Don't Fear the Resets
Some new news coming out regarding the viability of subprime loans. Everyone thought the resets on these were going to be the problem - at least once rapid appreciation halted. Turns out, there's little reason to worry about resets after all. We should be worried instead whether or not borrows can afford the teaser rates.
From TFA
That's double digit defaults before the year even ended. Could it be that the number of subprime forecloses is still being understated? With a recession coming, is it possible we might see a 50%+ foreclosure rate on subprime loans from 2006-2008?
From TFA
Defaults for subprime loans issued in 2007 - none of which have reset yet - hit 11.2 percent in November. That represents perhaps 300,000 households, and is twice the default rate that 2006 loans had 10 months after being issued
That's double digit defaults before the year even ended. Could it be that the number of subprime forecloses is still being understated? With a recession coming, is it possible we might see a 50%+ foreclosure rate on subprime loans from 2006-2008?
Comments
I completely agree. The interest rate itself has little to do with the foreclosure problem. It's all about equity. The less of it you have, the greater the odds you will default.
Thus, it should be no surprise that the most recent home-buyers will have the least amount of equity and therefore the highest incidence of delinquincy (i.e. since national prices are still close to the peak).
Being hit with a large mortgage reset is no big deal if you have sufficient equity. You can just re-finance, or even sell if necessary. It's the people who have no equity cushion that run into trouble.
Math is a dirty mistress.
Well then we are in for some very serious defaults. We need to go get the Christopher Cagan/Firstam Core Logic report from 2006 or early 2007. I will go find it.
http://www.csupomona.edu/~rerc/RERCSC%2 ... .30.07.pdf
He didn't factor in the large price declines seen in bubble cities and he didn't factor in the credit crunch, and the psychology behind the jinglemail decision.
Here are a few of my favorite charts:
http://www.financialsense.com/fsu/edito ... 703.h2.jpg
http://www.generationaldynamics.com/ww2 ... gchart.gif
http://msnbcmedia.msn.com/i/msnbc/Compo ... Chart3.gif
http://mortgage.freedomblogging.com/fil ... -chart.jpg
Those option ARM reset coming in 2010-2011 are nuclear bombs waiting to go off....
Tick, tick, tick ,tick.....
Here but now we're gone
The seasons don't fear the resets
Nor do the wind, the sun or the rain
we can be like they are
Come on baby... Don't fear the resets
Baby take my hand... Don't fear the resets
We'll be able to walk... Don't fear the resets
Baby I'm your man...
Lenders say they're done
Here but now they're gone
Romeo and Juliet
Are together in eternity...
Romeo and Juliet
40,000 men and women everyday... Like Romeo and Juliet
40,000 men and women everyday... Redefine happiness
Another 40,000 come everyday...We can be like they are
Come on baby... Don't fear the resets
Baby take my hand... Don't fear the resets
We'll be able to walk... Don't fear the resets
Jingle mail's our plan...
Love of two is one
Here but now they're gone
Came the last night of sadness
And it was clear payment couldn't go on
The door was open and the wind appeared
Copper was stripped and then disappeared
Curtains flew and then he appeared
Saying don't be afraid
Come on baby... and we had no fear
And we ran to him... Then we started to fly
we looked backward and said goodbye
We had become like they are
We had taken his hand
We had become like they are
Come on baby...don't fear the resets
Dont fear the resets
We have become like they are
Like romeo and juliet
Matthew, maybe a wave will be defaulting way before 2010, 2011.
I am no economist, but it would be interesting to try and predict early defaults on these. We could use Cagan's model and add in the psychological factors of the youwalkaway phenom, a continuing credit crunch, tightening of underwriting guidelines, an INCREASE in interest rates that is likely headed our way, and the recession that is now here.
Early payment defaults on all these will rise. But by how much?
There are some other unknown factors: An Obama election that provides as socialist solution for all these defaulting homeowners, actually, Hillary would probably do the same thing, and we must also not discount a new problem I see headed our way: Massive failure on the loan servicing level to keep up with all the defaulting homeowners.
