‘All Designed To Keep People Buying Homes’
This United Features Syndicate article has the latest twist on interest only loans. “A relatively benign form of interest-only mortgage is gaining popularity as the loan of choice among buyers who have affordability issues. The newer type comes with fixed rates that can never change. Borrowers pay only interest for the first five, seven or even 10 years. When the initial term expires, the payment increases to an amount that allows the borrower to pay off the balance over the loan’s remaining years.”
“‘It’s a very low-risk mortgage,’ says Doug Duncan, chief economist at the Mortgage Bankers Assn. ‘It’s essentially tax-deductible rent’ for the first few years, Duncan said. And by the end of the interest-only period, household income should have grown enough that ‘if the borrower has been reasonably prudent, he should be well-prepared’ for the big jump coming in his or her house payment.”
“If you stretched to get into the house and were betting on appreciation to keep you afloat, you could run into a serious problem.”
“‘Even with your eyes wide open, you can still get hammered,’ Keith Gumbinger, VP at a mortgage information firm warns. He suspects that most interest-only borrowers anticipate either selling their homes or refinancing them before the interest-only period expires.”
The Orange County Register. “ECC Capital has bet everything on borrowers with a history of bad credit. And it worked, for a while. Now, the company is doing everything conceivable to stem losses. The real estate investment trust has laid off 40 percent of its workers, canceled dividend payments to shareholders, and its top managers said they are working without pay.”
“ECC’s public filings show a pattern of lending that appears to ignore whether its borrowers can repay their loans.”
“Nearly half of ECC’s loans last year were made to people who did not demonstrate their income, traditionally a key measure of a borrower’s ability to repay a loan. And it said one-third of its loans made last year were exceptions to its own underwriting standards.”
“By comparison, 43.7 percent of New Century’s borrowers last year did not prove their income. The company also made loans with low introductory rates. ECC sells its loans to investors as bonds, a common industry practice. Until last year, such bond sales were highly profitable for lenders.”
“But the ability to sell most loans at a profit encouraged lenders to stop worrying about whether borrowers could repay them, critics say.”
“Another factor: banks and mortgage companies wanted to keep the lending boom going even as interest rates began rising in 2004. Critics say lenders responded by lowering their underwriting standards. They also pushed loans with low introductory payments that spike later. All designed to keep people buying homes.”
“‘For several years there has been no standard for loan underwriting,’ said Jeff Lazerson, president of a Laguna Niguel-based mortgage brokerage. ‘Every lender liked every loan.’”
“Subprime lenders also do a lot of home loan refinancing. Their borrowers tend to do ‘cash-out refis,’ in which a homeowner refinances for a greater amount of their loan balance, pocketing the difference as cash. Essentially, subprime lenders want owners to view their homes as cash machines.”
“ECC’s gamble backfired. The company lost $64 million last year and $6 million early this year. It got hit by investor panic.’ “Investors who buy bonds backed by mortgages got worried last year about credit risks in the market, said Scott Valentin, an analyst with Friedman, Billings, Ramsey & Co. ‘It happened very quickly in the fourth quarter,’ Valentin said of the investor shift. He said ECC had to sell loans at a loss.”
“Valentin said ECC is taking the right steps to become profitable again, but it’s too early to say if more cost-cutting measures are necessary. The company needs fewer workers because it won’t be doing as many loans to very low credit borrowers, he said.”
“‘That’s the right decision to make,’ Valentin said. ‘Why originate loans at a loss?’”
In one respect it’s a shame the bubble didn’t last a lttle longer. After IO and neg-am, I was eager to see what else lenders would come up with.
My idea would have been the “Pay Whatever You Want Loan”. How much would you like to pay this month to keep the mortgage on your $700K shotgun shack? $2000? $1000? $350? No problem, cuz you can Pay Whatever You Want!
Wanna skip out this month? Zero’s a number, so that’s cool too! We’ll just add on what you don’t pay to the loan balance, but who cares, because RE only goes up, math is hard, you can always refi, why worry about the future, and you’ll get rich anyway!
Heck, why bother with this old-fashioned notion of “payments” at all? Since RE always goes up, the bank will send YOU a check every month! You house was worth $700K…. LAST month. Now it’s worth $720K! So instead of paying $3000, we’ll give YOU the $17K difference! Not just this month, but every month!
It’s the Pay Whatever You Want Loan. Because real estate really does only go up.
I moved from Chicago to San Diego in late 2004 when the mania was at its height. What an eye opener. I couldn’t figure out how people were buying these houses when the income levels where not as good as they were in my native Chicago. Luckily I found Ben’s Blog over a year ago. It was the ridiculous loans and speculation that was going on. I had just bought a house in a suburb of Chicago in ‘98 and nothing like an I/O or Neg Am loan had been available to me there. The only break I caught was on the down payment % because I was a first time home buyer…that was it.
