Leak

The fed lets it be known through a "leak" they will NOT be inclined to bail out falling asset prices.

And

WSJ Fedwatcher Greg Ip said in an article published today that Bernanke is trying to break the market's association with market convulsions and rate cuts. Ip said that Bernanke is showing signs of a break with Greenspan by distinguishing between the Fed's two main roles of maintaining financial and economic stability.

We'll see.

Source.

Subprimate Woes Affecting the More Well Evolved

The problems of subprime loans and the "subprimates" who shackled themselves to them are now moving up the food chain. Loans for more than $417,000 are scarce and what is still available is very expensive.

How many buyers and sellers will be affected in Marin? We've already heard of a number of cases so far (for example). Who would have imagined that? But they must be an anomaly or something because we all know how everyone in Marin is filthy rich, right? So Marinites and wannabe Marinites should have no problem whatsoever making the $600,000 down payment (our laughable $1 mill median minus what would be needed to get a loan for something at or below the $417K cutoff) needed to get a loan for about $417K or less. Right? I mean Marin housing is "immune" and a "sure thing" so it's not like that $600K down payment is at risk. Right?

(AP) The subprime mortgage crisis is spreading to a somewhat unexpected place: homes costing more than $500,000.

As lending has rapidly gotten more restrictive for borrowers taking out large loans, sales of expensive homes have fallen sharply around the country during what should be one of the busiest seasons for buyers and sellers...

To some degree the change is due to difficulty getting financing, as borrowers are finding fewer lenders willing or able to fund "jumbo" mortgages, loans for amounts greater than $417,000. Such loans are too big to be guaranteed by government-sponsored housing finance agencies Fannie Mae, Freddie Mac or Ginnie Mae.

The banks that are still making jumbo loans are charging substantially higher rates to compensate for the lack of investor demand. Borrowers who could have gotten rates as low as 6.5 percent in June are now having to pay as much as 9 percent.

But aside from the financial impact of higher rates, in certain high-priced real estate markets, the effect of the suddenly tighter lending environment is more psychological, mortgage bankers and real estate agents say, as buyers and sellers alike don't want to plunge into an uncertain future.

"I think the psychological damage is worse than the financial damage" which is already bad enough, he said. Even for buyers who have plenty of cash or can easily afford higher mortgage rates, the sudden change in the financing environment reduces "the ardor to buy a house unless you have to," he adds.

With numerous buyers and sellers sidelined, the higher cost of big mortgages is bound to put downward pressure on home prices should the lending environment stay tight for a long period of time, said Ellen Bitton, president of Park Avenue Mortgage, a mortgage bank and brokerage...

In and around San Francisco, where the median home price is about $1.1 million, the tougher financing environment has created a "hesitancy and has led to some canceled escrows for buyers around the $1 million range, said Rick Turley, president of the San Francisco and Peninsula Region for Coldwell Banker Residential Brokerage.

"It's Going To Be A Little Worse [in Marin] Than People Think"

Gee, ya think?

This really pisses me off. It looks like the Marin IJ and Marin realtors are reading this blog after all:

The Marin "REIC" is finally starting to admit (two years too late, it seems to me) that Marin's market is not immune and is starting to crack. Of course, you have to read past all the feel-good spin, reporting foreclosure rates during the quiet part of the season, the "we knew it all the time" revisionism, etc.

Anyway... first it was that comment in the SF Chronicle (I've somehow lost the link so if you have it please share it) by the Marin real estate agent who admitted the fallout from the housing bubble had crossed Marin's sacred borders and is hitting Novato and Terra Linda hard, and now it is this. Could it be that the Marin IJ is finally getting a clue? Of course, they still downplay the effects and assuage the fragile egos of anxious Marin sellers, but it is a huge improvement from this time last year (emphasis mine):

In Marin, the national mortgage meltdown has done lots more than just make buyers... anxious - it has cost hundreds of mortgage industry and other housing-related jobs, kept houses on the market longer and boosted the county's foreclosure rate.

The Marin real estate market is weathering the storm, although borrowers and home sellers are feeling the pinch, real estate and lending experts said.

