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?
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Re: Milllenials want to buy homes, many don't have savings. These lenders say no problem
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.
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.
I guess the question then is...WILL the proper Financial GRC controls be put in place?
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No. There's too much money to be made in selling people snake-oil and then jumping ship when the harsh reality sets in.
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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.
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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.
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.
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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.
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).
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Not sure what the question is, but it seems to be about mortgages.
I am not a professional in this area. The best thing that I can advise anyone is to get a proper consultant. They cost much less than the possible losses that can happen because of one small mistake that you will never notice because you are not dealing with mortgages every day.
When I need to solve a mortgage problem, I go to goodlifehomeloans.com and ask them for advice. They are dealing with it all the time and know the situation in the market. So, this is my advice to you now.
Last edited by Cristozan on May 10th, 2022 at 09:45 AM