Who REALLY Can Benefit From Lower Mortgage Rates?
Posted on December 4th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research
**NOTE – Mortgage loan officers, we want to hear from you in the comments section. How does this summary compare with what you are seeing in your battle zone?
Who can benefit from lower rates? The answer is ‘a small fraction as in the past’. I am already seeing analysts reports come out saying things like ‘if rates drop to 5.25% then 6 million people will be eligible to refi’ and ‘this will save the purchase market and builders’. This in not correct and I will explain why in detail in this post.
First, I am glad to see mortgage rates dropping but it would have been nice to see them drop naturally vs artificially as a result of ‘announcements’ and ‘leaks’ from government agencies. I have always said there are only two ways to quickly stabilize housing prices – a) bring back all of the exotic loans lost in 2007 b) gave everyone 300% raises. These are obviously not going to happen but illustrate how much of a jam the housing market is in.
The only way to ‘fix’ the housing market with the financing available today is for home prices to drop and for the default crisis to end. Both have to happen fast and at the same time. All of this government interference to date has caused nothing but confusion and negative sentiment towards the sector. Home prices have still collapsed and show no signs of bottoming any time soon. Home prices will get back to their historic relationships with rents and incomes eventually and interventions like this only prolong the pain.
The government is trying to control interest rates through talk and selective purchases of mortgage securities that have not kept pace with US Treasuries by any stretch. Real interest rates have been falling yet mortgage rates were staying elevated – spreads widening. Last week it was announced that the Fed would buy $100 billion in debt and $500 billion in actual Agency mortgage backed securities. Of course the market assumed this would be done all at once within 24-hours but as we learn more it is a several quarter plan that will likely be used to control spreads ‘challenges’ like we were seeing before the announcement.
On a sidebar, I maintain that these ‘announcements’ are not so much about lower rates for you and me. Rather better executions for Bill Gross and Foreign Central Banks who are stuck with trillions of Agency mortgage paper and have been sellers for months in favor of US Treasuries. I am sure you saw Bill Gross threaten the Treasury on national TV before the Fonie and Fraudie bailout. Essentially he said ‘fix Fannie/Freddie bonds or I will tell my large clients not to buy anything for a long time’. Within a couple of days F&F were in conservatorship and their debt ‘effectively’ backed. There is still no ‘explicit’ guaranty, which is likely the reason you do not see a mad rush into this sector as you have the Treasury market so they felt more government meddling was needed. I talk about it in a recent post: Fed Buying Agency MBS – Still No ‘Explicit’ Guaranty. Time will tell if this is just all talk but as of now Paulson was effective in bringing down base-rates for perfect borrowers from 6% to about 5.5%. However, the latest chatter of 4.5% is more fantasy than reality. I will be shocked if we ever see it.
The housing market cannot be fixed with artificially low interest rates. Remember, we still have millions in the foreclosure pipeline and mortgage defaults at all time highs. The latest wide-scale mortgage modification attempts fall very short of being a permanent solution – please see story The Great Mortgage Modification Pump – GOD SAVE US ALL! (249). As long as borrowers are defaulting and losing homes to foreclosure we will be in a housing crisis.
Let’s Pretend
But let’s pretend for a moment that there were not two to three times the number of homes going into default and foreclosure than selling each month. Who out there can actually take advantage of these lower interest rates? Analyst with their antiquated modeling systems seem to think that at 5.5% a refi and purchase boom will ensure that will solve the housing crisis. I maintain this is a different world and interest rates do not mean what they used to. I talk about it in this recent story – Mortgage Rates Drop! It Does Not Mean What it Used to (67)
WHO REALLY CAN BENEFIT FROM LOWER RATES
REFINANCE
During the boom years when rates slammed down 50bps like we saw last week, it seemed that the entire nation would refi or re-refi at once. Refi’s drove the mortgage industry during the bubble years and loan officers lived for the next refi boom that seemed to come ever six months or so. Purchases ran a distant second making up 20% of activity at best.
Serial refinancing as values soared double digit percentages per year was a massive stimulus to the consumer, housing market and broader economy. With each refi came lower payments in the case of a rate & term refi; much lower payments when a borrower switched programs from a 5/1 interest only to Pay Option ARM; or lots of cash from a cash-out refi. Combining an existing first and second mortgage into a larger first mortgage and then adding a new second mortgage every year gave homeowners a major liquidity shot in the arm that was used from everything from vacations, plastic surgery, cars, jewelry and remodeling.
Now with values down in the bubble states on average near 50% in the past 18 months, most homeowners and serial refinancers are underwater or ‘near’ underwater meaning they can’t refi. In CA for example, 60% fit this profile. These homeowners are dead to the mortgage sector. In other bubble states negative equity is worse. Please see my latest report on negative equity. Bubble-States Awash in Negative-Equity (13)
Of the 40% that have a low enough loan-to-value to play ball, many made no mistakes during the bubble years and could be in a 5% to 5.5% 30-year fixed right now. Rates have to go much lower for these people to want to reset a loan with 26-years left to 30-years. Also within the 40%, not all have the LTV under 80% and credit score over 740 that allows them to take advantage of the vanilla base-rates. Remember, in the past year credit guidelines have tightened so much that unless the borrower’s profile is nearly perfect, they do not get the best rates. Please see my recent story on mortgage rates. Mr Mortgage: In-Depth Look at Mortgage Rates…5.5% Does Not Exist For Most (44)
There are significant adjustments that take base mortgage rates much higher which did not exist a couple of years ago for LTV’s, credit scores, loan type, purpose (and more) that are outside of the small vanilla box. During the bubble the box was huge where a 580 and 700 credit score could get the same rate from the GSE’s. Now there would be a rate hit of 1% or more if the borrower could even qualify. Then there are those in exotic Pay Option ARMs and alike that don’t want out regardless of where fixed rate loans go. Remember, index values underlying these loans such as the MTA, CMT, Treasury and LIBOR are falling making these loans attractive. A refi into 5.5% or even 4.5% means a payment increase, which is a tough sell. Additionally, there are the folks who went stated income/asset that can not qualify regardless of how low full doc Agency rates go.
