Housing Bubble Bursting?

[Brad Ellis]

Randolph,

First, do not forget electric rates. They may be causing more stress than any other single cost to the homeowner. Since W took over my rates have easily tripled.

Next, your last sentence, "A significant number of people bought houses on speculation, not based upon their incomes. I believe it is these people who are defaulting today."

Yes, I concur, but only to a point. I think many of them- perhaps most- have already dumped their "investments". IF that is true then recent higher foreclosures from those who could not recoup their investments account for a chunk of this. Now the question is how many more will come into the supply chain in the near future?

More important than you and/or me, the economists at Wachovia also concur that this is one of the most clear causes for higher foreclosures. However, we are nearly a year from the price peak (July 2006?). Per their reports most of these folks have already dumped their properties. And that will beg the question over how long this will continue and when it will peak?

Obviously, this is not the only factor. All those you cited may be contributing singularly or in concert with each other as you suggest. No quarrel with that assumption at all.

But, here is what I see happening right now- and this is surmise so no hard data to back me up-

Cali is still short of housing and it is a serious shortage. Dataquick suggested that the lower priced homes did not sell as well in the recent data; hence the increase in median prices. But, what I think is that there were plenty of those lower priced homes sold. What I think may be happening is that builder inventories are finally starting to come back into balance - in SoCal and not all over at all- and that available existing housing is increasing more due to supply/demand than due to anything else.

We know that, although new building is well off its record pace, prices continue to increase for the most part- up 3 of the last 4 months. So, given lower starts the inventory is lower either now or in the immediate future. Take supply out of the mix without a corresponding decrease in demand (and we see really no supportable indication of lower demand) then price pressure to the updside continues.

IF the builders are taking inventory off the table that will decrease the incentives being offered and then the market starts to decide if the new home is the answer (at increasingly higher costs to acquire) vs. the existing home with all its depreciation present. It could well be that this buying decision is fueling some of the last months increases in SoCal.

Brad

 

[hastalavista]

I cannot believe this!

April 23 (Bloomberg) -- Banking regulators may push more homeowners into foreclosure by making it tougher to refinance subprime mortgages, said Angelo Mozilo, head of the largest U.S. home-loan lender.

So, the regulators are getting their feet held to the fire in congressional hearings for not doing enough, but CW says future spikes in foreclosures would be the regulators' fault for doing too much?

The Federal Reserve, Federal Deposit Insurance Corp., and Office of the Comptroller of the Currency proposed guidelines last month that would encourage lenders to turn down borrowers who won't be able to afford mortgages after ``teaser'' rates expire. Rates on loans to people with poor or limited credit are typically fixed for two or three years and then rise.

Anyone who has read The Agency letters for the last 5-years will see that they have always advised those they regulate to use prudence and be especially risk-sensitive to subprime loan packaging in terms of its effect on the borrower/consumer (i.e., ability to repay the loan).

The plan is an ``inadvertent attack on liquidity exactly when it shouldn't happen,'' Mozilo, co-founder and chief executive officer of Countrywide Financial Corp., said in a phone interview last week from his office in Calabasas, California.

Methinks he doth protest too loudly!

The change would block more than half of subprime borrowers from refinancing mortgages at a time when slumping real estate prices have already caused delinquencies to rise to a four-year high, according to Mozilo. Teaser rates on almost 2 million subprime loans will expire in 2007 and 2008, according to First American Corp. a Santa Ana, California-based realty data firm.

Is this a call for the elimination of equity-based lending decisions?

Mozilo compared the proposals to the savings-and-loan crisis of the late 1980s, when he said more than 1,000 thrifts failed in part because regulators set rules that encouraged thrifts to buy bonds with credit ratings below investment grade and then forced them to sell, causing prices to tumble.

Strange; I thought it was the congress that passed a tax law that encouraged excessive commercial development? But, regardless, it sounds like its anybody's fault but the lenders.

``The Fed is very different than the OCC,'' which regulates national banks and ``is very different'' that the Office of Thrift Supervision, which oversees U.S. thrifts, Mozilo said. Countrywide became a thrift last month, dropping its OCC charter.

