Although I should be paying more attention to the mortgage market, I’ve only gotten a chance to catch up this weekend. Above is the stock chart for New Century Financial (NEW), the second-largest subprime lender in the country. It basically dropped from $30 to $3 a share in a month, and is no longer taking any new loan applications. From this AP article:
“New Century, already the target of shareholder lawsuits, alarmed investors Thursday when it announced one of its financial backers had turned off the funding spigot. The company said last month it had failed to keep tabs on how frequently borrowers missed payments.”
What? As a subprime lender, how is this fathomable? It looks like their fellow lenders haven’t been doing so hot either:
- Countrywide Financial Corp. (CFC), the largest U.S. mortgage lender, recently told its brokers to stop offering borrowers the option of no-money-down home loans.
- WMC Mortgage, part of General Electric (GE), recently laid off 20% of its workers and is no longer taking no-down-payment loans.
- Washington Mutual is no longer making no-down-payment loans.
- Fremont General Corp. recently shut its doors completely, and is seeking a buyer for its subprime operations after getting a cease-and-desist order from the Federal Deposit Insurance Corp.
- More than 20 other subprime lenders have stopped lending or gone bankrupt in the past year due to increasing defaults.
The New York Times just published this article titled “Crisis Looms in Mortgages“. Some excerpts:
“What’s happening is the front end of this wave of teaser-rate loans that are coming into full pricing,” Federal Reserve Governor Susan Bies said on Friday. “So what we’re seeing in this narrow segment is the beginning of the wave. This is not the end, this is the beginning.”
?I guess we are a bit surprised at how fast this has unraveled,? said Tom Zimmerman, head of asset-backed securities research at UBS, in a recent conference call with investors.
Like worms that surface after a torrential rain, revelations that emerge when an asset bubble bursts are often unattractive, involving dubious industry practices and even fraud. In the coming weeks, some mortgage market participants predict, investors will learn not only how lax real estate lending standards became, but also how hard to value these opaque securities are and how easy their values are to prop up.
It is too early to tell how significant a role mortgage fraud played in the rocketing delinquency rates ? 12.6 percent among subprime borrowers… Some 35 percent of all mortgage securities issued last year were [subprime], up from 13 percent in 2003.
I can’t help but predict repercussions from this fallout to the rest of the mortgage world. Bad loans » Stricter lending standards » People qualifying for smaller loans and thus less buying power » Lower housing prices?
Of course this starts just when I am starting to browse the MLS listings again. Let’s see how badly I can mistime this thing…
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Subprime borrowers haven’t been the only ones getting suicide loans. Plenty of Prime and Alt-A have been getting the same types of IO or NegARM loans hoping to sell or refinance before their mortgage resets. And if you lose the subprimers that were pushing up the bottom of the market, it is going to be ugly for everybody. A person might have great credit but that won’t help when their payment doubles or triples beyond what they can afford.
What I don’t understand is that the mortgage rate has been more or less stable and even fallen a little bit over the last 6-10 months. In fact, since the fed might cut rate in the next round, there are speculations that prime rate will further go down. All these seem to indicate the ARM type loans are not going to raise nearly as fast as many people thought. Imagine if the prime rate would raise to 8 to 9% as many predicted, the ARM will probably going through the roof. If that happens, the default and foreclosure rate will truly cause a major problem for the economy.
MossySF, the point is why the heck they try to buy a house that they can’t afford? good credit or not. So it’s their own responsibility for the double or triple payment when rate hikes.
One reason that the may not have been tracking missed payments is that even missed payments inflated their earnings, on paper.
From Business Week:
“The rest of the option ARMs remain on lenders’ books, where for now they’re generating huge phantom profits for some lenders. That’s because, according to generally accepted accounting principles, or GAAP, banks can count as revenue the highest amount of an option ARM payment — the so-called fully amortized amount — even when borrowers make only the minimum payment. In other words, banks can claim future revenue now, inflating earnings per share.”
http://www.businessweek.com/magazine/content/06_37/b4000001.htm
You are so close to putting it all together!!! Your last line of talking about how bad you can mistime this thing will really only be applicable if you buy soon before this whole subprime thing really gets going.
