Monday, December 11, 2006

L.A. Times: A loan that'll get ugly fast - "I am rather screwed"

While the analysts on Bloomberg crow about how bullish they are on the housing market, and how mortgage applications are up, this December 11 story by David Streitfeld will certainly help you see what is happening in the trenches.

Lots of homeowners in this state get to "choose" how much they pay each month on their mortgage loans. Pay option loans recommend to you an amount to pay to cover principle and interest, and another amount to cover interest only. Then there is another option to pay a very minimal amount. But you'll end up oweing bigtime as long as your option is to pay less than the principle and interest. And if you try to get out of such a loan, you get hit with a prepayment penalty that sounds criminal.

These loans are bets that a lot of things will happen - that the housing market will keep rising, or that the homeowner will inherit a chunk of money or get a big raise or. How far have these loans penetrated the California market? In 2003, only 8 out of every 1000 mortgage applicants did a pay option type of loan. In 2005, it was 1 out of every 5. For the first 8 months of 2006, it was nearly 1 in 3. Washington Mutual states that last December, 47% of its borrows took out pay option loans. So how many of those homeowners are making full payments, avoiding further debt?

Home buying now resembles auto leasing, where the monthly payment, rather than the price of the car, is what matters. But unfortunately, it looks like a lot of free money, and it isn't. Instead, pay option loans are a great way to fall into a sinkhole of debt.

Some lenders think all is well, claiming that their applicants have good credit scores. But how quickly can one's circumstances change of the worse, with a business failure or a layoff?

6 Comments:

Blogger wannabuy said...

First, I'm shocked I'm applauding the LA times. This article was on page 1! Talk about scaring a lot of wanna be buyers to the sidelines (which is good...).

To think, these mortgages haven't even begun to reset... With the ongoing collapse of the sub-prime market, we'll hear a lot more about this loans.

I'm still thinking 2Q 2007 is when the market turns. I am starting to question my end 3Q 2008 as the start of possible buying opportunities... I'm seeing far too many speculative homes go into leases. I've also done a lot more reading into the last bust and see how debtors can avoid fate for up to 2 years... sigh. I want to buy... but am patient.

Neil

1:44 PM, December 11, 2006  
Blogger bearmaster said...

Looks to me like Clif Droke's timeline is still very much on track.

There's been talk lately in the financial press about a lot of cash and credit sloshing around in the global markets - the "surge in liquidity" being a "new paradigm", and an L.A. Times article about In the Federal Reserve We Trust, to boot. The article does not really say it, but it's pretty clear that a major reason for the surge in liquidity is to offset a housing bubble bust, which is really a global problem, not just a U.S. problem. The big guns are throwing all they have at this thing.

There's also been a lot of talk about a bottom in the housing market, and inventory has dropped quite a bit at Zip Realty for Redondo Beach. But until I see most of the inventory records I've been gathering matched by sales records, I won't be convinced that a crisis has been averted. There is a heck of a lot of unresolved inventory out there.

10:03 PM, December 11, 2006  
Blogger stealthcat said...

For what it's worth, I kept track of Redondo (N+S) inventory last year (using numbers from realtor.com), and there was a noticable dip in inventory from around mid-December to late January.

The dip was from around 265 in early December 2005 to 217 on January 4. It was back up to 265 by January 30. Using current numbers shows that there's 423 units for sale, so we've definitely been in the area of 2x last year's inventory.

I'm very curious to see what happens after the (seasonal?) dip shakes out. The spring season could bring lots more units (especially those that are off the charts, now, as people decide to "wait until the big spring selling season").

8:41 AM, December 13, 2006  
Blogger bearmaster said...

Zip Realty is currently showing 370 units for sale (which I figure under-represents the real inventory), and my current inventory database of at least 520, minus 25 unknown sales, leaves 495 properties unaccounted for. Out of a complete table of now over 550 entries, derived from Zip Realty or open house listings, I've only accounted for the sales of 30 properties so far. (If there has been substantially more in the way of sales, then Domania is not listing them.)

So my guess is the true inventory probably lies somewhere between 423 and 495. Maybe 460ish? This is mid-December, and it sounds like anything in the 400's is a lot.

Yeah, a few have For Rent signs stuck out in front of them, but after setting too high of an asking price while trying to sell the place, I'm not sure these owners are going to be able to set a realistic rental price.

Last night I just noticed a townhouse a block from me, 3 bed 2/5 bath, asking $3K a month in rent. For north Redondo? Sheesh! Comparable 3/2.5 places rent for $2450 here. Are they charging rent by the square foot or something? (This property is 2525 sq ft.)

The address is not in my inventory database, and I don't know if the owners tried selling it earlier this year, unfortunately.

9:03 AM, December 13, 2006  
Blogger bearmaster said...

Oops, I typed that wrong. I meant to say Zip Realty (as of December 12) was showing 340 properties, not 370. As of 12/13, it's now down to 338.

Their inventory has been falling at a steady clip, but I don't have evidence yet to interpret this as a huge surge in sales.

12:59 PM, December 13, 2006  
Blogger stealthcat said...

I have noticed that there is often a disparity between ziprealty.com and realtor.com for total listings. Though I use ziprealty much more often, now, I used the realtor.com number (423) since it was what I used last year.

Some of the rentals here are also kinda ridiculous. I think the one a block away is asking $3500. I'm not sure if it's 3 or 4 bedrooms (need to take a moment to go read the tiny markings more closely), but it seems pretty unreasonable. A friend of mine rents a 2br ocean view in SoRedondo for about 2/3 of that.

7:57 PM, December 13, 2006  

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