Monday, May 16, 2005

Mortgage Originations Down 44% At ETrade

SmartMoney reports that one mortgage firm has a lot less business. "E*Trade's lending business slowed last month, with direct-mortgage originations dropping about 44% from March levels. 'The first month of a quarter is the slowest month,' President R. Jarrett Lilien said."

31 Comments:

At 10:40 AM, Blogger Gasman said...

If this is a true reflection and not simething specific to Etrade or the first month of a quarter then it is significant.

In Australia and the UK the first sign of trouble was a drop in mortgage advances.

 
At 10:50 AM, Blogger The Original Anon said...

This is off-topic, but here's an interesting twist: it seems like the mortgage interest deduction only applies to mortage balances which are under $1M AND lower than the fair market value of the house. Type in "mortgage interest deduction" in Google and take a look at the Quicken article for the source. Does this mean that when you buy a house for $900k with zero down (happens in California), and the market value goes to $700k, you can deduct only the interest on $700k worth of the mortgage? The IRS publication cited in the Quicken article doesn't say this, but the Quicken article seems to suggest it. Anyone know the answer?

 
At 10:50 AM, Anonymous Anonymous said...

Yeah, need more detail. E-Trade could have had a spike in business due to a new line of business or something.

I'd like to learn more about the general pattern.

 
At 10:53 AM, Blogger The Original Anon said...

Duh, I found the answer myself by reading more carefully. From the IRS publication: "If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that is not more than the cost of the home plus improvements qualifies as home acquisition debt. The additional debt may qualify as home equity debt (discussed later)."
The limit on the home equity debt is $100k, by the way.

 
At 10:53 AM, Anonymous Anonymous said...

OT:

http://biz.yahoo.com/prnews/050513/dcf039.html?.v=7

Remarks by President Bush to the National Association of Realtors

"There's more work to be done. A year-and-a-half ago, I signed the American Dream Down Payment Act. My 2006 budget requests $200 million for that initiative. And it's an important initiative. You see, that money will help thousands of families with their down payment and closing costs, which will help more people realize the great joy of owning their own home.

"To boost housing sales even more, Congress needs to pass my single-family homeownership tax credit. (Applause.) We estimate this credit would increase the supply of affordable single-family homes by as many as 50,000 each year. The idea is to increase the supply of affordable homes by seven million over the next 10 years.

"In other words, there is a proper role for government to provide incentives for entrepreneurs and small businesses to expand. One thing we've got to make certain is to understand that the mortgage interest deduction enables more Americans to be able to own their own home. It is an important part of our tax code. (Applause.)"

 
At 11:03 AM, Anonymous Anonymous said...

Ben, don't miss this one:

http://www.marketwatch.com/news/story.asp?guid=%7B42DA7578%2D84BD%2D4053%2DBE49%2DA3E144C63167%7D&siteid=mktw&dist=

 
At 11:03 AM, Blogger desi dude said...

any one seen this?

http://www.consumerreports.org/main/detailv4.jsp?CONTENT%3C%3Ecnt_id=579825&FOLDER%3C%3Efolder_id=162679

 
At 11:09 AM, Anonymous boulderbo said...

if you look at the forecast number for mortgage originations going into 2006, it's pretty bleak. the only thing that propping up numbers is the continuation of kamakazi programs. as an example, this came across my desk this morning, and i quote
"we are pleased to announce the borrower advantage 103 program is back, this is a true no downpayment loan!!! loans amounts to $500,000 includes 3% for financing closing costs and prepaids. borrower needs no money in the deal, the two months reserve requirement can be a gift"

get this, you can put yourself into a half million dollar loan (for a house you just paid $487,000 for) and the only money that you have to your name is two months payments, that you borrowed. that is why we are gonna have a problem.

 
At 11:16 AM, Blogger deb said...

"the two months reserve requirement can be a gift"

Holy smoke! The blind optimism of borrowers is truly mind bending.

 
At 11:41 AM, Anonymous Anonymous said...

http://www.latimes.com/business/la-051605homes_lat,0,7084718.story?coll=la-home-headlines

From Cashking

So the new DataQuick numbers are out for Los Angeles County and the median home price for the county has hit $447,000.00 with a reported year over year appreciation of 15.5%.

