Miguel Alfaro

Jeremy,

I have found a new graph that you may be aware of, it’s from a BofA analyst. It shows higher amounts coming due in 2008. If that updated graph is correct we may continue to have a steady amount of NDF and NTS for another year. I have to mentioned that we don’t know what the effect of the recent housing law, FHA short-refinance that will help distress homeowner to avoid foreclosure, will have in those loans that will reset to actually go into foreclosure or NTS.

I though you may like to check it out. Again that is in a national level. I tried to gather that information locally but it’s almost an impossible mission since the only way would be to gather all the public information individually on mortgages that have recorded. The summary section in the recorded documents does not have the particular information if it’s Interest Only and ARM or option ARM or if it was sub-prime. - Wed Aug 20 2008, 19:04

Hi again Jeremy,

I just got the attached report from Sonoma County Economic Development Board it has great information about residential real estate. You will find information about median prices, rental cost, inventory, construction permits and foreclosures/NOD.

I found interesting the "area" break down of average sales price and units sold, it just reiterates that every area is unique and different even in the same city. Look at the Fair Market Rent projected increase of 14% by 2009 ($1,839 for a 3 bed house). The number of NOD filed in 2Q08 is slightly less than 1Q08 (pretty similar trend to the ARM reset schedule graph I sent you before) that may indicate that the amount of NODs that were filed the 2Q08 may be the loans that reset by the end of 2007. NODs filed in Sonoma County have been slowing down in July and so far this month. Lastly, the number of residential building permits is picking up from their lowest levels. All these factors in Sonoma County are telling a different story of what the media is saying.

You may be closer to find an answer to your question.

Miguel. - Tue Aug 19 2008, 12:54

Dear Jeremy,
Pam Buda sent me an email to check out this question. I have some information that may help you find an answer to your question.
The current mortgage environment has drawn many comparisons with the 1930's, when the government stepped in. It is generally agreed that without those fundamental changes, the Great Depression could have been much worse than it was. In the early part of the last century, most home loans were a 5-yr ARM with a balloon payment. A brief summary: In 1932, the National Association of Real Estate Boards proposed (and Congress created) the Federal Home Loan Bank System, modeled after the Federal Reserve System. Twelve regional banks were created, and a Federal Home Loan Bank Board, like the Federal Reserve board, was set up to oversee them. The Appraisal Institute was also founded in 1932 by the appraisal industry. Bankruptcy and eviction laws were modified, and in 1933 Congress created the Home Owners Loan Corporation to help borrowers move from 5-yr balloon loans to 15-year amortizing mortgages. In 1934, Congress created the Federal Housing Administration (FHA) to insure mortgages, and the Federal Deposit Insurance Corporation (FDIC) intended to prevent runs on banks from depleting resources for home mortgages. Lastly, in 1938, Congress created the Federal National Mortgage Association (FNMA). Some argue that it is very early in this business cycle, but it is easy to see the amount of government intervention compared to today's market, especially at the Federal level.
Does it sound familiar...? My point is that in the long term there is always something that will help bring a solution to the problem and the prices tend to be higher.

I have a client right now that bought a house (in Windsor CA) in 1990 for $198K, by 1994 the value of his property was probably 20% less of what he paid for. Was he worried? You bet he was, but he didn't buy for a capital gain.... July 2008 his property value in zillow says $416K and if you look in the price graph it says it was $645K in January 2006, his current mortgage balance $26K. He is looking to buy another property and keep the current one as a rental, and he will use a 15 year fixed this time. This is a good example of a real home owner that has been responsible with his mortgage and not using the house as a piggy bank to cash out as soon as possible by using exotic mortgage products.

I have been sharing a graph that was prepared back in 2006 by Credit Suisse Fixed Income US Mortgage Strategy study. It shows the reset ARM schedule of Alt-A, prime, subprime, agency, option and unsecuretized ARMS from 2007 until 2013. That graph shows the highest month of reset at $50 Billion was November of 2007. For 2007 and 2008 close to 80% of the mortgages resetting are subprime, after 2008 there is a minimum % of subprimes (subprimes were usually issued for 2 or 3 years fixed only). The majority of Option ARM's (the ones that John mentioned) will start to reset in 2009-2010. I know for a fact that some of the major banks (World Saving now Wachovia, Wamu) that issue that type or mortgages have been taking a more pro-active roll lately by offering to modify the note to a fixed 3 years or 30 yrs mortgage with minimum cost to the borrower way before those reset or recast, as a result some of those won't actually reset. Some of the Alt-A, Agency and Prime ARM's (usually 5,7 and 10 yrs with fixed rate) that will adjust have a low margin usually 2.25% over Treasury or Libor (libor is currently at 3.314%) so the effective rate for another year will be the same or maybe lower of what the initial fixed rate was.

I believe there will continue to be defaults and foreclosures for the next couple of years and I also believe we won’t have 2006 prices in a couple of year, I strongly believe (and hope) the lenders won’t be willing to lend the way they were doing it in 2006.

I will love to share the graphic with all of you if you tell me how I can do it. I have it as a picture but can put it in PDF, word, pps, etc. - Tue Jul 29 2008, 18:19