Tuesday, April 15, 2008

'No Sign' of a Foreclosure Peak

From the Modesto Bee:

No matter how you crunch the numbers, March was a brutal month for foreclosures throughout the Northern San Joaquin Valley...San Joaquin had the highest foreclosure rate in the nation during March, followed closely by Stanislaus and Merced, according to RealtyTrac.

"There's definitely no sign of a peak in any of these foreclosure numbers," warned Sean O'Toole, owner of ForeclosureRadar.
From the Stockton Record:
Four months after CBS' "60 Minutes" broadcast a segment dubbing Stockton as this nation's "ground zero" of the foreclosure crisis, a TV crew from Australia's version of "60 Minutes," titled, well, "60 Minutes," was on a repo homes bus tour, making the rounds of bank-owned houses in Spanos Park and Brookside...Reporter Peter Overton bounded off the charter bus in choreographed exits not once but several times to get just the right take, to announce to the camera that there he was, touring foreclosure homes with "vultures ... here to pick the bones of the subprime crisis."
Reporter Overton said the "60 Minutes" crew was visiting the Central Valley to get a look ahead at the type of mortgage crisis into which Australia already is stepping.
From Slate:
California is to mortgage lending what Chicago is to pork bellies. For years, that meant it was a place with soaring house values; today, the foreclosure rate across the state is twice the national average and going up fast...And housing prices are in freefall.
Unfortunately, when it comes to the California crash, these striking numbers are not the end. They are the beginning...Which brings us to the other scary part of the California story: a coming wave of interest-rate resets in prime loans given to people with good credit that are just as bad, or worse, than we've seen in subprime.
Just two banks, Washington Mutual and Countrywide, wrote more than $300 billion worth of option ARMs in the three years from 2005 to 2007, concentrated in California...The really amazing thing is that the meltdown in California is already happening and virtually none of these loans have yet reset.


Jacob said...

yea I am definitely waiting for the resets coming this year.

And I am not touching anything until the foreclosures decline.

smf said...

Well, realistically the subprime crisis is almost over...

...of course, the other wave of resets coming is even worse!

Jacob said...

yea the bulk of the sub prime loans have already reset, but next are the option arms, i/o arms, etc.

And then you still have a wave of prime loans that will go into default from a) people with good credit just lose their jobs or something else out of their control happens, and b) people can pay no prob but their $600k just got a new comp down the street at $200k and the owner says @#$# it and mails in the keys.

neverborne said...

How high are they going to reset though?

Patient Renter said...

How high are they going to reset though?

Rates are low now, so many loans that start resetting won't inflict pain (for now), though many with teaser rates or pay options will.

Jacob said...

Who knows for sure, but if you had an option arm or I/O or any type of loan that you planned on refinancing out of, now you can't because the LTV is likely too high.

Diggin Deeper said...

I don't see how the banks will have any choice but to refi based on some type of bailout level regardless of LTV. They're probably not going to reduce balances but I would guess they'd opt to finance what's owed at very favorable levels. What else can they do? Better to get some loan performance than none at all, especially if you have to take it back into inventory and carry it. With liquidity an issue, banks need cashflow and lots of it.

If you think about it, the no or low money down, no doc loans, were akin to found money...There's no real sweat in these deals and it's really the banks call..because it was their weak risk profiling that allowed this to occur in the first place...

I think further bailouts are coming through creative bank financing...and LTV's won't really matter...The consumer will always have option of walking but if the banks save a homeowner from doing that, it's to their advantage...

Patient Renter said...

They're probably not going to reduce balances but I would guess they'd opt to finance what's owed at very favorable levels.

That sounds about right though I don't think the banks are on a solid enough footing to finance long term loans at low rates, thus we'll have the GSEs doing this.

Deflationary Jane said...


I thought that too until I began subscribing to a trustee sales service. It's the big loans that are coming now. The below 250k seem to be mostly flushed out until the 07-08 crop of flippers get slammed. Want to see pain? All eyes should be on Dixon.

Diggin Deeper said...

PR...I'd have to agree, there will probably be some collaboration between the banks and GSE's that guarantees liquidity for accepting the higher risks involved. Maybe even some contingencies where the homeowner relinquishes some or all of any appreciation... if that were EVER to occur. Regardless of their problems, the banks still hold the cards and one would hope their risk management from here would be spot on. You can bet they'll be pretty selective on who'll get to keep their property...

DJ...I agree that any major price reductions from here will come from the higher end homes, meaning that we'll still see price reductions across the board but the real drama will affect the current $400,000 and up properties. Areas I expect to be hardest hit will be outside of Sac County (Rocklin, Roseville, Lincoln, Folsom, EDH, etc.) and Dixon sure would qualify.

Within the county the ground zero locations have already caved in...with a bit more to go. Now it's the peripheral areas that need to do their part, along with some of the in-county high moat neighborhoods.

I do believe we'll get to the 50% off level with the higher end doing the heavy lifting from here. There are too many variables working that should make those areas less attractive.

Sippn said...

DJ and Diggin, it HAS been the $400K plus loans going bad... $400K -700K loans on homes that should have been $200-300K.... Elk Grove, Antelope, Natomas, etc. Its rather amazing the loan balances on the tract homes.

Talking to a client who is a lender told me that sales are taking off in Stockton area the last few weeks now that median is below $200K, bay area commutes vs gas prices vs home prices make it a buy again so I looked at some stats...

about 50% of homes under $200K, and about 40% 200-300K are in contract now.

