Waking up to a CNBC nightmare…the Hillary interview dissected
First off, thanks to those people that keep commenting and e-mailing me their support even in periods of less than frequent postings.
I know it seems like a lot is happening, and it is, but now that everybody (including people hand-writing fortune cookies in China…which just happen to be holding a couple hundred billion of our mortgage debt) now knows that there were some ‘risk assessment’ issues the past few years in the mortgage market, I didn’t feel like I was adding as much value as when I was one of a few people warning about what was coming.
I was gearing up to get a new post done anyway…then I woke up to my TV the other morning a few minutes before CNBC’s Dylan Ratigan was going to interview Hillary Clinton.
Ohhh…where to start. I guess I will start with the mortgage ’solution’ as proposed by Hillary. First off she wants increased standards for mortgage brokers. OK, I will go along with that. Since there are NO standards for mortgage brokers right now, some standards might be a start.
“SoCal, what do you mean there are ‘NO’ standards for mortgage brokers?? …they have to be licensed…right??” Well, not exactly. A real estate license covers a person to be able to do real estate and mortgage transactions. That license focuses more on real estate than mortgages and finance. BUT the REAL PROBLEM is that anybody can be a loan officer!!! I had broker shops where 1-2 people had their ‘broker license (RE license)’ and there were 10-100 people selling loans ‘under’ that license. All of the paperwork would have the ‘licensed brokers’ name on the 1003 (the mortgage application form), but it was ‘Joe-the-loan-officer-that-cold-called-all-day-long-that-dealt-with-the-actual-borrower’ who did all the work. It was all of THESE people that were selling loans with no verifiable training or license and met NO standard to become a ‘loan officer’. The only standard they met was that the ‘licensed broker’ wanted another 100% commission person working for them. No skin off their back. If they sold loans…cool. If not, no worries. Didn’t cost the ‘broker’ anything more than maybe some time and phone bills.
Let me make it simple. I have a Series 7 or ’stockbroker’ license. I cannot open up a shop and have 20 people calling clients selling them investments under my license, BUT that is what happened in every city in California as you could have people sell loans under your ‘California Real Estate License’ as long as the licensed person’s name was on the paperwork.
Now here is where Hillary starts veering off course. This statement shows she does not totally understand the mortgage industry:
“A lot of buyers think the brokers are actually representing them, when we know the brokers get paid depending upon the size of the mortgage they are able to sell,” - Hillary Clinton on CNBC
That is NOT really true. Mortgage brokers do not really control the size of the mortgage. If you and your Real Estate agent find a property, and negotiate a price of $450,000, that is the size of the mortgage you will get (assuming you don’t put any money down, or get a 103% mortgage, etc.). Your mortgage broker can’t ’sell you’ a $550,000 mortgage for your $450,000 home. Mortgage brokers can commit fraud on refinance deals by working with an appraiser to inflate the value of the property so they can ‘help’ the borrower take out more money. The funny thing is, the borrowers were usually happy about this. Very few times did I ever hear of a borrower that wanted a specific amount of ‘cash-out’ on a refi. Usually I heard “as much as I can get”, or ‘max cash out’. They probably wouldn’t be complaining about the extra cash-out if property went up every year like the ‘experts’ said it would.
That said, don’t think the borrowers didn’t know what was going on. MANY of the borrowers out there knew, or learned how to take advantage of the ‘easy money’ available. They knew how to get inflated appraisals and work the brokers. They would call brokers until they found one that would help them. So don’t think that every borrower was ‘unsuspecting’ and just wanted a ‘home to LIVE in’.
Let’s move on…
Then things get really hairy as she proposes that the TAXPAYERS fund a ONE BILLION DOLLAR federal program that is supposed to help state and local governments help at-risk homeowners avoid foreclosure. She says these programs will go to help ‘unsuspecting families’ linked to unfair mortgages. I don’t want to know the ’standard’ for handing out this money…as I’m sure there isn’t one, just like handing out credit cards after Katrina. Another ‘feel good’ program that isn’t thought out and becomes nothing more than another billion dollar boondoggle. If you really keep looking, there is another BILLION dollar fund she wants to create as well. As much as I hate to send traffic to her site, you can read her mortgage proposal for yourself.
IF the government IS going to help people, here is THE STANDARD that needs to be used: Only people that put 10% or more down, got a full-doc loan, with a 15,20 or 30 year fixed-rate mortgage should be eligible for any sort of help…and that is IF the taxpayers should help at all. I know that ’sh!t happens’, but government shouldn’t be in the charity business with taxpayer dollars, and certainly not to help people that made poor real estate decisions.
While we are at it, I should just address a few things she has in her ‘plan’ to address the mortgage industry. Of course, it is always good to find a ‘victim’ that needs to be ’saved’ by government and politicians. I just scanned the US Constitution again…in case I missed something the first 100+ times, but it says nothing about government helping to make sure you can afford your home. Here you go…from Hillary’s site:
New Hampshire resident Kristi Schofield joined Senator Clinton in Derry today. On July 31st, Kristi and her husband Paul lost their home of eight years in East Hamstead, NH because it had been purchased by the bank at a foreclosure auction. Yesterday, their mortgage company asked them to be out of the house in 17 days. They had planned to raise their three children and spend the rest of their lives in their home, but their adjustable rate mortgage payments continued to climb from $2,400 to its current level of $6,000 a month.
“We tried to do the right thing and continued to make the payments as long as we could with our savings and what earnings we had from unemployment, temporary and part time work. My husband had a good job, we had a great home. We were living our dream. Hillary Clinton is standing up today because she wants to help protect the American dream,” said Schofield.
