The mortgage data we have all been waiting for!
I had the following report sent to me by a reader, and it has also been posted in the forums. It is a report from First American Corporation and it is titled “Mortgage Payment Reset - The Rumor and the Reality“, by Christopher L. Cagan PhD. and Director of Research and Analytics
There is a ton of good information and graphs in the report. It is 33 pages long, so please understand that it is going to take me a few days to get posts up on many of the points that I want to make.
I have read the whole thing quickly, and gone back over several items. Not only is there a lot of information in there, it is going to take time to digest it all, formulate informative content, and get that information to you. I’m going to talk about 2 things briefly right now, just to get the ‘equity rolling’.
That said, I think page 10 and 24 are excellent places to start.
Page 10 has a chart that shows the equity percentage at the time a home was purchased or refinanced. It has data from 1985, 90, 95, and 2000-2005. If somebody bought a house in 1994, but refinanced in 2003, they will fall into the 2003 data. I wish I could copy and paste the table into this page, but it is a PDF, so you will have to open it, or print it off yourself to follow along. *update: Thanks to Duke for the files below.
If you go back to 2000 - 2003, you will see that about 8% of the people in each year are still even or underwater. That number jumps to 10.6% in 2004, and 29% in 2005! I think you can pretty much include the people that have 0-5% equity (the author does this in a smaller table on page 11). It is going to cost 5% to sell your house with realtor/title/escrow fees. If you use the 10% decline the author speaks of, AND assume people need to sell and include the 5% transaction costs…lets look how many people are now even or underwater. By doing that you ‘wipe out’ the people in the 10-15% brackets (10% depreciation plus 5% transaction costs). That puts:
21.2% of the loans in 2000
23.7% in 2001
25.5% in 2002
28.8% in 2003
38.5% in 2004 and
57.1% in 2005 of the loans in a zero equity position.
Even if you assume that people are going to sit tight…look what 10, 15, and 20% declines do to people’s equity position.
Now take a look at page 24. This is the data that many of you have been dying to see. It is pretty representative of what I have seen the past 2 years. Look at the amount of loans below 2%. Those my friends, are called option ARM’s and those are our favorite negative amortization mortgages. If you add up the other low rate loans, you are probably looking at about 20% of the loans on that chart being option-ARMs. As a quick reminder, these are the loans with a minimum payment option, an interest only option, a 30yr amortization option, and a 15 yr amortization option. These loans are usually tied to the MTA, COSI, COFI, and on some cases a LIBOR index. Not all option-ARMs had the 1% start rate. Many could have rates in the 2-4% range depending on the credit, borrower, loan terms, and pre-pay penalties.
I know, I know, I wish we had this data from 2000-2003, but at the moment, I don’t have it. But look at the data from page 10. See how many people are not in a good equity position in 2004 and 2005. Now look at page 24, and look at the make-up of the loans that the people in 2004 and 2005 were using to ‘afford’ their properties! 7.7 million loans that total almost 1.9 TRILLION dollars of adjustable rate mortgages (ARMs) in the past 2 years! Lots of these loans were subprime 2/28’s and 3/27’s as well as A-paper 3/1, and 5/1 ARMs. These ARM borrowers in 2004/2005 are the people who have very little equity to begin with…and you can see how many of them are playing with loans that WILL adjust. They are not just going to adjust a little bit…for many of them, they are going to adjust a lot! Lots of the loans were interest only loans (I/O), that not only adjust in rate, but you have to start paying principal as well. When the 1% option-ARM recasts and you are looking at rates in the 5’s and 6’s…that is a large jump in payment as well. That doesn’t even take in to account the people that are making the minimum payment on the loan, which just tacks the ‘deferred interest’ on the back of the loan in the form of negative amortization!
Please feel free to post your questions and comments. I will do my best to answer them. As I was quickly reading through the document, no less than 25 things popped in my head that I could expound upon, or refute. There was definitely some misconceptions about the sub-prime market in there. Again, it is going to take some time to digest all of that information and then create informative posts that are easy to read and understand.
Thanks for stopping by, and I look forward to working through this data with you. Keep the comments and feedback coming…both here and in the forums!
SoCalMtgGuy
February 16th, 2006 00:16
Socal:
Wow!! Incredible Article. Love the data - May take a couple of hours to digest, but the main point I am seeing is this is going to be bad for alot of people that bought in the last couple of years. Especially all the no doc zero down subprime people that should have never been able to get a loan in the first place…
thanks!
February 16th, 2006 04:43
Fiscal responsibility has gone out the window for tens of millions of my fellow Americans.
