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Saturday, September 30, 2006

Elizabeth Rhodes: Master Of Misdirection

Wow, Elizabeth Rhodes is on a real anti-bubble roll this weekend. Did one of you submit this letter to her "Home Forum" Q & A?

Q: I keep reading that home prices aren't expected to decline in the Seattle area. Aren't you overlooking the possible effect of "suicide loans" — those adjustable-rate mortgages that are common and dangerous? I think the interest rates on those loans will go so high that many will be forced into foreclosure. Won't that produce a glut of for-sale homes that will force prices down?

A: Let's start with the basics on those adjustable-rate loans.

The riskiest are teaser-rate loans. These start at an exceptionally low interest rate (like 2 to 4 percent), then reset upward later to a higher rate that can double the borrower's monthly payment. Obviously borrowers who can't refinance out of these loans are at great peril — particularly if their loan has allowed them to make interest-only payments, their home hasn't appreciated much and they have little equity to work with.

However, it's not a given that foreclosure is in their future. If the local economy is robust, jobs are plentiful and housing demand is strong about the time their loan resets, holders of teaser-rate loans have options. They may be able to increase their income and keep the house or find a buyer and escape foreclosure.
Okay I have to stop right there. "They may be able to increase their income"?!? Did she really just say that? Yeah, it's that easy Ms. Rhodes... When Mr. & Mrs. Too Much Homebuyer find that they can't afford to make their payments, why they'll just get new jobs that pay more!

Maybe I'm confused, but aren't there cities right now (San Diego, Sacramento) that have "robust economies" with "plentiful jobs" and yet are still experiencing a decline in prices? It seems to me that the one and only component that matters is that "housing demand is strong." Oh, and incidentally, housing demand is weakening across the nation, and even here in Seattle.

Moving on.
These loans can reset more than once, from one to 10 years after origination — meaning there's no one point at which distressed sellers will flood the market. Obviously, it's impossible to forecast whether the economy will be good years from now, allowing them to ride it out. Maybe it will. Maybe it won't.
Okay, so we admit that basically "who knows" if it'll be a problem or not...
Loan Performance, a San Francisco-based mortgage-information provider, calculates that teaser-rate loans comprise 13 percent of mortgages in the Seattle-Bellevue-Everett area. Since January 2005, teaser-rate foreclosures have consistently been lower than 1 percent a month.
Did you catch what she did there? The question was about adjustable-rate and "suicide" loans in general. However, Ms. Rhodes decided to shift the focus to solely "teaser-rate" loans, and then provided a statistic that shows "only" 13 percent of local mortgages fall under that specific category. What about non-teaser-rate loans such as plain old ARMs, negative amortizing, payment-option, etc.? Excellent use of misdirection, Elizabeth.

Furthermore, of course foreclosures are still going to be low for our area. As long as we're still experiencing double-digit year-over-year appreciation, it's easy to sell or refinance your way out of a risky loan. It's as though Elizabeth forgot the question (or more likely, just didn't feel like answering it), which was about where we're going, not where we've been or are.

I'm not going to bother quoting and responding to the rest of her answer here, because she's obviously chosen to answer a completely different question than what was asked. Go read it for yourself, and if you're convinced that her answer is sufficient, I guess you should go out and buy a house for 10 times your yearly income on a negative-amortizing, payment-option, no-money-down, adjustable-rate loan.

(Elizabeth Rhodes, Seattle Times, 09.30.2006)


john_law_the_II said...

it's all if if if if. here's an if, if the housing market falls there WILL be big problems.

seattle_slow said...

Good job catching the misdirection, Tim. The total percentage of teaser ARMs, neg-am, interest only, stated income loans, etc., is significantly higher than the 13% ARM number Liz chose to cherry pick. Some of those other loans are even more dangerous.

The part about relying on 'being able to increase your income' is insane. You don't get a loan amount and loan type based on what you *might* be able to earn in the future. Savvy people do just the opposite - they get loan amounts and loan types that they can manage should their income *decline* due to job loss, divorce, etc.

Good lord!

What a disservice she's doing to her readers. It's disgusting. Whatever happened to balanced reporting?

It's very disturbing to see this type of advice in mainstream media when the market is poised for a significant downturn. And guess what? It's already started. We're just a little _slow_ here in Seattle.


Crashcadia said...

The MSM are really doing them selves in on this.
They fail to realize that they are turning away customers as they spew out their biased reports.

