The ‘old way’ vs. the ‘new way’
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
August 2nd, 2006 23:03
Where have you been, SoCalMtgGuy??? I keep checking your blog, but you never post. You were one of my favorite sites back when you upated your blog regularly.
Surely, you have at least some secondhand stores about f’d borrowers through your friends that are still in “the biz.” Can you pass them on? That was one of the best things about your blog–you were on the front lines. It was great reading your stories about “oh, look at what kind of financial situation THIS guy is in…”
August 2nd, 2006 23:09
I wish I could put the time into the blog like I was. I am going to make an honest effort to get posts up more frequently…even if they are shorter posts. I do have some good stories…I will make them short posts and get them up.
Trust me, as much as I have been driving, I wish I could sit in front of the computer and get posts up.
Just keep checking back…I’m not going anywhere and I will keep the site up.
Thanks for the comments and for reading my blog!
SoCalMtgGuy
August 3rd, 2006 03:03
Interesting & insightful - as always!
Years ago my Dad advised just what you’ve outlined as the ‘old fogey’ method - 20-25% down on a maximum 25 year amortization. And he also suggested you figure your payments on an 8% interest rate and that’ll set your price range accordingly. This odd bit of common sense gave a margin of safety (who knows what’s coming down the pike over 25 years) by allowing some savings when rates were less to create a slush fund for prepayment or higher rates.
And, oddly enough, when you apply that rationale it’s pretty hard to buy something you can’t afford AND what you do buy actually becomes an equity building asset. Because I’m no sure how paying off the interest on an IO differs from paying rent to a landlord.
They really should drill this stuff into kids in school because FB’s are like drunk drivers - they’re a danger to everyone including themselves.
Cheers.
August 3rd, 2006 06:38
Good Post. It’s a shame the lenders and investors had such loose standards. I won’t be buying an MBS’s soon.
August 3rd, 2006 06:47
OK, so here is what is going on in the “inside”. I work for a mortgage broker in the LA area. Almost all of the Realtors that I work with have a slowdown in business from last year. We having been having lots of sales meetings in my office because of that. the “experts” have been saying that this is only a temporary lull and that it will “take off” again in the next few months. My question is how much higher can the prices “take off”. Now I don’t expect the industry to come to a standstill but I do expect the prices to take a dive. As far as I am concerned that will just give me access to more borrowers. Lower prices = more qualified borrowers. Despite what the insiders are saying, we have price reductions all over the place now. Check out all the inventory. We are starting to see plenty of people who’s ARMs are adjusting from a couple of years ago and cannot refi because of HELOCS and seconds that they took out. When there was huge appreciation it didn’t matter. Now appreciation has slowed and they are in a bad position. These next few months are going to be very interesting.
August 3rd, 2006 08:01
I tried the link above and it doesn’t seem to work - any suggestions?
August 3rd, 2006 08:22
SLO BEAR
Link is fixed! I had .com and no .org.
Thanks!
SoCalMtgGuy
August 3rd, 2006 09:09
I hear you Wiseguy
I have a friend who works for a large L.A Westside realty company who recently gave up his job to go and do something else.
He’d not had enough sales to feed himself and pay the rent since January.
i’m sorry he lost his job, but I’m glad he got out before it got really ugly.
August 3rd, 2006 09:32
Thanks for the great post. I am not sure that lenders will start requireing money down again as it would kill their business models at this point. They opened up a flood gate and robbed buyers from the future. Could you imagine what would happen to house prices if they required down payments? I have to beleive that they will continue with no down programs to keep transactions going.Prices are ridiculous around sacramento but coming down slowly. A person with 1 income is really screwed around here.It is going to take time an a lot of patience for this to unwind but it has begun finally.
August 3rd, 2006 09:45
Here’s a little story….
I decided to attend a homebuyers clinic that is funded by state tax dollars (Illinois). It’s free to attend and they go over all the basics. Basically they are letting you know how you need to prepare for homeownership, what state programs you may qualify for etc. After which you could set up a one on one with a counselor at a later date. So I do for sh!ts and giggles. You give them all your info…what you make, monthly debt yada yada yada and they run your credit to get an idea for what kind of rate you might qualify for.
The counselor looks my info over…all three credit scores just under 800, no debt at all, plenty of savings. So she starts writing down the names and numbers of mortgage lenders and RE agents I should contact. “Whoa, whoa!” I tell her. “I’m not looking to buy now. I’m just assessing my buying position. I’m waiting to see where the market goes.” She starts with the scare tactics, “The rates are going to keep climbing and housing never goes down so you should buy now.” This woman is paid by the state mind you. My taxes dollars are paying her to push me to the RE and mortgage people she obviously has a ” working relationship” with. I asked her point blank if she is compensated in any way by these people to direct business their way. Me thinks she protested to much. Needless to say voices were raised and I’m still considering reporting her to the state. I have no hard evidence of what she is doing but something is rotten in Denmark (or more precisely DuPage County, IL). The most she should have guided me to do was to contact my bank if I felt I wanted to procede to the next level of getting qualified for a loan.
P.S. - She had me at 41% debt ratio but she said, “but with your credit we could probably stretch it to 50%.”
August 3rd, 2006 09:48
SoCalMtgGuy. Great to see you back here. You are certainly one of the favorites here in Bubble Blogland. Great post. Would love to hear more stories about FBers. We will be seeing many more as time goes here.
August 3rd, 2006 12:39
Great your’re back SoCalMtnGuy!
Been checking for updates, how about a Friday post each week? Come on, brighten everyone’s weekend with a new FB story each week.
August 3rd, 2006 12:44
These people who buried themselves in mortgage debt are nuts. I couldn’t sleep at night. My wife said that she would be sick to her stomach if we were in that far over our heads. We’ll continue to pay our $1100/mo rent with an annual income in excess of 300K. Once all the FBs are flushed out of the market we’ll consider buying. Shouldn’t take more than a couple years. Keep up the great blog SoCal.
August 3rd, 2006 14:44
Ken-
These “Homebuyers Clinics” have been going on in Seattle for a number of years. What’s worse, they are, I think, required for 1st time buyers and are basically designed to PUSH people into homes that they can NOT afford.
Every single person that I know , without exception, who attended one was encouraged and cajolled to go considerably beyond their financial comfort zone in buying a home.