In my opinion, we are at the beginning of an industry wide meltdown in the mortgage market. The fact that banks and lenders are only BEGINNING to require some sort of down payment or documentation of income goes to show that for the past 5 years+ there has been little to no regulation or requirements to buy as much house as you wanted. This lead to mass speculation which pushed up prices beyond any reasonable and sustainable level. Now its time to come back down.
So now that we are seeing the very beginning of these requirements coupled with record (and rising) inventories in many areas should mean that demand is going to be significantly weakened. Even IF people still want to buy homes today, it will be difficult or impossible for many of them to do so due to the more stringent requirements. Again, couple this with the big (and getting bigger) inventory and I believe we will start seeing price drops by those sellers who actually want to get their properties sold.
I believe you are doing the right thing by tuning in and watching the conditions in the mortgage and housing market, however I believe it would be very wise to really be patient and keep building the down payment. After things get worse and worse in the market you will be able to walk into a bank and present a very high fico score along with a 20% cash down payment, making you a very rare commodity. Good luck and keep us posted on how things go as you continue looking at the home purchase.
It can only be explained as greed. This is not the first time subprime lenders got pounded into the ground. It happened in the late 90’s as LTCM blew up and The Money Store, along with a few others, imploded. Make no mistake I believe this will likely rock the real estate market as only borrowers with at 10% down will likely get any kind of financing but if you wait 2-4 yrs these products will likely be available again with the notable mantra “but this time it will be different”.
If the lender forecloses and the property sale is insufficient to satisfy the obligation, can’t the obligor be pursued using his personal note that he or she signed at the same time that he signed the mortgage note? Is this typically done? If not, why not? Are any statistics compiled on this?
Many of the housing bubble blogs out there have been predicting this very outcome since 2005. The $1 trillion of ARMS resetting this year and another 1T next year and the lack of lending standard are now starting to bite.
http://www.patrick.net is specific Bay Area blog for housing
bigmouth,
The problem is those teaser rates. Someone who took out a 3/1 arm 3 years ago is just now getting hit with the real rate. Those peoples payments have just suddenly skyrocketed. If the fed ever does raise rates, the problems are going to be multiplied 10 fold.
heather,
Just finished reading that article and I have to say its pretty damn scary. The accounting practice that they are using sounds absurdly similar to Enron’s completely legal accounting procedures!
To answer your question, Gollum, yes, if the foreclosed property is not worth enough to cover the balance on the mortgage, the lender can hold the mortgagor (borrower) personally liable for the deficiency. (In fact, in many jurisdictions the lender can sue on the debt first without foreclosing on the mortgage.) I don’t know the statistics, but one would think that there are often deficiencies after foreclosure sales, since if the market value of the property had been worth more than the balance of the mortgage, the mortgagor presumably would have sold it to avoid foreclosure. In any case, a right of action against the mortgagor for the deficiency isn’t worth much if the mortgagor is insolvent, which is the case with many mortgagors in default.
With recent events at New Century and FMT panic will set in. The foreclosure numbers are worse than expected. It is not a mistake the NAR has spent 50 million dollars to stimulate the resale market. Pricing nationwide is out of line with sustainable standards only three things can help unwind this situation.
Currency Devaluation!
Catastrophic Wage Inflation!
PAR 50 year am interest only loans.
Watch out for the 50 year it is on the horizon.
Banks can unwind positions over the next 10 years.
If you do not see the 50 year by 4Q 2007.
You will see foreclosure rates at 8.5% of all available inventory.(Catastrophic)
Bigmouth, the payments going up don’t have much to do with the prime rates. Instead, its teaser rates and equity requirements. Most of these loans with “flexible” payments will let you only hit up to say 115% of the original loan value. After that, it resets to become the mandatory amount in to pay off in 30 years.
Typhooonn asked the next question about why people would pick loans like this if they couldn’t afford it. Greed and fear. Lenders dropped their standards because they took no risk — they usually resold the loans to Wall Street to raise funding to write more loans. Real estate/mortgage agents probably told them since RE always goes up, they can refinance before the rate reset and even get more cash out. People see the prices going up and feel they have to buy before the prices rise beyond their reach even with suicide loans.
