I know, I know, it has been too long. But look at it this way, nothing ‘major’ has happened yet. Most of you that have read this blog for a while know what is coming. Sure, it is ‘nice’ or at least ‘validating’ for people on the ‘bubble side’ of things see inventories rising, appreciation slow or even go negative, and the “oh my gosh, the market turned so fast, I wasn’t able to flip for huge money” stories that are showing up more and more.

The media is doing a great job in its role of ‘lagging indicator’, by warning people about the pitfalls of creative financing and adjustable rate mortgages. Too little, WAY too late. But then again, if they had tried to tell people to not use interest only ARMs to buy homes they couldn’t afford a few years ago, people would have laughed in their face. Real estate only goes up….duh!

That said, let’s look at the ‘old way’ that most people used to buy property. Lets use the ‘new standard’ for homes/condos/townhomes in most areas…the ever popular “Starting at only $400k!!” I am going to use ‘rough’ numbers here to illustrate a point…so just bear with me. I am also going to assume these people have NO other debt that would figure in their debt ratio…no car payments, no student loans, no credit card bills…pretty big assumption….but it will only help make the point when you see how much most people are spending on housing.

In the ‘old days’, you would need an 80k down-payment to buy a 400k home. If you were an individual or family making 80k a year, if you saved 10% of your gross income JUST for a down-payment, it would take 10 years to save your 80k. I know that most people would have invested the money along the way, so let’s just say they put in in fixed income because they didn’t want to lose any money. So figuring in the investing, lets say it would take about 7 years for them to save the money needed for the down-payment. A $320,000 mortgage at 7.5% would yield a principal and and interest payment of $2237.48 per month. Throw in another $400 a month for California taxes, and that brings the total to a rounded off $2640 per month…and that is NOT including any HOA or association fees that most condos and housing developments have today. That 80k a year translates to $6666.67 per month (GROSS). That housing payment is 39.6% of gross income…and remember, we are NOT including any HOA or other maintenance. Throw in a $250 or $300 HOA, and we are pushing a 45% debt debt ratio, JUST on housing. That doesn’t leave a lot of money to save for retirement, disability insurance, other investments. Not to mention the new Escalade payment, the Best Buy card, Visa, Mastercard, the SDG&E bill, and the gas card. That is why the ‘old way’ was to keep housing costs at 30-35% of gross income. To really ‘afford’ this house, you would need to be making at least 100k a year. If you are making 100k a year, a $3000 a month housing expense puts your housing debt ratio at 36%. That is not too bad assuming you don’t have a lot of other debt.

The problem is that the median income in California is about 50k a year…well short of the 100k+ needed to really afford these 400k “starter homes”. Again, crazy me was actually assuming people had some ’skin’ in the game by putting down 20%. So remember that the mortgage numbers above are for a 320k loan.

With my new job, my territory consists of San Diego, Orange County, Riverside, San Bernadino, Palm Springs/Palm Desert, Temecula, and everything in between. So needless to day, I have seen most aspects of Southern California housing. From Crystal Cove and Newport Beach all the way to the 909 and Indio. Today I was driving the ‘back way’ from Temecula to Palm Springs. I was driving through Hemet and I was completely amazed at ALL of the housing developments that all had starting prices of “400k”. I didn’t spend much time there, as I was just passing through, but all I saw were gas stations, fast food, and your basic shopping center type stores. I by no means saw the potential for thousands of the 6-figure jobs that would be needed to purchase the hundreds and hundreds of homes that were for sale “starting at 400k”.

These same homes are all over the desert communities. I know that there are quite a few people making 100k+, but there is no logical reason why every new home or condo should ’start’ at 400k!

I know we have done it before, but let’s look how MOST people are/were ‘affording’ these 400k starter homes. First off, most are not putting any money down. The lenders I used to work for had 80/20 combo loan programs, but they also had 100% 1-loan programs, that could be interest only as well. Take a 400k loan at 5% Interest Only (a typical rate of 2 years ago), and you get a payment of only $1666,67 per month!! Saweeeeet!!! Throw in some takes and you are about $2000-2100 per month. With the ‘relaxed’ lending standards, the lenders I worked for would take a ‘full doc’ debt ratio of 55%…and a stated income debt ratio of 45-50% depending on the loan. Take the $2100 payment at a 55% debt ratio you only need to gross about $3850 per month ($42,600 per year) to ‘afford’ a 400k loan. The income needed would be higher on the 80/20 loans because the 20% seconds were NOT interest only, and were at higher interest rates. I won’t even get into the neg-am and other creative financing at this time. Check out the archives and popular posts for more info on those loans.

The scary part comes with the ’stated income’ loans. Go to this website www.mbarl.org and click the ‘facts’ on the left hand side. When a recent sample of stated income loans were compared to IRS records, it was found that 60% of the loans had income exaggerated by 50% or more! Now I know that the study was only a pool of 100 stated loans, and many of you won’t believe it, but from what I saw on a daily basis I don’t doubt this stat one bit. There were broker offices that only did stated loans. Some brokers would laugh when I asked if the borrower was going full doc or not.

HOW else could things get sooooo out of whack from actual incomes???? Come on, I’m waiting.

During the past 5 years, down-payments have slowly faded away…but lending standards have faded into oblivion.

It will only be a matter of time until the fundamentals return. Making a low teaser payment for 2, 3 or 5 years only works when prices go up. Many people are going to have that sick feeling in the pit of their stomachs when their teaser ARM adjusts and their property is worth 100k less than they ‘paid’ for it….and there is nothing that the great econoMISSED Leslie Appleton-Young can say to take that feeling away.

