Category: Housing Crash

US Subprime Markets a “Dangerous Cocktail”

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Moodys Investor Services described the US subprime marketas a“relaxation of risk management and underwriting standards combined with the growth of little understood debt derivatives, many of them based on US sub-prime mortgages, had proved to be “a dangerous cocktail” yesterday.

You think?

A governor of the Bank of England said that, “there were still troubles ahead in the sub-prime sector and that the losses of large investors made it difficult to decide where borrowing costs should move next due to the volatility it created in financial markets.”

This is why I think that this is heading to an illiquid state. Exotic high risk instruments are coming home to roost, and when they do, prices will drop, because these instruments monitized (drove up the price) of residential real estate.

With people owning highly leveraged homes that are falling in value, they will be under water, owing more than they have in equity, and they will be unable to sell the homes.

Home price depreciation at levels not seen since the Great Depression”

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At the Big Picture, there aresome thoroughly shocking quotes from Countrywide Financial Chief Executive Angelo Mozilo.

I agree with Mr. Ritholtz’s assessment that the shocker quote is, “Company is seeing home price depreciation at levels not seen since the Great Depression“.

FWIW, Mr. Mozilo also said, “no one saw the deterioration of real estate values coming“. I beg to differ.

There were a few people, including me, who were noting that house prices were insane, as early as 2002. (Not on this blog, on a message board)

I’ve also said that the dollar and the balance of payments in the US is unsustainable, and this will create a situation where interest rates going up makes real estate illiquid, and rates going down puts the US dollar through the floor.

We’ll see how it goes.

Prime Mortgages Going Bad Too

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The refrain of the NAR, and other people pimping for real estate has been that the meltdown will be confined to sub-prime mortgages.

Coffin, meet nail.

Countrywide feels pain of ailing mortgage market – Los Angeles Times
CEO reports that even ‘prime’ borrowers are having more trouble making payments. Company’s second-quarter profit slides 33%.
By Annette Haddad
Times Staff Writer

2:25 PM PDT, July 24, 2007

Shares of Countrywide Financial Corp. tumbled today after the nation’s biggest mortgage lender signaled that rising defaults and delinquencies were spreading beyond the troubled sub-prime market to higher-quality “prime” loans.

The Calabasas-based company reported a 33% drop in its second-quarter profit and slashed its outlook for the rest of the year, citing an “increasingly challenging” housing market.

“We expect difficult housing and mortgage market conditions to persist,” said Countrywide Chief Executive Angelo Mozilo.

During the quarter ended June 30, softening home prices in many areas of the country caused delinquencies and defaults to rise for Countrywide borrowers with all kinds of mortgages, Mozilo said.

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People paid more than they could afford for houses because they were afraid that rising prices would lock them out forever, and they paid too much, and got mortgages that were too bkg.

ONLY $2 Million???? ONLY?????

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The New York times has an article on the difficulties of finding a family sized apartment in New York.

In truth, they mean Manhattan, because they can be found in good neighborhoods Brooklyn and Queens, but generally it would be no never mind to be, but for this quote:

The elusiveness of these large apartments is hitting people with budgets of, say, $8 million just as hard as buyers with only $2 million to spend. And the fights for the apartments that are available are being won or lost in bidding wars.

Only $2 million? What the hell is up with that? Based on a simple rule of thumb, that means that these folks are making at around $700K/year.

Only in the Times real estate section is this poverty.

On the HedgeFund/Subprime Meltdown

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A survey of what is out there has the New York Post approaching this in its typically sensationalist manner, though there are some pieces of useful information:

HEDGE HORROR

SUBPRIME MELTDOWN COULD WIPE OUT BILLION$

By PAUL THARP
The stunning formal disclosures, which eventually could affect as much as $2 trillion in various mortgage securities, is expected to trigger widespread revaluation of the paper, which some analysts believe could wipe out 40 to 50 percent of their values.
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“The hedge funds are so over-leveraged, they’ll be the first to crack,” said Peter Schiff, CEO of Euro Pacific Capital.

By of perspective, that is about $6500 in mortgage securities for every man, woman, and child in the US, and the point about leverage is a telling one.

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The housing crunch sent the dollar plunging to a new low against the euro for the second day, to $1.3787. The greenback fell to a 26-year low against the British pound, at $2.0271.

This is where a lot of foreign investment is going, and if it’s scared off, it may not come here at all, pushing the dollar down and interest rates up.

The rather alarmist Post headline is reinforced by the fact that two Bear Stearns mortgage hedge funds have basically been wiped out. Investors have lost everything because of a relatively small drop by virtue of the amount of leverage.

So much for smart investors.

On the other side, we have Ben Bernanke claiming that everything will be fine , that the housing collapse will just a small bump int he road.

