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Friday, July 28, 2006

Majority Of New WA Mortgages "Nontraditional"

A perceptive reader pointed out a post at Calculated Risk that pointed to a 29-page report by the Federal Deposit Insurance Corporation (pdf). The interesting piece of information is contained on page 25, in Chart 4, reproduced below.

And here's the money quote from the write-up:
Nontraditional loan products can be appropriate for financially savvy borrowers with low credit risk. Indeed, many of these products have been offered for years to such borrowers, and credit quality generally has been good. What has changed, however, is how these loans have been marketed and used in recent years. Lenders have targeted a wider spectrum of consumers, who may not fully understand the embedded risks but use the loans to close the affordability gap.

The degree to which mortgage market innovation, fueled by significant MBS liquidity, boosted home sales last year is unknown. Anecdotal evidence suggests that affordability and financing played a strong role in extending the volume component of the mortgage credit cycle last year. For example, there is a correlation between nontraditional mortgage loans and home price growth. An analysis of state-level data from LoanPerformance Corporation shows the penetration of IOs and pay-option ARMs for nonprime borrowers into areas with strong price appreciation and reveals a strong positive relationship between the concentration of such loans and home price growth (see Chart 4). This analysis illustrates the recent development of borrowers increasingly using IOs and pay-option ARMs to purchase homes they might not otherwise have been able to afford. A June 2006 study by Harvard’s Joint Center for Housing Studies also confirms this trend.

Analysts are concerned that higher-risk borrowers are more likely to be affected by a major payment shock during the life of their mortgage and may be more likely to default. Compounding this possibility is the fact that the increasing availability of mortgage credit is occurring at a time when mitigating controls on credit exposures have weakened.
A number of readers agreed with the FDIC's statement. You would expect that more "nontraditional" mortgages would mean more defaults (and therefore more foreclosures). However, that hasn't really panned out in Washington State (yet). Although we're 6th-highest on the graph above, with around 55% of mortgage originations being nontraditional, we are down at number 18 for foreclosure rates, with 1 for every 1,460 households. Not only that, but as reader Christina pointed out, many of the states with the fewest nontraditional mortgages have surprisingly high foreclosure rates. (For example, Texas, Indiana, Ohio, Oklahoma, and Tennessee all have less than 30% nontraditional mortgages, but higher foreclosure rates than Washington.) Christina asks:
I want to know why on the chart of negatively amortizing loans, the states on the low end of the line have the highest percentage of foreclosures.
Sarah gives a possible explanation:
Christina- here's my guess, those areas did not appreciate as wildly as some others, so people were not able to unload as quickly and for ever greater amounts of $ and wound up in foreclosure.

CA foreclosure rates have only recently been starting to go up, now that the market has finally turned there.

It's the areas with the greatest amounts of appreciation that were forced into using the neg am loans as houses became increasingly unaffordable.

But the flip side of that is that those same areas, for a time anyway, were able to sell homes quickly and at a profit to avoid foreclosure. Since everyone was on the mania train and there were buyers aplenty.

As the market turns, my guess is they'll be plenty of foreclosures in the most egregiously overpriced markets, Seattle included.
I agree with Sarah's analysis. The big question is what will happen if/when appreciation levels off (or heads into negative territory), while interest rates continue to climb. I'll leave that as an exercise for the reader.

(FDIC, Summer 2006)
(Press Release, RealtyTrac™, 05.16.2006)
Please read the rules before posting a comment.

41 comments:

AnotherMIGuy said...

Wait a second - the story headline is misleading. The graph is percentage of nonprime originations, no percent of WA mortgages.

Any ideas what the percentage of nonprime originations in WA is?

It would be a lot more interesting to see the overall numbers/percent of nontraditional (vs traditional) mortgages here.

meshugy said...

I pretty much agree with Sarah's analysis. Places like Seattle have high home prices so people are using more exotic loans. However, a big part of the reason the prices are high is that we have strong demand. So no matter what kind of financial trouble you get into, you can usually unload the house quickly (often at a profit). But in low demand places like Oklahoma, it could take years to sell so you're forced to foreclose.

The Tim said...

midan,

Good call. I've added the word "new" to make the distinction. Wasn't trying to mislead. Sorry about that.

AnotherMIGuy said...