Why save for 6, 7, or 8 years and get a fixed rate loan when you can just ’state’ your income, not put any money down, and make 6-figures in appreciation a year??? Eventually you come to a point where the dollar can’t be stretched anymore. You come to a point where the massive ‘guaranteed’ appreciation isn’t there. You come to a point where the mentality shifts. Actually…we are just getting there now.

I look forward to the comments and feedback…

SoCalMtgGuy

I know, I know….it is taking tooooooo long between posts. I wish I had the time to post more often, but those of you that know what I am doing now, know that I have a lot going on, and that it pays a ‘bit more’ than blogging. I do have a few things to say and some quick advice. So let’s get started!

I know that many of you are excited because you are starting to see more and more articles that suggest the ‘ride is over’ and that the bubble is ‘deflating’. Just scan down the articles on Ben’s excellent bubble blog, and you will see that things are changing. That is nice that the media is finally starting to get a clue, but my response is ‘YAWN’. The media is a lagging indicator. This thing was WELL in the making a good 2-3 years before the media got a clue.

You are probably wondering about the title of this post ‘YAWN…’, but that pretty much sums up how I feel about things. Granted, I don’t have an ARM adjusting…I’m renting for 1/2 to 1/3 the cost of ‘owning’ with a fixed rate mortgage. I have minimal debt, I’m no longer employed in a real estate related industry, and I can honestly say I have a positive net worth with a year+ of living expenses in the bank. I would pay off my debt, but I’m getting a higher rate of return in my savings account. Those things, combined with my knowledge of what I believe is coming, allows me to YAWN at what is currently happening.

Go back and read the almost 100 posts that I have made. It shouldn’t come as any surprise to what is STARTING to happen. Lets take a look at a few things, and I will give you some advice.

Inventories are rising rapidly, sales are slowing 20-40% in many areas, foreclosures are up, and guess what, we still have a LONG way to go. Remember those 2+ trillion dollars of ARMs (adjustable rate mortgages) that are going to adjust in 2006 and 2007?!?!? Well, about 500 billion of that is supposed to adjust in 2006, and the remaining 1.5 trillion or so in 2007. Again, these are tough stats to gather and monitor, but lets just look at them as ballpark figures. Here is an old link from Nov ‘05 that had the numbers at 330 billion in 2006 and 1 trillion in 2007. I have seen it as high as 2.3 trillion for the same 24 month period, so lets just use my ’round’ numbers and understand they are not exact and that some will refi/sell/etc and not be a part of the data set anymore.

If $500 billion are supposed to adjust in 2006, and we are halfway through, lets just assume that about $250 billions dollars worth of mortgages have adjusted for people so far. We have already seen skyrocketing inventories in places like San Diego, Las Vegas, and the Tuscon/Phoenix areas. We are already seeing articles about foreclosures increasing 40-70% in some areas. What do you think is going to happen over the next 18 months when we have the remaining 1.75 trillion dollars worth of mortgages adjust??? Do you think things are going to get better or worse? Do you think most Americans are fiscally responsible?? …financially literate??

YAWN…

Some people act surprised that mortgage companies are going under or laying off lots of people. This should not come as any surprise either. Let’s see, sales volume is down 20-40% depending on the area. If there is a 20-40% decline in the amount of home purchases, guess what?? There is also a 20-40% decline in purchase mortgages. With the Fed staying the course and continuing to raise interest rates, do you think that bodes well for a large amount of refinancing? Not really. From the people I am talking with, finding people that can afford to refi their ARM into a fixed rate mortgage is the latest marketing push. The problem comes when people cannot afford fixed payments and/or have large pre-payment penalties from their ARMs. Most pre-pay penalties amount to 6 months of interest.

Lets not forget the massive job growth in the mortgage/real estate industry the past 5 years. If purchase transactions and refi’s are slowing down, do you think it might make sense for the industry to contract as well???

YAWN…

As I have shown mathematically many times before, buying a house in many areas does not make any financial sense. How long did you think that could go on??

Go grab some some old news articles from the .com era. I want you to re-read the articles, but substitute the words “preconstruction home” for IPO and “condo” where you see ‘.com’. Just as there was a mentality of “you can’t lose” with an IPO, the same mentality applies this time to ‘preconstruction’ pricing. Let me ask you this: how many of those IPOs are now ‘worth’ less than their IPO price??? Think that track home that was bought at the peak of the bubble in Vegas/Phoenix/Inland Empire won’t go down??

If you think a piece of property can’t drop below the IPO or ‘preconstruction’ price, then keep on buying. If you think there might be a shred of logic to my argument, keep reading.

Condos have become like .com stocks. For the past few years, it didn’t matter where the condo was, or how good the construction was…it went up. Just buy condos…they are great investments. The same thing used to be said for the .com stocks. It didn’t matter what they did, or if they made money…they were .com’s so they went up. …until people realized that they were WAY over-valued. A stock trading at 100x future earnings is like a property that rents for 1/3 of the mortgage payment.

Are you seeing any similarities yet??

I’m not saying things are exactly the same…but there are certain fundamentals that is/are/were lacking in both of these bubbles.

My advice is this: if you don’t own a place and you are in a ‘bubble area’, be patient. Just because that 400k condo is now 350k, doesn’t mean it is a good deal. If you have an adjustable rate mortgage that isn’t fixed for the next 7+ years, I suggest you try to refinance into a fixed rate mortgage. I see this problem looming for many people on the horizon: they bought a piece of property with little to no money down and now their mortgage is adjusting. They need to refinance, but property values have declined, and they are ‘upside down’ on their home. This isn’t necessarily a problem if you have a fixed rate mortgage and plan on staying for a while. But it is a terrible place to be when you ARM has adjusted, you are struggling with the payment, the value of your house is down, and you cannot refinance. If you can afford a 30-year fixed, do it. Buy the rate down as much as you can. The break even point is about 3 years for rate buy-down points. Refi now before property values take a dive. It will make refinancing easier and you will get better rates the lower your loan-to-value (LTV).

