A conservative estimate of those employed in Silicon Valley in 2000 and now have dropped out of the work force who still live there is 10% (I know quite a few of them). How did they manage all these years without jobs? Home equity extraction. Guess what will happen when prices decline 20%+? It is going to be ugly when these people are forced to sell and move to lower priced areas. No?
John Robbins: "The vast majority of borrowers understood the loan product they were getting into".
After losing money in the South Sea Bubble, Sir Isaac Newton wrote: "I can calculate the motions of heavenly bodies but not the madness of people".
Somehow I doubt that the "vast majority of borrowers" are smarter than Newton. Loan products do not exist in an isolated vacuum which means that they are subject to broader macroeconomic forces. In other words, merely understanding the written terms of a loan product is not sufficient.
Whatever happens with housing and the economy, let us all hope that the Boston Red Sox do better than the New York Yankees.
"Could you give an example of a legitimate reason?
Robbins: Someone who owns apartment units. Their tax return shows depreciation. It isnt a cash hit but its a GAAP (Generally Accepted Accounting Principles) hit to their income statement.
The Chairman's example makes no sense.
A borrower does not need to go stated income to overcome the problem of his taxable income being reduced by depreciation. An underwriter would add back depreciation (and some other allowable deductions) on a full doc loan anyway.
I'm curious. Is there any precedent where a large fraction of the population has been "trapped" in an investment (as large as a home mortgage) where (a) it's value has dropped, and (b) their payment terms deteriorate drastically (as will occur when ARMs reset).
I'd just like to see pointers to this having occurred in the past - and what the outcome was - whether people were able to somehow scrounge up from better off friends, relatives, etc to make it through the decade or however long they needed to be "above the waterline", or whether they were bankrupted, or ... you get the picture.
Also, what's different between now and then? For example, is the leverage much higher due to speculation being more (or less) widespread? Or does the Fed have more (or less) ability to inject liquidity and deflationary effects to contract the correction period from a decade to a few years, etc.
Or is this the trillion dollar question? If so, are there any precedents that are close barring one or more large differences?
Thanks for any education anyone may choose to impart.
Somehow I doubt that the "vast majority of borrowers" are smarter than Newton.
But it is possible that they have tools that allow them to "see farther than" Newton, by "standing on the shoulders of Giants".
I don't claim that this is necessarily true, but it is possible. For example, economists in the 70s thought US consumers were behaving irrationally with the amount of credit they were utilizing. In retrospect, with the amount of inflation the economy experienced, that choice turned out to be optimal - consumers paid with dollars whose time-value eroded rapidly - making their purchases on credit much cheaper than they would have been had they saved first and then bought. The wisdom of crowds is easily underestimated.
Is wage growth strong, or not? Common sense and personal experience say no. Conventional wisdom says yes. From Mauldin's weekly newsletter:
The BLS survey shows payroll growth at 1.8% and had wages growing at 4.3% last September. But then they come back and produce another report from hard data that comes out a few quarters later, which covers 98% of US jobs. They also go to state unemployment insurance programs which have reasonably accurate figures at to wages and taxes.
They just released the data for the third quarter of 2006. It looks like actual job growth was 1.5%, somewhat lower than the estimates. But the real eye opener was that wages grew an anemic 0.9% on a year over year basis. Given that inflation was in the 2.5% range, this means household income did not keep up with inflation.
That is about the dumbest set of comments about the mortgage industry I have ever read, and I am including every ignorant thing anyone has ever posted on the broker boards.
We need stated income programs because we aren't smart enough to analyze tax returns? Is that your final answer?
Sharon, you forgot to point out that Fannie Mae, among others, actually publishes a preprinted form for cash flow analysis (1084) in case your lender gets frozen like a bunny in the headlights over a self-employed borrower. It has a line for depreciation and very helpfully prints a little plus sign next to it to remind you that you add that, in case you are arithmetically challenged, like most people in finance usually are.
This is the voice of my industry? No wonder everybody thinks we haven't got the brains God gave a Waldorf salad.
the overabundance of easy money since 9/11 caused irrational exuberance in the housing market, spiraling home values higher for no reason. If you take out the stated non owner borrowers the last 5 years that caused supply issues, there would have never been a housing supply issue.
If American consumers were smart, they would have used the last six years to pay down debt with cheap money instead of maximizing their home purchases thinking housing would continue to go higher with no regard to simple economics of what one can reasonably afford.
In addition, the world economy is no longer dependent on what happens in the U.S. which means that if other countries have cheaper money and labor, they have a competitive advantage on America.
The oil war in the Middle East is based on the super powers controlling the current world supply of oil. Strict regulations also cause oil shortage concerns which drive up the cost of oil. As oil increases in price, inflation will follow because it costs more to ship goods and many goods are made from oil that our economy consumes. I am personally seeing inflation seep into our economy.
