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Subprime Worries

  • #1
  • First Post: Edited Mar 19, 2007 10:14am Mar 16, 2007 1:22pm | Edited Mar 19, 2007 10:14am
this subprime is going to have huge effects. i have been all over this one in the past week. i talked a lot about this at least a year ago...if i could find the thread you would think i was a genius. what is happening is that the people who bought homes who shouldnt have been doing so (cause their credit sucks) start to have their interest rates rise, coupled with the fact that their house is going down in value, this creates a bad situation for the banks. they now have collateral that is not even worth the value of the loan, and the owner cant pay the interest anymore.

anway, this is going to crush the housing market (if money is more expensive, less home buyers, less demand), and we all know the housing market plays a big role in the economy. what happens to all these guys building high rise condos around me?
Relax and be happy.
  • #2
  • Edited 1:47pm Mar 16, 2007 1:31pm | Edited 1:47pm
Quoting merlin
this inverted yeild curve is nothing more than predicting the past. sure, inverted curve has happened ahead of a recession for some arbitrary number of times, but when looking scientifically you find there is no statistical relevance.

this subprime issue, on the other hand, is going to have huge effects. i have been all over this one in the past week. i talked a lot about this at least a year ago...if i could find the thread you would think i was a genius. what is happening is that the people who bought homes who shouldnt have been doing so (cause their credit sucks) start to have their interest rates rise, coupled with the fact that their house is going down in value, this creates a bad situation for the banks. they now have collateral that is not even worth the value of the loan, and the owner cant pay the interest anymore.

anway, this is going to crush the housing market (if money is more expensive, less home buyers, less demand), and we all know the housing market plays a big role in the economy. what happens to all these guys building high rise condos around me?
Merlin, this is what I live for. In the late 70s I bought rental houses when the market was just like this and interest rates were thru the roof. I just went in a assumed mtgs at a discount. I did the same thing in 92. And at the end of last year I sold some.

This was pretty obvious it was going to happen 5 years ago when interest rates were in the basement and the banks needed an ever larger pool of buyers. So then comes the less than prime lenders, backed by Wall Street. You know that is a recipe for disaster. Then Wall street investment banks and the like stop funding and the whole thing collapses like a house made of cards... and that is where we are right now... One of the nation's largest subprime lender is just this side of bankuptcy.

an Interesting related article is here
http://www.npr.org/templates/story/s...toryId=7812252
  • #3
  • Mar 16, 2007 1:55pm Mar 16, 2007 1:55pm
I wonder what the effect of this really will be...I mean, in theory it makes sense, but not all sub-prime loans will go into default.

Hell, I was sub-prime 6 years ago when I bought my first house due to some typical college-level credit mistakes...but I sure as hell didn't have a problem paying.

Sub-prime is all based on your credit score, which isn't necessarily tied to your ability to pay currently...after all, bad credit can take a few years to correct.

I think what's happening is that there have been enough defaults that sub-prime mortgage lenders ARE being affected...does that mean that there will be a mass flooding of houses? not necessarily...that depends on the default rate.

What Merlin says is true...there will be plenty of houses up for sale, and there will be an influx, but not everyone in the sub-prime mortage will default.

I'm in the camp that the current bull-market has been fueled by the rise in home prices, but I don't necessarily believe that ALL bull markets and economies are completely built around double-digit gains in home prices.

Still, I'm a little excited about the impending "meltdown"...if it really is true...then housing is going to get extremely cheap, and pave the way for good rental investments. Couple that with the lowering of interest rates in the next 6 months, and you're looking at a great opportunity. I mean, think...people still have to live somewhere...rents are going to be decent play, because if you can land a solid low-cost mortgage in a hard-hit area (like Vegas, or Florida), people will still rent with the option to buy...that could look in some serious growth if you can hold out for 5-6 years.

