
Mortgage Market Reopens to Risky Borrowers - spking
https://www.wsj.com/articles/mortgage-market-reopens-to-risky-borrowers-11566379802?mod=rsswn
======
apo
> 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.

~~~
rayiner
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/innumer...](https://www.theatlantic.com/politics/archive/2007/12/innumeracy/47581).

~~~
kurtisc
I've noticed a trend on BBC news.

'[X market/stock] slumps as [thing related to X] [does something]'

Yet when you go and look at the long-term graph, it's well within normal
variance. There's no evidence they're connected at all. I'm sure it happens
with other media providers too.

Why? Because they didn't have the numbers right, or just didn't check at all.
Well, if I'd written a statement like that in an essay during my schooling,
I'd be marked down for unsubstantiated claims at best or admonished for
plagiarism at worst.

I find it irresponsible that the news rarely cites its sources beyond
admitting they bought it from AP/Reuters. I believe it should be enough to
prevent them being cited as a trustworthy secondary source until they at least
have their justifications to a level that would be considered adequate by a
high school history class. It's the only reason citogenesis happens on
Wikipedia.

~~~
buttcoinslol
The problem is that "Sellers outnumber buyers as equity markets fall" and
"Buyers outnumber sellers as equity markets post gains" are not compelling
headlines.

As you've noted, financial news is post-hoc analysis. It is narrative-based,
and not fact-based. Sometimes the narratives and facts coincide, though.

~~~
rebuilder
Those statements seem odd, as well. You can't really tell how many of either
there are.

------
opportune
Is anybody else making the supposedly foolish decision to time the housing
market?

I am financially ready to purchase my first home, currently living in the bay
area, but I think right now just looks like a bad time.

\- A lot of housing price growth is seemingly "priced in" since rents for
condos/apartments significantly lower than total monthly ownerships costs
(mortgage+hoa+insurance+taxes+etc.), even with 20% down.

\- The major high paying tech companies are expanding mostly outside of the
area. The fresh batch of big tech companies, outside of Airbnb, have an
unclear path forward.

\- Subprime lending, interest rates, the current PEs of REITS etc. seem to
indicate an impending housing contraction. So interestingly, dumb money (the
consumer lending market) is pricing in growth while the smart money is
indicating a contraction...

\- A lot of VC backed companies are looking bubbly, so if you are at an
actually profitable tech company in the area, your relative purchasing power
for housing would likely improve if the bubbly companies went under.

~~~
jedberg
In the Bay Area prices have already started to level off. Sites like Zillow
are predicting a 10% downturn in the next year in the highest priced areas.

If you want to buy in the Bay Area, I'd wait a year and see what happens. I
don't think the price increased will outpace your savings by very much if you
hold out and continue to add to your down payment fund.

But I'm just a guy on the internet, so don't blame me if I'm wrong. :)

~~~
acdanger
Interesting, have a link to the Zillow prediction?

~~~
ryanSrich
This is what I could find, but doesn't corroborate the prediction mentioned
above [https://www.zillow.com/san-francisco-ca/home-
values/](https://www.zillow.com/san-francisco-ca/home-values/)

~~~
jedberg
You have to average out all the different areas of the Bay Area. For example
check out San Jose: [https://www.zillow.com/san-jose-ca/home-
values/](https://www.zillow.com/san-jose-ca/home-values/)

------
whiddershins
For all the negative rhetoric around subprime loans, they enabled me and
others I knew who were young and self employed to own homes.

They aren’t always bad, they aren’t always crazy balloon loans or predatory
instruments. Sometimes they allow someone who has an alternative life
circumstance to not be excluded.

~~~
opportune
Yeah, subprime lending often makes a lot of sense for the person taking out
the loan.

If the rents are high relative to expected mortgages/recurring costs in your
area, it will pay itself off very quickly (minus the risk of default you open
yourself off to). And it allows you to lock in a monthly payment for
potentially decades, which has a massive amount of value by itself.

It also makes a lot of sense if you have reasonable expectation of a large
amount of income growth / expense decrease that will free up cash flow. For
example, if a household member is finishing up school or in training for a
more lucrative field (like an MD in residency) it might make sense to be house
poor for a small period of time to lock in rates, take advantage of a nice
buying opportunity, etc. Or if you are about to be released from child support
/ settlement obligations, and thus will experience some increased cashflow,
could also make sense.

It's not fair to assume that everyone with poor credit or lack of capital for
a downpayment is a bad person to lend to, HOWEVER, in the general case it's
probably true that in the absence of impending changes in household finances,
an inability to get good credit or accumulate savings is a negative signal.
And unless you are a small lender, your subprime loans probably aren't
discriminating against people who are about to increase income/decrease
expenses while building better credit, and people who just suck with money.

