Very short diary, just thought I'd add this to Bonddad's recent postings... Not that we have anything else to worry about or anything... Go here for a fuller accounting, but read the short info below the fold first, if you would be so kind...
The number of California homeowners who defaulted on their mortgage payments jumped to its highest level in almost 10 years, exacerbated by slowing home sales and adjustable-mortgage resets.
Homes lost to foreclosures in California shot up to 11,033 in the first quarter, an 81.5 percent climb from 6,078 in the previous quarter, according to DataQuick Information Systems. Foreclosures rocketed 802.1 percent from 1,223 in the first quarter last year but remained below the 1996 peak of 15,418.
Statewide, lenders sent 46,760 notices of default to homeowners in the first quarter. That marked a 23.1 percent jump from the previous quarter and a 148 percent jump from a year ago in the same period. Notices of default mark the first stage in the foreclosure process.
An 800% jump over one year! 2007 is the year when a large number of ARMs and Option ARMs reset to higher rates. 2008 is, apparently, going to be even worse.
It is terrible that so many people are getting turned out of their homes. This is the worst byproduct of this whole situation. Many of these people got sold a bill of goods.
It is almost equally terrible that bad regulatory oversight allowed so many bad loans to be underwritten. Buying at the top of the market is always a bad idea. Particularly when you're stretching to meet overinflated payments and then facing exorbitant interest hikes.
A lot of people bought into the Cult of Real Estate at the worst possible time. America nurtured a fetish. The hangover is now coming on.
The entire real estate industry, from the realtors themselves to unscrupulous mortgage brokers and big subprime mortgage lenders, all the way to the mortgage securities firms, have a lot to answer for. They pumped up a huge propaganda machine surrounding the "best of all possible worlds" real estate scenario. Only now are the consequences of their actions becoming clear.
I think the real estate market is in serious need of judidious refrom and enhanced oversight. I want to keep this short; I hope Bonddad may deal with topic at some point. At some point I may follow up with some policy proposals after I've had the time to do some more reading and research.
According to a recent issue of The Economist, 40% of all mortgage loans in this country last year were in the subprime market. Fortunately, this was a huge spike far above historical norms. Around $650 Billion of originated loans comprise the subprime market, out of a total real estate loan market of 10 Trillion.
UNfortunately, the stunning events in California are a leading indicator meaning, in my view, that a credit recession is coming. This WILL affect every major lending institution in this country.
As more and more of these foreclosed houses come back onto the market, running smack into a more restrictive credit market, what is going to happen? Steeper price declines, that's what. This issue will affect everyone, whether they have a fixed-rate or not. Most home owners are going to have to hunker down for awhile.
This vicious cycle is in its infancy and will take several years to run.
It will also inevitably affect other sectors of the economy, from retail to the job markets. Other commenters here have noted aspects of this oncoming wave.
Update [2007-4-17 23:49:22 by The Lighthouse Keeper]:In the comments below, Eugene has a couple of very useful links to major financial institution exposure to this problem...
From today's Seattle Times comes this report about Washington Mutual's exposure to the subprime market (checkout the attached chart to see other big banks that are also exposed). From the same paper we also learn today that WaMu earnings fell 20% thanks to these problems.