Greenspan provided liquidity to our marketplace after 9/11 and many of us became financially independent. Did he make mistakes? Yes. Did he provide lower rates to spur housing demand? Yes? Should rates be lower now to spur economic growth? Not until regulation is put in place to discontinue the abuses that the mortgage industry created the past six years with no doc, non owner, and easy money lending. I believe one recent analyst is correct that we will suffer as a country until 2011 as housing prices diminish 20%, the supply of homes eventually shrinks, and the easy money lending goes back to the standards of before this whole mess started.
Okay, Tanta, I read MBS for UberNerds I: GSE Pass-Throughs thoroughly, once through.
You write superbly. For example, I find this to be a particularly felicitous turn of phrase:
less a fact about the old days than an artifact of a certain nostalgia for them
And I believe I understood the post.
I am brought back to the demand side quite forcibly. I am beginning to understand the supply-side (I eagerly await your next post on the subject), but it would seem to me that, ultimately, the demand-side: those credit vacuum cleaners in Japan and China, are a huge part of the story.
And when we start discussing the demand side, it seems to me that we move instantly into the realm of policy, not to say politics: how much money is it worth to destroy American jobs by permitting currency and trade manipulation to occur without consequence.
A little history is surely important here. When the US was starting out, it was a matter of course that our nascent industry was "protected" from the established European variety.
But what is going on today has no precedent in history. It is an embrace of "globalization"...which has been...the envelope please...a disaster. Are cheap DVD's worth unemployment in the US?
And, finally, underlying nearly everything about the US housing market is the idea that home ownership is the key ideal in American life:
cheap loans? check.
mortgage interest deduction? check.
taxpayer guarantees? check.
Personally, I believe that with a 50% divorce rate we should be more concerned as a society with what transpires in the home than with whether it is a rental or owned.
Tanta.... I find your blog facinating and informative. I am not an Uber Nerd but a curious stay at home mom.
I found a link to your blog posted by a West Palm Beach real estate reporter. Our housing market is pretty much trashed here. Prices have collapsed... The Alt a and subprime market collapse is exasberated by record costs for wind storm insurance and out of control property taxes. The state legislator is attempting band aid fixes, but the effects are severe.
In my upscale but working professional community, prices are down 7 - 9 percent in the last four months. Inventory is at an all time high of 4 years. Homes that once sold in less than seven days are now averaging more than 135.
I am curious as to what percentage of the stated "Liar" loans are by selfemployed or S corp individuals? Here in Florida, self employment with excessive writeoffs is the norm. People flow everything that they possible can through their business because nobody is looking. Brokers can get an idea of cash flow by how large their AMEX bill is. No state income tax lets the average joe get away with alot. No sharing of records with the fed or SS lets people hid a lot of their income. Lots of people are living a higher life style than their 1040 shows.
In your high tax states where every fireman, policeman and construction worker is a flipper what are the repurcussions after the majority of these indivuals find that their higher interest reset loans have thrown them into the high tax AMT brackets and they do not have the cash to pay their huge tax bills in addition to their mortgage? In Florida it will not be too bad, the only people who pay AMT are professional wage earners. But I bet in SOCAL it is a problem..
Dfrmflorida, I don't know about the AMT on a state by state basis, but at a federal basis the AMT has been helping to cause higher federal tax revenues which is reducing our federal deficit. Drew Matus, an economist at Lehman Bros, says that if federal tax revenue growth stays strong then the deficit will be in the 200s billion range through 2009.
Also, a majority of Americans expect the Dems to win the Whitehouse in 2008. I don't follow politics closely but from what I've seen so far Hillary Clinton is smarter than Bush (which isn't saying much), but I prefer Barack Obama because he didn't vote for the war in Iraq.
Anyways, if the Dems win the Whitehouse then there will be less military spending in Iraq which will further help to reduce the federal budget deficit (but of course the Dems might increase other spending and we are going to have to face the retirement of the baby boomers).
I'm curious. Is there any precedent where a large fraction of the population has been "trapped" in an investment (as large as a home mortgage) where (a) it's value has dropped, and (b) their payment terms deteriorate drastically (as will occur when ARMs reset).
Name - go and read up on the Farm Crisis in the 1980s... all those things happened PLUS people's income collapsed simultaneously.
Realize most farmers back then really were family farmers... they lived on the land they worked. It was their home and their business.
Land in my area in the late 70s was worth about $800/acre... it ballooned to something like $3000/acre in many places (driven by aggressive lending & creative financing)... then the bottom fell out in commodity prices (corn at the terminals was less than $1/bu)... just about the time the financing balloons were coming due - no one would lend to them (for good reason) and failures occurred in huge numbers all over the place.
