Milllenials want to buy homes, many don't have savings. These lenders say no problem

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Surtur
"This Isn't Fake, This Is Real": Millennials Resort To Cyberbegging To Finance Down Payment

Before people scream about the link: the title of this thread is taken from the title of a WSJ article. That article is what the article I am linking is about because the WSJ is behind a paywall.

So anyways...if I'm not mistaken...wasn't it stuff like this that played a role in the last recession?

SquallX
laughing

Flyattractor
Didn't we go thru this before with Bernie Mac?

dadudemon
Originally posted by Surtur
"This Isn't Fake, This Is Real": Millennials Resort To Cyberbegging To Finance Down Payment

Before people scream about the link: the title of this thread is taken from the title of a WSJ article. That article is what the article I am linking is about because the WSJ is behind a paywall.

So anyways...if I'm not mistaken...wasn't it stuff like this that played a role in the last recession?

Oh, I see.

This is long BUT READ MY ENTIRE POST AS IT IS IMPORTANT TO UNDERSTAND ALL OF IT!!!!


The classic Financial GRC tactic was to have potential buyers invest money upfront into the real estate purchase. This is supposed to mitigate some of the financial risk from the lender. The idea is to have enough of an upfront financial investment from the buyer that the lender can either break even or even make a tiny bit of profit if the borrower/buyer defaults on the loan. That is why people with better credit have lower down payments: the risk of default is supposedly lower so there is less of a need to mitigate the financial risk of the borrower/buyer defaulting. The down-payment is supposed to cover the costs that the lender would spend trying to offload the asset or find a new borrower.


But what if the economic dyanamics changed for tens of millions of potential borrowers? What if the old Financial GRC tactics no longer make sense? What if the complicated probability formulas and statistics collected over decades is no longer accurately representing the borrowers? And, more accurately, what if there are borrower lattices* that need to be treated differently than others and have different probability formulas and statistics applied to them?


Enter the Millennial Tranche. This allows investors to capitalize on a particular type of Collateralized Debt Obligation (CDO) that has been assembled from millennials' loans. To put that into English, a certain type of home loan borrower should get different rules if they are functioning significantly different in the real world than the older prospective borrowers. You own a business. You want to capitalize on business opportunities. And there is a huge investment tranche waiting out there for you to capitalize on IF ONLY THE LENDERS would modify their rules to make such a tranche come into existence. AHA! There it is!


Here is why this is not as big of a risk as you think:

Renting in the same exact neighborhood in the same type of floor plan and quality costs MORE than owning with a 30 year loan and sometimes even with a 15 year loan. Meaning, you can capitalize on all the millennials renting out there who want to own a home AND save money on housing each month. Holy shit! Amazing! Why didn't lenders stop thinking like old farts sooner? The "old ways" don't work anymore for certain "lattices"* of the populace. Dumbasses, right?


So now innovative thinkers have figured out a very simple way to start capturing revenue from the millennials while also mitigating some of the financial risk from doing business with this seemingly riskier group.


The Housing Crash was not specifically due to home loans being given out to people who could not afford the massive jump in their monthly payment on their variable interest home loans. No no no, not at all, actually. It was the CDOs being packaged up with those high-risk loans (the ones with variable interest that some people would not be able to pay once their 1 year, 2 year, x year fixed introductory period of interest was over and the super high interest rates kicked in), being given high-ratings (meaning they were safe investments) when they were actually quite risky to invest in. When the loans started to default when they were not supposed to, it caused a massive problem and it cascaded. Effing CDOs embedded into CDOs. Yes, you read that right: CDOs packaged up into CDOs. And the actual "commodity" being traded and bought was the home loans but it was so obfuscated in CDOs with improper investment risk ratings that very few people took a deep look into it and discovered that there were poisonous assets on the books and the high-ratings on this CDOs were wrong.


But what happens if you can lend to what seems like a high-risk borrower under the old rules who will likely NOT default on their loan while also lowering their monthly housing costs? Well, looks like you have a potential borrower that can generate low-risk revenue for your company.


