Wednesday, February 01, 2006

Option-ARMs...FINALLY making the news!

The image to the left is from this WSG Online article about my favorite 'bubble' loan...the option ARM mortgage. This is the loan with 4 payment options and that all enticing introductory 1% (or similar) payment. You can see my post here for more info about the loan.

Like every tool, this loan has it's place for informed borrowers, or sophisticated borrowers that are trying to manage their cash flow. The problem is that since there is such a disconnect between income and housing prices (especially California), you have people using these mortgages as a way to 'afford' their property. The problem with making that minimum payment is that the difference between that payment, and what the interest only payment would have been, gets tacked on the back of your loan in the form of 'negative amortization'.

Quick example. Say the minimum payment on a 400k loan is $1200, and the interest only payment is $2200. If you made the minimum payment, then your loan balance would be 401k after one month. Then you would be paying interest on your deferred interest...can you say FUN! So, as you can imagine, like many people do with their credit cards, they make the minimum payment.

I think this statistic from the article is very telling: "the amount of interest that customers are rolling into their mortgage balances -- known as "negative amortization" -- rose $25 million in the fourth quarter to $63 million for the year, up from $6 million a year earlier".

YIKES! What does that tell you!?!?? People can't afford their mortgages. If they could, they would make at least the interest only payment. A 10-fold increase in deferred interest in 1 year!

"Another way to look at it is as a percentage of income. Fully 51% of FirstFed's pretax income and 41% of its net interest income was from negative amortization in the fourth quarter." Looks like this negative amortization is a rather large part of their income. The banks are also saying "that their losses on option-ARM mortgages long have been minimal". I'm sure they are saying that! It is like the analogy I have used several times before. They are driving forward by looking out the back window. There hasn't been a real catalyst yet that causes things to get ugly. If property prices decline and/or the rates start going out! But gets better!

"Moreover, over 80% of FirstFed's recent loans have been "low documentation" loans, meaning they required less confirmation about whether the customer was a good risk. Through the first nine months of last year, over 13% of its mortgages were NINAs -- "no income, no assets." In other words, customers get mortgages without disclosing their income and assets."

What I have been saying forever now!!! Not only are people getting option-ARM's, 80% aren't even fully documenting their income! Does anybody else see a problem here?!?!? I have been saying it here and on other blogs for many months now. I know some of you will be all worked up about the NINA loans. The thing with NINA'a is that you need a top notch fico score, and the are usually done at lower loan-to-values, than the other loans. Those people are usually putting down 20-40% in cash, so as bad as they sound, I don't worry about them as much as the 80% of 'reduced doc' loans. Depending on the lender, reduced doc is the same as saying 'stated'.

The other thing I will add about these loans, is that they are the highest paying loans available for loan officers and brokers. Every lender is different, but it was pretty standard that if the loan officer 'sold' the borrower in the 3yr pre-pay, then they would get 3 rebate points on the back of the loan. This means the lender would pay the broker 15,000 on a 500k loan. The "good" brokers would often tell the borrower "I can get you that 1% loan, but the only way I can do it is if you pay 1-point up front, and take a 3yr pre-pay penalty. That is the 'only' way I can get you that super low 1% payment!" It is amazing how many people would fall for this line. If you are cringing right now, I feel you. You just paid some loan officer who called you on the phone, $20,000 to do your loan, plus any other fees. You paid 1pt up front, and the lender paid them 3 points on the back. It would make me sick to know I paid some 'kid' 20k for my loan. I bet 20k would pay off most people's car payments right now...or pay off their credit card bills. The thing is, you can get an option ARM with no pre-pay penalty, and the 1% just doesn't pay a rebate on the back end. Sell a little pre-pay...make a lot of money. See how easy that is!?!?

I look forward to the comments!



Blogger Metroplexual said...

This is indicative of the crunch that many have predicted would happen. The Usatoday had an article yesterday on how people are having a hard time getting by with higher fuel and energy costs as well as the new BK law requirements that have doubled minimum credit card payments. This option-ARM loan with 4 payment options is just allowing a path of least resistance so these minimum card paying people can skate by.

I would bet that there will be all kinds of indicators coming out this month showing people struggling with their debt. Just for example the one wherer they track late paments on credit cards. These were already showing problems last year from the gas price hikes.

2/02/2006 3:47 AM  
Blogger xSparta said...

Not knowing much about the loan and mortgage business(I don't have a mortgage) what do you think will happen to the housing market in CA in 2006? How about other parts of the country as New England, AZ, FL?? Do you think the FED will let the housing bubble collapse? I think the FED will do everything in it's power to uphold housing prices as this is the only economy left in this country.

2/02/2006 4:47 AM  
Anonymous Anonymous said...

For those who didn't catch this in the Boston Globe earlier in the week:


The number of foreclosure notices filed against Massachusetts homeowners last year reached their highest level since the housing bust of the early 1990s, as homeowners fell behind on their mortgages and lenders began the process of taking back the properties.

