Good Credit Client's Defaulting.

Now that sub-prime is heading toward the light, the focus shifts to the ominous Alt-A loans. You know, the grey matter between prime and sub-prime. Take a look at this chart.

As you can see defaults are rising sharply partly because rates are resetting and housing prices have become stagnate. Countrywide and WaMu are some heavy hitters in this group but all eyes will be on IndyMac to see whether they follow the path of big brother sub-prime. This free flowing money again is because of loose monetary policy that encouraged credit creation and the populations incessant fascination with all things real estate. Just look at the sharp rise of 30 day lates; this will parabolically explode because we are resetting at approximately $100 billion per month and housing is going the opposite way. Otherwise we are in a perfect time bomb with no remedy. All the adjustable rates are resetting at least 2% higher than their current rate and people can't make the payments. They need to refinance before their rates reset. If they make a late payment they become subprime for the next three years and the lowest rates in subprime for fixed mortgages is about .50-75% higher than prime. That is several hundred dollars a month more for most home owners.

It's spreading:Target and GM Site Mortgage Meltdown for Decreased Sales.

April 23 2007: 4:28 PM EDT
LOUISVILLE, Ky. (Reuters) -- The crisis in the U.S. mortgage market has hurt U.S. auto sales this month, General Motors Corp. Vice Chairman Bob Lutz said Monday.
Lutz, who was in Louisville, Kentucky to attend an automotive industry conference, said he did not know how GM's (Charts, Fortune 500) own sales had performed in April to date, but said he expected the whole sector would feel the impact of the stress on the housing finance market.

"The market as a whole has been a little weakish. That has come as a result of the housing market problems and the mortgage industry meltdown," Lutz told Reuters. "A lot of people are finding themselves in a position of reduced affordability and that has had an impact, not just on us, but across the industry."
GM and other automakers will report April U.S. sales results on May 1.

Regarding Target from CNNFN.com:
"It's pretty surprising," Morningstar analyst Joseph Beaulieu said of Target's lowered forecast. "I don't think anyone really understands what's going on."
Beaulieu speculated that colder weather or high gas prices might have kept customer away from the stores in recent weeks.
Earlier this month, Target said it expected April same-store sales to fall 2 percent to 4 percent due to the earlier timing of Easter. Target's March same-store sales - a period that included pre-Easter shopping - rose 12 percent.
ThinkEquity analyst Ed Weller wrote in a research report the lowered forecast "appears to suggest an April (same-store sales) decline in the range of 8 to 9 percent."

Builder Cites Subprime as Slowing Sales

From National Mortgage News:
The crisis in the subprime mortgage sector is shaking the very foundation of the housing market, according to one of the nation's largest homebuilders. Ara Hovnanian of Hovnanian Enterprises said the subprime debacle is causing problems up and down the housing food chain. For one thing, fewer people can qualify for starter homes, Mr. Hovnanian said at the National Association of Home Builders' Multifamily Pillars of the Industry conference in Hollywood, Fla. For another, repeat buyers are finding fewer prospects for their houses, which they must sell before they can move, he said. But perhaps most important, the situation is having a dampening effect on the market in general. "The biggest impact is psychological," Mr. Hovnanian told the meeting. "Homebuyers were just beginning to feel good about getting back into the market" when the subprime meltdown became fodder for the media, he said. "Now they have lost their confidence." Hovnanian Enterprises is the parent company of K. Hovnanian Homes, the nation's sixth-largest builder based upon revenues and deliveries. Mr. Hovnanian said 15% of his buyers had to use subprime financing last year in order to qualify. But he said he expects that percentage to dwindle to 9% at most because of tightening loan standards.

It's only in subprime it won't impact us!

Really? Rewind to basic Econ 101. Remember supply and demand. We know that when supply overwhelms demand that prices fall. With all this supple on the market where is the demand going to magically come from to prevent prices from dropping. One hundred percent financing for most credit levels is gone entirely. Average credit level buyers are being required to put at least 5-10% down with most lenders. Six months ago if you had a pulse you could get 100% financing. Millions of potential home buyers(greater fools in some markets) are completely out of the game. My honest take is that we will see prices in some hot markets drop 20-30% from their peak over the next 2-3 years. Realise it is a slow inefficient market that takes time to adjust back to reality. With all this gloom and doom comes a ray of hope for the future buyers that can finally get a home at a reasonable price again. Just wait till 2010 to buy that condo in Vegas, OK?