"You're a very small elite market, so you're certainly not representative of the state as a whole," Leslie Appleton-Young, the chief economist for the California Association of Realtors, said of Marin. Still, she said: "No one is immune from what's happening in the marketplace right now. No one."

[Note: Leslie Appleton-Young is now back pedaling vis-à-vis Marin RE.]

At Charlie Christensen's Sausalito brokerage, CWC Financial, some clients are feeling the pressure... "It's very dicey out there - it's unprecedented," he said. "It's going to be tougher for people to qualify for new loans."

"It's touched us a lot," said Lee Aubry, a mortgage consultant with Wells Fargo Bank. "The bottom line is, cheap, easy loans are becoming very quickly a thing of the past. Lenders are basically going to be more conservative," This is going to take years. Now more than ever people will need down payments - they'll need good credit."

Houses are selling, he [Nick Cooper, a founding agent with Vision Real Estate in Corte Madera] said, especially at the higher end of the market. Proper pricing is key... [in other words, lower the price and keep lowering it until it sells...or don't sell at all.]

Hoping to help buyers caught in the crunch, some skittish sellers are putting up money, hoping to bridge the financial divide to close the deal. It's not something you see often in Marin, agents said. "We haven't seen seller financing in 10 years," said Kathy Schlegel of Lucas Valley Properties.

"It was so unrealistic to have the money so easily available," said Bill McKeon, a broker associate at Pacific Union Real Estate in Greenbrae. "That's what everyone's talking about. It was very common to have zero-down purchases a lot based on stated income, and that was bound to end. I think what's catching everyone by surprise is how abruptly it ended."

"We're kind of on an island here," he [Christensen] said of Marin. "It may not be as bad as it is in some other places, but I think it's going to be a little worse than people think unless the Fed steps in and takes some radical steps." "I think people need to take a deep breath and let this thing settle out," he [Christensen] said. "There's a correction occurring. Some people are going to lose their homes, some in Marin.

Unrestrained arrogance and hubris will get you every time.

And I really despise it when a news paper prints stuff like "Is it going to be biblical proportions? I don't think so [said Christensen]." Pose an absurd question as legitimate and then answer it. The answer is equally absurd. Correct me if I am wrong, but this is a false dichotomy and a form of argumentation you see all the time being spewed by those with a vested interest; it is common practice in the real estate industry during times like these. No, it won't be of "biblical proportions". Nothing ever is. Even the Great Depression was not of "biblical proportions". But it does not mean it won't be very, very painful for many people.

But yes, of course, the collapse starts in the weakest markets and works its way inward, towards the employment centers as has been said many times on this and other blogs. We, and markets like ours, will fall over but not until others have failed first. It just takes a little longer is all.

And it seems BusinessWeek is finally getting it in gear too. I especially like this quote regarding "toxic" loans (now, according to them, pretty much anything other than traditional fixed-rate loans with at least 20% down):

"The consumer has to be an idiot to take on those loans"...But since there were plenty of "idiots" out there, and legions of lenders eager to serve them,... hedge fund managers eagerly devoured the securities confected by investment banks from batches of dubious home loans."

And be sure to check out the "History of Hubris" where it starts off with:

As with the current subprime saga, past upheavals in the financial markets typically have been preceded by talk of new paradigms, perfect models, and fail-safe strategies — a "this time it's different" attitude. Here's a look at the egos and excess that ruled in recent boom periods and the inevitable fallout."

Ah yes, the sweet smell of revisionism and "we knew it all along"-ism.

Oh, and in that IJ article, where the real estate agent suggests that everything is going to go to hell in Marin and elsewhere unless the Fed steps in to fix things,... I'm sorry, but the Fed is ultimately powerless (homework assignment: go read Mish's blog or the CalculatedRisk blog, search around, and learn why). But for now, BusinessWeek comes through again:

By cutting the largely symbolic discount rate on Aug. 17, the Federal Reserve hoped to calm nerves and return borrowing conditions to normal. Instead, conditions got worse. Terrified to hold anything but ultrasafe securities, investors stopped buying IOUs from corporations and poured their money into Treasuries. A reliable measure of panic—the difference in yields between safe and less-safe securities—widened to the biggest gap in more than 10 years. Five days later, markets remained severely impaired.

