April 4th, 2008 at 8:16 am

Another awesome post.

One other thing that I think bears mentioning is that in the laundry list of toxic loans there is one particularly vile flavor that is certain to cause the most collateral damage: the Interest Only.

A particular example: an ex of mine in the Bay Area upgraded from a condo to a duplex back in August of ‘05. I spoke with her at random a couple months ago and asked how the housing market was up there, etc. and the subject of her loan came up. I inquired as to what type she had taken on 3 years ago and her response was “you know, a normal one”.

Long story short she sent me her loan docs and turns out she had a 3/27 IO ARM. Her interest rate would reset on 8/08 to 12 mo. Libor + 225 BPs, had a teaser of 5.375% to start, total amount financed 380K.

6 months later she decided she wanted “some things” so took out a 50K HELOC at about 9% and went on a spending spree. She soon thereafter was laid off and out of work for 6 months, so she lived off credit cards for that time, piling on another 25K in debt, all of this at 17-20%.

So, our discussion quickly led to the fact that she owed 430K on her house (had been paying interest only on the first, had maxed out the second) and another 25K on the cards for total debt of $455,000. She had zero equity in the house and, since her loan was due to reset in August, she was about to feel the real pain of “reset” on an Interest Only loan: YOU HAVE TO START REPAYING THE PRINCIPAL!!!

In my mind this is the thing that is going to sink 95% these loans. You could take interest rates to zero and it is not going to help people like this chick. Her new nut on the first is going to go up a minimum of $450 a month, and guess what? The house isn’t worth the balance of the first, let alone the second, she still has all that credit card debt and she could rent a place a block away for $900 a month. Even if she could (she can’t), why in the world would she stay?

Oh, I know what you’re wondering. This chick must be loaded, right? I mean, nobody just gives a half a million dollars to someone unless that person is a baller, right?

Think again. She is an administrative asisstant and makes maybe 65K a year.

Yeah, I’d say those loans are just about worthless.

April 4th, 2008 at 10:11 am

I started reading this blog about two weeks ago, DrHB, and I have to compliment you on your mix of useful information and snark. Some of those Real Homes of Genius are comedy gold!

I live in the east bay area, and I’m here to tell you that the bubble has burst with a vengeance in my part of the world. You can scarsely stand anywhere in Contra Costa or Alameda Counties and throw a rock that *doesn’t* hit a NOD, NOF or REO property. Even seemingly untouchable San Francisco is starting to feel the irresistable pull of reality.

As for me, I relocated here two years ago, saw what’s what and rented. No worries, mate!

April 4th, 2008 at 10:13 am

Long time reader - first time poster.

Did anyone who took out these toxic mortgages for $500K ever plug the numbers into an amortization calculator and see that the total principle+interest payments over 30 years was nearly their entire gross income for the same period? Did anyone who purchased these houses with 100% LTV ever expect to repay the loan with nothing but their income? I live in flyover country where our home prices never rose to these levels for simple tract houses and condos. Where I live 500K wont by the Biltmore, but it buys a lot more than a stucco tract house. I’m still trying to get my head around all of this.

April 4th, 2008 at 10:54 am

I’ve read your commenst with interest for a while but am increasingly coming to the conclusion your agenda is as much of the media - to fear monger - to present the negative part of the story only - and not the full picture

First - to be clear - there certainly IS a real problem - and there are unscrupulous lenders - always has been, always will be. Nothing forces anyone to take out one of these loans.

Now to your comments - you make comments about income - which I presume is to attempt to point out affordability - although you never really say what your point was.

So what about affordability in California?

The NAHB/Wells Fargo Housing Opportunity Index (HOI) tracks this number. The 4th Qtr 2007 median income across all Calif Cities they tracked is $64,200. The median home price during same period is $ 412,000. With 5% down, a 5.875% 30 year fixed rate loan, and a hoousing pmt at 28% of income the median income could afford appx 65% of the median home price.

However if a simple 2-1 buydown was used on the same 30 year fixed rate loan - so payment was 3.875% yr 1, 4.875% yr 2, and 5.875% yr 3 thru 30 - a median income would qualify for 81% of the median home price. Again - this is a fixed rate fully amortizing loan with no negative amortization

No, a median income earner can not afford a median price home in some of california - but statewide they come close.

