We are still waiting for the other two shoes to drop ...

The economy has three feet!?!?!

Bailey, they're probably still pending/in escrow. Still, that report matches some I have had recently.

It amazes me that the markets cannot see what is possibly/probably coming. And sometimes I figure they must have it right and us doomsayers have it wrong. What is to say their collective wisdom is not so wise?

Good question.

I'm not saying the market never gets it wrong, but if they've got it wrong this year - they've got it wrong on an EPIC level.

The only shoe that has to drop is for credit expansion to fall below what it costs to service it. Then the Ponzi will die of its own weight.

Anthony -- This may sound surprising coming from a real estate "bear," but I believe activity is picking up. The rub is, it ALWAYS picks up from the dead of the holiday season into February, March, April, etc. That's the seasonal pattern -- much less buying in Nov-Jan, much more buying Feb-July. Look at a non-seasonally adjusted sales chart and you'll see pronounced seasonal peaks and troughs.

The key questions to ask are: Is demand up year-over-year (to eliminate seasonal influences)? Are prices up YOY. And MOST importantly -- are for-sale inventories increasing as quickly, if not more so, than sales? I believe the likelihood of a "yes" answer to that final question is high.

Why? Tons of disappointed sellers who couldn't unload last year pulled their homes from the market late in 2006 and into January. Now, they're trying to relist and get out the exit door during the spring season. But there just isn't enough room for everyone. Indeed, the week-by-week inventory count here in my zip code (South FL) isn't looking good. It's not exact (I use Realtor.com), but the number of for-sale properties in my market that meet my criteria breached the old fall 2006 high about three weeks ago and it's still rising. If sales were picking up enough to absorb new listings and whittle away at old listings, I'd expect that figure to fall. Just my two cents, of course.

from NJREReport

New Jersey Real Estate Report » Page not found

>

S&P puts 11 mortgage bond deals on downgrade watch

S&P puts 11 mortgage bond deals on downgrade watch
| Reuters

CR - not sure I understand or completely agree with your observations on credit crunch definitions. You seem to imply that 'loans harder to obtain' is different than 'non-price rationing.' I fully agree, and have agreed for awhile, that price rationing is occurring - spreads are (finally) getting fatter. Is 'loans harder to obtain' somehow different from both price and non-price rationing?

wrt non-price rationing, I don't really see it, despite the recent announcements and grumbling on the mortgage boards. For non-price rationing to be having an effect, it would have to be the case that a large chunk of the subprime community has collectively stopped making loans with certain terms, not just a few high profile cases. If brokers appear on the board yelling, "Ameriquest won't do my loan to this 100%LTV NINA 550 FICO borrower" and someone else pops up and says "Yeah, but Company X will, call them" then borrowers aren't getting shut out, just shuffled around. I suspect that the craziest stuff (like the above scenario) probably is in the process of getting shut out, although I don't think we're there yet. And I think there are still plenty of outfits willing to make some fairly crazy loans for a high enough spread.

And I'll repeat that Fremont hasn't said that borrowers won't get loans, only that the form of the loan has changed. The borrower can no longer get a $160,000 first lien and a $40,000 2nd lien, but the borrower can get a $200,000 1st lien. That's hardly credit rationing.

The one place where I see 'credit rationing' may be really occurring to great effect is with flakey appraisals. Greater appraisal scrutiny might mean fewer loans get through that purport to be 95% LTV but are really 110% (or whatever). So far the evidence for that is pretty anecdotal, but I hope it's the case.

mort_fin - no, there are an awful lot of scenarios that would have been picked up in November that aren't even proposed now, and a lot more that are hopefully nominated but don't get the action.

Once 40% of the lenders started tightening, the worse loans got concentrated in the leftover lenders, producing startling default ratios. It's not just a reconfiguration - it's an actual tightening.

Thanks for the reply, CR. I guess I did misunderstand your viewpoint. I thought you felt that if we saw all three strikes a recession was certain.

I agree about the jobs. The January report was a bit puzzling and makes the February number that much more interesting.

Yeah, mort_fin, but I took the Fremont e-mail with the major grain of salt I always take that stuff with. I've sold enough whole loans in my day to have some experience with investors who advertise a product but almost never end up buying one, because you just can't get the deal done. Sometimes it's plain old bait-n-switch; in the current situation, I'd guess that nobody wants to freak the broker base/rest of the market out any further by taking 100% financing off the table completely. It's like that business about saying that an 80/20 is OK if you can find an outside lender for the 20. Okie dokie, outside lenders please raise your hands. (Outside lenders whose underwriting guidelines for the second are as liberal as FMT's are for the first, or otherwise the deal won't work. I mean, if the second lien lender requires a minimum 680, and FMT, say, requires a minimum 660, then it doesn't matter that Fremont "offers" an 80 with outside 20 at 660-679. Such deals won't happen in fact.)

And my point was to question whether the MIs would continue to write bulk policies at cheap enough premia, or that the old senior/sub structure can continue to "enhance" this stuff enough. Isn't what we have here a loss severity problem?

The WSJ is on this story - at least one piece a day now. The warehouse lenders are a path for the subprime problem to find its way into the mainstream financial institutions. From the comments on the LEND call today, it is clear they are nervous.

