Loans A ‘Built-In Financial Timebomb’: Massachusetts
The Beverly Citizen has this from Massachusetts. “Second-quarter home foreclosures are up across the state and in Beverly, according to figures tracked by ForeclosuresMass.com. The combination of a cooling housing market, increased interest rates and creative financing like no-interest mortgages has put a fiscal squeeze on homeowners and left some unable to pay ballooning monthly mortgage payments.”
“‘What we’re seeing is a perfect storm,’ said Jeremy Shapiro, president of ForclosuresMass. That perfect storm is behind the foreclosure increases, say both Shapiro and Thomas McElligott, vice president and senior lender at Beverly Cooperative Bank.”
“Statewide, foreclosures are up 66 percent over the second quarter of 2005 and up 114 percent over 2004. In Beverly, the city has already recorded 53 foreclosures through June 30 of this year. That’s more than all of 2005, which saw 42 foreclosures. In 2004 Beverly recorded only 36 foreclosures for the year.”
“Homeowners who gambled on dropping rates and increasing housing prices find themselves in a financial vise that is squeezing them with mortgage payments increasing anywhere from $300 a month to almost $1,000 per month.”
“A homeowner with a $300,000 mortgage and an adjustable-rate mortgage has seen payments go up about $240 a month, McElligott said. If that homeowner, with the same $300,000 mortgage, had an adjustable-rate, interest-only mortgage, that monthly mortgage payment would go from about $1,250 to $1,980.”
“McElligott said his bank stays away from such ‘creative’ financing precisely because of that built-in financial time bomb. ‘At some point you have to pay,’ said McElligott. ‘Many consumers are only looking at their monthly payment. They don’t look ahead.’”
“Worse, said Shapiro, once in a creative-financing bind, many homeowners can’t get out by refinancing, even if they do look that far ahead. ‘They are damned if they do and damned if they don’t,’ said Shapiro. ‘They have an adjustable rate and see down the road and try to get into a 30-year fixed. But they either can’t afford the 30-year payment or they don’t qualify. Sometimes, both.’”
The Wellesley Townsman. “Demand for housing nationwide is down and that includes Wellesley, said Wellesley resident Karl Case, a nationally known real estate expert who teaches economics at Wellesley College. Buyers are concerned about rising interest rates and worry about the housing bubble bursting, Case said.”
“A local banker agrees. ‘There’s a lot of inventory and buyers are waiting for prices to fall,’ which hasn’t happened yet, said Brian Lynch, senior VP at the Wellesley Bank.”
“‘The most remarkable news is what has happened to the ’under $1 million’ market,’ said (broker) Elaine Bannigan. There is a glut in the category compared to last year, she said.”
“The lower-priced homes are smaller and may need work, and buyers are not as willing to work on them as they have in the past, broker Gail Lockberg said. ‘Properties that need work and are perhaps priced on the high-side are getting low-balled,’ added Steve Palumbo, executive at Hammond GMAC Real Estate.”
“‘Right now we’re selling the inventory on the shelf. In the fall, more will come on and we’ll still be heavy in the $400,000 to $800,000 range,’ Lockberg said. ‘Sellers are starting to get it, that it’s not their house, but the market,’ she said.”
“One of two things will happen: Prices will drop, or sellers will become more flexible when they get an offer and more willing to negotiate, Lockberg said.”
“‘People are making price adjustments,’ Palumbo said. ‘We’re recommending to our clients that we review [the price] after two weeks and determine if price adjustments need to be made.’ He added that he has not seen any ‘collapse in the market. We’re not in a state where we are seeing bankruptcies or foreclosures.’”
“McElligott said his bank stays away from such ‘creative’ financing precisely because of that built-in financial time bomb. ‘At some point you have to pay,’ said McElligott. ‘Many consumers are only looking at their monthly payment. They don’t look ahead.’”
All three legs of the three-legged stool which supported the bubble
– crazy financing, rapidly inflating home prices, and lean inventories of homes for sale — are burning at the same time, and the heat from each leg’s fire makes the other two burn hotter.
