Agency Sounds Warning On Stated-Income And Interest-Only Mortgages by Kenneth R. Harney An important mortgage market player has sounded an alarm about limited-doc and interest-only features in a growing percentage of home loans, especially those made to purchasers with subprime credit. In an advisory issued last week, Wall Street's Dominion Bond Rating Service, which assigns risk ratings to mortgage-backed securities pools, expressed "concern" about lenders' potential "easing of credit standards" to boost origination volumes in the post-refi boom climate of 2005. The rating agency cited interest-only and "stated documentation" loans in new subprime mortgage pools as especially worrisome. "Stated" doc mortgages generally do not require homebuyers to provide hard evidence of income and assets to support their applications. Interest-only loans allow home buyers reduced monthly payments -- there is no principal reduction for an agreed-upon initial period -- but then convert to full amortization for the balance of the term. Dominion said "mortgages underwritten (with) minimal documentation sometimes account for as much as 50 percent of mortgage pools" in the subprime arena. Yet the no-doc/stated-income concept was originally designed to assist self-employed, business-owning homebuyers with solid credit histories who preferred not to divulge their full financial details. The idea was not designed for buyers with marginal incomes and credit. No-doc "has since been expanded to include salaried borrowers who cannot or will not show proof of income," said Dominion in its advisory. Some analysts have called such mortgages "liar loans" because the income or assets claimed by the applicant may be illusory or fraudulent. That potential, in turn, raises the chance of future delinquencies and foreclosures. Dominion is hardly alone in its opinions. Last spring, two major mortgage insurance companies blew the whistle on "NINAs" -- no income, no asset verification loans -- and curtailed issuance of new insurance to no-doc borrowers with low downpayments. "It may be stating the obvious," said Curt Culver, president and CEO of Mortgage Guaranty Insurance Corp. (MGIC), the largest underwriter in the industry, "but you can't document what you don't have. In many instances (NINAs) are allowing borrowers to do just that. Why wouldn't a borrower choose to fully document their income to assure that they get the lowest possible rate?" Another insurer, United Guaranty, stopped underwriting non-docs after investigators found that in 90 percent of NINAs that defaulted, mortgage or realty professionals working with the home buyers knew in advance they really didn't have the income or assets necessary to afford the house. Dominion's concerns about interest-only subprime loans centered around the fact that the industry has "only a limited performance history" on this breed of mortgage. Other analysts have pointed out that interest-only mortgages have a heightened propensity to default because of possible "payment shocks" after the initial low-payment period expired. For example, say a home buyer takes out a 30-year $333,700 hybrid ARM with an interest-only period of five years. The lender sets the initial fixed payment rate at 5.25 percent -- or $1,460 a month. But in the 61st month, the loan morphs into a one-year LIBOR-indexed adjustable with a standard 2.25 percent margin. With the onset of principal reduction, plus a compressed 25-year remaining amortization term, the monthly payment due from the homeowner would shoot up by 30 percent overnight -- to $1,895 -- if market rates remained flat. But if rates in the economy overall rose by just 1.5 points during the five-year period -- a scenario not unlike what could happen under current Federal Reserve monetary policies -- the payment due in the 61st month would jump by 50 percent to nearly $2,200 a month. That might well be too great a jolt for the homeowners to handle. The bottom line for realty and loan professionals: Tempting though it may be to "make the deal go through" with the help of short-term payment reduction techniques such stated-income and interest-only, the long-term result for home buyers with subprime credit could prove disastrous -- loss of their home to foreclosure.
