Significant Foreclosures Predicted
Submitted by
CalculatedRisk on Mon, 10/23/2006 - 9:18pm (56 comments)
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CR, don't we have 120 million homeowners? This would imply 4,8 million foreclosure. Since bankers are always over-optimistic, I would put the real foreclosure rate closer to 10% with 12 million households losing their houses.
kris b, according to the Census Bureau, there are about 125.8 million housing units in the U.S. But approximately 75 million are owner occupied units. The rest are rentals, 2nd homes, for sale, and a few other categories. So I guessed about 80 million units - give or take a few.
A 4% nationwide foreclosure rate would be stunning.
Best Wishes.
I think that's supposed to be 4% of "mortgaged homeowners" -- not 4% of homeowners.
And I remember reading that approximately a third of all owner occupied homes are free and clear of mortgage debt.
Yes ofcourse its 4% of "MORTGAGED homeowners"
The pity is CR has a masochistic pleasure reporting Housing bust and he kinda overlooked it (with a clouded mind)
I am not saying HOUSING is ROSY but ppl like CR make it more jittery for commom ppl.
Atleast Roubini is making variety of news posts and its kinda fun to read.
CR is just HOUSING-GONNA-BUST for three long years
Not sure if he will continue this for a decade.
CR, GET A LIFE !!!!!
they say no real bust in california:
Realty Bites: Housing market's looking positive - Press-Telegram
4% of mortgaged homeowners in the "coming months" is still huge.
You have a great blog, CR.
I pick a realistic assessment by the lending industry over rosy predictions by realtors.
Kris, I've never been called optimistic, but a 10% foreclosure rate strikes me as implausible to say the least. The current nationwide delinquency rate is still under 3%. To get 10% foreclosures in the next year you'd have to assume that the delinquency reporting is completely wrong, or that it will spike by 400% next month. I doubt both of those things.
According to the 2005 American Community Survey, there are 50,462,973
mortgaged owner-occupied housing units. Census doesn't provide information regarding mortgaged non-owner-occupied units, but industry estimates are somewhere between 12% and 24% of residential mortgages made to purchase non-owner-occupied housing in recent years. The non-owner-occupied housing always goes to foreclosure first.
In any case, if Perry means mortgaged owner-occupants, 4% of that would get you 2 million foreclosures. So that's less than CR's back-of-the-envelope number of 3.2 million. However, since 2 million is making my hair stand on end, I agree with a.
A Boston Realtor told me in summer 2005; "I just spent the last two years selling people houses they can't afford."
I guess if I talked to him today, he'd just make that 3 years.
A little testy this morning, too early for this, have some coffee.
However, I'd like to say CR has done this country an honorable public service far better than most legislators, I might add.
Hey Tanta -- can we multiply that 2 million number by the average home price in the US and derive some sort of equity-at-risk assumption? Is there a better way to figure out just what sort of exposure banks and investors will have to foreclosure?
Scary. Use the lowest numbers above - Tanta's 2 million units. Then look again at the Census report of starts and completions CR referenced a couple of posts ago. 2 million is at or slightly above a month's supply of completions - another month's worth of housing completions hitting the market, but this time at fire- er, foreclosure-sale rates. That's on top of the 2 million people teetering on the edge of bankruptcy and its effect everything.
And that's if it's "only" the 2 million Tanta guesstimates. 3.8 million from CR? [shudder]
To answer the question I silently asked myself:
"It's estimated that nearly 20% of those homeowners who were in default earlier in the year, lost their homes to foreclosure in the third quarter. That's a more than a three-fold increase over last year, when the default-to-foreclosure rate was only 6%."
That is some seriously bad news. I now ask myself, how many risk models had, say, a 12% default-to-foreclosure rate as their outside stress limit?
Foreclosures on the Rise
Based on the Third Quarter default rates from MTG and Radian it seems unrealistic that "4% of mortgages will default in the next few months."
However, the authors logic that foreclosures may reach high levels seems reasonable to me.
Sorry I meant to say is it is unrealistic that 4% will be foreclosed in a few months. Default rates could be high.
Paul, if you keep this "apples to apples" by using the same data source, ACS says the median value of mortgaged owner occupied property is $187,100. Times 2 million times a 10% loss to the lender would be some $37 billion. That's a big pile of what dryfly would call "pookie on the floor."
Sorry for the blatant plug for my blog, but I have posted correllating response (too long for here, I felt) on my blog. You can get to it by clicking on my name.
tanta - in my opinion a 10% average severity of loss is optimistic. I would put it closer to 15% or even 20% on the banks heavily exposed to I/O 0% down... and of course the 105% LTV loans.
