Tuesday, December 13, 2005

Interest rates are up, and standards are tightening


It isn't news that Greenspan raised rates another quarter yesterday (Tuesday). It might be news to some of you that lending standards are tightening. It seems like more companies are taking a much harder look at the income being used on stated income loans. Some companies have stopped doing stated loans on retired borrowers, military borrowers, or others where you can access a pay chart off the internet. This only makes sense, as you know what the bwr is making.

I think most of you understand the "catch 22" I was trying to explain in my "liar loan" post below. It is against the law to commit fraud on a loan application, but you have a "stated income" program that allows people to do just that. Generally, people are stating their income because they don't make enough money.

When a lender gets a stated income loan, they verify the length of employment, the position/job title, but not the income. So it is not like a bwr can say they worked a job for 3 years when they haven't. A janitor cannot say they are the CEO. Most companies use one of the many salary comparison websites to see if the income stated falls with in a range. These things will be done in underwriting. It just comes down to whether or not the lender and the investor will "buy off" on the income stated. As property appreciated, and investors were eager to buy more loans, the scrutiny on stated income deals seemed to slip. Well, that is all changing again. Rising housing prices and interest rates are "driving" up the incomes that need to be stated for borrowers to qualify for a loan. If you look at home prices in CA, you will see that you have to state quite a bit of money to do a 100% stated purchase, or way more than than the median income of about 53-54k. I hope this helps explain a bit more the situation, as well as what the lender does to check the income.

SoCalMtgGuy

36 Comments:

Anonymous Anonymous said...

Yes, yes, and yes. I work for an alt-a lender in Cali myself. I was just talking to someone in our securities department about how investors are really now asking for more % and I will tell you that risk dept.'s are more busy now since no one wants to be servicing some of the crap that is out there.

This is mostly past tense, as like you mentioned lenders are stopping many of the neg-am product lines, or changing them.

However let me wonder out loud a little. I know from around talk-ville, that there is a lot of fudging from brokers directly on stated loan apps. So if the borrower can't make the cut, inflated numebrs are calculated by the broker to meet said requirements. Like you say, it is stated. So if what you are implying that borrowers are going to be liable for these lies, they can point right to brokers and say that the broker gave them the $$$ figure to put in the app.

Are brokers going to be finding themselves possibly liable? Is the industry about to find itself in a S&L level scandal?

12/14/2005 1:10 AM  
Blogger Sunset Beach Guy said...

So Cal Mtg guy:

Keep up the good work.

Have you seen any individual homedebtors form an LLC to buy with 0% down and protect their other assets?

Is this a common strategy?

My problem is that I have cash in the bank that I would prefer not to lose so people with nothing to lose bid up RE prices.

If I can protect my assets, then I could play in the game of RE mania.

12/14/2005 7:25 AM  
Blogger SoCalMtgGuy said...

sunset beach guy...

Most residentail lenders will only lend to individuals. If they want to put the property in an LLC when it is over, that is up to the bwr.

I came across this situation 1 time many months ago, and the LLC was not allowed to "buy" the property. The 2 LLC owners bought the property, THEN put it in their LLC.

I hope that helps some, but I'm not an expert on LLC, S Corp, or C Corp formation. I'm familiar with the structures, and the tax/asset protection benefits of them, but it has been a 2 years or so since I was dealing with them on a regualar basis.

12/14/2005 9:25 AM  
Blogger Sunset Beach Guy said...

Thanks for the reply.

I would have guessed something similar.

It would be great to increase the moral hazard but the lenders/MBS market aren't quite that stupid yet.

12/14/2005 9:40 AM  
Anonymous Anonymous said...

Hi So Cal Mtg guy:

I am in process of selling my house..will close escrow on 12/29. Two questions:
1) when is it the time to know for sure buyer will get funding (I need to put deposit on new apt lease)
2) what is the current best investment for the $200K I made in 2.5yrs.

Thank you in advance and for all your blogs

12/14/2005 9:51 AM  
Blogger 277.18 Hz said...

This comment has been removed by a blog administrator.

12/14/2005 11:49 AM  
Blogger 277.18 Hz said...

Idiots abound....

