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.”

What?!?!?  …you ask.

Maybe some of you have heard them already, but I just heard my first commercial on the radio that goes something like this (not exact by any means…waiting for it to come on again):

“Do you have one of those ‘hard to understand’ mortgages that gives you several options to pay at the end of each month? Are your payments increasing and you were not aware of it. These ‘option ARM’ mortgages are very complex and things might not have been explained to you properly. If you have one of these mortgages you could be eligible for compensation! If this sounds like you, then give us a call for a free consultation. We might be able to help you get all your money back! So call Uraviktom & Playaviktom…attorneys at law.”

I don’t guess I should hold my breath for ONE of the ‘get-rich-quick-in-a-no-money-down-real-estate-late-night-infomercial’ students to take personal responsibility for their ’sure-thing’ real estate transaction going south. Why do that when there are lawyers just waiting to paint you as a victim…and financially illiterate judges and juries just waiting to hand you ‘free money’.

Don’t get me wrong, there are some people that did get screwed, but many more knew EXACTLY what they were doing. And if they had made those ‘easy riches’ they sure as heck wouldn’t be getting a lawyer to make sure they ‘paid back’ the person who they ‘got rich off of’.

The unfolding of this real estate bubble is going to be nasty…and this is ONLY the beginning. Just don’t expect to hear that from any ‘professional organization’ in the industry.

Stay tuned…

SoCalMtgGuy

If you didn’t see this weekends Marketplace section in the OC register, you should check it out. Here is the link to the main article that was on the front page of the Marketplace section: Subprime’s grip slips. This is the section that normally had articles about the unstoppable OC real estate market and how you should ‘buy today’.

I found the picture that was the backdrop for this article very interesting. Not only was it in color, but it was 9.25″ by 16.25″. Here is a smaller version of the picture: as you can see, it is an ‘orange’ holding a house from going over the edge. How fitting…as OC real estate gains are ‘in the bag’!

I almost spit my OJ across the paper when I saw the quote that was highlighted beside the article:

I think that deserves a classic Top Gun “BULLSH!T” cough!! Are you kidding me? Come on people, this isn’t rocket science. These guys had NO problem getting rich when the getting was good. Sure, it wasn’t completely their fault by any means. But don’t tell me that you don’t have any interest in putting people in homes they can’t afford. If you didn’t have that interest, you wouldn’t allow things like stated income for 100% interest-only loans. You would require a pay stub or W2 every once in a while.

I remember people buying 600-800k homes with 6-10k in the bank. Really! I saw all of their accounts and was amazed that lenders would do it. If you only have 6k in savings, you don’t need to be buying a plasma TV, much less a 600k new home!

After you read the article, check out the ‘buying it in…’ section. This link just so happens to be the ‘buying it in Mission Viejo’ section. I like this house because it is a $620k home which is about the ‘median’ home price in Orange County. This section gives 3 options of how to ‘afford’ this house. Granted they use these archaic standards such as 33% of income on a housing payment as well as this thing called a ‘30 year fixed’ loan. I don’t know what that means, but 30 years sounds scary. I’m going to sell it in a year for a 6-figure profit anyway… I just read a great book called “Getting Rich in Real Estate the Casey Serin Way”. I highly recommend it!

Anyway, back on track. Well, here are the numbers they arrived at to buy this ‘median’ priced home:

———————
24831 Daphne West, Mission Viejo 92691
Year built: 1973
Bedrooms: 4
Bathrooms: 2.5
Home size: 2,180 square feet
Lot size: 4,680 square feet
Sale date: Oct. 13
Last sold: Feb. 13, 2004
Last price: $620,000

---

FINANCING
Three ways to buy a $620,000 home, based on interest rates as of noon Thursday, no points and $4,000 in closing costs.30-YEAR FIXED
Loan assumes 5% down payment, 7.00% interest (7.02% APR).
Down payment: $31,000
Loan amount: $589,000
Monthly payment: $3,919
Req’d. annual income: $181,185
Cost as % of income: 33%30-YEAR DUE IN SEVEN
Loan assumes 10% down payment, 6.75% interest (6.77% APR).
Down payment: $62,000
Loan amount: $558,000
Monthly payment: $3,619
Req’d. annual income: $165,702
Cost as % of income: 33%

