"Pick a Payment" or Pick a Foreclosure

One good sign in the Option ARM issues are that analysts everywhere are aware of the future problems. The subprime and ARM issues have been very re-actionary. The huge spikes in resetting of the regular ARM were able to be taken care of through lowering interest rates. Many of these people can afford to pay their full interest with a but of principle so long as the interest rates remain low. The traditional ARMs are not increasing their debts every month - getting them further in the hole. Those who took out the Option ARMs are not so lucky. Every month they pick a lower option they are not paying any principal and are increasing the amount of interest due. Most of the loans are taking on negative amortization every month. Combined with falling home prices and Option ARMs are deeper underwater every day.

In this article from the Wall Street Journal, a look at the rising defaults from the Pick-A-Payment loans. These loans have numerous problems - they are very new and very complex. They are adjustable like regular ARMs but have negative amortization. People who qualified for a $200,000 mortgage and are paying only the minimum may not be able to payback the loan when it reaches the predetermined recasting level of 125% or $250,000. Lets take a look at the article, it summarizes many of the issues very concisely.

These mortgages, which are sometimes known as "pick-a-pay" or payment-option mortgages but are generically called option adjustable-rate mortgages, are turning out, in some cases, to be even more caustic than subprime loans, in part because the loan balance and the monthly payments on some loans is growing even as home prices are falling.

... Losses on option ARMs could be "in some cases close to subprime" mortgage levels, according to a recent report by Citigroup.

Unlike subprime loans, which went to people with weak credit, option ARMs were generally given to borrowers considered to be lower-risk. But lending standards weakened in recent years and many borrowers now have little or no equity. Many lenders reduced the teaser rates on these loans as home prices climbed, making them appealing to borrowers looking to make the lowest monthly payment possible.

Now, with home prices dropping in California, Florida and other markets where option ARMs were popular, a growing number of borrowers with these loans now owe more than their homes are worth, one reason delinquencies are climbing, lenders say.

... Most other lenders won't see large numbers of resets until at least 2009 or 2010.

Many borrowers now say they didn't understand the features of the loan. For example, borrowers who make the minimum payment on a regular basis can see their loan balance grow and their monthly payment more than double when they begin making payments of principal and full interest. This typically happens after five years, but can occur earlier if the amount owed reaches a predetermined level -- typically 110% to 125% of the original loan balance.

"My sense is that many option ARM borrowers are in a worse position than subprime borrowers," says Kevin Stein, associate director of the California Reinvestment Coaliton, which combats predatory lending. "They wind up owing more and the resets are more significant."

People were given complex loans at a time it was assumed house prices would keep increasing. I wonder how many people thought they could actually ever be at any advantage with this type of loan. People gambled that house prices would have to continually rise substantially year-over year. The real appraisal price would not only need to be above the negative amortization accumulation rate but for any resells that number plus a 6% realtor fee. Both the buyers and the lenders bought into this gamble.

Option ARM Horror Stories

Two Option ARM horror stories - one with a good ending and one with a bad ending. The first story comes from the Wall Street Journal -

Some borrowers say they weren't suited for these loans or that the terms were poorly disclosed. Edward Marini, a 63-year-old disabled Vietnam veteran, took out a $280,000 option ARM from Countrywide Financial when he refinanced the mortgage on his 2,000-square-foot home in Little Egg Harbor, N.J., in 2005, pulling out cash to pay off some debts. "The way I understood it was that I would have a really low payment for five years," says Mr. Marini.

Mr. Marini recently received a note from Countrywide that his payment, now about $1,300 a month, would jump to about $3,800 next year, well above his $3,250 a month in disability payments. Mr. Marini, who owes more than his home is worth, says he was turned down by Countrywide for a refinance and, more recently, for a loan modification. "I didn't think they would even pull this kind of stuff on someone who is on a fixed income," he says.

In a lawsuit seeking class-action status filed in U.S. District Court in Los Angeles, Mr. Marini and other borrowers allege that Countrywide put them into option ARMs that were "inappropriate and unsuitable." Mr. Marini wasn't told that his loan balance would rise if he made the minimum payment, says his attorney, Joe Whatley Jr. A Countrywide spokeswoman said the company's policy doesn't comment on pending litigation.

This loan is already underwater. With the fixed income there is no possible way the owner could afford the payments. Either the owner did not understand or did not want to understand the terms of the loans. The loans are very new and conventional. Many people just hear the how much they will owe every month in the near-term.

Now to the CNN Money horror story with a bit of a movie-type happy ending.

Take Trish Phillips, an office manager for an AM radio station in Florida, who bought her Ft. Lauderdale home in early 2007. She had a FICO score of 780 and a very stable work history, with 14 years at the same job. Less than a year later, however, she was in danger of losing her home.

...For Phillips, the problem was the she ended up with an exotic loan called an option adjustable rate mortgage (ARM).

... Trish Phillips had enough income to pay about $1,300, perhaps $1,400 a month for her home, which cost $279,900. The minimum payment on her option ARM was $1,276, but she was incurring interest of more than $2,000 a month. The difference of about $800 was added to her mortgage balance every month.

... According to Phillips, who was making the minimum payments, that meant her monthly bill would jump to $2,300 after just a couple of years and then to more than $3,000 a year after that She knew she couldn't afford it and went for help.

Phillips admits that she didn't clearly understand the loan terms before she closed on the house and says her mortgage broker didn't explain them. She had misgivings but, "I was afraid of losing the down payment," she said.

... Phillips, she managed to get her loan modified, with [a foreclosure prevention counselor, Michael] Sichenzia's help. Her payment is now frozen for three years at $1,281 a month and her balance will not increase during that time. She hopes to refinance into a fixed rate loan before those three years are up. And, since she succeeded in getting her mortgage modified before she even fell behind on her payments, her FICO score is still a healthy 775.

In three years this may or may not turn into a truly happy ending. Hopefully the housing prices in the owner's area will level off and she will be able to refinance into a payment plan where she can start paying off some principal at a term that she can afford.

Foreclosure Alert - 1 in 194 Households

Shocking news coming out today. Many links to new data showing that nationally 1 in every 194 is in some stage of foreclosure. Here are some of the alarming state numbers from RealtyTrac

1. Nevada - 1 in 54
2. California - 1 in 78
3. Arizona - 1 in 95
4. Florida - 1 in 97
5. Colorado - 1 in 110
6. Georgia - 1 in 136
7. Michigan - 1 in 153
8. Ohio - 1 in 161
9. Massachusetts - 1 in 166
10. Connecticut - 1 in 188

Meanwhile in New Jersey the rate is 1 in 265 and New York is 1 in 550.

Here are some articles about this depressing news -

Bloomberg

Associated Press

CNN Money

Reuters

Forbes

What - A Home is not an ATM?

Now you tell me.

``People were using their home equity as really an ATM machine,'' [Eli] Broad said, [co- founder of KB Home] referring to an automated teller machine. ``They were spending more money than they were earning by taking equity out of their home. That couldn't go on indefinitely. We're now paying a price for that.''

Some of the prices to be paid are lowered house values, increased foreclosures, reduced savings, increased debt, and now reduced economic activity.

In the article where the above quote is from, Bloomberg news says KB Homes expects another 20% housing price decline. That's correct - he expects another 20% decline. That means many more homes underwater. Here is an older chart from Calculated Risk showing the potential homes underwater -


That would indicate the number of homeowners (really homedebtors) will likely be between 13 to 20 million. These numbers are from January - they could easily be revised upward. Now lets take a look at the article -

Eli Broad ... said he expects home prices to drop another 20 percent.

``I don't think we're anywhere near a bottom in housing,'' Broad told Bloomberg TV at the Milken Institute Conference in Beverly Hills, California. ``We're going to have a big inventory of unsold, unoccupied homes that's going to take three or four years to clear out.''

... The number of mortgage borrowers behind on their monthly payments rose to a 22-year high in December, according to the Washington-based Mortgage Bankers Association. The trade group estimated that 16 percent fewer mortgages will be issued this year compared with 2007.

