The Growing Foreclosure Crisis
The Washington Post has a front page article filled with anecdotes about the foreclosure crisis. Their conclusion? Its getting worse, fast:
One oft-repeated assertion no longer holds true. Those in trouble are not, primarily, lower-income borrowers. The foreclosure crisis has become a wave, afflicting neighborhoods of every stripe — but particularly communities created by the boom itself . . .
They’re “underwater,” industry parlance for borrowers who owe more on their mortgage than their houses are worth. They have joined the growing line of homeowners seeking a break from their lenders.
Both the departing and incoming administrations in Washington have promised help on the foreclosure front, but providing help requires federal regulators to get their collective arms around the size and shape of the crisis. That isn’t easy. No one agency collects information on every loan, every borrower and every delinquency.
But interviews and a Washington Post analysis of available data show that the foreclosure crisis knows no class or income boundaries. Many borrowers ensnared in the evolving mortgage mess do not fit neatly into the stereotypes that surfaced by early 2007 when delinquency rates shot up. They don’t have subprime loans, the lending industry’s jargon for the higher-rate mortgages made to borrowers with shaky credit or without enough cash for a down payment.
The wave of subprime delinquencies appears to have crested. But in October, for the first time, the number of prime mortgages in delinquency exceeded the subprime loans in danger of default, according to The Post’s analysis.
This trend shows up most acutely in California and other high-growth regions, such as Arizona, Nevada, Florida and pockets of the Washington region, most notably in Prince William and Prince George’s counties . . .
The foreclosure crisis hasn’t played itself out. The next wave looms in the form of a new batch of adjustable-rate mortgages scheduled to reset over the next two years. Unless the market comes back with a roar, which is unlikely, more borrowers will struggle to hang on to their homes.
Where are the most underwater homes? Of the 20 Zip codes with the highest share of underwater loans, seven are in California and four are in Riverside County, the vast exurb southeast of Los Angeles.
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Source:
The Growing Foreclosure Crisis
Dina ElBoghdady and Sarah Cohen
Washington Post, January 17, 2009; Page A01
http://www.washingtonpost.com/wp-dyn/content/article/2009/01/16/AR2009011604724.html
January 18th, 2009 at 6:54 am
People without jobs or who are under employed can’t pay mortgages or much of anything else. This is what happens when you watch all the good jobs go overseas and even say it is good for us. Thanks George.
January 18th, 2009 at 7:10 am
so do you think debt repudiation will be a consideration somewhere down the road or is the fed just going to buy up every piece of owe and turn it into cash?
Maybe these guys will let the wages rise this time so as to get the real economy moving. That is, if there are any jobs left. Maybe we’ll have to wait until next time, if there is one.
This is what happens when you target wages in your inflation wars
January 18th, 2009 at 8:33 am
People without jobs or who are under employed can’t pay mortgages or much of anything else. This is what happens when you watch all the good jobs go overseas and even say it is good for us. Thanks George.
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I’m not convinced it could have been any other way no matter who the leader was. If you believe the Western world has become one big mature economy, you have to believe that cost cutting is part of the game. This led corporate America to emerging markets.
Stopping them from doing this would have been denying free trade. Think back a couple of decades or at least to the fall of the Berlin wall. The train was in motion and no one could stand in front of it without getting crushed. Our Boomers were entering the most productive years of their lives, en masse, and trade barriers would have gone against their generational convictions. Think Woodstock, think world peace, think freedom.
20 years ago most of us wanted to believe that helping emerging markets build wealth would conquer famine and desertification. Today, I’m willing to say that most now think that 7B people consuming like we do would devastate the planet. I think our collective minds are actually now tinkering with the thought that we might have to fight for our resources.
Yes, huge mistakes were made but you can’t look at the past without looking at the collective conscience of the time.
January 18th, 2009 at 9:05 am
so people who aren’t subprime can make poor decisions too.
Barry – please remind everyone that being underwater on your mortgage does not mean you cannot afford your payments. those are two entirely different things that the mass public lumps together as one…
January 18th, 2009 at 9:07 am
Well here’s my take on why it’s spreading! As a responsible home owner for 5 years with my current modest home, I’m now upside down. FICO of 790+, 47% savings rate of DPI, nothing pisses me off more than watching irresponsible buyers getting a free handout, so much so, that I’m actually considering letting mine go back! I don’t need financing for the next 7 years. (Or better yet, load up beforehand on credit and go the whole financial duress route!) I paid nearly $18k in INTEREST last year but I’m suppose to play nice/stupid and continue sinking money into it! I don’t think so. Within the month, I’m planning on calling Wells Fargo and telling them that unless they mark my loan down to market value, jingle jingle! I’ve had it! I’m going to jump on the taxpayer bailout program too! Hell, from a financial standpoint, I’d be stupid not to!
