Thursday, March 30, 2006

Money Magazine article, mortgage update and more

I know it has been a little while since I last posted, but I have been pretty busy with my 'plan B' job. Things are going GREAT with my new line of work, and I can honestly say it is refreshing to be out of the mortgage industry as my primary source of income. I have several great friends that are still 'in the trenches' and I still keep abreast of what is going on in the mortgage/real estate industry.

For those of you that are coming here for the first time since you saw the write up in Money magazine (subscribers edition...not the newsstand edition) or from this CNN/Money story, I want to say thank you for stopping by! Since I am no longer posting everyday like I was for many months, the best way to use this site is to check out the archives on this site, as well as my 'ORIGINAL SITE', and use the FORUMS. I will be organizing all of my posts so that they are easy for people to access here shortly. Until then, check out some of the 'Popular Posts' that I have linked to below, as well as the archives on the right hand side. Some of the 'popular posts' will link you to the 'original site' or you can get there with the navigation bar. There is also a TON of information and activities going on in the FORUMS. There are almost 350 members, 500 topics, and 3000 posts at this time!

Here are just a few of the posts that have been popular with readers:

  • -Math behind "should I buy or wait"

  • -Why is it taking so long to 'burst'?

  • -Welcome to the gun show - show me your ARMs

  • -Stock bubble vs. RE bubble

  • -The 40 year mortgage

  • -Investors count equity loans as 'income'

  • -Trillion dollar game of 'Jenga'

  • -Who is to blame for the 'bubble'?

  • -OCC Mortgage Guidance

  • -MTV Cribs, BLING and the Housing Bubble

  • -Population BANKRUPT in MATH

  • -When ARMs adjust

  • "-Help an FB" story

  • "-Uh-Oh...The times are changing

  • "-The market has changed"

  • These are just a few of the 80+ posts I have made. I have covered all aspects of the mortgage lending business. I have talked about interest only, negative amortization, adjustible rate mortgages (2/28, 3/27, 5/1, etc), fixed rate mortgages, 40 year mortgages, refinancing, appraisals, packaging loans, selling loans, loan standards, loan programs, stated loans, no doc loans, no ratio loans....I think you get the point. Don't worry, I made it entertaining. I wouldn't have been featured by CNN/Money magazine if it was dry and boring like your Econ 101 class.

    It just shake my head when I see how the media reports information. The media is a great 'lagging indicator'. We should have been seeing articles like this back in 2002 before everybody tried to become the next 'genius' real estate investor. It is amazing to me that nobody thinks about the long term financial repercussions of taking on some of these mortgages.

    I still get lots of e-mails with questions about option-ARMs, how they work, and the different indexes they can be linked to (COSI, COFI, MTA, LIBOR, etc). It is simply amazing to me that people will think they will be 'fine' making a $1600 payment on a 500k loan. That is about what the minimum payment can be on an option-ARM today. If you could theoretically make that payment for the full 30 years, you would barely cover the original loan amount ($578k). Too bad the 'real' payment for 30 years would have to be about double that amount to 'afford' a 500k loan. And you wonder how property has doubled or tripled in many areas over the last few years?!?!?

    The floodgates have been opened the past 5 years. Pretty much anybody could get a loan for 400-500k with not much problem. If you don't make enough, go stated. If you want to buy more house, go interest-only or negative amortization (option ARM). If you have no money problem. If you FICO is in the toilet, get it into the 500's, and you have options. For a while there, a 560-580 FICO score would get you a 100% loan. A month or so before I left my last company, they got rid of bankruptcy seasoning. That means that a borrower with no BK would get pretty much the same loan/rate as somebody who was 1-day out of bankruptcy. Does that sound right to you?!?!?

    I could go on and on. It seems that so many of the articles that are coming out now about the 'dangers' of interest only ARMs, etc. are a day late and a few trillion dollars short. Amazing that the 'important' people didn't notice that 80% of the loans in CA being interest-only ARMs or option ARMs might cause problems down the road. I saw it from the beginning. Many people were jumping into houses with ARMs, and their plan was to sell when the payments increased. Seems like lots of people had that same great 'idea'...

