Negative Equity + Subprime = Default
By Barry Ritholtz - July 5th, 2009, 8:09AM
Gee, who would have ever guessed Negative Equity amongst subprime borrowers would lead to lots of foreclosures?
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Hat tip Zero Hedge
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Source:
Below the Line: Estimates of Negative Equity among Nonprime Mortgage Borrowers Andrew F. Haughwout and Ebiere Okah
NY Fed, July 1, 2009
http://newyorkfed.org/research/epr/forthcoming/0906haug.pdf
July 5th, 2009 at 8:37 am
What do you think this is going to look like when they lend out 120%, then house prices drop another 30%?…
July 5th, 2009 at 9:06 am
cvienne-
they don’t care- this way it looks like they are doing something to solve the “foreclosure” problem and help those who are in adjustable rate products that will adjust and make payment’s unaffordable- regardless that it locks in the principle balance- my impression is the 125’s will have ZERO impact- and that very few people will take advantage and those that do will just re-default as has happened on loan modification programs already-
essentially only delaying the inevitable
July 5th, 2009 at 9:08 am
1/3 of the US population lives in those cities, and, by a quick and dirty mental weighted average, I figure 40% of the homes in those areas display negative equity. And yet, chart 7 is negatively skewed with a much lower percentage of negative equity on the whole. Why the discrepancy?
Also, Barry , you ever done any looking into how many homes have to have negative equity in a market before the market enters a death spiral? I mean, at some point, some of these markets are going to have to prevent builders from building ANYTHING for years just to burn through the unsold inventory, and even then, you’ve only put a floor under prices. How long does it take to get moving positive again?
On my street here in Tampa, seven of the twenty homes are now in foreclosure, and I get the impression they’ll come 70% off their peak values before any sort of settling can begin (hence why we rent)
July 5th, 2009 at 9:17 am
Teasing out sub-prime data seems less useful than here-to-for now that Alt-A and Prime loans are showing similar patterns of decay; e.g, http://tinyurl.com/nq7t54 and http://tinyurl.com/mvyb76
“We are all sub-prime now.”
July 5th, 2009 at 9:29 am
Actually Byno, that is a brilliant idea. Maybe governments, in order to raise revenue, should skyrocket the cost of building permits. That way if the banks won’t make the cost of mortgages prohibitively expensive for reckless builders, maybe fees will. The downside is it will kill the building side of the RE market for a while. It does have quite a few upsides though. Fee revenue, community control of growth back from the bankers, true justification of projects instead of funny money justification of projects.
In the future that sounds like a great way to take back control of communities from the Federal Reserve and the banking system. The ‘free money’ will be going out from the banking system and into the local government instead of it usually going the other way. LOL! The more I think of it the more I like it. Having the cash go to the local government may not be the best solution but it is better than having the cash flow out of the community and across the country to New York (nothing personal there Gotham
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July 5th, 2009 at 1:13 pm
There have been numerous houses go up in flames in my area. Now that’s burning off inventory. You used to here the fire trucks 1 or 2 times a week. Now its everyday.
July 5th, 2009 at 1:52 pm
When the folks with negative equity default, the resulting foreclosures reduce house prices more. That shifts more borrowers from right to left in chart 7. And since so *many* are sitting right at or near “0″, it means each wave of foreclosures can “tip the next group over” like dominoes. Or, like a string of climbers tied to one rope, each falling over the cliff and pulling the next climber with him/her. (That one might make for a decent cartoon. Unfortunately, I can’t draw.)
Could be wrong. But, my guess is the tight grouping of equity percentages makes it easier for one wave/domino to affect the next.
July 5th, 2009 at 2:25 pm
No Savings + Layoff also = FORECLOSURE
July 5th, 2009 at 2:32 pm
Steve
And for many the rational economic decision is becoming to stop paying and go to foreclosure before burning through all savings. When you’re so far underwater why throw good money after bad and drain yourself of all savings, especially if you’ve lost your job. It’s a tough decision for many to make and I’m certainly glad I’m not faced with it, but I’m really sympathetic to those who are that didn’t get themselves into that position through a liar loan or other irresponsible borrowing actions.
July 5th, 2009 at 3:36 pm
@Onlooker
“And for many the rational economic decision is becoming to stop paying and go to foreclosure before burning through all savings. ”
And I think the rational decision for banks is to foreclose on people right now and not be very cooperative about loan mods. This will force the feds hand and I think the fed will buy the assets on the books off at much higher value than they can get on the open market. Since I think the Fed will use printed money to do this I think they will write down the value of the mortgages and pass that on to the homeowner.
I don’t think the fed particularly wants to do this but I think they will do anything possible to stop deflation. The savers of the world will be screwed again.
July 6th, 2009 at 12:25 am
I think what would be really cool is to see an animated version of chart 7 going back 5 years or so. I assume the ‘wave’ is going backwards. Putting some action it is would look neat none the less
July 6th, 2009 at 7:12 am
There’s going to be a tipping point when even those who can afford to pay will also leave the keys in the mailbox.
July 6th, 2009 at 10:40 am
Can anyone explain to me why this is the case (Negative Equity + Subprime = Default)
July 6th, 2009 at 11:10 am
ahab, cvienne;
The people they are giving those 120% refinancings to are people in Fannie and Freddie loans. They have simply made a business decision that it is better for government to save those people into an underwater mortgage than to forclose on them and sell the property with a huge loss for government (and depressing RE prices in the process). I think it is a smart move; in the big picture. Even if some % of those refinanced will eventually default with a bigger loss that % would have to be very high to make the overall losses bigger..