Irvine Housing Blog

I do not favor 100% loans .... Perhaps one reason why the GSEs do it is to keep the cash flow coming and to do the extreme thing to keep the real estate market up; but this only works in the short term; its like an alcoholic getting some booze to stop the jitters.

I do want to take the opportunity to advise you that an epic change occurred September 22, 2010 which I reference in my linked Seeking Alpha article: A bear market has commenced in stocks; this as traders took profit from the recent rally by selling a broad spectrum of rally leaders.

Banks, KBE, fell 1.8%. The chart of Junk Bonds, JNK, reflecting the fall of investment liquidity, is the investment chart of the century. Peak Credit occurred Monday September 20, 2010 with the value of Junk Bonds, JNK, peaking out at 39.71. The Global Credit Bubble has been pricked. The world has gone over the tipping point; it has passed from prosperity to debt servitude.

The Bank of Japan and Kan have declared war on the currency traders to stop the rise of the Yen: “Japan and the currency traders have scorched the investment skies” … “Welcome to the investment desert of the real” … “We have a new investment matrix” … “We ain’t in Kansas no more” … Kan’s selling of Yen on September 15, 2010, has started global competitive currency devaluation. All currencies will now be falling into the pit of financial abandon together, albeit at different rates.

With bank capital being eroded by the bear market, and by the banks Excess Reserves, being deflated by falling US government bond, TLT, value, banks will turn to foreclosing and then renting properties.

And one day, US Treasuries will fail to auction and the GSEs will quit underwriting mortgages, and this too will cause banks to turn to foreclosing and renting properties.

“Ms. Gonzalez bought her home for $90,500, with monthly payments of $834”

WTF?  Did she get loan shark financing?  a 15 year mortgage of $90,500 calcs out at 7.5% interest rate… but the 30 year is a whopping 10.7% rate, over double the going rate… i guess the silver lining is that the money is being risk priced…

As to today’s property - The house was on the market for only a few days. It was taken for 925K (26K more than the asking price). It is still on the market for back-up offers but they don’t really talk to you. And there is no reason to offer more any way. It is a short-sale, and they are waiting for the approval of the second. After realtors’ fees, I guess nothing is left for the second, so why should they approve?

This is a decent house. But, the pictures of each room have so much going on. Too full of furniture and whatevers. Is that a beauty shop chair in the bathroom?

We had a zero-down loan on our first home.  While they were readily available for everyone, this was a product for MDs.  We got a 15yr, which is what I would want to see in 100% financing products.  I would give them to people short on savings but strong on cashflow.  They should be structured to have the highest payments up-front, and then at some point have the payments go down.  This serves two purposes: qualifying someone based on the higher payment yields a lower general DTI (ours was originally 13%), and the extra payment goes towards paying in equity.

100% financing should never go to non-owner occupied homes and other lenders should report to the original lender if someone gets another loan with an existing 100% loan out - to prevent the ‘investor’ from living in a home for a short period and then turning it into a rental/specuvestment.

“...Subprime borrowers suffer from the consequences of their own life’s choices…” 

I’m all for personal responsibility, but the position (family, neighborhood, culture) in life in which you’re born has a very large effect on your initial direction; and I’m a big believer in the power of feedback loops (positive and negative) - the theory that decisions/actions tend to lead to similar choices and results and these compound and feed on each other, in either a positive or negative direction.

“...Can no money down mortgages be underwritten prudently? ...”

Yes.  A high LTV is just one risk factor of many.  High LTV loans can be made very prudently so long as the underwriting is conservative/traditional otherwise.

e.g. If the loan is a:

30-year fixed loan,
< 28% front-end DTI,
< 33% back-end DTI, &
6+ months of reserves

Then going with 100% LTV does not increase the risk on this loan very much, AND you can charge for the additional risk in MI premiums and/or a higher rate.

No-down loans don’t need to be a disaster, and for many decades, VA and FHA backed no-down or 3% down loans for QUALIFIED borrowers with good results. Many lower-middle-income people were able to buy and attain housing security and a little bit of equity thereby.

What has caused this disaster is the total discarding of lending standards altogether. For one thing, the DTI ratios became absurd. I don’t care how much you put down or how good your FICO is or how solid and verifiable your income documentation- there is NO WAY anyone can afford to borrow 4,5, 5X his income or more. In the early 80s, when we saw the first ARM loans, lenders went to the 4X DTI standard, where it had previously been 2.5X your income. There was an immediate surge in defaults. I penciled through the numbers for my own income, and could easily see that I would be squeezed to death on a loan 4X my income, even at relatively low interest rates. It leaves no room for savings or other debts that many people have, such as multiple car loans and credit cards. It leaves very little room for any discretionary spending.

