Escrow company says 71% of purchase loans used 100% financing in 2005
First off, I want to thank:
Legacy Escrow Service, Inc in Washington State for sharing some of their 2005 year end statistics with me. Due to the competitive nature of the business, they asked that I not use the exact amount of purchase loans that they closed, but it is safe to say it was SEVERAL hundred purchase loans. Out of these purchase loans, 71% used 100% financing to get into the home. Many of those 100% loans used ARM's and interest-only payments. I want to reiterate that this is just one escrow company in the state of Washington, but I think it is just one more piece of data that confirms what I have been saying here all along.
I can tell you that I don't doubt those numbers for one minute. It goes hand in hand with what I have seen myself the past year. Legacy Escrow serves mainly the Seattle, Everett, and Bellevue communities in Washington State. Seattle might not be a top "bubble area" in the country like Southern California, but don't discount their numbers and don't think other areas are not seeing similar statistics. PIMCO research indicated that 82% of the purchase loans in California were either I/O or negative-amortization.
I feel like I'm beating a dead horse, but do you see the problems that could arise if 60-70% of the people are buying a house with NONE of their own 'skin' in the game? Yes, some of these people are responsible, but I think we can all pretty much agree that 70% of the people in ANY area are not going to be the 'sophisticated' type of homebuyer that is using 100% financing becaue they are getting a better return on their money elsewhere. Most people are doing 100% financing because they have no money to put down. They are using interest-only ARMs, and many are probably going stated because they don't even qualify under the 50% debt-ratio when going full doc.
Look at it this way...if property drops 5%, that leaves 71% of "several hundred" people underwater. Oh my bad, I forgot...real estate only goes up. Silly me, I forgot to follow the NAR (Nat Assoc Realtors) mantra where you face the nearest condo or housing development and chant "higher, higher, higher" 3 times per day. I was trying to drink their kool-aid, but I kept spitting it out while laughing at the various FB loan scenarios I see on a daily basis that are being counted on as the continuing fuel for this bubble.
Sorry for being a smart-ass...but I feel like the guy back in 97-99 who was saying that buying stocks that are trading 180 times future earning is not a smart move. The fundamentals weren't there, as they aren't there this time around. You just watch the "sping surprise" that many people are about to get when they all list their properties in March/April. I talked to 4 different people today that all mentioned they were going to be putting their places on the market in that time frame as "the appreciation will start again in the spring". Actually, it will be more like groundhog day...but he ain't showing up....so get ready for a long winter.
I look forward to the comments...
SoCalMtgGuy
posted by SoCalMtgGuy at 9:48 PM
38 Comments:
If you owe the bank a million dollars, you have a problem.
If you owe the bank a billion dollars, the bank has a problem.
This looks like a "moral hazard" problem: if nearly everybody is putting nothing of their own in, then as a whole class they will have little incentive to stick through it.
And in a recession/depression they will howl. Maybe even loud enough to change the bankruptcy laws back again, especially if the pseudo-economy of the last 5 years evaporates and entirely new politicians are elected.
The banks will have a Problem.
I have little sympathy for either these pre-fucked borrowers or the banking industry.
The greed of the banking industry in paying off the lawmakers to allow junk fees (credit cards) and especially punitive bankruptcy laws likely encouraged excessively lax underwriting standards. I.e. if they think that with the new laws they will be able to dun the borrower for decades then they won't have to write it off or set aside capital-burning reserves for losses, thereby keeping their stock up for the term of the current CEO. Bankers know full well the very deceptive marketing towards the less intelligent and less experienced and instead of feeling shamed (it used to be called "usury") they think they're now some clever hedge fund-level big swinging dicks.
They also don't have much skin of their own in the game, just Other Asian People's Money. The banks probably figure Helicopter Ben will bail them out and so why not go balls to the wall?
Consider S&L's in 1980's, a huge theft of taxpayer money to powerful Republican types.
In San Jose, my zip code , I am
starting to see more listings at
lower prices. Most are not moving.
One person I ran into in Sacramento
bought 5 new houses (don't know
how he did it, probably lied on
and cheated on the mortgages), has been putting 5 houses up for sale since Nov.
He has one sleeping bag, and move around from house to house, eating
Ramen noodle.
So far none has been sold, and he was trying
to sell one to me, but I said no thanks.
need 2 leave...
I haven't heard of them, but that doesn't mean anything. There are tons of people doing seminars on tons of different topics.
I'm always skeptical of the "big seminar". They tease you to get your interest, then hit you with a big sale at the end. Not all are like that, but many are.
