A Real Estate Professional's View On Lending
The Office of the Comptroller of the Currency recently issued a proposal for revising guidance on nontraditional mortgages. The office also requested comments on the proposal from banks, lenders, and financial institutions. The comments period was extended and it's deadline is today.
Interagency Guidance on Nontraditional Mortgage Products
One response, in particular, piqued my interest. This response was not from a lender or bank, but from a real estate and mortgage broker. This response can be found here:
Mr. Blomquist's Response(PDF)
I was surprised for two reasons. The first being that the this response was accepted from a layperson, the second being that Michael S. Blomquist seems to be one of the lone voices of reason in the group.
This document is a must read for everyone. While the average homebuyer might be intimidated, please, just take the time to go through it. He makes a very convincing argument, especially considering this person is a real estate and mortgage broker.
While I don't know who Mr. Blomquist is (a google search turned up very little), I am personally thankful for the time and effort he put in to his response. Mr. Blomquist deserves much thanks from this community.
Here are some highlights from his response:
After years of writing local representatives and banking regulators I am pleased that you have finally decided to address the risk layering and terrible declines in lending standards. I hope we can someday learn to address similar issues before they become a pandemic. Stated income guidelines have always been suspect, but due to recent declines in standards are now best defined as fraudulent. Option ARM loans are ticking time bombs and extremely misleading. The American Dream of homeownership should not have been exploited. Millions of borrowers, investors and the banking industry will be devastated when these loans begin to recast.
Future loan loss projections based on prior loan loss history will not provide accurate forecasts. The historical data does not reflect the existing risk layering, inadequate underwriting criteria, rapid appreciation, historically low rates or proliferation of option arms.
...
I have heard numerous comments from lending executives regarding the healthy track records of option ARMs and negatively amortized loans. I find these statements extremely misleading at best. Obviously, the level of market exposure is unprecedented. Home prices, appreciation, DTI and LTVs have never been higher as reduced or no documentation guidelines have become the underwriting standard. Loans that can have minimum payments which are 40% of traditional payments should have excellent credit ratings, but even under current payment caps that is not the case. In addition, the components of prior option arms or negatively amortized loans are completely different now.
...
I have been a real estate and mortgage broker for 14 years and have witnessed the aftermath of the 1990 real estate bubble/crash and S&L crisis. The size of the 1980's real estate bubble is miniscule compared to the current bubble. The 1980s bubble was created with more strict guidelines and much higher interest rates, but still resulted in much insolvency. Stated income loans, securitizations and 100% financing was relatively non-existent. Relative to income, home prices were much more affordable then compared to now.
...
Home price and economic stability should be a goal of all agencies. We have been bouncing from bubble to bubble for decades and the global environment has dramatically changed. At some point all of our increased leverage will come back to haunt us. We continue to hide our financial problems: The elimination of the dollar-gold standard, proliferation of securitizations and now the option ARM/non-traditional lending guidelines. This statement may sound too aggressive, but if we analyze the increased use of the option ARM, stated income guidelines, home appreciation, equity extraction, consumer spending and recent GDP growth there is a direct correlation. We continue to find ways to over-leverage our incomes while forecasting the most optimistic future scenarios. The recent stock market bubble is an excellent example. If our government and economic scholars can not exhibit spending restraint or accurate income forecasts how can we expect the average American homeowner to do so.
Caveat Emptor!
Grim
Interagency Guidance on Nontraditional Mortgage Products
One response, in particular, piqued my interest. This response was not from a lender or bank, but from a real estate and mortgage broker. This response can be found here:
Mr. Blomquist's Response(PDF)
I was surprised for two reasons. The first being that the this response was accepted from a layperson, the second being that Michael S. Blomquist seems to be one of the lone voices of reason in the group.
This document is a must read for everyone. While the average homebuyer might be intimidated, please, just take the time to go through it. He makes a very convincing argument, especially considering this person is a real estate and mortgage broker.
While I don't know who Mr. Blomquist is (a google search turned up very little), I am personally thankful for the time and effort he put in to his response. Mr. Blomquist deserves much thanks from this community.
