Trouble ahead: 2007 loans looking shaky

Good morning. The L.A.Times reports the orgy of bad lending that created the current mortgage mess appeared to continue well into this year: "The sub-prime loans backing mortgage bonds created early this year are going bad even faster than those issued in early 2006, a year that set a record for delinquencies on such loans, according to two new studies."

The current foreclosure wave is being fueled by loans made in 2005 and 2006; these new studies signal that 2007 loans were just as poorly underwritten -- perhaps worse -- and will keep the foreclosures coming for quite a while.

Another aspect here is pretty troubling: when loans made in late 2006 or 2007 are already going bad, it's hard to blame the terms of the loan -- misleading teaser rates, adjusting interest rates, payment shocks, etc. -- these appear to be borrowers who couldn't afford the initial payments, let alone the resets.

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Photo Credit: AP

Comments

[Toby]

The entire market for the last 6 years or so have been completely fake. But this crash...completely real.

[Todd in WeHo]

This mortgage mess is really speeding up and new figures seem to show it'll be prolonged beyond initial estimates. Take this article from The Wall Street Journal Online, Oct. 4:

Home prices will decline into late 2011 as inventories continue to grow, according to traders on the Chicago Mercantile Exchange (CME). Traders anticipate that home prices in 10 major cities will drop an average 10% from mid-2007 to November 2011, according to a study of prices for housing futures traded on the CME conducted by Tradition Financial Services. The trading is based on anticipated shifts in the S&P/Case-Shiller home price indexes. According to the analysis, traders predict prices in the Miami metro region will drop 28%. Other price declines are anticipated for Las Vegas (18%); New York (12%); San Diego (19%); San Francisco (26%); and Washington, D.C. (13%). Housing inventories in 17 metro areas were up 18% in September, compared with a year earlier, according to an analysis by ZipRealty Inc.

Not even a mention of L.A. but we've got to be in there somewhere.

[Rob]

Senate hearings....Senate heeeaarrrings....

No Mr. Senator there are no formal education requirement for our staff....

[Ace]

'these appear to be borrowers who couldn't afford the initial payments, let alone the resets.'

Or borrowers who choose not to afford the initial payments because they bought the house at the top of the market with a 100 percent loan and are already upside down.

[Ace]

'Traders anticipate that home prices in 10 major cities will drop an average 10% from mid-2007 to November 2011'

Not exactly bursting the bubble. Prices went up 100 percent over the last few years and will now possibly drop 40%. Also, if you take in consideration that the interest rate is already 1 point higher than 2005 and going up, a 40 percent decrease in housing wont make the houses more affordable unless you have lots of cash.

[scwolf]

Borrowers "couldn't afford" the initial rates? LOL you guys are so naive. It's FRAUD people. These borrowers NEVER intended to live there. They simply borrowed 100% LTV on a souped up appraisal so the Seller has this HUGE gain, but the Seller then turns around and shares his windfall with the "borrowers", both of who disappear leaving the bank wondering "wha' happened????"

Any time the first month's payment is missed, it is an instant redflag to the lender that it was a fraudulent loan - the buyer never even moved into the home, it was a clear example of "loan and dump". Take the money and run.

[Raughle]

Todd in WeHo: L.A. wasn't mentioned in the text of that WSJ article, but they did have a graphic showing the highest expected declines (2011), and LA was in there at 15%.

Should also mention the caveat in the article (which is supported in other similar articles) that trading in these futures is still very light, so there's a lot of volatility. Meaning.......the estimated decline represents the consensus of only a small number of traders, so you could look again in a few days and see a very different picture.

Still interesting and useful info, though...

[investorguy]

scwolf: so you're saying that EVERY SINGLE LOAN issued in the past few years was fraudulent? That no one actually lives in the home they bought?

What color is the sky in your world?

[Todd]

I pay close attention to action in the Silverlake/Echo Park area. There are so many houses and mulit units on the market that the owner's simply cannot afford. Too much zero down crap. I look at the mortgage histories. It is amazing. There are too many properties listed as short sales. 4 unit on Vendome was funded by Countrywide at $820,000 zero down 2 years ago. It is now reduced down to $519,000 and they still do not have offers. I offered $450,000 7 months ago and they told me to pound sand.

There are so many houses listed in this area by flippers who are very late to the party. Everyone now has a hangover and they just arrived with more booze. There is a flip gone wrong on Dahlia and a duplex flip gone wrong on Vendome.

I just personally know too many people who thought they DESERVED a big house. Too many people who thought it was their RIGHT to have a big house even though they don't have the income to justify it. I personally know too many people who purchases house 7 to 10 times their gross incomes. They are all in trouble. A few debating if they just throw the keys back to the bank. If they took my advice they wouldn't be in this situation.

[adoptivefather]

This is the best real estate link I have ever seen. Real estate prices back to 1800's adjusted for inflation plotted to roller coaster. Copied from CNN money page so no virus issues.