Land prices in my county finally settled down around $400/acre before heading back up... that was almost a decade after the whole thing started. By that time you had trouble giving good farm land away so many had been burned by then. I could tell you stories that would blow your mind considering RE prices today.
Also of interest... at no time did more than 25% of the farm population get into serious trouble... but it was a rolling 25% and that was enough to eventually 'clear' the market.
Last FYI - I was told land is now selling for $4000- 4500/acre out there now based on 'ethanol speculation'... there is no way on God's green earth you can make money growing corn on land you've bought for $4000/acre EVEN if corn stays around $4/bu.
Nothing changes... this rock keeps circling the sun like always.
Drew Matus, an economist at Lehman Bros, says that if federal tax revenue growth stays strong then the deficit will be in the 200s billion range through 2009.
Didn't we have a surplus a few years ago?
Oh yeah, before W.
(Yes, I know, the surplus disappeared due to a combination of factors, but W definitely helped it along.)
I am curious as to what percentage of the stated "Liar" loans are by selfemployed or S corp individuals?
Here's my take on the whole thing, as an informed observer, with approximate percentages I have calculated myself on the back of an envelope:
If there is a substantial pricing difference (higher rate or points) for the stated income option and the borrower is self-employed, at least 50% of them are outright tax cheats. Another 25% are exaggerations for purposes of qualifying for more loan than they really need. The rest are people who are themselves confused about their own cash flow, which implies they really aren't self-employment candidates in the first place and natural selection will be paying them a call fairly soon. This doesn't mean they'll all default, although a fair number of them will keep the loan going by folding this "business" and getting a job at AutoZone. Actual real small business people who understand the value of a dollar will drop off the tax returns and take the lower rate, because they didn't get where they are by paying premium rates for inconsequential "benefits."
When there is a pricing difference for stated and the borrower is a wage earner, every last one of them is somewhere between extremely exaggerated and outright insane, except for the 5% of people who don't understand their own paystubs. It's harder to be confused about your own income when you're salaried, but there are too many people on incentive/bonus/stock option plans these days who can indeed become confused about the stability of their own cash flow or the definition of "gross monthly."
When there is no penalty in the rate or points for stating your income, everybody who wants to lie, exaggerate, or hallucinate will of course do so, but you'll actually also get a bunch of people who will tell you the truth. This is strange, but it's true. If I don't have to drop off a copy of my paystubs at your office, since you're accepting my statement over the phone and not charging me extra, I'll just tell you what my income is and save myself the gas. Of course you'll have no idea in this situation which borrower is which. This makes the loan servicing process a constant series of surprises, and thus never boring.
Only if you naively accept government cash accounting. Using GAAP, there was never a surplus, just less money "borrowed" from the Social Security Trust Fund (cough).
It's almost too late to regulate the stated-income loans. I think the damage has been done, and now that the speculation in housing is over that folks won't be so eager to jump into something like this again. Especially since many of these folks are now just going through severe pain as their mortgages adjust!
Thank you for the pointer. What little I've read so far has already turned my stomach.
Tanta,
In a comment above, you said:
Another 25% are exaggerations for purposes of qualifying for more loan than they really need.
This confused me. I thought a bank would prefer to loan a person as much as they request, provided they have the collateral or income to pay the loan back.
For example, if I have liquid assets worth 50% of the house I'm about to buy, I may only want to commit 20% towards the down payment (so I can allocate the rest to riskier, higher yielding investments).
From what you said, it sounded like the bank would not want to loan me the 80%, but rather would prefer to loan a lower amount. Have I misunderstood the meaning of the quoted sentence?
Thanks in advance for any insight you may choose to share.
CR,
The verification of cash flow on rental property is an extremely complex issue which involves the following analysis. I appologize to all for the complexity.
Schedule E:
Line 26
+ line 20
- principal portion of mortgage payments (check your YE statement)
= Cash Flow
BTW,
Tax Freedom day is April 30 this year. The average American will spend 120 days working to pay taxes. Since most reliable estimates of unreported income are approximately 20% of the total economy, that means that on average, you will spend 24 calendar days, or 17 working days paying for the tax cheats John Robbins is enabling with his baseless stance on stated income mortgages.
Name, when you're talking about stated income, particularly, it comes down to a question of how much loan your income can support. You may not want to put all your assets into the down payment, but if your debt-to-income ratio is 128% with a proposed 80% loan, I'm likely to have some problems with that. Certainly if you can verify that you have liquid assets from which loan payments can be made, that can be considered. You'd have to document that, though, for me. Traditional lenders have a hard time giving you a loan that is so big you can't make the payments, was all I meant. And then there's this problem of making sure those assets are owned by the borrower and available to use for personal debt service, as opposed to owned by the business and necessary to keep it going. Underwriters spend a lot of time turning down certain loans involving "business funds," only to find the damned things coming back under a "stated" program.