David
Bubble Meter Blog
February 16th, 2006 06:13
The central assertion: the over-extended borrowers and irresponsible lenders will take their losses, but there are not enough of these to have a systemic effect on the overall economy.
I hope he is right, and precedent is with him — the overall economy did survive the collapse of the dot.com/telecom bubble.
The risk is that the insanity of the past few years will swing 180 degrees around to insanity in the other direction. That is, the excessively loose credit will be followed by a credit crunch, and the “upside panic” of homebuyers desperate to buy before prices go higher will be followed by a plunge as foreclosed houses sell but everyone is afraid to buy lest prices go lower. Note that there was no panic selling in the stock market during the long years of price adjustment. Will there be panic in the housing market?
February 16th, 2006 06:35
Help me please
I am hearing “people” telling consumers to use 100% financing because of the deficiency judgement rules in such states as california. They are saying they cannot get a judgement on a purchase money loan so you can walk away from house and just lose your credit. I found this article out there about deficiency judgements:
http://www.tdl.com/~mflaw/articles/article6.html
Can you guys help me out w/ the interpretation?
As I am reading if a loan is made from federal institution or insured though them they can get a judgement. Please help me get the word out and figure this bs out.
February 16th, 2006 06:37
There’s a little bit of legerdermain going on in the final pages. There’s an assumption that that first mortgage holders can recover 80% of the outstanding loan balance in the event of a default. The author claims that the “junior” lienholders will adsorb their losses first but never bothers to include those losses in the MBSec exposure or bottom line loses. There’s an implicit assumption that price declines are going to be 10% or less than one years worth of the last 4 years run up. There’s also quite a bit of asset averging going on. $4t of the $8t in all home debt originated in 2004-05 but for some reason only a very small percentage of those are considered at risk. There’s a lot here and i’m barely scratching the surface but I detect some major methodological errors.
February 16th, 2006 07:43
My initial impression is that this article, while based on real, honestly presented data, slips into pig/lipstick territory. On the one hand, 9.4% of homeowners were in a negative equity situation in September ‘05, near/at the peak of the bubble. But the writer is quick to qualify that with “However, this does not mean all of these people are in trouble.” Well, of course it doesn’t mean that, but I still find it ALARMING that nearly 10% of homeowners were in a negative equity situation before there were any discernible price drops. I mean, holy crap!
February 16th, 2006 08:04
The rather blase tone about the entire piece is somewhat misleading. The author is seemingly focusing primarily on the impact that an FB implosion would have on banks and the financial system. According to the conclusions of the report, the consequences will likely be quite manageable.
This is certainly a good thing, since it implies that the bursting of the bubble is likely not to take down the entire credit and financial system, Argentina style. I got the sense reading the report that this is the sort of data The Fed has been looking at over the last several years, which is perhaps why they have been so complacent about keeping the housing bubble pumped up. From the bankers POV, the risks to *the system* are manageable, so full speed ahead.
But, what the report doesn’t capture is the psychological effect of mortgage resets, shrinking equity cushions, and foreclosed borrowers. Those effects will likely be massive - with more consumers forced to curb spending to pay their ARMs, or the wealth effect morphing into the “FB effect” with plenty of underwater borrowed stuck in housing misery. Not to mention the housing ATM drying up and taking away the punch bowl from lots of semi-FB’s.
While the US financial system might only get the sniffled from the bubble bursting, consumer psychology is much more likely to have something serious like a minor heart attack.
February 16th, 2006 08:18
“I wish I could copy and paste the table into this page, but it is a PDF, so you will have to open it, or print it off yourself to follow along.”
Just use the “Print Scrn” button on your keyboard (near the upper right side, at the very top), and then paste into a photo editing program.
February 16th, 2006 08:34
i can’t spend much time looking at the report. is there any confirmation on the amount of arms resetting this year and next?
February 16th, 2006 08:53
arizonadude,
It is my understanding that if the homeowner refinances, it turns from a non-recourse loan to a recourse loan and the lender can get a judgement. Also the biggest thing to note is that the lender will 1099 the borrower for the loss even if it is a non-recourse loan.
SDGal
February 16th, 2006 08:54
[i]over-extended borrowers and irresponsible lenders will take their losses, but there are not enough of these to have a systemic effect on the overall economy.[/i]
They’re just parroting the line that Greenspan and Bernanke are saying. We’ll see…
February 16th, 2006 09:06
(I still find it ALARMING that nearly 10% of homeowners were in a negative equity situation before there were any discernible price drops. I mean, holy crap!)
