A misleading statistic...and a firewall 'work'around
I like the pic on the side...it reminds me of how many people got through economics. Maybe they shouldn't have slept through all that boring financial stuff. Hopefully this site isn't getting boring for anybody...I wouldn't want that!!!
I know that most people don't go back a few threads to look for new comments, so I want to address this one here. A few days ago, a poster had a comment regarding some info posted by the San Diego Association of Realtors. If you go to the website, you will see a box on the right hand side with the heading "NAR Economic Outlook". You can download a 10 page PDF from there. On page 5 of the PDF, there was the stat that was in question: "However, only 3% of the loans have loan-to-value ratios over 90%, so the foreclosure risk is minimal". The reader was bothered because they thought this number should be much higher...BUT I have very little doubt in my mind that the stat is true! WHAT?!??!? Are you kidding me?!?!?! BUT SoCalMtgGuy, YOU are the one who says people are doing lots of 100% financing...what gives?!?!?
Here is the problem. Loan-to-value (LTV) is NOT the same as combined-loan-to-value (CLTV). That stat is ONLY taking into loans that have an LTV over 90%. That stat does NOT take into account somebody that has an 80% first, and a 20% second for a 100% CLTV. The subprime industry used to do a lot of 95 and 100% 1-loan deals. These deals did not have PMI, and the borrower did not have to take on a higher rate 2nd mortgage. Yes, they paid a slightly higher rate because the LTV was high, but they could also get interest only in the full 95 or 100% of the loan, instead of just 80% had they done a combo loan.
A 100% LTV means 1 loan. A 95% LTV is not the same as an 80/15 which is 95% CLTV. An 80/20 is an 80 LTV loan and a 20 LTV loan, for a combined 100% CLTV loan.
Have I lost anybody???
Many months ago, I used to do a lot of 100% 1-loan interest-only loans. Since then, the rates have gone up dramatically as most investors do NOT want to lend 100% of the value of a property in 1-loan. They would rather do 80/20's in case the borrower defaults, this way they will probably only lose on the 2nd lein. Most A-paper lenders will NOT do a loan over 90% LTV. They will primarily do 80/10, 80/15, or 80/20, and each of these loans will NOT fall into the 3% of loans with LTV's of 90% or more. These loans have high CLTV's, and first leins of 80 LTV.
The same can be said for people that might have taken out a HELOC to push their CLTV over 90%. I have seen plenty of people that put money down on their property, only to turn around months later and pull it out, or get a HELOC.
NOW, does it make sense why that statistic doesn't mean very much. Most people don't know the difference between LTV and CLTV...but now you do. Aren't you glad you didn't sleep through this?
I think I will do a post and point out the 'spin' they are putting on their numbers, as well as the holes in some of their arguments. That could take me a while, so look for that later this week.
I want to thank everybody for the constructive comments on yesterdays post. I think our fellow reader knows what needs to be done, and will find a way to make things work. They e-mailed me and were glad for the support and the comments. I will keep you posted as I hear how things work out. I think it is safe to say we are all hoping things work out for them!
I haven't had as much time lately to read the comments and post over on Ben's blog. I am receiving anywhere from 10-30 e-mails a day, and I reply to every one, so that leaves less time to post other places. I read the articles posted, and try to read the comments on 'hot button' stories. I did see where a reader overthere was looking for me as they were having trouble accessing the site from work because of the firewall at work. Here is another way to get to this site, that should bypass the website f-word filters: http://tinyurl.com/ccxls . I hope this helps some of you (thanks scprofessor for answering long before I could!)
Keep the e-mails, comments, and feedback coming! I also want to give a special thanks to those of you that have made donations...they are greatly appreciated!