    If San Diego inventory is any indicator, it could take a l-o-n-g time to look at all the houses on the market. 18,192 per tonight. Prices skyrocket when buyers are chasing 2800-3000 properties on the market as they were in the spring of 2004. What happens when there are over 18,000 properties on the market?? Do we really need to poll Mensa to get the answer to this one?

    I happened to be in the LA area a week or so ago and I was scrolling through the radio stations and I came across 102.7 where Ryan Seacrest has a morning show. Part of his show is this little girl called Ali who calls people up and asks them questions. If you have heard it, you know what I'm talking about, if not...just trust me, it can be hilarious. I happened to tune in to catch little Ali calling a real estate agent and she asked about a 'housing bubble'. The realtor assured little Ali that the housing bubble is a 'myth'. Little Ali said "like Bigfoot" and the realtor said exactly.

    Sorry, but if that is the case, then Bigfoot IS real...and has been doing more steroids than Barry Bonds.

    Stay tuned, stay informed, and I look forward to the comments and feedback.
    I am going to keep making my posts over here, but most of the comments are happening at the new site. Go to...

    ...if you would like to see more comments and activity. Don't forgot to check out the activity in the FORUMS!


    Sunday, March 12, 2006

    I'm back! ...option ARMs , growing inventory, slower business, and more

    Hello everybody! Many of you know my feelings on where I think things are headed as well that I have been working on my 'plan B'. That said, my 'plan B' has worked out better than expected. I found an excellent opportunity in another industry. I will still be in sales in SoCal, just not in the mortgage industry. I will still be keeping my finger on the 'pulse' of things as I have several good friends that will keep me posted as new things happen. I have a LOT to learn with my new job, so the posts are going to be less frequent from me for the time being. I wish I could keep the posts coming every day, but blogging doesn't pay the bills for me. I will be focusing on the new job and posting as I have good information. That said, I do have some good info below, so lets have a look at what is going on in the industry and some of the things I am seeing and hearing from others.

    First off, things are much S-L-O-W-E-R in the mortgage business. I have met with several of my friends that are also account executives in the industry. One of them told me that only one person in their region 'commissioned' last month. For a territory that is used to doing 30-50 million per month, they did only 10 million. There was a time not too long ago, where the top rep in this territory was doing more than 10 million a month. I talked to 2 other reps where nobody in their regions hit their numbers. All but one of these reps is about to start looking elsewhere for work.

    The mortgage industry, and specifically the subprime industry, has tried to implement the 'outrun things with volume' strategy. They kept rates low to stay competitive. The slashed profit per loan, and tried to drive volume. In the last year at the company I just left, we had 5 different comp plans. The 'last' comp plan was about 'half' of the first comp plan unless you were hitting the highest numbers which only a very few people were doing. To give you an idea, a rep used to make $4000 to $5000 for every million dollars worth of loans funded. Now, the typical rep is probably going to make $2000-$2500 for the same million dollars worth of loans funded. The problem is that the volume isn't there for most people. I know reps there were doing 5-7 million per month consistently...and now they are barely doing 1.5 million. I know it is the 'slow' time of the year to begin with, but I don't see things picking up that much. Some of the reps that have been in the business for a while and that saved money, will be fine. Remember, most companies only had 3-5 reps for a region a few years ago. That grew to 15-25 reps as things were booming. The problem is that there isn't the volume to pay that many reps the money they need to be paid to live. Look at my earlier example. 8-10 reps can all do ok when a territory is doing 30-50 million, not 10 million. (some companies will split a region into territories, that is why a territory will have less reps than a region).

    That said, it isn't stopping the companies from hiring people. I have had no less than 6-8 companies that found my resume online, want me to come work for them as an account executive. It doesn't surprise me though, as there are not many barriers to entry in this industry. Since most account executive positions are 100% commission or have a very small draw plus commission, the companies aren't really taking much risk by hiring a new person. They will usually throw a short term comp plan that pays very well for about 3 months until you transition to the regular comp plan. I think that the companies are looking for new people that will have relationships with big accounts they don't know about or have relationships with. I have had another 15-20 companies that wanted me to be a loan officer for them. The funny thing is that when I ask them where they see things headed, they admit that things have been slow for a few months, but that they see things 'taking off' again in 60-90 days. I just don't see a major increase in activity in the near future. You can't have a 5-8 year bull-run in real estate, and NOT have things slow down...especially once people see prices coming down. Over 40% of the job growth in California has been in the real estate/mortgage/related fields industries the past 5 years. I'm not naive enough to think that RE can employ that many people in the long run.

