Weekend Topic Suggestions Here!
And send your housing bubble photos to:
hbbphotos@gmail.com
The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
About Me
Name:Ben Jones
Location:Northern Arizona, United States
To donate by mail, or to otherwise contact this blogger, please send emails to: thehousingbubble@gmail.com
PayPal is a secure online payment method which accepts ALL major credit cards.
Links
-
May 2024 M T W T F S S « Sep 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31
Photo Submission: hbbphotos@gmail.com
View the HBB Photo Gallery *updated 4/13/2008
Howzabout suggestions or ideas on ways to make some money while housing tanks for the next couple years… instead of sitting and waiting perhaps years for carcasses to settle to the bottom.
And, if anyone knows, share approximately what a bank with REO’s wants to hear (and what they do not want to hear).. along the lines of: “Mr. Banker, you and i both know those properties are depreciating fast and will eventually reach 1998 price levels, so let’s cut to the chase and deal now.”
The problem is that Mr. Banker will never sell at the price you both know is reasonable because he is waiting for (and may still get) the GF. As soon as the banks start to sell for reasonable prices; in a word, the gig is up. The comps will adjust to what the market will support (and no, a market will obviously NOT support the prices if you have a 60 month inventory; ala Palm Beach) and the banks will take the losses.
Unfortunately, the banks have little incentive to blow out their repoed properties; it will just decrease the values of the homes they are going to repo next week right down the street. However, how long with the bank’s investors allow them to keep a huge amount of RE on the books?
This whole thing is like trying to stop a crack in a dam with a putty knife. Right now everyone (sellers and banks) are trying to prevent the leaks from getting through. The problem is the water is starting to spill over the top!
Lets assume the greater and lesser fool pool is dried up.
The big hurdle is now low-price-comp-pollution of the remaining inventory.. so, is there a way to legally obsure the true sales price?
For instance, a property is worth 150K and a deal is struck for 150K. But the comp needs to be 200K.
hmm…
I pay the bank 150K cash “down” and the bank lends me 50K, a mortgage with a 50K balloon due in, say, one week. (for loan security, perhaps 50K in cash is in one of my accounts at that bank as collateral) Essentially i borrow 50k and repay 50k immediately.
Comp = 200K but my cost is 150K.
I know that sounds really funky (understatement of the year), and i would not expect it could be so simple, but if comps are the problem there’s gotta be a clean way around it.
I cannot believe that someone with 50k in cash would buy a house in this way. Why would he pay over 150k if that is what you say it is worth? If this is true then the pool of GF’s has not dried up. This sounds like fraudulent activity.
Property taxes to think of.
Joey — I’d be willing to bet that the transaction as described is illegal as all getout. In one form or another, it would be fraudulent. You’re describing a mortgage loan for $50,000 for which you will not be writing a check to the bank for $50,000, in order to pay it off. If you did, you would have paid $200,000 for the house.
There’s no way around it except for the bank to give you cash back at closing, under the table, in exchange for your signing the promissory note, in which case they are defrauding their investors/stockholders.
Chip.. l thought so too. It stinks.
All i wanna do is protect the bank’s interests, in this case providing them with a high comp. I’m willing to live with the inflated prop tax hit (as suggested by We Rent) or whatever other costs are necessary, presuming the price is right.
My first thought was a 99 year mortgage with no interest, no payments for 99 years. That sounded even more slimy and, anyway, i couldn’t figure how to fit it into the deal.
I don’t want anyone to end up with the short end of anything.. and it’s gotta be 100% legal.
All we’re talking about is a fake comp, not about getting over on anyone..
How about this: The sale is structured in such a way, or it has some particular characteristic that makes it unusable as a comp. Something causes it to be an aberration. Appraisers will not or cannot use it for some reason..
Joey — I recently thought I might face the same sort of dilemma — lowballing a builder who would want to keep the comps up in order to avoid lynching by other customers. I decided not to offer at all and avoid getting into the ethical quagmire — and in my case it would not have involved a loan of any kind — all cash.
“the ethical quagmire ..”
yeah.. especially with banks who have to appear conservative and above board.
im just searching for viable ideas that are off the beaten path..
hey.. how about a lease option with the bank? That’s not gonna show as a comp, afaik.
