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3rd wave of foreclosures

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May 25, 2009 – Comments (8)

I am still sitting on the sidelines as I still believe the worst is not behind us.  The next wave of foreclosures to be dealt with are the ones coming from the job losses.  I think it will be interesting how this wave gets dealt with when the markets have already been through incredible stress. 

I tend to think this wave will be harderwhen comparing the dollars involved to the dollars involved in previous losses.  There is much less of a cushion left, or no cushion left, in terms of trying to find money to cover the losses.

Big Picture has a good post on it.

Also, it seems to me that this wave is having to be dealt with at the same time the commercial real estate is defaulting.

8 Comments – Post Your Own

#1) On May 25, 2009 at 1:15 PM, OneLegged (< 20) wrote:

I can attest.  My current credit score is 831, but due to the fact that my business is down 92% from last year (construction related) my savings is 60% gone.  My retirement is gone 100% (American Funds squandered 71%).   I am certainly not alone in this.  The world has changed.

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#2) On May 25, 2009 at 5:52 PM, dwot (97.03) wrote:

Sorry to hear that One Legged...

I know you are not alone in this...

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#3) On May 25, 2009 at 6:30 PM, OneLegged (< 20) wrote:

It's hard to believe what a drastic turnaround has happened in such a short period of time.  At the very least it is quite an education to be around to see this economic situation unfold.  We will all learn many lessons!

 

(Thanks dwot.) 

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#4) On May 25, 2009 at 6:45 PM, angusthermopylae (40.04) wrote:

Mind if I jump in with a little math?

Median Housing price:  $175,200 in March, 2009.

Jobs lost since the December 2007:  5.7 million

Average 2006 mortgage payment (only number I could find):  $1,687

So, let's assume that these mortgages had about 10% down, and an additional 5% paid off (we're talking about the good loans...not the toxic loans), therefore....

=> Mortgages at risk due to jobs: $148,920

=> Total housing value at risk: $84,844,000,000 (that's $84.8 billion)

=> Monthly income to banks that's at risk...or already gone:  $9,615,900,000 (a potential loss of $9.6 billion per month!)

=> Quaterly loss possible to all banks in the mortgage business (all of them?):   $28,847,700,000  (potentially $28.8 billion)

These numbers could and most likely will be lower:  Some houses will have higher equity; some value will be recovered in the foreclosure sale; and, I suspect, that the "average" person at risk  doesn't fit the "average" profile.

But, as a ball park, let's throw a 25% error in there (higher and lower).  This give me a number that's anywhere from  $21.6 to $36 billion in quarterly loss to the banks.

This number is much lower than the $717 billion in distressed mortgages to which the article refers...and my numbers may be waayyy too conservative.

On the other hand, it tells me that banks could be in for an easily foreseeable $21-$36 billion quarterly loss across the board.

Takeaway #1:  I'm staying the hell away from bank stocks.

Takeaway #2:  I hope that someone smarter than me would sift through the quarterly reports of the big banks and get an idea if they are showing such losses (my numbers or the articles) or did they go the way of GS's "lost month"...   (Hey, maybe I'll try it...anyone got a good migraine remedy I can have handy?)

I tend to believe in the higher number--a significant portion of the $717 billion.  If half of the predicted 60% go under, that's already up to  $215 billion in losses.

 

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#5) On May 26, 2009 at 12:17 AM, dwot (97.03) wrote:

august, why would you start with a price that is a price correction on housing for recent buyers?  Aren't prices down something like 20%?

So, $175k/.8 =  $219k  

I'll go with the 10% down, and 5% paid back which leave a mortgage of $186k.

 

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#6) On May 26, 2009 at 6:45 AM, angusthermopylae (40.04) wrote:

Good point, dwot.  That would raise the numbers about 20% for the total risk I calculated, giving about $100 billion on the high end for total value at risk.

It's still not the $717 billion armageddon listed in the original article...but then, "armageddon" is relative (if it's your house or your bank that takes the big hit, it doesn't matter much about the others, does it?)

Like I said, I'm staying away from the financials--I might play a few green or red thumbs on CAPS now and again, but the whole deal is too shakey for me to put real money in and hope I can tell which way the frog will jump. 

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#7) On May 26, 2009 at 8:54 AM, dwot (97.03) wrote:

The next question I would have is why the assumption that 90% could still pay their mortgage when they have lost their job?  I calculated a trillion in mortgages for those out of work using the higher figure, so these mortgages would be under by $50 billion in terms of equity to home value.

But, a great deal of the problem is in places where home prices were much higher and have fallen much more and are being hit much harder by job losses. 

For a lot of these properties that are going into foreclosure the banks are taking more then $100k loss.

The other thing about the data that you are using, this median is being affected by an increase in lower priced home sales. 

Look at the home prices by region.

The foreclosure data indicates that the bubbled areas have the bulk of the increase in mortgage defaults.  These distressed places have homes on the market for 3 times that median.

Here's another piece on median home price.

That trend continued in the first quarter. Single-family home prices declined year-over-year in 134 of 152 metropolitan areas, NAR says. Nationwide, the median sales price for a single-family home was $169,000, down 13.8% from the same quarter a year ago. Median means half sold for more and half sold for less.

Median prices are skewed downward by the number of foreclosed and distressed homes being sold. They're selling for 20% less than traditional homes and account for about half of all sales, NAR says.

Look at the numbers for the distressed areas, down 40% on 3-4 times the numbers you have used.

This one shows that median home price peaked at $262k.

85% of that is $223k (10% down, 5% paid off), is 27% higher then the median price in the article you used.

 And it seems median home price for the nation is down even further now, at $169k.

I am looking at what you did further... You took the average mortgage payment and multiplied it by the $5.7 million for a month's income and then multiplied it by 3 for the maximum quarterly loss.  With what you did the banks would still be holding the mortgage and still have the same problem the next quarter.

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#8) On May 27, 2009 at 10:49 AM, angusthermopylae (40.04) wrote:

dwot,

Sorry it took so long to get back to you--real life issues.

You are correct; there are a lot of variations in how I did run and could have run the numbers...which is why I stopped there.  It starts to get into the Black Art of economic forecasting, and all I wanted to do was try a baseline based upon an easily found "average."

For example:

--As you pointed out, the areas with the highest foreclosures are crashing the hardest because they ran up the most.  This means that the losses (at least in those areas) will be much higher than the "average."

--I didn't intentionally make the assumption that 90% of the new unemployed would continue to pay...I actually think believe a large percentage will look at the "help is on the way" message from the government and stop paying altogether...but I have no data to back up this belief.

--The view was only on a single quarter--but the problem is stretched out over the last 18 months and will continue for the next Xteen months. At any single point in time, the losses probably won't be dramatic--but taken as an entirety over the "crisis," the whole major-banking industry will probably suffer for years to come.  Again, no data, but it's a logical conclusion.

--As far as recovering on the foreclosure sale...that amount is hurt by a surplus of cheap housing (other foreclosures), falling prices, continued unemployment, and either deflation (money not available to buyers) or inflation (cost of maintaining these homes increases.)  Again, in other words, the long term outlook for mortgage creditors is pretty ghastly.

Overall, there are a lot of factors I did not include...mostly because they could eat up an entire blog post in itself (hmmm...idea for my next one?), and I wanted to just run a quick reality check on the $717 billion number.

That, and I'm lazy.  I bow to the master...er...mistress.

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