The Foreclosure "Crisis" Up Close & Personal

[Tokenconservative]

Over the last two years, assorted American politicians, their eager lackeys in the media, frightened, self-serving government and lending bureaucrats and even doomsayers in the lending, real estate and appraisal industry have been predicting the end of the world, as we know it.

In this political season, it seems that nothing will stop them from doing their level best to make sure their dire predictions come to pass.

True, many mortgage lenders have gone toes-up recently. So have many butchers, bakers and candlestick makers. The institutions that have gone under or are in trouble engaged in risky lending practices such as 125% LTV (loan-to-value) loans, no-income, no-asset verification loans, subordinated 3rd, 4th and even 5th mortgages, no money down or heavily assisted down payment mortgages, and of course adjustable rate mortgages (ARM), an instrument previously reserved for sophisticated real estate investors. It’s as if the butcher was selling road kill, the baker was offering moldy bread and the candlestick maker was leaving out the wicks. It’d be far more surprising if they didn’t go out of business.

A residential real estate appraiser tells me that he's seen jollier crowds at funerals for Soviet presidents than he encounters among his clients these days. Worse, he says, most of them can’t wait to tell anyone who’ll listen how terrible things are. Yet, speaking recently to a local audience of Realtors® in this state, an economist and senior vice president of the National Association of Realtors® said that overall, the state's local real estate market would see a four-to-five-percent average appreciation rate over the next year and that, “(t)he one thing that may be holding back your market is buyer pessimism.”

And how. Last year, our local real estate values were steadily appreciating. Then, late in 2007, Fannie Mae (FNMA) announced that we are a “declining” market. FHA, nodding like a bobble-head on the rear deck of Fannie Mae’s ’72 Oldsmobile, agreed. Locally, pricing had been rebounding healthily from a real but slight decline starting in 2005; foreclosures were at about 3-4%--about average for any year.

But how will telling people the "crisis" is about average help anyone at Fannie Mae or FHA keep their job or help particular politicians get elected? This pair of torpid, lumbering bureaucracies, utterly unable to keep up with rapid changes in any market, used this antique data to declare this a real estate and lending disaster area. The simple fact is that there was no “crisis” here until Fannie Mae and FHA created one.

These royal economic edicts have already begun to produce a positive feedback loop that’s anything but positive for most homeowners and for average buyers. Lenders have either stopped lending at all here, or are putting an electron microscope up the rectum of every prospective borrower.

Since fewer people can get loans to buy, fewer houses are selling. Because fewer houses are selling, prices really are starting to fall. The lack of sales (for appraisal comparables) is making it harder for people with good home values and good credit to refinance, too. All of this means that more homeowners--even those with good credit and income and good home values--who are trying to escape rising ARM payments can’t refinance and can’t sell. So more of them are forced to let their homes go into foreclosure. People can’t sell, can’t buy, can’t refinance . . . is it any wonder we’re pessimistic?

Meanwhile cash sales are everywhere. Savvy investors using current data and analysis apparently unavailable to Fannie Mae and FHA, see this market as a gold mine. Taking advantage of the damage Fannie Mae’s and FHA’s meddling has done, they are rushing in to snap up properties--foreclosures and otherwise--at fire sale pricing. Smart, well-to-do homebuyers flush with cash from investments or their six-figure jobs (and there are a lot of these hereabouts), but uninterested in dealing with lenders, are putting cash on the barrelhead in this artificial buyer’s market, too.

Nationally, many experts say only ten-percent of all mortgages in America are currently one of those “at-risk” mortgages. Moreover, it’s believed that less than 1% of that 10% are held by borrowers who are at risk of not being able to make the higher payment. That’s a statistically insignificant number.

In fact, the foreclosure rate was higher in 1998 than it was in 2007, but for some reason it wasn’t a “crisis” then, and neither King Fannie Mae nor Queen FHA were waving their scepters at the map, declaring this or that area or that a “declining” market, either. But then, neither of them had just been found guilty by Congress of malfeasance and incompetence in 1998, as both were in 2007, either.

But why let accurate data get in the way in a hotly contested election year? What good are low unemployment and a healthy economy to someone on the campaign trial? You’d sound crazy promising a chicken in every pot when we’re already grilling t-bones while watching the Superbowl on our plasma wide screens.

Politicians, using their eager fellow travelers in the media and bureaucrats hoping to protect their own rice bowls, needed something to frighten Americans with. You can’t promise to fix a crisis unless you have a crisis to fix, can you? And what better campfire-scare-story can you tell someone than that they are going to lose their home?

Real estate prices rise and fall. The foreclosure “crisis” is a crisis only to those very few American homeowners who actually have lost or who will lose their homes. Just like any other year. The current, so-called foreclosure “crisis” is a mere shadow of real crises such as those in the 1930s or in the 1980s. This one is, instead, a cynical, political game of 3-card Monte, in which politicians, a “news” media that wants to help those politicians and self-serving lending and regulatory bureaucrats who want to protect and feather their own nests play us all for suckers.