(my bold)

I wonder why? I don't ask implying anything nefarious, but did CW's decision to drope the OCC charter and become a thrift driven because they thought the OCC was too lax in their guidence? All those agencies "say" the same thing?

Regulators, lenders and consumer groups are coming ``to the conclusion that the best way to deal with the issue that is looming in regards to subprime resets is to -- to the extent that they can make those payments -- put them into 30-year fixed-rate loans or comparable products that don't have these reset features,'' said Kevin Petrasic, an OTS spokesman.

Does the market have anything to say about rates here? Or, is the suggestion that if interest rates increase, we need a planned economy?

About 20 percent to 30 percent of people who took out subprime mortgages in 2005 and 2006 won't meet the financial thresholds regardless of whether the new guidelines are adopted because lenders aren't lending as much against property values, according to debt strategists at Lehman Brothers Holdings Inc.

Lenders aren't lending as much because investors aren't purchasing the securities. Now, how does one entice an investor to purchase an investment....... Could it be:
A. Reduce the risk (by tightening the quality standards)?
B. Increase the rate of return (raise the interest rate)?

The main cause of delinquencies and defaults has been ``flippers, speculators and people knowingly stretching themselves without the capability to get past any bump in the road,'' Mozilo said.

(my bold)

Mr. Mozilo is an industry genius and built CW into the giant it is- I sincerely mean that. However, his comment above is going to come back to haunt him (IMO); it reads as one of the top-ten denial statements of the current housing market "bump in the road" (his words) we are experiencing. It implies no responsibility by those who loan the money and all responsibility by those who borrowed the money. I use to hear that from my pre-teen all the time: "It's not my fault, dad".

What I find noteworthy is this: I thought CW was an A/Alt-A lender? If so, what's the concern?

 

[Steve Owen]

Strange; I thought it was the congress that passed a tax law that encouraged excessive commercial development? But, regardless, it sounds like its anybody's fault but the lenders.

You didn't actually expect Congress to take the blame did you?

 

[Randolph Kinney]

Randolph,

Next, your last sentence, "A significant number of people bought houses on speculation, not based upon their incomes. I believe it is these people who are defaulting today."

Yes, I concur, but only to a point. I think many of them- perhaps most- have already dumped their "investments". IF that is true then recent higher foreclosures from those who could not recoup their investments account for a chunk of this. Now the question is how many more will come into the supply chain in the near future?

Brad, you have speculators and then you have people who buy thinking they can afford this home at a teaser rate and by the time the reset comes, the value of the house has gone up, which will allow them to refinance or to sell at no loss. It is these people that are defaulting, not "investors" who flip properties. I agree with you on the speculators dumping their properties already.

Look at the news article on Countrywide above. "Teaser rates on almost 2 million subprime loans will expire in 2007 and 2008, according to First American Corp. a Santa Ana, California-based realty data firm." And this quote: "About 20 percent to 30 percent of people who took out subprime mortgages in 2005 and 2006 won't meet the financial thresholds regardless of whether the new guidelines are adopted because lenders aren't lending as much against property values, according to debt strategists at Lehman Brothers Holdings Inc."

But, here is what I see happening right now- and this is surmise so no hard data to back me up-

Cali is still short of housing and it is a serious shortage.

California has been short on affordable housing since the 1980's. Fannie Mae authored a report on this in May 2002 titled: The Great Housing Collapse in California

Overall, the pattern of housing construction in the Great Housing Collapse is unprecedented in
California, with the exception of during the Great Depression years. What is most puzzling is that the
state has recovered strongly from the economic recession of the early 1990s. Unemployment levels in
1998-2000 approached the lowest levels since World War II, and incomes also rose sharply from 1993
to 2000 in the great majority of the state. Yet housing construction has failed to respond in a manner
reflecting this overall prosperity.

Dataquick suggested that the lower priced homes did not sell as well in the recent data; hence the increase in median prices.

I believe this conclusion stated by DataQuick is really bogus on its face. They offer nothing to show that in the way of historical patterns or even bringing into the discussion the economics that support that.

But, what I think is that there were plenty of those lower priced homes sold. What I think may be happening is that builder inventories are finally starting to come back into balance - in SoCal and not all over at all- and that available existing housing is increasing more due to supply/demand than due to anything else.

