a casino, it might work out, but it might be also be a complete catastrophe.
- arcticbull 4y ago> Those types of loans also have a double-digit APR, which might have been fine if you tought you could flip your house for 30-100% in the near future. Nah not all of them. Margin loans were as low as 0.5% APR, and currently not much higher than that.
- brewdad 4y agoWhere are you seeing a margin loan rate that low today? Fidelity's current best rate (for over $1MM) is 4.75%. Their base rate is actually 7.85%.
- jmillikin 4y agohttps://www.interactivebrokers.com/en/trading/margin-rates.php https://www.interactivebrokers.com/en/trading/margin-rates.p... IBKR charges 2.33% base rate, reducing to 1.58% for balances over 1 million USD.
- arcticbull 4y agoInstitutional rates are even lower at, for instance, PMR.
- JumpCrisscross 4y ago> lenders will entirely or heavily discount RSUs for income calculations Multiple lenders, when I was shopping for a mortgage in October, encouraged me to take a variable-rate ARM with a balloon payment when I mentioned my options. (I declined, opting for a 15-year standard instead.) For the lender, as long as you can refinance in 5 years, the risk is minimal. For a borrower, this structure could easily wipe out one's savings.
- dhosek 4y agoThose of us who’ve lived through more than a few years of working life value stock options and RSUs and anything else at zero until it’s transformed into cash.
- whimsicalism 4y agowell that's obviously nonsense
- ActorNightly 4y agoTechies have zero excuse for any sort of financial trouble. Not only has the job market has been insane (and still is for the most part), the amount of money you make, even with previous RSU distributions should allow anyone in the field to save enough money to ride out a recession. There is however a definite problem of people across all income levels living way above their means.
- scarface74 4y agoI’ve had to go through the mortgage process three times in the last two years when my income was based on a prorated two year signing bonus and a back heavy RSU vesting schedule over 4 years [1]. The first time for a refinance and the second time for HELOC. Both times they would only consider my base. Luckily I lived in a relatively low cost of living area and we weren’t talking about that much by todays standards - a $300K refinance and a $160K HELOC a so my base pay was enough. The third time when I tried to get an investment property, my DTI was too high to qualify based on solely my base. If they had counted my RSU grants even considering the 30%+ YTD decline, it would have been more than enough. I ended up doing a no income documentation loan and paying down the loan by a point. I also had to put 30% down. For the second one, they still questioned why my stated income for 2022 was much lower than my actual income for 2021. I had to re-explain my compensation structure. [1] How do you say which BigTech company you work for without saying which BigTech company you work for.
- sbarbarian 4y agoThe subprime space is really interesting vs mortgages. Like others mention, the due diligence these providers run for these is minimal. The business model has been so successful in recent years because there have been such large numbers of applicants. Even though they approve only a fraction, the sheer volume means their business is booming. This all translates into not having to dig any deeper than credit scores.
- rco8786 4y agoThat doesn’t make any sense. You’re implying that they’re just lending to people with the best credit scores. Which definitioally makes these not subprime loans.
- sbarbarian 4y agoSorry, didn't mean to imply that. Its the best of the worst. You just lower the threshold to hit the volumes / default rate you're comfortable with to make a profit. Subprime is anything lower than 670, so you don't need to go so low.
- wanda 4y agoArticle is essentially paywalled, I'm not in finance and I'm not well-informed (and by my own admission I don't go out of my way to be well-informed), so forgive me if these questions are covered or stupid, but my questions when reading the headline are: 1. Are these subprime loans packaged in CDOs or any other kind of highly-rated derivative instruments? 2. If so, how exposed are the banks this time? What are current leverage limits? 3. Are there swaps on these instruments, and if so, are these positions being taken by the banks that are selling the CDOs? 4. If so, how exposed are the insurance firms? In short, are the conditions in place for a similar event to 07/08? Has any meaningful regulation been introduced that extends beyond the mortgage market? Looking beyond conventional lending, what is the scale of cryptocurrency lending? As I understand it, there's not much in the way of regulation when it comes to cryptocurrency, and I feel like that's probably a recipe for disaster somewhere in the future.
- labrador 4y agoLoan sharks probably aren't getting paid back as much which could explain the rise in assault and murder rates, at least partly
- Threeve303 4y agoA perfect storm of economic and geopolitical conditions… May you live in interesting times indeed.
- quux 4y agohttps://archive.ph/SL4Q4 https://archive.ph/SL4Q4
- yumraj 4y agoI was just thinking about this today. Given the very low interest rates in 21-22 and high prices, a certain percentage of folks would have purchased with a convertible mortgage. Assuming the standard 5-1 and the fact that rates are rising very fast, should we expect a repeat of 2008 in 2026-2027?
- bogomipz 4y agoWhy would someone have opted for for an adjustable rate mortgage that adjusts after 5-7 years when they could have locked in a historic low rate for 30 years?
- localhost 4y agoIn my case it’s because I don’t anticipate being in the house longer than the rate lock period
- bogomipz 4y agoOut of curiosity did you get a 5 o 7 year? What was the differential between adjustable and fixed?
