Friday, August 31, 2007

FHA Plan:Bring a water gun to fight a fire.

The markets waited with baited breath for the announcement of the Bush adminstration's plan to rescue subprime home owners from foreclosure:

"Traders seem to have packed away concerns regarding a speech by Federal Reserve Chairman Ben Bernanke, focusing instead on aid for subprime lenders being hinted at by the Bush administration. According to The Wall Street Journal, about an hour after Bernanke's speech, Bush is expected to announce plans for a change in the Federal Housing Administration mortgage insurance program to allow more people to refinance with FHA insurance if they fall behind on adjustable-rate mortgages. The change would allow 80,000 more homeowners in 2008 to receive federally insured mortgages on top of the 160,000 projected to use the insurance, the Journal reported."

This helps very few people in California, Nevada, Florida, etc. The states most affected by the resetting of subprime loans and the rising wave of foreclosure filings. As an example visit the Countrywide Foreclosed Home Blog. Notice how many foreclosed homes are above the FHA limit of 417k? Another point is that these folks could have received a number of different mortgage loans from Fannie Mae and FHA over the last few years but they wouldn't have qualified because their debt to income numbers are too high. The mortgage payment with taxes, insurance and all their debt(cars, credit cards,etc.) can't be over 50% of their gross income. They couldn't make the payments on time with a 5-6% 2Y or 3Y adjustable rate mortgage with interest only in the majority of cases. What makes people believe these folks can be helped? This is political grand standing at it's finest. This isn't a rescue plan nor should we allow one to happen. Unless fraud was involved on the part of the mortgage bank or lender these folks signed loan documents and commited to house payments that were beyond their means. They had ample opportunity to refinance throughout the last two years when subprime and ALT-A was available. They received an unbelievable amount of calls and junk mail to refinance.

More often than not they were hoping against hope that they could refinance into even lower rates. The back up plan was to sell the house and pocket 100-200k of their "equity" that they had earned for being a home owner in the great housing boom. Believe me, you couldn't get these folks to get a fixed rate mortgage during the boom years of 03-06. Because the rate was .25-.50% higher. All the subprime shops offered a 30Y fixed, and even had an interest only option available. They all qualified for it. They always opted for the cheapest payment. People need to downsize their home and/or lifestyle, work more or relocate to a city or state with more affordable housing. Taxpayers shouldn't bailout the home owners and the lenders who made foolish decisions.

Don't believe for a minute that all subprime borrowers were screwed over. Sure just like anything their was fraud and ignorance. But, in California, I witnessed a lot of people driving Hummer's and buying plasmas at Best Buy with the cashout from their Ameriquest ineterest only 2Y fixed adjustable rate mortgage. I work in the industry and have a million stories. What's your take, it might be your money on your 2008 or 2009 taxes?

Tuesday, August 28, 2007

Senators and Bankers beg for Jumbo Loan Changes

In response to a tightening of credit in the jumbo-loan market, lawmakers are calling on Congress to let Fannie Mae and Freddie Mac purchase substantially larger loans on homes in high-cost metro areas. Currently, Fannie and Freddie can purchase single-family homes for up to $417,000 in the continental U.S. In May, the House passed a bill that would let Fannie and Freddie purchase and securitize bigger mortgages in high-cost areas within the continental U.S. In areas where the median price exceeds to $417,000 cap, the current proposal would permit Fannie and Freddie to purchase loans up to that region's median price or $625,000, whichever is lower. Now Reps. Barney Frank, D-Mass, and Gary Miller, R-Diamond Bar, have called on the Senate to raise the conforming loan limits even higher. "It now is clear that we underestimated in the House bill how far we should raise the conforming loan limit, and the current crises in the mortgage market demonstrate we should raise it to a higher level," said Frank, chairman of the House Financial Services Committee and sponsor of the House bill, HR1427. However, neither Frank nor Miller would say exactly how much higher they would like the limit raised. In the past few weeks, several large lenders have cut back or ceased making loans that can't be sold to Fannie and Freddie, primarily because investor demand for these jumbo-mortgages has dried up. Investors are still willing to buy securities from Fannie and Freddie because these securities come with guarantees that investors will get cash flows - principal and interest - from the mortgages in their pool. The decrease in investor demand for jumbo mortgages has pushed up the rates relative to conforming loans. At this point, the difference in rates on jumbos as compared to conforming loans is almost three-quarters of a percentage point, about three time as wide as normal.It is still not clear whether Congress will agree to the increase in the limits. The California Association of Realtors and others have been lobbying Congress for at least 4 years to raise the loan limits in high-cost areas. Last year, the House passed a similar bill to the one now before Congress, but it never got far in the Senate. The Mortgage Bankers Association (MBA) has declined to endorse higher loan limits. One reason is that some of the MBA's large members make and securitize jumbo loans and don't like the idea of two giants such as Fannie and Freddie entering into their market. Another concern is that investors might get cold feet if Fannie and Freddie started putting jumbo loans into conforming-loan securities. The MBA believes a faster way to add liquidity to the mortgage market would be to let Fannie and Freddie keep more mortgages in their portfolios. Both companies are still operating under the portfolio caps imposed after accounting deficiencies were uncovered. The agency that regulates the companies has said that it is still unwilling to lift these caps for the time being. However, if the mortgage crises does not ease up soon, the MBA says it might reconsider its neutral stance on higher loan limits.

