Wachovia sees O.C. home prices dropping 20%
August 7th, 2008, 12:01 am · 33 Comments · posted by Mathew Padilla, Reporter
Wachovia, one of the largest financial firms in America, estimates some Orange County homes will drop 20% more in value, after already losing 12%.
Wachovia didn’t give an exact time line. The company, during its July 22 earnings presentation, estimated losses on loans that allow borrowers to choose their monthly payment, including one that means owing more to the bank. Having been burned, it no longer makes that loan.
It looked at how much home prices are likely to drop amid homes with such loans. Then it estimated probable losses on the loans.
The company predicts Orange County will be the fourth highest area in the nation for losses on such loans held by Wachovia. It expects to lose $546 million, or 9 percent of about $6.37 billion in its option ARM loans in the O.C.
The three Metropolitan Statistical Areas that could cost Wachovia more money are:
- Riverside at $1.34 billion
- Los Angeles at $1.28 billion
- Phoenix at $648 million.
In all, Wachovia expects to lose $13 billion, or 11 percent of its $122 billion in such loans nationwide. To view the full presentation, CLICK HERE.
Another interesting stat on Wachovia’s option ARM loans in Orange County: on average they originally equated to 69 percent of the value of the homes backing them. That figure has risen to 84 percent, based on computer modeling of home values in the area. By the time the market bottoms, Wachovia estimates that will total 104 percent.
And in related topics….
- Wachovia posts $8.9 billion loss, slashes jobs and dividend
- Wachovia says bye-bye to mortgage brokers
- IndyMac “unattractive” to buyers
- Bush signs mortgage aid bill
- Treasury Secretary backs new way to fund mortgages
August 7th, 2008 at 2:56 am
The banks know what will happen to home values, it will take years for the home owners to figure it out.
August 7th, 2008 at 5:14 am
Wachovia is a major problem in the mortgage meltdown. They did the Option Arm (Pick-a-payment) loans for thousands, because they paid brokers 3 - 3.5 points on the back, of course those were the loans that brokers were going to sell, the borrowers had no idea that the brokers were making upwards of 20K per loan. There are even brokers that did their own home loans and paid themselves the 3 points.
If Wachovia in the middle of the mess says that home prices are going to drop 20% more, why didn’t they see this happening when they were doing the loans 3 years ago, and stop doing them to stated wage earners and only do them to full doc borrowers?
August 7th, 2008 at 6:50 am
yes, 20% more reduction is a realistic number.
it is now the turn of the home owners to realize that it is buyers market.
it is better to sell the homes now, rather than wait for 2 years
August 7th, 2008 at 7:38 am
NO BAILOUT.
August 7th, 2008 at 7:42 am
What bailout did the people who lost 20% of their value in the early 90’s? If I recall correctly they got nothing, and the market recovered.
August 7th, 2008 at 7:48 am
They say we’re down 12%.
They say we got another 20% to go.
Wow. How did they figure out the OC property values are only off 12%? I’ve seen same property sales within 1/2 mile of my house off 40% or more.
Bestocmom is right, with one big difference. People could afford to keep thier neg equity property before because they could make the payments. No way in hell somebody making 80K can do a fully am’d $5K a month stroke, which is what a starter condo in Irvine would set you back.
August 7th, 2008 at 8:38 am
9% loss estimate on Option Arms? When all experts say it will meet or exceed subprime loss percentages?
Seems like Wachovia is underestimating their Option Arm losses by umm 300%.
WACHOVIA IS INSOLVENT.
And for OC price to income ratios to revert to the long term mean (a mathematical certainty) home prices will have to fall by a lot more that 20% from here. More like 35-40%.
But hope (and quarterly accouting BS) springs eternal…
August 7th, 2008 at 9:00 am
Thanks for responding Matt. Your additional comments were very helpful.
August 7th, 2008 at 9:37 am
Matt, second the appreciation of your additional comments. Also thanks for the link to their presentation.