Juxtaposed with this, you have Vulture Hedge fund Black Pearl preparing to snap up cheap mortgage securities. They believe that, “The subprime market is approaching a point where ‘widespread price dislocation’ is likely.”

Translated from the legalese, this means that folks are panicking, and they intend to capitalize on this.

I trust them more than Bernanke.

What’s Going On With Subprime Loans

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I came across this post at Alea blog, which has a picture worth many thousands of words:


As you can see, the other loan default rates are at or below their levels in the 2001-2002 recession.

The big question is whether the other default rates will follow subprime variable rates.

My guess is yes, for at least 2 of the remaining 3. Notwithstanding the Dow, we are headed for a slow down, and interest rates are going to have to rise. They are still at or near historically, and unsustainably, low levels.

With oil likely to break 90 by year’s end, and trillions in mortgage resets due to hit in the next few years, I see it as getting very, very bad.

Even With the Sub Prime Market Crashing, Bad Paper Still Flows Freely.

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People know that this is crashing. People know that someone will be left holding the bag on trillions in bad loans, but they are still making bad loans.

It’s simple: In our “flexible and deregulated economy” the crooks make their money, and get out of town before the house of cards collapses.

At some point, a risk premium will be associated with investing in the US, and it will get very ugly here.

Subprime lending: Business as usual

A consumer group charges that many subprime lending abuses continue to plague the lending industry despite the recent crisis.
By Les Christie, CNNMoney.com staff writer
June 28 2007: 3:25 PM EDT

NEW YORK (CNNMoney.com) — It would appear that subprime lenders have yet to learn from their mistakes. According to a consumer advocate group, abuses persist industry wide, despite the recent subprime mortgage meltdown.

At a Senate subcommittee hearing on ending mortgage abuse this week, the Center for Responsible Lending (CRL) presented its findings on subprime loans included in 10 recent packages of mortgage backed securities.

“A lot of the terms that make these loans so dangerous are still being used,” said Keith Ernst, CRL’s senior policy counsel. “We had been told that these things are going away.”

More than three quarters of the subprime loans CRL looked at turned out to be adjustable rate mortgages (ARMs). 90 percent of those were hybrid ARMs – otherwise known as “exploding” ARMs.

Hybrid ARMs have two- or three-year periods of cheap, low-interest, fixed-rate payments, or “teaser rates.” But after two years, the loans reset at much steeper rates, which can prove fatal for homeowners who can’t handle the higher payments.

On a $200,000 loan with a teaser rate of 5 percent, for example, borrowers would pay about $1,074 a month. At reset, the interest rate could jump to 8 percent, adding nearly $400 to payments, which could continue to increase every six months.

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Two Million Adjustable Mortgages to Reset

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You heard right, over the next few months, TWO MILLION mortgates will reset:

Borrowers who took out hybrid ARMs in 2004 and 2005 to secure low “teaser” rates for the first two or three years of the loan may see their monthly mortgage payments climb by 35 percentor more.

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“In October alone more than $50 billion in ARMs will reset,” according to Mark Zandi, chief economist and co-founder of Moody’s Economy.com. That’s a record, according to Zandi.

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I paid 20% down in 2004 for a 30 year fixed.
I fully expect to be under water at some point in the near future, dispite the fact that the value increased by over 40% from 2004-2006.

Home Foreclosures: This is Not San Francisco, Florida, or New York.

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One of the things that is going on right now is that the bottom of the housing market has stopped selling.

This IS going to work its way up the chain.

Increasing Rate of Foreclosures Upsets Atlanta
By IKAS BAJAJ

ATLANTA — Despite a vibrant local economy, Atlanta homeowners are falling behind on mortgage payments and losing their homes at one of the highest rates in the nation, offering a troubling glimpse of what experts fear may be in store for other parts of the country.

The real estate slump here and elsewhere is likely to worsen, given that most of the adjustable rate mortgages written in the last three years will be reset with higher interest rates, said Christopher F. Thornberg, an economist with Beacon Economics in Los Angeles. As a result, borrowers of an estimated $800 billion in loans will be forced in the next 12 months to 18 months to make bigger monthly payments, refinance or sell their homes.

A big reason the fallout is occurring faster here is a Georgia law that permits lenders to foreclose on properties more quickly than in other states. The problems include not just people losing their homes, but also sharp declines in property values, particularly in lower-income and working-class neighborhoods.

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The Real Estate Panic Begins

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Markets do not react in linear ways. They are vehicles for mob psychology, so people hold on past where the top should be, and then panic, and head for the door.

This is panic time.

Future shock: Central Florida markets will fall
A short-sale expert says he can predict market slumps by client traffic. Next stop: The Sunshine State.
By Les Christie, CNNMoney.com staff writer
July 6 2007: 12:55 PM EDT

NEW YORK (CNNMoney.com) — A tidal wave of foreclosures may be heading toward Florida, if you judge by the number of homeowners looking to get rid of their homes as fast as they can.