I have some stories and other things touch upon…but I will get to those next week. It has been a long week already, so I’m going to get some sleep.

YAWN…

I look forward to the comments and feedback.

SoCalMtgGuy

I know, I know…people want me to post more often. Well, I hope to post more frequently when I stop ‘drinking from a fire hose’ with my new job. That said, things are going well with the new job…and things are starting to fall ‘in line’ with what I thought would happen with this bubble. I still feel like I am beating a dead horse. This bubble should NOT be a surprise to anybody.

Look at it this way: if you give a 16 year old kid the keys to a new Porsche Twin Turbo, what are the odds that he will ‘over extend’ the speed limit a little bit? How cool will he look while he cruises past everybody by barely pressing his right foot? How will the novice handle that car when he is no longer on the perfect straight road and encounters the first curves and bumps in the road? Will our novice panic…what will they do? How will our ‘novice’ handle the car with little to no real experience in a vehicle like this? What are the odds that the novice driver crashes that car? Sure, I know that not every 16 year old that gets the keys to a fast car ends up wrecking it…but it shouldn’t come as ANY surprise to anybody when it DOES happen. (as I was typing this, there was a news story about a teenage driver that lost control of his Mercedes Benz on the 56 freeway and launched 100ft down an embankment through a fence and into a residential yard.)

The same thing applies to this ‘liquidity bubble’ that manifested itself in the housing market by way of the mortgage business. You have a bunch of financial ‘novices’ getting mortgages that allow them to ‘over extend’ a little bit so they can get into a house or condo (interest only, neg-am, option-ARM, stated loans, etc.). Many of these people were real ‘cool’ as their house shot up in value with little to no effort on their part. Then there were a few bumps in that ‘perfect’ road to riches that started popping up. Just like no road stays straight forever, nothing appreciates in a straight line like real estate has the past 5-9 years depending on where you live.

Just look at the numbers coming out of Orange County today. You can check out the numbers for yourself, but just notice that sales are way down from last year, and that inventories are up pretty much across the board (not on the chart). Note: don’t let the 22% down payment figure fool you. DataQuick doesn’t know if the 20% down payments were cash, equity from another house, or a 2nd mortgage. With the proliferation of 100% or 80/20, 80/10/10 financing, it is easy for me to speak from experience and surmise that the average ‘homeowner’ is not putting down 22% in cash, but rather using piggyback second mortgages. It is harder to track Orange County on ziprealty.com than it is San Diego because it lumps OC and LA together. But you can look at San Diego and see that they are about to go over 19,000 properties on the market. Just remember, when everybody was ‘cruising’ to easy riches, there were 2900-4000 properties on the market.

So, rising inventories is the first ‘bump in the road’ that people are experiencing. This doesn’t really show up on most peoples radar screen. Again, most of these people are novices and have very little knowledge of the real estate industry or the mortgage that is driving their real estate riches. Even if people know that their ARM will adjust, or that they can’t make the minimum payment on their option-ARM forever, they have no idea the ramifications of these decisions in a market that doesn’t always go up.

Here is a perfect example of the nonsense that illustrates why there is a bubble and why prices HAVE to come down.
—————
List Price: $469,000 - $469,000
ZipRealty will give you up to $2,814 cash back.*

Bedrooms: 1
Full Baths: 1
Partial Baths: 0
Square Feet: 828
Lot Size: N/A
Year Built: 2005
Listing Date: 03/17/06
On Market: 33 days
Type: CONDO/TH
Status: ACTIVE
MLS #: 066024054

Description
Perfect opportunity for an investor! This stunning unit is rented at $1600 per mo. Until jan. Of 2007. Some of the features include 11 foot ceilings, beautiful upgraded hardwood flooring, stainless steel appliances, upgraded granite counter tops, and more! You must see to appreciate this amazing unit!

HOA Dues: $312
——————
Let’s look at some numbers here on this “Perfect opportunity”. Lets say a ‘genius’ investor wheels and deals and gets a ’steal’ on this property at $450,000. Lets say they have $90,000 for the 20% down. Their mortgage payment on a $360,000 loan with a 6.25% 30 year fixed will be $2,216 per month. Throw in another $375 per month in property taxes (this is a low estimate using 1% of the purchase price), and $312 for HOA, and you are looking at a grand total of $2903 per month. I know, I know…you could put less money down and get an I/O or option-ARM mortgage and lower the monthly payment. This MIGHT get you to break even in the short run, but that is about it.

SO, you spent $90k for the ‘privilege’ to lose $1303 per month (yes, I know I’m not figuring in the tax picture…but I’m also low balling taxes and not adding in insurance). If you don’t see a problem with this ‘investment’ then I think your math and economics teachers did you a real disservice. See my post titled A population bankrupt in math.

See what I’m talking about?!?!? I have about had it with stupid people meddling around in the financial/mortgage industries. The sad thing is that somebody will probably be convinced this is a ‘great’ opportunity. They will crunch the numbers using a low ‘teaser’ payment that is interest-only or an option-ARM. I don’t see how anybody with a brain and/or any integrity could say something as stupid as ‘Perfect opportunity…’. Oh that’s right…it IS a 100% commission business. Do or say whatever is necessary to ‘close the deal’….right???

