Just like the ancient Pompeians, it’s pretty clear that a lot of Irvine residents will be abandoning their homes and running when that volcano erupts. Numbers do not lie. Thanks for the detailed analysis IR. 

Unfortunately too many people in today’s society attempt to live beyond their means by either buying when they shouldn’t (e.g. 100% financing) or using their home as an ATM. It’s really hard to feel sorry for those who bring this on themselves.

What really irks me is people who prey on the uneducated. I understand that ultimately the responsibility lies with those who sign the papers. But I believe there’s a special place waiting for predators who ruin peoples lives financially just for a big fat commission.

Although unrelated to the housing bubble, this article illustrates exactly what I’m talking about.

http://www.usatoday.com/money/perfi/retirement/2007-11-04-retirement-scams_N.htm

Like the old adage says, “If it sounds too good to be true it probably is.”  Greed is a powerful thing.
——-

One thing you did not mention (or if you did, I missed it), is that most ARMS rates are tied to LIBOR, or the london interbank lending rate. 

So for all intents and purposes it doesn’t matter if the Fed eases or not, if they are trapped in their ARM, the Bank of England and EU monetary policies matter way more than what the Fed does.

At this point in time the EU and BoE are far more concerned about inflation than the US Fed.  The eurozone is in a tighten/hold pattern, and thus out of sync with the US Fed on monetary policy.

So with ARMS mostly tied to LIBOR there is one more reason FBs (and massive HELOC debtors) are truly F’ed.

I’ve noticed the radio ads claiming “fixed rate at 1%” and the like (obvious option-ARM loans made to sound like fixed loans in the ads) have disappeared. I have only heard the HMS Capital ads recently, and the funny thing is they disavow subprime loans and option ARMs.

Sounds like some lending practices have become the redheaded stepchild of the lending industry!

Option ARMs, especially at the high LTVs they’ve been sold at, are the dumbest thing to hit lending and banking in years. We’ll be digging up the bones of victims out of the ashes for years.

I would love to take credit for this great analysis, but it was all graphix’s work.

Whenever I see facts like this presented, I can’t help thinking the deflation of this bubble is going to be even worse than the most bearish can imagine.

As I’m sure you all have noticed Citi is toast.

Whoops! Sorry graphix! Excellent work!

Yes, very crispy…

http://news.bbc.co.uk/2/hi/business/7070935.stm

Whoops… That was the wrong link.  A good one, but not about Citi specifically.

Here’s the one I meant to post…  Citi really screwed themselves.

http://online.wsj.com/article/SB119422328485282002.html?mod=home_whats_news_us

Idaho_spud,

LIBOR is not set by any central bank.  US dollar loans based on a LIBOR index are talking about US $ LIBOR, not pound LIBOR or euro LIBOR.  US $ LIBOR trades near Fed funds + perceived risk in overnight lending between banks.  Sometimes its even less than Fed Funds.  However, Since mid-summer, LIBOR rates (in al currencies) have been trading quite wide over Fed Funds (credit crunch).  So, increased risk in bank balance sheets hurt $ LIBOR based borrowers, but BOE & ECB policies have nothing to do with it outside of general effect over global short term rates being higher than domestic short term rates.

A few random remarks.

First of all, a secy at a law firm I was working at in the mid 80s had
the equivalent to the mtg described.  It may have been exactly the time.
She was married to an accountant who actually chose the thing.

But, they totally lucked out.  They got the mtg when interest rates were at their worst.  So after the first year’s reset, the negative am DECREASED.  And after the 2nd year’s reset, it went away, and by the third year, things were amortizing nicely.  Prices were also going up, in a desultory sort of way.

After I explained to her how horrible the loan was, but that she was super lucky and now, no negative am, she says, not hearing the good news at all, oh, then she should refinance!!  I said no.  You lucked out.
I think rates will continue to go down, so you should take advantage of
the favorable environment, and see your payment go down every year,
instead of refi-ing into a 11-12 % fixed (or thereabouts—that was considered low.)  My prediction came thru & I don’t think she refinanced.

