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Worsening housing market seen for the state
Loan resets will dim forecast, forum is told
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More from Local NewsSACRAMENTO — Home foreclosures in California rose 600 percent over the last year and the situation "is likely to get much worse before it gets better," the state director for the Center for Responsible Lending told legislative staff members Monday.
The darker cloud on the horizon, said Paul Leonard, is the volume of subprime, adjustable-rate mortgages with interest rates that will reset dramatically upward next year.
While the dollar volume of those mortgage resets averaged about $8 billion a month this year, the total will spike to more than $10 billion a month beginning in March and remain at about that level until it peaks at almost $12 billion in October. Leonard estimates 500,000 such loans will reset over the next 18 months.
These were so-called "2/28" loans that were issued in 2006 during the final months of the California housing boon. They were set at an initial interest rate of about 7 percent for the first two years, and then scheduled to adjust annually for the next 28 years, tied to an index that will put the new interest rate at about 12 percent. That will result in monthly mortgage payments at least 30 percent higher, Leonard said.
"There was, by design, a very large jump in mortgage payments, on the order of 30 percent to 40 percent," he said.
"These loans were designed to be refinanced before the 25th month. That was possible because California's housing market was growing at 10 percent, 15 percent, 20 percent per year. Borrowers could afford to refinance regardless of what was happening with their income."
Now that housing prices are in retreat and credit markets have tightened, those borrowers have no ability to refinance the loans and are facing higher mortgage payments many cannot afford.
Leonard noted that federal Housing and Urban Development Secretary Alphonso Jackson projects at least 25 percent of loan resets will result in foreclosures.
"It will take several months for the effects of those resets to play out," Leonard said. "It means this state will be in the housing doldrums through 2009."
Leonard spoke at a policy forum in the state Capitol sponsored by the New America Foundation, an event attended largely by staff members who work for state lawmakers.
He called on the Legislature to implement extensive new regulations on lenders, including a ban on the prepayment penalties that were the profit-generators that inspired these types of loans. Since lenders expected that these loans would be refinanced before the burdensome, higher rates kicked in, they included prepayment penalties equal to six months of interest payments.
Leonard also said lawmakers should enact other regulations in response to what he called "a tsunami of foreclosures." Among his recommendations: a ban on "stated income loans" that would require instead that lenders and brokers verify a borrower's income and ability to repay loans at the fully indexed rate, and a requirement that subprime loans include impoundment accounts that collect property taxes and insurance premiums month by month.
Because the adjustable-rate mortgages that are about to reset at higher rates are valid contracts, government cannot retroactively change those terms, he said. To prevent a new wave of foreclosures next year will take voluntary action on the part of lenders and loan service companies.
Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., has called on the industry to automatically restructure all 2/28 subprime hybrid loans for owner-occupied homes in which the borrower is current on his payments.
In an essay published in the New York Times last month, Bair said the mortgage industry could save billions in foreclosure costs by fixing those loans at their existing interest rates. "The mortgage crisis is growing, and the mortgage industry has the ability to help solve much of it on its own," she wrote. "In today's troubled housing market, widespread foreclosures will only maximize losses for servicers."
A study published last week by the Center for Responsible Lending concluded that all homeowners are hurt by high foreclosure rates, especially those who own properties in neighborhoods where foreclosures are concentrated.
"For every foreclosure in a neighborhood, every house within one-eighth of a mile experiences a .9 percent reduction in housing costs," Leonard said. "The costs of foreclosures are not limited to those who are losing their homes."
Posted by dcsfancy on November 20, 2007 at 6:36 a.m. (Suggest removal)
It is only the beginning. Wake up all who are in denial. The recession is coming. In fact I think it is here.
