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January 21st, 2010 at 5:22 pm
@bridgeman:
“…if you could a chimp how to originate a mortgage…”
You lost me. Wanna try that one again?
January 21st, 2010 at 5:19 pm
@davers:
You are assuming that the only two categories of US mortgages are prime and subprime and that distinction is based on fundamental lending risk. That’s a logical assumption but that’s not how they are defined. Take a look at the categories at the link I posted.
In particular Option ARM is a distinct category from subprime. Note also Alt-A which is borrowers with good credit ratings but with debt service ratios too high for prime (very common in costly states such as California). Agency is loans bought by Fannie/Freddie (maybe FHA insured too) which I think were all prime when originally issued. I do know that F/F did not buy the riskiest mortgages, I’m not entirely sure about the in-between stuff.
January 21st, 2010 at 5:17 pm
drachen:
“You were falling under niceness exemption A) pursuing an argument with flaws a chimpanzee could understand.”
I am getting the sense that we would all pay money to put you in a chimp cage and watch you pontificate, if you could a chimp how to originate a mortgage, you would have my respect.
We’re waiting.
January 21st, 2010 at 5:13 pm
drachen:
“I also occasionally make mistakes and jump at someone undeserving, when that happens I try to be as contrite as my ego allows. Does that work for you?”
No.
January 21st, 2010 at 5:04 pm
drachen:
“I just get pretty short with people who press a flawed argument even after the flaws in the argument have been demonstrated to them in such a way that a moderately intelligent chimpanzee could understand.”
I can’t wait to see how mad you get when that chimpanzee throws his feces at you as your are explaining your economic theories to him!
A word of caution, when angered, chimpanzees go for the hands and genitals first. It would be best to have 911 pre-dialed so you can press send with your nose.
I suppose your next trick will be teaching the dividend discount model to moderately intelligent dolphins?
January 21st, 2010 at 5:04 pm
@Anonymous:
Meh, are you saying you don’t occasionally make mistakes?
January 21st, 2010 at 5:03 pm
@Dave:
This debate is silly, yes there are lots of standardized tests for measuring intelligence, no, none of them test for grammar skills. This debate is about as far off topic as we can get (which I suppose is why Dave jumped in).
I was merely pointing out that judging people’s intelligence based on the grammar they use in an informal setting is a pointless exercise of stabbing in the dark, that’s all, there’s really no need for a dozen posts on the subject.
January 21st, 2010 at 5:02 pm
“I’m even nice to idiots who don’t get it into their heads that they’re geniuses.”
I was going to let that one slide, but I will join the dog pile. Shouldn’t it be:
“I’m even nice to idiots who don’t get it into their heads that they’re NOT geniuses”
January 21st, 2010 at 4:58 pm
Drachen:
“I’m actually quite nice to intelligent people. I’m even nice to idiots who don’t get it into their heads that they’re geniuses.”
As opposed to the geniuses who can’t get it into their heads that they’re idiots?
January 21st, 2010 at 4:47 pm
Hold on a second- is Drachen a professor?!?!
January 21st, 2010 at 4:42 pm
@Drachen:
You brought up the IQ thing a year ago for no purpose other than self aggrandizement. And now it is raised a second time for similar reasons. CFA called you out on it and he hit the nail on the head.
IQ tests WERE seen as the benchmark for intelligence… decades ago. If you got your head out of your academic environment (err ass) and looked at the real world, you might actually know that.
January 21st, 2010 at 4:24 pm
My point was not that I’m smart. My point was that IQ tests don’t measure grammar ability and yet they are seen as the benchmark for measuring intelligence. Logically then it follows that grammar skills and intelligence are not necessarily linked.
But then that should be obvious to anyone of intelligence.
January 21st, 2010 at 4:06 pm
Classic. When the errors of one’s ways are pointed out, one falls back on “I have a high IQ.” It is amazing the sheer number of geniuses on this anonymous blog. Throw in all the Warren Buffet money managers, and this site is a veritable collection of the best and brightest and richest.
January 21st, 2010 at 3:46 pm
Hmm, last IQ test I took didn’t have grammar on it. I guess that’s why I scored so well!
January 21st, 2010 at 3:30 pm
Do not take Drachen’s criticisms to heart Bridgeman.
