patrick.net

nice SOB stories...

A cook buys a 650k home.
A music guy buys a 815k home (with swimming pool)

jeebus.....

the more I read these stories, I am convinced waiting is the right move. Unless 'do-good' government decides to bail-out these idiots.

So this couple bought an $815K home with INTEREST-ONLY payments?! Why would anyone do this?

There are tens, if not hundreds of thousands like them in the bay area. I/O has been very common for over a decade, until around 2003 when even that wasn't enough of an affordability product, and they had to roll out the pick-a-pay loans where borrowers don't even pay the interest for the first several years. Just like I/O, the assumption is that property values go up, so you just refinance before the loan recasts. And now everybody is dragging their feet, lender and borrower alike, hoping a miracle will happen and the "market will turn around", or they'll get a government handout.

This will go on for many years.

Geez...

Paying $3500/mo for home or $3000/mo for lawyer sounds like the guy has good paying job, and since when a music store guy or bread delievery was like that?

The worst that could happen is when the guy finally find out that the things over his shoulder and his family's he thought are heads actually are meat balls.

815 thousand dollars house, close to a million dollars.

some people just dont know what they are.

use a Chinese saying, "dont know how much rice you can eat"

MarkInSF says

Just like I/O, the assumption is that property values go up, so you just refinance before the loan recasts.

This was an important incentive for loan brokers to put people in suicide loans. To get out, they'd have to refi down the road -- guaranteed repeat business. The worst case, people thought they could sell out and downgrade and still come out ahead due to the leveraged capital gain.

Salinas was one epicenter of negative am mortgaging:

"Because banks don't have to report how many option ARMs they underwrite, few choose to do so. But the best available estimates show that option ARMs have soared in popularity. They accounted for as little as 0.5% of all mortgages written in 2003, but that shot up to at least 12.3% through the first five months of this year [2006], according to FirstAmerican LoanPerformance, an industry tracker. And while they made up at least 40% of mortgages in Salinas, Calif. . . ."

http://www.businessweek.com/magazine/content/06_37/b4000001.htm

A hidden side of Option ARMs was that lenders could book GAAP income on how much interest the borrowers WEREN'T paying. Win-win for everyone. Many smart people saw that in the 2007-2008 and got short on the major players -- CFC, WM, WB -- that are no longer with us -- but the major players managed to hold out longer than most players expected. I got buffaloed out of my LEH puts two weeks before the f---er imploded.

The negative-am thing is a pretty good case study on how unregulated free markets work in practice -- they simply tear themselves apart due to the mismatch between those operating a corporation and the corporation's actual stakeholders. There's a technical term for this but I forget.

I'm with seaside
seaside says

Geez…
Paying $3500/mo for home or $3000/mo for lawyer sounds like the guy has good paying job, and since when a music store guy or bread delievery was like that?

now they wanna keep their house, or at least not move... they'res stupid if they think that they won't move eventually. They'd be better off waiting for foreclosure and not paying anything for awhile. The only winner is this lawyer.

> So this couple bought an $815K home with INTEREST-ONLY payments?! Why would anyone do this?

If you have some assets to lose, then it does seem stupid. But if you have no assets, and a bank offers to lend you that much money in a non-recourse state like CA, it's the bank that's stupid.

Then again, if the bank can sell the defaulted loan to the Federal Reserve, which is still buying mortgage-backed bonds with new money created from nothing, it's all of us that are stupid for allowing the Federal Reserve to exist.

"They made interest-only payments of $3,500 for two years, and were hoping to refinance, until he lost his job at a music store and his recording studio foundered."

I love how everyone was "hoping to refinance." Do they even know what this means? If you are only doing an I-O loan with rates already quite low, what were they planning on refinancing to? If they refinanced to a 30-yr fixed mortgage their payments would have jumped. If rates went up, their payments would have jumped. This "hoping to refinance" plan is just a load of crap.

The worst and sad part of the story was(and is) shaping in US Congress. They still want to help this guy and the bank that loaned him the money. Happy times are awaiting us!

PUT THEM BEHIND BARS! - THEY ARE PARASITES ON ANYTHING GOOD LEFT IN THE SOCIETY, AND PUT THAT MOSS ALSO BEHIND BARS

Teddy Says:

This guy needs to walk away, I have a friend in the same situation paying $3500/month on a 550K property. His wife wont let him leave and he doesnt have enough TESTOSTERONE in his veins to stand up to her. I am sure if ELLIE MAE can shut down her husbands request to overextend my friend can requalify to get his SCROTUMS back from his wife.