Tim - thanks. Note that's even more specific than that - it's "new nonprime mortgages" . I have no idea what percentage of our mortgages are nonprime, but I bet it's not quite 100%...

Anonymous said...

Nontraditional loan products can be appropriate for financially savvy borrowers

That excludes 99% of the population.

Tony G said...

so what happens when demand decreases due to a recession or high commodities, as we are experiencing now? OH UH!

plymster said...

According to this Housing Tracker, asking prices have leveled off over the last month and inventory is continuing to rise fairly dramatically. That spells doom for the appreciation getaway car.

Given that Colorado, Nevada, California, and Virgina/DC are all seeing higher foreclosure rates about when their inventories doubled YOY, I'd expect we have a few more months before we see an uptick in foreclosures.

Anecdotally, I keep hearing of more and more first time buyers (friends of my girlfriend), buying condos for "investment" purposes. If you're paying double your monthly rent on insurance, interest, condo fees, taxes, and maintenance, as these folks are, I wouldn't call that an investment.

plymster said...

Also, regarding defaults in TX, OK, TN, IN, these are all spacious states. In the DFW area, it can take 2 hours just to drive across the metroplex (no traffic). Couple that with the fact that there are a large number of SUV and Pickup owners, and you have regions that are very easily impacted by gas prices doubling in two years.

To make matters worse, homes generally cost less, so the average homedebtor has to come up with 1K (vs 3K here in Seattle), and salaries are generally stretched to the limit. The impact of doubling transportation costs hits these folks extra hard.

Based on that logic, I think you can point to gas prices for the decrease in home prices in non-bubble areas.

SourMash said...

Midan's nonprime distinction is important. These are loans for people with credit nicks (FICO in the mid-600s).

Some statistics on nonprime borrowers from a mortgage lender trade association put the overall numbers at 30-50% of all Americans.

So this graph, while interesting, is not talking about all originations. Just the riskier ones.

meshugy said...

According to this Housing Tracker, asking prices have leveled off over the last month and inventory is continuing to rise fairly dramatically. That spells doom for the appreciation getaway car.

We probably are starting to reach a plateau now. But asking prices only gives you a vague idea of what is going on. The sold data is a better barometer. That should be out next week....

My guess is that we're still still seeing double digit YOY appreciation but slowing MOM appreciation.

It's also worth noting that for the last couple of years, almost all the appreciation happened in the Spring. It then plateaus till next Spring. We saw an amazing rise in appreciation this Spring after a relatively flat winter, fall, late summer.

jcricket said...

It’s important when considering the possible effect any exotic mortgage financing will have on the economy to consider the age of mortgages and the overall percentage of mortgages in the last 5 years vs. the total number of mortgage obligations. I don't know the statistic for just WA, but I did read that more than 70% of mortgages in the US originated more than 5 years ago. This means that less than 30% of mortgages (total) originated in the last 5 years, during the “big price run-up”. We can infer from the statistics that Tim used for his source on this post that that less than 50% of those newly originated mortgages were non-fixed. When you combine the 70% of homeowners chose to stay put, along with any renters, you have a pretty big pool of people who are not in subject to any more financial risk than they were before the big home price appreciation boom. IMHO, the pool of people in potentially dire financial straights is smaller, as a percentage of the American population, than one might think, given all the reporting done on the housing bubble. To me, this buffers how big an effect any "home bubble burst" would have on the population in general (just like how the dot-com bust affected those directly employed in tech companies a lot more than people who weren’t).

Here are some good statistics on the 15 years of mortgage originations from 1990-2004 from the Office of Federal Housing Enterprise Oversight. Also, here's some specific economic data from the Federal Reserve they believe points to a soft-landing, even with price declines.

... in low demand places like Oklahoma, it could take years to sell so you're forced to foreclose.

I think that's part of it, but from what I've read, the biggest factor preventing higher foreclosures in WA state is that median income levels are much higher than those other states. Historically, income and foreclosure levels track closely (which makes sense). Sub-prime borrowers, whether they get a fixed or adjustable rate, are always closer to defaulting than others. As banks have learned from experience, people will stretch themselves very far to avoid defaulting on their home. And Higher income people simply have more room to manuever than low income people. This may not be good for the any consumer (no matter what income level, by stretching becomes unable to save for anything else) but it certainly reduces foreclosures, sustains house prices and helps dilute any economic shock to banks (and thus the economy as a whole).