Lastly, If the borrower has a second mortgage, as millions do, that they need to be kept in place the rate can jump at a minimum from 5.5% to 6% making a refi potentially out of the question.
When rates tumbled during the bubble it sparked a nationwide refi-party that was absolutely stimulative to the housing market and overall economy. Now, my research shows that of all the homeowners in the bubble states, less than 20% can actually benefit from rates dropping when you remove the parties outlined above. I naturally focus upon the bubble states because of their massive population and home owner bases and because no national housing market or lending upswing will occur without these states participating. Scratch the refi-boom.
MOVE-UP BUYER
Move-up buyers were the largest segment of buyers during the bubble years, as folks always wanted something bigger, newer or in a better location. Each quarter brought about new and innovative loan programs designed by the investment banks to bring payments and down-payments lower making homes more affordable. With very little down required and housing rising double-digit percentages per year it was easy to sell, pocket the cash above the loan payoff and buy the better home with little to no money down and a lower payment if you chose a Pay Option ARM for example. The new home was furnished on easy credit terms from their favorite furniture chain. EVERYONE qualified due to stated income, no ratio and no doc loans. Now, the move-up buyer virtually non-existent because most can’t sell for what they owe; can’t sell for what is needed to extract the large down payment needed to buy the new home given today’s financing; or can’t qualify for a mortgage on the home they presently live in let alone a larger mortgage without an exotic or liar loan. Scratch the move-up buyer.
FIRST-TIME BUYER
First time home buyers in their early to mid 20′s are a group that can benefit from lower rates. However, historically they were one of the smallest housing market segments. Now the question is, how many 20-something’s have a large down payment, 2-year job history, very little debt and good enough credit score to take advantage of the low base rates available?
This group as a whole will not be able to get the low base-rates being thrown around because they are not seasoned borrowers. An LTV and credit score that was considered ‘Super-Prime’ two years ago can result in a 1.5% hit to the rate bringing them from 5.5% to 7% very quickly. While the 7% rate may fall further, I believe that this group is more price-sensitive and looking for a ‘great deal’ on a foreclosure-related property vs waiting for rates to drop to buy. This seems to be the case with most buyers given over half of all home sales in the bubble states come from the foreclosure stock.
RENTER
Renters can also benefit from lower rates but the same rules apply as with First Time Buyers. This segment also has historically been one of the weakest, as many are renters for a reason. In many cases those reasons prohibit them from buying.
SECOND HOME/INVESTMENT BUYER
Once again, it is more about getting a ‘great deal’ on a foreclosure related sale vs hitting an interest rate level that prompts a purchase for this group. For those not paying cash, most investors have significant interest rate adjustments on their loan taking the rate up substantially over 5.5%. For investment properties, the 3-point hit for LTV’s above 75% alone takes the 5.5% to 6.75% – most will have multiple hits. The second/vacation home buyer can get more aggressive rates than investors, but I sure hope that economists are not staking their reputation on vacation home buyers saving the housing market.
Well, there you have it. This is my take on lower rates. While naturally lower rates are good for everyone, there is a fundamental problem with our government spending money to artificially push mortgage rates lower. Remember, it was artificially low rates on exotic loan programs that were one of the reasons we got here in the first place. – Best Mr Mortgage
December 4th, 2008 2:19 pm
yes. yes to all of the above.
as always, excellent commentary. As a mortgage industry vet of 20+ years, the spin out there is incredulous.
December 4th, 2008 2:21 pm
I think your analysis is right on the money!
December 4th, 2008 3:10 pm
so basically the simple answer is that 99% of the people who are in trouble and really need to a fixed loan product will not qualify.
December 4th, 2008 3:20 pm
I am one of those prime borrowers currently at 5 3/8% fixed mortgage. If rates go lower I will refinance to the lower rate but plan on continuing to pay the same payment I am currently making. This way if I have finanial issues in the future, I can scale back to the new lower 30 year payment.
December 4th, 2008 3:46 pm
looks like we are still headed toward PRINCIPLE REDUCTIONS FOR EVERYONE (although i guess it will take as long as possible for the morons to realize ITS THE ONLY ANSWER)
December 4th, 2008 3:50 pm
Owner of personal mortgage company (not Net-Branch) for 11 years, the rumor released this AM was reckless.
Taking your correct narrow focus of approval, based on property or person, then remember it will be an FHA type loan subject to 1.5 to 1.75pt UPMI and a mandatory .5pt 12 month MI factor making the loan cost 2.0 to 2.25% plus a lender fee of 1%. So a 4.5% goverment loan will cost 2.5pt to 2.75pts. TODAY on the open market I can get you 4.625% with 1.65 discount and 1 point broker fee and no mortgage insurance. Total points 2.65% and start saving TODAY instead of waiting a month for the announcement, then the 90 day locks as every homeowner submits 15 online applications. The only difference is I can’t go over 80% loan to value by adding it to the loan.