Slide 41 “Pick-a-Pay product advantages diminished by unanticipated significant deterioration in home prices” confuses me a bit. What is the chart in the mid/left side trying to show. It only inclused about 2000 loans and the max loss and less than 1 billion at risk? I can’t make sense of it. Any thoughts are appreciated!
August 7th, 2008 at 10:00 am
x-man-
I think the reason their loss number of 9% is lower than you’d expect is because the original LTV’s averaged out to 69%. That gives a 31% equity cushion before they suffer any loss (Of course prices dropping erode this cushion). If you add the original equity cushion of 31% with the 9% loss, it comes out to 40%.
40% is a typical loss percentage for a high-LTV subprime loan (Right now it’s running closer to 45%). Also, the costs related to a foreclosure like attorneys, taxes, and maintenance are a smaller percentage of the overall loan amount in high cost areas like Orange County. Losses in the Midwest are higher on a percentage basis because the fixed costs of foreclosure are a much higher percentage of the loan amount.
Matt-
I like your estimate of their number of Option ARMs. The only thing I would adjust is factoring in the original LTV of 69%. So taking the $600,000 home and multiplying times 69% equals $414,000. If you divide that into the total $ amount of loans held in OC ($6.37BB) it comes out to over 15,000 loans.
August 7th, 2008 at 10:15 am
I think Liar Loan is right, so number is probably closer to 15,000, unless these are typically on higher priced homes above the median.
August 7th, 2008 at 11:50 am
Also in the report:
Pick-a-Pay mortgage delinquencies continued to
outperform industry Alt-A, subprime and prime
negative amortization
Lower LTV loans at origination
Underwritten to the fully indexed rate
Product design minimizes recast risks due to 10-year or
125% recast vs. 5-year and 110% for industry
Deferred interest of $3.9 billion represented 3.18% of the portfolio ($390 million from NPAs)
Minimum Payment Usage:
65% elected in May 2008 vs. 66% in May 2007
51% elected the minimum option in each of the past 6 months
40% elected the minimum option in each of the past 12 months
$2.7 billion, or less than 2.3% of borrowers, with a deferred interest balance > 10% of current balance
Current average LTV (b) of 92% for loans with deferred interest balance > 10% of current balance
(The average Orange County client put down/had equity of 31% at origination. The irresponsible don’t have 31% to put down. They are still far from being underwater. Somehow, I don’t see them losing their minds, and ruining their lives for nothing, anytime soon. There are many models out there that are counting on this peculiar behavior. We shall see.)
August 7th, 2008 at 11:51 am
That’s right, you can go to 125% or 10 Years before a mandatory recast. That’s a lot of breathing room.
August 7th, 2008 at 12:06 pm
The number of mandatory recasts they expect by year:
(Assumes a flat rate environment, all borrowers elect the minimum
payment option 100% of the time, and there is no prepayment of balances.)
Year/#Loans/$Loans(millions)
2008 / 10 / $1.8
2009 / 33 / $7.5
2010 / 76 / $20.7
2011 / 246 / $84.4
2012 / 1,751 / $642.3
I don’t get the alarm.
August 7th, 2008 at 12:29 pm
OK, these predictions are from the same folks who got the region/country in this mess….I discount anything from their “expert” forecasters….. If they were so smart, they would have predicted the fall and stop their “give anyone a loan” practices.
August 7th, 2008 at 12:40 pm
ROC-
If the rates go up, how does that affect their negative am? Do the mininum payments adjust with rates or do they stay fixed while the rate on the loan adjusts?
August 7th, 2008 at 1:17 pm
The minimum payments cannot go up more than 7.5% per year. Rising rates would make the negam amount go up though. It would be intersesting to know the start rate on these. The higher the start rate, the less negam throughout the life. I still think they have some breathing room.
August 7th, 2008 at 1:18 pm
I believe they pretty much DO go up 7.5% per year.
August 7th, 2008 at 1:40 pm
LL, you misunderstand the 125%. It’s 125% of the original balance. As long as they are at no more than a 14% decline in value by the time the mandatory recast hits, they will not be underwater. I showed that the negam builds slower than many people think, due to the fact that minimum payments include some principal amortization plus they rise annually. It can take quite a bit of time to hit the 125%.