And in many markets a median income CAN afford that area’s median priced home - or more. Using the temporary 2-1 buydown this shows the percent of median price home a median income can afford:

Yuba City, CA 109%
Oakland-Fremont-Hayward, CA ^^^ 93%
Stockton, CA 100%
Chico, CA 119%
Sacramento–Arden-Arcade–Roseville, CA 115%
El Centro, CA 98%
San Jose-Sunnyvale-Santa Clara, CA 81%
Fresno, CA 102%
Modesto, CA 105%
Madera, CA 106%
San Diego-Carlsbad-San Marcos, CA 88%
Santa Rosa-Petaluma, CA 90%
Riverside-San Bernardino-Ontario, CA 95%
Santa Cruz-Watsonville, CA 71%
Santa Barbara-Santa Maria-Goleta, CA 85%
Oxnard-Thousand Oaks-Ventura, CA 85%
San Luis Obispo-Paso Robles, CA 72%
Merced, CA 93%
Santa Ana-Anaheim-Irvine, CA ^^^ 77%
San Francisco-San mateo-Redwood City, CA ^^^ 60%
Los Angeles-Long Beach-Glendale, CA ^^^ 70%
Salinas, CA 73%
Napa, CA 73%

In many markets, using a 30 year fixed rate loan, with a 2-1 temp buydown, with no negative amortization, a household making median income can afford a median price home - or more. In appx half of the markest a median income can afford 90%of median home price - or more. And in 16 of 23 markets a median income can afford a home 80% of more than median home price.

This is the most affordable Calif has been in very long time. Because of its costs and desirability along with limited supply and high demand, Calif will never be an “affordable” state but it is far more affordable today than many portray.

April 4th, 2008 at 10:56 am

Great Blog!

Looking around I’ve noticed discrepancies in mortgage reset charts.

The chart in this blog shows a y scale with a maximum value of about $45B.

A chart from Credit Suesse (Oct 2007) shows a peak value of about $35B
http://calculatedrisk.blogspot.com/2007/10/imf-mortgage-reset-chart.html
(This is a 20% difference from the above chart)

An older chart from Credit Suesse shows a peak value around $45B in line with the above chart. It makes sense that over time some of these loans will be removed from the books. (Sorry I no longer have the link)

I’m just wondering how often these charts are updated and if data from the older charts are often used and don’t reflect the current reset volumes resulting in a more pessimistic outlook.

It’s hard to know without information about when the data was compiled.

Keep up the great work! I look forward to the next installment.

Jeff

April 4th, 2008 at 10:59 am

About 1 year ago the wife and I went to the bank to switch our home equity ARM to a fixed rate. We were the only ones doing that according to the loan officer.

Shifting a bit, Washington is like wa wa, were they not the ones that stopped tax deductions on car loan interest? Thus steering the public into using home equity.
I am in no hurry to put extra cash into my principle when my neighbors might be allowed to walk, you can bet a whole lot of others are thinking the same way.

April 4th, 2008 at 11:22 am

Matt’s ex’s situation sounds unfortunately typical. A guy I work with is slowly being driven to his knees by a 600K mortgage he got in 06–since then they’ve had an unexpected baby and his wife’s back went haywire so she can’t work. He mentioned his mortgage resets this year–I know it was a 0 down. Very grim.
The sheer number of people involved in this situation is breath taking.
I kind of expect we will see an increase in people going postal.

April 4th, 2008 at 11:29 am

And then there is your implication that the remaining subprime loans are some kind of huge ticking time bomb.

Which is also largely untrue.

Why?

Because you seem to buy into the media hype without doing an analysis or review of the facts and details.

As you note the vast majority of those subprimes are 2/28 ARMS. These loans are typically based on 6 month LIBOR index plus appx 6% margin. They typically have appx 2.5% cap per adjustment.

When originated in 2006, the loans that will reset in 2008 had typcial first year rates of appx 8%. The index at time was a bit over 5% - which put the fully indexed rate when originated at a bit over 11% - making the 8% start rate relatively reasonable.

As these loan are coming up for reset now the current 6 month LIBOR is appx 2.8% - add a 6% margin and the current reset rate is appx 8.8% - almost no change - about $75 a month on a $200,000 mortgage.

The simple fact is that RESETS on theses subprime loans are no longer the reason for defaults.

This same situation is an even bigger benefit to all the subprimes that reset in previous years.

2005 Subprimes were the worst for interest rate increases at first adjustment. They also had appx 8% start rates when originated. And same terms as above. When they adjusted first time in 2007 the 6 mo LIBOR was still generally around 5% - add a 6% margun and the fully indexed rate was appx 11%. For these loan the cap kicked in - original rate of 8% plus 2.5% cap = 10.5% new rate.

These loans are the ones that caused the current increase in subprime defaults. That said, even with the big payment increases the current dfault rate is still just 5.27% for subprimes. Far below the subprime foreclosure rates in 2001 - 2003 which approached 10%.

The media ignored tehse facts. That 94+% of all subprime borrowers are NOT in foreclosure despite the big increases in payments they have managed to find a way to hang on. And they are now getting significant relief. Not from any govt bailout etc - but simply from the terms of their loans.

These 2/28’s reset every year tyically after initial 2 yr period. And as the loans that reset in 2007 to 10.5% are coming up on this years reset they are getting big relief. Again current index is appx 2.8% - plus 6% margin = 8.8% new rate … these owners will see their poayments DROP by pretty much same amount as it increased last year.

