Posted on 09/02/2007 3:27:24 PM PDT by 2ndDivisionVet
The subprime mortgage crisis is spreading to a somewhat unexpected place: homes costing more than $500,000. As lending has rapidly gotten more restrictive for borrowers taking out large loans, sales of expensive homes have fallen sharply around the country during what should be one of the busiest seasons for buyers and sellers, mortgage bankers and real estate agents say.
To some degree the change is due to difficulty getting financing, as borrowers are finding fewer lenders willing or able to fund "jumbo" mortgages, loans for amounts greater than $417,000. Such loans are too big to be guaranteed by government-sponsored housing finance agencies Fannie Mae, Freddie Mac or Ginnie Mae.
Given the troubles in the subprime sector, investor appetite for all types of mortgage loans not guaranteed by housing finance agencies has nose-dived.
Banks until recently were able to offload the risk of many jumbo mortgages by selling the loans to investors. But now, as investors burned by the subprime debacle have become extremely picky about what they will buy, banks are having to keep more of these loans on their own books and as a result are charging higher rates. Some lenders — such as Countrywide Financial Corp. — have made a point of saying they're now most focused on making loans that can be guaranteed by Fannie and Freddie.
Other lenders have simply tightened up their lending standards, for example by no longer making jumbo loans to lenders who can't fully document their income, even if they make large down payments and have stellar credit histories.
The banks that are still making jumbo loans are charging substantially higher rates to compensate for the lack of investor demand. Borrowers who could have gotten rates as low as 6.5 percent in June are now having to pay as much as 9 percent.
But aside from the financial impact of higher rates, in certain high-priced real estate markets, the effect of the suddenly tighter lending environment is more psychological, mortgage bankers and real estate agents say, as buyers and sellers alike don't want to plunge into an uncertain future.
"Showings are down, contracts written are down, and sellers are just as backed away as buyers are," said Lou Barnes, a partner in mortgage bank and brokerage Boulder West Financial Services in Boulder, Colo. The company arranges for financing on many higher-priced condominiums and houses in the state.
"I think the psychological damage is worse than the financial damage" which is already bad enough, he said. Even for buyers who have plenty of cash or can easily afford higher mortgage rates, the sudden change in the financing environment reduces "the ardor to buy a house unless you have to," he adds.
With numerous buyers and sellers sidelined, the higher cost of big mortgages is bound to put downward pressure on home prices should the lending environment stay tight for a long period of time, said Ellen Bitton, president of Park Avenue Mortgage, a mortgage bank and brokerage that does business in several states, including New York, Florida and Utah.
In New York, the most pronounced effect so far has been at the very top end of the market, for properties priced $25 million and above, said Dolly Lenz, vice chairman with Prudential Douglas Elliman.
"Every single person I have at the highest end is on hold. They're going to wait and see what happens," she said. "It has nothing to do with them being able to afford" properties or not, Lenz added. "It's a confidence thing. They somehow feel poorer, whether they are or not."
In California, where the median home price is well above $500,000, jumbo mortgages are as much as 44 percent of all mortgages issued in certain metro areas, according to data from First American LoanPerformance.
In and around San Francisco, where the median home price is about $1.1 million, the tougher financing environment has created a "hesitancy" and has led to some canceled escrows for buyers around the $1 million range, said Rick Turley, president of the San Francisco and Peninsula Region for Coldwell Banker Residential Brokerage.
“The subprime mortgage crisis is spreading to a somewhat unexpected place: homes costing more than $500,000.”
Unexpected for whom? Perhaps the childishly simple minded reporters. Thats about the only people who find tightening standards on large loans to be unexpected.
I wish I can buy a home!
Things have tightened up a bit, especially on the stated stuff.
But we have the same products and rates as always for jumbos. Since we are a large national bank; we have the ability to keep and warehouse the loans we make. Smaller lenders and brokers don’t.
Bottom line is that the financing is still there for most people.
