Too Little…Too Late
This is what you call ‘TOO LITTLE TOO LATE”. While I’m somewhat glad that the media is talking about this now, why weren’t they doing this 2 years ago?? Come on, it doesn’t take an MBA (it only takes a clear head and a calculator) to figure out that this was a recipe for disaster, not success.
What I am talking about, is this article from the LA Times titled: A Loan That’ll Get Ugly Fast. I REALLY suggest you read the whole thing. It is a great article on soooo many levels.
Before we get started, lets take a little test…don’t worry, it is only one question!
“Like hundreds of thousands of other homeowners around the state, Hertzberg has a mortgage that lets him choose how much he pays each month.”
Question 1. Do you think Hertzberg will chose the little amount, or the big amount to pay each month?? (Take your time…clear your head…take a deep breath…raise your hand if you need another pencil or an eraser. This is a question so tough that it didn’t even make the California High School Exit Exam…)
And the answer is……..
“Like many of them, he always chooses to pay as little as possible.”
DING DING DING….if you said the ‘little payment’ you won!!
It isn’t really any secret that when people are faced with spending a little money or a lot of money for the same ‘item’, they choose to spend the little amount. The problem is that you get ‘behind’ on that item if you pay the little amount. I saw an article many months ago in the OC Register that said something like over 70% of the people that were trading in cars in California now days are ‘upside down’. That is because people are getting these low payments for 6-8 years on assets that are depreciating faster than they can be paid down.
A similar thing is starting to happen now with real estate, except the difference is that the real estate is not appreciating at a rate to accomodate the ‘negative amortization’ these borrows are adding to the principal every month.
I have gone over the pitfalls of these loans, how they are sold by brokers so they can make a fat commission at your expense, and what to look out for here.
I suggest you read the entire article…but here is a nice little statistic to think about:
——————
In 2003, only about 8 of every 1,000 people buying a home or refinancing a mortgage in California got a pay option loan, according to San Francisco-based data tracking company First American LoanPerformance.
Last year, 1 in 5 loan applicants got one.
In the first eight months of 2006, even as the real estate market began to weaken amid fears of a downturn, the appeal increased again. Nearly 1 in 3 California loan applicants are now choosing them. The state boasts about 580,000 active pay option mortgages, about half the U.S. total.
——————
Lets pretend this was a ‘game’ in Vegas and you could place a bet on how you thought things would turn out. Would you bet that most of the 580,000 people with these mortgages are going to be earning the extra money needed to swing the full mortgage when the time comes? Are you willing to bet that appreciation saves them? Or do you think there are a LOT of over extended people out there who are going to be enrolling at FB University in the coming semesters?
Its your money…where would you put it?
Stay tuned…
SoCalMtgGuy
December 12th, 2006 01:01
I read the article. It was OK. Yet another article about stupid people doing stupid things. It’s getting monotonous in the news. Shills from the NAR and NAHB, boo-hoo schmucks on the low end of the totem pole that claim to have not understood the loans they had. Quite the cacophony.
It’s becoming worse than reality TV! Boring and monotonous.
December 12th, 2006 04:53
Hertzberg withdrawls $190,000 from the home ATM and blows it. What I think is funny is he thinks the 100 year note will be affordable. He must have missed something in Donald’s book.
No sympathy here.
December 12th, 2006 06:51
A similar thing is starting to happen now with real estate, except the difference is that the real estate is not appreciating at a rate to accomodate the ‘negative amortization’ these borrows are adding to the principal every month
The usual retort when getting this loan is, “What do I care what happens to the loan balance when the home is appreciating that much more.” Well, when the home stops appreciating, do you care now? Of course if home prices depreciate, will the borrowers just up and leave when they realize they they won’t have equity for the next 10-15 years or so. Of course, maybe the borrowers won’t have to worry about deferred interest because they all used the savings on “investments” (another LO sales claim). Although, if they followed that advice and invested in a decent stock mutual fund not named American Century Ultra (lost 6% when everyone else made double digit gains, but that’s another thread), they probably did earn more than the real interest rate charged on their option ARM. I have a strong feeling that wasn’t the case. I don’t see how this ends well and it’s only the beginning.
December 12th, 2006 07:30
“I read the article. It was OK. Yet another article about stupid people doing stupid things. It’s getting monotonous in the news. Shills from the NAR and NAHB, boo-hoo schmucks on the low end of the totem pole that claim to have not understood the loans they had. Quite the cacophony.
It’s becoming worse than reality TV! Boring and monotonous.”
What’s the matter? Did you look in the mirror after reading that article? Cacophony?? Don’t make me laugh. The media is only just getting started with reporting on this mess.
The Trillion $ train is coming and you better get out of its way. Frist stop, San Diego. Next Stop, OC. All FBs on board.
December 12th, 2006 08:27
It makes me sad to see people make choices like that– but it also makes me sad to see that they get no sympathy at all. Making mistakes is human and while you might not have made that one, it’s hard to know what might not work out and leave you a month from homelessness.
Anyway, I’ve also linked to the LAT article from my housing-bubble page. Thanks for the tip.
December 12th, 2006 08:52
Aaron,
No sympathy makes you sad? Don’t you think it is callous of Hertzberg to say “My heirs can worry about paying it off”?
Making mistakes is human, but this guy! Traveling around the world and gambling in the commodities market. His response was to blame the mortgage broker and lay the debt on future generations. He is already saying, I am too old to get a job, and he just in his 50’s What he is looking for is a bail out.
I too can show sympathy, but not in this case.
December 12th, 2006 08:57
This is a very typical case I think. As long as home prices continued to rise the party went on. Now we are see the aftermath of a 4 year party. The system needs to be flushed. Get ready for lots of REO’s and foreclosures for sale. Leverage has just killed the market.
December 12th, 2006 08:59
Aaron,
I think people have sympathy when it is JUSTIFIED. Trajic accidents, natural disasters, unforseen major medical problems, etc.
