Will Subprime Foreclosures Spread?

[eridanus]

What is the percentage of OVERALL loans each year that are SUBPRIME? I think everyone's being a little alarmist is saying it will put the whole economy in a tailspin...................

>50% in California. No idea about nationwide.

 

[cute fuzzy bunny]

I believe its about 10% of the total market.

 

[Alex]

>50% in California. No idea about nationwide.

have you any links or data to back this up? that sounds too high.

 

[FinanceDude]

I believe its about 10% of the total market.

So if 90% of the loans are good loans to people with solid credit that pay their bills, and 10% are bad, how does that bring down the whole economy??

 

[wabmester]

have you any links or data to back this up? that sounds too high.

Don't worry. Be happy. It's not that high. More like 20% for CA.

link

And there's always the map of misery for other types of toxic loans (option ARMs):

link

The problem isn't just subprime. And the raw numbers don't have to be very high. In any given year, the total number of homes on the market represents less than 5% of total home inventory, so it takes a relatively small number of foreclosures to seriously increase the inventory and seriously screw with home prices.

What I want to know is the extent of mortgage fraud that will be uncovered over the next few months. I think you'll start to understand the exact mechanism of how home prices were ratcheted up so much over such a short time. In any case, this will provide opportunites for the preforeclosure vultures. Stay tuned!

 

[tryan]

A lot of them are doing "short sales." That means they agree to allow t he dirtbag borrower to sell the house for less than the loan payoff amount and eat the difference. That way they avoid having too much REO on the books.

... and then pursuing FRAUD charges against the borrower if they: a) lied to get the loan b) or had no intention of repaying the loan.

Was the case for one sorry soul my realtor enlightened me about. Living off the equity (high life too, international vacations, Disney ...); just kept refi'ing as values increased. My realtor was working out a short sale until the banks agreed to the short sale after saying faud charges would also be filed. Owner opted for foreclosure instead. No word on if the bank is pursuing fraud charges after the foreclosure.

 

[eridanus]

Don't worry. Be happy. It's not that high. More like 20% for CA.

link

Hmm, yeah, but we might be looking at different numbers. Either that, or I'm just remembering incorrectly.

I found a link earlier stating that 50% of California mortgages that originated in Feb 2006 were subprime, but I can't find that link now. That's a different number from how many of the total mortgages outstanding are subprime. In any case, I didn't make that clear in my post.

"Just under 15 percent of U.S. mortgages at the end of 2006 were subprime loans, according to estimates by First American LoanPerformance, the San Francisco-based mortgage data and analytics unit of First American Corp."

http://news.yahoo.com/s/nm/20070313/bs_nm/usa_subprime_dc

"The share of subprime borrowers making late payments rose to 13.33 percent from 12.56 percent in the third quarter, the Washington-based group said in a report today. Foreclosures also rose on loans to borrowers with the best credit ratings, a sign of broader trouble in the mortgage market."

http://tinyurl.com/yusnlt <bloomberg link>


Edit: Ok, I was remembering incorrectly. Half of all California mortgages in 2/2006 were ARMs, not subprime. Big difference. Thanks for the challenge, Alex.

 

[Alex]

the actual numbers:
Subprime mortgage loans in california = 806,000
total morgage loans in california = 5,580,000
% of subprime =14.44 %

http://www.pe.com/business/local/stories/PE_Biz_D_mortgagebankers14.3a98fef.html

 

[haha]

In any case, this will provide opportunites for the preforeclosure vultures. Stay tuned!

Speaking of these worthies, the last couple weeks my voicemail has been full of messages offering to help me deal with my pending "foreclosure problem." Since I don't even have a loan I can’t conceive of what my problem might be. So I called one of my prospective helpers, a pleasant sounding woman. Turns out that another man with my name, who also lives close to me is the one with a foreclosure problem. I think I mentioned in an earlier post that this guy has had many legal problems, at least some of which I know about because I got served with his papers. Anyway, I chatted a little with this woman and she said her business is brisk lately.

