Housing Bubble Bursting?

[Fred]

Randolph,
I had no idea gold was up to $600. That means if you bought 25 years ago, you would only be down 25%. :icon_smile:

 

[Scott Kibler]

Unless things have changed since my last banking gig (it has been a while), ARM's are generally not underwritten beyond the first possible adjustment, certainly not to the max rate.

Of course life expectancies come into play here; if the loan can only go up say 3% within the first five years but can go up 8% over the life of the loan and the predicted life of the loan (before prepayment, refinance, etc) is less than five years then why underwrite to the 8% increase?

And yes, the 100% loans are in essence self insured via the additional interest income. Of course there may be lender paid portfolio insurance or some other risk mitigation scheme to protect against higher then expected default rates.

 

[JSmith43]

I didn't know that... but, of course, I'm not an expert on the lending side. So, Brad, why is it that a product that loans out at approximately 100% LTV does not require PMI? Is the second so profitable that the industry is willing to take on the risk for that reward? Just curious.

I'm not Brad, but I'm here now. First mortgage, general rules-if the first is 80% LTV or less, no MI. 80/20 = CLTV (Combined loan to value). There is a bit more risk as CLTV increases to both the first mortgage holder & 2nd mortgage holder, which often are different entities.

80/10/10 (where the 2nd 10 is the down payment and CLTV=90%) vs 80/15/5 (CLTV=95% vs 80/20 (CLTV=100%). As you go up the CLTV ladder, pricing gets worse for both the 2nd mortgage and underlying first mortgage.

Risk based pricing, sliced and diced as thinly as practical, which usually is in 5% increments for CLTV over 80%.

 

[George Hatch]

There's a reason the feds are getting ready to issue a letter warning lenders to not offer these exotic loans unless the borrower currently has the capacity to service the adjusted rate. And warning them to verify that income capacity. The motivations for this letter are not coming out of thin air.

I had a nice chat a couple weeks ago with the new chief appraiser over at one of the big residential mortgage lenders. Nice guy - I hope he makes it because he's taken on a daunting challenge. They brought him in to clean up the mess they're in. He told me that the amount of mortgage application fraud (particularly overstated incomes) being perpetrated by the borrowers and loan originators was so rampant that their company was at risk for basic solvency, even with their track record for gouging and predatory lending. That's not a fairy tale and I know that if it's happening at one of the big lenders that it's also happening elsewhere.

 

[Randolph Kinney]

The negative equity epidemic

All those ARMs and teaser rates are coming home to roost. 1 in 10 homeowners has no equity or is even 'upside down.'

http://moneycentral.msn.com/content/Banking/Homefinancing/P148861.asp#msnhp

 

[JSmith43]

Scott's basically right about manual UW. By hunch, it seems like hybrid ARMS are only slightly disadvantaged by automated underwriting. I don't do the ajudustominute ARMS A hunch is as close as I can get, since it would take quite an effort to reverse engineer the black boxes of AUW (automated UW). I have lots of "paired decisions" evidence, however.

Edit: Brad: Have you dissected any AUW models? Any decision rules you care to share regarding ARM transactions vs fixed rate?

 

[JSmith43]

He told me that the amount of mortgage application fraud (particularly overstated incomes) being perpetrated by the borrowers and loan originators was so rampant that their company was at risk for basic solvency, even with their track record for gouging and predatory lending. That's not a fairy tale and I know that if it's happening at one of the big lenders that it's also happening elsewhere.

I wish you could name names. Some of our investors are acting pretty shaky, but I'm not sure if they are big names, but they are relatively big. I am inclined to ignore their products, no matter the pricing or incentives.

 

[Randolph Kinney]

Randolph,
I had no idea gold was up to $600. That means if you bought 25 years ago, you would only be down 25%. :icon_smile:

I believe the context of my post was to illustrate the price movement in gold versus FED policy changes. Of course, if you want to use it as an investment vehicle to hedge currency risk, inflation risk, high uncertainty of future catastrophic events (Iran), that investment idea is in play at this very moment.

For example Steve, if you bought gold in July 2005 for $425, today it is $622. That's up over 46%. What has changed for people to pay that much more today than last year?:new_popcornsmiley:

 

[DTB]

I believe the context of my post was to illustrate the price movement in gold versus FED policy changes. Of course, if you want to use it as an investment vehicle to hedge currency risk, inflation risk, high uncertainty of future catastrophic events (Iran), that investment idea is in play at this very moment.

For example Steve, if you bought gold in July 2005 for $425, today it is $622. That's up over 46%. What has changed for people to pay that much more today than last year?:new_popcornsmiley:

I sure don't know, because you accuse me of tunnel vision.

Moh assures me that my 30 year real estate record is a fluke of speculation.

All I know is I'm making money, tons of it.

Wink, wink my Coldwater Creek stock is up 50% since January 2006. Dumb luck, works every time.

 

[Couch Potato]

For example Steve, if you bought gold in July 2005 for $425, today it is $622. That's up over 46%. What has changed for people to pay that much more today than last year?:new_popcornsmiley:

Easy question to answer, gold is always a good inflation hedge and the big run up in real estate prices signaled significant inflation is on the way.