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EJ
12-19-06, 05:17 PM
Worst U.S. Mortgage Foreclosure Crisis

Sub-prime Market to be Hit by Record-Setting Level of Failures

December 19, 2006

Today the Center for Responsible Lending (CLR) issued a report:


CRL Report to Project $160 Billion+ in Home Wealth Lost By American Families; Data Available For All Major U.S. Markets on Expected Foreclosure Levels.

In what is shaping up to be one of the worst foreclosure crises in American history, subprime mortgages originated from 1998 through the first half of 2006 will wipe out billions of dollars of the homeownership wealth of low-income and minority American families, according to a Center for Responsible Lending (CRL) report. With projected foreclosure data on all major U.S. metropolitan statistical areas (MSAs), the CRL study is the first comprehensive, nationwide look at how subprime mortgages perform.
Speakers:

Michael D. Calhoun, president, Center for Responsible Lending;
Pat Vredevoogd Combs, president, National Association of Realtors; and
Wade Henderson, executive director, Leadership Conference on Civil Rights.Main points:
The CLR expects 2.2 million mortgage loans with a value of $164B to eventually fail. Cause is accountability disconnect in the chain brokers, borrowers, lenders, and trustees in sub-prime market
The sub-prime market is huge–25% of all loans made since 1998 were sub-prime.
More than 20% of sub-prime loans made since 1998 will end in foreclosure. For comparison, the infamous "worst case" Houston housing market of the 1980s experienced a 15% peak foreclosure rate with 1 million homes abandoned. They are predicting a greater than 2x worse problem.Wade Henderson of the Leadership Conference on Civil Rights referred to the developing catastrophe as a "national housing Katrina" and expects a major increase in vacancy rates, neighborhood decay, and crime as a generation of progress for minorities and immigrants in the U.S. is negated with the wholesale loss in home equity, wealth and savings.

This report is consistent with a paper by William C. Wheaton, Department of Economics, Center for Real Estate, MIT; and Gleb Nechayev, Vice President, Senior Economist, Torto Wheaton Research: Past Housing 'Cycles' and the Current Housing 'Boom': What’s Different This Time? (http://econ-www.mit.edu/centers/wel/housingcycles.pdf)
Abstract

This paper examines the historic cyclic movement in house prices since 1975. Past swings in home prices have been largely a result of economic recessions. The exception is the 2001 recession caused by a plunging stock market wherein the Fed loosened credit, rather than fighting inflation with tight credit. Home prices have soared since then, while income, job, and rent growth were slow to recover.

We show that incorporating all the actual movements in economic variables (including mortgage rates), forecasts made back in 1998 completely fail to capture the recent rise in prices. The current housing market however has been subjected to two "shocks" not seen previously. The emergence of an active sub-prime lending market has raised the homeownership rate nationally to historic highs. In a state cross-section we show that recent increases in homeownership correlate strongly with increases in Price/rent ratios.

Secondly, households have been purchasing homes as a "2nd" residence or for "investment" at record rates. In 2005 total housing production exceeded household formation by 60%! Again using a cross section, we show that markets where this has been on the rise are also experiencing greater price inflation. These new factors are "outside" of model forecasts and hence a cause for concern. Going forward, rising interest rates could both reduce homeownership and cause a more sudden exodus from the 2nd home investment market. These changes would cause prices to correct more severely than in the past.
A few charts from the paper:


http://www.itulip.com/images/homemedian.jpg
By any measure, equivalent rent or construction cost, median home prices have gone through the roof

http://www.itulip.com/images/homepriceincome.jpg
To revert to the mean, either incomes will nominally rise or home prices will nominally decline

http://www.itulip.com/forums/../images/subprime.jpg
Lots of sub-prime loans sold, lots to go bad

http://www.itulip.com/images/rateresets.jpg
Looks like 25% of adjustabe mortgages will reset before the 2008 elections, so perhaps Congress will "do something" before then

http://www.itulip.com/forums/../images/2ndhomes.jpg
A boom in second homes presages a bust in second homes, so it's not only a "sub-prime problem"

http://www.itulip.com/forums/../images/homemktprice.jpg
Boston housing bubble

BK
12-19-06, 05:52 PM
The number of folks that I encounter who have acquired a 2nd home is mind boggling.

I'm willing to bet there are a fair number of folks like a my good friend in Maine. They owned one house that was acquired when homes were reasonable and bought a nicer home that they now live in. They chose to keep the first home and rent the place out (you never lose money in Real Estate- being his mantra). My firiend is betting on appreciation to make up for the low income the first home generates. I tried three times to counsel him against this move - my advice fell on deaf ears.

