Tuesday, September 19, 2006

"Don't blame exotic loans for the housing malaise"

That was the headline in the OC Register this weekend in the 'Marketplace' section. The smaller print after the big headline is "Stats suggest borrowers are handling supposedly riskier mortgages – so far." The BIG emphasis should be on those last 2 words...SO FAR. Here is the link to the online version: OC Register article - "Don't blame exotic loans for the housing malaise"

I will expound on things a bit more, but I think a post that I did about 10 months ago will be a good start. I am sure some of you have read it before, but it won't kill you to read it again. You will notice that some of the numbers in the post are lower than the numbers we are currently hearing today, that is because of more data is available today than was 10 months ago. Not to mention that mortgage resets is not the easiest statistic to compile. Well, here we go...

Tuesday, December 06, 2005

"Are we there yet??" "What is taking soooo long!?!?"

Like a neverending road trip in the family station wagon as a kid...one poster wonders "when are we going to get there?" (this post was actually taken from Ben Jones blog with the posters permission to use it here)

Former LA Homeowner said...

socalmtgguy and all the rest,

I believe there is a housing bubble, especially in So Cal but it is taking a freaking long time to burst. How long do we have to wait for this mess to unravel? I just want a decent house, nothing to flip or speculate on.

1:21 PM

There is not been any REAL pressure on the market yet for it to start coming down. Yes, interest rates have gone up some, and lending standards have tightened a smidge in some places, but for all intents and purposes, not much has changed. The latest increase in rates doesn't really affect that many people at the moment.

We all know that in the bubble markets, there is an overwhelming use of ARMs, I/O ARMs, and option-ARMs to be able to "afford" the property. Most of these loans are fixed for a minimum of 2-5 years, with some going as long as 7 and 10 years. The borrowers that are refinancing right now more than likely bought 2-3 years ago, and now their ARM is adjusting, or about to adjust. Assuming they didn't take out too many HELOC's (home equity line of credit), they should have plenty of equity to be able to refi at a lower LTV. Some of these people will be impacted, but for the most part, they have enough equity cushion to keep themselves safe.

On the other hand, you have the people that have bought in the past 12-18 months. These people are still sitting pretty with their low payments for another 12-18 months at least. Some of these people have some decent appreciation.

Here is where things get tricky. In 2006 there are approximately 335 billion dollars worth of ARMs that are set to adjust. Let's just assume that each loan set to adjust is for $500,000. That means 670,000 households are going to have 4 options: refi, sell, foreclose, or pay the higher payments.

Things get really tricky in 2007 as 1.2 TRILLION dollars of arms are set to adjust. That means 2,400,000 households have to pick one of those 4 options. (again, we all know that 500k is a high loan amount, but it will give us a 'low estimate' as the number of households that could be effected) Let's look at those 4 options a bit closer now...

Refinance - Most people will NOT like their mortgage payment fluctuating on a monthly basis, and they will certainly not like the fact that their payments will jump pretty dramatically as rates will most definitely be higher in 2006 and 2007. Rates will still be historically low, but not in the 4's and 5's which many of these borrowers will have had.

Sell - This is an option that many people will take. They knew going in that they could not afford the property for 30 years, but they would do whatever they had to do to get a piece of property and start getting the appreciation. There will be many of these people who will try and sell. The only problem is that supply and demand works both ways. The got the appreciation when the supply was low, now they will have to give it back as there are massive increases in inventory.

Foreclose - do I really need to go here? Many borrowers will lose their property because they cannot make their adjusted mortgage payment, or they cannot sell fast enough, or they cannot sell where they won't be upside down.

Make the higher payment - Some people might not be able to refi because of credit scores dropping, employment changes, or even tightening of lending standards. These people will do what is necessary to keep making the payment. Hopefully the jump in payment will not crush them.

So there you have it. That is one of the things I belive that will be the catalyst for the bubble to burst. Massive people selling will lower prices. Rising rates will force people to lower prices as the same payment buys less house. Tightening lending standards will pull potential borrowers out of the market. Once those stated loans get a bad rap and/or they actually start pricing them correctly, you will remove another section of people from the market.

Once these things start happening, I think you will see the beginning of things REALLY coming down. Don't fall for the dead-cat-bounce when people start buying in on the first dip.

I hope this helps to shed some light on how much longer "you will be stuck in this station wagon"!


It really doesn't surprise me at this time that the 'toxic loans' aren't performing worse than the 'conventional' loans. You see, many of the people with the exotic loans STILL have the low payment, and the ones that did get into trouble were generally able to sell before they got into any real foreclosure problems. With inventories at least double in many areas, and the sales pace down 25-40% from the same time last year, selling to get out of trouble is going to become MUCH harder...and we aren't even into 2007 yet. I can only guess that the first half of this article was to squash the 'bubble talk' that has become more commonplace in the media today.

The second half of the story is where people should be paying attention. The first half covers the 'past' the 2nd half of the story looks to the future. Once there is a reason...like...I don't know...at least 1.5 trillion dollars worth of mortgages adjusting, that could spell trouble for the future. The foreclosure rate is up across the country from the same time last year. Sure, it is still not a very high number of actual foreclosures, but lets revisit the stats AFTER 2007. Remember, it takes months to gather this data, analyze it, and get it reported to the people. So don't start jumping on my back when the first wave of numbers comes out in February/March/April of 2007 and say "you said 2007 was the year of reckoning"...much of that data will still be from 2006. Look at the data from late 2007 and early 2008 to see what REALLY happened with all the mortgage adjustments. Remember, 2007 will be a key year, but it will by no means be 'over' after 2007. You can't have a 5-8 year bull run and only a 1-2 year pullback. This thing will take time to run its course.

