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.

[RSmithOpt]

Proverbs 22- 7.

The rich rules over the poor, And the borrower becomes the lender's slave.

Hold fast to the Bible as the sheet anchor of your liberties; write its precepts on your hearts and practice them in your lives. To the influence of this Book we are indebted for the progress made, and to this we must look as our guide in the future. - Ulysses S. Grant

A wise person is hungry for truth, while the fool feeds on trash. - Proverbs 15:14

Teach your children to choose the right path, and when they are older, they will remain upon it.- Proverbs 22:6

Wisdom is a tree of life to those who embrace her; happy are those who hold her tightly. - Proverbs 3:18

The sluggard does not plow after the season, so he begs during the harvest and has nothing. - Proverbs 20:4

[kinoxi]

No comment? Is this good news or bad news? Is the glass half full or....

The glass is half full if you've been expecting this. The glass is half empty if you recently bought in most areas and desire equity in the next few years. Some areas will be hit harder than others.

[gcruse]

'BTW, the Center for Responsible Lending is chockfull of lefties and poverty pimps. "

Thank you. When I read that this was a nonpartisan group, the name itself sent up my spidey sensors.

[RockinRight]

You're right, and here's an example:

Two borrowers:

First borrower: He's a subprime guy because he went bankrupt 2 years ago. Made some mistakes, learned from them, and since then, he's reestablished a few small accounts, uses, but does not abuse, his new credit cards, and has less than $800 in new debt since then but his credit limits total $5000 (this is relevent because it shows he hasn't maxed out his new credit cards.) Credit score is 611 (for A-paper loans you need generally a 620 and 4 years out of bankruptcy,) he makes $4000 a month gross (about $2500 take home for sake of argument) and wants to purchase an $85,000 home, putting 5% down with money he's saved since re-establishing himself. His new payment will be about $650 with insurance and taxes, and after putting the down payment he'll still have cash in the bank. His rent has been on time for the last 2 years as well.

Second guy, 588 credit score, no bankruptcy but charge-off accounts out the wazoo and nothing ever paid on time, all the time. No money to put down, makes $3000 a month, $300 in monthly debts now and buying a $140,000 home. He QUALIFIES for the loan but his $1300 payment on his income will be much more risky plus the fact he doesn't exactly have a record of being timely on finances.

Chances are, the first guy will do just fine. The second guy will have big problems.

[Fee]

Read about lenders throughout the history of mankind. I think you would come around to my way of thinking. In Biblical days, Jewish lenders did not hesitate to make loans to fellow Jews knowing that the person could never be able to repay it. Why make the bad loan? The lender determined that the person and his familly if sold off as slaves (as mandated by law) if the loan was defaulted was worth more than the defaulted loan. The lenders did not hesitate to take advantage of the consumers' foolishness. Not everyone took the loan, but enough did to make the practice profitable. It was one of the reasons why God let the Babylonians destroy Israel and carry her people off to captivity. I see this happening today (except for the slavery part) when major banks try to entice college students to apply for credit cards even when they do not have a job and are still in school. Loans products that were used rarely for problem applicants are now being used as mainstream products for people who cannot afford to buy a home in the first place. I see ethical problems coming out of the financial institutions, and if government is not the institution to rein in these practices, do you advocate an irate realative entering these bank offices with guns blazing and hostage taking??????

[RockinRight]

See post 38.

I'm not a "sky is falling" type on this issue, but I do concede there are some problems.

[djf]

A while back on one of the talk shows they had an investment advisor on from IIRC like Money.com or somesuch.

They were talking about savings rates in America. This fellow said SEVENTY PERCENT of Americans are LIVING PAYCHECK TO PAYCHECK.

Now the figure seemed high to me. But even if you give him the benefit of the doubt and call it fifty percent, thats still an astounding amount. And I'm guessing a great many of these folks have mortgages.

The slightest burp in the economy could have some interesting effects.

Anybody ever hear of the Civilian Conservation Corps?

[Porterville]

This article is kind of complicated for a boy living with his mother isn't it?

[RSmithOpt]

Frankly, Barney & Buddies are of the party that have no problems to helping themselves to all 3 of your back pockets.

(Sorry....couldn't resist).

IMHO, after 9/11 and onset of the recession, the feds and Congress and the banking industry contrived the reduction in the prime lending rate, setup for sub-prime loans, etc., to in a sense --- keep the economy going with the housing / lending industry as the temporary anchor.

