Sunday, August 16, 2009
Deutsche Bank Report Projects 25 Million Mortgages Underwater By 2011
I found the Deutsche Bank Report by Karen Weaver and Ying Shen published August 5, 2009. it's at the website shown below and i've attached it as a .pdf file and here are the first five paragraphs below.
They looked at a Massachusetts study from the early 1990's that established a floor of 7% defaults for negative equity mortgages. Although they declined to project default rates today, their report suggests that default rates are significantly higher today.
It is very clear from this report that we are in a growth industry. For example, the report projects that 51% of Los Angeles County mortgages are underwater today, but that will rise to 62% by 2011.
http://www.docstoc.com/docs/9509772/Debt
Drowning in Debt - A Look at "Underwater" Homeowners [footnotes omitted]
The U.S. economy has been overwhelmingly a consumer economy. For much of the past decade, U.S. consumers have been greatly enriched by rising home
values coupled with "easy credit," enabling them to monetize their home equity early, and often. Some economists estimate that homeowners were extracting
25-30% of every dollar of increase in home equity, primarily for consumption.[2] But now, the Joint Center for Housing Studies reports that home equity had fallen
43%[1] - $5.9 trillion - from 2005 (peak) levels to the end of 2008.
Even if home prices stabilize, it seems unlikely that we will again see the confluence of factors (or one might say mistakes and debacles) that facilitated the
millennial wave of consumption. For many, the home has morphed from piggy bank to albatross. The questions now are, how will this wealth destruction drag on
consumption and how will outsized mortgage burdens be resolved?
In this paper we look at the issue of "negative equity,"[3] the situation where the borrower's total debt obligations exceed the home's current market value. We
estimate both the number of borrowers who currently have negative equity, and, using our home price forecast,[4] the number of borrowers who we believe will
reach a negative equity position before prices stabilize.
There are approximately 110 million households in the U.S. Of the 110 million, about 75.5 million are homeowners. Of those 75.5 million homeowners, approximately 68%, or 51.6 million have mortgages.[1] DB estimates that, as of the end of 01 2009, 14 million U.S. homeowners had negative equity, or approximately 27% of all homeowners with mortgages. Applying DB's most recent MSA-Ievel home price projections,[2] we estimate that 25 million homeowners will have negative equity before home prices stabilize, or 48% of all mortgagors.[3]
In Figure 1 below, we include other's estimates of the negative equity problem. First American CoreLogic,[4] estimated that 20% (or approximately 11 million) of U.S. homeowners had negative equity as of December 31, 2008 (their most recent work). According to the latest update from Economy.com[5], approximately 15 million homeowners had negative equity at the end of Q1 2009, and they project that number to climb to 17.5 million by Q1 2010. Economy.com's home price outlook calls for a further 9.8% decline from Q1 2009, on average nationwide, considerably less that [sic] our 14% HPD.[6]
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Deutsche Bank on those drowning US homeowners 20090806
http://ftalphaville.ft.com/blog/2009/08/06/65536/deutsche-bank-on-those-drowning-us-homeowners/
Deutsche Bank on those drowning US homeowners
Karen Weaver, Deutsche Bank's formidable global head of securitisation research, warned in a report on Wednesday that the percentage of US mortgage-holders facing negative equity would nearly double by 2011.
The term "negative equity" describes a situation currently faced by about 27 per cent of US homeowners with mortgages, who owe more than their houses are worth. According to Ms Weaver, that number will hit 48 per cent — or 25m households — within two years.
Still, Deutsche's projections are more aggressive than most, as the following chart makes clear:
Ms Weaver further argues that the negative equity problem has, not surprisingly, hit holders of subprime and Option ARM mortgages the hardest. Why?
According to Deutsche, there are several fundamental reasons:
First, because of the relative newness of these mortgage products and the tendency of these borrowers to refinance frequently (often to cash out equity), these loans are likely to be recent vintages. This means that many subprime and Option ARM loans were originated at the peak of home prices. A loan made in California in 2003 enjoyed three years of home price appreciation before prices began to fall, cushioning the impact. A loan made in September 2006 in Los Angeles has experienced nothing but depreciation.
