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This is the first article from Matthew who is a new contributor. I’m publishing it for him, but expect to see more from him shortly.
Bernice Ross, a national Realtor speaker and CEO of Realestatecoach.com recently stated on Inman News (inmannews.com), “Only 25 percent of all mortgages are subprime, and of these, 75 percent are performing.”
Wow! Using Ms. Ross’ own math, what she really telling us is that 25% of subprime loans are NOT performing and a minimum 6.25% of all mortgages (25% non-performing of 25% subprime loans she discloses in her comments) are NOT performing.
We can safely assume that since the vast majority of subprime mortgages were originated in 2005/2006, most of these have yet to adjust or step-up in interest rate. Not to mention the subprime underwriting quality went to down the toilet with the first half of 2006 subprime mortgage originations.
New Century, Option One, BNC, NovaStar, Household Finance, Fremont Investment & Loan, Full Spectrum Mortgage, Ameriquest, WMC, Long Beach Mortgage, First Franklin, ResCap, OwnIt, ECC, ResMae, Fieldstone, etc. are but distant memories or fading glories of the subprime debacle.
Yet the residue of their subprime mortgage originations is littering the real estate market in every neighborhood around the country. Whether outright fraud or just stupid underwriting, there are over one million bad loans that have to be dealt with by a declining real estate market. All these future REOs will put added downward pressure on real estate prices.
I’m already experiencing the first wave of the 2005 subprime mortgages trying to refinance into Fannie/Freddie type fixed rate products. One problem for many of these borrowers is that they had poor credit back then and many still have the same poor credit two years later, including 30-day late pays in 2007.
Another problem is that most of these borrowers purchased a home by putting 0% down payment and using 100% (or higher to cover closing costs) financing at the peak of the real estate market. Most properties have not appreciated in value since 2005. In many areas property values have declined. So that makes many of these subprime borrowers LTVs now over 100%. Lenders today have no desire to lend over 100% on a rate/term refinance.
But the biggest problem facing subprime borrowers is that lenders today require you to qualify for the financing. Long gone are the NINJA (No Income, No Job or Assets – No Problem!) loan days. To get a Fannie/Freddie fixed rate loan you have to have a 620+ FICO score, a documented job, documented assets, full appraisal and standard GSE underwriting.
I’m sorry Ms. Ross, Realtor cheerleading, “feel good” propaganda and myopic optimism won’t cut it this time. I’ve been down this road before in 1990-1995. Only back then we weren’t originating mortgage loans with 1.50% interest-only Option ARM loans, NINJA 103% CLTV low FICO score subprime loans, 100% LTV no doc investor loans, and high-LTV Alt-A (no doc) loans.
Back then aggressive subprime lending was at 75% LTV with a 25% cash down payment. Investors had to put a minimum 25% cash down payment. Most mortgage loans were written at full doc. The potential neg-am ARMs were qualified at 7.50%. And still we were in a real estate recession for five long years.
Mark my words, the real estate and mortgage markets will go through massive changes in the coming two to three years. Unfortunately, things are going to get a lot worse before they get better.
“Unfortunately, things are going to get a lot worse before they get better.”
I think that says it all. You brought up many great points and really highlight why the proposal to freeze rates is not going to be anything more than a finger in the dam. You are correct there is no escape hatch…
If the borrowers didn’t try to improve their credit over the past few years, what makes you think that 5 to 7 years is going to make any difference? Is there a guarantee that the inventory levels are going to go down and prices are going to go up for those that are upside down?…wish I had that crystal ball…
Morgan, Ms. Ross is a motivational speaker for real estate agents. I am not sure that she knows what portion of subprime loans are performing. Her job is to try an motivate a group of people who have been beatin down lately with bad news.
Much like how I love to hear positive things about this industry. Believe it or not there are still positive people in the real estate industry. There are those that believe things arent going to be as bad as the predictions. There are those who know that economies experience real estate bubbles. Bubbles exist for just about any marketable product. The markets will correct themselves and present many more opportunities for those of us who are strong enough to weather the storm.
It may take a few years for things to improve noticeably. But things will eventually improve. The sky is not falling. The government is working on plans to help borrowers and to stabalize the credit markets. The federal reserve will undoubtedly cut rates several more times. They never just make a few rates movements and we have not been so financinally sick in a long time. You can count on them cutting rates. You are seeing the weaker banks starting to receive capital injections from investors.
Its time that we start focusing on the positives. The facts…we will weather this bubble just like we have all of the others because markets correct themselves and move higher than ever. It may take a little time but thats precisely what WILL happen.
Gee Mike, I almost felt like breaking out into song. “Tomorrow, tomorrow, the sun will come out tomorrow”.
Being positive is over rated. Being truthful is not. The truth is that there are few positives in this market. It is not the job of agents to be cheerleaders. Their job is to sell real estate, regardless of the market, just like a stockbroker.
“Only 25 percent of all mortgages are subprime, and of these, 75 percent are performing.”
I spoke with a private sub prime lender last week. December 2005 they funded a record number of loans. Every one went sideways.
Realtors are universally angry with “the media” right now. They think that if the media would just “stop all the negative stories” everything would be OK & buyers would come out of the woodwork. But people have finally figured out that owning a house isn’t always better than renting. If you have a $2,000 interest-only mortgage payment or $1,000 rent for the same property, the rent is the better deal. The only advantage to owning is the possibility of selling to another sucker at a higher price. The only reason to have owned Cisco stock @ $80/share years ago was the hope that you could sell it for $100 to someone else. What it became apparent that that wasn’t gonna happen, it dropped to $10. Stock values (in the aggregate) are driven by earnings. Home values (in the aggregate) are driven by household income and are reined in by comparable rent & the cost of new construction. Home values will, on average, drop further. I will not tell borrowers otherwise - although selective good “buys” can be had.
Regarding subprime borrowers: You can take the borrower out of the trailer park, but you can’t take the trailer park out of the borrower.
Mike, I totally respect your opinion and know what you are saying, but Ms. Ross would better serve the members of NAR by communicating REALISTIC expectations. Morgan is SPOT ON!!!
I’ve been in and out of the business for 20 years, first in title for five years, then a 10 year break from real estate, then 5 years in mortgages (an industry I LOVE), and now real estate and loan origination.
The fact is that there are people that need to leave the real estate and loan industry. The roaches not only need to scatter, they need to go to jail. People got greedy, jacked up the prices and didn’t save anything. Now they want the Feds to come in with taxpayer money to bail this all out so the can continue to be greedy.
How about members for NAR AND MBA and CAMB start living within their means?
If I just made 3 real estate transactions at the average price in SD County, I’d make more than I did all last year, and to me, that’s great! The same if I originated about 6-8 loans! The problem is that people want fast and easy money, don’t care about their clients, are lazy and stupid and are waiting for the next victim. And they make 6 figures doing it.
These people need to go back to being used car salesmen and bartenders.
The sooner we take our medicine, the sooner we can bring a normal market.
This disaster is just one more red flag that this country has no crisis management skills. Recently we have seen 911, (many of the rescuers got sick and died due to improper safety gear), Hurricane Katrina ( I dont think this needs any explanation), The fires in California where things spiralled out of control into a major catastrophy.
There will be many more crisises in the future it is part of life. Maybe we should be thinking of putting together government crisis management agencies to plan for these incidences instead of waiting for the clean up teams who only have a limited amount of power and resources to manage ginormous messes. How many more times do we have to go through various different scenarios until we step back and really change the way our society handles things.