patrick.net

Prat - ha! I am the same bear on both RE and Google for the last three years. I work at Yahoo! now and watch the stock price difference between our companies with some dismay. Google is trading on a cool brand but I wonder how long that will last? I hope you were one of the early googler's so at least you could cash in a bit.

My solace is that I was severely criticized for being bearish in the Aus. market for 3 years before it started declining and feel somewhat smug that at least one of my predictions was correct. Actually, I have said to my husband that I thought the market might keep creeping up until the end of this year but it would topple. If it keeps going into next year I will put away my crystal ball forever.

Still on my personal RE crisis, if we can afford it and sit on the property long term then I suppose we can cope with some declines. My husband made about 300k on his current house so I figure that's paper money that if he really wants to buy desperately then he has that as his own cushion. I'm an understanding wife, worst case the market pops and I get to say I told you so for the rest of his married life. Revenge will be sweet:)

Prat
You sound like a smart husband who understands the finer points of married life. :D

Veritas

I don't know that much about foreclosures but I would be a little cautious. Years ago my parents went to purchase a home that was being sold by the owner, not through a broker. Fortunately, my Mom sensed something was a little off and decided to do some research (I would have to ask her where she looked to give you more detail) on the house. Long story short, the house was in foreclosure and the "owner" was trying to sell the house. Turns out the "owner" had done this before and had taken off with several down payments from previous would be buyers.

I also have looked online at sites that advertise foreclosures, and have noticed that several are listed by the "owners" and not the banks. As far as I know, if a house is foreclosed on, it is owned by the bank and not the previous owner. I have known some realtors who do deal in foreclosures, or at the very least can get actual foreclosure listings. My husband has also had realtor friends who occasionally tip him if they hear of a local forclosure going up, so they must have some source of information handy to them. I'll have to look into it a bit more.

"I’m an understanding wife, worst case the market pops and I get to say I told you so for the rest of his married life. Revenge will be sweet:)"

Gabby has just discovered the *perfect* housing hedge. Peter, HARM, take note.

Cheers,
prat

The loans are typically serviced by professional servicing organizations. They are sometimes independent of the lenders and sometimes subsidiaries or affiliates of the lenders. Whoever has the servicing is likely to dispose of the property.

Zephyr,

Names, websites? Any you'd personally recommend?

SactoQt: A foreclosure is a forced sale. Ideally the bank is successful in finding a buyer via the foreclosure “auction” or process. If that fails the bank could get stuck with the property on its books.

I never bother with foreclosures because I only buy properties in preferred locations with what I believe will be improving demographics and quality. Foreclosures are usually dogs in sub-par areas.

Gabby has just discovered the *perfect* housing hedge. Peter, HARM, take note.

Prat, I hear you, buddy. But sitting around watching the crash play out doesn't have anywhere near the moral satisfaction of taking profiteering scum's "investment property" off their hands for pennies on the dollar. Preferably with them standing right there.

Wamu, Countrywide, wellsfargo/norwest, sun trust, lots of lenders who service…

Why do you ask?

Zephyr
I'd have to disagree a little. The home my parents bought is considered to be in one of the best areas around. It's now valued at $1.5 million. Buuuut, this may be atypical.

Do you think with all the NAAVLP's out there the foreclosure picture may change from your previous experience and we may see more of them in all areas?

SactoQt: I said usually…

Yes. But we had negative amortization loans back in the 1970s. This is not as new as most people think.

Were the loans in the 70's as prevalent as now?

I have an “option” ARM on one or two of my properties. I always pay the full interest. I never borrow for consumption. In fact, I am a big net saver. No need to borrow to spend.

I was always a saver, even when I was young and made very little money. At the end of the day it’s how much you keep, not how much you make that matters most.

Obviously, the more you make the better positioned you are to save – if you have the discipline.

GAbby, don't let another year knock you down. It could still be going in a year, but I'm now convinced that oil is going to strangle the remaining life out of the economy. It's inevitable. When oil is jumping around based on whether Emily or Duncan is taking a left turn or right in the gulf, then you know the queens are gone and it's time for the end game.

The Negative amortization loans were not as widely used, and they were not as severely negative as today.

Zephyr

I very much agree with you that saving is key. My Mom used to tell me that I was so tight I squeaked. Call me Minnie. But it's always been my nature to save and all the NAAVLP's make me very uncomfortable. I'd rather rent than take a chance that I'm overextended in buying a home. Regardless of what this market does, I do think being frugal will pay off in the long run.

I believe negative amortization has been around for a while but it was meant to be a sophisticated money management tool. But only now do we have unsophisticated people using it to afford more house.

It is a rather complicated product with lots of if's and but's and risks can remain dormant until the worst possible time if it is not used correctly.

Zephyr Says:
Why do you ask?

See note to Prat ;-)

Zephyr/SactoQt:

I obviously have no direct experience in neg-ams (a.k.a "reverse mortgages"), but what I've heard & read from others who do tells me that prior to the current cycle, they used to be reserved primarily for 2 types of buyers:

1. Elderly owners who had paid off the mortgage & were "equity-rich" but income poor.
2. Financially saavy and stable long-term owner/investors (as opposed to flipper/speculators) such as Zephyr.

