The Mortgage Bust Goes On

Forbes ^ | December 19, 2006 | Matthew Swibel

[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.

[kinoxi]

Same article with a Baltimore/Washington area slant.
Baltimore Sun

[CDHart]

"And the bankers and Wall Streeters will still be eating lobster and flying first class."

That seems to be the end of all the stories lately.

Carolyn

[RSmithOpt]

There's always a scam of some sorts in some market sector with those on the front end raking in the dough and those that get suckered in on the backside get left holding an empty sack of flour.

[jammer]

Historically lenders will screw the consumer if left unsupervised by government.

I have no problems with questioning the voracious greed of some lenders--who will eventually want us taxpayers to bail them out.

But there are two problems, even discounting the anathema of more government intrusion in the marketplace, it seems to me, with leaving it at that:

(1) the consumer is the problem here, as alluded to by others. Not everyone can have a 2500-5000 square foot house as a starter home, and betting on the come, i.e., perpetually rising real estate prices, is bound to produce losers sometime; and

(2) "supervision" by the government, like cigarette taxes versus cigarette smoking propaganda, covers the fact that school districts and local governments have to have an increasing taxable value in order to fund their outlandish projects.

[AmusedBystander]

Good. Cleaning out the underbrush helps prevent bigger fires.

[Moonman62]

"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,

If there wasn't a subprime market there would be screaming about how the underprivileged can't get loans.

[Larry Lucido]

Historically lenders government will screw the consumer if left unsupervised by government.

There, fixed it.

[EVO X]

The folks in my town are still hoping against hope--putting their houses on the market for 2x-3x what they're worth

We have people with some rather high expectations in our town as well. Original asking price of $300K for a $200K home are somewhat common. Those home don't move at all.

[RockinRight]

Subprime loans do, and should, have a place.

I will concede that they've gotten way TOO lax in their guidelines though.

[capitalist229]

What happens if the valuations of property nationwide, but particularly in the specific speculative markets start to fall, and qualified homeowners see their assessments drop, and watch their loans turn upside down?

It's called deflation and helicopter Ben has been airdropping some serious bucks in the past few months to forestall it. Witness the recent dollar swoon.

Although the Fed created the bubble in the first place with 1% rates, this time Americans will be taking a bath with Mr. Housing Bubble.

Where's that cartoon when you need it ?

BUMP

[Fee]

I do believe in it because after 20 years of observing financial and corporate activities I first thought who needs government because who in business would screw the consumer intentionally because in the end you would be out of business. That is in theory, but look at reality. After the Savings and Loans bust, Dot.com bust, credit cards to college students who are still in school, Derivatives, Worldcom, and etc and etc. There are people in the finance industry who are willing to make a quick buck by selling defective deals and taking advantage of the foolishness of consumers. Many of these financial perps know what will happen but they took advantage of the loopholes in the regs or lack of government oversight and made their money. By the time the scam collapses, the consumer and the taxpayer is stuck with the bill, while the scammer have moved their money to dummy corporations or spent most of it so no one can ever get it back. Sure the scammer goes to prison, but first ones spend some time in prison before they were released for good behavior. By the time the government cracks down hard, the initial wave of scammers caught got off easy and are enjoying their ill gotten money offshore somewhere. Is it part of the consumers' stupidity, yes, but the scammer also knows that the loans are defective because they are knowledgeable about debt ratios/affordability factors, and they still pushed it onto the gullible/desperate consumer who wants to buy a house. I used to work in the mortage business and I am familiar with the rational behind the debt ratios and qualifications. Today we have major institutions who violated these concepts by taking advantage of the consumers' stupidity and pushing these financially risky loans onto them. Once they made their brokers' fees and interests they simply get these defective loans off their hands and bundle them with good loans (as a portfolio) and sell it to a reinsurer. Bottom line is the initial lender made their money and pushed the bad loan onto another insurer.

[zek157]

What will happen? Thousands of investors that have been sitting on the sidelines will pick up houses for quarters on the dollar. I used to buy old houses, renovate and rent them. In my area the last 3 years numbers didn't work unless you counted appreciation. Instead of buying I began selling. I assume many others did the same and are waiting for the rest of the cycle. The equation is now reversing.

[griswold3]

Now you're talking!
If the financial institutions wouldn't finance these outrageous prices or at least require folks to be able to afford the monthly payment, we would see real affordable homes.

[Moonman62]

It's called deflation and helicopter Ben has been airdropping some serious bucks in the past few months to forestall it.

How did he do that with an inverted yield curve?

Witness the recent dollar swoon.

Maybe you should look at the actions of foreign central banks to explain that, especially the ECB.

[brownsfan]

"I'm going to add a huge "it depends" to all of your points."

Yeah, but from the tone of your reply, sounds like you would follow my points for your personal finances? I'd also guess that these points are valid for easily 80% of mortgage applicants.

We are sort of insulated here in Akron. The housing market is flat, but since our homes aren't that expensive, they can't drop much. It's hard to drop the price of a home below the cost of building the same structure in place. :)

[djf]

Do you have $200,000.00 buried in coffee cans in your backyard? If not, you will need to get a loan, even at quarters-on-the-dollar.

The reversal we are starting to see in prices will be accompanied by a reversal in credit availability. There will be a liquidity crisis. I don't see how it can be avoided.

(I'm not talking about your particular situation, just generally.)

[zek157]

Absolutely not. What I am attempting to say is that loan qualifications are critical. Some people have qualified for loans that are predatory. Many people are living on the edge, others continue to have strange priorities that leave them exposed to extreme crisis at the slightest problem. I feel for these people. My sister is one of them. I won't let her go homeless and it will be a significant burden.

[LM_Guy]

Not trying to argue, but to you know how much of the $10 Trillion is now depreciating back down ?

Just curious ?

[zek157]

I always get notes. 30% down for investors. The house always has to pay the note plus a couple bucks. You can ride anything for years if it is slightly positive. I also look for houses that need work. Sweat equity is a beautiful thing.

[RockinRight]

I would do all those things, in the scenarios I mention.

I would buy a $50K house zero-down, since I could pay the entire thing off in 5 years if I really wanted to. I'd do a 3 or 5 year ARM if I had enough equity and would sell it by then.

But I might not even stay in Akron, so who knows.