My friends are financially responsible enough to say “You’re nuts, I can’t afford that! I’m out of here!”
But I’m sure there were many who got taken in and that these programs are partly to blame for the outlandish price run ups.
Too sick.
August 3rd, 2006 14:52
SoCal-
Do you know anything about the buying of these MBS’s? I wish I understood them better.
Why in the world would organizations and countries continue to buy them?
And most importantly, what would happen if they stopped?
I have this idea that they are the final link in the chain that could pull the whole market down fast and am hoping that that could possibly happen.
Am I indulging in too much wishful thinking?!
Anyone care to comment?
August 3rd, 2006 15:21
LJ,
I have had communication with several bond traders. What they told me is that there is so much money sloshing around out there, that people/funds/companies need a place to park it. They know there will be defaults, but the rate of return on the MBS is still way better than they can get in other places of the world.
I say yes…right now. but what happens if/when the massive defaults hit??? Same thing with the junk bonds is going to happen here.
Junk bonds became ‘hot’ items. Then the ‘junk’ that was backing the bond deteriorated to such a point that the whole thing crumbled. Same thing with mortgages. The quality of the borrower and loan deteriorated as the markets got ‘hotter’…and again, there will be hell to pay.
Just like people that were buying ‘bonds’ on crazy amusement parks in the middle of the desert…there are people buying mortgages on people who have little to no chance of ever being able to afford their mortgage when the paymnet adjusts.
I hope that helps (and makes sense).
SoCalMtgGuy
August 3rd, 2006 15:52
yo bubba,
thought you had been “offed” by one of your disgruntled previous brokers. market playing out pretty much as we discussed last year, the recent numbers out from the reits are downright scary. i like the economists backpedaling on their backpedal from last month. hope all is well with your new career, you got out just in time. my wholesale reps tell me that 3/4 of their sales calls are done at paneras bread or starbucks these days.
boulderbo
August 3rd, 2006 15:56
Great to hear from you!
$400K houses in Hemet as an example was the best laugh I’ve had all day. I can’t believe the number that have been thrown up all along that highway, let alone the crazy money that people want for them. Like you mentioned, there is nothing in the way of jobs there to support those prices. Construction aside, there is mostly low paying retail and a lot of retirees. It certainly isn’t a city generating $100K/yr salaries, but it has more than its share of flippers crying to get out right now.
Thanks for another needed dose of financial reality!
August 3rd, 2006 16:04
Thanks boulderbo!
Yeah, I have been busy. Actually, I have had a few brokers contact me and tell me “Man, you were right…”. My biggest office that had over 100 loan officers just closed their doors last month. Like I didn’t see that coming many months ago.
Most of these econoMISSEDs are tied to the industry, so they don’t have the integrity to tell the truth. Either that, or they are so far removed from the ‘ground level’ of what is really going on in most broker shops to see HOW people working fast food can buy 400k starter homes.
Stated income loans have been abused to such an extent that the repurcussions will be felt for years.
I will post more frequently, so keep in touch…
SoCalMtgGuy
August 3rd, 2006 17:22
Glad you are still employed SoCal.
Save your pennies. In the financial industry, there is always a “flight to stupidity,” doing what everyone else is doing, and someday no on will be able to find a mortgage broker willing to lend with just 20% down and a 30% cost to income ratio. That’s when you can come in, impose the “old rules,” and take over the business by being “aggressive.”
August 3rd, 2006 17:26
Dude!
Missed you terribly. BTW, ever thought of engaging a few professionals for some “guest blogs”? Savvy insiders like BoulderBo, nnvmtgbkr, S-Crow, Deb, etc. are all interesting writers and might be interested in contributing an extended anecdote and/or unique industry insight from time to time, filling in a little of the dead time between your posts. You’d still be “the man”, of course!
Whaddyathink?
August 3rd, 2006 17:41
tj and the bear,
I think that could be something to look at. I guess I would have to read what they would like posted before making any final decisions.
I really miss posting often and conversing with many of you. I am going to MAKE the time now that I am getting more situated with my work. Some of the posts might be shorter, but at least there will be new content.
Thanks for the comments!
SoCalMtgGuy
August 3rd, 2006 18:40
So Cal-
Thankyou for your explanation and yes, it makes sense. The buyers realize there may be risk but are willing to risk it because of relatively high returns.
I guess the next question would be, will any of those buyers be prudent enough to get out before an implosion? Is anyone considering that possibilty now?
Or are they going to follow the normal pattern and just hang in there til the worst happens (kind of like people who are finally thinking about selling their homes now that the handwriting is clearly on the wall!- but wait!-it’s too late!!)??
Will they keep buying these MBS’s as more foreclosure stats come out and the Housing Market gets worse and worse?
And if enough of them quit buying, is that the end for the US housing bubble?
Would we go back to individual banks assuming risk on the loans they make? Is that even a remote possibilty anymore or are those days gone for good?
August 3rd, 2006 19:23
I know a mortgage broker.
He has done incredibly well over the last 5 years.
1) He is selling a rental property that runs at a $500 loss each month. He was playing the appreciation, and is now unloading at a nice profit.
2) Says the mort. business is not what it used to be. Too many brokers chasing the same deal. People shopping you around. Not worth his time anymore. He’s scaling out of it..Played the bonanza, and it now moving on.
3) He’s buying a gas station. And will retire in 15 years, when he sells it.
August 3rd, 2006 19:33
This blog:
Budgeting Babe was discussing looking at a $200k condo in Chicago. Some CA posters said they were “floored” by the low prices. Seems they must have thought that condos started at $400k all over the US.
August 3rd, 2006 19:34
Nice to hear from you again, SoCalMtgGuy!
I agree, the Stated Income Loans really are just another form of mortgage fraud. I can just hear it now..
“No money! No problem! We’ve got a loan JUST FOR YOU!! If you can’t pay it all back, then we’ll just take your house, kick you out on the street, and remarket the place at the.. UH OH!! ..current price which is far below our original loan amount..”
Yep. This is definitely going to be interesting to watch all of this unfold in real time.
