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

[sdrealtor]

I think there is one part of this blanket statement which greatly influences how many fall in the last 2 categories. All ARM’s are not Suicide loans or Exotic loans. There are many ARM’s that are relatively safe. For example a 10/1 ARM that converts to a 30 year fixed at the same rate is not very risky. The real culprit is the Pay Option ARM’s that result in HUGE COMMISSIONS to Mortgage Brokers (I believe as high 3 points) that have 2 year prepayment penalties and buyers qualifying on low initial start rates. Someone taking out a 5/1 ARM in the last year is getting a rate within 1% of the 30 year fixed rate and will have a good chance of be able to deal with a reset in 3 to 5 years.

The answer to all of this is that we just dont know how many of the ARM’s fall into each category and how many of the TRUE Exotic/Suicide loans are in the hands of the most vulnerable.

BTW Lookoutbelow, Realtors to my knowledge dont push specific loan products (at least the ones I know). It is the lender who helps the buyer select a loan product. That is why as a buyer, you should NEVER do business with a combination Loan Broker/Realtor as the conflict of interest is HUGE! I also do not drive a leased expensive foreign car, a good old American Vehicle fully paid off is my ride of choice!

[Anonymous]

There is only a conflict of interest when it’s not in the best interests of the client.

[sakina96]

“I again kindly request data on which jobs in San Diego are going up 50% in the next 3 years. Please name the occupation, and how many of those jobs currently exist”

Powayseller,

I think that you have also made your fair share of statements without sufficient data to back it up. Firstly, you use a ton of anecdotal information to make your points. Second, several days ago you predicted that the San Diego housing market had dropped 10%, would drop 10% next year and then 20% for each of the next three consecutive years. I don’t recall an data to support that assertion. The whole premise was based upon what “Jim the Realtor” said that he had observed in North County.

I think that just about everyone in this forum agrees that San Diego housing will decline, that exotic financing has hastened the run up in prices and will surely hasten the decline. Despite this fact you seem adamant about fighting people tooth and nail when they don’t accept your assertions as truth.

[fuggy]

How can this technician afford the 2% taxes a year on a 1.1 million house?
That is $20,000! In a state with 10% personal income taxes.
Maybe he can take in roommates?

fuggy

[powayseller]

I rely on data to make my predictions. I extrapolate from history and current data to make my predictions.

A statement that many ARM borrowers can afford their products because their incomes will rise 50% should be easy to verify.

The sales decline are based on MLS data. Sales are falling by 10 points every quarter, so I am extrapolating. -10% Q1, -20% Q2, -30%Q3. I estimate -40%Q4, but we won’t know until it happens.

Likewise, home price deline is an extrapolation of past trends. I saw -5% by last winter, and now in summer we are hearing stories of 2004 prices, so that’s -15% in some cases. I extrapolate to get -20% by end of year. Again, time will tell if this is correct.

Anecdotes are very important, because as we know, the median is often 2 years lagging. Even the Federal Reserve relies on anecdotes for some of their analysis.

sakina96, let’s really try to analyze how many people would fall into the category of rising wages, because it helps us all to predict better the future of the market. What do you think is the impact of ARMs, both in data and in your own experience.

[sakina96]

I don’t dispute that ARMs will have a significant impact on the housing market. However, I also believe that not everyone with an ARM or I/O loan is in jeopardy on losing their home when they reset. Many of my colleagues have such loans and I have no doubt that they will come out of this housing bubble unscathed. These individuals opted for such loans not because they could not afford a more conventional loan but rather that it made more financial sense for them. I think that it is nearly impossible to accurately quantitate the number or percentage of people with ARMs that are likely to get burned. I personally do not have access to sufficient data nor the time to make such an analysis.

I actually do not believe that rising wages will do much to avert a significant housing downturn. My inclusion of this statement in my last posting served only an illustrative purpose…that while you have such a strong insistance that people support their statements with data you seem to have a very loose interpretation of what constitutes true “data” (ie. heresay, and personal observations).

[Beach Rat]

Jobs going up 50%: Well a friend of mine started working for Idec as a tech making about 38K in 2003. He is now making upwards of 60K in another large pharmaceutical even without stock options or 401k match figured in. Also he is now married and has a combined income of over 120k.

