Home : Blogs : Manhattan Beach CA/ e-PRO..... Kaye Thomas... : Kaye's Beach Cities Real Estate Info

Subprime Meltdown... Hey Guys..it's not Rocket Science..

There have been a number of recent posts about the chaos in the loan market and how it may affect buyers and sellers. Brian Brady wrote a series of articles, Broker Bryant posed questions about what happens to his buyers with American Home Mortgage out of the picture. Ricardo Bueno wondered whether the FED should been more articulate about what has been happening in the lending industry. Each article makes some great points.. I had to laugh at Brian's take that stated income buyers are the new smokers as a group to be shunned as bad.. very bad.

Truth is that I was hoping that the mortgage market was going to see some major changes.. but Brian Brady seems to think that the only thing that will change is the upfront price of the mortgage. In other words it will be business as usual but it will cost a little more for those who are not truly credit worthy. I'm sorry but I don't get it.

Come on guys this isn't Rocket Science.. if you make loans to people who don't really qualify for them... they will stop making payments and their houses will go into foreclosure. A good part of the country is having some serious problems with foreclosures. So why would you keep doing it? Am I missing something here?

If I read one more article about how surprised the financial community was about all the loans that have gone south I'll scream. How stupid are you people? Is anyone with a modicum of sense running any financial institution? In the spring I wrote a post.. Back to Basics: Maybe You Shouldn't Have That Loan.. My premise was that most of the people who had subprime loans could barely qualify for them and shouldn't have been given a mortgage in the first place. Why would anyone make a loan to someone knowing they could not make the payments when the loan adjusted? It defies logic that anyone even questions the results of these lousy loans. What on earth did lenders expect to happen.

I'm hoping Brian is wrong and that we will see some major changes in the mortgage market place. But I'm afraid he is is probably right and it will be business as usual..

Manhattan Beach-Beach Cities: Home Loans... The Good news.

All content copyrighted@ 2007 Kaye Thomas

Posted by Manhattan Beach CA/ e-PRO..... Kaye Thomas... on 08/05/2007 09:17 PM

Comments (41)

real estate loans, banks mortgages, lenders, home loans foreclosures

This post has been included in California Information Los Angeles County, CA Information Manhattan Beach, CA Information

41 Comments on Subprime Meltdown... Hey Guys..it's not Rocket Science..

AUG

2007

Kaye - Some interesting, and important, things to think about. The times they are a changin'. We can't ignore what is going on. And buyers now have a wake-up call 0 life will not be so easy for some. Good for everyone.

Jeff

Jeff.. Hey you got here before I had finished..Whoops... I hope we see some changes otherwise I think we will see more havoc in our markets..

Kaye - Great pooint - if you can't actually qualify for the loan, you probably won't be able to make the payments--0-you're so right---not rocket science. Good post, Kaye.

AUG

2007

Marlene-It seemed to make sense to me..

I don't blame the mortgage industry at all. They only do what buyers ask them to do, finance the purchase of this home for me. Many buyers don't care how. They just want THAT house.

IMO, it all stems from 9/11 and the stimulus from the fed. O.K. I'll do a post about that too althoug I suspect that I already have. IMO, our market was totally interest rate driven. More later. . . . .

Lenn- I agree the market was driven by low rates.. as rates had been extremely high for 20+ years.. I don't blame the lenders per se.. but I also have no sympathy for them now.. they created these loan products to grab as much business as they could without considering the consequences they knew would occur when they made loans to unqulified buyers.. Buyers have always wanted that house or that neighborhood.. but in the past they had to be financially qualified to accomplish it.. lenders simply made it too easy...It's like having sex without birth control and winding up pregnant.. may not be what you intended but it is always going to be a possible consequence..

Kaye

You asked, "so why do you keep doing it?" Because they make money doing it. Do you really think that the LO's that did/do it care a hoot about the client? No, if they did they wouldn't have put the client in that loan if the first place. Do you really think they care about the nation right now? No, only in as far as it might effect their bottom ......line.

What I do agree with is why Washington is so surprised about the situation. Who's driving the bus?

