Skip to content
Subscribe
Notify of
150 Comments
Oldest
Newest
Inline Feedbacks
View all comments
34f3f3f
14 years ago

Rollin’ Rollin’ Rollin’
Keep

Rollin’ Rollin’ Rollin’
Keep movin’, movin’, movin’,
Though they’re disapprovin’,
Keep them condos movin’ Rawhide!
Don’t try to understand ’em,
Just rope and throw and grab ’em,
Soon we’ll be living high and wide.
Boy my heart’s calculatin’

poorsaver
14 years ago

I still don’t get how these
I still don’t get how these tiers apply to most areas of Southern California. Low priced tier is under $284K, mid $284K to $419K, and high over $419. Let’s be realistic here, are there many areas that are less than the highest tier at $419K? Certainly not in my city, Diamond Bar, which is a pretty average bedroom community in LA County. I would expect San Diego County is similar. The last time I looked, areas that were like mine, such as Scripps Ranch or Rancho Bernardo, were priced higher than my area. So where do they even get the data for the low and mid tiers since there can’t be that much to draw from? I think more appropriate tiers for our area would be low at under $419K, mid $419K to $650K, and high above $650K. And that might be conservative.

poorsaver
14 years ago
Reply to  Rich Toscano

Again, it’s hard to believe
Again, it’s hard to believe there were many (detached SFR) homes sold under $284K. There are not any even listed under that price in my area, only condos. Where does that third come from for the data point if there are no sales in that range? What am I missing here, seems like simple math and statistics. Also, seems like sales must be heavily skewed in lower priced properties, as the higher priced props are still asking ’05 prices and staying firm.

CA renter
14 years ago
Reply to  poorsaver

Again, it’s hard to believe
Again, it’s hard to believe there were many (detached SFR) homes sold under $284K.
—————–

Here:

http://www.sdlookup.com/MLS_Listings-98+4-Oceanside

and here:

http://www.sdlookup.com/MLS_Listings-92+4-Vista

and here:

http://www.sdlookup.com/MLS_Listings-82+4-Escondido

and here:

http://www.sdlookup.com/MLS_Listings-80+4-Escondido

…among other areas in San Diego County. This is just in North County.

These are the areas with very high sales volume and multiple bids on most reasonable places.

34f3f3f
14 years ago
Reply to  poorsaver

Poorsaver, what’s missing
Poorsaver, what’s missing here is that as median prices have declined so have the three tiers, because that’s what they are based on. If memory serves me correctly, the top tier was originally about $550k and upwards. So any prices above the upper tier and within that tier. I agree though it would be nice to see what prices are doing in isolation in the $600k-$1m price range, because this seems to be the sticky area.

SDEngineer
14 years ago
Reply to  poorsaver

poorsaver wrote:I still don’t
[quote=poorsaver]I still don’t get how these tiers apply to most areas of Southern California. Low priced tier is under $284K, mid $284K to $419K, and high over $419. Let’s be realistic here, are there many areas that are less than the highest tier at $419K? Certainly not in my city, Diamond Bar, which is a pretty average bedroom community in LA County. I would expect San Diego County is similar. The last time I looked, areas that were like mine, such as Scripps Ranch or Rancho Bernardo, were priced higher than my area. So where do they even get the data for the low and mid tiers since there can’t be that much to draw from? I think more appropriate tiers for our area would be low at under $419K, mid $419K to $650K, and high above $650K. And that might be conservative. [/quote]

Scripps Ranch and Rancho Bernardo ARE high end areas. They’re not “middle tier”. They may not be as swanky as La Jolla or RSF (which are the high end of the high end), but they’re definitely up there. Mira Mesa, Santee, or San Marcos would be examples of “middle tier” areas.
Places like the mid and lower end areas of Oceanside, Escondido, Chula Vista, Encanto, City Heights, etc would be the “low tier”.

There’s plenty of those areas to draw from, my guess is that you simply don’t view those as “desireable” areas and unconsciously exclude them. But they’re still there, and on aggregate, those middle and low tier areas grossly outnumber the higher tier areas like RB, Scripps, CV, etc.

