June 5, 2008
U.S. Foreclosure Activity Continues To Climb Rather Than Fall
“New foreclosures rose to a seasonally adjusted 0.99 percent of all U.S. home loans, up from 0.83 percent in the fourth quarter, the Mortgage Bankers Association said in a report today. The total inventory of homes in foreclosure increased to 2.47 percent and the delinquency rate, loans with one or more payments overdue, grew to 6.35 percent. All were the highest since 1979, the Washington-based trade group said.”
“Prime adjustable-rate mortgages in California, the largest U.S. state, accounted for 36 percent of all U.S. foreclosures started during the period. The state's subprime adjustable loans were 26 percent of the national total.”
First Published: June 5, 2008 8:20 AM
Comments from "Plugged In" Readers
AH! ... my snarky ed mcmahon foreclosure comment got deleted!?!?!?!?
Clearly the editors are biased towards the RE industry (and good taste)
Posted by: badlydrawnbear at June 5, 2008 9:22 AM
The headline implies that people were expecting foreclosures to fall in Q1. I don't think anyone was expecting a fall in foreclosures in Q1 (or anytime soon).
Posted by: mk92 at June 5, 2008 9:24 AM
Many people have commented that the government should do something about this problem. I submit that they already are: they're leading by example.
Maybe "Famous California Foreclosures" could be a new SocketSite category?
Posted by: Dude at June 5, 2008 9:49 AM
Honestly, I don't see foreclosures as a bad thing, they are a good thing.
OK, so you have to move. People move all the time. No big deal on that front.
And you get to walk away from what otherwise would be a crushing debt. I just don't see any of that as being so terrible.
It's terrible for the bank. It's terrible for property values. But not so terrible for the former homeowner. It's the lost equity that's terrible, but helping to stave off foreclosure doesn't do much about that.
Posted by: tipster at June 5, 2008 12:35 PM
Let me disagree with you there. Apart from the flippers who got stuck into their own trap, there are simply a lot of families who believed they could live in a decent home but grossly overpaid for it. Sometimes these people have kids and being forced to scale down when you have kids must be a very painful experience. How many kids who have to switch schools middle of school year? How many divorces following financial hardship?
I do not enjoy seeing more foreclosures as there is a human level that cannot be measured. I'll enjoy the cheaper prices for sure, but we need to restrain from ignoring the suffering that is taking place.
Posted by: San FronziScheme at June 5, 2008 1:09 PM
Let's look at the numbers: you can rent a place for a fraction of owning it today, especially in still-bloated markets like the bay area. So your proverbial family that walks away from a $6K/month mortgage can move into a comparable rental home for $4K/month. Not exactly suffering or downsizing. They may even go rent in a better school district or safer neighborhood. In fact, they're usually financially better off by walking away (which is why so many people are doing it in the first place).
Posted by: Dude at June 5, 2008 1:21 PM
Families downsizing nowadays are not so much in the 4000/month rent range.
The typical trap was a very low introductory rate or negative amortization.
People making 60K/year could buy a 450K house with close to 100% financing and a 1.5K exotic mortgage payment.
Now that the rates have shot up, they're way over their heads with 3K+/month. They have to scale down and rent. If they can find a 1.5K house for rent (good luck on that), their credit report will show a serious ding. They'll go towards a place they could afford to pay in the first place.
Posted by: San FronziScheme at June 5, 2008 1:32 PM
I think you're using the utmost extreme example here, Fronzi. And I'm sure there are people in that category. But I'd wager many of those walking away can still afford the mortgage, but just don't want to owe $449K on a house that's worth $350K today and will be worth $250K next year. A few years of bad credit is better than being upside down for 15+ years.
So.... they basically go back to the same lifestyle they had before a credit bubble created the illusion that they were rich. Again, it's not a pleasant experience, but hardly "Save the children!" material.
Posted by: Dude at June 5, 2008 1:49 PM
I don't think most people would be so cavalier about walking away provided that (1) they can afford the mortgage and (2) the house continues to suit their needs. In addition to the credit hit, most people don't want to deal with the hassles of moving, finding a new place, dealing with landlords, finding new schools, etc. etc. Sure, there will be some that can affort but still walk away despite all the hassles, but I seriously doubt that it will be a significant number.
Posted by: mk92 at June 5, 2008 2:10 PM
SFS, people move mid school year all the time with kids, for job transfers. The kids aren't happy about it but they seem to live through it.
And a LOT of self made millionaires went through a financial hardship when they were kids, myself included. It opens the kids eyes. They may very well be better off in the end.
