patrick.net

You would make a splendid cruel oriental despot.

Huh?

Funny - someone posted a link to that lame money.cnn.com article about the subprime "blame game" and how they neglected to include the damn borrowers in shouldering some of the blame. Well, they've edited the story after apparently a slew of irate reader responses saying how pathetic it was to neglect the borrower's responsibility:

http://money.cnn.com/galleries/2007/real_estate/0704/gallery.paly_the_subprime_blame_game/index.html

Very funny.

"How about a day without a FB?"

How I long for that day! Imagine a world where going some place on the weekend is once again something special, with about half the traffic?

skibum,

FAIK your description of sub prime areas may well be right on the money. Yet I have my reservations. In any neighborhood there are people that can well afford to live there and then there are those that are posing.

I just don't know if everything will be as "tidy" as you describe?

DinOR,

Yeah, I agree that it's never that "tidy" a division. There are always posers trying to live above their means, especially in the wonderful Republic of Kalifornia. I think there will be clearly areas less hit by the fallout and those hit harder. As PAR cited, most of the recent mortgage products issued are either subprime or Alt-A. If only 20% of recent mortgages are prime, I doubt all 20% will be concentrated in the prime locations.

@skibum,

Agreed, likely as not I'm thinking "the fallout" has as much to do with "when" you bought as "how" you bought. I'm sure there are areas that will be almost completely unscathed.

The Economist (March 22nd) describes subprime borrower as follows:

"In America these people are, not surprisingly, poorer (and less likely to be white) than those who can obtain mortgages at lower, usually fixed rates. "

Some more juicy tidbits from that issue:
- on March 13th the Mortgage Bankers Association reported that 13% of subprime borrowers were behind on their payments.
- 80% of subprime loans made in 2006 included low “teaser” rates;
- almost eight out of ten Alt-A loans were “liar loans”;
- loan-to-value ratios were often over 90% with a second piggy-bank loan routinely thrown in.
- 40% of all originations last year were subprime or Alt-A.
- 60% of all adjustable-rate loans made since 2004 will be reset to payments that will be 25% higher or more; a fifth will see monthly payments soar by 50% or more.

Some other interesting quotes:
- "The suffering will be concentrated: only 7% of mainstream adjustable mortgages will be affected, whereas one in three of the recent “teaser” loans will end in default. The harshest year will be 2008, when many mortgages will be reset and few borrowers will have much equity. "

- "A glut of unsold homes will also push down prices, particularly in areas such as California and Florida, which had a disproportionate share of riskier loans. "

skibum-
I can cite one home in Los Gatos which was valued at $350K or so in 1997, I knew the owner. I saw the same home sell for $1.3M back in 2003, it many be considered to be valued much higher today. However I did come across the same home on Realtrac has going into foreclosure this year.

Shocker!!!!

I also see some homes going to Forclosure in prime areas of SC... Palo Altos, Los Gatos, and Saratoga. The RT listed some of these homes with Loan outstanding of $1M+

I also see many 750-950K homes as well, based on my memory or prices these homes are much smaller and around 2000 sq ft and I would say were valued at under $225K. Some are close to Stanford U in PA.

My 2 cents...

skibum Says:

> Prime: The rest of it, including “prime” SF, Hillsborough,
> Burlingame, “prime” Menlo Park and Palo Alto,

I don’t have any actual #s in front of me, but in the in the early 90’s when I looked at sheets of REO property coming over the fax form many banks the #1 city on the Peninsula for SFH REOs was often Hillsborough…

"The harshest year will be 2008"

Bummer. You mean it gets worse?

Skibum, from your link:

This means that the borrower's credit score is not quite where it should be, or they are not fully documenting their application, or there is something a little out of the ordinary with the deal.

Notice these conditions are all "or" conditions. A lower FICO that's not quite subprime can put you into this category, but you can still have an 800 and fall into Alt-A, if your loan does not meet other criteria.

Something "a little out of the ordinary" is another way of saying "non-conforming". Alt-A is anything that would not conform to fannie/freddie standards AND has an above-subprime FICO. (Below subprime FICO would obviously make the loan subprime...) Conforming is important for the bond market because they have tons of data on how well conforming loans will react once stress tested, thanks to fannie/freddie selling into the secondary market for years.

Bay Area is infested with Alt-A because just about nothing conforms here. (Tip: you need a principal balance under $417k. Good luck making that happen.)

