“Don’t blame exotic loans for the housing malaise”
That was the headline in the OC Register this weekend in the ‘Marketplace’ section. The smaller print after the big headline is “Stats suggest borrowers are handling supposedly riskier mortgages – so far.” The BIG emphasis should be on those last 2 words…SO FAR. Here is the link to the online version: OC Register article - “Don’t blame exotic loans for the housing malaise”
I will expound on things a bit more, but I think a post that I did about 10 months ago will be a good start. I am sure some of you have read it before, but it won’t kill you to read it again. You will notice that some of the numbers in the post are lower than the numbers we are currently hearing today, that is because of more data is available today than was 10 months ago. Not to mention that mortgage resets is not the easiest statistic to compile. Well, here we go…
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Tuesday, December 06, 2005
“Are we there yet??” “What is taking soooo long!?!?”
Like a neverending road trip in the family station wagon as a kid…one poster wonders “when are we going to get there?” (this post was actually taken from Ben Jones blog with the posters permission to use it here)
Former LA Homeowner said…
socalmtgguy and all the rest,
I believe there is a housing bubble, especially in So Cal but it is taking a freaking long time to burst. How long do we have to wait for this mess to unravel? I just want a decent house, nothing to flip or speculate on.
1:21 PM
There is not been any REAL pressure on the market yet for it to start coming down. Yes, interest rates have gone up some, and lending standards have tightened a smidge in some places, but for all intents and purposes, not much has changed. The latest increase in rates doesn’t really affect that many people at the moment.
We all know that in the bubble markets, there is an overwhelming use of ARMs, I/O ARMs, and option-ARMs to be able to “afford” the property. Most of these loans are fixed for a minimum of 2-5 years, with some going as long as 7 and 10 years. The borrowers that are refinancing right now more than likely bought 2-3 years ago, and now their ARM is adjusting, or about to adjust. Assuming they didn’t take out too many HELOC’s (home equity line of credit), they should have plenty of equity to be able to refi at a lower LTV. Some of these people will be impacted, but for the most part, they have enough equity cushion to keep themselves safe.
On the other hand, you have the people that have bought in the past 12-18 months. These people are still sitting pretty with their low payments for another 12-18 months at least. Some of these people have some decent appreciation.
Here is where things get tricky. In 2006 there are approximately 335 billion dollars worth of ARMs that are set to adjust. Let’s just assume that each loan set to adjust is for $500,000. That means 670,000 households are going to have 4 options: refi, sell, foreclose, or pay the higher payments.
Things get really tricky in 2007 as 1.2 TRILLION dollars of arms are set to adjust. That means 2,400,000 households have to pick one of those 4 options. (again, we all know that 500k is a high loan amount, but it will give us a ‘low estimate’ as the number of households that could be effected) Let’s look at those 4 options a bit closer now…
Refinance - Most people will NOT like their mortgage payment fluctuating on a monthly basis, and they will certainly not like the fact that their payments will jump pretty dramatically as rates will most definitely be higher in 2006 and 2007. Rates will still be historically low, but not in the 4’s and 5’s which many of these borrowers will have had.
Sell - This is an option that many people will take. They knew going in that they could not afford the property for 30 years, but they would do whatever they had to do to get a piece of property and start getting the appreciation. There will be many of these people who will try and sell. The only problem is that supply and demand works both ways. The got the appreciation when the supply was low, now they will have to give it back as there are massive increases in inventory.
Foreclose - do I really need to go here? Many borrowers will lose their property because they cannot make their adjusted mortgage payment, or they cannot sell fast enough, or they cannot sell where they won’t be upside down.
Make the higher payment - Some people might not be able to refi because of credit scores dropping, employment changes, or even tightening of lending standards. These people will do what is necessary to keep making the payment. Hopefully the jump in payment will not crush them.
So there you have it. That is one of the things I belive that will be the catalyst for the bubble to burst. Massive people selling will lower prices. Rising rates will force people to lower prices as the same payment buys less house. Tightening lending standards will pull potential borrowers out of the market. Once those stated loans get a bad rap and/or they actually start pricing them correctly, you will remove another section of people from the market.
