Adjustable Rate Borrowers Get Ready To ‘Pay The Piper’
The Wall Street Journal has this report on mortgage loan resets. “Millions of Americans who stretched themselves financially to buy homes face a painful adjustment, some could even lose their houses, as monthly payments on adjustable-rate mortgages are reset higher. More than $2 trillion of U.S. mortgage debt, or about a quarter of all mortgage loans outstanding, comes up for interest-rate resets in 2006 and 2007.”
“A recent study projects that about one in eight households with adjustable-rate mortgages that originated in 2004 and 2005 will default on those loans.”
“A barrage of negative trends is making things tougher for already-strained borrowers. Interest rates are rising, which can increase the size of each mortgage reset and make refinancing more expensive. The housing market is cooling, making it harder to sell homes or build up a cushion of home equity. Regulators are pressing lenders to tighten their lending standards, which probably will make it more difficult for some people to qualify for refinancing.”
“One couple that faces a reset this summer is Ruth and Magdi Fadlalla, who two years ago bought a three-bedroom house for about $294,000 in the New York borough of Queens. Their loan carries an interest rate of 7.46% for the first two years. This summer, at the first reset, the rate will jump to 9.46%, they have been advised, and the rate could rise further in the future unless interest rates generally decline. Already, the Fadlallas have fallen behind on their monthly payments of about $1,950 and have been put on notice that their home could soon be lost to foreclosure.”
“Mrs. Fadlalla, a special-education teacher, says her property taxes have risen sharply and other costs of home ownership proved higher than she expected. ‘This is killing me,’ Mrs. Fadlalla says, though she adds that ‘I’m going to work it out.’”
“The Fadlallas got their loan through a branch of Southern Star Mortgage Corp, acting as a broker. Like most mortgages, the loan later was sold to a financial firm that put it into a pool of loans that back mortgage securities owned by a variety of investors. Gary Shusterhoff, president of Southern Star, says the Fadlallas qualified for the loan when they applied. A unit of Wells Fargo & Co., acting as a trustee for the investors that now own the loan, has initiated legal action to collect overdue payments.”
“Debt counselors are bracing for many more such cases. ‘We have just begun to see what I fear is going to be quite a flood’ of people seeking help in coping with resets, says Sarah Gerecke.”
“Lenders and the economy as a whole could easily cope with such losses, Christopher Cagan says, though it would be devastating for some families and painful for some investors who bought securities backed by the riskiest loans. ‘It won’t happen all at once,’ Dr. Cagan says. ‘It will be spread out over several years.’”
“Rather than face those big jumps, many borrowers will refinance into new 2/28 loans, Grant Bailey, a director at Fitch Ratings believes. Currently, they could get an initial rate of about 8% to 8.5% on a new loan. But that won’t be possible for some borrowers who have taken on lots more credit-card debt and whose homes haven’t appreciated as much as expected. Because their debt costs would be so high in relation to their income and because they can’t extract cash from their home equity, they may not qualify for refinancing. That means meeting the higher payments on the original loan or facing foreclosure.”
“‘The ones who get stuck are probably going to be the ones who needed to refinance the most,’ Mr. Bailey says.”
“Even those who do refinance into a new 2/28 loan won’t necessarily be in the clear because they still face an eventual reset, and refinancing typically costs thousands of dollars in fees, which often are rolled into the new loan. A common sales pitch for 2/28 loans is that the borrower can use those first two years before the reset to improve his or her credit score and then qualify for a cheaper prime loan.”
“‘But that goal is rarely realized,’ says (mortgage broker) Daniel H. Jacobs. As the housing market cools, it probably will get harder for marginal borrowers to refinance on attractive terms, he notes, adding: ‘At some point, people are going to have to pay the piper.’”
Thanks to the readers who sent this in.
As we seen the loans adjust we will see more forclosures. Might as well send the keys to the real owner of the house and go shack up with the parents for awhile.
saw my first bank repo listed on zip realty.this was west lancaster cal.it was priced a good 50k below similar listings.there goes the comps.
Great news. Hope to see more real soon
Heck, I get those listings EVERY week!! There is AT LEAST one forclosed home per block in West Lancaster CA.! Deja Vu all over again!! ;o)
“A recent study projects that about one in eight households with adjustable-rate mortgages that originated in 2004 and 2005 will default on those loans.”
if this is true, we are going to see some major financial institutions go down
Just checked phx inventory and now at over 38000. I saw a few homes come on the market today and they are just grossly overpriced. They are pricing this cr@p like we are still partying like the good old days. This is absurd down here.
let the good times roll!!!
anyone know what the phuck is going on…. i agree… i see crap hitting the mkt at the same old july 05 price + 10%… wtf are they thinking… these arrogant bastards.
