Wednesday, January 18, 2006

Maxxxed out!!! ...and looking for a 'soft landing'

See this picture to the left. That person is doing what is called 'maxing out' on a lift, in this case the bench press. After warming up, the lifter attempts to do one rep at the max weight possible. Let's compare this lifter to some of the borrowers that maxed themselves out to buy a home, and/or live a lifestyle.

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?!?!?



Anonymous Anonymous said...

What you are saying is all fine and I agree on all of it; I already did before.

What is new for this week is that refinancing activity seems to be picking up pace again since the bond market is still defying gravity. Have you personally seen this at your work, SoCalMthGuy? Is there movement towards fixed rate loans from ARMs?

1/18/2006 10:29 PM  
Anonymous Anonymous said...

I also heard stories that people are paying a lot just to pull out enough cash to pay mortgage for the next three months.

They are probably hoping for a spring bounce, which I doubt will materialize. Perhaps they contribute to the refinancing activity?

They are so f@cked.

1/18/2006 10:42 PM  
Blogger SoCalMtgGuy said...


I have not seen a huge push towards fixed rate loans this week, but that really doesn't mean much.

I'm sure that people are awakening from the post holiday slumber...and getting their credit card bills and the realization that taxes are due here soon.

Many people will be able to refi into fixed rate loans, but there is a whole segment of the market that cannot afford fixed rate loans at this time. It is this segment that provided much of the demand to push prices higher.


1/18/2006 10:44 PM  
Blogger SCProfessor said...

The following pretty much sums up today's FB. Source is and it is titled "Nightmare on Main Street."


Mr. Randall quotes our book, Empire of Debt, and then elaborates:

"Our see-it, want-it, have-it culture is creating a sad class of debt junkies who are in so deep that the bailiffs will need to hire CaptainNemo to find them." Randall continues, "Instead of confronting their problems, these feckless borrowers simply close their eyes and sign the chit."

"Plastic fantastic," he says is creating a whole new group of people who live with far more debt than they can comfortably carry. In the old days, a man who saved money was a miser; nowadays he's a wonder.

Mr. Randall refers to the British. Americans may be in worse shape. In America, debt has become an art form.

Last year, a new record was set for personal bankruptcies in the U.S. - more than two million people went broke. Right there, you might do a double take. There was no recession in 2005. There was no stock market crash. Employment was near its highest level ever. Why were so many people going belly up?

The Economist notes that, "consumer spending and residential construction accounted for 90% of GDP growth in recent years." Yet, consumer incomes did not rise. Real wages actually sank in the last two years. People are simply spending more. And why not? Money was easier to come by than ever before. Every time we turn on our computer we find someone willing to lend us money; people we've never even met! We can walk into almost any shop anywhere in the world and buy practically anything we want. We just give the merchant a piece of plastic. He has no way of knowing whether or not we can afford it. For all he knows, we are millions of dollars in debt, have hocked grandma's jewelry, pledged the ancestral home three times over to all our friends and neighbors, and moonlight at Payless as a shoe clerk. But he doesn't care. That's someone else's problem. He's going to make the sale!

1/18/2006 11:19 PM  
Anonymous Anonymous said...


Very interesting observation!

I think we are seeing a peek at what happens when many of the factors that helped the boom change direction (interest rates, lending standards, risk premium requirements, etc.)

The borrowers you describe are already f-ed, they have no chance if house prices start going down, even a little-

1. Cash out refi needed-> bigger loan amount to pay for at higher rates, less equity.

2. House values decline-> remaining equity evaporates, turns negative.

So they pay more each month, have a higher loan balance and have no equity to bail them out.


1/18/2006 11:51 PM  
Blogger SoCalMtgGuy said...


And this amount of the population doesn't have to be huge to have a large impact.

20,000 homes in Orange County is not a lot percentage wise, but if they all HAD to sell in a 2-6 month window, that would have a dramatic impact on the overall market.

Same for any area.


1/18/2006 11:59 PM  
Blogger drwende said...

Among my morbid hobbies is watching the public records of a couple specific investors in the area. I wasn't surprised when one refinanced her primary residence to come up with down payments to buy money-losing rentals. I was surprised when she did a second refinance, seven months later when interest rates were running higher. Since no additional purchases appear in the records of the most likely counties, I suspect the second refi was to help cover the mortgage payments of the existing rentals.

That seems like the point at which it's not so much an investment as speculation... and losing speculation, at that.

1/19/2006 12:03 AM  
Anonymous Anonymous said...

DrWende, I like that hobby! How can I check a property in Northern NJ to see what mortgages/liens are on it? thank you.

1/19/2006 12:48 AM  
Blogger Jim A said...

