Wednesday, February 15, 2006

The mortgage data we have all been waiting for

I had the following report sent to me by a reader, and it has also been posted in the forums. It is a report from First American Corporation and it is titled "Mortgage Payment Reset - The Rumor and the Reality", by Christopher L. Cagan PhD. and Director of Research and Analytics

There is a ton of good information and graphs in the report. It is 33 pages long, so please understand that it is going to take me a few days to get posts up on many of the points that I want to make.

I have read the whole thing quickly, and gone back over several items. Not only is there a lot of information in there, it is going to take time to digest it all, formulate informative content, and get that information to you. I'm going to talk about 2 things briefly right now, just to get the 'equity rolling'.

That said, I think page 10 and 24 are excellent places to start.

Page 10 has a chart that shows the equity percentage at the time a home was purchased or refinanced. It has data from 1985, 90, 95, and 2000-2005. If somebody bought a house in 1994, but refinanced in 2003, they will fall into the 2003 data. I wish I could copy and paste the table into this page, but it is a PDF, so you will have to open it, or print it off yourself to follow along. *update: Thanks to Duke for the files below.



If you go back to 2000 - 2003, you will see that about 8% of the people in each year are still even or underwater. That number jumps to 10.6% in 2004, and 29% in 2005! I think you can pretty much include the people that have 0-5% equity (the author does this in a smaller table on page 11). It is going to cost 5% to sell your house with realtor/title/escrow fees. If you use the 10% decline the author speaks of, AND assume people need to sell and include the 5% transaction costs...lets look how many people are now even or underwater. By doing that you 'wipe out' the people in the 10-15% brackets (10% depreciation plus 5% transaction costs). That puts:
21.2% of the loans in 2000
23.7% in 2001
25.5% in 2002
28.8% in 2003
38.5% in 2004 and
57.1% in 2005 of the loans in a zero equity position.

Even if you assume that people are going to sit tight...look what 10, 15, and 20% declines do to people's equity position.

Now take a look at page 24. This is the data that many of you have been dying to see. It is pretty representative of what I have seen the past 2 years. Look at the amount of loans below 2%. Those my friends, are called option ARM's and those are our favorite negative amortization mortgages. If you add up the other low rate loans, you are probably looking at about 20% of the loans on that chart being option-ARMs. As a quick reminder, these are the loans with a minimum payment option, an interest only option, a 30yr amortization option, and a 15 yr amortization option. These loans are usually tied to the MTA, COSI, COFI, and on some cases a LIBOR index. Not all option-ARMs had the 1% start rate. Many could have rates in the 2-4% range depending on the credit, borrower, loan terms, and pre-pay penalties.



I know, I know, I wish we had this data from 2000-2003, but at the moment, I don't have it. But look at the data from page 10. See how many people are not in a good equity position in 2004 and 2005. Now look at page 24, and look at the make-up of the loans that the people in 2004 and 2005 were using to 'afford' their properties! 7.7 million loans that total almost 1.9 TRILLION dollars of adjustable rate mortgages (ARMs) in the past 2 years! Lots of these loans were subprime 2/28's and 3/27's as well as A-paper 3/1, and 5/1 ARMs. These ARM borrowers in 2004/2005 are the people who have very little equity to begin with...and you can see how many of them are playing with loans that WILL adjust. They are not just going to adjust a little bit...for many of them, they are going to adjust a lot! Lots of the loans were interest only loans (I/O), that not only adjust in rate, but you have to start paying principal as well. When the 1% option-ARM recasts and you are looking at rates in the 5's and 6's...that is a large jump in payment as well. That doesn't even take in to account the people that are making the minimum payment on the loan, which just tacks the 'deferred interest' on the back of the loan in the form of negative amortization!

Please feel free to post your questions and comments. I will do my best to answer them. As I was quickly reading through the document, no less than 25 things popped in my head that I could expound upon, or refute. There was definitely some misconceptions about the sub-prime market in there. Again, it is going to take some time to digest all of that information and then create informative posts that are easy to read and understand.

Thanks for stopping by, and I look forward to working through this data with you. Keep the comments and feedback coming...both here and in the forums!

---
I am going to keep making my posts over here, but most of the comments are happening at the new site. Go to...
www.housingbubblecasualty.com
or
www.anotherf@ckedborrower.com

...if you would like to see more comments and activity. Don't forgot to check out the activity in the FORUMS!

SoCalMtgGuy

6 Comments:

Anonymous Anonymous said...

It's hard for me to get past page 3 of this report. Table 1 is ridiculous. Of course, home equity values look reasonable because house prices are totally inflated. If you take the house real estate value at 2000 and grow it a reasonable 5% per year, you get a percent equity level close to 75%- implying many households have little or no equity.

2/16/2006 4:06 AM  
Anonymous Anonymous said...

Maybe I am reading table 12 incorrectly...
27.5% of all loans are already in the 6.5-7.5% range. Isn't that the going rate right now? So, if they refi, it will not be much of a change for them. Except maybe if they did neg-am (which is not identified in the table), then the loan will be higher during the refi. Please clarify.

2/16/2006 11:19 AM  
Anonymous Chris said...

This is breathtaking. Just the sub-2's are enough to raise an alarm. I wonder what the geographical breakdown is on all these 2-percenters. THAT would be very informative, as well.

2/16/2006 11:51 AM  
Blogger SoCalMtgGuy said...

anon 11:19

The thing is, they got rates in the 6.5%-7.5% range when rates were in the 5's.

Now, those people will be in the 8's and 9's.

I look at the rate sheets I have had over the past several months...and all the full doc deals are in the 6's and 7's now where it used to be 5's and 6's. The stated deals are all 7's 8's and 9's...and those used to be 6's and 7's.

Lots of things determine the rate...so take it with a grain of salt.

SoCalMtgGuy

2/16/2006 3:04 PM  
Anonymous Anonymous said...

This are all very interesting and informative. I have been one of the buyers but fortunatley havenot been f____ up. I wasn't that greedy so I bailed myself out once I see that prices increased more than 20% in less than 6 months. But I only dealt in preconstruction real estate. So far it was very rewarding and I only used neg am once to try and I saw how it could ruin your life if you just pay the smallest payment.
You are doing a lot of people good wiht this blog spot and educating everyone including those who think are educated enough. More power.

2/16/2006 6:01 PM  
Blogger blue][erring said...

the refi at the same rate thing is that if you buy a $400,000 house for 7% loan and then the next year it's worth $475,000 and the rate is the same, or even higher... you can refi to 'capture' the additional gain of the house. if you put 10% down or $40k in the first place, then when you refi, you 'leave' 47.5k in and extract the balance between 360 and 427, you 'get' $67,000 back and you get a fresh new loan with which to pay interest only. then the house goes up to $550, you refi again, leaving 10% in, or getting a loan of $495,000 and closing out your $427,000 loan and you get back 'free' cash of $68,000.
whoo hoo!
new car, plasma TV, internet gambling!
then, the house only goes up to $585,000
not enough past $550,000 to refi (there's fees and stuff) and so you sit tight until it hits $625k or so...
but then katrina comes and lots of inventory of kinda better houses than yours, and the price sort of seems like it falls to $575,000 or so.
meanwhile, that monthly bill is sneaking up
and after that first year, it kicks a bit...

-][

2/16/2006 7:45 PM  

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