Cheers,

SD Engineer

peterb
14 years ago
Reply to  SDEngineer

Here’s why it’s so busy at
Here’s why it’s so busy at the low-end. This guys analytical work is very good. The govt has taken over the irresponsible lending business. Already, these loans are starting to show very high NOD levels. SubPrime II, coming to a theater near you.
http://www.doctorhousingbubble.com/

SDEngineer
14 years ago
Reply to  peterb

peterb wrote:Here’s why it’s
[quote=peterb]Here’s why it’s so busy at the low-end. This guys analytical work is very good. The govt has taken over the irresponsible lending business. Already, these loans are starting to show very high NOD levels. SubPrime II, coming to a theater near you.
http://www.doctorhousingbubble.com/%5B/quote%5D

Truthfully, while I usually like his work, he’s twisting stats here.

The 4.6% and below level for FHA market share from 2004-2006 was a historical low (it’s historic market share has been anywhere between 10 and 30%, increasing in bad fincancial times, and averaging right at 18% of originated mortgages) – the demand for the FHA loan had been replaced by the toxic subprimes that not only didn’t require a down payment at all, but also didn’t require things like income or asset verification, let alone have a DTI that was enforced.

The FHA is pretty good at requiring those things – someone who gets an FHA loan CAN afford the payments, or they wouldn’t get the loan. It’s not like in 2004-2005 where the banks were giving out 400K mortgages to a household making 40K/yr – a product guaranteed to fail unless the market continued to appreciate.

peterb
14 years ago
Reply to  SDEngineer

3% down in a market that’s
3% down in a market that’s going down in price at an alarming pace coupled with an economy with rising unemployment, not good. Yes, the DTI and documented income are important differences, but the 7.5% NOD’s is a telling number. Add to this that the conforming limit is over $200K higher in most of CA than a couple of years ago…….

SDEngineer
14 years ago
Reply to  peterb

peterb wrote:3% down in a
[quote=peterb]3% down in a market that’s going down in price at an alarming pace coupled with an economy with rising unemployment, not good. Yes, the DTI and documented income are important differences, but the 7.5% NOD’s is a telling number. Add to this that the conforming limit is over $200K higher in most of CA than a couple of years ago…….[/quote]

Interestingly enough, the FHA reports that the loans that are increasing the fastest in default are NOT purchase loans, but refinance loans. Purchase loans were actually declining in failure rates (at least as of Jan 31, the latest data I could find)
http://www.washingtonpost.com/wp-dyn/content/article/2009/01/23/AR2009012304061.html?wprss=rss_realestate

This makes sense when you consider that under the FHA Streamline refinance program, DTI and income are NOT verified (unlike a purchase contract). It appears that there may be many of the questionable brokers that are now pushing these products just as they pushed other serial refi programs during the RE boom heydey so they can keep making money off the same customers.

http://www.dailyfinance.com/2009/03/30/fha-defaults-rising-rapidly-possibly-due-to-fraud/

I’d be curious as well to find out how many of the purchase ones that have been having trouble were the no downpayment at all loans that could be done before the HUD killed all the DPA programs.

As I said, he’s usually pretty good, but it really does look like theres some statistics being taken out of context in this blog post.

patientrenter
14 years ago
Reply to  SDEngineer

SDEngineer wrote:peterb
[quote=SDEngineer][quote=peterb]3% down in a market that’s going down in price at an alarming pace coupled with an economy with rising unemployment, not good. Yes, the DTI and documented income are important differences, but the 7.5% NOD’s is a telling number. Add to this that the conforming limit is over $200K higher in most of CA than a couple of years ago…….[/quote]

As I said, he’s usually pretty good, but it really does look like theres some statistics being taken out of context in this blog post. [/quote]

SDE, set aside the emotion around the housing market. Let’s suppose you were asked to lend $30,000 of your own money to someone who wanted to buy a car for $31,000. But the catch is that if they stopped paying for any reason, you could only repossess the car, and you would have no claim on their income or other assets. Would you feel comfortable doing that if all you could check was that they had an income of $50,000 or more, and some OK credit rating?

If I had to lend under these circumstances on a depreciating asset, I would require a substantial down payment by the borrower. On a non-recourse loan, it makes no sense in a declining market to allow tiny single-digit downpayments for anyone.

