If one was to read all of the OC Register article ("Who's at risk from subprime implosion?"), its account actually supports some of the points I've been making.
"Subprime lending does not happen equally throughout the state," said Paul Leonard, California director of the Center for Responsible Lending, a nonprofit advocacy group. "There are concentrations, both at the county level and the neighborhood level..."
"...The analysis also found:
The subprime market share varied widely among counties, from 8 percent in San Francisco to 40 percent in San Bernardino. In Orange County, 21 percent of home-purchase loan volume was subprime.
Subprime commanded most of the market in relatively poor cities such as Compton, Lynwood and Rialto. In wealthy cities like Beverly Hills, Saratoga, Newport Beach and Laguna Beach, subprime accounted for less than 5 percent of the home-purchase market.
Subprime dominated the bottom of the market, accounting for 61 percent of all home-purchase loans under $100,000 and 51 percent of loans under $200,000. Subprime lenders grabbed just 11 percent of the business in the over-$500,000 loan market."
Subprime is a significant problem for a small subset of homeowners (people of modest means with lower-priced housing), with far less significance for the majority of homeowners. It's right there in black and white, pulled from a link that CR himself provided.
It would be nice if someone (hint hint) did an analysis of some of the sources of the mortgage problems we are seeing today.
Homeownership has increased by x% (55% to 68%??). Suppose we assume that half of it is due to financial innovations allowing more people to enter the housing market. Then the other half are going to have to exit the market over a period of time. What is a sustainable home ownership rate in the US in the long term?
The second source is outsourcing of middle-management jobs. There are lot of 40-55 year olds who have exited the labor market and are living on MEWs. I assume these are the folks with some equity in their homes. Can we look at the labor participation rates for this group and estimate how much of the MEW is coming from this group?
If there is any government bailout, these are the two groups that can be helped. The rest, I think, are beyond help.
Thanks for this social impact note CR...the reality. How would you like to be the deputy, people? A long hot summer coming up...that could be manipulated by an administration/media package that does not smell good to me.
Now, if we had a responsible government that did not illustrate that you, too, can get away with just about anything...
The "gated community" is an important detail: this is not about the Poor who are used to losing and getting back up on their feet to work and lose another day. This is about the middle class who aren't anymore and who don't have that experience of losing...ok, and compared to 'material movers', or working.
I wouldn't get my hopes up that this foreclosure tsunami is going to happen in a vacuum. The point of the LA Times article is that this is moving into all neighborhoods. You also have to factor in how this impacts the housing food chain especially in California. The Inland empire is getting wiped out and now that is creeping into the burbs of LA and Orange County. The sales volume of the nice areas of LA/OC is dropping like a knife. The trends look horrible right now.
Subprime shmubprime. If people don't pay their bills before a mortgage, what makes you think they're going to pay after they get a mortgage? It shouldn't be any surprise that non-billpayers are not paying their mortgages. (Why do landlords insist on credit checks before they rent their apts.?)
The more extensive problem is the non-subprimers who wanted a nice home and took out an ARM which is now adjusting, and they simply can't afford it. Or they MEWed and that's resetting and they can't afford it.
It isn't subprime, IMHO, since you didn't ask, that is going to be causing the most trouble. It's basic affordability issues that have driven people into getting ARMs which are resetting, and their hopes of their incomes resetting along with their mortgages just isn't happening. This has set up a vicious cycle: people who had to use ARMs to afford their homes have driven up home prices (through cheaper initial rate loans), which in turn brings more buyers into ARMs to afford the higher prices, which drives up prices even more.
The ARMs were meant for certain situations, not the entire homebuying industry. So - how do we solve this?
To borrow from Warren Buffet, the tide is indeed going out and I think we are going to see that there are many more people swimming naked than even the most jaded would have believed.
This is just going to get uglier and uglier. Even David Lereah, as he heads for the door, is saying the end is nowhere in sight and prices are going to fall this year.
Inventory, already at record highs, seems to be growing like roadside weeds in the last week, at least at the Jersey Shore.Scary.
Outsider - a lot of it can't be fixed. Far too many of these loans were made and accepted because home prices in a particular area had become disproportionate to incomes. The traditional mortgage is still quite prevalent in lower priced areas.
We are in a period with exceptionally low mortgage rates (less than 6.25%) for 30 year fixed prime loans. Looking at demographics, it is probable that many people simply aren't able to pay an amortizing fixed rate mortgage on their home loans. Their plan was basically to keep refinancing to get lower initial terms and rates, and to pay the cost of those refinances out of increased equity on the home.
I can't be sure yet, but it looks to me like things are picking up a bit in markets that are less disproportionate to incomes. The market is clearly degenerating in the inflated areas however. There will be a period of wild swings in the higher-priced areas before the markets settle down again.
"This has set up a vicious cycle: people who had to use ARMs to afford their homes have driven up home prices (through cheaper initial rate loans), which in turn brings more buyers into ARMs to afford the higher prices, which drives up prices even more."
Well that was the cycle, that isn't the cycle right now. The cycle we are in right now are people foreclosing on their loan which tightens credit (i.e subprime meltdown, Alt-A's evaporating, proof of income, etc) which constricts sales which puts downward pressure on home prices which yields more foreclosures, which tightens credit.......
So how should we solve this. Just let the market correct. Let the cards fall where they may. The banks can help some people right on the bubble but lets be honest many if most of these people are going to lose their homes. The longer we delay the correction the longer we have to deal its negative consequences.
Vijay - FDIC did the type of analysis you are looking for. Their hypothesis was that roughly 5% of homeowners would lose their homes, which would return us to the historic pattern (64%).
