patrick.net

OO,

I've never thought of standard, full-doc ARMs as being inherently risky or necessarily bad. In times of historically high interest rates (early 1980s), they are preferable to FRMs, as rates can drop substantially. Today --with rates hovering near half-century lows and FRM/ARM spreads almost nonexistent-- I see little advantage to getting one over a FRM.

Last time I checked, ANY fully amortizing, full-doc mortgage could be considered "exotic" in CA. We've gone from qualifying people for 1-year 1% teaser NAAVLPs to 5-year 0.25% Super-NAAVLPs. What's next? $0-payment loans? Oops --looks like someone beat me to it! http://www.12modef.com/

@Person,

To you I say:

“If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.”
–J. Paul Getty

Oh, and I almost forgot one of my all-time favorites:

“…when I hear someone boasting about their FICO it makes about as much sense as a slave bragging about his healthy teeth and strong back! For what? So you’ll fetch a higher price at the auction?”
–DinOR

@Person,

Hey, don't get angry with me now --I've been carrying the "responsible borrower's" torch here for almost 2 years. Search the archives, and you'll find dozens of threads authored by me excoriating the REIC, Fed and crooks and liars of all stripes for encouraging this mess. I was just playing Devil's advocate to point out how insane the lending situation is.

The longer the Fed & FCBs keep the monopoly money party going, it's hard to keep coming up with reasons NOT to become an overleveraged FB. I mean, why go on being thrifty and responsible, paying your bills on time, living below your means and all, when the system goes on lavishly rewarding recklessness, irresponsibility and immediate gratification?

I mean, seriously, if you honestly believed this madness could continue for another 10 years, wouldn't you go out and get an NAAVLP right now? Why wouldn't you, if there were basically no downside or personal consequences? Not saying this will happen, just viewing things from "theotherside" for a change ;-) .

"just viewing things from "theotherside" for a change" LMAO!

Let me take a quick step back here. If you are in your 20's or 30's and have a great FICO score, Hey! If you've got it, flaunt it! I think it's great. There is a time in our lives when we're young and healthy and loading up on debt "can" make sense. I've worked w/both of our daughters to put them in the best possible place where this is concerned.

But think about it, we all have friends in their late 30's thru their 50's STILL bragging about their credit scores like some senior that nailed the prom queen for crissakes. Yeah dude, that was a really great story (when we were freshman in college!)

People in their 40's and beyond should be talking about their "equity" *not* their ability (or willingness) to get further into debt! More and more of their income should be coming from their investments (not their W-2).

My whole approach since my early/mid 30's has been toward that end. Your prime earning years "should" be ear marked for solidifying your financial picture, not jeopardizing it by feeding debt that may (or may not) pan out.

Person,

I'll bet if we ask HARM real nice he can re-post one of the greatest bubble pieces of all time! HARM, is it time to show Person the "There is NO Housing Bubble" link? I think he's ready for it.

excoriating

Jeebus H. Christ remind me not to play scrabble with you ;)

DinOR, my man, you got it!:

No Bubble, My Bad :-(
Bay Area Bubble Bloggers Admit Defeat, Throw in the Towel

People in their 40’s and beyond should be talking about their “equity” *not* their ability (or willingness) to get further into debt! More and more of their income should be coming from their investments (not their W-2).

Lurkers reading this blog, please take a note of the above quote by DinOR. You will not get such financial advice from RE agents or even you friends who have purchased homes recently. You are getting it here, free of cost.

My conservative rule of thumb is this. If you are over 40, you should not check if you can afford the house with a 30yr fixed. You should check if you can afford with a 15yr fixed !

@Mr. X,

Based on your little "fable", I'd say you're quite the talented "wordsmith" yourself, but thanks. :-)

I do some CC interest rate arbitrage on the side. That extra few hundred a month is not a lot, but it's better than nothing. At least it pays for diapers & formula for the month. The high FICO helps to get the big credit lines.

Whenever I see the score flaunting though, I'm always like, hey buddy, your FICO is over 700. You'll get the best rates possible, so who cares whether it's 720 or 850. Take a chill pill already.

X,

Fyi, I loved the part about Patrick sustaining himself with "the bitter tears shed by over-extended boomers". Reminds me of that South Parkepisode where Cartman murders the parents of some boy who cheated him, then licks away the kid's tears to savor his "sweet victory". Classic.

I do some CC interest rate arbitrage on the side. That extra few hundred a month is not a lot, but it’s better than nothing.

Huh? How does that work?

More and more of their income should be coming from their investments (not their W-2).

Like dividends? Or...?

I do some CC interest rate arbitrage on the side. That extra few hundred a month is not a lot, but it’s better than nothing.

Huh? How does that work?

eburbed,

My guess is MtView is transferring a large balance from one CC to another, to take advantage of initial no-interest offers for new customers, and investing that money in something paying substantially more than 0%.

My guess is MtView is transferring a large balance from one CC to another, to take advantage of initial no-interest offers for new customers, and investing that money in something paying substantially more than 0%.