Once these things start happening, I think you will see the beginning of things REALLY coming down. Don’t fall for the dead-cat-bounce when people start buying in on the first dip.
I hope this helps to shed some light on how much longer “you will be stuck in this station wagon”!
SoCalMtgGuy
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It really doesn’t surprise me at this time that the ‘toxic loans’ aren’t performing worse than the ‘conventional’ loans. You see, many of the people with the exotic loans STILL have the low payment, and the ones that did get into trouble were generally able to sell before they got into any real foreclosure problems. With inventories at least double in many areas, and the sales pace down 25-40% from the same time last year, selling to get out of trouble is going to become MUCH harder…and we aren’t even into 2007 yet. I can only guess that the first half of this article was to squash the ‘bubble talk’ that has become more commonplace in the media today.
The second half of the story is where people should be paying attention. The first half covers the ‘past’ the 2nd half of the story looks to the future. Once there is a reason…like…I don’t know…at least 1.5 trillion dollars worth of mortgages adjusting, that could spell trouble for the future. The foreclosure rate is up across the country from the same time last year. Sure, it is still not a very high number of actual foreclosures, but lets revisit the stats AFTER 2007. Remember, it takes months to gather this data, analyze it, and get it reported to the people. So don’t start jumping on my back when the first wave of numbers comes out in February/March/April of 2007 and say “you said 2007 was the year of reckoning”…much of that data will still be from 2006. Look at the data from late 2007 and early 2008 to see what REALLY happened with all the mortgage adjustments. Remember, 2007 will be a key year, but it will by no means be ‘over’ after 2007. You can’t have a 5-8 year bull run and only a 1-2 year pullback. This thing will take time to run its course.
On a side note, I had another friend who just left the business. He said he had 3 borrowers in the past month or so that got loans, and went 30, 60, 90, 120, default. The loans were all stated 100% loans from 500-800k. I guess the borrowers were hoping to ‘flip’ the property before they could default.
On another side note…I couldn’t sleep the other night, so I was doing a little channel surfing. I came across the show “Million Dollar Listings” which I had heard of, but not seen. Needless to say, I stayed up another hour to watch this show. I actually felt bad for the realtors in this show. The sellers they featured were completely irrational. This one lady bought her home for 1.5 million, did 200k of ‘renovations’ and wanted to sell it for 3 million a mere 18 months later. Actually, it was 2,995,000…or $5000 less. So shoot me for ’rounding up’! The realtor finally got an offer at 2.3 million, but the seller wanted nothing of it. The realtor took the lady to several other houses to try and show her that her house was priced to high. She did NOT get it. There was one she REALLY liked, nicer than here home, she asked how much it was…a mere 1.9 million. She says…GREAT! get me 3 million for mine and I might buy this one! The highest comp to her house was 2.19 million, but she said she would get 2.95 million, or nothing at all. She said she wasn’t in a hurry, and would wait to get exactly what she wanted. Needless to say, the listed was removed, and no sale was made. It was amazing how the sellers were completely disconnected from what their houses were really worth. The other realtors waited about 5 weeks to call the seller and recommend listing at a lower price. After debating firing them, the borrower decided to lower his price, and finally sold his house in the end.
Well, that is all for now. I look forward to the comments and feedback. Look for more frequent postings in the future.
Stay tuned…
SoCalMtgGuy
September 20th, 2006 02:59
hello from germany,
great post as always.
i have a piece with an interview from alan greenspan just a few day old (15.september 2006)
“We now have a slowing down of that whole acceleration process. The level of mortgage rates is not really an issue, even now”
complete interview
http://immobilienblasen.blogspot.com/2006/09/interview-with-alan-greenspan.html
what he fails to mention is that the level of debt that needs to be served has explodet.
amazing how he is still in denial or in “propaganda”mode
http://immobilienblasen.blogspot.com/
September 20th, 2006 04:15
I’m glad you’re writing again, SoCal. You may want to adjust the colors a bit - I can’t see the lines around the “Leave a Reply” section.
September 20th, 2006 06:45
Lou,
What is the problem? I’m trying to figure out what you are talking about.
Thanks!