January 18th, 2009 at 9:19 am
To echo some of the othe rcomments, Americans on average have little to no savings and their net worth took a massive hit in stocks and real estate. Many lost jobs will result in prompt delinquency.
If Shiller is not way off base, housing will not bottom for years…
http://www.ritholtz.com/blog/2008/12/classic-case-shiller-hosuing-price-chart-updated/
January 18th, 2009 at 9:43 am
I’m not convinced it could have been any other way no matter who the leader was.
This problem should have been corrected in 1996 when Greenspan first admitted irrational exuberance. At least then the world still had some economic breathing room. But noooOOOOooo!
January 18th, 2009 at 10:10 am
Morning gang,
I think what separates us here from past experience is the severity, speed, and global nature of the correction. As most financial bloggers are aware, things aren’t getting better, and in fact are getting worse and rapidly. No politician is going to say the future is bleak, certainly not the new president. But the time for the “we have nothing to fear but fear itself” speeches is probably past, and realism is here to stay.
This article caught my eye and the money quote about how many jobs and how fast they may be lost is reproduced below:
http://www.bloomberg.com/apps/news?pid=20601103&sid=aJA3rhYFkThw&refer=us
21,000 Jobs Worldwide Erased in Day as Recession Chokes Demand
About 2.1 million U.S. jobs will be lost in 2009, Lonski predicted, with 80 percent of the layoffs by the 4th of July.
“The downside risks facing the U.S. economy dwarf the upside potential that exists,” Lonski said.
If this fellow is anywhere near right, then we may well see unemployment numbers near the GD. And I’ve already posted that the massaged numbers of initial claims 524k, is already about half of the real initial claims of 950k…these are not “seasonally adjusted” numbers, these are numbers for those who live in Pollyannaland.
http://www.dol.gov/opa/media/press/eta/ui/eta20090020.htm
Just read through the unadjusted numbers again, and tell me seasonal adjustments are reasonable…it is like the “core cpi”…and we know how that works.
No, as individuals we simply must do the best we can with what we have here. But putting our collective heads in the sand won’t feed our families. We should expect a long and severe downturn, whatever the media cares to call it.
Good luck.
January 18th, 2009 at 10:27 am
The centerpiece was a couple with three kids that purchased a $1 million dollar home with 20% down and a $6,000 per month house payment. They are poster children for the couple that is one missed monthly paycheck from bankruptcy. While you have to have some sympathy, they were set up to fail. The real trqadegy here is that in an attempt to keep the house they have used up all their credit, savings, etc. Perhaps by seeing the inevitable they could have come out of this w/something. What this portends down the road, relative to peoples attitudes towards home ownership, life in general, remains to be seen.
January 18th, 2009 at 11:05 am
You kick the can down the road and eventually you come upon it again.
Gosh, what a surprise!
We seem to be coming to the end of the ‘phony war’ period, don’t we? The bank issues are still there, the mortgage issues are still there, the Fed has no more bullets and the economy – worldwide – seems to not be making a smooth river landing.
January 18th, 2009 at 12:35 pm
KidDynamite Says:
January 18th, 2009 at 9:05 am
so people who aren’t subprime can make poor decisions too.
Barry – please remind everyone that being underwater on your mortgage does not mean you cannot afford your payments. those are two entirely different things that the mass public lumps together as one…
……………………………
I second that. If you could make that $3,000 monthly payment on your house when it was worth $600K, you can still make that payment on the house when it is worth $400K.
You may conclude that you wish to exit a bad investment, and then how is your decision much different than a real estate developer say like Donald Trump, who defaults on loans? Except that you carry around a beaten up credit rating for several years, where it seems that businesess are always able to borrow again.
I assume that the folks that participate in renogotiating down their mortgages will not be allowed to participate in upside swings on their home value which may occur down the road?
January 18th, 2009 at 12:46 pm
WTF.
Both the Washington Post and the New York Times ran articles today about the bailout: Banks receiving TARP funds are not using them for lending and much, much more money is needed. And the government has no chance of recovery.
Exactly how many trillions are we supposed to funnel into our corrupt incompetent financial system before the pig squeals?