Good post. :)

Roberta- I agree ..money is king and they make bad loans because they get more money upfront.. what I find irritating is that they whine so loudly when things go the bad.. as if it was not expected.. and what really frosts me is many expect the tax payers to bail them out when their decisions are no longer profitable..

Kaye

Ohhhh I know this will get some comments but, the lenders knew what they were doing. This isn't a surprise to them. Maybe it came sooner than they expected or wanted, but they knew it would have to come. I for one think this should be theirbale out. Not yours, mine and the rest of the country. I'm tired of companies making big bucks, CEO's that make hundreds of millions in salary and benefits and when the company goes belly up due to poor management or fraud they look to us the tax payers to foot the bill. I'm all for saying not this time. :)...... Think Bush is listening to my words????

Roberta- Of course they knew what would happen.. they are not stupid.. the question is always about risk and reward.. there was enough reward over the short term.. and now the risk has gotten higher then they like.. so as Brain Brady noted.. they will still offer the loans they know are poor risks.. if the get significantly more money upfront to offset the perceived risk factor.. In the meantime they will shed tears over how much their profit margin has declined and like CW's president quietly sell off shares to be sure they get their money out.. Remember the S&L debacle?

Kaye...

Ahhhh. The other wise woman speaks about a 'hot' topic right now.

Our market will take several years to recoup from all of this. The foreclosures are taking place at an astonishing rate.

I have never seen anything like this. I've seen close to it but not like this. Good thing we don't have all our eggs in one basket :)

I have adopted the attitude that it's a good time for us to have some FUN :)

TLW...ROAR!

TLW- Aren't we glad there are two of us so we have someone to chat with...LOL.. We are not having as many problems as you are but what interests me is whether we will see changes or it will be business as usual with stiffer fees...

I think Fun is good and beats the heck out of the alternative..

Hugs,

It ISN'T Rocket Science. But many real estate people have denied the effects of this EASY CREDIT in the housing boom/bubble. It was not a boom built on fundamentals (income and jobs) it was built on a self reinforcing cycle of easy credit and speculation. It turns out when you give out large sums of money, there are people out there willing to take it... go figure.

Now the rug has been pulled out and we get to see who can actually pay of the loans they have. The pool of "qualified" buyers has been shrunk overnight. This is all a good thing long term for RE, but the short term of the next five to ten years there will be quite a shake out.

Kaye, I NEVER saw it coming. OK maybe I did. You know I kind of agree with Brian. If the rate is high enough investors WILL take the risk. I also believe the FED needs to stay out of it. Let the market adjust on it's own. The void in the mortgage market will be filled by someone. Just give it some time. It's time to get busy not the time to panic.

Mikey- I agree it's time we went back to some basic rules of qualifying..you ought to have clean credit and a little money of your own to prove you can budget... There are some people who can and should have 100% financing for a number of reasons but not some guy with bad credit and no money. I just wonder how much of a change we will really see..I have some lenders who are telling me that you will need 10%-20% down and others who state there is still 100% financing and 5% down loans..

Bryant- I'm surprised.. but then you are a listing agent and don't have much contact with how a buyer actually qualifies.. Lender says he's good to go and you would have no reason to challenge him.. I think Brian is right.. these guys will still make shaky loans if there is enough profit up front.... I think that if they get too many foreclosures they will do whatever it takes to get them off their hands... even if it means making more non-credit worthy loans as long as the get the bucks up front.. eventually it will catch up and many of these guys will go down the tube.. anyone remember Great Western?

Bryant- I also hope the FED leaves the market to work out the problem... and it looks as if they will.. I'm all for some tighter guidelines.. especially on RESPA's lenders have to give to clients.. at the moment these are pretty worthless..

Hey Beach girl,

Here's my nickels worth on this topic. IMHO I don't necessarily think the market was rate driven. Rates have been good and stable now for years. Rates today are still lower than 30 years ago. Many of us who have experienced 16-20% rates know what.

What I see as a bigger problem is the rapid increase in prices we experienced. The past seven years we've had the biggest run-up in prices. There is no way you can sustain double digit appreciation year-after-years. Homes doubling in 4 years, not realistic, yet it happened. Now adding 100% loans or neg-ams with a drop in pricing, what else could we expect?