Lot's of privileged beforehand knowledge folk have made a ton of cash in the ocrhestrated 'Housing Boom / Bubble / BS'. Part of the reasons why 'W' and Congress have done nothing to ebb the flow of illegals into this country for the cause of cheap construction labor while in the meantime, needing a place to live.

Now, inflation has come upon the country in a series hugh stunning way. People now have to choose heat and food over beebers.

[capitalist229]

How did he do that with an inverted yield curve?

Two ways. First, lower bank reserve requirements (now less than 1%). Second, buying Treasury bills to the tune of $2 billion last week alone.

Total bank credit creation zoomed up 500% in October !

I am surprised that the dollar has not fallen more given the magnitude of the stimulation.

BUMP

[finnman69]

Here's a classichttp://bubbletracking.blogspot.com/2006/12/4closure-ranch-part-v-flip-gone-flop.html

4Closure Ranch Part V: Flip Gone Flop in 5 Short Months

This one has it all, folks. New construction flip, zero down/100% financing, subprime lending, first payment mortgage default, a firm commitment to the 'False Drop Theory,' and a flashy Cadillac Escalade parked out front.

10219 Camino San Thomas is a 3,729 sqft home in the new Travata development of 4S Ranch purchased 6/23/06 for $1.106 million. Financing courtesy of WMC Mortgage using their "SuperSize My 80/20 Combo" jumbo loan package with a $885,000 first and a $221,000 second.

Fast forward 5 months to 11/28/06, the notice of default is sealed and delivered. What have we learned about NOD's filed less than 8-9 months after the loan origination? First payment mortgage default until proven otherwise.

Our flipper has not given up hope, however. Since 8/23/06, our flipper has been entertaining offers at $1.256 million. How are homes in the rest of 4S Ranch doing? Well, John Laing Homes is offering a 3,274 sqft home for $735,824. That's $225/sqft vs. the $337/sqft that our flipper friend is hoping for. What do you think about our flipper friend's chances? Think Mr. Smiar's 'False Drop Brigade' will come to the rescue?

[Fee]

Amen?!!! Funny how many modern things are Biblical.

[Larry Lucido]

as mandated by law

BINGO!!!!!

Corporations can't do squat to a borrower but send demand letters. Only government action can "enslave" the borrower, via the judicial process (which has the legitimate function of enforcing contracts through a system of civil courts). But it is the government, not the lender, that is the danger.

Your Proverbs quote was a warning not to be a borrower. Good advice as usual.

I'm sure you are also aware of the warnings in Samuel regarding the much larger dangers of government when folks begged for a king.

[djf]

Cut the Ad Hominem crap out. If you can't discuss the issues of the thread, go somewhere else.

[Always Right]

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

Assuming the latest statitics that show homes have depreciated 3.7% on a national level, that would translate to about 1.8 Trillion.

[RSmithOpt]

YUP....The CCC built a lot of roads and trails into the national parks, etc. back in the 1930's

[Proud_USA_Republican]

Chase bank is going to get hammered. They have been a huge buyer of subprime mortgages.

[RockinRight]

I don't have much sympathy for those guys.

I do, however, have much respect for those who buy delapitated homes, use materials, skill, and good old-fashioned elbow grease, and legitimately and fully repair them to resell at a profit.

Two different animals.

[finnman69]

Flippers in Trouble Tracking Network

--This Old House Flip, this blog serves to educate potential buyers of the unscrupulous activies of these flippers and will hopefully save you money in the longterm. Focused on San Diego County.

--SD Market Monitor, market analysis, news and reviews of specific properties that are for sale or have sold at a loss. Focusing on Downtown San Diego condo market.

--Pacific Beach Blog, covering flippers in trouble in the Pacific Beach area of San Diego.

--OC Flip Track, tracking flippers in Orange County with a strong focus on Irvine.

--Irvine Housing Blog, focusing on real estate developments in the City of Irvine. We’ve got plans to blog about a variety of topics and some posts will be more informative whereas others will be more entertaining.

--Forsaken Craft, tracking flippers in the Inland Empire. Also with an extensive collection of bubble related video-clips.

--Sacramento Area Flippers in Trouble, the title says it all.

--It's Just Money, a personal financial blog with part time coverage of flippers in trouble in LA's South Bay region.

[GSlob]

Well, their people involved are supposed to be professionals - thus one would think that they knew what they were stepping into. Chase as a whole has enough expertise to be stuck with the blame.