Monday, April 02, 2007

Subprime Mortgage Meltdown

The subprime mortagge market is in meltdown mode. Today, New Century, who in 2Q 2006 was the third largest subprime lender file for bankrupcty. Responding to the subprime mess, David Lereah declared "It's problematic, but not catastrophic." Bloomberg reported:

Sales of bonds backed by subprime mortgages are tumbling as investors and bankers, concerned about rising delinquency rates, pull back from what had been one of Wall Street's fastest growing businesses.

About $79.3 billion of securities backed mainly by loans to people with poor credit or high amounts of debt were issued this year, down 37 percent from $125 billion in the same period last year, according to a March 30 Citigroup Inc. report.

The subprime meltdown is already being felt across the nation. Once the spring / summer buying season has flopped, and we head into fall, the market will undergo a sharper decline.

P.S. The national foreclosure rate is about to increase dramatically as a big wave of ARMs reset and the economy falters.


  1. David,

    Given that the experts have already stated that what happens with the subprime loan market won't have more than a negligible effect on prices, what is your basis for claiming otherwise? I.e., How is it that you are in a better position to know than they are?

  2. "Given that the experts have already stated that what happens with the subprime loan market won't have more than a negligible effect on prices, what is your basis for claiming otherwise?"

    You mean the paid shills like David Lereah?

  3. David, you may also be interested in this chart which shows Washington, DC in the top ten cities for expected foreclosures of subprime loans originated in 2006.

    We should be proud of our accomplishments. Here is a draft of our acceptance speech for this fine honor(feel free to help me out with some ideas):

    "It is truly an honor to be included on this list and in the company of other great bubble cities such as Las Vegas and much of California. First, let me say that we did not expect to make this Top Ten list. Sure, our fine citizens have been doing all they can to buy more home than they can afford and to use their housing ATM's for splurges, but there are only so many plasma TV's we can put in our McMansions. So to say we are surprised to be in this list is an understatment. I want to thank the lenders who helped us achieve this honor - without you guys we wouldn't have been able to give the American dream of homeownership (followed by a quick foreclosure) to those with less than perfect credit. Now these borrowers can proudly say they helped make history. I also want to thank the realtors who gave us encouragement when we started doubting whether prices could really go up forever. Finally, I want to thank all the little people - the home buyers turned housing serfs - who really made this honor possible; without their fear of being priced out forever and their greed at wanting money for nothing, we wouldn't have made the top ten."

    Does anyone want to accept this award on behalf of our city? Lance?

  4. Hey, David Lerah's an expert! He's predicted 4 bottoms already!

  5. Bloomberg had a similar story today. What was surprising to me was the assertion in the article that "in the past two years, New Century underwrote about $120 billion of loans, or more than half the total since its inception. Subprime loans accounted for 86 percent of all New Century loans last year, the company said in today's court filings."
    This should have triggered a warning flag to someone on wall street or in the government. That is unhealty growth.

    - The Open House Network - ROpenHouse

  6. You mean the paid shills like David Lereah?

    Exactly. Non-shills, e.g. Thornburg, the economist, USB (bank), HSCB (bank), Merril Lynch, Credit Suiss, etc. have all published reports noting that there will be a economic impact due to the subprime debacle. They have all predicted a drop in US home prices.

    USB expects home prices to drop 7% in 2007, 8% in 2008. HSCB is 10% each year. ML is 5 to 10% in 2007 and 15% to 20% in 2008.

    Since these are the only people to accurately predict 2006... why listen to other "so called experts?"

    Oh... I hear Wells Fargo had accurate predictions, but since they do not publish nice reports... I cannot refer you to their information.

    So... the burden of proof is now upon those who claim contrary to those who predicted accurately.

    When the above sources start to predict a brighter future for the US economy and US home prices... I'll listen.

    And yea... ML was late to the game, but early enough to get credit in my book.

    Got popcorn?

  7. Remember how Lance liked to argue that DC wasn't going be affected by the subprime problems?

    Yeah... I guess we can file that one right up there with all the other "facts" he invented that weren't lets say... 100% spot on.

  8. Credit Suisse already came out with a report where they predicted a 21% decline in approved loan applications simply from the recent contraction of credit due to the subprime debacle. The report was spearheaded by Ivy Zelman, the first analyst who had enough guts to tear Bob Toll a new A-hole with his wildly optimistic predictions about new housing. With other factors including declining prices and erosion of consumer confidence, Credit Suisse predicts a 35-45% overall decline in sales from peak to trough.

