An Increase In The Use Of Incentives: CEO
Some housing bubble news from Wall Street and Washington. CNN Money, “In the latest sign of trouble for the battered real estate market, one of the nation’s top home builders warned Tuesday that it has yet to see the normal start of the spring home buying season, as it reported sharply lower sales for the first three months of the year. D.R. Horton, the nation’s No. 2 home builder, reported that the number of new homes it sold in its fiscal second quarter fell nearly 37 percent.”
“‘Market conditions for new home sales continue to be challenging in most of our markets as inventory levels of both new and existing homes remain high,’ said a statement from chairman Donald R. Horton.”
“The company said it continues to see an increase in the use of sales incentives in many of its markets. And it said that its cancellation rate, which calculates sales orders cancelled divided by gross sales orders, was 32 percent in the quarter, which it said was essentially unchanged from the first quarter.”
“The worst declines were in California, where volume was down 59 percent, and value of the homes sold fell 56.8 percent.”
From Reuters. “It has become more difficult for many buyers to obtain mortgages as lenders have tightened their underwriting standards. The steeper decline in the dollar value of D.R. Horton’s home orders, relative to the number of orders, suggests that some buyers are ‘downsizing’ to buy homes they can more easily afford.”
“First-time home-buyers account for about 40 percent of D.R. Horton’s sales.”
“The company has contracted some operations to prepare for a slowing housing market, including a reduction in the number of lots it controls.”
From Bloomberg. “The average price for a D.R. Horton house ordered in the quarter fell 6 percent to $260,373 from $276,660 a year earlier. Horton said in the statement ‘we continue to see an increase in the use of sales incentives in many of our markets.’”
The New York Times. “Some of the problems afflicting mortgages sold to borrowers with weak, or subprime, credit increasingly appear to be cropping up in loans made to homeowners who were thought to be less risky.”
“In February, 2.6 percent of Alt-A loans were delinquent by 60 or more days, up from 1.22 percent a year before, according to FirstAmerican LoanPerformance.”
“Until recently, mortgage companies had been able to sell loans to Wall Street banks and other investors. ‘Now you are selling at par or lower in some instances,’ said Thomas M. McCarthy, a managing director at a real estate investment firm that brokers the sale of mortgages. ‘It really throws the business upside down.’”
“‘Alt-A seems to be located regionally in spots where the market is having a great deal of difficulty, particularly in Las Vegas, Arizona and Florida,’ economist Mark Zandi said.”
The Financial News. “Trading volumes of Alt-A mortgages, which are considered less risky than the US sub-prime sector, have hit a wall in the past month as banks reported problems selling the loans in the secondary market.”
“Analysts are warning this is the second problem to emerge after those in the higher risk sub-prime market began in January.”
“Mehernosh Engineer, senior credit strategist at BNP Paribas, said: ‘This is starting to look more like what happened in 1991– a consumer hard landing. Sub-prime and Alt-A is more like a $3.5 trillion problem, which will progress gradually through 2007 and 2008.’”
“M&T Bank last week issued a profit warning after it fetched low bids on mortgages it tried to sell in the secondary market. M&T said it found ‘fewer bids than normal and the pricing of those bids was lower than expected.’”
“Mark Adelson, head of structured finance research at Nomura Securities in New York, said: ‘There’s not less interest, it’s just that the price is worse, which is not what M&T wants to hear. You can sell the loans, it’s just that if you’re greedy, you’re not going to get the price you want.’”
“‘There’s no question the credit problems we’ve seen in sub-prime are blending into Alt-A,’ said analyst Matthew Howlett. ‘It’s reflective of the poor underwriting that has gone on in this sector.’”
“Howlett said part of the problem was that Alt-A lenders had lowered their lending standards. ‘We’re going to see more Alt-A loans perform badly because they’re not traditional Alt-A loans,’ he said. ‘They’re sub-prime.’”
“Subprime lender New Century Financial Corp. has asked a federal bankruptcy judge to speed up the auction and sale of its lending platform so that the business isn’t wiped out, court papers show.”
“New Century said it wants to sell the platform by early May, and sees an ‘exigent and immediate need’ to set up bidding procedures, according to a late Monday filing.”
“‘There is a narrow window of opportunity,’ wrote Marcos Ramos, a lawyer representing New Century. ‘Indeed, it might be difficult to pursue and complete a sale of the loan origination platform after early May because the debtors have ceased originating loans.’”
“Prospects for a US growth rebound in the second half of 2007 have dimmed as the housing recession deepens and businesses cut spending, according to economists surveyed this month by Bloomberg News.”
“The subprime problem ‘is a brand-new kind of shock,’ said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. ‘The data we’ve seen lately is consistent with an economy that’s just not picking up.’”
“‘No one’s sure of the scope of the problems,’ said Harris. ‘We don’t have a lot of history to draw from in estimating the impact. It’s difficult to quantify.’”
“‘Since the risks to both economic growth and inflation are up, it makes the Fed even more uncertain,’ Lehman’s Harris said. ‘The Fed is a deer in the headlights right now. They don’t know which problem to address.’”
From MarketWatch. “The subprime mortgage crisis has re-ignited scrutiny of the industry and people who broker home loans. The main problem is that, counter to common perception, mortgage brokers do not represent the borrowers who pay them for advice. Instead, they are more like independent salespeople who are often paid as much by the lenders offering loans as the borrowers.”
“As the housing market boomed, mortgage brokers’ influence grew as they became involved in arranging the majority of home loans. ‘We all have some culpability,’ said Steve Heideman, a mortgage broker who heads an organization dedicated to improving disclosure in the business. ‘The problems and abuses are happening because brokers see it as their right to make as much money as they can on a loan.’”
“There’s a basic problem with mortgage brokers being paid by lenders as well as borrowers and ‘very few’ people know this happens, he added.”
“‘It’s a dirty little secret of this business,’ he said. ‘It shows a lack of confidence on the part of a mortgage broker to not tell the client what they’re making on the back side.’”
“The subprime problem ‘is a brand-new kind of shock,’ said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York.
Remember that scene where Bruce Willis throws the body out the window in Die Hard and it smashes the police car? “Welcome to the party, pal!”
No kidding.
This financial shock is only new to those who haven’t been hanging out on this blog for what, two-plus years?
I’m not so sure, more like those that have had their heads in the sand.
The subprime problem is a brand new kind of shock, said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York.
This guy confirms what I have long suspected, about the dangers of an expensive education which I bet he has received. It could cost you your common sense. “Welcome to the real world, pal.”
I doubt those ivy league investment bankers lost their common sense. If you said they have lost all morals, then I would agree with you 100%. Investment bank economists and analysts are nothing more than propaganda ministers, 99% of the time. Stephen Roach might be one of the exceptions, IMO.
Every large investment corp. has their resident bear/contrarian writing analysis for the CYA factor. I always find it amazing that one bear is all it takes to balance out the scales vs. a thousand bulls.
The people in the banks are indeed quite smart, though many may be naive.
They give their best advice to their own traders & bankers of course. What they say for the outside is always calculated.
Henry Blodget was completely correct when he told his own firm’s bankers and traders that the companies were trash; he was just naive enough to write it down as opposed to the untraceable channels they’re supposed to use.
They talk up or talk down their book.
He has a damned good idea of the problem.
I was given a detailed spreadsheet by this guy’s minions almost a year ago.
They have a very good clue. Sorry can’t say more.
“‘No one’s sure of the scope of the problems,’ said Harris. ‘We don’t have a lot of history to draw from in estimating the impact. It’s difficult to quantify.’”
This is the chief economist from Lehman. “We don’t have a lot of history” Hey, Pal, did you marry the bosses daughter to get this job and come up with this crap report. If you stop sniffing that “white stuff” at lunch time, and read this Blog, you would have enough research and projections, that even you, might be able to venture an educated opinion as an economist. And people pay big money to these morons.
The best part of my revenge is that I earn not once Cent, for my efforts~
We can’t be bought or sold.
“No one’s sure of the scope of the problems,’ said Harris.
Come on now Mr Harris. You may not know a lot, but I could bet a prime mortgage that you have an idea of the scope of the problem. It is just that saying it may not go down too well with your employer and could cost you your job and your lifestyle. That’s what you get for trading your conscience for hard cash.
lazarus,
I did not read down before posting my comment above. Sounds like we’re on the same page! A bunch of douche bags, IMO.
“Hey, Pal, did you marry the bosses daughter to get this job and come up with this crap report.”
…but I could bet a prime mortgage that you have an idea of the scope of the problem.
No question about it.
I have long wondered if at these
large institutions in fact 2 reports are prepared.
