Maxxxed out!!! ...and looking for a 'soft landing'
This lifter is at a point where he cannot handle anymore weight. Many borrowers are at a point where they cannot handle anymore debt. If you listen to all the bubble critics out there, they will tell you that adjusting ARMs and other things won't affect people that much. They will find a way to make their mortgage payment. But what about the people who got I/O ARMs at 55% DTI, or the people that had to go stated because they couldn't meet the debt ratios? You have seen my posts about how much payments can jump when ARMs adjust and/or rates go up (both are happening). Let's look at this lifter, he is currently bench pressing 644lbs. Do you think he could handle things if you added say another 10% to his weight (64lbs)?? Do you think he could handle another 20%, 30%? I have shown in earlier posts how payments can jump 20-30% or more in one shot when ARMs adjust. So lets just say we added another 128lbs (20%) to the bar right now....what kind of "soft landing" do you think his chest would be in for?? What kind of soft landing do you think is in store for the borrowers that are financially maxed out on their debt payments? Am I making any sense here?!?!?
I also want to talk about another type of scenario I am running into more and more. It involves the borrowers that bought with 100% or other high LTV financing and are now trying to refinance to either avoid an adjusting ARM, or pull some cash out. On paper, most of these people have some sort of equity, the problem is getting to that equity. As you all know, rates have gone up...especially in the higher LTV ranges. The investors are getting wary of lending 90% or more of the value of a property. Since it is their money, they seem to want a higher risk premium to pay for the risk that properties might go down 5-10%...or more. The market for 2nd mortgages is also tightening up as well. I was talking to a counterpart at another lender, and they said the same thing. The investors don't want the 2nd liens, and if they do, they want a high rate to compentsate them for their risk.
The rates today are MUCH higher than they were 6-24 months ago when many of these people bought or last refi'd. I have had 3-4 loans the past week where borrowers NEED to refi to pull out 8-12k cash. The problem is that most lenders won't do a refinance unless the borrower is pulling out a decent amount of cash. It doesn't look good when somebody pays $8000 to get $10,000 cash out. That is like paying 80 cents to borrow a dollar. "What you talkin about, Willis!?!?" That's right...many of these people need to make a 'cash call' with Gary Coloman, not refinance their entire loan to get a few grand cash out.
All in all, I think the subprime market is going to be in a for a rough time in the future. I know of 2 companies that stopped offereing subprime loans this month. They closed down their entire subprime operations. I know that popular opinion is that the subprime market will keep growing as more and more people get into debt and have their credit drop. In that sense, they are correct. There will always be subprime borrowers, but what will happen is that the 'risk premium' will return to the equation.
In the 'old days' subprime loans were noticibly pricier than their A-paper counterparts. BUT, over the past few years, competition for this segment of borrowers has grown tremendously. Lending to subprime borrowers was good business. You could charge higher rates, and with property appreciating the way it was, the lender was in kind of a win-win situation. They made more money on the loans, or if the borrower defaulted, they were holding an appreciating asset. The problem is that competition drove the rates down and eroded the 'risk premium' that made the loans financially possible.
The drive for market share and volume meant one thing...lower the standards and do loans others won't do. If companies will compete on rate, do you think they will compete on "lowering standards"?? Yes, they will. The combination of competing on rate and standards really led to 'giving anybody a loan'. As long as you could drive volume, things were good. After all, the statistics for defaults were still at all time lows. So let's keep lending!!!
Nevermind the fact that defaults were low because borrowers could refi or sell if they ever got into trouble. The appreciation machine saved many of these borrowers. You can make a lot of screw-ups with your finances when your property is going up 6-figures a year. Heck, most people's property was appreciating at a rate that was higher than their own salary!! I was talking to a doctor last week. His property went up over $300k in approximately 2 years. His condo appreciation almost outpaced his earnings from working as a doctor full-time for 2 years!! Can you expect that to continue forever?!?!?
All in all, I don't know how this is going to pan out, nobody does. All I can do is point out through facts, data, and personal experiences why I don't think things can continue as they have the past few years, and I certainly don't see a soft landing in the near future.
What do you think?!?!?