Fact Check on Mortgages
It seems that mortgages aren’t the issue. Really. At least not by themselves. There are not enough owner-occupied home mortgages in the US to cause all this grief, and certainly not enough non-traditional mortgages, even if they all became worthless
The US Census Bureau’s 2005 American Housing Survey has a fine breakdown of US home mortgages. A few numbers (All data US owner-occupied, 2005, in thousands of units. Numbers may not add due to unreported info):
- Total number of owner-occupied dwellings, US: 74,931
- Dwellings owned free and clear: 24,776
- 1st mortgages: 44,652
- Home-equity lump-sum loans: 4,485
- Home-equity Lines of credit: 10,044
- Purchase-money 1st mortgages: 27,592
- Fixed rate, self-amortizing mortgages: 37,392
- Adjustable rate/term/payment mortgages: 3,118
- Loans with private mortgage insurance (PMI): 6,189
- Median line of credit limit: $50,340
- Median line of credit balance: $23,701
- 1st mortgages less than 5 years old: 28,319
- 1st mortgages 30-year term: 29,765
- Current interest rate less than 6%: 22,716
- Current interest rate 6 to 7.9%: 18,891
- Mortgages with balances above $300,000: 3,029
- Mortgages refinanced with cash out: 2,375
- Mortgages with loan-to-value above 90%: 2,935
- Median loan balance: $92,607
- Median refinance cash out: $28,084
- Median loan-to-value: 55.1%
From this we also get the total sum of all US 1st mortgages is $4.13 trillion, with maybe another $400 billion in seconds, lines of credit and home-equity loans (data a bit muddled).
So what does this all mean?
Near as I can tell, assuming that the housing stock isn’t completely Hollywood sets, there is nothing at all wrong with this picture. It looks quite healthy and normal, with no obvious red flags. I had been looking for things like massive lines of credit, or high numbers of unconventional loans, etc. Don’t see them here. Unless this changed radically between 2005-2008, mortgages don’t begin to account for the financial crisis we are in.
If every last mortgage in the USA was a total fraud and worth zero dollars, the most anyone would be out (as of 2005) would be about $4.5 trillion. Yet the feds are already in for seven and a half trillion dollars, with more to come. Lately they have said that buying up the mortgage paper won’t help and they need to shore up the banks directly. Small wonder since the mortgage data seems, um, safe as houses.
No, it seems the problem lies more in what happened when Fannie/Freddie and the banks created mortgage-backed securities, turned them into a alternate currency, and then wrapped them in a poorly-engineered system of derivatives and other hedges. The system broke with the perturbations exceeded the permissible range and then positive feedback took over and pegged everything to zero. But that’s just an engineer’s guess.
But it does not seem like it was the mortgages themselves.
“Unless this changed radically between 2005-2008, mortgages don’t begin to account for the financial crisis we are in.”
There were big changes between 2005-2008.
“the banks created mortgage-backed securities, turned them into a alternate currency, and then wrapped them in a poorly-engineered system of derivatives and other hedges.”
Housing appreciation stopped, people couldn’t refi or flip and the game of musical chairs of passing the sliced and diced tranches of mortgage trash ground to a halt. Whoever was left holding the bag had to take pipe.
Comment by daleyrocks — 11/25/2008 @ 10:25 am
Actually, things DID radically change from 2005-2008. Specifically, the percentage of homes financed by a subprime loan more than doubled, and in poorer and more remote areas they made up close to half of all homeloans written from 2006-2007.
As for overbuilding, it might not be too bad if you look at overall national figures, but building was concentrated in a number of areas. Where I live in Orange County, there wasn’t much overbuilding in the residential sector (although there may have been a bit of overbuilding on the commercial side), but in places like the Coachella Valley more than half the properties sold are foreclosures and there are dozens of residential and commerical projects that are uncompleted because the builders ran out of money and the banks are unwilling to issue loans to complete the last 10-20% of the work because they are concerned about being able to recoup that additional amount. Think about that for a minute. The markets have turned around so sharply banks are hesitant to lend any more money even though they have already lent millions and won’t see dime one of that initial investment until the project in question is completed. However, without subprime borrowers, the demand for new housing either isn’t there or is easily absorbed by all the recent foreclosures.
