Friday, December 7, 2007

Must read

Here's a must read. Herb Greenberg, who has a blog on, has been getting all sorts of juicy information from a mortgage industry insider. He has posted this insider's latest thoughts about the Bush plan and the state of the mess in general. An excerpt:

The 3/1, 5/1, 7/1 and 10/1 hybrid interest-only ARMS will reset in droves beginning now. These are loans that are fixed at a low introductory interest only rate for three, five, seven or 10 years — then turn into a fully indexed payment rate that adjusts annually thereafter. They first got really popular in 2003. Wells Fargo led the pack in these but many people have them. The resets first began with the 3/1 last year.

The 5/1 was the most popular by far, so those start to reset heavily in 2008. These were considered ‘prime’ but Wells and many others would do 95%-100% to $1 million at a 620 score with nearly as low of a rate as if you had a 750 score. No income or asset versions of this loan were available at a negligible bump in fee. This does not sound too ‘prime’ to me. These loans were mostly Jumbo in higher priced states such as California….

For those that aren't in the know, and I think I may even include myself, 620 is a VERY low score! Yet the industry has been making these crazy loans with no down payment to idiots with a credit score of 620 and calling it "prime"! That's like calling Taco Bell meat Grade A Black Angus New York Strip!

But this is the scariest part:

One final thought. How can any of this get repaired unless home values stabilize? And how will that happen? In Northern California, a household income of $90,000 per year could legitimately pay the minimum monthly payment on an Option ARM on a million home for the past several years. Most Option ARMs allowed zero to 5% down. Therefore, given the average income of the Bay Area, most families could buy that million dollar home. A home seller had a vast pool of available buyers.

Now, with all the exotic programs gone, a household income of $175,000 is needed to buy that same home, which is about 10% of the Bay Area households. And, inventories are up 500%. So, in a nutshell we have 90% fewer qualified buyers for five-times the number of homes. To get housing moving again in Northern California, either all the exotic programs must come back, everyone must get a 100% raise or home prices have to fall 50%. None, except the last sound remotely possible.

Kind of sums up the whole housing meltdown in just a couple of paragraphs. He says that only the lest sounds remotely possible, and I agree somewhat. We are going to see home prices fall A LOT. But I think the second option has a real chance as well. The Fed is keeping the printing presses very busy, and Helicopter Ben is warming up the rotary motors. Inflation of nominal prices of everything, including income, will lead to a smaller decrease in nominal prices of homes that would be seen otherwise.

2007 has been an amazing year to watch the financial markets. My guess is 2008 will make 2007 seem boring in comparison. Keep your seat belts fastened!

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