While this is an impressive number, if you do the analysis DQNews seems reluctant to do you see, as I have been saying since November 2004, that we are headed for the bursting of the bubble on July 15th when DataQuick releases the numbers for June 2004 sales.

With the April Median of $447,000.00 this represents an increase of 7.97% since last June. Hardly the impressive rate of return everyone seems to be assuming. But what is going to happen when the June 2005 numbers come out and the year over year rate of appreciation is something like 9.5%?

What effect will that minimal rate of appreciation have on the market place? Will the “investors” who bought 33% of LA County Homes have second thoughts and decide to stop buying more properties, decreasing competeition for those homes currently for sale? Or will they decide to get out while they can and start to sell, at once, their mass of homes? Will the 13% of buyers who purchased “second homes” decide to stop buying and decide to sell?

What is the average buyer going to do when he hears the real estate he is so anxious to buy into has consistently been slowing down and might go negative during the summer? Wait to see what happens?

Or do people really think the average home price is going to go up 60K in the next two months to give them their much publicized 20% annual return on investment?

People are going to call this a "soft landing" but accordingt to my statistics, every rRE correction/crash began with a decrease in appreciation.

Here are the facts, collected from www.DQNews.com:

LOS ANGELES COUNTY
DATE Median HP YOY Appreciation 6/04 – present Appreciation

2004
Jan. 2004 352K 26.6% N/A
Feb. 2004 352K 23.9% N/A
March 2004 375K 29.3% N/A

April 2004 387K 27.7% N/A
May 2004 394K 25.9% N/A
June 2004 414K 32.3% N/A

July 2004 406K 23.8% -1.93% since June 2004
Aug. 2004 407K 20.4% -1.69% since June 2004
Sept. 2004 407K 21.1% -1.69% since June 2004

Oct. 2004 409K 23.2% -1.20% since June 2004
Nov. 2004 416K 22.7% +0.483% since June 2004
Dec. 2004 418K 21.2% +0.966% since June 2004

2005
Jan. 2005 414K 17.6% 0.00% since June 2004
Feb. 2005 424K 20.5% 2.415% since June 2004
March 2005 440K 17.3% 6.28% since June 2004

April 2005 447K 15.5% 7.97% since June 2004


And Just for Fun, here is San Diego’s Numbers again.

SAN DIEGO
DATE Median HP YOY Appreciation 6/04 – present Appreciation

2004
June 2004 464K 19.0% N/A
July 2004 472K 23.6% 1.72% since June 2004
Aug. 2004 483K 24.2% 4.09% since June 2004
Sept. 2004 480K 23.1% 3.44% since June 2004
Oct. 2004 489K 26.4% 5.38% since June 2004
Nov. 2004 487K 23.9% 4.95% since June 2004
Dec. 2004 491 21.2 5.81% since June 2004

2005
Jan. 2005 478K 20.7% 3.01% since June 2004
Feb. 2005 472K 16.3% 1.72% since June 2004
March 2005 477K 12.5% 2.80% since June 2004
April 2005 484K 10.30% 4.31% since June 2004

Wow! A whopping 4.31% return in the past ten months. If you sold now a house you bought ten months ago, you would be losing money!

ORANGE COUNTY
DATE Median HP YOY Appreciation 6/04 – Current Appreciation
2004
June 2004 540K 30.4% N/A
July 2004 525K 22.7% -2.78% since June 2004
Aug. 2004 543K 24.8% 0.55% since June 2004
Sept. 2004 533K 23.7% -1.29% since June 2004
Oct. 2004 532K 20.9% -1.49% since June 2004
Nov. 2004 541K 23.8% 0.18% since June 2004
Dec. 2004 551K 18.0% 2.03% since June 2004

2005
Jan. 2005 534K 18.7% -1.12% since June 2004
Feb. 2005 555K 16.8% 2.77% since June 2004
March 2005 565K 16.5% 4.62% since June 2004
April 2005 576K 10.1% 6.66% since June 2004

6.66% This is hardly a good return on your money.