Just point to the professor’s awkward sentence structure and improper use of commas in his last post if you want to feel good about your level of intelligence.
January 21st, 2010 at 3:24 pm
I know this is off topic, but I simply could not help it.
Only in Vancouver… – a “Million Dollar Home” is actually priced at $2.6M…. Too funny!
http://vancouver.en.craigslist.....76470.html
January 21st, 2010 at 3:24 pm
I was always under the impression that anyone who qualified for a mortgage on standard terms like a fixed rate 25 yr amrt kind of things was prime.
Anyone who needed special tricks like 0 down and ARMs in order to get a mortgage was subprime.
I dont think that Borrower B
(“Borrower B has a good credit rating, makes 30K, buys a 500K house with 0% down payment and an “exploding” option ARM. Borrower B is not “subprime”.”)
would be prime. He needed the 0 down ARM to get the loan. If he neede 5% down and 25 year amrt on a fixed term he wouldnt have gotten the loan.
Even if interest was 0% using the 33% rule (assuming he takes all 30K home) he could only pay off 10K/year. It would take a 50yr amrt for that to work. I dont see how this could be considered a prime loan.
I have no links supporting this, they are just my thoughts. The term subprime is thrown around to much these day there are probably 100 different deffinitions of it anyway.
January 21st, 2010 at 3:19 pm
@bridgeman:
I’m actually quite nice to intelligent people. I’m even nice to idiots who don’t get it into their heads that they’re geniuses. I just get pretty short with people who press a flawed argument even after the flaws in the argument have been demonstrated to them in such a way that a moderately intelligent chimpanzee could understand. I also occasionally make mistakes and jump at someone undeserving, when that happens I try to be as contrite as my ego allows. Does that work for you?
You were falling under niceness exemption A) pursuing an argument with flaws a chimpanzee could understand.
January 21st, 2010 at 2:59 pm
@scoop:
Correct, and notwithstanding my simplistic definition of “subprime” my main point remains:
The only criteria that determine whether there is a bubble, and therefore whether there will be a bust, are price/rent and price/income. What you call the mortgage does not matter.
January 21st, 2010 at 2:58 pm
@scoop:
Compounding the issue of not being able to refinance is falling real estate values putting the owner under water. Not being able to sell your property to cover the mortgage is the issue. That’s when the fun starts.
January 21st, 2010 at 2:56 pm
yay! look! a link! see how hard that was bridgeman?
January 21st, 2010 at 2:44 pm
@Carioca Canuck:
No he doesn’t. He has an Option-ARM mortgage. These are different categories as defined by the US mortgage industry. That’s my point. Look at the different categories in the chart below, for example (and note the minor role played by subprime mortgages):
http://www.calculatedriskblog......chart.html
To have a meaningful discussion about US mortgages, we have to use the definitions used by the US mortgage industry. You wouldn’t want to have a discussion about pets when different people call different animals a “dog”.
January 21st, 2010 at 2:02 pm
Patriotz got sidetracked from his own main point – the whole discussion of do we / don’t we have a “subprime” mortgage problem in Canada is irrelevant. When prices began to decline in the States (due to the bubble reaching its inflection point), overextended borrowers could no longer refinance and so were forced to default. The wave of defaults just hit the subprime market first because those borrowers were generally overextended the worst.
January 21st, 2010 at 1:22 pm
yet the moon is still made of cheese
January 21st, 2010 at 1:15 pm
~Drachen
Wow! You are an unpleasant fellow! You must be a lot of fun at parties
I think my biggest mistake was thinking there could be civil discourse on a blog forum. With that, I bid you adieu!
January 21st, 2010 at 1:08 pm
@bridgeman:
Are you being deliberately thick? FM&FM have their definition, sure, but theirs is not the ONLY definition of sub-prime, it’s not like they have the term copyrighted or anything.
So, as the term CAN be properly used on some loans that ‘conform’ by FM&FM standards you are wrong.
Since it doesn’t refer only to the credit rating of the borrower Patriotz is wrong.
Is there something tricky here? It’s not rocket science. It’s more like throwing rocks science.
