Brief Foreclosure History & Mortgage Delinquency Maps

A very short history of how we got here: All of the turmoil in the CDO, hedge fund, and subprime space has come about due to a very simple reason: An inordinate number of recent home buyers have been defaulting on their mortgages.

The why of this is rather simple: These are the folks who historically have not been home owners due to their debt obligations, low income, and/or poor credit. In the past, they were known as renters.

The ultra-low rates that Easy Al put into place when he dropped the Fed Funds to 1% started an entire chain reaction of events: If high rates keep home prices down, well you can guess what ultra-low rates do. Home prices rose due to the lower monthly carrying costs, and we were off to the races..

But the boom begat a feeding frenzy, and corruption soon followed. The appraisers faked values to get loans approved (making a 100% LTV look like a 80%). Mortgage brokers quickly learned how to get nearly anyone approved through no doc/no income check loans, AKA liar loans. A bunch-o-new mortgage products came out -- Interest only ARMs, LIBOR based, etc. I am not sure what legitimate purposes these very profitable products served, but we know what they accomplished: They got people into homes THEY COULD NOT AFFORD. 

Hence, when rates ticked up, when prices stopped rising, when people could no longer bootstrap paying their mortgages by taking out more home equity loans, the foreclosure rate began to rise.

When this happens, the RMBS/CDOs that have been sliced and diced and resold by iBanks to funds start to devalue. Since so many of these funds use huge leverage, the problem gets magnified.   

Hence, the recent Bear Stearns (BSC) and other fund problems.

~~~
To put this into a geographic context, here is where the foreclosures are coming from:

2007 Q2 Delinquencies:
click for larger maps

Source:
Mortgage Delinquencies
WSJ, July 19, 2007
http://online.wsj.com/article/SB118481288641971250.html

The Bear Facts: Mortgage Woes Are Apt to Worsen
RANDALL W. FORSYTH
Barron's JULY 18, 2007 10:45 a.m. EDT   
http://online.barrons.com/article/SB118470690240369216.html

Comments

[Malkiel]

In looking back on this situation one area of disconnect that seems to allow the overt corruptions is the writing of mortgages by independent mortgage brokers falsifying the information and then quickly selling it to institutional holders, who apparently don't do much checking. The independent brokers never have to face the music and quietly melt away leaving the institutional buyers holding the bag. There should be a lot of suits and arrests for fraud at this point, but the perps are too numerous and the individual cases too small a piece of the pie to bother with. The fix would have to be that institutional holders of mortgages originate their own within tight and controlled standards rather than buy them from unknown agents...

[brynaw]

Barry,

Please let's also not forget Businessweek's "Map of Misery". A thing of beauty to be sure.

[joyofyoga]

Oh come on, let's not blame this on the broker! Of the three parties involved in any transaction - the borrower, lender, and broker - it's clearly the lender that always wants the loan to close the most. New Century's offices were guilded in gold with their spiral staircase in the reception area that made the White House pale by comparison. And how about Wall Street? Don't they audit the loan files they purchase. Always blaming it on the little guy like the borrower. Greenspan clearly, very, very clearly said the best loan to utilize in the current econcomy was the 1% Option Arm. I still have his words in writing and should frame it.

[joyofyoga]

It's pompous to simplify the situation and say it's the fault of first time buyers, the slave in the food chain, when really it was those "experienced"... investors who wanted a new sandbox to play in when the stock market bubble cratered. Investors, who already had owned a home were buying up Non Owner Occupied investment properties at the dozen with little or no cash down thinking they could flip it for a quick profit. But the game and the rules definitely were set at the highest level and those people in high places, particularly the hedge funds, had the most to gain and benefit the most.

[wixeywaxy]

You got to the core of the problem by specifing the excessively low interest rates introduced by Mr. A. Greenspan. It strikes me that an ordinary man with a bit of intelligence would be a far better economist than what is generally acredited as being one. It's only common sense that interest rates when they are lower than even the phony inflation rate are damaging to the economy. Interest rates should be fair to the lender as well as to the borrower and if you can borrow money at no real cost the price of those things chased is going to be inflated. The more disturbing scenario is that these consequences may have been anticipated, even desired. I sometimes wonder how it is that so many things that are obviously haywire can't be fixed before a crisis occurs. You could have learned by a visit to the barber shop that the easy real estate mortages were going to go into the tank. Vic

[Jay Jay]

Well put vicvw. We let the market sset prices for most things, but why not the short term price of money (interest rates). Prices are signals to markets, and when signals are manipulated, waste and loss results. These losses end up going into the pockets of middlemen (brokers) instead of useful economic activities. In my own case, instead of learning more about systems engineering to make more more productive in the labor market, I'm learning about economics so I don't get buried by the market. Thanks AG, you'll go down in history.