Bubble News by Max
Much thanks to "Max," who sent us this letter to the editor of the Press Democrat. (aka. local real estate industry PR service)
Thanks Max, keep them coming! Indeed, Ms. Whitehead Chan hit the nail on the head.
Loan defaults
EDITOR: You report that home loan default notices in Sonoma County doubled last quarter. Who could possibly be surprised by this development? Your article speculates that interest-only loans and mortgages with minimum payment options might be contributing to this phenomenon, as interest rates rise and minimum payments start to kick in after the “teaser” period is over. But why would the average home buyer have agreed to a loan with those kinds of risks?
A local banker is quoted as saying, “Just because of the higher-priced homes, that is the product that is in demand in order to qualify.”This statement implies that “creative financing” was developed as a consequence of high real estate prices.
I believe that just the reverse is true: Creative financing was developed for the express purpose of enabling the finance, insurance and real estate industries to successfully market the higher prices of homes so that they could make the income from increased insurance premiums, interest income and commissions from those sales. Without creative financing, if no one had been able to qualify for loans at the unrealistic prices real estate was going for four years ago, the current “market correction” would have been unnecessary because prices would have corrected themselves then.
ALICE WHITEHEAD CHAN
Sebastopol
posted by Athena @ 9:35 PM
15 Comments:
MY GOD,They printed a letter like that! did Michael Coit respond? Talk about pyschological shifts...yeehaw.
Talked to an underwriter today,apps way up,approvals way down.shot down a refi again,no equity.home bought 12 years ago,married couple,both with 6 figure incomes,in their 40's,he got health problems...last refi a year ago to 90% (!!!!!) loan now at 9.6% and NOD on 500k...home worth 450k or so...byebye house.pretty Mercedes though,and maybe they can put a hospital bed in the suv,it is certainly big enough.they aren't bad people,it is a tragedy,but if they had basic math skills,had bothered to read their last refi contract and had as much sense as my neighbor's cat they wouldn't be facing this situation...all humans are born with two guarantees 1)Death 2) Taxes.and BTW life isn't fair,ask any 2 year old.
buddy just sold his house. Bought in 2004. After closing costs and fix up costs and mortgage payments, insurance since then he maybe broke even. Don't know if he's tellin anyone that though. Most people can't do math so on paper looks like he is up 50-60k but the reality of what it cost him for the past couple years, he's lucky if he got even to the penny.
jd,if your buddy broke even,he did well in this market.he should be on his knees in gratitude for the GF that showed up.people who buy today remind me of those folks who drive around the barrier at a railroad crossing,ignoring the flashing lights and blaring horn.once.
hmmm... Curiously, I was just discussing a similar situation. Wonder how many in town could be breaking even. Then again, perhaps it is the same person? Oh the joys of living in a small town. ;-)
So how much longer before all the RE smugness goes away once and for all? Here in Marin, it's quieter, but people seem to think that prices will just magically plateau versus any significant decreases.
Lisa,we are coming into a credit crunch,and i predict blood in the streets by september first,if not before.the NOD's,short sales and foreclosures we are seeing now are just the tip of the first wave,and 18 subprime lenders have failed since december.the ripple effects will be spectacular.Athena,Starbucks tomorrow? i can make it about noon.
Thanks Tom for the invite. I am completely swamped and chained to my desk with a cot underneath. (hence why the updates on the local market are so slow. no time to talk to anyone.)
Lisa- as for the RE smugness. I still know people who believe RE only goes up and at worst it will just remain at the current values for a year or so. I don't think the smugness will go away until everyone in the supermarket line knows someone personally who is in financial trouble and selling their hummer or in foreclosure and looking for a place to rent. :-/
Awesome.
Re "creative loans", yes, folks have been looking at mortgages like a car lease. What's the lowest possible payment? How low can I get my drive-off cost?
Making a downpayment, paying full P+I and just letting equity build was seen as old-fashioned and silly. I mean, it's your money, why not tap it?
Now people are slowing realizing that without any equity, there is NO safety net and huge loads of debt on a declining asset.
I am hoping that this debacle will bring back stricter standards, downpayments, clean financial picture, etc.
And gee whiz, how about actually paying off your house so you can retire one day???!!
A few comments from people i spoke to over the last 3 days.a BK atty who used to be a morgage broker"conservatively a 40% decline over the next 2-3 years,ad almost certainly a depression." A broker i trust "a lot of shortsales now,and more coming" a woman who loudly told me last summer "Real estate never goes down in sonoma county,YOU don't know what you are talking about" at a party...yesterday told me she expected prices to drop "a lot" for at least 2 years. a subprime loan officer i know in sacto told me today that their standards had tightened and they were declining loans they would have made a month ago,but that he didn't expect further price drops...i disagreed,and offered to bet $500 that the median in elk grove would drop 30% in 2 years in elk grove...he declined but said prices would be stable because wages "had to" increase to make homes affordable...and real estate brokers using BAREIS mls are now required to check a box if incentives of any kind are part of a sale.they are not required to note the kind,or amount of the concession,but will probably do so when they get tired of appraisers calling them.
Lisa,
People have done this because you can't swing a dead cat in California without hitting a realtor or mortgage broker. They are like butts. Everyone's got one. Everyone has a sister, brother in law, friend, neighbor, aunt, nephew, blah blah blah who is a realtwhore or a wannabe.
They've been drinking the kool-aid the cult of the damned has been serving up. Real estate only goes up. Nobody stays in their house for 30 years anymore...
Basically the Real Estate Industry has been serving up cooked data regarding how often people sell their houses. Dummies have bought the data... they figure why finance for 30 years... they will likely move within five years. Also, many were so deluded into believing they just had to get into the market and buy whatever they could afford... and financed to hold it for a couple years until they could sell to a bigger fool, collect their 20% for each year and move up to a better house.
Nobody stopped to ask where the source of the mania was coming from. Nobody bothered to look into whether their delusions were sustainable. They were being advised by their friends, family, girlfriends, brother in law, uncle etc... only the tinfoil hat people were being naysayers. They couldn't go wrong...
Don't you just want to play Dr. Phil and ask: "And how's that workin' for you babe?"
I admit it... I am a sick fork, and am looking forward to a few, "Who's your daddy now?" moments. ;-)
Athena,I have already had a few "who's your daddy" moments,and I am really looking forward to seeing a few of my fellow loan brokers go to prison.of the few real professionals i know in Real Estate,none made a killing the last few years,and some had their business drop a lot.that has changed,and i am glad of it...It will be real amusing when i start telling people it is a good time to buy,and i hear "YOU don't know what you are talking about,Real estate in sonoma county will just keep going down" and since "C" is ALWAYS RIGHT,i am sure to hear it.
Athena,the loan Money looks like it is going away FAST.we'll see panic on wall street by may 1St,and good luck getting a home loan next year unless your credit is excellent,your income is documented,and you have a downpayment.This is going to get real interesting when the prime selling season comes and there are almost no qualified buyers.the foreclosure to NOD ratio is HUGE,and with prices going nowhere but down can only get worse...if a builder has a captive lender they could conceivably do ok for a while...but i think a lot of GF's will be buying moondust instead of mcmansions.
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