I agree. While the article shows that mortgages issued in 1985 and held today have a large equity cushion, the data doesn’t show what the situation was in 1985 or 1995. That’s what I’d like to see.
In other words, 17.6% of the mortgages issued in 2004 were upside down in 2005. Were 17.6% of the mortgages issued in 1994 upside down in 1995 (not today)? Were 17.6% of the mortgages issued in 1984 upside down in 1985?
My guess is aside from FHA/VA nothing was upside down in the past, because downpayments were required and loans from relatives were not counted.
February 16th, 2006 09:11
I’ve learned that economists’ reports are twisted to support the views of their customer or special interest. So I checked the First American Real Estate Solutions website, to find out whose interests they are protecting. First American keeps an amazing database of real estate activity, and compiles and sells this to lenders, appraisers, title companies, realtors, etc. They have a vested interest in sugar coating this report.
I do commend them for their honesty in showing the data, and in admitting to the risk of foreclosure. This tactic is clever: by admitting some of the truths in your opponent’s arguments, you appear to be admitting them all, and be unbiased. However, they do twist their conclusions and make omissions.
They state that the economy is strong, and some foreclosures will reduce GDP from 3% to 2.7%, a small drop. However, they neglect to say that most of our GDP is a result of consumer spending from HEW, and as home prices flatten, the GDP will drop, regardless of foreclosure.
Their biggest mistake is assuming that home prices will continue to rise. Second, how do they know the current % of equity, since they are not including the $ amount of second mortgages or HELOCs (right?).
February 16th, 2006 09:29
(how do they know the current % of equity, since they are not including the $ amount of second mortgages or HELOCs (right?).
I think that is included.
The report also finds that investors are no more likely to be in the hole than real homebuyers. But that just means real homebuyers have been screwed by the run up in value so they are no better off than speculators, hardly a happy thought.
February 16th, 2006 09:32
Very interesting report, SoCalMtgGuy.
My problem is that I don’t have the background for good handle on the big picture. Maybe you or someone in the industry can help me with ballpark estimates of these questions:
Three questions that come to mind to get a better handle on how this is going to effect the overall economy:
1) What percentage of homes have any mortgage at all?
2) What percentage of homes with mortgages do these data represent (i.e. how many homes have mortgages that are 30 year fixed from 25 years ago)? I would suspect very few, given that the rates were so low in the last few years that almost everyone with a mortgage refinanced.
3) I would love to see the data split out into high-risk of decline areas vs. fly-over country? I would assume that the riskier mortgages are in the most bubbly areas, but when I look at the state list, this assumption doesn’t seem to be born out.
February 16th, 2006 10:23
http://www.firstamres.com/pdf/MPR_White_Paper_FINAL.pdf
February 16th, 2006 11:22
1) What percentage of homes have any mortgage at all?
http://www.census.gov/hhes/www/housing/ahs/03dtchrt/tab2-1.html
2) What percentage of homes with mortgages do these data represent (i.e. how many homes have mortgages that are 30 year fixed from 25 years ago)? I would suspect very few, given that the rates were so low in the last few years that almost everyone with a mortgage refinanced.
http://www.census.gov/hhes/www/housing/ahs/03dtchrt/tab3-15.html
3) I would love to see the data split out into high-risk of decline areas vs. fly-over country? I would assume that the riskier mortgages are in the most bubbly areas, but when I look at the state list, this assumption doesn’t seem to be born out.
http://www.census.gov/hhes/www/housing/ahs/03dtchrt/tab3-14.html
Or everything you ever wanted:
http://www.census.gov/hhes/www/housing/ahs/ahs03/ahs03.html
February 16th, 2006 11:58
Thanks, Robert. Very helpful.
So to summarize:
1) About 70% of the 100 million+ homes have a mortgage. (70% are owner occupied)
2) Just about everyone refinanced since the turn of the century. (A surprising quarter, approx., into 15 year loans).
3) We don’t really know what the risk distribution is in bubbly vs. flat land, though maybe it doesn’t matter too much. The bubble is contagious to some extent, and I’m guessing we will see distressed buyers everywhere, though their profile will be different in lower income less bubbly places.
February 16th, 2006 12:01
http://www.latimes.com/business/la-fi-loanrisk14feb14,1,3832177.story
Study Plays Down Adjustable-Loan Risk
By Annette Haddad, Times Staff Writer
The potential loan losses from new types of adjustable-rate mortgages issued since 2004 is relatively small, according to a study to be released today.
