As bad as it is…the worst is yet to come
I know, I know….it has been too long since my last post. I have been busy with other business interests yet still keeping an eye on the industry and what is going on.
NOTHING that is happening should come as a surprise, especially to regular readers of this blog. I pretty much called how this was going to play out. Lets refresh and see where we are today.
We have had rising inventories for quite some time now…but people whined and whined that prices were not coming down. No, prices did not come down immediately, that takes time. But I think it is safe to say that most areas are definitely having a softening of prices. There is a great website that tracks this information: www.thebubblebuster.com
As we have seen the inventories increase and sales volume drop 20-40% in many areas, we have seen foreclosures skyrocket to all time highs. I received an e-mail last week from foreclosure.com that said they are tracking a record 155,671 foreclosures nationwide! That might not sound like much, but if you look at the increased foreclosure activity in many areas, and the fact that it is only going to get worse, you will see that this is only going to exacerbate the supply/demand imbalance that already exists.
Do not forget there there is still a good trillion dollars or so of loans left to adjust in 2007. Falling values is going to make refinancing many of these loans very hard if not impossible. This will lead to more people walking away from homes because they can’t make the payment, or they don’t want to pay on a decreasing ‘asset’.
To make matters worse, the lenders that used to make these great ‘you can afford the American dream’ loans are either out of business or headed that way. I heard some intel that New Century is going to file for Chapter 11 here in the near future. Not only that, but like most of these other ’subprime’ lenders, has some pretty major accounting issues to ‘account’ for. BUT, even if the companies were still around to make the loans, nobody is buying them!
I have discussed the MBS (mortgage backed securities) market many times before. I have a friend that is now in the corporate offices of a major lender. He told me that the secondary market is basically paying ‘par’ for most ’subprime’ loan pools now. What does that mean?? It means that if a lender has a 500 million dollar pool of loans and they go to sell them, the secondary market will pay them 500 million for the loans. Dare I say it is hard to make money selling widgets that cost you $10…for $10. I am not including the expenses involved in making the loans either.
The way it should work is that the lender sells the $500 million of loans for say $520 million. Then goes back and lends that money…repeat cycle. Making money each time they sell the loans, which in turn gives them more money to lend out, and in turn sell for more money. Very simplified I know…but I’m not teaching an MBA class at Harvard, just trying to get people to understand the basics of what is going on here.
The main reason the lenders have been making these loans to begin with is because the secondary market would buy them and assume the risk! Remember the reference I have made several times about ‘driving forward while looking in the rear view mirror’? Everything looks good when looking backwards, but you don’t see the curve in the road ahead and the cliff to one side. That is how the mortgage market and the secondary markets have operated. The secondary markets kept buying debt and taking more and more risk, because they were not seeing the defaults yet (looking in rearview mirror). So they ‘put the pedal to the metal’ and would buy debt that was even lower quality and higher risk…but hey, all is well! The lenders will make ’stupid loans’ if they are not assuming the risk AND can make money while doing it. BUT, now that the secondary market is seeing defaults and foreclosure activity rise higher than projected, they scale way back, and stop buying the debt.
Lets not even get into the fact that China used to be one of the largest purchasers of our mortgage debt, and that if the consumption/production relationship between the USA and China falters, we could see some tough economic times ahead. Here is a good article from the China Daily from back in October 2005. Then you have this article from a bloomberg.com analysis of the Chinese market taking a dip. I like this part the best:
China’s slide affected markets around the globe for the simple reason that it reintroduced the long-forgotten concept of risk into the collective consciousness. Emerging markets don’t go up forever. Junk bonds are called junk for a reason. Subprime mortgage loans are made to those with less-than-first-rate credit histories.
You have news coming out that 60% of Countrywide’s ARM customers wouldn’t qualify for the loan if new proposed measures were put in place that made sure the borrower had to quality on what the payment could be, not the beginning teaser rate. Countrywide rationailizes that only 25% of people refi at the end of the period into another ARM loan, but from my experience and the people I am talking to today, the rate is much higher than that. Either way, if you remove 25-60% of the potential borrowers from the market, guess what, 400-500K is no longer ’starter home’ pricing.
