Friday, May 06, 2005

Borrowers Balk At Lifetime Of Debt

The 35 year loan program from the California Housing Finance Agency has been out for a while and the ModBee checks to see how it's going. "'For anyone who can fit into this program, this is the way to go. You can't beat it,' Neal said of the loan to finance up to 100 percent of a home's price. It can be combined with other options for a loan value of 103 percent."

"Yet, the loan is little used. Neal has issued five of the loans since the program started in March. Statewide, 127 of the loans have been approved."

With so much use of interest-only and adjustable rate loans, policy makers must be scratching their heads as to why this program isn't being adopted.

"Neal used the state program to help Davis and her family buy a $211,000 house. 'They put more money down on their car.'"

Mercury News informs us that the state will help out "low" income households. "CalHFA-backed loans in Santa Clara County are available to one or two person households with incomes up to $122,168 a year."

In California, they even have a different measure for debt. "Lenders traditionally limited borrowers' housing costs to 28 percent of their incomes, and total debt payments to 36 percent. In California's high-cost housing markets, however, lenders have stretched their limits for a borrower's total debt load. For a well-qualified borrower, '45 percent is very doable.'"

25 Comments:

At 9:24 AM, Blogger SoldAtThePeak said...

Ben,

Tons of bubble-related Q&A in the "Ask Realty Times" column today:
http://realtytimes.com/rtcpages/20050506_askrt.htm
Sample questions: "Why won't my beautiful house sell even when priced less than I paid?"; "My house doesn't appraise for the sale price. What do I do?"; "My husband thinks the market is going to tank and wants to sell and rent. I don't want to. Is this a good idea?"

Good stuff.

 
At 9:47 AM, Anonymous Anonymous said...

So this couple needed an IO loan to lower their payment from $1500 to $1100 a month.

The clearly have no business buying that home. If they can't afford an extra $400 dollars a month, how will they handle their payment when their IO term is up, and rates are up, meaning a monthly payment of much more than $1500.

What, are they gambling that inflation with bail them out. Assuming they still have a job.

I also blame the peddlers pushing these loans so they can may cash of the orgination fees. They should all be sued...

 
At 9:52 AM, Blogger Gasman said...

If you want to extend duration to make monthly payments affordable why would you go to 35 years when infinity mortgages (i.e. interest only) are available.

 
At 10:06 AM, Anonymous prof said...

It's all about finance.

Interest-only loans are a new development. In the last boom/bust here in Calif, we didn't have I/Os. So there was a natural brake on asset appreciation. Today with the majority of new Calif homebuyers choosing I/Os to stretch to afford homes, there is no such brake.

There's a law of diminishing returns on term mortgages. For example, a conventional 30yr 500K mortgage at 6% costs $2,997 a month. If you extend that term to 60 years (twice as long), the monthly payment is $2,570 or 15% less. So in a simplistic sense, you could "afford" to pay 15% more for a home with a 60yr. But if you extend the term to 100 years, the monthly is $2,506, only 2% lower than the 60yr. So there is a point where extending the duration doesn't help.

But with I/Os, there is no term so everything depends on the rate itself. The only way to keep bringing the monthly lower with I/Os is to lower the rate.

So we've seen rates come down and that got real estate moving. Then we've seen ARMs and I/Os come along and that has lowered the monthly. But there's not much left to do. Extending the duration is an option but a minor one.

I worry that if too many are carrying I/Os, the market will box itself into a corner. If rates rise and/or prices fall, millions of so-called "homeowners" (i call them "homeowers") would take a savage beating...as would the mortgage holders.

So not only are I/Os risky for buyers, they are risky for our whole financial system. And now that you have government entities (state of Calif) fueling this by offering cheap govt financing for supposed "low income" households (i.e., as if $122K a year is low), this is getting extremely dangerous.

This needs to end now.

 
At 10:07 AM, Anonymous Anonymous said...

An interest-only mortage is not an "infinite" term loan. Interest-only mortgages consist of an "interest" period (typically 10 years), followed by an amortized period (typically 20 years) where the principle is paid off.

This is one reason why interest-only loans are riskier. After the IO period the monthly payment jumps substantially, as the amortization period begins, and the payment is higher because it's only amortized over 20 years rather than 30.

