How is the mortgage market meltdown going to affect downtown KC's condo market?

[KCMax]

Subprime is a small part of the economy, but isn't it the perception that trumps reality in the stock market? Aren't investors like lemmings?

[beautyfromashes]

^It's wrong to think that the housing market is somehow detached from the rest of the economy.  It affects wages and inflation and also the borrowing rates of the bond markets.  Sure it, by itself, is a small part of the economy, but, all the these things are tied together.  Take our local economy- if one company of 50 people shut down it would look relative miniscule in the realm of over 1M people in the job market, but, the income to these people produces more jobs, more taxes, effects banks, credit card companies, etc.  You can't seperate parts of the economy, they're too linked.  But, I'm sure someone else has all the answers....anyone?....anyone?....Bueller?

[Maitre D]

I think Stein's point is valid tho - the subprime "meltdown" is largely a concoction, used to justify other actions taken by companies.

Housing is only 5% of our economy.  And the subprime sector a subset of that.  And defaults, a subset of THAT.  Don't let the boogeymen scare you.


To suggest this will consume the economy or shut down the mortgage industry, is foolish.  As he points out, most defaulted subprime loans will have at worst:  50% recovery on sale.  (Try going to a forclosure auction and take note of the other 40 people in the room).

[Gretz]

The Economist seems to think the current credit squeeze a healthy thing, per their front page article in last week's issue:

http://www.economist.com/opinion/displa ... id=9587517

They have more detailed analysis in a supplement, but you must be a subscriber, unfortunately.

[kclofter]

There still has not been a new condo tower go up in downtown KC in over 30 years.

Altho technically not towers, Conover Place & 5 Delaware are new structures, albeit River Market as opposed to CBD.

[aknowledgeableperson]

The argument about buying a house versus a condo is probably true in past years.  But as the baby boomers retire, a lot of them are realizing they don't want to do yard work or home maintenance, and they want to be free to travel.  A condo works better for them.  The older seniors who are living much longer, and beginning to have problems with their health, and mobility, want out of their houses and live where they don't have to do physical chores any longer.  Older women especially are looking for the physical security of a doorman or buzzer/alarm system in their dwelling.  The aged is the fastest growing segment of the American population.

It depends on how you are defining "condo".  Yes, some are going "condo" but those condos are not in the old city environment.  Mainly those "condo's being chosen are in the suburbs.  Just look at the Parade of Homes coming up in a few months.
But many more just may be choosing individual homes in a "maintenance provided community".  again, look at the upcoming Parade of homes.

[Maitre D]

I wouldn't be surprised to see some companies lay people off they don't like, under the guise of, "Sorry Jim but with that whole subprime meltdown and all..."

[aknowledgeableperson]

One of the effects of the meltdown will be the glut of homes foreclosed and that affect on the number of houses on the market.  More homes and fewer buyers just might equal lower housing prices.  And those lower prices are already showing up in many of the former "hot" housing markets.
Many were taking HELOC's and borrowing  money on the perceived higher housing values.  Value goes down those borrowers could just end up "upside down" just like car buyers who take out long term loans with little down.

[FangKC]

http://c.bizjournals.com/ct/c/23015625

Subprime implosion lowers KC-area housing permits

Kansas City Business Journal - 2:47 PM CDT Tuesday, August 21, 2007

The number of home-construction permits issued in the Kansas City area in July decreased 31 percent compared with last year, the Home Builders Association of Greater Kansas City said Tuesday.

Area municipalities issued 550 permits, down from 802 permits last year, the association said in a release. Area municipalities issued a revised total of 599 permits in June.

"Lenders have tightened their loan requirements in response to concerns about subprime loans, and borrowers are steering from more volatile adjustable-rate mortgages," Tim Underwood, the association's executive vice president and CEO said in the release.

Kansas City led area cities with 840 single-family home permits in July, followed by Olathe at 389 and Lee's Summit at 351. Rounding out the top 10 were Overland Park at 242, Kansas City, Kan./Wyandotte County at 221, Blue Springs at 181, Grain Valley at 166, Gardner at 158, Shawnee at 138 and Raymore at 129.

[FangKC]

http://www.investors.com/editorial/IBDA ... e=20070806

Loan Standards Up As Defaults, Wall St. Hit Banks, Lenders
BY SCOTT STODDARD

INVESTOR'S BUSINESS DAILY

Posted 8/6/2007

Mortgage lenders are restricting credit to a wide range of borrowers amid rising home loan defaults, analysts say, a move likely to prolong the housing slump and sap economic growth.

