A Debacle That Has To Be Cleared Out Of The System
The Modesto Bee reports from California. “The housing market news just keeps getting worse for the Northern San Joaquin Valley. Stanislaus, San Joaquin and Merced counties had the highest foreclosure rates in the country during August. And home values have plunged. August statistics show home prices fell about 15 percent in Stanislaus and San Joaquin counties and nearly 20 percent in Merced County compared with a year ago, according to DataQuick.”
“Only 450 homes sold in Stanislaus County during August. That’s a 43 percent drop compared with last year. Lenders, meanwhile, foreclosed at record rates last month.”
“‘What we’re hearing from a lot of investors is that there’s just not a lot of equity in these properties,’ said Daren Blomquist, a spokesman for RealtyTrac.”
“In cities such as Patterson, where median home sales prices have plunged nearly 33 percent during the past year, according to DataQuick records. Waterford and Atwater prices dropped 24 percent, Lathrop fell 23 percent and Newman declined 22 percent.”
“Prices in central, western and southern Modesto decreased more than 20 percent.”
The Santa Cruz Sentinel. “Maybe Watsonville private investigator Emilio Martinez has a crystal ball. Seven months ago, he predicted a foreclosure epidemic would sweep Santa Cruz County.”
“Since then, foreclosure sales in the tri-county area — Santa Cruz, Monterey and San Benito counties — have spiked to 786, a tenfold increase compared to a year ago. According to the Santa Cruz Record, the tally in Santa Cruz County is 147. In Monterey, it’s 514. San Benito, 125.”
“Martinez said a steady stream of people have come to his spartan office in a shopping center on East Lake Avenue unable to make their mortgage payments and asking, in Spanish, for his help. ‘Few want to talk about it for one simple reason; it is Latinos taking advantage of Latinos,’ he said.”
“Soquel attorney William Purdy concurred. ‘Hispanics in particular, but by no means exclusively, are having their life dreams stolen from them at an appalling rate,’ he said. ‘It is being done primarily in my experience by other Hispanics.’”
“The story is often the same: The borrower is a landscaper and his household income is about $40,000 a year, but on the loan documents, he is listed as the owner of a landscaping firm making more than $100,000 a year. Now the borrower and his family are in danger of losing a $700,000 home they can’t afford.”
“‘I have never seen as much wire and mail fraud as I’ve seen in the last two years. These are major felonies,’ said Purdy.”
“Martinez added, ‘I have a client in Salinas, a broker lent him $40,000 to make payments and now he wants the $40,000 back. Creative financing is not a mortgage broker lending someone money to make payments.’”
“He finds it incredible that Alan Greenspan, who chaired the Federal Reserve for 18 years until his retirement in January 2006, did not realize what might happen.”
The Press Enterprise. “Foreclosures continued to mushroom in Inland Southern California in August, as the two-county area was reported to have one of the highest rates in the country of households in danger of losing their homes.”
“San Bernardino and Riverside counties had the sixth-highest foreclosure rate in the country in August, according to RealtyTrac. Six of the country’s 10 highest foreclosure rates were in California metropolitan areas.”
“According to RealtyTrac, there were 56,935 Inland properties were in some sort of foreclosure proceeding last month, 32,541 in Riverside County and 24,394 in San Bernardino County.”
From Bloomberg. “Securities backed by prime U.S. jumbo mortgages may be riskier than investors think because almost half of the underlying loans are from California, where home prices may again collapse, according to Barclays PLC.”
“California accounts for 45 percent of jumbo mortgages in securities sold last year, up from 35 percent in 1989, Barclays mortgage-bond analysts wrote in a report yesterday.”
“Following a housing boom, home prices in California declined by 12.5 percent between 1991 and 1995. Losses after foreclosures on jumbo loans securitized in 1989 rose to 3 percent, which would be enough to cause many current investment-grade bonds to default.”
“‘The current housing environment in California appears similar to the 1990s,’ wrote the analysts led by Ajay Rajadhyaksha. ‘Many investors believe that jumbo credit is sound. We think that this sense of security is misplaced.’”
