Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Monday, April 03, 2006

Risky Business

"When Paul and Sandra Wilson moved from California, where they couldn't afford to buy a home, to Georgia in May 2004, they bought a house with an interest-only loan. But Paul, 52, has had a tough time finding work, and they lost most of their savings in a business venture. They refinanced to an ARM with a lower rate but one that reset every six months and that charges a $20,000 penalty if they refinance within three years."

"The loan broker "convinced us that it was in our best interest, and in most likelihood within six months our financial situation would turn around and we were going to look at selling," says Sandra, 53, a former law enforcement officer who is disabled."

"In less than a year, their loan payment jumped from $2,275 to more than $2,800. The couple filed for bankruptcy and will lose their home next month. "This was our fourth home," Sandra says. "It's not as if we weren't aware, but we'd never had an adjustable-rate mortgage before."
Banking regulators are concerned about risky loans made to people with precarious finances or those who didn't understand the complex terms and the peril they could face if interest rates rose."

"America's five-year real estate boom was fueled partly by a tempting array of cut-rate mortgages that helped millions of Americans qualify for home or refinance loans. To afford soaring home prices, many turned to adjustable-rate and other, riskier loans with low initial payments. The homeownership rate hit a record 70%."(CA is much lower)

"Now, the real estate market is cooling, interest rates are rising and tens of thousands more Americans are starting to have trouble paying their mortgages. Nearly 25% of mortgages - 10 million - carry adjustable interest rates. And most of them went to people with subpar credit ratings who accepted higher interest rates, according to the Mortgage Bankers Association."

"The number of borrowers in trouble will rise this year and peak in 2007 and 2008 as the largest number of mortgages reset to higher rates, according to First American Real Estate Solutions, a real estate data provider."

"Already, in West Virginia, Alabama, Michigan, Missouri and Tennessee, about one in five homeowners with a high-interest (subprime) ARM was at least 30 days late at the end of last year, according to the Mortgage Bankers Association. After 90 days, the foreclosure clock starts ticking."

"Most of those foreclosures are related to job losses in auto and garment factories; higher mortgage payments were often the last straw."

"What worries experts such as Christopher Cagan at First American Real Estate Solutions are the adjustable-rate loans made in 2004 and 2005, at the end of the housing boom. These loans were concentrated in the hottest markets, such as California, where about 60% of all loans last year were interest-only or payment-option ARMs. That's the highest such rate in the country." (82% in the bay area and 69% in Sonoma.)

"Of the 7.7 million households who took out ARMs over the past two years to buy or refinance, up to 1 million could lose their homes through foreclosure over the next five years because they won't be able to afford their mortgage payments, and their homes will be worth less than they owe, according to Cagan's research."

"The losses to the banking industry, he estimates, will exceed $100 billion."

"Last week, the Federal Reserve raised interest rates for the 15th time since June 2004 and signaled that at least one more increase is likely. That trend is ominous for borrowers who were seduced by adjustable-rate loans that offered interest-only payment options or teaser rates below 2% or that let the borrower pay less than the interest owed. They will face bigger payment shock once their loans reset to higher rates."

"In December, regulators proposed new guidelines for mortgage lenders to crack down on loose lending practices. The rules would require better risk disclosure and a fuller analysis of the borrowers' ability to repay the loan through maturity - and at the highest rates allowed under the loan terms."

"Bank trade groups complained that concerns were overblown. "We do not believe it is appropriate or possible for the lender to dictate the best mortgage products for individual consumers," America's Community Bankers responded."

"No matter what the final guidelines say, they will be too late to help people such as Susan Cambero. She got into trouble after she took out an equity line of credit on her home in Lilburn, Ga., to pay off her car and other bills. As a single mother with total income of $38,000 a year, including child support, she never would have been able to qualify for the $57,000 line of credit from a conservative lender. That line of credit, when added to the balance on her fixed-rate mortgage, totaled $10,000 more than her home was worth."

