Mortgage Lender to Answer Questions that You May Have

[powayseller]

X1Y273 – you are such a welcome addition to the forum. I’ve waited for 9 months for you!

The main question I have would be adddressing those on this forum who say that ARMs are not a big problem, because people will just refinance. I’ve posted this is usually impossible due to the higher interest rates that would prevent people form qualifying, and the loss of equity. Could you provide more details on the possibility of people refinancing out of these time bomb loans?

What is the usual income for someone buying the $1 mil tract homes?

How popular was equity cash-outs for people who bought their homes before 1999, esp. those who owned their homes since 20 years or more?

What is the financial situation of seniors?

Did your company keep statistics on loans given and loan performance? Where can we get data on the types of loans given in San Diego?

Does anyone keep data on CLTV? When someone gets an 80/20, isn’t that recorded as a loan with 20% equity?

What is the role of global investors, and what is the change in the risk premium they command?

How is the rising foreclosures affecting your bank’s lending guidelines? Do you have any thoughts on GSEs, CMOs or MBS?

[PerryChase]

Another question for you X1Y2Z3. Say a buyer borrows $500k to buy a house. Prices drop to $300k. Can the buyer hand the key to the bank and walk? What recourse does the lender have?

[ybc]

X1Y2Z3, thanks! Two follow-up questions:
1) Has lending standards been tightened today vs a year ago, or is it just as bad?
2) If the fed lowers interest rate once a recession hits, will that likely rescue many homeowners with ARMs that reset?

[SD Realtor]

X1Y2Z3 I thought you had a very cool post and I enjoyed reading it.

ybc I am not a mortgage broker but my speculative answer would be as follows…(x1y2z3 or anyone else feel free to correct me on alot of what I am about to write)

– Long term mtg rates are not based on the prime. As a barometer I use the 10 year treasury yield and add 1.3 to come up with an approximate standard 30 year conforming rate.

– Most (if not all) HELOCs ARE prime rate based.

– So yeah actually two things may help those people who are in big trouble. First off if the recession we all discuss does indeed happen then we may indeed see the 10 year treasury dip down again or at least stay low. If it does then that would be good for mortgage rates.

– If the fed does indeed lower the prime it will at least REDUCE some of the runaway HELOCs that people are now started to get hammered on.

HOWEVER… even if long term rates go down or stay at a decent value, if your home doesn’t appraise then you will need to come up with cash to refinance and get out of your ticking time of a mortgage.

So my humble opinion is that yes the recession could indeed help people out but it is hard to pinpoint how many will be saved. It all depends on how much depreciation occurs prior to the homeowner wising up and dealing with the problem.

[X1Y2Z3]

Powayseller,

1) The ARM reset question is a good one. I have seen people get in trouble to where they can’ t refinance because either they have no equity or they don’t qualify. Imagine someone who qualified at a 45% debt ratio. If rates went up at all, they can’t qualify for a standard loan unless their income shot up which is unlikely. Now, they could still get a stated, no ratio or no doc. But the rate will be higher than a full doc loan. Plus if they don’t have the equity they are finished regardless. I think we will see this being an issue for all the people who got 100% financing in 2005 and maybe some who took out 100% loans in 2004. If they don’t have the equity they will be in trouble. Bottom line, I think that the ARM reset is a potential issue. It really depends what rates do over the next 2 years. Its possible that the FED panics and cuts rates again as housing crashes and the economy crashes. If this is the case, many people will be saved. However, some will still have the equity problem and this will prevent them from getting a loan. If rates were to stay where they are or increase even just a little, watch out, it will get very ugly fast. This whole housing bubble was based on very low rates, and interest only ARMs, if rates go up people will get wiped out. Remember that when a rate adjusts, assuming the ARM is based on the 1 year t-bill, you add a 2.75% margin to it. So people who can’t refi will suffer. I think this will be a problem, and it will all depend on what the FED does over the next year. Also, one huge thing to remember, the FEDs rate increases take from 6-12 months to have an impact we haven’t even seen the effects of the latest rate hikes yet. There is much more pain to come.

That really depends on the type of loan one is doing. I was in a high priced market, but usually my max loan might be $650k – $800k once you go over $800k people usually have private bankers or some start paying cash. You could just take the 45% debt ratio and back into the income needed. Remember that a lot of people will use stated income, no ratio or no docs if they can’t afford the home. This leads to a funny thing I heard from a realtor. He said that at an open house in this neighborhood where the average house costs $1.5M or more, the women coming through the house were neighbors. They were complaining that their ARMS were going up and that they had to turn off the AC and the lights on the 2nd floor. These are people in $1.5M homes, no one is immune, in fact people in that bracket who relied on 4% ARMS are in big trouble.