Which will undo the hardship and burden putting them back almost to the original teaser rate they started with. Once again the subprime mortgage payment will no longer be the reason for default and/or foreclosure on these loans.

By the end of 2008 all of the subprime loans - except very small number originated in 2007 - will have reset to current rate and be at mid 8% range. This includes essentially all of the 2006 and earlier vintage subprime 2/28 ARM loans .

If the subprime ARM resets in the woirst year - 2005’s that reset in 2007 - have not caused higher than a 5.27% foeclosure rate - and with the vast majority of all subprime ARMS resetting to well under 9% thi year - there ios little credible evidence that foreclosure rates will skyrocket as claimed by so many

Yet the finacial sector has written down (Bloomberg story this week) $282 BILLION in subprime investments. Many to a 100% loss expectation status. Which is completely irrational and unsupported by any credible facts.

What is the real loss exposure to lender on subprime loans? Actually not that hard to figure out. There is appx $1.072 trillion in subprime loans out there out of appx $11 trillion in total US mortages. If a whopping 25% of all subprimes were foreclosed - a completely unrealistic number - and each of those loans the lender lost 30% of their mortage amount - the TOTAL loss for all would be appx $80 billion dollars.

The total risk of loss to lenders would be less than 8% of the total subpime loans outstanding - and well less than 1% of all US mortages. Well within the risk priced into these subprime mortgages.

So what then happens to the $282 bllion in writedowns? Just as the lenders were reqd to writedown - mark to market - these assets they will be required to write them “up” - one analyst predicts at least a 25% return to the sector on JUST these writeups alone.

Making the majority of this media induced “crisis” completely unsupported by the facts.

So Mr Housing Bubble … the alamist commentary and sky is falling fear mongering are the biggest reason behind the confidence crisis - no, not credit crisis - we are undergoing. The media screaming the end is here - supported by blogs such as this - have been responsible - largely without basis in real fact - for one of the greatest losses of wealth in our nations history ….

If you are going to comment I encourage you to conside the consequences - and as such fully research your comments - and then opresent all of the facts in perspective.

The reality is that despite the media telling us daily that we are on the edge of a precipice - with reports of foreclosures “up 300%” etc - that for SUBPRIME loans alone nearly 95% of all owners are NOT in foreclosure - and for ALL mortages - INCLUDING subprime loans - more than 99% of ALL US mnortgages are NOT in foreclosure

Those are absolute facts. If the media was reporting those numbers we would not have the situation we have today - whih is largely unsupported by inderlying fundamentals or facts.

April 4th, 2008 at 11:59 am

That’s why we call them put-option ARMs.

April 4th, 2008 at 12:13 pm

This is really destructive.

The ads in itself maybe not create so much damage but coupled with what these people see their relatives and friends doing(’investing’ and refinancing and buying their luxuries) these ads just validate what their feeling and hence, do what everybody is doing.

I hope they do something to change this.

April 4th, 2008 at 12:26 pm

ASG

There are two kinds of statistics: lies and damn lies.

I’ll concede that everything you have said is true and you know what? You still have a HUGE problem: the tightening of lending standards.

Had these not been relaxed starting in 2001 there is absolutely no way the pricing increases we have seen could have occured. And now that lenders are starting to look at things like “can this guy actually pay the loan back?” and “what sort of down payment has he saved?” prices are going to come down. The cost of credit has gone up (aside from the absolute interest rate) in the form of bigger down payments and fixed rate P&I 30 yr loans.

And why say that this blog is some sort of hypebole machine? You sound like maybe you are in the real estate/mortgage market given your bias, and that’s fine, but your arguments will likely find few proponents here. Your example in your first post is perhaps the least disingenuous:

No, a median income earner can not afford a median price home in some of california - but statewide they come close.

You then take another 300 words to explain how they can “come close” (is that like being a little pregnant?) but what it all boils down to is that people’s real incomes are going to determine how much house they can afford once again and prices should come down at least another 15-25%, maybe more.

Imagine it this way: what do you think the median house price would be nationwide if mortgages were illegal and eveyone had to pay cash?

What would it be if everyone could get a 1000 year Interest Only loan?

‘Nuff said.

April 4th, 2008 at 12:27 pm

If 256,630 people took cash out of there home, it’s a safe bet that 90% or more won’t be paying it back given we’re subprime. Doing some rededial math…

256,000 x $10,000 = $2,560,000,000 $2.56B

256,000 x $100,000 = $25,600,000,000 $25.6B

The total loss is probably somewhere in between. And this doesn’t include the total loss of the home, ifself. Yep, people sure were on a g**-d*** spending spree.