It’s all about dreams (money). Here’s a real life story. The people next door listed thier house last month. Within a week they got a July ‘05 +10% offer. They turned it down. They are holding out for a July ‘05 + 20%. They are risking hundreds of thousands of dollars in profits for 15 thousand. The last house that sold in my neighborhood was last fall and it sat on the market for 4 months, and 45,000 in reductions before it was sold.
What are people thinking! Take the money and run!
don’t hold your breath… in my country (after a nearly 10 year price runup of around 500%) inventory for sale started growing strongly and sales started declining 2-3 years ago.
At the same time, asking prices keep rising strongly and even sales prices keep climbing (+20% last year for my area, although that may have to do with less starter homes being sold).
In my city there are some expensive neighborhoods where about 25% of the homes has been for sale for many years, but nobody lowers their prices, on the contrary. These homes cost 20-40 times average income, most of them will NEVER sell for sure (not even with a 30% discount).
I think a major factor is that most of the sellers don’t realize that their home will never sell. We don’t have the large flipper percentage of phx, so there is less pressure; most of these sellers are sitting on huge virtual price gains and they will never consider selling at a lower price.
I heard last year in Orange County California like 75-80% of all loans were ARMs so this should help put some leverage on the high comps around here, especially Irvine if one in eight tanks and goes under. I’m sure with our special .6-.8% Mello Roos tax on top of 1% county tax, homeowners association added to the P&I will just be more icing on the cake.
It only takes one bozo to create a lower comp
Not necessarily, RE agents can hold a house or two off the MLS listings.
Yes, BUT the appraisers who use comps to determine the value of the property cannot.
As I have previously posted…
an average of 86 % of all homes in Santa Barbara, for the past 4 years have been reported as purchased on A.R.M. loans and Exotics.
With the basic prices someone has to pay for a standard house in coastal california… I FIGURE most had to be purchased with these types of loans. You’re reporting for Irvine, we’ve heard a ton of news out of San Diego-
If a MAJORITY of loans for the past couple of years have been done like this, it only means serious trouble for the whole region, when those loans start up-ticking.
LOOK OUT BELOW!!!!!!!
Hmm, what happens if they drop?
Or if interest rates do rise sharply?
Or both???
I read the rest of the report. Cagan says it is only 1% of the mortgage market and will have no real impact on the economy. Wish you would have published the rest of his quote.
Haha,
BANK REPO MAN TO THE RESCUE!!!
Let’s do their math.
25% of loans resetting in the next year — multiply by the 1 in 8 that will fail.
.25*.125=.03125
3.125% of home owners (haha, thats using the term lightly) are slated to suffer foreclosure!!
They surely won’t be able to pony up the cost to sell their upside down home.
This will crush all financial institutions hooked into these loans. Their miserable attempts to derivative the way to saftey will only accellerate the collapse.
Their one-in-eight estimate must be very conservative. I suspect many more will have problems making mortgage payments, with the additional horror of higher payments on unsecured/CC debt due to rising rates. The irresponsibility of getting into these ARMs seems to have become the norm.
One clarification… your 3.125% foreclosure number would be for mortgaged homes only, not all homes (sorry, just pointing out the obvious). Does anybody have a rough idea of what % of US homes are owned outright? In spite of all the recent insanity, I’m sure there must be _some_ people who have paid off their homes (though that is very out of fashion, it seems).
According to the Census Bureau, there are about 115 million owner-occupied housing units in the U.S. 1 million foreclosures would be less than 1%. Don’t forget, however, that this assumes a flat market and stable interest rates. In this scenario, most people who couldn’t afford a reset would be still be able to sell and avoid foreclosure
A more realistic scenario is that prices drop and interest rates rise. This could cause the foreclosue figure to rise dramatically.
I recall seeing in the census numbers that something like one-third of all owner-occupied homes are mortgage-free. Whether that does or doesn’t include subsequent HELOC’s, I don’t know.
Probably most people who own outright either bought years ago when that was still seen as a viable goal, or had enough cash to not need a mortgage.
Wow, it would have taken a genius to anticipate this happening; right?
Yeah, unless that genius is a Fed governor. Nope, the housing market will continue to be strong, due to fun.duh.men.tuls.
What did these stupid bastards who bought in the last 5 years think would happen? If you don’t have the fortitude to say no to herd mentality, then your weak character will beget all the trouble you’ll ever want.
They are chasing the money. They see are their so called friends buying homes and get pressured into buying. There are some people who think i’m nuts for not jumping on board. Well I have jumped aboard a bubble before and learned some valuable lessons. I’m sure there are quite a few people who have seen a real estate bubble like this but it be my first. You are right they just follow the herd and think their cool as can be.
When I saw this couple was from Queens I just gritted my teeth –It’s time to say this againl loud and clear for everyone who is going to bash this couple and laugh:
1. You have no idea how agressive and deceptive some of these mortgage brokers are that get NYC working people into bad loans. Don’t judge unless you know the whole tale.