So far, we've got over 3.5% to go if they are correct. There was speculation that about 10% of buyers were at risk.
If you are interested, I recommend starting here, and then following through with the footnotes and links in the text.
You'll note that this FYI makes the point that homeownership was over 69%, but the long term average was 64%. The boom was due to end when it did because 26% of the population has incomes so low that they are not even remotely able to consider buying. With only 5-6% more potential buyers in the pool (69+26 = 94%), David Lereah's rosy projections had a lot of bankers transfixed with incredulity. Shock and awe hit most of the bankers I know between mid-to-late 2005.
In fact, the boom only lasted as long as it did because of multiple-home buyers. This is a classic running-out-of-buyers market slowdown, and just as classically, it will take a long time to redress.
However, in terms of "owned" units coming on the market, the total number we would expect is higher than 5%, because of the multiple-buyer phenomenon. Even more painful is the fact that in bubbly areas, many of those multiple home buyers were employed in real estate. They were realtors, brokers, etc. Those are the persons most likely to take a severe drop in income from the buyer's slowdown.
Contrary to Sebastian's theory about the containment of subprime, in many of the bubbly areas we are at or above 20% for recent purchases. However, the Alt-A purchases are more likely to deliver the worst losses in those same areas, because those Alt-A's generally have worse payment shocks than the true subprimes, are for larger values, and were given to people who were making excellent incomes at the time. The Alt-A I-O/Option ARM/teaser rate was the vehicle of choice for these buyers.
You want to be extremely careful about claims about "subprime" lending based solely on interpretation of HMDA data. The OC Register ought to know that. It takes a lot of very careful analysis to make any statistically respectable claims based on the HMDA set, and there is always a great deal of controversy about them.
In short, while the HMDA set gives you some data about high-rate loans and borrower income, it doesn't give you any credit-related information. It does not give you LTV, it does not give you FICO, it does not give you DTI. It does not label a loan "prime" or "subprime." And its reporting of high-rate loans starts at a bucket of >3.00% over the comparable treasury. That's classic "Alt-A" territory. But of course, it's tricky, because it's an APR comparison, not a note rate comparison.
Anyone who wants to look at the data can do so at FFIEC.gov. You get pdf, which is a drag, but it's there, by MSA.
The following FAQ from the Fed might help you evaluate the usefulness of this data for the purposes of measuring subprime activity. Do go all the way to question 27 if you want to understand the price reporting issue fully.
David Lereah's article in Realtor magazine from last week. He says 1 in 8 subprime loans are in foreclosure. He warns of irresponsible underwriting in Alt-A and prime. He finishes with a cheery finale that all of this comes during a good economic/interest rate/liquidity phase so things could be okay.
That's the most frightening part of all. This is all happening during the good times...
If in the ritzy markets subprime is 5% and Alt-A is probably 10%; if a fifth of those properties start having issues, it's more than enough to swing property prices down and depress prices for a long time, even in stable neighborhoods.
Correction: Lereah says 1 in 8 ARMs are in foreclosure (a quarter of which are subprime), meaning that 16.6% of ARMs are in foreclosure and ONLY 4% of those are subprime.
That's evidence enough for me that it's not only a subprime problem.
When others were attacking you a while back i was charitable but now i have just decided you are a fool
You quoted this as an example of how you are right:
"In Orange County, 21 percent of home-purchase loan volume was subprime."
Elsewhere and earlier you claimed that subprime was not used much for home purchase! Now you are saying that 20 freeking % in an area like OC supports your argument!
If this problem gets bigger, then watch out. The risk of Watts/Rodney King like rioting is brewing in Cali and other cities.
Emmanuel Goldstein
(warning: sarcasm alert)
Oh, don't worry, just trust the rich folk to help everyone out. They can always be counted on to help out the needy. Wall Street and the bankers are truly the most selfless caring folks around. We can always trust them.
Back to reality:
Something tells me that those gates that the wealthy think will keep them safe in their gated communities won't quite hold when push comes to shove. Hard to hire more police when state tax revenues are declining. And who knows which side new hires will be on, could be like the insurgents in the Iraqi police force. "Don't worry, rich guy, we'll protect your gates."
"Her 29-year-old daughter, a graduate student with an annual income of less than $20,000, qualified for a mortgage of $600,000 with no money down, split into two different loans at 8.75 percent and 12.5 percent interest rates."
It's things like these. Think a bit. Someone that makes $20000 per year borrowed $600 000 and delivered those to someone else to buy the home. Sooner or later these $600 000 get consumed, several times, down the chain.
Someone that makes $20000 produced 30 TIMES the economic impact of her income.
And she won't be producing that impact the next year.
This is the real problem, not wether she'll pay back the $600 000 (she won't), but the fact that she produced a $600 000 impact (plus multipliers) on the economy one year, and won't produce it the next.
(one can say that whoever sold for the $600k bought something else, etc, etc, but somewhere down the chain the $600k get consumed multiple times)
"In fact, the boom only lasted as long as it did because of multiple-home buyers."
Thank you MaxedOutMamma
This is a point that is missed. I don't know the percentages but a very large percentage of Conventional prime loans are in programs that only accept owner occupied and require documentation that would reveal if you had another house in the same area. The solution for investors, whether real investors for income property or pure speculators, was to take an extra hit on your rate or terms and go sub-prime for the moveup.
I know this happens, the firm I just left wrote those loans all the time. You can debate how legal this was (not particularly) but in a rapidly appreciating market an excellent way to get on the gravy train.
