March 10, 2007

Say goodbye to 1.1 million potential fools (new homedebtors) this year with the massive credit contraction underway


* Homebuilders desperate to clear inventory,

* Mortgage brokers wanting to make loans

* Real estate clerks looking for commissions,

* Appraisers looking for work, and

* Desperate homedebtors looking to sell...

Have they figured out yet that the subprime meltdown and credit contraction underway will now severely limit the pool of potential fools (oops, I mean buyers) even more? (Which of course will speed up the pace of the housing crash underway)

(Reuters) - Tougher lending standards stemming from the shakeout in the beleaguered subprime mortgage industry could prevent up to 1.1 million U.S. homebuyers from getting mortgages this year, a Bear Stearns analyst told investors on Friday.

Banks and mortgage companies would sharply scale back lending to two groups: subprime and "Alt-A" borrowers, said Dale Westhoff, Bear Stearns' head of mortgage-backed research.

Consumers with low income and/or spotty credit histories are considered subprime borrowers, while Alt-A borrowers are typically those who fall short of being prime because they lack adequate income documentation.

Westhoff estimated a 30 percent, or $180 billion, contraction in the subprime sector in 2007 from 2006, and forecast a 25 percent, or $100 billion, decline in Alt-A loan production from last year.

"This implies a purchase contraction of 1.1 million borrowers," said Westhoff who was speaking at Bear Stearns mortgage conference here. "That's a non-trivial number."


JR Junky said...

If you are in any doubt and need a real fact to confirm we are in deep doo doo go to your local Home Depot or Lowes and look at the overflowing stocking levels in the hardware section aisles. The nails for the pneumatic guns were located in 3 new places.

Frank said...

This is a positive. Those who are declined for loans will be very thankful for the same in the near future.

My bad credit due to past-due student loans years ago prevented me from getting caught up in the easy-credit trap. It also forced me to be resourceful and entrepreneurial and pay cash for the things I wanted. I have good credit now, but now I don't need it anymore.

I think the availability of easy credit dumbs people down. They don't achieve what they're truly capable of because our society allows people to obtain things they really can't afford, and once people buy into that, the vicious credit circle begins and they're indebted for life.

David in JAX said...

The month of March 2007 may be the month when we finally move out of denial into the fear stage of the crash. We are finally seeing some realistic news on how this is going to shake out.

Flagg707 said...

Wow - you mean people will actually have to save up money and learn financial discipline before investing in an enormous purchase? That's crazy talk.

Anonymous said...

>> ...could prevent up to 1.1 million U.S. homebuyers from getting mortgages this year...

As it SHOULD be! Damn, they use the word "prevent" as if it's a bad thing...

Anonymous said...

Boomer Alert! Boomers have moved out of Home Depot, and are now seen in numbers at supermarkets, especially ones with food courts. At the gym hot tub, I still hear fat boomers optimistic on common stocks, and in denial we are headed for a real estate correction. Large jaw, small brain. The Boomers continued preoccupation with their mouth should bod well for capital investments in the food sector.

Grandpa Grumpus said...

What are we going to do? This is getting ugly, we're going to need a massive work program or a war soon. I think this is going to make 1929 look like a mild recession.

Lisa said...

"Wow - you mean people will actually have to save up money and learn financial discipline before investing in an enormous purchase? That's crazy talk."

LOL. But the sad thing is, this was the prevailing lending standard just 10 years ago. Nothing new. I bought in 1996, so I remember. You had to prove you were a saver before you qualified for a mortgage.

I wonder how soon people will realize just how screwed they are. Got in over their heads thanks to "exotic" financing. Now, the next person who comes along has to qualify under more traditional standards - down payment, proof of income, cash reserves, ability to pay full payment once rate resets, etc.

And AltA isn't just low documentation loans. It's also folks with good credit who do piggybacks (80/20 or 80/15) because they haven't saved for a downpayment. You know, most first time buyers in California.


“This is the first of what will probably be several high-end developers who had a number of luxury projects,” he said. “We’re going to see some where the banks take them back. We’re going to see some sold to other developers. We’re also going to see a lot of litigation.”

morning after said...

What we are seeing I like to call the "morning after" pill.

Mark in San Diego said...