This also illustrates that there is alot for financial pain to come. Another 20% of declines puts alot of people underwater. That would put approximately 1 out of every 6 homes in the U.S. underwater. A very dire forecast.

South Jersey Troubles

More trouble hitting South Jersey. Today there is an article in the Bridgeton News about South Jersey mortgage payments that are in trouble. The article focuses on the rising foreclosure rates in Cumberland County and what to do when one is in trouble.

Housing foreclosure rates are rising quickly throughout Cumberland County, with rates in Bridgeton, Millville and Vineland already surpassing the national average, according to representatives at the Tri-County Community Action Agency and Affordable Homes of Millville Ecumenical (AHOME).

... According to Turner, more than 168 Millville homes are currently in pre-foreclosure -- in which the residents have missed at least one payment. Sixty-six have already been taken by banks and 14 have gone up for auction.

In Bridgeton, 114 homes are in pre-foreclosure, with 71 taken by banks and 10 sold in auctions.

And more than 230 homes in Vineland are in pre-foreclosure, with already 84 picked up by banks and 20 sold in auctions.

"We expect these numbers to only increase," added [AHOME Executive Director Donna] Turner.

These south Jersey numbers are alarming. However, in a post earlier this month - several numbers illustrated that the state overall saw a slight decrease in foreclosures for the month of March.

RealtyTrac, one of the largest online providers of foreclosure listings in the country, places the foreclosure rate in Bridgeton at more than one in every 1,200 homes, using United States Census numbers. The national average is about one in every 5,000 homes.

In Millville, between one in 300 to one in 600 homes have fallen to foreclosure. It is the same story in many parts of Vineland, especially center city, its most affected area. East Vineland does slightly better than the rest of the city, roughly mimicking Bridgeton's numbers.

Elsewhere in New Jersey, residents are fairing about the same or worse, with only Middlesex and Hunterdon counties remaining largely untouched by this now national trend, with an average of one in 2,500 homes foreclosed there.

This is hard to understand - but is the author stating that even in the stronger counties of Middlesex and Hunterdon - there are still 2 times the national average given in this article.

These numbers seem to contradict some of the numbers that came out earlier this month. For instance according to data given in the The Record and the USA Today - the national foreclosure rate is 1 in 538, not 1 in 5,000. This would indicate the Bridgeton numbers as much better than the national average - not worse. Millville and Vineland would appear to be a bit worse than the national average, but nothing extremely alarming. While this is not great news, when compared with the Record's stats the Cumberland Country are not as alarming. Now Nevada's foreclosure rate of 1 in 139 is alarming! And anything closes to that would be very alarming.

... "The economy itself is taking a toll -- the loss of a job means less income to support a home. People are realizing its a national problem and are coming in for help."

This is more of the downward spiral. Housing prices falling, less spending, more job losses, and the downward cycle justs picks up speed.

... Turner said there are two main ways AHOME can help, by providing assistance in rearranging home owners' finances and negotiating debt forgiveness and term changes with lenders. The second -- described as a last resort -- includes selling assets and returning the house's title.

For those that can afford their houses - renegotiating is a great strategy. Hopefully learning to live within ones means is also addressed during the counseling strategies. For those that will never be able to afford their property moving is probably the best choice.

Morristown Knife Catcher

Knife Catcher – A buyer during the decline attempting to time the bottom and catch a price reversal. Since prices generally decline for long periods in a real estate slump, there are many buyers who buy too early and pay too much thus causing financial injury.

There were two really risky sides during the Great Housing Bubbles - the people who used their houses as second incomes and HELOCed to high heaven and the other group that was afraid to be priced out so ran to buy any property at any price fearing if they did not buy right then they could never buy.

Todays story is about a homeowner that bought at the wrong price and at the wrong time. It difficult to tell if the owner purchased the house as a home or as as a flip - there are lots of listed upgrades during less than three years of ownership. There was no HELOC heaven in this case - just knife catching.

Here is a look at the house -






Here is the property info

TOTALLY RENEWED, 5 Bedroom 3.5 Bath, beautiful Gleaming wood floors, Updated Kitchen, New Full Bath with whirlpool tub dry sauna, possible mother daughter suit, very new appliances and systems including HVAC. This home has been meticulously maintained and upgraded, including these upgrades, Electrical System, Roof, Air Filtration, Windows, Kitchen, 2nd Master Bedroom, New Stone Patio, Sidewalk, & Porch, New Outdoor Landscaping and Lighting... All on .84 Acres of wonderful land.

"Renewed" - like a book? The description states the kitchen was updated but it looks more 1990s than 2000s. A huge number of improvements are listed - HVAC, electrical system, roof, air filration, windowns , kitchen, landscaping with lights. These are all very expense renovations.

Here is a look at the finances -

• The house was purchased in Sept. 2005 for $650,000.

• The first and only mortgage is from Sept.. 2005 is for $520,000 taking with Wells Fargo.

• The current sales price is listed at $599,990.
  

This was a rare sight - an owner putting down a full 20% on a property during the bubble. And 20% for this property was a hefty $130,000. Either the upgrades were done prior to the current owner - or the owner sunk alot of money in this property.

The realtor's website still shows the listing for $649,990 - so the property has already been reduced $50,000. It looks like the owner has to sell - lowering the price so much less than the purchase price. The property is listed through a realtor - so a standard 6% reduction is assume off the sale price. After the realtor's commission, and if the property sells for the full asking price, the current owner will take a hit of at least $86,000. And if the current owner paid for the property to be "renewed" the loss could easily be double or triple the amount - which is a serious financial injury for most people.

More Banks Suspending HELOCs

During the Great Housing Bubble a home equity line of credit somehow became synomous with an emergency fund. One never had to worry about saving on their own - their house was doing it for them. People could buy a house and open a HELOC even if they had little or no equity. It was believed that housing prices only went in one direction - up. Today's feature is an article from Smart Money about more HELOC lines getting suspended. From the article -

TERI GRUBAR, a 46-year-old small-business owner in Minneapolis, isn't the type to pay a bill late or bounce a check. So when the owner of the tree service she had hired to spruce up her yard rang her bell earlier this month, angrily waiving a letter stating that her $3,000 check had bounced, she knew something was wrong.

A call to Citibank threw her into further disbelief: Her home equity line of credit, or HELOC, which had $20,000 in it for the occasional home repair or cash emergency, had been closed. It wasn't her fault. As the bank explained in a notice she received a few days later, her account was suspended because her home value had "significantly declined."

"This has affected me financially and emotionally," she says. "I'm self-employed and sometimes it can be a couple of months before I receive payments. Now I've got nothing to fall back on."

The lenders are obviously in a bind - if they notify people that their lines are going to be suspended most consumers would run and take out every penny. If banks close the lines than notify the borrowers you have cases like this where a check bounces and create alot of additional problems.

Also notice this borrower considered their HELOC as their emergency fund - money to fall back on when times are lean. For people who really have emergency funds - is hiring someone to spruce up your yard at $3000 really an emergency?

The article end with the same advice as all of the rest of these articles usually do. First fight the lender - get your own appraisal to prove you do still have untapped equity. Second shop around for a new HELOC. And of course, the most financially responsible one -

If you're worried that your lender may close your HELOC and you know that you'll need the money, it may make sense to tap the line now and deposit the cash in a high-yield savings account. Just keep in mind that most savings account yields have dropped dramatically so that money won't grow by very much while in the account. Also, don't forget that you're putting your home up as collateral, says Gerri Detweiler, a credit educator and author of "The Ultimate Credit Handbook." So you should only do this if you're certain you won't suffer a loss in income that may prevent you from making loan payments.

It seems a bit strange that a decent financial adviser would encourage people to take on additional debt based on housing when article after article depicts this as the worse housing crisis since the Great Depression. In some areas the devastation is already worse than the Great Depression averages.

If a Recession is Good, a Depression will be Great!

