"I was cheated"
I hope everybody had a great weekend. Alright, let's get down to business. I don't usually repost articles because I know that many of you have made the rounds on the "bubble blog circuit" and seen them elsewhere. There are some articles though that deserve to be posted, and expounded upon. Take this article titled: A Home Boom Busts - Shanghai's hot housing market has fizzled after a run-up fed by speculators, threatening a significant part of China's economy.Since it appears they are currently experiening a housing bust, let's look at some of the signals that are now so "obvious" to them, and see if there are any similarities to the United States "frothy" regions.
Let's start here with these 3 points: "Shanghai's housing bust comes after a doubling of prices in the previous three years, a run-up fueled by massive speculation. With China's economy booming and Shanghai at the center of worldwide attention, investors from Hong Kong, Taiwan and elsewhere were buying as fast as buildings were going up. At least 30% to 40% of homes sold were bought by speculators, says Zhang Zhijie, a real estate analyst at Soufun.com Academy, a research group in Shanghai."
So, they had a doubling of prices in 3 years. Know or heard of anybody who has had a property double in 3 years?? Anybody heard/know of a condo complex or housing development that was sold out?? Anybody seen the numbers that have the number of people buying for investment and second home in the 30-40% range in many "frothy" areas??
If you answer NO to all three questions, then stop reading now, go to Ebay, and buy all of the Beenie Babies you can...they will be worth a fortune someday!
Does this sound familiar?? "Ordinary people had no option but to follow the trend," Zhang said. "Worrying that prices would be even more unaffordable tomorrow, many of them borrowed from relatives and banks to buy as soon as possible."
Ah yes, the "if I don't buy now, I'll be priced out forever" argument that many of us have heard, but have a hard time believing. Priced out for a several years, maybe...priced out forever, doubtful. It is hard to be priced out "forever" when 82% of the purchases in the last year in California were done with Interest Only and Neg-Am mortgages. Those precious loans will have to adjust sometime, and I'm betting that most of those people aren't the "sophisticated" types that those loans were designed for. Wait a second, I guess watching a Robert Allen or Carlton Sheets infomercial does make one "sophisticated"...after all "no money down" is the way to go!!
I really like this part: "And for a short period, Wang believed she was raking in hundreds of dollars a day for doing nothing, as property prices in the city kept soaring."
Ha ha....that was ALL I heard for quite a while. It was "THE" talk in Southern California...as I'm sure it was in many places (Vegas, Arizona, Florida, etc). Everybody liked waking up in the morning with another 500-1000 bucks of equity in their property. But let's see what happened...
But today, prices at the complex have fallen by a third, and the lines of frenzied buyers are gone. Wang is among dozens who are fighting the developer to take the apartments back.
If you look at the ads for new construction, or have seen any open houses lately, you will know that the long lines of frenzied buyers are gone. I don't think we have seen prices come down a third in very many areas, but there are a lot of concessions being thrown in now days...especially from developers. It isn't uncommon to see free upgrades, free HOA's, free mortgage payments, free cars, free plasma TV's, etc. thrown in by developers to more their inventory. Look at the inventory numbers on the bubbletracking blog, those alone will illustrate that the "frenzy" is over.
There is a main point that I want to get to, but not until I say that the Chinese government did take some steps that caused this. They raised the minimum rate from 5% to 5.5%. They added some tax hits for "flipping" properties, and what I think is the biggest thing, they made downpayments go from 20% to 30% for investors. Can you belive that!?!?!? They actually had to put 20% down and they had a bubble. Can you imagine how bad things would be over there if they were making 100% loans? I/O loans? Neg-am loans? It appears they don't have the amount of "exotic" financing that we have here in the States.
But when it was all said and done, here was the final comment, which is the point I want to emphasize:
Huang regrets that she got caught up in the frenzied market, and says that even if she wins the lawsuit, she'll suffer a hard financial loss.
"I was cheated," she said.
This is the part that I have 100% no-doubt-in-my-mind will happen in this country. People will take zero responsibility for their actions, and look to grab a lawyer to "save" them from the "investment" they were "cheated" on.
