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davelj.
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September 25, 2006 at 10:56 PM #36430September 26, 2006 at 10:43 AM #36487
North County Jim
ParticipantGF,
My argument is certainly based on semantics. As you said, there’s a difference (huge IMO) between “at risk” and “expected”.
Powayseller’s thread title was extremely misleading and I see nothing wrong with pointing that out.
I read the same tone in the article you do. Do you see the same tone in the title of the thread?
September 26, 2006 at 11:01 AM #36490avidsaver
ParticipantWow… what’s with all of the personal attacks on PS? I get the difference between “at risk” and “expected,” but who cares? Now that you three have pointed it out, can we move on to some interesting and differing points?
I’m a total novice to this site, and sometimes the analysis is a bit much for me, but I appreciate the banter, and I learn a great deal.
But “misleading” is such a harsh word. Maybe it was a bad choice of words, maybe just an indication of PS’s “spin” on the situation… WHATever.
I would like to see some differing opinions that can help me grow in understanding. The personal attacks don’t do that.
September 27, 2006 at 7:24 AM #36562powayseller
Participant“The more precariously positioned ARM borrowers are very much on the minds of economists, some of whom fear that masses of consumers will not be able to afford the new higher payments, setting off a recession. According to Christopher Cagan, an analyst with First American Real Estate Solutions, a housing consultancy in Santa Ana, Calif., about 19 percent of the 7.7 million ARM’s taken out in 2004 and 2005 are at risk of defaulting.”
Cagan’s statement is in support of the argument for recession risk in the first sentence. The reason I did not change my mind about what Cagan meant, is because I still think he meant to say 1.5 million ARMs will default, leading to recession. How else can we have “masses of consumers not able to afford the new higher payments, setting off a recession”?
These types of articles are getting more common. Warnings about Option ARMs, and the risk of foreclosure are popping up all over the media. Interestingly, Cagan seems to be one of the only sources of information on how widespread they are. One of the Senate hearing panel members (non-traditional mortgages) quoted him, when asked about exotic loans. None of the panel members quoted a government or banking report. We just don’t have sufficient information on these loans, since most are made in the private market.
September 27, 2006 at 9:45 AM #36570kicksavedave
ParticipantI have a question for the experts here.
It seems obvious that a mid to lower income family, on a very tight budget, who got an ARM at the height of the frenzy and is barely able to make their $1100 mtg payment, would be in serious risk of default if the payment went up to $1500 or $1600. The family making $45K, with 3 kids, and limited potential for increasing their income – sure, they seem to be at risk when their ARM resets. They don’t have $500 in disposable income, entertainment budget, or other areas where they can simply cut back on and make up that new difference. There may not be any less affordable housing in their area. They have very few options.
But here in SoCal, especially in San Diego, the typical ARM, the typical new homeowner, seems more likely to be the ones making $70K to $100K, who’s payment is more like $2700… when their payment jumps to $3300 or $3500, it doesn’t strike me all that realistic that they will default based on that difference. They will either suck up the difference out of their discretionairy budget, trade in the Lexus SUV lease for a Toyota, or move down from that 4BR in Carmel Valley to a 3 BR in Escondido. They have plenty of options.
Basically, that whole ARM default tidal wave that we may or may not be facing, appears to me to be centralized in lower income, lower housing price areas… in other words, not here in SD county…. (maybe in Florida, Kansas, Pennsylvania, etc) I find it hard to believe that a whole lot of folks in their $750K new constructions in areas like SD central, coastal and inland and North County, will just have to walk away from them. Will people who make ~$12K a month default en masse because their ARM went from $2.5K to $3.5K or even $4K, ? I can’t see it.
Tell me why I am wrong?
September 27, 2006 at 9:58 AM #36574The-Shoveler
ParticipantNor_LA-Temcu-SD-Guy
What about the people in their $750K new constructions in areas like SD central, coastal and inland and North County.