Before 1999 I rarely did a cash out. People just did not use their home as their piggybank. I read the other day that cashouts were at the highest level since 1990 or so. This is a signal that people are living on their equity and when this dries up, due to declining prices, they will be in big trouble.

I never really worked with seniors too much. Most had either a pension or social security. They were usually conservative. So they would be safe. The ones I worked with took 30 year fixed rates and put 20% or more down. Again, I didn’t work with too many. Now, I know that some had problems with the annual tax increases.

I know my company kept data on loan performance, but I was not privy to it. I would watch the foreclosure rate and remember that it is a lagging indicator. The foreclosure rate has been artificially low because of the appreciation of the last few years. I have read that the subprime foreclosure rates have really jumped which makes sense. Many of those people should not have been allowed to buy a house.

The lenders have data on CLTV. Yes, remember that the two loan notes will be recorded separately and may be from 2 different lenders. So I agree that some of the LTV data is probably very flawed because its not catching the 80/20, 80/15/5, 80/10/10. In my area we have been doing these loans since 1997 or so. I almost never did a 95% or 90% with MI unless the 2nd wouldn’t get approved. I think the 2nd trust lenders will get killed as the market turns. I read the other day that the investors on Wall Street have already repriced (raised the rates) on the 2nds because of the greater risk.

I never saw a lot of global investors in my area. I know they were out there but my contacts weren’t working with them. I think what we will see is as all the housing markets slow worldwide, which is happening, their will be less global investors for the US. Note that the UK just raised their funds rate by .25% 2 days ago and so did Australia. Both of these markets are already hurting.

My bank is a very conservative large bank, (top 3 in volume). They will be fine because they do other stuff besides mortgages, they are very diversified. Other top banks who don’t have diversified businesses will be hurt much more. I didn’t’ t notice any tightening of guidelines at my bank, however, many banks are. I know that WAMU and Countrywide tightened the Option ARMS initial qualifying rates. Also, many subprime lenders have tightened or dropped risky products altogether. In fact, some subprime lenders are already going out of business or being merged.

[X1Y2Z3]

Perrychase,

The buyer can walk away from the house. However, the lender may go after them. Honestly I’m embarrased to say I’m not sure what the lender can do besides taking the house. Of course, the borrrower will have a foreclosure on their credit report which is a disaster. Also, I think I read somewhere that the borrower may have a huge tax bill from the IRS. Maybe an accountant can chime in here, I’m not sure what the IRS will do.

[X1Y2Z3]

ybc,

1) Yes, lending standards have been tightened. It depends on the bank. The option ARMS are no longer allowing people to qualify based on the initial interest rate. That was absurd. Lenders were allowing people to qualify at 1.5% knowing full well that the rate would adjust upward almost immediately. My lender will not allow a borrower to qualify at the initial rate on an interest only ARM unless the interest only period is 10 years. Here’s how this works. If I have a 5/1 ARM, the interest only period is now 10 years, not 5 years, this protects the borrower from a double whammy when the rate adjusts in 5 years. In a normal 5/1 arm, after the 5th year, their rate can adjust up and they must pay principal. That’s a recipe for disaster. Also, many subprime companies have dropped products, no doc, or tightened guidelines. In fact, some have already gone out of business.

2) I do believe the FED will panic and lower rates. It will save some people, however, not all. With declining home prices, some won’t have the equity to refinance. Some may have bad credit and still can’t get a loan. Because this housing bubble was also a massive debt bubble, the FED will most likely have to cut rates. This won’t help home prices because they are already too high and once they start falling its hard to turn them around. Even if the FED cut the funds rate to 1% again, it would not have nearly the same affect as last time. There is already too much debt and most people can’t take on anymore because they are having trouble servicing their current debt.

[X1Y2Z3]

SD Realtor,

You are correct long term rates are not based on prime they are based on the 10 year t-bond. Most helocs are prime based. Remember that the FED doesn’t set prime, they set the Funds rate which banks use to as a marker for prime. So everytime the funds rate moves, the banks move the prime rate.

Yes, lower rates will help those in trouble, however, those without equity will still be in trouble. And a huge amount of buyers in 2004 and 2005 put 0% down. I think I read 40% of 1st time buyers put nothing down in 2005. And I can guarantee that most have no savings or back up plans.