Lets get back to our ‘road’ so to speak. We are experiencing the increasing inventories at this time. The next step will be the eventual decline in prices. This will happen when people have to sell. People don’t seem to have a problem with ‘making’ 50-100k in equity when a property down the street sold for more. How do you think they will handle it when it goes the other way? What happens when the people that bought many years ago decide to sell and move away. They don’t need top dollar because they bought their 700k home for 150k a long time ago. They can ‘take’ 550-600k and be happy. What happens to the comps when houses start selling for less? I don’t know how the banks will handle it, we have never had 100% financing and this much ‘funny money’ sloshing around in such a short period of time. What is going to happen when you have thousands and thousands of people upside down on their homes? What is going to happen when the interest only period ends, the ARM adjusts, or the neg-am option ARM recasts…and the person cannot refi because the latest comps are less than what they currently owe?

Here is my prediction: I think San Diego will see 1000+ condos on the market in downtown, and 30,000+ properties on the San Diego MLS by then end of 2007. The only thing that will keep those numbers from happening is some rather large reductions in prices.

We will see how close my predictions come. Be patient people…this thing is going to get REAL interesting in 2007 and take YEARS to really play out. Save money, be patient, and be informed.

Here are a few quick things I wanted to put out there for you…

I was in a shopping center last week running some errands. All of a sudden I heard somebody calling my name. I turned around and recognized the face, but I could not immediately place the name. It was one of the loan officers from one of my old broker shops. Apparently things were getting pretty slow, and the owners were trying to ’steal’ loans and close them themselves to get paid. The days of there being ’so much business I can throw a few loans to the newer people’ are over. That is not the funny part, the funny part is that this loan officer was back to running two cell-phone kiosks at the local shopping centers. I know people have joked before about what all these loan officers are going to do when things slowdown, well, I guess this is how one LO was going to handle things. They also told me that of the 20+ loans they had in their pipeline, they were only able to get 2-3 to actually fund. They got into the business for the ‘big money’, but were a tad late to the party along with thousands and thousands of others. “Would you like an option-ARM or interest only?” is now replaced with “Do you want a bluetooth headset with that???”.

But don’t despair, Accredited Home Lenders doesn’t see things going the other way. They just dropped a cool million dollars for a 3-day ’sales rally’ in San Diego. They flew in every sales rep in the company, put them up in the Manchester Hyatt downtown, gave them all a $100 pre-paid ‘credit card’, and had entertainment planned each night at such venues as the House of Blues. I have a few friends that work for them in several areas of the country. They called to let me know they would be in town. They pretty much feel the same way I do about things, but they are sticking things out for a while longer. They told me of the ‘million dollar’ tab for the 3-day event, as well as some of the rah-rah-rah that was being used to pump everybody up, and keep them motivated. I’d like to see the 5 year reunion of this event, and see how many of the same people are still around. The loose credit has to tighten up and so will the entire mortgage industry when that happens. You can only lend money to people with spotty credit at high LTV/CLTV’s when the markets are rising. It is going to be interesting so see how the industry copes with the eventual price drops as inventory keeps increasing at a rapid pace. Just remember, 2007 is the year when a majority of the 2 trillion dollars of adjustable rate mortgages do their thing…adjust!

So, there you have it for now. I will do my best to post more frequently.

I look forward to the comments and feedback.

SoCalMtgGuy

I know it has been a little while since I last posted, but I have been pretty busy with my ‘plan B’ job. Things are going GREAT with my new line of work, and I can honestly say it is refreshing to be out of the mortgage industry as my primary source of income. I have several great friends that are still ‘in the trenches’ and I still keep abreast of what is going on in the mortgage/real estate industry.

For those of you that are coming here for the first time since you saw the write up in Money magazine (subscribers edition…not the newsstand edition) or from this CNN/Money story, I want to say thank you for stopping by! Since I am no longer posting everyday like I was for many months, the best way to use this site is to check out the archives on this site, as well as my ‘ORIGINAL SITE’, and use the FORUMS. I will be organizing all of my posts so that they are easy for people to access here shortly. Until then, check out some of the ‘Popular Posts’ that I have linked to below, as well as the archives on the right hand side. Some of the ‘popular posts’ will link you to the ‘original site’ or you can get there with the navigation bar. There is also a TON of information and activities going on in the FORUMS. There are almost 350 members, 500 topics, and 3000 posts at this time!

Here are just a few of the posts that have been popular with readers:

These are just a few of the 80+ posts I have made. I have covered all aspects of the mortgage lending business. I have talked about interest only, negative amortization, adjustible rate mortgages (2/28, 3/27, 5/1, etc), fixed rate mortgages, 40 year mortgages, refinancing, appraisals, packaging loans, selling loans, loan standards, loan programs, stated loans, no doc loans, no ratio loans….I think you get the point. Don’t worry, I made it entertaining. I wouldn’t have been featured by CNN/Money magazine if it was dry and boring like your Econ 101 class.

It just shake my head when I see how the media reports information. The media is a great ‘lagging indicator’. We should have been seeing articles like this back in 2002 before everybody tried to become the next ‘genius’ real estate investor. It is amazing to me that nobody thinks about the long term financial repercussions of taking on some of these mortgages.

I still get lots of e-mails with questions about option-ARMs, how they work, and the different indexes they can be linked to (COSI, COFI, MTA, LIBOR, etc). It is simply amazing to me that people will think they will be ‘fine’ making a $1600 payment on a 500k loan. That is about what the minimum payment can be on an option-ARM today. If you could theoretically make that payment for the full 30 years, you would barely cover the original loan amount ($578k). Too bad the ‘real’ payment for 30 years would have to be about double that amount to ‘afford’ a 500k loan. And you wonder how property has doubled or tripled in many areas over the last few years?!?!?

