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powayseller
ParticipantGreat stuff! So you can cancel your listing, even though your realtor will probably try to strong-arm you. I had thought we were committed to the entire 90 days in the contract.
ParticipantJim, thank you for explaining Option ARMs. Can you explain why a payment does not double when the interest rate has risen from 6% to 8% at the time of the loan reset?
This chart, from Forbes, shows that Americans are increasingly using cash from their homes to make up for a savings shortfall. This graph is the reason that I believe we as a nation are not prepared for mortgage payment increases. This chart is scary. I think most people with adjusting mortgages will need to find a way out. This graph shows there is no savings to fall back on, and that cash from homes has been used up. Where is the equity? What has been done with the cash that was extracted? It certainly didn’t go into savings.
[img_assist|nid=1631|title=Hey, Big Spender|desc=Americans are using cash from homes to replace savings|link=node|align=left|width=400|height=352]
ParticipantGreat chart, jg!
Participantsdrealtor, this is one last comment. You have a different way of resolving issues than I am used to. I expected to hear a thoughtful response to my arguments, and which ones you disagreed with. Instead, you prefer to diss me: I “SCREAMED FIRE”, you question whether I ever worked as a professional and if I did that I probably “yelled at people for being incompetent”, that I “taunt anonymously online”, that I “don’t have a clue about business conduct”, that what I “did to Jim is reprehensable [sp]”, and that “you can be a very vile person at times”, etc. You certainly have an interesting way of communicating.
ParticipantHere’s a post from a lady who manages a sales team for Aames Home Loan which will become Home Funds Direct in about 2 weeks, and be a part of Accredited Home Lenders. The merge of the companies will make them the 6th largest originator in the nation according to Wall Street
I am posting her insider’s view, because I think that understanding the depth and breadth of exotic lending will go a long way in predicting how this housing market shakes out. The majority of Americans will default when their loans adjust, in my opinion. After all, if we could handle the 50% – 100% higher mortgage payments, the IMF would not be warning of global recession due to the US housing market, and Greenspan would not have warned of systemic risk to the financial system. The risk being written about are due to the loans whose principal rises, and whose payments will shoot up. I believe Business Week called them neutron mortgages.
From a lender who deals in a the sub-subprime market, perhaps representative, perhaps not?
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My office of 7 loan officers takes +/- 100 loan applications per week, 90% of that coming from cold calls.
Of the last 100, I have taken some simple statistics and have found the following:
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68/100 had LTV’s over 80% at time of application
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16/100 had LTV’s over 100% at time of application
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78/100 had back end DTI’s over 55%
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31/100 had back end DTI’s over 70%
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23/100 had FICO’s under 500
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81/100 had credit card debt above $10,000
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54/100 had credit card debt above $20,000
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18/100 had credit card debt above $50,000
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66/100 had Pay-option ARMs
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27/100 had Pay-option ARMs and mortgage lates
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22/100 were either in forbearance or had been in forbearance within the past 12 monthsWe took 14 applications today and we cannot qualify a single borrower for any type of loan. We are sub-prime, in fact, sometimes I say we are sub-sub-prime. We can qualify almost anyone for a loan. Not today.
Let me tell you about just one borrower from today:
* Husband and wife
* Husband on fixed income military retirement $1800/mo
* Wife makes $9500/mo as a registered nurse
* 5 properties with $3,400,000 in mortgages
* All mortgages currently have prepays
* 8 interest-only mortgages
* 1 option ARM deferring $3500/mo
* 3 in Chula Vista and 2 in Escondido
* No more than $75,000 equity in any of the homes (verified by comp checks with 3 appraisers)
* All properties with front end LTV over 90%
* $65,000 credit card debt $672 Mercedes payment
* One property had 3 mortgages, one of them hard money
* 621 mid FICO
* 2×30 in the past 12 months
* Not a dime in the bankThey have been making mortgage payments with their credit cards and refinancing to pay off the credit cards. They are at the end of their rope, but refuse to throw in the towel.
This is not even an “extreme” example. I could show you dozens of these every single week.
I just wish the experts would see what I see. I think the statistics released would be different.
Granted, I only see applications from San Diego and Imperial Counties, but this is just getting out of hand.
UNQUOTEShe goes on to explain that many people do not understand their principal is increasing, and that elderly people who had a house almost paid off, now have a much higher loan that is about to reset. This is the same stuff I have been writing about for months now.
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The bread and butter of my office is selling people out of option arms and IO and back into a “real payment.” The broker office next door simply can’t believe that we stay in business without an option arm to sell.I will say this without any hesitation: 9/10 borrowers who currently have Option ARMs have no real understanding of what their loan is doing. I have had more than a few old ladies cry in my office when I show them the amount of deferred interest on their loan.
They were careless enough to sign a bad loan (ultimately the responsibility of the borrower to read the docs before signing), but it doesn’t help that every hack broker out there is pitching the option arm just because the rebate is so high.
Almost daily I see 70-year-old+ borrowers who used to owe $50k on their home now owing $600k on option arms.
UNQUOTE
That last part is just amazing. I think the number of refis into Option ARMs is going to be a surprise to the general public. The perception that these loans are held by new buyers is simply wrong. As Kelly Bennett reported in the Voice last week, Loan Performance records show that 68% of refinances in San Diego in 2004 and 2005 were Option ARMs.
Participantsdrealtor, my post was up for only a couple minutes, if even that, so I am surprised you happened to see it. I like Jim, his blog, his analysis, and I consider him a friend. He’s one of the few good realtors, he’s smart, and he writes stuff I don’t find elsewhere. I am disappointed that he erased my post, but he had every right to do so. This incident does not change the fact that he is an excellent realtor, and I will keep recommending him.
