They will write ’em as long as anyone will buy ’em, and the day when no one will buy ’em at these rates is coming. The news about the early defaults is just beginning to pop up. I know this is really boring stuff, but the timing of defaults has a great deal to do with the expectations over the life of a portfolio. A few more months of numbers like these, and shock is going to hit.
Another thing, a lot of refis are being done on the basis of “automated valuation”, meaning, there is no reappraisal and the loans are based on totally inflated values.
To give an example, I was talking two weeks ago to a guy who has a house in PA. He bought it in early 2003 at $275,000. That was a good price. His original loan was below $160,000. He is one of these financial conservatives. Now his loan balance is below $90,000, and right on schedule, the company sent him a nice reminder that his house is worth $540,000, and they are willing to allow him to draw on that equity. Just write a check! Here you go! Have some fun!
What’s happening is that loans at low interest rates (his is 5.5%) are not profitable to lenders and especially servicers when they go to lower balances, so they try to get people to refi or draw up.
The funny part of this story is that the house could be sold at the absolute most for about $360,000 in today’s market, and next year will probably end at a resale value somewhere around $320,000 at most. The company is willing to let him go to around $400,000. What does that tell you?
Believe me, when you are looking at equity estimates vs mortgage debt you are looking at some pretty funny numbers right now. As the foreclosure losses begin hitting, things are going to tighten up fast.