On a side note, I had another friend who just left the business. He said he had 3 borrowers in the past month or so that got loans, and went 30, 60, 90, 120, default. The loans were all stated 100% loans from 500-800k. I guess the borrowers were hoping to 'flip' the property before they could default.

On another side note...I couldn't sleep the other night, so I was doing a little channel surfing. I came across the show "Million Dollar Listings" which I had heard of, but not seen. Needless to say, I stayed up another hour to watch this show. I actually felt bad for the realtors in this show. The sellers they featured were completely irrational. This one lady bought her home for 1.5 million, did 200k of 'renovations' and wanted to sell it for 3 million a mere 18 months later. Actually, it was 2,995,000...or $5000 less. So shoot me for 'rounding up'! The realtor finally got an offer at 2.3 million, but the seller wanted nothing of it. The realtor took the lady to several other houses to try and show her that her house was priced to high. She did NOT get it. There was one she REALLY liked, nicer than here home, she asked how much it was...a mere 1.9 million. She says...GREAT! get me 3 million for mine and I might buy this one! The highest comp to her house was 2.19 million, but she said she would get 2.95 million, or nothing at all. She said she wasn't in a hurry, and would wait to get exactly what she wanted. Needless to say, the listed was removed, and no sale was made. It was amazing how the sellers were completely disconnected from what their houses were really worth. The other realtors waited about 5 weeks to call the seller and recommend listing at a lower price. After debating firing them, the borrower decided to lower his price, and finally sold his house in the end.

Well, that is all for now. I look forward to the comments and feedback. Look for more frequent postings in the future.

Stay tuned...



Anonymous Anonymous said...

Get a load of this one. The shill has spoken.

The housing boom ended more than a year ago, but sellers are having a tough time accepting that fact, says David Lereah, chief economist at the National Association of Realtors.

9/20/2006 5:29 AM  
Anonymous Anonymous said...

His most recent book.

Are You Missing the Real Estate Boom?: The Boom Will Not Bust and Why Property Values Will Continue to Climb Through the End of the Decade - And How to Profit From Them by David Lereah (Hardcover - Feb 22, 2005)

9/20/2006 5:48 AM  
Anonymous Anonymous said...

Hey! Time to change your approach to this mess? In the past you were interesting/educational/funny because you had great stories to tell abount how bad things were whilst the industry and MSM were saying "Life is GOOOD!"

Now much (but not all) of the USA knows the boom is over and the questions are:
How deep?
Where and when is the bottom?
When will we be in recovery?
Who bears the pain?
What will happen to Fannie Mae?
Are all these flaky loans still rated by banks as "performing" because terms were so loose (option-ARMs etc) that the true scope of delinquencies is hidden?

9/20/2006 9:20 AM  
Blogger powayseller said...

SoCal, love your posts as much today as I did when you were still in the industry. You're a witty informative writer!

Although purchases and refis are down 25-30% from last year, money supply is growing, credit card debt is rising, MEW is just as high as last year. So if ap/refis are down, how can MEW be up? As long as MEW is up, the consumer will keep spending, and the slowdown will be slow in coming.

If the Fed really wanted to lower inflation, why don't they just tighten up the reserve lending amount or quit "printing money"? Anyway, the MBS investors are adding so much liquidity, that people have enough money to keep buying. But where are the MBS investors getting all that money?

The 9/15/06 Credit Suisse report whisks away any concern of a consumer slowdown brought on by the housing slowdown? I can e-mail you the report if you haven't seen it. These are their main points, along with some further questions they would need to answer before I buy their story:

1. The economy is driven by jobs, wages, and tax cuts (the cake). MEW is merely the icing. In 2000-2005, MEW was only 11% of the growth in spending. (My question is: what are the absolute numbers so what is the percentage of MEW compared to wages; how much are consumers depending on that MEW to fund their consumption since flat wages and negative savings already prove that wages just don't pay for the current consumption; what happens when housing-related employment crashes and wages continue losing ground to inflation.)

2. The media makes too much of the MEW slowdown, since up to Q2 06, MEW is still rising. (My question: how much of the refinancing is due to consolidation of upward-adjusting HELOCs and ARMs, and how much is new cash out? They do raise a point I have been wondering about: why is MEW still rising? With interest rates so high and home values dropping, I would expect fewer people to qualify for loans. Large layoffs at lenders, and reduced purchase and refinancing application data shows that the number of loans is down 30% vs last year, so why is MEW still rising?)

3. Media makes too much of sob stories of Joe Homeowner who loses his home as his Option ARM adjusts. In reality, ARM payments this year went up only $20 billion, a small amount in an economy with $9 trillion of disposable income. In a large economy, there will always be a few who have economic hardship, but these are the exception. (My question: what will happen next year, when $1.5 trillion of ARMs adjust? The data doesn't yet include Q3, and this thing is unwinding rapidly; how does Q3 look for homeowners. Foreclosures and NODs are up all over the country, a trend that I think will continue and get very bad by 2009. Instead of realizing we are at the beginning of a new trend of rising foreclosures which should be projected out into the future, they just look at today's low numbers.)

SoCal, I'd love to hear your comments on the Credit Suisse report, and how MEW can keep at its high level of 2005?

Schahrzad Berkland

9/20/2006 2:03 PM  
Blogger SoCalMtgGuy said...


glad I checked over here to see your comment. it is late, so I don't have time to respond right now.

Feel free to leave your comments on the other blog as well. www.housingbubblecasualty.com

If you are having issues with that blog, please let me know.



9/22/2006 1:04 AM  

Excellent post

3/08/2013 7:37 PM  

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