Are we heading for another potential Financial Crisis?

[jazz4cash]

+1 on The Big Short. I think 10 years ago the problem was more the CDO's than the stretch loans per se. If the people granting the loan have to hold it they will evaluate the borrowers more.

Went looking for The Big Short movie (already read the book) on Prime but it's not free so I watched Too Big To Fail instead. Excellent perspective on the financial crisis of 08 from a broader perspective than just the housing component. Still, one of the best simple explanations of the intersection between mortgages and investment banking that was a major component of the crisis.

 

[Mr._Graybeard]

+1 on The Big Short. I think 10 years ago the problem was more the CDO's than the stretch loans per se. If the people granting the loan have to hold it they will evaluate the borrowers more.

Ten years ago NPR's "This American Life" produced a program called "The Giant Pool of Money." While the program certainly pointed fingers of guilt, it also noted one phenomenon in the global economy that set the stage for the risky loans, fraudulent CDOs and ultimately the financial collapse: The sum of investable money worldwide had doubled between 2000 and 2008.

Investors, both retail and institutional, were hungry for yield as a result ... and many were willing to turn a blind eye to the risk they had to assume to achieve it. That produced an opportunity for the ethically pliable in the financial industry, and they took advantage of it.

The program is a great piece of journalism. It's an hour long, but a transcript is available online: https://www.thisamericanlife.org/sites/default/files/355_transcript.pdf

 

[aaronc879]

I think variable rate mortgages are a bigger problem than 100% mortgages. That said, I do think there should be a minimum down payment requirement of at least 5%. I haven't seen anything to think we are heading toward another financial crisis but can't know for sure.

 

[ShokWaveRider]

Funny how we can change the subject so quickly and waffle on about movies and books that "Really" do not have anything to do with what I was asking / observing.

I am just concerned that there "May" be a bunch of folks out there that can be convinced to "bite off more than they can chew" with respect to a home loan. Especially Veterans and those that are being offered 100% mortgages. It was the Phrase "Your House/Home is your Bank" That got me concerned. There are a lot of Gullible people out there, and there are plenty more than are looking to take advantage of them.

 

[braumeister]

In all fairness, I bought my first home with a VA mortgage ($25 down payment). I couldn't have bought any other way, and it was a very good thing for me.

 

[Mr._Graybeard]

Funny how we can change the subject so quickly and waffle on about movies and books that "Really" do not have anything to do with what I was asking / observing.

I am just concerned that there "May" be a bunch of folks out there that can be convinced to "bite off more than they can chew" with respect to a home loan. Especially Veterans and those that are being offered 100% mortgages. It was the Phrase "Your House/Home is your Bank" That got me concerned. There are a lot of Gullible people out there. and there are plenty more than are looking to take advantage of them.

Of course. And there are always real estate brokers trying to convince home buyers they can afford to spend more on a house than they can pay for comfortably. There are traps at every turn.

 

[ShokWaveRider]

When we first came to the USA in 1989 and purchased our first home. We had no real established credit, even though we moved from Canada to Southern California. We both had good jobs and salaries for those days, a healthy bank account by comparison to most, but still had to find 20% in order to get a mortgage. It was OK for us because we had the cash from a home sale in Canada. But it was still tight as homes in SoCAL were quite expensive by our standards.

 

[MichaelB]

Funny how we can change the subject so quickly and waffle on about movies and books that "Really" do not have anything to do with what I was asking / observing.

I am just concerned that there "May" be a bunch of folks out there that can be convinced to "bite off more than they can chew" with respect to a home loan. Especially Veterans and those that are being offered 100% mortgages. It was the Phrase "Your House/Home is your Bank" That got me concerned. There are a lot of Gullible people out there, and there are plenty more than are looking to take advantage of them.

Actually, what "got us into trouble" was what Mr. Graybeard posted previous to your post. Financial imbalances led to too much money in financial institutions and not enough low risk borrowers. It's not the amount of the mortgage so much as it is the credit worthiness of the borrower. That does not seem to be the case today, at least in mortgages.

Ten years ago NPR's "This American Life" produced a program called "The Giant Pool of Money." While the program certainly pointed fingers of guilt, it also noted one phenomenon in the global economy that set the stage for the risky loans, fraudulent CDOs and ultimately the financial collapse: The sum of investable money worldwide had doubled between 2000 and 2008.

Investors, both retail and institutional, were hungry for yield as a result ... and many were willing to turn a blind eye to the risk they had to assume to achieve it. That produced an opportunity for the ethically pliable in the financial industry, and they took advantage of it.

The program is a great piece of journalism. It's an hour long, but a transcript is available online: https://www.thisamericanlife.org/sites/default/files/355_transcript.pdf

 

[Hamlet]

The next crisis probably won't be housing-related. Wall Street will have found something new to lose all of their borrowed money on.

We'll probably find out soon that AIG has been insuring trillions of dollars worth of bets on the leveraged VIX products, and is now insolvent again.

 

[CaptTom]

... Like in Canada you now need to have 20% I think. I know the US would not get that radical, but 5-10% is reasonable IMHO.

Personally, I think 20% is a reasonable down payment.

I'm expecting a lot of flack for that statement. I know what I think, and why. I'd be interested to hear other perspectives.

 

[GravitySucks]

Personally, I think 20% is a reasonable down payment.



I'm expecting a lot of flack for that statement. I know what I think, and why. I'd be interested to hear other perspectives.

My first house was 10% down, but was even less as we rolled all closing costs into the mortgage.
Second house was about 20% down.
This house was less than 20% down as the second house took to long to sell.
Each time I was under 20% I had to add PMI to the mortgage payment. That insurance payment was high enough that I can't imagine the underwriter would have trouble meeting payouts and was sure an incentive to get to 20% paid off ASAP.

