Freddie and Fannie have mostly prime 30 year mortgages. If there are really problems it would be more in the panic that is occuring rather than the soundness of their loans.

True about the make up of their portolio – but I’ve never been so sure they really have sound business models. They have enormous leverage, are subject to substantial gov’t oversight. and have historically been very badly managed. But even if that is not the case, perception seems to be reality these days. Not like Bear Stearns was so badly run and they imploded in a week. but they are basically the only game in town now days..

I have 2 Indymac Loans at 6.75% int only on rentals in Fallon Nevada. About 4.5 years left on the loans. Ah well. Bye Bye. Lets see who will service them now. BTW both homes are indeed GEMS. Bought them new at 139k (1400 sq feet) adjacent to Banner Hospital and they rent for 1000 per month. The Navy Pilots get 3 year duty assignments there. All are always rented without a hiccup.

Let me know if any of you are planning a trip to Fallon. Great Mexican food, White Sand mountain, and the Shoe Tree ( a tourist sensation!)

Ray Pepper
http://www.500Realty.net

If Fannie and Freddie lock up, things are going to massively ugly. Loans are tough enough right now. Consider this article from just a few months back

Freddie Mac and its fellow GSE Fannie Mae are now financing more than 80 percent of all mortgages in the U.S., up from 40 percent a year ago.

80% of the market. Sh!t!!! I saw a survey saying two thirds of borrowers have experienced tighter credit – either for a mortgage or some other borrowing. Think of how that changes with a missing or disabled Fannie and Freddie.

When are people (J6P) going to start realizing that this scenario is playing out eerily similar to 1929?

"golly" I made a lot of money this week, SKF to 174!!! It’s good to be short! I hope IndyMac wasn’t a Ray Pepper gem!!!!!!!!!!!!

If you go back to the last major “housing crisis” of the Savings & Loan collapse in the late 1980’s you will see that we had a tiny fraction of the number of foreclosures compared to the “boom-bust” housing markets in California and especially Texas

And this is exactly why the Eastside is NOT part of Seattle. Those poor suburban bastards saw 20% declines in the early 90’s. And Seattle did not.

I loved playing in the abandoned McMansions as a kid.

This CAN’T be in Seattle This is clearly a subprime on subprime situation. And there is so little subprime in Seattle it is just not possible. Right, Steve?

And who in Seattle only makes $72K yr? This is a frikin’ superstar city. You can’t even gas up your car on $72K/yr – and that ’s how it should be. Superstar cities have no room for po’ folk taking out massive subprime loans.

Please define what you refer to as “area” in “Only about 1% of mortgages in this area are subprime.” —because at first blush, I don’t believe that to be the case.
Let people know how you also define “subprime.” FICO driven? Subprime Lender driven?

Thanks.

If you go back to the last major “housing crisis” of the Savings & Loan collapse in the late 1980’s you will see that we had a tiny fraction of the number of foreclosures compared to the “boom-bust” housing markets in California and especially Texas.

According to the latest stats, less that 0.1% of King County homeowners are in foreclosure.

Only about 1% of mortgages in this area are subprime.

I predict that the worst of the foreclosures will be over by the end of this year.

The people who took out loans that they can’t afford are being forced to bail out now. We get calls all the time from people who got into stated income loans (i.e. “liar loans”) that they never should have qualified for in the first place. They can’t make the payments forever, and they will be selling or going into foreclosure sooner rather than later.

Here a just a couple of real life examples:

One guy called our mortgage office and wanted to refinance because his mortgage payment is almost as much as his entire monthly take-home pay. I asked him how he got the loan in the first place. He said he makes $3,500 per month but the loan officer used a stated income loan and said he made $8,000 per month!

No wonder he can’t afford the payments!

There is absolutely nothing that the guy can do but sell his house or lose it in foreclosure. He can’t carry that payment for very many months because he would have no money left for food, gas, utilities etc.

