The coming tidal wave: Bank sees 6.5 million foreclosures

The investment bank Credit Suisse is now predicting that 6.5 million American homeowners -- that's one out of every eight that has a mortgage -- will end up in foreclosure over the next five years.

In a report this week titled "Foreclosure Trends: A sobering reality," Credit Suisse predicts home prices will continue to fall throughout 2008 and 2009, causing a huge wave of foreclosures.

"... We estimate a total of 6.5 million loans will fall into foreclosure over the next five years, with the peak in 2008," the report says. "That estimate includes about 1.2 million loans currently already in foreclosure ... The coming flood of new foreclosures could put 8.4% of total homeowners, or 12.7% of homeowners with mortgages, out of their homes."

Other key points in the report:
-- The report predicts housing prices will fall by 10% in 2008 and 5% in 2009, and then grow by 3% in future years.
-- The report concludes falling prices -- and resulting negative home equity -- is "a primary driver of default and that the walkaway effect is alive and well." In other words, some people who have been paying their mortgages on time, and are capable of continuing to pay, will instead stop paying and walk away once they realize their home is no longer worth what they owe on it.
-- Likening the foreclosure crisis to a baseball game, the report says, "We are at best in the third inning ... global real estate investors are in the early stages of meltdown."
-- By 2009, the report predicts, 63% of sub-prime borrowers will be "underwater" on their mortgages -- owing more than their homes are worth.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo credit: Getty Images

Comments

[Wiilson]

At best, this amount of losses is very, very conservative...

Predicting any uptick in prices anytime in the next four years is a stretch of one's wildest imagination...

[Trudy Self]

Credit Suisse? They were so far off on the way down, we should expect their forecast to be right NOW? I think not. Bill Miller has a lot more credibility. Why are we so ready to listen to Credit Suisse, UBS, Moody's-- which rated all the subprime, Citi analysts, not to mention CAR and NAR, etc. These guys were major major wrong last time- how can they have any credibilty left? And why is the media panting to print their latest forecasts without mentioning their track record?

[Jonah LaFollette]

Wilson,

I certainly don't see an uptick in California anytime soon. Other places like Tennessee, Georgia, Texas and the like, may enjoy a slight uptick in '09 because of the transplants coming from California, Florida and other high priced markets.

[150 multiple choice questions]

At first blush that seems like a big number, even to me. But as these things get going, they pick up speed fast and dynamically change the psychology of the marketplace so it's entirely possible. Also, the preponderance of "experts" on CNBC who say "the worst is behind us" is proof it isn't behind us at all. I think 2nd or 3rd inning is correct.

Was talking to a builder yesterday who works on the westside who said if the teardowns in his neighborhoods got down to a point 25% below now (30% from the peak) that he thinks it'll pencil out as workable... I asked how that can be since the finished price will be down 25% (at least) and that's a much bigger number (25% off 2mil = 1.5 mil, 25% off 4mil = 3 million) so you're building the same house at the same cost but have 500k less spread... he didn't get it. THAT'S THE PEOPLE WHO HAVE DRIVEN UP THIS MARKET and will drive it WAY down.

Of course, none of this applies to Puckhead's neighborhood, where although prices are down and continuing down and the number of houses for sale is up... Um, what's his point? I guess it's private schools are still expensive and the Kings suck.

[steveRB]

Although I believe that housing will be in dire straits for at least the next couple of years, I wonder if some are making apocalyptic predictions just to lobby for a bailout.

[MyLessThanPrimeBeef]

3% growth in 2010?

Apparently, all that yodeling has exhausted all the oxygen in his Swiss brain.

[Uncle Billy]

Credit Suisse isn't so suisse anymore. CEO is Brady Dougan, the youngest head of a wall street bank (gotta watch those young ones... remember another "youngest guy" Kevin Warsh, who has a seat on the board of the federal reserve? The one who is married to the daughter of a good buddy of dubya? The one with the questionable financial education that was advising the president on economic policy and was liaison to the regulators?)