I like the idea of a thread on REOs and similar discounted real estate. From time to time, I look at the REOs listed on line by various banks and other institutions. Usually, the contact is a local realtor in the area. Even though we tend to diss realtors, the realtor who handles REO for one of the banks in this area (Tampa Bay) is very realistic. I had a conversation with her a few months back and she said that the bank she deals with has not yet adjusted to the reality of the bust and so the REOs are priced high.
Realtors who deal with repossessed property have a much different view of the market. They’ve been through it all and seen it all: the trashing of the property, squatters, stolen appliances and wiring, etc. My experience is that you can have a frank conversation with them. They will present your offer to the bank and will do the talking for you. They just have a hard time convincing the bank that the POS REO ain’t worth what the bank thinks it is worth.
yeah, im sure banks have no desire to deal directly with retail REO buyers and most won’t.. but if someone happens to be a highly valued customer of that institution, maybe they will?
But then, a good, trustworthy agent should be well worth the added cost… they know what’s happening and have resources.. and it might be best to go that route.
I knew of one guy who had authority to lock up a property for a particular client if a good enough deal appeared.
That’s the whole point, the banks consider “a good enough deal” to be a price fairly close to what is owed to them when in reality (because loans were offered close or above 100% LTV) the market price is well below this price point.
The banks are refusing to feel the pain and are putting off the day of reckoning. I say screw the banks. Understand that there IS a cost of holding REO’s. Taxes, Assoc fees, maintenance to name but a few. Let these suckers let these languish through the summer and watch the maintenance issues mount.
Anyone buying right now is completely clueless on how bad this is going to get and how far prices are going to fall.
Talk and speculation on Ben’s website has been right up there with main stream media. If you are a true believer in “the bubble” PUT options on Pulte Homes, KBH Homes, Toll Bros, Contrywide is the next logical step. Go to Big Charts and plug in Pulte (PHM) for 1 year. Fromm $35 to $22, and Pulte was at $5 during the last bubble 12 years ago.
I agree that the general topic of REOs and how to capitalize on them would be a very interesting topic.
How about discussing our elected leaders attitudes concerning and awareness of homeownership, risk, taxpayer bailout, etc.? I posted this text and link to the House hearings on FHA a couple of days ago. Maybe this time there can be some discussion of Congress’ attitude, as shown in the hearing questions, without distracting claims that FHA and GNMA don’t have explicit government backing.
And if you want to see the Congress in action, check out last week’s hearing on FHA and the non-profit downpayment assistance outfits that the IRS has labeled ’scams.’ Bipartisan support for the scams. You can read the prepared testimony faster than you can listen, so I’d fast forward to the places where Congresscritters are asking questions. Keep the airsickness bags at the ready. I’d especially advise reading the prepared testimony of Nehemiah’s Scott Syphax, who maintains that prohibiting FHA from insuring mortgages without downpayments is tantamount to slavery.
http://www.house.gov/apps/list/hearing/financialsvcs_dem/ht062207.shtml
It is imperative that buyers enter into mortgage arrangements responsibly and with realistic knowledge of their ability to repay. Further, the price of homes purchased using downpayment assistance must reflect a fair appraisal. …
Calls for genuine disclosure and quality appraisals indicate there is something more going on here than you suggest.
Speaking of “attitude”, you seem to be asserting that without much of regulations the broader market would be well served, but these agencies were created precisely because of the longstanding failure of the housing market to serve the public. We live in a world of collective efforts that include such outrages of socialism as shared roads, electric service, and more, so the extreme independence angle doesn’t really ring true.
“shared roads”
What do public goods like shared roads have to do with private goods like downpayment gifts to help people buy houses they cannot afford? Me confused.
You ain’t the only one.
I don’t have a clue as to what “mole man” is talking about, either. What “extreme independence” angle? And where did anyone assert that “without much of regulations the broader market would be well served?”
BTW - I would strongly encourage the HBB readership to watch some of that video (fast forward the recitation of prepared text, except maybe for Syphax) and watch your elected reps in action on the Q and A.
