Saturday, April 02, 2005

California Borrowing And Lending Is Insane

The LA Times has a story I hope remains free on the web, because it is packed with reports that California is facing ruin. In one instance, a builder conducted a test to see how many variable rate, pre-approved clients could qualify for a fixed loan. Out of 90, "only about 15 of the buyers still qualified. 'People are really pushing to borrow as much as they can, and the lenders are right there..there's apparently not much of a cushion."

"About one-quarter of the loan officers also reported that they increasingly had to keep home mortgages in their own portfolios rather than selling them to such quasi-government entities as Fannie Mae. The two reasons given: the loans were too big and they were of "insufficient credit quality."

"'A few years ago, you would have had to go to an infomercial to get the kind of deals we're offering now,' Wells Fargo home mortgage consultant Jimmy Kang told a group of new real estate agents last week."

The percentage of ARMs is exploding; "Santa Rosa was 85%; in Oakland 84%; in San Diego and Santa Cruz 83%; in Los Angeles 74%. About two-thirds of these loans are also interest-only, compounding the borrowers' risk of what the mortgage industry calls 'payment shock.'"

"If you're like me, you're so incredulous that anyone would give you any money whatsoever, you just close your eyes and sign the papers, I would have signed anything," said recent buyer Rachael Herron.

"If housing prices go down or even are flat, heaven help us," said mortgage analyst Ralph DeFranco.


At 7:22 PM, Anonymous Anonymous said...

Don't worry - the gubernator will put a stop to all this sissy-speak from all these "economic girlie men" - he'll beat on Easy Al and his buddies at the Fed to knock interest rates back down to 1% and lower to bail out these overextended borrowers and their creditors.

At 7:32 PM, Blogger Ben Jones said...

Did you notice that someone in the article thinks lenders will come up with a new loan AFTER the default? Gezz..Ben

At 8:30 PM, Anonymous JJ said...

OK -- I know California's market is absolutely insane, but I am continually surprised anew by the anecdotes out there. After reading that article, I am pretty much speechless. Even people who manage to build equity (unlikely for the people featured at this point in the cylcle, I would dare venture) simply plan to use it to pyramid more debt. People are simply buying expensive call options on their overpriced places, nothing more.

The script's playing out just like a securities bubble -- the more expensive the asset in question, the more people desperately want in. Shades of Tokyo '85-87.

Nobody gives a second thought as to how damaging this thing is to the real economy down the line. How many companies can afford to hire employees in CA except maybe payday loan stores and mortage-broker insta-storefronts? Nobody's bothered to think that their implied rates of appreciation going forward with mean a state of $45K avg. household income and $800K avg. places, with presumably all discretionary income devoted to interest payments. Has the lady featured in the article considered that even if her place appreciates 50%, that will mean that a nicer $500K place will now be $750K, still out of her reach.

I found the realtor's "too big to fail" argument particularly illustrative.

Interesting that all of this has been happening, while the actual quality of life in the state has been eroding. I lived in CA for the first 23 years of my life and have lived in the Midwest for a while, but go back to CA a couple times a year. To me, it seems like things have gotten palpably worse (traffic, pollution, etc.)

This puppy's going to blow about five times worse than the equity market bubble.

To be fair -- the article does point up a buying strategy those of us who don't want to risk a thin cent of our hard-earned capital on a downpayment in an overpriced place that may soon be upside down on its loan -- do a no DP, interest-only loan -- hell, even throw in a dash of negative-amortization. Get the payment pretty much down to where rent would be. If the thing goes down in value, send in the keys with your best to the local bank or whoever the hell's now the servicing the securitized loan out there in the financial netherworld.

Come back with the cash you have invested in energy, metals, commodities, and the by that point high-yielding fixed-income and buy the same place at a firesale. This all presumes that you have some serious cash on hand, but I suspect most people on this blog probably do.

I am last person to say something good about the Fed, but even those easy-money on steroids twits have to know just how bad this thing will get.

At 8:31 PM, Anonymous Anonymous said...

Great article - really scary. I am glad I sold my home last month and am renting until the crash.

Keep up the great work, Ben.

At 8:36 PM, Anonymous Anonymous said...

My wife and I just recently cashed out of our overpriced San Diego home and are now renting. Our real estate agent thinks we are insane for not buying someone else's overpriced home with our gains.
We were bullish on real estate until we closed. Some how our heads cleared soon after the closing. And now we are proud to be BEARS. We can see the storm clouds on the horizon and are puzzled why no one else seems to see them.

At 8:38 PM, Blogger deb said...

My heart breaks for these naive borrowers. Not the speculators, but the ones who think they are being given a chance to own a home. They will never own their home. They don't know that they are the "suckers" in the game.

At 8:45 PM, Anonymous great caesar's ghost said...

Wow. Just wow.

I don't even know how to digest that. Perhaps the most amazing/depressing thing about the home "ownership" mania is the almost absolute inability of these late comers to the party to even consider, much less honestly assess, financial reality. The money quote in this article:

"Interest-only loans, and other forms of so-called creative financing that are far riskier than the traditional 30-year fixed-rate mortgages, have allowed more people to afford homes ..."

