Some fascinating data from the WSJ:
• Nearly 1.2 million foreclosure filings were reported last year, a 42% rise from 2005. That is a rate of one in every 92 U.S. households.
• Colorado, Georgia and Nevada had the nation’s highest foreclosure rates last year, according to RealtyTrac. Among the top 100 metropolitan areas, Detroit, Atlanta and Indianapolis topped the list.
• About 80% of subprime mortgages today are adjustable-rate mortgages, or ARMs, that have been nicknamed "exploding ARMs" because they have low fixed-interest payments in their first few years but then usually adjust to higher interest payments.
• Creative new subprime loans — "piggyback," "interest-only," and "no-doc" loans, among others — accounted for 47% of total loans issued last year. At the start of the decade, they were less than 2% of total mortgage loans.
• Borrowers have never been more leveraged. Loan-to-value ratios, the loan amount expressed as a percent of the property value, have grown to 86.5% last year from 78% in 2000.
Source:
The Subprime Market’s Rough Road
NICK TIMIRAOS
WSJ, February 17, 2007; Page A7
http://online.wsj.com/article/SB117167930652011972.html
great data and graph!
i found this also surprising/shocking
Fannie and Freddie bought 25.2% of the record $272.81 billion in subprime MBS sold in the first half of 2006, according to Inside Mortgage Finance Publications, a Bethesda, Md.-based publisher that covers the home loan industry.
In 2005, Fannie and Freddie purchased 35.3% of all subprime MBS, the publication estimated. The year before, the two purchased almost 44% of all subprime MBS sold.
Three big lenders, NovaStar Financial , Deutsche Bank and BNC Mortgage, part of Lehman Brothers , sold more than half of their subprime MBS to Fannie and Freddie this year, said Andrew Analore, editor at Inside Mortgage Finance
… and for those who used to say “oh those folks can just refinance at a fixed rate”… no. The new rules being adopted by all of these lenders give these marginal borrowers, now underwater, no option but default. And the trickle turns into a flood.
Creative new subprime loans — “piggyback,” “interest-only,” and “no-doc” loans, among others — accounted for 47% of total loans issued last year.
The graph shows sub-primes as about halfway between 12% and 15% of all mortgages for 2006.
These two figures do not seem to match. Or did I misunderstand what the numbers are referring to?
~~~
BR: 47% of subprime loans were exotic . . .
Isn’t it priceless?
First, in the face of very low interest rates, Big Money could not lend enough, fast enough and to enough people…a rather vexing problem if you are someone dedicated to maximize the return on capital. Get yourself a tad too worked up and and strange thoughts can cross the mind. Like…relax lending standards for instance. Not much mind you…Not to worry, we are responsible managers. This begin to bear fruits but competitors are willing to go farther than you. Numbers are not THAT good anymore and stakeholders aren’t happy. Hardly a career-enhancing situation we got there my Dear Watson. Thus began the cycle of lowering standards below minimal carefulness. (I’m being charitable here)
Not to be caught totally without recourse, they got their cherished Bankruptcy Bill (serendipity…what a great thing!) passed by a all too willing Congress. After all, they do need protection against the stupids who think they can game the system, no? Never too careful aren’t we?
Alas, looks like things could turn pretty ugly after all…so, let’s make sure that the buck can be passed somewhere else. Hence, the growth in OTC derivatives. (Of course, this market was not created specifically for the US housing market but the smart reader gets the idea) And the accompanying spin that it helps diffuse the risk to so many counterparts that the systemic risk is much lower.
Gee! Now I feel totally reassured. Nothing bad can ever happen. It is different this time. There is no market risk we can’t control.
What? Me worry?
Francois
This ongoing meltdown in the sub-prime market seems to me to be the first definitive shoe to drop in widely predicted bust of the US real estate market. This will, if not corrected soon, lead to a substantial decline in the residential real estate market and a subsequent contraction of the overall economy. The questions for the big picture economists (amateur and otherwise) who frequent this site is ‘what can the fed and administration do to prevent or minimize this imminent and apparently inevitable downward spiral?’
Many Thanks.
“Creative new subprime loans — “piggyback,” “interest-only,” and “no-doc” loans, among others — accounted for 47% of total loans issued last year.”
Kevin, this represents that % of all loans issued during 2006.
“The graph shows sub-primes as about halfway between 12% and 15% of all mortgages for 2006.”
This represents the total of all subprime loans as a percentage of all loans issued since the beginning of time and still outstanding.
Creative new subprime loans — “piggyback,” “interest-only,” and “no-doc” loans, among others — accounted for 47% of total loans issued last year.
