Southern California Real Estate and Loan Market Outlook
Riverside County Foreclosure Rates Rise 64%
Riverside County is the exurban bedroom community not only for San Diego, but for Orange County and Los Angeles County as well. It's where people head for affordable housing, despite commutes that vary from one to two hours each way. Entry level people were buying there, just to get their foot in the door of being homeowners. And people being people and real estate agents and loan officers being what they are, of course the people were encouraged to stretch too much so that the alleged professionals could get a bigger commission, and now the chickens are starting to come home to roost. A couple years ago you could still get a decent house in Hemet for $100,000, but part of the price for most folks was an 80 plus mile commute, the first twenty of which were to get to the freeway. The same thing today is around $300,000 or so. Temecula and Murrietta are as expensive as suburban San Diego county. Market overheats, people pay too much and secure it with unstable short term loans that they know they're going to have to refinance. Then Wile E. Coyote looked down, and now the folks are upside down on their mortgage and they can't refinance, not to mention rates are up (At least a full quarter of a percent on 30 year fixed in the last week or so, over half a percent since the start of the year).
The lenders are going to be in trouble soon. Bet they're regretting pushing all the garbage loans, and I'm betting underwriting and program standards are going to get tightened in a hurry, particularly in the subprime market.
I've gotten compliance alerts that were non-news to me from at least four lenders in the last week. This was stuff like "Don't commit fraud" and "We're watching for excessive fees". The lenders normally send out this kind of thing when they've been sued, as evidence to show they're supposedly on top of it, or that they're closing the barn door after this particular horse has escaped, so that, to quote Leo Bloom "We're very sorry and we'll never do it again!" But the real hazard to the lender's health is going to be defaults, foreclosures, and REO's where they don't recover their investment. We are likely looking at subprime lenders failing in the same numbers as Savings and Loans did in the early nineties.
I do not believe the A paper lenders are going to have that level of problem, as the Fannie Mae and Freddie Mac guidelines are probably going to turn out to have saved their bacon in retrospect. They'll have some increase in the default rate, of course, but nothing like what the subprimers are likely to see. They'll also probably lose some refinance business because Loan to Value ratios won't be there to meet guidelines.
Taxpayer bailouts are likely to be limited, however, as most subprime lenders are packaging houses that work with Wall Street money rather than depositors' funds, but look for some real trouble in the bond market, particularly mortgage bonds, but bleeding through to corporate in some instances. Now would not be a good time to be in residential REITs, either.
Now if your current lender fails, it really doesn't make much of a difference to you. The right to receive payments is going to be sold off somewhere, so just keep making those payments on time. Nor are they going to alter the terms of the contract you signed. But when you go to refinance, it could be a lot harder to find a loan if large numbers of subprimes go out of business and the survivors tighten up their policies. The ones who survive are also going to raise prices, aka rates, because they will be able to. Furthermore, with market deflation, a lot of folks that are A paper now could find themselves stuck in a subprime lending situation. Say you bought the property with an A paper 3/1 ARM two years ago, but you can't afford what it adjusts to and when you go to refinance you find that you're now in a subprime situation because you've lost some equity. This may well be a horns of the dilemma situation as you can't afford your current A paper loan and you can't afford the rate on a subprime refinance.
This is why ignorance of financial principles among other things, can be deadly to your financial health. These folks were encouraged to stretch too far by unethical people who pretended to be their friends in that they promised to get them into property they should not have been able to afford. Now the people are going to lose their home, their investment, have their credit rating ruined (because nothing hurts credit like a mortgage default), and likely owe thousands of dollars in taxes from debt forgiveness. I sincerely hope that those agents and loan officers who made this their practice face some severe consequences. If there's some lawyers out there looking for class action work that actually benefits the public, I know where you can start looking. Ditto district attorneys looking for some high profile public feel-good cases.
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