FED Cuts, housing continues downward spiral.

At 11:15a PST the FED announced a small rate cut of 0.25% this produced an immediate rally in stocks and a sell off in bonds. Most mortgage rates rose as the FED statement indicated that they were concerned about inflation. I know I see it throughout the everyday economy. Have you bought gas or groceries recently? Inflation is the enemy of the lender as it destroys the value of the money they receive over the life of the loan. The dollar fell following the announcement and oil spiked to a record high. Oil is traded in dollars so as the value falls relative to other currencies the price per barrel rises in general. Gas prices should follow suit in the coming days.

How does this matter at all to housing? Well, I would expect rates to remain somewhat range bound throughout the next few weeks. Any additional confessions of major losses by world banks on mortgage paper would result in a flight to quality that would push high quality mortgage rates down.

In other housing news that is sure to put pressure on prices is Citigroups announcement today that they will no longer do purchase money 2nd mortgages in CA. This is Citi's way of avoiding the meltdown in housing in bubblicious California.

Case-Shiller announced their August housing report yesterday. They produce the most widely respected index on housing. They track individual metros. Here is a breakout chart from Time Magazine. Some cities look like a roller coaster ride at Six Flags, enjoy:

Falling home values=NO refinance options for millions.

The collapse in home values is proceeding at an ever increasing pace. Sites such as Irvine Housing Bubble, Sacramento Area Blog, and Phoenix Flippers Blog highlight the collapse of values in the last year. Especially, within the last three months we have seen a big drop in appraised values. You say home prices aren't dropping much? Well, investors/banks don't care if Joe Six Pack has a home on the market for $800k as a comparable value for a person refinancing. What matters is what has sold in the last month and the amount of foreclosures moving prices in that micro market. This is causing severe problems for solid money good clients with perfect FICOs, documented income and reserves. The higher the loan to value, the higher the mortgage interest rate, and often mortgage insurance is required. Mortgage loans are not being done at 100% loan to value above 417k on single family homes. Folks with jumbo mortgage loans resetting in the near future should carefully examine their financial plans, the market reality and consider refinancing, selling or riding out their existing loan. Next year $700 billion dollars worth of mortgages reset to full market rates. This is not a subprime problem, this is a global credit crunch. Those who don't plan, plan to fail by throwing their future to the vagaries of the market. And now, back to Lisa with celebrity news to keep us distracted.

Countrywide REO goes from 13k to 195k?

A developing story "scandal" started this morning when investors/realtors noticed that Countrywide on it's REO search site noted 180k more properties listed across the country. The new additions state that no broker has been assigned. I checked a few CA listings and they are indeed foreclosed properties. Check it out yourself Countrywide Foreclosure Blog.

Is this the disclosure that breaks the Countrywide balance sheet to have Bank of America come to the rescue?

Pain or Pleasure:Two Charts.

I present for your viewing pleasure or pain depending on your position in this market the latest mortgage reset chart and the foreclosure time table.

Remember that the foreclosures that are on the auction block or listed on the local MLS have been in process for many months. Word on the street is that lenders are trying to delay foreclosures in the "HOPE" that the borrower will be able to begin making the payments again. Seldom happens. The bulk of foreclosure filings won't occur in my informed opinion until 2009. The big resets of ALT-A(above subprime but below prime) occur in the period of 09-11. This will be very interesting, as these folks will reset to full market rates or if they are smart they would have refinanced their mortgage before the market rate reset.
We live in an instant society, unfortunately this slow unwind of Candyland prices will take years. Every bubble cheerleading pundit wants to say, "It's over and we go up from here." How long in your infinite wisdom will the unwind last? Comment, your opinion counts.

Market Falling, Banks failing? The end?

NO. But it helps to catch your eye with a dramatic title. Enjoy the Doors "The End"


Does any of the financial meltdown effect you? Or is it just a curious event on Wall St? Enjoy your weekend.

Market Meltdown benefits the SOLID borrower.

