Credit market

Articles on the mortgage and credit markets. Credit market dysfunction played an enormous role in the housing bubble and, as such, used to be a fairly big focus of this site. At this point, however, the topic has been pretty thoroughly exposed even in the mainstream media and blogs such as Calculated Risk and HousingWire cover the credit markets in a much more thorough manner than I could. For that reason, I have shifted my focus to the aftermath of the credit bubble as it pertains specifically to housing. More recent commentary is found either in the Housing Market or VoiceofSanDiego.org topics.

Credit Market Report: March 2006

Submitted by Rich Toscano on March 26, 2006 - 9:24pm

This article will address recent mortgage rate movements along with important policy developments by the world's central banks. Executive summary: the credit market sure seems hell-bent on preventing a meaningful spring rally.

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Surprises in Store for ARM Holders

Submitted by Rich Toscano on March 21, 2006 - 9:07pm

Check out the graph at the bottom of this Real Estate Journal article on adjustable rate mortgages. It ends up that many borrowers (nationwide, but if anything I imagine that SoCal is worse) aren't even aware of key facts about their ARMs, such as the cap on individual or overall rate increases, how rate resets are calculated, and more. Pretty amazing.

I imagine that many of these folks never bothered to learn the facts about their resets because they figured they'd sell or refi (for huge profit, or course) before the resets ever took place. Given flat home prices and rising rates, however, that no longer seems like such a great plan.

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Credit Market Report: February 2006

Submitted by Rich Toscano on February 20, 2006 - 9:29am

Rates are on the rise again, Bernanke has given us some hints as to what's in store for his first few months, and two US Senators threaten to inadvertently burst the housing bubble in March. The various goings-on in the credit markets, and their likely effect on San Diego housing, are discussed below.

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Dark Matters

Submitted by Rich Toscano on February 14, 2006 - 10:58am

This post may only appeal to those among you who are really into the global finance aspect of things, but here goes. A couple sites I read have recently discussed the "Dark Matter" theory that's become all the rage. The very short version of this theory is that since the US makes a net profit on its foreign investments, it must actually be a net creditor, instead of a net debtor as everyone thinks. The dark matter in question consists of those apparently unmeasurable assets that turn our national balance sheet positive.

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There's a New Sheriff in Town

Submitted by Rich Toscano on February 1, 2006 - 9:47am

Gentle Ben is now at the helm. My friend Tim Iacono said it best:

These were the photos in the Wall Street Journal write-up for the [Federal Reserve] policy announcement. Can you tell who's coming and who's going?

I suppose I should write a missive about how things might go down now that Bernanke has taken over the Fed... but I pretty much already wrote it back in October when they announced that Benito had gotten the nod. Good luck, Ben... you're going to need it.

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Credit Market Report: January 2006

Submitted by Rich Toscano on January 25, 2006 - 7:28pm

This article contains a review of recent mortgage rate activity, lender tightening (or lack thereof), San Diego borrower behavior, and the current and potential effects of all of the above on the housing market. Also included are some thoughts on what "asset inflation" could mean to our economy.

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Stated Income Loans—Now There's a Great Idea

Submitted by Rich Toscano on January 7, 2006 - 9:13pm

The folks at the Voice of San Diego are on a rampage with their continuing series on articles on housing-related chicanery. Their most recent piece focuses on mortgage fraud—specifically, the ever-popular stated income mortgage, otherwise known as a "liar's loan." While it's impossible to know how many people are overstating their incomes, the article quotes one mortgage professional as estimating (conservatively) that 25% of stated-income mortgages are fraudulent. Another mortgage executive acknowledged the "let it go" culture within the industry, supporting my frequent assertion that people tend to turn a blind eye to fraud as long as everyone is making money. This is an important topic, and we have by no means heard the last about it.

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Are Interest Rates About to Drop?

