Monday, March 17, 2008

The Spring bounce and Happy St Paddy's day!

B of A loan rest chart. This month looks like a doozy

The first day of spring is just a couple of days away. The NAR and the CAR and the rest of the *AR's will be expecting the arrival of the "spring bounce". Unfortunately the only bounce is likely to be in the number of foreclosures. I've posted a few charts showing the reset schedules. Normally you could look at the peak months and estimate the peak foreclosures to be 6 months to a year after that. Today however a growing number of these loans are going into default long before the resets. If you look at the foreclosure listings on the market you will see that many of these homes sold in Late 2006. Those loans have already gone bad long before the scheduled resets. I'm not sure if there is any way to accurately estimate (that's an oxymoron for sure) when the foreclosures will peak, level off or even decline. If I were gonna bet a green beer on it, I'd bet it won't be for a while. My guess is that it won't start tapering off until mid or late 09.

Now, if you don't want to rely on my estimates (and I don't recommend you do), then you might want to listen to what
Princeton economist Paul Krugman has to say. "What started in subprime is likely to continue cascading into the markets and keep the economy down until 2010, economist Paul Krugman forecasts. In places like Miami or Los Angeles, you could be looking at 40% or 50% declines (in prices)."

If you are bored take a look at the Credit Suisse report from March of last year. I warn you it's a long and boring read but it does have a load of information on the mortgages originated over the last few years.

Here's a few gems from the report,

More than 60% of homes purchased in 2006 had piggyback loans attached to them in hotbeds such as Los Angeles, the Inland Empire, Las Vegas, and Sacramento. More than half of all home purchases last year had CLTVs of 95% or higher in markets such as the Inland Empire, Las Vegas, Fresno, Detroit and Fort Myers (just to name a few!).

While the share of low/no documentation loans appears to be the highest in former investor hotbeds such as California, Las Vegas and Florida, there is not much of a drop-off in other parts of the country. Based on a survey of our private homebuilders, the percentage of buyers providing limited-to-no documentation was greatest in Arizona (71% of total), California (69%), Nevada (52%) and Florida (47%), while the average for all markets in 2006 was 46%.

Low/no documentation loans increased from just 18% of total purchase originations in 2001 to 49% in 2006 according to Loan Performance. Based on a survey of our private homebuilders, the percentage of buyers providing limited-to-no documentation was similar on the new construction side of the business to the overall market, at 46% in 2006. While many believe that buyers choose to provide limited or no documentation for convenience rather than necessity, a study by the Mortgage Asset Research Institute sampling 100 stated income (low/no documentation) loans found that 60% of borrowers had “exaggerated” their income by more than 50%.

An estimated 23% of total purchase originations in 2006 were interest only or negative amortization mortgages. Similarly, according to our private builder survey, interest only and option ARMs represented 24% of new home sales in 2006.


Spicy_McHaggis said...

Nice work X.

What's with the pricing of the Repo's. It seems like most of them are still showing up with prices that are waaaaay too high. Are the brokers that clueless or is it the banks that just "can't handle the truth" (spoken with a Jack Nicholson accent)heheh. I'm curious to know if the banks aren't listening to the brokers, or if it's the brokers that have there heads up there arses. Inquiring minds want to know. alrightee then, back to the Guinness, glug glug glug glug

Anonymous said...

GolferX, I love your blog here.

I'll definitely take the under on your guess of when foreclosures peak. My own guess is that we are probably within a few months of a foreclosure peak, but their negative impact on home prices will last for at least a year. And after foreclosures peak, they'll still run at an above-average rate for several quarters, so I wouldn't look for a market "rebound" before 2010.

There seem to be two groups that are contributing disproportionately to the CA foreclosure problem: specuvestors and people that were foolish/naive with their finances. My guess is that specuvestors are the bigger of the two by a good amount. If this guess is wrong, then I'll really miss the mark on when foreclosures peak. So I'm looking for some commentary on which is a bigger problem - specuvestors or families in too deep.

I base my guess on two sources: anecdotal stories (news and people I hear about), and the growing divergence of foreclosures in new versus established communities.

The anecdotal piece is pretty easy to summarize. Every story about a street w/ a bundle of foreclosures goes like this: poor Mr. and Mrs. Smith fell behind on a mortgage they didn't read or understand when he/she got sick. There are 4 abandoned homes on their block that were once owned by investors... I have yet to read about a street of spoiled dreams where several families were foreclosed on (and I know enterprising reporters are looking far and wide for such a street).

A portion of people get sick/divorced/unemployed every year and fall behind on debts, so this is nothing new. What is new is that you have a bunch of specuvestors dumping properties in otherwise stable neighborhoods.

The second leg for my theory is the enormous and growing divergence of distress between new and established neighborhoods. Newer neighborhoods are being hit way harder with foreclosures than older neighborhoods. This is true in Orange County, LA County, the IE, and Sacramento.

It could be that new neighborhoods just attracted way too many people who were foolish with their finances, but I'm pretty sure that fools are randomly distributed. The higher foreclosure rate could also be explained by homeowners taking a mercenary view of their homes as investments, and newer neighborhoods having a higher proportion of upside down owners. But how many people are willing to wreck their credit/reputation and displace their family by reneging on a mortgage they can afford to pay. Maybe its a bunch, but I have yet to meet one.