That aside, I think PMI insurance, and the fact that most loans are bundled/tranches/resold, makes the loans distributed enough to keep lending companies out of bankruptcy.
Tanta,
That caught my eye too. I good possibility for the cause would be that last year, someone in that situation with no chance of catching up on payments could refinance and get back on a teaser rate, or sell the house, maybe even for a small profit. Now both have become more difficult.
This is one of those stats where the snowball effect seems evident. Things are worse because things had gotten worse...
And it illustrates how a period of even slightly declining prices can have big consequences. It amazes me how people can predict that prices will fall 5-7% next year and still conclude there will be a soft landing. It's one or the other.
Basically, huge numbers of people made a highly leveraged bet that prices of a particular asset would increase in price. Just like Amaranth did with natural gas futures, only they weren't as leveraged as most recent home buyers. Granted, most homeowers will hold their assets for years, but those who can't will make things a little worse for the rest.
Leveraged on the way up, leveraged on the way down.
"banks heavily exposed to I/O 0%"
Could be interesting going forward, but up to this point the IO loans are performing much better than non IO.
Bryan, I just use 10% to stay with the assumptions of the "soft landing" crowd.
vicjim's point is well taken. MGIC, which in my view probably has the cleanest book of business of the MIs--and remember, the MIs have all high-LTV loans, that's what they insure--reports the following:
"As of September 30, 2006, the delinquency inventory is 76,301. At September 30, 2006, the percentage of loans that were delinquent, excluding bulk loans, was 3.99 percent, compared with 4.52 percent at December 31, 2005, and 3.95 percent at September 30, 2005. Including bulk loans, the percentage of loans that were delinquent at September 30, 2006 was 5.98 percent, compared to 6.58 percent at December 31, 2005, and 5.95 percent at September 30, 2005."
So if, for entertainment purposes, you took MGIC's total dlq rate of 5.98% on a conservatively-underwritten book of relatively recently-originated high-LTV loans, and then you assumed that 20% of dlq loans would end up in foreclosure in six months, and you applied it to 5% of the current total mortgage outstandings of 10 trillion, you'd get ~30 billion in dlq loans, ~6 billion in foreclosed loans, and ~$600 million in losses if severity = 10%.
If you figure that high LTV "nontraditional" mortgages probably don't perform as well as MGIC's book, you're probably right. If you figure that more than 5% of current mortgage outstandings are "high LTV," I won't argue with you.
For those of you who don't collect mortgage banking baseball cards, IndyMac has been in the subprime business longer than most people have stayed solvent. I also think Perry might be exaggerating, but I bet he knows more about the inside skinny on the high-risk loan business than I do.
If the national rate is 4% the bubble areas will be much more seriously hit. Also I wonder if the derivatives insuring the high risk tranches are factoring in this high a rate. See article on Bloomberg yesteraday about the ABX index spiking already.
Bob, you also want to factor in the folks who used HELOC draws to make mortgage payments with. The default-to-foreclosure rate seems to be tracking the declines in HELOC originations.
To be clear, I wanted to say if the overall rate is 4% the high risk tranches will have default rates much, much higher possibly leading to some interesting times in the derivatives market.
Ellen1910, Tanta, and all: 2 Million makes more sense (4% of mortgaged houses).
I think defaults and foreclosures will be a huge story in '07.
Best to all.
I am "Anonymous" above. I hate Haloscan some days.
A general commment on whether losses of whatever magnitude we can guesstimate are going to "bankrupt" lenders: these losses hit at the same time that revenues from new originations drop, credit support on outstandings gets more expensive, cost to service a loan shoots through the roof (you pay people to handle delinquent and foreclosed loans), whole loan bids deteriorate, low-net worth counterparties can no longer take back rep/warranty violations, and compliance costs increase. You can pass on a lot of credit risk and still find profitability heading south.
Kirk,
I think that 2 million figure for completions is an annual rate, not a monthly figure, somehow 24 million housing units a year strikes me as awfully high. So start shudderring some more. Heck even 1/2 that rate is a social catastrophe. If you assume 3 people on avg per houshold that is the equivelent of the population of Chicago (apx 3mil)losing their homes. For many people homes are much more than just a place to live, they have their hopes, dreams and asperations tied up in them. I Would assume that these people, at least the owner occupied ones that are foreclosed on will have to move to rentals (either that or the Salvation Army Shelter). Apartment REITs would be a good long play on this.
