U.S. Foreclosure Rates: February 2008 (Image Source: Bloomberg)
U.S. home foreclosure filings jumped 60 percent and bank seizures more than doubled in February as rates on adjustable mortgages rose and property owners were unable to sell or refinance amid falling prices….About $460 billion of adjustable-rate mortgages are scheduled to reset this year and another $420 billion will rise in 2011, according to New York-based analysts at Citigroup Inc.”
U.S. Home Defaults, Foreclosures Rise 60% in February [Bloomberg]
An ARM (And Quite Possibly A Leg) [SocketSite 6/05]

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Comments from “Plugged-In” Readers

  1. Posted by hotep

    why the jump from this year to 2011? what happens in 2009 and 2010?

  2. Posted by anon

    The fact that a huge percentage of SF purchases were made with ARMs in the last few years won’t affect things at all because mortgage rates are so much lower now, there is so much equity with recent price rises, and underwriting standards have loosened up particularly with jumbo loans. So everybody will be able to refinance into lower-rate loans. Not a problem.

  3. Posted by Rillion

    If my ARM reset today the rate would drop based on the LIBOR and margin set in the loan. My HELOC rate is now down to the 5 year fixed rate on my mortgage (and will likely end up less if the Fed cuts rates again).

  4. Posted by chuckie

    I haven’t kept up with what the rates are currently at for ARMs vs 30 year fixed. With the FED trying to keep the rates low, what’s that translating into the rates for ARM vs 30 year fixed? Wouldn’t the rates for ARMs stay low if the FED maintains its stance?

  5. Posted by Michael L.

    Here is a bright observation from the Bloomberg piece. Can you build me a rocket to Mars?
    “With declining prices, there is a pervasive problem of not being able to refinance or sell,” said Susan Wachter, professor of real estate at the University of Pennsylvania’s Wharton School in Philadelphia. “I’m very concerned.”

  6. Posted by Foolio

    Anon, also don’t forget that ARM holders can easily sell for higher prices and pocket the cash, because SFRE is so hot.

  7. Posted by Spencer

    can you guys please pass me some of what your smoking?

  8. Posted by Dude

    @ hotep: I believe this year we’ll see a peak in Alt-A and Prime ARM adjustments. It tapers in 2009 and 2010. In 2011 the Option ARMs have their big adjustment peak. Somebody have a link to an updated ARM adjustment chart?

  9. Posted by ashleydupre

    My mortgage broker just called me and told me [he] had one provider (indymac) who was now providing CA jumbo loans under the new limits ($700k+ vs $417k).
    He said the spread between the new Jumbo rates versus non-conforming (&lt=$417k)is 50 basis points as opposed to the 100-150 basis point spread a few months ago.
    He expects more providers to come in.
    Don’t know if this will stem the tide but hope it helps.

  10. Posted by ex SF-er

    why the jump from this year to 2011? what happens in 2009 and 2010?
    you get the next wave of resets.
    Much of the volume of “the boom” was 2005-2006.
    Most of subprime ARMs reset after 2 years, so you see a bump in resets (hence foreclosures) from 2007-2008 (2 years after 2005-6)- until Jan 2009 to be exact.
    There is a 6 month pause.
    then the Alt-A products, Option ARMs and unsecured ARMs reset. Most of them are 3-5 years… so that’s June 2009 through about December 2011 or so
    foreclosures are expected to follow closely after that… (and have followed expectations considerably)
    hope that helps.
    I’ve posted this before:
    here is Ivy Zellman’s groundbreaking research. Published in 2006 or so. It was updated. The last publically available update was from March of 2007. sorry, I don’t have an updated one since then
    The most important graph is page 47.
    the “x” axis is the date
    1= January 2007.
    13=January 2008
    25=January 2009
    37=January 2010
    49=January 2011
    61-January 2012
    Ivy’s awesome work
    this is why all dreams about a “quick rebound” in Real Estate are laughable at best.
    we have $30-40 billion of loans resetting every month for YEARS from the 2005-2006 time period, and we are increasingly amazed at how CRAPPY those loans were…
    we have to work through ALL of that (trillions of dollars)

