December 25, 2008

Merry Christmas! Here’s a gift from Burbed!

Merry Christmas everyone!

Here’s my gift! An article from 2006! Enjoy!

Nightmare Mortgages
Risks or not, the accounting treatment is boosting reported profits sharply. At Santa Monica (Calif.)-based FirstFed Financial Corp. (FED ), “deferred interest” — what an outsider might call phantom income — made up 67% of second-quarter pretax profits. FirstFed did not respond to requests for comment. At Oakland (Calif.)-based Golden West Financial Corp. (GDW ), which has been selling option ARMs for two decades, deferred interest made up about 59.6% of the bank’s earnings in the first half of 2006. “It’s not the loan that’s the problem,” says Herbert M. Sandler, CEO of World Savings Bank, parent of Golden West. “The problem is with the quality of the underwriting.”

In the middle of one of the hottest U.S. markets, Coral Gables (Fla.)-based BankUnited Financial Corp. (BKUNA ) posted a $14.8 million loss for the quarter ended June, 2005. Yet it reported record profits of $23.8 million for the quarter ended in June of this year — $20.9 million of which was earned in deferred interest. Some 92% of its new loans were option ARMs. Humberto L. Lopez, chief financial officer, insists the bank underwrites carefully. “The option ARMs have gotten a bit of a raised eyebrow because we generate and book noncash earnings. But…it’s our money, and we do feel comfortable we’ll get it back.”

Even the loans that blow up can be hidden with fancy bookkeeping. David Hendler of New York-based CreditSights, a bond research shop, predicts that banks in coming quarters will increasingly move weak loans into so-called held-for-sale accounts. There the loans will sit, sequestered from the rest of the portfolio, until they’re sold to collection agencies or to investors. In the latter case, a transaction on an ailing loan registers on the books as a trading loss, gets mixed up with other trading activities and — presto! — it vanishes from shareholders’ sight. “There are a lot of ways to camouflage the actual experience,” says Hendler.

To get the deals done, banks have turned increasingly to unregulated mortgage brokers, who now account for 80% of all mortgage originations, double what it was 10 years ago, according to the National Association of Mortgage Brokers. In 2004 banks began offering fatter sales commissions on option ARMs to encourage brokers to push them, says Gail McKenzie, assistant U.S. attorney in Atlanta, who is investigating mortgage brokers for improper practices.

The problem, of course, is that many brokers care more about commissions than customers. They use aggressive sales tactics, harping on the minimum payment on an option ARM and neglecting to mention the future implications. Some even imply verbally that temporary teaser rates of 1% to 2% are permanent, even though the fine print says otherwise. It’s easy to confuse borrowers with option ARM numbers. A recent Federal Reserve study showed that one in four homeowners is mystified by basic adjustable-rate loans. Add multiple payment options into the mix, and the mortgage game can be utterly baffling.

Billy and Carolyn Shaw are among the growing ranks of borrowers who have taken out loans they say they didn’t understand. The retired couple from the Salinas (Calif.) area needed to tap about $50,000 in equity from their $385,000 home to cover mounting expenses. Billy, 66, a retired mechanic, has diabetes. Carolyn, 61, has been caring for her grandchildren, 10-year-old twins, since her daughter’s death in 2000. The Shaws have a fixed income of $3,000 a month that will fall by about $1,000 in November after Billy’s disability benefits run out. Their new loan’s minimum payment of about $1,413 is manageable so far, but the fully amortized amount of about $3,329 is out of the question. In a little over a year, they’ve added some $8,500 to their loan balance and now face a big reset if they continue to pay only the minimum. “We didn’t totally understand what was taking place,” says Carolyn. “You have to pay attention. We didn’t, and we’re really stuck here.” The Shaws’ lender, Golden West, says it routinely calls customers to ask them if they are happy and understand their mortgage loan.

Analyst Frederick Cannon of Keefe Bruyette & Woods says most banks don’t apologize for their option ARM businesses. “Almost without exception everyone says [the option ARM] is a great loan, it’s plenty regulated, and don’t bug us,” he says. In an April letter to regulators, Cindy Manzettie, chief credit officer for Fifth Third Bank in Cincinnati, said it’s not the “lender’s responsibility to help the consumer determine the appropriate payment option each month…. Paternalistic regulations that underestimate the intelligence of the American public do not work.”