Duane LeGate, president of House Buyer Network, arranges quick sales for home owners in distress. He claims he can predict where markets will go bad by looking at the traffic on his Web site.

“We can tell you what’s going to happen nine months from now,” he said. His most endangered market right now is Orange County, Florida, home of Disney World.

“Orlando has blown up. There’s been a 700 percent increase in traffic of people filling out our forms,” he said. “I could put a bull’s-eye on Orlando and write the headline for what will be going on in January and February.”

What will be going on could include a large increase in foreclosures as well as lower prices, longer inventories and a slower sales pace.

Here’s how the House Buyer Network works: A homeowner wants a quick sale and signs up. The network connects the homeowner with a real estate agent who gets an appraisal for, say, $200,000. The agent markets the home at $195,000. If it fails to sell within the time stipulated in the contract, the agent will buy the house at a prearranged, discounted price of perhaps $180,000.

LeGate estimates the discount from what sellers would get if they didn’t need to sell quickly is 5 percent to 8 percent, once all the costs and fees are figured in.

LeGate’s forecast runs ahead of the latest home price statistics. According to the National Association of Realtors (NAR), Orlando prices for the first quarter rose 2.5 percent compared with a year ago, which would point to a weak – but more stable – market. Nevertheless, LeGate trusts his indicators.

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drop of half the value is not unrealistic right now if a seller needs to sell

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A 50 percent drop means that anyone who has bought or refinanced in the past 15 years would be owing more than they could sell the home for.

This is why short sales, where the bank accepts a loss, are becoming more common.

Seller cuts price of house by $1 million

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Mary Anne Windes, a veteran broker in Destin who has Real Estate Professionals of Destin, said in an e-mail interview, “The trend is that prices are moving to the same level that they were in 2003. As you will recall, 2004 and 2005 saw tremendous and often unrealistic growth. The market has now corrected itself. Many properties doubled in value during that time, so a drop of half the value is not unrealistic right now if a seller needs to sell.”

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United Capital Asset Management hedge funds halt withdrawals – Jul. 3, 2007

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This is called a run on the bank, and when investments start to become illiquid this way, people lose everything.

United Capital Asset Management hedge funds halt withdrawals
Embattled hedge fund management group suspends redemptions from four funds following losses in subprime mortgages.
July 3 2007: 3:43 PM EDT

NEW YORK (CNNMoney.com) — United Capital Asset Management has temporarily suspended payments from four of its Horizon funds following losses from its investment in subprime mortgage bonds.

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In the past ten days, the firm received an unusually high number of redemption requests, including one from its largest investor which accounts for one-quarter of the firm’s assets under management.

Where People Will Find Themselves Under Water with Their Mortgages

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Under water means owing more than it is worth.

Top 10 Places Where the Housing Bubble Will Bust
The current housing bubble first reared its ugly head in 1997. Prices began to climb so rapidly that they quickly became unaffordable for potential buyers making the median household income. By 2006, some of the air started being released from the bubble, and now the balloon is on the verge of busting.

What Goes Up…Must Come Down
Experts say that prices need to fall to 1997 levels to be sustainable.

Which experts? Nice Chart though. Also, there is always an overshoot.

Metro Area 2007 Price 1997 Price* % Decline to Return to 1997 Prices
SF-Oakland-Fremont, CA $748,100 $288,484 61.4
Miami-Ft Lauderdale, FL $385,300 $148,900 61.3
Riverside-San Bernardino, CA $404,400 $157,011 61.1
Sarasota-Bradenton, FL $337,000 $135,977 59.6
Los Angeles, CA $589,800 $241,976 58.9
San Diego, CA $595,200 $249,553 58.0
Orange County, CA $697,300 $293,362 57.9
San Jose-Sunnyvale, CA $788,000 $390,660 50.4
Nassau-Suffolk, NY $479,800 $240,933 49.7
Sacramento, CA $365,500 $196,738 46.1

*1997 prices have been adjusted at the general inflation rate and are reported in 2007 dollars.

Note also, that anyone who got a conventional old fashioned mortgage, 20% down, fixed rate, will be under water in these locations, and in many more not shown.

For those with interest only, no money down, negative equity, 5% down, etc., these numbers will be much higher.

Rich People Are the Only Ones Still Buying Houses in NY.

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Condos in New York are seven figure, and sometimes eight figure purchases.

The very well off, as opposed to the hyper-rich, cannot afford this, and they buy into co-ops.

The housing market is losing ground everywhere except with the at the very, very, very, top.

Co-ops Slip, but Condos Lead Rise in Manhattan Apartment Prices
By CHRISTINE HAUGHNEY

While housing prices are falling in many parts of the country, the cost of a Manhattan apartment is continuing to rise over all. But a stark divide is emerging between the prices of co-ops and condominiums. More buyers are choosing condominiums over co-ops and are paying far more for them, according to studies being released today.

