Home equity is altering spending habits and view of debt

[chowderhead]

Originally posted by: dullard
I've been arguing the same thing. The inevitable counter-argument is that the housing market will never cool, burp, rupture, or pop. However, in history with situations like today it has locally cooled, burped, and ruptured. Greenspan himself said that the housing surge cannot be sustained.

"The housing boom will inevitably simmer down," Greenspan said in the prepared remarks. "As part of that process, house turnover will decline from currently historic levels, while home price increases will slow and prices could even decrease."

Greenspan made his famous irrational exuberance speech about the stock market in 1996 and the market corrected itself in 2001. So, can we expect the housing market to deflate in 2010?

Anyway, there are increasing talk about a bubble. I am one to think that if there is a deflation it would be regional and be relatively soft. Somet of this chicken little talk is probably coming from investors who want to talk down the market and buy at the bottom.

Originally posted by: Pliablemoose

I can see people upside own on their home notes very easily, just like they are with their cars... Insurance companies should start selling gap insurance for homes

They sorta have that, it's called PMI. Too bad it is being circumvented as banks are now doing 100% financing with no down and 1st and second/HELs mortgages. I do feel that the banks should be the ones to take a bath if the borrower default as it is the bank's responsibility make responsible loans.

 

[Vic]

Originally posted by: chowderhead
They sorta have that, it's called PMI. Too bad it is being circumvented as banks are now doing 100% financing with no down and 1st and second/HELs mortgages. I do feel that the banks should be the ones to take a bath if the borrower default as it is the bank's responsibility make responsible loans.

Mortgage insurance is NOT a form of gap insurance. Not in any way, shape, or form. It insures only the lender, not the borrower, against default. It has always been that way. 100% 1st "no-MI" programs and high-CLTV combo mortgages usually still have mortgage insurance, but with the cost of the mortgage insurance wrapped into the interest rate. That way the borrower can deduct the cost from their income taxes (mortgage interest is tax deductible, mortgage insurance is not).
Banks take their responsibility to make responsible loans very seriously. Do borrowers? Lending is an extremely competitive business. If a lender tells a borrower, "We're sorry, but we feel it would be unwise to qualify you for this loan (due to legitimate reasons like credit, income, etc.)," what does the borrower do? At best, go to another lender who will qualify them. At worst, file various government complaints.

I would like to point out, in this context, that so-called "predatory lending" laws have actually encouraged this trend, via government-mandated reductions in lending costs. Refinancing your home has never been cheaper, both in rate and fee, so why not dip into the well again and again?

 

[Vic]

Oops double post

 

[rahvin]

Originally posted by: chowderhead
I do feel that the banks should be the ones to take a bath if the borrower default as it is the bank's responsibility make responsible loans.

The bank manages it's own risk but that doesn't absolve the buyer from taking out loans they can't afford. It is the BUYERS responsibility to know what they can and can't afford and be willing to abide the financial consequences of over streching their finances. This belief that people aren't responsible for their own actions is just reprehensible.

 

[conjur]

ruh roh, rorge!

Homebuilder insiders on selling spree
Analysts worry sales may presage downturn after boom
http://www.marketwatch.com/news/story.a...7%2D8623%2D96A6CFC6C5BF%7D&siteid=mktw

"There has been record insider selling within the last 10 months across a broad range of homebuilding companies despite very few sell ratings by Wall Street analysts and the general perception by investors that the stocks are undervalued," Richard Bernstein, the firm's top strategist, wrote in a note to clients.

Based on data going back to 1985, Merrill found that insider net selling at eight major homebuilders -- including bellwethers such as such as KB Home (KBH: news, chart, profile) , Ryland Group Inc. (RYL: news, chart, profile) and Toll Brothers Inc. (TOL: news, chart, profile) -- has hit record levels at some point in the last 10 months.

"Such insider behavior seems to mimic that of the technology sector around the peak of the technology bubble in March 2000," Bernstein said.

In July, Toll Bros. Chief Executive Robert Toll made two large sales in July worth $57 million and $27.4 million, according to data from Thomson Financial. Meanwhile, Bruce Toll, a board member, sold $21.7 million worth of stock in late July.

