Reset Timebomb Not Such a Big Deal?

Submitted by Rich Toscano on August 22, 2009 - 8:35am

I have long suspected that the whole "reset explosion in 2010 (or thereabouts)" factor was a lot more complex than people often make it out to be. Especially for San Diego... we are at the forefront of the bubble on the way up and then the way down; it makes sense that our reset peak might happen earlier as well.

But there are bigger reasons than that to doubt the reset explosion thesis. One is that resets don't matter -- all those loans were written at a time of substantially higher short-term rates, so a simple reset to the prevailing market rate should actually lower the mortgage payment. Recasts, not resets, are the danger. Recasts occur when the borrower starts paying down principal on an interest-only loan (in which they've paid only interest, as the name suggests) or a negative amortization loan (in which they haven't even paid all the interest, resulting in a principal that's been growing since they took the loan out). Option ARMs would fall in the latter category, assuming that the borrowers had chosen to take the "option" to pay less than the full payment amount.

Now, there are certainly a lot of loans like this set to recast, but they account for only a portion of the loans seen in those famous reset charts.

My other doubt had to do with the fact that people often don't wait for a reset to bail on their mortgage. If you paid peak pricing, unless you got a hardcore neg-am loan your monthly payment is higher than it would cost to rent the same place -- so why wait around for the reset before pulling the ripcord? Some neg-am loans might have payments so (temporarily) low that it would make sense to stay until the 11th hour. But in the case of many mortgages, it would make sense to default before the reset date.

Unfortunately all of the above are just suspicions without any data to back them up. So I was real interested today when I stumbled across an article on this topic on the blog Accrued Interest. The author provided data from option ARM-heavy mortgage pools he's (or she's?) been tracking, and the conclusion is that a lot have defaulted already and a lot have paid off already. Meaning that while there are still some potentially troublesome mortgages left, they aren't as big as the reset explosion thesis would suggest.

Thoughts from the Piggs?

(category: )

Submitted by XBoxBoy on August 22, 2009 - 8:55am.

I would agree that resets and recasts are not going to be the big time bomb that some are expecting. But unemployment over 10% in San Diego and almost 12% in California is solid data that is a definite challenge to any housing has bottomed story.

XBoxBoy

Submitted by 34f3f3f on August 22, 2009 - 10:50am.

Excuse me for my clumsy blurting in on the experts, but I had understood that the fuse on this one had fizzled out sometime ago when rates were lowered. It's seems more about the whole package now.

Submitted by barnaby33 on August 22, 2009 - 11:38am.

The problem with rates is that the govt doesn't control them in the long term. Recasts will occur and since most people have been paying the minimum on their POA's, its pretty much a guaranteed foreclosure. Add into that the double whammy of the bank actually having to back out all those uncapitalized profits and you have another potential catastrophic trigger in the banking system.
Josh

Submitted by justinmac on August 22, 2009 - 1:07pm.

I would say there's a very fine line between "resets" and "recasts" when talking about any 5 year ARMs in California. I would bet the farm that 75% of these ARM's were written as IO. That percentage certainly held true for the thousands that I saw written between 2004 and 2007.

The low indexes will definitely blunt much of any future foreclosure wave-- for a while. But how comfortable are folks going to be effectively living on a 6 month adjustable? For most of the folks that put down nothing with an 80/20 or even 10% with an 80/10 on their 5 year IO's, chances are that indexes will rise before they have enough equity to refi off their 6 month adjustable. Remember, these folks are now paying P&I on a 25 yr amortization schedule. How many are going to walk away because they have no equity AND they like to sleep at night? The day the Libor rises a full percent, there'll be a new batch of foreclosures. Lower indexes will just spread the pain over a few years at best.

Agreed that Option ARMs are recast nightmares. Some of the early ones (pre 2006) written by companies such as WAMU, had recast levels of 125%. WAMU changed this to 115% in line with the others after that point in time. To give you an idea of how lax underwriting standards were...All borrowers needed was a 600 fico to be able get an 80/10 (WAMU 1st and 2nd) Option ARM to purchase a million dollar home, stated income. If you had a 640-660, you could buy that same home Option ARM, stated with an 80/20 - 0% down. And, if something didn't fit, the Account Executive working for the bank would usually suggest to you how you could "fix it" since he/she was getting incentive pay for closed loans.