I wonder if someone can explain a puzzle. I agree with the logic behind these posts, and I’ve been expecting softening real estate prices since early 2005. However, here in Portland, OR it doesn’t seem to be happening. If you look at the homes for sale advertising, prices that were already sky high in 2005 just continue to soar into the stratosphere.
As you’ll hear often. “Real Estate is Local”.
Portland’s sold prices may still be rising, but if you look at the numbers inventories are going up and the time on market is lengthening. I think that Portland will outlast many of the hot markets in CA, but sooner or later it will lose steam. All the houses around me have been For Sale for months and months.
But again, this is why it’s so hard to time real estate markets as well. Who’s to say this cooling off won’t be delayed for another year?
how can people with good credit and cash…capitalize on other peoples misfortunes? thats my question..im a rookie..so i dunno. but i have alot of both.
Why this WON’T be cooling off anytime soon:
As the article stated, this is the 1st wave of subprime loans coming due. But the subprime lending reached it’s peak sales in 2005-2006. I don’t have the numbers but i’d bet that the dollar value of subprime loans on the market from Summer ’05 – Summer ’06 is at least 3 to 4 times the amount in 2002 (combine skyrocketing prices in that 3-4 year span with the popularity and availability explosion of the subprime loans, and what you have is forthcoming demise in housing prices nationwide).
Jonathan, i think you’d be best to keep watching as the prices keep falling…this is no short-term swing. And if the Fed starts believing that the magnitude of the default problem begins to weigh heavier on the economy than any inflation fears, they may eventually start cutting into the Fed rate again and you may be in a situation where all your numbers are working for you —
1. The overall price of homes your searching for falls,
2. The interest rates on 30-yr fixed loans fall,
3. Your savings for down payment and savings in general continued to increase b/c you are still saving for the purchase of your home.
Go ahead and forgoe the tax savings you’d reap from buying a house now…if you can buy the same place for $50-100K less in 1-1/2 years, why not wait?
HOW BAD IS IT?? Here’s a story about when i realized the housing situation was even worse that i’d predicted, and i was relatively bearish about the market in 2004.
I purchased my condo in Oakland, CA in 2004, sold it in 2006 (it was rented the whole time). I refinanced in 2005 to pay for a major assessment levied by the HOA. When the notary came by to have me sign the loan docs for the refi, i recognized her as the same person who notarized the docs when i first purchased the property just 11 months earlier.
I remarked to her how surprising it was to see her again with all of the buying/selling/refinancing going on in 2005. That’s when she told me that she was surprised that i hadn’t already re-finance earlier. On top of that, she said she’s notarized for MANY owners who have refinanced 3 times in 1 year! With so many people pulling every bit equity out of their house, all the while not realizing the full extent to which their subprime loans would adjust in 3-5 years, they cooked up for themselves a recipe for disaster.
It’s Bad…but if you’re in no hurry to buy, it’s potentially great for you!
Simon…In response to your question here’s what you need to know.
First, as the old saying goes ‘money talks and bullshit walks’. Know your credit situation and know what it affords you when you want to buy. General rule of thumb (20% down) should give you decent negotiating power. If you have access to more cash (50% or more) you’re flexibility and access to deals will increase dramatically. Second, when haggling over price in this market the biggest thing sellers worry about is the financing falling through. If you don’t have that problem and can get pre-approved or better use cold hard cash you’ll be surprised what doors open up.
Hope all this helps!
All the best,
VV
hey vegas. that was really cool of u to post that.
yea..basics always apply. 20 percent down is the safe bet..the more cash the better for the downpayment. im no real estate pro.
i manage to save more then 30 thousand a year…and im extremely cheap. im 31 yrs old..not married..and have a only have about 500 dollars in expenses per month. i live a close friend..who needs me to watch over he place.
haha. being cheap is nothing to brag about..but its helped. im a cheap date..and do a lot of stuff for free..but i dont haggle over price. money to me is peace of mind..being able to spend time with family and loved ones. i will pay a high amt for peace of mind though..and for value. always value.
thanks again vegas!