The Ponzi scheme needs first time buyers so everyone else can move up the food chain! That is what Wall Street doesn't get. . .I am already seeing this in San Diego as places fall out of escrow - people need to sell their 500K place (here a starter home)to move up to the 700K place - the 700K people need to sell their place to buy the 900K empty-nest condo (Senior Silos as we call them). . .so if no first-time sale of the 500K place - NO Move up! Game over - See today's Financial Times - page 12 John Authers, description of the "Minsky Moment" where the tipping point comes.

Anonymous said...

Good, let Ponzi Finance fall - the sooner the better; then we can get on to what we're really good at: blaming others (like the evil jooos) and killing each other for food and sex!

FlyingMonkeyWarrior said...

IN DEBT WE TRUST AS THE ECONOMY GOES BUST: A Return To Serfdom?, By Carolyn Baker
March 09, 2007

America Before the Bubble Bursts

An extraordinary and timely documentary “In Debt We Trust” written and produced by Danny Schecter, is a most illuminating—and chilling—must-see exploration of the debt issue. Starting from the standpoint that our society is set up to keep us struggling for our entire lives, saving almost nothing, and remaining in perpetual debt, the documentary proceeds to reveal the impossible shell game that is perpetrated on players in the debt game by a credit industrial complex which cannot exist or profit without debt, and specifically, losers in the game………..
……….In the documentary, Schecter reveals that the debt industry sets up consumers to be in debt from cradle to grave by getting them dependent on credit cards, carrying student loans, making car payments, and buying a house which then necessitates myriad additional purchases, leading in a majority of cases, to re-financing or the proverbial turning of one’s house into an ATM machine. Whereas in the old days, a “deadbeat” was a person who never paid his debt, in today’s debt industry, the term means just the opposite. In fact, what lenders hate more than anything is the consumer who regularly pays off her debt—so much so that within the industry, these people are called “deadbeats” because they are of no value to the industry. Only those consumers who perpetually carry debt have value for the debt industrial complex. In other words, from the standpoint of the debt industry, risk equals profit.

Not only does perpetual indebtedness serve the American financial system, it serves the political establishment as well by making it exceedingly difficult to protest that establishment when one is over one’s head in debt. As a matter of fact, perpetual indebtedness serves to make the consumer subservient not just because his credit rating might be used against him should he choose to organize politically, but to a certain extent, the consumer, particularly if he/she is uninformed, often feels a certain sense of “gratitude” for those pieces of plastic and the “privilege” of owning one’s own home. Debt industry propaganda markets not only the very expensive use of someone else’s money, but an idea, an image, and philosophy—that is, the notion that this is America, and where else in the world can one have what one wants so instantly?



FlyingMonkeyWarrior said...

Debt Pyramid Threatens to Topple Markets

By Jim Jubak
MSN Money Markets Editor
3/7/2007 6:54 AM EST

the biggest potential danger isn't from a slowdown in the U.S. or Chinese economies. It's from the pyramid of leverage in the debt markets created by traders and speculators using cheap money from around the globe, and in particular from Japan.

The selloff of Feb. 27 demonstrated how a panicked unwinding of that pyramid of debt could send financial markets into chaos.

Stuck in So Pa said...

(Reuters) - Tougher lending standards stemming from the shakeout in the beleaguered sub prime mortgage industry COULD prevent.......

Banks and mortgage companies WOULD sharply scale back.......

Westhoff ESTIMATED .......

"This IMPLIES.......

This is all so wishy washy, "maybe in the future" bs.
The spin is relentless, and the "free" money is still out there for the asking with even larger amounts and more ridiculous terms.

I Love Broadband over PowerLine said...

Countrywide ends no down-payment lending
Friday March 9, 6:46 pm ET

NEW YORK (Reuters) - Countrywide Financial Corp. (NYSE:CFC - News), the largest U.S. mortgage lender, on Friday told its brokers to stop offering borrowers the option of no-money-down home loans, according to a document obtained by Reuters.
Loans financing 100 percent of a home's value are among those that have led to a sharp rise in delinquencies at U.S. mortgage lenders. Such mortgages below "prime" quality have resulted in losses, sales and even closures at more than two dozen mortgage lenders, analysts say.

"Please get in any deals over 95 LTV (loan-to-value) today!" Countrywide said late on Friday in an urgent e-mail to brokers. "Countrywide BC will no longer be offering any 100 LTV products as of Monday, March 12."