My prediction - If a significant percentage of the 50% who took out adjustable or IO mortgages in WA also have low incomes, foreclosures will rise dramatically in coming years. If, instead, a significant percentage were higher income people, foreclosures will rise far less dramatically. For what it's worth, this report shows that a high percentage of buyers, nationally, who take out IO/adjustable loans are in the lower-levels of income, pointing towards an increased foreclosure rate. The sad thing is, that many of these buyers were sub-prime to begin with, and quite possibly banks were/are expecting them to default, blunting their impact on the rest of us.

If you want to be more frightened, read the comments from Wamu’s chairman and CEO, explaining that they unloaded their mortgage portfolio in order to free up resources to support more sub-prime, home equity and option ARMs. Yikes!

jcricket said...

For you data heads - good statistics (including some excel files) on mortgages can be had here:

http://www.ofheo.gov/Research.asp

This paper from 2003 compares the "loss" (default) rate in prime vs sub-prime borrowers. Income levels/Credit History being be more tightly correlated than just looking whether someone took out a fixed vs. ARM mortgage.

biliruben said...

JCricket -

I don't know the statistic for just WA, but I did read that more than 70% of mortgages in the US originated more than 5 years ago.

I haven't examined your links in detail yet, but I looked at this a few months ago, and though the mortgages originated more than 5 years ago, just about everyone with a mortgage refinanced. Only a complete idiot wouldn't have refinanced when 30 year-fixed dropped close to 5.0% in 2003 or 2004.

What sort of idiot wouldn't have? Sure, some of them went to 15-year fixed, and became more conservative, but others cashed out and went into "creative" structures, using the money to buy another house or an Escalade.

While this article only discusses non-prime loans, that's the ones you are most concerned about, as far as defaulting.

plymster said...

Meshugy,

You're dead on with the spring appreciation, but prices didn't plateau last year until November (about $14K price increase from August thru November, or about 1/3 of the yearly appreciation). If they're already plateauing in July, does that mean that the winter will likely see some monthly declines (though not necessarily YOY)?

Also, inventories flattened about this time last year. Right now, it looks like they're on a fresh uptick (since 7/1).

Admittedly, though, this just talks about asking prices, not sales prices, and it's a very small sample of data.

jcricket said...

Only a complete idiot wouldn't have refinanced when 30 year-fixed dropped close to 5.0% in 2003 or 2004.

Or anyone near the end of the life of their mortgage, like, say, nearly the largest part of the population, and the largest segment of homeowners, the baby boom generation.

point, counterpoint. :-)

biliruben said...

I wish I recalled where I got my data from. Gov't docs, but I don't recall which ones. I summarized somewhere, though I don't think it was here. Maybe fucked borrower.

It was pretty obvious, however, that nearly all, except mayybe 5% of mortgage holders, refinanced in the last 5 years.

Even if you had only 5-10 years left on your mortgage at 8%, which was about the lowest rate someone would have until very recently, you would be sorely tempted to refinance into a 15 year fixed, grab some cash and lower your monthly payment. I know several people who did this. I even know someone who had their mortgage paid off, have a couple mil in the bank, and took out a new mortgage just because the rates were so good.

Anyway, these likely aren't the people who are going to default in any great numbers. The ones we are concerned about are the sub-prime borrowers.

biliruben said...

For those that are still under the bizarre illusion that Seattle is somehow "special," I recommend this post over at Mish

In April:
Real estate is local. I have no doubt that Florida, southern California and other hot spots are having contractions. The speculative money has bailed out and that's what happens. But here in Atlanta, where my wife and I have our residential real estate business, it's a very different story. We never had a speculative run up in prices here and so far, this year, it's shaping up as a normal year.

and then Last week:
It's been a “character building year” as another agent in our office put it the other day. What makes it more stunning, at least to me, is that it started out so well. We ended the first quarter with nine deals pending or closed, which is a very solid start. Then we hit a brick wall with only three deals in the second quarter and that would make it our worst second quarter ever in our twelve years.

Then it got worse...


Read it all.

Anonymous said...