Defaults on these loans could result in $110 billion in losses nationwide over the next five years, less than 1% of the total amount of home loans sold in 2004 and the first three quarters of 2005, said Christopher Cagan, an economist at First American Real Estate Solutions, a division of Santa Ana-based title insurer First American Corp., which conducted the study.
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“It’s not great but it doesn’t break the economy,” Cagan said, adding that the loan losses would be spread out over the next four to five years because not all distressed borrowers would find themselves in trouble at the same time.
Cagan claims his study is the first to calculate the amount of loan risk based on homeowner equity associated with so-called hybrid ARMs. These loans allow borrowers to make little or no down payments along with low monthly payments for a fixed initial period. However, after the fixed period, the payments adjust upward based on prevailing interest rates. If rates rise sharply, the payments could rise sharply as well — increasing the risk that borrowers might default.
But Cagan said the risk won’t be very serious. Using data from LoanPerformance, a real estate research firm that was acquired by First American last year, he found that the adjustable loans most at risk of default were those with low initial “teaser” rates of 2% or less and whose borrowers had less than 15% equity. This pool represented about $70 billion in potential losses out of $1.8 trillion in ARMs issued in the last two years.
The problem for many will arise when these loans adjust to market interest rates. For instance, borrowers paying 1% on a $300,000 mortgage — or $965 a month — would see their payments jump to $1,799 if their loan were to reset at a 6% rate, Cagan said.
Combined with their having little or no equity and a softening housing market, many of these borrowers are likely to find themselves in a “can’t pay, can’t sell, can’t refinance” situation in which default may be the only recourse, Cagan said.
He found, however, that there was a small number of Southern Californians who face significant default risk. Out of 300,000 people who bought homes in Los Angeles and Orange counties last year, he estimated that fewer than 10% have the type of ARMs that he deemed to have the highest risk.
Yet, the potential for greater borrower distress could ratchet up if the economy worsens and the unemployment rate rises, said Edward Leamer, a UCLA economist.
“If you factor in a slowing economy the number would be larger,” Leamer said. “The ultimate decider of whether you can make your mortgage payment or not is your job.”
February 16th, 2006 12:15
This market is over extended and will crash regardless of interest rates — even if a magic fairy set all ARMS to 0% forever! The demand has been pulled too far forward, resources are too stretched beyond comprehension. These crazy finances are symptoms of the over extension. They will not be the cause of the crash, merely an early warning sign and it’s earliest victims.
February 16th, 2006 14:16
If only the people in a zero equity position walk away. That equal a 2 year supply of mortgages.
Now there is where all the inventory went!
Mortgages are a bigger number than sales transactions. I don’t know what the factor is but for humor sake let’s say .25 or 25%.
So the soon to be released inventory given a 10% drop in market prices is 2.5 years of sales volume.
Now that is what I call a buyers market.
February 16th, 2006 14:18
Socal,
How is the mortgage industry dealing with all of the mortgages no longer being paid in the Gulf hurricane damage zone? Is that area the test for the bubble areas when they pop? Can any comparison be made?
Thanks.
February 16th, 2006 15:00
Anon,
I don’t know much about the hurricane areas as far as what the lenders are doing. I think New Orleans and surrounding areas are a relatively small piece of the national mortgage pie…not only in number, but in loan amount. I’m sure it is affecting things, I just don’t know how, or how much.
SoCalMtgGuy
February 16th, 2006 15:28
Wouldn’t homeowners in NOLA have flood insurance. Insurance pays off mortgage and you now own a house that has to be demo’d and a lot in a flood plain! Yay!
February 16th, 2006 16:24
As for NOLA, I’m not speaking as an expert, but I’ve heard insurance only pays replacement cost of the building (not land). And it doesn’t cover mortgages that I’m aware.
February 16th, 2006 18:25
Flood, earthquake, wind, and fire insurance all only cover the replacement cost of the building. They don’t pay off the mortgage, nor do the compensate you for the reduced value of the land.
If you have a beach house and a hurricane comes in and destroys the house and erodes the land enough that your land is now underwater (worthless), the insurance company will not compensate you for the land. Only the structure.
February 16th, 2006 19:42
The Gulf Coast is two different problems. New Orleans is a small part and was flooded because of the levee failure. The flood insurance most people had was probably designed to cover a few feet of water damage not total inundation.
Mississippi, part of Alabama and Louisiana were wiped out by the hurricane surge. Many homeowners didn’t have a lot flood insurance coverage or bought it years ago and never updated the amounts, and others were told they didn’t need it because the house was above the flood zone, either by terrain or by being build on pilings. Most homeowners policies specifically exclude damage caused by wind driven water, i.e., surge. In addition, some were in the Mississippi wind damage pool for hurricane damage.