So while it is unlikely that a house in a gated community was sub-prime there are scenarios where it could be. One would be a move-up where your existing house has a nice rate that you don't want to give up, yet you still need to convert it to a rental. So you go to your lender and go stated/stated or go to a 2/28 with a nasty reset with the expectation that two years of appreciation will allow you to refinance both.
Now in a lot of these markets if you did this in early 2003 you made a ton of money even after the prepay penalty, if you did it in early 2005 they are probably keeping you away from sharp objects. That is real estate.
The point being is that not all foreclosures result in people losing homes. There is a difference between losing a home and having a real estate investment go south and lose a house as a consequence. Homes/houses, two separate concepts.
"Hard to hire more police when state tax revenues are declining."
It is not hard at all. Do what gated communities have always done, hire private guards. The rich will find a way to protect themselves, after hundreds of years they have gotten pretty good at it.
BTW, the rich (and upper middle class) sure did know how to protect themselves in NYC in the 70s - most got the hell out and depleted the city's tax base.
I am not sure our rich grifters in the banking industry will cause the same situtation after they are done fleecing the poor and unwary, but we'd all be kind of naive not to think that all these bursting dreams won't have any effect on crime and poverty.
As if I wasnt OT enough -- but this is important - I think Tanta and her Ubernerd guides need to be in this entry (maybe there oughta be a Tanta entry):
Sebastian, How's that NEW stock position working out for you? I remember your BUY rcommendations and the near perfect timing, where the stock headed straight down under $3 within a week or so. Nice call.
Now you're assessing RE and how one segment is completely isolated from another - totally ridiculous. Same goes for credit. There a continuum. Any weakness spreads like wildfire.
And, AltA, JUMBO ARMs, OptionARMs anything with a teaser rate is seriously feeble. The entire RE market is on the edge of the reset cliff.
Good Advice: Better put lipstick on it but adjust what little is left of your assets into something that isn't exposed to housing or an overall recession, that's not far off...
Are you the same Sabastion that posted about a month ago about one of his neighbors got foreclosed on and it ended up selling for about 100k less then what appraised values had been running?
Thanks, I was to lazy to go find that post but I think his belief was that his neighbors home going for 100k under appraised value wouldn't effect the value of his home or something like that.
Does anyone else think that borrowers might have been counting expected MEW as income on a no-doc?
................
Why is it that all rich people are bad, evil, thieves... Is it a switch that just clicks when they get their first million... Or is it just bad people that are able to become rich?
Time to take a look at the banking sector, these johnny-come-lately's are beyond comprehension.
""Their actual loan loss provision declined from $209 million in the second quarter to $192 million in the third quarter as loan delinquencies were rising rapidly," Mr. Gast explained."
"Time to take a look at the banking sector, these johnny-come-lately's are beyond comprehension."
The reason has become clear in another filing: the originators are expecting lower delinquency from the new underwriting rules so they are provisioning less.
What nobody seems to be counting on is that the tightening itself will increase delinquency on the debts that can no longer be refinanced.
Perhaps that's another "benefit" of Blackwater moving into San Diego. Lots of weapons-trained private contractors available, tested under fire in Iraq. These people may be correctly gauging a burgeoning new market in SoCal, given the potential civil unrest (not to mention border-proximity issues created by an imploding Mexico).
You know, this weekend thread has once again reiterated all of the key points necessary for anyone to determine that this situation cannot end well.
OTOH, I have yet to hear a solid counter-argument as to why it will not. Simply extending future circumstances has never and will never work -- as witnessed in '29, '99 and '05 (for housing). Even those that argue that "times are the best they've ever been" must acknowledge that there's rarely anywhere to go but down.
Nonetheless, I continue to look for a bull with a better argument than "that bad news isn't bad enough". Sigh.
A 'contained' 2-3% foreclosure rate among well heeled gated community dwellers used to 100% automatic god-given appreciation & easy refi could produce a more pronounced overall macroeconomic effect than say a much higher 5-10% foreclosure rate among working class stiffs used to lay offs & slow wage growth...
Its not the base numbers that are important but rather the effects from those numbers and no one knows what that might be or when it kicks in.
"I can't be sure yet, but it looks to me like things are picking up a bit in markets that are less disproportionate to incomes."
Gee, MoM, is there a market that is less disporportionate to incomes? I guess it depends how loosely you define "less disporportionate".
I think what you may be seeing in market pickup, at least I'm noticing it where I am, is that there have been bubbles of activity from pent-up buyers who have been holding off until they absolutely have to buy something. Just when I think the trend is now picking back up, activity again dies. Right now I'm hearing about more activity, but since prices really haven't declined all that much where I am, affordability issues still remain, and as long as there are still affordability issues, the recovery is not going to take root. My humble opinion, once again.
If I hear the ludicrous rant one more time stating that asset prices must go higher due to the lack of supply...
Assets are overpriced for one reason, excess debt, leverage is experiencing one of the greatest bubble periods in modern history.
These exact same arguments, this time is different, lack of supply, arguments & valuations based on cash flows that never decline, interest rates that never rise, and credit that never gets tight.
It was the year 2000 yesterday and these morons are beginning to spout the same exact garbage.
For those of us who know next to nothing about anything financial, it was raised as a possibility that the demise of the yen carry trade would be the harbinger of ill economic winds.
Could someone explain to me the things that might bring this to an end, since it seems to be in Japan's interest to devalue its currency, and it seems to be in the interest of US financiers to keep the trade going as well.
Congress-instigated 'trade war'?
Thanks to all for an informative and civil discussion today.
giacutter - I'm not sure how much the yen carry directly floats the dollar... but it still has an indirect impact...