Paradoxically, the sudden halt to sharply rising home prices put a squeeze on many borrowers, analysts said. Homeowners who stretched their finances to the limit to buy a home found it more difficult to make their payments on variable-rate mortgages as interest rates rose, but they were less able to refinance their loans at more attractive rates or sell and pay off their debts because the value of their homes fell or remained flat. "When prices are skyrocketing, you have the option" of selling the house for a gain or refinancing, said Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard University.

"In an economy where price appreciation is more modest or doesn't exist, what option do you have left?" he said. "Sadly, one of those options is foreclosure."

Last year, there were almost 11,500 foreclosure filings in Mas sachusetts Land Court, where most notices are filed by banks and mortgage companies against the homeowners, according to ForeclosuresMass Corp., which compiles and tracks filings. That is a 32 percent increase from 2004, pushing the number of filings on record to its highest level since 1993, when a once-booming housing market was in a tailspin. The biggest increases were in Eastern Massachusetts.

During the housing boom of 1999 to 2004, the average price of Massachusetts houses and condominiums surged by at least 10 percent every year except one, putting the state's home-price appreciation among the nation's highest. But last year, price gains slowed to 5 percent, and single-family home prices were flat or even declined in some Boston and suburban neighborhoods.

"There's an epidemic of foreclosures," said Boston lawyer Gary Klein, who represents borrowers in lawsuits against lenders. "We're getting a steady stream of referrals of people who are looking for any option to save their home."

Jeremy Shapiro, president of ForeclosuresMass, predicted filings would rise again this year, because many homeowners with adjustable-rate mortgages will see their monthly payments begin to rise along with interest rates.

"As we get into '06, '07, '08 and beyond, we're going to see more folks whose rates adjust," he said.

When notice is filed, it typically takes a mortgage lender three to four months to complete the foreclosure process and seize the property. Only about one in three filings actually results in a bank or mortgage company taking ownership of the home, but they provide a gauge of financial hardship.

The biggest spikes last year occurred in Essex County, north of Boston (up 48 percent), Barnstable County on Cape Cod (47 percent), Suffolk County (45 percent), and Bristol County (44 percent).

Divorce, separation, and job losses are the main reasons people lose their homes. While high-income individuals in divorce proceedings or spending beyond their means are vulnerable, working-class cities including Lynn and Worcester, where residents are more likely to live on a tight budget, were hardest hit last year. Also, people with poor credit ratings who qualify for mortgages from lenders charging high interest rates are also concentrated in these neighborhoods.

"People can't pay their mortgage," said Juan Ortega, a real estate agent in Lawrence in Essex County. "They're up to the top. They bought very high, and now they can't make the mortgages."

Lawrence's housing market surged with the rest of the state. But lately, said Ortega, a Century 21 agent, he is spending his time helping clients facing foreclosures, which seem particularly acute in one predominantly Latino neighborhood north of downtown Lawrence.

A rash of foreclosures can drive down property values in a neighborhood, as lending institutions that do not want to hold onto the houses drop the prices to sell them quickly.

In the winter of 2004, Susan Chamberlain lost her part-time job as an IRS tax examiner. She recently was rehired, full time, but that earlier layoff precipitated a November foreclosure filing. She and her husband, Kevin, initially purchased their Lawrence home for $158,000 in the spring of 2001 with US Veterans Affairs financing.

In December 2002, they refinanced and withdrew some money to pay off a car and some bills, bringing their mortgage debt to $206,000.

The interest rate on the new mortgage was variable, initially averaging 9 percent but rising since then.

With the Veterans Affairs loan, the Chamberlains paid $1,200 a month on their mortgage; their current monthly payment is $1,900.

In the Boston area, house prices are so high, Klein said, that mortgages consume a growing share of monthly take-home pay. "It used to be, if you lost a job you'd be at risk of losing the house," he said. "Now, if you lose overtime, many families are so close to the brink, and that can create problems."

2/02/2006 5:49 AM  
Blogger Rob Dawg said...

Do I have this right? FirstFed isn't really getting more interest income, they are just declaring the additional 51% of accrued and compounded as yet unpaid neg-am interest as income?

Look at the trend not just the numbers. All of 2004 $6m, Q1-3 2005 $38m, Q4 2005 $25m. That's exponential. And I don't care what GAAP calls it, I wouldn't call this "income" until it actually starts getting paid.

2/02/2006 7:25 AM  
Anonymous Anonymous said...

Compound fracture! Kung Fu Death Grip! Deadly choke hold! THE ECONOMY IS DOOMED! Make preparations, save yourself!

2/02/2006 7:43 AM  
Blogger Karen said...


I noticed the same thing. What the heck is FirstFed thinking? Those are phantom earnings.

Buckle up, baby, we're in for a bumpy ride.

2/02/2006 8:20 AM  
Blogger AZgolfer said...


