Don’t forget that you now have 2 ways to get to the site…no more having to worry about firewalls from work, or saying the ‘F-word’:

www.housingbubblecasualty.com

www.anotherf@ckedborrower.com

Don’t forgot to check out the FORUMS…lots of good activity going on over there already.

Have a great weekend….enjoy the Superbowl…and the advertisements. Keep the comments coming!

SoCalMtgGuy

I forgot to add that San Diego inventory now stands at 16,252, up from 15,568 12 days ago!

I was watching the 11 o’clock news tonight and there it was…the big ‘news story’ that people aren’t saving any money. I know that isn’t news to anybody here, but I’ll say it again….the media is a lagging indicator!

Anyway, they have Mr. Reporter go out on the street and ask people is they save money.

“Excuse me sir, do you save money every month?” …no
-next person-
“I was wondering if you have money in savings?” …no
-next person-
“How much money do you have left over each month?” …not much if any

So you get the point. The reporter asks a bunch of people if they have money in savings, or if they are saving any money. As you can imagine, most of the responses were ‘no’ and ‘not very much’.

They they asked one guy why he has no savings and why he isn’t saving any money….

“uh, I got a big mortgage…” “…I have to get a house now before it’s impossible”

Then the news story transitioned into how the cost of housing here was causing people not to save any money. The story mentioned the fact that the savings rate hasn’t been this low since the depression.

What I don’t get is why so many people will neglect savings, health insurance, retirement savings, etc. just so they can get some crazy mortgage and ‘own’ a house?!?!?

Believe me, I REALLY understand wanting to own a house, but at what cost? Maybe it’s just me, but the peace of mind knowing that I don’t have a $4000-$5000 mortgage…or better yet, a $2000 mortgage that I know is GOING to be a $4000 mortgage, hanging over my head is worth more to me than ‘owning’ a place I can’t afford.

How can I say most of these people can’t afford it?? How long have you been reading here?? Even the latest stats from the California Association of Realtors show that only 8% of the people in San Diego can afford the median priced home. That median priced home won’t even get you much ‘house’ in Southern California.

The story then goes to talk some financial advisor who said that people should try to save ’something’ every week.

Let’s get back to that famous line “…I have to get a house now before it’s impossible”. That is the mentality I have been talking about on this blog so many times. People want it, so they will do whatever to have it NOW! They don’t do the math, they don’t think about the future…other than what their property will be worth in it, they don’t think about back-up plans, they don’t think about retirement, they get emotionally set on something, and nothing is going to stop them…certainly not a little thing like income or savings.

Maybe it’s just me, but it is just amazing that people will just ‘assume’ that property will go up forever. It is that logic alone that they use to justify the option ARM, the interest only, the 2/28 ARM, the 100% financing, the NINA, the stated income. After all, who cares if you are buying no money down, when the place goes up, you will make money. Most Southern Californian’s think that real estate is impervious to any sort of decline now days.

The combination of negative savings, the price to income disconnect, and creative financing is the recipe for disaster. Do you wonder why all of the big lenders are headquartered in Southern California? It is the same reason tech was central to the Bay area, or why government contractors congregate around DC. That is where the action is. We saw what happened to the Bay Area when the ‘action’ returned to normal. What is going to happen to SoCal, when the RE/mortgage market returns to ‘normal’? Like many people have said before, we don’t need a huge dip to hurt lots of people. Even a flattening or small decline gets the first ‘houses of cards’ to start falling.

Per the news story tonight, we know that people aren’t saving any money. So if they aren’t saving, what are they going to fall back on when the ARMs adjust, and they can’t refi? Or they can’t afford the new ‘adjusting’ payment? What happens when people NEED to refi, but the ‘flat’ market means they need to pay for the closing costs out of pocket, instead of just ‘rolling’ the costs into the new loan?

Sounds like I’m beating a dead horse sometime…but I think most of you get the point.

That said, don’t forget to check out the Forum page. There are lots of readers with many areas of expertise. I think it can be an informative and entertaining place….let’s see what we can make out of it!