Just came across this older article about Seven Reasons to Welcome a Recession over at Yahoo Finance. I guess this article applies to those with recession-proof jobs. And to those that did not over indulge during the bubble. And those who were financially prudent but have decided that they will be spendthrifts now the the recession has started. (Note the Yeahs are sarcastic - it is not an agreement with the article.)

Those who bought homes looking to flip them for a quick profit and those who took out huge loans that they couldn't afford to pay will look at a recession with fear, but a recession should have little meaning for those who bought a home with the purpose of living in it for a long time.

Recessions are usually short-lived, and the housing market should recover long before most people are planning to sell their house.

For those who had been unable to afford a house because of soaring prices in the past few years, a recession is a golden opportunity. It brings housing prices down to more affordable levels. That means that many people who wanted to buy a house will be able to purchase one.

Recessions are also a good time to look for investment properties or vacation homes if either had been in consideration.

A recession gives anyone looking for quality housing a lot more bang for their buck than when the economy is flying high. Being able to purchase a quality house at an affordable price can greatly increase a person's net worth in the long run.

Yeah - with the recession house prices are back to affordable rates. Forget about the people who bought during the peak and the hundreds of thousands the average bubble investor lost. Investment properties - yeah foreclosures make those investments cheaper. Funny there is no caution to wait until we have reached the housing bottom and the tide is beginning to turn.

In the attempt to ward off a recession, the Federal Reserve has made interest rates extremely low, resulting in more affordable loans for those who are in the market to purchase a house.

While these rates may not be available throughout the entire recession if inflation continues to rise, the rates will be around as long as the Fed can use them to ease the recession. Taking advantage of these low rates along with lower housing prices can truly make housing a deal.

And you could save even more by using a teaser rate or an Option ARM. Yeah!

As the economy sours and people buy less and less, stores need to provide better deals and discounts to attract consumers to their doors. This can mean steep discounts through sales and promotions, as well as financing that allows consumers to pay no interest over long periods of time.

These deals are not limited to the retail stores. It also means that there are great deals in the second-hand markets, since there are more people trying to sell and fewer people looking to buy. If you are an investor in collectibles and know them well, you can often buy collectibles at steep discounts during a recession that can be turned into a healthy profit when the economy recovers. For those who have saved money waiting for good deals, a recession is a great time to find those deals.

Or your local stores go bankrupt and now you have to travel 25 miles each way with gas a $5.09/gallon. Good advice - be frugal during the bubble and a spendthrift during the recession. By all the collectibles and brick-a-brack you can find - it is cheaper now since people are selling them to buy their next meal. Yeah!

While everyone is taking their money out of the market, hard economic times can be a great time to pick up stocks on the cheap when you look at them as long-term investments. Consumer stocks for large, stable companies such as Proctor & Gamble that provide necessities such as soap and toilet paper will do well no matter what the economic conditions.

Recessions can be a great time to pick up undervalued stocks if you know what you're doing. That can greatly improve your net worth when the stock market recovers.

And just make sure you use a stable investment bank like Bear Sterns - whoops. Wonder if now is the time to invest in the local dollar stores.

During times of recession, most people don't think about traveling. For this exact reason, traveling can be a great deal when the economy is shaky. Lack of demand results in excess inventory, which forces hotels and other related travel industries to lower their prices. It also means a greater inventory to choose from and the ability to bargain for upgrades and other perks. That dream vacation that you have always wanted to take can be a lot more affordable during a recession, when travel related industries are begging for your business.

Don't worry that the flight you booked is only 1/4 booked - it won't be cancelled. And you can have the hotel all to yourselves. Yesterday there was an add for a special to Universal Studios Florida - right in time for peak-summer travel season. Yeah!

When things look like they are going to get a bit tougher, people begin to look at their personal finances a bit more closely and start to trim some of the fat. They look at ways that their money can be better spent and how they can get more for each dollar that they do spend. They pad their emergency fund a bit more and don't spend quite as freely as they do during times of rapid growth. This trimming of the fat is a good exercise that can help you see the important financial goals that you want to achieve and, by doing so, help you reach them more quickly.

So let me get the straight - streamline your finances, but invest in a house, buy up those collectibles, go on great vacations, buy up all those consumer products now that they have been discounted, and buy some of the stocks from large, stable companies. Live large but trim the waste.

If you have a good credit rating, you are in a position to get extra perks from your credit-card company. Credit-card companies see higher delinquency payment rates during a recession, and it becomes even more important for them to keep their best customers. That gives you extra leverage to ask favors from them, such as having your interest rates lowered and annual fees waived.

While most people will look at a recession with fear and uneasiness, it's important to also realize that it's an opportunity to get some great deals and improve your personal finances. Taking advantage will allow you to reap greater benefits from all those dollars you have saved.

This author would have loved the penny auctions during the Great Depression. Just wait until people start touting those deals.

Foreclosure Alert

This article in Reuters about foreclosures affecting 6.5 million loans by 2012 is pretty alarming. Of course the article brings another Great Depression parallel. Here is the worst part -

Falling U.S. home prices and a lack of available credit may result in foreclosures on 6.5 million loans by the end of 2012, according to a Credit Suisse research report on Tuesday.

The foreclosures could put 12.7 percent of all residential borrowers out of their homes, Credit Suisse analysts, led by Rod Dubitsky, said in the report. That compares with a foreclosure rate of 2.04 percent in the last quarter of 2007, they said, citing Mortgage Bankers Association data.

According to the US Census "0f the single family owner-occupied homes in the United States, about 70 percent were mortgaged and 30 percent were not." With 70% of the houses mortgaged and 12.7 of those falling into foreclosure - we talking numbers of roughly 9% of all homes facing foreclosure - that is just under 1 out of every 10 houses falling into foreclosure. Another huge and very terrifying number. At the height of the Great Depression in 1932-33, roughly 10 percent of all mortgages entered the foreclosure process.

The new forecast includes 2.7 million subprime loans whose risky characteristics sparked the worst housing market since the Great Depression. Subprime foreclosures, on top of the 676,000 already in or through the process, will hit 1.39 million in the next two years alone, an upward revision from the 730,000 predicted by Credit Suisse in October.

If the revised number went from 730,000 in October 2007 - to 1.39 million in April 2008. An upward revision that almost doubled the original estimate. Remember the Option ARMs are yet to recast so those numbers of potential defaults are not being fully included in the foreclosure forecasts.

Falling home prices have made an increasing number of U.S. homeowners more vulnerable to default, they said. Nearly a third of subprime borrowers owed more than their home was worth at the end of last year, and that figure will double to 63 percent in 2009, they said.

The shutdown of mortgage bond markets that financed many risky borrowers during the housing boom has also made it harder to refinance into affordable loans, they added.

This is the beginning of the downward spiral. More people underwater will increase walkaways and foreclosures. With the huge increases in these numbers, both will become more acceptable and commonplace. Occurrences like the following video will be commonplace.

Worse than the Great Depression?

Wow, that title alone is pretty scary. A small post at the Wall Street Journal called Yale's Shiller: US Housing Slump May Exceed the Great Depression. Once in a while there are references and comparisons in the Main Stream Media (MSM)between the current bubble bust and the Great Depression, but this article's title makes the potential sound worse. Most of the MSM are struggling to call the affects of the Great Housing Bubble a recession.

Yale University economist Robert Shiller, pioneer of Standard & Poor’s/Case-Shiller home-price index, said there’s a good chance housing prices will all further than the 30% drop in the historic depression of the 1930s. Home prices nationwide already have dropped 15% since their peak in 2006, he said.

This of course is a national aggregate. Some of the areas featured in Super Bubble States the houses have dropped over 50%. Some areas will not fall as dramatically, since they did not rise as dramatially.

“I think there is a scenario that they could be down substantially more,” Mr. Shiller said during a speech at the New Haven Lawn Club.

Mr. Shiller, who admitted he has a reputation for being bearish, said real estate cycles typically take years to correct. Home prices rose about 85% from 1997 to 2006 adjusted for inflation, the biggest national housing boom in U.S. history, Mr. Shiller said. “Basically we’re in uncharted territory,” he said. “It seems we have developed a speculative culture about housing that never existed on a national basis before.” Many people became convinced that housing prices would increase 10% annually, a notion Mr. Shiller called crazy.