Brady went to biz school in Chicago. Chicago, the spiritual home of those free-wheelin' free marketers like Friedman, Greenspan, etc. Who cares? Well, seems like a lot of trouble has been caused by these "chicago school" characters. Plus, we should look at CS carefully... they're the ones that circulated the mortgage recast graph that everyone uses to predict we're in the crapper until 2012. Now they're pushing out even bigger portents of doom. Surely they must have learned by now that ugly headlines will make an ugly economy even uglier. So let's watch and see what they have to gain by pushing fear.

[save your ammo]

If that's the BAD NEWS, I hate to add that they are
probably too conservative on several key points.

"The report predicts housing prices will fall by 10% in 2008
and 5% in 2009, and then grow by 3% in future years. "

THIS DOESN'T WORK ON THE BUBBLE PRICE GRAPH FOR CA.
ADD 50% TO EACH OF THESE YEARLY PERCENTAGES,
THEN ADD 2010-2011 AS SIMILAR TO THE 2009 DECLINE,
THEN PLACE 2012-2014 AS FLAT.
INCREASE FORECLOSURES TO ONE IN SIX.

NOW, THAT LOOKS ABOUT RIGHT.

[Fred]

Best news I've heard all day. Now that this bailout nonsense will be stuck in Congress for the next two years or so until it's way too late, I'll finally be able to buy a home at a reasonable price. Thank you greedy lenders and borrowers. You've made my life so much better I could kiss all of you.

[Leb]

I could parse each one of these snippets to show the reality in the broader picture, but what's the point - this report will hit CNN and other headlines today or tomorrow, thereby causing more people to not buy (homes and other things), which will in turn depress the economy more!! Common sense and level-headnessness is what is missing from this market!

[gary]

I know this is only fantasy so no yelling at me please.....BUT, since all these predictions are all over the place when it comes to predictions why dont we simply do this. All banks, and they can do it with a mere flick of a keyboard, reduce all loan amounts regardless of amount by 30%. Then make all loans fixed at 6% for 50 years. Now before you start yelling, wouldnt the banks make money over the long term on this???? Why is this a bad idea when we know they will loose zillions and the taxpayors dont have to pay.Dont fool yourselves folks, I as a homeowner with alot of equity knows that regardless of the results we are all screwed. At least the housing market will move and I for one would rather have 70% of something from my own then possibly 100% of nothing. Or is this just stuff we will laugh about in a few years when all the doomsayers are proven wrong.

[puckhead]

I have no doubt that there will be many foreclosures in the future. I have a lot of doubt about the accuracy of Credit Suisse's assertions of 65 million foreclosures. Credit Suisse took a 6 BILLION Swiss franc write down of their investments this past quarter. If they are so sure of the foreclosure levels, they sure didn't get out of the way fast enough.

[Tombstone Realty]

I thought it was interesting that they noted that the loss of equity was the primary reason of default.

It would be interesting to see not what the percentage of total mortgage/homeowner ratios are - but to see what the percentage of foreclosed loans out of the total issued in the last say, 8 years.

[JohnnyB]

Trudy Self; "Credit Suisse? They were so far off on the way down, we should expect their forecast to be right NOW? I think not."

Right on...

[puckhead]

"I guess it's private schools are still expensive and the Kings suck."

Ha Ha, the pain of RE does not get to me. I've had to endure the pain of the Kings for 30 years.

[sfvrealestate]

NOW they're predicting numbers? What else can they predict? And why didn't they predict this 2 years ago, unless they're inventing the metrics as they go along. Seriously, one in eight mortgages in foreclosure seems ridiculously high unless it is accompanied by some other world-shaking catastrophe (plague? Martians? Dick Cheney as Prez?).

[150 multiple choice questions]

Kings pain is a special kind of pain, yes.