More and more people will turn to the blog sphere for statistics, links, sentiments and opinions that are not reported by the bought-and-paid-for MSM.

What Hath Blog Wrought.

synthetik said...

There is no balanced reporting in terms of Lizzy Rhodes. Here paper would come under a lot of financial stress once they lose their RE advertising. There is no journalist integrity there at all, she is the worst of the worst. She should go be an understudy for Geraldo Rivera @ Fox News.

The damage she is doing to average Joe's financial condition is appauling.

Unfortunately she'll probably never be held accountable for her actions.

synthetik said...

Here's another total BS article in the Times.

What to look for when touring a house

• Ask haunting questions. If you're spooked by the idea of owning a home someone has died in, speak up. Ask the seller or the seller's agent if any crimes have happened in the home. If there was a notorious event, it could even stigmatize the property, limiting your ability to resell it later.

• Get a CLUE. The Comprehensive Loss Underwriting Exchange database tracks the history of claims for a particular home. Only the owner and insurance companies are supposed to have access to that information, but you can ask the seller to get a copy and show it to you"


Take that article and flush it down the toilet. a) don't BUY a house right now because it's Peak market and b) if are you stupid enough to make that decision, at least don't get an ARM or 100% financed loan.

Mikhail said...

Ms Rhodes does have a point. No one REALLY knows what will happen with the toxic loans. It's not as if we've ever had this kind of situation before (i.e. with these exotic mortgages making any measurable part of the over-all market).

Moreover, I haven't seen statistics anywhere that show the Puget Sound area is as bad as California or Florida regarding the number of exotic loans. If the Seattle region really does have a smaller percentage of exotic (e.g. no doc, 100% interest, no money down, option ARM, teaser rate, etc) than extreme bubble zones like Phoenix, California, and Florida, then perhaps the market really could keep expanding here for a while yet even while things contract elsewhere.

synthetik said...

>i haven't seen statistics anywhere

Um, map of misery?

Yeah, not as bad as california orparts of florida, but worse than Arizona and IN the top 5 worst in the nation.

stephen said...

The paper is a business and the RE section IS NOT a news section, it is a revenue stream for the paper selling ads to the local RE industry. IMHO the articles are fluff for the ads, period. The section is advertising for the local RE industry. I can't imagine this paper (or any paper) would ever run negative RE articles in it's RE ad section, that would almost be laughable.

Because it is so contrary to the actual state of the market ANYTIME that market is in decline or stagnant it will of course offer great "can you believe he/she said that.." quotes but considering the source does it really add anything to the discussion?

Towelie McTowel said...

Stephen. I totally agree with you, and I take Liz about as seriously as I take stock tips in Money magazine. However, there are very few people that actually make the distinction between news and advertising. IMO, the whole RE section should be tagged with 'Paid Advertisement'. Unfortunately, this section appears to be news when compared to the 'New Homes' section where salespeople try to scare you into 'registering early so that you don't miss out on this incredible opportunity'. That section is tagged as advertising which would lead people to believe that the RE section is actual fact-based news.

The thing is that all of this propaganda is insidious. It shapes the market, creates bubbles, and, hence, it is fair game for this blog. I constantly hear people quoting such rags as if they are fact. Someone has to start calling people on this BS.

seattle_slow said...

towelie - bullseye!


WaitinginMarysville said...

Does she mean to say that 13% of all mortgages in the greater Seattle area are teaser rate loans? That seems like a shockingly high amount, not something to say "only" about, because there must have been quite a few people who refinanced into these loans in addition to the new buyers of homes.

It seems to me that nearly all of the people who have these loans are going to have serious trouble paying their payments sometime in the future, otherwise why would they get the teaser loans at all if they could afford a less risky one?

Eleua said...


Who cares?

These financial Lewis & Clarks will be setting the marginal value of homes, as they default.

They will drag down the next 13%, and they will drag down the next 13%....and so on....

You could have your house paid off, and now only have to rent it from the county, and if your dim-bulb neighbors default and sell the house for $150K under what you paid, guess what?

You will be feeling mighty poor when you drop $500K on a house, and have it worth $350K. At least they got to default and stick it to 'da man.

Guess who 'da man is?

stephen said...

Well, I think you both may have missed my point.

While it certainly should be pointed out that the articles are simply support pieces for RE ads, it seems pointless to spend time dissecting the articles themselves.

It does however offer great rants about how absurd the contrary statements are to reality and I guess for many here that's part of the fun of the blog, and that's cool ;-)