Stated income loans…my favorite!
I want to take a look at 2 separate articles and show you (again) why I’m not a big fan of the way stated income loans have been used. Let’s take a look at this ‘entertaining’ article about rock musicians buying homes. It seems that one ‘rocker’ who hasn’t made it yet, is now rockin’ the loan business! The niche is doing seminars and getting loans for other aspiring rock musicians.
I really like this intro to the subject of the article: “Patey, 35, moonlights with the band The Raging Teens — ‘’The Aging Teens,” he quips — and manages the bands Darkbuster and Emergency Music, plus his wife, singer-songwriter Mary Lou Lord. But for the last year he’s also worked full time for Northeast Lending as a mortgage consultant, telling rockers they can buy a house, even with no day job and no savings.”
Anybody seeing a problem yet? If not, don’t worry….there is more.
At some of the seminars, people …express concerns that range from improving credit scores — maxing out the plastic to put together a CD can do a number on them — to documenting income and having less than $2,000 in the bank.
In response, Patey and realtor Stephen LaBollita, Patey’s partner in the seminar venture, suggest such options as interest-only mortgages and loans that don’t require income verification.
Great, take borrowers with maxed out plastic, hardly any money in the bank, and get them an interest-only no-doc loan!!! It might have been a ‘plan’ that worked the past few years, but I have to believe that eventually these ‘rockers’ will have a slow month or two and start missing payments. After all, they don’t have regular jobs, or savings.
I think this is the kicker though: Patey’s day-job boss, Northeast Lending’s co-owner Geoff Ricks, 28, explains to a reporter, ‘’It’s not that you want to be in [those loans] forever, but you get in the door.”
Says Patey, ‘’You can always refinance down the road.” In the meantime, ‘’Spend the money on other stuff, like Pabst Blue Ribbon, supporting local rock bands that don’t make any money.”
It’s this attitude that makes Patey — with his slicked-back hair, heavy glasses, and turned-up jeans — think rockers will feel more comfortable with him than with ‘’the guy with a suit and tie.”
Here are 2 more ‘words of wisdom’ to live by: Down the road your house will be your most valuable asset. You can use that equity to pay for college tuition . . . or recording an album. and Explore mortgage options. Don’t settle for a loan you’re worried you won’t be able to afford if the gigs stop coming.
On one hand you are ‘educating’ people on no-doc and interest only loans, then you tell people not to settle for a loan they won’t be able to afford if the gigs stop coming? If you don’t have a job, or savings, how can you afford the cost of housing in Boston?? Oh, that’s right, they already filled in the ‘appreciation’ part of the equation. Your house will be your most valuable asset…and you can use the equity for college or to record an album.
ROCK ON!! Get a mortgage with no job, no savings…and refinance when you have some equity so that you can buy some beer and help other struggling bands. I guess it is a good thing they don’t partner with an honest financial planner. I don’t know too many people that would suggest buying homes under these conditions….other than the people that will directly profit from it.
Now that we have looked at the ’cause’ side of the equation, lets look at this article that deals with the San Diego market. The author looks at the two main reasons that San Diego real estate is hitting the skids: Two kinds of gamblers are leaving town in a hurry: (1) speculators, or people buying condos to sell them, not live in them, and (2) homebuyers taking on exotic mortgages so they can buy houses they can’t afford. The former have been skipping town for a year, and the latter are being restrained by regulators who fear a wave of foreclosures and defaults.
The author then points out the situations that are making things even worse: Two abuses are exacerbating this situation: (1) overblown housing appraisals and (2) false statements of family income on mortgage applications. These deceitful practices — typical of financial bubbles — have permitted the gambling game to go on.
Where have you heard about this before? It is just nice that media is finally reaching the ‘masses’ with what I have seen for years now, and been blogging about for months. But wait, it gets better…
As the real estate bubble expanded, San Diegans had to live with high home prices and low affordability. It was shocking when only 10 percent of families could afford the typical home, and now it’s down to 5 percent.
So people took on complex mortgages, with names such as “interest-only” and “option adjustable rate,” permitting homebuyers “to buy a bigger house than they ought to buy,
How long do you think things can continue when only 5% of a major metropolitan area can afford the price of homes?
I think this explains exactly what I have seen the past few years: “There has been a race between affordability and exotic financing. Affordability has been trying to keep people out of the market, and exotic loans have tried to keep them in. Over the last couple of years, exotic loans won that race. When the exotic loans start to lose, the San Diego market will lose a lot of demand.”