Value = $100,000
Loan = $69,000
Forced Recast at $86,250
Decline over 10 years without going underwater = 14%
I plugged-in some numbers and see that rates would need to rise a half-percent per month, consistently, until the max rate is reached to force a recast in 2012. It would take a rise of one-quarter per month, consistenly, until the max rate is reached to force a recast in 2013. Basically only a 4 point rise in rates will really be able to force a recast earlier than 10 years out.
August 7th, 2008 at 1:57 pm
Ok, I see it’s not 125% LTV, but 125% loan balance that triggers the recast. That still seems rather safe compared to the Option ARMs that recast at 110%.
Do you happen to know what Downey Savings average LTV was on this product? I’m assuming they had the variety that recast at 110% or after 5 years.
August 7th, 2008 at 7:06 pm
Their 2007 Annual Report says the caps are generally 110% for original LTVs at or over 75% and 115% if under 75%. This behemoth (145 pages) report was a little confusing, but I did decipher this (hopefully correct) as of Dec 31, 2007:
Total loans in portfolio + mbs = $10.88 billion
Total negam loans in portfolio + mbs = $7.53 billion
Total mortgage loans of all types in OC = $849.7 million
So, I would guess they have a bit over a half-billion in Option ARMs in OC, compared to Wachovia’s $6.37 billion.
I’m pretty sure the biggest players would be Countrywide and Wachovia for this product.
August 7th, 2008 at 7:10 pm
Stealing our tax dollars and giving it to the very criminals that profitted from this mess is insane.
August 7th, 2008 at 8:09 pm
July was another record month for foreclosures in the state of CA with all hell breaking lose and banks taking back roughly 26,500 homes for $12.5 billion. ’Record-breaking’ is not a good thing in the foreclosure universe. This 25% increase breaks all records ever posted and all foreclosure estimates.
If past percentages hold true, next week when the national numbers are released by other data sources, the numbers should also show a similar increase. However, we do not all gather data the same way, so I can’t guaranty what others will report. If their data do mirror this report, I do not know how the markets will react to this but many times in the past, they have not responded very well to ’surging foreclosure rates’.
In May we passed $10 billion for the first time with $10.4 billion in loans, or roughly 24k homes, going back to the banks. In June, there were $10.2 billion in loans taken back by the banks, a slight drop. This was an encouraging sign until July’s figures were tallied.
To clarify, when I say ‘loans taken back by banks’, these are actual foreclosures. When a home goes to the auction block the bank puts up the opening bid. If no 3rd party bidder comes in, the bank buys it back. All year long in CA at least, banks have been buying back roughly 97-98% of all homes that go on the auction block. That is an astounding figure in and of itself!
This $12.5 billion in foreclosures were from Notice-of-Defaults (NOD) from the February time frame. It takes roughly 140 days in CA to go from NOD to foreclosure auction currently due to the back log. In Feb we had a drop in NOD’s to about 37k due to Feb being a short month. But from March though June we saw NOD’s shoot back up to record levels of about 43k per month (see chart below). This means that the number and dollar amount of foreclosures from Sept through Oct at least should be even greater than July by 10-20% depending on fluctuating cure rates.
August 7th, 2008 at 9:23 pm
Well, I do not see the decline right now. I have a house already (bought in the 90’s) and I decided I wanted a bigger house.
I have put offers on 8 homes already and have been edged out by bidding wars or outbid by someone with a full price or close to full price offer. One home that hit the MLS already had multiple offers on it before it hit 4 days old. I feel like we are back in the crazy 2005 boom market for homes in the 675-775k range.
I don’t understand what the he*l is going on because I cannot seem get another house even with me making decent offers.
August 8th, 2008 at 5:23 pm
Is Wachovia next Downey Saving? Meaning that their stock price will be $2 ?
