Housing Market Math, Circa 2010
When does 2 - 1 = 0?
When a two-income family that's "upside down" on their mortgage loses one of those jobs ("upside down" is Realtor-speak for owing more on your home than it's worth).
The first wave of foreclosures largely consisted of marginal borrowers -- putting very little (or nothing) down -- paying inflated prices in especially overheated housing markets.
By contrast, today's second wave of foreclosures disproportionately consists of homeowners who are financially stretched because they've lost their job(s).
That's from Bob Peltier, Edina Realty President & CEO, who spoke at City Lakes' weekly meeting this morning.
That unfolding, second wave of recession-driven foreclosures is likely to be one of the dominant stories of the 2010 housing market (as I've blogged previously, I'd add to that list Option-ARM's, strategic defaults, and the economy generally).
Showing posts with label underwater mortgages. Show all posts
Showing posts with label underwater mortgages. Show all posts
Tuesday, December 1, 2009
Sunday, November 29, 2009
Less Stigma, More Ditched Mortgages?
Social Stigma vs. Financial Self-Interest
During the Vietnam War, civil disobedience consisted of burning your draft card.
In Colonial New England, civil disobedience took the form of throwing highly taxed tea into Boston harbor.
Might civil disobedience, circa 2010, manifest as homeowners ditching their underwater mortgages, even though they still have the means -- at least for now -- to pay them?
Moral "Double Standard"
Called "strategic default," the practice is the subject of a new academic paper by Brent White, a Professor at the University of Arizona Law School. White argues that strategic default is a rational response for millions of beleaguered homeowners:
Aside from the morally repugnant nature of Wall Street executives paying themselves billions barely a year after their recklessness jeopardized the financial system, their behavior risks an even greater harm: it allows millions of Americans to rationalize their own bad behavior.
"The system screwed us," they might logically conclude. "Why shouldn't we screw it?"
Across U.S., Food Stamp Use Soars and Stigma Fades
--Headline, The New York Times (11/28/09)
[A new academic paper] argues that far more of the estimated 15 million American homeowners who are underwater on their mortgages should stiff their lenders and take a hike.
--Kenneth Harney, "The Moral Dimensions of Ditching a Mortgage"; The Washington Post (11/28/09)
During the Vietnam War, civil disobedience consisted of burning your draft card.
In Colonial New England, civil disobedience took the form of throwing highly taxed tea into Boston harbor.
Might civil disobedience, circa 2010, manifest as homeowners ditching their underwater mortgages, even though they still have the means -- at least for now -- to pay them?
Moral "Double Standard"
Called "strategic default," the practice is the subject of a new academic paper by Brent White, a Professor at the University of Arizona Law School. White argues that strategic default is a rational response for millions of beleaguered homeowners:
According to White, would-be defaulters can organize their financial affairs to minimize the disruptions caused by the inevitable damage to their creditworthiness. That includes making major purchases prior to defaulting."Homeowners should be walking away in droves," according to White. "But they aren't. And it's not because the financial costs of foreclosure outweigh the benefits. Most owners are too worried about feelings of shame and embarrassment following a foreclosure, and ignore the powerful financial reasons for going through with it," he said.
--Brent White, "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis"
Aside from the morally repugnant nature of Wall Street executives paying themselves billions barely a year after their recklessness jeopardized the financial system, their behavior risks an even greater harm: it allows millions of Americans to rationalize their own bad behavior.
"The system screwed us," they might logically conclude. "Why shouldn't we screw it?"
Tuesday, November 24, 2009
Under Water Mortgages & Strategic Defaults
Future Foreclosures?
As the accompanying story spells out, even the startling, 1-in-4 statistic understates things: in Nevada, Arizona, and Florida, the corresponding percentages are 65%, 48%, and 45%, respectively.
As I just posted last week ("Watching Strategic Defaults"), the biggest wild card in so-called experts' 2010 housing predictions is what happens when homeowners stop paying their mortgages not because they can't, but because they won't.
This is an unfolding story with huge implications for the entire housing market . .
1 in 4 Borrowers Under WaterIn truth, this isn't just a headline in today's Journal; it's THE headline.