April 4th, 2008 at 1:02 pm

We are not in a crisis. We are in the midst of a major price correction and a financial market cleansing phase. I had a friend who’s real estate agent advised him to buy a place he could not afford with a fixed mortgage during the peak. The real estate agent’s exact words were “What’s the worst that could happen? You just go back to renting.” I believe these words convinced alot of renters who couldn’t afford a home to take the risk, outbid people who might have been able to afford the list price, and catch the knife. I don’t understand what the big deal is about people losing a home they can’t afford. If they return to renting their quality of life gets better because they will no longer be under the financial distress of paying an absurd mortgage. I look forward to prices of homes becoming realistic again (Income x 3) and putting all the current events behind us.

April 4th, 2008 at 1:19 pm

So, Mr. ASG, you sure spent a lot of time on your comments. You said:

“If the media was reporting those numbers we would not have the situation we have today - whih is largely unsupported by inderlying fundamentals or facts.”

Total BS, Mr. ASG. (That and you can’t spell) You claim the media is the cause of this??? That sounds like the tripe coming out of D.C.

People lose homes because they CANT PAY. Not because of an article on TV or the internet.

Another thing totally ignored in all the facts presented is that the cost of living is going SKY HIGH. Don’t you think that contributes to people losing homes?

April 4th, 2008 at 1:22 pm

ASG, It is wise to critically analyze the data before marrying oneself to the conclusions based on surface evaluation. For example, of the supposed high percentage income segments, the 77% group, what is the number of non-home owners, or existing home owners that ‘need’ to up-size or relocate? I would say that if you looked at the number of renters, the upper income ones are either very well educated and understand that this price decline will drag on for 5+ more years and they will keep on renting and investing their money in real investments that show a positive return over this time span, or they are not the so well heeled renters that have no possible way to buy at what are still outlandishly high prices. You see it takes a real person, a buyer, to purchase a house and not an average, median, or typical income person, but real people that have access to a fair amount of cash from which to enter into a contract for a purchase. We are heading into, or as I believe already in a recession that will not end this year at all, and most of your “average” intellect folks can see this and are in no rush to buy a property only to have it fall another 30-50% before this is all over. House ownership is a big scheme with spin doctors from the realtors to the financial pundits all spouting off what a great investment it is and that it never goes down. A house is where you live and should never be the only asset you have for retirement as you can now see. Of course, we can expect to see some increases in prices over longer periods of time as a result of the devaluing of the currency that is so well done by your friendly FED, but do a search on the real rate of return on housing and you will see it barely keeps up with inflation, and it is not a very liquid asset like stocks or other tangible investments as you can now clearly see. None of this is news to anyone who studied the historic cycles of asset classes over time, but for those who don’t know, they are getting a very expensive education in risk and diversification. Oh well, it’s only money…and who needs to retire anyway, work is fun right?

April 4th, 2008 at 1:54 pm

Count the number of times the word loan is used in all these articles, this and others. Ask yourselves, What is it really you are borrowing? You never see the money being lent. Does it exist? It is well known that banks create money out of thin air, or as I prefer to say, by the stroke of a banker’s pen. They extend credit but it is not requisite that what they lend consists 100% of the deposits of other people. If at all it is a small % a hypothetical reserve requirement. Everyone will have to understand that we’ve been playing a game of “pretend the money exists.” If you get what I’m saying you’ll understand that these aren’t loans. These are agreements to play a game of pay back with interest over 30 years the credit extended to me. You put your credit at risk to write a check that would otherwise come back NSF but in exchange for a lien that titles the house to the bank, the bank rigs the system so that your check clears. Default, and while there is some expense, like $50,000 in legal, the bank can own the house. Now, isn’t that like getting a house for near nothing? And isn’t that as if the homedebtor gave the house for free to the bank? I admit there could be numerous errors with my thinking and all are invited to tell me where the errors are. But I don’t think so. So I ask, is it right to allow banks to extend credit when it is not backed substantially by something real owned by somone else and can be created by stroke of the pen? You might as well have your currency be backed by seawater, or sand. The whole point of money is its scarcity. When the counterfeitter runs 100’s off his color laserjet, it’s a crime. When the private banks extend credit, they no less make 100’s of debt on account for people to borrow, it’s allowed, so far, but how it it different other than for one a physical bill is produced (which takes some effort), and the other, is a ledger entry (which doesn’t)? And if banks are counterfeitting by extending credit, why do they deserve the right to place a morgage lien on the property? This is how real wealth is transferred from the people to the elites. Get some idiot to make a promise he cannot keep, then take the collateral. Except where was the counter-collateral? If the money didn’t exist before, there’s no value. It’s a void contract. If money is lent, it should be money owned by other people and the banks should be brokers, nothing more. And in the case of a rare forclosure, the bank could forclose as agent of the true lenders, the depositors, but the latter would be first in line for the proceeds of the liquidation, not the bank. Offered for your consideration. Does any of that make sense or is it all nonsense?