Thanks for stopping by, and I look forward to the comments on this post as well as the site changes!

SoCalMtgGuy

Welcome to the new home of Another F@CKED Borrower - Casualty of the Housing Bubble! Don’t worry, you will still get the same great content over here…information on interest only loans, option ARM mortgages, 2/28, 3/27, 5/1 ARM, mortgage insights, market info and more! I’m almost ready to go, so I’m asking for comments and feedback on this site. Feel free to leave comments now if you would like. I’m playing with several ideas now with this being the main one:

1. Keep both sites up and running. I have several URL’s that I will point towards this site. If you like this site better, then stay here. If you like the other site better (the one on Blogger), I will make my posts to both places, so you can keep going there, or get there from here. Don’t worry, same great content on mortgages, the housing market, and more….just a different look with some more features.

I am adding a FORUMS site, as well as a consulting page. I am getting several thousand readers a day…and growing, and anywhere from 10-30 e-mails a day. Many of these e-mails are people that would like some help, or have a ‘quick’ loan/mortgage/real esate/financial question. 20 people that need 5-15 minutes of my time adds up very quickly. Some days I spend 2-3 hours or more answering e-mail. That is why I’m going to have to start charging something to keep things going. See the consulting page for more info. I don’t think a $5-10 donation is out of the question to get some honest advice or an answer to your question. Comments and feedback are always welcome!

By making this the main site, there shouldn’t be any firewall problems because of the ‘F’ word in the url. About the F-word in the title. That is the only place where it is used. In addition to the mortgage and real estate info, this is a place to help and inform people that might have gotten in over their heads with thier ‘exotic’ mortgage and other debt.

I’m working out the kinks and making sure everything runs right. Thanks for your patience, and keep checking out the original site that started it all: Another F@CKED Borrower You can get to all of the popular posts on interest only loans, option ARMs, negative amortization, 2/28’s, FB’s, and more over on the right hand side of this blog.

Thanks for stopping by….and helping make this a better site!

SoCalMtgGuy
socalmtgguy@gmail.com

The image to the left is from this Wall Street Journal article about my favorite ‘bubble’ loan…the option-ARM. This is the loan with 4 payment options and that all enticing introductory 1% (or similar) payment. You can see my post here for more info about the loan.

Like every tool, this loan has it’s place for informed borrowers, or sophisticated borrowers that are trying to manage their cash flow. The problem is that since there is such a disconnect between income and housing prices (especially California), you have people using these loans as a way to ‘afford’ their property. The problem with making that minimum payment is that the difference between that payment, and what the interest only payment would have been, gets tacked on the back of your loan in the form of ‘negative amortization’.

Quick example. Say the minimum payment on a 400k loan is $1200, and the interest only payment is $2200. If you made the minimum payment, then your loan balance would be 401k after one month. Then you would be paying interest on your deferred interest…can you say FUN! So, as you can imagine, like many people do with their credit cards, they make the minimum payment.

I think this statistic from the article is very telling: “the amount of interest that customers are rolling into their mortgage balances — known as “negative amortization” — rose $25 million in the fourth quarter to $63 million for the year, up from $6 million a year earlier”.

YIKES! What does that tell you!?!?? People can’t afford their mortgages. If they could, they would make at least the interest only payment. A 10-fold increase in deferred interest in 1 year!

“Another way to look at it is as a percentage of income. Fully 51% of FirstFed’s pretax income and 41% of its net interest income was from negative amortization in the fourth quarter.” Looks like this negative amortization is a rather large part of their income. The banks are also saying “that their losses on option-ARM mortgages long have been minimal”. I’m sure they are saying that! It is like the analogy I have used several times before. They are driving forward by looking out the back window. There hasn’t been a real catalyst yet that causes things to get ugly. If property prices decline and/or the rates start going adjustible…watch out! But wait….it gets better!