If we add 2 million foreclosed houses to the existing houses -during the next 18 month per say- in the market for sale (I do not know how many houses are for sale now), this would exacerbate the market for the sellers.
I think we are going to have huge glut of houses for sale and tremendous down ward price pressure. Worse has yet to come, may be by end of 2007!
IMHO, some of those mortgages are on 2nd homes and investment properities. That mixure may make things look worst in that it is not occupied homes lost but something else.
OTOH it may make things worst if sloppy underwriting include a lot of that.
I don't think IndyMac is overstating the problem.
First, consider that many mortages not currently in default are being paid under terms that historically speaking, would have them being reported in the default category. Assuming that these folks can continue to pay when loan terms shift is a stretch, since we all know that the bulk of these loans were handed out as an affordability measure.
Second, factor in the increasing interest rates on HELOC's, which in many cases are putting people into default. The wave of those who could refi out of these loans is probably just about over. What remains are the marginal borrowers, and now the day of reckoning is closing fast.
Third, many of the well-paying jobs that were created in the last three years were related to real estate, and many of the buyers had jobs related to real estate. Even long-established contracting firms are facing hard times now. Here in SGa, in a very unbubbly area, I am already getting contractors going door to door to drum up business - just like in late 2000 and 2001. Many of these folks will default on their new homes.
Fourth, it is not just that easy terms drew many first-timers into the market, it is also that homeowners' FOR
is at historically unprecedented levels. Maybe 18.06 doesn't sound too bad, but the distribution is not even. This indicates that millions of households must be up over 40% of their pretax income, which is why, as Tanta points out, people have been paying mortgages from MEW (HELOCS or refis).
When millions of households are paying for their mortgages with new mortgage debt, you have a severe adjustment in the wings. The end to the appreciation cycle is going to produce that adjustment.
Fifth, with the bleedover beginning and the economy clearly slowing, spillover pressures on people with jobs unrelated to RE are going to build.
Sixth, the demographics are an issue. Many of the folks without mortgage debt are in their later years, and as we all know, those in their late 50's and early 60's tend to lose their jobs nowadays. Call it what you want, but how many people are permitted to stay in their jobs until the traditional retirement date of 65 these days? Somewhere around 15%, that's how many.
Unless they have built up a big nest egg, the first wave of the boomers who will be the first wave of the restructurees in this economic downturn will be severely at risk. Companies have sharply cut post-employment medical insurance coverage, and these people will be faced with the double crunch of finding much lower paying jobs and a severe risk of having to get health insurance on their own.
One addition that will create an "extreme" downturn in pricing will be from the overly negative perception in the market as a result of the tremendous increase in foreclosures. Many forget the creation of the overpriced housing market we're in today was significantly impacted by perception. So, the opposite has shown true in the past decreases when the market begins to perceive increased foreclosures, tremendous amount of supply and a decreasing cost, you'll witness a greater sell off and purchase reductions beyond forecasted figures. Perception is amazing and when "people" see a foreclosure rate at 4 times normal, the perception should greatly exacerbate the situation.
While the theater burns, no one is yelling 'FIRE!!'
A few whispers, some nudged elbows, but no one dares scream.
Interesting days ahead, indeed!
70% of where live (Sunnyvale) has been funny paper for a couple of years now. What % of these loands --20, 30, 40%? will go bad when the payments reset?
Another way of looking at is there is nationwide $2T+ resetting next year. 10% of that is $200B in bad loans, a million or so properties. That's the GOOD scenario. Three million looks to be more like it, unless the Fed can finagle lower rates, or the financial industry creates lifesaver products for these people.
(since the industry has a very vested interest in avoiding Crash City I expect something will be done to save these people, unfortunately (for me))
(sorry, I see the story down it's $1T, not $2T for 2007).
4 % foreclosure seems low to me based on non-scientific, anecdotal evidence of those I know at work and socially. Of about 20 people I know here in So Cal who have bought since Fall 2004 to just a few months ago, nearly all are interest only or option ARM and currently at the absolute limits of their financial resources. Many of that 20 have been continously refinancing in order to pay for cars, vacations, education costs, and to pay bills and credit cards they are behind on. Several have told me in the last few weeks that they NEED to re-fi again because the credit cards are out of control. One friend who bought 6 months ago recently told me that he was "shocked" by the size of his property tax bill (why didn't he know what it was going to be?) and didn't have the money to pay it. He asked me if he could just not pay it -- I told him, "not a good idea." When I explained to him what he would face when it came time for his ARM (low teaser rate) to readjust and what he was facing if his property values had fallen too low to re-fi his full purchase price, therefore forcing him to come up with cash to "Pay off" the difference in loans, not to mention the closing costs he cannot pay, he was again shocked -- "the loan broker never explained that!" If his ARM readjusts even 1% he cannot make his mortgage payments, pay electricity, put gas in car, eat, etc.
