Sep
12
2007
Subprime Photo
By Charles Turner
This is either really funny or really sad.Portland Real Estate Blog: Humor
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Looks like he’s in sunny California and a lot of defunct subprime lenders were based down there – so it could very well be true.
However, I do question the wisdom of standing in the middle of a busy street and admitting you had something to do with subprime lending in an area that’s ground-zero for the subprime problem. Could get you run over!
At least he’s keeping up on current events. Maybe he’ll be able to scrape up enough change (literally) to get a hold of a foreclosure in the coming months.
Hey Charles,
I don’t usually put links to my blog in comments, but this one is directly related to this post.
Someone was actually doing this near my office over by the Lloyd Center. Use my link below for the whole story:
Take care,
Jeff
So the Oregonian says Mortgage mess could hit home for Oregonians.
Some choice excerpts:
Oregon ranks among the top 15 states for high-risk loans made when lending standards were most lax. As home prices jumped between 2004 and 2006, Oregon home buyers turned to mortgages that could stretch their dollars by reducing the monthly payment — at least at the start.
Wait… I thought we were of higher moral fiber here or something… There weren’t supposed to be many risky loans here.
The next two years will be critical for some Oregon subprime borrowers, those with spotty credit. About 56 percent of new subprime home purchase loans in 2006 had adjustable interest rates that will increase in 2008 and 2009, according to mortgage giant Freddie Mac.
More than 1/2…
On the whole, the home market in Oregon and the Northwest is still humming faster than California and the nation as a whole.
Considering that sales in California have fallen off a cliff… preliminary numbers for September show sales down another 30% from August which was 20% down from July…
Oregon’s high rate of high-risk loans won’t necessarily translate into more foreclosures. If home values continue to rise, homeowners may have enough cushion to avoid trouble.
So in other words, if we keep believing in a fantasy we’ll be just fine. Just keep repeating the mantra: “This is Portland, prices never fall here, everyone wants to move here. This is Portland…”
The article said 15% of loans were negative amortization and 31% were interest only. That means close to half are probably upside down.
That should be great for price appreciation.
Naysayer-
The underlying debt on property does not change market value. The lack of ability of new buyers greatly restricts the aggregate quantity demanded.
In any event, an interst only loan does not add nor detract from the value of an asset.
An interest only loan does have a tendency to detract from equity accumulation, however. Given that some significant category of the interest loans are in the “option” category, this is very bad news. Once signficant price decline hit PDX (inevitable), and these loans reset or hit their equity cap, the sane choice will be to mail the keys and walk.
SE_Renter
“The sane choice will be to mail in the keys and walk”
You couldn’t be more right. I recent wrote a position paper for some apartment developers who are gearing up for this very outcome. With little or no equity in the deal “option” buyers are much more likely to just walk when faced with the higher costs of rate resets.
“So the Oregonian says Mortgage mess could hit home for Oregonians.”
It’s been the conventional wisdom in the mainstream media that Oregon has a low number of subprime mortgages, so this headline seems like a major turning point in public sentiment.
However, I’m still trying to reconcile these two statements in the article:
“Homeowners in Oregon hold high-risk mortgage loans at a higher rate than those in most other states”
“Oregon ranks below national averages for subprime loans”
I suppose “at a higher rate” could mean that the % of high-risk loans is higher than in other states, although the total number is still below the national average. Or “at a higher rate” could mean that Oregon is adding more high risk loans per week/month/year than other states…
However, I’m still trying to reconcile these two statements in the article:
“Homeowners in Oregon hold high-risk mortgage loans at a higher rate than those in most other states”
“Oregon ranks below national averages for subprime loans”
Leo, basically, this is an artifact of the whole “it’s contained to subprime” fallacy, but at least now they’re admitting that there are other classes of loans that are “risky” besides subprime. The article seems to be talking about interest only and Option ARM as the risky loans. These aren’t tecnically “subprime” as the borrowers usually have higher FICOs than the traditional “subprime” borrower. Often these are categorized as “Alt-A” based on the borrower’s credit history. The question now is how many of these folks who had nice FICOs prior to getting an interest-only loan will still have a nice FICO after they hit the equity limits and their monthly payment skyrockets? That’s why the nickname for a lot of these risky loans (Interest only, neg am) is “FICO shredder”.
The trouble isn’t confined to “subprime”. Kudos to the Oregonian for realizing this, but they could have explained it a lot better.
blaknecr, I think the apartment market is going to be hot. I’m thinking about long positions but the trick is find builders/devlpers who aren’t saddled with strip malls and office parks.
