From our friends at the W-S-J:
The struggling housing market appears as if it will sustain less damage than expected this year from a spike in the monthly payments on hundreds of thousands of exotic adjustable-rate mortgages.
The number of such loans scheduled to adjust to higher payments this year has shrunk. Lower-than-expected interest rates, coupled with efforts to aggressively modify loans, are likely to mute payment shocks for some borrowers. Many others already have defaulted on their loans even before their payments adjusted upward.
“The peaks of the reset wave are melting very quickly because the delinquency and foreclosure rates on these are loans are already very high,” says Sam Khater, senior economist at First American CoreLogic.
The housing market still faces enormous challenges, and a full recovery is likely to take years. The threat posed by resetting payments, Mr. Khater says, is “a drop in the bucket” compared to problems posed by the sheer volume of borrowers who owe more than their homes are worth, known as being “under water.”
Still, for years, housing analysts have worried about the threat of an aftershock from a big spike in mortgage defaults from so-called option adjustable-rate mortgages, which require low minimum payments before resetting to sharply higher levels, and “interest-only” loans, for which no principal payments are due for several years.
Most option-ARM borrowers made minimal payments, so their loan balances grew. That sparked worries about what would happen when those loans “recast” and begin requiring full payments on larger loan balances, usually five years from when they were originated or when the balance reached a designated cap.
Option ARMs may be among the most likely to benefit from the White House plan, announced on Friday, to force banks to consider writing down loan balances when modifying mortgages. Until now, the administration’s Home Affordable Modification Program, or HAMP, has focused on lowering monthly payments by reducing interest rates and extending loan terms to 40 years.
A separate program could benefit borrowers who are current on their loans but under water by allowing investors to refinance those borrowers into loans backed by the Federal Housing Administration. Investors are most likely to refinance the riskiest loans that qualify.
The majority of option ARMs are set to recast over the next two years. But the volume of outstanding loans has fallen sharply because many borrowers, prior to facing higher payments, received modifications, refinanced or defaulted. Option ARM volume peaked at 1.05 million active loans in March 2006. At the end of last year, there were 580,000 loans outstanding, according to First American CoreLogic.
Fitch Ratings estimates that nearly half of all option ARMs that were bundled and sold as securities were 60 days or more delinquent at the end of December, even though just 5% of option ARMs had faced recasts. Fitch estimates that another 7% have been modified.
“The default process has already hit something resembling a peak,” says Christopher Thornberg, an economist at Beacon Economics. “How much higher can it actually go?”
The threat of defaults, to be sure, is not going away. It is likely to weigh for years on high-cost housing markets in California and other states that saw an explosion in option ARMs and interest-only loans during the housing bubble.
Today, more than three in four option ARMs are under water, according to Fitch Ratings, and one-third have a combined loan-to-value ratio of over 150%.
Another 500,000 interest-only loans will begin resetting in the next two years. Many have fixed rates and require interest payments only for a five- or seven-year period, then move to adjustable rates and require full principal and interest payments.
But because interest-rate benchmarks are currently so low, interest-only borrowers who face resets this year could see minimal payment increases or even decreases.
Nevertheless, interest-only loans are likely to stress markets for years because so many borrowers are under water and because payments will go up once interest rates begin climbing.
Martha Shickley and her husband, who own a four-bedroom home north of Los Angeles, decided to stop paying their interest-only mortgage last August because they figured they wouldn’t be able to afford their payments next year, when their loan will reset. “We’re paying expensive rent here on a home that might already be under water and certainly will be soon,” says Ms. Shickley.
Ms. Shickley says she has heard nothing from her lender, J.P. Morgan Chase & Co., which acquired the loan when it acquired assets from failed lender Washington Mutual Inc. “They haven’t even sent us the default notice,” she says. J.P. Morgan declined to comment.
For now, she and her husband are living rent free, using the savings to pay off debts. They have applied to their bank for a loan modification, and they hope to pull off a short sale, where the bank will allow the home to be sold for less than they owe. “We’re ready to move on with our lives,” she says.
Markets increasingly are discounting the likelihood of a default wave from option ARMs because banks with big portfolios have aggressively tried to refinance or modify them.
