‘Squeezed From Both Sides’ As ‘Criteria’ Tightens
Several readers posted on lending standards. “I would like to hear opinions on the impact of the eternally ‘upcoming’ tightening of the Fed lending standards. What are the key new stardards/rules, will they actually be enforced, and most importantly, could this be the nail in the coffin?”
One replied, “They are doing it slow. Kind of like a heroin addict going to a methadone clinic. You don’t want to see an entire culture of FBs go cold turkey.”
Another said, “Sales are plummeting at mortgage companies. They’re not about to turn away any deal that walks through the door, no matter how stupid or risky. As long as the seconday market keeps buying the risky loans, they’ll still be selling them. The only thing that will tighten the market is for Fannie, Freddie, and the like to tighten.”
One asked about the securities. “Will the foreign investors holding our loans have anything to say about the delay in the tightening of lending standards?”
The Rocky Mountain News. “Colorado continues to bear the unwelcome distinction of having the highest foreclosure rate in the nation, according to a national report. ‘I would think we would have had to be leading the nation for at least a year, maybe two years,’ said Ed Jalowsky, (who) sells many homes in some stage of foreclosure.”
“‘The sad part is that it is not letting up, and it is not going to let up,’ he added. ‘It’s only going to get worse.’”
“Jalowsky and others say that lax lending standards have contributed to the large number of foreclosures. Lenders are now tightening their criteria.”
“For example, lenders are making it more difficult for several low-income families to pool money to buy homes and for people with bad credit records to get loans, according to brokers. Also, it is becoming more difficult for buyers to avoid paying down payments through gift programs.”
“Those changes are good long-term, Jalowsky said, because they were among the primary reasons the foreclosure rate is so high.”
“But short-term, it means there will be fewer entry-level buyers at a time when the supply of unsold homes in the Denver area is at record levels, Jalowsky said. ‘The market is getting squeezed from both sides now,’ he said.”
“Economist Patty Silverstein said said rising interest rates are hammering some people who locked in adjustable-rate mortgages and interest only loans and now are seeing their monthly payments rising by hundreds of dollars. ‘A lot of people took advantage of record-low interest rates by getting into the housing market before they were ready or buying too much house,’ Silverstein said.”
These listing just keep growing dare I say exponentially.
mid may was 799,000
6/10/06 was 836,471
6/14/06 was 840,935
6/17/06 was 846,120
6/20/06 was 850,317
6/22/06 was 855,892
6/24/06 today 860,647
http://www.ziprealty.com/maps/index.jsp?usage=search&cKey=74rbwvlk
I’ve been tracking the ziprealty Phoenix market. It’s been growing slightly over 112 new listings per day according to linear regression. Over 50,000 this week.
The fixed 30 year mortage is back at 6.75 per cent. My own model says we will really not see the exponential collapse until sometime near the end of September or October. If the fixed 30 year mortgage hits 7.5 per cent, the fourth quarter of the year will be a catastrophe for the housing market. Payments on a $250,000 mortgage would be about $2,500 a month with taxes and insurance. That’s more than the total disposable income for most families. There will not be a mortgage market left to finance and the days of funny money mortgages will be over. (Especially if the feds put a choke hold on FNMA and Freddie Mac).
$250k @ 7.5% is $1,748 per month. For the payments to be $2500, taxes and insurance would have to be $752. That would mean a tax rate of 3.4% — are taxes really that high in Phoenix?
Owner-occupied residential properties and residential rental property are assessed at 10% of full cash value. The average tax rate on homes in Arizona before exemptions and rebates is approximately 1.3% of market value.
Taxes would be about $200 per month on a $250K house, $100 per month for insurance, $250 per month HOA fees in new planned communities and $100 per month in property upkeep. I used $2500 as a round number figuring the all the carrying costs of a typical property.