I want you to check out this link: Upside down in Tuscon from the San Diego Real Estate Investment Club. Here is the "problem", a guy is negative on pre-construction property in Tuscon, AZ:
Now my situation is this-- If I hold it, I am looking at a negative cash flow of $600-700/month (after taxes, insurance, management fees, PMI, etc). If I sell, it would be at a loss with commission to the agent, about $10K. Do you think I should hold and wait or sell and cut my losses? Anybody in a similar situation?
That isn't what I have a problem with. Bwr made an investment, and is going to lose money. Has happened millions of times before, and will happen millions of times again. What bothers me is another guy in a similar situation, and their reply:
I have contract on a home in Tucson that should be done in January and may find myself in a similar situation. The price increase from my builder has only been $10k. I'm defintately getting the jitters about the whole deal and wondering if a good real estate attorney could get me out of the contract and get my earnest $ back prior to having to close.
(snip)
If anyone has ideas about how to get out of a pre-con contract I would love to know about that or if you know a great RE attorney I may need help. Could that be a less expensive way to go? I don't believe I am the only investor in this unfortunate situation.
So let me get this straight, I want to sign a contract for a home...actually, not a home, a house. Then I want to "flip" that house and make my "easy money" without doing any work. When it appears I'm not going to make the money I'm looking for, I will just call on an attorney to "get me out of it". I know I'm not surprised by this, but this is small scale, and only the tip of the iceberg in my opinion. Just wait until 1.5 trillion dollars of ARM's adjust in the next 24 months, and see how many people will want to sue then. Especially the ones that don't have the "guaranteed" appreciation that "goes along" with all real estate investments.
Do you think that every borrower with an "option-ARM" knows how the loan really works? I can tell you from the amount of people trying to refinance OUT of an option-arm, they they had no clue what kind of loan they were in. The number ONE thing borrowers care about is the payment, and the number one thing I hear from brokers when I ask "what kind of loan are they looking for?" they say "lowest payment possible". Well, the option-arm will get you the lowest payment possible...but there is a "price" for doing that. You can read my option-ARM post for the details.
So yes, China had some other factors we don't have here in the United States, but many of the underpinnings were the same. Yes, there were many more good pieces of info in that article, so you should read the whole thing. The sad thing is that no matter what happens anymore, the solution is to get a lawyer and sue somebody. Make an investment that doesn't make you six-figures, get a lawyer. Our culture sucks at math and reasoning, but they get an A+ for "bling" and playing the victim. It's OK though, everything will be fine, after all..."it's different this time".
I look forward to the comments...
SoCalMtgGuy
posted by SoCalMtgGuy at 9:08 PM
36 Comments:
How about a follow up to your Rant the other day about people being Bankrupt in Math.
How about a RANT about people that are completely illiterate in all matters financial ---
Check this out:
http://news.minnesota.publicradio.org/features/2005/11/07_olsond_stripping/
(forgive me if it was posted in a comment already) -
It blows my mind how many ignorant people there are in the world, but more so, it blows my mind that so many morally bankrupt people are there to take advantage.....
Good post.
You just need to read history.
You will soon realize that people come in two sorts. sheep and shepherds.
Unfortunately, over 95% of us are sheep.
There will be a lot of pain.
OT, but SoCal's little spot on the net has been "savaged" by those on Craig's List.
The author doesn't write very well and doesn't spell very well. Spelling isn't that important, but when combined with weak writing, is an good indicator of lax thinking as well.
The author is a mortgage broker. Whoopee. Not a lot of rocket scientists in that profession. Low barrier to entry, just a sales job for people who aren't very good at anything else.
So this guy sells loans, then writes sarcastic stories saying his customers are fools.
Good for him.
Not much there for me though.
http://forums.houston.craigslist.org/?act=Q&ID=37486909
I think you write just fine, SoCal. Evidently a lot of people agree, based on the traffic here. But there could be some material on that forum to work with.
What this country needs is a good financial cleansing.