...this is just another example of poor leadership in the household by a spineless MAN.

@Ellie - This is where you interject that I am a neanderthal...beast amongst men.

I do not see any reason why this person should move. He got a loan mod from $3500 to $3000 with a caveat he may be evicted at any time. Not bad for saving $500. I would gladly pay $3000 for $800k house. The point here is that our system is broken. It needs fixing. As of now I feel no one should be paying their mortgage just file a court case and pay half of your mortgage to lawyer. Later on if court decide you need to pay to banker well agree to pay with loan modification or walk away and rent another smaller and affordable house.
-PB

thunderlips11 says

Yes, I agree, not only should they not bail out banks stupid enough to lend these people money, the colleges that issued the bank employees their MBAs and JDs should re-examine their qualifications to hold those diplomas.

The "banks" were not stupid. Banks are not people. There is nothing stupid about a loan officer approving a $1 million loan to somebody they know can't pay it back, if they cannot be held to account and in fact make 1% off the deal. Or if you're the bank executive and you know you can sell the loan to an investment bank to package and sell to a sucker up the line. It's not stupid. It's just greedy. And no doubt in many cases criminal, though our government seems determined to prosecute nobody even though this dwarfs the S&L debacle of the late 80's.

The people at banks were smart and make out like bandits. That they left the financial system is sorry shape is irrelevant to to them. They already made their millions in bonuses.

> So this couple bought an $815K home with INTEREST-ONLY payments?! Why would anyone do this?

Correction: Why did SO MANY do this in Bay Area

.. must have been the weather or something.

MarkInSF says

The people at banks were smart and make out like bandits.

No, the banks didnt make out like bandits, as we can see their nearly collapsed due to uncollectable
mortgage payments.

The ones who got away like bandits are the sellers who has the cash and the realtors
who took a percentage off the top.

The negative-am thing is a pretty good case study on how unregulated free markets work in practice — they simply tear themselves apart due to the mismatch between those operating a corporation and the corporation’s actual stakeholders. There’s a technical term for this but I forget.

It is called an agency problem.

.

A much more sobering article...

http://blogs.wsj.com/deals/2010/03/03/mean-street-dont-be-brainwashed-by-the-housing-cult/tab/print/

So how does Bob Toll attribute a quarter of all American jobs to homebuilding?

Even if I threw in every mortgage broker and Home Depot checkout clerk with a generous definition of a “direct and corollary” job, I can’t get there.

Toll’s comment reminds me of the “millions of Midwest jobs” that our nation would supposedly lose if Detroit went belly-up. If I was from the Midwest, I may have actually believed it.

But the old ways of thinking about the U.S. economy die hard.

Even here at the WSJ, we play up every new release of “new home starts” and “permits for new construction.” And Wall Street still picks through the words of homebuilder CEOs like Bob Toll and Ara Hovnanian like tea leaves.

But real estate speculation – and by extension home construction – are no longer at the center of our economy. At $16 billion, the combined market cap of the top five U.S. homebuilders is less than the market cap of Adobe Systems. And that’s a good thing.

^ fallacy of the broken window basically.

Replacing something is wealth creation only to the extent that the old thing was insufficient or inefficient in providing the required services.

New housing is a luxury compared to reusing habitable existing stock.

But 2 million new houses per year doesn't seem that far out of whack. There is existing stock that needs replacing, and continued sprawl in the sunbelt as people move south. With 130 million homes that is a 60-year replacement cycle.

2 million homes divided by 10 builds per crew is 200,000 crews of ~20 full-time workers -- 4 million people doing the actual building for around $200B in wages. The housing goods themselves are at least $200,000 worth of stuff for another $400B in GDP, for $600B/yr or 4% of the economy directly associated with the housing good.

I am sick of talking about housing prices need to fall....especially since they are being propped up by 8K tax credits.

thomas.wong1986 says

MarkInSF says

The people at banks were smart and make out like bandits.

No, the banks didnt make out like bandits, as we can see their nearly collapsed due to uncollectable

mortgage payments.
The ones who got away like bandits are the sellers who has the cash and the realtors

who took a percentage off the top.

Read again what I wrote. I said "The people at banks", not "the banks". Big difference.

Angelo Mozillo has a personal net worth in the neighborhood of a BILLION dollars. His bank, Countrywide? It didn't do so well. I think you will find most financiers did extremely well in the bubble, even if their companies failed.