Anyway, on the subject of FB stories, I especially loved the “Rock Star Wannabe” FB story from time’s past. That one was a classic!
bubble_watcher
August 3rd, 2006 20:10
LJ,
The problem is that so much of the money is international money. On a worldwide scale, the USA is a great place to park money, and has had some of the highest returns the past few years when compared to other international investments.
read Ben’s blog…he has posted stories of high foreclosures creeping up overseas. This thing is by no means isolated to the united states.
If the banks had to hold these loans then this NEVER would have happened to this extent. When I was doing loans, our company would take a loan to the investor to see if they would buy the loan BEFORE we would approve it. This wasn’t done on all loans, just the ‘ugly’ ones. If the investor said OK, then the loan was made. Sometimes they would ask for other conditions, other times they flat turned it down.
There is more crap floating around out there than in the New York sewer system.
SoCalMtgGuy
August 3rd, 2006 22:09
GOOD TO SEE YOU BACK! Now I know you are still ALIVE. Good luck with the new job!! Its playing out just as we discussed last summer. Look forward to more posts!
August 4th, 2006 03:40
We were kind of forced to buy last winter (new kid, nonexistent house rental market, etc.). We went to a safe–but decidedly nonsexy–neighborhood in Chicago that has seen “only” 75% appreciation over the last 7 or 8 years.
We bought a house (and not townhome or condo). Put 20% down. Kept mortgage payments below 20% of NET income.
We still feel like we’ve lost money over the last several months, but we can live with it because we have such a buffer.
August 4th, 2006 05:31
hello from germany
great to hear from you.
http://www.immobilienblasen.blogspot.com/
jmf
August 4th, 2006 05:39
Moom,
$200,000 in Chicago is a 600sqft studio and that’s before you pay for a parking spot. If you want a 1000sgft 1bed/1bath in a nice area with a parking spot, which you have to have or else you’ll rack up thousands of $ in parking tickets, you need to start at $300,000 and they skyrocket from there. The link below is very indicative of what’s being built now.
http://www.mclcompanies.com/live/parkview/index.html
August 4th, 2006 12:42
Great to see you back SoCal. I was getting really tired of seeing the “YAWN” post come up every time I checked your blog (every day for 70 days!). That’s alright, pace yourself, as you’ve pointed out it will be a long, bumpy ride down to the bottom.
August 4th, 2006 12:55
SoCal: It’s great to hear from you again.
I do have a bone to pick with you though. 50k median income means that with both spouses working, it’s a 100k family income, which just about makes them eligible for the 400k home. I am ambivalent about assuming a dual income - there are big costs to pay when both spouses work, but that’s the fact of today’s life.
The second issue is about the fraction of income that is related to housing expenses. The days of your forefathers is not going to return. The US will become more like the rest of the world, where housing will be a major part of income, often around 50%. There will be less to spend on other toys. Housing and health insurance costs will mean that lifestyles are going to be hit, especially for the below median income families. Remember, when easy money stops, credit card rates and auto finance rates will shoot up as well. I’m not a soft landing guy but housing isn’t going to fall all the way back to 2001 levels.
August 4th, 2006 13:09
Hi SoCAlGuy,
Welcome back. It is good to see your posting again.
August 4th, 2006 13:37
“The US will become more like the rest of the world, where housing will be a major part of income, often around 50%. There will be less to spend on other toys.”
Yensoy, that’s fine. But at some point that debt ratio has to stop climbing. It can’t keep going up. Years from now I don’t want to hear, “55% is the norm” then 60% and then 65%. People have to be able to buy food & medecine. Those aren’t toys.
The reason why the fraction of income has changed so dramatically over the last 5 years or so is because housing has gone up and wages haven’t. That has to changed at some point or everyone will be renting.
August 4th, 2006 13:38
LJ
I went to one of those free seminars back in 2003 before the idiocy really got rolling. I was surprised when they showed a chart that compared the costs of making improvements vs. what you usually recouped from them when you sold. In most cases it was 50% or less. I don’t think any of them were over 100%.
Too bad they didn’t realize yet that prices always go up and that adding granite countertops, hardwood floors, recessed lighting, restaurant appliances, and a “summer kitchen” entitles you to a lifetime of riches.
August 4th, 2006 14:06
SoCal,
Relating to what you were discussing with LJ on MBS’s. I thought I heard recently that S&P told lenders that the “exotic” loans were going to be relagated to secondary MBS’s now. Is that true?
If that’s the case I would have to imagine that would slow the pace of those kinds of loans. How many investors, even foreign, would want to put their money into those?
I posted something to that effect onto a Chicago RE cheerleader board and I was summarily dismissed. One of the RE sycofants that told me that there would be investors. “Ever heard of Michael Milken?” he said. “I have. How’d that work out for him?” I’m still waiting on my answer.
August 4th, 2006 16:58
Yensoy,
Try making 100K in Hemet.
August 4th, 2006 20:34
Yensoy,
When you talk about 50% of income as a standard for houseing, my guess is that you are implying Europe, which has socialized medicine for the most part. Unless we get socialized medicine in the U.S., the 50% number is not feasable. Health Insurance has I believe the 6th largest Lobying group in the country, so I would not count on it(and personally I think it’s a bad idea).
If we had the same infrastructure as these historical 50% areas(not the current bubble-in the last 5 year areas-worldwide), this would be possible, but we don’t so it’s not. No amount of Toy Cutting can handle the required balanceing.
Then there is INFLATION, it is here, we all know it. The economy is unwinding now. Last november the Bond traders were saying the inversion would not herald a resession and that episode was different. With the current period of inversion those same Traders are now saying “This Ones for Real”.
2001 prices hmmmmm, rated for true inflation I think it’s quite possible.
OCBear
Oh yea, glad to see ya back SoCAL:)
August 5th, 2006 06:11
On Ben’s blog someone indicated that neg am loans sometimes have a clause that gives the lender the right to a reappraisal at the lender’s discretion, and that payments can be accelerated if the price of the house has dropped sufficiently. Ever seen or heard of a clause like that? People could be in for some real surprises if that’s true.
August 6th, 2006 07:44
I bought my first house in 1996, the “old way.” Banks wouldn’t loan more than 2.5x or 3x your gross income. Down payment of 10% or more strongly encouraged. Little or no debt AND money in the bank after purchasing also a requirement. So much of this mess is lending standards that just went out the window. And consumers were equally greedy to go along with it, convinced there was just no way to lose. For a while, real estate was the only way to “get ahead” in expensive parts of California (I sold my house in 2004). But for the late comers, it’s just massive amounts of mortgage debt, no equity and no safety net in their homes.