--Headline, The Wall Street Journal (11/24/09)
As the accompanying story spells out, even the startling, 1-in-4 statistic understates things: in Nevada, Arizona, and Florida, the corresponding percentages are 65%, 48%, and 45%, respectively.
As I just posted last week ("Watching Strategic Defaults"), the biggest wild card in so-called experts' 2010 housing predictions is what happens when homeowners stop paying their mortgages not because they can't, but because they won't.
This is an unfolding story with huge implications for the entire housing market . .
Thursday, November 19, 2009
Rick Sharga, Cont.
Watching "Strategic Defaults"
A couple other points from Rick Sharga's excellent presentation yesterday, including a much-needed "silver lining":
The "X" factor in everyone's foreclosure projections is what happens with "strategic defaults."
Typically, people don't pay their mortgages because they can't. A strategic default is when someone doesn't pay their mortgage because they've decided not to.
Basically, the borrower decides that the "cost" of wrecked credit -- at least for a few years -- is less than the "benefit" of preserving what cash flow they have, and being freed of making payments on a house that will never be worth what they bought it for (if by "buying" you mean putting next-to-nothing down, and making nominal payments for a few years -- the case for millions of "Buyers" at the peak of the housing boom).
The odds of strategic default increase as homes become more deeply "underwater" -- that is, worth less than the mortgage against it.
Nationally, Sharga estimates that more than 20% of all mortgages now meet that description.
A sea change in how otherwise solvent borrowers regard their mortgage obligations would obviously wreak havoc with the experts' current default predictions.
One Solution: Equity Sharing
Precisely because of the risk of strategic defaults, many experts are calling for some sort of "equity-sharing" feature in new mortgages, and in restructuring existing ones (I'm one of them).
For existing, "underwater" mortgages, the bank reduces the mortgage balance in exchange for an ownership stake in the collateral (the home that secures the mortgage). That's pretty much what happens now with creditors and corporations that file for bankruptcy protection.
Prospectively, new mortgages would provide that banks share in both a percentage of the upside and downside in the home's future value. In exchange, borrowers would have to forfeit the "non-recourse" nature of mortgage debt, as it's currently defined.
Oh, yes, the silver lining?
As bad as the foreclosure numbers are nationally, and despite signs of "metastasis" (discussed in my previous post), for now the pain is still geographically concentrated in places like Southern California, Arizona, Las Vegas, and Florida.
A couple other points from Rick Sharga's excellent presentation yesterday, including a much-needed "silver lining":
The "X" factor in everyone's foreclosure projections is what happens with "strategic defaults."
Typically, people don't pay their mortgages because they can't. A strategic default is when someone doesn't pay their mortgage because they've decided not to.
Basically, the borrower decides that the "cost" of wrecked credit -- at least for a few years -- is less than the "benefit" of preserving what cash flow they have, and being freed of making payments on a house that will never be worth what they bought it for (if by "buying" you mean putting next-to-nothing down, and making nominal payments for a few years -- the case for millions of "Buyers" at the peak of the housing boom).
The odds of strategic default increase as homes become more deeply "underwater" -- that is, worth less than the mortgage against it.
Nationally, Sharga estimates that more than 20% of all mortgages now meet that description.
A sea change in how otherwise solvent borrowers regard their mortgage obligations would obviously wreak havoc with the experts' current default predictions.
One Solution: Equity Sharing
Precisely because of the risk of strategic defaults, many experts are calling for some sort of "equity-sharing" feature in new mortgages, and in restructuring existing ones (I'm one of them).
For existing, "underwater" mortgages, the bank reduces the mortgage balance in exchange for an ownership stake in the collateral (the home that secures the mortgage). That's pretty much what happens now with creditors and corporations that file for bankruptcy protection.
Prospectively, new mortgages would provide that banks share in both a percentage of the upside and downside in the home's future value. In exchange, borrowers would have to forfeit the "non-recourse" nature of mortgage debt, as it's currently defined.
Oh, yes, the silver lining?
As bad as the foreclosure numbers are nationally, and despite signs of "metastasis" (discussed in my previous post), for now the pain is still geographically concentrated in places like Southern California, Arizona, Las Vegas, and Florida.
