Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Sunday, March 04, 2007

Train Wrecks are Train Wrecks

"What investors don't know about why the home mortgage securities market is in distress could fill volumes. As is often the case, only after fiery markets burn out do we see the risks that buyers ignore and sellers play down."

"Because so many players in this world have an interest in keeping risks under wraps, a complete understanding of the mortgage market's ills may take time. Unlike recent corporate disasters that have occurred at hyperspeed - think Enron and WorldCom - the mortgage securities boom seems to be unwinding in slow motion. But train wrecks are train wrecks, even when they occur at a crawl."

'"The problems are far broader than subprime," said Josh Rosner, a managing director at Graham-Fisher in New York and an expert on mortgage securities. Rosner says he believes that, absent a huge jump in home prices, investors will soon recognize that credit quality problems have also begun to seep into "the upper tranches" of the loan market."

"Wall Street, of course, prefers a more upbeat approach. And by the end of last week, many there were celebrating the fact that the indexes on mortgage securities, which had been in free fall, had stabilized. Big brokerage firms also have tried to persuade investors that mortgage woes would be limited to subprime loans - those given to people with weak credit histories."

"But last Thursday, the annual report from Countrywide Financial, a major lender, told a different story. While it confirmed fears about subprime loans - 19 percent of those in its portfolio were more than 30 days delinquent at the end of last year, up from 15 percent in 2005"

- "Countrywide also indicated that the percentage of prime borrowers encountering difficulties is rising. Delinquencies in the company's prime home equity loan portfolio totaled 2.93 percent, almost double last year's 1.57 percent."

"And consider the disclosure last Thursday of American Home Mortgage Investment, a home mortgage originator and investor that specializes in loans to those with middle-tier, not weak, credit histories. As of year-end, the company said, 8.13 percent of its loans held for sale (not investment) were nonaccruing. During the same period in 2005, that figure was just 0.43 percent."

"Investors get little to no information about how lenders work with troubled borrowers and whether those efforts actually cure the problem - or simply postpone the inevitable. As a result, investors do not know whether the default figures they are seeing reflect reality."

"In 2002, the Office of the Inspector General in the Department of Housing and Urban Development reviewed the department's loss-mitigation program and found some disturbing practices."

"Financial institutions that were surveyed from May 1999 to April 2001 in many cases chose to delay foreclosures even when it was obvious that loan workouts would probably not succeed, the study said. The audit reviewed practices from 1999 to 2001, but the practices remain very much in place today."

"Mortgage servicers "are approving borrowers for loss mitigation when, based on the servicers' expertise and past experience with delinquent borrowers, the workout is unlikely to succeed," the report said. "These actions are delaying the foreclosure process, increasing the cost of foreclosure, and subsidizing borrowers who do not pay their mortgage for extended periods of time."'

"The report noted several examples of borrowers who received workouts under truly kooky circumstances. One borrower explained that he could not pay his mortgage because of gambling losses; he received a workout and later filed for bankruptcy protection."

"Academic studies suggest that within the first two years of a workout, re-defaults can approach 25 percent. But there are no publicly available data to analyze the success rates of loss mitigation. And this is something investors sorely need."

"No one likes to face ugly realities like financially ailing borrowers who are so strapped that nothing can save them. Not the lenders, not the Wall Street firms that sell the securities, not even the holders. But experienced investors know that a reliance on fantasy will only prolong the pain that is racking the huge and important mortgage market."


At 3/04/2007 07:35:00 PM , Anonymous marinite said...

a reliance on fantasy will only prolong the pain that is racking the huge and important mortgage market


At 3/05/2007 07:58:00 AM , Anonymous tom stone said...

anyone who is surprised that there is a problem with "prime" loans has been working real hard not to notice."prime" meant you had a 720 score when you secured the says nothing about DTI,underwriting,appraisals,or any of the other factors that a prudent lender might consider.still an almost 20% delinquency rate on ANY kind of loan is staggering.Pawnshops do better than that,and they have security.anyone who considers a 90% plus loan made in the last 2 years a secured debt needs help.

At 3/05/2007 06:04:00 PM , Blogger Lisa said...

Still, MSM is calling this a "subprime" problem. I wonder at what point it becomes obvious that this problem is way, way beyond subprime only.

Think of all the buyers who stretched, the buyers who have tapped equity, refi'd multiple times, etc. And wait for the foreclosures to hit the market. Banks won't sit around and wait for a "wishing price." Fewer people able to buy, fewer people able to re-fi their way out of this mess with tighter lending standards.

And are you still prime if you're $100K underwater on your house?

I'm so, so glad I sold in 2004. And I have no pity for anyone in the Bay Area who bought into this madness. I mean, didn't we all just live through the meltdown here? Really, people.

At 3/05/2007 06:38:00 PM , Blogger marin_explorer said...

I mean, didn't we all just live through the meltdown here? Really, people.

Indeed. Some of us felt the meltdown acutely (and learned), but I'll guess most people still do not see the connection between these two events. After all, us Bay Areans exude success, so the downside risk cannot possibly overtake the local consensus. Oops--surprised again!

Smart move on selling your house. You must have detected a trend, and had better sense than to "time the market."

At 3/05/2007 07:21:00 PM , Blogger Athena said...

right... we exude success, it is different here, California is god's country, (marin in particular and Sonoma is at least his weekend place) and we all make $200k and we will all be fine here, those sup-prime people must be in other states. Right?

How many conversations are happening right now among the RE believers just like that one?

At 3/05/2007 07:28:00 PM , Anonymous tom stone said...

Lisa,I had a flashback when i read the third paragraph of your post.when i was young,i accompanied my father on a number of appraisals,one of them a custom meat processor for high end restaurants.we left with several pounds of "prime" grade beef.I have never forgotten the sight and smell of those carcasses on the hooks in that cold room.that is the current condition of many "prime" borrowers.there are still buyers out there,i am acquainted with 3 people who have bought in the last 6 weeks.i keep my mouth shut about the market around them because anyone who is stupid or delusional enough to buy now is "i'm glad you got what you wanted",gotta go.

At 3/05/2007 07:32:00 PM , Blogger Lisa said...

"right... we exude success....

Yep, and for a lot of folks, it was debt, debt and more debt.

At 3/16/2007 05:43:00 AM , Anonymous Anonymous said...

Will Friday be an economic doomsday?

At 3/21/2007 10:58:00 PM , Anonymous Anonymous said...

are you telling me that i can not borrow housing anymore and make twice the average,average income anymore, while paying the banks lenders and depositors less than the owners rent equivelent {not ownership inflation}{because}anymore,{because we want savers screwed}anymore????

At 3/21/2007 11:00:00 PM , Anonymous Anonymous said...

bummer dude, detroit manufactures mansions selling for 125,000

At 3/21/2007 11:01:00 PM , Anonymous Anonymous said...

bummer dude!

At 3/21/2007 11:04:00 PM , Anonymous Anonymous said...

access to one of the worlds largest fresh water resourses and the railyards of Canadas basic material commodities??? 125,000?

At 3/21/2007 11:08:00 PM , Anonymous Anonymous said...

what value? tulip bulbs, still 1 make 6?

At 3/21/2007 11:09:00 PM , Anonymous Anonymous said...

cant smoke em, cheap, gotta pay tax

At 3/21/2007 11:10:00 PM , Anonymous Anonymous said...

elliot ness was a tool of standard oil


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