August 6th, 2006 13:23
I’m not a soft landing guy but housing isn’t going to fall all the way back to 2001 levels.
in some ares it will go back beyond 2001 levels.
there is no way home prices can triple in 5 years and then eventually just stay flat that’s have never nor will every happen.
August 6th, 2006 18:14
This is in response to post 10.
I have been concentrating primarily on reverse mortgage loans the past year. Before a borrower can go forward on a reverse mortgage is to receive credit counseling. I am working with a borrower in Miami. I am in Tampa. I send her to the closest credit counselor so she doesn’t have to drive far. I never hear back from her. Then about 2 months later she calls me. It seems the counselor told her not to use my company, to instead use a loan officer in Colorado. She refuses to give my client her RM counseling certificate, instead she faxes it to the CO LO. The counselor proceeds to act as a loan processor for my client, gathering information such as insurance, copies of driver’s license, etc. She even orders an appraisal for my client and has her pay for it, only it wasn’t an FHA appraisal. My client was frantic over how badly her loan was being botched. She had to refinance her 2/28 loan because it’s reset time and her rate is increasing 2-3%. She won’t have the income to make the new payment. Luckily we are moving forward with the deal. I know for a fact this counselor used this LO because they pay commissions for referred deals. She would have made $1,375 if this would have gone through. I can imagine she has done this to other borrowers. I reported this lady to HUD. They have never responded to me. If I don’t do anything else this year, this credit counselor will never work with anyone again. Of course, this is Miami and it is par for the course.
August 7th, 2006 07:01
#37, LJ, note that improvements such as that will hit you in property taxers every year.
I’m quite handy, and had planned to renovate kitchens and bathrooms (since I can do everything myself), but the tax increase makes it a poor “investment.”
Now I know why people who are fairly well off don’t always remodel — TAXES.
August 7th, 2006 10:29
I remember when loan to income was 28 percent. In England it is now 40 percent on average. The banks in the US changed the 28 percent to 40 percent and added arms and helocs and piggybacks and interest only. I think the RE market will tank more than many realize. It only takes a catalyst like high oil to speed the process up.
I personally believe that Bernanke must tank the economy to protect the dollar. I don’t know if he has the will to do that although I think he must.
August 7th, 2006 17:47
SoCal:
You’re the best blog there is. You write really well and you’re super smart to boot. Given your experience in the biz, what’s your guess as to how much of a drop we could be looking at to bottom: 30 percent, 50, 70? Remember, the Nasdaq dropped 80 percent and is still down 60, and as Yale’s bubble-calling champ Schiller likes to point out, when Japan’s bubble burst, housing prices fell 50 percent, and stayed 50 percent lower for 20 years! Schiller also likes to point out that in the previous bubble, prices fell 50 percent in L.A. and that bubble was nowhere near as huge as this one. Also, as if asking you to call the drop isn’t enough, I’m also curious when you think we’ll see bottom: ‘07, ‘08, ‘09, beyond? Thanks for all your insights, and take as long as you want between posts if it means keeping the quality so high!
August 7th, 2006 20:46
Hi SoCalMtgGuy! Welcome back. I miss reading your posts since you aren’t posting as often as you used to. Nice to hear you considering more frequent posts. That would be great!
I follow Grim’s Northern NJ Real Estate Bubble blog and your blog is a great complement to his.
Thanks again for all the work you put into this site.
-RoadTripBoy
August 7th, 2006 22:50
If you are renting with the hope of picking up a bargain house in a couple of years, I have a few questions for you:
1- How long are you planning to stay in your rentals trying to TIME the present housing bubble crash? 2 years? 5 years? Or 17 years (like in Japan, for the doomsday prophets among us)?
2- And more to the point, would you still be happy and comfortable in your (cheap) rentals, if prices are still going down after 2, 5 or 17 years?
Once again it helps to remember that nothing is different this time around. So it is safe to assume that most people will not be able to SUCCESSFULLY TIME (i.e. make money) this cycle.
August 8th, 2006 06:37
2- And more to the point, would you still be happy and comfortable in your (cheap) rentals, if prices are still going down after 2, 5 or 17 years?
There are better places for your money than to have it tied up in a house that decreases in value year after year and fails to keep up with inflation at the same time. If one just looks at housing as a consumption item then one has to figure out which is cheaper: renting or buying?
Once again it helps to remember that nothing is different this time around. So it is safe to assume that most people will not be able to SUCCESSFULLY TIME (i.e. make money) this cycle.
There is no timing involved here. You just need to figure out where your money is going to earn the highest return with the least amount of risk.
August 8th, 2006 08:40
theotherside,
I’m renting because I don’t want to over pay for a pice of crap. I’d rather wait and get a better home for the same money that the crap is selling for right now. For me it’s not about “timing”. It’s about not being able to justify paying X amount of dollars for a house that I know isn’t worth it.
August 8th, 2006 09:07
To poster 50, you asked:
> If you are renting with the hope of picking up a bargain house in a couple of years,
Yes, I do.
> I have a few questions for you:
> 1- How long are you planning to stay in your rentals trying to TIME the present housing bubble crash? 2 years? 5 years? Or 17 years (like in Japan, for the doomsday prophets among us)?
I planning to stay until 2009, because I want to see how the option-mortgage resets in 2007 are influencing the market, e.g. through foreclosures. No, I don’t want to time the housing bust if you mean hitting bottom by it. If house prices drop a bit further after I bought, that wouldn’t concern me much, as long as my monthly costs as owner are not more than as renter.
> 2- And more to the point, would you still be happy and comfortable in your (cheap) rentals, if prices are still going down after 2, 5 or 17 years?
I don’t understand your question: If prices are going down, they will hit the fundamentals at some time (in buying versus renting) and then the time to buy begins. Or do you expect a great depression kind of bust with 90% value loss? I don’t. Of course, everybody weighs the non-material sides of homeownership differently and people will enter the market at different points, putting an end to the downslide.
> Once again it helps to remember that nothing is different this time around. So it is safe to assume that most people will not be able to SUCCESSFULLY TIME (i.e. make money) this cycle.