2. If you live in close quarters like we do in NYC -or even in a bustling suburb - remember you will not escape the consequences of forclosures, bankruptices and defaults of your fellow citizens. Neighborhoods may die because of these things, and I for one am NOT looking forward to the increase in crime and poverty that will be a consequence of folks with slime loans going bust.
So do your superior dance, but lock your damn doors and close your shades when you do it.
And this is not your GARDEN VARIETY BUBBLE…
This is the MOTHER OF ALL BUBBLES- so maybe bullet proof glass is in order?
Do you think that this is somehow the first time suckers got taken? Many expensive car loans are upside down. People buy furniture, carpeting, sh*t, just about anything on crazy terms. The bankruptcy laws will now make it easier to re-sell homes for bankruptcies and believe me, they’ll get bought. The faster this bust hits bottom the better. I just hope the Fed doesn’t try to do anything stupid to save their member financial institutions. The RTC was a scam that made a lot of connected people rich. Let’s hope this time the internet will prevent cronyism and everyone gets a stab at the cream at the top…
I agree it should be fast, but I’m not fooling myself into thinking it’ll be painless — even though I did the right thing by cashing out and waiting. Repeat: Neighborhoods might die. In NYC, corrupt flippers already are burning houses in Crown Heights. If this happens on a grand scale, and the economy goes with it, where exactly will we buy our dream houses here in the city?
Huh, their variable rate loan, acquired two years ago when interest rates were lower, is 7.46%, when they can get a fixed rate loan today for less?
Stupid is as stupid does.
People this dumb shouldn’t be buying a house.
Likely bad credit so they were forced into subprime loan.
I dont know Queens, but 300K sounds very low, maybe really old with lot of repairs necessary?
Very poor neiborhood. A disability teacher doesn’t make much money either. Yes, I agree they are poor and ignorant and just trying to get a little piece of the pie themselves. But it sounds like they got burnt!
She must have terrible credit to end up with an interest rate this high.
Soon to become more terrible, from the sound of the story…
Well, at least they still have their Pride of Ownership(TM).
they should not be allowed to breed either!
As they say… LOVE IS BLIND.
Correction: their PARENTS should not have been allowed to breed.
That might have been the best they could get at the time. What really screws them is getting behind on their mortgage payment. Now even if they want to refinance out of what they have, they may not get a better rate than 9.46% because no mortgage company will touch them if they have mortgage lates. It will be interesting to see if people like this sell at the same time in a higher interest rate, tighter lending standards, fewer buyers, environment.
“People this dumb shouldn’t be buying a house.”
Then the bubble and this blog would not exist!
That would suck. Reading this stuff is better than a night out at the movies.
Something tells me there is a brighter tomorrow on the horizon for borrowers who were formerly priced out forever…
Not everone here who enjoys reading these stories has been “priced out”. I have a home in Sunnyvale, California, and since I bought it to live in and not as an “investment”, I simply don’t care what it’s worth. I’d be perfectly happy if prices in this neighboorhod fell 50%, because it wouldn’t affect me one drop, except maybe to keep property taxes from rising!
Good for you Robert. However, I bet you have slept easier knowing if you got seriously ill, lost your job, or transferred away from Calif., you’d be able to sell and walk away with cash. Now suppose how people will sleep knowing that if they get seriously ill, lose a job, or transferred away they will owe more than they can get for their house. Don’t underestimate the psychological toll being underwater tens of thousands of dollars can have.
Tens of thousands are small change for CA RE. Most respectable communities are up north of $800K. A 50% drop, very likely, will devastate more homeowners that have to move, get divorced (most do), retire, lose their job or get sick. It’ll creep back up in 5-8 years but many won’t have that kind of time…
“More than $2 trillion of U.S. mortgage debt, or about a quarter of all mortgage loans outstanding, comes up for interest-rate resets in 2006 and 2007.”
This sounds more ominous than the Katrina storm surge piling up in Lake Pontrachain before inundating NO…
Totally agree. $2 trillion alone is shocking, but that ~25% of all outstanding mortgage loans fall into this category shocks me even more.
Sickening, but not shocking or suprising. It seems that anyone with a pulse was able to borrow money over the past few years. Assuming that the intelligence of mortgage holders follows the same normal distribution as the entire US population, the bottom quartile have an IQ of 90 or less. If I were a mortgage broker, and without a conscience, those are the people to whom I’d be hawking ARMs and the various exotic/suicide loans.
Just a pulse? I bet when the dust clears we find some dead people got second and third homes for the benefit of the “relatives” with power of attorney.
“The housing market is cooling, making it harder to sell homes or build up a cushion of home equity.”
My guess is that a cooling market also makes it harder to get a suicide loan, and hence more difficult for the current pool of prospective buyers to prop up stratospheric prices.
Well said Get Stucco,
I have acquaintance friends in the “Bin nez”… and they say that the banks are already battening down the hatches and are JUST SAYING NO to funky loan applications.
