2008 Florida Housing market Thread Jan - Mar (Rio: mortgage, credit)

[CJFlorida]

Originally Posted by Mike Peterson

That chart shows mortgages that will reset.
Fixed rate loans do not reset.

All sub prime loans are about 14% of the outstanding loans on the market.

Not sure if the 10% I figured for option arms is high or low, my guess would be I was high.

It is meaningless what percentage the resets are of the mortgage market. What matters is the total dollar amount of resets and the ripple effect they have on the entire market. The resets are worth billions upon billions of dollars. They represent thousands and thousands of homes. These homes effect every other home trying to sell, no matter if they are fixed or not.

Also, many of those fixed mortgages you speak of may have other loans tied to them. It was not only first mortgages that were ARMs, but many 2nd mortgages as well. A fixed mortgage with a bad loan tied to it is no longer a fixed loan unto itself. It is now polluted and that does not show up in your statistics:

December 10th, 2007
Herb Greenburg Marketwatch:

The Government and the market are trying to boil this down to a ’sub-prime’ thing, especially with all constant talk of ‘resets’. But sub-prime loans were only a small piece of the mortgage mess. And sub-prime loans are not the only ones with resets. What we are experiencing should be called ‘The Mortgage Meltdown’ because many different exotic loan types are imploding currently belonging to what lenders considered ‘qualified’ or ‘prime’ borrowers. This will continue to worsen over the next few of years. When ‘prime’ loans begin to explode to a degree large enough to catch national attention, the ratings agencies will jump on board and we will have ‘Round 2?. It is not that far away.

Since 2003, when lending first started becoming extremely lax, a small percentage of the loans were true sub-prime fixed or arms. But sub-prime is what is being focused upon to draw attention away from the fact the lenders and Wall Street banks made all loans too easy to attain for everyone. They can explain away the reason sub-prime loans are imploding due to the weakness of the borrower.

How will they explain foreclosures in wealthy cities across the nation involving borrowers with 750 scores when their loan adjusts higher or terms change overnight because they reached their maximum negative potential on a neg-am Pay Option ARM for instance?

Sub-prime aren’t the only kind of loans imploding. Second mortgages, hybrid intermediate-term ARMS, and the soon-to-be infamous Pay Option ARM are also feeling substantial pressure. The latter three loan types mostly were considered ‘prime’ so they are being overlooked, but will haunt the financial markets for years to come. Versions of these loans were made available to sub-prime borrowers of course, but the vast majority were considered ‘prime’ or Alt-A. The caveat is that the differentiation between Prime and ALT-A got smaller and smaller over the years until finally in late 2005/2006 there was virtually no difference in program type or rate.

The bailout we are hearing about for sub-prime borrowers will be the first of many. Sub-prime only represents about 25% of the problem loans out there. What about the second mortgages sitting behind the sub-prime first, for instance? Most have seconds. Why aren’t they bailing those out too? Those rates have risen dramatically over the past few years as the Prime jumped from 4% to 8.25% recently. seconds are primarily based upon the prime rate. One can argue that many sub-prime first mortgages on their own were not a problem for the borrowers but the added burden of the second put on the property many times after-the-fact was too much for the borrower.

Most sub-prime loans in existence are refinances not purchase-money loans. This means that more than likely they pulled cash out of their home, bought things and are now going under. Perhaps the loan they hold now is their third or forth in the past couple years. Why are bad borrowers, who cannot stop going to the home-ATM getting bailed out?

The Government says they are going to use the credit score as one of the determining factors. But we have learned over the past year that credit scores are not a good predictor of future ability to repay. This is because over the past five years you could refi your way into a great score. Every time you were going broke and did not have money to pay bills, you pulled cash out of your home by refinancing your first mortgage or upping your second. You pay all your bills, buy some new clothes, take a vacation and your score goes up!

