Thursday, December 29, 2005

Have a Safe, Happy, and Prosperous New Year!!

Have a Safe, Happy, and Prosperous New Year!

I'll be back with more posts in 2006!

I added a section of "Popular Posts" below the links because I know that going through the archives is a pain on blogs. Let me know if there are other posts you would like to see there.

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MTV Cribs, Bling, and...the housing bubble?!?!?


I got an e-mail from a reader today that posed the following question to me:

Do you think there is a direct correlation between MTV Cribs and the housing bubble?

I have thought about the very same thing on many the MTV Cribs, pimp-my-ride, bling-bling attitude IS having an affect on society. I was talking with a title rep friend today, and they mentioned the "bling factor" that everybody is striving for and I said the same thing: that everybody wants to "live" like "mtv cribs" but they don't have their albums on the charts yet, movies in theatres yet, or play for a pro team yet. On a side note: the title rep didn't like the financial situation that many people were getting into, but they said the same thing that soooo many others say "if we don't do the deal, somebody else will".

I don't think MTV Cribs or any of those things CAUSED the bubble, but they are definitely influencing the perspective of generations of Americans. I think it extends to way more than housing's the cars, big chrome wheels, tv's in the cars, Crystal in the fridge, etc. It is a "look" that you have to have if you want to be "somebody". MTV Cribs even has their own line of home furnishings...for those who want to "live like a celebrity".

I enjoy watching Cribs, as I enjoy flipping through a Robb Report. There has always been an interest in "lifestyles of the rich and famous" and there always will be. The difference is that living that "lifestyle" has become more "attainable" through lax credit standards. Years ago, if you wanted a TV, you saved your money, and bought a TV. You didn't make buying a TV a 4-5 year process. I happened to be in Los Angeles recently and heard an add on the radio where you can lease and/or finance wheels for your car! Call me crazy, but if you have to lease the wheels to put on your car, then I think your priorities are slightly out of whack. But hey, at least you are living a "pimp-my-ride" lifestyle!

Almost every single person in MTV cribs...says "you ain't a playa without a plasma on the wall". I just happened to be at Best Buy this week, and EVERY lcd and plasma tv has a little sticker with a bow on it "take me home for $47/52/77/120 a month" "no interest for 18 months on TV's $299 and up" etc. Sure, many of those MTV Cribs were done by a professional designers, for millionaire sports stars, actors, or recording artists. They can actually afford to pay cash for the TV, and not finance it over 3-5 years. Debt is what happens when people try to live a life they cannot afford today. Everybody wants to live like a millionaire, but does anybody really want to do the work, or wait the time it takes to REALLY be able to afford these things?!?!? Why wait until tomorrow, when you can finance today?!?!?

It is even having an impact on childrens toys. I happened to be in Target the other day to get some detergent and other necessities. There was a display in the toy section for remote control DUB cars. If you don't know what DUB Magazine is, here is the link. Anyway, these cars are all "pimped" out with big chrome wheels, lowered, and all the bling you can imagine. Check the 2 links I just highlighted to see what is showing up in the toy section. There is nothing wrong with the cars, bling, etc. in and of itself, it just becomes a problem when people make it a priority in life, and will go into great debt to "look" like they are a "baller".

Been to Vegas lately?!?!? All the young people "ballin" with their expensive clothes and jewelry, pimped out cars, and thowing big money down on the tables and $400 VIP bottle service in the "hot" clubs. Heck, a drink at most bars now is $8-16 bucks! I know there are a lot of young people that are making lots of money (especially after the stock boom, and now real estate boom), but I have a feeling that a majority of people in their 20's are not millionaires. I have seen some of my brokers that have made a big montly check, and head to Vegas to drop 3-5k in a weekend of partying. The problem is that they don't have health insurance or a long term plan. I know this, because I'm starting to sense some desperation with some brokers (mostly the younger ones) that thought 20k a month was going to go on forever. Some are wishing they had 5k back in their savings accound, instead of memories of a great weekend.

If you haven't read or heard of the book "The Millionaire Next Door", I suggest you check it out. Here is a shameless plug on my part...but I have a link to the book on the right hand side (scroll down a little bit). I think people should check out that book if they want to see how people become REAL millionaires. Here, I'll give you a big hint: it involves living beneath or within your means, and not taking on needless debt for things like "bling".

I guess the way I was raised, is that you buy all of the "stuff" after you have taken care of the "important things" i.e. savings, insurance, investments, retirement, risk management, etc. I know that isn't popular, doesn't make for great television, but it makes for a responsible member of society. Don't get me wrong, I like all that "stuff", I just don't think it is prudent to go into high levels of debt to put on a "show" or live a lifestyle beyond your means. I am by no means perfect, and there was a time when I was younger that I financed an TV/surround/DVD system because it was at 0% interest for several months. I had the money to pay for it up front, but since it was 0%, I ended up spending a bit more than I had planned and paying for it over several months. So yes, even I was guilty of doing this...albeit when I was younger and on my own for the first time.

How are you going to feel when your taxes go up because the government decides to bail-out all the people that wanted to live an MTV Cribs lifestyle on a Gomer Pyle income?!?!? How much are you going to wish that there were more financially responsible people in this country.

So that is what I think. I don't think any of those things CAUSED the bubble, but they are definitely influencing the perspective and consumer spending of generations of Americans. Several months ago, one of my brokers was telling me that their daughter thinks she is getting an H2 when she turns 16. The thing is, she thinks she is entitled to it, and that you are a nobody without it. It seems that many children in their teens see the lifestyle, but they have no comprehension of how hard it is to really earn the 50k needed to buy a Hummer...and how old it gets spending $500-1000 a month on gas to keep it running.

I know there are many responsible parents and children out there, but I have a feeling their numbers are falling behind those of the MTV generation. If the number of people overextending themselves to finance homes, cars, and consumer "lifestyle" items is any indication, I think we will be in for trouble in the long run if we keep extending credit for everything in the world.

I know this wasn't a totally housing related post...but I think that people chasing a lifestyle is definitely contributing to the consumer spending that is being financed through this housing boom. Debt, and living beyond your means, whether through housing, lifestyle, or a combination of the two can certainly make somebody an FB.

What do you think?

I look forward to the comments...


Wednesday, December 28, 2005

FB's with sub-500 fico scores

I know everybody loves the FB stories...but it IS the holidays, and the RE/mortgage industry is traditionally slower during this time of the year. Not to mention that mortgage applications are at a more than a 3 year low right now per this article from Bloomberg. I think because things are slow, that brokers are going back through their old files they couldn't place months ago, and trying again. Those of you in the industry know what I'm talking about...yup, that drawer. The place where the "these files are ugly" or the "I'm not going to waste my time on this file" sit until things get really s-l-o-w. Well, it's slow...and the beauties are resurfacing again looking for a loan.

That said, I did run across 2 FB's today. I know you like the stories where I can paint a pretty good picture of their situation, but these borrowers are so F'd, their only hope will be either to sell their properties. I don't think that a hard money would help them that much either.