Conclusion: Waiving the down-payment for millennials because they clearly do not have the buying power of previous generations due to the stupid f*ck ups from the previous generations, is not a bad idea. With the proper Financial GRC controls in place (such as requiring the borrower prospect to prove they made 12 rental payments successful at a rate that will be equivalent to the real-world payment once the loan starts), there is no greater risk than the classic lending models that required a down-payment. Companies who fail to adapt to a changing market will stagnate and eventually fail.



Holy shit, that was a lot of typing. You f*ckers should pay me to write this stuff.


* I am using lattice similar to this definition:

https://en.wikipedia.org/wiki/Lattice_(order)

-Pr-
I'm so glad I watched The Big Short, otherwise that shit would have made no sense to me.

dadudemon
Originally posted by -Pr-
I'm so glad I watched The Big Short, otherwise that shit would have made no sense to me.

lol


Dude, I spent a long-ass time explaining the House Crash a few years back:


Originally posted by dadudemon
Okay, quick overview in not-so-layman's terms:

Those home loans, owned by the banks, were purchased by investment banks. They packaged up those home loans (from really good to sub prime loans) and created bonds for investment. Those investments were then invested in in the form of Collateralized Debt Obligations (CDOs). Those CDOs were packaged up and the poorest performing loans in the bonds (the crappy "tranches"wink were ignored or obfuscated, on purpose. These newly packaged CDOs were then invested in and those are known as Synthetic CDOs. Then they added another layer (and perhaps another layer on top of that).

The subprime loans were never the problem that led to the housing market crash. It was the packaging up of those home loans into investment opportunities (CDOs) and with reserve requirements being only 10%, investment organizations (calling them "firms" doesn't seem to be encapsulating enough) could theoretically create up to 10x the amount of money they invested (huge return of investment). But they would package up these investments into higher tiers of investments (Synthetic CDOs). And then those new packages (which were packages of packages) were invested in (synthetic CDOs of synthetic CDOs?). And it didn't stop there...they added another layer of this and invested in that new layer, too (synthetic CDOs of Synthetic CDOs of CDOs?). And they tried to cover their asses with Credit Default Swaps if their bonds/CDOs failed.

And when the sub prime loans started to go into default, it had a catastrophic cascading effect as each of those lattices of investments would collapse from the bottom up, horrendously destroying each layer of investments. Since each layer represented a huge increase in investment value, each layer represented an exponential loss. And since retirement funds and all sorts of goodies were rolled up into these investment bundles, they collapsed, too. The actual cash available from these investments were percentages of percentages of percentages.

Subprime loans did not cause the housing market crash. It was the investment strategies that the rules permitted that caused the crash. If they were not allowed to balloon their investments up to 10x the amount (because cash reserves only had to be 10%, remember?), then the sub prime loans that defaulted would have a direct value to loss impact on investment rather than the ridiculously ballooned exponential impact that those defaults caused.

Oh, and, also, the AAA rating for the investments that had a significant percentage of sub prime mortgage loans in them greatly created a false sense of security for people investing in those programs. So not everyone on walstreet is to blame for this (but that's where almost 100% of the blame should be placed, not on the actual subprime loans).


Cut out the 2 major factors that led to this crisis:

1. Rules that allowed cash reserves to only be 10% of the investments.

2. Cascading investments with packaged up home loans.



If those two variables were not present (in other words, no-nonsense regulations were in place), then the housing bubble could never have happened. We wouldn't have ever gotten silly overpriced homes because there was no way for it to balloon like that with absurd regulatory requirements of only 10% cash reserves and the ability to package up investments that are already packaged up investments which were comprised of packaged up investments. I mean...how greedy do you have to get to do something like that knowing full well that even a fraction of the underlying investment, if it fails, will cause an exponentially bad impact on the highest levels of those packaged investments?

Hedge funds betting against portfolios failing?


Man, I feel like I still don't understand all of this stuff.


