Housing Mammoth Stuck in Tar Has Bigger Problems To Worry About

Posted on May 7, 2013 by Logan Mohtashami

Housing Mammoth Stuck in Tar Has Bigger Problems To Worry About

May 07, 2013 8:11 AM

Perhaps Mr. Yun would do well to take a visit to La Brea Tar Pits, and there consider the plight of ancient Wooly Mammoths. Some of those were stuck in the mire too, but though the tar was a contributing cause, ultimately, what delivered their fatal blows? In some cases It took the Saber Tooth Tiger, and sometimes packs of Dire Wolves to do that, sometimes both at once.

So what of our housing market? Prices are on the upswing, in some markets demand outstrips supply to the point that multiple offers are not uncommon. If housing can “unstick“ itself with an increased inventory, then what could possibly go wrong? What are the saber tooth tiger, and dire wolves of housing?

They are these:

1. Housing Price Inflation without income growth: When prices of homes rise faster than incomes, buyers become priced out of the market. While home prices, year over year, are on the rise, average incomes are not keeping pace. This is not a good long-term trend. Cash buyers are currently 30% of the market, and cash buyers have no debt to income problems. These buyers are helping price some primary mortgage home buyers out of the market.

2. Demand light from first time buyers: Even with historically low-interest rates hovering in the 3.25- 3.75% range, we are hearing cries that mortgage lending is too tight, and that would be first time buyers are having trouble qualifying for a loan. Even in 2013, first time home buyers are running at a 30% level, lower than the historical norms of 40-43%. What happens when interest rates rise (as they inevitably will do) ? Unless we see good income growth, those that can’t qualify now will have a much harder time qualifying when mortgage rates are higher.

3. Mini-Bubble 2.0: The main reason home prices are rising at current pace is that on-sale inventory is so low. There continue to be problematic numbers of homes underwater, many Americans in the 90-99 LTV range, which means these homeowners will not be putting their homes into the for sale inventory. Further, there has been a big drop in home construction in the last 5 years. Though that number is getting better each year, we are not building homes fast enough to make a significant push into inventory. Finally, properties in distress take a long time to get to market and we have still have roughly 5 million homes that are either delinquent or in the foreclosure process. So long as these factors exist, then there remains the possibility that the few properties there are, are being inflated to unrealistic levels, and that mini bubble in prices will get bigger.

It would be wonderful if the good news being reported by many is actually good long-term news as well. But, in my view, the recent rise in home prices , without the corresponding increase in real incomes, and new home purchase mortgage applications being approved, then the truth seems to be more like the truth for our fateful Wooly Mammoth. Sometimes the initial problem becomes insignificant, though contributory, to the much worse problems to come.

Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial columnist for Benzinga.com and contributor for Businessinsider.com

Posted in Uncategorized | Tagged Debt-to-income, Home Prices, Housing Bubble 2.0, Housing Inflation, Housing Inventory Crisis, Income Growth, NAR | Leave a comment

Will be on Bloomberg Financial: Talking about Bernanke’s Myth on Tight Lending Standards & The Real Housing Story

Posted on March 27, 2013 by Logan Mohtashami

Will be on Bloomberg Financial: Talking about Bernanke’s Myth on Tight Lending Standards & The Real Housing Story

Logan Mohtashami, Benzinga Contributor

Will be on Bloomberg Financial

Talking about Bernanke’s Myth on Tight Lending Standards & The Real Housing Story

The Hays Advantage

Podcast of the Interview

http://www.stitcher.com/podcast/bloomberg-news/episode/22524279

http://www.bloomberg.com/podcasts/hays-advantage/

Posted in Uncategorized | Tagged housing inventory, Lending Standards, FHA, Hays Advantage, Housing Bubble, Debt-to-income, FED, Home Prices, Bloomberg Financial, Kathleen Hays, Vonnie Quinn, Bernanke, Freddie, Fannie | 1 Comment

Bernanke’s Lending Standards Delusional Rhetoric

Posted on March 25, 2013 by Logan Mohtashami

Bernanke’s Lending Standards Delusional Rhetoric

Logan Mohtashami, Benzinga Contributor

March 25, 2013 9:23 AM

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Baa Baa Black sheep have you any wool?
Yes sir, yes sir, three bags full.

