It’s Different Here - It’ll Be Worse
Chuck Ponzi January 28th, 2007
The Orange County Register featured an article today about the growing subprime debacle that is unfolding in slow motion. (BTW, can you really call it slow-motion when 16 mortgage lenders have imploded since December 2006?)
Some real gems are in the article:
Perhaps most troubling, loans made by Orange County companies in 2006 were among the quickest to see defaults, data show.And many of those subprime companies – which tend to cluster here in Orange County – are in trouble.
Some time ago, I noted that Orange County could discover that the mantra “It’s different here” might have a negative connotation, that it’s worse.
From my earlier entry (The Orange Crush):
17% of Orange county’s employment base is Real-estate related.This represents the highest number, and the highest share of total jobs occupied by real estate on record. We have often heard that the 1990’s bust of housing caused by job-losses in the manufacturing sector; we are more diversified out of manufacturing since then and it doesn’t represent the same risk. Pish-posh. We are out of manufacturing and much heavier in real estate.
From the OC Register article, we learn that people are overstretched here. Not only in a risky industry, but their own homes as well.
According to UBS what did they do wrong?
They didn’t scrutinize borrowers’ incomes, and they allowed subprime borrowers, who by definition have had past problems with their credit, to take on lots of risk.
Borrowers took advantage of “stated income” loan programs, where they simply tell lenders what they earn, said David Liu, director of UBS’ mortgage strategy group. And many first-time homebuyers made a small down payment or none at all. Often they took out simultaneous second mortgages to avoid paying mortgage insurance.
We in the blogger world have been fond of calling this “risk layering”. What is risk layering? It is what is called taking what a normal lender could hande for a single risk and layering several more on top of them. What are some of them we know of?
1. 100% or near 100% of value mortgages. (This includes new 80/20 Loans)
2. Low Credit Score
3. Interest Only or Negative Amortizing Loans
4. Prior Bankruptcy (even 1-day out of BK loans)
5. Multiple income Borrowers
6. Stated-income or No/Low Documentation
7. Back-pocket appraisers
The problem is not that any one of these risks exists in a vacuum, but that they often simultaneously existed on MANY loans.
An Accurate OC Fact: I have an acquaintance who has an 80/20 Negative Amortizing loan with a state income/no documentation, and he has a low credit score (and his broker had to bring in an appraiser to inflate the value so his closing costs were funded from the loan). He has absolutely zero skin in the game. Does he care if the stated rate is 8%? No, because his payment for the negative amortizing loan is about 3%, and it doesn’t reset for another 8 months. On a 1.5Mil loan… good luck with that one.
An even more onerous problem is cash-back at closing. When a lender is led to believe the value of a home is greater so that the buyer (or seller) recieves cash back, it is illegal (and yet this kind of mortgage fraud happens far more often that most believe or understand). I have heard reports of it occuring in over 25% of all loans in the past 2 years.
So, what does the future portend for home buyers… no more risk layering? Somehow I doubt that the entire industry can turn on a dime after the past 2 years of outrageous lending, but there are some margin improvements reported in the OC register:
Like Fremont,
New Century has taken further steps to make its underwriting more restrictive, according to the company.
Several of the new rules affect first-time buyers. New Century won’t lend them money if they don’t plan to live in the property they’re buying. And if first-time buyers are putting less than 10 percent down with a “stated income” loan, they need to have savings equal to six months worth of mortgage payments.
Tony Meola, executive vice president with loan production at New Century, said the company is acting more from a sense of prudent lending than from pressure by government agencies or investors in its mortgages.
We’ll just have to see how much influence “investors” will have in the future since they are the ones determining how much risk they will ultimately accept. I suspect that the problems so far are not yet systemic in scope. However, if cross-defualts occur (one default causes another) among lenders, that will change dramatically to account for borrower AND lender risk.
Who are the 16 companies that went bust in OC? It would be nice for us blog groupies to know or pass along to others who may have a loan with one of these companies.