Also many people prefer to have roommates and still more will get roommates if they need a few hundred extra dollars each month. If you have a 3 bedroom you can rent out the other two rooms for a minimum of 1000/month in San Diego. Even if your mortgage takes up your entire pay check you can still live. Or heaven forbid you pick up a part time bartending gig. I have seen lots of my friends take out crazy loans. You can tell the ones that will make it. They have drive, initiative, and the desire to succeed. It may not be pretty, but many people will make it work. There are others that I have seen fail. This guy has no problem. He can sit through a 50% drop in equity and still about break even if he is forced to sell. The problem comes when you have negative equity and can’t make the payments even by renting out rooms.

[Bugs]

Someone who’s in their 20s or 30s can easily make some big salary increases while their career path is still in its earlier stages. Those are personal trajectories that help them catch up with their more established peers. A sales rep having a good year can have those kinds of increases.

When those careers start stabilizing and the promotions are slower in coming their prospects for salary increases are more closely tied to the fortunes of their company and their industry. I know of no industry whose fortunes are increasing to the tune of 30% in the next couple years.

If 70% of all mortgages involve these exotic loans, what percentage of those buyers are still in the earlier stages of their careers? It can’t be anywhere close to half of them. Bear in mind, it probably doesn’t even take 5% of all recent buyers suffering a foreclosure or short sale to cause the entire pricing structure to collapse. All the action occurs on the margins.

[powayseller]

In the last few years, we sold 40,000 homes annually. Let’s average this to 50% ARMs per year(some years were 50%, while later years were 80%). This gives us 20,000 homes per year financed by ARMs. How many of the 1.1 million SD homeowners refinanced out their equity with ARMs? Maybe 20%? 10%? 5%? I found 3 in Poway who bought in the 1980’s and got these loans to liberate equity. Let’s say 1%, just to be ultra conservative.

In the last 3 years, we had 93,000 ARMs.
3 * (20K + 1% of 1.1 mil) = 3 * (31,000) = 93,000

Let’s assume that 10% of these people are under the age of 25, and upwardly mobile in their careers. I think this is generous, because a study showed that half of 900 people surveyed on an exotic loan study this year lied about their incomes by over 60%. The study compared the loan application income to IRS records.

Half of the 93,000 lied about their income and exaggerated it by at least 60%. So 46,500 people exaggerated their incomes and can’t even afford those loans at current interest rates.

10% can afford it now, and after the reset period, because they are upwardly mobile. That leaves 90% of 93,000 who will not get significant raises. So 83,700 people with ARMs that they can’t afford. This is the most conservative estimate I am willing to make. It doesn’t even include HELOCs, assumes only 1% of SD homeowners refinanced during the housing boom, and gives a 3 yr average of 50% exotic loans (I think if you add I/O and stated income and HELOCs the number of people in over their heads is much higher).

83,700 people with ARMs, in over their heads, who probably can’t make their new payments in the next 3 years.

This is almost *triple* the current level of sales.

What would happen when inventory skyrockets as these homeowners and banks put those properties on the market? If 1/3 of these people sell their homes every year, we would be adding 27,900 homes to inventory every year, doubling the inventory.

If sales keep decreasing by 10 points per quarter, we will sell at most 20K homes next year. Today our inventory and sales level is 8 homes/buyer. What will happen when we have 32 homes/buyer, and those homes are listed by people in default or REO departments of banks?

What if my estimate was too conservative, and we have 60 homes/buyer?

How will the buyer fear and psychology shift into high gear, and people will flee housing purchases with the same frenzy that they used on the way up?

Some people talk about the last bubble. We didn’t have all these exotic loans. Just replace the # of people laid off from defense jobs in the last bust with the # of people with ARMs. How will the change in underwriting guidelines be different this time? Any similarities, or is it an order of magnitude worse this time? Does anyone know?

[Daniel]

Hi all,

Regarding the arguments about the percentage of exotic loans that are likely to get into trouble, I can suggest a paper that was published about half a year ago:

http://www.firstamres.com/pdf/MPR_White_Paper_FINAL.pdf

Some of you may be familiar with the paper or its author (Christopher Cagan, from First American Real Estate Solution). He has gathered pretty good data about exotic loans, and it’s all there in the paper.

He then proceeds to consider several scenarios (flat prices, down 10%, etc) and estimates how many people would be in trouble under each scenario. But, in my opinion, the best thing about the paper is that it provides the raw data, so a reader can make an analysis under different assumptions (for example, down 20%).

