“American Home Mortgage Investment Corp. shares sank on Monday after the home loan provider announced “major” writedowns, delayed a dividend and said lenders were demanding it put up more cash.”
“The announcement late Friday evening reflects how liquidity and credit issues affecting subprime lenders are extending to companies that make home loans to borrowers considered to be good credit risks.
American Home…specializes in prime and near-prime loans. It has, however, made many loans that allow borrowers to produce little documentation. Such loans are often considered riskier. The company recently commanded a roughly 2.5 percent share of the U.S. mortgage market.” (Cash woes pound American Home Mortgage)
JustQuotes: Is The Subprime Sickness Spreading? [SocketSite]

30 thoughts on “JustQuotes: Forget Subprime In San Francisco, But How About Alt-A?”
  1. This was in today’s Chronicle:
    So basically, what lenders thought was prime credit was really subprime in disguise – 630 FICO, 0% down, stretched income. Regardless of credit score, we’re now getting into that adverse selection/adverse incentive scenario proffered by ex-SFer on another thread.
    We used to be considered one of the “bulletproof” markets. Now Forbes has us as fourth-riskiest:
    This is going to get good.

  2. People who are paying 80% of their net income into their mortgage for their tiny flats in marginal neighborhoods are going to find their 2/28 loans resetting in the second half of this year. I fully expect to see a lot of these places on the market at realistic prices.

  3. For that Forbes article, is it just San Francisco they’re talking about? It just says “market”, so I’m wondering if it includes other areas as well, besides the City proper.

  4. American Home Mortgage (AHM) reopened trading at $5.51, currently trading at around $1.20
    The stock was trading at $10.01 at close on Friday

  5. Forbes also had an article recently declaring S.F. one of the five best markets for sellers (along with Charlotte, Denver, and some others) so they seem to be a little all over the place.
    I agree that 0% down, no doc loans to people with 630 FICO scores should not be considered “prime”. I took an Alt-A loan, but put up 10%, along with 780 FICO and 35% debt to income ratio. That’s Alt-A- anything less than 20% down with a mortgage other than 30 year fixed. Those mortgages are not going away- I don’t even think 100% financing will go away completely, but 0% down with less than stellar credit and a high debt to income ratio is probably going to be hard to come by. As it should.
    I suspect that AHMI wrote an awful lot of “near prime” loans without any documentation to even establish that the borrowers were anything other than subprime credit worthy. If others did the same for the S.F. market, then I hope all of those buyers have been getting big raises.

  6. The two articles/reports from Forbes did not use the same data or methodology to come up with the best seller’s market or riskiest market lists. The best seller’s market list was based on current housing
    inventory and sales rate over the last year. Forbes did not account for employment growth, income, etc. The riskiest housing market list was developed based on cities with the highest shares of ARMS and LTVs, P/E ratios, and vacancies. Also, affordability was also factored in.
    Anyone can argue it’s a seller’s or buyer’s market if you use the right data. I’m not sure why Forbes did not include income to crunch their numbers to calculate the best home seller’s market. Income should be one of the most importat factors in determining whether it is a buyer’s or seller’s market.

  7. American Home is an option ARM lender. I have not seen hard numbers, but I suspect a large % of bay area homes were financed w/ these negAm loans the past few years. From AHM’s 10k: “The weighted-average FICO score for our $58.9 billion of total originations in 2006 was 716.” California is twice the size of any other state (around 25%).

  8. So let me get this straight. 70% or more of the loans in SF were Alt-A.
    American Home is going under because nobody, I mean, *nobody* is willing to fund Alt-A loans any more.
    So 70% or more of the SF borrowers will now either not be able to get a home loan or will be required to spend a couple of years saving up some more cash.
    If demand dries up by 50% or so, I think that doesn’t bode well for SF home prices.
    And when do those one Rincon and Infinity loans need to be funded? When 50% walk away because they are unable to get loans, the boom (bubble?) will be officially over in SF. The developers will of course do everything they can to hide the fact that they now have a bunch of units and no market for them because no one else can get loans either. But at some point, the strain will become too great.
    This is the tipping point and I think nothing can stop it at this point. Nothing.

  9. I was looking through some Socketsite archives today, and let me tell you – some fun reading! Everyone should do it! Then you can see how long Mr. Tipster has been declaring “the end”.

  10. I doubt the Forbes article is talking just about loans within SF city limits. It could certainly include it’s riskier neighbors (oakland, hayward, redwood city, etc). I’d like to know where Forbes got their data before jumping to conclusions (hint hint Tipster).