Quoting merlin
this inverted yeild curve is nothing more than predicting the past. sure, inverted curve has happened ahead of a recession for some arbitrary number of times, but when looking scientifically you find there is no statistical relevance.

this subprime issue, on the other hand, is going to have huge effects. i have been all over this one in the past week. i talked a lot about this at least a year ago...if i could find the thread you would think i was a genius. what is happening is that the people who bought homes who shouldnt have been doing so (cause their credit sucks) start to have their interest rates rise, coupled with the fact that their house is going down in value, this creates a bad situation for the banks. they now have collateral that is not even worth the value of the loan, and the owner cant pay the interest anymore.

anway, this is going to crush the housing market (if money is more expensive, less home buyers, less demand), and we all know the housing market plays a big role in the economy. what happens to all these guys building high rise condos around me?
  • #4
  • Mar 16, 2007 3:18pm Mar 16, 2007 3:18pm
mrmikal its not just about the default rate. this has already created a panic that is way beyond the actual effect. this subprime scare will make ALL lenders more careful in who they lend money to, its not just about the lenders who may default. everything gets overdone like that, and im sure politics will play its part as well as these political candidates start trying to show their heroics. and just wait until this news hits the everyday consumer, you know how the public likes to react to financial issues.

to me what makes this issue for real is that it effects both the supply and demand of housing. less money lent equals less buyers. less buyers equals less demand. then on the supply side you have all these houses up for sale because of the default. i think the demand side will have more impact, but the fact that both sides are being effected is a slam dunk for me. im not so sure the currency market is the best place to play this idea, im still trying to figure things out with the currencies.
Relax and be happy.
  • #5
  • Mar 16, 2007 3:21pm Mar 16, 2007 3:21pm
Quoting smjones
Then Wall street investment banks and the like stop funding and the whole thing collapses like a house made of cards... and that is where we are right now...
exactly!!!

us geezers have long memories!
Relax and be happy.
  • #6
  • Mar 16, 2007 3:28pm Mar 16, 2007 3:28pm
Quoting merlin
exactly!!!

us geezers have long memories!
If one is a RE investor, now is the time to start raising cash and think about the easy pickings in the next few years... I think we are a bit out though...

Of course this has a ripple effect through all parts of the economy. I am one who tends to agree more with Greenspan's senerio than I do Benny's...
  • #7
  • Mar 16, 2007 3:32pm Mar 16, 2007 3:32pm
LOL ive already started to look around at all these condos going up and wondering which builder will be in the most pain in about 6 months. oh there are going to be deals galore!
Relax and be happy.
  • #8
  • Mar 16, 2007 4:00pm Mar 16, 2007 4:00pm
Because this is just the tip of the iceberg on the problem, I was wondering if just about every release having anything to do with housing would make dollar very volatile. I was wondering if there would be closer attention paid to this type of data, like what is coming out next Tuesday.

These are listed as little impact, but I wonder if their significance will be greater...
  • #9
  • Mar 16, 2007 4:15pm Mar 16, 2007 4:15pm
the reason next weeks indicators wont be important is because they are stale data. the first numbers that will give an indication for this fallout wont be released until next month.
Relax and be happy.
  • #10
  • Mar 16, 2007 4:26pm Mar 16, 2007 4:26pm
just saw this in the related threads...
http://www.forexfactory.com/showthread.php?t=21606

greenspan says no spillover can be seen, but seems to admit it is likely.
Relax and be happy.
  • #11
  • Mar 16, 2007 4:26pm Mar 16, 2007 4:26pm
Quoting merlin
the reason next weeks indicators wont be important is because they are stale data. the first numbers that will give an indication for this fallout wont be released until next month.
Could the sub prime worries be similar to the savings and loan mess of the early 90's??
Proper Prior Planning Prevents Piss Poor Performance
  • #12
  • Mar 16, 2007 4:38pm Mar 16, 2007 4:38pm
at any rate, im guessing those numbers wont alter the FOMC decision next week. im still not sold that this will be an outright disaster, though i think weve all seen it coming for some time now. its just been creeping up though, no big break yet. those overpriced condos will probably be rental conversions or be sold for little to no profit... new york to philly corridor i dont see a collapse in real estate in the next 12 months at least. bargain hunters like yourselves and myself have been waiting the last how ever many years, thats the soft landing bernanke wants. even when liquidity dries up, somebody digs a new well. mer, when you figure out how to play this in fx let me know. im thinking short USD/MXN, lol :
  • #13
  • Mar 16, 2007 4:43pm Mar 16, 2007 4:43pm
interesting thread. does everyone agree that the sub-prime market complications will have deleterious effects on the dollar(really devastating), as it will cause a mess to the economy through 07 and perhaps even 08, or do you believe this to be a transient matter?

With the economy slowing down, I think we're going to see a recession really soon - less growth, fewer jobs created, all sorts of loans gone wrong, and perhaps even a systemic failure? It doesn't seem all far fetched now.