Friday, November 13, 2009
Et Tu, FHA?
Hemorrhaging at FHA
Here we go again.
First come the rumors of funny accounting and huge, buried losses.
Then come the vehement denials from company executives.
Finally, the truth comes out: the critics are vindicated, the losses are toted up, the discredited executives are booted (or not) . . . and the government provides a multi-billion dollar bailout.
Are we talking about Fannie Mae? Freddie Mac?
Well, yes. But this time, the embattled government agency is FHA.
Background
As you may or may not know, Fannie Mae and Freddie Mac -- the two biggest government-sponsored players in the housing market -- finally hit the (accounting) wall and were taken over by the government more than a year ago.
Both ultimately required tens of billions in government bailout money -- money they denied needing practically up until the end. In fact, they are still in business, still incurring losses, and still in need of more bailout money.
As Fannie Mae and Freddie Mac lending slowed down, much of the slack the last year has been taken up by FHA.
In fact, something like 30% of all mortgages made in the U.S. in the last year were backed by FHA.
Its appeal? Government insurance, plus low, 3.5% down payments.
No Margin for Error
Unfortunately, lending into a declining housing market to Buyers putting down a very slim down payment is a recipe for disaster.
In fact, my first-grader could do the math: 3.5% down, minus the drop in the local housing market (call it 5% to 20%), equals the amount FHA borrowers are underwater.
Throw in millions of recession-induced job losses, and the picture suddenly isn't very pretty.
Even if things aren't quite so dire, after Fannie Mae and Freddie Mac, I doubt that many people are going to give FHA executives the benefit of the doubt.
FHA runs low on cash, fueling bailout concerns.
--Headline, The Boston Globe (11/13/09)
Here we go again.
First come the rumors of funny accounting and huge, buried losses.
Then come the vehement denials from company executives.
Finally, the truth comes out: the critics are vindicated, the losses are toted up, the discredited executives are booted (or not) . . . and the government provides a multi-billion dollar bailout.
Are we talking about Fannie Mae? Freddie Mac?
Well, yes. But this time, the embattled government agency is FHA.
Background
As you may or may not know, Fannie Mae and Freddie Mac -- the two biggest government-sponsored players in the housing market -- finally hit the (accounting) wall and were taken over by the government more than a year ago.
Both ultimately required tens of billions in government bailout money -- money they denied needing practically up until the end. In fact, they are still in business, still incurring losses, and still in need of more bailout money.
As Fannie Mae and Freddie Mac lending slowed down, much of the slack the last year has been taken up by FHA.
In fact, something like 30% of all mortgages made in the U.S. in the last year were backed by FHA.
Its appeal? Government insurance, plus low, 3.5% down payments.
No Margin for Error
Unfortunately, lending into a declining housing market to Buyers putting down a very slim down payment is a recipe for disaster.
In fact, my first-grader could do the math: 3.5% down, minus the drop in the local housing market (call it 5% to 20%), equals the amount FHA borrowers are underwater.
Throw in millions of recession-induced job losses, and the picture suddenly isn't very pretty.
Even if things aren't quite so dire, after Fannie Mae and Freddie Mac, I doubt that many people are going to give FHA executives the benefit of the doubt.
Monday, June 29, 2009
Housing Market Psychology
"Can't Sell" vs. "Won't Sell"
Much attention has been paid to all the homeowners who want to sell now but literally can't afford to, because they owe more on their mortgage than their home is worth (in Realtor's parlance, they're "underwater").
Unless they can get the bank(s) to reduce their principal or simply default, they would need to write a check at closing for thousands or even tens of thousands of dollars.
However, anecdotally, I'm seeing more instances where Sellers are declining to sell for psychological rather than purely economic reasons.
Specifically, they're not willing to sell until they can break even (because they still have equity in their home, they would still receive money at closing rather than have to pay it).
Latent Supply
This isn't surprising to behavioral psychologists, who've long noted that loss aversion is a more powerful incentive than scoring gains.
However, Sellers' "need" to break even suggests that there is at least some latent supply that improving conditions will unlock.
That, in turn, will act to keep the recovery subdued.
Of course, there is also "latent demand" waiting for signs that housing prices have finally stabilized.
