San Diego Housing Bubble News and Analysis

Here's the chart from Calculated Risk.
Chart credited to Credit Suisse, I'm not sure which analyst.

http://calculatedrisk.blogspot.com/2007/...

Bubblesitter

Another interesting analysis at Calculated Risk. Many of these loans are actually recasting early as the loan balances hit a specific principal cap, typically 110% and 125% of the initial loan amount.

http://calculatedrisk.blogspot.com/2008/...

Mr Mortgage has been saying this for at least a few months now.

I did a simple study of option ARMs for my blog a week ago. Main findings were, 1) option ARMs appear to be the cause of 25% to 30% of all foreclosures that occurred the last 6 months, 2) they are overrepresented in the South Bay. In 91914 (the upscale corner of Eastlake), the percentage of option ARM induced foreclosures is close to 50%. (That explains how we came to have a pocket of million-dollar houses in the area so far away from any high-tech employment.)

Numbers seem to suggest that option ARM holders are defaulting en masse long before the final reset.

Of course, that only tells us about ARMs that already went delinquent. There could be a big chunk of sleeper option ARMs in Carmel Valley. But those must be still paying. In all of 92130, I only see 9 trustee sales since July that have negative-amortization characteristics.

http://www.usatoday.com/money/economy/ho...

Unemployment is now the cause of almost half of all foreclosures on conventional mortgages, raising concerns that mounting joblessness will stall any housing recovery and could cause more foreclosures next year.

The increase in unemployment as a cause is a significant shift from 2007, when foreclosures were primarily driven by the large number of homeowners who had taken on risky loans. Many were first-time home buyers or those who bought during the housing boom that ended in 2006.

Now, layoffs and the recession are playing the pivotal role in driving mortgage defaults. The 4.3 million people collecting unemployment is the most since 1974, the Labor Department says.

So much for a 2009 turn-around.

A lovely bit of nostalgia. Last time I mentioned this, someone said the recession would takeover where the subprime left off, in pushing home prices down. You have to laugh at the Realtor who now empties foreclosed homes. That's adapting to the times, and I expect he's hoping he doesn't bump into a former client. What concerns me is who is left holding the can (aside from the taxpayer)? Are there any banks in the US, and abroad who are particularly exposed to Alt-A's and Option ARM's? Are we going to see HSBC, BoA, Well Fargo fail?

Over the weekend I watched the movie "I Am Legend". I thought it was long, slow and boring. However, I noticed a couple of interesting things in the movie that directly relate to the housing market and the economy:

The first scene of the movie shows a local news station interviewing this woman who claims she has the cure for cancer. On the bottom of the screen, there is one of those news ticker things that constantly scroll the news highlights. The news story that caught my eye was the one that said "2009 home sales lowest they've been in the past decade". I thought that was interesting because this movie came out in 2007. So, some producer or screenwriter in Hollywood knew what was going to happen with housing back when they made this movie. Another highlight said that Shaquille O'Neal is going to announce his retirement in 2010.

Finally, there was a scene where Will Smith is filling up a gas can at a deserted gas station. Gas prices were about $6.60 a gallon.

Another graph.. one that was posted earlier:
LoanOrignation.2005-2006

Sidenote: Can't insert any image bigger than a thumbnail directly into a post. This makes viewing some of the user posted graphs difficult. You actually have to click on the graph followed by selecting original to really see it. I tried 400x374 and it was very fuzzy.

Someone needs to go out on a limb here and call for a market bounce in early 2009!!

OK, let me play devil's advocate.

- Option ARM payments reset every year. Much-hyped reset charts refer to the date of final reset to fully amortizing. In reality, payments go up bit by bit (maybe 10% a year) and then jump when the principal cap is hit. For a distressed borrower who had to lie about his/her income and get an option ARM just to afford the house, every reset has a potential to overload his/her financial capacity and cause a delinquency.

- There was a study by First American Loan Performance that found that a "double-digit percentage" of all option ARMs in San Diego area were 60 days delinquent as of October 2007. What's the delinquency rate today? No one knows for sure.