Wells Fargo & Co., which inherited $120 billion in option ARMs when it bought Wachovia Corp. in 2008, says it expects just 528 loans to recast with big payment jumps over the next two years. Wells says it modified loans for some 52,600 borrowers last year that included $2.6 billion in principal write-downs. Most of those borrowers were put into loans that have five- or seven-year interest-only periods.
That won’t completely fix borrowers’ problems because they will face yet another reset, but it does buy them time. Late last year, banking regulators began telling banks that they shouldn’t give borrowers interest-only mortgage modifications in most circumstances.
“There is no relaxing, really,” says Brenda English, a homeowner in Reseda, Calif., who had her option ARM modified into a loan with three-year interest-only payments at 4.25%. Her modified payments are around $25 less than what she paid before, but she says she’s worried about what happens in three years. “It’s just throwing it up in the air and hopefully the market will be better,” she says.
This bust could take another 5 years to play out. Sure seems that way from reading the people in this article.
If, however, the average is better than the above, it could be shorter, but either way 50% of currently outstanding Option ARMs are in default…
What does that tell you. HALF. Wow, just wow.
3 years ago if you had said in a crowded room of bankers that Option ARMS would be 50% delinquent you would have been laughed at and then been ripped limb from limb. What a difference a little time makes!
A lot of these borrowers were also high income people who took a big hit in the stock markets, etc. They were often highly leveraged, and needed low payments up front. . .on a positive note, the markets have come back quite strong, so some of these borrowers might have better financial resources to service their debts – certainly more than a year ago.
Perhaps my optimism is because my own portfolio has come back about 25%, but as I talk with other people in a similar situation, we are all “coming out of the storm cellar” and starting to spend a bit again. . .could we actually see a faster recovery in housing than expected? There is a lot of pent up demand to buy/sell, and move on with our lives. Just as the stock market recovered faster than expected, perhaps housing will start “taking off” this summer. . .perhaps that is why banks are still sitting on all that inventory.
But the lenders/servicers are telling borrowers to quit making payments to improve their chances of getting a loan mod.
Neg-amers are prime candidates for loan mods and principal reductions. Having 50% delinquent probably just shows how many are in line for free cheese.
And suddenly, the dreams of the permabears that we would see a TSUUUUUUUUUUUNAAAAAAAAAAMIIIIII of option arms wash over the market just had their dreams smashed against the rocks.
Somewhere, Mr. Mortgage is sitting in a room pissing his pants in fear of thousands of angry renters storming his house and draging his body through the streets.
Buy now or be priced out of the current pricing. There’s only one way it’ll go now. There’s no way any government will let the housing crash get any worse than it already is. They are in for the long haul.
I’m more worried for the local business economy.
If SoCal RE prices stay this high, it seems to me that recruiting/retaining employees is going to cause continuing problems. Either you have high labor costs to compensate for the RE prices, you move your business to a lower cost locale, or you lose out to the competition.
“Somewhere, Mr. Mortgage is sitting in a room pissing his pants in fear of thousands of angry renters storming his house and draging his body through the streets.”
LOL! It will be like that scene from Black Hawk Down, except the name of this movie will be “Dude, wheres my Tsunami”???
Just as the stock market recovered faster than expected
Have you no sense of history? The stock market “recovered faster than expected” in 1930, only to explore much greater depths thereafter. Dead cats bounce pretty high.
“Buy now or be priced out of the current pricing.”
Wow. We’re already back to ’05, I guess.
“Mr. Mortgage is sitting in a room pissing his pants”
Only because he simply added up the numbers and came up with the most logical conclusion. You can’t really account for government intervention when forecasting Economics.
Let’s see…
Tarp = $700 billion Deficit spending to bailout homeowners at everyone else’s expense.
Fannie + Freddie = Over $126 billion Deficit spending to bailout homeowners at everyone else’s expense.
Federal Reserve = Over $1.75 Trillion in printed money to buy MBS at the dollars expense.
But at least the boomers won’t lose any equity. While deadbeats live for free and scammers manipulate the MLS.
Notice that the national picture says things are not so bad, but real estate is a local market. California has a much higher proportion of problem loans, and the ratios of outstanding debt to income are higher here than most of the country.