'Irrational exuberance' -- again! Remember the stock bubble? Yale economist Robert Shiller, says we're just as mad for real estate. January 25, 2005: 12:54 PM EST By Robert J. Shiller NEW YORK (MONEY Magazine) - Yale University economist Robert Shiller made one of the great calls in stock market history. His book "Irrational Exuberance" hit the shelves in March 2000, the same month the tech-stock bubble struck a sharp pin. Timing helped turn "Irrational Exuberance" into a bestseller, but Shiller had been predicting for several years that excessive speculation would prove a disaster for many investors. A few days before Alan Greenspan famously used the phrase "irrational exuberance" in a December 1996 speech, Shiller had been at lunch with the Fed chairman, arguing that the stock market was irrational and suggesting that Greenspan might have something to say about how overvalued it had become. Shiller's first tome focused exclusively on the stock market. A substantially revised edition of "Irrational Exuberance", to be published in April, includes a new chapter on what Shiller believes is the bubble in residential real estate. The housing-price boom that is taking place in big metropolitan areas in the United States and around the world, he maintains, has no basis in economic fundamentals or precedent in real estate history. Even if you don't buy Shiller's argument, you'll want to know what he's thinking -- and not just because he was right once. Shiller knows this subject. He and Wellesley College professor Karl Case are principals in Fiserv CSW, a respected real estate analysis and forecasting firm. Below is a MONEY exclusive: excerpts from the new edition of Irrational Exuberance, in which Shiller aims to pop the conventional wisdom about the causes and sustainability of the current boom, and about the real return of investing in homes. There are always popular explanations for real estate booms, but "popular" doesn't mean "correct." A number of glib rationales have been offered for the run-up in prices in many places in the United States and elsewhere since the late 1990s. One is that population pressures have built up to the point that we have run out of land and that home prices have shot up as a result. But we didn't just run out of land since the late 1990s: Population growth has been steady and gradual. Another theory is that the things that go into houses -- the labor, the lumber, the concrete, the steel -- are in such heavy demand that they have become very expensive. But construction costs are not out of line with long-term trends. Finally, some argue that the boom is due to the interest-rate cuts implemented in many countries in an effort to deal with a weak global economy. But while low interest rates are certainly a contributing factor to rising home prices, central banks have cut interest rates many times in history, and such actions have never produced such concerted booms. There is no hope of explaining home prices solely in terms of population, building costs or interest rates. None of these can explain the "rocket taking off" effect starting around 1998. So what did cause this real estate boom in so many parts of the world? My conclusion: Home-price speculation is more entrenched on a national or international scale now than ever before. In the United States before 1960, people were living in a less avowedly capitalist economy, and they were not primed to believe that their well-being depended in large measure on their property. Today, with good public information about prices -- information that might help generate irrational exuberance -- widely available, our increasing public commitment to market solutions to economic problems has led people to worry more about home prices, and hence to make them more prone to the kind of feedback that generates bubbles. Stories have abounded since 2000 of aggressive, even desperate, bidding on homes. People have been afraid that the price of housing would soon rise beyond their means and that they might never be able to afford a house, and so they have rushed in to bid. Regional housing booms aren't uncommon, but what's going on today is different -- and dangerous. It is commonly said that there is no national home market in the United States, only regional markets. There is something to that statement, but it is not completely true, and it appears to be getting less true. Real (that is, inflation-adjusted) home prices for the U. S. as a whole increased 52 percent between 1997 and 2004. Yes, the increase was higher in some areas and lower in others, but the fact that there was a 52 percent increase overall is remarkable. There was only one similar time in U.S. history: the period that followed World War II. The ascent in home prices since 1998 has been much faster than the rise in incomes, and this raises concerns about the long-run stability of home values. From 1985 to 2002, the median price of a home rose from 4.9 years of per capita income to 7.7 years in the eight most volatile U.S. states; thus in these states, which account for more than a quarter of the country's population, there are significant new stresses on family budgets in making mortgage payments. This price behavior is dramatically different from the behavior of long ago. The late 19th and early 20th centuries saw many local bubbles surrounding the building of highways, canals and railroads. Even when land was so abundant that one could buy it, in some places, for a dollar an acre, there could be real estate booms. If land prices were to go up to $2 an acre near a new rail line, this prospect could be quite exciting to investors. Regional real estate booms are nothing new. But there was no national boom in home prices to accompany the sharply rising stock market of the Roaring Twenties. Home prices were not carried along by the stock market, nor did they drop in real terms when the stock market crashed starting in 1929. After World War II, there were large real home-price increases, at least in the big cities. Government restrictions had severely limited the supply of new homes during the war. Returning soldiers wanted to start families; they were about to launch the baby boom. But prices in that period did not overshoot, and they did not have to come crashing back down. Even though demand soared, there was no real buying panic, as the conventional wisdom of the time was that construction would soon greatly increase the stock of available homes. It is different now. We are feeling worried and vulnerable, and the market volatility that flares up from time to time, in both the stock market and the housing market, reflects this. The big glamour cities (and associated regions) of the world can experience a massive boom at the same time. The similarity among the price paths for these cities (really stunning price increases both in the late 1980s and after the late 1990s, with stagnant or falling prices in between) is striking, as is the similarity of popular stories of exaggerated excitement about and speculation in homes. Whatever it is that drives this excitement, it can cross vast oceans. The notion that home prices always go up is very strong, and very wrong. (cont.)