Just this week I saw several homes fall out of escrow and go back on the market. I am speculating that the hopeful buyer COULDN’T GET IT DONE in the loan department.
I have some too. Appraisals that were strongarmed by lenders to come in are now getting realistic so… appraisals are holding up or crushing deals now too.
Any appraiser “crushing” deals won’t be in the biz too long.
The “rubber stamper”, “hit the number” hacks are in control now.
Canary died in the mine 10 years ago.
It’s gonna be a bloodbath.
Underwriters are tightening the noose with dates only back 2 months and comps req’d in the same neighborhoods. A little late. Like closing the barn door after you see your criiters on your neighbor’s grill. Really all they’re doing is accelerating the crash, cornering the flippers and Zero-Down crowd in their debt traps…
Friends of ours bought a home in Santa Cruz two years ago. They have to sell it now, because their mortgage has adjusted and they can’t afford the new payments. They are waayyyy stretched………..I don’t know what they were thinking when they bought it…..
what makes you believe they were thinking at all?
Oh, they were thinking something, baby: W
E 
‘ 
R 
E 
S 
O 
S 
M 
A 
R 
T 
!!!!!!!!!!!!!!!!!!!
My guess about what your friends were thinking:
“Prices in Santa Cruz always increase at double-digit rates. Hence we will soon be Caleefornia millionaires…”
Show me the money
SD Slide,
Your friends sound like average folk “just trying to buy a house in CA”… so this is a bummer to hear-
HOWEVER, there are a TON of Johnny Come Lately flippers that dove into these A.R.M. loans with smirks on their faces.
Why the smirk? Because they thought they were so brilliant to pull a teaser rate loan on a flip, do their deed and then dump it for a cool profit. Well, markets change, real estate has always had “cycles”… and some of these folks became FLOPPERS overnight.
Average folk are stupid.
Remember this?
“Only two things are infinite, the universe and human stupidity, and I’m not sure about the former.”
-Albert Einstein
That is a great quote!
“The housing market is cooling, making it harder to sell homes or build up a cushion of home equity.”
Let’s just say the music has now stopped, and everyone who has been walking around the circle of chairs is trying to quickly find a place to sit…
I like the analogy, and would contribute one more “VISUAL”…
For every 10 people participating in the game, there are only 4 chairs. When the music stops, it isn’t the traditional, one sorry b@stard that loses.
maybe one could take the analogy a little further:
there are not just 4 chairs and 10 people, no … they are continually adding chairs and people to this great game (but more people in proportion of course).
The music stopped sometime ago already, but people are still running around - who will blink first and run for an empty chair?
I’m sure everyone remembers the best part of that game (in what, elementary school?). WATCHING and LAUGHING!
I’m suck a jerk.
Mrs. Fadlalla is screwed! She’s screwed! She and the other dumbasses of the world are going to get what’s coming to them.
sounds like this goofball needs some “special ed” herself!
“One couple that faces a reset this summer is Ruth and Magdi Fadlalla, who two years ago bought a three-bedroom house for about $294,000 in the New York borough of Queens. Their loan carries an interest rate of 7.46% for the first two years. This summer, at the first reset, the rate will jump to 9.46%, they have been advised, and the rate could rise further in the future unless interest rates generally decline. Already, the Fadlallas have fallen behind on their monthly payments of about $1,950 and have been put on notice that their home could soon be lost to foreclosure.”
2% of $294K is about $6K. GIven their financial position, I wish them luck at making the jump.
$500 more per month…no biggie!
Just think of the tax deduction on $500/mo, though!
probably enuf to wipe out taxable income for the next 20 years+
if that doesn’t do it, the property tax increase sure will
I see over at sdcia poor Jeff is trying to do the taxes on the fifteen rental properties he purchased in the last year.
Hehe, that’s pretty funny. Reminds me of that radio commercial here in SoCal: “Stop paying taxes, and start saving them!” As if going eyeballs-deep into debt is some ingenious tax move.
It’s a tax deduction folks, not a tax credit!
Lenders and the economy as a whole could easily cope with such losses, Christopher Cagan says, though it would be devastating for some families and painful for some investors who bought securities backed by the riskiest loans. ‘It won’t happen all at once,’ Dr. Cagan says. ‘It will be spread out over several years.’”
The pain will indeed be spread out for several years — maybe even 15 years or so like in Japan since 1990…
Good point, stucco, and isn’t it ironic that the Japanese are going to get burned by two real estate bubbles within a 20-year span — first their own, and then ours?
“‘The ones who GET STUCCO are probably going to be the ones who needed to refinance the most,’ Mr. Bailey says.”
Something tells me that my nom de plume will be seeing more press coverage in the coming year…
” As the housing market cools, it probably will get harder for marginal borrowers to refinance on attractive terms, he notes, adding: ‘At some point, people are going to have to pay the piper.’”
