Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Wednesday, March 07, 2007

Primed for Disaster


“In another sign the mortgage crunch is spreading, Lehman Brothers Holdings Inc. announced it is cutting the ratings of Countrywide Financial Corp., the largest mortgage lender, and other prime lenders as defaults surge.”

anyone remember the local Countrywide broker who bragged that 80% of his local customers use the Neg-Am Bendover loans and plan on refinancing or selling just before they reset? Smells like trouble a brewing to me...

“‘Prime loans will see rising default rates as subprime has, due to increasingly weak underwriting in recent vintages,’ analyst Bruce Harting said. ‘The rapidity, breadth and depth of the subprime sector meltdown has been extraordinary, even in the context of an environment in which most industry observers felt that major problems in the subprime space were inevitable and overdue.’”

"The mortgage market has been roiled by a sharp increase in bad loans made to borrowers with weak credit. Now there are signs that the pain is spreading upward."

"At issue are mortgages made to people who fall in the gray area between "prime" (borrowers considered the best credit risks) and "subprime" (borrowers considered the greatest credit risks). A record $400 billion of these midlevel loans -- which are known in the industry as "Alt-A" mortgages -- were originated last year, up from $85 billion in 2003, according to Inside Mortgage Finance, a trade publication. Alt-A loans accounted for roughly 16% of mortgage originations last year and subprime loans an additional 24%."

"Data from UBS AG show that the default rate for Alt-A mortgages has doubled in the past 14 months. "The credit deterioration has been almost parallel to what's been happening in the subprime market," says UBS mortgage analyst David Liu. The UBS report contrasts with testimony Federal Reserve Board Chairman Ben Bernanke gave to Congress yesterday."

"Borrowers who take out Alt-A mortgages are considered less risky than subprime borrowers because of their higher credit scores. But as the housing market cooled and loan volume declined, some lenders lowered their standards for Alt-As. Now a rising number of borrowers who took out these loans are running into trouble."

"Housing counselors and bankruptcy attorneys say they are seeing an increase in troubled borrowers who previously had good credit. "We have clients with 720-plus credit scores, and they are in awful products," says Jennifer Harris, executive director of the Home Loan Counseling Center in Sacramento, Calif. Some of these borrowers took out option ARMs with low introductory rates and are likely to fall behind when their monthly payment resets at a higher level, she says."

"The catch-all Alt-A category includes many of the innovative products that helped fuel the housing boom, such as mortgages that carry little, if any, documentation of income or assets, and so-called option adjustable-rate mortgages, which give borrowers multiple payment choices but can lead to a rising loan balance. Loans taken by investors buying homes they don't plan to occupy themselves can also fall into the Alt-A category."

"Thomas Gorman, a bankruptcy attorney in Alexandria, Va., says he is seeing more financially strapped borrowers who "probably bought more house than they could afford and then took on more credit-card debt" to furnish the house and pay for the move. When the housing market cooled, they were "caught in the middle," unable to sell their home or refinance and make their debt load more manageable."

"The UBS study found that the problems are greatest for Alt-A borrowers who took out interest-only adjustable-rate mortgages, which allow borrowers to pay interest and no principal in the loan's early years, with 3.71% of interest-only ARMs originated in 2006 at least 60 days past due. As in the subprime sector, the riskiest loans are those made to home buyers who put little, if any, money down and don't document their income or assets."

"Some borrowers who took out Alt-A loans in recent years are starting to feel the strain. Johnny and Shirley Johnson, retirees in Cleveland, took out an option ARM when they refinanced their $92,700 mortgage in July 2005. The loan carried a 3.5% introductory rate that began moving upward a few months later. The couple, who live on a fixed income, are currently making the minimum payment on their loan. But they are afraid they won't be able to keep up with their loan and other debts once their monthly mortgage payment adjusts upward later this year."

"Glenn Costello, a managing director at Fitch Ratings Inc. in New York, expects the foreclosure rate for Alt-A loans to ultimately be only 10% to 20% of the rate for subprime borrowers."

"Yet investor concerns about Alt-A loans are rising, according to Walter N. Schmidt, a mortgage investment strategist at FTN Financial Capital Markets in Chicago. A report from mortgage analysts at Barclays Capital in New York this week pointed to fraud as one reason for early defaults on Alt-A loans. The mortgage industry is battling a rash of cases in which borrowers, loan officers and appraisers collude in providing false information to induce lenders to advance more money than homes are worth."

p.s. (thanks Marinite)

10 Comments:

At 3/07/2007 11:59:00 AM , Anonymous marinite said...

"We have clients with 720-plus credit scores, and they are in awful products," says Jennifer Harris, executive director of the Home Loan Counseling Center in Sacramento, Calif. Some of these borrowers took out option ARMs with low introductory rates and are likely to fall behind when their monthly payment resets at a higher level, she says."


But, but,... I thought it's 'different this time'?

he is seeing more financially strapped borrowers who "probably bought more house than they could afford and then took on more credit-card debt"

"more house" -- which in much of CA means pretty much any house at all!