-Ivan
Question:
As I understand it, something like a million or three ARM's are going to be coming due for an "adjustment" this year and next, and the folks holding them may or will face substantially higher payments. Now I can understand how flippers and speculators might be disappointed when this happens (awwww....), but isn't it possible that many people might be able to opt for some other type of mortgage (say, some fixed-rate thing), and smoothly transition from a precarious position to one that's at least sustainable? I'm trying to get some idea of just how large and dire a shakeout is likely (aren't we all?). Any thoughts?
Lou,
That is pretty funny. Somebody posted the quote that I posted about...it wasn't my writing.
I try to catch the spelling/grammar errors, but from the response I have received, lots of people happen to like the way I write.
Also, they called me a mortgage broker...I am not, I am a mortgage banker. I represent the bank and ONLY deal with brokers. I don't work with borrowers at all. Borrowers are nothing more than "data" to me (fico, ltv, etc.).
Oh well...I don't think the person even read the website.
Thanks for the link!
SoCalMtgGuy
It's a little more justifiable in China. They have had 10% GDP growth per year for a decade, and their government's statisticians recently revised UP the figures for many of the past years.
So, it wasn't unreasonable for Chinese to believe that in the heart of the boom city, Shanghai, prices would soon reach high Western valuations of major capitals.
Unlike here, incomes have also been rising very rapidly---especially among the upper 20%.
anon 7:43
There are over 1.5 TRILLION dollars worth of ARMs that are set to adjust the next 24 months (1.2 trillion in 2007).
It sounds "easy" in theory...can't all these people just refinance into a fixed rate loan?!?!? But it isn't that simple.
Yes, some of these people took the "lower payment" in the short term and will have no problem refinancing. Lots of people could ONLY afford the property by doing an ARM, so with rates higher, they might not
be able to afford the new payment.
PLUS, you have to have equity to refinance. If they bought "late" in the cycle at a high LTV, then they might not have any equity, which will make it even harder to refinance.
See my post under "popular posts" titled "welcome to the gun show, now show me your ARMs'...or click the link below.
Post about ARMs
SoCalMtgGuy
SoCal
Is an ARM ever a good choice for a buyer?
Can someone answer this, so I get a better idea for the mechanics of exotic loans?
If you take an I/O loan for ~100% LTV and your house valuation goes up by, let's say, 30 - 40% then what kind of reduction in interest rate are you likely to get if you then move to a fixed interest loan? You owe the same amount of money but because your LTV is now lower you can get a break on the interest rate because the Banks' risk has been reduced. How much of a break are we talking about?
I guess my real question is about the math of how what is being sold is supposed to work if everything goes according to plan? Can someone who can only afford the monthy payments on an I/O loan eventually change to a fixed and still make the payments? How much house appreciation does it take?
What might be interesting is what happens when banks start foreclosing on bad loans and "discover" that the applicants had mistated their incomes. The borrower (or at least many of them) will blame the mortgage broker or realtor who they will say told them to lie about their incomes (which in many cases will probably be an accurate claim). The mortgage brokers will blame the borrower who signed the forms verifying the income figures. Some brokers may blame the banks, saying they new what was going on but looked the other way to gain more business (at no risk since they immediately sold the mortgages). The potential exists for a real legal food fight.
And what will happen with the realtors who guaranteed the buyers that real estate would always go up. A stock broker or mutual fund manager could never get away with a similar statement concerning their products.
Anon.
Yes, an ARM can be a great loan depending on the situation.
Getting an ARM when rates are at all-time-historical-lows is probably NOT the best time to get one. If rates are so low, why not get a fixed rate and lock that in?
Yes, I know that many people used the ARM because the payments were lower, and they were just going to "sell it anyway" in 2-3 years when the ARM was going to start adjusting. But then you have another problem...selling the property. Sounds good in theory, but when thousands of other people have the same "idea" and the market gets flooded with property with fewer buyers, then prices go down (I know the RE "experts" say otherwise though).
An ARM is a great loan if interest rates are at historical highs, or if rates look like they will be on the downswing for several years. That is what "helped" during the last property decline in CA in the early 90's. Rates declined from the 9% range to the 6-7% range. Doesn't sound like much, but decreasing payments help a lot.
