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Fascinating and distubing analysis of current Mid-To-High End mortage situation.
"One market segment that will not catch fire from anything being done is the mid-to-high end (MTH). This is where the next crisis is building right now...
Many are counting in large part on the MTH homeowner carrying the housing market, consumer spending, and the broader economy straight into a full-blown economic recovery. That is a lofty premise if they are talking about the same MTH borrower with whom I worked for years...
The reason why the MTH has not tumbled in the same fashion as the lower price bands is simply because this group of Jumbo Prime, Pay Option and Interest Only borrowers have a) much more leverage-in-finance with loans such as the Pay Option ARM making up a large percentage of the total b) loans that were structured with interest only or neg-am teasers that typically last a minimum of 5-years vs 2-years on a Subprime loan c) more options available to them such as cashing in retirement to keep kicking the can d) more stable employment e) a better chance of qualifying for a mortgage mod...
The Mid-to-high end collapse will keep its borrowers financially strung out for years, as conscientious home owners sell other assets or cash in retirement to keep making payments while others opt for a pro-bank mortgage mod in which most of their disposable income each month goes to repay their massively underwater monument to stupidity. Some that simply bought at the wrong time with larger down payments, perhaps most of their savings — and who have seen all of their equity evaporate — will opt to earn their way out of it, which is a long process during which spending is restrained. Still, many will choose the route of default and foreclosure because with negative-equity so extreme in the MTH, they are renters anyway, unable to refi, sell or re-buy, and foreclosure is the fastest road to household balance sheet recovery...
The hot period for MTH Real Estate was 2003-2007. During this time 75%-80% of all houses either a) changed hands b) were refinanced (including cash-out, which increasing the loan balance c) were built and purchased for the first time d) or leveraged further through the addition of a second or third mortgage. Yes, the potential at-risk population is the vast majority of MTH owners...
A $1 million house is now the home of a millionaire…someone who can put down $270k and show proof of over $200k per year income for the past few years. Oh, and a 740 credit score is paramount. Unlike the bubble years when a $1 million house could be purchased by a moderate income household — one working as a checker at Safeway and one a mailman (both great jobs with a combined gross income of over $100k) — now the buyers must be rich.
There are far more MTH houses on the MLS — and coming at the market in the foreclosure pipeline — than there are rich buyers who a) do not already own b) who are liquid enough to be able to buy a new house and rent their present house c) or that are in the enviable equity position to be able to sell, pay a Realtor and put a large down payment on their new house...
The Bottom Line is that MTH foreclosures and foreclosure starts have been held down artificially, no doubt. This is because of the national foreclosure prevention programs but also because more Jumbo whole loans are owned by financial insti’s as portfolio loans. This allows the bank the flexibility to do what they want unlike Agency or Subprime loans for example serviced for others, such as an MBS investor. They always fight harder when it’s their own money on the line — think of Jumbo sort of in the same fashion as commercial but to a lesser extent with respect to tampering by the lien holders.
The negative-equity across the MTH is extreme and high-LTV HELOCs are also common with this crowd. In fact, HELOCs behind Jumbo loans attached to MTH properties can be $250k – $1 million, which is even greater motivation for the banks to kick the can as far down the road as possible.
Because of incurable negative-equity, tumbling rents, and overall harsh reality that they have become a renter in a 5000 square foot house, premeditated defaults are a favorite among mid-to-high end homeowners. For those in a serious negative equity position, a pre-mediated loan default, short sale or deed-in-lieu is usually much better than any alternative because a) they can rent the same house down the street for much less than the cost to own b) leaving the house begins the savings, de-leveraging and credit repair clock c) earning their way out of a $500k negative equity hole is simply out of the question for most...
Most think the MTH homeowner is somehow isolated from the broader housing market collapse – hogwash. They are more impacted because unlike the low-end hand-to-mouthers, these borrowers may have assets to attach or protect and perhaps something called a budget. Right now in cities across America there are married, working couples in MTH houses sitting around the dinner table saying “honey, we make $150k a year. Why can’t we save any money? Where does it all go each month?”.
Jumbo Prime, Pay Options, Interest Only etc loans routinely allowed up to a 50% debt-to-income ratio, even on a 30-year fixed...
But in reality the majority of MTH homeowners purchased or refied with a stated income or no doc feature making it impossible to know the true extent of the leverage across the sector. One thing is for sure…it is higher than if it were full-doc or there would have been no reason so many used limited doc loans...
To think the MTH earner will somehow pull through this unscathed, lead high end retail sales this holiday season, etc is verging on laughable...
What happens to the economy when you knee-cap the MTH earner the same way the low-to-low mid was knee-capped in 2007 when housing first fell off of a cliff? Stay tuned."
http://mhanson.com/archives/305
"One market segment that will not catch fire from anything being done is the mid-to-high end (MTH). This is where the next crisis is building right now...
