The Emperor's New Clothes


National Mortgage News article on Model Validation

We recently wrote an article on Model Validation for National Mortgage News. You can find it here:

http://www.nationalmortgagenews.com/blogs/compliance/Regulatory-concerns-show-need-model-validation-1034890-1.html



The signs were clear in early 2006 that we were headed for a crisis
June 14, 2010, 9:36 am
Filed under: Press Articles | Tags: , ,

Excerpts from: “Analyzing Home Price Trends: Do Real Estate Values Always go Up?”

Secondary Market Executive; January 2006; Dr. Thomas J. Healy CMB

  • Modest Household growth – Goldman Sachs economists have pointed out that investment in residential real estate is at a 40-year high, yet the number of households is growing at its slowest pace in 40 years. This may very well create excess supply.
  • Easy money – According to the Economist (6/18/05), 42% of all first-time buyers and 25% of all buyers made no down-payment on their home purchases last year. Additionally, homebuyers can get 105% loans to cover buying costs. And, increasingly, little or no documentation of a borrower’s assets, employment and income is required for a loan.
  • Innovative Products – Interest-only, multiple payment option, forty year term and negative amortization loans also add to the home-buying and refinancing exuberance.  Over 60% of all new mortgages in California, and one-third nationwide are interest-only or neg-am.  Also, these exotic products are usually adjustable-rate mortgages (ARMs).  ARMs have risen to half of all mortgages in those states with the largest price increases, which may present difficulties when interest rates start to rise.
  • Interest rates — Given today’s historically low rates, there may be more opportunity for rates to rise than for them to fall.  If that is in fact the case, mortgagors’ payment percents must rise (unlikely due to the large percentage of disposable income already consumed by housing), or real estate price multiples must fall.
  • Investor owned properties – There are increasing numbers of Americans that are buying houses for speculative purposes.  That is, they are buying them to flip under the assumption that housing prices will continue to rise.  Fully 23% of all purchases in 2004 were by investors. In Miami, one-half of all condominium purchases were by these “flippers”.  While economists such as Karl Case believe that bubbles don’t burst, rather they deflate due to “downward stickiness” of prices (i.e. when demand dries up, potential sellers simply hang on and wait for prices to rebound), investors are not so constrained.  As rents continue to under-perform relative to housing prices, investors will be under increasing pressure to sell … at any price.
  • Values to rents – “An asset derives its value from the income that it will throw off in the future. With a stock that means the dividends it pays, with an owner-occupied house, it’s what economists call ‘imputed rent’- what you would have to pay to rent an equivalent house.” (Justin Fox, Fortune 6/13/05).  There is currently a diverging relationship between house prices and rents.  “To bring the ratio of prices to rents back to some sort of fair value, either rents must rise sharply or prices must fall. …For example, if rents rise by an annual 2.5%, house prices would need to remain flat for 12 years to bring America’s ratio of house prices to rents back to its long-term norm.” (The Economist, 6/18/05)

The presence of real estate bubbles in the United States can have significant impact on our industry and economy.

  • Roughly two-fifths of jobs created since 2001 have been in housing-related sectors such as construction, real-estate lending and brokering. If house prices fall, this boost will turn into a substantial drag.
  • The mortgage industry is dependent upon a series of explicit and implicit: guarantees, credit insurance, liquidity agreements, and the expansive derivatives marketplace to thrive.  A broad-based real estate bust could strain this infrastructure.
  • The real estate bubble has fostered household over-borrowing and over-consumption. Given the high average level of personal debt relative to personal income, an increase in bankruptcies is likely. Personal consumption expenditure, which has driven the economy so far, may drop.


Featured as Person of the Week on MortgageOrb.com
December 30, 2008, 7:55 pm
Filed under: Press Articles | Tags: , , ,

 

Tom Healy | The Emperor's New Clothes

Tom Healy

 

 

I was just featured as Person of the Week on MortgageOrb.com – the single most relied-upon electronic information venue for all mortgage professionals. 

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