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A Really Dumb Headline
Thursday, November 17, 2005
After coming across an article like Is Getting a Home Loan Becoming Too Easy? it becomes painfully clear that the greatest problem facing real estate market observers today is in attempting to determine who the dumbest participants are - the mortgage borrowers, the mortgage lenders, or the headline writers.
In this look into low-documentation and no-documentation loans, Wall Street Journal Staff Reporters James R. Hagerty and Ruth Simon do a respectable job of assembling comments from the minimum number of interview subjects required to submit a story to their editor (apparently eight), but in the end, the experience is spoiled as readers refer back to the headline after every fifty words, wondering when the satire will begin.
The answer to the question posed in the title is exceedingly obvious to anyone paying any attention to what is going on in the nation's housing market today:
How can a story with a headline like this be anything other than satire?
After expecting the now-worn phrase "anyone who can fog a mirror" to pop up with each new paragraph, the reader ultimately reaches the end of the article unamused and unsatisfied. Surely there were some clues along the way for whoever it was that adorned this work with the headline that it now bears...
It begins:Obtaining a mortgage loan used to be an ordeal that involved retrieving reams of tax returns, pay stubs and bank statements. Now, some critics contend, it is becoming a bit too easy, putting everyone from homeowners to certain bond investors at risk.
So, the part about lazy, busy, or secretive customers and less demanding lenders combining to cause a sharp rise in low and no-documentation loans during the peak of the largest real estate boom in history, where prices have escalated beyond anyone's wildest imaginations while income and rental prices have been flat ...
Mortgage lenders -- competing for customers who are lazy, pressed for time or reluctant to reveal their financial secrets -- have grown much less demanding about the amount of proof borrowers must provide about their earnings and assets.
The result is a sharp rise in loans known in the trade as "low-doc" or "no-doc." These loans, which typically carry slightly higher interest rates, allow borrowers to skip some or all of the traditional requirements for verifying income and assets.
The danger is that these loans may allow some borrowers to exaggerate their financial strength and buy houses they really can't afford.
This should have been an indication that maybe getting a home loan is becoming too easy and that the headline wasn't suitable - this should have been clue #1.Bank regulators, however, are starting to raise questions about low-doc loans. "My premise is: How hard is it to come up with a couple of copies of pay stubs and copies of W-2 [tax forms]?" says Barbara Grunkemeyer, deputy comptroller for credit risk at the Office of the Comptroller of the Currency, which regulates national banks. "I think there's a good reason why no-doc and low-doc loans are called liars' mortgages." She adds that there are some circumstances in which low-doc loans are acceptable, such as refinancings that don't involve extracting cash from home equity.
My premise is, "Where have you been Barbara?" and why has it taken you so long to find out about "liars' mortgages"? Actually they're called "liar loans", which rolls off the tongue much better, and as such, this alliteration earns the coveted spot as clue #2.But Michael D. Youngblood, an economist at Friedman, Billings, Ramsey & Co., in Arlington, Va., recently studied low-doc loans made to borrowers with less-than-pristine credit records and concluded that lenders are being prudent in granting them.
The only person that doesn't see a problem is the economist - clue #3.Among loans used to back mortgage securities created by Wall Street and other firms that aren't affiliated with the government, the percentage of mortgage loans that are fully documented dropped to 54% in this year's first eight months from 72% in all of 2000, according to LoanPerformance, a unit of First American Corp.
While many are anxiously awaiting the recently announced negative-documentation loans to be made widely available, almost half of all new loans being low-doc or no-doc qualifies as clue #4.Countrywide Financial Corp., the nation's biggest mortgage lender, has what it calls a "Fast & Easy" loan program that eliminates much of the paperwork normally required.
Buying a home should not be like renewing your driver's license - clue #5.Daniel Rubén Odio-Páez, owner of DROdio Real Estate Inc., a brokerage firm in the Washington area, recently took out a low-doc loan from Countrywide to buy a house in Chantilly, Va. He says he couldn't document his income because he hadn't yet filed his 2004 tax return. The $522,000 loan carries a 6% interest rate. If he had provided full documentation, his loan officer says, Mr. Odio could have received a rate of 5.625%. That would have lowered his monthly payment by about $313.
Owning a real estate company, Daniel is understandably much too busy to file tax returns or care about an extra $313 a month - this is likely to change in the years ahead, and therefore could possibly qualify as a clue sometime in the future, but does not qualify as a clue today - sorry Daniel.Other people choose low-doc loans because they are straining to qualify for a mortgage. Charles S. Davis, who operates APRCompare.com, a mortgage brokerage in Huntington Beach, Calif., says some borrowers in expensive markets need to pay as much as 50% of their income to meet mortgage payments, insurance and property taxes. That would disqualify them for most conventional loans. "In this case," he says, "I would use a low-doc loan to help them into the property they want." Mr. Davis adds that he wouldn't offer such a loan if he believed the house was "truly unaffordable" for the borrower.
