Wednesday, January 21, 2009
Economic Fantasies Can Be Very Expensive
Now we keep reading that "credit is tight", as in this article about new record lows in the homebuilder survey:
The National Association of Home Builders/Wells Fargo index of builder confidence dropped to 8, lower than forecast, from 9 in December, the Washington-based association said today. A reading below 50 means most respondents view conditions as poor.This is not true. Credit is not tight by any reasonable standards.
Builders’ attempts to reduce the property glut by slashing construction have been hampered by a jump in foreclosures that’s returning homes to the market. Prices and sales are likely to slide further as banks stay reluctant to lend and job losses discourage buyers.
“Builders have completely thrown in the towel,” Ellen Zentner, a senior U.S. economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said before the report. “They have their finger on the pulse of the credit market and they know credit is tight.”
You want proof, but don't want to go through the hassle of a mortgage application? Try Fannie Mae, which is basically setting industry standards right now. Look at their 12/18/08 guidelines for credit scores, DTIs etc, which can be found on this page. These draconian requirements include
- Minimum credit score of 580 (but not for manual underwriting or for bailout streamlined refis),
- Maximum 45% DTI (Debt/Income ratio) for manually underwritten loans (standard Desktop Underwriters apply for the rest),
- Allowing non-arms length purchase money mortgages as long as it is for the primary residence.**see explanation below.
Do want seller DP (seller contributes 3% for downpayment) ARM Interest Only 40 year 97% loans? Get 'em here! Max CLTV 105% MyCommunity (low to moderate income borrower can get up to 105% of appraised funds with Community Seconds, no borrower funds required), interest rate buydowns, nontraditional credit okay with credit counseling - why sure! 40 year loans w/ 10 year I/O period? Of course! Go ahead and look at these products - this is hardly tight lending.
There are some tighter requirements for the High Balance portfolio (what used to be jumbo conforming) with a 90% CLTV for one unit principal residences. There are also loan level pricing adjustments for higher risk transactions and adverse market delivery charges (see the current LLPA/AMDC matrix here). So, for example, after April 1st, my 90% ARM is going to cost me 25 bps, and my credit score of 675 is going to cost me another 125 bps, and my IO feature is going to cost me another 50 bps, total additional cost of 200 bps or 2% more.
Of course, I could knock that down to 1.25% more by improving my credit score to 680, and frankly, if you were shopping for a mortgage, I'd make you do that first! Because if you are so uncontrolled that you can't jack your credit score up 10 points in six months, you are not ready to buy a home IMO, and believe, there are plenty of homes out there which will be available when you do manage to do it.
Credit truly is tighter for investment properties, but it always had been before the late insanity. The reason is that investors walk away when it makes sense to do so. So Fannie wants you to put 20% down, and if you only want to put 10 or 15% down, they'll make you the loan but charge you extra for their additional risk, depending on your credit score.
All the rhetoric is generated by lobbying arms of various special interest groups, and never checked by reporters. Policies serving the interests of builders (among other goodies, they are asking for a 22K tax credit for purchases) are going to cost the taxpayer a lot of money and generate more bad loans. There's nothing wrong with the credit options available to would-be purchasers. There's still a lot wrong with pricing in many areas, and most of the people who wanted to buy already did buy, so there is a relative paucity of buyers. That is temporary and will pass. How much more can lenders do? After a period of extremely loose credit, there will be a few years in which new entrants into the housing market are restricted simply because anyone who would normally have qualified under reasonable terms already qualified during the period of no-fear lending.
**Explanation of non-arms length mortgages: These were one of the most transparent builder scams out there. Note that what has been changed is that investors can no longer get these, but principal residence buyers can.
What builders used to do is build up a few houses in a new subdivision, get them professionally decorated and throw in all the options. These were their "models" used for sales tours. But the builders wanted to establish high appraisal values for their subdivisions, which in many cases were larger homes placed very near to existing homes (usually smaller and older) that were selling for 40% less at least than the builder's desired price-point. In order to do this, they sold the model homes to investors or invesmtment groups for high prices, and leased them back for 18 months or 2 years at a very high monthly rate which more than paid the mortgage. This set the original appraisal value for the subdivision, and the investors got to hold the homes for free and profit off the appreciation. That worked great in bubble markets, but once the bubble started to deflate, the investors defaulted when the proceeds from any possible sale were less than the mortgage balance.
Another scam was that employees or associates of the builder would "buy" a second home from the builder in the early stages of the development for the builder's inflated price. Needless to say, those employees or associates got paid for the mortgage somehow - through bonuses, etc. Nice work if you can get it, huh?
Comments on news articles about the builder bailout plea indicate the public does get it though...too late, but they get it. I don't see really anyone but builders as being for a builder bailout now. Several years ago the public would've totally fallen for it. Unfortunately, congress will do what they are "paid" to do, in the end, which is probably bail out the crooks of corporate America as usual.
Anyone have info on emigrating to another better country? This one's going down the toilet.
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