Prices rose by 85% over tens years, rather than an inflation adjusted 30% - which will still leave an imbalanace of 55%. This means that basically to get back to average inflation adjusted appreciation levels huge price drops would need to occur. Significantly larger than the anticipated 30%. The economically lethal combination of inflation in food and gas with the lowering of property values, the forthcoming recession looks very bleak. As Shiller said this is "unchartered territory."

Ending Conspicuous Consumption

Will the deflating of the Great Housing Bubble be the driver that ends conspicuous consumption? According to a Newsweek article about the The End of Shopping - it just may be. The easy access to cheap debt through credit cards and HELOCs allowed people to purchase anything they wanted and well beyond their means.

Before looking at the article - lets just review the term Conspicuous Consumption. At wikipedia the definition given is "the lavish spending on goods and services acquired mainly for the purpose of displaying income or wealth. In the mind of a conspicuous consumer, such display serves as a means of attaining or maintaining social status. A very similar but more colloquial term is 'keeping up with the Joneses'."

Let's take a look at the Newsweek article -

Transfixed by turmoil in the financial markets, we may be missing the year's biggest economic story: the end of the Great American Shopping Spree. For the past quarter century, Americans have gone on an unprecedented consumption binge—for cars, TVs, longer vacations and just about anything. The consequences have been profound for both the United States and the rest of the world, and the passage to something different and unknown may not be an improvement.

People were buying anything and everything. People regularly lived lifestyles that were well beyond their everyday means through debt. Credit cards were the more visible method, but many so many people whittled away their home's equity to finance the consumptive lifestyle.

... To say that the shopping spree is over does not mean that every mall in America will close. It does mean that consumers will no longer serve as the reliable engine for the rest of the economy. Consumption's expansion required Americans to save less, borrow more and spend more; that cycle now seems finished. Americans' spending will grow only as fast as income—not faster as before—and maybe a good bit slower. The implication: without another source of growth (higher investment, exports?), the economy will slow.

Just why Americans went on such a tear is a much-studied subject. In a new book, "Going Broke," psychologist Stuart Vyse of Connecticut College argues that there has been a collective loss of self-control, abetted by new technologies and business practices that make it easier to indulge our impulses. Virtually ubiquitous credit cards (1.4 billion at last count) separate the pleasure of buying from the pain of paying. Toll-free catalog buying, cable shopping channels and Internet purchases don't even require a trip to the store. Pervasive "discounting" creates the impression of perpetual bargains.

The economy has already slowed. The debt was incurred by people across all of the economic classes, even those whose real wages declined. Even with another growth source - like experts - will not benefit across the board. Growth is imagined as always good - but uncontrolled, non-contained growth is not. Like a cancer, this uncontrolled growth of debt was eating away the healthy economy. With numbers like 1.4 billion credit cards for just over 300 million people (actually less than 250 million over the age of 15) - that is more than 5 credit cards per each American adult. And $0.14 per every dollar people make is going to service debts. This type of debt-growth is unsustainable.

... What's notable is that all these forces for more debt and spending are now reversing. The stock and real-estate "bubbles" have burst. Feeling poorer, people may save more from their annual incomes; it's already much harder to borrow against higher home values. Demographics tell the same story. "Life-cycle spending drops among 55- to 64-year-olds"—they borrow less and their incomes decline—"and that's where our household growth is now," says Susan Sterne of Economic Analysis Associates. "After 2010, growth is among the 65- to 74-year-old households, where incomes are even lower."

And credit "democratization"? Well, the message of the subprime-mortgage debacle is that it went too far. Up to a point, the spread of credit was a boon. Homeownership increased; people had more flexibility in planning major purchases. But aggressive—and often abusive—marketers peddled credit to people who couldn't handle it. There are no longer large unserved markets of creditworthy consumers, and, indeed, many Americans are overextended. In 2007, household debt (including mortgages) totaled $14.4 trillion, or 139 percent of personal disposable income. As recently as 2000, those figures were $7.4 trillion and 103 percent of income.

Before people can even enter the savings realm, they must reduce some of this debt. With debt equaling "139% of personal disposable income" there is a long way to go. Any way is going to be hard. Many blogs are pondering which will be more painful - a shallow but very, very long recession or a short but very deep one. What does the Newsweek article ponder -

...But what if the correct answer is "nothing"? Nothing takes the place of the debt-driven consumption boom. Its sequel is an extended period of lackluster growth and job creation. Somber thought. For good or ill, the ebbing shopping spree signals that the U.S. economy has reached a crucial juncture. It will challenge the next president in ways that none of the candidates has probably yet contemplated.

Remember, many people did not have any real growth during the boom - there was consumptive growth due to debt - the debt that has become a cancer on the economy. The Great Housing Bubble just illustrated how bad the cancer has become. The only real questions left are - How bad the treatment to cure the debt-cancer will be? What role did conspicuous consumption play in causing our debt-cancer? And will we be able to change our lifestyles and adjust to the required treatment?

Walking Away and Short Sales

Calculated Risk takes a look at Walking Away and how pessimistic to be about the future. The post reviews Professor Roubini's article: The worst is ahead of us rather than behind us in terms of the housing recession and its economic and financial implication. (Subscription Required)

While the whole thing is a good read - lets pull out some interesting numbers. This paragraph has so much info that it is worth taking a look at (and, yes, it really is this long) -

The argument for a trillion dollar of losses on mortgages alone is based on the following three parameters (two of which an undisputed while a third is more subject to uncertainty. First, let’s conservatively assume that home prices fall about 20% rather than 30% so that only 16 million households are underwater; this assumption is not very controversial as most now would agree that a cumulative fall in home prices of 20% is a floor, not a ceiling to such price deflation. Second, lets assume – as Goldman Sachs does – that a foreclosed unit causes a loss of 50 cents on a dollar of mortgage for the lender as, in addition to the fall in the home price one has to add the large legal and other foreclosure costs including loss of rent on empty properties, risk of the property being vandalized and cost of maintaining an empty property before resale. Third, lets assume – and this is more controversial – that 50% percent of households who are underwater eventually walk away or are foreclosed. Then, since the average US mortgage is $250k total losses from borrowers walking away from their homes are $1 trillion. Goldman Sachs agrees with me on two parameters (20% fall in home prices and 50% loss on a mortgages) but more conservatively assumes that only 20-25% of underwater home owners will walk away. In this case mortgage losses would be “only” $500 billion. But home prices may likely fall more than 20% and with a 30% fall in home prices 21 million households (40% of the 51 million with a mortgage) would be underwater. So, there is certainly uncertainty on how many underwater households will walk away but given the recent evidence of subprime but also near prime and prime borrowers walking away even before they are foreclosed one can be pessimistic on this.

So the current conservative estimate is that house prices will fall 20% from peak, which will cause 16 million households underwater.

The next interesting number is that every foreclosed mortgage costs the lender 50 cents on the dollar. This makes us wonder why most lenders do not try to streamline the short-sale process. With the lenders taking such a potential hit the best thing would be to take a short sale - a known loss now rather than an unknown, potentially huge loss later. The potential costs of having a foreclosure appear huge to the lender - these include "loss of rent on empty properties, risk of the property being vandalized and cost of maintaining an empty property before resale."

Lastly the prediction that 50% of those underwater will go to foreclosure or walk away. That would be 8 million households going into foreclosure or walking away.

The post concludes -

One of the greatest fears for lenders (and investors in mortgage backed securities) is that it will become socially acceptable for upside down middle class Americans to walk away from their homes.

We think walking away already is becoming acceptable for the middle class. In someways it is even more acceptable than going into foreclosure - walking away shows some control over the situation and foreclosure illustrates none. Either way your credit score takes a huge hit. The smartest thing would for a massive industry wide push to streamline short sales. This would prevent walking away and foreclosure, while reducing the huge potential loss to the lender. It may be the only way to prevent a total meltdown. It also sounds like it would be in the best interest of the sellers, the lenders and the potential buyers.

