Broken Arms

Adjustable-rate mortgages, or ARMs, the vehicle of choice during the housing boom, are now turning into a nightmare for those home owners that took them. ARMs have dominated mortgage delinquencies and home foreclosures. Nationally, 48 percent of subprime ARM loans were at least one payment past due in the MBA's latest report. In Florida, the subprime ARM delinquency rate was more than 60 percent. And, in the second quarter of 2008, Florida and California accounted for 58 percent of the nation's prime ARM foreclosure starts.


With home values dropping anywhere from 20 to 50%, returning values back to 2003 prices, most South Floridians with option ARMs are unable to refinance because their loan is upside-down, meaning they owe more than the house is worth.



Adding to the problem were all of the toxic ARMs that were developled during the bubble, to put people in houses they couldn't afford, and to pay higher commissions to the salesmen pushing them. Often called ''liar's loans'', these were often given to the borower without any income verfication (anyone remember Casey Serin?) , interest-only loans that often balloon when adjusting and ''option'' ARMs in which the homeowner initially may choose from a variety of payments, including one incredibly insane option that doesn't even cover the monthly interest amount, adding to the principal of the loan (so-called negative amortization).



Adding to the problem, rates are rising. Despite Bernanke and the Obama administration printing up hundreds of billions of dollars, and buying up hundreds of billions in Treasuries and MBS's, yields are higher than at the beginning of the year. The average rate for a 30-year loan jumped from 4.82 percent a week ago to 5,45 percent by the end of the week. Every 100bp increase means the borrower has about 10% less buying power, based on payment.



It doesn't really matter where rates are if you are in a negative equity situation, or if you lost your job. How many people have or want to write a check for $50,000 to refinance a house? Most people are stuck in these loans, and have to make the decision to either keep paying or walk way. As evidenced by the massive increase in foreclosures, it appears people are choosing the latter.


To get an idea of how large this problem is, for the next two years we are going to see about 50 billion dollars a month in resets or recasts. That is a ridiculous amount. If we are running at 40 to 60% delinquency rates now, what is going to happen when this next wave of inventory floods the market, depressing prices further?

I've Fallen and I Can't Catch Up

I commented yesterday that one in eight home borrowers in the US are behind on their mortgage payment. It's far worse in Florida, as about one in four borrowers was late on their mortgage or in foreclosure in the first three months of the year.

Remember when I told you to go outside and count the number of houses on your block? SURPRISE! Double the number of your neighbors from last night that are either delinquent or in foreclosure. If you have 20 houses on your street and they have a mortgage, 5 of your neighbors are in trouble. Which means you are in trouble.


An additional 99,000 Florida borrowers went into foreclosure in the first three months of the year, bringing the total number of home loans in some stage of the foreclosure process to 374,134. With 11 percent of its home loans in foreclosure, Florida ranked first in the country for defaults and was the only state in double digits. The rate was up roughly 2 percent from the previous quarter. To put it in perspective, the national rate was 3.85 percent, up about half a percent from the previous quarter, a record high. Almost half of all sub prime ARMs are past due or in foreclosure. In Florida, New Jersey and New York the number is above 55 percent.


At the end of March, about 71 percent of owners who bought in Miami-Dade and Broward counties in the past five years were underwater, according to Zillow.com. Just like I said yesterday, we are back to 2003 prices, on our way back to 1999 prices

Notice you have not heard a peep this year from either the FAR or NAR about the "Spring Buying Season", because we haven't had one. With the Summer here, potential families moving have already done so, if they could have.


Take a walk around your neighborhood this weekend. Go to Zillow or South Florida Block Shopper and look up the home sales for the past few years. When the prices were going up 20% a year, no one cared about affordability and how these people could afford the homes or how they financed them. We now know up to 75% were ARMs or other toxic loans.

And what about these government programs that threw hundreds of billions at this? Studies show between 65% and 75% of modified sub prime loans will fall delinquent by 60 days or more within 12 months of having been modified to keep the borrowers in their homes. Even loans whose principal was reduced by as much as 20% were still redefaulting in a range of 30% to 40% after 12 months.

This is not complicated folks. Houses are still too pricey. Those people that bought houses and either tried to flip them and got caught or simply couldn't afford them when they bought them, are not going to continue to pay regardless of any modification if they are 20,30, 0r 50% underwater! How difficult is this to understand?

Until we return to 1999 prices ( perhaps 1994 if this keeps up), purge the system of excess inventory, and sound lending practices, I do not see any "bottom" in sight. For those of you that like to see things in pictures, this chart by Robert Shiller is one of my favorites.

What a Long Strange Trip It's been..........

After a very loooong vacation, I've returned to continue my blog. There's so much more to comment on. So much more indeed.

Looking back on the posts from when I first started this back in 2006, it's scary to see both how accurate I was, and how insane the bubble was. Even though I still believe we are not yet close to the decline in prices. this is being called the "greatest Real Estate Bubble of the Century". With price declines of 50% and more in many areas, I would agree. But keep your seat belts on folks. We are only back to 2003 prices.Round two is coming which should bring us down to 2000 prices. More on that later.


We have witnessed so far trillions of dollars in house prices evaporate (wiping out equity and making millions underwater), trillions in wealth in the financial markets disappear. millions of jobs lost, over 300 lenders, dozens of banks, scores of builders, Bear Sterns, Lehman, Wachovia, Chrysler, GM ( next week), Circuit City, hundreds of retailers, malls, and countless other business go bankrupt. All in the last year. Despite trillions upon trillions of dollars thrown into this black hole, in a futile attempt to keep house prices artificially propped up to keep the bubble from popping. Trillions of dollars we don't have. Trillions of your, your children's, and your grand children's dollars.