This will not happen again, I think.

Also, I have tried to explain the margin in every single closing I’ve done, and nobody has ever understood it.  This is not a hard concept, to my mind, but apparently it is to the unwashed.

Finally Herculaneum is still there, tho Pompeii is not.  You can stand on a hill and look upwards, seeing the excavated houses below, and the modern Herculaneum above, and in ‘72, when I was there, you had to look hard to distinguish the ruins from the lived in houses.  The Pompeians did not waste their money, to my lights.  We have lots of stunning Roman art which we’d never have had, had they not spent, spent spent.  The Villa of the Mysteries. . . with this wonderful bright red paint, in better condition than some stuff from the Renaissance—or it was in 72.  Sometimes you could look down the street, and so much is preserved you think it is a living city for a nanosecond or 2.  I’d love to go back.  Back then, they had decided to not excavate the other half which is still buried; I suppose to preserve things for future archeologists with even better techniques.

I didn’t realize the YSP was based on the margin.  Thanks.

Oops, that picture does show the ancient/modern non-contrast.  There was no fresh paint in ‘72.

Great first post, Graph.

Glad to see you finally popped your…volcano.

SCHB

lawyerliz - It may not have been luck.  If not she, then maybe her husband timed the loan market with the probability of lower interest rates in mind.  I won’t bore you with the details, but I watched my father do this back in the late eighties.  I still marvel at his belief in himself and his willingness to take a calculated risk.

What is even more disturbing is tha the scenerio explained is only for a $500K loan? That only got your foot in the door of a small condo and starter shack. What about the people that were buying the middle of the road $800K and $900K houses? To me that is where the real insanity was. What did these people think? Those houses were going to be worth $1Mil plus in 2 years? And who did they think would be buying them when it cam time to sell? The pool man? If you would have written this script ten years ago people would have told you, you were off your rocker.

I hope so, but I’ve seen accountants do some awfully dumb things.

Wachovia is still advertising a “pick your payment mortgage” on CNBC.  Of course the commercial doesn’t explain the loan (that’s what the microscopic print at the end is for), but it sounds like an option ARM.

Was just in the Quail Hill gym today next to two women who were discussing whether to keep or sell their home.  The one said, “You should definitely keep your place.  Its price is only going to go up the next few years.”  The other appeared somewhat uncertain, but relieved to hear that information.  How irresponsible to make such a statement with conviction.  Even with a mountain of support, I would at least make such a statement conditional.  Frankly I’m astonished that I’m still hearing such statements, considering what’s happening in Quail Hill.  I don’t think that owner sentiment has quite turned around.  There will likely not be a recovery until there is a capitulation and general sentiment turns sour.

I don’t understand the following:
“Lenders thought it was a good idea to let anyone sell this loan… and sell it on the fact that they can make 3% yield spread premium on the back end. Yield spread premium is paid by the lender to the broker. The amount is determined by the broker by adjusting the rate higher or lower. The higher the rate the more YSP the broker will make. However, with option ARMs it is how high the margin is. The real interest rate is the margin plus the index. Option ARMs use many different indexes, but a common index it the MTA.”

Can you explain what “they can make 3% yield spread premium on the back end. Yield spread premium is paid by the lender to the broker.” really means.

What is also scary is the break-even point back to the original loan terms.  By my calculations, assuming a the recast payment and interest stays the same, in October 2014, the original principal balance will return to 500,000.  So basically, in almost 10 years of payments you’re back to where you started.  Now you have 20 years instead of 30 to pay back the original 500K loan.

YSP aka commission by the lender to the broker.  So imagine a $15K (500K * 3%) commission for brokering the loan.  Sounds even easier and better than earning a Realtards commission.

Presumably most people will be making more in 10 years than they are today because of advancement in their careers and the benefits of inflation.

Actually, for a low interest rate mtg the difference between 20 and 30 years is not so great.