WAMU's OA underwriting guidelines were not that different from dozens of other lenders-- I am just chosing them as an example since they are now defunct. These Option ARM loans were a cash grab for all. We have not heard the whole story about what kind of loans are sitting on these banks' balance sheets since, the banks, obviously, would prefer an ordered descent into chaos. This is why they're tight lipped, there is a shadow inventory and I know of dozens of people who have not paid their mortgage in a year but have not received an NOD.

It would be possible with the indexes (ie: MTA) being down of late-- even with margins of 3.5% -- for some earlier Option ARM loans to get the full 60 mos of minimum pay.

I recall a statistic a few years ago claiming that even though 80% of OA loan holders stated that they made more than the minimum payment, only about 20% actuality made more than the min pay. The payment shock alone on ANY of these OA's that come due/recast taken in the context of this economy, upside down positions of these loans would cause me to wager that the majority of these will default when they recast. Payments jump from about half of an IO payment to a full P&I payment -- who's going to refinance them at 50% negative equity?

Right now, if OA loan holders are making the minimum payments-- and these artificially low indexes have extended the amount of time that these dwellers' were able to make these minimum pick-a-payments-- they're living above their means, in "their own home" and paying half of what it would cost to rent. Why wouldn't they hold off until recast before defaulting-- especially if some banks are taking a year now to begin foreclosure?

Submitted by temeculaguy on August 22, 2009 - 1:27pm.

There might be a batch of foreclosures but there wont be a wave anymore. There are less and less of these loans every day, they haven't been making new ones, their popularity fell incredibly over the past two years and the article rich linked tried to put a number to it, saying that only about 1/4 of them still exist, having not been refi's or repo'd already.

A lot of people bought from 03 to 06 that had no business buying but those who were holding their breath waiting for appreciation have already drowned, gotten out of the water or sprouted gills. This was a valid theory at one point, but it already happened, recognize that the wave of foreclosures is already upon us, there wont be anymore big ones because short sales and loan mods occur daily but new zero down i/o loans stopped, it's just hard to see because they have only been spening a few hours on the market, had people not bought them, they would appear to be everywhere.

Submitted by jpinpb on August 22, 2009 - 1:34pm.

Although zero down has stopped, we have FHA at 3.5% and that's minimal. Perhaps there is no wave to happen in Temecula, but I can tell you that I continue to see NODs that just don't let up over here and some were from last year, had foreclosure dates and either reinstated, got modified or got extension, only to be getting NODs again.

If the game is extend and pretend, that seems to be working. But eventually you would think the bank will have to come to the table w/some money and if a high percentage of homes they're holding are not generating revenue, then something will come to pass. Perhaps the government will just continue to throw money at it until you kids have grandkids.

Submitted by justinmac on August 22, 2009 - 2:52pm.

temeculaguy:

Ah, No. I just followed the link and read the blog: The author said that 40% are not paying and another 23% (probably the min pays) are not technically dilinquent. How is it that "only 1/4 still exist"?

Second of all, I don't agree with the author's methodology. My feeling is the 11th hour holdouts are more likely to default and past percentages have no bearing. These people haven't refied, moved, etc. because they are most likely clinging to that below rent payment. I think out of those 23%, there will be a higher % of defaults.

"...Another 40% is not paying. That means the potential 'new' problems are only 23% of the remaining principal..."

How is it that when that 40% get's foreclosed on that that won't be a "new" problem for the banks (who have to now write off the loss) or the real estate market, which I believe is what we're ultimately concerned with here?

Submitted by SD Realtor on August 22, 2009 - 3:52pm.

Rich I would have to agree with you 110%. I am in the midst of a major rethinking of things myself. In retrospect I feel that for properties below a certain price level not only has the bottom come but we have seen a fairly substantial bounce already. Case in point in PQ where I had a close of escrow in February at 490k. SAME floorplan went on the market 3 days ago and is in escrow. I believe the accepted price was 40k above that. Conditions of the homes were similar. So that represents almost about 8% appreciation in 6 months.

I am seeing much of the same behavior in lower end and even mid end stuff. Take Sabre Springs for instance, same behavior in the low 600k range. In short I am beginning to believe that if you are searching for a home under 700k you have indeed missed the bottom altogether. Certainly those looking for 300-400k stuff in many Mira Mesa or Clairemont are out of luck at least for the time being.