Should congress raise the conforming loan limits to ease the crunch?

Jumbo definition: "The term jumbo mortgage loan refers to any loan that is higher that the maximum dollar amount established in Fannie Mae and Freddie Mac's guidelines. At this time, any loan for a single family property greater than $417,000 is considered a jumbo loan. The limits increase to $533,850 for two-unit properties, $645,300 for triplexes and $801,950 for 4-unit homes. There are also some areas of the Country where the limits are higher including Alaska and Hawaii."

Monday, August 27, 2007

A Distorted View:Existing Home Sales.

Today we received the existing home sales from the National Association of Realtors and I wanted to comment on these a bit. The headline numbers are off 9% from last year and the median price is down only 0.6% nationally. The median is being distorted by sales volumes above the median in each area propping up what would otherwise show falling home prices in these areas. The greatest decimation in the market has been in middle class housing. Homes priced below 500k have seen the largest price declines and volume decreases. Sales at the high end of the market continues to stabilize the median value. The western region has a median home value of $349,400. The median in Los Angeles for example is about $575k. I think median values are pointless as a forecasting tool. What would be the point of knowing the median price of stock on the NYSE? What's the point in knowing the median price of gas nationally? The price of gas in CA is higher than most other markets because of taxes and a lack of refining capacity boosting the price at the pump. The price you pay in your market matters. Real estate is a locally priced good. It doesn't matter if a similar home is $250k in Chicago and $400k Los Angeles. A home is only worth what a buyer in that local market is able to pay vs other comparable properties in that immediate surrounding market. This is largely dependent on available financing. As the financing has become tighter and more expensive because of higher rates across the board the volume has dramatically declined from prior years.

You can't compare the median value in Malibu to Compton. Pointless. Those markets are at the opposite ends of the spectrum. The only value in my opinion in the NAR home sales numbers are volume and the amount of existing inventory. Volume leads price. The amount of available homes for sale allows the potential home buyer to have more choices and bargaining power. This pressures asking prices. Then as properties languish on the market sellers realize they are above the market and often lower their prices or remove their home from the market altogether. The amount of homes on the market locally and nationally leads me to believe that we will continue to see price declines across the country but especially so in bubble markets for years to come. Notice the big drop off in sales around Mar 2007. That's the start of the implosion of subprime lending. The July numbers are barely reflecting the implosion of ALT-A lending that started in mid July and ran throughout August. I believe the August numbers will post an all new low as financing has become much tighter in the last few weeks. Bar chart courtesy of Calculated Risk.

Saturday, August 25, 2007


In the spirit of democracy and a good Saturday round table discussion, what is your view on the proposed bailout plans that the presidential candidates have been discussing?

If you would like to voice your opinion on a bailout please visit: Petition.

Please voice your thoughts and comments below:

Friday, August 24, 2007

Where did the punchbowl go?

Having personally lost a small fortune in the stock market in 1999 and 2000. I can tell you that markets can stay irrational for a very long time. Any seller that has had his/her property on the market for 60-90 days and hasn't received a reasonable offer is nuts. They need to drop their price or sit out the credit crunch. The credit crunch could last many years.