In today's situation, you have many people that maxxxed themselves out at ultra-low rates to "afford" property. When those rates go up 1-3% they will be in for a hurting...especially if they had I/O loans and have to start paying principle as well.
See my ARM "link" a few comments above.
Again, even I/O and neg-am loans have their place if used correctly by people that are familiar with how the products work, and the risks involved. The problem is that most people don't bother, they just want the lowest payment today, so they can get appreciation tomorrow.
SoCalMtgGuy
Anon 10:26
EXACTLY! A legal free for all where the only "winners" are the lawyers.
SoCalMtgGuy
ALSO...it helps to reply to "anonymous" posters if they type in some sort of name when they post. You don't have to register, just post as "other" and type yourself a name...or give yourself a name in the post. Get's hard to reply when there are multiple "anon's" on one thread.
No biggie...just makes it easier for readers to track.
Thanks
SoCalMtgGuy
SoCalMtgGuy,
I don't mind topic drift and such but you are correct that multiple "anons" is just too hard to follow. My other pet peeve is the "hijack post." You know, 3 replies in somebody says "gold! new highs!" or "Cheated? You should see Australian price depreciation!" Everything gets talked about so there's no need for this.
Do you think that every borrower with an "option-ARM" knows how the loan really works?
Just looking around at my little corner of Sonoma county, there are about 25 + properties in some form of preforeclosure or foreclosure, and that's not counting the Bks and tax liens...judging by this..no.
The scapegoating has already started. Everyone's looking to pin this on crooked appraisers. To be sure, what is alleged of thousands of appraisers is wrong, bad, illegal, and they should be punished if they're found to have broken the law.
But that does nothing to absolve any buyer of the responsibilities relating to his/her having bought wildly overpriced properties. Even after the appraiser signed off on a sky-high value, the buyer still went ahead with the purchase.* The two things are completely unrelated.
*In one sense, the fact that deals continued to go through can be seen as justifying what the appraisers are said to have done: the property was worth what someone was willing to pay for it. Ok, not really, but it does strike me as a bit ironic.
excuse me, I meant 50+ preforeclosures.
Someone asked if an ARM is ever a good deal. In 1984 I had one. Everyone I knew called me crazy, as rates were falling and they would "lock in" at a rate to protect themselves from the rates going back up to 18%. My initial rate was (I think) 8.5%, and I know it never went past 11% (remember the times). I watched friends spend money to refinance at 16%, 14% ... as rates fell. It cost them money each time, and each time they told me how wonderful the deal was, and how stupid I was for not locking in at that rate.
I will say this though. I was lucky more than smart. I knew I could handle the maximum interest (which could have gone to 18%), and I figured I was not going to stay there more than 4 or 5 years, so it would have been a positive even if the rates had gone up. The only way in which I was smart was that I knew what I could handle, and so the ARM would not have bankrupted me. But some people it could have (and will).
One lesson I have learned in life is that when everyone says something is a bad idea, it is more likely a good idea. If everyone thinks you are an idiot, you have a shot at looking good.
In fact, reading the housing blogs sometimes depresses me. Even people who think there is a housing bubble are waiting for it to burst so they can buy into real estate. Everyone still wants to buy (albeit, not at these high prices). Until everyone says you are an idiot for ever thinking of buying a house (except to live in, and then you will probably lose money), this market is far from the bottom. Until I read a blog and everyone says buying houses is only for fools (at ANY price), I am going to stay away from buying them. I personally find there is too much optimism about housing, even in the housing bubble blogs.
BTW - That does not mean I think housing is going to crash like the great depression. I am just waiting for the psychology to shift to where people don't want to own houses, except to live in and expecting to lose money. Then we are close to turning the corner.
I think that a lot of these people are going to be shocked at how little recourse they have legally. Not that some enterprising ambulance chasers won't try suing under various novel theories but I can't see an easy way out of jail for most of them unless they were mentally defective at the time of the transaction and were coerced into it.
