Seattle Bubble

Interesting story from Kirsten Grind over at the Puget Sound Business Journal: Experts see more subprime-loan pain ahead

Another big wave of subprime mortgages will see interest rates reset to a much higher rate over the next six months in the Seattle area, an indication that the Puget Sound region might still be facing further economic trouble.

The large number of resets mean it’s possible that foreclosure rates could continue to rise across the state as homeowners struggle to make higher payments. Banks, already weighed down by bad loans, could face an even more hefty load of troubled mortgages on their books, according to experts.

The result could be a damper on some sectors of Washington’s economy — including the housing market — which has so far fared better than many states in recent months.

About 12,600 subprime loans are scheduled to reset in the Seattle-Tacoma-Bellevue area over the next six months, or about 52 percent of the subprime loans left to reset in the area…

In addition, a large chunk of Alt-A loans — known for little or no income documentation — will start resetting with the possibility of higher rates in about a year, a trend that mortgage experts are watching warily because less is known about their loan performance.

Reading the entire article, I can’t help but see an eerie similarity to what has already happened down in California. The “experts” quoted in the article claim that since home prices are only down 5-10% here, loan resets won’t be as big of a deal as they have been in the Golden State. But when most people put 0-3% down, it seems to me that a 5-10% drop in prices is more than enough to send those people into foreclosure.

I don’t think the Seattle-area will see as many foreclosures as San Diego or Sacramento, but I do think we’ll have our fair share, which will probably be more than any point in Seattle history.

(Kirsten Grind, Puget Sound Business Journal, 08.22.2008)

Last week the Puget Sound Business Journal ran a piece comparing King County to San Diego County. It was behind a subscriber-only wall, but now it’s fully available on their website: How King County dodged mortgage mess compared to San Diego. Unfortunately, the article doesn’t really have any new material that regular readers here haven’t seen before.

While the housing market’s downturn has certainly struck the Puget Sound region, it hasn’t wrought the widespread havoc that hit cities like Miami, Las Vegas and San Diego.

On the surface, there appear to be few reasons why the Puget Sound area has been able to escape the worst of the mess. Housing markets in both cities saw companies, jobs and people pour in during the first half of the decade. Both are desirable places to live. Home prices rose. And subprime mortgages were widely available.

But a detailed comparison of the two regions shows why King County’s economy is heralded as a bright spot across the country while San Diego County has come to represent everything that went wrong.

First off, I agree 100% with what appears to be the basic premise of this article: that the housing bust won’t be as bad here as it will be in San Diego, Phoenix, Florida, etc. I don’t think anybody has ever tried to argue that things will be as bad or worse here.

Unfortunately, while the article promises a “detailed comparison,” it doesn’t really deliver.

Builders in San Diego raced to build homes to keep up with demand, pushing farther into the previously undesirable areas of southeastern San Diego County, far away from the ocean.

In contrast, Seattle builders were restricted in part by the state’s growth management law and weren’t able to build at nearly the same pace.

In addition, mortgage companies and banks in San Diego — including Seattle-based Washington Mutual — wrote thousands of subprime loans. Their counterparts in Seattle wrote far fewer.

Ok, those are some interesting assertions, but where’s the data? What were the per capita rates of new construction and subprime lending in the two counties? The article doesn’t say. In fact, the only data I’ve been able to find that compares lending in San Diego to the Seattle area shows suprisingly similar amounts in both areas.

Later in the article, they do cite some raw data on homebuilding:

In San Diego, developers got 9,749 permits for single family homes in 2002, up about 6 percent from 2000, according to the Building Industry Association of San Diego County. That pace held steady through 2004 and then started to fall. By 2007, building permits for single family homes had plummeted 64 percent to 3,508 from the heyday of 2002.

By comparison, King County’s single family building permit activity remained flat between 2003 and 2005, with about 1,300 permits filed each year, according to the Washington Center for Real Estate Research. In 2007, permits dropped slightly to 1,239.

So, San Diego permits went up in 2002, leveled off for two years, then fell. In King County they leveled off for two years, then fell— the same pattern as San Diego, but offset by a year.

