Housing Bubble Bursting?

[Randolph Kinney]

Maybe the average American is slightly more savvy about their personal finances than the previously posted graphs and numbers would indicate.

http://www.inman.com/hstory.aspx?ID=62636



Could it be that falling home prices in some areas will wind up being a boon to the economy?

Good point Steve, falling home prices will be a boon. Lets hope the home prices keep falling and give those renters a chance at owning. From your INMAN article:

The National Association of Realtors has maintained that consumer psychology contributed to the housing slowdown that began in 2006. NAR launched a nationwide advertising campaign in November aimed at boosting buyer confidence, proclaiming, "It's a great time to buy or sell a home."

Too bad NAR has no idea what is causing the problem. They are spending $40 million to convince people who can't afford a down payment or monthly payments on a mortgage to buy a home.

The Bankrate survey, conducted by GfK Roper Public Affairs & Media, found that the second-most cited obstacle to home ownership for renters was a lack of financing.

Now here is a problem; some renter wants to buy but can't get financing.

A March 20 Banc of America Securities LLC report predicted that tightened lending standards in the wake of the subprime lending crisis will cut demand for homes by 15 percent this year, and depress prices by 5 percent.

Now that won't help that renter to purchase a home.

Homeowners with ARMs were asked what they planned to do when their loan payments readjust. Although 36 percent said they planned to refinance to a fixed-rate loan, nearly as many -- 34 percent -- said they didn't know what they would do. About one in four said they didn't plan to have the loan when it reset.

More good news! It goes right to the point of defaulting loans, foreclosures and falling home prices.

 

[moh malekpour]

Indymac in the Hot Seat

http://www.thestreet.com/pf/newsanalysis/realestate/10344684.html

Indymac (NDE) made its case Thursday to distinguish itself from the crumbling subprime market, but with defaults rising among so-called Alt-A mortgages, the lender still is facing a very challenging 2007.

In a report this week, UBS mortgage credit research analyst David Liu highlighted the growing signs of weakness in the Alt-A market.
Delinquency rates on both subprime and Alt-A loans have doubled in the past year, Liu noted. At the end of December, about 2.4% of borrowers for Alt-A loans were delinquent by more than two months on payments, whereas the rate for subprime was 14%, according to data from First American LoanPerformance.
Alt-A borrowers generally have higher credit scores than subprime borrowers, who are the riskiest homeowners. From a credit standpoint, Alt-A loans are riskier than prime mortgages because the underwriting often is sloppier.
One popular Alt-A product, the option ARM, allows borrowers the choice to pay less than their fully amortized rate each month. Once too much of the proper loan balance is deferred, a process known as negative amortization, then the monthly payment adjust to the full amortized rate -- known as payment shock.
Indymac has a very large exposure to the Alt-A market. About 90% of the company's mortgage originations last year were Alt-A, with slightly more interest-only loans than option ARMs. A total of 45% of these Alt-A loans were originated for California homes

the problem is that the Alt-A mortgage origination business is on the verge of becoming unprofitable.
Moreover, as defaults among borrowers pick up, Indymac will be forced to repurchase more bad loans that it had sold off in the secondary market to Fannie Mae, Freddie Mac and Wall Street investment banks (similar to what happened with the subprime lenders).
Indymac expects to repurchase $600 million of loans this year, but a rapidly falling Alt-A market could make that number look conservative.

Brad told us in his previous post that the IndyMac share of Al-A loans in 2006 was 3% of its total loans while this article says about 90% of the company's mortgage originations last year were Alt-A, with slightly more interest-only loans than option ARMs. A total of 45% of these Alt-A loans were originated for California homes. I just got one of them that I am using it as a listing in my subject neighborhood that I asked Brad in my previous post to give me some information about its financing by IndyMac few months ago

 

[Randolph Kinney]

Good article Moh, it does drive home the point about California, ARMs, not-so-prime, less-than-prime and subprime loans.