Leo, No interest and option-interest loans are also considered to be risky. Almost all of these fall into the Alt-A category. Interestingly, the deafult rate of Alt-A loans is actually **HIGHER** than subprime in some MBS tranches. Its widely accepted that interest only and option loans are among the riskiest loans underwritten. The fact that these precentages are so high spells real trouble.
SE_Renter,
Agreed. Consider the ratio of average rent rates and the mortgage of the median priced home (assuming standard baseline financing assumptions). The ratio currently sits at about 58%, a balanced market is typically around 75%. Look for price pressure in the rental markets soon, then your (less savvy) developers will start to come around.
Rentals will get cheaper as more houses come up for rent or sit empty. You people don’t get it. There IS no upside to this. Except that maybe the immense pain will cause a liberal populist to rise up and convince the masses to round up the republicans (starting with the MBAs).
Look for price pressure in the rental markets soon,
I’m thinking Naysayer could be right here. It’s possible we could see some short term pressure on rents, however, a lot of houses that are currently on the market will turn to rentals soon especially as winter approaches – better to get some cash flow than none. Also, a lot of condos will likely convert to apartments (many of them started out as apartments).
Lots of condo towers will essentially be apartments with many landlords instead of just one. It’s all part of the republican ownership society, dontcha know.
I’m sorry to TiP and Naysayer but I think you guys couldn’t be more wrong. Naysayer, you can’t argue for a subprime/foreclosure fallout without seeing pressure in the rental market. Developers are not that quick to adjust to market conditions.
TiP, I think given many seller’s financial constraints holding for a cash flow position is a less viable than you make it seem. Oh, and also, average rents in PDX metro are already up 8.5% year-over-year! But who knows at this point. Any of our guesses are just that–I suppose.
The supply of housing is already huge and will only go up as foreclosures accelerate. What does that do to rental prices?
The increase in rent includes gentrification effects not underlying increases in rent. Sure, the crummy building on [Alberta,Broadway, Hawthorne, Pearl, etc] used to rent units for $500 but now that the area(s) is fabulous and the building restored it’s now renting units for $950. All things being the same, rent is stagnant in Portland.
“Oh, and also, average rents in PDX metro are already up 8.5% year-over-year! ”
I’ve heard this type of statistic also, but I think it’s seriously skewed by gentrification effects. High-end rentals like the Burlington and the Louisa didn’t even exist in Portland a few years ago. That’s gotta skew the numbers.
Anecdotally, my own rent has not risen over the last few years. Also, the *exact* apartment I rented in Y2000 rents for only $50 more this year.
I think there is a huge amount of pent-up supply in speculator condos. Some of my colleagues have been trying to rent out their condos (for unrealistic prices) for almost a year now. Long-term, I think we have an oversupply of housing.
Naysayer and Leo,
I disagree with your arguments that gentrification and “better supply” is what is driving rent increases in Portland. Obviously it has its effects, but rental occupancy rates have risen sharply from around 93% in 1Q05 to nearly 97% in 2Q07, indicating market forces are at hand.
“High-end” rentals like the Lousia comprise only a small percentage of the inventory in the metro area. Their impact on average rents is small. Plus the these projects were at stabilization during the period of time I’m looking at. I do agree that certain apartment sectors will have issues. For example, the “high-end” urban apartment market will have the most problems as failed condo projects convert over. Just read today’s Oregonian article about The Wyatt.
blaknecr:
Like I said, my data is anecdotal. For some reason, the only two reference points I have (the apartment I rented from 2000-2003, and the apartment I rented from 2005-now) have not experienced rent increases higher than inflation. Because my own experience contradicted the rent statistics I often read about, I hypothesized that a gentrification effect may explain the discrepancy. It is possible that I have just gotten extraordinarily lucky in my own choice of rentals…
I am curious to see how the high-end rental market will fare as well. My guess is that Ladd Tower and The Wyatt will try to set new highs for rental rates in Portland, so they will be swimming in uncharted waters…
As a landlord, I might have a little insight into why Leo’s rent hasn’t gone up. We’ve only got single families as rentals but what we have found is that we would rather have a good tenant stay than risk raising their rent and having them move. If we raise the rent $100 on a $1200/mo rental and the result is a vacancy, what have we achieved? Probably the loss of at least a month’s rent, the cleaning costs, the placement costs and time. It would take more than a year to recover the costs.
My rent has gone DOWN 6% in the last 6 years.
And no, I don’t like in a crummy area. It’s a nicer complex in SW Portland.
I’ve posted the latest on the Wyatt on my blog…come check it out. At least we can say there will be no subprime loans held in the new building.