• Markets
• Economy
• Federal Reserve
• Housing
• Energy
• Digital Media

Brief Foreclosure History & Mortgage Delinquency Maps

A very short history of how we got here:

All of the turmoil in the CDO, hedge fund, and subprime space has come about due to a very simple reason: An inordinate number of recent home buyers have been defaulting on their mortgages.

The why of this is rather simple: These are the folks who historically have not been home owners due to their debt obligations, low income, and/or poor credit. In the past, they were known as renters.

The ultra-low rates that Easy Al put into place when he dropped the Fed Funds to 1% started an entire chain reaction of events: If high rates keep home prices down, well you can guess what ultra-low rates do. Home prices rose due to the lower monthly carrying costs, and we were off to the races..

But the boom begat a feeding frenzy, and corruption soon followed. The appraisers faked values to get loans approved (making a 100% LTV look like a 80%). Mortgage brokers quickly learned how to get nearly anyone approved through no doc/no income check loans, AKA liar loans. A bunch-o-new mortgage products came out -- Interest only ARMs, LIBOR based, etc. I am not sure what legitimate purposes these very profitable products served, but we know what they accomplished: They got people into homes THEY COULD NOT AFFORD. 

Hence, when rates ticked up, when prices stopped rising, when people could no longer bootstrap paying their mortgages by taking out more home equity loans, the foreclosure rate began to rise.

When this happens, the RMBS/CDOs that have been sliced and diced and resold by iBanks to funds start to devalue. Since so many of these funds use huge leverage, the problem gets magnified.   

