Tuesday, March 06, 2007

Sacramento Subprime Reset Risk

From USA Today:

Almost 3 million homeowners with shaky credit have adjustable-rate mortgages. Refinancing those loans will be hardest in areas where home prices are falling. Here is a look at the top 24 metro areas with the largest home-price declines at the end of 2006 and the percentages of homeowners with subprime loans who face higher payments by the end of 2008:
  • Sacramento: 51%


Patient Renter said...

Wow, more big numbers from USA today. It speaks for itself.

Sittin' Out This One said...

PR, the silence seems to be deafening on this blog today. Perhaps people are dealing with the reality of their prior disillusions about the market?

cba said...

The percentage of 51%, in and of itself, is meaningless. Are there 2 subprime loans in Sacramento and one resets in 07/08. What is the number of subprime loans that resets in 07/08?? That number would tell us something and we could relate it to other data.

Sippn said...

CBA - good point, I would expect all subprime loans to reset, 100%, so 51% is a positive!

Jeff said...

Sippin, you remind me of growing up when the smartass kid was always egging everyone else on to jump off the bridge but he never had to guts to jump himself...we're waiting on you to start buying again, but you just stay on the sidelines proding us with your stick always finding "positive" news while RE collapses below us.

Diggin Deeper said...

With subprime grabbing national and local headlines, Fed head Bernanke speaks about Fannie and Freddies problems in Hawaii, begging Congress to set new standards for both sometime this year. I think he knows something's wrong and he's not talking right now. Add it up:

Suprime loans tanking
Alt a in trouble
Yen carry trade blowing up
Freddie and Fannie warned
Factory orders lowest in 6+ years

The economy has no legs left, and if we move into recession later this year, real estate ratchets down further. Trying to take the big picture in, I can't see any positives with the 51% number. There are plenty of subprime loans to deal with in Sacramento due to affordability index being so high.

Perfect Storm said...

Hey! It’s a buyers market for subprime originators.

I new that spin phrase by the realtor spin machine had to have some truth somewhere.

drwende said...

Our local public radio station here in Phoenix is running an interview with James D. Scurlock, in which he's talking about how banks make their money by encouraging people to take on lots of debt, which they then resell.

Scurlock's documentary, Maxed Out, is opening in March, but it's not scheduled to play in Sacramento or Phoenix. Y'all can see it in San Francisco, though.

Sippn said...

drwende - business that make money by encouraging people to take on lots of debt:

Credit Cards
Most retail
Insurance sales
Auto sales
Private schools
Government (bonds)

And then there's kids..

byt the way, where do you fit into this?

Gwynster said...

I'll answer this one

Credit Cards (all paid off)
Most retail (don't buy lots of crap and got rid of most of my stuff on ebay and craiglist)
Insurance sales (1 payment a year easy for the car and the rents ins)
Auto sales (new car- paid cash)
And then there's kids. (don't have any)

We have one student loan left, the DHs grad school. All mine were paid off about 6 yrs ago.

I figure I'm the credit industry's worst nightmare.

drwende said...

Sippn, I fit into this because I wrote a little story about murder and mayhem in the West Sacramento housing market:

Obviously, I either lived in California at the time or have a bizarre obsession with housing in hot, flat places.

Jeff said...

Way to ignore the issue Sippin. BTW, the WSJ reported of all major US cities, Sacto had the 4th highest rise in inventory levels, but that's ok, just ignore the facts and keep pumping up RE.

Sippn said...

Well Jeff, if you can't get my attention by calling me names, throw some facts my way - good job, I'll have to read up on the WSJ.

The last article from Jan didn't even mention Sac as important (significant), even though the numbers were high.

But inventory is only 1/2 the equasion, we were spoiled by several years of no significant inventory, no significant foreclosure activity, huge appreciation without effort, and many of us forgot how it looks when you're not on the peak.

Diggin Deeper said...