Buying a $130k house…and pulling out $190k over the years does NOT deserve sympathy. By the time you are 56, your mortgage should be going down…not up. He is a perfectly healthy individual that has done nothing more than make some poor decisions.
The thing is, most of these people knew EXACTLY what they were doing. They became ‘pros’ at refinancing and ‘playing the market’. I remember being in offices and borrowers would call the broker ‘telling’ them what they wanted…and that if they didn’t get it for them, they would find somebody that would.
Not saying this guy was doing that, but don’t tell me that 1 in 3 borrowers in CA are using option-ARMS because they are such astute investors and are just ‘managing’ their cash-flows.
Sorry, this thing is bigger and will hit deeper than most people know right now. Most of these option ARM people CANNOT afford their house in the long run…but they will get the ‘appreciation’….or so they were ‘told’.
Buyer Beware…Do your OWN due diligence and take PERSONAL RESPONSIBILITY for your actions.
SoCalMtgGuy
December 12th, 2006 09:30
One summer in my college years, I had an intern-type at the biggest employer in Central Florida at the time. One of the men in our part of the huge office would go to the dog track and gamble away his money. When I next said hello to people I worked with that summer, I learned that this fellow had taken his daughter’s college-education savings and lost it at the track, too. Made me feel sick — a “This stuff doesn’t really happen, does it?” shocker. My sympathy was for the daughter, not the loser.
Case Two. My mother was sympathetic about a neighbor of hers who, for a DUI in which he killed a pedestrian, received a penalty of losing his drivers license for life. I told her, “Mom, I’ll feel sorry for that man when the pedestrian he killed walks again.”
December 12th, 2006 10:15
SoCal,
I am disgusted by the people looking for the appreciation to bail them out. How many of these people honestly thought that their incomes would go up and that they would eventually really be able to afford the house they bought? In an up market I think everyone (except us bloggers) is an optimist. I get slammed all the time for being a renter bubble sitter, what can I say I saw this once before only last time these crazy loans were not used as affordibility vehicles.
I want to thank you for loan education. I read alot of financial and housing blogs but your insights have been very helpful and complimentary to the other info I have picked up. If only they gave better education on consumer issues in high school so as not to end up an FB like these poor schmuck borrowers. No one wants to be left holding the bag he or the guy who is still standing during musical chairs when the music stopped.
As Mr. Hertzberg said “I’m Screwed”.
December 12th, 2006 10:16
I’m sick and tired of renting in the OC, but I’ve held off buying for many years because I simply couldn’t afford the homes and was unwilling to get interest only or ARM loans. I usually would go to many properties with agents only to listen to my concience and call the whole thing off. I think I did that with 2 or 3 agents because I thought of all the risks and stress I’d be under just to make the payments.
My wife and I have been living comfortably in the last 3 or 4 years. We’re able to have fun and enjoy life, something we probably wouldn’t have been able to do if we chained ourself to a home payment in the OC. We’ve also been padding our retirement accounts as much as possible since we save a lot of money not having to pay property taxes and mello roos.
I still have a dream of owning a home. I’ve been waiting for the ball to drop. Does anyone here think OC prices will drop dramatically in the next year or two? I keep looking for a significant downward trend in the OC register, but so far things haven’t progressed passed a “stall out” phase where there’s been no movement in either direction.
Comments anyone?
December 12th, 2006 11:07
Fat Down,
Your concience has served you well. In CA there are times when it’s more advantageous to buy, and times when you’re way better off renting. I sold here in Northern CA in late 2004. At that time there were only 80 homes for sale in my town of 60,000. The vast majority of our friends thought we were crazy, especially as the prices continued to rise for another 8 months. We’ve been living quite comfortably in a rental with no debt and the ability to add thousands a month the the equity we extracted from the home we sold.
This market has seen highs that have defied fundamentals in unprecedented proportions. You can rest assured that what will follow is a period of lows that will defy fundamentals, most likely, in unprecedented proportions. My advice is to wait until the market is so bad that the vast majority of your friend’s think you’re crazy for buying!
December 12th, 2006 11:42
The reason that these situations are all too common? The facilitators in the transaction only get paid IF the deal closes. No close, no pay. Since the facilitators get paid a percentage of the deal, it behooves their personal interest to facilitate the pargest deal they can.
“Well, Mr. buyer, I could show all of these fine homes in the $400,000 price range that you could buy for your budget of $2,500 per month, but I can also show you some lovely upscale properties in the $950,000 to 1.2Million range that I can put you in for only $1,850 per month. Which would you prefer…”
Duh!
In a related note, I loved the squirmy realtor on CNBC last week who was asked whether they disclosed to the buyer when a certan house had a premium commission associated with it. His answer “Of course we disclose it. It’s on page 8 of the contract.”
December 12th, 2006 12:48
You know, what this little case study shows is how the Great American Public has NO concept of the difference between “debt” and “equity.”
If I buy a property and pay 50% of the loan amount over 15 years (assuming a not-so-usual-anymore 30-yr fixed), then I have equity in the amount of 50% of the home. Right? Am I missing something?
This guy had a loan on a house that was valued at $500,000 (or whatever)…so he OWES $500,000. He does NOT have $500,000 of equity. Even if home values appreciate rapidly beyond all reasonable values, you still don’t have “equity.” Those HELOCs and HELoans are this close to being unsecured loans…if the house isn’t worth what you extracted in that loan, then that loan is effectively unsecured. Scary stuff, and I don’t think the average consumer is taking the time to really think this through.
December 12th, 2006 13:41
Clearly this “borrower” didn’t know fundamentals about his acquired debt. Call it stupid –ignorant–naive….but the reality is –people like this need a course in home buying and financing, before ever making a purchase like this. I think some blame falls on the lenders and on regulators –they are the so-called “professionals.”