In the first scenario, a refinance, the borrower had a FICO score in the 470ish range. Since a 500 FICO is the bare minimum that I require to get a loan done, I could not do this loan. But just because I can't do it, doesn't mean it can't be done. The problem you run into, is the rate that will be charged to get the loan done. In this case, the borrower had multiple 60 day lates (among other credit problems...I didn't pry) and a sub-500 credit score. The loan was full doc and the LTV was in the 60/70% range. In cases like this, I try to add value to the broker by pointing them in a direction where they might be able to get it done. I bet you didn't know there was a mortgage company called Sub500 Mortgage. The rates aren't pretty...lowest rate possible is in the high 10's...but they will do some ugly stuff as long as the LTV is in the 60 - 75 range. Maybe things will work out for this borrower...but selling the property, walking with a chunk of cash, and repairing your credit might be the best thing for them in the long turn.

On the second scenario, another refi, the borrower had a FICO barely over 500, but they were going stated, and needed a rather large loan amount. Since the loan amount was higher than our guidelines for credit that bad, and underwriting is REALLY looking hard at stated income deals right now, there is nothing I could do for these borrowers. Even if I could help them, the rate would NOT be pretty, and they would have to state an "unbelievable" amount to be able to afford to refi.

So that is about it for FB's for today. Hopefully things will pick up some after the first of the year.


Tuesday, December 27, 2005

I'm BACK! "celebrity" FB story, random thoughts, and more...

I hope everybody had a nice long holiday weekend and that not too many of you are suffereing a holiday hangover! I had a great Christmas myself, and I enjoyed the time off. Based on many of the comments and e-mails I received, it seems that you missed not having any new content or posts. Well, I'm back, and hopefully I will be able to keep the high quality content going! It isn't easy writing GOOD content on a daily basis. It takes quite a bit of time. I wish I could blog more, but I still have to make a living. I could probably make more money making license plates in prison....but I enjoy sharing my experiences and the e-mails and feedback that I receive in return. I have been using the downtime to work on a few projects to fall back on if/when the housing market/loan business take a turn for the worse. I'm working on my backup plans now so that I can make a seamless transition if things get bad. OK, enough rambling from me...just wanted to let you know where I'm coming from.

I'd like to thank one of my readers for sending me this "celebrity" FB story from the Boston Herald. Some of you might have seen it already, but it is worth looking at again. It is a short one, so I'll post it here:

Emily Rooney, host of WGBH’s public affairs show “Greater Boston,” fears she has landed hard on the wrong side of the real estate boom.
Rooney just closed a $1.5 million-plus deal for a Back Bay condo on tony Marlborough Street. That’s the good news.
The bad news: Rooney’s West Newton tudor is still on the market for more than $1.7 million, three months and counting.
“I am the cliche example of what is happening to the real estate market,” quipped Rooney, who served as news director for Channel 5 for years.
Rooney’s predicament could be a warning to Hub condo high-rise developers banking on empty nesters landing in town after selling their suburban homes.
With her children now grown, Rooney put her suburban house on the market in September as she moved forward with the plans to buy her Marlborough Street condo.
She banked on a quick sale of the West Newton home, but the only thing that moved forward was her Back Bay condo purchase.
Too far along to pull out, Rooney recently closed on the three-bedroom condo.
But she now finds herself in the tricky situation of having no idea when she will be able to move into her Back Bay condo as she faces the continued demands of maintaining and selling her suburban home.
Rooney’s real estate woes come as unsold homes pile up across the suburbs and buyers become picky after enduring years of a sellers’ market.
“I have had a lot of lookers,” Rooney said. “The buyers are waiting. Nothing is selling right now in the suburbs.”

Let's look at this situation for a moment, because I have seen many situations like it here in SoCal. Maybe I'm just not a "risk taker", or maybe from past experiences I know this guy named "Murphy" likes to show up so I like look at things through "plan B" eyes. It is amazing to me how people just ASSUME that they can put their house on the market and it will sell for what they are asking (or more) and very quickly. Just because your "friend" sold in 2 days for more, doesn't mean that TODAY, YOU will too!! Repeat after me: "past performance is NO guarantee of future results". That quote is all over the place in the financial/investment industry, but nowhere to be found in the RE business.

I know it's old...but many people still haven't heard of it. What happens when you ASSUME?!??!

A: You make an ASS out of U and ME....except in this case, it is just U that is being made an ass. The RE agent got their money, the seller got their money, the loan officer got their money...what did you get (besides a piece of got a lot of debt, a stressful situation, and a financial NEED to sell your original home quickly). Think any of the 3 parties are going to care. Nope, they will pay you lip service and "feel your pain", but in the end, they have YOUR money, in THEIR bank account already.

I had this happen 2 times in the past few weeks. I was supposed to do the loan on the new houses, but the only way these loans could happen is if the borrowers got EXACTLY what they were asking. These borrowers didn't have the reserves to pay for closing costs etc. They needed to sell their homes and use the cash to pay off debt and closing costs so they would QUALIFY for the new, bigger house. I was completely amazed how these people were affording their current mortgages, much less how they could afford a home that was about 200k more. Needless to say, I didn't end up doing either of the 2 loans, and I assume the borrowers are still living in their prior homes. I have no idea if they are still on the market or not. They might have been advised to "wait until spring" when thing will inevitably "take off again". One of the offers was only 20k lower than the 600 or so thousand they were asking, but the borrowers needed a full price offer to "make it work".

If you talked to enough Real Estate professionals, you would think that RE is like a NASCAR track: you slow down around the holidays like a major curve, then springtime you "take off" down the straightway...and it is this way EVERYTIME.

Back to our "celebrity" living in million dollar homes. I know nothing of the financial situation of this borrower, but I assume that a "news channel director" of 5 years doesn't have the income to afford the mortgages on 3 million dollars worth of property. I assume they don't have a ton of reserves, because if they did, it wouldn't be that big of a deal that they have made 1-2 months of mortgage payments on 2 houses. The biggest reason why I think they don't have the reserves is because if they did, this story probably would NOT be in the NEWSPAPER!!!! When you buy a new home, depending on when you close, you can easily get 2 months without having a payment due. You will still be accruing interest, but you won't have to make a payment. It IS a good thing that they are "moving down" in price instead of up. It just amazes me that people will close a purchase deal without having completed their sale beforehand. What is soooo hard about extending escrow, working with the seller, or even WAITING until your property has sold. I know it stinks to lose a deposit, waste people's time, or not get a house you really want...but are any or all of those things better than putting yourself in a stressful financial predicament?!?!? Losing a 10k deposit sucks....getting behind on 10k a month mortgage payments on your 1.x million dollar home sucks more.

I hope all goes well for our Boston celebrity. I just wish people would look at something other than the "best case" scenario when making major financial decisions (I consider 6-figure decisions "major"...but that's just me).

I like to play dumb when talking to financial planners to see what they really know (I have Series 7, 63, insurance licenses...but haven't used them in a while). I can't stand the guys that use 12% as an annual rate of return when doing a "plan" for somebody. 12% is not a baseline rate of return that should be used. Something more like 6-8% would be more accurate and give a more realistic picture for people. The same thing needs to happen in the RE industry. There needs to be a reasonable expectation set for "appreciation". It amazes me how people now think that 6-10% annual appreciation is low or normal for RE when historically, it tracks very close to inflation.