12/14/2005 11:51 AM  
Blogger ocrenter said...

been wondering the same questions dave and chickenlittle have been asking: what % of loans do the stated loans and ARM and option ARM loans represent. here's what I found from BusinessWeek's housing bubble blog:

Ordinary ARM loans, which are riskier than fixed-rate loans, apparently aren't risky enough for many borrowers. The MBA says that their market share fell from 46% in the second half of 2004 to 36% in the first half of 2005. Why? Partly, it seems, because more people chose option ARMs. Those, of course, are specialty ARMs that give you the option to pay even less than the monthly interest you owe. The unpaid interest gets added onto your principal (negative amortization). Option ARMs climbed from 17% to 23% of first-mortgage originations.

Then there are alt-A loans--the ones you get when you don't submit all the documentation that would be required to qualify for a straight loan. Those are usually chosen by people who have unsteady sources of income--or simply have too little documented income to qualify for a straight loan for the house they want to buy. The MBA says alt-A loans' share rose from 8% to 11%.

12/14/2005 12:44 PM  
Blogger ocrenter said...

and keep in mind this is a figure for the entire country. If I remember correctly, SD County's ARM/option ARM percentage was in the 70% range of total loans.

So if SoCAlMtgGuy works in the capital of bubbleland (the OC), I wouldn't be suprised if the stated income loans he has been talking about is in the 30-40% range of all loans.

12/14/2005 12:48 PM  
Blogger chickenlittle said...

ocrenter said...
"and keep in mind this is a figure for the entire country. If I remember correctly, SD County's ARM/option ARM percentage was in the 70% range of total loans."

but over what time period and how many homes turned over during this time out of the total existing number of homes? You guys must all be in RE and used to talking about stock, which doesn't a measure of what's not on the market. I'm after the big picture here. If the bubble breaks and mainly burns the recent speculators, that's different from what my Dad used to call a soupline depression. I found one sort of statistic of the sort I'm looking for, but still not satisfactory:

http://www.knowledgeplex.org/news/121474.html

Unfortunately, there is no breakdown by state. But it still gives some insight.

12/14/2005 1:43 PM  
Blogger apollo3333 said...

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Do your own due diligence, of course.

12/14/2005 1:56 PM  
Blogger Former LA Homeowner said...

Socalmtgguy,

Are mortgage/lending companies required to abide by the guidelines released by the US Office of the Comptroller of the Currency? Say if the OCC releases guidelines that lenders need to tighten their standards, are lenders required to follow those guidelines or can they just continue what they (lenders) are doing?

12/14/2005 2:11 PM  
Blogger Lou Minatti said...

chickenlittle, yours is a reasonable question. I haven't been able to find the answer either, perhaps because I am not searching for it correctly.

12/14/2005 2:39 PM  
Blogger Lou Minatti said...

chickenlittle, from that article:

"The survey also found that the refinancing booms of the last decade, as well as frequent moves, mean that 60 percent of all mortgages for single-family houses are less than four years old."

Is 60% a reasonable figure for the California market? I think so.

We generally agree the bubble really cranked up around 2001. So if there are (to make it simple) 10,000,000 mortgages in California, 6,000,000 of them were done during the bubble. If 70% of those mortgages are ARMs (per the article), that's 4.2 million mortgages at risk, or about 40%.

Does that add up?

12/14/2005 2:46 PM  
Blogger Rob Dawg said...

Remember 60% of mortgages is not 60% of houses by a long shot. I've picked up a mortgage in the last 4 years on a house that has changed hands twice in the last 40 years.20% LTV and less than 5% fixed. Pretty much anyone with a house in these situations refi'd at or near the bottom. Not everyone cashed out. Not everyone used an exotic.

California Census 2000:
5,527,618 housing units
4,367,361 with a mortgage. 79.0%
More than half LESS THAN $1500/month.
More than 72% are less than 35% of household income to housing costs.

12/14/2005 3:27 PM  
Blogger chickenlittle said...

lou minatti:

Re: Does that add up?

With a few caveats in decending order of importance
(1) There is still a percentage of houses not mortgaged in CA (I know that sounds like an oxymoron) as per the orginal article <40% and shrinking and probably less for CA.
2) Single family houses doesn't include condos, and I'll bet the "70%" number is skewed towards condos
3) It is unreasonable to assume that just because 70% of all homes refinanced, all 70% blew the wad on hot tubs and European vacations, despite what one reads in bubbleblogs and the MSM. (We also read that Iraq is a quagmire, but that is way OT). Many conservative investors also refinanced within the the last 4 years.