I think it is funny that just because our area has been 'slow' to catch the trend which many parts of the country have already started to experience (DC, Florida, CA, Mass) they think we will somehow not experience it. The writing is on the wall folks. We look exactly like those areas did this time last year. See http://www.benengebreth.org/housingtracker/location/Washington/Seattle/ -- inventories up 6% just this month -- up 30% in just the last 3 months. First inventory soars, then prices stagnat -- then prices drop. We are in the inventory soaring phase just like those other mentioned places were last year. We are right on the edge of prices stagnating.

Anonymous said...

sorry link was http://www.benengebreth.org/housingtracker/location/Washington/Seattle/

Anonymous said...

no sure why it is doing that but after location it should be location/Washington/Seattle/

richard said...

biliruben What makes it more stunning, at least to me, is that it started out so well. We ended the first quarter with nine deals pending or closed, which is a very solid start. Then we hit a brick wall with only three deals in the second quarter and that would make it our worst second quarter ever in our twelve years.


For some reason this reminded me of...

okay, really quickly...best joke of the night (imagine kevin nealon - who, by the by, is HELLA tall and wearing a hideous purple sweater - saying this): "not that i watch porn but it was just randomly on my tv the other night and i don't know, i was kinda bored at first but then i got interested and then more interested and then SUPER interested and then i was REALLY REALLY REALLY INCREDIBLY INTERESTED and then all of a sudden, i wasn't interested at all.

Sorry about the P-word, but the parallel is just too funny.

meshugy said...

First inventory soars, then prices stagnat -- then prices drop.

Our inventory is still about 50% less then normal...we need well over double the current inventory before we'll see a drop in median price.

Days on the market is always a good barometer:

King County - Residential

Days on the market June 2006: 57
Days on the market June 2005: 56
Days on the market June 2004: 61
Days on the market June 2003: 68

Houses are still selling faster then previous years...just 1 day slower from the boom times of last year.

biliruben said...

Days on the market 1999: 32
Days on the market 1998: 33
Days on the market 1997: 44
Days on the market 1996: 35

Anonymous said...

Our inventory is still about 50% less then normal...we need well over double the current inventory before we'll see a drop in median price.

...or half the demand. Stop being such a simpleton.

You've been repeating this same line for weeks now (if not months), and you've just transitioned it from "assertion" to "fact" in your head. But it isn't a fact. It isn't even a very good assertion.

You're making a comparison between two drastically different markets. In the 90s, far fewer people were priced out of the housing market than today. And though the market is still hot, it's probably a very safe bet that aggregate demand for home ownership is probably lower due to the massive price increases of the last 5 years. There's lower inventory, to be sure, but there are also fewer and fewer people who are willing to sell their first-born child's organs in order to procure a home.

So...do we really "need" a 2-fold increase in inventory to get a price decline? That entirely depends on the latent demand for housing. In other word, it's a complicated question involving supply and demand curves, not a simplistic, one-variable model.

Eleua said...

plymaster,

I have lived in both the DFW area and the PNW in the past few years. I believe your analysis to be flawed.

Dallas is FAR cheaper to live, even correcting for home prices. Gas is cheaper, food is cheaper, day-to-day expenses are cheaper, and you don't have to drive all that much.

Yes, it can take 2 hours to cross the Metroplex, but that is not done very often. It is no more common to live in Mesquite and work in Fort Worth, than it is to live in Lynwood and work in Olympia. If you live in Flower Mound, you have at least a dozen grocery stores within 6 miles of your house to choose from.

There are almost no toll roads, and nobody has to take a ferry to get anyplace. 4 Interstate Highways criss-cross the Metroplex.

States in "flyover country" did not experience the Baby-boomer, hip-n-trendy real estate psychosis that was experienced in the uber-chic, super-sophisticated regions of the country. That's why it is called the "bi-coastal bubble." The operative word is bubble. Bubble phenomenon is characterized by the growth of the bubble feeding upon itself until exhaustion sets in.

Texas saw over 1,000,000 people lose their homes to foreclosure when the oil bust hit, and that was just 15-20 years ago. That kind of sticks with you. No such phenomenon exists in the smuggy cites of the West.

If my household income in Dallas was $80K, it would go much further than it would in Seattle, and that is without consideration of housing costs. I've done both.