Perception is reality and the reality is that this political season-meddling in real estate markets is likely to harm the local economies capriciously targeted, and (as planned) damage the national economy for political purposes. Are crippled local economies and valueless real estate the price you want to pay to make sure some politician gets elected or some bureaucrat gets a raise?

Tokie

[Nick Bogaerts]

Nationally, many experts say only ten-percent of all mortgages in America are currently one of those “at-risk” mortgages.

Ten percent is a lot of people. And who are these unnamed experts?

Moreover, it’s believed that less than 1% of that 10% are held by borrowers who are at risk of not being able to make the higher payment.

I love the passive voice. Who is that doing the believing?

That’s a statistically insignificant number.

You probably wrote that because it sounds neat. The concept of statistical significance escapes you completely, doesn't it?

[drkitten]

T
You probably wrote that because it sounds neat. The concept of statistical significance escapes you completely, doesn't it?

Why should "statistical significance" be the only concept Breach of Membership Agreement removed.actually gets?

[Soapy Sam]

Could someone replace an acceptable version of whatever was removed, so I can read what DK said?

[Leftus]

Last year, our local real estate values were steadily appreciating.



See, there's your problem. You've attempted to apply what is happening locally to what is happening nationally.

And it would be nice if you could cite your sources. Unnamed and unidentied sources might be kosher for the NY Times but that doesn't mean that they should fly here.

[Toro]

Over the last two years, assorted American politicians, their eager lackeys in the media, frightened, self-serving government and lending bureaucrats and even doomsayers in the lending, real estate and appraisal industry have been predicting the end of the world, as we know it.

My friend, you have got it exactly backwards. As an active participants in capital markets for the past 15 years moving billions in stock around, I will tell you that the game is rigged on the upside, not the downside.

[Tokenconservative]

Ten percent is a lot of people. And who are these unnamed experts?



I love the passive voice. Who is that doing the believing?



You probably wrote that because it sounds neat. The concept of statistical significance escapes you completely, doesn't it?

You have to read more closely...it says 10% of MORTGAGEs, not, as you are attempting in this conflationary response, "people."

No, the concept does not escape me, and while it sounds neat, it's also true in this case.

Tokie

[Tokenconservative]

Why should "statistical significance" be the only concept Breach of Membership Agreement removed.actually gets?

LOL!

My stalker returneth!

[Tokenconservative]

See, there's your problem. You've attempted to apply what is happening locally to what is happening nationally.

And it would be nice if you could cite your sources. Unnamed and unidentied sources might be kosher for the NY Times but that doesn't mean that they should fly here.

Actually, this was published elsewhere, but was so "neat" I thought I'd throw it in here, too.

Yes, I am using a local anecdote...the state I live in is identified as one of the "top 10" (or 50...one of those) in "foreclosure crisis" so I feel comfortable using this here.

By the way, the other data are national. And if you want the sources, go find them.

Tokie

[Tokenconservative]

My friend, you have got it exactly backwards. As an active participants in capital markets for the past 15 years moving billions in stock around, I will tell you that the game is rigged on the upside, not the downside.

You are misunderstanding what I am saying, I think.

The politicos are using the "crisis" to make hay. Acutually, not as much as I had anticipated they would, primarily because they know it's only impacting a tiny, tiny number of voters. So they are concentratating their deceptions elsewhere, for the most part, leaving the fearmongering and hysterics to their fellow travlers and supporters in the "objective" left-advocacy media.

As for the others, well, these are people whose jobs are either directly controlled by whomever it is sitting in the Oval Office or indirectly. Moreover, they've been and are being investigated up the ying yang for the "crisis" (and to be sure, for a few reasons they should be investigated) and are desperate to show they are "doing something!!!"

Tokie

[Tokenconservative]

See, there's your problem. You've attempted to apply what is happening locally to what is happening nationally.


Actually, I am doing exactly the opposite of this

In some localities (look at Detroit...hoo boy!) there really is a "crisis" but it has little or nothing to do with the larger "mortgage bubble." That's why I talk about the foreclosure RATE rather than the numbers of foreclosures here or there, and use as an EXAMPLE our local market.

But nice diversion!

Tokie

[CriticalThanking]

In some localities (look at Detroit...hoo boy!) there really is a "crisis" but it has little or nothing to do with the larger "mortgage bubble." That's why I talk about the foreclosure RATE rather than the numbers of foreclosures here or there, and use as an EXAMPLE our local market.
Apoligies if you have said this in a separate thread, but now that you state there is a crisis somewhere, please tell us what number crosses your lower boundary of crisis?

CT

[Tokenconservative]

Apoligies if you have said this in a separate thread, but now that you state there is a crisis somewhere, please tell us what number crosses your lower boundary of crisis?

