[Eugene]

Does that mean the homes are worth 11-27% of what they were when the mortgages were written

I think it’s much more complicated than that.

Basically here’s the situation (as far as I understand it)

Suppose that some company offers you a bond that pays 1000 dollars a year in interest for 10 years. What’s that bond worth?

If it has zero probability of default (e.g. it’s a government bond), the value of that bond is $1000 divided by 10-year treasury rate, give or take. Let’s say it’s 25k.

If some respectable credit agency tells you that the bond is AAA-rated, you might be willing to pay 20k for it.

The company takes your 20k and gives a subprime loan with 10% interest rate to someone. At 10% rate, it’s only necessary to loan 10k to generate enough revenue to pay you back. As long as home prices are rising, default rates are low, the company can spend the remaining 10k whichever way it wants (e.g. pay big dividends or do a stock buyback).

Subprime crisis hits, and now it suddenly turns out that the bond is not really AAA. (And you don’t really know what it is, because the market for those bonds is frozen solid) You do know that only 10k out of your 20k was really spent on the actual house. Besides, home prices are declining and the company will only get maybe 7-8k out of 10k if that house forecloses. Furthermore, the company will bear legal expenses and pay all sorts of fees before the house is sold, so you will only get 5k back. Finally, there is a good possibility that the company goes bankrupt and you will have to jump through all sorts of hoops before you see a singe penny.

Under these circumstances, you might consider yourself fortunate if someone agrees to buy the bond from you for 5k which is only 25% of what you paid for it.

[Eugene]

Does that mean the homes are worth 11-27% of what they were when the mortgages were written

I think it’s much more complicated than that.

Basically here’s the situation (as far as I understand it)

Suppose that some company offers you a bond that pays 1000 dollars a year in interest for 10 years. What’s that bond worth?

If it has zero probability of default (e.g. it’s a government bond), the value of that bond is $1000 divided by 10-year treasury rate, give or take. Let’s say it’s 25k.

If some respectable credit agency tells you that the bond is AAA-rated, you might be willing to pay 20k for it.

The company takes your 20k and gives a subprime loan with 10% interest rate to someone. At 10% rate, it’s only necessary to loan 10k to generate enough revenue to pay you back. As long as home prices are rising, default rates are low, the company can spend the remaining 10k whichever way it wants (e.g. pay big dividends or do a stock buyback).

Subprime crisis hits, and now it suddenly turns out that the bond is not really AAA. (And you don’t really know what it is, because the market for those bonds is frozen solid) You do know that only 10k out of your 20k was really spent on the actual house. Besides, home prices are declining and the company will only get maybe 7-8k out of 10k if that house forecloses. Furthermore, the company will bear legal expenses and pay all sorts of fees before the house is sold, so you will only get 5k back. Finally, there is a good possibility that the company goes bankrupt and you will have to jump through all sorts of hoops before you see a singe penny.

Under these circumstances, you might consider yourself fortunate if someone agrees to buy the bond from you for 5k which is only 25% of what you paid for it.

[Eugene]

Does that mean the homes are worth 11-27% of what they were when the mortgages were written

I think it’s much more complicated than that.

Basically here’s the situation (as far as I understand it)

Suppose that some company offers you a bond that pays 1000 dollars a year in interest for 10 years. What’s that bond worth?

If it has zero probability of default (e.g. it’s a government bond), the value of that bond is $1000 divided by 10-year treasury rate, give or take. Let’s say it’s 25k.

If some respectable credit agency tells you that the bond is AAA-rated, you might be willing to pay 20k for it.

The company takes your 20k and gives a subprime loan with 10% interest rate to someone. At 10% rate, it’s only necessary to loan 10k to generate enough revenue to pay you back. As long as home prices are rising, default rates are low, the company can spend the remaining 10k whichever way it wants (e.g. pay big dividends or do a stock buyback).