  11. Posted by ex SF-er

    FWIW:
    she was fired for this research… sorry “let go” for this research.
    we THINK it’s because it impacted Credit-Suisse’s ability to market the crap they had.
    She published this in 2006 BEFORE there was little to any hint of RE trouble.
    Even in end 2006 we heard daily “there is no RE bubble… and if there was it would be local froth only”

  12. Posted by tipster

    Great analysis ex-SFer.
    Subprime was not really part of the SF market, so its direct impact will be small. The impact of subprime is indirect: empty nesters in the burbs can’t sell their homes and move to SF (because all the subprime sales have dropped the value of their homes), so it reduces demand a little.
    But Alt-A is a much bigger problem, and we’ll start to see its impact late this year and early next year, particularly from option arms. Those allow someone to pay a fraction of the mortgage payment, with the balance added to principal.
    My understanding is that they reset, but the reset happens earlier if you hit a limit on how much you can add to the principal. Because 75% of the borrowers are making only the minimum payment, 75% will hit that earlier limit, about three years after the loans were taken out (the early 2005 ones are just hitting now and the foreclosure process will add another 8 months). And the jumps in payments between the minimum and the reset with the higher principal are enormous. Essentially, no one will be able to afford them, the balances will be too high to refinance, and all of those homes will be sold. Because the balances will be far higher than the value of the property, they will likely be sold by the bank, who will have no emotional attachment to them.
    So SF’s problems, which have been very mild in terms of numbers of foreclosures will really only start to hit at the end of this year. Then, and only then, we’ll start to see the drops in prices from foreclosures.

  13. Posted by fluj

    Yeah, but you said that last year too.
    RE in my ‘hood, north Bernal, is up 20%. All the months of median gain, volume loss that the B’errors so archly dismissed for a year or so actually mean something to banks and appraisers.
    Lots of SF people who bought with ALT-A in 2005 and 2006 can refinance, right now, if their credit is good.
    If you’re still calling for the reset tsunami next year … oh wait.

  14. Posted by fluj

    I should qualify what I said there about the 20 %. What I mean is that lenders and appraisers will typically be able to find enough comps to justify 20 % equity gains, the number necessary to re-fi. I know because I am beginning to do one myself. I am certain I am not unique.
    Seriously, I wish many of you would take a look at the condescension with which you have regarded the past year or two of median gain, volume loss. It was real. You all had a blast with your shadenfreude. But guess what? Lots of San Francisco people are going to be able to avoid toxic re-sets.

  15. Posted by tipster

    “Yeah, but you said that last year too.”
    Really? I checked. Here’s what I said 9 months ago:
    “My prediction on the number of foreclosures in SF is ZERO. That’s right , ZERO.”
    I then went on to say that Alt-A loans were experiencing a higher than expected foreclosure rate and would therefore be greatly diminished in the market.
    It’s about halfway down, at 4pm on this link:
    http://www.socketsite.com/archives/2007/06/national_inventory_numbers_out_highest_in_15_years.html
    Fluj, after making that post above, how did I do on my predictions from 9 months ago? You did bring it up!

  16. Posted by Dude

    fluj – up 20% over what?