Not one story I have read about the mortgage 'crisis' has mentioned the PMI That most of the loans required. How does the mortgage company lose money if the loan is insured?
You can still buy a home. As a matter of fact, it is a buyers market.
You are correct, they don’t.
And most reporters don’t realize that most of loans have been pooled, and the lender has sold the pool of loans to investors. The big lenders however will retain the servicing and contact with the customer.
Ping
“Other lenders have simply tightened up their lending standards, for example by no longer making jumbo loans to lenders who can’t fully document their income, even if they make large down payments and have stellar credit histories.”
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Wow, you mean lenders actually are NOW expecting borrowers to actually be able to afford to pay back their loans??? Why, that is downright un-American!! I wonder if the Bank of Amigo is still doing mortagages for illegal aliens???
There are still good lenders making jumbo loans, usually thrifts. They can hold them on their books. And why shouldn’t they for people with 20 percent down, great credit and documentation of income and assets? While clearly the jumbo market is in trouble, this story is not even-handed. I’ve heard of people combining $417,000 first mortgages and home equity lines of credit to reach the total amount of the loan (provided 20 percent down.) For properties under $1 million, I think good borrowers can find a way to get a mortgage without paying the rates implied in this article. Plus, I think it’s only a matter of time until the prime jumbo market financed by Wall Street is back up and running. These are good, profitable loans, tarnished in the mad dash away from subprime and alternative A mortgages.
On the other hand, I have six open houses this holiday weekend.
Houston has turned around and it is great!
So there is a crisis because some folks do not want to purchase un-vouched for loans?
Why not have the bank actually make sure the loan has a great chance of being paid back, before selling it off?
I know don’t ask silly questions, if the bank actually made sure the loan was good, the time and money spent would come off of their bottom line.
Just last month the world was coming to and end when the market made a simple correction.
These things are cyclical. Spine up reporters. Things will be okay.
I have been watching several publicly traded mortgage companies, including some REITs, for the last month or so. If they have survived so far, things are starting to stabilize, and the stock prices are starting to stabalize at new levels, and gradually go up.
I do mortgages and we have NO problem doing anything from $50K to $100 million.
This is going to get a lot more ugly before it gets better.
It should be were selling.
The problem is that there is no price on the CDIs that are now out there.
I’m convinced that much of the mortgage “crisis” (not all, of course) is an exaggeration by the MSM who really need an economic crisis during the Bush years. The best way to elect Dems is to show the GOP as failures in security and prosperity.
I say that as I am trying to sell 2 houses (1 went like lightning); buy another (no problem getting conventional mortgage money, but then, maybe I’m nuts for buying something I can afford); and deciding about another purchase.
This is a good time for people who want or have houses they can afford. The speculators are as dead as the tech stock investors of the 90’s.
maybe standards have been tightened because many of those 500K homes were valued at 300K or less 5 years ago and lenders are skeptical that the current prices will hold up for much longer.
Credit scores don’t matter at this point as much. What they want to see is that the borrowers have the collateral and income to handle a buzzcut to their home values and not panic or walk away from it and let it go into foreclosure.
I have no problem with tightening standards due the fact that for many years now, banks have had NO standards. Especially with the Alt-A (aka liars loans since you could say whatever you wanted on the mortgage application) or subprime.
Simple logic is lost on most reporters. In the last two years I’ve driven past growing numbers of developments with monster homes and thought - there cannot be this many people who can afford to live this way. Guess I was right.
Have any of these reporters ever taken a college course in basic economics?
It is probably too early to call the housing pullback over, but some of the homebuilder stocks have been beaten down so low they will start to shoot up at the first signs of a recovery in the market.
It’s the sales of mortgages to illegal aliens that are the most risky. The decision in 2003 that the government made to encourage banks to approve mortgages to those without valid SSN and instead using TIN numbers is the origin of our banking crisis. I think this sh!t had it’s start from George Bush who is a lover of Illegal Aliens going back decades who employed them as maids and gardeners in his household and even has “brown” inlaws in his family. He has a warped view of national security that is causing a great deal of harm to financial security.