NJ Mortgages Harder To Get

There was an interesting article in The Record about the every-changing rules in New Jersey for obtaining a mortgage. The article is called Forget about easy mortgages. The article discussing how much tighter the lending standards are - and are expected to get ever tighter in the future. Down payments of at least 3% are require. Piggy-back loans have disappeared. The minimum credit score is now 580 up from 530. And anyone putting down less than 10% requires full documentation.

A first-time home buyer, [Steve] Sost, a partner at a public relations firm, visited a lender he was familiar with to see if he qualified for a mortgage. After submitting voluminous paperwork including his bank statements and credit reports, he found that he qualified.

That sounds like a traditional full document loan. I guess it is better when the bank just checks your FICO score and takes the homebuyers word for everything elese. Oh, those wonderful liar loans.

... According to some lending experts, national lawmakers who were initially too lax, giving out loans to practically everyone, are now having a knee-jerk reaction, tightening the rules to bring the market back up to par.

"I can't disagree with the new rules, but it just makes it more complicated for people," said Glenn Durr, president of NJ Lenders Corp., a privately owned licensed residential mortgage banker in Little Falls. "Now someone with a credit score of 620 has to pay more than someone else with a credit score of 800."

According to Durr, a mortgage lender, the number of clients who were unable to pre-qualify has greatly increased at his business in the past year due to the elimination of many mortgage products, particularly those with less than full income verification and lower down payments.

Because of increasingly poor performance, particularly by subprime borrowers, there has been a tightening of credit standards in all segments of the mortgage industry in an effort to make mortgage-backed securities more appealing to investors, he said.

"Guidelines change every day," Durr added. "We've seen more changes in these past six months than we saw in 16 years at this business."

Now the lawmakers are approving loans? While they may have loosened some of the standards banks did not have to give to readily give out liar loans. We know from the Chase Memo called Zippy Cheats and Tricks with steps to avoid any triggers that would prevent loans. I guess that was also the lawmakers fault. The lenders are made because the tighter restriction makes the potential lending pool significantly smaller. Also many of the high rate loans have been removed so the loan "incentives" are drying up.

... According to Peter Calautti, regional sales director at Residential Home Mortgage in Clinton, prior to walking into a bank, would-be home buyers should be prepared to document their income, unless they have a majority of their income derived from non-salary sources coupled with a large down payment or equity.

... "When delinquencies start to return to normal levels and home prices start to stabilize, lending standards will loosen," said Calautti, "but probably not to the level seen in previous years."

Hopefully lending standards never return to the Great Housing Bubble standards. Giving a loan with 110% loan-to-value on a liar loan because someone has a good FICO score never made sense. Giving 100% funding for a property with someone with a low FICO score also did not make sense. Everyone who was getting a cut of the profit was looking the other way during the Bubble and now we are paying the price.

Lincoln Park Failed Flip

The example of NJ HELOC Heaven will now be a Sunday feature. Today's example is another failed flipper. Just guessing from the time period and property info, these flippers probably occupied the house while making their upgrades. This house features the unfortunate combination of peak price purchase and peak price renovation - which has shown to be a money losing combination. Lets take a look at the house -


Here is the property information

Priced at $309,900

Bedrooms:	2	Bathrooms:	1
County:	Morris	Property Type:	Single Family Detached
MLS Number:	2489560
Property Description
This cute 2 bedroom ranch offers an updated kitchen with granite countertops. Hardwodo floors throughout the home. Partial basement. Just reduced. Bring all offers. Call today.

Remember when selling real estate, spell-check is your friend - hardwodo

The house is cute starter home but the bulkhead in the front yard combined with the front French Doors some potential curb appeal is lost. This house is being sold by a realtor. Savva & Rabin Realty - who will make approximately $9,000 for their share as the selling agents - can not even spell hardwood correctly on Craigslist or on their own website.

Here is the financial information for the property -

• The property was purchased in Sept. 2005 for $215,000.
• The first mortgage taken Sept. 2005 was for $192,950 with Wall Street Financial Corp. the mortgage was closed May 2007.
• A second mortgage was taken Feb. 2006 for $10,299.40 with Beneficial Mortgage Co. This loan was closed in April 2007.
• A HELOC was opened in Aug. 2006 for $35,000 with Wall Street Financial Corp. WALL This line was also closed May 2007.
• In May 2007 another mortgage for the property was $284,250 with Freedom Mortgage Corp.
  
• The house is currently for sale on craigslist for $309,900.
  

The owners originally put down just over 10%, 0r $22,050 when they purchased the property. At the peak of the bubble 10% is a significant amount down. The owners proceeded to take out a series of mortgages the next year. This is probably when alot of the work upgrading the property was starting. It looks like the common story of under-estimating the price and scope of work exceed the original expectations. Less than 2 years after the purchase, the first two mortgages and the HELOC line look like they were rolled up and closed off with a new cash-out refi in May 2007. The cash-out appears to be approximately $46,000.

If the sellers receive an offer for the full asking price, after deducting the standard realtor fees of 6% ($18,594) the owners will net $7,056 for their work and investment during the last two years. Actually, when you consider all of the other closing costs to buy and sell the property as well as mortgage fess, this property is probably already at a loss. With the profit margin being so small, if the selling price of the property is below $302,500 the flippers will definitely lose money on the deal. Most likely they will either need to bring a check to closing or negotiate a short sale.

While the failed flipper is a sad story, the stories of the families losing money on their purchases are even sadder - like here, here and here.

More HELOC Fun

A very informative article appears in CNN Money that explains how to thaw a frozen line of credit and what exactly happened to cause the lines to become frozen. With article after article involving irate people giving the impression that the lender was taking their money when HELOC lines were shut down. The articles clear explanation that HELOCs are equity and a lender does not, and probably will not, have to loan out more than 80% of the loan-to-value ratio. Equity is not a set, guaranteed amount and it can fluctuate both up and down.

... At worst, outright freezes cause havoc for many borrowers. Even for borrowers being told they can only draw less than the amount initially authorized, it can be a costly inconvenience.

Many lenders are freezing and cutting HELOCs even for borrowers with sterling credit and big equity in their homes, says Weston Sutherland, director of product management, FeeDisclosure.com.

Borrowers generally see HELOCs as an inexpensive, flexible source of cash. Lenders have opened more than $2 trillion in HELOCs, according to broker Keefe, Bruyette & Woods.

But if your line has been lopped, there may be steps you can take to fight back or cope with the problem. "That depends on the equity in your home," said Greg McBride, senior financial analyst, Bankrate.com.

A HELOC is secured by your equity in the home. Recent declines in housing values have trimmed home equity in many areas. That's why lenders are reining in HELOCs. They often reserve that right in the fine print of their deal.

There are three primary reasons that lenders have stopped the HELOCs - one is that lenders do not have funds available if the given HELOCs are used. The second and most common is that the value of properties have dropped, therefor there is no equity, some cases there is now negative equity. The last one, and an offshoot of declining equity is the lenders are requiring a more stringent 80% loan-to-value ratio. For the third case, even if ones house values did not drop the new equity requirements are not there.

Note the first reason is being done for the institution to survive and has little to do with the homeowner. The second and third involve the homeowners and their own illusions (or delusions) about the real worth of the property and their finances. The article points out to home owners that if you are in the second or third category there is little that one can do - these new requirements are being adopted across the industry.

Fighting Back

... You can accept the new limits. Maybe you simply don't need to borrow money.

If an emergency comes up, perhaps you have cash reserves to tap. You might draw down a money market fund now paying around 2%.

... Call the lender's customer service department and ask if it has an appeals procedure. "You generally will need to demonstrate that the value of your home hasn't declined or hasn't fallen by much," said Keith Gumbinger, vice president, HSH Associates, a publisher of loan information based in Pompton Plains, N.J.

You probably will need a current appraisal. Ask your lender for a list of approved appraisers.