I represented an S & L, and was getting the fabulously low rate of 13 1/2 %.  I ran my finger down the amortization table and figured out that
we could just barely afford payments at 18 years.  So we signed up for 18 years.  At that time 15 year fixeds weren’t heard of, so I sorta invented it independently.  They went along with my weird choice since I worked there.  So, when we went to sell we only owed about about 30 grand instead of what? maybe 65 or so.

Also, I had modified since I went to a different S&L to an adjustible, which went down, down, down.  The 1 yr T-bill index with a margin which was was only 2.5.

S & Ls went under, I left, and the first year they readjusted it, they did
it wrong, in their favor of course, and I raised hell and they fixed it.  Some time later I supervised a pay-off of the same sort of mtg with someone else, and they were adjusting that one wrongly too—KNOWING that they were conning the borrower.  None of it was for very much money. 

But still. . .

Anyway, bottom line is a 20 year mtg isn’t so bad, unless you couldn’t have afforded the 30 year mtg in the first place.

The credit market can turn on a dime, but popular psychology will take longer.  People will need to be pounded with months of empirical data that prices are going down AND they’ll need to feel it personally (i.e. see neighbors moving out because their loan’s adjusted).

That’s ok. I am happy that the quality of my post would be confused with IR’s. That is quite a compliment. I admit to <s>stealing</s> using his music theme though.

Also, there is a great Pompeii novel written by Harris who wrote Silence of the Lambs.

Heh, yeah - that’s exactly what threw me off. It was a bit wordy though so I should have noticed. Of course the words were right on the money so thanks for calling it like it is.

She would never be able to sell it now, so let her be happy in her dream world.

Man, that first picture looks so much like Irvine.

Imagine a plan that is based using your increased wages in the next ten years to pay an even higher house payment. I guess no one would ever want to take a vacation or send their kids to an Ivy League school.

Does anyone know how much of this mortgage product was sold in Irvine?

Yeah, but her loss would be less if she sold now.  You can sell, you just have to be a bargain compared to other list prices.  And, probably even more of a bargain this time next year.  I’d rather lose $100K now than $200K in two years.

Mark,

I disagree.  I have seen this before.  People will remain oblivious to the problems forever if possible.  It is only when they go to sell their place that they encounter the hard truth.  Even then, most are in denial for a good 6 months of their first listing.  This is how it happened in the 90’s.

Most people live in a constructed world of half-truths, fairies, moonbeams, unicorns, and ever-appreciating real estate.  Reality will never touch the ponies of OC.  Never.

Just admit that not everyone is as smart as you, and it’ll be your turn to make mistakes in the future.  I, for one, am laughing all the way to the bank.

Chuck Ponzi

This loan has been around for a long time. It used to be just for “A” borrowers with good credit who needed a cash flow loan. It became the loan of choice for flippers in 03’. Countrywide and some others only put a soft pre-pay on it, so it was the perfect investor loan. Low carry charges and no pre-pay when you flipped. Sweet!  It rolled out with ferocity in mid 04’. The market hit a wall about then, in that rates and prices had finally pushed most people out of the market. It’s not that they could not lie their way into a loan. It’s just that the debt service would have been too high. This was the loan that brought the punchbowl back for another two years. It allowed a borrower who could really service a 350K, 30 year fixed, at 6-6.5% to make the same payment on a 700K loan. The Kool-Aid was potent. It was a foregone conclusion that things would happily keep on rising and the day of reckoning would never come.
The lenders made the pre-pay hard in 05’. Making 3 points was usually just for the Orange County chop shops. They are gone and not missed. If the borrower didn’t want to pay the closing costs, I could raise the margin enough to cover them on ysp.
If there is any silver lining to all this, and I admit you have to squint to see it, it is that the people who will be hurt by this product, [myself included] will be able to eventually buy back a similar home at a price, and terms that are sustainable.

Great post Graphix!  Thanks for the info!

I will print this out and save it for future reference.

However, this topic should have been blogged last Wednesday because it is VERY SCAREY!!!!!!!!!!!!!!!