SoCalMtgGuy
September 20th, 2006 12:38
SoCal, great post as usual.
I am continuing to track the listings in my area just outside of Los Angeles and have the following to report:
Very little sales activity. The only places that are on “Backup Offer” status are in the lowest price range and mostly townhomes. These sold after the, what is now, usual price reductions.
Speaking of price reductions - a couple of months ago I noticed several price reductions, but they were quite small in nature. Now I am seeing big 50 and 70k price reductions on homes listed between 600 and 800k.
Many of the reductions are on listings that have stagnated on the market. So, it looks like the typical “follow the market down” syndrome.
New listings are being added everyday and still look like they are priced for 2005. I guess they did not get the memo.
BTW, being an ex real estate investor, I can tell you that even at the reduced prices, these homes and townhomes are jokingly still overpriced.
There are a few homes that have been on the market more than six months. One of them is a dump that was originally priced at 540k, then marked down to 465k, and now listed at 420k. You could not give that place to me, seriously.
Well, just a side note, my wifes friend who is a cook just closed on his first home. Its in an undesirable city, but he paid 540k for it using some kind of ARM loan - 100% financing. The broker or agent gave him the usual speal that he can just refinance the loan before it resets. LOL!
Lending standards? What lending standards?
http://earlyretirementadvice.blogspot.com/
September 20th, 2006 14:28
Million Dollar Listing is some crazy voyeur TV, isn’t it? Have you seen Property Ladder? It’s yet another house flipping show, but unlike the others it follows the flipper all the way to sale. I’ve been tivo’ing this stuff. It seems that about half of the flippers end up losing or breaking even at best.
September 20th, 2006 16:29
“The broker or agent gave him the usual speal that he can just refinance the loan before it resets”. LOL!
this should be against the law as it an outright lie!!!
and i’t prolly will be in the future.
September 20th, 2006 17:46
your analysis is always so insightful. keep up the great work and thank you. because of your help, my husband and i held off on buying a home in vegas and now we are grateful we did! we are seeing massive inventory and slowly the prices are starting to come down. we havent lost a thing by renting and i feel confident in our decision. too many flippers, too many people overextended using exotic loans equals great buying opportunity in the years to come! so thanks again!!!
September 20th, 2006 17:50
ceeewoood,
That is exactly why I started doing this blog. It wasn’t to be doom and gloom…it was to show people what they were ‘competing’ against when trying to get a mortgage. ‘Everybody’ wasn’t making more money, they were just using crazy financing to make it happen.
Sure, they had a big paper gain for a while, but we are in the process of watching that get erased right now.
Glad you were patient, I think you probably saved 50-100k already by waiting.
Best of luck to you!
SoCalMtgGuy
September 20th, 2006 17:54
I think the OC Register article was right with his article: “Don’t blame exotic loans for the housing malaise”, at least for what we have seen so far. With these low interest rates in 2002/2003, there would have been a housing bubble anyhow, at least on the coasts, and it would have ended in a malaise. What is different this time, is the extent of the bubble, both in its size and in the area that it reached, Arizona, Utah, Montana etc. And the extent of the bubble cannot be separated from the exotic mortgages. They also define the time the housing market cannot be trusted - only when the lending standards have been reestablished, the last bulk of exotic mortgages has reset and their last weak borrowers have lost their homes, we will know what houses are worth. To buy in 2006, 2007 or in 2008 is probaly unwise.
September 20th, 2006 18:26
No, the exotic loans are not SOLELY to blame, there are many factors.
But don’t try to tell me that there is no bubble, or that things will be OK, because the ‘exotic’ loans are performing better than the conventional loans over a short period of time.
Like I said, there has NOT been a real reason yet for things to change. When the ARMs start adjusting in mass…then look to see how it all pans out.
It is going to be interesting either way!
Stay tuned…
SoCalMtgGuy
September 20th, 2006 18:55
Documents from today’s Senate Banking Hearing on Non-traditional mortgages.
http://banking.senate.gov/index.cfm?Fuseaction=Hearings.Detail&HearingID=239
September 20th, 2006 19:27
Will this “crazy loan” crap ever be cleaned up? Once again they are only going to issue “guidelines” NO enforcement only voluntary! This is so frustrating! I wonder if this nonsense in the lending industry will ever end? A realtwhore tried to talk me and my husband into getting an interest-only loan a few weeks ago. CRAZY!! Lower the prices!!