For me, it’s not about timing as in making money but about minimizeing your risks of loosing money. That can be done in different ways without timing the bottom. Buying a house now at the peak of a bubble market, however, is not one of them.
Regards,
Peter
August 8th, 2006 09:15
SoCalMtgGuy,
Good to see you posting again. I still have a number of friends whom are on the flipping side. I keep sending them articles on how inflated this RE beast is and they keep buying new properties to flip. Their relatives think they are so bright and will be rich some day. Recogition is not even close. I think denial is in play and they will probably sell at the absolute bottom of the RE cycle. Maybe I’ll buy it from them at that time. Your bog keeps this renter sane in SoCal. Keep up the good work.
August 8th, 2006 09:43
If one just looks at housing as a CONSUMPTION ITEM then one has to figure out which is cheaper: renting or buying?
BINGO!!! Most people don’t look at housing as a CONSUMPTION ITEM, especially over medium to long term (3-7 years). I will even bet that a majority of people on the sideline (with a family and kids) don’t either.
You just need to FIGURE OUT WHERE your money is going to earn the highest return with the least amount of risk.
CRYSTAL BALL, ANYONE!!!! We are talking future returns here, remember!!!
And remember, the IMPLICIT assumption made by a lot of people on the sideline is that the crash will be severe and widespread, will maybe lead to a recession but of course their jobs will not be affected….
Personal story:
Bought a house in late 2003 for about 500,000. Put 170,000+20,000 (closing cost) down. Mortgage of 330,000. Chose a very traditional conventional 30 year fixed @ 5.75%. Taxes-HOA-Insurance about 7000/year.
Recently put the house on the market in the low 730,000 got a low ball offer at 670,000.
Option 1: take it and leave the table with a nice and fat check and start PRAYING in some cheap rental that similar house sells for about 515,000 in the next 3-5 years. This is the break-even point taking into account the 8% back-and forth transaction fees, the need for a 22 year or shorter mortgage term to account for lost time in 1st house and rental unit, and for higher interest rate)
Option 2: stay put realizing that no one can predict the depth, magnitude and shape of the upcoming crash.
August 8th, 2006 12:41
Welcome back SoCal! Great to see you have returned!
Regards to poster #55:
My wife and I are in the same boat. We could sell our home for a nice 230K profit from the past four years but are unsure about this market. I definitely see inventory piling up (tripled in fact) but have not seen many price declines. Obviously time on market has increased a bit.
It’s tough for me to sell our house and go rent and hope that the market decreases. It seems obvious that it will decrease…but sometimes things are difficult to predict.
We know we want to move - our house is only 1000 sqft. But all of the “step up” homes are about 800k. We only pay $1200 a month right now thanks to the 200k @ 5.65% we locked in. Tough to rationalize an extra 3k a month just for an additional 1500sqft. So we are waiting…
The funny thing is our family and friends are all so excited by this RE boom! They cannot understand why we’re not pleased. They do not understand that since all the houses we want to move into have doubled in price that the gap between those and our house has increased as well.
For instance:
Our house: Purchased at $200k - Valued at $500k
House we want: Sold at 350k in 2002, Current Value 800k
Price gap in 2002 - 150k
Price gap in 2006 - 300k
How can people NOT understand that owing an additional 300k by purchasing the bigger house now is not a happy situation? Crazy crazy times…hopefully sanity will return soon…
August 8th, 2006 12:42
Correction to the math above:
we would owe an additional 150k due to the gap factor…
August 8th, 2006 15:30
I recommended this site to a friend who happens to be a loan officer and below is his response, any one care to comment?… :
“I checked out that site from chicken little. His numbers are correct but his interpretations are way off,guys like him have been saying the real estate sky is falling for the last five years they don’t base it on facts.Imagine if you had listened to them before you bought. It is true that prices have come down but that is only the market correcting it’s self,this is a good thing and they have only been minor.If you can show me a house that is selling for less than it did 12 months I want to buy it seriously. I have been telling my clients this is the best time to buy when the market is down. I have some economic news that I keep up with I will try to dig it up to show you. If you look at history they usually come down half of what they went up at worse and it takes a couple of years for the correction. If you think you will lose your gains you are getting bad info. Prices will start going up again but not like they did in the past 5 years. We are going back to a normal market. There is a 6 month inventory that is why so many are panicking and many new agents don’t know how to sell a houses. They get desperate and drop the prices because they had them up to high to begin with. Don’t get me started on the ARMS so many people don’t understand them especial the media they are better than 30 year fix when used correctly.Much like stocks you need to move your money around to where you can maximize your returns it’s not just a house payment.If you cash out and rent you will be losing alot more than your equity over 30 years. Tell me what is more of a benifit debt free or income? If you don’t have income what good is being debt free. In order to lose all your equity the maket and the economy will have to crash. If you are serious about learning more let me know “
August 8th, 2006 17:09
In at the Rise,
I could shoot many holes in that response. It is sooo typical of people in the industry who are ’smarter’ then the rest of us.
1. I have not been saying RE is falling the past 5 years. I have shown why/how the FUNDAMENTALS are out of whack.
2. Those of you that have read for a while know what I have said regarding buying a place. If you can afford to put money down, get a fixed rate mortgage, and plan on staying a while, then go ahead and buy. Just realize that the value might go down for a while…but if you like the house, can afford it, and plan on staying there, then go ahead and buy it.
The problem is that many people cannot afford the property they want today without using ‘creative’ financing.
3. Their quote “If you can show me a house that is selling for less than it did 12 months I want to buy it seriously.”
I think I know what they are trying to say, but that is one terrible sentence. Besides, I think there have been quite a few instances of property selling for less than 12 months ago. Heck, the ‘median’ price in San Diego is negative from last year.
4. “I have been telling my clients this is the best time to buy when the market is down.”
If this is his/her idea of a ‘down market’, I think they are in for a rude awakening. This is only the beginning. 1.6 trillion dollars of those ARMS to adjust next year.
5. “Don’t get me started on the ARMS so many people don’t understand them especial the media they are better than 30 year fix when used correctly”
I have a Series 7 and an economics degree from the Naval Academy…I know that there are situations where ARMs can be used in a way that is more advantageous than fixed rate mortgages. There are different time frames and goals, but I assume they mean, get an ARM and a low payment, and sell it before it adjusts and make lots of money.