30-YEAR ADJUSTABLE
Loan assumes 20% down payment, 1.5% interest (7.61% APR). Adjusts annually with a 7.5% cap per adjustment and a life ceiling of 9.95%, tied to 11th District Cost of Funds, plus a 3.45% margin.
Down payment: $124,000
Loan amount: $496,000
Monthly payment: $1,712
Adjusted payment: $3,500
Req’d. annual income: $152,566
Cost as % of income: 33%
Payment fully indexed, based on current rates.

———————

I highlighted the required annual income required to responsibly purchase these houses, and it seems to be just a smidge higher than the median income of Orange County. Actually, even 2 people earning the median income of Orange County would be hard pressed to afford 1 median priced home. But don’t worry, the lenders would NEVER (cough-cough) want to put somebody in a house that they couldn’t afford.
But not to worry…people have been saving large amounts of money and using this savings for large downpayments! These large downpayments mean smaller mortgages and therefore not as much income is needed to support them. So it all makes sense.

On a not-so-important side note, I saw an article today that said the savings rate is now at a level similar to the Great Depression. (Well crap…there goes my ‘everybody is saving’ theory…along with my blogging credibility) The savings rate was negative .4% in 2005 and negative 1.0% in 2006. This was the lowest savings rate in 73 years and only the 2nd time ever with 2 years of back to back negative savings rates. The last 2 years of negative savings rates were 1932 and 1933. I really think saving money is over-rated and not that big of a deal really. My house has gone up in value so much and I just got a new HELOC so I’m off to Fashion Island and South Coast Plaza. I’ll check out the comments later…

Stay Tuned…

SoCalMtgGuy

I hope everybody is having a great 2007 so far. Let’s see…Donald and Rosie are in a spat, Beckham is coming to Los Angeles, the Chargers blew another playoff game, and YES…real estate is still overpriced in many areas.

I know it has been a while since my last post, but I am just here to casually remind you to do your own research and not buy into the latest and greatest marketing hype.

I saw this one today on a big ad: “Don’t let this buyers market pass you by!”. And it went on to say how you will miss the next run up if you don’t buy now and let this “great opportunity” pass you by. ARE YOU KIDDING ME? Depending on who you talk to and the location, most would say this ‘buyers market’ has been going on for about 6-12 months. I’m sorry, but after a 5-8 year bull run in real estate which was predominately a ’sellers market’, don’t tell me that a few months where buyers aren’t taking it in the shorts and are allowed to negotiate means that the bubble is ‘over’.

It is nice that property values are much softer in many areas now…but property in many areas is still extremely over valued. So before you fall for the latest and greatest marketing that is being used by real estate agents and brokers, be sure to do the math for yourself and see if it REALLY is a good deal.

That said, stay tuned as I will have more posts coming. Also a big thanks to everybody that voted for me for the REBA award. I took 2nd place in my respective category.

Remember…2007 is the year when things REALLY start getting interesting.

SoCalMtgGuy

I hope everybody had a great Christmas holiday and is looking forward to a Happy New Year and productive 2007!

I have done some upgrades to the site software, so that should allow me to spend a lot less time managing the SPAM attacks, and getting new posts up!

That said, apparently this blog ‘Another FB’ along with several of your other favorite ‘real estate blogs’ have been nominated for a REBA (Real Estate Blogging Award)!! Please go to THIS LINK TO VOTE for your favorite RE blogs. The voting has already started and ends at 10pm CST on January 10, 2007.

Thanks for reading my blog…and look forward to new posts and an exciting year in 2007!