I will use this to lead into a great thread I was a part of over on Ben's blog. The topic was loan disclosures, and how good a job the industry does with disclosing things like payment shock, pre-pay penalties, etc. with these "exotic" loans. Here is a link to the story and posts: Fed's Flunk on loan disclosures. I'm not going to rehash it all here, but it is worth reading the article and the insights and comments over there.

Well, I hope I'm not too rusty after a few days off. I look forward to the comments and feedback!


Friday, December 23, 2005


I want to wish everybody a Merry Christmas and say 'thank you' for reading my blog! Special thanks to those who have sent e-mails, left comments, and supported the e-tailers on my blog.

I will be enjoying the time off, and not spending much time on the computer. I suggest you do the same! ;)

If you get bored, you can read some of the older posts in my archives, and check out the links I have posted on the site. There should be more than enough housing info between my blog and the links I have provided.

If you need to do any last minute shopping...try I know they have some great shipping deals to get those last-minute gifts delivered on time.

I heard Santa is delivering lots of plasma TV's, luxury cars, and other high-end "must have" items this Christmas. It will be interesting to see how people handle the higher credit card minimum payments, adjusting ARM's, and higher interest rates on the debt they are racking up. I'm sure there will be more than enough FB stories in 2006 that you won't want to miss...

Thanks again for stopping by!


Wednesday, December 21, 2005

The blame game...comments and ramblings

I have recieved several e-mails and comments where people wanted to know my opinion on a few things. Instead of replying to these various comments individually, I will just make a post and give my opinion on various items. Well, here goes...

I don't know how the new BK rules are going to pan out. I don't know if the lawyers are going to find loopholes and exploit the system or not. I don't know if lenders will keep giving 100% I/O loans to borrowers 1-day out of a BK either. I do think it will continue longer than most of us think is prudent or even possible.

I don't know what is going to happen when there are 10's of thousands of homes that are worth much less than the loans on them.

I would like to think the "investor" eats that loss without the government stepping in, but who knows. After all, the government decided to pay for New Orleans homes that did not have flood insurance...what will stop them for doing the same if there is an earthquake in California? Will they pay for the homes where the homeowner decided not to get earthquake insurance? By following the same train of thought...Will the government step in to help people that are upside down on their mortgages?

I sure hope not...but who really knows. It isn't their place to, but history shows otherwise. If enough people are "hurt" by the housing bubble, can you see the politicains pandering to these people for votes as they offer a 'taxpayer' assisted solution to the great mortgage 'crisis' of 2007?? I sure can.

People ask me whose fault I think it is...Greenspan, Bush, media, brokers, realtors, etc. I don't think you can blame any one person for anything this large in scope. Just like I don't think Clinton had much to do with the stock bubble, I don't think Bush had much to do with the RE bubble. Both bubbles are/were fueled by greed and people chasing "easy money". I don't want to make this a political argument....just a mathematical one.

People were buying at $200 becaue there was a greater fool they could sell it to at $300. People were buying 1 bedroom condos for $450,000 because there is (hopefully) a greater fool a $600,000. Clinton didn't force people to buy the stocks, and Bush/Greenspan never forced a hand at the doc signing table. Yes, Bush wanted people to own homes, but he sure didn't say to do it with a stated neg-am if that is the only way you can afford it. I'd like to poll borrowers on "why they bought their property". Somehow, I don't think "cause Bush wanted me too" will fall in the top 10. They were not buying a house because of presidentail recommendations. They were buying a house to live in, and/or as the next great asset class that will provide for a retirement with little to no real work. Why keep working a 40k a year job, when you can buy a condo in Vegas, and make twice that much in 6 months of doing nothing???

Midnight infomercials on daytrading stocks as the "road to riches" were replaced with no-money-down property flipping infomercials as the "road to riches". Whose fault is that?? Go to Border's Books or other big book stores. Most will have a special section dedicated to "real estate investing" and it is full of property flipping and "no-money-down" books to read. Again, whose fault is that?!?!?

The media had "skyrocking" .com stocks on the cover of every magazine...just as they had skyrocking property values this time around. So whose fault is that you ask? I say it is the fault of millions of individuals chasing easy money. Nothing wrong with that, but we all know that there is NO easy money in the long term. The irrational behavior becomes euphoric as "everybody" is getting rich. The mentality becomes, "I want to be rich too, so I had better do what they are doing". Forget's different this time!! ...yeah right.

Sure, interest rates and lending standards helped add fuel to the fire, but you cannot blame that on any ONE person, thing, or entity.

If INDIVIDUALS did their own research, crunched the numbers for themselves, they would have seen BOTH of these bubbles clear as day. People assume that because some financial analyst, broker, realtor, media type, or other person "in the know" says it's different this time, that it is. They see that their neighbor made $200k flipping some properties, so it must mean they can do it as well. Yes, those things happened. People made money trading stocks and flipping houses...but the big variable is WHEN did they get in?!?!?

Buying Cisco in 2000 was a different purchase than in 1994. Just as buying condo conversions for $400k is different than buying larger $400k homes back in 1999. Just like the small print on every mutual fund add says "past performance is no guarantee of future results" the same applies to real estate investments as well...even though it isn't written anywhere. At least in the "stock-jockey" profession, anybody with a Series-7 is extremely careful about NOT "promising" or "guaranteeing" future results. In the loan/RE business, it is just standard practice to tell people that RE goes up, and that people WILL have the equity needed to refi when the time comes. People use 100% I/O loans as part of a financial plan to "get out of debt". How you ask? Well, that's easy, buy a property with no money down, come back in 8-12 months and pull out the cash you need to get out of debt...duh!!! I bet you are wondering why YOU didn't think of that "foolproof"plan.

See, that is the problem. People see the completely irrational happen...and think that is the norm. As more and more people see BECOMES the norm....until it reaches a point where even the "greater fool"...isn't.

Looking back, everybody now sees that stocks trading at 180 times future earnings is NOT right...but it sure made sense at the time. As much as people belived "it WAS different this time", by the end of 2000, most realized it wasn't.

I think people will look back a few years from now, and wonder why they thought a $3500 a month I/O payment on a piece of property they could only rent for $1600 a month was a "good deal".

P/E ratios are one of the best ways to value a stock, just as rental income is one of the best ways to value a property. When either of those get out of whack, you will have problems. Just because things have been able to stay out-of-whack for years, doesn't necessairly mean it is a permanent condition.

Again, I just hope the government stays OUT of the equation. Just because the masses are irresponsible financially, does not mean they should be bailed out by the taxpayers. Individuals should be left to suffer the consequences of their actions. I know a lot of people could be ruined for a long time, but that is a better solution than setting a new precedent of using tax dollars to bail out individuals that made poor investments.

I look forward to the comments...