‘My idea would have been the “Pay Whatever You Want Loan”.’
Hopefully the Pay-option ARM is the closest the lending market will get to your scenario in our lifetimes…
I love it! Where do I sign?
My idea would have been the “Pay Whatever You Want Loan”
They have that here in San Jose, you pay whatever you want every month even if it is zero.
I referred to Washinton Mutual contacting their current customers with interest only loans. They are asking them to do workouts.
They will keep the same interest rate the borrower has for the remaining term of the loan-however, the borrowers will have to start paying principal as well.
Washington (I.M.O.) may feel it is better to take this hit rather than have an incredible amout of foreclosures.
The loans mentioned in this article have existed as far back as 10 years ago. However, this was an option for commercial real estate. (very few banks offered them).
The bottom line, interest rates are higher, so today’s interest only loan would have been the same payment as principal and interest 2 years ago.
It may work great in the future, however, this may be too little, too late right now (especially what Washington Mutual is doing)
Your WAMU scenario was pretty well de-bunked last time you brought it up.
They are preemptively going choose to lose 1.5-3 points on these loans for the next 30 years.
Nah, all investors eventually want their $ back.
Until more evidence is coughed up, I don’t buy it.
Sunsetbeachguy-
I only stated what I heard.
I don’t think it was debunked. Maybe you were reading a different blog.
Actually, your thought that WaMu wouldn’t try to alleviate a problem they see coming for a mere one to three points makes no sense at all.
Trust me, the amount it takes to foreclose on a property is a lot more than those points and processing fees.
I know, I use to work at Countrywide abot 10 years ago and saw the costs.
Remember, servicers like WaMu and Countrywide have an agreement to still make good on at least the interest on those loans to the “investors.”
What is the best way to search comments?
I have tried using Ben’s search box but that only covers Ben’s postings.
What is the easiest way to find Only-A-Matter-Of-Times posting on WAMU IO workouts from the last 2 weeks of this blog?
Thanks.
Gee, and you were so sure the WaMu story was so debunked.
However, just summarize the parts that debunks what I heard about what WaMu is now starting to do.
Obviously, you do not believe in any business doing damage control.
This particular section of Ben’s incredible blog simply collborated my posting about a week ago.
Thats all.
Now you are admitting you have posted the WAMU story again.
I simply don’t have time to review 1-2 weeks of postings to find your “story about WAMU”.
A bond trader pointed that the losses on a workout of WAMU’s portfolio would be several billion dollars and dwarf any front end profits they had made.
A bond trader pointed that the losses on a workout of WAMU’s portfolio would be several billion dollars and dwarf any front end profits they had made.
I don’t ever recall seeing that comment.
However, if that is the case, can you imagine how much more would be lost if these properties actually went into foreclosure?
Further, if you recall, I did also state that WaMu is a takeover target.
The surf is nice right now. I am going surfing.
I will not spend any further effort.
I offer a truce, post all you want on hearsay on WAMU’s workout department.
Just remember there are no winners in a workout, everyone just loses as much as they can afford to and the borrower a bit more.
An important and overlooked point is identified in this article. There are two factors setting the rates on these mortgages. The swap curve yield at the point of the expected life of the mortgage AND the spread based on the perceived credit risk. Perceived credit risk is unimportant until it’s important. Mortgage rates could jump dramatically without a corresponding move in the 10yr if the buying dries up. The Japan free money carry trade is going away, if it wasn’t OPM the reversal would be much faster. But the paper-profit guys keep saying, “Let’s hang on one more quarter”.
Don’t forget about this mtg broker.
http://www.fantasylandmortgage.com/pages/944526/index.htm
Some people in the bubble blogs are concerned about some of the “saner” IO mortgages 10yr IO periods and fixed rate IO mortgages.
While yes, they may help create a “softer landing”, think about it from a borrowers perspective.
IO’s only work in a appreciating market. A 10 year IO term allows a longer period of time to get the necessary appreciation.
However, the burden of the mortgage reset with a flat or depreciating market will be crushing.
Why keep making payments, locked in for 10 years, on a asset that looks like it will never be worth more than they paid.
Globalization has kept a lid on wage growth and shows no signs of abating, unless we do another Smoot-Hawley tariff and we all know how well that worked out last time.
Yes, that’s a good point actually. Without the incentive of continuing 10-20% annual appreciation, then there is no real reason to go I/O unless you are dead certain that your income will be double what it is now in 5 to ten years. That is one hell of a gamble for Joe Sixpack to make. Those new I/Os are meant to stave off pending resets for FB’s who bought ‘03 and ‘04 as well as buying the mortgage lenders more time. They’re not meant for additional speculation in my opinion.