Option ARM mortgages have negative amortization features, so that product cohort is obviously most likely to be underwater. Moreover, the starting LTV for these loans were particularly high, since they were higher credit loans (i.e. had higher FICO scores), which was believed to offset the higher loan amounts and other risk characteristics. Lastly, the popularity of this product was greatest in the bubble markets; like subprime, Alt-A and Option ARMs were also referred to as "affordability products" because they were designed to enable borrowers to buy homes in unaffordable areas. Hence, the geography of these products was adversely selected toward bubble markets
The second-worst product type vis-à-vis negative equity is subprime. There are two drivers. Once, again, the make-up of subprime is disproportionately skewed toward more recent vintages and hence the peak of the housing market. Two, the weighted average LTVs insubprime were higher than in, say, conforming mortgages or prime.
But by Deutsche's calculation, "the next leg of the decline will have the biggest impact on conforming borrowers" - or those borrowers with mortgages conforming to the guidelines set by mortgage giants Fannie Mae and Freddie Mac.
Deutsche estimates the per cent of conforming borrowers with negative equity will soar to 41 per cent by the first quarter of 2011, compared with just 16 per cent in the first quarter of this year. Negative equity among holders of prime jumbo mortgages — or loans above $417,000 made to borrowers with solid credit histories — will reach 46 per cent, compared with 29 per cent currently, the bank said.
And, as Deutsche points out:
The most obvious implication is for mortgage defaults; borrowers with negative equity may be forced to default after a life event (e.g. unemployment, underemployment, divorce, disability, etc.). Borrowers may also "ruthlessly" or strategically default even without such life events. Apart from default, this reversal of fortune for the middle class will surely suppress consumption. In the meantime, we don't expect a quick turnaround of the housing market due to the weakness in labor markets, excess supply and continued un-affordability in some regions.
This is significant not just on the consumer level (and the attendant feed-through to the real economy), but because conforming loans and jumbo loans represent the biggest share of outstanding RMBS products:
In short — more writedowns ahead.
Back in January, as part of her argument opposing a "bad bank" plan that would buy distressed assets from Wall Street, banking analyst Meredith Whitney highlighted the exposure of the largest banks to residential mortgages.
As FT Alphaville noted at the time:
By Whitney's reckoning (and others), Merrill and Citi have the biggest exposure to residential mortgages, at $44.6bn and $26.7bn respectively. Citi also has a fairly significant exposure to US ABS CDOs, at $18.9bn gross and $6.9bn net. So does Bank of America, with $11.9bn gross and $5.3bn net. (Gross means after writedowns but before hedges, in Oppenheimer parlance).
Moreover:
A large percentage of banks' exposures are to areas with the greatest home price declines and the most vulnerable negative equity positions.
An example? Bank of America — pre Merrill acquisition — had $94bn in exposure to Californian mortgages - or five per cent of the company's total assets.
Given that investment banks are also (if belatedly) preparing for a severe shakeout in commercial real estate and CMBS, further significant deterioration in RMBS would suggest that the pain on Wall Street is far from finished.
Related links:
The 20 worst housing markets in the US - FT Alphaville
What's driving defaults? It's not just negative equity - FT Alphaville
Charting the mortgage crisis - FT Alphaville
Sunday, August 9, 2009
Housing market may return to normal in 2012 20090621
California
Metro: Los Angeles-Long Beach-Glendale
What a home will be worth in 2012: $253,328
Q4 2008 price: $350,000
Projected price change by MSA: -27.6%
Projected price change by state: -13.2%
Los Angeles, best known as the home of Hollywood, is home to excellent universities such as the University of Southern California and large corporations such as aerospace contractor Northrop Grumman. Southern California has been particularly damaged by the downturn in the housing market and home values are expected to remain soft.
MSNBC.com
Housing market may return to normal in 2012
In 3 years, market will likely be governed by local issues, not credit crisis
Business Week
updated 9:23 a.m. PT, Sun., June 21, 2009
Americans have not seen a boring housing market since the last millennium. You know — the average, ordinary kind of market where supply just about matches demand, prices are steady, and real estate ceases to be a topic of daily conversation. Instead, we've had six years of upside craziness followed by three years of downside terror. Now we're in a tug-of-war between those who think we've finally found a bottom and those who are convinced that the overhang of unsold homes is going to push prices considerably lower.
By 2012 we may finally get back to blissful boredom. With any luck, three years should be long enough for the U.S. economy to recover and for the nation's housing inventory to shrink to more normal levels. At that point, housing will return to its old ways, with prices governed not by national mood swings and global credit crises but by local issues ranging from zoning to immigration to job growth.