Plenty of signs suggest that a fair amount of money is leaving Japan to look for higher yields elsewhere. More and more of those outflows seem to be coming from leveraged investors who borrow yen to buy other currencies look at the excellent analysis by Hali Edison and Chris Walker in the IMFs Asian regional outlook (box 1.4).
But it doesnt seem like much of it going to the US. At least not directly.
Not sure what would 'kill it'... congress sure could but that would be throwing the baby out with the bath water.
A country like the US that imports as much energy as we do and will continue to do so for the foreseeable future can't get around 'globalization'...
But we just need to find a way to make it work better for all of us... where we trade for what we import not borrow for it... so we aren't running up so much debt... and they aren't sitting on such a huge pile of potentially worthless IOUs. That is a mutually unstable arrangement.
The sooner the rebalance occurs the better off we all are.
REBear - the thesis that the rest of the world will decouple from the US economy rests strongly on Japan's strength, because of the size of the US and Japanese economies. Good link.
Outsider, there sure are. Some of the slower-growth areas in 2004 have picked up on their own surge of speculation since, but there are quite a few areas in the country where you can buy a nice house for < $150,000. There are a non-negligible number of places where you can buy a nice house for less than $100,000!
From the April 6, 2006 Dallas Morning News article referring to foreclosures in Dallas area:
"The good news is that unlike the late 1980s slump, home foreclosures haven't been concentrated in particular areas of the city. A study of April's foreclosure postings shows a wide distribution of homes facing forced sale."
So, the same "good news" is being found elsewhere.
Dryfly, I am shocked. I didn't know the midwest had such high scores. And to think it beats out much more affluent areas of the country! Just goes to show - more money does not necessarily mean better education.
I guess Garrison Keiller really was serious... all the children above average...
Outsider - state 'average' standardized test scores can be misleading. It is not uncommon for a state to test very high in one type of test & not the other. The reason is that usually only one type is 'required' so everyone takes it (lower average) while the other is only needed for 'outstate' placements (elite schools) and only elites take it.
So what you want to see is a high average scores and high participation (high percentage taking the test) to know that the overall school system is doing its job...
Generally speaking the Upper Midwest states have both high scores & high participation.
And almost everyone goes to public schools. To be honest - some of the very best schools up here are public, many of the privates are a step down (you got to the privates because they have better sports teams).
The system isn't broken everywhere... it just seems that very few people want to live where it isn't broken.
Then again I'm just now comfortable with the idea of putting my snow shovel & ice scrapers away for the summer... so maybe we aren't so smart.
As you can see by my spelling & grammar - I didn't sky the language part of the standardized tests I took.
Then again I got most of my elementary education in the East & Deep South... so my bad grammar & spelling maybe proves the point that Midwest schools ARE better...
Or maybe it proves I'm a really lazy proof reader...
"Yes, and that's the same Sebasian who told us "the value of my home is up a tidy amount from last year :)"."
Sebastian could easily be right. In the DC area where I'm at, housing values declined for the area overall, but that was driven mainly by a total crash outside the beltway and relatively more marginal areas inside the beltway, one that is ongoing.
But in some parts of DC, prices actually went up in 06. Both the median price and average price in Zip code 22301 (Del Ray neighborhood in Alexandria) increased almost 20% YOY from March 06 to March 07.
Foreclosures in prosperous times.
Foreclosures among the well to do in prosperous times.
And the bulls play on.
If one was to read all of the OC Register article ("Who's at risk from subprime implosion?"), its account actually supports some of the points I've been making.
"Subprime lending does not happen equally throughout the state," said Paul Leonard, California director of the Center for Responsible Lending, a nonprofit advocacy group. "There are concentrations, both at the county level and the neighborhood level..."
"...The analysis also found:
The subprime market share varied widely among counties, from 8 percent in San Francisco to 40 percent in San Bernardino. In Orange County, 21 percent of home-purchase loan volume was subprime.
Subprime commanded most of the market in relatively poor cities such as Compton, Lynwood and Rialto. In wealthy cities like Beverly Hills, Saratoga, Newport Beach and Laguna Beach, subprime accounted for less than 5 percent of the home-purchase market.
Subprime dominated the bottom of the market, accounting for 61 percent of all home-purchase loans under $100,000 and 51 percent of loans under $200,000. Subprime lenders grabbed just 11 percent of the business in the over-$500,000 loan market."
Subprime is a significant problem for a small subset of homeowners (people of modest means with lower-priced housing), with far less significance for the majority of homeowners. It's right there in black and white, pulled from a link that CR himself provided.
Sebastian
It would be nice if someone (hint hint) did an analysis of some of the sources of the mortgage problems we are seeing today.
Homeownership has increased by x% (55% to 68%??). Suppose we assume that half of it is due to financial innovations allowing more people to enter the housing market. Then the other half are going to have to exit the market over a period of time. What is a sustainable home ownership rate in the US in the long term?
The second source is outsourcing of middle-management jobs. There are lot of 40-55 year olds who have exited the labor market and are living on MEWs. I assume these are the folks with some equity in their homes. Can we look at the labor participation rates for this group and estimate how much of the MEW is coming from this group?
If there is any government bailout, these are the two groups that can be helped. The rest, I think, are beyond help.
Vijay
Thanks for this social impact note CR...the reality. How would you like to be the deputy, people? A long hot summer coming up...that could be manipulated by an administration/media package that does not smell good to me.
Now, if we had a responsible government that did not illustrate that you, too, can get away with just about anything...
