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.
May be a god time to pick up vacation property at a cheap price...On the court house steps.
"I'm not a "sky is falling" type on this issue, but I do concede there are some problems."
I agree. I think the flippers who bought homes for an invetment will be hurt (and I won't feel sorry for them) but the average person who bought a home for a residencewill be o.k.
Other people who recently bought in the last 2-3 years and have to move will also be hurt. My neighbor being one. He will probaly loose some but he say's he can accept that.
We all know the story of The Reason for the Season and how a manager was just fine at the beginning for the King of Kings.
You ever routinely vacuumed the carpets a 3000+ sq. ft. house?
It takes about an hour and 15 minutes if there's a lot of carpet. If not, ya still gotta mop the hardwoods, tile etc.
Personally, I only need about 20 sq. ft. to rest comfortably at any given time and not much more to eat or watch TV.
A nice big house is not a bad thing....it's the love of "I just gotta have one" that gets people upside down in life.
The Freepers will tell you 2.2 million is a drop in the bucket.
"Never, ever borrow against your home, or roll debt into a mortgage unless it's your last option.
People want everything now. Kids who are 25 want a home bigger, newer and nice than mom and dad's house. The concept of a starter home is lost on most people now."
I don't think that's good general advice. THere's nothing wrong with taking a HELOC or 2 for home improvement, especially for a "starter home," which usually means "needs some work."
Non-partisan my goose! LOL! You loves these lefty sites, eh?
My grandfather was a mason. He built bridges for them, at least one that I know of still standing.
What happened to financial discipline and economics in school?
About the max I'd want is 2000. And that's only because 600 of it will be my home theater. :D
It depends on why, what, and how often.
LOL!!
Based on misleading government statistics, the housing market appears to stabilize in the first quarter of 2007. For a few months, those forecasting a bottom in residential real estate appear vindicated. Evidence of cracks in subprime credits are ignored, with housing-related equities soaring to new 52-week highs by March 1.
However, continued heavy cancellations of home contracts -- which are included in the government releases on homes sold and lead to an erroneous inventory of unsold units for sale -- lead to: A dumping of homes on the market in the spring A quantum increase in the months of unsold housing inventory A dramatic drop in the average home selling price. Sales of existing and new homes take another sharp leg lower as we enter what I've dubbed "The Great Housing Depression of 2007."
Importantly, the financial intermediaries that source mortgage financing/origination begin to feel the financial brunt of "The Great Mortgage Bubble of 2000-06" after years of creative but nonsensical, low or nondocumented lending behavior.
Foreclosures steadily rise over the course of the year to nearly 3 million homes in 2007 vs. about 1.2 million in 2006. Deep cracks in the subprime market spread to other credits in the asset-backed securities market as a lumpy and uneven period of domestic economic growth takes its toll. In a similarly abrupt and dramatic manner, credit spreads fly open and revert back to mean valuations, as previously nonchalant investors are awakened to the reality of credit risk.
The magnitude of the credit problems in mortgages takes its toll on the hedge fund industry, which is much more exposed to real estate than generally recognized. A handful of multibillion-dollar, derivative-playing hedge funds bite the dust in the aftermath of the housing debacle. Several California-based industrial banks fail (the West Coast is always at the leading edge of financial creativity and leverage!), and a large brokerage firm, heavily involved in fixed-income market-making and trading, faces material losses, and its debt ratings are downgraded. As the financial contagion spreads, rumors of a $10 billion-plus derivative loss at JPMorgan Chase (which ultimately prove to be false) spark the largest one-day percentage drop in its shares in the past 15 years.
In a panic, Congress announces a series of hearings on the derivative industry, and the Federal Reserve reduces the fed funds rate by 50 basis points in each of three consecutive meetings. Those efforts are too late to affect the already weakening economy as the long tail of housing begins to affect not only consumer confidence and spending but also other peripheral areas of the economy.
Stocks begin 2007 the way they ended 2006 -- very strong -- and the S&P 500 temporarily breaches 1450 in February. But by the end of the second quarter, under the brunt of the mortgage implosion, stocks drop nearly 15% and remain relatively range-bound for the rest of the year. The S&P 500 ends the year at around 1250, dropping by about 11% in 2007.
With confidence in the markets and economies ebbing, merger-and-acquisition activity slows to a crawl by May. Several leading universities and endowments, which previously underwrote large private equity commitments, announce that they are dramatically reducing their exposure to that asset class.
As the capital markets falter, institutional funds committed to real estate are also reined in, initially leading to a marked slowdown in the recent appreciation in office building values. While broadening economic weakness leads to only a slight rise in office vacancy rates, as the year progresses vacancy rates deteriorate more noticeably. REIT shares get hit hard (and fall below net asset values) as the historic relationship between REIT dividend yields and the yield on the 10-year U.S. note mean regresses.
Wal-Mart fails to come out of its funk and reports five consecutive months of negative same-store sales. Overall retail spending follows the housing decline and briefly falls to levels that haven't been seen since the last recession as consumer confidence drops to lows not seen in more than 15 years. Purchases of discretionary items such as motorcycles, high-end kitchen appliances and jewelry suffer.
He also points to this interesting bit of information: http://www.census.gov/const/www/salescancellations.html
What's your source for that? The Federal Reserve almost never changes the reserve requirement. The overnight funds rate is the monetary tool of choice.
Second, buying Treasury bills to the tune of $2 billion last week alone.
That's a meaningless statistic taken by itself. The Federal Reserve participates in the bond market on a daily basis in order to keep the interest rate near its target in the overnight funds market. Their target rate is currently very high. It is higher than the yield on much longer term government securities.
Total bank credit creation zoomed up 500% in October !
Another meaningless statistic. It's up 500% compared to what?
Didn't one of the large building outfits announce that they went from making 180 Mill the previous quarter to losing 180 Mill this last quarter due to cancellation costs?
I am seeing more and more for sale signs, but admit they seem to be selling briskly.
Time will tell.
Wow, literally swimming in debt. That must be bad.
"It depends on why, what, and how often."
Of course it does, that's why I said that a blanket statement that any borrowing against equity was bad.
An interest only loan to get home improvement work done 2 years before you sell it is a bargain esp considering that you get to write off the interest and you get to enjoy the work you had done for 2 years before you sell it for example. (That's what I'm about to do) I can think of a lot of other scenarios where it makes sense to use equity.
Hand in hand with paycheck to paycheck living is low 401K accounts. The average balance is around 50-60K at a time we all are living longer and defined benefit plans are disappearing.
Heck here in Indiana they run radio commercials that tell you - - "relieve the stress of holiday gift bills by refinancing your house."
How well does that work?
default stats by location: http://www.frbsf.org/community/research/assets/GeographyofMortgageDelinquency.pdf
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