Thanks Guy. I hope you don’t mind if I share the following data. I just got the following table showing the Case Shiller Futures Markets Contracts. The table s shows that the futures prices predict that the National Housing Market will bottom at a -26% peak-to-trough decline in December of 2009, followed by a very modest recovery to -20% peak-to-trough decline during the following three years. The National Housing market is indicated by the “RPX” contracts below, followed specific futures pricing for Los Angeles, Detroit, New York and Phoenix. Notice that Los Angeles is still predicted to be -39% by Dec 2010.

Pretty dire stuff. Sadly, that is what market participants now believe and it is expressed in the futures markets equilibrium pricing. As I sat at my desk today talking to traders and portfolio managers I couldn’t help but think that today Wall Street witnessed the death of a large portion of what we used to call the “Investment Banking Industry”. Like it or not, you, me, and all other taxpayers suddenly own a lot more real estate!

From: MS HOUSING DERIVS (MORGAN STANLEY)
At: 9/11 17:26:37

Index Maturity Close Change Cum HPA
RPX.CP28 DEC 08 214.00 0.22 -17.55%
RPX.CP28 DEC 09 192.00 0.41 -26.02%
RPX.CP28 DEC 10 194.00 1.50 -25.25%
RPX.CP28 DEC 11 200.00 -0.83 -22.94%
RPX.CP28 DEC 12 208.50 -0.83 -19.67%

RPX.LA28 DEC 08 255.12 -3.13 -30.25%
RPX.LA28 DEC 09 229.50 0.00 -37.25%
RPX.LA28 DEC 10 225.00 0.00 -38.48%

RPX.MI28 DEC 08 124.50 -0.50 -32.74%
RPX.MI28 DEC 09 110.88 0.00 -40.09%
RPX.MI28 DEC 10 113.50 0.00 -38.68%

RPX.NY28 DEC 08 268.88 0.18 -7.59%
RPX.NY28 DEC 09 248.12 0.00 -14.73%
RPX.NY28 DEC 10 240.50 0.00 -17.35%

RPX.PX28 DEC 08 104.25 0.75 -27.62%
RPX.PX28 DEC 09 92.25 0.00 -35.96%
RPX.PX28 DEC 10 90.12 0.00 -37.43%

I think this is a subject [the ability to qualify for any mortgage] I alerted the group to several months ago and quite frankly, Guy’s findings don’t surprise me at all. The problem is really twofold.

First, it’s the loss of equity in our homes which [at least for refi/HELOC products] Guy mentions.

But there’s something more sinister at play and that’s the tightening [actually choking] of lender guidelines insofar as income documentation/verification is concerned [even where equity exists]. It no longer matters if you can document your income. Now that income must be formally evidenced by W-2s, 1099s and the previous two years’ income tax returns. And if you’re self-employed or generate income [like rental] subject to expenses you have an incentive to “pad” [because it results in less tax to you], banks are going to use your lower adjusted net figure [because arguably, they take your representations to the government very seriously] for income documentation purposes.

It’s really the latter reason, IMO, which has in essence shut down new mortgage originations and as a consequence, dropped monthly unit sales. If people can’t borrow the monies necessary to finance real property purchases, then there aren’t going to be any!

Congrats, MKchick. If you can afford what you’re buying, love the house and neighborhood, and plan on staying for 15 years, then you should be fine. As you are probably aware of, problems occur when there are financial hardships or other unforeseen issues which force one to sell. If you have a substantial down, and none of this happens within the next several years, then it should be a non issue. However, if you are forced to sell, be prepared to give up that equity or worse, bring money to the table. If there’s no money to bring to the table, it’s hello foreclosure. This is what makes a purchase risky in a rapidly declining environment.

Many of the people who purchased last year and thought they were getting the greatest of deals, are already seriously underwater. Not a good feeling. It’s also made worse by the fact that yesterdays purchase price brings a much nicer house in a much nicer neighborhood, today. Good luck to you.

The financing issue, which Smarten touches on, is what is helping the price declines along at such a rapid clip. People can no longer just “state” what their income is. They must provide extensive documentation which is now intensely scrutinized. This will ultimately lead to a market median which reflects the purchasing power of local wages, not liars and their loans. I don’t think we’ll ever see such irresponsible lending behavior again in our lifetimes. The banks literally gave away loans, for almost any amount, to anyone who wanted them.

No Sully -

Income for self-employed people can come from a myriad of sources that aren’t necessarily evidenced by W-2s and 1099s. My point was that even though a borrower may be able to document that income in other ways, it becomes irrelevant for loan qualification purposes. So no, it’s not the old way being brought back into vogue. The pendulum has overswung in the opposite direction and as a result, buyers by-and-large can’t secure funding and sellers can’t find buyers.

Sully, why do you think new loan originations are down 75%? Do you really think it’s only because 10 years ago liar loans were the norm and now they’re not? I would submit to you that loan qualification has become all but impossible except for a very small segment of the population [those who receive essentially all of their income via W2 earnings].

