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Even affluent, good-credit-risk Palo Altans are feeling spinoff effects of the national and international collapse of the subprime mortgage market.
Local experts said Friday that even the financially fortunate are not immune and that the subprime collapse may even affect the venture-capital market and hence start-up businesses.
“Even if you have great credit and make a lot of money, it’s becoming more difficult to qualify for a loan,” Chris Iverson, an agent with Keller Williams Realty in Palo Alto, said.
During the earlier real estate boom, the numbers of investors with poor credit financing mortgages with subprime loans, whose interest rates can skyrocket after a year or two, increased dramatically.
As the housing boom decelerated, many defaulted on now-high subprime payments, leaving the American subprime market damaged and European investors shaken.
On Thursday, France’s largest bank stopped removal from funds exposed to the U.S. subprime market, while banks throughout Europe pumped money into their systems to prevent crisis.
And while the woes of typically poor-credit investors and Continental banking houses may seem far removed from Palo Alto, Iverson and others say the subprime crisis is having a clear impact.
“Some loans are going to be harder to get,” Iverson said.
For example, residents with variable income, such as those who earn from market investments, salespeople who get paid on commission or consultants, typically opt for stated-income loans.
“Stated-income loans allow earners without a W2 tax form to simply say, ‘This is how much money I make,’ without going through a long, complex documentation process,” Iverson said.
Since documentation of variable income is tricky and time-consuming, consultants and investors in Palo Alto have been drawn to such stated-income loans.
But the shattered subprime market has made lenders more cautious, Iverson said.
“People who have really good credit and really high cash flow — your typical Palo Alto buyer — are encountering more stringent requirements. Lenders are saying, ‘I want to see stuff backing up what you’re telling me,'” he said.
But the increasing reluctance of brokers to offer stated-income loans affects not just the affluent.
“If you do away with stated-income loans, you jeopardize an entire industry of people that are maybe getting paid in cash,” said Julia Wei, a real estate and mortgage lawyer at the Law Offices of Peter N. Brewer in Palo Alto.
Cash earners in Palo Alto include waiters and waitresses, day laborers, migrant workers or any other undocumented workforce.
Wei also speculated that subprime troubles abroad could affect the local start-up venture-capital economy.
“We have a lot of venture funding here on Sand Hill Road,” she said. “We don’t really know where partners [backing the venture capital funds] have holdings, but I can’t imagine it’s entirely local. And if there are international investors feeling the squeeze because generally the economy is affected by the subprime news, they might pull out funds,” Wei said.
If investors pull funds out of venture capital, the start-up companies that rely on venture funding may falter. This could have a short-term negative impact on Palo Alto’s economy, which is intricately linked to local start-ups, Wei suggested.
“We all know someone who works for a start-up.”
And although the national default-and-foreclosure trend is less prevalent in communities with fewer subprime loans, Palo Alto is experiencing more foreclosures, Iverson said.
He cautioned against drawing dire conclusions from the rising numbers, however.
“Percentage-wise, you could say, ‘Oh, foreclosures have gone up 200 percent,’ but that’s an increase from a very small number to a slightly larger one,” he said.
Wei also pointed out that the rising number of local foreclosures and more common short sells, which indicate cash-flow problems, are part of a larger market cycle.
“We didn’t get those calls for the last seven or eight years. … I had the novel experience of dealing with a paralegal who didn’t even know what a short sell was,” she said.
“But as far as these problems [of short sells and foreclosure] we’ve seen them a decade ago. And also in the savings and loan crisis of the early ’80s and late ’90s.”
Why does the Weekly ask a residential real estate lawyer about the state of the venture capital market? Is it that hard to find someone who might actually know something about the venture capital market in Palo Alto?
Also, how many day laborers are buying in Palo Alto? Who cares about cash earners not being able to buy – they weren’t buying here before.
Please stick to covering the city counsel and the school board and don’t make a meager effort to put a local spin on a national news story – this story is weak on so many levels.
PA isn’t immune to the funny money lending standards that have been floating around the last 5 years, so I think the article is pretty relevant. Most of the loans in the bay area were low doc, no doc, arm, jumbo types. These are the loans being affected by the credit issues surfacing today.