    Now lets take a look at my favorite loan...the option ARM. It seems that option ARMs are making up what seems to be a very large part of the business in SoCal. Part of this is due to the fact that it pays well, but I think it mostly deals with the fact that most people cannot afford property using 'conventional' financing, so the option ARM is the only way to get the payment low enough. I was talking to several other account executives that were saying the same thing. They are seeing some offices that are doing option ARMs for 80-90% of their business. I saw this trend a while ago...especially when they started offering the option ARM to people with FICO scores in the high 500's and low 600's. The option ARM started targeting more of a 'subprime' borrower...but it wasn't offered by your true subprime lenders.

    Speaking of lowered standards. One major nationwide lender now added a 3-month bank statement program to their arsenal. Not too long ago, most banks wanted 24 months of bank statements, but some would take 12 months. Then most banks added what was called 'lite-doc' or 6-month bank statements. This means the borrower shows their last 6 months of bank statements to 'verify' their income. Now we have a 3 month program?!?!? I don't know the specifics with regards to LTV, FICO scores, etc. but come on. As you can see, this is just another 'lowering of standards' to try and get a few more people who can qualify for a loan. The problem is that there isn't much further you can go. Whats next, the 1 month bank statement program?!?!? Doesn't it sound a little crazy to give somebody a 30 year loan based on only a 3 month history?!?!?

    Lets not forget those inventory numbers. I take off for a few days, and the San Diego inventory numbers jump from the low 17,000's to 17,685 per It is pretty safe to say that inventories are steadily increasing. Too bad that the sales transactions are not keeping pace.

    That is about all for now. I'll be posting periodically as I have good information or analysis to share with you. I have a LOT to learn with my new job and I am VERY excited about it!! I will be spending most of my time working on that, as it pays the bills quite a bit better than the blog ;) I suggest making the FORUMS a regular stop each day. There are now over 300 members, 2200 posts, and 340 topics to read about. There are some very articulate and informative people in the forums.

    To everybody who has sent e-mails the past week to 10 days....sorry it took so long to get back to you. I hope this post helps to explain things a bit better. Thanks again to everybody for all of the support. I'll still be around...and I'm looking forward to watching this whole thing unfold.

    I look forward to the comments and feedback!
    I am going to keep making my posts over here, but most of the comments are happening at the new site. Go to...

    ...if you would like to see more comments and activity. Don't forgot to check out the activity in the FORUMS!


    The 40-yr mortgage

    Quick update: I am not going to be available that much this week via computer. I was presented with a very good opportunity that I decided to take advantage of. That said, no time for a 'new' post. But here is a repost of an older topic that I think more people need to look at again. I keep getting e-mails about 40yr and longer term mortgages. Here is the math behind it. Those of you that have sent me e-mail, I will get back to you this weekend. Spend time in the FORUMS....LOTS of info going on there. Thanks! SoCalMtgGuy
    The 40yr it for YOU?!?!?

    Why be knee deep in debt for 30 years, when you can do it for 40 years?!?!?

    I'm sure many of you have heard about the latest and greatest "advancement" in the mortgage industry: the 40 year mortgage. These come in various forms: 2/38, 3/37, 40 year fixed, and 40/30 mortgages. The 40/30 mortgage is a "balloon" mortgage. The loan is amortized over 40 years, but a "balloon" payment is due for the balance of the loan in 30 years. You have to either pay it off, or refi the remaining portion. The 2/38 and 3/37 are your standard ARM mortgages that are fixed for 2 or 3 years, then adjust for the next 37 or 38 years. Sounds like fun doesn't it?!?!?

