Schwarzenegger, Countrywide in mortgage deal

A day late, my apologies, but worth noting: "Four major sub-prime lenders promised to give a break to California homeowners who cannot afford escalating mortgage payments, under a plan announced Tuesday by the lenders and Gov. Arnold Schwarzenegger."

More, from SFGate.com: "Countrywide, GMAC, Litton and HomeEq - which collectively service more than one quarter of sub-prime loans to people with poor credit - agreed to maintain the initial, lower interest rate for some sub-prime borrowers whose rates are scheduled to jump significantly higher. To qualify, borrowers must occupy their homes, have made their payments on time and prove they cannot afford payments with the higher interest rate."

It's not clear how long the lenders will freeze rates under the plan, which Schwarzenegger says will save "tens of thousands of people from being added to the foreclosure lists."

Where did the idea come from? According to the governor's press office, "The agreement the Governor negotiated with lenders builds off a proposal put forward by Federal Deposit Insurance Corporation Chair Sheila Bair that encourages lending agencies to keep sub-prime mortgage borrowers at their initial interest rate if they are living in their home, making timely payments, but can't afford the loan "reset"--or jump to a higher rate."

Your thoughts? Comments? Email story tips to lalandblog@yahoo.com.
Photo Credit: AP
Hat tip: E&A, via email.

Comments

[yourkillingmelarry]

Trevor,

You have correctly pointed out that RE bubble is Global. Here is an excerpt from a 2005 article in The Economist, a very prestigious rag in the UK.

"NEVER before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stockmarket bubble burst in 2000. What if the housing boom now turns to bust?

According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries' combined GDPs. Not only does this dwarf any previous house-price boom, it is larger than the global stockmarket bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stockmarket bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history."

http://www.markzwick.com/real_estate/_upload/
57355.html

This is a must read. The US bubble just happened to pop first. Here is an article from the UK today.

"Housing slump fears rise as new mortgages fall
Declining buyer and seller confidence has reduced new mortgage approvals by 16 per cent during October"

http://business.timesonline.co.uk/tol/
business/industry_sectors/construction_and_property/
article2929358.ece

Also

"Europe Suspends Mortgage Bond Trading Between Banks (Update3)
By Esteban Duarte and Steve Rothwell

Nov. 21 (Bloomberg) -- European banks agreed to suspend trading in the $2.8 trillion market for mortgage debt known as covered bonds to halt a slump that has closed the region's main source of financing for home lenders."

http://www.bloomberg.com/apps/
news?pid=20601087&sid=aLzGEmrjr0fA&refer=
home----------

Can you begin to see the scale of this? You cannot throw the issue of affordability out the window. Housing is not slumping for political reasons, it's slumping because people can't get loans at these prices. Not to compare the two but Japan's lack of available land is far far worse than California's. They are just now recovering from their property bubble from the 1980's.

[yourkillingmelarry]

MyLessThanpPrimeBeef,

Bravo!

[Randy Adams]

MyLess, that entry sweeps all the awards.

Trevor, I don't know where you are writing from but very small houses on my small street went from a low of $240K in 1995 to a high of $1M in 2006. That is a not a normal appreciation by any standards and is not supported by any economic or demographic developments in the area. It is a bubble. I have personally witnessed two previous Los Angeles real estate bubbles. They are not an anomaly; they are a regular and nearly predicable pattern.

Something very similar occurred in my hometown of Fresno, California. The weather there is mediocre at best, unemployment is chronically high and yet housing went up three and four-fold in the same time frame. This was an unusual event because Fresno's property does not have a boom and bust record, presumably because of the ready availability of additional building space and the relatively anemic economy. But they too are now faced with a bubble, probably largely fueled by retired transplants from the Los Angeles and San Francisco Bay areas, taking advantage of their opportunity to cash out of the booms in their local areas but still desirous of staying within California.

I am not aware of many of the international housing markets, but the collapse of the Spanish Mediterranean real estate bubble is famous and occurred only recently. Because I like the city, I have watched the real estate market in Brisbane, Australia for 2 or 3 years. The prices used to be high-ish in the popular inner city areas (New Farm, Spring Hill, Tenerife, Hamilton) but still usefully less than the nominal prices in Los Angeles and there were still actual prices listed. Two years on and NOW the properties are only sold at frenzied auctions with no prices listed at all. This is another bubble waiting to burst, probably when the global economic ripples from the U.S. recession reach the shores of Australia. Water is scarce in Oz but land most certainly is not and the population influx is carefully controlled.

I think we will find that "globalization" has created an international real estate bubble. The credit crisis in the U.S. is already costing UK, European, Japanese and Australian banks big sums of money. How will this impact the cost of money in their own markets? Either we all have a huge inflationary spiral or a bubble deflates.