Thanks to the sizzling U.S. housing market and low interest rates, has homebuilders have been enjoying an unprecedented boom. Over the past twelve months, the Dow Jones U.S. Home Construction Index (DJ_HOM: news, chart, profile) has leaped 53%.

Yet the index has steadily declined in August on inflation worries, some brokerage downgrades and widespread publicity about perception of a speculative bubble in the housing market.

Some analysts have suggested that insider selling in the homebuilding sector is simply the result of executives wanting to diversify their holdings.

"However, we think there is a strong contrary message to investors if the stocks have appreciated so much that executives across nearly the entire industry feel the need to diversify at record pace," Bernstein wrote.

The strategist noted that Merrill has previously pointed to concerns about a flattening of the so-called yield curve, a data trend that indicates a narrow spread between short-term and long-term interest rates. The narrower the spread, the greater the suggestion of "significant problems" in the housing market, Bernstein said.

 

[chambersc]

this concept (borrowing against the equity) disgusts me. Essentially, the loan is for people too afraid to move out of the house you're in now (for whatever reason) and to lock in that equity and buy a house much cheaper elsewhere but rather they, as the OP stated, use a magical ATM card that gives them a seemingly unlimited amount of money (i live in prime equity area, port saint lucie, FL. My house has been valued at 4.28 times what we payed for it (334k paid 78k). A plethora of cliches can be applied to this situation of the housing market (what goes up must come down...) yet people fail to realize the inevitable future.

The only way to securely lock in that equity is to find someone who will buy your house for that price -- this point I believe is lost on most people. Sure, they hire an appraiser to come out and tell them that their house is worth 3.4hundred k but someone has to buy it at that price. The quote alone is meaningless without the person on the backend willing to spend that cash. Once the bubble pops and people say "know what, I don't wanna buy for that much" all the people that have taken out equity loans are gonna be up sh!t creak. It's scary that people are willing to depend on the future this much rather than securing it now and then depending on the present.

 

[alent1234]

Originally posted by: rahvin

Originally posted by: chowderhead
I do feel that the banks should be the ones to take a bath if the borrower default as it is the bank's responsibility make responsible loans.

The bank manages it's own risk but that doesn't absolve the buyer from taking out loans they can't afford. It is the BUYERS responsibility to know what they can and can't afford and be willing to abide the financial consequences of over streching their finances. This belief that people aren't responsible for their own actions is just reprehensible.

banks don't have the risk anymore

the money funding mortgages is coming from mutual funds that invest in bonds and foreign investors. if people foreclose that means the investors of those funds will lose out. And I was looking at my 401k choices this weekend and all the bond funds had exposure to the mortgage market. If people foreclose en masse, guess who losses?

 

[Vic]

Originally posted by: alent1234

Originally posted by: rahvin

Originally posted by: chowderhead
I do feel that the banks should be the ones to take a bath if the borrower default as it is the bank's responsibility make responsible loans.

The bank manages it's own risk but that doesn't absolve the buyer from taking out loans they can't afford. It is the BUYERS responsibility to know what they can and can't afford and be willing to abide the financial consequences of over streching their finances. This belief that people aren't responsible for their own actions is just reprehensible.

banks don't have the risk anymore

the money funding mortgages is coming from mutual funds that invest in bonds and foreign investors. if people foreclose that means the investors of those funds will lose out. And I was looking at my 401k choices this weekend and all the bond funds had exposure to the mortgage market. If people foreclose en masse, guess who losses?

This is not entirely accurate thinking. Banks have always borrowed the money that they lent out. That is the primary business model of banking -- buying and selling money and profiting on the margin. Once they borrowed from savings accounts, now they borrow from mutual funds. This does not reflect a reduction in bank risk, but a fundamental change in the way people invest their savings.

 

[BoberFett]

Originally posted by: chambersc
this concept (borrowing against the equity) disgusts me. Essentially, the loan is for people too afraid to move out of the house you're in now (for whatever reason) and to lock in that equity and buy a house much cheaper elsewhere but rather they, as the OP stated, use a magical ATM card that gives them a seemingly unlimited amount of money (i live in prime equity area, port saint lucie, FL. My house has been valued at 4.28 times what we payed for it (334k paid 78k). A plethora of cliches can be applied to this situation of the housing market (what goes up must come down...) yet people fail to realize the inevitable future.

