Sunday, April 08, 2007

"Crash Landing"

From the Sacramento Business Journal:

The once high-flying subprime mortgage industry is crash landing all through the Central Valley.

The three-county Sacramento metro area -- Sacramento, Placer and El Dorado counties -- saw its rate of subprime mortgage defaults more than triple from December 2005 to December 2006. The subprime default rate climbed by 10.7 percentage points, from 3.4 percent at the end of 2005 to 14.1 percent at the end of last year, the biggest increase among all metro areas in the nation, according to research by First American LoanPerformance in San Francisco.
"A lot of the California MSAs saw a huge increase," said Bob Visini, head of marketing for First American LoanPerformance. The default rates climbed by 9 or 10 percentage points almost across the state, translating to increases of 200 or 300 percent, he said.
When appreciation stopped, the loans started going bad with a vengeance through the Central Valley..."This was one of the hottest markets in the state for a very long time, and now it is not," said Dustin Hobbs, spokesman with the California Mortgage Bankers Association in Sacramento. "It is one of those areas where home pricing had no business going up like it was."

Easier access to subprime loans helped extend the housing boom by months or years beyond the typical cycle of buyers' and sellers' markets. That could extend the correction, some in the industry say.


Jeff said...

That last paragraph says it all. Price increases in the 24 remaining months of the run up were due almost entirely by people signing up for loans they wouldn't otherwise be able to afford, and their panick in trying to get a house fed a frenzy that's starting to unravel now. I still see people buying homes when home prices continue to decline so these people are also contributing to the problem, but it will all come out in the wash in the next 24 months.

Cmyst said...

My job is not in real estate or finance. My interest in those things stems from my personal life experience.
My job does call for me to work in the community, in neighborhoods both rich and poor, all over the greater Sacramento area. And for the last two months not one week has gone by that I did not have someone tell me a real estate tale of woe, involving themselves or a very close family member facing foreclosure. In almost all of these cases, the problem as described was a totally irrational belief that a family could afford a house priced at anywhere from 6 to over 10 times their yearly income, and a no-down payment ARM. Prior to 2 months ago, no one had these stories to tell me.

Perfect Storm said...

As foreclosures increase it will become just socially acceptable to give up the house. People will say dang man the Johnsons got foreclosed on well then maybe I should leave the keys on the counter also, misery loves company.

Were all just human in the end.

ralphk said...

Now this is intersting:

From CCR Newsline -

Study: Card Payment Trumps Mortgage for Some ‘Subprime’ Borrowers

The traditional assumption of lenders – that borrowers will meet their mortgage obligation first before any other required monthly payment – “has been relaxed in the subprime segment,” says Stan Oliai, vice president of decision sciences at Experian.

The credit bureau released a study Tuesday that examines consumer delinquency trends.

It appears “there has been a paradigm shift in payment hierarchy,” Oliai says. A notable segment of “subprime” consumers (who have credit scores below 620) – particularly those who are stretched financially – are using a credit card to fund daily living expenses and paying the card bill on time, even if it means being 30+ days late with the mortgage payment.

Consumers with “prime” credit scores (above 680) followed the historical pattern of paying the mortgage before their credit card bill.

While mortgage delinquency rates among subprime consumers rose 13.2% over the past four years, this group’s bankcard delinquencies steadily declined. Oliai attributes this shift, in part, to education efforts by credit card issuers. Issuers invested in sophisticated customer management and collection systems and it’s paying off, he says.

Many cardholders today understand what will happen if they’re delinquent on the card payment, and they know how long it takes to go through a mortgage default and foreclosure.

Keeping the card account current to fund daily expenses has taken priority for some households, even though “it’s a dangerous game to play,” Oliai remarks.

Since 2003, bankcard lending to subprime consumers jumped 137% and mortgage lending for the same consumer group grew 58%, Experian’s analysis found.

The study’s researchers extracted data from open mortgage and bankcard accounts of 40 million consumers.