At least in the short run, the direction of housing prices may depend on which of these two groups -- "latent buyers" or "latent sellers" -- is larger.
Much attention has been paid to all the homeowners who want to sell now but literally can't afford to, because they owe more on their mortgage than their home is worth (in Realtor's parlance, they're "underwater").
Unless they can get the bank(s) to reduce their principal or simply default, they would need to write a check at closing for thousands or even tens of thousands of dollars.
However, anecdotally, I'm seeing more instances where Sellers are declining to sell for psychological rather than purely economic reasons.
Specifically, they're not willing to sell until they can break even (because they still have equity in their home, they would still receive money at closing rather than have to pay it).
Latent Supply
This isn't surprising to behavioral psychologists, who've long noted that loss aversion is a more powerful incentive than scoring gains.
However, Sellers' "need" to break even suggests that there is at least some latent supply that improving conditions will unlock.
That, in turn, will act to keep the recovery subdued.
Of course, there is also "latent demand" waiting for signs that housing prices have finally stabilized.
At least in the short run, the direction of housing prices may depend on which of these two groups -- "latent buyers" or "latent sellers" -- is larger.
Thursday, May 21, 2009
Hurricane Metaphor
Breached Levee's & Underwater Mortgages
If the housing bust and resulting recession are the equivalent of an economic hurricane (albeit a man-made one), what were the levees designed to hold back the flood waters?
Certainly, the major ones were:
--the role played -- or not played -- by the credit rating agencies, which blatantly mis-rated trillions in securitized mortgages as "Triple-A" that in fact were junk.
--the Glass-Steagall Act, passed by Congress in the Depression to separate investment and commercial banks, and repealed --at the behest of Wall Street - in 1999.
--SEC rules limiting investing bank leverage that were relaxed (gutted?) in 2003.
--the (erroneous) assumption that there was no "national housing market," just dozens of "local" ones (the diversity was thought to protect against a simultaneous downturn).
--the belief that the Federal Reserve possessed the tools and discipline to keep monetary policy on an even keel, or, in the event that an asset bubble formed and then popped, it would know how to clean up any resulting mess (Alan Greenspan's mantra).
--the belief, widely held by lenders, that borrowers with high credit scores -- and not much else -- would never default.
Clearly, all these "levees" and more were breached.
As is also the case with hurricanes, it's the low-lying areas that get inundated first. In the housing market, that would be homes purchased by marginal buyers, using dubious loans, with nothing down.
No wonder a mortgage that's worth more than the underlying home is said to be "under water."
If the housing bust and resulting recession are the equivalent of an economic hurricane (albeit a man-made one), what were the levees designed to hold back the flood waters?
Certainly, the major ones were:
--the role played -- or not played -- by the credit rating agencies, which blatantly mis-rated trillions in securitized mortgages as "Triple-A" that in fact were junk.
--the Glass-Steagall Act, passed by Congress in the Depression to separate investment and commercial banks, and repealed --at the behest of Wall Street - in 1999.
--SEC rules limiting investing bank leverage that were relaxed (gutted?) in 2003.
--the (erroneous) assumption that there was no "national housing market," just dozens of "local" ones (the diversity was thought to protect against a simultaneous downturn).
--the belief that the Federal Reserve possessed the tools and discipline to keep monetary policy on an even keel, or, in the event that an asset bubble formed and then popped, it would know how to clean up any resulting mess (Alan Greenspan's mantra).
--the belief, widely held by lenders, that borrowers with high credit scores -- and not much else -- would never default.
Clearly, all these "levees" and more were breached.
As is also the case with hurricanes, it's the low-lying areas that get inundated first. In the housing market, that would be homes purchased by marginal buyers, using dubious loans, with nothing down.
No wonder a mortgage that's worth more than the underlying home is said to be "under water."
Thursday, February 19, 2009
Underwater Mortgages: How Much?
Underwater . . vs. Drowned
According to The New York Times, "about $500 billion in mortgage debt is already underwater" ("Bailout Likely to Focus on Most Afflicted Homeowners"). That's realtor-speak for a house being worth less than the mortgage against it.
Unfortunately, based on my calculations, that number appears to be conservative.
