Posts tagged ‘LTV’

A Stupid Suggestion

A guest blogger on Megan McArdle's blog writes:

Here's my first such idea:

Abolish Mortgage-Backed Securities (and Offspring)




Here is a better plan:

  1. Narrow the AAA tranches of MBS
  2. Fix bank capital requirements vis a vis mortgages and MBS
  3. Stop encouraging high loan to values on mortgages

House Flipping Commercials? Already?

Today on the radio I heard a commercial for a company promising to teach me the exciting art of flipping houses.  I could buy and resell houses up to three at a time in less than 30 days.

I guess I thought it would take a bit longer for this nuttiness to come back.  I do know some smart people who are buying undervalued houses, putting a bit of money in them, and putting them on the rental market.  Converting owner-occupied homes at the bottom of the market to rental properties makes sense to me, particularly since the ones I know are doing it with all equity.

However, I presume the folks tuning into the radio don't have that much equity, and anyway they were explicitly using the word "flipping" in the commercial rather than talking about rental income.  I wonder who is lending on this stuff?  I tried to refi my mortgage about 6 months ago on a 40% LTV but as a self-employed person it was a pain in the ass.  Who's financing house flipping?

(yeah, I know, the answer probably is "all of us, via Fannie and Freddi or some other dumb government program).

Fannie and Freddie: Worse Than We Thought

From Edward Pinto at the American








Bailed Out Banks Take On More Risk

I found this fascinating, if unsurprising, via Zero Hedge:

Ran Duchin and Denis Sosyura of the University of Michigan looked at the U.S.’ Capital Purchase Program. You may recall that this became the centerpiece of TARP once Hank Paulson decided that the money would be better spent directly buying into the banks as opposed to overpaying them for dodgy asset-backed bonds. (Mind you, other parts of TARP were spent overpaying for dodgy asset-backed bonds.)

The CPP lasted a little more than a year and invested $205 billion of taxpayer funds into various qualifying institutions. Not every bank that filled out the 2-page application was successful in gaining access. Others were approved but ultimately decided not to take the funds (probably because of the attached restrictions on pay and on paying out dividends.) In the end, 707 financial institutions received the funds.



They found more risk, across the board.  There is a lot of detail, so I will leave it to you to go to the source for more, but Zero Hedge concludes:

The bail-out itself increased our chances of having the bail the banks out all over again. Moral hazard is no longer in the realm of the abstract

A few months ago I went through an unbelievable hassle refinancing my loan.  Based on current appraisals, my loan to value was less than 50%, but I still ended up coming to the table with more equity to reduce the new loan size.  I was staggered at how hard it was to close what should have been a dead-safe loan, given the LTV and my income and credit history.  The study actually has a finding related to that:

For mortgages the bailed-out banks increased their risk–

“after CPP capital infusions, program participants tilted their credit origination toward higher-risk loans by tightening credit standards for the relatively safer borrowers and slightly loosening them for riskier borrowers.”

–while at the same time ensuring that they didn’t trip off any alarms

“This pattern would be consistent with a strategy aimed at originating high-yield assets, while improving bank capitalization ratios, since the key capitalization ratios do not distinguish between prime and subprime mortgages.”

This is a fascinating sort of metric manipulation.  Having my loan go from 45% to 40% LTV does nothing, really, for the overall safety of the bank, but it improves their averages and makes them look safer, while all the way they are actually engaging in more risky behavior.