Foreclosures Climbing the Economic Ladder

Submitted by Rich Toscano on May 23, 2008 - 6:11pm

I recently wrote that San Diego's more upscale housing sub-markets aren't out of the woods just yet. One of my arguments concerned the behavior of the region's more creditworthy borrowers: it's not that they stayed away from risky loans during the boom, just that the types of loans they tended to get took longer to reset than the subprime loans that are currently blowing up all over the county's less expensive neighborhoods.

For a visual I point you to the mortgage reset chart hosted on the always-informative Calculated Risk economics blog. While I suspect that San Diego was a little ahead of the nationwide figures represented on the chart, the fact remains that the types of risky loans often taken out by the well-heeled have barely begun to reset. (This March article offers a more in-depth treatment of the afore-linked chart and the topic of Option ARMs, mortgages that can cause particular trouble upon recast given their negative-amortization payment schemes).

Now a bit of evidence for higher-end mortgage distress is starting to trickle in.

read more at voiceofsandiego.org

(category: )

Submitted by SD Realtor on May 24, 2008 - 11:11am.

It is starting to trickle in... Way back I had actually taken the time to search all sales in like 4S for I think it was 2006 verses 2007 and I did various string searches in the comments for short, reo, bank, etc... The 2007 levels were well above 2006 and I believe 2008 will be above 2007. The same is/will happen to CV and other more desireable areas over the next 3 years. Unfortunately it is not happening as fast as I like but there can be no denying that it will not happen.

SD Realtor

Submitted by 34f3f3f on May 24, 2008 - 11:46am.

That is a very clear and concise chart, and I was wondering when the distant rumble of Option Arms was going to be heard roaring into town. Is it safe to assume that the chart is representative of the proportion of all mortgages? Or is it just resets? I wonder what the percentage of foreclosures will be, and to what extent banks re-packaged these mortgages. Are we in for a second serving of chaos in the markets?

Submitted by BKlawyer on May 24, 2008 - 8:50pm.

I can tell you that it IS HAPPENING!!!!!! I am now doing BKs for people who live in REALLY expensive areas (N. County golf course homes). Houses that are leveraged to the tune of $1.7 mill. where other houmes are for sale at $1.0 mill. and REOs for about the same. Anyone with a Lexis account and www.sdlookup.com can cross reference what is owed and what it's worth. I've found that some friends(ex?) of mine who countered my "chicken little-the sky is falling" diatribe with a dismissive "different this time" "rich daddy poor daddy" "always goes up" etc. nonsense are DYING under mtgs. they refied every 6 mps. to take money out and dodge the adjustment. Public records are great!!!!!!!!!!!!!!!!!!!!!

Submitted by gdcox on May 24, 2008 - 11:04pm.

Qwerty, I have not heard of any securitization of option arms. I suspect that even the corrupt rating agencies could not hide those festering contracts in triple A bonds. Also a simple Google of option ARMs and securitisation etc throws up nothing, so it may be a problem for Cal banks.

Submitted by 4plexowner on May 25, 2008 - 5:07am.

http://www.realtor.com/search/listingdet...

Found this listing yesterday - it's a view property in La Playa (nice part of Pt Loma) - interesting text in the comments: "Owner has submitted a full price offer to lender."

I assume this means the 'owner' is currently in foreclosure and has offered the bank the current market value for the property. I further assume that the 'owner' owes more than the $699K list price or they wouldn't be playing this game.

According to zillow.com this house last sold in 1994 for just under $300K. To have a short sale at $699K means the 'owner' has pulled more than $400K out of this property in 14 years.

At the peak, the 'owner' could have gotten a refi appraisal on this property for around $1.1 mil so they may have pulled as much as $800K from the property. Maybe even more with 125% financing.

~

I'm betting that there are many more properties just like this one scattered throughout Pt Loma, Mission Hills, Ocean Beach, Pacific Beach, La Jolla, etc - the 'owners' purchased long ago but they have been pulling money out over the years for one reason or another - some of them will reach a point where they can't support their financial house of cards anymore and their properties will end up on the market as distress sales.

For many of them, it is end-game time now. They have been refinancing every 18 to 36 months for the last decade and they aren't going to get the next loan. They are stuck in their current loan and will have to deal with whatever reset terms they agreed to - this could be a major 'ouch' even for the well healed.

Submitted by CA renter on May 25, 2008 - 3:15pm.

I think this is the point that many people are missing. For the lower end, it was resets that caused the strain because they had no equity (most 100% LTV and recent buyers).

For the move-up buyers and long-time residents, many have been living off their equity (from down payments obtained from sales of starter homes **or** equity from price appreciation over many years).

Many of the residents in higher-end areas are under tremendous financial strain, but they've been able to hide it because of this equity cushion that they've been able to tap whenever things get dicey.