Another case is a couple that called me for looking for help. They got suckered into two negative amortization ARM’s — one on their old house which is now a rental and the other on their current residence. They owe a total of $1.2 million dollars on the two loans and their total income is only $72K per year!!

They are making the minimum payment each month, which is negative amortization and adding to their loan balance each month. They can’t even come close to making the interest-only payment, let alone the fully amortized payments.

They asked me for help and I said all you can do is try to sell the houses as fast as you can to cut your losses. They are just getting deeper into debt every month.

We get calls like that every week.

These people can’t hang onto those homes for another year or two .. they are going to have to sell or walk away within a few months.

That’s why I think the number of foreclosures will probably peak this year and then start to decline.

Seattle’s market was able to stay flat after the dot com crash due to loosening lending standards. If the bubble hadn’t already started, prices would have plunged with the high unemployment during that period.

I think that’s highly likely. Yet another reason why you can’t just say “Looks like prices started to ramp up right here so this where they will fall to.” Even flat prices can be a bubble if they should be dropping.

The YoY graphs are a little misleading since its a delta change. The area under the curve is what matters most, so a quick spike or longer wave could have equivalent changes overall. But you are right, SD rose higher and is currently now falling lower than Seattle. I would expect Seattle will end up around 30-40% off peak and SD will be more like 50-60%.

The difference would be the rate that they obtained the IO loan at, compared to the rate of a current 30yr fixed. It’s the number that my brother in law told me, I believe they received their IO loan in early 2004 when interest rates for a 30yr fixed were in the mid 5’s. I don’t think he was being exact, he told me about 1k.

That 20% is essentially the difference between the two markets so far, San Diego is off about 25-30% and seattle is off 5-10% so far (looking at the CSI that includes all three counties for “Seattle”)

It is pretty obvious from tim’s graph that our peak is more like St. Helens than the other bubble markets.

http://seattlebubble.com/blog/wp-content/uploads/2008/06/case-shillerhpi_all200804.png

http://www.newyorkfed.org/mortgagemaps/

Other than subprime it is really difficult to determine the financial condition of a group of loan holders, as both wealthy and stretched individuals hold various prime loan types.

So far the foreclosures have been concentrated in the rust belt, or in places where there has been tons of new development. While the exotic loan types lowered the bar for home ownership, having homeowners with these loans is not enough by itself to send prices down, they have to be combined with lots of development concentrating the distress.

The degree with which a given market saw appreciation during the boom is a poor indicator as to how far it is going to decline.

Denver is a good example. Look at their Case-Shiller chart and they were completely flat during the boom years and yet they’ve dropped about 10% already. This is why I think that looking at a chart, declaring a certain year the start of the “boom years” and then saying that prices can only fall to that starting level is way too simplistic (or alternatively using price increases during those years to compare cities).

I believe the correct term is “dot bomb”.

San Diego:
Jan 00 – Nov 05 (Peak): 2.5x
Jun 01 – Nov 05 (Peak): 2.0x

Seattle:
Jan 00 – Jul 07 (Peak): 1.92x
Jan 03 – Jul 07 (Peak): 1.66x

Difference:
Jan 00 – Peak: San Diego went 30% higher
Jan 03 (or offset) – Peak: San Diego went 20% higher

I chose Jan 03 for Seattle since that is when we have discussed before being the “bubble really started” in Seattle. I chose Jun 01 for San Diego as the 18 month offset from that start.

So really what happened is that San Diego appreciated during the dot-com boom times while Seattle sat stagnant. Overall from Seattle’s start and a subtracted offset from San Diego, the difference in appreciation was 20%. That is quite a bit, but its not twice as much by a long shot.

Do you have any information about the split between neg am and IO? I’m wondering if neg am is significantly more toxic than IO, and if so, how much? It’s one thing to have a 10 year IO loan on a property that goes down 10% in value. It’s another thing to experience a second year recast of your neg am loan when it hits 125% of the original value, and now it’s worth 72% of what you owe (for that same 10% decline in value).