If you got one of those lovely stated/stated loans--where you can lie about your income and your assets, too--of course you can do whatever you want.
I was at a party yesterday, someone asked about the current prospects for the Silicon Valley housing market. One person said that he felt that buying housing in Silicon Valley was a no lose investment because of the limited land supply. He also said that it was sensible to put a huge investment into property because its value would always increase. I have been a short term observer of the market here and it is true that the general direction of prices has been upward, but I was surprised that someone believed that prices here could never decline. Does anyone know of longitudinal data on real prices in Silicon Valley? Is unrelenting price increases really the history here? If anyone can direct me to a data source, I'd be grateful. Thanks and thanks also for an excellent blog.
It gonna be bad when it get here and literally generations of folks' stomachs have turned and churned about this.
But it's taken a long time to get here and money just keeps growing on trees to replace that lost. And creative ways to finance those who cannot pay into new and inventive debt.
It may be a coming, our ATM is down, our jobs are crap, China don't know what to do with all the extra dollars and fearful if they don't keep welcoming them.
When the big it gets here, none of us is going to like it.
Actual real small business people who understand the value of a dollar will drop off the tax returns and take the lower rate, because they didn't get where they are by paying premium rates for inconsequential "benefits."
As one of the above - I am going to go one farther...
If you don't have steady reliable income you have to be prepared to live for extended periods of time like you don't have any income... not pretend you have more than you do.
That is why this whole Alt A, sub-prime, jumbo, get-the-biggest-liar-loan-you-can story has absolutely stunned me. I can't get in their heads no matter how hard I try.
OT: but while we've been watching the corruption in the mortgage biz we've (at least I know I have) missed the corruption in the Student Loan biz and now Sallie Mae is being sold to private investors:
Prescott Bush, the data to which Ron linked is very helpful in terms of trend, but it doesn't tell the entire story. A relative, who owns several rental properties in San Jose's Cambrian Park area, told me recently of prices for single family residential in that area declining 15-20% over the 1990-1996 period.
I guess it depends on where and what you're looking at. Towns like Los Gatos, Los Altos, or Saratoga might not be affected the same way as the valley. I'm told that nothing much is moving in Los Gatos right now, but it might be another story in the mountains above town. Income distribution and all that.
Those loans, called low-doc or no-doc here in Australia, are rather popular. The Australian Taxation Office loves them, too, because they provide a good list of people to audit.
The Las Vegas Housing Authority finds itself in a peculiar situation, possibly a victim of its spotty past.
Contractors don't seem to want to work for the agency, the largest of three housing authorities in the Las Vegas Valley.
Last week the agency took out two advertisements for the fourth time in four months, extending the original deadline from Feb. 23 to Apr. 20, after receiving zero interest in making two housing projects accessible to disabled people. Two more ads appeared this week on similar projects.
All four were originally bundled together in one ad last July, which also drew no response.
The total cost of all four projects is expected to be about $2.5 million.
"It's been hard getting bids," interim Executive Director Carl Rowe said. "It's unusual."
Slightly OT, but what % of the subprime lenders are still going strong? Because I see internet ads, banner ads, sidebar ads, $200K mtg. for $800+, etc. etc.
Just how dead is the subprime lending market, and is it still alive and well?
Big swoons in California tax receipts. Inquiring minds would like to know on the Ministry of Truth can pull 0.8% retail sales numbers out of their hats? here
Thanks so much for that data and wisdom. The area we were most interested in was Los Gatos so your insights are especially helpful. I really appreciate the commments.
arbogast said: "...But what is going on today has no precedent in history. It is an embrace of "globalization"...which has been...the envelope please...a disaster. Are cheap DVD's worth unemployment in the US?..."
Please tell me you don't believe this, you were just being sarcastic, pulling my leg, etc.
The median unemployment rate since 1948 is 5.5%, with a high of 10.8% in the 1980's.
So with cheap DVD's AND current unemployment still near historic lows (4.4%), globalization is a disaster?!?!
My God, LOL!, what would a SUCCESS have to look like? No wonder the housing market looks like a "bust" on this blog.))
Globalization is a very real disaster to a significantly large number of people who live in areas where manufacturing has supplied a large percentage of the jobs, and who now are forced unfairly to compete with foreign workers whose employers receive enormous subsidies from their governments via exchange rate manipulation.
The Japanese yen is currently undervalued about 30%, and the Chinese yuan even more. These undervaluations represent not only a subsidy to their exporters, but also a de facto tariff barrier to imports of any kind. But curiously, economists who would scream bloody murder if the US Congress were to enact general tariff barriers against Asian imports of similar scale still speak of this situation as one of "free trade".
--
Hello CR,
A conservative estimate of those employed in Silicon Valley in 2000 and now have dropped out of the work force who still live there is 10% (I know quite a few of them). How did they manage all these years without jobs? Home equity extraction. Guess what will happen when prices decline 20%+? It is going to be ugly when these people are forced to sell and move to lower priced areas. No?
Jas
No. I think in this particular case there was flawed underwriting. Some lenders were too aggressive and the market punished them as it always does.
Curiously, I didn't see a single comment asking for a bailout. We should wave this comment in his face after he bows to industry pressure.
John Robbins: "The vast majority of borrowers understood the loan product they were getting into".
After losing money in the South Sea Bubble, Sir Isaac Newton wrote: "I can calculate the motions of heavenly bodies but not the madness of people".
Somehow I doubt that the "vast majority of borrowers" are smarter than Newton. Loan products do not exist in an isolated vacuum which means that they are subject to broader macroeconomic forces. In other words, merely understanding the written terms of a loan product is not sufficient.
Whatever happens with housing and the economy, let us all hope that the Boston Red Sox do better than the New York Yankees.
"Could you give an example of a legitimate reason?
Robbins: Someone who owns apartment units. Their tax return shows depreciation. It isnt a cash hit but its a GAAP (Generally Accepted Accounting Principles) hit to their income statement.
The Chairman's example makes no sense.
A borrower does not need to go stated income to overcome the problem of his taxable income being reduced by depreciation. An underwriter would add back depreciation (and some other allowable deductions) on a full doc loan anyway.
I'm curious. Is there any precedent where a large fraction of the population has been "trapped" in an investment (as large as a home mortgage) where (a) it's value has dropped, and (b) their payment terms deteriorate drastically (as will occur when ARMs reset).
I'd just like to see pointers to this having occurred in the past - and what the outcome was - whether people were able to somehow scrounge up from better off friends, relatives, etc to make it through the decade or however long they needed to be "above the waterline", or whether they were bankrupted, or ... you get the picture.
Also, what's different between now and then? For example, is the leverage much higher due to speculation being more (or less) widespread? Or does the Fed have more (or less) ability to inject liquidity and deflationary effects to contract the correction period from a decade to a few years, etc.
Or is this the trillion dollar question? If so, are there any precedents that are close barring one or more large differences?
Thanks for any education anyone may choose to impart.
Charlie Stromeyer said:
Somehow I doubt that the "vast majority of borrowers" are smarter than Newton.
But it is possible that they have tools that allow them to "see farther than" Newton, by "standing on the shoulders of Giants".
I don't claim that this is necessarily true, but it is possible. For example, economists in the 70s thought US consumers were behaving irrationally with the amount of credit they were utilizing. In retrospect, with the amount of inflation the economy experienced, that choice turned out to be optimal - consumers paid with dollars whose time-value eroded rapidly - making their purchases on credit much cheaper than they would have been had they saved first and then bought. The wisdom of crowds is easily underestimated.
Tanta - this one for you
Mortgage Grapevine: Fannie Mae Stated???
--
I think that someone is hacking the site.
My Name, Email, URL fields get automatically changed to strip girls, etc. Let me see if this happens again.
Jas
--
It seems that any field that is blank gets blinked!
Just field the URL.
Jas
Is wage growth strong, or not? Common sense and personal experience say no. Conventional wisdom says yes. From Mauldin's weekly newsletter:
The BLS survey shows payroll growth at 1.8% and had wages growing at 4.3% last September. But then they come back and produce another report from hard data that comes out a few quarters later, which covers 98% of US jobs. They also go to state unemployment insurance programs which have reasonably accurate figures at to wages and taxes.
They just released the data for the third quarter of 2006. It looks like actual job growth was 1.5%, somewhat lower than the estimates. But the real eye opener was that wages grew an anemic 0.9% on a year over year basis. Given that inflation was in the 2.5% range, this means household income did not keep up with inflation.
test
That is about the dumbest set of comments about the mortgage industry I have ever read, and I am including every ignorant thing anyone has ever posted on the broker boards.
We need stated income programs because we aren't smart enough to analyze tax returns? Is that your final answer?
Sharon, you forgot to point out that Fannie Mae, among others, actually publishes a preprinted form for cash flow analysis (1084) in case your lender gets frozen like a bunny in the headlights over a self-employed borrower. It has a line for depreciation and very helpfully prints a little plus sign next to it to remind you that you add that, in case you are arithmetically challenged, like most people in finance usually are.
This is the voice of my industry? No wonder everybody thinks we haven't got the brains God gave a Waldorf salad.
Look what I found on the grapvine:
the overabundance of easy money since 9/11 caused irrational exuberance in the housing market, spiraling home values higher for no reason. If you take out the stated non owner borrowers the last 5 years that caused supply issues, there would have never been a housing supply issue.
If American consumers were smart, they would have used the last six years to pay down debt with cheap money instead of maximizing their home purchases thinking housing would continue to go higher with no regard to simple economics of what one can reasonably afford.
In addition, the world economy is no longer dependent on what happens in the U.S. which means that if other countries have cheaper money and labor, they have a competitive advantage on America.
The oil war in the Middle East is based on the super powers controlling the current world supply of oil. Strict regulations also cause oil shortage concerns which drive up the cost of oil. As oil increases in price, inflation will follow because it costs more to ship goods and many goods are made from oil that our economy consumes. I am personally seeing inflation seep into our economy.
Greenspan provided liquidity to our marketplace after 9/11 and many of us became financially independent. Did he make mistakes? Yes. Did he provide lower rates to spur housing demand? Yes? Should rates be lower now to spur economic growth? Not until regulation is put in place to discontinue the abuses that the mortgage industry created the past six years with no doc, non owner, and easy money lending. I believe one recent analyst is correct that we will suffer as a country until 2011 as housing prices diminish 20%, the supply of homes eventually shrinks, and the easy money lending goes back to the standards of before this whole mess started.
Mortgage Grapevine: I think that the Fed needs to change the way it does things.
Okay, Tanta, I read MBS for UberNerds I: GSE Pass-Throughs thoroughly, once through.
You write superbly. For example, I find this to be a particularly felicitous turn of phrase:
less a fact about the old days than an artifact of a certain nostalgia for them
And I believe I understood the post.
I am brought back to the demand side quite forcibly. I am beginning to understand the supply-side (I eagerly await your next post on the subject), but it would seem to me that, ultimately, the demand-side: those credit vacuum cleaners in Japan and China, are a huge part of the story.
And when we start discussing the demand side, it seems to me that we move instantly into the realm of policy, not to say politics: how much money is it worth to destroy American jobs by permitting currency and trade manipulation to occur without consequence.
A little history is surely important here. When the US was starting out, it was a matter of course that our nascent industry was "protected" from the established European variety.
But what is going on today has no precedent in history. It is an embrace of "globalization"...which has been...the envelope please...a disaster. Are cheap DVD's worth unemployment in the US?
And, finally, underlying nearly everything about the US housing market is the idea that home ownership is the key ideal in American life:
cheap loans? check.
mortgage interest deduction? check.
taxpayer guarantees? check.
Personally, I believe that with a 50% divorce rate we should be more concerned as a society with what transpires in the home than with whether it is a rental or owned.
Tanta.... I find your blog facinating and informative. I am not an Uber Nerd but a curious stay at home mom.
I found a link to your blog posted by a West Palm Beach real estate reporter. Our housing market is pretty much trashed here. Prices have collapsed... The Alt a and subprime market collapse is exasberated by record costs for wind storm insurance and out of control property taxes. The state legislator is attempting band aid fixes, but the effects are severe.
In my upscale but working professional community, prices are down 7 - 9 percent in the last four months. Inventory is at an all time high of 4 years. Homes that once sold in less than seven days are now averaging more than 135.
I am curious as to what percentage of the stated "Liar" loans are by selfemployed or S corp individuals? Here in Florida, self employment with excessive writeoffs is the norm. People flow everything that they possible can through their business because nobody is looking. Brokers can get an idea of cash flow by how large their AMEX bill is. No state income tax lets the average joe get away with alot. No sharing of records with the fed or SS lets people hid a lot of their income. Lots of people are living a higher life style than their 1040 shows.
In your high tax states where every fireman, policeman and construction worker is a flipper what are the repurcussions after the majority of these indivuals find that their higher interest reset loans have thrown them into the high tax AMT brackets and they do not have the cash to pay their huge tax bills in addition to their mortgage? In Florida it will not be too bad, the only people who pay AMT are professional wage earners. But I bet in SOCAL it is a problem..
Just a few questions since it is tax day..
Dfrmflorida, I don't know about the AMT on a state by state basis, but at a federal basis the AMT has been helping to cause higher federal tax revenues which is reducing our federal deficit. Drew Matus, an economist at Lehman Bros, says that if federal tax revenue growth stays strong then the deficit will be in the 200s billion range through 2009.
Also, a majority of Americans expect the Dems to win the Whitehouse in 2008. I don't follow politics closely but from what I've seen so far Hillary Clinton is smarter than Bush (which isn't saying much), but I prefer Barack Obama because he didn't vote for the war in Iraq.
Anyways, if the Dems win the Whitehouse then there will be less military spending in Iraq which will further help to reduce the federal budget deficit (but of course the Dems might increase other spending and we are going to have to face the retirement of the baby boomers).
I'm curious. Is there any precedent where a large fraction of the population has been "trapped" in an investment (as large as a home mortgage) where (a) it's value has dropped, and (b) their payment terms deteriorate drastically (as will occur when ARMs reset).