The credit squeeze has turned into a credit freeze in recent days, as Wall Street has shunned mortgage-backed securities.

That's accelerated lenders' push to raise rates on some mortgage products, scrap some types of loans altogether and more closely scrutinize borrowers.

"The mortgage spigot is closing. Even prime borrowers are having difficulty now," said Mark Zandi, chief economist at Moody's Economy.com.

Tight credit could put more pressure on home prices and sales, which could spur further defaults.

Mortgage lenders got some relief Monday on reports that government-sponsored enterprise Fannie Mae (FNM) wants to buy more loans from struggling lenders. Fannie shares rose 10% while its sibling, Freddie Mac, (FRE) climbed 8%.

Countrywide and other mortgage lenders surged on the report and other positive news.

"We need them (Freddie and Fannie) to provide that liquidity. . . . It would be huge," said Matthew Howlett, an analyst at Fox-Pitt Kelton.

NovaStar Financial, (NFI) which plunged early Monday after suspending mortgage fundings, said it will resume operations. Down 35% early, it closed up 6%.

Bear Stearns, (BSC) which has been slammed for its exposure to subprime and other debt, jumped 5% as investment banks bounced back.

But real problems remain. Defaults have soared among both subprime borrowers with poor credit histories and so-called Alt-A, or "liar loan," borrowers who didn't have to verify income. Even loans to people with good credit increasingly are going bust.

Insatiable demand for mortgage-backed securities fueled the housing boom over the past five years by encouraging lenders to write increasingly risky loans. Lenders could unload that risk and free up capital by bundling loans into securities that had high credit ratings and offered good returns.

But a spike in foreclosures has sharply curbed investor interest in the securities.

"There's definitely a backlash now in which investors are saying they don't want to hold anything with a mortgage attached," said Guy Cecala, publisher of Inside Mortgage Finance.

"Loans are going to be much harder to get and more expensive to get," Cecala said.

That will make it harder for borrowers with adjustable-rate mortgages to refinance when their interest rates adjust higher. An estimated $1 trillion of ARM loans is due to reset this year — raising the specter of higher monthly payments, especially on loans with teaser rates to start.

Many of the loans were made near the top of the market, so borrowers have little home equity to fall back on. Many may be underwater.

"There's no question that we're still on the rise for delinquencies and defaults across the board," Cecala said.

Rising foreclosures and plunging demand for mortgage-backed securities have put dozens of lenders out of business in the last year.

On Monday, American Home Mortgage, (AHM) which offered Alt-A mortgages, filed for bankruptcy protection. It had earlier halted operations and fired almost all of its 7,400 employees.

Some lenders have stopped offering certain loans.

Wells Fargo (WFC) has stopped lending to prime borrowers who don't show proof of income. It also curtailed funding of Alt-A loans via outside brokers, while Wachovia (WB) has stopped such fundings entirely.

Subprime loans used to be a small share of the total mortgage market, but they soared to 20.1% of the total in 2006, according to Inside Mortgage Finance. Their share fell back to 14% in the first quarter and likely dried up further in the second quarter.

The housing slump has dragged down economic growth over the past year. Analysts say current credit conditions could make matters worse unless Fannie or Freddie step in or the Federal Reserve lowers interest rates.

"It'll weigh heavily on the economy and argues for some Federal Reserve easing," Zandi said.

The Fed almost certainly will keep short-term rates at 5.25% at its meeting Tuesday. But some analysts expect the Fed to express greater concern about the economy as a first step toward an eventual rate cut.

"The odds are rising that it will ease," Zandi said.

[FangKC]

http://www.npr.org/templates/story/stor ... d=12588053

Realtors Group Lowers Housing Forecast
from The Associated Press

WASHINGTON August 8, 2007, 8:17 p.m. ET · Home sales will hit a five-year low this year, as wary lenders cut back on loans for many borrowers, a trade group for real estate agents said Wednesday.

The National Association of Realtors' revised forecast calls for existing home sales of 6.04 million in 2007, down 6.8 percent from last year. The forecast was 1 percent lower, or 70,000 fewer homes, than July's prediction of 6.11 million.

