Spike in Foreclosures Goes Beyond Subprime

Some people — the usual suspects — have claimed that foreclosures are primarily a sub-prime phenomenon.

That might have been mostly true much earlier in the cycle of credit and housing problems. Sub-prime was the canary in the coal mine, with the financially weakest people most at risk of mortgage delinquency, default and foreclosure.

Today, however, foreclosures are moving up the socio-economic ladder:


Foreclosures on Prime Mortgages

map courtesy of NYT


The Trouble in Housing Trickles Up   
NYT, June 1, 2008

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  1. Douglas Watts commented on Jun 1

    The large brown block in central Maine is Penobscot County, which would be the Bangor metropolitan area (although most of it is very rural). The increase in foreclosure there is undoubtedly linked to the enormous jump in heating oil prices this past year. The local utility, Bangor Hydro, reported in April that 50 percent of its residential customers were delinquent in their electricity bills. This is because Maine law prohibits electricity shut-offs during the winter and customers were paying their heating oil bills and letting the electricity bill go unpaid until spring.

  2. upsidetrader commented on Jun 1

    i had three friends tell me last week that the availability on their equity lines were outright canceled.The reason stated by the bank was falling equity prices and their opinion that they were going to fall further. They all have immaculate credit and make very nice loot. Bad news for the guy who needs that cushion.

  3. Doug commented on Jun 1

    Barry: This post illustrates why the media’s choice to call this mess ‘the subprime crisis’ has and will continue to be so costly. It is more accurately ‘a securitization crisis’.

    Unfortunately, though, main stream media latch onto simplistic descriptions in the absence of even a reasonable amount of reporting and analysis. In part, the media can excuse themselves by pointing to downsizing of journalist staffs. But, it’s a cop-out. New economic and business realities must be faced with renewed commitment to accuracy as a journalistic value.

    MSM may have fewer folks on their staffs. BUT meanwhile there are folks like you, Yves Smith of nakedcapitalism and many many more who both have more subject matter expertise than any generalist journo ever could and take the time to share your insights.

    What’s so hard for a journalist to know who the bloggers are and consult them before writing the story?

    Must they take care with these sources?


    But so what?

    Now, unfortunately, this will be called the ‘subprime crisis’ for years to come.

    And the world will be shortchanged in its understanding and response as a result.

    We’re in a mess because Wall St et al fell in love with securitization based on idealized, inaccurate models and a Panglossian marketing of ‘risk shifting’ that were always more about fee and bonus structures than responsible investment.

    We are not — N.O.T. — in this mess because a whole lot of folks with dodgy credit got loans.

    And, for evidence of that, just look at the non-profit sector’s track record of continuing very low delinquency and foreclosure rates among the lowest income borrowers to whom they lend.

    (A track record, by the way, that continues to be ignored in ALL proposed solutions to the crisis. Nonprofits have dramatically outperformed the for profit sector. Nonprofits have THE core competencies needed to move forward. And, nonprofits have no real seat at the table. Instead, they are considered merely as window dressing. Throw some dollars their way for counseling. Well, how about throwing capital their way since they, as said, still know how to lend money responsibly?)

  4. John Thomas commented on Jun 1

    Is it just me or does it seem the banks literally control the world?


  5. KirkH commented on Jun 1

    Regarding the economic ladder. If the economy is 60%+ consumer spending and the wealthy are responsible for most of that 60%, what the hell is about to happen to GDP when these non-subprime loans start to blow up?

    Also, Barry, this post is currently on the front page of Reddit.com. It’s a bit like Digg where users vote on the stories they like. Front page should be worth 10k views or so in case you’re wondering about the traffic.

  6. Home Buyer commented on Jun 1

    I couldn’t agree more with this story. This is not a subprime mortgage crisis. This is a Wall Street derivatives crisis. The Wall Street firms that packaged CDOs, MBSs, and all the other “securitized” investments added speculative derivatives into the packages so they could make much, much larger commissions. It is the derivatives that are the main cause of the problem. Unfortunately, the main stream media is controlled and owned by the same group of people. You will not be told the truth by these people. You will only be told what they want the public to believe. This country needs to throw off the shackles that the elite international bankers have placed on us and get back to following the Constitution.

  7. katee commented on Jun 1

    This has been the case for over a year now.

    A paper and Alt A borrowers with any type of rate and payment re-set are walking if their homes are considerably upside down.

    Not only are equity lines bsing pulled but credit card limits are dropping as well.

