has week of 8/3 led to any changes in Puget Sound?
Does anyone have any idea as to whether any of the mortgage industry disruptions of the past week (ending on Friday, August 3rd) are having any direct impact on the Puget Sound real-estate market? Is there any evidence of any purchasers who were trying to close on deals this past week who now can't? Did any deals fall apart when trying to go to escrow directly because of credit tightening during the week?
Or is it too early to tell what impact this week's events will have on our local market? I asked this question over on Raincity but didn't get a very concrete answer (e.g. they commented that prime borrowers can still get loans).
Maybe Seattle really is "special"...
Or is it too early to tell what impact this week's events will have on our local market? I asked this question over on Raincity but didn't get a very concrete answer (e.g. they commented that prime borrowers can still get loans).
Maybe Seattle really is "special"...
Comments
Justifications from others in that blog seemed to be regarding people already having locked in mortgages underway and that tightening of standards usually only affects those not already in the pipeline.
It's too early to ask. Wait until next week for the fallout to begin. I was in Spokane on Friday and the loan originators came back from their lunch break very upset. I'm concerned that we'll start seeing medium to small size mortgage broker firms start to fold nationwide, including here. I have another class on Monday where I'll be seeing another group of LOs. I'll try to get more info for you then.
There are still many loan originators and Realtors in total denial that this will affect them here in Seattle.
That's the funny thing about financing. While real estate may be local local LOCAL, financing is national. Wall Street doesn't care about how pretty the lakes are in Seattle, or how prices will be going up forever on a steady grade making us all millionaires. MILLIONAIRES DAMMIT!!!!
1) New LOs that have no idea what's going on.
2) Somewhat experienced LOs who have been in the industry less than 10 years who are angry that their loan products are going away.
3) Seasoned veterans who have learned not to panic and instead are trying to re-learn which lenders offer which products.
4) Career LOs who survived many financial crisis' in their lives including the 1980s S&L bailout and know that they will survive this one too. These folks already know disaster is upon us but prefer not to talk about the elephant in the room and instead are focusing on "strategic resiliance."
Best quote heard in my classroom today: "100% LTV stated income/no doc loans are gone. This wipes out a huge segment of the population that previously had ONLY relied on these loan products. I have nothing to offer these buyers and refinancing homeowners."
Really? Is this the case for Washington state in general, or the Puget Sound in particular? I was under the impression that dodgy loans were a fairly small part of the market in the Seattle and East Side areas. If it turns out that there really are a lot of people in Seattle and East Side who rely on these kinds of products then I guess we could be in for a rockier ride than many anticipate.
I suppose it depends on how you define "dodgy". If you mean subprime, then I think you're right, there are relatively few subprime loans compared to other areas of the country. Or so I hear...
If you're talking Alt-A (still dodgy IMO) then there is a large percentage of people getting these loans. I'm not sure how Alt-A lending is going these days. Obviously it's getting tougher, but I'm unsure how many of the programs are still available to the public. Any brokers out there?
Is it actually possible to have a no-doc, 100% LTV loan that isn't subprime? Subprime or not, just how prevalent are no-doc, 100% LTV loans in the Seattle area?
Zero-down mortgage? Big lenders saying no
4 out of ten used Zero-down 100% LTV in 2005 and 2006 nationally.
I believe someone pointed out a source here that mentioned 33% of King Co. mortgages issued in 2006 were subprimes, and others have said it is closer to the 10-15% average since 2002.
Did a search, here but could not find it, so I don't have the link.
I think you are mixing facts. According to CSFB Seattle has 33% IO or Negam - which are not subprime and not necessarily "non-conforming". Seattle Times reported a while back that subprime was ~8%.
In terms of the Puget Sound area having a lower percentage of subprime loans when compared to other parts of the country, well, I guess it depends on how you define "Puget Sound area."
For example, when Elizabeth Rhodes of the Sea Times did her report, she only looked at certain segments of the Seattle/King County area and completely missed reporting on South Pierce County and other counties that we would typically add in when we think of "Puget Sound."
The best and only way to get this data (that I'm aware of) is to make a friend at a title insurance company. They have a database called Metroscan that you can query by a 100 different data points. For example, you could ask Metroscan to give you a report, by time period, as to how many ARM loans were originated in a specific zip code, and so forth. Chris Cagan from Firstam Real Estate Solutions will often release data to the media. (Firstam owns Metroscan.)
Now, here's what I can offer you: I meet loan originators every day. With some very minor exceptions, the thousands of LOs I meet use to originate (this is past-tense) only subprime, or a high percentage of subprime EVERY SINGLE DAY all over the state up until the March New Century meltdown. I'm only talking about LOs that work for a mortgage broker, not loan officers who work at a bank or credit union.