With the large drop in the US stock market and the bank losses over the last few days we have seen a massive drop in mortgage rates for our clients. The loans with the biggest investor demand and best price improvements are for "money good credits." Low loan to value, high income, strong FICO and ample reserves. It is a flight to quality across the board. Investors in treasurys and mortgage backed securities only want the filet mignon. The ground beef they purchased from New Century, Ameriquest and these exotic NEGAMs are a causing Montezuma's revenge all over the bank balance sheet. They only want the rock solid risk scenarios because Wall St is in a state of fear as global financial firms one after the other come to the confessional with massive multi-billion dollar loan losses. Remember these are loans that started having trouble over six months ago that are in foreclosure or sold off as non-performing to another institution. From all the evidence we have seen these write offs and tightening of credit for riskier loans will continue unabated for at least 1-2 years. Here is an excerpt from the Wachovia call today courtesy of Calculated Risk.

"Much of the increase in non-performing loans and the losses are on loans in certain California markets that have experienced fairly steep declines in prices. Our delinquency call centers report that the primary reasons for borrowers struggling to pay are three fold. First is reduction of income or underemployment. Second is the assumption of additional debt from lenders other than Wachovia and thereby changing the credit profile from the origination of the loan. And third unemployment. We have seen some uptick in unemployment in some of these markets. Let me also point out that while the average current estimate at the appraised value of non-performing loans is 77%, there is $380 million in balances out of the total $1.7 billion where the current estimate of value is over 90%. Actually on that pool, averages in the high 90s, again reflecting the dramatic decline of house prices in certain markets. These particular loans have a low loan to value of just under 80% at origination. It's interesting to note here that problems in these markets, really for all lenders seem to be across the board without originating FICO, the type of loan or the property. Given our outlook for continued weakness in the housing market and possibility for slow income consumer sector, we anticipate loans on consumer mortgage book continue to increase over the next few quarters and that losses will be up albeit fairly modest charge operates. To manage the increase in loans in foreclosure, we have significantly increased our staff responsible for handling Oreo properties and working with delinquent borrowers. Prepare the property to sell and sometimes choosing to maybe take a somewhat higher loss on that sale rather than risk holding out for a top dollar opportunity that may or may not come down the road.” emphasis added

If you would like to subscribe to our Mortgage Market Update report send an email to mrmortgage at thegreatloan.com. Would prefer to put a link but then we would be too busy sorting through all the great deals for Viagra. Have a prosperous day.

Countrywide Buying America?

Countrywide has been doing very well recently in executing their plan to own all the homes in America. As you can see from the chart the growth of their real estate owned portfolio is impressive. I know they must be anxiously awaiting the wave of subprime loans resetting so they can get those keys. A well placed source at Countrywide stated that 70%+ of the subprime folks that are calling in to refinance can't refinance because they are upside down or can't afford the new risk adjusted rates that are between 8-12%+ for a 5/1 ARM. We are running a contest to see where the readers think the Countrywide REO portfolio will end by year end. We will be giving away a copy of Devil Take the Hindmost:A history of financial speculation by Edward Chancellor and a copy of The Black Swan:The impact of the highly improbable by Nassim Taleb. To participate please send your best guess to mrmortgage at thegreatloan.com. If you would like to be added to the Mortgage Market Report include that in your email as well. We will not spam you. Winner will be announced on Jan 1st.

September Southland home sales lowest in more than 20 years

September Southland home sales lowest in more than 20 years
by Real Estate Analyst John Karevoll-->October 16, 2007