I don’t get it, how are they losing the home NOW, after EIGHT years?? The ONLY way they could have a mortgage adjust from $2400 a month to $6000 a month is if it was a ‘neg-am’ or option-arm loan. There is NO way a basic ARM loan would have the payments go up that much. I am willing to bet they didn’t get an option-arm loan 8 years ago, so that means they refinanced and pulled some money out along the way. I don’t know the RE market in New Hampshire, but I would bet that property appreciated over the past 8 years…call me crazy. Either way, a $6000 a month payment would put their mortgage balance somewhere between $800,000 and $900,000 dollars (depends on too many unknown variables). What I want to know is what these ‘victims’ did the past 8 years. How many times did they refinance? How much cash did they pull out? Besides, since when was being able to live in an 800k house guaranteed as part of the ‘American Dream’? The complete and total lack of personal responsibility in this country makes me sick. But what do you expect? The politicians are all too eager to ‘help out’…but with OPM (other people’s money). Sad…
In response to another question regarding lenders ‘exploiting’ borrowers, here was her reply (sorry for the all caps…that is how it was on the CNBC site):
SENATOR CLINTON: I WILL GIVE YOU ONE EXAMPLE. THIS WHOLE IDEA OF PREPAYMENT PENALTIES WHICH ARE OFTEN BURIED ON PAGE 700 OF FINE PRINT. PUT HOMEOWNERS IN IMPOSSIBLE POSITION. LOT OF THEM WHO HAVE TRIED TO PAY OFF THEIR MORTGAGE, MORE MANY FIRST-TIME HOME OWNERS SEEMS LIKE THING TO DO HAVE BEEN HIT WITH THE PREPAYMENT PENALTIES YOU KNOW THE PAPER HAS BEEN SOLD AND PEOPLE ARE, BASICALLY, BANKING LITERALLY ON WHAT THE PROJECTED INCOME WOULD BE. I THINK WE’VE GOT TO, REALLY, REQUIRE THAT LENDERS TAKE, A DIFFERENT APPROACH IN DEALING WITH PEOPLE WHO MAY NOT HAVE THE CREDITWORTHINESS IN ORDER TO, HANDLE THE KINDS OF MORTGAGES THAT ARE BEING SOLD TO THEM.
First off, I have seen some big mortgages, but NEVER one with 700 pages, and certainly not that much fine print. There is a lot of paperwork, but there are some ‘key’ documents that are pretty much STAND OUT that you need to pay attention to. But even if there were 700 pages of fine print, TAKE SOME F%@#ING PERSONAL RESPONSIBILITY and don’t sign until you, or somebody you trust, or other hired expert tells you it is OK to sign. The ‘I didn’t know what I was signing defense’ is complete BS. If you didn’t know what you were signing…DON’T SIGN!! Funny how there were NO problems with these mortgages when everybody was ‘getting rich’.
Most prepayment penalties are only 1-3 years, usually the length of the ‘fixed rate’ part of the ARM loan. If you are buying the house to live in, you need to be there for at least 3+ years for it to make sense financially in a ‘normal’ RE market. So don’t buy property with short term mortgages if you don’t have a long-term plan and you can’t afford them once they adjust! I know, I know…the plan was to ‘flip’ the property and make 6-figures. I just don’t see how a 2 year pre-pay penalty puts a borrower in an ‘impossible position’. The borrowers KNOW this going in, and they know they will have to refi, sell, or deal with fluctuating payments in 2 years. Besides, nobody said the borrower HAD to take a 2-year loan, or a loan with a pre-payment penalty!! Guess what, the rate was LOWER with the prepayment penalty. You don’t know how many times I would hear the borrower tell the broker they didn’t want a pre-payment penalty…and then when they heard the new, higher rate, they would take the prepayment penalty. They didn’t have to have the penalty, they could have had a higher rate instead, it is just numbers. You either pay with a higher rate, or you pay with the prepayment penalty. If they ‘ban’ pre-payment penalties, then the investors won’t buy the loans. If they won’t buy them, the lenders won’t make them. If the lender doesn’t make the loan, then guess what, Joe-wanna-be-homeowner…won’t be.
We do NOT need government telling the lenders what they can and can’t do…the FREE MARKET is already doing that!!! The lenders are not making those loans anymore because there is NO MONEY IN IT!!! Just ask Bear Stearns! I spoke with some people in Capital Markets this week, they told me that NOBODY is buying MBS (mortgage backed securities). This was further confirmed by Cramer ranting tonight on his show (I usually don’t watch his entire show, but the first 10 minutes were all mortgage talk, so I had to watch). The lenders NEVER would have made those loans if there weren’t people buying the paper. Now, there are NO people buying the paper, and guess what, NO loans are being made! Funny how that works. The free market has it’s issues, but none of them are as bad as guvment ’solutions’.
A few more points. There is NOTHING guvment, or the financial industry can do right now to ‘fix’ this. It just has to run it’s course. People need to go BK. Hedge funds that got too aggressive with mortgages need to reap the consequences. People need to be fiscally smarter, think for themselves, and not run with the herd. There is nothing that can be done to support property values where they are in many areas, and borrowers do NOT need to be rewarded with taxpayer money for over-extending themselves.
I hate to say it, but this thing is going to be ugly, and we are a good 2-3 years from even thinking about the bottom. We finally started reaching critical mass with ’subprime’ foreclosures, but we haven’t even begun to hit the alt-a and a-paper sham loans. They are starting to pop up, but they will take longer. Most alt-a and a-paper borrowers were doing 5, 7, and even 10 year ARM loans. 5 years seemed like an eternity when things were good. Appreciation was guaranteed! Well, I know several people with 5 year ARMs and all of a sudden 2-3 years doesn’t seem so far away…especially the way things are headed. Sadly, I think many people are going to be in for a nasty surprise when their 5 year interest-only ARM starts to adjust, and they realize that their property is worth the same or less than it was 5 years ago, and their mortgage balance hasn’t changed one bit! Tell me how it felt to RENT from the bank and the guvment (you do have to pay property taxes when you own)…instead of a landlord.
On a quick side note, it looks like Europe now has a pretty good idea how bad our debt is. I will try and post more frequently now that major companies are going under, hedge funds are going under, markets are halting trading, and things ARE finally starting to happen.
Here are my ’solutions’ to stem this from happening again. Have a private company establish a set of standards to become a Licensed Mortgage Specialist. This person needs to meet certain educational requirements and take an extensive test that covers math, mortgages, and situational based integrity questions. The license would have some sort of continuing education and a certain number of mortgage complaints would impact maintaining the license. It would be like a Series 7, in that you must have one to call, pitch, market, sell, talk mortgage products with potential clients. This license would be completely separate from a RE license, and the RE license would not allow people to do mortgages. Secondly, in addition to all the other pages that are already there, I would make a simple ONE-PAGE disclosure statement with all the pertinent loan information. It would be spelled out in simple ENGLISH (not spanish) and cover things like rate, payment, high adjusting rate and payment, broker commission, prepayment penalty, and other important terms. Of all the other pieces of paperwork, this piece would have the ‘main’ parts of the mortgage all spelled out so ‘anybody’ could understand it.