Posted by ecarson1958 on November 20, 2007 at 8:29 a.m. (Suggest removal)
I have a big problem with the State Legislatures trying to fix the problem. They're blaming the lending industry for allowing people the opportunity to own a home, on stated income only, sometimes with no money down. The lenders told the borrowers that in a couple of years they would need to pay more money each month for the house payments. But since the stated income on the loan application was fraudulent, there wasn't going to be any more money for the house payments. I believe that the majority of most of the borrowers were both hoping and thinking that things would get better at work, or maybe the wife could take on extra work. Anything to find the way to pay the additional amount needed for the house payments. Then after moving into the house, and since in some cases it was a first time home, the reality of all of the additional expenses of owning a home came into focus. The feeling of finally being a Homeowner, thanks to the nice lending people giving them all of the money to move into the new house, wasn't so great after all. Both parents are stressed out because they work longer hours, and have no money now since the rent they used to pay every month was $1900 a month less then the new house payment now. And now they're finding out that what they thought about the house being worth more than what they paid a year earlier wasn't true anymore. They were going to be stuck paying those ever increasing monthly mortgage payments. This is not the fault of the lenders. They were only trying to help people with the opportunity to own a home. Obviously, the money was only a loan and the lending institution was going to make money.
The couple in the above story is being duplicated hundreds of thousands of times. The general public has created this problem by stupidity, greed, a lack of foresight and intuition. I say to the legislatures, fix the way people are educated here first, then they will have the intelligence to make the rational decisions needed when someone is handing you the keys to a $400,000 home, and telling you that every month you will need to make your house payment. Then with some clear headed thinking the borrowers can tell the lender that in two years when the interest rate resets they're probably not going to afford to pay the higher payments. Thanks, but no thanks.
Posted by Fay_Buddha on November 20, 2007 at 9:15 a.m. (Suggest removal)
Wow is all I got to say. It is worse than I thought with ARMs resetting at twice their rates. But then people have been told they can afford it and if they are willing to research a little they will know they cant afford to buy a home.
IE
Dataquick has VTA's median home price at $535,000 for Oct 07
if you plug in the numbers for a 30 fixed loan at 6% you are paying about $3k/month and that is not taking into account Insurance, HOA's, Taxes or Mello-Roos
taking into account you should not spend more than 28%-30% of you income on your housing you need to be making more than $120K/year
a few days ago the Star had the median income for VTA at ~$80K so right off the bat the median family in VTA is priced out of the market
Posted by lthrnek on November 20, 2007 at 10:07 a.m. (Suggest removal)
Back in the old days, we had trustworthy Better Business Bureaus and Chambers of Commerce that tried to ride herd on unethical business practices in the community. Those days are apparently gone forever. Today, our business world is filled with shiesters and there's still a sucker born every minute.
Posted by Fred on November 20, 2007 at 3:04 p.m. (Suggest removal)
It is about to get really ugly..... the rollercoaster has started dropping and now we can see that the bottom is really far away and all we can do is hold on tight.
Unfortunately, this is exactly what is needed. Prices need to reset to 2001 levels, the sooner, the better.
Posted by surfing93035 on November 20, 2007 at 4:24 p.m. (Suggest removal)
tsu.lee is right. To afford a $400K home you need a household income of $120k..period..what we have here is a bunch of people living way way above their means getting loans on homes they couldn't afford and had no business buying. This caused a wave of bad loans and artificially drove the house price up and out of control. 3 bdrm tract homes with 1800 - 2200 SQ feet selling for $600K when they were really only worth $350K max. Now add the greedy folks who refinanced and took the money and either bought high priced homes, or went on trips or bought cars, they are screwed too. Too bad so sad.
Posted by Twslv05 on November 20, 2007 at 6 p.m. (Suggest removal)
ecarson1958 and tsu.lee are right on the money !!
It is amazing to me that the whole idea that the state can step in to save these poor folks from losing thier home is just as irresponsible as the lending practices that were used when they signed on the dotted line.
Most of these borrowers knew exactly what they doing when thier loans were given along with the consequeces of future interest spikes.
So why should me or you the average taxpayer have to subsidise such irreponsibility here?
In 2003 less than 15% of Ventura County households could afford the median house price of $400,000 only to have that number shrink to less than 7% when the market peaked at $635,000 but loans were given at record rates.