I believe that we (or at least I) have made an egregious error on the efforts that would be made to reinflate. Simply stated the pockets of the govt are deeper then any other pockets on the planet. Unemployment is as high as we have seen it and will get even higher but every pigg who has played that unemployment card has seen quite opposite results. It is like holding a double down etf over the past 4 months... You are simply swimming against a tide that is provided by vast resources. Getting ones mind around the fact that the markets, (be it equity or housing) can be easily manipulated is a tough thing to do.

While it is true that our credit is dictated by China it seems quite unlikely that they will turn that spigot off in short order. In fact even if there were a high number of recasts, I would very much say, "So what". Honestly, so what? Big deal. We have a government in place that has essentially taken over two car manufacturers and a monolithic insurance company. We have a Tresury that has more power then it has ever had in the history of our country. We all KNOW FOR FACTs that banks have plenty of inventory. We also know that there are the beginnings of PPIP investments now being made, (SOME EVEN BY CHINA) for the distressed assets. Moreover the events that I have been seeing at the trustee sales of late are also signaling a significant shift in what has been coming available and what the sales are going for when they do sell along with the opening bids.

So in summary what I see is that they, (the "they" being those who have an interest in reinflating real estate values) have actually done a fabulous job. If you are looking for a higher end home, maybe 700k and up, you are still in good shape. If not then you are not in good shape.

My last ditch hope does pretty much lie in the bond market. If somehow we can get a dislocation there, then yes all bets are off... However that will be a much wider destruction of credit then just real estate. Similarly I do also believe we will be in a jobless recovery sort of scenario but that is just what the next version of our economy will be. Yes we will have less people gainfully employed but that seems to not have had any effect on demand for many of the desireable homes.

Housing prices have come down, not nearly to the extent that I wanted them to but for many sectors they came down enough. Now I do not expect a runup but they have already bounced pretty hard in areas I serve. Some of my clients have indeed thrown in the towel and bought and others are resigned to renting a few more years. However in all cases I am not giving out my previous forecast that I believe this is a temporary bounce. In fact I think we will be in a stagnant to slowly trending up case for another year or two (as long as rates stay put) and then we will see what interest rates will dictate with regards to direction.

Submitted by ralphfurley on August 22, 2009 - 3:52pm.

temeculaguy wrote:
There might be a batch of foreclosures but there wont be a wave anymore.

I really think that depends on your area. If you flushed all the crud out of the system already (like it sounds there in Morgan Hill), then there will most likely not be a wave.

But in areas that have not dropped (definitely some areas of LA), the floodgates have to open at some point.

I have a friend that teaches in an LA suburb and he told me that 80% of the kids apply to get a free lunch because they are below the poverty line. Three bed, one bath, 1100sq ft. houses in that area still go for $600k. The same houses that sold for ~$220k in 2000.

Houses have to come in line with incomes at some point. I don't know how it will happen, but I gotta believe it will.

Submitted by CA renter on August 22, 2009 - 5:01pm.

IMHO, everyone's been focused on the foreclosures, where the real problem lies ahead of us -- qualified buyers with substantial down payments in a higher interest rate environment. Prices are dictated by new buyers, not by old sellers.

Right now, we are seeing artificially suppressed interest rates, "free" money from the govt., down payment assistance via tax credits and what appears to be a significant number of "cash back" deals (please confirm if you are seeing the same), low down payments that essentially put the buyer underwater on day one (if you're only putting 3.5% down, and selling costs run at least 5-6%, you're underwater), etc.

On top of all that, the supply side is being manipulated more than anything I've ever witnessed before via moratoriums, forced loan mods, short-term refis (back into hybrid ARMS!!!!), and deadbeats who've been allowed to squat for many months if not years.

Just like during the boom, they are sucking in all the demand from future years. Many of today's buyers are investors and flippers (again!). Where are the future buyers going to come from after all the current FHA and govt-guaranteed loans default in the near future, and the rest of the world has had enough of the jacked-up inflation efforts of our Fed?

So many still have the notion that housing is their ticket to wealth. The excesses have not yet been wrung out. The only lessons that have been learned thus far is that the biggest risk-takers and deadbeats will be "saved" at the expense of the few remaining responsible people.