**********************************************************************************************************************
But…but….many of them can’t pay the piper! So their homes are taken by foreclosure and they go into bankruptcy. Bankruptcy will mean 5 years of servitude for many. Kinda like debtor’s prison if you don’t make your payments.
What has our country become?
A nation of debt slaves…
enjoy the trip, Mel!
The Debt, Debt, Who’s Got My Debt? Game is about to come to an end!!!
the other side of story.
http://tinyurl.com/j8zwr
good grief! That pdf looks like it was written by NAR not some foreign bank. Present facts and then try to squirm out of the truth. If anyone has funds with danskebank.dk (assumed to be a bank) get ‘em out quick. these folks are morons
Gee, the guys who wrote that paper probably thought cold fusion was a real breakthrough, too.
Their conclusion is that nominal house prices will “only” rise 10% in 2006, unless interest rates rise or real wages drop. Well we can see what’s going on with interest rates, and real wages are only increasing if you believe the CPI accurately measures inflation.
I’d say the Danish are about as good at banking as they are at cartooning.
HAHAH,
LMAO
They seem much better at cartooning.
I don’t see any fundamental flaws in the reasoning in this report (but maybe I overlooked something?).
Their model looks at longterm interest rates and unemployment which have hardly moved. The model seems to explain what has been going on in many EU countries over the last years (where people expected a crash around 2001/2002, but prices are still climbing althoug at slower rate than the years before).
IF their model and the data they use are correct I think they are right that we need significantly higher longterm interest rates and/or significantly worse unemployment to cause a housing crash.
Obviously, if you think that unemployment numbers and interest rates in the US are manipulated, all bets are off … And I agree that the way these ‘models’ are constructed does not have a very sound scientific basis; I wouldn’t count on their predictive value.
Is this just fancy bankspeak for “we’re getting really good at giving people with poor credit records loans they can’t really afford”?
Dumb question, but what’s a 2/28 loan? From the article, I’m guessing it’s a 30 yr loan with an introductory rate that goes up after the first two years?
2/28 I/O loans are interest only for 2 years, then fully amortized over the next 28. REALLY amplifies the payment crunch, as this is also when they start adjusting.
>His cohort suggested that 40,45,50 year mortgages make sense
Assume you are buying a $500,000 house…
A 30 year fixed at 6.25% would have monthly payments of $2463.
A 40 year fixed at 6.25% would be $192 less a month.
A 50 year fixed at 6.25% would be $283 less a month.
A 100 year fixed at 6.25% would be $375 less a month.
So instead of buying a $500K house with a 30 year loan, the 40 year loan would allow you to buy a $542K house with the same payments.
A 50 year loan would allow a $565K house with the same payments.
A 100 year loan would allow a $590K house with the same payments.
So, in this case, you could “afford” 8% more house with a 40 year, 13% more house with a 50 year, and 18% more house with a 100 year.
Longer than 100 years, the monthly ’savings’ (hah!) you get REALLY trail off…100 year vs. a 1000 year, the monthly payment difference is only about $4!
So, with our $500K house example, the most that longer term loans could help price inflations seems limited to 18% or so. After that, you could have a billion year loan, and it wouldn’t make a bit of difference.
Scary.
Also, since enough buyers are already focused on “per month AT THE START”, you already have the 1,000,000,000 year loan priced into the market: the Interest Only loans.
Oops, sorry for the double post…this was supposed to go in the “Any Desperate Flippers In Your Housing Market?” topic. Resume your daily lives, citizens…
The valuation notices are being sent out in Maricopa County as we blog. Accompanying the notice is a flier that explains that “Your County is HOT” and “You may have more equity in your home”. Valuations are being increased by a third and new tax rates will be determined in August . So taxes will be going up just as values are falling, driving the last nail in the coffin for stretched flippers and forcing more marginal borrowers back to renting. Inadvertantly the tax authorities will kill the golden goose.
KBTC interrupts this blog to bring you the following educational program.
Howdy boys and girls! Guess who’s back?! It’s me! Your old pal Bubbles the Clown with another fun filled show! On our last episode, we all sang a fun song about the Flippers! It was zany fun wasn’t it! I hope you tuned in!!! And thanks for all your fun comments, especially to ‘cereal’ who came up with a dandy second verse! Yea!
On today’s episode we’re gonna talk about The Mortgage Lenders! Do you know who The Mortgage Lenders are? You got it! They’re the folks who would loan over a half million dollars to hairdressers making $20,000 a year so they could buy one bedroom condos. Yikes! And they work at such fun sounding places too, like ‘The Lending Tree’. Do you know what a Lending Tree is kids? That’s right! That’s the tree where all your Mommies and Daddies are gonna hang from after they realize that they’re ruined! Oops! And The Mortgage Lenders are the wacky bunch that gave them the rope to do it. Silly Lenders! Would you like to hear a song Bubbles wrote about The Mortgage Lenders? Yea! Okay here we go! Sing along kids!
“Ya Burn and Surely”
Give us any chance, we’ll take it.