La Jolla,CA----Home sales in Southern California plunged to the lowest level in more than two decades, as financing with "jumbo" mortgages dropped by half. The median price paid for a home dropped sharply as a result, a real estate information service reported.
A total of 12,455 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in September. That was down 29.9 percent from 17,755 for the previous month, and down 48.5 percent from 24,195 for September last year, according to DataQuick Information Systems.
Last month's sales were the slowest for any month in DataQuick's statistics, which go back to 1988. The previous low was in February 1995 when 12,459 homes sold. The September sales average is 25,258.
"Some of last month's drop was part of the longer-term slowing trend, but most of it was due to mortgage market turbulence and difficulties in getting jumbo financing. There's a good chance there will be some "catch-up" sales activity between now and the end of the year as jumbo loans become more available. Still, we can't expect the market to re-balance itself until sometime in 2008," said Marshall Prentice, DataQuick president.
The number of Southland homes purchased with jumbo mortgages dropped from 5,359 in August to 2,681 in September, a decline of 50.0 percent. A jumbo mortgage is a home loan for $417,000 or more. For loans below that threshold, the sales decline was 19.3 percent, from 9,237 in August to 7,459 in September. Historically, sales drop by about 10 percent from August to September.
The median price paid for a Southland home was $462,000 last month, down 7.6 percent from $500,000 in August, and down 4.0 percent from $481,000 for September last year. If the jumbo-financed portion of the market had remained stable, last month's median would have been $487,000.
DataQuick, a subsidiary of Vancouver-based MacDonald Dettwiler and Associates, monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts.
The typical monthly mortgage payment that Southland buyers committed themselves to paying was $2,198 last month, down from $2,422 the previous month, and down from $2,295 a year ago. Adjusted for inflation, current payments are about the same typical payments in the spring of 1989, the peak of the prior real estate cycle. They are 11.7 percent below the current cycle's peak in June last year.
Indicators of market distress continue to move in different directions. Foreclosure activity is at record levels, financing with adjustable-rate mortgages is flat, financing with multiple mortgages has declined significantly. Down payment sizes are stable, flipping rates and non-owner occupied buying activity is flat, DataQuick reported.

My comments:

For every foreclosure and distressed seller there is a happy buyer waiting for the right price/home. Prices will drop to levels that can be supported by the down payment and income of the borrower(s) using sensible mortgage financing. Every market is different. Every city and block has micro markets. I have always thought the national figures were meaningless. Comment as free speech is still in effect. You won't be carried out of the debate and pepper sprayed.

Realtors moving offices to Candyland?

Below for your enjoyment is a collection of article headlines posted today from various news services. Can you spot the one that's from Candyland? The mythical place where everything is great. The roads are paved with chocolate and the sky is full of rainbows.

Links

Builder confidence hits 22-year low

Treasury Secretary urges action on housing downturn

Bernanke: Housing will continue to drag U.S. economy

Articles:

California Home Prices Predicted to Fall for First Time in 10 Years

California median home prices are predicted to fall next year for the first time in ten years, according to a a recent forecast released by the California Association of Realtors(CAR). CAR is predicting that in 2008, the median price of a resale home in the state will drop 4 percent to $553,000 and sales will fall another 9 percent in addition to the 23-percent plunge that is predicted for this year. Riverside, San Bernardino and the Central Valley counties are experiencing the steepest declines, the forecasters said, largely as a result of an exceptional amount of new-home construction, which has forced builders to take large price cuts to clear unsold inventories. CAR President Colleen Badagliacco predicts that Riverside and San Bernardino counties will continue to suffer more than the rest of the state because of the large number of subprime mortgages that were used by first-time buyers who moved inland from coastal counties to buy affordable housing. Badagliacco said she expects the California housing market will again be jolted in the second and third quarters, when more adjustable-rate subprime mortgages are scheduled to reset, possibly at higher interest rates. "Tighter credit standards, affordability concerns and a continued standoff between buyers and sellers will contribute to continued weakness in the market going into next year," Badagliacco said. Badagliacco added that the industry is hoping the federal government will help by raising the lending limits on government-sponsored mortgages. Chapman University economist Esmael Adibi said the significance of CAR's projection is that it reflects a growing pessimism among real estate experts. Adibi said it is the first time that Badagliacco's group has acknowledged the downturn may continue for another year. "We haven't seen any turnaround in sales, and the inventory of unsold homes keeps rising," Adibi noted. "For sure there will be no rebound."

Banks to Set Up Fund to Bail Out Investment Vehicles

Several major banks, including Citigroup, Bank of America Corp. and JPMorgan Chase & Co. have announced they are pooling money to prevent investment funds from having to dump assets into the market. The pool will prop up funds known as structured investment vehicles (SIVs), which have had trouble refinancing their debt recently and in the worst case scenario would have to sell their assets to pay off investors.