This old nursery rhyme runs through my head as I sit down to write.

So here’s my “bag of wool” — Lending standards are not too tight. And, yes, I am the black sheep in the Mortgage industry for saying so. Everyone in their right mind, including the Fed chief himself, has said that lending standards have gotten too tight. Ben Bernanke reiterated this view once again recently, when he was asked about lending standards during the Q & A session following the minutes. His view in this regard has not wavered.

But this idea that Lending Standards are too tight, thereby preventing many people from buying a home, has no factual merit. Unless a buyer’s condo project does not pass or the appraisal comes in low, more than 99% of the time a potential buyer will get approved for a loan. This I say with full confidence and from experience.

Yet the Fed chief says standards are too high. How? In what way? Unless you believe bringing back zero down payment loans, extending Debt To Income ratios higher and not allowing any reserves after the transaction then there is little that can be changed to lower standards.

Remember this; the first principle on which we should base all lending standards is that the buyer should have the capacity to buy the home and make the payments. What we should not do is lower lending standards in order to create a new pool of buyers simply because some believe the standards are too strict.

At some point we will realize that it isn’t lending standards that are the problem. The problem, and the cause of the dearth of buyers, is the economy, debt to income ratios and liquid asset availability. It stuns me that even today the Fed chief hasn’t grasped this concept.

Bernanke also believes that clarity on the regulations will clear up confusion which is causing trouble in lending land. However, the only confusion is among the milling sheep who continue to bleat about lending standards. DTI and liquid assets remain the stumbling block for many would be new home buyers. There is nothing confusing about those terms in the regulations.

Trouble began when lenders gave money to people who did not have the capacity to repay the loan. Sensibly, now, people must show their financial capacity when applying for loans. Even so, buyers don’t need 20% down and a 740 Fico score to get a loan. (Though that is required for A pricing conventional loans.)  You can get a loan if you have 642 FicoScore, 3.5% down-payment with Debt to income ratios of 43. That’s not strict; that is damn easy if you ask me.

The Put Back wars that Bernanke also talked about in the Q&A is more of a paperwork battle to hedge against future law suits. Freddie, Fannie and FHA will sue everyone they can to get money for their depleted balance sheets since all 3 are really insolvent and need government assistance. Defensive lending isn’t based on a borrower’s capacity as much as the need of extra paperwork to defend against potential future lawsuits. Any positive changes on that front will ease the volume and absurdity of types of paperwork but it won’t create any easing in core lending standards. Changes in this regard won’t bring more buyers to come to market. Jobs, income, liquid assets, proper DTI ratios, good credit record are the real keys.

So when the US government fixes QRM ( Qualified Residential Mortgage) & QM ( Qualified Mortgage) don’t expect too much change to core lending standards. Ben Bernanke may believe that clarity on regulations will flush in new buyers. But, that is not true.. If Ben Bernanke wanted to clarify his statement about tight lending standards he should detail guideline changes he wants to see, so that the CFPB ( Consumer Financial Protection Bureau) can review and hash the specifics out. However, he and they won’t because they have nothing useful to say on that front.

So the next time someone says, lending standards are too strict ask them to give the exact core guidelines which need changing. Once the speaker opens their mouth to speak, though, you may hear nothing more than , “Baaa.”

At least the Black sheep had three bags full, and I just gave you mine.

Posted in Uncategorized | Tagged Ben Bernanke, CFPB, Fannie Mae, Fed Minutes, FHA, Freddie Mac, Lending Standards, QM, QRM | Leave a comment

Housing Inventory Hangover will Continue in 2013

Posted on February 27, 2013 by Logan Mohtashami

Housing Inventory Hangover will Continue in 2013

Logan Mohtashami, Benzinga Contributor

February 27, 2013 8:59 AM

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The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

For years Americans have seen the drying up of homes for sale. The drought has been harsh. Last year I wrote many articles talking about this trend and how this has had greater effect on a rise in sale prices than has pure demand. Now, this price rise caused by parched inventory is threatening to create another problem down the road which, if allowed to take hold, will only choke us further. What is this trend? I am not worried that home prices will bubble up into frothy foolishness, but I am concerned that this fast rise in prices will result in homeowners reaching their DTI (debt to income) limit and liquid asset limit faster, thereby pricing homeowners out of healthy financial decisions. This becomes a greater threat as mortgage rates slowly trend higher.