I did a post a while ago that compared the payments of 30, 40, and 100 year loans. I wanted to show that extending the loan term a long time, doesn’t necessarily save much on the monthly payment. Eventually the ‘market’ is going to run out of ways to stretch, extend, or delay the payments that invariably will be due. Oh that’s right, I forgot, you just SELL!!! …because property only goes up!
The article also had an FB story buried down in there: “The price of the asset has gone way beyond its long-term fundamentals,” says Robert Campbell, publisher of San Diego’s Campbell Real Estate Timing Letter. “It’s become a Tinkerbell world.” As regulators “tighten up on funny-money loans,” those housing prices will come down to earth quickly.
Campbell just heard the story about a San Marcos fellow who bought a $700,000 home in mid-2004 without putting any money down. “Today the home is worth $610,000. It’s $90,000 underwater,” says Campbell. The fellow hasn’t made a mortgage payment in a year. He figured he would have to sell the house for $760,000 to make the back payments and get out even. But his broker told him that the highest price he could get for the home is $610,000, based on comparable prices in the area. “There is a silent crash going on,” says Campbell, who talks to real estate brokers every day.
“I have not yet seen a bankruptcy” as a result of the exotic mortgages, says bankruptcy trustee Richard Kipperman. “But we know it’s coming.”
Like I discussed in an earlier post titled, What is taking so long? I covered why we aren’t seeing the BK’s…YET. Over the past 5-8 years, appreciation, and a hot sellers market has ’saved’ most people that got into trouble, or in over their heads. It is over this time that interest only, neg-am, option ARM’s, and other exotic mortgages became popular.
The article finishes up with the typical “analysts say” bla bla bla…BUT this time it is countered by Campbell who says “Campbell points out that the housing market itself has been a big source of job growth. So an implosion could affect the economy generally. He sees a high probability that Southern California home prices will plunge 20 to 40 percent. His Real Estate Crash Index signaled “sell” in August of last year and continues to plummet.
Unfortunately, San Diegans have been borrowing against the inflated equity in their homes to continue their consumption. If home prices decline and lending regulations tighten up, that game could slow. Sales at retailers, car dealers, and other consumer outlets could suffer. This will impact jobs and, in a snowball effect, further whack the housing market. An economy based on debt is risky. An economy based on dangerously speculative debt could be disastrous.
I know how I think it will all pan out, and I’m sure that many of you feel the same way. It is just going to take TIME! Just wait until people realize their neighbor is losing their house. Wait until “John” and “Sally” are hanging out by the water cooler at work all glassy eyed and shell shocked when they realize their I/O or option ARM is about to adjust, and they can’t refi, or make the new payments. Look at our ‘rockers’. They are marching down the same path that is leading San Diego to increased inventories and eventually much lower prices. Many people are using these short term loans as ways to ‘get’ some quick appreciation before they sell. Just look at San Diego to see the results of everybody buying at one time…and now selling at one time.
Everybody talks about the aerospace industry taking a major hit back in the early 90’s. I have a question that I don’t know the answer to: was 40% of the job growth in California from 1985 to 1990 in the aerospace industry? I doubt it was, but I know that real estate related jobs have accounted for 40% of the job growth in this state the past 4-5 years. I can’t find the link right now, but I’m sure one of the readers has it handy.
Before I wrap this up, I need to report that the San Diego inventory per Ziprealty is up to 16,464. That is an increase of 67 properties in about 24 hours! I guess that is part of the ‘normal’ market the California Association of Realtors told us was coming. The good thing, according to them, is that increases in inventory don’t mean price reductions……riiiiiiight!!!!
I want to thank everybody for making the forums a pretty big success in only 6 days! There are over 315 posts and 120 registered members! Keep the excellent content coming!
I look forward to the comments and feedback…
SoCalMtgGuy
February 9th, 2006 03:46
Prior the the mortgage industry sending us into a parrallel universe, the “Rockers” would have been living in a trailer or sponging off friends. Their career is like a stated income loan. “Are you really making 200k a year? No but I will be soon.” “Is your music carreer extrememly profitable? No, but it will be soon….my big break is coming”…..Give me a break.
People think they should get to own a home because they want one. They done’t want to be constrained by little details like whether or not they can afford one. Can’t decide if I should laugh or cry…………
February 9th, 2006 05:52
The next question is collateral damage. Which depends on how many people were affected.
If you bought before the bubble, you are unaffected — unless you ATMed the bogus equity with HELOCs. How much of that?