Dallas was far cheaper than Seattle, even when gas was $.89/gal.

Trust me on this. If there was some ephemeral, hippy-dippy, mystique that drew the post-WW2 generation to commune with Bluebonnets, BBQ, and Baptist Churches, while making them shun mildew, salt-corrosion, and grey skies, homes in Highland Park, Texas would be at 14X income, while Bainbridge Island, Washington sits at 1.8X income.

It's a bubble, and it did not descend equally across the nation.

Nothing more...
Nothing less...

Eleua said...

Another point about comparing incomes in the sexy, coastal communities, vs. the mundane mid-West cities.

I'll have to check on this, but I'm pretty certain that if Mercer Island was transported to the Dallas-FW Metroplex, it wouldn't even be in the top 10 in median household income. I think the only city in Washington that does make it is Medina (and Hunt's Point, if you consider data that small).

I've posted this a million times, but since I have left the Navy, I have lived in two, relatively affluent cities - Highland Village, Texas, and Bainbridge Island, Washington.

HV has lower crime, higher educational attainment, shorter commutes, much higher income, better schools, and the quality of housing (in terms of sqft and amenities) is much higher. Highland Village is all built-out and is also a waterfront community.

House price/income ratio is appx 2.0.

Bainbridge Island is almost 10.0, and that is with significantly less disposable income, and higher fixed commuting costs (ferry tolls).

Why the price/income disparity? Largely, it is X-Cal money driving prices up, coupled with the bi-coastal bubble phenomenon.

Picture, if you can bear it, what home prices on Bainbridge would be if their prices adjusted to make their ratio 2.0.

Picture $150K.

Eleua said...

Correction to last post...

BI price to income ratio is 8.0.

biliruben said...

I disagree, there, Eleua. I think it's a national, if not global, credit bubble. As such, no place will be safe.

Banks were too free with credit everywhere. The scale is simply different.

I agree it won't be completely uniform, but the deflating bubble will be felt to some extent everywhere.

Eleua said...

I totally agree that everyone will pay for this credit bubble, but the runup was isolated to the areas that 77,000,000 Mouseketeers find hip-n-trendy.

I've scratched a hole in my head trying to understand how the credit bubble did not run North Texas homes into orbit, but I could only arrive at my "hip-n-trendy" conclusion.

The "fundamentals" are significantly higher for rising home prices in Dallas when compared to the PNW, yet the disparity continues to widen.

It's not about the fundamentals; it's about the psychosis and the bubble.

biliruben said...

Did you check out my link to Mish's anectdote in Atlanta?

You'd really like his blog, btw. Smart, contrarian thinker.

meshugy said...

bili...which data are you looking at? Mine was taken from "active listings residential."

If you look at "pending sales residential" for June 2006 it shows 43 days on the market. Closed Sales shows 38 Days on the market.

I think you were looking at closes sales for 90s...

Anonymous said...

Meshugy,

Do you belong to the “Flat Earth Society”? Yes, there is such thing is “Flat Earth Society”
http://www.alaska.net/~clund/e_djublonskopf/Flatearthsociety.htm
whose members refuse to believe that the Earth is round because they claim that they cannot observe it with their own eyes. The same force that inflates the housing bubble everywhere is receding or has reached its limit, and now the bubble is being deflating everywhere. The bubble arrives here late and thus will linger a little bit longer. Anyone with an open mind can see it quite clearly while you still desperately hang on to your personal experience – a few blocks around your house. I’m sick and tired of your repeated statements … but I don’t see it here – no, the job market is too strong- what? – the inventory is too tight … blah blah blah…

Amit D. Chaudhary said...

I am new to this, but it is not just days on market or inventory as people will withdraw listings and change plans, if expected appreciation is not coming. Yes, prices for homes sold is the final number.

However, I personally found the pending sales numbers insightful. It turn negative YOY since Nov 2005. Also, note historically, Dec-Jan are the only slow months.


NWMLS June 2006 figures


4-COUNTY PUGET SOUND REGION PENDING SALES
(SFH + Condo combined)
(totals include King, Snohomish, Pierce & Kitsap counties)
Jan Feb Mar Apr May Jun Jul
Aug Sep Oct Nov Dec
2005 5426 6833 8801 8420 8610 8896 8207
8784 7561 7157 6188 4837
2006 5275 6032 8174 7651 8411 8094

Amit

meshugy said...