Now, subprime is disintegrating back where it came from: the hard-money lenders.
The challenge I see coming is that there is far too much competition for conventional/prime business and too many Mortgage Brokers/LOs to support it. That's what put MILA under here in Mountlake Terrace this past spring. They tried very hard to move into Alt-A and Prime wholesale lending but there was too much competition and they couldn't hang on.
Sorry for the long comment. I was out all day teaching and have been reading your comments on my pocket pc.
Seattle is not special. We're just lagging behind the rest of the country. Perhaps our hit will be less than cities such as, say, Detroit but this will affect us here as well. The extent remains to be seen.
When you say:
"With some very minor exceptions, the thousands of LOs I meet use to originate (this is past-tense) only subprime, or a high percentage of subprime EVERY SINGLE DAY all over the state up until the March New Century meltdown. "
Is that because the classes you teach are particularly attractive to subprime lenders, or is that a representative cross-section of all LOs?
Remember the 4-part blog articles I did on RCG regarding the differences between a banker, a broker, consumer lender, and a credit union?
LOs who work for a bank or a credit union do not have to become licensed, pass a competency test, or take continuing ed. Consumer loan lenders are tricky. If the company brokers out loans, they're subject to licensing. 95% of the LOs in my classes are working for mortgage brokers licensed under the state Mortgage Broker Practices Act. As of this past Jan 1, 2007, they all need to become licensed. Among other topics, I teach their required ethics class, and the other popular class right now is a state and federal law review to prepare them for their competency exam in which I'm with them all day long.
Banks also originated some of the subprime loans. Banks ALSO purchased subprime loans from brokers through their wholesale lending department (such as Countrywide). Banks, such as Countrywide, ALSO purchased mortgage backed securities and CDOs containing subprime loans. Yeah, thanks Angelo, for selling your stock just before you changed your company outlook. We all really appreciate the way you give corporate America such a fine reputation.
LOs who work for a broker do so because they can (well, could) make a boat load of money with: no training, no experience, little supervision, practically non-existent government oversight, and no incentive or external motivation to look out for the customer's interests. There was (and still is for maybe a week or so and then it will be all over) a plethora of $$ external motivation $$ to put the clients into subprime, and corporate culture that rewarded, encouraged, and promoted making as much money as possible off the consumer.
A banking environment is radically different than working for a broker or consumer loan lender. Remember that the two biggest national predatory lending settlements were against consumer loan lenders: HFC and Ameriquest.
But, but, but Rhonda has lots of training and experiece and has her clients' best interests at heart.
regarding past data from Metroscan, sadly no. The very best one of us could do is to try calling the customer service department at any of the local title companies. Also, real estate offices often have a full monthly subscription to Metroscan, Realquest, or Experian. If someone's real estate office has a subscription to any of these database products, bring me into the office and I'll run the report for you.
If the borrower had a decent credit score, the loan you describe would (I believe) be classified as Alt-A. "Subprime" refers to the borrower.
My understanding is (someone correct if I'm wrong):
-Subprime: Low credit score borrower, mostly loans with teaser rates and other bad loan terms, because otherwise they wouldn't be able to afford the "normal" fixed loan. Besides, they're only using the loan for a couple of years to fix their credit score and then they'll refinance into a sensible prime loan, right?
-Alt-A: Higher-than-subprime credit score borrower, dodgy loans. Either ARMS, IOs, neg-AM or 100& CLTV or whatever. The borrowers are more likely to try really hard to pay their loans (because they have good scores) but that doesn't mean they can "afford" their loans in the first place. So a LOT will default, but it is taking time for the defaults to get moving. This is why the media is obsessed with the "containment" of the problem withiin subprime.
-Prime: Good score, "sensible" amortizing loan, etc. Unlikely to default in normal conditions. Of course, you never know how many of these peeps will default if they see housing prices shoot down. For that to happen, we'll need serious depreciation.
My understanding is that in Seattle the Alt-A has the majority, with prime following and subprime near the bottom. Not sure of percentages although I'm sure someone here has a chart they can share.
If anyone out there can correct my understanding of the loans as described above, I'd appreciate that. I'm not 100% confident in the descriptions.
http://www.billcara.com/CS%20Mar%2012%2 ... ousing.pdf
So it looks like "Seattle" (not sure if they mean the city, or city and surrounding areas, like they usually do - Case Shiller, for example) has a 33% rate of IO/Neg-am for 2006. I'm sure there are other Alt-A products too, so I'll just round up to 35%. I've heard that subprime is about 8% in this area, so that pretty much takes us to ABOUT 50% Alt-A and sub-prime, more or less.