So today, everyone is telling me to hold on their 5.00% locks from last week. A $250,000 6.25% lowered to 5% saves $200/month. To get the FHA-type gov loan at 4.5% will save another $80/month but cost $5000 more minimum. Not to mention it will take AT LEAST 90 days to close as you are in line with every homeowner submitting 15 online applications. So you will miss on 3 months of savings and pay $5000 = $5600. That extra $80 will add 6 years to break even over a 5% 1 point today.
Thanks rumor guys! Now we sit and wait for the ‘real story’.
I read your blog every day mostly so I have someone to scream in frustration with.
Portland, OR where every homeowner is the genius.
December 4th, 2008 4:02 pm
15 year fixed at 3.5% and my ears will perk up. People’s worldview has changed. Folks that can re-fi into a low rate loan because of good credit don’t want MORE debt, they want less.
December 4th, 2008 4:34 pm
Hey Lenderboy…I take issue with your post
Every homeowner here in New Jersey is a genius!
Maybe that’s the problem…not enough borrowers are dumb enough to listen to us?
December 4th, 2008 4:36 pm
I bought a foreclosure about 6 months ago (non-bubble state, bit or a fixer upper but a good neighborhood). I’m paying 6.75%, looking for a no-cost refi (because we’ll probably move within 2 years.) After all the news about ultra-low rates, I priced it out, and my LTV <80, FICO 735 rate comes out to… 6.75%. Whatever.
December 4th, 2008 4:50 pm
I read a great story on FDR, Obama and the Great Depression.
http://www.humanevents.com/article.php?id=29646
It quotes the treasury secretary of the time calling the New Deal a failure, and cites a couple of Nobel Laureate economists saying the GP would have ended in 36 if not for failed intervention. The parallels are alarming. An unsustainable system was built that was bound to collapse. Our central planners are throwing everything and the kitchen sink to keep it from collapsing, but they are only delaying and exacerbating the inevitable.
As for the rates. IF they hit 4.5%, while bad for the economy as a whole, I’ve gotta believe it would be a boon to originators. I do concur that most people who could qualify for the best rates are already at sub 6% on fixed rates and you would therefore need a rate of sub 5 to make it worth their while. If made available to FHA buyers it would increase demand on housing, but only for as long as the artificial interference was maintained, and therein lies the problem. Treating unsustainability with more unsustainability.
December 4th, 2008 4:53 pm
Your analysis is right on target. My wife (an unemployed underwriter with 25 yrs experience)and I (18 years as an originator)were discussing the topic this am while listening to the CNBC announcement about the feds trying to lower rates. We came to your conclusions (you must be a very bright guy). Lower rates will not cure the LTV’s. The only other point you did not mention specifically was the GSE’s tightening of DTI. Reducing DTI from 60% to 45% kills the possibility of most borrowers from refinancing unless they originally had 80% equity. Try doing the math on the scenario of your choice. You will be amazed and shocked at the results.
The new rules also pretty much rule out mortgage brokers and RE agents from refinancing. Between LTV, DTI (especially the “I”) and full doc requirements it is a tough nut. Sure hope everyone had their ducks lined up 1-2 years ago like we did.
December 4th, 2008 4:54 pm
Mr. Mortgage you are correct sir these low rates stir up a bunch of excitement for nothing. I read that the Treasury’s plan would not include refinances. Um lemme see the people who need the most help need to refinance but can’t…brilliant (sarcasm). I have no idea with leaders like these how it is possible we are the only super power on the planet.
What I don’t understand is why the obvious is still not being done. It is like they have the answer to fixing the problem (because you and others keep telling them) but they refuse to take that direction. Am I being naive? Is it that the security holders and banks are telling the government “no principal reductions” who is pulling the strings here that’s what I can’t seem to figure out. Who benefits from the crisis continuing and for that matter who benefits from no principal reductions. I smell some real stinking @#*^! if you know what I mean.
December 4th, 2008 4:59 pm
There is no fix for this. The only fix is for prices to drop down to historic fundamentals and thats it. Everything else is kicking a rock down the road so the next guy deals with the problem. Is there no one at .gov, except for Ron Paul,
that understands this?
December 4th, 2008 5:09 pm
“looks like we are still headed toward PRINCIPLE REDUCTIONS FOR EVERYONE (although i guess it will take as long as possible for the morons to realize ITS THE ONLY ANSWER)”
Javagold:
I see princiPLE reductions all around me. After all, it requires a reduction of principles to be in favor of principal reductions!
December 4th, 2008 5:36 pm
The Rudderless Twenty-Somethings as we call them typically have low FICO’s caused by cell phone collections and other trappings of today’s youth. They also carry with them HUGE car lease payments throwing their ratios out of whack. They typically lack any employment stability.
Aside from all that they are petrified of the commitment and being tied one place because they value mobility. Not to mention, they have bourne witness to what their parents have been going through these past two years and want no part of it. NEXT!
December 4th, 2008 5:41 pm
As usual, your analysis is dead on.
We cannot fix the problem untill we own up to it.
We have a global recession because global debt grew to an unserviceable high. That is, the debts exceed the borrowers ability to pay.
Governments, corporations, businesses, and individuals took on too much debt.
In the process they created too many factories, too many shopping malls, too many houses, too many cars, too many ships, and too many consumer luxuries.
So the only possible outcomes are:
A) A long recession with deflation, bankruptcies, foreclosures, and shrinkage of the financial sector.
B) A longer recession with high inflation, fewer bankruptcies, fewer foreclosures, and expansion of the financial sector.
C) A lost decade like Japan.