CT

When we start seeing a foreclosure RATE, nationally, up over 10-12%, then we can start getting worried. Estimates for the top end (and it probably won't go that high) for this "crisis" is 7%. Please do not confuse the issue: that is 7% of the MORTGAGES out there, not the "homes" or "people."

Tokie

[Nick Bogaerts]

You have to read more closely...it says 10% of MORTGAGEs, not, as you are attempting in this conflationary response, "people."

*I* have to read more closely? I know exactly what I am saying, and I am saying that 10% of all mortgages is a lot of people.

No, the concept does not escape me, and while it sounds neat, it's also true in this case.

That's an astonishing claim, given that we hacve exact numbers for foreclosures. t must mean the estimates for the total number of mortgages are wildly inaccurate. But go ahead, demonstrate that we cannot get a statistically significant rate of foreclosure.

I've also asked you for eviidence of your claims. None have been forecoming. Why is that? Must I do your homework for you?

For instance, you claim that foreclosure rates were higher in 1998 than in 2007. What were these rates?

For instance, the Mortgage Bankers Association claim (http://www.mortgagebankers.org/NewsandMedia/PressCenter/58758.htm) that for 2007:
The delinquency rate for mortgage loans on one-to-four-unit residential properties stood at 5.59 percent of all loans outstanding in the third quarter of 2007 on a seasonally adjusted (SA) basis, up 47 basis points from the second quarter of 2007, and up 92 basis points from one year ago

and that The total delinquency rate is the highest in the MBA survey since 1986. The rate of foreclosure starts and the percent of loans in the process of foreclosure are at the highest levels ever.

That doesn't agree with your claims. Where do your figures ccome from?

[Tokenconservative]

*I* have to read more closely? I know exactly what I am saying, and I am saying that 10% of all mortgages is a lot of people.

That's an astonishing claim, given that we hacve exact numbers for foreclosures. t must mean the estimates for the total number of mortgages are wildly inaccurate. But go ahead, demonstrate that we cannot get a statistically significant rate of foreclosure.

I've also asked you for eviidence of your claims. None have been forecoming. Why is that? Must I do your homework for you?

For instance, you claim that foreclosure rates were higher in 1998 than in 2007. What were these rates?

For instance, the Mortgage Bankers Association claim (http://www.mortgagebankers.org/NewsandMedia/PressCenter/58758.htm) that for 2007:


and that

That doesn't agree with your claims. Where do your figures ccome from?

You can say whatever you want....first of all that is not a lot, and 10% is the total of mortages that might be considered "at risk" (meaning ARMs, HELOCS, mostly) and of that 10%, less than 1% is REALLY at risk, meaning held by borrowers who may not be able to meet a rising payment.

I never said we can't get a statisitcally significant rate for foreclosures...whatever that even means. We know what the current foreclosure rate is and we can project based on what we know about the market and the numbers of these kinds of loans are out there and who they were made to.

Do whatever homework you wish to.

The rate for 98-99 was higher than was the rate for 2007.

Sorry you don't like that, but there it is...now, even if I were wrong, and the rate now were higher, so what? Most years, the rate hovers around 4-5%. So even if it is all the way to the top of the anticipated maz of 7% (not sure where you got 10% from...I suspect a dark, stinky oriface...) that's still not a lot...of MORTGAGEs.

Once again, you believe that 10% is of "people" it's not...it's mortgages.

Tokie

[Ateius]

[/lurk]

Aww ... you actually provided a link, TC. That's not nearly as entertaining. What happened to the old you, who hilariously decried other member's attempts to get you to cite something - anything - in such a manner that could even make their request seem unreasonable? You used to be cool. :p

Now, let me just say: I know squat about mortages. I read this forum to watch smart people debate things, not to try and compete with them. Still, if you could just clarify for me:

Please do not confuse the issue: that is 7% of the MORTGAGES out there, not the "homes" or "people."

By this, are you asserting that the majority of the mortgage foreclosures threaten businesses/commercial properties, not homeowners?

[lurk]

[zooterkin]

[/lurk]

Aww ... you actually provided a link, TC.

He did? Where? Perhaps that's why he has got himself banned now; having violated his principles, he could no longer remain here...

[Metullus]

[/lurk]

Aww ... you actually provided a link, TC. That's not nearly as entertaining. What happened to the old you, who hilariously decried other member's attempts to get you to cite something - anything - in such a manner that could even make their request seem unreasonable? You used to be cool. :p

Now, let me just say: I know squat about mortages. I read this forum to watch smart people debate things, not to try and compete with them. Still, if you could just clarify for me:



By this, are you asserting that the majority of the mortgage foreclosures threaten businesses/commercial properties, not homeowners?

[lurk]Since Token can no longer respond I will in his stead.

Not all homes are mortgaged.

Not all people live in homes that are mortgaged.

The statistics to which he refers apply only to mortgages.

Token is therefore saying that the 10% figure applies only to the subset of homes that are mortgaged.

[Ateius]

He did? Where?
Oh ... silly me. That was Nick with the link. Sorry, Nick! No slight intended.