(cont) It is true that, for the United States as a whole, real home prices were 66 percent higher in 2004 than in 1890, according to the index my research assistants and I have put together. But all of that increase occurred in two brief periods: the time right after World War II and since 1998. Other than those two periods, real home prices overall have been mostly flat or declining. Moreover, the overall increase, including the booms, is not very impressive -- 0.4 percent a year. Why then do so many people have the impression that home prices have done so well? People remember the prior purchase price of a home from long ago and are surprised at the difference between then and now. In closing out the estate of an elderly person, one may be surprised to see that he purchased a house in 1948 for $16,000 and that the estate sold the house in 2004 for $190,000. The appearance is that the investment in the house did extremely well. But the consumer price index rose eightfold between 1948 and 2004, so the real increase in value was only 48 percent, or less than 1 percent a year. In fact, the theoretical argument that home prices can be expected to appreciate faster than consumer prices in general isn't strong. Technological progress in the construction industry may proceed faster than in other sectors. Barbers and teachers and lawyers are doing things more or less as they always have, but new materials, new equipment and prefabrication help make housing cheaper. As for land prices, in most parts of the United States there is abundant land relative to demand. There is still plenty of room to spread out. True, there is little empty land available to build on in Los Angeles or Boston, or, for that matter, in London or Sydney. But when home prices rise to the point that mortgage payments take up a large share of family income, there is a powerful incentive to move to a lower-cost area. This safety valve tends, in the long term, to prevent the price of homes from rising too much and to burst bubbles that have inflated too far. The increase in home prices since 1980 in Los Angeles has really not been so much larger than in Milwaukee. But Los Angeles has gone through two booms and a crash along the way. Life was simpler once; one saved, bought a home as part of normal living and didn't think to worry about what would happen to its price. The increasingly large role of speculative markets for homes, as well as of other markets, has fundamentally changed our lives. The price activity that was once very localized and connected to the building of highways and the like is now connected to popular stories of new economic eras. The changing behavior of home prices is a sign of changing public impressions of the value of property and of a heightened attention to speculative price movements. It is a sign of a bubble, and bubbles carry within them the causes of their ultimate destruction. Top of page Find this article at: http://money.cnn.com/2005/01/13/real_estate/realestate_shiller1_0502
Wells Fargo Home Mortgage Introduces 10-Year ARM With Interest-Only Feature DES MOINES, Iowa, Jan 26, 2005 PRNewswire via COMTEX/ -- A new product feature from Wells Fargo Home Mortgage can help homebuyers looking to increase their short-term cash flow or who intend to move or refinance within a few years. The company is launching an interest-only feature that doesn't require principal payment for a period of 10 years. Wells Fargo Home Mortgage's interest-only product feature was previously available only on 5- and 7-year adjustable-rate mortgages (ARMs). Interest-only mortgages can be used for purchase or refinance transactions and allow homebuyers to make payments of "interest only" during the fixed-rate period of the ARM -- five, seven or 10 years. After the interest-only period has ended, full principal and interest payments are required as the loan fully amortizes. Homebuyers/homeowners can make principal reductions during the interest-only period, but aren't required to do so. Potential homebuyers who may be suited for the interest-only feature include: -- Those who do not intend to be in their homes for more than a few years. -- People looking for lower monthly payments and a chance to redirect their cash flow to high-yield and tax-deferred savings or maximize retirement contributions. "We are committed to designing mortgage products and features that meet the needs of our homebuyers," said Joe Rogers, executive vice president for pricing, products and programs within Wells Fargo Home Mortgage's National Consumer Lending Sales area. "The rollout of our interest-only 10-year ARM is another option we're offering customers to help them meet their overall financial goals." Interest-only mortgages are not for homebuyers who are looking to build equity by paying down their principal or buying in a market where home values are not