You mean people don’t plan ahead??? They only worry about their monthly payment???
“At some point you have to pay” ….no you don’t, real estate only goes up!!! …right???
SoCalMtgGuy
http://www.housingbubblecasualty.com (new post up yesterday)
It does always go up..
Either in price or in flames…
So if you were upside down and the house “happens to catch fire” Is the insurance payment limited to the actual value of the home? I’m wondering whether even arson won’t save fome of these FBs.
Great site, socal. That opening photo of all the “For Sale” signs made me laugh out loud!
Here in Tampa, we’ve got the same thing, only slightly less expensive: the infamous “$350K starter home”. I am amazed and amused that there STILL ARE a few people willing to pay that kind of money. Unfortunately for the vast majority of sellers out there, there’s not enough idiot buyers to go around. So sad…..yet so funny.
The sub-prime lenders can fix this mess. They will work with the borrowers and refinance them into a nice exotic loan products. Each new loan product will be more ingenius than the last. New teaser rates with 100 ways to make a payment. Hell they will create a loan product where you feel the BANK IS PAYING YOU. The borrower will use up whatever equity they have left or percieve they have according to the fraudlent appraisal, and then they can take whatever cash is left over from the refinance and go on a nice exotic vacation. SIMPLE SOLUTION TO THE WHOLE PROBLEM. YEAH WHEN PIGS FLY!!!!
I thought you were serious there for a moment.
I think the exotics are going, going, going and soon to be gone…
“Hell they will create a loan product where you feel the BANK IS PAYING YOU.”
Been there / done that. It is popularly referred to as “home equity cashout ATM financing.”
Also, I’ve been hearing whispers about the latest financial instrument (i.e.; scam) that will SAVE THE HOUSING INDUSTRY and therefore SAVE THE AMERICAN ECONOMY.
The 40-year mortgage. Now EVERYONE can afford to own an over-priced home! Sign up for one today!
you feel the BANK IS PAYING YOU.
I like that idea.
if all these stupid sheople panic and go south of the border, do you think our offspring will have higher IQs - collectively weed the dumb-ass herd???
‘Sellers are starting to get it, that it’s not their house, but the market,’
Until you pay off the mortage it’s the banks house…
“One of two things will happen: Prices will drop, or sellers will become more flexible when they get an offer and more willing to negotiate, Lockberg said.”
Translation: prices will drop if seller wants to sell.
I looked at that statement and thought it was complete doublespeak. prices will drop, or sellers will become more flexible What is the difference? Sellers will have to give up something to move their property and that either means cave in on low ball offers, fix the place up (for the same price), pay closing costs and down payments or throwing in the BMW with the deal. Bottom line - sellers have to give more.
…Because all of those things an imputed value.
“‘Right now we’re selling the inventory on the shelf. In the fall, more will come on and we’ll still be heavy in the $400,000 to $800,000 range,’ Lockberg said. ‘Sellers are starting to get it, that it’s not their house, but the market,’ she said.”
The market is currently undergoing a massive equilibrium adjustment to lower prices. Nobody with savings, a comfortable living situation, and a credit record worth protecting would be advised to buy until the uncertainty resolves, as the direction of resolution is clear (downward adjustment to market prices) and the magnitude will be large, but sellers are still in denial.
“One of two things will happen: Prices will drop, or sellers will become more flexible when they get an offer and more willing to negotiate, Lockberg said.”
One of two things will happen: Prices will drop, or sellers will lower their prices.
LOL. Yah, I caught that too…they’re spinning like their jobs depend on it (literally), but the market’s toast no matter how they say it.
What amazes me about articles like this is that some of the commentary suggests that this was all completely unforseen, like a natural disaster. This was the most predictable economic phenomenon imaginable - like predicting what happens if you try to inhale water. People take out adjustable-rate mortgages to buy homes they can’t afford and then - surprise! - they wind up in financial trouble when rates begin to climb back up from abnormally low levels.