August 8th, 2008 at 5:42 pm
If wachivia has 10,000 potential bad loans what about all the other big players in neg-am, countrywide ,WAMU,downey ,GMAC,Citi and all the others? I have been touring properties and I can tell you Ladera Ranch,Talega,Laguna and most of the other high end south county areas are getting barbequed due to this product. And the fun is just begining!!!!!
August 9th, 2008 at 6:01 am
I agree with Mark. This is just the beginning. It seems to me that after all is said and done, a loss of value from peak could be as high as 60%, perhaps even more. Like most market corrections, the trend line typically shoots below the mean base support level, before recovery to mean.
All bets are off however, should interest rates rise. I fear the Fed will not be able to maintain this low of a rate for much longer as inflation, which they create, will begin to take a real toll on the dollar’s purchasing power. If interest rates do not go up, then the dollar will continue to decline, even crash. The reason, about one-half of US currency is held outside our borders. Once the holders of those dollars realize that they must dispose of them quickly to avoid losing any more value, then the whole house of cards begins to fall.
The Fed is between a rock and a hard place. If they raise interest rates, the currency will stablize for a time and the real estate market adjusts down accordingly. Lower the rate, or maintain it as it is, the dollar witll continue to drop on foreign exchange markets resulting in most things we buy will continue to escalate in cost. Either way, the average American family, deeply in debt, is in deep yogurt and may not ever recover.
In general, interest rates must compensate those who hold dollars for the loss of purchasing power. In reality, the Fed is a legally sanctioned counterfeiter, as every dollar they create out of nothing waters down the existing dollar pool in terms of value.
The next stage of housing defaults are soon about to begin. In OC, this promises to be a huge mess. I can’t prove this claim, but a friend told me that in some areas of South County along the coast, about 60% of the homes are financed by interest only loans!
What insanity is this?
The possibility of an Obama presidency, with rising taxes, an out of control state legislature that wants more tribute from our most productve citizens, a higher sales tax becasue the idiots in Sacramento refuse to quit spending money they don’t have, and every Tom, Dick and Harry two-bit agency demanding more and more so they can keep this nonsense going a little while more.
The whole thing is unsustainable as it is now folks. If Obama and Sacramento get their way, it will just go down in flames faster. This just goes to prove that these so-called leaders don’t have a clue about how this economy functions. They have never understood that someone actually has to earn funds by productive effort in order to create wealth and prosperity. They could care less as they get a check regardless. I don’t know why. After all they don’t produce anything that anyone wants to buy.
With $ 55 - 76 trillion unfunded liabilities at the federal level alone, the fat lady is about to sing. Prepare soon or you will lose all that you have worked for out of a lifetime of honest efort and sacrifice.
August 9th, 2008 at 9:58 am
I’d hardly call a 60% LTV / 720 credit score loan a bad loan.
August 9th, 2008 at 9:58 am
That’s stupidity. ARMs were not invented in this decade.
August 9th, 2008 at 6:41 pm
Prrovider with all due respect your need to get a clue ARMs where not invented in this decade but they where exploited beyond your wildest imagination I have been in the indutry for 18 years and I never did neg-ams or option arms I always thought these where crap products. I have many times had the oppertunity to put people in these loans but I always refused, a close friend was trying to buy in south OC in 06 peak of market found a cracker box that had all kinds of problems but they got cought up in the hipe he paid 1M against my advise. I told him he did not qualify,he then found another broker who introduced him to a neg-am got him a 80% LTV loan that he borroed 100k from his dad to get in then gave him a HELOC for 150k behind it to get the cash to pay his dad back. He called me last month asking for my help he is going into forclosure and the property is now worth 720k on a good day. There is nothing I can do for him. I can not tell you how many of these stories I hear daily. This neg-am problem is going to get much worse.God help us all!!!!
August 14th, 2008 at 8:57 am
NO BAILOUT! They deserve what ever happens to them. Stop blaming the brokers. You people wouldnt take the fixed rates because the arm was cheaper. When brokers were trying to help those with arms get into fixed rates over the past 3 years you all thought the brokers were just trying to scare you. Scared now?