"The monthly payments for the equity line have more than doubled in four years, to about $400. (She also has a $700-a-month mortgage and hefty credit card bills.) "I can pay it, but I have nothing left over to eat," says Cambero, a contract analyst for a computer company. "I'm going to lose my house."'


At 4/04/2006 11:36:00 AM , Anonymous tom stone said...

$100 billion looks very optimistic to me...i finally read the article on the proposed hospital bond measure in sonoma...$33 per $100k,assuming a 10%annual appreciation of real property for the next 30 years.not much more likely than bush cuttting the deficit in half by '08....but a good reason to buy in sonoma now...i almost wish i still smoked pot too!

At 4/04/2006 12:11:00 PM , Blogger Athena said...

I bet we top out that number here in CA alone. Oh and that bond measure? Good lord!!! You would think the thugs masquerading as hospital administrators would have actually taken the pulse of the community before drinking their own kool-aid and believing in the righteousness of their plan. Talk about stooges. PLUS... they seem to have some problems with math from the lack of clarity with the hospital budgets, to poor planning and forecasting, to just plain pisspoor management in general. Add a hefty dose of we are the chosen people living in the promised land tude they've been sportin' and good grief what a mess they've made.

Everyone knows their names now. Oh and we also love how the administrator is supposed to get a half a million dollar kick back if he succeeds in building a new hospital instead of remodeling the current one. Oh and do you LOVE the fact that HE doesn't even live in Sonoma and won't be paying that tax he is pimping.

have you seen this?

“New data released from the FDIC shows that the same banks have concentration of real estate-related loans that are well above that of previous boom years. More than half, or 56 percent of community banks in Florida had an exposure of construction and development loans that were 100 percent or more of capital. In contrast, just 22 percent of banks had such exposure during 1987, the last boom period.”

“At 421 percent, the median commercial real estate exposures (CRE) loan-to-Tier 1 capital concentration among California-based institutions ranked fourth highest among the states as of year-end 2005. Elevated concentrations of CRE loans may leave institutions more vulnerable to adverse changes in market conditions.”

“Innovative mortgages and investors may be buoying California housing demand. Interest-only and negative amortization loans accounted for 69 percent of non-prime mortgage originations in California in the first 11 months of 2005. During the same period, investors and second-home purchasers accounted for 15 percent of California Alt-A mortgage originations.”

should we call all the sonoma county banks and ask for their exposure stats?

At 4/04/2006 12:44:00 PM , Blogger Athena said...

GetStucco over at Ben's place is so darn smart. This is what he had to say about the latest FDIC exposure:

Comment by Getstucco
2006-04-04 10:13:48
“New data released from the FDIC shows that the same banks have concentration of real estate-related loans that are well above that of previous boom years. More than half, or 56 percent of community banks in Florida had an exposure of construction and development loans that were 100 percent or more of capital. In contrast, just 22 percent of banks had such exposure during 1987, the last boom period.”

When the buildup of systemic and correlated risk which fuels the boom unwinds, the feedback effect will make this crash much worse than the any others of at least the last 60 years. Too many individual decision makers have tacitly colluded to make the same collectively foolish mistakes, failing to notice that rather than excercising independent prudence, they were running with the lemmings herd to the edge of the cliff. This characterization applies in equal measure to recent homebuyers who used suicide financing to stretch their home purchase budgets, consumers who lived the life of Ryan through cashout-ATM financing, bankers whose loan portfolios are are topheavy with RE construction loans, mortgage lenders who took the low level of defaults during an unprecedented runup in home prices as evidence that subprime lending risk was no longer a concern, and investors who bought on to the new dogma that real estate is a superior asset class to equities or savings because real estate prices only go up. This multilayered and mutually-supporting web of stupidity will impose a high level of collateral damage beyond those who are directly responsible, as our national economy has turned into a giant addict to the heroin of runaway real estate price inflation.


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