Palo Alto is not immune to what is going on globally. As San Jose tanks big time, it is not like people are going to pay 4 times SJ prices for the privilege of living in the one-and-only Palo Alto. Palo Alto prices will keep their historic relationship to prices in places around here. Remember it always starts at the periphery and moves to the center.
I also get the distinct feeling Google in 2007 is much like Yahoo in 2000. People are projecting cycle peak advertising forward.
Mortgage fraud has been rampant in all of CA and even here. Look at New Century. They made up incomes so people could get a loan and they could get a fat commission. It will be good if recession hits CA and people loose 50% of the value of their home and millions loose their home. This is what we have earned.
But hey. We can import more illeagals and drug pushers to bail us out.
You complain that many affluent “cash earners” are having trouble securing financing, and you list illegal day laborers as a primary example of this? What a joke. Tell me what legitimate buyers cannot produce the last few years worth of tax returns documenting their income. At most this would preclude drug dealers and money launderers from obtaining mortgages, and really any of them worth their salt should be able to afford to pay cash anyway, so this is a moot point.
It shows that what happens to one miles away may affect others thought to be immune and living in a cocoon.
Ok, I find this article horribly naive.
We have been part of 4 start-ups and several severe economic down turns AND upturns over the last 25 years..we have bought or been part of buying and selling 10 homes and 2 industrial buildings,..not once during these downturns or during the start-ups w/o income could we ever have expected to get any kind of loan, let alone a home loan, and didn’t even try.
To imply that those living on “cash income” or in start-ups who can’t provide some kind of proof of stable income are now unable to get home loans, as if this is new, is at the best disingenuous.
Lending loosened up for awhile, and many people got into homes who would not have otherwise been able to do so. Some people were foolish and took on loans they couldn’t pay when they ballooned. Those people are back to where they were, without their own home.
The market is simply adjusting back to where it was, but now millions more people who wouldn’t have been doing so are earning equity in homes they are paying mortgages on … instead of throwing money down the toilet in rent.
Panic in financial markets is only stirred up by this kind of writing..and it is typical of Europe, base of the “central planning” thinking in western world, to feel edgy about free market adjustments and react.
Take a deep breath everyone.
These may be “free market adjustments”, but the gross mis-allotment of capital in the first place was a result of government manipulation of interest rates and the money supply. Now we’ll pay for this intervention, and we won’t get back to where we were without additional cost.
Thanks for the comments everyone. Here is an article from yesterday’s New York Times about the subprime crisis’ effect on so-called “jumbo loans” typically taken out by the wealthy:
http://www.nytimes.com/2007/08/12/business/12mortgage.html?_r=1&adxnnl=1&oref=slogin&adxnnlx=1187028639-hgzjj1/2WF7FBsL7+giYlA
I didn’t know all Palo Altans were affluent.
15% of Palo oAltrans live on less than 40k per year.
Also, central banks (even the Indonesian Central Bank!) have kicked in more than $300 BILLION within the last 5 days, to keep everything stable. This situation is far worse than the S&L crsis in the late 80’s, but we will probably survive.
What’s maddening is that paper manipulators in hedge funds, and the “gifted” analysts on Wall Street are still driving their Carrera 4’s and living the high life on the backs of the rest of the world.
We need some SERIOUS enforcement and PUNISHMENT for those who perpetrate these long term investment frauds for short term gain.
Say goodbye to the “American Dream” (read Pew study results that only 36% ofo Americans buy into that anymore, anyway)
Keynes – the problem wasn’t the hedge fund managers, it was the mortgage brokers and realtors who helped people who make 40k a year buy houses. Home ownership has reached 70% of the US, way above the normal trend of 65%. It will fall back to trend and the people who shouldn’t have become homeowners will become renters again.
If you don’t like seeing people driving Carrera 4s, I suggest you move to a workers paradise like Cuba. You will not have to see the horrors of income inequality there.
Citizen, it’s the hedge fund hogs who bundled paper for hundreds of international and domestic financial institutiions. These people are mostly without value in their paper manipulations of leverage cash.
btw, I love Porches, and I like money; I just hate to see those who leverage their wealth on the backs of the poor participating in the good life.