Those new I/Os are meant to stave off pending resets for FB’s who bought ‘03 and ‘04 as well as buying the mortgage lenders more time. They’re not meant for additional speculation in my opinion.
_______________________
Precisely. In a flat/depreciating market, there is no incentive to buy a house with an I/O because it’s the same as renting — with the additional risk of being stuck in a house you cannot afford, and losing equity/going deeper into debt (and often, it’s more expensive than renting even with I/O).
What these “fixed” I/Os & neg-ams can possibly do is allow FBs the opportunity to tread water through the downturn **IF** they are lucky enough not to lose a job, get sick, run into unexpected expenses, get divorced or any of the myriad things life can throw at a family for the next 15 to 20+ years.
We bears are counting on all these FBs getting hit with resets in the near future (1-5 years) in order to get this bubble deflated quickly. The PTB are buying time with these loans. Now, the FBs might not see resets for 10 or 15 years. Will the market break even by then? I doubt it, personally. I think this is the mother of all bubbles, and I will wait until the vast majority of these loans reset, even if it takes 10 or 15 years. There is nothing lost in renting as long as there is no appreciation, IMHO; only downside as one has much less financial flexibility. This is why I think this will be a long, long cycle. We will have to wait quite a while until the FBs get shaken out OR wages grow at an astronomical rate in order for this housing/credit bubble to get back to equilibrium, IMHO.
I’m confused. Why, in any market, would you want to pay principal on your mortage if you didn’t have to? It isn’t tax advantaged. It has no effect on your return in absolute terms - in fact, the lower the investment, the higher the return. It seems to me to be a waste of cash that could be invested elsewhere, all other things being equal. Granted, you might get a lower interest rate and/or avoid PMI because you have purchased an equity position but that is up to the lender and may make sense given what other possible returns are available in other types of asset classes. And I can understand the assumption that people who are not sophisticated and/or incapable of saving outside of paying principal on their mortgage may like to use it as a form of social security.
And, as to your point about depreciating markets, isn’t it true that there is no incentive to buy, from a financial point of view, regardless of the type of loan where the asset will be depreciating, unless that depreciation is already baked into the price?
jdd,
You’re making the same assumptions that the speculators have been making lately. The point of paying principal is not “forced savings” as much as it is paying off a debt. Housing usually tracks inflation, so in a normal market, you are simply protecting the value of your dollars/earnings.
Personally, I think the benefits of buying a house as opposed to renting are: locking-in monthly expenses, investing in low-cost housing for retirement (hopefully, a paid-off mortgage), preserving the value of your money (against wage inflation), protecting yourself from losing your home if a LL wants to sell or do something else with the house.
IMO, housing is not necessarily an “investment” like stocks.
As to your last question, yes. There is no incentive to buy a depreciating asset, regardless of type of financing. I think this will become very evident in the coming years as this credit bubble implodes (hope it implodes quickly rather than a long, drawn-out downturn). It’s why I belive monthly carrying costs will go down as prices go down.
The very best thing that can happen to create “affordable housing” would be to allow the credit bubble to burst completely.
I’m confused. Why, in any market, would you want to pay principal on your mortage if you didn’t have to?
Because as the loan amortizes you pay less interest over time.
Floating loans is risky. For example, I take 0% offers on credit cards and put them in CDs just for fun. This is very low risk but theoretically not zero risk… what if I forget to make a payment (which I’ve done).
So the short answer to why pay off debt? To lower your interest payments and reduce risk.
Your thinking works only when you can invest the principal payments somewhere else at a higher return than the loan interest, with the same risk of course (you can’t just take off to Vegas and visit a casino). Paying the principal make a nearly zero-risk return, so look for a zero-risk return higher than your interest, and go a head - invest the principal payments there.
Jdd “in any market,would you want to pay principal on your mortgage if you didn’t have to ? It isn’t tax advantaged”.
The lenders want principal paid down because they can’t afford to carry someone for 30 years at a lower interest rate that principal is never paid down .
The whole concept of the adjustable was to protect the lender/investor from interest rate hikes in which they would lose to much money on the yield .
If you never pay your loan down it doesn’t free up dollars for new borrowers at whatever the current rates are .
Its also nice to pay down debt . If the market has cycles up or down ,at least you know you getting rid of the debt . Alot of people like the idea of having a paid for house when they retire .Paying down the debt is extra insurance that you could sell if you had to because you have equity.
A interest only loan is good for a short term flipper in a market that is going up . Interest only loans use to have very short terms on them and the investors use to only go low loan to value ratios . Interest Only loans have always been short term type loans years ago .
The old school lending system was designed to protect the lender/investor and the funds .
One of these days America won’t even offer fixed rate notes anymore .
Are all of these losses going to put us into a depression?
Yes.