There are plenty of guilty parties, but perhaps the most negligent have been the bank regulators, who have turned a blind eye to what was happening in plain sight - no-doc loans, fraudulent appraisals, predatory lending. These are the people who are supposed to be protecting the economy and banking system as a whole from the systemic risk posed by the recklessness of a minority of individuals. However, once it became clear to all that the regulators were playing along, the majority swarmed onto the field and it became a free-for-all.
“Success has a thousand fathers and failure is an orphan”
-JFK
I think part of the problem is that people are very ignorant when it comes to money, budgeting, etc.
Also, they have no conception of the time value of money or the impact of small changes on a large principal. For example, a rate goes from 4% to 5%, it’s only a 1% point increase, but it is also a 25% increase in the same rate. On a 300K mtge, the 1% turns into $250/month…which can’t be “absorbed” by someone that is already stretched.
Absolutely, Pen, and in general I’m all in favor of personal responsibility — if people make poor decisions, they should pay the consequenses. However, when idiotic behavior becomes as widespread as it has, we all invariably wind up paying for it — the economy suffers, property taxes become artificially inflated, and the taxpayers wind up bailing out failed banks.
I agree.
I also think, though..the the banks/regulators, etc., should have reigned things in long a go..now, we have gone from a “new” paradigm, to people not having a pair-a-dimes to rub together.
Part of it that many people haven’t been exposed to Depression Era or WW2 people. These people have so much to offer when it comes to life wisdom.
I agree that they have a lot of wisdom, but why, oh why, to they have to buy the biggest, ugliest, and toneau covered cars out there? It seems that any great generation person that is worth his salt has a large Caddy, Lincoln, or Crown vic, with gold trim and a toneau cover!
Because after 40 years of paying it forward, paying the bills and generally ‘buying at K-Mart’ they want the flashiest thing around - and I guess that means their father’s car.
Do you mean a vinyl roof? To me a toneau cover is something that covers the interior of a convertible when the top is down. Little used now that convertibles aren’t as difficult to get up and down as they once were.
They buy a Caddy, Lincoln, etc. because they want a V8, rear wheel drive car and they won’t buy German or Japanese cars and they are too F@CKING smart to buy a British car (i.e. Jaguar).
As for the Vinyl roof, you got me there…..but I suspect it has to do with the beautiful canvas tops from the 20s -30s.
you make an excellent point. i’m a financial advisor at a major firm. we’ve had eliot spitzer crawling up our intestinal track for a number of years. EVERYTHING we do is second- and third-guessed, documented, justified, etc. my clients can only the money in their accounts. an underwater homeowner can lose everything. far more damage will be done to people by unscrupulous lenders than a brokerage firm could ever do. eliot spitzer, where are you?
ATTENTION BLOGGERS - Better email, write ,or call Yellen at the SF Fed and tell her to raise rates. She sounds like she’s not going to recommend it be raised.
“What amazes me about articles like this is that some of the commentary suggests that this was all completely unforseen, like a natural disaster.”
Sorta like the surprised response to Hurricane Katrina last year? After a Fall 2004 National Geographic story prominently featured the looming disaster of a major hurricane striking NOLA? (BTW, Katrina was far from the worst-case scenario of a direct hit by a Cat-5 storm. Although it was Cat-5 on its approach to NOLA, the eyewall collapsed before landfall, downgrading the intensity to Cat-3, and it also veered to the east before hitting land.)
It has been argued that the eye travellig slightly to the East of NO is the worst case because then the winds funnel water first into lake Ponchatrain (sp?) from the East and then South into the city.
Only so because of levee failures. If the levees had held, Katrina would have turned out to have been a dodged bullet.
However, a direct hit by a Cat-5 storm, including tornadic wind damage and a far more catastrophic level of storm surge than Katrina delivered, would be another story entirely, punctuated by a far higher body count than the few hundred (NOLA) Katrina victims.
the most negligent have been the bank regulators
One point I would make on this comment is how much of this money came from outside the reach of regulators. GE and GMAC are some of the largest mortgage companies in the world now. Look at the hedge fund industry that consumes MBS paper to keep the carry trade going. Clearly this is beyond the scope of existing regulations.