Who enables the realtors and mortgage brokers, Citizen? Think about it…
if there’s still any doubt…
http://www.marketwatch.com/news/story/economist-world-one-hedge-fund-collapse/story.aspx?guid=%7BC9E3B6A4-A22E-43D2-BA2A-EC4A8F61D2E4%7D
I’d love to see some special investigations into this mess, and further see some hedge fund and other leveraged paper execs do SERIOUS JAIL TIME.
Keynes – were you abused by a hedge fund as a child? exactly what is the crime you think was committed by hedge funds in the link you attached?
Crimes were committed, but they were by the realtors and mortgage brokers who facilitated fraudlent mortgage applications.
When a hedge fund leverages up and invests in risky paper that defaults, the hedge fund investors lose and the hedge fund fails. This is called risk taking and it isn’t criminal.
Citizen, Hedge funds are clubby arraangements for wealthy investors that want an opportunity to cash in, in ways that the non-wealthy can’t.
That’s OK as far as it goes. Nobody said everyone should be rich (at least I haven’t). Yet hedge funds are permitted to stretch the rules of the game – in some ways even *make* the rules of the game, as they seek out ever more exotic and fulffy opportunities to line the pockets of their investors.
They are essentially funds without a soul, blindly looking for profit at any cost. Realtors and mortgage brokers were *enabled* by the knowledge that someone was going to buy up and leverage risky paper.
Without the excess greed of financiers, hedge funds, and some banks, there would have been no subprime crisis. With proper fiscal oversight, there would have been no subprime crisis.
Almost ANYONE with a grain of common fiduciary sense saw this coming, yet the so-called “sophisticated” financiers and hedge managers continued to run after more profit, no matter how many small investors would lose everything.
The hedgies and banks got just what they deserved – they are failing, and sadly all their tony central bank friends (who they often helped put in place) are bailing them out. It’s sick.
More than $300 BILLION pumped in to save the international banking system, in less than a week, with the progenitors of this mess still riding in their chaffeured limos.
LOTS of people are suffering that shouldn’t have had to. Someone needs to go to jail, and I, for one, will be happy to bolt the first lock.
Hedge funds provide a valuable service in reducing inequities in the financial markets. There’s nothing inherently illegal or immoral in this.
The real culprit is the Fed. Their subjective manipulation of the interest rates and money supply disturb the workings of a free market.
Wray, please explain what a free market is, and how it works. Then, we can have a discussion based on your assumptions.
Here’s my assumption: there is no such thing as a free market, as produced in theory. Ideal – or free – markets are an academic fantasy.
Now, let’s hear what you have to say.
Keynes, define “free” in your above statement and then, maybe, we can have a discussion based on your assumptions.
A free market operates by voluntary trade in the absence of physical coercion.
The SEC physically prevents (by threat of fines or jail) small investors from directly investing in hedge funds. That’s an example of an unfree market.
Keynes – you still haven’t pointed out a crime. Greed isn’t a crime and its legal to ride in a limo.
I don’t see that Keynes has used the word “crime.” Others have. We’re talking about financial instruments and manipulative investment strategies that are mostly too new to be covered by traditional financial rules/regulations/penalties. It’s not obvious that anything illegal has occurred, although ethical lapses abound.
Yes, the Fed should have taken the initiative long ago, but the Fed wouldn’t. Why should it? It’s a private entity that serves primarily to facilitate an increase of wealth for a small elite group. The handmaidens, aka hedge fund managers, get their cut, but most of us are left out in the cold as collateral damage.
Will the financial system crash? Will the Fed monetize the debt? Will you have to load your Lexus up with cash before you go to the grocery? Interesting times these are.
Agree – Keynes wants people to go to jail, yet he isn’t pointing out any crimes. Apparently he thinks its fine to put people in jail if they are rich from investing.
Well, as completely predictable, now the media is decrying the fact that poor/minorities are worried that they won’t be able to get loans for homes now that everything is tightening up again.
Too bad the hysteria is going to hurt the very people that were helped the most by the sub-prime mortgages – the poor/minorities. We are back to this group having less opportunity to own their own home.
The 85% of the sub-prime mortgages that have remained successfully in the hands of the poor/minorities did a good thing. Too bad the 15% who bit off more than they could chew are ruining it for the rest.
