Thursday, May 19, 2005

Hi there! My name is Captain Obvious!

Washington Post: "U.S. Warns Lenders to Elevate Standards"

So apparently some federal regulators stepped up to the plate a few days ago and suggested that mortgage and real-estate lenders ratchet-up their lending standards. A little late to the game, I'd say.

Easily the best paragraph of the article:

"As long as the housing bubble doesn't burst, home equity lines should remain strong and remain safe," said Scott Stern, chief executive of Lenders One, a St. Louis-based cooperative of 60 mortgage companies that originate home-equity lines, including some that feature 100 percent loan-to-equity ratios. "As long as the bubble doesn't burst, there should be no serious problem."

If lending and buying criteria are based on bubble conditions, exactly how is it that the words "strong" and "safe" can even apply at all? Unless I'm mistaken, history is still waiting to see an asset bubble that doesn't burst. That's the nature of a bubble, right? To burst?

Or maybe my focus should be on the word "burst" rather than "bubble." Maybe what Mr. Stern means is that if the bubble merely "slowly deflates," instead of "bursts," then everything will be hunky-dory, for the most part. My understanding is that when it comes to real-estate bubbles, you typically don't get a burst. You get a hiss.

I don't know how much you can compare the situation of Japan 1989-2005 to that of the United States 2000-?, but according to most sources I've read, values of land in Japan have declined for 14 straight years now. (While all land values fell heavily, Japanese commercial land values fell much faster than residential land values.) That would be the hiss noted above, methinks. Not saying that it will happen here, but real estate values can fall, and fall for extended periods.

This month's issue of Money magazine is replete with stories of west-coast real-estate riches — from the already-realized, to the we're-banking-on-it, to the merely hoped-for. Making a mint by flipping San Diego stuccos every two years sure makes wealth look easy — except that that last house you just bought for a cool $1.5 million is just as hyper-inflated as the $800k fixer-upper you just sold. And with banks loaning huge mortgage money to pretty much anyone with two teeth and a shadow, you have to wonder how all this is going to turn out.

— Posted by Michael @ 12:05 AM


Whether it's a hiss or a burst, you're still going upside-down on your house if your HELOC is 100% LTV. I think the whole 100% LTV this is just scary.

I think the lender mentality has shifted from "let's make a loan we'll get paid back on" to "let's lend to this family before someone else does." Or perhaps it's just "let's make a loan we can sell for a little profit on the secondary market."

Neither of the latter two options lead to reliable lending and solvency for debtors or lenders.

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