Comment by Sean P — 11/25/2008 @ 10:37 am
Yes, there are pockets of overbuilding, primarily outside metro areas, but Coachella Valley, Antelope Valley were built at much the same rate earlier, too. If what you are saying is the music stopped, well fine. That happens every recession and the rapidly building outskirts have problems. In 1973-74, that could have been said of Huntington Beach.
The real issue still wasn’t the mortgages, but the debasement of the bundled mortgage-currency and the effect that debasement had on the fast-moving (and aptly-named) derivatives. When you have something known to increase in risk during downturns you don’t wrap it up with a brittle system.
If every chancy mortgage in the country — lets be REALLY generous and say 20% of them — went bust, you could have paid them off with maybe $1 trillion (and still owned value in those houses). We are so far past that and still not to daylight that it is funny.
It isn’t the mortgages, it’s what was done with them.
Comment by Kevin Murphy — 11/25/2008 @ 10:56 am
“It isn’t the mortgages, it’s what was done with them.”
Kevin – I don’t think I buy your argument. If the mortgages are money good, so are the derivatives written on them. Once the mortgages start heading south in higher than expected numbers, craters start appearing in peoples’ balance sheets creating unanticipated systemic stress. It may ultimately turn out that the storm can be weathered, but not without eliminating a number of players who took greater risks than others.
Comment by daleyrocks — 11/25/2008 @ 11:25 am
Daleyrocks–
Yes, if everything’s good, everything’s good. But mortgages go south in every recession. There’s always a period at the end of the boom where silly mortgages get written. You would not believe the junk I was offered in 1990 just before the L.A. housing crash. What matters is what happens when things start to fall off.
The derivatives move much faster than the underlying mortgages, and reach zero LONG before the mortgage paper does. The system did not have enough dynamic range to handle any sizable changes, and the more they leveraged the system and added financial widgetry, the more brittle it got.
The mortgages were healthy in 2005, started to go south by 2007, as they always do at the end of the cycle. Only this time the financial industry had become rigid in its response. The base shifted and everything went CRACK.
Comment by Kevin Murphy — 11/25/2008 @ 12:15 pm
Kevin – I think you’re missing my point. You cite 1990 as an example. That downturn was largely a California phenomenon. Through the 1980s and 1990s the country experienced largely regional housing downturns, not national downturns. The current crisis, while worse in certain areas, is definitely national.
A number of the loans written in recent years were of the riskier variety, 100% LTV, ARMs of various types including option ARMs, Subprime and Alt A, second home or investment property, etc., etc.
I agree that once the underlying mortgage loans start underperforming the derivatives written on them should start reacting in a magnified way. The portfolios of loans people were writing the past three years were just begging for trouble.
My point is that you can’t look at the aggregate value of those loan balances in isolation and assume the system can absorb it. One primary method of loss mitigation is not readily available or active at the moment to my knowledge, an active residential resale market. Absent that, the losses are just knocking holes in the capital in of the industry.
Comment by daleyrocks — 11/25/2008 @ 3:56 pm
This post is dead-on.
Forget the numbers of the actual mortgages after 2005. Add a trillion to the one trillion of real toxicity Kevin outlined. Fine.
The problem is that the instruments created for the credit swaps an derivatives were booked in such a way as to allow financial institutions to leverage their worth many times over (on paper). Then, when it came time to start liquifying this junk, the card houses came crashing down.
Why, in God’s name, are we now in the process of indemnifying these financials with the full faith and credit of the U.S.? We are paying a multiple of at least five against the actual assets (mortgages/properties). And we aren’t done.
Comment by Ed — 11/25/2008 @ 6:11 pm
Ed–
We’re paying because otherwise NOBODY has any money at all. A Gordian Knot of obligations now underlies all world finance and unless we can un-debase it we are truly screwed.
I think that they tried this when they let Lehman fail, and the fallout from just that (AIG & WaMu to name two) scared the ever-loving daylights out of them. Dominoes.
Me, I favor bailing them out, but barring all principals from future endeavors in the biz (since we cannot shoot them). Just so we can reduce casual requests, and limit this in the future.
Comment by Kevin Murphy — 11/26/2008 @ 12:41 am