Wednesday, September 19, 2007

Rate cut WILL NOT save the housing bubble

I don't have time for a long post right now, but I wanted to get my quick thoughts on the 50 basis point rate cut.

Sadly, this will only make things worse in the long run. Unless the median income reaches into the 6-figure range over the next 1-3 quarters, this 50bp rate cut isn't going to save the housing market.

It will be nice for some businesses and aspects of Wall Street, but remember that lots of people got their 'sweet' interest-only loans and ARM's when the Fed Funds rate was at 1%. If they couldn't afford a fixed rate loan when the fed rates were over 4 points lower, how can they afford it now? I know that mortgage rate are not completely tied to this number, but you get the point.

It is really simple: there is a huge disconnect between income and property values thanks to creative financing and little to no risk assessment.

Sadly, this goes WAY deeper than subprime. We have not even had the option-arm loans start to do their recasting and we have not had the worst crop of loans that were made in 2006 come to light yet. Just wait until all the crappy loans that were made to 'keep things going' in 2006 start to default. A lot of these loans are Alt-a and even A-paper. Just because you are an 'A-paper' borrower, doesn't mean you have the INCOME to afford your loan. (especially when it adjusts!)

Let's not forget that a lot of properties in the major 'bubble areas' have already had their gains from the past 2-3 years erased. I know people that bought 3.5 years ago that are 'upside down'. Sadly, I also have a lot of friends with 700+ credit and good jobs. They can afford their 5yr I/O loans now, and for the next 2-3 years, but if property doesn't appreciate, they will be hurting. Their payments will jump, and they are already upside down, just hoping things will turn around in the next 3 years. Unfortunately, I think they are mistaken and will only be further in a bind as they owe a lot on a house that is worth much less than their mortgage. What is the market going to do when all these 'A-paper' borrowers making 80-100k start getting behind on their payments??

The pundits and analysts can bat this thing around for the next few months and tell you that it is 'subprime' and that is has 'worked it way out', but there are a good 2-3 more waves coming. There will be blood in the streets by 2009 as we enter a recession that was completely our own doing.

'We' threw out risk assessment and gave anybody with a pulse (and a lack of integrity as lying about income was a necessary part of 'qualifying' for many of these 'stated' loans) a loan for whatever they wanted. It was easier to get a 500k mortgage than a line of credit at Circuit City.

Like I have said before. I know what is behind the data that all these 'analysts' are reading. I know what is really in the mortgage paperwork, no matter how Moody's or anybody else 'rated' it. This thing gets worse for at least 2 more years before it gets better.

Stay Tuned...