IMHO, the bubble is not over. We've just seen a tiny blip along the way. We may well continue to have a strong market through next year, but then what?

Submitted by moneymaker on August 22, 2009 - 5:03pm.

With high unemployment and businesses going under everywhere isn't the government doing essentially what everybody buying a house was doing 4-5 years ago. They are spending with stated future income. Where will the gov get the tax money if the economy doesn't revive. I say the government is doing a big poker bluff, they're hoping the economy recovers before the bill is due. I just hope we don't end up like Russia, broke and destitute.

Submitted by temeculaguy on August 22, 2009 - 5:09pm.

Pockets of resistance, not the majority of the landscape. My hood isn't an eception, it has become the rule, the exceptions are the few places that didn't lose any value from peak. When Rich posted a graph last week of the entire county of San Diego down between 40 and 50%, it was followed by complaints that a few zip codes that bucked that trend. Those are the pockets of resistance, they will either have a late drop or be slower to rise next time. sdrealtor showed some examples that they didn't go up during the boom at the same percentage, postulating that the downturn wouldn't be as sharp, that theory has some legs too.

Ralph, the example in L.A. could be that the example is confined to a specific zip code, I have no data but I have to believe the whole county isn't holding onto 300% appreciation from 2000 with a pupulation of 80% below the poverty line. Either it's bad data, skewed data or the people will choose the next town over at half th price and the neighborhood your friend spoke of will correct. There are fluxuations and it takes the market a little time to even them out.

justinmac, I don't anything about that guy or his methodology, I just agree with his premise, that there was a finite number of these loans, they aren't making any more of them and lots of them have been eliminated one way or another, with more each day, at some point it's been worked through.

jp, fha's 3.5% requires verification of income, assets, reserves, credit score, etc. If someone is able to qual in what many think is the worst labor market in a long time, their risk level isn't on par with these loans. They don't do teaser rates, option arms, for the most part it's vanilla 30 yr fixed. They have also existed for decades, and performed well for decades, through many cycles, so I don't consider them a continuation of the recent lending practices that got us into this.

SD, I agree with your analysis, as much as it will have repercusiions, as real as the threat of inflation is by their actions, the powers that be did reach their goal, they forced a bottom. Or did they? maybe they just wasted time and money and we would have gotten to this same point by ourselves, when you look at the affordability graphs rich posted, isn't that where it would have found itself with no intervention, perhaps all they did was prevent a severe overcorrection.

Submitted by SD Realtor on August 22, 2009 - 5:25pm.

temecula I am not sure where the bottom would have been without all of the intervention. Most of what I am sure of is that for the time being we have hit a bottom and indeed sprung off it in many areas. I do agree that this is not what I would call a fundamental healthy market. Not that a healthy market was the goal of the govt. Nobody wants the hard path, not the government and not the public. Health implies hard cuts have been made and that is not what we have seen. We have seen an explosion (rather then a contraction) in my opinion of credit. That is, rather then forcing the credit failures into the market we have done the opposite, force them out! The inventory suppression has been no short of remarkable. I have just spent the last 2 hours studying the upcoming trustee sales in the various zip codes around the county and it is horrendous with respect to availability. I agree with what you said in that maybe they wasted time and money and maybe they did not but my kids are screwed either way. I will be intrigued to see how it plays out because just like CAR said all of this is indeed based on low rates. I cannot help but think that higher rates will really crush things but how badly? I mean people buying now at a fixed rate will indeed be okay when rates hike up. So who is screwed besides the patient buyer hoping to score a deal. Well obviously a seller and obviously those who have loans being reset... Okay but what if the gubment simply forces a loan mod for those guys? Well? Obviously it will not be the first time thats for sure.

Again, tg you have me in your boat for sure...I agree with CAR when the rates run things will be very interesting and we should see trouble again but I think our wonderful prez, treasury and fed will be keeping rates in line for awhile now.