I would love to know how many folks like my friend - gave up their Tax Free Gain in order to hold on to a piece of Real Estate (for future anticipated appreciation) - my gut tells me there are many -many stories like my friend. My friend is very bright and often does things counter to the norms of society(tells you how over-whelming this real estate mania has been).

Jim Nickerson
12-19-06, 06:46 PM
$164 billion divided amongst 2.2 million mortgages averages $74,545 per mortgage. On average that does not strike me as impressive.

I must be missing something. What is it?

One place I read Katrina cost I believe it was to the people of Mississippi and Louisiana $160 billion. I do not come close to fully appreciating how badly some of those people suffered, but that did not bring down the country. I think the worst thing felt nationally was a rise in gas and oil prices.

metalman
12-19-06, 06:58 PM
$164 billion divided amongst 2.2 million mortgages averages $74,545 per mortgage. On average that does not strike me as impressive.

I must be missing something. What is it?

One place I read Katrina cost I believe it was to the people of Mississippi and Louisiana $160 billion. I do not come close to fully appreciating how badly some of those people suffered, but that did not bring down the country. I think the worst thing felt nationally was a rise in gas and oil prices.

i'd have to see the whole report. my sense is that the subprime borrowers are the canaries in the coal mine and, mixing metaphors, the $164b is the tip of the iceberg. take that and run it up the flag pole. enough cliches for ya?

DemonD
12-19-06, 07:15 PM
164b loss would likely lead to a loss of confidence in the RE market. The effect on the consumer probably won't be all that bad, and I don't see a doomsday of like Escape from New York type anarchy, but all the super glossy neighborhoods that have sprung up will probably go into a bit of decay.

More worrisome is will this loss effect employment enough to cause a depression? I don't see it, but these numbers seem to be in line with a 10 year RE correction.

And btw, I wouldn't criticize someone for keeping their first home to rent it out. If you have a good property manager, and the place is kept up well and filled, that's a nice hunk of change in your pocket where you are basically doing nothing except collecting the dough. RE investing isn't for everyone, and it's certainly not "easy" as the guys on the infomercials tell you, but it is a valid way to generate income in this world. I worked with a guy who owns about 7 homes around the country. He was an orthopedic technician, and he was wealthier than all of the doctors he worked for. He retired at age 60 (well before medicare and social security) because he had almost all of his homes paid off and they were all bringing him enough money to where he didn't have to work. He could have retired 5 years before he did.

Now, if your friend is cash-flow negative on his house, then that is just not good business. That's how a lot of people lose money on RE.

Anyway, I think this article is basically more hard evidence to what EJ had predicted for housing corrections with that neat circle-graphic. I wonder if some rural/far suburbs will be completely abandoned in the next 5 years with a return of actual ghost towns.

hayfield
12-19-06, 09:47 PM
$164 billion divided amongst 2.2 million mortgages averages $74,545 per mortgage. On average that does not strike me as impressive.


Maybe more importantly than the dollar figure, there will be 2.2M properties in the hands of banks, who will likely look to sell. Adding that many more homes to the existing inventory cannot do any good for prices. And if the additional inventory pushes down on prices, then the next tier of the marginal-mortgaged-to-the-hilt "debt set" (as opposed to "jet set") will be ready to drop the keys off at the bank while walking away from their underwater house.

hayfield
12-19-06, 09:56 PM
I wonder if some rural/far suburbs will be completely abandoned in the next 5 years with a return of actual ghost towns.

Here in rural central mass, we have a builder buying 168 acres at 1.6M to build 70 luxury homes. Plans to start next year if he can get through the historical commission, environmental protection, wildlife management, etc. I figure he'll be bankrupt before he breaks ground.

Reminds me of a builder who bought 155 acres adjacent to us in 1986 or so. After years of wetlands battles, he was bankrupt in 1990. Then the state bought the land at an FDIC auction for a song and a dance in 92.

Jim Nickerson
12-20-06, 12:09 AM
If what EJ is alluding here with the mortage total and number of potential mortgages that will default is truly signified by looking at the average of 75K, then what is at stake are a good many small time loans. If that is true I imagine the properties are far from anything prime, and thus the poor people who lose their homes will just be poorer.

I looked for a post I made a while ago, but could not find it. In it a female economist was talking to some group, perhaps of bankers, and if I recall she was saying the impact of recession, and I believe she alluded to the defaulting on debts by highest risk group of debtors, would mainly be on the low economic echelon of society. I do believe she thought everything else would be okay. I apologize for not providing that reference.