This year's sales would be the lowest since 2002, when sales hit 5.63 million. Last year's sales were 6.48 million.

Next year, the trade group expects sales to climb to 6.38 million, up slightly from the forecast it gave in July of 6.37 million.

The forecast comes as delinquencies among borrowers with weak, or subprime, credit have risen dramatically over the past year, and other loans are showing weakness as well.

"With fewer affordable loans available, that will cut back on some of the homebuyers who wanted to enter the market," Lawrence Yun, the trade group's senior economist, said in an interview. However, Yun projected that demand would rebound next year.

As of May, more than 16 percent of mortgages issued to subprime borrowers were behind on their payments by 60 days or more — nearly double last year's levels, according to research firm First American LoanPerformance.

As delinquencies rise, lenders are reducing the availability of credit to those borrowers.

Those worries have also extended to the market for "jumbo" loans, or those above the $417,000 individual limit for home mortgages that mortgage giants Fannie Mae and Freddie Mac are allowed to buy. Investors worried about rising mortgage defaults have all but stopped buying mortgage-backed securities.

That market could remain "frozen" for up to a month, said Doug Duncan, chief economist for the Mortgage Bankers Association.

However, the Realtors' Yun said investors are overreacting by refusing to buy jumbo loans.

Among borrowers with strong credit and "jumbo" mortgages, delinquencies rose to 0.5 percent in May, from 0.3 percent a year earlier, according to the FirstAmerican LoanPerformance statistics.

While sales fall, some elements of supply are expected to be down as well. More than 1.4 million housing starts, including multifamily units, are forecast this year and in 2008, but that is down from 1.8 million last year.

Median nationwide existing-home prices are expected to fall by 1.2 percent to a median of $219,300 this year, before climbing back next year to $223,600. Median new home prices are projected to fall 2.3 percent to $240,800 this year and then rise to $246,300 in 2008.

---

Economists Brace for Worsening Subprime Crisis
by Chris Arnold

All Things Considered, August 7, 2007 · Jose Pomales stands on his back porch with his 7-year-old son, Jordan, and looks out over his big backyard.

Eight years ago, he moved into his modest ranch house in Boston's Hyde Park neighborhood and has since spent time and energy on landscaping and fixing it up.

Pomales has a solid job with a local housing authority, and he and his wife's combined income is around $65,000 a year. He says he has always paid his mortgage, but two years ago, Pomales refinanced and got a loan from New Century, a lender that has since gone under after writing too many loans that customers didn't or couldn't pay back.

The monthly payment on Pomales' $300,000 loan started at about $2,100. Then, the payment increased by more than $300 a month, and will soon be adjusted to about $2800 per month. In another six months, his mortgage payments will be increased even more.

Pomales says he had no idea how much his monthly payments would go up and is now unable to afford his home. His only option, he says, will be to either try to sell the house or just let the bank take it. Recently, he received a foreclosure letter in the mail.

"This is my home, and I don't want to let somebody just take what we've worked hard and sweated for. I mean it's not the biggest house. It's maybe not the most glamorous house. But it's my home," he says.

Many More in the Same Boat

Most subprime loans are fixed for two years, adjustable for 28, and even if overall interest rates stay flat, these loans still adjust up much higher than their initial rates when they hit their "reset date."

Analysts say that in September 2005, the subprime lending boom started hitting its peak. Now a bigger wave of rate resets could mean a flood of foreclosures.

Susanne Mistretta, a managing director with credit rating agency Fitch Ratings, says that the borrowers who have loans adjusting now are much more exposed to the rate reset than the borrowers who had loans adjust prior to this point. She says falling house prices and stricter credit standards are making it harder to refinance out of these loans, which were written during a time when lending standards in the mortgage industry were getting out of control. Many lenders were processing loans without documenting borrowers' incomes, and some loans were made for more than the houses are now worth.

Just last week, Fitch changed its default forecast for one subset of subprime loans, saying 50 percent more loans will default than they previously predicted.

A Historic Number of Foreclosures

More economists are predicting that a historic number of people will lose their homes.

"I foresee several million. I think that we could easily see 2 to 3 million people lose their homes and go back to renting, basically," says Bill Wheaton, who runs MIT's Center for Real Estate.

He says that some of those affected will be people who paid too much or borrowed too much against their homes. If their payments are rising and the houses are worth less than they owe, they'll just walk away, Wheaton predicts.

