August 2, 2007
JustQuotes, RandomRumors, And Readers Report: Alt-A All In One
“At this time Wells Fargo...is no longer accepting Alt-A loans. Period. I also have CONFIRMATION that IndyMac is also tightening significantly: http://www.theimbreport.com. I have UNCONFIRMED reports that WaMu, BofA, and Wachovia are also significantly restricting Alt-A loans as of today.
Again, there will ALWAYS be some market for Alt-A and subprime...[b]ut it will be much more expensive to use those products. We are seeing more demand for down payments, more income verification, decreased loan amounts, etc. The days of 100% financing using IO or option ARMs at low rates [are] over. Some lenders will still offer 100% financing, some will still offer option ARMs or IO ARMs... but it will cost more.”
UPDATE: "Rumor modification -- I just checked with my Wells mortgage agent. He hadn't heard that they were no longer offering Alt-A. So I cruised some mortgage broker blogs. The rumor seems to be that Wells is no longer offering Alt-A's to brokers and correspondent banks, reserving them for their own branches instead."
First Published: August 2, 2007 11:03 AM
Comments from "Plugged In" Readers
In all seriousness what effect will this have on SF itself?
here are a few of my thoughts.
This will obviously hurt sales volume but the month of supply stood at only 2 months as of June, even after 2 years of volume declines, and that is still a pretty tight market.
There will be some buyers who purchased at the peak who will not be able to refi and forced to sell and some of these will be foreclosures, how many is difficult to predict, but we can expect a rise in inventory and certainly a rise in 'must sell' properties, but again, how many is difficult to predict.
The effect on prices again is hard to predict, simply because a steep drop would put so many owners, not just recent buyers but long term owners who HELOC'd out their equity, so far underwater that the market is inherently going to resist it.
But could this cause a collapse? I don't know any buyers in the last few years who didn't use some kind of 'exotic' mortgage to buy in SF. Whether they were all considered Alt A I can't say for sure. But when the median home prices is 9X the median income the percentage of buyers using a traditional 30 year fixed is going to pretty small.
So how will any first time buyer get into the market if these exotic packages disappear or are priced so high as to make unavailable to first timers.
Does that matter in SF? Is the SF market that dependent on first time buyers? or is the vast majority of the market 'move up' buyers who have large amounts of equity?
Any one have some hard numbers? I known DQ put out that +70% of all mortgages in 04 and 05 were some form of ARM but is that true of SF or just CA in general?
Posted by: badlydrawnbear at August 2, 2007 11:28 AM
No hard numbers, but won't the market in S.F. just revert to its pre-boom status? It was always very expensive and daunting for first time buyers, and the City has always had a relatively small number of transactions. It doesn't seem like first time buyers were all that important, though I know a lot of first time buyers who bought here in the last few years.
By the way there are lots of buyers who put at least 20% down (including myself) but still didn't take out a 30year fixed. I have neighbors who put 30-50% down after saving for 10-20 years and/or cashing out equity in other locations. 150-300K is a big chunk of money sitting in S.F. real estate and perhaps the principal payment on a mortgage is better spent diversifying into something else if you put up a big down payment.
Posted by: anono at August 2, 2007 11:49 AM
The hurt will start at the bottom and work its way up. Medians will initially rise because until the home sells, it doesn't hit the median, and the low end is going to slow down faster than the high end.
The undisciplined (those people with no down payments or poor scores, who have been in the drivers seat for the past five years, paying whatever price they need to) will still bid, subject to a financing contingency, and the sales will fall out of contract. After awhile (around December), no one will accept a financing contingency without documented 10% down and a decent FICO score and the undisciplined will be out of the market for good. The disciplined will realize they aren't competing against spendthrifts and they'll adjust their offers accordingly.
Some buyers will switch to other products. But the fact is that, although some will switch to something else, most can't switch, at least for two years, and so something like 30-50% of the buyers just got (or will shortly get) knocked out of the market.
How will that affect prices? Ask any high school economics student. I'm guessing you'll start to see the effects of this really kick in by early next year.
Posted by: tipster at August 2, 2007 11:52 AM
Good analysis, BDB. A few more thoughts to add to the mix:
This can only exert downward pressure on prices even if not a single SF purchaser is forced to liquidate. The supply side is important to the supply/demand/price equation, but so is the demand side. As you note, a huge percentage of SF buyers in recent years have used these exotic mortgages. While some of them could have qualified for more traditional financing means, many of them could not have. That large pool of buyers is now out of the market, or they cannot afford as much as they could have 2 years ago.
Stagnating/drifting prices from the absurd levels of recent years is also causing well-qualified buyers to sit on the sidelines. People are not going to panic bid for less-than-perfect places or overpay as in recent years because the overwhelming consensus is that prices are only going to get better. This is the complete opposite of the 2004-05 mindset. This is a big reason why we are seeing a growing number of perfectly good, but unspectacular, places going unsold for lengthy periods and/or getting pulled from the MLS.