In closing, as bad as it was waking up to Hillary Clinton on my tv…I would rather be forced to see pictures of her cleavage (don’t ask me why that was nationwide ‘news’) than have to see the results of her proposed guvment programs.
Stay tuned…
SoCalMtgGuy
August 9th, 2007 22:43
I’m so glad to see you are back with new insights . . . and what insights your provide! This is worse then I could have possibly imagine and everything you warned us about. Thank you so much for this blog. Yes, I hope to see more posts in the future. I wait with bated(sp?) breath.
August 9th, 2007 23:43
SoCal,
Is this only going to be brutal in the places like l.a., s.f. vegas, florida ny san diego etc where things went nuts, or is this going to be a nationwide problem. in other words, are there enough places that weren’t “frothy” to save the nationwide economy, or is the american consumer going down and taking the stock market with it? if r.e. looks like no place to invest for the next decade, isn’t that available money going to almost HAVE TO go into stocks? and have the events of the past month given you any more of a feeling as to how far down we might be headed here in SoCal.
GREAT to see you back. sometimes i think you scripted this whole “mortgage meltdown” — it really did unfold exactly as you said it would.
August 10th, 2007 00:04
What you are suggesting has been in place in australia since the late 80’s. Borrowers are required to read a “plain english” document explaining the risks and also you have to pay a lawyer to give you advice on the implications.
Despite all this our housing bubble is argueably bigger than yours.Not sure that you can regulate away the effects of cheap money if the lenders dont even look at the stated income box.
August 10th, 2007 07:26
Wouldn’t that be a nice job for an investigative journalist to find out the real financial story of the f@cked borrower Schofield? (Some foreclosures are due to unmanagable medical costs, of course, but those stories are connected to what to do about health insurance, not to bad mortgages.)
August 10th, 2007 07:59
I’m not sure I agree or disagree with you; there is a lot in your post to mull over, a lot in Clinton’s proposal, and I’m no expert in these matters anyway.
But I will point out that all this government involvement is probably not only inevitable but also predictable, if history is any guide. I’m thinking of the Great Depression, where people needed (rightly or wrongly) to have their butts bailed out by the government in such a way as to change the whole philosophy of our economy (i.e., The New Deal). When things get bad enough the people will vote in representatives who will bail their butts out, even if they are responsible for their problems to begin with. To whatever degree this most recent economic downturn will be similar to the Great Depression, I don’t know–it’s probably unlikely. But if it gets bad enough Clinton’s general philosophy will be implemented, either by her or someone else like her.
August 10th, 2007 08:38
Simple response here - (obviously) don’t vote for Hillary.
Vote Ron Paul.
August 10th, 2007 11:26
peterw…
I agree that it isn’t going to solve the problem, but making sure that every person selling 500k mortgages has some sort of education, understanding, and training can only help keep some bad apples out of the industry.
When there is ‘easy’ money to be made, there will always be people throwing caution to the wind.
Allthingsgood…
If government always bails things out, that sets a dangerous precedent. With freedom comes responsibility. If there are never any consequences for bad investments of poor choices, a country cannot survive in the long run.
SoCalMtgGuy
August 10th, 2007 11:43
“Very few times did I ever hear of a borrower that wanted a specific amount of ‘cash-out’ on a refi. Usually I heard “as much as I can get”, or ‘max cash out’.”
Reminds me of stories my sister told of the days she used to work at Lincoln Savings and Loan. She would try to explain that the American Contental Corp. bonds were not insured, and were not CDs. If fact the two were not even sold from the same desk. But no one wanted to hear it, they just bought the ACC notes because they had a higher yield.
August 10th, 2007 11:53
I have a question for mortgageguy or anyone who has an answer: who is getting mortgages this week? I see people buying here in San Diego more specfically I have a work friend who’s offer on a condo was accepted on Monday. I’m afraid to ask her if she got a loan yet (as of Tuesday she had not).
Are lenders taking a little longer in their lending decisions?
August 10th, 2007 11:55
Wait, I thought we already had a single plain English form: The Truth In Lending” disclosure form. What is missing from that form that you want to include?
Form here:
http://www.lenderhomepage.com/Forms/Truth%20in%20Lending.pdf
August 10th, 2007 12:01
Toots…
The offer being accepted has very little to do with a loan being officially ‘approved’ and that it is going to fund. I’m not talking ‘pre approved’, I am talking rate locked, with conditions to satisfy before funding. I wish them luch, with need more details to give you a better answer.
DavidinAL….
I agree with you. Maybe we can redo that form in CRAYON or something. There are a FEW pieces of info to make sure that are correct before you sign, if you can’t do that responsibly, then you get what you deserve. It takes a few hours to educate yourself on something you will be working 40 hour+ work weeks for 30 years to pay off. Easy decision to me…do some research and be informed. But why bother if you can play ‘victim’ and be bailed out by the taxpayers.
SoCalMtgGuy
August 10th, 2007 12:05
Thanks for the quick reply socal. They plan to put 10% down on a 670K 2 bed condo in Ocean Beach. They’re young. Their combined income is less than 150K. She argues because it has a beach view it will hold its value……………
August 10th, 2007 12:27
toots…
I don’t know their situation, but I don’t think they are really making enough to truly afford that house. I have some friends that are making about 180k combined and they bought a place with 10% down for 680k…the payment isn’t cheap…and they did a 5yr I/O at lower rates than today.
I wouldn’t buy in this market right now. I think waiting is a guaranteed winner. It is safe to say that prices won’t be going up very much in the near future, and that the risk of price declines is much higher.
Whatever happens…I wish them the best.
SoCalMtgGuy
August 10th, 2007 12:34
Hey is big Ben (Jones) hatin’ on you? He keeps on taking down your links. I’ve seen him do this to CrispyCole as well.