I am going to be politically incorrect here for a minute. As a general rule, who do you think are ‘financially smarter’ people: people with good credit (700+), or people with bad credit (500’s)?? The reason I ask, is that people with good credit for the most part make good financial decisions. And people with bad credit make bad financial decisions. So, wouldn’t making loans that require some financial knowledge, to people that generally don’t posess this knowledge, be a recipe for disaster?? You are making high risk loans to high risk borrowers, and NOT making them pay the risk premium anywhere close to the risk being assumed.
But don’t think that ‘prime’ borrowers are exempt. Remember me saying that there was a distinct lack of good underwriting across the board? Well, it doesn’t mean much when I say it, but apparently it does when Lehman Bros does. Here is the quote:
Lehman Brothers Holdings Inc. announced yesterday it is cutting the ratings of Countrywide Financial Corp., the largest mortgage lender, and other prime lenders as defaults surge.
“Prime loans will see rising default rates as subprime has, due to increasingly weak underwriting in recent vintages,” analyst Bruce Harting said. “The rapidity, breadth and depth of the subprime sector meltdown has been extraordinary, even in the context of an environment in which most industry observers felt that major problems in the subprime space were inevitable and overdue.”
If you think the nonsense in the lending arena was concentrated only in the subprime markets, you are mistaken. It has permeated all aspects of lending. Risk assessment has been shoved aside for the past few years…be it mortgages, car loans, credit cards, etc. With the massive consumption by most Americans being done on credit, look for trouble up ahead…but it will require you to stop looking in your rear-view mirror to see it.
Stay tuned…
SoCalMtgGuy
******JUST GOT SOME FRESH INFO (March 8th)*******
Don’t take it as gospel, but…
Word has it that New Century will be back to ‘business as usual’ early next week. Apparently they are in the process of being acquired by a big name institution. Morgan Stanley was mentioned as a front runner. No new apps until the deal is finalized. Could be as early as Monday/Tuesday.
All you options traders…have fun with this one. There is going to be volatility with this, one way or another.
*****UPDATE - Monday 12 March *****
Guess Morgan Stanley backed out….I thought it was a long-shot myself, but you never know what goes on behind closed doors, or what ‘off book’ assets companies can have.
From Marketwatch: ” New Century said it’s been informed by Morgan Stanley of problems with a $265 million financing agreement. ‘The company received a letter from Morgan Stanley notifying the company of certain purported defaults, accelerating certain obligations under the Morgan Stanley Agreement and stating that Morgan Stanley was discontinuing financing,’ New Century said in a filing.”
From CNN Mondy: “Embattled mortgage lender New Century Financial Corp. announced early Monday that all of its lenders are cutting off its financing, that it has been found in default of many of its financial agreements, and that it does not have the funds necessary to meet its obligations under current circumstances.”
“The company’s filings said that several of its lenders were now demanding New Century and its subsidiaries repurchase all outstanding mortgage loans, and that its other lenders now all have the right to make that demand. It said if each of the company’s lenders make that demand, the aggregate repayment obligations would be approximately $8.4 billion.”
March 8th, 2007 13:35
In the words of DR Horton, Tomnitz, 2007 is going to suck. Probably 2008 also, Mr. Tomnitz.
March 8th, 2007 13:42
I have to wonder how many FB’s are out there with their heads in the sand thinking everything is going to be OK? I can imagine the scene when they walk into their mortgage broker’s office to refi this summer and they are told they no longer qualify. The inevitable question arises, “So what do I do, I can’t afford the new payment, and the house is worth less than I owe?” How do you answer that one? It must be like a doctor telling a patient they have a terminal condition, “Uh, I’m sorry, but you are an FB, but not to worry, after foreclosure, some new family will call your house ‘home.’” I also wonder how many times this scene will be played out in Southern California over the next few years?