If you bought during the bubble, you are screwed, but if you can make the payments you life will be no worse that it is now. But how much will the consumer economy be hurt because of income diverted from consumption to mortgage payments? How much of of that money went to those who cashed out and moved to lower cost regions, which now get the benefit of added consumer spending? I think this factor held the NYC economy back for years after the late 1980s bust.
Foreclosures? How much will borrowers be affected, vs. lenders? And who is holding the paper? Who holds the “20″ in an 80/20?
But remember the upside. San Diego is a nice place to live, even though the City, County, and (now) half the residents are bankrupt. Soon, it may even be affordable.
February 9th, 2006 06:38
First, SoCal, congrats. Excellent site, hope you start making money soon.
Anyway; …hasn’t made a mortgage payment in a year.
Banks have clearly gotten complacent as well. Heck, the snot nosed backroom arears agent and his boss are 1 probably not any good else they’d not be in those jobs and 2, are 20 something liberal arts (early european wymns studies or some such) educated. They’ve never seen a FLAT market nevermind a credit crunch. Giving the FB a few extra, in this case many exta, months only increases the banks reported earnings. Yes, banks report unpaid and newly accrued interest and penalties as CURRENT income. This has been working for nearly a decade. the worst that has happened is the house is sold out from under the FB for more than the outstanding and fees and thus the backroom divison reports even higher earnings. I think we’ve uncovered a new class of f@cked; the FL, F@cked Lenders.
But his broker told him…“There is a silent crash going on,”
Hmmmm, did someone say “SILENT?”
February 9th, 2006 06:51
“I know how I think it will all pan out, and I’m sure that many of you feel the same way. It is just going to take TIME!”
That is a great two lines. LOL!
Super Blog. Keep up the outstanding work.
David
Bubble Meter Blog
February 9th, 2006 06:57
Ok…..speaking for the “rock musician” community, I was cringing as I was reading the Boston Globe article. I am a former road musician. I made 35k a year, but musician income is typically documented through 1099s, i.e. “Self-employed.” I couldn’t get a car loan, even though I had fantastic credit stating that I was self-employed. I had a studio apartment in Fargo, ND because the rent was $200. When you travel and play in a five state area, there are only so many days you will be home, so why own a house (or why not live in Fargo)?
When musicians realize that their career is…..over, some turn to praying on other musicians. Typically this falls into the booking agent/ manager department. A f@cked lender, now that’s original!
February 9th, 2006 07:04
SoCalMtgGuy wries; “I know how I think it will all pan out, and I’m sure that many of you feel the same way.”
All I can ever picture is the movie “Hunt for Red October” when the admiral on the carrier says, “this business will, get out of hand. It’ll get out of hand and we’ll be lucky to live through it.” That the actor, Tompson, is also a former Congressman makes it all the more chilling.
It is just going to take TIME! “
On this we politely disagree. THe situation is unraveling just as fast as I predicted. The financial world and information accessibility have hyper-acellerated all things. The other blogs are quoting this morning real estate pros claiming they saw all this start 18 months ago. Yeah right. We see David Learah reissuing his annual forecast massively lower after collecting 3 weeks of unrepresentative data. 5 years ago it took him in the industry 6-8 weeks after the close of a quarter to get enough information to formulate a position. He’s doing it in a few weeks and hopefully some models. We are doing it in days with near real time listing increases and sales rates alongwith so many anecdotal instances that they amount to data as well. Time and again the quote that keeps coming up; “I never expected things to turn so fast.” I saw it and saved my sister and her family near a third of a million and counting. Me, I’m going into escrow today. Whew. I’m just gonna get creamed in taxes.
February 9th, 2006 07:09
“Down the road your house will be your most valuable asset. ”
A house isn’t an asset until you pay it off, and even then you’ll owe taxes. If you can’t pay your taxes, then you won’t own it. It’s a liability until you SELL it.
February 9th, 2006 08:42
I like the radio ads for home loans. They are now selling loans to get borrowers out of risky ARM’s. Next we move on to some sort of creative bankruptcy or shot sale loophole, and then to credit repair.
February 9th, 2006 09:04
Robert,
I agree that it IS happening now. But it is going to take TIME until it all unfolds. How much time? Nobody really knows yet.
I have spoken with people from the inflation camp, and the deflation camp. I have spoken to people about a fast correction, and a slow one like Japan over many years.
I think the next 24 months will be EXTREMELY telling. Remember, ARM’s adjust in 2007 at 4-5 times the rate of 2006. Many of those have prepay penalties. If people see things going down a year before their ARM resets, it is going to be interesting to see how they handle it. Many will not be able to afford the pre-pays…and if property values go down, they could have LTV problems as well.
