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ParticipantThe market in SD is the canary that everyone is watching. We were the poster child for irrational exuberance and we will also lead the way for the correction.
The markets in L.A. and the O.C. were behind S.D. entering into the increases and they are now lagging on the decline. They’re all still connected, so the question really isn’t “if”, but “when”.
ParticipantA few months ago I had one of their employees in a class I was teaching and I got to talking with him. He had been recently hired to solve some problems for them relating to the way they had been doing business. They were intending on converting over out of subprime and performing on a more conventional level.
He did describe a management culture at most levels of the company as being fairly corrupt and short sighted, so I don’t know how successful he’ll be at reforming his end of it. He answers to the CEO so I guess it will come down to whether that person is serious enough about running a clean book of loans or not.
I wish him luck at it, even if reform means the company is no longer competitive. This layoff may be part of that remodel.
ParticipantAn attorney friend of mine has an active law RE law practice, and his favorite cases involve dual agency situations (one realty agent or broker representing both ends of the transaction). He says dual agency cases have sent both his kids to college and paid for his vacation home up in Tahoe.
March 15, 2007 at 3:04 PM in reply to: Get fired up! Congress considering bailing out SUB PRIME! #47764ParticipantWe’ll always have subprime products of some sort. During a tough market the subprime category will actually grom because of the problems people have when times are bad.
These lenders and investors aren’t having problems with their subprime portfolios because it’s some sort of illegitimate product. The problem is the way the lenders have been underwriting those borrowers. Subprime works great when they run it in a responsible manner:
Reduce the maximum LTVs in proportion to the borrower’s credit; and
Verify the borrower’s income and credit over a period of several years, not just the previous year; and
Use real appraisals that call it how it is, not how the loan originator wants it to be.
———————–If the most credit worthy borrowers are good to go at 100% LTV then the subprime borrowers shouldn’t be any higher than 80%, and that’s COMBINED loan to value (CLTV). Some of those borrowers shouldn’t be higher than 70% and the most marginal borrowers should be at 50%. They should be able to prove their income for at least 2 or 3 years. Those appraisals should be heavily scrutinized and anything that even smells funky should be tossed without recourse.
Do all that and those subprime loans won’t be that risky. Of course, those types of financing terms won’t prop up an overextended market, so there won’t be that many transactions in that category either.
ParticipantIt almost sounds like they wanted the seller to do a build-to-suit prior to the close of escrow. The more typical way of handling it would usually involve a straightforward “as is” transaction with the seller and a subsequent remodel on the buyer’s dime after the close of escrow.
I know there are a couple of professional ADA trolls out there who are basically extorting the business community with frivolous lawsuits. I hadn’t heard anything about that making its way into the residential markets but you never know. These guys apparently have their pet attorneys and they seem to be quite brazen about pocketing the cash AND forcing the physical improvements on these small office and retail properties. I’ve had several of these small business guys tell of having to spend $5k to make the troll go away + the $5k for improvements to their buildings that never ever get used.
I think that asking the questions was a smart move because of the element of the unknown, but you would want to be a little coy about it. There’s no sense in giving them some comment that can be spun into being a violation of the ADA or the Civil Rights Act.
ParticipantThe lenders can either choose to disperse up front or through a fund control mechanism wherein the costs are doled out in segments. Considering this is only $90k I would think some lenders would just fund up front, and others might break it down into 2 draws; one at the 50% mark and the other upon final completion.
If it’s fund-controlled what usually happens is the contractor fronts the money for materials and completes portions of the work. When one of those portions is complete the contractor calls the lender for a draw payment. The lender sends out the original appraiser or a construction estimator to inspect the project and verify that the portion of the contract being paid for is complete; when the lender receives that draw inspection report they fund the draw.
A few lenders do so many construction loans they employ a construction estimator or contractor on staff to conduct those inspections – one of my clients has a guy like this on staff. Other lenders subcontract those inspections out to either the original appraiser or contractor.
With that said, there might be a few lenders that would just disperse the money and hope the project would be completed. That’s pretty risky because some of these contractors have been known to quit, go broke or just skip out on the work after receiving payment. The federal banking regulators wouldn’t put up with more than a couple losses arising from such decisions.