There’s plenty more to read. What a great gift!

Comments (33) -- Posted by: burbed @ 5:21 am

33 Responses to “Merry Christmas! Here’s a gift from Burbed!”

  1. bob Says:

    Happy Holidays Burbed!
    A great bit of info indeed: The next perhaps bigger shoe to fall. 2009-2011 will certainly be interesting.

  2. Rocket Says:

    What does it really cost to build a custom home in the RBA? I saw numbers of $150 a square foot for tract homes built in volume in the East Bay mentioned by A. Lewis. With that kind of volume, I can believe that is the marginal house cost. I doubt that includes any of the other costs, but maybe it does.

    I am building on a >10K square foot lot in Los Altos. I lived in the existing house for a number of years before deciding to scrape and build new. The new house will be approximately 3K square feet. I am on a fairly strict budget and all costs are watched very closely.

    I have spent close to $100K before breaking ground. That includes:

    Architect
    Structural Engineer
    Soils Engineer
    Surveyor
    Arborist
    Green Points Consultant
    Permit fees for two school districts
    Permit fees for the city
    Demolition permit fees
    Demolition firm

    I am sure there are some minor expenditures I am missing.

    I did a significant amount of the preparation for the demolition myself to save on costs.

    Even though this lot has all the utilities at the lot line from the existing house, the power, gas, and low voltage lines will have to be new and run below ground. Most people use PG&E for this and my neighbors who have had this done paid $10K to $15K.

    My best estimate today is I will spend $900K on construction of the actual home and around $100K for post construction costs including landscaping.

    I have several friends that are in the construction business that mostly build in the higher end peninsula communities and their estimates were right around $1.4M. If I can get it in for $300K below their estimates I will be really happy.

  3. bob Says:

    Rocket,
    I believe you’re in a different financial situation than the majority of people here. Not many people have a million bucks to blow on a house, much less rebuilding one. But that said, California has the strictest building codes of any state. I used to work at a contractor supply place and most California homes are built in a fashion that makes them more like semi-commercial buildings elsewhere. Obviously much has to do with earthquake materials and environmental requirements.

    In comparison, the home you describe could probably be built for 150-200k grand total most anywhere else. I’m taking a trip to Austin and from what I’m seeing, what would cost several million dollars in the Bay Area costs 4-500k in Austin for a similar level of house.

    In any regards, the BA is expensive, whether you’re buying or building. No thanks.

  4. Rocket Says:

    I hear you Bob. I have spent close to 20 years to get to this point, where I can afford to build a new home. It took long hours at several startups and purchasing a couple of investment houses along the way.

    My college friends in Arizona easily built a home like this 7 to 10 years out of college. It was really tempting when I was back there over the holidays to just sell everything here and live the quiet life in the desert. Oh well, the price I pay to live in the RBA. :-)

    The point of my post was that people throw all kinds of numbers high and low on how much it costs to build a nice house. I hoped to provide some real world numbers.

  5. Stepford Says:

    “The point of my post was that people throw all kinds of numbers high and low on how much it costs to build a nice house.”

    My architect got a guestimate this past Sept. from a contractor based on our plans. My house is not a complete tear down. It would keep the existing foundation and one room as is. It is for a 3200 sq foot house, but that includes the garage (about 400sq ft). It would be a two story house with 3 bedrooms + office up and 1 guest bedroom down. 3 full baths and 1/2 bath. the finishes would be medium to high (where possible) quality. The estimate was for 550k and I think it would end up being about 660k. My neighbors (San Carlos) seem to run from 450k – 700k to remodel. I think since you are in Los Altos a contractor will charge you more for the same work expecting that you could pay more. (This is just what I have heard, no idea if it’s true) A friend who had a large windfall was charged more for her house as the contractors new of the windfall. She didn’t figure that out until they tried to charge her 100k to outfit the master closet. I guess it’s kind of like going to the mall and getting attacked by the kiosk people who will charge you what they think they can pay. If you question why someone payed less then you they say because there was a “special” going on when they bought, but they are actually judging you by the clothes, shoes etc.