“The housing recession in the early 1990s in California was driven by over-appreciation in the preceding years and job losses in the defense industry, the Barclays analysts wrote. Today, a rapid rise in prices may combine with tightening lending terms to cause another crash.”
“The effects of a California slump on jumbo securities will be worsened by the loans also having ‘become riskier,’ the Barclays analysts wrote. More than half of fixed-rate California jumbo mortgages packaged into bonds in 2005 and 2006 didn’t require borrowers to fully document their incomes or assets, compared with 19 percent in 1989, they said.”
“The median resale price of a single-family home in California in July 2007 was $586,030, compared with $221,500 in December 1999, according to the California Association of Realtors.”
The San Francisco Chronicle. “They say the best cure for a hangover is a little hair of the dog that bit you, meaning a nip of whatever you were drinking the night before. But the same treatment is not likely to alleviate the housing market’s pounding headache.”
“The Federal Reserve has been accused of creating or at least abetting a mortgage and housing bubble by keeping interest rates too low for too long. Now it’s the morning after and lenders, borrowers and investors are clamoring for pain relief in the form of an interest rate cut. Today, the Fed is widely expected to slice the federal funds rate.”
“While that might help the housing debacle from spreading, it’s not going to help the people who need it most.”
“People with ARMs tied to the London Interbank Offered Rate might not get any relief from a Fed rate cut. Corporate credit concerns have put upward pressure on Libor and downward pressure on Treasury yields. A Fed rate cut won’t automatically lead to a lower Libor rate.”
“Meanwhile, rates on jumbo loans of more than $417,000 and other nonconforming mortgages have barely fallen at all because investors are shunning mortgages that can’t be sold to Fannie or Freddie.”
“‘With jumbo loans and other nonconforming loans, price is not the biggest issue. The trust relationship between buyers, sellers and holders of this kind of debt has been shattered. Cheaper money doesn’t fix that,’ says Keith Gumbinger, a VP with HSH Associates.”
“Meanwhile, a Fed rate cut will do nothing to help subprime and other borrowers who are facing steep payment increases and have no hope of either refinancing their mortgages or selling their homes to pay off their debt.”
“‘The Fed cutting interest rates is not going to help a homeowner who is three payments behind on their mortgage,’ says Greg Mc Bride, senior financial analyst with Bankrate.com. ‘It’s like erecting a tent in the middle of a thunderstorm. Some people will stay dry but a lot of people will still get soaked.’”
“It’s possible the Fed has already written off part of the market.”
“‘I think the Fed believes a certain portion of the subprime marketplace is going bankrupt,’ says James Paulsen, chief investment strategist for Wells Capital Management. ‘The Fed thinks they can’t do anything about it. Maybe that’s the way it should be. To try to prevent it otherwise is creating a moral hazard.’”
“The Federal Reserve is expected to lower bank borrowing rates today, but buyers will not rush back to the housing market and foreclosures will not stop their upward spiral, economists and mortgage industry officials said.”
“Chapman University economist Esmael Adibi said because the Federal Reserve rate is a benchmark for all short-term interest rates, a change is likely to be reflected in rates charged to holders of credit cards and adjustable-rate mortgages.”
“But any adjustment will have no impact on long-term rates, such as those on 30-year fixed-rate mortgages.”
“‘The Fed’s fear is that inflation is still a problem and if they reignite the housing market, that inflation …will get out of control,’ Adibi said.”
“Brian Weide, owner of a mortgage broker in Ontario, said mortgage rates have been less of a problem for the Inland housing market than a drying up of mortgage money, reflected in a requirement for borrowers to show higher credit scores and to make larger down payments.”
“Economist Chris Thornberg said he doesn’t believe anything the Federal Reserve does will prevent an impending round of foreclosures.”
“‘We have to take our lumps, period,’ he said. ‘We have a housing debacle on our hands that has to be cleared out of the system. It is going to be a painful.’”
“Leslie Appleton-Young, chief economist for the California Association of Realtors, said, ‘It is certainly a step in the right direction and will calm the markets a bit and make credit a little more available. Every little bit helps. Will it stem the tide of the downturn we are in? No.’”