Choice A yields a stable economy the soonest.
Choice B leads to a hyper-inflationary collapse.
Choice C is the path we are on, however our politicians are doing all they can to put us onto Choice B, which is the worse choice.
December 4th, 2008 5:45 pm
None of the proposed solutions will work. We have a major clog in the artery of transactions… People can’t sell or refi when they are upside down.
The solution needs to address this issue by using bailout funds to incentivize the lenders to settle loans based on current value. Currently the lenders are reluctant to write off losses and take shortfalls based on current market values and LTV.
If the govt guaranteed a high enough percentage of loss to the lender(maybe 50-75% of the shortage)it would make the short sales and modifications more palatable to them. It would provide some basis for evaluating the price of the MBS’s out there (hopefully giving a firmer floor to work from) giving some hope of stability to valuing the MBS market. Also, it would give a big boost to get homes sold and loans refinanced. There would be some basis for the market to flow again.
I haven’t heard anyone talking about this as a solution… am I missing something??
December 4th, 2008 5:46 pm
Hello Mr Mortgage,
Im reading articles stating that the housing market is worse than ever and only going to get much worse next year. However, I look at foreclosureradar.com for my zip 92882 and the number of homes (3,000 sq ft and above category) in “preforeclosure, auction and bank owned” categories has steadily decreased from 135 homes three months ago to 89 homes today. This seems counterintuitive to all the literature Im reading, can you explain this phenomenon?
December 4th, 2008 5:48 pm
I have a question. If they go through with the principal reduction nonsense. Will that mean that every property around the property that had it’s principal reduced also have their value reduced? Maybe I didn’t word this perfectly but you get the gist. Will it lower prices for all housing? Because if that’s the case…then I’m all for this principal reduction “plan”. And if that’s the case doesn’t that go against their plans to prop up housing prices?
December 4th, 2008 5:57 pm
fred:
Yes, principal reductions are deflationary. That’s pretty much the only good thing about them, in my book.
December 4th, 2008 6:31 pm
Thank you Coast is Toast.
December 4th, 2008 6:39 pm
These new low rates the Fed is suggesting would NOT apply to refinancing. The potential rate cut would ONLY apply to NEW home buyers.
This is the Fed’s pathetic attempt in curbing the collapse in home equity.
What a joke.
December 4th, 2008 7:07 pm
Fedwatcher,
I don’t think we will ever have hyper-inflation. Maybe just some inflation after these deflationary quarters.
The reason, is there is sooo much money being destroyed right now, and this is reason the Fed is cranking money out left and right. The question is, will they be able to turn off the spiggot at the right time?
If they turn it off too soon, we will see massive deflation. If they turn it off too late we will see massive inflation. But either way, our country has too much infrastructure, a diverse economy, and wealth to ever see the hyper inflationary conditions Germany faced in the 20′s.
December 4th, 2008 7:35 pm
We are all definitely living ‘the greatest show on earth’. I’ve been seriously thinking of ‘Walking Away’ and I am not so sure to wait for a principal reduction because 1) it may not happen 2) if it does happen, it may be two years down the road. We bought a 630K detached home at the peak in 4/07 with 10% down, 90% LTV. Financed with a 7/1 ARM IO, 6.375% and a HELOC at prime negative. Based on the latest comp down the street we may be at a zero equity position if not hanging on to 5% (not bad relatively speaking in today’s market) and BOTH loans are from JPM/Chase. I really can’t see this home selling for $550K being 2 miles from the beach in an established higher end neighborhood. Our DTI is 28/30 – we have NO credit card debt and very low expenses. We are both gainfully employed (for now) and annual household income is approaching 200K. We have always been matress stuffer and my significant other contributes regularly to her 401K and the rest goes into the bank. I do not have 401K at the moment but everything goes to savings with the exception of a minor slush fund. My wifes credit was 840 FICO mid score and is now sitting at 740 after we purchased the house and my FICO is at 720. I’m willing to walk away and rent for the next 5 years then be in the market to purchase in 2013. I can care less about the FICO credit hit since we pay off our revolving charges to zero every month so we can get away with cash and carry. Is this a smart move? I can save alot of money renting the next 5 years not to mention the chance of buying a home at a greater discount. Are there any risk analysis uber nerds on this site willing to comment on my plan? Is this all for nothing at the end of the day? I doing this because at the end of the day in 30 years, I may save my self a half million dollars. I am I nuts?
December 4th, 2008 7:43 pm
what in the fcuk does the fed fool with this….it is what it is…..
they already guranteed FNM & FHLMC bond holders unfortunately
so every other bond holder can go fcuk themselves as far as I am concerned.
I think the whole nation should walk away from every UPSIDE DOWN asset cars, houses & stocks
and tell the FED shove it
December 4th, 2008 8:03 pm
These past 7 days i have been swamped with loan applications for mostly refi’s but also purchases. The lower rate didn’t influence the buyers to buy now but did make them feel better about buying now. Lucky for me and my company, we are located in the NJ/NY metro area where for the most part, values have held up better than the rest of the nation, most of equity in their homes, and good credit. I pt 5 loans in this week to Wells alone, each for 417k, LTV under 60%, credit over 700, and with a combo second HELOC at prime + 1.25% for CLTV’s 70% or less. The rate on the 1st 5.25%, my YSP 1.25%. Clients happy, i am happy, banks are happy. All happy.
December 4th, 2008 8:24 pm
RE: Kashmula – foreclosure drop – California Gov. signed a bill to freeze foreclosures for 60 to 90 days. . .this took effect in September – watch out for a rush of foreclosures in January / February time frame.