Call an appraiser on the list and ask about fees. They often charge a few hundred dollars. But the appraisal may help your frozen HELOC to thaw.

... What if your lender won't let you appeal your frozen HELOC? If you have enough home equity, consider refinancing with another lender.

Funny that the section is called fighting back when the first two options are stating basically do nothing. First - do nothing and accept your situation. Second - find the money someplace. Third - fight the lender with a new appraisal showing more than 20% equity under the current market conditions. Fourth seek out another lender. This order is probably because the majority of people fall in the live in declining areas and/or have less than 20% equity. My instinct is that since we are still in the downward spiral for home prices, lenders will stall and find any excuse for not re-opening HELOCs among people who have less than 30% equity or live in Super Bubble States. With home prices falling in the double digits year-over-year, it is probable that someone who currently has 25% equity will have less than 20% next year.

Bottom line: People who bought homes at the peak of the market may face stiff challenges. Many owners now find the ratio of their home loans plus HELOCs vs. home value has soared. If your home is leveraged over 80%, you likely will find it hard to get more home equity debt.

The situation is better if you bought your house before the market peak. You may have ample home equity. If you have solid credit and reliable income, you can borrow against your house.

This is a good section since it is outlining that if you bought in the peak and/or had 100% financing not to bother. If you bought at the peak - even with 20% chances are you currently do not have 20% equity. That equity is gone. If you put less than 20% down during the bubble, do not even bother. Also noted is that the HELOC bargains during the Great Housing Bubble are not the same, higher fees and even closing costs are the new reality.

Good "wake-up" article for the masses.

A Look at Option ARM Issues

A few interesting pieces in today regarding Option ARMS - first the terminology. ARMs reset, Option ARMs Recast. On the Federal Reserve Boards website there is a post about the dangers of Option ARMs - unfortunately none of our figure heads were verbally spreading the warnings. It may have made consumers and bankers wake up for a moment and realize the potential problems. Here is a snip -

• Rising monthly payments and payment shock. It is risky to focus only on your ability to make I-O or minimum payments, because you will eventually have to pay all of the interest and some of the principal each month. When that happens, the payment could increase a lot, leading to payment shock. In the worksheet example, the monthly minimum payment on the option-ARM payment rises from $630 in the first year to $1,308 in year 6, assuming the interest rate stays at 6.4%. The monthly payment could go up to $2,419 if interest rates reach the overall interest rate cap.

• Falling housing prices. If housing prices fall, your home may not be worth as much as you owe on the mortgage. Even if home prices stay the same, if you have negative amortization, you may owe more on your mortgage than you could get from selling your home. Also, you may find it difficult to refinance. And if you decide to sell, you may owe the lender more than the amount you receive from the buyer.

And remember regarding the upcoming Option ARM problems, that it is estimated 80% people with Option ARMs can only the minimum payment we are already in a world of hurt. Just wait for the recasts. Marketwatch has a great description of the coming problems -

After about 40 months your 2% b.s. payment would make the loan grow to about 115% of the original amount and then — WHAMMO — your loan would recast to a 27-year fully amortizing mortgage. Your payments would go from $1,000 a month to over $3,000 and you would be walking around wondering, like “What is happening?” A good analogy is the three-year no-payment, no-interest Circuit City TV loan. The catch is that in month 37 you owe ALL back interest — usually about double the original charge.

The guys talking about resets are trying to confuse the situation. The option arm loan was very popular through 1Q07 - so take 40 months from that date, plus 3 months for them to go 90 days late and then and only will you see foreclosures start to level off.

We have not started the huge levels of recasts yet - lets take another look at the reset/recast chart and note that the recasts do not really start showing up until 2009. Then they rise in huge numbers in 2010 through 2011. With the combination of falling house prices and negative amortizations these will result in huge, huge numbers of defaults.




At least some lenders realize what is coming and are trying to solve some of the issues before the crisis occurs. Here is a quote from Thomas W. Casey, Chief Financial Officer & Executive Vice President, during a Washington Mutual Q1 Earnings Call -

Option ARMs represent roughly half of the prime balances but approximately 70% of our prime non-performing loans. Option ARMs tend to have higher expected losses in all environments. Losses tend to be driven by the same attributes: leverage and FICO that drive losses in other loan types, current evidence does not support the conclusion that negative amortization or payment shock from loan recast are contributing to the recent deterioration in the performance. Further, expected recast dates have been pushed further in to the future as a result of the decline in treasury yield which comprise the NPA index used for option ARMs. Although the bulk of our option ARMs are not expected to recast until 2009/2010 we are already working with option ARM borrowers in a variety ways such as expanding recast figures to avoid foreclosure. Included in our NPAs are $669 million of troubled debt restructurings resulting from our work with customers to keep them in their homes through work out plans or modifications. Approximately 54% or $363 million in non-accrual CDRs were current with revised loan terms at quarter end. We expect the level of work out plans or modifications to continue to rise in 2008 as we continue our proactive practice of working with borrowers to keep them in their homes.

But current evidence also illustrates that loans are not recasting in record numbers yet. It would be great to see the data of Option ARM - 100% financing loans. These are already bank-owned, they are just showing up on the wrong side of the balance sheet. With house prices still in free-fall in some areas, especially the Super Bubble States, this will probably require numerous revisions to the original contract to try to stave off foreclosures and walk-aways.

Trust In FICO

One funny thing I have noticed is that all these well paid executives never imagined that anyone with a decent FICO score would consider walking away. In article after article industry experts and risk analysts are stunned people are doing what is best for them and their families for the immediate future - even if that might mean a hit to their credit and FICO score. My prediction is that as the numbers skyrocket bad FICOs for middle and upper incomes will become less and less of an issue. It will be what a tattoo was in the 1970s. Once just for those on the fringes, now it is they are sported by the nurses in my doctors office.

So today there is an article in the International Herald Tribune about problems arising when homeowners (should really say homedebtors) walk away.

... Rapid declines in home prices in many parts of the United States will soon leave as many as one in five borrowers owing more on their loan than the house will sell for, removing the single most powerful incentive to keep up with payments.

The phenomenon of "walkaways" or "jingle mail," so called because of the noise the house keys make in the envelope mailed to the bank, is hard to measure but shows every sign of gathering pace and having a substantial impact.

One in five borrowers under water. It is said that only about 2/3 of homeowners have a mortgage - so taking that into account then approximately 13% of all properties will be owe more than their house is worth. I wonder if the models ever took that into account...

Wachovia went so far as to change its models on how quickly loans will go bad in the face of what it called "unprecedented" changes in consumer behavior.

"I don't know where the tipping point is," said Don Truslow, chief risk officer at Wachovia. "But somewhere when a borrower crosses the 100 percent loan to value, their propensity to just default and stop paying their mortgage rises dramatically and really accelerates up."

If you are underwater AKA upside, one has to figure out how long it would take them to break even. As the property values spiral downwards people are even more underwater. The analysts need to look at various underwater points - 1%, 5%, 10%, 25%, and 50% underwater. I can not see anyone that underwater staying put - unless renting in the area is more expensive which does not seem to be anywhere. Since people have been encouraged to view their homes as a long-term investment and retirement fund it makes sense for people to walk away. The housing paradigm has changed drastically the last ten years - if a lender paid someone to take a house - with the did with some of these 100% with cash-outs what incentive is their to stay. If your home is worth 50% less than what you owe your credit score will rebound faster than your home value will. So what have the models based on...

He added, "It's almost regardless of how they scored, say, on FICO or other kinds of credit characteristics."

FICO, a credit score developed by Fair Isaac Corp., is one of many barometers of creditworthiness used in home lending to help predict the likelihood that a borrower will repay.

Oh, of course they placed all their trusted in the FICO score. Why would someone want to hurt their credit score - self preservation is stronger than caring about ones FICO score. Modelers used the FICO score to predict future behavior but how many ran those models on properties that lost 30-40 even 50% of their original purchase price or peak value.

... Mark Zandi of Moody's Economy.com estimates that 10.6 million homeowners will have zero or negative equity by the end of June, or 21 percent of first-mortgage holders.

