San Diego Housing Bubble News and Analysis

This guy is not getting the dynamic info on Alt-A. I personally haven't seen the data myself as to how much Alt-A is really out there but the consensus is about $600B. The most important and damaging part of that seems to be the Pay Option ARM products in the Alt-A space. With estimated $500B in Pay Option out there that would be about 80% of Alt-A. Then you have articles out there saying that...

Up to 80% of all option ARM borrowers make only the minimum payment each month, according to Fitch Ratings. The rest of the money gets added to the balance of the mortgage, a situation known as negative amortization.

There seem to be principle caps on the loans and as 80% of the buyers are effectively running Neg-Am on their loans the resets are happening quicker that expected a-la this graph...

Revised Alt-A Reset chart due to Pay Option ARMs

Based on the original reset pattern the guy was on it but with this new wave coming much faster than expected it's going to couple with what is already going on to make a real mess. This wave will likely take Wamu, Wachovia and Wells Fargo out to the woodshed.

Alt-A is really out there but the consensus is about $600B. The most important and damaging part of that seems to be the Pay Option ARM products in the Alt-A space. With estimated $500B in Pay Option out there that would be about 80% of Alt-A.

I think many people consider alt-A and option ARM interchangeable. They are not. These are not mutually inclusive categories (nor mutually exclusive).

Option ARMs are toxic. But they are a category of loan product that was available as alt-A, prime and even sub-prime.

Alt-A includes not only option ARMS, but fully amortizing and IO options on 5/1, 7/1, 10/1 ARMS, and 15, and 30 year fixed.

So the $500 Billion pay option ARMS are toast, but they are not all Alt-A loans. Some were/are subprime and prime.

Option ARM are toast. Alt-a as a general category is another question.

Great clarification, fsd. Sounds exactly right to me. Also sounds like you should be the one writing for the Financial Times...

BTW, I wasn't aware that Wells was so exposed in the Option ARM segment. I understand they have a problem with HELOCs. What does their balance sheet look like with respect to the Option ARM products? If they originated the products but sold them off to MBS investors, are they still on the hook in terms of their balance sheet? Servicing revenues? Where do they take the hit? What's their liability?

Up to this point, I hadn't grouped them into the Wachovia/Wamu set. Looking for comments on why I might be wrong...

Thanks,
Gandalf

So the $500 Billion pay option ARMS are toast, but they are not all Alt-A loans. Some were/are subprime and prime.

Very few of them were subprime, but it doesn't matter. We have $500 Billion in loans and banks will be taking a huge loss on them. They are heavily concentrated in California, and more specifically San Diego. Alt-A will likely be fine if you take the option-arms out of the equation, because most loans currently would reset to a lower rate. However, if interest rates start to jump we'll see just how accurate people reported their income for Alt-A loans.

There's also the problem that the historical causes of foreclosure are still happening (death, divorce etc.) Without equity the houses can't be sold to prevent a foreclosure, so we may have more foreclosures than normal just from the typical reasons.

http://www.housingwire.com/2008/08/04/ny...

My perception of the effect of Subprime and Alt-A meltdowns was changed by this article at Housing Wire last week. Basically it points out that the Prime sector, due to its size and expected stability, is the key driver.

Small increases in the prime default rate can translate into much more money lost than large increases in the Alt-A default rate.

Also, because very few subprime and Alt-A loans are being made now, problems in the prime sector will more dramatically affect the future of lending.

The banks know Subprime/Alt-A is going bad, and they have cut those out. Prime is still there. If prime goes bad, it hurts the vast majority of past loans, discourages future loans and may cause rates to really rise.

After reading this article, I'm much less interested in Alt-A, except as an indicator that the prime meltdown is approaching. When prime hits the fan, or even grazes the fan, that is what makes the big mess.

Prime problems, not Alt-A problems will drive the desireable areas like CV into the dirt.

Interestingly enough, when looking for the link above, I found this article on Housing Wire about the FT article posted by the original poster:

http://www.housingwire.com/2008/08/11/le...

View this video. Mr. Mortgage lays out the facts with concrete data. Alt-A is a significantly bigger problem than subprime.

http://www.youtube.com/watch?v=pmeBSWI9sF8

Basically it points out that the Prime sector, due to its size and expected stability, is the key driver.

It will be interesting to see just how "prime" those loans are. I heard somebody talk about how some prime loans didn't have properly documented income. Mortgage brokers would first run the loan through the computer and sometimes the computer would allow a prime loan to be made, without income verification. Then they could make a no-doc loan, and have it be prime as well. I guess we'll find out if this is a rumor and if it did happen, how often.

Interest only.
Neg Am.
FICO score with undocumented income.
Upside down on your loan walk aways.
Unemployment.

If the index is lower, great, but it does not mitigate these issues very well.

Alt-A and prime could be the next leg down.

Prime, Alt-A, sub-prime are all in the same boat. Too many people paid too much for their shacks. The foreclosure "crisis" isn't the result of loan types as much as it's a result of people taking on too much debt so they could pay more than a house was worth (and the non-existent lending standards allowed this).

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

Heavyweight detail

Find me an Alt-A or prime borrower who refi'd or moved up in the last 5 years with no intention of selling when their rates reset and I might listen to why Alt-A won't be an even bigger problem than sub-prime.

What's really going to do all the damage is the dollar amounts of the losses from the Alt-A loans.

