by Calculated Risk on 12/04/2005 09:27:00 PM

Barrons opines on housing (pay):

... the accompanying chart ...[with] that single line rising toward the heavens depicts the share of household real-estate assets as a percentage of gross domestic product. It's a graphic (in every sense of the word) description of the fantastic rise of the housing bubble. ... As David warns, "Caveat emptor whenever anything approaches 150% of GDP."

There are ... any number of reasons to be wary. Among them: Affordability is at a 14-year low; the sales of new and existing homes are leveling off or worse, even as prices continue to rise; inventories of unsold homes are more than ample; mortgage applications are running some 20% below the summer's high; and even a few -- make that a very few -- home builders insist that business is as good as it gets, but could get better.

Moreover, the regulators are growing restless, as they inevitably do when denial can no longer serve as adequate policy to cope with a speculative frenzy that's reaching fever pitch. ... the Comptroller of the Currency, the Fed, the FDIC and their kin who oversee the thrifts and the credit unions are busily drawing up drafts of rules they plan to issue before year-end to seriously tighten standards on risky loans.

Not surprisingly, those risky loans ... are those that cheerfully don't require the consumer to pay down principal; for their part, the originators of such loans ... haven't the foggiest real notion as to whether said consumer can afford the house he's buying. Since these exceedingly risky loans are ... "ubiquitous" a crackdown on them could ... "have a significant impact on the housing market, bank-lending activity and the broader economy, beginning in the first half of next year."

What has made the regulators more than a little antsy is that many of the folks taking interest-only or so-called option adjustable-rate mortgages (ARMs in the popular parlance) are due for brutal "payment shock" when the loans reset, as a heap of them are slated to do over the next several years. Resetting, in this instance, means that the suddenly-not-so-happy home owner, besides higher interest rates, will have to start paying down the principal, a double whammy that could raise his monthly mortgage payments by 50%, even 100%.

Since the bulk of option ARMs and interest-only loans are also "stated income" loans, in which the bank cheerfully accepts as income whatever the borrower says it is and no documentation is required, the shock -- and the consequences -- are sure to be that much greater for the borrower. In the circumstances, lenders might begin to feel a bit queasy as well.

Such risky (to put it mildly) loans, ISI reports, may account for nearly half of all the loans made in the past 18 months...

by Calculated Risk on 12/03/2005 01:20:00 AM

US Population distribution by age, every decade 1920 - 2000, plus 2005.

NOTE: Thanks to InsultComicDog for hosting this animation. Please see previous post for individual graphs.

by Calculated Risk on 12/02/2005 08:33:00 PM

The following graphs shows the US population distribution by age since 1920.
All data from the Census Bureau.

This is nothing new, but its interesting when considering the debates on Social Security, medical care, budget deficits or when considering investments that are related to demographics (like 2nd homes).

Click on graphs for larger image.

1920 The graphs for 1900 and 1910 have a similar shape as 1920. With the medical advances of the 20th Century, we would expect the shape of the distribution to become flatter as fewer people die of illnesses in the prime of their lives. Otherwise this represents the expected population distribution.

1930 Although 1930 has the general shape of the previous decades, the first evidence of the Baby Bust is apparent. Although 1929 is usually considered the start of the Depression, there was a large segment of America that was struggling economically several years earlier. This shows up in the drop in births.


1940 The Depression era Baby Bust is evident in the 1940 census data. With tough economic times, it is no surprise that many families postponed having children.


1950 Here comes the Baby Boom. The Boom actually started during World War II and really picked up after the war.

The Baby Bust is very clear on the graph.


1960 The Baby Boom probably peaked in the mid-1950s.

The 1960 graph clearly shows both the Baby Bust of the '30s and the Baby Boom that followed.


1970 The Baby Boom is over and a mini-bust has started.


1980 By 1980, the Boomers are mostly in the workforce. Social Security is close to running a deficit and Alan Greenspan heads a commission to fix the program. The Greenspan commission recommends several changes, including having the Baby Boomers prepay their Social Security.


1990 By 1990, the Baby Bust is close to retirement. The Boomers are entering their peak earning years.

This combination of fewer retirees in the '90s (Baby Bust) and Boomers entering their peak earnings years is a positive for running huge Social Security surpluses and working towards balancing the Federal Budget.


2000 By 2000 it is hard to distinguish the Baby Bust, but the Baby Boom is very clear. New entries into the population have been relatively steady for years. Even with the lower impact from the Baby Bust, medical costs are still straining the budget - and with the Boomers nearing retirement age, this is clearly a major issue for the US.


2005 And here is an interim population estimate from the Census Bureau. The distribution is starting to flatten out due to advances in medical care. The largest increases in the distribution have been in the older age groups (compare 2005 to 1920).