The problem is that people are using ARMS because they couldn’t afford the prices with fixed rate loans. Getting an ARM when rates are at historical lows is NOT the brightest thing to do. Getting ARMs when rates are at all time highs is a better plan.
My point is that most of these borrowers with 2 and 3 year ARMs are not ’sophisticated’ borrowers managing their cash flow between business entities. They are over extending themselves to make ‘easy money’ on property because they have seen it work in the past.
Again, all these loans, even the option-ARM, have their place for RESPONSIBLE, INFORMED, borrowers. The guidelines should be tighter on these products and really look at the quality of the borrower and their ability to repay.
6. “Tell me what is more of a benifit debt free or income?”
What are they talking about? I think I have shown many times already that there will NOT be any ‘income’ from renting properties that are bought at these levels. Again, using debt and leverage are great when things are going good (like they have been the past 5-8 years)…but when things turn, leverage can crush you.
I don’t own a home, but I can honestly say that I have a positive net worth. I could be debt free in 5 minutes if I wanted to be…it just doesn’t make sense with the little bit of debt I have and the rate which it is at, to pay it off right now.
Having little to no debt is a great place to be. Watch the borrowers who bought property at 90%+ loan to values start to squirm when YOY (year over year) ‘appreciation’ goes negative. If you bought a place for 360k that is now worth 400k a year later, you had an 11% return that year. But guess what, a 5% decline wipes that gain out completely (again, not figuring in transaction costs…which are relatively high in RE).
7. “In order to lose all your equity the maket and the economy will have to crash.”
What if I bought a place with 100% financing? How much equity do I have? I would argue that you are negative the moment you buy a place with 100% financing. Even if you turn around and sell it tomorrow for what you paid for it today, you will still have to pay 3-6% in transaction costs.
People had no problem ‘making’ 80-100k in equity when the house down the street sold for more and more. But these people don’t think it can happen the other way around??
8. “If you are serious about learning more let me know ”
I’ll leave this one to the readers…who seems to make more sense here???????
I hope this helps some…
SoCalMtgGuy
August 8th, 2006 17:51
BINGO!!! Most people don’t look at housing as a CONSUMPTION ITEM, especially over medium to long term (3-7 years). I will even bet that a majority of people on the sideline (with a family and kids) don’t either.
This is precisely the problem. Most people don’t use houses as consumption items. They instead use them to flip in hopes of getting a huge profit from someone willing to pay the price or they use the house as an ATM machine in order to maintain their current standard of living. So how does this make real estate a good ‘investment’ for the long haul (2, 5, 10, 17 years and beyond)?
CRYSTAL BALL, ANYONE!!!! We are talking future returns here, remember!!!
And remember, the IMPLICIT assumption made by a lot of people on the sideline is that the crash will be severe and widespread, will maybe lead to a recession but of course their jobs will not be affected….
4-week Treasury bills are currently paying 5.22% with no risk at all. OTOH, the return on gold (risky) is currently outpacing inflation and will in all likelihood continue to do so as long as the Federal Reserve board decides that it is still much more important to make a concerted effort to ‘repeal the business cycle’ than to fight inflation.
Personal story:
Bought a house in late 2003 for about 500,000. Put 170,000+20,000 (closing cost) down. Mortgage of 330,000. Chose a very traditional conventional 30 year fixed @ 5.75%. Taxes-HOA-Insurance about 7000/year.
Recently put the house on the market in the low 730,000 got a low ball offer at 670,000.
Option 1: take it and leave the table with a nice and fat check and start PRAYING in some cheap rental that similar house sells for about 515,000 in the next 3-5 years. This is the break-even point taking into account the 8% back-and forth transaction fees, the need for a 22 year or shorter mortgage term to account for lost time in 1st house and rental unit, and for higher interest rate)
Option 2: stay put realizing that no one can predict the depth, magnitude and shape of the upcoming crash.
You should take Option 2 and hope and pray that the real estate market doesn’t crash, so that you won’t end up being a F@cked Borrower..
bubble_watcher
August 8th, 2006 19:21
That loan officer reminds me of many stock brokers at the height of the dot-com bubble. Some of them went to jail.
The mistake I think some people on this blog make, though, is to presume that people like this loan officer are full of crap and steering people into bad situations just to make a buck. On the contrary, I think many of them fully believe what they say. I can only hope someone like that is putting his money where his mouth is and snapping up properties right now “at the current market bottom.” When the Nasdaq fell from its peak of 5,000 down to 4,500, some people bought in at that “bottom” too. It’s at 2,060 today.
What kind of sheltered environment did these people grow up in to think that money grows on trees? If you’re going to view housing as an investment, you should at least have learned that investment comes with risks.
When you see how many people are still so bullish on housing, you realize the slight price declines we’ve seen so far are the tip of the iceberg, and that we have along way to go before the classic “capitulation” of a bottom where people view housing as a “bad investment.”
August 8th, 2006 20:53
Part of the problem is from the crazed lending practices that set people up for default down the road:
http://rebalancing.blogspot.com/2006/08/middle-class-squeeze-many-middle-class.html
But the bigger, long-term problem is the tremendous surplus of housing created by homebuilders and supported by amatuer investors.
http://rebalancing.blogspot.com/2006/08/housing-vacancies-americans-arent-just.html
http://rebalancing.blogspot.com/2006/08/anatomy-of-housing-bubble-mdc-holdings.html
August 9th, 2006 06:01
I think the slight appreciation we’ve seen this year even in the wake of drastically increasing inventories are what some investors call a “fools rally”. “It can’t get any worse than this, I’M BUYING!”
August 9th, 2006 10:50
Part 2 from my buddy the ‘LOON-OFFICER’ (btw..he works for an OC lender)..