The looming mega-crisis in derivatives is worth some discussion. Here is a quote from an article by Adrian Douglas posted at lemetropolecafe.com:
” It is naïve to think of the $500 Trillion derivatives market as a sideshow, where some silly prices are agreed for obligations that no one has the creditworthiness to back. This is not just an ugly, non-malignant tumor that can be conveniently cut off. This massive financial activity that bets on the outcome of the pricing of the underlying assets has corrupted the system such that those who would be responsible for paying out orders of magnitude more money than they have if the bets go against them are sucked into a black hole of moral and ethical destitution as they have no other choice but to manipulate the price of the underlying assets to prevent financial ruin.”
http://lemetropolecafe.com/toulouse-lautrec_table.cfm?pid=6181
A sidelight of the derivatives crisis is what is going on at Bear Stearns. Two of their hedge funds have blown up and their loans have been called. However the collateral for the loans has much less value when presented to the market than originally thought. Rumors abound that efforts to sell the collateral resulted in bids as low as 30% of carrying value. As a result the sellers withdrew rather than sell at such deep discounts. So how much are these packages of subprime loans REALLY worth? I guess we will have to wait and see.
Meanwhile Bear Stearns is not the only one with highly leveraged hedge funds holding such assets. We can reasonably expect to hear of other hedge funds coughing up their subprime backed holdings rather soon.
Stock up on pop corn!
You can’t link to this site because it is a pay site. Just fyi.
Nicolas Sarkozy was elected the president of France recently. One of his big platform issues was to push through a US-style mortgage interest deduction. Will this be a chance to observe whether or not the MID is a significant cause of house price inflation?
It was in the 20th century.
What I read is that FDR put it through as payback to his RE buddies. He did a lot of sketchy things, so it wouldn’t really surprise me.
Morning all,
Howzabout a topic on the consumer and how he/she can continue to spend on everything from eating out to shoes to cars to whatever?
Is there some theoretical limit to how much unsecured credit can be extended?
What would it take to break the consumer (other than job loss)?
That’s a good question. I’ve got family and friends I know are in debt up to their eyeballs that continue to spend like drunken sailors. I guess they spend their entire paycheck and the rest just goes on the credit card. It definitely causes some concern for the future as these are mostly people in their mid to late twenties. New houses, new cars, toys of every sort all bought on credit and not a dime invested or in savings. I can’t help but think it will end badly, but I’ve yet to see much if any negative consequence for this lifestyle. It’s quite frustrating for those of us living a modest lifestyle and saving for the future.
Here’s how it worked for me in FB-world: You pay the mortgage and the credit cards with your paycheck. You live on what’s left over plus the credit cards. You hope that you’re living cheap enough that the credit card balances are going down, but try not to look at them too closely because you know you might not like what you’re seeing. When you reach the point that you’re living on nothing but credit cards and have to start using them to pay each other, you admit that this time you weren’t careful enough, you refi them back to zero, and promise to do better. It only breaks down when refi isn’t an option. Until then you will not see any negative consequences for them. Since we’re now past the last refi for most of them (and the credit card company data suggests that the FBs have not made any meaningful cutbacks), the countdown to destruction has begun. It’ll probably average about 2 years before most of them fold, and about 5 years until the last one goes down. Right now they’re religiously making the credit card payments because they still think they can somehow pull it off without a bankruptcy, even though they might lose the house. After the house is gone they’ll realize that even in a cheap rental they can’t service the cards and eat, so the BK comes after that.
In my case I was stupid enough to be an FB, but smart enough to see where it was going, and sold in 05 and took my medicine rather than riding a toxic refi to oblivion…all my mortgages were 30 year fixed, and I knew I’d screwed the pooch when that wasn’t going to work any more.
Former FB — thanks for the sobering anecdote. Always good to hear first-person accounts of logical outcomes.
Oh, all sorts of things from a trip to the emergency room to a car engine trouble to a forced reduction in work hours.
But let me propose something else. What would happen if a whole lot of the ARM holders COULD “work something out” on their loans. Not the $35K per year for both adults working as strawberry pickers with a $700K mortgage. They don’t have a prayer. But what about people who are a heck of a lot closer?
For example, in the vicinity of $90K per year, you might bring home about $2000 every 2 weeks (after taxes and enough in the 401K to get the full empoyer match and health insurance and a few bucks in the various flex spending accounts - lets assume a job that provides those sorts of benefits). That’s $4000 per month and an extra paycheck twice a year for emergencies or a vacation or Christmas bills. If you have a $500K mortgage the monthly payment on a fully amortizing 30 year 6.25% rate is $3079 per month. If you assume that the tax benefits of the interest deduction cover the insurance and property taxes (big assumption, but lets use it for now and assume no AMT issues) you might, just might, be able to cover your other expenses but boy would it be tight. $1000 a month to cover transportation expenses, phone, heating, electricity, food, child care, etc.