4 or 5 months ago Ben and others in the know on the Phoenix market predicted 50K + inventory by June 06….Nice call guys…
“But short-term, it means there will be fewer entry-level buyers at a time when the supply of unsold homes in the Denver area is at record levels, Jalowsky said. ‘The market is getting squeezed from both sides now,’ he said.”
Jalowsky somehow ignored adding a key word and making the sentence say:
“But short-term, it means there will be fewer UNQUALIFIED entry-level buyers at a time when the supply of unsold homes in the Denver area is at record levels”.
Looks like power has shifted in Colorado and the dark side is slowly losing the battle now as lenders are realizing they are knee deep in subprime no doc quiksand. They will continue to tighten as they will have to to stay in business. Expect the same scenarios to repeat in OC, LA, Florida, PHX etc….. it is just a matter of time.
It happens in all credit cycles. People go too far and credit is withdrawn. Then, the over-pricing becomes obvious and prices fall. The biggest mistake folks have made regarding future home prices was to assume the lax lending conditions would exist permanently.
But don’t you remember the 2003 front-page WSJ discussion that interest rates may be able to stay low forever because of foreign competition causing constant downward pressure on price inflation?
Just another hogwash story spoken by someone who doesn’t understand economics.
Or spoken by someone who makes more money by propagating lies…
Economics by nature is hogwash. Remenber the New Economy? Even that total moron Alan Greenspan believed in the New Religion. Economics like banking ain’t that serious.
Clowns are more serious that enjoyable that all the economists working at the FED. Stop taking this economics crap seriously.
Ok inside information is that equity lenders are not able to shoot potential subprime qualified borrowers up the ladder. Two reasons, first a lot of subprime programs for people below 550 FICO are no longer around and equity lenders who have borrowers locked into a 11% rate are stuck with the borrower because subprime rates are at 9% to 10% and it is not worth it to the borrower to pay the fees to switch.
Ben said:
“The biggest mistake folks have made regarding future home prices was to assume the lax lending conditions would exist permanently.”
I’m not sure that many really understood/understand the situation enough to make that mistake.
They may have assumed continually higher home prices, but they they didn’t know the “fundamentals” behind such an assumption.
The biggest mistake folks have made regarding future home prices was to assume the lax lending conditions would exist permanently.
Perfectly stated, Ben. Now extend that logic to cars, credit cards, and all other forms of consumer credit…
Unfortunately, I still see no evidence to the contrary.
Correct Bear;…..This is a housing blog but the whole loose credit problem has yet to materialize….If we get ANY significant job losses in this country, it culd get real ugly…
Oh. And who at the FED or at their “friendly” financial institution warned people not do such a thing?
Did the political authorities in Washington proved to be a shinning example of responsible spending and borrowing?
NOBODY. NOPE.
It’s easy and natural for the masses to assume this, when your own elites, if you can call Bush or Greenspan, members of an elite, yeah an elite of morons, encouraging this type of wreckless behavior. Sorry but with this hyper easy credit, what else would you expect?
USA really desserves financial punishment. It’s a shame to say, that again, it’s the middle class and the poor that will bear the brunt of the total stupidity of those in Washington and Wall Street.
“For example, lenders are making it more difficult for several low-income families to pool money to buy homes and for people with bad credit records to get loans, according to brokers.
Uh oh. That’s been one of the main strategems for sub-prime, low-wage Latino immigrants to purchase homes in the low end of the market.
A friend in Loudoun County, VA, told me that if it wasn’t for multiple Latino families pooling their money for SFHs (and turning them into Multiple Family Homes, not to mention ten cars per house) the market in places like Leesburg would’ve already witnessed a sharp decline. He also said white flight is accelerating from Loudoun County SFH neighborhoods — usually a percursor of the barrio-ization of the community, as as happened in most of Falls Church, VA. Loudoun County will be ground zero in the housing bubble implosion.
How can lenders rely on loose family ties to make home loans? Especially if the citizenship is in question.
A lot of the mortage brokers and realtors who service this sector of the market are also Latino. While their countrymen may trust them because of shared language and cultural ties, they find out too often that they are being preyed upon by unscrupulous agents, lenders, and brokers.