Hence, the recent Bear Stearns and other fund problems.

~~~
To put this into a geographic context, here is where the foreclosures are coming from:

2007 Q2 Delinquencies:
click for larger maps

Source:
Mortgage Delinquencies
WSJ, July 19, 2007
http://online.wsj.com/article/SB118481288641971250.html

The Bear Facts: Mortgage Woes Are Apt to Worsen
RANDALL W. FORSYTH
Barron's JULY 18, 2007 10:45 a.m. EDT   
http://online.barrons.com/article/SB118470690240369216.html

Thursday, July 19, 2007 | 06:15 AM | Permalink | Comments (59) | TrackBack (3)
add to de.li.cious | digg this! | add to technorati | email this post

Comments

Barry,

I am not a well paid wall street analyst or economist, but just from listening to knuckleheads I know talk about housing and seeing all of the "Flip this House" shows on the idiot box, I could tell something wasn't right. I then did some research and came to the conclusion you write about. This was 18 months ago. When Hank Paulson and Ben Bernanke said the housing market had hit bottom several months ago, I knew they were full of crap.

Posted by: spongetoddsquarepants | Jul 19, 2007 6:24:48 AM

So...last night on Bloomberg there was a show on about the Subprime issue and it featured a discussion between Marc Faber, Jim Rogers, and Ken Fisher. Faber and Rogers said what they always say, buy gold and commodities...the dollar is toast, the debt bubble will be popping for years.

Fisher, on the other hand, said this problem won't even be big enough to cause a ripple in the boom that is going on right now. Despite his goofy hand gestures, his reasons are compelling.

The vid clip is over at Bloomberg if you want to see it. Could it be that this whole subprime mess will be "contained" to a dollar amount of damage that really won't have any impact?

Posted by: Sven | Jul 19, 2007 6:46:15 AM

sven you got it right with faber he's on the sell side
fisher's latest book shows he's not his father
but do you really think very highly geared trillions of dollars don't matter
and you are not alone no one can exactly value one cdo let alone how many that are out there
rgds pcm

Posted by: peter from oz | Jul 19, 2007 7:13:51 AM

I was chatting with a CEO of a bank, saying that with securitization of mortages there is much less reason for lenders to worry about credit worthiness and so more dubious loans get made. That is to say, if Jimmy Stewart's S & L made a loan, he knew he would hold it for 30 years, but when a bank today lends for a mortgage, they know they will hold it for a week.

He replied that securitization may well make lenders less cautious but on the other hand, if the loans go south, investors get burned but the banks are okay which means that there won't be a classic credit crunch, thus much less chance that defaults will trigger a recession.

What do you think?

Posted by: tom | Jul 19, 2007 7:26:35 AM

Lets not forget that the new $250,000/$500,000 tax-free income from selling a house also increased the frenzy. Where else in our economy can you make that kind of money tax-free? I personally know that it led to a lot of money-laundering--pay for all the upgrades/remodeling with cash and keep the proceeds tax-free. This is one reason that I think A paper may be in trouble too. Many otherwise sober people made big bets because they couldn't resist the tax-free idea. Will they walk or hold out for years?

Posted by: dave | Jul 19, 2007 8:13:17 AM

"if the loans go south, investors get burned but the banks are okay"

They're okay if they don't get sued 'til death separate them from their cashola. Judging by the amount of negligence and outright deceptive lending practices of the banks during the housing boom, and the amount of money in play, this whole affair could get truly ugly.

As long as the current Administration is in place, the banks are safe. After January 2009, all bets are off baby!

Posted by: Francois | Jul 19, 2007 8:44:35 AM

Barry:
this market looks unbeatable.
china produced another 11% GDP growth yesterday.
It "feels" like this will go on for some time.
employment is low yet inflation is reported to be low.That means stocks are the only place where your dollars don't get eroded.
Meaning unless you speculate, you are a chump. I hate such circumstances.

Posted by: sam | Jul 19, 2007 8:50:26 AM

tom:
what about "putbacks".. i know some lenders were forced to take back the loan from the investment houses. So it is not clear cut.

Posted by: sam | Jul 19, 2007 8:53:55 AM

In early 2005, Bennie and June wanted to marry and set up housekeeping. Bennie rented a small studio and June was still living with her sister. They went looking for a two bedroom apartment and found one for $1250 a month. They were told they needed to pay first and last months rent plus a $750 deposit. They did not have $3250 in cash. June was a secretary and earned about $28,000 a year pretax. Bennie was a salesman for a tote the note used car dealer and averaged close to $38,000. They were bright young kids and knew from their parents to keep their housing expense to about a quarter of their after tax income.

Bennie’s Uncle Vinny had a solution for their dilemma. He knew of this house that had just gone on the market,, by owner in a very nice neighborhood in Phoenix. It was priced at $600,000 and was just two years old. Uncle Vinny told Bennie to go to the owner and offer him $625,000 on the condition that the house would be financed for $700,000 and that the day after closing the seller would kickback $75,000 to Bennie and June. Bennie would have to pay cousin Lennie, a certified appraiser, $15,000 which would leave Bennie and June about $60,000 to set up housekeeping. Their loan would be No doc no closing cost 100% with a two year teaser rate of 3.75%. It would reset in January 07 at 4.5% above Libor.