The floodgates have been opened the past 5 years. Pretty much anybody could get a loan for 400-500k with not much problem. If you don’t make enough, go stated. If you want to buy more house, go interest-only or negative amortization (option ARM). If you have no money down…no problem. If you FICO is in the toilet, get it into the 500’s, and you have options. For a while there, a 560-580 FICO score would get you a 100% loan. A month or so before I left my last company, they got rid of bankruptcy seasoning. That means that a borrower with no BK would get pretty much the same loan/rate as somebody who was 1-day out of bankruptcy. Does that sound right to you?!?!?

I could go on and on. It seems that so many of the articles that are coming out now about the ‘dangers’ of interest only ARMs, etc. are a day late and a few trillion dollars short. Amazing that the ‘important’ people didn’t notice that 80% of the loans in CA being interest-only ARMs or option ARMs might cause problems down the road. I saw it from the beginning. Many people were jumping into houses with ARMs, and their plan was to sell when the payments increased. Seems like lots of people had that same great ‘idea’…

If San Diego inventory is any indicator, it could take a l-o-n-g time to look at all the houses on the market. 18,192 per ziprealty.com tonight. Prices skyrocket when buyers are chasing 2800-3000 properties on the market as they were in the spring of 2004. What happens when there are over 18,000 properties on the market?? Do we really need to poll Mensa to get the answer to this one?

I happened to be in the LA area a week or so ago and I was scrolling through the radio stations and I came across 102.7 where Ryan Seacrest has a morning show. Part of his show is this little girl called Ali who calls people up and asks them questions. If you have heard it, you know what I’m talking about, if not…just trust me, it can be hilarious. I happened to tune in to catch little Ali calling a real estate agent and she asked about a ‘housing bubble’. The realtor assured little Ali that the housing bubble is a ‘myth’. Little Ali said “like Bigfoot” and the realtor said exactly.

Sorry, but if that is the case, then Bigfoot IS real…and has been doing more steroids than Barry Bonds.

Stay tuned, stay informed, and I look forward to the comments and feedback.

SoCalMtgGuy

Hello everybody! Many of you know my feelings on where I think things are headed as well that I have been working on my ‘plan B’. That said, my ‘plan B’ has worked out better than expected. I found an excellent opportunity in another industry. I will still be in sales in SoCal, just not in the mortgage industry. I will still be keeping my finger on the ‘pulse’ of things as I have several good friends that will keep me posted as new things happen. I have a LOT to learn with my new job, so the posts are going to be less frequent from me for the time being. I wish I could keep the posts coming every day, but blogging doesn’t pay the bills for me. I will be focusing on the new job and posting as I have good information. That said, I do have some good info below, so lets have a look at what is going on in the industry and some of the things I am seeing and hearing from others.

First off, things are much S-L-O-W-E-R in the mortgage business. I have met with several of my friends that are also account executives in the industry. One of them told me that only one person in their region ‘commissioned’ last month. For a territory that is used to doing 30-50 million per month, they did only 10 million. There was a time not too long ago, where the top rep in this territory was doing more than 10 million a month. I talked to 2 other reps where nobody in their regions hit their numbers. All but one of these reps is about to start looking elsewhere for work.

The mortgage industry, and specifically the subprime industry, has tried to implement the ‘outrun things with volume’ strategy. They kept rates low to stay competitive. The slashed profit per loan, and tried to drive volume. In the last year at the company I just left, we had 5 different comp plans. The ‘last’ comp plan was about ‘half’ of the first comp plan unless you were hitting the highest numbers which only a very few people were doing. To give you an idea, a rep used to make $4000 to $5000 for every million dollars worth of loans funded. Now, the typical rep is probably going to make $2000-$2500 for the same million dollars worth of loans funded. The problem is that the volume isn’t there for most people. I know reps there were doing 5-7 million per month consistently…and now they are barely doing 1.5 million. I know it is the ’slow’ time of the year to begin with, but I don’t see things picking up that much. Some of the reps that have been in the business for a while and that saved money, will be fine. Remember, most companies only had 3-5 reps for a region a few years ago. That grew to 15-25 reps as things were booming. The problem is that there isn’t the volume to pay that many reps the money they need to be paid to live. Look at my earlier example. 8-10 reps can all do ok when a territory is doing 30-50 million, not 10 million. (some companies will split a region into territories, that is why a territory will have less reps than a region).

That said, it isn’t stopping the companies from hiring people. I have had no less than 6-8 companies that found my resume online, want me to come work for them as an account executive. It doesn’t surprise me though, as there are not many barriers to entry in this industry. Since most account executive positions are 100% commission or have a very small draw plus commission, the companies aren’t really taking much risk by hiring a new person. They will usually throw a short term comp plan that pays very well for about 3 months until you transition to the regular comp plan. I think that the companies are looking for new people that will have relationships with big accounts they don’t know about or have relationships with. I have had another 15-20 companies that wanted me to be a loan officer for them. The funny thing is that when I ask them where they see things headed, they admit that things have been slow for a few months, but that they see things ‘taking off’ again in 60-90 days. I just don’t see a major increase in activity in the near future. You can’t have a 5-8 year bull-run in real estate, and NOT have things slow down…especially once people see prices coming down. Over 40% of the job growth in California has been in the real estate/mortgage/related fields industries the past 5 years. I’m not naive enough to think that RE can employ that many people in the long run.

Now lets take a look at my favorite loan…the option ARM. It seems that option ARMs are making up what seems to be a very large part of the business in SoCal. Part of this is due to the fact that it pays well, but I think it mostly deals with the fact that most people cannot afford property using ‘conventional’ financing, so the option ARM is the only way to get the payment low enough. I was talking to several other account executives that were saying the same thing. They are seeing some offices that are doing option ARMs for 80-90% of their business. I saw this trend a while ago…especially when they started offering the option ARM to people with FICO scores in the high 500’s and low 600’s. The option ARM started targeting more of a ’subprime’ borrower…but it wasn’t offered by your true subprime lenders.