One is “public facing” the other “internal confidential”.
Otherwise, how could they possibly stay in business?
The creeping of problems into the alt-a market could be a tipping point. Actually, to be more accurate, it is the mainstream realization of the already existing alt-a problems, that will be a tipping point.
Todays news is a glimse of these problems being apparent. Until now, the news has always been “will it happen”.
Now it is apparent that it is. You can replace “alt-a” in the recent stories with “sub-prime”, and the stories will be identical to 6 - 8 months ago.
This should convince many more people, especially those with money at stake, that the rate of descent for the RE market is real, and accelerating.
Have posted before, the volume of ARM resets peaks for sub-prime end of 07, peaks for Alt-A in 2010-11. In 2010-11, the flow rate of Alt-A’s resetting will be at least twice what it is now. However, through 2007, the rate of subprime resets will remain around 10 times the rate of Alt-A resets. So I think subprime will remain the bigger news story for a while, at least. However I agree with Dave’s point that the realization that subprime is not the only problem does provide a further psychological blow.
I’ve wondered about this before. I assume you’re referring to “The Chart” from Credit Suisse. I think the ‘Alt A’ category is traditional 5 year ARM, while ‘Option ARM’ category is also Alt A listed at the drop dead reset date. A lot of those will reset sooner as the principal spirals upward. And does the existence of the ‘Unsecuritized’ category imply that all these others are sold off already? That’s crazy.
What I miss are the hard-luck stories from Alt A. I feel that they’re thoroughly unrepresented in the news. I’ve shed all the tears I have to give for subprime… I want to know how my stated income brethren fare! Like that Shimasaki guy “You’d have to make, Oh My Gosh, $90k to afford a condo.” Truly, priceless.
I’ve shed all my tears for the sub-prime guys, too.
I’ve got lots a Kleenex left over if anyone needs them.
It’s like a string of financial i.e.d.’s going off, for years…
Inland Empire Defaults, my rotiserie pick. (looked better on paper, but the season is young)
…A lot of those will reset sooner as the principal spirals upward…. Yeah, I was thinking the same thing. That makes estimating “max reset date” pretty hard. But it does mean that the long grinding bear market after the sharp declines may be shorter than some are anticipating.
“In 2010-11, the flow rate of Alt-A’s resetting will be at least twice what it is now.”
Will this foreseeable train wreck create an ongoing slow decline in the U.S. housing market over the next four years and beyond, or will some form of intervention or general market correction wash the sleight clean before hand? It seems as though the potential for a Japanese-style ongoing slow long-term (17 years?) slide in housing exists for the U.S.
I thought Alt-A Option ARMs become fully amortizatable loans once a certain debt level is reached, 115-125% LTV. With prices declining and most borrowers choosing to pay the minumum and adding to the loan balance, will the Option ARM reset start earlier than forecast? Will lenders ramp up the pressure early based on falling home vaules or will they wait until the trigger level is set by the original appraisal amount?
They become fully amortized as low as 110%. In fact I think most are 110 or 115. These will go off starting about now and all thoughout 2007.
In this calculation the property price is fixed at the date of purchase. But increasing principal due to neg-am will indeed trigger a fully amortized schedule once it reaches 110-125% LTV.
Good point (all of you) about the increasing principal bringing about quicker resets, at least for those with option-ARMs. Do you think the “Alt-A” category on the Credit Suisse chart includes such a possibility? I thought it wouldn’t, because of “option ARMs” being broken out as a separate category.
“‘Alt-A seems to be located regionally in spots where the market is having a great deal of difficulty, particularly in Las Vegas, Arizona and Florida,’ economist Mark Zandi said.”
The difficulty, Mr Zandi, is affordability. Once A-credit borrowers no longer qualify for home prices with their current incomes, the only option left is alternative finacing. The areas you mention have affordabilty issues, and thus the proliferation of Alt-A lending. Sub-prime really is not a factor in this equation because every area has it’s lousy borrowers. But when even good credit borrowers cannot qualify, you need to find a solution. Enter Alt-A.
Someone was confused about the defference between Alt-A and subprime over at “bits bucket” and I offered my definition. I’ll throw it out here too for anyone still wondering. The individual was asking if the the difference between the two had something to do with loan types, ie a 30yrfxd being Alt-A and an Option ARM being subprime. That is not the way it works at all. The difference between the two is all about credit score, really. Anything sub-600 FICO is usually considered subprime, regardless of the type of loan, be it an adjustable or fixed rate. The cataogries have nothing to do with LTV’s either, for 100% financing exists in Alt-A, subprime, and even straight A-paper deals. When you think of Alt-A, think of everything being someone with over a 640 FICO score (recently raised to 660 and even 680), but that for some reason couldn’t qualify going straight A-paper. Now, the difference between these two is this: A-paper fully documents all information provided on the application for qualifying purposes. Alt-A, on the other hand, eliminates having to document one or all of the normally documented items on the underwriting checklist (ie the No-Doc loan). In many cases you have a A-credit borrower, but for some reason a piece of the puzzle is missing, whether it be a lack of reserves or inability to verify sufficient income. This is where Alt-A steps in. But to reiterate, it has nothing to do with loan type. You could have a 30yrfxd A-paper(good credit borrower with everything documented), a 30yrfxd Alt-A (good credit borrower with one or all items not being documented), or a 30yrfxd subprime (a sub-credit borrower with everything documented or minimal documentation. Minimally documented subprime you might want to call it Alt-subprime). The same is true for OptionARM’s. You can have this loan type in any of the three catagories mentioned above, or any loan type for that matter. Instead of looking at it from the loan type perspective, look at it from the underwriting guidelines perspective.
well put. Thanks for the clarification! Good to have those in the biz on this board (or at least, those who until recently were in the biz).
hope your post-broker life is going well thus far…
I might add that the difference between A and Alt-A is rate and/or fees. Like I said, you can have a 30yrfxd in A-paper and in Alt-A. But, because the lender is assuming a higher risk by eliminating one or many of the normal qualifying procedures, the rate and/or fees will be increased accordingly. A straight A-paper 30yrfxd might be 6%, whereas the same 30yrfxd loan done as an Alt-A stated/stated might be 6.75 or even higher. That’s why when the market was cooking people where loving the Alt-A because of the higher yield over A-paper. As in anything, the higher the risk, the more potential gain. But it’s a two-edged sword. The higher the risk can also mean the more the potential loses.
That was a great breakdown. I just copied and sent this off to a fellow bear who just sent me a couple of interesting articles.
Thanks, ex-nnv.
BayQT~
ex-nv….havent been on the blog in a while. Im sure it’s common knowledge but, what happened to make you an ex? (i’m guessing its the downturn in the industry but was just curious if you found religion or some other external factor is in play). Also, what do you do now?
Well, didn’t people like Casey Serin take out Alt-a? (I haven’t followed his story that closely, but I believe he had reasonable credit at one point, but still did no doc loans).
Thanks ex-nnvmtgbrkr–you cleared up all questions I had on the difference between subprime, Alt-A and prime in one post.
Ex-nnvmtgbrkr might be Tanta’s (from Calculated Risk blog) brother or something.
The description above is the easier to read version than Tanta’s more detailed uber-nerd post.
Either way still worth a read over at CR.
“‘It’s a dirty little secret of this business,’ he said. ‘It shows a lack of confidence on the part of a mortgage broker to not tell the client what they’re making on the back side.’”
Can we get a class action going here? That way all the brokers can go broke and lenders will start dealing directly with the person borrowing money? All this middle man crap has got to go.
IMHO the documents at closing show all fees paid, it is only the “inhouse” serviced lenders that are not required to show the profit for the basket of loans subsequently sold. RESPA is a good law, we do not need new laws. I have little sympathy for borrowers that do not read contractual documents that explain, in detail, the costs of the transactions. Especially when these contracts last 30 years.
IMHO the documents at closing show all fees paid…
So a buyer has to wait until their almost ready to close before all the fees are disclosed? What kind of options do you have at that time to negotiate the charges and fees?
Don’t feed me the “documents at closing” BS I used to work at a brokerage I know what really goes on.
Walk out. Or trust a government to act in your best interest?
Are mortgage docs similar to credit card agreements?
http://www.law.harvard.edu/news/2007/01/Warren%20Testimony.pdf
“Contrary to usability and readability best practices, disclosures buried important information in the text, failed to group and label related material, and use small typefaces.” Little wonder that the GAO interviews with consumer revealed that “many failed to understand key aspects of their cards, including when they would be charged for late payments or what actions could cause issuers to raise rates.”