That’s plain BS - You should be able to link your good info
Keep up the good work!
August 10th, 2007 12:43
here in Canada, especially cities like Vancouver Calgary Edmonton, they claim that there is very little sub-prime mortgages out there, that is hard to believe, avg prices in Calgary were at about 160,000 4 years ago, now they are avg 510,000, do you think bad mortgage products are here also ?
your postings have been so valuable, thanks
August 10th, 2007 12:51
garyincanada…
YES, the mortgage products are everywhere. The industry morphed the past few years. Subprime, alt-a, and a-paper got so competitive that in a way that all sort of blended together the past few years. You had option-arms that used to be reserved for 700+ fico scores dipping down in the 600’s and even high 500’s (580 is the lowest I saw from a major lender). Subprime was doing stuff over 700…and alt-a went in both directions as their ’segment’ of the market got pressured.
Sure, they each had their ‘core’, but every lender tried to find their ‘niche’ to get that particular business.
Did incomes in Calgary double or triple in the past 4 years?? What happened other than an extremely lax lending environment with too much easy credit available.
SoCalMtgGuy
August 10th, 2007 13:39
I agree that any bailout will only encourage stupid risk taking behaviors. Geez, my parents lost a lot of money in the Dot.Com stock crash. Did the Clinton offer any help then? What’s the difference. People will lose their house? SO RENT! Move back with your parents! At least people still have money. Ranting over.
August 10th, 2007 13:46
sidelined…
Just saw interview with Ron Paul…….THAT is the kind of financial decision maker this country needs. Eliminate as much of the guvmment bureaucracy and waste as possible.
SoCalMtgGuy
August 10th, 2007 14:19
Another thing I would like to add is this. Just like with a Series 7 you can’t guarantee or say the housing increasing in value is in the bag.
August 10th, 2007 14:48
Nice thoughts on the issue.
Never could understand why or how people could tolerate another ‘Clinton’ in office.
August 10th, 2007 17:46
Couldn’t agree with you more about Hillary Clinton. You must be an Obama guy, like me.
August 10th, 2007 17:52
Not to fond of Hillary but I don’t think another Clinton in office could be half as bad as suffering though another Bush has been.
August 10th, 2007 18:05
Hello. I gave a “hat tip” for your article when I posted my article on the Hillary bailout (click name link if interested).
August 10th, 2007 18:24
SoCal:
The situation you described with the “loan officers” here in Calif is illegal. Everyone who talks to the public and gives RE or loan information needs a sales license. These license holders must work under a broker. If found out by the DRE, these Brokers would have severe penalties, including losing their Broker’s License. I know this because I have had a DRE license for 31 years, and a Brokers license for the last 17 years. I understand other states are much easier, and have situations as you described being done legally.
Great summary by you. I also agree that we are years away from a bottom, my guess is 4 years. Good point on having a Lender’s license with a knowledge based exam. Many people entering the business the last few years have no idea of the product and how loans work. The public has not been served well. I could give you many examples.
(I work for a bank where you do not need to be licensed, because Federally regulated banks are exempt from state licensing laws. However, the bank does a thorough background check, only hires loan officers with minimum of 5 years experience, average is 18 years experience. Typical education is BS degree. These officers know their stuff, and are monitored constantly.)
August 10th, 2007 18:57
SoCalMtgGuy said:
“Just saw interview with Ron Paul…….THAT is the kind of financial decision maker this country needs. Eliminate as much of the guvmment bureaucracy and waste as possible. ”
Good to hear. I’d encourage anyone who isn’t yet familiar with Ron Paul to please check him out. He’s fighting against the status quo and needs our support.
August 10th, 2007 20:41
“The lenders are not making those loans anymore because there is NO MONEY IN IT!!! Just ask Bear Stearns! I spoke with some people in Capital Markets this week, they told me that NOBODY is buying MBS (mortgage backed securities).”
Now weren’t those the type of securities the US (and foreign) Treasuries just purchased out of the market to inject liquidity? So didn’t we just witness a bailout of the hedge funds that were holding the bag? Then again, who knows what price they paid for them. Hopefully, they were severely discounted, but I’m not holding my breath. I suspect that we all just bought into this mess.
If you can do a quick post explaining what just happened in the market, that would be great.
Thanks!
August 10th, 2007 21:42
By bailing out speculators(flippers, hedge funds) and lenders(banks, ABS investors), you encourage more speculation and bad lending practices.
If I bet all my money on the roulette tables and go broke, will the taxpayers take care of my bills?
August 11th, 2007 04:21
Truth in Lending or reg Z is just another bothersome detail that borrowers don’t give a rats ass about. It is all about the monthly payment…Until they can’t pay it. Then we here all the whining about the bad guys of finance. If you are a borrower you are buying a product and a service. If you don’t like the product or service don’t f@cking buy it. Or, at least know what you are buying.
I have been renting for 7 yrs to save for a 20-30% down payment and have been called stupid by people who are now looking for a place to rent because they can’t get refinanced. And everybody said they were doing so well. My turn to buy and I think I may look at their old place.
We live in a culture of financial illusions and the secret is about to be revealed. SoCal guy thanks for this blog it is a breath of fresh air for the financially responsible and somewhat Cynical.
August 11th, 2007 11:26
“The lenders are not making those loans anymore because there is NO MONEY IN IT!!! Just ask Bear Stearns! I spoke with some people in Capital Markets this week, they told me that NOBODY is buying MBS (mortgage backed securities).”
The SF Chronicle ran a front page article this week with sob stories about how it’s suddenly become so, so difficult to get a jumbo loan. Well, the banks can always go back to keeping a loan on their own f****books. Which they’ll have to, if they can’t sell off the loans anymore.
But if that happens (which I hope it does), prices will have to plummet. We’ll be back to traditional lending standards….buy at 3x gross income, at least 10% down, 6 months cash in the bank, no credit card debt, steady & documented income, etc. Hmmm….that leaves about 5 qualified buyers in California.
Bring it on.
August 11th, 2007 12:22
Just left a little rant on Hilary’s site. Thanks for the ammunition.