The only way to securely lock in that equity is to find someone who will buy your house for that price -- this point I believe is lost on most people. Sure, they hire an appraiser to come out and tell them that their house is worth 3.4hundred k but someone has to buy it at that price. The quote alone is meaningless without the person on the backend willing to spend that cash. Once the bubble pops and people say "know what, I don't wanna buy for that much" all the people that have taken out equity loans are gonna be up sh!t creak. It's scary that people are willing to depend on the future this much rather than securing it now and then depending on the present.

You don't really understand how the home equity loan or appraisal process works, do you? It's based on comparable sold properties. The number isn't just snatched out of the air. If the market didn't support that price it wouldn't appraise for that much. If a cities housing market suddenly collapsed and no homes were being sold, then home equity loans in that area would cease. No bank is going to take a home as collateral that has less value than they've loaned out on it.

Your house being valued at 4 times what you paid for it is called inflation and demand. But hey, if you want to sell it for me at your purchase price, because selling it for more than 78K disgusts you, then by all means let's do it. I'll have a signed purchase agreement to you tomorrow. Just put your John Hancock on it and I'm ready to close this week. As for what going up must come down, you're thinking of physics. Not economics. I think you need to head back to school.

Finally, why should someone have to move to borrow money against their home? If Joe Homeowner wants to tell John McBank that he's willing to put his house up for collateral in exchange for a loan, what the hell business is it of yours?

Home equity is nothing compared to the disgust I have for people who talk about things they clearly don't understand.

 

[Vic]

For those who think real estate appraisers just pull value out of thin air, may I recommend some "light" reading -- Uniform Standards of Professional Appraisal Practice (USPAP)

 

[alent1234]

Originally posted by: Vic

Originally posted by: alent1234

Originally posted by: rahvin

Originally posted by: chowderhead
I do feel that the banks should be the ones to take a bath if the borrower default as it is the bank's responsibility make responsible loans.

The bank manages it's own risk but that doesn't absolve the buyer from taking out loans they can't afford. It is the BUYERS responsibility to know what they can and can't afford and be willing to abide the financial consequences of over streching their finances. This belief that people aren't responsible for their own actions is just reprehensible.

banks don't have the risk anymore

the money funding mortgages is coming from mutual funds that invest in bonds and foreign investors. if people foreclose that means the investors of those funds will lose out. And I was looking at my 401k choices this weekend and all the bond funds had exposure to the mortgage market. If people foreclose en masse, guess who losses?

This is not entirely accurate thinking. Banks have always borrowed the money that they lent out. That is the primary business model of banking -- buying and selling money and profiting on the margin. Once they borrowed from savings accounts, now they borrow from mutual funds. This does not reflect a reduction in bank risk, but a fundamental change in the way people invest their savings.

i thought they borrow from other banks and then resell the loans to mutual funds as mortgage pools?

 

[IronWing]

Originally posted by: Vic
For those who think real estate appraisers just pull value out of thin air, may I recommend some "light" reading -- Uniform Standards of Professional Appraisal Practice (USPAP)

All I know is that when I refinanced the first appraisal came back too low to qualify for the particular deal being offered. The same bank did a second appraisal one week later that came back 35K higher than the first. Taking the average of the two appraisals magically yielded the exact value needed to qualify for the loan. I ain't complaining but it did seem odd.

 

[dullard]

Originally posted by: Vic
For those who think real estate appraisers just pull value out of thin air, may I recommend some "light" reading -- Uniform Standards of Professional Appraisal Practice (USPAP)

I didn't read that link. But the appraisers are currently under extreme investigation for phony appraisals.. You might not be able to publically admit it due to your job, but you know it is going on. Banks tell the appraiser what amount the house must appraise for, and what do you know, most of the time the appraiser comes back with that exact amount.

Why are banks legally permitted to tell the appraiser before hand? Doesn't this lead to serious conflicts of interest? The banks need the value to be XXX to make money on the deal. The appraiser needs to keep the bank happy to have a job. Thus they both benefit if the result is an appraised value of XXX.

 

[Vic]

Originally posted by: alent1234
i thought they borrow from other banks and then resell the loans to mutual funds as mortgage pools?