  6. Rocket Says:

    I looked at doing a full remodel, but based on how much I wanted to change the house I decided to go new. I have some friends that have had good luck with $600K whole house remodels (from 5 years ago or more), but others have discovered major issues when they opened the house up and spent right at $900K at that time, which could have gotten them new.

    I get a little bit of the Los Altos pricing effect, but not much. Now, if went to a downtown Los Altos builder we would probably be looking at that $1.4M number.

    One thing that really helped was talking with the owners of the last few houses a contractor completed. That gives you an idea of their ability to meet schedule and cost estimates and how happy the home owner is after living in the house for awhile.

  7. WillowGlenner Says:

    Merry Christmas Everybody! Hope you all had a great day. Food was tremendous in our house, as always.

    On the article mentioned above, BURBED, this article was a great find. The article is primarily a scare about Option ARMs, something we don’t see too much of here. But the interesting part of this article is the comments, there were pages and pages of comments. I was stunned to see how many comments started off with ~I am a mortgage broker~, etc. with dates around 2006. This profession or whatever it was is equivalent to the $180K/year self employed web designer of the 1990s. Then there were comments like this,

    Nickname: RKP
    Review: I had a 5.5% 15-year fixed and re-fi’ed at 4% 5-year balloon. I don’t think it’s a bad deal. I have to re-fi again in 2009 when the loan comes up and if I can find another 5-year at less than 6%, I will be okay. That’s what I am thinking. Am I missing something?
    Date reviewed: Sep 1, 2006 8:07 PM

    Yes you are missing something RKP, you are missing the housing crash which means you cannot refi and you will lose your home.

  8. A. Lewis Says:

    Rocket, thanks VERY much – those kind of real world numbers are really useful.

    So to summarize crudely, if you come in for your $1M budget on a 3000 sqft home, that’s $333/sqft.

    What does a recently updated 3k sqft home in Los Altos sell for these days? Isn’t Los Altos in the stratospheric $600-$1000/sqft range? Minimum $500, right? I know it drops as you get to larger homes – but still – by RBA standards, assuming you aren’t in some CRAPPY part of Los Altos, let’s say $500 – making it $1.5M. I guess the difference is the value of the land. With the future value already priced in. $500k for the empty lot. Actually – that doesn’t sound too high by RBA standards!

    This is what I mean by wishing prices. Because plenty of those Los Altos homes are not going to be anywhere NEAR as nice as this new home, or have the earthquake safety and the code updates that add real long-term value to the property that this new home will have. But they sell for insane amounts higher than $333/sqft.

    Also, 3000sqft is pretty big, dude. Enjoy it, and congratulations on your prosperity. I would love to build my own dream home, too. (No sarcasm intended – in case this doesn’t blend with the rest of the post).

    So if you can build, in Los Altos, a 3,000 square footer for $1M, how much do you think one should pay for a 40-year old 1,500 sqft home in the same part of the RBA?

    On construction costs, I am surprised it costs $100k before breaking ground. I didn’t realize it was quite so high. Any chance you’d be willing to break those costs down a bit so I see where it comes from? Much appreciated you sharing your personal details with us, Rocket – it’s fascinating.

    I do sometimes think about buying empty lots and building the home I want instead of buying. I’d like to know what that dream entails.

    So clearly, Rocket makes the case that if you buy recent construction, it cost the custom home builder a LOT, so you should expect to pay a lot. He plans to pay $33/sqft for prep of the lot, and $300/sqft for construction. The cost of the dirt is not factored in yet.

    How much should one subtract for depreciation? Is there a standard rule of thumb (maybe used in commercial real estate?) for depreciation of the property due to age? So you have an idea of how much more new construction is worth that old construction (assuming you can somehow judge the quality levels of the construction?)

  9. A. Lewis Says:

    Also on moles – I saw two of the dead ones my cats killed (they didn’t eat them…), and I’m pretty damned sure it’s a mole not a ground squirrel. I googled california ground squirrel and they look like ordinary squirrels to me – which are around – and this was not it.