Gary;

It won't work for two reasons:

1. If you fix a marketplace, very few if any want to be in it. NO ONE will 'make the market'... that is buy loans. So no one will sell loans to consumers because no one will buy that paper, etc. It also screws those that were in the market and not making stupid loans or using crazy leverage. Your plan penalizes those who were playing smart to protect the banks that were most reckless. (it's just a different bailout plan)

2. Would banks make more money? Maybe but it doesn't matter. That would fix the return for ALL banks (see above re: reckless) and what bankers really want is change in a market (up or down) and not only to make money, but more than all the other banks. They all think they're too smart - and smarter than everyone else - so they'll be fine... Until they realize they're not fine.

As for your situation, you're better off with the market playing out naturally. The faster it falls to a point that people can actually afford to purchase (have a good chance of paying them back with their income) the faster and easier it will be for you to move your house if you want. It may be 50% less that the peak, but then it will begin to recover at some reasonable, historic, inflation-tracking rate.

[lefty]

guys you know what, Credit Suisse stock went down from 79 to 55 this year! so take a big piece of salt with these 'experts'! lol well they may be right on one thing, 2008 is the time to buy marvelous metro L.A.!! so get your house now and have some thai food!

[Cal]

sfvrealestate : "And why didn't they predict this 2 years ago"

I know you know nothing about generating metrics or analyzing data. But maybe.. just maybe... they received more data and can refine their predictions? Based on current default trends and factoring in how much credit has gone away plus an updated economic model gives them an updated number.

They can look past the end of their noses, something I find lacking in a lot of people.

I remember when the CRLA came out with their 2 million foreclosure number.. the MBA and the NAR called them irresponsible and said they knew nothing. I read the report (unlike most people criticizing it) and looked at their methodology and thought it was very conservative. Turns out, looking back, that 2 million is a very conservative number.

Realtors shouldn't worry about trying to discredit other peoples numbers, it puts them in a very weak position. They aren't "numbers" people, they should stick to their knitting.

I haven't read this particular report, I have access to Credit Suisse research reports in an investment account when its above a certain size. Unfortunately for me I recently repositioned some assets and went under the limitation. If it was Moshe Oro-something (I forgot their mortgage analysts last name) he is very conservative and not prone to hyperbole.

[tew]

Interesting, Hussman, whom I read on financial markets (primarily equities) says early third inning as well:
http://www.hussmanfunds.com/wmc/wmc080414.htm

Note that the baseball analogy can be misleading though. Neither Hussman nor Credit Suisse are saying that we're only one-third through price declines. They're saying we're one-third through the peak-trough portion of this cycle in terms of time and/or in terms of total defaults.

[Sharam]

I bought a house in 2005 that was too expensive for me, but I got the money and it's the bank's fault because they told me I could lie about my income. Then in 2006 I cashed-out the equity even though I never put a down payment at all. With the money I bought a Humvee I love it. Now I think I owe much more than the house is worth!! This is not fair, I know Hillary is going to bail me out and make the bank reduce my mortgage by 15% by using taxpayers' money, but if she doesn't, then I am going to hand the keys back--to the house though, not the Humvee =) I love America and the taxpayers, they all want to help me.

[jeff]

Gary you have actually hit upon a really good point. I have pointed out the natural parallels to Japan on a number of times on this blog.

The reason why this won't happen right now is human nature and partly greed. The banks don't want to admit how big the problem is. Write-offs happen NOW and they affect the bank's reserve ratios right away. That would mean almost all banks would have to raise capital immediately to stay afloat and their prices would get pummelled and ultimately the board and executive officers lose their jobs to take the blame.

On the other hand, by postponing the day of reckoning, they keep their jobs and their paychecks and just pray that maybe things will turn around and rescue them.

Ultimately after the fed has printed as much money as it can, the government has tried as many stimulus plans as possible, there will be sufficient momentum to finally tackle the problem.

This all happened in Japan all because of a bursting asset bubble. What was the result. Banks were forced to write down the loans, banks were forced to recapitalize, and finally the system got back to normal.