Minorities – excellent point. Everyone (except the Wall Street Journal) has focused on the 15-30% of subprime borrowers who will default and not on the 70-85% who have now become homeowners and would not have had the chance without expanded access to credit.
Citizen, yuo may not thyink that most of the greedy bastards that caused the S&L crisis back in the 80’s were not criminals. The only one of them to see jail time was Keating.
There are lots of “legal” things in the world that are absent nurturing value. Someday those things may be illegal. I hope they will be.
Is it right to promise poor people a “home of their own”, knowing that the downside risk is going to be FAR bettter managed by those who leverage mortgage paper, than the homeowners themselves.
Is it better to contribute to a financial crisis that was easily predictable, based on the number of sibprime mortgages issued (and issued only because investors knew their was a place they could leverage bad risk paper)?
We’re arguing personal value. There is no “I’m more right than you, here”. That said, I’m comfortable with my position.
As financial liquidity becomes more transparent (and it WILL, because communications technologies are enabling even the poor), the scum that leverage the sweat-of-thier-brow savings of othe poor into personal financial wealth will become less and less able to create advantageous delays in the financial markets that bring them just enough advantage to profit, before things collapse (only to be propped up by friendly central banks, like the Fed)…
If you think 15-30% of subprime borrowers who will lose almost everything is acceptable, so be it.
Frankly, I think that’s bankrupt morality, but that’s just me.
Might I suggest a read of John Donne…
a n other, I define a free market (as I understand the assumptions of those who claim markets are free) as a market that is free to operate on the necessary homeostatic need to balance supply and demand.
I’m waiting for substantive responses, instead of parrying.
There was a thread on Sowell back a ways, and some pretty weak non-arguments went up in support of him (Sowell). I think this is going to bemore of the same.
Homeostatic?? Is that some postmodern Marxist jargon?
Markets are dynamic.
Homeostasis can only be achieved in a dynamic setting. From the wikipedia definition of homeostasis (http://en.wikipedia.org/wiki/Homeostasis)
“Multiple dynamic equilibrium adjustments, controlled by interrelated regulation mechanisms, make homeostasis possible.”
Although it is not a term that most of us would associate with a free market, it actually encapsulates the key defining attributes pretty well.
You got me. I thought it pertained more to a boil on the backside.
Keynes –
If 15 to 30% of subprime borrowers lose home that they didn’t make any substantial down payment on, they really aren’t losing anything – they will go from “homeowners” with no equity to renters – basically the same thing. And if 70% to 85% actually manage to build up some equity and a nest egg, mazel tov.
This isn’t the 1980s – we aren’t taking about risky investments being made with government insured deposits.
Heedge fund managers weren’t making promises of homeownership to the poor – realtors and mortgage brokers were doing this. Why are you so quick to blame hedge funds that were far removed from the actual mortgage origination yet you don’t assign any blame to those who pushed people into subprime loans without mentioning the prepayment penalities and interest rate resets? Just because the hedge fund managers are rich and the mortgage brokers are middle class doesn’t mean that the hedge fund managers are the criminals.
Citizen: “This isn’t the 1980s – we aren’t taking about risky investments being made with government insured deposits.”
You can’t be serious. What do yuo call the inflationary effect of $300BILLION + pumped into the financial markets to prevent a full blown run on international banks. What has THAT dome to the inherent value of currency, worldwide.
Real people – people on the margin – are now LESS well off than they were. Their credit is now kaput; many had some meager savings in subprime mortgages.
Did I say that the realtors and mortgage brokers were innocent? They’re as guilty as the rest of them.
Pushing a subprime onto a poor credit rsik, or someone with marginal ability to pay is a pathetic example of untrammeled insensitivity and greed.
Again, it’s a moral argument. There’s no final “right” answer. Here again we have those with ultimate advantage using financial instruments to enable worthless investments, fuel rediculous housing cost increases, etc. etc.
Like I said, go read Donne…
This is about minorities? This is about hedge funds?
This IS about another Iraq war – another thing America inflicted on the world.
The Fed kept interest criminally low for so long. People wanted and sometimes (pension funds) needed YIELD. Hedge funds gave them that. Banks had offloaded their risk onto hedge funds which again offloaded risk, “repackaging” loans and selling them in tranches (want to complain about the riskiest tranches going to the least sophisticated investors?).