  11. tipster has been declaring ‘the end’ for awhile because it has been so clear for so long that prices in SF, the Bay Area, CA, and National jumped the shark several years ago.
    It has been clear for a long time now that low interest rate, non existent lending standards, and a mania fueled housing prices rising them to historic highs. This was clearly a good thing for a great many people. But the housing market is just that, a market, and ALL markets correct.
    And the correction began in 2006 with steep declines in sales volume and rising inventories nationally, which continued into 2007.
    Now, we have sky rocketing defaults, tightening lending standards, failing home builders and lenders, liquidity to fund mortgages drying up, and strong evidence of a full blown credit crunch.
    You can poke fun at tipster, or other market bears such as myself, but the fact is all the downsides that were predicted are happening now.
    People can claim CA, the Bay Area, or SF are ‘bubble proof’ but unfortunately they were wrong in the 80’s and they were wrong in the 90’s.
    DQ provides a look at what is yet to come in their archives showing that in 1994 24% of SF homes sold for a loss, most by buyers who bought at the 89-90 peak.
    Resale houses
    Sales counts & loss percentages
    March-May 1994 and 1995
    Mar-May Loss Loss
    County All Sales# Pct. 95 Pct. 94
    San Francisco 1,026 16.2 pct. 24.0 pct.

  12. I like The Economist’s line on this one, namely something like “Financial bubbles always last longer than anyone imagines they will, but burst they always do”.

  13. bear – merely poking fun at tipster because of how long he’s been claiming it – I guess I was a genius too – in 1998 I claimed that there was a stock bubble and continued claiming it through 2000. Eventually I was right, sure, but any prediction should have an exact set of dates. I can start saying that “Now is the time to buy, buy, buy!” and I’ll probably be right in 20 years – prices then will be higher than now.
    Predictions of doom without any time constraints are ridiculous – as you said, markets correct, but many times that takes a LONG time. TIME is what makes people money.

  14. You can look up at a big pile of snow on a cliff and say to yourself, “Yup. Someday that’s gonna come down in an avalanche and bury the town.” Even if you have no way of knowing when it’s finally going to happen or what’s going to trigger it.

  15. “American Home is going under because nobody, I mean, *nobody* is willing to fund Alt-A loans any more”
    this is a slight exaggeration. Some lenders will still fund some types of Alt-A loans, but it is shrinking rather rapidly.
    Some things specifically on the chopping block (depending on the lender):
    -NINA (no income no assets) loans or Stated income loans
    -High Loan-to-Value Loans (above 90% or so).
    -Low FICO score borrowers
    -high price mortgages (some lenders restricting mortgage to $500,000)
    Wells Fargo has stopped Alt-A altogether for now until they can see what future alt-a pricing will be… other banks are doing Alt-A with restrictions. an example of 3 different forms of tightening going on right now:
    (a blog run by a mortgage lender in Sacramento):
    It will not help that Moody’s has just changed the way they rate Alt-A loans. This will restrict lending further as it will change future pricing of Alt-A and subprime.
    SOME firm will always offer subprime/Alt A, etc… it’s just a matter of PRICE (to compensate for the risk). For instance, it may be that an option ARM later this yearcomes with sky high rates (like 10-15%++)
    one other poster stated this, and I agree:
    the SF market hinges on whether or not the majority of homes are bought by people who have the incomes to support the deals versus those who require financing to purchase.

  16. tipster has been declaring ‘the end’ for awhile because it has been so clear for so long that prices in SF, the Bay Area, CA, and National jumped the shark several years ago.
    Yes, like a week ago I predicted investors would run for the exits out of Alt-A. And that’s exactly what is happening now. I’m sooo wrong.
    And the run for the exits has been the BASIS for my prediction that the end was here. What I did that you apparently didn’t do, was to see the cards all lining up for the investors to take off.
    I could see the wave building out in the ocean to start predicting that it was going to crash onto the shore. If you want to stand there and say, “no, that wave heading towards the shore isn’t actually ON the shore yet, so it won’t happen”, fine with me, but the forces were in motion and for weeks I couldn’t see any other outcome.
    But the wave has now crashed to the shore. When no one can get a loan for more than 90%, those people who are spendthrifts and have no savings get knocked out of the market, and the more rational people no longer have to compete with them. Just that ALONE is enough to have a profound effect as the buyers know that there a)isn’t going to be some fool who will always outbid them and b)there may not be any fool there to buy it for a too-high price when they are ready to sell.
    And I love the line that, “no, under 500K mortgages are still just fine.” Um, that’s my point, the price of homes became unlimited based on lenders lending anyone anything. If lenders won’t lend more than 500K, prices fall to near that level.
    And 15% sky high loans is as good as home prices falling by half. People aren’t going to pay 3X the rental price of a home for the privilege of buying a declining asset. Once the spendthrifts are gone, no one is going to be that dumb. And the spendthrifts just got pushed out of the market.