The average price of a condo in Manhattan rose by as much as 28 percent in the second quarter of this year compared with last year, according to data tracked by four large real estate brokerages. In the same period, the average co-op price dropped by as much as 10 percent. Buyers paid an average of $1.49 million for a condominium, compared with $1.13 million for a co-op, according to figures from Brown Harris Stevens.

Brooklyn did not share Manhattan’s price rise. There were more deals, but the average apartment price dropped by 4 percent, to $629,000, compared with last year, according to data from the Corcoran Group.

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Pending home sales index fall signals more weakness ahead – Jul. 3, 2007

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So the housing market is not yet worse than a terrorist attack.

Also note that this is pending sales, and there will be more cancellations today than in 911.

Banks are tightening credit today, Greenspan flooded the economy with liquidity after 911, so this is going to get a lot worse.

Pending home sales index fall signals more weakness ahead
Reading of pending home sales sinks to lowest since September 2001, suggesting more pain for the housing market.
July 3 2007: 10:33 AM EDT

NEW YORK (CNNMoney.com) — Existing home sales are likely to see more declines in coming months as a key reading of pending deals fell to nearly a six-year low in May, a real estate group said Tuesday.

The National Association of Realtors said its index of pending home sales, which reflects homes under contract, sank to 97.7 in May from 101.2 in April. The latest reading is 13.3 percent lower than May 2006.

The index was created in 2001 to be a more forward-looking reading on home sales than the group’s existing home sales report, which charts sales at the time of closing. The pending home sales index tracks when a sales agreement is signed, generally a month or two ahead of closing.

The index was set at 100 at the start in 2001. The May reading is the weakest since September 2001, the lowest on record, when the Sept. 11 attacks hit consumer confidence. The latest reading matches the third lowest.
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This is Where We Are in Real Estate

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5 Paragraphs, and the entire picture of the sick man that is US housing is laid bare.

Salton City: A land of dreams and dead fish

New homes and old optimism continue to sprout in a desert community that hasn’t really jelled in 50 years.
By David Streitfeld
Times Staff Writer

July 1, 2007

SALTON CITY, CALIF. — This lakeside hamlet is about as remote as you can get in Southern California and still have plumbing and pavement.

Nestled on the western shore of the Salton Sea, the town doesn’t have a supermarket or movie theater or drugstore. But it has as many as 250 homes for sale, most of them newly built — a huge supply for a place with just 1,440 people.

When real estate values began soaring a few years ago, builders flocked here. Summer temperatures might hit 115 or even 120 degrees and the sea may be too sickly for swimming or sailing, but land was cheap. Builders figured that people priced out of Los Angeles and San Diego would discover Salton City and the other towns in Imperial County.

Now, with home values sliding, mortgage rates edging up and gasoline prices on an upward trend, that assumption appears premature at best. Imperial County, at least for the moment, seems a subdivision too far.

“Builders are like lemmings. They saw a few of their peers going to Imperial County and they all joined in,” housing consultant Patrick Duffy said. “They didn’t do market studies. They just crossed their fingers.”

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Emphasis mine.

Move Over Subprime. Here is Your Brother, Alt-A

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These are more common than subprime loans, and while the terms are better, and the debtors in a better position to pay their loans, this bubble is deflating too.

To quote Rich Toscano, “As a matter of fact, high-risk mortgages have accounted for a comfortable majority of all San Diego home loans in recent years.“

If you have a 10% drop in housing prices, you will see many, if not most, of the homeowners in the US under water, owing more than they can sell the property for.

Alt A Loans `Disconcerting,’ Jumbos Weaker, S&P Says
By Jody Shenn

June 26 (Bloomberg) — U.S. homeowners with good credit are increasingly falling behind on mortgage payments, a sign lenders have been offering “higher risk” loans outside the so-called subprime market, Standard & Poor’s Corp. said today.

Rising late payments and defaults on so-called Alt A mortgages made last year are “disconcerting” and delinquent borrowers appear to be “finding it increasingly difficult to refinance” or catch up on their payments, S&P analysts said today in a statement. “Serious” delinquencies, foreclosures and seized property among “prime jumbo” mortgages in bonds from 2006 reached the highest among loans of less than 13 months since at least before 2000, S&P said in a separate report.

Alt A home loans are granted to borrowers with generally good credit scores who opt for unusual loan terms or underwriting standards, such as reduced proof of their pay, without enough offsetting positive attributes.

S&P, one of the two largest ratings firms, is now “examining how the risk profile clearly increased” in the Alt A market, it said in a statement sent by e-mail today. “We will communicate our findings to the market,” S&P said, in language it typically uses ahead of adjusting its rating methodology.

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