LowlySmart quotes The Economist:
40% of all originations last year were subprime or Alt-A.

Keep in mind that this is a national figure. Much worse here, specifically. Closer to 80% over the last three years in the Bay Area.

I think the supply will determine the extent of drop.

Anything along the western foothill will be more protected, to a certain degree, because the lots are simply bigger. If you look at any SFH from Palo Alto to Los Gatos (or even down to Alamaden along McKean Road) west of 85, most of the lots are 8000 sft if not larger, and there is no shortage of acre+ properties. Larger lot size=less supply.

If you look on foreclosure.com, at least for now, the not-so-prime areas seem to have far more foreclosures and pre-foreclosures. Foreclosure means the seller has to sell. Lots of homeowners in prime spots who bought in the last few years are likely to be under water, but as long as they can hold on to their homes, the impact on local housing price can be mitigated. It is the foreclosures and must-sell cases (divorce, relocation) that will drive the price down.

Most of South Bay will be quite hard hit, but I am going to mention a few more"prime spots" that I believe will be just as badly hit as the subprime:
Cupertino east of 85 in the Cupertino High district
Saratoga east of 85 NOT in the Lynbrook district
Eastern Los Gatos along 85 NOT in the LG school district

I'm more interested in what percentage of Alt-A's were ARMs. The people who took out prime ARMs have a reset period of (typically) 5 years or even 10. That's at least enough time for inflation to eat at the debt and wages to go up enough to qualify for a new loan if need be, or just accept the adjustment.

Alt-A ARMs typically had a 2 year reset. Those could be brutal.

Saratoga east of 85 NOT in the Lynbrook district
Eastern Los Gatos along 85 NOT in the LG school district

Excellent!

I wish I can buy a house without school "rights."

Randy H Says:

> Here’s a hint. If your life sucked, you know, your life
> just really blew… Then perhaps you’d want a Second
> chance where you could pretend your Life was that of
> FAB’s, only with custom designed women and cars, all
> exhibiting cartoonish proportions.

I bet most of the people in Second Life have more fun than I do in Real Life (like this past weekend when I worked all Saturday morning before driving up to the apartments in Sacramento with a SUV full of crap from HD Supply then worked all Easter Sunday morning before driving to the Peninsula for Easter dinner)…

"just about nothing conforms here"

Sounds disaster prone to me!

Yes, this is the $64,000 question: will the default rate for Alt-A go up? I tend to think not: most Alt-A borrowers are people with jobs and good credit histories. Are they going to ruin their credit for seven years just because they are upside down on a mortgage? I don't think so, but I am obviously in the minority here.

FAB,

Sounds more interesting than gym. Maybe you can sell apt restoration as a class to yuppies.

"but as long as they can hold on to their homes"

What makes you think they'll WANT to!?!

I think Hello Kitty worked in the lending field during the mid-90's and said that people that were as little as 10-15% under water were just walking away. They figure that renting an identical place was so much cheaper they'd just go that route.

That was you HK, wasn't it?

Are they going to ruin their credit for seven years just because they are upside down on a mortgage? I don’t think so, but I am obviously in the minority here.

They may have good jobs but that can still have homes that are too good for them. Once they are unable to extract home equity to pay for their mortgages, all is lost.

Tack on energy costs, ridiculous property taxes, etc.

Actually, allah has convinced me that the property tax here isn't that bad. Prop 13 really does help homeowners (at the cost of children and society).

Most recent buyers have not been very conservative, you know. You are right that they will try to hold on though. With credit contracting, it is becoming difficult.

Actually, allah has convinced me that the property tax here isn’t that bad. Prop 13 really does help homeowners (at the cost of children and society).

I hate prop 13 because it interferes with market processes. Why should homeowners be protected? No one deserves protection from market forces.

Similarly, rent control is evil. But I am tired from saying that. Different Sean will come back and say that I am evil.

@eburbed,

I wouldn't even THINK of buying a house that didn't have power steering! :)

In Chicago the condo market is beyond dead!

I went to check out an open house on Sat. for a condo auction open house. The sellers rep. said they had planned to auction 12 units but now its 17. I guess 5 couldn't even close. A friend went over and asked about the auction and they said don't bother I have foreclosures in the building you can buy.

http://www.ricklevin.com/REAuctionDetail.asp?val=177

"Yes, this is the $64,000 question: will the default rate for Alt-A go up? I tend to think not: most Alt-A borrowers are people with jobs and good credit histories."

