Housing Bubble Bursting?

[xm72mhd]

However, here is an alternative possibility: If a 40 or 50-yr mortgage can be "swapped" for the existing exotic product, the lenders may look at this as the optimal choice/action. What I've read about these products is that they are high in fees and interest, and that the payment is similar to a low interest loan, so as a rule, they are not advantageous to the borrower. However, the key here is that the borrower cannot qualify for anything else. So, if the choice is to have bankruptcy or default on one's credit score vs. signing up for a 50-year mortgage, what is the likely choice?
Advantages to lenders/note-holders are:
1. Eliminates REO activity.
2. Generates new fees.
Advantages to borrowers are:
1. Maintains a low(er) payment, one that is assumed can be met.
2. Protects credit score.
3. Borrower keeps house.

Well where's the "no win" in that? I thought an essential ingredient was that both sides of the equation were vicitmised. What good is a crash if somebody isn't completely devastated by loosing their home or their collateral?

How much commish do the MB's get from this Denis? Pam has been telling us for years the amount of impact mortgage loan commissions have on our business. I think they just may have some influence on where the market goes too.

Maybe if some salesman doesn't get paid a commish the engine stops. So add to the plan that MB's get an "enhanced" commish to get a troubled loan conversion to a 50 year am.

 

[Big ole Boy]

Its already a washed out commish economy.

Our economy has been relying on high turnover transactions to fuel a nominal

wage base as part of the index measurements.

Those transactions (velocity) have run up to the Nth degree.

Hello stagflation and then depression and then total melt down.

 

[hastalavista]

How much commish do the MB's get from this Denis? Pam has been telling us for years the amount of impact mortgage loan commissions have on our business. I think they just may have some influence on where the market goes too.

Maybe if some salesman doesn't get paid a commish the engine stops. So add to the plan that MB's get an "enhanced" commish to get a troubled loan conversion to a 50 year am.

Edd-

I assume that your question is probative and phrased partly tongue-in-cheek. I've read Pam's post and I agree that she makes some legitimate points. I'm not ready to equate the "refi boom/exotic loan program/housing bubble concern" with agent commissions, however.

Take the Mortgage Brokers out of the equation and assume that every borrower who is running the risk of default deals directly with a lender and avails him/herself to a 50-year mortgage. Question: Will the lack of a MB in that transaction diminish the potential number of such transactions? I think not.

The MB, in many markets, has replaced a lender's in-house lending department. In the old days, banks would have their own loan agent employees; some still do. Many have decided to expand into "wholesale" and use the MB as their sales force. If it were more efficient and profitable for the bank to run its lending business strictly "in-house", it would do so. Having this part of the transaction "out-sourced" doesn't necessarily mean higher costs to the borrower. If the competitive advantage in obtaining a loan from a borrower is based on the borrower's costs + the quality of the product + the time it takes to close the deal, and if MB participation in that equation resulted in it being more costly than having the banks deal direct, the number of MB originated loans would be reduced significantly (such to the point where they would be a specialist and not a generalist as they are today). Add to the mix that their are now lenders/originators who's business is not "banking" (accepting deposits) but strictly mortgage lending, and the business model of having brokers makes sense (for now; the Internet may replace them eventually, except for the "specialists").

So, back to your specific questions:
How much commish do the MB's get from this Denis?
As much as they can vs. as little the lender can pay. Similar to the fee structure of appraisers.
Maybe if some salesman doesn't get paid a commish the engine stops.
Here's the "tongue-in-cheek" part, right? If the product is available, and it is acceptable to investors and borrowers in whatever form it takes, why wouldn't someone be paid for providing the service?

Edd-
In my post I said

What I've read about these products is that they are high in fees and interest, and that the payment is similar to a low interest loan, so as a rule, they are not advantageous to the borrower.

But then I added

However, the key here is that the borrower cannot qualify for anything else. So, if the choice is to have bankruptcy or default on one's credit score vs. signing up for a 50-year mortgage, what is the likely choice?
Advantages to lenders/note-holders are:
1. Eliminates REO activity.
2. Generates new fees.
Advantages to borrowers are:
1. Maintains a low(er) payment, one that is assumed can be met.
2. Protects credit score.
3. Borrower keeps house.

I am guilty of writing my "hypothetical pitch" to the borrower by the loan agent in a sarcastic manner, which I now regret (not all LAs are scum). Had I written it without the sarcasm, and as a straight business proposition-
"I know you are concerned about your payment adjustment going up. It may put you in a very bad position with your cash flow. There is an alternative available; a 50-yr mortgage. The advantages are that you will keep your payment low and not take a hit on your credit score. The disadvantage is that this type of loan carries higher up-front fees and realistically does not start to pay-down the balance until about 20 years into the program. When the market changes, you may be able switch out of this program and into a conventional 30-year mortgage. However, "when" that happens is anyone's guess. So, you should know that if you opt for this program, you should look at yourself as paying a premium for the ability to keep a low mortgage payment and not take a derogatory hit to your credit score. Does this sound like an option you wish to explore?"

Would you view this option any differently?

 

[George Hatch]

Dennis,
I can easily imagine this option being considered by lenders to be the better option for them. Especially if they believe that they can avoid the consequences of an outright price correction by means of a devaluation of the dollar. If yr2012 dollars turn out to be worth 20% less than the yr2005 dollars used in the initial purchase then that would go a long ways toward correcting the imbalance between PV income and mortgage payment. Good for the lenders and for those borrowers, but not so good for everyone else.


Mike (N),
We've already gone through this tangent and the point has already been made that for a person who looks at their home in terms of utility rather than as a "powerful wealth building system" there may be no advantage to selling now. In such a case the person would be very much living in accordance to their personal convictions.

