Tuesday, March 07, 2006

The Bay Area's Debt Bomb

I've been wondering how prevalent are "exotic" loans in Marin. Well, I'm still wondering. But Athena of the Sonoma Housing Bubble blog did a little poking around and came up with these references that do include Marin (thank you!).

This article from June, 2005 takes a cautious look at "exotic" loans and places the market share of these loans at around 66%:
Housing markets across America have been booming for quit some time now, yet people are still rushing to get on the property investment bandwagon for fear of being left behind. In this clamor for closings, many of these Johnnie-come-late-lies are allowing themselves to be blinded by reason and they are accepting mortgage terms that could one day come back to haunt them.

Two out of every three San Francisco home purchases are now being financed by interest-only loans, and Marin, San Mateo and San Jose are right on their heels. Nationally, a third of all loans granted last year were interest-only mortgages. It's no wonder that we may soon see a crisis.
This article from August, 2005 claims that "exotic" loans were just 2% of the market in 2001 and jumped to 50% by 2004:
Almost 50 percent of home purchases in Californians last year were financed using interest-only loans, up from about 2 percent in 2001. As such, financially stretched buyers could quickly find themselves at the breaking point if home values were to stagnate or interest rates to jump.
This article, also from August, 2005, puts a very positive spin on "exotic" loans and says that they are a good thing because of the high cost of housing in the Bay Area. Hmm, but I have to wonder: how much has the increased popularity of these loans actually caused the escalation of housing prices? Sort of a chicken-and-egg thing. Anyway, apparently by 2005 "exotic" loans occupied as much as 70% of the market:
So, this new demon, interest only loans, is what has allowed almost 70% of buyers in San Francisco, Marin and San Mateo to afford homes.
And then there is this one from May, 2005 that also puts it at 70%:
[Interest-only loans] accounted for nearly 70 percent of home purchases in the first two months of the year in San Francisco, Marin and San Mateo counties, up from 18 percent in 2002 and 59 percent in 2004, according to data compiled for The Chronicle by San Francisco mortgage research firm LoanPerformance, a unit of title giant First American Corp.
So, to sum up:
2001: 2%
2002: 18%
2004: 50-59%
2005: 66-70% (50% were IO ARMs according to this)
2006: ?
Is it any stretch of the imagination to suppose that "exotic" loans make up about 80% of today's market in the Bay Area?


Anonymous said...

As the article outlines: these loans were made in the last couple of years. Prior to that, there was a HUGH WAVE of borrowers went with long-term fixed and most of them stayed put. They are still there with their long-term (inflation-proof) fixed rate loans!

Anonymous said...

I was always conservative and got 30 year fixed rate mortgages until a few years ago. I now have I/O loans on all 3 of my properties although all fixed for 30 (10 year I/O, 20 year amortizing). I will get a 50% increase in my payments in year 10, but rent and wage increases should more than cover it after that long.

I have a few friends with more exotic loans (5 year ARMs and the like). Interestingly they did so in 2002 and got locked in in the low 4% range. They did it not because they were stretching, but because they simply figured they saved alot of money that way -- it was their financial planning. They make more than enough for a 30 year fixed but have been saving thousands of dollars over the past 4 years that they can now apply to their new, higher payments.

It is a mistake to think that everyone who takes out an exotic loan did so out of necessity.

Also, most of the rest of the world doesn't even have a 30 year fixed loan -- it is only because of the unique secondary market in the US that we have that option. In Australia, the longest you can fix for is 10 years, so by our definition 100% of Australians have "exotic" financing.

sf jack said...

junkie -

Nothing you have said is news.

What's news is that perhaps 80% of all loans around here are now "exotic" (just as marinite is pointing out).

That, to me, sounds like "trouble."

But then again, maybe I'll stick my head in the sand like so many others and say... well, maybe it's not "trouble" at all because everyone is sophisticated just like you and your friends - and knows just exactly what they are doing.

Athena said...

Right and there are no specuvestors and everyone in the last two years who bought houses TOTALLY had the income to afford the 600k+ median price for their house... they just waited to buy and spend more than anyone else to show off.

