The Mortgage Guy Blog

As I surf the blogosphere, I occasionally come across misconceptions that just need to be addressed. I had to respond to a post made on an article on MarketWatch’s site pertaining to the upturn in refinance activity.

Here is the comment I responded to…

by BobP863 2 hours ago

The obvious question is why not wait till the FED is through lowering interest rates? Unless there are no closing costs, i don’t understand the urgency. Unless, of course, those irresponsible mortgage lenders are desperate and have to oversell their products in order to survive.

Apparently in need of some guidance, I responded…

While you are waiting for the fed to finish lowering rates, house values are declining. Lack of adequate home value can make refinancing more expensive (pmi) or in some cases, not possible at all.

Further, lending guidelines are being tightened everyday. You can qualify yesterday and may not be qualified today.

The fed doesn’t control mortgage rates. Further deterioration in the Mortgage Backed Securities market could widen the spread between treasuries and mortgage rates. It’s possible to see treasuries move down in yield and mortgages move up in yield, especially in the current environment.

These are reasons for urgency. Maybe now you can understand. But I doubt you will ever understand that it’s not just a subprime issue anymore and that the most blame for the debacle is to be placed on Wall Street and the ratings agencies.

They (Wall Street) enabled every player in the chain. Without Wall Street lying about credit quality and spreading their fraudent securities around the world, we wouldn’t be in this mess. The lenders would not have lent and the buyers would not have bought unaffordable homes.

Tags: Current Events, Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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Entering what could be the worst recession in generations, homeowners can expect to see the values of their homes decline dramatically over the next year or two. Home prices will decline due to a soft market where sellers are lowering their prices daily. Foreclosures will also impact home values negatively and 2008 is expected to be a record year for foreclosures. Foreclosures add to inventory and usually sell at less than market value prices.

I know, cycles come and cycles go but this time it’s different. We aren’t talking about 5% to 10% declines, more like 30% or higher on a national level.

This is from CBS MarketWatch…

Merrill Lynch says U.S. nationwide home prices may fall 30%

Merrill Lynch forecasts nationwide U.S. home prices could decline 25% to 30% over the next three years, as new supply and weak demand weigh on the market. “This sounds dire… but would only reverse part of the unprecedented 130% price surge from 2000 to 2006,” wrote economist David Rosenberg in a research note released Wednesday. Rosenberg added the S&P 500 may decline an additional 20% to 25% to breach the 1,100-point level if the market follows historical precedents at times when the U.S. economy is in recession.

More evidence of this trend is the number of properties in foreclosure. Here are some numbers from California.

DataQuick Information Systems reported yesterday that foreclosures rose 353 percent to 7,349, while default notices – the start of the foreclosure process – increased 128 percent to 20,138. The numbers were the highest since DataQuick began keeping track of county foreclosures in 1988 and defaults in 1992.

Here is what is happening in Wisconsin.

“When I started in 1998, there were fewer than 800 for the entire year, maybe 20 or 30 a week,” said Eileen Carlson, a civilian employee of the Sheriff’s Office who helps supervise the weekly sale of foreclosed property.

“We’ve already issued 1,000 docket numbers for 2008. We’re already booking sales into March.”

Close by in Massachusetts, it’s just as discouraging.

Mortgage companies foreclosed on 7,563 Massachusetts homes last year, almost nine times the number in 2005, when the housing boom peaked, and almost three times the number in 2006.

It’s pretty much the same for the Northeast in general.

The pending sale index’s drop in states including New York, New Jersey, Massachusetts and Connecticut was triple other U.S. regions and demonstrates home sellers are having to lower expectations as the real estate slump worsens…

…“The northeast is getting hit hard,” said Paul Rinkulis, an agent at Keliher Real Estate in Boston. “It’s at least as bad as it was in the late 1980s, early 1990s, and that was bad.”

Here in Connecticut, it’s pretty much more of the same.

A slower housing market and the proliferation of risky mortgage products continue to drive up foreclosure rates across Connecticut. Preliminary figures for February gathered by RealtyTrac Inc., a national online marketplace for foreclosure properties, show a total of 1,451 foreclosure filings in Connecticut, a 61 percent increase over the corresponding period last year.

Your home’s value is directly affected by the price of homes sold in your immediate area. When a home is appraised, several comparable sales are used in determining the value. If sellers in the area are lowering prices, your home’s price would more than likely be affected as well.

It’s plain to see values will fall over the foreseeable future. Now is the time to take care of refinancing and cashing out if you still have enough home value and can meet ever tightening lending requirements. The market situation can make it more costly to borrow and in some instances, the occurrence of which is happening more and more, impossible to borrow.

Tags: Current Events, Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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For those homeowners who still can, now is the time to take defensive measures. Home values are dropping at historic rates, lenders are tightening up underwriting requirements for the minority of mortgage products still left in the market place. Unemployment is rising. The stock market is falling.