If the FED lowers rates, meaning the Fedreal Funds rate, the 10 year may or may not decline. If the bond market thinks that the FED is letting inflation get out of control, the 10 year rate will rise. In fact, the FED is between a rock and a hard place. Inflation has been rising and the economy is slowing. So do they raise rates to curb inflation or drop rates to keep the economy and housing afloat? I think the FED is weak and will cater to the economy and housing. The problem is that this will let inflation continue. And ultimately they will have to raise rates at some point. That’s why Bill Gross of PIMCO, the largest bond manager, just wrote an article saying that this will be the last bond bull market. He means that the FED will panic and cut rates which boosts bond prices. But they won’t be able to cut them any lower. Last cycle the FED cut the funds rate to 1%. They don’t have any room to go lower. Then the FED is stuck like the Japanese FED. The Japanese FED cut rates to 0% and did what is called quantitative easing. Meaning they just printed money and bought 10 year bonds to drive those rates lower. It still didn’t help. The Japanese Real estate market has been down more than 50% for more than 10 years and stocks down more than 70%. It’s called a liquidity trap. If you lower rates too low, you can’t raise them again because people can’t repay the debt.

[powayseller]

x1y2z3, thanks for all those insightful answers. That was a lot of typing. It’s really great to have an insider’s view of the mortgage industry.

Could you elaborate on the ARM resets? Someone on this forum thought ARM resets would not affect most of the people who took them out, since there is a large group of people who will get 25-50% pay raises within their adjustment period. He cited professionals in startup positions in engineering, law, or doctors. If the doctor took an ARM while in residency, he would surely be able to pay the new mortgage when he’s a full doctor earning much more. I’m wondering for your own experience, how many of the people you saw, who took out adjustable loans, were in jobs like this, or expected promotions.

How many people thought ahead of how high their payments could go? Or was the idea that they would just refinance when it got too high? In other words, how many people are even aware yet of what will hit them?

What did your office do with the loans after purchase? I am interested in learning more about what happens after the loan is sold off, who buys them, and WHY they would take on such high risk. Is this MBS owned by all of us, without our knowledge, i.e. in our money market holdings, pension funds? How much of the City of San Diego pension money is in 2nd mortgages or MBS or CMOs? Perhaps we cannot find out.

I personally think the ARM resets are going to make this housing bubble bust worse than any in history, and they are causing the market to soften nationwide. I was in Omaha, NE this summer, and I saw “price reduced” in housing ads. A friend told me one builder went under, and her office did one 3/1 ARM for a non-English speaking woman who had 5 half-dressed kids in tow and didn’t even own a car. People all over stretched into homes with subpar credit and qualifying on those teaser rates. For this reason, the reset problem will bust housing nationwide.

Are you still in the mortgage industry?

[irvinesinglemom]

Hi X1Y2Z3:

Wow, thanks for all the information. Definitely the kind of “meaty” information I’ve been looking for as part of my fascination with this bubble. Here’s my question for you: can you please give me advice based on my current situation? (I rarely ask for financial advice because I’m convinced I’m smarter and more competent than most people, but you seem to really have a handle on things and you write well, which is SOOOO rare!)

I am a single professional in Irvine with an MBA, a rock-solid job and a 3 year old child. My current annual income is $109,000 with a 10% annual bonus and I anticipate annual bonuses of 3-5% for the forseeable future, along with a promotion or two. I have $85,000 locked up until 02/07 in a 4.85% 12-month CD, and another $10,000 in several individual stocks. I have $10,000 in my checking account. I have no credit card debt, I own my 2002 Volvo and will keep it at least 3-5 more years. When I do buy another car it will be with cash because after I paid off my Volvo I decided that I will never take out a car loan again. My student loans are all paid off. I receive enough child support to fully pay daycare tuition, with about $200 extra each month. I put about $2000 a year into my son’s 529 college fund which is at about $6000 right now. My 401k balance is $150,000 and right now I still contribute 15% to it but I would consider reducing my contribution level to 5% if I needed to (more on that in a minute).

Here’s my dilemma: I desperately, obsessively want to buy a house! I’ve been in an apartment for 8 months, since separating from my spouse, after having been a homeowner for 8 years. (We sold our home in December ’05 and you’d think I’d have more money than I do, however my husband and I spent pretty freely the whole time we were homeowners, both on major improvements to the place -it was practically unlivable when we bought it – as well as extravagant stuff that I regret now but what’re you gonna do?!!) Anyway, after splitting the profit in half and then furnishing my new apartment, etc., it is what it is.

I want to get my son into a house before kindergarten, in September 2008. I want him to stay in the same school from K-6 and then move right into the local high school. I want him to have that stability. So I want to buy a house that will be our home for the next 15 years. So I know that I have LOTS of time (2 years, basically) before I need to make this move. However, I find myself going to open houses every weekend and salivating over the brand new developments like Portola Springs, and gagging at the 30-year old Brady Bunch houses that are just STUPID over-priced. I don’t want a Brady house!