For several years now we have had very low rates and affordability has been high, and yet the traditional and first time home buyers have not been participating in great numbers. This is not surprising, as I have been saying for years, because we simply don’t have enough qualified home buyers ( excluding cash buyers) here in the US. This always had more to do with the Debt-to-income ratio of Americans rather than tight lending standards. Mortgage purchase applications have shown this as first time and traditional buyers have been not as strong as some people have hoped, even though rates have gone a lot lower since Mid 2010. DTI is simply too high and liquid assets are too low to generate a mega boom in traditional and first time home buyers . After tax/expense incomes of Americans especially those that would be first time home buyers is not high enough for them to get into the housing. Jobs, incomes, liquid assets, student loans and confidence all play a part for the first timers.

But we have all heard reports that in some areas there are multiple bids on many decent properties coming to market. So, we must know… What is driving this combination of low inventory, and the resultant push up in prices?

Here are the big 3, which are merging together to create this epic problem.

-There remains roughly 5.3 million homes either in delinquency or in the foreclosure process. Now the Shadow Inventory that everyone knows about are stuck in areas that remain the most troubled economically. The banks will extend out that pot of homes for as long as they can and most likely rent out a portion of them, which would leave over 3 million plus loans in delinquency. Now I am not saying every one of them is going to short sale or foreclosure, but a good portion will. So we have a delinquent back log of homes and the timeline to get those homes market in some states can take as long 3 years. There is a big difference between judicial and non-judicial states in regard to time lines.

-Housing Starts are making a comeback but if you look at the history of housing starts, you will see that the previous 4 year period was the worst period of housing starts since those began to be tracked. So, even though we are seeing a rise in starts, we must recognize it is a rise against a very low base. Now, starts will give a boost to the economy but nevertheless we aren’t building enough homes to get to market which means less inventory. So, this aspect has created the inventory shortage. I do believe we can get to 1.4 million in starts soon, but 2013 won’t be the year where new home inventory is going to create some balance.

- Underwater problem continues to plague us. We have over 10 million homes yet either under water or whose equity level LTV (Loan to Value) is 90-99. Having that high of a LTV means that traditional sellers won’t be putting their homes onto market in big numbers. The reason I point out the LTV levels of 90-99 is that when you consider total cost to sell your home you don’t have much left and in some cases you would have to bring money to escrow.

“So what,” you may wonder, “who cares, home prices are going up?” Maybe this market is like a stock with a very small float and the prices fluctuate higher, does it really matter to us all. Yes, it does matter and I will tell you why. My longer term concern with a sharp spike in prices is connected to the fact that we have not yet seen a boom in this economy. We are growing 2-2.4% and still averaging 150,000 -160,00 jobs per month. Neither do we see much income growth here in the US. True, the rise in stock market will help those who own equities and likely give a boost to the higher end homes for sale. For first time buyers, though, the likelihood of owning enough stocks to make a difference in ability to afford a first home is less likely.

As home prices push higher the average American will have to put more money down, borrow more and pay more for the cost of shelter which will lead to less disposable income after expense and less for long-term retirement investments and savings.
So, if home prices continue to rise due to the fact that we have these epic lows in inventory, it won’t only affect the housing market, it will also effect the economy longer term. We need a balance in the rise of prices because mortgage rates can’t be below 4% forever. So for those who says housing is on fire and booming because home price are rising, take note at where the buyers are coming from.

Do you want to know when you will see a real true recovery in housing? Wait until you see a move higher in first time home buyers and traditional buyers and less cash buyers. Then you know the market has solid conviction and a foundation on which to build. But until then, this is a very juiced up housing market backed by 3 trillion plus of the Fed’s balance sheet heading to 4 trillion, cash investors and a low inventory hang over.