Why didn't Chairman Bernanke's script play as well as many hoped, at least in the early going? Simply put, the Federal Reserve did not—and cannot—fix the problem at the root of the market crisis.

Lenders know there are billions of dollars of weak assets out there, such as securities backed by foolish or fraudulent mortgages.

What they don't know is who holds those weak assets. So when borrowers come to them offering suspect securities as collateral for a loan, the safest thing to say is no. When everyone says no at once, the result is a credit crunch that, if unabated, could cause a recession.

And I fully agree with this reporter's words (hat tip goes to the Ben Jones blog for the link); let the greedy fools burn:

I know people are going to hate me for saying this, but I’m not sorry that foreclosures nearly doubled last month and are increasing every day.

I’m not sorry that real-estate prices are creeping down by the glut of desperate for sale signs all over Southern California.

I’m not sorry that all those developers building lofts downtown and in Hollywood and North Hollywood with no parking might have to eat their investment when they find they can’t get half a mil for the 400-square-foot corner of a former sweatshop.

I’m not sorry that people who kept taking the "free" home-equity money from the banks beyond all reason are now finding out how not free that money was.

I’m certainly not sorry that the huckster mortgage companies and banks that thought it was a good idea to make subprime loans to people with bad credit ratings are now taking a bath. I only wish it involved some sort of public humiliation involving glue, sand and glittery body paint.

I’m not even sorry that people will lose their homes and be forced to give up the Hummer they bought with a home-equity loan, and move into a one-bedroom apartment in Panorama City or, worse, in with the in-laws in Porter Ranch.

I tell people I am sorry, but I’m really not. I am, in fact, gleeful. And I’m not the only one.

Most everyone who is not employed by a mortgage company or is not a real-estate agent or is not trying to sell a house or can't pay the mortgage anymore feels the same. We are secretly dancing little happy jigs because it seems that the insanity is about to, finally, end and the snake-oil hucksters will fold up their tents, take their sleazy subprime offers and slink out of town.

Then maybe life can slowly come back to normal, and regular people with regular incomes can buy regular houses again without agreeing to loans so abusive they ought to be handed out of the back of gangster bars. We don't even care that it means our own property values will drop, if it means we might avoid another block of luxury lofts.

It’s a relief, too, because we all knew this was coming. Even people like me with math anxiety could work out that at some point the hot real-estate market, built in part on risky loan deals, was someday going to reach critical mass and start to crumble.

Well, here we are, and it’s beautiful. And that’s why I must implore all the well-meaning politicians proposing bailout measures to just go away and work on curing cancer, or something that will actually help humanity, not enable it to continue on its financially irresponsible path.

In the words of one esteemed reader "Somewhere, a crocodile has shed a tear."

Just Making It Up As We Go

This is what makes America great...her ability to make up new rules whenever the old rules become inconvenient. God bless America and may all the loser/armpit nations of the world follow our great and glorious lead.

In a clear sign that the credit crunch is still affecting the nation's largest financial institutions, the Federal Reserve agreed this week to bend key banking regulations to help out Citigroup (Charts, Fortune 500) and Bank of America (Charts, Fortune 500), according to documents posted Friday on the Fed's web site.

The Aug. 20 letters from the Fed to Citigroup and Bank of America state that the Fed, which regulates large parts of the U.S. financial system, has agreed to exempt both banks from rules that effectively limit the amount of lending that their federally-insured banks can do with their brokerage affiliates. The exemption, which is temporary, means, for example, that Citigroup's Citibank entity can substantially increase funding to Citigroup Global Markets, its brokerage subsidiary. Citigroup and Bank of America requested the exemptions, according to the letters, to provide liquidity to those holding mortgage loans, mortgage-backed securities, and other securities.