Oh yes, Now this has winner written all over it….NOT! All this does is push back the day of reconing. And makes the current problem longer and larger. This is nothing but desperation. Instead of a crash and a cleaning we have a steady drip drip drip of declining prices ended off by a giant inplosion. And please correct me if I am wrong but I think a paralell can be drawn to the Japaneese recession. One of the things that prolonged the problem was that the Japaneese banks refused to write off/down non performing loans. Is this not the same thing American style?
My question is about the reset on the fixed rate in 10 years on the IO loan . Does the fixed rate kick in at what the market is at the time of re-set ,or is the fixed rate pre-set 10 years ahead of time ?
If these IO loans that adjust to fixed don’t extend the loan length at the end of 10 years the payment will be really high . So I think they might adjust to a 30 year note at the end of 10 years making them a 40 year note ,( this is just a guess on my part ).
Also ,if they give more than 80% loan to value on these loans they are still risky . Its betting on the income of borrower going up in a 10 year span of time as well as the price of the property .
Can’t we just get back to people qualifying in the now ?Creating loans to support a inflated false market is a joke .
Couldn’t agree more, Wiz.
I believe that the loan only spans 30 years so the payment would jump dramatically in 10 years. But the little research I did just found that they have a dizzying array of products so they may have one such as you described. I did find this. Which supports the idea of 30 year loans.
In any case, 2015 should be an interesting year.
“‘It’s a very low-risk mortgage,’ says Doug Duncan, chief economist at the Mortgage Bankers Assn. ‘It’s essentially tax-deductible rent’ for the first few years, Duncan said. And by the end of the interest-only period, household income should have grown enough that ‘if the borrower has been reasonably prudent, he should be well-prepared’ for the big jump coming in his or her house payment.”
If these fixed interest I/O loans are so low-risk, then why doesn’t Duncan go use one to buy himself a home, instead of renting a place (which he does)? You cannot evaluate the risk of a loan without considering the likely future direction of housing prices and the economy. The manic runup in prices and the building boom it stimulated suggest we have a ten year soft-landing in price levels to work through, and the bond market is signalling an impending economic downturn. Under these conditions, the assumptions which underpin the “low-risk” story Duncan suggests, namely that either incomes will rise sufficiently to fund a 50% increase in mortgage payments once the note amortizes, or that the seller will be able to sell for more than the purchase price, both seem unlikely to pan out. And I don’t know about what kind of lease Duncan has on the place that he rents, but mine has no asset price risk attached to it (unlike a mortgage used to buy an overpriced house).
Sheer curiosity, how do you know he rents
I read it in an LA Times article last spring, and that kind of information (Chief Mortgage Bankers Association economist rents, while earning said rent by telling others all the great reasons to buy) tends to remain lodged my long-term memory.
http://www.cepr.net/cepr_news/latimes_2005_05_29_housing.htm
As it should, good stuff as always Stucco
He does rent, a poster on this blog knows him and has confirmed as well as being reported in the media last spring.
At least he was honest, he said he wanted to take some money off the table.
If these fixed interest I/O loans are so low-risk, then why doesn’t Duncan go use one to buy himself a home, instead of renting a place (which he does)?
Realtors are also notorious for this type of two-faced pandering.
They’ll set up their finance-ignorant, unsuspecting clients with some sleazebag rackeetering co-hort L/O, peddlin’ a I/O pr Neg/AM garbage on which they grab a kickback; but when it comes to their own re-fi situation, they trot their sorry, miserable azzes down to their local savings bank who holds their fixed rate 15 year note in house.
The ultimate hypocrites.
Nah, most Realtors I know peddle what they use. Why do you think these things are so popular. For a Realtor or Mortgage Broker these are the best products since corn flakes. For average joe sixpack 9 to 5 they are the kiss of death.
MRincomestream,
Just curious if hearing the same thing I am from seasoned LO’s and MB’s? The seasoned ones I’ve talked to are all certain that values will fall significantly. I’m just wondering if “underground” the majority of those in the business feel the same or if I work with a unique group of individuals?
One LO told me the other day as I was picking up docs that she is pretty worried about a lot of her borrowers. They ust keep coming back for more cash out refi’s. Granted she could turn them away, but then someone else will just give them a loan and probably charge a lot more and have a higher rate.
Seasoned + Underground=Minority. Do her a favor refer her when you can.
Do someone a favor I meant.
hd74man……Your so right . Maybe if a realtor is doing a quick flip on a property they might use one of these IO or ARM loans ,but on a house they are living in long term they are on a fixed note ,and I would bet on it .
In my market I’d take that bet and give you points
if the borrower has been reasonably prudent, he should be well-prepared’ for the big jump coming in his or her house payment.
This line actually made me LOL.
From the link GS provided, Duncan obviously sees it coming; he’s just lying through his teeth to keep the Ponzi scheme going. I wonder how such people sleep at night.