December 12th, 2006 13:45
Slinky writes:
You know, what this little case study shows is how the Great American Public has NO concept of the difference between “debt” and “equity.”
The difference is simple. Debt is real. Equity is an opinion.
December 12th, 2006 14:30
A lot of borrowers don’t understand risk and are relying on lenders to tell them how risky they are. Lending standards have gradually ceased to be indicator but people don’t understand that risk is risk regardless.
It’s absurd to assign the responsibility of figuring out your risk to a lender. Lender risk may have been tied more closely to borrower risk in the past but this has appears to have changed without the necessary adjustment of perception in the borrowing public.
I’d like to see a discussion on the difference between lender risk and borrower risk and when the two diverge.
December 12th, 2006 14:53
OC resale homes are down $45,000 since June 2006.
December 12th, 2006 15:25
Methinks lenders are preparing for an avalanche of ‘jingle mail’ as I type ;>)
December 12th, 2006 17:52
I put a bid on house today. Spoke to the realtor at 11:10 in the morning and she said she had spoken to the sellers realtor. I Assumed she put the bid in. Then at 3:15 in the afternoon she calls me back and starts talking about helping me with for sale by owner houses and prices of other homes in the area. After further discussion back in forth about house prices, I asked her if they put in my bid and she said no. I asked her to put it in and if the seler wanted to turn it down so be it.
How do I know if they presented my bid to the seller? This is my second bid so I am not so sure even if they put in my first one?
How can you find out?
December 12th, 2006 18:11
My advice is to find a new realtor.
It makes sense that in conversation the ’sellers’ realtor said we won’t take less than ‘x’, so if it is less than that, then don’t bother. BUT your realtor needs to communicate that to you.
Some sellers are still ‘holding out’ for things to recover…just like holders of tech and .com stocks. That is their choice.
BUT, your realtor needs to be upfront with you. If you aren’t getting that warm, fuzzy feeling from your realtor, then I suggest moving on.
You could contact the sellers agent to see if they received the official bid, but I don’t know how far that would get you. I would keep looking for properties and the ‘deal’ you are looking for. The supply is ONLY going to get better.
Again, I don’t have all the info about this situation, so take that into account when making your decision.
SoCalMtgGuy
December 12th, 2006 18:26
How does one approach offering a bid directly to homeowner? How does one know when a listing runs out and the seller can sell on his own without realtor fees? I do not trust either realtor in the process. So why not by pass them both?
December 12th, 2006 20:21
Try this: www.reply.com you can make an offer on any house in America. Still in beta…but give it a shot. Let me know what you find out.
SoCalMtgGuy
December 13th, 2006 10:35
Glad to see that on Yahoo news, Mortgage delinquencies a rising threat
“Subprime borrowers had a delinquency rate of 12.56 percent in the third quarter, the highest in more than three years. The delinquency rate for these borrowers holding adjustable-rate mortgages was even higher — at 13.22 percent in the third quarter, also the worst reading in more than three years.”
http://news.yahoo.com/s/ap/20061213/ap_on_bi_ge/late_mortgages
December 13th, 2006 11:02
It would be interesting to know the age of the debt. Subprime loans tend to be refinanced at a higher rate than conforming loans. The usual MO with subprime is the rate resets, the borrower goes to his/her mortgage broker and refis into another subprime ARM and get more cash out of their home. Do this every two or three years (or less) and the mortgage debt owed on the home can be pretty high. With the ARM’s, I wonder how many of these have even reset? Most subprime loans are ARM’s, so it’s not that big a surprise the ARM’s have a higher DLQ rate. If the majority haven’t reset, how high will the DLQ ratios go when they do?
December 13th, 2006 11:19
Hey, SCMG:
This is interesting. Your comments?
http://www.creditslips.org/creditslips/2006/12/why_comparisons.html
December 13th, 2006 12:44
Today’s FREE report on Miami has been released! Tomorrow I’ll release both the Las Vegas & San Diego reports. They will joins prior Q3:2006 reports on Boston, Bakersfield, Chicago, Denver, San Francisco, Seattle & Los Angeles.
thebubblebuster.com
December 13th, 2006 13:19
txchic57…
I think there is a lot of BS in there.
Everybody became a ‘rate whore’ as we called them the past few years. The subprime markets were notorious for shopping rates around. I call BS, on the “wah wah wah, I can’t be responsible…I need a politician to save me” crap.
Sorry, but loans for the most part are about risk. Sure the standards have been lowered, but just because you are a ‘minority’ doesn’ mean higher rates. I know it is hard to fathom, but has anybody actually considered the fact that more people in ‘inner city’ areas just might not have that great of credit?
Yes, there are always going to be people who will try to take advantage of others. No legislation is going to stop that. It is only going to raise the cost of doing business for everybody.
You do NOT have to pay a fee to get quotes on subprime loans. I quoted loans all day long for free…that was my JOB. Granted, the loan still has to to through underwriting, and the rate could change…but if the borrower doesn’t like it, they don’t go through with the loan. No charge to the borrower. A half decent mortgage broker can help a subprime borrower shop for the best rate.
And yes, there are ‘Truth-in-Lending Act disclosures’ in the subprime world as well.
I knew this was going to happen…the moment things turned and the ‘get rich quick’ ended, I knew there would be a large segment of the population turning to guvment for a ’solution’.
Sorry, but I am all out of ‘compassion’ for people that make bad personal decisions. You want to live on the flood plain and not buy flood insurance…fine. But do NOT ask for one effing penny when it floods. You watched Robert Allen ‘no money down’ path to millions and you didn’t quite get there…tough. Not my fault. Go lick your wounds and try again. Don’t go cry to your politician for a taxpayer assisted solution to your problem.
I know I got off track…but this is going to be even more prevalent in the next few years. And you better PRAY that guvment stays out of things.