Speaking of lowered standards. One major nationwide lender now added a 3-month bank statement program to their arsenal. Not too long ago, most banks wanted 24 months of bank statements, but some would take 12 months. Then most banks added what was called ‘lite-doc’ or 6-month bank statements. This means the borrower shows their last 6 months of bank statements to ‘verify’ their income. Now we have a 3 month program?!?!? I don’t know the specifics with regards to LTV, FICO scores, etc. but come on. As you can see, this is just another ‘lowering of standards’ to try and get a few more people who can qualify for a loan. The problem is that there isn’t much further you can go. Whats next, the 1 month bank statement program?!?!? Doesn’t it sound a little crazy to give somebody a 30 year loan based on only a 3 month history?!?!?

Lets not forget those inventory numbers. I take off for a few days, and the San Diego inventory numbers jump from the low 17,000’s to 17,685 per ziprealty.com. It is pretty safe to say that inventories are steadily increasing. Too bad that the sales transactions are not keeping pace.

That is about all for now. I’ll be posting periodically as I have good information or analysis to share with you. I have a LOT to learn with my new job and I am VERY excited about it!! I will be spending most of my time working on that, as it pays the bills quite a bit better than the blog I suggest making the FORUMS a regular stop each day. There are now over 300 members, 2200 posts, and 340 topics to read about. There are some very articulate and informative people in the forums.

To everybody who has sent e-mails the past week to 10 days….sorry it took so long to get back to you. I hope this post helps to explain things a bit better. Thanks again to everybody for all of the support. I’ll still be around…and I’m looking forward to watching this whole thing unfold.

I look forward to the comments and feedback!

SoCalMtgGuy

Quick update: I am not going to be available that much this week via computer. I was presented with a very good opportunity that I decided to take advantage of. That said, no time for a ‘new’ post. But here is a repost of an older topic that I think more people need to look at again. I keep getting e-mails about 40yr and longer term mortgages. Here is the math behind it. Those of you that have sent me e-mail, I will get back to you this weekend. Spend time in the FORUMS….LOTS of info going on there. Thanks! SoCalMtgGuy
——————————————–
>
The 40yr mortgage…is it for YOU?!?!?

Why be knee deep in debt for 30 years, when you can do it for 40 years?!?!?

I’m sure many of you have heard about the latest and greatest “advancement” in the mortgage industry: the 40 year mortgage. These come in various forms: 2/38, 3/37, 40 year fixed, and 40/30 mortgages. The 40/30 mortgage is a “balloon” mortgage. The loan is amortized over 40 years, but a “balloon” payment is due for the balance of the loan in 30 years. You have to either pay it off, or refi the remaining portion. The 2/38 and 3/37 are your standard ARM mortgages that are fixed for 2 or 3 years, then adjust for the next 37 or 38 years. Sounds like fun doesn’t it?!?!?

Now that we know the basic types of these loans, lets see how it hits the old pocketbook. I am going to compare the payments at different rates, using 30, 40 and 100 year mortgages. WHAT, a hundred year mortgage?!?!? Well, they aren’t here yet…but in the effort to “keep homes affordable” we might see it in the future. I think you will be surprised with what you see in regards to the 100yr mortgage. You will see that even a 100yr mortgage does not lower payments that dramatically, especially for the money you will end up paying in the long run.

I am using 2 loan sizes that are “typical” in high value areas. Again, take the numbers for what they are worth. Look at the trends. Lots of things to go over here. Here are the numbers for a $400,000 and $800,000 loan at 30yr fixed, 40yr fixed, and 100yr fixed payments.

$400,000 loan at 5% 30yr fix = $2147.28 . . . . .total pmt = $773,023
$400,000 loan at 5% 40yr fix = $1928.78 . . . . .total pmt = $925,817
$400,000 loan at 5% 100yr fix = $1678.09 . . . . .total pmt = $2,013,709

$400,000 loan at 6% 30yr fix = $2398.20 . . . . .total pmt = $863,352
$400,000 loan at 6% 40yr fix = $2200.85 . . . . .total pmt = $1,056,408
$400,000 loan at 6% 100yr fix = $2005.04 . . . . .total pmt = $2,406,048

$400,000 loan at 7% 30yr fix = $2661.21 . . . . .total pmt = $958,035
$400,000 loan at 7% 40yr fix = $2485.72 . . . . .total pmt = $1,193145
$400,000 loan at 7% 100yr fix = $2335.50 . . . . .total pmt = $2,802,600

Whew, lots of things we can learn from these numbers. Let us look at some simple things first, like the impact of interest rates on things. Look at the 30yr fixed payment on the 3 loans. 5% is a pretty accurate fixed rate that wasn’t that hard to get the past few years. Right now, rates are in the 6% range, and if you look at the projections, fixed rates around 7% could be here in 12-18 months. Many subprime/alt-a borrowers today are in the 7% range. That $2147 payment at 5% covers the mortgage at $400k. That same $2147 payment at 7% only covers a loan amount of $322,710 !! That is a 19.3% drop in buying power, with just the rate going up 2% from 5 to 7%.

Let’s see if the 40yr mortgage would help us here. Let’s keep the same $2147 payment, but lets do a 40yr loan at 7%. The same payment on a 7% 40year loan only covers the mortgage on an amount of $345,492! That is still 13.6% short of what a 5% loan on a 30yr fixed did just a year or so ago!