Too often, I hear about a guy that bought a house in a new subdivision, and then bought one or two more in the next tract as can't miss investments with no plan/ability to make the investments cashflow positive. All of these stories about specuvestors seem to be pretty much concluding now. Can't meet the obligations, NODs have been filed, etc.

Time will tell, but I don't imagine many specuvestors are still feeding beasts they can't afford in California.

snob from morgan hill said...

Nice Charts...I want to catch a falling knife sooo bad, but after seeing this data going to hold up for another year. I am still planning to buy in summer 2009.

Anonymous said...

That chart has scared me safe into next year sometime. Besides it will take a while to actually see those homes show up on the market as foreclosures.

Smithers said...


Thanks for the IE blog. I have family that lives in ground zero home in (Eastvale), I am guessing around 3-3.5K sq ft, which they bought with 100% financing new from the builder in 2003.

I am very concerned for them. They like the area (I guess you get used to the cowpie smell after a while), but going from equity-to-spare to upsidedown in your house, while your neighborhood turns into foreclosureville, is no fun for anyone.

briar said...

The weird thing is, I drive through some of these Eastvale neighborhoods, and there should be one For Sale sign after another according to Refin, and yet, there aren't. I don't think people will really realize what's going on until they see the steady march of For Sale signs going down these streets. I guess the banks don't want to scare prospective buyers off, which would probably happen if every house that was actually for sale had a sign in front of it.

Anonymous said...


I live in Eastvale and have been looking at Redfin regularly. I don't know when Redfin updates its listings but there is one home up the street from me that was a foreclosure and was listed on Redfin. When I first saw it, Redfin said it was listed for 3 days so I went to check out the house and it looks like it has already been sold. There was a dumpster out front with old carpet and people are currently residing there and no for sale sign. As of today it still shows for sale on Redfin and says it has been listed for 27 days. So I don't think you can trust Redfin 100%. It is listed at $399,000 and is the same model as mine so I am curious to know what the final sales price is.

Luckily I bought in 2003 with 15% down so I still have plenty of equity remaining. It appears that most houses listed at around $120-$130 sqft sell fairly quickly right now in Eastvale. I view $110-$120 sqft as fair value for an Eastvale home at this time given it is closer to the OC and LA job centers than those homes in S. Corona. I can't stand the 15 fwy down there which is why I bought in Eastvale as opposed to S. Corona.

golfer_X said...

Smithers, hopefully they did not cash out that equity. If they bought in 03 they may be able to weather the storm unless they refi'd into ARM they can't afford. If they still have the original loan AND they can afford it, hopefully they will do OK. I've been through a similar thing myself.

I bought in 88, saw my house go to nearly double what I paid in 2 years. Then in the next two years it came right back down to what I paid for it (or slightly less). It stayed there till the late 90's. I could afford the house so it didn't matter. For me a house is a place to live, it's not an investment. So I just kept paying and didn't think about it.

Way too many people think of a home as an investment. The NAR has people brainwashed into thinking it's their retirement lotto ticket. That's just not the case in normal times. House values just barely keep up with inflation in normal markets. Besides, when you retire you still have to live somewhere.
I think this crash will snap most people back into the mindset that a house is a place to live.

golfer_X said...

I believe Redfin pulls it's data from the local MLS sites (there are several). It's not perfect but overall its pretty good. So Redfin is only reflecting what is in the local MLSes.

Remember just because a house is "pending" does not mean it is SOLD. Not until the loan is funded, the papers sign and the deed transfered is that home sold. A lot can go wrong especially now days. Last I checked something like 70% of pending sales in the IE were falling out of escrow. The listing agents may want to leave the properties on the market to attract backup offers.

Smithers said...

"Last I checked something like 70% of pending sales in the IE were falling out of escrow."

That's a pretty amazing stat, if true. Where do you learn that type of info? What are the boundaries of "IE" for purposes of this "70% fall out of escrow" number?

Whatever the true number is, I assume it's because eithe rbuyers tank the deal themselves after a cold dose of WTF was I thinking (as prices continue spiral downward) or lenders don't give them a loan.

golfer_X said...

I think that 70% came from the Press Enterprise back before xmas. I think the number came from DataQuick ( and it was reported by the PE. I don't know what the current number is but I'm sure it's still high.

The problem is financing. It's not that people are backing out although I'm sure more and more will get cold feet. But the banks are getting very uptight (as well they should) with who they loan money to these days. Jumbo's are hard to get without a sizable down payment and stellar credit. Most if not all of the no-doc/low-doc loans are gone. With the IE identified as a declining market most lenders want 20% to 30% down. That's a tough pill to swallow for most buyers. I sure don't have $100k laying around and if I did I'm not sure I would want to use it as a DP on a house.

As far as the boundaries of the IE, well, varies. I think the article I read was for San Berdu/Riv counties.

golfer_X said...

Forgot to mention the new homes are suffering a 30% to 50% cancellation rate AND of those that don't cancel a fair amount of them can get financed. I watched the same house fall out of escrow 4 times at the Van Dale tract in Victoria Groves. I've not been back up there in a few months, it might still be for sale. It started off near $700k and the last time I saw them trying to sell it they had dropped it to $498k. Some poor sap lost a lot of deposit money because it had many custom upgrades that I bet he had to pay for up front.

Smithers said...

OK - thanks. And, thanks again for the blog. I will be a regular reader.

Marla said...
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