Can’t afford a loan? We’ll fake it.
Just wait until your rate balloons.
Screwin’ ya our way.
Nice to see that you’ve come back now.
Home loans are re-fi crack now.
Your many purchase dreams come true.
Screwin’ ya our way.
That house you shouldn’t buy.
Did you say the word affordable?
You’ve got a pulse, lucky us!
We’re gonna do it!
On the mark, in pen, just sign now,
Grab your ankles, soon you’ll know how.
We’re gonna hear your screams next June.
You’re gonna lose it! Someday, yes someday.
We know it seems real cruel.
Can’t refuse it, dumb play, you dumb prey.
Lent to extremes, you fool…
You see, you’re screwed!
Did you like that song boys and girls? Hurray! What’s that? What does ‘grab your ankles’ mean? Well kids, that’s what adults do when something really, really bad is about to happen! It reminds Bubbles of the time when the zany benefit show he did at the state prison went horribly wrong. Who could have guessed the inmates would get so mad about a gag water-squirting flower? Yikes! And you thought Bubbles walked funny ‘cuz of these big floppy shoes!
Okay kids, that’s all the fun we have time for today! Now put away that sad face! Bubbles will see you all next time with another fun filled show abuot his best friends The Realtors…Yipee! Until then remember: Bubbles the Clown is FUN! Housing bubbles are icky!
A rainman18production 2006 copyright
BTC#2
Rainman, enough already, laughing so hard I can’t breathe! The talent and expertise on this blog never ceases to amaze me. Can’t wait until your next production!!
RainMan18,
I am glad you copyrighted it. It deserves to be sent to as many of these types of blogs that you can muster up. Fun FUN!
LOL. Gilligan’s Island, Laverne and Shirley…..you’re half-way to an album. Next perhaps The Beverly Hillbillies (”millionaire”, “black gold”, “texas tea”, “Californy is the place you ought to be”)?
bwahahahahahahahahahahahaha!!! Again! Again! Do this on my blog!!! bahahahahaahahaha!!!!
in 2004, interest rates were at 40 year lows. Anyone who remembers double-digit mortgage rates of the early 80s (or who did a tiny amount of research) would have certainly obtained a 15 or 30 year fixed mortgage.
And anyone who didn’t deserves what they get! The only sad thing is that honest, hardworking taxpaying Americans like you and me will end up covering for these folks when the government bails our their banks, they declare BK, or go on the public dole. Maybe we should act pre-emptively to make sure this doesn’t happen!
“in 2004, interest rates were at 40 year lows. Anyone who remembers double-digit mortgage rates of the early 80s (or who did a tiny amount of research) would have certainly obtained a 15 or 30 year fixed mortgage.”
Yup. Been there, did that. (It was a refi, not a purchase, so we weren’t concerned about being outbid!)
You aren’t kidding. These dopes were out there bidding up these PoS places to unrealistic levels, all on $$$$$ they could never hope to pay… driving it up for everyone else. These losers should be held accountable and the lenders… let them rot!
It’s worse than that… not only will hardworking people get screwed paying taxes in the gov’t bail-out of failed banks, they also have been getting screwed by record-low interest rates (not keeping up with actual inflation) and wreckless fiscal policy that has weakened our currency. Oh, and also getting screwed by higher property taxes because of the bubble-level appraisals of even modest homes. The lending conditions of the past five years have rewarded the wreckless, the stupid, and the greedy, while punishing everyone else.
it’s even worse: if things get bad, savers will loose their money (failed banks), while the debtors laugh all the way to the bank.
We had a banking crash in the Netherlands a few months ago, caused by too much leverage and too low reserve requirements for the bank (as with all banks). This 150 year old bank for relatively rich people all of a sudden had to close down. The clients lost ALL their money (we have only $ 10.000 deposit insurance here, and that doesn’t even always apply).
A few clients tried to buy treasuries from their savings accounts the day before the bank closed down, but thanks to our vigilant central bank all these transactions were reversed at a later time so even these clients lost all their money.
Of course, the bankers themselves with their fat paychecks and all the people who borrowed more money from this bank than they can ever pay back have no problem at all.
“in 2004, interest rates were at 40 year lows. Anyone who remembers double-digit mortgage rates of the early 80s (or who did a tiny amount of research) would have certainly obtained a 15 or 30 year fixed mortgage.”
the payment would still have been too high to compete with the numerous other bidders on $500K houses that were only $250K in 2001. No teaser I/O ARM, no house.
“Friends of ours bought a home in Santa Cruz two years ago. They have to sell it now, because their mortgage has adjusted and they can’t afford the new payments.”
Selling might not solve their problem, they are probably seriously under water.