On the other hand, I have six open houses this holiday weekend.
Houston has turned around and it is great!
Wow, the housing crisis is over? Cool!
The season is drawing to a close, and people who wanted to buy this year are starting to make their moves. I think we'll see things pick up a bit now.
“Thats about the only people who find tightening standards on large loans to be unexpected.”
...and who go on to call it a ‘crisis.’
Terrific, I am buying a house, or at least, I have started the process. Pre-approved for a loan, and I am NOT going for big dollar. :-)
I am hoping to be done, closed and moved in 6 months. Considering I haven't seen a home yet, I think I can get it done.
What part of town are you in?
“...and who go on to call it a ‘crisis.’”
Perhaps these are some of the people with the ARMs. The ones whose payments are jumping 5-6 hundred dollars as interest rates rise.
They need to sell more stories so they can make their payments.
I felt I had it made when I was finally able to pay cash for a house. Yet I still get at least one call a week from someone offering to refinance my mortgage. I laugh and hang up on them.
The loan being insured against default doesn't mean a buyer exists for it on the secondary market. So, if a company funded the loan expecting to sell it but now can't, they're stuck. Those secondary market investors willing to buy the loan may require the seller to take a loss on the transaction.
Another way for them to lose money is if an investor audit reveals some "issue" witht he file. The investor can force the mortgage company to buy back the loan.
Although I am in Katy, I work the whole town as my radio show is heard in all corners of the Houston metro area. In which area do you have an interest?
“This is a good time for people who want or have houses they can afford. The speculators are as dead as the tech stock investors of the 90’s”
Thank you for posting that.
The speculators artificially drove up property values, and I have no sympathy for their “suffering” now.
I am personally not in a position to buy, but somewhere nearby, I am hoping my future “dream landlord” is.
I am honestly perplexed as to how so many speculators convinced themselves that “if they build it, they will come” in areas with depressed wages.
If a Democrat gets in the White House in 2008, all these crises and gloom will suddenly get much brighter in the MSM. Practically overnight, all will be healed.
Many, probably most, sub-prime loans were not made by banks.
The originator creates loans and then floats them until the loans can be packaged into mortgage-backed securities. These securities are then sold to secondary investors. Secondary investors could include pension funds, banks, insurance companies, hedge-funds... any number of “BIG” money investors.
“Things have tightened up a bit, especially on the stated stuff. But we have the same products and rates as always for jumbos. Since we are a large national bank; we have the ability to keep and warehouse the loans we make. Smaller lenders and brokers don’t. Bottom line is that the financing is still there for most people.”
Yes, at a price. However, “most people” may find the price out of reach if furious and fearful investors in the secondary market paper stop buying in sufficient volume. Why might they be fearful? Try this:
Unsafe at Any Rating, CDO Speeds to CCC From AAA: Mark Gilbert
By Mark Gilbert
Aug. 30 (Bloomberg) — Watching the rating cuts trickle out of the derivatives forest is akin to searching for elephant dung on a path to try and work out how many pachyderms are in the jungle. There’s clearly a herd in there. And it’s probably much bigger than the ordure you have seen so far would suggest.
Last week, Standard & Poor’s butchered the ratings on $3.2 billion of debt from structured investment vehicles spawned by Solent Capital Partners LLP in London and Avendis Group in Geneva. About $254 million was slashed from the top AAA grade to CCC+ and CCC — slides of 16 and 17 levels, triggered by their investments in mortgage-backed bonds.
Think about that for a second. You left the office Tuesday owning a AAA rated security. By the time you got back to your desk on Wednesday morning, it was eight steps below investment grade in a category S&P defines as ``currently vulnerable to nonpayment.’’ Try explaining that to your pension-fund trustees.
The rating companies are sifting through the billions of dollars of repackaged bonds and structured investment funds they graded in recent years. You can bet the world’s biggest and smallest banks are also panning for risk in the structured investment vehicles and off-balance-sheet companies they casually sponsored in the gold rush.