The graph shows sub-primes as about halfway between 12% and 15% of all mortgages for 2006.
To put things in context,
Total mortgages -> mortgages on all housing, could be issued in any year.
Mortgages issued last year -> mortgages issued in just the last year. Subset of total mortgages
housing sales/yr = approx 10% of total housing stock.
Now we don’t know how much of 10% was due to subprime – because 47% is based on last years _issued_ mortgages, which includes both refinancing and purchase mortgages.
If we assume that 47% of purchase loans issued last year is also subprime, (a conservative assumption, given the fact that people who refinance are more probable to have some equity, and hence able to get better loan terms) what it means is that half of last years demand was due to subprime.
It does not matter if that was only 5% or 2% of total housing or mortgages. That 5% or 2%, when compared to sales is about 50%.
Housing is a thinly traded market. The extra few percent demand( when considered as a percentage of total housing stock) drove prices higher last few years because that few percent demand is a double digit percentage when compared to sales/yr.
A few percentage of housing, selling for higher prices. Marked-to-market value of entire housing stock rising in tandem with that. Refinancing/HELOC against that marked-to-market valuation. That’s the last few years.
And it can happen in reverse.
These are concepts known to stock traders. Like “Its the marginal buyer/seller who sets the price of a thinly traded stock”. Every other owner is doing “marked-to-market valuation”. Yet still the bulls try to obfuscate, mixing housing stock numbers with flow numbers.
Winjr,
Thank you. That makes sense.
Please excuse my persistence but now I am wondering, why did a 47% ratio of loony loans to new 2006 mortgages not change the ratio for total outstanding mortgages? The graph soars in 2003, starts to level off and is pretty flat 2005-2006. Perhaps that is because enough people shifted out of subprimes into more normal mortages to hold the running total down even as the number of new subprimes skyrocketed? (Shifting out would be smart and often doable as long as prices were still rising.)
The reason I am pressing on this is that the 47% figure simply stuns me. Can that really be the correct figure? That suggests a deep systemic failure. Where were the adults who were supposed to be supervising the children issuing these loans?
This is one half of the gross product of the industry that was the major engine of growth for the past few years. Wow.
Is it possible for a nation to get away with something like that?
47%? Since the money is coming from China, we decided to emulate their fine banking system?
Sorry for the outburst.
“The questions for the big picture economists (amateur and otherwise) who frequent this site is ‘what can the fed and administration do to prevent or minimize this imminent and apparently inevitable downward spiral?'”
No, the question is: what WILL they do? The one sure answer to this problem is to unleash the dogs and let inflation run. But it is extremely unlikely that they will do that because they believe that cure would be far worse than the disease.
“The questions for the big picture economists (amateur and otherwise) who frequent this site is ‘what can the fed and administration do to prevent or minimize this imminent and apparently inevitable downward spiral?'”
No, the question is: what WILL they do? The one sure answer to this problem is to unleash the dogs and let inflation run. But it is extremely unlikely that they will do that because they believe that cure would be far worse than the disease.
The banks are not about to repeat the late 70’s and let inflation run rampant. Nothing worse to a banker than getting paid back with cheaper dollars.
The overall contraction in credit will cause accelerated deflation as the money supply contracts in accordance with the contraction in credit.
Has anyone seen a graph of the total Fannie and Freddy loans over the last 20 years- all backed by the full faith and credit of the US govt,I think, with much less than 1% funds to back them up? In the last 6 years,the graph has gone parabolic and is now well over 3 trillion dollars. And why are so many of their loans subprime? Is the fox guarding the hen house or will someone tell us that all these loans are non recourse? Will subprime become prime? It doesn’t make any sense.
It was all caused by the fall in the wall in east berlin. The US Federal Reserve under Allen Greenspan, and 1 % money, had absolutely nothing to do with it. Really.
Noticed the other day here in Vegas a large residential development that was under construction just shut down. The land had been leveled and some of the infrastructure put in place. As of yesterday all construction has stopped and all the equipment is gone. We simply built to many houses. The demand was driven by speculators looking to flip. They are all gone now. With no one to buy I don’t know how anyone could possibly believe the bottom is in. We can’t have a bottom until supply and demand get back in line. With out all the speculators its going to be a long time till that happens.
The banks are not about to repeat the late 70’s and let inflation run rampant. Nothing worse to a banker than getting paid back with cheaper dollars.
The overall contraction in credit will cause accelerated deflation as the money supply contracts in accordance with the contraction in credit.