As an aside, I attended a Suze Orman lecture-love that girl!-and Suze says not to worry about subprimes, but to worry and worry big about re-pricing of many of the arms that will re-price this year.

So many worries, so little time.

Ha

 

[al_bundy]

What is the percentage of OVERALL loans each year that are SUBPRIME? I think everyone's being a little alarmist is saying it will put the whole economy in a tailspin...................

A MUCH BIGGER worry is if GM, Ford or Daimler Chrysler go out of business to the Asian Invasion...........the shock waves of ANY of those would be a lot bigger, since roughly 30% of the overall economy of the US is tieed to the car industry.............

i don't know about subprime but in the last 2 years well over 50% of all new mortgages in california were over 50% ARM. I think 2006 was around 60% and 2005 around 75%. you can use your imagination for the 2004 and earlier numbers.

on a nationwide level say there are around 60 million total homeowners. 10 million or so total sales every year for the last few years. If 30% average of new loans were ARMs in the last few years then potentially we are looking at 12% of homeowners will see their mortgage repriced in the next 2 years.

around 7.5 million homes resold every year. if half the ARM people try to resell we are looking at a potential of a few million extra homes for sale for the next 2 years and less buyers due to tighter credit and demographic trends of less people enterinf the workforce

 

[justin]

I think the ARM repricing will be a bigger deal than subprime over the next few years. In the bubble markets at least. Folks who bought at or near the high point, who now will get stuck with payments that might double from the initial payments, but whose house has since decreased in value 5-20%.

I'm pretty sure I'll be in the market to refi my ARM in another year or so, depending on the interest rates.

 

[Alex]

Edit: Ok, I was remembering incorrectly. Half of all California mortgages in 2/2006 were ARMs, not subprime. Big difference. Thanks for the challenge, Alex.

Well, that 50% figure had me scared for a minute there!!!

the interesting thing about the subprime mortgage market is that the great majority of these loans go to minorities. I hope we don't see this taken to the point that we no longer have sub-prime mortgages available. Let's not throw the baby out with the bathwater.

I agree that ARMs could be a problem at some point, only time will tell. IMHO, mortgages are tools; used properly they can help create wealth, used recklessly you could lose an ARM (pun intended) .......................................... and a leg!.

Due to my personal circumstances, I've had a preference for ARMS over fixed rate mortgages. I've even used a neg-am loan to great benefit! A few years ago I had a NEG-AM mortgage. The payments were set very low and for the first 2 years of the loan, my teaser payment covered all of the interest and a part of the principal! Once the loan started to go into negative territory (about three years into the loan) I refinanced into another loan. Since I don't plan on living in my home for more than 7 years, I refinanced into another ARM with a seven year fixed rate. The payment is locked and the loan has no negative am. I choose to pay interest only and I invest the savings into a balanced investment portfolio. I've been able to increase my liquid accounts considerably over the last 3-4 years thanks to my judicious use of ARM mortgages.

To be clear, I am not saying that this strategy is right for everyone. Most folks would be better off with traditional 15 or 30 year fixed mortgages. It really depends on the circumstances.

 

[wabmester]

Some more optimism found!

LA Times link

Borrowers who have built up their stakes could help keep the U.S. out of recession, despite troubles in sub-prime lending, economists say.

(I don't think so.... )

 

[al_bundy]

equity can vanish in the blink of an eye. a lot of good neighborhoods in california dropped 30% or more in past housing busts

 

[Retire Soon]

There was an article in today's Wall Street Journal entitled, "Lending Oversight: Regulators scrutinized in Mortgage Meltdown." It seems that most of the subprime loans are out of the jurisdiction of federal regulators. Here's the breakdown:

52% originated by companies with no federal supervision

25% originated by finance companies that were units of bank holding companies,with only indirect supervision by the Federal Reserve.

23% regulated by banks and thrifts.

