WSJ: No-Doc Mortgages Making a Comeback

[Slimprofits]

https://www.wsj.com/articles/no-pay-...ck-11548239400

Lenders issued $34 billion of these unconventional mortgages in the first three quarters of 2018, a 24% increase from the same period a year earlier, according to Inside Mortgage Finance, an industry research group. While that makes up less than 3% of the $1.3 trillion of mortgage originations over that period...

[..]

So far, specialty mortgage companies have dominated in making such unconventional loans. But traditional lenders, which are doing less conventional business as interest rates rise, are turning to borrowers with harder-to-document creditworthiness as a new source of revenue and are helping to drive the growth. Nearly half of lenders who participated in a recent survey said they have plans to get into this business, according to Inside Mortgage Finance.

[..]

At the same time, Wall Street investors who buy home loans are scooping up unconventional mortgages that have been packaged into bonds, edging back into a corner of the market that is riskier but provides higher returns. There were $12.3 billion of such residential-mortgage-backed securities sold in 2018, nearly quadruple from a year earlier, according to credit-rating firm DBRS Inc.

DBRS says these deals have shown very little in the way of losses and nearly all underlying loans have remained current, though borrowers could become more stressed if the economy turns down.

Credit-rating firms say there are key differences between old loans and new: The new loans comply with postcrisis “ability-to-repay” rules that require mortgage lenders to make a determination that borrowers can pay down their debts. Underwriting standards and due diligence are stronger these days, they say.

[BK]

Re: WSJ: No-Doc Mortgages Making a Comeback

Check out St Louis Feds - Vacant homes in USA - held off market - 4.1 Million homes https://fred.stlouisfed.org/series/EOTHUSQ176N

[dcarrigg]

Re: WSJ: No-Doc Mortgages Making a Comeback

I've noticed an obvious jump in vacant properties on the ground for some time now. Lots of luxury condos built in the last decade near me are obviously not lived in for years on end. Census data pretty much confirms it. A good chunk might be owned by people who just use it as a pad a terre for a couple of weeks per year or something. I've seen whole complexes 80% empty. No people, no cars, no furniture. I'm not sure exactly how the business side all works out, but they keep building more, and it's almost all they build these days. Just today, the developer of one complex about a mile away sent out a news update that it now has a "special offer" to sell 2-bed units it was asking $950k for at $750k. They built the damned things in 2008. This is a giant, billion-dollar+ developer. I really ought to get to know how the business all works out better. But it's just totally strange to me. I never used to see stuff like this.

[Morgasbord]

Re: WSJ: No-Doc Mortgages Making a Comeback

It all enrages me. Most of the blue state metro markets are peaking and turning over starting last summer. It seems like it was all just an alternative-to-stock investment dumping ground for the global excess reflated money, and something in the system finally hit it's limit.

I pay 1500/mo to rent an apartment, been in it for over a decade, and I see units a block away of the same quality asking 450-500k, and I scratch my head in bemusement. Why would I pay ~2800/mo all in for what I can get for 1500? What I see is that some of these places turn into 30-day minimum VRBO furnished rentals, skirting the rules on our town's ban on unoccupied airbnbs. My town has several older entrenched landlords with low fixed costs, most of whom aren't greedy, and outside of their holdings is a limited housing stock changing hands every 6 months between flippers and wanna be landlords thinking they can get 2500/mo for garbage units from a college town with a household income of 60k of mostly service jobs. Now with California passing laws overruling local government's ability to influence development, we're seeing outside developers come in and build off campus student housing complexes where two bedroom apartments are split between four kids, two to a room at 1500/head. "Luxury student housing", they call it; I'm not even kidding.

I keep pouring my excess FAANG income into our business to build it up; at least we can control that.

[dcarrigg]

Re: WSJ: No-Doc Mortgages Making a Comeback

Sounds like your observations are coming from the other side of the continent to mine. Goes to show that the national legal structure is somehow promoting this type of thing. I like to think I'm decent at sniffing out the con--figuring out the game being played. Got to admit, on this one, I'm flummoxed. I get that the capital glut fuels it. I get that luxury is part and parcel of the sales pitch. I can't understand how holding a unit off the market for 10 or 11+ years rather than renting it or dropping the price is somehow the preferred option for a lot of these developers. I know some are used as AirBnB holes. But lots just sit empty. There has to be some combination tax scam or credit gambit going on behind the scenes that makes it so profitable. Otherwise, why the hell else would 80%+ of all new housing in the US for the last decade have been luxury units, an historically unlikely huge share of which persist in vacancy?

I feel like I'm an observant rube in an alley at a three card monte game. I can tell there's a scam going down. I just can't yet put my finger on exactly how it works. And what really has me scratching my head is noticing that lots of them are suddenly dropping the prices now after refusing to do so for so long. The game's afoot. But I'm no Sherlock.

[BK]

Re: WSJ: No-Doc Mortgages Making a Comeback

"I feel like I'm an observant rube in an alley at a three card monte game. I can tell there's a scam going down. I just can't yet put my finger on exactly how it works. And what really has me scratching my head is noticing that lots of them are suddenly dropping the prices now after refusing to do so for so long. The game's afoot. But I'm no Sherlock."

I couldn't agree more. Most homes that get sold today are often empty. Homes that were bought by contractors and then resold at 2x or 3X the price to acquire the property. Is it all on big 'make work' scheme to employ as many as possible rebuilding old homes and reselling.

[Morgasbord]

Re: WSJ: No-Doc Mortgages Making a Comeback

The FIRPTA reform passed by Obama late in 2015, ie, the relaxation of taxes against foreign real estate purchases, is part of the picture. But then there are conflicting rules as well: All-cash buyers of LA Country luxury homes have to reveal identities. I wonder if it's all a scheme to transfer risk to foreigners as the bag holders. But then yeah, why hold things off the market?