My idiot niece bought a POS 2-unit 2 years ago in a suburb of Boston @ $340k. Qualifying income at the time-$54k w/ $1000 rental from adjacent unit. Now divorced, her interest-only VRM has gone from $1800. to $2400. in the last 6 months. Property taxes @ $4800/fuel oil @ $5000. She is constantly begging money from her grandparents (my parents) to keep her afloat. This is your current 1st time homebuyer. Lots of these out there…
Like in prior housing slumps , sellers will start resorting to “creative financing”. The sellers will play the lender by doing wrap-around mortgages . Or ,sellers will market that they have a assumable loan and be willing to take back a second on the purchase just to get out ,( this is assuming they have any equity and the lender doesnt call the note because the property changed ownership }
HOLY CRAP!!!!
Did I see that correctly?!!! 1 out of every 8 loans will go into foreclosure???
I am floored. Simply floored. This bubble is going to make the srock market crash seem like a picnic.
My God Ben, not to sound like the sky is falling but I cannot remember in our lifetime of such an enormous financial catastrophe. Assuming even in my area of South Florida if they did 10,000 loans last year 1250 are going to default. Think about the rippling effect this is going to have on our economy and our country. In my opinion they are underestimating this percentage. I think it is going to be around 20%.
This is going to take years to unwind and it is going to be very ugly.
Maybe all the RE agents, loan officers etc. can go to law school and get a degree? We will need legions of lawyers to sort out this mess.
I don’t believe for a minute than people will just accept that their free money has disappeared.
I think you’re a little generous in your assumption of the intelligence level of your average loan officer/RE agent. They’re not that bright…..
I know, it’s sad that such an assertion should come from inside the ranks but it’s true!
I thought terrorism was going to be the thorn in side of the United States for years to come . Now I find out its flipperism .
LOL that is gold! In it goes to my list of good quotes.
Can you give me your ID so I can make sure your not a flipper
One reason the dot com bust did not decimate the economy was that securities brokerages had been requiring traders to use 100% cash for the most volatile bubble stocks, and less-than-usual margins on others.
Housing, however, is leveraged like nothing ever seen before. OK, scratch that. Leveraged similarly to (but still more than) the 10% margins of the 1920s staock market and Florida land speculation.
And where did that lead? (Tapping foot…) Yes, this is gonna be one helluva mess.
Even during the GREAT DEPRESSION,(1930″s) ,real estate values only lost value 10% average in the United States . The banks worked with the people , sometimes letting them pay rent until they could resume paying the note .
Shiller’s “Irrational Exuberance” claimed that the RE losses in the depression were nominal, and that, when correcting for the deflating CPI, real values remained fairly level.
interesting. i never see good stats on GD. people post that some areas lost 90% of value. now you say 10% on average.
now theres this guy on talk radio with a financial show that Ive been listening to off and on for over 10 years. (money talk KLSX FM 97.1 LA) he says its likely we may see 10-15% drop in real estate prices, but thats not going to kill us.
i dunno. compare and contrast.
I don’t think it will be 10-15%. I think prices will revert to what they were in some year between 1998 and 2001. Best guess is a bottom around the 1998-level, then a bounce back up to the 2000 level. I am beginning to wonder, based on not much, I admit, whether a lot of non-bubble areas might suffer more than a lot of bubble ones. Pretty much by definition, they didn’t have a lot of attraction in the first place, and now when prices fall dramatically in the more attractive areas, what is the incentive to buy in the boonies?
I have read several examples of newly built homes in CA that sold for less than 10% of their 1929 construction price. Those were very expensive homes, so it might not be representative for the total housing market.
I also remember reading that in some US cities, homes sold for 2-3 times the (very low) yearly rent; in my country, sales prices are now hovering near 40x equivalent yearly rent.
just 10% down sounds very strange to me.
The last housing crash in my country (NL) was around 1979. Before that crash there was a +/- 5 year boom with around 100% price gains. All gains were erased in a 1.5 year crash where AVERAGE homes values dropped 40% (and inflation removed the rest of the gains). After that, homeprices went nowhere for the next 10 years. So yes, a serious drop can happen.
Gains in the US are now much higher than that; gains in individual home prices in my country for the current boom are 500-1000% and still climbing. We need a 80-85% drop just to get back to the historic trendline…
Sorry I went to bed before I saw all these comments . Thanks for responding everbody . It goes to show that the history books all write the story of THE GREAT DEPRESSION different.
From “Four Myths About America’s Great Depression”:
The Federal Reserve System continued to follow an easy money policy during the second half of the twenties. Between July 1924 and 1929, the money supply increased more than 20 percent. Farm and urban mortgages increased more than $10 billion between 1921 and 1929. Because much of the new money created by the system was channeled into speculation in real estate and the stock market, rapid price rises occurred in the stock market and in real estate.