Merlin, am I going crazy?
  • #14
  • Mar 16, 2007 4:56pm Mar 16, 2007 4:56pm
... My wife and I actually been waiting for this to happen for a couple years now. We really want to buy a condo in southern california ... or maybe San Fran ... I'm just waiting in the shadows ....

Here in Jacksonville, FL ... I know a few couples that were renting and now they live in 3000+ sq. feet homes for about $250,000 ... these same houses were going for $350,000 just last year.

I also know some people trying to sale their current homes to get into something new, but they are not having much luck.

Like most have already mentioned ... the builders around here are still building tons of condos, townhouses, etc. ... only time will tell how this all turns out .... Happy Trading ...
If it is not broken, fix it until it is!
  • #15
  • Mar 16, 2007 6:02pm Mar 16, 2007 6:02pm
I actually work in the mortgage industry, and basically once rumors of New Century going into bankruptcy and one of the board of directors stepping down has made all of the other subprime lenders paranoid. Even after an appraisal a few lenders have cut the value on what it received by almost 70,000 dollars. Basically loans applications I could've pushed 2-3 years ago easily with little to few hiccups are a royal pain now because all the lenders are tightening up their guidelines big time. Lenders that used to take a mortgage late in the last 12 months have pushed it back. All I can say though its sad when someone calls you up saying they're having troubles paying their mortgage and their balance is 120% of the value of the home. You know they're going to lose their home and there is little you can do to help.
  • #16
  • Mar 16, 2007 6:15pm Mar 16, 2007 6:15pm
Quoting merlin
i talked a lot about this at least a year ago...if i could find the thread you would think i was a genius.
well not exactly genius LOL but at least i knew it would end in panic!

http://www.forexfactory.com/showthre...?t=4231&page=2
Relax and be happy.
  • #17
  • Mar 16, 2007 6:16pm Mar 16, 2007 6:16pm
Quoting Diate
I actually work in the mortgage industry, and basically once rumors of New Century going into bankruptcy and one of the board of directors stepping down has made all of the other subprime lenders paranoid.... All I can say though its sad when someone calls you up saying they're having troubles paying their mortgage and their balance is 120% of the value of the home. You know they're going to lose their home and there is little you can do to help.
thanks for the confirmation from the front lines
Relax and be happy.
  • #18
  • Mar 16, 2007 9:00pm Mar 16, 2007 9:00pm
Quoting Diate
All I can say though its sad when someone calls you up saying they're having troubles paying their mortgage and their balance is 120% of the value of the home. You know they're going to lose their home and there is little you can do to help.
I would be pissed myself to keep paying for something that is not worth what I am paying it for.
  • #19
  • Mar 16, 2007 10:31pm Mar 16, 2007 10:31pm
Quoting BurgerKing
I would be pissed myself to keep paying for something that is not worth what I am paying it for.
Alas that happens every time we buy a car. Drive one off the lot and wreck it at the next corner, and you'll find out just how much you overpaid.
  • #20
  • Mar 17, 2007 10:15am Mar 17, 2007 10:15am
Sub prime becomes an issue in the following way:

What allowed sub primes to be made in the first place was rising home prices. Sub primes were made at teaser rates that artificially set lower initial monthly payments. Those payments were set to go up after a certain period because the interest rate on those loans were set to rise to a level that actually reflected the credit risk of the borrower. As long as housing prices rose-those mortgages could be re-financed leaving the monthly payments about the same.

As housing prices went down starting last July (by 8.5% from July to the end of the year), subprimes that were set to have increased monthly payments could not be re-financed and the loans went bad because these people couldn't pay the new monthly payment. Housing prices have continued to go down so far this year.

What Greenspan actually said regarding sub primes is what everyone knows: If housing prices keep going down, the sub prime situation will get worse. The opposite is also true. What he didn't say was which way housing prices would go, although he has said twice recently that housing MAY have hit a bottom.

So it isn't really a question of whether sub primes will eventually affect other classes of loans-it's a question of whether home prices will continue to fall, which will have the effect of raising monthly payments on any loans set to adjust up to a higher interest rate since those loans also will not be able to re-financed at better rates.

Just to give you an idea of some of the big player's opinions, Pimco (a huge gov't bond fund) has stated they feel housing could decrease another 4-5% this year. On the other hand, Berson of Fannie Mae has stated he expects housing to go up in six months.
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