It seems odd to me that the bank will pay a morgate broker more for a ARM loan than a convetional loan. If the bank pay 3% on the back how does that effect the borrower?

2/02/2006 8:57 AM  
Blogger Rob Dawg said...

My first thought was short the FirstFed. Then I realized that shorts only work when the markets work. This is not a functional market. I want loans that are neg-am to be reported as non-performing assets. A 30yr fixed where the borrower is paying less than the monthly interest is a non-performing loan. Why the heck are these any better? I also want any portion of a loan exposed to more than 75% LTV to be considered non-asset backed. Where are the bank examiners in all this?

2/02/2006 9:00 AM  
Anonymous Anonymous said...

"Where are the bank examiners in all this?"

The 'pro-business' Republican junta that controls the government has virtually eliminated any regulation or oversight. And not just in banking. The shit is going to hit the fan; I hope you all are doing what you can to prepare yourselves.

2/02/2006 9:22 AM  
Blogger Karen said...


Good question! This stuff scares the hell out of me. My husband and I have always been very conservative home-buyers, and I thought we would be safe in a downturn, (we have very secure jobs paying considerably more than we owe on the house, and no other outstanding debt) but now that I know how fast and loose banks are playing, I'm afraid that all our self-protective measures were for naught.

Additionally, we may be selling our house soon to take advantage of a really wonderful job opportunity in another part of the country (plus I really hate the east coast, but that's another story!). Now that it's more difficult to sell, I wonder if we may have gotten ourselves trapped.

BTW, neighbor works for Freddie Mac as an underwriter. I asked him what he thinks about the current market conditions. He's in complete denial that there is a problem. It makes me want to go smack my head against a wall!

2/02/2006 9:25 AM  
Blogger Former LA Homeowner said...


Your neighbor who works for Freddie Mac is in self-preservation mode. He needs to deny the problems in the housing market just to keep his sanity. You are asking him to admit that his equity is going down the drain and his job may follow suit.

2/02/2006 10:00 AM  
Blogger SoCalMtgGuy said...


No way!

Look at the option ARM loan. ALL of the 4 payments fluctuate. The payment is NOT a 30yr fixed, but a 30 yr amortized payment. If rates go up, they make more money.

But the big reason they can pay 3pts on the back is because they are going to make a killing on people using the neg-am feature. Not to mention that there is a 3yr pre-pay on the loans that pay 3 points on the back. The pre-pay is usually 6 months interest. On a 500k loan, that could easily be 12,000 or more.

Even if the borrower makes the I/O payment, after a few months, the bank will have made enough money to 'pay for' those 3 points. On a 500k loan, the bwr will have paid 15k to the lender in about 6-8 months...and they have a 3yr pre-pay.

There is nothing fancy with the 30yr 'secret' places where lots of money can be made. Lots of people are going to get crunched with their option-ARMs the next 2-3 years. Remember, all 4 payments are tied to an index + some margin. If rates go up...all 4 payment choices go up.

I hope this helps clear some stuff up.


2/02/2006 10:38 AM  
Blogger MrIncomeStream said...

Yea a lot of folks think those minimum payments are going to go on forever. They have no idea about recasting and how screwed they would be if that were to happen.

It'll be interesting to see how all this fed rate raising affects the indexes these loans are tied too.

2/02/2006 10:58 AM  
Blogger SoCalMtgGuy said...


Did you catch my reply to your post on Ben's blog...the last post of the day yesterday on his site (WSJ -exotic loan problems)...about world savings?


2/02/2006 11:10 AM  
Blogger Karen said...

Former LA Homeowner

I'm not so sure that's the case with my Freddie Mac neighbor. He and his wife are renting their house. Maybe he's brighter than I thought?

2/02/2006 11:41 AM  
Blogger InLibrisLibertas said...

So if the lender takes the whole interest amount into income (not just what was actually paid), can the borrower deduct the whole amount? In other words, if I have a 5% $500K option-ARM loan with annual interest of $25,000 but I only pay at the 1% rate ($5,000) at the end of the year is my mortgage interest deduction $5,000 or $25,000? It seems to me it should be the $25,000 because the lender has actually lent me the money to pay the interest and added that loan to my balance.

2/02/2006 11:50 AM  
Blogger Rob Dawg said...

I decided to leave Eastern Mass on April 1, 1983 (check the historical weather). Never looked back, dropped off my thesis and rode my motorcycle until I parked on the pier in Santa monica. Never ever regretted a second. Mass is losing population. Pretty soon the motto will be; "Home to the newly wed, nearly dead or deeply inbred." People don't even understand that the entire BosWash corridor in running on inertia. Were it not for the billions we pour into the OPACs (Obsolete Pre Automotive Cities) the collapse would be even faster. Boston and NYC are just the most insulated not immune. Draw circles out and see Pittsfield, Springfield, Worcester, Boston. Same for Buffalo to NYC. Some of us saw this 25 years ago and now we are millionares on the California Coast. That window is closed. Where next? Maybe RTP, maybeTuscon, maybe the Central Valley, maybe Austin (again). I can only hope that someplace learns and keeps taxes low and lending standards high.

