Banks and mortgage lenders

[squiffy]

This is what may happen eventually to overextended or overly aggressive banks, savings and loans, or mortgage lenders after 5-10 years of a go-go real estate market.

http://www.fool.com/News/mft/2004/mft04021318.htm?source=mpmftlist

[deathtoau]

The housing bubble can only go so far. The burst is coming and when it does the S&L scandals of the 80s will be repeated in force. Be afraid, be very afraid.

Or maybe I am just extra parnoid, maybe home prices will continue rising between 8-15% a year forever. Anyone want to make a wager??? /images/graemlins/grin.gif

[adios]

Don't have time to respond to all the posts and I'll get back to them later but this one I can dispose of quickly. Looking at the housing market as a ubiquitous market is a mistake of ignorance. So the question that begs to be answered is which housing markets are you referring to when you state 8%-15%? Tell me which lenders you think are particularly vulnerable in the areas you refer to and lets see if we can make a bet about whether or not they'll go into chapter 11 at even money. I assume you have some lenders in mind that are particularly vulnerable.

[Wildbill]

They don't have to raise 8-15% for the bank to survive, they just have to avoid going down 15% instantly. Hard to see the whole thing being revisted, Fanny and Freddie are just so powerful right now. They are the only ones we need to worry about for now. If incomes start plummeting I suppose banks could be in trouble, but right now they pawn off so much exposure to third parties that I doubt they are as exposed as people think. Also lower rates throughout the system have led a lot of money to flow through to REITs and other real estate investment ideas. Those people are bearing a lot of the risk as well. Simply put back in the 80s getting a home loan meant talking to a bank or S&L. Today there is a much more diversified field to choose from, which is also partly the reason for such low rates.

[SossMan]

[ QUOTE ]
The housing bubble can only go so far. The burst is coming and when it does the S&L scandals of the 80s will be repeated in force. Be afraid, be very afraid.

Or maybe I am just extra parnoid, maybe home prices will continue rising between 8-15% a year forever. Anyone want to make a wager???


[/ QUOTE ]
The S&L scandals had less to do w/ a housing bubble, and more to do w/ an unregulated lending environment and a regulated deposit base. Also, the popularity of ARMs and hybrid ARMs as portfolio loans on the books of SnLs along with the MBS market for fixed rate product protects real estate asset backed banks from the risk of negative yields (the symptom/byproduct of the aforementioned environment).

[squiffy]

Well, an ARM is a double-edged sword. If a high percentage of buyers go to ARMS and buy too much house at a deceptively low rate, the default rate may increase substantially if interest rates increase and if a high percentage of ARM buyers cannot pay the increased mortgage payments.

Then, remember that the ARM loan is secured by, you guessed it, home values. So if a high percentage of people default on their ARMS in a community, and borrowers have to sell their homes or the bank has to foreclose on a lot of homes, home values may fall.

[adios]

What you say about home prices could conceivably happen. However, you really have to look at firms involved with mortgages on a case by case basis to evaluate the risk involved to earnings. For example the business model for FNM is far different than say the business model for NFI or IMH which is far different than the business model for NLY which is far different than the business model for CFC.

What I am more concerned about is the derivatives market where mortgage firms hedge their risks and the liquidity of money for short term borrowing. An LTCM type event would be really bad news for these firms.