Nowadays, if you can fog a mirror...

Gabby has just discovered the *perfect* housing hedge. Peter, HARM, take note.

It is not a perfect housing hedge for the husband. Instead, it would be a "double whammy" if the market goes down. ;)

PeterP: The negative amortization loans of the 1970s were designed for the purpose of enabling young first-time homebuyers to be able to better afford their starter home. The idea was that their income would be growing so it made sense to offer depressed initial payments that would increase later when they could better afford it. In other words the entire purpose was really to get them into a house that they otherwise could not afford. That was in the 1970s.

Harm: Reverse mortgages are a full step beyond negative amortization. They actually pay you… one big growing credit line.

Sometimes all the information can be so confusing to the poor befuddled beginner........ I thought neg-am's were intended for the wealthier buyers back in the 70's.

HARM: "Preferably with them standing right there."

Coldblooded man. Coldblooded.

Cheers,
prat

Harm: “Nowadays, if you can fog a mirror…”

Credit does go in cycles and we are at the liberal part of the cycle. It does seem more liberal today than in prior cycles.. even at the top.

SactoQt: I was a loan officer in the mid 1970s. I never saw these loans used for anyone but younger, marginal buyers. That I did not see them does not mean that they were not used for sophisticated borrowers.

The negative amortization loans of the 1970s were designed for the purpose of enabling young first-time homebuyers to be able to better afford their starter home.

Perhaps I should call my loan broker and get approved for NAAVLP. Let me see... yep, I can fog a mirror. :)

Inflation was so high in the late 1970's and early 1980's that even with high interest rate it was not uncommon to have a mortgage completely paid off in under 10 years.

Zephyr
It's good to have someone with your knowlege because the various articles in the papers don't have much real expertise about these loans and seem to rely on opinion from unbiased sources like realtors, mortgage brokers, sellers, etc.

Maybe I tend to over-analyze... When I see variables and conditions, I tend to do "what-if" the product until it is "concluded" as too risky. Just maybe...

Zephyr, I really appreciate your views. They really help us debunk some myths.

In the early 80’s, there were still lots of assumable loans too, and people would say “I didnt buy a house, I bought a loan”, if they got a good rate.

It is would be nice too assume a loan with a lower fixed rate. However, I heard that the seller will be on hook if the buyer defaults.

Zephyr,

Thanks for the distinction on reverse vs. neg-ams. As I said, I'm too young to remember what went on in the mortgage markets in the '70s (though I do remember the late '80s), but it seems to me that lenders' use of IOs & neg-ams are much more widespread and reckless than at anytime in the past. 70% (since Jan. 2005) seems like an awfully big chunk of the market --especially for people who are stretching to the extreme edge of affordability payments-wise, or for flippers who are only using them in the expectation of fast appreciation..

Prat
You said that you called the bubble 2-3 years ago and feel a little embarrased. This should make you feel better. A couple of guys my husband works with were CONVINCED

Zephyr, what happen to negative amortization loans after the 1970's? Did they go away completely or did they just become unpopular?

Ooops!

Anyway. These guys were convinced the market had peaked 2 years ago, they sold their homes and moved their families into apartments. They've been waiting for the market to crash ever since. I guess the lesson here is that you truly cannot time a market.

With your investments, I favor a very diversified index-based portfolio:

10% smallcap value/growth index funds
10% midcap value/growth index funds
10% largecap value/growth index funds
10% international index funds
5% real estate tracking funds

Prat, are you a broker? That portfolio (with yearly rebalancing) will make any broker happy. :)

Anyway. These guys were convinced the market had peaked 2 years ago, they sold their homes and moved their families into apartments. They’ve been waiting for the market to crash ever since. I guess the lesson here is that you truly cannot time a market.

If they sold when the relationship between rent and price was out of whack then I believe they may not be in a bad situation, providing that they do not mind apartment living for a few years.

Inflation was so high in the late 1970’s and early 1980’s that even with high interest rate it was not uncommon to have a mortgage completely paid off in under 10 years.

Good point, Peter. Ties nicely into our discussion about "monetizing" the twin Debts and what the Fed's planning for us, inflation-wise. If you're expecting high inflation (assuming wages rise too, that is), then those NAAVLPs don't look so dumb. If wages DON"T keep pace, and much of that inflation is "off the books", however...

I'm sure they will end up in a favorable situation. But as you guys mentioned earlier, the wives may have something to say about the situation.

Question for the resident experts. Would high inflation occur fast enough to make a difference for those people who have Arm's coming due in the next year or two?

This might have been brought up before...

"If Americans ever allow banks to control the issue of their currency, first by inflation and then by deflation, the banks will deprive the people of all property until their children wake up homeless."

Thomas Jefferson

Question for the resident experts. Would high inflation occur fast enough to make a difference for those people who have Arm’s coming due in the next year or two?

Zephyr, we are waiting for your answer...