Yep, you answered the question. The problem with the ‘pump’ people is, controlled deflation is a better alternative though probably recessionary as it demands a modest credit contraction. But the “pump” theory would make it worse cause post-WWII record inflation that would harm the financial system much worse.
Keeping Bretton Woods II intact without a major pump job is the right idea. Now keeping it from a really hard landing is to. Not a easy job in this managerial capitalist system.
FWIW, I agree with the building. January was the first sign builder didn’t have the credit to build even though they had the permits(land). Signs of builders dumping land in droves may be the story of the late winter/early spring.
hate to burst your bubble kevin rooney, but not every subprime ARM out there is going to default-
good point blam :-)
have almost forgotten it
“The banks are not about to repeat the late 70’s and let inflation run rampant. Nothing worse to a banker than getting paid back with cheaper dollars.”
How about owning a bunch of empty houses they can’t sell??? The banks have gotten greedy and messed up again and the taxpayers will pay the price of lax oversight. Where have we seen this movie before?
In response to blam’s comments on the bottom of the housing market….I think Paul Kasriel answered that question in his December post on Safe Haven with Chart 3 – The relationship between housing starts and 1 Family Home for Sale. Based on analysis of that chart I believe we have a year or two to go to see the peak to peak.
Link: http://www.safehaven.com/article-6548.htm
We have several macro pushes taking place. The rapid demise in subprime lending as chronicled on –
Link: http://ml-implode.com/
and
Link: http://www.autodogmatic.com/index.php/sst/2007/02/02/subprime_credit_crunch_could_trigger_col
I believe this is the canary in the housing mine that is currently doing the funky chicken.
We also have the rapid demise in housing prices that Paul covers in Charts 4 & 5 of the following article –
Link: http://www.safehaven.com/article-6255.htm
And we also have the tremendous accumulation in consumer debt as shown in the following chart – Consumer Debt Chart, 3rd one down
Link: http://prudentbear.com/bc_chart_library.html
So to sum a few things up that have happened, are happening, and will happen…..
A withdrawal out of the housing market of 25-30% of buyers that are investors and will retreat due to falling prices….
A withdrawal out of the market of an additional 25-30% of subprime buyers due to increased regulation and policy changes in subprime lending….
An increase in interest rates to cover the increased perception of risk in the housing market taking out ??? additional purchasers…
A conservative estimate of 20% of subprime mortgage holders defaulting this year as their contracts reset to higher interest and/or premium payment inclusions ($1 Trillion will adjust this year according to Reuters – so $200 Billion default…..the 1997 collapse was triggered by Russia defaulting on $100 Billion) that will add ??? houses to the market and downgrade prices by ???….
The continued retraction in home equity withdrawals that will suck an estimated $300 – $500 Billion in spending out of the economy in 2007….
The interest payments on all the accumulated debt shown in the previously mentioned chart that sucks $??? out of discretionary spending….
Does the picture look bleak yet?…..I believe we are in the very early stages of a downward spiral caused by too much credit/money and/or short-term financial attitudes/behavior….or where ever one might lay the blame. I reckon one could blame the Devil LOL!…. but no matter the reason we have stepped in the quicksand….anyone have any ideas on how we might get out of it or survive it?
… and for those who used to say “oh those folks can just refinance at a fixed rate”… no. The new rules being adopted by all of these lenders give these marginal borrowers, now underwater, no option but default. And the trickle turns into a flood.
This comment by jmf posted on 2/19 sums the situation up fairly well. Today 3/7, three weeks later the majority of loan products have undergone an overhaul of tightening in underwriting guidelines on many loan types, not just subprime, which is being avoided like the plague.
From Wall Street firms we have another round of comments and viewpoints from economists and analysts stating what has been known for 6-12 months by those of us that work in mortgage finance industry. The herd instinct is alive and well and unfortunaetly will accelerate the demise of a number of borrowers that would have had the ability to continue making current payments, if the opportunity to refinance would have existed to so. Given the above mentioned tightening of guidelines that opportunity has disappeared for some. The surge in refinance applications over the past month will serve as a marker as to how many actually make it to new loans.
Buy Silver
Pass 4: Residential Investment & Housing
The last 2-3 weeks of housing related news ought to draw anyone who is interested in the outlook for the economy attention, their very serious attention. Major money center banks who have been financing the mortgage companies have announced serious…
I am looking for basic data: total mortgage as a % of total debt, breakdown of mortgage market (prime, subprime, alt-a), delinquency rates and if possible, trending information.
It would be GREATLY appreciated if you would be so kind as to point me in the right direction.