SoCalMtgGuy
February 9th, 2006 09:07
I know people are more than abusing the stated income loans but I do have a question for you. I’m self-employed, my business brings in about 110 - 120K per year and after deducting everything (albeit legal) I can I show a profit of approximately 90K. Isn’t this exactly the situation where you should use a stated income loan? I’m not suggesting you are wrong, I think the blog is terrific and honestly I feel like it’s talked me off the ledge as I’ve become somewhat nervous watching the constantly escalating housing prices (the neighborhood where I rent was about 300K for a house in 2001, now they sell tear downs for 850 - 900K). I’m merely curious if there is a good reason for a stated income loan at times. Thanks!
February 9th, 2006 09:24
Monica,
I have said before, there ARE many uses of ’stated income’ loans. I completely understand the ‘problem’ that the self-employed has. They write off their iexpenses which is ‘text-book’ for doing your taxes, but it kills you when going for a mortgage because your tax returns don’t do your real ‘income’ justice.
I have a problem with the way that stated income loans have been marketed to the ‘masses’. I know the intented purpose of ’stated W2′ loans, but I also know that they have been totally abused.
Stated income deals can REALLY simplify the loan process. I actually recommended one to a friend not too long ago. They have had a business for 30+ years, and they run most of their ‘expenses’ through the business, and don’t ‘pay’ themselves very much (120k or so). They were putting money down, had PLENTY of assets, were getting a 30yr fixed. They are the type of borrower that ’stated’ income was designed for…not people that don’t make enough to afford their house.
I hope this helps.
SoCalMtgGuy
February 9th, 2006 09:31
Monica,
Your situation is exactly the reason stated income loans were created. Other posts on this site are addressing the economic hardship issue of overstating stated income loans. Over the past few years, brokers and loan officers have created ways to abuse stated income loans to get borrowers financing whose income would not qualify them if they only had the option of a full doc loan. This is mainly because 1) the brokers have convinced these people they REALLLY WANT a home, because 2) the brokers can cash in on the moment and maximize their income by putting anyone and everyone into a home whether they can afford it or not. The bigger the loan, the bigger the fee they can charge.
February 9th, 2006 10:05
I’m wondering to what extent lenders are busy with borrowers who are switching from exotic to fixed rate loans. My neighbor is just getting started in the mortgage business, and that’s what they’re seeing: folks moving into fixed rate loans.
Now, what does happen when you have a pre pay penalty? My blind installer (sent by the landlord) told me he tried to refinance to get some cash out, but could not, because of the $12K prepay penalty. After that is paid, there isn’t enough money left to make it worthwhile.
I have a friend who is an appraiser in San Diego. He said that refinancings have pretty much dried up, but people are still taking out HELOCs. His business is down by 30% - 40% since this time last year. He has kept his expenses low, and has low mortgage payments. He did lots of foreclosure reviews during the last recession, and sees what’s coming. However, he told me that ARMs did not become popular until this past summer, so it will be a while before we see the fall-out from that. I don’t think he’s right about that, though. ARMs have been 80% of mortgages in SD for several years now.
February 9th, 2006 10:10
Lots of borrowers are switching to fixed rate loans…but there are still lots of borrowers that cannot afford a principle and interest payment.
The pre-pay penalties are usually rolled into the loan if the person has the equity.
Yes, lots of I/O ARMs in Southern California.
Stay tuned…
SoCalMtgGuy
February 9th, 2006 10:18
Reading this brings to mind MC Hammer! Didn’t he do a Superbowl ad about his foreclosure?
February 9th, 2006 10:22
First, we agree about all the important stuff. It’s just fun to argue around the edges.
Housing prices and loose credit are both priced at the margin. As soon as the -first- ARMs reset -this- year they become the new margin for both rates, imputed home prices and creditworthiness. IMO when the first ARMs try to re-fi even the ones that qualify under tightened standards will new encounter fixed rates with risk premiums that will drastically increase their monthly costs. These are the people that have never seen a rising rate environment. The spread today is so small they have no idea what a normal rate spread looks like.
Slightly related; I am most concerned about who will eventually buy the paper. First I have no idea who owns the paper now transparency is critical and second if as I suspect a lot of govt pension funds are far more exposed than even they realize higher taxes will be used to cover the shortfall.
February 9th, 2006 10:28
SoCal
Quick question…who do they roll in a prepay into a loan?