Since Token can no longer respond I will in his stead.

Not all homes are mortgaged.

Not all people live in homes that are mortgaged.

The statistics to which he refers apply only to mortgages.

Token is therefore saying that the 10% figure applies only to the subset of homes that are mortgaged.
Clear and concise, thank you.

EDIT: Am I the only one finding it amusing that Toke will say this:
So even if it is all the way to the top of the anticipated maz of 7% (not sure where you got 10% from...I suspect a dark, stinky oriface...)
... despite being the one to say this:
Nationally, many experts say only ten-percent of all mortgages in America are currently one of those “at-risk” mortgages.
Bolding mine. This guy is a laugh riot. :D

[Chaos]

Since Token can no longer respond I will in his stead.

Not all homes are mortgaged.

Not all people live in homes that are mortgaged.

The statistics to which he refers apply only to mortgages.

Token is therefore saying that the 10% figure applies only to the subset of homes that are mortgaged.

Nice to see you are posting.

By the way, do you have any numbers (nothing precise, just general estimates) about what percentage of homes are mortgaged, and how many people do live in mortgaged homes?

Judging purely from my very limited exposure to the US, I would say that, outside the major cities, most people live in single-occupancy house. Assuming that house prices in most areas of the US are comparable to those over here, and assuming that the same goes for income levels, I would venture a guess that middle- and lower-income households (which means the vast majority of households) canNOT afford such a home without mortgages.

If we assume (please understand that I am pulling these numbers out of my ass) that half the people in the US live outside the major cities, and 80% of those live in single occupancy houses, and 80% of those have a mortgage on their houses, and 10% of all mortgages are at risk, this means that 300,000,000*0.5*0.8*0.8*0.1 or roughly 10 million people at in deep financial trouble. I would say this is significant.

[Metullus]

Nice to see you are posting.

By the way, do you have any numbers (nothing precise, just general estimates) about what percentage of homes are mortgaged, and how many people do live in mortgaged homes?

Judging purely from my very limited exposure to the US, I would say that, outside the major cities, most people live in single-occupancy house. Assuming that house prices in most areas of the US are comparable to those over here, and assuming that the same goes for income levels, I would venture a guess that middle- and lower-income households (which means the vast majority of households) canNOT afford such a home without mortgages.

If we assume (please understand that I am pulling these numbers out of my ass) that half the people in the US live outside the major cities, and 80% of those live in single occupancy houses, and 80% of those have a mortgage on their houses, and 10% of all mortgages are at risk, this means that 300,000,000*0.5*0.8*0.8*0.1 or roughly 10 million people at in deep financial trouble. I would say this is significant.

I really do not know what percentage of homeowners in the US have mortgages, only that it is not 100%. The cost of houses varies considerably from place to place; my house (with which you are familiar) appraises for about 700K right now while the house I owned in Louisiana many years back and which is about 50% larger and sits on a half acre of land would go for about 130K. One of the strategies employed by people owning homes in areas where the market has been advancing unmercifully over the past several years is to sell high and then move to the boondocks and use their equity to buy much larger homes for not much more than they cleared on the sale of their previous house.

To the point: I am not at all uncomfortable with your estimate that 80% of homes carry mortgages. I do not doubt that 8% to 10% of mortgage holders are potentially in trouble.

Around here it appears that about 1 property in 4 that is on the market is distressed, which seems quite high on its face, but there are relatively few properties for sale so it does not take many distressed properties to skew the percentages.

Kinda-sorta off topic: The problem we have here is that "no docs" loans (loans that require little or nothing in the way of documentation from the borrower) have been common and borrowers have evidently exaggerated their incomes in order to qualify for very large loans on very expensive houses (houses that they could not afford) in the expectation that the house would appreciate quickly and that they could then refinance at a more favorable rate before the teaser rate expired. When the market flattened they found that they have not accumulated the equity that they had counted on and therefore could not refinance. These people found themselves stuck with a mortgage payment that was far in excess of that which they could afford - a mortgage payment that would have been more than they could afford even if rates had not increased. For these folks I must admit I have some difficulty generating a great deal of sympathy.

[Chaos]

I really do not know what percentage of homeowners in the US have mortgages, only that it is not 100%. The cost of houses varies considerably from place to place; my house (with which you are familiar) appraises for about 700K right now while the house I owned in Louisiana many years back and which is about 50% larger and sits on a half acre of land would go for about 130K. One of the strategies employed by people owning homes in areas where the market has been advancing unmercifully over the past several years is to sell high and then move to the boondocks and use their equity to buy much larger homes for not much more than they cleared on the sale of their previous house.

Ah. Interesting. I wouldn´t have thought the spread between cheaper and more expensive properties to be so big.

To the point: I am not at all uncomfortable with your estimate that 80% of homes carry mortgages. I do not doubt that 8% to 10% of mortgage holders are potentially in trouble.

That depends on how strictly we define "in trouble", I suppose. Exactly how far does "potentially in trouble" go for you?

