here in San Diego, I think it's mostly (3) Buyers can only qualify with a reduced payment. Once the market is drained of the greater fool, the bubble deflates or pops...in South Riverside there are For Rent signs popping up in every neighbordhood, and many landlords are offering first and last month free rent, or reduced rents...a mechanic I know owns three rental houses, all ARM's with a five year fixed...he plans on selling in five years. None of his properties net him positive cash flow. "But what if the prices go down, and you have to sell? " I asked. He looked at me like I was stupid...
delecti, I'm hearing similar stories ... that is why I think we will see a surge in inventories (as a prelude to a drop in transactions and then a drop in prices).
Given the spread between the various mortgage products, I'm surprised anyone is using an ARM. The breakeven point for a 30 year fixed rate mortgage vs. a 1 year ARM is less than 3 years. For those using a 5/1 year ARM (fixed for 5 years), the rate is the same as a 15 year fixed!
I wonder if the application procedures & screening are different for ARMs & FRMs... similar to what you said in line item #3 - Buyers can only qualify with a reduced payment - but it isn't the payment differentials that kills them it is the SCRUTINY they face applying for conventional mortgage products that they might not face in the ARM market. Just a WAG.
So we've gotten past the "if" stage and have reached the poing of asking, "when, and how much?" with regards to the bubble.
To make a few predictions (all in fun, of course):
-the idea that the bubble is beginning to deflate will probably not enter the consciousness of the American public until mid-2006, at this rate.
-the eventual price decline may occur in one of three different ways:
(1) An outright collapse (15%+ in most hot markets) over a period of one year. This is a distinct possibility because many speculators have become jittery over the possibility of the property market reversing course. This was not the case in 2000, and I think that this is a key difference; as soon as we see negative appreciation rates, many people may decide to dump their properties on the market all at once.
(2)A plateau (with prices creeping down 2-5%) and a sharp decline after about 6-12 months of this movement. The media will have already proclaimed that the top is in and that we are heading for a soft landing.
(3)A gradual (but nevertheless devastating) decline over many years.
Predictions on specific markets:
-Nevada/Arizona/etc have a long way to go before prices reflect reality. Fully leveraged speculators (like those described above) may very well unload everything as soon as considerable YOY negative appreciation rates show up. I'd estimate a 30% decline from top to bottom.
San Francisco Bay Area/Los Angeles/New York/Boston: -20%; whether or not this happens in nominal or real terms is a different issue.
San Diego/Orange County: -30%, same caveats as above.
Florida: Could see a collapse in some of the frothier markets (Miami) of 35-40%; speculation and flipping are rampant and out of all the bubble markets, this is, demographically, one of the weakest. The other areas attract working singles or families; Florida attracts aging seniors and immigrants.
The breakeven point for a 30 year fixed rate mortgage vs. a 1 year ARM is less than 3 years.
An friend of mine recently bought a house (may be 30-45 days ago) and he told me that the 5/1 ARM was quoted almost 1% less than the 30 years fixed. I found that surprising, but didn't want to question more. May be the mortgage brokers deliberately steer people into ARM. Is the commission different?
(2)A plateau (with prices creeping down 2-5%) and a sharp decline after about 6-12 months of this movement. The media will have already proclaimed that the top is in and that we are heading for a soft landing.
My wild guess: a plateau that will last more than 18 months. After that though, I think the budget and current account deficit, as well as slower consumption and asian currency probable revaluation will set us up for a 20% to 40% drop in real estate which will lead to a recession sometimes in 2007-2008.
I've been in the mortgage industry for a long time. Since the sunny days of the RTC, as a matter of fact.
Not all ARMs are "portfolio product," but the vast majority of "portfolio product" is ARM. "Portfolio product" is the stuff banks and thrifts originate, or purchase in flow or bulk from correspondents or brokers, for their investment portfolio. It isn't intended to be securitized. "Traditionally," meaning before the New Paradigm In Lending, you had a higher standard for your portfolio product than for your salable product. After all, you are the bagholder, and as the stuff isn't securitized you get all the credit risk as well as the interest rate and liquidity risk. The technical term was "Don't shit in your own nest."
For a lot of institutions these days, however, the portfolio is a great place to put the stuff that Fannie and Freddie either won't take, or will only take with a serious loan-level pricing adjustment. For instance, the LLPA on a second home or investment property starts at 1.50 points and can get to 2.50 to 3.00, depending on LTV and product type. The agency guarantee fees, which are lender-specific and Top Secret (go ask Karl Rove), go up accordingly for pools with these characteristics. I personally have seen some G-fees lately for those interest-only ARMs that were, well, shocking for allegedly "prime" paper. The agencies can be stupid, but there is a limit to their stupidity.
