December 06, 2011

"Flippers" an important factor in housing bubble

The NY Fed says "flippers" were an important part of the housing bubble. There maybe some CYA here for the NY Fed, a *private* institution, on its failure to get Wall Street to rein itself in. But, I largely agree with the idea, substantiated by some research. And, I'm guessing a fair amount of these flippers were 2-20 percent, not just 1 percenters.

To put the header on the graphs above in plain English, each bar represents people who had at least one mortgage already on their hands when they took out another one during the year in question. Note that in the four "ground zero" states of the bubble, the percentage of people with multiple mortgages was nearly half!

Now, some of the people with just one mortgage on the books already may well have been movers, not flippers. Fair enough. Knock out two-thirds of the people with two mortgages, and at the height of the boom, in the four ground zero states, you still have 30 percent of buyers who are likely flippers.

Everything else adds up, then. At first, presumably because they had more money, "flippers" were better risks. But ... when the bubble started bursting, as bubbles do, they became worse risks.

And, as a later chart shows, many of these flippers' loans were securitized, as they were rushing to get in on the bubble. Hence, their troubles, as much as subprime first-time buyers' troubles, became Wall Street's troubles. And, their speculative buying hurt others:
We conclude that investors were much more important in the housing boom and bust during the 2000s than previously thought. The availability of low- and no-down-payment mortgages in the nonprime sector enabled investors to make these bets. This may have allowed the bubble to inflate further, which caused millions of owner-occupants to pay more if they wanted to buy a home for their family.
As noted above, I'm guessing a fair amount of these people were in the 2-20 percent. The Fed doesn't do an income breakout, but I can't believe that that many spec buyers were 1 percenters. Certainly not fractional groups within the 1 percent.

Finally, this is why I am against blanket-type amnesties or modifications of loans. Many people, whether using subprime loans of some sort to do so or not, were deliberately buying houses to flip them. They had at least one mortgage before, therefore, in addition to taking responsibility for investments in general, had some idea already of what the loan process was.

These people deserve no mercy. We don't give a do-over on bad stock purchases, either.

Loan modifications MUST BE on an individualized basis. Here, as well as elsewhere, we need realism from folks like Occupy Wall Street.

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