That’s funny you should mention that because the very same thing you’re talking about happend in Vista, CA very recently. Here’s the lead in:
VISTA —- Affinity fraud. It’s a common type of investment fraud, say state and local officials, and it’s growing. And it may have been used to snare the savings of scores of North County Latinos.
http://www.nctimes.com/articles/2004/12/19/news/top_stories/22_06_5112_18_04.txt
This is why those reports claiming racism in the mortgage industry are without merit. The reports say that mortgage firms appear to be ‘targeting’ the other races; what they fail to mention is that it is usually a race-based mortgage firm doing it!
The victim is the perpetrator.
If you read the article, you’ll see that most of the people arrested have non-Latino last names — like Johnson, Samples, etc.
I agree WRT Loudoun, although more for factors of traffic/commute times and fuel costs. I wasn’t aware that white flight was also a factor. Has white flight occured in Falls Church, too? I’d think it would just be too expensive an area for immigrants to afford. Then again, I don’t know Falls Church too well. Maybe I’m in my own “bubble” here in western Ffx County.
I can’t understand why people choose to live as far away as Loudoun County. A commute that felt doable even 2 yrs ago has got to be absolute hell now. And how much worse will it be in another two years, and when gas is another dollar or so more expensive?
I don’t buy the white-flight: Loudoun is too expensive for multiplie low-income families to get together to buy a house, and I haven’t seen any evidence in my area. I do see traffic and such leading to flight.
So why do people live in Loudoun? In my case, I had signed a contract in early 2002, and by the time I came out in May 2002, prices had gone up so much that I could no longer afford a place in Fairfax. My choice was between renting a 2brm apartment for $1400 at Fair Lakes, or owning a 3br townhouse across the border in Loudoun with a PITI of $1400 a month. To me, it was a no-brainer. In the intervening years, traffic has gotten so bad, that I am looking to move out of the area altogether, and I hope to land a job somewhere in flyover country. I just wish I could have landed a job last year so that I could have profited from the bubble.
The white flight is real in Loudoun, but most especially in Sterling, parts of Herndon and areas of Leesburg.
I know first hand. I bought a townhouse in 2001 and sold it in October of 2005. When I moved into the neighborhood I could get into DC in 40 minutes and it was a safe neighborhood. Within a year the change began. The pooling of money and 20 people in a townhouse, gangs, the entire thing.
It was really, really bad. I live in Vienna now in a SFH that I rent. I find the traffic is worse out in Loudoun than inside the beltway which is opposite of what it was when I moved to the DC metro area in 2000.
I wouldn’t say all of Loudoun is toast but depending on how foreclosures shake out, it could be very ugly.
novasold
I was recently out in the Northern Virginia area visiting friends, after having left that area back in late 2002. The trend I noticed even then was that young, middle-class, white families were growing increasingly uncomfortable with the demographic changes occurring in their neighborhoods, be they in McLean, Falls Church, or (especially) the Kingstowne/Alexandria/Springfield area. Families with kids were moving further out, obstensibly for the better school systems, and their places were being taken by Iraqi or Afghan taxi drivers with burqa-clad wives and 8 unruly kids, or Latinos living ten or more to a house. (Some exaggeration, I admit, but it was a common perception that the new arrivals were generally less desirable neighbors than the people they replaced). Many more people would move if they could, but have been completely priced out of the market or would have to deal with horrendous commutes if they moved out to places like Fredricksburg or Manassas. The quality of life is deteriorating, and crime is rising. At some point, something has got to give, and I suspect house prices will start breaking down in a significant way by the late Fall.
I agree about the white flight, especially in Herndon. We have friends that moved to loudoun because every house that sold in their Herndon neighborhood was bought by extended families of 10people and 5 cars parked on the lawn. Not meaning to sound racist but Herndon is referred to as Hispanica.