Automated underwriting has concentrated most on credit score and not other factors or verification of documents. That is coming home to bite some lenders in the backside.

Going forward, I expect the problems of mortgage defaults to ripple into other areas, a financial contagion.

 

[moh malekpour]

Mortgage Woes Beyond Subprime

http://finance.yahoo.com/loans/article/102641/Liar-Loans:-Mortgage-Woes-Beyond-Subprime

Subprime mortgages have been generating a lot of attention, and worry, among investors, economists and regulators, but those loans may be only part of the threat posed to the housing market by risky lending.
Some experts in the field are now concerned about the so-called Alt. A mortgage loan market, which has grown even faster than the market for subprime mortgage loans to borrowers with less than top credit.
Alt. A refers to people with better credit scores (A-rated) who borrow with little or no verification of income, or so-called alternative documentation

The biggest Alt. A lender is Pasadena, Calif-based IndyMac Bancorp. Trade publication Inside Mortgage Finance estimates it did $70.2 billion of the loans in 2006, up 48 percent from a year earlier. As the sector grew, its shares shot up nearly 50 percent in a year and hit a record high in April 2006. But with rising concern about the mortgage sector, its shares have plunged 36 percent since the start of 2007.
But it's not just the smaller lenders like IndyMac in the sector. Like subprime, some of the nation's largest finance firms are major players. Countrywide Financial, one of the nation's largest mortgage lenders, is the No. 2 Alt. A lender with $68 billion in loans, according Inside Mortgage Finance.
GMAC, the finance unit of General Motors that is now 51 percent owned by Cerberus Capital, is No. 3 on the list at $44 billion, and a unit of General Electric is No. 4 at $28.3 billion, just ahead of Washington Mutual, the nation's largest thrift with $25 billion in the loans.
What is not known is which Wall Street firms, banks and hedge funds have bought hundreds of billions of dollars worth of mortgage-backed securities comprised of Alt. A loans, or have lines of credit out to the smaller Alt. A lenders.

 

[Randolph Kinney]

Oh! It is nasty mortgages again

http://www.marketwatch.com/news/sto...x?guid={916A2E34-A4BD-4F1F-981C-41EE86937BC4}

NEW YORK (MarketWatch) -- Beazer Homes USA Inc. saw its shares fall 10% Wednesday, in retreat as the company said federal authorities have requested documents regarding its mortgage business.

Several major home builders also operate finance companies to aid customers in buying their houses. Those businesses and the broader home-lending industry have been under scrutiny lately as defaults among the riskiest of those loans, called subprime, have spiked.

KB Home, for example, teamed with Countrywide Financial Corp. in a joint venture they created in 2005.

Centex Corp., Lennar Corp. and Pulte Homes Inc. also run mortgage operations.

Trouble in the subprime market, along with continuing weak home-builder earnings reports and bearish government data, has sparked concerns about spillage over into the broader U.S. economy.

 

[Brad Ellis]

Moh,

You tried to put words into my mouth but you blew it big time. To wit,

"Brad told us in his previous post that the IndyMac share of Al-A loans in 2006 was 3% of its total loans while this article says about 90% of the company's mortgage originations last year were Alt-A, with slightly more interest-only loans than option ARMs. A total of 45% of these Alt-A loans were originated for California homes. I just got one of them that I am using it as a listing in my subject neighborhood that I asked Brad in my previous post to give me some information about its financing by IndyMac few months ago"

I did not say that. YOU are telling everyone a lie.

I said 3% were SUBPRIME- not Alt-A. And Mr. Liu has his facts wrong as well; our Alt-A percentage is more like 70%, per our own releases. Let me repeat:

Alt-A is NOT subprime; they are different animals- period. Of course Wall St. would like you to believe that Alt-A is the same as subprime because they can drive the stocks of the Alt-A lenders down and buy them low and profit once they later issue their statements that Alt-A does not have the same default rates and so those firms are not in trouble. Patience and you will see this.