    From my googling on mole elimination, it seemed like a lot of people said the sonic repellers were crap. Of course, that could have been the poison and trap sellers trying to say only they worked.

    Anyone ever tried the sonic repeller? They’re a little pricey, and who wants to live it plugged in forever? Will it scare away my hummingbirds? I’m very choosy about ‘wild’ species I want to share my property with, see…

    And don’t even get me started about the ants.

  10. zanon Says:

    A. Lewis: Some people joke that RBA had a land bubble, not a real estate bubble because building the house itself is pretty cheap (materials, labor).

    I think that is wrong, there is both a land bubble AND a house bubble, the dirt is very expensive AND CA regulations make the house (materials, labor) expensive as well.

    I’m in Palo ALto, but it’s right on the edge of Los Altos, and I don’t know where Rocket’s home is but everything here is around $2M. The houses are very nice though, maybe would cost about $1M to build, so $1M is just the land.

    This is why crap shacks in RBA are so much. $1M just gets you the land, leaving the remaining $200K for the house/shack itself. As RE says, it’s all about location.

    Or you can just rent the thing for $2K (ok, ok WG, rents are *red hot* so you will have to rent for $3K).

  11. WillowGlenner Says:

    I agree with you Zanon. Thats why if you are investing you should:
    - never pay for earthquake insurance
    - maintain a high deductible for homeowner insurance
    - refi with fairly cheap, but decent materials

    The value is in the land. If the house is a complete rebuild from the ground up then it is probably good quality and worth insuring. But if it is a remodel of one of the houses already there, forget it. Those are worth $150 sq ft, TOPS. I realize some remodels are really rebuilds.

  12. WillowGlenner Says:

    By the way if you are in Palo Alto or Los Altos those rents are $4K. $3K is where I am.

  13. PAhomeowner Says:

    Rocket – thanks for the numbers. I am a fellow homeowner who is just sickened by the estimates I hear for building. A neighbor just built about a 2400 sq ft house a few blocks from me and he spent $1.2 million on it. A few years ago when he started on it he told me the budget was $650,000. A year ago he told me the new budget was $800,000. These costs are nuts.

    I have plenty of money to build and a pretty small mortgage, but I just can’t pour all my money into my house – plus once its replaced with a new house it will be reassesed – my taxes will go from 8000 to at least 22000.

    Is there any way to build a decent 2600 sq ft house in Palo Alto for $600,000?

  14. MP newbie Says:

    Interesting — anyone have any comments on the figures quoted in building permits? Are these dollar amounts typically accurate for new construction? For instance some of the new homes in Park Lane by Summerhill are quoted around $200/square foot. Or even permits for one-offs.

  15. sonarrat Says:

    Summerhill saves money by building scads of cookie-cutter identical houses. You can’t use their figures for custom projects, even if you use a bog standard blueprint there are always going to be unique issues.

  16. MP newbie Says:

    sonarrat, I get that it’s cheaper for a builder who is building many units, but it was just a simple example for me to pull. In general, I’ve seen costs on a per square foot basis around 200. Are these figures generally under reported?

  17. Rocket Says:

    PAhomeowner, Prop 13 protects your land value and with an old house like mine, all the value is in the land. So, my property taxes will go up just for the house value.

    If you act as your own general and can build some of it yourself you can get it to $200 per square foot. My prior software manager built his own house in Los Altos. It came out beautiful, but he has real skill as a woodworker and was able to a lot of the work himself which included a lot of the finish work.

  18. Rocket Says:

    My $100K in prep costs is pretty much evenly split between:

    Architect
    Structural Engineer
    Demolition
    Permit fees
    Professional services for the lot

    My architect and structural engineer costs are higher than normal because of the complexity in design that is required in Los Altos if you want to build a two story house that maximizes the backyard size.

    The typical new house in my neighborhood has been in the $2.5M range last year and closer to $2.2M this year. Though most of the new houses built in my neighborhood have been by owners and not developers, so they never come to market to have their value determined. Owners seem to spend a little more on new construction than a developer will.