There will always be sellers who sell for the old reasons. Now add in the huge numbers of condos coming on-line and those who have to sell because they cannot afford their re-set ARMs (numbers hard to predict), and the supply/demand balance will tilt even further in favor of buyers.
This is not new. I saw the same thing when a bunch of my friends bought right out of college in the last frenzy in '89-90 because prices are "only going up." They could have bought 40% more house just a couple years later.
Posted by: Trip at August 2, 2007 12:00 PM
"By the way there are a lot of buyers who put at least 20% down.."...
anono - could you please back this up with hard data? Your neighbors have actually disclosed to you that they put 30-50% down? You must be on real friendly terms with them.
Posted by: anon at August 2, 2007 12:05 PM
the reason I focused on first time buyers is because studies show that a single first time buyer transaction generated 4 'move up' transactions.
So, even if first time buyers only make up a small number of buyers in the SF market this could really impact the number of transactions up and down the chain.
Even if you consider that many buyers come from outside SF (although I am not sure how true that really is), the first time buyer market appears to be the hardest hit at the moment through out CA and Nationally.
if the RE market is a pyramid with the base being first time buyers and/or outlying counties and the tip being Baby Boomer retirees buying in Noe Valley or Pacific Heights or One Rincon, if you remove the base doesn't the tip fall too?
Posted by: badlydrawnbear at August 2, 2007 12:27 PM
I just looked outside, and the sky is still not falling. This latest development isn’t too surprising honestly. I would expect the bigger banks to stop offering Alt-A loans for while given all of the issues going on in Real Estate these days. This actually presents a nice opportunity for smaller banks to increase their rates and focus even more on Alt-A and exotic loans. When the market shifts more favorably, the big banks will likely come back with Alt A loans of their own, and the rate spread with prime loans will become smaller as the perceived risk decreases.
Frankly, I think Alt-A is here to stay. The rates may go up and the banks offering it may change, but Alt A loans likely aren’t going away. I also doubt that this will have a huge effect on SF prices or the number of sales, as I believe that the number of buyers using Alt-A has actually been decreasing -- depending on your interpretation of Dataquick’s press releases over the past few months. So, the lower prevalence of exotic loans is already built into the current run rate.
Posted by: Anon at August 2, 2007 12:32 PM
The Indymac CEO's letter is startling. I think it is very important to read it in its entirety.
I've already spoken (too much probably) how the lending situation is really imploding right now. I can't explain how breathtaking the last 1 week has been for the mortgage and financial industry.
One interesting point from the letter COULD be the Real Estate Market's "salvation" however, and "save" SF RE values:
(from the CEO's letter):
"I received a call from U.S. Senator Dodd this morning who seeking an understanding of “what is really going on and how can I and Congress help?” I also have talked to the Chairman of Fannie Mae this morning and have traded calls with the Chairman of Freddie Mac (Fannie Mae’s Chairman telling me that they are “prepared to step up and help the industry”)."
Whenever discussing future path of housing, one cannot exclude the government and the Government-Sponsored-Organizations-they are POWERFUL.
The government CAN significantly change things due to regulation or maneuvering through the GSE's.
as example, the gov't could create a product similar to federal student loans... below-market federally-guaranteed mortgages for the lenders. They could roll it out through Fannie and Freddie.
This would allow the lenders to continue lending foolishly, but still be protected. (not too dissimilar to what happened after the S&L crisis)
By the way, it would also wreak havoc on inflation, but that is another story.
Posted by: ex SF-er at August 2, 2007 12:35 PM
Anon 12:32 makes a good point about the DQ releases "Financing with adjustable-rate mortgages has declined significantly." My questions is, just because it is or isn't an ARM are these Alt A?
I would be inclined to agree that Alt A is here to stay in SF because honestly I don't see how pretty much anyone would be able to afford the home the want without it.
which leads me to what anono 11:49 said
"By the way there are lots of buyers who put at least 20% down (including myself) but still didn't take out a 30year fixed."
I realize that the buyer might be using the extra income to diversify, but aren't there plenty of buyers who did this because even with 20% [they couldn't] afford the 30 yr fixed fully amortized payment on the home the wanted to buy?
Meaning, they were looking to buy a 3 bedroom but if they went 30 year fixed they could only have afforded a 2 bedroom (or maybe a 1) ... and if they 'had' to go 30 yr fixed would they have bought that smaller home?
I know that's getting into buyers heads and not something you can really prove or quantify, just something I was thinking after I read that.
Posted by: badlydrawnbear at August 2, 2007 12:45 PM
Anon @ 12:05- there is no need for your neighbors to tell how big their down payment was because loan information is publicly available if you know where to look. Of course, this data could diguise a HELOC but there would be no logical reason to take a out a piggy back loan with a greater than 20% down payment.
Check out PropertyShark sometime, it's pretty interesting.