Tuesday, December 20, 2005

OCC Mortgage Guidance

Allrighty....I have received several e-mails and comments from readers requesting my take on the recommendations made by the Office of the Comptroller of the Currency, Treasury (OCC). Here is the link to the FDIC press release if you haven't already read it yet:

Before I get ahead of myself, let me say that I am by no means an expert on the OCC, their authority, or how mortgage companies will "jump" at their requests. From what I have read, I don't think they have any "authority" to force mortgage companies to change their ways. After all, they are private companies conducing business. Here is one excerpt from the release that leads me to believe they don't have much authority:

The Agencies expect institutions to effectively assess and manage the risks associated with their credit activities, including those associated with nontraditional mortgage loan products. Institutions should use this guidance in their efforts to ensure that their risk management and consumer protection practices adequately address these risks.

and another one:

As with all activities, the Agencies expect institutions to effectively assess and manage the risks associated with nontraditional mortgage loan products. The Agencies have developed this proposed Guidance to clarify how institutions can offer these products in a safe and sound manner, and in a way that clearly discloses the potential risks that borrowers may assume. The Agencies will carefully scrutinize institutions' lending programs, including policies and procedures, and risk management processes in this area, recognizing that a number of different, but prudent practices may exist. Remedial action will be requested from institutions that do not adequately measure, monitor, and control risk exposures in loan portfolios. Further, the agencies will seek to consistently implement the guidance.

Sounds a lot like giving a bunch of kindergardners the authority to decide how long recess will be, and how many cookies each will get at snack time.

The problem is that most lenders THINK they are doing a good job managing risk with their portfolios....and right now, it probably looks like many of them are. They are seeing more pressure as rates are rising and investors are demanding more return on their money. The problem is that the lenders keep looking at the recent batches of loans as indications for longer term performance. These loans have not been tested over the long haul the way fixed rate loans have. Again, I am not in capital markets, and I haven't seen the numbers showing how different loans are performing. I know that companies are not being intentionally wreckless...but at the same time, how many investment companies had "stong buys" on stocks that probably weren't a few years ago?!?!? How many investment companies were bullish on everything ".com"?!?!? Along those same lines, how many mortgage companies are bullish with regards to the performance of their loan portfolios!?!?!?

I don't have an MBA and I'm not a rocket scientist...BUT, I know that in the long run, lending 100% of the money for a house to a borrower who got out of a bankruptcy YESTERDAY is probably not a good long term business model. Earlier this week I said I had some bad news....well here it is. My company, in an effort to remain "competitive" just removed all bankrupcy (BK) seasoning. 1-day out of bankrupcy and we can lend to 100%. We are by no means the only lender that does this. Other major players in the market have just started doing this, or have been doing it for a while. Gotta stay competitive you know... As nice as it is to have a new program to go "sell", when is enough, enough??

But it isn't just BK's that company's are going light on. Some companies price loans off of the "highest" of the 3 FICO scores, while the standard is to use the middle of 3. Most companies have minimum tradeline requirements. They want to see some sort of credit track record before lending hundreds of thousands of dollars. I saw a rep in one of my accounts from Countrywide's subprime part of the company. They were passing out fliers and they told me that as of a recently (within the last week or so) they removed all tradeline requirements! This means that if you have a credit can get a loan. No longer do you need 3 tradelines and a 24 month history (the standards guidelines that most companies have) to get a loan.

I don't see how or why investors would buy loans from borrowers that are 1 day out of a BK and/or have NO credit history. If a bwr can't or hasn't demonstrated the ability to repay a $500 Mervyn's/Target/Sears/etc. card, how can you be sure they will repay the mortgage on $500,000?!?!?? If a person hasn't ever had any debt....don't you think a $500k loan is a tough way to find out if they can handle it?!?!? That is kind of like taking your kid to beach and throwing them into the rip current to see if they can swim.

I don't know, maybe I'm wrong. Maybe giving 100% interest only mortgages to borrowers 1-day out of bankruptcy is a great thing. Maybe I'm a fool for not wanting to give somebody a 100% stated loan when they have no credit history. What's next? Who is the next class of people to lend too?? Once you have hit the borrowers with BK's and those with no credit history...where do you go?!?!? Who do you lend too? How much lower can we get??

There is nothing the OCC said that is completely groundbreaking or earth shattering. It just seems to me that their hands are tied. They can recommend all they want, but as long as investors will buy the loans, the lenders will keep making them. The lenders DO have disclosures for the things they have listed...but come on, do you think every borrower pays attention. It isn't the lenders job either to spell it out in cRaYoN so that every person understands what is going on. Yes, there is a lot of paperwork involved with a loan, but there are a FEW key documents that pretty much spell out the important stuff. The main points are in big, bold type, and not hard to understand.

I just feel that the lenders/investors haven't tested the products on the market enough before they lowered the standards even further. There are some very smart people on the investment side of the business, and none of them want to lose money, but let's be honest...even the best people can be blinded by success and/or pressured to keep making things happen. I know that right NOW, the lenders and the investors will keep making loans because they are NOT seeing the higher default rates yet. Again, most of these products have only been used widely the past 1-4 years. The massive appreciation and "can't lose" attitude towards real estate has saved people from getting into any "real" trouble. Get behind on payments, sell the house or refi. It has worked in this booming market, but I don't think it is a recipe for long term success.

What do you think?!?!?


Monday, December 19, 2005

Winding down into the holidays...

Things are slowing down as we head into the Christmas and New Years Holidays. Most of my brokers are closing out their pipelines and not doing much (if any) origination (getting new loans). I looked at 3 stated deals today. Nothing terrible, but nothing to get excited about either. One of them was an 80/20 condo purchase. I guess the bwr is seeing things "slow" a little bit and wants to jump on before the train "takes off again" in the spring. I think many people are going to be in for a little surprise come springtime...when the train they ran so hard to catch...backs up to where they were standing.

I have some bad news. Our company had a conference call today, and just when I thought standards were going to tighten some, they did the opposite. I'll give more details later this week. It looks like the only thing slowing the market is higher rates and the high cost of housing right now. I really wish I knew what was going on in these "investors" heads. I wish they would put their foot down on the nonsense that is now passing as a "loan".

I will do my best to keep posting through the holidays. I won't be spending too much time in front of a computer the next week or so...and hopefully you won't either! Since I am getting more traffic each day (thank you everybody!) I might repost some of my earlier comments so that more people can read them.

Fill in the blank:

If your relatives start making New Year's resolutions to "flip-more-condos" in 2006 after watching Carleton Sheets videos, and pounding egg-nog....

I will _______________________________.

Thanks for stopping by...and keep checking back.


Friday, December 16, 2005

FB's, Feedback, and support your favorite blogs

Ok, it's that time again. I have a few more stories of potential FB's. Some are better than others. On some scenarios I know that I cannot do anything for the borrower after two or three questions. On many others I'm left standing there scratching my head going, there is no way to help these people. Take this one for example:

Bwr has a FICO score in the 530's, 2x60 mortgage lates and several 30 day lates in the past 12 months. They needed to do a refi to get about $5000 or so cash out to pay their taxes. The problem is that the rate would be too high for them to afford the payment, even at 80% LTV. If the bwr had paid their mortgage on time, or at least not had the 60 day lates, I could have gotten them the cash out they needed, AND lowered their payments.

That reminds me. Here is the ORDER in which you should pay your debt:

1. pay your MORTGAGE first!!!!
2. pay your installment debt (car payments, etc) next.
3. pay your revolving debt (credit cards, store cards) next.
4. pay student loans next
5. pay medical bills last

I'm not telling you this from MY perspective, I'm telling you this from the perspective that mortgage companies look at your credit. You should pay all your bills every month. BUT, I know that things happen. Sickness, accidents, etc. When these happen, follow the guide above, and you will do the "least" amount of damage to your ability to get a mortgage.

