The Great Housing Bubble Book

THE GREAT HOUSING BUBBLE: WHY DID HOUSE PRICES FALL?
The Great Housing Bubble is a fantastic resource for anyone looking to understand why home prices fell. The writing has exceptional depth and detail, and it is presented in an engaging and easy-to-understand manner. It is destined to be the standard by which other books on the subject will be measured. It is the first book written after prices peaked, and it is the first in the genre to detail the psychological factors that are arguably more important for understanding the housing bubble. There have been a number of books written while prices were rising that used measures of price relative to historic norms and sounded the alarm of an impending market crash. Economic statistics and technical, measurable factors show what people did, but they do not explain why they did it. The Great Housing Bubble analyzes not only what happened; it explains why it happened.


The author of The Great Housing Bubble, Lawrence Roberts, works in the real estate industry, and he lives, Irvine, California, the center of both the housing bubble and the subprime universe. Irvine's residential real estate market witnessed one of the most dramatic increases in prices of any market in the United States. His unique location and his position in the industry make him uniquely qualified to discuss the housing bubble.


The Great Housing Bubble is an easy read. It was developed section by section through a series of posts on the Irvine Housing Blog. With the feedback provided by 3,000 daily proofreaders, the writing is clear, concise, and accurate. Much of the work reflects the collective wisdom of this large and diverse community. However, the book is also a fully researched and supported academic work. Statistics used in the work are cited, and conclusions are drawn from academic literature and documented in an extensive bibliography and end notes. These academic research papers are used to support the author's arguments and lift the work from a series of unsubstantiated opinions to a collective, unbiased, and widely accepted view of the housing bubble.


The Great Housing Bubble concludes with a series of recommendations for preventing future housing bubbles. There are both regulatory and market-based solutions. These include changes in standard appraisal methodology, the revamping of our current system of loan standards and documentation, and a call to regulate the sales tactics of realtors. These solutions are carefully explained, and although they would be difficult to implement politically, if these proposals were adopted, future housing bubbles would be very unlikely.

Mortgage Industry will say NO more often.

In a move that will stymie thousands of would-be home buyers and homeowners, Fannie Mae announced another round of mortgage guidelines changes a few weeks ago that will have a huge impact.

Unlike past revisions in which Fannie Mae tightened debt ratio and credit scoring requirements, however, the newest underwriting updates home equity and home buyer downpayments.

This is consistent with the emerging underwriting philosophy that Collateral is King.

No home equity, no downpayment, no loan.

Effective December 13, 2008, Fannie Mae will enforce the following single-family residence restrictions:

• Primary residence, "cash out" refinances are limited to 85% loan-to-value



• Second home, cash out refinances are limited to 75% loan-to-value



• Investment properties cannot be refinanced without a 25% equity position

Each bullet point represents a 5 percent tightening over the previous guidelines.

Now, to be clear, Fannie Mae isn't the only source for mortgage money. The others are comprised by the FHA, the VA, and an innumerable amount of portfolio lenders. To date, these groups have yet to announce similar loan-to-value restrictions.

But, because Fannie Mae (along with Freddie Mac) guarantees almost half of the nation's home loans, it does swing a big stick. Historically, when Fannie Mae gets tight with its money, the other groups tend to follow.

Starting 45 days from now, qualifying for a conforming mortgage will require more home equity than at any time since 2003.

Now, there are a lot of people sitting around right now, waiting for mortgage rates to fall before buying or refinancing their home.

I'd offer a more prudent idea: Just get on with it already.

None of us can predict what where mortgage rates will go. Recession, inflation, whatever -- it's a big mystery. But, we do know with 100% certainty that guidelines will tighten effective December 13, 2008, and it will prohibit Americans from getting access to mortgages.

We know this because Fannie Mae published it on its Web site.

If you're buying a home or in need of a refinance, consider moving up your timeline. If rates fall after-the-fact, you can always try to refinance into something less expensive. But if guidelines shut you out, there's nothing you can do about in hindsight.

If you know you need a conforming mortgage or a jumbo mortgage, just take care of it. Great low rates don't mean a thing if you can't get qualified. And starting December 13, 2008, the qualifying hurdles are going to be raised.