Unfortunately it took 13-14 years to get to that point.

My final point, many people don't realize that without this asset bubble we would have been in a deep recession year's ago. Debt bubbles always burst and the U.S. consumer and U.S. government were in a debt bubble before the real estate bubble ignited. Cheap money inflates a new bubble and delays the day of reckoning, making the fall ever more painful. And it is happening again.

No one wants to be the bearer of bad news.
No one wants to admit the nature of the problem.

The news is bad and the problem is deep.

[the problemwithcaring]

They aren't "numbers" people, they should stick to their knitting.
Posted by: Cal

Uh-oh watch the turn of phrase Cal...you know some of the feminist that read this blog are already out for your head...lol

[$30/hr.]

Whhheeeeeeeeeeeeee!

And now the banks are re-positioning themselves to benefit on the backside of the losses.

Because the banks will always win.

They have the political clout and the resources to ensure favorable legislation when it's needed.

Sure they're all taking hits now that things are souring. But what did they pull in the past five years?

Be a smart consumer.

Get ready for some vulture investing.

[Cal]

PWC,

LOL, I never thought of it like that. Now I'm REALLY in trouble.

[Joseph...The Real Estate Guy]

I will never listen to banks again!

Real estate in the four "Bubble-Ridden" states will never be the same. Maybe 7-10 years before prices go up!

Next 5-7 years, expect prices to keep going down. I have been in the business nearly 20 years. I have been doing research for about 30 years.

Most salespeople are taught to repeat "Platitudes".

[MyLessThanPrimeBeef]

I saw an interesting documentary just recently thought it's been around for a while, called 'Cane Toads: An Unnatural History.'

These are ferocious creatures introduced into Australia years and years ago from Hawaii. The 'scientists' (notice a pattern here? it's how all the smartest people are always involved in the biggest disasters in the history of the world.) thought these toads would get rid of a little nuisance known as cane grub/beetle infestion. As usually the case involved scientists and their solutions, the toads became a bigger problem today than the beetles, for these horny guys are prodigious breeders.

How prodigious? The male cane toad would even make love to a dead female cane toad...in the middle of the road, during the day for hours and hours.

Now, it just seems to me that people like Bin Lackey, Paulson and Dodd, they are like cane toads trying to impregnate a dead female toad with their Sisyphean attempts to manipulate and distort the market.

It's NOT going to happen!

And it's unnatural, gross and pornographic.

I have to go take a shower now. I feel dirty just thinking about it.

[LeftLA]

puckhead: 6.5 million, not 65 million.

[AMerica]

America is a great country. Where else in the rest of the world would an illegal alien such as myself am able to buy a $800k house in South Central LA with 0% down and making only $8 a hour.

Although I can no longer make payment on my house today, I can still live in my house without making a payment for the past 5 months.

I hope everyone vote for Hilary Clinton so she can help illegal aliens like myself live in my house. I would vote, but I'm not here legally.

[Figgins]

Credit Suisse's prediction paints a very bleak picture indeed. However, do we really know the true motivation behind the author's pontifications?

Has CS already written down everything they can, and are looking to push prices further down, in order to buy on the cheap?

Or is their judgment so colored by their financial wounds, that they can't see anything but gloom-and-doom?

Either way, I don't trust them or their report.

[IToldu2CashOut]

There is a lot of denial on this forum. A lot of people are going to be surprised in a few years when they try to sell there house. People really believed that their house had made them rich and was their golden ticket to the upper class. The few smart people who sold and understood what was going on have possibly realized that jump, but for most people, best case scenerio is they end up with a normal rise in value of a their home. Which is the price they bought it for plus inflation. Everyone nowadays is looking to get rich quick, for a lucky few this will happen, but for most people it is a long slog of hard work and patient investing, and then maybe after you die your kids might actually get rich in their lifetime if they do the same thing.

