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VCJIM,

I believe you are correct that the Fed is stuck between a rock and a hard place. They left rates alone today, that was because the economy is slowing and housing is falling. But, they are supposed to be fighting inflation and inflation is very much a problem now. My guess is that the Fed will be weak, and will ignore inflation, they will talk a mean game but won’t do anything about it, to keep the economy afloat. The problem is the US econnomy is based on debt and if rates get to high, it would be a disaster. Its called a liquidity trap, rates have been too low for too long and people have taken on too much debt. The same thing has happened in the UK. Their central bank raised their rate by .25% and people are crying because they can’t pay their debts. The next problem is that the Fed already cut the funds rate to 1% in 2003 or so. If they cut rates again, it will not have the same impact, because people are already so indebted, that is why you are seeing 40 year adn 50 year mortgages coming out. People can’t continue servicing their debt. I believe in Japan, at the height of their RE bubble they came out with 100 year mortgages. Well their RE market has been down more than 50% for 10 + years. And their central bank cut rates to 0% plus they went even further by printing money to buy 10 year bonds to drive down long term rates. But, everyone was so indebted that the increase in liquidity by their central bank did not stop the housing market from crashing. Also, their stock market is still down 70% from 1989. It peaked at 40k in 1989 or so and is at 16k or so now. Their psychology changed and people refused to buy even with 0% interest rates. When prices are falling, especially if they are falling fast, do you buy today, or wait a day to buy for a cheaper price. This becomes a vicious circle, the exact opposite of the foolishness we saw the past couple of years where people felt that if they didn’t but today the price would be higher tomorrow.

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Daniel,

A good place to look for mortgage data, historical numbers and index information is HSH.com if I remember it correctly. You should be able to pull up the 10 year data and the 30 year fixed data and do a graph in Excel to get your answer.

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Daniel,

Honestly I have never paid much attention to the 30 year fixed rate margin over the 10 year t-bond. And I never paid any attention to the 1 year ARM since I originated maybe 1 or 2 out of 1,000+ loans. You have a good question, unfortunately, I don’t know the answer. The margin may change due to inflation expectations, market conditions, profitability, etc.

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mydogsarelazy,

You received good advice from a previous posting. Do not co-sign unless you absolutely trust the person will pay on time. Your credit is at risk. And the odds are that you will not know if the person you signed for is paying their bills on time.

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irvinesinglemom,

You are in a great financial position. I’m not going to tell you exactly how mjuch you can qualify for since that can change dramatically depending on interest rates and available loan products. However, you have good cash, nice savings and no debt. You won’t believe how few people are in that position. I originated probabaly close to 1,000 or more loans and most people have no cash, lots of debt and average credit scores. It always blew me away to see the financial profiles of people. And the interesting thing is that the highest earners, in many cases are no better off that the average earner becasue they ramp up their spending with their income.

I do think you might want to wait and see how this market shakes out before buying. If you really want to buy, you should, however, you must know going in that home values may go down for years. Also, I would stop going to open houses because its only going to get you excited about buying. I have seen too many people get caught up in the whirlwind of buying and then later regretting it. Take your time, think about your goals, and hope for bargains. I think you will find patience is a virtue and people with patience will be rewarded in the coming real estate cycle.

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PowaySeller,

Here are the answers to your previous quesionts:

1) ARM resets will be an issue. I disagree with the person who said that a large group of people will get 25-50% pay raises before the ARM adjusts. Number 1, there are very few people who become doctors each year, a bit more become lawyers and engineers. Secondly most of them have enormous debt from school. Here is a quote that I pulled from an article yesterday, “A look at the economy today reveals that in real terms, hourly and weekly wages are slightly down since the beginning of the recovery in November 2001, and real median family incomes dropped each of the first three years since 2001.” Doesn’t look like a lot of people are getting large raises these days. In fact, I would argue that the people who have done well recently are real estate agents, lenders, appraisers, builders, etc. not because they are brain surgeons but because they were in the right place at the right time. As housing goes, so goes the economy.

2) Almost no one thinks about where their ARM might end up. I mentioned before that the easiest sell for a lender is to say, “oh you will either move or refinance before your ARM adjusts. This is a load of hogwash, but everyone wants to believe it. 1) If rates have gone up, how is the person going to refinance? 2) If the real estate market is falling how will the person sell their house without taking a beating? People hear what they want to believe.