If you aren't selling your loans to the GSEs or a conduit, though, you can set your own pricing. It doesn't surprise me in the slightest that an originator would be quoting more points for a FRM than a 5/1 ARM at the same rate. The FRM has to have risk-based pricing adjustments on it to make the agency want to take the risk. The ARM still DESERVES the pricing adjustments, but may not be getting them because the portfolio lenders aren't forced to charge them. (That bill comes due later.)
And, yes, FRM borrowers by and large get more "scrutiny" than ARM borrowers, perversely, for this reason. A portfolio lender can, at least in the short term, book some risky loans with nobody looking closely at them.
There's also another issue besides the lower monthly payment: the lower down payment. Again, there's a perverse incentive to put 100% borrowers into an 80/20 deal where the first mortgage is an ARM--because 100% financing isn't acceptable to the agencies for second homes, investment properties, or even higher-risk principal residences. So you make the first mortgage as "portfolio product." (Note: be skeptical of claims that portfolio LTVs are trending down. They may well be, but it's the CLTV that is the true risk measure. Unless your data says it measures CLTV, it probably measures LTV. LTV is trending down not just because of value inflation, but because piggyback loans are taking over from high-LTV single loans.)
Banks and thrifts keep interest rate risk off their books by holdi
You're welcome, df. I really have very little idea what most people really know about how mortgage lending works, so I really don't know if this information helps anyone. I just keep seeing things in print that are misleading and self-serving to the industry. And since 90% of the folks in the mortgage industry with any really good information are country-club republicans, I tend to assume they wouldn't share even if they stopped drinking the Kool Aid long enough to realize what they're doing to themselves (let alone what they're doing to the rest of us).
I also remain amused (not exactly in the funny-ha-ha way) that the biggest concentration of liberals in the mortgage biz are at Fannie Mae. And lots of liberals are joining the Fannie Mae pile-on, as if a lot of the bitching about the GSE's relationship to the Treasury weren't coming from industry insiders who just want a bigger piece of Fannie Mae's action. How ironic.
And no, I'm not saying there's nothing wrong with the agencies or that a great deal of their "American Dream" rhetoric isn't horseshit. It's just surreal from inside the industry to hear people reflexively trash everything the GSEs put out while treating someone like David Duncan at the MBA as if he were the last of the great Bond Market Vigilantes.
Calculated Risk is so lucky. He (she?) is retired. I'm still in the salt mines. Anyway, thanks to CR for having us over.
Inlaws visiting from Denver (no condolences necessary) - apparently lots of foreclosures in Denver areas, even though has not been identified as classic bubble area (or at least not like San Diego).
I know the plural of anecdote is not data, but it's interesting.
But the limit of 'anecdotes goes to infinity' starts to converge on 'data' somewhere... and well before the 'theoretical limit' is ever reached... so as all these little bits add up it starts to tell the story.
tanta, its "he". Great information (as always), thanks for posting it here.
pebird, "I know the plural of anecdote is not data, but it's interesting." That made me laugh ... but like you and dry fly, I think the "anecdotes" are piling up.
This bubble along with its companion refinance bubble represents one of the great wealth transfers of all times. One from which the working class may never recover.
That note just played by ken needs some expansion.
'the working class may never recover from this wealth transfer'
I'm not too keen on the Marxist analysis (yet) so I take the term 'class' as loosely as it can be taken. Let's identify those people who are renting because they have no choice (and maybe those who think they can pay for that house they started mortgage payments on last year or so).
They are losers in this transfer. Fuggedabout their earned incomes barely keeping up with inflation. It's not. It has to keep up with the house that is inflating away from everybody but the real estate developers. (Ok maybe some of the house owners)[I worry about the old granny and wish her no harm, but the other guys who are leveraged to the hilt and preying on others, --pass me the meat cleaver.]
You might think that we have 3% inflation, like the officials say. But those officials don't think their house value grew by only 3%.[Ok north dakotans excepted] {The rest believe they are doing well, --this is as far as they take it. It doesn't occur to them that those unfortunate renters are being robbed.}
But ken 'Robbin Hood' melvin thinks so and I'm with him.
LOL... you got those no daks scratching their heads... 3% of 'nothing' is nothing right? Well then we haven't done too bad compared to more recent years!
here in San Diego, I think it's mostly (3) Buyers can only qualify with a reduced payment. Once the market is drained of the greater fool, the bubble deflates or pops...in South Riverside there are For Rent signs popping up in every neighbordhood, and many landlords are offering first and last month free rent, or reduced rents...a mechanic I know owns three rental houses, all ARM's with a five year fixed...he plans on selling in five years. None of his properties net him positive cash flow. "But what if the prices go down, and you have to sell? " I asked. He looked at me like I was stupid...
delecti, I'm hearing similar stories ... that is why I think we will see a surge in inventories (as a prelude to a drop in transactions and then a drop in prices).