Combine an IO loan and an ARM and the buyer could get double whammy if interest rates rise.

 
At 10:28 AM, Anonymous prof said...

***

---An interest-only mortage is not an "infinite" term loan. Interest-only mortgages consist of an "interest" period (typically 10 years), followed by an amortized period (typically 20 years) where the principle is paid off.---

Given the magnitude of the house price rise over the past 5 years and given the high pct of people using I/O now, I can see a housing slump lasting 10-20 years unless the decline dead ahead shakes out all the weak hands in one fell swoop (or is it one swell foop?).

If we see a slump, most if not all of the I/O brigade will be underwater on their mortgages. Then to make matters worse, once the I/O portion of the program expires, their monthly payments shoot up. A 30yr conventional $500K mortgage at 6% costs $3,000. Amortizing over 20 years, the same mortgage costs $3,582---20% more. If rates rise to let's say 7.5% instead of 6%, the payment is $4,027---34% more.

That's a big difference. If this isn't risky, I don't know what is.

 
At 11:02 AM, Anonymous boulderbo said...

prof,

i've been lending for 20 years and have never seen the kind of wreckless behavior before. if makes sense if you consider how many people are involved in the feeding chain. volumes peaked in 2003 and the only way to feed the "volume monster" was to step over the line of sound credit underwriting standards. i will tell you that the majority of loans written are 80/20 (read no equity), done on a stated income basis (because they don't have the income to qualify otherwise), fixed for no more than 3 years and usually carrying a "soft" prepayment penalty. not only will they get whacked by rising rates when the loan adjusts, but they won't be able to get out of the loan. risky, you bet.

 
At 11:04 AM, Blogger deb said...

boulderbo,

What are the terms for the prepayment penalties generally? How much? For how long? etc

 
At 11:10 AM, Blogger Melody said...

An eye opener:

THE 4 DERIVATIVE U.S. DICTATORS:
SECRETS OF THE PLUNGE PROTECTION TEAM

There are just four people who control all of the U.S. markets through their use of dangerous and explosive DERIVATIVES. They are risking the assets and retirement funds of all Americans. Because of their manipulations, especially since 2001, U.S. financial markets are now based on the gambling whims of a special fraternity of Federal Government DERIVATIVE dealers.

This group is known among Wall Street as the Plunge Protection Team (PPT). Their "official" role was to prevent another 1987 "Black Monday". They have the entire U.S. Treasury at their disposal to manipulate the markets through DERIVATIVES (futures options). In other words, they are using the assets behind the U.S. Treasury to rig the prices of commodites (gold, currencies, etc.) and stocks.

This fraternity comprises of Fed Chairman Alan Greenspan, the Secretary of the Treasury, and the heads of the SEC and the Commodity Futures Trading Association. It works closely with all the U.S. exchanges and Wall Street banks, including the largest DERIVATIVE risk holders Citibank and JP Morgan Chase.

Few people are aware of Executive Order 12631 signed by Ronald Reagan on March 18, 1988. In a nut shell, this is the "authority" behind the four dictators and the [sic] "laws" and "regulations" that have backed their casino-style DERIVATIVE gambling spree since 2001. Here are some highlights of this Executive Order to ponder:

Executive Order 12631 - Working Group on Financial Markets - Mar. 18, 1988; 53 FR 9421, 3 CFR, 1988 Comp., p. 559.

"By virtue of the authority vested in me as President by the Constitution and laws of the United States of America, and in order to establish a Working Group on Financial Markets, it is hereby ordered as follows:

Section 1. Establishment. (a) There is hereby established a Working Group on Financial Markets (Working Group). The Working Group shall be composed of:

(1) the Secretary of the Treasury, or his designee;
(2) the Chairman of the Board of Governors of the Federal Reserve System, or his designee;
(3) the Chairman of the Securities and Exchange Commission, or his designee; and
(4) the Chairman of the Commodity Futures Trading Commission, or her designee.

Section 2. Purposes and Functions. (a) Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintaining investor confidence, the Working Group shall identify and consider:

(2) the actions, including governmental actions under existing laws and regulations (such as policy coordination and contingency planning), that are appropriate to carry out these recommendations.