Submitted by Rich Toscano on January 6, 2006 - 8:03pm

PIMCO's Bill Gross has written an interesting, if somewhat dense, piece in which he opines that both short- and long-term bond yields are close to topping out. In (very) brief, his thinking is that the lagged effect of rate increases to date will soon start to cause the type of economic slowdown that has historically preceeded lower bond yields.

I find it troubling to question the wisdom of the world's biggest bond investor, and more troubling still to maintain that "this time is different." That said, it seems to me that Mr. Gross' analysis does not fully account for the fact that U.S. interest rates (at least on the long end) are largely controlled by foreign investors. This dynamic—or, at very least, the magnitude of its effect—truly is a new development. Foreign investors in U.S. debt, most especially central banks, have a different set of priorities than Treasury buyers of yore, and it's not clear to me that a U.S. economic slowdown will induce a decline in long rates this time around. Foreigners may find reason to sell U.S. bonds regardless of the state of our economy.

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A Message from the Yield Curve

Submitted by Rich Toscano on December 27, 2005 - 8:22pm

The yield curve briefly inverted today: for a moment, the yield on longer-dated bonds was actually lower than the yield on shorter-dated bonds. To be specific, the yield on the 10-year Treasury briefly dropped below that of the 2-year Treasury, before rising up to close barely above the 2-year yield.

This brief foray into yield curve inversion is getting a lot of press, and for good reason. According to economist Paul Kasriel, a yield curve inversion between the 10-year and 3-month Treasuries has preceeded every recession over the past 45 years. Over this period, there were only two periods of yield inversion that did not precede a recession, versus six that did. That's a pretty decent economic indicator, though as Kasriel notes, it's a better predictor of economic activity in general than recessions in specific.

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Credit Market Report: December 2005

Submitted by Rich Toscano on December 24, 2005 - 8:15pm

The markets got all atwitter because the Fed dropped the word "accommodative" from its latest post-meeting statement. Does the change in wording imply that the rate hikes will soon be over? This question will be discussed below, along with some thoughts on fixed and adjustable mortgage rates, inflation indicators, the new federal lending guidelines, and how all of the above will affect the housing market.

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Is This the End of E-Z Credit?

Submitted by Rich Toscano on December 23, 2005 - 5:03pm

This past week, a group of federal agencies released a draft of their guidelines on non-traditional mortgage lending . Christmas came early for those of you who like to pore over 42-page regulatory manifestos; for the rest of you, highlights follow.

The issuing agencies (the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration) have done a good job of covering the notable areas of risk in non-traditional lending. They begin with loan underwriting standards, addressing the following topics:

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Trouble In ABS-Land

Submitted by Rich Toscano on December 7, 2005 - 9:37am

A couple of my fellow online housing pundits have beaten me to the punch on this article, but it's an important one so I thought I'd link to it as well. It's a Bloomberg article on the declining demand for subprime mortgage-backed securities. The market finally appears to be pricing in the risk of people defaulting on these mortgages. If the trends described in the story keep up, which they likely will, it's going to be a lot harder for less well-to-do homeowners/homebuyers to refinance/buy at such low rates.

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Tip of the Mortgage Fraud Iceberg Coming to Light

Submitted by Rich Toscano on December 5, 2005 - 9:55am
The LA Times features an article on mortgage fraud. It is often acknowledged that mortgage fraud, along with its cousin appraisal fraud, runs rampant.
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Credit Market Report: November 2005

Submitted by Rich Toscano on December 3, 2005 - 8:34pm

Mortgage rates have finally taken a breather, but they are still noticably higher than they were last month—and much higher than they were this summer. Meanwhile, inflation expectations are too high for the Fed to stop tightening, and the OCC has purveyors of non-traditional mortgages in its crosshairs. None of this looks very promising for a housing market that lives and dies by E-Z credit...

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Option ARMs Losing Their Appeal

Submitted by Rich Toscano on November 30, 2005 - 9:29am
The WSJ features a very good article on option ARM mortgages: how they work, the r
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