THE HOUSING MELT-DOWN IS JUST STARTING

[BobbyD]

Saw this on Patrick.net today.

THE HOUSING MELT-DOWN IS JUST STARTING
AND THE CANCER WILL GROW IN MY OPINION
by Stephen Tetreault
March 26, 2007

In my humble opinion the contraction in the subprime mortgage market is just starting and it will no doubt lead to a significant retraction in and impede any near-term housing recovery despite what we have been hearing from the parade of so called experts being pranced about on the various bubblevision media channels. I have read recent reports (which I believe underestimate the contagion) that have forecasted that we will see a 20% – 30% reduction in available buyers (these are huge numbers folks) as these subprime borrowers will not now be able to get funding/loans over the ensuing months and years due to tighter restriction in credit. And I believe that this is only the tip of the proverbial iceberg as we are only seeing the beginning of the perfect-storm [a force 5-huricane] that will result from the impact of the subprime mortgage mess, and that this cancer will feed into the Alt-A borrower class of loans as well as it is just beginning to show up in the delinquency and foreclosure data that I have been reviewing these past weeks as such, it is way to fricking early for the fed-heads or the so-called self-professed housing guru’s to be proclaiming that the worst is over in the housing sector.

For the first time in our nation’s history, a large number of Americans are going to be adversely impacted and many will most likely lose their homes even though they still may have a steady job or two in most cases. And unfortunately it’s not just an issue for low-income people with those with poor credit and those with subprime loans. It will also affect people with good credit who qualified for a prime loans known as Alt-A mortgages (the proverbial middle-calls in America), these loans were written for 3 out of every in 10+/- mortgages and this could have a big impact on the overall economy and on credit markets and I believe it is significantly bigger, perhaps, than the effects of the recent subprime contagions.

Who are the main contributors to the housing-market implosion?

Bubble creator Greenspam and Helicopter Bernanke will be the main-players along with the other fed-heads and to some extent the brokerage-dealers and banks…..as they are responsible for the mega-bubble-implosion of the housing markets. I believe that the housing-market is on the threshold of suffering a serious collapse in many of the once hot-real estate markets. Jim Rogers, a true and seasoned market guru has warned that real estate in expensive bubble areas will drop 40 to 50%. Mainstream bubble-vision talking-butt-heads are stating just the opposite as they are basically reporting that the possibility of widespread defaults on subprime mortgages seeping over into prime mortgages is highly unlikely. I get sick to my stomach ever-time I hear this crap, as none of them even warned about the sun-prime cancer, not they want us to believe their unfounded hype. When this bubble finally starts to burst millions of Americans will be looking for someone to blame (and the fingers will be pointing everywhere). The democratically controlled Congress will certainly be holding hearings into subprime lending practices and “predatory” mortgages; and the next phase will be the role of brokerage and banks. We will no doubt hear a lot of grandstanding about how unscrupulous lenders took advantage of poor people, and how rampant speculation caused real estate markets around the country to overheat; and the hearings will take on an Enron type of cancerous contagion to those affected and the message will be the same: free-market capitalism “greed” when left unchecked, leads to irrational- market moves, fraud, and unethical if not illegal business practices (like the ones I have repeated-reported on….making FDIC issued loans to known illegal aliens). But unfortunately excessive-greed is not solely o blame for the housing mega-bubble, the FOMC and their hyper-inflating money supply is the real-culprit in my opinion. Their direct and indirect) in my opinion illegal” intervention in the economy through the manipulation of interest rates and the creation of “cyber-mystical” money has caused the huge bubble (debt-bubble) in the mortgage arena.

The FOMC has roughly increased by 440-500% the amount of dollars and credit in circulation just since 1990. Housing prices have risen dramatically not because of simple supply and demand, but because the Fed-heads have literally created demand by making the cost of borrowing money artificially low; as historically every-time when credit is very cheap, individuals (and corporations) tend to borrow much more than needed and they in turn spend recklessly without abandon believing that more easy money is just around the corner. It’s the age old premise of finding the next-bag-holder to pass off the hot-potato to….everything is fine as long as there is a greater fool to be found….Congress needs to get their proverbial head out of their ass…and stop kissing the ass of the fed-chairman and respective large brokerage firms like GS as the Federal Reserve provides the basic mother’s milk for all the booms and busts wrongly associated with a mythical “business cycle.” Imagine a Brinks truck driving down a busy street with the doors wide open, and money flying out everywhere, and you’ll have a pretty good analogy for Fed policies over the past 8-10 years. And until we get the FOMC out of the business of creating money out of thin air and setting interest rates, we will remain vulnerable to market bubbles and painful corrections. If housing prices plummet and millions of Americans find themselves owing more than their homes are worth, the blame lies squarely with Greenspam and FOMC in my opinion.