I have pretty much convinced myself that I can’t do a thing until at least February 07 when my down payment money becomes available. I want to be financially pragmatic and not lay awake at night worrying about paying the bills. But I also want to be able to stay in the same house for a really long horizon over which my odds of promotion and salary and bonus increases are really, really good. (Unless people stop having high cholesterol and heart attacks, my job is as good as guaranteed.)

So assuming I start looking to buy a house in the middle of 2007 (and god only knows what prices will be doing at that time!!!), what is a reasonable “stretch” mortgage amount and type that someone in my situation should be looking for? Keep in mind that I’ll probably end up buying something in Woodbury or Portola Springs that comes loaded with high HOA and Mello Roos payments. Hence my earlier comment about reducing my 401k contribution level. I want a newer home in a newer neighborhood badly enough that I’m willing to compromise by extending my retirement out a few more years.

Thanks for any advice or words of wisdom you or any of the other folks on this blog can impart!

[technovelist]

I think you would be much better off paying for private school for your child and continuing to rent an apartment for at least the next three or four years. The housing crash has just started, and buying anywhere in your area in the next 12 months is likely to be a VERY expensive mistake. I think a 50% drop from the highest prices seen so far is a very conservative estimate; 80% or 90% may be more accurate, given the unwinding of the mortgage insanity as well as the other serious economic issues that are going to clobber most people without their having a clue.

There won’t be any hurry in buying after the bottom is in. No one will want to talk about real estate for a long time, which is when you want to buy it.

[irvinesinglemom]

technovelist:

Well, luckily this is Irvine and I can get my son into a California Distinguished School (I’m thinking Canyonview Elementary and Northwood HS) without having to pay for a private school. I can rent a beautiful new apartment from the Irvine Apartment Community, or lease one of the luxurious townhomes in Woodbury that I’m coveting. So it’s not a matter of living where I want to live – it’s the part of home ownership that, having been a homeowner for 8 years, I am having trouble letting go of. I must admit, I was kind of an elitist snob in that I did look down on people who, after the age of 30 or so, were not homeowners. Given how drastically things have changed, I certainly wouldn’t change my decision to sell the house. I was convinced a couple years ago the bubble was gonna burst and I was in a mild panic to “cash out” and become a renter for a while. So intellectually, I am very comfortable with renting. I just think about how my whole childhood was in rented apartments and a rented house, and how as a teenager I felt “less than” the other kids whose parents owned their homes. I don’t want my son to feel that way! I have to remind myself that he’s only 3, he doesn’t know or care, and that in several years he’ll still be very young, and if I can remained disciplined enough during that time, I can buy us a beautiful new house while he’s in elementary school and we can live “happily ever after.” It’s hard, though, to fight the urge to buy sooner, especially since my plan would be to make offers significantly lower than asking price…

[technovelist]

I think your son (and you) will do a lot better if you resist that temptation. Being able to pay the bills and provide an appropriate lifestyle for your child will be much easier if you keep saving money (in a way that won’t lose purchasing power) and wait until the bubble has fully deflated.

[lindismith]

irvinesinglemom,
There is tremendous pressure in our society to own a home. (Never mind get married and have kids. I am single, and late 30s, so talk about pressure!)

That said, the pressure’s only in our heads. You sound really smart and successful. If you succumb to it, you will ultimately be doing yourself and your children a huge disservice.

I’m not saying don’t ever buy. Just don’t buy in the next 18 months. You will regret it. You work very hard, and if you buy you will end up losing a lot of money. Based on the areas you are talking about, what would that be? $50K, $100K? That’s 6 months to a year’s worth of work for you! Can you imagine going to work everyday knowing you are working to pay off an ‘investment’ that’s losing value every single day? Talk about a waste of time and energy. You’d be better off taking a year off from work, and putting in some quality time with your kids.

I’m sure you can find a nice rental, and sit tight. Having that kind of discipline will pay off in the long run. Your timing (Feb 07) is when the tsunami should be hitting us, so wait it out. You won’t be losing anything by sitting on the sidelines for a while.

There are some threads on this forum about how a house purchase is very emotional. See if you can search for them using the key word “emotions” in the search bar (or maybe “emotional”). Once you read through them, you’ll see the intellectual/rational side to you will be back in charge.

[PerryChase]

irvinesinglemom, I would second all the advice on delaying the purchase. Don’t succumb to the pressure to buy now. You’ll be amply rewarded.

I know people who bought expensive homes just to keep up with their friends and try to get that perfect lifestyle. Well, they’ll find how empty their lives are pretty soon.

Even stretching to buy an expensive car is unwise in my view. Remember that beautiful Mercedes you saw drive down the street? Do you remember the person at the wheel? huh… i bet you don’t even remember. So why try to live life by what others might think.

There’s nothing wrong with renting.

[Author]

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