January 21st, 2010 at 12:36 pm
the moon is made of cheese
January 21st, 2010 at 12:27 pm
“@bridgeman:
Those definitions apply to all forms of sub prime lending, including Mortgages. You’re both wrong, live with it.”
Conforming loan standards for mortgages as defined by Freddie Mac applies to consumer credit card loans?
January 21st, 2010 at 12:25 pm
“Fannie Mae and Freddie Mac have defined qualifications for what does and does not constitute a sub prime mortgage.
—————-
Then why not link to those definitions?”
You got me logic, I made the entire thing up. There is no such thing as a conforming loan.
January 21st, 2010 at 12:20 pm
Fannie Mae and Freddie Mac have defined qualifications for what does and does not constitute a sub prime mortgage.
—————-
Then why not link to those definitions?
January 21st, 2010 at 12:18 pm
@bridgeman:
Those definitions apply to all forms of sub prime lending, including Mortgages. You’re both wrong, live with it.
January 21st, 2010 at 12:18 pm
“I am not here to do the work for people”:–
———–
So, unsupported statements then. Way to make an argument.”
Oh, I am not trying to make an argument. Fannie Mae and Freddie Mac have defined qualifications for what does and does not constitute a sub prime mortgage. Nothing anyone says on this web site can change that. I was just pointing out that Patriotz definition of a sub prime mortgage, while entertaining, is not correct.
January 21st, 2010 at 12:13 pm
“FM&FM ‘conforming’ loans is only one part of the definition.
So… You’re both wrong.”
My posts were only referring to Sub Prime MORTGAGES. I was not speaking about sub prime lending (as it relates to credit cards, etc), which is an altogether different animal.
January 21st, 2010 at 12:08 pm
CBC radio just had a little blurb on recent layoffs in the news (teachers, BC govt etc) The Govt of BC is saying that although layoffs are occurring, the economy is improving. The Govt says “people should watch their spending and not get into debt”
Bwhaahahahaha…..anyone point out to them that if we DIDN’T get into debt (ie mortgages, consumer spending) our economy would surely be in the toilet??
January 21st, 2010 at 12:05 pm
@bridgeman:
“Subprime lending (near-prime, non-prime, or second-chance lending) in finance means making loans that are in the riskiest category of consumer loans and are typically sold in a separate market from prime loans. The standards for determining risk categories refer to the size of the loan, “traditional” or “nontraditional” structure of the loan, borrower credit rating, ratio of borrower debt to income or assets, ratio of loan to value or collateral, documentation provided on those loans which do not meet Fannie Mae or Freddie Mac underwriting guidelines for prime mortgages (are “non-conforming”).”
FM&FM ‘conforming’ loans is only one part of the definition.
So… You’re both wrong.
January 21st, 2010 at 12:01 pm
“I am not here to do the work for people”:–
———–
So, unsupported statements then. Way to make an argument.
January 21st, 2010 at 11:52 am
I am not here to do the work for people, I just wanted to let people know it was not correct. This is an anonymous internet forum- the only thing I know for certain about Patriotz is that Patriotz is not a Chartered Financial Analyst.
How about this: everyone interested spend a few minutes and post what they have found to be the *researched* definition of a subprime mortgage (not what you think it is). Hint: it has to do with conforming and non-conforming loans per Freddie Mac and Fannie Mae.
And bonus question: if an individual with a credit score of 790 and a gross household income of 100k takes out a mortgage for 950,000, would Fannie Mae and Freddie Mac consider that a ‘prime’ loan or a ‘subprime’ loan?
January 21st, 2010 at 11:25 am
@bridgeman:
As a service to the rest of the readers could you make a clarification of the errors in the statements made? I know that Patriotz can handle the truth if you have it and most of the readers would like to know the truth.
January 21st, 2010 at 11:02 am
That should be “debt service ratios”
January 21st, 2010 at 11:02 am
@patriotz:
Subprime is just that. Lower credit qualification standards, such as credit score and/or debt servcie rations……or the extremely loose and obviously redrawn terms of the financing are also what make any particular deal “subprime”.
Borrower “B” in your scenario has a subprime mortgage…….there are no two doubts about it. IMHO every single deal CMHC does is subprime. Why ? Because the banksters won’t hold the paper and take the risk themselves.