Many others facing possible foreclosure are longtime homeowners, like Jose Pomales, who say they just didn't understand what kind of loan they were getting into when they refinanced and who are now stuck.

Running Out of Options

Jose Pomales has tried unsuccessfully to refinance his mortgage, which is now managed by Chase Home Finance. He says he has been asking Chase to work with him and give him a more affordable interest rate but says they have refused.

Chase won't discuss individual customers, but a spokesperson offered this statement:

"Chase works with customers individually and uses a number of strategies to help borrowers facing financial difficulties, including refinancing and considering all options available to modify loans."

Other lenders are making similar pledges to modify or refinance customers who are stuck in loans with rapidly rising rates they can't afford, but housing advocates say that, so far, they are not doing it very often.

Pomales worries that without refinancing, he will soon be forced to leave his longtime home.

"We're just regular middle-class, hard-working individuals, and you hate to see things taken away when you're working hard for it," he says.

[FangKC]

I just heard predictions on PBS' McLaughlin Group Friday evening to expect the Federal Reserve to lower interest rates at least two times within the next six months. 

http://www.kare11.com/money/business_ar ... yid=262359

Fed lowers interest rate on loans made to banks

The Federal Reserve, declaring that increased economic uncertainty poses risks for U.S. business growth, announced Friday that it has approved a half-percentage point cut in its discount rate on loans to banks.

The action was the most dramatic effort yet by the central bank to restore calm to global financial markets which have been roiled in the past week by a widening credit crisis.

The decision means that the discount rate, the interest rate that the Fed charges to make direct loans to banks will be lowered to 5.75 percent, down from 6.25 percent.

The Fed did not change its target for the more important federal funds rate, which has remained at 5.25 percent for more than a year.

However, it has been infusing billions of dollars in money into the banking system over the past week to keep that rate from rising above the target level.

Many economists believe if the financial market crisis worsens the Fed will soon move to cut the federal funds rate as well.

In a statement explaining the board's action, Federal Reserve Chairman Ben Bernanke and his colleagues said that while incoming data suggest the economy is continuing to expand at a moderate pace, "the downside risks to growth have increased appreciably."

White House deputy press secretary Tony Fratto declined to comment on the announcement but said, "We have full confidence in the Federal Reserve on these issues and respect their independence."

The Fed said it was "monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets."

The Fed said that "financial market conditions have deteriorated and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward."

The policy announcment was approved unanimously by the Federal Open Market Committee, the group of Fed board members in Washington and Fed regional bank presidents who set the federal funds rate.

Many economists have been calling for the Fed to move to cut the target for the federal funds rate, which has been at 5.25 percent since June 2006.

The discount rate covers only loans that the Fed makes directly to banks. But the funds rate covers all loans that banks make to each other on a short-term basis. It is much more critical in determining interest rates in the economy such as banks' prime lending rate.

The nation's once high-flying housing market is sinking deeper into gloom, and credit, the lifeblood of the economy, is drying up. Many economists believe these problems, including declining consumer confidence, could lead to a recession.

Since setting a record close of 14,000.41 just a month ago, the Dow Jones industrial average has shed 1,154.63 points in a string of triple-digit losing days that have raised anxiety levels not just on Wall Street but on Main Street as well.

The markets have been pummeled by a rapidly spreading credit crisis that began with rising defaults in subprime mortgages -- home loans made to people with weak credit histories. Now the problems are spreading to other borrowers.

Countrywide Financial Corp., the nation's largest mortgage banker, was forced to borrow $11.5 billion on Thursday so it could keep making home loans. It was a move that rattled investors who have watched a number of smaller mortgage companies go under because of credit problems.

The shockwaves have extended to giant Wall Street investment firms such as Goldman Sachs, which announced earlier this week that it was pumping $2 billion into one of its struggling hedge funds. BNP Paribas, France's largest bank, last week froze three funds that had invested in the troubled U.S. mortgage market.

The Fed and other central banks already had infused the banking system with billions of dollars in an effort to keep short-term interest rates from surging and making credit even more difficult to obtain. However, those billions did not calm investors worried about which big hedge fund or mortgage company will be the next to announce serious problems. For that reason, investors have become fearful to supply money through credit markets to companies even if they have strong credit records.

By Martin Crutsinger, AP Economics Writer

(Copyright 2007 by The Associated Press. All Rights Reserved.)