Maybe not out of reach, if the regulators feel the need to protect hedge funds by artificially propping up MBS, in order to avoid a “too big to fail” event (like LTCM, 1998).
The main point here is you just don’t make loans based on real estate going up . You make loans based on ability to repay over the long haul . Take away all the loans that should not of been made and you would of had at least 30% less demand for the last 4 years . Take away the speculators and that’s another 30% demand that would not of been there .
The false demand of the speculators and loan applications that should not of been made is leaving so all you have left is the real demand,( a demand that isn’t high enough at current inflated prices ).
‘Properties that need work and are perhaps priced on the high-side are getting low-balled,’ added Steve Palumbo, executive at Hammond GMAC Real Estate.”
“‘People are making price adjustments,’ Palumbo said. ‘We’re recommending to our clients that we review [the price] after two weeks and determine if price adjustments need to be made.’ He added that he has not seen any ‘collapse in the market. We’re not in a state where we are seeing bankruptcies or foreclosures.’
Obviously, this guy is totally clueless. There are daily reports here in MA, where the increase in the foreclosure rate is reported. MLS inventory is growing daily, FSBOs inventory is growing, because brokers/agents are refusing listings if the seller’s expectations are too high, as they almost always are.
I know this will get some flack, but….
I suspect this will not deflate slowly, meaning a more another 12 months. I think the first “pop” will come in the next 6 - 9 months, as we are only 9 months from the beginning of next spring selling season. If people think a 30 yr fixed rate mortgage at 6.50% is “HIGH”, then that points to an affordability problem. There are only two fixes for that: 1) higher wages (ain’t gonna happen) and 2) lower prices (coming soon to a theatre near you).
The median income in MA is around 50K. Even at double that, the home buyer is stretched to buy a decent entry level home (figure $450K) in a decent area within an hour of Boston.
We are slowly moving from FBs to FSs (F@cked Sellers), but that will change as the RE folks start to turn the thumbscrews on the FSs. I have read that even the large brokerages have told their agents to refuse listings that won’t sell quickly and have “heard” that a veteran mtge person from a large financial institution said, “knock 20% off the current listing price”.
“I suspect this will not deflate slowly, meaning a more another 12 months.”
Please strike out “a more”.
I have stated this before, but my guess is 3 or 4 years to revert back to fundamentals. Probably will over-shoot the mean a bit so there may be big bargains 5 to 6 years out…
FSs for Everyone!
wow this is moving quick
ITS IN THE BAG - NOT!!!
___________________________________________
O.C. home gains just 4.2% past year
Is O.C. home appreciation history? Mid-July stats from DataQuick show the local median home price up just 4.2% from a year ago. If
that trend holds, July would have the smallest annual appreciation rate since July 1999. Plus, it’s all but a certainty that July with be the 9th straight month with O.C. homes sales failing to match the previous year’s pace. For the 22 business days ended July 18:
“Prices will drop, or sellers will become more flexible when they get an offer and more willing to negotiate, Lockberg said.”
Um, don’t those pretty much amount to the same thing?
Not exactly. The “price” is what is put on the listing, being more flexible means accepting an offer for less than the listed price or giving other concessions like leaving the appliances and putting on a new roof. When people are buying a starter house it’s very common for them to ask for the appliances as part of the offer.
It was pretty funny when we sold our first house. My wife about threw a fit that the buyers had the gall to ask for “her” washer. I explained to her that Sears had plenty of them in stock and then we didn’t have to move it.
Bonds starting to run here with rates dropping substantially over the past 2 weeks, especially on the apparently attractive short end of the spectrum - for those gamblers. There might be a few more options for FBs to refinance here to “soften” the landing?
I doubt the FBs have the FICO, equity or cash to do the refi.
Just wondering if this will play out quicker than usual. I have been assuming that peak to bottom is five years in housing, but “could it be different this time?”
Perhaps information moves quicker now for housing.
