Nor_LA-Temcu-SD-Guy

Another Christmas story,

GOOD DAY FOR: Renting, as about one in five homeowners — 1.1 million people — who took out subprime mortgages in the last two years will end up in foreclosure and lose their houses, according to the Center for Responsible Lending. (The New York Times, free registration required)

Wow! Good find, Perry. I also happened to see this in the front page of today’s U-T, and am glad you posted this first. Now every U-T reader who opens to the Business section will see “1 in 5 Subprime Loans in Trouble”.

Too bad the title was not more accurately “1 in 3 Subprime Borrowers in Trouble”. If I had written the story, I would have titled it “1 in 3 Subprime Borrowers in Trouble”.

Who cares what happens to a specific loan? We care about the fate of the borrower, the fate of the house.

Let me explain, per page 19 of the report.

The 20% foreclosure rate is for one specific subprime loan, not for one specific homeowner. Because 60% of subprime borrowers homeowners refinance their way out of the problem into another subprime loan, “1/3 of all families who obtained a subprime loan in 2005/2006 will ultimately lose their homes”(p. 19)

Borrowers who repeatedly refinance into a subprime loan increase their possibility of foreclosure, so that by the 4th loan, their foreclosure possibility is 36%.

The report found that subprime borrowers in trouble used to refinance their way out of the problem. Large numbers of subprime borrowers have been leaving their mortgages under duress in recent years. Even though they were behind on their mortgage, rising home price appreciation allowed them to refinance. Now that home prices have stopped rising, they cannot refinance while delinquent.

Half of all subprime borrowers are delinquent at least once during the first 5 years. That is an amazing number. In the past, these borrowers could work their way out of the problem by either refinancing or selling. Their inability to do either is what’s causing the concern.

The most startling figure then is that half of all subprime borrowers are delinquent at least once. What will be their prognosis in an era of declining home values, rising interest rates, and rising unemployment? A strong housing market covered up the distressed mortgages, but did not prevent them from occuring.

The study only considered loans with first liens made for owner occupied property. How many more borrowers who got flipper and investment and vacation homes and rentals, are we going to add to this list?

“The housing market downturn is in full swing”, chief economist from Moody’s.com (p. 20)

The report concludes with some options. I found it interesting that the lenders are not willing so far to help the borrower in trouble. “As one Wall Street professional put it, ‘The general feeling among investors is that they are not willing to trade…income for increased servicing costs’.” (p 33) So investors do not want to spend the extra time or money it takes to work with a borrower in trouble.

I wish I could ask them “would you rather restructure the loan for this guy or lose $50K or $200K of your investment by having to sell it at auction?”

So I don’t understand why the investor would rather foreclose than restructure.

I wish I could ask them “would you rather restructure the loan for this guy or lose $50K or $200K of your investment by having to sell it at auction?”

I think they know the trough they’ve been dining at pretty well. I saw the SecureAdvantage loan ad from Quicken in the paper this morning. With an 80% LTV, the rate is 6.5% with a minimum payment of 3.5%/year. So a 300K loan is min payment $875. Regular $1896. I wonder how much the rate and minimum payment goes up as you exceed 80% LTV.

Unfortunately, I suspect they know that the buyers can only really afford the minimum, any restructering merely delays the inevitable and potentially increases their loss.

Two thoughts:

There is an obvious reason for sub prime lending. The borrowers have bad credit and most (not all) take there debt obligations less seriously than those with good credit. When they default they will damage their already poor credit even further. I suspect most (not all) will walk away without batting an eye. I would not plan on sub prime defaults changing the market as a whole.

The homes the sub prime buyers purchased tend to be in less desireable areas. Knowing what I know about the make up of the Piggington’s, I wouldnt count on buying one of their homes.

Perry, I think we disagree on this one. I actually believe that people will try to avoid foreclosure at all costs. The only exception I see would be vacant flipper houses. Those will be quickly abandoned. But I think that a regular homeowner in a bad loan will attempt to stave off foreclosure as much as they can (cutting down on consumption, renting rooms, etc). Whether they can pull it off or not is another story, but I think that they’ll try very hard. Homeownership has such a strong emotional and social component, people won’t let go without a fight.

I recall people were ganging up on PS because she stated as incontrovertible fact that x would happen, and anyone estimated the probability of x as less than 100% was either afraid to face the truth or not smart enough to follow ps’ arguments. She’s “open-minded” enough to entertain the most bizarre conspiracy theories, but won’t stand for the possibility of alternate scenarios for something that hasn’t even happened yet.