SDEngineer
14 years ago
Reply to  patientrenter

patientrenter
[quote=patientrenter][quote=SDEngineer][quote=peterb]3% down in a market that’s going down in price at an alarming pace coupled with an economy with rising unemployment, not good. Yes, the DTI and documented income are important differences, but the 7.5% NOD’s is a telling number. Add to this that the conforming limit is over $200K higher in most of CA than a couple of years ago…….[/quote]

As I said, he’s usually pretty good, but it really does look like theres some statistics being taken out of context in this blog post. [/quote]

SDE, set aside the emotion around the housing market. Let’s suppose you were asked to lend $30,000 of your own money to someone who wanted to buy a car for $31,000. But the catch is that if they stopped paying for any reason, you could only repossess the car, and you would have no claim on their income or other assets. Would you feel comfortable doing that if all you could check was that they had an income of $50,000 or more, and some OK credit rating?

If I had to lend under these circumstances on a depreciating asset, I would require a substantial down payment by the borrower. On a non-recourse loan, it makes no sense in a declining market to allow tiny single-digit downpayments for anyone.[/quote]

My point was that historically these loans have been ok, and that currently, the purchase loans (which rely on those historically “ok” dti and income guidelines) don’t seem to be doing as bad as that blog post implies.

I just don’t see the issue as a huge problem, though time will tell. The people getting approved these days have sufficient income to afford the place, sufficient credit scores to show they aren’t likely to default on a major purchase, and a low enough debt that they should be able to fairly easily afford the payment. They are getting into a loan that has high mortgage insurance, mostly paid up front.

Yup, it’s a declining market. So you could, theoretically, decide that making a 20% down payment should be mandatory, thus taking a large chunk of buyers – especially first time buyers – who have the means to afford the houses, out of the market, which would make the housing market even worse. The FHA was created as just that sort of cushion – to lend to entry level buyers during times when other lenders would not. You may disagree with it’s purpose, but so far, as I pointed out, the problem doesn’t appear to be with it’s purchase money delinquency rate, it’s with abuse of it’s streamlined financing program (which I tend to agree needs restructuring – the refi program should look at DTI and income just as the purchase program does).

peterb
14 years ago
Reply to  SDEngineer

3% down sounds very
3% down sounds very irresponsible to me. I know a couple of people who pulled the trigger for exactly this reason. Hardly any skin in the game. Lower down side risk. But they will also go negative on their equity position very easily and perhaps quickly. This is ripe territory for defaults. Brought to us by our govts unending desire to keep people borrowing that probably shouldnt be.

CA renter
14 years ago
Reply to  peterb

peterb wrote:
Hardly any skin

peterb wrote:

Hardly any skin in the game. Lower down side risk. But they will also go negative on their equity position very easily and perhaps quickly.
—————-

Already done! Considering the fact that the various closing costs, commissions, repairs, etc. will cost **at least** 6% or more, people are underwater from day one with these loans. That’s what makes them so irresponsible, IMHO. Absolutely NO skin in the game. The lender (that’s us, fellow taxpayers!) is on the hook for any losses, whatsoever.

We’re right back to where we were a few years ago. Lots of people flipping and speculating on rising prices from here. I’m seeing it all around me. Oh well, guess it’s going to take a few more years now before we get to see a real bottom in the housing market. 🙁

patientrenter
14 years ago
Reply to  CA renter

CA renter wrote:peterb
[quote=CA renter]peterb wrote:

Hardly any skin in the game. Lower down side risk. But they will also go negative on their equity position very easily and perhaps quickly.
—————-

Already done! Considering the fact that the various closing costs, commissions, repairs, etc. will cost **at least** 6% or more, people are underwater from day one with these loans. That’s what makes them so irresponsible, IMHO. Absolutely NO skin in the game. The lender (that’s us, fellow taxpayers!) is on the hook for any losses, whatsoever.

