Monday, December 10, 2007

An Example...

...of why home price have nowhere to go but down, in this test case the Bay Area of California. This exact scenario, however, to smaller or larger degrees of magnitude, is playing out all over the country. People who got a mortgage in the last five or six years do not seem to understand that they could never qualify for a mortgage today, even though their income and credit score may be nearly the same as it was.

Straight Talk on the Mortgage Mess from an Insider
Herb Greenburg 12:11:23 PM December 6th, 2007

...[Home] Values are down and these [mortgages offered over the past 5-6 years] are [among other flaky variable rate mortgages] interest only loans, therefore, many are severely underwater even without negative-amortization on this loan type. They [the borrowers] were qualified at a 50% debt-to-income ratio, leaving only 50% of a borrower’s income to pay taxes, all other bills and live their lives. These loans put the borrower in the grave the day they signed their loan docs especially without major appreciation. These loans will not perform as poorly overall as sub-prime, seconds or Option ARMs but they are a perfect example of what is still considered ‘prime’ that is at risk. Eighty-eight percent of Thornburg’s [investment] portfolio is this very loan type for example.

One final thought. How can any of this get repaired unless home values stabilize? And how will that happen? In Northern California, a household income of $90,000 per year could legitimately pay the minimum monthly payment on an Option ARM on a million home for the past several years. Most Option ARMs allowed zero to 5% down. Therefore, given the average income of the Bay Area, most families could buy that million dollar home. A home seller had a vast pool of available buyers.

Now, with all the exotic programs gone, a household income of $175,000 is needed to buy that same home, which is about 10% of the Bay Area households. And, inventories are up 500%. So, in a nutshell we have 90% fewer qualified buyers for five-times the number of homes. To get housing moving again in Northern California, either all the exotic programs must come back, everyone must get a 100% raise or home prices have to fall 50%. None, except the last sound remotely possible...

There's not a snowball's chance in heck that those flaky adjustable mortgages will be returning. Already they can't sell the securities they already have that are based on the already existing flaky mortgages - they're literally "no-bids," that is, NOT A SINGLE INVESTMENT FIRM will even look at them. So that option is off the table.

...Wamu, Countrywide, Wachovia, IndyMac, Downey and Bear Stearns were/are among the largest Option ARM lenders. Option ARMs are literally worthless with no bids found for many months for these assets. These assets are almost guaranteed to blow up. 75% of Option ARM borrowers make the minimum monthly payment. Eighty percent-plus are stated income/asset. Average combined loan-to-value are at or above 90%. The majority done in the past few years have second mortgages behind them....

Well, that's not good. I'm not expecting a 100% raise anytime soon, class. Are you?

That just leaves....your home value crashing through the floor, along with your investments, your retirement, and your ability to get credit of any kind.

Fun, eh? If you haven't already figured out a way to live within the means of your take-home pay, you'd better figure it out soon, because borrowing or credit cards will no longer be an option, class. The time to ditch expenses that cannot be borne is now, before things spin out of control - before your home is in danger.

Things cannot go on as they have before. Act now, or don't gripe later.


Jeff said...

Hey gal, you're not alone. Let me invite you to 2 sites that think the same:


There are other thoughtful intelligent people who think likie you do. Let's not give up.

Jeff said...

I can't say how awful it is that this doesn't get more traffic. What a great site!

Ahavah B. said...

Writing on water is what this is. Spitting into the wind. Those who need to hear it won't listen. Those who listen don't need to hear it.