    I will be in this house for a long time, so I am not super concerned on what its value is on the open market.

  19. A. Lewis Says:

    Thanks again, Rocket, it’s fascinating.

    I’m pretty sure I know what service the Architect delivers. What does the Structural Engineer do besides? Ouch $20k in permit fees. Does that vary much by city in the Bay Area?

  20. A. Lewis Says:

    WG – interesting take on earthquake insurance. So as an investor, you do NOT choose earthquake insurance on a modest-quality older home. But what happens in the big earthquake to your investment? Say a 7.8 hits and the thing radically shifts on it’s foundation, big water damage, etc. – pretty much total loss. Has to be demolished. It could happen – not too crazy to imagine.

    Now you are going to pay for construction costs – $200/sqft (lower quality than Rocket’s custom build). To remake your 1500 sqft investment home costs $300k, plus overhead ($30k instead of Rocket’s 100k?). The homeowner’s insurance doesn’t pay off at all in the earthquake scenario, right? Also property taxes and carrying costs during construction…

    So you have $330-$350k out of pocket? Isn’t that like…a big problem?

    Or do you just sell the land at that point, because you think it’s a large enough part of the value. You still take a big loss, right?

    Please enlighten me if I’m off base. I’m just saying I was planning on getting earthquake insurance when I buy.

  21. WillowGlenner Says:

    A Lewis, earthquake insurance is an interesting subject and something that comes up often at the Tri Cities rental association (something I don’t bother to attend after about 3 meetings due to the boredom factor). There are a few things to keep in mind when considering earthquake insurance for a rental:

    - houses built out here in the 30s and early 40s tended to feature construction where the frame was heavily bolted on to the foundation. There are lug bolts every foot or so on these, much more secure than modern construction- why this exists I don’t know, maybe the folklore still around regarding 1906. So if you have any of these, foundation earthquake damage is less likely. This style of construction exists in Willow Glen and in the hilly area of San Mateo behind Hillsdale Mall, for two.

    - we’ve had a 7.2 on San Andreas already and the damage was concentrated in liquifaction prone Marina and Foster City, as well as foothills type location like Los Altos Hills. The point being, these houses that I own have been through an earthquake before.

    - Any properties anywhere near the Hayward fault should be insured, but I don’t own anything on Hayward.

    I have to admit though, if we were having 5.5 earthquakes in the bay area every few months like we were in the 1987-1988 period, I would be on the horn to my insurance agent for earthquake insurance on everything I own. We had some warning on the Loma Prieta going into it.

  22. WillowGlenner Says:

    A Lewis, heres a good mole site.
    http://www.pesticide.org/moles.html

    They suggest some sort of castor oil mixture at the bottom of the page. I have never heard of anyone having moles here. They are usually either ground squirrels or gophers. A mole has funny feet and a gopher looks more like a rat.

  23. bob Says:

    test

  24. bob Says:

    I used to sell Simpson Strongtie earthquake retrofitting hardware. To say that an old home bolted heavily the the foundation is ‘safe’ isn’t very accurate given that these older homes lack the brackets and ties used in modern construction. In other words, an old house shaken by a violent earthquake is much more likely to shift laterally than a modern or retrofitted home. Its your call, but it would be incorrect to assume that an non retrofitted home is safe in comparison to one up to current code. All I know is that when we looked at rental homes, I looked in the basement. The one we rent has modern Simpson hardware, hence we chose it.

    It only makes sense to not insure a home if the land under it is worth more than the purchase price. No foreclosed home in the BA is in that category, hence any earthquake damage would mean placing the buyer immediately in the red. But for my Mother In law who owns beachfront property worth almost a mil that she paid 20k for a long time ago, it makes sense because coastal RE insurance is insanely high, and since the land itself is worth a lot more than the purchase price and the house is old, it makes sense in her case.

    And for your mole problem, Harbor Freight tools sells a “mole chaser”, which is basically a little windmill you stick in the ground. The movement of the blades creates underground noise and chases em’ away. I have a worse problem: Zillions of little ants that erupt out of the ground anytime I pull up anything.