Most lenders do not care about "medical collections". I'm not saying it is right to pay your student loans and doctors last, but that is pretty much how the industry looks at credit reports and extends credit. Most lenders care about your MORTGAGE HISTORY first and foremost. Their rationale is that, "if you paid your mortgage before, you will pay it again"...nevermind that you can't make car payments, credit card bills, or medical paymets. They are not lending you money on those things, so they don't care. Again, this is from a subprime lenders perspective. There are many different lenders, each with different guidelines, but that is how the companies I have dealt with look at credit.

Ok, back to FB's...

I think these people are in the hurt locker. They have a FICO score in the 560's, and they need a stated loan to 90% at about $420-430k on their primary residence to get some cash out. The only problem is that they would only be able to pull out about 10-12k. That 10-12k wouldn't really help them pay off the $50,000 or so of car payment and revolving debt they are carrying. They also have an "income" property that isn't. They have a stated loan on that property in the mid $300,000 range. So far, they have paid their mortgage on time, but with 2 stated income loans, a rental that doesn't cover the costs, and lots of revolving debt, I don't see a "soft landing" for them. Even if I could refi them, their rates would be higher and their payments would go up a few hundred a month. Hopefully they will find a way to work things out.

It's feedback time again. Let me know what you like, don't like, general thoughts and comments are always welcome

I know people have requested statistics and such, but I'm not really in a position to get the numbers that you need (aside from articles that come out like the PIMCO one below). It would take lots of time and money, and it would still be difficult to compile some of the info people want to see. Prof Piggington has some good stats for paying members.

Also, one other quick thing. Aside from comments and e-mails there is one other thing you can do to show your support. If there are blogs that you visit on a regular basis and you like what you read, show your support by going through the blog to get to the e-tailer of your choice. I know Ben's blog has Wal-mart, myself and others have Amazon. I know people hate ads and such, but if you are going to do some Christmas shopping, why not help out a blogger that you read on a regular basis. It takes quite a bit of time to compose posts, reply to e-mails, and keep good content flowing on a blog. I know it is a little thing, but all of us bloggers really appreciate it. To those of you that already do it...thank you!

Have a great weekend everybody! Only a few days left to get your shopping done!


PIMCO says...82% of CA purchase loans are interest only or Option-ARM


The data below is from Scott Simon of PIMCO:

The really negative sign for us is the fact that, last year, 82 percent of the purchase loans in the state of California -- Orange County being representative -- were either interest-only or negatively amortizing loans. We view that not as an economic choice people were making, just simply an I-can’t-afford-the-house choice.

Need I say more?!?!? If you have been reading this blog, you know what happens when ARMs adjust, and how neg-am (option-ARMs) work. I'm just glad that a major company compiled the data that backs up what I have been seeing on a daily basis for a while now. Patience will be rewarded...


Thursday, December 15, 2005

Was I sleeping during this part of "ECON 101"???

I'm not one that usually posts articles from other places, but this article has waaaay too many priceless quotes in it, to NOT share with you.

The logic behind some of these quotes come close to topping the logic of the "we count our equity loans as income" quote I wrote about.

The problem is, I don't even know where to start with all of these choice quotes...but here goes.

The article I am referring to is from the San Diego Union Tribune ( titled "Pros see no doom, gloom in slowdown"

Here goes....let's look at this economic wisdom first:

Despite rising interest rates, a growing for-sale inventory and a slowing sales pace, the county's shortage of housing will prevent prices from dropping steeply, speakers asserted.

"It's Economics 101," said Leslie Appleton-Young, chief economist for the California Association of Realtors. "It's demand and supply."

I guess I slept through the part where RISING inventory and SLOWING sales means that there is a "shortage" and that prices won't drop. In the economics class I took in college, they said that supplies grew as demand went down...not the other way around. Let's not even take into account the fact that rates ARE rising, and as you can see in the post below this one, it does affect the amount of money you can borrow.

Let's see what else we can find:

The fundamentals of the housing economy remain sound, said Louis A. Galuppo, director of USD's Burnham-Moores Center for Real Estate. "We may see a decline in sales but not prices."

Again, inventories have grown dramatically the past several months, and there are decreased sales. In the class I took, that means that prices will have to come down so that an equilibrium level is reached. You cannot continue to have inventories grow with sales slowing, and NOT have prices go down.

Another reason homeowners are staying put is Proposition 13, the landmark property-tax-cutting initiative. Passed in 1978, the measure limits tax increases on properties until they are sold. Many owners are reluctant to sell and give up their tax breaks, Appleton-Young said. If they buy a new home at a higher price, "they look at doubling and tripling their taxes."

So let me get this straight, the people that own a home already will be reluctant to "move up" because of higher property taxes. So...does that mean the property taxes aren't just as high if you don't already own a home?!?!? $500 to $1000 bucks a month in property taxes is big increase no matter if you own already or not. BUT, by looking at the rising inventories, it seems that many homeowners aren't so reluctant so sell, but what do I know. See this site for inventory tracking of various "bubble areas" and see for yourself.

Next we have one of my favorite topics...the use of "creative" financing to help borrowers 'afford' the high housing prices. Let's see what the 'experts' say:

Several speakers at the conference addressed the use of new lending products that had enabled middle-wage consumers to attain financing for high-priced homes. Many "creative" mortgage loans have low, introductory payments that adjust upward with prevailing interest rates after several years. In general, they shift risk from the lender to the borrower.

Anfuso said fears that such loans would trigger defaults were misplaced. Many borrowers "are going up the wage scale" and will be able to handle rising payments, he said.

Look at my post below. I know the numbers are for fixed rate loans, but just look at the difference in payments at 1% and 2% increases. I just have a hard time believing that a lot of people will be making an extra $1000 a month over the next 1-3 years to be able to afford the jump in their payments. If you look at California Association of Realtors report numbers, they say that:

"California households, with a median household income of $53,840, are $70,480 short of the $124,320 qualifying income needed to purchase a median-priced home at $530,430 in California..."

Do you really think that most people are going to have their incomes more than double in the next few years to keep up with adjusting ARMs and rising interest rates??? These people couldn't afford fixed rates when they were at all time historic lows, what are they going to do when their adjustible rates and fixed rates are higher?!?!?

Here is a prediction from one of the 'experts':

In her forecast, Appleton-Young predicted a 2 percent statewide decrease in single-family home resales next year. She anticipates a 10 percent statewide increase in the cost of a median-priced resale home.

So there you have it. Sales are going to decrease 2%, but prices are going to increase 10%. With the inventories growing like they are, the cost to borrow money increasing, and affordability at an all time low, I don't see how property can appreciate at 10%.

I'll leave you with this final comment that should put your minds to rest:

Appleton-Young called California real estate a market in transition. "I think we're in for a soft landing," she said.

Well, there you have it. The experts say there is nothing to worry about. I tend to think differently, but what do I know. I just look at the math behind what they are saying and make my own conclusions.

Either way, we will have to revisit this at a later date to see who is right. Who do you believe, and if you had to place a bet, where whould you put YOUR money, on their analysis, or mine?!?!?