Ah. Yeah that. I had friends who did that after college - until they realized that that would hurt their credit score.

I was thinking that maybe Mr. MtView was actually borrowing cash from his CC to invest. That'd be pretty hardcore.

You can arbitrage debt anytime you can get a loan for less than your personal discount rate, which should be the risk-free CD rate or higher.

It only works if you have good credit. And only if you don't do it too much so as to hurt your credit (although all that means is your credit goes down temporarily, assuming you pay off the loans, and you have to stop arb'ing due to rates you can get).

Say you're going to buy something for $10K. You have $10K cash to buy it. But some CCard company will give you 0% interest for 3 months teaser to buy it. Take the CCard offer, put your cash into a 3m CD, then pay it off before you accrue CCard interest.

More substantial, you can arb the automakers financing. We did this with my wife's new Audi last year. We were going to pay cash, but they gave us a 3-year 0.9% loan. We took loan, and have the cash in a tax exempt Vanguard muni that allows no-penalty monthly withdraws set up to auto-pay the loan. We're clearing about 8.5% give or take after taxes risk free. And risk free is the primary requirement of an arbitrage play.

I take advantage of intro balance transfer offers, like 0 or 1% for 12 months then put the cash into those high yield savings accounts and get around 5% pre-tax. Most CCs will ACH directly into your checking account, so just pay the minimum on time, and pay off the loan when the promo period runs out. Pretty much risk-free unless you miss a payment or if you miss something in the fine print. It'll easily drop your FICO by 100 points, but since I'm bubble-sitting, I don't need the credit score cept for this anyway.

Guess I could invest the money. Go nuts and do some commodities options trading or something. Too bad our compliance guy (also the prez of the company) needs to approve every trade besides mutual funds & treasuries. Not a good idea to be so highly leveraged personally when you work in the industry.

Randy,

I'm curious which fund you used to clear ~8.5% after tax risk free. The only muni fund I'd consider risk free is the money market CA muni, and it yielded ~3% last year. The longer term funds yielded a couple hundred bps more, but those have a decent amount of duration risk.

I think all the 0% promos are great, no matter the industry, given that 1) you have the money and discipline to make the payments on time, 2) you're working with a reputable company, and 3) your FICO score can afford to take the hit.

Harm,

Mortage Deferral - That has got to be a spoof web site!?!

Time to get a Job, HA HA HA! I love it!

Thanks for cracking me up!

Paul

@ Harm,

“If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.”

Do you think that's what treasury says to China every time they talk?

Paul

Harm,

Mortage Deferral - That has got to be a spoof web site!?!

Nope. Out of curiosity, I called the 800# and got a bona-fide operator. According to their "about us" & "preferred partners" tabs, they're legitimately operating in Roseville, CA and are underwritten by Harbinger Mortgage Solutions: http://www.harbingermortgage.com/.

Being a model tenant (i.e., paying the rent on time every month and not burning the place down) has its privileges!!

Do you rent from some private party? I rent from a corp - and they have no reservation about raising rents.

a harbinger of bad things to come, I suppose.

Here in Chicago, when the lease came up the manager was just so grateful we were staying, there wasn't even a thought about a rent increase.

Mine bumped me 5% in the 11th month of my lease. Not huge, but still it's money.

SP,

you're right, for Singapore, the case is government subsidized housing. For Hong Kong, it is government housing (tenant gets no ownership, pays rent to government). In Japan, it is also government housing.

HARM,

ARM in itself is not exotic, as you pointed out, how we apply it and process it is what makes it exotic. I can't keep track of these latest offers anymore.

Also, people elsewhere who only have ARM available are generally more conservative in committing themselves to long-term debt, because they know the interest rate hikes can come back and bite them in the ass. Lots of Americans take up ARM as if they were taking up FRM, having no memory of how their parents coped with the fluctuating rates. People of my generation (30s) growing up in a predominantly ARM environment all have vivid memories of parents coping with double digit mortgage rates when growing up. I still remember the time when mortgage rate was at 24%, and I grew up assuming one day that I would have to buy a home with a mortgage rate of at least 15%.

@jbunniii -

I rent from a private owner, which is my preferred situation as well. A similar unit in our condo building just rented for $250 more than we are paying. I thought we might see a $100+ increase after the last unit rented so much higher than ours. It feels good to be all squared away for another year, on the sidelines.

I remember back in the dotcom days when I lived in an apt complex - my rent went up $250 when my lease expired. I was single back then and my roommate had just lost her job. Nightmare.

I rent from a private owner

Do you find these from craigslist? Or are there other tips?

I'm looking at possibly moving to Redwood City (a step down from Sunnyvale) and I need to continue to rent (obviously).

Air condition seems to be impossible to find in Redwood City. Yuck.

"You should check if you can afford a 15 yr. fixed"

StuckinBA,

Well there you go! Isn't advocating people in their 40's at least consider a 15 yr. FRM vice a 30 yr. part of the radical thinking that put Patrick.net in the "Extreme Category" for blog awards?

