Friday, January 18, 2008

Uhh-Ohh… Looks like the ‘wealthy’ people got a little carried away too. I told you this was coming!

Wow, what interesting times we are in right now! American's largest lender Countrywide was teetering on the brink of bankruptcy. American Express has to write off a measly 480 million that borrowers didn't/couldn't pay. Citibank and Merrill Lynch are having some pretty large write downs. I mean, what is a few Billion here and there. What I find EXTREMELY interesting is this sentence regarding the Merrill Lynch situation:

"The loss was almost three times bigger than analysts estimated and resulted in the first full-year loss since 1989, sending Merrill down 10 percent in New York trading, the biggest decline since the 2001 terrorist attacks."

Wait, the analysts were off? Never, no way, I don't believe it. How could the all powerful analysts that completely underestimated the stock bubble miss this one too? How could all the MBA's and Wall Street 'geniuses' screw this up to the tune of tens of billions of dollars? Maybe because they have a vested interest in keeping things going as long as possible. Either way, it doesn't matter. Just take everything that the analysts, or any other person with a vested interest says with a grain of salt. Speaking of, how is Gary 'In the Bag' Watts doing right now? Haven't heard much from him or Leslie Appleton Young lately. I guess 15% appreciation is NOT 'in the bag' this year. But what do I know...

What has been interesting up until this point is that ALL of the mortgage mess has been the fault of the 'subprime' borrower. Now I know better, but you would think it was just the people with poor credit ruining the economy and the mortgage backed securities market for everybody. Then the news hits today "Wealthy may be next in line in home crisis". Oh really? But I thought if you had a 700+ FICO score then you could easily afford the payment on a 1.2 million dollar mortgage?!?!? So credit score does not necessarily equate to income? Who knew?

That said, even if you could get a 100% 1.2 million dollar fixed loan at 6.5% your payment would be $7584.81 per month, PLUS taxes and insurance. I don't know Chicago property taxes, but in California, that would be an extra $1200 a month. With insurance you are probably close to a total payment of $9000 a month. Even at a 50% debt ratio with NO other debt, you would need an income of 18k per month. To use the 'old' debt ratios of about 35% of your income to a mortgage, you would need to make $25k a month. I am not as familiar with the Chicago area, so I will apply this to California. A million bucks doesn't buy much more than a tract home in many parts of California. The fact that you would need an annual income of 200k-300k for 30 years to truly 'afford' those houses is out of whack to what REAL incomes are.

The problem is that for the past few years, you could get 1-1.5 million dollar loans with NO money down, and very little documentation. The 'creative' financing with option-ARMs could make that $7000-8000 mortgage payment less than $3000. So THAT is how the 'value' of many of these properties reached those levels. Lets not even get into all the people that were living WAY beyond their means by living off their house of ATM.

Things in San Diego are definitely down. I was talking to a friend that used to work the VIP bottle service at one of the 'high end' downtown hotspots. She said things were 'dead' and that the amount of people that used to come in for $400 and up bottle service ($1000-3000 per VIP booth) has completely dropped off. That doesn't mean a whole lot as it is just some anecdotal evidence, but I know for a fact that a lot of money that was being thrown around was from mortgage brokers and real estate agents. Now that those 10-30k monthly paychecks are not rolling in, it is hard to justify dropping $500+ bucks on a night of drinking at the club.

Lets get back to the 'wealthy' people. You probably saw that the $3 billion dollar Cosmopolitan property in Las Vegas is probably going into foreclosure. I'm not sure, but I would bet that foreclosing on a $760 million dollar loan can hurt even the wealthiest of people. Who knows the details, but I believe that many 'wealthy' people made similar mistakes as 'typical' homeowners did, they just did it on a larger scale with a few more zeros.

I spoke with some people on Wall Street and at the higher levels of some financial companies. The outlook is not good. The dollar is dropping in value and the talk is that the big R is coming. NO, not recovery, but RECESSION. A contact of mine in capital markets said that the loans made in 2006 are performing HORRIBLY, with some delinquency rates hitting as high as 24%! And those loans won't reset until the 2009-2011 time frame. The reason these loans are sooooo bad is because these were the loans made to people when the companies were doing 'anything' to drive volume. They got their volume, but the quality is terrible.

The downward price pressure is going to make things even worse. Just wait until late 2008 and 2009 when all the alt-a and A-paper 5-year ARMs from the boom times of 2003 and 2004 start to reset in the face of down property values. It is NOT going to be pretty, and this thing is going to be ugly for at least the next 5-10 years as this whole mess gets worked out. You cannot hand out 500k-1million dollar loans to people with such little risk assessment and expect things to end well. Even the people that can afford to 'wait it out' will have to do so for years. It is going to take a long time for incomes to reach a level that makes these recent home values attainable. If we go back to debt-to-income ratios at 40% or under, that will further put pressure on the markets as it will remove lots of 'potential' borrowers from the market. It needs to happen. It doesn't make sense that people should have to spend 50-55% of their gross income on housing.

I know this post was a little scattered, but I hope it covers some of what has been going on. I have been following things, but I have been working hard on building the new business and doing quite a bit of traveling which has been nice.

Thanks again for reading my blog!

Stay tuned...