I agree with you Brad, there are low price homes that are selling. It appears to me from my experience and what I see in my market is that low priced homes have more short sales and REO sales than higher priced homes. If the ratios remain the same across the economic spectrum for homes that sold, the distressed sales should have pulled down the average price and the median price. Strange, that is not what was reported.

New homes are not built for the lowest end of the economic spectrum, except by government sponsorship. New homes are built for the middle and upper end of the economic spectrum. The supply of new housing is justified by rising prices. The problem we have now is that the people who can afford to buy a new home has declined substantially as indicated by the C.A.R. house price affordability index. These same people who are in the market today to buy have a choice to buy an existing home. The inventory numbers do not support that a balance is anywhere near. The last report I saw showed that the level of vacant homes, existing and new, is rising, not falling.

The builders where I live are still building. What has happened, Brad, the new condos are not condos anymore. They are coming on market as apartments because they can't sell them at the price they need. That reduces the cheap end of the spectrum of supply for sale of new housing units, which aren't really that cheap.

Going forward, the low price end is affected more so by financing. You can't get 100% financing these days. That takes more people out of the market as buyers of the low price market than the high price market. Credit scores also have been raised for most loan products that are offered to low price home buyers. But this just started to happen in March. It will have a large impact going forward. The foreclosure statistics I have looked at show a new ratio of notice of default to notice of trust sale; 40% of NOD are ending in foreclosure. I believe that ratio is rising because short sales are not as successful at mitigating the loss or finding buyers at the price / terms the lender will accept.

 

[Randolph Kinney]

Moody's Raises Loss Estimate for 2006 Subprime Loans Used to Back Bonds

http://www.bloomberg.com/apps/news?pid=20601009&sid=a4B2utqh0eRY&refer=bond

April 23 (Bloomberg) -- Moody's Investors Service said losses on subprime mortgages made last year will be worse than it had previously forecast.
Moody's expects cumulative losses of 6 percent to 8 percent of the loan principal, up from 5.5 percent to 6 percent it had previously forecast, according to an April 20 statement by the New York-based credit-rating service.


The end of a housing boom and looser standards combined in 2006 to produce a crop of home loans to borrowers with poor credit, which are performing worse than loans issued in any previous year. Losses for the ``worst-performing vintages'' have ranged from 5 percent to 7 percent, according to Barclays Capital.


Moody's said it expected more severe losses than in its last estimate from March, because of ``its current outlook regarding home prices, interest rates, unemployment and the reduced availability of refinancing options for subprime borrowers.''


``As many subprime borrowers will soon face higher interest rates at the end of their initial fixed-rate periods, many of them might be unable to afford the higher mortgage payments, leading to further increases in delinquencies,'' Moody's said.


New York-based Standard & Poor's said last month that it expects losses to range between 5.25 percent and 7.75 percent.


Payment rates on about $650 billion of subprime loans will adjust higher by 2009, at a time of tougher underwriting, according to analysts at Lehman Brothers Holdings Inc.

 

[Greg Bell]

Uh Oh..It's the appraiser that caused the problem..

http://www.news-press.com/apps/pbcs.dll/article?AID=/20070423/RE/704230350/1075

 

[moh malekpour]