Uncle Vinny recommended that Bennie save the amount they would have paid for an apartment to pay taxes and insurance on their new home and use the $60,000 to help pay the monthly mortgage. It was a done deal.

Every January for the past two years, Bennie and June’s insurance company raised their coverage on the house by $100,000 assuming like all insurance companies that homes only appreciate in value. Besides structural damage now at $900,000, the contents package was equal to 40% of the house value or $560,000.

Bennie and June were happy. Their house payment of $2187 a month was $937 more than rent but that money came from the $60,000 they banked at closing with about $7500 left over after two years which they spent for furniture and patio furniture by the pool. Then came the shocker. Their mortgage holder informed them that their loan had re set to 9.8% which increased their monthly to $5,716 a month.

Bennie went to Uncle Vinny for advice. Uncle Vinny told them to refi but the market had collapsed and Bennie and Junes house was only worth $600,000. Uncle Vinny then recommended a visit to his second cousin Denny who was the son of great Aunt Winnie. Denny specialized in mortgage equity extractions.

Denny told Bennie and June to plan a vacation, purchase two potted palm trees and a space heater to keep them alive in their garage while they were away. Curiously Denny told them to make sure the car they left in the garage had a full tank of gas……..

Upon arriving home from vacation, Bennie and June were aghast to find their beautiful four bedroom three and a half bath home utterly destroyed by fire! Poor heartbroken Bennie and June collected $1,360,000 from insurance and paid off their $700,000 mortgage. A small gift of $50,000 to Uncle Vinny and Denny for consulting on this matter still left them with $510,000, enough to completely rebuild their home on their own lot and foundation which did not burn. Fire equity extraction. FEW coming to a neighborhood near YOU ?…………….

Posted by: Ross | Jul 19, 2007 8:56:27 AM

when a bank today lends for a mortgage, they know they will hold it for a week.

unless they sold it to a hedge fund run by the parent company.

Posted by: a guy called john | Jul 19, 2007 9:02:13 AM

All the while the dollar gets fed to the wolves ...

Posted by: Chief Tomahawk | Jul 19, 2007 9:19:11 AM

Like Y2k that was suppose to destroy the world, Avian Flu that was suppose to kill 100 million, and now a day’s voodoo Global warming that is suppose to help accelerated melting of the North Pole, sub prime is a new and the latest 'false tool' of doom and gloom .

Just go fast backward, in 2005 and 2006 it was all about impending recession and exploding deficits. One needs to be well aware of ‘left-wing Keynesian economics’ crying wolf for quite a long time.
On needs to know more about the historical propaganda of ‘left-wing Keynesian economics.’ Numbers involved in the subprime issue aside the same cable of left wing liberals today make a mountain out of a molehill. Their Paul Krugman Op-Ed column wrote in 2003 ‘for 20 months United States economy has been operating in twilight zone: growing too fast to meet classic definition of recession, but too slowly to meet usual criteria for economic recovery; says recent spate of optimistic pronouncements only show that things are getting worse more slowly; expects growth in second half of year to be faster than in first half, but not high enough to make jobs easier to find; calls this indictment of Bush administration's economic policy.’

Donald Luskin their nemesis wrote a piece in Jan 2004 highlighting their errors of prediction.
http://www.nationalreview.com/nrof_luskin/kts200406141035.asp
In November 1982, when Krugman was a staff economist in Reagan’s Council of Economic Advisors, he co-authored with Larry Summers (later to be Clinton’s Treasury secretary) a memo warning of a coming “inflation time bomb.” Krugman and Summers wrote, “It is reasonable to expect a significant reacceleration of inflation in the near future … A significant portion of the slowing of consumer price inflation since 1980 does not represent a reduction in the underlying rate.” the “stagflation” of the 1970s — the combination of high inflation and low economic growth — utterly confounded the Keynesian orthodoxy, which would have predicted that such a combination was utterly impossible. Then in the 1980s the Keynesian model predicted that the combination of falling interest rates and Reagan’s tax cuts should have created a massive stimulus to aggregate demand that would send inflation even higher. Yet inflation fell dramatically over the 1990s.
At that point inflation had fallen from a maximum of 14.6 percent in March 1980 to 4.5 percent. Its average for the rest of Reagan’s presidency was 3.5 percent. The “inflation time bomb” Krugman predicted didn’t go off. It still hasn’t.

Please read this from 2004...

"When the curve inverts, run for the exits," said Smith, who served as an economist for the Fed from 1975-77. "It will stay that way until the Fed realizes it caused a recession in 2007. Investors should start planning for a recession."