SoCalMtgGuy
December 13th, 2006 14:28
Actually Hertzberg made the right choice. A man, with no job, no children, and no real attachment to anywhere, can blow his money as he pleases.
He only has himself to look after. He doesn’t know about his heirs, and he doesn’t seem to care anyways. Granted if he lives long enough he will be in a sorry state, but at least he had his fun when he could.
December 13th, 2006 14:51
SCMT: What about the allegation that a subprime bwr often didn’t know the rate or terms of his loan until he got to closing. I personally can’t imagine allowing that to happen to me but they claim it does.
December 13th, 2006 15:10
Txchick57
Again, that is only if they don’t ask! People can clain whatever they want…and it does happen…but only because the individual LET IT HAPPEN!
I know the crap they pull at the signing table…but believe me, if you don’t sign…they don’t get paid!! Some people will try to get away with whatever you will let them.
When you go buy a car, does the salesman focus on the rate and making sure you can ‘afford’ it? NO. He tries to ’sell’ you a car. IF and when you ask, they will tell you what financing you qualify for…but if you don’t ask, it is assumed it isn’t important to you.
Just like people who bought stocks without doing ANY research, you had people doing that with houses.
You will know as much about the loan transaction as you want to know. If you don’t ask or take an interest, don’t expect anybody to ‘force’ it on you.
If you let yourself get strung along to the closing table for a several hundred thousand dollar purchase without knowing much…that is on you. Put your foot down until you get answers. Oh I know…people were ‘emotionally attached’ to the house. Well, they can work 40hours a week, 50 weeks a year, for many years to ‘pay’ for their mistake…OR they can spent 2-3 hours doing some research…or EVEN hiring somebody to help them. If the only advice you are getting is the 22 year old kid on the phone…then yeah, you could be in trouble.
This REALLY ISN’T rocket science. Yes, it can be confusing, but if you do some basic research and ASK questions, you can prevent most problems. You have high-school dropouts doing it all over the country, so if they can learn it…you can too.
People just get lazy…and want to place complete faith in a ‘professional’. Sorry, but you can’t blindly trust people these days.
I know it sounds harsh…but nobody gave a crap when the times were good…so don’t come cry to me when you didn’t make your ‘easy millions’ in real estate.
SoCalMtgGuy
December 13th, 2006 16:53
Fair enough. I think I’m known in the bubble world to have earned my chops as a housing bear so nobody gets any sympathy from me. I was just surprised to read this stuff. It is all written from a consumer-friendly perspective but the people who run that blog are well known bankruptcy academics. This is the kind of stuff you will hear when the drumbeat for “mortgage reform” starts, though, count on it.
December 14th, 2006 07:18
I think there are laws on the books already for mortgage fraud. It just seems to me that the problem has been the ‘enforcement’ of these laws for quite some time now. It’s too bad that they don’t have a law against someone who has been asleep at the switch, or otherwise has been persuaded to turn a blind eye to the problem via monetary incentives from an ‘industry’ (or should I say ‘racket’) that stands to lose the most.
December 14th, 2006 07:34
I knew this was going to happen…the moment things turned and the ‘get rich quick’ ended, I knew there would be a large segment of the population turning to guvment for a ’solution’.
It looks like getting away with mortgage fraud is a very nice way to ‘get rich quick’..
Now, can you imagine what’s going to happen to the purchasing power of the US dollar if everybody decides to do this for a living?
Here is some free printing press money, but don’t worry! The guvment will ‘bail out’ all the stupid and/or crooked mortgage lenders and mortgage investors that made these loans happen — and everybody knows that sh*t happens!
December 14th, 2006 08:57
SCMG: Your comment on allegation that outsourced underwriting leading to problems in prime market too re suitability?
http://www.creditslips.org/creditslips/2006/12/suitability_now.html#more
December 14th, 2006 08:57
BTW, if you have time, I think you should post on that blog and answer some of these charges.
December 14th, 2006 09:43
I think people have a hard time understanding the difference between mortgage broker and mortgage banker and who the lender is.
I did not know of one ‘lender’ (aka…accredited, argent, ameriquest, countrywide, downey, new century, etc.) that outsourced underwriting.
I do know quite a few BROKER shops that did. Some of these shops were ‘lenders’ in a sense that they would get a credit line, make loans, then sell the loans (or try to). Most of the credit lines that I saw were 1-3 million. So yes, in a sense, these people were lenders, but having a 2 million credit line doesn’t let you write very many loans in Ca.
Outsourcing the underwriting can open the door for problems, and that is why the major lenders do not do it (that I know of). Every major lender has a pretty organized underwriting system…and I don’t see how ‘outsourcing’ it would be practical on the scale that the major lenders are doing loans.
Not to mention the privacy act and security rules they have to abide by. I just can’t see a major lender having lots of people underwrite from home, or non-centralized offices.
Of all the things that have contributed to this bubble, I don’t put ‘outsourced underwriting’ in the top 10. I could have missed something here…or the lenders could have had some operation I didn’t know about. But since I was an underwriter for a major lender for about 6 months, I think I would have known about it.
SoCalMtgGuy
December 14th, 2006 12:01
Your on record with 2007 being the ARM reset hell year, the first I read of it. If you are right, you’ve outforecasted them all.
December 14th, 2006 12:44
Again, though, we need to see if what the Countrywide CEO said is true.
************************************
First, borrowers are becoming more educated about this payment shock and are looking to refinance ahead of it. Second, the low interest rates right now and the tremendous capacity in the subprime mortgage market allow borrowers to refinance. Countrywide posted a fascinating slide on its Web site in its presentation at the Merrill Lynch Banking Conference this week, showing that two-thirds of those loans with resets on or before Dec. 31, 2007, have already been refinanced into other loans. Without a recession (and I’m no economist), the Pay Option furor appears overblown.
Source:
http://www.thestreet.com/_rms/markets/activetraderupdate/10323047.html
Long Countrywide but from over 10 years ago.
