The Collected Works of Author and Blogger Larry Roberts

Archive for September, 2012

Demand for houses by owner occupants has been anemic for nearly three years after four years of steep and unprecedented declines. Despite the refrain of increased demand from the bottom-calling glee club, the data clearly shows any increase in sales volume and demand this year is entirely due to cash investors, largely hedge funds buying low-end properties in beaten down markets. The decline in purchase applications is caused by two factors: potential buyers do not have the down payment, and potential borrowers cannot qualify for the loan. During the housing bubble, debt was cheap and plentiful, so many Americans stopped saving in favor of taking on copious amounts of debt. The Great Recession depleted the savings of the few Americans…[READ MORE]

Forecasting interest rates is very difficult. I haven't had much success at it. The first challenge is to figure out what the market would do if left to its own devices. With the plethora of variables in play, that's no easy task. Further complicating the problem is the federal reserve which will often intervene to make interest rates do the exact opposite of what a natural market would do. It's very difficult to figure out when the federal reserve will move in and mess everything up. For example, when the housing bubble burst, a free-market would have taken mortgage interest rates sky high. Mortgage rates were too low during the bubble as risk was mispriced. After prices turned south, the…[READ MORE]

Most people are cautious by nature waiting for others to pioneer new places, new ideas, and new patterns of behavior. People will observe the results of pioneering behavior, and if the pioneers are rewarded and recommend what they did to others, the herd will follow. If the pioneers are handsomely rewarded and  strongly recommend a course of action to others, the herd can turn into a stampede. The rewards of strategic default has bankers worried. With 11 million underwater loan owners, the last thing bankers want is a wave of strategic default as overextended borrowers realize they can eliminate their debt-service payments with little or no penalty. The onerous burden of housing debt may be soothed by rising prices, but…[READ MORE]

When you were in high school, did your parents ever caution you about the company you keep? The people you share common interests with can be either a positive or a negative influence on your decision making. They can lead to to success, or they can lead you astray. When lenders want to evaluate a potential borrower, they don't interview friends, but they do examine the financial characteristics of a borrower's life, and they make determinations based on the historical behavior of others with the same characteristics. That's the whole point of a FICO score. The Fair Isaac Corporation built a successful business around classifying and categorizing large groups of people based on similar financial characteristics. If people in your…[READ MORE]

In The Great Housing Bubble, I wrote about how we could prevent the next housing bubble: Loans for the purchase or refinance of residential real estate secured by a mortgage and recorded in the public record are limited by the following parameters based on the borrower’s documented income and general indebtedness and the appraised value of the property at the time of sale or refinance: All payments must be calculated based on a 30-year fixed-rate conventionally-amortizing mortgage regardless of the loan program used. Negative amortization is not permitted. The total debt-to-income ratio for the mortgage loan payment, taxes and insurance cannot exceed 28% of a borrower’s gross income. The total debt-to-income of all debt obligations cannot exceed 36% of a…[READ MORE]

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