This is the scenario that the people calling for the banks to “work something out” with the borrowers are advocating. And we all know that it will take a while longer, but this isn’t just the sub-primes, it is the alt A’s and the primes as well. As a matter of fact, it may be more true in these groups, because they are more likely to have middle class incomes.
What happens to the economy? No HELOCs to bail you out. The house eats up everything. My family lived like that for a few years that I can remember as a kid. The house cost $19K and my dad made about $6000: only one car in a suburb with no public transportation, entertainment meant going to Grandma and Grandpa’s house and they fed us dinner about 3 times a week (not a solution available to everyone), sneakers from the $5 bin at Bradlee’s, hand me down clothes from cousins whenever possible, etc. I didn’t see a movie in a movie theater until I was over 6 years old.
Now, my dad was at the very beginning of his career so his salary pulled us out of that lifestyle after a few years, but I don’t know if most of the people in this mess are looking at significant salary growth over the next decade. Are they? And if they aren’t and the work outs came to keep them in their houses, how many people would be living on the edge like my family did? Would they be able to stick to the incredible discipline it requires? What would it do to the economy?
FBs, even the ones with the best intentions, have no clue how to live on $1000/mo after the mortgage payment is made. Most of them are probably spending $1000/mo just on food and energy. As long as they have credit cards available, they will live as cheaply as they know how (which is not very cheaply) and pray for a miracle. You can’t “work something out” as long as they have access to credit. They’ll just auger back in. People don’t realize that the lifestyle that a median income will really support doesn’t include a whole bunch of the stuff that “everyone” has. A wrenching change in mass consumer psychology is yet to come.
“People don’t realize that the lifestyle that a median income will really support doesn’t include a whole bunch of the stuff that ‘everyone’ has.”
A great summary of the puzzlement and frustration many of us feel, to different extents. I see it every day — people with lifestyles and toys that their jobs can’t possibly support. Wonder if there’ll be a correlation in the volume of liquor sales, as these folks begin to sweat.
Do you really think 1k left after paying the mortgage payment is enought to live on each month? Don’t try it with 2 children to feed and clothe. Oh and don’t think about having a Fido in the back yard or a Molly to curl up on a sunny windowsil.
Yeah, and that is just what I am talking about. What effect on the economy? Dogs and cats dropped off at the shelter or abandoned. Neighborhood swap meets to trade used children’s clothing around - no fancy sneakers, torn items mended not tossed. More kids applying for free school lunches and breakfasts. No cable. No internet. Either no cell phone or no land line. If your house has AC you can’t afford to turn it on. Back to the public library for books, videos, magazines. Kids “enrichment classes” like dance or music at the rec center (if the town still has one) or not at all.
And that is just the stuff I remember from my childhood, I’m sure I’m missing lots of stuff. Seem like it would have a heck of an impact on large and small businesses. But how to figure out what the impact would be? Would it have a similar impact on the economy as an x% sudden unemployment rate? I’m not sure. A lot of people think that they will be able to get a new job quickly after a layoff - and a lot of them are right. But the “beneficiaries” of a mortgage workout will be looking at 30 years of the same thing. Rising wages will be the only thing to get them out of the hole and they won’t be able to move to find that higher salary until the house values come back many many years later.
As for the discipline, my mother still writes down every penny that she spends in a budget book at the end of the day and reconciles it at the end of the month. It is left over from the time she was making the “house poor” budget work. She has never gotten over it.
Scarily prescient, Polly.
Is there anything that would change your mind about not buying now or in the next few months, other than price drops? For example, if the 30 yr fixed rate dropped to 5%, would you buy?
Doesn’t matter to me, I’m looking to pay cash. I’m more concerned about regional stability (in Florida). My biggest beef with the bubble and its bust is what it has done to regions and communities. I am interested in the sociological aspects of the bubble/bust and I am very unhappy with the destabilization that has occurred.
Amen palmetto. Crime stats in my boro, Brooklyn, indicate an increase in robberies — granted, in most pcts these crimes were at their lowest in 05-06 (height of housing boom). But they are now rising, and I expect crime stats will correlate with what is happening to the economy, as they have done in the past. Be careful where you scoop up your bargain houses.
We’ve had a statistical rise in violent crime in Florida, so much so, that Orlando is one of four cities in the country that requires a special FBI task force to handle gang-related problems. Funny side note, the right hand doesn’t know what the left is doing, so there was an incident where some undercover guy from ATF was trying to sting some undercover guy from the FBI. Keystone Kops.