2/02/2006 12:21 PM  
Blogger Pointlines said...


Back on Ben's Blog he just posted the link to an article on the Fed's Concerns with these loans - just like your article is talking about.

and the original article at

"There are certain rapidly growing business lines in banking operations that are placing pressures on risk-management systems," Bies told a financial services industry conference as she outlined guidance regulators have issued on commercial real estate and so-called nontraditional mortgage lending.

In discussing the guidance on exotic mortgage products, such as interest-only loans, Bies repeated that government regulators were concerned risk-management practices had not kept pace with the risks that these widely available loan products could present.

She also cautioned those risks could be "heightened by a downturn in the housing market."

Since the housing market is turning down, I think we see the pain from all this risk happening pretty quickly.

By the way, did you happen to notice over the last couple of days the short end of the bond curve moving up while at the same time the long end is dropping. We may see a full inversion rather quickly if this trend continues...

From Bloomberg quotes.....Yields

30 Year - 4.70%
10 Year - 4.56%
05 Year - 4.50%
03 Year - 4.55%
02 Year - 4.58%
06 Month 4.60%
03 Month 4.47%

2/02/2006 12:22 PM  
Blogger Karen said...


We live near D.C. after cashing out of the California market last year close to its peak (home prices have stagnated in our former neighborhood). We nearly bought a house for cash here and have been shoving as much as possible into investments.

My husband is now competing for his dream job in Colorado where we have family, but I'm nervous that unloading our dumb, dumb, DUMB purchase here in Maryland is going to be difficult.

We should have rented until we knew that this was our homestead. As it turns out, I hate it here and have been longing for the west since the day we arrived on the east coast.

Hindsight is 20/20!

I would love to go back to California, but I refuse to put my young children back into those schools, and now that we've cashed out, we can't afford to buy back in, anyway. And, Texas & Arizona just aren't my speed.

Oh, well. I'm still dreaming of a retirement house at Sea Ranch, though, so I can guarantee we'll be living very simply and under our means for the next 25 years.

And, as far as those high lending standards. We can only hope.

Interesting sidenote...

We actually had a difficult time finding a lender here because the loan amount was too small. We are not money-makers for lenders. We took a small loan on a 5/1 ARM, which we triple-pay each month, so it will be payed off before it adjusts. Just like credit card companies don't like people who pay their balances each month (we actually had a credit card company threaten to drop us for just that reason), lenders don't like borrowers who pay off their loans early. Cuts into their profits.

2/02/2006 12:46 PM  
Blogger Karen said...

"Home to the newly wed, nearly dead or deeply inbred."

Funny stuff. You're quite the comedian.

2/02/2006 12:48 PM  
Blogger Riskbabe said...

Something funny a co-worker sent me today...

2/02/2006 12:54 PM  
Blogger Rob Dawg said...

Karen said...
"Home to the newly wed, nearly dead or deeply inbred."

Funny stuff. You're quite the comedian.

Thanks, I try real hard to keep people guessing whether I'm actually trying to be funny.

Anyway, there's a big difference twixt misled and unfortunate and what you call dumb. Dumb would be going into denial or trying to bargain or any of those other coping mechanisms. You are smart. thing of the costs of getting smarter as tuition. Montgomery and Loudon are D.C. poster children much like Santa Barbara and Orange County are the SoCal minions of the bubble gods.

I am truly sorry you cashed out of California. We need people like you to buffer the insanity. I am most impressed by your admission. I know dozens, yes dozens of people who cashed out. A very few are brave enough to say out loud that it may not have been the best choice. Make no mistake, this runs back to when some good friends of my wife's parents left 30 years ago in the mid 70s. They are still friends, they have regrets. Nothing new here.

You are so correct that the schools suck. There I said it. They suck. Take away local control, take away local funding, then take away suplemental funding and impose onerous non-educational demands and surprise, quality suffers. There are still a few districts left but the houses in them cost more than private tuition.

The only good news is that lending is about to change. Think for traditional home loan lending and for transaction costs. both may each take Supreme Court review but both are coming.

2/02/2006 1:09 PM  
Blogger Karen said...


We're actually in Howard County, a pretty nice area, as Maryland goes, and also in a huge bubble. Talked to our Realtor today in preparation for selling, and she confirmed the slow-down. Of course, I already knew what we were facing, and it will be painful.

I don't really regret leaving CA, but I do regret coming to the east coast. We have always wanted to live closer to family in CO, but we weren't brave enough to do it without jobs, so we came to Baltimore. Now, we're going to see about $50k of equity vanish doing what we should have done in the first place, gone straight to CO.