Many lost their jobs as well as their homes so even with relief provided by mortgage companies, they can’t resume payments.
I know of one of the best insured people who is letting his slab go into foreclosure as he’s been informed that it’ll be a year or so before the insurance is sorted out. He intended to build then sell but has decided to just walk away and take a job out of the area. His flood insurance, wind damage insurance and homeowners were all trying to sort out who had to pay as all he found was his porch a half a mile away so what actually took the house is unknown. Did the tornados demolish the house and the surge wash it away or did it happen in some other order.
The Gulf Coast will have foreclosures but it won’t be a big impact on the country as a whole. The assistance programs are designed to help people. In addition, there is usually a price surge as small parcels come available to be combined into larger developments. The mortgage holders will probably do okay in the long run.
Contrast this to all $500k to $1 million foreclosures with falling prices.
February 16th, 2006 20:28
It is not surprising that the Helicopter doesn’t sound overly concerned about a potential housing bust. During the last Fed tightening cycle, Easy Al was asked about the tech bubble. He replied that we can only know if an asset class has achieved bubble status in hindsight, although privately the Fed worried about “adverse developments in the stock market” according to the Dec. 1999 Fed minutes:
“In their review of economic conditions across the nation, several members noted that high levels of business activity were severely taxing available labor resources and appeared to be constraining growth in a number of industries and parts of the country. Rising employment and incomes along with the advance in stock market prices to new highs in recent weeks were fostering elevated levels of consumer confidence and would be supporting consumer spending going forward. Anecdotal reports pointed to notably brisk retail sales during the current holiday season in many parts of the country. Sales of new automobiles had rebounded recently after moderating somewhat from an exceptionally rapid pace earlier. While recent developments provided little basis for anticipating slower growth in consumer spending, members commented that such spending could be vulnerable to adverse developments in the stock market and the attendant effects on consumer wealth and confidence; and spending for household durables could be damped by the anticipated softness in housing activity.”
http://www.federalreserve.gov/fomc/minutes/19991221.htm
Why is it that Greenspan lectured Congress on the virtues of the free market yet central planners set one of the most important economic levers, interest rates? These jokers are directly responsible for the “funny money” and they will be responsible for the fallout once the greatest credit bubble in history blows.
February 16th, 2006 21:24
The articles number crunching offers some eye opening statistics.
The assumption that the 19 trillion is a valid assement of home asset value and that 11 trillion of it is homeowners equity, is kind of a stretch. Its like suggesting that Google at $450 can be had by every shareholder when they go to sell.
The irritating thing about stocks and real estate, is that the value of YOUR property can be determined by what the joker down the street sells his for.
Its like the guy who shows the neighbor his new 2 million dollar dog. The neighbor asks where he got the money to pay for it and the guy says “I gave the seller two one million dollar cats.”
Another thing that will start to enter into the housing equation, is not only supply of houses, but supply of buyers. The baby boomers have their houses. There is 25% less buyers behind the boomers. At these prices, they’re going to live with Mom and Dad a few more years.
February 16th, 2006 23:47
Jim Brubaker
The irritating thing about stocks and real estate, is that the value of YOUR property can be determined by what the joker down the street sells his for.
It’s important for people to realize this. All those people who thought that their wealth increased as prices went up must now realize that their wealth will fall by 10-20% or more as prices fall.
February 18th, 2006 13:12
I just ran into an old friend, who wants to get $1mil for his 2000 sq ft house in Escondido! It’s an 80 yr old house on 1 acre, and he is fixing it up and adding square footage to come up to 2000 sq ft. He has a realtor license and used to do mortgage loans, but didn’t like the erratic income so now does something else. I’m amazed that someone like him, who should know better, still thinks his house is worth a pot of gold! And get this: he wants to buy investment property in Texax, Austin. I told him that Austin was priced low for a reason, but he says the jobs pay equivalent to SD, and lots of movie stars are moving there, and it’s the next big town. You just need screened porches to protect yourself from giant bugs.
February 27th, 2006 23:48
It hosts a numbers of home for sale by owner, Canadian vacation rentals,
rent and agents listing Vancouver, BC Canada. www.realsale.ca
January 6th, 2007 02:57
Array
January 16th, 2007 00:09
Array
August 31st, 2007 14:47
Cool site. Thanks!!!
February 3rd, 2008 00:23
The mortgage data we have all been waiting for! might be fabulous matter that you performed phenomenally; thanks for the info!