Wednesday, December 14, 2005

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.



Tuesday, December 13, 2005

Interest rates are up, and standards are tightening

It isn't news that Greenspan raised rates another quarter yesterday (Tuesday). It might be news to some of you that lending standards are tightening. It seems like more companies are taking a much harder look at the income being used on stated income loans. Some companies have stopped doing stated loans on retired borrowers, military borrowers, or others where you can access a pay chart off the internet. This only makes sense, as you know what the bwr is making.

I think most of you understand the "catch 22" I was trying to explain in my "liar loan" post below. It is against the law to commit fraud on a loan application, but you have a "stated income" program that allows people to do just that. Generally, people are stating their income because they don't make enough money.

When a lender gets a stated income loan, they verify the length of employment, the position/job title, but not the income. So it is not like a bwr can say they worked a job for 3 years when they haven't. A janitor cannot say they are the CEO. Most companies use one of the many salary comparison websites to see if the income stated falls with in a range. These things will be done in underwriting. It just comes down to whether or not the lender and the investor will "buy off" on the income stated. As property appreciated, and investors were eager to buy more loans, the scrutiny on stated income deals seemed to slip. Well, that is all changing again. Rising housing prices and interest rates are "driving" up the incomes that need to be stated for borrowers to qualify for a loan. If you look at home prices in CA, you will see that you have to state quite a bit of money to do a 100% stated purchase, or way more than than the median income of about 53-54k. I hope this helps explain a bit more the situation, as well as what the lender does to check the income.


Does your house have one of these signs?!?!?


Not really, but it sure seems like it. Of the 8 loans I looked at today 6 were stated and 2 were full doc. The "full docness" of the loans was about all they had going for them. On one, the bwr had multiple mortgage lates, and a sub 520 FICO score. At least the LTV was under 60%. At least I could actully price that loan out. It wasn't a great rate, but it was a decent diving or gymnastics score! On the other full doc deal, the bwr, who incidentally refi'd only 5 months ago, wanted to do a 100% refi, to pull the last remaining 10-15k out of his property. I guess he has one of the signs above parked in front of his house.

Of the other 6 stated deals, 4 were high LTV refi's, and 2 were high LTV purchases. The purchase deals were for $700,000+ homes. The refi's were all 90 LTV plus deals. People trying to tap that last little bit of equity. Needless to say, high LTV stated deals are not pricing the best right now...and my company has tightened standards more than some of our competitors.

Nothing surprises me anymore. I used to think that "people can't be that stupid"...but they can. Have you ever had one of those friends that pulls out only $20 bucks when they go to the ATM? You watch them spend a $1.50 five different times over the course of a weekend because they don't plan ahead and take out $80-100 bucks at one time. I see the same thing with many borrowers doing refinances. I don't know if they don't plan, underestimate that there are costs for doing a loan, don't account for pre-pay penalties, or just plain don't care. Either way, they are spending tens of thousands of dollars on nothing but fees to pay for their poor planning.

This borrower is a prime example. They payed 15k for a refi 4 months ago, turned around, decided they wanted more cash, and refi'd again. These people have no idea that they spent 50 cents to borrow a dollar. Or maybe they do know...but they just need money so bad. The problem is that most lenders will not do a loan unless the cash out is at least 2x the amout of fees charged for the loan (including pre-pay penalties that usually run 6 months interest, or 80% of 6 months interest). Lenders have to be careful of the perception of "predatory" lending, or taking advantage of borrowers. It doesn't make sense to spend 8k to get 10k cash...even if that is what the borrower wants.

The ones that really get me are the people that had a $68,000 dollar mortgage balance in 1994. Fast forward 10 years, and they have a $600k loan! You might think they used their equity wisely, but since the same broker has done all of their loans over the past 20+ years, they told me that the bwrs just upped their lifestyles and that is about it. They remodled this, drove that, visited there. I'm sure it was fun, but to think you were $68,000 away from being free and clear on a piece of property in Southern California. They still have plenty of equity, but $600k is not a cheap mortgage.

All I know is that the FEDs meeting today and the one in January will be very telling as to what we will probably see this "spring" season when everybody is banking on things taking off again after this 4-5 month "return to a more normal market". If the fed raises at both of these meetings, watch the house of ATM start running pretty dry, as it will be empty, or the "withdrawl fee" will be too much for many borrowers to handle.

Some people are going to see that the "ATM is out of service" here very soon.


Sunday, December 11, 2005 first exposure to "liars loans"

It seems like forever ago, but it was really only a few short years. I took a job at a major nationwide "subprime" lender. Yeah, can you believe it....a mortgage company in Southern California?!?!?

I didn't know that much about the inner workings of the loan business. I knew the financial side of things, but I had no idea how the whole loan process worked. I started out as an underwriter. Underwriting is the step of the loan process where the lender assesses a borrowers ability to repay a loan.

As an underwriter, I would take an incoming file, rip open the invelope, and start plugging away. I would input the data into the computer and underwrite the file. Nothing new or special was going on...underwriting was underwriting. I had people help me along the way, and from what I was told, I was a very "quick" learner.

As I got into underwriting, and leaning the various guidelines for various programs, I started to see some problems. I had underwritten a fair amount of files for the few weeks I had been working. I had underwritten full doc, stated, and bank statement deals. We would get full doc deals, and if the income wasn't enough, we would "flip" the deal to stated income so the bwr would DTI (debt to income ratio). Of course, we would have to get the brokers approval when doing this...but somehow, they always approved. At first I didn't really have a problem with this. On lots of the deals the bwr was only 100 bucks or so from meeting the 45 or 50% DTI we required. I didn't really see too much wrong (at first) stating $4200 a month for a bwr who had W2's showing $3950 or $4000 a month. After having been in a similar situation a few years before where I did not get a loan because my DTI was in the low 40's, I didn't feel that 200 bucks a month was going to put anybody in a bad position.

BUT, I will never forget the day it "hit me" like a "stack of t-boxes". I had a file where the borrowers DTI was off the charts. There was no way they could or should be buying a house with their income. My manager told me to just state the income needed to DTI so that we could get the approval out. The broker and the bwr could decide if they wanted the loan the way it was conditioned. I had to state $2000 a month MORE than what was sent in with the file. I remember asking, how can we do this deal? The bwr only makes "x" per month, and we are having to state $2000 a month more than that for them to qualify. "How are they going to make that payment?" ....I asked. Just do it, if they want the loan, and will find a way to make the payment. Ok, I said.

I talked to other people about that situation and others like it, and apparently it wasn't was just accepted. Stated income wasn't "illegal", just part of "doing business". Everybody has numbers to hit, everybody wants a bonus, and nobody wants to give market share to another company.

I completely understand the INTENDED purpose of stated income. It was for people with hard to document income and the self-employed that don't have "regular" income. I can understand doing stated income at lower LTV's when the borrower has some "skin" in the game. What I don't understand is why lenders (and the investors who are financing this whole deal through MBS) would lend 100% or MORE of the value of a property to a borrower who is "stating" their income?!?!?

