Realty Check

Your Thoughts on Subprimes


Since I received so many responses to my blog yesterday on Subprime Subterfuge, I thought I’d post them here for everyone to see. Thanks to all for writing in!

Better Chance at a Craps Table?
I used to work for a federal agency that insured mortgages. The political idea was to get up to 65% of eligible people into owner occupied housing. No mention was made about the quality of mortgages issued.

Then came along interest only mortgages. One has a better chance at a craps table in Vegas than handling this type of mortgage where the interest rate could go up. Payments go up and no funds are put onto the principle. It is being upside down in the biggest investment many people have.
- Donald F.

The 80/20 Mortgage

No one has mentioned the 80/20 mortgage. The buyer qualifies for a first mortgage with a 20% down payment but finances the down payment in the form of a second mortgage. This is a loan made to a buyer with good credit and is very very common here in CT. What I see as a real estate broker is most buyers purchase houses with very little or no equity. Also declining house prices affect a person's credit score making credit harder to qualify for in the future.

I see people even if they can make their payments being stuck in their houses. I see many vacant houses due to people not appreciating the risk involved in owning 2 houses. With mortgage money so available people buy first then sell, instead of selling first then buying. It's not: damn the torpedoes, full speed ahead, it's: what torpedoes, full speed ahead.
- Al M.

It Ain't Over Yet

I wanted to chime in on today's article. As mortgage professionals with over 30 years each in the industry, my wife and I have been waiting for this "shoe to drop." As one knowledgeable mortgage broker recently put it, 'there's been a race to the bottom' (by subprime lenders). We've arranged very few true subprime loans and absolutely no payment-option ARM's since starting our own mortgage company 12 years ago. Not that these products haven't been available to us, it's a matter of full and accurate disclosure. During the REFI boom, we'd get calls, day after day, asking about "that wonderful 1.0% loan." Early on, I made it a practice to ask each caller what they understood about the payment-option ARM. Not one actually understood the loan in its entirety. After going through a detailed explanation, every caller I spoke to asked me one simple question: Why would I do that? Those callers that didn't like my detailed explanation of this loan probably went to some other mortgage lender or broker that just wrote the loan (without adequate consultation). By the way, in this jurisdiction, Department of Real Estate licensees are the agent of the homeowner and owe a fiduciary duty to their clients to make these disclosures - unlike the institutional lenders that never have this duty (there's probably the best reason to use a mortgage broker in California). If anyone thinks this subprime mess will be over or, at the very least, contained to the lenders already in the news, they're nuts! Take a look at the 10-K Golden West (World Savings) filed with the S.E.C. before Wachovia bought them. You'll find that over 50% of their earnings were from the negative amortization interest on their payment-option ARM loans. Also, you might find last year's National Association of Mortgage Broker's survey about who was the "favorite" subprime lender interesting... it was World Savings! Think Wachovia might have a problem or two? How about Washington Mutual? Downey Savings? Why do you think Countrywide sent out hundreds of letters to its payment-option ARM homeowners warning them about the consequences of making only the minimum payment? This problem surely isn't over.
- Chuck O.

Starting to Look Like 1929
Folks on Wall Street like to play pretend, and then you reporters let them believe their own lies (where were the government regulators the last three years?). It’s not any different than the press letting the government get away with playing pretend on the bogus intelligence we used to invade an innocent country.

We have lost our collective moral and ethical compasses. Why this country thinks we can’t be right back to 1929 is beyond me. My grandmother lived through it and she said it all started when everyone thought the unreal was possible in finances … sounds familiar.
- Brian A.

Don't Forget About Commercial Subprime
I am a real estate appraiser. Single family subprime loans are just the tip of the iceberg. 100% subprime COMMERCIAL LOANS are also going to go into default. Why? Because 100% loans were made on both Single Family and Commercial loans. And both have adjustable rates. Cap rates on commercial properties have been artifically push down to nothing around 3% or 4%. Based on that none of these properties will debt service and as rates adjust up major defaults will happen in the commercial.
- Anonymous

Banks Blind to Coming Meltdown
The problem has a history of serious flaws:
1. The prices were driven by meddling in the housing market which required e-mail sign-ups due to alleged short supply of available homes in many markets.

2. The builders were selling to investors not planning to occupy the homes. Some stopped this practice when the homes were back on market competing with new sales. This just reinforces the artificial demand existing.

3. Those investors were using up the subprime loans available.

4. Quick re-finance within a year of closing and taking out additional hundreds of thousands in loans. These banks have been pleading with people to take new loans before the rates go higher. Every mailbox in the country is getting these mailings.

It is ridiculous to me that the banks could not see the meltdown coming.
- Larry M.

Getting It Right
Nice call! I think you got it right. I love your last paragraph. I think that is what is called a blinding grasp of the obvious.

For fun, if you would like to see some interesting comments, go to Art Cashin’s comments at UBS today. He talks about correlation in various markets.

Keep up the good work.
-Jim G.

Questions?  Comments?