Around here it appears that about 1 property in 4 that is on the market is distressed, which seems quite high on its face, but there are relatively few properties for sale so it does not take many distressed properties to skew the percentages.

Ah, the joys of small sample sizes. ;)

Kinda-sorta off topic: The problem we have here is that "no docs" loans (loans that require little or nothing in the way of documentation from the borrower) have been common and borrowers have evidently exaggerated their incomes -

This is all so boringly predictable, isn´t it? Moral Hazard and Adverse Selection at work. Asymmetrical Information. Agency Theory 101. Kinda sad, really.

A few weeks ago, they interviewed a professor giving finance classes at a German university (not mine, though) on TV. He gave a short summary of the whole subprime thing from a finance perspectice, touching such things as risk premiums and risks. Then the interviewer asked:
"So, you say none of your students would have done such as thing [as the professionals involved did]?"
He replied, with a thin smile: "None of those who passed, anyway."

On the other hand, if *I* was an academic lecturing on finance subjects, these days I would spend much of my time pounding my head against the wall in frustration. I find it difficult enough not to do that as it is...

- in order to qualify for very large loans on very expensive houses (houses that they could not afford) in the expectation that the house would appreciate quickly and that they could then refinance at a more favorable rate before the teaser rate expired. When the market flattened they found that they have not accumulated the equity that they had counted on and therefore could not refinance. These people found themselves stuck with a mortgage payment that was far in excess of that which they could afford - a mortgage payment that would have been more than they could afford even if rates had not increased. For these folks I must admit I have some difficulty generating a great deal of sympathy.

So, essentially everybody involved, both home owners and financial institutions, gambled. I must admit I share your sentiment here.

[drkitten]

That depends on how strictly we define "in trouble", I suppose. Exactly how far does "potentially in trouble" go for you?

How about "upside-down" (Mortgage balances that exceed the value of the house)? That's a nice one because it's easy to measure....

From CNN (http://www.cnn.com/2008/US/02/28/beck.commentary/index.html?iref=newssearch):

Roubini says that 8 million households are already upside-down on their mortgages and he thinks we could see that number go to between 16 million and 24 million by the end of 2009. A lot of those people, he believes, will simply walk away from their homes and send their keys back to the bank.

[Metullus]

How about "upside-down" (Mortgage balances that exceed the value of the house)? That's a nice one because it's easy to measure....

From CNN (http://www.cnn.com/2008/US/02/28/beck.commentary/index.html?iref=newssearch):
These loans are not necessarily at risk. There are a great many people where I live (Northern California) that are "upside down", not because of the nature of their loans, rather, simply because with the down turn their 10% - 20% equity (representing the down payment at the time of purchase) evaporated. They are still able to meet their loan obligations - having purchased homes that they can afford - and are riding out the market. Indeed, we have a few properties that are in that very situation, all of them rentals, none of which will we be bailing on.

[Metullus]

Ah. Interesting. I wouldn´t have thought the spread between cheaper and more expensive properties to be so big.It is actually pretty amazing. And the houses (our current one and our old one) are comparable in quality and are both in fairly desirable locations - we are not comparing high-end homes to tar-paper shacks...

That depends on how strictly we define "in trouble", I suppose. Exactly how far does "potentially in trouble" go for you?Not at all surprisingly this is a good question. I would say that "potentially in trouble" means that the property is upside-down and/or the mortgage payment has increased substantially. "In trouble" would be when both the borrower cannot manage his monthly loan payment and the present market value of the house is not sufficient to cover the loan obligation.

Ah, the joys of small sample sizes. ;)I live for them!

This is all so boringly predictable, isn´t it? Moral Hazard and Adverse Selection at work. Asymmetrical Information. Agency Theory 101. Kinda sad, really.Yup. More than...

A few weeks ago, they interviewed a professor giving finance classes at a German university (not mine, though) on TV. He gave a short summary of the whole subprime thing from a finance perspectice, touching such things as risk premiums and risks. Then the interviewer asked:
"So, you say none of your students would have done such as thing [as the professionals involved did]?"
He replied, with a thin smile: "None of those who passed, anyway."

On the other hand, if *I* was an academic lecturing on finance subjects, these days I would spend much of my time pounding my head against the wall in frustration. I find it difficult enough not to do that as it is...Like the man said, "never gamble more than you can afford to lose..."

So, essentially everybody involved, both home owners and financial institutions, gambled. I must admit I share your sentiment here.I often find it hard to argue with you when you are being reasonable. But you know that.

[Chaos]

It is actually pretty amazing. And the houses (our current one and our old one) are comparable in quality and are both in fairly desirable locations - we are not comparing high-end homes to tar-paper shacks...

Amazing indeed. I would assume you could find similar spreads in Germany, but only between areas like Bad Homburg´s "millionaires´ quarter" on one side and those areas in rural East Germany with zero economic perspective on the other side.