When a $400k mortgage goes down those losses have been amounting to (generally) $100k - $150k after consideration of the holding costs, foreclosure costs and costs of resale as REOs. The Alt-A loans were the financing vehicles of choice for all these $600k+ mortgages throughout the new subdivision areas. When they go down the losses will start at $200k each and work their way up.

The other thing that I think will happen is that these markets will be playing catchup with the bottom end. That means the pricing structure will collapse all that much more quickly, thereby running the losses up even faster.

The last time we went through a correction the pricing structure compressed. That meant that there were huge differences between what you got for $250k vs $300k, even though $50k doesn't sound like a lot of money right now.

Really, how many $500k losses will it take to gut any lender?

I was interested to see Wells Fargo mentioned in the same breath as Wachovia. What's the story in this?

You would think that you would see a lot more for sale signs up in the high end area's of SD than I have been able to see if this was going to hit SD hard.

But maybe these guys are just going to ride this to the end, or they are praying for a loan work out (or at least praying anyway).

I guess the last part of this year is going to be interesting to watch.

It's been fun here in Temecula this last year, looks like you guy's in SD may be able to join the fun now .

There is nothing like seeing brown lawns and abandon homes to cheer you up in the morning.

needless to say yard maintenance is not a priority when you are in the foreclosure process.

Perhaps unemployment hasn't hit (yet) and people can sort of squeak by for now?

Can someone who was here in 1993 summarize what the local job market was like then? Perhaps that would be an interesting comparison. I wasn't here and didn't know the details, though I read and heard a lot of about high(er) unemployment here during that time.

It's not entirely fair to lump Wells Fargo in with the other banks who gave out Pay Options but the fate of Well Fargo's portfolio is very likely related.

HELOC performance hasn't been as bad as expected yet but with the Alt-A and Prime defaults going up it's very likely that a ton of HELOCs go to zero. Well Fargo having a massive 80+ billion HELOC portfolio heavily centered in Florida and California should be expected to see a lot of these losses.

What should be of more concern is the default rate in commercial real estate loans on their books is up almost 400% from a year ago. With the CMBX spreads gaping wider than the Grand Canyon we should expect to see a double pinch on Wells as they get hit by both commercial and residential losses. It may not be enough to take them down but I don't believe they will be as free from the crisis as everyone thinks.

Seems that they are increasing the allowable time to foreclosure. Are they overwhelmed with foreclosures, trying to help the borrower or pushing off losses for another quarter or two of profitability?

As it happens Mr M focus on Helocs today ; see second half of http://mrmortgage.ml-implode.com/2008/08...

Hahahahaha... didn't see this coming with Wells being some of the only good earnings to come out in financials. Those who drove up the stock price are on crack!

http://mrmortgage.ml-implode.com/2008/08...

Does anyone else think this market turn around of the past month or so (fueled largely by financials) is another clam before the Alt-A storm?

Or have we really seen the bottom for thesse guys?

Personally with another half trillion resetting this year I don't see how banks could avoid further suffering even if they actually hold none of the mortgages at all.

Looking at all of these banks and they're continuous and willing untruthfulness I'm calling this and all other rallies "suckers rallies"... that is until all of them are truthful with their books and off-book asset values.

Why are people looking at the end of this year as a time that we could see a nice dip in prices in SD? Is there a new regulation starting? Just because winter traffic usually slows? Or is there a large amount of resets going to happen?

See Mr Mortgage's latest blog entries. Alt A and HELOC's look to be cracking now. Also, there's a good chance a lot of shadow inventory will hit the market in "bulk assets" sales. Then just throw in seasonal slow-down. So the odds are good it's coming down more. I bet it aint the bottom, by a long shot. Lenders wont lend to people with more than two mortgages now, so the investor that wants to buy and rent out the unit is a little stuck.

I guess the one saving grace is this new FHA loan that goes to $625K, 3% down, 680 FICO, std. 30 fixed rate with 1.5 point up front for insurance.
But they may be countered by the tax refief act.

But they may be countered by the tax refief act.

Which tax relief act ?

The stats I have seen only show less than 20% of the alt-a's being option loans. So a good 80% could never go negative.

BUT, that only buys them a year or 2 at most. They will have to refinance either through the new Oct 1st FHA bail-out loans, or through loan re-negotiations.

Alt A's loans are sketchy not only for their option subset, but also because they relied very heavily on one's FICO score rather than detailed documentation and I am not sure about how much they required for down payments as well. So you can have these as "liar" loans as well as "walkaway" potential...i.e. they're still shakey due to other factors besides not having neg-am, interest-only type options. Terrible thing about devaluation is that it makes all debt more burdensome, even the "good" debt.
Tax relief act of 2008 allows one to default on their home mortgage without getting hit with the IRS considering the defaulted amount as a gain to the person defaulting. Since this may not last forever, I would think it an incentive to walk away if you were already feeling crappy about your debt.
One more very important thing to keep in mind is the study done by the Boston Fed regarding the effect negative equity has on default rates. Basically, the biggest indicator of the probability of someone defaulting on a loan is if they are in a negative equity position. Income level and FICO dont seem to matter nearly as much as if they are upside down in the loan.(And this seems very rational.)Well, I have to believe that many loans made in the last 4 or 5 years are in a negative equity position at this point in CA!

Look out below.........

The more desirable coastal areas are indeed stickier on the way down, but come down they will. IMHO there is a LOT of credit created by the real estate bubble that will eventually be cleansed from the system. For the high-end real estate it's a waiting game...a staring contest at this point. Don't blink and you'll be rewarded.