I'm not saying it's all fun and games, but I honestly don't see anything happening to these people in a foreclosure that thousands of people don't voluntarily choose for themselves every day. It just doesn't seem like it's the end of the world: they just have to move.
The only real downside is what happens to their credit reports. But when there are millions of people just like them, it just isn't going to have the impact it once did.
Getting laid off in Silicon Valley was a difficult thing to overcome on a resume, until it happened to just about everyone. Now, no one cares. It will be the same for foreclosure: walking away will be as common as returning an item in a store that you decided after you got home was too expensive. It happens, no big deal.
And mk92, you are out of touch. People ARE walking away when it is in their best interest to do so. Not all of them, but a lot of them. There is a mind shift going on in America: it just isn't the end of the world to walk away, and it can be very liberating. Someone whose mortgage is about to go up by $2K per month might be much better off dealing with a few landlords rather than pissing away $24K per year they don't have, even if some or all of it is tax deductible, even if the house meets their needs.
The banks were COUNTING on this very mentality when they gave away money at 2% per year that turned into 8% after the first 3 years. They COURTED people who live for RIGHT NOW, and that's who ignored the ridiculous price and took the loans. The rest of us stayed away. So they actually self selected people who were MOST likely to walk away, by structuring a loan in a way that was attractive relative to renting only in the initial term.
Posted by: tipster at June 5, 2008 2:39 PM
"And mk92, you are out of touch. People ARE walking away when it is in their best interest to do so."
Link? Any articles or data to confirm that people who can afford a mortgage are nevertheless walking away from owner-occupied homes?
Posted by: mk92 at June 5, 2008 2:55 PM
It may be true that in the past most people didn't walk away if they could afford their mortgage even if they were upside down on their loan. However, that was back in the days before Zillow and before the entire real estate industry started chirping their mantra about "building equity" and getting in no matter what the cost because prices only go up. 15 years ago, people weren't necessarily aware of how much their home was worth as long as they could pay the bill. The American Dream used to be about actually owning a home, paying down a mortgage over time until you didn't owe the bank anymore. In the past few years it became about borrowing as much money as you could and then borrowing more as the value of the house rose. Riding the rising equity tide has been the new game. Now that it is over, people won't care about "pride of ownership any longer." They'll walk.
I have to agree with Dude. In parts of the country where prices have fallen 20-30%, people may start walking away in droves. They take the hit to their credit for a couple of years, rent a place, and move on.
Posted by: K10 at June 5, 2008 3:09 PM
I think the other thing you are ignoring is that people develop attachments to their houses and become invested in them the longer they stay. Sure, people sell and move their houses all the time, but it's usually either because (1) their house is no longer suiting them or (2) some job change/family event has forced them to sell. So, for people to just walk away en masse despite being able to afford payments would be a fundamental sea change. The hit to the credit is a minor factor in this equation -- that fear is not what will keep people from walking away -- it's the other factors.
Posted by: mk92 at June 5, 2008 3:14 PM
"In the past few years it became about borrowing as much money as you could and then borrowing more as the value of the house rose. Riding the rising equity tide has been the new game. Now that it is over, people won't care about "pride of ownership any longer." "
I'm sure there are people who bought during the run-up for whom this is true and those people have gotten a lot of press. But, I think that most people still bought primarily because they wanted to own (and wanted to own in SF in my case) -- and for those people, pride of ownership will not be easily sacraficed.
Posted by: mk92 at June 5, 2008 3:32 PM
mk92, I agree with you completely. But the relevant point is that even if it was not most buyers, increasing numbers (a wild guess -- 20% in SF) of recent purchasers were in it solely as a financial move. No pride of ownership, just a cold investment. So in addition to the normal turnover for the reasons you cite, at least that category of buyers is going to walk away or otherwise dump the place. The added inventory is what will affect prices even if nothing else changes.
If you add in any effect from the consequences foreseen by others here -- increases in those who have to sell because of ARM resets even if they would rather not or increases in those walking away just because they recognize the benefits of doing so outweigh the pride concerns -- and the trend accelerates. I don't know if these phenomena will make a big impact in SF, but this is what is happening all over.
Posted by: Trip at June 5, 2008 3:57 PM
I never meant to insinuate that ruthless defaults were the driving force behind the sharp increase in foreclosures. But they are an increasing trend and growing component thereof. Here's a link to a recent WSJ article on the topic:
And here's the Jose Canseco story:
There's been a lot of academic research done on this using option pricing theory, which is probably beyond the scope of this blog. But suffice it to say that the propensity to walk increases greatly the further underwater borrowers are, regardless of ability to pay. This is what happens when real estate stops being shelter and becomes the latest get-rich-quick scheme.