That only make 45K with 3 kids and have been sucking money via MEW to live on, and the Real-estate agents mortgage broker etc.. who were make 100K+, now less than 50K all of a sudden.September 27, 2006 at 10:01 AM #36576JES
ParticipantIf you add job lossses and a recession everyone will be impacted. I agree with you that there are a large number of people who will be hit hard, but will have a relief valve in the form of putting the wife to work, lowering expenses, or moving down. Even for these folks this will create an urgency to get out of their current prediciment and could result in more inventory and lower prices.
September 27, 2006 at 10:03 AM #36577sdcellar
ParticipantMain Entry: risk
Pronunciation: ‘risk
Function: noun
Etymology: French risque, from Italian risco
1 : possibility of loss or injury : PERIL
2 : someone or something that creates or suggests a hazard
3 a : the chance of loss or the perils to the subject matter of an insurance contract; also : the degree of probability of such loss b : a person or thing that is a specified hazard to an insurer “a poor risk for insurance” c : an insurance hazard from a specified cause or source “war risk”
4 : the chance that an investment (as a stock or commodity) will lose valuePossibility, chance, degree of probability. Nowhere does it say certainty.
September 27, 2006 at 11:12 AM #36584lamoneyguy
ParticipantI’m not a frequent contributor, but I’m going to throw in my two cents on the semantics debate here. And yes, it is semantics, as most or all here are in agreement that this does not bode well for the housing market or the housing bulls. But semantics are important. Maybe when Lereah says that he thinks that the housing market has bottomed out, he means that sales volume has bottomed, and will rise in a declining price environment. I doubt it, but it’s possible.
“At risk” and “expected” are quite different. “At risk” is a term frequently used to describe Jr. High or High School aged children who are acting out and have had disciplinary issues. If my child were described as “at risk” and another parent, upon hearing that said, “we expect him to wind up in Juvie…” we would have big issues. If I lend a person money, I do so with the expectation that they will pay me back. However, there is the risk that I will get stiffed.
To be fair, sdcellar, PS didn’t say that 1.46mil will certainly default. She said that they are expected to. The truth, it would appear, lies somewhere in the middle.
Even as many homeowners will escape default, it does not mean that they are in the clear. At best, it will pinch their budget, and we will see a decline in consumer spending, mostly affecting retail and construction.
September 27, 2006 at 12:59 PM #36599PerryChase
ParticipantI don’t expect the option ARM holders to default when the loans reset to a higher interest rates. I expect them to default when the LTV caps are reached AND the notes have to be fully amortized at a higher rate. We’ll see real pain when the payments double. They won’t be able to refinance because the houses won’t appraise and they won’t be able to sell because they’ll be seriously under water. 2008 is when that’ll start to happen.
September 27, 2006 at 1:06 PM #36598ParticipantI would like nothing more than to get my hands on accurate default rates on Option ARMs. Cagan’s admission that these loans are at risk is a huge admission. He’s the one who published a paper showing that most homeowners have plenty of equity and ride out any housing downturn. I found his change in sentiment significant.
The per capita income in San Diego is nowhere near $70K – $100K. I think less than 20% of families in San Diego make in that income range. So the income premise does not hold.
Most important is this: lenders qualify borrowers at 40% – 55% DTI, based on today’s teaser rate. It doesn’t matter how much money you earn, if you are already maxed out on your mortgage payment and it goes up 50% – 100%, you’re at risk of default. In my opinion, most of the people whose mortgage adjusts up by at least 50% will end up in foreclosure. My reasoning is that they are already maxed out on their mortgage payments.
IF the lenders used traditional underwriting guidelines, and they qualified the borrower on 33% DTI, then your mortgage is max. 28% of your gross income and your total debt payments are a max of 33% of gross income. So the general formula is that you could borrow 3 – 3.5x your salary for a mortgage. If the lenders used the traditional guidelines, they would make sure the maximum interest rate under the loan AFTER the teaser period ends, falls within the 33% guideline.
But that is not happening. This revelation was a surprise to us on this forum when we mutually discovered it earlier this year. We were astonished, “What, the borrower is qualified based on the teaser rate only? Then how does the lender expect the borrower to make the mortgage payment when it jumps 50% or even doubles?” Answer: the lender doesn’t give a damn, ‘cuz he sold the loan to the MBS investor.