The loan servicers are not staffed, trained and ready to handle the demand. I wonder what the servicer's capital base looks like? Do they have the money to pay for increased staff and all the increased expenses? If not, they will have to raise their fees on the banks.
I think that's going to turn into a real good question. I see at least one issue though. People like to work where the big money is. When you could make unethical loans and people didn't care because "OMG, I bought a house!" it's easy to make big money.
But now things are closing down. People are going to start looking a lot more closely at what loan services are actually being provided. Heck, some people might expect a lot of this work to be pro bono, just to make up for the last 5 years. I think this will be a kind of catch-22, and the catch will be that not enough loan officers are available to respond to mounting problems. Which likely increases burn out rates, encouraging the good officers to leave and forcing business to hire green employees. So, not only do I think they are stuck short on employees, I think they might also become less efficient as qualified employees replace unqualified ones.
FWIW, Obama's position seems to be positively libertarian as opposed to Hillary's. Her husband is on record as saying the lenders should write down the loan amounts, eat 20% while the gov't eats the other 20%.
http://www.barackobama.com/issues/econo ... -ownership
Hillary is quoted in the news today calling him "just to the right of Bush"
http://www.huffingtonpost.com/2008/02/1 ... 87442.html
Prime isn't as prime as it used to be.
She has to say anything she can to get votes at this point. She's getting stomped in the primaries.
In regards to higher defaults on the 2007 prime loans, we can go back to the basics. The top two reasons why people default on their loans are:
Divorce and failure of a business.
There are other reasons such as job loss and medical problems but those are the top two.
The top two reasons why people divorce are:
sex and money.
It would be interesting to track divorce statistics in areas of high default and cross reference that with economic downturn data for the same geographical area, along with small business failures. Just for fun of course, we would also need to look into the sex part. Maybe I should become a sociologist.
But I digress. If traditional reasons such as divorce and business failure were not on the rise, I would want to look at other sociological factors at play in the mortgage market. We were still hearing "buy now or be priced out forever" during the first quarter of 2007 from Realtors (LOL, we're still hearing that now.)
Also, the mortgage market started to experience some anxiety during the first part of 2007. This could have prompted mortgage brokers and banks to actually become more desperate in making as many loans as possible in order to make their quotas. Underwriting guidelines didn't REALLY start to tighten until the Fall of 2007. I am not surprised with the 2007 prime defaults.
I would like to predict right now that the 2008 vintage (prime) loans will also contain a higher than average number of defaults. As equity evaporates and the recession swings into gear, people will walk away, as sniglet has been having us ponder for quite some time now.
The underwriting guidelines have not yet come back into "sane" territory for our current economic conditions, our current declining prices, and the lack of a social stigma of walking away.
Sorry Jillayne, but I am going to have to disagree here. The number one reason people default on loans is a lack of equity. Provided there is an equity cushion, even divorce or business failure won't cause default. At most, these dramatic life changes will only force someone with equity to sell.
Look at it another way: why would you allow your home to be foreclosed upon and get a trashed credit rating if you had enough equity to be able to sell?
As I said earlier, I suspect that the prime reason we are seeing higher default rates in the newest vintage loans is because these people have less equity than buyers of years past.
I can certainly agree that divorce or job loss are prime factors in determining if people can afford to stay in their home. However, it is equity (or the absence thereof) that determines whether the home will go into foreclosure.
The life-event just causes you to determine you can't stay in the home. It is the amount of equity you have that determines if you default or sell.
In the end, it is the amount of equity that counts. The vast majority of foreclosures only happen when there is no equity.
P.S. The only foreclosures I've ever heard of when there was equity were due to some bizarre circumstance. The movie "House of Sand and Fog" had a good example of this occurance, where the owner was suffering depression and literally ignored any property tax notices, etc. She also had a deep attachment to the home for sentimental reasons that caused her to refuse to sell even though she couldn't afford it. But this is an example of a batty person, not someone who is rationally looking at their best financial options.