Unfortunately Obama seems to be following in Slick Willie’s footsteps with his cabinet choices and his words. I agree with the idea of making Volcker the honcho.
Anyone have any bright ideas on how to slow down this stampede?
Seems the powers that be have learned the best way to herd the Sheeple along is to create or maintain a crisis.
January 18th, 2009 at 1:54 pm
@danm: You make excellent points.
“I think our collective minds are actually now tinkering with the thought that we might have to fight for our resources.”
What gives you the impression that our collective minds are now tinkering with this thought? Maybe it’s a California thing but most people I know are stuck in the Woodstock spirit…
January 18th, 2009 at 2:04 pm
From page 5 of the article:
“Carri Clark, a mortgage broker at Mortgage Tree Financial in the city of Riverside”
(…)
“Clark said. “They have three homes, including a vacation home and rental property. . . . I keep telling people: ‘You signed a promissory note. You told the bank you’d pay it back. It’s like marriage. It’s for better or worse.’ “”
So.. mortgages are like marriage, so people shouldn’t foreclose? Has she taken a look at divorce rates, recently?
January 18th, 2009 at 2:18 pm
The writing is on the wall for high-end areas of California. With over $300,000,000 in Option Arms, begining to reset over the next couple years, Alt-A and Prime borrowers are the next wave of this mess. Affluent areas have barely begun to adjust(10-20%), but 2009 will change all of that. In the Los Angeles Area, Santa Monica, Brentwood, Malibu, Pacific Palisades, Venice and others will decline significantly. The only question remaining is, how far back do we go. The bubble started in 1997 and began picking up steam in 1999. If we roll back to historical norms, today’s prices would be cut in half.
January 18th, 2009 at 3:43 pm
Even the prime of prime in Los Angeles is faltering now. Santa Monica 90402, North of Montana Avenue ,has begun it’s decline. Lot values are dropping and development has collapsed to a crawl. Even the thickest of denial, can’t stop this part of the real estate cycle.
http://www.santamonicameltdownthe90402.blogspot.com
January 18th, 2009 at 5:08 pm
next up in the bailout nation conga line…..Homeowners (finally/also wastefully) & STATES (further waste) on top of the current Deficit (waste)-Debt interest (waste)-2 Wars of Waste-Wall Street pillage & waste rounds 2 and 3-the “Big 3″ Auto waste-Homeowner-State-Stimulus Healthcare waste………. on & on & on
& we are so fucked and it is so RICHLY deserved.
January 18th, 2009 at 5:47 pm
rob,
You are right. I too have a high FICA score and save diligently. My house is, however, paid off. I urge you to continue doing the right thing. It’s your house. You like it. Keep enjoying it. Look at it this way: With all the liquidity being thrown at the banks in particular and the economy in general, within two years reflation will have galloping inflation erase any home underwater status. Just because the crooks and shysters act irresponsiblydoesn’t mean the rest of us have to imitate them.
I repeat: The current deflation is temporary. Hang in there.
As to the examples in the article, I could see the problem right away. The people were doing the “how much is my monthly payment?” trick. The question for a 30 year investment should have been, “Am I SURE that I can pay this mortgage with 25% of my current and projected income for 30 years after the interest rate resets?”
I guess that would have made their heads hurt.
January 18th, 2009 at 6:09 pm
A word about the “help” we gave to emerging markets. It’s a lie. It’s a corporate PR stunt.
The truth is that our EPA put industry in the crosshairs and corporations, true to form, found some other place to crap on. You’ll never guess why Eli Lilly, J&J, Pfizer, Abbott, etc. have a pack of factories in that “tropical paradise”, Puerto Rico. And this is technically US territory. All that shit GE used to do in Alabama and Mississippi had to move overseas from the cancer publicity.
But what about the “clean” jobs that were offshored? That was, I admit, truly chasing lower wages but it’s part of a larger picture.
We are now in a situation where the rich pay peanuts for services that can’t be offshored. We, the poor, provide ourselves most of these services. So we need to “adjust” (corporate speak) services (butcher, baker, plumber, auto mechanic, waiter, etc.) to provide a living wage while simultaneously guarding against divide and conquer tactics. That will be $642 for the toilet repair, Mrs. Desperate Housewife, thank you.
January 18th, 2009 at 7:47 pm
Let’s call it:
“The Detroitification of American”
or
“We’re All Detroit Now”.
(Except anyone who can live off interest and dvidends from companies free of debt.)