As for overall economy – I think things are like Japan – real estate and stock market hit a peak in 1989 and still have not recovered. . . actually, I just read that 100K invested 25 years ago in Japan would still be 100K – 25 years of lost appreciation.
December 4th, 2008 9:22 pm
Admin, I see principal reductions as the only way out too. But how will they do it? Do they go to EVERYONE even folks w/a $2M house or will it be limited to people w/houses worth under $500k? It doesn’t seem fair to everyone.
December 4th, 2008 9:38 pm
I think this sums up the mess perfectly:
Forest Gump Explains the Mortgage Mess:
“Mortgage Backed Securities are like boxes of chocolates. Criminals on Wall Street stole a few chocolates from the boxes and replaced them with turds. Their criminal buddies at Standard &Poor rated these boxes AAA Investment Grade chocolates. These boxes were then sold all over the world to investors. Eventually somebody bites into a turd and discovers the crime. Suddenly nobody trusts American chocolates anymore worldwide.
Congress now wants the American taxpayers to buy up and hold all these boxes of turd-infested chocolates for $700 billion dollars until the market for turds returns to normal. Meanwhile, the Wall Street criminals who stole all the good chocolates are not being investigated, arrested, or indicted.
Mama always said: ‘Sniff the chocolates first, Forrest’.”
Quote of the day from a fund manager:
“This is worse than a divorce… I’ve lost half of my net worth and I still have my wife..”
The bailout, a different perspective.
Back in 1990, the Federal Government seized the Mustang Ranch brothel in Nevada for tax evasion and, as required by law, tried to run it. They failed and it closed. Now we are trusting the economy of our country to a pack of nit-wits in Congress who couldn’t make money running a whore house and selling booze? Plus GM, Ford, and Chrysler wants Congress to reward them for making cars that no one wants to buy! Run, Forrest, run!
December 4th, 2008 10:01 pm
Ok, so we give troubled borrowers principal reductions down to a payment that they can afford. They get to stay in their lovely house on a nice block and make their payments now. Hey wait a minute? I make the same money that guy makes but I didn’t buy into the stupid market bubble. Now I’m still living in a 2bd rental in a less then perfect neighborhood and he’s living on easy street with 4 bd. My credit score isn’t so bad and I’ve been debt free and didn’t make any bad decisions. Can I take over his principal reduced house and move him into my crappy 2 bd. rental?
December 4th, 2008 10:19 pm
Dick:
If it does happen on any real scale (and I have my doubts about that) it’s going to be limited to what the government will back (i.e., 115% of MSA median for “jumbo conforming”).
There is no way you’re going to convince fly-over representatives that their constituencies should be responsible for bailing out overpriced coastal real estate. No way it will happen.
As I posted before:
I think underwater homeowners with jumbos will, by and large, get little or no candy from Uncle Sam. The political fallout from flyover states over bailing out overpriced coastal McMansions would be enormous. I think they will concentrate their efforts on helping the greatest *quantity* of people (voters). This says to me that they will bail out ten $150K home owners over one $1.5M underwater homeowner.
December 4th, 2008 11:35 pm
awesome comments section guys and gals. I was out all day at meetings and just got in. I will try to get to some of these a little later. Have a good night everyone.
December 4th, 2008 11:36 pm
by the way kashmula – its because of SB1137, which makes banks do tons more due diligence before sending notices. The defaults are there, and growing back to GREATER than what they were before.
December 4th, 2008 11:49 pm
I didn’t read all the replies, so please forgive me if this comment has been posted. As a buyer waiting on the sidelines in So Cal, it doesn’t matter to me if rates are at 3%, the market is still too high at the sales end. I need to see at least an additional 20% drop before I’ll test the waters. I think a lot of people in the deflating bubble called So Cal feel the same.
December 4th, 2008 11:51 pm
To: I see the ocean
Dude, you are right on the $. I cannot see one reason why anyone would pay there mortgage, with promised help on the way. Plus the bank is not going to foreclose on you they can’t. They don’t have the capability to take anymore on. Lots more reasons. Why pay. The renting scenario if you can get it is a perfect plan.
December 5th, 2008 12:23 am
I was just goofing around with 30YR fixed rates on my exisiting mortgae. 5.5%, 5.25%, 5%, and 4.5% don’t really make much of an impact on my monthly payments.
Only unless the 30YR fixed goes to 3.5% does it make sense.
Thoughts? Comments?
December 5th, 2008 1:21 am
KurtA:
You nailed it. My rent went up 3 times in 4 years, keeping pace with the increase in home values. My landlord laughed when I asked if the housing decline meant that my rent would come down.
So I definitely am feeling shorted a second time now as some bastards who gambled and lost are now paying no mortgage yet are staying in their homes (per edict from governor Arnold Benedict Schwarzenegger).
I had a neighbor, who is fully employed, say brazenly he’ll “just walk away” if he can’t get a loan modification. Please … please, just walk away! And when the bank drops it to $350K, I’ll take it!
December 5th, 2008 2:04 am
Flooding the market with easy mortgage money pushed the price of housing too an unsustainable level. When home buyers realized that the mortgage instruments used to leverage them into overpriced homes were really a bad investment, they did what any sane person would do – they walked away. Lower interest rates may ease the pain, but spendng 30 years putting money into a bad investment is still dumb. Consumers would be smarter if they boycotted home buying until prices come down to a level that they can really afford. Lower interest rates are nice but not the real solution.
