patrick.net

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?

@eburbed,

¡Compre mi pedazo demasiado caro de crap, usted gringo estúpido!

Can you point out to me the section in either of those articles where it says that Alt-A default rates are up? I did not read the entire 67 page billcara link, but it seems to say that lenders will be tightening up their standards, which is great, but not the same thing as saying that defaults will go up.

They could go up, and obviously Wall Street is worried about it, driving down the value of AHM's portfolio, but is it actually happening right now?

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.

Wow, so the Bay Area really is "special".

I really should be learning Spanish or Portuguese. It will open up a lot of opportunities.

eburbed,

Yes, that sounds about the same. Sunnyvale routinely ranks as one of the safest big cities in America, you know that right? I am not saying Redwood City is paradise or anything, but it is nothing like Oakland or Richmond (or even the rougher side of San Francisco).

"Sunnyvale routinely ranks as one of the safest big cities in America"

It also ranks as the most "Boring" God knows you may be close to work
if your a workaholic, 6-7 days a week and there are some out there.
But you can find better places to live...

On Friday, the Melville, N.Y.-based mortgage lender said it tried in March to sell a pool of Alt-A home loans, which carry better credit than subprime loans and worse credit than prime. Far fewer bidders offered materially lower prices for the loans, the company said.

Because of a cooling market for mortgage debt and a spike in payment defaults among Alt-A borrowers, American Home Mortgage Investment said it now expects profit of $3.75 to $4.25 per share this year. The company, which operates as a real estate investment trust, previously predicted $5.40 to $5.70 per share in 2007 profit.

http://www.businessweek.com/ap/financialnews/D8OD4B100.htm

Ah, there you go. Yes, that definitely looks bad.

So, it's both. Defaults are rising and the demand from Wall St. is drying up. This is happening to a very, very small extent on prime too. Credit crunches usually play out like this.

http://www.financialnews-us.com/?page=ushome&contentid=2447522020

I'm off to dinner but I'll check back in later tonight...

Sir Randall of H should get a kick out of this:

It's a buyer's market - like never before

"If you go to a lawyer or a doctor, you are paying a lot for that opinion," said Doreen Drew of Coldwell Banker Daisy Mountain. "But in real estate, they argue with you, even though they are paying huge amounts for you to sell their house."

My, but we *do* have a high opinion of ourselves, don't we?

FB: "I've got a bad case of overleverage and it's making me sick!"

"Dr." Doreen Drew: "What are your symptoms?"

FB: "Sleeplessness, stress, a general feeling of doom'n'gloom from that option-ARM reset staring me in the face. I just can't go on like this, doc. Is there anything you can do for me?"

"Dr." Doreen Drew: "Can you afford to sell or refinance into a FRM?"

FB: "Nah, I'm already at 120% LTV, plus the place has dropped 15% in value."

"Dr." Doreen Drew: "I think I have a solution for you, but it's not for the faint-hearted. Have you ever heard of 'organ donation'?"

Excellent point PAR about the extra credit lenders will want in a new, post-subprime/Alt-A disenchantment. I think it puts those of us with excellent credit and that [antiquainted] notion of 20% down at a good advantage, not to mention that such requirements will surely put pressure on sellers to lower the price somewhere within our realistic reach.

I'm thinking rather selfishly about the Tri-Valley area, where new homes are being built for a far as the eye can see. New supply along with used home supply will surely mount as fewer can qualify for the jumbo loans (even with 20% down). Who is going to buy them?

If it's play money based on a shaky loan application, nobody cares if it's a couple extra 100 thousand dollars (or much more). Appreciation cures all evils in that scenario. Not so when you're dealing with credible loans, borrowers with real money to risk, and a stagnating appreciation rate. I think that holds true even for appreciation rates which fall into historic norms of 2 -4% annually.

Is that indeed a historic norm? I sure as hell know 20% appreciation quarter over quarter verges on the psychotic.

Yes Jon, I'm wishful thinking that downpayments will go to 20%.

In your ven diagram, have you accounted for the correlation between autism and parents who are engineers, and the disproportionately high population of engineers in the Bay Area?

I see you have accurately accounted for the other populations. ;)

I get an ad/flyer about once a week for 50y mortgages. I summarily put them in my circular file. Not all of us of us on the sidelines are idiots. Still, fewer idiot buyers are fewer buyers overall.

Not to seem cynical, but... aw hell, when have I ever let that stop me? If someone had a 20% downpayment in the Bay Area, wouldn't it make more sense to move somewhere 1/3 as expensive with better schools and just buy a house outright? If I had $300,000, I would just buy a nice 1500 sf finished + 1000 sf unfinished house for $250K in Fort Collins, get a job at a local firm (sufficient tech jobs in the $40-50K/year range, less in the $60-90K/year range) and then bank my entire salary instead of paying it to mortgage interest. Better schools, safer, less expensive and I'm flush with cash.

theotherside Says:

> Here is an interesting article confirming that lenders
> will be trying VERY HARD to put struggling alt-a
> owners with decent job prospects into more affordable
> and predictable loans…

Keep in mind that “lenders” don’t put anyone in to a loan it is the “loan originators” and “mortgage brokers” that put people in to loans (and they will do what they can to fund as many loans as they can and with rare exceptions don’t care if a homeowner ever makes a single payment as long as they get paid a commission at loan funding)…

Some of us are wed to the tech economy... so moving away is tempting but not a total slam dunk.

It is a third world out there …. India is better than sunnyvale

Terminal C of SJC reminds me of the movie Raid on Entebbe. It looks like an African airport 30 years ago.

Some of us are wed to the tech economy… so moving away is tempting but not a total slam dunk.