Posted by: anono at August 2, 2007 12:47 PM
I should add that many people do discuss loan terms, particularly when a lot of us were refinancing we discussed who had the best rates and products.
Posted by: anono at August 2, 2007 12:49 PM
Oh good, maybe senator Dodd can hold some hearings, just like he did with sub prime! Nothing happened, but he got a LOT of free press!
Beyond that, he didn't really do much for sub prime, so I wouldn't hold my breath waiting for him to do anything. With deficits and inflation, his hands are tied. And the government could start insuring burning buildings too, but they really don't have the money.
The reason the investors are fleeing the market is because the borrowers aren't paying the loans back, not because of any hardship, but because the borrowers made foolish decisions.
Like the famous Greenspan Put (that never materialized), or the sub prime bailout (that never materialized), there will be much talk, because that's what gets votes, and maybe even some window dressing (they'll "allocate" money to forgiveness programs that never seem to actually get funded), but the fact is, there's nothing to do but wait for the tide to pass.
And when prices drop by 20%, all those "neighbors" who had 20% to put down will realize that their life savings can evaporate in a year, and then we'll see how eager they are to plunk that down on a home.
Posted by: tipster at August 2, 2007 1:00 PM
“I just looked outside, and the sky is still not falling.”
Thanks to leverage, the sky need not fall for this to have a significant impact. An “insignificant” 5% drop in the market would represent a $40K loss to the average SF homeowner. Assuming 20% down, that’s a 25% loss on their investment, with 10% down that’s a 50% loss, and with 5% down...
“This actually presents a nice opportunity for smaller banks to increase their rates and focus even more on Alt-A and exotic loans.”
Increasing rates will lead to reduced prices in San Francisco as the purchasing power of buyers’ incomes fall.
Posted by: Michael at August 2, 2007 1:07 PM
Tipster - Do you really expect prices to drop in SF by 20%? Has RE in SF every had a decline like that? Has RE in any major city had a 20% decline not caused by a natural disaster?
I think you make some good points but to make a prediction like a 20% drop in SF housing prices is pretty bold and seems very doom & gloom!
I expect to see a dip in the market over the next 12-18 months but over the next 5-10 years housing prices will be more expensive then they are today.
Posted by: JJ at August 2, 2007 1:13 PM
Rumor modification -- I just checked with my Wells mortgage agent. He hadn't heard that they were no longer offering Alt-A. So I cruised some mortgage broker blogs. The rumor seems to be that Wells is no longer offering Alt-A's to brokers and correspondent banks, reserving them for their own branches instead.
Posted by: Wowf at August 2, 2007 1:19 PM
JJ - tipster has been predicting LARGER than 20% drops for years now. If you take a look at what prices were when he first started making the "sky is falling" predictions, we would need to see 50-60% price drops to get down to where he thought they would be years ago. $250,000 penthouse condos coming soon? According to tipster, yes.
Posted by: tipster checker at August 2, 2007 1:22 PM
These loans will dry up. They won't completely disappear, of course, but it is not just a matter of smaller banks making up for what larger banks no longer offer. The problem is that nobody is buying these loans anymore. Banks, large or small, do not hold onto the home loans they write anymore. They package them up and sell them to big investors. But these big investors are not stupid. Some have already crashed and burned (Bear Stearns) and others are not now going to foolishly rush in and pick up the slack, particularly in a world where prices are falling and these loans are riskier than ever. Banks will (and can) only write what the secondary markets will buy.
Posted by: Trip at August 2, 2007 1:27 PM
The equation is simple. The availability of money/financing is one of the primary influences on real estate and ultimately real estate prices. Tighter credit/financing standards are a downward influence on real estate prices. The true effect of this announcement though is yet to be seen as there could be other sources of money that come in and fill the gap. But this is a major trend to be watched - the tightening of credit - as I think this announcement is a reaction to the spigot being shut off at the Wall Street/securitization stage of these loans over the last month.
Posted by: Miles at August 2, 2007 1:28 PM
Agree with your comments badlydrawnbear. My suspicion is that although some buyers could put 20% down, they could not afford the 30 year fixed loan. Out of curiousity, I was perusing through property shark and pulled out loan info. for the Lake St. corridor. I looked at the homes/condo that were sold for >$1.5M. A great majority of them had variable rate loans. You are only allowed 6 free reports a day so I can't really say that is statistically significant, but take it for what it's worth. I've been pulling these reports up the last few days.
Posted by: anon at August 2, 2007 1:35 PM
tipster checker -
Agree 20% decline is largely unprecedented. But also unprecedented was the increase in real estate prices over the last 5 years (not justified by the underlying economic growth) driven by unprecedented liquidity and several years of loosing credit standards. A 20% decline over several years might not be as outrageous as it first appears.
Posted by: Pvilly at August 2, 2007 1:49 PM
sorry for the misinformation.
I have not gotten information about Wells Fargo's in-house ALT-A availability.