Not at all surprisingly this is a good question. I would say that "potentially in trouble" means that the property is upside-down and/or the mortgage payment has increased substantially. "In trouble" would be when both the borrower cannot manage his monthly loan payment and the present market value of the house is not sufficient to cover the loan obligation.

That sounds fair enough.

I live for them!

Yup. More than...

Like the man said, "never gamble more than you can afford to lose..."

Aww... won´t somebody think of the poor, overpaid bankers and mortgage brokers who desire nothing more than to make a fortune off questionable strategies at great risk to those whose money they are working with?

I often find it hard to argue with you when you are being reasonable. But you know that.

You can be so disgustingly fair sometimes, it is hard to endure. Can´t you at least *sometimes* flame me a little bit, or call me a clueless moron now and then?:)

[Metullus]

Chaos, "clueless moron" I reserve for a certain fellow countryman of yours. Will you settle for "ignorant heathen"?

[Chaos]

Chaos, "clueless moron" I reserve for a certain fellow countryman of yours. Will you settle for "ignorant heathen"?

Usually not, but for you I´ll make an exception, because we´re friends.

[drkitten]

If we assume (please understand that I am pulling these numbers out of my ass) that half the people in the US live outside the major cities, and 80% of those live in single occupancy houses, and 80% of those have a mortgage on their houses, and 10% of all mortgages are at risk, this means that 300,000,000*0.5*0.8*0.8*0.1 or roughly 10 million people at in deep financial trouble. I would say this is significant.

CNN was kind enough to provide some actual numbers today (http://money.cnn.com/2008/03/06/real_estate/defaults_continue_climb/index.htm?cnn=yes).


Over 900,000 households are in the foreclosure process, up 71% from a year ago, according to a survey by the Mortgage Bankers Association. That figure represents 2.04% of all mortgages, the highest rate in the report's quarterly, 36-year history.

Another 381,000 households, or 0.83% of borrowers, saw the foreclosure process started during the quarter, which was also a record.

N.b. 900,000 houses in the foreclosure process, which of course is much more stringent than merely "at risk." If we assume a roughly 10:1 ratio between "risk" and actual foreclosure (as Roubini's numbers hint at), that's about 9 million households, 20% of all mortgages, and probably twenty million or more individual people.

[Chaos]

CNN was kind enough to provide some actual numbers today (http://money.cnn.com/2008/03/06/real_estate/defaults_continue_climb/index.htm?cnn=yes).



N.b. 900,000 houses in the foreclosure process, which of course is much more stringent than merely "at risk." If we assume a roughly 10:1 ratio between "risk" and actual foreclosure (as Roubini's numbers hint at), that's about 9 million households, 20% of all mortgages, and probably twenty million or more individual people.

Thank you for the information.

How long do foreclosure processes tend to take? Your quote says "up 71% from a year ago", meaning there were about 525,000 last year. If last year´s are all done by now, we have 900,000 instead of 525,000 this year, which is bad enough. If such processes drag out two years on average, we have about 650,000 fresh ones instead of about 260,000 to be expected, which would be even worse.

[drkitten]

Thank you for the information.

How long do foreclosure processes tend to take? Your quote says "up 71% from a year ago", meaning there were about 525,000 last year. If last year´s are all done by now, we have 900,000 instead of 525,000 this year, which is bad enough. If such processes drag out two years on average, we have about 650,000 fresh ones instead of about 260,000 to be expected, which would be even worse.

My understanding --- with the usual caveats that IANAL and YMMV and that different states have different laws --- is that a typical foreclosure takes about 6 months (http://www.bob-taylor.com/foreclosure-timetable.htm) to go through. You have to fall at least three months or so behind before they can start the procedure, and then there's some legal argle-bargle, and then they have to actually sell the damn thing.

On the other hand, that's California. There's another time-table (http://www.bob-taylor.com/foreclosure-timetable.htm) suggesting that in Illinois it could be over a year from filing to final sale.

[JoeEllison]

These loans are not necessarily at risk. There are a great many people where I live (Northern California) that are "upside down", not because of the nature of their loans, rather, simply because with the down turn their 10% - 20% equity (representing the down payment at the time of purchase) evaporated. They are still able to meet their loan obligations - having purchased homes that they can afford - and are riding out the market. Indeed, we have a few properties that are in that very situation, all of them rentals, none of which will we be bailing on.

Yeah... being "upside down" only matters if you need to sell or borrow against your home. Otherwise, it doesn't really mean much. Right now, I'm about dead even on my home, or possibly very slightly "upside down" but since I plan on living here for the rest of my life, it doesn't make much of a difference. The only time I plan on borrowing against the house is when I put the giant pool in the back, and that will add to my property value so it balances out as far as what we're discussing. :D

[Shalamar]

Interestingly enough, the 'mortgage crisis' is actually having an effect on my wife and I, and not in the way we thought.