 

[timo2]

Regarding the OP, that was the last crash. From my rudimentary view, bubbles precede crashes. It seems as if every bubble is different. So what will the bubble be this time?
Some 'economists' say that excessive tax cuts cause bubbles. I guess we will see.

 

[haha]

They're just ads. Could just be a bait and switch. "Oh madam, the 100% mortgage only applies to certain customers. Those in your situation may wish to look into our other offerings..."

I get dozens of ads for walk-in tubs, stair-climbing chairs, gigantic underwear (who even knew there was such a thing as an "MM" brassiere?)

I think that stands for majestic mammaries. Congrats!

 

[Amethyst]

I had an alternate notion, but thought better of it...either way, I do not qualify...

I think that stands for majestic mammaries. Congrats!

 

[kgtest]

First house 10% down, no PMI on CFD
2nd house 10% down no PMI + govt credit
3rd house 10% down PMI for 2yrs.

edit, I had like 60k cash for the third home, but was glad I left a buffer. 2 brand new car payments, brand new 400k home, rolling fast and furious in IT with first kid on the way and boom laid off without severance.

that was four years ago. Things have changed drastically. debt free, well on way to 2 comma! IT recruiters don't stop calling.

 

[Pilot2013]

Some 'economists' say that excessive tax cuts cause bubbles. I guess we will see.

 

[bobandsherry]

Some 'economists' say that excessive tax cuts cause bubbles. I guess we will see.

Who?

 

[dixonge]

Funny how we can change the subject so quickly and waffle on about movies and books that "Really" do not have anything to do with what I was asking / observing.

I am just concerned that there "May" be a bunch of folks out there that can be convinced to "bite off more than they can chew" with respect to a home loan. Especially Veterans and those that are being offered 100% mortgages. It was the Phrase "Your House/Home is your Bank" That got me concerned. There are a lot of Gullible people out there, and there are plenty more than are looking to take advantage of them.

SWR - no one changed the subject. The movies and books being referenced are *absolutely* tied to your OP. You know, 2008, when everyone was giving away homes for nothing down and giving away HELOC loans for amounts larger than your home value. It’s exactly the same.

However, we are a LONG way away from another mortgage-related bubble.

 

[Brat]

When the Big Short was published I asked DD what she knew of Michael Burry. She said he is smart, very smart, but his investing style and personality don't make him a good fit as an investing partner in a VC.

 

[Senator]

& actually the "housing crisis" was as much about the investment industry gambling on things like credit default swaps and synthetic collateralized debt obligations (CDOs.) IOW, greed. And greed is wired into the human condition by Darwin, so never say never.

I thought it was caused by people not paying back the mortgages they took out? I wonder if the people continued to pay their mortgages, if the 'crisis' would have ever occurred?

It is a bit harder to take a mortgage out now, which is a good thing.

 

[OldShooter]

Who?

Well, the staff of the Economist magazine for example. The headline is "Running Hot" and the subhed is "America's Extraordinary Gamble." https://www.economist.com/printedition/2018-02-10

The articles "Running Hot" and "The Great Experiment" are worthwhile.

And @SWR, I mentioned "The Big Short" precisely because it is completely on topic. I think that few people realize how complex that crisis was. It has very little to do with the quality of the loans and everything to with how they were packaged and sold. See the movie and then read the book.

 

[pjigar]

FWIW:
Bought first house in 1999 with -3% down payment i.e. loan was 103% of the purchase price.
Second home in 2003 with 10% down
Third home in 2012 with 20% down.

I

 

[Senator]

Regarding the OP, that was the last crash. From my rudimentary view, bubbles precede crashes. It seems as if every bubble is different. So what will the bubble be this time?
Some 'economists' say that excessive tax cuts cause bubbles. I guess we will see.

Maybe it is the bubble in bond prices over the past 10+ years that is headed for a crash?

We do not have excessive tax cuts, so it will no be that. Letting people keep more of their own money is a better euphemism than tax cut.

I agree it may be the tax credits that can cause a price bubble. People are given money that they never had in the first place, and that could cause inflation. When you give people money and they do not know what to do with it, it can certainly cause issues. For an example, look at the excesses of the professional athletes...

 

[bobandsherry]

Well, the staff of the Economist magazine for example. The headline is "Running Hot" and the subhed is "America's Extraordinary Gamble." https://www.economist.com/printedition/2018-02-10

Um, as I read the article the only tax cut reference I saw was this:

Thanks to the recently enacted tax cuts, America is adding a hefty fiscal boost to juice up an expansion that is already mature. Public borrowing is set to double to $1 trillion, or 5% of GDP, in the next fiscal year. What is more, the team that is steering this experiment, both in the White House and the Federal Reserve, is the most inexperienced in recent memory. Whether the outcome is boom or bust, it is going to be a wild ride.

Is there something else I missed? If not, how do you draw this conclusion:

Some 'economists' say that excessive tax cuts cause bubbles. I guess we will see.

from that?

The only mention of a "bubble" is in regards to Fed policies, nothing about tax cuts:

What will determine how this gamble turns out? In the medium term, America will have to get to grips with its fiscal deficit. Otherwise interest rates will eventually soar, much as they did in the 1980s. But in the short term most hangs on Mr Powell, who must steer between two opposite dangers. One is that he is too doveish, backing away from the gradual (and fairly modest) tightening in the Fed’s current plans as a salve to jittery financial markets. In effect, he would be creating a “Powell put” which would in time lead to financial bubbles. The other danger is that the Fed tightens too much too fast because it fears the economy is overheating.

 

[OldShooter]

@bobandsherry, believe what you like. I have no interest in arguing.