My RANT: a population bankrupt in MATH
I'd say rates need to continue to rise, housing prices need to align with the fundamentals, and MBS investors need to "take their medicine" for lending money to risky borrowers with little or no risk premium. I'm sure that all those people who tried their darndest to get loans will be the first ones to grab lawyers when their payments adjust, and they don't have the magic 6-figure appreciation they were "promised" or "guaranteed".
As you can guess, the market is pretty slow right now. Higher rates, less than rapid appreciation, and the fact that holiday credit card bills haven't arrived yet are the major contributers. I'm not looking at many deals, and I feel like I'm inspecting porta-potties when I do get to look at one. In the name of "competition" and not losing market share, investors and lenders have lowered standards further than your local public school. Nobody seems to think for themselves, or crunch their own numbers anymore. Take this post that was forwarded to me by a reader (from the Motley Fool):
"I am starting to get into rough times financially. My
mortgage is going up an extra 900 a month leaving my
mortgage to $3400 a month. My bills monthly with
everything food, gas, utilities, etc. total to almost
6800 a month. credit card bills are 800 a month. My
husband and my income total together is only 4500 a
month. We made bad decisions by refinancing alot in
the last two years and the closing cost, prepayment
penalty fees ate up alot of our equity. I paid off our
cards and unfortunately have run them up again to get
cash to pay bills and stuff. We will now just be
concentrating on paying our mortgage and some bills
and I have been trying to get an extra job with no
success. So my credit card bills will be behind in a
couple of months and unless a miracle happens, it will
be delinquent. I want to know what I should do. If I
should just pay what I can monthly or claim
bankruptcy? Total CC bills is 30,000. Please advice."
What kind of a mathematically challenged 'homeowner' thinks they can exist in the...hold on, I'm going to use two dirty words here....LONG TERM by spending $6800 a month, when they only make $4500 a month combined?!?!? Heck, their mortgage payment with no taxes and insurance BEFORE it jumped $900 was $2500 a month. That alone is 56% of their income before paying for anything else. This is not algebra, geometry, calculus, or differential equations...just basic math than can be done on any 99 cent calculator from the local drugstore. 4500 - 6800 = -2300 uhhh...uhhhh....honey, do you think we can afford this?!?!?
But I don't fault just them. I fault the "do gooding" lender that gave them a loan (actually multiple "refi" loans) in the name of "helping them achieve the American Dream of home ownership". Since these borrowers obviously aren't that 'up' on basic math, I'm sure the broker realized it, and made a fat commission on them. I'd love to see an in depth investigation of how these borrowers got their loans in the first place. I'm almost positive that no rules or laws were broken...the standards are just that low...and THAT is the problem.
I not here to get into some education debate (just follow my thought process before you blow up), but if you look at the CAlifornia High School Exit Exam (CAHSEE) results, you will see that only 63% of the people pass the math portion. The link is here (click the top report, combined, all grades) When I went to school, a 63% was a 'D' or an 'F' depending on the grading scale being used (90-100 A or 93-100 A, 85-92 B, etc). The reasons 'why' the results are what-they-are is immaterial. Once these people turn 18, they are allowed to apply for loans. Not once have I ever seen a broker or a lender ask to see a borrowers CAHSEE results when they applied for a loan. See where I'm going with this?!?!? The lenders don't care what 'politically correct' tag the education system tacked on somebody to 'explain' their results one way or another. In the 'real world' all they care about is 'passing' you so that you can get a loan, and they can get paid. Am I making any sense?
I am just sick and tired of the crappy borrowers that lenders will give millions of dollars to!! Don't believe me?!?!? I was in an office today and I wrote down the highlights off of one of the flyers there. Try these on for size:
This lender will do 100% stated interest only loans to 1.4 million with a 620 FICO score.
They will do 90% stated interest only loans to 2.4 million with a 620 FICO score.
They will do 95% stated interest only on NON-OWNER OCCUPIED housing.
The thing is, I don't know who is buying these loans?!?? Who in their right mind would give somebody with a 620 fico score, a loan to 1.4 million with NO money down?!?!? The only person I think wins in a loan like this, is the loan officer/broker who makes 20-30k in fees doing the deal. See my post on leverage if you haven't already for a more in depth perspective.
When I got into this business I had no idea how low the standards had gotten...or how low they would become. Maybe the people in capital markets see something I do not. I think they are 'driving' by looking through the rear view mirror. They are looking at the performance of these untested products over the past 1-5 years to determine how they should move forward. Only time will tell who is right. But from what I have seen, there is waaaaay too much debt in the hands of people that have no idea what they are doing. They barely, if at all, have the income to support their current debt levels...and will be in for a certain shock when their ARMs adjust $900 a month...or more.
I leave you with one question:
Out of the 1.5 trillion dollars of ARMs that are set to adjust the next 24 months, how many of those people do you think are good at math, did the math (correctly), and know what is coming their way in the name of higher payments in the near future?!?!?
Even if they do know that things will adjust, I won't even ask if they have a plan for how to deal with it. Somehow, I think there will be more than a few borrowers like the one above.
I really look forward to the comments on this one...