Thanks though, we are getting closer to answer to this important question.

12/14/2005 3:39 PM  
Blogger Former LA Homeowner said...

Robert Cote`

That is 2000 Census. Most economists claim that this real estate bubble and thus the rampant use of exotic mortgage and refinancings started in 2001 and later. 8 of my colleagues bought houses in 2003 or later, 4 of them used ARMs and 2 used IO mortgages. I don't know how many used stated income/no doc loans. All are up to their eyeballs in debt, holding 2 jobs just to pay the bills. I don't need the Census Bureau or some scientific study that most people who bought houses since 2003 are FBs.

12/14/2005 3:39 PM  
Blogger Former LA Homeowner said...

clarification:

Most people who bought houses in So Cal.

12/14/2005 3:41 PM  
Blogger Rob Dawg said...

"I don't need the Census Bureau or some scientific study that most people who bought houses since 2003 are FBs."

Yeah, who needs data when there's so much anecdote. Sorry for even trying. Please resume your mutual anecdote trading club. Any resemblence to the housing buy and trade frenzy that ignores the facts is purely deliberate.

12/14/2005 3:48 PM  
Blogger SoCalMtgGuy said...

I understand where everybody is coming from here. The stats you talk about would be expensive and hard to come by. I do not have them.

BUT, here is the thing. I know that lots of people buy a house to live in, and don't care about the "investment" side of it. Most of these people are paying their mortgage, if they still have one.

The problem is that you allowed a whole segment of people the past few years to buy homes. This (lets just use a lower percentage) 10-15% segment of the population all of sudden became able to buy property.

These people didn't qualify for home loans before because they had poor income and/or financial problems. But NOW they are let into the market. They drove up prices for everybody, and were a large part of the increased demand.

When these same people start to default, they will drag the market down the way they brought it up. The people who just kept paying their mortgage, and bought the house as a place to live will really be unaffected if they didn't tap into the equity that was created.

I know several friends that don't care one bit what happens. THey have their houses, they can afford the payments, and they are not looking to flip, invest, or otherwise profit from their house. They just want to LIVE there.

I hope this is making sense. It doesn't take 80% of the homeowners to sell to hurt the market. It only takes that 10-15% of the market to try and sell to drag it down for everybody.

SoCalMtgGuy

12/14/2005 3:50 PM  
Anonymous Florida Girl said...

Florida panhandle here. I have been sitting on the fence for a couple of years now deciding whether or not to buy. I have come to the conclusion that it is the bottom line - the amount I would owe - that is important to me. It is just not worth it here.

Also, skyrocketing property taxes and jacked-up insurance premiums as a result of the past few hurricane seasons have made renting look more and more attractive. I think I'll put the dollars I save on taxes and insurance into my IRA. :)

Love the blog.

12/14/2005 3:56 PM  
Blogger Former LA Homeowner said...

Robert Cote`

I don't ignore the facts but your data is outdated and trying to use that and support your argument is invalid.

12/14/2005 3:56 PM  
Blogger chickenlittle said...

Former LA Homeowner:

OK you stick to your anecdotes, and I'll stick to mine. I'll just quote you a very old piece of advice from a sage scientist, Lord Kelvin:

"When you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind. It may be the beginning of knowledge, but you have scarcely, in your thoughts, advanced to the stage of science."

12/14/2005 3:59 PM  
Blogger chickenlittle said...

socalmtguy: I understand the "catalyst" argument:

It doesn't take 80% of the homeowners to sell to hurt the market. It only takes that 10-15% of the market to try and sell to drag it down for everybody."

But how is it going to be dragged down for me (bought in 2000, refinanced to 15 year fixed in 2003 no equity withdrawl) if I see my house as a steadily increasing asset? A bunch of folks on another bubbleblog really dissed George Chamberlain for essently the same point. Your argument really depends on the majority of homeowners being irresponsible. That's why the numbers are so important.