  25. Rocket Says:

    The architect does everything but structural. She will also help with picking finishes. The structural engineer is only keeping the house from falling over.
    :-)

    Because of Los Altos setback requirements, 10 feet on each side yard for the first story and 17 feet on each side yard for the second story, there are a lot of structural issues with the second floor since very few of the walls line up between the first and second floors.

  26. bob Says:

    Two fun stories for the holidays:

    1:

    Bay Area Newsgroup. “It has got even harder for low- and moderate-income first-time home buyers to find an affordable loan, thanks to the state’s budget problems. The California Housing Finance Agency has temporarily suspended popular programs that help people get into homes through 30-year, fixed-rate loans and down payment help.”

    “The programs were suspended in response to action taken last Wednesday by the Pooled Money Investment Board, which halted nearly $4 billion in state loans for various infrastructure programs. CalHFA also suspended a program that helps teachers and school employees buy homes and local governments and non-profit housing groups provide mortgages to qualified borrowers.”

    “‘The state basically shut down the down payment assistance program,’ said Ken Giebel, CalHFA’s director of marketing. ‘It hurts a lot. It’s really a state budget issue and we just had to react to that.’”

    “‘It will have a huge impact on the number of first-time home buyers that qualify to buy,’ said Leanne Odom, a mortgage professional with Prospect Mortgage in Concord, who estimates that in the last two years most of her loan volume has been linked to CalHFA programs. Odom said CalHFA lending programs are designed to help ‘the first time buyer who has good credit but just needs help with the down payment. It’s really one of the last programs that offer special financing for first-time buyers.’”

    There ya’ go investors. If moderate income folks- or people who might have qualified to buy your little crap-shack repos wanted to buy them, they can’t. Not until California turns its finances around, which given the economy won’t be happening anytime soon.

    Story no. 2 tells a classic tale of how even the rich in the RBA are getting affected… might explain why sales in Palo Alto are the lowest in 11 years:

    The first reaction of those who dwell in California’s cradle of technology to the recession was blithe indifference — Wall Street’s problem, not theirs. How swiftly they learned otherwise. A tipster sends in photographic evidence.

    Spotted at Collateral Auction Systems, an outfit in the Bay Area suburb of Fremont, Calif. which sells repossessed cars: A Mercedes biturbo V12 SL600, a car which sells new for $120,000.

    On the license-plate frame: the logo of Cisco, a San Jose-based networking-equipment giant which makes everything from cable set-top boxes to telecom switches to home Wi-Fi routers.

    There’s a story behind this photo of someone who lived high off of Cisco’s rich stock options — an engineer? an executive? a salesman? And just as suddenly, the spigot of cash shut off. In six months, the stock has fallen by more than 40 percent. Cisco stealthily laid off employees even as its cheerleading CEO John Chambers said the company wouldn’t cut staff. We don’t have the details on how this six-figure driving machines landed in a repo lot — but the picture tells a story all the same.

    http://tinyurl.com/a43sxj

  27. Lionel Says:

    Great article on mortgages…

    Low Mortgage Rates to Spur New Wave of Defaults
    Posted on December 26th, 2008 in Daily Mortgage/Housing News – The Real Story, Mr Mortgage’s Personal Opinions/Research
    Talk about unintended consequences. The following is significant insight from the street level. This is especially important for those of you thinking that these low mortgage rates will lead housing and the consumer to the Promised Land.

    Everyone wants to refinance right now – that’s a fact. Home owners and loan officers around the nation have not been this exited in years over the low rates. Purchases are far and few in between and require solid relationships, so most loan officers love a good refi boom – they are the easy pickens (until now). The media are actually quoting mortgage rates non-stop, which is a complete story in and of itself.

    Loan officers and banks are very busy taking loan applications, as reflected in the faulty MBA loan application survey data (Mr Mortgage story out next week). Loan approval times at some banks is at three to four weeks making for a two month start to finish process. Fall-out will be extreme over the near-term as brokers and borrowers switch banks three and four times trying to get the lowest rate available. Trying to hedge this chaotic mess is a mortgage secondary marketing manager’s worst nightmare and can lead to significant losses.