I will refer to these graphs in future posts. All comments are welcome.

by Calculated Risk on 12/02/2005 01:24:00 PM

Fiscal 2006 is off to a poor start as the increase in the National Debt set a record for the first two months of the fiscal year. The National Debt increased $159.6 Billion to $8.092 Trillion as of Nov 30, 2005.


Click on graph for larger image.

The previous record through November was in 2004 (fiscal 2005) with an increase in the National Debt of $146.2 Billion.

Each month I will plot the YTD increase in the National Debt and compare it to the proceeding years. I expect fiscal 2006 to set a new record for the annual increase in the National Debt.

by Calculated Risk on 12/01/2005 09:03:00 PM

John C. Dugan, Controller of the Currency, remarked today on exotic mortgages and the housing market. The first half of his talk, before the Consumer Federation of America, concerned changes to credit card regulations. Here are his remarks (pdf) on negative amortization mortgage products:

"And so, just as we come to the end of the neg am story in credit card lending, I fear we are at the beginning of one in the mass marketing of home mortgages. One of the new “non-traditional” mortgage products you may have heard about is the so-called payment-option ARM – a mortgage that allows borrowers to select from a menu of payment possibilities, ranging from a fully amortizing monthly payment to the neg am payment option that does not cover the outstanding interest. Such products have been available for quite a long time, but until recently had been provided primarily to a narrow group of very creditworthy borrowers who found differing payment options to be an attractive “cash management” tool over time. In this niche market – which is different from the credit card market because of the collateral securing the loan – borrowers have generally had the wherewithal and sophistication to handle temporary periods of negative amortization without jeopardizing their ultimate repayment of principal.

In the last two years, however, we have seen a spike in the volume of payment-option ARMs, which are no longer largely confined to well-heeled borrowers who can clearly afford them. Increasingly, they are being mass marketed as “affordability products” to borrowers who appear to be counting on the fixed period of exceptionally low minimum payments – typically lasting the first five years of the loan – as the primary way to afford the large mortgages necessary to buy homes in many housing markets across the country. And as the loans become more popular, the prospect of using them to penetrate the subprime lending market cannot be far behind.

The fundamental problem with payment option ARMs, other than the growing principal balance due to negative amortization, is payment shock. A traditional 30-year fixed-rate mortgage requires the borrower to amortize the principal balance through equal payments over the 30-year life of the loan. In contrast, a typical payment-option ARM is a 30-year mortgage that permits five years of negative amortization by allowing a borrower to make very low minimum monthly payments during that period. Beginning in the sixth year, the borrower must begin paying the full amount of interest accruing each month, and must also begin amortizing the increased principal over the remaining 25-year life of the loan. The combination of these factors can produce sharply increased payments in year six. For example, a typical payment-option mortgage of $360,000 at 6 percent can produce a monthly payment increase of nearly 50 percent in that year, assuming no change in interest rates. If rates rise to just 8 percent, the payment increase when amortization begins would nearly double.

To the extent that they are planning for such contingencies, many payment-option-ARM borrowers calculate that they will be able to sell their property or refinance the mortgage by year six. But if real estate prices decline – and there already is evidence of softening in some markets – these borrowers could face the bleak prospect of loan balances that exceed the value of the underlying properties. In that case, selling the property or refinancing the loan would not be a viable escape valve for avoiding huge payment shocks.

In these circumstances, do consumers really understand the potential consequences of the neg am feature inherent in a payment-option ARM? Is this an appropriate product to mass market to customers who may be looking at the less than fully amortizing minimum payment as the only way to afford a larger mortgage – at least for the five years before the onset of payment shock? And are lenders really prepared to deal with the consequences – including litigation risk – of providing such products in markets where real estate prices soften or decline, or where interest rates substantially increase?

I fear the answer to all these questions may be “no.” That is one reason why, if all goes according to plan, the Federal banking agencies will propose new guidance with respect to nontraditional mortgage products by the end of this month. While the guidance will cover many other issues besides negative amortization and payment option ARMs, these will certainly be central among the topics addressed. I am mindful of the history of neg am products in credit cards, and I recognize that the nationwide mass marketing of neg am mortgages is in its infancy. As a result, I firmly believe that the guidance should draw clear lines about appropriate standards for qualifying borrowers for payment option ARMs that explicitly take into account potential payment shock. Put another way, lenders should not encourage or accept applications from borrowers who clearly cannot afford the dramatically increased payments that are likely to result at the end of the five-year, low minimum payment period. Disclosures should also be clear, timely, and meaningful. And lenders should have very substantial controls in place to manage the potential risk of such loans."