Good data. Just want to add that “Seattle” in this context means Pierce/Snohomish/King. Just for those out there that might take the data in a literal city sense.

I know a few people with IO loans. He got an IO loan because he wanted the flexibility to pay off huge chunks at a time, which he is in fact doing. He’s the original and legitimate target of the IO loan.

I am sure there are a handful of people with IO, or option-ARM, loans who are handling them responsibly. Unfortunately, statistics from regions facing significant numbers of foreclosures show that these loan categories are far more likely to default than those of a standard fixed rate variety.

A lot of people who got these neg-am loans were clearly stretching beyond what they could afford, gambling that appreciation would allow them to refinance.

Perhaps a better way of saying it might have been “There were less loans made in Seattle with exotic features such as zero down, neg AM, IO”.

Nope. Seattle was right up there with the best of them in the issuance of dodgy loans. 33% of all Seattle area mortrages were of an interest only or negative amortization variety in 2006 alone. That’s only slightly behind Phoenix (34%) and Stockton (35%). The US average was 23%. True, San Diego clocked in at 42%, but Seattle still had a respectable showing as one of the top regions in the nation with dicey loans.

http://seattlebubble.com/forum/viewtopic.php?f=1&t=466

That would be correct.

Perhaps a better way of saying it might have been “There were less loans made in Seattle with exotic features such as zero down, neg AM, IO”. That I could believe as being true, especially when you compare to San Diego. We still had our share of those loans here in WA, but you have to have lived in San Diego to experience how nutty they are about housing. We’re crazy up here, but they’re crazy to the power of crazy.

One is a pretty well off friend who probably has a household income at about $300K. He got an IO loan because he wanted the flexibility to pay off huge chunks at a time, which he is in fact doing. He’s the original and legitimate target of the IO loan. He has massive amounts of money in the bank, and could survive extended periods of unemployment should he need to. I’m pretty sure he’s in the minority when it comes to borrowers with IO loans.

The others I know have 10 year IO loans that they got a couple of years ago. They’re also relatively young (30ish) and in the early/mid career stage. Assuming they keep their jobs (which is a big or small assumption depending on how bullish/bearish you are) they will have no issue paying their mortgage up until it resets. At that point, it all depends on whether “unexpected” events occurred. Unexpected, like having children or buying that expensive car. Ya know, the kind of things you couldn’t *possibly* have predicted just a few years prior.

A relative of mine, a mortgage broker, even advised me to do the 10 year IO loan. Same old advice: “You can save the difference”. I asked how many people actually do that. The silence was deafening. Ultimately, brokers officers got paid more commission with IO and ARM loans, so that’s what a lot of them pushed.

I haven’t met anyone with a neg am mortgage, ever. I know they exist, I’m just not sure what kind of idiot got one.

Matthew, your sister’s loan: Using some quick calculations, the difference in payment between an IO and a 30 year for $600,000 (assuming no equity at all) is only $600, at 6.25%. Where does the $1000 come from? Not trying to be confrontational, just wondering if they got some super deal on a short term IO at a low initial rate or something. If so, how long was the IO for?

My sister has an IO loan on her 600k+ house on the east side. Their logic was exactly the same as you described, they thought they would only live there for 5 years or so and then would buy a bigger house. That isn’t happening, they are going to be in that house for a long time, but have grown used to making the IO payments. If they refinanced to a 30yr fixed, their payment would go up by about 1k a month, and they can’t really afford that. They have been saving some money, but not a lot. Most of the difference between the IO loan and a 30yr they have just been spending. They are prime borrowers, but in a tough situation. There are plenty of people just like them that will be hit hard if Seattle takes a sharp drop in home prices, or if interests rates spike upward.

I agree; in particular with your comment about prime borrowers. Sure, subprimes were a mess. But, a lot of prime borrowers had to super stretch to get in.