December 5th, 2008 3:44 am
Trojan4life,
You are only looking for reduction of 20% in S. CA at this time? According to the Case Schiller graph for that area that would still put you about half way up the bubble still. Most of the last bubbles have overcorrected and this one should also, down to below 110 basis points. Be careful when you catch a falling knife.
December 5th, 2008 3:56 am
Mr Mortgage is totally correct with his assertion that few will benefit from the low rates. Looking over my list of numerous previous closings, none of the purchases done over the past 3 years that were 80/10 or 80/20′s can refi due to insufficient equity, adders and/or high MI on a new first. This is on the east coast where values didn’t really tank that much. On previous purchases done with a larger down payment no savings with lower rates due to high MI or LTV. Forget about trying to refinance any of the low doc, no doc, stated, POA or self employed customers.
One CA customer (Riverside County) with great credit & income etc. saw her value drop from $400k in early 2007 to $236K today which gives her an LTV of 107%.
The A+ customers all had ample opportunities to refi into the low to mid 5′s previously and they don’t want to borrow money; they are trying to save money to make up for vaporized equity, 401k’s and stock accounts.
December 5th, 2008 4:48 am
Mr. M, another awesome post – I learn something new everyday. I think you are missing a genre however in your post: educated renters waiting on the sidelines since 2004 waiting for the rock bottom to buy.
I know I am not the only one in this position: finished college/grad school in the middle of the bubble – and recognized that it was a bubble. Paid off school debt the last 3 years while seeing income increase 4-fold. Looking at the market now, why would I pull the trigger? We still at the least, another year of price reductions…more realistically 2 or 3 years.
Anyways, thanks for all of the info!
December 5th, 2008 10:50 am
I’d love to see that happen, and while I think this mkt still needs to drop
20%+, I would have to feel comfortable that the mkt would’t drop more
than an additional 10% after I buy. I’ll be buying for the long haul.
December 5th, 2008 11:23 am
You make solid points and get it. I don’t understand how the media and those at the regulatory and legislative levels don’t get it either.. Or maybe they do and this is window dressing for the masses.
One other group to consider out of the game: The FORMER homeowner who is now in the RENTER category. In many cases.. this animal is very different than the typical renter. Many have been homeowners for YEARS. A purchase now would be re-entrance, not a NEW purchase. However, they too will mostly not be in the purchase game because 1) Credit is shot, 2) Were foreclosed, 3) Income/unemployment, 4) lost all equity and barely got out, 5) short sold add to the list.
This is basically a stew of people who can’t play now or in the near future in the purchase game, but unlike the typical renter, they would be or would have been ‘players’ in this game and were in the past. Big group of MILLIONS here right now.
December 5th, 2008 11:26 am
One more point. When rates get as low as 4% or 5%, it’s an emotional or mental impact, not really a financial one. Rarely will a 1% difference in rate make or break a purchase when rates were already in the 5′s and 6′s. 2-3% differences will do that.
December 5th, 2008 1:23 pm
My sister an dher husband bought a modest $450k house in the NYC area in, I think, 2005-2006. Today, it might be worth $375k and they are underwater.
I mentioned “why don’t you just walk away?” They said it was just too much of a hasstle. They have 2 small kids and they both work. They would have to walk, find an apartment. Most of all, when the market bottoms and they want to buy their credit would be shot by the walk away that they wouldn’t be able to get a mortgae.
Anyone have thoughts on this? Becuase I think the average American is in a similar position where it just might pay to sit tight, not walk away, and let the market come back in 10 years.
December 5th, 2008 2:17 pm
Can someone please print this analysis and sent it to Congress, because apparently they just don’t get it.
Makes you wonder… Don’t they own homes? Aren’t they in this same boat with all the rest of us?
December 5th, 2008 2:53 pm
Sadly, I agree. Bankruptsy laws are way too harsh these days.
What I want to know is; isn’t is coincidental that our gov’t made bankruptcy much more painful right before this whole mess blew up?
Honestly, Americans are nothing more than indentured servants to the Federal Gov’t. Call it modern day slavery using debt as the driving force. It’s scary to think what the gov’t will pull next, after the dollar becomes practically worthless after this fiasco.
December 5th, 2008 3:08 pm
Housing prices will have to drop according to market demand, which is driven by qualified borrowers. Unqualified homeowners and the lenders that funded their mortgages will eventually be replaced to create a more stable market. Mortgage rates will only play a small part in the process.
December 5th, 2008 3:40 pm
Seetheocean: Doesn’t that strike you as wrong? You bought a house that is more than 3X your annual income. You can pay for it, though I don’t see how, and you can live in it. Seems immoral.
Principle reductions: Wouldn’t this just put a whole bunch more people in negative equity. never mind the renter. What about the person who lives next door who put 20% down and is 4-10 years, or more, in. All of a sudden their home is negative because they played safe and by the rules. Bailing out the screw ups. Once again, here we are privatizing profit and socializing risk.
As far as the 1.5M negative beach house. Screw em. I don’t hate the rich, I want to be rich. But hey, if you make that kind of $ you should know better.
