When the Music Stops, Who Loses a Seat?

Let's face it, folks: the good times won't last forever in mortgages and housing. Right? Of course, predicting an end to the current housing and mortgage boom is like predicting sea currents - which means just when you think you understand everything you realize you don't.

New research from Friedman Billings Ramsey & Co. tells us that 42 U.S. cities (a k a urban areas or UAs) are facing a housing bubble, up from 27 the last time FBR sharpened its pencil.

Why do these cities (nine of the top 10 bubbles are in California) look like bubbles? Because incomes are way too low when you look at the crazy prices being paid for housing there. So, how then are consumers affording these sky-high-priced homes? Answer: interest-only ARMs and payment-option ARMs.

This column isn't about beating up on IOs and PO ARMs. My feeling is this: if a lender wants to fund the loan and the consumer qualifies, then so be it. The general media have lost their minds if they think these loans are the "Great Satan" of housing finance.

But let's get back to our first question, which has to do with the long-running party that's been going on in housing and mortgages. Yes, things are great. Loan production hit a record $3.9 trillion in 2003 and last year was darn good at $2.9 trillion with another $2.9 trillion expected this year.

Yes, overall industry volumes are down but profit margins have been healthy. Then again, profit margins in the nonconforming niche have been slipping the past six months and some folks are getting squeezed which leads us to ask who in the industry is going to jump ship first.

Usually, the big boys (the top 20 funders) manage through the morass and experienced loan brokers (not the "newbies") always seem to find new ways to make money. That means the midsized firms will get squeezed and head for the exits.