Prices? While they're likely to keep falling a while longer under the weight of foreclosures, the market is definitely closer to the bottom than the top. "We expect prices to drop for another year and then stabilize before starting to rise with incomes," says Standard & Poor's chief economist David Wyss. Moody's Economy.com predicts the S&P/Case-Shiller U.S. National Home Price Index, maintained by data specialist Fiserv, will fall about 16 percent this year before regaining ground. Based on the National Association of Realtors national median home price of $180,000 for the fourth quarter of 2008, that would mean a median of $152,000 at the end of 2009 and then a rebound to $179,000 by the end of 2012.
All real estate is local
Of course, the national median price is an artificial construct, since there is no such place as National Median, U.S.A. Different trends can have a big impact on sales and prices across the U.S.
Local job growth is one of the most important factors to study when assessing a market's prospects. Omaha, for example, which has attracted employers such as Yahoo! and Google, missed out on the boom but is likewise dodging the bust. With the city adding jobs, the prospects for home prices look good. Detroit, where home prices fell by a third from 2003 through 2008, is likely to suffer even more in coming years as the auto sector continues to shrink. Demographic change, another trend examined here, is equally influential. For instance, Salt Lake City's youthful population is primed for house buying. While the bust left prices in once-bubbly Western markets such as Phoenix and Vegas lower in 2008 than in 2003, Salt Lake prices rose 51 percent over that period.
Other important factors are even more local than those, such as how far a house is from the nearest supermarket. You'll know we're back to an ordinary, boring real estate market when buyers focus less on the intricacies of foreclosures, short sales, and the like and go back to the things that used to matter most: What are the schools like? How quiet is the neighborhood? When am I going to have to replace that roof or cut down that diseased oak?
Sellers Mark and Maura Rampolla, who put their house in Oradell, N.J., on the market early this year, are coping with ultra-local issues such as their house being on a fairly busy road. They're also up against the national housing crisis angst. The Rampollas bought their house for $556,000 in 2004. Now they need to sell it because they're moving to the Los Angeles area to set up a West Coast distribution hub for their coconut-water sports-drink company, Zico. They listed the house for $599,000, which would represent a loss after factoring in closing costs and renovations. House hunters didn't even nibble on the property that the Rampollas and their two young daughters have grown to love. In mid-June the couple dropped the price to $559,000. "People say it's a beautiful house, but they're just very nervous right now," says Maura.
The Rampollas will probably end up being the first owners to lose money on the Oradell home since it was built in 1925 — a phenomenon that's happening across the U.S. The classic American foursquare, with four bedrooms and original chestnut molding, was sold by the Bonavita family to the Riccio family for $47,000 in 1972, the first recorded transaction price. The Riccios made out by selling to the DeSouza family for $285,000 in 1997. The DeSouzas sold just seven years later to the Rampollas for $556,000. "We actually bought the house in a day," laughs Maura. "Mark ran through the house in 10 minutes, I kid you not, because he had to get to a meeting in Queens. ... We had nothing to sell, and we just said: 'Great!' "
The good news is that the Rampollas' loss could wind up being some first-time home buyer's gain. From now through 2012, lots of families that couldn't afford to buy when prices went through the roof will be able to get in on the ground floor. Based on today's household incomes and mortgage rates, the National Association of Realtors' Housing Affordability Index is bobbing around the highest level since recordkeeping began in 1970. "To generalize, yeah, it is a good time to buy a house. I don't think there's any urgency because I think it'll still be a great time to buy a house a year from now," says economist Richard DeKaser of Woodley Park Research in Washington.
Homebuilders are helping by absorbing their share of the pain. In general, the U.S. needs about 1.5 million new homes a year to accommodate the growing population and the demolition of decayed properties. Builders exceeded that rate during the boom, but now they're building fewer than 500,000 homes per year. Their cutback should reduce the glut of homes and bring the market into better balance by 2012, if not sooner.
A still-murky picture
Most important, the economy should be growing briskly again by 2012, according to Moody's Economy.com. In May, the firm predicted gross domestic product would shrink 3 percent this year before growing 1.4 percent in 2010, 4.7 percent in 2011, and a robust 5.8 percent in 2012. It's also looking for home buying and building to return to their pre-bubble paces—no higher and no lower — by 2012.