The vice-president of Booz Allen Hamilton, Inc., a top-line international business consulting group, summarized the current state of bank products as “too complex for the average consumer to understand.”3 He was correct. Anyone who has ever tried to read a credit card agreement knows that the terms are simply incomprehensible. The inserts sent along with monthly bills to amend the card agreements are filled with language even a lawyer would have difficulty parsing. In such an environment, the average consumer doesn’t have a prayer.
Either Harvard Law students are stupid or the Wall Street financial industry is a slimy machine designed to dishonestly trick and trap people into a permanent state of debt…
———
Warren conducted an experiment with a class comprising 80 third year Harvard Law School students, just a couple months from graduation. One of her students had brought in a credit card offer trumpeting 3% cash back and asked “Surely even you must admit this is a good deal.”
She xeroxed the offer passed it out to her bankruptcy class and asked two questions: What’s the effective interest rate, and under what circumstances will you get the 3% cash back?
“It took the entire group, the eighty law students in my bankruptcy class, working together for an entire hour, to figure out they THOUGHT it was a 17.99 percent card, and that you only got cash back when you were paying that rate - that is to say, it was a 14.999% card. It took an hour for them to figure that out. What chance does the ordinary customer have to understand these terms?”
Slimy machine
SDMisfit -
Thank you for pointing this out. I’m often accused of being in favor of litigation (even though I am not a litigator) or against big business or “in the pocket” of my profession. However, you’ve pointed out a very important fallacy when it comes to CC contracts, that is equally applicable to mortgage contracts as well.
There is not a clearly understandable and discernible “deal” that comports with the understanding of both parties.
When it comes to business transactions between parties of equal size and or sophistication, I think that buyer beware is adequate.
But I also think that you’ve pointed out a good example of what happens when you basically provide an adhesion contract to an everyday person. Major misunderstandings arise, and result in catastrophe.
I am not suggesting bailouts or major lawsuits, but perhaps moving forward a simplification of the documents and process. I don’t want more work for lawyers. I’d like less.
There is a big difference between a 2 page HUD-1 and the garbage from the credit card companies.
Slimy machine
LaLawyer: I don’t object so much to the contracts of adhesion. In dealing with a bank that is ALWAYS what you get. Imagine J6pack marking up a contract and giving it as a counter offer… What I object to is that typically they only see the contract on the day of closing. There is simply no meaningful chance to review it, even if you do decide to spend $ to have a lawyer review it.
“Alt-A mortgages, which are considered less risky than the US sub-prime sector”
I would argue against this statement vehemently. I would much rather be carrying a full-doc note with a borrower at a 580 FICO (subprime) under 90% LTV over a No-Doc note with a borrower at a 720 FICO (A-borrower) and is over 90% LTV. There is a broad swath of Alt-A that I would consider much riskier than a lot of the subprime paper.
Maybe it means ‘considered less risky by bond market ratings’.
And that is a really exciting can of worms that I’m sure we’ll be opening in the coming months.
I would rather carry a 500 FICO with a 30% down on a tight appraisal than the highest credit rating at a o down loan .
I don’t understand why the media/brokers are so fixated on FICO score. If you can afford the payment Month #1 because of the ARM/I.O/etc, but can’t afford the higher full payment month 37 or month 61, then what does it matter whether the borrower has a FICO of 580 or 780? I fail to see why the people who bought MBS bundles didn’t consider this.
Is’t this more of an exotic-mortage meltdown than a sub-prime meltdown?
It’s simple, really.
The new “Standards” for the mortgage business was based on FICO being more reliable measure of probability of default than all that “old school” collateral/income/job/LTV/ documentation crap that hampered borrower’s ability to get loans. Then, based on the FICO, the loans could bundled and SOLD to suckers, so there was no liability to the brokers or original lenders, which meant that the originators (if banks or S&L’s) could LOWER their reserve requirements because the bad debts were no longer liabilities to the lender………etc. etc.
You obviously have not been keeping tabs on what’s going on in the mortgage business and why with FICO you can computer generate a credit score and not be guilty of any “discrimination” of whatever suit you may choose.
It all is going to work out soooo…much better. Thanks FED/Congress/OCC and all you stooges working for “we the People”.
Totally agree with ex-nnv and HW. I don’t give a damn about FICO scores, documented income, or any of that. Borrowers try to tell me about their income sources and I tell them I don’t care and don’t want to know. What I do care about is how much the property is worth (my own eyeball appraisal and local knowledge), and making sure the borrowers have made a real cash down-payment of 30% or more. I have not experienced any uncured defaults in the past three years, and hope I can say the same next year.
“Prospects for a US growth rebound in the second half of 2007 have dimmed as the housing recession deepens and businesses cut spending, according to economists surveyed this month by Bloomberg News.”
Wow, for a minute there I thought he said housing recession.
There is a residential construction recession currently underway which represents over a 25% decline in construction off the peak. I know this time is different, but seven out of seven previous times since 1955 that residential construction dropped by this much, there was a concurrent recession in the overall economy.
Yup, it’s even happening in “Everyone Wants To Move Here” Arizona:
http://ebr.eller.arizona.edu/azeconomy/azeconomy.aspx?issue=AZE07SPR
This is looking more and more like the economic tsunami foretold–in amazing detail–by the most dire posters on this board. Wasn’t it Andy Warhol who said, “In the future everyone will have a house for fifteen months.”?
I thought it was “everyone will have fifteen houses”.
“Howlett said part of the problem was that Alt-A lenders had lowered their lending standards. ‘We’re going to see more Alt-A loans perform badly because they’re not traditional Alt-A loans,’ he said. ‘They’re sub-prime.’”
I can I do a little “I-told-you-so” dance right now?
yeah sure!
I’ve got my cha-cha’s at the ready!
Isn’t that comment just a way of trying to claim that the problem is “contained” in sub-prime? There isn’t problem in Alt-A because Alt-A isn’t really Alt-A….
Mr. Howlett needs to stop spinning…
Actually, I read it as the opposite:
He says it himself:
-alt a lenders have lowered their standards
-thus you will see MORE alt-a loans perform badly
This means that the damage will specifically spread OUTSIDE of “subprime” because so much of the non-sub prime stuff is crap!
It would be like if you were in a house, and someone said “the virus is contained in that room, and is only in those people in that room!”
Then someone else says “oops! a lot of the people in this room were supposed to be in that room, but they’re in here with us instead… and they’re infected!”
Alt-A is a ticking time bomb with a 700 FICO score attached to it.
Correction, with what USED to be a 700 FICO attached to it.
“As the housing market boomed, mortgage brokers’ influence grew as they became involved in arranging the majority of home loans. ‘We all have some culpability,’ said Steve Heideman, a mortgage broker who heads an organization dedicated to improving disclosure in the business. ‘The problems and abuses are happening because brokers see it as their right to make as much money as they can on a loan.’”
The way the current system is set up almost encourages fraud and deception. I’ve seen more honest people “go dark” once they entered the world of loan origination. It is a despicable business the way it sits now
I’ve seen more honest people “go dark” once they entered the world of loan origination.
I knew a guy who was a full on liberal for the people socialist who became a loan officer for a mortgage broker and this guy changed his tune quick. The money quickly turned him to the dark side quick.
‘The problems and abuses are happening because brokers see it as their right to make as much money as they can on a loan.’
Wow, it was their RIGHT to make as much as they could on a loan…screw whoever was actually borrowing the money and their ability to pay it back. I am not naive, I know it takes two to tango, and the GREED factor is equally present on the borrower’s side. This guy had a rare moment of honesty when he made that statement.
There were some people who only wanted to buy a house to live in and enjoy. They were duped by the stack of 50 pages and the broker pressuring them. It can be confusing for first time buyers. Those are the only ones I feel sorry for
I lived in Irvine a few years back, (’04) and a friend of mine at the dog park was an RE agent. One time he asked me why I didn’t buy a house and I told him I was still saving up a down payment. He chuckled and said “Oh you don’t need that.” He was about to go on, but just stopped and sighed, and ended the conversation right there. I guess he didn’t have the heart to do it.
A few weeks later he was pretty upset about his job, shaking his head and talking about how the RE industry was polluted with money and greed from all sides. Could you imagine an unhappy RE agent in the OC in early ‘04?! You have to wonder how long a good person can be surrounded by unchecked greed and still maintain.
You know, the movie Boiler Room is about fly-by-night stock traders. A friend of mine used to work in that business. That movie all seemed VERY familiar to me, most of the chicanery was exactly what he described.
now they use YOY cause 06 was stinky too
try 04 or 05
http://tinyurl.com/2gnuve
Not on the articles above, but interesting non-the-less–related to mortgage business.
