There is some scary stuff happening out there with housing. Some snippets: In the last month, federal regulators issued guidance pertaining to non-traditional loans (I/O adjustable amongst others.) Mish’s reaction:
1. If the guidelines are followed, which I don’t know how they can not follow, a ton of loans in the pipeline are going to be rejected. Furthermore, the recasters are going to have hell of a time refinancing, while the existing loans are all going to be non-conforming to these guidelines.
2. The big question is applicability to the non regulated lenders such as NEW, LEND and NFI. Could they actually benefit because all the regulated lenders such as CFC, WM, WFC would all be forced out of the market. I find it hard to believe that the powerful banking lobbyist would allow that to happen so it would be only short term.
3. I think it has teeth because while they are just guidelines, the banks are going to have to explain to the examiners why they choose to ignore the guidelines if they continue to lend using old underwriting standards. They guidelines are pretty clear.
Further down in the article:
On a national basis 46% of loans in 2006 were adjustable and of those 63% were non-traditional. In other words 29% of all loans nationally were either interest only or pay option arms. That is likely to be a huge problem as interest rates reset. The chart above shows the number of neg-am loans. It is close to a staggering 27% of all loans this year in California. If the only way people could “afford” those homes was the low teaser rate, then look for a huge drop in purchases as the lending guidelines are followed.Summary of Effects
- Stated income loans all but vanish
- Pay option arms all but vanish
- Pool of eligible buyers shrinks
- Inventories will rise
- Increased downward pressure on prices
- California, Nevada, Florida hardest hit
- Foreclosures will continue to rise
One of the arguments against there being a housing bubble is that homeowners will re-finance when their payment spikes from one ARM product to another. These guidelines make that more difficult especially if your home has decreased in value and you have no equity cushion. If the appraiser comes out to decide what your home is worth and it is worth less than what you owe or has not increased enough in value to give you an equity cushion, either you won’t qualify for that new loan or you have to bring money to the table.
Calculated Risk points to a couple of articles that predict some pretty awful stuff (posts on October 23.)
Here is Reuters: Fannie, Freddie chiefs see danger in new mortgages Popular new mortgage products that have helped fuel the U.S. housing boom will soon lead to more delinquencies and foreclosures as rates are reset, the chiefs of mortgage finance giants Fannie Mae and Freddie Mac said Monday. Next year, a trillion dollars worth of mortgages will have their rates reset, said Dan Mudd, chief executive officer of Fannie Mae. That’s a significant share of $9 trillion in mortgages outstanding, he said.“Those resets are going to have some very interesting and difficult-to-predict impacts on consumers,” Mudd said, noting that many consumers will have trouble keeping up with payments.
And in another article:
Up to 4% of America’s mortgaged homeowners might lose their homes to foreclosure in coming months, one of the nation’s largest lenders predicted Monday, as those homeowners find themselves trapped by heavy debt and the housing slump. …………………………………………..
Four percent, of the approximately edit: 50 million mortgaged homes is 2.0 million potentially lost to foreclosure in the “coming months” (thanks to Ellen1910 and
Tanta for the correction).
The emphasis above is mine. On the bubble blogs here, here, here, and here it is often argued that the reality on the ground is not reported in the MSM until 3 or more months after it is actually happening. I’ve followed these blogs for close to a year now and that has proven to be true. What’s being reported on these blogs actually hits the MSM much later. It’s important to read through the comments on these blogs. The comments often flesh out what is in the post and most of the posters are financial people who know what they are talking about.
If what is being predicted above is true then this is going to be much worse than I can even fathom. My Dad talks about the last bust in the late 80s and early 90s and how there were pages and pages of foreclosure auctions listed in the newspaper. To see if the number is rising where I live I signed up for a free foreclosure alert from realtytrac. I’ve been getting one or two emails a week from them with new foreclosures. It’s not a huge amount but what happens when all of those exotic mortgages adjust next year?
As my Grandmother would say, Holy Smokes!