You're correct in saying that Californians are nuts. I remember being astonished when a single-earner family across the street bought a $750k house last year. I could not figure out how they did it. At the time, I thought perhaps family had chipped in, but now I know the truth. It was an option-ARM. I fear for their future.

I didn't realize how fiscally conservative I am until I started reading this blog. I can't fathom using my house as an ATM for consumer purchases like cars, vacations, etc. When the equity in our CA house sky-rocketed, my first first thought was "Yippee! We can move somewhere else and never have a house payment again." It was definitely not, "Let's go buy a Hummer!"

I'm glad to know that I'm not alone in my views. Reading this blog has helped me stay grounded and focused in the midst of all this insanity.

2/02/2006 1:36 PM  
Blogger Karen said...


Oh, and you're right about the schools. Howard County is one of the best public school districts in the country, and California pales in comparison. It's truly shocking how much better it is here.

2/02/2006 1:40 PM  
Blogger Rob Dawg said...

As long as we agree that most California primary and secondary schools are substandard. Not all. There still exist many "holdovers" from the age of superiority. They just cost so much in property taxes that they are phasing themselves out of existance. There is another bubble related issue here. Smart districts have set up dual track schools within schools. My oldest is in one such. All the core classes are "honors" track. Meaning good. In exchange her test scores keep them out of trouble for underperformance.

Don't worry about California despite all this. On the evil side we are sure to export our problems just as we exported our bounty. On the good side we are likely to export our tax views. Prop 13 and such.

2/02/2006 1:55 PM  
Blogger MrIncomeStream said...


Yea I saw it. I guess World hasn't learned it's lesson after all. The next 6 mo's to 2 yr's is going to be really interesting. I just got a call from a guy that makes me realize that the few that are on this blog are the only one getting what's happening. He refi-ed 6 mo's ago and because the house next door to him just sold after 4 days on the market for a 100 grand more than what his appraised for he wants to refi again so he can buy a new car. Of course he wants an option-arm so I guess I'll be giving World a call.

I tried to talk him into waiting but midway thru the conversation I just resorted to smiling and nodding after he told me that he belives by summer he'll have another 100k in equity. What can you do?

2/02/2006 2:02 PM  
Blogger mtnrunner2 said...

SoCalMtgGuy - I reread your post about the Option ARMs, but have another question:
1. Is it legal for brokers to lie and say they can get you the lower rate only if you accept the 3-yr prepay penalty? If so, I guess the borrower should check w/ other lenders to verify.
2. The example in your November article was for a $500K loan, min. payment $1600/month. If the broker gets $15K, that would take the borrower at least 9 months of payments just to cover the broker's fee. How does the lender pay that large of a fee? It's not folded into the loan, so it comes out of the interest stream? But the interest is already low, at 1%.
3. I just opened a CD with World Savings, since they offered the best rate: 4.61%APY on a 4month CD. That shows they really need the money, the deposits. Why? After the 4 months, I need to go somewhere safer. If they default, how long does it take for the FDIC to reimburse my money?
4. How likely is it that my neighbor, who is new into mortgage lending, will make $3K-$5K/month? Your most recent article stated about the lower income. Articles of layoffs in the mortgage industry keep cropping up. She said they're moving people into fixed mortgages, and are the exclusive preparers for a local mortgage company.

2/02/2006 2:02 PM  
Blogger MrIncomeStream said...


As far as your neighbor making 3k to 5k a month. There are a lot of variables in that. Realistically in this current market. She could start making double that in 2 to 3 mo's if she's a hard worker, she has a good split, marketing by her or her broker is outstanding and if she's a go-getter.

2/02/2006 2:08 PM  
Blogger SoCalMtgGuy said...


1. I'd say it is more about integrity than anything 'illegal'

2. Easy, the 1% rate is the same up front, but there will be a higher 'margin' that is added to whatever 'index' (cofi, cosi, mta, etc) the loan is tied to. Don't forget the pre-pay penalty. Also, don't forget that even if the borrower makes the minimum payment, most lenders are 'counting it' like they got the profit of the I/O payment. The higher margin, and the pre-pay protect the lender for the large upfront payout.

3. I wouldn't worry about them defaulting on a CD at this time...or in the near future.

4. Very likely they could make 3-5k or more. Don't get me wrong, lots of people are still making lots of all depends on the situation they are in. If you are 'new' and are just dialing for dollars, you better be burning up the phones all day, everyday. You will be able to make a just gets old quickly. If you are at a company that has good referrals and better than average lead streams, then you can easily make 3-5k. The days of 'easy' 20-30k are over for many people.

How is that?!?!?


2/02/2006 2:12 PM  
Blogger Karen said...

"...because the house next door to him just sold after 4 days on the market for a 100 grand more than what his appraised for he wants to refi again so he can buy a new car."

I'm speechless.

2/02/2006 2:20 PM  
Blogger MrIncomeStream said...