  9. The experts? Hmmm.

    "Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants... With these advances in technology, lenders have taken advantage of credit scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers... Where once more marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending... fostering constructive innovation that is both responsive to market demand and beneficial to consumers."
    -- Alan Greenspan, April 2005

  10. I have an off topic question(at least to this post).

    I'm going to graduate this May, and it looks like I will get a job in Rockville (I'm in Baltimore right now). My career is centered around Biotech, so I plan on staying in Rockville/D.C. for most of my career and eventually buying.

    I already plan on renting for at least a year or two until I get to know DC better and find out where I want to live. Also, I have no money and need to pay off my student loans first and build up a cash reserve.

    So I guess my question to you is, while I read about the bubble and its reasons for declining across the nation, the one thing that makes the DC-Baltimore area diffrent is BRAC and all the new jobs coming in over the next 7 years or so.

    I agree there are a lot of forces that will push the housing market into decline over the next few years, but with the impending rise of new gov't jobs, do you still see this area going down?

    If this has been answered before, I apologize.

  11. Okay, time for some balance on the other side. It would be nice if we had some intelligent pro-housing people, but Investor and Lance just aren't up to snuff, so I'll do the job:

    1. The Center for Responsible Lending foreclosure estimates are based on survival models to estimate their forclosure rates, and the results of survival models are very, very sensitive to slight changes. We still haven't seen the sort of subprime meltdown that has been seen in economically depressed areas in the industrial midwest.

    2. The numbers coming out today indicate a boost for existing home sales in February, well above economists' forecasts. It would be interesting to see how much this matches lagged new home sales, which tend to be a leading indicator.

    3. Using Virginia MLS, inventories are slightly lower than they were at this time last year, and pretty solidly lower in the inner suburbs or Arlington and Alexandria.

  12. Stocks Surge on Home Sales Data
    Tuesday April 3, 11:25 am ET
    By Madlen Read, AP Business Writer
    Stocks Surge on National Association of Realtors Sales Data, Falling Oil Prices

    NEW YORK (AP) -- Stocks surged Tuesday on signs of an improving housing market, with falling oil prices contributing to the rally. The Dow Jones industrials gained more than 120 points.

  13. Lance,

    OK Take this frkm a local SoMD renter. But also from Someone who has spent the last 40 years IN the ML and RE business. When I moved here in June of 04 I didnt just see a bubble, I saw a bubble being manufactured. The problem in not with the 20% of all loans being subprime or that 13% of those Subprime will end in foreclosure.

    Subprimes had low credity scores, something that could be documented. What I saw were people with fairly good credit, "stating" income on the advice of the builders phase one lender, these are your Alt A loans no one is talking about. In these talks the buyers were assured that before the loan that they knew they would eventualluy be unable to afford, that Phase 2 would come along with higher prices creating instant equity....Of course what they didnt tell them was for that equity to do them any good they would have to sell otherwise it was just a loan to them selves adding on to what would reset.

    Then came the advent of Option ARMs and other exotic loans. Today I am subprime and a vet I have a 600 score because of my RELO to the DC area and having to pay high rents here while making a Mortgage payment in Atlanta.

    And I am ready to buy a house, I have no debt make greater than 130K. But need 100%.

    So I will wait, because the GS 9's that work for me all live in 500-600K homes and have new Lexus's are already getting ulcers and putting off the inevitable.

    Whats going to happen is the inventory will be up, in clusters mostly by subdivisions newer than 2003. But inventory on the MLS will not differentiate.

    This will force existing HO's to reduce their price if they truly have to move. This will force those that can make their payments in the subd. value go down, and as long as they havent taken any equity out, have a fixed rate then they will only be upside down in the house on paper and not in the pocket but it will be a while before values will increase. As you see no qualified buyer will buy a house to live in while the houses around them are destined to foreclose. Every potential buyer I know now is staying away from any subdivisions that are new, they watch the bus stops, we look on the states assesment real property website and see what was paid, and if you look your self you will see that in most every iunstance purchases in newer SD's stopped virtually on March 8th the day before the fed guidance took effect.

