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Worst still to come for Sub-Prime Lenders like LEND, NFI, NEW, CFC

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February 23, 2007 – Comments (0)

A report says that Sub-Prime loan defaults could reach 21%+

The Voice of San Diego reports from California. “The number of San Diego County homes in some level of foreclosure activity reached 1,150 last month, according to RealtyTrac. That’s up 20 percent from January 2006 and up more than 240 percent from the first month of 2005. But even as the market has slowed, the popularity of risky loans has spread. New data for San Diego County reveals that 67 percent of loans made in the first 11 months of 2006 were interest-only or negatively amortized.”

“Of that 67 percent, 30 percent were negative-amortization loans, a threefold increase since January 2004 and 30-fold jump since January 2003, according to FirstAmerican Loan Performance.”

“Last week, a San Diego-based subprime lender, Accredited Home Lenders, joined the ranks of companies vowing to tighten standards after reports of significant losses last quarter. Rick Sharga of RealtyTrac said he’s noticed the link between the lenders’ stricter regulations and the rate of foreclosure activity. ‘I think the two go hand-in-hand,’ Sharga said.”

“Now, home values have stopped appreciating and pricing in some areas has leveled or even declined. Last month, the median sale price for a home in San Diego County was 5.6 percent lower, nearly $30,000, than the $500,000 price logged in January 2006, according to DataQuick.”

“In a report published in December, the Center for Responsible Lending stated that the default rate for subprime loans made between 1998 and 2001 was 3.2 percent in San Diego County. But for the nearly 5,000 such loans originating in 2006, the center predicts that 21.4 percent are headed for default.”

“‘There are some fundamental flaws in the underwriting process that are coming back to haunt lenders,’ the centers’ Paul Leonard said. ‘The lenders seemed to count on appreciation rather than the people’s actual income.’”

“Since 2001, according to the San Diego Association of Governments, local population rose 6.7 percent while the housing stock grew by 6.1 percent. This is hardly crisis material to begin with, but the numbers are even less alarming when you consider that virtually all the disparity between population and housing supply occurred from 2001 to 2002.”

“Between 2002 and 2006, population and housing supply both grew by the same amount, 4.8 percent. During this same period San Diego single family home prices rose 74 percent.”

The Union Tribune. “Mortgage professionals who are struggling with a national spike in residential foreclosure rates were warned yesterday to expect more of the same in 2007. ‘I personally think we are at the beginning of this cycle, mortgage attorney Daniel D. Phelan said. ‘It is going to get worse before it gets better.’”

“Diane Mitchell, an attorney from Salt Lake City who spoke at the conference, said numerous foreclosure filings come from loans that were originated in 2006, when home prices had peaked in many markets. Some borrowers now find that their properties are worth less than they paid for them.”

“‘They got in at the top of the deal and didn’t get out quick enough,’ Mitchell said.”

The San Diego Daily Transcript. “Real-estate analysts, economists and housing industry leaders agree the market is down. The decline in sales of 10 or more units intended for condo conversion was precipitous: 26 sales in 2006, a 75 percent decrease from the 102 sales in 2005 intended for condo conversion.”

“In the second half of 2006, there were only four reported sales of apartment properties (10 or more units) intended for condo conversion, compared with 47 sales in the second half of 2005. The average price paid per condo-conversion unit peaked in the first quarter 2006 at $210,000, and plummeted 37 percent during the rest of the year down to $133,000 in the fourth quarter.”

“There is so much stagnant converted inventory already that the premium for condo-mapped apartments is gone unless they are exceptionally desirable from a retail-marketing standpoint. Developers who entered the fray late in the season prepared to reap their share of profits are now scrambling to stay afloat.”

The Sacramento Bee. “Born during the Great Depression, the 20 percent down payment traditionally used to buy a house has now joined $1.50 gasoline as ancient history. More than 1 in 5 California homebuyers now finance every cent of their home purchase, says the California Association of Realtors. Seven years ago it was 4.5 percent.”

“‘Frankly, I didn’t realize it was that easy to do,’ says Doug Self, who used 100 percent financing last year to buy a house in Citrus Heights.”

“‘Realistically, if a typical house is going for $400,000, just to do a 10 percent payment is $40,000,’ he says. ‘How many people are going to scrape together $40,000 in a reasonable amount of time? That’s three years of socking away a grand a month and not having anything go wrong. That’s just not realistic.’”

From Bloomberg. “Luxury home prices in California fell for the first time in two years as potential buyers waited for prices to fall and fewer sellers received multiple offers, according to a survey by San Francisco-based First Republic Bank.”

“‘The decline in values is due to concerns among buyers about the direction of the market,’ Katherine August-deWilde, chief operating officer of First Republic.”

“Maxine Golden, a broker in Newport Beach, said a client last year listed her three-bedroom Irvine townhouse for $1.25 million. The woman received several offers below the asking price before taking the home off the market in November. She listed it again last month for $950,000 and the property sold within a week, Golden said.”

“‘Buyers stayed away and sellers pulled their homes and said they’d put them out in the spring,’ Golden said.”

“Bill McKeon, a Marin County real estate agent, noted that potential home buyers are ‘pickier because they have more advantage in this market. It’s been a year of correction anyway, and I believe that November and December were two of the slowest months we had all year,’ he said.”

“‘North of $12 million to $15 million, there are many houses that sit on the market for two years and end up selling for 30 percent less than the asking price,’ said Steven Grothelf, a real estate broker in San Francisco.”

From Inman News. “Leslie Appleton-Young, chief economist for the California Association of Realtors, said many buyers in Los Angeles County ‘were underwater’ with their loan payments in 1992 but managed to find a way to stay in the home. Last year, when home prices softened, many potential buyers lost the ‘psychological impetus’ to get into the market.”

“‘During the boom, houses in some neighborhoods were going up 20 percent,’ Appleton-Young said. ‘Consumers could not afford not to buy. But when that that appreciation factor goes away, psychologically they are not in the same place.’”

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