Submitted by peterb on August 22, 2009 - 6:27pm.
Submitted by temeculaguy on August 22, 2009 - 7:09pm.

peterb wrote:
http://mhanson.com/blog

With his webpage reset I cant see his old predictions but he has his past media appearances listed, I'm pretty envious he got on cnbc with erin burnett, even if it was a remote (I refuse to do a remote, holding out for an in studio appearance and she has to touch my hand) but my petty jealousy aside, I watched his april appearance, he ended with "we will look back on 2009 as the catastrophic slide of the upper middle and high end (over 500k)." In four months, if that doesn't happen, can we ban linking to his predictions. How many wrong guesses do you get, in baseball and family fued you get three, just give me a number so I know when I am done hearing it.

Submitted by justinmac on August 22, 2009 - 8:28pm.

"...Right now, we are seeing artificially suppressed interest rates, "free" money from the govt., down payment assistance via tax credits and what appears to be a significant number of "cash back" deals (please confirm if you are seeing the same), low down payments that essentially put the buyer underwater on day one (if you're only putting 3.5% down, and selling costs run at least 5-6%, you're underwater), etc...."

Not for too long, CA Renter:

http://www.reuters.com/article/marketsNe...

Now there's no direct correlation, but all of these indexes we're talking about have a strong tendency to follow the fed rate. Once inflation rears its ugly head, those currently low rates that will blunt the impending full-on foreclosure wave in the near term, will escalate and perpetuate where things left off.

There is no free lunch. We are simply stretching the pain out over time. It's better for the banks (and general economy) this way-- they get more of their money back with an orderly descent into chaos. If rates are held artificially low, it slows the amount of time it takes for housing to find its true bottom and more evenly distributes the pain, but the flipside is that we don't come out of it as quickly. Once those that like to see the value of the dollar sustained start clamoring, the fed will need to raise rates. These low rates are temporary. (Although if we look at Japan as a model, they could last 10 years.)

SD Realtor, I appreciate you being upfront about being a realtor, but let's be honest...San Diego real estate values are going nowhere quick. In fact it may be a better time to buy 3 years from now. We are only about halfway through paying the fiddler and these artificially low rates offer a tentative bottom and have the net effect of draining future equity/home appreciation (because the other shoe- ie: raising rates-- will have to drop eventually) until a sustainable overnight lending rate is implemented. We are simply robbing Peter to pay Paul later by keeping rates this low.

Disclaimer: I am a CA RE Broker who can't wait for real estate to get well again.

Submitted by patb on August 22, 2009 - 9:07pm.

I'm with the T2 Partners.

The number of ungodly bizarre mortgages written is unprecedented.

Bernanke, paulsen and geithner are trying to reflate the bubble, this is not
a simple task and won't change things.

blogett called this the mother of all head fakes, and i'm with him.

consumers are dying, unless geithner thinks he can print enough
wall street millionaires to buy all that california real estate, the bottom will
keep falling.

Submitted by smshorttimer on August 22, 2009 - 9:13pm.

Grrr, SDR. I leaned on your posts (and others) to needle my boosterish agent. Now what am I to do?

Submitted by SD Realtor on August 23, 2009 - 1:20am.

sms do not fret. Please go back and reread my post okay? If you don't want to then take heart in the last part of it...

"Now I do not expect a runup but they have already bounced pretty hard in areas I serve..... In fact I think we will be in a stagnant to slowly trending up case for another year or two (as long as rates stay put) and then we will see what interest rates will dictate with regards to direction."

In other words, in the ABSENCE of interest rate shock I do not believe that prices will go down significantly in the sectors I discussed above. I am convinced that unemployment will continue but I believe will not significantly push pricing. I am also convinced that foreclosures will continue however I think between the fed/treasury/govt/wall st that there is not this huge inventory landslide that others have predicted.

*************

As for mr mortgage who many people here love to quote...lets look at a few of his gems shall we?

http://www.fieldcheckgroup.com/2009/04/0...

Foreclosures About to Soar Near-Term — Easily Back to All-Time Highs

Are you ready to see the future? Ten’s of thousands of foreclosures are only 1-5 months away from hitting that will take total foreclosure counts back to all-time highs. This will flood an already beaten-bloody real estate market with even more supply just in time for the Spring/Summer home selling season – great timing!

*****************************

This one is from his 2/20/09 Guide to the Truth.

http://sethkaufman.posterous.com/2-20-mr...

