Pass the Popcorn & the Fool-Aid

"As home prices in the Bay Area stagnate and sales volume plunges, the next blow to the region's housing market could come from defaults among high-risk borrowers, some experts say. "

"The stunning erosion in mortgage credit quality is quickly becoming another very heavy weight on the Bay Area's housing market," said Mark Zandi, chief economist at Moody's Economy.com."

"Until recently, the Bay Area's booming housing market kept such marginal borrowers out of trouble. But no more."

"Housing prices went on a five-year tear in the region, jumping 72 percent to reach a median of $628,000 last year from $365,000 in 2001, according to DataQuick Information Systems."

Really? Do you really need to be a rocket scientist to do the math on that? This was not real appreciation. There was nothing that transpired in the Bay Area that can account for a real increase in value. This was loose lending standard driven speculation run up. What goes up, must come down. Pass the Fool-Aid.

"When the housing market was strong, the brokers expanded, adding staff and origination infrastructure," Zandi said. "When demand started to weaken, they were under tremendous pressure to fill the void. The only way to do that was by lowering their standards and bringing in less-creditworthy borrowers."

"Meanwhile, the foreclosure rate is rising, particularly among high-risk borrowers, known as subprime in the lending industry."

"About a quarter of the mortgages issued in 2005 and 2006 in California fell into the subprime category, compared with 20 percent nationwide, according to Economy.com."

California Rest In Peace

"Nationwide, the number of subprime borrowers who missed home-loan payments jumped to 22 percent in the fourth quarter of last year from 16 percent in the fourth quarter of 2000, according to Economy.com. The percentage of Bay Area subprime borrowers who fell behind on payments jumped to 23 percent from 11 percent in that same period."

"Across the country, those loans are going sour fast, Zandi said. More than 7 percent of homeowners who took out adjustable-rate subprime loans in 2005 were at least 120 days behind on their mortgages within 12 months of when the loan was issued, according to an Economy.com report that Zandi helped write. For the 2006 subprime loans, 4 percent of borrowers fell into that same category after just five months."

"Rising delinquencies are bad news for an already teetering housing market, both regionally and nationally. A higher number of delinquencies will likely lead to a spike in foreclosure rates, depressing home prices as lenders sell repossessed property at a discount. Also, as lenders struggle to cope, they become increasingly tightfisted. That makes it harder to borrow, shrinking the pool of potential buyers and drying up demand."

"Most people are stretching pretty far to get into that loan to begin with," Leonard said. "Many of these loans were underwritten only based on initial payment, not on a fully indexed rate."

"Some borrowers will simply be unable to afford the higher payments, said Christopher Thornberg, a principal at the consulting firm Beacon Economics."

'"Money is money, and the first rule of financial markets is that there is no such thing as getting money in a cheaper way," Thornberg said."

'"That could lead to another big step down for the housing market," Economy.com's Zandi said."