The ’second mortgage implosion’, ‘Pay-Option implosion’ and ‘Hybrid Intermediate-term ARM implosion’ are all happening simultaneously and about to heat up drastically. Second mortgage liens were done by nearly every large bank in the nation and really heated up in 2005, as first mortgage rates started rising and nobody could benefit from refinancing. This was a way to keep the mortgage money flowing. Second mortgages to 100% of the homes value with no income or asset documentation were among the best sellers at CITI, Wells, WAMU, Chase, National City and Countrywide. We now know these are worthless especially since values have indeed dropped and those who maxed out their liens with a 100% purchase or refi of a second now owe much more than their property is worth.

How are the banks going to get this junk second mortgage paper off their books? Moody’s is expecting a 15% default rate among ‘prime’ second mortgages. Just think the default rate in lower quality such as sub-prime. These assets will need to be sold for pennies on the dollar to free up capacity for new vintage paper or borrowers allowed to pay 50 cents on the dollar, for instance, to buy back their note.

The latter is probably where the ’second mortgage implosion’ will end up going. Why sell the loan for 10 cents on the dollar when you can get 25 to 50 cents from the borrower and lower their total outstanding liens on the property at the same time, getting them ‘right’ in the home again? Wells Fargo recently said they owned $84 billion of this worthless paper. That is a lot of seconds at an average of $100,000 a piece. Already, many lenders are locking up the second lines of credit and not allowing borrowers to pull the remaining open available credit to stop the bleeding. Second mortgages are defaulting at an amazing pace and it is picking up every month.

The ‘Pay-Option ARM implosion’ will carry on for a couple of years. In my opinion, this implosion will dwarf the ’sub-prime implosion’ because it cuts across all borrower types and all home values. Some of the most affluent areas in California contain the most Option ARMs due to the ability to buy a $1 million home with payments of a few thousand dollars per month. Wamu, Countrywide, Wachovia, IndyMac, Downey and Bear Stearns were/are among the largest Option ARM lenders. Option ARMs are literally worthless with no bids found for many months for these assets. These assets are almost guaranteed to blow up. 75% of Option ARM borrowers make the minimum monthly payment. Eighty percent-plus are stated income/asset. Average combined loan-to-value are at or above 90%. The majority done in the past few years have second mortgages behind them.

The clue to who will blow up first is each lenders ‘max neg potential’ allowance, which differs. The higher the allowance, the longer until the borrower gets the letter saying ‘you have reached your 110%, 115%, 125% etc maximum negative of your original loans balance so you cannot accrue any more negative and must pay a minimum of the interest only (or fully indexed payment in some cases). This payment rate could be as much as three times greater. They cannot refinance, of course, because the programs do not exist any longer to any great degree, the borrowers cannot qualify for other more conventional financing or values have dropped too much.

Also, the vast majority have second mortgages behind them putting them in a seriously upside down position in their home. If the first mortgage is at 115%, the second mortgage in many cases is at 100% at the time of origination — and values have dropped 10%-15% in states like California — many home owners could be upside down 20% minimum. This is a prime example of why these loans remain ‘no bid’ and will never have a bid. These also will require a workout. The big difference between these and sub-prime loans is at least with sub-prime loans, outstanding principal balances do not grow at a rate of up to 7% per year. Not considering every Option ARM a sub-prime loan is a mistake. The 3/1, 5/1, 7/1 and 10/1 hybrid interest-only ARMS will reset in droves beginning now. These are loans that are fixed at a low introductory interest only rate for three, five, seven or 10 years — then turn into a fully indexed payment rate that adjusts annually thereafter. They first got really popular in 2003. Wells Fargo led the pack in these but many people have them. The resets first began with the 3/1 last year.

The 5/1 was the most popular by far, so those start to reset heavily in 2008. These were considered ‘prime’ but Wells and many others would do 95%-100% to $1 million at a 620 score with nearly as low of a rate as if you had a 750 score. No income or asset versions of this loan were available at a negligible bump in fee. This does not sound too ‘prime’ to me. These loans were mostly Jumbo in higher priced states such as California.

Values are down and these are interest only loans, therefore, many are severely underwater even without negative-amortization on this loan type. They were qualified at a 50% debt-to-income ratio, leaving only 50% of a borrower’s income to pay taxes, all other bills and live their lives. These loans put the borrower in the grave the day they signed their loan docs especially without major appreciation. These loans will not perform as poorly overall as sub-prime, seconds or Option ARMs but they are a perfect example of what is still considered ‘prime’ that is at risk. Eighty-eight percent of Thornburg’s portfolio is this very loan type for example.