I too purchased properties in the 70s and 80s and although I had to document income, any type of documentation I provided was adequate. That’s no longer the case. Furthermore, in the past I’ve qualified for dozens of mortgages and now that my financial position has improved [compared to then], I’m finding it more difficult to qualify for a mortgage [and I’m certain I’m not the only one].

So as I observed before, it’s not simply the old way being brought back into vogue.

No Sully - I’m saying the majority, at this stage, can’t demonstrate W-2 documented “earnings” to qualify for a purchase money mortgage. You know, people who work in the service industry who rely upon yet can’t document tips? Or what about all those contractors who survive on undocumented piece work?

So you see, you don’t need to be a self-employed multi-millionaire.

And if you disagree with me then I go back to my initial question: why the drastric drop in mortgage originations? Is your explanation that essentially the only loans originated were liar loans?

Ok, as far as the drastic drop in mortgage originations go. I only have your word this is happening, as (using mortgagenewsdaily.com) I can find no evidence of this happening. I see rates dropping slightly and applications up, but nothing about a 75% decline in originations.

I did find that last Oct; Countrywide said their originations were down 50%.

Maybe one of the bankers can shed more light on this detail.

As far as documenting unreported income, I think I have in the past said bankers were greedy, but never have I ever said they were stupid.

So, what is a banker supposed to do. If I go into a bank and ask for a loan based on money that I don’t report - how can he give me or anyone a loan based on nothing? That’s how it was before and how it should be now.

Basically, if that was your point, I think what they are doing is right. As far as the massive drop in originations, I have no comment until I actually see proof of it.

Credit tightening during downturns is a standard practice. Banks loan like crazy. Some of those loans go south. Banks become more picky.

I’m more conversant with commercial than residential, but in the commercial area, lenders that would do 80% loan a couple of years ago now are declining 50% loans. In the residentail area I’ve read reports of lending institutions declining to offer mortgages to qualified buyers because they don’t like the area the buyer is interested in. Basically with prices falling so rapidly it’s difficult for a lender to know what a “safe” loan is. Even with 20% down a buyer could end up upside down in fairly short order.

Hopefully this will turn around. To some extent the housing bubble hid just how bad things have been. We’ve had negative real income growth for eight years, the first time that has happened. We’ve gone from record surpluses to record deficits. Rather than being normal the last years have been abnormally negative. There actually is a lot of potential for advances and with decent government policies they will materialize.

One immediate positive is that the Fannie/Freddy takeover has gone better than expected. Regional banks and S&Ls seem able to weather the defaults on their preferred shares, and the credit swaps have not become a problem because the debt is still trading near face value. These were two potential big problems and both seem to have been avoided.

You people just don’t get it. Talk to the top agents out there; they’ll tell you what’s going on in the real world.

You want some examples? I’ll give you some.

As some of you may remember, I invest in secured deeds of trust. The notes I receive are typically for less than five years. Notwithstanding I can document this income [copies of the notes, deeds of trust, payments], lenders discount the income source because it’s less than five years.

I declare my note income on my income tax returns. But I don’t receive 1099s from the promisors. Again, lenders discount the income source because there aren’t any 1099s.

Some of my deeds of trust are less than two years old. That means income from them hasn’t appeared on a minimum of two years’ tax returns. Again, lenders discount the income source.

Some of my deeds of trust were placed in 2008. Thus no income from these notes appear on previous years’ income tax returns. Again, lenders discount the income source.

I also receive income from some oil and natural gas limited partnerships. The way these vehicles work is the first year there’s essentially no income. Then it takes a good 6-8 months for income to start ramping up in year two which means for a good portion of the year, there’s not a whole lot of income. Then there’s an increase in income for the next couple of years as the wells flush after which there’s a falling off of income over the next ten years.

So although I receive a good income stream today [which again can be documented], that wasn’t the case two years ago. And even if it were, the income generated two years ago isn’t anywhere near what it is today. So today’s income becomes meaningless.

Then there’s the oil depletion allowance which in essence shelters about 20% of income. In other words, only 80% of actual income is considered by lenders for loan qualification purposes.

How about rental income? It used to be that when it came to expenses, lenders only considered mortgage, property tax and insurance payments. But if you’re a real estate professional and take additional rental expenses on your income tax return, only what’s left on Schedule E after deducting all expenses is considered by lenders. Given there’s an incentive to maximize deductions so you pay less income tax, your tax incentive comes back to bite you in the behind when it comes to mortgage qualification.

Then there’s your rental income. It used to be that only 75% of your rents were considered for income qualification purposes [the balance being a reserve against future vacancies]. Now the percentage is up to 50%.

Now mind you; all of this income is documented and appears on income tax returns so there’s nothing gray. But it doesn’t fit the mold of the wage earner who has no other source of income but for wages evidenced by a W2.