Best,

SoCalMtgGuy

This is what you call ‘TOO LITTLE TOO LATE”. While I’m somewhat glad that the media is talking about this now, why weren’t they doing this 2 years ago?? Come on, it doesn’t take an MBA (it only takes a clear head and a calculator) to figure out that this was a recipe for disaster, not success.

What I am talking about, is this article from the LA Times titled: A Loan That’ll Get Ugly Fast. I REALLY suggest you read the whole thing. It is a great article on soooo many levels.

Before we get started, lets take a little test…don’t worry, it is only one question!

“Like hundreds of thousands of other homeowners around the state, Hertzberg has a mortgage that lets him choose how much he pays each month.”

Question 1. Do you think Hertzberg will chose the little amount, or the big amount to pay each month?? (Take your time…clear your head…take a deep breath…raise your hand if you need another pencil or an eraser. This is a question so tough that it didn’t even make the California High School Exit Exam…)

And the answer is……..

“Like many of them, he always chooses to pay as little as possible.”

DING DING DING….if you said the ‘little payment’ you won!!

It isn’t really any secret that when people are faced with spending a little money or a lot of money for the same ‘item’, they choose to spend the little amount. The problem is that you get ‘behind’ on that item if you pay the little amount. I saw an article many months ago in the OC Register that said something like over 70% of the people that were trading in cars in California now days are ‘upside down’. That is because people are getting these low payments for 6-8 years on assets that are depreciating faster than they can be paid down.

A similar thing is starting to happen now with real estate, except the difference is that the real estate is not appreciating at a rate to accomodate the ‘negative amortization’ these borrows are adding to the principal every month.

I have gone over the pitfalls of these loans, how they are sold by brokers so they can make a fat commission at your expense, and what to look out for here.

I suggest you read the entire article…but here is a nice little statistic to think about:

——————
In 2003, only about 8 of every 1,000 people buying a home or refinancing a mortgage in California got a pay option loan, according to San Francisco-based data tracking company First American LoanPerformance.

Last year, 1 in 5 loan applicants got one.

In the first eight months of 2006, even as the real estate market began to weaken amid fears of a downturn, the appeal increased again. Nearly 1 in 3 California loan applicants are now choosing them. The state boasts about 580,000 active pay option mortgages, about half the U.S. total.
——————

Lets pretend this was a ‘game’ in Vegas and you could place a bet on how you thought things would turn out. Would you bet that most of the 580,000 people with these mortgages are going to be earning the extra money needed to swing the full mortgage when the time comes? Are you willing to bet that appreciation saves them? Or do you think there are a LOT of over extended people out there who are going to be enrolling at FB University in the coming semesters?

Its your money…where would you put it?

Stay tuned…

SoCalMtgGuy

I was out of town on the east coast for a little while catching up with friends, and going to the Army/Navy game in Philadelphia. Navy made it a 4 year sweep of both Army and Air Force…too bad they didn’t play that well when I was there. Anyway, I have quite a bit on my plate right now, but lets look at a few things.

First off, OwnIt Mortgage went down faster than a Pamela Anderson marriage. It appears that their website is already shut down… www.ownitmortgage.com I remember when this company hit the market, and now I got to see it go full circle. Here you go:

—————————————–
From: OwnIt Mortgage Solutions [mailto:info@ownitmortgage.com]
Sent: Tuesday, December 05, 2006 4:26 PM
To:
Subject: Ownit Mortgage Solutions is Closing Its Doors

To view this email as a web page, go here.

December 5, 2006

To All Ownit Mortgage Solutions Friends and Partners in Business,

It is with deep regret that we inform you Ownit Mortgage Solutions will cease operations on December 6, 2006. For the past three years, we have pursued a mission to influence the mortgage industry toward increased affordability options for a changing market of home buyers. Change takes time, and we are saddened that the current unfavorable conditions of the mortgage industry did not afford us sufficient time to see our mission through.