Without appreciation to save them these FBs won't sell, they don't have the money to bring to closing to repay the mortgage. They'll ride the elevator all the way to the basement and get off on the foreclosure level. So who makes the decisions then? The bank that is servicing the loan? What if some bondholder sues because any moron should have realized that the FB's stated income was fraudlent? Who makes the decisions and how much will they be slowed by legal actions. All those carrying costs have to paid by somebody in the interim, because the "investor" is now broke.

1/19/2006 4:50 AM  
Blogger panicearly said...

i bought apeice of land in Hi. in 2000 and built a 880sf. cottage .intending to live there for a while. Total cost was 550k. mostly for the land.
In 2005 Jan. I sold the place for 1.65million. I had an appraisal done
4 months prior and got a 1.15mil.
I sold FSBO and it took ten days to get a serious buyer. i had a sign posted at 1.7 and we negotiated for this and that to 1.65. now this buyer was worried about the new appraisal, shopped around and found an appraiser through a realtor friend that came up with the right numbers.1.9mil.
I was naturally wondering if my price was too high and no one would finance it for the sale. He thought i was worried about his credit wrthiness and told me "dont worry i have a realtor friend who is hooking me up with a good appraiser". they were so proud of themselves for being clever. everybody was happy.
the buyer was happier than i was!
if they sell tihs place they have to find someone crazier then them, but can the apraiser help them out again? it was too good to pass up so i got out. even though i got the upside, the whole thing just smelled like scam.

1/19/2006 5:27 AM  
Anonymous Anonymous said...

You know, as a renter I've been reading this and a few other real estate & macroecon blogs with great interest -- the obvious hope being that a significant decline in RE prices would allow me to buy a decent home. But it's now getting to the point where I'm actually more worried than hopeful. Not worried that a decline won't happen -- worried that the decline will quickly become a crash that will drag the entire U.S. economy down with it. The "home as an ATM" phenomenon is particularly scary in this respect -- and precisely what today's post addresses. If consumer spending is what has driven economic growth for the past several years, and equity lines of credit have provided a significant portion of the capital for that spending, what happens with the HELOC activity drops by 90%? Does GDP drop by 1%, 2%, 3%? This could get really, really ugly before it's over...

1/19/2006 5:30 AM  
Blogger Tom Gullo said...

Here's a good site that explains basic terms of the mortgage industry:

1/19/2006 5:35 AM  
Blogger Flatteningyieldcurve said...


Given that the vast majority of mortgage resets over the next two year are plain vanilla ARM structures. Do you thing these borrowers will simply refianance into I/O and neg amort structures to offset the increase in interest rates. It seems to me that there are many lenders who would be quite willing to help them do this type of swap (for a fee of course)

1/19/2006 7:02 AM  
Blogger Lou Minatti said...

I liked the analogy.

1/19/2006 7:34 AM  
Blogger BubbliciousBrooklyn said...

Notice how the bar is on his chest. The weight is already pushing on his midsection. From the looks of it, it unclear whether he'll get it off his chest. What happens if the spotter adds another 128lbs(20%)?

The lifter is screwed. Compound this with evidence the subprime lenders are exiting the marketplace. This is like the spotter putting on the weight and then walking away. Ouch.

Anyone who's lifted by themselves knows what happens next. You slowly and painfully try to roll the bar down your chest and midsection, without crushing the family jewels. And afterwords you swear you'll never lift without and spotter again.

1/19/2006 7:53 AM  
Blogger drwende said...

Anonymous in Northern NJ -- To check property records easily, you need a county that makes its records searchable online. The whole record itself is unlikely to be online (here, that's illegal) but you can often trace a pattern without having the actual numbers.

I'm in California, so NJ may be different, but let me tell you what I look at, as a starting point.

"Official Public Records," usually linked from County Clerk or Clerk/Recorder on a county's site: these are sorted by grantor/grantee and (in CA) don't contain property addresses. Liens show up here -- you just may not be told what property they're originally against.

Assessments, provided by the Assessor-Recorder or similar. These are by address or parcel (which is often cross-referenced with address). This will often tell you if property taxes are delinquent but won't necessarily show other types of liens and or give the owner's name.

How do you match a name to an address? One option is to go in person to the county offices and read the records. The other is to find a third source -- phonebook, newspaper listing of homes sold, etc. -- that fills in the missing information. If Prudential realty is out there, their Web site has a "watch your home's value" feature that will disgorge the names of all the owners on the same block as the address you give them.

There are usually details that you can only get from the physical document. But out here, I know that if I see a GRANT DEED, that's a transfer of property, and if I see a TRUST DEED, that's a mortgage. So a trust deed without a matching grant deed is a refinance. (And a grant deed with two trust deeds executed that day means a piggyback mortgage.) NJ may use different terms for these documents, too.