I can't help you on this one...
SoCalMtgGuy
I also believe the BK law will be loosened up in a couple years. This whole thing is just a house of cards. An economy is not built on selling houses to each other and once this game ends, the rest of us who live in moderation will have to clean up the mess.
need2leaveCA,
A few months ago I received tickets in the mail for a real-estate seminar here. I believe it was along the lines of buying foreclosed homes and reselling for a tidy profit. I shredded them as quickly as possible, as to me it's a sign of something seriously wrong when every Tom, Dick, and Harry is trying to get rick quick. Reminds me of late night informercials touting the benfits of oil stocks back in 1996 before that bust.
I feel like a relic from the horse and buggy days.
I would not feel secure with anything more than a 15 year loan with 50% down. Actually, I have never had a mortgage and I'm in my 40s. If I didn't know I could pay the sucker off by the time I was 60, I wouldn't get one.
SoCal
I have been lurking since you started, but I have to post now since this is close to home.
How representative of the market is this escrow company? If it is typical, then these data may provide important insight regarding the proportion of demand that is artificial relative to historical patterns.
For example, some of these 2005 0%-down buyers are surely speculators—in fact in the small community of Mountlake Terrace in Snohomish county that I have been tracking, about 1/3 of the dozen or so new listings since Jan 1 were for house bought in the summer of 2005. The next question is how many of the remaining 0%-down buyers are actually part of the newly exploited pool of people that do not regularly participate in the housing market because they can’t save any money. It is likely to be a high number since this county is mostly blue-collar, and more affordable compared to Seattle, and thus attractive to marginal buyers from that region.
These data suggest that if/when speculators leave and when sub-prime/easy credit lending tightens, demand could absolutely collapse in this county.
These results are also probably generalizable to other suburban/exurban parts of the country since Snohomish county has exhibited typical bubble-like patterns. The median price rose 26% last year to $319K. It is close to but significantly cheaper than Seattle proper ($393K median), and is generally composed of vast tracts of spec $hit boxes from every decade since the 50’s.
sno-ho,
While our Snohomish County and Puget Sound region may be less impacted in a bubble than other states in the country due to our large and diverse employment base, the Puget Sound communities are hardly immune.
The 71% at 100% financed mortgages that we reported is the real deal for purchases that we closed. Refinances, although still working to produce those stats, probably mimic the number above.
You raise a great question. Are we a large player in the market. Hardly, and that is why it is a stunning statistic. The title companies and others close thousands of transactions locally and across the country. I would venture that their stats would be similar. But I don't know if they would report it. Potential political backlash.
Live under your means.
Legacy Escrow Service, Inc.
snoho,
I don't know all the stats for the Washington area. If you could find out how many purchase transactions there were last year, you get an idea of how big or small their exposure is.
Since escrow companies just process transactions, they are not out "marketing" specific loans like a broker shop would be.
Even if it is a very small percentage of the actual, I think it still paints a picture of what is going on. It is just one more piece of data that adds to the argument that this credit bubble is what is driving this whole thing.
Think about it, just a few years ago, you couldn't hardly find a place that would give 100% financing. Yes, there were some, but it wasn't marketed or widespread like it is today.
SoCalMtgGuy
Got 50???
50-year real estate loans a possibility
Longer loan terms would lower monthly payments
"It's a good idea for consumers," said John Marcell, president of the California Association of Mortgage Brokers. "There's nothing wrong with a 50- or 60-year mortgage."
So far, 50-year loans are only a gleam in a couple of securities issuers' eyes, according to Mark Douglass, a senior director at the Fitch ratings agency. It's not possible to get such a loan at present.
In May, Fannie Mae confirmed that the mortgage giant plans to expand its purchase of 40-year mortgages, making such mortgages available to additional lenders. To make 50-year mortgage loans a possibility, Fannie Mae would have to embrace them – and the government-sponsored enterprise has given no indication as to whether it will or not.
But the idea is currently a hot topic in the industry, and 40-year loans are becoming more and more popular, suggesting that 50-year loans might find favor with consumers as well.
By stretching mortgage payments out over a longer period of time, borrowers can lower their monthly payments, even though the interest rates on alternative products such as 40-and 50-year loans are higher. This can be a big help to low-income home buyers or people in areas with high home prices.
Because homes in California are so expensive, Marcell said, alternative loan products such as interest-only loans, adjustable-rate loans and 40-year loans are popular in the state.