I imagine the super wealthy forming an enclave to themselves, protected by sentry robots. Not sure if that’ll be NYC or Hawaii. Maybe the reverse of “Escape from New York”.
January 18th, 2009 at 7:48 pm
Er, “The Detroitification of America”.
January 18th, 2009 at 9:51 pm
The upcoming “Tsunami” Wave of Foreclosures is very different from the previous Subprime Wave. Whereas, the Subprime were mostly to borrowers with lowest credit scores, the next wave will consist of ALT-A, Option ARMs, and Interest-Only Mortgages who were taken out by Prime and Near-Prime Borrowers with very good credit scores. The problem with these ALT-A is that the borrower was able to qualify for the mortgage with no income verification. They were willing to pay a higher mortgage rate of interest for that luxury. In fact, these mortgages were targetted to Self-Employed Small Business Owners because they were most willing to get these mortgages which didn’t require tax returns or any other form of proof of income. Most of these small business owners chose the most flexible type of ALT-A mortgage that allowe d them to pay little if any of the Principle portion of the loan. Everyone can understand that if you pay only interest or make a “minimum payment” (similar to the “minimum payment” of credit cards) the Principle is barely touched. Therefore, upon “reset”, which will arrive in 2009 and continue through 2012 for many Borrowers, the new and revised monthly payment be determined by dividing the remaining Principle over the remaining term of the mortgage. It is a known fact that 80-90% of all ALT-A Borrowers selected the Option ARMs and Interest-Only type. With $1 Trillion in ALT-A and $5oo-600 Billion in OPtion ARMs and Interest-Only, now you can see why experts are worried.
Allow me to add another worry.. I authored an NASE Survey which provided evidence that 3.7 Million small business owners had these “Toxic” Mortgages; 3 Million were “Very Worried” that they would not be able to afford the “reset” monthly mortgage payment: and most shocking is the fact that in Mid-November, 2008, there were 1.3 Million small business owners who were already 1-3 months DELINQUENT on their “ALT-A mortgages!!
So, here we have a major problem… Since these businesses employ from 1-10 employees, not only will these small business owners lose their homes, but there will be the resulting JOB LOSSES on their business failure.
Prof. Samuel D. Bornstein
January 19th, 2009 at 12:53 am
As California goes, so goes the nation …
It no longer matters what kind of mortgage one has, ARM, subprime, prime — they’re all the same when they encounter plummeting housing values combined with a severe economic contraction (soaring unemployment and business swirling down the toilet).
We no longer need to worry about stopping the Great ARM Engine of Destruction, we must now concentrate on developing a mechanism of restructuring failing mortgages of any kind, stretching out payment streams to ensure that the lenders don’t take all the pain, but allowing as many to hang onto their homes as possible.
The alternative is some sort of full nationalization of the mortgage industry, with the government owning all mortgages. We’re probably halfway to that already.
People will come to discover that the only protection from foreclosure is complete ownership, free of any liens/mortgages, as average national home values drop past 70% of peak values and unemployment heads up towards (past?) 20% over the next several years.
I know how extreme this sounds, but the kind of relentless deflationary contraction we are likely to see as this mess unfolds will bring about exactly these kind of conditions.
Of course, I could be wrong, and we could have bottomed last fall.
Everyone who believes we are not poised to go over the waterfall, raise your right hand. I hope you are right.
January 19th, 2009 at 2:36 am
I will pay that inflated price resulting from overheated mortage lending, real estate markets and 30 to 1 Wall Street leveraging. I agreed to the price and I will pay it. However, I was also told I could refinance at a better rate at the end of a 3 year prepayment penalty period. 25% ($110,000) of that over priced value of the this property has already been received in interest by the Wall Street drivative lenders – poor dears. The prepayment penalty in our agreement requires this. Wall Street got theirs. Now that our credit scores meet the refinance requirements (720) there is not a lender around that will refinance. The property is upside down by almost 50% . Can you say “bait and switch?” If we are unable to work with lenders to obtain a reasonable loan (lower interest/40 years) – we will also be unable to provide for retirement. My special ed teacher wife and I are now on a path to spend our last years in financial destitution paying off this 10.8% note. Wall Street already helped themselves to 50% of retirement savings – so we need to re-double our savings efforts. With health issues we are feeling our age, however must somehow make it to 70 before retiring. Real Estate has not seen, in 80 years, a time when housing, nationwide, have lost such a large percent of value. Up until lately real estate was considered to be a sound investment. No one could have predicted a 50% loss in value. How many others like us out there. I estimate 20% of existing mortgages?