Now is the time, before witnessing further deterioration, to make household budgets as affordable as possible to weather the coming perfect storm of financial woe.

Adjustable rate mortgages should be refinanced to the current low fixed rates. First and second mortgages could be consolidated. Consumer credit, credit cards and installment loans, should be looked at for consolidations. Overall, the household budget should be scrutinized and made as manageable as possible.

Why this needs to be done now

The United States economy is entering what is shaping up to be the worst recession of my lifetime. To offer perspective, I entered the work force under the Carter Administration. This recession is firming up to be worse than any economic downturn including and since the stagflation era under Carter.

Here are some tell tale signs of the severity of the coming recession.

• The largest residential lender in the country, Countrywide is number 214 on the lender implode list. They were bailed out via a buy out, courtesy of Bank of America for a total of six billion dollars.
• Citigroup, the nation’s largest bank is reeling. Citi cut it’s dividend by 41% after losing $9.83 billion dollars and were forced to write down 18 billion dollars in bad debt. I’ve seen estimates Citi’s exposure to bad debt to be as high as 100 billion dollars. The quarter was so bad for them that they had to sell a 6.81 billion dollar stake of the company to an investment consortium consisting of primarily foreign investors.
• Lenders are refusing to lend. Even to each other.
• Foreclosures are running at a historical pace. The pace is expected to pick up in 2008. No doubt this is putting downward pressure on all home values.
• The supply of real estate is historically high and the demand is historically low. There is very little money available to fuel real estate purchases. An entire segment of the market, those with little or no down payments and dinged credit is no more.
• It is estimated that real estate prices need to fall 30% for the market to reach an equilibrium necessary for the market to recover. At best, recovery is estimated to be a year and a half to two years away.
• The consumer, which accounts for 70% of gross domestic product (GDP) is completely tapped out. They can’t spend from savings because they don’t have any to speak of and their credit cards are maxing out. There is no cash out refinance available to release the credit card pressure on budgets.
• As consumers stop spending, layoffs will increase.
• The credit markets are broken. No one is buying mortgage securities and consequently, lenders aren’t lending. There is evidence that the mortgage credit squeeze is spreading to credit cards and installment loans. Without credit, households and business won’t/can’t spend money to fuel the economy.
• The Federal Reserve and the government is responding to the crisis with liquidity and lowering interest rates. However, with lenders refusing to lend, these actions will prove to be ineffective. Without lenders lending, there is no way for the cheap money to get into the hands of those who need and want it.
• The Fed itself is taking aggressive measures to avoid a recession that is unavoidable. When cheerleaders get scared, you should be too.
• Don’t expect the global economy to save us as they are experiencing the same debacle as we are.

The reasons for taking action right now are numerous. The case for an economic tsunami is real and frightening. But now is not the time to be the proverbial “deer in the headlights”. Negative developments are coming at us at break neck speed. Like a linebacker, homeowners need to read the play and react to it immediately.

Fairfield County, in Connecticut, is already on FreddieMac’s official “Declining Markets List“. That means prices in Fairfield county are declining measurably. Which also means homeowners in this county have already seen their ability to refinance impacted in a very negative way.

We have seen firsthand, clients and friends who have been negatively impacted by the rapidly evolving negative state of the lending industry. We had one client who is currently months down on their mortgage payments, see several approvals go into the trash can due to lenders going out of business or taking programs off the table.

I cannot stress strongly enough that time is of the essence. Prices are falling and loans are harder to qualify for by the hour.

Thirty year fixed rates are hovering around a very sensible 5.25%. Don’t wait for rates to go lower. Even though they may go lower, falling home values and tighter qualification requirements can sabotage your ability to refinance, either making it more costly or perhaps impossible.

If you have visited the links in this article, you can plainly see we are in for the roughest economic environment since the Great Depression of the 1930’s. In light of this, it’s time for homeowners to become as defensive as possible. Meaning homeowners should shrink and fix their housing costs and perhaps, overall budgets.

The perfect storm is here. Are you prepared to weather it?

Tags: Current Events, Finance & Economy, Mortgages, Real Estate, Tips & Tricks by The Mortgage Guy
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For months now the Mortgage Guy has been concerned about an impending recession and possibly something much worse, a depression on the scale of the 1930’s. It’s been my view that the mortgage meltdown could spread to other types of debt, namely installment loans and credit credit card debt.

Of course if this were to happen, it would be a knock out blow to the consumer and any hopes that consumer spending would help us to avoid a recession or get us out of one.

Well the cancer is spreading to other types of debt as pointed out in this Market Watch article.

“The story of this quarter is consumer loans,” said Zach Gast, an analyst at The Center for Financial Research and Analysis, a unit of RiskMetrics Group.

Until the middle of last year, consumer loan losses were held in check as house prices climbed, allowing borrowers refinance mortgages or take out home-equity loans and use the cash to pay off credit card bills and auto loans.