Thus, only 23% of the subprime loans written had direct supervision by the Federal Reserve. This may account for the fact that so many of them have been written in the past few years. In fact, even when the fed investigated complaints about these loans they, "shielded federally regulated banks from states and private litigants." It went on to say that the underlying belief is that too much regulation would stifle credit for low-income families. This philosophy is shared by the Bush administration.

Currently about 7 1/2 % of these loans are either 90 days late or are in forclosure. This is a pretty big number when you consider that 20% of the mortgage loans written in in 2006 were subprime loans.

Last fall federal bank regulators changed standards for these loans by requiring that the applicants qualify for the "highest interest rate" and not the "teaser rate." Under pressure from congress this month, underwriting standards for these loans are under "new guidance." Ironically, the subprime borrowers now behind in their payments are more apt to go into foreclosure because of their inability to refinance because of the effects of this new lending "guidance."

 

[LazyErik]

Somebody appointed me to revive old threads last week. I take my job seriously. So with the powers vested in me. . I LazyErik am trying to bring this to the forefront for discussion purposes.

After a quick read it is obvious that this forum is a well balance thoughtful group of cynics, which might explain why we are trying to FIRE. I want to highlight a quote brought up by Retire Soon in the first post. . ."Is this only the tip of the iceberg and could this problem eventually worsen the downturn in the housing market and cause a recession?" And another discussion by justin about how homeowners in CA were going to have a real tough time getting their homes refinanced after their ARM expires and their home is worth 20% less. Jees some of these comments bordered on prescient.

So the question I have for those that adjusted their portfolio or lifestyle prior to or during the recession is what did you do and what would you do differently?

I myself got really scared in 2008 and started all dividends into cash to build up a cash hoard. It helped me sleep better at night, but I did lose out on that cash which could have been in a nice DRIP plan.

Also how do you think the current bond bubble will play out? Any thoughts on super high treasury rates (like the Carter/Reagan era) within the next five or six years? Or anyone concerned about the student loan debt bubble that keeps young families from buying homes, nicer cars, and supporting the tax rolls by buying the trappings of American existence.

These are just some of the things I am concerned about. I wish I had ESP like some of you.

LazyErik

 

[daylatedollarshort]

In terms of housing, we are looking at that as more a consumption item and hope to cash out the current house before the prices drop again too much. They are kind of leveling off by us now.

I do wonder about the student loan debt, the shadow inventory that still exists of housing and so many people retiring before too long with limited savings. I don't think that bodes well long term for the U.S. housing market. It probably does bode well for manufactured homes, condos, tiny houses and low to moderate priced rental properties since retirees still have to live somewhere.

However all that could be changed by factors like raising immigration rates (soaking up more housing), forgiving more student loan debts, allowing student loans to be discharged in bankruptcy or taxing imports raising salaries in the U.S. so I think at this time the future is unknowable. No one thirty years ago could have predicted today's economy.

 

[yakers]

LazyEric, how old are you? If you have a long time, make a long time plan and time should be your friend, economically. I am retired and I am more concerned. I have reduced bond holdings, from 40/60 to 60/40 stock/bonds. But that is about it. I do not expect the high inflation of the early 80s but even a 5-7% rate would be a major problem to retired folks with a lot of fixed income. If inflation grows slowly those holding bond funds will be OK over time, but if it jumps up bonds will be terrible, 'reward free risk'. So the quality of bonds is important maybe safer things like ibonds?

 

[LazyErik]

I'm in my very late 30s. My parents and grandparents tell me stories about the early 80s like it was some horrible period of economic history. Higher inflation while still working does not scare me; however if I was retired, it would keep me awake at night.
I also worry about GDP being impacted by things like the student loan bubble.

 

[HFWR]

Lock in low mortgage rates, if you want to be a homeowner. Carry no other debt. LBYM. Save/invest all you can in a balanced portfolio. Keep bond duration short. Keep skills and education current.

Lots of boogie men out there, and what will really happen is anyone's guess, so control what you can.