DBS Group Holdings Ltd., Singapore’s biggest bank, said on Aug. 7 it had S$1.4 billion ($921 million) at stake in collateralized-debt obligations. This week, it boosted that total to S$2.4 billion. It seems the bank had overlooked its commitment to a unit called Red Orchid Secured Assets. As the man said, a billion here and a billion there and pretty soon you’re talking about real money.
`An Oasis of Calm’
A rare moment of comedy arises from what Moody’s Investors Service had to say about the oversight. ``I don’t think DBS will be the only one who has missed something the first time,’’ said Deborah Schuler, a senior Moody’s analyst in Singapore.
Could this be the same Moody’s that called structured investment vehicles ``an oasis of calm in the subprime maelstrom’’ in a July 23 report? ``The vehicles are not structured to forcibly liquidate assets in times of crisis,’’ Moody’s said. Their ability to access several sources of finance ``obviates the need to liquidate large buckets of assets at potentially the worst period in the life of the vehicle.’’
Tell that to Cheyne Capital Management Ltd., which said yesterday it may be forced to dump the securities owned by its $6 billion Cheyne Finance LLC fund because the asset-backed commercial paper market is freezing up and the SIV is struggling to fund itself beyond November.
Shifting Scenarios
Moody’s recently added some new phrases to its lexicon of code words. When the rating company refers to ``updating its methodology’’ or ``refining its risk assessments,’’ what it really means is that its historical models say absolutely nothing about how the future might turn out.
Last week, for example, Moody’s summarized ``the most recent refinements’’ to how it treats bonds backed by so-called Alternative-A mortgages. ``In aggregate, the change in our loss estimates is projected to range from an increase of approximately 10 percent for strong Alt-A pools to an increase of more than 100 percent for weak Alt-A pools,’’ Moody’s said.
So a mortgage-backed security with a rating based on, say, a 1.5 percent loss rate might now suffer 3 percent losses in its collateral, Moody’s said. How’s that for missing something the first time?
Marked to Which Market?
Here’s what is most worrying about the coming flood of downgrades and defaults. The U.S. Securities and Exchange Commission is investigating how the biggest brokerage firms priced securities caught up in the subprime meltdown as their values collapsed. My colleague Jonathan Weil last week detailed some of the accounting shenanigans that accompany how banks measure the ``fair value’’ of their assets.
What happens if the SEC discovers that different units of a single bank assign different values to identical securities? That seems like a viable scenario for what might happen when a complex market of infrequently traded securities whose prices are dependent on a series of assumptions hits trouble.
And what happens if the SEC finds that banks marked the securities they owned at high prices, while attributing much lower values to identical securities offered by their hedge-fund clients as collateral? Again, that seems like a plausible strategy for a bank concerned about the longevity and liquidity of its customers.
Moving the Goalposts
Suppose regulators decide to play hardball on how the financial community marks to market, imposing rules that outlaw the existing freewheeling approach to how over-the-counter derivatives are assayed.
Moreover, suppose those new decrees come just as much of the underlying collateral is so tarnished as to be almost worthless compared with its initial valuation.
The ensuing carnage in the balance sheets of every financial-services company in the world would dwarf the damage wrought in the securities industry by the subprime crisis so far.
It will be hard enough for central bankers in the U.S. and Europe to set monetary policy at next month’s meetings when they have no way of knowing how bad the financial storm might get and how much it might hurt economic growth. The more things that go boom in financial markets in the coming weeks, the harder the task facing the rate setters will get.
Homelier Outlook for Mortgage Finance
Credit Suisse
IN THE MORTGAGE-FINANCE SECTOR, we have revised our 2007 origination forecast to $2.3 trillion from $2.5 trillion, owing to reduced liquidity in the secondary market and lower refinance activity.