But, yeah, it was never poor people that caused this problem. It was stupid regulations and rich people who got greedy. Making home loans available to people with weaker credit is not going to cause the housing market to crash. Not even close. That's not what happened that caused the housing market to crash to begin with.

That article was written by an idiot who is trying to spread partisan fear-mongering while, at the same time, covering the tracks of the Wall Street crooks and banks who actually caused the problems. It is a political agenda against Democrats, not actually anything legit. Let's also be clear that the Democrats also contributed to the policies and housing market crash. Just not in the way that the article describes Obama's recent decisions.

BackFire
Yeah but the movie's good.

Beniboybling
time to abolish private property

Flyattractor
You first.

snowdragon
It got even better also when Obama put forth the effort to homeowners that were upside down and being foreclosed on, the problem was because it was a packaged mortgage multiple organizations were asking for their share of money and it couldn't be fixed.

Surtur
Originally posted by dadudemon
Oh, I see.

This is long BUT READ MY ENTIRE POST AS IT IS IMPORTANT TO UNDERSTAND ALL OF IT!!!!


The classic Financial GRC tactic was to have potential buyers invest money upfront into the real estate purchase. This is supposed to mitigate some of the financial risk from the lender. The idea is to have enough of an upfront financial investment from the buyer that the lender can either break even or even make a tiny bit of profit if the borrower/buyer defaults on the loan. That is why people with better credit have lower down payments: the risk of default is supposedly lower so there is less of a need to mitigate the financial risk of the borrower/buyer defaulting. The down-payment is supposed to cover the costs that the lender would spend trying to offload the asset or find a new borrower.


But what if the economic dyanamics changed for tens of millions of potential borrowers? What if the old Financial GRC tactics no longer make sense? What if the complicated probability formulas and statistics collected over decades is no longer accurately representing the borrowers? And, more accurately, what if there are borrower lattices* that need to be treated differently than others and have different probability formulas and statistics applied to them?


Enter the Millennial Tranche. This allows investors to capitalize on a particular type of Collateralized Debt Obligation (CDO) that has been assembled from millennials' loans. To put that into English, a certain type of home loan borrower should get different rules if they are functioning significantly different in the real world than the older prospective borrowers. You own a business. You want to capitalize on business opportunities. And there is a huge investment tranche waiting out there for you to capitalize on IF ONLY THE LENDERS would modify their rules to make such a tranche come into existence. AHA! There it is!


Here is why this is not as big of a risk as you think:

Renting in the same exact neighborhood in the same type of floor plan and quality costs MORE than owning with a 30 year loan and sometimes even with a 15 year loan. Meaning, you can capitalize on all the millennials renting out there who want to own a home AND save money on housing each month. Holy shit! Amazing! Why didn't lenders stop thinking like old farts sooner? The "old ways" don't work anymore for certain "lattices"* of the populace. Dumbasses, right?


So now innovative thinkers have figured out a very simple way to start capturing revenue from the millennials while also mitigating some of the financial risk from doing business with this seemingly riskier group.


The Housing Crash was not specifically due to home loans being given out to people who could not afford the massive jump in their monthly payment on their variable interest home loans. No no no, not at all, actually. It was the CDOs being packaged up with those high-risk loans (the ones with variable interest that some people would not be able to pay once their 1 year, 2 year, x year fixed introductory period of interest was over and the super high interest rates kicked in), being given high-ratings (meaning they were safe investments) when they were actually quite risky to invest in. When the loans started to default when they were not supposed to, it caused a massive problem and it cascaded. Effing CDOs embedded into CDOs. Yes, you read that right: CDOs packaged up into CDOs. And the actual "commodity" being traded and bought was the home loans but it was so obfuscated in CDOs with improper investment risk ratings that very few people took a deep look into it and discovered that there were poisonous assets on the books and the high-ratings on this CDOs were wrong.


But what happens if you can lend to what seems like a high-risk borrower under the old rules who will likely NOT default on their loan while also lowering their monthly housing costs? Well, looks like you have a potential borrower that can generate low-risk revenue for your company.