So was I and that doesn't happen often

2/02/2006 2:24 PM  
Blogger Karen said...


Doesn't happen often for me either!

Perhaps we're the ones who are crazy and the rest of the world is totally sane. Maybe I'll head on over the local Hummer dealership this weekend. ;)

2/02/2006 2:29 PM  
Blogger DannyHSDad said...

Karen, as someone who will be moving to S.Calif this summer, I understand what you're saying. We lost 50K (yes, lost equity, not lost profit) on our home when we sold in Central Texas Nov'05. We're renting until the school year is out and then when we move, we'll rent or move in with my parents, as much as my wife would love to buy a home, she also knows we can't afford our own with the current market (we saw 2 dumps this Christmas listed for $550K and $660K).

As for schools, we're not worried since we have been homeschooling and will continue to do so.

2/02/2006 2:43 PM  
Blogger Karen said...

Yep. We're in the same boat. We will be losing real equity by bouncing through this house so soon. It's expensive to prepare a house for market, pay Realtor's fees, and then move household goods. In addition, Maryland has this strange back-end tax they levy against homesellers. I don't understand it completely, but it's gonna bite us.

If we do manage to get to Colorado this summer, I guarantee that we will be renting for awhile until we are absolutely certain we're committed. I don't plan to do this again. Ever. It's too hard to pick up a life, pack it in a truck, and start all over again.

I don't see the housing market as a game, with the winner taking away $100k or more in profit. Real people, hard-working people with good incomes, are being priced out and those who have risked their futures taking on risky loans stand to lose everything.

I want off this crazy, housing merry-go-round!

Good luck in your move. I hope everything works out for you.

2/02/2006 3:07 PM  
Blogger MrIncomeStream said...


I know your kidding about the Hummer. But I just saw a brand new one pass by my window.

How insane is that. 60+k, 10-12 mpg at $2.75+ per gallon and you use it as a daily driver. Nevermind the 1000.00 per mo to insure it.

I really don't get it. But the client I mentioned before is smarter than most. No Hummer for him it doesn't come with a lot of bling type goodies. No smart guy wants a brand new Escalade. He's paying cash of course

2/02/2006 3:09 PM  
Blogger Karen said...

Is this the same client who thinks he'll have another 100k in equity in the spring?

Yeah, he's brilliant, alright.

2/02/2006 3:20 PM  
Anonymous Anonymous said...

My buddy just cashed out and sold his house in CA and moved to Virginia. He just told me he just bought another home that cost more. Bought in at the peak. Now he calls me and tells me he is not sure if he can afford it. He says theres a chance he might sell it later and move back. Hes afraid he wont be able to come back to CA. He cant even afford his old house. Obviously this guy didnt do his research. He should have traded down but like most people do, he got some cash in his pocket burning a hole and he traded up. He is in a bigger hole now.

2/02/2006 3:34 PM  
Blogger MrIncomeStream said...


Wow that's crazy. How are so many people getting caught in the craziness is it short term memory or is it a not going to happen to me syndrome thing. I really don't get it. Especially after having conversations where grown men were in tears asking me to please take their property off their hands in the mid to late 90's so they wouldn't suffer a BK or a foreclosure hit and me being powerless to help them because they owed more than 25 - 30% of what the property was worth. How does it happen again? Amazing.

2/02/2006 3:45 PM  
Blogger betamax said...

He should have traded down but like most people do, he got some cash in his pocket burning a hole and he traded up. He is in a bigger hole now.

Him and millions of others. So much for a soft landing.

2/02/2006 4:45 PM  
Blogger ctz274 said...

Karen –

Regarding your neighbor in Freddie, guess there are people everywhere in denial intentionally or unintentionally.

As for homeowners, most of those who bought when the price was low, they don’t want their home appreciation gone even they didn’t have exotic refi. so they are in denial; and most of those who bought when the price was high, they are in denial for obvious reason – don’t want to admit they made mistakes.

About 5 months ago, one of my coworkers who’s living in Clarksville kept on bragging to me about her neighbor’s home just sold for over $800K while she paid only mid $700K for hers at the end of 2004. Couple of weeks ago, she got worried when another two of her neighbor’s houses were on the market for months and not sold after price reduction. But she told me she wouldn’t worry too much because xxx hospital was going to move to Clarksville and there would be so many families in need of homes in the coming year. Oh, boy! People do have ways to blind themselves.

All in all, I really admire your courage to admit rushing in too fast.

2/02/2006 5:17 PM  
Anonymous Anonymous said...

Not all homeowners who bought low care if paper equity is lost. If we take a dive, who cares, its all paper equity. Even better with a 30yr fixed below 6%. My house is not an investment, its a home for my family. Not an ATM.

2/02/2006 5:31 PM  
Blogger Karen said...


Are you talking about Clarksville MD? Well, howdy neighbor!