It looks like we won’t have the worst case scenario play out, but there isn’t any evidence that conditions will be back to boom times any time soon. Even so, prudent investment can pay off; transactions are happening, people still need places to live.
“Wow. We’re already back to ‘05, I guess.”
We’ll get there soon enough with the help of the government.
I have been enjoying my home for a good year now while all these permabears are sitting and waiting and hoping for bigger drops to come.
There’s no way that the government is going to let this get worse. They’ve invested way too much.
“I’m with the Government, and I’m here to help.” Well now isn’t that consoling.
The govt and the lending industry have been 10 steps behind this thing from the outset. Ask the guy in O’side who watched 70% of his property’s value evaporate or the guy in Chula who has seen 50% of his value evaporate how they feel about efforts to avert crashing values. There are a few distinct zip codes in SD County that have managed to hold up relatively well, but there are alot of zip codes in the County and the majority have been whacked but good.
What this is about now – primarily – is the incredibly low index that these ARMS are tied to. The motivation to strategically default is removed when rates are so low that tax-adjusted mortgage payments are comparable to or even less than rents. That’s mostly it. If the 6 month LIBOR was at 5 or 6% instead of <.5% we would have a totally different scenario, like a 100 ft tsunami scenario.
Just read the last paragraph of the article again. There is no relaxing.
CV Asian,
It’s interesting that your worldview includes a government that is both willing and capable of holding asset prices far above their intrinsic value for long periods of time, perhaps indefinitely.
One begins to wonder… if they have the power to do so, why didn’t the prop up the stock market? It would be much cheaper, and it has proven to have a much larger wealth effect, especially since it does not require a functioning banking sector to increase the leverage considerably.
My worldview still maintains that we’re in a dead cat bounce with housing, and that the flood (not tsunami) is still coming. It may not be as deep, but it’s going to be longer. Changing the rate of moving leveraged assets from weak hands to strong hands only lengthens the process, but does not fundamentally change the need to pass from non self-liquidating to self-liquidating asset prices. How can Congress and the White house repeal the laws of economics?
Every lever has been pulled, true, but which levers are left?
Chuck
“There’s no way that the government is going to let this get worse. They’ve invested way too much.”
I wish I could share your confidence in our government’s abilities. I can’t think of many examples where any government – let alone the U.S. – has intervened in a market and made the market better in the long haul (see, e.g. Japan). Granted, things can sometimes look okay in the short term, but gravity always wins in the end.
“I have been enjoying my home for a good year now while all these permabears are sitting and waiting and hoping for bigger drops to come.”
Have you convinced yourself that you made the right play yet?
Wait, wait, wait… did I get punked by a troll?
Oh, crud, I thought I’d never fall for that one again! Man, these faux trolls are getting good!
I’m tending to agree that the gov’t is not going to let housing decline too much more, although it is going to drop some as Jim has mentioned due to Realtor shenanigans.
IMHO, the tax credit pulled demand forward but there is still a natural lid on pricing – loan availability. There is a limit to the number of people who CAN buy at this price level. At some point, that demand is going to weaken once everyone who CAN buy has been able to land their little piece of the middle class dream. Without exotic affordability products in the form of no-doc, neg am, and option ARM there is a natural ceiling on pricing — unless wages take a sudden turn upwards.
So, I’m thinking that this current pricing is going to be vigorously defended for quite some time. I don’t see any large gains because the creative loan affordability products are off the market and those are what supported bubble pricing. If those make a re-appearance, this time I’m going to sell, collect my magic bubble equity and get the hell out of dodge.
“Have you convinced yourself that you made the right play yet”
Actually, I don’t need to convince myself that I made the right play or not. We saved up a 45% down payment and bought a home we love and decided that it was right seeing as the prices didn’t drop as much as everyone was saying.
Carmel Valley it seems has plenty of FCB’s holding up the prices nicely as they are doing in Irvine. No shortage of them at all. They are buying all over the western world.
“Changing the rate of moving leveraged assets from weak hands to strong hands only lengthens the process, but does not fundamentally change the need to pass from non self-liquidating to self-liquidating asset prices. How can Congress and the White house repeal the laws of economics?”