    We keep a $20,000 VISA around in cae of emergencies, they just dropped the limit to $500.

    People are filing BK to discharge their foreclosure debt relief so why not throw the credit cards in there as well.

    The folks who tend to misuse credit are the folks who have refinanced every year since 1999 to payoff their consumer debt.

    Now they cant refi and their cards are maxed out as usual with no relief in sight.

    Bototm line is you can say goodbye to consumer spending for a very long time.

    We’re going back to the 50’s when people only bought what they could afford to pay for.

    If I had stock in any company specializing in the sales of frivolous items, I would seriously consider unloading it.

    When people no longer have available credit and gas is 4 bucks a gallon, I think they are going to fill the tank before they buy the kids an ipod.

    The credit card and car loan implosion havent even begun to hit the radar yet.

    Buckle your seatbelts.

  8. Mr Mortgage commented on Jun 1

    The negative equity effect will be what gets everyone because it crosses all socio-economic boundaries, loan classes etc. Pay Option ARMs for example are killer just waiting on the horizon to slam the market. Pay Options are still rated Prime in many cases and by many banks.

    You saw the devastation that came from subprime. In CA, the ALT-A universe is 50% larger and acting just like subprime did a year ago with defaults ramping to nearly 20%. The average CLTV on Alt-A purchase loans in 2006 was 89%. Most are now underwater now. 83% were limited doc loans. In the subprime universe only half were. 45% of Alt-A loans are cash out refi’s meaning what do the borrowers have to gain by staying, they already cashed out.

    In addition to Pay Options, those with Home Equity Lines/loans are mostly underwater as the average CLTV across that uninverse was 85% or so.

    I won’t even go into what Fannie abd Freddie considered ‘Prime’ over the past several years, since their loan inderwriting systems, DU and LP respectively, took over making 95% of the underwriting decisions. I can tell you with 100% certaintly there are a large number of sub 620 score borrowers on the Agency’s books rated as Prime. Remember, one of their primary decision making criteria were credit scores, which we now know are fundamentally flawed.

    Sit back, relax and wait because before too long, there will be very little differentiation between the paper types. Subprime and Alt-A will be performing equally as bad and Prime will fall off a cliff due ot negative equity and the human emotional factor of paying into a massively depreciating assets or staying in a losing investment.

  9. michange commented on Jun 1

    Subprime wahahaha? talk neocons worlwide casino.
    I strongly beleive that da Tsunami is nothing subprime, it is just Friedmanist Fed, Easy Money, Joey Mortage, Ponzateral Debt Obligations and so on.
    Subprime was only the match. Credit is the dynamite. Oil/commodities Bubble is the dam, and the American Public Deficit will be the final wave, unwinding from fall 2008 until spring 2018.
    And some guys @ Financialsense also beleive that, like in 1929, credit shortage is the source of the real danger :

    This ‘third leg of the bear market’ (1930 to 1933) was characterized by the failure of the banking system to provide credit and money for the proper functioning of the economy. With bank failures currently looming, ignore history at our own peril… (continued here)

    Also, Tom Wolfe @ FT has a seminal view about Taleb distributions in hedge funds. :
    – Why today’s hedge fund industry may not survive

  10. wunsacon commented on Jun 1

    >> 45% of Alt-A loans are cash out refi’s meaning what do the borrowers have to gain by staying, they already cashed out.

    I recall reading that 1st mortgages in CA are non-recourse but that home equity lines are full recourse. How do you classify this group of Alt-A refi’s: non or full?

  11. VacantHomes commented on Jun 1

    Doug wrote:
    “And, for evidence of that, just look at the non-profit sector’s track record of continuing very low delinquency and foreclosure rates among the lowest income borrowers to whom they lend.”
    I believe that this is true also, but do you happen to have any information or links pointing to some studies or articles about this?

  12. Sean OToole commented on Jun 2

    wunsacon wrote: “I recall reading that 1st mortgages in CA are non-recourse but that home equity lines are full recourse.”

    In practice there is no such thing as a recourse loan in CA, 1st, 2nd, heloc or otherwise. CA offers 2 types of foreclosure, judicial and non-judicial. Only judicial offers recourse, but lenders are VERY unlikely to use it as it takes forever to get through the courts, and then the owner still has a ONE YEAR redemption period. No lender wants to wait 18 months to 2 years in this market to get a house back just to get a judgment that may be difficult to collect anyway.

    Sean O’Toole

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