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Jun. 13, 2009
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Housing report: More pain ahead

Three new waves of defaults seen breaking

By HUBBLE SMITH
LAS VEGAS REVIEW-JOURNAL
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The first two waves of mortgage losses are mostly behind us but three more waves are coming, two of them in the housing market and one in commercial real estate, an executive for a New York investment firm said Friday.

There's more pain to come, said Whitney Tilson, principal of T2 Partners and publisher of a June report on the housing and credit crisis.

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    • While the majority of mortgage defaults so far have been subprime borrowers, more middle- and upper-income homeowners are starting to walk away from their mortgages, he said from New York.

    Roughly one-fourth of homeowners with a mortgage owe more than the home is worth, making them much more likely to default. Among those who purchased in the past five years, 30 percent are underwater. The figures are worse in bubble markets such as Las Vegas, where 61.4 percent of buyers in the last five years are underwater, according to Moody's Economy.com.

    The early wave of defaults came from fraud and speculation, starting in late 2006 when home prices started to fall, Tilson said.

    The next wave was borrowers who went into "payment shock" when their adjustable mortgage rates reset. Two-year teaser subprime loans written in early 2005 started to reset in early 2007, though those defaults are tapering off as low interest rates mitigate the shock.

    Tilson, author of "More Mortgage Meltdown," is now seeing the third wave of prime loans defaulting due to job losses and home price declines. Prime loan default rates have jumped from 0.5 percent to 4.5 percent in the last year, he said.

    In California, the average mortgage owed on homes in foreclosure is $412,000, while the average appraised value of those homes is only $235,000. That's going to cause a lot of people to walk away from their obligation, Tilson said.

    "The average person in foreclosure in California is 43 percent underwater, so it's not like these people are close to the edge and you can save them with a loan modification," he said. "These people are deep, deep underwater. Are you going to keep paying when you're that far underwater?"

    A fourth wave of prime jumbo loans, second liens and home equity lines of credit started to swell in early 2008, again created by job losses and home price declines.

    When both the husband and wife were working, they could afford a big mortgage, Tilson said. Now, with 10 percent unemployment and some 3.5 million job losses, they're tightening their belts.

    "It's not just unemployment, it's underemployment, people taking cuts in pay and working fewer hours. So what you're seeing is the middle and high end start to tip over," he said.

    Wave No. 5 involves losses among loans outside the housing sector, the largest being $3.5 trillion in commercial real estate. Commercial mortgage delinquency rates have doubled since early 2008.

    Tilson thinks housing prices will reach the fair market value trend line when they fall 40 percent from their peak based on the S&P Case-Shiller index, which implies a further decline of 5 percent to 10 percent from the first quarter.

    "It's almost certain that prices will reach these levels," Tilson said. "The key question is whether housing prices will go crashing through the trend line and fall well below fair value. Unfortunately, this is very likely."

    Contact reporter Hubble Smith at hsmith@reviewjournal.com or 702-383-0491.

    Homeowners underwater
    Metro area Percent of price
    drop since peak    		 Percent of buyers in last
    five years underwater
    Miami -36.6 65.1
    San Diego -34.3 63.9
    Las Vegas -41.8 61.4
    Los Angeles -32.0 56.4
    San Francisco -27.8 51.2
    Washington -24.8 50.3
    Phoenix -37.7 36.4
    Boston -21.8 27.8
    Atlanta -10.4 23.2
    New York -15.2 23
    SOURCE: Moody's Economy.com
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    tony dancel - Realtor wrote on June 16, 2009 05:03 AM: We do not have a Real Estatae problem,
    what we have is a serious BANKING PROBLEM WITH THE POLITICIANS WHO THEN COURAGED THE BANKS TO CREATE VERY
    DISHONEST LOAN PROGRAMS. THESE ARE THE BAD GUYS THAT NEED TO BE DICIPLINED !
    THE QUESTION THEN, WHO IS GOING TO DICIPLINE THESE CRIMINALS ?


    Keith wrote on June 14, 2009 08:43 AM: The peoples to be blamed are the builders themselves, who were in bed with the mortgage companies and the appraisers that worked for the mortgage company. Sure I'm going to appraise a house for higher than the REAL value. It would only have to be $5000 here, $10000 there, the next thing you know you have a market (LV) that is now so over inflated and the true value is lost. Why, To make the builders & mortgage company way more money. That would seem to be an ethical violation.


    Jason wrote on June 13, 2009 05:37 PM: As long as the housing bubble is blamed on Bush, it's going to be more doom and gloom. As soon as it can be blamed on Obama, it's going to be "happy days are just around the corner!"


    Thanks Democrats! wrote on June 13, 2009 03:20 PM: Thanks for all you've done.
    http://www.youtube.com/watch?v=hN31-nKndg8

    http://www.youtube.com/watch?v=cMnSp4qEXNM&NR=1


    Yo Negative wrote on June 13, 2009 03:17 PM: I must have missed your complaint when Barry was trash-talking the economy for a year and a half.


    Lil Blond Bimbette wrote on June 13, 2009 02:57 PM: Hi- (-:

    Realtor Bimbo, my boss, is away for a two day vacation, so she left me to do the open houses (-:

    Not one person came in today. This is so depressing. Hubble, why the negative news? My Bimbo boss says you been too negative and that you need to take some happy pills.

    Meanwhile, the joke in the office is to tell buyers happy news so that they buy, buy, buy. One day I will be on my own and not work for Binbo Realtor anymore (-:


    book 'em dano wrote on June 13, 2009 12:57 PM: Whitney Tilson is selling a book, and this is the point of the article.


    Free Nevada wrote on June 13, 2009 12:52 PM: @in the same boat: i'm actually a (young minded) Conservative..clearly stated that the proposal excludes lenders from participation in the negative equity relief except through approval of "short sales." i think what you actually meant was that this kind of solution helps undeserving speculators out, and I can't argue with that except to say that your blog name correctly sums up the situation --and right now we need to worry about plugging holes in the sinking boat before we all drown (of negative equity).


    Really wrote on June 13, 2009 12:18 PM: Negative Press wrote on June 13, 2009 11:10 AM: Hubble Smith
    Thanks for more negative and bad news. Things would turn around if we did not have the newspapers printing all the negative news about the sky is falling. What would you expect people to do when all they hear is bad news after bad news and all the time? Las Vegas will continue to be in the toilet with this type of negative press.


    Would you prefer he sugar coated it like THE REALTORS DID WHO STARTED THIS MESS? At least the RJ is reporting it how it's happening instead of leading locals astray.


    skeptic wrote on June 13, 2009 11:23 AM: Helen...what you are refering to is called a universal default rate. When a credit card company determines you were behind with ANY creditor at all.. could even be your water bill...they deemed you an increased risk and raised your rate. I thought that practice was abolished or is being banned by the new credit card reform. Joe...welcome to real estate in LV. Me personally I think it is a scam perpetuated by the industry to push up prices. I have often wondered if any agent within the sales transaction is actually REQUIRED to provide verification of these other offers?


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