LIBOR: The Driver of Jumbo Rates.

With the London Interbank Offered Rate (Libor) at record levels, thus hurting short-term borrowing, as well as blowing up many jumbo mortgages linked to the floating rate that have begun to adjust, it's useful to remind yourself how exactly Libor works. Click image to enlarge.

First Time Buyer Credit: Really a 0% Loan

I’ve been seeing quite a few agents and lenders using the $7,500 1st Time Buyer “Credit” in their promotional materials aimed at first time buyers. Be careful out there as many people “explaining” this “credit” to first time buyers are not including the part where it has to be repaid. The first payment of $500 begins two years after you receive the “Credit” and continues for 15 years. If you sell the property at a profit before the $7,500 is paid back, the balance is due when you sell. On the bright side, it does appear that if you do not have enough “profit” to repay the interest free loan of $7,500…it is forgiven.

Excerpted from FAQ’s On the $7,500 1st Time Buyer “Credit”:

“ …Because the tax credit must be repaid, it operates like a zero-interest loan….The program is called a tax credit because it operates through the tax code and is administered by the IRS. Also like a tax credit, it provides a reduction in tax liability in the year it is claimed.”

“…the tax credit must be repaid. Home buyers will be required to repay the credit to the government, without interest, over 15 years or when they sell the house, if there is sufficient capital gain from the sale…if the tax credit is claimed on the 2008 tax return, a $500 payment is not due until the 2010 tax return is filed.”

“…this will maximize the stimulus for the housing market and the economy, will help stabilize home prices, and will increase home sales.”

It’s not that I’m against a stimulus package for increasing homes sales, but you have to wonder how many people see CREDIT and understand LOAN? They really should call it a $7,500 1st Time Buyer Interest Free LOAN. And for all you mortage and real estate professionals, maybe we understand why the government has to call it a TAX CREDIT, but to be sure your clients know the amount has to be repaid, you should call it an interest free loan when explaining it to your clients. As always consult a CPA or accountant for further clarification.

Financial Crisis Has Hit Main Street

Jumbo Mortgage rates moved up sharply over the past week as the credit markets ground to a halt. Borrowers with good credit and a 20% down payment today could qualify for a 30-year fixed-rate mortgage at 7.625% with a one-point fee. That's up from 7.25% on Friday of last week.The rate has been trending upward from 7% since the financial meltdown gained full speed in the last few weeks. Investors are pricing in the increased default risk and the national decline in home prices. No area is immune as noted by the latest Case-Shiller numbers. The move by the US government to pass the mother of all bailouts has been awaited anxiously by the entire credit industry. If you can't save housing you can't save the financial system nor the economy from a financial meltdown/great depression scenario.

However, the worst development is adjustable rates have dramatically increased. Bloomberg reports that the international rate banks charge each other for one year loans, known as the London Interbank Offered Rate or LIBOR, moved LIBOR rates to 4.08% as markets were locked up with the meltdown in credit markets. LIBOR was in the mid to low 3% range throughout the summer. If we move to LIBOR rates of 5% range that would push ARMs to about 8%. The meltdown of household names is the best opportunity for people to refinance or purchase as investors want something safe/secure. Nothing is safer in this market than solid credit client's looking for a phenomenal jumbo mortgage rate. Now is the time to refinance as rates are likely to get worse over the next two years and guidelines to get more restrictive. The best rates in a generation are behind us as banks recapitalize and governments work to save a financial system on the edge of complete panic.

About 6 million U.S. mortgages, including almost all subprime home loans and 41 percent of prime ARMs, are linked to LIBOR, according to First American CoreLogic, Bloomberg reported.

Depending on a Bailout: Slide Show

Making Sense of the Mortgage Meltdown

View SlideShare presentation or Upload your own. (tags: kedrosky milken)

Great slide show on making sense of the mortgage meltdown from a seminar today at the Milken Institute in Los Angeles. They always have the best and most data-rich slides, bar none. Press the easel button in the viewer to blow up it to full screen.