The big problem I see and I speak to dozens of realtors a week; is that sellers feel that their "equity" is real money. I always have to remind people that something is worth only what another person is willing and able to pay. The ability of people to pay irrational prices for homes in bubble areas is gone for the middle class market. Remember the rich are different. Working class vs asset class. The loose financing is gone. Stated loans are on life support. Real income for middle class Americans has barely kept pace with inflation the last few years. At the end of the day Wall St can create the wildest financing known to man but it has to be repaid some day. Investors don't give money away. The market for ALT A and subprime mortgages is DEAD. In addition, a knee jerk reaction has occured in large prime loans as well requiring extreme levels of documentation and big down payments on the order of 20-25%. No stated income loans unless you are putting 20% down and have a 720 FICO. That is a generalization of course as every loan scenario is unique.
I am a very optimistic person by nature so negative views are seldom heard from my lips. I am sorry to say that we are in for a very long period of recession or stagflation(low growth with inflation i.e. late 70's). If you need a broader clue as to how bad our nation is currently behind the eight ball check our dollar vs major currencies and you will see what the world thinks of our prospects. Too much governement and household debt. The world's appetite for our excess is over. It's time to save and be prudent. Back to reality. The punch bowl of easy money is gone. Parties over it's time to sober up.

Shocking move by FED to aid CITI and Bank of America.

In a shocking revelation after market hours the FED on August 20th wrote a letter allowing the bank(i.e. retail banking)divisions of Bank of America and Citigroup to extend to their brokerage divisions capital(i.e. loans) up to 25% of their capital. The previous limit was 10% for all banks with brokerage divisions. This rule has been in place for decades to prevent stock/bond market calamity from filtering back to affect the safety of the retail bank operations. Of course all accounts are FDIC up to 100k but this points to a very large situation the FED and the world's banks know that they are trying to fix behind the scenes. Their was no announcement on monday when this letter was effective. The news comes out after stock market hours on a Friday. The letter can be found here.Their server is jammed currently with people trying to read the letter. Also read the CNNFN story here:This is a developing story and I will have more later tonight.

Wednesday, August 22, 2007

Lose an arm and a leg:Get an option arm today!

I have long hated this mortgage product. I am a big proponent of getting an old fashioned fixed rate. I completely understand the purpose of this loan structure, but in no way did the 12% of people that did them last year really understand the product. We usually see people get the picture about a year in when the balance has skyrocketed. Unfortunately, the NEGAM is the payment they could afford not the interest only. In addition, with the financial engineering in these products people buy the idea of the NEGAM payment and don't notice the high note rate which is the real interest rate that the borrower is charged. This product is being eliminated at lenders/banks daily. The real concern for people with these is that they get out from under them and into a safer loan product. Cheers and don't let the video spoil your dinner. From our friends at:

Bank of America Helps Rival Countrywide.

Countrywide and BOA are competitors across a variety of business segments. It came as a surprise to the markets that Bank of America had agreed to buy $2b dollars worth of Countrywide preferred stock. Countrywide shares rose sharply in afterhours trading, the perception is that this is the start of a move to merge the companies together. Bank of America is not a star in terms of mortgage origination. Countrywide needs a source of cheap funds and BOA has an enormous pool of savings and CD account money to tap into. On the surface it looks like a great merger. But, I think the real issue of concern is that Countrywide is going around Wall St with cap in hand to raise any money that is available. As of now the terms of the preferred stock deal are not known but this wasn't cheap money so it makes you wonder if the giant Countrywide is going to fall into another banks arms or just fall apart. Heard any news, rumors about Countrywide? Post a comment.

Tuesday, August 21, 2007

Countrywide Seeks Cash.

As a source of mortgage funds most lenders such as Countrywide, Ditech and all the hundreds of mortgage bankers repackaged the debt to get fresh funds to lend with the help of the big Wall St investment banks. These debt securities were sold to mutual funds, hedge funds, foreign banks, etc. The appetite for CDOs as they are known has dried up for all but the most stellar loan scenarios. The investors that bought these instruments have been burned and are demanding higher rates or are completely done with mortgages altogether. So where do the lenders get more money to lend? Going back to the old school banking playbook, Countrywide is taking the lead on this one and soliciting the highest CD deposit rates in the country. Check for yourself by looking at your local paper or checking under the CD tab.