December 14th, 2006 13:05
Yes, they HAVE been refinanced into other loans…other ARMs and option arms that just ‘delay’ the inevitable. NOTE how he doesn’t say what they refied into.
I have shown countless times the difference in payment between I/O, ARMS, fixed, option arm, etc.
Nothing has changed. Just because you have ‘equity’ doesn’t mean you can afford a fixed rate mortgage. Yes, a lot of people have refinanced….into other ARMs and option ARMs. I’m sure people did get fixed rates that could afford it.
But don’t think that just because they ‘refied’ they are safe. Actually, I think they could be worse off. If they are locking into another 2-3 year loan, they could be REALLY screwed when it comes time to refi the next time around. Either way, if people just keep refinancing and never paying off/down the principal…this thing will only prolong and be worse.
In the subprime sector, it is like an annuity for the brokers and the lenders. Get people coming back to refi every 2-3 years. Granted, this only works if things keep going up up up. Which is no longer the case.
Either way, I still stand by 2007 as being ‘the year’ when this thing really starts to happen.
SoCalMtgGuy
December 14th, 2006 13:10
I agree with you. We just always want to hear the other side of the trade.
December 14th, 2006 13:23
Countrywide is a good company, and will fair better than most. But don’t think countrywide is above it all. There are/were an option arm leader in the business.
if property values have a noticable decline next year that can’t be hidden in ’seller consessions’ and ‘kickbacks at closing’ look for there to be MAJOR problems.
You have all the borrowers going negative on property that is declining. When they walk…the lender also loses that ‘480 million’ that is negatively amortized (from the article above).
Its all good on the way up…but unless a lot of people start making a LOT more money the next 5 years…it is GAME OVER for many people.
Sorry, but there are no new fundamentals.
Thanks Txchick57
SoCalMtgGuy
December 14th, 2006 23:16
In my state, all mortgage records are available online.
And my analysis of the data seems to reveal that both txchick57 and SoCalMtgGuy are correct:
1- Most people with these crazy loans resetting next year have already refinanced.
2- In the process, they took a lot of cash out. We are talking about real pocket change here ($100,000 to $300,000…the 20-40% appreciation seen in the last 3 years).
For example, one of the FBs here has about $200,000 of borrowed cash pulled out of a investment house that has been sitting empty for 12 months with a $800,000 mortgage and a selling price in the $900s…Even factoring in some living expenses, the $200,000 gives this FB at least 2 year before having to contemplate foreclosure…
3- But most refinanced into other crazy IO loans…(can you smell that addiction to borrowed money?)
==> May be that’s why in most parts of the country, we are NOT SEEING REAL PANICK and the stock market is so BULLISH!!! Even the CREDIT MARKET does not show signs of PANIC!!!!
=> The FBs have pushed back the payment shock date by 2-3 years and they have enough borrowed cash available to pay the bills and service the debt.
=> Even the flippers who bought at the high in late 2005 are still in the black overall, if you factor in all the profits made on previous flips.
Conclusion:
Being PESSIMISTIC about the US economy is a DIFFICULT proposition and it will be a long time before the 30% drop that some are forecasting… It easy to be right over the long term, but you will surely go bankrupt before you can cash in on your contrarian views…
If you don’t see why, try shorting that so overvalued GOOGLE stock!!!!!
December 15th, 2006 10:19
I partially agree with 2007 as being ‘the year’ when things get started. I partially agree with it because though it has not been said, it sounds implied as that will be the worst year.
Yes 2 year fixes and 3 year fixes were popular. But in ‘04, and ‘05 you could almost get the exact same interest rate with a 3 year fix and a 5 year fix. I have heard from numerous clients (I am a mortgage broker) that they only want to live in this condo or house for 3-5 years. So I believe that most people got 5 year fixes in 03 and 04 and they will be hurt the most.
Going back to 07 being the year it all starts to happen is correct, but 08 nd 09 (when the 5 year fixes from the lowest interest rate period in history reset) will have the biggest influx of payment shock. 07 will strip away the equity that was gained and make it impossible (by todays guidlines) to refi. Banks will have to come up with 150% LTV’s to allow consumers to refi.
SocalMrtGuy, When you were in the business do you remember your company at times actually having higher interest rates for a 3 year than a 5 year? I dont think it happend much in Subprime, but in the A paper market it was happening all the time.
December 15th, 2006 12:06
Ending 2006 with 6% interest rates is really unbelievable. A gift really.
It will help some, but delay the inevtiable for many. After all, if they could really afford a 30yr at 6%, why didn’t they do it before? Its been 6% +/-.5% for 5+ years.
What they are doing is reevaluating their situation and thinking they can scrimp by on other expenses and still avoid the ARM rest and keep their house. However, by doing this they will starve consumer spending and bring about a recession.
Its easy to see why these housing busts last so long, by the time everyone spreads out and gets loans of varying periods, instead of one large wave of default, it becomes a wide pool of troubled waters…
Many areas are going to see an inflation adjusted 40% drop in the future. Whether it happens in 2 years or 6 years, in fact it might be more desirable if it was shorter.
December 15th, 2006 13:45
This is from RealMoney today (written by the same guy who said the Dow is going to 16,000 next year). I just put ‘em out for comment.
4. “The Great Housing Depression of 2007.” I just don’t see it, not with 4.5% rates on 10-year yields and short-term interest rates getting cut at any sign of a more severe downturn in housing. Although, that said, I do somewhat agree with No. 5.
5. “Foreclosures steadily rise.” I do believe that the subprime, BBB-rated category of homeowners is in trouble. These are people who have never been granted loans before and now they’re getting mortgages at almost the same rate a herd of Bob Rubins would get them. However, these also are exactly the sort of people who don’t have a huge effect on the economy one way or the other when they abandon their homes.
