The Subprime Market: "Six-inch Hooker Heels"
[Originally written in June of 2007 by Todd Waller]
The subprime blowout is not over?
So, cruising around today on the RSS feeds and bump into this (behind Inman subscription wall now…) little beauty of an article on Inman News. Never mind the icky feeling I get seeing two sumo wrestlers practicing their sport, there is something special about an article that describes how the most recent housing boom was somehow influenced by mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) as “six-inch hooker heels.”
As written about earlier this year on this blog, the subprime mortgage market is like a briar patch. You may know exactly what you are looking for, but the density and tenacity of the “wait-a-minute” vines quickly cause one to lose track of what it was they went into the briar patch for in the first place.
The odd thing about the stand out phrase (the one about the “hooker heals”) is that it was not aimed at how attractive the subprime mortgage product was to the consumer….and attractive it was! That descriptor was used to describe how attractive MBS and CDOs were to ratings agencies looking for a better return on their money.
So is the subprime implosion over? A recent discussion with a financial planner at Merrill Lynch revealed that they believe it to be overhyped and therefore not nearly as large as predicted. And then there is Bill Gross, the manager of PIMCO, the world’s largest bond fund, and the originator of that wonderful descriptor. Here’s his take on the subprime market from the article:
Gross says that using the current default rate of 7 percent on subprime mortgages — which he says equates to total losses of between 3 percent and 4 percent — “the holders of some BBB investment grade subprime-based CDOs will lose all of their moolah because of the significant leverage.” And if subprime total losses hit 10 percent, he predicts, “even some single-A tranches face the grim reaper.”
Huh? Speak English Todd!
At the end of the day, home buyers still have a lot of inventory to look over. Interest rates, while they have shown their desire to inch up, are still near historic lows. This subprime implosion will force lenders to ensure their buyers have good credit and good documentation to back up a mortgage. This all translates into a tightening of the underwriting requirements and a “liquidity constriction.”
Again, that was written in 2007. What’s fascinating to look back upon is that the tightening of the underwriting requirements nearly stalled the real estate industry last year. Some of the requirements still feel pretty onerous, but if they had been in place earlier this decade, we likely wouldn’t be in our current position.
The breakdown for buyers:
- good credit scores for good mortgage rates
- FHA financing requires at least 3% down
- FHA seller concessions will be reduced from 6% to 3%
- bring a big bag of patience when it comes to answering the lender’s requests for information
- bring another bag of patience for the final approval process
The breakdown for sellers:
- if you need to sell in 2010, list NOW; the costs and rates of mortgages is predicted to jump after the first half of the year
- bring a big bag o’ patience with the buyer’s lender, as the underwriting guidelines can shift on seemingly a moments notice
- do not be insulted at low offers; buyers are searching for a bargain and simply want to plumb the depths of your pockets
- know your numbers and your market so you can respond to ANY offer with accuracy, speed and efficiency of time
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