About six months ago I was having lunch in Hollywood and these two woman were talking down to their friend because she sold her house and it was "only worth 500k, thats nothing", they said. Well they will most likely find their houses are worth "nothing" too when they try to sell.

[Robert D]

I mentioned to my Bud from LA another article that I read in the LA Times yesterday, the one with the pictures of 14 new homes for sale in a row in Gardena. I live in Vegas, and had no idea of where Gardena was located. When I told him that the previous $700G homes were priced in an auction at $450G, his first response was "Who's going to buy them, the gang-bangers?" I guess the closer you get to Long Beach, the worse it gets. I do remember riding the Blue line a couple of years ago, and there were people selling packages of tube socks and, honest to God, a guy selling watches. When I asked what he was selling, he opened his coat to display the watches-"Pretty nice, Hombre". There must be a movie with this scene. Amazing...

[Daniel]

It is very interesting to watch the two sides of the debate. On the one side you have those people who were priced out of owning a home in So Cal and these folks talk nothing but doom. Its not based on fact of course, its based on their own facts, that they seek home ownership and the only way this will happen is for prices to fall. On the other side you have RE agents, investors, and current homeowners who don't want to see their investments drop in value, or go underwater. These folks naturally talk about coming stability, the bottoms arrival date, and when we will see appreciation.

Both sides have major flaws in their arguments. The folks who bring out national averages and income levels and really expect houses in Southern California to cost the same as houses in Cleveland Ohio, I don't know what they are thinking. Thats the folks who think housing prices will decline until 2014 or some future date just because it happened that way in the 90s. This is not an average market, it never has been and it never will be. Housing here is always going to cost much more than the national average, because people want to live here. That is not going to change because until we have Ohio style winters, people are still going to want to live here.

I personally am one of those people who would benefit from a downturn by purchasing properties at what I feel will be severely discounted rates and renting them out. I would love for housing to continue to decline through 2012, but realistically I think the bottom is closer to spring 2009. I wouldnt get too excited thinking those million dollar Huntington Beach houses are going to be 400K in three years, its probably not going to happen.

The nature of real estate in the desirable coastal areas is for large upswings and large downturns and we will continue to experience both. When things do turn around, I would expect 5% plus price growth. If you want stability, try Nashville, TN or Chicago, IL where you will get your steady 2-3% every year, but never a year at 20%. It also wont go down 20%.

[mbob]

And.....housing is a trailing indicator.

We're just now starting to feel the first faint ripples from an economically distant event. The tidal wave is yet to arrive.

Anyone old enough to remember the Disney mousetraps & ping pong ball setup to visualize nuclear fission?

I'd reckon we're about 10 loose ping pong balls into a room full of flying spheroids.

A vanished construction trade is going to reverberate through our economy for a long time. Butterfly effect and all that.

We are so in uncharted waters.

[Rich]

First, a reminder to all you apocalyptic California readers: you are the center of the hurricane, pricing in other parts of the country are nowhere near as bad as they are for you, and the rest of the country has a good chance of real estate recovery even late next year, with or without you. The chief problem outside your market is stabilizing the lending industry, not pricing.

Sources that claim there will be vast foreclosures caused by walkaways never give us the basis for their prediction--no numbers to show that people are doing this in any appreciable numbers and the trend is increasing. People who walk away face very real difficulties in getting an apartment, given how the rental industry has gotten so picky about credit ratings and multi-month security deposits, so people trying to walk away in bubble markets may change their minds when they start to hear the horror stories about people going homeless through inability to get a rental.

If that many people were to damage their credit by letting themselves be foreclosed, it would present the market with an interesting dilemma in future years--with so many potential credit card or car loan customers wearing the scarlet "F", would lenders really withhold credit? In the '90's credit card issuers would issue to anything that breathed, so if they stay true to form foreclosure might not turn out to be the ruin it's been made out to be. And that would cause some permanent problems for the next real estate cycle if people hand back the keys as a first resort rather than a last...