This Spring/Summer selling season could very easily bring this all to a head. Banks, that have been holding on tight to much of their distressed note and REO inventory awaiting the big taxpayer bailout that would buy distressed assets for 100 cents on the dollar, may decide Obama’s plan was more of the same and bring a flood of inventory to the market right before the buyers show up in March. *****Those looking to buy this Spring/Summer should have a lot to choose from.****

*****

So really now.... Is there a single buyer out there who reads Piggington who can say that this spring there was alot to choose from?

Meanwhile while he posted that, I had posted my concerns about a lack of inventory and about how I was seeing many Active listings were not even available because they were short sales and had offers on them. I also was skewered by some after Rich posted about my experiences with inventory shortages and a heating up market. Someone even said I was exhibiting salesmanship and trying to create a sense of urgency.

All I was doing was reporting what I was seeing in the market I service. That is all I am doing now.

************

justinmac, I have posted here for over 3 years and if you can find a single post where I have told anyone it is a good time to buy then go ahead and bring it up. I am not saying now is a good time to buy nor did I say even at the supposed bottom it was a good time to buy. As usual I have to explain that people buy for thier own reasons and not everyone buys for financial reasons. Saying I feel as if we bottomed out in some markets doesn't mean anything more then that. Also please see my already rereferenced thoughts about interest rates driving prices down. Furthermore I also qualified which markets I was referring to. As far as business goes, realtors should not care if the prices are high or low. With the pricing in San Diego anyone can do well if they are honest and know what they are doing.

When rates rise, and they will absolutely, then yes pricing will adjust. However I don't believe leading people down a primrose path with promises of impending price drops in all markets is any more helpful then saying real estate goes up everywhere forever.

If you or anyone else really believes in thier heart and mind, that those in power will let the bond market dislocate in the next few months, or even in the next year, then so be it. I do not. Furthermore you posted

"but let's be honest...San Diego real estate values are going nowhere quick"

What exactly was this in response to?

Was it in response to me saying

"In fact I think we will be in a stagnant to slowly trending up case for another year or two (as long as rates stay put) and then we will see what interest rates will dictate with regards to direction."

Also I am not saying prices will go up quick. I am saying in certain submarkets they ALREADY HAVE gone up. At least in a few of them I work in. Have you showed any homes in PQ lately? Have you noticed the trend at the courthouse down on Broadway with opening bids?

Submitted by deriving drunk on August 23, 2009 - 8:01am.

SD realtor, another masterstroke of psychological warfare - were you a psyops officer in the military? Just curious.

We don't know how large or sustainable the buyer pool is. Anecdotes on bidding wars and enormous pools of buyers are just that.

Many feel that the pent up demand will peter out, just as pent up supply builds. Then what happens? The seasonal bump in sales and prices is pretty predictable - so what? 12% unemployment and decreased state spending has what effect on household income and home prices?

Some of you have allowed yourselves to be manipulated by these folks into a panicked frenzy. Take a deep breath, remember the fundamentals, remember that many of the 2005-2008 buyers are tomorrow's foreclosures.

This market is not going up for any sustainable length of time. It will drip, droop, and dribble along due to the interventions.

Inflation or deflation? The $23.9T question.

Submitted by deriving drunk on August 23, 2009 - 8:05am.

CA renter wrote:
IMHO, everyone's been focused on the foreclosures, where the real problem lies ahead of us -- qualified buyers with substantial down payments in a higher interest rate environment. Prices are dictated by new buyers, not by old sellers...

So many still have the notion that housing is their ticket to wealth. The excesses have not yet been wrung out. The only lessons that have been learned thus far is that the biggest risk-takers and deadbeats will be "saved" at the expense of the few remaining responsible people.

IMHO, the bubble is not over. We've just seen a tiny blip along the way. We may well continue to have a strong market through next year, but then what?

Great post. You may very well be right about the short term bounce. Then what?

Submitted by deriving drunk on August 23, 2009 - 8:13am.

SD Realtor wrote:

If you or anyone else really believes in thier heart and mind, that those in power will let the bond market dislocate in the next few months, or even in the next year, then so be it. I do not. Furthermore you posted

Also I am not saying prices will go up quick. I am saying in certain submarkets they ALREADY HAVE gone up. At least in a few of them I work in. Have you showed any homes in PQ lately? Have you noticed the trend at the courthouse down on Broadway with opening bids?

And how will they control the bond market?

Does seasonality enter into the equation? Do markets go up and down in a straight line?