But as the subprime-fueled credit crisis erupted in August, such activity ground to a halt.

The consumer’s debt pressure relief valve, the cash out refinance, no longer exists. Debt balances are growing and the consumer is struggling to service that debt. There is nothing in the pockets of the consumer to fuel economic growth. Consumer spending represents 70% of gross domestic product and now it’s gone.

With consumer spending now accounting for a record 71% of our gross domestic product, it will take a whopping increase in business spending and exports to keep the U.S. economy out of recession.

With broken debt markets, it’s impossible to avoid recession and or depression. The same holds true for the U.S. banking system, which is alarmingly close to insolvency. The solution, provided by the fed, is to lower interest rates. These lower rates have no way to get into the hands of those who need or want them because the delivery system, the debt markets, isn’t functioning. Zero interest rates does no one any good if the lenders aren’t lending.

No problem can be solved until it is recognized to be a problem. Nor can a problem be solved unless it is completely understood. Joe Sixpack, industry professionals and most certainly our political leaders and regulators either don’t recognize the problem or fully understand it. This just adds to the danger at hand.

The problem is there is no confidence in the debt markets and consequently they aren’t functioning. Unless the debt markets are restored and functioning properly, we are all economically doomed.

Tags: Current Events, Finance & Economy, Mortgages by The Mortgage Guy
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Despite the overwhelming evidence showing that the real estate bubble has popped and that price declines still have a ways to go, you will inevitably come across real estate cheerleaders. Now I don’t mind it when lay people make a case for buying real estate now. When professionals dishonestly or ignorantly try to convince us that now is a good time to buy real estate and the worst is behind us, I take exception.

Take for example Connie Degroot, a Beverly Hills realtor. Thankfully Peter Schiff sets the shyster straight. The problem is there are more Connies out there than Peter Schiff’s.

Hat tip to Chris over at the Housing Panic Blog.

Real Estate Cheerleader

http://www.youtube.com/watch?v=h4dOh8–rN8

Notice at the end of the video, our realty cheerleading friend is so shook up she forgot she was a realtor. She states “I’m not selling anything”. Oh yeah, what did we just watch? Style over substance. What do you expect from a Beverly Hills realtor?

Here is another cheerleader to be wary of.

http://www.youtube.com/watch?v=Eg-uQhtd_zs

As usual, out of touch with reality. The antidote to accepting bad advice from cheerleaders is knowledge. Steer clear of mainstream news sources. Dig a little. Look for opposing view points. Then make your decisions.

Tags: Current Events, Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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Due to the holidays, year end house cleaning and illness, I haven’t posted in a couple of weeks. Well the new year is here and having taken care of the above issues, I am back to posting.

The question mark in the post title is no accident. This will be, without a doubt, the most challenging year we have ever faced in the mortgage industry. Will it be happy? Only time will tell.

The mortgage industry continues to shrink with the lender implode list reaching 210. Subprime product offerings remain slim. Essentially, there is no subprime as we once knew it. I have clients and friends that I cannot help due to products being discontinued. It literally keeps me up at night, knowing that a year ago, their problems would be solved but now they will only get worse and there is nothing I can do about it.

Alt A isn’t much better. The jumbo price spreads remain unusually large and product offerings in this class of loans are shrinking like the subprime offerings.

That leaves conventional loans. Fannie and Freddie pricing is pretty attractive right now. However, underwriting in this class of loans has tightened significantly as well. We are not an FHA shop so I won’t address that market other than to say, it’s not a panacea for the ills the industry faces, not that anyone said it was.

Let’s not forget that mortgage lending is collateral based. The collateral being real estate, the value of which is plummeting at record paces. Without adequate collateral, mortgages cannot be made. I don’t know how far real estate prices will fall but I can tell you this. Until the mortgage industry is repaired, values will decline in a historic manner.

In order for this year to be good for the mortgage industry, the process of securitizing mortgages must be repaired. The mortgage industry cannot survive without it. Real estate prices will need firm up as well. However as long as the mortgage industry is broken, that will not happen.

Another ingredient for a good year is for our government leaders to get a clue about what is going on and how to deal with it. Every government action to date clearly miss the marks needed to turn the situation around. Their so called solutions reveal their total lack of understanding of the situation at hand. It’s all show. “I care so re-elect me.” Meanwhile their actions will shrink an already devastated industry making consumer choices fewer and more expensive. It’s good thing they care.

Let me just say that when I started this blog it wasn’t my intention to become a gloom and doomer. That isn’t my nature. I am and always have been a “can do”, optimistic guy. But I am foremost a realist. I accept reality at face value in order to deal with it efficiently. The reason for the negativity in this blog is because in reality, we are faced with a very negative outlook.

There’s more to come. So let’s work at making 2008 a happy year. Good luck, we are all going to need it.

Tags: Current Events, Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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