Posted by: Dude at June 5, 2008 3:59 PM
I find the most interesting part of this story to be the fact that it is PRIME borrowers who are increasingly defaulting, not subprime.
it blows away the "it's all contained" theories.
the other interesting part is that (no surprise) they are finding that foreclosures are highest in people who have high Loan-to-Value ratios, REGARDLESS of FICO score. ARMs are also doing worse than fixed. again no surprise.
thus, the next logical leap is to beware of areas that have high concentrations of high-LTV loans and ARMs. sound familiar to anyone?
given all the above, it is highly unlikely we'll go back to the 80/20 loans of yore anytime soon. add in the major bank losses that are accelerating (not decreasing) and you can basically forgeddaboudit.
Posted by: ex SF-er at June 6, 2008 5:30 AM
Ex SF-er has hit it. The situation with prime ARM loans is exactly what we saw developing with subprimes about a year-and-a-half ago. The lag makes sense since payments on prime ARMs were low and affordable until resets began, whereas subprime borrowers could not afford the payments from day one. This development, along with the terrible unemployment stats today, shows we are a long way from the bottom. The news is not good -- the tragedy is that it was all so predictable (and predicted).
Posted by: Trip at June 6, 2008 7:37 AM
@ Trip – I disagree. I think the use of ARMs has a lot less to do with foreclosures than the percentage of down payment that homeowners use. First of all, a down payment gives you a cushion in case prices do drop… which arguably they haven’t much in SF. Secondly, you have a much bigger incentive to make sure that you don’t default on your loan when you have skin in the game. And finally, with the rates used to index ARMs being so low, many people would actually pay LESS if their loan were to reset today. I know as I’m one of them.
Anyways, you should check out the data. Per Policy Map, only 15% of SF homeowners have a piggyback mortgage… which is half of the statewide number. Despite arguments to the contrary, people in San Francisco put down relatively large down payments when they bought. That could very well explain the relatively low foreclosure rate. Here’s the link: www.policymap.com
Posted by: Lance at June 6, 2008 9:34 AM
Thank you, Lance. The ARM reset tsunami argument is fine if getting some mileage. (We know, we know, not 2008. 2009! 2010!) Delivering it in world weary "I told you so" manner is for the birds.
Posted by: fluj at June 6, 2008 9:54 AM
I agree fluj, world weary "I told you so" is so last year. How about we switch to bitter, unrecognized genius mode, "You fools! I told you so!"
Posted by: diemos at June 6, 2008 10:51 AM
Aahh, it's my old pal Diemos. How's the second advent of the Great Depression coming along? (I know, I know, wait until 2010!)
In all seriousness, this is a San Francisco real estate site. Right? You know, high median values, small volume hits YoY (if at all), far less foreclosures than anywhere else in this hard hit state, properties generally selling. How do you feel justified in speaking the way you do? Purely to get a rise out of people? I'm serious.
Posted by: fluj at June 6, 2008 11:04 AM
Ok, I won't deny that I enjoy teasing you fluj but it's mainly as an antidote to having to sit back and watch this slow motion train wreck while knowing that there's nothing one can do to stop it.
How's the Great Depression going? So far, it's following the script: Credit tightens, asset values fall in the outlying areas, economy slows, layoff start to ramp up, banks start going insolvent.
What's up next? Without credit to fund leveraged buyouts and stock buy backs along with shrinking profit margins we'll see a sharp correction in the broad stock index sometime in the next year.
Shrinking economic activity, more layoffs, more credit going bad. Not just home loans but auto and credit card as well. Reduced consumer spending as people try to repair their personal balance sheets leading to more economic contraction and layoffs leading to more credit going bad.
And yet, life in the great city of San Fran is still good. The sun is shining, the city is bustling, restaurants are full, la cite est plein du les tourist francophone. And I survived the latest round of layoffs at work. Yay!
But tell me true fluj. If I had told you in 2005 that a property in Tracy that was selling for 500K would in 2008 be a REO on sale for 200K would you have believed me?
I'm sorry but past performance is not a guarantee of future results. Houses can go down as well as up. The core desirable area will just go down last.
I feel justified in speaking the way I do because it is honestly what I see coming. A better question would be why do I bother posting it on socketsite. That I couldn't tell you but I do try to keep it down to the occasional snarky comment. You must admit it's been a long time since one of my lengthy great depression rants.