“Tell this to Donald Trump I doubt he would agree. Yes there are going to be some markets where they are going to get a deeper impact than others.This will be temporary the rates are at the top end they will not climb to much higher. In fact they came down this week. I recently attended economic seminar with a doc of economy.He talked about the salaries going up in certain sector like the Inland Empire.Right know we are in a transition of reducing low paying jobs and replacing them with high paying jobs. California is expected to grow 30% in the next 10 years putting a continuing demand on housing. Rents are going to climb at a fast pace because of low supply and rising cost.Yes there are many foolish people using there house as an Atm and a few desperate sellers that will spoil it for some neighborhoods. Did you know that rate were in the 9-13% in the late 1990’s unemployment was outrageously high and there was an oversupply of home with very few loan options.Banks are getting creative with their loans but again buyer beware. We have nothing like that today. Sadly many people are priced out of the market and are moving out of state. Unfortunately its hard to see anyone paying off a huge mortgage. There are new rules and you need to understand them. Yes it is very important to live at or below your means. I don’t trust many of those sites that you talk about they are not always up to date and they to have agendas. I use the ones from Title companies and I find conflicting info. Did you know that very high percentage of people using those “do it your self site” end up using Realtors. Also we are seeing a rise in Realtor commissions. I notice you take a lot of extreme situations and assume it is happening across the board. I don’t Denie that some of those things are happening but the data I see doesn’t support a big decline. Remember people still need a place to live and it is not always about an investment. I read economic news from all sectors, yes things are really slow.Economist and housing experts are saying there is a light at the end of that tune we are at the bottom end, of coarse no one can predict the future..I know a woman that has nine mortgages most of homes are now worth double she generates 15,000 a month free and clear and her net worth is over 5 mill she took a chance you can do both be debt free and generate income. That is my goal, it’s about knowing how to use leverage and calculated risk. You can make money in real-estate in any market ,just got to know how to play the game. I am still a student.
I guess when it comes down to it it’s how you choose to look at it, but waiting yourself out of an opportunity is bad advise.”
August 9th, 2006 12:19
SoCalMtgGuy,
You wrote:
> Again, all these loans, even the option-ARM, have their place for RESPONSIBLE, INFORMED, borrowers. The guidelines should be tighter on these products and really look at the quality of the borrower and their ability to repay.
I just read under
http://www.contraryinvestor.com/mo.htm
> One last outstanding issue of importance is the OCC mortgage lending guidelines to come. You may remember that very early this year, the OCC (Office of the Comptroller of the Currency - the banking system regulator) set forth proposed guidelines that essentially mandate that banks knock off no-doc, negative am, option ARM, etc. lending. Well, it has been one of the longest “comment periods” we’ve ever seen for this type of regulatory guideline enactment. But, as of now, these guidelines are set to take effect by the end of summer. The only loud vocal opposition has come from the NAR (Natl. Assoc. of Realtors). We’re certain the guidelines will be enacted as almost completely originally handed down due to the fact that neither Congress nor the Senate even made a peep about them. So, there’s going to be additional mortgage credit cycle pressure yet to come.
How probably is it that option-mortgages etc are simply being outlawed this fall because of widespread misuse? Or will there be loopholes for (proven) high-income borrowers who are supposed to be more sophisticated with their finances?
Regards,
Peter
August 9th, 2006 12:38
In at the Rise,
You have a greedy friend, did you know:
> I know a woman that has nine mortgages most of homes are now worth double she generates 15,000 a month free and clear and her net worth is over 5 mill she took a chance you can do both be debt free and generate income. That is my goal, it’s about knowing how to use leverage and calculated risk.
And the greed will be their downfall. Of course, you can win gambling in Las Vegas or in real estate; you can loose, too. And leverage is a double-edged sword, increasing profits AND losses.
>Tell this to Donald Trump I doubt he would agree.
I have heard of Donald Trump (and I have seen his ugly hair style). Wasn’t he the man close to or in bankruptcy and who earns his money now rather on the seminar circle than investing his time in real estate? Go, and follow his advice NOT.
> I recently attended economic seminar with a doc of economy.He talked about the salaries going up in certain sector like the Inland Empire.Right know we are in a transition of reducing low paying jobs and replacing them with high paying jobs.
Did this doc give any reference to in which sectors the new high-paying jobs should be? I have difficulties to believe such a development in the current clima of outsourcing even high-paying jobs. Right now, many jobs are lost in housing, low and high paying.
>California is expected to grow 30% in the next 10 years putting a continuing demand on housing. Rents are going to climb at a fast pace because of low supply and rising cost.
Number of houses on the markets increases by the month, home builders are holding their projects, and their stocks are going down since the beginning of this year. Why don’t they see that their products will be in such great demand? Someone seems to paint a rosy picture here.
Regards,
Peter
August 9th, 2006 12:42
In at the Rise,
I’m sure your loan officer friend believes this, but keep in mind there were MANY highly educated brokers and analysts who “believed” in amazon at $400 a share (it’s in the 20’s now) etc. he might be a good loan officer but he doesn’t seem to understand the concept of a “market.” things CAN go down. is your friend young? i imagine he missed the previous drop (50 percent!) in the early 90’s. yes, the conditions he mentions (high rates, high unemployment) aren’t present today (and we haven’t had a big quake in while thank God) but there are other factors this time around, including millions of borrowers who will not be able to pay when their ARM’s adjust this year and next. as for the “lady he knows” with nine mortgages, let me just say those things never end well and maybe when she’s wiped out in a few years you’ll remember this post. i hope you’re friend just makes it his job and is not going too crazy with home-buying for himself. i know he’s a loan officer, and kinda has to believe the industry is healthy, but wow, he really drank the Kool-Aid!
August 9th, 2006 14:38
I was looking at Craigslist Tampa. I wondered what type of investments were out there. I found a condo in South Tampa, I think it was converted from apartments within the last two years. Let’s say I am an “investor” and I really believe real estate is a no-brainer, that this is Florida, the 1000 or so people are moving here every day, baby boomers are retiring soon, they’ll buy anything, etc, like my Gatorade after my workouts, I just have to have it.
I find a 2 bed, 2 bath condo and they sell for $279,000. Let’s assume I buy it with a 10% downpayment (I know, old fashioned), I use Fannie Mae type financing, with MI and I prove my income (blasphemy) and I buy it as a non-owner occupied property. I get a 30 year fixed rate because there is not much difference between that and an ARM. Using a rate of 7.25%, MI rate of .9%, my PIMI payment is $1,922/mo. My monthly taxes (using Hillsborough Co tax mill rates)will be $500/mo, my HOA (according to Craigslist) is $300, and though it isn’t part of my official house payment, I should probably add in housing expenses such as upkeep, advertising costs, maitenence, and clean up. Let’s say housing expenses are $200/mo. Add everything up and my total house payment is $2,652/mo. I could go IO but that would only save me $165/mo.