    Now that we know the basic types of these loans, lets see how it hits the old pocketbook. I am going to compare the payments at different rates, using 30, 40 and 100 year mortgages. WHAT, a hundred year mortgage?!?!? Well, they aren't here yet...but in the effort to "keep homes affordable" we might see it in the future. I think you will be surprised with what you see in regards to the 100yr mortgage. You will see that even a 100yr mortgage does not lower payments that dramatically, especially for the money you will end up paying in the long run.

    I am using 2 loan sizes that are "typical" in high value areas. Again, take the numbers for what they are worth. Look at the trends. Lots of things to go over here. Here are the numbers for a $400,000 and $800,000 loan at 30yr fixed, 40yr fixed, and 100yr fixed payments.

    $400,000 loan at 5% 30yr fix = $2147.28 . . . . .total pmt = $773,023
    $400,000 loan at 5% 40yr fix = $1928.78 . . . . .total pmt = $925,817
    $400,000 loan at 5% 100yr fix = $1678.09 . . . . .total pmt = $2,013,709

    $400,000 loan at 6% 30yr fix = $2398.20 . . . . .total pmt = $863,352
    $400,000 loan at 6% 40yr fix = $2200.85 . . . . .total pmt = $1,056,408
    $400,000 loan at 6% 100yr fix = $2005.04 . . . . .total pmt = $2,406,048

    $400,000 loan at 7% 30yr fix = $2661.21 . . . . .total pmt = $958,035
    $400,000 loan at 7% 40yr fix = $2485.72 . . . . .total pmt = $1,193145
    $400,000 loan at 7% 100yr fix = $2335.50 . . . . .total pmt = $2,802,600

    Whew, lots of things we can learn from these numbers. Let us look at some simple things first, like the impact of interest rates on things. Look at the 30yr fixed payment on the 3 loans. 5% is a pretty accurate fixed rate that wasn't that hard to get the past few years. Right now, rates are in the 6% range, and if you look at the projections, fixed rates around 7% could be here in 12-18 months. Many subprime/alt-a borrowers today are in the 7% range. That $2147 payment at 5% covers the mortgage at $400k. That same $2147 payment at 7% only covers a loan amount of $322,710 !! That is a 19.3% drop in buying power, with just the rate going up 2% from 5 to 7%.

    Let's see if the 40yr mortgage would help us here. Let's keep the same $2147 payment, but lets do a 40yr loan at 7%. The same payment on a 7% 40year loan only covers the mortgage on an amount of $345,492! That is still 13.6% short of what a 5% loan on a 30yr fixed did just a year or so ago!

    Let's see what the $2200 payment from the 40yr loan at 6% would buy us on a 30yr fixed loan at 6%: it would make a 30yr fixed mortgage payment on a $366,941 loan. By using the same payment on a 30 and 40 year loan, we would be able to purchase a house that is only $33,058 more expensive by using a 40yr loan. Would the lifestyle change really be that different between a $367,000 home and a $400,000 home?? The long term finances of it would surely be different. I guess it is up to the bwr to decide. I'm not here to tell you what to do, I'm just here to give you the math behind it. Goodness knows, very few brokers and real estate agents have YOUR best financial interests at hand.

    Let's do something really crazy, and assume we actually want to pay our loans off, and live in a house with no mortgage. Look at the total payment amounts! At 6%, the 100 year mortgage saves about $393 a month, but you (and your heirs) would end up paying $1,542,696 MORE over the life of the loan than if you did a 30yr fixed. Even with the 40yr mortgage, you only save 198 bucks, but it costs you an extra $193,056 over the life of the loan.

    BUT, let's assume that some of you are astute investors, and you take the money saved and you invest that money instead of buying cars, clothers, vacations, etc. Let's assume you take the $198 and invest it at 6%. At the 30yr mark, where your house would be paid off if you had done the 30yr loan, you would have $198,893 dollars saved (assuming no taxes/expenses/etc.), BUT you would still owe about $198,200. So, if you saved the money, got a 6% return for 30 years, you would just about break even.