How true, all issues you mention are now in reverse trying to find some level to spring from. Until it shakes out (no one knows how long it will take) some are better off watching the fire than jumping into it. Real estate had its run. Those working in the industry had their day. Now its time to give some of it back.

Patient Renter said...
This comment has been removed by the author.
Patient Renter said...

"CBA said...
The percentage of 51%, in and of itself, is meaningless. Are there 2 subprime loans in Sacramento and one resets in 07/08. What is the number of subprime loans that resets in 07/08??"

You're missing the importance of this statistic. It's not as important that loans are resetting as it is that 51% of subprime loans that are resetting this year are resetting *to a higher rate*. This fact doesn't need any other data for comparison.

"Sippn said...
CBA - good point, I would expect all subprime loans to reset, 100%, so 51% is a positive!"

To say that this statistic is positive is about as delusional as Lereah. Not all subprime loans are adjustable, therefore they're not all going to reset. Furthermore, not all subprime loans were made when interest rates were low. Again, this statistic deals with loans resetting *to a higher rate* (ie. the owner will be paying more money each month to live in the same house). There is absolutely nothing positive about such a fact.

BubbleViewer said...

The bottom will be in when the Bee has three to four pages of auction listings every day for about six months straight. And that time is coming, probably sometime in '08-10 is my guess. Until then, we get to see how much of the Sacramento region's growth was tied to the creation of ever more suburban sprawl and the servicing of that sprawl.
If you've ever read Creature from Jekyll Island, you know that the Fed and the Banking system are not your friend.
We are going back to the days of 20% down and prices that reflect the average person's ability to come up with that 20% sum, whatever it is.
There will also be a dramatic reduction in the number of overpaid RE agents, loan processing officers, mortgage brokers, etc.

Perfect Storm said...

From Davie Lierah Watch

The National Association of Realtors (NAR) released their pending home sales report for January 2007. Nationally the seasonally adjusted index was down 8.9% as compared to January 2006. Hat tip to Paper Money. The pending sales index showed decline in all 4 regions of the county.

The Northeast region was down 1.3% as compared to January 2006.

The West region was down 7.0% as compared to January 2006.

The Midwest region was down 10.8% as compared to January 2006.

The South region was down 11.8% as compared to January 2006

The manipulative David 'Paid Shill' Lereah blames the declining sales on the weather.

Sippn said...

Agreed the pending index was dissapointing yestuday.

It is important to know the % of subprime, or the 51% of resets might be insignificant.

Doubt we'll ever see 20% down requirements as it is now not politically correct to require, like redlining - everybody deserves to have the opportunity to own...damn the financial prudence!

Sippn said...

Jeff... WSJ article cited Sacramento as #6, not #4 so if I look at this negitively, you were off 50% or 150%. Its all neg data, but current.

A positive - Zip Realty has February data while Realtors are feeding us January.

OK I get it, I must sound like that old guy who used to call about the Kings... "positive Dave" drove me crazy!

Have fun with this.

Athena said...

How long before we start hearing how prime is the new-subprime. How many people took advantage of a high credit score to score a toxic loan for more house than they could afford, or to buy a second property? So many believed you can't lose, and it always goes up... and they were jumping on the bandwagon in numbers that put the sub-primes to shame. So how long before we start hearing about never having so many former Prime borrowers circling the bowl?

Jeff said...

I believe 20% down will be the new standard again. Sippin, your "politically correct" remark stating the 20% down might not come back was the most accurate thing you've written since I've been reading your comments, you're coming around nicely :)

Sippn said...

Why would RE loans require 20% down when you can get a new car loan at about 110% of value (incl tax and fees) for an asset that looses 20% of value driving off the lot, when you can purchase $10-100K of junk on credit cards with no colateral?

drwende said...

What you're about to start hearing is states considering passing laws to require lenders to make a reasonable effort to put borrowers into loans they can afford. That's in today's WSJ.

Article says just what I've argued before: borrowers expect that we're still in the era when banks were reluctant to lend, so they assume the bank is giving them a loan they can handle.

sf jack said...

