Sunday, December 20, 2009

Bloomberg: Luxury Homeowners Defaulting at Twice the Rate of the Market

Since the current "market" in housing is so misconstrued with artifical interest rates, $8000 (or $6500 for repeat buyers) handouts, HAMP programs, bailouts, 3.5% down (haha) FHA loans to almost anyone who breathes up to the $730K range, and the like [Nov 20, 2009: NYT - With FHA Help, Easy Loans in Expensive Areas].... perhaps the only "true market" can be seen in the range over the recently doubled FHA mortgage limits.... i.e. million dollar plus market.

If that is the case, you can see the trillions we are borrowing, printing, and then spending to "save" the housing market, is probably reducing the carnage by a factor of 50% - kicking the can in most cases.  If you believe in the free market, this will mean the pain in the luxury market will be more immense now (pulling the band aid off fast) - but the true rebound, without need for constant government intervention - will happen sooner in this price range.  Hence, in my estimate - in about 3 years the brush will have been burnt, and the forest will be able to reseed in that price range.  Of course this $1m+ mortgage market is just a tiny sliver of the overall US housing market....

Meanwhile there is a park ranger stationed near almost every tree to make sure no embers hit the "FHA market" - which of course is an expensive venture but whatever the cost it takes to stop reality from happening - it is worth it. What the "reality" of the sector is, in the FHA range of mortgage limits - is completely unknown.  So many 'visible' hands manipulating so many levers, who can tell what is going on - we can just know that it shall remain extremely reliant on government assistance, and market clearing prices where true buyers meet true sellers might never again be seen in the U.S.

Via Bloomberg:
  • Homeowners with mortgages of more than $1 million are defaulting at almost twice the U.S. rate and some are turning to so-called short sales to unload properties as stock-market losses and pay cuts squeeze wealthy borrowers.
  • Payments on about 12 percent of mortgages exceeding $1 million were 90 days or more overdue in September, compared with 6.3 percent on loans less than $250,000 and 7.4 percent on all U.S. mortgages, according to data from First American CoreLogic Inc.   The rate for mortgages above $1 million was 4.7 percent a year earlier.  (that's an incredible year over year jump)
  • The rich aren’t as rich as they used to be,” said Alex Rodriguez, a Miami real estate agent with JM Group USA Inc., whose listings include a $2.9 million property marketed as a short sale because the price is less than the mortgage, leaving the bank with a loss. “People have reached the point where they can’t afford the carrying expenses of a $2 million home.”
  • “It’s not uncommon to see this situation on the high end of the market -- homes selling for less than it would cost to build them,” said Holzknecht’s agent, Joe Flick of Roanoke Group in Seattle.
  • Short sales almost tripled to 40,000 in the first six months of 2009 from the same period a year earlier, according to data from the Office of Thrift Supervision. The bank regulator doesn’t break out short sales by size of mortgage.
  • You are just starting to see the tip of the iceberg with luxury short sales,” said Adrian Heyman, owner of Property Advisors, a real estate broker in Scottsdale, Arizona. “A lot of wealthy people are upside down in their mortgages and they just can’t afford the second or third vacation home anymore.”
  • The entry-level segment of the housing market was aided this year by an $8,000 first-time buyers tax credit that pushed resales to a 6.1 million annual pace in October, the highest since February 2007, the National Association of Realtors said in a Nov. 23 report.  The new version keeps the first-time buyer benefit and makes a smaller credit available to some move- up buyers. It can’t be used for homes priced above $800,000.
  • The Federal Reserve set out in January to lower fixed mortgage rates by purchasing $1.25 trillion of bonds backed by home loans. The 30-year fixed rate for so-called conforming loans that can be bought by Fannie Mae and Freddie Mac dropped to an all-time low of 4.71 percent in the week ended Dec. 4.
  • The reason the low end stopped falling is because the government stepped in with affordable loans,” said Scott Simon, managing director at Pacific Investment Management Co., a Newport Beach-based investment firm that runs the world’s largest bond fund. “There is no political will to bail out a million-dollar house.”
  • The Fed purchases haven’t affected the high end of the market because they exclude so-called jumbo loans. Mortgages above the $729,750 limit set by Congress for the nation’s highest-priced markets cost almost 1 percentage point more than conforming loans. That’s quadruple the historic spread
That last point is very important - why is the spread quadruple in the jumbo market?  Because in the area not under shelter of FHA, some form of reality still exists.  Banks offer mortgage rates they believe they can make money on over the long run... credit is being rationed based on price.  That's so old school.  Meanwhile in the FHA market, no one cares anymore about risk.  Just like in the "good ole days" of... err, well 3 years ago.  No different than mid decade mortgages are made... packaged off to some ultimate sucker (back then, they were securitized and sold to far flung buyers all over the globe; nowadays - they have a very short trip to the Federal Reserve Balance sheet) and we're at exactly the same spot we just "exited".  Almost nothing down loans (or if you have the tax credit, which many states now allow to be used as the down payment and closing cost, then a nothing down mortgage) with historically low interest rates, where the originator of the mortgage could care less how the loan performs because the risk has been pushed to someone else.

Last I checked, that didn't work out too well, but certainly if you see a massive mistake, the best way to battle it is to avoid repeating it repeat it.   And that's the nexus of our so called housing recovery - kicking the can like the country has never done before; institutionalizing in government the same ugly private sector behavior that got us here, using Fannie, Freddie, FHA, and the Person of the Year's artificial interest rates, and the taxpayer piggy bank known as his balance sheet.  Anyhow who does not believe you and your grandchildren will be paying for this in spades through repeated taxpayer losses/bailouts through the next 5-7 years, is living in a world full of unicorns and mermaids.  [May 6, 2009: FHA - The Next Housing Bust]

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