Not just crime, though. I’ve watched entire landscapes change in just five short years, and not for the better, as gulag developments spring up along with traffic problems.
Neighbors lose long time neighbors who sell out and move. Families are uprooted and children have to get used to new schools and new friends, not always a bad thing, but I’m sure many on this blog have had the experience of moving as a child and the pain that comes along with that, even if the move is good for the family.
There have been demographic shifts in areas as well. Not to mention the massive numbers of illegal immigrants who participated in the construction during the bubble and we are now stuck with the consequences of that, just like France is stuck with the consequences of their immigration after WW2, to rebuild the country. There’s also more noise, more trash and more pollution. I don’t know if it just me, but the bubble seemed to produce some sort of population boom. There’s just too many people.
As Neil Peart’s lyrics usually say, “changes aren’t permanent, but ‘change’ is.” Sometimes for the better, and sometimes for the worse. Americans fear change. Hence they elect the same stupid politicians and they want to manage the climate (or temperature).
“they want to manage the climate (or temperature).”
Bro, I agree with you on a lot of things. But what’s wrong with managing the climate or temperature? After all, here’s your quote from another thread:
“Just wondering how some of the bubble bloggers are faring in the Southwest with the widely reported heat wave and in Texas/Oklahoma/Kansas with all the precipitation. Everybody OK?”
It’s a piece of cake. Anyone here ever heard of air conditioning?”
Seems like you don’t mind doing a little temperature management. That’s what AC is, after all.
I think there is going to be a great deal more social upheaval and instability from this bubble than many people expect. The hedgies and banks are starting to feel what it’s like to foul your own nest. They haven’t even begun to feel the backlash from fouling everyone else’s.
“They haven’t even begun to feel the backlash from fouling everyone else’s.”
Another good one.
Let me answer this question with some data from a house I bought in 1997 and sold in 2000 and what that house is valued at now. In 1997 I bought this house new for 199k. Sold for 250k in 2000. Now house is supposed to be worth 350k. If prices dropped to 2000 year price at a 7% rate with 20% down my payment would be $1,331. If rates dropped to 5% and prices do not change I need an additional 20k for 20% down. My payment now would be $1,610.
That question is too easy to answer.
possible topics:
1) HB Blog attacks–the number of assaults continues to grow, from last year with Marin blog getting death threats (and shutting down for a while) to the most recent Implode-O-Meter Jedi under attack. Ben, you must have some real doozies (you could share generically, ie, company xyz said….). I’d be interested in hearing of some others I’m sure I missed along the way.
2. Much lighter topic– Just what brand of popcorn does Neal recommend we purchase? haha
“Marin blog getting death threats (and shutting down for a while)”
I didn’t hear about that. Wow, that really sucks profusely.
yeh, i remember her posting about it way back when. Wasnt there another doozy about 2 years back where somebody bought the domain names out or something, so when you click you’d end up at realtor websites? hmm.. cant remember exactly.
Ben, aren’t you protected from that sort of attack a little bit because the main posts are composites of items that are published elsewhere? I don’t read the other blogs that were mentioned, so I don’t know if your style is unique. It just seems that even most irrational people are going to look at one of your posts and get angry at the reported at a reporter at Bloomberg or the Florida paper et al that you are quoting.
I’ve never had any threats or even angry emails.
maybe that’s because you keep a tight reign on the posts.. i know a few of my potentially troublesome, borderline comments have been rejected and applaud you for having better taste and judgment than i..
suckup/off
Oh, and does anyone know of a chart that provides the integral of the Credit Suisse ARM reset chart. I would like to see a chart of the accumulation of people dealing with resets as we go along, and that requires the area under the curve…
Not that you may not be aware of this, but the “accumulation of people dealing with resets” changes daily. The information is not static.
The Credit Suisse chart is far from losing its usefulness, but at some point, the data in the latter years is not going to be as accurate as it is today. Or was when Ivy created it.
The actual situation will eventually be worse than it looks (on the chart) before it gets better years from now.
That is why I am looking for a new chart not a number. For example, the integral of a chart with 2 big bumps will be one with a very steep upward slope that evens out to being a much less steep upward slope for a bit and then back to the steep upward slope. At least that is what I think it will be. And that is why I am asking if anyone has seen a chart like that.
I think you are right about the curve. I haven’t seen such a chart.
My apologies, I missed your “as we go along” and Calculus was some time ago!