I'm seeing more people here and on other blogs (also ourselves) starting to notice the price discrepancy between better areas and the areas that have seen significant price drops, and sales ARE starting to pick-up in those cheaper neighborhoods. We'll probably see the substitution effect go on for a while now (i.e.: we wanted to buy in Encinitas, but could find a MUCH better deal in Escondido & don't want to wait any longer, so we're buying a better home in a "less desirable" location for a much better price). This is what will cause the next move down in the higher-end markets, IMHO.

Once these better areas lose their equity cushion, we'll see who can really afford those $1MM tract homes with HOAs & Mello-Roos.

Submitted by LesBaer45 on May 26, 2008 - 9:09am.

Forgive my ignorance, but what's the "Agency" loans on that chart?

I've seen this chart elsewhere but that term never registered with me. Viewing this again, I'd say you'll see all sorts of calls of a 'bottom' around 4thQ 2008 - 1stQ 2009. Might even see a slight up tick in sales early/mid 2009.

This dead cat bounce will encourage a lot of fence sitters to buy, but unless they intend to stay long term I think it'll be a classic case of catching a falling knife.

Then it looks like feces meets rotational air movement device again early 2010 through early 2012. I think this shock to the system will really be the kicker as the Opt-Arm, and Alt-As will drive the burn off of FBs. Probably even bleed over into the primes who overdid the HELOCs.

I just wish I had the cash to take advantage in 2012.

Submitted by CA renter on May 26, 2008 - 3:35pm.

Agency loans:

agency bond
Definition

A bond, issued by a U.S. government-sponsored agency. The offerings of these agencies are backed by the U.S. government, but not guaranteed by the government since the agencies are private entities. Such agencies have been set up in order to allow certain groups of people to access low cost financing, especially students and first-time home buyers. Some prominent issuers of agency bonds are Student Loan Marketing Association (Sallie Mae), Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). Agency bonds are usually exempt from state and local taxes, but not federal tax.

http://www.investorwords.com/152/agency_...

Submitted by 34f3f3f on May 31, 2008 - 7:55am.

gdcox, I just stumbled across this

Fitch Ratings modified how it assesses outstanding securities backed by Alt-A U.S. mortgages by starting to update projections for losses from non-delinquent loans instead of keeping estimates static from the time of issuance.

A record jump in delinquencies and defaults prompted the change ... Borrowers are at least 60 days late on 11 percent of adjustable-rate Alt-A loans backing bonds created in 2006 and rated by the firm, compared with a historical average of 1 percent to 2 percent.
...
The firm hasn't yet decided whether to use its new surveillance approach on prime-jumbo mortgage securities, Barberio said....

The Fitch analysts weren't able to immediately say how many Alt-A securities from the past three years have been downgraded. Most of the non-AAA bonds were lowered and others remain under review, they said.

Top-rated securities accounted for about 90 percent of the debt created in Alt-A deals. The company will downgrade many over the next few months, [Grant Bailey, a senior director at Fitch] said.

``I don't know if it's going to be a majority or not but I think a large number of the senior classes are facing downgrade pressure,'' he said.

Submitted by LesBaer45 on June 1, 2008 - 8:52am.

Thanks CA renter, I probably should have google'd a little harder to figure that out. Makes perfect sense. Our tax dollars at risk.

.45, Don't leave home without it.

Submitted by BKinLA on June 5, 2008 - 11:03am.

Another rung or three up the ladder...

http://www.housingwire.com/2008/06/05/pr...

...

Among subprime borrowers, severe delinquencies — a measure that includes 90+ day delinquencies and foreclosures — increased from 14.44 percent of loans in the fourth quarter to 16.42 percent in Q1. In contrast, just 1.99 percent of all prime borrowers were severely delinquent at the end of Q1, compared to 1.67 percent at the end of last year, numbers that illustrate the relatively greater distress felt by subprime borrowers.

But it’s the velocity of these changes that’s most worth noting from an investor’s perspective — the Q4 to Q1 change in severe delinquencies strongly favors prime borrowers, for example, with severe DQs increasing by 19.2 percent for prime and 13.7 percent for subprime borrowers.

By splitting out fixed-rate and adjustable-rate DQs, the increasing distress now being felt by prime borrowers becomes even more evident: prime ARMs showed the highest velocity of change of any major loan category in nearly every measure of distress published by the MBA. Severe delinquences increased a whopping 28.71 percent among prime ARMs during Q1, while in comparison, subprime ARMs saw severe DQs jump 18 percent.

It’s a pattern repeated outside of ARMs, too. The velocity of severe delinquencies among prime, fixed-rate borrowers actually came close to doubling that recorded by subprime FRMs during the first quarter. Prime FRMs saw severe DQs increase 12.1 percent in the first quarter, while subprime FRMs posted a 6.7 percent increase in severe delinquencies over the same time frame.

...

Gonna make for a very lively bottom half of 2008, I'd wager.

 

Brad

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