They need to raise funds ASAP to fund the 40 billion dollar monthly pipeline. You will notice that many large lenders are on the CD tables with very attractive rates for the CD investor. Thinking ahead, won't this result in a dramatic change in the type of loans offered and the rates charged? They can't pass off the risk now, they are not selling these loans. These will stay on the bank balance sheet and must perform. After all, you can't tell grandma that her CD is gone because the bank loaned money to a flipper using a NEG AM. Something about FDIC insurance and bank regulators prevents Countrywide and others from making wild loans when they use their banking centers as a source of funding. Would you deposit money with Countrywide?

Monday, August 20, 2007

Interesting Info from Countrywide.

Given the daily rush of news, I think a lot of careful analysis gets lost. Thinking about Countrywide's conference call almost a month ago, these slides are very valuable in thinking about where housing and the mortgage industry could be heading. Countrywide services about 20%+ of all mortgage paper in this country. So they have a remarkable opportunity to analyze the specific loan performance of various types of credit and mortgages from conventional to jumbo and the exotics that we may never see again(i.e. option arms and 2/28 ARMs.) Please post your insightful comments. Enjoy this info and give it some thought:

Lenders and Brokers:Only focus on conforming!

I received this just now from INDYMAC. They are a large thrift based lender that does retail and wholesale.

"Time to shift our focus…

The mortgage industry is changing rapidly and oftentimes without warning. In order for you to continue to succeed in this industry, you must embrace change. Today, another one of our lending competitors, GreenPoint Mortgage, closed their wholesale operations. It is definitely a time to focus on what we can do rather than what we no longer can.

Income Documentation: Embrace Full Doc.
Stated, No Doc, NINA, etc. are still being offered by IndyMac Bank for conforming loan limits. However, the shift in our industry has definitely gone to Full Documentation. Don’t be afraid of W2s, Pay Stubs, and 1040’s. We even allow you to document income via a fully executed VOE for your wage-earning borrowers. We also allow Non-Occupant Co-Borrowers to be on the loan if you need more income. Also, Fannie Mae MyCommunity loans are designed to help your lower income borrowers qualify.

Conforming Loans and DU Approved Loans: Currently 50% of the National Mortgage Market – Soon to be 90%.
We, along with our competitors, are shifting to lending on conforming loan amounts. In the 48 mainland US states, the conforming loan limit is $417,000 for SFRs and $533,850 for 2 units, and higher for 3 and 4 units. Alaska and Hawaii have their own limits. Whether you believe it or not, there are customers out there that need loans within these limits in CA – you just have to find them. With full doc conforming loans comes a world of excellent products. These Fannie Mae/Freddie Mac based products will allow you to reach more customers.

Alt-A Jumbo / Super Jumbo / Ultra Jumbo
These products are still here, however, focus on business that are of higher credit quality and lower LTVs. Although we live in CA where the median home values are above $500,000, we need to shift our focus to the business that we can do. If you’re going to do jumbo loan sizes, your efforts would be best spent on deals with lower LTVs, higher FICOs and higher liquid assets."

What does this all mean to the average hard working american homeowner? INDYMAC and other lenders are saying that the only loan market that is functioning is the conforming end of the spectrum. I have heard this throughout the day but this was one of the largest to issue a warning to their wholesale channels.

The jumbo market which is about 12% of all mortgage loans nationally but is a huge portion of the market in Southern California is showing increasing signs of distress. A week ago the mortgage market felt that the lack of investors in the secondary market would recover for the best mortgage paper. We got a discount rate cut on Friday, the stock and bond market cheered but we haven't seen any liquidity move to relieve the constipated state of the non-conforming market. We are not talking subprime slime or alt-a loans. This is prime full doc refinance or purchase loans that lenders/investors are avoiding. Anything above 80% loan to value is having pricing trouble and I have seen rates in the 8% plus range for jumbo mortgages. I believe this will get worse before it gets better. Refinance your jumbo mortgage while you can.The jumbo mortgage market completely depends on mutual funds, pensions, hedge funds, and foreign governments. They are in the slow process of repricing the risk and we will likely will see rates about 7% for the best credits for the next few months.

Friday, August 17, 2007

Excellent Jumbo Mortgage Summary

Here is an excellent piece from
"I hate to belabor this point but I really think that the vanishing of the affordable prime Jumbo loan is easily the most significant development for home prices that I have heard all year.Remember, the Jumbos have dried up for PRIME borrowers.But what does it mean to say “dried up”… again, as I noted before, it simply means borrowers will need to put 20% down (or have 20% equity for refinance), provide full disclosures of income (tax returns, stubs, etc.) and then pay over 7.5%.