  17. Tipster’s analysis is sound. But there is one additional factor that can only drive demand (and prices) down from the irrational levels of recent years. Not only are there fewer nutty buyers because fewer out there can qualify for the necessary financing, but even the savvy creditworthy buyers with plenty of cash for a downpayment are increasingly on the sidelines because the smart money says that prices will be significantly lower 2 years from now. This is the exact opposite of the 2005 mind-set.

  18. Tipster and Bear – I doubt many people would refute your point that we are having a market correction, but that is very different from a bubble bursting as many here keep predicting. Prices are certainly due to stagnate after years of heavy appreciation, but I doubt that you’ll see 30% drops in value – even with the subprime / Alt A problems that are the topic du jour in the press.
    I saw some interesting stats earlier this week on historic housing appreciation in San Francisco proper. In the 20 years of data that I reviewed, prices in SF have NEVER dropped over 10% in any one stretch of time. I know that history alone can’t predict the future, but statistically – a big drop just isn’t very likely here. I think the comments about using caution and common sense when making a home purchase (especially now) are spot on, but the sensationalist bubble talk is pretty overblown. Just my two cents…

  19. tipster:
    I agree with your overall analysis, it is what I’ve been posting since I’ve joined here.
    I was only pointing out above that Alt A and subprime do still exist (so people can’t claim that this is just chicken little stuff).
    I then subtly showed how that won’t help a lot of people in San Francisco due to the rapidly emerging tightening on such products (limits of $500,000, need high credit scores, need 20% down, and the future high cost of “exotics” etc)
    to me, the end of the end was when the 2 Bear Stearns Hedge funds blew up. I believe I’ve stated so many times here in the past.
    For those of you interested in the turmoil that has occurred recently, even over the last 48 hours, here is an interesting forum:
    This is a forum of a bunch of mortgage brokers. You can simply read for yourself, as lender after lender is going under. (most recently, AHM and ABC as well as possibly Fieldstone in the last day or two).
    A few lenders have gone out of business over the last few days, including AHM and ABC. Customers who were “approved” for a loan who went to close today found they had NO loan…
    thus, if you are about to close on a house soon, you may want to check your loan status with your broker immediately… and also set up a PLAN B with a different lender (a big lender like Wells Fargo or WaMu or Countrywide) just in case your deal falls through.
    remember, just because you’re approved for the loan doesn’t mean the lender has to fund it when you go to close!
    Good luck all!

  20. “And when do those one Rincon and Infinity loans need to be funded? When 50% walk away because they are unable to get loans, the boom (bubble?) will be officially over in SF.”
    Ummm, I’d say “no way” on that one. I know that in one of the current large developments well over 50% have 9-month locks on 10-year loans and plan on significant down payments. “Very few” have sub 5 year loans. I mean seriously, even if you don’t know what a yield curve is you have to be far from logical to choose a short term loan these days. I’m quite certain that at Rincon and Infinity the number of people unsophisticated enough to choose a dangerous loan is rather low.
    If prices fall more than a few percent then sure, people will either walk or renegotiate. But they’re not going to lose their loans.

  21. Read the post above, Gdog. Even if you are right, a good chunk of the lenders will be out of business by the time the loan gets funded, and no other investors will be found to fund new ones.
    The people who committed to those things are screwed. If they follow through, so many of their fellow investors won’t be able to fund the loans and so few new ones will be found that the value of their unit will be far less than they paid for it, and they will wish they had walked away.
    And Lance, you are hilarious. This is no mere “market correction”. This is a rout. The market is evaporating right before your very eyes.
    Similar to the dot com IPO situation, in which companies that wouldn’t be profitable for 5 years were going public, but when it all ended, there was a 5 year dry spell for IPOs while the banking community waited for the life cycle of the existing companies to catch up to the new marketplace that demanded profits before an IPO, so too will the people getting loans five years before they could save a downpayment now have to catch up to the market reality for loans that requires they have a downpayment. Call me in 5 years when the population saves up enough cash, if they can save anything at all.

