health care technician w/ I/O loan in $1.1 mil house

[powayseller]

Hybrid Loan Time Bomb. Warning: you need courage to read that link. The ARM problem is big, IT IS 12% of SFH LOANS!

There may not be a way to refinance out of it, because rising defaults and new FDIC regulations will tighten lending standards. Most of the ARM market is sub-prime mortgages, and those people have a high chance of NOT qualifying for a refinance next year, under tighter credit standards.

You all can get mad at me for seeing “black”, but it simply does NOT look good for exotic lending. It’s downright scary, and it is the factor that us bears believe will really pop this bubble.

Some snippets from the above link.

Senior Economist of the Mortgage Bankers Association, senior Michael Fratantoni, says that the five-year adjustables that were issued during the refi craze of 2002-03 are a concern.

“The estimate is that in 2007, more than a trillion dollars worth of hybrids are going to hit their first reset date,” he said.

That one chunk of hybrid loans represents 12 percent of the $8.8 trillion in single-family home loans outstanding nationwide.

“We don’t have enough data to know how big a problem this will be,” said David Berson, chief economist at Fannie Mae, the nation’s largest mortgage packager.

Paul Kasriel, chief economist at Chicago-based Northern Trust, wrote that “Asset bubbles are characterized by cheap credit. Usually what bursts a bubble is higher cost of credit, because that is what inflates the bubble, is cheap credit.”

Making matters worse, it is the the sub-prime lenders issuing the most adjustable-rate mortgages. With those who participate in the survey, 80 percent of their loans were ARMs compared to 55 percent in the broader market.

[powayseller]

bmarum, I back up my statements with data, and I wish you would do the same. I’m still waiting for you to list the occupations with 50% salary increases. I will take your punches when I am wrong, and right now the ball is in your court to do so.

[sdduuuude]

Once again, powayseller, you have missed the point for which you have been criticized.

You have also missed the point of the 50% salary increase comment. It isn’t a blanket statement about the state of salaries in San Diego. It was an example meant to show that different people are in different circumstances and it isn’t wise (or even possible) to judging individual cases without understanding the complete individual financial picture.

Furthermore, it is also not wise to use your judgement of individual cases (the entire background of which you don’t know) to prove a point.

Going on and on in your Hybrid Time Bomb posts only shows you didn’t understand this. We understand the ARM, I/O, HELOC time bomb. We don’t disagree. We just think you have misused the example of the health care technician.

[carlislematthew]

It’s almost funny to hear people defending these loans.

IO loans are entirely defensible. There is a segment of borrowers that are prime candidates for this loan, but it’s certainly less than 80%!! WAY less.

One shouldn’t say that these loans are good for everyone, and one shouldn’t say that they are good for noone.

[bmarum]

This is my last post on the subject. PS, I don’t think you and I disagree all that much. I took issue with this statement: “In a market of rising interest rates, anyone who is not converting to a loan that is FIXED and PAYING PRINCIPAL, is in over their heads.” For all the reasons I mentioned above, I don’t believe this is true. I gave examples of my friends whose salaries were going to increase. They’re lawyers, at large law firms in town. Most will see their base salaries increase by about $35k over the next three years. Including bonuses, the increases will be even higher. That’s going to give them a lot of extra cash three years from now. The chart that the link below leads to is somewhat dated, salaries have increased since it was made, but you get the idea.

There aren’t a lot of these jobs out there and I don’t think the fact that these people exist is going to have any significant effect on the market in the coming years. The point I was trying to make was simply that not everyone who got an ARM in the last couple of years is going to end up in foreclosure, or are in over their heads. Since I don’t know any other way to put that, I’m done with this subject.

http://www.infirmation.com/shared/search/payscale-compare.tcl?city=San%20Diego&usps_abbrev=CA

And, by posting on this at 9:30 on a Friday night I’ve conclusively proved that I have no life. There, disagree with that! 🙂

[carlislematthew]

I again kindly request data on which jobs in San Diego are going up 50% in the next 3 years.

It’s not that certain JOBS will go up 50%, but certain PEOPLE may experience 50% increases in pay. Let’s look at my profession – software development. When I had 2 years of experience I was earning $53K. When I had 5 years of experience I was earning over $80K (I don’t remember the exact figure). Sure, I did well for myself, but I was NOT an exception by any means.

Go to salary.com and do a comparison of entry level programmer vs a programmer with 3 years of experience, or some equivalent search. You’ll find large increases in salary based on the increased experience.

Later in your career, salaries will tend to level out somewhat, or keep on increasing if you go into management, or whatever.

I decided to get some data for you, from salary.com.

Entry level software engineer – 92126 – $56K.
Intermediate level software engineer – 92126 – $70K
Level III software engineer – 92126 – $82K

The intermediate position is defined as 2-4 years of experience (so let’s say 3 years) and the salaries are median salaries. 25% increase in salary in 3 years.