Loudoun inventory now over 4,800 and NoVa inventory surpassed 23,000. This fall and winter are going to be ugly. THe only saving grace will be college and pro football on tv.
I sold in May and now have my cash in the Vanguard MM at 4.86%. If all goes according to plan, BB will will reward the savers and demolish housing.
Refills anyone…..
http://bigpicture.typepad.com/comments/2006/06/call_to_arms.html
http://bigpicture.typepad.com/comments/2006/06/why_the_real_es.html
It is very important to offer incentives when you want to sell a $250k sh-tbox for $400k.
Try that again:
http://www.eatonrealtyllc.com/FreeGas.php
It is very important to offer incentives when you want to sell a $250k sh-tbox for $400k.
And the fine print says the offer must be full price to get the card. As if the price of the home itself wasn’t insult enough, now they insult the intelligence of anyone buying with this gimmick to make a full price offer. If they are inclined to offer an incentive then do so, don’t pull this nonsense. This company needs to go BK, period.
interestingly, I just saw an ad for a Hummer that includes an incentive. If you buy the hummer you get a gas price guarantee of $1.99 a gallon for a year.
I wonder how that affect the purchase price sales tax.
Real estate speculator thread discusses bleeding to death on neg cash flows, and exit strategies attempts in Tucson. The various comments say it all, including this one, “I’ll never do this again”.
http://www.websitetoolbox.com/tool/post/sdcia/vpost?id=1205179
Thanks for the post & link, Russ. Man, what a contrast between this site and that one — they’re hunkered down, gloomy, and fearful. The brighter ones seem to have a dim perception that the market has turned, but they lack the intelligence to realize the full magnitude of the disaster that lies ahead for their “investments.”
http://www.flickr.com/photos/ulrichp/1362599/
Raading their tales of woe, one can only cry out, “Oh, the Huge Mannatee!”
The advise from this guy to a screwed Speculator makes me sick;
Native—CA————–
It seems to me that the strategies break down into two categories, depending upon whether you are personally responsible to pay the loan. Here in CA, if you sell a house with a purchase-mortgage loan on it, you are not responsible for the loan after the sale.
However, this is not true in most of the other states. However, if you ARE NOT personally responsible for the loan, I’d suggest the following approach. Deed the property over to somebody who does not care about their credit report. Perhaps a minor, a derelict, a very elderly person who never buys on credit, somebody else who does not care. Make sure that you “sales agreement” makes you responsible for the ownership expenses so you will be able to deduct them from your taxes. Then rent out the property for as much rent as you can. After a few months, stop paying the mortgage and let the property go to foreclosure. Later you have “credible deniability” for the loan. That is, you can explain to credit granters that you were not responsible for the new owner’s having defaulted on the loan.
If you are personally resposible for the loan, I don’t have much to add to what others have said. The only thing is, nobody has mentioned the tax benefits of owning rental properties. If you rent out the property and can take advantage of the tax benefits of owning a rental, you might find that the monthly payment is not quite as bad as you have been thinking.
I’m sorry you are taking a painful seminar in real estate investing. I hope you can minimize the damage.
Good Figuring Things Out*********Ron Starr************
Moral Responsibility is gone, what quality of person will our children have to live next to. Loop holes don’t make things right.
This type of Fraud needs to be prosecuted if performed.
I found it shocking too the callousness with which he is encouraging defrauding the banks, like oh it’s no big deal. Looks like we’ll need to be clearing out a few blocks of the state pen to make room for these guys.
I’m glad it seems to be illegal in California.
Take him immediately to your back-yard garden. Show him the lovely, symmetrical mature dandelion ready to spread it’s seed in the next fresh breeze. Then show him the beautiful baby yellow dandelion that can be made into a wonderful wine.
Then shoot him in the head. Twice, just to be sure!
If you are on the ‘deed of trust’ you will be responsible for years to come. I still have to explain to lenders that my x got the property in a divorce settlement 22 years ago, she hasn’t had a late payment. They still count the payment partially against me. The mtg is only 5% of the value of the property.