We’re right back to where we were a few years ago. Lots of people flipping and speculating on rising prices from here. I’m seeing it all around me. Oh well, guess it’s going to take a few more years now before we get to see a real bottom in the housing market. :([/quote]

Not only that, but once the down payment is so tiny (3%), it’s easy to go even further and arrange backdoor 100% financing. Enough middlemen and sellers have an incentive to funnel some money back to the buyer that there is really no down payment requirement at all. But even without this, the 3% is ridiculously small. I challenge anyone on this blog to lend 97% of their own unleveraged money to the typical FHA borrower for a non-recourse home loan in this market. If you do it voluntarily, I promise to eat my words.

Trouble is, if you are a net saver and taxpayer, then you are doing just that involuntarily…. to save our “economy” (the new euphemism for the group of people who borrow and refuse to give up real stuff in order to repay their borrowings.)

urbanrealtor
14 years ago
Reply to  CA renter

CA renter wrote:peterb
[quote=CA renter]peterb wrote:

Hardly any skin in the game. Lower down side risk. But they will also go negative on their equity position very easily and perhaps quickly.
—————-

Already done! Considering the fact that the various closing costs, commissions, repairs, etc. will cost **at least** 6% or more, people are underwater from day one with these loans. That’s what makes them so irresponsible, IMHO. Absolutely NO skin in the game. The lender (that’s us, fellow taxpayers!) is on the hook for any losses, whatsoever.

We’re right back to where we were a few years ago. Lots of people flipping and speculating on rising prices from here. I’m seeing it all around me. Oh well, guess it’s going to take a few more years now before we get to see a real bottom in the housing market. :([/quote]

While I agree that default risk varies inversely as the function of cash position, this does not paint the whole picture.

A buyer with a 3.5% (the current FHA minimum) cash position, a 750 FICO and a 32% front end ratio (common now) is a world of difference from a buyer with a 0% cash position, 620 FICO, and a 64% front end ratio(common in 2005).

For example, if the purchase price is $150k, the cash position is $4500 PLUS standard closing costs PLUS FHA funding fee.

Lets rephrase that:
The high-risk loans today are made to people with good credit, savings accounts, who are spending the same percentage of their income on housing as they would were they renting.

To be sure, there are exceptions. HUD does not have much in the way of FICO requirements (thought the banks that underwrite those originations often do) and people could always borrow money from Mom and Dad for the cash component.

I found the following CR article quite interesting on this topic.The article it references suggests the spread of use of subordinate liens (among other innovations) accounts for most of the (no longer) effective demand (see page 5).

http://www.calculatedriskblog.com/2007/12/home-builders-and-homeownership-rates.html

While these newer generation of innovative loans do have a higher risk of default than, say, an 80% loans, they don’t exactly lend themselves to inevitable default.

Thoughts from the peanut gallery?

CA renter
14 years ago
Reply to  urbanrealtor

A buyer with a 3.5% (the
A buyer with a 3.5% (the current FHA minimum) cash position, a 750 FICO and a 32% front end ratio (common now) is a world of difference from a buyer with a 0% cash position, 620 FICO, and a 64% front end ratio(common in 2005).
—————-

Absolutely agree with this. There is less risk of default, but still a great risk that the loan will be underwater from day one. If people lose their jobs or face financial hardship — potentially forcing them to sell — there is nothing for them to fall back on. They will not be able to sell their homes, which practically guarantees these homes will be tomorrow’s short sales and foreclosures, IMHO.

urbanrealtor
14 years ago
Reply to  CA renter

CA renter wrote:A buyer with
[quote=CA renter]A buyer with a 3.5% (the current FHA minimum) cash position, a 750 FICO and a 32% front end ratio (common now) is a world of difference from a buyer with a 0% cash position, 620 FICO, and a 64% front end ratio(common in 2005).
—————-

Absolutely agree with this. There is less risk of default, but still a great risk that the loan will be underwater from day one. If people lose their jobs or face financial hardship — potentially forcing them to sell — there is nothing for them to fall back on. They will not be able to sell their homes, which practically guarantees these homes will be tomorrow’s short sales and foreclosures, IMHO.