Posted by: diemos at June 6, 2008 11:47 AM
You in your own honest view see it coming, fine. You're a smart guy and I do read what you have to say because you, unlike some others, tend to have fully fleshed out arguments. However, seeing it coming is opinion. It's the future, and who really knows? Taking a condescending stance as if calamity has already occurred is disingenuous and all who do so on this site actually know better. Because it hasn't happened here in SF. And as to your question about Tracy? Well, I can honestly say that I advised a client not to buy in Manteca three years ago because the values were unsustainable.
Posted by: fluj at June 6, 2008 12:00 PM
"It's the future, and who really knows?"
"Always in motion is the future." - Yoda
As I sit here basking in the gorgeous sunlight I can guarantee you that 12 hours from now it will be dark out. There, you see? I can see the future. That's because the day/night cycle is governed by eternal and unchanging physical laws that allow me to predict the day/night cycle thousands of years into the future.
Unfortunately economic laws are not quite as eternal and unchanging. Some of those laws are based in physical reality but most are created by men, exist only so far as the powers that be enforce them and subject to change without notice. Not only that, they're affected by the psychology of the masses. So no, I'm not clairvoyent. But as I've said before, this isn't the first credit fueled asset bubble in the history of mankind and we know how all the others played out.
"Well, I can honestly say that I advised a client not to buy in Manteca three years ago because the values were unsustainable."
Fascinating. I'd love to know the details of the analysis that lead you to know that Mantecan values were unsustainable.
Posted by: diemos at June 6, 2008 12:53 PM
"Taking a condescending stance as if calamity has already occurred is disingenuous and all who do so on this site actually know better."
Actually the calamity HAS already occured.
It occured when the nation's collective retirement savings was, through the magic of securitization, handed over to illegal alien strawberry pickers so they could "buy" a 750K house with nothing down. Now all that's left is the weeping, wailing and gnashing of teeth as the middle class collectively comes to the knowledge that not only is their house not worth what they thought but their retirement savings is gone too.
Posted by: diemos at June 6, 2008 1:31 PM
Tell me more about the illegal strawberry pickers 750K house. Where could I do some reading on that. And where is the strawberry patch so we can get grandma's money back that was handed to them.
[Editor's Note: Minorities are the emerging face of the subprime crisis.]
Posted by: sparky at June 6, 2008 1:38 PM
"...securitization, handed over to illegal alien strawberry pickers so they could "buy" a 750K house with nothing down."
If your unfounded predictions (i.e. - rants) about 50% price drops weren't enough, now you're resorting to bigotry. Not cool...
Posted by: Lance at June 6, 2008 1:48 PM
"through the magic of securitization, handed over to illegal alien strawberry pickers so they could "buy" a 750K house with nothing down"
Well well well. Um, no.
And also, San Francisco real estate site, remember?
Posted by: fluj at June 6, 2008 1:56 PM
"now you're resorting to bigotry. Not cool..."
All I said was "illegal aliens". Are you implying that illegal aliens are dominated by some particular racial group? How racist of you. Not cool.
Posted by: diemos at June 6, 2008 1:58 PM
"And where is the strawberry patch so we can get grandma's money back that was handed to them."
Actually the strawberry pickers didn't get a cent. They were just allowed to live in a house they couldn't afford for a while on the cheap.
Where DID the money go when that loan was generated and the house sold?
the mortgage broker,
all took their cut.
The rest went to the seller of the house, in this case the production homebuilder.
Where did the money COME from? Your 401k bond fund. Your defined benefit pension fund's assets.
When the borrower doesn't pay and the home can't be sold at a price that will cover the loan who takes the loss? You do.
You want to get that money back? Sorry, it's been spent already on jet skis and hummers and spinning rims and boob jobs and vacations and the kid's college tuition and yoga classes and granite counter tops. Where did you think the booming economy of the past 6 years came from? It came from our spending our retirement money through the mechanism of cash-out refinances and HELOCs. Now that's over, which is why we're at the beginning of the second great depression.
Durn it. I was just going to make one snarky comment and you got me going with another great depression rant. sorry.
Posted by: diemos at June 6, 2008 3:02 PM
Actually the whole thing took place in your mind, diemos. Nobody loaned an illegal strawberry picker 750K, bro. The whole thing was/is credit based. I know several English expats pulling down substantial six figure salaries who are annoyed that they are unable to purchase anything. This was just as true a few years ago as it is today.
Posted by: fluj at June 6, 2008 3:08 PM
The whole US economy is based on rims, boobs and jetskis, so I don't know how any of this hurt anyone. That jetski rep bought booze at the corner store and those boobs are charging a fee at a pole near you. Trickle down, ask GWB about it, it works. P.S. you can put your 401K in lot's of places, including things that have worked well in these time. Should have put some of it into OIL.
Posted by: sparky at June 6, 2008 3:23 PM