But as long as you're asking, you're right. Someone whose priority is the bottom line would make that move. And guess what? People are doing just exactly that. Surprised? - you shouldn't be. First there is the equity flight to consider, a factor for which some of the outlying markets should be supremely grateful because without imported money driving the expectation of quick profits many of them would have never got going in the first place.

The appraiser I shared office space with did just exactly that - he was getting ready to retire anyway, so he decided to pull the trigger a couple years early because he could see it coming. He sold his home in mid-2004 right when the prices in his subdivision peaked, and then he took his equity to Oregon where he and a number of other Californians have contributed to their boom. Cause and effect demonstrated. That market wasn't doing anything in terms of price until the imported money came to town, which in addition to the direct effect also added the expectation at the local level.

In addition to the equity flight we have had going for some years now, there are also some people in our area who are selling to rent right now and who have already congratulated themselves for locking in their profits from a late 2004 or 2005 sale vs. the declining 2006 prices. Not only have they pocketed the extra cash from selling then vs. selling now, but they're also pocketing the difference between their rental payments and their former mortgage + insurance + taxes + insurance. I'd say a net 50% savings in monthly housing costs during a declining market is a pretty profitable move, wouldn't you?

 

[JSmith43]

Denis has properly put into perspective the MB role, IMO. Roughly two thirds of residential mortgage origination activity comes from the wholesale/correspondent side (mortgage brokers, mortgage bankers). Most of the investors keep retail origination alive since they can adjust the carrot in front of their in house LO's and thusly help fill commitments where they want to hurry them along to match their hedging instruments and/or opinion of where the market is going, etc.

Edd: What does a MB make? NOYB! Illustration purposes disclaimer, although this may accidentally be close to reality: When I was on the retail side originating for a big bank (stage coach & ponies), I made .65 basis point on sales, max! It would depend upon that month's monthly volume, sales vs refis, etc. Near as I could tell, the company netted about twice what I netted per transaction, based upon their bonus accounting figures.

Now, they are merely one of several investors. If I price their products similar to how they were priced during my in house activity, I would make about 2+ points. I choose to make substantially less per A paper transaction and price more aggressively. B-C paper, I only do by accident, not design. Willy Nelson's joke about why divorces are so expensive (because they are worth it) applies to 2+ points for most B-C transactions (PITA).

 

[moh malekpour]

This mortgage can be marketed with the same promise as the exotic programs-
"Look, this loan allows you to keep your payment affordable, protects your credit, and you keep the house. Sure, you will not build-up any equity in the first few years [more like the first 20] but once the market takes-off again, then you can refi into a 30-yr mortgage and recoup your equity. Yes, I know that was the plan with your interest-only loan, but its not your fault the market went south and the appraiser doesn't believe you and me when we say your house is worth so much more. In any event, the bank will start their foreclosure proceedings within the next 60-days, so I suggest we move quickly on this. And, remember, we can wrap all your fees into your loan, so there will be no out-of-pocket expense. When can you sign?"

What this does in real terms is switches a number of homeowners into something similar to a lessee. But, it does offer an alternative, albeit a costly one, to a borrower who simply cannot afford an increase in their mortgage payment.

Denis,

One of the main attraction of exotic loans is their very small or no down payment requirements. Sometimes their down payment requirements are covered by second loans from the same lender with much highere rates. Do you know if the 50 yr loan requires any down payment and if so how much? As far as I know, all long-term loans are tight to 10 yr TB and have fixed int rate for the life of loan. Lenders have to cover their risks one way or another. In adjustable loans, 100% financing or interest only mortgages, they compensate their risk by adjusting the interest rate real quick few months after the loan or add it to the principle in the case of negative amortization. In long term loans like 30 or 15 yr loans, they require 20-25% down payment and if the borrower doesn’t have it, they require a PMI. I suspect they either require equal or higher down payment or PMI for 50 yr loans. The borrower who is candidate for exotic loan, the 50 yr loan with PMI is as bad because the PMI is very expensive on the top of mortgage payment and is the fee that the borrower may have to pay for 20 years till get 20-25% equity and that fee may not be tax deductible. I don't think there is a good loan avaialbe for a borrower with no down payment.

 

[JSmith43]

Denis is doing pretty well on the lending questions. I think I will stick with issues more closely related to appraisal theory for a few hours

 

[moh malekpour]

Denis is doing pretty well on the lending questions. I think I will stick with issues more closely related to appraisal theory for a few hours

Roger,

Since you are in the mortgage business, you might be able to answer my question regarding the down payment or PMI for 50 year loans. Does 50 Yr loan requires down payment or PMI and how long it takes in this market to pay off the PMI if it is required?

 

[hastalavista]

Denis is doing pretty well on the lending questions. I think I will stick with issues more closely related to appraisal theory for a few hours

Thanks, Roger!

Moh-

I do not know the answer to your question, and any thing I say will be pure speculation. It is a very good question, and if I can get an answer, I will post it (or, maybe by that time, Roger's hour-glass will need to be turned over from the "appraiser" side back to the "loan agent side", and he can provide the qualified and knowledgable answer!:new_smile-l: )

 

[moe cohen]

Barron's

In this coming week's issue Allan Abelson, the editor, appears to support the case for an upcoming bubble. Abelson is a great writer but he also predicted 5 out of the last 2 stock market collapses. He examines the poor performance of the home builders' stocks and quotes the NAR statistics indicating a 30% increase in inventory, among other things.
In this issue I found 2 other interesting articles. One that examines the future performance of the parent company of First American (First Fidelity?)
Isn't LSI part of that mix?
Another article points out the vulnerability of large banks to a decline in real estate value. It indicates that banks currently provide more NEW liquidity in the secondary mortgage market than FNMA or FHMLC.
Moe