Posted in Uncategorized | Tagged Delinquent loans, Foreclosures, Home Builders, housing inventory, Housing Starts, Shadow Inventory, Underwater Homes | 15 Comments

Highway to the Danger Zone for Refinances

Posted on February 8, 2013 by Logan Mohtashami

Highway to the Danger Zone for Refinances

Logan Mohtashami, Benzinga Contributor

February 08, 2013 3:03 PM

Mortgage debt refinancing has been a strong point in the mild recovery the United States is experiencing.

Many Americans have taken advantage of low-interest rates by doing a rate and term refinance. Some have even shortened the term (duration) of their mortgage while maintaining a lower dollar monthly payment . Now that is an economic plus.

When mortgage rates collapsed from the 5% level in early 2011 to the low of 3.25% last year, this created a series of serial refinances and Harp 2 borrowers who jumped on this historical economic event.

Recently we have seen a move up higher in rates and some are asking if we have already seen the bottom.

I believe the low point in yield on the 10 year note was struck last year after the Spanish Default Fear trade sent an already highly manipulated 10 year note to break slightly under 1.40. Absent another major calamity in the world we have seen the low point in the yield of the 10 year note. With that backdrop rates should be rising higher. There will likely be some pull backs since the FED is stilling buying Mortgage Backed Securities for 2013. There is some concern we might get a spike in the 10 year note. However, my bet is that there is only a slight possibility of a spike. Why? I don’t think America will be punished for it’s government debt load in 2013. We may face consequences years down the road, but not this year.

So what does this mean for the Mortgage Refinance Market? Clearly, the mega boom market in home refinances is done. Origination volume in 2012 was very high due to the factors mentioned above. We won’t see that type of volume again unless rates break under 3%. Even with the Fed promising to buy MBS, I don’t see that lower break happening. If Mortgage rates get to 3.75% and stay above that range the pool of available refinance candidates is small. Barring a Harp 3.0 Product for private label loans, all those who could refinance did so last year. This is not to say there aren’t yet people who may refinance, of course. There are, but not in the high numbers we saw last year. The refinance boom we have seen these last few years is clearly in the danger zone . For 2013 refinance origination will clearly be lower but the real trouble could come in 2014. The Fed will likely call an end for QE (MBS purchases) which will push rates toward the path of normalization, or more toward the 6% level years from now. Concern at the Fed is already being expressed about their 3 trillion dollar balance sheet. And that balance sheet is north of 4 trillion dollars in less than a year. I suspect by Q2 2014 QE is over and then eyes will be watching to see when the Fed raises short term rates and if they stick to that 6.5% unemployment rate metric.

Potentially there is a future effect of all these low rates captured by some Americans . There are now numbers of homeowners who have locked in very low (cheap) money for 30 years. Down the road if they plan to move by first selling their home, clearly they lose that inexpensive mortgage and will likely be looking at a higher interest rate for their next home. Unless home prices have dropped dramatically, or they are scaling way down in size, their monthly payment will rise, maybe substantially. Will this affect their decision to move, or not? Would some decide to hold onto their first house, and turn it into a rental, while buying another home? It’s not that easy to rent a home and qualify for another mortgage on top of that. Let alone having the liquid asset ready for a down payment without selling a home. So, years out there will be many Americans thinking about this problematic situation. Some may not even qualify for a mortgage when rates normalize to 6% or higher. In the short run this last refinance boom certainly brought disposable income into the hands of those who could refinance. This extra disposable income may have helped the consumer economy a bit. However, the overall state of the housing market was not changed. The Core problem in housing yet remains with us. We simply do not have enough qualified home buyers to cause a rise in prices or expansion of homeowners (excluding cash buyers). Until we get more job growth, higher incomes and better liquid asset profiles for first time and traditional home buyers, we are going to be in the same boat. And that boat yet remains sloshing around in the doldrums waiting for a rising tide.