Here are some highlights from his response:
After years of writing local representatives and banking regulators I am pleased that you have finally decided to address the risk layering and terrible declines in lending standards. I hope we can someday learn to address similar issues before they become a pandemic. Stated income guidelines have always been suspect, but due to recent declines in standards are now best defined as fraudulent. Option ARM loans are ticking time bombs and extremely misleading. The American Dream of homeownership should not have been exploited. Millions of borrowers, investors and the banking industry will be devastated when these loans begin to recast.
Future loan loss projections based on prior loan loss history will not provide accurate forecasts. The historical data does not reflect the existing risk layering, inadequate underwriting criteria, rapid appreciation, historically low rates or proliferation of option arms.
...
I have heard numerous comments from lending executives regarding the healthy track records of option ARMs and negatively amortized loans. I find these statements extremely misleading at best. Obviously, the level of market exposure is unprecedented. Home prices, appreciation, DTI and LTVs have never been higher as reduced or no documentation guidelines have become the underwriting standard. Loans that can have minimum payments which are 40% of traditional payments should have excellent credit ratings, but even under current payment caps that is not the case. In addition, the components of prior option arms or negatively amortized loans are completely different now.
...
I have been a real estate and mortgage broker for 14 years and have witnessed the aftermath of the 1990 real estate bubble/crash and S&L crisis. The size of the 1980's real estate bubble is miniscule compared to the current bubble. The 1980s bubble was created with more strict guidelines and much higher interest rates, but still resulted in much insolvency. Stated income loans, securitizations and 100% financing was relatively non-existent. Relative to income, home prices were much more affordable then compared to now.
...
Home price and economic stability should be a goal of all agencies. We have been bouncing from bubble to bubble for decades and the global environment has dramatically changed. At some point all of our increased leverage will come back to haunt us. We continue to hide our financial problems: The elimination of the dollar-gold standard, proliferation of securitizations and now the option ARM/non-traditional lending guidelines. This statement may sound too aggressive, but if we analyze the increased use of the option ARM, stated income guidelines, home appreciation, equity extraction, consumer spending and recent GDP growth there is a direct correlation. We continue to find ways to over-leverage our incomes while forecasting the most optimistic future scenarios. The recent stock market bubble is an excellent example. If our government and economic scholars can not exhibit spending restraint or accurate income forecasts how can we expect the average American homeowner to do so.
Caveat Emptor!
Grim
38 Comments:
I googled him too. He sells RE in Silicon Valley, CA. Maybe he can be the patron saint of this blog? That is if shiller already isn't.
Kudos to Mr. Blomquist for his efforts.
Hopefully, it won't fall on deaf ears...
OT, but, how can you possibly take this listing seriously given the completely out-of-focus, sideways, etc. photos included. Not to mention, they don't even show you the front of the house, the backyard (if there is one), or really much of the rooms that they decided to take pictures of....
http://newjersey.craigslist.org/rfs/146327806.html
Excellent article and I "hope" first time buyers heed this well thought out warning.
If you don't you may permanently put yourself in a hole that may take you years and years to climb out of.
If you didn't listen in grade school the stakes are much igher now. SO LISTEN!
this guy has been writing to everyone at the federal level.
http://www.federalreserve.gov/SECRS/2006/February/20060209/OP-1246/OP-1246_8_1.pdf
http://www.usdoj.gov/atr/public/workshops/rewcom/212859.htm
http://www.ftc.gov/os/comments/realestatecompetition/518795-00167.htm
http://www.federalreserve.gov/SECRS/2005/June/20050621/OP-1227/OP-1227_35_1.pdf
Grim,
Interesting indeed... but what's the bottom-line from the OCC... are stated loans now off the table? or if not, do they at least require a downpayment?
A million dollar crack house:
http://tinyurl.com/jbh23
Make an offer, won't last long!
OT
Foreclosure shock
Denver market sees 31.5% increase from first quarter of 2005
By John Rebchook, Rocky Mountain News
March 29, 2006
Rising interest rates, a glut of unsold homes on the market and falling home prices in some submarkets drove up Denver-area real estate foreclosures by more than 30 percent in the first quarter of this year compared with the first three months of 2005.
The 31.5 percent jump is the largest year-over-year percentage increase for a quarter in almost two years.
Get used to it...this I believe will be the headlines every year for the next 3 years. Except in Summit of course :)
$21,000 price drop, hurry, don't miss this tear-down with no garage on the busiest street in Short Hills!