March 8th, 2007 14:16
Well, SoCalMtgGuy, excellent work, as usual.
People the world over are watching the U.S. mortgage bubble, since when it pops it is going to cause grief in the entire global network of credit markets.
It’s impossible to call the top of this bubble, though. Heck, we might not be seeing the genuine top yet, the recent jitters might just involve an element of random static. When we finally see price drops starting to match volume drops in magnitude, then maybe we’ve hit the peak. Bubbles, from my small experience looking at them, have a creepy way of being deceptive. This particular bubble has utterly confounded me me for three years, I must admit; I had no idea that such a flood of easy credit would be sustained for such a long time. If I hadn’t seen this actually play out, I would have said that it was impossible. If Paul Erdman had written a novel about this 10 years ago, we would have set that the loose-credit plot was implausible.
Anyway, keep up the good work!
March 8th, 2007 14:43
Great work as usual.I find it real ironic that the government and politicians have all of a sudden become worried about lending standards.I think their silly laws are actually going to cause more problems than good.Where were they three years ago when it mattered?Now they are going to create a total fiasco.I think they should let this play itself out and let the market handle the situation.
March 8th, 2007 15:01
arizonadude…
I agree with you completely. As I have said many times before…the guvment solution scares me more than the problem in most instances.
The markets will ’solve’ this problem on their own as people lose money. Legislation will only make matters worse.
I prefer to do thing this way…through the blog and education. If the masses aren’t dumb-asses, then these things don’t gain as much traction in the first place.
The financial smarts of the average joe is pretty pathetic. BTW…I have a 96 month car loan and some wheels you can lease from me….
SoCalMtgGuy
March 8th, 2007 15:44
I have been trying to buy a house for a while, but have been quite disgusted with the attitude of sellers. So I hope to really give it to them when the time comes. I have 2 houses on my radar screen bid $380,000 for it and was laughed at about 6 months ago. Initially they started out with price in high fives now down to high $400’s. Still for sale already about a year.3 bdr 1 1/2 bath 55 years old with little or no upgrades (old kitchen old bath)with 15 year units.
Another house went on market about 3 months ago asking mid $500’s. Put a bid on for 450K no response. More than I think it is worth, but the greedy seller is in total denial when mentioned a similar house went for $430k a few months ago. Their response oh that didn’t happen.
Since I have a large down payment with no problem of getting financing I hope there comes a day when they come crawling back to me cuz they are going to pay dearly for their greed if we hammer out a deal.
March 8th, 2007 15:47
rentfornow…
…that is exactly what I would do. We are NO WHERE near the bottom.
Keep saving money and enjoying life…your time will come.
SoCalMtgGuy
March 8th, 2007 15:54
I would appreciate if you could post more often gathering info from some of your past contacts in the business. The real time insights would do wonders to counter the propaganda spilled by Lierah calling a bottom along with Bob Troll every few weeks months.
SCMG some seller out there is going to take a real low price for their overpriced dreamboat, but they just do not realize it.
Thanks for the great posts.
March 8th, 2007 15:54
Great post, thanks for your insight. I think a lot of the reason for the volatility in the stock market last week was directly related to the subprime market situation. Where it goes from here remains to be seen, but I do think that cash is king right now, and in the coming years there should be some pretty good deals on real estate.
I liken this whole economic situation (very low interest rates, loose lending standards, no personal responsiblity) to a guy painting his garage floor and painting himself into the corner.
March 8th, 2007 15:55
You are making high risk loans to high risk borrowers, and NOT making them pay the risk premium anywhere close to the risk being assumed.
You could say the same thing about the funds selling options for “income.” It’s worked great while the VIX is less than 20 but that’s going to change and then what.
March 8th, 2007 15:56
To put things in perpective, foreclosure.com was showing approx. 129,000 forclosures on Jan 01. A 20% increase in 2 months doesn’t bode well.
