Research (or Speculation) as to timeline for Mortgage Resets and NODs

[luchabee]

I’ve been looking at the Credit Suisse bi-modal graph (i.e., two adjacent bell curves) for mortgage resets and it suggests the final wave of mortgage resets is to occur in about 2012. Does anyone have any speculative ideas as to how long the over-stretched borrower could generally hang on for? And also account for the NOD and foreclosure timeline? Would it be reasonble to suggest a year?

If this graph is correct (and I remember seeing some criticisms of it), it appears the bottom of the market would be 2012 to 2013, taking into account a period of time for the consumer to get behind on payments and the foreclosure timeline to finish. Anyway, for the people who have looked at it (I don’t have the link, sorry),what is the conventional wisdom on the year that will be the real estate bottom?

To me, and I’m not an economist or finance pro, it seems like the fall of 2012 or so based on this graph (and giving a little time between the reset and foreclosure).

Anway, the graph is imporessive (and terrifying), if you haven’t seen it.

Any thoughts?

[hpi]

Don’t count on graph. The bottom will probably last very long nationally, but every RE market is local. It is not clear how many purchases made in 2004-2006 will turn to be NOD, if 10% goes to NOD, it adds the same faction of supply to the overall volume in the future, which doesn’t seems to be a very big problem. The major issue here is whether there are plenty of capable buyers to support current price … this mainly relates to local economy, especially creation of new jobs.

[hpi]

Don’t count on graph. The bottom will probably last very long nationally, but every RE market is local. It is not clear how many purchases made in 2004-2006 will turn to be NOD, if 10% goes to NOD, it adds the same faction of supply to the overall volume in the future, which doesn’t seems to be a very big problem. The major issue here is whether there are plenty of capable buyers to support current price … this mainly relates to local economy, especially creation of new jobs.

[4plexowner]

Here’s a link to the chart:

http://www.bubbleinfo.com/statistics-2007/2007/3/15/arm-reset-schedule.html

IMO bottom is no sooner than 2011 – more likely 2012 and then flat for several (or many) years

these are the main factors I consider in my analysis:

> the ARM reset chart – resets have barely started and look at the effect already – Option ARM resets in 2010/2011 could be very nasty due to years of negative amortization

> another 5000-6000 condos downtown by end of 2009

> typical real estate down cycle is 6 or 7 years and peak occurred in mid-2005’ish

> 20 to 40% of current MLS listings are vacant – these properties will continue to drop in price to a selling point or they will become rentals

> good jobs and people are currently leaving San Diego – families with six figure incomes are leaving the city because they can’t afford to live here in a financially conservative manner (ie, own a house instead of a house owning them)

I take the factors above as given – the effect they will have on San Diego’s market can be debated

There are many more factors that will play into the current downturn but they are challenging to analyze:

> rising interest rates in marketplace (due to increase in perceived risk of holding US dollar/debt?) vs Fed’s desire to keep rates low

> ongoing outsourcing of US jobs

> need for baby boomers to access the equity in their real estate for retirement (starting as early as 2008) – note that the MSM started telling boomers this week that they NEED the illegal immigrants if they want someone to sell their houses to

> psychological effects of real estate bubble bursting – historically, after a financial bubble bursts, it takes a full generation before the public will come back to an asset class – gen X and Y may watch the boomers lose their asses in real estate and decide that they don’t want to own real estate EVER

[4plexowner]

Here’s a link to the chart:

http://www.bubbleinfo.com/statistics-2007/2007/3/15/arm-reset-schedule.html

IMO bottom is no sooner than 2011 – more likely 2012 and then flat for several (or many) years

these are the main factors I consider in my analysis:

> the ARM reset chart – resets have barely started and look at the effect already – Option ARM resets in 2010/2011 could be very nasty due to years of negative amortization

> another 5000-6000 condos downtown by end of 2009

> typical real estate down cycle is 6 or 7 years and peak occurred in mid-2005’ish

> 20 to 40% of current MLS listings are vacant – these properties will continue to drop in price to a selling point or they will become rentals

> good jobs and people are currently leaving San Diego – families with six figure incomes are leaving the city because they can’t afford to live here in a financially conservative manner (ie, own a house instead of a house owning them)

I take the factors above as given – the effect they will have on San Diego’s market can be debated

There are many more factors that will play into the current downturn but they are challenging to analyze:

> rising interest rates in marketplace (due to increase in perceived risk of holding US dollar/debt?) vs Fed’s desire to keep rates low