The "gated community" is an important detail: this is not about the Poor who are used to losing and getting back up on their feet to work and lose another day. This is about the middle class who aren't anymore and who don't have that experience of losing...ok, and compared to 'material movers', or working.
Sebastian,
I wouldn't get my hopes up that this foreclosure tsunami is going to happen in a vacuum. The point of the LA Times article is that this is moving into all neighborhoods. You also have to factor in how this impacts the housing food chain especially in California. The Inland empire is getting wiped out and now that is creeping into the burbs of LA and Orange County. The sales volume of the nice areas of LA/OC is dropping like a knife. The trends look horrible right now.
Subprime shmubprime. If people don't pay their bills before a mortgage, what makes you think they're going to pay after they get a mortgage? It shouldn't be any surprise that non-billpayers are not paying their mortgages. (Why do landlords insist on credit checks before they rent their apts.?)
The more extensive problem is the non-subprimers who wanted a nice home and took out an ARM which is now adjusting, and they simply can't afford it. Or they MEWed and that's resetting and they can't afford it.
It isn't subprime, IMHO, since you didn't ask, that is going to be causing the most trouble. It's basic affordability issues that have driven people into getting ARMs which are resetting, and their hopes of their incomes resetting along with their mortgages just isn't happening. This has set up a vicious cycle: people who had to use ARMs to afford their homes have driven up home prices (through cheaper initial rate loans), which in turn brings more buyers into ARMs to afford the higher prices, which drives up prices even more.
The ARMs were meant for certain situations, not the entire homebuying industry. So - how do we solve this?
To borrow from Warren Buffet, the tide is indeed going out and I think we are going to see that there are many more people swimming naked than even the most jaded would have believed.
This is just going to get uglier and uglier. Even David Lereah, as he heads for the door, is saying the end is nowhere in sight and prices are going to fall this year.
Inventory, already at record highs, seems to be growing like roadside weeds in the last week, at least at the Jersey Shore.Scary.
Outsider - a lot of it can't be fixed. Far too many of these loans were made and accepted because home prices in a particular area had become disproportionate to incomes. The traditional mortgage is still quite prevalent in lower priced areas.
We are in a period with exceptionally low mortgage rates (less than 6.25%) for 30 year fixed prime loans. Looking at demographics, it is probable that many people simply aren't able to pay an amortizing fixed rate mortgage on their home loans. Their plan was basically to keep refinancing to get lower initial terms and rates, and to pay the cost of those refinances out of increased equity on the home.
I can't be sure yet, but it looks to me like things are picking up a bit in markets that are less disproportionate to incomes. The market is clearly degenerating in the inflated areas however. There will be a period of wild swings in the higher-priced areas before the markets settle down again.
The underlying problem is that America and Americans are in debt up to their eyeballs.
Sub-zero savings rates for individuals, exploding balance of payments debt for the country as a whole.
The yen is going to shoot up. That is the end-game. The yen cannot be kept artificially low forever.
When the yen shoots up, the wheels come off.
All this talk of deputies and where subprime loans were made is interesting, but it isn't the underlying reality.
The underlying reality is the crushing debt of the US and the artificial value of the yen (yuan).
It can't last. It didn't last for Argentina, and it won't last for us.
"This has set up a vicious cycle: people who had to use ARMs to afford their homes have driven up home prices (through cheaper initial rate loans), which in turn brings more buyers into ARMs to afford the higher prices, which drives up prices even more."
Well that was the cycle, that isn't the cycle right now. The cycle we are in right now are people foreclosing on their loan which tightens credit (i.e subprime meltdown, Alt-A's evaporating, proof of income, etc) which constricts sales which puts downward pressure on home prices which yields more foreclosures, which tightens credit.......
So how should we solve this. Just let the market correct. Let the cards fall where they may. The banks can help some people right on the bubble but lets be honest many if most of these people are going to lose their homes. The longer we delay the correction the longer we have to deal its negative consequences.
Vijay - FDIC did the type of analysis you are looking for. Their hypothesis was that roughly 5% of homeowners would lose their homes, which would return us to the historic pattern (64%).
So far, we've got over 3.5% to go if they are correct. There was speculation that about 10% of buyers were at risk.
If you are interested, I recommend starting here, and then following through with the footnotes and links in the text.
You'll note that this FYI makes the point that homeownership was over 69%, but the long term average was 64%. The boom was due to end when it did because 26% of the population has incomes so low that they are not even remotely able to consider buying. With only 5-6% more potential buyers in the pool (69+26 = 94%), David Lereah's rosy projections had a lot of bankers transfixed with incredulity. Shock and awe hit most of the bankers I know between mid-to-late 2005.
In fact, the boom only lasted as long as it did because of multiple-home buyers. This is a classic running-out-of-buyers market slowdown, and just as classically, it will take a long time to redress.
However, in terms of "owned" units coming on the market, the total number we would expect is higher than 5%, because of the multiple-buyer phenomenon. Even more painful is the fact that in bubbly areas, many of those multiple home buyers were employed in real estate. They were realtors, brokers, etc. Those are the persons most likely to take a severe drop in income from the buyer's slowdown.
The OCR article didn't state where Alt-A fit in their analysis.
I am guessing that they lumped it into their definition of prime.
OC is the king of alt-a. Jumbos, stated, neg am, IO, exceptionally high DTIs, etc.
Contrary to Sebastian's theory about the containment of subprime, in many of the bubbly areas we are at or above 20% for recent purchases. However, the Alt-A purchases are more likely to deliver the worst losses in those same areas, because those Alt-A's generally have worse payment shocks than the true subprimes, are for larger values, and were given to people who were making excellent incomes at the time. The Alt-A I-O/Option ARM/teaser rate was the vehicle of choice for these buyers.