appreciating. Interest-only mortgages cannot be used for investment properties. "The interest-only feature is a great option for customers who need to invest funds in other ways," Rogers said. "To some, a home is not their best or most important asset-building tool. To others, a short-term ability to lower payments each month works with their long-term cash or asset management strategies." Wells Fargo Home Mortgage is the nation's No. 1 retail mortgage lender*, the No. 1 lender to both low- to moderate-income customers and ethnic minorities, and one of the country's leading servicers of home mortgages. It operates the country's largest mortgage network from more than 2,000 mortgage and Wells Fargo banking stores and the Internet. Based in Des Moines, Iowa, it serves about 5 million customers in all 50 states through its retail and wholesale lending operations. *Based on third quarter 2004 statistics compiled by Inside Mortgage Finance . Nov. 19, 2004 SOURCE Wells Fargo Home Mortgage
70 years ago, people seldom borrowed money for anything other than houses. It was shameful to be in debt. Today, you have kids in college using credit cards. We are just so used to credit. So since people are no longer debt averse, this is what is happening: A dot com bust and an attack on U.S. soil stalls the economy so the Fed slashes interest rates. Subsequently, Joe Citizen realizes he can buy a bigger house for the same price. Likewise, Joe's cousin, Bill Citizen, realizes he doesn't have to rent anymore so he buys a house. Ok, so the prices of housing start to rise in compensation to the low interest rate. Over time, Joe Citizen realizes his house has increased in value substantially. Since interest rates are low, Joe listens to the advertisements on the news about how much equity he can tap from his house, so he does so and buys himself a new Lexus. He also buys himself a Plasma Television from a Foreign Country. Yes, he's buying stuff made in the good old U.S.A. also, but those foreigners aren't buying as much from us because going into debt is very taboo. The trade deficit starts to yawn wider. Lets focus on the foreign companies now: Now, the company in the Foreign country has U.S. Dollars as profit. They decide to leave some of that money in the U.S.A. and use it to purchase bonds. The people that issue bonds realize there are a lot of foreign businesses out there buying bonds, so they can offer really low rates and still get their bonds sold. The mortgage companies, who are in competition with each other to offer low rates, hedge their low rates with bonds so they, in turn, offer low mortgage rates. Because the mortgage rates remain low (or maybe even drop lower), there is more demand for housing in Joe Citizen's neighborhood. Joe Citizen realizes that his house has increased in value even more, and decides that maybe he needs a nice foreign dirt bike... And the cycle continues (maybe for years more), until eventually, Joe Citizen doesn't have any equity in his house left, and he doesn't need anything because he already has a big television, a new car, and a nice motorcycle, so he stops buying. So what happens then? Does the economy crash into a recession? Well, maybe Super Greenspan, wearing a cape, sees this cycle developing, and he starts raising the overnight lending rates. He has to raise the rates slow enough so that the Joe Citizens of the world can lock into fixed rates, so he makes his intentions crystal clear. At the same time, he plans to bring rates up fast enough so that Joe Citizen will still have a few things on his want list left, which he will then purchase slowly, over the years. So the question is...will Greenspan bring the rates up quick enough before everyone is in debt up to their eyeballs? IMHO, he's a little late. So look at the long term. Our Federal Government is going into debt, so our dollar is going down in value. This implies that inflation should occur because the dollars are worth less, so investors demand a greater percentage of them as profit. At the same time, the citizens themselves are going into debt. They will be creating a subtle political pressure in support of inflation? Owe someone $1000 and you don't want to work at a $10 an hour job for 100 hours to pay it back? OK, well then, devalue the currency so that you're getting paid $20 an hour, and you only have to work half as hard. Sounds like a deal. I think I'll call my congessman. So, as investors, this leads us to one conclusion. Expanding debt of our nation, and the individual citizens means inflation is coming. But, because of the real estate boom, and the influsion of money from second mortgages that are being used to buy foreign toys, they can buy lots of bonds that hold the rates down. The cycle will break when Greenspan stops it by raising the rates high enough, or Joe Citizen runs out of equity. Either way, the bond market is very, very, wrong, in their forecasts for the 10 and 30 year bonds. Rates will be higher. So to capitalize on this, how can you short the bond market over the long term? My particular solution is to buy income producing property on fixed notes and hold them. Its also my mantra. I'm open to any "cleaner" ways that I can short the bonds long term if anyone has an idea. SM