In the months and years ahead this cancerous credit-crunch will not only adversely effect those in the low-to-moderate income brackets but the 3cancer will most likely in my opinion hit millions of middle-class homeowners who took out riskier loans during the great housing boom earlier in the decade thinking that they could not lose. I have read reports that are forecasting that 1-2 million families will/could lose their homes in the next 1-4 years, while one study predicts the number of foreclosures could reach 2.4-3.00 million over the next 2-4 years….these are staggering numbers folks.

This threat to our economy and upon the highly sought after American Dream could have serious and powerful negative implications. This time is very different folks as in the past homeowners have generally lost their precious homes due to foreclosure when they suffered a major life-changing event such as (loss of their job, a major illness or death of a family member). Historically a big jump in the foreclosure-rates was unheard of outside of a deep a recession that brought about as through a significant higher unemployment rate.

We have also seen a compounding negative contagion that will only grow in my opinion over the next 1-4 years in the form of loans such as ( 0% down, no interest for 3-5 years, home equity loans for 100-125% of the current value of the home etc.) that were geared primarily utilized to allow people who could not…in reality in any other manner…afford to buy such an expensive home (or extrapolate more equity then by standard historically norms) ; which was unfortunately much more than they could truly afford in the first place, all it will take is just one blip in their incomes to trigger a default; and worse yet at some point, most of all of these risky-hybrid loans are going to soon adjust from these abnormally low monthly payments to significantly higher rates….and in the not-too-distant future, millions of or brothers and sisters Americans will be receiving letters if they have not already advising them that their mortgages are resetting/recasting with a dismal affect. Most so called economists that have been given air time on the various financial bubblevision media channels have stated that the problems won’t spread beyond the poor, and that the extent of the losses to families, mortgage underwriters and investors will be small in the context of our $12-14 trillion dollar economy. And you all know that I have a significantly differing opinion as I believe that the risks are much more wide widespread and that the economy will be hit hard by these failures that will take on a cascading affect in the US credit market; and in my humble opinion, it will take years for our economy to recover from this cancerous affect. Its basic economic 101 as tighter lending standards, increased foreclosures, more homes being brought on the market, resulting in lower prices, and thereafter we will see less construction of new homes which will result in unemployed construction worker etc. will led to adverse implications of all parts of our economy and markets.

The data is proving my underlying premises to be right, as last year, 55% of Alt-A loans came with simultaneous second mortgages; while the average loan-to-value ratio was 89%; and more than 80% of all Alt-A borrowers chose to provide no documentation of their income, and 62% took an interest-only or option ARM that reduced their payments at the inception that would lead toward higher payments later. More than 28% of the Alt-A loans were one-year adjustable loans, not the five-year adjustable that has been the standard for prime borrowers in the past. So as you can infer this situation/contagion could get very ugly very fast!! Trillions of dollars worth of adjustable-rate mortgages will reset in the next few years. That could dent consumer spending, but the wave of resets may end up being a ripple for the U.S. economy. More than $3.29 trillion worth of ARMs were originated in 2004, 2005 and 2006, at the peak of the recent housing boom, according to a study released this week by a unit of real estate data company First American. This year, it is estimated that almost $470 billion worth of first ARMs will be resetting, and more than $420 billion worth will reset in 2008 and 2009 and another $975 billion will do so in 2010; as a result you can see how this wave can have on the economy.