This appears to have happened merely because Wall Street, who inevitably supplied the liquidity behind these loans, are now obviously more risk averse and are effectively unwilling to cheaply underwrite large home loans.And the cheap Jumbos are not coming back anytime soon.Why?These loans are for the most qualified borrowers at the higher end of the income spectrum so you have to ask yourself… what is wrong with affluent borrowers being required to put 20% down, verify income, and pay a premium for a large principle loan?The key point here is that the terms have just come back to normal… NOT tightened!

Also, remember that, unlike the subprime issue, there is not even the slightest chance that any government program, Fannie, Freddie, FHA, VA, etc. or for that matter any politician can do or will do ANYTHING about it.People who currently have rate-resetting large principle loans or are planning to get one for a new purchase are on their own.Again why is this important?Because, in the last 5 years (really the last 10 years in the ultra-hot bubble metro markets) it’s NOT been the Vanderbilt’s who have been making use of Jumbo loans… it’s been the middle class dual income couple (DINKS and with kids) and the upper middle class professional individual.

The out of control spiraling buying mania forced virtually everyone in the bubble metro’s to stretch ever higher for the brass ring of the coveted residential property.Whether it was for a starter single family, rehabbed single, simple or luxury condo, affordable Jumbos with low down payments were a KEY element in enabling the prime home buyer to function in these areas.

This is the major shoe to drop for the ultra-inflated home prices in this cycle.As for today’s Fed discount rate cut… Don’t look for that kind of Federal Reserve action to restore the easy lending days of the past.At this point, lenders, banks and Wall Street alike are merely concerned with how to stabilize their operations, preserve capital and stay solvent NOT how to maximize profits by ignoring risk."

Thursday, August 16, 2007

Jumbo Mortgage Meltdown Freezes Luxury Housing

The media has done a very poor job of relaying the collapse in the jumbo mortgage market. The term jumbo mortgage loan refers to any loan that is higher than the maximum dollar amount established in Fannie Mae and Freddie Mac's guidelines. At this time, any loan for a single family property greater than $417,000 is considered a jumbo loan. The limits increase to $533,850 for two-unit properties, $645,300 for triplexes and $801,950 for 4-unit homes. There are also some areas of the Country where the limits are higher including Alaska and Hawaii.
But, what does that mean for housing in high cost areas like CA, NY, FL, etc? The guidelines for doing a jumbo mortgage have tightened dramatically in the last few days. Lenders such as Indymac, Countrywide and WAMU have increased reserve requirements and stopped taking stated income for loans with less than 20% down. The interest rates for full doc jumbo loans in CA have risen by .50-.75% for the most prime credit worthy borrowers. A client making $200k gross income(everybody right?), with 1k monthly payments on the credit report for cars, putting 20% down qualified for an 825k purchase using standard debt to income ratios two weeks ago. You move rates to 7.75% and the client only qualifies for 777k. Jumbo mortgage rates are averaging 7.75% for this scenario for a 30Y fixed. Which everyone should have, it makes no sense to gamble with an adjustable if you are planning to live in the home more than a few years.
As the guidelines continue to tighten, and the reality of the freeze in the jumbo market sets in you will see sellers drop their prices as we move toward the credit freeze of winter. Buyers can no longer go to their mortgage lender and get the rocket fuel financing that propelled the luxury market between 650k-1.5m. Above these loan sizes clients tend to have substantial active and passive income from stocks, bonds, and small businesses to manage almost any lending squeeze. Working class vs asset class. Don't worry about the rich, they always find a way to make it. Keep your head on and remember it's never different this time. Please post your thoughts.

Musical Mortgage Chairs!

In speaking to investors, clients and realtors; I came away with the idea that the mortgage freeze is like a game of musical chairs. Some of us can remember the feeling of scrambling for that last chair as the music stopped. Many property investors that have a large number of single family home rentals(10-15 in some cases) are trying to grab at financing that doesn't exist in today's mortgage market. They will be forced to sell. Many investors are barely holding onto rentals that only made sense for the property appreciation that happened between 2001-2006. The negative cashflow was big to the tune of 1-2k a month with the taxes and insurance per house. Many of these folks took interest only mortgages or negative amortization loans because they were really betting that housing would rise in the next few years and they could sell with huge gains. Now that housing prices are falling; the music has stopped, but so many people just don't realize it yet. Did you know the music stopped a few months ago? Better find that last chair.