Subprime crisis hits, and now it suddenly turns out that the bond is not really AAA. (And you don’t really know what it is, because the market for those bonds is frozen solid) You do know that only 10k out of your 20k was really spent on the actual house. Besides, home prices are declining and the company will only get maybe 7-8k out of 10k if that house forecloses. Furthermore, the company will bear legal expenses and pay all sorts of fees before the house is sold, so you will only get 5k back. Finally, there is a good possibility that the company goes bankrupt and you will have to jump through all sorts of hoops before you see a singe penny.

Under these circumstances, you might consider yourself fortunate if someone agrees to buy the bond from you for 5k which is only 25% of what you paid for it.

[Eugene]

More good news from UCLA Anderson. The worst is over for San Diego County’s housing market. Prices will decline by less than 2 percent through next summer, then start to rebound.

http://www.signonsandiego.com/uniontrib/20070501/news_1n1forecast.html

[Eugene]

More good news from UCLA Anderson. The worst is over for San Diego County’s housing market. Prices will decline by less than 2 percent through next summer, then start to rebound.

http://www.signonsandiego.com/uniontrib/20070501/news_1n1forecast.html

[Eugene]

More good news from UCLA Anderson. The worst is over for San Diego County’s housing market. Prices will decline by less than 2 percent through next summer, then start to rebound.

http://www.signonsandiego.com/uniontrib/20070501/news_1n1forecast.html

[Eugene]

More good news from UCLA Anderson. The worst is over for San Diego County’s housing market. Prices will decline by less than 2 percent through next summer, then start to rebound.

http://www.signonsandiego.com/uniontrib/20070501/news_1n1forecast.html

[Eugene]

More good news from UCLA Anderson. The worst is over for San Diego County’s housing market. Prices will decline by less than 2 percent through next summer, then start to rebound.

http://www.signonsandiego.com/uniontrib/20070501/news_1n1forecast.html

[Eugene]

Combined monthly payment on their two loans is only around $2100. That leaves $800 month property tax and HOA fees. Half of what it costs to rent a 3br in the area before they even begin paying off mortgage. Ouch.

[Eugene]

Combined monthly payment on their two loans is only around $2100. That leaves $800 month property tax and HOA fees. Half of what it costs to rent a 3br in the area before they even begin paying off mortgage. Ouch.

[Eugene]

Combined monthly payment on their two loans is only around $2100. That leaves $800 month property tax and HOA fees. Half of what it costs to rent a 3br in the area before they even begin paying off mortgage. Ouch.

[Eugene]

Combined monthly payment on their two loans is only around $2100. That leaves $800 month property tax and HOA fees. Half of what it costs to rent a 3br in the area before they even begin paying off mortgage. Ouch.

[Eugene]

Combined monthly payment on their two loans is only around $2100. That leaves $800 month property tax and HOA fees. Half of what it costs to rent a 3br in the area before they even begin paying off mortgage. Ouch.

[Eugene]

A couple more observations.

Not only do coastal and inland areas of San Diego show relatively low levels of foreclosure activity, but so far at least 1/3 of all REOs in these areas are condos. There’s very little distress among single-family houses in good areas.

Among those houses that do get foreclosed upon, considerable numbers are neither listed nor resold. Banks seem to be simply sitting on them. (Random example: 7958 Camino Tranquilo in University City)

It’s interesting to compare these rates with Temecula/Murrieta, but I can’t find any foreclosure data for Riverside County.

[Eugene]

A couple more observations.

Not only do coastal and inland areas of San Diego show relatively low levels of foreclosure activity, but so far at least 1/3 of all REOs in these areas are condos. There’s very little distress among single-family houses in good areas.

Among those houses that do get foreclosed upon, considerable numbers are neither listed nor resold. Banks seem to be simply sitting on them. (Random example: 7958 Camino Tranquilo in University City)

It’s interesting to compare these rates with Temecula/Murrieta, but I can’t find any foreclosure data for Riverside County.

[Author]

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