I was misled by the wording that was sent to brokers:
"Today from Wells Fargo…
Alt-A Discontinued Until Further Notice
Due to the appetite and demand for this product in the secondary market, we are not able to obtain pricing from our investors. Until we find out more, the rate sheets will not have pricing for this product. A newsflash will be going out soon regarding unlocked pipeline and loans locked that are not yet delivered.
Thank you for your understanding during these market conditions. Please let us know if you have any questions."
my original mis-source:
Posted by: ex SF-er at August 2, 2007 1:50 PM
No harm. I'm just modifying your tip with some more data points.
Speaking of data points: American Home Mortgage folded today. According to Forbes, they didn't even originate sub-prime mortgages.
Posted by: Wowf at August 2, 2007 2:08 PM
Confirming Wachovia - no Alt-A (at least wholesale).
Posted by: cd at August 2, 2007 2:15 PM
"Speaking of data points: American Home Mortgage folded today. According to Forbes, they didn't even originate sub-prime mortgages."
This is true but most of their loans were "stated income" loans which if you think about it can be & are just as risky as subprime loans.
Posted by: JJ at August 2, 2007 2:18 PM
I agree with you, JJ. That is mostly true if the underwriter doesn't check all the other components of the applicant's financial health, i.e. if the underwriter doesn't protect itself against fraud.
Posted by: Wowf at August 2, 2007 2:40 PM
JJ - "stated income" loans are considered Alt-A. As you say, just as risky as subprime. As others have said, Alt-A loans have accounted for the majority of new loans in SF over the past couple of years.
Posted by: Anon2 at August 2, 2007 2:40 PM
Wells Fargo is closing its wholesale subprime division (for mortgage brokers). You can still get a subprime loan through the Wells retail channel. Home equity loans are getting harder to get. Citimortgage and Indymac are requiring higher credit scores, more documentation, lower combined loan to values... And in markets with distressed real estate values, buyers need to put more money down. Even with all of these changes, there are lots of options for borrowers.
Posted by: Lee Aubry at August 2, 2007 2:44 PM
Yes "stated income" loans are Alt-A, but not all Alt-A are "stated income" loans.
So, even if most of the new loans in SF are Alt-A (which makes sense considering housing prices compared to the rest of the nation) it doesn't mean they are "stated income" and doesn't mean they are high risk & will default.
Posted by: JJ at August 2, 2007 2:48 PM
"The three-month constant default rate for 2006 Alt A hybrid adjustable-rate mortgages is 2.3 percent, compared with 2.2 percent for subprime ARMs, New York-based Citigroup analysts led by Rahul Parulekar wrote in a July 20 report. The figures represent the percentage of balances in a mortgage-bond pool expected to default in the next year based on 90-day trends."
Posted by: Anon2 at August 2, 2007 3:00 PM
I don't know if the sky is falling, but the uncertainty about whether or not this will be a bump in the road or a train wreck for America's economy (and thus the global economy) sure got torqued up a bit in the last three weeks.
Posted by: Jamie at August 2, 2007 3:07 PM
One certainty - rents are going up.
Posted by: Jamie at August 2, 2007 3:08 PM
Gotta love how the market drives changes on its own.
Now what about this whole thing about regulation?
Posted by: Usually Named at August 2, 2007 3:26 PM
I'm not an Economist, but what if this helps trigger bigger events in the economy where the Fed feels they need to cut rates? What would presumably happen? Would there be a bounce in re-fi's, and slowing the downward skid in values?
Posted by: Can't think of cool name at August 2, 2007 3:31 PM
What would happen is that the dollar's decline would accelerate. I'll let others pontificate as to the likely consequences of that!
Posted by: Amen Corner at August 2, 2007 3:35 PM
"I'm not an Economist, but what if this helps trigger bigger events in the economy where the Fed feels they need to cut rates? What would presumably happen? Would there be a bounce in re-fi's, and slowing the downward skid in values?"
This is what the housing industry is hoping for, but it is unlikely to work.
Mortgage rates are not really set by the Fed. They are set by the secondary mortgage market, which is most influenced by the 10 year Treasury Rate (I will only expand on this point only if you desire). Typically, mortgage rates will be equal to the 10 year treasury PLUS a "risk premium" tacked on. (or the LIBOR plus a risk premium)
In the PAST (pre 2000) raising the Fed Funds Rate (a short term rate) would raise the 10 year treasury rate, and hence raise mortgage rates. Lowering the Fed Funds rate would lower the 10 year treasury which would lower mortgage rates.
However, over the last 5 years or so this changed. From 2003 until 2006 the Fed Funds Rate raised from 1% to 5.25%, but the 10 year Treasury rate hardly budged (causing an "inversion" of the interest rate curve), and mortgage rates raised less than 1.5%. This was Alan Greenspan's so-called "conundrum".