Countrywide Mortgage in Liquidity Crisis.

Forbes 8-6-7:
"Countrywide Financial offered hope Monday that it might avoid the fate of other troubled lenders. The mortgage company revealed that it has cash access that could help it survive brutal industry conditions. In Monday filings with the Securities and Exchange Commission Countrywide revealed it has $186.5 billion in available liquidity. It also said it has access to $46.2 billion in highly reliable short-term funding. "

Fast forward ten long days. Today we were greeted by another bad sign that mortgage markets have stopped working. Countrywide is the largest lender in the country. They originate through retail and broker channels roughly 20% of all mortgage loans. They funded $40 billion last month. This is not subprime, or ALT A, the majority of these loans are very prime mortgage loans to folks fully documenting their income. They were forced to tap a line of credit they have to the tune of $11.9 billion. They did this because they couldn't use their traditional financing of borrowing in the short term commercial paper market. This is bad in that the largest lender in the country is not being trusted by the global community to lend money to on a very short term basis.

The impact of these events and others to follow is that mortgage rates will likely continue to rise for any mortgage loan that doesn't fall into the conforming guidelines of Fannie Mae or Freddie Mac. This will have large ripple effects throughout the financial community and especially so in housing over the coming days. The rates for non-conforming loans is between 6.75-7.75% for scenarios of putting 20% down, fully documenting income, and prime credit levels. This is up from the high 6% range. This is putting pressure on the $650-$1.5m market. This can be clearly illustrated by our friends at Above these values you move into super jumbo mortgage rates and they have been in the 8-10% range for most scenarios. I have to get back to the grind. Stay sane and remember that Rome isn't burning, it's just a little smoke.

Wednesday, August 15, 2007

Signed mortgage. Conditions meet. Sorry can't fund!

I received this item just now. Really points to a mortgage market meltdown. This is from a large national mortgage wholesaler that only does prime and a small amount of alt-a paper. This implies that a borrower could meet all conditions, sign the loan, it moves past rescission(client cancelation period) and is ready to close/fund; then suddenly a Wall St bank like Bear Streans or Goldman Sachs would inform the mortgage banker that the loan was unsaleable in the current market. The loan would be turned down. This points to very bad conditions in the secondary mortgage market where everything is packaged and resold to investors. Lending depends on confidence in both parties to deliver on their promises, should loans get turned down in funding; realtors/lenders/borrowers will move from mild concern to panic.

Tuesday, August 14, 2007

The new word of the day is NO!

The mortgage market is undergoing a rapid change that the public at large is only coming around to slowly. People believed that money would flow to anyone with a pulse at terms that were increasingly better than their previous mortgage loan. The game was going fine till people took on more debt than they could pay. The mortgage defaults started and picked up speed at the start of 2007. Then, the investors started to slowly tighten guidelines and then it was a race to the bottom. Small lenders in order to compete and keep volume flowing keep very loose lending guidelines. They then began having trouble selling these to Wall St, who packages the prime and subprime mortgage loans and sells them to investors.

The mortgage interest rates couldn't rise much because people couldn't qualify even with an interest only or a 40Y fixed mortgage. The investors weren't being compensated for the added risk but there was an instatiable appetite for yield or a rate of return better than safe government bonds. Eventually, all this consumption of bad mortgage debt lead to severe problems. Lending depends on keeping the money flowing; borrowers making payments, and default rates staying predictable. Everything has changed and the mortgage investors are in a holding pattern till the dust from the collapse settles.

The biggest toxic mortgage product in domestic and international portfolios is stated income loans for subprime or ALT A clients. People had used stated loans as a way to qualify for rates and loan programs that they otherwise would not qualified for. But, that game ended when we had gardners and secretaries stating that they made 100k+. The investors didn't believe the income and the underwriters turned the files down. Many people had used refinancing as a way to bid time. They couldn't make the mortgage payment but they could refinance, pull cash out and make the new payment again for a few months.

