With the breaking news of the accused fraud within Freddie and Fannie, I like to brag on my distant post of July 2007 and our analysis and caution. Even our most dire of predictions we fell short by over $200 billion dollars in possible (fraud) liabilities at the heart of the sub-prime lending programs.
Will the Sub Prime Crisis be diluted?
Posted: 7/27/2007 4:25 PM
Implications:
32.6% of new mortgages and home equity loans in 2005 were interest only. 43% of first-time home buyers in 2005 put no money down. 15.2% of 2005 home buyers owe at least 10% more than their home is worth. 10% of all home owners have no equity in their homes $2.7 trillion in loans will adjust to higher rates in 06/07 70% of borrowers who took out pay-option ARMS in the past year have loan balances larger than their initial loan. According to Reality Trac, foreclosures up 53% over a year ago. The number of homes for sale is at record highs, and inventories are higher than a year earlier. The house price-to-income (rents) ratio is off the charts. According to HSBC, in 18 states accounting for over 40% of national home values. Nationally, home prices have not declined on a year-to-year basis since 1933. Recently, prices have been dropping in the North East, West and Mid-West.
Ofheo, Fannie’s regulator, has noticed company increased its sub prime exposure in recent years, not an enormous part of their business but it has been increasing. Ofheo report due out later this year is expected to show Fannie’s sub prime exposure is moving up.
Gilchrist Berg founder of $2billion hedge fund firm Water Street Capital said in recent newsletter to investors that Fannie Mae(NYS:FNM) could lose $22-$29 Billion if foreclosures increase to 6%-8% Berg said it’s not implausible that 15% of Fannie’s mortgage exposure is sub prime. That’s more than half of the roughly $40 Billion in capital Fannie had at the end of March.
A great deal of discussion about the housing downturn (Bubble) has focused on inventory and new home builder slow down. However Sub Prime lending and ARM’s maturity in the next few months have my attention and expect it to have a continued significant negative influence on the housing markets.
Home loan lending readjustments heading up ward will have a greater motivation to the home owner to sell as the valuations of the homes continue to pull back. My buyers concerns weigh in on the side of caution to remain on the side lines for more assurances that their fears of buying a declining investment or low equity appreciation. Add this to the consumer sentiment pull back and jobs reports from affects of the auto industries will be played out across Americans collective living rooms. This creates a bearish scenario that few realtors and consumers have seen in the housing markets.
From the Realtor community it is one thing to be attentive to the buyer vs. seller motivations, but rarely has there been events where this volume of homeowners mortgage readjustments are to play out over the next few years as mortgage valuations go negative on their primary homes. These events will take years not months to work its way through the market that has been operating on an irrational false wealth affect that has come to its end.
Here are some facts to consider. Quoted from Comstock Partner.
32.6% of new mortgages and home equity loans in 2005 were interest only
43% of first-time home buyers in 2005 put no money down
15.2% of 2005 home buyers owe at least 10% more than their home is worth.
10% of all home owners have no equity in their homes
$2.7 trillion in loans will adjust to higher rates in 2006 and 2007.
70% of borrowers who took out pay-option ARMS in the past year have loan balances larger than their initial loan.
According to Reality Trac, August foreclosures up 53% over a year ago.
The number of homes for sale is at record highs, and inventories are 59% higher than a year earlier.
The house price-to-income (rents) ratio is off the charts. According to HSBC(NYS:HI), in 18 states accounting for over 40% of national home values, the price-to-income ratio is 3.6 standard deviations above the mean.
The OFHEO index of house prices deflated by the consumption price deflator has soared to a record high of 350 from 250 in 2001. From 1976 to 1996 it never was above 220.
Nationally, home prices have not declined on a year-to-year basis since 1933. Recently, however, prices have been dropping in the North East, West and Mid-West.
Some studies show that the housing industry and all its related activities have accounted for 30% to 40% of the entire employment growth in the current cyclical expansion. In addition it has been well demonstrated that mortgage equity extractions have been a cash cow providing home owners with hundreds of billions of dollars that have gone into consumer spending. With housing already in a hard landing, it will be extremely difficult to avoid a disruption in other sectors of the economy.
24 months ago analyst dubbed the housing market as a Goldilocks scenario. Low mortgage finance, abundant supply of existing and new homes, home ownership over 70%. Not to cold, not to hot, just right. That analogy did not conclude how the the nursery rhyme finished with the bears coming home in the end.
