Countryside Mortgage Las Vegas Blog

PRINT Aftermath of the Global Housing Bubble

Sometimes the complexity of the world is a ruse, and seeing the overwhelming future of our fortunes is strangely simple. Our past and future credit crisis is but one case in point. Remember when fear and failure wrecked markets wising up to the fallout of debt given to anybody for anything, but especially for buying houses?

Naturally our financial leaders around the world took the radical steps required to reduce the debt created in a massive credit bubble. Oh, sorry, that was my fantasy world I was talking about. What our leaders are doing is correcting a severe cyclical recession. What our reporters are doing is covering a severe cyclical recession. What sublime kabuki theater.

Back in the real world, the destruction of debt required to cure a credit bubble hasn’t been done. That means the reason for the new credit crisis is no different than during that past time of fear and failure – except that now we have new magnificent malignant clusters of sovereign debt serving as a sort of hand-held fan covering the unclothed emperor. Does that count as cover?

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There is a prism I use to see the world. It is in houses. Look immediately above to see housing prices (the global housing bubble chart). Let me tell what I see when I look at this: We had one wicked housing bubble in the United States, but apparently we were the conservative party poopers. It looks like the funner countries are Ireland, Britain, Spain, Sweden, France, Norway, Denmark and Italy.

I know mortgages are used to buy houses. Yet they also represent not just the largest financial asset category, but the use of debt to buy anything including companies and commercial real estate and credit-card receivables. What are the futures of these debt assets? If we know the fate of mortgages do we know the fate of them all?

Oh and I also wonder about the sovereign kind? Luckily those debts are backed by the likes of honest hard-working Greeks who live to protect their impeccable reputation for being always good-and-true to their word. “Pass the Ouzo Aristotle. Do you have a cigarette? Did you have to pay any taxes this year?”

The strange case (Or is it the normal case?) is the residential mortgage market in the United States. Look immediately above. Values of the equity asset have fallen more than 30 percent, but the values of the debt asset (mortgages) used to buy the equity asset (homes) have fallen two percent. Both of these investments have a right to title to the same asset, but one has fallen FIFTEEN TIMES further than the other. Is this the real world or is it make believe?

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While it’s possible that this anomaly may hold, the 15 percent of residential mortgage borrowers who are now behind points toward the debt mortgage balances and the equity home values moving closer to each other.

That’s a complicated way of saying that mortgage balances logically should fall in value in a ratio very much like the fall in value of the house asset itself. Has not happened yet, but isn’t it true that the world is logical?

We know that the fall in property values is real and we know that the United States bubble in values was far greater than any bubble of the last 120 years (See chart above and pay close attention to the amazing “X” bubble. That’s historical.). Thus now do you see the pattern of Armageddon gathering force and deciding when and where to explode and paint a picture of gore all across the world.

The American market in housing went totally off the deep end. A flood of negative equity now invades our land. Yet look yonder to strange and distant shores. Look at Italy and Denmark and Norway and France and Sweden and Spain and Great Britain and Ireland.

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Their real estate market got bubbled worse than ours, but surely their central bank and treasury are more honest, courageous, and knowledgeable than ours?

Oh, I’m sorry. That’s another scary discovery. Admit the ruthless incompetence of the Fed and the Treasury in the management of our massive credit bubble, but give them credit for being rather like the publishers of Consumer Reports where their evasions and deceptions are surely trivial when compared to old world freaks like Italy and Spain who publish Penthouse for its unending internet offshoots. Did you read the prospectus?

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Just when you think it’s impossible for dishonesty to be taken to the next level in the American housing market, you see a factoid like this one, which, if true, means that bank-owned properties are being held like abandoned castles (See chart above showing huge numbers of banks owned properties lying hidden in your local bank’s burka.). I had always assumed that the shadow inventory was just bungling bankers failing to execute foreclosures. I didn’t see the sale of the foreclosure as boiling poison and certain death, but then I saw that chart up there and interpreted it as an executioner’s song.

One on top of the other I saw this stupendous headline in Forbes: “Six Giant Banks Made $51 Billion Last Year; The Other 980 Lost Money.” And then I said to myself: “Well, if my bank would go out of business if I sold my foreclosure collateral, would I just hold it then to live for another day?” The answer was obvious: Yes, if that was allowed, I would just hold it like an old abandoned castle.

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It takes me aback. It staggers me. Our housing market is a true obstacle course. The federal government is making every mortgage loan to forestall radical crashing, and our local banks are pretending to solvency by going into the castle and museum business (foreclosures held as investments).