Now also consider that "prime" is split into conforming and jumbo. This isn't CA, so our rate of jumbo isn't going to be huge, but I'm sure it's large. Consider that jumbo loans are LOANs over 417K and not HOUSES over 417K. A lot of people move up and take equity with them...
Regardless, right now it's looking like they'll be a period of time where prime conforming (non-jumbo) loans will be the only ones with attractive rates on them. All others with either be unavailable, or more likely have significantly greater interest rates, to match with the "now apparent" risk.
So:
-Save 20%
-Don't get a loan for more than 417K
-Get a W2 job
-Be old fashioned and consider paying your loan back in the future
So, just so I'm clear, it sounds like you work primarily with those at brokerages, because most at banks and credit unions are either already licensed or get the info you teach in-house?
So the upshot is that the LOs you come in contact with, who you say are (or were) mainly operating in the subprime arena, are not a representative sample of all LOs, just those who work for brokerages, right?
Alt-A = stated income, no income verification (a.k.a. liar loan), but good credit risk
Prime = borrower with good credit risk, verified income
The terms of the loan like ARM, IO, Option, jumbo are independent of the classifications above. You could have an IO jumbo prime loan, though I agree that loan terms such as IO or Negative amortization are more common with subprime and Alt-A segments, since these terms made it easier to qualify.
Personally I think IO loans make sense for prime borrowers if you put 20% down and have extra assets. It's OK not to be paying down the principal if that lets you conserve the cash you would be otherwise repaying. The cash you save is a liquid asset that you can use when needed a lot more easily than tapping the equity of the house.
Alt-A loans originally existed to let people with variable income get loans, but they have been abused by having the mortgage brokers invent incomes for the borrowers such that they qualify for the loan - sometimes with and sometimes without the knowledge of borrowers. Hence the name "liar loans", and hence a greater risk of default.
I also saw the term "Ninja" loans in The Economist: No Income, No Job or Assets. I wonder where these fall?
Run of the mill houses in Lake Hills are going for more than $417k. Hell, that includes the house i'm renting -- an average house in an average neighborhood (that sold for ~$250k a few years ago).
The question is: who is buying these homes? What percentage come with equity? If these houses are NOT move-up houses (those with equity) then this segment of the market will experience significant downwards pressure in the coming months.
I'm not sure I completely agree with this. If you're looking for a highly liquid cash asset, and have 20% down on your house, get a 10% HELOC and don't use it. You can write yourself a check any day and even get a credit card! Keep it as your emergency fund. You won't pay any interest until you use it.
The strategy changes if you're thinking long-term, but as a short term play you can't beat an emergency HELOC. Hint: get one before you lose your job so that you qualify!
not that it's a lot, but median value in kingco is still under $500k, so FNMA/FHA cover half of the potential market, at least - which is in line with the national stats. CSFB has a great chart that shows the breakdown of the national market in excruciating detail showing 50% is gov't backed, 50% is securitized.
Exactly. Plus, you MUST assume that *some* of the $500k+ housing market is for people that are moving up and are coming into the house with a little equity.
In my opinion, the market for higher level homes will be hit pretty significantly by all this and this in turn will push down the value of a lesser (location/niceness) homes.
All I have are anecdotal observations for the Lake Hills area I mentioned. The house that very recently sold down the street had ben reduced to $479k, which is still ~$20k above the latest comp I know of. The people that moved in looked pretty young, maybe mid-20s. The husband drives a Comcast van, no idea what the wife does, or how much they might have brought to the table.
Another house farther up in Redmond that recently sold was apparently bought by a shuttle driver for Lexus of Bellevue, since the van is always in the driveway. Nearby comps to my knowledge had exceeeded $500k last year.
Makes me wonder how much these van driver jobs pay. Maybe I'm in the wrong industry.
HELOC is an alternative strategy, but I don't like it for several reasons:
- like you said you have to apply for a HELOC *before* you need it; besides the paperwork and the fees, it creates a second mortgage and makes it harder to refinance, sometimes a lot harder. When I was refinancing with a HELOC a few years ago, they assumed payments on the HELOC as if it was fully utilized, at a maximum interest rate, even if you had nothing drawn from the HELOC at the time of refinance. And then you have to get subordination agreement from the HELOC lender, which I guess should be a formality, but still it's an extra hassle.
- the interest you pay is tax deductible and you can invest the cash, depending on your risk apetite, so you can either almost match your interest payments on the safe end, or exceed your payments when you take on risk. IMO the cost of keeping a higher mortgage balance is a wash, and you have more liquid assets.
That really does not bode well for the Seattle area.
What I'm saying! I knew business school was the wrong path to riches