A few quotes:
“The top Democrat and Republican on the House Financial Services Committee said investors in mortgage bonds should be liable for deceptive loans made by banks.”
” “More money was being lent than should have been lent,” Frank said in an interview from Washington. Frank, who last month predicted that the House would approve such a bill this year, said growth in the market for mortgage bonds “provided liquidity without responsibility.”
An agreement by the two lawmakers may increase the likelihood legislation will be passed this year. The cost of borrowing would rise and curb financing for some lenders and subprime homebuyers, said David Brownlee, who oversees $14 billion as head of fixed income at Sentinel Asset Management in Montpelier, Vermont. It would also reduce opportunities for the Wall Street firms that pool the home loans as securities. ”
It says “investor”, but it remains somewhat unclear to me whether they are putting the responsibility on the ultimate investor (pension fund), the bank securitizing and selling the notes, or the initial lender–or ALL of the above?
Seems to me the biggest impact would be for those closest to making the loans bearing the responsibility.
In any event, if such a law is passed, IMHO, it would be a significant factor contributing to overshooting the bottom.
I grew up in Barney Frank’s district (actually it was Margret Heckler’s district for a long time, then Barney’s district), and he has a soft spot for the poor, the old, the infirmed and the stupid, but he is a smart man (don’t let the speech impediment fool you).
A long time ago banks were careful with loans because they were risk averse and the loans were the assets they kept on their books. Wall street changed that by buying anything (and assuming that diversification was enough to protect them from any local market troubles). Wall street could have done the work to be sure they were buying good loans instead of relying on diversification only. They didn’t. They deserve a lot of the blame and they should take a huge hit. Problem is, pension funds and bond funds (that old folks move their IRA’s to ) are exposed to this stuff big time. Making Wall Street take the hit doesn’t mean only rich people will be hurt.
I foresee at least some big pension clients telling the brokers that sold them the most toxic stuff that, if they ever want to do business with them again, they’d better eat some of the more egregious paper.
Calpers comes to mind. I don’t see how the brokers will avoid sucking up at least some of this hit. And, if its as big as it appears to be, I don’t see how they (or anyone else holding part of this bag) will be able to hide these hits very well either.
I’ve said before, those tails get even thicker when you lean on the shoulder of the bell curve. If you set up a system that will be safe unless there is a nationwide decline in RE, you almost guarantee it will keep humming along at full speed until there is a nationwide decline in RE.
To expaned on this. You want systems that have predictable failure modes SHORT of complete catastrophe. An example is that the hooks on cranes are designed to fail before the cable. this is because when the hook fails, the load falls endangering only anyone stupid enough to be standing below it. If the cable breaks, the end can whip in an unpredictable fashinon and tear somebody in half.
“D.R. Horton, the nation’s No. 2 home builder, reported that the number of new homes it sold in its fiscal second quarter fell nearly 37 percent.”
It is pleasing to see these guys pay the price for their underhanded marketing tactics. Afterall, they are using a lot pricing and incentive gimmickry in the Jacksonville market.
One problem these guys (the builders) face is that the barriers to entry in their industry are low. Its relatively easy to start a homebuilding business (as opposed to say automotive manufacturing). Cost of exit is low as well. Which means that it was very easy for the market to be flooded with new houses.
Can someone give me an idea if all Interest Only / Option ARM loans are considered ALT A loans. Is there such a thing as a “prime” Option ARM?
I’ve been asking that same question for a while, and I haven’t been able to get an answer. It’s not noted in news articles, and even folks here don’t seem to know.
ex-nnvmtgbrkr, care to chime in? You seem to be most well informed in these matters…
Go to the blog Calculated Risk.
Search for Tanta uber-nerd posts.
One of those will be a LONG treatise on prime, alt-a and sub-prime.
Read all of her uber-nerd posts and you will be smarter than most mortgage brokers.
Prime loans refer to “full documentation”; Alt ‘A’ refers to ‘Stated something” (income, assets, job,etc.).
A prime borrower (depending on state and length of time on job) can have a FICO of 580 (25 yrs same job, no mortgage lates ever); Alt A (because it is stated something) generally FICO starts at 660 (again depending on state).
If the FICO’s are over 720, there was no difference in the interest rate between Prime and Alt ‘A’.
Option Arms are Prime and Alt ‘A’ loans. Option Arms are rare in the subprime market.
Look at my post above. You are looking at it from a loan program type perspective, which is not accurate. You can have OpARM’s in A-paper, Alt-A, and in subprime (to the poster above, World Savings will do OpArm’s for subprime borrowers if the LTV is low enough) You have the same loan types across the board, whether it be A, Alt-A, or subprime. The difference is the way they are underwritten and credit scores. A-paper and Alt-A borrowers have good credit (normally 640 and above), while subprime borrowers have poor credit (usually sub-600).
World was lucky to have sold to Wachovia! I did not know anybody would do a subprime OpArm! Thanks Ex-
Alas Wachovia
“‘It’s a dirty little secret of this business,’ he said. ‘It shows a lack of confidence on the part of a mortgage broker to not tell the client what they’re making on the back side.’”
It is only a dirty little secret because brokers and LO’s want to make more than they are entitled to. Personally, I think YSP/broker rebate is a great way to reduce cost for the borrower. For example, if someone pays points on a refi it tkaes a while to recoup the cost of the point/points. But, if the broker can do the deal for no points, and even no processing fee (which is a joke - don’t even get me started), and get paid on the backside by the lender, this can be a great deal for the borrower. The key is full disclosure. The reason most won’t fully disclose is because they’re not looking to offset the points charged or other fees in any given deal, but rather maximizing the money making potential of any given deal by going ahead and charging as many points up front as they can without the borrower screaming “foul”, and making backside YSP in addition to the points. The problem isn’t the system in palce, but rather the abuse of the system in place. When i was doing deals, if I could make 1.5 points in YSP (less if the loan amount were larger) I would charge no points or origination and waive the processing fee. Most today automatically charge a point of two up front and then look to make the most YSP they can. Each deal is looked at from the perspective of how much I can make, rather than how can I do the best for my borrower and still make my wage.
It’s funny - the Yield Spread Premium is similar to the “hold back” that car dealers get. Most car dealerships will tell the buyer they are getting quite a deal if they buy a vehicle at 2% over invoice. The dealer will insist that he is loosing money and jut trying to get the car off the lot. At the end of the quarter, the dealership then gets a nice rebate check from the automaker. The buyer has no clue that he had extra wiggle room.
So the problem there is the dealer insisting that he’s loosing money, rather than being up front and disclosing that due to the rebates recieved from the automaker they can offer a better deal. Again, not a problem in the system in place, but the abuse of the system in place.
loosing?
loose money — lose money
ensure — insure
housing track — housing tract
hind lick maneuver — heimlich maneuver
No difference - just different spelling.
after the dust settles do you think there will be even .5% commision in the future?
Just when you thought it was safe to put the barf bags away we get another staement from Always-Look-at-the-Bright-Side-Lereah:
http://www.mortgagenewsdaily.com/4102007_David_Lereah.asp
“n a column on the NAR website titled “The Subprime Mess” Lereah gives his take on what has happened and what might. Much of it is a recounting of the familiar history leading up to the current tumult, but he does have an interesting take on the psychology behind the mess.
“Just as children in an orderly classroom stir up a wild ruckus when the teacher leaves the room,” he says, “some people and businesses stray from fundamental behavior during a frenzied market environment.” He cites the savings and loan crisis of the 1980s when S&Ls were purchasing pricy art while the bank was floundering and the all too familiar behavior of investors during the dot.com boom when fundamental investment principles were viewed as tools for sissies. The subprime mess, he maintains, is just another example of typical human behavior in a frenzied environment.
So, according to this theory the current mess was either inevitable or should have been foreseen and stopped in its tracks. The looming danger hardly went unnoticed; many people were warning about the risks two and three years ago but they were, in general people and organizations who did not have the means, power, or connections to do anything about it. Maybe, therefore, it was inevitable.
In any case it is now water under the bridge.
So where does Lereah see us going from here? First of all, he disagrees with the media and their doomsday prognosis about the crisis which needs to be weighed against his reputation as a cheerleader for the housing industry. Still, he again has some interesting ideas about the future.
He says we should expect a drop-off of subprime originations through 2008 which may mean that half of high risk borrowers will fail to secure loans. This, if it happens, will depress home sales. What he sees is more likely, however, is that these buyers will be serviced by a newly revitalized FHA and from lenders stepping into the breech to make loans meeting Freddie and Fannie standards and offering “fair and affordable mortgage options to subprime borrowers.” He, like The Mortgage Bankers Association, the National Association of Mortgage Brokers and other advocacy groups have warned again overkill by regulators and Lereah does so as well, asking for responsible lending practices as opposed to practices that cause a credit crunch.