December 5th, 2008 4:45 pm
Slow-Rion ,
You do know that 3x is a guideline right? We are at 30% DTI and that includes expenses – not bad. Yes California is expensive as there is a premium to live two miles from the ocean, work from home, ride a beach cruiser (pedal bike, you know the one with balloon white wall tires) to and from work, drive less than 6k miles per year and the avg temp is approx 70 degrees all year long. We are in a great spot and are NOT in trouble or hurting monetarily. You say ‘immoral’ – please define that within the scope of doing what is perfectly legal under the law. Don’t get me wrong, I don’t litter, I help my fellow man, I pay taxes, and we save a lot of money – remember we have always been ‘mattress stuffers’ but also invest/save conservatively. The housing market and economy will take a while to turn. My ARM is up in 2013. Rather than refinance in 2013, why not buy at a deep discount and save in the meantime? I can care less what happens to our credit if I walk away or better yet perform a Deed in Lieu. We don’t really need credit at this juncture – it’s going away anyway
. After 5 years and a few 100K in the bank, I should be able to buy another home.
December 5th, 2008 5:23 pm
SeeTheOcean,
Right there with you man. Your situation sounds extremely similar to mine. I don’t really see how legal + intelligent = immoral. Making a decision based on what will definately happen (rate reset on an ARM) vs. what may happen (bailout for underwater owners) seems to be the prudent thing to do. Voluntarily keeping yourself in your own debtors prison (your underwater house)is just about the dumbest thing someone can do these days. It’s ironic to call it a debtors prison, as this is what many people who abhor walkers would like to see the US open. I bet it pisses them off that walking away is actually the way to AVOID debtors prison. Kind of funny…
December 5th, 2008 7:29 pm
Partyboy,
Looking back, I made a wrong decision to purchase in 06. I had all the tools, read all the blogs, evidence and knowledge to stay clear. But I was newly married and had pressure from my significant other to purchase and start a family – all good things in life! Now I have have a chance to correct or at least improve on the situation. I feel confident walking away and or a deed in lieu is the right decision. I’m not the super rich so these types of monetary decisions I don’t make on a regular basis – I’m playing at the $5 Black Jack tables as opposed to the $100 tables. I am once again on the path facing a fork in the road. LOL.
December 5th, 2008 9:02 pm
i love all these so called “educated” renters who are so smart that they just sit on cash and rent watching the market until the perfect time !!….What a joke , if any one believes that BS, where were you in 1997-2000, should been buying a house then….BOTTOM LINE and dont let anyone tell you differently , LIFE IS ALL ABOUT TIMING, most people who bought ahome in the last 3 years had to buy a home because there was a reason in their life that they had to buy a home at the INFLATED prices that were high because of FRAUD on so many levels….they were stupid or foolish or looking to make a big score and if there is going to pricipal reductions , they need to make them for EVERYONE
December 5th, 2008 9:03 pm
they were NOT stupid or foolish
December 5th, 2008 10:14 pm
Javagold:
Chill out. You sound so angry. We can all look back with perfect 20/20 vision and it’s so easy to judge others today. Please don’t.
December 5th, 2008 10:44 pm
Honestly, I wasn’t thinking about walking away or a deed in lieu until recently. We would still be fine having bought a home 2.5 years ago. But if Joe Flash is going to have his cake with MY tax money, I might as well have my cake and eat it too.
December 5th, 2008 10:49 pm
Seetheocean: You made a deal. You signed a contract. You have the ability to honor it. Now, 2+ years later you think it was a bad deal, yet you like where you live and the lifestyle it allows you. immoral is not necessarily illegal and vice versa and you know it. Lots of bankers did lots of immoral things for the obvious example, but they weren’t illegal. I have no respect for someone who shirks their obligations because they feel like it. It is easier. This is why our country is going down the tubes. In your case the bank is not the bad guy, you are. Realistically by 2013 things will have turned around but you are so concerned with instant gratification that you will walk away. I guess it is cool to ditch your house now. You will probably squat there for 6 months before you move too. What a loser. I would hate to be you or know you.
I bought our second house (not second home) in late 06. Put 20% down. And yes, I am a saver too. My home cost 2.5x my annual income. My financial situation is pretty similar to yours but I guess I am a grownup about my responsibilities. Even if my home declines 10-20% I will live up to my obligation. I am lucky, new homes in my neighborhood are going for a hair more than I paid.
December 5th, 2008 11:44 pm
Slow-Rion,
You stated: ‘You made a deal. You signed a contract. You have the ability to honor it. Now, 2+ years later you think it was a bad deal, yet you like where you live and the lifestyle it allows you. immoral is not necessarily illegal and vice versa and you know it’
You cannot be more correct. But my contract also states I can ‘walk away’ and the result is foreclosure. I can also work with the lender and perform a deed in lieu all perfectly within the system. If this were a real estate only issue then maybe just maybe by 2013 the market will turn. But throw in the Financial crisis, the Auto and soon Pet bubble (yes I said Pet Bubble) it is going to take much longer than 5 years to recover. Homeowners like you are not immune (and I’m not saying that you said you are immune) and before long those with 10 year fixed or even traditional 30 yr notes are going to walk. Do you really thing the Fed is in in to save the homeowner? What they are doing is criminal and same with those financial institutions, mortgage and Realtors that were ‘just playing within the rules’. If someone hits you in the face, are you going to hit them back or just let them keep punching you? That said, I admire you for your stance, but at the end of the day, this is a purely business decision. I am grown up and my responsibility is to my family. The theater is on fire, I’m going to save my family first.