March 8th, 2007 16:00
“I liken this whole economic situation (very low interest rates, loose lending standards, no personal responsiblity) to a guy painting his garage floor and painting himself into the corner.”
Awesome description of the stupidity irrationality the past several years.
where were all these cruddy experts when most of us here were countering the Housing bulls the past few years?
They all “SUCK” and the internet has all the evidence to prove it.
March 8th, 2007 16:28
” …an environment in which most industry observers felt that major problems in the subprime space were inevitable and overdue.”
Oh yeah? Who are these “most industry observers” cited by Lehman’s analyst? Care to name any names? Oh yeah, and “problems…were inevitable and overdue”? Really? So when did Lehman come to this realization? Does anone believe it was in 2005 along with Ben Jones, Patrick and SoCalMgtGuy and a bunch of anonymous bloggers who called this catastrophe in the making? I think not. I think Lehman’s securitization desk was busy packaging and flogging these subprime loans as fast as they could…just like Goldman, Morgan Stanley, JP Morgan Chase et. al. And making a bundle. And I don’t think they published a word of any possible problems on the horizon for subprimes.
Revisionism at work…Lehman just flat out lying. After all its not like the ibanks make any money telling the truth.
March 8th, 2007 16:30
You can charge 20% if you want, but you won’t be collecting a penny on a FPD. That is why there has to be at least a 10% down payment and an independent appraiser who is NOT selected by the buyer or any of his agents.
The funny thing is how all these geniuses running these hedge funds and banks were suckered by some lowlife grifters, many of whom can’t even speak English
March 8th, 2007 16:53
2007 YTD purchase transactions are running at 50% down payment/or cash folks and 50% were 100% financed nothing down folks. It is currently split right down the middle. And every one of those 100% borrowers were financed by sub-prime lenders WITH sub-prime terms.
This is down from 71% of all purchases closed in our escrow office which were 100% financed in 2005.
Question for SoCalmtgguy: Do LO’s make more money originating 100% loans (piggy backs) than straight 100% 1sts or 30 yr fixed products when a borrower actually has a down payment???.
PS. I already know the answer, but some readers may not. Humor them.
March 8th, 2007 17:26
Folks, what are your best short ideas?
I am short CFC, but, if you have any better ideas and don’t mind sharing, then please feel free.
Many thanks.
March 8th, 2007 17:29
Great entry, I love reading your explaination of the market. Great job.
March 8th, 2007 17:40
******JUST GOT SOME FRESH INFO*******
Don’t take it as gospel, but…
Word has it that New Century will be back to ‘business as usual’ early next week. Apparently they are being acquired by a big name institution. Morgan Stanley was mentioned as a front runner. No new apps until the deal is finalized.
Stay tuned…
SoCalMtgGuy
March 8th, 2007 19:44
After hours trading has New Century at $3.87 per share.
[Link]
They look dead to me!
…
Anyway, you warned us about the impending implosion of the subprime lenders last year, and you were right-on-the-money!
March 8th, 2007 19:57
Folks, what are your best short ideas?
Mortgage lenders
LEND (Accredited Home Lendrs Hldg)
AHM (American Home Mtg Invt Corp)
Home builders
MTH (Meritage Homes Corp)
TOL (Toll Brothers)
I prefer the near or at-the-money put options for their low/risk high return profile, but do use sound money management principles when investing in these (i.e. DO NOT BET THE FARM!). Options involve substantial risks. You can lose your shirt. etc. etc.
March 8th, 2007 21:19
“Trillion dollars of ARMs set to reset in 2007.”
Where does this figure come from?
March 8th, 2007 21:43
That figure is all over the place. I have placed multiple links to various sources on this blog over the past year+. The old numbers from 2005 projected 1 trillion+. I have seen 1.2 to 2 trillion just for 2007. It is a hard stat to track…but the trillion dollar number is real.
Try google for more….but here are a few.