No, they can't afford those homes. Getting an interest-free loan for a $211,000 postage-stamp sized, freeway-abutting home is not the same as being able to afford a $211,000 postage-stamp sized, freeway-abutting home.

At 8:56 PM, Anonymous Anonymous said...

i live in berkeley and interviewed for a job in san francisco last week. i liked the company (6 people) they liked me. they want to hire me, i'd like to work there. problem is the salary i need (not to support my family mind you, merely contribute - my wife also works) was/is more than they can afford. i know they can't afford to pay me what it costs to live in the bay area, they think my request was perfectly reasonable.
it won't take a crash to destroy our state economy, it's already happening.

At 9:18 PM, Anonymous Anonymous said...

We are being talked about at

Last night on Ben Jones' excellent Housing Bubble Blog, a very interesting series of posts were made. While the commentary was lively, there was a very clear and recurring sense of angst - just what type of person would be feeling anxious, or uncomfortable in any way, while in the midst of unprecedented increases in personal wealth, largely as result of rising real estate prices?

Some people may feel this way because they have never owned a home and are currently renting - they now find themselves priced out of their desired market, and deem this to be unfair. Had they been born a few years earlier or married sooner, they would have been able to purchase a home at a reasonable price and would be well on their way to amassing a great fortune - maybe they would have been able to "trade up" by now, and instead of being on the outside looking in, they'd be enjoying truly spectacular digs. It seems timing has become increasingly important to every individual's financial success in life - much more so than a few generations ago.

Or, perhaps they are renters who some time ago sold their home with the intention of buying again "after the crash", and they are now perplexed by both the continued price escalation and general insanity of it all - growing impatient with the pace at which real estate prices make their inevitable return toward long established trendlines. They feel that they understood things that others did not and due to this superior reasoning ability, they took action - but they are now restless, waiting for their shrewd wager to pay off.

Perhaps they are homeowners who have dramatically improved their standard of living as a result of the equity "built up" in their home over the last few years - never has it been so easy to "build" anything before ... truly a "lazy man's way to riches". They wonder if maybe they have "tapped" too much of this equity - if maybe they have been fooled in some way ... duped into spending money which they shouldn't have. The thrill of the purchases having long since passed, the debt remains, and it becomes more costly to service as the months go by.

You can add your comment to their board here:

At 9:23 PM, Anonymous Anonymous said...

I've got a question. Our savings rate as a nation is about 1%. We don't save diddly, even though our corporations have nearly record profits. So why do Japanese, Chinese, Tiawanese and Korean investors buy our bonds ?

What do they see in our currency that we don't ? Or more to the point, if they see us NOT investing, why do they ?

Another thing I find funny is why they buy our bonds instead of our equities. If I were them I'd buy some of our oil companies instead of our bonds. The higher oil goes the farther the US dollar is going to fall.

At 9:46 PM, Blogger John Law said...

the Japanese buy our bonds because they have to to keep the yen in check versus the dollar to protect their exports. the Chinese do it so that they can keep building their industrial infrastructure for the future. that's not to say they aren't playing with fire

who knows what the Chinese are buying in equities, I'd like to know if anyone knows. but they have been looking at companies I believe. didn't they try and buy some Canadian mining company? I forget the name.

remember, sometimes things don't make sense.

At 10:06 PM, Blogger John Law said...

("I have $40,000 in student loans from my master's degree," Herron said. "I have high credit card debt. I'm a typical American. And yet they wanted to give me more debt to buy a house.")

oh boy.

At 12:54 AM, Blogger Ben Jones said...

(they can't afford to pay me what it costs to live in the bay area)

A real life story of how the housing bubble dislocates lives.

At 6:59 AM, Anonymous Russ Winter said...

Even I am shocked at how egregious the use of these IOs has become, really had no idea it was running that high, would explain alot.

Thanks for running this important blog. If you've noticed a pick up in traffic, a portion is coming from this top Silicon Investor site, please feel free to drop in:

At 8:00 AM, Anonymous Anonymous said...

I work at a Mtg banker in sub-prime. We lend 100% to those with fico scores around 620. Our average LTV is 82%. Everyone I work with has the best intentions. We look at the historical data and see low defaults because that is the recent history. Home price appreciation has bailed everyone out. My company is fairly conservative in rolling out new products, but the competition is fierce and we need to offer these products. We sell our bonds to pension funds, hedge funds, foreign banks, mutual funds,etc. Unfortunately, until the defaults grow, these new products (i/o, 40yr) will not be stricter in guidelines.