Mortgage Rates Falling

With jumbo mortgage rates moving faster than anytime in recent history, let's take a few minutes to recap what's going on, and what's causing rates to be so volatile.

First, the bailout.

Late Sunday, Congress drafted the Emergency Economic Stabilization Act of 2008 bill and it goes to vote sometime today. The key provision in the bill that's helping mortgage rates is on Page 110.

The passage reads, summarized:

• The U.S. Treasury gets access to $250 billion immediately



• The U.S. Treasury has to ask the President for its next $100 billion



• The U.S. Treasury has to ask Congress for its next $350 billion

Because of how the bill is worded, the U.S. Treasury can't go spending taxpayer money willy-nilly, lessening the likelihood of inflation nationwide. This is good because anytime inflation pressures ease, mortgage rates stand to benefit and this is one of the catalysts for today's rate drop.

Another reason why rates are falling is death of banking giants Washington Mutual and Wachovia.

It's no coincidence that these two institutions shut down within 3 days of each other. Both were heavy pushers of the now-famous Negatively Amortizaing Mortgage, the time-bomb assets of which clogged the banks' respective balance sheets.

Consider: When Washington Mutual was rescued bought by JP Morgan Chase & Co. and the buyer devalued WAMU's portfolio by a massive $31 billion, it forced investors to reassess Wachovia's mortgage portfolio, too.

Within minutes, Charlotte-based Wachovia lost a quarter of its value and was a Dead Man Walking. Then, before even a weekend could pass, Wachovia had been packaged and sold to Citigroup with the help of the U.S. government, leading to another $42 billion in mortgage portfolio writedowns.

That's $73 billion in mortgage losses practically overnight.

Surprisingly, this is good news for mortgage borrowers because each time a bank acknowledges losses like this, the mortgage market as a whole gets one step closer to discovering what an individual home loan is really worth on Wall Street.

In fact, it's this exact conundrum that defines the mortgage market domino chain, dating back to July 2007. If markets could just accurately answer "What is a mortgage worth?", this little credit mix-up thing would be over.

WAMU and Wachovia hitting the showers brings us one step closer, and at least for today, brings mortgage rates down.

(Image courtesy: The Wall Street Journal Online)

The American Empire is Burning:Pull up a chair.

Although I’m sure that, like I, many of you are not at all surprised by the extent of the financial crisis we have seen to date, I’m absolutely certain that most of you are shocked by the extent government’s response.

This decline was inevitable… it was obvious and for years many have taken to writing/blogging and debating it’s various details but could anyone have ever predicted that as a result of this ugly episode the federal government would violate our economic and social system to such an extent?

I know I didn’t… I now see that I was naive.

In anticipation of the decline I had envisioned the outcome many times… Americans tightening belts, losing their jobs and then their homes, increases in crime, a “poverty effect” that would reverse most of our gains from the nineties leaving the country trapped in a vicious-circle pushing us into a long and deep recession always teetering on the brink of depression.

Yet… I suppose I should feel foolish admitting this now… I had always expected that households and firms would be largely on their own to navigate the down-side much as they had the up-side of this historic and nearly multi-decade boom.

I say “largely” because our government has, for generations, had at its disposal many well known tools for engaging tough economic times (unemployment insurance, FDIC, fed funds rate, lender of last resort etc. etc.) and although this bout looked to be fairly severe, they seemed to me to be adequate.

Never did I EVER expect that the federal government would force American taxpayers, and their many generations of descendants, to essentially be the sole bearers of this epic catastrophe.

It doesn’t matter if you were prudent, if you planned, if you resisted reckless behavior or were even thrown to the side, unable to keep up with all the mayhem.

You will now PAY for the aftermath.

And if that’s not enough, you’re not simply being drafted to defend our social system by subsidizing the failures of all the individual ignorant greater fools… you are going to be the FINAL greater fool for the WHOLE system itself.

If congress passes the proposed legislation and the president signs it into law (as is likely), all private financial institutions, even foreign institutions will clean their balance sheets of junk mortgages, credit card debt, car loans, student loans and other nearly worthless assets on the back of your labor.