NAR Says Improvement in Mortgage Market Bodes Well for Housing in 2008

Conditions in the mortgage market are improving for consumers, according to the latest forecast by the National Association of Realtors (NAR). Lawrence Yun, NAR vice president of research, notes that widening credit availability will help turn around home sales. “Conforming loans are abundantly available at historically favorable mortgage rates. Pricing has steadily improved on jumbo mortgages since the August credit crunch, and FHA loans are replacing subprime mortgages,” he said.

If you would like to subscribe to our Mortgage Market Update report send an email to mrmortgage at thegreatloan.com. Would prefer to put a link but then we would be too busy sorting through all the great deals for Viagra. Have a prosperous day.

My Mortgage:I'll take care of it later.

We often see this with foreclosures or clients that waited too long to refinance. Humans are built to remember the recent past with the greatest clarity. Not withstanding those folks with alzheimer's who live in brighter time in their mind's eye. Maybe homeowners have bubbleheimer's. The bubbleheimers remember the housing boom and falling interest rates. They completely forget the past housing bubbles various areas have experienced let alone the multidecade collapse Japan experienced.

Millions think their houses are worth a kings ransom, that rates will always be the same or less than their current rate, and that financing will always be available on very attractive terms. This is proving all wrong for millions of people. This crosses all income brackets and home values. I have seen multimillion dollar homes serially refinanced till they have little or no equity. When prices are soft, homeowners can't refinance and a sale would result in a check required from the seller to close after real estate commissions and fees. Mr. Smith we need $125k to close the sale of the home you can't afford. Read the blogs to the right if you want a glimpse into individual housing disasters.

With the complex instruments(NEGAMs, ballon loans) that people used to refinance or purchase their homes, procrastination can be the death nail as adjustable loans unlock, property values fall and the homeowners options evaporate. Work with a reputable mortgage professional or contact your favorite realtor to explore your options. Make the decision yourself, don't let the market or the bank make it for you.

Why bubble home values may decline for years.

This is a weighted chart of home values in Irvine, CA which is a thriving high job and income growth area of South Orange County,CA. Many law firms, accounting, biotech, and tech companies have offices in Irvine. By way of Irvine Housing Bubble Blog you can clearly see the individual distressed homeowners. I think Irvine is a good community to consider in terms of its broad mix of housing. You have entry level starter homes/condos and you have luxury developments approaching $3M.

In a classic credit crunch the weakest borrowers are hit first. I think we have seen that wave in the last year and the subprime/ALT-A credits will continue to unwind and result in an increasing pace of foreclosures over the next two years. The larger concern would be the wave of ALT-A and prime loans resetting to market rates over the next few years. Millions of homeowners purchased or refinanced with 5Y interest only ARMs between 01-04. These loans were at rates of 4-6%. Depending on loan to value, credit, etc. Their first reset if they don't refinance or sell will be 2% higher. Most luxury homeowners can stand a reset but would want to consider getting another ARM or a fixed rate. Of greatest concern is the middle income homeowner who can't afford a mortgage at today's market rates. Remember the creative exotic financing is gone for all but the lowest loan to value scenarios. These folks are looking at regular loan structures and likely because of loan to value will be forced to prove their income and reserves. Remember in a survey over the summer brokers said 57% of clients couldn't refinance, loan to value and insufficient income were the primary reasons.

I believe we will continue to see downward price pressures on residential real estate in areas where the incomes don't support traditional mortgages. The loose money is long gone and with it the candy land values. What are your thoughts? Post your comments. We still have free speech when I last checked.

Where will mortgage rates be in the coming years?

I often get this question from clients. Luckily, we just hired a mystic to forecast the mortgage interest rate climate for you. Previously, he worked for the local news in the weather department. So you know he must be rock solid with his forecasts. Seriously, no one knows. But, you can make an educated guess as to the overall direction. I would venture to say that mortgage rates and interest rates in general will be higher in the coming years. We are coming out of a period of Fed rates not seen since the 50's. Global investors are very unhappy with the falling dollar. This destroys their USD based returns. We have exported a large amount of debt both public and private. We saw the ten year reach 4.50% range recently which would usually have jumbo mortgages around 6.25% and conventional mortgages in the 5.75% range. This didn't happen as I believe investors/banks see a lot more risk in mortgage paper and will demand higher rates for the risk that has exploded in the last year. The weak dollar and the mortgage risk repricing makes me believe that rates will drift higher in the coming years.