Ticking Time Bombs?

As you can see the last part of the real estate boom was fueled by the riskiest credits. They were late to the party and many of these folks are already upside down on their houses. It won't take much to make them think about turning in the keys. Their payments are adjusting higher, their income is stagnant and their dream of homeownership is becoming a nightmare. Many will walk away.

Heat Map of the Mortgage Meltdown

This is an interesting map. You can see the once hot real estate markets that are facing large increase in late payments. The exception would be La. which is a mess following Katrina and the lack of flood insurance which has caused people to abandon properties. Notice the huge increase in the Inland Empire and Las Vegas. These were the hottest markets in 04-06. These markets have a huge percentage of subprime mortgages that are adjusting.

Housing: Inside the eye of the storm.

I present for your viewing pleasure an insiders view of a presentation I attended. Home values in the middle class segment of the market deflate, foreclosures increase monthly, consumer spending slows down and the economy faces stagflation. That's just my take. But your smart, you do the math.

Notice the amount of subprime loans that are adjusting over the next two years. The first adjustment is 2% above their current rate. And up to 2% every 6 months until the cap of 9.95% is reached.

The riskiest borrowers became a bigger portion of the purchase market.

Having trouble driving volume and qualifying people. The industry pushes and the client demands very aggressive mortgages that could well be a ticking time bomb for millions of families.

Here you can see the hot areas of the country were fueled by the most dangerous loan products. How else would people be able to chase inflated home values and take on enormous mortgages if not for creative financing? Afterall, average middle class income is rising around 3% a year. Yet housing rose 20%+ in most of these areas over the last five years.

Interesting Graph

New Home Slump May Last Till 2011

The new home market may not return to normal until 2011, a top housing economist has told a meeting of multifamily builders and developers in Hollywood, Fla. David Seiders, chief economist of the National Association of Home Builders, said it will be three or four years before the oversupply of finished but unsold houses is worked off and housing starts move back up to the 1.8-1.9 million-units-a-year trend line. The unsold inventory will be a "pretty heavy drag" on production, he said at the NAHB's Multifamily Pillars of the Industry Conference. As a result, he added, prices will continue to fall. "There's no question there is an oversupply of housing and that homebuyers know it," Mr. Seiders said. "So they are just waiting, and builders have no choice but to cut prices on a cumulative basis." Mr. Seiders told the conference that while the most recent data indicate that the inventory of existing condominiums has fallen, the situation is going to get worse. That sentiment was also voiced by Ron Whitten of Whitten Advisors, Dallas, who predicted that because multifamily structures have a long construction cycle, the excess in the condo sector won't start to burn off until 2009 at the earliest. Mr. Whitten described the condo outlook as "painful." The NAHB can be found online at http://www.nahb.com.

Real estate short sale: More tips to stop foreclosure

There are some helpful tips today in the Orange County Register for homeowners who are searching for ways to catch up on their mortgage payments and to avoid foreclosure.
Here’s the quick list:
Talk to your lender as soon as possible
Get financial counseling
Consider selling before foreclosure is final
The overriding theme of the article, which was written with the help of industry experts, is to act fast.
We couldn’t agree more — the quicker a distressed homeowner reaches out for assistance, the more options he or she will have from which to choose.
And, if for some reason a resolution cannot be agreed upon to save the home, at least these homeowners will have more time to put their properties on the market with the hopes that buyers come along to bail them out.
Filing for bankruptcy is the absolute last option, as well as one of the worst.
Consider this:
“Filing for bankruptcy isn’t a good option. Bankruptcy will not only ruin your credit but, depending on whether you file Chapter 7 or Chapter 11, the lender may still be able to foreclose or the court may order the sale of your home.”
The article also touches on a non-conventional strategy called the short sale. Essentially, this means that the house is sold for less than the actual loan amount.
However, the lender must agree to the terms of the price beforehand and be willing to accept the discounted offer.
Lenders sometimes do this to keep foreclosures off their books and to ensure that more money is not lost while the home is wasting away on the market.
In short, when it comes to foreclosure there’s no silver bullet solution that cures all situations. Fortunately, there are programs, services and options available that help distressed homeowners keep the keys to their front doors.
Therefore, alwayss remember that it is often a race against the clock — give yourself the time you need to arrive at the resolution that best fits your needs.