Has the housing bubble contributed to global warming? All that concrete and asphalt. I’m feeling it here in Florida, when I take a morning walk. The steam and heat rising from the pavement and houses even in the early hours before the sun is well up.
I’ve always thought development has to go hand in hand with preservation of the environment to some degree. When you have massive development, a lot of trees and plant life fall to the bulldozers and bush hoggers. That’s less shade, less of an ability to process CO2.
Hey, flame away if you think I’m a tree hugger. But I say all this development is a real problem for the environment and breathable air.
What’s wrong with being a tree hugger?
Beats being a consumption hugger.
what are builder lots going for
bought 04/05 now ?????????
Foreclosure question: does foreclosure discharge outstanding debt? For instance, lets say you had a 250K loan. Mail the keys to the bank. Bank eventually sells the home at a foreclosure auction for $200K. Does the bank (loan owner) typically eat the $50K and send the IRS a 1099? Do they come after the borrower for the $50K? Do they typically sell the debt to Bubba’s collection agency for $5K (and send the IRS a $45K 1099)? If so, there’s your future business opportunity… What about transaction/brokerage fees? Are they piled onto outstanding debts?
Folks seem pretty cavalier about walking away from a mortgage. “Jingle mail” sounds so easy- just take the hit on your credit score for a couple of years. I am wondering if the reality is years of persuit from collection agencies, wage garnishments, etc. Would the debts be discharged in bankruptcy? Under the new rules? On a first mortgage? On a HELOC? I’m guessing it varies from state-to-state-
Just curious.
D.O.O.M. & G.L.O.O.M.
Days overpriced on market
Giant looming obligation on mortgage
It would be interesting to discuss strategies for negotiating with FB’s. Let’s say a home has been sitting empty for 6-12 months, priced way over fundamentals, owners are carrying two mortgages…
Is there much we can do to nudge FB’s into capitulation? The whole standoff phase seems such a waste: (1) potential sellers are losing money every day a home sits vacant and as potential buyers we’d rather not wait 3 years for the whole thing to wind down.
Lowball.
Didn’t someone around here have a strategy of sequential lowballs with sellers, and then telling each one they have a limited time to accept the deal before the buyer would move on to the next one?
It’s the reverse of one overbidding session on a single property by multiple buyers.
Lowballs by one buyer on multiple sequential properties.
How about Interest Rates. And that England just raised their rates to hightest level since 2001 and will likely set precendence for rest of world’s central banks to follow.
http://www.guardian.co.uk/frontpage/story/0,,2120206,00.html
Article helps deliver a mostly unspoken message that what Ben and the US Fed does really does not amount to much on the world scene with respect to what longer term rates (mortagage) do.
I wanted to post this comment by exeter from the housing bubble news thread for consideration as a weekend topic, since we’ve been having some back and forth about “the wealthy” over there:
“There is nothing right or wrong with wealthy folks. The problem is an ideology spawned in the greedy minds of the wealthy call “trickle down” economics. Ben Bernanke, under oath and in front of Congress stated “there is absolutely no evidence that tax cuts increase revenue”. Now Mr. Paulson conceded the same thing albeit reluctantly. This utter foolishness that manufacturing, deficits and good paying jobs don’t matter is all a part of that ideology.”
I agree, and you could expand the topic to the bifurcation of wealth in this country…and the resultant social and economic fallout.
When this housing mess shakes out, and the middle class is gutted, the future for us in the country is going to be very different. And that will affect all our lives, renters or not.
How about tapping equity by selling a share in the future appreciation of your house?
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/07/06/BUGHQQRLUC1.DTL
“Pharmer John” - OMG - Never heard of anything like this one. Wondering if it could be the first of many such schemes to re-inflate. (Should we debate the terms of Rex & Co’s inevitable bailout, or is it too early?)
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/07/06/BUGHQQRLUC1.DTL
So the homeowner nets maybe 98K, paying a good chunk of “points” (’scuse me, Servicing Costs) up front. And the lower the amount borrowed, I assume, the more those costs would cut into the net.
54K to agent, 175K to Rex, a few grand closing costs (again, really) - that’s 233K out of pocket on 900K house plus mortgage of …? As this Rex & Co. is requiring 25% equity, assume that means that when the $100K was “given”, the hypothetical owner had $562,500 or less owing on his mortgage. So assuming he is not allowed contractually by Rex to raid more equity by Neg Am, taking a second, etc., he will have about 143K or better in pocket at close, after agents costs and the rest.