And NO- I will not discuss any specific loan we made, nor will I state that underwriting is perfect- NOR will I state that the appraisals backing up the underwriting is perfect. To discuss the details of a particular loan would be breaking the law- so NOT from me. And by the way- not from YOU either since you have no idea what kind of loan was made on that property unless you happen to know the FICO and are able to look at the documentation.

EVERY lender will take losses- THAT is why there is such a thing as interest (rates depending upon the 2 factors that make up interest- opportunity cost and risk). And THAT is why there are reserves.

Mr. Liu also has his default percentages wrong if he is talking about us.

Brad

 

[moh malekpour]

Moh,

You tried to put words into my mouth but you blew it big time. To wit,

"Brad told us in his previous post that the IndyMac share of Al-A loans in 2006 was 3% of its total loans while this article says about 90% of the company's mortgage originations last year were Alt-A, with slightly more interest-only loans than option ARMs. A total of 45% of these Alt-A loans were originated for California homes. I just got one of them that I am using it as a listing in my subject neighborhood that I asked Brad in my previous post to give me some information about its financing by IndyMac few months ago"

I did not say that. YOU are telling everyone a lie.

I said 3% were SUBPRIME- not Alt-A. And Mr. Liu has his facts wrong as well; our Alt-A percentage is more like 70%, per our own releases. Let me repeat:

Alt-A is NOT subprime; they are different animals- period. Of course Wall St. would like you to believe that Alt-A is the same as subprime because they can drive the stocks of the Alt-A lenders down and buy them low and profit once they later issue their statements that Alt-A does not have the same default rates and so those firms are not in trouble. Patience and you will see this.

And NO- I will not discuss any specific loan we made, nor will I state that underwriting is perfect- NOR will I state that the appraisals backing up the underwriting is perfect. To discuss the details of a particular loan would be breaking the law- so NOT from me. And by the way- not from YOU either since you have no idea what kind of loan was made on that property unless you happen to know the FICO and are able to look at the documentation.

EVERY lender will take losses- THAT is why there is such a thing as interest (rates depending upon the 2 factors that make up interest- opportunity cost and risk). And THAT is why there are reserves.

Mr. Liu also has his default percentages wrong if he is talking about us.

Brad

Brad,
This was not a Lie, a misplacement of Alt-A with sub prime as they are very similar to most poeple. So, IndyMac had 3% of all its loan sub-prime and 90% Alt-A. only 7% prime. Does it make IndyMac a prime lender or Alt-A lender? According to the next article that I posted, Alt-A loan are in trouble as well. The fact tha they have less volumes and get less publicity, doesn't mean that they are any better. We still have to wait and see.
http://www.mtgfoundation.com/2007/0...ack-to-haunt-credit-worthy-consumers-too.html

A record $400 billion of these midlevel loans - which are known in the industry as “Alt-A” mortgages - were originated last year, up from $85 billion in 2003, according to Inside Mortgage Finance, a trade publication. Alt-A loans accounted for roughly 16% of mortgage originations last year and subprime loans an additional 24%.
The catch-all Alt-A category includes many of the innovative products that helped fuel the housing boom, such as mortgages that carry little, if any, documentation of income or assets, and so-called option adjustable-rate mortgages, which give borrowers multiple payment choices but can lead to a rising loan balance.

 

[Randolph Kinney]

Thanks Brad

http://appraisersforum.com/1346024-post14.html

For reference purposes, prime loans currently have about a 2.5% default rate, Alt-A 5% and subprime is all over the place depending on many factors but can go as high as 22%. They are all different animals.

Brad

It appears that default rates have been rising across the spectrum of loan quality. Any reason to believe that it will not continue?

 

[Brad Ellis]

Randolph,

I sure would appreciate it if you would NOT cite us with potential problems if you do not have specific facts to back that up- and it seems you are making a generalization.

Generallizations are OK so long as one calls them that- but in reading the article whose link you posted I saw no mention of us. So you are the one who cited Indymac, not the article- and for those who did not bother to read it the assumption that they would make is that the author cited us in it.