This unusual move by the Fed shows that the largest Wall Street firms are continuing to have problems funding operations during the current market difficulties, according to banking industry skeptics. The Fed's move appears to support the view that even the biggest brokerages have been caught off guard by the credit crunch and don't have financing to deal with the resulting dislocation in the markets. The opposing, less negative view is that the Fed has taken this step merely to increase the speed with which the funds recently borrowed at the Fed's discount window can flow through to the bond markets, where the mortgage mess has caused a drying up of liquidity.

Bonuses on Wall Street Threatened by Credit Crunch

Aug. 22 (Bloomberg) -- The credit-market freeze that's paralyzing leveraged buyouts, mergers and myriad computer-driven trading strategies may cut Wall Street bonuses for the first time in five years.

"There's a lot of pessimism out there,'' said Gary Goldstein, chief executive officer of executive-search firm Whitney Group in New York. "Looking at the world today as we see it and the impact the crunch is likely to have, it looks like bonus pools will decline.''

Bonuses, the financial industry's annual rite of compensation typically calculated as a multiple of salary, probably will decline as much as 5 percent from 2006, according to Options Group, the New York-based firm that has tracked pay and hiring trends for more than a decade. While the payouts often far exceeded the average of $220,650 at the biggest U.S. securities firms last year and increased as much as 20 percent from 2005, the subprime-mortgage collapse already has drained the punch bowl.

Hardest hit will be employees who create and sell securities backed by mortgages or pools of debt, Options Group said. One out of every three people in those roles may lose their jobs unless business picks up by the end of the year, the firm estimates.

Bonuses may fall as much as 40 percent.

Source.

One Reader's Analysis and Predictions

Someone sent me the following by email. Thanks and I think you are spot-on:

According to wikipedia (http://tinyurl.com/yb4835), income in Marin is like so:

• Per Capita Income: $44,962
• Personal Per Capita Income: $67,682
• Median Household Income: $71,306

The median price of a house in Marin County in July, 2003 was about $650,000. You have pointed out before on you excellent blog that 2003 was probably teh normal cycle peak in the housing market. But then Greenspan came along and (directly or indirectly) inflated housing by inflating credit. As a result, in 2007, as proclaimed with ill-considered glee in the IJ, the median house price was a tad over $1 million. How was a rise in prices of $350K to $400K over four short years possible? It wasn't because Marin is any more special today than it was four years ago that's for sure. It was possible only because of so-called "affordability" products aka "toxic" mortgages - 0% down, low teaser rates that reset later, interst only, neg. am., etc, etc, etc. that were given not just to subprime people with low credit ratings, but, as we are learning now, to people with good and even stellar credit. You've shown that recently about 80% of borrowers in Marin make use of these "affordability" products to some extent.

We are now finally and at long last returning to more traditional lending practices where borrowers are expected to make 20-30% down payments. If in addition to that lenders return to the traditional rule that teh amount you borrow should not be more than 3-4 times your income, then there is no way the $350,000 to $400K increase in Marin's house prices can be sustained.

Based on tradional standards, a household bringing in the median household income would only be allowed to borrow about 3.5 x $71,306 = $249,571. That implies a median house price of about $311,964 (assuming 20% down). Not $1 mill.

It seems to me there are only three likely outcomes:

1. House prices come down to levels sustainable based on incomes,
2. Incomes rise to justify current house prices (if the Marin median house price stagnates, that implies the Marin household median income will rise from its current $71,306 to about $230,000 per year),
3. The market's freeze up except at the higher end.

I think #3 is pretty much where the market is now in Marin and why the county statistics show the county median house price still rising. The truth is that the majority of the Marin market is barely moving if at all and there are a few steep discounts now. I think #2 is incraedibly unlikely given the job market and outsourcing and globalization and the like which is not likely to change any time soon. #1 is the most likely and certainly the most desirable outcome in terms of long-term economic and societal health.

Keep up the good work.

And keep up sending in the insightful emails.

'Suzanne Researched This' Act Deux

I love it. The second act of the "Suzanne Researched This" family melodrama. Nice catch Tim.