12/14/2005 4:06 PM  
Blogger Former LA Homeowner said...

chickenlittle:

Yup, my population sample is small: n = 8 (people who purchased a house in So Cal in 2003 or later). It is anecdotal and I admit but I still think it is unfair to use 2000 data because it does not capture the real picture of the 2003-2005 homebuyer in So Cal. You can argue about data and statistics all you want and slam me for using anecdotes but reality should be reflected and use of statistics (data) must be current. As far as I can remember, whenever you publish a peer-reviewed article, your references should be current (not more than 3 years old, 5 years if you want to stretch it).

12/14/2005 4:12 PM  
Blogger Joe Schmoe said...

SoCalMtgGuy is right, it is all about the comps. If there are 20 houses on your block, and just two of them sell, they will set the market price for the other 18.

I am one of the people who predicts that housing prices will decrease by @50% in SoCal. But I don't think that this will result in economic Armageddon. Here is why.

First, plenty of people have been in their homes for 10 or 15 years, and will still be ahead even if the market drops by 50%. My in-laws, for example, have been in their home for 33 years. They paid $22,000 for it, it probably would sell for $450,000 today. Their first mortgage was retired long ago. Today they have a home equity loan with a balance of $15,000. What do they care if value of their home drops by 50%? The answer is that they don't care. They would still come out way ahead if they decided to sell. However, they have no intention of selling, so they care even less.

There are a whole lot of people like this out there.

Even financially irresponsible people won't necessarily be destroyed by the housing bubble. Consider the situation of hypothetical homeowner A. A bought his house for $178,000 in 1996. By 2002, it had appreciated in value and was worth $300,000; A had about $140,000 in mortgage debt remaining. A decides to refinance and "cash out" some equity. A takes $75,000 and uses it to take a first class Hawaiian vacation and buy stainless steel appliances for the kitchen as well as a Lincoln Navigator.

I think most of us here would agree that A made a stupid financial decision. You should not be using home equity to purchase a vacation and an SUV, and even remodeling the kithcen almost never actually increases the FMV of your home.

Suppose that next year, the housing market crashes and the value of A's home drops by 50%. Will this destroy A, financially? No! A still has only $215,000 in mortgage debt, a sum that is managble for most middle-class Californians. Moreover, the value of his home has apprecaited since 2002 -- it is probably worth $400,000 by now -- so A still has plenty of equity. Even though A did a stupid thing with his money, he won't be left destitute by a crash in housing prices.

Who will be destroyed? First-time borrowers who stretched too far and used risky loans. Stated income borrowers. Speculators. People who refinanced again and again and again, completely draining their homes of equity. Those who lose their job or for other reasons are forced to sell quickly, at a loss.

Most people will get through a crash just fine. But the ones who won't will set the market price for everyone. Once the banks start foreclosing, comps will drop fast. And once the supply of easy credit dries up, people will have to lower their prices if they want to sell.

So no, not everyone in CA has a suicidal mortgage. Not everyone is financially irresponsible. And many of those who are irresponsible will nonetheless emerge from a crash unscathed. Even when housing prices do fall, it does not have to lead to Armageddon. A 50% drop is plenty survivable.

12/14/2005 4:16 PM  
Blogger SoCalMtgGuy said...

Chicken Little (and other)

Look at this data from the largest Mortgage company in the country:

Countrywide October 2005 Report

A few highlights:

- Year-to-date mortgage loan fundings were $405 billion.

- Adjustable-rate loan fundings for the month were $23 billion, up 42 percent from October 2004. Year-to-date adjustable-rate fundings totaled $214 billion.

SO, if you take the $405 billion of loans, and see that $214 billion were ARMs...that there is over 50% and that does NOT count the option-ARM loans. Those have been running about 2.5-3.2 Billion per month, but jumped to over $8 billion in October.

You can conservatively add $26 billion in option arm volume for the previous 10 months of 05. That puts approx $240 billion of the 405 billion dollars of loans in the ARM/Option ARM category.

You can "assume" that most other lenders will track to these numbers as well.

It ain't perfect, but does that help some?!?!?

SoCalMtgGuy

12/14/2005 4:17 PM  
Blogger Former LA Homeowner said...

Socalmtgguy,

Did you say my question regarding the Office of the Comptroller of the Currency (2:11 PM)? Basically, I just want to know if lenders need to follow the OCC's guidelines or jsut continue doing their business?

12/14/2005 4:25 PM  
Blogger chickenlittle said...