[MyLessThanPrimeBeef]

Youarekillingmelarry, the United Shoppers of America, aka U.S.A., is not in the best position to rescue UK and France, much less the world this time.

[yourkillingmelarry]

Here the links to my previous post as a tinyurl

The Economist article

http://tinyurl.com/ynwr4e

The Times Online article (UK Mortgages)

http://tinyurl.com/ysgku6

The Bloomberg article (Europe Mortgages)

http://tinyurl.com/22gbgm

[Ann]

Check this out.

Nothing new in the Gubenator's supposed 'agreemnet'. In fact the named lenders say there was no speical 'deal' cut.

http://www.modbee.com/local/story/131542.html

And for this poster who says "Prices in California will always be high...Our Population is not decreasing last time I check... Posted by: Brother Joe |"

CA popuation 2000 33,871,648 Median income $47,493
CA population 2006 35,594,342 Median income $56,645

Increase over 6 years 1,722,694 $9152
That is a 5% over 6 years 19.27% NOT INFLATION ADJUSTED
$56135 needed in 2006 to = 2000

This means that the population has increased by .833% a year, and that income over 6 years has only increased .9% or less than .15% a year.

Ergo, the demand of an increasing population did NOT cause by price increased 100 or 200% or more over that time. Nor did increasing income drive up by 12, 20, or 30% a year.

There should have rice increases in line with inflation of about 3.2% a year. Add in the .15% (less than 1%) for the annual increase in income plus the .15% (less than 1%) for the population increase and the grand total is 6.21% a year over 6 years.

That means a house at $100,000 in 2000 would, at most, be about 37% more in 2006 or $137,000 - $140,0000 if, and ONLY IF, there had been no increase in the supply of housing at all. Since more houses, condos etc were built that there was an increase in population, the increased supply easily absorbed the increase in demand so out that goes, Now the adjusted price from 2000-2006 is basically the rate of inflation so that $100000 house should have been $119,000 - 120,000 in 2006 - NOT a jump to $350,000 or whatever ridiculous number they were selling for.

[Susan]

> S. California is experiencing a net out-migration as a result of this debacle.

Source? According to SCAG, 6 million more people are projected to be added to the population of Southern California within the next 20 years-- many of whom will be born here and want to stay. A LOT of people would have to leave to balance that out, and I'm sure not seeing it!

http://www.scag.ca.gov/factsheets/

[Trevor]

This is great, an actual discussion about the fundamental value of things rather than the usual...Man, I wish I'd bought seven years ago, maybe we can convince everyone the sky is falling.

This is just a personal observation but I've never seen a populance so in tune with world trends before. So you think maybe we'll eventually run short of oil?... next month it's $100 dollars a barrel. Maybe the dollar will drop in a few years, two months later the Canadian dollar is 1.10. Wow maybe the North West passage will open in fifty years...Even the ice caps are listening. It used to be that we would all stick our heads in the sand and just assume we could let our grandkids worry about it. Now it seems everyone and everything gravitates wildly to any presumed movement.

Why did land values go up so quickly? I guess because everyone's priorities changed. We've been investing in illusions for so long and at the same time becoming so protective of our own private world that I think we realized our most valued resource was a bit of earth to call our own. Not much different from those poor peasants who clung their vegetable patch not so many years ago. Without a place to call home, you're never truly at peace in this world.

Speaking of peace in this world, if I can be allowed one last personal aside. An electic vehicle getting a hundred and fifty miles to the gallon would go a long way.

[Ann]

Source? According to SCAG, 6 million more people are projected to be added to the population of Southern California within the next 20 years-- many of whom will be born here and want to stay. A LOT of people would have to leave to balance that out, and I'm sure not seeing it!

http://www.scag.ca.gov/factsheets/

Posted by: Susan

Uh huh...... based on the past 6 years it was .(point) 83% a year.

Your happy guess of 6 million in 20 year would be 300,000 a year or .(point) 87% a year. All they are doing is using the growth rate of the past few years. Since there are 2.69 people per median household, that is only 111,524 households a year. There are 58 counties in CA so that would mean 1,922 new housing units every year er county - not 4000 in one developement with 50 develoements in a county.

That is less about the world population growth rate of 1.1% a year based upon breeding.

What CA has had is a net outward migration of middle income and upper middle income households. That is dangerous as it is on track to have predominately poor and lower income households and rich households. The housing prices have reached the point that emloyers are having trouble attracting emloyees whose incomes will not allow them to be in the top 17.66% as is necessary to purchase a home. Even the rents are problematic when a 1 bedroom apartment is going for $1500 -1800 or 2000. Employers can not raise wages to be competitive for emloyees without having to raise the cost of their goods which will then make them uncompetitive with their competitors who are located outside CA and who do not have to deal with the high housing costs which in turn necessitate higher wages.