August 11th, 2007 12:56
Here is a good idea for the new mortgage form required since people can’t do math with interest rates:
Year 1 Month 1 $1500 Due 1/31/08
Year 1 Month 2 $1500 Due 2/31/08
Year 1 Month 3 $1500 Due 3/31/08
…
Year 3 Month 1 $3300 Due 1/31/09
…
Year 30 Month 12 $3300 Due 12/31/37
Oh, crap! - They got me! lol I am a neg am! Neg am a I am!
August 12th, 2007 09:48
If I have to look at Hillary for a month or two on your website I won’t be back
August 12th, 2007 19:31
SoCal,
I guess my big question is what percentage of homeowners are at serious risk of going into foreclosure in the near future? If you can get a somewhat accurate number on the estimate of future foreclosures, that should give a pretty good idea of how bad this whole mess can get. If it is around 10- 15% of all homeowners, I think the market can absorb that with a 10-20% correction in prices. Would you agree with my assessment?
Thanks for the great posts!
August 13th, 2007 01:10
Brownie,
Sorry, but a 10-20% price correction isn’t going to fix it. Many areas have already had a 10-20% correction. Lots of places had real estate go up triple digits over the past 5 years.
Soooo many people got on the ‘get rich in real estate train’ with leverage and the easy credit that was available. The only thing keeping the train going was further appreciation. Since the ‘guaranteed appreciation’ is gone in most cases, it is time for things to settle back to more ‘traditional’ lending requirements with REAL risk assessment.
If the banks priced risk accordingly, prices NEVER would have gotten this high. Sorry, but lots of people are going to see their 6-figure gains disappear.
Stay tuned…
SoCalMtgGuy
August 13th, 2007 17:44
If prices went up by as much as 200 percent in some areas, that means they’re going to down by at least 100 percent, right?
August 14th, 2007 00:04
So you are upset because you bought high and had to sell low. Well that’s the nature of any free market, they go up, they go down.
Yes, any one who bought a home in 2005 or 2006 has lost value in it, but anyone who bought before 2000 is still sitting on a very nice appreciation, thank you very much. .
Real estate prices in South Florida were essentially unchanged from 1990 to 2001, and if you factor in the rapid rise from 2001 to 2005 and then the decrease from 2005 to 2007 you would still be looking at about an average 6% a year increase from 1990 to 2007, it just all happened in a few years.
So you’re the F*CKd buyer, poor baby, you bought high and sold low and now you want to blame someone else instead of yourself for your bad judgement. Yes, no one saw the sudden decrease over the past 2 years, but guess what, what goes up usually comes down.
Grow up, get a life and stop trying to blame everyone else for your bad call. “Mommy Mommy, the big bad mortgage companies and realtors MADE me buy a house, now I’ve lost money…Boo hoo.
August 14th, 2007 02:07
Very good analysis of the problem and proposed solutions. A lot of gibberish out there proposing bailouts that needs to be put into perspective. The price decline and return to sensible credit standards just have to run their course, and it will certainly take several years — just like all the past housing bubbles.
Will
August 14th, 2007 15:06
“If prices went up by as much as 200 percent in some areas, that means they’re going to down by at least 100 percent, right?”
Ummm, not quite.
A 100% drop means the house price goes to zero.
If a home has appreciated by 200%, than a correction of roughly 67% is in order. That will bring it back to normal levels.
Although of course everyone I talk to is still in denial; the notion of a house dropping 60+% in value is virtually unheard of in their realm. “That can never happen!” they say. And when I ask “why?”, I seldom seem to get any answer other than “well, its real estate. It doesn’t go down like that.”
Incidentally, that $1 billion bailout that Hillary is proposing is nothing but a bandaid, even if it was enacted. Hell, they gave more than that to the airlines after 9/11. $1 billion could not even remotely come close to covering the estimated trillions of dollars worth of bad loans. It would be like trying to stop a freight train with a BB gun.
My personal opinion on when the “bottom” will be seen is roughly 2010-2011. I am basing that on the fact that 2005 was the peak of the refis of the interest-only type mortgages. The majority of those taken out were between 3-5 years in term. So next year, you’ll start to see the beginning of that fallout. And it will last until roughly 2010. Some additional drag will be felt afterwards from the slightly longer term mortgages and regular ARMs.
August 14th, 2007 15:14
Very interesting read. Sad to see that I will have to bail out other people because they were stupid and greedy. I went with a 30yr mortgage that actually stays the same rate the whole 30 years! Crazy, huh? I did my research and saved before buying my place.
Lack of fiscal education and responsibility all around. The aspect of making money took over and no one thought of the future consequences.
With all this craziness planned for the next few years, I will spend this time paying off my fixed mortgage, while learning how to be a wise real estate investor. This site was a great starting point!
August 15th, 2007 16:37
Here’s a few facts on the southern NH real estate, since I live in Derry. As expected with the media fact checking there is no East Hamstead, NH, but assuming the Schofields live in the eastern part of Hampstead and bought a 90th percentile Mc Mansion in 1999, they spent about $350 to $395K. And I wouldn’t be surprised if it appraised at 895K at the height of the cash out bubble late in 2005. Also that $6,000 figure probably includes a $1,000 month escrow for property taxes.
But those are big assumptions. As recently as the 1980s, real estate in the eastern Hampstead consisted of seasonal lakefront camps and year-round tar paper shacks. In the 1980s building bubble, the developers came in and ruined a good thing.
August 15th, 2007 19:51
The prices of houses, which are real assets, have escalated to unreasonable values in relation to incomes measured in dollars. Dollars are a currency - just paper assets - that have simultaneously rapidly lost their value.
This situation was propagated by a politically motivated Federal Reserve, which cut nominal interest rates to historical lows while real inflation rates were running at 8-10% per year.
The Feds have a natural conflict of interest to keep interest rates low, in order to reduce their own debt service payments and entitlement expenses (e.g. social security).
The rest of the world is finally awakening to this shell game, and now refusing to lend U.S. entities any more money at these artifically low rates.
The result in plain english? Interest rates are going WAY higher, not lower - so be prepared. Mortgage borrowers with fixed rates may survive if they can earn more of those abundant dollars.
Borrowers with adjustable, payment-option, negative amortization, interest-only, etc. loans? They are truly f@cked, as you say here!