I don’t think he is lying.
If you define a situation narrowly enough, almost any conclusion can be reached and defended.
Troublesome data just can be waved off with a comment about it being outside the scope of this study.
And by the end of the interest-only period, household income should have grown enough that ‘if the borrower has been reasonably prudent, he should be well-prepared’ for the big jump coming in his or her house payment.”
I love this assumption that income *should* go up. Sez who?
This whole idea is bothersome. The whole point of homebuying is to build up equity and to ensure that over time the cost of living in your abode decreases, so that you are able to spend your money on necessary things that come along as you grow older.
If you are going to face higher prices anyway, you may as well rent.
The whole crux of the matter is appreciation.
‘It’s essentially tax-deductible rent’
But here in northern Arizona, rents are half of mortgages, even interest only.
Ben, check out this article published in the LA Times today:
To live and buy in L.A.
More people. Prices stuck in the stratosphere. Vanishing open land. These and other factors give the housing crunch new bite.
By Diane Wedner, Times Staff Writer
June 4, 2006
Just when we thought the media was beginning to catch on…sigh.
The print media is all about representing every side of an issue. The muddle of conflicting information belies a complete dearth of principles, not to mention consistent editorial positions.
That LA Times article is a joke. It goes on and on about how the present state of the RE market in LA is how it will forever be. The really frustrating part is that they seem to always come up with the idea that schemes to increase “affordability” are the answer (often taxpayer funded!). And, “affordability” is achieved not through lower prices, but through more creative ways for buyers to bury themselves in debt.
The Wells Fargo Housing Opportunity Index is now 1.9% in LA. That is to say that 1.9% of homes sold in 2006Q1 were affordable to a household making the median income. This is a new all time low for any city, ever, in the history of the index. This cannot be a permanent phenomenon.
I completely agree, the article is pure junk. The focus is on “creative development” and “multi-use”; who in the hell wants to live by Union Station for half a million bucks? And they conveniently ignored UCLA’s predictions of a flattening market. It’s too bad the Times can’t assign the reporters who are skewering Kaiser to the real estate crooks. Oh wait, I forgot, maybe Kaiser doesn’t advertise in the Times.
Right, Ben — you would need to be in a pretty high tax bracket for the after-tax payment on an I/O mortgage to be cheaper than rent on a comparable home, and that is before you weigh in the risk of tumbling market prices.
‘Every lender liked every loan.’”
And when the appraiser said the property wasn’t worth what was being loaned on it, the L/O trashed the report and then found a fellow racketeer to rubber stamp the deal.
And then the note gets sold to FNMA….brahahahahahaaaaaaaaaa!!!!
How’s that recent $52mil bonus, Raines? You, low-life POS!!!!!!!!!!
Most mortgages in So Cal don’t get sold to FNM.
The conforming limit of $417K doesn’t even come close to decent housing prices here.
Not only that, but so many loans are non-conforming because of stated income, neg-am, low FICO scores, etc. FNM does not buy these loans. They are sold off to other (stupid? ignorant? blind??) MBS buyers. THIS is what needs to be fixed, IMO. I often don my tin foil hat and wonder if the govt/Fed is not involved somehow in this market. People who actually consider capital risk cannot possibly be buying this crap, can they????? Can they?????
I suggest reading this week’s issue of BusinessWeek. It’s a real eye-opener:
http://www.businessweek.com/magazine/content/06_24/b3988004.htm
There is a real push at investment banks to buy high risk financial instruments, including sub-prime MBS’s. Pretty scary stuff!
I subscribe to BW, gotta use those frequent flier miles for something.
It is a copycat article from the Economist of 2 weeks ago.
Goldman Sachs culture of risk.
The even lifted part of the headline.
I was at Enron and know a thing or two about hedging and risk management.
It was mostly smoke and mirrors at Enron and will prove the same at Goldman and the other wannabes.
Very interesting and creative. But no matter what kind of loan scheme you can come up with, at some point you have to reckon with the fundamentals and no manner of creative loan will overcome that. Gasoline engines are only what, 21% efficient? After 125 years we are not going to improve on that since we have reached the physical limit for efficiency. SImilar with loans. If it gets to be too much then no one will be able (note I didn’t say not willing) to buy. But then I could be wrong.
very nice to see another mortgage broker flat out say there were NO underwriting standards.zip,zero,none.last year i could have gotten an unemployed homeless person with good credit a million dollar loan for a non owner occupied investment property at a good rate,easy.this year the rate isn’t great and it would be harder,but doable.there is nothing wrong with the types of loans available,there is a huge problem with people getting unsuitable loans for them,and the total alck of underwriting….loans are tools…next time you drop your engine to work on it use a 5lb sledge…it will work.