We visited Herculeum and Pompeii back in 1965. 

Even though I was a kid, I really enjoyed the place.

And the pizza in Napoli was spectacular, even if the downtown streets stunk of pee.

As my wife said, when looking at those Quail Hill homes that look like they’re from a 3rd world country -you know.. the mediterranean/tuscan look-... If I want to live in a 3rd world country, I don’t want my neighbors to live ten feet from me

How true.

Pizza…....now your talking…........food from the gods…......

paulspizzaworld.com

Really, what’s the title?  The stuff by Thomas Harris is great (twisted, but great.)  Same guy who did Red Dragon, right?

When did Italy and Greece become Third World countries?

Parts of Italy are pretty third world; most is not.

Sicily never did get over being conquered by Rome.

Hey, everyone, rejoice with me; I thought my mtg would be paid
off in a couple of months, but it’s paid off NOW.  Seems our monthly payment was so high due to all the escrows, it was enough to pay the whole thing off.

Hope that doesn’t cause the financial universe to end.

Mortgage burning party at Liz’s….WOOT !  Congrats.

IR,

I ran some regression analysis of housing trends in Ladera Ranch, and it was pretty sobering—for 1/2/3 bedrooms, $334 in value destruction PER DAY over the past 6 months, normalizing for other factors.  Do you guys want a copy?  drop me an email if so…

- Zileas

It’s going to be more along the lines of Krakatoa eruption than Vesuvius.

Right, and I don’t remember the name.  It’s about an aquarius—in charge of the aquiducts, you know—who’s been sent down from Rome to check out why they went dry.  He also wrote Imperium which I think is set in the time of Cicero.  Don’t get me started, but if you like your history lite, there’s Lindsay Davis (the time of Vespasian, just before the Volcano blew, Sayers, time of Cicero, and Medicus, new series starting, by Downie, time of Trajan/Hadrian.  I haven’t read any of the Hannibal Lector stuff, the ancient history novels are no more twisted than any mystery novels.

You come 3,000 miles, I’ll throw a party to die for.

I have a friend in the Mortgage business. His name is Anthony. We used to have a glass of wine together at a popular local Italian place.
A couple years back I mentioned that I was a RE Bear and he just laughed and told me I was another “doom and gloomer” Well when New Century imploded he just scoffed. Lots of business still. Well I saw him again the other night. He looks like a Pompeii refugee. The neat suits and nice haircut have evolved into. “Tequila and as fast as possible”. He looks at me and just cusses and says. “Dont open your mouth about the Mortgage business”. As for the Mortgage business in Orange County.  Cue the music. ” Its the end of the world as we know it and I feel fine”.

I was on firstteam last night and there are nice 2 bed condos w/2 car garages and backyards/patios in Ladera renting for 1800 a month.  Looks like rent is coming down as well.

Jumbo mortgage business is screaching to a halt, even though rates are improving.  And by screeching to a halt, I mean non-existant. 

1.) You are a smart home owner and you did a 30 year fixed or a long term fixed ARM when rates were low and don’t need to refi.

2.) You purchased a property with 10% down OR LESS in the last 3 years.  Can’t refi now

3.) You are a first time home buyer that now has to push back purchasing until accumulating a larger down payment.  Can’t buy now

4.) You have great income and tons of cash but don’t want to plop money down and are waiting for a better deal. Choose not to buy now.

5.) You have great credit, plenty of equity, but given rates and new product restrictions you cannot afford your fully amortizing payment and cannot refinance.

6.) You made a recent late mortgage payment and are now considered sub prime.  Cannot refi.

7.)  You have your property listed for sale or just recently removed it from MLS.  Sorry but you’ll need to wait 6 months, possibly 12 months before a bank will take your loan.  They may also require you to take a new prepayment penalty.  You can’t refi.

Here is an interesting note: In 27 years from now when the loan in the example is done, the payment is still at ~$4100 per month.  In real dollars (using an inflation rate of 3.5% per year), that comes out to ~$1600 per month.  Which, coincidentally, is about the same amount that the loan started out at. 