- How many option ARMs were there in San Diego to begin with? We had 22 thousand defaults in the county in 2007 and 31 thousand thus far in 2008. How many non-delinquent ARMs are left?

- Is it possible that the impending Alt-A tsunami might turn out to be a fizzle?

The other point that folks who are afraid of the reset monster forget is to consider what the rate will be at reset.

Your typical alt-A 5/1 ARM that originated in 2005 at 5.5- 5.75%, is tied to 12-month Libor with a margin of 2.25%.

Currently the 12-month LIBOR is under 2.5%.

This means that these loans, if resetting today would reset at or below their original rate. Perhaps as low as 4.75% !!!

Don't get me wrong, The option ARMs are toast already because of negative amortizaiton. The Alt-A interest only or "traditional" ARMs are not nearly as deadly.

I found some data to answer one of my own questions. In Q3 2006, 29.92 percent of the 6,134 [securitized] loans originating in San Diego were option ARMs. Thats 1,835 in one quarter. Their percentage was below 10% until Q3 2004 and they went away in 2007. So, the total number of option ARMs ever issued in San Diego was probably in 15,000 to 20,000 range.

ok, so FSD has a very good point. The Option ARMs are toast, but not necessaraly all the ARMs. But the buy downs we are seeing in interest rates will not last forever. Eventually we will stop the maddness. And then what? Rates will go back up to 6-7%+, the borrowers will still owe huge amounts, and they will still be underwater (unless we relive 2004). We will be right back where we were before the bailouts with high foreclosures and underwater "owners". The fundamental issue is that a majority of these people purchased houses that they were unable to afford and all the financial magic aside, they still cant afford it at prevailing/normal interest rates. So we will have 5-8 years of housing pain instead of 3 years of housing chaos. Eventually though, these places will have to "readjust".
That is unless we see strong wage growth in the next few years, but I have no idea how that would happen.

The mainstream media is just about up to speed now.

All the non conventional mortgages are dead meat.

it's just a matter of time

DWCAP is on the right track.
It's not the resets that. It's negative equity and affordability (income versus payments) that kills.

People get too hung up on the second wave of resets simply because the first wave was the trigger to the market's downfall. That's yesterday's news.

Define non-conventional.

If you mean anything that is an ARM (as opposed to fixed rate) you are wrong.

Until last year I had an adjustable rate loan that was interest only for 5 years on a rental property in San Diego (oooh, SCARY !).

Unfortunately, since I am conservative (from an investment point-of-view) I made the mistake of refinancing into a fixed rate loan last year at 6.25%. If I had kept my "dead meat" loan my reset would have been below 5.25%. I'm pretty sure I would have been OK paying a couple hundred per month less on my loan. In the long run I guess that's the insurance I am paying to keep my fixed rate.

DWCAP is onto something. Attempts to prolong the pain, may just mean that the economy recovers before the housing crisis is completely played out.

There are two separate factors. One is that these are ARMs and can reset to prohibitive interest rates. The other is that these are Alt-A, meaning that their overall affordability, even at the initial interest rate, is in doubt. From Wikipedia:

Characteristics of Alt-A

Within the U.S. mortgage industry, different mortgage products are generally defined by how they differ from the types of "conforming" or "agency" mortgages, ones guaranteed by the Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac.

There are numerous factors that might cause a mortgage not to qualify under the GSEs' lending guidelines even though the borrower's creditworthiness is generally strong. A few of the more important factors are:

* Reduced borrower income and asset documentation (for example, "stated income", "stated assets", "no income verification")
* Borrower debt-to-income ratios above what Fannie or Freddie will allow for the borrower credit, assets and type of property being financed
* Credit history with too many problems to qualify for an "agency" loan, but not so many as to require a subprime loan (for example, low scores or serious delinquencies, but no recent charge-offs or bankruptcy)
* Loan to value ratios (percentage of the property price being borrowed) above agency limits for the property, occupancy or borrower characteristics involved

[end]

Simply put, these are mortgages that, even initially, were not affordable enough for the GSEs to buy.