Mortgage Hot Potatoes - WSJ.com

Mort_Fin - I'm not in the mortgage business except that I do bank consulting and inevitably some of it is related to the mortgage market.

It's not just that I have a few good realtor contacts - I've been reading several broker forums a day, and conditions have changed extremely rapidly. Not that it is overall a bad change, but it is going to affect demand this year.

I started reading broker forums in the third quarter because every quarter I read the financials for a number of lenders to get benchmarks for due diligence purposes, and I couldn't make the numbers add up. I knew in 2005 prices were going to turn around because of demographic issues, but in 2006 the underwriting just seemed to blow up. Then I found Calculated Risk and at least my hair stopped turning grey. The rest is history now.

FWIW, a bank - especially a community bank - has to be extremely careful about the loans it writes for its in-house portfolio. They do not have the cushion of geographic distribution, for example.

"Was there excess? - SURE. But the vast majority of people were not speculators; nor were they first time subprime buyers. They were buying a home of there dreams to live in for quite a few years. This is not the STOCK SPECULATION of 1999 for the vast majority."

The NAR itself determined that at least 28% of all homes purchased in 2005 were purchased by speculators. That's 2 million homes. In 2004, the percentage was 26%. This doesn't include the subprime buyers, nor does it include those investors who lied on their 1003 and said "owner occupied".

Those prime borrowers who purchased their homes to live in were the majority, but it's not accurate to say that their predominance was "vast". "Barely" is probably much closer.

1) Don't mess with winjr.

2) "They were buying a home of there dreams." Certainly, they were. We are, however, allowed to speculate a bit about the content of those "dreams." As far as I can tell, a lot of people were dreaming about more than the endless joys of granite countertops and an extra 1000 square feet for the dog. It appears to me that a lot of people dreamed that a "home" was also always an "investment." Doesn't matter whether they thought that "investment" was as liquid as equities or not. I'd guess a large percentage of them couldn't define "liquidity" if you threw them into the swimming pool. Nonetheless, you'd look at what people were spending not only purchase money but MEW on--another deck?--and the retort was always that this stuff was "home improvement," not "consumption," as if affixing it to a piece of real property automatically makes it an "investment" instead of an old-fashioned spending spree. In any case, people who couldn't make a contribution to the 401(k) because the payment on the "home of their dreams" was eating too much take-home were, undoubtedly, telling themselves that said home would provide for their retirement at some level. Will they end up winning that bet if they make it to retirement? Who knows? Even speculators win a few now and then. I, however, tend to doubt that most people's "dreams" involved having to wait out a long period in which the "home" is just a home, not an "investment," all the while that mortgage payments continue to be required to be paid.

winjr/Tanta,
My 2 cents adding to your points:

Most of the people investing during the dot com era were wage earners dutifully investing a percentage of their wages into tax deferred accounts. The fringe of much fewer people were speculating and turned those systematic investments into losses that have not yet been recovered (NASDAQ) 7 years later.
Everything we buy has an underlying and sometimes elusive intrinsic value.

Lama, maybe everything you buy has an intrinsic value. I happen to be sitting here looking at the red glass cone-shaped "artisan" candle-lantern that some well-meaning individual purchased for me at Christmastime, and I'm not even getting the "elusive" part. I'm staring at it because I'm trying to figure out what I'm going to do with it. It's too bulky/fragile/oddly-shaped to be easily stored in some nook or cranny of my 1150 sq ft apartment. I can't believe the St. Vincent de Paul folks really want it, but they're likely to get it. I need that kind of credit with heaven, because when the giver of the gift visits next year and doesn't see it, I will lie and say I broke it.

So I'm even less patient than usual with everybody's bullshit justifications for overconsumption, overimprovement, and overestimation. I guess you'll have to humor me.

Unless . . . do you need a red lantern?

I'm not "cheap." I'm practical.

I buy spices in small quantities from the bulk bins at the health food store. That means they come home in baggies. I transfer them into these high-quality matching hard orange plastic containers I have with the well-fitting lids. No tacky baggies for me.

So a friend comes to visit and we're cooking dinner. "Fetch me the marjoram," I say, jerking my head toward the cabinet. Friend roots around, says "I don't see any marjoram." "It's the one labelled "amoxicillin," I say. Friend says, "there are three of those." I say, "It's the 500mg one without a refill, right there, next to the thing that looks like iron supplements but is in fact sesame seeds." Friend says, "You are aware that normal people use spice bottles, aren't you?"

Of course I used to make labels for the things, but that was back when I could "liberate" a handful of labels from my employer . . .

But for a 2004 buyer, they have received at least 3% pay increases in 2004, 2005 and 2006. Their incomes are up at least 10% making the home mortgage more affordable and they still have a cap gain in their home.

You're telling me that everybody who bought in 2004 got a fixed-rate fully-amortizing loan? I missed that part.

Income up 10% doesn't exactly make a dent in payments up 30%, let alone insurance and taxes . . .

And you don't have a "cap gain" on a home. You have a "cap gain" on an ex-home. My problem all along has been with people who think that appreciation is money in the bank.

Second paragraph should read "subprime has gone"