======= Billbuild; You have some excellant building points, especially presboard JUNK & excellance point of pressure-treated lumber, with warranty of 30 years , some has lifetime warranty.[against rot, termites...] KC and you may have hated OSB when it first came out; i still hate it. No way OSB is as structuraly stong when it gets wet-it rots then; most of my contractor friends use it cause its cheaper, and many customers unwisely shop price only!!! In particular, OSB on roof,OSB on subfloor is asking for trouble; compared to more exspensive exterior glue plywood, or more time consuming lumber. KC is right on this. Interestin comments on CA real estate sellers concerned about a long time of one month; most all certified appraisals in this sunbelt state have 3 choices 1] marketing time under 3 months 2] marketing time 3-6 months 3]marketing time over 6 months [freddie mac form 7d 6/93,; certified appraisal FEB-2004]
depression is a strong word. However, I thing all you have to do is look at the Japanese economy to determine what we can expect.
Many Homeowners Who Depleted Their Equity Sink Deeper Into Debt By Paul Wenske The Kansas City Star January 18, 2005 Like millions of Americans, Jerry Whetstone joined the rush to tap the equity in his home a few years ago. Whetstone and his wife figured that with his sales job and her nursing degree, they were financially solid. So to pay off student loans and credit cards and to finance other needs, they took out a $ 70,000 equity loan on the Kansas City house they owned outright. Then Whetstone's wife got cancer and he was laid off from his job. By the time Whetstone's wife died in July, their credit card and other debts had ballooned. The interest on the home equity loan also grew, from 4.25 percent to 6 percent. Now Whetstone faces selling his house to pay his debts. With extensive improvements, the house might fetch $ 150,000, but he doesn't have the money for that. Whetstone thinks at best he can get about $ 100,000. "We thought if we could maintain our jobs, no sweat," he said. "There's denial when you are looking at 4.2 percent. It's better than this credit card. Still, you have to pay the loan back." The housing and refinancing boom, sparked by historically low mortgage rates, prompted millions of Americans to see their homes as possible piggy banks. While many borrowers used refinancing to greatly improve their household cash flows or consolidate higher-rate consumer and credit card debt, some used it to take on debts they now can't afford. Thanks to rapidly appreciating home values, the Federal Deposit Insurance Corp. estimates that the total equity held by homeowners has increased $ 2.2 trillion since 2000. In the Kansas City area, the average home price increased 31.6 percent over the five-year period ending Sept. 30, according to the Office of Federal Housing Enterprise Oversight. But there is growing concern about the dark side of the refinancing, home equity loan and line-of-credit boom. According to the Joint Center for Housing Studies at Harvard University, between 2001 and 2003, Americans turned about $ 333 billion in home equity into cash. Between 2001 and early 2002, Federal Reserve statistics show, 44 percent of Americans who refinanced with fixed-rate mortgages pulled cash out of their homes. Of those who refinanced with adjustable-rate mortgages, 57 percent pulled cash out. Many homeowners who depleted their equity continue to borrow to purchase new cars, build new decks or just make ends meet. Now they are sinking deeper into debt. As interest rates rise, some financially strapped homeowners risk losing their most valuable assets -- their homes. New government and consumer studies warn that if housing values stagnate or tumble -- a concern focused more on red-hot coastal markets than in Kansas City -- millions of homeowners could be devastated. The studies also predict repercussions for the economy, which has been carried largely by consumers who, in a period of stagnant wage and job growth, spent liberally using money they carved out of their home equity. "If home values bust, many of these homeowners will be devastated," said Javier Silva, author of a new report, "A House of Cards: Refinancing the American Dream," released this month by Demos, a New York-based nonpartisan public policy organization. Demos found that while a record number of Americans own homes, on average they own a smaller share of their homes than Americans did in the 1970s and '80s. Home