Brokers and correspondent lenders do this, yes. Mortgage origination is very complicated, but suffice to say that the lender who originates your loan, and even the lender who services your mortgage payments, may not be (is probably not) the actual institution holding your note. That does not mean that the originator is free from risk and liability though. Quite the opposite in fact, as the major investors (Fannie, Freddie, Lehman Bros, Bear Stearns, etc.) are so big that they typically have no trouble muscling a "buyback" down on the little guy.

Originally posted by: ironwing
All I know is that when I refinanced the first appraisal came back too low to qualify for the particular deal being offered. The same bank did a second appraisal one week later that came back 35K higher than the first. Taking the average of the two appraisals magically yielded the exact value needed to qualify for the loan. I ain't complaining but it did seem odd.

That is extremely odd. Not necessarily the different values (appraisals are professional legally defendable opinions, but still opinions nonetheless), but this "taking the average of." Typically in mortgage underwriting, if 2 appraisals of recent age (<120 days) are present, then the lower of the 2 appraisals is always used as the final determination of value, unless it can be determined that the lower appraisal is somehow improper (inferior comps, etc.). Not any type of average. "Super jumbo" loans (those in excess of $650k) frequently require 2 appraisals as just a standard guideline. My hunch is that you went through a broker or correspondent lender, not a true bank, and that the 1st (lower) appraisal conveniently found its way into the round file, where the investors would never see it.

 

[IronWing]

Originally posted by: Vic

Originally posted by: alent1234
i thought they borrow from other banks and then resell the loans to mutual funds as mortgage pools?

Brokers and correspondent lenders do this, yes. Mortgage origination is very complicated, but suffice to say that the lender who originates your loan, and even the lender who services your mortgage payments, may not be (is probably not) the actual institution holding your note. That does not mean that the originator is free from risk and liability though. Quite the opposite in fact, as the major investors (Fannie, Freddie, Lehman Bros, Bear Stearns, etc.) are so big that they typically have no trouble muscling a "buyback" down on the little guy.

Originally posted by: ironwing
All I know is that when I refinanced the first appraisal came back too low to qualify for the particular deal being offered. The same bank did a second appraisal one week later that came back 35K higher than the first. Taking the average of the two appraisals magically yielded the exact value needed to qualify for the loan. I ain't complaining but it did seem odd.

That is extremely odd. Not necessarily the different values (appraisals are professional legally defendable opinions, but still opinions nonetheless), but this "taking the average of." Typically in mortgage underwriting, if 2 appraisals of recent age (<120 days) are present, then the lower of the 2 appraisals is always used as the final determination of value, unless it can be determined that the lower appraisal is somehow improper (inferior comps, etc.). Not any type of average. "Super jumbo" loans (those in excess of $650k) frequently require 2 appraisals as just a standard guideline. My hunch is that you went through a broker or correspondent lender, not a true bank, and that the 1st (lower) appraisal conveniently found its way into the round file, where the investors would never see it.

Wells Fargo
I thought the original was too low as it showed only 1% annual growth in value over a three year period in a neighborhood where 5-10% annual increases had been the norm. The second was a bit high based on comp sales but the average was a bit low for the market. The target the bank was aiming for was to get to 20% equity so they didn't have to mess with PMI.

 

[Vic]

Originally posted by: dullard
I didn't read that link. But the appraisers are currently under extreme investigation for phony appraisals.. You might not be able to publically admit it due to your job, but you know it is going on. Banks tell the appraiser what amount the house must appraise for, and what do you know, most of the time the appraiser comes back with that exact amount.

Why are banks legally permitted to tell the appraiser before hand? Doesn't this lead to serious conflicts of interest? The banks need the value to be XXX to make money on the deal. The appraiser needs to keep the bank happy to have a job. Thus they both benefit if the result is an appraised value of XXX.

Certain individual appraisers are always in trouble. This is nothing new. Like all industries, lending has its fair share of fraud and (quite frankly) the honest among us don't like the fraudsters one bit. Fraud is IMO an unfair advantage. Sadly, borrowers reward fraud. They look through the yellow pages calling for rates and go with that one guy who quoted far lower than everyone else. Does he have a miracle product or direct conduit? Of course not, those customers just get a nasty surprise at the closing table, where they either have to sign or sleep in a U-Haul. You think I like this? Hell no.