You are more pre-occupied with dissing me, than in debating my arguments, my analysis, my forecast. I don’t know what you mean with “screaming FIRE”? So I will ask you for the 3rd time: what specific item in my post disagrees with you?
Participantsdrealtor, did you read the post, or are you just having fun with me? BTW, I was promoted to Quality Assurance Manager just one year out of college, and worked in Sales and Marketing as well. So yes, I do have professional experience.
Participantwoodrow, you are right. I should have used the average U.S. home price in Q2 2006, $300K.
I actually used a $200K figure in my July 6 post, where I explained the problems with resetting loans:
” This story has an example of a 50% increase in payments.
I forgot that the going ARM rate was 3.5%. A $300K loan at 3.5% had payments of $1300. They will go up to $1800 to $2100 this year. This is the $1 trillion of resets they keep talking about. It’s the glut of 3/1 ARMs, made at very low rates 3 years ago. If each ARM is $200K average, that’s 5 million people whose mortgages will increase, mostly at 50% increases. That is a huge deal. 5 million homeowners will see their mortgages go up 50% next year. ”If Americans lived below their means, or saved more than 5% of their income, I would say this is not a problem. However, national data is showing that the personal savings rate is negative, wages have been flat for at least 5 years, and borrowers are spending 35% – 45% of their pay on mortgages. This doesn’t sound like a society that can easily take on a 50% jump in mortgage payments.
Lenders used to qualify borrowers based on their abiilty make the maximum capped payment, but a few years ago they started qualifying people on the initial teaser interest rate. That’s why those loans are more risky now.
The branch manager at my bank, World Savings doesn’t even understand that his loan can reset. How does that bode for Joe Sixpack? Here’s the conversation:
He said, “I have an adjustable rate mortgage, and my payment hasn’t gone up. Why do you say they go up?”
My reply, “That’s because you haven’t hit your adjustable period yet. Your 4% rate can go to 6%”
He responded, “But that’s only a 2% increase”.
I tried again, “It’s a 2% increase in the rate, but a 50% change in the payment. Your $2,000 payment would go to $3,000 if your rate changed from 4% to 6%.”
He: “OOOOOhhhhhh……..”
Woodrow, what assumption would you use? How many borrowers can handle a 50% , 70%, or 100% increase in their mortgage payment?
ParticipantPerryChase, I appreciate your public support.
It appears that the people upset by my predictions are most likely homeowners. What I propose, a 50% nominal drop in San Diego home prices, is nothing short of scary. Some homeowners believe they are “safe” from price drops, because they bought a “superior property”, in a desireable neighborhood. (A “superior property” is a property that increased greatly in value during the bubble, but will *not* go down more than 5% or 10% because it is unique, owned by someone who will not be forced to sell, and has few sales, thus commanding higher prices.) For the record, that idea is fantasy. Every property will return to its baseline: its fundamental rental ratio and the price it would be today had the bubble never happened. So even “superior properties” will see big drops. I would need information on the pre-bubble prices of these properties to make a forecast, so I will save that for another day.
They say it is my style that offends, not my message. But hey, I am just a nice girl next door, that has coffee with the neighbors and carpools to church. I believe the threat is not my style, but the message itself.
They say they don’t like predictions, but they were silent when David Lereah told us for all those years that home prices never go down, real estate is a great investment, the changing demographics ensure a new permanently higher plateau. Lereah has the data that I could only wish I had! He doesn’t even have to make assumptions, because he has all the data to make accurate forecasts. But curiously, when he spins around the data he already has, there are zero objections from our real estate bulls. However, my assumptions are stated upfront, I am honest and sincere in my efforts, and it causes a ruckus. It’s very interesting to observe the reactions.
Participantsdrealtor, what bothers you about my post? Note to self: do not provide controversial real estate analysis on a realtor blog.
I guess there are a few that I have rubbed the wrong way, but that does not make me wrong, nor does it make you wrong for disagreeing. I am only one housewife writing about the economy and housing, and look at the hoopla I stir up. I am at peace with my work.
I hope the reader can differentiate between fact and opinion, so it doesn’t need to be stated everytime. We are in unchartered territory, and the loan data that I so desperately want is secretive and not available to the public. I have to make more assumptions than I would like. However, for the sake of harmony, I will from now on clarify my opinions explicity, by stating “it is my opinion…”.
ParticipantJosh, I take it you’ll be moving to SEH?
MEW is always used for breast augmentation. In my opinion…
ParticipantWhat concerns me is that some people don’t know that they have a loan that will reset.
“John G. Walsh, a senior official at the federal Office of the Comptroller of the Currency, recently described his agency’s concerns about poorly informed borrowers who don’t realize that their artificially low monthly payments won’t continue indefinitely.
“We’ve had consumers tell us they didn’t know that after making 60 minimum payments on [a payment-option loan], they would owe more than they did when the loan was brand-new. They should certainly understand the basic bargain: the price of a low payment now is a much higher payment later,” his statement said. “
ParticipantI used $400K to be conservative. If I use your $200K figure, then the number of people affected by mortgage resets would double. That brings the number of borrowers hit with rate shock to 7.5 million. (Under my assumption, only 3.75 mil were affected.)
woodrow, I also like it better when I stick to the facts and leave assumptions out of it, lOL. The hardest part is getting all the facts that I need. The entire exotic loan data is secretive and/or difficult to get. I lay out all my assumptions, and thank you for bringing to my attention that I was way too conservative.
ParticipantIt’s not at a bar, is it? I vote for a restaurant, quiet if possible, so we can talk.
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