Cagan said 1 million people WILL default

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Submitted by powayseller on September 27, 2006 - 2:16pm

"Assuming that home prices stay around current levels and interest rates don't rise sharply, Dr. Cagan figures about one million households eventually will default and lose their homes to foreclosure. That would cause about $110 billion of losses for lenders, he says."

woodrow and Daniel, the personal insults directed at me in the other thread was a joke!

My interpretation of Cagan was correct. Back in March, he expected 1 million defaults. He has since written a paper (see my Sept 12 06 post) where he explained the higher risk taken on without lender knowledge when people take out a HELOC. The borrower's risk to the lender increases without the lender's knowledge. That, and the swell of news coming out about subprime borrowers, has probably led to his statement this week that he expects 1.5 million loans at risk .


Submitted by woodrow on September 27, 2006 - 2:40pm.

Does this warrant a new thread? Why not post it in either of the other 2 threads you've devoted to this issue?

BTW, you're still wrong. No where in the March article you're now citing does Cagan say he "expects" 1.47M defaults, just as he doesn't come to that conclusion in the Sept 12th article.

Finally, "insults" is plural, and thus the corresponding verb should reflect that. It should be "personal insults were a joke", not "personal insults was a joke".

Submitted by sdcellar on September 27, 2006 - 3:04pm.

PS, it's possible that this earlier article makes the same mistake. Take that as a compliment!

To get to the end of this, I tried to track down something that actually came from Cagan's mouth or pen and one of the things I found was an October 28, 2005 paper he wrote. I'd say I put little credibility in what Cagan has to say whether he means "at risk" or "expected".

Are There Foreclosures in Your Future?
In the hot coastal and cyclical areas, foreclosures are now few, and have a small impact on market conditions. Are foreclosures likely to return soon to these markets in large numbers? While there may be local exceptions, on an overall basis the answer is “no” for two reasons.


Therefore, I do not expect foreclosures in significant numbers for years.

If you're interested

I no longer care what Cagan meant.

Submitted by woodrow on September 27, 2006 - 3:09pm.

FYI - Kelly Bennett over at the voiceofsandiego disagrees with you PS.  From her blog in which she singles Cagan's comment:

Nineteen percent of 7.7 million is 1.463 million loans considered "at risk" by Cagan.

Submitted by powayseller on September 27, 2006 - 5:32pm.

I respect Kelly Bennett, I love the Voice of San Diego. They are very good journalists. I'm not sure if she would have interpreted his comments differently, if she had read his other work, as I have. Yes, I did use the wrong verb in insults, and you misspelled "nowhere". So what?

Submitted by FormerSanDiegan on September 27, 2006 - 5:41pm.

People will default. Whether it's 1 million, 500 thousand, 1.47 million or 1.49 million, who cares ? They are going UP.

These are currently opinions anyway, whether they are Cagan's, powaysellers' or Kelley Bennett's. Who cares if one or more of them misinterprets someone elses opinion. Opinions are like a$$hole$. Everybody has one.

Let's watch the actual numbers come in and argue over when they have peaked instead of arguing over semantics on someone's estimate of anothers' opinion.

Submitted by sdcellar on September 27, 2006 - 5:50pm.

According to Cagan (at least on February 14, 2006), it doesn't matter what the numbers are as it won't have much of an effect anyway. Excerpt:

Entitled "Mortgage Payment Reset: The Rumor and the Reality," by Christopher Cagan, Ph.D., director of research and analytics at First American Real Estate Solutions, the study utilizes the extensive database and analytical resources of First American RES and its subsidiary LoanPerformance to classify market segments as relatively safe or vulnerable under the pressure of mortgage payment resets. The most vulnerable will be those who do not have substantial equity in their homes, but hold adjustable rate mortgages (ARMs) with low initial rates, often with interest-only and negative-amortization features.

The study concludes, however, that while individual families and firms that are involved with the riskiest loans may suffer, on a national basis the impact of mortgage payment reset and subsequent default will not significantly impact the economy, as it will result in approximately $110 billion in losses, or less than 1 percent of total U.S. mortgage lending annually.

I disagree. Discuss!

Submitted by powayseller on September 27, 2006 - 6:04pm.

I posted an analysis of Cagan's paper a few months ago, and pointed out his errors. His biggest mistakes are 1) not understanding that the 2-3% of homeowners who sell set the price for the other 97% - 98% who don't, and 2) that lenders track LTV, not CLTV, so 100% financing loans which are 80/20, are captured as having 20% equity (80% LTV, but 100% CLTV). If he would correct those two mistakes, his conclusions would be significantly different!