WSJ reports that “More than $2 trillion of U.S. mortgage debt, or about a quarter of all mortgage loans outstanding, comes up for interest-rate resets in 2006 and 2007, estimates Moody’s Economy.com, a research firm in West Chester, Pa.”
http://seattletimes.nwsource.com/html/realestate/2003575632_arms18.html
Mortgage experts estimate that approximately $1.5 trillion worth of adjustable mortgages will reset by the end of 2007.
OLD article from 2005 NYT
http://www.nytimes.com/2005/06/16/realestate/16arm.html?ei=5088&en=d4ea9a4dd01af4d5&ex=1276574400&partner=rssnyt&emc=rss&pagewanted=print
But in 2007, the portion will soar, with $1 trillion of the nation’s mortgage debt - or about 12 percent of it - switching to adjustable payments, according to the analysis.
SoCalMtgGuy
March 8th, 2007 23:06
Socal -
Great to see a fresh post up. Let’s not forget there is more unfolding in ‘07 than the collapse of the subprime market. There are plenty of borrowers in the prime market that will be experiencing payment shock over the next 12-18 months. I don’t hear this being brought up on Bloomberg or CNBC over my morning coffee.
My wife was just telling me one of her friends is worried because her husband just lost his job due to a “restructuring” and she is 8 mos. pregnant. They are both working professionals that recently (2-3 years ago) bought a $1M house. I “guesstimate” their income to be $300K-350K per year. I was a little surprised to find out that they have NO SAVINGS, and their mortgage payment just jumped more than they had expected. Why do people with this level of income find it necessary to spend every dollar they make?
Seems like this slow moving train wreck will take some time before it comes to a halt. Which reminds me, I wish the MSM would stop asking the “Do you think we’ve hit the bottom?” question. They sound like idiots and I have to flip the channel.
March 9th, 2007 08:25
SoCalMtgGuy, Good for you to have left the industry. What ab out your contacts, former colleagues etc. who still work there? Are many or all(?) of them looking for other jobs, too, now?
March 9th, 2007 09:27
Many have left the industry. Some are still in there. I have some good contacts that have now moved into the corporate level at some companies. They are no longer in the field, and are getting to see the other side of the business now.
I still keep my finger on the pulse of what is going on…but glad that I am out of that industry.
The only thing more bankrupt than the companies that have gone under is the overall level of integrity in that industry as a whole.
SoCalMtgGuy
March 9th, 2007 09:27
SoCal,
Great to see you back…thought they may have foreclosed on your home?
Well fresh off the newswire:
” Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- New Century Financial Corp. (NEW) appears to be running out of cash and may yet file for bankruptcy, as the embattled home-loan lender has stopped making new loans and is struggling to meet margin calls even after getting emergency financing from Morgan Stanley (MS).”
NEW is down to $3.00 - down another 20% from yesterday. At this point why would anyone want to rescue this company? If anyone tries to prop them up, short the heck out of that company.
I am not a professional investor so caveat emptor does pertain. Just making money on what we bubble bloggers have been preaching for the last year.
March 9th, 2007 09:35
Come on now…I’m renting!
I have just been working on other business interests.
That said…stay tuned as I am putting together a truly ‘inside’ look at the subprime mortgage industry. I pulled out all the rate sheets and flyers that I saved from my time in the industry. I will be making the first of several posts on Sunday night. I have rate sheets and loan programs from about 15+ lenders that I will be sharing. I am taking actual photos of the documents and posting big pictures…so people can actually SEE the nonsense that was going on. It will be a real eye opener for some of you…
Stay tuned…
SoCalMtgGuy
March 9th, 2007 10:06
Bring on the ‘eye opening’ *stuff*, SoCalMtgGuy.
I would love to see it!
:)
March 9th, 2007 10:21
SoCal,
It feels good to be right. I am glad you were there to educate me while you have been blogging on the topic.
As for the ARM resets $ numbers.
I have seen all kinds of amounts written. But the one that comes up most has been $600 billion for 2006 and $1.3 Trillion for 2007. for 2007 and 2008 I have seen a combined value of $2.1 trillion. To put this in perspective, the outstanding mortgage debt is about $10 Trillion. The net worth of RE in the US is estimated at $40 Trillion
March 9th, 2007 11:33
Good one as usual SoCal. Can’t wait to see the next post.
