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Making the Connection: Vegas and Yesterday’s New Mortgage Rules

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Yesterday, the Finance Minister announced a number of new regulations designed to tighten the lending standards for mortgages insured through CMHC. The main three are:

-Refinancing is now capped to 90% of appraised value, down from 95%
-Mortgages on investment properties now require a minimum of 20% down payment
-First time home buyers must have enough documented income to qualify for the payment equivalent of a five year fixed rate mortgage. The buyer may choose a variable rate option at a lower payment, but the income has to be there to be able to make higher payments in anticipation of rate increases.

In practical terms, on a $200,000 mortgage, the buyer needs to qualify for a $1065 payment of a five year term, even if they choose a variable rate mortgage that would actually be $923 a month. (Currently at 4.09% vs. 2.75%). That translates to an additional $345 a month of income, or reducing other monthly payments by $138 a month.

That brings me to my trip to Vegas last week. Vegas is one of the ground zero cities in the U.S. mortgage meltdown. The city that never sleeps had a decade of building house after house, and selling it to investors with no money down, gambling they’d be able to flip it at a higher price to the next buyer – kind of a legal pyramid scheme. And homeowners saw the value of their homes double and triple over a decade and, on average, cashed out their equity every two and a half years, for an average of $30,000 each time.

Now that the music has stopped and reality has set in, the majority of residents owe way more on their homes than the value. You won’t see the devastation on the strip, but drive a few miles north on I-95, and you see foreclosures and bank owned sales, after foreclosure and empty homes.

An even bigger problem are the upscale, luxury condominium projects that just came on line in the last year. They’re 20-30 stories, often, like the Panorama complex, multiple towers – and pretty much empty. At the end of the strip is a twin tower called One – Las Vegas. I saw four cars and a security guard. I’m guessing one entire tower of 20 some stories is empty.

Visitors to Vegas are down 10%, and I’m surprised it’s not way higher. The casinos, hotels, and malls are noticeably empty. Gambling revenue is also way down and the hotel occupancy rates are the lowest since 1984. The Tropicana is in bankruptcy, and even Hooters Casino is in default on their loans.

Unemployment is over 13%, and expected to peak at about 14.5%. Vegas has the greatest fall in personal incomes, highest national foreclosure rate, and the largest percentage of homeowners who owe more than their home is worth.

THAT is the end result of a real estate bubble and insane speculation of buying homes people couldn’t afford, with teaser, variable rate mortgages and no down payments. It works for a while, but it’ll always come to an end. THAT is why the Finance Minister preemptively amended mortgage rules before we potentially get to that point.

Every kid puts their hand on a hot stove once. Yet us adults keep making stupid financial gambles over and over, somehow thinking the next time will be different. Yes, it’s our money, but when our gambling starts to affect the overall economy, it is reasonable for the government to set some basic ground rules.

My rules, and advice for anyone who will listen, go way beyond that:

-Broke people shouldn’t buy or own homes.
-Never buy an investment property without at least 50% down. Because when the roof needs to be fixed or there’s no tenant for two months – you’ll lose it all.
-First time home buyers need to be debt free and have 20% down to avoid our outrageously expensive mortgage insurance in the first place. It’ll make it a dream home, not a mortgage and debt nightmare.

News from the US

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Late last year we talked about the coming opportunities of buying real estate in the U.S. At that time, it seemed reasonable to be talking the fall of this year.

But you can forget that. The mortgage problems aren’t anywhere near an end and right now the problems are feeding on themselves and making things worse and not better.

There are a ton of foreclosures, averaging around 7,000 A DAY, and that’s bad enough by itself. But what’s happening now is that people who have been paying all the way along are becoming hard-pressed and discouraged.

They’ve seen foreclosures all around them but have been paying on a home that’ worth nowhere near what they owe. Ballpark? $50 to $100,000 or more in the hole. So many of those are now mailing back their keys and giving up. Banks call it jingle-mails as the keys are mailed back to them.

Others, and in growing numbers, are looking down the street at a foreclosure. That house, same street, so probably very similar in size, etc. is now $100,000 or so less than they owe! So many people are now buying that foreclosed home, setting up the mortgage and then sending back the keys to their home. Yes, this buying and bailing as it’s called, wrecks their credit rating, but they’ve first bought another home on the same block.

It’s not right, it’s not moral, but it’s happening in ever increasing numbers while Congress keeps coming up with bailout plans, the vast majority of which are designed to help lenders and not homeowners.

It doesn’t help that mortgage lenders are totally overwhelmed and often don’t even return calls, never mind helping homeowners restructure their loans and the whole process keeps feeding on itself: Foreclosures get dumped on the market at any price, more people are forced to re-finance at higher rates they can’t afford, seeing their home dropping more and more in value as foreclosures surround them, giving up on their payments, which puts even more houses into foreclosure.

Oh, and a recent survey reports that about half of all foreclosures have significant damage such as ruined floors, carpets, holes punched into walls and missing appliances, all of which reduce the home values by about another 25%, according to the survey.

In Miami, the home inventory is about three years, based on normal sales volume – and what on earth is “normal” these days. And even in Arizona, it’s more than a years’ worth of surplus inventory.

So hurry up and wait…maybe next fall if you’re thinking of buying down there.