[/quote]

Well…sort of.
If the purchase is at a standard housing-expense-to-income-ratio, then it is likely the borrower would not even be able to rent if they were that destitute. Since we are not currently inundated with homeless (and of course that may change), that leads me to believe that most people in such a situation will do what it takes to make the numbers work sufficiently well to keep a roof over their heads.
For example:
If the mortgage is $1200/mth and rent on a comparable place is $1200/mth, then I am doubting this will lead to a swell of distress sales. The places where distress sales have been most prevalent have been those where renting was 40-70% of purchase carrying costs.
Additionally, it is unlikely that someone with a 3.5% cash position would be upside down by day one. It is possible they could be upside down by day 90. However, again we are talking about someone with a record of saving money, a good credit rating, and a job that pays 3 times housing. Several factors would have to combine to make default a sensible option for such a borrower.

CA renter
14 years ago
Reply to  urbanrealtor

urbanrealtor wrote:
For

urbanrealtor wrote:

For example:
If the mortgage is $1200/mth and rent on a comparable place is $1200/mth, then I am doubting this will lead to a swell of distress sales. The places where distress sales have been most prevalent have been those where renting was 40-70% of purchase carrying costs.
Additionally, it is unlikely that someone with a 3.5% cash position would be upside down by day one. It is possible they could be upside down by day 90. However, again we are talking about someone with a record of saving money, a good credit rating, and a job that pays 3 times housing. Several factors would have to combine to make default a sensible option for such a borrower.

——————–

It’s very easy to simply walk away from a mortgage and move in with mom and dad (who probably have a few empty rooms in their paid-off house). This consolidation is what’s happening right now, from what I can tell.

Yes, a buyer is upside-down on a “~3% down” mortgage from day one because the selling costs alone will take that and more. You’re a realtor, and know exactly what I’m talking about. It’s not unusual to see 4-5% for realtor commissions, plus termite inspection/repairs, plus closing costs. That will easily run into the 5-8% range, depending on the house and agents/brokers/escrow company. 3.5% down…POOF!

jpinpb
14 years ago
Reply to  CA renter

The next question is how soon
The next question is how soon before all these newly bought FHA home loans start defaulting? They have the great incentive to buy now, tax credits and low prices. Take away the tax credits. How many people would go for it? Tax credit is a nice boost. People start buying, people see others buying, they think it’s safe to buy, they start buying.

When the deadline for the tax credit has come and gone and buying is not in it’s spring frenzy mode and more foreclosed homes get unleashed upon the market, will the new homeowners feel duped come winter? When they see their homes depreciate another 10%, that tax incentive will seem quite paltry.

When unemployment continues to rise and the new homeowner has income reduced or layoff on the horizon, will we have a new batch of foreclosures waiting in the wings?

urbanrealtor
14 years ago
Reply to  CA renter

CA renter wrote:urbanrealtor
[quote=CA renter]urbanrealtor wrote:

For example:
If the mortgage is $1200/mth and rent on a comparable place is $1200/mth, then I am doubting this will lead to a swell of distress sales. The places where distress sales have been most prevalent have been those where renting was 40-70% of purchase carrying costs.
Additionally, it is unlikely that someone with a 3.5% cash position would be upside down by day one. It is possible they could be upside down by day 90. However, again we are talking about someone with a record of saving money, a good credit rating, and a job that pays 3 times housing. Several factors would have to combine to make default a sensible option for such a borrower.

——————–

It’s very easy to simply walk away from a mortgage and move in with mom and dad (who probably have a few empty rooms in their paid-off house). This consolidation is what’s happening right now, from what I can tell.

Yes, a buyer is upside-down on a “~3% down” mortgage from day one because the selling costs alone will take that and more. You’re a realtor, and know exactly what I’m talking about. It’s not unusual to see 4-5% for realtor commissions, plus termite inspection/repairs, plus closing costs. That will easily run into the 5-8% range, depending on the house and agents/brokers/escrow company. 3.5% down…POOF!
[/quote]

Regarding the cash component, you have a basic misunderstanding about how the costs work.

For example:
Purchase price $200k.
Minimum cash to principal from borrower at closing is $7k.

Realtor commissions are paid out of sales proceeds.
That means they are paid from the money that would otherwise go to the seller.
The agent costs are not supplemental to the purchase costs.
They are included in almost every transaction.

The termite inspection and repair is generally paid by the seller. A termite clearance is not necessarily required to close. Even being paid by the buyer after closing would not have an effect on the buyer’s closing costs.