[GRG55]

Re: WSJ: No-Doc Mortgages Making a Comeback

Seems just the ongoing evolution of property being financialized.

What used to be something for sheltering a family has become yet another "asset class" to be promoted, traded and leveraged. Is there anything that is safe from this?

[dcarrigg]

Re: WSJ: No-Doc Mortgages Making a Comeback

The FIRPTA reform passed by Obama late in 2015, ie, the relaxation of taxes against foreign real estate purchases, is part of the picture. But then there are conflicting rules as well: All-cash buyers of LA Country luxury homes have to reveal identities. I wonder if it's all a scheme to transfer risk to foreigners as the bag holders. But then yeah, why hold things off the market?

Yeah. I mean, there's a couple things going on simultaneously.

Foreign purchases of empty units are a real thing. It's a big problem in NYC. And has been since even before the FIRPTA reform. And it's increasingly a problem in smaller cities too. Here's a Boston article. What's weird is that prices stayed high for so long, and for the last few months, suddenly prices are coming down. Here's a Miami example. Here's a San Diego example. Places just empty for years on end is the new normal everywhere. So to GRG's point, sure, they're a financialized asset class. And I guess somehow people imagine that leaving it empty will be better for the long term value than renting it out.

What's more strange to me is when developers year after year build more luxury buildings and complexes and still haven't sold off most of the existing units from a dozen projects ago, even in more typically domestic places and in complexes with relatively cheaper units. I wonder: Aare they thinking of their construction/development firm as more of a private REIT with a development arm now? Have they simply been holding with unrealistic prices for years until they think there's a market top? Like I said, they advertise the suckers for sale, but for years they didn't drop the price to where they'll actually sell. I'm just recently noticing price drops locally--I'm on some e-mail chains of local developers and it seems like the price slashing is really picking up this winter. And it seems like it started hitting the highest end of the market too.

I really don't understand how it works. But it seems to me that they were more than happy for about a decade to keep overpriced units off the market, and in the past few months that seems to have started to change, and now it seems like they actually want to move them. Don't know if it's a harbinger of things to come or not.

[jk]

Re: WSJ: No-Doc Mortgages Making a Comeback

money laundering.

purchases by anonymous llc's with hidden beneficial owners.

and in major hubs- nyc, san francisco, boston, los angeles - places for flight capital to land.

on another note- reminds me of china's ghost cities, investments for those with a lack of good alternatives.

also, the projects are investment destinations for foreign nationals who by investing $500k to $1M [depending on location] can get a green card.

[BK]

Re: WSJ: No-Doc Mortgages Making a Comeback

Could raising rates making the carry cost too high?

[BK]

Re: WSJ: No-Doc Mortgages Making a Comeback

A friend is a real estate appraiser and he sees real estate buys by Chinese. Many times a property gets purchased by a Chinese national for cash and they promptly do a 80-100% cash out refinance and buy another property. Crazy times!

[dcarrigg]

Re: WSJ: No-Doc Mortgages Making a Comeback

Could raising rates making the carry cost too high?

Could be. I'm not exactly sure how they're financing the projects either. If it's getting harder and/or more expensive for them to get development loans, maybe they simply need to raise cash to build the next one now. Could it maybe have something to do with the new tax law too?

I mean, development finance has always been sort of opaque to me. But if they were able to pull cheap credit at 3% for a while, and real estate appreciation was higher at 10% or something, and they weren't paying taxes thanks to depreciation, it might have been a decent play to carry it that got fowled up when appreciation cooled and rates climbed. I have no clue what A&D loan rates for these kind of things are though. I've also wondered if part of why I'm seeing so many 55+ projects (again with lots of vacant units) is that they can tap FHA senior care credit on top of the HUD HOPA benefits, even though they're just building luxury condos. I'm not exactly sure how all the vacancy loss factors are enforced or work out.

One of the things I've noticed is that the whole trend really seems to have spun up in the wake of the last housing bubble. And I know they re-wrote a lot of laws and regs around this stuff. There was a specific housing for the elderly act in 2010. And of course, the entire housing law system got reworked in the Housing and Economic Recovery Act of 2008.

My town had one 55+ development before then, and it was mostly trailer homes that felt more like a campground, not a ton of units. We've got about 6 or 7 giant luxury 55+ condo developments since then, many of which are conspicuously vacant. The town likes it, because it's theoretically tax revenue without the expense of schooling children. And they built a big new elder-sports activity center. But it's conspicuously sparsely attended too. Seems to me like the town planned on these things all being filled with retirees. But they're not really. So they bought shuttle buses and built facilities meant to handle elder traffic that's hasn't materialized. If you've got the money in retirement to blow over a half-million on a 2-bed condo, you're probably moving to somewhere warmer.

Anyways, something had to have made that so lucrative too that several developers got in on it, I figure. Just don't know enough about the business to say what. It's all so different from the 1990s and early 2000s when they'd have them sold before they built them, and I never really saw new construction empty for a decade.

[jk]

Re: WSJ: No-Doc Mortgages Making a Comeback

here's something on 100% financing for such developments, with cheap money via reits.

https://www.seniorhousingforum.net/b...ng-development

[dcarrigg]

Re: WSJ: No-Doc Mortgages Making a Comeback

That's a pretty great one. Seems not quite right to me either. But it's probably part of the puzzle.

HCP (Irving, CA REIT) just built a 90-unit complex in Watertown. They've got them in Norwood and Shrewsbury and other spots too. They were complaining about taking a hit with the new tax law for some reason. They've been unwinding their position in BKD for the past couple years. The effect there was heavy: