Not too surprising. Given fixed rate mortgages have an embedded prepayment option that the borrower receives from the mortgagor, with the increase in fixed income volatility, it would make sense for mortgage spreads to widen. This helps compensate for the increase in option cost. Still, option adjusted spreads are finally beginning to widen, so it will be interesting to see if FNM and FRE are allowed to step purchases of non-conforming mortgage products.
it's as if the PTB are intentionally /trying/ to crash the RE ecosphere.
A person would have to be insane, or really getting tired of renting, to buy into the market with all these boat anchors being attached to prices left and right.
2/28 / neg-am /stated blew up this bubble, and I don't see what's going to support prices in there place, other than foreign REITs moving in for the kill with their super-appreciated currencies, but even then it makes sense for them to wait out the currency appreciation before pulling the trigger.
I expect the new bankrupcy laws to retard any declines in home prices. Also it appears new regulation will give subsidies to lower income homeowners, likely available through both banks and GSAs. Holding up the bottome will keep the top from falling. See regulatory changes: http://www.fedfin.com/press_center/Testimony_of_Basil_N_Petrou_071807.pdf
Troy - that's the whole point: Prices are not close to reality. They are where they are because everyone ate the tea leaves instead of reading them. Result was EZ qual for anything and everyone. Fog a mirror guidelines. Add Greed to the mix from a bunch of wall street houses who see fee income from several sides of the mortgage loan. Add Greed of speculators who bought N/O/O homes (some sight unseen) thinking they would flip them for a fast buck.
All of that (and more) drove prices to levels that cannot be sustained in any kind of environment for any length of time.
That's my 2 cents - and while I might think I know alot about this business, I read this blog because Tanta and CR have proven (to me) they have a deeper understanding and are going to great pains to research and comment on the root causes.
And in an entertaining manner that certainly holds one's attention. Hat's Off to Tanta and CR.....please keep it up.
Alt Reality - have not read the link yet but I gotta tell you, I have a hard time believing any changes to the Bankruptcy Law will "retard any declines in home prices".
A borrower in over their head is in over their head, and any law designed to stave off the inevitable will just prolong the agony. Trust me, someone or some security will take the hit if the borrower doesn't.
JR - According to FM Policy Focus, GSE debt went from $196 billion in 1992 to $1.13 trillion in the first quarter of 2001. FM Policy Focus says that "the GSEs now guarantee more debt and mortgage backed securities (MBS) than all comparable Treasury-guaranteed debt."
That is quite a statement -- we have more GSE/MBS type debt than Treasury debt. Remember in around 2001 when Greenspan got rid of the 30Yr T bill. Maybe the money that normally went into 30 year Treasury debt moved into GSEs (MBS, CDOs, etc.) instead. While Tbills are backed by the government, it was my understanding that GSE's are not -- I thought I read several Greenspan comments to that effect. Maybe house prices rose because savings once earmarked for Treasuries had to find a home and they poured into 30 year home loans which poured into the GSEs. Who knows but it is an intersting site anyway.
Bob, I guess you haven't read the new laws. They are not just for individuals but business too -- you will see lots of businesses selling off pieces of themselves because for a business to even file today they have to come to the courthouse with lots of money. And for people -- it is a lot harder to file -- the debt follows you around unless you truely are indigent and you have to take classes that you pay for and there are lots of other issues. I studied them some time back but you may want to give them a read.
"Maybe house prices rose because savings once earmarked for Treasuries had to find a home and they poured into 30 year home loans which poured into the GSEs."
Uh, no. The long bond is the playpen of certain investors. FCB's and such buy at the short end.
House prices rose because of rank speculation and low mortgage rates.
To the extent that the new bk laws are stricter, it is bad news for real estate.
Under the new bk law more money gets paid to car lenders in most Chapter 13 plans- and sometimes the infamous 'means test' dictates that MBNA must also get some money. In so far as other creditors get paid more than they used to (which is still an open question), the Chapter 13's filed today are probably marginally more likely to fail- a big negative for housing.
The effect of having more cash strapped borrowers pay MBNA rather than Countrywide will probably do much more damage to housing than the slight 'benefit' to housing by deterring higher end borrowers from walking away.
As an aside, the fear of the new law has probably caused consumers as much harm (and MBNA as much benefit) as the new laws themselves.
It seems odd to raise the rates. Why not just raise the minimum down payment? 20% down, 30% down - sounds harsh but maybe it should have been that way all along.
JR -- the Bankruptcy laws are not in that post, what was in that post was what Congress etal are presently working on to fix the problems with subprime. It was a good summary of ideas on the table. The new laws went into effect Oct 05 so maybe people didn't notice but there are loads of writeups on them, here is one:http://www.creditinfocenter.com/bankruptcy/NewBankruptcyLaws.shtml
I do not see how it would be possible that they will not slow the drop. You can't just "walk away" like Cramer advised.
Alternate Reality-
The new bk laws, though unjust and a real pain, are not the Dickensian nightmare that MBNA and NCO Financial wants you to believe.
For example, I've had clients here in LA earning 6 figures qualify for Chapter 7's- certainly not easy but possible in some cases.
Ironically, the new laws favor homeowners (unfairly, in my opinion.)
It seems to me that the demographic most hurt by the new laws are not homeowners, but dual income renters with no kids.
Lastly- the much touted credit counseling classes that you mention and that people are so afraid of; they cost $50 or less and can be done at home on the internet in under an hour.
Moving from 6.5% to 7.34% @ $450k moves the payment from $2,844 to $3,097. Doesn't seem like much, but the purchase price of the house drops from $450k to $412.5k, or an 8.5% drop in affordability.
Dr. Deflation, First of all rates were low for homebuyers, but they were pretty good compared to tbills if you were an investor. Also things happen at the margin and we are talking about a pretty big margin here. Take a look at Credit Suisse's chart on who buys agency issed securitized mortgages and it was 11% governments, 16% Commercial banks, 17% foreign investors, 8% insurance companies, 5% thrifts and credit unions, mm funds, mut funds, etc, etc, etc, lots of the same group. A year ago, when they started issuing 30 years again they went in a flash and I heard they had a huge pent up demand. The money went somewhere.
With interest rates rising, a negative savings rate, plus housing prices coming down where are the consumers in this consumer based economy going to find any more "leverage" to feed that consumptio
I don't know why "jumbo" is the same across the country. There are several $2 million+ homes on my street. How to mortgage them?
And where to draw the line neighborhood to neighborhood, state to state? Here in the Midwest few 'city' homes would cost 2 million... but add some land and they sure do... and where I live there is PLENTY of land to add.
There is a county I go through on business where a local biz guy told me they have more 'millionaires per 1000 population' than anywhere in the state... That includes some very posh suburbs. This was a 100% rural county not even close to the suburbs & city.
The reason is so many folks have 500 acres or so & much of it paid for... with land costing $3,000-$4,000/acre it adds up fast.
But these folks aren't really farmers either, you need at least 2000 acres to make a modest living cash grain farming if that's all you do - even at today's commodity prices. The inputs cost too much to make a go with only 500 acres.
So they might 'farm' but its really only a big hobby farm producing pin money - they have to have real jobs too, both of them, else its a no go.
So why let California & NYC and DC get Jumbo's raised but not say Grundy County Iowa? Maybe I want a nice home there with a 'little land' too?
Sure there are farm programs to help fund loans for farmers but a lot of these folks might actually have trouble qualifying since they really aren't 'farmers'... professionals who want a place but can't just write a check that big a loan... a BIG jumbo would make that possible.
Or maybe lake frontage up north... I was looking at property in N Minnesota... Take two identical modest homes, one on lake will cost g.t $500K... same place off lake l.t. $150K. The two might be separated by a few hundred yards. How to Jumbo not Jumbo that?
That's the problem the 'regulators' have with willy-nilly raising the cap for some & not everyone.
There is no easy answer for this problem - it will suck no matter what they do or don't do.
I don't understand-you mean that Jumbo loan is different from state to state? a non-conforming in Iowa is different then in Utah? I just assumed it was all the same
Alternate Reality, It is my understanding that states have different laws regarding homeowners in default. In some states (Texas, for example) the lendor can foreclose on the house AND pursue a deficiency judgement against the borrower. In others (California, for example) the state can EITHER pursue a dificiency judgement (leaving the borrower in the house) OR foreclose on the house. Since borrowers tend to destroy the property after loosing a difficiency judgement hearing, banks in California will always foreclose. So Cramer was right advising borrowers to walk away if they lived in a state like California. Please correct me if I'm missing something here.
That big a jump in rates on jumbos will bring housing here to a complete halt. Conv isn't a purchase option in most of coastal CA, only a refi option for those with lots of equity.
I don't understand-you mean that Jumbo loan is different from state to state? a non-conforming in Iowa is different then in Utah? I just assumed it was all the same
My understanding is 'No - they aren't the same state-to-state'... that there are variations over what is 'conforming' and they vary based on local profiles of income & costs.
Maybe I'm wrong on that and they were only proposals I've heard to vary this IN THE FUTURE (heard Pelosi carping how Cali needs MUCH larger caps then Iowa - obviously SHE isn't running for President or she'd be running from rubber chicken thrown at her by Iowans)... but I believe that is accurate.
Whether true or not it would make some sense since $400K would buy you one helluva a pad in my little town - why have GSEs fund it? $400K buys you diddley squat in the OC.
Might need an Official Tanta Clarification here... but that is my understanding.
BTW - Iowa & Utah would probably be pretty close... but not Iowa & say California.
Original money purchase loans in CA are not subject to deficiency judgments, but refis can be. How much are you willing to pay the IRS is the question? If you are bankrupt, no problem, can't get blood out of a rock. Just stay in the place rent free until evicted.
RThomas, you are spot on. In California if your mortgage(s), this includes seconds, are the orignal mortgages that provided the funds used to purchase the house, then you can walk away. If you refi'd, then the bank can pursue a deficiency judgement. If you have a HELOC then the bank can pursue a deficiency judgement.
"Cindy Rosenberg, Mayfair's director of sales and marketing, said company President Mehran Saberi is seeking new financing for the 37-unit project, but she offered no further explanation."
"I own a business that contracts with an intermediary asset manager for the largest lenders in the country. My company primarily does field inspections for accounts that are in various stages of delinquency."
"The past two quarters have kept me very busy with each month seeing a significant increase in the amount of delinquent accounts. But something 'broke' this last month (July). I can tell you, first hand, that people in some of the wealthiest areas (Monterey and Santa Cruz counties of Ca.) are making a financial decision to just walk away."
"Make no mistake, these are not stupid people. These are not subprime accounts. Would you continuing paying a loan were the underelying market value is less than your principal? Maybe yes, maybe no. But the fact remains that I am a very busy man because a lot of folks are just walking away."
"I can tell you, first hand, that people in some of the wealthiest areas (Monterey and Santa Cruz counties of Ca.) are making a financial decision to just walk away."
Hmm. Craiglist has an unusually large number of top-end homes for rent in Santa Cruz, some even furnished. Also "Unusual" also because you usually don't see many such homes advertised on Craigslist around here -- too low-end a venue, though free of charge. I smell a hint of desperation.
mlslistings.com, a Bay Area real estate listing site, shows 128 homes for sale in Santa Cruz County for prices over $2 million. Rough count shows an aggregate asking price of around $350-375 million. Do you see that kind of money showing up anytime soon?
"Here is an example: WaMu (one of the better priced lenders for this product)...5/1 IO Jumbo Stated Income/Verified Assets $700K purchase 10% down: Feb rate: 6.000% at par
Today's rate: 7.125% at par...
(this is for the 1st lien... I didn't check the rate for the 2nd)"
Isn't this just future toxic waste. Stated and IO means they aren't earning enough to cover the payments. The second means they don't have skin in the game. Isn't there some chance that home values will revert to the mean and this home will be seriously underwater and a walkaway? Seems like the necessary tightening hasn't really begun.
"Goldman Sachs' $10 billion flagship hedge fund dropped nearly 8% in a week at the end of last month as hedge funds recorded their worst returns in at least four years."
"It seems odd to raise the rates. Why not just raise the minimum down payment? 20% down, 30% down "
Doing so will reduce home prices and that is the one thing no one is willing to touch.
They will go around it and around it - just to keep prices high.
If you think about there is nothing good for any economy in the world to have R/E prices go up. It only sucks up cash and increase debt - for the economy it is a zero sum game.
Think of a world in which no debt is allowed - will people have no place to live ? they would just in homes that cost a whole lot less work hours to buy.
Wall Street's deal-making machine hit a bump when a joint venture of Tishman Speyer Properties and Lehman Brothers Holdings Inc. said it would delay the completion of its $15.2 billion acquisition of apartment-owning titan Archstone-Smith Trust from later this month to early October.
Archstone-Smith, a real-estate investment trust based in Englewood, Colo., issued the date change in a news release, but it didn't say exactly why the closing is being delayed. The merger is now scheduled to close Oct. 5.
ROOMS AVAILABLE
The Issue: Lehman Brothers and Tishman Speyer have delayed until October the closing of their $15.2 billion buyout of apartment titan Archstone-Smith.
The Downside: The move shows further evidence that credit markets are taking a toll on deal making.
The Optimist's View: The buyout price stayed firm, indicating underlying real-estate values are strong.The change is one of the first hard indicators of the problems hitting Wall Street, which is trying to cope with more than $200 billion in financing commitments extended for a wave of private-equity deals. While analysts said they expected a deal to go through, the delay brings its own risks. And it also suggests that the financiers of this deal, including Lehman, are looking for fresh financing sources to minimize their own risk.
Archstone shares were up 42 cents to $56.91 at 4 p.m. on the New York Stock Exchange, after falling as much as 89 cents during the trading day.
"If you allow time to pass, it is never a good thing when you have uncertainty to deal with," says Richard Anderson, an analyst at BMO Capital Markets. Still, Mr. Anderson is optimistic that the deal will occur. "They established a closing date, reaffirmed the purchase price, and the shareholder meeting has not been moved."
The $60.75 a share deal, which was announced in May, is seen as a bellwether in the real-estate market. "It will be very interesting to see how it pans out because it's so large, and it was priced before all this debt-markets turmoil," says James Corl, chief investment officer at Cohen & Steers, a New York investment firm specializing in REITs.
All parties to the deal declined to comment. A shareholder vote is still expected to take place Aug. 21, as originally envisioned.
The announcement also said the merger agreement would be altered to change the tax liability for shareholders of certain special Archstone-Smith units. It also said that Barclays PLC's Barclays Capital will provide financing on the transaction, in addition to Lehman and a unit of Bank of America Corp., both of which had already committed to the deal. The purchasers also will assume $6.5 billion in Archstone-Smith debt.
Among other things, the delay gives Lehman and the other banks more time to find buyers for the $17.1 billion in debt that the buying group needs to complete the transaction. The delay also gives Tishman Speyer and Lehma
Mortgage REITs that specialize in Jumbo had held up well until recently. Red wood trust RWT dropped from about 50 to 30 during late July. Thornburg TMA held up much better with very strong resistance at 25 but started dropping a little over a week ago. TMA was mentioned by Cramer as having an especially cautious and wise CEO that dealt only with the highest quality mortgages. Both of these were on my "housing bubble watch list" since both eventually took big hits during the early 90's housing bust.
I have looked at TMA. Could not see any neg-arm income. ARM resets are years into the future. I hate to agree with Cramer but I don't think they are a good short. If you can convince me other wise I am listening. I usually do the opposite from what Cramer say.
Thornburg's lending book is the cleanest in the industry. They only take the best credits from the rich/nouveau rich, skulk off and find someone else to prey on.
In others (California, for example) the state can EITHER pursue a dificiency judgement (leaving the borrower in the house) OR foreclose on the house.
RThomas, that's not true.
IIRC, just over half the states allow non-judicial foreclosures. This is also called "power-of-sale" FC, because it uses the power of sale granted in the deed of trust or mortgage to force sale of the property without a court order.
In any of those states, the lender can also pursue a judicial FC if it wants to. Generally, the only reason the lender would want to is if it wished to obtain a deficiency judgment, which forces the borrower to pay the difference between market value of the property and the loan amount, when the loan amount is greater.
A borrower can also contest a power-of-sale FC, which forces it into the courts.
A judicial FC does not necessarily result in a deficiency judgment for upside down loans. There are judges who have been known to tell the lender to eat it.
Many states don't allow non-judicial FC. Ohio is an example.
Some states do not allow deficiency judgments in any case when the original loan was purchase-money. It doesn't matter whether it was a first or second lien; if the proceeds were used to purchase the property, the lender can recover only market value. If you live in one of those states--like CA--you might see on your copy of your mortgage the words "this is a purchase money mortgage" or something to that effect typed in somewhere around the legal description of your property. If you see that, you are not in danger of a deficiency judgment. (If you don't, you can still prove that your mortage was for purchase money with a copy of your HUD-1 Settlement Statement.)
Lenders may have the right to pursue a deficiency, but they are not obligated to do so, and it can often end up cheaper to skip it: if the deficiency isn't that much, or the borrower is too obviously insolvent, the added court costs of seeking the judgment outweigh the gain. In that case the lender goes the non-judicial route.
Thornburg's lending book is the cleanest in the industry.
Clyde speaketh the truth. Thornburg has been taking all the best jumbos and leaving the rest of us with the bottom of the barrel for years. They are respected and resented in equal doses by their competitors.
If they ever have a problem, I'd guess it would be a duration one: it would take quite an economic disaster to make TMA's borrowers default. But they'll sit there forever with their low-rate loans, 'cause they aren't the sort who needs to cash-out periodically. Therefore the issue, if there is one, is TMA's hedge, not its credit quality.
More free-market fun! Yes, let the blood run through the streets and let the players learn their lessons -- well, maybe just some streets and some players...
dryfly,
One good reason for higher caps some places may be that those places support higher home prices because they are closer to centers of economic activity, oceans/seas, or universities where people make more money and where maybe it is less advantage to have retirees causing nonproductive population density. I have always expected retirees to move inland -- or Florida if they want water-- as the world becomes more global and shores/universities become relatively more important than before.
I caught a couple of key moments on CNBC yesterday regarding the crisis in the credit markets.
In one early morning segment, ITG economist Robert Barbera made the case for the Fed cutting rates by over 1-1.5 bp in one sharp move before the year is over -- his thesis was that this help keep ARM holders on the right side of their mortgage payments. He did not expect a cut this week, however.
And then there was J Cramer last night making the absurd claim that his now famous rant on CNBC's morning show was, in fact, motivated by his deep concern for the "7 million homeowners who are about to lose their homes to foreclosure". It was the most blatant and transparent shilling I have ever witnessed. Incredible.
I wasn't sure if anyone posted this already, but another small lender is getting out of the game. HomeBanc Corp., a lender with operations around the Southeast U.S., just announced it will stop originating mortgages. The company said it can't borrow on its credit facilities and that it could no longer fund loans as of August 6. It said Countrywide will buy up certain retail loan origination assets.
Number2Son wrote ...ITG economist Robert Barbera made the case for the Fed cutting rates by over 1-1.5 bp in one sharp move before the year is over -- his thesis was that this help keep ARM holders on the right side of their mortgage payment.
But would it? There are multiple ARM indexes, and some are not very subject to the movements of the Fed. How much influence would such a move have on LIBOR?
If you think about there is nothing good for any economy in the world to have R/E prices go up. It only sucks up cash and increase debt - for the economy it is a zero sum game
The same thing can be said about gold. They really do the same thing - offer a hedge against fiat 'money supply' inflation.
The real irony to me is that a lot of the people who are proponents of owning gold (out on the internets & including on this forum) are the same folks who appear to be the most outraged & offended that RE prices have risen so much.
Personally if I lost faith in fiat completely - I'd buy land & real estate before I bought gold. I don't think I'm alone - that's why we will certainly see a 'correction' in RE prices but no massive collapse... not until the dollars dry up (fat chance of that with the current M growth).
I don't think we'll ever see gold or RE at mid 90s prices again... not in 'dollars' anyway.
Alt-R-
The new bk law compares a family's income to the median income of that family size- those below median are not subject to the new 'means test'. The universe of 2 person families contain many, many households where only person works (because the other person is a minor child, for example.) A family of 2 where both work is thus more likely to be over median income.
Also, many child related expenses get a free pass on the 'means test' so it often possible to get a family with kids with income far above median income to qualify for a 7.
If there any significant difference in the cost of mortgages in recourse and non-recourse states, or is the chance of recovering additional money through a deficiency judgment so small that, other things being equal, it doesn't make a difference in price?
One good reason for higher caps some places may be that those places support higher home prices because they are closer to centers of economic activity, oceans/seas, or universities where people make more money and where maybe it is less advantage to have retirees causing nonproductive population density. I have always expected retirees to move inland -- or Florida if they want water-- as the world becomes more global and shores/universities become relatively more important than before.
Typical coastal bias... there is more than turnip farms inland... no shortage of universities... and airports to fly 'globally' from.
I like ocean as much as anyone but I don't see why a California 4 BR home on a small lot should get a loan for a million dollars that GSE's should be given 'special consideration' to be able to buy... and a million dollar 300 acre 'hobby farm' in Southern Minnesota with a trout stream shouldn't qualify for the same?
And don't tell me its because the Cali house is near Stanford University or some such because that southern Minnesota hobby farm could be near the Mayo Clinic & Medical School.
Similar situations are like this all across the country. My experience traveling the whole country is everyone thinks their situation is different & deserves special consideration. As wise old Missourians say... Show Me!
I was not saying that TMA is a good short. However, from a technical point of view it has two issues. One is that it has held it's value extremely well. The second point is that it has broken resistance. I guess that people who are selling must have some concerns about the increased cost of jumbo loans.
If there any significant difference in the cost of mortgages in recourse and non-recourse states, or is the chance of recovering additional money through a deficiency judgment so small that, other things being equal, it doesn't make a difference in price?
There have been various attempts over the years to quantify the marginal differences in FC cost between states and evaluate that impact on mortgage rates/fees/availability. The usual conclusion is that it just doesn't make enough of a difference.
However, like all analyses of a "normal," not a stressed market, that may be subject to change. You have to bear in mind that most studies of this problem had to use the biggest, most geographically diverse database there is, which would be the GSEs and HUD. So, well, with a fairly consistent application of credit guidelines across states, and homogenous loan amounts, you get six-of-one-half-dozen-of-the-other on FC law variation.
Try it again with Alt-A, jumbo, subprime, etc. and you might get something rather different.
I like Cramer. For all the nuances, I think he's quite entertaining, and clearly intelligent. I don't agree with him on many occasions, but I much prefer him to any other biz TV personality. I like to see people who are passionate about what they do, and he's got that in spades.
I'm curious to see if TOL will say anything on their conference call tomorrow regarding the new Jumbo rates?
I like Cramer. For all the nuances, I think he's quite entertaining, and clearly intelligent.
Erik - I agree but then I liked PeeWee's Playhouse too. I've often said Cramer is on the wrong network & should come right after Jon Stewart and before Colbert. Perfect.
Not too surprising. Given fixed rate mortgages have an embedded prepayment option that the borrower receives from the mortgagor, with the increase in fixed income volatility, it would make sense for mortgage spreads to widen. This helps compensate for the increase in option cost. Still, option adjusted spreads are finally beginning to widen, so it will be interesting to see if FNM and FRE are allowed to step purchases of non-conforming mortgage products.
another german fund closed to withdrawals. looks like there is beginning to be a run on funds, hedge, and otherwise...
Credit Worries, Imported From U.S., Lead German Firm to Shut Fund - NY Times
it's as if the PTB are intentionally /trying/ to crash the RE ecosphere.
A person would have to be insane, or really getting tired of renting, to buy into the market with all these boat anchors being attached to prices left and right.
2/28 / neg-am /stated blew up this bubble, and I don't see what's going to support prices in there place, other than foreign REITs moving in for the kill with their super-appreciated currencies, but even then it makes sense for them to wait out the currency appreciation before pulling the trigger.
I expect the new bankrupcy laws to retard any declines in home prices. Also it appears new regulation will give subsidies to lower income homeowners, likely available through both banks and GSAs. Holding up the bottome will keep the top from falling. See regulatory changes:
http://www.fedfin.com/press_center/Testimony_of_Basil_N_Petrou_071807.pdf
Saw this just now:
My regional-chain grocery has an in-store banking desk for a major bank.
All HEL and HELOC advertising has been removed. First time I've ever seen this.
Troy - that's the whole point: Prices are not close to reality. They are where they are because everyone ate the tea leaves instead of reading them. Result was EZ qual for anything and everyone. Fog a mirror guidelines. Add Greed to the mix from a bunch of wall street houses who see fee income from several sides of the mortgage loan. Add Greed of speculators who bought N/O/O homes (some sight unseen) thinking they would flip them for a fast buck.
All of that (and more) drove prices to levels that cannot be sustained in any kind of environment for any length of time.
That's my 2 cents - and while I might think I know alot about this business, I read this blog because Tanta and CR have proven (to me) they have a deeper understanding and are going to great pains to research and comment on the root causes.
And in an entertaining manner that certainly holds one's attention. Hat's Off to Tanta and CR.....please keep it up.
Thanks
Did any builders have a relationship with LUM?
Alt Reality - have not read the link yet but I gotta tell you, I have a hard time believing any changes to the Bankruptcy Law will "retard any declines in home prices".
A borrower in over their head is in over their head, and any law designed to stave off the inevitable will just prolong the agony. Trust me, someone or some security will take the hit if the borrower doesn't.
"I expect the new bankrupcy [sic] laws to retard any declines in home prices."
Um, that certainly sounds like an alternate reality. The new bankruptcy law makes it harder for someone in financial trouble to discharge debts.
this is the best bubble implosion blog IMHO. Please preserve posts and comments for historical research.
JR - According to FM Policy Focus, GSE debt went from $196 billion in 1992 to $1.13 trillion in the first quarter of 2001. FM Policy Focus says that "the GSEs now guarantee more debt and mortgage backed securities (MBS) than all comparable Treasury-guaranteed debt."
That is quite a statement -- we have more GSE/MBS type debt than Treasury debt. Remember in around 2001 when Greenspan got rid of the 30Yr T bill. Maybe the money that normally went into 30 year Treasury debt moved into GSEs (MBS, CDOs, etc.) instead. While Tbills are backed by the government, it was my understanding that GSE's are not -- I thought I read several Greenspan comments to that effect. Maybe house prices rose because savings once earmarked for Treasuries had to find a home and they poured into 30 year home loans which poured into the GSEs. Who knows but it is an intersting site anyway.
http://www.fmpolicyfocus.org/risk/
Bob, I guess you haven't read the new laws. They are not just for individuals but business too -- you will see lots of businesses selling off pieces of themselves because for a business to even file today they have to come to the courthouse with lots of money. And for people -- it is a lot harder to file -- the debt follows you around unless you truely are indigent and you have to take classes that you pay for and there are lots of other issues. I studied them some time back but you may want to give them a read.
"Maybe house prices rose because savings once earmarked for Treasuries had to find a home and they poured into 30 year home loans which poured into the GSEs."
Uh, no. The long bond is the playpen of certain investors. FCB's and such buy at the short end.
House prices rose because of rank speculation and low mortgage rates.
To the extent that the new bk laws are stricter, it is bad news for real estate.
Under the new bk law more money gets paid to car lenders in most Chapter 13 plans- and sometimes the infamous 'means test' dictates that MBNA must also get some money. In so far as other creditors get paid more than they used to (which is still an open question), the Chapter 13's filed today are probably marginally more likely to fail- a big negative for housing.
The effect of having more cash strapped borrowers pay MBNA rather than Countrywide will probably do much more damage to housing than the slight 'benefit' to housing by deterring higher end borrowers from walking away.
As an aside, the fear of the new law has probably caused consumers as much harm (and MBNA as much benefit) as the new laws themselves.
It seems odd to raise the rates. Why not just raise the minimum down payment? 20% down, 30% down - sounds harsh but maybe it should have been that way all along.
JR -- the Bankruptcy laws are not in that post, what was in that post was what Congress etal are presently working on to fix the problems with subprime. It was a good summary of ideas on the table. The new laws went into effect Oct 05 so maybe people didn't notice but there are loads of writeups on them, here is one:http://www.creditinfocenter.com/bankruptcy/NewBankruptcyLaws.shtml
I do not see how it would be possible that they will not slow the drop. You can't just "walk away" like Cramer advised.
I don't know why "jumbo" is the same across the country. There are several $2 million+ homes on my street. How to mortgage them?
Alternate Reality-
The new bk laws, though unjust and a real pain, are not the Dickensian nightmare that MBNA and NCO Financial wants you to believe.
For example, I've had clients here in LA earning 6 figures qualify for Chapter 7's- certainly not easy but possible in some cases.
Ironically, the new laws favor homeowners (unfairly, in my opinion.)
It seems to me that the demographic most hurt by the new laws are not homeowners, but dual income renters with no kids.
Lastly- the much touted credit counseling classes that you mention and that people are so afraid of; they cost $50 or less and can be done at home on the internet in under an hour.
Moving from 6.5% to 7.34% @ $450k moves the payment from $2,844 to $3,097. Doesn't seem like much, but the purchase price of the house drops from $450k to $412.5k, or an 8.5% drop in affordability.
Dr. Deflation, First of all rates were low for homebuyers, but they were pretty good compared to tbills if you were an investor. Also things happen at the margin and we are talking about a pretty big margin here. Take a look at Credit Suisse's chart on who buys agency issed securitized mortgages and it was 11% governments, 16% Commercial banks, 17% foreign investors, 8% insurance companies, 5% thrifts and credit unions, mm funds, mut funds, etc, etc, etc, lots of the same group. A year ago, when they started issuing 30 years again they went in a flash and I heard they had a huge pent up demand. The money went somewhere.
Fred, If you raise the minimum downpayment, then that money is tied up in the house and not liquid anymore and not available for investment.
Creative destruction,
How do they hurt dual income couples with no kids?
With interest rates rising, a negative savings rate, plus housing prices coming down where are the consumers in this consumer based economy going to find any more "leverage" to feed that consumptio
I don't know why "jumbo" is the same across the country. There are several $2 million+ homes on my street. How to mortgage them?
And where to draw the line neighborhood to neighborhood, state to state? Here in the Midwest few 'city' homes would cost 2 million... but add some land and they sure do... and where I live there is PLENTY of land to add.
There is a county I go through on business where a local biz guy told me they have more 'millionaires per 1000 population' than anywhere in the state... That includes some very posh suburbs. This was a 100% rural county not even close to the suburbs & city.
The reason is so many folks have 500 acres or so & much of it paid for... with land costing $3,000-$4,000/acre it adds up fast.
But these folks aren't really farmers either, you need at least 2000 acres to make a modest living cash grain farming if that's all you do - even at today's commodity prices. The inputs cost too much to make a go with only 500 acres.
So they might 'farm' but its really only a big hobby farm producing pin money - they have to have real jobs too, both of them, else its a no go.
So why let California & NYC and DC get Jumbo's raised but not say Grundy County Iowa? Maybe I want a nice home there with a 'little land' too?
Sure there are farm programs to help fund loans for farmers but a lot of these folks might actually have trouble qualifying since they really aren't 'farmers'... professionals who want a place but can't just write a check that big a loan... a BIG jumbo would make that possible.
Or maybe lake frontage up north... I was looking at property in N Minnesota... Take two identical modest homes, one on lake will cost g.t $500K... same place off lake l.t. $150K. The two might be separated by a few hundred yards. How to Jumbo not Jumbo that?
That's the problem the 'regulators' have with willy-nilly raising the cap for some & not everyone.
There is no easy answer for this problem - it will suck no matter what they do or don't do.
I don't understand-you mean that Jumbo loan is different from state to state? a non-conforming in Iowa is different then in Utah? I just assumed it was all the same
Alternate Reality, It is my understanding that states have different laws regarding homeowners in default. In some states (Texas, for example) the lendor can foreclose on the house AND pursue a deficiency judgement against the borrower. In others (California, for example) the state can EITHER pursue a dificiency judgement (leaving the borrower in the house) OR foreclose on the house. Since borrowers tend to destroy the property after loosing a difficiency judgement hearing, banks in California will always foreclose. So Cramer was right advising borrowers to walk away if they lived in a state like California. Please correct me if I'm missing something here.
That big a jump in rates on jumbos will bring housing here to a complete halt. Conv isn't a purchase option in most of coastal CA, only a refi option for those with lots of equity.
I don't understand-you mean that Jumbo loan is different from state to state? a non-conforming in Iowa is different then in Utah? I just assumed it was all the same
My understanding is 'No - they aren't the same state-to-state'... that there are variations over what is 'conforming' and they vary based on local profiles of income & costs.
Maybe I'm wrong on that and they were only proposals I've heard to vary this IN THE FUTURE (heard Pelosi carping how Cali needs MUCH larger caps then Iowa - obviously SHE isn't running for President or she'd be running from rubber chicken thrown at her by Iowans)... but I believe that is accurate.
Whether true or not it would make some sense since $400K would buy you one helluva a pad in my little town - why have GSEs fund it? $400K buys you diddley squat in the OC.
Might need an Official Tanta Clarification here... but that is my understanding.
BTW - Iowa & Utah would probably be pretty close... but not Iowa & say California.
Original money purchase loans in CA are not subject to deficiency judgments, but refis can be. How much are you willing to pay the IRS is the question? If you are bankrupt, no problem, can't get blood out of a rock. Just stay in the place rent free until evicted.
It is usually determined from the median in the area which is usually the county here. Sufficient for a bad neighborhood or a small condo.
RThomas, you are spot on. In California if your mortgage(s), this includes seconds, are the orignal mortgages that provided the funds used to purchase the house, then you can walk away. If you refi'd, then the bank can pursue a deficiency judgement. If you have a HELOC then the bank can pursue a deficiency judgement.
What are people hearing about availability of Jumbo loans in California, besides rising interest rates?
Considering that pretty much everything in coastal CA is over the conforming limit, availability of Jumbos will determine how much sells from here on.
What are people hearing about availability of Jumbo loans in California, besides rising interest rates?
I believe it was a Brokers' Outpost post that mentioned there was a new soft limit of $1M on jumbo loans in Ca.
OT But interesting....
Luxury condo project on hold | The San Diego Union-Tribune
"Cindy Rosenberg, Mayfair's director of sales and marketing, said company President Mehran Saberi is seeking new financing for the 37-unit project, but she offered no further explanation."
From jt.sterlin@sbcglobal.net:
"I own a business that contracts with an intermediary asset manager for the largest lenders in the country. My company primarily does field inspections for accounts that are in various stages of delinquency."
"The past two quarters have kept me very busy with each month seeing a significant increase in the amount of delinquent accounts. But something 'broke' this last month (July). I can tell you, first hand, that people in some of the wealthiest areas (Monterey and Santa Cruz counties of Ca.) are making a financial decision to just walk away."
"Make no mistake, these are not stupid people. These are not subprime accounts. Would you continuing paying a loan were the underelying market value is less than your principal? Maybe yes, maybe no. But the fact remains that I am a very busy man because a lot of folks are just walking away."
FYI, every lender in our network, except for ING dramatically raised the cost of stated jumbo financing today.
Here is an example: WaMu (one of the better priced lenders for this product)
5/1 IO Jumbo Stated Income/Verified Assets $700K purchase 10% down:
Feb rate: 6.000% at par
Today's rate: 7.125% at par
(this is for the 1st lien... I didn't check the rate for the 2nd)
Stated jumbos are still available, but they are getting more and more expensive by the day.
"I can tell you, first hand, that people in some of the wealthiest areas (Monterey and Santa Cruz counties of Ca.) are making a financial decision to just walk away."
Hmm. Craiglist has an unusually large number of top-end homes for rent in Santa Cruz, some even furnished. Also "Unusual" also because you usually don't see many such homes advertised on Craigslist around here -- too low-end a venue, though free of charge. I smell a hint of desperation.
mlslistings.com, a Bay Area real estate listing site, shows 128 homes for sale in Santa Cruz County for prices over $2 million. Rough count shows an aggregate asking price of around $350-375 million. Do you see that kind of money showing up anytime soon?
No wonder they're walking away.
S&P May Lower Ratings on $914 Million of Alt A Bonds (Update2) - Bloomberg.com
Wells Fargo, Rivals Cut Lending Amid `Credit Crunch' (Update4) - Bloomberg.com
"Here is an example: WaMu (one of the better priced lenders for this product)...5/1 IO Jumbo Stated Income/Verified Assets $700K purchase 10% down: Feb rate: 6.000% at par
Today's rate: 7.125% at par...
(this is for the 1st lien... I didn't check the rate for the 2nd)"
Isn't this just future toxic waste. Stated and IO means they aren't earning enough to cover the payments. The second means they don't have skin in the game. Isn't there some chance that home values will revert to the mean and this home will be seriously underwater and a walkaway? Seems like the necessary tightening hasn't really begun.
CNNMoney.com: 404 Page Not Found
"Goldman Sachs' $10 billion flagship hedge fund dropped nearly 8% in a week at the end of last month as hedge funds recorded their worst returns in at least four years."
"It seems odd to raise the rates. Why not just raise the minimum down payment? 20% down, 30% down "
Doing so will reduce home prices and that is the one thing no one is willing to touch.
They will go around it and around it - just to keep prices high.
If you think about there is nothing good for any economy in the world to have R/E prices go up. It only sucks up cash and increase debt - for the economy it is a zero sum game.
Think of a world in which no debt is allowed - will people have no place to live ? they would just in homes that cost a whole lot less work hours to buy.
I was expecting this
From WSJ Online
Wall Street's deal-making machine hit a bump when a joint venture of Tishman Speyer Properties and Lehman Brothers Holdings Inc. said it would delay the completion of its $15.2 billion acquisition of apartment-owning titan Archstone-Smith Trust from later this month to early October.
Archstone-Smith, a real-estate investment trust based in Englewood, Colo., issued the date change in a news release, but it didn't say exactly why the closing is being delayed. The merger is now scheduled to close Oct. 5.
ROOMS AVAILABLE
The Issue: Lehman Brothers and Tishman Speyer have delayed until October the closing of their $15.2 billion buyout of apartment titan Archstone-Smith.
The Downside: The move shows further evidence that credit markets are taking a toll on deal making.
The Optimist's View: The buyout price stayed firm, indicating underlying real-estate values are strong.The change is one of the first hard indicators of the problems hitting Wall Street, which is trying to cope with more than $200 billion in financing commitments extended for a wave of private-equity deals. While analysts said they expected a deal to go through, the delay brings its own risks. And it also suggests that the financiers of this deal, including Lehman, are looking for fresh financing sources to minimize their own risk.
Archstone shares were up 42 cents to $56.91 at 4 p.m. on the New York Stock Exchange, after falling as much as 89 cents during the trading day.
"If you allow time to pass, it is never a good thing when you have uncertainty to deal with," says Richard Anderson, an analyst at BMO Capital Markets. Still, Mr. Anderson is optimistic that the deal will occur. "They established a closing date, reaffirmed the purchase price, and the shareholder meeting has not been moved."
The $60.75 a share deal, which was announced in May, is seen as a bellwether in the real-estate market. "It will be very interesting to see how it pans out because it's so large, and it was priced before all this debt-markets turmoil," says James Corl, chief investment officer at Cohen & Steers, a New York investment firm specializing in REITs.
All parties to the deal declined to comment. A shareholder vote is still expected to take place Aug. 21, as originally envisioned.
The announcement also said the merger agreement would be altered to change the tax liability for shareholders of certain special Archstone-Smith units. It also said that Barclays PLC's Barclays Capital will provide financing on the transaction, in addition to Lehman and a unit of Bank of America Corp., both of which had already committed to the deal. The purchasers also will assume $6.5 billion in Archstone-Smith debt.
Among other things, the delay gives Lehman and the other banks more time to find buyers for the $17.1 billion in debt that the buying group needs to complete the transaction. The delay also gives Tishman Speyer and Lehma
I'm not sure I agree with everything, but I found this longish piece in the wsj quite good.
How Credit Got So Easy And Why It's Tightening - WSJ.com
Mortgage REITs that specialize in Jumbo had held up well until recently. Red wood trust RWT dropped from about 50 to 30 during late July. Thornburg TMA held up much better with very strong resistance at 25 but started dropping a little over a week ago. TMA was mentioned by Cramer as having an especially cautious and wise CEO that dealt only with the highest quality mortgages. Both of these were on my "housing bubble watch list" since both eventually took big hits during the early 90's housing bust.
Bill,
I have looked at TMA. Could not see any neg-arm income. ARM resets are years into the future. I hate to agree with Cramer but I don't think they are a good short. If you can convince me other wise I am listening. I usually do the opposite from what Cramer say.
Bill,
Thornburg's lending book is the cleanest in the industry. They only take the best credits from the rich/nouveau rich, skulk off and find someone else to prey on.
Bill,
I should add that I am a fellow jackal.
In others (California, for example) the state can EITHER pursue a dificiency judgement (leaving the borrower in the house) OR foreclose on the house.
RThomas, that's not true.
IIRC, just over half the states allow non-judicial foreclosures. This is also called "power-of-sale" FC, because it uses the power of sale granted in the deed of trust or mortgage to force sale of the property without a court order.
In any of those states, the lender can also pursue a judicial FC if it wants to. Generally, the only reason the lender would want to is if it wished to obtain a deficiency judgment, which forces the borrower to pay the difference between market value of the property and the loan amount, when the loan amount is greater.
A borrower can also contest a power-of-sale FC, which forces it into the courts.
A judicial FC does not necessarily result in a deficiency judgment for upside down loans. There are judges who have been known to tell the lender to eat it.
Many states don't allow non-judicial FC. Ohio is an example.
Some states do not allow deficiency judgments in any case when the original loan was purchase-money. It doesn't matter whether it was a first or second lien; if the proceeds were used to purchase the property, the lender can recover only market value. If you live in one of those states--like CA--you might see on your copy of your mortgage the words "this is a purchase money mortgage" or something to that effect typed in somewhere around the legal description of your property. If you see that, you are not in danger of a deficiency judgment. (If you don't, you can still prove that your mortage was for purchase money with a copy of your HUD-1 Settlement Statement.)
Lenders may have the right to pursue a deficiency, but they are not obligated to do so, and it can often end up cheaper to skip it: if the deficiency isn't that much, or the borrower is too obviously insolvent, the added court costs of seeking the judgment outweigh the gain. In that case the lender goes the non-judicial route.
Thornburg's lending book is the cleanest in the industry.
Clyde speaketh the truth. Thornburg has been taking all the best jumbos and leaving the rest of us with the bottom of the barrel for years. They are respected and resented in equal doses by their competitors.
If they ever have a problem, I'd guess it would be a duration one: it would take quite an economic disaster to make TMA's borrowers default. But they'll sit there forever with their low-rate loans, 'cause they aren't the sort who needs to cash-out periodically. Therefore the issue, if there is one, is TMA's hedge, not its credit quality.
More free-market fun! Yes, let the blood run through the streets and let the players learn their lessons -- well, maybe just some streets and some players...
Bear Stearns Caymans Filing May Hurt Bankrupt Funds' Creditors
If this doesn't make investors freak out, I'm not sure what would...
dryfly,
One good reason for higher caps some places may be that those places support higher home prices because they are closer to centers of economic activity, oceans/seas, or universities where people make more money and where maybe it is less advantage to have retirees causing nonproductive population density. I have always expected retirees to move inland -- or Florida if they want water-- as the world becomes more global and shores/universities become relatively more important than before.
I caught a couple of key moments on CNBC yesterday regarding the crisis in the credit markets.
In one early morning segment, ITG economist Robert Barbera made the case for the Fed cutting rates by over 1-1.5 bp in one sharp move before the year is over -- his thesis was that this help keep ARM holders on the right side of their mortgage payments. He did not expect a cut this week, however.
And then there was J Cramer last night making the absurd claim that his now famous rant on CNBC's morning show was, in fact, motivated by his deep concern for the "7 million homeowners who are about to lose their homes to foreclosure". It was the most blatant and transparent shilling I have ever witnessed. Incredible.
I wasn't sure if anyone posted this already, but another small lender is getting out of the game. HomeBanc Corp., a lender with operations around the Southeast U.S., just announced it will stop originating mortgages. The company said it can't borrow on its credit facilities and that it could no longer fund loans as of August 6. It said Countrywide will buy up certain retail loan origination assets.
Expired
Number2Son wrote ...ITG economist Robert Barbera made the case for the Fed cutting rates by over 1-1.5 bp in one sharp move before the year is over -- his thesis was that this help keep ARM holders on the right side of their mortgage payment.
But would it? There are multiple ARM indexes, and some are not very subject to the movements of the Fed. How much influence would such a move have on LIBOR?
Wouldn't help with the teaser rates either.
If you think about there is nothing good for any economy in the world to have R/E prices go up. It only sucks up cash and increase debt - for the economy it is a zero sum game
The same thing can be said about gold. They really do the same thing - offer a hedge against fiat 'money supply' inflation.
The real irony to me is that a lot of the people who are proponents of owning gold (out on the internets & including on this forum) are the same folks who appear to be the most outraged & offended that RE prices have risen so much.
Personally if I lost faith in fiat completely - I'd buy land & real estate before I bought gold. I don't think I'm alone - that's why we will certainly see a 'correction' in RE prices but no massive collapse... not until the dollars dry up (fat chance of that with the current M growth).
I don't think we'll ever see gold or RE at mid 90s prices again... not in 'dollars' anyway.
JMHO.
"And then there was J Cramer last night..."
The end of the bull market will make Cramer one of the most hated people on this planet.
He'll probably end up hiding in the south of France with a lot of other hated people.
Alt-R-
The new bk law compares a family's income to the median income of that family size- those below median are not subject to the new 'means test'. The universe of 2 person families contain many, many households where only person works (because the other person is a minor child, for example.) A family of 2 where both work is thus more likely to be over median income.
Also, many child related expenses get a free pass on the 'means test' so it often possible to get a family with kids with income far above median income to qualify for a 7.
Tanta -
If there any significant difference in the cost of mortgages in recourse and non-recourse states, or is the chance of recovering additional money through a deficiency judgment so small that, other things being equal, it doesn't make a difference in price?
One good reason for higher caps some places may be that those places support higher home prices because they are closer to centers of economic activity, oceans/seas, or universities where people make more money and where maybe it is less advantage to have retirees causing nonproductive population density. I have always expected retirees to move inland -- or Florida if they want water-- as the world becomes more global and shores/universities become relatively more important than before.
Typical coastal bias... there is more than turnip farms inland... no shortage of universities... and airports to fly 'globally' from.
I like ocean as much as anyone but I don't see why a California 4 BR home on a small lot should get a loan for a million dollars that GSE's should be given 'special consideration' to be able to buy... and a million dollar 300 acre 'hobby farm' in Southern Minnesota with a trout stream shouldn't qualify for the same?
And don't tell me its because the Cali house is near Stanford University or some such because that southern Minnesota hobby farm could be near the Mayo Clinic & Medical School.
Similar situations are like this all across the country. My experience traveling the whole country is everyone thinks their situation is different & deserves special consideration. As wise old Missourians say... Show Me!
I was not saying that TMA is a good short. However, from a technical point of view it has two issues. One is that it has held it's value extremely well. The second point is that it has broken resistance. I guess that people who are selling must have some concerns about the increased cost of jumbo loans.
If there any significant difference in the cost of mortgages in recourse and non-recourse states, or is the chance of recovering additional money through a deficiency judgment so small that, other things being equal, it doesn't make a difference in price?
There have been various attempts over the years to quantify the marginal differences in FC cost between states and evaluate that impact on mortgage rates/fees/availability. The usual conclusion is that it just doesn't make enough of a difference.
However, like all analyses of a "normal," not a stressed market, that may be subject to change. You have to bear in mind that most studies of this problem had to use the biggest, most geographically diverse database there is, which would be the GSEs and HUD. So, well, with a fairly consistent application of credit guidelines across states, and homogenous loan amounts, you get six-of-one-half-dozen-of-the-other on FC law variation.
Try it again with Alt-A, jumbo, subprime, etc. and you might get something rather different.
I like Cramer. For all the nuances, I think he's quite entertaining, and clearly intelligent. I don't agree with him on many occasions, but I much prefer him to any other biz TV personality. I like to see people who are passionate about what they do, and he's got that in spades.
I'm curious to see if TOL will say anything on their conference call tomorrow regarding the new Jumbo rates?
I like Cramer. For all the nuances, I think he's quite entertaining, and clearly intelligent.
Erik - I agree but then I liked PeeWee's Playhouse too. I've often said Cramer is on the wrong network & should come right after Jon Stewart and before Colbert. Perfect.