On the 1003 (the standard loan form) on the bottom of page 4 it says:

"I/We fully understand that it is a Federal crime punishable by fine or imprisonment, or both, to knowingly make false statements concerning any of the above facts as applicable under the provisions of Title 18, United State Code, Section 1001, et seq."

So, if you only make $4000 a month, but you tell the broker you make $8000 a month, you are LYING! If the broker tells you, "you need to state more income", they are telling you to lie!! Now, I'm not an attoney, and I'm sure somebody could tell me with 'legalese' how that isn't lying, but it sure sounds a LOT like "making false statements" to me. But what do I know...

Look at the income figures from this California Association of Realtors Report. It says:

"California households, with a median household income of $53,840, are $70,480 short of the $124,320 qualifying income needed to purchase a median-priced home at $530,430 in California, according to the California Association of REALTORS® (C.A.R.)"

Now, it doesn't take an MBA from Marshall or Anderson to see that this situation isn't sustainable for the long term. Heck, I bet even most 2nd graders in public school could answer this question:

T or F If you need to make $124,000 a year to afford a house, and you only make $54,000 a year, will you be able to afford the house??

This is NOT rocket science...just basic math. Since very few people make the money needed to buy most of these houses, how do you think they are going about it??

Many of you reading this, probably have an education, a pretty decent job, and work hard for your 40-70k (range where most are making their money). Would you believe me if I told you that almost every landscaper and housekeeper in SoCal is making 6-figures?!?!? No, you don't believe that?!?!? Well, they do. They all have CPA letters that "verify" the income stated for their loans.

My question is, how can there be a big crackdown on "mortgage fraud" when the industry has completely sanctioned "liars loans" in the form of stated income?!?!? There won't be a crackdown until tons of people get burned and lose money. Then we will get to hear all the "genius" analysts, execs, governemnt officials and the like try to rationalize "why" this happened.

I look forward to the comments...


Friday, December 09, 2005

"We sort of count our equity loans as our income"

Thanks to the reader that e-mailed me this article. I think it is worth taking a look at. I want to hear your feedback if you think they will be an FB or not.

I think this part of the "story" says it all...but read the whole thing.

Sacco estimates that along with McCook's mother, who has been a silent partner, they've made $1.3 million since they began their buying spree, but all of this is still in equity on their properties. Their monthly reality is more sobering. They have $2.3 million in mortgage debt and negative cash flow that ranges from $5,000 to $15,000 monthly depending on the season.

So how do they pay the bills?

"We sort of count our equity loans as our income," she says

Now THAT is a statement to remember!!! Loans count as income! AMAZING!!! I'd just LOVE to be the investor holding that paper.
-------------------'s FEEDBACK time!!!

Since I'm writing almost all of my own content and not just copy/pasting from the internet, it takes time. I really appreciate the feedback that people have given me so far. It really motivates me when I know that people are benefitting from reading this blog. It is not easy writing your own content, and it takes time to make it informative, easy to understand, and entertaining. So how am I doing?!?!? I want to hear from you lurkers as well...go ahead and post anonymous comments, or make up a name and post.

That said, what would you like to see next week? I know that people like the FB scenarios, and I will keep them coming. What else is weighing on your mind in regards to the mortgage/real estate markets? I'll do my best to answer your questions.

I hope everybody has a great weekend...I know I will! I look forward to the feedback when I return!


Trillion Dollar game of JENGA!!

This housing bubble is like a game of Jenga. You can see the blocks going higher and higher, you know it is going to fall down soon, but it hasn't yet...and you just hope it isn't on your turn when it does! The housing market is the same way right now.

Some people pulled out of the tower, and are content. Some wanted to "win", so they kept taking turns and piling blocks on the top. Some just wanted to stay where they were, but all the people piling on the top forced things like property taxes so high, they were forced to move.

BUT, as of right now, the tower is still standing. The "players" are taking more time moving their pieces. Occasionally the ceiling fan rocks the tower and some people yell "it's crashing!" while others look at it and say the fundamentals are is a strong table, nothing to worry about, keep piling on.

So the question is, WHAT IS going to push this thing over the edge? and WHEN is that going to happen.

In an earlier post I went over how the ARMs were set to adjust and how I think that will be one catalyst that could finally send the jenga tower falling.

Another thing that could shake the markets is if there is a liquidity crisis in the Mortgage Backed Securities (MBS) markets. These are the people the buy the loans which allow the lenders to keep making loans. They are already starting to demand more premium (interest rate) for the risk they are assuming.

I think this story from Bloomberg says it all. The title is: Housing Bubble Bursts in the Market for U.S. Mortgage Bonds . I'm not going to paste the article here, and I'm sure some of you read it already over on Ben's blog a few days ago.

This thing is really VERY simple. You have 50-80% of borrowers taking ARM mortgages the past few years. These people got loans when rates were crazy low, and lending standards lacked "old school" criterias like verif
ying income, reserves, penalizing people for BK's, etc. When these people run out of "fixed" time on their ARM and they look to refi again, they are going to find higher rates (yes, still historically low, but not super low like they had been), and much tighter lending standards because of the article above.

This combination of higher rates and tightening lending standards (they ARE happening now) is going to leave people with very few feasible options. If they can barely afford their I/O ARM at 50 and 55% DTI's (debt to income ratios), what are they going to do?!?!?

I predict that things will be slower and prices will start a slow decline through 2006. Hot properties will still move as will properties that are priced right. I look to 2007 and 2008 for things to start looking like this: JENGA!!!

Between now and then (through 2007), there are about 1.5 trillion dollars of mortgages that will be going adjustible. I'm already seeing the tightening in the MBS markets. I was talking to my manager this week about a loan, and they told me that our investors were demanding a lot, so we could not be lenient with rate and loan exceptions. Very few times the past few years have I ever been told that. The old mantra was "we'll find a way, we'll make the exception", now the mantra is "we're not going to lose money on that loan".

Only time will tell...but that is where I have my sites set. What do YOU think?!?!??!?


Wednesday, December 07, 2005

Let's play "Should I buy...or wait"

On one of the threads today, an anonymous poster asked me a question about whether they should buy a house or wait. I will paste part of our conversation below...and then give my answer.

Anonymous said...

So are you saying to wait until 2007?

I am about to put 40k down (10%) on a detached house in a good neighborhood in La Mesa (San Diego). 800 sf house w/ 2-car garage on 7200 square foot lot. This is a house we could raise 2 kids in for ten+ years.

I am doing a 30-year fixed 6.5%... Payment with PITI is 30% gross income... FICO is probably 650-675, can I do better on the rate?

If I wait 2 years I can easily put 80k down or more... but I have already waited a long time.

12/07/2005 10:02 PM

I asked the poster the purchase price of the home, and what they were paying in rent. The purchase price is between $400,000 and $425,000, and:

Anonymous said...

I pay 1450 in rent, larger, nicer place in a better location.

12/07/2005 10:23 PM

***UPDATE!!*** I found a pic of a house in La Mesa that is similar...about 875 sqft with a 2 car garage. Built in 1942.

OK, here we go! Let's assume you get the house for $400,000. You put your hard earned 40k down, and finance the last $360,000 doing a full doc, 30yr fixed, at 90% LTV with NO PMI. I looked at the rate sheets of 3 major lenders, and used the 675 FICO to give you the benefit of the doubt. I was coming up with pricing in the 7.25-7.5% range. Remember, you are doing a loan to 90% with no PMI, so the rate will be higher. Again, I do not think you can get a 6.5% rate at that LTV on a 30yr fixed.