Of course, the actual cost for the 100K over 5 years…nope, more like $98K, don’t forget the “RE Services” origination charges - that would be about 16.7% per year, on a property that appreciated at a hypothetical 3.1% per year.
40.5K to agent, 63,500 to Rex. Maybe not a terrible deal in a down market, Rex gave the owner 100K at 4/10s of 1% per YEAR interest, plus defrayed his equity loss by 50%. Assuming FBer can come up with the other 37.5K, this may be a choice preferable to default.
Homeowner is only out a few grand? Again, just 2% for 5 years or 4/10s of 1% per year.
Yikes! Home owner paid 37.75% for those 11 months. Yikes!
Oh, I’d like to suggest one the columnist didn’t explore:
Scenario 5: After five years, the house sells for 420K, it has lost 330K in equity. Rex “owns” half of that equity loss, or a negative 165K (minus it’s original outlay to the homeowner). Does Rex pay the owner $65,000 at close?
This is interesting. It could effectively work both as a loan and a kind of “equity depreciation insurance”, only when RE times are good, the “loan” commands an obscenely high interest rate, and when bad…I do wonder if Rex has a stop loss so they never have to pay out to the Homeowner for depreciation above and beyond their initial “investment”. It’s probably academic anyway - if they don’t have that stop loss clause, they’re going bankrupt in any seriously down market, and god luck collecting.
I’d love to see a RE/tax attorney pick this one apart. I’m wondering if it’s not a much more sophisticated scam, even, than my little brane can comprehend.
“Pharmer John” - OMG - Never heard of anything like this one. Wondering if it could be the first of many such schemes to re-inflate. (Should we debate the terms of Rex & Co’s inevitable bailout, or is it too early?)
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/07/06/BUGHQQRLUC1.DTL
So the homeowner nets maybe 98K, paying a good chunk of “points” (’scuse me, Servicing Costs) up front. And the lower the amount borrowed, I assume, the more those costs would cut into the net.
54K to agent, 175K to Rex, a few grand closing costs (again, really) - that’s 233K out of pocket on 900K house plus mortgage of …? As this Rex & Co. is requiring 25% equity, assume that means that when the $100K was “given”, the hypothetical owner had $562,500 or less owing on his mortgage. So assuming he is not allowed contractually by Rex to raid more equity by Neg Am, taking a second, etc., he will have about 143K or better in pocket at close, after agents costs and the rest.
Of course, the actual cost for the 100K over 5 years…nope, more like $98K, don’t forget the “RE Services” origination charges - that would be about 16.7% per year, on a property that appreciated at a hypothetical 3.1% per year.
40.5K to agent, 63,500 to Rex. Maybe not a terrible deal in a down market, Rex gave the owner 100K at 4/10s of 1% per YEAR interest, plus defrayed his equity loss by 50%. Assuming FBer can come up with the other 37.5K, this may be a choice preferable to default.
Homeowner is only out a few grand? Again, just 2% for 5 years or 4/10s of 1% per year.
Yikes! Home owner paid 37.75% for those 11 months. Yikes!
Oh, I’d like to suggest one the columnist didn’t explore:
Scenario 5: After five years, the house sells for 420K, it has lost 330K in equity. Rex “owns” half of that equity loss, or a negative 165K (minus it’s original outlay to the homeowner). Does Rex pay the owner $65,000 at close?
This is interesting. It could effectively work both as a loan and a kind of “equity depreciation insurance”, only when RE times are good, the “loan” commands an obscenely high interest rate, and when bad…I do wonder if Rex has a stop loss so they never have to pay out to the Homeowner for depreciation above and beyond their initial “investment”. It’s probably academic anyway - if they don’t have that stop loss clause, they’re going bankrupt in any seriously down market, and god luck collecting.
I’d love to see a RE/tax attorney pick this one apart. I’m wondering if it’s not a much more sophisticated scam, even, than my little brane can comprehend.
$#!- sorry for double post.
I propose a thread on underwater subprime hedges; how many are there, and how long until they collectively drown?
At some point, I’d like to see an analysis of MBS CDO “tranche” problem in the simplest possible terms — ideally using three or five mortgages, total, in the example. They could be for houses # 1, 2, 3, 4 and 5 Elm Street. What I hope to understand is how the mezzanine and equity slices pertain, for example, to the mortgage on #2 Elm when the owner of that property defaults. How many institutions own a piece of that particular mortgage? How, exactly, is that ownership defined in relation to #2 as a physical address. Who continues to pay the servicing agency that is trying to collect on the mortgage. Etc., etc.