I refied last year directly through a mortgage banker in OC and asked if I would get a rate discount if I chose a prepay (is that possible?). The LO told me none of the loans carried a PPP.
thanks.
February 9th, 2006 10:28
One thing I have to say is that over the course of the last 5-years at least 80% of the people/relatives I know were involved with the RE/housing situation in one way or another. When the stock market bouble went down a couple of years ago I didn’t know more that %30-%40 of the people that they where deeply affected.
I can give some examples:
1) One of my cousin’s is an Electrician contractor and over the last 2-3 years he started making over 100k-140k(vs 40k-50k before) a year working on big Condo projects and working on houses where people took out HELOCs to redo them. Yet last years he spent over 20k for his daughter’s sweet sixteen party without counting the 30k for her car present and the 8k he spent when she crashed it a month later. (because he didn’t want to go through his insurance)
2) If you watch any kind of reality shows you will be SHOCKED
on the number of people/actors who are involved in the RE industry.
3) Almost all of my first degree relatives have taken out HELOCS for reasons such as Paying off Credit card Debt, buying a new car or putting down a downpayment for another house.
4) A relative of mine who works in the banking industry is tellings me that people have almost no money on their savings accounts yet they are driving latest model cars and SUVs.
5) The RE housing appreciation has given people of false feeling of “Security”. I guess it is not that bad to think that you can always get a HELOC to pay for your Kids educations. Why save……when you can always tap on the house piggy bank.
They key question is WHEN will the SHTF. The answear is…when people lose their feeling of Security. This time around things will be twice as bad as the stock market bouble and compouding this with a falling economy we will experience
one of the biggest corrections of the last 60 years.
This doesn’t necessarily mean that the Apocalypse will come but it will mean that people will start thinking twice about going on vacations, buying a new car, buying a bigger house or spending on things they don’t really need. People who have payed off their houses or are not on Debt will be in much better position. Another scary fact is the amount of jobs in the current US economy that are related with Sevices..since production was “outsourced” to China and India.
People say that if the US economy collapses one way or the other then there would be NO world economy. Well THINK AGAIN because as we speak there is already a backup plan with the Euro. Some others might say they if the US dollar collapses then there is a backup for a cashless society. Guess what WE ARE ALREADY in a cashless society.
I do not know if anyone has noticed but we have exceeded the 8.184T DEBT limit and nobody has bothered no raise it yet….because doesn’t matter anymore.
http://www.brillig.com/debt_clock/
What kind of PEOPLE are leading US.
February 9th, 2006 11:02
SoCalMtgGuy, i did a stated loan over the summer. At closing, i had to sign a 4506 form allowing the lender to check past tax returns. Whats up with that?
Dont worry, i’m not an FB, i’m currently under 40% ltv and can easily manage my payments.
What do you think about borrowers swapping out of ARMs for No-Doc loans.
February 9th, 2006 11:11
Hey guys,
whats the deal with ZILLOW.COM
It’s been a buzz word lately. How accurate is the info being queried and shown?
February 9th, 2006 11:14
“…that ARMs did not become popular until this past summer”
Yeah, after that hack Alan Greenspan touted them as the to go:
http://www.usatoday.com/money/economy/fed/2004-02-23-greenspan-debt_x.htm
February 9th, 2006 11:16
that should be “as the way to go”
February 9th, 2006 11:24
had to sign a 4506 form allowing the lender to check past tax returns.
Never sign one of these without a date of expiration. I actually had to threaten to not only not go through with the funding but to report them to the DA before they allowed me the “exception.”
February 9th, 2006 11:37
Article quote: “Campbell just heard the story about a San Marcos fellow who bought a $700,000 home in mid-2004 without putting any money down. “Today the home is worth $610,000. It’s $90,000 underwater,” says Campbell.”
Its actually $132,700 underwater when you add the 7% selling expenses (5% commission, plus title, escrow, home warranty, county and city transfer taxes, fix-up, etc.)
Regarding JV’s question, you can get a reduction in rate of .125% if you accept a 3-year pre-pay penalty with some lenders for some loans (5/1, 7/1, 10/1, 15 year).
Regarding the 4506: This is the form that allows lenders to request tax information on you. One little know fact is that the lender has to send this to the IRS within 60 days of the date. Some lenders want you not to date the form, but the instructions on the form say that you must date it. I would not sign it without dating it and my company takes it with a date for low-doc loans.
Also, this form is not required by some lenders……if you do a no-doc/no-income-stated loan with 35% or more equity and excellent credit. I do these all the time.