A mortgage meltdown tsunami which in my opinion will rattle the economy; the first stage will come as a result of falling home prices; as with new supple coming onto the markets supply will increase and demand will continue to fall. And with the nearing increase of tougher mortgage underwriting standards we will see the elimination of 25-35 additional buyers from the pool of potential buyers, including 50% of the subprime buyers and 25% of the Alt-A buyers, according to estimates and research that I have reviewed. Its elementary as basically when the supply of homes grows; through foreclosures and new-homes dumped on the market by desperate sellers this depress prices (a supply/demand function), which in turn would further depress voluntary home sales and home building in a vicious downward cesspool type spiral.

Also when confronted with a weak market, many lower wage homeowners even numerous middle-class home owners facing higher resetting payment shock would find it difficult, if not impossible, to refinance their loan or sell their home for what they currently owe on it as home prices have been slipping downward. About 13-17% of the owners who face the unfortunate resetting of their mortgage rates this year have less than 3-5% equity in their homes, and therefore with tighter lending standards will be unable to refinance unless they have other hard tangible assets, and according to the industry research I have read if home prices fall 4-5% more the percentage of those with no equity would grow to 23-26%, this is a huge economic contagion folks…and if god forbid if home prices fall 8-10% the numbers could to 35-40%.

Now you ask why we should be so concerned about the housing market…well lets reflect on simple economics-101 when consumers have their discretionary incomes where they are severely impacted by higher mortgage rates it results in what we call a chilling effect on consumer spending and since the American consumer accounts for 65-75% of our economic activity the economy suffers. According to recently released Federal Reserve data, consumers have taken about $3 trillion in equity out of their homes in the past five years, adding about 7-8% to disposable incomes every year (hell their wages have been stagnate to decreasing when accounting for inflation). This ongoing scenario (cashing out equity) has consistently helped to boost kept the otherwise sagging economy, and it’s kept it humming however it has driven the personal savings rate below zero for over 2-years now the first time since the Great Depression.

If home prices continue to fall the American consumer’s ability to continue to cash out home equity to feed their enormous appetites for spending will not only curtailed but significantly negatively impacted. What is also damaging to our overall economy will be the inability, of many consumers who have yet to extrapolate out any equity from their homes during this recent housing bubble. During this recent period where the housing bubble was increasing to mega proportions most homeowners experiencing rising equity, and they felt richer and didn’t feel the need to save as much; however we see now that this situation/scenario called the paper “wealth effect” is coming to an end.

Also let’s face it folks homeowners are starting to be (and many more will be over the ensuing months/years) faced with much larger mortgage payments and you do not need to be a rocket scientist to determine that this will reduce their over all discretionary spending (especially on durable-goods and luxury expenditures) so as to avoid defaulting on their mortgages….this cut back in spending will affect many firms catering to these sectors.

The real $64,000 question that remains to be answered is what will happen to overall investor sentiment once these new contagions start to take root. If what I believe happens, happens then investor sentiment will start the erosion process with US investors and it has the potential to act like a cancer and undermine even global investor confidence. The result will most likely result in a general drying up of credit, and it will likely affect even the most qualified and untainted borrowers. The markets believe that helicopter Ben Bernanke come to the rescue and does he and his fed-heads even possess the know how or resources to be the saviors that everyone believes that they will be. So remember to ask yourselves can and will the fed come to the rescue and prevent an even more potentially more damaging crisis then we saw with the Asian financial crisis of 1997-98.

I sincerely believe that the markets haven’t even begun too priced in the risk associated with defaults on non-traditional loans, or of the even-more complex mortgage-backed derivatives; and I believe even investment-grade CDOs will experience significant losses if home prices continue to fall. And the contagions could take on a life of their own as any decreased the overall funding for mortgages from large banks, institutional investors and pension funds, and any such pull-back could set a chain affect creating a downward spiral in credit availability.

In the worst-case scenario involving a significant credit crunch (hopefully it will only be localized), is a ferocious cycle of weaker/lower spending, slower or hiring and most-likely lay-offs that could lead-toward mass-lay-offs, and these contagions will lead toward less income gains, tighter credit and significantly lower spending and it would result in the forcing our economy into a steep recession.

© 2007 Stephen Tetreault

[citydweller]

It’s been pretty obvious to me that the housing bubble has peaked and is on it’s way down. My question is, who is buying? Why would anyone buy right now? Whenever I see statistics that show that sales volume is declining, I’m just amazed that ANYONE is buying.