I want to repeat a point that I made in a prior post.

Many of these private institutions are THE VERY SAME that lobbied hard for sweeping new bankruptcy reforms that now make it harder than ever for individuals to seek shelter during times of personal financial hardship.

If you’re late on your credit card debt, these institutions will hammer you with fees that can, under certain circumstances, eventually exceed the debt itself… if you default they will ultimately sell that debt to a collector that will stop at NOTHING to squeeze you for every last penny.

This bailout scheme will create a massive multi-generational transfer of wealth from the many average American households and firms to the very few wealthy, elite and well connected.

Let’s remember that these actions are coming at a time when our stock markets have declined less than 25% from their prior peaks and absolutely NOT in the context of a calamitous depression.

This is an absolute disgrace and I’m convinced that no other generation before us would have ever conceived of this level of cynical tyranny.

There is no liberty… you are not free… America is truly a collapsing empire with only hollow ideals and empty slogans left to remind us of our once proud ambitions. Don't believe me? Our dollar is down 6% since last Thursday vs the EURO. That is an enormous move in the currency markets. Foreigners don't like what they see, neither should you.

GOVT In Action: Jumbo Fixed Rates Drop

Mortgage rates dipped over the past few days as investors shunned stocks and purchased mortgage securities backed by the federal government and solid prime jumbo loans.
Borrowers with good credit and a 20% down payment today could qualify for a 30-year fixed-rate mortgage at 5.50% with a one-point fee. That’s down from 6.00% on Friday of last week.
The rate has been trending downward from 6% since the government took possession of mortgage buyers Fannie Mae and Freddie Mac on Sept. 7. Investors now feel comfortable buying those companies’ mortgage securities, and that lowers rates to consumers. The move by the US government has had the needed impact. If you can't save housing you can't save the financial system nor the economy from a financial meltdown/great depression scenario.

However, adjustable rates have improved much more. Bloomberg reports that the international rate banks charge each other for overnight loans, known as the London Interbank Offered Rate or LIBOR, more than doubled and then moved lower as the FED and European Central Bank moved to inject money moving rates to 2.95% as markets were spooked by the bankruptcy Monday of Lehman Brothers and the death rattle of AIG. The meltdown of household names is the best opportunity for people to refinance or purchase as investors want something safe/secure. Nothing is safer in this market than solid credit client's looking for a phenomenal jumbo mortgage rate.

About 6 million U.S. mortgages, including almost all subprime home loans and 41 percent of prime ARMs, are linked to LIBOR, according to First American CoreLogic, Bloomberg reported.

Avoiding the Jumbo Mortgage Man

How do you avoid paying jumbo mortgage rates on a jumbo-sized mortgage?

You avoid taking your mortgage to a Wall Street lender, that's how.

It's pretty simple when we break it down.

---

The word "jumbo" is a Wall Street-specific term for home loans larger than $417,000. In certain "high-cost" areas, the number is $729,750.

Lately, rates on jumbo mortgages have been terrible compared to its cousin, the conforming mortgage. Plus, jumbo mortgages carry higher loan fees.

The price disparity is even worse for so-called "Super Jumbo" mortgages. A super jumbo mortgage is similar to a jumbo mortgage, but bigger.

But the thing is, the terms "jumbo mortgage" and "super jumbo mortgage" -- these are conventions of a Wall Street-bound loan. Just because your loan size is over $417,000 doesn't mean that you have be subject to the jumbo and super-jumbo rules.

To avoid them, just make a choice avoid Wall Street mortgage lenders when your loan size exceeds your local conforming loan limits. This means bypassing your neighborhood Big Bank retail branches in favor of a niche banks that harbor no allegiance to Fannie Mae or Freddie Mac.

Finding banks like this isn't always easy, but it's worth the effort. This is because when a lender makes its own rules, its mortgage rates tend to be lower, its downpayment requirements tend to be smaller, and its underwriting process tends to be smoother.

These are all good things when your mortgage is greater than $417,000.