>> A cook buys a 650k home.

That's "Exceutive Chef" to you, buddy.

oven engineering tech

So this couple bought an $815K home with INTEREST-ONLY payments?! Why would anyone do this?

Interest only loans were designed to allow the borrower to increase the amount of home they could purchase. By qualifying for a loan excluding principle, the mortgage amount increased. Typically, these loans were also zero down. Interest only loans had a reset period attached to them, usually in 2 - 5 years. At that time, the loan ballooned and full payment was due at the designated time, which forced the borrower to refinance (making more money for the mortgage brokers), which of course paid off the interest only loan with the new loan. The problem obviously is that by the time their reset came due, the market prices collapsed, which made it impossible for the properties to appraise and reset. All of this creative financing was based on the premise that real estate values would continue to escalate.

lol

RayAmerica says

Interest only loans were designed to allow the borrower to increase the amount of home they could purchase.

(lemme quibble here) compared to full amortizing buyers, but once everyone starts going IO all this does is bid up the cost of homes since housing demand exceeds the supply. Nobody gets "more home", everyone just "pays more" for the same home. Big win for the bankers, of course. Same thing with moving to longer amortization, qualifying on total household income not just the primary income, the gummint interest deduction, pushing up DTI ratios (or ignoring them altogether with SISA/NINJA loans).

Housing is a very oddball form of good and normal economics does a very poor job of modeling its valuation dynamics. The more we try to make it "affordable" the less affordable it becomes.

thomas.wong1986 says

MarkInSF says

The people at banks were smart and make out like bandits.

No, the banks didnt make out like bandits, as we can see their nearly collapsed due to uncollectable

mortgage payments.
The ones who got away like bandits are the sellers who has the cash and the realtors

who took a percentage off the top.

The bank employees and executives who made commissions off granting and packaging the loans made like bandits at the expense of the bank's shareholders. Many of them made enough money for a couple of generations at least if you look at what is required to sustain an average upper middle class lifestyle in the US. And to prevent bank runs and prevent a total freeze of the system, the Fed had to step in. In military terms, this was like using nukes because a troop surge would not have been enough. Bernanke knew that this was the best option in the short term.

This women shacks up with her boy friend and brings her minor children into this house? Where is CPS when you need them.

jvolstad says

This women shacks up with her boy friend and brings her minor children into this house? Where is CPS when you need them.

Did you seriously say that? Their lack of moral character in that they refuse to accept that they're scamming the system in order to remain in their $815k home isn't the problem - it's that they're not married? Don't you think that CPS has something real to do, like prevent actual abuse?

4X says

Teddy Says:
This guy needs to walk away, I have a friend in the same situation paying $3500/month on a 550K property. His wife wont let him leave and he doesnt have enough TESTOSTERONE in his veins to stand up to her. I am sure if ELLIE MAE can shut down her husbands request to overextend my friend can requalify to get his SCROTUMS back from his wife.

…this is just another example of poor leadership in the household by a spineless MAN.

@Ellie - This is where you interject that I am a neanderthal…beast amongst men.

Actually, it seems to me that this is another example of one spineless partner refusing to stand up for his/her comfort level when it comes to finances.

However, I'd be interested in meeting a man with "scrotums" from a purely scientific standpoint. It'd be difficult to walk with a bunch of 'em.

Troy says

A hidden side of Option ARMs was that lenders could book GAAP income on how much interest the borrowers WEREN’T paying.

This is true, the revenue was booked, however as ARM expired and higher payments started to kick in, the past due over 90s days grew higher and higher. Per GAAP the writeoffs from over 90 days back to the profit/loss increased accordinly driving both earnings and cash flow back down.

steady market watcher says

The bank employees and executives who made commissions off granting and packaging the loans made like bandits at the expense of the bank’s shareholders.

The banks employees didnt make commissions... commissions are for sales not for standard service fees. Yes the banks could have charged x% present value of the loans are pretty small, compared to overall 6% off the top on full sales prices received by realtors.

A realtor gets 6% on say $600,000 transactions today... $36,000. Compare that to a $600,000 loan 30 years, at Present Value is some $200,000 which is the value carried on the books per GAAP. Even at 6% that gets you only $12,000. But I think you will find its much less than $12K and more around 1-2% service fees.

Damn.
Two families I know lost their homes in "Evergreen" this weekend.
Heard that the school district will give out scores of pink slips to teachers, and "this time is different"- absent the expectation that it's a routine matter of course that most of them will be reinstated in the fall.