OT, but related to mortgage options. Since I value all the advice on this blog, I was wondering what opinions are on this http://tinyurl.com/gqlgv. Would this be worth it if a person qualified?
My question is other than the rate, which you don’t know if it’s real because the information is dated would be why would you need it? In todays market.
Your link didn’t work for me.
“And by the end of the interest-only period, household income should have grown enough that ‘if the borrower has been reasonably prudent, he should be well-prepared’ for the big jump coming in his or her house payment.”
Why do these guys insist that your income will rise enough in a few years to cover these costs ? I’m just not seeing wage growth large enough to cover more than inflation and maybe not even that these days.
“‘It’s a very low-risk mortgage,’ says Doug Duncan, chief economist at the Mortgage Bankers Assn. ‘It’s essentially tax-deductible rent’ for the first few years, Duncan said. And by the end of the interest-only period, household income should have grown enough that ‘if the borrower has been reasonably prudent, he should be well-prepared’ for the big jump coming in his or her house payment.”
Insanity! They can’t afford today how are they going to afford tomorrow. How many people experience “big jumps” in their income? They are taking interest only loans because that is the only way they qualify for a loan. Meanwhile they still have to pay taxes etc on the “value” of their house. In otherwords, they are already maxed out in relation to their income and most likely unable to save for a rainy day on a house that is going down in value. Where do these so called economist get their degrees from, the cracker jack box?
‘I’m just not seeing wage growth large enough to cover more than inflation and maybe not even that these days.’
Excellent point.
Especially after a bunch of people are getting laid off from RE/finance right in time during these five years.
RE people ALWAYS say your income is going to increase. We were saying it in the 80’s in SD. Of course the Chinese/Indians/Africans have changed that. Unless Wal-Mart starts giving better raises.
After that unexpected dropoff in job creation last week some economists are starting to think we’re heading into a recession… just in time for all the mortgage payment resets coming next year.
Could be a huge mess. Perfect storm. [Insert other hyperbole here.] etc.
Distressing news today in the Seattle Times. It’s from a syndicated column called “Nation’s Housing” by Kenneth R. Harney.
I don’t do links, etc. but if anybody can figure out how to get to the full text or more articles, more power to you. Here’s the gist:
title: “Bill Offers Better Deal for First Time Buyers”
“An unusual Capitol Hill alliance of liberal Democrats, conservative Republicans, commercial banks, real estate brokers, ethnic group lobbies, homebuilders and mortgage brokers is pushing for legislation that could give thousands of first time home buyers a better deal than they get in the mortgage market today.”
The “better deal” includes: “FHA loans that carry flexible or no downpayment”
The bill is dubbed “Expanding American Homeownership Act of 2006″. It is jointly sponsored by Rep. Robert Ney, R. Ohio and Rep. Maxine Waters, D. CA.
Other Bill supporters mentioned in the article include:
Cynthia Mckinney, D. GA.
Katharine Harris, R. FLA. “plus more than 50 other Rep’s and Dem’s.”
Other supporters: NAR and the American Bankers Assoc.
Can we find out more about this? Can we start an email campaign?
Was it not just last week that it was all over the nightly news that tons of low income and minority Americans are already suffering enough from the high cost of squeezing into an over-priced home? Isn’t Ohio ALREADY one of the highest BK rates in the nation and yet the bill is co-sponsored by an Ohio politician?
Are these politicians being naively “compassionate” or are they actively trying to screw more Americans to the wall?
Are these politicians being naively “compassionate” or are they actively trying to screw more Americans to the wall?
________________
I often wonder about this as well. If they are trying to be compassionate, they are idiots. If any of these politicians gave even a cursory thought to giving money to “poor people” to spend on buying houses, they would immediately see massive inflationary ramifications. Can they honestly be so stupid as not to get this very obvious consequence?
**as to not get** Sorry, where is that edit button?
They are just riding the wave. After RE crashes, things like these will become the third rail in politics.
FHA already allows no down payment loans, in effect, because they allow “gifts” from the seller funded non-profits. This proposal would at least allow FHA to charge more for loans with higher risk. If you don’t like no down payment FHA loans the time to complain was 1997, when they started. Granted, you could easily argue that it would be better to stop this completely, but allowing FHA to charge more for the loans is at least an improvement over the current situation (from the taxpayer’s perspective), where they effectively do them but can’t charge more for them. If you want to stop no down payment loans, then work to stop them.
I wondered when this started. 1997 makes a lot of sense. In Seattle at least, that was when the prices first started doubling. I’m sure those loans helped that phenomenon get going.
unbelievable how things have changed since I bought my San Diego house in 1999. I am self employed, so I had to come up with 20% down, in addition to $5k cash for closing costs, and I had to show bank statements proving I had 6 months living expenses banked in case of financial difficulties, and I had to show my business account activity to prove self-employed business income, all for a Countrywide stated income loan.
