If you aren’t depressed enough by the coming collapse of social programs for Californians as the budget nightmare drags on, consider that there will soon be more need for social services and less revenue available, as we segue into the rarely-remarked upon second wave of foreclosures in the Alt-A market.
A new wave of foreclosures is building in Sonoma County, one that echoes the subprime crisis that flooded the region’s housing market with distressed properties.
The tide of troubled loans, which first struck high-risk borrowers who did not qualify for conventional mortgages, is now spreading to people with good credit who purchased more expensive homes.
This time, it involves borrowers who took out mortgages known as Alt-A loans. Like the subprime loans that began imploding in 2006, these loans offered seductively low introductory payments that enabled many borrowers to buy or refinance homes that were pricier than they could otherwise afford.
Now, those borrowers increasingly are discovering the true cost of their loans. When the introductory period ends, monthly payments can jump 50 percent or more on the typical Alt-A loan, far higher than many borrowers can afford.
There are hundreds of thousands of these loans in California just waiting to recast. In the context of Sonoma County, 18% of all housing loans are Alt-A, most of them purchased between 2004 and 2006. Two-thirds of them will see rapid jumps in their payments in the next two years.
I spoke with Asm. Ted Lieu this weekend, who didn’t even want to describe these as foreclosure waves. “It feels like they never stop.” He hopes that the latest government program to try and fix the foreclosure crisis, which can allow new mortgages to be issued at 96.5% of current value, will actually make an impact, but we’re talking about a whole new class of borrowers getting into trouble because of these rate recasts. This of course adds to the properties on the market, bringing down prices, adding to a whole new wave of tax reassessments, and on, and on, and on.
You can almost set aside the unemployment crisis, and the feedback loop of decreased government spending leading to reduced consumer spending and more unemployment. Just this continuing housing crisis is enough to permanently disable any solutions to economic recovery.
…I should note that AB260 passed the Assembly today, forward-looking legislation which would prohibit lenders from steering borrowers into bad loans, prohibit lenders from reaping financial advantages (called yield spread premiums) from that steerage, ban negative amortization loans and regulate subprime lending. The Governor vetoed similar legislation last year. This is an impressive reform, but too late. The crisis has spread into prime loans by now.
The problem is that we have too many people in overvalued houses. For some, a loan modification (esp. with principal reduction) might be in their interest. However, many simply need to move to cheaper housing. Given that the cost to rent the same structure is 20-50% cheaper, depending on the area, it’s clear that moving many owners into a rental position would allow them more free cash flow each month to spend in the real economy.
Housing is a non-productive asset. Once it is built it does not contribute to the economy. Falling home values are not the problem; they are the solution. Foreclosure delays and moritoria only prolong the inevitable default and keep overburdened homeowners on the hook for longer. Banks wish to delay foreclosures because the don’t need to take the write-off on the loan until they sell the asset at a lower price.
There is a massive second wave of foreclosures coming that has been well publicized on Calculated Risk and the Irvine Housing Blog. Prices in higher end areas like Irvine, Newport Beach, and West LA are going to plunge this winter.
The only reasonable government intervention should be to accelerate this process, perhaps a fine for each month that a bank holds a property in REO without releasing it to the market.
The sooner the foreclosures are sold at new (lower) market values, the sooner all home values will reach a stable bottom. Only then, can lenders loosen lending standards and allow more individuals to purchase.
Everyone needs shelter. That shelter can be rented or owned. No one needs to own a home.