His job is very economy sensitive, he has no savings, he has no short term likelihood of boosting earnings. He told me, " if that comes to be we'll just walk away from the place, I don't really care."
I know a lot of people who fit or nearly fit, this scenario. I think 4 % could be a very conservative estimate. The slightest downturn in the economy is going to send a lot of people right over the cliff.
Guest,
An acquaintance who is a realtor just southwest of Boston (Foxboro) told me in July that some of his recent buyers were already coming in with their keys and telling him they were moving into an apartment or with the spouse's parents.
He deals in better homes and is not a "bottom feeder".
Th rate might be much higher given the coming significant recession in 2007.
I believe that the total world bond market is roughly 45 Trillion dollars. The 30-50 billion in loan losses due to default on the newly adjusting mortgages seems trivial moneywise.
I agree with Brian, many of these loans are packaged sliced up and distributed, thereby distributing risk across many different banks and even different countries.
The bigger concern in my mind is the housing glut and its impact on US consumer psychology and spending.
You might find the stats on this page useful.
In billions:
In 2002, $8,244.4 in mortgages were outstanding.
In 2005, $11,942.2 in mortgages were outstanding. That is an increase of @ $3,698 billion.
That increase was concentrated in residential ($2,905 on homes, $187 on multi-family).
I would like to respectfully suggest that the debt-servicing capacity of the United States has not increased by that volume since 2002. We could, at a stretch, handle perhaps half of the increase. Therefore approximately 1.5 trillion of debt, plus whatever additional has been racked up in 2006 should be considered at risk.
At risk does not mean that it will default, but one way or another, I suspect that one-third of this money is gone. Some of the unserviceable debt will be absorbed by homebuyers, some will be absorbed by insurers, and some will be insured by mortgageholders. A great deal of the serviceable debt will be paid off as a withdrawal from future earnings of companies or individuals struggling to pay this debt, which will serve to depress our economy for some time to come.
However this bill is coming due. If you will scroll down the page, you will see that the Insurance Information Institute has $244 billion in estimated cashout mortgage refis net of mortgage payoffs estimated for 2005. It is becoming clear that we have scavenged home equity to support this housing inflation and the higher property taxes and insurance that went with it. I cannot believe that this will continue for much longer, and the fact that homeowners have been reported to be increasingly refinancing into higher interest rates in order to withdraw money must mean that our total ability to pay our debt has come to the breaking point.
PS: The American Housing Survey for 2005 H150-05 shows only 5.5% of people living in homes built in the last 4 years, while 7.3% of the population lives in housing built before 1920.
How can we have an increase of home-related debt of this magnitude founded on a relatively small increase in homes? How can we expect to support it?
If I were in the position as many people seem to be with their mortgages readjusting and my payments increasing, I would be looking for a second job. Are there any signs that the part-time job market is getting flooded? Perhaps that could be an indicator of how people are faring.
The delay in the bursting of the housing bubble and the follow on effects has been amazing. I expected the pain train to come into the station 10 - 12 months ago. That said, I think the banks will do everything possible to keep the party going or at least keep it on life support. Just a thought, but could the banks turn home owners into Zombie debtors much like the Japanese banks did to their corporate clients?
At some point, the banks will have to face up and write off loans/dump houses onto the market. So, unlike the last bubble, debt doesn't evaporate like such crappy tech stock that goes to zero.
Hello Mr 12% Default Foreclosure, meet my good friend Mr Bermuda Shorts.
'"A lot of [hedge funds] have sold insurance, are sitting on the premiums--and are bare-ass," says Charles Gradante.'
'$20 billion in protection has been written on just $2 billion in bonds.'
'Suddenly, though, they had to close out their moneylosing positions. So many funds had made the same bet that it "magnified the deleveraging process,"'
A Dangerous Game - Forbes.com
I believe that the total world bond market is roughly 45 Trillion dollars. The 30-50 billion in loan losses due to default on the newly adjusting mortgages seems trivial moneywise.
Ya with inflation a 'billion' isn't even real money anymore. Has to have a 'T' behind it to garner more than a yawn.
while 7.3% of the population lives in housing built before 1920.
I'm one of those - they give refi loans for houses that old & older too.