By the way if you used STATED Income to buy the property, and it was incorrect, you are screwed. Fraud cancels any purchase money protection.
EXCELLENT POINT Pismo !!!!
Funny, they sound kind of like us in terms of general awareness of the real estate situation– except they are on the sellers end of the equation sweating it out, and people here tend to be potential buyers waiting for the coming collapse. Right now, better here than there.
The chickens come home to roost. Unfortunately, a lot of good people are going to lose their homes. I for one would like to see MUCH more emphasis on economics 101 starting in Jr. High School, and continuing on in college (ie: required electives). Especially before the credit card Cos. start indoctrinating the freshmen with easy credit cards. Debt can be a useful thing, or not depending on how its used.
“The rich rule over the poor, and the borrower is servant to the lender.” Proverbs 22:7
Where was the oversight? Whom was guarding the henhouse (besides the fox). Whose crazy idea was it to pkg. these toxic loans up and send them off to Fannie and Freddie. Now the taxpayers are on the hook, plus a lot of foreign investors who probably don’t know how much of a ticking time bomb that is…
If econ 101 were taught in middle school, you can bet that the NAR and the credit card companies would heavily influence the curricula.
As with most middle-school teaching, there would be precious few teachers that really understood the material that they were teaching, particularly for elective classes. By the time the lobbyists and politicians got through with it, the texts would be “Consumerism 101″ and there would be tear-out credit card applications in the back of the book. The assumptions built into the examples would be “real estate always goes up”, “inflation will take care of your debts”, and “social security will always be there”.
Better to keep it out of the schools.
As a former teacher, I am ashamed to admit that most of my former colleagues were not well-versed in economics/finance. This still does not excuse us from our duty to educate the students. It really is unbelievable that students are allowed to take elective classes like cooking and shop, when many of them can’t even balance a checkbook. It should absolutely be mandatory to teach basic personal finance for one semester, a macro-economics class for another and micro-econ for a third semester, IMHO.
Oh how right you are
First start electing honest politicians and do business with honest people. Impossible! It seems that Tony Soprano type has won a long time ago in the US and the rest of the world. Reality is more extraordinary than fiction.
In one of the threads yesterday, someone said that Six Flags was considering selling Magic Mountain and turn it into housing. Someone else mentioned that their company, also in the LA area, was looking to sell their buildings for housing and move 2000 jobs somewhere else. That made me think, what would happen if we started having businesses all over do that. Let’s turn all office buildings, stores, hospitals, amusement parks, churches, etc into more housing. Then there would be nowhere for anyone to work, or shop, or worship, play, etc. What do others think of this ludicrous idea. The thought is almost too funny, but also too scary. If a major playing area, theme park were to close and do that. What would stop others from doing it? Thoughts?
Your post gives me an inspiration for a new board game… “Monopoly - Special Edition Housing Bubble”.
I suggest a Housing Bubble edition of Kerplunk…
http://www.playthingspast.com/mt506.html
If it were up to me, my environmentalist streak would put a moratorium to all new building. Everybody visit San Francisco. It’s a lovely city with nice architechture–with of course the exception of a few recent butt-ugly condominiums– and is densely packed which allows more room for wilderness to thrive.
But it’s hard to imagine Magic Mountain not making tons of money.
If the OC sold the original Dineyland to developers, we would probably have a greater cesspool of hookers and drug dealers than we now have. I guess we should be grateful.
Walt is turning as we blog.
Years ago, Magic Mountain reportedly used to use a profiling system to keep out potential troublemakers. That’s probably not feasible these days, due to lawsuits, so maybe they’re closing the doors before decent families stop coming and the place dies out.
Been to two six flags parks on the east coast, one near washington dc and the other in new jersey, both are disgusting, overun by teenage thugs and wannabe gangsters. they should close both and let nature reclaim them
Well you could sell the houses to invading Martians. Personnaly I prefer the gals from Venus. You could call it Out of this World Real Estate. Change the name of the country. Instead of United States of America, you could call United Real Estates of America ? From USA to UREA. Urea formaldehyde.