FormerSanDiegan, you are right on! I don't actually put much credence into Cagan, because he made 2 major errors in an important reseach paper, which ended up misleading many people. Unless you spend hours every day researching this stuff as I do, you wouldn't know it was complete spin. For the record, I predict our MLS inventory will rise above 50,000 in 3 years, and we will have tens of thousands of foreclosures in San Diego. I expect a banking collapse worse than in the 1990's. It's all corroborated in economist John Talbott's book, Sell Now, a must-read for anyone contemplating whether they should own a house (advice: Sell NOW!).

Submitted by sdcellar on September 27, 2006 - 11:00pm.

Now we're getting somewhere. I would agree that it doesn't seem like it will take huge increases in foreclosures to impact resale values.

Why did you choose to "quote" Cagan, especially since you don't put much creedence in what he has to say? It certainly seemed to cost you and others a bit of grief today.

For me, I'm hoping foreclosures don't get too bad because I don't want to see neighborhoods go to hell in a handbasket. Nope, just enough to bring things back to normalcy. I've heard of neighborhoods north of San Diego experiencing multiple foreclosures on a single street (could be hearsay, I don't live there). That can't be good.

Submitted by BikeRider on September 28, 2006 - 10:51am.

I have first hand experience with having a HELOC. How scary it can be and how stupid you feel later. My wife and I were (WERE) living beyond our means. Not by much really. Never to a point where we even thought we were out of control. A few years ago a friend kept telling my wife that we should take out a HELOC. Have it sitting there for emergencies. They had bought their cars with theirs, to write off the interest. Anyway, we did take out one and the rate was really, really low. Like 3% AT THE START. We started using it, little bits at a time. Even paid off some other higher interest fixed rate loans (stupid), and of course the credit cards, thinking that we were saving money and could write off the interest. Ok, so then rates started going up and we had this $30K monster that was growing, staring at use each month. It was really upsetting. For one, I realized that why they heck would we want a HELOC for emergencies? I mean, if you are having trouble, you don't want more debt. We should have been growing our savings for emergencies. Anyway, we buckled down and got the friggin loan paid off. It was tough. I went to close it and the bank says that I would have to pay a penalty unless I waited another year. So I closed it later. The things are a trap. Now we have things paid off and even with that, even with just utilities and incidental stuff, we struggle to save. I know now that we should have been living off one salary all the time. So, in case one salary was lost, we could keep going without much upset. We always paid our bills on time, but it was sometimes a juggling act. If the upcoming ARMs and HELOCs are all resetting, rates rising, people are going to really struggle. I'm sure most families are blindly going along as we did. Not thinking about the what if's. Not planning even six months down the road. They will probably be blindsided. Sorry, I ramble.

Submitted by powayseller on September 28, 2006 - 11:08am.

BikeRider, thanks for your candid admission. Someone told me today that he got a HELOC, but the interest rate is rising so much, that it is making up more of his payment, and he's working diligently to pay it off. People will really struggle when their loans reset, and their HELOC payments rise. You are fortunate you got out of the trap.

Submitted by PerryChase on September 28, 2006 - 12:35pm.

I know some people in bikerider's situation. Actually, they are much worse off than him because at he "saw the light" and got rid of the HELOC.

Getting a HELOC for emergencies?! Yeah, you should save for emergencies.

Submitted by Daniel on September 28, 2006 - 3:15pm.

Powayseller said...

"woodrow and Daniel, the personal insults directed at me in the other thread was a joke!"

Wow, I didn't visit this site for a while, and this thing got totally out of control! I feel ostracized like good docteur here. Well, PS, let's be friends. I regret it if you perceived my little comment as an "insult". And, believe me, regarding fights, I have neither the energy nor the desire to start one with you. I apologize for the incident and will try to keep in mind your sensibilities next time I post. Peace, OK?

Submitted by powayseller on September 28, 2006 - 5:48pm.

Thanks, Daniel, that was very generous and sweet of you.

Submitted by LookoutBelow on September 29, 2006 - 9:23am.

Only time will prove out PowaySeller forecast and predictions. I agree with her.

People have a tendency to be overly optimistic at certain times and this is no different. Its going to be a bloodbath for most of these families finances. 

In 2 years or less, PowaySeller will look like an Oracle.  

Submitted by woodrow on September 29, 2006 - 11:38am.

In 2 years or less, PowaySeller will look like an Oracle.


I certainly hope so.  I enjoy her efforts and agree with most of her predictions re: the local RE market.  I've learned a lot from the discussions she's sparked by posting articles and analysis - so much so that my wife and I have put off buying until late '07/early '08 at the earliest.

But PS will still be wrong w/re: to her interpretation of the terms "at risk" and "expectation" - they are fundamentally different terms and are not to be used interchangedly in economic discussions.