The Feds have a conflict of interest in keeping
August 15th, 2007 20:29
Keep up the good work, SoCal. We’re definitely at the end of the game of musical chairs, since lenders now won’t authorize a loan to anyone based on a pulse. I’m expecting a bumpy ride down compared to the exponential rise we observed.
Does Hillary or her staff recognize that 1 Billion is 1 THOUSANDTH of 1 Trillion? Her campaign is The Emporer’s New Clothes, and our media is enabling our A-D-D nation to fall for it when they spend more time discussing her attire than the (lack of) substance of her campaign.
Exiting Taxifornia for western NV.
August 15th, 2007 20:57
B: What can I say? If in fact the bailout happens, it will fall flat just like the New Deal (colossal failure). If it had not been for lend-lease and then WW II’s contributions to the economy, FDR would have been strung up
August 16th, 2007 05:56
I think your next post should be:
Countrywide goes Bankrupt!
August 16th, 2007 19:19
People seem excited about a possible Countrywide bankruptcy. But remember, if we get another depression, that’s not going to be good for anyone. Okay, almost anyone. A financial collapse would be a bad, bad thing. There’s a reason everyone’s grandpartents talked about how bad the depression was and avoided risk for a generation.
I don’t mind seeing arrogant idiot homeowners get wiped out, nor arrogant idiot realtors and lenders. but let’s get real.
August 17th, 2007 10:09
The Onion has a funny take on subprime lending:
http://www.theonion.com/content/files/images/Statshot-Paying-Mortgage.jpg
August 17th, 2007 10:31
Welcome back!
THANK YOU!! Why didn’t the mainstream press pick up on the inconsistencies in the Schofield story?
I’ve blogged about this, with the info my husband and I were able to find while watching South Park. Here’s what the housing market was like in New Hampshire: They had the second highest appreciation in the country. The Schofield’s house cost about 3x the median New Hampshire home price at the time. It’s a bedroom community for Boston.
The Schofields home was on acreage, and, according to the New Hampshire papers, they had a 6-figure income. Kristi’s husband has a linked-in page detailing his employment history. Doesn’t look like he was hurting until he lost his job, but he’s back on his feet now. Kristi graduated Amherst, but, judging by her linkedin page, she’s been a housewife. I guess they didn’t “need” her income.
New Hampshire price appreciation has been so high, the Schofields *should* have been able to sell their house for big profits. Jon Stewart joked about the “Save the Money” foundation - I think Hillary is trying to charter the “Save the Rich” foundation with her bailout plans for the Schofields.
http://webtracy.blogspot.com/2007/08/hillary-to-rescue.html
The address we found for the Schofiels is in my blog. If any New Hampshire residents can tell us more, I’d love to hear it!
August 17th, 2007 17:02
I started reading AFB back in 2005 I believe. At first I thought you where just another bitter mortgage salesman. But I kept reading. Did not take long to figure out that you where real.
Then came time to refi myself. Took what I learned from you and others “in the know”. My situation had improved substantially from when I did my first mortgage. So I went from a thirty year to a fifteen year mortgage at over 2% below what I was paying. Took no equity out, just paid off the old mortgage and declined their offer for a HELOC.
Just want to thank you. Fully half my payment is going towards principal now.
I just want to say thank you.
My life and my families life is better for it.
August 18th, 2007 09:24
Ok, this is how I understand the linkage b/w: mortgages, subprime/CDO blowups, hedge fund contagion, and housing slump….
The mortgage mania was fuelled by excess money supply / massive liquidity. (Some say due to Fed overprinting US dollars b/c of Y2K hype) Large institutional bond investors were indirectly making these mortgage loans. How? Banks/Lenders/Brokers sell the mortgage, but don’t hold it. Instead, Wall St. firms would buy pools of mortgages, and package these mortgage loans into CDOs tranches and sell them to whoever wanted ‘em (hedge funds, pensions, other banks, int’l investors, etc) There was tons of money investing in these types of bonds, b/c Treasury/MM funds were only paying 1-2%. Instead, you could get 6%, with virtually “zero” risk, b/c residential mortgage defaults were at record lows. Very popular. That’s why mortgage interest rates were at historic lows. The investors uiltimately putting up the mortgage money were willing to accept increasingly lower levels of interest. It still beat cash/MM/treasuries. Supply/demand. It’s virtually impossible to default/foreclose when you’re in a declining interst rate environment, with annual price appreciation in the double digits. Can’t pay the mortgage? No problem. Just refinance at a lower rate. Or sell the house for a profit, and pay off the mortgage. This became a vicious cycle and spurred the real estate boom…Not salary growth, but easy credit. More mortgates ==> more buyers ==> more demand ==> higher prices.
With tons of money willing to finance mortgages, the entire industry changed. More “fringe” (subprime) borrowers were getting mortgages and buying real estate in the last few years. Refi advertisements everywhere. Mortgage brokers knocking down your door trying to give you another loan. etc.
Also, the traditional days of 20% down on a 30 year fixed seemed quaint during this freakish aberration.
