Continuing the ongoing saga of the subprime implosion, Federal Regulators have gotten into the play of our Spring Smackdown by strongarming mortgage lenders into qualifying based on fully amortizing payments.
Can you say Ruh roh Shaggy?
Regulators are concerned lenders are issuing mortgages to borrowers with little proof that they can repay their loan and do not fully understand the risk of increasing payments, the document states.
Subprime borrowers could find themselves unable to afford monthly payments after the initial “teaser” rate expires and make payments for taxes and other expenses if lenders do not hold such costs in escrow, the document states.
Subprime borrowers also face the risk of “losing their home,” the document states.
That pretty much describes most of Southern California. When our affordability dipped below 6%, and much of the wealthy already live here (we’re not attracting a higher percent of millionaires than are already here), the area’s housing will stop in its tracks if documented income were required on a fully amortizing basis.
Dead Cold.
More than 80% of the loans made recently in SoCal were of the adjustable rate ilk, and I’d venture a guess than more than just a smidgen of those are due to affordability of the monthly payment. Fully amortizing loans are currently touted as stone age devices not worthy of a modern world. All part of the “it’s different this time” argument that is so quickly spouted by the clueless. Just look at history if you want to know what affordability is going to look like. Because, frankly, if the loans of yesteryear are reintroduced, so are the prices. Incomes have not kept up with basic inflation, much less the out-of-control prices of Southern California.
The positive to all of this speculation squashing is that it will flush homes back to banks and back on the market at reduced prices. Individuals will lose out, but the overall will be better. Risk will once again be priced in.
Interesting timing:
http://www.irvinehousingblog.c.....financing/
The regulatory thing was a land mine for a politician.
You bust up on a subprime lender and the minorities are all over your ass for being a racist/elietest.
I’d really like to see them go after insiders who sold like crazy from NEW FMT… and then had to restate or delay their financials.
That was very enron esque…
Live interview with Freddie Mac’s chief on CNBC early Tuesday morning. Freddie Mac essentially announced that they would “stop purchasing subprime loans or any securities with high risks of default.”
In 2006, about 15% of new mortgage originations (not refis) were sub prime. Add in the various “liar loans” where there is no income check and no documentation is required, and other flavors of exotic fare such as interest-only loans, and piggyback mortgages that allow 100% loan to value, and you have as many as 30% of new mortgages.
With one fell swoop, Freddie just eliminated between 15% and 25% of home purchasers from the credit pool, and that just set the housing bottom-callers back another year.
I believe you’re right about what will stop this insanity. As soon as the lending standards get back to normal, so do prices. Generally, those who are able to buy a $500,000 house now in So Cal with a toxic loan would most likely only be able to qualify for $275,000 or so – and that will be where the market goes.
The lenders can’t keep making these crazy loans forever. Eventually they will stop, either because of the losses or because regulations force them to. When this happens, the market shifts overnight.
Tell all those real estate people, this isn’t the bottom. Not even close. Even GMAC said that they are starting to have some problem loans. They only lend to good credit customers.
The stock market is saying that the economy isn’t going to be so rosy in the future.
Going down to Chinatown. Last week, I was chatting with a few folks and I was telling them they should short subprime lenders for a quick buck and look at more traditional lenders such as Wells Fargo and Countrywide on the longer term horizon to short. The feeling they gave me was that the subprime lenders got caught up in the market freefall and they would rebound.
Let us take a look at NEW this morning. Nope, no rebound here.
Hate to say it but this is the stuff we bubble bloggers have been preaching for ages. I’m just happy to make a profit and see corrupt lenders go down in flames.
Dr. Housing Bubble
http://drhousingbubble.blogspot.com