I wonder if the Chinese are watching this? Don’t they buy off a lot of these bad or soon-to-be-bad loans? How do they feel about throwing their money down the toilet?
Can somebody explain how all this works (keep it simple please!) and what are the ramifications are for the ultimate backers of these loans?
Is it the Chinese we should be writing to?! Maybe THEY’LL help us poor strapped and strangled Americans! They tightened their own lending practises just a couple weeks ago. Maybe they can “help” (read “force”) us to tighten our own?
You’ve seen this before, Think Japan.
mrincomestream-
Is this how we screwed Japan in the 90’s? Held them up and then pulled the rug out suddenly? Causing their fall from grace?
Please explain details- it’s very fuzzy to me.
In the mid to late 80’s, early 90’s or should I say during the Reagan yrs. Japanese (sp?) investors bought large real estate holdings in the U.S. ie: Sears Tower, Kennedy Center, and quite a few Los Angeles, New York skyscrapers and other large commercial U.S. trophy properties for what at that time was considered astronomical prices. Only to turn around and sell it back in some cases to the same people they bought them from for pennies on the dollar. Same thing is happening to the Chinese. Same concept but instead of actually holding the property they hold the paper this time for all the obvious reasons. Not trying to interject politics but in a sense Kerry not being elected to the presidency may not have neccessarily been a bad thing for the U.S. considering his families long term connection to that country.
That is well documented fiasco should take all of 5 minutes on google to find a wealth of information on that time period.
This is just a matter of history repeating itself IMHO
Here is a self-compiled list of Japanese property purchases at the top of the last bubble.
Pebble Beach Golf course and resort
Steamboat Ski Resort
Heavenly Ski Resort
Rockefeller Center
Guess who owns these properties now, Americans bought them back for pennies on the dollar.
I guess Orange County, SoCal is “different”, we have 3 of the largest subprime lenders in the nation located here. When these 3 companies tank, who says the economy won’t take a hit ???
The data is fascinating. It suggests that almost half of all loans made by some entities had no income vertification whatsoever, and perhaps a third failed the lenders’ own underwriting standards. This tells you a couple things, starting with they’re going to get sued by their investors. It also helps explain why prices skyrocketed. People who had no chance of qualifying during a non-frenzy period rushed to “get on the boat” at any price. Literally. They became completely price-insensitive for a time, because they could get a large loan where they could never have previously. This led to massive inflation of an initially limited housing market, and now that the prices have reached the sell point, massive inventory combined with federal regulators cracking down, investors becoming skittish, rising interest rates, and prices which have adjusted out of reach for even the most lax lending institutions to risk so much capital, there is a pregnant pause…
good summary Kia. Here in ORange County last I heard bout 75% of people buying property went into sometype of adjustable rate mortgage. Talked with my Real Estate neighbor (who is also renting by the way) and he stated just sold a home in Rancho Santa Margarita for $630K originally listed for $685K 2-3 months ago. Sounds like a 8% haircut already and we’re just getting warmed up!
I’ve had this type of loan in the past (30-year fixed, first 5 years IO), because I knew I was going to sell the house before 5 years was up (and I did).
I asked a broker friend if she had anything like this today. She said that to get a 30-year fixed, first 10 years IO @ 6.625% would require full doc and one point. On a hypothetical loan of $500K, if you only did pay interest the first 10 years, in the 11th year the monthly payment would go up from about 2800/mo to 3800/month (these are all rough figures). What they do is at the end of year 10 they reamortize the loan over 20 years, using the same fixed interest rate. If you pay some principal during the first 10 years, the monthly payment goes up less. That’s the way she explained it.
So, I guess everyone looking at something like this has to do a personal risk assessment. It can work in your favor, I guess, if your income does go up significantly or if interest rates and/or rents skyrocket in the next 10 years. You don’t pay much principal the first few years of a 30-year mortgage anyway. You do get the tax benefits that you don’t get with rent. It’s caveat emptor, as usual.
I think that a lot of people who would like this type of mortgage can’t do the point and full doc to get it.
I think your numbers are off. If I still owe $500K at the end of ten years and have twenty years to pay it off in, the monthly principal alone is $500K divided by 240 (number of months), or over $2K in additional principal alone. I know you said it was ballpark and I might be wrong too, I’m just saying it looks even worse than $2800->$3800.
Maybe it’s because the interest has been paid for 10 years, so the total monthly payment does not go up more than $1K?
500k @ 6.625 over 20 years is $3,764.75 = $1,004.34 principal + $2,760.42 interest.
Sorry, that’s just for the first month. Future months, interest goes down, principal goes up, total is the same…
Hmm, well I just tried it myself and $2800->$3800 is correct. Now, that doesn’t seem that bad to me, but I’m guessing they are stretching to make the $2800 payment as it is.
