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Author Archive: Irvine Renter

When the economy creates low-paying and part-time jobs, the newly employed don't qualify for home mortgages, and they don't buy homes. The conventional wisdom is that increased job growth inevitably leads to increased household formation and increased home sales, and although the connection is real, increased home sales is not inevitable. For home sales to increase, the newly employed must have sufficient income (and sufficient desire) to move out of their current circumstances and buy a house. For that to occur, the new job needs to be a good paying one capable of supporting a mortgage payment large enough to finance today's house prices. Super low mortgage rates help, but it isn't necessarily enough. The lack of sales in 2014…[READ MORE]

Some form of stated-income loan will likely be offered by portfolio lenders in the future, but it will be limited to borrowers with large down payments. When lenders underwrite new loans, one of the fundamental tasks they perform is determining whether or not the borrower can repay; therefore, allowing borrowers to simply state their income with no verification is an abdication of an underwriter's responsibility. Stated-income loans (aka liar loans) were the worst financial innovation of the housing bubble because these loans undermined one of the pillars of lending: borrower capacity. Liar loans were the worst financial innovation of the housing bubble because these loans caused investors in mortgage-backed security pools to question the financial representations of all borrowers in all loan…[READ MORE]

Underwriting loans to unqualified borrowers with super-low FICO scores is a recipe for another crisis of loan delinquencies and foreclosures. Many have quipped that FHA has become the replacement for subprime because they have very low standards for qualification, a very low down payment requirement (currently 3.5%), and as a result, they have become the loan-of-necessity for anyone who doesn’t have the credit requirements or the down payment necessary to obtain other financing. In other words, they have stepped into the void left by the collapse of subprime lending. I recently reported that the FHA reduced it's insurance fees to spur first-time homebuying; this move came despite the fact the fund maintains reserves far below it's mandate. Many Congressional Republicans…[READ MORE]

When house prices are falling and it's cheaper to rent than to own, strategic default becomes widespread, and banks are powerless to prevent it. One of the great advances which has come from the Internet is the quick dissemination of useful information. In short, secrets don’t remain secret very long. Lenders didn’t want borrowers to know that their friends and neighbors stopped paying their mortgages, and their lives improved. Lenders want borrowers to remain in the dark and fall victim to old beliefs and habits which prompt them to keep paying even when it is not in their best interest to do so. Unfortunately, the quick spread of information on the Internet got out the word, and “mavens” like myself…[READ MORE]

Many people read financial news for emotional confirmation about decisions they already made, and the financial media panders to these readers. I've written a number of times about the tendency of financial media reporters to provide optimistic spin and emotional support to gain readers, and reporters hope to influence public behavior and stimulate the economy. Personally, I think providing emotional therapy is a task better left to family, friends, or paid therapists, and the idea of MOPE (Management of Perspective Economics) is pure lunacy. No matter how influential the reporter, they simply don't have the power to move financial markets or the overall economy. I had people condemn me back in 2007 and 2008 for "talking down the housing market."…[READ MORE]

Borrowing home equity to invest is generally a loser's game because the only road to success requires excessive risk. With mortgage rates below 4% and the stock market moving ever higher, many people are tempted to extract their home equity to play in the markets. It's hoped that investing over the long term will yield a rate of return in excess of the cost of borrowing that money. Personally, I think it's a foolish idea. Professional investors evaluated the risk and reward potential of a variety of investment alternatives and determined that providing the money for a home mortgage at 4% was the best risk and reward available. The only way an ordinary investor is going to beat the pros…[READ MORE]

The Chinese government is loosening restrictions on the flow of capital, inflating real estate values in California. Is the influx of Chinese money is based on sustainable fundamental factors? I don't think so. In my opinion, this is hot money escaping an inflated and collapsing market, subject to the policy whims of an unpredictable totalitarian government. Chinese capital is an unstable source of investment, and it could reverse course in a moment based on policy changes in China. Most California real estate market bulls and enthusiasts blithely assume the influx of Chinese money will never stop because everyone in China wants to live here, right? Unfortunately, in the real world, for money to leave China, it generally has to pass…[READ MORE]

Only 10% of borrowers with a prior serious delinquency regain access to the mortgage market within 10 years of their default. Hope for a better tomorrow is a basic human need; people who give up hope often become deeply despondent and even suicidal. People look for hope wherever they can find it, and over the last eight years, people who work in real estate, homebuilding, sales, and so on, needed hope for a better tomorrow because the current situation consistently sucked. Anyone out of work over the last several years spent most of their time scouring job boards and résumé spamming job posting sites, and since they were already on the web, most would also check the news for any…[READ MORE]

Today’s 4% mortgage rates represent an artificial transfer of wealth from Generation X, Generation Y, and Millennials to Baby Boomers. Even before the housing bubble created a great deal of false wealth, baby boomers were the recipients of an artificial boost in home prices due to 25 years of falling mortgage interest rates. At least 40% of the value of their homes was created totally by increased borrowing power of subsequent buyers. Consider the following: the chart below shows the monthly cost of ownership from 1988 to 2015, and from 1989-1991 and again from 2011-2013, the monthly cost of ownership was approximately $1,850. Twenty-four years apart, the cost of ownership on a monthly basis was unchanged, yet house prices were…[READ MORE]

There is no evidence Millennials are becoming more active in the housing market, but hopeful anecdotes warm the hearts of realtors and homebuilders. Ever since the collapse of house prices and sales in 2007, homebuilders, realtors, and everyone else who depends on real estate sales finds a new Messiah each year that will save the housing market. Each year they are disappointed. For the last two years it was the boomerang buyer, those former homeowners who were supposed to return to the housing market in droves. Of course, they didn't, and the false hope and wishful thinking resulted in dashed hopes for 2014. For 2015 the false hope and wishful thinking is centered on Millennials, those born approximately between the…[READ MORE]

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