Sadly, the rate at which these things fall has everything to do with price trends. Suppose for arguments sake there were 100,000 units of REO or future defaults in existence.
One one end of the spectrum, if all 100,000 of those came onto the market tomorrow, prices likely would plunge 40-50-60% or more by the end of the year.
On the other end of the spectrum, if those 100,000 units were somehow heremetically preserved, and dispensed, one at a time for 100,000 years, there would be no price drops whatsoever.
Obviously these hypotheticals are a bit absurd, but you see the point. Where the reality of the situation falls in terms of that spectrum has everything to do with whether we see further price drops, stagnation, or perhaps just underperforming increases for years to come.
Jason,
First, reveal your assumptions: That there will be increases in the future.
Are you so sure about that one?
We’re at generationally low interest rates that have been held artificially low through private sector debt monetization.
We also have globalization wage-arbitrage headwinds.
AND, we have household formation headwinds vis-a-vis Boomer pig in the snake demographic realignment.
Are you SURE housing prices are going up in the future?
Are you SURE housing prices are going up in the future?
Yes.
Are you suggesting they are going to go down forever?
I think house prices are going to reflect interest rates and the max amount dual income households can afford.
Since interest rates can’t go down any further. The most likely play will be for house prices to stay the same or go down over time.
Here’s my case for pricing stabilizing right about where it is now for “affordable” neighborhoods and dropping another 5% in the mid and high ranges.
Continued fraud is going to escalate before something is finally done. The folks sitting at the big kids table in the RE industry aren’t going to make any moves that might impact their people “just trying to make a living in a tough market” until the press becomes really bad. Every other industry has met this kind of problem with the exact same response: pretend it doesn’t exist until a “60 Minutes” reporter shows up your doorstep. When it gets bad and the entire industry is tarnished, only then will the rules change. So, I’ll guess there’s plenty of room for escalation before it really blows up – which is bad news for pricing.
But is there really anyone out there who thinks the tax credits will be allowed to expire? Anyone? We all saw what happened to auto demand after Cash for Clunkers. http://1.bp.blogspot.com/_pMscxxELHEg/S410LoDr97I/AAAAAAAAHpw/gu38MKWD0Rk/s1600-h/AutoFeb20102.jpg
Immediate drop in demand. Light rebound, then slow slide downward. No way is the gov’t going to allow that to happen in an election year. My money is on “tax credit extended through the end of the year.” This may or may not completely offset the decline in pricing due to Realtor creativity.
Way too much optimism here.
Even without the bubblicious NINJA/NegAm/OpArm crowd not overpaying for anything mortgageable, housing is still “priced to perfection”. Historically low rates, FHA to $700K with 3.5% down, tax credits, supply constrictions… the market should be setting new records, not bordering on comatose.
Interest rates will rise later this year and housing prices will fall, not so much on the lower end but the mega mansions have more pain in their future. BTW the argument that the government won’t allow the housing market to fall any further is predicated on their ability to sell treasury paper and fund the support. Getting more iffy every auction.
Asia, what are FCB’s??. . .I hadn’t heard that term . . .perhaps Foreign Cash Buyers?? If so, I am seeing a lot of that downtown. . .about half the tourists I hear on the waterfront are speaking German, Dutch, Italian, etc. Seems SD has become a very popular foreign vacation spot, and relative to other coastal towns – Newport, etc. we are still cheap to buy a vacation home.
After reading all the comments here, I would tend to agree that house prices are going up at the mid to low end, and probably will still fall a bit at the over 1 million point. As for someone’s comment on the stock market in 1930 – yes, I am aware (having bought my first stock in 1975) of stock market history, and yes we could be seeing the “dead cat bounce”, but I tend to look at the world economy, not just USA, and things were priced for the depression that never came, so probably the market at around 11K to 12K is about fairly priced. . .but we shall see.
Jason,
I’m not sure of anything. Most of all, the price of something in the future. Forever is a long time.
We are living in a time of breakneck innovation and technological breakthroughs. We also live in a time of declining prosperity and on the backend of our empire’s economic decline.