The physical property inspection is paid COD at the time of inspection by the buyer. Regardless of who pays this would not effect buyer’s closing costs.

Closing costs would be as follows:
Escrow/closing fees-$1000 (this could be rolled into the loan)
Title insurance- lets say $1000 (I don’t recall the actual number) This could be rolled into the loan.
Loan origination of 1%-$2000 (this could be rolled into the loan)
Funding fee required for FHA loans-$3500 (this could be rolled into the loan).

ERGO:
The total cash from buyer in this $200k purchase would be $7000-$14500 depending on which closing costs were rolled into the loan itself.

Regardless of which were rolled in, the principal outstanding at time of close would be 96.5% of purchase price (at maximum).

That is the maximum that HUD will underwrite.

I am not aware of any loan products widely available allowing a larger percentage of purchase price to be financed.

Homepath financing from Fannie Mae might be the lone exception.

The bottom line is it is literally impossible to close the purchase without 3.5% equity.

CA renter
14 years ago
Reply to  urbanrealtor

urban,
I’m talking about

urban,

I’m talking about when/if the new buyer has to turn around and sell it, not about the first buying transaction.

The NEW buyer, once in the house, will not be able to sell without bringing money to the table (unless prices are rising). IOW, if something should happen to that new buyer (lost job, divorce, sickness, job transfer, etc.), that house is almost guaranteed to be a short sale or foreclosure — going forward — if they only put 3% down. They new buyer’s future selling costs will most likely be more than the 3% they put down.

(former)FormerSanDiegan
Reply to  CA renter

CA renter is spot on.
It’s

CA renter is spot on.

It’s quite simple, and can be explained in 2 sentences:

If I have 3.5% equity in my house and I have to sell, the selling costs are likely to be 6-7%.

So, although technically I would have 3.5% equity, effectively I am upside-down if I have to sell

sdrealtor
14 years ago

Is that called flipping? i.e.
Is that called flipping? i.e. buying to sell?

Dont most people buy to live in?

CA renter
14 years ago
Reply to  sdrealtor

Dont most people buy to live
Dont most people buy to live in?

———————–

Not anymore! 😉

rubberducky
14 years ago

We are saved
We are saved !
http://money.cnn.com/2009/03/26/real_estate/California_comeback/index.htm?postversion=2009040311

Excerpt:
The booming sales have whittled away existing home inventory to just six and a half months – down from 15 months a year ago.

Oops:
One wildcard, however, is that banks have kept many repossessed homes off the market. “Banks are spoon feeding them out very slowly so they don’t overload the market,” said Whitehead. But, he added, if they release a lot of properties during the heavy spring buying season, they “will be eaten right up by buyers.”

Taking a leaf out of DeBeer’s marketing plan, I see….

NotCranky
14 years ago
Reply to  rubberducky

Thoughts from the peanut
Thoughts from the peanut gallery?

Well done post. I am happy these loans are available to help poor to modest income, hard working, decent people, enter the market at the trough or near it, instead of being sidelined. Even if they default, when the programs attempt to be reasonable it doesn’t bring down the world economy. Poor people are not to blame for this.

Lots of people who use these loans are very practical and savvy enough to make good decisions.Plenty of them are fantastic market timers and wait to enter the market until it will work for them. Others, at least have the sense to find someone honest to guide them.

rocket science
14 years ago

Don’t remember seeing
Don’t remember seeing reference to the ‘second’ wave of foreclosures lately, but a LA Times article contained this:

U.S. home prices show record drop in January

Foreclosures nationwide are hitting higher-priced homes as well. Data released Tuesday by the Hope Now coalition of home loan and housing groups show foreclosures of prime mortgages — those issued to better-qualified borrowers — are rising. That could lead to further price erosion of more expensive homes.

Hope Now said foreclosures on prime mortgages climbed to 55,530 in February from 30,413 a month earlier. Subprime foreclosures, meanwhile, fell to 31,816 from 37,700 in January.

Little more than a year ago, foreclosures involving subprime loans vastly outnumbered those of prime loans — 58% more in the last three months of 2007. But by the end of 2008, the number of foreclosures in each category was about the same.