We have been blessed with the opportunity to work with you over the past three years, and we wish each and every one of you success in your endeavors. We look forward to future opportunities to work with you again. Provided below are regional contacts for loan status: (I removed the contact info - SCMG)

Ownit Mortgage Solutions . 27349 Agoura Road, Agoura Hills, CA . 877-443-0405

This email was sent by: OwnIt Mortgage Solutions
27349 Agoura Road Suite 100 Agoura Hills, CA 91301 USA
—————————————–

What I find really interesting is how this company, and the whole RE industry as a whole thinks they are doing people a favor by adding more ‘affordability options’. It is really simple…you either have, or make enough to afford something, or you don’t.

I can’t afford a new Ferrari F430 with the Novitec Rosso package right now. The only way I could afford one is if I either 1. started making a lot more money (must…blog…harder…) or 2. saved my money for a long, long time. Some ‘nice’ company on a ‘mission’ to help me ‘afford’ one by finding some way to stretch my current pay is NOT really doing me any favors in the long term. But hey, I could get into a Ferrari today and live the ‘American dream’! We’ll worry about tomorrow another day…

The same thing has happened to many with Real Estate. So many bought into homes they couldn’t ‘afford’ in the long term, but they could afford the interest only, or neg-am payment today. And that my friends is why we have a bubble. You can’t stretch the dollar forever…no matter what OwnIt or any other ‘helpful’ mortgage company tells you.

That brings me to my next point. See this story from the NYT. Look at this quote from a top mortgage executive at a major bank:

“We all should be proud as an industry,” Michael W. Perry, chairman and chief executive of IndyMac Bank, a lender in Pasadena, Calif., told his peers at the Mortgage Bankers Association’s annual convention in Chicago recently. “We have created an enormous amount of wealth for Americans.”

Yeah, I could’ve sworn the CEO of ‘whatever.com’ said the same thing a few years ago. These people have made sooo much money off the masses, what do you think they are going to say? Just like the stock market boom, there are a lot of people who made a killing in the RE and mortgage industries and will be set for life. BUT, there will be many more that are left clenching ‘old’ appraisals the same way stock-jockeys were left clenching Wall Street Journals from 1999.

I am working on a few things that I think you will find very informative. I have saved a LOT of information from when I was in the industry. I think it is time to peel back the curtain and let you see for yourselves what was REALLY going on. Look for these posts throughout the holidays.

Also…I just got my annual web hosting and URL bill in the mail. So if you need to do any Christmas shopping this season, help out the bloggers that you read by shopping through their e-tailers. I have Amazon.com on my site…so if you are buying any books, music, or electronics for anybody, going through my site is greatly appreciated. Every little bit helps!

Stay tuned…

SoCalMtgGuy

Look at this latest report from the California Association of Realtors (CAR): 3Q 2006 First-time Buyer Housing Affordability Index (HAI).

This is the part I find interesting…and for several reasons to be discussed below:

—————-
The minimum household income first-time buyers needed to purchase a home at $478,710 in California in the third quarter of 2006 was $98,890, based on an adjustable interest rate of 6.58 percent and assuming a 10 percent down payment. First-time buyers typically purchase a home equal to 85 percent of the prevailing median price. The monthly payment including taxes and insurance was $3,300 for the third quarter of 2006.
—————-

First off, the OLD standard used to be 20% down and a FIXED rate loan. Now, they are using 10% down and an ADJUSTABLE rate loan. Looks like the ole “when things aren’t looking as good as we think they should, we will just change the standard”. It has been used successfully with SAT scores, so why not housing stats? After all, if we just change the ’standard’ every so often, we can show progress with each new ’standard’. Don’t believe me…here is the link to a report from December 2005 that uses the ‘old’ 20% down standard: The ‘OLD’ affordability index from 2005. Here is the excerpt:

—————-
LOS ANGELES (Dec. 8 ) – The percentage of households in California able to afford a median-priced home stood at 15 percent in October, a 4 percentage-point decrease compared with the same period a year ago when the Index was at 19 percent, according to a report released today by the California Association of REALTORS® (C.A.R.). The October Housing Affordability Index (HAI) was unchanged from September, when it stood at 15 percent.