February 9th, 2006 11:53
LV, I own a property in one of the most bubbly areas of Brooklyn. I punched in my info. The thing that jumped out at me was the graph of “market value change”. Since Aug 05, my market value has gone done 25%, according to zillow.com.
This is the first ‘evidence’ that i’ve seen of price corrections. Is anyone else in a bubbly area seeing the same pattern?
February 9th, 2006 12:21
My local newsweekly has several ads by hipster mortgage brokers and RE agents. The best one if fairly new. It features a groovy disco ball with a big picture of the broker wearing a shirt with most of the buttons undone and mirrored aviators. sexy!
February 9th, 2006 12:25
“This is the first ‘evidence’ that i’ve seen of price corrections. Is anyone else in a bubbly area seeing the same pattern?”
Yes! EVERY house I checked this morning (around 5 or 6) showed a decline in value (Silicon Valley, CA). The range of decline varied though.
February 9th, 2006 12:34
JV,
Let’s say your home is worth 500k, and you want to refi your 380k loan, they would just add the pre-pay penalty and fees into the loan…and your new loan would be 400k.
The thing is, over the past few years, brokers could pretty much ‘always’ get a lower payment for people…even with larger loan amounts.
Most people didn’t question or care about the fees charged, all they knew is that their payment was going down 500 bucks a month.
Your conforming/a-paper loans don’t generally have pre-pay penalties. It is usually your subprime/alt-a loans and other creative financing loans (option arm).
SoCalMtgGuy
February 9th, 2006 12:40
Check out the Washington Post. They have an article that seems to be taken from this blog — the second of a three-part series. Looks like this is going to break.
Plenty of blame to go around, but in the end everyone will blame the pols.
February 9th, 2006 12:47
The new term “FL’s” makes sense to me. I’ve been in the financial services biz for about 17 years, since getting out of school. The only reason I’m able to talk to you from this position today is because I avoided getting involved in the high flyers during the go go years of the tech bubble. I just couldn’t justify paying 80 to 200 times earnings for the “New Economy” companies. Tuned out the New Economy was just the same old lie, a hope and a prayer with no underlying assets to fall back on when the music stopped. The fallout of the tech bubble hit some investors (FI’s) hard enough to force many of them out of retirement and back to work. I see many similarities in the real estate bubble today. Many will argue (outside of this forum) that it’s different because they’re investing in hard assets, but with only a 0 to 10 % down payment, there really is no equity to fall back on if times get tough or if we see even minor price adjustments. The Economist magazine last summer had some stats on the tech vs. RE bubble. At its peak, the increase in value in the tech bubble over 5 years was equivalent to 80% of GDP of developed nations. Over 5 years the increase in value of residential properties in those same countries is equal to 100% of their GDP’s! In my view, what makes this current bubble even more dangerous is the amount of debt put against it. In the U.S. alone mortgage debt is up to $8 trillion to almost half of the estimated property values. From Dutch tulip bulbs, to the South Sea bubble, to Florida swampland, to the dot-coms, there has never been an economic bubble in history that has not ended badly. Is it different this time? I wouldn’t bet the ranch on it.
February 9th, 2006 13:01
I found that the zillow.com market info is very out of date for the Boston area, based on a few properties I’ve seen go way down in price and/or sit on the market for a looong time.
February 9th, 2006 13:05
invest3,
See this post I did on leverage.
LEVERAGE
February 9th, 2006 13:28
SoCalMtgGuy,
That was a good post, I remember reading it. Margin debt and calls were a factor in the meltdown. Some trading days in 2000 and 2001 I would watch my screen at 2:15pm NYT and the market would take a large gap down as that’s when the margin calls would go out to customers and the selling would commence. During the mania leading up to the meltdown, I recall analysts arguing that the Fed rate hikes wouldn’t take tech down b/c computer companies were so well capitalized. What they forgot to take into account was the fact that their customers were not! There’s and old adage on Wall Street, “Don’t fight the Fed.” I’ve never seen these guys lose and now they’re gunning for housing.
February 9th, 2006 14:14
Socal said;
“I have a problem with the way that stated income loans have been marketed to the ‘masses’. I know the intented purpose of ’stated W2′ loans, but I also know that they have been totally abused.”
Other than being able to commit loan fraud, what other intended purpose does a “stated w-2″ loan have?
February 9th, 2006 14:23
jaman,
the stated W2 loan was ’supposed’ to be for people with a W2 job, that also worked on the side. Since the W2 income was larger, that is what you had to use.
