Media usually has wrong story (by mannfm11)

Media usually has wrong story	mannfm11	NEW 8/31/2007 11:10:05 AM
Adjustablerate mortgages aren't what is causing this mess. Subprime isn't what iscausing this mess. The whole system skewed to the right and created afalse demand that is certain to glut markets. We are now seeing thesupply side of the glut. Here in DFW, the market never went upbecause the prime employers around here fell into the tank, telecom andairlines. Prices are supposedly holding steady here, but Is suspect itis more because larger homes are being bought and the inner city is hotproperty than because homes in general are going up. Foreclosures hereeven 2 years ago were matching new home sales. This pretty much meansthe market is a year ahead of real demand, which would be qualifiedhome owners. The price bailout hasn't happened here, so it has shown upin foreclosures. The rest of the country is nothing but abacklog of what has happened here. Price has bailed out and it hasallowed for equity withdrawal. Equity withdrawal in Texas is limited, Ithink to 70% LTV. So that isn't going to cause a problem here if I amcorrect. But, in high increase states like California and the EastCoast, we are going to see some problems. Now, the people taking equityout of their homes have at least shown an ability to pay theirmortgages in the past and are probably better risks than the typicalfirst time homeowner who has never maintained a home. But, if therefinancer isn't controlling his other spending habits, he is going tobe faced with a dilemma, pay his next round of credit cards or make thepayment on a house that isn't worth what they owe. The Fedfunds rate hasn't been touched since June 29, 2006, so any ARM madesince then on a conventional basis should have been priced in the 6%range and the rate shouldn't increase beyond 8%. The problem withhousing has very little to do with this. It has more to do with tehconstruction of housing and the purchase of housing well in excess ofhistorical norms. It has more to do with the fact that very little inthe way of down payments were actually made, especially on the lowerend product. This was quoted out of the article on this link: Tightercredit and higher borrowing costs threaten the housing market, whichhas been an engine of U.S. economic growth. At the end of last year,there were 7.5 million subprime mortgage borrowers with $1.4 trillionin loans, according to the Center for Responsible Lending, a researchorganization in Durham, North Carolina. More than 2 million Americanswill lose their homes as introductory interest rates on mortgages resetto higher levels in coming months, according to the center. Bloomberg: Bush Pledges Help for subprime borrowers If you read this article from an economic standpoint, you might begin to realize that the entire media push on this is NONSENSE.Bush said nothing about subprime borrowers. I think he is going to moveto attempt to save some of the FHA stuff mentioned in this article, notthe junk out there. Second, repairing the mess that created the messisn't going to fix the mess. The whole thing is being woven as a lie. Thefacts are these. First, the article mentions that sales have fallen totheir lows since 2002. 2002 was a year of bubble sales, not depressedsales. Second, last week it was reported new home sales in July were870,000. Prior to 1999, 870,000 homes had never been sold in the US.Third, the article mentions FHA. It says that 12% of the mortgagesserviced by FHA are delinquent or in foreclosure. Now, we aren'ttalking about subprime here. This isn't generally a subsidized program,but a program insured by the borrowers premium paid to a federalinsurance agency. The main risk of FHA loans? No or low downpaymentsI have been in the mortgage business and the real estate business andgetting a FHA loan is a pain in the ass. They don't take anyone thatwalks in the door and the main risk is as I said, the minimal downpayments, including financing of closing costs. There havealways been 3 things that limited home ownership; Credit, down paymentand income. Of the 3, the most elusive has been downpayment. FHA wascreated to reduce downpayments in the first time home buying market,under the idea that a first time buyer with little down could become asecond time buyer with a downpayment for a higher priced home. FHAwould be there to assist the next new home buyer in purchasing theprevious FHA buyers home. The loans used to be assumable with no creditcheck, thus allowing easy transfer out of the property for the ownerand quite possibly an investment property for the next owner. This wasthe backbone program for the US housing market. Today it is somethingelse entirely. Today loan limits are as high as $544,185 in Alaska andthe US islands, $362,790 in high priced areas and $200,160 in otherareas. Thus, it has been as much an instrument to sustain the spread ofthe housing bubble as any financing out there. $200,000 is a prettynice house in Plano, Tx., which from what I saw in the paper the otherday is the highest per capita income city in the USA with a populationover 250,000, not exactly a slum area. Thus, you might realizethat few people are going to have $15,000 laying around to buy a$300,000 house plus the closing costs, meaning $20,000 at a minimum.Under old guidelines, you would have needed $60,000 plus to buy a$300,000 house. I think it is highly doubtful that 10% of the non-homeowning public have $15,000 in all accounts combined and most people buytheir first home either with almost nothing down, ala VA or small FHAor with a bonus or large gift they got from somewhere. Most people aretoo busy with shopping or drinking on their Visa cards to save up anymoney. The other point in downpayments is that FNMA joined theparade. Get a few credit cards and charge up your downpayment and besure to make the payments on the cards. What I mean is put your moneyin the bank and live off the cards to a point. It is costly, but aftera couple of years, you have $12,000 in the bank and $12,000 in creditcard debt and a perfect pay history. Resist buying a new car untilafter buying a house and you are eligible for a massive home withnothing down or very little down. The term massive house might notapply to California and some high cost areas, but for most of thecountry it applies. Truth is that a couple in their late 20's, eachmaking $60,000 a year can qualify for a $3300 house payment. When rateswere 5%, that was over a $500,000 house. You get rid of the downpaymentand McMansion here I come. In all my life what is a $500,000 house herewas way out of the reach of what equates to a $120,000 household today.I doubt seriously $120,000 a year would make a dent in a $20,000 a yearjob in the mid 1960's, the relative status of my Dad at that time whenhe dared move into a sizable old home in Plano and went to the poorhouse. So the income part was taken care of and the creditpart could be taken care of merely by having a few successfully paidcards because a person was in debt. Thus you could have a negative networth and be gold plated. The other factor is income. FHA usedwhat was known as residual income back when I was doing loans orselling houses. This meant that they took what was left over afterpaying everything including payroll deductions and if it met a criteriafor a household size, you were in. This day of credit scores and such,income could go all over the place. The question is, what happens ifafter someone buys a house, they go out and buy a couple of automobilesto match the home they bought? Joe and Suzi's $500,000/$3300 a monthpurchase is now backed up $1200 in auto payments, a $500 a month homeimprovement loan for landscaping, drapes and a pool for their new homeand suddenly they are paying out 50% of their $10K per month incomeplus credit cards. The IRS gets another 30% or so after taxes andsocial security, so Joe and Suzi are left with $2000 a month for alltheir other goods. That is just about enough to eat out moderately fora month in the North Dallas area, so forget cell phones, telephones,utilities ($500/Mo at a minimum). The point here is we have agroup of trend followers thinking they are going to get rich on housingand the American dream clashing. Neither is going to happen. The busthasn't happened yet and the solution is to continue to pour gasoline onthe bust fire to try to put it out. They aren't going to get moreincome. They aren't going to suddenly reverse a trend that has justreversed. They aren't going to invent the equity to pay the creditcards off again and again. The money for the bulls has to come fromsomewhere and the flock has been fleeced. Thus the money for the bullsand Wall Street has to come from the bulls and Wall Street and I don'tthink they like that. To separate the feces from shinola, hereis what actually transpired today. It has nothing to do with subprime,as subprime has to do with poor credit in general. It has to do withmost likely backing up interest rates for those that have a chance tokeep paying, thus those that are generally a good risk that have beenput under water by rate adjustments. The real FHA story today