April 4th, 2008 at 2:59 pm

ASG, you are only half right. http://globaleconomicanalysis.blogspot.com/2008/04/closer-look-at-arms-reset-problem.html

Check out Mish’s analysis. People who got 3-year adjustables (3/27s, 3/1s, etc) in 2005-2006 range are going to be better off in terms of payment. But people who got 5/1s and 5/25s are going to have increased payments.

Some of your facts are completely irrelevant. Your 95% and your 99% figures sound meaningful, but by themselves they aren’t. You also have to consider that only a very small number of houses, let’s say 5% sell from year to year. Those 5% set the market for the other 95% of the houses. So an increasing number of defaults is very relevant even at the margins. I’m just making up numbers here, but if 0.25% of houses normally go into default, that could be a 20:1 ratio of houses sold to houses defaulted (5:0.25), assuming 5% are sold every year. If that default ratio goes up to 0.5%, then the ratio goes to 10.5:1 (5.25% to 0.5%). If foreclosures go up 300%, as you said, then the foreclosure rate goes to 1.0%, and the sale rate goes to 5.75% — then the ratio is 5.75:1. Don’t you think such a dramatic change in ratios would make a huge difference? I don’t know what the actual numbers are, but the ratios are being changed at these magnitudes.

The underlying fundamentals say housing prices must fall. Housing prices are way out of line with income and historically the prices have been more closely allied to income. That’s what’s causing housing prices to drop, regardless of all the subprime/Alt-A Wall Street crap.

April 4th, 2008 at 3:07 pm

ASG, I don’t really read the media spun crap. Here’s actual data for you. 25+% of one Washington Mutual Alt-A loan portfolio is at 60+ days delinquent:

http://globaleconomicanalysis.blogspot.com/2008/04/wa-mu-alt-pool-deteriorates-further.html

60+ days delinquent = 60 days + 90 days + foreclosure + REO. Note that 13.35% of houses are in foreclosure proceedings and 4.44% are already owned by the bank. These are Alt-A loans — that is the level above subprime, but below prime.

This portfolio was considered 92% AAA, but is obviously not, especially since only about 11% were full doc. Do you think these numbers are media hype? Just because you CAPITALIZE words every few lines doesn’t mean you have a valid point.

April 4th, 2008 at 3:08 pm

To all reading ASG.

Why we even respond to this poor man. He is probably in a bar on a second shot crying for the good old days. I start reading his spin and stopped. Why should I listen to a Realwhore anyway.

April 4th, 2008 at 3:20 pm

ASG MUST be a realtor or store-front mortgage broker

****(1) “The NAHB/Wells Fargo Housing Opportunity Index (HOI) tracks this number. The 4th Qtr 2007 median income across all Calif Cities they tracked is $64,200.”

*** I haven’t since such flat out bogus bullhockey in YEARS. Guess someone didn’t tell him or his sources that it is not nice to tell lies, The 2007 income data is not in yet completely. (I’m talking about the RELIABLE sources.) Median HOUSEHOLD income in California, according to the data gather in 2007 for 2006 was $56,645. Seriously doubt that incomes went up 13.3% in one year. Citing FAMILY household income ($62K) as the median for ALL households is simply flat wrong and untrue.

***(2) “The median home price during same period is $ 412,000. With 5% down, a 5.875% 30 year fixed rate loan, and a hoousing pmt at 28% of income the median income could afford appx 65% of the median home price.”

****Geez, this person NEVER quits. Good lending practice says not more than 28% of gross income for principal, interest, TAXES and INSURANCE. And 30 year rates have been at or over 6% for quite awhile. Allowing 1% of value for real estate taxes, and $53/$100000 of insured value with a 30 year loan at 6% and 10% down (although how many buyers with a median income of $56,645 have $41,000 in their piggybank is highly questionable) gives a payment of $2449 for principal and interest (51% of gross) and with taxes ($343) & insurance ($218), it would be a total of $3010 (63.75% of gross income.) This poster is NUTS! Even using the FAMILY household median income, the principal and interest alone would be 45% of income. Liar liar pants on fire.

****28% of the median household income of $56K for principal, interest, taxes and insurance is $1321. That is around a $175,000 mortgage – NOT a $370,000 mortgage.

*** 28% of the median family household income of $62K for principal, interest, taxes and insurance is $1446. That is around a $200,000 mortgagae.

****(3) “ That 94+% of all subprime borrowers are NOT in foreclosure”

***NO – according to the MBA last December or so around 16-18% of them were in foreclosure. (Geezz…if you are going to lie, don’t lie about something that can be checked – even the WSJ ran that chart that was released by the MBA.) And those who are defaulting are typically defaulting even BEFORE the reset. http://www.frbsf.org/news/speeches/2008/0403.html All those slime bag mortgage brokers are the cause that people were ‘qualified’ for loans where the mortgage alone (excluding taxes and interest) were 40, 50 or more % of gross income (Just like this poster wants to do when the median household income is $56 K and this twit thinks a $2449 a month for principal and interest alone is just fine at 52% if gross income or where the median family household would be at 47% of gross income.)