“Moreover, over 80% of FirstFed’s recent loans have been “low documentation” loans, meaning they required less confirmation about whether the customer was a good risk. Through the first nine months of last year, over 13% of its mortgages were NINAs — “no income, no assets.” In other words, customers get mortgages without disclosing their income and assets.”

What I have been saying forever now!!! Not only are people getting option-ARM’s, 80% aren’t even fully documenting their income! Does anybody else see a problem here?!?!? I have been saying it here and on other blogs for many months now. I know some of you will be all worked up about the NINA loans. The thing with NINA’a is that you need a top notch fico score, and the are usually done at lower loan-to-values, than the other loans. Those people are usually putting down 20-40% in cash, so as bad as they sound, I don’t worry about them as much as the 80% of ‘reduced doc’ loans. Depending on the lender, reduced doc is the same as saying ’stated’.

The other thing I will add about these loans, is that they are the highest paying loans available for loan officers and brokers. Every lender is different, but it was pretty standard that if the loan officer ’sold’ the borrower in the 3yr pre-pay, then they would get 3 rebate points on the back of the loan. This means the lender would pay the broker 15,000 on a 500k loan. The “good” brokers would often tell the borrower “I can get you that 1% loan, but the only way I can do it is if you pay 1-point up front, and take a 3yr pre-pay penalty. That is the ‘only’ way I can get you that super low 1% payment!” It is amazing how many people would fall for this line. If you are cringing right now, I feel you. You just paid some loan officer who called you on the phone, $20,000 to do your loan, plus any other fees. You paid 1pt up front, and the lender paid them 3 points on the back. It would make me sick to know I paid some ‘kid’ 20k for my loan. I bet 20k would pay off most people’s car payments right now…or pay off their credit card bills. The thing is, you can get an option ARM with no pre-pay penalty, and the 1% rate…it just doesn’t pay a rebate on the back end. Sell a little pre-pay…make a lot of money. See how easy that is!?!?

I look forward to the comments!

SoCalMtgGuy

“There has been a lot of talk here and on the other blogs about the consumer spending that has been financed through the equity extracted from real estate. But what about the people that make the industry possible? What kind of money have many of these people been making, and what is in store for them?

To answer that question, let’s look at the growth in the mortgage industry. Take a look at this chart from the Mortgage Bankers Association which shows the amount of mortgage originations by quarter. An origination is a purchase or refinance loan. I went ahead and added up the quarters to give an ‘annual’ picture of things.

1990 - 459 billion
1991 - 563 billion
1992 - 893 billion
1993 - 1.020 TRILLION
1994 - 769 billion
1995 - 640 billion
1996 - 785 billion
1997 - 833 billion
1998 - 1.656 TRILLION
1999 - 1.379 TRILLION
2000 - 1.139 TRILLION
2001 - 2.243 TRILLION
2002 - 2.854 TRILLION
2003 - 3.812 TRILLION
2004 - 2.773 TRILLION - 2.92 trillion per IMF Pubs
2005 - 3.120 TRILLION - only 2 quarters data from MBAA so IMF Pubs provided the 2005 data

If you look at this data it is pretty easy to see that as the stock market started cranking in the late 90’s so did mortgage originations. Things tailed off in 2000 as interest rates were at their highest point in years. As you can see, 2003 was the largest year on record. Almost 4 trillion dollars worth of loan originations. Your interest only loans started becoming popular in 2002 and they took off in 2003 and beyond. There were almost more mortgage originations in 2002-2005 than there were from 1990-2001.

But what does all this mean?!?!? Let me ask you this (especially the people in California): how many people do you know that could do a loan for you? How many people did you know 3-5 years ago?

I couldn’t find the article at the moment to provide a link, but something like 40-50% of the job growth in CA has been in the real estate/mortgage/construction industry since 2000. When you see an industry flooded with money like that, what happens. People run into the business for the money!

The whole point of the above data is to show you the size of the mortgage business. Now that you have seen the amount of money that is out there, you know that there were lots of people making good money.