My suggestion therefore is that you look in to the John Paulson trade. Read up on what that was all about (See the short simple version of it here.). See if there is some sort of echo housing-bust credit-crisis mass-multiple derivative instrument which you can use to really get the chance to do it this time. This is the best trade ever. It’s easy. It’s obvious. It’s real.

The center cannot hold. America is a bubble. The world is a bigger bubble. We and the world and the debt behind the mania will break. Hell will rule, but remember, it will only last for an extended period.

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PRINT Aftermath of the Global Housing Bubble

Michael David White is a mortgage originator in all 50 states.

Way out West in the land of JUMBO MORTGAGES, we don't get a volume discount when we borrow a BIG CHUNK of CHANGE to buy our PRICY real estate. We get a VOLUME PENALTY, and let me tell you, these days that penalty is HUGE. Jumbo money, no matter how you look at it, is ridiculously expensive as compared to that sacred cow with the magic number of $417,000: the conforming mortgage.

Its like saying that all women who weigh over 120 pounds need to pay double for their clothes. Who came up with that number of 120? How is that fair when it is a lot easier to weigh 120 when you are 5'2" as opposed to 5'8"? And if I am big-boned AND tall, why do I have to pay the FAT PENALTY?

You see, size does matter.

Sure we have movie stars and we have vineyards. Sure, we have sunny, 70 degree days in mid-winter , and only need air-conditioning about 3 times every summer. We can snow board, wake board, and surf board all in the same day, surrounding by all the majestic beauty that defines coastal California. 

Because of all this, our real estate is, well, probably a lot more expensive than yours. We Coastal Californians  justify this like those gorgeous ladies on TV: Why? Because its worth it.

But lately, finding jumbo money at any kind of reasonable rate has turned California Dreaming into a California Nightmaring. Where is the salvation promised by the increase in conforming rates?

When starter homes cost $600,000 and basic homes cost a million bucks, there is a darn good chance someone will need a loan of greater than $417,000.

We foolishly bit, hook, line, and sinker, when the Feds promised they would raise the limit on conforming loans. Most Coastal California counties were awarded the highest limit: $729,000. For about 10 seconds, we thought all loans between $417,000 and $729,000 would carry the same low rates as those below $417,000. But no, we were wrong.

Our first clue was the wording that made the higher limits "retroactive" to last summer. Okay, what does this mean? Could it be that the REAL reason for the increase was to "restore liquidity"? Banks everywhere have been forced to "portfolio" (or retain) their jumbo loans, because governmental agencies would only buy loans of less than $417,000. As liquidity dried up, RATES SOARED. Extending limits allows banks to sell the bigger loans currently in their portfolios, therefore restoring "liquidity" (the ability to loan more money).

Our second clue was BANKS set the rate for loans, not the Fed. NEWSFLASH: Banks STILL don't want jumbo loans, even though they can dump them. A bunch of little loans spreads the risk much more nicely than one big loan, and the increase is only temporary.Why encourage those big loans when the whole abilty to get rid of them goes away at the end of the year?

So last week the first few lenders finally provided the guidelines for the new, higher limit loans (most awkwardly named "temporary limit increase agency jumbos"). 

Although the limits are higher, these loans are still a sad step child in the mortgage world, carrying rates much higher than conforming loans, and the rules to qualify are far stricter.There are plenty of little "gotchas" too. For example, the loan is ineligible if a relocation package is assisting the borrower. Please don't ask me why. It makes no sense to me, either.

In addition, many lenders have credit score criteria that is higher, and have pulled out the old "declining values" penalty, which lowers the actual loan amount if the county is in a "declining value" market, which includes just about every county in the state.

Are there options? Well, yes. Lenders who portfolio their loans anyway are grabbing the niche that exists between the $417,000 and the $729,000. They offer only ARMS, and not 30 year fixed rate financing, but rates are much lower. Too bad everyone is focused on getting that 30 year fixed money right now after being stung by an adjustable.

There is FHA, which now carries the new higher limit as well, but carries costs that a non-FHA loan does not. And finally there is the old tried and true first and second combo, with the first loan capped at $417,000 and the second loan ( assuming you can find one) making up the difference.

For now, the volume penalty on larger loans is very much like the FAT PENALTY.  Many Californians (who can't help it if they are big boned) will simply wear what is in the closet for now.

Maybe you can now weigh 135 pounds instead of 120, but what does it matter if they have JACKED UP THE PRICE OF CLOTHES ANYWAY?

 

 

 

 

Written by Janet Guilbault, California Mortgage Expert based out of the San Francisco Bay Area