He even gave advice to everyone of why an interest only loan was great: ie. because if you only hold the house for five years you can pay a smaller monthly payment over that time and put the rest in the stock market where you can “easily make 11 or 12% interest, and then you have your home equity in 5 years also.” He said he is doing that on one of his properties right now and balked when I asked him how that 11 or 12% on stocks was looking for this year. To his credit, he did say that at this point he would never recommend a neg. amortization loan.

I have no data to back it up, but I also have no reason to believe that this practice wasn’t extremely prevalent in Seattle.

San Diego’s price run up was nearly double that of Seattle’s.

The degree with which a given market saw appreciation during the boom is a poor indicator as to how far it is going to decline. Many markets that are seeing big declines today never saw the massive appreciation of California or Florida. Heck, there are counties in Arkansas and Ohio that are choking on foreclosures. Just look at Colorado or Georgia: they never saw the kinds of appreciation that the bubbly markets experienced yet they are experiencing some of the highest foreclosure rates (and price declines) in the nation.

I think a far better indicator as to the health of a given market is the percentage of negative amortization, or 100% financed loans that were made. People with these kinds of products are extremely vulnerable to any declines in real-estate. On that measure, Washington state (and the Puget Sound) were right up there with the bubbly states.

By the way, I am NOT talking about sub-prime. The Puget Sound saw masses of negative amortization and 100% finance loans given to prime borrowers.

What’s your proof for “stricter lending standards” in Seattle?

From what I saw when I sold. and from the anecdotal evidence that I have seen of people I know getting in way over their heads in Seattle, I am not sure if the “stricter lending standards” were applied.

Again, anecdotal, but someone with no money down shouldn’t be lent an 80/20 package, especially when all the closing costs were rolled into the loan as well.

Yet I know banks did it here (National City being one of them).

So, please, provide me with concrete proof that stricter lending standards were applied here.

I would argue that location made NO difference to lenders until the words “declining market” started appearing with regularity.

I welcome your sources for your supposition.

San Diego’s price run up was nearly double that of Seattle’s. This blog constantly talks about how Seattle is 18-months behind the trend. That analysis is way too simplistic.

Many in San Diego benefited from huge run ups causing a “Real Estate Mogul” effect where many of the beneficiaries thought they could be the next Donald. They were lured by easy money and the idea that real estate would never go down and leveraged their newly found home equity. Californians inundated the Phoenix and Las Vegas markets purchasing cheap homes thinking they would just flip them. As a former Arizonan I remember full well all of the articles citing Californians for the price increases. Phoenix and Las Vegas have California to blame for many of their problems.

Seattle’s late run-up and stricter lending standards helped prevent the market from taking off in the manner and magnitude San Diego experienced. By the time Seattle was ready to shoot the moon San Diego and many of the Bubble markets started to show weakness further preventing Seattle from the San Diego-like run up.

The best repo advice comes from realitors, especially if they like you. I knew a realitor who bought repos in 1990, then sold them 20% under market, he still made about 20% too. He turned me on to the newspaper, “The Investors Edge”, subscription cost was $150 back then….its probably $300 or so now….well worth it though. Gave title check info too.

You need to be single and no family though. Lots of painting and remodel work, then moving like a gypsy to the next repo.

Good money though. I saw 4000 SF fixers in Kirkland for $120K back then, they were going for $200K normally.

They say high oil prices are making it too expensive to ship stuff from overseas, bringing more industry back to America.

Perhaps that’s the bottom of the RE market [foreclosure growth], 2-3 years from now, after we rebuild an American manufacturing base from high oil prices?

The worse thing we could do after we regain an industrial base with subsequent likely reduced foreclosures and assuming oil like went back down to $60-70/bbl with less foreign demand for shipping, is go back to brainless globalism again and start another likely American housing bubble?

Bernanke….did you hear me?