Of course comparing raw data like this is rather deceiving since the population of San Diego County is 2.8 million, versus King County’s 1.7 million. A better comparison would be King, Snohomish, and Pierce combined, with a population of 3.0 million. And as anyone that’s spent much time driving around outside King County knows, there was a heck of a lot more development in Snohomish and Pierce than there was in King. (And there are a lot more foreclosures out there, too.)

Another big reason: It took Seattle longer to recover from the economic aftershocks of 9/11 and the dot-com bust. As a result, the city entered the housing boom late and “although it got heated, it wasn’t as seriously overheated as some of the other parts of the country,” said Glenn Crellin, director of the Washington Center for Real Estate Research, Washington State University’s real estate research arm.

“Our economy has done very well compared with many other parts of the country,” said Crellin.

Does it occur to folks like Mr. Crellin that perhaps the only sectors of San Diego’s economy that are suffering are those related real-estate, and that perhaps the reason our economy looks so great is because the housing bust here is only just getting started?

I also don’t understand how someone can say “we entered the housing boom late” then when we likewise exit the boom late, say “look how unique and strong we are!” How does that make any sense?

What lies ahead? Chad Ruyle, an estate planning attorney and co-founder of You Walk Away, a foreclosure advice firm, thinks San Diego is not near the end of its housing market downturn.
…
“No one can predict when the market will bottom out and return to normal,” said Ruyle. “But I think we’re only a third of the way through it.”

Seattle, on the other hand, has likely made it through the worst of its downturn and will slowly start recovering, said [University of San Diego professor Norm] Miller.

I’d be curious to know exactly what Mr. Miller is basing his theory on. Unfortunately, the article doesn’t say.

No offense to Ms. Grind, as I realize there’s only so much you can fit into an article of this nature. But I have to say that this article came across to me as light on details and high on wishful thinking.

(Kirsten Grind, Puget Sound Business Journal, 06.06.2008)

My favorite personal finance blog Get Rich Slowly gave me a heads up earlier this week about an excellent radio piece that you should make the time to listen to.

It’s titled The Giant Pool of Money, and you can download the mp3 for free through the 18th of this month. They interview a handful of people from up and down the chain of mortgage lending over the last few years, and lay out the nature and source of today’s mess in plain language.

You’ll hear from a borrower that took on far more mortgage than they could afford, a lender that wrote and immediately sold the loans (while making obscene amounts of money), and a CDO manager that owns pieces of millions of loans that he literally looks at as lines in a spreadsheet.

It’s an excellent piece, and although many of you may have already seen mention of it elsewhere, I felt I should link to it here as well.

The Sun Sentinal article:

“In an effort to halt what one official called ‘an investment world version of a run on the bank,’ state officials froze withdrawals Thursday from a $27 billion investment fund that local governments drained by almost half during the past two weeks.” (bold type by me for emphasis)

“‘It is certainly unprecedented, and there is a nervousness out there that we’ve never seen before,’ Broward County Commissioner John Rodstrom said.”

This is nuts. What say you King County? Did I not read a few weeks ago about some of the investments King Co. made were possibly suspect and tied to mortgage securities?

The mortgage securities problems are reaching out and touching everyone. What happens to government municipalities that go broke? What happens to these municipalities when those folks (and there are many) in suspect loans that have no “escrow reserve acct.” do not pay property taxes. Traditional mortgages have “escrow accounts” which are in place to pay property taxes.

The Mortgage Queen Spider has evidently spun her web much more broadly and intricately than anticipated—many more objects are getting caught. Perhaps the Mortgage Queen Spider likes warmer climates, thus sparing Seattle and vicinity. Time will tell us, I suppose.

Update: This is exactly what I’m talking about regarding property taxes.

“Treasurer’s offices all over the country are bracing for the day when lenders stop paying the taxes on many properties in the worst hit neighborhoods.”

Mark Trahant is definitely my favorite writer for any of the local papers. If we ever get around to having a Seattle Bubble meet-up, he’s definitely invited, and his drink is on me.

His latest piece continues to hammer home the reality of the world we live in today: mortgage / housing market is a mess and not likely to get better and no, we’re not immune in Seattle.