Best Wishes.
Given the spread between the various mortgage products, I'm surprised anyone is using an ARM. The breakeven point for a 30 year fixed rate mortgage vs. a 1 year ARM is less than 3 years. For those using a 5/1 year ARM (fixed for 5 years), the rate is the same as a 15 year fixed!
I wonder if the application procedures & screening are different for ARMs & FRMs... similar to what you said in line item #3 - Buyers can only qualify with a reduced payment - but it isn't the payment differentials that kills them it is the SCRUTINY they face applying for conventional mortgage products that they might not face in the ARM market. Just a WAG.
So we've gotten past the "if" stage and have reached the poing of asking, "when, and how much?" with regards to the bubble.
To make a few predictions (all in fun, of course):
-the idea that the bubble is beginning to deflate will probably not enter the consciousness of the American public until mid-2006, at this rate.
-the eventual price decline may occur in one of three different ways:
(1) An outright collapse (15%+ in most hot markets) over a period of one year. This is a distinct possibility because many speculators have become jittery over the possibility of the property market reversing course. This was not the case in 2000, and I think that this is a key difference; as soon as we see negative appreciation rates, many people may decide to dump their properties on the market all at once.
(2)A plateau (with prices creeping down 2-5%) and a sharp decline after about 6-12 months of this movement. The media will have already proclaimed that the top is in and that we are heading for a soft landing.
(3)A gradual (but nevertheless devastating) decline over many years.
Predictions on specific markets:
-Nevada/Arizona/etc have a long way to go before prices reflect reality. Fully leveraged speculators (like those described above) may very well unload everything as soon as considerable YOY negative appreciation rates show up. I'd estimate a 30% decline from top to bottom.
San Francisco Bay Area/Los Angeles/New York/Boston: -20%; whether or not this happens in nominal or real terms is a different issue.
San Diego/Orange County: -30%, same caveats as above.
Florida: Could see a collapse in some of the frothier markets (Miami) of 35-40%; speculation and flipping are rampant and out of all the bubble markets, this is, demographically, one of the weakest. The other areas attract working singles or families; Florida attracts aging seniors and immigrants.
Thoughts from the rest of you?
"He looked at me like I was stupid..."
Ha.
The Kool-Aid is strong.
So many people walking around in their little imaginary armored suits. And here comes a fleet of Mac trucks hauling gasoline.
I would think the problem is actually worse,and is underreported.
The breakeven point for a 30 year fixed rate mortgage vs. a 1 year ARM is less than 3 years.
An friend of mine recently bought a house (may be 30-45 days ago) and he told me that the 5/1 ARM was quoted almost 1% less than the 30 years fixed. I found that surprising, but didn't want to question more. May be the mortgage brokers deliberately steer people into ARM. Is the commission different?
(2)A plateau (with prices creeping down 2-5%) and a sharp decline after about 6-12 months of this movement. The media will have already proclaimed that the top is in and that we are heading for a soft landing.
My wild guess: a plateau that will last more than 18 months. After that though, I think the budget and current account deficit, as well as slower consumption and asian currency probable revaluation will set us up for a 20% to 40% drop in real estate which will lead to a recession sometimes in 2007-2008.
I've been in the mortgage industry for a long time. Since the sunny days of the RTC, as a matter of fact.
Not all ARMs are "portfolio product," but the vast majority of "portfolio product" is ARM. "Portfolio product" is the stuff banks and thrifts originate, or purchase in flow or bulk from correspondents or brokers, for their investment portfolio. It isn't intended to be securitized. "Traditionally," meaning before the New Paradigm In Lending, you had a higher standard for your portfolio product than for your salable product. After all, you are the bagholder, and as the stuff isn't securitized you get all the credit risk as well as the interest rate and liquidity risk. The technical term was "Don't shit in your own nest."
For a lot of institutions these days, however, the portfolio is a great place to put the stuff that Fannie and Freddie either won't take, or will only take with a serious loan-level pricing adjustment. For instance, the LLPA on a second home or investment property starts at 1.50 points and can get to 2.50 to 3.00, depending on LTV and product type. The agency guarantee fees, which are lender-specific and Top Secret (go ask Karl Rove), go up accordingly for pools with these characteristics. I personally have seen some G-fees lately for those interest-only ARMs that were, well, shocking for allegedly "prime" paper. The agencies can be stupid, but there is a limit to their stupidity.
