Seattle Bubble

Refinancing & Purchasing may have just become a bit tougher

In my opinion, of all the pieces written on the market, this one by syndicated columnist Ken Harney has the potential to really put the hammer down on mortgage qualifying under no-doc, low-doc or ’stated-income’ loan products (’oft referred to as liar loans). The impact and ramifications of this little change initiated by the IRS is surely going to, at minimum, put concern into borrowers who have purchased a year or so ago and are looking to refinance again in the near future (read: those with ARM’s and HELOC’s).

There has been much discussion about the impact of non-traditional loan products that are driving the market, including the article The Tim refers to in the prior post. To pass the muster test, one should really ask the question, “if you take away the stated-income and 100% nothing down purchase loans used to purchase scores of homes across the country, where would the market be?” It would be a much different market and my income including many allied real estate professionals would be, well, less.

On Monday the IRS will be initiating an electronic mechanism to speed up audits on Form
4506 -T, which every borrower signs just prior to closing (and of which I am very familiar with in assisting clients with signing closing and lending paperwork).

The form authorizes the lender or the investor providing the money for the mortgage to obtain transcripts from the IRS summarizing the borrowers income and tax data for four years. The form must be signed by the borrower and can be used only during the 60-day period following the date of signing.

This development is huge.

By electronically (via secure internet I presume) allowing lenders to obtain IRS tax data on the borrower in only a business day or two will dramatically speed up audits and could potentially stop refinance and purchase closings dead in their tracks BEFORE the transaction closes—if data from the IRS is “curiously” different from what the borrower claims as income. This is huge. And, it is huge in that it will reduce F-R-A-U-D.

And it is big news for the following observations:

1) I think back on all the 100% borrowers that closed purchase transactions through our own office and across the country. Many will be refinancing again.

2) I think back on all the refinance business closed over the last three years, 2005 in particular. Many refinanced into other ARM products and increased their base loan amounts higher than that of their original mortgage Note (for debt consolidation, among other things of bling bling nature).

3) Forget about market conditions for the moment: If these borrowers refinance again, they will no longer be able to go ‘no-doc or stated-income’ without the potential for scrutiny by a quick IRS electronic audit, prior to closing. In other words, many will not be able to refinance, due to income discrepancies–including the potential to see prior IRS 1040 income which may not have jived with the EXISTING loan in which the borrower is trying to refinance again. In other words, it could trigger the potential to see earlier fraud.

If that’s not enough,lending standards, outside of the IRS audit conduit, may make it difficult enough. Read below!

Federal Banking Regulators are poised to tighten lending standards as guidelines were published last week by the Office of the Comptroller of the Currency.

From Inman News: Testifying before members of the Senate Banking Committee last week, Kathryn E. Dick, deputy comptroller of the Office of the Comptroller of the Currency, said, “Underwriting standards that do not include a credible analysis of a borrower’s capacity to repay their entire debt violate a fundamental principle of sound lending and elevate risks to both the lender and the borrower.

That could mean fewer borrowers will qualify for nontraditional loans that many in the banking and real estate industry say have helped buyers purchase homes they would not have been able to afford using a traditional mortgage.

Obviously I’m no fan of a difficult market, but it appears that the “perfect storm” analysis just might have more merit than I’d like to believe. This is one call where I really hope to be wrong.

Wow, Elizabeth Rhodes is on a real anti-bubble roll this weekend. Did one of you submit this letter to her “Home Forum” Q & A?

Q: I keep reading that home prices aren’t expected to decline in the Seattle area. Aren’t you overlooking the possible effect of “suicide loans” — those adjustable-rate mortgages that are common and dangerous? I think the interest rates on those loans will go so high that many will be forced into foreclosure. Won’t that produce a glut of for-sale homes that will force prices down?

A: Let’s start with the basics on those adjustable-rate loans.

The riskiest are teaser-rate loans. These start at an exceptionally low interest rate (like 2 to 4 percent), then reset upward later to a higher rate that can double the borrower’s monthly payment. Obviously borrowers who can’t refinance out of these loans are at great peril — particularly if their loan has allowed them to make interest-only payments, their home hasn’t appreciated much and they have little equity to work with.