Name - go and read up on the Farm Crisis in the 1980s... all those things happened PLUS people's income collapsed simultaneously.
Realize most farmers back then really were family farmers... they lived on the land they worked. It was their home and their business.
Land in my area in the late 70s was worth about $800/acre... it ballooned to something like $3000/acre in many places (driven by aggressive lending & creative financing)... then the bottom fell out in commodity prices (corn at the terminals was less than $1/bu)... just about the time the financing balloons were coming due - no one would lend to them (for good reason) and failures occurred in huge numbers all over the place.
Land prices in my county finally settled down around $400/acre before heading back up... that was almost a decade after the whole thing started. By that time you had trouble giving good farm land away so many had been burned by then. I could tell you stories that would blow your mind considering RE prices today.
Also of interest... at no time did more than 25% of the farm population get into serious trouble... but it was a rolling 25% and that was enough to eventually 'clear' the market.
Last FYI - I was told land is now selling for $4000- 4500/acre out there now based on 'ethanol speculation'... there is no way on God's green earth you can make money growing corn on land you've bought for $4000/acre EVEN if corn stays around $4/bu.
Nothing changes... this rock keeps circling the sun like always.
Drew Matus, an economist at Lehman Bros, says that if federal tax revenue growth stays strong then the deficit will be in the 200s billion range through 2009.
Didn't we have a surplus a few years ago?
Oh yeah, before W.
(Yes, I know, the surplus disappeared due to a combination of factors, but W definitely helped it along.)
I wondr what Mr Robbins' position is on any of the "borrower" bailout programs being proposed might be? Think he's interested?
I am curious as to what percentage of the stated "Liar" loans are by selfemployed or S corp individuals?
Here's my take on the whole thing, as an informed observer, with approximate percentages I have calculated myself on the back of an envelope:
Didn't we have a surplus a few years ago?
Only if you naively accept government cash accounting. Using GAAP, there was never a surplus, just less money "borrowed" from the Social Security Trust Fund (cough).
It's almost too late to regulate the stated-income loans. I think the damage has been done, and now that the speculation in housing is over that folks won't be so eager to jump into something like this again. Especially since many of these folks are now just going through severe pain as their mortgages adjust!
dryfly,
Thank you for the pointer. What little I've read so far has already turned my stomach.
Tanta,
In a comment above, you said:
Another 25% are exaggerations for purposes of qualifying for more loan than they really need.
This confused me. I thought a bank would prefer to loan a person as much as they request, provided they have the collateral or income to pay the loan back.
For example, if I have liquid assets worth 50% of the house I'm about to buy, I may only want to commit 20% towards the down payment (so I can allocate the rest to riskier, higher yielding investments).
From what you said, it sounded like the bank would not want to loan me the 80%, but rather would prefer to loan a lower amount. Have I misunderstood the meaning of the quoted sentence?
Thanks in advance for any insight you may choose to share.
CR,
The verification of cash flow on rental property is an extremely complex issue which involves the following analysis. I appologize to all for the complexity.
Schedule E:
Line 26
+ line 20
- principal portion of mortgage payments (check your YE statement)
= Cash Flow
The End
BTW,
Tax Freedom day is April 30 this year. The average American will spend 120 days working to pay taxes. Since most reliable estimates of unreported income are approximately 20% of the total economy, that means that on average, you will spend 24 calendar days, or 17 working days paying for the tax cheats John Robbins is enabling with his baseless stance on stated income mortgages.
Name, when you're talking about stated income, particularly, it comes down to a question of how much loan your income can support. You may not want to put all your assets into the down payment, but if your debt-to-income ratio is 128% with a proposed 80% loan, I'm likely to have some problems with that. Certainly if you can verify that you have liquid assets from which loan payments can be made, that can be considered. You'd have to document that, though, for me. Traditional lenders have a hard time giving you a loan that is so big you can't make the payments, was all I meant. And then there's this problem of making sure those assets are owned by the borrower and available to use for personal debt service, as opposed to owned by the business and necessary to keep it going. Underwriters spend a lot of time turning down certain loans involving "business funds," only to find the damned things coming back under a "stated" program.
If you got one of those lovely stated/stated loans--where you can lie about your income and your assets, too--of course you can do whatever you want.
Calculated Risk, Tanta and comment writers:
I was at a party yesterday, someone asked about the current prospects for the Silicon Valley housing market. One person said that he felt that buying housing in Silicon Valley was a no lose investment because of the limited land supply. He also said that it was sensible to put a huge investment into property because its value would always increase. I have been a short term observer of the market here and it is true that the general direction of prices has been upward, but I was surprised that someone believed that prices here could never decline. Does anyone know of longitudinal data on real prices in Silicon Valley? Is unrelenting price increases really the history here? If anyone can direct me to a data source, I'd be grateful. Thanks and thanks also for an excellent blog.