This is the kind of stuff that happens when you have a fiat (Financial Instrument Administering Theft) money system where a central can create money backed by nothing. Where was the Federal Reserve?
I wonder how soon the taxpayer will be asked to bail out banks that made stupid loans to people who could not really afford some of the homes they were buying. Looks like the big guys on Wall Street made the money off the paperwork fees to unqualified lenders and repackaging of these loans into other financial instruments. I wonder what affect those failed repackaged financial instruments will have on the working stiff’s 401k/IRA portfolio?
This is why I am for a monetary system backed by precious metals and with real private banking. If we had real money and business with any ethical aspects would be more careful who they lent money to.
Here is a historical example of why fiat money always fails. Note the speculative aspects and horrendous inflation:
http://en.wikipedia.org/wiki/John_Law_(economist)
For more “inspiring” news on this, peruse some of the articles here:
http://itulip.com/
So basically those who are starting off in life- say early to mid twenties- and are in the process of saving to buy a house would benefit from this? I’m just trying to figure out the other end of the spectrum here, being a college graduate this upcoming spring and starting to generate a decent income to save… versus scraping by on a frugal college lifestyle each month.
M. – there’s something called the golden ratio. Applied to financial markets, it says the period of real price drops (after inflation) last roughly 60% longer than the runup period that proceeded it. Since we just had the biggest real estate runup in history from ’97-’05, using this quick rule of thumb says bottom won’t be reached until about 2017. Perhaps your area’s runup only started in ’00 — that would put the timeframe at 2013. So you have roughly 5-10 years to save up your downpayment. Don’t worry too much about squeezing every marginal dollar out of the market — anywhere from 2013-2017 will probably be within +/- 10% of the bottom.
Keep in mind, Countrywide has only eliminated the 100% financing for subprime only (thankfully as I’m getting a loan from them currently!). Also, not all markets are hurting, some are growing! Salt Lake City has shown a 19.5% growth in the past year. A market that is normally one of the slowest in the nation. I’m interested to see how this all pans out.
MELISSA,
I HAVE SEVERAL BROKER FRIENDS IN SLC. THEY SAY THE PHANTOMS ARE ATTACKING YOUR MARKET NOW. THEY WERE IN LA, THE CENTRAL VALLEY, TUCSON, PHOENIX, LAS VEGAS, WEST PALM BEACH, DELRAY BEACH, MIAMI, SAN ANTONIO TEXAS AND NOW SLC.
GO OUT TO SOME OF THOSE NEW NEIGHBOORHOODS AND SEE HOW MANY FAMILIES ACTUALLY LIVE IN THOSE NEW HOMES. WHEN YOU DO YOU WILL SEE THE GHOST TOWN EFFECT THAT OUT OF STATE INVESTORS LEAVE IN THEIR WAKE.
SLC WILL SOON FEEL THE WRATH OF BEING OVER BUILT AS ALL OF THE AFOREMENTIONED COMMUNITIES NOW FACE. PRICES WILL DECLINE IN ALL OF THE ABOVE LISTED MARKETS IN THE NEXT EIGHTEEN MONTHS. THE QUICKENING IN SLC HAS REACHED ITS PEAK. THE FUTURE IS THAT OF PHOENIX, MIAMI AND LAS VEGAS.
Yes, we do have the “Phantoms” everywhere… however, our rental market here sucks. What those phantoms want for rent, they can’t get so as a result we do have several neighborhoods full of homes for sale. Several master planned communities have come up with a pretty stiff contract to keep investors out, and yes, they will hold up in court (not all of them will, but the larger communities will!). Thankfully, SLC has had the oppurtunity to see the consequences of other cities and many have taken a stance to prevent the same from happening here.
I do think several areas in SLC will take a hit, but so far we’re hanging in there as a whole. BTW, I’m very familiar with the home business having worked with several builders and currently working for an engineering firm, along with the contacts I’ve developed along the way (not to mention the investors I know). We’re still far from our peak, after all, homes are still somewhat affordable here!
Right now, I’m more concerned about the hit St. George is going to take since they have taken a lot of Las Vegas’ market!