What was happening is that investors were lulled into complacency by these new mortgage products, thinking them as "safe". too much money chased too few "safe" investments. thus the spread between the 10 year treasury note and the mortgage rate got very thin... the market "priced" in the risk of these mortgages as very low
Now, the true risk of these mortgages is UNKNOWN. Unknown is the worst possible. If the risk is high, but quantifiable, then a risk price can be found. But if there is UNKOWN risk, there is a lot of fear. Today, nobody knows how much extra these need to cost to cover for the unknown extra risk.
as an example: compare these:
1. You must pay me $10, and you can pick one of 3 shells. One shell has $10 under it. One has $1000 under it. One shell has $0 under it.
2. You must pay me $10. You can pick a shell. You have no idea what's in the shells.
You can see that in example 1, you have 33% chance of breaking even, 33% chance of losing $10. 33% chance of making $990. In example 2, you don't know what your odds are.
AT THIS POINT: risk is unknown for the secondary mortgage products. The ratings companies (Moodys, S&P, etc) are backtracking on all their previous ratings. Big losses are happening.
It will take some time (maybe a few months?)for market participants to understand/quantify the current mortgage market risk. once that time happens, odds can be recalculated, and re-pricing can resume based on newly understood risk. ALL types of loans will be re-offered at that time by at least somebody (Alt A, Subprime, Option ARMs, etc). But the price will be different, likely way higher, than it was a week ago.
Many people (including me) HATE Alan Greenspan for what he did/allowed to happen through the Federal Reserve. At the end of his tenure, he discussed what is happening right now. His infamous speech:
most famous line from the speech:
"Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums."
This is what is now occuring.
HOWEVER, I repeat: One way to work around this, would be a government program which would offer federally-GUARANTEED loans. This way a lender would still lend because they'd be guaranteed to not lose money. (sort of like student loans). This could be done by Fannie Mae/Freddie Mac as example, or through some form of Federal Home Loan Insurance. However, the potential cost to the taxpayer would be astronomical, as they would be "on the hook" for any losses.
Posted by: ex SF-er at August 2, 2007 4:07 PM
Sorry for the long posts. I am horrible at being concise... and this is truly fascinating to me. I apologize in advance to people who hate my long posts and hope that some of you get something out of them... I realize of course that they are more macroeconomic than SF specific, but I honestly think that they apply.
Posted by: ex SF-er at August 2, 2007 4:18 PM
What is really interesting to me is to watch the credit spreads between U.S. Treasuries and Federal Agency securities (the Fannie, Freddie, FHLB, etc...) get so wide in such a short period of time .... most folks consider the Federal Agency securities pretty darn safe, and yet the spread on a 2-year Agency from a 2-year Treasury has jumped from around 18 bps (0.18%) earlier in the year to around 46 bps (0.46%) more recently. Gotta love a good old fashioned credit crunch.
Posted by: Jamie at August 2, 2007 4:22 PM
ex-SF-er: best post I've ever seen on here.
As for loan guarantees, not gonna happen. You wanna know when the last time the sky DIDN'T fall? When sub primes imploded. The government did nothing and the economy kept on going just fine, in spite of the prediction of doom and gloom on the economy.
So why would anyone care about this product when the last product had barely a ripple effect on the economy? They don't and they won't. This is just another mortgage product that got too far out of hand, and a lot of foreigners are stuck holding the bag. No big deal. The world goes on.
Alt-A loans may be the center of the universe for SF realtors, but the rest of the country doesn't much care if one loan product or the other goes by the wayside. 30 year fixed with 20% down or a PMI option are doing just fine, thank you. Always have, always will. Back to normal.
Posted by: tipster at August 2, 2007 4:38 PM
ex - SFer, your posts might be long, but they are very interesting. Does your name you post under say that you left "the best place on earth"? We are about to watch a generation under the age of 35 experience their first real estate downturn. That age group by far seems to have no fear of massive debt, and are the firmest believers that real estate "only goes up".
Posted by: anon3 at August 2, 2007 5:11 PM
ex-SFer. Love your posts. It's been a long time since I've been out of school. Thanks for the econ/finance refresher. And yes, I also blame Greenspan for this mess.
Posted by: anon at August 2, 2007 6:14 PM
Does your name you post under say that you left "the best place on earth"?
-yes. in body, but not spirit. Born and raised in the Tenderloin. Lived all over but lived in Inner Sunset near Parnassus the 8 years prior to me leaving the city.
I'm in SF a fair amount (maybe 4 weeks per year) or so, but in the end my destiny was not to be there.
I may go back, but economically it doesn't make sense for me at this point in my life. I have a dream job here that simply doesn't exist in SF. And financially FOR ME it was no contest. (my salary doubled, cost of living is 1/3rd). Thus, no SF for me.
I cried when I first moved away. Then after time, you realize that all places have their own unique positives... so I started loving my life where I am.