Kass says that the asset-backed securities, or ABS, market will be fractured by the volume of foreclosures at the subprime level. I’ve spent some time doing due diligence on very smart funds on both sides of this trade. I have no idea who is right(Nobel-level economists were doing the modeling on each side, so who am I to argue?). However, if the ABS market does start to fracture, enough hedge funds and banks are short the subprime tranche that a short squeeze would buffer any fall.
6. and 7. The hedge fund and derivatives industries. These are scary “surprises” worth pondering. If the subprime market falls apart, banks such as JPMorgan Chase (JPM - commentary - Cramer’s Take - Rating) could be exposed to trillions of dollars in counterparty risk. This is a doomsday scenario, and I know at least one multibillion-dollar hedge fund that told me it has taken out credit insurance on JPMorgan as a bet that this actually will happen. But there’s a reason this type of insurance trades for pennies on the dollar: Most people believe this doomsday scenario is extremely unlikely. I’m in that camp.
December 15th, 2006 13:49
“I have heard from numerous clients (I am a mortgage broker) that they only want to live in this condo or house for 3-5 years.”
That is one thing that cracks me up. That is how people justify getting a ‘low payment’ on a loan. “ah, I’m going to sell it in a few years anyway. I won’t be paying much principal anyway…and the appreciation will make up for it…so I will just get an I/O ARM, or option-ARM.”
Even if 2007 isn’t a catastrophic down year, and is just a down year, it is going to make it next to impossible for these people to refi, or sell and make a profit.
The fundamentals WILL return to the markets…it is just going to take at least 3-5 more years…possibly even longer.
SoCalMtgGuy
December 16th, 2006 08:19
When annual home sales decline to 4 million these people are well and truly stuck. 40 years ago moving every 6-9 years was common. In the last decade this changed to those staying put and serial repurchasers. This lkely 50% reduction in margin on top of a 50% reduction in volume fundamentally changes the mortgage industry. Millions of people trapped in starter homes that don’t meet their needs 5 years from now in mortgage products that are so costly that they cannot save but tighter lending prevents them from refis. Equity extraction is a memory as well.
2009: “We’ve reviewed your full doc refinance application for your 2005 LIBOR plus 3 and we have some bad news. Under current lending stanards you don’t even qualify for the loan you have.”
December 16th, 2006 10:49
Housing bubble or not, people who are tapping equity out of their house are in a sorry state. The fundamental, they are missing is that the loan balances have to be eventually paid back. You can have a $1 million dollar equity in your home, but if you have $500,000 loan, you need to pay it back and your income has to be up to that debt level. For the $500,000 loan with an in annual income below $150,000 you might be in hot water.
When you refinance, you get saddled with closing costs, loan origination fees, points, you name it and that increases your debt. Most of the people will “take cash out” to pay credit card debt. Option ARM loans with minimum payment will add to your principal and few years down the road you increased your debt.
Conclusion, refinacing is a bad option bubble or not, with some aggravation if house values decline.
December 16th, 2006 11:07
Bombo_buster said:
…”The fundamental, they are missing is that the loan balances have to be eventually paid back.”…
I don’t think this is true for the biggest FBs with no doc (= no job) interest-only pick your payment 100% financed loans… They are simply not planning to repay the balance and will default…This is why their borrowing patterns are so INSANE!!!!
Where are they going to find the hundreds of thousands $US needed to pay back the loan?
Conclusion:
The costs associated with defaulting are so minimal after a couple of years that this strategy makes sense especially if you spend the money on things that can not be seized like living expenses…
This people really got a free CALL OPTION from the lenders…If there is appreciation, the equity is theirs to take and if prices are falling, they can simply walk away or default..
December 17th, 2006 10:33
No Sympathy here! I have been in mortgage lendering for 14 years now and 12 years thru 2004 I have been in CA. I left CA. in August of 2004, I was born and raised in CA. Simply stated people in CA. believe that their house is going to be their retirement plan. They use their house like an ATM and believe forever housing will go up and bail them out of their overspending. I many times try to convince my borrowers to take 30 Year Fixed Mtg but they didn’t, they wanted the cheapest payment.
If you are prudent and you bought before 2001 you are sitting pretty as long as you didn’t use you house as an ATM.
It was amazing how many people flaunted the fact that they were brilliant just because they owned a home. Amazing!
December 19th, 2006 21:12
I’ve posted before about the refinance transactions our office closes. Many people this year, particularly 3rd quarter ‘06, were refinancing into OTHER I/O ARM products, not 30 yr fixed. They couldn’t. Payment would have been too high and qualifying would have been almost no-go in that scenario.
The majority rolled closing costs into the loan and a good portion just went from one pre-payment to another. My wife and I discuss loans we close all the time and when I mentioned that I thought an $11,000 pre-payment penalty was the topper, she interrupted and said, ‘no, no…we had one recently that was about $14,000. And the people signing loan docs thought nothing of it. Very cavalier. I’m thinking in my mind, holy crap, that’s equity that is poof!… Gone!
Multiply this scenario across the country. Wow.
December 19th, 2006 23:27
“Many people this year, particularly 3rd quarter ‘06, were refinancing into OTHER I/O ARM products, not 30 yr fixed.”
I know we’ve read a million times about ARM resets in 2006, 2007, and 2008 being $600B, $1T, and $1T respectively. Well, 2006 is almost in the books - do we have revised numbers for ARM resets in 07, 08 and 09?
December 20th, 2006 04:49
S-Crow,
I just saw a loan close recently where the pre-payment penalty was higher than $14,000. If I could re-write the predatory lending laws, I would include PPP’s as a percentage of broker fees. If you include the PPP as part of the 5% (or 7%) maximum fees, you would eliminate quite a bit of these unnecessary loans. I can’t believe how many calls I’ve gotten from people who just refinanced more than once in the past 12 months. A majority of these are subprime loans where you know there is a fat PPP to deal with.
