Jul

10

Looking at the news today, there are several stories that reek of bearish propaganda. An article on Reuters talks about a ruthless sub-prime lender who talked a woman into signing for a mortgage as her husband underwent open heart surgery. Instead of perhaps discussing the ruthless behavior of the woman trying to get a death bed comp., the story is about the ruthless behavior of the lenders who make these high risk, high return mortgages.

Only 10% of sub-prime mortgages are apparently in arrears right now, with only 5% total under threat of foreclosure. On the other hand, how many low income families have been able to improve their status in last five years because of what this product offers? Enough to bring the home ownership rate to 70% of all families (2004), and presumably this is even higher now.

Most of the sub-prime mortgages are to low income people who would not have been able to improve their life style without the brokerage houses packaging these mortgages up, enabling all the new sub prime lenders to compete with the big banks. Just like the organized protests against fast food restaurants in fancy neighborhoods, the root cause of the trouble here is in part envy that the formerly low income people can now enjoy luxuries once reserved for those wealthier than them.

Another propaganda story for the bears is the news that Home Depot and Alcoa disappointed in early earnings reports. The hope that we will have a disappointing earnings season is always highest when the pre-earnings announcements are negative (which they have to be for legal purposes). Bear in mind that these are two companies suggesting that they may not meet expectations, amidst a sea of those that have hit or beaten their targets in each of the last twelve quarters.

The last bearish propaganda story I saw today was about Bernanke's talk today, and the fear he will talk about inflation. This is a man who wrote a Principles of Economics textbook, and chaired the Princeton Economics Department — clearly he is able to tell what inflationary expectations are from the bond rate, which is currently a little below 3%.

This orgy of negative news induced me to reduce my level of reticence, which was a naturally little high coming off a week like last week.

Thomas Miller replies:

Thank you for keeping your positive perspective, based on counting, in the current negative-news atmosphere. The bears are always trying to entice us to fall into their cesspool of negativity. We are fortunate to have a guide to help keep us out of financial danger.

Your comments on sub-prime are right on point. I know a 46 year old woman who was able to become a property owner thanks to sub-prime. She struggled to raise two straight-A students by herself. She was always a renter and would probably always be one without sub-prime loans. She is now very happy and proud, and is improving her financial situation. She will be able to refinance at a lower rate as her credit score improves.

This is what America is all about: a land where hard-working people have opportunities to improve their lot. The majority of sub-prime borrowers are like my friend. They now own property and they will do what it takes to keep it. Based on man's innate desire to improve his lot in life, the vast majority of sub-prime borrowers will not default.

Roger Arnold writes:

Congress is currently going through the process of increasing the FHA loan limits to match those of Fannie and Freddie and to increase the loan amount to up to 100% of purchase price from 97%.

That would increase the FHA loan limit about 15% from $362,790 to $417,000. That process should be completed within a few months.

They may also allow refinancing into FHA loans from non-FHA loans (now FHA loans may only be used for purchase transactions). This would allow borrowers in subprime loans to move out of the private lender space and essentially to a federally co-signed mortgage. Obviously this would also allow the holders of those loans, and the associated MBSs and CDOs to offload their risks to the federal government, thereby shunting the necessity for the normal process of defaults, foreclosures, evictions, bond market disruptions, etc.

The same is being considered for the VA loans.

The FHA and VA, however, have loan processing guidelines that are very paperwork-intensive and require lenders to be individually licensed to make FHA / VA loans.

Most lenders as a result, until recently, have avoided providing FHA / VA loans. Now, most are gearing up for these changes, educating their loan officers, going through the paperwork required to provide these loans, and creating marketing systems to go after them.

Once begun, this should alleviate much of the concerns in the sub-prime space, such as liquidity and contagion.


Comments

Name

Email

Website

Speak your mind

Archives

Resources & Links

Search