~~~
tathougies
> poor credit or lack of capital for a downpayment is a bad person to lend to

There is a _huge_ gulf between those who have unconventional sources of income
and those who lack capital for a downpayment or who have poor credit. Poor
credit is caused by things like not paying off previous loans / carrying high
balances. Not having a down payment is a sign you have not yet demonstrated an
ability to save enough, or don't have enough income to save enough, both of
which seem reasonable criteria off of which to base a lending decision.

The parent commenter described a circumstance -- self-employment -- that is
wholly unrelated to both poor credit and an inability to save a down payment.
You made the leap between the two. We need to end this kind of thinking.

> a nice buying opportunity, etc

Equal housing laws mean that -- in the absence of very particular
circumstances -- any opportunity for this hypothetical student would also be
available to more reliable debtors.

------
tathougies
As someone who is interested in buying a home. This scares me. We have lots of
money saved for our down payment, but I don't want to end up in a bidding war
with someone who isn't as good financially, and then end up purchasing for
more than the house is really worth. Also, cheap money inflates the prices of
homes anyway.

Grumble grumble... we will have to stay disciplined and be honest with
ourselves as to what the home is truly worth to us.

~~~
pickle-wizard
I bought my house in Austin 4 years ago in a pretty hot market. The advice I
can give is don't let yourself get emotional. If you get outbid on a house,
there will always be another one you can bid.

I ended up putting in offers on 8 houses before I didn't get out bid.

~~~
JMTQp8lwXL
I've been watching one particular neighborhood within my city (to be more
specific, a specific section within a neighborhood), and it's had about 4
sales in the past 3 years. I can only imagine how many of those were investors
were deep pockets, and if I'll ever have my day to compete with them. In the
meantime, I'll continue building my down payment fund.

The neighborhood is predominantly aging Boomers, so it's possible in a decade
there will be increasing sales volume, providing a better opportunity to get
in.

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bransonf
Off topic, but ?mod=rsswn in the url allows me to access any article for free
on WSJ.

~~~
banglaman
Thanks for the tip

------
JackFr
With respect to MBS pass throughs, 'conventional' means securitized through
Fannie or Freddie. The opposite of 'conventional' isn't 'unconventional' its
Ginnie Mae.

------
throwaway38501
Throwaway account for reasons that will be clear.

Few years ago, used to be have a 820+ credit score, earning £30k a year, had
one barely used credit card that was always fully paid off, I would struggle
to get approval for loans or overdraft, etc.

My depression and anxiety came back, got into reckless behaviour and drugs for
a while, three credit cards, payday loans, random holidays on credit for no
reason, down to 400s or so now. My banking app has started aggressively
suggesting mortgages to me since last month, every time I open the app.

To those worried I'm turning things around, cut down on drugs quite a bit,
payday loans all paid off, £2k left in credit card debt and will start earning
£60k a year once I start my new job next month.

------
notTyler
There are commercials and ads everywhere on how easy it is to get a mortgage
from Rocket / Guaranteed Rate etc. Ever since that started happening I kind of
assumed this was coming down the pipe.

------
ARZ3
So, next thing like in "Big Short" in 22 months?

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vagab0nd
We were planning to start (our first) small business, which would require
locking in some capital. I'm worried about the future of the economy, and have
been thinking about putting it off. I know a lot of people say don't time the
market, but I feel this is a bit different from timing the market in the
context of investing. What should I do?

~~~
thehappypm
There's always a million reasons not to do something. Vague economic fears
should rank low on the list.

------
xivzgrev
Eventually the piper needs to be paid. If people are taking more measured
risks in search of growth vs outlandish, then eventually we will see a gradual
contraction vs sharp correction. They will expand bit by bit into risky
waters, get hurt a little, but and pull back, but not so sharply.

Or maybe everyone is just fooling themselves that this time will be different

------
jayyeh
Coincidentally chatted with an expert in this space recently and he talked
about the feast and famine cycles for the mortgage lending business. The
sentiment was that we are definitely feasting and there wasn't much indication
of a near term change to famine.

Somewhat tangential comment but feels like it is in line with OP article...