He warns we should expect that 10 to 25 percent of households that fit the subprime profile will be unable to secure a mortgage under today’s stricter lending standards but that “many of these households will probably, over time, purchase a home when they have attained the financial capacity to do so… So the long-term health of the housing market will probably stay in tact (sic).” In the short term Lereah expects that home sales will fall by 100,000 to 250,000 annually during the next two years due to tighter underwriting practices.
He quotes, as did we several weeks ago, First American CoreLogic estimates that about 1.1 million of the 8 million adjustable rate loans originated over the last three years are likely to end up in foreclosure. He predicts that most lenders will attempt to work out problem loans before they become critical by refinancing borrowers into other mortgages and that disproportionate numbers of the foreclosures that do occur will do so in high cost areas such as California but views this as relatively good news as those more or less healthy local economies will present fertile ground for lenders to sell the foreclosed properties in a reasonable amount of time. “Foreclosures will create temporary inventory problems, but inventories will be eventually worked out.”
Although this presents a fairly optimistic picture of what is to come (depending on your perspective as a lender, a real estate agent, or a hapless homeowner) Lereah does add a disquieting note. He expects that today’s subprime problems are likely to spill over into the housing sector and the economy in a number of ways. He projects that, if lenders exercised poor underwriting in the subprime market, it is likely that these practices were also used for their Alt A loans (the medium credit range of lending about which little had been said in the current climate) and possibly even into prime mortgage lending as well. This could mean that delinquencies and foreclosures in these markets will also become a factor.
In addition, he fears that the tightening of underwriting standards in the subprime market may lead cautions lenders to tighten their approach to borrowers in the prime market as well, keeping some households from purchasing homes even though they are well able to afford them. And, the media comes in for a piece of the blame. Lereah says that continual problems and media reports about subprime activity may drive away buyers and reduce overall consumer confidence in the housing sector. Last, an increase in foreclosures could raise the inventory of homes in individual local markets, softening prices and the demand for homes.
But from a broader perspective, he says, today’s subprime problems are occurring against a backdrop of cyclically low mortgage rates and a growing, healthy economy. Jobs and liquidity are plentiful in the marketplace, suggesting that the subprime problems may be a manageable problem within our $10 trillion-plus economy.”
The actual write-up is here (pdf):
http://www.realtor.org/Research.nsf/files/CurrentForecast.pdf/FILE/CurrentForecast.pdf
Very entertaining, especially the forecasts. So what do you do when you have a graph with a downward slope and you need to predict the future? Draw a line going up, up, up, of course.
6 months ago he was saying that all is well in the RE market. Now he wants us to believe this current round of BS. He has lost ALL credibility and any quotes from this dolt should be prefaced with the statement that he has a conflict of interest as well as missing the call on the present downturn. If THAT statement was made then I would have no problem with the media quoting this idiot.
–
‘The problems and abuses are happening because brokers see it as their right to make as much money as they can on a loan.’
As I have been saying for years, what mortgage brokers were doing was a clear case of fraud (lending someone else’s money without consequences and with perverse incentives) except that it wasn’t defined as fraud, legally.
Legalism leads to moral corruption and we have been there for some time. The real blame lies with the regulators and ultimately with the Federal Reserve that is suppose to control private credit.
Jas
Lending someone else’s money with perverse incentives is not fraud.
–
Yes, it is not a fraud, legally. When legality is in conflict with ethics what happenes? Unethical practices florish. And there we are in out financial system. What would end these practices? When consequnces are brought home. No pun intended.
Jas
Lending someone else’s money, keeping no risk yourself, and getting to keep the fee? That isn’t fraud. It is lucky.
Telling someone that you aren’t getting a fee when you are, and using that disclosure to entice the person to use your services? That is fraud
The line blurs when some when an unscrupulous MB uses a FB’s greed to steer them into a toxic loan with more profit on the backside.
But I think Jas is right in putting the blame on the Fed Reserve as the root of the problem. The idea of maintaining the integrity of money and rewarding savers has long been ignored. Sow the wind reap the whirlwind
Mortgage brokers are not financial advisers, they are salesmen. I’m sure all of us have received “refi now” offers in the mail, but none of us bit. Yet all these FBs did, and many have no idea what is in their loan documents. I have a hard time blaming the loan people, when you are signing your name to a $500,000+ promissory note, you’d better know what you are doing. If not, don’t come crying fraud to me.
Definition of loan-originators as “salesmen” is very apt. Real Lenders (me) don’t even have to sell. People come to me all the time without my taking the slightest initiative. My only ads are a couple of index cards on the bulletin boards at some PHX condo-ized trailer parks. Come to think of it, I’d better take those cards down now that I wish to reduce exposure.
Well, having advertising that talks about 1% loans when that is really a PAYMENT rate and the extra interest is added to the principal IS fraud IMHO. Yes, it is remarkable that people fell for the something-for-nothing pitch, but like Nigerian frauds, the stupidity of the victim doesn’t make the perpetrator any less guilty.
“..one of the nation’s top home builders warned Tuesday that it has yet to see the normal start of the spring home buying season..”
Ah, the fabled Spring selling season, you know, that time of the year with starry-eyed GF’s lined up for overpriced houses. It’s not happening this year. Didn’t happen last year either, Spring sales were down versus 2005.
Put a fork in it.
And even if the majority of AltA resets don’t happen until 2010 or 2011, there will be fewer AltA buyers in the market between now and then, so it’s going to be that much harder to unload the house before the reset smacks them.
Speaking of putting a fork in it, the house behind me is up for sale. Again.
It was put up for sale by its previous owner in July 2005. After a change of agencies, a crummy exterior paint job, staging on the inside, and several price reductions, it FINALLY sold in March 2006.
Now the current seller, who’s a University of Arizona senior and newly minted real estate agent, is putting it on the market at exactly the same starting price as the previous owner. Of course, we all KNOW that the housing market has greatly improved since July ‘05, so buyers are going to line up for it, right?
Put a fork in the toast, it’s done.
Spring will arrive when sellers are willing to sell for 10X the buyer’s downpayment, with a 30-year self-amortizing mortgage only taking 30% of their income. Winter will continue until then.
It never ceases to boggle my mind how someone with virtually no income (like a college student) goes out and buys a 300-400K house. And that banks would line up to lend him money is even more insane.
In this case, I think Daddy took out a HELOC to buy the house behind me. It’s in the son’s name, and it’s probably what he THINKS will launch him in his career as a real estate mogul.
BTW, the house is on a tiny lot with no street frontage. When I was house-hunting back in ‘04, I looked at the one directly north of it. My real estate agent advised me not to buy it, because of the difficulties I noted in the first sentence of this paragraph. I’m VERY glad that I took my agent’s advice.
“Analysts are warning this is the second problem to emerge after those in the higher risk sub-prime market began in January.”
It’s the same problem with a different product label. Poor underwriting is the common denominator all across the line. The only difference is the customers’ payment shock absorbability. Some recent home buyers and refinancers have a lot of income and savings to make increased payments; however, a good number of them do not.
One reason that the problematic Alt A’s are in place like Florida and Las Vegas is that this was the preferred loan for flippers. These people had fairly good credit and did not want to document that they already owned several houses. Not surprisingly, these “real estate investors” will be leading the way in foreclosures.
Exactly. In the alt-a category, we don’t have to wait for the “reset.” Alt-a = “I can’t afford it, so i won’t show you how much money I make and you’ll lend me the money anyway since i have a decent credit score.” So, forget about alt-a resets. It’s a mute point. Those buyers are toast when they cease to be able to pay the mortgage on the home they couldn’t afford in the first place. It’s that simple. Nobody’s gonna have to wait until 2010-2011 to see those chumps go into foreclosure.
“The Fed is a deer in the headlights right now.”
Didn’t Stucco use this exact sentence to describe the Fed recently?
I’d offer that the “deer is in the radiator” might be a better description of the situation.
Ha! I love that!
“moose in the windshield” ?
Yes, I think it was last week.
“Until recently, mortgage companies had been able to sell loans to Wall Street banks and other investors. ‘Now you are selling at par or lower in some instances,’ said Thomas M. McCarthy, a managing director at a real estate investment firm that brokers the sale of mortgages. ‘It really throws the business upside down.’”
Selling …”loans” to WS Banks & Investers …and …throws “Business” upside down ?
IT Frigging REAL !!!