    This will effect existing homes as well but only in the sense that they will have to lower their prices. Many to below 417K if they want to attract any buyers such as VA because no lenders in the nation are doing 100% jumbos most 90% and most families just dont have the 42K as a down payment. And if they have it in the house they are in now well they still have to find a qualified buyer.

    They are not out there. We signed one of the Feb contracts. We will not get funded. Wait until the numbers come out for weeks after March 9th...

    This will have reproctions through every city, in every town until homes get back to afffordable prices. Hopefully the RE and the ML lobbisists will get congress to let them gradually ease back into "credit explination letters" but still insist on w2's etc....

    The industry needed tightening but it will come at the expense now of the existing HO that may lose3 their home or be in so upside down if they took out HELOCs...that they could end up getting busted.

    And do not forget the 60% of sr govt workers that are scheduled to retire, now they may not get to.

    So all in all I may very well be the buyer that everyone will want, because all credit scores will heal over time, I wont have anymore debt, and I know just like every other knowledgable person out there including those that dont want to admit it because their lively hood depends on it. If spring is the bust that we all think its going to be...the feds will lower the rate in May to stimulate the buyers but it wont because the qualified buyers are sitting in their homes not ready to take a loss but instead ride it out, transients like me, cant until my score is excepted at a rate I can live with or I continue to rent for 1600. Its not do or die and there will be plenty to rent thanks to the condo market colapse and turning into rental property. Smart folks wouldnt buy folks will wait until 2008 when the first option arms reset. We have 2 yrs of unknown.

    Oh, and the investors picking up the foreclosures from the banks, woul;d that be the same ones that started this mess that are some of the ones dumping properties now?

  14. and if it wasn't for the lousy weather in February the numbers would reflect what Diarreah Lereah has been saying. all is well. housing only goes up. Are you missing the boom? Buy now, or be priced out forever. Don't listen to Jealous Bitter Renters- they are just pissed they don't have their own housing ATM. Keep buying, keep helocing, refi forever you will never have to pay off the loan. There will always be people who will be only too happy to take your debt off your hands. Smart people know debt = wealth. There are plenty of Prime buyers out there, fix up your house, and make it look nice, and they will come. You don't need no stinkin' lifeboats. This ship can't sink!

  15. Here is an "expert", Mark Zandi, chief economist at, as quoted in tomorrow's WSJ:

    The number of foreclosures in the U.S. is likely to reach a record 1.3 million this year, compared with an estimated 900,000 in 2006, Mr. Zandi says.

    Foreclosures will cause more homes to be dumped on the market at discount prices at a time when inventories of unsold homes already are high in much of the nation.

    As a result, Mr. Zandi predicts, the median price for sales of previously occupied homes will fall nearly 5% this year, which would mark the biggest national drop since the Depression of the 1930s.

  16. David,

    I am a contributor to the Baltimore Metro Area Housing Blog. Nikki, the blog owner is on vacation. Somehow, the Blog was hijacked so you might warn your readers. The URL of her blog was changed to somehow. You might also want to temporarily change your link to Nikki's site. Also, if anyone does navigate to the hijacked site (now in Chinese) please flag it so that maybe google will do something. I am not getting anything but a form answer back from google.

  17. Yes, every time housing hits a new bottom, he's right on top of it! It appears the markets are "stabilizing" in their downward trend.

    Of note: It looks like there's not going to be any bailout until at least 2009. George Bush's administration has indicated that it would veto any such measure, arguing that the federal government's intervention "wouldn't be appropriate."

  18. David!

    You need to post more often. A lot is taking place in the DC market. Try to be like Ben Jones. Thank you!

  19. he one thing that makes the DC-Baltimore area diffrent is BRAC and all the new jobs coming in over the next 7 years or so.

    ???? BRAC has been moving jobs net out of DC? The MDA is moving 2,000 jobs out. Egland AFB (sp?) is slated to lose personnel too. Its Edwards, (mindblock, huge base near Panama city for JSF), Huntsville (again, mindblock on the base name), and a few others that will see the huge job gains. (Air Force is going to a "superbase" concept.) Marines are where they're going to stay (excl. some foreign bases), but the Army and Navy have a contentious amount of consolidation.

    Unless the Army or Navy is moving jobs to DC that I missed... The BRAC will net hurt DC home values.

    Got popcorn?