The first time you go to work this out for your locale, it is incredibly tedious! Then once you know what works locally, it's fun and easy.

Alas, the most interesting county in my region is too poor to provide an online records search... :-(

1/19/2006 9:00 AM  
Blogger Arioch said...

Here is an interresting article of what happens....

Some choice clips from it:

At 44, she and her teenage daughter lived on Social Security survivors benefits and her $8.50-an-hour pay as a cashier at a party supply store.
But that day in August 2001, Boone chatted with a customer she'd never met, a woman who was a real estate broker.
She invited Boone to a seminar: Buy a home with little or no money down. Free food, games and prizes.


The price for the 1,002-square-foot house was $105,000. For just $500 earnest money, it would be hers.
Later, she learned her loan payment would be $715 per month. That seemed affordable. She had an adjustable-rate loan that started at 9 percent, and she knew payments might go up. But she wasn't too


Bills for home insurance and taxes also appeared. Several homeowners had thought those were included in the mortgage payments.
Cassandra Boone also faced unexpected monthly payments for a second mortgage.
At least 75 percent of Hamilton


In January 2003, less than two years after the subdivision was built, the first bright yellow foreclosure sign went up in Hamilton Oaks. Two more followed that year.
Then the pace picked up.


By early 2005, 14 homes -- 25 percent of the Hamilton Oaks subdivision -- had foreclosed. Those owners were gone. Sales of their houses were final.At least two more owners had foreclosures pending. One was Cassandra Boone.

Those are just some clips from the article. And entire development of FB's. This may happen elsewhere too as ARMs adjust etc...

1/19/2006 9:09 AM  
Blogger Arioch said...

I have an idea for an exercise for us...

Using a hotmail or other temporary email account (to avoid getting spammed) we could try to following:

See who can get a positive response for a loan with the worst possible circumstance.

ie: Fill out an online mortgage teaser questionaire (using a temp email account) with such things as income = $8.50/hr, 3 previous BK's, 2 car loans, 15k in CC debt etc...

See how much can be borrowed. Such as "thank you for your inquiry, congratulations! You can buy a house up to $650,000 with no money down!".

Just to see how far this signature loan mentality has gone.

1/19/2006 9:17 AM  
Blogger Stephanie 81 said...


I just tried to do that until it asked me for my SSN.

1/19/2006 10:21 AM  
Blogger Arioch said...


yup, found the same thing as well. They also want phone #'s (and there is no way I'ld want to talk to them).

Perusing the sites is scarey though, it is presented as though crack junkies with no jobs who just got out of prison for bank robbery and a FICA of 100 are "OK! We can finance you today!!".

1/19/2006 11:06 AM  
Anonymous Anonymous said...

DrWende, Will do thanks.

1/19/2006 12:17 PM  
Blogger apollo3333 said...

Your photo reminded me of that SNL skit where the weightlifter does a clean-and-jerk with a massive amount of weights. As he stands up, his arms tear off. Seems like there's a metaphor here with respect to the housing bubble.

1/19/2006 1:28 PM  
Blogger Dukes said...

Here is a link to that article on Charlotte foreclosures. It is pretty sad actually. This is an interactive link, you can see this lady's story.

We will see this in spades coming to all neighborhoods...

1/19/2006 5:26 PM  
Blogger Dukes said...

Forgot the link, here it is:

1/19/2006 5:26 PM  
Anonymous Anonymous said...

I am also a socal mtg guy, but do commercial. Love the site, just found it. Still seeing alot of activity, holding our breath on value.

1/19/2006 6:09 PM  
Blogger need 2 leave CA said...

I, too, wanted to see what they would give me but stopped when they wanted the personal information. I figured a lot of these sites are scum.

Can anyone top my FB of the $13/hr people with an $850K neg am loan as detailed in the previous blog subject?

1/19/2006 7:42 PM  
Blogger Arioch said...

Need to Leave,

My best FB's that I know (I posted their situation a month or so ago on another thread, but this is the best I have).

They have 1/2 acre or so here, bought it (not sure of terms). Made a small business on it a few years ago (think they refi'd or HELOCed to build the structure for the business). Like any business, it sits in the red for some time. They moved out of the house on the property into a rental. Why would they do that you ask? Well, they took out another loan (3rd or 4th loan so far) so they could bulldoze the existing house (it's now gone) and build a McMansion.

Neither one of em have a regular income, and their business does not do much in terms of break even.

They're carrying close to 1.5 million now in debt.

1/19/2006 8:16 PM  
Anonymous Anonymous said...