Level III position is 5 years of experience, which is another 17% is the following 2 years.

So, an average software engineer will increase their salary by an average of 46% in the first 5 years of their career. OK, so it’s not 3 years, but still. It’s not wage stagnation by any means for these particular people.

I imagine there are other professions that are similar.

[Beach Rat]

We have all missed the point. I too have been critical of PS in the past. I now realize that half the people are below average intelligence. Ok technically half the people are below the median. If you look further into the problem, average intelligence is normalized to 100 so in effect half the people are below are below average intelligence. Ok the point is if you followed that you are probably not the half that is below average intelligence. What we need for this bust is for the Irrational Exuberance to change to Irrational Pessimism. Why is propaganda used? Because there are so many idiot’s that don’t think for themselves. We need board sweeping comments about Armageddon to get the sub-par members of this society to freak out and cause a panic. Therein lies the difference between a 20% correction and a 50+% correction. If everyone has a level head at -20% and doesn’t start panicking the market may indeed level out. If at that point Irrational Pessimism takes over then who knows 50,60,70%… . Maybe the world will end! Go preach it on the mountain sister! 🙂

On a more serious note did that sign twirling idea about the housing bubble ever get off the ground? We really need to get the Propaganda machine organized!

[LookoutBelow]

I agree with PowaySeller here, she is not making blanket statements, she backs it all up with hard data. Bmarum is living in “Happy Talk” land, with his overuse and over defense of the “perfect” english language, this is a discussion not a class on semantics or grammar, drop the “perfect grammer” crap and make your point, your blowing smoke when you inundate issues with “Red Herrings” like your preponderance of information of the word “Constant” being used by PowaySeller to make a point. I recognize it as a tactical debating technique taught in college debate courses, nice try, your cover is blown.You look foolish, smoke another bowl bro !

FACT:

There is something fundamentally wrong with a person who makes 60K (or thereabouts) annually and is living in a 1.1 mil. house. If he has a rich uncle who died, I can then understand it, but no, its NOT the norm.

Its a prime example of the type of people that will collapse during the coming years with this type of purchase mentality, and brotha, there are a MILLION of em !

I do believe, and I have proven it to myself many times, that life IS BLACK AND WHITE…98% of the time. Most people’s choices are really that simple. If you live in the “gray area”, then your one of those people who usually, unnecessarily, complicate their lives and need lawyers constantly. I have stepped over and around many, many people like that while I achieved my goals and objectives in my life, and they did NOT as they were overrun with minutiae and complexity.

Realtors love the Suicide loans…after all, what does it take to become a realtor anyway ?
Morals snd background checks is not generally one of them. I know they have a “code of ethics”, but get real, so do politicians. Im not saying all realtors are shysters, but most I’ve met are.
Anything that helps make sales happen for them, will automatically get a “green light” from their industry. Although the NAR would like us to believe they are finely skilled craftsmen and their skills equal the skills of a neurosurgeon, but we all recognize the hype and see the smoke that is being blown there too. I saw the ridiculous TV commercials a few years ago too, I had to laugh.

Truth is, they could care less if you default on your “exotic loan” in 2 years, as long as they get their commission and can make their silver Mercedes Benz C230 lease payments, its a GO !

They placate their conscious and salve their ego’s by telling themsleves:
1. “Everyone in my office is pushing this type of easy loan, why should I tell them these things are dangerous and kill my sale ?”
2. “Hey I helped the customer realize a dream”……(Yeah right !!)

Truth is:

Exotic loans are DANGEROUS !! Unless your a very wealthy sophisticated investor, these things are like live hand grenades to the inexperienced..thats a fact.

Cheap money is like cheap heroin, eventually it will destroy the society that uses it. See Von Mises Economics for a detailed explanation.
The Banksters are responsible for this mess, starting at the very top with the (not so Fed) Fed and then right on down to its biggest customer, the US Government pimps in CONgress, straight on down to Wall Street and those greedy dogs who bundle up MBS (Mortgage Based Securities) and sell em to the (then) unsuspecting Chinese as a stock. What a scam.

This WILL be ugly and its not just here in the USA. Its worldwide.

[Anonymous]

PS,

First of all, you assume (and we all know what that stands for) that the amount of the ARM is the max that the person could afford. There are people that purchased or refinanced into ARMs that were much less than they could afford because they were not planning on staying in the house that long. If you know that you are not going to live in a house more than 5 or 10 years, what is the purpose of paying the premium for a 30 year fixed? Someone made a very educated and insightful post regarding this issue earlier in this topic.

Also, people who purchased or refinanced in 2002-2003 should still have plenty of equity left to facilitate a refinance now or in the near future. They could use some of their equity to buy their rate down if the rates at the time of their refi were higher than they were expecting.

