[MaxedOutMama]

Before buying any one of these stocks, take a very careful look at debt, bond ratings, and assess what would happen if the value of their hard assets (land/inventory) were to fall 30%.

You need to read the balance sheets very, very carefully, and think about St. Joe’s situation before buying into this “quality” line. They are going to find it harder and harder to sustain funding. The only reason to buy one of these is for hard assets that total more than stock price, but I haven’t seen one where applying the logical deflator results in a very good book value.

Don’t forget, these guys have been buying and building in the “hot” markets which now will see the largest drops.

In GA, my area was never bubbly. It profited slightly, and that’s all. Well, land bought at auction here about a year ago is now being auctioned off at 50% less.

[MaxedOutMama]

Recent REIT reports seem to be indicating a continued appetite for the first tranche, but increasing problems unloading the scratch and dents, refurbishes, etc.

I would say that the loss of marginal profitability is going to hit some of these companies hard over the next year. It’s the mezzanine holdings that investors are becoming leary of. Having to hold more is cutting into profitability already for some companies.

Another factor is concentrations. You have to write enough of these in enough areas to get good risk evening, or you have to mix and match. A lot of companies seem to be looking to unload nonprime business lines.

[MaxedOutMama]

The existing home sales for June just came out. Condo prices in the west were listed as being down over 10% since last June.

I wouldn’t be buying a condo any time soon in your area. If you can afford to buy single family your risks are not so severe.

[MaxedOutMama]

Even with high taxes, you are saving a lot from month to month by not buying now.

As for when to buy, I would say that it would be very risky to buy until at least 60% of the new mortgages written in your area are amortizing mortgages and lenders resume requiring downpayments. As long as an area’s price range is being propped up by interest-only and/or option ARM’s, there is a built-in future correction. Because of San Diego’s uniqueness, you can have a higher percentage of these without a crash. But you can’t have 80% high-risk mortgage originations without a future loss of RE value, so SD has a long way to go, and the direction is straight down.

[MaxedOutMama]

Oh, I don’t know. There’s gold in that thar spin:
“Although short-term rates have risen, long-term interest rates, (although higher than last year) are still historically very low. The refinance market has decreased to some extent because of the rate increases. However, many clients are refinancing from mortgages tied to short-term rates to a longer-term program (10-year ARM’s and 30-year fixed). An increasing number of consumers are attracted to interest-only mortgages to offset higher rates and to significantly lower the monthly payments.”

So the refi business is composed of people getting into less risky mortgages (the 10 yr ARMs and fixeds) and people getting into really risky mortgages (interest-onlys) because they can’t afford their payments.

I sure would like to know the relative percentages, because it would say a lot about the future direction of the Sarasota market. If they now are writing 10-15% non-amortizing, then the market is going to fall considerably over the next three years.

[MaxedOutMama]

Powayseller wrote:
“…you don’t need job losses to cause foreclosures. All you need is the borrower’s inability to make the mortgage payment.”

That’s correct. The reason that this went up further than anyone expected was because of the explosion of the exotics, and the reason why it’s going to crash out is because of the exotics. The last time you saw financing deals like this was in the 20’s, and we all know what happened next. When large numbers of people buy on margin in an inflating market, it must unwind somehow. The markets in which over 50% of the buyers over the last few years either did not buy with traditional mortgages or bought as investments are similar to the Florida land rush of the 20’s. The bad money has chased out the good.

The bottom line is that buying real estate with less than 10% down and a non-amortizing loan is pure speculation. This is a grossly abnormal market, and no comparisons to post-30’s RE markets are valid for this market.

I work in a banking service firm that provides software and compliance services. Sorry to say, but the national RE market is already shifting. Everyone’s looking to move to guaranteed loans now. BTW, most banks did not participate in the primary mortgage mess, although many did in the HELOC market and will now take major losses from that, causing them to tighten underwriting standards.

The financing for this disaster came primarily in from non-regulated financial companies. In the last five years, the proportion of home loans packaged and sold in the traditional way dropped massively. The vectors controlling this market have not been seen in the US for over 70 years.

[MaxedOutMama]

I think you should run the numbers.

If you can find a place you would like to rent for less than your mortgage + taxes + insurance now, selling would allow you to build a lot of principal for your retirement. You can probably offset the tax advantages by dumping that in retirement funds of one description or another.

If you don’t like numbers, this might be a question you should take to a financial planner. I don’t want to ask you personal questions on this board. A lot depends on how well your retirement is funded and the degree of security you have for the next ten years, but the future value of a few hundred thousand could make an immense difference for your retirement.

You see, if you are going to spend no more on rent than you spend for your house now, the capital you get out of your house PLUS the ongoing proceeds can be invested now and will grow very rapidly. This is likely to bring much higher returns at least for 5-6 years than staying in the house will. For many people, staying in the house in a situation such as yours can be a very expensive decision.

Factors which would weigh against selling are:
1) You intend to live in the same area after you retire.
2) You cannot find a place to rent for less than your P&I mortgage, taxes and insurance.
3) You already have a secure retirement and you feel secure in your job.
4) You are healthy.
5) You can save substantial money each month for your retirement now.

Factors which would indicate a sale are:
1) You don’t necessarily want to stay in the same area after you retire.
2) You can find a place to rent for less than your P&I mortgage, taxes and insurance.
3) You are not comfortable with your retirement funding currently, or you are not sure that you will be able to stay at your company for 8 or 10 more years (or whatever it will take to build up your retirement stash to where you want it to be).
4) You have or may have health problems.
5) You are not currently saving enough money each month to meet your retirement goals, and you have no current plan to achieve them.
6) You are relying on a non-vested contractual company pension plan and social security to fund your retirement.

Many company pension plans are not secure, and it is likely that you will receive very little from SS for your retirement. So pulling out capital now while it has time to grow would really provide you a tremendous return down the road. I will come back with some sample numbers, if you like.

Btw, I’m not a financial planner, so I’m not shilling. The less financially risky decision here is probably to sell, but personal factors may change that decision for you. At least you have good options.

[MaxedOutMama]

They will lose their house. HELOCs are secured by the home, either by a deed of trust or a mortgage, depending on the state.

Under federal law, if the debtor cannot pay the creditor gets the house, and the debtor gets whatever is left over after sale expenses and loan payoff. Court proceedings can delay but cannot cancel the debt. To get out of it, the debtor would have to prove that the lender did not provide certain required disclosures under federal law (rescission, Reg Z), or qualify under various state laws. But the vast majority of people have no valid legal claims.

I believe CA does have a law cancelling overages. I.E., if the person ended up owing more than the house was worth, all the creditor would get was the house. I’ll have to look it up. A couple other states have statutes highly favorable to homeowners in this situation.

Paradoxically, a homeowner in way over their head (more loan than house value) might do better with a second-lien home equity or HELOC. You normally need to be under 10% or so. The creditor might deal because the first mortgagee is going to get almost everything, so it is better to work something out to get more on balance.

[MaxedOutMama]

I am in banking(compliance), and the idea that lenders are writing I-O loans at 55% DTI is horrifying.

Historically DTI’s over 45% have been associated with bad performance (high defaults), and DTI’s of 50% and over have been considered predatory lending. In my opinion non-amortizing adjustables with DTI’s over 35% should be classed as HOEPA loans, which require special disclosures, enhanced documentation, a special waiting period and restrictions on loan terms.

I agree with those that say this is a credit bubble, and I expect lenders to take losses of over 600 billion on RE loans by 2009. Many borrowers will take a severe hit. Many of them literally will not have understood the risks or the terms of their loans.

IMO, these loan terms have amounted to a massive consumer pyramid scheme.

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