One final thought. How can any of this get repaired unless home values stabilize? And how will that happen? In Northern California, a household income of $90,000 per year could legitimately pay the minimum monthly payment on an Option ARM on a million home for the past several years. Most Option ARMs allowed zero to 5% down. Therefore, given the average income of the Bay Area, most families could buy that million dollar home. A home seller had a vast pool of available buyers.

Now, with all the exotic programs gone, a household income of $175,000 is needed to buy that same home, which is about 10% of the Bay Area households. And, inventories are up 500%. So, in a nutshell we have 90% fewer qualified buyers for five-times the number of homes. To get housing moving again in Northern California, either all the exotic programs must come back, everyone must get a 100% raise or home prices have to fall 50%. None, except the last sound remotely possible.

What I am telling you is not speculation. I sold BILLIONs of these very loans over the past five years. I saw the borrowers we considered ‘prime’. I always wondered ‘what WILL happen when these things adjust is values don’t go up 10% per year’.

[Crazy G]

""ANYBODY"" that has purchased a house in the last 3 years is NOW underwater on their purchase price...

FACE IT....Who wants to continue making payments....sometimes that are resetting higher...on a house that is worth less than you paid for it, and continuing to go down year after year....

In Japan, real estate went down 18 years in a row....and YES!!! that consecutive...

As the economy slows, Alt-A's ,and Prime are also going to take a hit!!!!

The credit freeze contraction is """ON"""".....""NOW"""...""TODAY"""

Banks are conserving cash....They need cash!!! NOW...

EG...I got a ad from a local bank to open a checking account, and receive a free gift....
Two things....You don't get anymore ads for credit cards anymore...""RIGHT""

Now, your going to ads for free gifts to entice you to give them your cash....

Banks are in serious trouble, just like they were in the 1980's after the S&L crises meltdown.....

Remember all the banks that went out of business....

WELL!!! IT'S GOING TO HAPPENING AGAIN...."""NOW"""

P.S.....Realtors are ""TOAST"" just like they were nearly 20 years ago...

[Wild Style]

Originally Posted by Mike Peterson

I kind of just threw a year out there to see the reaction.

I see all kinds of predictions out there on what years prices we will go down to and no one questions when someone predicts 1990, 1999 like prices.

As far as prices hitting bottom. I quoted a report for a 4 county area that stated 3 of the 4 have hit bottom.
I know the counties and that is why I believe it.
Inventory is down, the phones are ringing again and prices are reasonable.

it is impossible to say when prices have hit rock bottom unless you have a few consecutive months to track if prices are holding steady or not. Anything else is just speculation (remember that word? thats what got us here in the first place, well that and exotic loans)

[CJFlorida]

Originally Posted by Wild Style

it is impossible to say when prices have hit rock bottom unless you have a few consecutive months to track if prices are holding steady or not. Anything else is just speculation (remember that word? thats what got us here in the first place, well that and exotic loans)

Also, the real estate industry has called bottoms for 2 years now. How many homes have been pulled from the market, how many rented, etc, how many trying for sale by owner...lots of things drop inventories for a while.

I don't know what specific counties he is talking about, perhaps some remote ones not heavily populated.

But from Tampa through Naples is crumbling fast, as is Jacksonville, Orlando, Palm Beach County, Broward, Miami Dade. Thats got to be 90% of the population concentration of Florida.

[Crazy G]

As I have said for more than 3 years NOW..

>>""""GOLD""<<< is going to take down the markets.

"""ALL ASSET PRICES ARE GOING TO BE REVALUATED"""....so said Alan Greenspan, in Germany in 2005....
Yes!!! That includes the Stock market, the bond market, and real estate....

Real Estate is headed down, the stock market is rolling over, and soon the bond market will capitulate, and interest rates will sky-rocket....
YES!!! Double digit interest rates, coming to a bank near you....