http://seattletimes.nwsource.com/html/businesstechnology/2002717303_bonds03.html>

< The Bush Budget Deficit Death Spiral
by Robert Freeman

Lenders talk about a “debtor’s death spiral.” It occurs when borrowers get so far in over their heads they begin borrowing money just to cover the interest payments on past borrowings. The borrowers have to do this to keep the lending flowing but they can no longer plausibly pay down the principal. As new debt compounds on old, bankruptcy becomes imminent. Further lending is foolhardy. Foreclosure is only a matter of time.

The U.S. is starting to look like it is entering just such a death spiral. It is foretold not simply by the large and growing deficits, nor by the fact that their carrying costs will rise quickly as interest rates rise. Rather, it is the fact that these trends are becoming irreversible, a structural part of the U.S. economy.

When the ultimate collapse will occur, whether it comes with a bang or a whimper, how it will be triggered, and how severe it will be are as yet unknown. But as Herbert Stein, Chairman of the Council of Economic Advisers under Richard Nixon was fond of saying, “Things that can’t go on forever, don’t.”

The first signs of impending trouble are the exploding budget deficits themselves. They began, of course, under the parlous economic stewardship of Ronald Reagan. Reagan cut the marginal tax rate on the wealthiest of Americans from 70% to 38%. He promised it would spur an orgy of investment and rocket the economy to new levels of production and prosperity. Instead, his “supply side economics” did the exact opposite. It produced the deepest recession since the Great Depression. http://www.commondreams.org/views04/1022-26.htm>>

All the above have come out to be false.

With probably economic growth making the deficit disappear.

.''I think the deficit for fiscal 2007 will be a lot lower: $135 billion (i.e., a harmless 1.0% of GDP). I also see that if the current trends continue, the unified budget would move into balance in October 2008.''

http://www.optimist123.com/optimist/2007/07/deficit-watch-j.html

Last fall Edward Lazear, the Bush administration’s top economist, explained that what’s good for corporations is good for America. “Profits,” he declared, “provide the incentive for physical capital investment, and physical capital growth contributes to productivity growth. Thus profits are important not only for investors but also for the workers who benefit from the growth in productivity.” Economic growth is a function of domestic demand and global demand, with 1 billion new consumers awaiting US products from China, Brazil and India , Russia we are looking at robust earning growth of technology unseen before.

Subprime as a percentage of debt is already a unrated debt, the diversions of the corporate yields point to long standing market practice of shooting first and asking questions later, market is efficient and will deal with the problem and excesses in the best possible manner. Underlying this strategy is the fact that overall 'growth' begets more growth and cash settles most of the problems of corporate excesses. The CDO graph represents a picture where nearly 15% or even less forms the 'toxic waste portion, the one which is not investment grade. Now if we see the total market of CDO's at 503 billion $'s, and even the whole 15% of the toxic waste defaults we are here looking at 80 billion $ say 100 billion $ spread as follows...
32% Banks and brokers...Equals 32 billion $
22% Asset managers..... Equals 22 billion $
19% Insurance.......... Equals 19 billion $
18% Pension funds...... Equals 18 billion $
10% Hedge funds........ Equals 10 billion $
In a world where monetary assets have grown to 145 trillion $, the amount of 'toxic waste portion' of CDO's as a proportion is very negligible and forms anyway the riskiest part of the CDO universe and well provided for. Those who will suffer loss will be the ones who have an inbuilt appetite for larger risks. The markets being primed for efficiencies take their own toll, sensationalism and herd mentality will take its due course, whoever said it is easy to make money through pyramids of leverage.

Posted by: Iqbal Latif | Jul 19, 2007 9:45:53 AM

We've had several suspicious fires located at condo developments that have not quite been finished yet. FEW already starting here.

As far as the long post above..

Luskin?????? That's where I stopped reading.
I do not even know where to begin with that...

Ciao
MS

Posted by: michael schumacher | Jul 19, 2007 10:13:35 AM

If the original bond investors bail and the fund or other investors buy their position at 2 cents on the dollar, so what? Wouldn't
these new investors still have a claim to the mortgages that make up the bonds? So, when the house sells at auction for half
the original price, the proceeds distributed will be far north of the 2 cents they paid, Yes? No?

Posted by: Tim | Jul 19, 2007 10:30:05 AM

Question from a small potatoes guy: How "contained" is "contained enough"? We know that sub-prime debt is already toast, and the REOs are starting to pile up. But when do we really say that we're in deep doo doo?

Posted by: zero529 | Jul 19, 2007 10:30:47 AM