They were SELLING Frauds and the “Business” was a Big Time assemblyline moneymaking SCAM that just about Everyone WAS IN ON …PERIOD
So right mikey …I guess the front line lenders didn’t get the memo that the secondary market doesn’t want their fake liar loan packages with the inflated appraisals with cash backs and bogus incentives . Those loans were as bad as the bad dog food that got pawned off on the public .
It’s funny - the Yield Spread Premium is similar to the “hold back” that car dealers get. Most car dealerships will tell the buyer they are getting quite a deal if they buy a vehicle at 2% over invoice. The dealer will insist that he is loosing money and jut trying to get the car off the lot. At the end of the quarter, the dealership then gets a nice rebate check from the automaker. The buyer has no clue that he had extra wiggle room.
If it sounds too good to be true, it usually is. The excuse I got (for the same exact deal, selling the car just over invoice) was that the dealership was willing to lose money to gain a customer.
They offered me an $8k trade-in on a truck that had a $15k book value and I was getting the deal because I was paying dealer invoice?! suuure… I decided to keep my trade-in and run it to the ground. It’s cheaper then another car payment.
In all fairness, full “book value” (usually per Kelly Blue Book), is fairly inflated over “real” street value (average of what private parties settle on after haggling). Even so, I agree that a 47% discount for them vs. flat “dealer invoice” + no discounts/extras for you is a pretty crappy deal.
“The worst declines were in California, where volume was down 59 percent, and value of the homes sold fell 56.8 percent.”
This may be a dumb question, but can I interpret “56.8% decline in value” as the same as a decline in price? If so, that’s incredible and I don’t know if I believe it. If it were true, shouldn’t that data start showing up in existing home sales as well as prices of new homes put downward pressure on existing homes. I haven’t seen any data of existing home sale prices anywhere near this percentage.
No, I think value would equal price X volume.
I take that as total value, i.e. total income, as down 56.8% percent, therefore the average value is actually slightly up.
I too, was struck by this. And I am constantly confounded about how lousy the reporting is––down 59 percent compared to what? Value of homes sold fell 56.8 percent compared to when? YOY? Since last quarter? Still, these are pretty powerful numbers here, and I’d like to know where they came from.
Anyone?
I worked as a statistician for about a decade, and the first thing I ask, when I see numbers being spouted is:
“X% of what?
Over how long/what measurement scale?
What are you comparing Y% with, and in all honesty, should you…”
Rarely do I get sensible answers.
BTW - wtf is ‘value’?
A microeconomist might naturally interpret “decline in value” as pertaining to individual houses, while a macroeconomist might naturally interpret it as the loss of aggregate value for all the homes in a particular geographic region. However, a journalist with no training in economics would naturally confuse the notion of economic value with the aggregate dollar volume of homes sold for a given locale and time period.
Thanks GS
As I suspected - ‘value’ is a qualitative term. What they really mean is ‘price’ - nice quantitative number that I can plug in my trusty calculator and compare with other quantiative numbers.
Which pi$$es me off no end. Just like calling a house a ‘home’, when the property has been sitting empty for months, being no one’s ‘home’, in any meaningful sense, for a while.
Sheesh - sometimes having a mathematical background can be a disadvantage…
“What they really mean is ‘price’ -”
More like “revenue” (= price * quantity).
Agree with some of the others, what is probably meant is a YOY 59% decline in number of units sold, and a YOY 56.8% decline in aggregate sale price.
“Instead, they [mortgage brokers] are more like independent salespeople who are often paid as much by the lenders offering loans as the borrowers.”
Heideman makes a good point; however, incentives offered by New and other originators stimulated and rewarded underhanded broker behavior. Independent mortgage brokers were not operating in a vacuum.
A MUST read at Charles Hugh Smith’s blog explaining the breakdown of all outstanding mortgages. It obliterates the MSM’s story that the sub-prime meltdown is contained.
http://www.oftwominds.com/blog.html
‘These numbers blow the doors off the “containment” theory. Rather than being limited to a few million mortgages, the risks of re-sets or sinking equity affect fully 75% of all households holding mortgages in the U.S.’
His analysis is quite consistent with the mystery of how Californians continue to purchase homes even though less than 10% of CA households can “afford” them.
No kidding…only 25% of all mortgages are conventional fixed rate, no HELOC.
OK so now we know how The Man owns those folks. How does The Man intend to put a headlock on the rest of us?
“The worst declines were in California, where volume was down 59 percent, and value of the homes sold fell 56.8 percent.”
Could that 56.8 percent be a misprint? Because the figures that get tossed around in the MSM totally mask anything near that level. And there is no indication that used home sellers have substantially adjusted their list prices down below 2006 sales price levels.
I am also wondering if the 56.8 percent might be understated, as the use of incentives (financed on the mortgage note) hide the true loss in value?
Not price, sales dollar volume. If the number of homes sold fell by more than the total amount they sold for, the average price went up slightly, no?
“sales dollar volume”
It says “value,” not “volume,” but I am willing to concede the journalist was probably confused on this point.
I’m betting there are very few places where sellers are asking anything over 05 pricing……
I was on realtor.com today and saw a couple condos in a community I was considering listed at 2005+ prices. Are the sellers going to get their price? Probably not. Just an example of the persistence of the bubble mentality.
I also noticed that particular development had its fair share of knife-catchers last year.
Yeah, but the current subprime implosion is hurting sales of low price homes more tha high price homes.
I love this quote from the articles above… “There’s not less interest” in their mortgage backed securities — riiiight!
“Mark Adelson, head of structured finance research at Nomura Securities in New York, said: ‘There’s not less interest, it’s just that the price is worse, which is not what M&T wants to hear. You can sell the loans, it’s just that if you’re greedy, you’re not going to get the price you want.’”
Sounds like he’s trying to sell houses here! “There’s not less interest [in overpriced McMansions], it’s just that the price is worse… You can sell the [McMansions], it’s just that if you’re greedy, you’re not going to get the price you want.”
I thought we were reassured by the industry some weeks ago that this problem wasn’t going to spread.
Sorry! What he says makes a lot of sense.
He’s saying there’s interest but not at the price M&T wants which is totally correct. At the right price, there will always be interest (just like houses.)
His phrasing is a little bizarre but he’s no shill.
But isn’t price an indication of the balance between supply and demand?
on YAHOO ! marquee’
Save for Retirement by Buying Land?
Kiplinger Personal Finance
Investing in a parcel of beautiful land may mean a payday that’s a long way off. But in the right circumstances, that payoff could be highly lucrative.
“Prospects for a US growth rebound in the second half of 2007 have dimmed as the housing recession deepens and businesses cut spending, according to economists surveyed this month by Bloomberg News.”
No worries as long as the stock market keeps going up, right?
And don’t forget…full employment with “high” paying jobs… as well as…huge salary increases for the “wee little” people.
All is well… move along
“The subprime mortgage crisis has re-ignited scrutiny of the industry and people who broker home loans. The main problem is that, counter to common perception, mortgage brokers do not represent the borrowers who pay them for advice. Instead, they are more like independent salespeople who are often paid as much by the lenders offering loans as the borrowers.”
Ding! Ding! Ding! We have a winner.
“Mehernosh Engineer, senior credit strategist at BNP Paribas, said: ‘This is starting to look more like what happened in 1991– a consumer hard landing. Sub-prime and Alt-A is more like a $3.5 trillion problem, which will progress gradually through 2007 and 2008.’”
Hmm, $3.5 x 10^12? Compared to the S&L mess, this is 3.5 times as big in adjusted 2007 dollars. S&L was $500 x 10^9 in 1986 or so which is a little more than $900 x 10^9 in todays dollars. 3.5 times as big. It is a little better than 1/3 of a 10 trillion dollar economy.
It really isn’t manageable. It really isn’t.
Roidy
“The average price for a D.R. Horton house ordered in the quarter fell 6 percent to $260,373 from $276,660 a year earlier. Horton said in the statement ‘we continue to see an increase in the use of sales incentives in many of our markets.’”
In other words, sale prices are down 6% , IN ADDITION TO whatever percentage the average accumlated incentives are. Those incentives could be seller paid closing costs or upgrades amounting to tens of thousands of dollars that last year’s buyers didn’t get…maybe both.
The cowards don’t have the guts to publish the average amount of incentives given to today’s buyers because they know it would reveal significantly more than a 6% haircut off of last years prices.
“‘It’s a dirty little secret of this business,’ he said. ‘It shows a lack of confidence on the part of a mortgage broker to not tell the client what they’re making on the back side.’”
The wording of the above sentence is inappropriate.
From Merriam-Webster online –
Main Entry: confidence
Function: adjective
: of, relating to, or adept at swindling by false promises confidence game > confidence man >
In light of the misused definition, I suggest substituting the word integrity for confidence.
