Housing Bubble Bursting?

[Couch Potato]

Where?

Keep the american dream afloat and purchase a new Florida condo for 600K with and Ocean view when you stick your head out of the Bathroom window.

You can't get one with a view like that for only 600K. :new_all_coholic:

 

[Greg Bell]

Sorry , I don't know the market in Florida.I do know of a 1 Bedroom Condo that sold for $900K with a view of the Ocean (No kidding) that you had to poke your head out the bathroom window at a right angle.Forgot to mention after the dead count bounce in November's increase of 3.3% sales of new homes does not included CANCELLED contracts , do you think that would make a difference??Also new sales were DOWN 15% from November 2005..
It doesn't matter the NAR will call this a boom and the bottom of the market , can't wait for the talking heads to babble the merits of this HUGE rise in new home sales.

 

[Greg Bell]

Words of wisdom from Wisdom Financial..

The Real Estate Burst Effect on the Economy


Without question, the real estate bubble has fueled this US economy in the last several years. I am amazed at the amount of times I have heard about a friend or neighbor who decided to refinance their home, get an adjustable rate mortgage, and take cash out for some type of trivial expenditure. Why not? They would argue. I just made a 200k profit this year. This same irrational exuberance reminds me of the “paper millionaires” in the Dotcom era who pointed to their stock portfolio as a means to justify their spending. Although this spending served to fuel the economy, it also served to further fuel this bubble and send your typical consumer further and further into debt. In the future, those that can afford to pay the additional amount on their higher mortgage will have to “tighten their belt” and not spend as much money in the economy. Consequently, they will hold on to their car a couple of years longer, not frequent their local restaurant as often, and cut back on their overall spending. In turn, this will flow into the economy and we will most likely see a much needed recession as individuals refocus on savings and the re-accumulation of wealth.


The Implications of an Upcoming Recession


Generally speaking, a recession is a prolonged period of time where the economy is contracting. During a recession, you will most likely see consumers spending less money and saving more, a subsequent decline in the stock market, a rise in unemployment, and a decline in real estate prices. The idea is that the economy has to have periods of contraction after years of expansions. From 1991 to today our economy has been constantly growing. Some Economists might argue that we did go through a recession in 2001. I disagree. Although we did have some characteristics that were indicative of a recession, we also had some glaring omissions. How can we have a recession that only lasts one quarter, especially after we just came off a major stock market bubble? Why would real estate prices continue to rise in a time of less spending and more saving? In either case, the recession that is to come will be a multi year recession that will serve to slow down this economy that has been wildly expanding over the last decade and a half.


I see the commodity markets as the premier place to invest during this upcoming recession. Like the recession of the 1970’s, I also expect to see rising inflation and soaring commodity prices. Whether you invest in the metals markets, agriculture, or basic raw materials, I believe that positioning your wealth towards commodities will best position you to ride out this housing burst and subsequent recession.

 

[Randolph Kinney]

Randolph,

Actually I do not have that data. You see, all these guys are going only a few years back. What I want to see is how the current (or even anticipated) forclosure rate compares with more normal market- not those within a hot market nationally.

Anytime a hot market cools you see these dramatic drops or upticks just like you see wild projections of long term gains when a market is coming off its lows.

Brad, I have been doing some research on sub prime mortgages. For sub prime mortgages known as "piggyback mortgage" (typically 80% first mortgage with a 20% second mortgage), the default rate is much higher than any other sub prime mortgage products. Selling a sub prime second mortgage often is discounted 50% or more so lenders tend to hold these. Lenders will sell the the sub prime first mortgage of the piggyback to the likes of Fannie Mae, Freddie Mac, or private bond issuers. At any rate, loans that are sold into the secondary market usually end up in giant pools of mortgages that are converted into bonds for institutional investors.

Wall Street ratings agencies tell investors how risky the underlying mortgages in a pool are (how likely they are to default and cut off the investor's income stream), IE - S & P, Fitch, Dominion, etc.

Recently S & P conducted an extensive analysis of nearly 640,000 piggyback first-lien mortgages contained in bond pools. Many of the mortgages helped fund home purchases in California, Washington DC, New York and other high-cost areas between 2002-2004. S & P's findings amounted to a big dose of bad news for fans of piggybacks: First-lien mortgages connected with piggybacks are far more likely to go into default than stand-alone first mortgages of comparable size.