------
fencepost
Is some of this in the category of "looking for new business areas as signs of
possible recession loom?" Between the yield curve inversion coverage and
concerns about trade war impacts I could easily see concerns and people trying
to get things started while it's possible to do so.

------
SilasX
Negative yielding bonds that people only buy in hopes of unloading onto a
bigger sucker?[1] Pre-crisis level of subprime lending? Time for the financial
equivalent of going to the Winchester to wait for this to blow over.

[1]
[https://news.ycombinator.com/item?id=20760222](https://news.ycombinator.com/item?id=20760222)

~~~
driverdan
> Pre-crisis level of subprime lending?

Nope, not there yet.

------
rossdavidh
So, is it just me, or have we as a society/economy learned absolutely nothing
from the Fiscal Crisis?

------
luxuryballs
Man I wish someone would give me a “risky deal” I am totally good for it but I
just don’t have a decent enough down payment. Paying $2000/mo for rent sucks.

~~~
crazyivan2008
I didn't have the credit score to qualify for a mortgage 5 years ago, and the
house we were renting was being sold. We found a private lender and paid $150k
for a nice little home in the Austin suburbs - $20k down and 7.9%.. I know,
it's a crazy high rate but I'm so grateful that the guy trusted us. My credit
score is now > 760 and we're closing this week on a 10-year refinance at 3.5%.

------
adanto6840
My question is, who is to say that X "FICO Score" correlates to anything _too_
meaningful -- or that the score itself has not become harder or easier to
obtain?

Perhaps the data exists on this, but to my unresearched mind there's a lot of
"fudging" potential within it all by itself. For instance, maybe the current
'borrower state' that gets you a 690 previously would have given you a 725; or
maybe it's the opposite.

I understand how averages work, but is there any oversight or auditing done on
the rating agencies and the ratings themselves? It just seems ripe for
'gaming' at that level IMO; if banks need to sell financial products and they
buy the ratings from the agencies, surely they can lean on an agency to
'fudge' numbers one direction or the other (I'm speaking in aggregates here)?

Anecdotally, every time I look at my credit score I cringe -- I've never
carried much debt, have always paid it off on time or early, and yet my credit
score stays somewhat low, seemingly because I largely don't participate in
"the system". Furthermore, every time I've ever applied for credit I end up
with scores (and offers of credit) far in excess of the numbers I see when I
either get my 'free credit report' from the 3 agencies, and they're similarly
different than the numbers I see if I pay to see my reports from the 3
agencies.

I don't know, it just seems like a "chicken-egg" problem to me, and one where
the rating agencies are perhaps incentivized in a way that does not align with
the "economy" as a whole -- and is instead much more closely with their high-
value customers (lenders). I also feel like there's so much "missing data",
which could probably tell quite the tale, for instance, if someone such as
Google was to begin a 'ratings agency'. Half of my finds that to be a scary
thought, the other half of me thinks that we'd probably end up with
objectively better outcomes, both economically and probably, in many cases,
even individually too.

~~~
adanto6840
Hrm -- I'd love to be enlightened! I didn't word it very well, but my
questions are primarily:

What oversight is there on the _ratings agencies_ themselves? How do we know
the distribution of scores is the same today as 10 years ago (and
proportionate to credit-worthiness)? Is there anything that prevents credit-
ratings companies from under/over valuing the credit-worthiness for large
swaths of the population?

Is there historic data available to correlate "consumer credit score" to
distressed notes -- and can that be done in a forward-looking manner, to
exclude credit score 'fudging' as a factor, and to better be able to know that
it's apples-to-apples comparison historically speaking. Otherwise, could it
not simply be that borrowers previously known as higher-quality borrowers are
simply being rated more poorly/cautiously, for instance? I'm not saying that
is the case, but I've always felt that the incentives seemed strange.

Are credit rating agencies paid (by lenders) based upon their prediction
accuracy?

~~~
kasey_junk
The lenders themselves spend a lot of effort on making sure that the credit
ratings are good signals.

When your business is extending credit (typically very low margin) you walk a
very fine line between being overly permissive in lending and not lending
enough. Minor movements of that line can be the difference between
profitability and not.

If a ratings agencies algorithm was shown to be changing to be too aggressive
(either historically or against its peers) the lenders will dial back its
importance in their own decisions. In the extreme to the point of not paying
for it anymore.

This internal competition does a pretty good job of making sure the algos
represent the current state of the world.

There is a question of about this system causing future systemic risk to be
underpriced because no one is incentivized to investigate it fully and add it
to their algorithm.