I think our biggest mistake was assuming that we would be happy in Maryland and buying immediately rather than renting. If we had rented, we would be more willing to cut our losses and run. We just assumed that we would be happy here, and that's not the case. The situation is complicated because we sank our considerable (>$300k) equity into our house, and now not only do we have to sell the house, but we have to fund yet another move.

The only bright spot in all this is that the company making the job offer may be willing to move us on their dime, so we only have to eat the cost of the Realtor. Oh, and the cost of replacing the rotten bathroom floor that the inspector missed when we bought the house last year. Grrrr! And, the cost of the carpet and kitchen appliances we bought when we still thought we'd be here awhile.

Please don't feel like I'm asking for a pity party. I'm definitely not. Our equity is still substantial. I tell my story to illustrate a point. We took a big risk when we left CA and came to MD, assuming that we would like it here. Unfortunately, that is not the case.

The one smart thing we did was down-sizing, freeing up a lot of income for investing, rather than getting ourselves into a bigger mortgage like Anon 3:34's buddy. If we had been even smarter we would have rented before making the commitment to purchase.

I'm not a big advocate of renting in the hopes of making a killing off other people's misfortune if the RE market tanks, although I know some posters are salivating at the very thought of it! I like owning my house, and I don't look at it as an investment or an ATM. I'll buy again, but this time, I plan to make sure I'm going to be in the house for the long-term.

When we were considering leaving CA, a lot of people asked me if I thought they should sell, too. I told them that if they loved the community and could afford their house (i.e. no exotic loans), it was silly to leave. I would still give the same advice.

So, if you are thinking of chasing the money and leaving CA (or whatever other bubble community you may be living in), make sure it's what is really best for you and your family. There is no going back.

2/02/2006 6:40 PM  
Anonymous Anonymous said...

I agree with anonymous about losing paper equity and it being a home not an ATM. We bought a 2000 sq. ft. condo on logan circle in 1999 for 385k. I'm still decorating/upgrading the place and loving every minute. A significant drop in the market would give us a breather from the ever increasing taxes and allow us to buy a future retirement home via foreclosure sales.

2/02/2006 7:04 PM  
Blogger Karen said...

"A breather from the ever-increasing taxes"

I hope you're not counting on a decrease in property taxes if values drop. Not likely to happen.

Anybody have historical data on property taxes in CA last time values went south?

2/02/2006 7:16 PM  
Blogger MrIncomeStream said...

In the Los Angeles region you have to have the property re-assesed to get a reduction and even if you can prove your property is worth less. It takes an act of god and threats of lawsuits to get the reduction.

2/02/2006 7:33 PM  
Anonymous Anonymous said...

Not all homeowners who bought low care if paper equity is lost.

Well, a lot do care, at least most of the homeowners I know. Currently, the level off theory is very popular during lunch breaks.

2/02/2006 7:35 PM  
Blogger ctz274 said...

"I hope you're not counting on a decrease in property taxes if values drop. Not likely to happen."

Heard from a coworker the property tax is going to go up for the next 2 years in Maryland to catch up with the current property appraisal value. Anywhere one can check about this?

2/02/2006 7:40 PM  
Blogger Karen said...

This comment has been removed by a blog administrator.

2/02/2006 7:40 PM  
Blogger DannyHSDad said...

I agree with Karen's "A breather from the ever-increasing taxes"
I hope you're not counting on a decrease in property taxes if values drop. Not likely to happen.

Here in Texas, when the appraisals came down 2001 or 2002 they claimed that they had to raise the tax rates to keep paying for needed services.

Translation: no way are we going to fire city employees or cut our pay. Are you crazy?!?

2/02/2006 7:41 PM  
Blogger Karen said...


I don't know about the next two years, but I was certainly glad that we have a yearly cap when we received a notice of reassessment a few weeks ago. Ouch!


Good one!

2/02/2006 7:47 PM  
Blogger Karen said...


We're so far OT, I hardly remember where we started this evening, but boy have you attracted a good crowd of posters. Interesting people and conversation. Kudos on a great blog!

2/02/2006 7:52 PM  
Blogger nelsonal said...

Mr. Cote
While it is certainly a negative to have receivables rising faster than income (or sales growth) most firms save a few types of retail operations only rarely collect cash when then generate earnings. That is one of the basic building blocks of accrual accounting. Earnings or losses are created when any sort of transaction occurs not when cash is delivered.
Two other banks with negative ammortization exposure are Downey Financial (DSL) and GoldenWest.
Be cautious about that column in the Wall St. Journal. The author has substantial access to hedge funds which gives him good insight into many odd but useful topics. However, he is sometimes used to flip things on less savvy buyers or sellers.

2/02/2006 7:55 PM  
Blogger SoCalMtgGuy said...


Thanks for the kind words!

That is EXACTLY what I was looking for....a place for good people to meet, and pass information!

I think you will like what I have in store here shortly....


2/02/2006 8:17 PM  
Anonymous Anonymous said...