It might get to bottom quicker, but I don’t think that they would rebound any quicker. All those burned hands take a while to heal. It’s mostly psychology, both up and down, and it takes time before the zeitgeist returns to “maybe real estate isn’t a sucker bet after all.”
Jim-
usual? this has never been this bad before….
I mean Pete! whoops
Hovnanian Enterprises Inc. cut Friday its profit targets for the remainder of fiscal 2006, reflecting a combination of factors hitting lately at many of the nation’s home builders: slower sales, high cancellation rates and increased use of concessions and incentives to spur prospective buyers.
Ara Hovnanian, president and chief executive, also cited the Red Bank, N.J.-based company’s efforts to renegotiate “a significant number” of land-option contracts, saying Hovnanian’s “likely to incur walk-away costs” on some of them.
Time for another homebuilder share price rally, then?
Shaeffer recommended that ‘ September puts be liquidated to restrict losses’. Looks like a dead cat bounce to me.
‘Hovnanian’s “likely to incur walk-away costs” on some of them.’
Translation: While the value of land-owned never drops all the way to zero, the value of a call option to buy land can drop to zero if the value of the underlying land on which the option is written falls permanently below the strike price.
But that’s still better than if they had purchased the land.
“We’re not in a state where we are seeing bankruptcies or foreclosures.”
By which he really means:
We’re not in a state where we are seeing bankruptcies or foreclosures YET.
In the last cycle, the high point of the default notices was in 1996. The high point of trustee deeds was 1997. We are only at less than 50% of the default notices at this time. It might be ’some’ time before this cycle gets flushed out, what ever ’some’ is.
“We’re not in a state where we are seeing bankruptcies or foreclosures.”
Weren’t we reading a thread just last week about escalating foreclosures in MA? I believe Barnstable County was at the top because I remember commenting on how I thought Hyannis was largely responsible for Barnstable’s escalation. Guess this guy doesn’t follow the local press.
“The lower-priced homes are smaller and may need work, and buyers are not as willing to work on them as they have in the past.”
Another way the buyers got screwed — overlooking the amount of work a house required, and the cost of that work. You can’t check things out and get estimates if you only have ten minutes to decide whether or not to buy the only house available for more than the asking price.
Let’s say buyers will once again be unwilling to buy unless they have enough money left over from closing to actually pay for required repairs? Another reason to lowball.
This is a big deal in older areas like the Northeast. Some of these 2005 homeowners may go under because the roof gives out.
It only needs a little paint and paper…
and a kitchen, roof, furnace, siding, windows, flooring, bathrooms, plumbing, electrical, landscaping, doors, chimney, gutters, insulation, plaster, driveway, walkway………
Very true. Seeing that in Arlington,VA where you have thousands of WWII 2 bed/bath houses selling for $600k being renovated into $1-1.5mil yuppie homes. Sales for those are way off, because no one wants to risk the investment. Sales in the upper end are still happening, but these non-renovated boxes are sitting, and depreciating. This change in sales mix is actually driving the average price up here, when reality is the opposite. Interesting stuff.
Very true. Seeing that in Arlington,VA where you have thousands of WWII 2 bed/bath houses selling for $600k being renovated into $1-1.5mil yuppie homes. Sales for those are way off, because no one wants to risk the investment. Sales in the upper end are still happening, but these non-renovated boxes are sitting, and depreciating. This change in sales mix is actually driving the average price up here, when reality is the opposite. Interesting stuff.
Well some of this is the simple fact that with all the new construction and rehabbing that has been done in the last few years, the average house for sale is “newer” than pre-bubble. For a large percentage of people newer=more desirable. It is usually true that when there is an oversupply of housing, the least desirable is the most hammered by falling prices.
HomeownerMA and LVLandlord must be having lunch together in Hell.
I almost miss their unthinking generalizations, their childish presumptions, and their blustery pride. Almost.
At least MrIncomeStream still posts here to satiate such perverse yearnings
LOL take a hike GS!!
Just ribbing — I value your posts…
It was taken in the spirit given. I must say though that your response to being told to take a hike is a lot more civil then my wifes. With her I usually get an assault of middle finger waving and phrases that would make sailors cringe.