But I will always look in on my hometown, thus I'm so glad to have found this site! I see pictures of all my old haunts... and I get to keep up on all the local stuff. It truly is amazing how much the city has changed over the decades!!!!
Posted by: ex SF-er at August 2, 2007 6:44 PM
So, let me ask you ex-SFer. Let's say you were the Fed chairman and 9/11 just happened.
What would you do?
Posted by: Usually Named at August 2, 2007 7:26 PM
Oh, and the dot-com crash just happened too.
As Fed Chairman, what indeed would you do?
Posted by: Usually Named at August 2, 2007 7:29 PM
This idea that the risk can be quantified is pernicious nonsense. We have seen hedge funds do whatever they want with little oversight, an explosion in concocted and derivative debt products, and banks essentially allowed to print money until they blow. Even if the situation remains "contained", remember what happened last time. Prices stagnated or retreated one or perhaps a few percent each year. Meanwhile inflation started to gouge. People came away from 1988-1995 with some warm and fuzzy feelings about property because homes were still terribly expensive. In reality the drop had been around 30% and things will be similar but much worse this time. When the market is gamed not only institutionally but at the governmental level the inevitable correction just gets worse and more spread out. In the end all of this fraud will land with some agencies and society as a whole will have to make decisions about what to do.
Posted by: Mole Man at August 2, 2007 8:04 PM
as you well know, it is always easier to be an armchair quarterback than to put up an action plan!
I also know you hate long winded responses. So I will be brief.
most people know that the Federal Reserve Bank controls lending through manipulation of the Fed Funds Rate. Most people DON'T know that this is NOT their most powerful weapon.
more powerful is their control over reserve requirements and general banking practices. I would have wielded this.
The Fed dropped rates to 1% and kept them there for too long, hoping the money would flow to equity markets. Clearly, the money was flowing to Real Estate.
As soon as this became clear (2003 at the latest), the Fed should have:
1. raised rates MUCH faster to show they were serious about asset prices
2. increased reserve requirements. One can argue that reserve requirements are as low as 1%-10% (some argue near 0%) due to changes in the way the requirement have been calculated. this allows banks almost unlimited money to lend. The Fed could have (and should have) increased requirements drastically. this would have drained the system of signficant liquidity.
3. I would have attacked an obvious asset bubble (which the Fed openly said it did not want to do).
Instead, the Fed:
1. kept rates at 1% for way too long
2. left reserve requirements way too low, (they still are)
3. purposefully used "core CPI" so that they could ignore the OBVIOUS inflation going on in housing, and keep rates too low too long. (by the way, housing part of CPI is figured using IMPUTED RENT, not home purchase prices, thus the major housing boom was left even more out of inflation "measurements")
4. came up with rediculous "hedonics" to help lower core CPI even further, justifying too-low Fed Rates.
5. encouraged borrowers to use ARM's. (greenspan's infamous speech, just before he raised the FFR 17 consecutive times)
But most of all: I would have tightened the lenders years ago. When you started having No-Income No Asset Loans and Stated Income Loans it had clearly gone too far. As soon as I saw that, I would step in and examine some books. that behaviour would stop IMMEDIATELY once the federal Reserve Audit begins.
USA Today article about greenspan endorsing ARMs in february of 2004: (I'm too lazy to find his real speech, but everybody remembers it):
Posted by: ex SF-er at August 2, 2007 8:42 PM
I think I'm young - 32 y.o. - but how young do you need to be to think that real estate only goes up? People on here are asking if SF has ever seen depreciation? Yes! in the early 90s, SF home prices saw 30-35% year over year depreciation! And that was just a bad economy as far as I know. This is a full blown mortgage scam, living way above your means, salaries not rising, mass exodus from California, crisis.
Posted by: 32 at August 3, 2007 5:40 AM
"Yes! in the early 90s, SF home prices saw 30-35% year over year depreciation!"
WOAH!!!! hold on there partner! I lived through the downturn, and don't remember anything so severe as that! Although certain properties did lose a bundle, I can think of few, if any, that lost that much!!!
In my neighborhood some properties lost about 20-35% (maybe) over the entire duration of the downturn, but certainly not per year! (and this was inflation adjusted losses... many of the homes lost only 5-15% over the entire duration nominally)
I'd like to point out, that what is going on now in the financial markets is awe inspiring... but short term. Eventually "risk" will be priceable again... I'm not sure how long that will take (I've never seen anything like this before, so your guess is as good as mine). But repricing WILL happen. The end is not here... but the rules will change.
Today the Wall Street Journal is announcing that Wells Fargo will price their 30 year jumbo mortgages at 8%, up from 6.75%. (not sure if this is the rate offered through brokers, or direct from Wells Fargo)
See? Re-pricing is already occuring!
In the early stages (now), pricing is very difficult to accomodate the UNKNOWN risk. Going forward, risk may be able to be recalculated, and then repricing can occur... And then the mortgages will start moving again!
it is theoretically possible but HIGHLY improbable that we'll see the loose lending of the last few years... thus, loans will be more expensive.