If you aren't selling your loans to the GSEs or a conduit, though, you can set your own pricing. It doesn't surprise me in the slightest that an originator would be quoting more points for a FRM than a 5/1 ARM at the same rate. The FRM has to have risk-based pricing adjustments on it to make the agency want to take the risk. The ARM still DESERVES the pricing adjustments, but may not be getting them because the portfolio lenders aren't forced to charge them. (That bill comes due later.)
And, yes, FRM borrowers by and large get more "scrutiny" than ARM borrowers, perversely, for this reason. A portfolio lender can, at least in the short term, book some risky loans with nobody looking closely at them.
There's also another issue besides the lower monthly payment: the lower down payment. Again, there's a perverse incentive to put 100% borrowers into an 80/20 deal where the first mortgage is an ARM--because 100% financing isn't acceptable to the agencies for second homes, investment properties, or even higher-risk principal residences. So you make the first mortgage as "portfolio product." (Note: be skeptical of claims that portfolio LTVs are trending down. They may well be, but it's the CLTV that is the true risk measure. Unless your data says it measures CLTV, it probably measures LTV. LTV is trending down not just because of value inflation, but because piggyback loans are taking over from high-LTV single loans.)
Banks and thrifts keep interest rate risk off their books by holdi
holding ARMs, creating a perverse incentive for the riskiest borrowers to migrate into the riskiest product.
Tanta - for every one who comes here for insight & info...
Thank You.
You're welcome, df. I really have very little idea what most people really know about how mortgage lending works, so I really don't know if this information helps anyone. I just keep seeing things in print that are misleading and self-serving to the industry. And since 90% of the folks in the mortgage industry with any really good information are country-club republicans, I tend to assume they wouldn't share even if they stopped drinking the Kool Aid long enough to realize what they're doing to themselves (let alone what they're doing to the rest of us).
I also remain amused (not exactly in the funny-ha-ha way) that the biggest concentration of liberals in the mortgage biz are at Fannie Mae. And lots of liberals are joining the Fannie Mae pile-on, as if a lot of the bitching about the GSE's relationship to the Treasury weren't coming from industry insiders who just want a bigger piece of Fannie Mae's action. How ironic.
And no, I'm not saying there's nothing wrong with the agencies or that a great deal of their "American Dream" rhetoric isn't horseshit. It's just surreal from inside the industry to hear people reflexively trash everything the GSEs put out while treating someone like David Duncan at the MBA as if he were the last of the great Bond Market Vigilantes.
Calculated Risk is so lucky. He (she?) is retired. I'm still in the salt mines. Anyway, thanks to CR for having us over.
Inlaws visiting from Denver (no condolences necessary) - apparently lots of foreclosures in Denver areas, even though has not been identified as classic bubble area (or at least not like San Diego).
Denver newspaper, with the latest Colorado news, sports, weather and entertainment : Rocky Mountain News
I know the plural of anecdote is not data, but it's interesting.
I know the plural of anecdote is not data, but it's interesting.
But the limit of 'anecdotes goes to infinity' starts to converge on 'data' somewhere... and well before the 'theoretical limit' is ever reached... so as all these little bits add up it starts to tell the story.
tanta, its "he". Great information (as always), thanks for posting it here.
pebird, "I know the plural of anecdote is not data, but it's interesting." That made me laugh ... but like you and dry fly, I think the "anecdotes" are piling up.
Best Regards to all!
This bubble along with its companion refinance bubble represents one of the great wealth transfers of all times. One from which the working class may never recover.
That note just played by ken needs some expansion.
'the working class may never recover from this wealth transfer'
I'm not too keen on the Marxist analysis (yet) so I take the term 'class' as loosely as it can be taken. Let's identify those people who are renting because they have no choice (and maybe those who think they can pay for that house they started mortgage payments on last year or so).
They are losers in this transfer. Fuggedabout their earned incomes barely keeping up with inflation. It's not. It has to keep up with the house that is inflating away from everybody but the real estate developers. (Ok maybe some of the house owners)[I worry about the old granny and wish her no harm, but the other guys who are leveraged to the hilt and preying on others, --pass me the meat cleaver.]
You might think that we have 3% inflation, like the officials say. But those officials don't think their house value grew by only 3%.[Ok north dakotans excepted] {The rest believe they are doing well, --this is as far as they take it. It doesn't occur to them that those unfortunate renters are being robbed.}
But ken 'Robbin Hood' melvin thinks so and I'm with him.
Ok north dakotans excepted
LOL... you got those no daks scratching their heads... 3% of 'nothing' is nothing right? Well then we haven't done too bad compared to more recent years!
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