"If we include the 50-year mortgage with alternative loan products, this collection of loan products that enables people to become home buyers when they otherwise could not would certainly work in favor of those households," said Robert Kleinhenz, chief economist of the California Association of Realtors.
Already, 40-year loans are catching on, at least in California. Now, "one-quarter of the loans closed every day (in California) are 40-year loans," according to Marcell.
Both industry professionals pointed out that the average mortgage is not on the books for 30 years.
"The average house in California is either sold or refinanced after five years," said Marcell. "The national average is seven years."
For the first few years of most mortgage loans, most of the payments go to interest rather than principal. This is particularly true of 40- and 50-year mortgages, however.
"With a $400,000 loan, the difference between the payments on a 40-year loan with a 6 percent interest rate versus a 30-year loan with the same interest rate would be $200 a month," Marcell said. But even less of that money would go toward paying off the house, as opposed to paying interest, he said.
Hence, a 50-year or 40-year mortgage could leave the borrower with precious little equity when it comes time to sell or refinance, the two pointed out.
"We're lucky in California that we have seen some substantial equity gains. But there are areas between the two coasts where you can't count on a whole lot of appreciation, so taking out a 50-year loan amounts to breaking even," Kleinhenz said.
"It's important to counsel people taking out mortgageloans so they make an informed choice," Marcell emphasized. Such counseling is especially important with unconventional loans, he said.
"These loans are good for some people. The problem is that they aren't good for everyone. Everyone in California wants to buy a house, but in some cases, financial disaster could happen by putting them in these products," the mortgage association president said.
However, a 50-year fixed-rate mortgage is less potentially dangerous than an adjustable mortgage. This is because with an ARM, the payments go up after a certain amount of time, usually 13 months. "Payment shock can get to you," Marcell said.
"The 40-year or 50-year loan is a fixed rate. It's going to be there as long as you want it and the payment is not going to change. It's a safer loan for people who can't afford a 30-year fixed loan," Marcell said.
As an investor, why would you want to buy 50 year fixed notes? If they were ARM's, it would make sense because there would be protection from rising money costs. There is no protection with fixed rate loans, especially if people can't refinance or sell because there is no equity. Fifty years is about 10-15 interest rate cycles. Think there will be more than a few years that the interest rate will be lower than inflation? There will be quite a few of those investors who have to sell those bonds at a loss.
drchaos, Not to change the subject or anything, but your line:
"Consider S&L's in 1980's, a huge theft of taxpayer money to powerful Republican types."
is just wrong. Here's what actually happened:
The ethics committee's investigation focused on five senators: Alan MacG. Cranston (D-Calif.); Dennis W. DeConcini (D-Ariz.); John H. Glenn Jr. (D-Ohio); John S. McCain III (R-Ariz.); and Donald W. Riegle Jr. (D-Mich), who became known as the Keating Five.
I see 4 democrats and 1 republican not a big deal, but I like to be vigilant when Dems rewrite history.
We got 100% financing, 30yr fixed, end of 2003. It was not a problem as long as the FICO was up there. I got burnt on some closing cost though :-( Not too bad. But I got in just in time before it went berserk :-)
I agree with you guys. Stretching out the mortgage payment doesn't save that much money on a monthly basis.
I did a post on this where I crunched the numbers between 30, 40, and even 100 year mortgages.
See this link:
Another F@CKED Borrower - Math behind 30, 40 and 100yr mortgages?!?!?
As you can see, even a 100 year mortgage doesn't change things that much. Even if you do a 100yr mortgage, what is next? Where do you stop "lowering" the standard?
How about you set the standard at the 30yr mortgage, and make people have to AFFORD the property. All that is being done now is letting the "price" drive new, and unproven ways to make it 'affordable' even if it is over 50-100 year periods of time.
SoCalMtgGuy
Keating was a Republican. There was a Democrat majority in the senate at that time. Those were the ones that needed to be bribed. The bailout was *by* Dems *for* Repubs.
Taxpayers of both parties got screwed. Expect a repeat.
RE: the savings and loan.
It was another case of greed and easy money. Like this, it is no-one-person's fault, and it spans all political parties.
Let's try to keep the posts away from finger pointing, and more towards problems/solutions and the financial impact on things.
Thanks.
SoCalMtgGuy
Oh how wonderful. With 40, 50 year loans now houses will be even MORE overvalued as overextended idiots jack up the prices. Don't these people realize that they will be basically paying interest for the first decade that they "own" the home? By then they will have already moved. WTF, haven't these FB's heard of RENTING? It would be CHEAPER. Oh wait, I forgot, housing prices "just go up". Gotta get in before I'm priced out.
