Name the Year: Declining Home Prices and Equity Removal
UPDATE: In this context, Dr. Black catches Jamie Dimon expressing what is at best ignorance:
However, [Dimon] cautioned, until the market meltdown “you never saw losses in these products, because home prices were going up.”
All that research in 1984 and 1990 was for naught, apparently.
I’m still away (things are better, but still not completely back to normal), but this is too good not to post:
Unfortunately, many default models using original LTV [Loan-to-Value] have underestimated the level of delinquencies in recent years. Measurement of the amount of equity borrowers have in their home is the chief cause. Such mismeasurement is due to two factors: declining home prices and removal of equity via second mortgages or home equity lines of credit.
Is this from:
- 2008-2010?
- 2004-2006?
- 1996?
- officially 1996, but other textual evidence indicates it was written between 1989 and 1993?
My answer is (4); the official one is (3), since it’s from the Third Edition of Frank J. Fabozzi’s Bond Markets, Analysis and Strategies (now in its 7th edition). But if anyone out there has the first or second edition and wants to check the chapter on Mortgage Loans, I’ll give odds the paragraph is virtually identical in the Second Edition.
you never saw losses in these products, because home prices were going up.
This is pretty much true. From 1990 to 2006 (16 years) during the time these products were becoming popular home prices pretty much just went up: http://www.doctorhousingbubble.com/wp-content/uploads/2009/08/case-shiller-index-nationwide.png
Over the long term if you look at some Case-Schiller charts you see some “busts”:
http://yellowroad.wallstreetexaminer.com/blogs/wp-content/uploads/2009/03/case-shiller-chart-updated.png
but be careful, most of these charts are “inflation adjusted” so nominal values held up a lot better: http://img33.imageshack.us/i/chartusa1900nominal.png/
However were some periods of time where housing prices declined, but this was often considered a regional phenomena and unlikely to be nationwide. Furthermore, during most of mortgage history down payments were required, shielding lenders from principle losses from say a 10% decline.
It is from this data set that the models and concurrent underwriting standards were developed, to the banks everlasting regret.
There was this guy who believed very much in true love and decided to take his time to wait for his right girl to appear.
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You may painfully regret, only to realise that it is too late.
It is interesting that the great depression was clearly such ancient history that it had to be ignored on the house price issue. One such house price collapse suggests that another could follow. Yes there were not nice digital data available, but Wall Street could have hired flocks of students to go to libraries and collect the information from old books and newspapers. 16 years is a laughably short period for tail events, 100 is barely adaquate, but better. Note that this sort of thing happened once the depression generation retired from Wall Street, and their replacements did not know/care about this.