March 6, 2007
Just Quotes: From Easy (Money) To Hard (Times) In Subprime
“We made so much money you couldn’t believe it. And you didn’t have to do anything. You just had to show up.”
“Now an escalating crisis in the market, which seemed to reach a new crescendo late last week, is threatening a wide band of people. Foremost are the poor and minority homeowners who used easy credit to buy houses that are turning out to be too expensive for them now that mortgage rates are going up, but the pain is also being felt widely throughout the business world.”
∙ Mortgage Crisis Spirals, and Casualties Mount [New York Times]
First Published: March 6, 2007 5:50 AM
Comments from "Plugged In" Readers
The Chronicle had an article about this today as well, specifically referencing rising foreclosures in the Bay Area. Interesting thing to note is that these problems are all surfacing now, and the majority of ARMs have yet to adjust this year.
Posted by: Dude at March 6, 2007 8:28 AM
So a question: when we talk about ARMs adjusting and the increasingly frail shape of the subprime lending market (or, more accurately, the sub-prime borrowers themselves), does anyone have an idea (fact or conjecture) which SF markets may be harder hit? I think it's a semi-reasonable assumption that some areas will be more affected than others, but wanted to toss that out there for feedback.
I would think SOMA/South Beach, but that's mere speculation from an outsider. Thoughts?
Posted by: Irrational Exuberance at March 6, 2007 9:19 AM
I don't believe any source tracks subprime lending stats by zip code, if that's what you're asking, but maybe somebody out there has this info?
My guess is that, as lending standards tighten, fewer people in general will be able to qualify for loans of any type, be it subprime, prime, conventional, or I/O. So the pool of buyers is reduced, which puts downward pressure on the general market.
Obviously cities like San Francisco, which have higher incomes and lower supply compared to, say, Sacramento or Modesto, will see less fallout. Home values here won't fall 20% in a few months, like they have on the outskirts of Sacramento.
But why should SOMA suffer more than other neighborhoods? If you're in the market for a condo, would you rather pay $1,000/sq. ft. in the Marina or Pac Heights for an 80 year old building, or $700/sq. ft. for something brand new in SOMA with views and a garage?
Tangentially, this is not just limited to subprime. Several lenders are no longer offering piggyback loans for prime borrowers. That means down payments are coming back. Cash will soon be king again, regardless of your FICO. Again, just my conjecture.
Posted by: Dude at March 6, 2007 10:28 AM
From Paul Kedrosky blog:
"The median price of an existing, single family detached home in the state jumped from $241,350 in 2001 to $524,020 in 2005. Meanwhile, home purchases using adjustable-rate mortgages (ARMs) for financing nearly quadrupled (from approximately 20% to 80%)"
Now … assuming that SF trend is similar to that of California I assume that there are a lot of ARM out there in all SF districts. In a near future Foreclosures should go up, access to loans should go down; inventory should build up (foreclosures + condos coming online) ... oversupply + less buyers = price decrease
I agree that the first areas to go will be burbs + east bay but it will hit also SF.
[Editor's Note: From the SocketSite archives (May 2005): “…in 2002 less than 20% of property purchases in San Francisco utilized interest-only mortgages. In 2005? Nearly 70%.” The use of ARMs, however, has recently been trending down as the spread between short-term and long-term money has narrowed.]
Posted by: il_guru at March 6, 2007 12:38 PM
According to the Contra Costa Times, option ARMs accounted for 38% of all refi's in the Bay Area by December 2006.
This is going to get worse before it gets better.
Posted by: Dude at March 6, 2007 2:53 PM
I think the market is a mixed bag at the moment. I have seen properties languish for months, watching the seller gradually drop prices downwards or withdraw altogether but it can still be very competitive. Interest rates are ridiculously low. 30 year fixed is below 6%!
I just put an offer on a house in an affluent Oakland neighborhood and the listing agent received 5 offers the day after the first open house. According to my agent all the buyers came to the party with a down payment in the 20-50% range. Unfortunately I didn’t get the house and I suspect it will eventually go 15%-20% over asking. Buyers are being selective but if the right property comes along there is still plenty of cash and people are very aggressive!
Logic tends to suggest that the less expensive neighborhoods in the Bay Area will be effected by the sub-prime melt down. I’m not going to name places but I don’t think it’s too difficult to figure out. It’s unfortunate because poorer people who were ill advised to purchase in the first place and were subject to predatory lending may be financially ruined.
Posted by: Willow at March 6, 2007 4:34 PM
Actually, it will get better before it gets worse, as the last of the sub prime borrowers realize the window is closing for them and they jump through it.
And logic actually dictates that it will be all neighborhoods, not just the poorer ones that will be affected. A lot of people have bad credit because they want the best of everything, just outside of their means, and that behavior reaches all price points. People who live within their means buy a lot of Chevys. People who get in over their heads buy a lot of BMWs. That isn't to say the Chevy drivers can't get in over their heads and BMW drivers are living within their means, but it will reach all levels.
And maybe those five buyers the previous poster discussed had 20-50% down, but that's not how the number of sales and prices got to be where they are. On the other hand people are always buying if the price is right.
Posted by: tipster at March 6, 2007 7:44 PM
I'm a former loan officer in the sub-prime area, so I can speak from experience.
The fallout won't be hardest in the South Beach area or any of the more affluent parts of SF. The distinction here is that subprime loans are different than interest-only loans. Subprime loans are typically for people with poor credit and a great deal of debt and cannot find a loan elsewhere. They typically found rates of 10%+ or maybe down to 8% when rates hit their lows. These types of people are more commonly found in the poorer areas to working class parts of the city (bayview, balboa park, sunset, etc). Sure, they will be scattered throughout, but in lower numbers in South Beach. A mortgage in South Beach would typically require a "jumbo" loan, which is normally reserved to people with A-paper (i.e. high credit scores, low debt).
Now, we may see foreclosures in South Beach due to the prevalance of interest-only loans, but this is not sub-prime.
Posted by: Anonymous at March 7, 2007 4:18 PM
I think houses in the sunset or mission terrace will require jumbo loans even with 20% down. Bayview, maybe not.
Posted by: Anonymous at March 12, 2007 6:30 PM