Let’s see what the $2200 payment from the 40yr loan at 6% would buy us on a 30yr fixed loan at 6%: it would make a 30yr fixed mortgage payment on a $366,941 loan. By using the same payment on a 30 and 40 year loan, we would be able to purchase a house that is only $33,058 more expensive by using a 40yr loan. Would the lifestyle change really be that different between a $367,000 home and a $400,000 home?? The long term finances of it would surely be different. I guess it is up to the bwr to decide. I’m not here to tell you what to do, I’m just here to give you the math behind it. Goodness knows, very few brokers and real estate agents have YOUR best financial interests at hand.

Let’s do something really crazy, and assume we actually want to pay our loans off, and live in a house with no mortgage. Look at the total payment amounts! At 6%, the 100 year mortgage saves about $393 a month, but you (and your heirs) would end up paying $1,542,696 MORE over the life of the loan than if you did a 30yr fixed. Even with the 40yr mortgage, you only save 198 bucks, but it costs you an extra $193,056 over the life of the loan.

BUT, let’s assume that some of you are astute investors, and you take the money saved and you invest that money instead of buying cars, clothers, vacations, etc. Let’s assume you take the $198 and invest it at 6%. At the 30yr mark, where your house would be paid off if you had done the 30yr loan, you would have $198,893 dollars saved (assuming no taxes/expenses/etc.), BUT you would still owe about $198,200. So, if you saved the money, got a 6% return for 30 years, you would just about break even.

Somehow, I think the odds of most people diligently saving and investing the difference is slim. Sure, some of you are going to say I could get 8 to 12% return on my money. Maybe you could, maybe you couldn’t. There would be taxes, fund expenses, etc. I’m not here to debate the investment side of things, I’m here to show how the different loan periods can have a dramatic effect on the amount of money you will spend.

Hey wait a second, SoCal, most people only keep their house 5 years before bumping up or refinancing. Those statistics are true about people moving and/or refinancing. BUT people assume that because in the past property has gone up, that it will continue to do so. People generally move up when they have appreciation and/or they make more money. As we have shown, with rates rising, they will HAVE to make more money to afford the same size loan as before. With so many people doing “buy-now, pay-later” loans (ARM’s, option ARMs, I/O, etc) they are not going to be able to afford to move up. They will barely be able to afford their own adjusting loans, nevermind taking on a larger loan at higher rates.

And now the larger loan sizes. I’m not going to write as much about these loans below. Just look at the numbers and see how higher rates, and longer mortgage periods really affect the payments.

$800,000 loan at 5% 30yr fix = $4294.57 . . . . .total pmt = $1,546,045
$800,000 loan at 5% 40yr fix = $3857.57 . . . . .total pmt = $1,851,633
$800,000 loan at 5% 100yr fix = $3356.18 . . . . .total pmt = $4,027,419

$800,000 loan at 6% 30yr fix = $4796.40 . . . . .total pmt = $1,726,704
$800,000 loan at 6% 40yr fix = $4401.71 . . . . .total pmt = $2,112,820
$800,000 loan at 6% 100yr fix = $4010.09 . . . . .total pmt = $4,812,108

$800,000 loan at 7% 30yr fix = $5322.42 . . . . .total pmt = $1,916,071
$800,000 loan at 7% 40yr fix = $4971.45 . . . . .total pmt= $2,386,296
$800,000 loan at 7% 100yr fix = $4671.01 . . . . .total pmt = $5,605,216

I know it is hard to read these numbers in the space provided, but I think it gives somewhat of a clear picture the “benefits” and drawbacks of the 40 and 100yr mortgages.

The benefit to the 40yr mortgage is that it will lower your monthly payment today, but you will spend hundreds of thousands of dollars more in the long run. If the only way you can afford a property is a 40yr mortgage or more, you probably need to wait, make more money, or look for a less expensive property.

I didn’t even take into account that there is usually a 10, 25, or 35 basis point add for the 40yr program depending on the lender. I am using numbers that give these programs the benefit of the doubt, and I still don’t think there are compelling savings or reasons to use these mortgages. Maybe it is just me, but I don’t like the feeling of being in debt for 40 years. What do you think?
>
I’m sure there will be questions and things I will have to explain in further detail, so leave comments and I will do my best to answer your questions.

Thanks.

SoCalMtgGuy

Whoooopsieee! Looks like the media is starting to catch a ‘whiff’ of this bubble leaking some air. The realtors for the most part are in denial. It is as if they are walking downwind in a cow pasture, but they won’t admit something ’stinks’ until they step in it! Right now, all the realtors are trying to rationalize that things don’t smell at all, and if you put on enough cologne, things smell just great! The thing is, most people are sheep, not pigs. Sheep follow the heard, pigs wallow in crap.

Let’s look a some of the information that is STARTING to come out of the media. It won’t take long for the sheep to take notice…the ‘bubble’ word propping up in more and more headlines. Let’s be honest, most people don’t read the whole article. I forgot the statistics I read a while ago, but most people scan the headlines and the first paragraph, and read on an 8th grade level. I’m not too worried about the ‘average joe’ pondering the inverted yield curve, supply & demand, inflation, “medium” home prices, etc. They will be focusing on words like bubble and bursting.

You have to hate it when the New York Times starts running a story titled: Don’t Fear the Bubble that Bursts. Uh oh…please don’t talk about the past. After all, its different this time….right?

You have to like it when the local ABC news channel runs a story: “Central Valley Housing Bubble Ready to Burst?”. Here is the FIRST sentence that most will read:

“The Valley housing boom is over, with home prices in some neighborhoods dropping $50,000 in just the past two months.”

You can just hear it now. “Aw sh*t Ethel, our house is going down in value!”.

