Posted on 12/20/2006 8:07:27 AM PST by GodGunsGuts
The Mortgage Bust Goes On
Matthew Swibel, 12.19.06
WASHINGTON, D.C. - A record-high 19% of high-cost mortgages originated during the past two years will end in foreclosure, a consequence of the growth in risky mortgage products, according to new data compiled by an industry group.
The nonpartisan Center for Responsible Lending predicts 2.2 million households in this mortgage segment, known as subprime borrowers, either have lost their homes or hold mortgages doomed for foreclosure in the next few years. This estimate comes a week after a grim survey from Fitch Ratings, which studies residential mortgage securities, showing a 16-fold increase in past-due subprime loans in the third quarter of 2006, compared with 1998.
Subprime borrowers, who typically pay interest rates 2% to 3% higher than those with good credit, currently account for a quarter of all mortgage originations.
In Pictures: Ballooning Foreclosure Rates "This is the largest rash of mortgage foreclosures in the modern mortgage market," says Michael Calhoun, president of the Center for Responsible Lending.
The worst-hit areas for rising foreclosures include cities in California, Nevada, New York, New Jersey and the greater Washington, D.C., area that recorded steep housing price appreciation in the past few years. As the market cools, homeowners will find it harder to tap their homes for bigger lines of credit or to take cash out in refinancing.
Here comes the pinch: To manage household debt, Americans have used such moves to pull over $2 trillion out of their homes in the past five years. In the first six months of 2006, consumers extracted over $500 billion.
The sharp increase in foreclosures poses "a serious threat to neighborhood stability," said Pat Vredevoogd, president-elect of the National Association of Realtors, in a conference call with reporters on Tuesday. "It can cause all homes in the neighborhood to lose value."
The deterioration of homeowners' ability to keep up with mortgage payments will add oomph to calls on Capitol Hill for new regulation of mortgage lenders and brokers. "There is considerable discussion by incoming House Finance Committee Chairman Barney Frank [D-Mass.] to enact a predatory lending law for these mortgage lending problems," says Keith Ernst, senior policy counsel for the Center for Responsible Lending.
The Senate Banking Committee's agenda under Sen. Chris Dodd, D-Conn., will scrutinize the home-buying process, too. "The amount of household and mortgage debt as a percentage of disposable income is at its worst levels in over a quarter of a century--putting countless Americans on the financial brink," Dodd told a press conference earlier this month. "In many respects, the American Dream is at risk in a way it has never been before. I do not intend to preside over its demise, but rather to do everything possible for its revival."
The growing chorus of concern over mortgage costs and foreclosures could ensnare more than just the lenders like Countrywide Financial, Wells Fargo and H&R Block who peddle adjustable-rate mortgages with low teaser rates and interest-only features. On Wall Street, risky mortgages get bundled into large pools of mortgage-backed securities, which now account for 23% of all bond market debt outstanding, making it the largest single segment of the U.S bond market.
Increased regulatory oversight could lead to a demand that mortgage servicers give greater flexibility to delinquent borrowers to avoid foreclosure. This would increase a pool's income, but it would also raise its servicing costs--something investors dearly want to avoid.
Doesn't look that bad to me. In fact the graph suggests foreclosures are down slightly.
What baffles me is foreclosure rates are HIGHEST in CHEAP areas and LOWEST in EXPENSIVE areas. You'd expect the exact opposite.
So in places where average incomes are 44k and average homes are 115k, they're having MORE trouble paying their mortgage than in places where the average income is 43k and average house is 510k?
Doesn't make sense.
My mortgage was just sold to Chase (a 15 year fixed). If anything happens to Chase financially could I get in trouble in anyway?
Nothing lemming-like about it. It's happening because the real estate market is not supported by the fundamentals. If you want to blame someone, blame Alan "bubbles" Greenspan who became the pied-piper of loose lending standards/risky loans.
I'm thinking it's related more to the job market.
The midwest has gotten hurt pretty significantly in the manufacturing area.
Also we have essentially an unlimited supply of cheap (by residential standards) farmland which is turned into "vinyl villages" by aggressive developers who have local officials in their back pockets vis a vis zoning.