MELISSA THE BUILDERS DID NOT COME UP WITH THE RECORDED ANTI SPECULATION AGREEMENT RECORDED WITH THE DEED OF TRUST WHERE THE PURCHASER AGREES TO OWNER OCCUPY FOR 12, 18, 24 MONTHS.
THAT IS DONE FOR PACKAGING TO FANNIE MAE AND FREDDIE MAC. ALL OF THE MAJOR BUILDERS WHO HAVE A PREFERRED LENDER IN ORDER TO PRESERVE THE INTEGRITY OF THE COMMUNITY HAVE AGREED TO SELL LESS THAN 10% OF THE AVAILABLE INVENTORY TO INVESTORS. IF THE NUMBER EXCEEDS 10% OF THE COMMUNITY FANNIE MAE AND FREDDIE MAC DO NOT HAVE TO PURCHASE THE MORTGAGES. THE ADDENDUM IS AN INSURANCE POLICY AND AGREEMENT THAT SURVIVES THE CLOSING.
A SECOND HOME BUYER IS CLASSIFIED AS SOMEONE WHO LIVES MORE THAN 100 MILES AWAY BY DU(DESKTOP UNDERWRITER) THAT IS YOUR PHANTOM LOOPHOLE.
ALL OF THIS WORKS PERFECTLY IN A MARKET WHERE HOME PRICES ARE SITILL ON THE RISE.
2.5% IS ACCEPTABLE LOSS IN A PAPER
10% IS ACCEPTABLE LOSS IN SUB PRIME
TOTAL MARKET= 286 TRILLION DOLLARS
SUBPRIME MARKET= 80 TRILLION DOLLARS
THE US HAS AN EXPOSURE= 10 TRILLIION DOLLARS
WATCH IT BLEED OUT IN THE CREDIT SWAP MARKETS
THIS STORY IS ONLY GETTING STARTED.
Hmmm, 2013-17? I would say more like 2012 for the bottom. When it goes, it will go fast, and then it will stop. I would say even sooner, but that may just be wishful thinking on my part. I’d like to buy another house in 2009.
FASTER CORRECTION ! AND HOW!
The Los Angeles Market had a correction 1990-1995 with a 40% decrease in values. Similar markets encountered the same.
The reason the timeline will be compressed this time is DATA FLOW.
In 1990 the MLS books were printed once a month mid 90’s twice a month. Sales figures were compiled and released 60 days later.
FAST FORWARD 2007
MLS DATA IS LIVE DAILY MONTHLY SALES FIGURES ARE AVAILABLE IN 72 hours. NEW HOME SALES DATA RIGHT NOW. FUTURE BUILDING PERMITS NOW. PUBLIC RECORD DATA ACCESS NOW. FORECLOSURE DATA NOW.
THE DATA IS SO GOOD AND FAST IT HAS ENHANCED THE PANIC CYCLE AND CREATED CHATTER.
A HOME IS A PLACE TO LIVE FIRST AND AN INVESTMENT SECOND. IT IS NOT A PLACE TO SPECULATE. YOU MAKE YOUR MONEY ON A HOME WHEN YOU BUY AND REALIZE THE GAIN WHEN YOU SELL.
THE WAVES OF DATA HAVE MADE IT DIFFICULT TO PUT A PRETTY FACE ON WHAT IS YET TO COME. THE FUTURE HOUSING MARKET LOOKS BLEAK FOR A VERY GOOD REASON AND THE MATH PROVES IT.
I’ve been reading up on the status of Portland real estate here, and from what I am seeing, it looks like Portland’s real estate trends just doesn’t coincide with what the rest of the country is experiencing. We’re still experiencing growth, with low interest rates…now Jonathan, and anyone else who have been looking at housing prices…I just don’t feel like we’re going to hit a bottom for quite awhile. Portland is unique in its urban growth limits, allowing real estate to be limited, and keeping demand high.
I myself am a bit unsure whether buying a house right now is a good idea if Portland is only following suit with what is happening with the rest of the country, but again, since it seems to be anomalous with the rest of the country, I don’t know if we can safely say, it is not a buyer’s market right now in Portland either.
Jonathan, since you are buying real estate here…what are your thoughts?
I’m not buying in Portland, that’s the problem 🙁