What needs to happen though is when the inevitable defaults happen, the people who made these stupid moves should be in the penalty box insfar as being able to buy more property for years to come. Ha. Like that will ever happen.
anon 12:04
The point of my blog is for people to crunch the numbers and make sure that purchasing a house is a good financial move.
I'm not anti-housing. If homes were appreciating at this rate while everybody was putting money down and getting fixed rate mortgages while incomes were going up 30% a year, then no problem.
The problem is the "funny money" that is being thrown around during this "credit bubble" which is responsible for allowing people with a Target card to "state" their income and buy a $600k house with "no money down".
That is the problem.
SoCalMtgGuy
I still see full page ad in the Chinese language newspapers here in LA advertising for Shanghai and Beijing condo's.
My dentist was raving about how he's got to get in on the action too.
When it comes to greed, people just don't learn, or they think this time it is going to be different.
In the article it mentioned Hong Kong investors. Hong Kong was in the biggest housing bubble for years after the Chinese take-over. Almost everyone was under-water with their mortgage. You think these people would learn.
It also mentioned Taiwanese investors. This is a little OT, but China's got 600-800 bilistic missiles pointed at Taiwan and all of its military exercises "simulate" amphibious assaults of "islands." And here we have Taiwanese putting down cold hard cash to by real estate in a country that wants to swallow you whole. Can we say blinded by greed? Did we see Kuwaiti's investing in condo's in Baghdad? These Taiwanese investors deserve to get burned.
Yikes! This is getting scary! I am an appraiser, always appraised the home for what the comparables supported, not what the contract price or owner's "estimate of value" was. I have good documentation, notes on everything, but I fear that even I will not be immune to the coming law suits. Planning my exit strategy but I suspect I will be keeping my E&O for years after I have left the industry for the retroactive coverage.
RE: When is a good time to get an ARM?
I got a 1 year ARM in 1997. If I would have got a fixed loan, my rate would've been 8.50%. Not once when I had my ARM (1997-2004) did my rate ever adjust to more than 8.125%. When I paid off my loan, my rate was 5.125% and would've gone down to the mid 4's had it reset. I like to think it was one of the better financial decisions I ever made. I never thought about refinancing my mortgage because I knew rates were going down. I kept making my normal payment and paid off principal.
When fixed rates were in the low 5's in 2003 and in the mid to high fives from 2004-2005, there was no reason to get an ARM unless there was a clear plan to pay the loan off in a set period of time (3, 5, or 7 years).
Getting an ARM, Option ARM, IO, just to qualify to buy a property because you can't meet traditional underwriting guidelines (30 year fixed pmts, 28/36 dti's etc) is a recipe for disaster. Great blog BTW.
This is my favorite blog.
when I lived in China around 1998-99 the idea of a mortgage was quite new. people I knew who "bought"* their tiny state-owned apartments paid for them in full. most others rented from the city housing committee.
credit in general is a new thing in China. looks like they're finding out about them easy payments.
*I never did find out how this worked; whether the buyer actually owned anything other than the air inside the walls a la condo, or owned a share of the building, or what. communism is hard. this Chinese-flavored version is even harder what with rampant speculation and huge class divisions.
oh and I am sooooo glad I sold my loft in St Paul MN last summer. whew.
While picking up my weekly Monday evening pizza special I overheard two agents talking while smoking a cig. next to their office. They were saying how it's slower than they want it to be but they did get an offer on one property. Now I had to chuckle because I just read an article where the broker, next to the pizza joint, stated he expected a hot market with double digit price appreciation in 06. So there you have it, the media spin vs. the watercooler talk.
>>I think that a lot of these people are going to be shocked at how little recourse they have legally.<<
That's true for most borrowers. There might be some good consumer class action suits in big cities, but the real money for lawyers will be in litigation on the other end of the transactions. Buyers of mortgage backed securities are already starting to force loans back on the lenders when borrowers don't pay.
Think about it. Next Century Mortgage makes bad loans because they fail to supervise their sales people. They package and sell the loans to the California Prison Guards' pension fund, with Countryside Home Loans servicing the loan for a fee. Suddenly, a bunch of borrowers stop paying.
Whose fault is it?
Did the seller misrepresent the quality of the loan?