Enough of the past. Fast forward to headlines from today-May 2009. One out of eight home borrowers ( notice I do not say home owners. The bank owns the home until it's paid off) are behind on their payments. One in eight. To put this in perspective, walk outside your house tonight, and count the number of houses on your street. One in eight of your neighbor's can't pay his mortgage. Hit "home" yet? Considering the bank recoups about 40-50% of "market value" on an REO sale, imagine two,three, maybe five of your neighbors going into foreclosure. Then calculate what your house is worth.


"The U.S. delinquency rate jumped to a seasonally adjusted 9.12 percent from 7.88 percent, the biggest-ever increase."

Remember when it was "contained" to only sub-prime?

"Prime fixed-rate home loans to the most creditworthy borrowers accounted for the biggest share of new foreclosures at 29 percent, MBA said, a sign job losses are hurting homeowners. "


As I predicted, Florida would be hit the hardest.

"About half of the new foreclosures were in four states: California, Florida, Arizona and Nevada, according to the report. Measuring both old and new defaults, 11 percent of all mortgages in Florida were in foreclosure at the end of the first quarter, the highest in the U.S. The inventory of new foreclosures and those already in the process of being foreclosed upon jumped to 3.85 percent, the MBA said. Half the loans now in foreclosure, adding the new and existing defaults, are held by prime borrowers, according to the trade group’s report."


Even at "depressed" prices, home sales are faltering.
"New home sales fell 34 percent in April from the year earlier period, the Commerce Department said today. The U.S. median home price tumbled 9.5 percent last year, the most ever recorded, according to the Realtors’ group. That’s more than six times the 1.4 percent drop in 2007, the first decline in the national median since the 1930s. ""

There are no more sheeple left to buy these McMansions.

" The unemployment rate increased to 8.1 percent in the first quarter, the highest since the end of 1983, according to the Bureau of Labor Statistics. "



Does it make sense to anyone over the age of five that we are at or near a bottom? Here's the deal folks, you were lied to. Repeatedly. By Bernanke, Paulson, Frank,Dodd, Geitner, the NAR, Bush, Obama, CNBC, and every other Real Estate Cheerleader that in spite of the huge flashing red sirens we were heading for a crash of epic proportions, told you to buy a house, or two, go into debt, real estate always goes up, buy now or be priced out.

And yet these same liars, con men, and spinmeisters are still given media coverage, still touted as "experts" to be listened to. These same charlatans that were wrong. more than wrong, and sometimes dead wrong. Many of them made fortunes while millions of you lost trillions.


Case in point, from today:
"This year, prices probably will fall 4.9 percent before posting a 4.4 percent gain in 2010, according to Lawrence Yun, the trade group’s chief economist."


Why would anyone give an ounce of credibility to this paid shill for the NAR when they have been wrong each and every year for the past decade? The last 'Chief Economist" for the NAR, David Lierah, ( now out on his own) has pretty much said he was paid to say all those rosy things about house prices and stuff. He was just talking his book. As my grandfather said, " Go ask a barber if you need a haircut. They will always say YES."


But I digress, it's been a while. Ok. I mentioned Round Two earlier. Here's why there will be a Round Two folks. We are merely in the eye of the Hurricane. That should be a very familiar metaphor for us Floridians. We've witnessed the front of the storm. It has not passed, we are in the calm that precedes the back half of the storm. A lot of people think that we've seen the worst, even some of my fellow housing "bears" are calling this a bottom or near bottom. There's talk about "green shoots", instead of preparing for a tsunami of inventory that will flood the markets and begin Round Two of falling prices.


What they fail to mention is that for the past few months there has been a quasi-moratorium on foreclosures. Remember when Obama asked for this and most banks complied back in early 2009? Most institutions with delinquent mortgages didn't foreclose. Well, that's over now and the rush to get properties on the market is coming. There has been billions on billions just thrown at this problem to stave off the inevitable crash. It will not stop it, it only resulted in a pause. An eye of the hurricane. Only 30 percent of foreclosed homes are currently on the market, meaning that some 500,000 sit vacant across the country, part of a vast “phantom inventory” that the market has yet to grapple with. Remember your neighbors?


Did I mention the wave (remember Hurricanes come in waves) of resets? We are approaching a second colossal reset and recast wave hitting the U.S. over the next few years. The resets are when the just the interest rate on your loan changes, but the recasts are when the payments change. That's what's going to up this hurricane a level or two. It's not a big deal if just the interest rate changes but when your payment doubles, your in trouble. Any of your neighbors move in over the past few years? I'll bet they have an ARM, ALT-A, NEG AM, or other toxic loan with almost no down payment and are under water.

Who's there to buy these houses? Potential buyers can't purchase homes when they are losing their jobs, or are already behind on their current mortgage, regardless of how attractive the credits and mortgages are. Banks have significantly tightened their guidelines. Mortgage rates are increasing. Foreclosures will begin to flood the market. Inventories will resume to swell. The price of homes will continue to fall until the properties are affordable for potential buyers. That's worth repeating. Prices will continue to fall until they are affordable- by conventional, old time standards and ratios of solid, verifiable, what the hell are you making and can you really afford it prices. I'm not even going to start with our ludicrous taxes or insurance problems.

I'll continue this in another post, but for now I will leave you with the chart on the left. They say a picture is worth a thousand words. Buckle up folks.