Even if the economy performs as projected, there's still plenty that could go wrong in the housing market. Because conditions have been so unusual, "it's very hard for the model to extrapolate, based on past experiences, what's going to happen this time," says Moody's Economy.com Senior Economist Celia Chen. In a study of global real estate markets, economists Kenneth Rogoff of Harvard University and Carmen Reinhart of the University of Maryland found that home prices fall for an average of six years after a major financial crisis. That would put the U.S. bottom in 2012, or later.
Another risk is that potential buyers will stay out of the housing market, no longer trusting in home appreciation to do their saving for them. Writes David Rosenberg, the former Merrill Lynch economist who is now chief economist at Toronto-based asset management firm Gluskin Sheff & Associates: "Baby boomers are still in the discovery process on oversized real estate being more of a ball and chain than a viable retirement investment asset." Rosenberg also is concerned that an aging population won't need the kind of big houses erected during the boom. "The high end of the market will be in a bear phase," Rosenberg says in an interview.
So much has gone wrong with housing lately that it's easy to imagine worst-case scenarios. But in the more likely case, the market will fall some more, bounce off its lows, then gradually start growing. By 2012, families like the Rampollas may even get a warm, fuzzy feeling about homeownership again.
Copyright © 2009 The McGraw-Hill Companies Inc. All rights reserved.
URL: http://www.msnbc.msn.com/id/31446244/
Mortgage modifications moving at snail’s pace 20090804
http://www.msnbc.msn.com/id/32281959/ns/business-real_estate/
Mortgage modifications moving at snail's pace
Bank of America, Wells Fargo get low marks on plan to help homeowners
updated 4:06 p.m. PT, Tues., Aug 4, 2009
WASHINGTON - The government's $50 billion program to ease the mortgage crisis is helping only a tiny fraction of struggling homeowners, and a list released Tuesday showed which lenders are laggards.
As of July, only 9 percent of eligible borrowers had seen their mortgage payments reduced with modified loans. And the first monthly progress report showed that 10 lenders had not changed a single mortgage.
The report indicated that lenders such as Bank of America Corp
. and Wells Fargo and Co. have lagged behind government expectations. Both banks received billions in federal bailout money.
"We think they could have ramped up better, faster, more consistently and done a better job serving borrowers and bringing stabilization to the broader mortgage markets and economy," said Michael Barr, the Treasury Department's assistant secretary for financial institutions. "We expect them to do more."
Wells Fargo says it plans to speed up its efforts, signing up most borrowers for the Obama plan with one phone call and sending customers a trial offer within two days.
The report is "only part of the story" because the numbers do not reflect an additional 220,000 loans that Wells modified outside the Obama plan this year, a company executive said.
BofA said it would improve its "processes for reaching those in need" and continue working with the Treasury Department to help homeowners who fall outside the program's eligibility requirements.
Increase in foreclosures
Meanwhile, foreclosures continue to rise. About 1.5 million households received at least one foreclosure-related notice in the first half of this year, according to RealtyTrac Inc.
"There are certainly more foreclosures going on in the country then there are modifications — by a long shot," said Bruce Dorpalen, director of housing counseling at Acorn Housing, a nonprofit housing group. He said his group has intervened to prevent about 500 foreclosure sales in cases where borrowers wanted to be considered for the Obama plan.
A housing counselor told 36-year-old Veronica Cassella she should qualify for a loan modification, but Green Tree Servicing LLC claims she does not. Cassella, who works at a hair and nails salon in Visalia, Calif., has seen her income shrink with the economy from $35,000 to $25,000.
Her husband still works, but their income is not enough to cover the $213,000 mortgage on their home, which has lost roughly half its value.
"My life has been a standstill with these people for at least half the year," Cassella said. Green Tree, which modified 4 percent of eligible loans, did not return calls for comment.
There are 38 companies participating in the government program, and some noticeable holdouts that control 15 percent of outstanding mortgages.
HomEq Servicing, owned by Barclays PLC, and Litton Loan Servicing, owned by Goldman Sachs, have yet to join. Spokesmen for both companies said they plan to do so soon.
Government partly to blame
So far, banks have extended only 400,000 offers among 2.7 million eligible borrowers who are more than two months behind on their payments. More than 235,000 of those borrowers have enrolled in three-month trials.