Did the buyer do proper due diligence?
Did the servicing company stay on top of the late payments and do everything it could to get maximum value for the house once it went into foreclosure?
That's not even getting into independent brokers, appraisers, insurers, title agents, etc.
Some of these cases will go on for ten years or more. Just hope they don't figure out a way to outsource the legal work to China or India.
SoCalMtgGuym
thank you for your site.I read it every day. Cannon Fodder posted a link to an article by Mike Adams that had an interesting fact/fallacy I have not heard of before."Read the fine print on your home loan. Your bank can make you pay the difference between what your property is worth today, and what you owe them, plus a little bit more to make sure that you have at least 20 percent equity". Is this true? if so this could have a huge effect on the slide down. It sounds like 1929 when the banks sent out notices to home owners to pay the balance of their loans in three days all at once(As I recall my history).
-waiting in Irvine...
Get me the link and I'll check it out. I know that the lender is entitled to getting the loan repaid in full.
-tollhousecookies...
To be honest with you, haven't seen many 125% loans. They were offered more 2-3 years ago. I'm sure there might be a place to get these done, but I haven't seen any advertised in the shops that I visit in a LONG time. I know that quite a few companies still do the 103% loans...the 3% for closing costs/moving costs/etc.
SoCalMtgGuy
"The author doesn't write very well and doesn't spell very well. Spelling isn't that important, but when combined with weak writing, is an good indicator of lax thinking as well."
Heh, heh. Well, I for one think that you have a great writing style which is both very entertaining and informative. As for the Craigslist poster, this is just a guess, but I honestly sense someone who has had a raw nerve touched. Anyway, great web site, SoCalMtgGuy.
Need 2 leave Ca
I don't think there is a massive "nationwide" bubble. I think there are large bubbles in highly populated areas...coastal metro areas. Property might go down in kentucky, but nothing like what has the potential to happen in ca, vegas, miami, etc. We all know the areas that have parabolic growth. We all know the areas where i/o and neg-am are the main ways people are still buying. There are lots of places where good homes can be had from 80-180k. Those kind of mortgage payments are attainable for most people with fixed rate mortgages.
The 800k fixer uppers in CA...that were 280k a few years ago...watch out!
Not too familiar with New Mexico. I know that some californians started speculating out there, but I don't think it has been to the extent phoenix/vegas was hit by these people. Just do your due diligence and you will be fine.
Again, I don't care where the property is if you can put money down, AFFORD a fixed rate mortgage, and plan to stay for a while, then buy the house and make it a home! Just understand it might go down for a while...even a long while. But if you can afford it, and are aware of the risks, then go for it. I'm just here to make sure people think things through before they pull the trigger.
SoCalMtgGuy
anon and warenter...
I honestly think that person was talking about the quote I was talking posting about.
Either way, I'm not too worried about it. I do my best to check the spelling and grammar. I'd say from the comments and e-mails that I have received...most people like the sarcastic humor, and the writing style. Somebody has to make "finance" entertaining!
Thanks for the kind words!
SoCalMtgGuy
Someone suggested appraisers might be the real crooks when the "legal food fight" breaks out, but it has been suggested that the banks are leaning on these guys to get the appraisal to match the inflated price.
Normally, banks want the appraisal to be as legit as possible, but my understanding is that they're now able to turn around and dump their mortgages on Fannie Mae... so they lack the incentive that they used to have to ensure that the collateral they were getting for their loan actually measured up to the cash they were doling out.
I don't know the federal regs that control this, but it makes sense to to me. In the end, who cares if your appraisal is high if you can "flip" the loan to the Feds? That @#$%% appraiser had better come back with the right value or he's going to torpedo the exotic loan you're all set to sell to the government.
Not to defend appraisers - there's a lot of blame to go around.
I have a relative who is an appraiser here in Michigan. My relative recieved a lot of grief for refusing to "push" the prices in the past. Now the market has slowed down but my relative is now busy working for. . . the FBI! (They are bringing charges against the mortgage companies.)
And to think that the bubble is only starting to pop.
I guess a lot of folks feel the say way.
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