However, the worst damage was done when sanity was abandoned altogether with I.O., NINJA, No-doc, and pay option arm loans. These are the loans that made it possible for somebody with a combined 2-income household income of $60K to buy a $900K house in a Chicago suburb. DTIs of 7, 8, or more became very common. Now, anyone can see that this only “works” with a pay option ARM or IO or some other piece of insanity that allows the borrower to enter the deal with an absurdly low payment relative to the amount borrowed, with the understanding that the house will automatically appreciate enough by the time the loan resets to make the inevitable balloon payment for all that deferred interest and principle. Of course, this would never happen because the value of houses was determined by whoever was willing to borrow the most irresponsible money. There was never any chance these people could pay back these loans.

Add to this the incredible HELOC abuse, and we had the perfect setup for a complete financial collapse. It could not have happened any other way.

Eliminate ARM loans, IO loans, and other kinds of “trick” mortgages, write loans only for 2.5X income, or even less if the borrower has other debt; verify incomes and credit histories- in other words, underwrite the loan properly- and we can offer no-down loans to select borrowers as we did in the 50s, 60s, and 70s. But there is no way we can have a decent financial system with the incredible abuses and trickbag loans of the past 15 years.

My issue with zero down loans is that the buyer is always going to be underwater for the first several years of a loan if they have to sell.  They are going to be out 5 or 6% just for the sales commission, and if the market isn’t great, they’ll be paying 3 or 4% in closing costs and incentives to the next buyer. 

And if they default, by the time the bank forecloses on them, it will cost the bank 10 or 15% in lost interest and disposal costs.

If the buyer can’t come up with 3.5% down, what makes anyone think that they can come up with 8-10% cash to bring to the table to get out of a house after a couple years? And if they have no skin in the game, why would they even try?

Zero down is a horrible idea, but I expect the program will be significantly expanded because it is consistent with other ill-advised government programs as follows:

- Is short-term focused w/o regard to long-term consequences.
- Attempts to solve a government and individual problem of too much debt, too much spending and too little savings with more debt, more spending and less savings.
- Involves immediate gratification as opposed to working hard, saving and prudent spending.
- Moral hazards of teaching people that saving money isn’t necessary, 100% leverage is not only acceptable but is the solution, living on the edge financially is encouraged, personal responsibility isn’t important, all risk should be absorbed by the government, etc. - i.e. teaching people all the wrong lessons.
- The government (ie taxpayers) assumes 100% of the risk and receives 0% of the reward.
- Total disregard of the use of taxpayer money.
- Wastes more money by artificially attempting to prop up home prices.
- Assumes that the home ownership is better than renting even if it involves living on the financial edge which is completely wrong. 
- Encourages entitlement thinking.
- This proposal merely adds to the house of cards instead of fixing it.

Too much leverage was a significant factor in the great depression.  Stocks could be purchased with 10% down which contributed to bubble prices in stocks in the roaring 20s.  The bubble wasn’t completely deflated until the Dow lost 90% of its value as selling causes more selling in over leveraged markets.  10% down allowed a lot of people to participate in the stock market only to wipe them and others out.  10% down was a catastrophe.  And now we have witnessed how over leverage contributed greatly to the housing bubble and makes any solution exceedingly difficult and expensive.  50% down is now required (although can be circumvented) for stock purchases which is an obvious improvement, although even 50% down causes over leveraged selling (e.g. margin calls) that can feed on itself. 

The solution to over leveraged markets is not more leverage.  The 3% down government programs aren’t much better.  Such programs just add to systemic risk and will inevitably lead to disaster at some point when prices fall precipitously and selling begets selling, wiping out the people who thought were supposedly being helped as well as others.  If you like 3% down government programs than read the above bullet points again because they largely apply.

The pennies down after govt rebates on a HOUSE loan is asking from trouble again.  The redeming aspect of the minister’s loan is that the DTI is only 3x and payment is likely about $952/month or $11433 per year which would include RE taxes ($1500), interest (5%), PMI (1.5%) and insurance ($800) with in income of $32,000.

Not much different from the 3.5% FHA loan less the tax rebates.  The banks don’t care if they make a new GSE loan that defaults.  They will have been paid, will get extra for the FC and are no longer liable if the loan was properly documented and rated.  The Taxpayers wil pick up the tab—Party on!

A co-worker was approved for a regular loan.  Found out about the 3.5% FHA loan and closed within a month.  Who says they dried up.  There talk about making 0% down as standard GSE and 0% on Jumbo’s for new MD and JD.  Some animals are created more equal than others.

“The illusion in Irvine is that a mob of high-income buyers live the good life. The reality is that many of them are pretending Ponzis that only made it by spending their home appreciation as soon as it appeared”

The reality seems a heck of a lot more like this:

This house sold for $750K in 2003.

Now it’s under contract to sell around $900K to someone with income and assets that support that price.

Sorry but that’s the cold truth.

> He added, “One of the great and unsung tragedies of the whole crisis was the end of the subprime market.” - Prentiss Cox, a professor at the University of Minnesota Law School

ROFLMAO

WTF? Did a lender donate a building to the law school?