[rankandfile]

Nice addition, Daniel. That report seems well thought-out and comprehensive. I am not an expert in housing or economics, but I do have some comments.

1. PAGE 20: The author equates rising monthly mortgage payments (due to resetting ARMs) to increases in gas prices in 2005. He basically said that rising mortgage payments will cause pain, like the rising gas prices did, but that life will go on. Well, no s$#% Sherlock! The problem is that resetting ARM prices could present SUBSTANTIALLY higher monthly costs that would dwarf those of gas prices. Oh, by the way, gas prices (and utilities) are still up- so add those to the higher mortgage payments. One more thing- wage growth is not keeping pace with all of these rising costs. Time for a new credit card or refi.

2. PAGE 32: The author essentially states that purchasing residential real estate should be a long term investment, and those that treat it as such will fare well. The problem is that a number of folks bought residential real estate either as an investment property or to live in for the short term, or both. I wonder if this wisdom was also applied to those who purchased at the height of the early 1980s bubble?

Although the author does a good job in using data to support his arguments, I still feel that his viewpoint is too optimistic.

[powayseller]

Daniel, I read a number of Cagan’s reports, and found his earlier work quite good, his later work full of flaws, as he makes one serious omission: he ignored CLTV and erroneously lists LTV as CLTV. Let me explain: Fannie Mae and other agencies do *not* keep track of the piggyback loans. If you get an 80/20, they record the 80% part, for a LTV (loan to value) of 80%. So a 100% CLTV (combined loan to value) loan is recorded as an 80% LTV. Cagan does this in one of his entire reports. Since you have already read this report, perhaps you could answer if he takes CLTV into account properly.

The Mortgage Bankers Ass’n and Fannie Mae have publicly acknowledged these loans are a concern, and they don’t know how widespread the problem will be. I bet they could find out if they really wanted to, but why should they? They’ll just say enough to CYA, so they can say later they warned people about this coming down the pike. It’s not a coincidence or conspiracy that the media is jumping on these stories. The exotic loans are a true concern..

[equalizer]

Thanks Bugs

Salary increases tend to be parabolic when finishing college/adv degree and after 5-10 years plateau out with much smaller gains.

In my neighboorhood it seems that most people have 5 year adjustable at 4.5% and will reset in 2.5 years. I asked one neighbor if they are planning to move and they said no, we just wanted lower payments and they’ll just refinance! I think they can easily afford the new payments unless they have a loan that jumps up to 5% on first reset. Of course they can just take out a new 5 year adjustable. So most people will not lose their homes, but will end up taking 35+ years to pay off mortgage. In last 5 years nobody except us seem to give a hoot about paying off mortage. You should not have a mortgage after retirement. That is the scary issue.

[Daniel]

Powayseller,

Cagan’s report does take into account CLTV. On page 4, he explains how he computes the loan amounts, and he makes very conservative assumptions: he adds first and second mortgages, and then adds all the HELOCs on a property (since he doesn’t have access to current balances on those HELOCs, he assumes the full amount has been drawn).

So I believe his database is rather good, and, to my knowledge, this is the only public report that has statistics on CLTV amounts (stuff coming from NAR and CAR only reports LTV, which, as you point out, is quite meaningless).

As for his analysis, there he stops presenting facts and starts making some assumptions and projections. Naturally, projections and forecasts are debatable, and different people making different assumptions would arrive to different conclusions. Assuming 20% or 30% price drops would certainly change the results, and I think the reader is free to look at the data and see what would happen under different scenarios.

In my opinion, the greatest value of the paper is in making public the loan data. If anybody knows of any other public resource that has equal or better data, I would surely like to look at it.

[powayseller]

equalizer, did you read my post the other day about the 2 reasons that prevent someone from refinancing today? Many people cannot refinance. I don’t want to repeat the entire post, maybe Search will find it for you. I read an article in USA Today about a lady squeezed out by adjusting ARM payments, and it said she could not refinance for 2 more years, and I didn’t understand why. So I asked my neighbor, a loan officer, and she explained it to me.

Daniel, I think I remember it now. Cagan’s assumptions are based on prices not falling? Prices have already fallen, as others on this forum have reported. Realtors are telling me of big falls, and many houses back at 2004 prices. Did Cagan talk about the effect of foreclosures, and the 2 scenarious under which someone cannot refinance?

[Author]

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