WSJ: Oh Wow, This Could Be A Disaster!
This WS Journal report must mean that the halls of power are getting worried about what they have created. "In California, interest-only loans accounted for 61 percent of the mortgages taken out to buy homes in the first two months of this year, up from 47.1 percent in 2004 and less than 2 percent in 2002."
"Mortgage strategists at UBS AG called the shift to ARMs and nontraditional mortgage products such as interest-only loans 'symptomatic of..the end of the housing cycle."
"Partly because of these products, mortgage originations are expected to total nearly $2.5 trillion this year, according to the MBA, down slightly from $2.6 trillion in 2004."
There you have it, the MBA admitting that mortgages are down. And what would the numbers be if these 'products' weren't around? The bubble would have already burst. Consider this; if the interest only loans were 17% of 2004 totals, that's $442 billion! The percentage is certainly higher for 2005.
"If home prices fall as rates rise, some borrowers with interest-only loans could wind up owing more than the value of their home. Even if the growth in home prices simply flattens or slows, some borrowers could be squeezed by rising mortgage payments." A little late, WSJ, but welcome none-the-less.
24 Comments:
^^^
Classic fin-de-siecle quote from mortgage snakester:
"As long as the housing bubble doesn't burst, home equity lines should remain strong and remain safe," said Scott Stern, chief executive of Lenders One, a St. Louis-based cooperative of 60 mortgage companies that originate home-equity lines, including some that feature 100 percent loan-to-equity ratios. "As long as the bubble doesn't burst, there should be no serious problem."
That's comforting. It's like jumping off a building and saying, "As long as I don't hit the ground, things should work out OK."
What is going on? These guys absolutely know this is a disaster in the making, yet they keep lending with the full knowledge that it will blow up---and on riskier and riskier terms.
Help, Mr. Wizard!
Moral Hazard introduced by Sir Alan Greenspan.
Give it 2 or 3 years and all the current buyers on IO and adjustable loans will be crying for the government to 'DO SOMETHING' to help them out of their fix. I can see it now.
"The data, from the Mortgage Bankers Association, show that adjustable-rate and interest-only mortgages accounted for nearly two-thirds of mortgage originations in the second half of last year."
Two thirds of the mortgages NATIONWIDE are ARMs or IO. Why are people in Iowa, Kansas, etc., turning to these loans?
Anon 2:38
I have the same sick feeling as you. And what scares me is that it may happen, and what a wonderful way to reward the financially responsible by taxing the hell out of them to bail out the numbskulls that happily borrowed more than they could ever repay.
"Why are people in Iowa, Kansas, etc., turning to these loans?"
I don't know. It's my gut feeling, but I bet they aren't using these type of loans to as great an extent as the so called boom cities.
I just returned from a visit to some family in a small town about an hour South of Omaha on the Missouri side of the river. Houses seem pretty cheap to me compared to California real estate.
While I was there I was watching a local TV station advertising homes in the Omaha area. Not too hard to find a decent 3br 2ba 1800sq ft house for 150K, and a darn nice looking 4000sq ft newer home for 299K. 399k was the most expensive one I saw advertised and it was a beautiful 4500sq ft 5br, 3ba, three car garage home.
I had to look hard to see a for sale sign in the small town I was in.
OH, and gas is under two bucks a gallon.
"These guys absolutely know this is a disaster in the making, yet they keep lending with the full knowledge that it will blow up---and on riskier and riskier terms."
The mortgage guys are just cashing in and don't give a damn that it's all going to fall apart. They have all made millions, so screw everyone else.
That kind of attitude is leading America down the tubes.
But many say "real estate prices never drop."
If I invest and prices do drop, will I be able to sue realtors and mortgage brokers that are making such statements?
"if IOs are being used in some weird places, it could be RE investors from hot markets who swoop in to buy homes."
Very good point.
> If I invest and prices do drop, will I be able to sue realtors and mortgage brokers that are making such statements?
Nope. It is my (I am not a lawyer) understanding that in no case do these people have any legal responsibility to act in your best interest, including your own realtor (unless you have a buyer's agent contract, in which case you are paying your realtor on top of the commision the seller is paying them)
-- If I invest and prices do drop, will I be able to sue realtors and mortgage brokers that are making such statements? --
Actually I heard that the big real estate brokerages are having buyers sign a hold harmless addendum that states that the brokers can not be held responsible for any future fluctuations in value.
{If I invest and prices do drop, will I be able to sue realtors and mortgage brokers that are making such statements?}
Call me old fashioned, but doesn't anybody remember personal responsibilty?
If you are making an investment, due your homework, take any statements that something 'always' happens with a grain of salt, and remember its your money, both present and future, that you are committing.
but I guess you're looking ahead to who you can blame should things not go well...it's become the true 'American Way'. ..sigh..
"due your homework"
LOL!
The Real Estate Rapture is upon us.
re: "due your homework"
yeah, it's funny, but I always go easy on misspellings on blogs, it's hard to type correctly while you simultaneously grind your teeth and blow steam out of your ears. Plus I think there are a few English as a 2nd language posters here (rather, I hope there are).
lol. alan greenspan does not give shit -- he will continue to prop things up until retirement and then the next guy in line will be left holding the BAG (aka tax payer)
At 2:38 PM, Anonymous said...
Give it 2 or 3 years and all the current buyers on IO and adjustable loans will be crying for the government to 'DO SOMETHING' to help them out of their fix. I can see it now.