****(4) more than 99% of ALL US mnortgages are NOT in foreclosure Those are absolute facts.

****According to who? Someone in a hashish induced dream? The foreclosure rate varies some BUT nationally it is well over 2.5-3+% and rapidly rising. This person needs to go back and learn how to read repots and do math. The Mortgage Bankers Assoc is not smoking what ever he is smoking – they have much much higher rates using their real world numbers.

****(5) And people are NOT losing their homes because of what they read in the news. They are losing their homes BECAUSE THEY DO NOT HAVE THE INCOME TO PAY THE LOAN with principal and interest Typically they couldn’t afford those homes even with a 30 year fixed rate because they believed slimey lying brokers and realtors who made insane loans and sold them the houses, and for many, even if they only had to pay the principal they couldn’t afford it.

April 4th, 2008 at 5:00 pm

@AnnScott et al

Hallelujah, and testify! LOL.

If we were over at CR or on the OC Register blogs we could make fun of his acronym “ASG” = asinine stupid guy, another sorry gasbag, etc., but let’s give him credit. Oops - nobody is extending credit these days, are they?

ASG - step back from the koolaid. Some of your points might even have some merit, if you choose to better research your data. You’d likely need to re-formulate your conclusions, however, if you did correlate data to the ideas.

This one, for instance (referred to in Mish’s article): the lower Fed Funds and Discount rates have caused lower LIBOR and other ARM rates, which in turn mean that resets are not as difficult as they would have been when the debacle gained steam last March. Mish concedes this point. You neglected to note that the 2/28 reset was changing from interest-only (I/O) to fully amortized, however, which means that ‘almost no change’ to the rate AFTER RESET WOULD have a substantive change to the payment.

Let’s do the math, shall we? For a $391,400 loan (95% of your mythical $412k house, pick a different figure if you want) at 6% start I/O, the payment is $1957. At 8% PI, payment is now $2922 and change at the reset. At 8.8% it’s $3139 and change. Before taxes, insurance, and, um, this little thing called mortgage insurance that’s required anytime the loan balance exceeds 80% LTV. You may have heard of it? Not that any of the MI companies can actually pay the lender for losses right now, but the concept is there, anyways… In any event - a nearly $1000 payment difference per month just on the mortgage is rather significant to most people earning $62k, or $56k, or whatever K you want to pick up to probably $500k per annum.

Argue if you will about median buyers ability to buy, or blame the media, or bemoan the lack of coordinated statistics and which ones should be used. Go ahead. Just be very careful about bringing up figures that can be independently verified - there are a lot of p*ed off people who read these blogs who will your sh*t OUT.

And, if I may add, why are we all so p*’ed off? To sum, because logic, common sense, decency, and reasonableness got tossed aside during the bull(sh*t) run earlier this decade, and now as taxpayers we’re all paying the price.

Full disclosure - I was a mortgage broker for 16 years and now am not. I couldn’t sell the OA crap and so didn’t do that well between 03 and 07 - I kept stupidly insisting that prospects understand the financial ramifications of the make-believe loans. Cost me referrals from re-litters and some ticked off buyers who would have none of my ‘doom and gloom’ factual excel spreadsheets. Oh well - I just never tried to convince some prospect to buy based on median this and average that. ASG - you should become accustomed to tailoring your specific prospect’s needs with their financial ability to pay on a 30 yr fixed, and with the prospect of impending future market value declines. If you can’t do that, don’t be surprised when you get flamed for bringing that pseudo-statistical crap on this (or other) boards.

April 4th, 2008 at 6:09 pm

The last time I saw these numbers posted on this site (the income percentiles) someone wrote in the comments about how they made $200,000/yr and was renting because they couldn’t afford to buy. Commentors said, “oh, man, you could/can/should/ought to buy a house!” I wonder if I point out that I make a bunch of money and am in the 4%-ish of income earners, if I’d get the same reaction today, when it’s so clearly throwing money away?

I am a proud renter. I had a house once. Leaves kept falling in the swimming pool. The grass kept growing and needed to be landscaped. And the roof needed to be replaced sometime in the near future. I had squirrels burrowing into my 8-foot tall custom cedar privacy fence because it was hollow on the inside to hide the stakes on both sides. Owning a home, from my perspective was a big pain in the neck. But I’m technically single and I travel extensively for work and fun. So homeownership just wasn’t for me.

In a few years if I’m married and have kids, then the story will be different. I just hope by then things return to normal by then. But I’m not sure this is just a market adjustment. I believe all great civilizations fall. Just ask the Romans or Mayans. I think this could be the beginning of the end for us in the U.S.

April 4th, 2008 at 6:26 pm

Like nocaster, I am more a reader than a poster but I would like to this opportunity to thank all posters for your views/judgements. Although a very small percentage make my blood boil (ASG) the majority are an eye opener and a true learning experience (AnnScott, Exit). Most importantly, thank you DHB for your time/skill/dedication to this site and your new quarterly newsletter. It’s greatly appreciated!!