I've been a recovering mortgage banker for the past 10 years. These new creative lending practices have left me stunned. I've done California, I've done and am doing again Northern Virginia. When I first learned of how many I/Os were out there I was shocked. It was extremely rare that I'd do a true NINA loan "back in the day", let alone some of these more exotic loans. I have only very little exposure to sub-prime and what I did see I didn't like.

I'm arm-chairing this now as just a regular homeowner and observer. After the last downturn in California in the early 90s I got out and moved on.

I live in Fairfax County, near Dulles Airport. The new construction is unbelievable. Who are all these folks who can afford $700k townhomes? Or these "executive" homes on zero lots for $900k?? I'm all for some density building but do they all have to be this unaffordable crap?

I look around at my little 1400 sf dollhouse and say "well, at least it doesn't take long to clean." And I can afford it. So far. Tax assessements just made my payment $53/month more expensive. And, no ARMs in this household. After all my years in the "biz", if you can't qualify for a home on a 30-year fixed at 6.5%, you can't afford the damn house. 7% is a great rate in any market as far as I'm concerned and we haven't been there in years and people STILL need I/O loans?

Give me a break.

2/02/2006 8:26 PM  
Blogger Sensible Lender said...

When I read this article yesterday I was shocked at the extent of the option ARMs on interest income. When I was in grad B-School in the early 80s taking courses in financial institutions, if I created such a scenario I would have been failed by the professor.

2/02/2006 8:39 PM  
Blogger Roadtripboy said...


I enjoy reading your blog and I appreciate your candor regarding your industry.

But I do have to say that this business about the mortgage broker receiving a "3 point rebate" for selling the 3-year pre-payment penalty troubles me a little. Instead of "rebate", how about the term "kickback"? I recognize that the term "Kickback" has an unsavoy feel to it and no industry would want to be associated with the term. But isn't that what it amounts to? If the broker disclosed this fact to the lender (that he was receiving the "rebate"), in addition to all of the terms and ramifications of this loan, I don't think I would have a problem with it. But the idea that some brokers are taking advantage of their clients like this is really appalling. It seems very unethical and possibly illegal?

2/02/2006 9:08 PM  
Blogger SoCalMtgGuy said...


It is the 'lender' that pays the rebate. It is up to the broker/loan officer to determine the loan for the borrower.

I know some brokers that hate the option ARM. I know some that will only do it with the no pre-pay or the 1-yr (depending on the loan program). I also know brokers that live and die by the option arm. Selling it with 3 points back is the only way to go.

I hear you. Believe me I do. I'm just telling you what the reality of the situation is.


2/02/2006 9:13 PM  
Blogger Pointlines said...


Could you please do me a favor and make sure I am not seeing things...

Earlier today I checked the number of listings (THE SUPPLY) of homes listed for Orange County CA on ZIPRealty. The number of listings was 8560. New inventory has been coming on at about a pace of 200 a week or so for the last 2 weeks. Nothing big, just consistent.

I just checked again as usually Thurs and Friday are the biggest volume days.

OC Just showed 9156. It jumped over 500 from the afternoon.

Could you check and confirm for me that you see the same thing.

If so, the Spring spike in volume is now hitting big.


2/02/2006 10:21 PM  
Blogger SoCalMtgGuy said...

bubble butt...

I don't doubt it for a minute.

San Diego is up over 600 properties since last Monday.

15,568 to 16,192 at my last check at

Working on fonts and stuff on the other blog...


2/02/2006 10:53 PM  
Anonymous Anonymous said...

I'm a mortgage broker. I sell a ton of these loans, in fact my brokerage advertises heavily for them by direct mail and television advertising.

For some people it's a great loan. Some people can effectively manage the cash flow by utilizing the monthly payment savings. What we as brokers have to take the initiative on is correctly educating our borrowers on how to use the loan so they don't get into trouble down the road.

This can be done by setting up the loan with a longer recast cap rate, giving the borrower a loan with a higher minimum payment rate so they cannot defer as much, and tieing the loan to a more stable index.

When the shit does hit the fan, the ones to blame will be the greedy, slimy brokers who did not explain the loan effectively and instead focused on their max rebate. And also, the blame will fall on these banks being too aggressive with their mimimum payment rates in a rising interest rate market.

If you look back even 5 years ago...the Pay Option Loan was offering a 2.95 - 3.95% minimum pay rate. When rates began to fall, we ran into a period where the interest only payments on the loan were lower than the minimum pay rate. This opened the flood gates to lower the min pay rate down to rock bottom (there is a loan out there with a .25% start rate, I/O payment). And when rates turned and began to rise....nothing happened to START RATES!! Banks in general where competing for business and were too afraid to lose out to another bank with a lower start rate.

This is another big reason you see the amount of deffered interest increasing so much.

Hindsight may be 20/20 but, you'd think common sense would tell you that the start rates need to move with interest rates.

2/26/2007 1:40 PM  

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