However, it’s not a given that foreclosure is in their future. If the local economy is robust, jobs are plentiful and housing demand is strong about the time their loan resets, holders of teaser-rate loans have options. They may be able to increase their income and keep the house or find a buyer and escape foreclosure.

Okay I have to stop right there. “They may be able to increase their income”?!? Did she really just say that? Yeah, it’s that easy Ms. Rhodes… When Mr. & Mrs. Too Much Homebuyer find that they can’t afford to make their payments, why they’ll just get new jobs that pay more!

Maybe I’m confused, but aren’t there cities right now (San Diego, Sacramento) that have “robust economies” with “plentiful jobs” and yet are still experiencing a decline in prices? It seems to me that the one and only component that matters is that “housing demand is strong.” Oh, and incidentally, housing demand is weakening across the nation, and even here in Seattle.

Moving on.

These loans can reset more than once, from one to 10 years after origination — meaning there’s no one point at which distressed sellers will flood the market. Obviously, it’s impossible to forecast whether the economy will be good years from now, allowing them to ride it out. Maybe it will. Maybe it won’t.

Okay, so we admit that basically “who knows” if it’ll be a problem or not…

Loan Performance, a San Francisco-based mortgage-information provider, calculates that teaser-rate loans comprise 13 percent of mortgages in the Seattle-Bellevue-Everett area. Since January 2005, teaser-rate foreclosures have consistently been lower than 1 percent a month.

Did you catch what she did there? The question was about adjustable-rate and “suicide” loans in general. However, Ms. Rhodes decided to shift the focus to solely “teaser-rate” loans, and then provided a statistic that shows “only” 13 percent of local mortgages fall under that specific category. What about non-teaser-rate loans such as plain old ARMs, negative amortizing, payment-option, etc.? Excellent use of misdirection, Elizabeth.

Furthermore, of course foreclosures are still going to be low for our area. As long as we’re still experiencing double-digit year-over-year appreciation, it’s easy to sell or refinance your way out of a risky loan. It’s as though Elizabeth forgot the question (or more likely, just didn’t feel like answering it), which was about where we’re going, not where we’ve been or are.

I’m not going to bother quoting and responding to the rest of her answer here, because she’s obviously chosen to answer a completely different question than what was asked. Go read it for yourself, and if you’re convinced that her answer is sufficient, I guess you should go out and buy a house for 10 times your yearly income on a negative-amortizing, payment-option, no-money-down, adjustable-rate loan.

(Elizabeth Rhodes, Seattle Times, 09.30.2006)

An oft-cited argument by those who believe prices in Seattle are totally justified is that the number of “investors” here is not at the level of other, more obviously bubbly cities. However, no one ever seems to be able to provide any actual statistics to back up this assertion. While it does not actually answer the question of “how many local purchases are by investors” a new study at least provides a little insight into the investment situation in Seattle.

Why have home prices risen so dramatically in many parts of the country?One of the reasons often cited is flipping — investors buying homes they never intend to live in, sometimes freshening them up, then selling months later for many thousands more than they paid.
…
However, it’s been hard to know exactly where flipping is frequent enough to be a factor — and whether flippers are really on a gravy train to riches.

A new national analysis has begun to answer those questions. It shows that flipping in the Seattle-Tacoma-Bellevue area has increased over the past five years but is still below the national average. The only Washington city that does mirror the national average is Spokane.

The analysis — by HomeSmartReports.com, a California firm that tracks housing data — examines flipping in 147 metropolitan areas across the U.S.

A home is considered flipped if it sells twice within a nine-month period, said Michael Ela, the firm’s president.
…
The latest numbers, reflecting transactions that occurred this spring, show that 4.7 percent of national home sales were properties that were flipped. This is down from the previous six months. Sales include houses and condominiums.
…
In the Seattle-Tacoma-Bellevue area, some 3.5 percent of spring home sales were flips, Ela said. This is down from 4 to 4.5 percent in the preceding six months but above the five-year average of 2.4 percent.

I don’t doubt that many anti-bubble types will latch on to this story as “proof” that Seattle real estate prices are justified, and not propped up by investors. However, I don’t think that this study should offer much comfort to those with that viewpoint. Seattle’s rate of flipping is only slightly below the national numbers, and as recently as late last year was right up there with the rest of the nation.