The rich are different:Luxury Market Alive and Well.

NY Times has an excellent piece about the luxury market here:

$6 Million for the Co-op, Then Start to Renovate

Jumbo Mortgage Market Improves.

Fannie Mae put out a research piece highlighting the spread in the jumbo market vs the conforming "government guaranteed" paper. As you can see that the spread widened to about 1% and now is drifting down. The reason for the improvement is the market is repricing risk and we have seen improved jumbo mortgage rates especially for money good credits. These are the lower loan to value,higher FICO, and solid income loans. We continue to see higher rates for high loan to value scenarios. Most lenders/investors aren't doing 2nd's above 80%. WAMU and Indymac are out of this market. The market currently believes we will see a substantial decline in prices in the bubble areas so they aren't lending for risky loans. Scenarios above 80% on traditional jumbo lending require mortgage insurance from GE, AIG, etc. The monthly cost varies based on risk but can be $200-800 a month depending on loan balance and whether they agree to pledge their first born. All of the subprime jumbo mortgages are without mortgage insurance that's why they are trading at FIRE SALE prices. I believe we will see a clear distinction between the various risk levels. As in beef, a filet mignon is not a chuck roast. The market of 02-06 was so hungry for loans of any kind they couldn't tell the difference.

Image from Monty Python "The Meaning of Life"

The loans from 06 and 07 are the worst performing in history.

Moody's released a report highlighting the various vintages of subprime mortgages and their default characteristics so far. It shouldn't be a mystery to any of my readers that the worst loans were done right before the bubble popped. The reason being is that these were the last available buyers ("greater fool theory") or the most banged up refinance loan scenarios. The market had scraped the bottom of the barrel to approve people that wouldn't have been able to get a loan but the lenders were letting bad loans fund just to keep the volume up and maintain market share. Lenders who are now out of business which number over 161 according to our friends at the Implode-O-Meter would send daily emails and faxes to brokers advertising how crazy their programs were. It was a game of one upmanship. They then pass the loans to the investment banks like Lehman, Goldman Sachs, etc where they were packaged into billion dollar mortgage pools. The "lenders" didn't really care and the investment banks were just passing off the ultimate lending risk to other banks, hedge funds, and foreign governments. I heard a rumor that China has 300B worth of mortgage paper and a lot of it is subprime. They can't be happy. Maybe that's why they are sending shoddy products over. "You sold us bad loans, here are some badly made toys. Enjoy."

Subprime lending is still functioning albeit at much higher interest rates to compensate for the risk. The difference during the bubble years was .50-1%. Now most subprime investors are demanding 2-3 higher than prime and will only lend up to 85%. The sanity is returning to the market. Two forces in Wall St are fear and greed. The greed will return over the coming months and more products will be available to subprime borrowers but the rates will be much higher than Joe Sixpack is expecting.

100% Home Purchase after 04 can't refinance!

Thousands of prime full doc homeowners are shocked/angry to discover that they can't refinance under any terms. Washington Mutual, Bank of America, Indymac, etc don't allow above a 95% Loan to Value on jumbo loans after losing their shirts on risky loans in the last few years. Many people are coming out of adjustables or want a better fixed rate. These aren't risky cashout, stated deals. This is bread and butter lending. The banks and Wall St based money sources have completely pulled back on risk and this is terrible for client's trying to refinance anything above a conforming loan limit, (417k for a single family home.) The biggest problem is values in bubble market have collapsed back to 2004 or 05. These homeowners don't have equity and their loans are adjusting. This is the tip of the iceberg of the housing meltdown. The entire lending industry better get the math wizards in a room and whip up some products to do these loans otherwise you haven't even seen round 1 of this housing meltdown.

CNBC's Maria Bartiromo/Bill Maher Housing Bubble Video

Here is a clip from Real Time with Bill Maher which aired Friday September 28th. I have never heard the housing slump sound or look this good.