According to S & P credit analyst Kyle Beauchamp, first mortgages that were originated as piggybacks are 43 percent more likely to go into default than standard first mortgages. Piggybacks made to borrowers with FICO credit scores below 660 are 50 percent more likely to go into default than stand-alone first mortgages made to borrowers with identical credit scores.

The reason for the higher default according to the study is because the borrower does not have anything to loose. And these loans are more sensitive to changes in employment and interest rates.

According LoanPerformance, 80.2% of all mortgages originated in 2005 were ARM. Of the ARM mortgages, 74.9% are 2-year ARMs. That really does indicate that 2007 is going to be a problem year for mortgage default with home prices flat to declining.

One of the statistics that Roger is pointing to are the short sales that do not show up in the foreclosure statistics. Short sales are precipitated by default or seriously delinquent mortgage payments. There are more short sales in my market than foreclosure REO sales by 8 to 1. I have looked at many of the loans of these distressed sales and they are piggyback loans, mostly 100% financing.

For the vast majority of loans, the taking of property is not profitable for the lender. As a result, lenders make substantial efforts to delay or even forgo foreclosure and find alternative and less costly outcomes. These alternative outcomes are especially enticing to lenders in the sub prime market, where losses on foreclosures tend to be higher (Capozza and Thomson, 2005) and the time spent being in delinquency tends to be longer (Capozza and Thomson, 2006). In addition, since sub prime loans have relatively high interest rates, any ongoing payments made by a borrower, even if sporadic, may be able to generate more income for the lender than eviction of the owner and lender ownership of the property.

However, a substantial fraction of sub prime loans do enter foreclosure proceedings. For example, the Mortgage Bankers Association of America reports that over 9 percent of outstanding sub prime loans were in foreclosure at some point during the 2000-2001 time period (recession?). That percentage is over 12 percent today and rising (no recession).

 

[Brad Ellis]

Randolph,

1. 80/20 or piggybacks are not necessarily sub-prime. The overwhlming majority are made to prime borrowers.

2. Thanks for the stats from 2000-2001 showing a 33% increase from then- but, that was also the time of the dot.com bubble- an actual real bubble. Some (do not know the percents) were for high value housing to the very folks who saw their nest egg disappear almost overnight.

That is why I think we must go back much further for comparisons. 2000-2001 was still a hot or warm RE market. I wrote my first article on the "bubble" in mid 2002. And I do not think and will not accept that we were in a recession. GDP actual numbers declined only for one quarter- 4Q of 2001 directly due to 9/11. Q1 of 2002 saw growth.

As to delaying the foreclosure, please remember that I am up to my elbows every day in just such scenarios. We do not ever want to foreclose but will always make the decision to maximize the revenue- however that happens.

At the same time, unless there is some reasonable basis for belief that the loan will cure, nobody in their right mind will fail to foreclose ASAP. The rule is- your first loss is your smallest loss.

If you think that is not right, you can then please explain to me why I get such pressure ecvery day to provide values for foreclosure purposes. Were there an advantage to delaying it, no one would get upset about missing a bid date. Let me assure you they get very upset.

Sub-prime guys may delay this stuff a bit but cannot for too long or they will lose their credibility on the street (Wall). If that happens they are essentially out of business.

Brad

 

[Greg Bell]

Holy cow.The stock market took off with the greatest news ever , New home sales rose a whopping 3.3% wooooooooooweeeee.The housing crash is over , everbody buy , buy , buy.Don't forget that huge number does not include cancellations , so what , get out there and buy something ,anything.PS Forgot to mention manufacturing was way down for November...

 

[Greg Bell]

Another lender bites the dust , how can this be with boom back in new sales ,
also Mortgage applications down 14% last week..

Another mortgage operation said it will shut its doors today, with Alliance Bankshares Corporation announcing a major restructuring of its mortgage banking unit, Alliance Home Funding, LLC. Today, approximately 43 employees were told of the business decision to cease operations as a stand-alone mortgage banking subsidiary.