Using industry statistics, and a blend of various housing price indices (National Association of Realtors, S&P/Case-Shiller, etc.), I estimate that more than $540 billion in mortgage debt nationally is now underwater. Of course, that number continues to rise as home prices fall.
Here is the math, along with the underlying assumptions (downpayments are presumed to rise steadily from 2006, as lending standards tightened; homes sales include both new and existing):
2006
Home sales (units): 6.5 million
Sale price (ave.): $250,000
Down payment (ave.): 5%
Mortgage (ave): $237,500
2009 market value: $187,500
Amount "underwater" (ave): $50,000
Total -- all homeowners: $324 billion underwater
Down payment (ave.): 5%
Mortgage (ave): $237,500
2009 market value: $187,500
Amount "underwater" (ave): $50,000
Total -- all homeowners: $324 billion underwater
2007
Home sales (units): 5.7 million
Sale price (ave.): $233,000
Down payment (ave.): 7.5%
Mortgage (ave): $215,525
2009 market value: $187,500
Amount "underwater" (ave): $29,125
Total -- all homeowners: $165 billion underwater
Down payment (ave.): 7.5%
Mortgage (ave): $215,525
2009 market value: $187,500
Amount "underwater" (ave): $29,125
Total -- all homeowners: $165 billion underwater
2008
Home sales (units): 4.9 million
Sale price (ave.): $220,000
Down payment (ave.): 10%
Mortgage (ave): $198,00
2009 market value: $187,500
Amount "underwater" (ave): $11,000
Total -- all homeowners: $54 billion underwater
Down payment (ave.): 10%
Mortgage (ave): $198,00
2009 market value: $187,500
Amount "underwater" (ave): $11,000
Total -- all homeowners: $54 billion underwater
Underwater mortgages - Total: $543 Billion
As the foregoing shows -- and the chart illustrates -- the closer to the 2006 peak one bought, the further underwater they are.
To round out the picture, some further tweaking is necessary.
Specifically, add: 1) the "pre-peak" home buyers in 2004-2005 who still caught some appreciation, but who lost that (and more) in the subsequent decline; and 2) all the homeowners who borrowed against their homes via home equity loans and cash-out refinancings.
The main subtraction would be the three million-plus homeowners who've already lost their homes to foreclosure. According to Moody's Economy.com, foreclosures could swallow another five million homes the next three years.
If so, that will certainly reduce the number of underwater mortgages -- but only because a corresponding number of homeowners will have drowned.
Wednesday, November 5, 2008
'Underwater' vs. Foreclosure
"'Underwater' Need Not Mean Foreclosure"
That's the title of a nice article in today's Wall Street Journal. The article's author makes the point -- which I have observed -- that most people who owe more than their home is worth keep making payments, regardless.
Assuming they can.
According to the article, the two biggest factors causing people to mail their lender the keys (so-called "jingle mail") are financial wherewithal, and the expectation that their home price will eventually recover. Of course, homeowners who default know -- or should -- that their credit will be wrecked for years to come.
Future Expectations Key
So what does the foregoing tell you about likely foreclosure rates this cycle?
That the key is whether "underwater" homeowners view their situation as temporary or permanent.
By that reasoning, areas of the country with rosy long-term outlooks, like San Diego, Boston, and Denver, will likely experience relatively fewer foreclosures. Declining, economically depressed cities like Detroit will have it rougher (what's new??)
That's the title of a nice article in today's Wall Street Journal. The article's author makes the point -- which I have observed -- that most people who owe more than their home is worth keep making payments, regardless.
Assuming they can.
According to the article, the two biggest factors causing people to mail their lender the keys (so-called "jingle mail") are financial wherewithal, and the expectation that their home price will eventually recover. Of course, homeowners who default know -- or should -- that their credit will be wrecked for years to come.
Future Expectations Key
So what does the foregoing tell you about likely foreclosure rates this cycle?
That the key is whether "underwater" homeowners view their situation as temporary or permanent.
By that reasoning, areas of the country with rosy long-term outlooks, like San Diego, Boston, and Denver, will likely experience relatively fewer foreclosures. Declining, economically depressed cities like Detroit will have it rougher (what's new??)
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