No wonder every realtwhore in the BA takes a cheap shot at us! Here is yet another cornerstone of traditional financial planning cast aside all in the gamble to have a "free" house at 50, not a paid in full home by retirement age.

You gotta love it!

http://www.consumeraffairs.com/news04/2007/01/mln_subprime.html

"The last few months have seen a flurry of subprime lenders shut their doors, declare bankruptcy, or engage in mass layoffs as the housing market freezes up.

Ameriquest, formerly the country's largest subprime lender, collapsed quickly after its former CEO, Ronald Arnall, was appointed by President Bush to be ambassador to the Netherlands"

the other side,

Spoken like a true realtor (tm)!

Inflation and housing prices - are they tied together?

I’m increasingly of belief that we will see dramatic inflation in the near future. The perpetual fall of the dollar. The massive government debts. Continued upwards trend of the price of raw materials.

I’m too young to know - but what happens to housing prices if inflation say… hits something moderate like 5-6%?

Does it tend to match?

I’ve been futzing a lot with this calculator recently: http://www.dinkytown.com/java/MortgageRentvsBuy.html and I’m perpetually surprised at how close the break even point is… especially when I tweak the inflation knob.

Frank,

Is Ameriquest already gone? I thought any company that can get their name on a blip would be around forever! The name always reminded me of Ameritrade = Let's light this candle, dude!

@eburbed -

I found my current residence via craigslist. You can also find listings in the small publications (Palo Alto Daily) or regular newspapers like the SJ Mercury. Another thing that works on occasion is to drive through a neighborhood you like and check the "for rent" signs.

jbunniii Says:

> OK, I’ll bite. What else would you do
> with an old refrigerator?

When I was a kid my Dad used to make me take apart old refrigerators and save all the old parts in the hope that we might some day save a few dollars by using the old parts to fix another refrigerator. My Dad would not just take apart the old refrigerators he would bring home almost anything our tenants threw in to the dumpsters with “perfectly good hardware” still on it. When the water bed fad ended in the late 70’s I bet I took apart about a dozen water beds saving the nuts, bolts, screws and drawer hardware from the (more often not) “black lacquer” pedestal drawers. I swear I’m not making this up, but I just remembered that my Dad used to make me cut up the shell of the old fridges with the Sawzall so we could throw them in the dumpster and save the couple dollar dump fee at the old Burlingame dump…

Bay Area real estate will NOT appreciate 3% + inflation, because it is already discovered.

30 years ago, Bay Area was an orchard, a huge orchard. My wife who grew up here never thought of this place as the "silicon valley", to her, it is just Santa Clara Valley. As Santa Clara Valley grows into the Silicon Valley, you get 3% + inflation over the last 30 years, which is a very strong appreciation if you compound the 3% over 30-year period.

However, now that it is already the Silicon Valley, where else can it go? Many places on the west coast has been growing faster than inflation due to the "discovery" factor. When it is already discovered, the most it can grow will be pretty much tracking the inflation.

Look for 3% + inflation somewhere else, particularly in the unsung regions of the west coast like Oregon, after the bubble pops.

SFWoman said:
No private developer is going to build houses where you lose money on 64% of them.

Well, I think that interpretation is quite wrong, isn't it? They are saying *below market rate*, not making a loss. i.e. sell it for less than the current 'generally agreed' market price. Developers often have a 25-30% profit margin built into their retail price, to begin with. I'm certainly not asking any developer to 'lose money'. The fact is, the cost of construction is not that high at the development end, it's the attributed cost of land that blows out the price. Hence, I would try to control asking prices for land somehow, as per the rest of my post. (And there are 'not for profit' developers out there who don't walk away with massive markups, as per Bridge Housing e.g. the Fisherman's Wharf project) It can still be win-win for everyone, just not quite so much win for the original land vendor. The point is, if prices crash everywhere as so many posters here predict (and fervently hope and pray) then the cost of land will go down in the market anyhow! i.e. the concept of value of land will be reduced back in line to something reasonable, which then flows into the developed asking price for a place... What went up came back down... I'm just saying go back a step and try to control the asking price for land, probably by govt fiat... is that any clearer?

When I was a kid my Dad used to make me take apart old refrigerators and save all the old parts in the hope that we might some day save a few dollars by using the old parts to fix another refrigerator.

Beware escaping refrigerant!! :o Actually, your father sounds like me -- a bit of a scavenger 'just in case' the part can be used again...

"Ameriquest, formerly the country’s largest subprime lender, collapsed quickly after its former CEO, Ronald Arnall, was appointed by President Bush to be ambassador to the Netherlands”

surprise surprise... the republican establishment guy at the top gets a plum job to escape to... a defence minister here 'retired' after a phone card scandal, went straight to a job chairing a billion dollar defence contract bid, which he surprisingly won, then went on to become a Euro ambassador on $400K paid for by the EU...

Threadmasters,

Is there an Email address that us proles can send thread suggestions to?

I have a couple of ideas, but I don't think I would be able to adequately control them. I'm in the wrong time zone for to-ing and fro-ing during my evening (this is 10:15pm for me), and I can't send from my work PC any more (firewall restrictions).