"Article says just what I've argued before: borrowers expect that we're still in the era when banks were reluctant to lend, so they assume the bank is giving them a loan they can handle."


Here in SF, at least a few years ago, I would argue the opposite was the case. Though I heard this regularly in social situations for a time, perhaps these were isolated cases.

I recall individuals telling others (who were house hunting):

"Be careful; they will 'qualify' you for a lot more..." (than you would want or should be able to handle)

I do have to wonder how many actually listened to that advice.

Diggin Deeper said...

"Article says just what I've argued before: borrowers expect that we're still in the era when banks were reluctant to lend, so they assume the bank is giving them a loan they can handle."

This seems ridiculous! Its the borrow's responsiblity to know whether they can handle a home loan or not. All this is going to do is legislate more buyers out of the market, create more cost for the borrower, and make the realtors and buyers fill out and sign more paperwork. The disclosures on a real estate contract in California used to be 5 pages long. Now they are probably close to 20 pages (half that front and back), maybe more. The financial institutions don't need state govts to tell them what standards are necessary for loan approval. They'll squeeze down as they've already begun to do. With all the delinquencies taking place today, the mortgage lending institutions will over compensate for their losses through risk aversion. I haven't read the article but it sounds like more political feathering and higher state management costs with nothing meaningful returned. Just another attorneys' income stream in the making!

mnadim22 said...

I have been reading Sippn's comments and am really tired of them now. He seemed to be positive about the real estate while the real estate just got into free fall. Reminds me of Titanic and those musicians on the deck.

By the way, Sippn = Spin (hired by NAR on their $40M ad compaign "It is always a good time to buy and sell") What a bunch of morons

drwende said...

SF Jack, I'd suspect very few people listened, because it feels good to think you can afford a $600,000 home. That, and looking at the homes people could qualify for was often depressing.

However, bear in mind that a lot of the subprime market was not middle-class, educated people like us. As the WSJ article points out, many of the people moved into high-risk loans were retirees on fixed incomes (who would be more familiar with the era of more conservative banking) and people with limited English skills. I remember seeing one Filipino weekly in the Bay Area where there were ads pushing 1% introductory rates.

I have such mixed feelings about regulation (okay, usually I'm just against it), but then you look at the predatory lending practices of the past few years... The upshot of the bubble seems to be that all of the people you're paying to work for you (realtor, mortgage lender, possibly mortgage broker, possibly other financial advisers) have no qualms about setting you up for bankruptcy, and that's a basic failure of civilization.

Cmyst said...

Article says just what I've argued before: borrowers expect that we're still in the era when banks were reluctant to lend, so they assume the bank is giving them a loan they can handle.

I'm only 49, but for the first half of my adult life, and most of the years I was raising my kids, my ex and I were turned down repeatedly for home loans in the Midwest. By the time we moved here, we were convinced that we would never qualify for a home loan. Some co-workers talked me into trying again, and it was an amazing difference. The ex had been working for years as a welder/pipefitter and making good money, but in the Midwest at the time this was considered "seasonal construction work" (it wasn't)and we could not qualify for a home loan. Here, not only did we qualify, but we qualified for homes that to us seemed like palaces. All those years of living in the Midwest, with 4 kids and one bathroom in an old house in a working class area came in quite handy. We couldn't conceive of living in such grandiosity and we very happily settled into a light fixer in a nice neighborhood with a huge yard and the unbelievable luxury of 2 bathrooms.
Things are different now, and they were rapidly changing even then. There is such pressure to buy electronics, furniture, expensive cars. After 9/11, as a people and country we were told that our duty was to go shopping!! We purchase nearly everything based not on logic, or need, but on emotion. As a people, we are not as resourceful or thrifty or sensible as our forbears and we place way too much value on appearances and not nearly enough on substance.
Perhaps we will learn from this RE tragedy... and perhaps not. My parents behavior with money was in large part due to their being raised in the Depression. My behavior with money is due in large part to starting a family and trying to survive in the Carter/Reagan recession, when unemployment in my home town was 10% and interest rates were closer to 20%.