Never mind that the whole point of a loan is that you PAY IT OFF BEFORE YOU DIE.
Ferromancer..
Renting is just "throwing your money away".
While owning, you get appreciation every year!!
;)
What happens when people cannot afford housing even with 50 and 100yr mortgages? what's next?
SoCalMtgGuy
Thank you for this stat. It's pretty significant to have another source expose how out of control this bubble is.
Again, all this smug attitude that owners are idiots and renters are smarter or vise versa.
I am sure right now renting is the best thing to do for many people with the prices gone wild (maybe only choice for some e.g. non-eductaed, crappy job,1 income, etc..)
Lets just acceptt some prefer to rent and some prefer to own.Renters are form Mars and Homeowners are from Venus.
Renters have their own cliche " I love having no yard to cut, yada yadayada".
An before you attempt to bash me, Iwas a renter for a LONG time. It's just that the time was right to make a move several years back. Your time will come too. Its like marriage or kdis, you say 'Oh no not for me!" and BAM there you are.
Good luck.
Aguho,
Does PRIMERICA ring a bell? Big time scam artists.
My brother in law saw an ad in the paper "make 10k monthly being a LoonOfficer". He signed up and now claims he is making wads of cash. Even bought himself a new 600k pad of course with his own products he pushes : IO/NegAmortization?ARM/Pick your payment loan. He used to be a Milkman for Christ sakeand now he passes himself as some affluent big shot RE Investor always telling me "you can do it too!".
I cant wait for him to crash and burn.
ieguy 67,
I am most definitely NOT bashing owning a home. I have said it time and time again, if you can put money down, get a fixed rate payment that you can AFFORD, and plan to stay awhile, then go for it.
To the people who bought a while ago BEFORE prices skyrocketed due to loose lending, that is great.
I'm here to let people know some of what is REALLY going on, and how all these people can 'afford' to buy these 300-600k homes.
You even said that you bought SEVERAL years back. Where do you live? How much did you buy your place for, and how much would it cost today? Just curious.
I have news for you...you can have a great job, a great education, and not be able to "AFFORD" a 450k 600-800 sqft condo in Southern California. 40 year old homes in the "ghetto" areas are running 450-650k.
So just remember that some places are waaay more out of whack than others...especially at this point and time.
SoCalMtgGuy
Most people are doing 100% financing because they have no money to put down. They are using interest-only ARMs, and many are probably going stated because they don't even qualify under the 50% debt-ratio when going full doc.
What a great and troubling article. Thanks so much for posting it. It really explains how these nutso "flippers" I've been running into around town are managing to suck up these expensive properties. For example the guy whos wife works a job as a concierge in a local hotel , and happens to be the "owner" of three one milion dollar plus spec houses he's going to "flip" come the spring. Ireally wish they were something that I wanted to scoop up to live in once the crash comes but #1 they're ugly as hell, and #2 they're built in a flood prone area of town. tHis guys gonna be "underwater" in so many ways it's not even funny.
Ummm...is it not true that the longer you take to pay off your loan, the more expensive your house becomes- I mean in terms of actual, real dollars.
So why would anyone want a 40 yr. loan? So they can "buy" a house for 350K and end up spending 900K for that same house by the time the loan's paid off???
Wouldn't a 40 year loan just be another justification for driving up house prices?
Is there any way to make Americans understand that the money they pay on interest is as real as the money they pay on the principal?
For me, an (at least) 20% dpt. and a 15 year loan w/ the option to prepay is the only way to go.
Americans have got to quit with this "Let's all make the banks and money-lenders rich" thing.
anon 8:22
See my post under the "popluar posts" about the 40 year mortgage.
I also posted it about 12-15 comments above these.
I totaled ALL of the payments for a 30, 40 and 100 year loan...as well as looking at the difference in monthly payment.
SoCalMtgGuy
Two guys at work today were talking about the latest seminar they attended. They were told the following:
"Since most of your net worth is in the equity in your house and with a high chance of housing going down, refi now and pull as much cash out as you can. Then if it goes down, who cares? Either keep paying for it or walk away. Invest that new found money in a nice safe place, like the universal life we're selling."
fishtaco...
I couldn't get past the fact that it has a 2 1/2 car "gradge".
SoCalMtgGuy
So why would anyone want a 40 yr. loan? So they can "buy" a house for 350K and end up spending 900K for that same house by the time the loan's paid off???
