Some observations from a well-placed viewer, on crashing home markets in California-- identical to what is happening in South Florida:
Last week, X spent some time in the "Inland Empire" of California on a diligence trip to survey the actual damage. As many of you already know, 55% of all Subprime loans were made in California and Florida. The inland empire of California can be described as the central valley that extends from the southern part of the state all the way to the northern part of the state at least I-hour inland from the coast. Let me start by saying it is MUCH WORSE than even I thought it could be. I met with various mortgage lenders, originators, economists, and capital markets professionals. The overriding theme that I got from them was that "Everyone committed fraud and everyone is responsible for the problem". They told me that they believe that 90% of all Subprime loans that were made contained some kind of fraud. Either borrowers lied about their incomes or mortgage brokers fudged numbers on the applications to make them pass muster with the needed ratios in order to get loans approved. They also said that of the borrower frauds, 50% of applicants overstated their income by MORE THAN 50%!!!
As Kindleberger put so well in his book, Manias, Panics, and Crashes:
"The implosion of an asset price bubble always leads to the discovery of frauds and swindles. The supply of corruption increases in a pro-cyclical way much like the supply of credit. Soon after a recession appears likely the loans to firms that were fueling their growth with credit declines as the lenders become more cautious about the indebtedness of individual borrowers and their total credit exposure. In the absence of more credit, the fraud sprouts from the woodwork like mushrooms in a soggy forest."
In California today, home prices are down between 25%-40% in the central valley. From San Bernadino to Stockton, home prices are in free-fall and their physical condition is actually worse than their price decline. The borrowers are locked out of the financing market and there is no logical buyer for these homes outside of the original borrower. The foreclosure wave will hit these neighborhoods like the Asian Tsunami. If you plug in 15% depreciation in housing prices and 50% loss severities into our Subprime model, the capital structure is wiped out all the way to the "AA" tranches.
6 comments:
i agree Gimleteye, I have detected plenty of fraud in the tranactions of foreclosures people I picked at random. One thing I saw, people buying homes very close together so the 2 or 3 transactions didn't have time to get recorded. Maybe their credit was good for one transaction but not 3, so the lenders, not knowing of the other two sales, based income on one sale. That was one scam I saw. But the 100 financing, I still can't figure out how that could possibly work to a lenders advantage...and I saw plenty of those.
I completely checked out one and saw the property listed for40% more than it was worth. It then sold for 1/8 more than it was worth. An appraiser O K ed that figure as correct value. The broker then obtained a mortgage for the entire amount based on the buyer having put up 1/8th the price. At the settlement the seller gave back to the buyer the 1/8th to allow the transaction to go through at the price given the mortgage Co. In the end the seller got the actual value of the property, the buyer got it for no money and the broker made a big fee. Some time after that the property was again up for sale? I did not check after that.
NO NO NO...
CA geograpny 101. The Inland Empire is the area immediately inland from Los Angeles.
It includes portions of Los Angeles, Riverside, and San Bernardino Counties and portions of the high desert (the Mojave) after you commute over a 1 mile high change in elevation.
http://en.wikipedia.org/wiki/Inland_Empire_%28California%29
You described California's Central Valley, which is rich agricultural land, and the destination of "Okies" from the dust bowl era.
http://en.wikipedia.org/wiki/Central_Valley_%28California%29
We still have people with rich accents and voting habits, as well as teeming southern Baptist churches ;) Quite a diverse state, to be certain!
Which is not to say that changes the gist of the article LOL. If you are trying to buy or sell a house, you are pretty much screwed.
The difference between CA and FL is that CA has a real economy. While the Central Valley and Inland Empire are less diversified than other parts of the state income is still more diversified than FL's over reliance on tourism, real estate and health care providers.
Yes. Another reason Florida is the epicenter of the housing boom and bust. And if you liked the stock market on Friday, just wait until next week. The chickens are coming home to roost.
Forclosures are already hitting higher numbers in the UK, another center of the whole housing Anglo-American-Spanish model of economic growth. And just before Sarkozy wanted to join the party by removing the (up to) 33 percent capital gains tax on the sale of French property sold in less than 15 years from purchase.
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