March 9th, 2007 18:14
“The way it should work is that the lender sells the $500 million of loans for say $520 million. Then goes back and lends that money…repeat cycle. Making money each time they sell the loans, which in turn gives them more money to lend out, and in turn sell for more money.”
I enjoyed your analogy here. Sounds alot like flipping houses. Just as specuvestors kept rolling gains into new properties, sounds like the lenders were doing the same. Wow! A Ponzi scheme built on another Ponzi scheme! Whooda thunk?
-Starve
March 9th, 2007 19:37
So I read Countrywide just closed all lending on 100% loans. That will be the MOTHER of all DUMPS on the current housing market.
March 9th, 2007 21:08
Even A borrowers are deeply into exotic loans and are counting on two salaries coming in and appreciation. Of all my friends and acquaintances who have bought recently, I can’t think of any couple not taking huge risks and counting on appreciation.
Who has 100K or more stashed for a down payment? Not many, even if their credit is great. Sadly, the press shills keep looking at the wrong places: inventory, speculators, consumer confidence and what not, with nary a word about prices.
March 9th, 2007 21:32
“I have to wonder how many FB’s are out there with their heads in the sand thinking everything is going to be OK?”
MORE THAN YOU CAN EVER IMAGINE. In my office, there are at least 3 FBs (and I am talking about small office of 50). These people are educated and intelligent BUT they have NO F*&&^&%ing clue. They think that party will go on forever.
March 9th, 2007 21:40
“Folks, what are your best short ideas?”
Well, for the first time that I shorted and it was NEW at $38 and covered at $6
:) That was the easiest money I have ever made. I am also short on (months ago) on CFC, TOL, NDE, DSL, KBH.
I am thinking to increase my shorts on NDE.
March 10th, 2007 08:45
“Even A borrowers are deeply into exotic loans and are counting on two salaries coming in and appreciation. Of all my friends and acquaintances who have bought recently, I can’t think of any couple not taking huge risks and counting on appreciation.”
Absolutely. In CA, I think piggyback loans were the only way first time buyers could get in. No one had 10% or 20% saved to put down. No one “qualified” under traditional lending standards.
This is the elephant in the room that isn’t getting much attention yet. MSM assuring us that the problem is confined to subprime. No, it’s not. EVERYONE stretched to buy in this market over the last few years, regardless of credit score.
The crazy lending standards enabled people to live way, way beyond their means, if only for a few years. I think that is how this “boom” will be remembered.
March 10th, 2007 10:31
Lisa,
Agreed. The subprime collapse has the spotlight right now, but in 6-12 months the payment shock to prime borrowers will be the headlines as ARMs reset and they have no way out. The smart ones will be on the sidelines for several more years and be grateful they aren’t a part of it. Think BB will get them out of this mess? Unlikely.
March 10th, 2007 19:30
Good post SoCalMtgGuy. It is strange how house prices are holding exceptionally strong in many areas - even in your neck of the woods in SoCal sale volumes are way down, inventory is down, but prices in Laguna Niguel, Laguna Beach, Anaheim - even Ladera Ranch seem to be unaffected - at least for now. What are your thoughts?
March 10th, 2007 19:47
These people are educated and intelligent BUT they have NO F*&&^&%ing clue. They think that party will go on forever.
And with that comment at the forefront, an oldie-but-a-goodie Pink Floyd song comes to mind..
“Sheep
Harmlessly passing your time in the grassland away;
Only dimly aware of a certain unease in the air.
You better watch out,
There may be dogs about
Ive looked over Jordan, and I have seen
Things are not what they seem.
What do you get for pretending the danger’s not real.
Meek and obedient you follow the leader
Down well trodden corridors into the valley of steel.
What a surprise!
A look of terminal shock in your eyes.
Now things are really what they seem.