Also, remember that the oft-repeated argument is that Seattle doesn’t have as many investors as other cities. Since the study was limited to 9-month flipping, it really doesn’t provide a complete picture of amount of investment that’s going on in our area. Even our local blogging real estate investor Eric has rarely (if at all) closed a deal in nine months or less.

Does Seattle have less flipping than other bubble cities? Yes, slightly. Does Seattle have less investment purchases than other bubble cities? Who knows?

(Elizabeth Rhodes, Seattle Times, 09.30.2006)

Do you think demand for commercial space will result in a continued rise in property values in King County?

Evidently, Susan Ryan at the P-I Real Estate Blog thinks so…

An article in today’s PI on the institutional investor interest in Seattle, highlights one of the reasons the local residential real estate remains strong.

Low office vacancy rates and investor/retailer interest in commercial property means more people working dowtown and wanting to live near where they work. If you’re not one of them — as in you can’t afford a home or condo close in — it seems hard to believe that there are enough folks who can afford to live in town to sustain the prices. But there are.

The problem is that there aren’t enough houses to buy. It’s kind of a weird point in the market cycle. There are both more buyers actively seeking homes that are still in short supply with other buyers afraid to buy right now, scared by what’s happened in other parts of the country and the unrelenting news coverage of the real estate downturn in those places. They don’t want to get stuck with a property bought at the top of the cycle.

But with the strong Seattle economy, in order for there to be a downturn, there has to be a flurry of homes coming on the market — like when sellers trying to cash out before prices drop. It is that glut of homes for sale that that makes them get cheaper. So far there’s no flurry, no glut.

It’s like a collective holding of breath with buyers and sellers both waiting to see who will blink first.

Blink. Blink.

(Susan Ryan, Seattle Real Estate Professionals, 09.29.2006)
(Andrea James, Seattle P-I, 09.29.2006)

Seattle was mentioned today in this piece from CNNMoney.

NEW YORK (CNNMoney.com) — Home price increases have slowed nationwide and even reversed in many markets. Inventories are up and new home builders are cutting back. More and more sellers are having difficulty selling their properties.
…
For some sellers selling their old home quickly is critical: They’ve already made other plans.

Tom Shipp, Seattle: “My partner and I purchased a new home in Seattle, before we listed our current home on the Eastside. Our agents were confident that our current home would sell in 2 weeks and advised that we not make a contingent offer on the new house. . . . [the bid] was quickly accepted.

Ninety plus days, a second mortgage, and a bridge loan later we are still trying to sell our Eastside property! We just made our first double mortgage payment and are feeling desperate and depressed. We are supposedly still in a “hot” market and our property has what the agent’s say are the three mandatory factors for a quick sale; price, location, and condition.”

(Les Christie, CNNMoney.com, 09.28.2006)

Thanks to msrelo for pointing out today’s article in the PI.

“…living with mom and dad, or mom and dad-in-law, is just practical. The Gwinns are using would-be rent money to pay off debts and save up to buy into Seattle’s out-of-reach housing market. And they are not alone.

While moving home with a spouse has been common in many cultures, now it seems to be hitting the U.S. mainstream for economic purposes — at least in pricey cities such as Seattle.

More than 22 million adult sons and daughters were living in a household maintained by one or both parents in 2005, compared with 15 million in 1970, according to Census Bureau statistics. Fourteen percent of all U.S. families included at least one adult child in 2005 — up 3 percentage points since 1970; a Census analysis attributed the increase to delayed marriage and increasing costs to set up and maintain a household.

Kate Gwinn, 26, said some of her friends moved back in with their parents for a while before they bought houses, and these are young people with good jobs.
“It’s like what all the cool kids are doing,” she joked.

“The problem is, home prices outpaced income growth,” center Director Nicolas Retsinas said. “Moving in with mom and dad gives you that sort of breathing room to catch up.”

This USA Today article provides slightly different statistics.

“Since 1970, the percentage of people ages 18 to 34 who live at home with their family increased 48%, from 12.5 million to 18.6 million, the Census Bureau says.”

Peronally, I could never move back in with my parents. My dad watches Fox News 24/7 and my mother would insist on washing my underwear… ew.

(Aubrey Cohen, Seattle P-I, 09.28.2006)