I am holding a DC suburb 100% loan for a 2005 $600k TH. The loan is prime, 5.625% fixed for 80%/6.875% fixed for 20%. It is currently about $50k underwater. I do not plan on living here for more than 5 years, due to school district considerations - and I am fully prepared to walk rather than lose $100k+ of my savings in a short sale. I knew that was the most likely scenario when I bought, hence the large loan instead of putting up any sort of down payment.
I am not worried about a resetting loan, or even losing my job. What I am worried about is that this house has become such a bad investment, beyond what I was even thinking would be the worst-case two years ago.
Morally, I wish I didn’t have to contemplate it, but in all honesty, I am going to make sure my family has the $100k+ instead of the bank. And I had the down payment in the bank, and I made sure it was a non-recourse loan in the event that hell does come (suitcase bomb, anyone) and the market here goes 40% south instead of the 12-15% I think it wil.
If there is enough market softening/crashing to make me walk away, then where/what I want to buy will crash even farther and I will just pay cash.
And I know I am not the only one, I know a handful of people (but definitely minority) - who refi’d to take cash out and PUT IT IN THE BANK. I don’t know if we are any sort of meaningful percentage, but what happens if/when we walk away??
You sure it is totally non-recourse? Because if you are considered responsible for the loan, even if the bank does not choose to go after you personally, you are responsible for taxes on the amount of “debt forgiveness” income. IRS debts don’t go away.
If it really is non-recourse, you might be off the hook. Credit rating should be in the basement for about 7 years.
I’m not sure, but I think the holder of the 20% can come after you for deficiencies. I would really would check that plan out thoroughly before walking. It might not be the giggle you think it is going to be.
And if someone can prove that your neighbors re-fi’ed with no intention of paying back the loans (the took out the cash and planned to walk away from the debt), they could be charged with fraud. Hard to prove, but still a risk.
I figured there were a group of people like this out there somewhere. The people that had the money for the dp but didn’t use it.
Can’t answer your questions, but I have a few. Do the others you know also have non-recourse loans for their refi’s? How did you set it up so both the first and second were non-recourse? Is that common practice or specified by statute? Do you have your $100k in the same bank as the loans (potential offset issues)?
I made a statement sometime ago that I would not want to be one of the few that had made a big dp in an area where very few did so. Loan type redlining if you will. I have no problems with 100% at amortizing fixed rates assuming you can afford it, etc. IIRC someone else seemed to agree with me.
So, you’re saying that you re-fi’d, put the money in the bank, and are going to walk on loan if the value drops; knowing full well that that was the likely scenario?
I just want to be clear on your situation before I label you morally bankrupt, and tell you that I hope your house catches fire with you in it.
You people are nuts. OF COURSE I DO NOT WANT THINGS TO GO SOUTH. I want to make a nice profit, and roll it over into a nicer house. When I bought this place in early ‘05, it was what was affordable and that was the game plan. Don’t overstretch, keep saving for the dream house/neighborhood that would come eventually it things worked out they way they should. I didn’t put a dp up because I thought I would take that cash and sink it into renovations. Now I’m sitting with the cash in the bank but afraid to spend it on the new kitchen and bathrooms and family room addition I so desperately want and thought I’d have by now.
If things end up as bad as they seem to have developed over the last two years, then I will be forced to move into worse surroundings, not better. It is not going to be fun and giggles, it is going to be incredibly hard - do you save your credit score and your dignity to watch everything you have in the bank be taken away from you by a house you didn’t even plan on living in for a very long time? Or do you try and salvage what’s left and hunker down for ten years, severely downsized but at least partially intact? It’s a question that I NEVER thought I’d have to even think about, let alone possibly face in 4-5 years time.
If you cashed out at the top, then good for you. I’m just trying to say that there are some of us out there who not sweating a $200 arm increase but who still might lose our houses just the same.
What I took from your original text was that you refinanced and took the equity and put it in the bank, expecting the value of the home to drop, at which point you’d just walk away. If that wasn’t the case, and you actually saved money for a down payment, then disregard my first post.
However, if I was correct, and you did refinance the home, took the cash and put it in the bank and you think that it’s right to keep the money and walk away from the loan, thereby defrauding the lender and basically stealing that money, then you are the one that is nuts.
This is one of the most interesting posts I’ve ever seen here. Here’s what I’m taking away from it:
I think we can all agree that what we’ve witnessed the past several years is a housing market run absolutely amok. It sounds like this guy recognized it as such a while back and so tried to put some safe guards in place for himself just in case his intuition was right and the whole thing was as big of a shakey stack of cards as it seemed to be.
In other words, unlike the sobbing FBs who are currently garnering media attention, this guy was looking out for himself and his family in the midst of the biggest appraisal/lending fraud episode this country has ever seen.
This housing market scared the sh#t out of me, to the extent that I was a coward who refused to get involved. However, if I *had* been brave enough to go there, I hope I would have been more like this guy than the dopes who didn’t get it and walked gleefully out of the office with their ARM loan.
I know that’s a bad place to be, choosing between “screw or be screwed”. But honestly, the lenders, the appraisers, and the NAR kind of set it up that way, didn’t they?
There is no healthy market when people are trying to buy at 4-12 X income.
Has anyone seen the posts at “bubblemarketsinventorytracking” lately? If someones got the link, please provide. It is absolutely astounding the cash outs that WAMU and other banks were doing for people who bought obviously fraudulently appraised homes in the first place. One after another after another on the SAME HOME. When you look at those lists compiled by (OCRenter?), it’s not hard to think: These banks and lenders have NOONE but themselves to blame.
I’m all for being upright, but I think we’ve got to realize there’s all kinds of people in the world. These banks seemed to have been BEGGING to be conned. In fact they STILL ARE!!! Seen those Bank of America HELOC ads lately? In a market that’s going down?
Thanks for the post, Prime Borrower. It really made me think.
Oh yeah, and on a lighter note: Nice to hear that there are upper end prime borrowers who are thinking of walking! Keep those foreclosures coming! Let’s get this correction underway all up and down the spectrum!
Stealing is stealing, no matter what the justification is. Is a guy who robs a liquor store to feed his starving family any more guilty than a guy who sets out to defraud a bank just to protect himself from a failing economy?
PRIMEBORROWER wants us to feel sorry for the fact that he may lose his home. Under the circumstances, he’s no better than any other FB. He paid more than he could afford if things went horribly wrong. If he wants to earn my sympathy he could say that he’d give back the money that he would be stealing when he plans to walk away from the whole mess.
Yeah, the lenders set themselves up for disaster by not doing their due diligence, but compare them to a company that hires an accountant and trusts that person with their money. The guy then embezzels a ton of money. It’s their fault for hiring that person, but he still had no right to steal their money. Stealing is bad!
Before you do anything else, pay to have an experienced lawyer who is an expert on such things (not a “We handle bankrupcies and Foreclosures!”shill) to go over ALL your loan paperwork and make SURE that it is indeed non-recourse. Even if judicial foreclosures are rare in your jurisdiction, you have enough money to make it worth the lender’s time.
The mortgage brokerage business is fiercely competitive - especially for the standard Fannie/Freddie stuff. This has become even more so with the advent of the internet. We all get rate-shopped like crazy, unless it’s an old client or a referral. I refuse to do Alt-A or sub-prime, but I know that it is also quite competitive at both the wholesale and retail level.
If people don’t understand car dealer hold backs or yield spread premiums, they are either lazy, or willfully ignorant or are candidates for the Darwin award. Googling “yield spread premium” generates over 1,140,000 hits and “car dealer hold back” generates 278,000 hits.
For people who are aware of the existence of YSPs and dealer hold backs, I agree with you that they should inform themselves; they’re failure to do so is at their own risk. The problem is that many (maybe most) people are not even aware of YSPs or dealer hold backs. If you’re not aware of something, it is pretty tough to research it.
YSPs seem like they can really be a problem if the mortgage broker does not disclose it (some mortgage brokers, like correspondent brokers, are not legally required to disclose YSPs and many did not - NovaStar is now being sued over this tactic). So, for the FB who was not aware of YSPs and the YSP was never disclosed to them, I have a hard time looking at them as lazy or willfully ignorant.
If the mortgage broker is looking out for the interests of the borrower, and not SOLELY at how much money they can make on each deal, then they should discuss these issues with the borrower. YSPs are not always a bad thing, and they can actually be used to help borrowers in certain cases by reducing fees (granted, the borrower is then amortizing those fees over 30 years, but if they are informed and choose to do so, then that is fine). But mortgage brokers shouldn’t take a holier-than-thou attitude that the borrower should just have known about YSPs and done their homework before dealing with the mortgage broker. Mortgage brokers present themselves to their clients as working on their behalf, and many borrowers believe that they are. Few people would believe that a car salesman is working on behalf of the buyer.