December 5th, 2008 11:44 pm
Loan Mod Chick, think u need to reread my post , i am not pro 20/20 hindsight, i am saying , i dont believe those people, you need to read before you post or you sound stupid for calling happy people angry
I see the Ocean, dont listen to anyone such as Slow-rion, slow is a good name for him, as he is just a bit slow, to understanding what has happened over the 3 years in this country….all bets are off and the rules have changed (actually they seem to chage every week)…you do what you think is best for you and your family and sleep good at night doing so, i think you most likely bought a home with good intenetions, as i did, and thru no fault of your own, have been screwed by the banks, brokers, investors and our government…..if slow rion is a little slow in understanding that, hopefully by reading the posts here we can help him get up to speed and REALIZE WHEN THINGS FINALLY CRASH (AND THEY WILL) IT WILL MOST LIKELY BE EVERY MAN FOR HIMSELF…..its better to be ahead of taht curve as much as possible…good luck
December 6th, 2008 12:05 am
Javagold said: “I see the Ocean, dont listen to anyone such as Slow-rion, slow is a good name for him, as he is just a bit slow”
Javagold, I am just saying this(I thought)is a format for opinions ,not harsh judgements. You don’t know me, how can you call me stupid?
We all see things with opposite views, but isn’t it so interesting to read others opinions without FORCING our own thoughts on others? My God, arent things difficult enough right now, in this perfect storm of events?
December 6th, 2008 12:17 am
load mod chick,
Slow rion, called Ocean a loser, that is is you should be calling out for harsh posting , not me, you dont even understand what i even posted, and say we have opposite views, when i believe WE HAVE THE SAME, thats why i said you sound stupid…..but either way stop being so thin skinned, its a MB on the internet , who cares what anyone says …
December 6th, 2008 12:48 am
Javagold:
There you go again, with the name calling!
Now, you say I am not only stupid, but thin skinned.
OMG,you must be either very young, or an old control freak.
Try posting your comments without the name calling.
I haven’t ever seen MM comment that people are stupid, thin skinned, or slow, or………and I am pretty sure some of our comments must make him crazy!
What demeaning name is next? Bring it.
You can certainly make your point, without name calling can’t you?
December 6th, 2008 3:23 am
kashmula is right, the FHA-Hope has kept a ton of people out of foreclosure. Mr.M. conveniently leaves out an important fact, the lower interest rate will bring in a bunch of new buyers which in turn will drive up the prices. YES, prices will start to go up within a few months after rates drop below 5%. Keep your day job Mr.M because those of us still in the business are doing much better these days.
December 6th, 2008 3:59 am
Kind of like more homes are selling so prices are higher?
FHA-Hope only prolongs the inevitable.
December 6th, 2008 10:50 am
AC, I think what you meant to say was that FHA / Hope have delayed a ton of people from entering foreclosure. That and all the new programs from various states not allowing foreclosures to take place. It is all a shell game with the tax payer holding the bag. January brings changes to the conforming loan amounts back to where they were and fewer and fewer will qualify for FHA loans as we move foward. This is all a false blip that will turn right back around. You can delay the inevitable but you can’t make it go away, and that is all that is happening here.
Mr. M. as usual a great post right on target. This will do very little if anything to turn things around. The problem is tied more to the people who can afford to buy and the people we need to be buyers right now to turn things around, simply don’t want to buy right now. As you point out the speculators, renters and first timers are not nearly enough to get things turned around and in fact they may actualy do the opposite if things get a lot worse because they are the buyers that would be least able too handle a continued downturn once in their homes. They could actually end up helping to prolong the problem down the road.
December 6th, 2008 10:50 am
AC, I think what you meant to say was that FHA / Hope have delayed a ton of people from entering foreclosure. That and all the new programs from various states not allowing foreclosures to take place. It is all a shell game with the tax payer holding the bag. January brings changes to the conforming loan amounts back to where they were and fewer and fewer will qualify for FHA loans as we move foward. This is all a false blip that will turn right back around. You can delay the inevitable but you can’t make it go away, and that is all that is happening here.
Mr. M. as usual a great post right on target. This will do very little if anything to turn things around. The problem is tied more to the people who can afford to buy and the people we need to be buyers right now to turn things around, simply don’t want to buy right now. As you point out the speculators, renters and first timers are not nearly enough to get things turned around and in fact they may actualy do the opposite if things get a lot worse because they are the buyers that would be least able too handle a continued downturn once in their homes. They could actually end up helping to prolong the problem down the road.
December 11th, 2008 3:04 am
Prices will not go up in the next few months or years.
Purchasers are and SHOULD be looking for the best possible price to purchase a home, which are the REO”S.
The majority of the sales in the market today are from REO’S since they can and do under-sell the other homeowners in the same area.
Everyone loves a bargain.
Every closed sale becomes a comparable creating a value for the area.
As a buyer waiting on the side line, why would you purchase a similiar type home in the same vicinity for 20-30-40% more than the REO? You wouldn’t and the deflationary cycle continues.
December 11th, 2008 3:06 am
Actually the Hope for Homeowners program only had 111 applications, so far.
December 11th, 2008 3:53 am
Susan, that was a really nice post you did on Anaheim home prices and incomes. Clearly it showed that the buyers were entering into contracts they could not afford. Which brings about the question: Do you bail out speculators?
Here are two maps from the fed. This one looks like home ownership rates in CA will drop below 1990 levels by the time it is over.
http://research.stlouisfed.org/fred2/series/CAHOWN?rid=144
This will leave CA with the lowest home ownership in the nation.
http://geofred.stlouisfed.org/?l=state,state_lbl&sa=Not Applicable, Annual, Percent&cm=equal&ex=-139.701727,24.811483,-71.726477,49.94623&nob=5&cs=ylorbr&geom=state&st=Home Ownership Rate&dtn=Percent&dt=2007&fq=Annual&
In order for ownership rates to align with the rest of the nation, prices will have to fall to the level of affordability. That means incomes will have to match housing prices without hocus pocus finance.