Saturday, December 29, 2007

Putting Subprime Mortgages in Perspective

According to Glenn Maguire, chief Asia economist for Societe Generale SA in Hong Kong:

The economic repercussions of the housing bust and mortgage woes are limited to a great extent because fewer than half of American families own a home with a mortgage. Almost a third of all families rent their house or apartment, almost a fourth own and have no mortgage and the vast majority with a mortgage are current in their payments. Even with about a tenth of all subprime mortgages now in foreclosure, only a small share of all American families -- about 0.3% -- own a home in foreclosure, he said.

It's true: 55.5% of American households either rent their home or apartment (32%), or own a home with no mortgage (23.5%), see chart above. Then add in the 34.5% of homeowners with a prime mortgage, and the 4.2% of homeowners with a FHA or VA mortgage, and you've got more than 94% of American households who are NOT subprime borrowers, and fewer than 6% who are subprime borrowers. And the subprime fixed-rate mortgages are not really a problem, it's only the subprime adjustable mortgages that are having problems with delinquencies and foreclosures.

Then consider that according to the
Mortgage Bankers Association, the percentage of loans in the foreclosure process was 1.69% of all loans outstanding at the end of the third quarter 2007 (both subprime and prime). But because only 44.4% of all homes have a mortgages, that means that only about .75% of all American household own a home in foreclosure.

(HT:
Marginal Revolution)

Note: I think that Glenn Maguire gets a figure of only .30% of homes in foreclosure by looking at the rate of loans entering the foreclosure process (.78%), and not the percentage of all loans in the foreclosure process (1.69%).

14 Comments:

At 12/30/2007 1:42 AM, Anonymous Anonymous said...

...only about .75% of all American household own a home in foreclosure.

Bottom Line: From the article you cited, "The total delinquency rate is the highest in the MBA survey since 1986. The rate of foreclosure starts and the percent of loans in the process of foreclosure are at the highest levels ever."

 
At 12/30/2007 5:20 AM, Blogger deathsweep said...

I have been trying to tell a similar story to a friend in real estate explaining that there is more to the loss of the bottom of the market than these loans.

 
At 12/30/2007 11:40 AM, Blogger Rick Ballard said...

How many subprime mortgages were on the books in 1986?

The phrase "loss of the bottom of the market" is as meaningless as reference to "median" income tied to "median" home value on a national basis. There is no "national" real estate market.

Mortgage lenders erred in their assessment of the risks involved in extending trust to a generation that doesn't even have second hand knowledge of depression era stories concerning the reality of foreclosure as a result of poor credit management.

It's quite difficult to determine which were the bigger fools - those making bad loans or the people lieing to the loanmakers.

 
At 12/30/2007 12:12 PM, Anonymous Anonymous said...

Rick,
the loan officers are not mistake making 'fools' as you suggest. They made bad loans because they could. Regulations were eased under Clinton. Bad loans could be bundled and sold off immediately, so the originator no longer needed to CARE about whether the loan was secure or not. He could skim the cream and hand it off. This is not foolishness, it is human nature to grab low hanging fruit.
This set-up by the Republican Congress, under Clinton, was putting the foxes in charge of the henhouse, in other words, an opportunity for savvy lenders!

 
At 12/30/2007 1:00 PM, Blogger Rick Ballard said...

Total origination fees for $600 billion worth of non-performing loans comes to $12-$18 billion. When the dust settles the losses on those loans will come in at $150-$200 billion - plus the loss of origination fee income during the period when the number of loans made will remain below "historical" averages.

It would be helpful if you would point to a volume loan originator with a "see how much healthier X Corp is today than they were in 2003". If it wasn't foolish, then surely there must be a shining example of a company involved that is doing well today as a result of the changed underwriting practices.

 
At 12/30/2007 3:09 PM, Anonymous marmico said...

Yo Rick, methinks you have to reassess the $150 billion Bernanke towline anchored in July. It has grown very threadbare and ought to be replaced.

Hatzius of Goldman Sachs upped the ante to $400 billion, Rosenberg of Merrill Lynch raised to $500 billion and Barclay's re-raised to $700 billion.

The Fed got it very wrong. Subprime is not contained.

 
At 12/30/2007 4:30 PM, Blogger Rick Ballard said...

Marmico,

The problem with the housing doom boys scenarios is roughly equivalent to that being suffered by the warmermongers. Here's a DataQuick piece identifying 95330 as the heart of real estate darkness in CA. Here's the Realty Trac listing of bank owned property within the zip code and here's the Zillow list of recent sales for the zip code.

When one of you "sky is falling" enthusiasts puts together a model based on actual sale prices dropping through the floor, let me know.

Until then the $150-$200 billion number remains a good estimate based upon historical outcomes regarding sale values of foreclosed properties.

Did you know that the hottest year since 1938 was nine years ago?

 
At 12/30/2007 9:24 PM, Anonymous Anonymous said...

It's contained. HAAAAAAAAAAA

 
At 1/01/2008 2:37 PM, Anonymous marmico said...

Yo again Rick, according to CAR, median single family home prices have fallen $90,000 in the last three months. Back of the envelope calculation, that's a $700 billion vaporization (~4% of GDP for contextual purposes) in real estate valuation. (The loss per unit is greater than the value of all residential real estate units in the state where MJ Perry is employed and the unit losses probably exceeds the median price of a unit in Flint, Michigan).

This is an unprecedented bloodbath.

The securitization bankers and all the money managers who bought the virused product can kiss half of that amount goodby in the write down confessional booth in the next and subsequent quarters.

If you want to discuss global warning, I suggest that your opening gambit be an ounce of honey not a quart of vinegar. :-> You are US-centric and your data is statistically ill-advised.

 
At 1/01/2008 6:41 PM, Blogger Rick Ballard said...

You need a new envelope, Marmico. Among other things.

I gave you actual sources of "real" houses - surely you can develop a hundred house model showing a drop of in average price per square foot rather than rely upon the infamous "median" drop derived three months after lending was curtailed in the jumbo market.

Smoke - what type of mirrors do you use?

 
At 1/01/2008 10:20 PM, Anonymous marmico said...

Morgan Stanley, Citigroup, UBS and Merrill Lynch have (and will this month) announced $60 billion in mortgage related writedowns through Q4.07. Four investment banks...$60 billion. Why don't you tally up the names of the other banks that have also written down $60 billion? And then we will move on to the funds, insurers and pensions.

The problem you must overcome is when the bloodletting stops. Subprime is not contained. Alt-A and prime are up next.

The peyote dust hasn't settled on your cracked crystal ball quite yet and I'm certain that in the fullness of time you will admit to the errors of your selective bias.

 
At 1/01/2008 10:36 PM, Blogger Rick Ballard said...

Marmico,

If you don't have the skill to assess a single zip code, why in the world should anyone pay any attention whatsoever to your babbling?

It isn't very difficult - more complex than regurgitating headlines, certainly, but basic spreadsheet skills would get you through.

If you had them.

 
At 1/02/2008 12:21 PM, Anonymous marmico said...

Sheesh, the libertarian american thinker lacks erudition, elementary arithmetical skills and is just a plain old curmudgeonly, uncivil GOP hack.

To quote Ricky: The last chapter of the housing "bubble" story won't be written until around the first quarter of 2010.

Case closed. Adios on this thread.

 
At 1/02/2008 7:51 PM, Blogger Rick Ballard said...

Not even basic spreadsheet skills, huh?

Well, you've mastered minimal googling - maybe in 12 to 15 years you'll be able to do something with actual numbers.

 

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