In the past I've seen prices increase about seven out of ten years, ..maybe a year or two of decline and a flat year. It happened in the very early 80's (with horrible rates) when we had to "wrap" loans, the AITD'S and seller carry-backs. Then (at least in CA) about the 3rd quarter of 1989 we began to see demand drop off. (again after double-digit appreciation) and job losses. Actually now that I think about it, it also happened in the early 70's but I was too green then to know that. I just sold houses anyway, I thought that's what you were supposed to do. We had rates then around 7%.

Who knows for sure, it's an interesting time to be in the market and I loved reading everyone's comments.Like my good friend Marlene B. says, opinions are like belly-buttons, everyones got one!

Opinions are like Belly Buttons, everyone gets one. Love it Love it. Wouldn't you Marlene would come up with that zinger. She is not only sweet but a dear funny lady to boot.

Well, I just looked and I don't have lint in mine so I guess I it is Ok to express my opinion.

There are several things going on at once. A lot of pople took advantage and shame on them other took advanyage and now instead of renting they have a home. They are not all going to forfeit so on one side, I am pleased on the other , it is so unfortuate that many will lose their place.

Someone suggested once that is better to have tried and faild than to havee tried. So I gues they got to enjoy homeownership for a while. I hope there will be at some resuce effort to help the innocent ones.

Lynda commented on the escalation of prices. it is almost unfathomable to realize that not only was the equities increased, but the taxes were increased flooding this state and others with money. What do they do with it? The spend more on stupid-s---- and want to raise the taxes more anyway.

It is all so artificial and more people realize it . The economy is whatever the investors want to make to be.

Think about this idea. Cancel all the debt, everyones total debt. Roll the property price values back to 1980 price levels. You know what would happen? People would just do the exact same thing again.

We all worry because of the consequences. I think maybe all the consequences are built in to the whole phony system. Sort of senseless to worry about it at all. That was my altruistic side speaking.

I don't actually feel this way but what I am realizing is how it is so totally manipulated anyway and we really aren't in control. Sadly no one is.

AUG

2007

Hey Ms OC Real Estate.. I think your nickle is worth at least a couple of dollars.. The last few years have been crazy. I do think it has been interest rate driven... because people buy a comfortable payment.. if that comfort level is $3500 a month.. then a 12% interest rate will reflect a completely different loan amount then a 5.5% interest rate.

In the beginning buyers realized they could have the same payment and afford more house... but after awhile the prices got higher as did the loan amounts.. so to keep payments fairly stable.. the exotic loans emerged.. Now everyone could afford to buy a house.. and prices went up as supply decreased and demand increased. That was basic econ 101.. but as you note so well.. there is no way to sustain it year after year. No idea what will happen but I can tell you we are still seeing multiple offers on some very high priced real estate. That said buyers are picky and many seem to have drawn a line in the sand about just how much they are willing to pay. Major activity in our area is under the $2.0 mark.. and I suspect buyers have picked certain levels in most markets that they are reluctant to cross. Inland it will of course be less then along the coast.

Our Miss GG is so smart..

William-Great point.. if you bumped prices back to those of the 80's .. people would do the same.. a large group would continue to wait for prices to drop to the mid 70's levels while others would spend whatever it took to buy their dream home.

The scenario has been happening for a very long time.. which is why you can't buy a house for $4000.00 as our parents did in the early 50's. Of course you can't buy a new car for that either. Prices continue to go up as demand for certain items goes up... 15 years ago Pele were tearing each other apart over beanie babies.. now no one cares and prices are very low.

As long as rates remain fairly low and people feel comfortable with the monthly payment you won't see much change.. Look at gas prices.. 25 years ago there was panic in the streets when prices rose above a dollar a galleon.. few people even batted an eye as they approached $4.00 a galleon..

Good question... what has Sacramento done with all the new tax money?

Kaye.... some valid points. I also agree that the fed should leave things alone. I just read a comment by another loan officer that said the feds should have lowered the prime rate. Why? In reality, this won't get more to buy. It's the actual programs that he should be worried about. Some of these people don't understand that houses can sell just as they did back in the mid to late 90's with limited programs, getting back to the basics.