These new homes are aggressively marketed to low income buyers who often are unable to keep up when the teaser/ARM rates go up. In our county in Indiana, yearly welfare payments have gone from $3000 total (!) to mid 6 figures in 2 yrs.
That all makes sense.
But still doesn't explain how Joe Schmoe in CA making 60 grand pays his mortgage on his half-million dollar home.
Aw geeze, can't you just let them wallow in pity?
Must you ALWAYS bring common sense and reality to the threads?
As the situation worsens over the next couple of years I expect a "bailout" law to be passed in Congress. It will cost the rest of us (either in direct taxes, or some tax on existing mortgages) to pay off all the defaulted loans. The bill will pass after intense lobbying (read bribes) by mortgage institutions.
How could they be holding a lot? Some maybe, but a lot? Anybody know?
My advice.
Buy a road warrior car, stock up on canned dog food, and get ready for the Chase meltdown.
Just kidding.
You'll be fine. Chase could take a major hit down the road, most of the banks holding tons of subprime garbage will, but those loans are just a portion of whats held by these institutions. Chase needs to raise a bunch of cash quick, they could just sell off your loan to someone else.
No biggie.
Then have your mommie explain it to you.
You said,
"...the real estate market is not supported by the fundamentals..."
I have to wonder if you even know what a "market" IS:
A "market" is a willing buyer who says: "This is a good price!" And a willing seller who says: "This is a good price!"
All of the "buyers" who "wounta " pay more, lose out. And all of the "sellers" who "wounta" take less, lose out.
I sense that all you guys, who "think" that you are "smarter-than-the-market", keep losing money.
So, let me ask:
(1) based on your REALIZED real estate profits, just how "smart" are you guys, really? (Be honest!) And
(2) based on that record of failure, why should we believe anything you say? EVER?
Even blind squirrels find the occasional acorn...
You're right, we should give them credit when they have identified a real problem.
The teaser rates are due to expire on something like a half trillion dollars of these loans in the next 18 months. It's not that tough to predict the result.
The glass is half full if you're looking to buy. It's a disaster if you took out a payment option ARM in the last couple of years.
Great responsibility comes with power. Financial insitutions have the power to create prosperity and opportunity or financial ruin. In the past if one wants to apply for a loan to buy a house, the income and debt ratios that he/she must meet were established to protect the bank, and the stringent standards unintentionally protected the applicant from him/herself. Banks understood their responsibilities while making money. Today there are many in the financial ranks (and some in the Free Republic) think that because there are consumers that are foolish or reckless in applying for loans to buy a house, it is okay for banks to take advantage of this stupidity to make a buck by marketing these loans to them. Many of these new loans have such high debt ratios, and approximately 1/4 may face default indicates that these new products are detrimental to the society as a whole because the practice of pushing these loans on dumb consumers will cost the taxpayers and good consumers money while the lenders made their money on the points and fees and bundled the risky loans into a portfolio and sold it to a mortgage reinsurer.
I directed my investments elsewhere and did just great. You?
I boght my first house for $99,000, sold out for 265,000 4 years and 11 months later. (Massachussets 496 technology belt, during dotcom boom)
I bought a new place for 290,000, and sold out for 450,000 4 1/2 years after.
OK, so the divorce ate up most of my profit, but I have some saved up, and I'm currently renting. I'm waiting for these bargains people keep talking about, but they are not happening here.
You said,
"I directed my investments elsewhere and did just great."
==> Hopefully, that means you are an "expert" with respect to THOSE investments. But, IMHO, no real estate "experience" means no real estate "expertise".
"You?"
==> Since you asked:
Real estate investing is a "part-time" activity for me, but I've bought and sold several properties over the years, each time at a profit. The properties I own now are financed with about 30% debt and 70% equity.
My original investment in real estate was $5,000. That equity has grown over the past 25 years at a rate that's equivalent to a compound interest rate of 30%. My annual income, just from rents, is well into 6-figures.
Right now, some partners and I are involved in real estate development projects in California, Washington, Arizona, Colorado, Illinois and Maryland. Some projects are ahead of schedule. Some aren't. It all balances out in the end.
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