Giving the appraiser a target value is a hot topic, of course. My answer is that the appraiser is under no obligation to meet that target value, and that they frequently don't in my experience. "Most of the time"? Heh, I could only wish. BUT, if the target value is unrealistic, then I may not want the appraiser to meet it, strange as that might sound. A very high percentage of appraisals are subject to 3rd party review (desk or field, even), and a "pushed" appraisal value can nuke an entire deal with no hope of future salvation while incurring additional costs along the way, both to borrower and lender. It's not in my interests to feed appraisers while starving myself.

 

[Vic]

Originally posted by: ironwing
Wells Fargo
I thought the original was too low as it showed only 1% annual growth in value over a three year period in a neighborhood where 5-10% annual increases had been the norm. The second was a bit high based on comp sales but the average was a bit low for the market. The target the bank was aiming for was to get to 20% equity so they didn't have to mess with PMI.

Hmm... interesting. Growth rate is not used for determining value (just market conditions, for example a declining market may be unlendable). Sales comps is where value is determined. I assume you had to pay for both appraisals?

You guys realize that underwriting and reviewing appraisals is a high art, right? Good underwriters know all the tricks that a crooked appraiser can use. It's not like the appraiser just provides a value number and nothing more. He has to show to his work and then some. And an independent review can be ordered at any time, automated underwriting systems remember previous values and will "red flag" new applications with a suspiciously high value, and automated valuation models are increasingly being used as a way of double-checking values. LTV guidelines are the singularly unbreakable "no exceptions" guidelines in mortgage lending, and the absolute last thing that a lender likes getting burned on.

 

[IronWing]

Originally posted by: Vic

Originally posted by: ironwing
Wells Fargo
I thought the original was too low as it showed only 1% annual growth in value over a three year period in a neighborhood where 5-10% annual increases had been the norm. The second was a bit high based on comp sales but the average was a bit low for the market. The target the bank was aiming for was to get to 20% equity so they didn't have to mess with PMI.

Hmm... interesting. Growth rate is not used for determining value (just market conditions, for example a declining market may be unlendable). Sales comps is where value is determined. I assume you had to pay for both appraisals?

The cost of the appraisals was rolled into a fixed "application fee". I don't know who they had do the appraisals but I think they did them in-house. Basically they wanted to do the loan. Due to the interest rate change from my existing mortgage to the refinance the total monthly outlay (P+I+PMI vs P+I) for the refinance was lower than the original loan so they figured they didn't have too much risk since my payments have always been made full and on time.

 

[alent1234]

appraising is a bunch of BS

look at home, measure square footage and look at the comps. Allow a few % for growth in value. Next home.

 

[zendari]

Originally posted by: Engineer

Originally posted by: Pliablemoose
Just read the article earlier, love this bit:

CMG Financial Services, a mortgage company in San Ramon, Calif., introduced another tool this summer: a combination checking account and mortgage.

It works like this: Your paycheck is deposited into your account and immediately applied to your mortgage principal. Over the course of the month, as you spend money on food, gas and other necessities, the principal creeps back up. But the result is that your mortgage debt gets paid off more quickly.

I really hate the idea of dicking around with my mortgage, I'm at 5.875 after refinancing X1 with no equity cash out. Can't help but think the real estate boom/equity cash out boom is freaking insane. But I guess I'm unsophisticated LOL...

<--debit free except my mortgage.

Seems like a checking account like that, unless somehow capped, could lead one to spend well beyond their means. Example: Get paid $2,000 this month, but spend $2,700. You now have added $700 to your mortgage without thinking about it. Too open to easy debt.

<---- Will be mortgage free mid 2006 and full debt. free within a few months after that!

That's precisely what it is. It's a way of getting those debit card individuals.

It's potentially possible to beat the 5-6% interest rate on larger HOL, but its certainly not guaranteed.

 

[Vic]

Originally posted by: alent1234
appraising is a bunch of BS

look at home, measure square footage and look at the comps. Allow a few % for growth in value. Next home.

No. Value growth is not a determiner of final value. Ever. Final value is primarily weighted on sales comps. Always.

At a gross of $300-$400 per property (for single family), just how long do you expect an appraiser to spend preparing a report? Months?