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  1. Bugs
    February 14, 2007 @ 11:48 AM

    I think the word that should
    I think the word that should jump out at everyone is “unprecedented”. I keep referring back to the bust of the ’90s and how badly burned some of the GFs from 1988-1989 were, but that upswing was only 1/3 above the long term trendline from where we peaked this time.

    The losses of the ’90s were commonly in the low-mid five figures, and those loss rates drove a lot of lenders and their borrowers under. We’re already seeing foreclosure losses starting in the 6 figures this time, and I don’t think we’re anywhere near being done yet.

    Seriously, how many people who work for a living can recover from a $100k loss without bankruptcy? What would it be like if a $600k house at peak pricing eventually settled at $400k?

    • JWM in SD
      February 14, 2007 @ 12:39 PM

      Yeah, the media is only just
      Yeah, the media is only just now catching on to the scope of this story. Unfortunately, J6Pck is still blissfully unaware of the magnitude of this credit bubble.

      It is truly akin to standing on the shore and turning one’s back to the approaching tsunami.

    • DaCounselor
      February 14, 2007 @ 4:24 PM

      “Seriously, how many people
      “Seriously, how many people who work for a living can recover from a $100k loss without bankruptcy?”

      Ironically, I believe a homeowner can simply walk away from his original purchase loan (including a piggyback loan). They would lose whatever downpayment $$ they put into the deal (which these days seems to be, oh, about $0) but I don’t think the lenders have any recourse to collect any shortage after the foreclosure sale.

      The folks who stand to get creamed are those who have refi’d and also taken out 2nds or HELOCs and are upside down. I believe the lenders can obtain judgments against them for any deficiency after a foreclosure sale, which very well could end up in the six figures. Seems to me, though, that the typical problematic scenario being referred to on this site is the recent 100% finance purchaser who is facing a reset and is or is on the way to being upside down. I think these people just walk, if necessary, and take the credit hit and the pride hit but no real monetary loss.

      I’d be very interested to get Ramsey’s take on the servicing/lending industries reaction to the potential wave of foreclosures. As quoted by Rich, refi volume is high and presently indicates an orderly response to looming resets. If this continues, could it be disaster averted? And if not, what will be the industries’ reaction in terms of forebearance, renegotiation of terms and other classic and well established loss mitigation responses to homeowner distress.

      • Anonymous
        February 14, 2007 @ 9:12 PM

        Rich, you have a thoughtful
        Rich, you have a thoughtful friend who is generous with his time, to have put together such an informative post. Thanks for sharing.

      • Asterix
        February 15, 2007 @ 8:32 AM

        This article was well
        This article was well thought and very informative. Kudos to Rich and Ramsey. It will be interesting to see if the lenders try to push thru some kind of “emergency” legislation or regulation that will allow them to obtain judgements against owners who walk away from their properties.

        Either that, or we could see another massive bailout like the S&L crisis of the 80’s. I wonder how the voters in the Red states would feel about having to pay back the mortgages of people in CA.


      • Anonymous
        February 16, 2007 @ 7:11 PM

        Not only a 100k loss, but
        Not only a 100k loss, but even though the lender can’t seek compensation if the mortgage was a purchase and not a re-fi. The lender can/will issue a 1099 for the 100k to the defaulted borrower who will then owe Uncle Sam a boat load on income taxes!!!! If I am correct, bankruptcy doesn’t wipe out income taxes owed.

      • DaCounselor
        February 18, 2007 @ 2:37 PM

        In the case of the homeowner
        In the case of the homeowner who is indebted only by original purchase money loans (including the 80/20 deals that probably make up the majority of the problematic situations), I believe they not only escape liability to the bank for any shortage on a foreclosure sale but also avoid being taxed on the shortage by the IRS. I think this is the outcome of non-recourse loans in California. I’m not a tax specialist by any means but I do believe the outcome will be that these folks can simply walk (and of course have the 7 year foreclosure hit to their credit).

  2. no_such_reality
    February 15, 2007 @ 9:30 AM

    Thanks to your friend Ramsey
    Thanks to your friend Ramsey Rich.

    The thing that catches my eye is his opening bullet:

    REOs are “must sell” properties. Once they become prevalent in a market, they will influence market prices.

    Refi’s are high, but foreclosures are higher. From Bubble Markets Tracking Inventory Blog we see San Diego had 1475 foreclosures in January. From the Sandicor MLS on resale homes, we see San Diego had 1768 sales of existing homes.

    Looking back to foreclosures, we see Feb is rocking, 1719 foreclosures as of Tuesday the 13th. How high will it go?

    So do the banks feel the critical pinch of volume? If January foreclosures hit the market in March and Feb in April, when will the banks reach critical mass? They had 1251 and 1304 foreclosures in December and November. Those apparently came online January and this month.

    With current foreclosures on par with the resale sales rate, how long before the banks blink in the game of Chicken pricing to move the volume they see in their pipeline?

    From the 4S Ranch Update based on OCRenters pricing info, the other must sell that Ramsey pointed out being builder Specs, appears to already be blinking.

    If current volume all home (new & resale) is in the 3400 units range and the banks end up with a foreclosure pipeline for 2007 with 50-100% of that volume every month in “must sell” properties. How hard is the landing?

    Can the banks sits comfortably with 24,000 REOs in SD alone on the books with a book value of $12 Billion?