September 20th, 2006 19:45
It will end when things stop going up.
It is going to take years for this to pan out…but it will.
We didn’t need a law that told people NOT to buy stocks trading at 180 times future earnings…getting burned badly kept people from doing it.
SoCalMtgGuy
September 20th, 2006 20:35
All one really has to do is look at all the moving trucks on the road in order to see how the masses are handling ‘things’ (mortgage adjustments, job changes, etc.).
It will end when things stop going up.
I think it will end when the populace no longer ‘feels the need’ to get out of Dodge..
bubble_watcher
September 21st, 2006 06:29
SoCal, glad you are posting regularly again.
i’m seeing a lot of foreclosures happening 3-6 months after close of escrow in San Diego. I don’t think when the $2 trillion reset was forcasted these instant foreclosures, ie didn’t even pay the first mortgage, were factored in. things may be a lot worse than predicted?
ocrenter
September 21st, 2006 08:23
I don’t blame the exotic mortgages one bit. These mortgages are merely tools that allowed people to become FBs. Credit cards do the same, but I don’t blame the credit cards for allowing someone to get five digits in the hole. They are merely tools that must be used responsibly. If they are not, well, this is what happens. Sadly, the uninformed consumer combined with the opportunistic mortgage broker makes for a bad relationship (for the consumer).
September 21st, 2006 08:50
LAMoneyGuy nails it!
The whole problem is that this country has gotten away from taking personal responsibility for ones actions.
Spill coffee…its McDonald’s fault
Get fat…its the fast food companies fault
Get into too much debt…it is the credit card companies fault
Get a bad mortgage…it is the brokers fault
If people were as quick to do their own research before blaming somebody else, things would be much better off.
It sucks that there are people out there that will intentionally take advantage of somebody, but no ‘law’ will stop that.
With the internet, it is not that hard to get informatin and read up on things before making purchases that have long reaching financial implications.
SoCalMtgGuy
September 21st, 2006 10:52
I am not looking for the housing market to suddenly turn back up on a dime. Too much inventory to work through. Some of that inventory will drop off as sellers cancel their listings (or they expire) as they were unable to sell at prices that are no longer available. These are the ones who didn’t have to sell, didn’t have to move, didn’t have a bad mortgage to refinance, but were willing to sell at inflated prices and didn’t pull it off.
READ MY CALL TO ARMS: http://millionairenowbook.blogspot.com/2006/09/call-to-arms.html
September 21st, 2006 11:16
Here is just one item of Larry Nusbaum’s advice from his blog:
“Do not get suckered into a 30-year fixed rate loan.”
Larry sure has been posting alot on the RE blog circuit lately. He does look a little like David Lereah…hmmmm.
September 21st, 2006 11:30
I don’t have time at the moment, but look for a reply from me regarding that information.
In short, I agree with him on some things…that all these loans have a place and a situation where they can make sense.
But flat out recommending that people NOT buy down the rate on a 30-year fixed, or get ’suckered’ into one is non-sense!!
There are a LOT of people out there that want to stay in a house for 10+ years at least. When rates are at historical lows, it makes sense to get a fixed rate mortgage…and even get the rate down if you plan on staying at least 3-5 years (that is about the time it takes to ‘breakeven’ for the points paid up front).
Don’t forget…there is a difference between paying points to the lender for a lower rate…and paying points to a broker as a commission.
More to come…
SoCalMtgGuy
September 21st, 2006 11:41
Yes, I agree SoCal, there are some things in his blog that make perfect financial sense, but then they are followed with some ideas that I think are suicidal for the average person.
I would never condone this for example:
“Resets can all be met with orderly refinancing into……another negative amortization or interest only loan.”
What am I missing here?
September 21st, 2006 11:45
You are ‘missing’ the ‘annuity’ that the broker gets by having a borrower come to him/her every 2,3,5 years for another loan to ‘refinance’ into.
Once property stops appreciating at crazy rates…you will see the market shy away from these loans.