So, why would I say we do not have this sort of problem?

First, while we certainly do offer option arms, we underwrite them to the fully indexed rate. By doing this we know that the borrower is able (no one can know if they are willing- that where everyone hopes the FICO is a true predictor- and so far it has been)) to service the obligation even after all the resets. We have been doing that a long time and we have no problem selling these loans except when the appraisal is bad.

Next, even the more traditional ARMs as they reset are going to do so over a period of 6-7 years. During that time, for some of them, their financial condition, if it was not perfect (subprime, not Alt-A), may well improve so not all will default of course. Couple that with increasing values that will surely come some time during that period (even if we disagree on the depth and length of overall declines I do not see anyone with a reliable fact based prediction that any housing drop would last that long) and the risk is certainly less. BTW that statment about the 6-7 years is from Chris Cagan of First American/Core Logic- a friend of mine.

Our niche is in Alt-A loans. Atl-A loans are made to A level credit borrowers. They become Alt-A when alternate documentation is used- not when the credit profile is bad. Don't want to give me your tax return and you claim to make $7K/month as a hair stylist? OK- give me the last 6 months of your bank account statements. I can pretty much tell what you are taking in- or at least if it is enough. I also have the credit report so I already know what the outstanding obligations are and how they are paid.

No one is saying that ARM resets are not a problem. They sure can be and especially if it is for subprime (where we have about 3% of our volume). But pretty much every article by the so-called experts simply state the totals and do not talk about how/when they might occur or even if market conditions will mitigate any of that.

So, if we do go into recession (I am guesing not until next year if it happens), then rates will come down- perhaps dramatically. So some (I do not know and will not guess at percentages - but some) will be able to refi at a rate that they can afford. If employment stays strong, it will mitigate some of this. If price go back up within the period, it will depend upon how much and when that will dictate if there are actual losses or how much they will be.

The actual facts are not even close to being in, but there sure is a ton of hype. Time will tell if that hype is/was anywhere near accurate. But even if it is, my bank is going to survive and may well even propser from this environment. Wall St. still has a big appetite for CDOs- just not the really risky stuff anymore.

Brad

 

[Randolph Kinney]

Subprime Mortgage Collapse Eviscerates California Headquarters

http://www.bloomberg.com/apps/news?pid=20601109&sid=alOjASNOLKcQ&refer=exclusive

Hometown lenders including New Century and Ameriquest Mortgage Co. already have fired more than 3,000 people, house and condominium prices are down 17 percent since June and office vacancy rates are poised to double this year, said John McDermott, regional manager for Orange County at commercial real estate broker Sperry Van Ness.

The collapse of the subprime industry probably will affect everyone from printer-paper suppliers to office-maintenance companies to retailers who depend on employees of lenders including New Century for sales, said Jacquie Ellis, president of the Irvine Chamber of Commerce. Before its collapse, New Century had 7,400 employees, compared with 8,600 at the University of California, Irvine, she said.

``There are going to be massive layoffs and maybe something worse than that,'' Ellis said. ``You wonder what impact it's going to have on other companies as well.''

Half of the 20 biggest U.S. subprime lenders are in California, including three in Irvine, and about 13 percent of the nation's subprime loans are in the state, according to the Washington-based Mortgage Bankers Association and industry newsletter Inside Mortgage Finance of Bethesda, Maryland.

More than two dozen mortgage lenders have closed or sought buyers since the beginning of the year. Irvine-based People's Choice Home Loan Inc. filed for bankruptcy protection last week. H&R Block Inc. is trying to sell its Irvine-based Option One Mortgage Corp. unit. Accredited Home Lenders Holding Co., based in San Diego, has offices in Irvine, and Ameriquest is based in Orange, just north of Irvine.

For Irvine's 190,000 residents, the median price for new and resale houses and condominiums was $641,500 in February, down 17 percent from last June's peak of $775,000, according to La Jolla, California-based DataQuick Information Systems.