RIVERSIDE COUNTY
DATE Median HP YOY Appreciation 6/04 – Current Appreciation
2004
June 2004 319K 25.1% N/A
July 2004 327K 28.7% 2.50% since June 2004
Aug. 2004 334K 28.5% 4.70% since June 2004
Sept. 2004 338K 29.5% 5.95% since June 2004
Oct. 2004 339K 29.4% 6.26% since June 2004
Nov. 2004 346K 29.1% 8.46% since June 2004
Dec. 2004 371K 36.4% 16.30% since June 2004

2005
Jan. 2005 354K 29.7% 10.97% since June 2004
Feb. 2005 372K 30.50 16.61% since June 2004
March 2005 379K 26.3% 18.8% since June 2004
April 2005 374 21.4% 7.24% since June 2004

Ditto.

SAN BERNARDINO COUNTY
DATE Median HP YOY Appreciation 6/04 – Current Appreciation
2004
June 2004 246K 26.2% N/A
July 2004 257K 31.1% 4.47% since June 2004
Aug. 2004 261K 26.1% 6.09% since June 2004
Sept. 2004 265K 33.2% 7.72% since June 2004
Oct. 2004 266K 30.4% 8.13% since June 2004
Nov. 2004 284K 34.6% 15.44% since June 2004
Dec. 2004 281K 30.7% 14.22% since June 2004

2005
Jan. 2005 278K 35.6% 13.00% since June 2004
Feb. 2005 292K 41.1% 18.69% since June 2004
March 2005 298K 34.8% 21.1% since June 2004
April 2005 304K 32,8% 23.57 since June 2004

People are still buying here!

VENTURA COUNTY
DATE Median HP YOY Appreciation 6/04 – Current Appreciation
2004
June 2004 500K 26.3% N/A
July 2004 502K 24.6% 0.4% since June 2004
Aug. 2004 514K 27.2% 2.8% since June 2004
Sept. 2004 540K 30.1% 8.0% since June 2004
Oct. 2004 518K 29.2% 3.6% since June 2004
Nov. 2004 507K 25.8% 1.4% since June 2004
Dec. 2004 522K 26.1% 4.4% since June 2004

2005
Jan. 2005 512K 19.1% 2.4% since June 2004
Feb. 2005 521K 18.4% 4.2% since June 2004
March 2005 535K 16.1% 7.0% since June 2004
April 2005 529K 9.5% 5.80% since June 2004

5.8% ROI. Why don't they report this ten month rate of appreciation?

SOCal as a Whole

DATE Median HP YOY Appreciation 6/04 – Current Appreciation
2004
Jan. 2004 343K 21.2% N/A
Feb. 2004 351K 20.2% N/A
March 2004 370K 23.3% N/A
April 2004 386K 25.7% N/A
May 2004 396K 26.9% N/A
June 2004 406K 26.5% N/A
July 2004 402K 22.6% 0.01% since June 2004
Aug. 2004 407K 20.4% 0.24% since June 2004
Sept. 2004 409K 22.1% 0.73% since June 2004
Oct. 2004 410K 23.1% 0.98% since June 2004
Nov. 2004 415K 23.5% 2.21% since June 2004
Dec. 2004 424K 22.5% 4.43% since June 2004

2005
Jan. 2005 415K 21.0% 2.21% since June 2004
Feb. 2005 425K 21.1% 4.67% since June 2004
March 2005 439K 18.6% 8.12% since June 2004
April 2005 445K 15.0% 9.60% since June 2004

 
At 12:15 PM, Anonymous Anonymous said...

http://money.cnn.com/2005/05/11/real_estate/investment_prop/re2005_scam_0506/index.htm

Article on RE bootcamps, with reality checks toward the bottom.

 
At 1:24 PM, Blogger Ben Jones said...

Great info Cash King, thanks!

 
At 1:27 PM, Anonymous docseverinsen said...

(Does this mean that when you buy a house for $900k with zero down (happens in California), and the market value goes to $700k, you can deduct only the interest on $700k worth of the mortgage?)

Many cite "favorable" tax treatment as a big reason why real estate is so buoyant. There's truth to that.

But at this stage of the bubble, some of these favorable tax implications wash away.

For example, as cited above, you can only deduct interest on a mortgage that does not exceed the FMV of your home. If/when values decline, your deductibility will decline right along with it.

Also, you can only deduct interest on a mortgage up to $1M. With so many homes in bubble states now exceeding that threshold, the benefit of tax deductibility is capped. This will potentially put a lid on appreciation or a least place a roadblock in its path.

And, you can only deduct interest on a mortgage for your first and second homes. No benefits for those speculators piling up homes to flip. And my guess is that most of them aren't savvy enough to incorporate to run their flipping operations as a business.