Yield-seekers all over the world bought these things. Some of them, like the people with mortgages, wanted a better life.
Some of us knew we had a choice with the Fed setting such low rates. Go for yield and accept the risk. Don’t go for yield and be stolen from year after year – taxed on the interest when in real terms you were losing money.
I don’t feel sorry for anyone – but I hope we don’t run out of safety deposit boxes.
The mortgage brokers weren’t out to help minorities and the poor.
They were out to take advantage of them for their own profit, without concern for the consequences.
Bottom line: the mortgage markets, and almost ALL paper markets are rigged in favor of those closest to real-time, inside information. By the time it hits the wire, or WSJ, it’s too late.
America is haeding toward the European trend of 90% NON-home ownership. That’s not so bad.
There was a time when owning one’s own home was a worthwhile goal. What happened? The financial wizards who manufacture paper schemes faster than Mario Androtti ever drove a Ferrari understand that impulse, and have played with it for years.
People don’t own their homes, banks and financial funds do.
Keynes,
This is amusing to me.
When I bought my first house in PA, in the mid 1970s I had no money, just a job at $700/month. It was a real shack, but I was handy, so I figured I could fix it up, which I slowly accomplished. At a bar-b-que party one night, I met someone who sounded EXACTLY like you! Same rap about the banks and manipulators, etc. It is NOT a new concept.
Let me cut to the chase…this same guy bought a house about 15 years later. I had lost track of him. One day he knocks on my door. He said he wanted to admit that he was wrong. He was from Europe, he said, and he was “imbued with the socialist concept” . He said that this misconception cost him dearly, because he should have bought when I did. I invited him in for a martini, and we had a very enjoyable afternoon. He has now built significant equity (he was a fixer-upper, too).
This basic story will continue to happen, if one wants to put in the work. It is not all up…I have weathered two major downturns. On balance, though, I am WAY ahead of my peers that thought owning a home was a fool’s paradise.
May I ask: Do you own a home?
Until recently the leftists were castigating the greedy mortgage lenders for being too discriminating by not lending to the “poor minorities”; now they claim the greedy lenders have not been discriminating enough. This shows their Marxist ideology is just name-calling and makes no sense.
Wow, R Wray, those are quite a few leaps to make in one post! Political ideology has very little (if anything) to do with the current predicament. Your own perspectives on economics may affect your view of the current predicament, but if anything, I would call Keynes’ perspectives conservative. They certainly aren’t [dare I type the word?] liberal.
Go back and read Keynes’ post about the 300 billion, and then hop over to a few websites — bloomberg is a good general starting point – and begin to educate yourself. Whether you call yourself a member of the Republican, Democrat, Libertarian, Peace and Freedom, or Guns and Roses party, if you’re not mildly terrified when you finish reading, you’ve forgotten how to think.
no freight train,
I suggest you read John Maynard Keynes, The General Theory of Employment, Interest, and Money. You will find what has been written, “he adopts a style of language which sounds hardly distinguishable from Marxism”. Nothing our poster using the moniker, “Keynes”, has written separates him from his namesake.
You’re wrong about ideology not being important; it fundamentally drives everything.
Wray, your post illustrates your ignorance of the theories espoused by the heavy hitters of economics. The illogical jumps that leads you to equate Keynes with Marx (Keynes was decidedly anti-Marx; if their birth order had been reversed, Marx would probably have been anti-Keynes) do not bespeak an understanding of economics. To conclude from this historical hodge podge that Keynes, the poster, is a Marxist is truly absurd.
But…all this is irrelevant. What is relevant is to look at what’s happening around you and to realize that, unfortunately, it’s not about ideology. It’s about money, both real money and surreal (created by various financial and quasi-financial organizations) money. It’s about the very real possibility of another catastrophe on the order of 1929, this time with far greater global reverberations.
Maybe, somehow, in some unforeseeable manner, disaster will be averted. But meanwhile, I am stunned at the number of Palo Altans who choose to remain ignorant.
Sure there are differences between Keynes and Marx. As far as I know Marx didn’t hold that “pyramid-building, earthquakes, and even wars may serve to increase wealth” as Keynes did. But on a fundamental level both were statists and anti-capitalists. Both would have the government manipulating the economy–which got us into the problems we now have.