(b) The Working Group shall consult, as appropriate, with representatives of the various exchanges, clearinghouses, self-regulatory bodies, and with major market participants to determine private sector solutions wherever possible.

Section 3. Administration. (c) To the extent permitted by law and subject to the availability of funds therefore, the Department of the Treasury shall provide the Working Group with such administrative and support services as may be necessary for the performance of its functions."

Get out of the markets before the inflated DERIVATIVE bubble bursts

The pre-911 U.S. markets showed an astounding - yet confounding and puzzling - rise for the 4 months proceeding 911. The U.S. media dubbed it a "patriotic rally". The European Press called it a "PPT [Plunge Protection Team] rally". Obviously, the U.S. markets were manipulated and rigged to an inflated value in advance of the 911 disaster. Was this a coordinated measure in anticipation of what was to come? Only The Powers That Be can answer that question directly.

Since 911, there have been at least three major long-term stock market rallies. In all 3 instances, when the markets opened all the indexes began to quickly plunge. In each incidence, by early afternoon the markets were brought back from the brink of collapse to the surprise of everyone, including historical analysts.

An event that should have sent markets spiraling downward was the Enron, et al, unprecedented corporate accounting scandals. Yet despite this, an unprecedented accross-the-board markets rally began on July 24, 2002. Once again, the European Press called it a "PPT rally".

Outside the U.S., it's no secret who is behind these secretive "no-name" purchases of high risk DERIVATIVE gambling wagers:

On September 16th, 2001, The Guardian reported "that a secretive committee... dubbed 'the plunge protection team'... is ready to coordinate intervention by the Federal Reserve on an unprecedented scale. The Fed, supported by the banks, will buy equities from mutual funds and other institutional sellers... "

On Feb 21, 2002, the Financial Times featured an article about Japan's Stock Buying Body. The article stated that "...government backed equity markets, as Japan has recently become aware, do not work... Plunge protecting the world's markets may be a hazardous pursuit."

In each of these occurances, a large "no-name" buyer in the futures market secretly plunged in and bought up massive quantities of DERIVATIVES through banking groups such as JP Morgan. These were completely reckless gambling bets that the futures index [S&P] would rise even though it was obvious that it was going to fall. Because such a large amount of money was wagered on the S&P's rise, in each instance, it reversed the market's free-fall.

At the Federal Open Market Committee meeting on Jan 29-30, 2002, the Federal Reserve System (Greenspan) openly discussed the use of "unconventional methods" to stimulate the economy. Recently, the Financial Times of London quoted an anonymous U.S. Fed official who stated that one of the extraordinary measures "considered" in January 2004 was "buying U.S. equities".

These gambling interventions by the "Four Financial Dictators" have successfully brought the markets back each time... despite the inflated financial realities that existed. The purchase of these gambling DERIVATIVES at a great loss have transformed each market crisis into a rally. By manipulating the markets in this way, they have further inflated the highly overvalued market indexes.

Perhaps Americans can now understand why the major U.S. banks, such as JP Morgan, are holding TRILLIONS of gambling derivatives on their books as the PPT group of four use them to rig the markets. Sooner or later, these market "fixes" will no longer hold the bubble from bursting.

Thus, we have witnessed the creation and growth of the financial bubble that is on the brink of explosion... and we know who rigs and controls the markets to create this inflated bubble of gambling debt.

Paper Stocks Rise as Metals Loose - PTT Rigging is Obvious

In the same motus opperandi, the PPT group of 4 are currently buying metals futures (DERIVATIVES) in great amounts on the New York and Chicago exchanges. For the past two weeks, they have created a loss in silver and gold indexes by purchasing (at U.S. taxpayer's expense) large gambling bets (derivatives) against the true value of intrinsic metals.

The result is that they have rigged the value of metals to discourage investors from purchasing gold and silver instead of U.S. Federal Reserve Notes. This is a measure by the PPT to plug a large hole in the bursting dam of the financial bubble, but even Hans Brinker cannot stop this leak.

The bottom line? Stick with history and prepare for the financial explosion. When the bubble deflates and pops, economic deflation will control our daily lives. The PPT cannot continue to spend what it doesn't have. The retirement funds they are "borrowing" from are already exhausted. Get yourself some gold and silver... it will buy your bread to survive in the coming future... while paper Federal Reserve Notes will burn in your furnace to heat your homes.