I read this blog constantly and this “tightening” of lending standards argument is what troubles me the most because I don’t think I’ve seen any stories or links actually showing any widespread tightening. I keep hearing it’s going to happen and see figures about foreclosures up and mortgage apps down, but nothing about willing buyers being turned away or people trying to roll one interest only mortgage into another to stretch out D-Day being denied. I think there is so much fraud in this industry that even a tightening of “guidelines” for loans will not have much of an impact at first. I’m still a big bear because this has all been a ponzi scheme from the start and now there are way to many homes and too few buyers, but does anyone have any hard facts showing banks/mortgage lenders are actually tightening?
Bottom line, my question for all those more experienced in these matters than I: what’s going to stop the I/O crowd from trading one I/O mortgage for another?
The biggest tightening has been the fixed rate increases and adoption by borrowers. Everyday I read RE folks insisting that adjustable borrowers ‘get into a fixed as fast as possible.’ Total originations are down over 25% YOY. And then there are reports like this one from Colorado, where brokers are aware of it. Subprime is doing the death walk it always does at the end of a credit cycle.
Ben:
Do you mean that subprimes won’t qualify for fixed rates now because of tightening?
If so things are going to get ugly in DC Metro. Re: what Sammy Shadenfreud above, this is true. My close realtor friend talked about people buying all over who were clearly not qualified to manage the payment and buying with the risky products.
If all of this is true to the extent is has been expressed to me, this area is in for a huge fall and how it shakes out could change the normal dynamic which is inside the beltway vs. outside the beltway.
I’m glad I’m trying to get out of here.
I’ve heard similar stories about the NYC boroughs that are not Manhattan proper. That will get real ugly as well if the subprimes are shut out of refinancing to fixed.
One thing nobody wants to think about, much less talk about, is what will happen in neighborhoods with 20 Latino “undocumented workers” and their families once the construction industry starts to crater. Do you think they’ll go quietly and resignedly back to Mexico, El Salvador, etc.? I think not. Yet there will be millions of young, unemployed guys who will be increasingly desperate and no doubt angry. What will they do to make ends meet and support their families? I’m guessing many of them will turn to crime and drugs (we’ve already got something like 7 MILLION illegal aliens, er, undocumented workers, in correctional custody). I agree, this is going to get real ugly.
Yep. Thanks to the banks for lax lending standards that screw-up neighborhoods and encourage this type of thing.
Agree completely, I’m very curious to see, especially inside the beltway, how the inevitable surge in foreclosures plays out, I’m of the opinion that many (majority) of subprime borrowers will stop paying the loan and simply refuse to leave the house. How does the inevitable public relations game play out between banks foreclosing and the tidal wave of hard luck stories running to the local media for help.
- Another delusion I’m looking to see shattered is the that the federal government as employer shields this area from housing downturns, the biggest story in federal employment locally is how many jobs the dept of defense is moving out of this area.
“I read this blog constantly and this “tightening” of lending standards argument is what troubles me the most because I don’t think I’ve seen any stories or links actually showing any widespread tightening.”
Because it hasn’t happened yet. What many here are talking about is an alphabet soup of federal organizations (OCC, FDIC, etc.) that will be issuing final guidelines this summer re mortgage lending. In Dec. 2005, the OCC (Office of the Controller of the Currency; go to http://www.occ.gov and check archives) issued tentative guidelines with much stricter guidance to banks/lenders on we’ll just call them toxic mortgages (IO/neg-am/low-teaser ARMs). The upshot is they wanted banks/lenders to qualify people based on whether they’d be able to pay when the higher rates kick in/teaser period ends. All very sensible, in my opinion. After issuing these work-in-progress guidelines issued in Dec., the OCC asked banks/lenders to “comment” on the new standards. Judging from the speeches given by various OCC heads, banks/lenders were fightin’ mad. But it would also appear from said speeches (again, seek archives–they’re all there) that the OCC will hang tough. We’ll see. The final guidelines should be out in a matter of weeks.