We are also introducing our initial 2008 origination forecast of $1.8 trillion. While adjustable-rate mortgage resets should reach their peak in 2008, we believe the overall level of industry originations should be negatively impacted by declining housing activity and home prices, rising inventories and lower refinance activity.
While liquidity should return somewhat to the secondary market in 2008, the housing market is unlikely to rebound until 2009. Our 2008 origination estimate would represent the lowest level of activity since 2000.
We forecast additional declines in both new and existing home sales of 5% and 6%, respectively, in 2008. This follows an estimated decline of 19% in new-home sales and 7% in existing-home sales in 2007.
We expect new-home sales should amount to roughly 810,000 units, as reduced liquidity tempers demand, while we expect existing-home sales to fall to 5.66 million units in 2008. Existing-home sales should be negatively impacted by bloated inventory levels and weak pricing trends.
Housing inventories are currently at record levels and exhibiting few signs of improvement. In absolute terms we forecast a 2% rise in new-home inventory and 10% increase in existing homes in 2008. We have already seen a sharp decline in housing permits and starts, which should limit the overall supply of new homes in 2008.
However, with foreclosures surging in 2007 this should put additional upward pressure on existing-home inventory over the next 18 months. Given the decline in housing turnover we estimate on average it could take 12 months to sell an existing home.
We do not expect a reacceleration in home-price gains until affordability improves and inventory levels are reduced substantially. We expect home-price appreciation will hover around 0% for new homes and project a 3% outright decline for existing homes in 2008. Existing-home prices should feel the brunt of bloated inventory levels and foreclosure activity in 2008.
I've been watching the same "open house" signs, for the same houses, go up every other weekend or so for several months now.
Maybe six sub-prime borrowers are near default and dumping their houses on the market?
Maybe the market is diferent in Houston. If you have buyers for those houses, that's great. Let us know how many you sell.
I hope you give us good news.
“How does the mortgage company lose money if the loan is insured?”
‘The loan being insured against default doesn’t mean a buyer exists for it on the secondary market. So, if a company funded the loan expecting to sell it but now can’t, they’re stuck. Those secondary market investors willing to buy the loan may require the seller to take a loss on the transaction.’
“”Another way for them to lose money is if an investor audit reveals some “issue” witht he file. The investor can force the mortgage company to buy back the loan.””
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The investor can only force the mortgage company to buy back the loan if the mortgage company has money or credit to buy it back. Lots of the belly-up firms in recent weeks may have offered recourse to their loan buyers, but those buyers are now “stuckees” with those loans.
As for insured loans, investors losses are reduced, but not eliminated, by most primary MI coverage plans, and pool coverage has a stop-loss limit (so if the insurer’s total losses on the pool reach the stop-loss limit, any additional losses remain with the investor). More details, for those interested, may be found in this article:
http://www.law.wfu.edu/prebuilt/w04-johnstone.pdf
ping ping and thanks for later
Wow! How do liberals justify this "widening gap between rich and poor in America" when the average Joe union member couldn't even think about paying this for a house? Wouldn't that be about 7000 to 8000 per month in mortgage payments? Shouldn't Hillary have some kind of government program to help these poor souls?
I payed 500,000 for mine here in the bay area. It hurt psychologically but they are still selling homes for 800,000 and up. But I’ll be honest I don’t know who can afford those. But even more than the home prices if anything will kill this market its the taxes on top of the high home prices. Not only do you have all the county taxes you also have “special” assesments against new properties. It’s like they are trying to kill the market.
Don’t let facts get in the way of a panic.
The most accurate post rarely gets the attention it deserves. A busted bubble is not fixed in a month.
Yes that is right. I’m quite happy with our 1970’s-era 2000 sq. ft. rambler. It is not pretentious, and comfortable for a family of five. I want nothing more.
Having said that, why I am paying so much for it ($350,000 selling price, incl. 5 acres) is somewhat of a mystery. Right now I am thankful that the lender has offered to reset the ARM for a couple more years under certain conditions, until we can refinance without being told we are scum of the earth despite the fact I work my a$$ off 50 hours a week for $65/hr and pay the bills.