Lower reset interest rates help the Alt-A problem, but they absolutely do not make it go away. It might not be a tsunami, but not a ripple either. Unfortunately, the underlying data on the mortgages is poor, so no one knows for sure how unaffordable the mortgages are, and one is forced to go back to more broad metrics such as house price to income ratios.

I had an Option ARM on a flip a couple years back and one of my clietns who just sold their home had one too. They may have been the only people paying the 30yr fully amortized payment with extra principal payments every month too. Thats at least 2 out of the pipeline.

Point being while alot of them could be toast, ALL of them are NOT.

I had a stated income loan, hence it was alt-A.
I did not overstate our income. It was simply too easy to do stated with virtually no penalty at the time in terms of higher rates. It is definitely a different world today.

But I am willing to bet that there are a significant number of alt-A loans where the borrower is ready and able to pay. They just may not be willing depending on the value of the property with respect to the loan amount.

Your typical alt-A 5/1 ARM that originated in 2005 at 5.5- 5.75%, is tied to 12-month Libor with a margin of 2.25%.

Currently the 12-month LIBOR is under 2.5%.

5 years ago the 12-month LIBOR was at 1.4%. The loans resetting this month, reset to a higher interest rate until we get into loans that originated in June 2004 and later. For the next six months without the LIBOR going down, ARMS are going to reset higher. For 7/1 ARMS the 12-month LIBOR 7-years ago was 1.4% as well. The next two years of 7/1 ARMS saw the LIBOR at 1.4% meaning that there's a very good chance they'll reset higher as well, barring a drop in the LIBOR.

Yes, us Piggs already knew about Alt-A and option ARMs and certainly Mr. Mortgage gave us the heads up, as well.

But for mainstream media to come out and announce it, gave new light.

I thought 60 minutes was great and the only problem I had w/it is that it did not fully explain the option ARMS.

From what I understand, you can choose to pay less than the actual monthly payment and whatever is left over that is due that you don't pay is then tacked on to the actual loan amount.

So, if this is right, say you bought a 600k house and your payments, hypothetically, are 4k a month, but you're only paying 2k a month, the remaining 2k is added to the loan amount of 600k.

This was attractive and not a concern for many, well, b/c real estate always appreciates.

So after 2 years of only paying 2k a month, means, quick math, almost 50k added to your loan of 600k.

Now to add insult to injury, your 600k house has lost, minimum 20% value. Now worth 480k, but you owe 650k and your loan has reset.

Double-whammy. Yeah. This is not going to end well.

You are incorrect. You seem to be confusing the start rate with the fully indexed rate. Loans originated in the Fall of 2003 when the 12-month LIBOR was in the 1.4% range had start rates of 5.5% with no points. I know this because I had such a loan.

Also, for the Jumbo loans in 2005 that I was looking into the start rate was 5.625% when the LIBOR was in the 4.25% range.

The start rate is often different than the fully indexed rate and tended to follow longer-term rates. The relationship between the start rate and fully indexed rates depends on the yield curve.

jpinpb - You are on the money with respect to Option ARMs. Increasing balance (negative amortization) kills. Those kinds of loans need cigarette label style warnings on them.

What I want to know is how this unwinds. How does this all go when we end the total recession and start to recover?

Lets say things go bad for the next 9 months. That puts us to September 09. The FED stimulates us out of this recession using unusual methods and unheard of rates to get people buying houses again. Unemployment is bad for another year or so after that, but GDP starts growing again in Q3. Inflation will start slamming the economy as all this "stimulus" sets in and the FED starts raising rates to control the inflation and stops "stimulating" to limit the damage this kinda "financial planning" can do.

Then what? Rates go up, and lending slows, reducing affordability and housing values? This loss of value starts putting people who were unable to refi cause they were horribly underwater but survived cause of the low low rates into foreclosure. Foreclosures rise again, hitting housing values, putting more people under water. Values fall until back in line with fundamentals, and if history is any guide alittle lower. People with good credit and the ability to pay get affordable payments, everyone else gets to rent.

What have we gained again?

DWCAP - Does that bring us full circle yet?

Someone get me off this crazy merry-go-round!