The Collected Works of Author and Blogger Larry Roberts

Archive for September, 2014

FHA loan originations are plunging because high borrowing costs turn off potential buyers, and risks of put-backs make lenders reluctant. The biggest barrier to first-time homebuyers is saving for a down payment. As a result, most first-time homebuyers turn to the FHA because the FHA only requires 3.5% down, but as everyone who's gone down that road also quickly learns, FHA financing is expensive; in fact, FHA financing is so expensive, it's like taking out a 12.4% second mortgage! Many have quipped that FHA has become the replacement for subprime. They have very low standards for qualification (a 580 FICO score), a very low down payment requirement (currently 3.5%), and as a result, they stepped into the void left by the…[READ MORE]

Based on the moral hazard from lessons learned from the last housing bust, future housing declines will experience very, very low sales volumes. What lesson did lenders learn from the painful losses from the housing bust? Did they learn they shouldn't peddle toxic mortgages? Nope. Did they learn they shouldn't give loans to unqualified borrowers? Nope. What they learned is that no matter how foolishly irresponsible their lending gets, they will get bailed out by government cash and federal reserve interest-rate policy, and they can avoid mortgage default losses by loan modification can-kicking until prices rebound. As long as they don't foreclose and resell for a loss, they can amend-extend-pretend their way out of any lending disaster. That's really what…[READ MORE]

The best savings and investment plan for a stress-free retirement involves paying off a home mortgage. Four years ago when I was raising money for the Las Vegas venture, I gave presentations on why I believed cashflow-positive rental houses were a good investment. One of the primary reasons was to provide for retirement. Most people look at investment as the process of picking which asset will appreciate the most during a holding period. In my opinion, that is speculation. Ultimately, speculative assets need to be converted back to cash in order to provide benefit to the investor. That brings emotion into the decision and timing becomes overly important to performance. When do gold bugs sell their gold? I prefer selecting assets based…[READ MORE]

Rather than exacerbating a problem with homelessness or creating a mass migration, most people who lost homes in foreclosure stayed in their neighborhoods. What happens to people who lose their house in foreclosure? Do they end up homeless and destitute? Do they resort to a life of crime or prostitution? Is foreclosure the end of modern civilization as we know it? People who were trying to prevent foreclosures proffered all of these fallacious reasons why we needed to stop foreclosures and give delinquent borrowers principal reductions or free houses. The reality is, most people who lost their homes in foreclosure moved in to a nearby rental -- and many were financially better off with a lower cost of housing in…[READ MORE]

Some form of subprime mortgage lending will return. Will subprime 2.0 be a disaster to rival the Great Recession and Housing Bubble? Subprime lending as an industry barely existed prior to 1994. There were few lenders willing to loan to people with poor credit, and there was no secondary market to purchase these loans if they were originated. The growth of subprime was the direct result of the lowering of lending standards created by the change of incentives brought about by the creation of the secondary mortgage market. Once lenders no longer had responsibility for holding the loans they originated, their incentive was to increase volume; quality meant nothing and quantity meant riches. The easiest way to increase volume was to…[READ MORE]

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