MLS 2244112
349 Old Short Hills Road, Short Hills
$650,000 => $629,000
Days on Market: 49
http://www.realtor.com/Prop/1055565397
Owner paid $400,000 in March 2002.
RE: 349 Old Short Hills Road
Note: Photo #6 shows the neighbor's yard. This yard ends at the fence just behind the deck railing.
I posted a few items, including Blomquist on another website, and certain people completely lost their minds. All kinds of profanity laced posts flying all over the place. The webmaster had to delete the thread to maintain the peace.
Chicago,
What site?
"The webmaster had to delete the thread to maintain the peace."
That's great. How people can think the current real estate market is in any way 'normal' or 'healthy' is beyond comprehension.
I steped upon this article,
http://www.realestatejournal.com/buysell/markettrends/20060329-simon.html
KBR
Regarding that Old Short Hills Rd house, you're missing its true value - note the lot size "LTSZ: 65x131x72x115"
While it appears small, it's actually 4 dimensional! Won't find that even in Summit!
Interest-rate futures show traders are pricing in a 97 percent chance the Fed will raise the rate to 5 percent at the next meeting on May 10. The odds of a quarter-percentage point move to 5.25 percent at the June 29 gathering are 22 percent, up from no chance at the beginning of the week.
Anonymous said...
Chicago,
What site?
4:05 PM
The one for my building. It ends up being a territorial pissing contest between those who own and those who rent. You know my camp.
Will post the Wednesday Residential Inventory tomorrow morning. I have the numbers at work but was unable to post them up today..
grim
Grim,
Here is a link to another site that provides sales by zip code and average price of homes sold by month. Nice way to target a particular zip and see pricing trends...I'll just throw it out for everyone to look at...
http://www.melissadata.com//lists/ezlists/ezhomeowners.aspx
JM
On my website, some one said that there was a lady holding up an "open house" sign in front of the Path station in Hoboken. That sounds a little desperate.
http://shorebubble.blogspot.com/
JM, great link!
Just my opinion... but it seems like there are a couple of RE bulls on this board... which is fine. Just listen to this. My dad's friend bought a home in franklin lakes about 5-6 years ago for about 250K... 6 months ago a builder offered him 1.3 Mil... he didn't take it... quite foolish... it's an old house and does really need to be repaired or knocked down, as the builder was going to do... anyway... point is how did a home go from 250K to 1.3 mil in a span of 5-6 years? he didn't add anything value to it nor did the supply of housing drop in franklin lakes... this is all about 40-year low interest rates and lax lending standards, my friend... and that's all changing... the spigots are truly being turned off... and the lending standards being being tightened... that 1.3 mil that my dad's friend was offered will never come back around again in his lifetime... so, if you want to buy that house in summit, that's your business... but it and other similiar homes in that and other towns will be priced lower some time in the near future... you just have to be patient... Real estate is cyclical... prices rise and fall... that's just the way capitalism works... there are winners and losers with every transaction... there's no such thing as a win/win... i wish everyone the best of luck.
i'm concerned about all these mandatory reevaluations that are being pushed on many towns recently. I just read that Hasbrouck Heights has been summoned by the state to reassess. First time since the late 80's I believe. All these homes are being assessed in correlation to current "market prices" When some of them begin to sell there homes whether a retirie with major equity or the not so fortunate recent buyer...they are really going to be shocked when they may not realistically get anything near what there home is being assessed for. Is this a possible circumstance or am I over analyzing.
-bobby
ps great link to home sales data grim
I have been following a site now for almost 2 years and I have found it to be both reliable and profitable. They post daily and their stock trades have been beating
the indexes easily.
Take a look at Wallstreetwinnersonline.com
RickJ
Tick tick tick tick a time bomb ready to go off as these creative ARMs are readjusted upwards starting this year and next.
"Regarding Hoboken, when I got off the Path last night, I saw 3 signs right there for open houses...on a Thursday night."
Those signs caught my attention as well. Somebody is becoming desperate.
Regarding Hoboken, I was looking at some data and home sales dropped from 174 to 20 in the December to March timeframe from 12/04-3/05 to 12/05-3/06. The March 2006 data obviously isn't complete, but that's still a 88% decline in a year. Prices hadn't dropped tremendously, but were down.