You have to take inflation in account. Now suppose the interest rate is close to inflation, or inflation is even higher than interest rates (like in Spain at the moment) then people have no problem taking big and long loans. Their income is rising with the inflation so they think they can easily afford it.
Then again, US is no Spain. Median wages aren't going up as fast as inflation.
Even in spain, real interest rates (i.rate - inflation) won't be negative forever. The bubble is real. The amount of debt outstanding is real. It will pop, eventually.
Karen-
Thankyou. Now, the next question is, is there any possible way to get Americans to understand that:
if the shirt costs $25, it is cheaper to pay $25 now than $25 cost of shirt plus $15 interest = you just bought a $25 shirt for $40.
Inflation and all other justifications aside, I would rather buy the shirt for $25 and a pair of pants on sale for $15= $40.
Or save the $15 that I would have spent in interest on the shirt.
Is the shirt ultimately worth $25 or $40?
Or, what I should have said is;
Is the $25 shirt worth $25 or is it worth $40?
I'm thinking, clearly it is worth $25 or they would've asked $40 for it in the first place.
Heck, it may not even be worth $25. Maybe it's really only worth $5! This is a concept that Bubble heads ought to be able to wrap their minds around.
The $150K house that you "bought" for $550, that with years and years of interest payments, you will ultimately spend almost a million dollars for.
Smart!
And thankyou for the name (Anon 8:22) SoCal Mort. Guy, I really like it!
Anon 8:22
Ha ha...
I'm glad you like it! I use the time of the post so people can track which 'anon' I'm replying to. (I'm sure you know that).
Either way, Anon 8:22, glad you like you name and nice to have you here!
SoCalMtgGuy
Not sure if this is good or bad news. Gut tells me it's bad...
http://news.bostonherald.com/localRegional/view.bg?articleid=121116
to the last blogger 2/10/06 12:21 am. Did you go the the 3 day seminar put on by the Income Strategies Institute? We went to their seminar last night and signed up for their 3 day seminar in April. I am researching on the net and have not found much about them or Sidney Sperry.
How was the three day seminar? I got an invitation to their free seminar and did not find much information on the net. Any insights on the quality of the seminar and the people conducting is appreciated.
Thanks
I also went to the seminar & bought the $199.00 package, yet to go to the 3 day seminar. I am tring to find information on the income strategies institute and on Sid Sperry. Can't find much. Need a feed back from someone who bought it. Was it worth taking time off from work for 3 days? Is it like the rest of the real estate seminars?
Has anyone attended this seminar? I just signed up and just today started looking on the net about them. according to utah commerce the company was only registered in NOV'05. meaning that very, very, young!
Please any feed back?
I just completed the 3-day workshop offered by Income Strategies Institute. It was my first seminar.
I can appreciate all the people with bad vibes on these kind of seminars and their opinions. They make sense.
I had some serious doubts concerning the following: Income Strategies Institute is the 3rd company from the State of Utah I've come across which specializes in building wealth through real estate.
I tried to go in with an open mind, but I went with this thought on the back burner. Their presentation got me really amped! Their information is very useful.
However, they kept stressing that the knowledge they give is not useful unless it is applied, thus their sales pitch. I can relate to what one of the other people said about these companies in Utah and that the people who work for these companies are former Mormon missionaries and are "salespeople". What is it about Utah that these companies are based there, and not anywhere else in the country?
I did some research and I started with Google.com. I put in "Income Strategies Institute" and I found a hit on a website called www.ripoffreport.com. I found 4 complaints from people who went. I concluded these people were put off by the tactics and didn't buy into their philosophy.
They pitch themselves as having alliances with the #1 title company in the U.S., a working relationship with Wells Fargo and real estate brokers with the "yellow sportjackets".
Anyway, I heard enough to decide that I was willing to take one of their classes as a flyer. If I get the results, and more importantly, the support and mentoring they really pride themselves on then it will have been a solid investment and I'll continue to take their courses.
This is my first time going to one of these seminars, so I'll keep you posted.
People...People...please come to your senses and stop giving money to these useless seminars. They are nothing more than high pressure sales that force you to believe that you are stupid to not follow their advice. They don't provide any information that you can't obtain on your own... Save your money and stop wasting your time and money with these clowns.
http://badbusinessbureau.com/reports/ripoff206487.htm
http://tinyurl.com/2tw3vf
For those that purchased at 100% finance congrats; Hopefully you kept the down payment and leveraged it and created some kind of cash flow. Choice and control is key so learn as much as you can as there are many roads to Rome.
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