So let's see what that mortgage payment comes out to...(tapping away on my old school HP calculator)

$360,000 loan amt. 7.25% 360 months payment= $2455.83
BUT to be fair, I'll use 6.5% like you posted payment= $2275.44

Now lets look at the taxes. $400,000 x 1.25% = $5000 a year or $416.67 per month.
Let's throw in $50 a month for insurance.

Soooooo...the grand total is (at your lower number) = $2742.11
the grand total at the more realistic rate is = $2922.50

You would be paying an extra $1292.11 (or $1472.50) per month to, by your own admission, live in a smaller, crappier house, in a worse location than where you currently rent.

But wait! You get a TAX deduction for your interest and property taxes. I don't know your tax situation, but lets just assume you get 28% of your taxes and interest back each month, so that comes to $700. So, even after the tax break you are still spending $592.11 (or $772.50) to live in a smaller house in a worse neighborhood.

Assuming you have NO other car payments or debt, you would need to make $5484.22 (or $5845) per month to be at a 50% DTI exactly. This equates to making $65,810 (or $70,140) per year.

Because you are reading this blog, I'm sure you are somewhat aware that there has been some "housing bubble" talk over the past few weeks. The questions you have to ask yourself are, what is the upside for me to buy NOW, and what is the downside of me buying NOW.

I think the downside WAY outways the possibility of appreciation at this time. But lets say that I'm wrong, and property goes up 3% next year. You would need to spend an extra $12,000 to buy the same house. But guess what, you saved an $15,500 by continuing to rent ($1292.11 x 12 months), not to mention you were in a bigger house in a nicer neighborhood.

Let's say that things drop the 10% that many people think is possible. That 10% drop would completely wipe out the 40K you put down on the property. How would that feel??

The most striking thing to me, is that you would be willing to take your family of 4 (I assume 2 parents and the 2 kids you mentioned) into an 800sqft house in a WORSE neighborhood, and pay more money to do it!

It is just a place to live!! I'm not telling you what to do, I would just hate to see a family buy at or near the top of an 8 year real estate bull market, and be stuck there for the time to come. Do NOT look at the past performance of the market and assume it will continue.

IF you do decide to buy, I would keep your 40k in your pocket, and do an 80/20. Yes, the payment will be a bit higher, but at least you keep the 40k in savings for a rainy day. You might end up upside down on the property, but at least you would have savings and a steady job and be able to keep making the payments.

What happens if I am right?!?!? What happens if you keep saving money, and prices decline? How would you like to buy a bigger house in a nicer neighborhood to raise your kids for the next 10 years. 800 sqft cannot be anything bigger than a small 2 bedroom. That is not very much space to raise a family of 4. I live in a 1000 sqft condo and I cannot imagine 3 other people here with me.

I hope this helps some. I look forward to the feedback...


Tuesday, December 06, 2005

So you like the stories of FB'!?!?

From the feedback I received last weekend, it seems the readers have spoken and they like to see real life scenarios of FB's. Well, I aim to here we go!

Bwr NEEDS to refi. Looking at about 85% LTV with a sub 580 FICO score. They need cash-out (don't they all). $400,000 loan amount. "Stated" income. Nothing too ugly. Oh wait, I forgot to mention the multiple 90 day mortgage lates during the past 12 months. OOOOPS. The max I could do on this loan is about 70% LTV or $250,000...and the rate would be in the 9's. Somehow, I don't think this borrower can be helped....UNLESS any of you want to pool your money together and give this guy a "hard money" loan?!?!? Any takers?!?!? That's what I thought.
This next scenario is one from a few months ago. I remember this story vividly. We had a bwr that had approximately 100k equity in his house that was worth about $480,000. The bwr wanted to refi, and take some cash out. BUT, about three months before they decided to refi, they were feeling pretty "rich" with the quick 100k+ their house had "made" for them. It just so happens this was about the same time Cadillac was doing their 0% financing special. Do I really need to tell you what happened next?!?!!?

No, but I will anyway...this borrower went out and bought a new Escalade. The monthly payment was about $960 a month for 60 months. Let me tell you, buying a 60k SUV before you want to refi is not that bright. BUT wait, the story gets better. There was another new tradeline on the blog from some "custom car" business. Come on ...are you REALLY going to be caught dead in an Escalade with stock wheels?? and no TV's in the headrests?? That's right. The same month the car was bought, this new tradeline with a $17,000 balance was opened. When you add over $1200 a month in debt payments (in addition to other debt the borrower had) it REALLY kills your DTI (debt to income ratio)...and your credit score (I will do a post about credit scores another time...remind me). So, the borrowers FICO dropped, his DTI was off the charts, and he needed close to a 100% refi to "save him". IF the bwr had been patient, and thought ahead, he could have easily refi'd and THEN done all of that stuff.

I hate to say it, but I told the broker to tell the guy that I hope that Escalade is nice...because he is going to be living in it soon! The only solution for the bwr was to sell the house, and start over. I don't know what happened to that bwr. I only know that the loan officer was not able to get the borrower a loan anywhere.

And NO, they could not have gone stated income. Their FICO dropped too far, and the LTV was too high. See, I told you that not everybody can get a loan!! ;)

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

Like a neverending road trip in the family station wagon as a 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 intensive 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 definitey 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"!


Monday, December 05, 2005

FB...the NEW Scarlet Letters?!?!?

One comment said:
"Finally I don't really hear about any FB's."

Come on now!! You think ANYBODY who is putting up a front and living beyond their means is going to tell you that?!?!?

"Hey Jeff, nice Mercedes!!"

"Yeah, it would be a lot nicer if I weren't behind on the payments and using my credit cards to pay for groceries and my mortgage".

DOES NOT HAPPEN. You are correct that it is like the stock market. Nobody brags about their losses...only the wins. Nobody is going to be bragging about all of their "negative cash flow" properties in the next 2 years. Heck, I wouldn't know these people were FB's if I didn't get to see their credit report and all of thier "assets".

Maybe that is the problem...if people had to wear the NEW Scarlet Letters "FB", we could identify them easier ;)

From the comments I have received, people really like the stories of FB's. you GO!

Take this borrower for example:

Bwr needs to refi both of their "investment" properties, AND their primary residence to get cash. They are having trouble renting the 2 properties, and here is the kicker...the bwr WANTS TO BUY ANOTHER PROPERTY!!!! They need the cash out from the "rentals" to help pay the bills since there is no renter, and when there is, it won't cover all of the expenses. They need to refi the primary residence to pull cash out to buy another rental. Needless to say, I didn't even bother to get into the specifics of this file, because they were going to try and do is ALL at the same time, with different lenders, so they could refi each property as "owner occupied". The credit wasn't that great anyway, but I did not feel the need to get wrapped up in that situation. Just a can of worms waiting to spring out. I'm sure they eventually got it done, but I have no confirmation of that. If you can't rent the 2 properties you have, why would you buy a third one?!?!?!??!? Oh yeah, they keep appreciating, I forgot!!