  20. Maryland gains from BRAC.

    A lot of BRAC jobs move from Crystal City to Fort Belvoir, both within the DC area.

  21. Keith said...
    "Maryland gains from BRAC.

    A lot of BRAC jobs move from Crystal City to Fort Belvoir, both within the DC area."

    In the longterm, the entire DC area gains from BRAC moving jobs to the outlying areas. I.e., Job infrastructure gets "seeded" out to outlying areas helping grow the metro area as a whole over the longterm. Reducing pressure on housing prices in the center in the shortterm, AND laying the stage for further economic growth as other wealth generating nodes of employment contribute to the overall prosperity of the Washington metro area.

  22. My only problem with NAR's feb numbers are that its contracts SIGNED not closed...gotta have the funding for the sale. Brokers started dancing shopping for the lenders that would lend to their client and also having lenders that had promised loans dropping them...So while contracts were signed I expect it was at the urgence of the realtors since everyone new the guidance was to be released in early March...

    I will bet a paycheck March numbers suck...NAR is running out of ripe looking apples on the dying tree. I believe looking in my crystal Ball will be that NAR will say in regards to March numbers "we saw a decrease in contracts on new and existing homes du to an increase in oil prices which kept folks from house hunting, thus delaying the spring buying boom until April at which time sales will be down due to families gone on trips called Spring Break for the first time and waiting on May for thge feds to lower rates since we have seen an increase in fixed rates on 1 onebillionth of one percent...and May wont reflect the decrease so June, thats it June will be the start of the spring buying craze"

  23. To anyone that can provide a well-reasoned response:

    I'm considering purchasing my first condo in DC. I've got $250,000 I can pay down and I've got a FICO rating of 810. I've been searching new construction all over downtown DC, and I think that $500,000 for a 2 bdrm is overpriced. Do you think that's a reasonable reaction, or has pricing for new construction in the downtown area reached a "fair" range?

  24. Lance said...
    “Given that the experts have already stated that what happens with the subprime loan market won't have more than a negligible effect on prices, what is your basis for claiming otherwise? I.e., How is it that you are in a better position to know than they are? “

    Are the “experts” you refer to “Lance”, the ones that have called the bottom several times now?

  25. Paul said: "I'm considering purchasing my first condo in DC. I've got $250,000 I can pay down and I've got a FICO rating of 810. I've been searching new construction all over downtown DC, and I think that $500,000 for a 2 bdrm is overpriced. Do you think that's a reasonable reaction, or has pricing for new construction in the downtown area reached a "fair" range?"

    Your reaction is completely reasonable for most of downtown. The biggest bubble is the large number of new condos now being built downtown, especially in the Mount Vernon Square area, where over 1,000 units are in the process of being built. Most of that area is still 10 years from being truly livable, safety is a concern, and the design and construction is mediocre at best. Pre-bubble prices (1999) for a nice modern two bedroom around 17th and P were, around $200 - $250,000, but prices are now completely out of whack.

    I believe that given the neighborhood, $500,000 for a new two-bedroom is fine, but good luck finding that anywhere in DC, even in Columbia Heights, which has more potential in my view than Mt Vernon Square, but the units are already priced as if it is a neighborhood that has arrived like Logan or U Street (the center of each, not the fringes). In the past, you could pay bargain prices but have either a lot of space or great design, but suffer with the neighborhood. Now there is little incentive.

    I am also looking for a one-bedroom den (or more if it exists) for around $500,000 and I want a condo downtown. For me, I am looking for the apartment that I intend to keep for many years, design is important and am willing to suffer. Prices seem less overvalued around Logan/Dupont/Georgetown for what I believe the value will be in the long term than in the marginal areas or even in Penn Quarter. That's not to say they are not overpriced, which I think they all are by at least 25%, but there's a deeper market of people with cash willing to rent/buy in those areas.

    Watch out for the latest trick, which is to offer parking separately. Circa 2004/05, the prices included parking. Now many new projects don't, mean they are priced as ridiculously as ever.

    Call me CondoCritic

  26. What is an “Expert”? (Pronounced ex spurt)

    EX means former
    SPURT mans spray or dribble of water.

    So there you have it, an expert is a former drip, and for anyone who listened to the real estate “experts and bought at the top are all wet.

    Common sense is still an uncommon trait