Conclusion: Waiving the down-payment for millennials because they clearly do not have the buying power of previous generations due to the stupid f*ck ups from the previous generations, is not a bad idea. With the proper Financial GRC controls in place (such as requiring the borrower prospect to prove they made 12 rental payments successful at a rate that will be equivalent to the real-world payment once the loan starts), there is no greater risk than the classic lending models that required a down-payment. Companies who fail to adapt to a changing market will stagnate and eventually fail.



Holy shit, that was a lot of typing. You f*ckers should pay me to write this stuff.


* I am using lattice similar to this definition:

https://en.wikipedia.org/wiki/Lattice_(order)

I guess the question then is...WILL the proper Financial GRC controls be put in place?

Tzeentch
No. There's too much money to be made in selling people snake-oil and then jumping ship when the harsh reality sets in.

Flyattractor
We should just make it so the GubMint just supplies EVERYTHING for the Poor Widdle Millennials. Housing, Healthcare, Schooling. Heck just make it so that if the Gubmint doesn't require Parents to abort their lifeless clump of cells it should be that the child is just handed over to the GumGint to be sure it is raised PROPERLY!

Leftists already think we are owned from birth by the GUBERMINTOS already.

dadudemon
Originally posted by Surtur
I guess the question then is...WILL the proper Financial GRC controls be put in place?

I believe under the Sarbanes-Oxley Act, certain financial practices have to be followed or you can get in trouble up to criminal prosecution and imprisonment. If an executive approves a new strategy to generate revenue, and they (SEC) find any shred of evidence at all that the executive knew it would cause financial ruin for the company, his ass is going to prison.

Outside of that, I cannot think of any regulation that forces them to have to make good business decisions on new strategic initiatives. That is how capitalism works. I named just one financial risk mitigation technique, but there are probably dozens of others that they can put in place to decrease the risk of funding a loan that eventually defaults. The good news is, as these types of loans get offered, and more data is collected, they can fine-tune their GRC controls to minimize risk and maximize revenue.

Mindship
@dadudemon:

While college tuition's been rising over the years, do you think the money lending institutions anticipated this current situation? I had a discussion about this with a friend around 7-8 years ago. Not being in the money field, neither of us had a solution to espouse. It just seemed very socially/economically shortsighted. But then ... humans.

dadudemon
Originally posted by Mindship
@dadudemon:

While college tuition's been rising over the years, do you think the money lending institutions anticipated this current situation? I had a discussion about this with a friend around 7-8 years ago. Not being in the money field, neither of us had a solution to espouse. It just seemed very socially/economically shortsighted. But then ... humans.


That's a pretty damn good point.

Super stupid high tuition. Stupid super expensive student loans. Now millennials that graduated college with degrees 5-10 years ago cannot afford home loans because of the down-payment-entry-cost and are stuck pissing their money away on renting.

Seems like the loan strategy that Sutur posted in the Opening Post is just a natural reaction.

Since the buying power of the 20-30 age group has decreased over the years and wages have virtually stagnated, surely the loan experts and market scientists would have seen this coming. It's very simple addition and subtraction math. What if this was all part of the plan, anyway? To eventually move the lending model to something else as the Gen-X and Boomers age out of home-purchasing and the Millenials and younger become the primary home loan borrowers?


Whoever your friend is, we all 3 need to sit down and chat.

Mindship
Originally posted by dadudemon
What if this was all part of the plan, anyway? To eventually move the lending model to something else as the Gen-X and Boomers age out of home-purchasing and the Millenials and younger become the primary home loan borrowers? I can't imagine that this was entirely unforeseen. Like you said: simple math. In any event, the environment has changed; adaptation needs to occur ... though I'm also wondering if there could be trickle-down effects to other large purchases, eg, cars (including insurance), large appliances, travel/vacation packages. Maybe even having children (ie, being able to reasonably afford it).

Originally posted by dadudemon
Whoever your friend is, we all 3 need to sit down and chat. beercheers

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