Well, as long as it's not "truly unaffordable" - clue #6.One of Mr. Davis's customers, Jennifer Abate, a financial adviser in Santa Ana, Calif., says she chose a low-doc loan because it was easier and she didn't want to take the risk that she wouldn't meet an income requirement for the home she wanted.
Unsound risk aversion and "ugly" easily earn clue #7 and #8.
But as the housing market cools, many low-doc loans will go bad, predicts Michael Menatian, president of Sanborn Corp., a mortgage bank in West Hartford, Conn. "It's going to be ugly," he says.
Just who came up with such a headline that is so inconsistent with this story? Has there been a recent exodus of Money Magazine editors, now employed at the Wall Street Journal, who left their previous employer in a dispute about how the real estate market should be presented to their loyal readers?
Just doing a Yahoo! search for no-doc loans and examining what shows up in the Sponsored Links section of the page should demonstrate what is going on in this market - think of the guy in the big red Hummer H2 with HOME LOANS and his phone number in fourteen inch bold white letters on his side and rear windows.
[By the way, on a related topic, four very interesting comments showed up on the Bryo piece that appeared here a couple months ago - does anyone believe that a 62 year-old lady has really visited this blog and left these comments?]
16 comments:
One of the constant memes on the housing boom is that a big crash in house values requires some kind of external force like large local job losses. Since we're not seeing big job losses, guys like Greenspan say, we can't have a crash. Which would be a great concept if systems worked in consistent, predictable ways.
With these loans comprising so much of the market, it wouldn't take a much to push a lot of people over the edge. Who needs a recession when a failure of the economy to deliver 3-4% growth rate consistently over the next few year could tip the tottering structure that is the real estate market over?
*chuckle* WSJ has been like that for at least 10 years. maybe even forever.
95% of their articles is recycled garbage from other publications. It is truely a rare moment when i learn of anything new from them.
They remind me of press releases done by economists that work for national realtors association.
That's one dumb headline alright -- you have to wonder who really writes the headlines and how that makes the reporters feel.
Having worked in the mortgage industry for over a decade as an originator and closing attorney, I can attest to how crazy things have gotten in the last two years. Over half the loans (purchases and refinances) we see now are interest-only. We routinely see equity-lines with stated-incomes from $50K to $100K per month. On a full-doc loan I rarely see monthly income over $20K.
This industry has gone mad.
what type of job do you make $50K to $100K per month - condo flipping?
have a pulse? You can get a no doc zero down interest only loan these days
amazing.
http://housingpanic.blogspot.com
In the spirit of the headline, I would like to offer the politically incorrect Really Dumb Portfolio. (Past failure is no guarantee of future success, or there are no past guarantees of future success, or vice versa, or something like that.) So, here goes:
Indymac Bank (NDE) -- A play on the "Alt-A" single family residential mortgage market. As Rick Perry, the CEO, said in a recent conference call, they are right in the cross-hairs of the housing bubble and the flattening yield curve.
General Motors (GM) -- Also a play on the flattening yield curve, with the possibility of a really damaging strike at Delphi thrown in at no extra cost. But you do get to make some money off the sale of all those Hummers.
Conoco-Phillips (COP) -- If you're going to make money off of Hummers, then you might as well make some money off of the gas needed to fill them up.
U.S. Tobacco (UST) -- A company whose products are the epitome of political incorrectness and allow you to profit off of other people's really disgusting habits. This is the "consumer staples" part of the portfolio.
Kaufman and Broad (KBH) -- Need I say more?
If about half a dozen current, really strong trends in the economy reverse, you might make money off this portfolio. Otherwise, I would not hold my breath.
You know, you shouldn't make fun of real, live 62-year-old grandmothers like that.
I'm a 95-year-old WWII veteran with a bumb knee, a walker and a glass eye, and Bryco helped me get a beautiful blonde 20-year-old wife, a new home in Berverly Hills and a brand-new Cadillac! And all that on my Social Security check!
Bryco! Believe It!
OMGBBQ those trolls were thoroughly illiterate, weren't they? Then again, federal regulations state that you only need a third-grade remedial edumacation to get the Federal Funny-Money Mortgage Broker license.
Bryco, my a--!
Be a real man!
Go to Indymac and get a Reverse Mortgage. Then you can unload the Caddy and get an H-1.
Plus, you'll still be able to afford those new implants, even if your wife does lose her health insurance with GM.
Housing bubble won't burst? Have look at what happened to real estate in Japan. To try keeping it from bursting, the currency will be sacrificed. Then, it will still bust.
Julian's Real Estate Myths
1)Housing is "different" than other assets. Speculation and mania doesn't happen in this asset class, it's only confined to stocks and commodities. Unfortunately, much of the same psychological drive that inflated the dot coms inflated this bubble. Sorry Julian, there are certainly differences, but it only took one similarity to make them much of the same.