It’s obvious that all the investors/speculators have stopped buying, but is it first time buyers who are keeping the market alive at all?

[lindismith]

My trainer just bought. He and his wife want to start a family, and they want a house to do it in. She works in a bank so is fully aware of the market. They plan on staying in it 10 years.

Another friend just bought a house. She is aware of the market situation, but she just divorced, and wants a home for her daughter. She plans on being in it for a while. (Incidentally, she makes a boat load of money, so if she had to move, I don’t think it would impact her much.)

Another guy I know is going through a divorce, and he just sold today. He tried to do a FSBO, but got no bites after 3 months. Finally he got a realtor friend to put it on the MLS. It sold in 1 week, and his realtor friend made 10K.

People want homes. They are sick of renting. They have made deals with themselves, ‘if it gets to x, then I’ll buy.’ That’s what people do.

My trainer is a first time buyer. My friend is not.

[citydweller]

lindismith,
Do you know if they got 30 year fixed? I would be surprised if anyone these days would think an ARM is a good idea.

IMO, the only buyers out there are people who have figured out how much they can afford, and want to buy a place that they plan to stay in for awhile, so will go 30 year fixed with no surprises. The old days of counting on 20% appreciation and refinancing in 3 years are behind us.

So it seems the pool of buyers will be shrinking rapidly.

[kewp]

Not everyone is underwater. Consider what I call the ‘lottery winners’, people that have just received a large inheritance, vested a bunch of options, or even indeed, won the lottery. How is buying an overpriced home any different than buying any other overpriced asset in these cases? Sure, its a lousy investment, but maybe they are buying it just to live in!

There will always be enough folks out there, even if credit dries up entirely, to buy homes. *Thats* the fundamental that will drive the deflation of the housing bubble and return the market to equilibrium.

Once all the desperate/forced sellers realize they will have to drop their prices, in some cases drastically, in order to attract what few buyers there are out there, will prices come down.

[LookoutBelow]

Trainer ? like in "Physical work out trainer" ?

 

Well, if a worker in that UN-lucrative field is still able to qualify for a home loan (arm) then we have NOT reached the bubble peak.

 

Anybody that purchases at the "top of the market" is a fool, anybody that does this AND knows he's doing this is psychopathic.

Emotional reasons such as "I hate to rent" or "Im buying for my 3 yr old daughter" are some of the ways that people are led to financial slaughter. ..Rational people have made a bunch of money before off of other people's  irrational decisions to buy and own things, this is how low brow emotional buyers are quickly relieved of their money

[recordsclerk]

My in-laws just sold their home. It took about 4 months to sell. They took it off the market at one time. When they put it back on the market it only took 2 weeks to get an offer. I think the price was more appropriate when they put it back on the market. The couple that bought the home got an 80/20 loan. They also negotiated seller to cover closing cost. My in-laws did not want to pay the closing cost, so buyer offered more for the purchase to cover the closing cost. This makes me believe that they didn’t have any down payment, including closing cost. I told my in-laws we could probably buy their home back in a couple of years for a $100k less.

[PerryChase]

Interesting that many of the experts/officials are already calling a bottom. They are try to talk the market up and prevent a panic. Some buyers believe it and are jumping back into the market. Too bad for them as they’ll regret it.

Based on Jim the Realtor’s data it seem like it’s the higher end customers who are jumping back into the market. There are fools are every income levels.

We haven’t even started this down cycle yet. The 2-year ARM reset foreclosures haven’t even hit the MLS yet. We still have the 5-year ARM resets to watch. 2010 would be the earliest bottom, in my opinion. We can’t call a bottom until all the 2.4 million foreclosures predicted by the Center for Responsible Lending are wrapped-up.

Home loan defaults skyrocket in county
http://www.signonsandiego.com/news/metro/20070329-9999-1n29default.html

[4plexowner]

PerryChase – I have been calling for a bottom in 2008-2010 but seeing the chart of ARM resets has caused me to re-think this date range

The chart shows that a huge chunk of ARMS are going to reset in both 2010 and 2011

A possible scenario I am considering – since most market moves end with high volume (greedy fools buying at the top and fearful fools selling at the bottom) it is possible that the 2010-2011 timeframe will be the high-volume end of the real estate decline

Anyone that is forced to sell in 2010/2011 will be selling into a market that has been soft/declining for 5 years already – not a good time to sell but their selling could create a real bottom (as opposed to the bottoms that have been called already and continue to be called)

As the Chinese say: “May you live in interesting times.”