But the government is partly to blame for the languid start. The administration rolled out the guidelines gradually this year. Much of the program was not finished until mid-May, and the guidelines were updated again in early July.
The White House maintains it is on track to meet its goal of helping up to 4 million homeowners by 2012. Last week, the administration extracted a verbal promise from the mortgage industry to reach 500,000 borrowers by Nov. 1.
American Home Mortgage Servicing and PNC Financial Services Group Inc. were among the companies that had a zero next to their names on Tuesday's report.
In a statement, American Home Mortgage Servicing explained that it did not join the program until July 22 but had modified nearly 37,000 loans in the first six months of 2009.
David M. Friedman, president and CEO, said executives expect to help 60,000 customers, or about 40 percent of the company's eligible delinquent borrowers.
PNC, which owns National City Bank, began the process in early July.
The best results among the large loan services came from Saxon Mortgage Servicers Inc. One in four of Saxon's eligible borrowers has a trial loan modification with a lower monthly payment to help the homeowner avoid foreclosure. Aurora Loan Services LLC, GMAC Mortgage Inc. and JPMorgan Chase all had one in five qualified borrowers in a trial loan.
"We've got feet on streets in neighborhoods where borrowers need help," said David Lowman, chief executive of the JPMorgan Chase's home lending division.
For each homeowner who makes regular payments for three months, the loan servicer collects $1,000 from the government. The company is paid thousand of dollars more if the borrower stays current for three years.
Housing advocates cite numerous cases in which companies have not followed the program's rules. And when borrowers are denied, they often are not told why. In response to such complaints, the Treasury Department says Freddie Mac will be doing random audits to see if borrowers are being improperly rejected.
Tuesday, August 4, 2009
Housing plan offered help to 15 pct of borrowers by Alan Zibel 20090804
http://finance.yahoo.com/news/Housing-plan-offered-help-to-apf-1327402806.html/print?x=0
Housing plan offered help to 15 pct of borrowers
Report says lenders in Obama housing plan offered help to 15 percent of delinquent borrowers
- On Tuesday August 4, 2009, 9:19 am EDT
WASHINGTON (AP) -- Only 15 percent of homeowners eligible for the Obama administration's $50 billion loan modification program have been offered help so far.
In its first monthly progress report on the plan launched in March, the government on Tuesday detailed big disparities among the 38 companies that have signed up. Several loan servicing companies -- including American Home Mortgage Servicing and PNC Financial Services Group Inc. -- have yet to modify a single loan.
So far, more than 400,000 offers have been extended to 2.7 million borrowers who are more than two months behind on their payments. More than 235,000 of those borrowers have enrolled in three-month trials.
Saxon Mortgage Services Inc. had the best results among the large loan servicers. One in four of its eligible borrowers has a trial loan modification with a lower monthly payment to help the homeowner avoid foreclosure. Aurora Loan Services LLC, GMAC Mortgage Inc. and JPMorgan Chase all had one in five qualified borrowers in a trial loan.
For each homeowner who makes regular payments for three months, the loan servicer collects $1,000 from the government. If the borrower stays current for three years, the servicer gets a maximum of $4,500.
When the plan was launched in four months ago, the government said it hoped to help up to 4 million financially distressed homeowners modify their mortgages. The administration says it is still on track to meet that goal, and last week extracted a verbal promise from the mortgage industry to reach 500,000 borrowers by Nov. 1.
But despite these efforts, foreclosures continue to rise. About 1.5 million households received at least one foreclosure-related notice in the first half of this year, according to RealtyTrac Inc.
Housing advocates say the plan has been a big disappointment so far. They cite numerous cases in which companies haven't followed the program's rules. And when borrowers are denied, they often aren't told why. In response to such complaints, the Treasury Department says Freddie Mac will be doing random audits to see if borrowers are being improperly rejected.
The lending industry is asking for patience, saying the industry needed time to implement the program. The administration rolled out the guidelines gradually this year. Much of the program was not finished until mid-May, and the guidelines were updated again in early July.
American Home Mortgage Servicing, for example, just started the program on July 22, the company said.
Copyright © 2009 The Associated Press. All rights reserved. The information contained in the AP News report may not be published, broadcast, rewritten, or redistributed without the prior written authority of The Associated Press.
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