As example, Wells Fargo's new pricing would mean that a $1,000,000 mortgage now costs $12,500/year more in interest charges (almost $1000/month)- very rough math. The mortgage still exists... just more expensive! So home prices will need to change to accomodate more expensive financing.
The end isn't here, or even near... just a very large change in what was! remember, 8% mortgage is historically pretty darn normal! Mortgages have been as high as 18% in the past!
Posted by: ex SF-er at August 3, 2007 6:29 AM
I don't think anyone is predicting a 30-35% price drop in a year. However, the example ex-SFer gives illustrates how we could easily see market price drops of 10% or more in the next 12 months. A huge number of buyers are now out of the SF market altogether. They cannot get any financing at all because they could only afford (if even that) teaser rates and interest-only loans at low rates. Those are largely gone. Now even well-qualified buyers with significant downpayments are going to be paying $1000 more a month in interest on a typical purchase, meaning they would be willing to pay $1000/mo less on the principle (unless you want to ignore the laws of price curves).
That these enormous constraints on buyer capacity will result in lower market prices is a certainty. How low, and for how long, is where we can debate.
Posted by: anon at August 3, 2007 7:16 AM
Okay. Now it's 2003. America is prepared to go to war with Iraq. Uncertainty abounds. What do you do, Mr. (Ms.?) ex-SFer, Fed chair?
Anyway, you know what I'm getting. As they say, hindsight is 20-20. Decisions are easy when they're not real.
Posted by: Usually Named at August 3, 2007 8:06 AM
Slightly off-point, but I see that three securities class actions have already been filed against American Home Mortgage. I guess this meltdown will be good for somebody, if not home sellers.
Posted by: Trip at August 3, 2007 9:22 AM
Ah yes, I remember the last down turn in San Francisco. My parents used to drag me to Sunday open houses. There was no one looking. You could hear a pin drop. It was so quiet.
Posted by: anon at August 3, 2007 9:29 AM
Some stats from page A3 of the WSJ this morning.
Alt-A loans represent 13% of the mortgage market in the US.
Subprime represents about 20%.
See, Alt-A is no problemo at all. It's only about half the size of subprime, and our feds did nothing to stop the subprime collapse and nothing happened. So they sure aren't going to worry about such a minor blip for the nations housing market.
And if you pull out SF and a handful of other cities, Alt-A really is a mere blip on the nations housing market (probably less than 10% excluding that handful of cities), and nothing to be concerned about in the least when it goes up in smoke. The fact that it represents an astounding 70%+ of the mortgages in SF just means the impact will be dramatically concentrated in just a small handful of locations, and nothing at all for the nation to concern themselves with.
Other loans are doing just fine. 30 year fixed, with 10% or more down, conforming loans are fine. No problems at all.
As for being able to price the loans when the risk is quantified, absolutely correct. But the problem is that resets are just now starting, and so no one really knows the risk. It's a moving target. Will be a moving target for years. Subprime isn't showing any signs of recovering, and that market is a month or two ahead of Alt-A.
So I wouldn't count on any quick fixes. A lot of people are losing a lot of money in the sector, except those who bet against it! And many people think the losses are bigger than are being reported. As those start coming out, the risk will be seen as unquantifiable again and again.
Steer your clients back to 30 year fixed conforming loans with big downpayments (of course, you'll need to wait a few years for them to save up that kind of coin) and you'll be fine.
What? House prices will have to drop to get there? Imagine this scenario at Senator Dodd's next hearings:
Potential Homeowner: "But Senator, I need those Alt-A loans so that I can spend 70% of my take home pay on a tiny 1000 psf condo next to the freeway. Otherwise, I'd have to find something else to do with my life like take vacations instead of working all the time to pay for this condo.
Seated Audience: murmur, murmur, did she say $1000 psf? murmur, murmur...
Dodd: Order! Are the cameras rolling, I'm taking in almost no reelection funds and these hearings are my only chance...
Potential Homeowner: Of course, that would be my SECOND home, in addition to the one I have in the east bay.
Seated Audience: murmur, murmur, bail out second homeowners? murmur, murmur...
See: I wouldn't count on any bailouts!
Posted by: tipster at August 3, 2007 11:10 AM
Good times to be a lawyer I guess.
Posted by: Jamie at August 3, 2007 11:24 AM
The fun is just starting....got cash?
Posted by: Dude at August 3, 2007 1:34 PM
"Has RE in any major city had a 20% decline not caused by a natural disaster?"
Yes, prices in Texas fell by 40% during the last crash there...Houston in the mid 80s was hit pretty hard, but you could argue that was oil-driven.
Florida in the 1920s saw a horrendous bubble and crash driven purely by speculation.
Even "world class cities" like New York City have seen it....Manhattan in the early '90s.
Posted by: Dude at August 3, 2007 2:00 PM
tipster, those mortgate percentage stats were from last year- not the overall percentage of mortgages.