Mortgage loan rates will continue to rise for risky loan scenarios. Millions of people are unable to refinance their loan now. They may be aware of this and list their home for sale, or go into default; or they are clueless staring at their plasma they bought at Bestbuy. The average increase for people with adjustables is 2%. An average loan balance in Southern California for example is 350k. With a 2Y fixed or 5Y fixed interest only done a few years ago the payment would be $1750. With the first adjustment their new interest only payment moves to $2333. If people are complaining about gas prices. Think about the impact of that payment increase on the average middle class family. That payment doesn't include the property taxes or home owners insurance.

Of course, adjustable loans are used from the conforming loan market to the super jumbo loan market for the multimillion dollar homes. The difference with the larger balance loans is that the lenders require larger down payments and much lower debt to income levels. Most jumbo clients can easily handle their first adjustment. This is not true within the conforming loan market. I do not believe that people are prepared in anyway for their first adjustment. Almost, $2 trillion dollars of mortgage loans adjust in the next twelve months. It will be interesting to see how people handle the coming wave of change. Borrowers are more likely to hear NO or sorry a lot over the next few years.

Monday, August 13, 2007

Time Heals all Wounds.

It has been a few months since I last posted. I find hundreds of other authors doing a good job covering various elements of the housing and lending collapse. Although, I would add that most bloggers are outside observers and a few have very biased views. Of course, I have my bias as I am a mortgage broker here in CA. An unstable housing market isn't good for anyone. Sure it was easy to find a mortgage loan for a client as long as they could fog a mirror. But, all the competition for housing priced out the rational client's that didn't want to take on risky financing.

I didn't hear of pick a payment or negam loan until 2003. After reading through the paperwork, I really thought that the product was being sold to less than savy clients. Wall St created these products because it allowed the investors of these mortgages to make very large returns. Estentially, the balance is compounding at a rate somewhere between 7-10%+. The borrower is only paying 1-3% and the rest of the interest is tacked on to the balance. I have seen clients that went into major banks like WAMU or Indymac and thought that they were getting a fixed loan. Sure, they signed a one hundred page plus loan document, but clients rarely read these forms. They are written by a room full of lawyers and regulators. The average person has trouble setting up their cable modem and setting the clock in their car. Do you think they will get the potential risk of negative amortization in a flat or falling real estate market? The balance is going up and the home owners equity is evaporating each month.

These products were sold as a way to help people buy houses or live a lifestyle they couldn't otherwise afford. The lending industry has been burnt on this product and it is no longer available but for the most well qualified clients. People forgot the old childrens tale about paying the piper. Eventually, you have to pay the money back. It's funny, people used to take pride in paying cars and houses off. The crazy easy money era convinced people that debt was king. Borrower till you don't need or want anything else. The crazy money era ended in March or April of this year when housing started to fall and the subprime lenders began to implode.

Investors will take almost any risk as long as they are compensated with an appropriate return. That's what hurrican insurance is all about. That's why after you have a major car accident your insurance rates go up. Sure, State Farm will cover you, but they need to be compensated for the added risk. Right now in the mortgage market, the investors(banks, pension funds, foreign governments, etc) don't know what the default rates will really be so they can't model the risk correctly so they have decided not to lend to risky credits or risky loan scenarios.

The rates for jumbo loans (417k+) has gone up about .75% in the last two weeks because a default on a 800k home could cost the bank 100-200k by the time the home is sold. The interest rates for second mortgages has gone up about 1-2% for client's with excellent credit because even the most credit worthy get divorced, get sick and lose jobs. If a default occurs on a 2nd mortgage in this market and they have to foreclose, the 2nd is likely wiped out entirely.

It will take 3-5 years in my estimation for this to entirely work out. I expect real estate prices in the hot markets to steadily drop for years. The underlying fundamental of home mortgage finance is the borrower's ability to pay the loan back. Regular residential housing will revert back to a level that can be supported by a dual income household making a regular 30Y fixed mortgage payment. The upper end of real estate 750k+ is largely driven by rolling equity from starter homes, the stock market, and income earners in the top 10% nationally. Don't forget that the wealthest people in the country live in CA, NY, and FL. I expect this market to soften with rising rates. It is a bifurcated market. The middle class became convinced by all the forces that be that they needed/deserved four plasmas, a Hummer and a 50k pool upgrade on the salary of a handy man and a secretary. Everyone should get the most out of life but not at the expense of their future when the piper comes to take their home away.

Lessons are being learned and things will get a lot worse before things get better. But, one persons foreclosure is another persons new bargain home purchase.