The problem overall is that a lot of loan officers don't know how to be creative. They liked the easy programs, these no docs that just needed a fico score. This is the sad part. Many don't know how to read tax returns, compute income outside of a salaried person, etc etc.

Brian says that we won't see much more change? I also disagree. We will see a lot more change and soon. I already know of two major players changing their guidelines again, this week. It will be tight for a year. FHA will be a major player. Not sure if congress will vote in the bill to accept 100% financing, but they are suppose to say yes to higher loan limits.

Kaye..... in my previous post I said that you could use my link. Thanks and good post with thought provoking insight.

jeff belonger

Jeff- I think we are about to see major changes... Wells Fargo just priced jumbo loans.. stated and full doc at 8.5%. even if you have over 20% down ... that's going to impact my market big time and a lot of others..

I hear Indymac is about to go down and Countrywide is in trouble...If this new pricing proves to be more then a short term fluctuation and Countrywide goes down..you will see home prices take a major nose dive as the pool of buyers just shrunk..

AUG

2007

Hi Kaye,

There is discussion again about turning back the clock in Sacramento and trying to either amend or alter Prop 13. Prop 13 worked well when things were different back in the 70's but then are they ever really different. Different day, same scenario,lol With the state control by the tax and spend and more liberal mind set that runs the state now and will be long past when I am useful, I have to wonder if these people really understand or even care about homeowners. I know one senator ( no capital S for this one) and this individual is big on retrofitting at point of sale. I could never figure out why. I had heard ( not verified) that this person only recently purchased a property. Prior to this purchase had been a tenant. I can not speak to if it true or not but if it could explain the particular mindset.

AUG

2007

William- They always want to alter Prop 13.. because they spend more then they take in... Taxes are high for new buyers.. but they stay stable over time.. if they fool around with Prop 13 we can expect to see higher rates forever and they won't be tied to purchase base as they are now but to current value and that will be a disaster

AUG

2007

Kaye,

I think my opinion is being taken a tad out of context. In times of crises, change and liquidity are imperative. Loan guidelines will change; they'll be reset to 2002. Stated income loans were made with 20% down, no doc loans were made with 25-30% down back in 2002.

The premium charged for those loans will be higher as will the down payment requirements. The "business as usual" comment I made reflects a much longer term view. Usual, in my world, references the world prior to the post 9-11 attack easy money frenzy.

Now, I mentioned that change is important but so is liquidity. Rate adjustments to reflect the higher risk these borrowers present are necessary. The rate adjustment, however, is preferable to a complete shut down of alternative documentation loans; that would "reset" usual to 1985 .

Roberta,

That's not really an accurate statement. Market forces drive participants to act exactly as those forces dictate. Did Realtors sell homes to those stated-income borrowers? Of course they did. I'd venture to say that every commenter on here was involved in a transaction that may result in severe hardship to a borrower in the next 6 months or 6 years, including me.

Why? Market forces drive market participants to act exactly as those forces dictate. A SoCal Realtor who refused to represent a buyer who used alternative financing would have to exclusively operate in the $1,500,000 market. Even then, they wouldn't be exempt from the occasional alt-doc loan. A soCal originator who refused to offer alt-doc products from 2002-2007 is out of business today. Market forces drive market participants to act exactly as those forces dictate.

And what did the whole easy money boom accomplish? What will it accomplish when all is said and done? The homeownership rate in this country will stand far above where it was in 2002. We'll be back to business as usual (my reference for "usual" is 2002).

I apologize to all if my opinion wasn't precise about my definition of "usual". I hope this provides clarity to my statement.

Kaye

I just have to put my 2Cents worth in here.

IMHO

I agree that it has to reset and that going to 2002 Guidelines are good bet, however to begin with I expect to see what the post states as a return to previous as lenders run scared. I don't believe LO are the most at fault, as that post said, the market dictated the loans, and the LO did not write the guidelines, they did not invent the programs. No one is without fault, lenders, lo , processors, underwriters, agents, brokers and more specifically the buyers/borrowers.