[(former)FormerSanDiegan]

4plexowner –

It’s possible that the effects of the second wave of ARM re-sets will be less than you suspect.

Consider that the second wave of ARM resets starts about 2-2.5 years from now and extends to about 5 years from now (… I think … I can’t find the chart right now). I believe that one potential outcome is that the effects of the first wave and the housing bust will have caused rates to drop by the time the second wave of ARM resets hit, giving relief to these folks. In some cases the adjustments may result in lower rates.

I think the second wave of ARM resets will have much less effect than the first. AT that point in time, it’ll be excess inventory hanging over more than ARM resets driving the market

Not saying that’s what will happen, just saying that it could be a consideration.

[4plexowner]

Here’s a link to the mortgage reset chart

http://www.bubbleinfo.com/statistics-2007/2007/3/15/arm-reset-schedule.html

If I understand you, PerryChase, you are saying that because of lower interest rates the 2nd wave of ARMs will have more options for re-financing (and maybe a better market to sell into)

That seems reasonable with the caveat that lower interest rates don’t do much for the upside-down homedebtor

Correct me if I’m wrong here – the ARMs resetting in 2010/2011 are mostly 5 yr fix / 25 yr float and they originated in 2005/2006 ? some of them must be 7 and 10 year fixed ?

Looking at the chart I see that a significant portion of the ARMs resetting in 2010/2011 are Option ARMs – these loans are potentially neg-am so by 2010/2011 they could be ridiculously upside-down (depending on where market prices are)

My scenario for ARMageddon in 2010/2011 is based on two assumptions:
1. these ARMs originated in 2005/2006 (ie, peak prices and the peak of 100% financed, liar loans, etc)
2. at reset time most of these mortgages will be underwater (ie, the overall trend in real estate prices remains down between now and then)

I like this idea of a final washout in prices because it goes along with what I understand about financial markets in general – ie, moves tend to finish on high volume – this may not be applicable to the real estate market since the ‘bottom’ is likely to last for several years (ie, basically flat for 2-3 yrs) while the overhang of inventory is worked off

~

As I write this, I am dismayed to remember having read today that one of the northeastern states is about to ban all current and upcoming foreclosures – because of actions like this it is hard to say what will really happen to the real estate market in coming years – perhaps someday we will have free markets …

[citydweller]

How can they “ban” foreclosures?

And if they do, wouldn’t that encourage everyone to just stop making payments? If you can’t be foreclosed on, why make payments?

[Anonymous]

That’s a good one, ‘ARMageddon.’

FSD, I’d say there’s a good chance that rates will be higher in ’10-’11. We’ll be in the middle of a depression, but with our big socialist state, interventionalist political class, whining Baby Boomers, etc., on top of our huge debt, the Feds will have to pay top dollar (interest rates) to get more suckers to buy T-bills/notes/bonds to finance government ‘services.’

This depression will be different from the depression of the ’30s, given that governments have already borrowed to the hilt. This feels more like a collapse of the dollar depression, not the ‘nobody wants to spend their few gold-backed dollars depression.’

Weimar Republic, here we come. Awful.

[4plexowner]

Here’s an article about potential foreclosure ban in Mass – the proposed legislation is to “protect thousands of homeowners who may have been victimized by predatory lenders”

http://www.southcoasttoday.com/apps/pbcs.dll/article?AID=/20070328/NEWS/703280337/1011/TOWN10

[kicksavedave]

This Massachusetts thing is blown out of proportion. They are suggesting laws to give court oversight to the forclosure process, not to BAN them altogether. 30 other states require court approval on the foreclosure, MASS does not, but is trying to legislate that in. Its not a big deal.

That’s a far cry from saying they are trying to BAN forclosures. They are not doing that. That would be tantamount to telling the banks who are not getting paid “tough noogies” while telling borrowers who aren’t paying “don’t bother”.

[Author]

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