Submitted by powayseller on September 29, 2006 - 3:25pm.

woodrow, I agree with you that "risk" implies a possibility, and not a certainty of occuring. Risk means a chance of it happening. I think Cagan misused the word in the story. So I took it in context: "masses of foreclosures leading to recession" cannot occur if only a "risk" exists of 19% of 7.7 million homes leading to foreclosure. Even if the entire 19% leads to foreclosure, namely 1.5 million, I don't know if that would be enough foreclosures to cause a recession. How could we have "masses of foreclosures leading to recession" if 1.5 million loans only have a slight chance of defaulting? It just doesn't make sense to me, still. Perhaps you can explain that, and then I'm happy to change my mind.

In the meantime, maybe Cagan can clear up for us exactly what he meant? That would settle it once and for all.

Submitted by North County Jim on September 29, 2006 - 3:58pm.

I think Cagan misused the word in the story.

Well that settles it. Cagan's wording was poor.

Someone should write him and let him know how his poor choice of words caused some bad feelings here.

Any volunteers?

Submitted by woodrow on September 29, 2006 - 4:11pm.

I don't think anyone can point to a specific number and say "that many foreclosures will trigger a recession". Our economy is too complex and dynamic for a singular issue to cause a meltdown. Obviously, more foreclosures signal greater economic distress.

My biggest criticism of your title was that instead of using Cagan's exact words you chose a more bearish term instead of accurately quoting Cagan. If you had quoted him accurately, there would be no criticism.

Now you are suggesting that Cagan misused the word in the story. Perhaps he did - we'll likely never know. But what is more probable - that Cagan misused the word, or that you misinterpreted his quote in your haste to post another bearish article? Again, I'm on your side, and believe the market is in the process of tanking, but I'm inclined to believe that the author of the quote actually meant what he said in his quote, and not your interpretation of what you thought he meant to say. I think we're overanalyzing the issue when we question what Cagan "meant"; why not just assume that he's rationale and meant what he said? His quote is scary enough without turning it into a doomsday guarantee, which was my point the entire time.

Submitted by PerryChase on March 28, 2007 - 10:25am.

For a little perspective, here's an article on CNN.
What seemed a big number back then is taken for granted today.

Subprime losses lead to drop in home ownership
Despite the mortgage industry's claims to the contrary, an advocacy group says that subprime foreclosures will leave 1 million fewer homeowners.

By Les Christie, staff writer
March 27 2007: 4:28 PM EDT

NEW YORK ( -- About 2.4 million holders of subprime mortgage loans made between 1998 and 2006 will lose their properties to foreclosure, according to a report from the Center for Responsible Lending, a non-profit policy and advocacy organization for home owners.

Worse, that will result in a net home ownership loss of one million households.

Submitted by deadzone on March 28, 2007 - 11:34am.

Great, so one million homeowners who never should have been homeowners in the first place will no longer be homeowners.

The beauty of all this, when the dust finally settles in a few years, is that those of us with professional incomes that didn't buy real estate during the boom will move up at least one rung on the class ladder.

Submitted by anxvariety on March 28, 2007 - 12:05pm.

deadzone, if you really did short LEND and NEW - you are probably a few rung up already!

Submitted by deadzone on March 28, 2007 - 12:53pm.

Not quite, the NEW shorts helped a little. To make the full jump up the social ladder, I am counting on a lot of people to become poorer at the same time that I get wealthier.

Submitted by powayseller on March 31, 2007 - 8:41pm.

According to Credit Suisse, "on a trailing 6 month basis, roughly 700,000 homes have entered foreclosure based on Realty Trac's data". Some of them may be cured, but the foreclosure rate for the US is 1%! The top 10 foreclosure rates range from 1.4% to 2.7%, and do not even include CA.

I realize why Cagan is so optimistic, after a recent conversation with him. He assumes that prime borrowers have loans at 30% DTI, and did not take on teaser rates; thus their resets will be relatively minor and their low DTI will allow them to take on an increase in payments. I asked him where he got the 30% DTI for primes, since CTLV is not reported, and 70% of all loans in the last few years were not fully documented, and he could not cite any reason. So I now think that Cagan is not reliable in his analysis. The better analysis is by Credit Suisse's homebuilding team, led by Ivy Zelman.

Submitted by patientlywaiting on March 6, 2008 - 2:59pm.

I searched for foreclosure and I ran into a gem from the past.

I think that we can all agree that the more pessimistic predictions have come to pass and have been surpassed by a big margin.

There was one poster who said he will delay his purchase until 2007/2008. I wonder if he did pull the trigger.

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