Median income is $56,645 with 50% having more and 50% having less.

What is worrisome is that 4,031,631 households or 33.17% of all households have incomes between $15,000 and $50,000. Middle class (speaking economically) is from $45,316 to $67,994. Upper middle income is from $67,994 to roughly $90632. Upper income starts at that $90,632 and goes from there. An income of $100,000 would just barely buy a $345,000 house with 10% down. Those with an income of $100,000 and up are only 2,994,716 or 24.6% of the population. To purchase a house that is the median price in the lowest 25th percentile of homes in LA would mean spending around $425,000 (think that is about right from the data) which means an income of at least $123,100 with 10% down. That is, at most, 2,146,379 households or 17.66% of all households -and that is in the economic class considered the 'rich' as they are in the to 1/5th of income groups. .

The only choices for the other 82.34% are to

(a) rent at a price which they can pay based upon income which means rents have to reflect the ability to pay which means landlords canonly buy property at a rice which will allowthe rents to cover costs and leave a profit:

or

(b) leave the state, if their skills and emloyment prospects are not likely to one day put them in the top 17.66% of income (the rich). Since most people in the middle class and upper middle class aspire to someday own a home that means that either their income increases a LOT or they leave the state. Thats it. (except for inheriting their parents' home bought 20 or 30 years ago and being able to keep it and not have to sell it to settle the estate or split the value with siblings.)

The economic concept of 'demand' is not just about how many people there are who might want something. It MUST include the concept of the ability to purchase the item. "Demand' is more correctly stated as the number of potential urchasers with the ability to pay the price who want the item.

Unless and until either (a) incomes increase or (b) prices decrease, the poulation could double and they still CAN NOT pay the prices which do not reflect income. If they do not have the income to ay prices unrelated to income then they either do without housing in CA by leaving the state or crowd more people into the available housing to cover the cost. There are no other options with respect to the price of housing.

[yourkillingmelarry]

Here is a San Diego UT Article that primarily focuses on San Diego but addresses domestic out migration in S. Cal.

http://tinyurl.com/2o8x8q

According to the Census Bureau these were the domestic migration losses for 2005-06;

Los Angeles -183,063
Orange County -46,199
San Diego -42,034

The IE is showing population growth but not enough to offset the net of LA, OC and SD out migration. The following is a quote about SD from the article which is very reflective of LA

"Immigrants and births are now the sole contributors to the region's population growth. That's a departure from the late 1980s when the county's population surged 80,000 a year."

Babies and poor immigrants aren't going to buy houses in LA. Recruiters are having major problems getting people into the sate and more college grads are leaving the state than staying. Which makes perfect sense when home prices have been artificially pushed beyond most people's means.

[Teresa]

Yourkillingmelarry:

I am an adult college student at Temple University in Philadelphia. Plenty of California companies come to campus, trying to recruit soon-to-be grads. Because this is a four-season area, lots of those grads show great interest in moving to California...UNTIL they see how much housing costs there. Then they decide that shoveling snow for maybe 6 days a year isn't so bad after all.

And I'm talking grads being offered what would, in other parts of the country, be considered excellent incomes...$50k, $75k. Out here, you can own a nice home and support a family on that. In L.A., you can cram into a little apartment.

Ann is right in that California is on track to be comprised of nothing but millionaires and the people who cut their lawns.

[Confused]

Trevor, do you really think the frenzied collapse of the housing market is related to the current pres and his policies? Please explain. I either spent the last hour being mystified due to my ignorance or you are a moron.

[Dabu]

The relationship between the material value (cost/availability/real demand of land, cost of structure, cost of local taxes and services) of homes and their inflated values is more extreme the more you get away from dense areas it seems ironically.

I live in the high desert, and like the commenter in Fresno mentions, there is a worse justification for prices in these areas. In my area, one can easily buy property, build a mansion and get hook-ups, within blocks of where you want to be, for half the price of what the real estate market is offering and appraising existing modest-sized homes at. Current sales here only have appeal to those have recently landed good jobs and have an immediate need to move in, but even that is going down the tubes.

The same alternative of buying land nearby (if that is even an option) and building on it does not get the same level of savings in the big cities. I have had many job offers in SoCal, but I would be trading a home for an apartment.

[C]

I see there are a lot of so called responsible people out there that commented on this issue. I start off by saying I am among the responsible but, I seemed to be one of the few that realize the sub prime borrower was a very important element to how much equity and money a lot of people made. Nobody was complaining when everyone was doubling and tripling their investments!! In comparison there are so many great credit borrowers out there. The market is full of credit risk borrowers and what we were all taught growing up is that the majority rules!! In closing, don't turn your backs on sub prime borrowers. A lot of us made a great living on the backs of these people and if they weren't around, a lot of people would have gone by the wayside a long time ago. Just a thought!! Take Care