Logan Mohtashami is a senior loan officer at his family owned mortgage company AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial columnist for Benzinga.com and contributor for Businessinsider.com

Posted in Uncategorized | Tagged 10 year note, FED, HARP 3.0, Higher Mortgage Rates, MBS, Mortgages Rates, QE, Refinances | Leave a comment

CFPB Qualified Mortgage: Snore!

Posted on January 17, 2013 by Logan Mohtashami

CFPB Qualified Mortgage: Snore!

Logan Mohtashami, Benzinga Columnist

January 17, 2013 7:53 AM

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The long awaited Qualified Mortgage Rules finally came in last week and while reading them I think I fell asleep 4 times because it really was a big snore. There was no dramatic or even interesting change to note, in reality the issued rules are simply summarizing what the market place (Excluding FHA) has already done. And what is that, pray tell?

The days of the radical lending standards of the past are over. This is a positive for lenders and borrowers alike. My view has always been that lending standards aren’t too tight. I have called out to those who publicly complain that standards are too tight to provide evidence that massive amounts of qualified home buyers are being shunned out of the market. To this date, nothing worthwhile has been presented to me. And as long as FHA has their core weak guidelines I don’t imagine anything will.

To stay on task however, lets take a look at the core idea behind the Qualified Mortgages Rules. The idea is to focus on the ability of the borrower to repay the loan. This is my favorite core idea because I am a firm believer in the importance of debt to income when determining viability.

Below are the Ability to Repay Determinations:

1. Current or reasonably expected income or assets; income capacity and showing liquid assets to buy a home.

2. Current employment status. (The person should have a job and show stability in the same line of work for a certain length of time).

3. Monthly payment on the covered transaction.

4. Monthly payment on any simultaneous loan.

5. Monthly payment for mortgage related items.

6. Current debt obligations, alimony and child support.

7. Monthly debt-to-income ratio or residual income . ( 3-7 debt to income ratio)

8. Credit history (history or credit that prove timely payments have been made and not too much revolving credit card debt is a good thing)

All of the above determinations make good sense, and most are geared at ensuring a healthy debt to income ratio.

Further, below are additional points with which I agree and firmly believe should never be changed.

1. No interest only loans or Negative amortization loans. This is a plus because it eliminates any uncertainty to surprises over the long-term cost of shelter for the borrower.

2. No more loans longer than 30 years. (In time, I think the 30 year loan may even be eliminated. But it is definitely a good idea to do away with any loans that are amortized for longer than that)

3. Stated incomes loans are a thing of the past. (Good riddance to bad rubbish!)

4. No loans will be done with a DTI over 43. This is my favorite item. In fact, this rule should be mandated for the FHA tomorrow.

As I said earlier, most of the core ability to repay standards are already in the market place by now. There are exceptions. Some lenders will do stated income with 30% down. And, of course, the FHA has its reckless core lending standards for their insured loans. In fact, and I cannot stress this enough, FHA is the last lending institution that needs major overall. Once they are fixed we should be able to have greater long-term confidence for this country going forward.

Frankly, I would not have fallen asleep and in fact would have been wide awake if there were more biting teeth in these standards. If the FHA had been covered in these standards I would have been cheering. However, that is a different war for another day. Meanwhile, as I said, the reality is that most of these standards are already in the market place. But while this issued guideline was not exactly riveting reading, it was a welcome final nail in the coffin of lax lending standards in this country. That is a good thing. We never want another person with no capacity to repay a loan, to be given the go ahead to buy a home, thereby bringing trouble down upon the homeowner and everyone else, again.

Posted in Uncategorized | Tagged CFPB, Debt-to-income, FHA, Qualified Mortgage | Leave a comment

Interview with AxSA: Fiscal Bluff & Fiscal Abyss

Posted on January 11, 2013 by Logan Mohtashami

Logan Mohtashami, Benzinga Columnist

http://www.blogtalkradio.com/axsa/2013/01/11/axsa-conversation–facing-down-the-fiscal-abyss

Posted in Uncategorized | Tagged Debt Ceiling, Fiscal Bluff, Fiscal Cliff, US Budget, US Economy | Leave a comment

Logan Mohtashami