In the late 1940’s, our nation began to repaya 120% debt to gross domestic product 9(GDP) ratio after World War 2. It was done by a “middle class” economy of producers and taxpayers. Presently we are at only 100% of GDP. (Yes $14 trillion is a lot – but that is also our GDP capability) if we don’t let it slip. We can repay this also. I already stated that we will pay our note off, if it can be made do-able. So will the rest of the middle class. We don’t want to sack our debts. We want to pay them. Middle class America wants to live within their means, raise families, and enjoy stable lifestyles. When we save for retirement we will re-energize and re-build the stock markets. Empower the middle class. Lower interest rates and collect the full value of the loans for EVERYONE and get this problem behind us. Together, ALL of us can re-build the economy quicker than a just a FEW of us that were somehow more succesful or fortunate and have paid off houses. And your houses will be worth more. Can’t be stingy and make this work for just a few. All ships will rise on this tide.
January 19th, 2009 at 8:18 am
What gives you the impression that our collective minds are now tinkering with this thought? Maybe it’s a California thing but most people I know are stuck in the Woodstock spirit…
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I think it’s majorly a California thing 1st, then an American thing 2nd.
America is the 800 pound gorilla throwing its weight around and Americans don’t care about the effect it is having on the ROW. Generally speaking, I find Americans have been completely oblivious to what has been happeneing. Why would you worry when the world is at your beck and call? Us foreigners, no matter where tend the share the same opinions and see the world in pretty much the same way. I love reading blog comments because it makes me realize how out of touch Americans are and helps me understand their psyche a little better. It is so easy to tell apart the American posters from the foreigners. America takes up so much space that we can not do anything but follow.
So here in Canada, we’ve been talking about American excess for a LONG time but in the last 2 years the conversation has really taken a turn. These are some of the app0roached subjects…
1. Boomers saying they are happy they won’t be here when the environmental SHTF.
2. Parents thinking of having their kids learn mandarin to get an edge.
3. Skepticism towards the oil sands. Comments about the environmental devastation of Alberta. If you map out the announced projects, you will see that they could potentially mine a huge percentage of Alberta.
4. If 1 billion consumers can create such environemental havoc, imagine 2B and world population is going to 10 billion.
5. Muslim fertility and huge population gowth. In 15-20 years when these children grow up, will we end up with hundreds of angry men or will we be able to find jobs for them? Will they be emigrating to Canada? Will we be accepting Sharia?
4. In the best of times, they could not maintain our infrastructure, how is that going to change now that the economy is tanking AND that we don’t have enough trained engineers/scientists? Are we going to import them from China?
5. With the expansion of real estate in inhospitable areas, the US will surely find a way to get to our water.
6. With those hundreds of billions , the Chinese will fight for their rights. A shift in power must be happening from West ot East. That would implicate energy and resources.
7. From executives and blue collars: the middle class will contract or disappear as the world’s rich get more evenly distributed around the world and not only in developed countries. I don’t hear this so much from whitecollar/middle managers, I think 99% of them have bought into the idea that with a little more effort, they could be in the 1%.
January 19th, 2009 at 9:52 am
The was a similar article here in the Twin Cities yesterday. And why is this a shock to some people again?
January 19th, 2009 at 9:53 am
@SB: We are all insolvent now!
January 19th, 2009 at 10:38 am
When are our idiot leaders going to realize that they have to let housing prices drop to the market-clearing price instead of propping housing up?
If housing gets cheaper, Americans can work for lower wages. As commercial Real Estate declines, corporations will pay less rent. This makes American businesses more efficient and competitive with the rest of the world.
We MUST get more efficient. And the final step will have to be throwing off the yoke of excessive government taxation.
January 19th, 2009 at 11:18 am
I am thankful I am not underwater on my house, but if you are six figures under you have to seriously consider stopping payment on the mortgage. If you know you’re going to be in the house for 5+ years and you can afford the payments, keep at it, but otherwise it’s crazy and ultimately destructive.
If you know you will need to move and you won’t be able to sell the house, you may as well stop making payments and start saving for a downpayment for a new place or a rental deposit. If you can afford it, go and buy a new house before stopping payments on the old one. Otherwise, get your affairs in order such that you can avoid major credit purchases for 5-7 years (auto and furniture), live in the house as long as the bank will let you, and fight the foreclosure as much as the law permits. The sooner the credit gets ruined, the sooner it will roll off the record.