Tuesday, September 12, 2006

Betting You Default

From the NY Post

"A New York hedge fund is betting big time what apartment-obsessed New Yorkers have been whispering about for months: that the real estate boom is over.

In July, Paulson Credit Opportunities Funds raised $147 million in equity and promptly put it to work on a leveraged $1.8 billion bet that home owners are going to have a very difficult time paying their mortgages."

Full article...

2 Comments:

Anonymous Anonymous said...

Foreclosures spiked in August
Rising payments on adjustable-rate mortgages contribute to 53% jump in foreclosures.
By Les Christie, CNNMoney.com staff writer
September 13 2006: 5:42 AM EDT


NEW YORK (CNNMoney.com) -- The number of homes entering into some stage of foreclosure is surging, according to a survey released Wednesday.

In August, 115,292 properties entered into foreclosure, according to RealtyTrac, an online marketplace for foreclosure sales. That was 24 percent above the level in July and 53 percent higher than a year earlier.

It was the second highest monthly foreclosure total of the year; in February, 117,151 properties entered foreclosure.

Some of the bellwether real estate market states are among the leading foreclosure markets. Florida, had more than 16,533 properties in foreclosure in August. That led all states and was 50 percent higher than in July and 62 percent higher than in August 2005.

California foreclosures are increasing at an even faster annual rate, up 160 percent since last year to 12,506. And the formerly red-hot Nevada market recorded a spike of 24 percent compared with July and a whopping 255 percent increase from August 2005.

Rick Sharga, RealtyTrac's vice president of marketing, says the rising foreclosure numbers are in part the result of rising monthly payments on adjustable-rate mortgages, which have a low introductory interest rate that heads higher after an initial period.

"Usually, foreclosures are a lagging [market] indicator," he says. "But we've never had a situation like this with adjustable-rate mortgages amounting to $400 billion to $500 billion coming up for adjustment over the rest of the year."

For a homeowner with a 5/1 ARM that's now resetting, the adjustment could add at least two percentage points to the interest rate. That could send the payment on a $200,000 loan up from about $950 a month closer to $1,200 - $250 more each month.

These exotic mortgages, which have been issued by lenders at much higher numbers the past few years, default at a higher rate than do fixed-rate mortgages. And sub-prime loans, which are much more common than in the past, have a higher default rate as well.

But, Sharga says, "The real wild card is the nature of the loans themselves. Historically, ARMs were underwritten pretty conservatively. There has been a loosening of standards with lower credit worthiness and smaller down payments."

Underlying causes
Homeowners are also in Dutch because of underlying economic conditions. Many of the worst hit markets, such as in the Midwest, are in areas hard hit by layoffs or other economic ills.

When housing markets were hot, homeowners could often avoid default through two ready made options, according to Sharga: They could sell to a ready market or they could use the increase through appreciation in their equity to refinance their homes. Increasingly, both those options are evaporating.

Contrary to what many consumers may believe, lenders are not anxious to foreclose on homes and put families out on the streets. Foreclosures tend to be money losers for lenders and are done mostly as a last resort.

Sharga says lenders are beginning to recognize that a problem is brewing and are taking steps to address it. They are much more amenable to a short sale, for example, in which they accept a low-ball, cash bid early in the default process that may not even cover their mortgage, in order to avoid a larger loss later. That can help homeowners by preserving their credit scores and easing their transitions into the rental market.

"Lenders say they're looking for ways to work with homeowners in trouble," reports Sharga. "So for homeowners looking at a default situation, the sooner they talk to their lender - and see what options are available - the better."

Wednesday, September 13, 2006 11:41:00 AM  
Anonymous Mr. Rant said...

Merrill Lynch On Housing
According to RealtyTrac, foreclosures nationwide surged 53% year-on-year in August (to 115,292 properties) and spiked 24% month-over-month. In California, foreclosures are up an astounding 160%. The culprit, according to RealtyTrac, is the resets on option ARMs – apparently coming in at a typical two percentage points above the rate on the initial mortgage.

About 25% of all mortgages carry adjustable rates, and more than half of those loans are to subprime borrowers (according to data gleaned from the USA Today). As a result, 12.2% of ARMs borrowers were late in making their mortgage payment in 2Q – the highest since 2003, when the economy was shedding jobs and the Fed was deeply worried over the deflation threat. In 18 states, more than 15% of homeowners with sub-prime ARMs were behind in making their payments in the second quarter. And it’s not just in frothy areas – the Midwest may already be borderline recession as the auto sector cuts hit home because the delinquency rate in Ohio is 11% for homeowners with sub-prime ARMs. Note too that the Homeownership Preservation Foundation, which
provides free credit counseling to distressed borrowers, fielded a record 2,464 calls in August – a 25% jump over July. And more than half the calls were folks with ARMs.

Those in their 60s that still have a mortgage – this is amazing too – now represent 45% of their age cohort; 25% of folks 70 and over have a first mortgage too. Why haven’t these people paid off their house yet (because they borrowed against the price boom to finance their lifestyles). For people in their 60s, the study shows, they are paying 21% of their income on mortgage payments; for those 70 and up that share is 24%. These are unheard of numbers. Hey there – 30 and 40-year olds: don’t waste your time dreaming how you’re going to be spending ma and pa’s money after they're gone – it’s going to the bank.

5:13 PM

Tuesday, September 19, 2006 9:11:00 AM  

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