Submitted by Arraya on August 23, 2009 - 9:05am.

Inflation or deflation? The $23.9T question

While everybody is waiting for inflation like the cavalry to come in and save the day, wages are down almost 5% YOY and they are lowering SS payments for the fist time ever. So what exactly is inflating besides deficits?

25-50% of the mortgage holders in SoCal area under water and almost a 3rd nationwide puts resets to the back seat as a major default threat.

Of all the people that became unemployed over the last 12 months how many are still sitting in their homes waiting for foreclosure?

Submitted by jpinpb on August 23, 2009 - 10:02am.

peterb - thanks for the link. Some impressive graphs and strong arguments.

I think I'm in the camp of head fake, too. It looks like a spring dead cat bounce to me. And w/a lot of bank and gov assistance to force it to happen.

Government throwing just an incredible amount of money to banks, bailouts, incentives. I mean in the order of throw anything at the wall and see what sticks. The low rates and incentives have even lured some Piggs to succomb. I am even quite tempted.

The banks are cooperating in this regard by holding back inventory. You can argue whether it's intentional or not for whatever reason, whether they're too busy or incompetent or don't want the loss on the books, but I think we can agree there is inventory they have that is not listed that evenutally will be.

I say eventually b/c I do not envision squatters living for free in houses forever or houses sitting empty that are bank owned for years. I imagine their investors will some day want to see some money coming in and free loaders or an empty houses just won't do it.

The inventory is low, yes. Agreed.

The NODs are so voluminious and in par w/what Mr. Mortgage has discussed. They continue in the now 10+ ZIPs I watch. The only ZIP that I've seen low NODs is Point Loma.

Now trying to figure out what's going on w/all the NODs is what I've been trying to understand. So bear w/me while I write out loud and hopefully some of the Piggs can offer feedback and assist me w/this. This is what I've observed.

Some places tried to have a normal sale and then eventually get a NOD and end up sold by the bank for a lot less.

I figure a low percentage of NODs got modified, those that qualified, which according to Kelly at VOSD, is low. And I believe it. There are a lot of restrictions to qualifying and that is going to weed out many.

I have seen some of these NODs succeed in short sales. The short sales take an inordinate amount of time, but they do occur and it's for considerably less than what the house had previously sold and/or less than the refi/HELOC.

I have seen some that must have gotten reinstated, but then turned around months later only to get another NOD and eventually list for much less. This has just assisted in prolonging the process.

I have seen some that got foreclosure dates and then fell off the map. Then re-emerge w/another NOD later and go through the process again. Delaying the eventual sale for a lot less.

I have seen some w/foreclosure dates that banks sell as REOs w/in a month and for lower price.

I have seen some w/foreclosure dates that banks list w/in a few months for less.

I have seen some w/foreclosure dates that just disappear. No listing. And I mean for a very long time, like several+ months and still stealth.

So we agree there is low inventory.
We agree rates are low.
We agree there are tax incentives.
We agree prices have come down.
We agree sales have happened for the above reasons.
We agree the can is being kicked, dragging this out.
We agree that NODs continue.
We agree that banks have inventory that for whatever reason is not listed.

I'll even agree the government will continue to throw money at this for as long as it takes.

However, can we agree that considering all the money spent already, the best they've done is nothing to celebrate over. All their efforts has merely succeeded in slowing down the process.

(Like watching a train wreck in slow motion)

Can we agree that many of the NODs will eventually list or are there some that believe they will all be modified?

For the NODs that eventually list, can we agree it will be less than the last purchase price? I say yes, otherwise, if the owners can sell for more, it would be an organic sale and not a NOD.

Other than modification, short sales or bank holding on to them indefinitely, but to be eventually listed, any idea how else the NODs will be absorbed?

I think the only other option is if the market turned around and we were at peak prices again. Anyone think that's going to happen any time soon? Next year?

What would be the impetus to make prices go to peak levels? Low rates - Check. Easy money - FHA. Somewhat got that at least for mid-priced.

Anyone think we'll have laxed lending again any time soon?

Inflation does seem to be the wild card.

For those that believe inflation will happen, any idea when? A couple of months from now? A year from now?

Submitted by peterb on August 23, 2009 - 10:21am.