 
At 11:14 AM, Anonymous boulderbo said...

deb,

prepayment penalties are generally 6 months interest. penalty is in place anywhere from 1 to 5 years, usually 3 years.

 
At 11:36 AM, Anonymous Anonymous said...

"When the bubble deflates and pops, economic deflation will control our daily lives....Get yourself some gold and silver... it will buy your bread to survive in the coming future... while paper Federal Reserve Notes will burn in your furnace to heat your homes."

I don't understand why you would argue for a deflationary scenario and then advise us to prepare for hyperinflation. While I agree that we might be in for a severe 1930's style depression, gold is not the way to prepare for it because the price of gold will go down in deflation like everything else. In fact paper money becomes more valuable during a depression since there is little demand, sellers cut prices. During the Great Depression, CPI inflation was something like MINUS 10% per year as prices fell. Now, notice I said "paper money" and not bank deposits since banks will fail in a depression due to bad loans, and then you cannot get your money out of the bank unless you believe the FDIC can absorb all of the bad loans. That's why grandpa keeps his money in his mattress.

 
At 11:40 AM, Blogger Melody said...

Is this true Ben?

Derivative holdings by U.S. banks increased nearly $4 TRILLION in just 3 months to now total over $71.1 TRILLION. JPMORGAN CHASE accounts for $3.1 TRILLION of this increase.

That's $ 71,100,000,000,000.

The first 7 banks listed below account for 96% of all commercial bank derivative holdings, with 90% of these derivatives in extremely risky OTC (Over the Counter) contracts.

As I said in Cooking the Books Part I, U.S. banks are giant gambling casinos, and now they have become even larger gambling addicts at the expense of all Americans.


DERIVATIVES CONTRACTS AS OF DECEMBER 31, 2003
(based on just released 03Q4 OCC Bank Derivatives report)

1. JPMORGAN CHASE BANK - $36,805,757,000,000 (Assets $628,662,000,000)
Risk Ratio 58.5:1 ($58.54 of derivatives per $1 of assets).
Credit exposure to Risk-Based Capital Ratio 844.6%
OTC Derivatives 92.6%

2. BANK OF AMERICA - $14,869,220,000,000 (Assets $617,962,000,000)
Risk Ratio 24:1 ($24.06 of derivatives per $1 of assets).
Credit exposure to Risk-Based Capital Ratio 221.7%
OTC Derivatives 83.4%

3. CITIBANK - $11,167,882,000,000 (Assets $582,123,000,000)
Risk Ratio 19:1 ($19.18 of derivatives per $1 of assets).
Credit exposure to Risk-Based Capital Ratio 267.1%
OTC Derivatives 96.4%

4. WACHOVIA BANK - $2,326,465,000,000 (Assets $353,541,000,000)
Risk Ratio 6.6:1 ($6.58 of derivatives per $1 of assets).
Credit exposure to Risk-Based Capital Ratio 80.6%
OTC Derivatives 70.2%

5. HSBC BANK USA - $1,353,741,000,000 (Assets $92,958,000,000)
Risk Ratio 14.5:1 ($14.45 of derivatives per $1 of assets).
Credit exposure to Risk-Based Capital Ratio 288.5%
OTC Derivatives 88.7%

6. BANK ONE - $1,232,095,000,000 (Assets $256,787,000,000)
Risk Ratio 4.8:1 ($4.79 of derivatives per $1 of assets).
Credit exposure to Risk-Based Capital Ratio 58.7%
OTC Derivatives 96.1%

7. BANK OF NEW YORK - $561,694,000,000 (Assets $89,258,000,000)
Risk Ratio 6.3:1 ($6.29 of derivatives per $1 of assets).
Credit exposure to Risk-Based Capital Ratio 77.7%
OTC Derivatives 78.1%

8. WELLS FARGO BANK - $557,161,000,000 (Assets $250,474,000,000)
Risk Ratio 2.2:1 ($2.22 of derivatives per $1 of assets).
Credit exposure to Risk-Based Capital Ratio 26.7%
OTC Derivatives 66.3%