And dear god, what you get for $500K in CA and you’re paying $2800/month not counting property taxes!
I’m in NV, not CA. We’re renting a 2300 square foot house for $2200/month, which is the going rate for a nice house in a good neighborhood. The house is now on the market for $650K.
Of course, if house prices decline significantly you can be upside down with one of these mortgages as easily as you can with any other…
And it said one-third of its loans made last year were exceptions to its own underwriting standards.”
One-third is not an exception. One-third is precedent.
And it is not like their “standards” were all that strigent in the first place. There’s a papre trail here and when the secondary market starts to see their guaranteed income stream falter they are going to go back and see where bad loans were misrepresented and it will be kneecaps and baseball bat time. Here’s ECC:
http://finance.yahoo.com/q/bc?s=ECR&t=1y&l=off&z=m&q=l&c=
Awwww. Fall down go boom.
Long term interest only loans will not make a dent in this crash. Thornberg said it best (I paraphrase): “homeowners have been getting an average 80k a year in appreciation in CA and using that money for day to day living expenses, what will happen to the market when that is taken away?” They are already using neg am, even a thousand year fixed rate interest only loan won’t save them. Many people are up $hit creek with no paddle and no canoe, IMO.
Half of all loans are less than 4 years old but many people still have low LTVs. Those LTVs are going to change but…
Thost LTV(s) will change for the better, or for the worse?
The thing about MBSes is that there has to be someone on the other end of the bond that is willing to take the risk. I think the cat is out of the bag about the housing bubble. I think that MBS buyers are going to realize that they need more of a risk spread than they already have. And that will start what is known as a death spiral. Mortgage rates go up because of perceived increases in risk. That causes more people to default. Rates go up more. More people default.
Even with a 10 IO, the payments are still going to go up. The valuations are still out of line. And now that prices are going DOWN, banks are going to demand cash to make up for underwater properties before people can refinance. In the near future, people will be writing about 125% mortgages to help out those underwater. But the thing is, who is going to buy that mortgage. You know the homeowner is on the brink of disaster if they are underwater 25%.
There is only one solution to this problem and that is to let the market run its course and to suffer the inevitable defaults and foreclosures that are going to occur.
“There is only one solution to this problem and that is to let the market run its course and to suffer the inevitable defaults and foreclosures that are going to occur.”
Yes, but there is a “market-based” solution, or at least a modifier. Banks can work out the difference between the monthly payment due and the monthly payment that WOULD have been due, if the buyer had bought the home at an earlier time with lower interest rates. For example, If I were a bank, I might choose to have a loan continue to perform at a 5% interest rate, which would have been acceptable back in ‘03, rather than foreclose, if the lendee has notified me in a timely manner.
Sure, it’s less profit, but the bank is still raking in all that interest, rather than taking a loss at a foreclosure sale. Smart banks will be flexible in the coming hard times, because prices may be much lower.
The 30 year fixed loans from 2003 will still be performing, and the bank won’t call those loans, so why not discount the later ones?
One more thing: if we bail people out of this bubble, the next bubble is going to be even worse. People just don’t learn unless they get burnt.
Amen.
The sheer financial lunacy of recent real estate lending is probably unsurpassed in human history.
Think about it. If you combine interest only loans with a steady stream of cash out refi it means that the lender is PAYING the seller to take the house.
Here sucker. Take this house and live in it. And then through the magic of financial mumbo-jumbo we will GIVE you money every few months. Not only do you live for free but you make a huge profit just by taking this house and agreeing to live in it.
Sound crazy? Well, that’s how most recent buyers look at it. They get a house and they get lots of money. Most people have absolutely no concept of debt and risk. They don’t understand that they are gambling their entire financial future on the premise that real estate will always go up.
My prediction: 10 million bankruptcies in the next 5 years.
Yeah, I think that’s the instinctive thing that the FBs are missing. It’s their FUTURE income they are gambling with. Not money they’ve already and could lose without affecting their everday expenses. I know that’s what made me highly skeptical about housing prices in SoCal back in ‘04 and why I didn’t run out and get and I/O loan for 600K starter house in sunny San Diego.
“‘It’s a very low-risk mortgage,’ says Doug Duncan, chief economist at the Mortgage Bankers Assn. ‘It’s essentially tax-deductible rent’ for the first few years, Duncan said. And by the end of the interest-only period, household income should have grown enough that ‘if the borrower has been reasonably prudent, he should be well-prepared’ for the big jump coming in his or her house payment.”
Yeah, great, but even after the tax deduction, the interest is way higher than my rent, and as a bonus I get illiquidity, transaction costs, property tax, maintenance, and liability issues. No thanks, I’ll stick with being a real renter and not a wanna-be.