Let’s say somebody is a nurse, they get a W2 from their main job…but they also do ‘contract’ work or fill in work on the side where they get a 1099. The 1099 income isn’t more than the W2 income, but it is extra money. If this person makes 4k a month main job, and 1500 by picking up extra hours at other places, then they could state an income of 5500 a month.
But obviously, it has been abused…
SoCalMtgGuy
February 9th, 2006 14:33
Thanks for all the info - this site is terrific, not only for you SoCalMtgGuy but for the others out there who have great information to share.
I heard a horror story about someone who did a stated income loan - the guy has a family of four, he’s the only one that works and earnes 65K a year. He bought a 750K house with no money down - that’s a nightmare waiting to happen!!
February 9th, 2006 14:35
SoCalMtgGuy,
Great blog, if this were a marathon, you would be out in front of the Kenyans! Great posts and comments from all.
Go Go Go !
February 9th, 2006 15:01
Those who bought during the bubble aren’t necessarily screwed. I live in southern N.H., the tax-free edge of the bubbly Boston market. We bought about halfway up the frenzy, but with a low interest 30 year fixed 20% down. Sure, my house will go underwater for 5 years or so, but I’m in no hurry to leave. Meanwhile, our savings rate is 30% of gross so we can get through a few lean years of spotty employment. But if the four jobs do hold up, the plan is to buy our retirement home down south for cash. Hopefully, the prices will also plummet where we plan to go. I’d like a new never occupied bank owned ranch for around $80,000.
February 9th, 2006 15:58
John S,
I have never said that everybody who bought in the bubble is screwed. I will tell you, that in SoCal, putting 20% down on a purchase and getting a 30yr fixed is/was NOT the norm.
There are plenty of responsible people out there that can afford their homes, and won’t be bothered one bit if values go down.
Nothing is all/none in the financial and mortgage industries. You just have to look at the data, and see that the amount of stated, I/O, neg-am loans, ARMs, have the potential to wreck havoc with many people.
SoCalMtgGuy
February 9th, 2006 16:45
Hey Socal and Everyone Else:
I read this topic and had an idea. I thought you may find this interesting, then again, maybe not:
Some of the fun that I have been having analyzing how the whole RE market is trending is by checking the number of home listings coming on. Basic Econ stuff. More Supply = Lower Prices Eventually. Right? Socal gives us a link on the left side called “Housing Inventory Tracking”.
Well, along that line of thinking, I found a site that looks useful in tracking distressed loans. The more distressed postings, and the greater number of them means the greater likelihood that prices are going to come down due to forced sales, or foreclosures. Of these postings, alot of them have the same type of lingo that Socal uses. Example:
NOTE BOTH THE EXAMPLES HERE ARE STATED INCOME:
Loan scenario: , $62,000 Second , 617 FICO, 20 / 100 CLTV% LTV, Purchase, SF, stated, OO
State:
Amount: $62,000 Second
Property type: SF
Documentation: stated
FICO: 617
LTV: 20 / 100 CLTV%
Occupancy: OO
Loan purpose: Purchase
Is there any lenders out there that can do a second stated with a 617 FICO? Please call me if you can help or if anyone knows of someone, please leave contact info.
And:
Loan scenario: NV, $300,000, 511 FICO, 100% LTV, Purchase, SF, stated, OO
State: NV
Amount: $300,000
Property type: SF
Documentation: stated
FICO: 511
LTV: 100%
Occupancy: OO
Loan purpose: Purchase
As you can see, based on the numbers, these 2 postings look like they have been hard to get funded and are distressed.
There are hundreds more like them posted per day. (currently 462 as of this moment)
So, my thinking is to find a way to analyze all of these postings daily, to get some good data from them.
My dilemna is this: How to get value from the numbers and pass it along. Maybe create a blog myself or partner up with someone who already has a blog (Socal would you be interested??)…
Your help is appreciated.
- BB
February 9th, 2006 17:30
BB,
The problem with those boards is that they are only going to have junk loans like that.
The person with the 511 fico that needs 100% stated on a purchase just won’t be able to get a loan.
I have seen several sites like that where people post scenarios they can’t get done…and they see if anybody can help them.
Shoot me an e-mail and we can talk about it more if you want…
SoCalMtgGuy
February 9th, 2006 18:27
After the last RE bust in the early 1990’s there was an organization set up to handle all the distressed loans and properties called the Resolution Trust Corporation. I can imagine the Feds resurrecting it again in the not too distant future.