“In 2006, management of Alliance Home Funding, LLC in concert with senior executives of the bank undertook a series of steps designed to improve results,” said Thomas A. Young, Jr., President and Chief Executive Officer of Alliance Bankshares. “Regrettably, our actions have not yielded the desired outcome. As we enter 2007, with a continued modest outlook in the housing sector, we felt a radical change was necessary.”

Alliance Bankshares said it will take a fourth quarter pre-tax charge in a range of $540,000 and $675,000 to wind down the operations of Alliance Home Funding, LLC. This charge will have an after-tax impact on fourth quarter earnings of $350,000 to $450,000. The charges cover staff severance, systems charges, estimated subleasing costs and various other costs associated with the closure of Alliance Home Funding, LLC.

“Our mortgage banking services will continue in a dramatically new fashion. Approximately ten people will join the Alliance Bank organization as part of a mortgage banking division. This division will offer home mortgages to bank customers, prospects and home builder clients. The focused approach of this division should lead to better performance metrics,” said Thomas A. Young, Jr.

Harvey E. Johnson, Jr., Chairman of the Board of Directors said, “The Board and Management strongly feel this action to revamp the mortgage banking operations is the proper course for Alliance. We remain committed to delivering high quality financial services in the Greater Washington, DC metropolitan marketplace yet we must constantly assess and modify our delivery channels.”

Alliance Bankshares Corporation is a locally managed community banking organization based in Northern Virginia.

 

[moh malekpour]

Lehman brothers holdings, inc is in trouble because of their sub-prime bonds that they made last year and now Moody is in process of downgrading their 30 bond issues with $416 million in balance. The loans for these bonds were made by Fremont investment & loan over in Anaheim. Default on sub-prime adjustable mortgage surged 27% last month. This is getting out of control
http://www.bloomberg.com/apps/news?pid=20601009&sid=aFypypTBULf0&refer=bond

 

[Randolph Kinney]

Randolph,

1. 80/20 or piggybacks are not necessarily sub-prime. The overwhlming majority are made to prime borrowers.

That's nice, 43 percent more likely to go into default than standard first mortgages. The lower the credit score, the higher the percentage more likely to default.

2. Thanks for the stats from 2000-2001 showing a 33% increase from then- but, that was also the time of the dot.com bubble- an actual real bubble. Some (do not know the percents) were for high value housing to the very folks who saw their nest egg disappear almost overnight.

That is why I think we must go back much further for comparisons. 2000-2001 was still a hot or warm RE market. I wrote my first article on the "bubble" in mid 2002. And I do not think and will not accept that we were in a recession. GDP actual numbers declined only for one quarter- 4Q of 2001 directly due to 9/11. Q1 of 2002 saw growth.

Quoting from http://www.nhsnyc.org/docs/WSJ-More%20Borrowers%20With%20Risky%20Loans-wsj.pdf

Predicting losses on these securities is a challenge because there's little or no historical evidence
to show how subprime loans will perform at a time when home prices are falling, says Thomas
Lawler, a housing economist in Vienna, VA. An analysis by Merrill Lynch & Co. found that losses
on recent subprime deals could be "in the 6% to 8% range" if home prices are flat next year and
could rise to the "double digits" if home prices fall by 5%. Falling home prices could trigger losses
not only for investors who bought riskier classes of mortgage-backed securities, but also for some
holders of A-rated bonds, according to the report.

You have several sub prime lenders that are now under water with more to follow. Bond rating services are down grading CMOs that were A rated. For example, loans made early in 2006 are showing double-digit percent late payments. Rating services like Moody's are eager for more information about whether the losses that come when homes are foreclosed upon will increase as a housing slowdown hurts resale values. S&P/Case-Shiller Home Price index is closely monitored for future price trends as the barometer for defaults and foreclosures to come.

I believe the sub prime defaults are going to be tolerated and any move to foreclose will be procrastinated as long as a short sale looks promising. It is only when the market value approaches the first mortgage amount will the lender seize and foreclose the asset to dump it to salvage the first and kill the second. That should improve home prices.

 

[Greg Bell]

Here is a nifty chart showing the booming new home sales (Not)
http://housingdoom.com/