2)You can ride out being 'underwater', because you are in it for the 'long-term'. Right, no one needs to move for family reasons, relocate for work, relocate seeking a better life elsewhere. You can just stay where you are, shackled to your golden palace when prices fall.
3) Assumption that rentals are always more expensive than purchasing because you are 'throwing away money'. Rents, Wages, and Home Prices have historically tracked each other very closely. If you home price fell to a dollar, you could likely find a place to rent for less than a penny.
4) Tax incentives! Sorry Julian, but don't overplay the incentives here, in fact many people choose the standard deduction because their deductions are not high enough. Second, there are many people being hit by the AMT which eliminates those deductions. Third, you might find those incentives gone in the near future.
5) Locked in! You sure are locked in! You are locked into rising property taxes and maintenance on a depreciating asset for 30 years. You are locked in to paying a price which you might find hurts the wallet a little more than you thought if the tax laws change. Oh, and who ever told you rents always go up? They've been incredibly stable and low over the past 5 years. Are you proposing that there is going to be a rent bubble?
6) Be part of the American Dream! Oh boy, talk about pushing a load of bunk on Americans. This is almost as bad as a DeBeers commercial.
7) A period of declining wages and price inflation stressing affordability will not lead to people being 'priced out'. Sorry, affordability is king. People will demand higher wages, people will move, local areas will fall apart. Periods of wage decline and housing inflation will lead to a fall in home prices.
8) You'll be priced out forever! Another psychological ploy to put fear in the hearts of non-owners. Pump the psychology, pump the bubble! Sorry, that concept is a joke.
It was fun! I hope you do well in your investment.
Grim
Northern NJ Real Estate Bubble
Actually, if you have locked in low rates for 30 years (or, better, 15), _and_ you have been paying down the mortgage, you're probably in pretty good shape. The folks who are going to be in big trouble are those with adjustable rates (even worse are insanities like the interest-only and negative-amortization loans) as payments rise and appreciation dwindles or reverses. A lot of people, too, have been using the "housing ATM"--extracting the paper equity with home equity loans, so they have been borrowing ever-more heavily against the rising nominal value. They're likely not only to end up upside-down on the loan, but squeezed by skyrocketing repayments as rates rise. This is particularly the case if they've been using the equity extraction for living expenses while hoping for continued house appreciation to bail them out. They won't have any sort of financial cushion.
Those of us on the wrong side of 50 remember other real-estate downturns, with people just leaving the keys under the doormat and walking away. It's going to happen again.
PS: "The Day After Tomorrow" series on Jim Puplava's Financial Sense Online site (www.financialsense.com) has an entertaining fictionalized set of scenarios on the housing bubble.
Julian and everyone think you are safe:
Think again -- stats shows that about 50% of jobs nationally created in the past 3 years after recession is directly or indirectly linked to Real Estate -- realtors, loan officers, appraisers, contructors, builders, painters, Home Depot, Lowes, electricians, .... you can expand your imagination here.
In the meantime, few hundreds of Billions equity was extracted from home equity due to rising home prices -- to buy cars, eat out, home upgades, vacation, fancy cloths ... create more service jobs which are non-productive as they don't manaufacture real stuff. An economy cannot sustain simply as you wash my laundry and I clean your house -- consumption economy won't last.
When the boom stops, house price don't increase and no home equity extraction, think about your job security. It's a good thing that you locked in 30 year interest, and reducing your mortgage principle. But there are things that you may not control.
Get better education, learn different languages, acquire higher paid skills to compete Globally. This will ensure you will survive in the upcoming financial storms.
Julian: You say that owning is part of the American dream, but does one really 'own' a house they are paying a mortgage on? It's really not too much different from renting in the fact that if I truly own a home outright without intentions of selling, I can paint it taco pink. If I have a bank note, I must be mindful of the banks' interest and not do such a thing.
Plus you say the American dream is owning. How many people own the SUV's they are driving? Not too many.
A severe housing crash is coming - I'm glad in the way that I'm sick and tired of hearing all the idiot investors who think they are gazillionaires because they made $10,000 on someone else's stupidity. I'm also worried about all the jobs that will evaporate in the downturn- possibly including mine.
Perhaps there is no housing bubble after all, just a nasty possibility for inflation.
It is interesting to read these comments. One thing no one has mentioned is the massive amount of debt that the banks themselves are in. If the housing markets collapse what does one think the banks will do?
Perhaps the collapse of the housing market will be precipitated by the demise of GM. Suddenly loans are harder to attain. Causing housing prices to drop, thereby causing a cycle of falling home prices and no people able to obtain loans for them. This would raise interest rate, causing the government to spew out warnings of deflation. This would prevent the in-debited consumer from spending money. Another, possible threat for deflation, and with the governments hedonically manipulated core price index, allow for a nice amount of deflation fear. Next, this would lower the tax revenue of the government, thereby causing them to print their way out of debt. (have to stop the deflation) This would debase our currency, causing inflation.
My, my what a twisted web we weave.
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