The minimum household income needed to purchase a median-priced home at $538,770 in California in October was $128,480, based on an average effective mortgage interest rate of 6.03 percent and assuming a 20 percent downpayment. The minimum household income needed to purchase a median-priced home was up from $106,490 in October 2004, when the median price of a home was $459,530 and the prevailing interest rate was 5.70 percent.
—————-

There you have it…complete with links to actual pages on the CAR site. I wonder why it is so hard for the OC Register, LA Times, San Diego Union Tribune, and others to do such ‘investigative journalism’? “Bueller……Bueller…….” Did somebody say advertising?

Not only did they change the standard, but they used an interest rate that I don’t think is attainable by very many people. I looked at the California rate sheet of a major nationwide lender, and I think it would be rather difficult for most people to get a 90% LTV loan at 6.58%! For the people that could get it, they would need to show full documentation, and that rate would only be ‘fixed’ for TWO years!! Sorry, no 90% stated loans at that rate! Getting that rate would ‘assume’ that the broker wasn’t charging any points, and bare-bones fees…and we know how much brokers like to work for ‘no fee’ loans! But lets not forget that unless you were using a ‘non-conforming’ loan, you would be paying PMI (mortgage insurance) until you had 20% equity in your property…so that would add a few hundred a month to the bill as well…and make that rate even less applicable to this situation. Most people would have to get an 80/10 loan to get to 90%…and the 10% would be in the 8-12% range depending on all of the underwriting factors, but they would avoid paying the PMI by using the ‘combo’ loan.

From the thousands of credit reports and files that I looked at, very few people had $47,000 to $50,000 sitting in their savings accounts for the 10% down payment…which doesn’t include those pesky things called closing costs. I know that most sellers are dying for a chance to pay them for you now, but we can’t assume that those will automatically be paid for. So, might as well have another 5-12k set aside for those. But let’s do this the bare-bones CAR way…after all, why should they care if you have any money left in your savings account for reserves, emergencies, etc? You ‘own’ a house now…right?!?!?

So, using their numbers, I crunched the loan of $430,839.00 at 6.58% to have a principal/interest mortgage payment of $2745.90 per month. That doesn’t include insurance, which on a $480k piece of property will be about $100 a month. Don’t forget property taxes which will run about $450-500 per month (most lenders underwrite CA state property tax at 1.25% of the purchase price…but it can be a bit lower, or much higher depending on things like Mello Roos and other local assessments). Lets just round the property taxes to $444.10 and that makes our total monthly expenditure for this house the $3300 like the CAR says was the average in Q3 2006. At least the CAR can crunch the numbers right! The problem is that their numbers are not completely realistic in my opinion. This situation would put the person at a 40% debt ratio assuming they had NO other debt…no student loans, no car payments, no credit cards bills…nothing. If that was the case, this person would be OK spending 40% of their income on housing with no other debt.

Let me just throw this question out there for many of you…what do you think the ‘typical’ 480k house in California rents for per month??? Do you think the rent is more or less than $3300 a month? Enquiring minds want to know…

The scary thing is what happens in 2, 3, or 5 years when that wonderful ARM adjusts! What does the payment jump to then? What is the underlying index the CAR suggests to use for the ARM? Where will that index be in a few years? What will happen if ‘heaven forbid’ property values decrease a bit before I need to refinance, and I can’t get out of my ARM? Even if they decrease just a little bit, that 10% equity cushion can evaporate pretty quick. Even if the borrower isn’t upside down, it will still be hard to get a good rate on a high LTV loan (loan to value). I think you get the point…

Oh well…anything to make the market look better for a little while longer. You know what though…just like a kid wading too far into the deep-end…even the biggest moron knows when he is underwater and drowning…and there is nothing the CAR will be able to say or do to make these people feel any better about their situations when that time comes.

Stay tuned…

SoCalMtgGuy