Consider these mortgage scenarios from a sampling of local banks. Each example carries a corresponding mortgage rate in the low-to-mid 6-percent range:

• $700,000 mortgage with 20 percent down, primary residence


• $1.5 million mortgage with 30 percent down, vacation home


• $2.5 million mortgage with 30 percent down, primary residence

Now, compared to what Wall Street lenders are offering, not only are the small bank rates up to 2 percent lower, but they're not accompanied by discount points, either. And that's even giving Wall Street the benefit of the doubt -- most Big Bank lenders won't hardly touch a jumbo or super jumbo mortgage with a 10-foot pole anymore.

The irony here is that wealthiest Americans often have private banking relationships with firms like Chase, Bank of America, and Citi among others but their private banking relationship is ill-equipped to handle the mortgage needs of a high net worth client anymore.

In 2005, the banks performed admirably for their wealthy clients. Today, not so much.

So, the best way to avoid paying jumbo mortgage rates on a jumbo-sized loan is to get out from Big Bank mentality and get your mortgage funded from somewhere other than Wall Street.

Jumbo mortgage rates are expensive. Niche, local bank mortgage rates are not. If you're a jumbo homeowner and you have a local banking relationship, it may be wise to call your branch to get a better rate quote.

And, if you don't have a local bank to call, know that you can always call or email me. I lend in 42 states and have niche banking relationships in all of them. If you can't find low rates for yourself, I'm happy to find them for you.

Millions of home sellers failed Econ 101?

We are going to keep this simple because millions of people must have failed Econ 101 or missed the month of supply/demand charts and it's influence on prices.

If you had a car dealership full of cars that weren't selling what do you do?Hey maybe have an enormous sale:

This is the current for sale inventory of existing single family homes in the U.S.:

from our friends at Calculated Risk.

Maybe the millions of sellers should pore a huge cup of coffee and wake up to today's market. But, who am I to judge that asking prices are too high? Maybe these sellers are aware of 5 million wealthy Asian and Arab buyers that are dying to move in and pay full sticker price. Sure and Santa Clause hangs out with the tooth fairy in the Cayman Islands during August summer break.

The way this standoff resolves itself is with declining prices to meet the available buyers or staying stuborn and waiting for the market to rise up to the current asking prices. Homes are selling every day... that are priced right. And now for a laugh from my favorite newspaper comic when I was a kid. Calvin and Hobbes.

Larger Version of comic.

Converting Your Primary to Investment Property: You may not qualify.

When a homeowner buys a new home, he has 3 options of what to do with his current residence:

1. Sell the home, paying off the mortgage in full
   
2. Keep the home as a second/vacation home
   
3. Convert the home to an investment property

The most common action plan is the first one -- sell the home and pay off the mortgage. However, with home prices poised to rebound, some savvy homeowners are trying to avoid "selling low".

Unfortunately -- as of August 1, 2008 -- waiting out the market won't be so easy.

Burned by foreclosures and wary of risk, Fannie Mae issued new conforming mortgage guidelines that specifically apply to home buyers planning to convert an existing primary residence into a second home or investment property.

Among the highlights of Fannie Mae's Changes:

Selling the primary residence
If the new home being purchased closes prior to the existing home's sale, both payments must be used to qualify the buyer for the new mortgage.

Converting to a second home
If the home has less than 30 percent equity in it, the home buyer must show 6 months of PITI reserves for both properties to qualify for the new mortgage.

Converting to an investment property
If the home has less than 30 percent equity, its rental income may not be used to help the buyer qualify for the new mortgage.

If it seems like mortgage rules are getting strict, that's because they are. And they're expected to get tougher, too. With each foreclosure and high-profile bank collapse, mortgage lenders tighten up their guidelines just a bit, freezing out the "fringe" borrower from access to mortgage money.

Mortgage rates may rise through 2009, or they may fall. We don't know. But what we do know is that borrowing money to buy a home will be tougher.

If you plan to buy a home in the next 12 months, consider moving up your timeframe or -- at least -- planning ahead. Guidelines for jumbo mortgage programs are likely to follow as Fannie/Freddie set the tone for the overall market. Understanding the mortgage rules and how they can change may be the difference between getting approved for a home loan, or getting turned down.