I think I understand the problems in the aggregate, at least well enough for my own concern. But the details interest me — I’ve seen inklings of the problems related to these questions in a few article to date, along the lines of “Who really owns the mortgage/REO now?”
Not to go all anti-Jimmy Stewart on you chip, but ‘your money isn’t in #5 Elm St.! Take the simplest possible case. An MBS consists of the first mortgages on #1, #2, #3, #4, and #5 Elm St. at $200K each. A “special purpose entity” - more or less a corporation, owns the mortgages, and the MBS owners are, sort of, shareholders in that corporation. The SPE has a contract with a servicer, who owes a fiduciary responsibility to the SPE (effectively, the “Shareholders” who own the MBS). The contract will typically also lay out, pretty explicitly, how much lattitude the servicer has for things like workouts and short sales. So an MBS owner doesn’t really have mortgages, he has an undivided interest in an entity that owns the mortgages.
Tranche that MBS into a CMO (Collateralized Mortgage Obligation) with two tranches and you start in more or less the same place. There is still an MBS with mortgages owned by an SPE, and a servicer with fiduciary responsibilities and pretty explicit contract terms. Only now there are two “Classes of shareholder” (think of common and preferred stock). The senior tranche gets all the cash until the first 800,000 is paid off, and then the junior tranche starts to get whatever is left (this is WAY oversimplified - usually more than 2 tranches, interest can go one way and principle another, etc.) If a loan goes bad, it is still the servicer, with a contract with the SPE that owns the mortgages, that takes possession of the property and sells it off.
The servicer still has a fiduciary responsibility, but to whom will be the subject of some really interesting litigation. The senior tranche owner may not care if the servicer is efficient or not - they are covered in any case. The junior tranche owner cares a lot about how good a job the servicer does with respect to avoiding credit losses. But the senior tranche holder is much more concerned about interest rates - if rates have gone down since the mortgages were originated, he’ll want a foreclosure ASAP, even if the loan can be worked out. If rates have risen, he’ll want a workout attempted, even if the chance of success is remote. Remember, he’s almost certain to get his money (he’s in the senior position) and cares mainly about WHEN he gets his money (soon if he can reinvest at a better rate, later if the mortgage is better than any other investment available). This is the ‘misaligned incentives’ issue that will make workouts more difficult (there is also an accounting issue, but I’ve typed too much for one day).
Mort_fin — thanks — that’s a good start. Probably all I need to know, for that matter, in that I’d never have enough money to invest in such stuff.
I’d also like to see this. I’ve read up on CDOs, but they still makes my head spin.
The best metaphor I can think of involves apples. Suppose you have an orchard full of trees. You need financiers, so you decide to have people “sponsor” trees. Think of each mortgage is a tree. The trees produce 3 kinds of apples: red, green, and brown. Red apples with grow healthy apple trees. Green apples grow sickly apple trees. Brown apples grow nothing.
A CDO is a basket with different percentages of red, green, and black apples. An investment-grade tranch is a box of red apples. A mezzanine-grade tranche is a box of green apples. An equity-grade tranche is a box of brown apples. Ratings refer to the proportion of red, green, and brown apples in a box.
That’s as far as I’ve gotten.
‘Brown apples grow nothing.’
I always looked at it as some kind of risk allocation. Think of brown and green as less desirable, but still marketable apples. Those trees may get diseased easier than the red is the problem and the market for the three colors can get jostled when news about apples going up 20% annually in price is held to be the norm.
Hedge fund hearing set
House panel to hear if funds pose risk to economy and financial system.
July 5 2007: 4:51 PM EDT
WASHINGTON (Reuters) — The U.S. House Financial Services Committee said Thursday it will hold a July 11 hearing into systemic risks to the economy and the financial system posed by hedge funds.
Chairman Barney Frank, a Massachusetts Democrat, said in a statement that senior officials from the Federal Reserve, the Treasury Department, the Securities and Exchange Commission and the Commodity Futures Trading Commission are scheduled to testify.
The hearing will focus on efforts to monitor hedge fund risk being carried out by members of the President’s Working Group on Financial Markets ( aka the Plunge Protection Team ), an inter-agency committee within the Bush administration.
http://money.cnn.com/2007/07/05/news/hedge_hearing.reut/?postversion=2007070516