From “Causes and Effects of the Great Depression”:
Banks that had invested heavily in the stock market and real estate lost their depositors money. A panic ensued as people lined up at the banks to get their money. unfortunately for many the money just wasn’t there. As the amount of money in circulation dropped deflation hit. Money was worth more but there was little money to be had. The fed which had the power to put more money into circulation did nothing (laissez faire). Workers were fired as thousands of businesses closed down. Unemployment rose to 25-35%. In Toledo Ohio fully 80% of the workers were unemployed! Real estate investments flopped because with deflation a building that was once worth ten million was now worth five. The mortgage and debt stayed the same but the income was gone. Banks foreclosed on loans and took possession of worthless properties that nobody could afford to buy. Between 1930 and 1932 over 9000 banks failed.
Thanks you for your work
OT. Anytime that I see the Federal Reserve brought up I try to remind folks of the bigger picture with regard to this monetary system we live under. I apologize to those who are continually barraged with my comments. I will preface the link with a quote that I think everyone here will see a linkage with.
“If Americans ever allow private banks to issue their currency, first by inflation then deflation, the banks and the corporations that grow up around them will deprive the people of their property until one day their children will wake up homeless on the continent their fathers conquered.” Thomas Jefferson, 1809 during debate over the recharter of the 2nd U.S. Bank.
http://video.google.com/videoplay?docid=8442305921010099392
This link will bring you to the first of three videos that will give a short history of money and the FED.
One thing that I did not realize was that the system that our forefathers fought against (as indicated in the quote above) was foisted upon us in a vote held at night on Dec 23rd, 1913 by only 3 senators. Apparently the senate recessed without closing in a parliamentary procedure that allows a small minority to pass bills as long as there is no dissention. So there you have it, a bill creating a monetary system where we pay a private banking cartel interest to print our money out of thin air is passed by 3 senators. Anyone want to guess who wrote the bill? You’re going to have to watch the movie! A good primer for those who are interested. I will post the links to the other 2 videos if anyone is interested.
Ever notice how many of these idiots you read about are foreigners? The bottom feeders of the RE industry really went after that group after they’d exhausted the pool of home-grown idiots. Wonder if all those illegal aliens they were giving mortgages to last summer are holding on (smirk).
I agree with the comment upthread that these people should not be allowed to breed. But neither should the ones a few tiers above them in the pecking order, you know, the ones you see hawking Queen Creek houses on Craigslist and begging for sympathy. Screw them all.
Oh, and Florida friend update: Units on the market up to 19 now, up from 15 last week. Three price reduction, no sales or contracts. He also just lost his job. He can pay his bills and doesn’t “need” to sell right now but I have a bad feeling about the next 12 months for him. His place would not sell now for within 10% of what he could have gotten last summer when I was all over him trying to get him to sell. I told him to do a sell/leaseback, because there were so many idiotic “investors” slithering around who would have loved to buy a condo with a tenant in place already. His next door neighbors bought at hte highest price yet with a suicide loan. Oh, and did I mention that they are from Cuba or Haiti or some other third world country to match the other neighbor who is from Poland? I just shake my head at the greed and stupidity . . .
This guy is doomed! Keep us posted!
A return to 1999 era pricing would put us back to the long term uptrend. That’s a reasonable enough guess. But is real estate so “special” that it can’t break a long term trend? Stocks sure do, when nobody wants them.
You can buy houses all day long in the rust belt cities for $20,000. Big turn of the century forsquares 2500 sq ft large.
Why couldn’t this scenario repeat in Las Vegas or Phoenix if there is a water crisis? Or in Florida if we continue to have category 5 hurricanes? I’m not predicting this, but it’s academically possible for anywhere to become a ghost town when there is no demand.
$ 20.000 for a whole house? shhh … don’t tell the foreigners from Uk or Netherlands, they will buy up the whole rust belt in a minute (I think Dutch banks would easily provide 200% financing on such great deals).
Even a sh**house costs nearly 10x as much over here (and that is in areas that have hardly any good jobs either).
They call him Flipper, Flipper, faster than lightning,
No-one you see, is smarter than he,
And we know Flipper, lives in a world full of wonder,
Flying there-under, under the sea!
Everyone loves the king of the sea,
Ever so kind and gentle is he,
Tricks he will do when children appear,
And how they laugh when he’s near!
They call him Flipper, Flipper, faster than lightning,
No-one you see, is smarter than he,
And we know Flipper, lives in a world full of wonder,
Flying there-under, under the sea!
Going back to the foreigner thing, I remember now the daytrading bucket shops and websites marketing to and opening foreign language branches at the end of the stock bubble. I guess tapping that pool is the endgame for all manias.
The Bubbles the Clown posting is just too precious. I had to stop from laughing so hard. That would be a great video to sell when most of the people realize that they are F*CKED BORROWERS, or HOMEDEBTORS. I sent the previous BUBBLES story to some of the FBers posted on Craigslist. Oh, the fun.
Just think how much fun these people are going to have - negative equity, higher payment, losing job, BK can’t save - can we say spell TROUBLE. I feel sorry for the day to day story, but it is going to be one “Mother of Bubbles” and nobody will really know the impact until it is upon us.