I work for CurrentForeclosures.com, a foreclosures site and have seen a huge increase in the number of foreclosures in the past 7 months. I believe it is a combination of not only sub-prime and ARM mortgages, but also the high number of people who have gotten loans with interest rates at an all time low... in addition to the rapid depreciation in some areas and the difficulty some are experiencing in selling their homes.

Posted by: TSmith | Jul 19, 2007 10:33:17 AM

The thing is...it seems, is that to determine the worth or worthlessness of these securities you literally have to dig through the "collateral" (mortgages/homes) determine their value and then write them down. No one is going to know ANYTHING for years cause no one on wall street is going to do that work.

All that is going on now is a couple groups trying to rid themselves of the problem.

Posted by: Sven | Jul 19, 2007 11:19:45 AM

There are plenty of deficits but the largest ones are dealing with information

The aggregates deterioration are to be seen on a trend (please see the Ned Davis research ratios of US debts to GDP 177 PCT or ratios of commercial debts to GDP 332 pct) , the financial risks are systemic whenever concentrated (please see the P/L of banks which can afford to publish their losses HSBC), the assumption that they are diluted throughout titrisation is ill fated (please see as a sample 60 subprime lenders foreclosure and see the Bear and Stern funds where around 3 Billion USD were deemed to be injected when B/Stern market cap is 20 BILLION USD small in size? Small in sample? Small in leverage?), to be diluted throughout aggregate GDP’s is a wishful thinking the US GDP is of around 13 trillion USD the World GDP of major economies 52 trillion USD and JP Morgan total derivatives exposure of 45 Trillion USD.
The main problems are issues which have been hidden from the public, built up in artificial profits and contained through « a plaster on a wooden leg » the equities markets. The productive world need clarity and explanation not the sake of rejoicing but to have better understanding of the operational environment, and I dare to think that economic agents are as mature as the wall street of the world and as productive as their administrations .

Posted by: Philippe | Jul 19, 2007 11:23:52 AM

You left one thing out of your analysis, Barry. The loose lending standards, low rates and liar loans allowed people to overbid for homes, pushing prices higher, which only tempted more people into the market to get in on the "sure thing" in real estate.
Contrary to your analysis, I don't think it was primarily low interest rates that fed this frenzy; it was the loose lending standards that Big Al nurtured that caused the big problems. Low rates by themselves weren't enough to inflate the bubble; it took a lot of looking the other way by the Fed, Wall Street, S&P, Moody's, your local mortgage broker and the local appraiser to create this bubble.

Posted by: rex | Jul 19, 2007 11:44:07 AM

I'm watching Bernanke talk today. I really don't understand how he can continually downplay the negative savings rate. He persistently talks about the average Joe having untapped savings in his home, yet downplays the fact that the average Joe must take on more debt, or sale his home, to tap that equity.

Come on Ben, savings is real and tangible, it is not something that you must incur more debt to benefit from. If we were going to use Bernanke's logic, one's savings would be subject to the highest bid in a declining market were a third party (mortgage co) dictates the value of the asset.

In economics, personal saving has been defined as personal disposable income minus personal consumption expenditure.

Hey Ben, let me clarify:

Income - Expenses = Savings

All this makes me wonder what the FEDs longterm intent is.

Posted by: Donny | Jul 19, 2007 11:45:33 AM

Ross,

I think you have spotted the next major economic "device" to keep the bull market rolling.

I'm actually quite surprised we didn't have more "accidental" fires in upside-down neighborhoods on the 4th of July.

"Really officer, I saw that bottle-rocket lodge itself right in the eaves, and the whole place went up like a tinder-box..."

Posted by: Pool Shark | Jul 19, 2007 11:55:19 AM

The Fed's longterm intent is to see no evil, hear no evil, speak no evil....while making sure the evil doesn't impact the banks.

You, however, are on your own.

Posted by: KnotRP | Jul 19, 2007 12:11:39 PM

The purpose of the Fed is to protect the banking system and not individuals.

Posted by: mhm | Jul 19, 2007 12:19:32 PM

I agree 100% with Tom.

In theory, RMBS/CDOs are a wonderful innovation because they enable the transfer and sharing of risk. Unfortunately, because everyone in the underwriting process believes risk is being offloaded to the next link in the chain, a perverse situation develops where nobody is incented to say "no" at any step.

It is too oversimplified, and intellectually dishonest, to lay all the blame for this at Greenspan's feet. Greenspan was on no credit committee that approved a single mortgage loan. He was on no credit committee that approved extending a mortgage loan warehouse facility to any mortgage originators. He didn't approve the creation of a single RMBS. And he didn't approve bringing a single CDO to market.

I blame the perverse incentive structures along the entire chain.

Posted by: Groty | Jul 19, 2007 12:33:18 PM

hey Igbal

i wish you would post more often

Posted by: Shakespeare | Jul 19, 2007 12:39:12 PM

December 2008

Sun	Mon	Tue	Wed	Thu	Fri	Sat
	1	2	3	4	5	6
7	8	9	10	11	12	13
14	15	16	17	18	19	20
21	22	23	24	25	26	27
28	29	30	31