LookoutBelow,

You make a statement regarding a medical tech purchasing a $1.1 million home on a $60,000/year salary. The home was not worth that when he purchased it, he purchases it for much less…but it has appreciated to that point over the past few years. Equity will come and go with any purchase without regard for the timing of the purchase. If you hold on to a property for a long period of time, you will see value fluctuate both ways.

Exotic loans are only “exotic” for people who cannot afford them. So, in the name of factual data and precise analysis, I would like powayseller to detail the exact number of people that opted for ARMs, interest only, and neg-am loans that truly cannot afford them. Facts only, please. No general or blanket statements. Please detail this analysis with accurate numerical figures. Only then will we have an accurate view of the current mortgage market. Because saying that the market will crash just because people have an ARM or IO loan is irresponsible. So instead of relying on just the number of people that have these loans, let’s examine the financial picture a little deeper. Prove to me that the loan will cause the financial devastion that you are predicting.

[powayseller]

I don’t have a life either :), and thanks for all the comments.

I checked the Labor market data, which lists employees by the type of employer (so janitors at realtor offices are listed under real estate). Out of 1.3 million jobs,
law firms employ 11,800
scientific research and development 71,000

Most of our employment is in
retail 219,000
construction. 95,700 + ? (10% of 1 mil in CA)
gambling/restaurants 154,700
real estate,lending,insurance 83,800

So there may be a handful of people who get promotions to cover their ARMs. It doesn’t matter if you are a lawyer earning $200K, only that your salary goes UP 30-50%. This is a subset of the professional category.

Let’s give you the benefit of the doubt, and say that 5% of ARM holders will get 50% pay raises and afford the higher payments. What will the other 95% do?

Remember, I am looking at the big picture: you only need 30,000 motivated sellers at any time to start seriously reducing property values. The motivated sellers bring down the price for the other 1 million homes. It doesn’t matter if a few ARM holders can afford their higher payments or leave town or refinance. We’ve got a mass of people who used these as affordability products, and the trend will be set by them.

Not even Fannie Mae or the FDIC knows how big this problem is. Neither do I. I’m just having fun guessing (since I don’t have a life…)

[rankandfile]

Hell hath no fury like a Powayseller scorned.

[KingKong]

Gosh, so many post in a day. I am swampped just to read all the postings.

This technician (assumes making 60K) purchased a house for less than 700K and within 4 years, it is appreciated to 1.1M. He paid (assume a 4% interest rate) 28K*4=112K in four years and if he sells now, he will get back over 300K tax-free. What’s his rate of return? 300K/112K, that is close to 300% within 4 years.

My point is that just like the tech boom in 1999, if you buy and sell right away, you are making big money. If you do not cash out, you will be in trouble. That’s also called the bigger fool theory. I respect the “fool” who bought and sold at the right time and laugh at the bigger fool who bought and hold although the difference between them may be just purely luck.

If I remember correctly, PS was calling for a 40% decline. For his 1.1M mansion, 700K is where it should be. So as long as he can afford the payment, everything is great.

Yes, only if he can afford the payment 🙂 As they said, devid is in the details.

[rankandfile]

I feel sorry for those “bigger fools” who bought into the market towards the end…most likely on their own false assumptions/calculations and advise from overly optimistic realtors and mortgage brokers. I am sure that many are middle-class people with families and are finding it tough to sell their home to the next bigger fool.

[powayseller]

That’s why this guy is nervous. His neighbor has been on the market since January, with no sale and several reductions. This guy doesn’t know what to do. Sell for less than the neighbor, i.e. low 900’s, hope for prices to come back up, hope for interest rates to drop before his interest only period expires?

BTW, I didn’t say what department he’s in. I saw technicians in 4 departments during that visit.

[Daniel]

Yes, there are many posts since yesterday. Unfortunately, it seems that civility goes out the window when opinions differ.

I will try to summarize the facts of exotic loans in a short paragraph. I hope everyone will agree with these.

Exotic loan holders fall in 3 main categories:

1. Sophisticated buyers who don’t need I/O loans, but choose them as a financial planning tool. Believe me, it makes perfect sense for someone in a high tax bracket to take a larger loan that he/she needs to, and then pay lower taxes on dividends and capital gains (thank the government for that). Probably less than 5% of borrowers fall in this category. This was the only category that existed several years ago.

2. People who stretched to get into exotic loans, but will make it out alive, due to either (i) increasing incomes, (ii) having bought at lower prices in 2002-2003, (iii) managing to sell before it’s too late, (iv) cutting expenses and lowering living standars to “save the house”,
and (v) a combination of the above.

3. People who stretched to get into exotic loans, and won’t be able to make it, despite their best efforts.

I hope we all agree that these are the 3 main categories, and that #1 above is just a sliver (less than 5%).

Where we don’t agree is on the percentages of #2 and #3. Powayseller seems to thing that most buyers are in category #3. Some beg to differ. I, for one, think that both category #2 and category #3 are quite large. On this aspect, I think we can just leave it at that, we have to agree to disagree.

[Author]

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