Denis & Steve

The Fed gets what the Fed wants
After last recession and the 9/11 disasters, the fed had no choice but to save the economy by lowering the interest rates. That was the Fed responsibility. The Fed and the nation already had experience of the stock bubble and didn’t want to repeat the same economic fiasco again so the policy was to load financial institutions and banks with low interest money and credit and let them to lend the money to homeowners and home buyers that could stimulate and move the economy. The effect started showing up in late 2002 and continued. Most homeowners refinanced and refinanced again and many people who didn’t have home started buying. This was the Fed policy and it was good. Remember in 2004 Greenspan said that borrowers should go for adjustable rates because adjustable rates were following the Fed rates and the Fed rate was going down. With extra ordinary availability of money with such low rates to banks and lenders, they had no choice but to lend them out. Banks couldn’t make money if they kept it in the bank and when they couldn’t find enough borrowers, they became creative to find ways to lend them out. That creative lending like 100% loan, option arms and other innovative loans were not part of sound and safe lending for banks but the regulators who were supposed to supervise them looked the other way because supposedly they were loaning money to low income borrowers who wanted to fulfill American Dream. But that availability of money to banks and lack of regulation enabled speculators to take advantage of the market and turn the real estate booming market to a bubble market. Most home values increased between 100-200% within 2 or 3 years while the rest of economy increased between 4-5%. That scared the heck out the Fed because it was not what they wanted. They wanted homeownership increase not speculators and the wanted price affordability not the price that an average American couldn’t afford it. They found out how those sub prime and Alt-A loans were made and how they were going to end up. They know now that the housing market is going to collapse because of those bad loans and there are going to be a recession on housing market for few years to come and that is what they want but they don’t want the whole economy collapse and it is not going to collapse.
Currently there are signs of recession and inflation in the market. The Fed may have to cut the rate again in order to expand money and credit to the business but wants the housing and lending sector stay away from that low rate money and credit when they bring the rate down. They don't want the same thing happen again . They want that money be available to business to create jobs and trades to compensate for housing decline. To prevent the lenders from the same fiasco, the Fed is going to enforce a very tight regulation on lending. The low rate money would be available to lenders but they cannot lend them to wily nily borrowers anymore. This is the Fed policy and the Fed gets what the Fed wants. Regulators are the fed pressure valves. They can turn them on and off at any time they want and Mr. Mozilo should know it.

 

[Brad Ellis]

Denis,

While CW does do Alt-A lending, it is only a secondary part of its overall product mix. Indymac is the industry leader in Alt-A (by percentage of volume- CW may be larger in hard numbers but they are also 6 times our size)and knows how to do it better than anyone if the actual credit losses that Loan Performance reported for 2002-2005 is any indication. Actual creidt losses were .0881% (less than 1 basis point).

Randolph,

I concur again but I would certainly question Moody's on almost anything they say. They have not been correct yet. Still, it does make sense that with the tightening credit many of those sub-prime buyers will not be able to qualify to a new loan. But, that does not mean that lenders will refuse to restructure the loans whenever and wherever they can. Making a loan that is risky may well be deemed more desireable than foreclosing. We just will not know this until they get into the details at loan level.

Moh,

I think someone scared you as a baby with a sign reading Alt-A (even though I happen to know these types of loans were not available when you were born).

So- repeat after me: "Alt-A is OK; Alt-A is OK". Moh, it is Alt-B Alt-C, Alt-D that is not OK.

Brad

 

[moh malekpour]

Brad,
Why don’t you give me a second solid source except your own opinion or Alt-A lenders opinion that indicates Alt-A loan is O.K? That Alt-A loan is not a liar loan, that Al-A loan is not any income statement or verification loan. That Alt-loan is closer to prime loan than to the sub-prime loan. Then I don’t put Alt-A loan next to sub prime loans any more. The psychology of repetition doesn’t work for me. I am not a parrot to repeat after you, I need sources and proof. Please post an objective source.

 

[JSmith43]

Brad,
Why don’t you give me a second solid source except your own opinion or Alt-A lenders opinion that indicates Alt-A loan is O.K? That Alt-A loan is not a liar loan, that Al-A loan is not any income statement or verification loan. That Alt-loan is closer to prime loan than to the sub-prime loan.

Moh, I'll vouch for Brad, if he made the general representations quoted above. Does that help?

A "liar's loan" refers to a stated income loan, generally in situations where there is self-employment, off book employment, or hard to document part time employment. LO's that are the do anything for a $$ type, have given such products a bad name (liar's loans).

A more original use of the term stated income....I think: If the borrower is really good A paper borrower & the scenario is relatively low risk, a DU or LP approval finding might waive documentation beyond what is stated in the application.

The LO might have 2 years of W-2s and 2 months worth of pay stubs in the preliminary file, but the parameters of the deal are so good, (LTV, perhaps seasoning of an existing mortgage, etc) normal documentation is waived.

An alt-a borrower might have a credit nick or two that would choke the original LP & DU programming, etc. However, an UW, using layered risk analysis could determine that the nick wasn't too significant in the grand scheme of things (think Butch & Sundance-Hell, the fall will probably kill you ).

They just zing the rate a half percent or so, just for the aggrivation of having to cherry pick through the deal more closely & the slightly elevated loss potential