It gonna be bad when it get here and literally generations of folks' stomachs have turned and churned about this.
But it's taken a long time to get here and money just keeps growing on trees to replace that lost. And creative ways to finance those who cannot pay into new and inventive debt.
It may be a coming, our ATM is down, our jobs are crap, China don't know what to do with all the extra dollars and fearful if they don't keep welcoming them.
When the big it gets here, none of us is going to like it.
"If American consumers were smart, they would have used the last six years to pay down debt with cheap money" ....
Huh. That's what we've been doing and telling friends to do. Guess we just weren't smart enough to cash in on the house ATM or move up, though...
During early part of the early-mid 90s many bay area homes lost up to 25%-30%
Actual real small business people who understand the value of a dollar will drop off the tax returns and take the lower rate, because they didn't get where they are by paying premium rates for inconsequential "benefits."
As one of the above - I am going to go one farther...
If you don't have steady reliable income you have to be prepared to live for extended periods of time like you don't have any income... not pretend you have more than you do.
That is why this whole Alt A, sub-prime, jumbo, get-the-biggest-liar-loan-you-can story has absolutely stunned me. I can't get in their heads no matter how hard I try.
Prescott Bush: You will notice a nice decline from 90 to 97 ish.
Northern California FHFA Home Price Appreciation Tracker
OT: but while we've been watching the corruption in the mortgage biz we've (at least I know I have) missed the corruption in the Student Loan biz and now Sallie Mae is being sold to private investors:
Sallie Mae to be sold for $25 billion: WSJ - MarketWatch
This seems like a big deal.
Prescott Bush, the data to which Ron linked is very helpful in terms of trend, but it doesn't tell the entire story. A relative, who owns several rental properties in San Jose's Cambrian Park area, told me recently of prices for single family residential in that area declining 15-20% over the 1990-1996 period.
I guess it depends on where and what you're looking at. Towns like Los Gatos, Los Altos, or Saratoga might not be affected the same way as the valley. I'm told that nothing much is moving in Los Gatos right now, but it might be another story in the mountains above town. Income distribution and all that.
Those loans, called low-doc or no-doc here in Australia, are rather popular. The Australian Taxation Office loves them, too, because they provide a good list of people to audit.
OT
The Las Vegas Housing Authority finds itself in a peculiar situation, possibly a victim of its spotty past.
Contractors don't seem to want to work for the agency, the largest of three housing authorities in the Las Vegas Valley.
Last week the agency took out two advertisements for the fourth time in four months, extending the original deadline from Feb. 23 to Apr. 20, after receiving zero interest in making two housing projects accessible to disabled people. Two more ads appeared this week on similar projects.
All four were originally bundled together in one ad last July, which also drew no response.
The total cost of all four projects is expected to be about $2.5 million.
"It's been hard getting bids," interim Executive Director Carl Rowe said. "It's unusual."
Stories published April 13, 2007Las Vegas Sun
Gross but true or as they say in "Lion king": Slimy but satisfaying"
Blogger: Page not found
Slightly OT, but what % of the subprime lenders are still going strong? Because I see internet ads, banner ads, sidebar ads, $200K mtg. for $800+, etc. etc.
Just how dead is the subprime lending market, and is it still alive and well?
Big swoons in California tax receipts. Inquiring minds would like to know on the Ministry of Truth can pull 0.8% retail sales numbers out of their hats?
here
Ron and mp
Thanks so much for that data and wisdom. The area we were most interested in was Los Gatos so your insights are especially helpful. I really appreciate the commments.
arbogast said: "...But what is going on today has no precedent in history. It is an embrace of "globalization"...which has been...the envelope please...a disaster. Are cheap DVD's worth unemployment in the US?..."
Please tell me you don't believe this, you were just being sarcastic, pulling my leg, etc.
The median unemployment rate since 1948 is 5.5%, with a high of 10.8% in the 1980's.
So with cheap DVD's AND current unemployment still near historic lows (4.4%), globalization is a disaster?!?!
My God, LOL!, what would a SUCCESS have to look like? No wonder the housing market looks like a "bust" on this blog.
))
Sebastian
Sebastian,
Globalization is a very real disaster to a significantly large number of people who live in areas where manufacturing has supplied a large percentage of the jobs, and who now are forced unfairly to compete with foreign workers whose employers receive enormous subsidies from their governments via exchange rate manipulation.
The Japanese yen is currently undervalued about 30%, and the Chinese yuan even more. These undervaluations represent not only a subsidy to their exporters, but also a de facto tariff barrier to imports of any kind. But curiously, economists who would scream bloody murder if the US Congress were to enact general tariff barriers against Asian imports of similar scale still speak of this situation as one of "free trade".