At 9:15 AM, Blogger John Law said...

this is from doug noland's recent column

"We have to say the individual decision is rational, and that’s important. This is not a mania in which everyone is running around doing silly things. It’s not that. This isn’t playing out like other market bubbles we have read about in history books. These decisions are very rational. It is rational for the person out in California to buy a home and to take the adjustable rate mortgage. It’s rational for the hedge funds to do what they’re doing. It’s rational for the businessmen to what they are doing– these are all rational decisions. This credit bubble has nothing to do with rationality. It has to do with the market’s pricing mechanism getting distorted. You have such monetary disorder that even though people are making rational decisions, individually, for the system as a whole, those decisions create huge dislocations. I am going to rant forever to make this point. People aren’t crazy. The system itself tempts people to do things that are individually very rational, but that, as a whole, can be very dangerous for the system. Very destabilizing. It’s all too rational to borrow to buy assets today. It’s all too rational to borrow to speculate."

At 9:56 AM, Anonymous Anonymous said...

Get your money out of the USA! The easy money loan terms will blow up in the faces of US banks and threaten their solvency. Many European countries and even Canada have much tighter lending standards. If you have savings, they are at risk in the USA. Another alternative is a US Treasury Bill only mutual fund such as American Century Capital Preservation Fund. Now is the time to protect your savings!

At 10:47 AM, Blogger Ben Jones said...

(who knows what the Chinese are buying in equities)
Bits of IBM, Costco, the Panama canal, Hutchison Wampoa, the Lippo Group is in there somewhere. Did you hear the chairman of Cisco say their goal was to become a Chinese company?

At 11:00 AM, Anonymous Anonymous said...

That is one truly frightening article. One wonders at the financial time-bomb of Fannie/Freddie and the implcations of a banking meltdown. Who puts an end to the madness? Clearly not the Fed. Who becomes an adult and says that no $ down IO Arms are NOT responsible and fiscally sound lending/borrowing practices? Something has gone terribly wrong.

At 3:20 PM, Blogger John Law said...

it was Noranda that China tried to buy.

At 9:01 PM, Blogger Mr. Naybob said...

Bob, Thanks for the mention. I have posted my 2 cents worth and linked back to you.

At least there is an "equity stake" when a substantial down payment is made, 20% or more.

A statistic for how many loans are 100% LTV (loan to value) would be an interesting codicil.

This would really show the amount of leverage out there and how much it could boomarang.

Distinct Regards,
The Nattering Naybob

At 9:55 PM, Anonymous Anonymous said...

(Or, perhaps they are renters who some time ago sold their home with the intention of buying again "after the crash", and they are now perplexed by both the continued price escalation and general insanity of it all - growing impatient with the pace at which real estate prices make their inevitable return toward long established trendlines. They feel that they understood things that others did not and due to this superior reasoning ability, they took action - but they are now restless, waiting for their shrewd wager to pay off.)

Not exactly angst. I sold my home six months ago and I am renting and waiting patiently for the buying opportunity. I wait patiently because that is how fortunes are made. I wait patiently because I remember that I bought that home in July, 1999 with 100% cash, no mortgage, after I could no longer find the huge gains on my monthly brokerage statement from AOL, CSCO, and JDSU credible. Of course, I was a little early and I second guessed myself for about nine months while all of the conversations I overheard daily on my Metro North commuter train out of NYC were people discussing their further gains with giddy delight. Hell, I felt like a damn fool watching that NASDAQ 5000 party on CNBC in March 2000, but that marked the very top of the insanity. Last month when I saw that headline in the San Jose Mercury News trumpeting "Santa Clara Median Home Price Exceeds $700000," with everyone, everywhere in the Bay Area discussing it with giddy delight in local restaurants and moms at playgrounds, I nearly had that damn fool feeling again. But older and wiser now, I am realizing that giddy people and giddy headlines mark the top as surely as that NASDAQ 5000 party on CNBC did. Be patient people. Bubbles don't unravel overnight. As I recall, tech stock bubble talk on internet discussion boards didn't start in earnest until about 1998. Bubble talk in the media at low decibel levels is the first step in educating the masses about their folly, and they don't listen at first because they are listening to their greed. As they gradually wake up to reality, the bubble unravels. As I learned during the tech stock bubble, it's better to sell a year too early than a year too late.

At 1:48 PM, Anonymous Anonymous said...

"Hell, I felt like a damn fool watching that NASDAQ 5000 party on CNBC in March 2000, but that marked the very top of the insanity."

Me too. And I was feeling sorry for myself this weekend that I have not played this bubble. The thing is that I knew this was a bubble and I knew the dot com situation was a bubble too. I could have played those situations and made a fortune.

By nature I am not a speculator, but I am beginning to think that our society rewards speculators and thus I am missing out on a lot of "opportunity".

One more thing: I agree that housing prices are generally "sticky on the downside". However, I don't think that will be the case this time. I think the fact that the US economy is a bit shaky, inflation concerns, oil constraints and owner leverage may conspire to make this correction quick and neat.

All it would take is one good speach by Greenspan. We can only hope.

At 10:41 PM, Anonymous tony said...

Hey anonymous, don't feel sorry for yourself. The main reason I pay so much attention to the bubble bears is to keep myself from being swept up in the mania. Keep the faith!

At 5:35 AM, Anonymous Russ Winter said...

Last five months of ARMs reset indexes:


Post a Comment

<< Home