S Cal Mtg Guy:

The whole thing might amenable to pie chart encompassing all houses. A minority slice would be outright owned, another slice would be mortgaged, but at various levels of risk. Imagine how nice that would look on your site. A certain slice of the pie would be the ultimate FB portion. Degrees of FB'dom!

12/14/2005 4:30 PM  
Anonymous JWM said...

Chicken Little

I think Joe Schome addressed your question about how would "it drag you down personally" given your debt situation. The answer is that it won't. I live in SD and have friends who bought a few years before the bubble for reasonable prices. They have a good income and don't believe in the paper gains they have on house. They have no intention of wrecklessly tapping the equity. But, the bubble bursting has affected their neighbor...who just happens to be selling their house (identical)next door...or has attempted to sell it for the past three months unsuccessfully. I started with researching the bubble to figure out what was driving prices and help my wife and make a decision about renting or buying right now. Now my questions are not so much about the direction of housing prices, but rather, what will be the economic fall out from the decline in prices that has to happen soon. It could affect the economy in other ways that are not immediately obvious and could impact everyone. One example is a government bailout of the recent FHBs who undoubetedly have used exotic mortgages. Will that raise my taxes and yours even though the decline in housing really doesn't affect myself as a renter or you as a responsible homeowner? Probably.

12/14/2005 4:35 PM  
Blogger SoCalMtgGuy said...

Former LA Homeowner,

I wish I could give you a difinitive answer. I think the comptroller can make suggestions, but I don't know if they have the power to "stop" the free market.

Again, when investors quit buying these loans, the lenders will STOP making them.

Probably not much help I know...I think Ben's blog had an article about the comptroller a while back.

12/14/2005 4:38 PM  
Blogger chickenlittle said...

jmw said:
"It could affect the economy in other ways that are not immediately obvious and could impact everyone."
I would like to hear how it would likely affect the bond and stock markets and what would be the Fed's likely response.

12/14/2005 4:50 PM  
Blogger Wes D said...

"It could affect the economy in other ways that are not immediately obvious and could impact everyone."
I would like to hear how it would likely affect the bond and stock markets and what would be the Fed's likely response.

Jobs - a couple million jobs evaporated in this country in the housing sector alone will drag down the other sectors (Home Depot, retail, computer services, automobile mfg). There could be 3-5 million jobs lost which will erase all the job gains since 2003.

Stock market - Initially down as people become worried about future growth. Eventually rises as stocks and bonds become the investments of choice (like they should be - not houses).

Fed response - this is a tricky one here and depends on inflation. At this point, the fed can't hardly cut rates or it will let the inflation genie further out of the bag. Without cutting rates it's going to be hard to get economic traction. Cannot print money and throw it out of a helicopter for the same reason (inflation).

Fed must be patient and hold rates firm for the first 6-12 months and then begin a gradual reduction if it appears that inflation is under control. We are now at 4.25% prime rate which is still very low by historical standards. I forsee us looking at 6-8% rates within a year unless this baby really pops and then it's more like 4-6% with a gradual easing no lower than 3%. For the economy's sake, I hope we never see 1% rates again.

12/14/2005 9:01 PM  
Anonymous Anonymous said...

Sure would like to hear Brokerhater's opinion on these posts. Where did he disappear to so quickly??

As always, great blog, socal.

12/14/2005 10:16 PM  
Anonymous San Francisco renter said...

Joe Shmoe: excellent post.

I don't at all mean to put a rosy spin on our current economic situation because I believe that the housing bubble is very real and will clearly have negative effects on our economy.

But I think it is important NOT to focus too much on the possibility of economic armageddon and a second Great Depression resulting from all this--the probability of this is very low. The bottom line is that we all have to take care of our own situations to make sure we are fully prepared. If you have managed your personal finances in a prudent manner so that you are not over-leveraged, you are not going to get killed by the downside of this bubble. You will likely see a temporary drop in the value of your stock, bond, and real estate market holdings, perhaps a significant drop. But if you have planned properly so that you don't have to liquidate any of these holdings at the bottom you will be okay. And you'll be paying less in property taxes! Hooray!

12/15/2005 1:24 PM  
Blogger SoCalMtgGuy said...

SFR

Agreed. but how many people in Ca and other places are really living within their means?

that is the question...and only time will be able to answer it.

SoCalMtgGuy

12/15/2005 3:19 PM  

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