He doesn't, as long as the number of foreclosures is small enough that the PMI company does not itself go bust. How well capitalized is the average PMI provider? Also, if the house price was appraised fraudulently high, will the PMI provider pay off?
OK, now how do immigrants who make less than minimum wage expect to pay for a 3/4-million-dollar home, especially after the ARM resets?
Suddenly, when the sub-minimum-wage, illegal homeowners are faced with a dilemma, there is a subprime crisis and we should bail them out.
Who in the hell sells a 3/4-million-dollar home to illegal crop pickers? I couldn't qualify for such a home.
‘How does the mortgage company lose money if the loan is insured?’
“He doesn’t, as long as the number of foreclosures is small enough that the PMI company does not itself go bust. How well capitalized is the average PMI provider? Also, if the house price was appraised fraudulently high, will the PMI provider pay off?”
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comments:
Again, investors typically have some residual losses, since Private MI usually is not 100% coverage. For further details, see:
http://www.law.wfu.edu/prebuilt/w04-johnstone.pdf
The private MI companies have been running risk-to-capital ratios in the range of 10 to 20 in recent years, so capital of from 5c to 10c for each $1 at risk. For example:
http://biz.yahoo.com/bw/070829/20070829005709.html?.v=1
Note: “Along with its mortgage insurance affiliates, PMI maintained $3.5 billion of consolidated statutory capital at June 30, 2007 composed of $2.8 billion of contingency reserves and $662.4 million of policyholders’ surplus to support its $31.6 billion of U.S. mortgage insurance risk in force.”
By comparison, the GSE’s (Freddie and Fannie) have been on the order of 3c to 4c on the dollar (see page 10 of http://www.cbo.gov/ftpdocs/73xx/doc7323/06-23-FannieFreddie.pdf )
More at: http://faculty.haas.berkeley.edu/jaffee/Papers/JWGSEPaper04.pdf
http://www.freddiemac.com/finance/smm/july98/pdfs/kinsey.pdf
http://faculty.haas.berkeley.edu/jaffee/papers/FinalJFSR.pdf
http://www.ots.treas.gov/docs/4/48262.pdf
http://www.federalreserve.gov/SECRS/2007/May/20070531/R-1261/R-1261_52_1.pdf
http://bodurtha.georgetown.edu/enron/Poole_housing_in_the_macroeconomy_2003_03_10.htm
Stamdard MI coverage has exclusions for fraud committed by the investor’s origination agents. So, for example, appraisal fraud committed with the knowledge of the loan officer taking the application would be contractual grounds for excluding coverage. In some cases, it is not a trivial matter to enforce such a provision, especially if the case is an “isolated incident”. It is easier if there are multiple cases with similar characteristics. See the following for more details
Various coverages may apply (D&O or E&O, if PMI exclusion holds up)
http://www.dicksteinshapiro.com/files/upload/Subprime_Lending_Alert%20August%202007.pdf
See page 12 of the following for a typical exclusion-for-fraud provision:
http://www.secinfo.com/drjtj.14bv.d.htm
FBI report - see section D of:
http://www.fbi.gov/publications/financial/fcs_report052005/fcs_report052005.htm
A bit of irony here:
http://www.urban.org/UploadedPDF/410832_mortgage_default.pdf
http://www.housingfinance.org/pdfstorage/NAmerica_jun00us.pdf
Exactly right. The clintoon era was supposed to be great economic years, but I (and many like me) were very nervous about it being just a “tech bubble”. Which turned out to be true, but the press portrays that as a “Bush recession”, even though the bubble burst in Mar 2000.
I’ll take the gloom and doom from the MSM if I can keep my economic prosperity that seems to coincide with GOP rule.
For some reason, if you take out two loans, one for the down payment and one for the rest, you may not need to pay PMI.
Another potential downside of what was going on near the very end of the housing bubble is that as loans were getting ever riskier, much less money was going into PMI.
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