April 4th, 2008 at 8:26 pm

@exit - We really should have some pity on ASG. I’m a retired lawyer (litigator in federal court specializing in commercial law and labor law) with another degree in economics (specialty in micro and pricing.) You have the real world experience.(You would LOVE my local bank - they have trouble spelling ARM and probably have never seen the loan docs for an OA. They too actively discourages their customers from even considering such things.) Really too shabby of us to launch into a battle of wits with an unarmed man (or woman.)

****I have been watching the WaMu pool on Mish’s blog in fascinated horror. Yikes!

**** I was fooling around with affordable caluclations and have begun to question whether 28% of gross income is too high. I took a real world budget and worked backwards since food, utilties and other necessary expenses can not be restricted to a % of gross income no matter what since those things keep going up and up in cost.. I assumed married couple with 1 child. I included utilties (gas $100, electric $65, water & sewer $75, trash $20, cable & ISP $120, phone $50), food ($675 - seems high to me I’m told that people usually spend that much), car insurance (2 cars $120), car maintenance ($100), 1 car payment (Ford Focus around $500), household misc (cleaning stuff. light bulbs, etc - $75), gasoline (both work so $385), personal care (haircuts, clothing etc- $150) and $200 for the ‘whatever’ (computer repiars, things kids need for school etc) and assumed credit card(s) with $9000 and 29% interest (average balance carried by US households) so the payment would be $197 (interest + 1% balance.) No vacations, no toys, no plasma TVs, no cell phone per person, no ‘extras.’ Then I used the median priced house of $195,000, 10% down, 30 years at 6% with a PITI of around $1318 (not including PMI.)

*****To cover all those expenses, the household would need a gross income of around $66,000 (Top 31.69% of households) The PITI would be 24% of gross income.

****If the household were to save an amount equal to 10% of their net income, they need close to $75,000. (Top 26.66% of households) The PITI would be 21% if gross income.

****Maybe 28-31% works for households in the top 20% or more of income but I really don’t see it working for the other 80% of households.

April 4th, 2008 at 9:00 pm

I think that the core of the mess is essentially deregulation. One cannot really expect corporations, whose purpose is to make money, to behave ethically. Regulations ensure that these entities behave in a way that is compatible with the good of society. Advertising makes things worse, obviously, but why shouldn’t big mortgage companies advertise for something that creates a huge profit for them, if it’s legal? I think we should blame the legislators on this, not the advertisers. They had either a conflict of interest, or they were incompetent in not being able to see this mess developing, or both.

April 4th, 2008 at 9:03 pm

I have a simple question for everyone: “Why was this debacle allowed to happen”?

Dr HB saw it coming. I too saw it coming, and many of you here also saw this coming.

Greenspan, federal regulators, bankers, etc. They too must have seen this coming.

Why was this housing debacle allowed to happen?

April 4th, 2008 at 9:13 pm

In re to ASG

We are here to discuss the reality of a recession, a housing market
that has gone insane and although we all have our opinions
To claim that simply talking about it and pointing out the facts
of life is the actual reason that we are in a recession and have
a mortgage crisis is just plain stupid.

Our discussion will not stop anybody from defaulting on their
mortgage just because we said he would.
Simple fact is these people are defaulting because they can no
longer pay. Even the ones that had no personal hardship and loss of
income can no longer just spend, spend and spend. Between the
mortgage resets and the fact that their Credit Card limits are dropping
there is still the problem with the cost of living.
In my business I see the misery on a daily basis. People that have
to try 3 different credit cards before one of them finally approves for
the $10 of gas they are trying to buy so they can make it to work at all.

They raid their coin collections and use them for change.
They think twice about getting their cup of coffee in the morning.
Jobs have gotten so scarce that the local paper only had 3 help
wanted ads in their weekend edition.

All around me Retailers are cutting back on labor. Oh they don’t
lay off, oh no, let’s just cut the hours. The poor cashier that barely
can make a living on 40 hours a week now all the sudden finds herself
with 24 hours a week. She is not a statistic for the Unemployment
record - just someone that can’t make a living anymore.

At the same time everything from donuts to beer all the sudden costs
more. Donuts go up because wheat is traded at record levels since
investors are pulling out of wall street and trying to find another reliable
commodity to trade. Well guess what - when alot of people start buying
a commodity just to make money - the price goes up. Yesterday it
was housing related investments (mortgages) and today it is Wheat,
Oil, Gold, etc. Same game - just a different colored egg.

If we had as much influence as ASG claims please let’s get these
investors to concentrate on a different commodity than Wheat and Oil
Please…. how about “Pet Rocks or Beany Babies”?

I hear they were pretty cheap to make and could be sold at huge
profits.