I've said it before that often the reasons for getting these "exotic" loans has little to do with how wealthy you are. Buyers want the most house they can get and that psychology is true for prime borrowers just as much as it is true for subprime borrowers. People are people regardless of their bank account. Someone making bookoo dollars will buy as much house as they can and borrow as much as they can at the most favorable rate they can get so as to get that "most house" and as a result they are just as much at risk as the first-time buyer or the subprime borrower. The logic is the same.

The question then becomes what do they have in reserve to cover themselves when things go wrong? Given the national savings rate is like negative, the answer is probably not much. I think the same is true in Sonoma and for a large segment of Marin...most buyers, especially in the so-called "low end" market, don't have the reserves. I can't prove it though. If anyone has data that can shed some light on this, well, I am all ears.

 
At 3/07/2007 12:04:00 PM , Blogger Athena said...

Well we know these folks have DEBT... but the real question now is... Got Money?

The lenders should have been asking that up front before they pimped their take it in the butt loan products... but now everyone is going to be asking it. Debt, Debt, They've all got the Debt... but Donde Esta the Dinero?

 
At 3/07/2007 04:30:00 PM , Anonymous marinite said...

Well, I see those HG Wedworth (or whatever it is) commercials all the time where some old fart is repeating "Get cash NOW". Seems like the sort of fellow who would appeal to all the old Marin farts in trouble.

 
At 3/07/2007 04:47:00 PM , Blogger marin_explorer said...

"...I think the same is true in Sonoma and for a large segment of Marin."

Especially given the fact that people will leverage credit to enjoy the perceived "lifestyle" of Marin. The subtle social pressure here runs deep, and I know many people who spend more than they should to simply feel part of that happy, affluent crowd. Ultimately, this is a Bay Area game of abusing credit until you've lost all contact with fiscal responsibility.

"...would appeal to all the old Marin farts in trouble.

They'll be OK. They can sell all their limited-edition Thomas Kinkade™ prints and cover their shortfall nicely.

 
At 3/07/2007 08:43:00 PM , Blogger Lisa said...

Ah yes, the AltA crowd. Solid credit scores BUT probably mortgaged to the gills because their good credit allowed them to. I think this is the 80/15/5 IO crowd, which is just about everyone I know who bought recently. Little or no equity and mortgage about to reset. They're in the same boat with the subprime crowd if you ask me.

 
At 3/07/2007 08:48:00 PM , Blogger Lisa said...

"Well we know these folks have DEBT... but the real question now is... Got Money?"

If someone can't afford a downpayment, doesn't have 6 months in the bank, they don't have money to be a homeowner. Not really. Not without vodoo financing.

I don't know how people are sleeping at night.

 
At 3/07/2007 09:44:00 PM , Anonymous tom stone said...

3 ambien and a pint of vodka will put almost anyone to sleep,the nightmare resumes when you come to in the morning.Alt-A and prime are meaningless categories at this point,due to the absence of underwriting and the deflationary trend in real estate. my ex and i leased a home at the peak for 1800 a month that would have sold then for 1.2m.current value is 1m or a little less.if we had put $250k down we wouldn't have much skin left considering piti and maintenance costs,even with an i/o loan,and ignoring opportunity costs.when people who put 20% down are underwater,with prices dropping ,ouch.

 
At 3/08/2007 11:05:00 AM , Blogger Dr Housing Bubble said...

Athena:

How do people go from good credit standing to poor credit standing? If you want to learn how to get from point A to B the quickest, you can draw a straight line through Alt-A loans. Nope, not talking about a Microsoft keyboard shortcut but those folks with high credit scores jumping into zoolandish mortgages.

It will be interesting to see a study showing how many of these folks go from prime credit scores to subprime. I'm sure many have hit this threshold, refinancing into subprimes since all that was needed was a pulse and a shrewd broker. Now that the subprime game is done, where will these people go play?

 
At 3/08/2007 11:11:00 AM , Blogger Athena said...

Dr. HB - No arguments here. I was wondering the same thing over at Lander's place. How long will it take before the real truth hits and they realize that the primes circling the sub-prime bowl will be in numbers unprecedented? This will be a meltdown of epic proportions... seems to me the coverage is simply socializing the truth a little at a time. Spoon feeding it thinking they can avoid panic in the markets. Everyone proceed orderly to the exits no panic here... but as soon as the herd realizes there are no lifeboats on this titanic of financial folly the panic will happen anyway.

 
At 3/09/2007 11:19:00 AM , Anonymous Anonymous said...

Okay, what person in their right mind refinances a measly 92 thousand dollar loan into an option arm? They could have got a fixed at a 5 percent interest rate and they'd only looking at barely a 500 dollar a month. With property tax, homeowners insurance, etc I bet they still wouldn't be much over a thousand to keep a roof over their heads. Can't rent much cheaper than that. Please tell me why I should feel sorry for these losers?

 

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