He can’t… he never leaves his computer!!!
Stay with us… enjoy the show and share your comments. Please.
ex-spurt
a drip under pressure- you’re only good if you called it a year ago
like us on this blog
What if you “called it” back in 2003?
Uh… Isn’t that the same thing?
whoops recession ralley ending already
stagflation scks
Can there be a recession if the media does not say so?
Kind of OT… but relative to a housing crash…
I have been getting reports of people beginning to get “student loan” collections notices. Some of these appear to be over 10 years old, with no correspondence for that time period from the lender. And in some cases, there had been no reports to credit bureaus about any outstanding student loan debt. (example report)
I did some research and learned that in December 2005, a special ruling the by US Supreme court was decided which ruled that the government can claim for repayment of student loans even on loans over 10 years old.
I am fairly sure there are many millions of people whom have large outstanding student loans. And if these people experience a financial crunch may experience additional financial crunch from outstanding student loans which apparently are somewhat resistant to discharge if the debtor is unable to repay.
In one report, I read that as the word gets out about this new ruling, many students will make decisions about their education, which may include finding cheaper schools to go to.
If schools experience a decline in attendance because of this, that may mean, those schools may have to reduce their expenses, which may include laying off workers. This may add to the other industries which are in decline due to the real estate slow down. And together, these effects may be cumulative in creating an even greater economic slow down. And that may mean that there would be even more pressure on real estate prices to drop.
Any thoughts?
My wife had a $2500 outstanding balance from the early 80’s and we were forced to pay or risk her credit rating. She swear4s it was paid in full, but who knows after all this time. I’m not sure how one would “prove” one’s innocence though after so many years. All bank records are gone etc.
Interestingly, the statute of limitation for child molestation by comparison is 5 years in most States, so it is interesting to see where our government places importance.
I wonder if we will see IRS Statutes and other debts made limitless at some point? Now that would truly be interesting.
Debtor’s prison anyone?
Take a look at an article I found, published in May 2006. It is titled Sallie Mae’s Success Too Costly?
Here is one interesting quote from the article:
For some borrowers, the system is unforgiving. But it has worked well for lenders like Sallie Mae, which has 10,000 employees in 19 states and manages $123 billion in student loans. Sallie Mae declined to give 60 Minutes an on-camera interview, saying they didn’t think they’d get a fair shake.
I think you have something with your reference to “debtors prison” comparison to the radical way laws student loans are handled.
This information is probably a very important warning to anyone considering taking out a student loan. The laws appear to be tweaked to the detriment of the “consumer” or borrower.
Any other thoughts?
“If you don’t pay Sallie Mae, then Sallie Mae gets to come after you in ways that virtually no other creditors in America can do,” says Elizabeth Warren.
Watch that 60 Minutes segment video
About time that they went after the dead beat students who partied on taxpayers money. If they can’t pay take their ss money or better yet arrest them and put them in a chain gang or stocks and let townspeople throw rotten fruit on them. Oh, you mean we can’t do that anymore? What is this world coming to?
That’s why the only safe way to default on your student loans is to pay them off with credit cards and then declare bankruptcy. What kind of idiots designed a system where people can’t default on some types of loans? Money is money, and you can always borrow money in an easier to get rid of form.
Thank you. You saved me from making the same suggestion. However, I would make this maneuver at least 9 months to a year before filing the bankruptcy and would make a few token minimum payments before filing to avoid the contention that you incurred the debt without ever intending to pay it or that you engaged in some fraudulent conversion of non-dischargeable debt into dischargeable debt.
The government obviously wants to get paid so they look out for themselves first by making student loans nondischargeable then hosing unsecured lenders.
Of course, the availability of student loans and significant part of them with subsidized interest has added to the ridiculous runup with tuition. That, and the fact that merely getting into some of these institutions seems to cloud ones judgment with money.
On NPR yesterday they said California foreclosures are up 100% over June 2005.
Up 100% from what?