December 20th, 2006 08:54
SCMG or anyone else in the biz: I got this email cc’d to me just now. Why, I have no idea. The person sending it is a mortgage broker. What does this mean?
*******************************************************
Does anyone know of a lender beside Fremont and First Franklin that swaps borrowers scores for 100%??
Thanks.
_________________
Senior Loan Officer
December 20th, 2006 10:06
Subsonic22-
Yep. So, in the cases we describe, the borrower increases their base loan amount by many thousands over where they were initially. The funny thing is the payment difference is arguably minute, but they just increased their debt load and the LO is laughing all the way to the bank. I cannot believe how lucrative the sub-prime market is.
Your thoughts about broker expenses.. utilizing PPP’s into the fold is interesting.
I can’t count how many times borrowers signing loan docs comment about how they paid off all their (or much of it) CC’ds, Car Loans etc and their payment is now manageable. I’m thinking in my mind, ‘wrong. You just shifted the debt to your house and it cost you $10K to do it.’
We are not an escrow company anymore. Feels more like we are a credit bill paying service.
December 20th, 2006 11:11
txchick57
When doing a loan where 2 people (or more) are on the loan, then the person who makes the most money (or states the most) is the ‘primary borrower’. Even if they ’state’ the most, it still has to be somewhat believable.
I believe the type of loan they are looking for is one where they will take the co-borrowers score and go to 100%.
There are some cases when this doesn’t make sense…here is a typical situation: husband works full time, wife doesn’t work, or works a part time job, but has a credit score much higher than the husband. Sorry, can’t use her credit score to ‘qualify’ for the loan because she isn’t the primary borrower. And you can’t ’state’ her income to be x-amount if she is a housewife, because she doesn’t have a job that can be verified.
I also remember a case when it would have helped me out had we been able to do that. It was a full-doc loan and both husband and wife made pretty much the ’same’ money. But when it came down to it, the wife actually made about $150 more than the husband…but his score was higher. So even though they were almost ‘equal’, had to price the loan off the lower fico score.
Sometimes it doesn’t even have to be a big difference to make a big deal in the rate of the loan. There are breakpoints that are usually about 20 fico points apart until you get to a 700 fico. There is a decent difference in rate between somebody with a 599 fico, and somebody with a 602 fico. That is when getting your credit up can save you .25-.5 or more on rate depending on the breakpoint. That is also why people will try to use the co-borrowers score…and obviously some lenders are catering to that…I just can’t believe they are doing it to 100% now.
I hope that helps.
SoCalMtgGuy
December 20th, 2006 14:38
If you have two borrowers, husband and wife, one has good credit and little/no income, other has income but bad credit, that is a loan I would normally do as a no doc. Use the low income/good credit as sole borrower, only drawback is you need at least a 5% downpayment. Good part about this is that the lender doesn’t care where the 5% comes from. If it is a purchase, the closing costs can be mostly financed by the seller. However, with 100% financing the rage, it becomes more dicey for the lender.
Of course, when the norm is 5% down, it won’t be long before someone else comes along and lowers the bar. Here is a recent e-mail I received from an account executive:
680 MID SCORE!!!
OWNER OCCUPIED
Yes, It’s a “TRUE NO DOC”!!!
PULSE IS REQUIRED!!!
SAMPLE PRICING:
1st on a 5 year arm, interest only @ 6.75% par, 7.5% pays 1pt., 8.25% pays 2pts. (No prepay)
2nd on a 30 year fixed @ 12.75% par (No prepay)
Prepays are available for even better pricing!!!
I wonder if the end investor knows what their money is going towards.
December 20th, 2006 14:54
subsonic 22
I agree with you that the no-doc loan can be used. But when you are dealing with people in the 500’s and low-mid 600’s, they usually aren’t eligible for those loans…not to mention, they ‘need’ 100% financing. Even putting 25k down on a 500k ’starter home’ is hard to come by for most of the people I saw.
But yes, the lenders will keep competing and lowering the bar to ‘drive volume’ and help people ‘own a piece of the american dream’.
SoCalMtgGuy
December 21st, 2006 08:37
Would one of folks with the info be so kind as to post where the FICO “breakpoints” are? What’s the difference, say between a 685 & 700? Thanks!
December 21st, 2006 10:01
That’s been the problem all along. It has now reached a point where ‘a pulse’ is the only requirement for a loan.
December 21st, 2006 10:33
FICO breakpoints really depend most on the loan product being used. For example, a conforming Fannie Mae mortgage, one where you verify income and assets, you have to run through an automated underwriting system called Desktop Underwriter and that basically approves your file. There is not a specific credit score you need to get approved (although if you have a borrower with a 500 fico score and they want to borrow 95% to buy a home, don’t waste your money trying to put it through). I have submitted over a thousand requests through DU or LP (Freddie Mac’s system). Typically the closer you get to 100% financing, the higher the credit score you need. I can remember about 600 fico score VA loan approved by DU at 100% income and a 50% debt to income ratio. DU might not like a 90% cash out refinance even if the borrower had a 660 FICO score. There are so many variables that go into the DU/LP scoring model, you really can’t guess what the answer will be if you know you have a “borderline” loan (ex - someone with a 640 fico, wants 100% financing, and 45% debt to income ratios).
Where fico scores do matter the most are in the subprime, alt-a, and second mortgage area. For example, let’s say someone wants a second mortgage and a 620 fico is needed for approval. If your borrower has a 619 fico, they aren’t getting the loan, period. FICO scores for those programs are very strict. There is no gray area like there is with Fannie/Freddie products. Usually 580 is needed to get 100% financing via subprime if you fully document your income. I see 640 needed to get 100% financing with a stated income product, it was 620 but guidelines are starting to tighten. Usually subprime and alt-a’s provide better rates in 20 point increments, and usually give the best rates at either 680 or 700+. With your C + D and below credit, you need at least 500 or you don’t get approved. This doesn’t matter much on purchases but it does on refinances. If a borrower is below 500, there is pretty much nothing other than private funding that can be done for a borrower. LTV’s, occupancy type, loan purpose, property type, documentation type all work in conjunction with respective credit scores in determining what someone qualifies for.