Instead unprecendented types of mortgage loans were gained in popularity:
* Interest only loans [[ You’re not actually paying back any principal ]]
* Negative amortization loans [[ Ypu pay so little that each month, you now owe more than you did last month!! ]]
* 0% down loans [[ Look, just borrow the money, ok? ]]
* Piggyback loans [[ Want to avoid 0% down’s PMI penalty? Just take a different mortgage for your downpayment. ]]
* Super low teaser rate ARMs [[ We’ll take 2% now, and 8% later ]]
* 105% mortgages [[ Hell, just borrow more than the appraised value of the property!! i.e.: We’ll PAY you to buy this house! ….Like those “cash back” car loans frenzy in the past ]]
* No-doc/stated income loans [[ Salary, Schmalary, we don’t care. How much do you want to borrow? ]]
Too much money chasing risky mortgages loans. Credit spreads dropped to stupidly historical lows. Either invest in zero risk Treasury for 5%. Or, invest in murky/dogshit asset backed mortgage for 5.1%. Sucker bond investors were virtually getting no premium for taking increased risk of bond default, based on:
1) They simply didn’t know what they were investing in. This is where the “AAA Alchemy” came into play. They saw the interest rate, and the “bastardized” AAA rating (AAA tranche = Getting the best slice of dogshit cake)
2) Faulty default assumptions . The quality of mortgage taker in 2005-2006 dropped dramatically. All those exotic styles of mortgage loans spiked up dramatically in 2005-2006. Subprime loans spiked up. In reality, risk of default by these borrowers was MUCH higher than people who took out mortgages in 2002-2004, who truly did have low default risk…(Actually putting 20% down, better FICO score, etc) Instead, they assumed/projected default risks of new batch of borrowers to be the same as the previous. In hindsight, not even close, and they started defaulting within 6 months. Once that came to light, the subprime CDO’s crashed, and started the whole mess. Hilariously, Fitch’s CDO risk ratings were based on assumptions that house prices ONLY go up, …never flat, and certainly not negative. Amazing. In reality, prices dropped, and defaults spiked even more. (underwater on mortgage = walk away)
Hedge funds are highly leveraged (low volatility/high Sharpe , and high leverage is the name of their game). They’re leveraged to either to buy these bonds themselves (e.g. The Yen carry trade), and/or using these bonds as collateral to buy other securities, like equities, on margin. Well the prime brokers who make the loans to hedge funds are now getting nervous about the shitty collateral/positions. Therefore, they said, your CDOs are not worth what we thought they were, so either put up more collateral, or reduce your margined positions. Well, the funds can’t exactly sell the CDO’s b/c no one’s buying, b/c no one knows what they’re really worth anymore ! Secondary CDO market has seized by now. With this in mind, hedge funds were forced to liquidate other, more liquid, assets b/c of increased margin calls.
These fixed income margin calls are what slammed the US equity markets last week. Particularly, this is what slammed Quant hedge funds ..Stocks being sold off due to exogenous unseen “5 sigma” event (the CDO bond mess) Apparently, all the quant funds unwound a lot of the same types of trading models (factor based models). “Good” stuff being sold. Markets weren’t “supposed” to do this. And again, margin/leverage magnifies losses by multiples. Hence, Goldman $6B flagship hedge fund down 30% in a month. Losses starting to rival Amaranth, yet there’s so much shit going down, it’s only news for a day or two !
No one has actually sold the “toxic” CDOs ..There are no buyers. Buying demand for these bonds has dried up, virtually overnight, after the Bear Stearns blowup. (Which was buying these dogshit bonds margined out 10:1, hence 100%+ loss of capital, and also major loss for the banks that made the margin loans…Merrill, et al.)
In fact, HFunds don’t want to sell their CDOs. Default risk is now more accurately associated w/ the value of these “toxic waste” bonds, once subprime mortgage loans are started to default. Therefore, CDOs are now valued at, say, 30 cents to dollar, for example. Or simply no offers at all. Actually selling at this reduced offered price would force “mark to market” revaluation of a fund’s entire position in these bonds. One you sell, you establish a new market price, and must mark the new value of the position on the books. Result: Now you’re not collecting performance fees based on artificial prices, etc. (This doesn’t happen with equity prices, b/c the markets are much more liquid, i.e.: Everyone knows what IBM is worth, b/c it trades millions of shares a day) Instead of selling, it’s “better” to carry the inflated illiquid assets on your books, using a price based on your own assumptions/model (!) i.e.: “mark-to-model”, and continue to collect fees based on that outdated, unrealistic price. (this merely delays the inevitable reality that your bonds are way underwater, or delay things until it all “goes away” ) That’s why some of the hedge funds halted investor redemptions (which forces liquidation of positions to raise cash) i.e.: We don’t want to try to sell anything, so don’t try to take your money out. A redemption “run” could crush an illiquid fund overnight. (and it has with several)
Who will get blamed ? The ratings agencies, for one. This is why I shorted Moody’s (MCO)
Also, removal of artificially inflated purchasing power powered the “exotic” mortgages made in last few years has(will) now caused housing prices to “revert to mean” and drop in many areas. (Overbuilding + fewer mortgages + foreclosures = lower prices)
August 19th, 2007 14:37
Yes, yes, yes! Give SS a gold star! I’ve followed all this for two years plus but still didn’t write it all down as concise as that, in that order - Great job! And I’m still a little fuzzy on margin calls and a few Wall St points, but it doesn’t have to be Crystal to see what happened….
I have a 21-yr old son who knows nothing about all this - that is Expected but Not from 30 & 40-somethings. TV generation, the insidious creep into our lives of buy-now, pay-later, easy money Car loans, as someone said - I said 3 years ago, OMG this is like the general/plastic credit thing, and that will be disaster for real estate, with no equity!
Argh…. The penalty on ethics and experience/realism in appraisers is appalling, has been since the effective (though ignored) end of the bubble. Thanks again, SoCal
Uh, can someone help me find a job in damage control at a servicer or re-purchasing division someplace? Knowing it was coming did not make me one dime…. Seriously, I know some ways 2nd leinholders can recoup a bit, through forensics I can do. Starting to get a tiny bit of that from One company now but it’s not growing fast enough. Or I’d love to make a course out of all this and get a Road Show going.
Seriously, Anyone of the regulars on this blog or someone you know, recruiters, whomever, I’d so like to educate people and get paid for once, for doing it. At 50, it’s unlikely I’d fall into a new career or be all that employable, long term - but it might get some of us through the worst of the next few years. I think people are finally at the point where they want to know what hit them, and they may be outraged enough to make enough noise to contain bailout somewhat… Worth a try, as someone probably said Many times through history, when it was for a minute “power to the people”.
Doreen in FL (have PPt will travel, lol)
August 19th, 2007 18:34
Why all the hate for 0%-down loans? I get a better return from investments than the loan costs me–hell, with the loan rate I’ve got I could almost break even with a savings account!
Unless that’s your point–that the people who do nothing-down loans generally aren’t thinking of it that way. They’re thinking “gosh, even though I don’t have any money in the bank, I can still buy a nice big house! And then sell it in four years and make lots of money!”
August 20th, 2007 07:52
Duck,
Exactly what they are thinking! And in FL (maybe CA too, I’d think bubble areas) the Pols get their mitts on the Tax $ and it’s Ever-Increasing, so the Greed blinds them - they spend it all like no tomorrow & steal it too….