Five years ago, we purchased our first (and only) house. This was JUST as the housing market was starting to accelerate, its a smallish house (1500 sqr ft) for the neighbourhood, but a great location, good area, and while the price was a little more than what we wanted to pay, it was a little much to pass on. We ended up paying $209k (In the greater Seattle area) for a house we were happy with. (We placed the offer the same day it went on the market. It was undervalued.)

However, The lending companies were only willing to give us a 5 year ARM. We have a good rate on it, and the amount that the rate can go up is very much limited. So seeing as this year is when the ARM is up, we want to refinance.

Now, even with the declining housing market, our home is values between $300k-$325k. We want to refi, and use some of the equity to consolidate some debts. We have been told that right now is a BAD BAD time to do this.

While the fed has been dropping the prime rate, interest rates on mortgages, are actually higher than our current arm. Apparently, with so many bad loans out there, and having been sold for less than the actual value, there's somewhat of a glut on the market, and this is inflating the interest rates. (Thats the gist I got. I could be wrong) so we're told to wait a couple months and to see if the rates come down, as we'd really like to lock into a good rate for a 30 year fixed.

So in an indirect way, the crisis can impact those who aren't 'at risk'. Something that my wife and I hadn't even considered.

[Chaos]

Good point, Shalamar. Thank you for reminding us.

[blutoski]

This relates to business fraud:

[Chase Mortgage memo leak: tricks and fudges to get people to take on
mortgages they can't afford (http://www.boingboing.net/2008/03/29/chase-mortgage-leake.html)]

Includes:

Lump all of an applicant's compensation as the applicant's base
income, rather than breaking out commissions, bonuses and tips.
Do not disclose use of gifts for down payments.
If all else fails, simply inflate the applicant's income. "Inch it
up $500 to see if you can get the findings you want. Do the same for
assets.

[JonnyFive]

This relates to business fraud:

[Chase Mortgage memo leak: tricks and fudges to get people to take on
mortgages they can't afford (http://www.boingboing.net/2008/03/29/chase-mortgage-leake.html)]

There's an interesting article on it over at Calculated Risk (http://calculatedrisk.blogspot.com/2008/03/more-on-chase-and-zippy-tricks.html) about the implications of this. I'm inclined to agree that it doesn't matter if this memo was a joke, or an internal employee-initiated thing, or what (I agree that it doesn't look official, but that might not really matter all that much). The problem is the implication of the "tricks" involved, and what they might mean in terms of risk management if the lender is using these kind of practices.

I'm of the opinion that sloppy, greedy risk management practices always end up biting both the borrowers and the lenders in the ass. I've seen that kind of "race to the bottom" the CR article talks about when evaluating insurance risks, and it often ends poorly.

[pipelineaudio]

Ten percent is a lot of people. And who are these unnamed experts?


5% of homes bought in the greater phoenix area in the last year are owner occupied

A house in Hawaii walking distance from the beach can be had for less than a trailer on 1/16th acre i nthe phoenix area

Ten percent of these troubled mortgages represents a LOT less people than you might think.

Now there are actual sob stories about people making 20k a year buying a 40k house for 400k and getting foreclosed on, but...I am having trouble finding too much sympathy

There's a lot of talk of "predatory lending" but you dont hear too much in the media about "predatory borrowing" though the cops are cracking down nicely

[Nick Bogaerts]

5% of homes bought in the greater phoenix area in the last year are owner occupied

Ten percent of these troubled mortgages represents a LOT less people than you might think.

That, by UK standards, is shockingly low. What are the 95%? Buy to rent is probably the largest proportion, secondary homes would be a fraction of that, so what is the rest? Is everything rented? I'm having a hard time believing only 1 in 20 households are homeowners.

Plus I doubt your typical subprime mortgage is buy-to-rent. But then again, without reliable estimates I may be talking out of my ass.

[CriticalThanking]

That, by UK standards, is shockingly low. What are the 95%? Buy to rent is probably the largest proportion, secondary homes would be a fraction of that, so what is the rest? Is everything rented? I'm having a hard time believing only 1 in 20 households are homeowners.

Plus I doubt your typical subprime mortgage is buy-to-rent. But then again, without reliable estimates I may be talking out of my ass.

Hmmm... that stat got my attention as well. If true, it is possible the emphasis should be on "5% of homes bought [..] in the last year". Not that only 5% of all homes are owner-occupied, but that things are moving so slowly that of the few sales, most are going to investors. I just happen to have some of the data handy. Will check it out shortly. [sounds of data mining including picks, shovels, power equipment, and explosions]

CT

[BenBurch]

CT, Yeah, that would seem to me to be the implication too; That PHX has been "soft" for over a year and so real homeowners have stopped buying there.

[CriticalThanking]

[CT emerges from the data mines, covered in dust.]
Hmmm.... the part of the mine that addresses Phoenix only is flooded. But I was able to drill a shaft into the general Arizona area for loans originated in 2007. :dig: For the loans I see, far less than 20% are non-owner occupied. Note that I am intentionally not saying the exact number as I would not want to give away state secrets. Without more info I would have trouble believing the Phoenix area really skews to 95% non-owner occupied for residential mortgages. By any chance does the number include all commercial as well?