  17. Posted by Satchel

    fluj,
    20% up in Bernal Heights? Don’t you mean 20% DOWN:
    http://www.socketsite.com/archives/2008/01/back_on_the_market_but_not_the_mls_in_bernal_330_banks.html
    (hehehehehe)
    Actually, fluj is on to something here, and he is right I think when he talks about what is important to appraisers. Read carefully the comment at 5:19 pm in the above link from the listing realtor. Now, tell me, hmmmmm, I wonder why we wouldn’t want the appraiser for the bank in a potential refi to know that the property is failing to sell at 15% BELOW its last price a few years earlier…. And the realtor says that this is a “very good reason” to keep a property off the MLS!! Show that to the next person who talks about realtor “ethics” (hehehehehe)

  18. Posted by michiko

    Playing in this market – housing or stock – you’d better have an understanding of what’s going on behind the scenes.
    ex-SFer’s been good enough to give us the Ivy Zellman link. Here’s another one – Bill Gross of Pimco about the Fed and the shadow banking system.
    http://www.pimco.com/LeftNav/ContentArchive/Default.htm

  19. Posted by fluj

    I don’t know, up 20 % since 2005 or so?
    3147-3149 Folsom is a good example. It just sold for 1.2. Two years ago $1.2M for a cosmetic fixer two unit in Bernal was completely unheard of. There is another one on Manchester that is pending at $~1.25M or so. There’s the SFR on Samoset I mentioned the other day. Apples to apples, three years later selling for 1.09 from 890K. No, I know what I’m talking about.
    This is happening in other ‘hoods too. Noe Valley just saw its second $3M+ sale ever, and the other one was 526 Duncan which was nearly 6000 feet. No, the median gains you guys all poked fun at are real. And they will help people avoid toxic resets.

  20. Posted by tipster

    fluj is right. If you bought at the beginning of 2005 or before, AND you didn’t refinance and cash out, you’re still up 15-20% or more on your loan balance. That was before the really funny stuff in loans had much of a foothold.
    There are a lot of people with toxic loans who bought after that time period or who bought before and then refinanced and took cash out.
    But it’s not like everyone who bought a home in SF for the last ten years is toast.

  21. Posted by ex SF-er

    “Yeah, but you said that last year too.”
    Fluj,
    not sure if you mean that I said that last year too. I most certainly did not.
    I have felt that pain in SF wouldn’t be for quite some time, I’ve said as much many times.
    (I’ve oft used the example of San Diego… pain didn’t start there until 2 YEARS after appreciation stalled)
    You can read Ms. Zellman’s research or not… I subscribe heavily to it, and it has served me very well.
    you seem to sometimes confuse the uber-perma-bears who display shadenfreude with those of us (like me) who (I believe) are rational humans who have come to a bearish conclusion.
    For me, simply put, San Franciscans are not rich enough to afford current RE valuations. if they were, we wouldn’t have had so many ARMs and IO ARMs and Option ARMs.
    I thus see a correction in the future, although this correction may be a combination of home price declines, inflation, and perhaps income growth (depending on recession/economy).

  22. Posted by Spencer

    “fluj is right. If you bought at the beginning of 2005 or before, AND you didn’t refinance and cash out, you’re still up 15-20% or more on your loan balance. That was before the really funny stuff in loans had much of a foothold. ”
    for now, this is right, but we will be at the 2005 prices within 1 year and the 2004 prices with 2 yrs.
    2004-2010 will most likely be a wash

  23. Posted by fluj

    I was talking to you, ex-SFer, and I do sometimes neglect to distinguish between uberbear hobbysts and normal folks who have drawn bearish conclusions. I will try not to do that in the future. I think one of my points still stands though. People can make cases for appreciation post 2006 in some areas of SF. I said Bernal and Noe and I’m sure most of areas 7 and 8 too. Therefore, many toxic loan using buyers will be able to re-fi without needing to put that much cash into it. I think. We’ll see.

  24. Posted by fluj

    I was talking to you, ex-SFer, and I do sometimes neglect to distinguish between uberbear hobbysts and normal folks who have drawn bearish conclusions. I will try not to do that in the future. I think one of my points still stands though. People can make cases for appreciation post 2006 in some areas of SF. I said Bernal and Noe and I’m sure most of areas 7 and 8 too. Therefore, many toxic loan using buyers will be able to re-fi without needing to put that much cash into it. I think. We’ll see.

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