The impact of a new wave of defaults will also be potentially important. Banks and other investors in mortgages, as has been seen, will take further hits to their already weakened capital.

This is just for June, the longer and deeper the recession gets the larger and larger these numbers will become.

While few might shed tears for banks, this means a longer and deeper credit crunch. It will also mean a wave of new properties hitting the real estate market, driving prices lower still, as banks seize and seek to sell the houses homeowners have fled.

Why would anyone worry about the banks - when an investment bank was given a sweetheart deal on a Sunday afternoon. While any help to the individual homeowner drags on and on and includes subsidies for big business. Everyday it seems the Federal Reserve Board is coming up with new ways to help the banks (see here and here) - other than scolding the home-owners not to walk-away what has been done for the little guy? What will be done? And when?

... While borrowers acting in their own best interests really should not shock anyone, the costs associated will be just another unwelcome drag on the economy and finance until the value of U.S. houses stops falling.

The models should be recalibrated using what would be in the homeowner's best interest rather than than relying and focusing on the FICO score. Stories abound of people having problems getting in touch with the current owners of their mortgages, top that off with the lenders rejecting short sales or making them so difficult that people who are trying to do the right thing are not able to - and there are not many choices left. People with great credit and equity are upset about losing their HELOCs. Imagine how furious the people who played by the rules (at the time even if they were too loose) only to find out they are underwater and its getting worse everyday.

Good News or a Breather

Wow - finally some good New Jersey news. The Record has an article about New Jersey bucking the foreclosure trend. (If only they could spell the title correctly.) While foreclosure rates are up overall, year-over-year there has been a slight decline. Rumors about that many lenders are either so swamped there is a processing lag or the banks are stalling foreclosures so as not to take the hit which would make them report their actual numbers. Let's take a look at the Record article -

Foreclosure activity in New Jersey declined 6 percent in March, compared with filings in the same period a year ago, RealtyTrac announced Monday.

One in every 775 properties in the state was in some stage of the foreclosure process — ranging from a default notice to bank repossession.

Nationwide, one in every 538 properties was involved in a foreclosure filing last month, according to RealtyTrac, which collects and sells foreclosure data.

Foreclosures have risen nationwide over the last several years, in part because many home buyers took out adjustable-rate and interest-only mortgages so they could afford houses as prices soared during the recent boom. Now many of those mortgages are resetting, raising monthly payments to levels that many homeowners cannot afford.

Although foreclosure filings have risen in New Jersey since the housing cycle turned down in 2006, the state's housing market is healthier than in many parts of the nation. Development is limited in New Jersey because of government restrictions and a lack of open space. As a result, the Garden State did not see the kind of speculative building that took place in Florida, Nevada, Arizona and California. In those states, foreclosure rates have risen faster.

Foreclosures are rising highest in the Super Bubble States the most. The whole country was in a bubble but the Super Bubble States of Florida, Nevada, Arizona, and California are facing crises that the rest of us can't begin to comprehend. Unfortunately it appears as if the government and lenders do not really understand what is happening either.

The Great Housing Bubble seems to be following Newton's law "For every action, there is an equal (in size) and opposite (in direction) reaction force." Not Realtors Law "It's a great time to buy a home!" The states that had the highest year-over-year increase are now facing huge year-over-year declines complete with foreclosure increases. Note that alot of the Super Bubble States had high numbers of people using liar and suicide loans as well as anything else that would land them a house. NJ has a good percentage but not nearly as high as many other states.

There is an interesting article and chart discussing foreclosure rates state by state in USA Today called rate of home foreclosures expecting to get worse. New Jersey is bucking the trend with the following other States - Alabama, Colorado (could this be right?), Iowa, Kentucky, Nebraska, North Dakota, South Dakota, Texas and West Virginia. Due to reporting changes it is not possible to tell which States have the actual highest foreclosure rates. Here is some interesting parts of the USA Today article -

One factor driving up foreclosures has been the number of adjustable-rate loans that have reset to higher rates, raising the amount that homeowners owe each month. Because ARM resets will peak later this spring, the pace of foreclosures could rise further into the third or fourth quarter of the year, says Rick Sharga of RealtyTrac.

... "We could argue this is the worst housing downturn ever," says Mark Zandi, chief economist at Moody's Economy.com. "Negative equity and unemployment are the driving factors. Things are getting worse, not better."

... "This isn't a subprime problem," says Dean Baker, co-director of the Center for Economic and Policy Research. "The underlying issue is housing prices are falling. It's going to get worse. Subprime (foreclosures) may have peaked and will start to trail off. In terms of the rest of the market, we're just beginning."

Some homeowners who might have planned to refinance into lower-rate loans are finding they can't because falling prices mean they owe more on their mortgages than their homes are worth.

... Zandi adds: "What we're seeing that's new is people who are under water" — whose loans exceed their home's value — "walking away" from those homes.

People are walking away already we still have huge wave of Option ARMs still to come. People are already underwater. Just wait for all the negative amortizations to materialize and even more people facing the foreclosure/walkaway dilemma.

Some of the best advice floating around on this topic is from Mish's Global - read it and remember.

If you are in agony over a pending decision to walk away, just remember, your moral obligation is not to Paulson or your lender, nor is there any patriotic duty to bankrupt yourself for benefit of others. Please don't blow your life savings, tap your IRA, or use credit card debt to forestall the inevitable. Your moral obligation is to yourself and your family. If it makes economic sense to walk, then walk.

Some common sense. Thanks Mish!

On a side note - a big topic on various boards is the actual definition of "walking away". Some people apply it to anyone who leaves their property. Others use it only in the cases where people who can pay a mortgage choose not to do so because they are underwater. Hopefully the term is streamlined soon so we are all discussing the same thing. Because classifying someone who leaves during the foreclosure process is not the same as someone who is leaving a property since their investment is worth less than when they purchased it. Many, many people have mortgages they will never be able to afford so these people are not walking away - if they leave the property they are really just waking up or getting off the kool-aid.

More Bad NJ News

Stories about half finished communities ghost-towns in Nevada, Arizona, California and Florida have been common for the last year now. Today I came across an example from New Jersey. While we did not have the huge growth of other areas of the country, we still had alot of new development all throughout the state.

At the new community of Seapine Estates, street names like Sea Foam Drive and Shoreline Road are meant to evoke a feeling of coastal tranquility. Instead, the two dozen or so residents of this New Jersey Shore development, near Atlantic City, feel anything but peace. The Pennsylvania builder went bankrupt last summer and halted work, leaving open foundations, unfinished homes and empty streets that have invited outsiders to dump trash, spray graffiti and race cars.

In other parts of the country these communities are becoming increasingly dangerous places. And the early buyers are stuck - properties are losing value and they have no recourse.

... America's housing market has foundered, homeowners who bought into newly rising projects at just the wrong time have found themselves marooned in stalled, abandoned or largely unoccupied developments with little place to turn, placing a strain on them and municipalities forced to pick up the pieces.

Experts say it's one of the least examined aspects of the housing downturn, and one that has struck many parts of the country, from areas like Las Vegas, which experienced rampant speculation and overbuilding, to cities where construction was more restrained such as the Jersey Shore and Philadelphia.

Many times these new developments are isolated from the rest community - on the outskirts of an established town. Once in a while they are giant eyesores in the middle of a community. When they are easily viewable and accessible other residents will push for something to be done about a property and also notify authorities when they see anything questionable occur. Local residents will also prevent "Bandos" or squatters who now live in abandoned homes. In semi-established communities, stories abound of other residents taking care of the properties so as not to allow the area to deteriorate. There are stories about townships taking care of swimming pools in abandoned communities to stop mosquito problems. These unfinished developments also require even more police and fire protection. Finally, there are stories involve criminal groups going in and removing everything of value from the unfinished or abandoned properties.

... Ken Bachman, 37, who lives on a half-empty street in Seapine, feels trapped. When he leaves the house every day, he has to look at an unsightly, unfinished home across the street. Bankrupt Elliott Building Group of Langhorne, Pa., had planned more than 200 houses in the development with prices starting around $300,000, but residents say the community is only about a fifth occupied.