Countrywide joins other large lenders that will require homeowners to have at least a 5 percent stake in their homes, including Washington Mutual Inc. (NYSE:WM - News) and General Electric Co.'s WMC Mortgage. Fremont General Corp. (NYSE:FMT - News) last month stopped making "piggyback" loans that are often used to make up 100 percent LTV loans, and last week stopped lending altogether amid pressure from regulators.

The surge in delinquencies, due to loose underwriting standards and a cooling housing market, has alarmed financial markets in part because it has happened so quickly. The bulk of delinquencies is coming from loans made last year that are as little as one month old, making 2006 perhaps the worst ever in terms of mortgage credit quality, according to analysts at UBS Securities.

Countrywide Chief Financial Officer Eric Sieracki this week said the Calabasas, California-based company will survive the downturn in subprime mortgage credit quality since it has not been forced to sell loans into a turbulent market.

Monoline lenders such as Fremont and New Century Financial Corp. (NYSE:NEW - News), which focus on subprime mortgages rather than a broader line of lending, have to sell their loans to maintain cash flows. They are going through "a very dark time," Sieracki said at a Raymond James Financial conference in Orlando, Florida.

Countrywide is the largest subprime lender, with $38.5 billion originated in 2006, according to trade publication Inside B&C Lending. But the volume makes up less than 10 percent of the total $468.2 billion originated by Countrywide last year, Sieracki said.

The general pullback in credit to riskier borrowers will take a toll on the overall economy, economists at Goldman Sachs Group Inc. said in a research note this week.

More cautious lending could cut annual new home purchases by 200,000 units in "a relatively conservative scenario," the economists wrote. Higher defaults and foreclosures of existing loans will dump more supply on the market, they added.

Anonymous said...


3/10/07 Financial Times article, the "minsky moment". From the article

"There are greater fears for lending to individuals. Americans spent more than they earned in 2005, for the first time ever, implying heavy borrowing. They increasingly did so using adjustable rate mortgages, a new phenomenon in the US. There is no experience on what will happen to defaults when interest rates rise.

Why are ARMS introduced in this article as a "new phenomenon" in the US. ARMS were around in the 80's are quite popular. Then the S&L crisis came upon us. But we all recovered, all was good eventually. Everyone spends money they don’t have. Big deal.

The availability of information does not make it more important, just more present. Everything will pass, be forgotten ,and start up again.

We will continue to make the same mistakes when a new generation comes on board, a new generation of homebuyers who needs easy money.

So what is 1.1 mil homebuyers are out now? This is temporary. Don't let the easy flow of information be a deciding factor in anything.

It is all temporary. What will the credit crunch lead us to? People will spend less for awhile and then buy a lot again. And all will be forgotten. Quick, without looking it up, how many can describe the S&L crises of the 80's by memory?

What saddens me is that the poor will once again suffer the hardest.

Remember the goal of the poor: to highlight the rich. Remember the goal of the military, to protect the rich from the poor when the poor eventually wake up to the daily exploitation.

The key thing is to squeeze every last cent from the poor and middle class and continue the master-slave relationship. If you give your workers too much comfort, they won't work for you. You must make your workers suffer just enough to make them sacrifice their life for your company.

Imagine a country with:

1)healthcare for all
2)food for all
3)shelter for all
4)free education
5)all religous infighting ends

What a country this place, the US, would be.

Lies you are told:

1. The US believes in family values.

No it does not. If the US believed in family values, children would be protected, would always eat, be educated, we watched and cared for. Children will continue to be exploited for the benefit of shareholders.

2. If you work hard enough, you can be rich.

The biggest lie ever produced. The cause of all suffering and exploitation.

3. Jesus Loves You

The cat loves you more than Jesus. At least the cat is real. Jesus is made up, fake, does not exist. Have faith in street lights, not the Bible which is only a historical document made up by lunatics.

4. Real Estate will never do down.

It does down and you had better be ready when it does. Get your act together. Save your money.

Markus Arelius said...

Aw, come on!
New credit regs?
And I was so hoping to secure that interest only to buy a $700k cement shitbox in OC California this summer too!

Mark in San Diego said...

Flyingmonkey. . .GREAT POST - In Debt We Trust. . .have included that on my Favorites list. . .will use it for years. . .so true, so true.

porn* said...