  22. “And when do those one Rincon and Infinity loans need to be funded? When 50% walk away because they are unable to get loans, the boom (bubble?) will be officially over in SF.”
    So here’s a question:
    I had a friend that reserved at OneRincon during the first week of their release and was able to lock down a pretty good deal on a upper floor corner unit (above 30th floor). Since then, ORH has been selling the same corner units on similiar floors at a 15-20% premium over his price.
    If ORH closes on most of their units even at the higher prices, does that mean his unit is worth the higher price and is that were the “comps” will come from?
    He’s worry about this whole mortgage mess and is considering backing out, but since he got in early, does he have a safe buffer against a downturn?

  23. I think I’m going to get ready to buy five condos in SF, since according to tipster, there’ll be plenty to be had for $150,000 apiece!

  24. “If ORH closes on most of their units even at the higher prices, does that mean his unit is worth the higher price and is that were the “comps” will come from?”
    Yes. The actual closing price for each comparable unit will be the comps for your friend’s unit, regardless if those units go for more or less than your friend’s unit. (in this case it will be more)
    However, if some units come right back on the market (from an investor or whatever) then THAT new sale will be the new comp. (again, regardless if it is lower or higher price than your friend’s unit)
    An appraiser also has the ability to adjust the valuation up or down due to what is occuring to similar units elsewhere in the neighborhood as well…
    and lastly, appraisers often want “newer” comps (less than 3-6 months old) to help make a valuation.
    10 units, all same floor and same size.
    Your friend pays $1M. so do 3 other units.
    The other units go for $1.25M
    Comps for your friend’s unit is $1M to $1.25 M
    Then a flipper makes a sale 1 month after ORH opens, and sells for $1.5M
    New comp is $1.5M.
    Then another flipper bites it and sells for $750k. New comp is $750k.
    But let’s say there’s another 30 floor condo building of similar style within a few blocks, and there’s been no ORH sales of late. In that other tower a similar condo goes for $1.66 M. That may be used as the new comp for the ORH condos too.
    hope that helps.

  25. “Read the post above, Gdog. Even if you are right, a good chunk of the lenders will be out of business by the time the loan gets funded, and no other investors will be found to fund new ones.”
    Almost all the loans are through the developments’ preferred lenders (usually no other lender can touch their rates and fees). So you’re saying that Wells Fargo, B of A, Chase, et. al. are all going out of business and/or the mortgage backed securities market for high income home buyers will evaporate?

  26. “So you’re saying that Wells Fargo, B of A, Chase, et. al. are all going out of business and/or the mortgage backed securities market for high income home buyers will evaporate?”
    They won’t evaporate, but they are tightening considerably. At this time Wells Fargo as example is no longer accepting Alt-A loans. Period.
    I also have CONFIRMATION that IndyMac is also tightening significantly:
    (this is the website for indymac, a letter from the CEO.)
    I have UNCONFIRMED reports that WaMu, BofA, and Wachovia are also significantly restricting Alt-A loans as of today.
    Again, there will ALWAYS be some market for Alt-A and subprime… (I argued this above). But it will be much more expensive to use those products. We are seeing more demand for down payments, more income verification, decreased loan amounts, etc.
    The days of 100% financing using IO or option ARMs at low rates is over. Some lenders will still offer 100% financing, some will still offer option ARMs or IO ARMs… but it will cost more.
    Please see my links again:

  27. I think our misunderstanding lies WRT Alt-A loans at new developments. What I’m saying is that close to 0% are Alt-A. I had to provide nearly full documentation just for a pre-qual, and a 5 year IO ARM was the riskiest loan presented and it wasn’t attractively priced. Because almost everyone is rate locked at developments that are within 9 months of move-in I don’t see how many loans can fall through.

  28. Not only will the exotic loan packages of recent years be more expensive, but they will be available to far fewer buyers–basically, those who don’t really need them. We can argue about what pct of the buy side in SF just dried up, but it is significant (my guess is 50%).

  29. When SF corrects in price (and the process which is well underway elsewhere is indeed about to unfold in SF) many mouths will fall open, at the sharpness of the fall. One of the nasty little surprises among many in store for places like SF is that foreigners cannot be counted on to save the day–even if the USD falls hard. Because foreign buyers are Alt-A.
    SocketSite, which is a real-estate fetish site, is itself the top of the market. It too will be gone eventually, and very few people will eagerly discuss real estate as they have done.
    Let’s take a look at how the bubble has morphed in the last 15 years: First stocks, then Treasury Bonds, then Housing, –and soon commodities. Commodities are in a bull market and have been for seven years. But they are not a bubble yet. That’s what comes next. Stocks are not in a bubble currently, and the Treasury Bond bubble is in the process of bursting, right along with Housing.
    The grim reaper in real estate however will save his harshest blow for income property. Income property is now travelling down from high prices and low rates, and the bottom is a super long way away. (low prices and high rates).

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