Many are counting in large part on the MTH homeowner carrying the housing market, consumer spending, and the broader economy straight into a full-blown economic recovery. That is a lofty premise if they are talking about the same MTH borrower with whom I worked for years...
The reason why the MTH has not tumbled in the same fashion as the lower price bands is simply because this group of Jumbo Prime, Pay Option and Interest Only borrowers have a) much more leverage-in-finance with loans such as the Pay Option ARM making up a large percentage of the total b) loans that were structured with interest only or neg-am teasers that typically last a minimum of 5-years vs 2-years on a Subprime loan c) more options available to them such as cashing in retirement to keep kicking the can d) more stable employment e) a better chance of qualifying for a mortgage mod...
The Mid-to-high end collapse will keep its borrowers financially strung out for years, as conscientious home owners sell other assets or cash in retirement to keep making payments while others opt for a pro-bank mortgage mod in which most of their disposable income each month goes to repay their massively underwater monument to stupidity. Some that simply bought at the wrong time with larger down payments, perhaps most of their savings — and who have seen all of their equity evaporate — will opt to earn their way out of it, which is a long process during which spending is restrained. Still, many will choose the route of default and foreclosure because with negative-equity so extreme in the MTH, they are renters anyway, unable to refi, sell or re-buy, and foreclosure is the fastest road to household balance sheet recovery...
The hot period for MTH Real Estate was 2003-2007. During this time 75%-80% of all houses either a) changed hands b) were refinanced (including cash-out, which increasing the loan balance c) were built and purchased for the first time d) or leveraged further through the addition of a second or third mortgage. Yes, the potential at-risk population is the vast majority of MTH owners...
A $1 million house is now the home of a millionaire…someone who can put down $270k and show proof of over $200k per year income for the past few years. Oh, and a 740 credit score is paramount. Unlike the bubble years when a $1 million house could be purchased by a moderate income household — one working as a checker at Safeway and one a mailman (both great jobs with a combined gross income of over $100k) — now the buyers must be rich.
There are far more MTH houses on the MLS — and coming at the market in the foreclosure pipeline — than there are rich buyers who a) do not already own b) who are liquid enough to be able to buy a new house and rent their present house c) or that are in the enviable equity position to be able to sell, pay a Realtor and put a large down payment on their new house...
The Bottom Line is that MTH foreclosures and foreclosure starts have been held down artificially, no doubt. This is because of the national foreclosure prevention programs but also because more Jumbo whole loans are owned by financial insti’s as portfolio loans. This allows the bank the flexibility to do what they want unlike Agency or Subprime loans for example serviced for others, such as an MBS investor. They always fight harder when it’s their own money on the line — think of Jumbo sort of in the same fashion as commercial but to a lesser extent with respect to tampering by the lien holders.
The negative-equity across the MTH is extreme and high-LTV HELOCs are also common with this crowd. In fact, HELOCs behind Jumbo loans attached to MTH properties can be $250k – $1 million, which is even greater motivation for the banks to kick the can as far down the road as possible.
Because of incurable negative-equity, tumbling rents, and overall harsh reality that they have become a renter in a 5000 square foot house, premeditated defaults are a favorite among mid-to-high end homeowners. For those in a serious negative equity position, a pre-mediated loan default, short sale or deed-in-lieu is usually much better than any alternative because a) they can rent the same house down the street for much less than the cost to own b) leaving the house begins the savings, de-leveraging and credit repair clock c) earning their way out of a $500k negative equity hole is simply out of the question for most...
Most think the MTH homeowner is somehow isolated from the broader housing market collapse – hogwash. They are more impacted because unlike the low-end hand-to-mouthers, these borrowers may have assets to attach or protect and perhaps something called a budget. Right now in cities across America there are married, working couples in MTH houses sitting around the dinner table saying “honey, we make $150k a year. Why can’t we save any money? Where does it all go each month?”.
Jumbo Prime, Pay Options, Interest Only etc loans routinely allowed up to a 50% debt-to-income ratio, even on a 30-year fixed...
But in reality the majority of MTH homeowners purchased or refied with a stated income or no doc feature making it impossible to know the true extent of the leverage across the sector. One thing is for sure…it is higher than if it were full-doc or there would have been no reason so many used limited doc loans...
To think the MTH earner will somehow pull through this unscathed, lead high end retail sales this holiday season, etc is verging on laughable...
What happens to the economy when you knee-cap the MTH earner the same way the low-to-low mid was knee-capped in 2007 when housing first fell off of a cliff? Stay tuned."
http://mhanson.com/archives/305
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