The most important asset of the Bay Area is its restaurants. Other things can easily be duplicated elsewhere. (e.g. good weather can be created using broad-spectrum light sources)

Speaking of 3rd world appearances in the Bay Area, it wasn't until we moved to Boston that I realized how crummy most of the public schools, particularly the elementary schools look. It's only gotten worse. Even in the supposedly fantastic Palo Alto district, for example, most of the schools look like they haven't been updated since 1981. That's unless you count all the trailers put on their grounds for "temporary" classrooms.

And this is what all the masses are clammoring to send their kids to?

theotherside Says:

> I disagree that we will see a floods of NODs/
> foreclosures in Alt-A and prime loans in good
> locations were people have decent jobs prospects
> because the lenders will rework the loan terms

In the last down cycle banks (who held most loans) “couldn’t” rework the loan terms since the government will only let an FDIC insured bank hold a small number of real estate loans with a loan balance more than the home is worth…

In this down cycle MBS servicers (who hold most loans) “can’t” rework the terms (or do anything not allowed under the terms of the loan docs). The first loss bondholders will work with the special servicers to foreclose as fast as possible as soon as anyone goes in to default…

In the past decade anyone in the Bay Area that couldn’t afford the payments after a teaser rate adjusted could just sell their home at a profit. I know a lot of people with great jobs and great credit (so far) that will be in big trouble when they can’t afford the new payment and can’t sell…

"most of the schools look like they haven’t been updated since 1981"

Oh how right your are !! This is true in Santa Clara County. All the Lotto money didnt
make much of a dent.... Does anyone recall the whole idea behind the California Lotto
was to fund schools.. So much for that... LOL

Every time I eat out (every day) I am shocked by the 8.25% sales tax.

Why is the tax so high (the optimal rate is around 0%) yet the schools are so bad? We need to think long and think hard.

otherside, NODs are already starting to pile up.

http://flickr.com/photos/7409273@N03/453465468/

This is not seasonal fluctuation, like housing inventory for sale. Is this prime? subprime? alt a? I don't know. But the shear growth rates are staggering.

Fort Collins and Denver are unbearably too white and Christian for my taste. Other than steakhouses, not many good restaurants out there either. One exception is Sushi Den. Unbelievably good (and expensive) sushi for a location so far from any ocean.

It snowed on Easter Sunday in Fort Collins and the streets were very icy. One of my co-workers lives there and travels about 3 hours roundtrip each day to his job site in the Denver Tech Center.

Keep in mind, one can still be flush with cash in the Bay Area. It's called renting an apartment instead of renting money.

All comes down to what you're looking for in terms of lifestyle and culture.

Are you in the Denver area Brand? Let me know....I'm out there quite a lot, and visit the Den quite a bit too.

"Has anybody seen Sunnyvale downtown mall "

Sunnyvale is overrated. I can say that since I been here since 70s.
Needless to say not much has changed. Downtown was alot worst.

LowlySmartRenter says: It snowed on Easter Sunday in Fort Collins...

Yeah, and I went for a walk today (Monday) in only my T-shirt and jeans. It was probably high 50's or low 60's. More days of sun here per year than Miami. The snow rarely sticks on the road for more than a day or two, even in the dead of winter.

I keep hearing that Brand, but this last winter was a b*tch. That snow stuck real good, for several weeks in December and January. I have enjoyed the sun though. No fog in Denver. The sun is much more intense at that altitude too.

Yeah, hence the much higher incidence of skin cancer. Less atmosphere, more UV.

Anyway, I drive a rear-wheel drive sports car, and I didn't think this winter was anything challenging, even with a 30 minute commute. There were maybe 3 days when I just knocked off work because I didn't want to drive. But possibly that also had something to do with strapping two fiberglass sticks to my feet on two of those days... :o

Yes! I notice far more 'sick' days of my colleagues in Denver when the powder is particularly sweet. Beats driving 2+ hours to Tahoe in the same conditions.

My perception of Denver weather is skewed by the long drive from DIA and their horrific problems this last winter. All and all, Denver is a great place to call home. Just gotta get the right gear.

2 quick thoughts. Peter, I don't see any boundaries on subprime. I think those borrowers are just as likely to be the poser Hummer owning high rollers, as they are to be some low income minority 1st time starter home buyer.

2nd thought regarding this last TOS rebuttal. I tend to agree with TOS to a point about prime borrowers. I believe the majority of prime borrowers:
A. Didn't overextend, and probably have enough cushion to ride it out.
B. Being prime have the integrity to do anything to preserve a great credit rating.

That being said, tough times, job loss, and horrific price drops will lead to higher than normal prime defaults, but not in droves like the subprime guys. They are two very different animals.

That CNN blame game article that Patrick just sent out is pretty good. I still think appraisers are getting more blame than they deserve. Their job is only to put a current value on a house. When you have three people frantically bidding against each other that is a legitimate current value.

What I found most interesting is the last one, the borrowers. They referenced the outpouring of disagreement from readers from prior articles demanding that borrowers be responsible for their actions.

Obviously some bubbleheads have been paying attention.

Peter, I don’t see any boundaries on subprime.

Yep. Many professionals may get foreclosed upon.

Didn’t overextend, and probably have enough cushion to ride it out.

Hard to say. Many "prime" borrowers thought stretching to avoid getting priced-out was the right thing to do. If they had a warped picture of risk, they could very well be overextended.

Being prime have the integrity to do anything to preserve a great credit rating.

One needs a great credit rating to get into a reasonable mortgage. Once the dream of homeownership turns into a nightmare, the perception may change. They will do everything possible to keep the house though.