The whole real estate circus was fueled by greed not the American Dream it should have.
The market has been "Flipped" now it is going to flop and the only ones who should pay are the Irresponible lenders and borrowers who participated in this fraudulent get rich frenzy.
Posted by desdave on November 20, 2007 at 7:44 p.m. (Suggest removal)
Prices went crazy, and quickly rose above what most families could realistically afford. The finance industry makes money by issueing new loans, so to keep business coming in they came up with these wacky loans that allowed people to buy houses way above their budget. Anyone who bought the line that prices would keep going up and they would be able to refine didn't pay any attention to the history of boom bust in the ca. housing market. Shame on the mortgage industry and ill informed buyers. Now we have houses prices above median income, and no more "creative" loans. So, now houses aren't selling, and I don't think anything but a dramatic drop in prices will fix it. The number of families that can make a $3500 house payment is very small. Big mess, no clear answer.
Posted by AutumnRose on November 20, 2007 at 8:04 p.m. (Suggest removal)
DJKnows - I wonder if they'll even be able to qualify for a rental. Just to rent some hovel, you need paycheck stubs, a credit check, and references. And if your credit isn't sparkling, good luck!
That's what I could not understand about that "take your word for it" home loan access. How could it be easier to pass muster to buy a house than to rent one? Guess that added to the appeal, huh?
Posted by tiny_housing_bubbles on November 20, 2007 at 10:10 p.m. (Suggest removal)
Just look on cable TV at all the reality shows about flipping homes. High school grads (if that) making tens and hundreds of thousands in just a few weeks with little real work. Anyone can do it. Show up when you want, set your own schedule and be your own boss!! No money down and no risk. Finance the refurb on your credit card, or stretch your contractor and the trade until you sell for the big number! Lie about your income; lie about your assets. Lenders don't care; and it really doesn't matter anyway since real estate prices in CA never go down. They are not making any more land, you know. There is lots of pent up demand now, so this is the perfect time to buy!! The economy is strong and thousands of people are constantly moving into the state, so money is rock solid in real estate. Can't lose. CFC on the verge of BK? nah... couldn't be. Wamu dedicating billions out of the kindness of their hearts to "helping" borrowers refi into loans they can somehow afford? Yeah, that'l work. IndyMac taking write downs and cutting dividend. Freddie Mac taking on water and FNM with no idea if it is in the money or insolvent. Just starting, my friends; just starting. And I say burn, baby burn! One year from now the local median price will be at least 20% lower than it is today. There is absolutely no support for today's prices - purely a function of easy liquidity, unforgivable lending practices, morons for borrowers and greed. Don't confuse pent up demand with pent up frustration. Morons no longer can lie about income and borrow what they want, therefore fewer buyers at every level and prices will crater. Smart sellers will sell quickly and the morons will "hang tough" and watch paper gains evaporate (or short-sale 1099 income go through the roof!). This is just the beginning.
Posted by ecarson1958 on November 21, 2007 at 7:57 a.m. (Suggest removal)
Folks, there is one huge equation to the necessity of the Government stepping in to help the over extended borrowers on the verge of bankruptcy. PROPERTY TAXES!!! You think there are problems now? The money that is going to be lost from property taxes will be so great that local county governments will probably start filing for BK. All county governments have the same problem. Their pension fund expenditures will far outpace their ability to meet their obligations for the retired baby boomers. A majority of counties had investments in the stock market which tanked back in the late nineties. The shortfall was so extreme that the governors of many states needed to go to the feds for a solution. Wah La! Lower the interest rates as far as necessary to stimulate the housing market, increase the values, and then the big one, higher PROPERTY TAXES. And just a couple of years ago all of the counties were counting their money and praising their good fortune. Well it backfired. It won't be long before we start reading and hearing about the problems that the retirees are having because they are not receiving their full pension checks and in some cases not at all. This is the beginning of the collapse of the local governments.
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