“Unfortunately,” says the Congressional Joint Economic Committee, “conditions in the housing market indicate that house price appreciation will no longer be able to disguise the financial precariousness of millions of borrowers whose subprime adjustable rate mortgages are about to be reset.”

The report released Thursday said the mortgage mess is going to get a lot worse — and will last for at least the next two years. “We estimate that subprime foreclosures alone will total approximately 2 million,” the report said.

But in bold typeface the committee points out: “However, it is quite possible that the house price declines will be substantially larger.”

The reason for that is simple: Many of the people trying to negotiate with their lenders for a better deal owe more than the house is worth.

Washington state has 156,810 outstanding subprime loans — and the committee estimates that 21,282 of those homes will go into foreclosure proceedings between now and 2009.

That is bad news across the board. “A glut of foreclosed homes for sale depresses home market values for other owners,” the report said. Most homes will be worth less — especially in neighborhoods where there is a concentration of foreclosures. “Moreover, the homes left vacant by foreclosure lower the desirability of the neighborhood since there is often an increase in crime associated with a vacant house.”

Washington’s mantra for a long time is that the state is protected by its strong job market. But a crashing housing market means less construction activity, fewer jobs and generally less consumer wealth.

Local and state governments already are starting to see the impact on revenues — and that, too, will get worse to the tune of nearly $1 billion between now and 2009. The report estimates Washington counties will lose at least $15.4 million in property taxes.

But all of this assumes we know what we know. And that’s precisely the problem: We don’t.

I rarely have much to add to Mark’s pieces, since he puts it so well himself. I just wanted to make sure this wasn’t missed by any of the readers here. Keep up the good work, Mark!

(Mark Trahant, Seattle P-I, 10.26.2007)

A couple people pointed me to a great article in today’s Wall Street Journal on the prevalence of sub-prime lending across the country over the last few years. The article discusses the surge in such risky loans, and the fallout that is already underway and likely to continue.

The data suggest that financial suffering is likely to persist in many parts of the U.S. where subprime lending had surged. Many loans at risk of going bad have not yet done so. As much as $600 billion of adjustable-rate subprime loans, for example, are due to adjust to higher rates by the end of 2008, which means that more and more borrowers are likely to fall behind.

Attached to the article is a nifty interactive graphic that shows just how widespread subprime lending has become since 2004. Here’s a bit about the methodology they used:

High-rate loans are defined as those having an annual percentage rate of at least three percentage points above a Treasury security of comparable maturity for first-lien loans and five percentage points for second-lien loans. Lenders have been required to report pricing details on high-rate loans since 2004. High-rate loans are considered to include many, but not all, subprime loans.

So how does the Seattle area stack up? Obviously we didn’t have nearly the amount of sub-prime lending as other parts of the country, such as Miami, Orlando, Las Vegas, or Los Angeles, where sub-prime made up over 30% of all mortgages in 2006. But we still experienced plenty of a “surge” of our own:

2004

2005

2006

Yup, sub-prime lending more than doubled as a percentage of the total mortgage market in the Seattle area. Tacoma was even worse, clocking in with 31% of all loans being sub-prime in 2006, earning them special mention in the WSJ article.

Lest you think that 20% is a low enough number to keep us out of trouble when the appreciation music stops, consider San Diego’s sub-prime stats for the same period (2004-2006): 8.1%, 19.1%, 22.7%. So no, sub-prime lending itself does not precipitate the decline of home prices. But once home prices do start to decline, even having 10-20% of recent mortgages being sub-prime can result in skyrocketing foreclosures.

Am I saying that things in Seattle will shake down exactly like they have in other places (such as San Diego) with similar statistics? Of course not. All I’m saying is that if they do, no one should be surprised. The real estate “professionals” that are frequently quoted in the media keep saying that the market is different enough in Seattle to protect home prices from falling, but every time we see the real data, such statements appear to be nothing more than wishful thinking.

(Rick Brooks & Constance Mitchell Ford, Wall Street Journal, 10.11.2007)
(Interactive Graphic, Wall Street Journal, 10.11.2007)