> ongoing outsourcing of US jobs

> need for baby boomers to access the equity in their real estate for retirement (starting as early as 2008) – note that the MSM started telling boomers this week that they NEED the illegal immigrants if they want someone to sell their houses to

> psychological effects of real estate bubble bursting – historically, after a financial bubble bursts, it takes a full generation before the public will come back to an asset class – gen X and Y may watch the boomers lose their asses in real estate and decide that they don’t want to own real estate EVER

[JWM in SD]

That is an interesting thought about GenX / Y never wanting to own RE again. I would be considered the archetype Gen Xer as I was born in the early seventies. I owned a very nice townhouse outside Chicago B4 I moved here to SD in 04. I rent now…and it aint bad. There would have to be some real benefits to owning such as rent in parity with Mort payment before I would consider buying again.

[JWM in SD]

That is an interesting thought about GenX / Y never wanting to own RE again. I would be considered the archetype Gen Xer as I was born in the early seventies. I owned a very nice townhouse outside Chicago B4 I moved here to SD in 04. I rent now…and it aint bad. There would have to be some real benefits to owning such as rent in parity with Mort payment before I would consider buying again.

[PerryChase]

I concur with 4plexowner and JWM.

Just watch the market carefully and you’ll get a feel of the bottom when it’s here.

JWM is right. No need to buy anything if you can rent for less. Young folks tend to enjoy condo/apartment living. In this case, renting is best as you can hop around and try out different communities (such as in Downtown San Diego).

I remember my college days. I would love to move because, each time, it was to a nicer, cleaner apartment.

[PerryChase]

I concur with 4plexowner and JWM.

Just watch the market carefully and you’ll get a feel of the bottom when it’s here.

JWM is right. No need to buy anything if you can rent for less. Young folks tend to enjoy condo/apartment living. In this case, renting is best as you can hop around and try out different communities (such as in Downtown San Diego).

I remember my college days. I would love to move because, each time, it was to a nicer, cleaner apartment.

[Bugs]

One footnote to the ARM rests – the fallout is in no way limited only to purchase transactions; it also includes anyone who maxed out their mortgages during that time frame. It’s just a guess, but anyone who refinanced using an ARM probably withdrew much or maybe all their disposable equity when they did it; why else would someone use an ARM in a refi?

I’ve seen a number of foreclosure sales wherein the original sales transaction prior to the foreclosure was but a fraction of the foreclosed loans.

[Bugs]

One footnote to the ARM rests – the fallout is in no way limited only to purchase transactions; it also includes anyone who maxed out their mortgages during that time frame. It’s just a guess, but anyone who refinanced using an ARM probably withdrew much or maybe all their disposable equity when they did it; why else would someone use an ARM in a refi?

I’ve seen a number of foreclosure sales wherein the original sales transaction prior to the foreclosure was but a fraction of the foreclosed loans.

[asragov]

The link between ARM resets and the bottom may not be exact.

For example, it might take some time for tighter credit standards to cause problems in the market.

I think that the graph helps give some insight into the timing of malaise, but may not tell you when the bottom is, because the market will be pushed there by a number of factors.

[asragov]

The link between ARM resets and the bottom may not be exact.

For example, it might take some time for tighter credit standards to cause problems in the market.

I think that the graph helps give some insight into the timing of malaise, but may not tell you when the bottom is, because the market will be pushed there by a number of factors.

[Nancy_s soothsayer]

Looking at the ARM-reset graph, I can see the bulk of neg-am loans are supposed to reset on the 33rd through 60th months. My guess is that they would reset way sooner because the denominator “value” in the loan-to-value ratio will become smaller in the following months which would trigger the early resets. If I remember correctly, the loan contracts for neg-am loans stipulate that the loan-to-value ratios are recalculated periodically. The value portion (the denominator) is a variable in the calculation that will deflate in future months. Hence, the bottom of market will be sooner than 2012.

[Nancy_s soothsayer]

Looking at the ARM-reset graph, I can see the bulk of neg-am loans are supposed to reset on the 33rd through 60th months. My guess is that they would reset way sooner because the denominator “value” in the loan-to-value ratio will become smaller in the following months which would trigger the early resets. If I remember correctly, the loan contracts for neg-am loans stipulate that the loan-to-value ratios are recalculated periodically. The value portion (the denominator) is a variable in the calculation that will deflate in future months. Hence, the bottom of market will be sooner than 2012.

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