This fellow owns a house in a 600 home gated community in Collier County Fl. This place has all the amenities and has been around for fifteen years. Two years ago the minimum house was $1mm and the max was $3mm. Because of the relative age and the stability of the members it was believed that values would not be impacted as they were in newer and more speculative communities.
No such luck. All involved were shocked to learn that 6 homes had gone into foreclosure from June 1, to July 15 of this year.
The selling season for these types of properties ends on June 1st. It’s too hot and the ‘snow birds’ have gone back north after that. Demand disappears until the following November. What must have happened this season was that there were some owners who were in payment default. The lenders said, “We’ll give you to July 1, and then we will move on you”. These owners were ‘upside down’. If they had any realizable equity they would have dropped the price to flush out a buyer or held off the lender with some cash. That did not happen. There were very few sales this year. At the end of the season the lenders acted and filed papers.
I reviewed data from RealtyTrac. I looked at the numbers of recorded defaults on properties with a “value” greater than $1mm. I narrowed the time period from June 1 to July 16. Just 45 days. I compared the data from 2009 to 2007. The numbers are for recorded defaults only.
I believe that RealtyTrac does a good job of compiling this information. I am also sure that there are errors in this data. There are some significant changes over the two-year period. This can’t all be dismissed as bad data. The following chart looks at various Florida counties.
On the assumption that this data accurately reflects what went on during the past 45 days in Fl. there are some significant conclusions that can be drawn:
-Lenders are going to get hurt. This is not a FNM or FRE problem. This is the banks. To my knowledge there has not been much provisioning for losses of the mega jumbo loans that are now going into default.
-As with lower end communities the defaults will lead to foreclosures and auctions. The result will be that high-end homes will lose value. If the average ‘value’ in the 600 home example I provided was $1.5mm two years ago, it just went down by a 1/3. That implies an asset loss of $300mm. Multiply that by a few hundred of these places and you get some real money. This wealth effect will impact consumption.
-The lower home values that will be realized over the next six months will, no doubt, force more leveraged borrower to walk. The number of defaults on $1mm+ mortgages has no-where to go put up.
- The reduction in RE taxes is going to kill the local communities. These homes were a big component of the tax base. (Approximately 1.8% of purchase price)
I did check a few other areas in the country to see if the phenomenon of jumbo mortgage defaults was popping up elsewhere. In Maricopa County, AZ the numbers went from 1 to 26. In San Bernardino County, CA the number went from 1 to 23. This again, is just for the last 45 days.
These numbers could trump the green shoots. It may reopen the door on the issue of the stability of the banks. The stress test did not contemplate the implications of broad based jumbo mortgage default. I can’t envision a plan that would result in assistance to high-end homeowners that are underwater. There is no obvious solution to this one.
07 RealtyTrac
09 RealtyTrac
Excellent analysis and a quick peek. The real big effect of a snap fall in the jumbo space will be on the PSYOP program to get those that can spend, spending and investing with their favorite broker. The real effects on those holding these notes will be spectacular, but the psychological impact will be the true multiplier. All of the folks in jumbo land holding out for one more year for prices to bounce back in their exclusive world are about to realize a world of hurt.
Nice analysis!
There are any number of possible solutions to the jumbo default problem.
In reality (I speak as a member of upside down jumbo nation) this problem is more solveable than the subprime (mostly sorted out by now), Alt A or Option Arm messes.
That's because people who have jumbos have skills, assets, and even if their income is down (way down) it is almost never zero. I would hazard a guess that most of us made big down payments (I did) and smaller debt burdens relative to income than any other segment of America (I own my own cars, have no second mortgage or loans of any kind).
So, jumbo debts are bigger but often the options are more attractive. Debt for equity swaps are a real option here. Get creative, bankers, we'll listen.
Politically, however, we know that we are radioactive and no one will speak for us (despite the fact that Geithner and 44 himself are members of the nation). We must walk the plank so that they can maintain their street cred.
There are any number of possible solutions to the jumbo default problem.
In reality (I speak as a member of upside down jumbo nation) this problem is more solveable than the subprime (mostly sorted out by now), Alt A or Option Arm messes.
That's because people who have jumbos have skills, assets, and even if their income is down (way down) it is almost never zero. I would hazard a guess that most of us made big down payments (I did) and smaller debt burdens relative to income than any other segment of America (I own my own cars, have no second mortgage or loans of any kind).
So, jumbo debts are bigger but often the options are more attractive. Debt for equity swaps are a real option here. Get creative, bankers, we'll listen.
Politically, however, we know that we are radioactive and no one will speak for us (despite the fact that Geithner and 44 himself are members of the nation). We must walk the plank so that they can maintain their street cred.
There are any number of possible solutions to the jumbo default problem.
In reality (I speak as a member of upside down jumbo nation) this problem is more solveable than the subprime (mostly sorted out by now), Alt A or Option Arm messes.
That's because people who have jumbos have skills, assets, and even if their income is down (way down) it is almost never zero. I would hazard a guess that most of us made big down payments (I did) and smaller debt burdens relative to income than any other segment of America (I own my own cars, have no second mortgage or loans of any kind).
So, jumbo debts are bigger but often the options are more attractive. Debt for equity swaps are a real option here. Get creative, bankers, we'll listen.
Politically, however, we know that we are radioactive and no one will speak for us (despite the fact that Geithner and 44 himself are members of the nation). We must walk the plank so that they can maintain their street cred.
A fair number of folks in jumbo land in northern cal did a 5/5/5 deal. 5% down on a 5 year option arm with the balance due in 5 years as a baloon payment underwritten with the expectation of an easy rollover. After all, why lock up working capital in a property when that asset can only go up in value and there is money to be made with whatever liquidity can be mustered. I know several folks that have been playing out the good old wait for the bounce since they were slammed in '08 and margin call is killin' their liquidity and the rollover hopes look as good for jumbo res and it does for the commercial space. Hate to say it but afair number of folks in jumbo's written in '05 or since put less than 10% down and the new jumbo standard is 30-35% down... And that is with the new found standards of appraisals that the industry is bitchin' about..
I can’t envision a plan that would result in assistance to high-end homeowners that are underwater
Try this: The $1 million mortage gets 5x the consideration that the $200k mortgage.
You might have to close your eyes to envision it. Sometimes it helps.
Green Shoots!!!! Green Shoots!!!! We'll all go down together!!!
this is all a bunch of goddamn lies.....you fucking phreaks need to stop pushing this crap about real estate crises because you are just feeding negativity....these figures are backward looking and unreliable...how do i know? becaue jim cramer said the housing crisis would end june 30!!!!!!....and what date is it now??? you hurt people and need to be locked up.
:-O....never mind.....
That was awesome! I hope you were joking because if you weren't I feel bad for you. Either way.... too funny!
Excellent analysis. One you won't see in the MSM, because they don't like to deal with facts.
Really compelling work; once again taking a look at what the "green shootists" don't want to see.
Makes me wish I hadn't just bought a vacation house by the water (even if I did get a ridiculous interest rate....)2