DL is looking for scapegoats? Link below from Ben's blog.
Topic Galleries -- chicagotribune.com
Seb, what is your opinion on DL and his revised assessment?
And not to forget, this is happening in the best of times...
What happens when things go south.
You want to be extremely careful about claims about "subprime" lending based solely on interpretation of HMDA data. The OC Register ought to know that. It takes a lot of very careful analysis to make any statistically respectable claims based on the HMDA set, and there is always a great deal of controversy about them.
In short, while the HMDA set gives you some data about high-rate loans and borrower income, it doesn't give you any credit-related information. It does not give you LTV, it does not give you FICO, it does not give you DTI. It does not label a loan "prime" or "subprime." And its reporting of high-rate loans starts at a bucket of >3.00% over the comparable treasury. That's classic "Alt-A" territory. But of course, it's tricky, because it's an APR comparison, not a note rate comparison.
Anyone who wants to look at the data can do so at FFIEC.gov. You get pdf, which is a drag, but it's there, by MSA.
The following FAQ from the Fed might help you evaluate the usefulness of this data for the purposes of measuring subprime activity. Do go all the way to question 27 if you want to understand the price reporting issue fully.
http://www.federalreserve.gov/boarddocs/press/bcreg/2006/20060403/attachment.pdf
Front Lines: Economy/David Lereah
David Lereah's article in Realtor magazine from last week. He says 1 in 8 subprime loans are in foreclosure. He warns of irresponsible underwriting in Alt-A and prime. He finishes with a cheery finale that all of this comes during a good economic/interest rate/liquidity phase so things could be okay.
That's the most frightening part of all. This is all happening during the good times...
If this problem gets bigger, then watch out. The risk of Watts/Rodney King like rioting is brewing in Cali and other cities.
If in the ritzy markets subprime is 5% and Alt-A is probably 10%; if a fifth of those properties start having issues, it's more than enough to swing property prices down and depress prices for a long time, even in stable neighborhoods.
Correction: Lereah says 1 in 8 ARMs are in foreclosure (a quarter of which are subprime), meaning that 16.6% of ARMs are in foreclosure and ONLY 4% of those are subprime.
That's evidence enough for me that it's not only a subprime problem.
Tight credit shutting out house hunters
Business Week Online > File Not Found
"Lereah says 1 in 8 ARMs are in foreclosure "
That's when he is working for NAR. Ask him the same question in a couple of weeks.
Sebastian
When others were attacking you a while back i was charitable but now i have just decided you are a fool
You quoted this as an example of how you are right:
"In Orange County, 21 percent of home-purchase loan volume was subprime."
Elsewhere and earlier you claimed that subprime was not used much for home purchase! Now you are saying that 20 freeking % in an area like OC supports your argument!
You just seem after all to be a total wacko!
If this problem gets bigger, then watch out. The risk of Watts/Rodney King like rioting is brewing in Cali and other cities.
Emmanuel Goldstein
(warning: sarcasm alert)
Oh, don't worry, just trust the rich folk to help everyone out. They can always be counted on to help out the needy. Wall Street and the bankers are truly the most selfless caring folks around. We can always trust them.
Back to reality:
Something tells me that those gates that the wealthy think will keep them safe in their gated communities won't quite hold when push comes to shove. Hard to hire more police when state tax revenues are declining. And who knows which side new hires will be on, could be like the insurgents in the Iraqi police force. "Don't worry, rich guy, we'll protect your gates."
Hey, Neil, can you spare some popcorn?
"Her 29-year-old daughter, a graduate student with an annual income of less than $20,000, qualified for a mortgage of $600,000 with no money down, split into two different loans at 8.75 percent and 12.5 percent interest rates."
It's things like these. Think a bit. Someone that makes $20000 per year borrowed $600 000 and delivered those to someone else to buy the home. Sooner or later these $600 000 get consumed, several times, down the chain.
Someone that makes $20000 produced 30 TIMES the economic impact of her income.
And she won't be producing that impact the next year.
This is the real problem, not wether she'll pay back the $600 000 (she won't), but the fact that she produced a $600 000 impact (plus multipliers) on the economy one year, and won't produce it the next.
(one can say that whoever sold for the $600k bought something else, etc, etc, but somewhere down the chain the $600k get consumed multiple times)
read all:
Mortgage Grapevine: Two things the mortgage industry needs to do immediatley to improve the industry.
"In fact, the boom only lasted as long as it did because of multiple-home buyers."
Thank you MaxedOutMamma
This is a point that is missed. I don't know the percentages but a very large percentage of Conventional prime loans are in programs that only accept owner occupied and require documentation that would reveal if you had another house in the same area. The solution for investors, whether real investors for income property or pure speculators, was to take an extra hit on your rate or terms and go sub-prime for the moveup.
I know this happens, the firm I just left wrote those loans all the time. You can debate how legal this was (not particularly) but in a rapidly appreciating market an excellent way to get on the gravy train.
So while it is unlikely that a house in a gated community was sub-prime there are scenarios where it could be. One would be a move-up where your existing house has a nice rate that you don't want to give up, yet you still need to convert it to a rental. So you go to your lender and go stated/stated or go to a 2/28 with a nasty reset with the expectation that two years of appreciation will allow you to refinance both.
Now in a lot of these markets if you did this in early 2003 you made a ton of money even after the prepay penalty, if you did it in early 2005 they are probably keeping you away from sharp objects. That is real estate.