9. FLEET NATIONAL BANK - $443,708,000,000 (Assets $192,265,000,000)
Risk Ratio 2.3:1 ($2.30 of derivatives per $1 of assets).
Credit exposure to Risk-Based Capital Ratio 20.2%
OTC Derivatives 64.1%

10. STATE STREET BANK - $369,843,000,000 (Assets $80,435,000,000)
Risk Ratio 4.6:1 ($4.59 of derivatives per $1 of assets).
Credit exposure to Risk-Based Capital Ratio 161.0%
OTC Derivatives 89.2%

JPMORGAN CHASE is far past the point of no return. To put it in simple terms, JPMORGAN CHASE, BANK OF AMERICA, CITIBANK, and HSBC are already insolvent many times over. They have no liquidity, yet they are still operating as if they do.

This has now gone way beyond the imminent bursting of the US financial debt bubble... it has become an explosive financial weapon of mass destruction.

To understand the gambling risk U.S. banks have created, please read the following articles:

THE 3-D BOMB: DERIVATIVE DOMINO DESTRUCTION
http://worldvisionportal.org/WVPforum/viewtopic.php?t=177

U.S. BANKS HAVE BECOME A PONZI SCHEME
Most Bank Derivatives Have UNLIMITED Risk
DERIVATIVES ARE THE KISS OF DEATH
(scroll down to view these articles)
http://worldvisionportal.org/WVPforum/viewtopic.php?t=160

U.S. Bank Fraud Created Europe's Largest Bankruptcy
http://worldvisionportal.org/WVPforum/viewtopic.php?t=176

$25 BILLION of Fannie Mae Derivative Losses
http://worldvisionportal.org/WVPforum/viewtopic.php?t=192

 
At 11:43 AM, Blogger Melody said...

All I can say is the more research I do, the more scary it looks. Cash under the mattress it is.

Question:

Why do we buy stocks if it's rigged? Can we have a free market again?

 
At 11:56 AM, Blogger Ben Jones said...

Melody,
I hadn't heard that particular number but Greenspan said this week that total derivatives sit at $220 trillion so that kind of an increase wouldn't be out of the question. I did know about the JPMorgan position.

That's a lot of paper. I hope it is stronger than it looks.

 
At 12:24 PM, Anonymous Anonymous said...

I disagree we will have "deflation" as we did in the 30s. I rather think we will see a period where the gov prints money to dig us out of the credit bubble they've created. How else will the gov pay off it's debts?

But that will not save the housing bubble, since housing will scale with salaries, and imports from China/India will keep our wages low.

But the money the gov prints will lead to future increases in the prices of commodities: gold, silver, oil, etc, and their respective companies that mine them.

Just my opinion.

 
At 1:26 PM, Anonymous Rob said...

Anon 12:24

I am not agreeing or disagreeing, because I don't know, but it seems to me that if they are going to just print money, they better make sure it doesn't get into the hands of real estate speculators, or it won't get us out of the debt bubble. They better just print it and load it onto a cargo ship and send it to Japan and China to buy back the Treasury notes.

 
At 1:42 PM, Blogger John Law said...

look at those derivative positions...still think your money is 100% safe in a bank?

 
At 2:31 PM, Blogger Ben Jones said...

John,
The bank positions are nuts.

 
At 2:39 PM, Anonymous Anonymous said...

John,

"look at those derivative positions...still think your money is 100% safe in a bank?"

I agree. Cash in this case is not king. If banks are not safe, should be hold physical cash.

Some have suggested gold and silver, but won't those decrease in value in a depression. Gold is not money anymore, and cannot be used to pay debts. The gov only takes federal reserve notes, so I don't understand why some people think gold will appreciate in the coming depression. This time, gold may actually decrease in value?

Very confused. I'm sure that's what the gov wants...

Still feel deep down inside that gold is safer that federal reserve notes.

 
At 4:12 PM, Anonymous Anonymous said...