January 21st, 2010 at 10:59 am
Patriotz~ the information you provided about what does and does not constitute a subprime mortgage is incorrect.
January 21st, 2010 at 10:37 am
Just because prices for downtown condos have doubled in 5 years doesn’t mean it’s a bubble. Right Dave? After all, when you are a pretty, medium sized city on the coast in the southwest corner of the country, with a very desirable climate and strong tourism, this gain is justified. Right?? Yeah, that’s what these guys thought too!
Then they lost $28k/month.
January 21st, 2010 at 10:25 am
@Arwen:
Keep saving, you should have a good down payment by the time prices are hitting reasonable levels and if you buy at the right time on the way down you can not only save a bundle by selective shopping and driving a hard bargain you will have an unprecedented range of choice among properties as the inventory should be pretty huge by then.
January 21st, 2010 at 10:17 am
@patriotz:
Three, the writer wonders whether the CMHC could ramp-up their due diligence as fast as they’ve been increasing the pace of their underwriting. It’s a false assumption that they were doing adequate due diligence BEFORE 2008 (clearly there are enough examples around here that they were not).
January 21st, 2010 at 9:48 am
What I find ironic is that with what we’ve saved for down payment and in a regular market with our credit rating, we’d be a good risk. But any bank who extends that ‘good risk’ profile – for $300K or so of mortgage – to $500K and more would be asking for us to default.
January 21st, 2010 at 9:14 am
Great post, thanks.
As it was discussed many times on this blog, the CHMC is the MAIN reason for the huge run-up in transaction and prices. Interest is a large part of the actual cost of housing.
By heavily subsizing interest costs (by providing extremely low interests to untrustworthy borrowers with low down payment and high risk) the government of Canada is effectively stoking up the market and generating an unnatural and very dangerous price dynamic in the Canadian housing market.
This is especially visible in Vancouver where the market was already largely overvalued and RE valuations were way above reasonable fundamental valuations in 2008.
I have said this before and I will say it again: if you have a chance, write to your MPs (again and again) to let them know you are AWARE of the scam, you don’t condone it and you hold them responsible for it.
The CHMC operations should be scrapped or drammatically restricted: only then rationality and measure will return in this market.
Th CHMC and the government of Canada is adding fuel to the engine of a train which is speeding up towards precipice.
And we will all pay for their short-term vision and populism!
Write to your MP!
January 21st, 2010 at 8:14 am
The emergency rates are luring in borrowers that have no business borrowing in the first place. This brings in riskier borrowers who are candidates for being violently penalized when we return to traditional interest rates.
January 21st, 2010 at 8:04 am
@buffates:
No, you don’t understand what the US term “subprime” means. It refers only to the credit rating of the borrower.
Borrower A has a bad credit rating, makes 30K, buys a 100K house with a 20% down payment and 25 year amort. Borrow A is “subprime”.
Borrower B has a good credit rating, makes 30K, buys a 500K house with 0% down payment and an “exploding” option ARM. Borrower B is not “subprime”.
As I said the term has nothing to do with the fundamentals of the mortgage.
January 21st, 2010 at 7:56 am
Canadians are holding the equivalent of subprime if they are getting accustomed to emergency interest rates. Rates that have never before been seen in the history of our country. Raising these rates is an exact parallel to the US fiasco. On another note, I’m seeing pervasive examples of the real estate community urging new buyers that they should not trouble themselves with the principle of the loan but rather what they can afford monthly. If they are stretched out at the never-to-be-seen again low rates then WHEN the rates return to NORMAL they will start treading water and eventually have their heads underwater. Do not be a debt slave in the environment we are just about to go into.
January 21st, 2010 at 6:34 am
Good article but the author is still holding to some fallacies.
One, the RE bust in the US was not caused by “subprime” financing. Like all other RE busts, it was caused by prices being out of proportion to rents and incomes. Whether the financing was “prime”, “subprime”, “Alt-A”, or “option-ARM” is beside the point – the fundamentals determine the soundness of the financing, not labels based on other criteria.
Two, nobody is “homeless” in the US because of the RE bust. Rental accommodation is plentiful in all US markets and rents are falling – precisely because of the overbuilding caused by the bubble.