I also assume you’re right, eventually housing prices will go up, assuming that inflation gains traction. However, I’m more interested in when than if. That is a far more relevant question and one we all hotly debate.
Chuck
and things were priced for the depression that never came
They said the same thing in 1930.
Mark in SD, I agree that we need to look at the economy from a global perspective, though I’m not a savvy global economist. That being said, I don’t feel the rest of the world (particularly Europe) is in much better shape. What, in particular, gives you reason for such optimism?
“They said the same thing in 1930.”
You also said last April/May that the upward movement of the dow was a bear market bounce and we would roll over once again come Sept/October. How did that one work out?
“That being said, I don’t feel the rest of the world (particularly Europe) is in much better shape.”
Europe may not be in better shape than us, but the emerging markets, mainly China and India are. China will be the next superpower within the next decade.
Guaranteed, if you have a home in a great school district, your home will appreciate in the coming years. The Chinese and Indians value education over anything else. It’s already happening in Australia where I used to live. The Chinese have priced out the locals in the good school districts.
CV Asian,
Were you around in the 1980’s when Japan was going to be the “New Superpower” and they where buying all the trophy commercial properties, golf courses,( ARCO center, Pebble Beach etc) and nice homes in all the best school districts?
China and India have major political, social, credit, infrastructure risks ahead of them due to the hyper growth in the last decade. China has loaned the US 800 billion to finance its “cheap unregulated trade practices”, because its domestic economy cannot not stand on its own.
I have heard the battle cry that the FCB’s are coming, along with no more land, and good school districts( anyone been to a parent teacher conference lately?), and no way can real estate go back to intrinsic pricing.
The headwinds are blowing very strong, with too many unknown factors, to be so sure CV real estate is a given my friend.
China is growing, but I’m not convinced they’re ready to take over the world. They’re improving their infrastructure, but aren’t they mostly a manufacturing country dependent on foreign consumers (mainly US and Europe?) China’s a popular topic on CNBC, but it sounds like a lot of hype sometimes. They’re on their way for sure, and I like some of their financial moves, but how’s the innovation there? India is a LONG way away from being a player in the world economy.
As for Asians pricing out locals, well, there’s no arguing that. But are they truly bringing wealth, or are they simply throwing themselves at the best school districts? My hunch is if they were truly wealthy, they’d be buying up LJ, DM, and RSF and send their kids to private school.
I don’t know, but it makes for a great discussion.
“My hunch is if they were truly wealthy, they’d be buying up LJ, DM, and RSF and send their kids to private school.”
Asians who are wealthy are also still frugal. That’s how they become wealthy. They don’t indulge in fruitless spending. Why would they send their kids to private school if they can receive just as good as an education in a public school.
Asians who are wealthy are also still frugal. “That’s how they become wealthy. They don’t indulge in fruitless spending”
LOL I just left a PTC and a nice asian teacher walk to her 325 BMW with apple computer and i-phone, and coach bag in toe.
Asian people fall for the same consumerism marketing tactics as in the western world.
“LOL I just left a PTC and a nice asian teacher walk to her 325 BMW with apple computer and i-phone, and coach bag in toe.”
And I didn’t say they didn’t. She probably was a first gen american. I’m talking about the older gens that don’t indulge and the FCB’s that come. It’s always the first gens.
“They don’t indulge in fruitless spending. Why would they send their kids to private school if they can receive just as good as an education in a public school.”
Well then they could buy in Vista and send their kids to private school – MUCH cheaper than buying in CV. But they don’t. They want the granite, stainless steel, and privilege of saying they live in CV just as much as (if not more than) everyone else.
And the more I think about the glut of FCB’s theory, the less sense it makes. Why do people from other countries move to the US? It’s probably not because their own is booming with prosperity. And if they are sitting on piles of cash, why would they move thousands of miles to live in Carmel Valley?
Better lifestyle? Why would they move thousands of miles to live in Carmel Valley? Well, they don’t just live in Carmel Valley, they are where all the good schools are which also happens to have a lot of their own ethnicity to make it easier to settle into a new country.
“Well then they could buy in Vista and send their kids to private school – MUCH cheaper than buying in CV.”
And then try to keep up with the Joneses? I went to a private school all my life and I can tell you that studying was the last thing on anyones mind.