"It's an undesirable place to live right now," Bachman said. "Homes have been on the market for sale in here for over a year and they're just not selling, because who wants to move into a development that's bankrupt?"

Beside the safety issues I stated above - there is also the depreciation of value to the area. People were paying $300,000 and up to live in a great community with wonderful amenities they will never see - private pools, community centers, beautiful landscaping are among the most common . This will also cause a decline the property values. The development lost some of its value the day the builder filed bankruptcy. If a new developer were to come in quickly the value could be restored. However, the deterioration and safety issues will also aid in depreciating the property values.

... At the unfinished Seapine Estates, Denise and Kevin Urtubey, parents of a toddler, worry about the safety of their daughter. Cars have raced down the street in the middle of the night; a couple was found having sex toward the back of the development; tubs and other debris have been dumped in empty lots.

"It wouldn't have happened if the neighborhood's completed. It's not a dead-end street. It's just that nobody's back there," said Denise Urtubey, 27.

Like abandoned and foreclosed homes, unfinished houses and projects are not merely community nuisances. They also contribute to the glut of inventory dragging down the market.

How long will a family stay there. Areas like these can be dangerous for children of all ages. The buyers were probably envisioning a nice, safe family community. That is not what ended up getting. If they have any chance to leave they will jump on it. With the declining market values some of the homeowners will end up being underwater. As time goes by they must decide if the best thing for their family is to just leave.

... As for Seapine, Egg Harbor Township officials said they've notified the insurers who issued $2.3 million in construction bonds to finish building the streets and other infrastructure or pay the town to do the work. They said they would sue if necessary.

Bank of America has taken over 180 of the lots at Seapine while 22 properties are in litigation over liens, the builder's attorney said.

Bank of America has received several offers for the lots, Bank of America spokeswoman Shirley Norton said, but that it will be up to whoever buys the properties to decide what to do with the development.

Even a quick sale would not guarantee a quick fix in today's market. Builders are being squeezed by tightening credit, weak buyer demand and cash flow problems as banks in some cases pressure them to pay down more of their loans as land values decrease, said Dave Seiders, chief economist for the National Association of Home Builders.

That means Denise Urtubey might have to wait a while before Seapine becomes a real community filled with neighbors and kids.

"I don't know what's going to happen to the neighborhood," she said, wistfully. "It's kind of sad that we won't have all the people we were expecting to have."

No builder is going to buy the property until all of the litigation is complete, which could take years. In addition all of the tax issues for the development will have to also be addressed. This will also delay any development and cause further erosion to housing prices.

Hopefully we do not see too many stories of things like this happening around here.

HELOC Lock-out

This article from Dow Jones Marketplace discusses the HELOC line that are being shut-down at Wachovia Bank. The banks are in a bind - keep the money allocated towards HELOC which are defaulting at higher rates or freeze the lines. Remember HELOC and equity loans are second in line when the mortgages default, so many lenders receive nothing back.

Wachovia Corp. said on Monday that it's limiting homeowners' ability to tap home equity lines of credit that they haven't used yet as the giant bank tries to cut its exposure to the broadening housing crisis.

Other mortgage lenders, including Washington Mutual, Countrywide Financial, Indymac Bancorp have also been cutting home equity lines aggressively, Fred Cannon, an analyst at Keefe, Bruyette & Woods, wrote in a note to investors on Monday.

Bank of America, Suntrust Banks and some other smaller lenders are also starting to cut these credit lines, Cannon added.

Pretty soon we will see almost every lender closing down the HELOCs. I wonder if they industry will revise the requirements and change the terms across the board. When prices were rising by double digits they could not lose - now the same system makes it almost impossible for them to win, or make a profit as the case may be.

Wachovia, which reported worse-than-expected quarterly results on Monday, said in a presentation to investors that it's "implementing additional limitations on utilization of undrawn equity lines."

The bank has more than $60 billion of home equity loans and lines of credit. Almost 1.4% of those are at least 30 days delinquent, Wachovia reported on Monday. That's up from 0.78% a year earlier.

The delinquency rate has almost doubled, and we are not even at the time of Option ARM resets yet. I think lenders will shut down all the lines and re-open them using a much more stringent process. The huge amount of borrowing on a HELOC is a relatively new thing. In the 1980s and 1990s they were not used as credit card substitutes. I read an article recently tying the HELOC lending with the rise of the FICO score - people getting massive credit almost instantly. (Note - I will post a link if I can find the article). The credit lines people were taking during the Bubble even exceeded the value of the house by 10-20% making a loan-to-value ratio 110-120% rather than the old standard of 80-95%.

Home equity lines of credit let homeowners borrow extra money, up to a pre-arranged limit. The loans, which can be tapped when needed, are backed by people's homes, so the interest rate on this type of financing is lower than other unsecured sources such as credit cards.

During the housing boom earlier this decade, U.S. consumers borrowed against the value of their homes in record numbers. Home equity withdrawals grew at an annual rate of $300 billion to $400 billion. There's now roughly $2.2 trillion of home equity lines, which represents about 20% of all outstanding first mortgage debt, KBW estimated.

It is not clear if this includes all home equity withdrawals such as the cash-out refis that also became very common over the last 10 years. We see so many people refinancing over and over again, taking out all of their equity every year- these are home-debtors and in no way home owners.

About $1 trillion of these home equity lines of credit haven't been used yet, Cannon noted. If a lot of that extra available cash is withdrawn by lenders, the economy could take another hit, the analyst explained.

"The importance of home equity lines as a source of household liquidity is a recent phenomenon and one which can have an outsized impact in the current economic cycle," Cannon wrote.

This is the problem - while on one side it offers the home-owners liquidity, it also increases their debt. Remember currently $0.14 per every dollar people make is going to service this and other debts. The economy is so dependent on the debt and the credit - take it away and things collapse even quicker. The current write-downs banks and lenders are making are not even close to $1 trillion yet - but all that HELOC money lent out currently will be at a much higher risk of defualt

Home equity lines of credit were traditionally used for major home improvements and other big-ticket items. But as the housing market boomed and U.S. consumers saved less, these products evolved into cash-management and liquidity tools, Cannon explained in an interview.

"A lot of Americans don't have much savings but they have these home equity lines," he said. "These may have been used instead of a rainy day fund."

Not much needs to be added to this section. This is the problem right here. It has been encouraged and promoted to use the equity in your home as ones emergency fund. But with falling house prices these funds are evaporating. The equity has been encouraged to do most everything - your rainy day fund, your home upgrade fund, your vacation fund, your credit card reduction fund, etc. etc.

We also know many people used the money to live like Rock Stars and Movie Stars. Everybody wanted a gourmet kitchen - even people who do not cook. People were taking extravagant vacations several times a year. Working class people driving high-end luxury cars. The easy money was spent on everything we could get our hands on. Even when it made no sense. I laugh when I see these House Hunter episodes with people wondering if a walk-in closet the size of a small bedroom will be big enough for all of their clothes. Do people need this much space and so many things?

Some of these homeowners may be relying on these lines of credit to cover expenses when regular sources of income decline. If this access to extra borrowing is pulled, people may default, or have to turn to more expensive financing like credit cards, Cannon said.

Other homeowners who haven't had their lines of credit cut yet may borrow the maximum amount quickly before it disappears, he added.

"It is likely that many of the most vulnerable borrowers are likely to take this action, potentially creating 'bad growth' in home equity portfolios," Cannon wrote.

There are many people who are using their HELOC to pay their mortgage. They do not realize that while this may be a reasonable short-term solution, long-term they will have even more debt. It is just a higher-end version of the pay-day loans. Borrow some money and pay back even more. This is a very dangerous debt spiral. It would be better to make drastic life-style changes than doing this - stop eating out and eat in economically, cancel cable and internet services, restrict all buying to absolute necessities. If you lose your house (whether you are walking away, short-selling, or foreclosing) you are making a huge lifestyle change.