A house down the street is a FB - this is sunny south OC.

I bought and moved in around the same time these people did - June 2005. Theirs is now up for sale in January 2006; I have not met them, but I did do some research.

Its a sweet house - 2600+ SF, %BRs, less than 5 years old, upgraded to the max. These people bought it at $880k back in May. Current comps put this house comfortably in the $920-$950K range now (yes, stuf fout here appreciated in the 2nd half of 2005 - go figure). So, they listed at at cool $1mil.

These people used 100% financing. Ugh. Quick calculation - that's like $5k a month just in mortgage payments, assuming they used some sort of funky financing (more like $7K otherwise). Taxes at around $1K/month and a couple hundy per month in HOA dues to boot.

I asked why they are selling, broker tells me "they miss their out of state family, and want to move back".

Uh-huh. Sure. I think they miss their disposable income. A $5k/month or more house payment, compounded by payments on 2 of those large Lexus SUVs, is tough to swallow on anyone's income (I make well north of $100K and I wouldn't sign up for that pain without Vinny or perhaps his associate Luigi holding a gun to my chin).

Do the math. Say $880K purchase, $5k/month in mortgage payments. That's $30K in prepays. Add in 7% for tranaction costs (broker fees, etc.) - another $60K or so. That puts him at $970K or so. The $30K cushion was probably kept as negotiating cushion, or for capital gains purposes (don't know his tax situation).

$970K to break even. House is worth, maybe, $950K - my guess is it would pop at around $900-$920K in reality.

This guy's screwed. And, very few investors would step up in this circumstance (unless there was no broker).

1/19/2006 11:38 PM  
Blogger Out at the peak said...

A radio bankruptcy ad came on the air while driving home. It claimed that 95% of credit card holders only pay the minimum payment. Is this correct? I believe this is a fake statistic into befriending a FB.

In my circle, only two-three pay minimums and live paycheck to paycheck. At least those people don't have a mortgage.

1/19/2006 11:49 PM  
Blogger need 2 leave CA said...

Arioch - in the words of the car rental lady to Steve Martin's character in Planes, Trains, and Automobiles (referring to your people story) "YOU'RE FUCKED" = they must be some real business geniuses there.

1/19/2006 11:58 PM  
Blogger Wickedheart said...

out at the peak

I think that is incorrect. I could be wrong but I believe I read that 60% of all cc holders pay in full each month.

1/20/2006 7:57 AM  
Blogger moonvalley said...

I read the 60% figure myself...we pay off in full every month..of course we only use about 30% of available credit also. My husband has to ask me to please use the card once in awhile inorder to keep up some sort of useage.

1/20/2006 11:04 AM  
Blogger Wickedheart said...

We also pay in full every month and even though the most we've ever used of our available credit is half (usually we only use a third) we have gone over our limit several times. How? It seems that if you use your credit card online some companies bill the pending charge and then actual charge too. It takes a few days before the pending charges come off. This pisses me off big time...........

1/20/2006 2:26 PM  
Blogger mtnrunner2 said...

socalmtgguy = the San Diego Assoc'tn of Realtor web site has an NAR economics report, which states:
1. ARMS accounted for 67% in 2004 across the region, one of the highest rates in the country. Furthermore, the interest-only loans accounted for nearly half of all loans in 2004. Therefore, some homeowners will feel the pinch of higher rates over time.
2. However, only 3% of the loans have loan-to-value ratios above 90%, so the foreclosure risk is rather minimal. (That is, prices would have to decline by more than 10% to have a measurable impact on foreclosure rates.)

I thought the rates were much higher than that. By the way, I got to page 4 of the report and had to stop reading. It is filled with myths, twisted data. The SDAR front page claims our housing shortage of 100K units per year has led to the huge price runup. But the housing shortage is a myth! Doesn't anyone have to censor whether people speak the truth on their official web sites???

1/21/2006 7:22 AM  
Blogger LArenter said...

The figures put out are such a load of lies! When I was in graduate school studying statistics the running joke was that you could make the stats say anything you liked depending on the skew. This is exactly what I see! These people are pushing the envelope for all they can. Bleeding the system dry! Hopefully the system will be regulated eventually.

1/21/2006 10:34 AM  
Blogger SoCalMtgGuy said...


That is probably true. Only 3% of the loans might have an LTV of over 90%.

BUT, they did not say CLTV...that is combined loan to value!!!

All of those 80/20's and 80/10 and 80/15 would NOT fall into the LTV over 90% category.

It is a harder stat to track, the CLTV that people owe. Somebody had an 80% first, then took out a HELOC or 2nd to push the CLTV over 90...they won't be accounted for in that stat.


1/21/2006 11:45 AM  

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