Anon:
Check out http://www.ml-implode.com.
Not all of them were in OC.
John Doe
Hello Doe,
I looked at the ABC special on housing. They are still expecting that you save money by year 4 or year five. That would be a 7% appreciation or so (Huge).
They also mentioned giving the buyers agent extra incentives. I just had to sit back aghast about the conflict of interest.
There was some mention of the fact that you are better off with a fixed rate loan BUT then their affordability numbers were far different. They had an affordability set at 20% or so.
The entire group of people they had on the were from real estate complex as well.
Except for the UCLA professor who did not mention anything about the housing cycles, rent cost to mortgage payment exc. Just that it might not be a great investment.
So, an early propeganda move…
I am begining to fear the governments next move. We are already at a point where your savings are being rapidly devalued. I just wonder when a huge tax payer bailout from my income will happen. I know your a little left leaning but its painful to think I’m going to be paying an extra 20-30% to bail out people that made bad decisions.
Perhaps even worse they will change laws about banruptcy or forclosure and protect people in houses. THose of us on the outside will be severly marginalized. Not the first time this has happened.
LAEF2
LAEF2
“A little left leaning”?
Ha Ha, Ha Ha.
That’s a good one.
I don’t discuss my political leanings on my blog, but I like the personal responsibility that libertarians espouse.
John Doe
“I looked at the ABC special on housing. They are still expecting that you save money by year 4 or year five. “
I saw that special too. I was so angry I could hardly watch it. If I am not mistaken they showed that you saved money by year 3 even with rental being half the cost of ownership in year 1. What complete BS! You would need 10% appreciation or more, and of course, they don’t give you their assumptions. Shows like this encourage people to commit financial suicide. The producers should be ashamed.
OK Doe,
From an ultranationalist neocon perspective of mine…you seem a little left leaning.
Its hard to figure out the right moves these days. I’m trying to save an invest but you hear some stuff.
1)The increasing M3 supply… looks like a -8% per year on your savings account
2) Wall street is so crooked it is stunning. I could not believe they decided to set aside the verdict on the enron guy cause he dies. Nice but now the family sits on all of his stealings.
3) The back dating scandals. Jobs might be good for Apple but he was stealing. Go to jail.
4) No one was punished for all the fancy accounting tricks used in worldcom/mci or other telecoms
5) Congress is considering a bail out already for our FB
6) Congress and the new senate spoke about counting other sources of income against your social security payments… This would make your 401K into a BAD investment
So…. I’m kind of in a transition period where I try to protect my meager assets.
SS just worries me like heck. So far between me and my employer I’ve maxed out since 1998. What is my return going to be on that? Looks more like complete loss everyday.
I don’t mind paying for infastructure/illness/children in trouble but it can quickly get to rewarding those who didn’t work or even try.
Very cool to see a few people on these blogs who know what they’re talking about. I’ve been watching the mortgage scenario with much interest. Many of our agents are seeing the pinch…. their clients are in a tight spot.
Amazing though, how clients who agreed to crooked tactics to get qualified for a mortgage loan are the same people screaming to high heaven that they were wronged by their mortgage lender because the lender inflated their income to qualify them! Nevermind that they knew what their payment would be and should have enough brain power to determine if they’ll be able to cover the bills on their income.
OK, I’ll get off the soap box. Next?
Cameron
http://www.Homefindinginfo.com
inre rent vs buy, the last time I ran the numbers using my own “real world” financial scenario, I found that it only takes a modest amount of appreciation to justify a PITI that’s 2x rent. The prices are so high and the leverage is so intense that a 3% appreciation will make the numbers pencil-out pretty quick.
God help you when that 3% has a hyphen in front of it.
To the neocon comment:
Did you notice I’m getting some ads served up from google about gay cars… I didn’t know cars even had gender.
All part of living in SoCal.
Yes, leverage can make you a genius or destroy you completely (as C Serin is finding out). Perhaps we have entered a brave new world where only extreme risk takers thrive?