Anyone want to predict when we will have a mass suicide?The lenders are going to destroy themselves by tightening credit.They are going to see a sh@tload of homes handed back to them as the greatest ponzi scheme in history unravels.Thank you mr greenspan, may I have another?

hooray said...

They're saving 1.1 million FB's from getting screwed by the REIC

Anonymous said...

"As it SHOULD be! "

Bear in mind that the way things should be includes making it possible for the average (hint not $100k and up!) family to buy the average (decent, not ostentasious) house. Tighter credit is only part of the equation.

love hurts said...

Most people who sell their homes still don't use the equity for a down payment. They buy new cars and upgrade their new home with any equity.

Anonymous said...

There are many similarities between 2007 and 1929, but some of the things that are different, such as automated triggers to shut down trading, and FDIC will change the way the crash happens. It's uncharted territory in more ways than one. Could even be that some of the protective measures work and prevent total meltdown. Could the system be both more fragile than we think and deceptively resilient? We have to go through this, but there are some signs of hope, no?

Anonymous said...

I believe that anyone who lied on a loan application should be prosecuted to the fullest extent of the law. If any broker or lender was involved they too should be prosecuted.

Those that were honest and just got burned by a reatly clerk friend are bought in to the homes only go up nonsense you have learned a great lesson which is probably for your own good.

Anonymous said...
This comment has been removed by a blog administrator.
bubble be gone said...

The lenders are in a catch-22. If they continue with their reckless lending, they will all go the way of NEW and FMT. If they tighten, they will cause more foreclosures, but might end up surviving.

One thing people are leaving out is the bond market. BBB-rated MBS dropped 20% in February. Subprime lenders like NFI are losing money on the loans they are originating. Some lenders can't even find a buyer at less than a 10% loss. Imagine losing thousands of dollars on every loan you underwrite. What's a subprime lender to do?

Either way, the buyers for these MBS are disappearing fast. FRE and FNM have been ordered to downsize and focus on smaller mortgages. The private MBS buyers are wising up and demanding much lower prices for subprime and Alt-A.

Anonymous said...

Don't Fall for a 50 Year Mortgage!
Not Even for a Couple of Years

When I taught freshman math, I included a section on interest, in which I tried to give my students some understanding of personal debt and the National Debt. In one of my lectures, I talked about the relative costs of fifteen-year and thirty-year mortgages, and demonstrated that no mortgage longer than about twenty-seven years makes much sense. Back then, mortgages longer than thirty years weren't even readily available. I punctuated my point by explaining why: "Even real stupid people won't sign 'em."

Apparently I was wrong. Mortgage lenders are now offering fifty-year mortgages—and they are finding customers. Any way you look at it, this is financial insanity beyond comprehension. I guess the only part of my lecture that turns out to be false is that real stupid people apparently will sign 'em.

Many people start their house-shopping activity by determining how big a payment they can afford, usually based on how much they're currently paying for rent, or for their current mortgage. Then, they ask their real estate agent how much house that will buy.

Don't Let Your Real Estate Agent Decide What You Can Afford.
Now, some people are fond of bashing real estate agents, but I'm not. I personally think you're nuts to buy a house without an agent. Real estate transactions are complex business, and agents do them every day; you may only do them three or four times in your entire life. But your agent is not the person to tell you how much house you can afford—that's your job.

It's OK to ask your agent how much house your planned payment will buy, but ask more than that, and make your own decision based on the answers. Start by asking how much house you can get with a fifteen-year mortgage, with a thirty-year mortgage, and with a fifty-year. Then ask to see an amortization schedule for each of those loans. The schedules will show you how much of your principal you will pay off each month, and how much you'll still owe.

An Example
Suppose you're a first-time home buyer, and you've been paying $800 per month for apartment rent. You have good credit, and just got a nice promotion at work, so you think you could make a $1000 per month payment on a condo. You've been saving, and have a $25,000 down payment in the bank. So you look at how much you can borrow with each type of mortgage:
6.0% Fixed Interest

15-yr 30-yr 50-yr
Mortgage amount, $1000/mo. payment

118,504 166,792 189,968

Down Payment 25,000 25,000 25,000

Less origination and other costs

2,500 2,500 2,500

Price of House

$141,004 $189,292 $212,468

At first blush, that 50-year mortgage certainly looks interesting. You can borrow $71,464 more money, with the same monthly payment.

