Housing

Just how bad are things in the housing market?

There's a whole lot of fear. The credit markets are under tremendous pressure. But just what does that mean? Mish:

Late last Friday I gave a call to Dave Donhoff at No Bull Mortgage and was wondering about subprime and Alt-A, and how they were affected by these treasury gyrations. Before I go further, let me say that Dave is one of the good guys. He has not had a single returned loan or foreclosure on one of his customers in the last 6 years. Although Dave has not been tracking exactly what I wanted he did offer this:

* Almost all stated income loans everywhere vanished last Friday.
* Almost all 2/28 ARMs vanished last Friday.
* While this was eventually expected it was not expected by everyone overnight.

As we were talking I was fortunate that a representative of major mortgage lender who had a scheduled appointment stopped by to see Dave. That person agreed to talk to me on condition anonymity so I will honor the request. But here is what I found out from that major lending insider.

* Subprime rates have risen by as much as 190 basis points at his organization in just the last 2 weeks!
* Many other lending institutions have done the same thing.
* The definition of prime has tightened considerably, everywhere.
* Any variance from prime raises the mortgage rate.
* Small differences in FICO score now matter (sometimes by a lot).
* Every little thing adds up.
* 90% LTV rates are higher than 85% LTV rates which are higher than 80% LTV rates.
* 100% LTV rates are very difficult to come for subprime and even Alt-A.
* Condos vs. homes matters significantly.
* There were 3 rate increases in the last 2 weeks even as 10 year treasury rates rallied [10 year treasuries fell].
* Second mortgages have nearly vanished - no market.
* 2/28 arms - gone.
* Someone who is "really clean" but is not prime (but close) and is putting down 20% has had a 70-80 basis point hike in the last 2 weeks.
* The bankrate charts might not show it, but in the last two weeks nearly every loan rate went up even as treasuries rallied significantly. The primest of prime was perhaps flat.

A 190 basis point hike in two weeks was so shocking that I asked for a repeat. "90?" I asked. "No. that's 190 basis points" came the reply. For those not familiar with the term basis points, 100 basis points is a 1% rise in the loan rate. For example, 190 basis points would send a mortgage loan from 7% to 8.9%. The bigger the loan the bigger the increase in monthly payments (ouch!)

Go read the whole thing for a full perspective.

Now let me say this. Mish is a bear. He thinks the whole mess is going to crash around everyone's ears. And unfortunately thus far, he's been correct. I'm hoping he's overly pessimistic now.

There's two things I take away from Mish's post. First, because of increasing defaults and a popping in the housing bubble, mortgage interest rates are going up significantly if you can even get a loan. And that's a key. Unless you are a very holy prime borrower, forgetaboutit. And if you do get a loan, be prepared to have that loan be a couple of percent higher than a few months ago.

Second, we already know that most of the adjustable rate mortgages that were lent during the bubble are due to adjust early in 2008. And those adjustments now look to be rather large which will fuel another large round of defaults. Defaults = losses and = depressed consumer spending.

Bottom line, we're a long way from being out of the woods in the housing slump. The slump seems to be affecting consumers and pessimism is running really high about the economy right now. Are these predictions accurate? Or, as some stock advisors like Bob Brinker suggest, is it simply setting the stage for a huge stock market rally based on a proverbial "wall of worry"? Bob has called the turn in previous stock markets ......

My guess? There's trouble ahead. But unkie's Paulson and Bernanke will come to the rescue with plenty brand new freshly printed dollar bills. This won't solve the housing problem, but it will ease the credit markets softening the blow. And it will further fuel inflation .......

Update: Here's a chart that shows the adjustable mortgage resets (numbers are in billions):


Note that the bulk of adjustable mortgage resets occur in early 2008 .... a whole lot of them. Also note where we are in the process ..... Ouch.