Anonymous said...

Does anybody wonder why there are so many radio ads for mortgage/refinance?

The mortgage folks and RE brokers are loving our stupidity.

Buyer beware.

Home debtors beware.

Anonymous said...

athena and sfjack-

I did not state that everyone is financially savvy; I merely shared some anecdotal, non-statistically significant data to suggest that not everyone who gets an exotic loan is in trouble. The truth is, none of us know how distressed these borrowers are -- we can only speculate.

Anonymous said...

Also, I think I have been consistently posting that I am in agreement that prices are overvalued. However, foreclosures are still historically low, so the most obvious sign of market stress is not reflecting borrower issues.

Anonymous said...

I sold my Fairfax house in 2004, and when the market continued to steam ahead, I asked my agent how buyers could afford the never-ending price increases. I didn't know anyone who had the bank account for 10% or 20% down on these hugely expensive places. She flat out said, they can't afford it - 1st mortgage, 2nd mortgage, interest only payments - but people were buying anyway.

fredtobik said...

More "statistics".

It would be interesting to see for Marin the amount of I/O loans that have been paid off in that 5 years, or current data that shows these loans weren't refinanced, and maybe when the I/O period ends, I imagine the flippers and RE investors have a lot to do with these numbers. Add the amount of SFH sold in Marin in the last 5 years, and you should get an accurate count of I/O floaters.

I remember reading for every 1 SFH in Marin their 4 in SF, and 3 in CC, and houses sold over the last 5 years was around 12k, but that didnt include flips.

Marinite said...

For the record: I used the word "exotic" too freely. Probably a standard ARM is not "exotic" as they have been in use for a long time (though not at a time when interest rates can only go up). The articles quoted in this post did not break down the types of adjustable loans into the more "toxic" types. But we all know what is meant however.

Marinite said...

I did not state that everyone is financially savvy; I merely shared some anecdotal, non-statistically significant data to suggest that not everyone who gets an exotic loan is in trouble.

I understood you perfectly. No worries.

Not everyone is savy like you and your friends though. I respect your opinion -- what fraction of the estimated 80% do you think might be of the "toxic" type and are held by folks who are not very savy in Marin? I know of three families off the top of my head who fall in this category and they have no clue what is about to happen and they don't want to know. But what do you estimate?

The truth is, none of us know how distressed these borrowers are -- we can only speculate.

Again, what is your best guess? If you don't want to guess then I can understand.

hemorrhoidforhousing said...

A friend of mine who works for the state housing fund sent me this link to a PDF. I think all of us bubble believers will find validation in the authors words. He is saying what we have been saying for 2 or 3 years now. When the insiders start validating the bubbles existence, you know reality is re-entering the building.


fewlesh said...

I just want to throw out a word of caution. While many mortgages were financed with I/O, realize that MANY of these people have piggybacked loans.

For example, many people want to qualify for a 30-yr fixed but don't have the down payment. SO they layer an I/O to make the down payment, but still get a 30-yr on 80% of the value.

The statistics still say that 70+% have used I/O mortgages, but a vast majority of them are not financy I/O on 100% of the property. There could easily be actually multiple layers, an 60% fised, 30% ARM, and a 10% neg I/O.

I don't care about the total percentage that used I/O loans, I would like to know the number of loans, and the total aggregate amount that was I/O financed. Does anyone have this statistic?


Paul said...


100% or 103% financing is nothing new, nor loose lending in general. My parents got non-owner-occupier financing on a Terra Linda Eichler in 1978 for $105,000 + closing costs. Not a nickel out-of-pocket. Ah, those were the days...

But you raise a good point -- is the I/O loan a 10 due in 30 fixed rate (like mine) or a 1 year teaser ARM that adjusts monthly? Does the average borrower have 10% equity? 30? 40? Do they have alot of other assets they could liquidate if they had to, such as their 401(k) or other properties (as I do)?

marinite, I could not even hazard a guess as to how close these borrowers are sailing to the wind -- there are just too many variables we just do not have data on.

Anonymous said...

Oops -- now you know my first name. D'oh.