Home Owners: Too Big To Fail (What are your thoughts?)

[San Diego]

Home Owners: Too Big To Fail

Tue 27 Dec 2005

Posted by Jonathan J. Miller under Appraisals , Mortgage , National Market , Brokers , Foreclosure
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If there is one thing that mortgage servicers learned from the last downturn in the housing cycle (1989-1995) was that foreclosure were expensive and had the potential to be a public relations nightmare. In the today’s market, Ken Harney’s article Mortgage Servicers Help Avoid Foreclosures [Washington Post] discusses how mortgage servicers do everything they can to avoid foreclosures.

In the 1990-91 market downturn, lenders had to maintain large in-house departments to manage inventory as well as manage vendors that were needed in the process such as lawyers, brokers and appraisers. As an appraiser, I stood with many a broker and locksmith in the early 1990’s, getting into a foreclosed apartment, only to find the interior was picked clean.

Daniel Gross, in his article Didn’t Pay Your Mortgage? Don’t Worry. Why banks are so afraid to foreclose on you [Slate] he discusses why this is happening. Lightening up on those who fell victim to the hurricanes is understandable and would be a public relations disaster. But what about everyone else?

In the process of raising the percentage of home ownership [Census], the lending industry is trying to avoid the expense of foreclosure. The delinquency rate as of the 2nd quarter, according to the MBA was 4.34%, but less than half of those are in excess fo 90 days. [MBA]

Gross notes that the delinquincy rates of ARM mortgages is 10.04% and subprime loans is 9.06%, which means that the rate for conventional loans is barely on the radar, clearly a pattern related to the pressure to expand the base of customers to those who are a higher risk.

He concludes that when borrowers get behind in their payments, lenders prefer to do workouts and these often can come into the form of another refinance, with the homeowner getting deeper in debt. They have in effect, like lenders 20 years ago, become too big to fail.

[powayseller]

Read my post “preforeclosures in Poway”. There are definitely preforeclosures going on. I just don’t know what happens next… will the house go to auction?

Regarding lender leniency: What lender will let the homeowner live for free? They have to do something to get their money.

Once they’re behind, the homeowner can’t get help with refinancing. It is hard to get a loan, if not impossible, with “mortgage lates”. At some point, the homeowner runs out of CC, refinancings, HELOCs, and is out of money to make the mortgage, and by then it’s even harder to get caught up on default amount.

I don’t know if there have been these preforeclosures for many years. I just checked the first time last week.

[uncle_git]

This one confuses me – everyone says lenders will work with a buyer who’s in trouble to “refinance”…

Refinance an I/O ARM at historic living memory lows in rates into what exactly ?

Anyway you shake he numbers they are going to be paying more…. unless you refi them to Neg Am. loans…

Plus how do you refinance if you’re underwater in your property – surely the property has to appraise for you to refinance….

[sdduuuude]

Did you see this one:
No Skin in The Game

To avoid foreclosure, the homeowner has to WANT to avoid foreclose. If a buyer has put no money down on a $400,000 condo and it depreciates 5%, the owner is out $20,000! No matter what the mortgage company does, short of sending cash, why would the homeowner do anything but walk away?

[4plexowner]

Don’t forget that the length of mortgages can be extended to reduce the monthly payment. Japan had 100 year mortgages before their bubble popped.

Care to wager that Fannie & Freddie and all their relatives will be rolling pre-foreclosures into longer term mortgages in order to “help” the struggling homeowner?

[DiveUrge]

Of course! But what is truly frightening about this affair is how those that are in the business of supposedly knowing better read this stuff Check this!

http://www.usatoday.com/money/perfi/housing/2006-01-17-real-estate-usat_x.htm

The PMI Chief Risk Officer interprets these ZERO-DOWN loans as tranferring risk to borrowers?? Remarkable!!! A $ZERO-DOWN LOAN by definition carries ZERO RISK TO THE BORROWER!!! How tough is this to figure out?

Even a modest price decline will guarantee that the sub-prime borrowers will simply toss their keys. They have no history of responsible credit behavior and no other recourse anyhow. This has happened before only against a backdrop of moderate appreciation without the overhang of widespread use of this creative financing that lowered the barrier to entry to those that are in no position to weather a downturn.

Uncharted territory.

[powayseller]

The difference in payment between 30 yr, 40 yr, 50 yr, and 100 yr is minimal. On a $400K loan at 6%, your payments would be $2400, $2200, $2100, and $2000 (courtesy of housingbubblecasualty.com), respectively. However, your total interest paid goes to $860K, $1.1m, $1.3m, $2.4m!

A borrower who who can’t make the $2400 payment under a 30 yr amortizing schedule, could be put, by the lender, into a 100 yr loan. The payment would be reduced to $2000, which is still pretty high. I bet that our troubled borrower did not have a 30 yr loan; more likely, he had an I/O neg-am loan starting with super low payments of perhaps $1200. Thus, even the 100 yr loan won’t help him much, because it would cost $2000 monthly, and he qualified for only a $1200 payment. So the 100 yr payment of $2000 is almost doubling the payment he could make.

How could the lender possibly work with someone? As shown above, not by giving the borrower a longer loan term.

No loan product exists that can help someone whose ARM is adjusting. The lower their teaser rate, the quicker their demise when their ARM resets. The only hope is the Fed lowering short term rates.

I don’t think we’ll be seeing much of this rescuing. Remember, banks are owned by shareholders, and all those interest and principal losses will show up on the company’s profit and loss statement.

[Bugs]

We’ll still see a lot more short sales this time arond; that is, sales where the lender has already agreed to take less than the outstanding balance on the loan.