The point being is that not all foreclosures result in people losing homes. There is a difference between losing a home and having a real estate investment go south and lose a house as a consequence. Homes/houses, two separate concepts.
"Hard to hire more police when state tax revenues are declining."
It is not hard at all. Do what gated communities have always done, hire private guards. The rich will find a way to protect themselves, after hundreds of years they have gotten pretty good at it.
Saving the best Lereah quotes for last in the ChiTrib story:
In characteristic cheerleader style he demurred when asked whether he ever felt pressure from within NAR to skew forecasts in a positive direction.
"You'll have to talk to me about that in two or three weeks," Lereah said. "I work for NAR now."
"containment is spreading"
BTW, the rich (and upper middle class) sure did know how to protect themselves in NYC in the 70s - most got the hell out and depleted the city's tax base.
I am not sure our rich grifters in the banking industry will cause the same situtation after they are done fleecing the poor and unwary, but we'd all be kind of naive not to think that all these bursting dreams won't have any effect on crime and poverty.
As if I wasnt OT enough -- but this is important - I think Tanta and her Ubernerd guides need to be in this entry (maybe there oughta be a Tanta entry):
Mortgage-backed security - Wikipedia, the free encyclopedia
Sebastian, How's that NEW stock position working out for you? I remember your BUY rcommendations and the near perfect timing, where the stock headed straight down under $3 within a week or so. Nice call.
Now you're assessing RE and how one segment is completely isolated from another - totally ridiculous. Same goes for credit. There a continuum. Any weakness spreads like wildfire.
And, AltA, JUMBO ARMs, OptionARMs anything with a teaser rate is seriously feeble. The entire RE market is on the edge of the reset cliff.
Good Advice: Better put lipstick on it but adjust what little is left of your assets into something that isn't exposed to housing or an overall recession, that's not far off...
Sebastian
Are you the same Sabastion that posted about a month ago about one of his neighbors got foreclosed on and it ended up selling for about 100k less then what appraised values had been running?
It doesn't really matter if subprime is contained or not.
If people don't pay the millions they borrowed before, the economic impact is negligible (except for the fact that lending standards get tightened).
What is REALLY important, is if people borrow many fewer billions this year and next. That's the thing that has economic impact.
Where did "banker" go ? she/he should read this:
Fast, Loose Credit Scares Even the Buyout Gurus: Mark Gilbert - Bloomberg.com
Kevin,
Yes, and that's the same Sebasian who told us "the value of my home is up a tidy amount from last year :)".
But he's very smart, special kid and a master day trader in bankrupt mortgage companies.
You do know, Bruce Webb, that private security guards are less vetted than law enforcement, don't you?
Yeah, that's the solution.
lama
Thanks, I was to lazy to go find that post but I think his belief was that his neighbors home going for 100k under appraised value wouldn't effect the value of his home or something like that.
Does anyone else think that borrowers might have been counting expected MEW as income on a no-doc?
................
Why is it that all rich people are bad, evil, thieves... Is it a switch that just clicks when they get their first million... Or is it just bad people that are able to become rich?
Never understood that....
Time to take a look at the banking sector, these johnny-come-lately's are beyond comprehension.
""Their actual loan loss provision declined from $209 million in the second quarter to $192 million in the third quarter as loan delinquencies were rising rapidly," Mr. Gast explained."
MarketWatch.com
"Time to take a look at the banking sector, these johnny-come-lately's are beyond comprehension."
The reason has become clear in another filing: the originators are expecting lower delinquency from the new underwriting rules so they are provisioning less.
What nobody seems to be counting on is that the tightening itself will increase delinquency on the debts that can no longer be refinanced.
dotcommunist,
Perhaps that's another "benefit" of Blackwater moving into San Diego. Lots of weapons-trained private contractors available, tested under fire in Iraq. These people may be correctly gauging a burgeoning new market in SoCal, given the potential civil unrest (not to mention border-proximity issues created by an imploding Mexico).
You know, this weekend thread has once again reiterated all of the key points necessary for anyone to determine that this situation cannot end well.
OTOH, I have yet to hear a solid counter-argument as to why it will not. Simply extending future circumstances has never and will never work -- as witnessed in '29, '99 and '05 (for housing). Even those that argue that "times are the best they've ever been" must acknowledge that there's rarely anywhere to go but down.
Nonetheless, I continue to look for a bull with a better argument than "that bad news isn't bad enough". Sigh.
A 'contained' 2-3% foreclosure rate among well heeled gated community dwellers used to 100% automatic god-given appreciation & easy refi could produce a more pronounced overall macroeconomic effect than say a much higher 5-10% foreclosure rate among working class stiffs used to lay offs & slow wage growth...
Its not the base numbers that are important but rather the effects from those numbers and no one knows what that might be or when it kicks in.
Japan's Economy Probably Cooled as Companies Curbed Spending
Japan Economy Probably Cooled as Companies Spent Less (Update1) - Bloomberg.com
"I can't be sure yet, but it looks to me like things are picking up a bit in markets that are less disproportionate to incomes."
Gee, MoM, is there a market that is less disporportionate to incomes? I guess it depends how loosely you define "less disporportionate".
I think what you may be seeing in market pickup, at least I'm noticing it where I am, is that there have been bubbles of activity from pent-up buyers who have been holding off until they absolutely have to buy something. Just when I think the trend is now picking back up, activity again dies. Right now I'm hearing about more activity, but since prices really haven't declined all that much where I am, affordability issues still remain, and as long as there are still affordability issues, the recovery is not going to take root. My humble opinion, once again.