After all…the lenders marketed the heck out of ARMs when the times were good…now all you hear from Ditech and others is “is your ARM adjusting…get a fixed rate loan NOW!”
SoCalMtgGuy
September 21st, 2006 14:08
Is it safe to take out my crack pipe? I’ve stayed away from this blog to get over the withdrawals. If you’re promising to post more, I’ll start visiting again.
September 21st, 2006 14:10
BTW, can you please install one of those nested comments plugins for your blog that allows you to reply to a specific comments directly? It makes reading/replying the long thoughtful replies here much easier.
September 21st, 2006 15:35
Suzanne,
I will see what I can do with the plugins. I worry more about screwing things up since I am not a html/website expert…but I will give it a shot.
Thanks!
SoCalMtgGuy
September 21st, 2006 17:17
Hey Socal:
Got this from Ben’s blog……
Pretty much summarizes the speculation and loan fraud you have been talking about….
About a 24 year old guy with several homes. Check it out.
http://iamfacingforeclosure.com/24/honest-for-sale-by-owner-sign
September 21st, 2006 18:09
Instead of
> OC Register article was right with his article: “Don’t blame exotic loans for the housing malaise”
it should have been
> OC Register article was right with his title: “Don’t blame exotic loans for the housing malaise”
The rest of my posting from September 20th, 2006 17:54 was as I intended.
September 21st, 2006 20:48
No, don’t do nested comments, they make it a pain to read comments when you come back multiple times to a comment thread, you have to plow through stuff you’ve already read instead of just scrolling to the bottom!
(oh, and welcome back
)
September 21st, 2006 20:52
Every single piece of “refinance now” junk mail I currently get (maybe once every two weeks) is for an Option-ARM.
The most recent ones have NO information on interest rates or neg-am consequences on the front page; just all of the advertising fluff concerning ‘how *low* your monthly payments could be’.
You have to read the fine print on the back (and squint real hard) to see what sort of trouble you could get into with these loans.
I’m amazed that not more people are getting tricked into these…maybe word is getting out?
September 21st, 2006 21:32
Using Firefox 1.5.0.7 the color does look a little pale on my Sony Trintron monitor - its readable, but tends to cause eye-strain. Lou Minatti probably needs to adjust his brightness/contrast, or is using an LCD which displays the background more washed out (I find LCD monitors are not good for reading print, unless you have a really expensive one). You might want to try a new color scheme, the orange letters on the pale beige background are giving me a headache.
September 21st, 2006 21:38
So Cal - great to have you back here. Your blog has been awesome, and a great learning tool. Look forward to more.
September 21st, 2006 22:02
“Wells Fargo CEO Dick Kovacevich said Monday that the nation’s housing slowdown is a positive development. ‘We were getting into bubble territory,’ Kovacevich said. ‘As everyone knows, when a bubble bursts, the smaller the bubble, the better it is.’”
Yup, good thing we never quite reached a bubble, yet alone a big one.
Couldn’t agree with you more, Mr. Aptly Named.
September 22nd, 2006 07:57
I’ve also become a fan of “million dollar listings”, and watched that particular episode closely…..sort of like watching a train wreck in slow motion!
I have to say I found it odd that that lady with the set-in-concrete $2.995 million pricetag so easily cowed the normaly formidable Scotty Brown. Still, I guess when you’re faced with that kind of stubborness, its just easier to let them hang themselves with thier own rope.
Anecdotally, I’m tracking a few places in Malibu (I have a notion that the MDL place is one of them) and am seeing the same mentality shining through in many of the listings - places priced at double what they were a couple of years ago, and 100+ days on market with no price reductions.
My guess is that the really expensive areas of L.A will just follow the market down, harder and more stubbornly than other less ‘toney’ areas.
Still, I suppose if you’ve invested your entire portfolio on a massively expensive ‘house in the hills’ you’ll do anything to come out of the deal with more cash than you went in with, no matter how long you have to wait. Still you have to wonder how much slack even the very rich can carry for 1,2 and even 3 years before finally getting rid of the albatross around thier necks.
Interesting times, indeed.
December 29th, 2006 19:33
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