(we will see a period where the gov prints money to dig us out of the credit bubble)
It surprises me how many people think that the government can simply print money. I think Germany tried that once, leading to hyperinflation and world war, with the famous pictures of German women burning worthless paper money in their stoves to cook dinner. As a result, the US money supply is not directly controlled by the government, nor does it "create" money. In a fiat money system, banks are the entities that create money out of nothing when they make loans. The govermnent sets reserve requirements for the banks and fed funds rates. Practically, the closest the government can come to "printing" money is to lower interest rates to zero. It came pretty damn close with extended period of 1% fed funds. The key point of this is that you can bring interest rates as low as you want but in order to increase the money supply, there has to be a willing borrower and a bank with sufficient capital reserves to make the loan. That is why Japan has no inflation with 0% interest since its banks have inadequate reserves due to bad loans.
Back in the gold standard days, the bank reserves actually had to be in gold, but now reserves are in fed funds instead of gold. That is why if the derivatives explode, banks may fail, reserves will decrease, economy will slow, inflation may give way to deflation. That is not the time to own gold. The time to own gold is in hyperinflation like the seventies, we had stagflation due to rising oil prices making goods more expensive which led to workers demanding raises which squeezed corporate profits leading to a vicious inflationary cycle. And guess what we did? We blew a GOLD bubble bringing the metal up several hundred percent before it crashed and has not regained that level to this day even without adjusting for inflation!

 
At 4:46 PM, Anonymous Anonymous said...

Anon 4:12

Iv'e seen um printin it. I even have sum.

 
At 5:26 PM, Blogger Ben Jones said...

4:12 anon,
I agree, someone must borrow a dollar into existence. If people become afraid to take out a loan, the central bank will be pushing on a string. They already are, actually, because businesses are refusing to borrow. Some say that's why the Fed created the housing bubble, because that was the only willing money creation tool at their disposal. Thanks, good comment!

 
At 6:30 PM, Anonymous dumbfounded said...

---BoulderBo wrote: i will tell you that the majority of loans written are 80/20 (read no equity), done on a stated income basis (because they don't have the income to qualify otherwise)---

If I were king, I'd outlaw stated income loans. What kind of loan is this? Who loans money to someone without any idea of their financial situation? I have an acquaintance who just bought a $300K home on a "stated income" basis. She has no assets. She works part-time (if at all). She makes less than $30K a year.

To top it off, the home she bought is an "investment" property. It is out of state and she has no plans to live in it. The rent it generates is less than the mortgage---so she's in a negative income position. Not a good thing when you have no assets and no full-time job.

I asked her how she qualified for a loan. "Stated income," she said. What's that? "My broker said I needed to show $65K household income to qualify. So I wrote down $65K on the form. My broker says they never check," she said. Nice.

Lendee: I'd like to borrow $300,000.

Lender: OK. What's your collateral?

Lendee: This killer home I'd like to buy. It's an investment, you see. Though the rent doesn't cover expenses and I'll be losing money every month, the real estate market is so hot that it doesn't matter. We'll all be rich very soon!

Lender: Fair enough. How do I know you can pay the loan off? How much income do you make? How long have been at your job? What other assets do you have?

Lendee: None of your business.

Lender: Fair enough. I think we have a deal.

 
At 10:04 PM, Anonymous Anonymous said...

The federal government CAN print money, as long as it runs a budget deficit. The Treasury sells bonds to pay for the deficit. If there is insufficient demand for the bonds, then the price of the bonds will fall and yields will rise. The Federal Reserve can fight this rise in bond yields by buying the bonds itself, using money created out of thin air. What happens is that the Federal Reserve just creates a checking account at a Federal Reserve bank containing as much money as it wants and then uses this money to buy the bonds, thereby pusing the bond prices back up and the bond yields back down. The Federal Reserve creates and destroys money like this all the time to control the overnight rate, but there is no legal or practical reason why it can't also try to control the longer rates.

The "pushing on a string" phenomenon only occurs when the government is reluctant to use the full powers of money creation and deficit financing. My feelings is that this phrase was invented as a way of intentionally deceiving the public, since there are always many constituencies that WANT more inflation. For example, everyone involved in this housing bubble would love to see hyperinflation. Normally, the rich and the bankers and the other powers that be want to avoid hyperinflation. By talking about "pushing on a string" these powers that be can make it sound like the government is incapable of creating the desired inflation, and thereby keep the masses from demanding it.

 
At 7:52 AM, Blogger deb said...

The gov't needs to preserve its ability to borrow money, by selling its bonds and notes. In the end, I think they will sacrafice every other market to protect the bond market and their ability to issue more debt.

 

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