When the old plaster ceiling came crashing down in our kitchen & forced an immediate remodel at about the same time our daughter headed off to a prestigious & expensive private eastern university to study engineering - we went for a loan and they were MORE than happy to help us. Our circa 1920 home was fine collateral in their eyes.
However we went with a fixed rate one time HELOC and are actively buying it back down now. I'm pretty sure not everyone is doing that.
Jeeze, doc. I read your "Mr. Bermuda Shorts" and "bare-ass," then read the Forbes article, and when I got to "Primus Guaranty" I misread it as "Priapus." (Those of you who were not classically educated will have to Google it; this is a family blog.)
Now I have a mental image of the "deleveraging process" that won't go away. I blame you.
Just a little slightly off topic info.
According to the ACS, about 30 percent of the mortgage carrying homeowners on the Jersey Shore (Monmouth and Ocean counties) have a second mortgage or HELOC.
High or low comparatively?
For what it's worth, just over 1 percent have both (shudder).
What an outstanding and informative thread. Thanks CR and all who contribute here for their superior analytical minds.
Lindsay,
Do you live in Monmouth County? I'm curious as to the chatter there about that local market with BRAC coming--will values plummet if half the town is BRACed? Down by me where the jobs are moving, Baltimore, everyone is so sure BRAC will be the saving grace, but we're already seeing surveys reveal that 2/3 of BRAC relocatees from VA say they won't move. Is the sentiment the same there?
Yes, dryfly. I'd bet that your home is a lot better built than many of the more recent vintages!
My question was directed to the relative increase in housing secured debt compared to the increase in housing stock. It's very disproportionate and very sudden - and it has to be paid back.
Yes, dryfly. I'd bet that your home is a lot better built than many of the more recent vintages!
I don't know about that. To give you an idea:
We put in a woodstove and removed an old window & cut out a section of wall - this was over 20 years ago. The only insulation we found was crumpled up newspapers from WWI. Understand that I live in Minnesota. Brrrrrr.
Also, it isn't uncommon for the ground to freeze 36"-48" down. My foundation is made from fairly large blocks of limestone from a nearby quarry - long closed. Combine freezing-thawing ground & loose block foundation and you have serious shifting and settling. Almost a century worth of it. The house is a witness to all of that - every crack, twist & bend.
But it was a good place to raise kids, cats & dogs. Not like they could do much more to it than nature hadn't done already.
Plus it was cheap. Heck it still is by the standards of everyone reading this blog.
There are alternatives out there to the half million dollar tract home but you have to move to fly over to find them this cheap.
but the big risk is not in the 187K mortgage rather its on the coast and close to it. Calif medium is more in the mid 500K.
I live in Sonoma, the wine country.
The number of folks over their head in debt is beyond belief. A friend owns a small winery, has a 5 Million heloc and just got another for 1.25 million. His business does not cover the debt and the wife is putting 20K a month on American Express. So when they foreclose (it will happen) the numbers are huge. How many in Ca have very large debt and just hanging by the refi? bet enough to make those foreclosure dollars you are discussing look pretty small.
Nikki,
There are very large concerns about BRAC, but no one seems to be panicking yet.
Fort Monmouth has really been a very big engine for the area's economy and even though there are readily available reports on just how significant it has been, I don't think it has sunk in for most people.
For us, the plus side is that there is a lot of very valuable infrastructure there, but unless they can attract some kind of large research facility, it's going to be hard to properly use everything the base has to offer.
dryfly,
We renovated this mid-19th century house in Massachusetts, basically gutting it. Insulation? Not even old newspapers. The windows have no headers. Some of the old beams still had bark on them. The "improvements" done over the years were even more suspect, a door framed into the plaster lathing. People told us we'd almost certainly find hidden money. All we found was a lost quarter from 1871.
People forget that in the old days, there were a lot of poor as $hit farmers who weren't too concerned about building codes...
LOL Bob - people like me in my 'old' Mississippi valley river town forget... that when my house was 'new' places like yours was already old.
An interesting off topic anecdote:
Lots of New Englanders settled out here in the mid to late 1800s... including some of my mother's family. The morons though chose the worst land - as similar to New England as they could find. Rocky sandy full of stumps.
At the same time the Norwegians came here and they got the 'left overs'... flat grassland thought to be too poor to grow crops cause it couldn't even grow trees.
Or so they thought.
Turns out that land is prairie - the topsoil a 150 years after first sod busting is still 6-8 feet thick in many places. Most productive land in the world.
LOL. We are all slaves of our preconceptions & misunderstandings.
Tanta-
This is a family blog? What parent would let their children rot their brains reading this stuff?