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From Diana Olick at cnbc.com:

I have argued many times that just because a loan is underwater (value of loan is higher than value of home) it doesn’t necessarily mean that the borrower will stop making timely payments.

Yes, the incentive to abandon the home is there, but for most homeowners, their home is their community, their daily life, and not just an investment. Most probably think the value will come back over time, and unless they desperately need to move, they have no reason to stop paying.

Amherst analysts disagree with me. “Borrower equity status is the single most important predictor of success,” they claim. To explain their premise, they use two definitions of performing loans: A “successful” loan is one that is always performing, re-performing or voluntarily prepaid. A “clean success” takes out the re-performing loans. Here’s what they found:

For loans with equity, 88.9% were successful after 2 years, and 84.4% represented a clean success.

For loans with CLTV >120, only 53.6% of loans were successful and only 40.9% represented a clean success.

We talk a lot about the shadow inventory of foreclosed properties overhanging the market and weighing down inventories, but the inventory of potential new defaults is clearly high; that potential, even with steady economic recovery, exists and must be factored into the equation.

The latest home price reports are not good, and even though sales appear to be bottoming in some markets, prices always lag. Also, many of the sales are foreclosures (around 30 percent), so that knocks the price recovery premise on its head as well.

Now that their prices have dropped substantially, Oceanside has been on a good run this year. There wasn’t an unusual drop-off in sales during the 4th quarter either, despite the grim economic news.

I calculated the averages from the last thirteen years, and compared to 2008′s numbers – look how steady it is in Oceanside:

Oceanside, CA 92054, 92056, 92057, 92058

Not only are the number of sales above average, the pricing is back in line historically too. Here are other signs that Oceanside’s market is finding equilibrium:

575 Actives / 277 Pendings = 2.08 to 1 ratio (2:1 considered the healthiest market)

46 closings since Dec. 15th = $200/sf (right in line with quarterly average)

25 of 46 closings sold over list price.

No matter how you slice it, Oceanside’s market looks good. How does pricing compare to the peak?

The dollars-per-sf average declined 37%, which sounds about right. We know there have been some houses selling for 50% to 60% off peak pricing, and there had to be some at 25% off too.

I think it’s safe to say that if other areas experienced the same, their sales would be cooking too. If all it takes is a 37% decline from the peak to get Oceanside back to frenzy-like statistics, how far off is your area?

There aren’t any of the prime coastal areas that are approaching -37% yet, and probably why their sales are more sluggish. Yet you can verify with any buyer in Vista or So. San Marcos that the market is active with lookers, and we’ll see if they turn into buyers.

But wouldn’t they perform better than Oceanside? The Big O probably had more subprime loans than all of these other areas combined, but all that did was exacerbate their price decline.

Will the other areas follow?

If you feel that all areas will decline approximately the same, then you have the chart above to guide you as to how much further your area has to go.

If you thought that there should be a premium added for premium areas, then add some cush to the -37% decline. For instance, Carmel Valley is only showing a 10% drop from peak to 4Q08. If you thought that the supply and demand for CV was strong enough that the -37% expectation should really be more like -20% to -25%, then we’re about half way there.

This is a general statistical overview – I think what is happening more and more is that, as prices get lower, buyers are shifting their focus towards finding a property with all the extras, and one that fits all their needs. Statistically, further declines in pricing are likely to be choppy, because I think there are buyers willing to pay today’s prices if they could just find a really good house.

There were more quotes in the Kelly’s article at the Voice of SD about the market getting hammered statistically: Link to Article

How bad are the stats?

The numbers are skewing from all the action on the lower-end:

# of Total Listings Jan 1 to June 27 in SD County (Att & Det):

Once you get into the closed sales, you really see it. Here are the closings between May 1st and June 15th:

You’ll be hearing about how sales aren’t that bad compared to last year, but it depends what segment of the market you are looking at – more later today!

Alt-A loans have been around a long time.  Back in the day, alternative documentation was allowed by Fannie Mae and Freddie Mac, but all it meant was that you could leave out the tax returns – you still had to provide the rest of the loan package.

Where did the Alt-A loans veer off-course?

As the lenders became more sophisticated, and the real estate market started cooking, three things developed:

1. Automated underwriting

2. Reliance on FICO scoring

3. Private label mortgage-backed securities

Because there was a voracious appetite on Wall Street for higher-yielding vehicles, the scramble began to process the loans quicker and easier.  Around 2001 or 2002 Countrywide and others began to accept and approve loans based on FICO score only, and no income documentation was required to get A-paper rates.  Normally, Alt-A loans paid a rate premium of 1/4% or more for the convenience of low-doc, but not any more. 

