Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Friday, September 08, 2006

Financial Food Poisoning?

If you read Norton Juster's "The Phantom Tollbooth" as a kid, you're familiar with the concept of subtraction soup. As the characters dine on a concoction called "subtraction soup," they become hungrier by the spoonful. They feel ravenous at the conclusion of the course.

"An option ARM is like subtraction soup, except that a steady diet of minimum payments can result in a feeling of homelessness instead of hunger. To pile on the alarming rhetoric, a recent cover story in BusinessWeek dubbed the option ARMs "nightmare mortgages" and called them "toxic" and "deceptive."'

5 risk factors
1. You don't understand how an option ARM works, but you have one anyway.
2. You exaggerated your income on your application.
3. You regularly have been making minimum payments.
4. You're approaching the principal cap.
5. House prices in your neighborhood are falling.

'"They're nightmares to the extent that people don't have them explained," Ohlbaum says. "I get calls all the time from people who say, 'I took this loan, I didn't understand it, my rate keeps going up. No one explained it to me."'

"In July, National Mortgage News reported that an unidentified lender took a random sample of 100 stated-income loans, looked at the borrowers' tax returns and discovered that 90 of the borrowers had lied. Thirty exaggerated their incomes by between 5 percent and 49 percent, and 60 borrowers had puffed up their incomes by 50 percent or more. Just 10 told the truth. The lender didn't say how many of these stated-income loans were option ARMs."

"Bottom line: If you lied about your income, you're more likely to find that you don't earn enough to pay your debts.

Personally, I think you already know this about yourself....

Watch the ABC video for How You Got Here...

'"Basically, what you're going to have on a lot of those pay option ARMs is you're going to see a lot of customers giving the keys back," says Mark Lefanowicz, president of E-Loan."

Don't Buy Stuff You Can't Afford!!!


At 9/08/2006 05:57:00 PM , Anonymous tom stone said...

change #2 to "i committed mortgage fraud,a fedral crime,and a felony"

At 9/08/2006 09:02:00 PM , Anonymous trailer trash said...

"Bottom line: If you lied about your income, you're more likely to find that you don't earn enough to pay your debts."

True. On the other hand, some of these loan applicants may very well earn a lot of money that they don't report on their tax returns.

At 9/08/2006 10:32:00 PM , Blogger Athena said...

great comment about the temporary lift of homebuilder stocks from BEN's place:

by mrktMaven FL
2006-09-08 09:25:10

Yesterday you inquired about the bad news bounce in HB stocks. I replied rather loosely that it might be short covering and it did’nt make sense. After some reflection, here is why it makes sense for HB stocks to rise on bad news.

As you know, to short a stock you borrow it from a broker and immediatly sell it in the open market at a high price. Sometime later in the future, you buy it at a low price and return it to the broker, profiting the difference.

Now, suppose 6 months ago you borrowed 100 HOV shares at $50 and today it trades at $25 a share and you want to realize a gain. In order to realize this gain, you have to go in the open market and purchase the 100 shares you borrowed to cover or close your position. To maximize your gain, you wait until sentiment is at its worse (like when HOV announces bad news) then you buy the 100 replacement shares, closing or covering your short position.

Now, suppose their are many other short sellers like you simultaneously trying to close or cover their short positions and there are’nt enough long sellers willing to bail on the stock. The result is temporary upward pressure on the stock’s price. As a result, you see a bounce in the stock’s price on bad news, “the bad news bounce.”

At 9/10/2006 12:54:00 AM , Anonymous Anonymous said...

What will you blog about once there is no more housing panic? Not that there really is anything to be so chicken little over in the first place.

At 9/10/2006 09:10:00 AM , Blogger marin_explorer said...

"once there is no more housing panic...Not that there really is anything to be so chicken little over in the first place"

That's right. It's all panic, and surely there's no fundamental instability or affordability issues. Athena makes all these stats up, dontcha'know? Maybe you should brush up on what the NAR's cheerleader is saying now, or did you miss the memo?

At 9/10/2006 11:40:00 AM , Blogger Athena said...

well... Sonoma has hardly begun to panic yet, so the story is just beginning. they are starting to advertise for real estate sign spinners in the newspaper. Things are starting to get interesting. That's why I am here and blogging. The topic is what is interesting, not what I have to say. But thanks for asking.



At 9/10/2006 11:54:00 AM , Blogger Athena said...

The Grand Poobah of the National Ass. of Realtors had this to say:

"Lereah predicts the market will pick up again next year after sellers begin to cut prices this fall.”

“‘They will have to, he says. He says that all talk of the Fed’s role, shaky mortgages and irrational speculators aside, what’s at the root of the market stall is sellers’ reluctance to budge on their asking price.”

‘Basically the speculators and the exotic mortgage instruments, interest-only loans and zero-down payment loans that permitted households to purchase at lofty prices, they emptied the punch bowl at the party,’ he said.”


At 9/10/2006 01:40:00 PM , Blogger Athena said...

Great Comment from Ben's Place:

Comment by Housing Wizard
2006-09-10 12:05:19
(1) low cost for money
(2) Easy money to finance speculation coupled with low down payment requirements
(3)Increasing demand by putting unqualified people on toxic ARM and IO loans with low downs
(4) One sided media coverage in favor of advertisers
(5) Low wages not keeping up with inflation causing people to tap equity,/gamble .
(6) Banks paying low interest to savers causing people to look for higher paying investments
(7) Flip that house programs /get rich quick seminars and all the other cheerleader pushing get rich quick .
(8) Creation of mass panic buying based on real estate always goes up/we are running out of land/ you will be priced out forever .
(9) Herd mentality-everybody else is doing it so it must be safe , I want in on the easy money etc.
(10) Avoisance of 2000 recession and perhaps a reaction to 911
(11) Human nature vunerable to greed ,lazyness ,looking for easy ways out .
(12) Babyboomer wanting to fund retirement that they have not saved for .
(13) Young people wanting money to fund retirement because they feel they won’t see any SS fund left .
(14) And just plain unrealistic people who want to party hardy with all the toys and have a easy way of paying the bill.
(15) Lack of bank/lending regulation and disregard for time tested prudent underwriting standards coupled with faulty appraisals .
(16) Refusal to stick to fundamentals in investing and blind faith that real estate goes up 15 to 30% per year .
(17) Recent change in real estate capital gain tax exclusion up to 500k every 2 years ,causing increased activity and shorter term investment turnover .


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