 
At 1:41 PM, Anonymous Pete said...

Hey Cashking:

The lemmings don't look at it this way. If you only have 10% down or "in to it", and I know many people have even much less than that in it, you've just made 50% on your money. Assuming a 500K joint with 50K down and 5% appreciation. What they forget is that:
A) It takes much more time to sell these days.
B) If this were to go 5% negative, which is real easy, you just lost 50% of your down.
C) The interest paid on the huge mortgage net of taxes, property taxes, insurance, maintenance, higher utility bills etc.
These are not deep thinkers who are in the game right now. It's these people who will get burned badly.

Pete in SD

 
At 1:57 PM, Anonymous Anonymous said...

Pete in SD -

I agree. The smart money is getting out, the less smart money will get out next and once a highly publicesed 0-3% appreciation (year over year) is realized the speculators will bail simultaneously and the market will be flooded with houses for sale, forcelosure properties, etc.

This dump will bring prices down fast!

Cashking

 
At 2:08 PM, Anonymous Anonymous said...

I'd like to take a poll. How far do you all think prices will fall before turning back up?

<10%
10-20%
20-30%
40-50%
50-60%
60-70%
70-80%
>90%

?

 
At 2:14 PM, Anonymous ChrisH said...

40-50%

 
At 2:30 PM, Anonymous Anonymous said...

It varies depending on area and price category:

In Bay Area, my guess will be:

300K-400K: 50%-60%
400K-500K: 50%-60%
500K-600K: 40%-50%
600K-700K: 40%-50%
700K-800K: 30%-40%
800K-1M: 30%-40%
1M-2M: 20%-30%
2M+: 0%-20%

 
At 2:43 PM, Anonymous Anonymous said...

30%-40% in OC

 
At 2:48 PM, Anonymous Anonymous said...

I'm in Boston, and most home prices in many areas have "only doubled" since 1998.

I find it hard to beleive that we'd know have a 50% drop here, since that would mean prices fall back to pre-boom levels.

It could happen, but heck, most homes are about $450K, so that would mean a drop to $225K for a single family home.

Sounds a litte too low, don't it!
Since most household incomes are about $80K.

 
At 2:50 PM, Anonymous Anonymous said...

My guess is that San Diego will go down by 30% - 50%, but I believe this will take quite a few years. Perhaps we will see the bottom in around 2008 - 2011 when all the I/O and hybrid ARMs reset and more baby boomers try to sell in order to fund thier retirement (as they see appreciation in flat/negative territory, they will get scared).

 
At 3:35 PM, Anonymous Anonymous said...

I think 50% in Los Angeles and San Diego. Maybe more in Riverside.

Will take a long time.

I used to only think 30%, but now I think it has gone up too much.

Look at revenues for rentals in LA area, rent only covers 30-50 percent of home ownership costs.

 
At 3:40 PM, Anonymous Anonymous said...

Am I missing something? I see all these links to articles etc.
But unless Ben is doing the link
you cant click directly to it.
How do you access these great links without typing in all the info?

 
At 3:41 PM, Anonymous Anonymous said...

At 10:53 AM, The Original Anon said...
"If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that is not more than the cost of the home plus improvements qualifies as home acquisition debt. The additional debt may qualify as home equity debt (discussed later)."

A related issue: it has been said that Californians whose houses are upside down can just return the keys and walk away from the mortgage. Someone then pointed out that this works only for first mortgages - i.e. the borrower is still responsible for the second mortgage (the other 20%), refis, HELOCs, etc.

Anon's post makes me wonder if there's also a restriction on first mortgages that are worth more than the market value of the house (i.e., can a CA borrower walk away from the entire first mortgage or do they have to make up the amount by which the house is upside down)?

I think I've read that they can get the difference forgiven in bankruptcy, but then the forgiven debt is considered "income" and they get taxed on it. I think this applies to non-Californians, though (if the Californians can walk away from the first mortgage in any case, then obviously there's no need to declare bankruptcy).

It'd be great if there were a comprehensive resource on mortgage defaults as they relate to credit ratings, taxes, etc.

 
At 3:46 PM, Blogger deb said...

It does not matter whether the loan is in first position, what matters is whether or not it was a purchase money loan, meaning money borrowed for the purchase. A cash-out refi (even if just $1 more than the original loan) cannot be just walked away from even if it is a first.