“And then try to keep up with the Joneses? I went to a private school all my life and I can tell you that studying was the last thing on anyones mind.”
And living in CV is not keeping up with the Joneses?
Not sure what was on your mind, but private schools have a much better track record of “pull thru” % of students who complete degree’s. Many teachers in the public sector are not there for the “calling”, but for the paycheck.
I am happy for your purchase CV asian,its OK to buy a home for comfort and utility, there is no need to convince yourself or others that you made a good investment………….otherwise you just become one of the Joneses………LOL
CV Asian,
You are right about “Good school districts”… holding value better than bad school districts.
But for your average buyer… Someone buying with an FHA loan or less than 20% down payment.. Now is a terrible time to rush into buying. It’s smarter to save up a larger downpayment like you did.. 45% down payment is pretty enormous… No wonder you bought.. You are probably in the top 1% of Americans that can afford that big of down payment.
Especially since you most likely had a years in savings to ride out any downturns in the market.. or a job loss… ect.
The housing market won’t recover at a high speed though… So why rush? When unemployment declines, the foreclosures work their way out of the system, and consumers work their way out of debt… Then the market will take off again.
It’s technically impossible for another housing boom to occur with the above conditions as bad as they are.
My fiancee and I are renting a 1 bedroom apartment and saving around $40K a year in cash by doing so! We are young, make a combined wage of about $133K… (Used to be higher before a job loss and a new lower paying job last year changed things).
In a few years we’ll have a downpayment large enough to buy a $500-600K home in a good school district. We could stretch and buy now.. but we’d have no savings in the meantime. Homes in that price range aren’t going to increase enough to warrant the risk of decline in prices still.
As I said before, I don’t need to convince anyone. We saved a 45% down payment, bought a home we love, saw that prices didn’t drop as much as everyone was hoping and as a bonus, happens to be close to where both of us work.
As for private schools having a better “pull thru %” that will change overtime as the demographics of CV change even more.
I am not keeping up with the Joneses but am keeping up with the Wongs, Lees and so on. The Wongs and Lees value education more than the Joneses that value possessions.
CV Asian (aka Mr Wong?),
I respect your views and thought’s regarding Asian’s value of education over “white trash Jones”, and I agree that you dont see to many Asians wasting their money down in spring break in Mexico, but you are putting way too much credence in the public schools of CV. The public US school system has a very poor track record of developing math and science students.
I lived in Irvine(turtle rock)and most of the “Old School” asians were disappointed in paying huge tax premiums and getting so little return.
You need to get in on , the the 21st century the US Asians are being intergrated into american culture, it only takes one turning(generation) to accept bad habits. CV is not in the peoples republic of China, but according to you we can re-name China Valley?
I really have my doubts that CV can remain insulated from all the changes happening in society.
CV Asian (aka Mr Wong?)
Actually, I’m Vietnamese married to a Caucasian girl.
“I really have my doubts that CV can remain insulated from all the changes happening in society.”
And that’s what they said about Irvine too. The big drops never eventuated because more FCB were coming in and buying homes there. Irvine demographics are already changing as you seem more and more Asians moving on in. I see the same thing happening in CV. I foresee Irvine and CV becoming like all the areas in SF.
How did that one work out?
My predictive record on *what* will happen is nearly perfect; when it will happen is something else entirely. If the latter was better I’d be employing Jim to find me a bluff property in La Jolla. 😉
“My predictive record on *what* will happen is nearly perfect; when it will happen is something else entirely”
LOL! Heres a permabear who predicted the great depression II back in 1989
http://www.nytimes.com/1989/02/06/business/market-place-2-theorists-split-on-elliott-wave.html
This guy is still predicting (more or less) the same thing now, 22 years later. Imagine how much $$ one would have lost sitting on the sidelines since 1989. In what conceivable world is he “right”?
With a long enough time line, any prediction will become true. For example, I predict the Dow will fall to 400 – the day after an asteroid hits eurasia, kills 1/2 billion instantly, and threatens the survival of the human specie going forward. Eventually, my prediction will be right. As to whether I will be alive to see it is another thing.
Sorry dude but timing is critical.