3) Ok, my company sells the loans to wall street in MBS (mortgage backed securities. Many people invest in MBS, in fact, you and I could if we had an investment in a mutual fund that invests in mortgage securities. I believe that both China and Japan have been heavy buyers of MBSs which has helped to keep rates somewhat artificially low. I do believe the risk has been underestimated in these securities and someone will pay the price. Also, on a tangent, I believe that the credit scoring models are a huge potential issue because they have never been tested in a downcycle. Who is to say that people with 700 credit scores will be able to service their debt in a recession? The credit scores are looking at past data that does not include a real estate downturn.

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For the person asking about how to invest in currencies. Try http://www.everbank.com. Its a highly rated bank that offers virtually all currencies. They also have CDs made of of currencies: asian tiger CD, commodity CD, etc. If you invest in stocks, I belive their is an ETF (exchange traded fund) that invests in the Euro. I can’t remember who offers it, it may be profunds. Everbank also has a good email newsletter called the daily pfenning that gives updates on the currency market. Good luck.

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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.

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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.

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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.

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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.

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JS,

No problem. Most of my ex colleagues are still in the business although they are hurting.

Honestly, it wasn’t really the market that made me get out, its that I really didn’t like the business. However, its easier to get out when business is bad. I am young enough to be able to make a career move and I decided that I better do it now. I knew there was no way I wanted to be a Loan officer for ever.

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JS,

Yes, she can get a loan. Anyone can get a loan!

Pros:

Lots of equity
Low loan balance: $260k
Good income from husband

Cons:
The rent may not count if the property is zoned as 1 unit
She will have to prove that the income from the husband will contiune for 3 years through a separation agreement. She may have to provide cancelled checks or bank statements showing deposits of the income.

She can go stated income. With a 610 it should work fine. She is a good borrower for stated income as she really is receiving the income, but she just doesn’t want to document it. She might be able to qualify for a regular loan, see the pros and cons above. But it might not be worth the hassle.

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Yes, I understand Neg Am option ARMS. They are terrible loans. Obviously they are a easy sell when the teaser rate is 1.5%. I had a lady and her real estate agent come into my office to do a refi. She had no idea what kind of loan she had so I told her to bring in her loan note and mortgage statement. She had a neg am option arm. Her loan had grown something like $8k on a $300k balance. She had no idea this could happen. She also had a prepayment penalty of 2%. I ran the numbers and it was a tough call whether to refi. If she planned to keep the house, then she should have sucked it up, switched to a 30 year fixed and rolled all closing costs into the loan. However, she couldn’t make the new payment. She had a renter in the home and now I’m sure she is in trouble. This was a few months ago. Yes, I have heard of caps of 110% up to 125% on these option ARMS. These ARMS helped extend the bubble by allowing marginal buyers to purchase homes. They are going to have massive default rates. I will tell you about an even worse loan. Our compnay offered 2 equity lines back to back. So you could do an 80/20 no money down with 2 equity lines. Well equity lines are tied to prime, have only a life cap and are monthly adjustable. They started a 3.5% for the 1st loan and probably 7% for the 2nd in 2003 or so. Now they have gone up by 4.25% on each loan. Anyone still in those loans is finished. They are the riskiest loans I have ever seen. They were interest only and the buyer could ask the seller to pay all closing costs. So one could buy a home with nothing down, no money in the bank, no assets, with a monthly adjustable loan with no monthly or yearly rate caps up to $500k. And this loan was from a conservative lender.

I would estimate that the majority of people with prepayment penalties have no idea that they have them. Very few people would realize they should get a rate break to accept a prepay penalty. Yes, I have seen a bunch of people consider refi-ing with a prepay penalty because they can’t afford not to. Honestly, I would say the great majority of home buyers do not understand their ARMs, the caps, whether there are prepay penalties and when their ARMS adjust. The buyer is usually more concerned with the payment than the type of loan they get. Of course, there are exceptions to this but I really believe that most of the buying public knows very little about how their mortgage works. Some understand that they have a 5/1 ARM and that the rate will adjust in 5 years. But they won’t know that the cap is 5% at the first adjustment. They also won’t know that they will have to pay principal at that time if they took an interest only. Most lenders will say, oh you will either move to another house or refi before your 5/1 ARM comes do. Everyone buys that line and then forgets they have a time bomb waiting in 5 years.

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DKS,

You are in a great position. Time is on your side. RE takes a long time to move, the downcycle has only just begun. Luckily you didn’t listen to your agent. Many people bought the line, “if you don’t buy now you never will be able to”. That’s total BS. Its tough being a contrarian but can be very profitable. The old adage, it’s best to buy when everyone is selling and best to sell when everyone is buying, is perfect for this real estate bubble. Now we are on the sell side of the equation as inventory continues to build. The buyers market has only just begun.

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