[goes to console the grieving loved ones of those lost in the mines]

CT

[shuize]

As an owner of rental property in the Phoenix area, as prices come down I'm debating cashing out of a retirement account to either pay off the first note or buy additional rental property there.

Any thoughts?

[CriticalThanking]

IANAL/CFP/CPA/etc

While I have great data on what has happened to home values and mortgage delinquencies, none of us have a crystal ball for what will happen in the future for either valuations or the viability of rental property in your area. My questions would center on what you would lose in interest/penalties from cashing out vs what you could get in return from the rental properties (or interest savings from paying off your existing note early).

There are forum members here finding that it is cheaper to rent a nice place than to take over an underwater mortgage. What are the occupancy rates for rental property where you are? If more of the houses for sale become rental properties, can you afford to go longer periods between renters due to the competition (or worse yet, lower your rental price)?

I'm risk averse (a coward). I like the idea of paying off early if the simple return is better. The purchase of additional rental property is a separate question. YMMV, IANA[insert list of things I am not], etc.

Good luck,

CT

[shuize]

Thank you for the response.

Because of my situation in Japan, I can cash out of my retirement account in the U.S. without tax liability. It counts as income, of course, but if I take it out over the course of a couple years my foreign-earned income exclusion covers my Japanese income (with the U.S. -- I still pay taxes here) and the U.S. standard deduction and exemptions will cover the retirement account withdrawals.

I have to review the numbers since the yen has appreciated against the dollar quite a bit recently and I really wouldn't want to take it out early just to pay taxes on it.

There are a lot of houses on the market in the Phoenix area. But houses still seem to be renting. Crazy as it sounds, I don't really mind lowering my rental price. I'd just need someone to cover the mortgage payments. If I had renters covering both mortgages, I think I'd be fine not turning an immediate profit. I could even manage one property sitting vacant. Although two sitting vacant for any length of time would be difficult.

The safe thing to do would be to pay off the note before buying additional property. Still, I am very tempted. Always playing things safe makes me think I am missing bigger opportunities.

[Geek Goddess]

when I look at the statistics, it seems Nevada, Florida, and Phoenix are in the worst condition.

I'm selling at house in one part of Texas, that has a huge number of houses on the market. My realtor said that she frequently has over 50 houses in a certain price range to show a buyer, just in my general area. Some are brand new, never-lived-in. Mine was built in the mid-90s, so I have to price my house under the price of the new houses that have the 'trendy' things like granite countertops, against builders who have bridge loans they must get out of. She also told me that there are a few foreclosures on the builders. A year ago, houses in my neighbor average 30 days to sell. I've got mine listed for abut 25% under what I would have sold it for a year ago. If my company wasn't paying my moving costs, closing costs, and making up part of my loss, I'm not sure I'd be willing to move. It's funny - I had my house professionally appraised a couple months back, to get teh CURRENT value, by two different companies (they matched within $1500), and have the price set $25K below that. People come in and say things like "well, it needs new upstairs carpet". (I put new hardward floors on the entire lower floor a few weeks before I was told I was moving :( )Or they want the granite counters. Yes, that's why I have it listed way below the market.

I'm moving to another part, where the market is softening but not terrible. I've been looking for 10 months, at certain areas. I see the same houses for sale $50-100K less than what it was for sale when I started looking last summer. I can lease a very nice 10-year-old house for probably what the owner is paying for the mortgage plus property taxes and insurance, which means they're not getting uptick due to increased values over that time. I searched for foreclosures in the particular city I finally decided on, and found TWO - and both were under the price range I wasn't interested in. I keep hearing about how hard credit is to get, but I didn't have a problem. Of course, I didn't try to maximize my house like some people do, buying the most expensive thing they can get into and having nothing left. I could qualify for a house more than twice what I am paying for the one I just contracted last week.

[CriticalThanking]

when I look at the statistics, it seems Nevada, Florida, and Phoenix are in the worst condition.It depends upon what statistic you are looking at. There are so many depressing statistics to look at: foreclosure, delinquency, change in home values, time on market, occupancy rate of rental property, etc. The states vary slightly depending upon which metric you are using. And yes, Florida is near the top (or is that bottom?) of many of these metrics.

CT

[JoeEllison]

I'm in Florida... it is a nightmare here. A NIGHTMARE.

[Geek Goddess]

I have been through that, Joe. In the mid-80s, when oil dropped under $10 per bbl, many houses in West Texas dropped 50% in value. It was caused for a completely different reason, but had the same effect for people. I had an assumable non-qualifying loan, and basically turned over the keys to an older couple who could make payments but had little for a down payment. Unemployment was close to 30%, and the thousands of laid-off autoworkers who had moved there to cash in on the labor shortage a few years earlier, all went back to Michigan, as well.