I can then rent out the property. According to Craigslist, the same exact property, 2 bed, 2 bath, same sq. ftg., I can rent for $1,325/mo. I may not have much luck renting it out for $2,650 to cover my mortgage payment.
If I am lucky enough to rent out this property after I purchase it and find a renter that is able and willing to pay the going rent rate, I will have a $1,300+ negative cash flow, and that is assuming my renter stays and pays. What happens if my renter leaves. I could sue but then I have to hire a lawyer and find another renter. Or my renter, who quite likely can’t qualify for a mortgage because of bad credit, can’t make his rental payment. Now I have to evict and I also have no income either which means I am down the whole $2,650.
Maybe some greater fool comes along down the road to buy me out, but what if prices don’t move and I really have to sell because I can’t keep taking the $1,300 hit. Then I have realtor fees, RE taxes, and most likely the buyer’s CC’s to pay because who uses their own money anymore when buying property? I know this is FL and prices only go up, but the St. Pete Times reported that in Pinellas County there are now 9 homes for sale for every interested buyer. I don’t think 20% appreciation is too likely in this environment.
As SoCalMtgGuy says, math wasn’t a strong point with a lot of these FB’s. The fundamentals don’t support the huge property appreciation. Using traditional underwriting methods (verifying income, normal amortization, downpayments from your own funds, etc…), there is no way a lot of these buyers could afford to take out the loans they are. These safeguards where in for a reason. The next 2-3 years will show why.
August 9th, 2006 15:28
subsonic22
I think you will like my next post….
It is almost ready to go, and should be up in the next day or so.
Stay tuned!
SoCalMtgGuy
August 9th, 2006 15:37
this was a spam i got today:
3:49 PM christiandating@qualityloan-quote.com Single? Christian? Let us match you
look at the domain name. i guess the “quality” loan business isn’t as lucrative as it once was and they’ve moved on.
August 9th, 2006 17:27
Peter,
Why would the OCC guidance have much impact at all? It only applies to depository lenders. If borrowers are willing to take these loans, and investors are willing to fund them, restricting them at depositories will only mean that they will move to non-depository lenders.
August 9th, 2006 17:50
In at the Rise,
Your loan-officer friend says:
“Did you know that rates were in the 9-13% in the late 1990’s unemployment was outrageously high and there was an oversupply of home with very few loan options… We have nothing like that today.”
I wouldn’t expect your friend to believe the bears on a housing bubble blog, but would he believe the CEO of Toll Brothers, one of the biggest home builders in the country:
“‘It appears that the current housing slowdown is somewhat unique: It is the first downturn in the 40 years since we entered the business that was not precipitated by high interest rates, a weak economy, job losses or other macroeconomic factors,’ said CEO Robert Toll. ‘Instead, it seems to be the result of an oversupply of inventory and a decline in confidence: Speculative buyers who spurred demand in 2004 and 2005 are now sellers; builders that built speculative homes must now move their specs; and nervous buyers are canceling contracts for homes already under construction.’”
August 9th, 2006 19:51
tickets,
You wrote:
> Why would the OCC guidance have much impact at all? It only applies to depository lenders.
Sorry, I am notfamiliar with the details of mortgages. Actually, I knew very little about mortgages, before I started reading here. What are depository lenders? Banks? Credit unions? Could these depository lenders still originate the exotic mortgage but not longer hold it, or is for them any handling of these mortgages then forbidden?
> If borrowers are willing to take these loans, and investors are willing to fund them, restricting them at depositories will only mean that they will move to non-depository lenders.
I see your point. I didn’t know that the OCC had no or little regulatory power over these non-depository lenders.
Regards,
Peter
August 9th, 2006 20:14
I have a question, mainly about your opinion.
Say inflation goes up significantly (maybe hitting 6% or greater and trending upward) but the interest rates remain constant (say at 12%, because the Fed is being run by an idiot). I know the economy would be fucked.
But knowing this, when should I get into the market? Answers are:
-Don’t. In that kind of environment, you’re crazy!
- Get in now (in that 6% inflation environment).
- Get in late. Someone will be screwed and I can be the vulture (if you choose this answer, what would be your timing signal)
- Stupid question. The economy will never be the way you described.
August 9th, 2006 20:18
#61
Con-men must believe what they say otherwise they wouldn’t be able to sell it to sheeple.
I have no doubt they believe it to their core, it is adaptive behavior in a socio-biologic point of view.
August 9th, 2006 22:03
HC,
I got a question first to your scenario:
> Say inflation goes up significantly (maybe hitting 6% or greater and trending upward) but the interest rates remain constant (say at 12%, because the Fed is being run by an idiot).
With only 6% inflation but 12% FED fund rate, few people would want to borrow money anymore. Economic activity would stall, unemployment rise, politicians be voted out of office. Or do you assume here that inflation rates climb and climb finally above 12% and the FED wouldn’t react even then? Then we get hyperinflation, because everybody borrows in the expectation to pay back later with devalued money.
August 10th, 2006 03:40
Peter,
The OCC regulates nationally chartered banks. The interagency guidance mentioned, for which OCC seems to be taking the lead, applies to all federally regulated financial insitutions. Those are institutions with federal charters, and/or taking federally insured deposits (depository institutions). The final guidance may or not apply to holding companies that inlcude both a bank and a finance company, but they definitely won’t apply to stand alone finance companies (Ameriquest) or mortgage REITs (Novastar) because they aren’t federally regulated.
August 10th, 2006 06:11
With only 6% inflation but 12% FED fund rate, few people would want to borrow money anymore. Economic activity would stall, unemployment rise, politicians be voted out of office. Or do you assume here that inflation rates climb and climb finally above 12% and the FED wouldn’t react even then? Then we get hyperinflation, because everybody borrows in the expectation to pay back later with devalued money.
Let’s say for this scenario that we’ve got a strong feeling that the FED @ 12% will go up, and that we wouldn’t get into that situation where inflation > than the FED fund rate. If you want another another datapoint, assume that the Republicans are still in control of Congress and the White House.
August 10th, 2006 09:00
OCC regulates nationally chartered banks because of FDIC. Feds dont care if Ameriquest and private lenders go under cause they dont “insure” them.
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