So, if there were never a bubble again (unrealistic to be sure) and prices dropped to what the median income could really afford, that median $500k house would take over 25 years to again be worth what it was at the peak with regards to payments.  That is really quite sobering.

I don’t understand #7.  And how could they impose a new prepayment penalty, if it’s expired on an existing loan.  Or, are you
saying that if you listed it and now want to refi, they’ll impose a prepayment penalty, no matter what.

Ahh, I see, they’re scared you’re going to take your equity and walk?
But then all they have to say is no cash-out.

You couldn’t sell it and therefore it isn’t worth anything?

The investor will more than likely require a ppp.  It costs money to originate a loan.  The investor needs to hold the loan for generally 3 to 4 months before they are “in the black.”

Cash out is a definite no-no.

You listed it once before, so the invester is scared you will sell before he can get back in the black.  Ok.

As if that’s gonna happen. . .

Any thoughts that the jumbo limit will be raised?

Congratulations Liz.  That is wonderful.

It won’t

Hmm…. thats unusual lendingmaestro, rents SHOULD be going up in general because of all the people like us on the sidelines waiting to buy later ratcheting up the prices.  I would guess theres just a lot of people in serious trouble (investors and speculators) in that area who need to rent however possible to keep some cash coming in….

The novel about Pompeii was written by the British author Robert Harris. He also has a trilogy about Cicero currently in production. I have read a couple of his books and can vouch for him as an excellent author.

It was Thomas Harris who wrote Silence of the Lambs. He’s not bad too

Oops, wrong Harris.

If you have not, go read the story on CNN.com, “Subprime Bailouts: Chump Check”  By Les Christie / November 5 2007: 1:22 PM EST,,, it describes Countrywide lowering a.r.m. post-teaser rates from 10.5 to 5 percent, when fixed-rate (in their example) is still held at ~7 (and pissing off many fixed rate clients for certain)....

http://money.cnn.com/2007/11/01/real_estate/Countrywide_bail_out_bashers/index.htm?postversion=2007110513

So this is how the damage may be distributed: the bank just giving up on the original loan terms somewhat, to keep the house occupied and somebody paying something for it.

Of course a lot of people are still going down, they can’t even afford half their reset rates, but this shifts the problem in an interesting way—how will the people stuck with 7% fixed’s ditch them to get that 5% rate?

-end-

The reduction in rates is simply an extension of teaser rates for another 5 years.  We will not be back to the heights in 5 years.  I supposed the loans may amortize down a bit.  And rates may be lower.  But this is just postponing the damage another 5 years.  If these people have any brains, which they don’t, they would pay at least an extra $50.00 a month, so at the end of the 5 years they have a slightly higher shot of refinancing or selling.

Also, they kept repeating this was a taxpayer funded bail-out.  I know this had been addressed, but isn’t it Countrywide agreeing to lose a little money rather than a lot of money right away?  Are they being subsidized by the taxpayers to do this?

Off to Miami.  Looks like instead of making my monthly payments to the lender, I will be paying the oil companies.

Can we invite the Cubans too?

Do we have to smoke cigars outside?

Yep.

Why should those of us who refinanced into nice fixed 30 year loans when the rates were low and did not overextend into McMansions do when we figure out how those clowns are being helped and we are leaving holding the bag?

As I posted in one of my original posts on this web site, I have no issues with these loans resetting differently, but there should be some very tight restrictions, otherwise this is just a give away.

Yes.

None of the Cubans I know smoke cigars.

This homebuyer/renter thing just too complicated for me.  Isn’t renter population only increase when people outside of the town moved in and decide to rent?  The other way is when an ex-home-owner decide to sell his home and be a renter.

Existing renters who decided to continue to be renters do not increase the demand for rental property.

The change in the supply of rental properties as well as new inventory of rental properties may affect the price, but the entire thing just too complicate for me to know rather it should go up faster than usual in this real estate environment.  Anyone who can enligten me on this, or point me to a thread on the forum?