The Total Cost of a Loan

But look deeper. The first thing to investigate is the total cost of each of those mortgages. That's a simple calculation; just multiply the payment amount by the number of payments. Add in the origination and other costs if you want to.

15-yr 30-yr 50-yr

# of Payments

180 360 600

Payment Amount

1,000 1,000 1,000
Origination and other costs

2,500 2,500 2,500

Total Cost of Loan

182,500 362,500 602,500

Woops! Can that be right? Yes, you'll pay $420,000 more for that additional $71,000 worth of house. You'll pay 567% more interest on the fifty-year loan in this example than on the fifteen-year loan—and you only get 51% more house.

"But," you say after you start breathing again, "I only intend to keep this house for five years, so it won't be so bad, right? Well, let's look. This table compares the mortgage equity you'll have in each loan at the end of five years and ten years:


Need to keep house payments low? Try a 50-year mortgage
Updated 5/16/2006 1:06 PM ET

By Noelle Knox and Mindy Fetterman, USA TODAY
Those struggling to afford a home may be wondering how long their mortgage payments can be stretched out.

The new answer: a half-century.

A handful of lenders have begun offering 50-year adjustable-rate loans to buyers who need to keep payments low in the face of record home prices and rising rates.

Most big banks already offer 40-year mortgages, which account for about 5% of all home loans, according to LoanPerformance, a real estate data firm. So far, only a few small lenders have rolled out the five-decades-long mortgages.

"One of the biggest things in California is the high costs of homes," says Alex Diaz Jr. of Statewide Bancorp in Rancho Cucamonga, Calif. "And with rates going up, there's demand from customers (for) longer loans."

Statewide, which introduced its 50-year loan in March, has received about 220 applications, Diaz says.

For cash-squeezed buyers, the longer-term loans are another option. In California, only 14% of people could afford a median-priced home in December, when the median was $548,430, if they had to put down 20%, the California Association of Realtors found.

The 50-year mortgage also signals that the cooling real estate market is heating up competition among lenders.

"Mortgage lenders are getting craftier to get the attention of consumers," says Anthony Hsieh, CEO of LendingTree. But, he says, "The consumer needs to slow down and understand the product."

Two issues to keep in mind: A borrower with a 50-year mortgage builds equity very slowly. And because rates on the loans are adjustable, borrower's monthly payments could rise.

Still, the 50-year isn't considered as risky as an interest-only loan or a mortgage that lets borrowers pay even less than the interest.

With those loans, a borrower might not build any equity and could end up owing more than a home is worth — called negative amortization.

That's why Anthony Sanchez applied for the 50-year loan to refinance his California home. "I looked at a lot of different options," says Sanchez, 30. "I didn't want to be tempted with negative amortization."

Mortgage experts caution that the 50-year mortgage is best-suited for those who plan to stay in their home for about five years, while the loan's interest rate remains fixed.

"If you're going to be there more than five years, you're gambling," says Marc Savitt of the consumer protection committee for the National Association of Mortgage Brokers. "You don't know what interest rates are going to be. I wouldn't do it."

Anonymous said...

could prevent up to 1.1 million U.S. homebuyers from getting mortgages this year

What is the total number of homebuyers in U.S. yearly?

Anonymous said...

The scammers will have to find another way to fleece those losers

Anonymous said...

5% downpayment is ridiculously low. Sheesh. Why bother?

Wait for these dp's to get closer to 20%.

And anybody who takes out a loan for more than 30 years needs to get their head examined.

20% DP/ 15 year loan/ 2X income. THAT's what we need.

Then we can finally be done with this nonsense around "affordable housing" in this country.

Seriously, this has gotten so out of hand that I could care less what kind of crap we have to go through as a nation to get back to some semblance of fiscal sanity.

Bring it on and let's get it over with.

Anonymous said...

During the Japanese housing bubble of the early 1990's (which makes our current situation seem tame), lenders were offering 100-year mortgages after land hit $20k/sq ft! These borrowers were committing 3 generations off their progeny to loans.

After their bubble crashed, prices were back to nominal values within a few years, and lenders at the peak were left still paying on extremely over-valued property...