Then when income bears NO relation to “Home cost” and when there are Lots of insane home costs like Neg-Am, and the bubble bursts - thier ARM re-sets to a huge payment & they want to REFI - You could BUY zero down, but REFI requires that you Share the Risk with the bank by HAVING EQUITY - which means you OWN part of your house…..
You buy a home during a bubble/boom for $500k - The market goes up less than the hype makes it appear - this seemed to end like running into a wall, but when you’re IN it like an appraiser is, seeing listings, sales & older sales, you see inventory building - a little before the panic sets in -
don’t forget ARMs reset Daily, not just all at once annually, b/c John got his Jan 1 & I got mine Jan 2, etc. That said, there are Clusters based on local events such as a new project opening up - selling out in hours or days sometimes here in the hysteria, like concert tix or PS3s….
So Two Years later, the home may Appear to be worth 30% more, or it may have Gained 20% & lost 10% or depending When you bought or last refi’d and if the latter, how Creative MBs & Appraisers Got with it…. But let’s say it’s Truly worth $650k, or close enough, you can refi If income, debt ratio, credit are good. Even $50k Less, however, your Loan to Value is too high and you Don’t Qualify to Keep your home. Just a Ten Percent or less Difference, can make or break your next two years (or 5 if 5-yr are available)
But don’t forget people thought rates would go back Down to 5-some & also that Increasing Values would cover their needed Equity and Then some, to allow them to Cash Out again - so the Penalty for Early Withdrawal of Equity can be on you or the bank, and can be slight or significant depending on timing of your bubble area’s issues AND your purchase & refi history… Add all the Newer, Opportunists in the industry at all levels, and compound the numbers by that margin of error & greed factor…
Had we had Informed Foresight, Everyone may have been smarter - but human nature Can’t Resist the Easy Money & Nothing Down, Play Now and Find a Way Not to Ever Pay, Bling mentality today. This is not the Strong Generation of Working people that lived in the Depression - We are some Coddled wimps by comparison, with Lots of Loopholes and scams now.
Doreen Campbell SE FL veteran Appraiser
August 20th, 2007 11:45
Density Duck,
Not exactly. The 0 down loans were mostly 80/20 loans. You could get a great rate on the 80% (4’s-6’s depending on many variables), but the 20% was usually in the 8-10% range. It would be hard to get a return to ‘beat’ the 8-10% loan rate and still make enough money to make it worth it.
You are correct that there were many circumstances where a ’seasoned’ or informed investor could use OPM (other peoples money) ie the banks money, instead of their own to buy real estate. This means they could invest their money instead of using it as a downpayment.
That said, those people were in the minority. You would be amazed how many people were buying 500-1.2million dollar homes with less than 10k in the bank. I distinctly remember one loan where the people were buying an 800k home (100% financing 80/20) and they only had $6000 in the bank!!!
Yes, there were 2 months PITI (principle, interest, taxes, insurance) required, but that condition got ‘waived’ to get the deal done. The lenders would do anything for ‘volume’. You shouldn’t be buying a 30k car, much less an 800k home with only $6k in the bank!!! (at least in my financial world you shouldn’t…but what do I know…they probably made a couple hundred thousand off appreciation…right??)
For further information, see the post I did about leverage a long time ago. Here is the link: http://anotherfuckedborrower.blogspot.com/2005/12/stock-market-bubble-vs-housing-bubblea.html
Stay tuned…
SoCalMtgGuy
August 20th, 2007 19:42
I worked part time for my friend who owned a morgage shop back in 04. Do you know why I didn’t make any money? Because I was HONEST. The AE’s who made 200K per year were the ones who would tell a potential borrower what they wanted to hear. When I would tell the truth, the potential borrower was like ….”See ya! I have 3 other loan agents willing to do a much lower rate”. I would try to warn them and tell the truth, but they rarely listened. After 6 months I quit.
I am getting so pissed off with any talk about bailing these people out. Sure the loan agents were scum liars. But the borrower’s were at fault too. They were GREEDY. PERIOD. They did not want to educate themselves because they wanted to believe the liar loan agents who told them what they wanted to hear which was “you don’t want a fixed rate, you want the low introductory rate then you just refinance out of it with me in 2 years. That way you will be on top when your property is up 40 percent!”. Do you know what a loan agent made on an option loan? about $15K on a 400K option arm loan. Most of these guys barely had a high school degree.
There should be NO talk of bailing anyone out of this. It was greed on both sides. They all get what they deserve. The loan agent is now working at McDonalds and bankrupt from all his trips to Vegas. And the “homeowner” is bankrupt and out on the street where they should be for taking part in running this whole thing up so that responsible people like me could not afford to purchase a home.
August 21st, 2007 20:24
“Hey is big Ben (Jones) hatin’ on you? He keeps on taking down your links. I’ve seen him do this to CrispyCole as well.”
I noticed this too. There was a link to AFB and Ben took it down. Not sure why… it’s topical, and based on the comments SoCal’s blog is popular.
Oh well, these things frequently happen once they are brought to the mainstream.
August 22nd, 2007 21:59
Check out this petition, I found it on an appraisers’ forum:
http://www.petitiononline.com/bailout/petition.html
September 3rd, 2007 11:35
No politician (and anyone connected to him) who wants to use my tax money for this bailout is ever getting mine and my family’s vote as long as we live. I am furious. NO BAILOUT.
September 15th, 2007 07:18
Politicians don’t care if people lose their homes and families find themselves living in homeless shelters. If they did they would be talking about using the money to fund public housing. This talk about bailing people out of their debts is all about rescuing the banks and hedge funds that bought the loans (MBSs, CDOs etc.).
November 26th, 2007 14:17
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January 16th, 2008 23:30
If there is anyone that needs to find a mortgage broker as an expertwitness check out www.expertwitnessmortgagebroker.com
January 31st, 2008 23:15
Thanks boysf6b761806e0fe982b6519b7aeba8859e
February 9th, 2008 05:48
If your Politicians want to legislate their way out of this mess, why don’t they legislate a retro-active increase in the capital gains tax and hammer all the flippers who have walked off with the cash that has caused this problem?
March 24th, 2008 03:30
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