Enjoy!

http://generationrisk.blogs.money.com/2007/04/05/real-estate-that-last-dip-could-be-a-doozy/#comments

[MyLessThanPrimeBeef]

Not sure about only going up 100%. But let's use 100% appreciation in the last few years.

Now, the article says 10% decline. If a 40% drop is not exactly bursting the bubble, I don't what will.

If it was $200K, 100% appreciation makes it $400K today.

50% drop takes it back to $200K. That's bubble bursting.

Now, 40% drop is close enough. It's still bubble bursting.

But a 10% drop is not quite bubble bursting.

Still, the beauty is that it takes only a 50% decline to completely wipe out your 100% gain.

[MyLessThanPrimeBeef]

You have to wonder why the smartest guys in the room continued to buy those CDO tranches well into June/July of this year.

[Bill J.]

scwolf does have a point...fraud is a factor here, though not in every loan.

The way that loans got bundled and sold meant that lenders did not have as much incentive to carefully review the applications and be sure they weren't being lied to. Moreover, the loan agent had an incentive to cram through as many loans as possible. The lying of the borrower was actually beneficial to the broker, since it enabled more loans to go through.

Of course, not all loans involved fraud...but there was a lot of lying going on.

The other thing that happened is that some lenders (let's call them "Nationwide") gave loan agents incentives to put borrowers into riskier loans. I am guessing that when "Nationwide" went to sell those loans (with higher interest rates) they got a better price for those loans.

Lying borrowers...shady lenders. Sounds like they were made for each other!

[Robg]

Unfortunately, it is the irresponsible actions of both the buy, and seller that has created the situation of overpriced homes in LA and throughout the country. To the buyer there is an old saying "anything that sounds to good to be true, probably is" next time do your home work and be patient. To the seller (mortgage co, reale estate agents). . . shame on you . . .but there is an old saying for you to "fool me once share on you, fool me twice shame on me". Unlike others, I do my homework and have a lot of patience. Now, I have to just wait for the smoke to settle and clear.

[MyLessThanPrimeBeef]

Todd, I hope the people you know don't turn in their keys, but each one of them spends every dime of his income on his mortgage so he can't dine out, can't go to movies, can't take a vacation, has to sell his cars, takes bus to work, cancels his cable TV and never goes out again for entertainment. That is, do his patriotic part to subtract from our GDP.

Buy hey, he gets to have a house, survive the storm and emerge, 25 years later, victorious to crow about his 100% profit. He would also lend support to those who say, as of now, there is no bubble bursting. Meanwhile, people waiting on the side can't get in.

It's a lose-lose situation.

But, com'on, what do you expect? We live in Murphy's World and we have to obey Murphy's Law.

[twohoos]

Shiller's home price index graph (basis for the roller-coaster video):
http://graphics8.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif

Why do I envision Al Gore on a rising platform? ;)

[investorguy]

Less: there is no gain or loss until you sell. You make your money when you buy (cheap enough) -- you realize your profit or loss when or if you sell.

[Ace]

MyLess,

According to trulia.com, the average (not median) price of a LA house in the year 2000 was about $200,000. Now the average is about $700,000 (a 350 percent increase). If prices fall 10 percent per year for the next four years, the average will still be $459k. We can't possibly consider a 130% increase a 'bubble burst'.

If prices fall only 10 percent per year, it will take until 2017 before prices are back to the year 2000 value adjusted for 3 percent inflation (about $245k).

Now, if you bought in 2004 or 2005, your bubble is gonna burst if you have to sell.

[sandiegan]

There's a new plan being floated to help out ARM holders: Have lenders lock their loans in at their current/initial rates before they readjust to rates they can't afford.

http://money.cnn.com/2007/10/05/real_estate/
fdic_rate_freeze/index.htm?cnn=yes

[MyLessThanPrimeBeef]

Investorguy, I know what you mean.

It's like when I divide my monthly salary by 30 and thinking each day after I put in 8 hours of work that I have earned that.

But no, I haven't earned it even though I have worked 8 hours...at least not until I get paid at the end of the month.

[MyLessThanPrimeBeef]

Ace, I know you like to say, hey, the typcial buyer is not making median income in the LA country. And so, affordability index should include only those who are able to buy, or are capable of buying or interested in buying... or something like that.

Similary, I think you should consider the fact that not everyone bought in 2000. Some might have bought in 1995. Some 1948. Some 2004. So, for some, a 10% drop is bubble bursting. For others, a 25% drop is bubble burstting. And for still others, a 40% drop is bubble bursting. Then there are those for whom a 200% drop is not bubble bursting.

I guess it's like relativity - depending on how fast you are going, each of us experiences the world at a different rate.

[Roger Herrick]

What happens next? The major damage is probably already done, and the present situation will likely settle out over the coming year. Lenders will stop pulling products off the shelf, and the rates on products that have moved so significantly higher now should trend lower down the road as delinquency rates stabilize.

Look for me at www.contactherrick.com