Just my $.02
Oh my. Someone finally admits there’s a bubble in Dallas
Posh Oak Lawn condos up for auction
Centrum investors are using strategy that’s new to Dallas
09:23 AM CDT on Tuesday, April 10, 2007
By STEVE BROWN / The Dallas Morning News
stevebrown@dallasnews.com
The owners of an Oak Lawn high-rise condominium have decided to auction off more than a dozen of the luxury residential units.
The condos are on the top floors of the Centrum tower at Oak Lawn Avenue and Cedar Springs Road.
FILE/DMN
Five of the Centrum tower units will be sold without a minimum bid. Thirty-four living units in the building were purchased in late 2005 by Centennial Real Estate Corp. of Dallas and GEM Realty Capital of Chicago.
The rental units were converted into condominiums and have sold for more than $500,000 to almost $3 million.
Now the owners plan to auction off 15 of the unsold condos May 20.
Sheldon Good & Co. of Chicago has been hired to handle the auction.
Five of the units will be sold without a minimum bid.
The auctioneer is suggesting that opening bids for the high- rise properties start between $250,000 and $500,000 for the condominiums, which range from 1,362 square feet to 5,164 square feet.
“We want to sell the building out,” said Steve Levin, president of Centennial Real Estate. “Our partnership group thought this was a great way to sell a lot of units very quickly.
“This is a strategy that hasn’t been done here but has been done in other markets successfully,” he said. “I think other people here will do it.”
The Centrum investors also plan to sell a three-story penthouse unit in a sealed-bid auction.
“We decided to break with traditional marketing efforts,” said Travis Mathews, a vice president at Briggs-Freeman Real Estate Brokerage who is marketing the units. “We’ve had a great response from fellow real estate agents.”
Mr. Mathews said that about eight of the 34 units in the building have been sold and that most of what’s available in the building is going up for auction.
Any remaining units after the auction will be listed for sale, he said.
The auction of high-rise condos doesn’t happen often in the Dallas market – “certainly not at the higher end,” Mr. Mathews said.
Dallas housing analyst Mike Puls said the planned auction is a sign that the high-rise condo market has softened.
“The air is coming out the bubble,” Mr. Puls said.
The 19-story Centrum opened in 1987 with two floors for retail space and 250,000 square feet of offices. The residential units occupy the stair-stepped upper floors.
Uh-oh. Air coming out of Texas-sized bubble. Clear the area, everyone!
“We want to sell the building out,” said Steve Levin, president of Centennial Real Estate. “Our partnership group thought this was a great way to sell a lot of units very quickly.”
Translated: we’re in a cash crunch and can’t make OUR payments.
Silly bear. Bubbles are for baths.
You’ve all been afraid to admit it…
Mehernosh Engineer is the fakest sounding name i’ve heard in a decade~
It is a Parsi name. Google ‘Parsi”
This is a letter I just sent to our local realtor association. I am loathe to deal with them but I cannot sit back and watch this. I am probably going to get hit with an “oh well”. Time to be proactive in this mess. I will forward the referenced listing and subsequent sale to anyone sending me their email. Mine is jconnor3@cfl.rr.com
I am a member of the board.
I am also an appraiser. I am writing concerning a new phenomenon we are seeing in the records of the MLS.
For some inexplicable reason we are seeing listing histories coming through along with a sale that is much higher than previous listings.
I direct you to Listing O4734076
This property was reduced over a period of months to $399,900 and then closed magically at $489,000.
I think we are all aware of the issues with regard to mortgage fraud. I am not suggesting that this is fraud but it warrants some explanation. Appraisers are relying on this data and it serves no interest to inflate sales prices or recorded prices in this climate. I have tried to reach the broker to no avail.
This is not an isolated situation. I do a lot of reviews for national lenders and I am finding this to be a pervasive situation.
I am not alone in monitoring this as I can assure you that the authorities are also taking a keen interest in such acitivities. There is a national hotline and website for reporting mortgage fraud and it is being monitored by the FBI.
Cash Back at Closing Scheme Gets Agent and 5 Others Convicted
Friday, April 06, 2007 - By Staff Writer, National Realty News
OKLAHOMA - Brandon L Baum, a licensed real estate agent and five others were convicted this week by a federal jury of all charges for employing illegal cash back at closing scheme.
According to the indictment obtained by the National Realty News, “Potential homebuyers represented by Baum were told they could receive substantial funds at the time of closing under the guise of ‘repair costs’ which they could use for their personal benefit, if they agreed to purchase homes at an inflated price.”
“Once the terms of a purchase had been approved by both the buyer and seller, in many cases [the] sellers’ agents would increase the MLS list price for the properties to an amount equal to or above the agreed inflated sales price to avoid detection by lenders and others” the indictment said.
At closing, the title companies were directed by Baum, sellers’ agents and the sellers to issue checks from the sales proceeds to various entities for purported remodeling, repair costs, marketing service fees or other fees.
The five other defendants that were involved it the scheme were; Joseph Therrien, Teresa Therrien, Rusty Therrien, Charles Caldwell, Jr. and Gayle Caldwell.
http://exurbannation.blogspot.com/2007/04/another-
piece-of-puzzle.html#comments
I am contacting you regarding this as I am sure that all members would benefit from it being clearly presented that this activity is serious and is being pursued on a national level and in particular those areas with large inventory.
We have a great Board and I want to see it stay that way.
Thanks
This little economist is yelling the Emperor has no clothes on:
http://www.financialsense.com/fsu/editorials/dorsch/2007/0410.html
“Fuzzy Math and US Jobs Reports
US Labor apparatchniks have a history of tinkering with employment reports. Last August, Labor revised an original 128,000 increase in payrolls into a gain of 230,000 jobs and September’s 51,000 increase was revised upwards to a 148,000 gain. Last November, Labor apparatchniks raised a lot of eyebrows, when their fuzzy math produced an extra 810,000 jobs from April 2005 through March 2006 than originally reported, all with the simple stroke of a pen.
So traders bet correctly, when Labor reported a “stronger-than-expected” 180,000 new jobs for March with the jobless rate slipping to 4.4%, a six year low, implying the US economy remains resilient despite a slowdown in housing. Labor went two steps further and revised upward the estimate for jobs created in January and February by 16,000 each month to 162,000 and 113,000 respectively.
Still, the most glaring irregularity in Labor’s latest employment report was a 56,000 increase in construction jobs to a near record 7.7 million workers, and offsetting a decline of 61,000 in February. One might have suspected that the sizeable loss of construction jobs in February was the beginning of a trend, and not a one-time fluke, given the 33% slide in housing starts since January 2006.
Overall, construction jobs have shown no net growth since peaking in September 2006. Until then, the housing industry was the key engine of job growth in the USA, and had accounted for more than half of private payroll jobs created since 2001. But Labor’s fuzzy math is not subject to the same audits or accounting standards as home builder’s earning reports that will be forthcoming in the weeks ahead.
Labor’s claim that US construction employment remains unchanged from a year ago doesn’t jive with industry reports. Luxury-home builder Toll Brothers TOL.N said its first-quarter profit dropped 67% from a year ago, and Lennar LEN.N, the #3 home builder, posted a 73.4% plunge in profit, saying the industry’s spring selling season has failed to bloom and its outlook for the rest of 2007 does not look bright.
“While some markets are performing better than others, the typically stronger spring selling season has not yet materialized,” said Stuart Miller, Lennar’s CEO. “These soft market conditions have been exacerbated by the well-publicized problems in the sub-prime lending market,” he said. It defies all logic that hemorrhaging US home builders are retaining idle workers and not initiating layoffs, as Labor’s stats suggest.
Many bond traders do not trust Labor’s fuzzy math, and instead rely on private surveys, such as the NAPM report on manufacturing employment, which showed a contraction in factory jobs in March, matching Labor’s claim of a 16,000 job loss. However, the ISM index on service sector employment stood at 50.8 last month, compared with December’s 53.1, and August 2005’s 59.9, when US home builder share prices topped out, before their 50% year long slide. Together, the private surveys show stagnant to contracting US jobs growth.”
“Cramer, stipulating that he “loves” Countrywide (CFC - Cramer’s Take - Stockpickr) chief Angelo Mozilo, suggested Mozilo cut back on the TV appearances, reasoning that Countrywide stock gets hit every time Mozilo is on.”
This one should go in the history book of this housing bubble.
Yeah but I bet Hawaiian Tropic stock goes up.