- mrep 4y agoI just got a 10/1 ARM because second home rates spiked recently [0] so the ARM was a lot lower (I think 1.125%) than a 30 year fixed. [0]: https://www.ezhomesearch.com/blog/second-home-mortgage-rates-are-going-up-in-2022/#:~:text=The%20FHFA%20will%20begin%20to,loan%2Dto%2Dvalue%20ratio https://www.ezhomesearch.com/blog/second-home-mortgage-rates....
- UncleOxidant 4y agoI thought adjustable rate mortgages were pretty much dead after '08? Why would anyone get an ARM when rates were in the 3% range for a 30 year fixed mortgage (as they were for several years until recently)?
- 4y ago
- deleted 4y ago[deleted]
- 2Gkashmiri 4y agoso....... good time to wait for the next crash and buy the dip?
- adamsmith143 4y agoTime in the market beats timing the market. You almost certainly aren't going to buy back in at the right time.
- lkjfdslkjf222 4y agoWith what? Dollars that are dipping 8% a year?
- andrewmcwatters 4y agoInteresting you mention this because the US equities market is dropping in value faster than the dollar is right now. :)
- 2Gkashmiri 4y agointerestingly US $ to indian rupee is growing more wider at around 77.8 INR to 1 US$. by that projection, indian rupee is falling so either invest in gold or US$ to beat "indian inflation"... does that make sense?
- vmception 4y agoYes exactly. You can handle inflation for 6 months to 2 years
- onlyrealcuzzo 4y agoIf the hypothesis is that home prices are going down - then dollars are not going down the same amount WRT house prices.
- ryanSrich 4y agoHome prices are not going down. The math just doesn’t work. The demand outweighs the inventory by several orders of magnitude the last time I checked. Rate hikes and inflation won’t have much of an impact.
- ryanSrich 4y agoHow are people with a subprime score even getting a loan? When I took out a mortgage in 2015 and then again in 2017 they scrutinized my entire life. I have no idea how we’ve regressed back to 2008 after years of very strict regulations.
- giantg2 4y agoThe scrutiny may be higher, but the amounts they are approving people for is insane. Like who thinks it's a good idea to approve someone with an $80k income for a $450k mortgage?
- scarface74 4y agoI’m not aware of any mortgages that allow that debt to income ratio for a mortgage. Unless it’s a rental and then the down payment requirements are insane.
- NovemberWhiskey 4y agoA little while ago, when 3% loans were still a thing, a $450K loan over 30 years was a $1,900/month expense. An income of $80K with a $1,900/month in debt is a 29% DTI which is comfortably below the DTI limits for a conforming loan (43-45%). Even at 5.5%, it's still "only" 38% DTI ratio.
- scarface74 4y ago- No one making $80K is going to have money for a $90K down payment so you have to add PMI - $300/month. - you’re also ignoring property taxes and insurance. I pay another $400 a month for that in a relatively low cost of living state and I have a $5K deductible. That 1900 adds up to $2800/month real quickly.
- deleted 4y ago[deleted]
- 4y ago
- aaroninsf 4y agoComment on "ARMs did not cause the 2008 crash." Absolutely true; the question about whether they may cause an imminent one is still a good question. Rhymes-not-echoes, etc. Google cruft suggests that the number of ARMs was < 5% five years ago but has climbed recently, e.g. https://www.nbcnews.com/business/business-news/adjustable-rate-mortgage-demand-doubles-interest-rates-hit-highest-200-rcna26226 https://www.nbcnews.com/business/business-news/adjustable-ra... from April says: "The adjustable-rate mortgage share of applications last week was over 9 percent by loan count and 17 percent based on dollar volume." I would welcome informed comment on what the total outstanding % of loans by count and total volume data looks like, and in particular, insight as to whether the amounts are likely to trigger market disequilibrium...
- bitwize 4y agoQuasi-on-topic anecdote: Amazon used to (and may still) sell these DVD bundles, like 8-12 movies to a pack. There would be a few classics (Ghostbusters or something) mixed in with arrant garbage. The hope was you'd buy the pack for the classics and maybe watch the garbage later because you have it so why not. I used to call this sales strategy "Amazon Subprime". I still think that's one of my cleverest jokes, but unfortunately you might only laugh if you know how the 2008 housing crisis actually started... and the people who do know that are not great in number.
- bee_rider 4y agoThis fall into the class of pun that is both completely perfect, and also incredibly situational. If I have a pun like this, either the situation to use it will never come up, or if it does I will become too excited and flub the delivery. Bravo getting this one out there.
- Srikanth 4y agoThanks for sharing this anecdote. TIL: arrant = complete, utter.
- yardie 4y agoMost people believe 2008 was caused by single mothers (as an example) "buying a home they couldn't afford." The reality is it was the upper-middle class, non finance professionals just thinking they were savvy. When your doctor, dentist, or general contractor gives you financial advice you should run the other way! I see this playing out now with cryptocurrency. Suddenly, everyone is an expert on Bitcoin!
- adamsmith143 4y ago> The reality is it was the upper-middle class, non finance professionals just thinking they were savvy. But also lots of highly educated Ivy League Finance folks who thought they were smarter than the were. Hence Bear Stearns, Lehman Brothers, AIG, Merill Lynch, etc.
- 4y ago