"Alt-A loans accounted for about 13% of U.S. home loans granted last year, according to Inside Mortgage Finance, and subprime loans about 20%"
Subprime accounts for only 3.4% of all mortgatges in U.S., and Alt-A is even less. This makes any bailout unlikely in my mind- I had actually thought the percentages were higher. If the market keeps tanking, Bernanke may just start cutting rates to soften the landing of the housing market and free up the credit markets again.
Posted by: anono at August 3, 2007 2:24 PM
Not sure where your getting your fact but according to a report issued by Credit Suisse back in March of the $7.8 trillion of outstanding first lien mortgages Alt-A represented 9.3% and Subprime 10.6%.
Posted by: Pvilly at August 3, 2007 3:58 PM
I didn't read through every message above, so excuse me if these links are reposts.
"If I’m wrong, then I’m the first one to say it. But I have to say; I can’t believe I’m wrong about this. Given all the news, data, analysis, and sheer emotion of the current downturn in the housing market, you would think an awful lot of Americans would be worried, concerned, maybe a little, well, interested? Maybe not so much......"
"Pending sales of existing homes rose by 5 percent in June compared with the previous month, a surprisingly positive sign for the beleaguered housing market......"
Posted by: blahhh at August 3, 2007 4:41 PM
Pvilly- your post led me to dig around and while I found some conflicting info the % of subprime/alt-A was much higher than I stated and in one case matched your post:
I found this quote from Bloomberg News on July 24: "Alt A and subprime loans compose about 13 percent to 14 percent of all outstanding home mortgages, according to estimates Federal Reserve Bank of St. Louis President William Poole cited in a speech last week."
And this quote from the Chicago Fed yesterday: "According to the Mortgage Bankers Association, prime mortgages make up about 80% of the mortgage market, subprime mortgages about 15%, and Alt-A loans about 5%. These figures represent the stock of mortgages out-standing as of 2006."
Chicago Fed Essay 241 (google it and it's the first link) which the above quote is from is a great explanation of the current situation and actually predicts limited spillover of current subprime woes to the rest of the mortgate market.
Posted by: anono at August 3, 2007 5:12 PM
some of the confusion about percentages of Alt A, Prime, and Subprime might be due with how they're measuring. Some measure by TOTAL DOLLAR VOLUME and some are looking at NUMBER OF MORTGAGES.
the percentages are different I believe.
Arguably, the best research report ever done on mortgage finance was by Ivy Zelman of Credit-Suisse. It was released in March 2007. Credit Suisse has been by far the leader in this research over the last 4 years or so. Their analysis is rock solid, and their projections have been very prescient due to that analysis.
It is easily readable in PLAIN English (for the most part) but it is like 67 pages (large type and lots of graphs though). If you are a little dorky, this is the report for you. And Credit Suisse is a highly respected institution: this isn't some doom and gloomer blogger or something!
The most quoted part of the enitre report is page 47, "exhibit 42 adjustable rate mortgage reset schedule". She basically researched WHEN the various ARMs reset (by dollar volume) and plotted it out on a graph.
It basically shows that mortgage resets have a double peak. The first peak is from April 2007 until about October 2008. (this is primarly due to Subprime originations resetting)
The second peak is from May 2010 until January 2012. (due more to Alt A, option ARMs and Agency ARMs resetting).
This would indicate that significant mortgage losses are going to continue at LEAST until October 2008 based on the bad loans written pre-January 2007. In other words, tightening now won't save a lot of people or investors... the horse already left the barn.
it is also terrifying for those of us reading this report because the mortgage losses started BEFORE the resets even happened! So people can't even afford the teaser rates on their mortgages!
I have no financial interest in any RE market except my primary home. I also have no investment exposure to the housing or financial sector whatsoever, EXCEPT passively in my 401k that holds an S&P Index fund (so I'm essentially "long" the financials and housing in my 401k)
I may in the future invest in financial/housing sectors (specifically by shorting them), but I don't even have an account set up to do it yet, so it wouldn't happen for months at least.
Posted by: ex SF-er at August 4, 2007 5:43 AM
the Credit Suisse Report uses data based on NEW Home sales. (not resales). The report is really to give research about BUILDERS (not mortgage lenders).
That said, there have been other reports correlating this new home data to the resale data (in terms of financing).
Posted by: ex SF-er at August 4, 2007 5:47 AM
I may in the future invest in financial/housing sectors (specifically by shorting them)
Quite frankly, there is not much left to short as just about everyone has taken a fairly decent sized hit this past week. Most home builders are hanging by a thread and pure mortgage plays have imploded. Some banks have gone down, but Wells Fargo is a possible candidate as their subprime portfolio (low LTV, HELOCs) has yet to blow up (but I have no doubt it will bleed them over the next couple of years).
Posted by: EBGuy at August 5, 2007 1:06 AM