So the money is lent w/ a double whammy of risk: at the teaser rate and at up to 55% of income. So the borrower is already at a high debt load in the initial teaser period. He’s basically screwed if he can’t refinance when the teaser period ends.
It’s the lax lending guidelines that are to blame for the wave of defaults we will see.
Remember Casy Serin who got $2.2 mil in loans? This kid barely had a job.
To understand why I am so bearish on housing, you’ve got to understand the lending environment, and how loose it is. Low FICO, one day out of bankruptcy, no problem. Brokers are lying about borrower income, stated income, 0% down, qualifying borrowers on the teaser rate only without regard to whether the borrower can afford the payment after the loan resets….
The lenders have abandoned prudent lending guidelines. It’s all about getting the commission today, and no longer about making sure the loan actually gets repaid. The lender could care less if the damn loan gets repaid. They have the profits today!
Get this: the subprime hybrid ARM has very low payments for 2 years, and then jumps in year 3, with a payment shock of 40% – 50%. Even if the interest rate goes down by 200 basis points, the payment shock is 25%!!!! (Center for Responsible Lending). The panel member at the Senate Hearing said there are 3 main problems with the subprime loans:
1) high debt ratio (50% – 55% of gross income for principal and interest).2) underwriting to initial payment, so the borrower is qualified based on his ability to pay the temporary low intro rate. When the payment goes up, the FINAL PAYMENTS EXCEED HIS GROSS INCOME!!!!!!
3) borrower’s ability to pay is on principal and interest only. They don’t even include the taxes, insurance, HOA! If you include all that, you could be over 55% – 60% of gross income. That is on the initial teaser rate only.
This degradation of lending is criminal. We’ve got lenders who are selling products for the sake of commission, without a care whether people can stay in their homes.
So don’t waste your time getting mad at me. Get mad at the lenders who have perpetrated the greatest homeowner disaster in our history, basically ensuring that millions of Americans have loans with payments they soon cannot afford. Will not afford. So I will be very clear: in my opinion, millions of Americans will lose their homes in foreclosure because lenders put them in products they simply cannot afford.
If you disagree with me, start your own thread. What do YOU know about the lending environment, and what will be its consequences?
September 27, 2006 at 1:28 PM #36602ParticipantExpected and risk do not mean the same thing at all. Take a look at the now unfortunately cross-posted Critique the analysis, not the person.
sdrebear chose to post the definition of “expect” and if you read both definitions, you’ll see that risk and expectations are very different things.
You see the word certain in the definition for expect, whereas you’ll find nothing like this in the definition of risk. Sure, expectations aren’t always met, but they do imply a much higher degree of realization of the stated outcome.
and lamoneyguy, you are correct, PS never said certainly and I was mistaken to state that (sorry PS!). I think we do agree about the difference in the level of certainty between risk and expectations however.
It’s interesting to note that Cagen never used the word expect in his article with regard to the number of defaults because he likely understands the important distinction between the two.
I’m not trying to nit, and I’m not trying to pick on anyone, but I understand where people are coming from on this issue. I, and I’m sure many others, read it as ~1.5 million loans will default because of the word “expect”. Had the title read “risk”, it probably would have been taken as anywhere from 146,000 to 500,000 or so.
September 27, 2006 at 2:16 PM #36623woodrow
ParticipantIf you disagree with me, start your own thread.
I agree with most of your analysis, and disagree with some. Does that mean I'm allowed to post the agreeable comments here, but I must start my own seperate thread on the aspects of your post that I disagree with?
September 27, 2006 at 2:49 PM #36625ParticipantStart a thread woodrow – let’s see what you’ve got!
October 2, 2006 at 9:56 AM #37008sdduuuude
ParticipantTo summarize my thoughts on this matter from another thread, the problem starts with the lack of clarity by the author. He uses the term “at risk” but never puts a number to it. What does at risk mean? 10% chance of default? 50% chance of default?
Powayseller was trying to quantify this and made an assumption that was not agreeable to everyone. She assumed “at risk” meant 100% default, when we really have no idea what it means at all. I think we all made our own assumption, but powayseller voiced hers as fact.
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