What effect will it have? My understanding (not huge) is that the OCC can throw their weight around if they want–all good if you’re looking for a stricter lending environment. But my deeper opinion here is that even if the OCC does nothing, the risk for this toxic loans is eventually going to be too high to sell off–and that tipping point is looming large.
I agree. I have a selfish interest in the pop coming sooner rather than later, and think that the OCC will only accelerate the inevitable (if they choose to). Thier level of enforcement is the trillion dollar question. It does seem like they have been talking tough, and, all the numbers show that lenders are doing the status quo (not listening to “recommendations”) or even lending more risky/aggressively. This very likely could force the OCC’s hand?
I have seen signs that the bankers are tightening on the commercial side, condos, business expansions, but I don’t expect this do nothing congress to legislate any further mortgage lending restrictions. If you want to be ill read this:
http://tinyurl.com/nhfhk
As an aside, China is doing a much better job changing lending regulations than the US and they have one heck of a bubble too. I expect as liquidity dries up in China there won’t be so much loose money sloshing around the US sub-prime market. The regulations already in place in the US will have some greater impact going forward as rates go up. The fed. gov. has lost control of the money supply. This is why rates on the long end must go up. A housing crash is inevitable but they are trying to keep up both ends (asset prices and the dollar) while simultaneously feeding the beast, this effort is doomed to failure.
This has been kicked around for awhile now. These standards apply only to depository lenders. A subprime finance company that sells into the private label MBS market is completely unaffected by banking regulation. The standards, by themselves, will just cause a shift from depository subprime lending to non-depository subprime lending.
I don’t think anything will stop this lending, but two things can slow it down quite a bit. One is the investors buying this stuff can demand higher credit spreads. I’ve heard that this has been happening over the last 6 months, but have seen no hard evidence of it. The other is the increase in short term interest rates. The way lenders made it “affordable” was ARMs. Now they have to do it via buydowns, which are more expensive. Increasing rates, caused either by increasing spreads or increasing Treasury rates, will slow down the borrowers.
I wouldn’t count on some foreclosures ending things, or scaring lenders or investors too badly. Do some quick and dirty math. If 25% of loans go bad, and the lender loses 30% on each bad loan, the lender needs 7.5% to break even. He has to collect that off the 75% of loans that don’t go bad, so he has to collect 10%. 2 points upfront, 3 points per year in spread, and a 3 year prepayment penalty covers his losses and leaves him with a profit. The fact that the losses are in the future, that some of those 25% pay for awhile before going bad, and some of the 75% keep paying after the 3rd year still leaves him with a healthy profit. You can have a lot of bad loans and still make a buck.
I don’t think there has been any tightening of standards at all. I think people will be surprised to see that standards are even looser than last year’s. If the standards were to be tightened, you would see the sales drop to a fraction of what they are right now and the foreclosures would start mounting.
Nobody has been able to provide me of any example of tightening of standards. You can still get a no-doc 0% down loan at a reasonable rate from the thousands of newly minted mortgage brokers.
If it helps, thirteen lenders turned down this would-be refinanceer:
http://tinyurl.com/nwqez
“Lenders hate lending to desperate people” - I love it. A really nice and diplomatic way to open the advice column.
And lenders are themselves desperate to make any profit by lending like crazy fools. Who cares anyways? It’s the taxpayer that will be footing the bill in last recourse.
Bottom line, my question for all those more experienced in these matters than I: what’s going to stop the I/O crowd from trading one I/O mortgage for another?