Sippn said...

mdim22 - I have teenagers who can spit venom at me better than that.

Sippn said...

Sorry if I sound positive about all real estate, I am most definately not.

The list of dont's would be very long.

But somebody is already talking about "knives falling" so I'll talk about something else.

Diggin Deeper said...

"There is such pressure to buy electronics, furniture, expensive cars. After 9/11, as a people and country we were told that our duty was to go shopping!!"

Those days might be over soon and we'll finally return to saving money, living within our means, and providing a balanced fiscal future for our kids.

ralphk said...

I doubt it. This is the land of instant gratification:

'Consumer Credit Up 3.2% in January; Credit Card Spending Slows

Consumers take out a lot of auto loans in the first month of 2007, but leave the credit cards in the wallet.

Coinciding with the Senate’s increased scrutiny of the credit card industry comes the monthly release from the Federal Reserve telling us all how much money people spent that they didn’t have. This month, the Fed says consumer credit card debt is slowing, and it has been steadily slowing down for a couple of months.

In January, credit card spending increased only 1.1%. This is after another anemic increase of 1.9% in December. In fact, the 1.1% reading was the slowest growth in credit card spending in 10 months. Of course, these numbers are coming off of November’s 14.7% increase, so folks are still using the plastic…they’re just doing it like a frat boy drinks: binge-ily.

Overall consumer debt increased $6.4 billion, or 3.2% annualized in January on a jump in non-revolving credit, specifically auto loans.

Revolving credit (credit cards) increased $816 million, or 1.1%, in January.

Non-revolving credit increased $5.63 billion, or 4.2% annualized.

Also, credit growth in December was revised down from $6.0 billion to $5 billion, punctuating the slowing of credit growth.

For all of 2006, consumer credit expanded by 4.8%. Total outstanding debt reached $2.41 trillion in January.'

Diggin Deeper said...


I guess my point was that this financial irresponsibility really can't go on much longer without some serious fallout. The real estate bubble is just one of many and if it permeates the economy, like it could, there are other dominoes that could go with it including consumer debt as you've noted. Fannie and Freddie are sitting on over $4 Trillion in mortgage note and derivatives that no one seems capable of evaluating. That ought to raise a flag but its swept under the bus. We just can't continue to live financially upsidedown...as a country and as a people. Eventually the markers get called and there's not enough money in the till to pay...IF and when that happens, real estate is but a small percentage of the overall problem.

Diggin Deeper said...

New Century gets a $265M loan from an unnamed creditor!


What institution is dumb enough to loan this company a cup of sugar much less refinance its debt and other financial obligations? Hmmmm, something's fishy here. Why go unnamed if your that benevolent?

ralphk said...

Diggin - I totally agree. I think it is all about to come crashing down and, in my opinion, it's long overdue.

It's not that I'm wishing ill will on anyone but this country really needs to return to the core values Cmyst referred to.

A few weeks ago I hit a career low point - we received a bankruptcy notice on a 20 year old. That new record was broken the following week when one was received on a 19 year old.

What a wonderful world we live in when our biggest priority/problem is camping out in front of Best Buy so that we can be the first one on our block with the lastest electronic game.

Diggin Deeper said...

"It's not that I'm wishing ill will on anyone but this country really needs to return to the core values Cmyst referred to."


anon1137 said...
This comment has been removed by a blog administrator.
Cmyst said...

Anon 1137:
I'm not sure where your anger is coming from, but somehow I don't think it's from a concern for the overpopulation of the planet!

Urban sprawl? Not my fault, really. I hate stucco. Blame some really poor to non-existant city planners.
Anyone that would allow developers to build in Natomas is a moron.
Native Californian? The ex is a third gen Cali native, born in San Diego and raised in Santa Rosa/Sebastopol.
Everyone has to be responsible for their own footprint. That was pretty much my rant earlier. Somehow, that got flipped into evidence of poor global citizenship and a taste for urban squalor in an eerily Rovian manner.