Don’t worry those of you on the East Coast, there is a bit of news for you as well! This little paper called the Boston Herald had an article titled “Roof Collapses on Housing Boom“. No, it is not something you can just take out a HELOC to repair. Here are the first 3 sentences:

Massachusetts house sales plummeted 21 percent last month, stoking fears that the housing bubble may have burst and could send shock waves across the economy. It was the biggest year-over-year sales drop in almost 11 years - as Realtors recorded the slowest January since 1996. What’s more, one of the worst fears of homeowners appears to be coming true: House values have dropped nearly 8 percent since August.

Let’s take a tour down South and see whats going on in West Palm “RE never goes down” Beach. Home sales, prices continue downward slide is what is going on. The first sentence:

Maybe the housing bubble hasn’t burst, but it’s losing air fast.

Imagine you are on a completely full 737 cruising along at altitude when you feel uneasy that something happened. The Captain comes over the speaker and says “We are not going to crash, but we are losing altitude fast”. What do you think most people are going to do??

I know, I know…not the best comparison, but you get the point. Here is more from the story: The median price of an existing home sold in Palm Beach County in January fell to $393,700, well below the November peak of $421,500 and the first time the typical home has sold for less than $400,000 since July.

I do want to pause to let people know that I found an honest RE agent. Check out this quote from the same article: “Palm Beach County has a mini-blood bath going,” said David Dweck, a Boca Raton real estate agent and investor who heads the Boca Real Estate Investment Club.

I’m not a professional PR guy, but I think that the term ‘blood bath’ probably doesn’t have a positive connotation with most people.

Along the same lines a bit further south, we have The Boom is Gone: Home Sales fall 36% In Broward. First sentence: South Florida’s five-year housing boom is over. Need I say more?

I’m sorry (not really) for being a smart-ass. I just can’t believe that with all of the information out there, that people STILL think real estate only goes up!! You would think that after the ‘irrational exuberance’ of the stock market bubble of 5-6 years ago that everybody saw so painfully clear when it was over….that we wouldn’t be running into another bubble so soon.

These articles are just the tip of the iceberg. Since about a third of the houses were bought as ‘investments’, people are counting on appreciation and making easy money. As you can see, once people realize the party is over, watch demand start to ‘dry-up’. Once people realize they can’t make 10k a month on a condo conversion, or by painting a house and cutting the grass, they will stop doing it. The problem is that there is going to be quite a large supply of homes, and not near as much demand for them.

I happened to catch an episode of “Flip that House” this past weekend. The guy bought a house in LA for $360k. Put $75k into the remodel. I’ll admit, the house had a LOT of problems, and the guy did a great job fixing things properly and not cutting corners. There are 2 problems. The first one is that more time should have been spent inspecting the house before purchasing it. If that had been done, the $25k that was budgeted wouldn’t have grown to $75k. That extra $50k was a ’surprise’ that really eats into the profitability. The second is that in the end, the RE agent said the house was ‘worth’ $480,000. If you take the $435,000 invested then you are looking at a ‘profit’ of $45,000. But remember, that is before the transaction costs of purchasing the home, the carrying costs until it sells (mortgage/taxes/etc.), and the costs of selling the home. It took 12 weeks to do the remodel. By the time the transaction costs are figured in, I don’t think there is much of that $45,000 left over, even IF it sold at $480k.

Check out the section of Forums that deals with the Craigslist/Classified-Ad FB’s. Spend a few minutes there. I’m serious…do it. There are waaaaay to many FB’s out there for one blogger to handle. Besides, I think it adds credibility when you see it listed in the ‘real world’. I’m not kidding when I say there is a LOT of good information in the forums.

That is all for now. I have some good stories to share with you next week…stay tuned!

I look forward to the comments and feedback!

SoCalMtgGuy

NOT going to do it!

As many of you know, I have mentioned several times that things have gotten quite a bit slower. I think this story pretty much sums it up, especially this part:

“How would you characterize the housing market right now? MOZILO: The market has turned. The psychology of the buyers for single-family homes has clearly changed. We are seeing it from the flow of loan applications. If I had to pick a time, I would have to say it turned in January.”

There you have it, from the CEO of the largest mortgage origination company in the country. If the largest originator in the country is being hit by the slowdown, what do you think is happening to all of the other companies?

Look at the stock price of ECR (Encore Capital Corp). This chart does not surprise me in the least. That is what happens why you try and “buy the market” with crazy rates and guidelines that most other companies wouldn’t touch. Encore is known for using the “high” FICO score, not the middle of 3 or lower of 2 like the rest of the industry. Some other companies would do it, but with an add-on to the rate. Encore did it with no add-on. They were also very liberal with pricing for several months there. Maybe that is why they are in the predicament they are in. I’m sure their customers and brokers love them…but at the end of the day, they are taking some large losses on their portfolios.

That said, I have seen the writing on the wall for quite a while now. As things have started slowing down even more, I have began working-on and looking-at other options in and out of the mortgage industry. Just bear with me as I’m working on my plans B, C and D at the moment. It takes quite a bit of time to write 5 completely new posts a week. I really enjoy doing the blog, replying to e-mails, and helping people out…but blogging doesn’t exactly pay the bills at this time…I wish it did though!

The forums are becoming an excellent resource. There are over 200 topics, 1300 posts, and almost 250 members. If I don’t have a post up, spend some time over on the forums. There are a lot of FB stories, as well as other posters that have a lot of good information to share.

Thank you for your understanding, patience, and support!

BTW…San Diego inventory is now sitting at 17,225 per ziprealty.com.

I look forward to your questions, comments, and feedback!

SoCalMtgGuy