    Somehow, I think the odds of most people diligently saving and investing the difference is slim. Sure, some of you are going to say I could get 8 to 12% return on my money. Maybe you could, maybe you couldn't. There would be taxes, fund expenses, etc. I'm not here to debate the investment side of things, I'm here to show how the different loan periods can have a dramatic effect on the amount of money you will spend.

    Hey wait a second, SoCal, most people only keep their house 5 years before bumping up or refinancing. Those statistics are true about people moving and/or refinancing. BUT people assume that because in the past property has gone up, that it will continue to do so. People generally move up when they have appreciation and/or they make more money. As we have shown, with rates rising, they will HAVE to make more money to afford the same size loan as before. With so many people doing "buy-now, pay-later" loans (ARM's, option ARMs, I/O, etc) they are not going to be able to afford to move up. They will barely be able to afford their own adjusting loans, nevermind taking on a larger loan at higher rates.

    And now the larger loan sizes. I'm not going to write as much about these loans below. Just look at the numbers and see how higher rates, and longer mortgage periods really affect the payments.

    $800,000 loan at 5% 30yr fix = $4294.57 . . . . .total pmt = $1,546,045
    $800,000 loan at 5% 40yr fix = $3857.57 . . . . .total pmt = $1,851,633
    $800,000 loan at 5% 100yr fix = $3356.18 . . . . .total pmt = $4,027,419

    $800,000 loan at 6% 30yr fix = $4796.40 . . . . .total pmt = $1,726,704
    $800,000 loan at 6% 40yr fix = $4401.71 . . . . .total pmt = $2,112,820
    $800,000 loan at 6% 100yr fix = $4010.09 . . . . .total pmt = $4,812,108

    $800,000 loan at 7% 30yr fix = $5322.42 . . . . .total pmt = $1,916,071
    $800,000 loan at 7% 40yr fix = $4971.45 . . . . .total pmt= $2,386,296
    $800,000 loan at 7% 100yr fix = $4671.01 . . . . .total pmt = $5,605,216

    I know it is hard to read these numbers in the space provided, but I think it gives somewhat of a clear picture the "benefits" and drawbacks of the 40 and 100yr mortgages.

    The benefit to the 40yr mortgage is that it will lower your monthly payment today, but you will spend hundreds of thousands of dollars more in the long run. If the only way you can afford a property is a 40yr mortgage or more, you probably need to wait, make more money, or look for a less expensive property.

    I didn't even take into account that there is usually a 10, 25, or 35 basis point add for the 40yr program depending on the lender. I am using numbers that give these programs the benefit of the doubt, and I still don't think there are compelling savings or reasons to use these mortgages. Maybe it is just me, but I don't like the feeling of being in debt for 40 years. What do you think?
    I'm sure there will be questions and things I will have to explain in further detail, so leave comments and I will do my best to answer your questions.

    I am going to keep making my posts over here, but most of the comments are happening at the new site. Go to...

    ...if you would like to see more comments and activity. Don't forgot to check out the activity in the FORUMS!


    Friday, March 03, 2006

    The times are changing....

    Whoooopsieee! Looks like the media is starting to catch a 'whiff' of this bubble leaking some air. The realtors for the most part are in denial. It is as if they are walking downwind in a cow pasture, but they won't admit something 'stinks' until they step in it! Right now, all the realtors are trying to rationalize that things don't smell at all, and if you put on enough cologne, things smell just great! The thing is, most people are sheep, not pigs. Sheep follow the heard, pigs wallow in crap.

    Let's look a some of the information that is STARTING to come out of the media. It won't take long for the sheep to take notice...the 'bubble' word propping up in more and more headlines. Let's be honest, most people don't read the whole article. I forgot the statistics I read a while ago, but most people scan the headlines and the first paragraph, and read on an 8th grade level. I'm not too worried about the 'average joe' pondering the inverted yield curve, supply & demand, inflation, "medium" home prices, etc. They will be focusing on words like bubble and bursting.

    You have to hate it when the New York Times starts running a story titled: Don't Fear the Bubble that Bursts. Uh oh...please don't talk about the past. After all, its different this time....right?