December 26th, 2006 16:02
OK, I went and searched up the FB blog, which stops in early 2006, so I’m guessing it came here.
SoCal, would you please call or email me? I want to put together a show/DVD series called Real Estate Reality, primarily for the public benefit, as you stated at the other blog where this FB stuff started. Seeing you are an AE, but like you said it would piss some people off to recommend against bad loans, would you help me?
Here’s the thing: Once something becomes common knowledge, there is less pressure not to talk about it. But I need to put this together SOON, to help more people Before they are FBs. My volume of work is down 65% or so, no surprise if you are not deep in denial. Of course Forensic Appraisals can be done to replace cashflow, through I guess Loss Mgmt depts. If you can send me any contact info for those types of clients, that’s awesome, truly. My goal is to be kind of Suze Ormond of homeownership.
One of the big problems in South FL, where I live/work, is that the Insurance is doubling and Tripling, causing bigtime payment shock, Just at the time when ARMageddon kicks in, for the TFB combined effect… Add our large number of foreign borrowers, who have NO clue how to find this blog, or what the terms LIBOR, Fed, MBS or anything Else mean, and it’s truly a mess. All those who cut the grass, wash restaurant dishes or take out the trash, are finding it hard to live here and suddenly, for us. CA has been way high for decades, and your incomes to a large degree compensate for that. I wonder how they’ve kept a lid on it and kept the public believing that more still move In than Out, of FL and CA?
I talked to a data vendor the other day, trying to get foreclosure listings (they have someone go to the courthouse and get Lis Pendens and key them in, daily) In Broward county alone (Ft Laud area) there were 53 keyed in One Day last week. However, when I went to the official county recorder site, I see only 3 filed in 3 weeks from Dec 5 to Dec 26??
OK, lag time, but let’s face it, was November not pretty much Way enormously busier than that anyway?? Assuming it took them a month to get it where the public could see it…. Now, does that mean we’re sandbagging records, and if so, why? To avoid wholesale panic, or to let the sharks get a headstart on foreclosures? Doesn’t add up to me. Can you help me here?
Another thing we have here, that is Doubtless replicated nationwide, is the “Investment Club” or Foreclosure Group, which is typically owned by some cats that skim the cream and flip houses to the general membership. I’ve offered to speak FREE at their meetings and it’s declined. Why? They pay (or have the members pay) Big like $100 each, to see national “make a million without trying” so called experts, and these people hawk books, DVD’s mentoring services, hard money lending, data services and more to their captive members through email, direct mail and meetings.
There are so many ways the public is fleeced in real estate, and I can’t pay attention, much less to produce a show. Speaking of which, see Oprah and Nate singlehandedly solving the oversupply? I love it when a plan comes together. And two shows named almost exactly alike, to create cashflow for someone other than the viewer, “Flip This House” and “Flip That House”. People Believe what they see on tv, is the scary part.
It seems like “equal time” is in order. I remember when they advertised cigarettes on tv. And there was this anti-smoking ad, a man and his adorable baby boy go walk in the woods, skip stones, and each time they do something cool, the voice goes, “Like father, like son”. Then he sits down and lights up a cancer stick, “Like Father, Like Son…. Think about it”
I say we take a Fraction of the Windfall property tax revenues and fund a series of anti-stupid loan ads, and anti-thinking you’re qualified as an investor, “don’t try this at home” ads. But what do I know? Maybe a big lender or Real Estate franchise would help fund it, or NAR.
Who am I kidding? Appraisers make too much sense. Kind of like the old days when someone was smart, they made him a priest or killed him, if he didn’t go along. The same figuratively happens to us, as we’re paid 20 to 50 times Less than LO’s & realtors but then we’re a “necessary evil”. Well, 90% of us are now officially corrupt or ignorant, having come into a market so far removed from the present one, and so quickly, that our poor little heads are spinning, for the most part.
OK, so now go up a couple of paragraphs to how uninformed bwrs are, and now apply that to 90% of presently active realtors, mtg brokers, and appraisers. Nobody saw the problem because we’re too close to it and it’s changed (on the face, though lots of us saw it coming) so fast. When these people were shown how to do their jobs, that was almost a different job. You had only to type a listing into MLS and stand back while the offer stampede took place. Same goes for the rest of the industry, and greed is very strong. Now that they, too, have big bills, are FBs &/or have 4 investment properties, they need to keep the lies flowing to pay for it all - hostage to the lifestyle the boom created.
FNMA changed the forms to include a section where we analyze the contract. But then Nobody created a single course to teach appraisers how to DO that. That’s just one small issue with the whole system. And states do it their own way, and maybe they record stuff their way too.
Check out China’s national debt as a percentage of GDP: 24% as opposed to Our 64% and Europe’s 67%. That bothers me, but of course there’s not a damn thing I can do. I already voted, which our complacent citizens have by & large stopped doing.
Chavez and Ortega won, spelling some short-term possible relief for south FL, and the boomers retire to sunbelt, not cold places. However, FL no longer enjoys affordability. The state has $8.7 Billion in windfall property tax revenues, and we will have to appeal One By One to get it changed. They increase taxes blanket, yearly, whether they need it or not.
Man, I feel like running for office - oh yeah, I’m broke. You need money to get to help make bad decisions, unlike the people who have to actually Live with the bad decisions the rich politicos make…. That seems wrong somehow, doesn’t it?
Doreen
December 29th, 2006 14:59
I know there was a short post after that long one…but I accidentally deleted it…SORRY to the poster!
SoCalMtgGuy
January 23rd, 2008 08:10
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