    Along side of being one of the biggest consumer ‘bait and switches’ of all time, this drop in rates should set the stage for a significant leg-up in mortgage loan defaults and leg down in house values and consumer / homeowner sentiment.

    http://mrmortgage.ml-implode.com/2008/12/26/low-mortgage-rates-to-spur-new-wave-of-defaults/

  28. WillowGlenner Says:

    wow Lionel, that idiocy is a new low even for “Mr Mortgage” the blowhard. I am in the process at refiing 2 properties, no problem. Appraisals are fine, rates under 5% in both cases which he seems to think is impossible. That article seems to be suggesting that when the flood of refis sees what their appraisal, that will usher in a new level of defaults, based on something he just pulled out of his ass.

  29. anon Says:

    http://www.miamiherald.com/business/story/825962.html

    WG, he’s not the only one.

    How do you view your situation as relevant? Do you think that people like you are the cause of the problem?

    If not, then what makes you think giving people like you access to lower interest rates will solve the problem?

  30. Lionel Says:

    WG, he states quite clearly what you have experienced. People like yourself who do not need to refi can refi; people who need to refi can’t.

  31. Lionel Says:

    Interesting post on SV:

    I wouldn’t count the Valley out quite yet, but it has almost overwhelming problems in several areas:

    - The real estate bubble has yet to really get going on the downside. This may start happening later in 2009, sooner if job losses mount. The alt-A, liar, and ninja loans reset en masse starting 2010.

    - Delusion in the executive ranks. The guys who run the company I work at do not seem to “get it” yet. They are talking about doing a stock buyback next year. Our P/E ration is sky high, maybe 78 if I remember correctly. Our stock could be cut 50% from its current level and be equal to the Enterprise Value that Russ has been mentioning lately. Interesting, that price would take us back to about 1995 levels.

    - Delusion part II. One of the guys on my team was told that we should stop reading those “kook fringe sites” when we pointed out to them earlier in the year what was about to happen. In fact the CEO was dismissing any chance of a recession back in June. Ooops, egg on his face. Many other CEOs here were saying the same thing.

    http://wallstreetexaminer.com/2008/12/28/insiders-view-of-silly-con-valley/#more-3661

  32. Renter4 Says:

    >it’s not the “lender’s responsibility to help the consumer determine the appropriate payment option each month…. Paternalistic regulations that underestimate the intelligence of the American public do not work.”

    Excellent. Then we don’t need paternalistic handouts to anyone involved in this mess. We should let the buyers get foreclosed on, and we should let the banks go under.

  33. bob Says:

    The summary of the Mr. Mortgage article is this:

    From early reports since rates fell sharply in early December, 80% of the loan applications are not getting out of the starting gate easily. Loan officers are all saying the same thing — that appraisals are not coming at value due because ‘all of the foreclosures and REO sales have taken the value down’. In the majority of these cases, this kills the loan.

    The loan officer then notifies the borrower of the news and they are in disbelief. All home owners think that their home is worth the most on the block and I have been told that this is a tough pill to swallow. This brings the crisis home instantly.

    Either way, RE investors typically buy lower end garbage with the hope of reselling far higher. This only works two ways:

    A: With first time home buyers with typical lower to moderate incomes.

    B: Another massive, crazy housing boom where either lower to moderate income buyers with access to unnatural and questionable loan products enables them to buy starter homes at luxury home prices, or upper income buyers willing to pay luxury home prices on starter homes because again, the bubble has blasted values of the homes they would usually buy out of their price range.

    The problem is that for one, situation A is of buyers who now cannot qualify for loans, nor get enough financing to buy. To think we’re anywhere close to another bubble is lunacy, so count part B out. That only means that investors today might possibly gain profit the old-fashioned way: By having a long term holding strategy, as in 10 years or so before they can hope to gain a profit.

    Anecdotal story: A friend of ours whom has decent income and decent credit was turned down when he made his offer on a home in Oakland… for $175k, I kid you not. If that’s not telling, I don’t know what is.


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