During the boom times, it was not uncommon for somebody with little to no mortgage experience to make 5-10k in their first month…and some people made much more. You had people making 20, 50, 100k+ a month. Yeah, it was mostly the top dogs making 100k+ a month, but there were lots of them. From what I saw, it was pretty safe to say that most people were making 15-30k a month. I don’t have stats or anything to prove this, just what I saw on the ‘tracking’ boards in offices, and from knowing how much people were making on the loans I was doing for them.

It’s funny, I had loan officers that wouldn’t “do loan amounts less than 500k”. They would pass them on to somebody else because it wasn’t worth their time to do anything smaller. But do you want to know what is REALLY funny, I was getting calls from some of these same people a few weeks ago for 150k loans in Florida. I said, “I thought you didn’t do the small loans”. They said, “very funny…in this market, I’ll take what I can get”.

I’m also seeing a bit more stress on some people’s faces. After several good months in the business, many of these people realized they could get a mortgage, and they were making good money, so why not?!?!? The only problem is that that mortgage is a 30 year commitment. 6-12-18 months of good income doesn’t mean you can afford that in the long run. When the 20k a month isn’t rolling in so fast, that 4000-6000 a month mortgage starts looming large in some people’s eyes. I even had one office where the other loan officers pointed to a guy who was stressing out…and I just watched as he was burning up the phones, dialing for dollars. You could tell he was on a mission. I asked one of the guys “what’s up?”. He said that the loan officer in question had a $4000 a month mortgage and the holidays were pretty rough for him. Rough in the sense that mortgage production slowed down, and there wasn’t a big paycheck at the end of the month.

You could only imagine the stories I would hear from the 5000-10,000 dollar weekends in Vegas. The clothes, the cars, the jewelry…it was everywhere in some of my offices. There were 20-25 yr olds rolling in 745 BMW’s, Hummers, 500SL Mercedes, Escalades, etc. You name it. The phones were ringing and there was an energy you felt when you walked in. People were making money, and life was good.

That energy is gone from my best offices. Many of the cubicles that used to be full, are empty. The top people are still around, but they are having to work much harder. Some have been in the business for a while, and knew it would slow down some. Some have never known anything other than the ‘boom times’. Of the ‘mom and pop’ shops that worked out of their homes, or had small offices, some of them have closed their doors, or taken the step towards home office.

I will say this, at the same time when these people were making lots of money…and letting everybody know it. There were the quiet people (I really enjoyed talking with these people). The ones driving an older Honda Civics or pickup trucks. These people usually owned the shop, or had been in the business for a while. I think they knew this wouldn’t last, or maybe they just weren’t the ‘flashy’ types. Some of these people are probably set for life after the money they made…and the money they saved.

None of the above is scientific, or applies to every loan officer or broker shop. Everybody is different. There are all sorts of people that are in the business. Some are flashy, some big spenders, some are savers. Some care only about the dollar and nothing else. Some will do a loan that pays less because it is he right thing for the client. Some are a combination of the two depending on the situation.

One thing is for sure, there are 3 things that are going to affect the amount of originations the next few years.

1. interest rates
2. lending standards
3. property values.

If interest rates go up, then there will be less refinancing. If lending standards tighten, there will be less people able to qualify for a loan. If property values decline then the loans will be smaller. Smaller loans mean less commission. Higher rates and tighter lending standards will also affect property values. If the mortgage originations decline, so do a lot of people’s paychecks.

Don’t get me wrong, there is still plenty of business out there as a whole, but we are returning to a more normal market. I think we are returning to a more normal market that is not going to be able to pay everybody what they are used to being paid. If the market goes back to a 2 trillion dollar market, that is about a 33% cut. That cut is going to have to come out of paychecks, the number of people in the business, or a combination of the two. The established people will stay, some will stick it out, many will leave. I don’t know when this will happen exactly, but I think the next 6-24 months are going to be very interesting.

What do you think??

I look forward to the comments and feedback!

SoCalMtgGuy