ParticipantAs I understand the scenario, there is a purchase for the home and the purchase contract includes some work to modify the structure for handicap accessible features.
Basically what appears to be happening is the lender is financing the improvements as well as the purchase. It’s not a common situation but there are lots of lenders who can do type of loan.
Assuming it’s handled legitimately (??) this loan probably isn’t going into a conventional program; more likely one of the community banks or possibly some specialty lender or involving some government grant.
From an appraisal standpoint this type of appraisal problem can be resolved without any sleight of hand. We would have an “As Is” value of the house prior to improvements, and a value “subject to completion” of the improvements as specified. It’s just like a construction loan, wherein the project starts off with a vacant lot and the lender finances all the construction. The lender would fund conrol the costs of construction, doling out portions of it to cover the costs at the various stages of completion.
The only difference in this case is that instead of doing all new construction we’re only talking about remodeling costs. Adding ramps, widening doors, new kitchen and bath cabinets and fixtures, non-twist doorknobs, etc..
ParticipantNo, now what happens is we continue waiting for the bottom and carefully follow the indicators until they turn in favor of investing again. The idea is to always lead, never follow.
ParticipantWhat they need to do is sell the house now before they lose any more money. $800k homes in Temecula are going to get nailed even worse than the $880k homes in San Diego.
March 14, 2007 at 10:19 AM in reply to: Get fired up! Congress considering bailing out SUB PRIME! #47649ParticipantThese guys have no idea what the magnitude of the problem they’re contemplating stepping into, or how much it will cost the taxpayer to bail these people out. The threat to these borrowers is not limited to the terms of their loans; a lot of these properties are located in overextended markets. The price corrections are doing more damage to these people than the terms of these loans. If the values were still increasing these borrowers could solve their own problems by refinancing or selling.
Say some subprime borrower lives in a $400k house in one of the big metro areas. Getting gov’t assistance in recasting their abusive mortgage into a fixed rate mortgage isn’t going to make up for the fact that the declining market in that area is going to lower the amount that can be financed, regardless of terms. If that borrower could have borrowed the full amount under conventional terms they would have done so in the first place. The whole reason these borrowers went subprime is because they either lack the income or the ability to manage their income well enough to do that.
Even if we could afford it (we can’t), government assistance can’t transform a subprime borrower’s personal characteristics and it can’t prop up the values in an overextended market. All it can do is make the situation worse for everyone concerned, which will be…everyone.
ParticipantYou really have to wonder how many of those pendings are contingent on financing terms that are no longer available. If the past is any indication it could be a majority of them.
“Back on market” may become a real common opening line on some of these MLS listings in the near future.
ParticipantIt doesn’t matter how much we can conserve; human beings depend on water even more than the U.S. economy depends on energy. More people will mean more water consumption. Eventually our population will outstrip the capacity of our fresh water sources. No doubt we’ll get there faster as a result of the efforts our conservation friends are expending on behalf of the frogs and fairy shrimp.
When the economics of the situation justify the expense to do so I have no doubt that the technology and capactity of desalinization will expand to cover the gap. We might have to pay 5 times as much for our water but we’ll continue to have water here for as long as there is an ocean. That is, unless our conservation friends can convince us that the oceans will evaporate, too.
Who knows? Maybe water production will become for San Diego County what oil is for Saudi Arabia.
ParticipantThe percentages of those loans locally are a lot higher than that, which means the numbers of at-risk borrower locally is a lot higher than that.
A subprime loan on a $100,000 is going to be a lot less risky than one on a $600,000 home. The amount of the loss is also going to be much higher.
ParticipantIn order to compare the magnitude of losses between the last spike and the potential losses from the current one you’d have to be able to figure out what’s at risk here. Every time someone tries to take a tenative swing at quantifying the number of at-risk borrowers the figures seem to be so high that nobody can take them seriously.
In short, it’s so high it can’t be real.
I had to laugh the other day. I was reading a thread over on BrokerOutpost.coms’s Mortgage Grapevine. A couple of these mortgage brokers were speculating that the federal government would step in and prevent the collapse of the housing market. NOT. Even if the feds wanted to they don’t have near enough money to do it.
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