I could give additional examples but from my experience [confirmed by a number of mortgage brokers I’ve dealt with], the mortgage market for borrowers like me [and there are many of us] essentially no longer exists. So no Lurch, lenders are NOT very willing to work with many self employed credit worthy borrowers.

Disbelieve me if it makes you feel better, but then come up with plausible explanations like BB as to why loan originations are down so dramatically [and with all due respect, BB’s explanation is by-and-large wrong].

Want additional evidence? I’ll provide two pieces.

First, look at all the mortgage lenders and consultants that have gone out of business. Why? Because mortgage originations are down dramatically.

Second, look at all the listings where sellers are now offering to carry back financing [something you can verify with Guy]. Rarely have sellers en masse agreed to carry back financing [especially on all inclusive deeds of trust]. Now it’s almost common place. And why? Because many qualified purchasers [especially in the higher priced segment of the market] cannot secure purchase money financing. Thus if they want to sell their homes, they’d better offer the financing as well as part of the deal.

I think I see what Smarten is saying… it is relative to the price point. If your situation is that you are sitting on $250k and wanting to take out a jumbo on a IV $1MM property, then maybe you should set your sights on a property in the price range that already saw significant price declines.

If you are looking for a loan for a house under $200k, you’ll get one with 20% down and good credit. Business is brisk here.

If you are looking for a loan for a house $200-350k, you’ll get one with 20% down and good credit. Business is okay here.

If you are looking for a loan for a house ABOVE $350k, then there is still too much downside risk to lend to you and you will need to document out the wazoo. And even after that, you still may default due to more price declines. There is very little business at this level.

I’m closing next week. We had zero issues documenting because our loan was solely based on my spouse’s income and we’re buying half the house we can afford. The banks were tripping over themselves trying to get our business.

We’ve gone on too long on this subject, but I do see what you’re talking about. I will concede that they are choking the system with the higher discount rate.

Having been self-employed for the last 30 years I know about most of the hoops you have to jump through.

That is primarily why I am now a cash buyer, as I don’t want to go through all the hoops again.

And yes, you are not the only one with this problem. But, that doesn’t mean the vast majority of buyers (loan applicants) are in your situation.

And, as far as the service industry workers or contractors working for cash. Well, they’re avoiding taxes - so they shouldn’t be getting credit anyway. BTW, how many waiters/waitresses are buying houses in your neighborhood?

To sum it all up, the banks (et al) are standing to lose in the neighborhood of One Trillion dollars (some experts have this number higher) because of the previous loose lending practices. At some point the bleeding has to stop.

Since Congress, the Fed and Treasury don’t seem to think we should tighten up, someone has to carry the ball. Why not the lenders, as these guys are the ones taking the direct hit.

Taxpayers will eventually wake up and see the damage being caused by the politicans and vote them out. Maybe then we can avoid a “Fall of the Roman Empire” scenario.

This he-said-she-said helps little. Given all the eyes on this blog, there seems to be no single family mortgage professionals to chime in.

Guy, Joann, et.al. - perhaps you could invite a guest posting from a reputable single family mortgage professional active in Reno to give everyone a current status update on this market?

****

BTW, all, I can say both Fannie and Freddie have gone to lengths to reassure their multifamily lenders (I am) that they are in business, actively seeking new loans and dedicated to do more. We don’t know how long that will last, but that’s the current word. I am told that last Tuesday both Secretary Paulson and FHFA’s chief (name escapes me?) both personally and specifically reaffirmed that Fannie and Freddie are to continue to provide apartment financing.

Again, there remains very few defaults in my commercial world, barring the very high leverage purchases of the past 18-24 months, and condos.

DonC,

In a word, yes. New constuction, condo conversions and acquisition/rehabs in the past 24 months are stressed in many cases. Lenders are cutting back on loan amounts by tightnening lending standards across the commercial spectrum. However, the loans being done by my life companies and Fannie/Freddie are still in the low 6’s%, and after today’s UST movement, in the upper 5%’s for a low LTV refi.

The NOD list from Ticor Title came out today for the week 9/12/08-9/19/08. There were 133 NODs filed for the week.

Just on a hunch, I did a study of how many Hispanic names were in the report.

One-third of the NODs were on Hispanic names.

Now, I’m not pointing fingers at anyone, but isn’t it unusual to expect a minority population to be so heavily represented? I’m guessing that less than one-third of the homebuyers over the past 4 years were Hispanic.

Seems like a disproportionate number to me. And it dovetails nicely with the push for minority homeownership that began in 1999 (during the Bill Clinton administration). Hillary will get her turn in 2012, I’m thinking.

That’s when Freddie/Fannie loosened criteria on mortgage loans they purchased. But it took the banks and mortgage companies to unlink payments from affordability (about 5 years later), that proved the undoing of the securitization market as we now know it.

If you look back, mortgage default rates stayed low until mid-2006. Then subprime loans went bad, and the contagion spread up the chain.

I haven’t gone back, but it would be instructive to see when the deeds were originally recorded. Chances are very few of them are more than 4 years old.