Then they bypassed Fannie and Freddie and sold these loans direct to Wall Street, bundled up to look like agency paper with the focus on yields, not documentation.

These loans are still available today. 

In yesterday’s chart we saw that 83% of the Alt-A loans were low or no-doc, and as JMS correctly pointed out, that is the definition of Alt-A – a loan with alternative documentation.  The other 17% were full doc but must have had another kink, like a lower FICO score, that kept them from being a regular package.

Note that the average FICO score was 709 on the Alt-A loans, which is a decent score.  Borrowers who were cast into the Alt-A pool weren’t necessarily bad credit risks – it has as much to do with the lenders wanting to hurry their loans to Wall Street as to why borrowers ended up as Alt-A.  I sent many well-qualified buyers to Countrywide because of the convenience of FICO-score-only underwriting, and they were getting A-quality rates, or very close, because the secondary market was so competitive.

In summary, just because a loan is in the Alt-A pool doesn’t automatically mean worse-qualified borrowers – it means easier-qualified. 

The bigger concern is the type of loan – it’s the resetting ARMs that will cause the bulk of the trouble over the next few years.  Today I added to yesterday’s chart the mix of fixed-rate and adjustable loans.  There are 72% of the subprimes and 73% of the Alt-As that are adjustable-rate loans in California. 

It works out to roughly 31,691 subprime loans and 278,132 Alt-A loans that have yet to reset their adjustable-rate terms in the Golden State, using the NY Fed’s numbers.

Here’s another Alt-A reset chart through Jan. 2010, with this month circled:

We’ve seen around the blogosphere the mortgage map from the NY Fed, and for future reference here is the link:

Link to NY Fed Mortgage Map

Poking around the website provided additional data about subprime and Alt-A loans in each state. We’ve been wondering what’s in store for resetting ARMs over the next few years – here’s what the NY Fed’s research department has published on the State of California (they credit FirstAmerican CoreLogic, LoanPerformance Data):

Facts About California Subprime and Alt-A Mortgages

This chart is for all of California, at their website you can plug in your individual zip code but not get specific counts, just a colored map. The NY Fed decided to stop publishing the numbers last month – sounds to me a little like when the government quit publishing the M3 – they don’t want you to know how bad it is specifically, “but here, have a colored map instead”. BTW, the percentages don’t add up on when the resets are coming, but I think you get the gist of it – steady diet of subprimes resetting the next two years, followed by solid neg-am action. Though the stats here are probably based on planned resets for the neg-ams, they will start sooner if/when they hit their cap limit.

Here is a copy of Alt-A loans in North SD County zip codes marked for those who missed a payment in the last 12 months, with an inset of the total Alt-A chart for California:

Here’s more ammo for you conspiracy theorists; they aren’t publishing data for RSF’s 92067 zip code. Everyone knows that there is no mail delivery in the Ranch, residents only have a P.O. Box. That’s about the only excuse I could think of as to why the 92067 zip isn’t included, but notice that the darker cloud over the Ranch is marked as 92091.

How is the market activity in different price ranges?

Here are the number of active listings, the number of solds in the first quarter, active listings divided by solds, and the number of current pendings in each price range:

SD County Detached Active Listings & 1Q08 Solds

The most vulnerable range is the $800,000 to $2 million range, and is overdue for some squishdown. There are 2,552 active listings, yet only 350 sales last quarter, and currently 373 pendings.

If that continues, it means there is only one buyer for every six or seven listings. What are the other 5-6 sellers going to do?

The $2 million to $10 million market isn’t in great shape either – there’s only roughly one buyer for every ten to twelve active listings – but they have the money to be able to hold out, right?

Sellers, either get in the game, or risk being left behind. If your house is listed above $800,000, your chance of selling this quarter is one out of six, at best. You sure don’t want to look up in the middle of summer, with a stale 100+ days on market, and begin to start thinking about possibly getting around to maybe lowering your price.

We know that there is usually a rush of closings the last few days of every month. This month? Some areas are going to need an avalanche to catch up with last year – though you can probably add 20% to 30% to this month’s totals to account for those closing in the next four business days, and late-reporters. Here are the March 2007 closings, and those already closed this month:

In November we felt an inflection point hit the market, and since then we’ve seen Fed rate drops, loan-limit increases, and more false hype – it looks like we could use another inflection point, more than anything.