At 2:44 PM, Anonymous said...
Anon 2:38
I have the same sick feeling as you. And what scares me is that it may happen, and what a wonderful way to reward the financially responsible by taxing the hell out of them to bail out the numbskulls that happily borrowed more than they could ever repay.
That's my nightmare, and that of half of everybody who reads here, probably.
Our family already had our homeowners' crisis, no one to bail us out, but we did get an education. Bitter irony if we'd have been better of ignorant, eh?
I do have hope, though, that everything will hit the fan at once: GSE failures, the stock market, a rising tide of foreclosures and bankruptcies, all of it. Enough failing at once and not even the most craven legislator - I hope - will have the balls to suggest that the American people can dig themselves out of an abyss with high enough taxes.
If there is a bailout, I fear it will be for the banks and GSEs - just the big players. The individual guy with a defaulted mortgage will be left holding the bag - for life - in the wake of the recently passed bankruptcy legislation. (Well, if truly in poverty, he'll be chapter 7 certified or at least judgement proof. If truly wealthy, he'll have bankruptcy-proof trusts and untouchable home equity. It's only the 95% in the middle there who'll be screwed for life.)
2:35 Dannyboy:
"... That's comforting. It's like jumping off a building and saying, "As long as I don't hit the ground, things should work out OK."
Great comeback. Will add it to my library of snappy quotes.
5:00 Anonymous:
"Actually I heard that the big real estate brokerages are having buyers sign a hold harmless addendum that states that the brokers can not be held responsible for any future fluctuations in value."
My wife is a Realtor in a tiny office. This is very useful as CYA. Trial lawyers / ambulance-chasers could not make much money at all if they represented people who accepted personal responsibility for their actions/decisions. As a nation we are breeding personal responsibility out of our children. So such clauses are, sadly, increasingly necessary.
When the collapse occurs, the news media will be looking for a culprit. With the 2000 Nasdaq tech collapse,(only obvious several yrs later) they tagged most of it on the alleged telecom overbuild, which of course was only part of the larger problem
However, when the GREAT REAL ESTATE COLLAPSE OF 2006 (?) finally becomes obvious to all, the public will soon relize that we will be looking at another taxpayer bailout, this was one far larger than the S&L bailout. This will primarily lead to the doorstep of FANNIE MAE, the entity that keeps the entire system afloat, with its increasingly lax lending standards over the past decade supposedly under the guise of increased demand for housing
The reality is when something is virtually free, obviously demand will be nearly unlimited. The fact that so much debt has been used to increase the square footage SIZE of houses and not just the quantity of housing stock - suggests this is not just about getting more families in more houses
In effect because of Fannie Mae and the secondary markets, there has been a complete disconnect between the house owner/debtor and the final creditor - at least creditors with a true stakehold - unsupported by either explicit of implicit government guarantees
Otherwise at this point such true stakeholders would have forced credit standards to have risen, interest rates to have gone up far more, or caused many types of loans to have been disallowed
Greenspan is obviously hoping for a real estate soft landing, but I cannot fathom how its possible at this late date.
blogger 1 said "But many say "real estate prices never drop."
blogger 2 said "If I invest and prices do drop, will I be able to sue realtors and mortgage brokers that are making such statements?"
There is a general rule applicable in nearly all jurisdictions that so called "puffing" is not actionable via a tort (i.e damage) claim. Classic would be when a used car saleman says "this car is the cleanest car in the world" or this is the "best car in the world." Basically the courts (in the interest of not inteferring with commerce) give salesman and comparable equivalents wide latitude in making generalized statements that on their face to a reasonable person are obviously clearly in the nature of a sales-inspired exaggeration
Now clearly, the salesman's
cars are not actually the cleanest or the best in the world, just as obviously to a rational person - real estate can and does in fact fall in value at certain times. No rational person thinks a real estate investment is in the nature of a bank deposit
If the courts let plaintiffs take all such comments literally, commerce would in effect probably shut down.
Bottom line, you will have no case
(lawyer/accountant)
"If the courts let plaintiffs take all such comments literally, commerce would in effect probably shut down."
Great, then it's ok to lie.
I'll become a stock broker/realtor and tell clients that these investments never drop in value.
I love Amerika.
7:22 Anonymous:
There's a difference between a lie and an incorrect opinion. Some statements are so general that they're understood not to communicate any useful information -- the "puffery" spoken of above.
That said, plenty of RE people may be walking a fine line between puffery and fraud. A specific statement like "Coastal Orange County real estate has never declined" might cross that line. On the other hand, it's so easily demonstrated false that you might have a hard time proving "reasonable reliance" -- that you were justified in believing and acting on a false statement, which you have to show to prove fraud.
A buyer might have a better case if he could show that a broker or a mortgage broker caused a fraudulent appraisal to be made.
(This is not legal advice, no attorney-client relationship is created hereby, all the usual CYA, etc.)
Plus people do not typically think of RE agents as "salespersons" as they should. RE agents have "clients", not customers. They are full of financial and investment advice and opinions, and are supposedly bound by "fiduciary duty" to the client. These things make people more inclined to lay their trust in RE agents in a way they would not with, say, a car salesman, from whom they know to expect puffery.
You may or may not be able to win a case wherein a real estate agent stated "Real estate in location XYZ has never dropped."
Irrespective, I'm sure it would put the fear of GOD into most real estate people. You might just get a settlement to shut you up!
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