April 4th, 2008 at 10:04 pm

OK, not going to even bother digging through stats, ASG. I truly appreciate opposing opinions and points of view. BUT, did the media cause Bear to falter? Is the media the cause of institutions lining up for fed loans? Is the media the cause of massive foreclosures? Countrywide? Sure, they would be fine if not for sites like this one.
No. As AnnScott pointed out, the issue is that many people cannot pay their insane mortgages. The borrowers were stupid and the lenders greedy. Plain and simple.
Median homes are affordable for the majority of median earners? These median priced homes are/were in f’ing COMPTON!
As CompaJD has stated … This is not a crisis, rather a much needed correction.

It’s not rocket science. It’s not a new paradigm. It’s common sense and plain arithmetic. Nothing more.

April 4th, 2008 at 10:19 pm

To respond to ASG:
In 2006 40% of all home purchase mortgages had a piggyback loan. So while the primary loan may reset for a year to the current low LIBOR rates the second loan will float with LIBOR, and that isn’t likely to stay this low throughout the year. Also most HELOCS are floating and not fixed. The central bankers will have a very difficult time trying to keep yields low for an extended period of time. To put it another way, they can’t prop up both the bond and stock markets at the same time, one of them has to give.

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April 4th, 2008 at 11:27 pm

Great comments here. I appreciate both sides of the argument on this issue. Unfortunately, there seems to be a heavy bias leaning toward one side of the issue. As some of the commentators have stated, the problem boils down to income. To say a family on $64,000 can “afford” a $412,000 is technically accurate. But it is also feasible for someone on minimum wage to lease a Lexus. Yes, 75 percent of your income will go to the car but if we are to use “afford” as simply meaning you have the money to pay for it, we all can afford many things. Or to paraphrase Chris Rock, “you can drive with your feet, but doesn’t mean it’s a good idea.”

I’ve heard this “95 percent” of sub-prime loans are not in foreclosure argument a few times. Did you look at the above data from the New York Fed for California? Already over 10 percent of sub-prime loans are in foreclosure. And California has only started seeing negative year over year median price drops since late in 2007. Just because something hasn’t happened doesn’t mean it will not. The trend is to higher rates of foreclosure. Even in 2006, it was evident that sales were dropping and this was a leading indicator telling us where prices would be going as well. Didn’t happen over night but it eventually arrives.

In regards to why nothing was done. Well, things were done. I, as I’m sure many of you wrote letters to certain representatives, talked with friends/family, and also did not buy into the hype but the fact is that our society is a consumerist nation. As long as there is a collective winning feeling fueled by credit, even if the prize is a façade, people will want to keep the pretense going. Think of the stimulus checks coming next month. They are inherently being billed as a spending rebate. In fact, they are crossing their fingers and praying you’ll blow that $600 on consumer goods. Is any leading politician actually saying that maybe we need to tighten our belts a bit for the next few years? Instead of encouraging you to save or spend the money paying down debt, they want the credit cycle to continue. But guess what? The credit party is over:

“Seventy percent of consumers who have received their 2007 income tax refund are using it to pay off credit cards and bills, the first time in 20 years that figure has topped 50 percent, according to Beemer. People who may have never seen the inside of a Wal-Mart are now buying groceries there, he said.”

Bloomberg Article

Why save at your local bank when savings rates are 1 percent and CDs are 3 percent and inflation is at 4.8%? If the Fed wanted us to save, all they need to do is jack up rates and the money will start flowing into Treasuries and folks will be encouraged to save and avoid more expensive credit. Whether they say it or not, they want everyone to keep spending regardless of their income and some people have bought into this religion.

April 5th, 2008 at 1:03 am

@JohnH

Why? A good, simple question with a fairly simple answer. Except it’s not really that simple, is it? Sociological implications of fiscal policy that encourages consumption over production, political policy that teaches jingoism over diplomacy, a tax code that favors capital gains over labor.

Ultimately, though, IMO it boils down to speed. We Americans have been taught that speed trumps deliberation. Fast food - but instead we get fatter and unhealthier, and lose the communal sense of going to market, making, and sharing a meal. Fast track to wealth - instead leading us into the present debt debacle. Fast on the freeway - more gas spent, higher gas prices, and ensuing conflicts over petroleum resources - all to get home five minutes sooner to do what? Watch some TV show and shut out conversation with the spouse or kid while wolfing down some high in saturated fat fries - with a diet soft drink, natch.

That old refrain to ’stop and smell the roses’ has never been more applicable. Too many people wanted to get rich quick and so threw sense out the window, cheered on by the 6%’ers, by the Fed, by the tax code, by advertisers.

Enough schadenfreude. Right - simple answer. Back on track. Why? Perhaps Gordon Gecko - greed is good. Short memories. And maybe - of those that did remember, so many of us believed ‘it’s different this time’, and that we’d outsmarted the historical and economic forces that pointed out the folly - this time. Turns out, not so much.