JM
You forgot to mention that most of the biggest RE bulls in Hoboken only recently started to shave.
You have to forgive a lot of people in Hoboken, when you consider how many recent condo buyers have never worked a day in their life without a PC on their office desk. They have never seen prices drop. At worst they have been flat for a few months. Hesitation to buy has been met with swift financial punishment in terms of affording what they want.
I'm reading a great book, "The Millionaire Next Door," which analyses at length the buying and investing habits of multi-millionaires.
The book looks at high earners ($200K+) who are not wealthy, have almost no net worth, and are not millionaires because they spend all their money buying bigger houses and fancier cars. They label these people UAW, or "Under Accumulators of Wealth."
The book then juxtaposes those UAW types with people who often earn less, but invest more money, buy more modest homes in modest neighborhoods, drive normal cars, and raise their children to be less consumed with material things. These are the PAW, or "Prodigious Accumulators of Wealth." Many of these folks have a net worth of 5 million or more, are in control of their financial well being, and can live for many years without a paycheck.
One compelling comparison in the book is with two doctors. Both make $600K a year, yet one (the UAW) has a net worth of only a few hundred thousand, and the other (the PAW) has a net worth in the millions. All because one lives modestly, while one spends everything trying to 'live like a doctor.' The big spending doctor also has grown kids who expect handouts, which further reduces his chances for wealth accumulation.
Fascinating stuff.
I'd recommend this book to anyone hoping to gain control of their financial future.
Unrealtor:
One of my unfinished [never to be finished?] projects is to write book reviews for a series of pertinent tomes that I would recommend. You just hit on one of them. Another is Freakonomics.
My caveat? The same one for this Blog or any information source. Never buy into any point of view completely. Simply to be intellectually curious, soak up information, be informed, and draw your own conclusions. I hope this comment doesn't sound condescending. It is not intended to be at all, but I always worry how these comments look in black and white on a page without context.
chicago
"Never buy into any point of view completely. Simply to be intellectually curious, soak up information, be informed, and draw your own conclusions. I hope this comment doesn't sound condescending."
Not at all -- appreciate the advice.
As I read the book, I think there's more of a lifestyle balance that needs to be struck from what they advocate. I don't want to make $600K and not enjoy life a little. But the point they make and hammer away at throughout the book is definitely a strong one, and will definitely alter my outlook on things.
In general I think I'm on the right track (never finance cars, never pay interest on credit cards, have zero debt, save a lot, etc), but I'm a complete illiterate when it comes to investing, and really need to address that somehow.
I've tried a few books, but it all seems too 'advanced' or risky. I like zero risk, such as from a 5% CD. But that's not aggressive enough, and I know it, but I still hate risk.
I've always lived by the mantra that "if you don't know the rules, you shouldn't be playing the game." Since I don't know the "rules" of successful investing, I'd probably just lose money, or get taken advantage of by more savvy "advisors" selling the latest junk.
I am biting my tongue :)
"I am biting my tongue :)"
Feel free to elaborate.
Unrealtor, there is a huge difference between 200k and 600k. 200k is just surviving in NNJ, for a family with 2 kids. We make a bit more, and still, we rent and can't afford too much. We have been hit by AMT, and above 200k every taxing body considers you rich and worth to slap you with yet another surtax.
So what's your tax rate?
I'm not familiar with AMT, and it's effects, can you elaborate?
I usually bumble through a 1040 each year, like going to the dentist.
"Unrealtor, there is a huge difference between 200k and 600k."
Just to clarify, in the book they document case after case of people who make low six figures yet have substantially more net worth than those who make 2 and 3 times more.
The doctor who makes $600K and pisses it all away on $50K property taxes and $80K Porshes gets outclassed by the dude who makes far less, but lives modestly.
They point to 'high end' towns as a never-ending economic trap. First you buy the nice house on a nice street, then you need the nice cars, then you need nice furniture, then you need to send your kids to Europe like all the other high-consuming families on your street, etc, etc.
I have been following a site now for almost 2 years and I have found it to be both reliable and profitable. They post daily and their stock trades have been beating
the indexes easily.
Take a look at Wallstreetwinnersonline.com
RickJ
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