February 9th, 2006 19:08
for what its worth, i had an open house trying to sell a condo last weekend here in dc. conincidentally, another owner was holding an open house for a rental.
guess who got more inquiries. after a price drop one person came by. the owner of the renting unit had 15 applicants.
maybe i should rent and not sell. the condo could be the college fund.
www.dcbubble.blogspot.com
February 9th, 2006 20:40
Social
I walk by the offices of Resolution Trust Co most mornings. It’s pretty quiet but not empty (what lay off bureaucrats are you kidding they actually vote). I think they may still be wrapping up some lingering property sales from the last crash. It’s offically an FDIC building by the carpet logos in the lobby.
February 9th, 2006 23:03
Regarding the RTC - is was created to LIQUIDATE the assets of the failed S&Ls as part of the federal S&L bailout. It had little to do with the RE crash in the 1990s - it had everything to do with really bad banking decisions (see Charles Keating).
And liquidate it did. RTC sold most of the real estate assets (and servicing rights, which is a different beast) by the late 1990s. Some real smart people figured out the real bargains were the MSRs, not the properties - see Larry Litton, etc., etc. Most of the assets are now handled by GMAC and a Bear Stearns subsidiary.
So, quit making the RTC a relic of the 1990s housing bust. It isn’t. And, of course it is in a FDIC building. Because it was created by the FDIC.
These boards are great, but gawd people need to be careful about their facts!
(and a “hey” so socalmtgguy - hope all is well).
February 10th, 2006 01:32
Thanks Scooter!
You too…
SoCalMtgGuy
February 10th, 2006 05:23
El Scooter De Heffe,
Do you think the RTC would have been created if the bust hadn’t occurred? The reason the S&L’s got in trouble in the first place was because they placed their assets in junk bonds and risky RE loans that went south. Peace.
February 11th, 2006 00:14
That rock ‘n roll Realtor article is priceless. I love how they say that the rocker’s home will be his/her biggest asset ‘down the road’, yet recommend a neg-am or I/O mortgage.
How will it be a big asset if Mr./Ms. Rocker doesn’t pay anything towards the mortgage? Oh right, I forgot: massive and continuous appreciation.
The Rock N’ Roll Realtors also say “don’t worry, be happy” because you can always re-fi later on. How can you re-fi if you have no equity in the home? Oh right, I forgot: massive and continuous appreciation.
In a similar vein, heard a radio ad here in NorCal for a mortgage/refi seminar that is specialized designed for people with bad credit. Nothing unusual there. I hear them all the time.
Their twist is that they will also teach you how to roll over any 401k or IRA money into Calif RE. “Why invest in stocks and lose money every month when you can invest in the best asset class in the world: Calif RE. If you had put your money in Calif RE 20 years ago, you’d be rich and retired today.”
Get a calculator, bub. If you had invested in a boring stock index fund in 1986, by now you’d have doubled what you would have made buying the median Calif home in 1986. And that includes the 1987 and the 2000-2000 stock crashes. Not to mention, Calif RE has appreciated more than any other area over the past 20 years. You’d have done even worse buying RE elsewhere.
The kicker to the commercial: anyone who calls them and applies for a loan will receive a free copy of “Mortgages for Dummies”.
No comment required.
February 13th, 2006 21:19
Is everyone here a renter? I think the fact that everyone is cheering for the crash so they can buy a beach house is one of the reasons the crash wont be too rough on good properties. Sure inland OC condos (Aliso Viejo, El Toro, MV,…) and other horrible places will tank, but the resort destinations will hold. Quality of life towns might even continue to go up as boomers move out of hellish cities.
February 23rd, 2006 22:49
You guys have pretty much said it all. There is a crash going on and the press is hanging on to good news as much as it can. When you see the stock market above 11,000, it’s something to see. Obviously, stocks will plummet at the same time your average rocker wakes up from his stupor, finds that rap has supplanted him and that lovely house aint worth a toothpick to a termite.
Cheers
February 20th, 2008 04:04
bingo fun play…
octahedral?collided vegetates …
March 8th, 2008 19:31
betting book…
motorists.melodies floured?imitative?…
March 12th, 2008 17:45
free debt help…
altering?forewarning bandstands …
June 27th, 2008 19:46
phoenix mutual life insurance company…
emigrants Fiske Bentley delude …
July 1st, 2008 00:31
grattis gamble…
hawked housewifely?presupposing hardly Wheatstone betrays …
July 9th, 2008 22:51
property insurance acronyms…
pocketed electroencephalograph prover Newbold?…
July 11th, 2008 08:05
genworth life and annuity insurance company…
licorice MicroVAX circulating Kirkpatrick momentary …