Seems like the media in ubiquitously putting Seattle in the "bucking the trend" category:

Number of U.S. homes, condos for sale rises to 9-year high


Some local markets, including the Seattle area, remain very strong. Once-hot markets — such as California, Florida and the Washington, D.C., area — are cooling. New Mexico, Texas, Pittsburgh and Milwaukee are heating up.

This is probably the 5th time in the last few days that I've seen a reference like this to Seattle...the sarcastic quip "oh, but we're different" which is so popular on this blog just might be true.

jcricket said...

the sarcastic quip "oh, but we're different" which is so popular on this blog just might be true.

Or we're the opposite of the canary in the coal mine. We're on the end of a rubber band and we'll be pulled downward faster than others.

Tony G said...

We are different. We are one of 5 or 6 states that have the highest rate of ARM's and I/O's and other fancy types of lending.

Seattle's new motto:
Seattle. Where not only are the people are diverse, are loans are too!

Anonymous said...

mushugy Why are You here?????? Everytime I read your statements, I dont even have to see the tag stating the persons identity writing~!

You seem to be so bent on Making everyone believe it can't happen here~!

Why don't you give us some real evidence you understand markets and investing to say the least.

I willing to bet you have 0000 experience in trends and absolutly nearly 000 insight into markets.

Other than the fact you bought a home when the sheep were just beginning to in to the slaughter house.

It is true that many people here ar indeed renters or priced out then there are some of us that bought way before the massise appreciation came.

Im willing to bet you actually see yourself benefiting from the massive appreciation that rose all ships... and in the process that tax bill feels pretty good, Wooow were really Gaining Mushugy.. My home went up 300,000. dollars and your home went up as well..... to bad everyone elses did as well... GEEE WIZ... I Also Love that TAX INCREASE.... Im Richer Now.. Now Mushugy tell me how your benefiting??????????

I personally think its a WIN WIN FOR the Government and everyone with multiple homes.. However us primary resisdence holders are getting screwed as well... were bagholders thinking were making out as well...

Gee Whiz... ooooh I forgot my House is a Disguised as "ATM MACHINE... But REALLY ITS A CREDIT CARD~!!!!!!!

SeattleMoose said...

Here are the monthly increases for various price points as interest rates increase

Loan/Rate/Increase
100K/2%
100K/4%/$107
100K/6%/$230

300K/2%
300K/4%/$323
300K/6%/$690

500K/2%
500K/4%/$539
500K/6%/$1,150

700K/2%
700K/4%/$755
700K/6%/$1,610

Assumptions:
Term: 360 months
Increase: P&I only

Error: ~10% (due to not taking into account various factors like decreasing term and loan balance)

Given that subprime ARMs have been the financing tool of choice during the last 3 years all I can say is....OUCH

sarah said...

Amit-

Thanks for the info and welcome to the blog!

rsharga said...

Really interesting discussion.

I wanted to answer an earlier question about why states without a high percentage of exotic mortgages had higher than average foreclosure rates.

Historically, most foreclosures haven't been related to exotic mortgages, but to underlying economic problems - either personal, like divorce and illness, or regional, like unemployement. Many of the midwestern states are having employment issues right now, which is vaulting them into the higher levels of foreclosure rates.

Other regions have specific issues - Colorado has some excess inventory problems, Georgia has foreclosure fraud, etc.

As we're tracking all of these data points at RealtyTrac, it doesn't appear that the anticipated effects of all of the ARMs have hit...yet.

With many of these loans are due to "reset" over the next 18 months, and as the average mortgage holder could be looking at between a 20% and 50% increase in monthly mortgage payments, no one's really sure how bad the fall out might be. But we'll all know soon enough.

As a side note, since there's been a lot of discussion regarding the percentage of mortgage types, the MBA's numbers suggest that the percentage of ARMs peaked last year around 36%. No information yet available on how many of these were subprime. We're trying to analyze the properties in our foreclosure database to determine how many ARMs vs. fixed, prime vs. subprime etc, and will publish whatever we find.

Anonymous said...

rsharga-

thankyou! Can't wait to see those stats!