equity actually has fallen, from 68.3 percent in 1973 to 55 percent through the second quarter of 2004. The report echoed concerns of financial experts that the refinancing boom blurred the line between unsecured debt, such as credit card debt, and secured debt backed by a solid asset such as a home, which long has been a personal source of wealth and security. "It's like buying a Big Mac with a credit card and then transferring that debt to your mortgage -- now you are mortgaging your home for a hamburger," said Kevin Glendening, deputy commissioner in the Kansas bank commissioner's office. Federal statistics show an increase in delinquent payments on home equity loans, suggesting growing problems for some consumers. Delinquent payments can result in late fees, lower credit scores that make it hard to get good loans, and foreclosures. Ultimately, when the debts become more than consumers can manage, experts look for a surge in bankruptcies. "While nobody has a crystal ball, increased consumer debt ratios may be a sign that more families are in financial distress," said Ted Janger, a professor at Brooklyn Law School and a former resident scholar at the American Bankruptcy Institute. Similar warnings are sounded in the FDIC's winter outlook. Although the total equity held by homeowners has risen sharply, the FDIC notes that mortgage debt rose to a record 72 percent of household debt in 2003. The report expresses concern that homeowners, squeezed between higher interest rates and stagnating or falling home prices, could face problems servicing their debts, causing them to become delinquent or unable to repay loans. "Home prices cannot rise faster than the fundamentals," Richard Brown, the FDIC's chief economist, said in a phone interview. "Those appreciations can't be sustained long term. Households that have taken on more of these risks and more debt are more vulnerable." Many Americans took on the risks because of low interest rates. Banks and mortgage brokers encouraged Americans to refinance their home loans. When the refinancing boom slowed in 2003, lenders began to aggressively market equity lines of credit to generate new loans, the FDIC said. One frequently cited argument used for converting consumer debt and credit card debt to mortgage debt is that the interest paid on mortgage debt is tax deductible. But the equity credit lines, unlike most mortgages, carried adjustable interest rates. While they started as low as 4.2 percent, they began to climb last year when the Federal Reserve began raising the prime rate. The FDIC report also expressed concerns that some banks, tempted by hefty profits, are loosening their underwriting practices and making riskier loans. Investigators in some states have looked into allegations that some overzealous brokers pressured appraisers to inflate appraisals to induce more loans. The FDIC report concludes that now, with many Americans deeper in debt, more consumers are "in a weaker position to repay the loans." Elizabeth Watkins, a senior loan officer at Advance Mortgage in Overland Park, said some people are returning to refinance their loans and consolidate their debts once more, even though interest rates are higher. Just to keep their payments low, some borrowers have taken out loans with adjustable rates that start low but risk going higher in three years. "People paid off their debt, and now they have debt again," Watkins said. "Now they're very embarrassed. You have people laid off, people with life-threatening emergencies and people with kids in school." Home values in Kansas City still are going up, though less rapidly than in recent years, so people still have equity to work with. "The real problem will come if home values depreciate," Watkins said. Watkins tries to move clients as soon as possible into fixed-rate loans, even if the rates are higher yet. The process has left her much more wary of how easy it is to lose one's nest egg. "You have wealth sitting in your house, but you have to respect it for what it is," she said. "Use it if you need to, but do it with your eyes open." Necia Gamby thinks she is doing just that. Gamby lives in a house near midtown that she and her mother bought about 10 years ago for $ 64,005. But its value soared to about $ 200,000, as people have begun moving to the area. Over the past three years, Gamby has refinanced her home three times, using the money to repair her credit, consolidate medical and education expenses, and pay for a new roof, windows and siding, which have improved the value of her home. Gamby now has a fixed 30-year mortgage at 6.5 percent, but she also owes $ 143,000 on her mortgage.
Selling TOL here, testing my strategy!!! Will see what Monday and the next few weeks bring. Will short below 75.25 with a stop @ 80 and target of 63. Nothing better to do on a Saturday night than work on trading strategies.