Regardless of the dream of home ownership, anyone who signs for a loan they can not pay, can blame no one but themselves. And, that is the bottom line in my opinion. When you see that monthly payment, before you sign your life away, you know then and there if you can afford it, and no one else can be blamed for that.

The fact that the programs where out there, well, they were there to help, not abuse. Abuse is what has caused the problem we face now.

Brian.. Thanks for the clarification.. I was a bit confused about your terms.. I think going back to 2002 is not a bad thing.. I agree with much of your premise and while I definitely agree that there is a lot of blame to go around.. I don't believe there was a real reason to change loan standards and certainly not to lower the bar the way the credit markets did except to maximize profits for the credit markets....Sorry.. I never understood why lenders were offering these loans that were just asking to go bad... I don't know of one buyer who demanded he get a no down.. interest only loan where he could lie on his loan application.. sorry that came directly from the mortgage market.

Roberta- You are right everyone has to share fault in what hapened in the market.. and yes buyers knew better but chose to ignore common sense in many instances.. and Brian is right market forces drive market participants to act as those forces dictate. the problem we now face is how to correct the abuses in the market without totally killing the market...

AUG

2007

Abuse is what has caused the problem we face now.

Amen.

Thanks, ladies.

Kaye: Nice job of cutting through all the BS floating about on this topic. It has been cited that US home ownership percentage is at an all-time high, it has also been stated that foreclosure rate is at an all-time high. It ain't rocket science for sure!

Jay

Jay- Thanks.. Somewhere along the way we forgot that homeownership is something you earn... not an automatic right just because you want to own a home.. part of the reason for earning the right is that you will appreciate a home when you get one..

AUG

2007

Kaye,

It was a great idea..but now they are drowning from mistakes they made by lending to people who really could not afford it. I understand some people will never make enought o afford a home..but obviously this method is like steriods..a great feeling at first..but the after effects can kill you.

Neal-I like the steriods analogy.. very apt for all concerned in this debacle..

AUG

2007

Neal - You're right. Good idea, wrong implementation.

Brian - A second Amen

We are definitely seeing changes, with major changes still ahead. For people to qualify for homes with full doc financing, there will have to be a major decrease in prices, interest rates at zero, or some type of stated income loans.

Valerie- There will certainly be lots of changes ahead and while there will be price declines they may not be major ones in all areas... I don't see prices in the So Cal beach cities going down much more then 10%.. I believe they will continue to be very flat for a long period of time..which means that if you buy today you will have to hold it .. if you try to sell within 2 years you might have to kick in some cash to cover costs.

In my market a large percentage of buyers will qualify using full doc loans as they have the financial resources.. and I think there will continue to be some type of stated income loan available.. I suspect that most will not choose a 30 year fixed but some type of adjustable.. However in marginal areas the market will be in a lot of trouble and for a long time.

Very good points, we as americans however, have always found it hard to live within our means. Credit has always been too easy to get. I've been in commercial real estate lending since 1987 when I opened my first company and this is the 2nd time around that I've seen this same situation. The first was in 1991 and as soon as we were through it, it was nothing but a distant memory and everyone forgot about the perils of free money.

Chris-Yep.. as my Mom says.. we can't seem to remember beyond our noses.... banks are especially bad in the memory dept.. No one seemed to remember The S&L debacle and the 90's foreclosure market.. granted the 90's was a bit different and had more to do with lack of employment then poor decisions..but this smacks of the 80's see thru office buildings... that said this too will pass and a few years later the lessons will be forgotten as a new scenario replaces the old one..

"--------->that said this too will pass and a few years later the lessons will be forgotten as a new scenario replaces the old one.."

There's that wise thing we've been discussing :)

TLW...ROAR!

TLW.. Not sure we are talking wise...maybe just experience.. haven't we seen this too many times...

Yes. We have seen it too many times...

But...Like you said...The lesson will be forgotten. There within lies the problem.

P.S. Experience creates wise :)

TLW...ROAR!

Ahhhh... so that's it.. you are so right... the problem is that we need to remember a few of these lessons and we don't.. Fortunately you and I are here to remind them..ever so gently... when they screw up...

Leave a response…

Name:

Email:
(optional)

Comment:

What does the graphic say?