""GOLD"" is headed to $900....""NOW""

SSOOOO!!! At what price are you going to become a believer....

""IF"" gold goes up......I positively assure you, the rest will come down....

>>>>>>>."""PLACE YOUR BETS NOW""""<<<<<<<<<<

[Mike Peterson]

Originally Posted by CJFlorida

It is meaningless what percentage the resets are of the mortgage market. What matters is the total dollar amount of resets and the ripple effect they have on the entire market. The resets are worth billions upon billions of dollars. They represent thousands and thousands of homes. These homes effect every other home trying to sell, no matter if they are fixed or not.

Also, many of those fixed mortgages you speak of may have other loans tied to them. It was not only first mortgages that were ARMs, but many 2nd mortgages as well. A fixed mortgage with a bad loan tied to it is no longer a fixed loan unto itself. It is now polluted and that does not show up in your statistics:[/indent]

You say it is meaningless what percentage the resets are of the mortgage market and what matters is the entire dollar amount.

I would think that those to figures will be in direct correlation with each other.

As far as the 2nd's, I think this was a bad attempt by Greenburg to overplay the effect these will have .

[Mike Peterson]

Originally Posted by Crazy G

""ANYBODY"" that has purchased a house in the last 3 years is NOW underwater on their purchase price...

FACE IT....Who wants to continue making payments....sometimes that are resetting higher...on a house that is worth less than you paid for it, and continuing to go down year after year....

In Japan, real estate went down 18 years in a row....and YES!!! that consecutive...

As the economy slows, Alt-A's ,and Prime are also going to take a hit!!!!

The credit freeze contraction is """ON"""".....""NOW"""...""TODAY"""

Banks are conserving cash....They need cash!!! NOW...

EG...I got a ad from a local bank to open a checking account, and receive a free gift....
Two things....You don't get anymore ads for credit cards anymore...""RIGHT""

Now, your going to ads for free gifts to entice you to give them your cash....

Banks are in serious trouble, just like they were in the 1980's after the S&L crises meltdown.....

Remember all the banks that went out of business....

WELL!!! IT'S GOING TO HAPPENING AGAIN...."""NOW"""

P.S.....Realtors are ""TOAST"" just like they were nearly 20 years ago...

Your first line in this post shows how far off you are.
I won't waste my time replying to you anymore.

[Mike Peterson]

Originally Posted by CJFlorida

Also, the real estate industry has called bottoms for 2 years now. How many homes have been pulled from the market, how many rented, etc, how many trying for sale by owner...lots of things drop inventories for a while.

I don't know what specific counties he is talking about, perhaps some remote ones not heavily populated.

But from Tampa through Naples is crumbling fast, as is Jacksonville, Orlando, Palm Beach County, Broward, Miami Dade. Thats got to be 90% of the population concentration of Florida.

The factors you mentioned for a drop in inventory have been factors in every market not just the current one. Why do we need to discount numbers now?

The counties I mentioned were Pinellas, Pasco and Hernando and with a population of approximately 1.5 million people between them is hardly remote or unpopulated. If I add Hillsborough which is the 4th county I was speaking of we are up to 2.5 million.

[CJFlorida]

Originally Posted by Mike Peterson

You say it is meaningless what percentage the resets are of the mortgage market and what matters is the entire dollar amount.

I would think that those to figures will be in direct correlation with each other.

As far as the 2nd's, I think this was a bad attempt by Greenburg to overplay the effect these will have .

Now Mike, thats a good one. Greenburg was attempting to overplay stats?

Have you been reading the constant revisions by the NAR the past 3 years!! Come on now lets be fair, the real estate industry are the kings of using tricks to make statistics look better than they are.

What other business can you change a list price a little or pull a listing for a week and have a new days on market count start? What other industry can you give a $60,000 give back and still have the purchase price listed as the higher number??

[Crazy G]

""I won't waste my time replying to you anymore."""
================================================

I think that's really funnnnny....& I appreciate it....

The 3 categories of people I find most amuzing are;

Realtors, Car Salesmen, and Bankers.....

They all use "spin" .....