Property values decline. Those who bought homes with little or no equity are now upside down and their loans aren’t eligible to be refinanced. Either yesterday or the day before I saw the statistic that 29% of all homes bought in 2005 now have negative equity. They won’t be refinancing anytime soon. Another thing that could stop IO from refinancing into an IO is higher interest rates and/or other debt obligations. Who’s to say the IO borrower forgot how stretched they were and proceeded to buy new cars, home improvements, other playtoys, etc. And there are the “investors” who took out IO loans because who could make a larger ROI through the stock market than it would paying back their mortgage. I invest in the market as well, over the long term you should make money. But in the short term, anything can happen. There is no guarantee that your investments will perform better than the 6 to 7% mortgage rate. What if that $300 per month that should be going to pay back the mortgage instead is invested in a bear market where you lose 20%? Didn’t the stock market just go down 1000 points in the last month or so?
There are a lot of things that can go wrong. Lately, because of lower rates and rapid appreciation, people have been able to get away with IO loans without pain. It will be very interesting too see how these borrowers deal with higher interest rates, stalled or even declining property values, ARM resets and/or having to pay back principal.
I remember the last tightening cycle. you had some people that said greenspan was going too far. I remember wall street was getting a little itchy at greenspan. bill o’reilly even did a segment saying how greenspan was wrecking the economy and how he doesn’t do interviews.
this feels just like last time…
wells fargo and some other banks have loan programs for illegal aliens…as far as standards tightening….well yes,and no.world got a little tighter on underwriting due to the wachovia deal,the subprime folks just goosed the rates up…however they are having trouble reselling these notes…just a little trouble now….however this paper is so horrific that once investors get a clue it will be discounted heavily…with the combination of inflated prices,high credit risk and liars loans..err stated income loans…the risk cannot be measured,but is clearly very high.i spent a lot of years in credit/collections,and if buying a pool of these mortgages that were performing,i would want an initial return of 30%,minimum,and would expect over 5 years to actually average about 12% after losses.
Still way too early. The free market system will take care of itself, eventually. As Bubbles Greenspan himself stated… “History has not dealt kindly with the aftermath of protracted periods of low risk premiums”.
Exactly. The toxic lending will stop when the lenders have nobody to pass the trash to. I’m surprised that the secondary mortage market hasn’t seized up already - are there really that many yield-chasing fools out there? And the higher rates get on government debt, the less attractive the trash gets.
And history will not have kind words for this jerk called Alan Greenspan.
i have a question:
against my advice, a good friend of mine purchased a home near denver for $189,000 with zero down and interest only.
He makes about $79,000 a year and is the only breadwinner in the family of 3.
I dont’ have any other details about his loan because he’s stopped talking to me about real estate. He’s using the ostrich technique of burying his head in the sand regarding it.
What do you think will happen with his loan? What type of loan did he get and how will it most likely play out?
One thing he did say was that he purchased his house under the median price, and therefore it wouldn’t drop at all - and something about his rate was locked in.
How do these loans really work?
Buying a $189,000 house on an income of $79,000 sounds OK to me. I really cannot understand why he choose a interest only loan. It would appear that he could afford a conventional mortgage.
It is possible to lock-in an interest-only loan rate for 7, 10, and even 30 years. So, it is possible that he will not be hurt by a payment reset. However, he will not be paying down principal with an interest-only. You never really own your home until you pay off the loan.
Even then, the property taxes and insurance will plague you, and they will normally increase every year.
i doubt he had the down payment for a conventional loan.
Irrespective of the DP, I think your friend will be alright, as long as he can keep his job. His income-to-home price seems very reasonable to me.
I am a little late to respond about taxes at the top of the thread. But my taxes in Jacksonville Beach for a city tax appraisal of $280,000 is around $4500 year ~ $375 month. The taxes combined with increased mortgage payments will kill over leveraged people.
Good. When will they vacate the place for the cemetary, for heaven or hell? So much stupidity came from this country and from Japan also, these last years. I hope they get killed. They have made life a living hell for people trying to live and invest rationally within their humble means. I know that I am being mean. But they desserve it and much much more. Hey big spender when will you croke? Very soon, I hope.