Then too, there will still be people who can’t afford any mortgage payment of any kind, because of job loss or illness. Think of how many people are in the construction and real estate businesses who are going to lose their income as a result of market slowdowns. Nothing is going to help the lender on that sitaution. If the mortgage payments were 30% higher than rent in ’91, they’re more than double the rents now. That’s going to add up pretty fast when considering how many of the buyers are already in trouble as of the next ARM adjustment.

[powayseller]

Where will all these defaulting homeowners live? They’ll need cash to move and make a downpayment on an apartment or house. The moving and downpayment can easily come to $4K. That’s a lot of spare cash, that most don’t have at foreclosure. Is the rental vacancy rate high enough to absorb thousands of new families? Will this push up the rental rates? What happened during the last housing bust to the rental market? Were any one you around to see?

[Bugs]

We had net outmigration last time around. More people leaving the area than coming in. Those weren’t necessarily all homeowners but the folks who left were living here somewhere. Besides, the number of vacant homes at any one time probably won’t be that large. If prices are reduced enough, like down close to rental levels, there will eventually be buyers – and occupants – for those homes.

We did have more rental units at that time, there being a big boom in apartment construction in run-up of the mid-80s. A lot of the apartment units have since been condo-ized, but they’re still there and they can still be rented or re-sold even if at lower prices.

Of course, I say all this within the context of what happened last time when the run up was maybe 25% of what it has done this time. I suppose it could be argued that our exposure this time around is much larger just because of the higher percentage of people who are overextended.

By the way, when there are a lot of vacant apartment units, the property managers offer rent concessions like first month’s rent free and installment plans on deposits. There are rent concessions being offered on apartment units here in SD County right now – that’s been going on in some areas for the last year or so. The lack of a deposit will not necessarily mean a trip to homelessness. Also, there may be some investor types who will offer walking money to owners while they’re still in the foreclosure process. Buying pre-foreclosures is one of the “wealth building systems” that are constantly being hawked by the late-nite infomercial crowd. Those techniques actually work during certain points of an economic cycle, but the mortgage payments have to make some sense compared to the rental rates before that happens.

[4plexowner]

The recent “U-haul ratio” is 4 trucks leaving California for every 1 that comes in – ie, net outmigration from the state.

Inre 100 year mortgages and the reduction in monthly payments:

I should have done the math that powayseller did. I was surprised that extending a mortgage to 100 years had so little effect on the monthly payment.

I am fully expecting the government to attempt some type of bailout for homeowners in trouble. In this age of printing press money, the political ramifications of a housing crash will not be acceptable and the printing presses will be called into action.

It will be interesting to see how this bailout is structured.

Any thoughts on how an entity (our government and central bank) with unlimitted access to the monetary printing presses will avoid the political fallout from a nationwide housing crash?

[Bugs]

It won’t be a nationwide crash because it wasn’t a nationwide bubble. There are a lot of markets that have barely moved in the last few years. There are still lots of places in the U.S. where you can buy a home outright for less than $100k. Those markets are in no danger of eminent collapse.

The term “bubble” gets overused, too. I don’t think a market that’s 15% over the trendline is in any danger of suffering a catastrophic collapse. At 25% it would be borderline for some markets and probably only a little painful for others. At those prices, local employment and population trends can dampen the impact to a certain degree.

I think there are enough potential losses to cause real problems for the lenders and the government, but I don’t subscribe to the notion that we’ll become a Third World nation as a result of a correction in real estate prices. Look at Japan – they managed to suffer a pretty long and nasty downturn and I notice they didn’t turn to eating each other.

[Mr. Drysdale]

It’s all relative, but it could very well be nationwide. Homes are cheaper elsewhere because average incomes in those areas are much lower. Maybe those homes sold for $50,000 five years ago. Easy credit via no money down, I/O and ADJ. loans will adversely affect those low cost areas too. It will just be proportional to that area’s economic profile. It happened in 1989-1995.

[smfj]

This is antecdotal, but- San Diego is by far the worst place of which I have first-hand knowledge from an income -to-housing price perspective. New York? Inflated, yes, but with high incomes to match. Chicago? Pretty reasonable when you consider housing prices are less than they are here and incomes are much higher- even though there has been considerable run-up there in the past few years. Last week, while visiting my parents in North Carolina, I read that the average income of the area was over $65k- I didn’t believe it until I looked it up on the Census website. That’s quite a bit higher than San Diego- and a 2 bedroom townhouse in a nice neighborhood is a mere $150k- despite the run-up they’ve had recently. My personal experience is that my earning potential and that of my peers is lower in San Diego than in any of the aforementioned areas… so, relative, yes, but San Diego’s just ridiculous.

[Raybyrnes]

I have read a lot of experts expressing concern about a housing bubble in San Diego yet none of them have said anything as to how to capitalize on it especially if you home free and clear. So I am going to give the common man a chance to cash in on an obvious opportunity.
Once you make that final payment to the bank you get the psychological value of ownership but you accept all the risk of a rising or falling market. So why not shift that risk. Sell your home back to the bank and get the biggest fixed rate interest only mortgage your Credit can support. That might initially sound risky but it is probably the least risky thing you can do. Why? Becasue the government rewards you fro debt by the fact that you can itemize the interest on the loan so an interest rate of 6 percent only nets out to 3.9%. Now that I have 600K in cash that the bank just lent to me for my overvalued home what I am I to do with it. I can simply invest it in an I bond that pays me a tax free rate of 6.71 percent and is reset each year. That nets out to a rate of return of 10.32%. Now if the house goes down in value it is on the banks books not your. Additioanlly if interest rates go up you are going to see a greater rate of return. If interest rates were to fall back to our post 9/11 envioronbment you can cash in the bonds and pay off the home. Either way you are in an arbitrage situation which if you play right can make out like a champ. Best of luck to those of you who put this on a spead sheet and begin to realize the ability of thinking outside the box.

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