I know, la la la la la, lets see if the closure rate continues the same trend...

Diggin Deeper said...

Sippn, no one's disputing the lower end properties as they probably won't correct as much due to the big dive they've already taken...plus the weak dollar could soon prop them up from here. They're on fire because there's fire sale going on right now and they are being dumped.

$400K may be a bit on the margin, as these homes were yesterday's $600k homes. But there's still pleny of room for higher end properties to correct before this is over...another 25% off the big ticket home is well within a possible range...maybe more if they're in areas that lose traction due to commuting costs, inflation, job losses, etc.

smf said...


As noted in other areas and comments, there is plenty of evidence that a good percentage (I say about 50%) of the lower priced homes are being snapped up by investors that want to rent them out while 'waiting for the market to recover'.

Plenty believe that prices 5 years from now will be much higher and their 'investments' will give them then a handsome return.

I don't think so.

All they are creating is a transfer from a home for sale glut to a home for rent glut.

Deflationary Jane said...

DD and SMF are being much nicer then I would be. Glad they tackled this before my horomones kicked in >; )

What this is telling to me is that all the demand is at 100k to 300k because that's all people can really afford. It doesn't matter what they sold for at the top. It matters what the banks can get for them now.

So if we just relieved a bunch of pent up demand by having houses finally come into the affordable range, what about the big stuff that's about to be dumped? I see a huge deflation pressure on this year's sales by years end.

Let's flash back to 1992. There was some buying then after the initial losses hit as people thought the worse was over. Whoops - not so smart. The next spring hit and it continued down down down to 1996. I know people who had to wait to 02 to get out of those houses. Hell, I just looked at a house that was underwater from 94!

There is plenty of pain left and I'm glad the investors are diving in. They'd be my top pick for folks I'd love to see take these huge losses. Couldn't happen to nicer people >; )

Diggin Deeper said...

I'm still having a hard time believing that small time investors are buying up homes in the lower end...From what I see qualified people who've not had the chance to buy are finally getting their opportunity to become homeowners...Call it pent up demand or a first time opportunity. First time home buyers were priced out of the market for 3 or 4 years. That demand did not go away.

With information streaming in from all mediums, a one-time flip investor would have to be brain dead to wade in for short term gains. You'd have better odds at the roulette table in Reno.

There's plenty of investors cutting deals and land banking property for another day. The deals are usually done quietly, by design, and end up buried on the books. Why? Who wants to be a market breaker when your goal is a return on your investment over a given point in time? It would defeat the purpose of investing at the outset.

No, I tend to think that people are actually buying homes because they can afford them and want to live in them.

Deflationary Jane said...


I know it sounds nuts and I would believe it unless I saw it with my own two eyes.
Here is an example:
MLS #: 70129774

A bigger house in that neighborhood rents for $1300. A house that size rents for 1450 in Davis if they are lucky. You want someone that won't trash it? Drop the lease price and hope you get a good one.

This must be a mom and pop that has no idea how much they've lost the minute they signed.

Diggin Deeper said...


Unfortunately, people can't be kept from themselves...There will always be examples of wingnuts making bonehead decisions.

For example. The Alt-A buyer was one of two animals...either a second home buyer for personal use or an investor. Those resets will cull out the losers in a hurry as no investor will stand the time it takes for the property to double in price just to get even. And there ought to be some pretty decent properties to choose from.

Randal said...

This crisis can be summed up with the title to the old Carpenters song, "We Have Only Just Begun."

A lot of people on CNBC etc., keep saying, "we're very near the bottom" when, in reality, we are YEARS away from the bottom! The most dominate emotion regarding this entire mess is DENIAL!

The harsh truth is this: Sacramento will ultimately lose more than 50% of the value of its homes, and based on "normal" appreciation (1.8% annually), homes will not return to 2006 levels until approximately 2025!

Welcome to the 15+ year recession (or depression) depending on how you look at it!

Randal said...

A friend of mine has a home in Woodland, that he purchased as a rental in 2005 for $399K. The house is 1400 sq. ft., and currently rents for $1300 per month. The home is on a tiny 4500 sq. ft. lot, and was built in 1997.

After taking out $50K in equity (yes, unbelievably, he actually had equity) his current mortgage payment (PITI) is $3476 per mo. He works for the State and I always jokingly call his home "The Million Dollar Mansion" because over the 30 year mortgage his home will cost him $1,251,360!

If he averages $1700 per mo. rent over the entire course of the 30 year loan, he will lose $639,360! Great investment huh! Even though he has a traditional fixed-rate mortgage, he'll soon walk away from this money pit

Unfortunately, the Sacto area has thousands of these horror stories, which will materialize in the next five years. Standby, its gonna get REALLY ugly!!!

Sippn said...

DD - the lower end is about 1/2 first time buyers and 1/2 investors looking for rental return, NOT speculators looking to flip, but traditional rental investors.

DJ - saw your comments on Wassermans - good points.

smf said...

"1/2 investors looking for rental return, NOT speculators looking to flip, but traditional rental investors."

BS flag raised waaaay up!

Sorry, sippn, not quite the case.

Yes, these are investors looking for the rental return right now, but expecting the big payoff a few years down the road.

If the payoff does NOT come, they too will bail out.

Being a landlord is not very easy, and I know more people that have left the business than are willing to come back and become traditional landlords.

At the same time, the current crop of low priced houses are located in the really shitty areas. Not a good idea to become a slumlord and hope for a good payout.