If I hear the ludicrous rant one more time stating that asset prices must go higher due to the lack of supply...
Assets are overpriced for one reason, excess debt, leverage is experiencing one of the greatest bubble periods in modern history.
These exact same arguments, this time is different, lack of supply, arguments & valuations based on cash flows that never decline, interest rates that never rise, and credit that never gets tight.
It was the year 2000 yesterday and these morons are beginning to spout the same exact garbage.
Subprime was nothing, get ready to point fingers.
Does ADP use birth-death model while reporting payroll numbers? or did too many errors cancel each other resulting in ADP numbers matching BLS?
For those of us who know next to nothing about anything financial, it was raised as a possibility that the demise of the yen carry trade would be the harbinger of ill economic winds.
Could someone explain to me the things that might bring this to an end, since it seems to be in Japan's interest to devalue its currency, and it seems to be in the interest of US financiers to keep the trade going as well.
Congress-instigated 'trade war'?
Thanks to all for an informative and civil discussion today.
giacutter - I'm not sure how much the yen carry directly floats the dollar... but it still has an indirect impact...
Plenty of signs suggest that a fair amount of money is leaving Japan to look for higher yields elsewhere. More and more of those outflows seem to be coming from leveraged investors who borrow yen to buy other currencies look at the excellent analysis by Hali Edison and Chris Walker in the IMFs Asian regional outlook (box 1.4).
But it doesnt seem like much of it going to the US. At least not directly.
Setser Apr 23, 2007
Not sure what would 'kill it'... congress sure could but that would be throwing the baby out with the bath water.
A country like the US that imports as much energy as we do and will continue to do so for the foreseeable future can't get around 'globalization'...
But we just need to find a way to make it work better for all of us... where we trade for what we import not borrow for it... so we aren't running up so much debt... and they aren't sitting on such a huge pile of potentially worthless IOUs. That is a mutually unstable arrangement.
The sooner the rebalance occurs the better off we all are.
The trade deficit with Japan isn't as politically sensitive as the one with China.
REBear - the thesis that the rest of the world will decouple from the US economy rests strongly on Japan's strength, because of the size of the US and Japanese economies. Good link.
Outsider, there sure are. Some of the slower-growth areas in 2004 have picked up on their own surge of speculation since, but there are quite a few areas in the country where you can buy a nice house for < $150,000. There are a non-negligible number of places where you can buy a nice house for less than $100,000!
From the April 6, 2006 Dallas Morning News article referring to foreclosures in Dallas area:
"The good news is that unlike the late 1980s slump, home foreclosures haven't been concentrated in particular areas of the city. A study of April's foreclosure postings shows a wide distribution of homes facing forced sale."
So, the same "good news" is being found elsewhere.
That last one was by me.
MOM
Lots of places with sub 100K homes but what about education?
In a couple of years, my last youngun will be out of high school and my range of places to live opens up a lot.
But the cheap places my not be for families.
Friends of mine moved to Ohio for the schools. I think they bought a house for around $60,000. They say the schools are much better than in GA.
Lots of places with sub 100K homes but what about education?.... But the cheap places my not be for families.
They do in the the upper Midwest... check out graduation rates & test scores in places like rural Iowa, Minnesota & the Dakota's... very strong.
ACT Composite Scores by State
Or this
State-by-state rankings
Rank - State - Average SAT Score
1 North Dakota 1,815
2 Iowa 1,806
3 Illinois 1,786
4 South Dakota 1,772
5 Minnesota 1,765
5 Wisconsin 1,765
7 Missouri 1,760
8 Kansas 1,738
9 Nebraska 1,725
10 Tennessee 1,714
And some of the cheapest housing in America are found in those states. Very low unemployment too.
But we are talking some serious boondocks.
Dryfly, I am shocked. I didn't know the midwest had such high scores. And to think it beats out much more affluent areas of the country! Just goes to show - more money does not necessarily mean better education.
I guess Garrison Keiller really was serious... all the children above average...
Outsider - state 'average' standardized test scores can be misleading. It is not uncommon for a state to test very high in one type of test & not the other. The reason is that usually only one type is 'required' so everyone takes it (lower average) while the other is only needed for 'outstate' placements (elite schools) and only elites take it.
So what you want to see is a high average scores and high participation (high percentage taking the test) to know that the overall school system is doing its job...
Generally speaking the Upper Midwest states have both high scores & high participation.
And almost everyone goes to public schools. To be honest - some of the very best schools up here are public, many of the privates are a step down (you got to the privates because they have better sports teams).
The system isn't broken everywhere... it just seems that very few people want to live where it isn't broken.
Then again I'm just now comfortable with the idea of putting my snow shovel & ice scrapers away for the summer... so maybe we aren't so smart.
As you can see by my spelling & grammar - I didn't sky the language part of the standardized tests I took.
Then again I got most of my elementary education in the East & Deep South... so my bad grammar & spelling maybe proves the point that Midwest schools ARE better...
Or maybe it proves I'm a really lazy proof reader...
"Yes, and that's the same Sebasian who told us "the value of my home is up a tidy amount from last year :)"."
Sebastian could easily be right. In the DC area where I'm at, housing values declined for the area overall, but that was driven mainly by a total crash outside the beltway and relatively more marginal areas inside the beltway, one that is ongoing.
But in some parts of DC, prices actually went up in 06. Both the median price and average price in Zip code 22301 (Del Ray neighborhood in Alexandria) increased almost 20% YOY from March 06 to March 07.
dry
I am a product of Southern Education and let me inform you that the problem is ... spell checks that don't have the smarts to do context checking.