No, this is no bad dream. ”
[Link]
March 10th, 2007 20:26
Stefan,
The masses still don’t get it yet. The lenders are just starting to crack. The standards are just starting to change. The foreclosures are just starting to rise.
This will take YEARS to pan out. Wait and see what happens this time in 2008. Once the alt-a and a-paper borrowers start to default on the option-arms…AND there is no more ‘crazy’ financing going on because the secondary markets won’t buy the loans.
It IS going to take some time…but like I have said before, the fundamentals WILL return to the markets, it will just take some time.
Lenders are already cutting back 100% LTV/CLTV loan programs, and some have stopped them completely. This is going to make ANY sort of appreciation going forward very hard.
Stay tuned…got the first of several good posts coming on Sunday….
SoCalMtgGuy
March 11th, 2007 03:22
Countrywide is doing away with 100% LTV loans on their subprime loans according to an article. “Countrywide BC will no longer be offering any 100 LTV products as of Monday, March 12.” Countrywide BC deals with mortgage brokers who sell subprime loans. The days of giving 100% financing to marginal credit borrowers are coming to an end. I don’t care what interest rate you charge, if the borrower can’t pay a loan back and if you have no equity, it can only end badly.
I believe Countrywide will still offer 100% financing on conforming paper and alt-A loans only with those programs you need to verify the income and be approved by Fannie Mae’s or Freddie Mac’s underwriting systems (conforming) or a very high credit score on the alt-A side if you can’t verify income (alt-A).
The new guidelines that 60% of the present borrowers wouldn’t be able to qualify for will put an end to 2/28 and 3/27 loans. These make sense because if you aren’t able to refinance or sell, you will be making a higher payment for the majority of the loan life on an adjustable rate mortgage, especially if it’s a subprime loan with a high margin. I recently saw a borrower with a 2/28 loan that has reset. The initial rate was 7.625%. The reset rate is the 6 month LIBOR (currently 5.30%) + a margin of 8.125%. In two years, if she doesn’t refinance and rates stay the same, she will have a rate of 13.4125%. In her case, even if the LIBOR went down to 0%, her rate would be no lower than 8.125%. Her loan amount is about $164,000. Her payment would increase about $800/month from the initial payment until fully indexed. This borrower seems to have enough equity to make refinancing into a fixed conforming product work. Hopefully her credit score has recovered, otherwise, she is in FB purgatory.
I think we have our answer to how well 100% stated income loans made to marginal credit borrowers will work in the intermediate and long term for investors and the mortgage companies that make them or more accurately, the mortgage companies that used to make them.
March 11th, 2007 06:43
SoCalMtgGuy, what is the typical DTI of prime borrowers? Christopher Cagan of First American Real Estate Solutions told me they are at 30%, and even if their 4.5% loan goes to 7%, that’s only an increase to 39% DTI. I told him I think the primes are as overextended as the subprimes. A mortgage broker told me, “everyone’s been going ’stated income’ so we don’t know what DTI is”.
Ok, if the loan is stated, then nobody knows DTI.
The primes can hold on to their property longer, as I found in some primes I researched for my website. Nice big homes, so they are in and out of foreclosure for one year; meanwhile, they take on more credit from private lenders, maybe liquidate that stock portfolio, and soon enough they are in foreclosure again.
Here’s another mortgage guy: Blown Mortgage
March 11th, 2007 08:08
RentforNow, I made a post on my website based on your idea that sellers should give away their homes just because you don’t want to pay market price, and that they are “greedy sellers”. I strongly disagree. The fact that market price is higher than you would like is perhaps disappointing, I agree with you there, but is more likely to make you a “cheap buyer” than make them a “greedy seller”. Wouldn’t you try to get top dollar for your house if you were selling it? Aren’t the people calling “greedy seller” really just “cheap buyers” who are priced out?
Not greedy sellers but cheap buyers.