****************************
"Am I missing something? I see all these links to articles etc.
But unless Ben is doing the link
you cant click directly to it.
How do you access these great links without typing in all the info?"

Copy and paste is all I do.

 
At 3:55 PM, Anonymous Anonymous said...

Ah. Thanks for the clarification Deb.

Does this apply to all purchases, or is there also a distinction for "investment" purchases?

 
At 4:02 PM, Blogger deb said...

To be protected from a deficiency judgement on a mortgage loan, I believe the home must be your principle residence.

Someone correct me if I'm wrong.

 
At 4:10 PM, Blogger desi dude said...

ben,

this question about foreclosure, anti deficiency etc is coming up again and again.

Pl consider putting up some decent links on these and related issues on the main page.

I believe these kind of questions will increase in frequency in the coming days.

 
At 4:24 PM, Anonymous boomer said...

While I believe prices will actually fall in many markets, as opposed to flatten or rise more slowly, it doesn't mean that all of a sudden there will be bargains galore.

Let's say median prices in Orange County drop 20% over the next five years. That doesn't mean every house will become available for 20% less. Most people won't sell into a bear market unless they have to. They will just keep living in their homes.

During the difficult years in the 90s in SoCal, we saw a flurry of bankruptcies and foreclosures from 92-94. Most of the people who sold were those who had bought near the top, who were speculating, who had personal financial reversals (divorce, job loss, etc). The vast majority just rode it out. So there were bargains, but it wasn't as if every home went up for sale.

It could be a little more intense this time around, particularly in markets that have seen the most speculation because there are a lot of "weak hands" in these markets. Plus we have so many people overleveraged through the use of interest-only finance.

Markets that have run up but have little speculation will probably be OK. They just won't appreciate for a while, maybe a long while. Where I live in NorCal, the high end homes ($2M and up) have not appreciated very much in the past five years. All of the action has been in the lower-end (around here that means under $1M). Once the low-end hits near $1M, demand slows noticeably. Perhaps this is because $1M is a psychological barrier and also it is the limit for mortgage interest deductibility.

I think the biggest damage will be in the condo arena in places like Miami, Phoenix, LV, San Diego, etc. And in the SFH sector in secondary and tertiary markets like Fresno, Chico, Tracy, Fairfield in Calif. These are less-desirable areas that have only jumped because they were starting from a much lower price base. Once it becomes clear that the RE boom is over, those towns will have to stand on their own fundamentals and, IMO, that means price declines.

 
At 4:48 PM, Blogger Ben Jones said...

3:40 anon,
I drag my curser across the link and highlight it. Then right click on the link, 'copy', and click into the google search bar and right click, 'paste and go'. Sometimes that will get you into stories that are otherwise subscription only, as well. Good luck.

 
At 5:16 PM, Blogger The Original Anon said...

"Once the low-end hits near $1M, demand slows noticeably. Perhaps this is because $1M is a psychological barrier and also it is the limit for mortgage interest deductibility."

I suspect it's the loss of the deduction more than the psychological barrier. Lenders do have red lines that make it pretty hard to get loans over $1.1M ($1M primary plus $100k HELOC). This means that homes above about $1.2M are limited to second-time homebuyers (or first-timers with more than $100k in cash, but they're rare). Who's left out: the two earner couples making $80-100k each, which is a substantial chunk of the buying pool in Silicon Valley. There's great price compression in the $1.2M price range. $1.3M will get you a much nicer home than $1.15M (in a good school district, a 2200 sq.ft. nice home vs. a 1500 sq. ft. ok home). It's a bigger difference than between 1.3M and 1.45M, or 1.15M and 1.0M, for example.

A different poster wrote: "I think I've read that they can get the difference forgiven in bankruptcy, but then the forgiven debt is considered "income" and they get taxed on it. I think this applies to non-Californians, though (if the Californians can walk away from the first mortgage in any case, then obviously there's no need to declare bankruptcy)."

This is exactly right. Under the federal tax code, loan forgiveness is considered income. It makes sense, if you think about it. If loan forgiveness weren't income, it would be pretty easy to shaft the tax man: we all wouldn't be paid salaries any more, we'd just borrow money from our employers, who would forgive the loans every month. This is federal tax law--the state doesn't matter.

 

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