Actually, lenders will look for job history in which borrower held a job at one place for 5 years or more. If not you become a risky borrowers, and since the typical job history in SV is more around 2-2.5 years at one place i can see many as being more risk. But than again this is very typical around in Tech Land. Overall credit risk is rather high.

eburbed,

That neighborhood isn't really *that* bad, though I would not personally want to live there. When me and my wife first started dating, she was living on Maple St, about half a mile north of there and on our walks, we would routinely walk around that neighborhood. That areas is definitely Blue Collar, but it did not strike me as being especially high crime: I saw lots of little kids running around and stuff.

Maybe it has changed in the last four years though: after we moved to The City, we never went back to visit or anything.

@FAB,

Yes, but at least in Real Life *you* are financially solvent, well housed and can afford to retire.

NOD? What does that mean?

SP - yea I wont mind seeing that in Los Gatos, very overpriced well beyond fundementals.

PAR-
Aside FICO, you need to factor in Job History.
That will also tac on risk. If we recall the liar loans
also lied about job history not just salaries $$$.

Here is some news from the PRB.

Patrick Kennedy and David Teece—Berkeley’s biggest private landlords—are selling their seven signature apartment buildings to a Chicago-based corporation.
....
Money matters

The sale likely means a huge windfall for Kennedy and his principal partner, UC Berkeley Professor of Economics David Teece, a New Zealand native who has made millions from LECG, a consulting firm he built up, and from a business that sells rugby clothing in his homeland and Australia. One of his homes is a costly house in the Berkeley hills above the Claremont Hotel.
http://www.berkeleydailyplanet.com/article.cfm?issue=04-06-07&storyID=26725

NOD? What does that mean?

Notice Of Default. An acronym lots of FBs will be familiar with in coming years.

sfbubblebuyer, here's a good slicing and dicing of the data for the Bay Area:

http://www.billcara.com/CS%20Mar%2012%202007%20Mortgage%20and%20Housing.pdf

Jimbo, the Alt-A default rate is already rising. Read S&P's comments regarding M&T bank and American Home Mortgage. Both are NOT subprime lenders:

http://www.businessweek.com/investor/content/apr2007/pi20070409_186749.htm

Jimbo

That neighborhood isn’t really *that* bad, though I would not personally want to live there. When me and my wife first started dating, she was living on Maple St, about half a mile north of there and on our walks, we would routinely walk around that neighborhood.

Maybe I'm just spoiled then by living in/around Sunnyvale for so long.

When I was there this weekend:
1) The street had 0 parking spots left - every inch was taken up by a van, or a pick up truck with landscaping equipment. I think I saw like 1 sedan.

2) Most properties had huge gates/fences.

3) As I was leaving, the person in the lowered el camino? car who was turning in gave me a damn cold stare. (I've lived in some very shady East Coast places - I know exactly what that look was...).

I suspect Spanish is the primary language on that street - being that I don't speak any, that would probably be poor neighborly relations. :(

I think you're all on the right track here but you're focusing too much on the seller's finances and not enough on the mortgage market. Let's shift over and take a look at demand rather than supply, shall we?

The secondary mortgage market is blowing up now. Subprime is completely and thoroughly whacked. Alt-A is in the process of getting whacked. What does this mean to us? It means that any area that is heavily dependent on these two types of financing (all non-prime or, if you prefer, subprime + alt a) will find it increasingly more difficult to even QUALIFY FOR A LOAN without paying through the nose. Bay Area real estate financing is essentially a junk bond market at the end of the day. We are currently reliant on these junk bonds to the tune of 80% of originations.

My point is, it won't matter how good the current owner's FICO score is or his likelihood of default. Sure it would be great (for me) if half the people in Palo Alto went into default. What matters more is: how many buyers will now qualify under this increasingly more difficult "credit crunch" scenario? If the secondary market now wants a couple more percentage points to compensate for risk (and they do) then we can't play affordability tricks with unconventional loans anymore, even if we want to do so.

PAR,

You're absolutely right. This expanded credit accounted for much of the runup in demand during the boom times, and its contraction will account for much of the loss in demand.

No doubt many here would decry this as left wing propaganda, but: http://www.newyorker.com/talk/2007/04/16/070416ta_talk_surowiecki

Good point, PAR.

OT: is there any man here playing golf with ladies' clubs.

I love my wife's clubs. I seem to be able to hit better with them. Is it a weight issue or a length issue?