March 11th, 2007 08:19
Yes, even long-time homeowners are under water. under water long-time homeowners refinanced out their equity
Stefan, you are right. Prices are not dropping because the buyers are chasing the same FEW good homes. MLS is 17K, but only 2-3K are good homes. In a buyer’s market, only the GOOD homes are desired. Nobody right now wants the trashy dump, the busy street, the tiny yard, the overhead power lines in the back yard, so only the good ones sell. Buyers are making multiple offers on the same few ones, keeping the prices high. Credit crunch is needed to make the prices fall.
March 11th, 2007 16:16
I have made predictions for the Irvine Housing Market.
* Median sales price will decline approximately 40% from near $700,000 to near $400,000 over the next 5 years.
* There will be a multi-year flattening of prices at the bottom.
* Sustained appreciation will not return until 2013 or later.
* Peak bubble prices will not be seen until 2027 (unless we get another bubble).
I would enjoy hearing your input (link below).
http://tinyurl.com/2penea
http://www.irvinehousingblog.com/
March 11th, 2007 20:02
Schahrzad Berkland,
Why would you have a website having anything to do with real estate when you obviously don’t know your ass from your elbow? it’s clear you’re just another trembling real estate agent trying to single-handedly hold up a crashing market. rentfornow is absolutely right — the greedy sellers SHOULD lower their prices, but not for rentfornow’s sake. they should do it for their own sake because if they don’t, a year from now they’ll be whining to us all about how they should have cut their price a year ago when they could still have gotten a hundred thousand or two hundred thousand more for their house.
the subprime market is the bottom level of the house of cards, and the subprime market just collapsed. do you really think nothing is going to happen to the “FEW GOOD” homes on the top level? how about a post about how clueless you are?
March 13th, 2007 12:26
As of today, 3/13/2007 subprime is officially dead:
Accredited (Nasdaq:LEND - news), based in San Diego, said it needed to raise money after paying $190 million demanded by its lenders, is cutting an unspecified number of jobs, and is exploring “strategic options,” including raising new capital.
Irvine, California-based New Century (Other OTC:NEWC - news), meanwhile, had trading in its shares suspended by the
New York Stock Exchange prior to delisting and received a grand jury subpoena in a federal criminal probe. On Monday, the real estate investment trust had said it did not have enough cash to repay its own lenders.
SoCalMtgGuy how could you possibly think these companies would be saved? The meltdown is going faster than even you thought. As you say: “Stay Tuned” for our next show: The Alt-A Body bag round up.
March 13th, 2007 12:32
waitingpatiently, I am not a real estate agent. I have owned real estate from 1988 - 2005, and sold my primary residence to get out of the way of the collapsing bubble. My mission is to inform, and my long-term projection is the same as irvinerenter: prices in So CA are likely to fall 35-50% from peak to bottom. Then some flat, then gradual appreciation. I don’t think we will see today’s prices in my lifetime.
May I guess is you are a renter, mad you are priced out of the market? If you were selling a house for which you could get $650K, you would actually sell it for $350K, because you don’t want to be greedy, and because you want to lower the comps for your neighborhood? I look forward to your response.
Gee, we should have more generous folks like you!
March 16th, 2007 09:55
Here are some nice posts on the subprime crash as well as a few stories on the UK housing bubble, which appears to be continuing despite higher interest rates.
http://economicdespair.blogspot.com
March 30th, 2007 03:32
I have only one “gripe” with this article-the part about people with “good” credit making smarter financial decisions than people with bad credit. I have NO credit, which makes it sound as if I have bad credit. I don’t have any debts. I pay cash for everything. I live below my means and save all the income I don’t spend by doing so. What’s so bad about that? Yes, I rent an apartment. No, my kids don’t have designer clothes. We have a used car. But we can sleep at night, and when the bubble finally pops, we won’t lose our home, our car, our savings, etc, etc. I’d say we’ve been pretty smart financially for even getting credit.
March 30th, 2007 03:33
Err…”NEVER even getting credit”, I mean, lol
February 27th, 2008 15:43
house insurance companies…
alum occurs exhibits …