  3. davidortiz619
    February 15, 2007 @ 1:16 PM

    this is one of the best post
    this is one of the best post i have read, thanks for the hard work. Passing this to all i know

    • Anonymous
      February 15, 2007 @ 6:56 PM

      Very well written post. I
      Very well written post. I have been talking about this as well. In fact I have spoken to many MBS traders and they were not even aware of the CLTV… they simply priced on the LTV and priced accordingly.

      The aggressive lending is the problem we are facing. As you indicated in the recast of 2/28, I have created a 2/28 mortgage calculator this automatically calculates the adjustments and many will be surprised by the jump in payments… often increases of over 50% for the I/O products.

      The 2/28 is a much bigger problem than the pay-option arm that everyone loves to vilify which only has the 110%-125% recast option that no-one really understands but still semi protects borrowers since payments don’t really jump unless they hit the recast.

      Many of these 2/28 have 3 year pre-pays further prohibiting borrowers from qualifying due to lack of equity when you combine low or negative appreciation, prepayment fee’s and new loan fee’s… and the fact that they will no longer qualify for a “real” mortgage where they have to state their real income.

      The word on the street from the wholesale lenders I know is that the “stated” income loans for “salaried” borrowers are going to be gone by late March, early April.

      I have been around since 1987 and remember 89-91 in So. Cal when 51% of homes sold in OC where short sales… as stated in the article… that can’t happen this time around because of the 2nds.

      Also, what is significant to me is the change in people’s attitude towards real estate. Clients used to buy a house because they wanted a “home” now they buy because they want an “investment”. Borrowers will be more likely to walk away from their “investment” if it’s not making money then walk away from their “home”.

      Also, there is no longer this association of the Scarlett Letter F for foreclosure on your chest as being a loser for losing your house to foreclosure… just the letter A as being an A+ smart real estate investor who walked away from a bad investment.

      • Anonymous
        February 20, 2007 @ 10:54 PM

        mortgage info:
        I really

        mortgage info:

        I really think the effort for the 2/28 calculator was noble but I regret that the output from the calculator paints to rosy of a picture. My experience with these products tells me you need to add a 3% initial rate adjustment with 1% adjustment every 6 months. That is the way most, if not all 2/28’s and 3/27’s are written these days. You will see that in today’s flat to inverted yield curve tug of war, even at flat, payment increases are going to be even greater than projected in your calculator.

        In reference to option ARMS being less risky, you need to re-think the 110% recast statement for sure and possibly even the 125%. The way these loans are currently being sold is going to kill borrowers. It is truly not the recast feature in itself, but irresponsible pricing strategies and lending practices.

        Once upon a time Option Arm loans were better performing and less foreclosed on than Fixed rate loans. Unfortunately thanks to Wall Street joining the party and uneducated greedy originators, the true pioneers of the option arm market abandoned their sensible pricing practices. They did this to compete with Wall Street for business originated by a bunch of bloodthirsty greedy thug originators whose vacation home, or new Mercedes was more important than the safety of their client. Their greed ultimately sold many unsuspecting borrowers down the river.

        The lenders and investors day of reckoning is coming, and a 110% recast will blow up 3-8 months sooner and with a lot louder bang than the 2/28’s! If you look at the large spread from fully indexed option arms with a low 1 – 2% start rate you will see that 110% can be reached well before month 24. The recasted payment vs. the minimum payment is over a 100% payment increase. Can you say payment shock? There is no way that the 25th month payment on the 2/28 ever reaches this magnitude in the effect on the borrowers budget. I have run the numbers and the Wall Street greed for yield on these loans may blow up in their faces and relatively soon! When they added such high margins and stuck borrowers with 3% pre-payment penalties so they could rebate 3% in premium to a thug originator who never even knew what a recast was, they ruined the product. This will cost them dearly especially since they weren’t finished there, they started lending at 95% to 100%LTV on some of these products. Prior to 3 years ago lenders never really ever approved many if any option arms loans above an 80% LTV and if they did there was PMI. Again unfortunately some greedy wizard said, c’mon guys lets self insure these and raise the margins another .8 to 1.4%(making the recast kick in even sooner). OOPS! I’m sorry, I do not see how a borrower with insufficient equity due to the neg am forcing them upside down in the property, a 3% going away present (pre-payment penalty) with new and improved payments (100% + payment increases) doesn’t walk, do you?

        I am just not sure Wall Street ever expected 17 rate hikes and this long of a pause! It may really cause havoc, and option arms once a very effective lending tool may go bye bye forever as a result. The worst has not probably shown itself yet, and it hurts me because greed has ruled over sensibility. I feel we are at that place just before the tech bubble really imploded, you know when you couldn’t help jumping in at the last minute to try and make one more major play and got spanked! OUCH!

        Hoping for better than most forecasts, but I am a realist, the storm clouds tell me take shelter!

        P.S. Now I know some originator who sells option arms properly and discloses the positives and all the risks is going to write bcak telling me I am wrong. I know you are correct and you sold the lowest margin and you explained all the reasons not to make the minimum payment just like I would. You and I did not create this problem, so don’t bother writing me back defending your position, I understand it! Just think about the 70 or 80% of the idiots who never explained anything, led people to believe their payments were etched in stone for 5 years on a truly monthly adjustable rate loan, locked them in a pre-pay with the highest margin available in this solar system, they are the culprits. Yep, we did the equivalent of handing loaded guns to children! Take cover as there’s gonna be some shootin’!

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