"In my opinion, if Bernanke discontinues his agency MBS purchase plan, the market will collapse overnight. The suspense will soon be over."
- R. Su

Does this statement instill confidence in you? When someone this insightful, experienced and analytical says that something's going to break soon and it may not be good......enter at your own risk. But you cant say you were'nt warned.

Mortgage payment details may be a moot issue with unemployment at these levels and growing. Even so, if most people are paying the neg-am payment level, will they be allowed to continue this?

Submitted by jpinpb on August 23, 2009 - 10:25am.

peterb wrote:

Mortgage payment details may be a moot issue with unemployment at these levels and growing. Even so, if most people are paying the neg-am payment level, will they be allowed to continue this?

Rich and others say that unemployment is not a leading indicator and even w/unemployment this high and rising, sales continue.

Submitted by Rich Toscano on August 23, 2009 - 2:43pm.

deriving drunk wrote:
SD realtor, another masterstroke of psychological warfare - were you a psyops officer in the military? Just curious.

What is that supposed to mean? It sounds to me like you are accusing SDR of being dishonest and trying to manipulate people. He has been an active and (to me, anyway) valued member of this site for 3 years -- you've been here 3 weeks. It's totally inappropriate for you to make that kind of accusation without having any context. Forgive me if I misinterpreted your post -- but if I didn't, please, show more respect.

As it happens, I think SDR's arguments are completely reasonable. I also think CAR's post was fantastic as well. I don't know what the answer is, and I don't think anyone does. There is no precedent for this and no way to know for sure how it will play out. But there are good, reasonable, and data-driven arguments coming from either side.

I think a big difference just comes down to personal belief in the efficacy of govt intervention. I happen to be with Adam on this one; I think that all the money printing, intervention, and on-the-fly changing of the rules is a major force to be reckoned with. Some people obviously don't feel that way. There is room for disagreement and debate without resorting to personal attacks and accusations about people's motives.

Rich

Submitted by Rich Toscano on August 23, 2009 - 2:48pm.

Arraya wrote:
So what exactly is inflating besides deficits?

CPI, energy, commodities, home prices, stock prices...

Looking at YOY figures obscures the fact that this stuff has all been rising for most if not all (depending on which one you are talking about) of 2009...

rich

Submitted by Rich Toscano on August 23, 2009 - 2:52pm.

justinmac wrote:
temeculaguy:

Ah, No. I just followed the link and read the blog: The author said that 40% are not paying and another 23% (probably the min pays) are not technically dilinquent. How is it that "only 1/4 still exist"?

What he means is that all mortgages in those pools have either been refi'd or already gone into default -- meaning that only 25% remains that could POSSIBLY go into default.

The point of this thread was that the expectation of a huge number of new DEFAULTS due to resets in 2010-2012 might be exaggerated, because many of them have already gone into default (or been pid down).

rich

Submitted by justinmac on August 23, 2009 - 4:02pm.

SDR..Apologies for jumping to conclusions-- It does appear from your past posts that you are logical and data driven and not simply arguing from the standpoint of a vested interest. I saw the Realtor, and well, I've been hurt before.

Rich, agreed that perhaps only 23% of OA's remaining are elegible to be categorized as defaults...But the 40% are not being dealt with and have yet to become problematic to the general economy and the RE market. All due respect, I think it's a question of semantics since most would probably see the the "default" hitting once the negative effect is felt by the public. My point is that the banks aren't taking any action in many case/obfuscating, so they're already sitting on the wave of "defaults", it just hasn't hit the public yet. but yes, it does appear that the bottom may be between 40-63% OA default ratio. I guess that's encouraging in some regard. What will the effect be once these turn into foreclosures/bank losses?

As far as having confidence in the Fed's ability to maintain control: They are between the same rock and a hard place as they have been for a couple years now-- ie: Deflation and Inflation: I am in the camp that's calling BS on Bernake's claim that he's got lots of tools to fight inflation that don't involve raising rates. Bernanke's got few alternatives but to jawbone.

There is a growing divide today between those that want to maintain the value of the dollar by raising rates and not printing so much paper and those that want to stimulate the economy by dropping money from helicpoters. I thnk Ben's hands are tied and the only thing the fed can do is slow the trainwreck. There is no wiggle room/ alternatives are limited. Each option that helps in one regard plays havoc in several others. IMHO.

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