    You have to like it when the local ABC news channel runs a story: "Central Valley Housing Bubble Ready to Burst?". Here is the FIRST sentence that most will read:

    "The Valley housing boom is over, with home prices in some neighborhoods dropping $50,000 in just the past two months."

    You can just hear it now. "Aw sh*t Ethel, our house is going down in value!".

    Don't worry those of you on the East Coast, there is a bit of news for you as well! This little paper called the Boston Herald had an article titled "Roof Collapses on Housing Boom". No, it is not something you can just take out a HELOC to repair. Here are the first 3 sentences:

    Massachusetts house sales plummeted 21 percent last month, stoking fears that the housing bubble may have burst and could send shock waves across the economy. It was the biggest year-over-year sales drop in almost 11 years - as Realtors recorded the slowest January since 1996. What’s more, one of the worst fears of homeowners appears to be coming true: House values have dropped nearly 8 percent since August.

    Let's take a tour down South and see whats going on in West Palm "RE never goes down" Beach. Home sales, prices continue downward slide is what is going on. The first sentence:

    Maybe the housing bubble hasn't burst, but it's losing air fast.

    Imagine you are on a completely full 737 cruising along at altitude when you feel uneasy that something happened. The Captain comes over the speaker and says "We are not going to crash, but we are losing altitude fast". What do you think most people are going to do??

    I know, I know...not the best comparison, but you get the point. Here is more from the story: The median price of an existing home sold in Palm Beach County in January fell to $393,700, well below the November peak of $421,500 and the first time the typical home has sold for less than $400,000 since July.

    I do want to pause to let people know that I found an honest RE agent. Check out this quote from the same article: "Palm Beach County has a mini-blood bath going," said David Dweck, a Boca Raton real estate agent and investor who heads the Boca Real Estate Investment Club.

    I'm not a professional PR guy, but I think that the term 'blood bath' probably doesn't have a positive connotation with most people.

    Along the same lines a bit further south, we have The Boom is Gone: Home Sales fall 36% In Broward. First sentence: South Florida's five-year housing boom is over. Need I say more?

    I'm sorry (not really) for being a smart-ass. I just can't believe that with all of the information out there, that people STILL think real estate only goes up!! You would think that after the 'irrational exuberance' of the stock market bubble of 5-6 years ago that everybody saw so painfully clear when it was over....that we wouldn't be running into another bubble so soon.

    These articles are just the tip of the iceberg. Since about a third of the houses were bought as 'investments', people are counting on appreciation and making easy money. As you can see, once people realize the party is over, watch demand start to 'dry-up'. Once people realize they can't make 10k a month on a condo conversion, or by painting a house and cutting the grass, they will stop doing it. The problem is that there is going to be quite a large supply of homes, and not near as much demand for them.

    I happened to catch an episode of "Flip that House" this past weekend. The guy bought a house in LA for $360k. Put $75k into the remodel. I'll admit, the house had a LOT of problems, and the guy did a great job fixing things properly and not cutting corners. There are 2 problems. The first one is that more time should have been spent inspecting the house before purchasing it. If that had been done, the $25k that was budgeted wouldn't have grown to $75k. That extra $50k was a 'surprise' that really eats into the profitability. The second is that in the end, the RE agent said the house was 'worth' $480,000. If you take the $435,000 invested then you are looking at a 'profit' of $45,000. But remember, that is before the transaction costs of purchasing the home, the carrying costs until it sells (mortgage/taxes/etc.), and the costs of selling the home. It took 12 weeks to do the remodel. By the time the transaction costs are figured in, I don't think there is much of that $45,000 left over, even IF it sold at $480k.

    Check out the section of Forums that deals with the Craigslist/Classified-Ad FB's. Spend a few minutes there. I'm it. There are waaaaay to many FB's out there for one blogger to handle. Besides, I think it adds credibility when you see it listed in the 'real world'. I'm not kidding when I say there is a LOT of good information in the forums.

    That is all for now. I have some good stories to share with you next week...stay tuned!

    I look forward to the comments and feedback!
    I am going to keep making my posts over here, but most of the comments are happening at the new site. Go to...

    ...if you would like to see more comments and activity. Don't forgot to check out the activity in the FORUMS!