It began in good, not bad, economic times, and has proven to be national rather than regional in scale, with markets around the country detonating like Chinese firecrackers between early 2006 and mid-2007.
With the benefit of hindsight, one can discern a concatenation of developments that made the latest cycle almost inevitable. In the aftermath of the 2000 stock-market bust and the 2001 terrorist attacks, and amid heightened fears of deflation, the Federal Reserve drove short-term interest rates to near-historic lows and flooded the nation's financial system with money. Cheap funding spurred a surge in home-buying, and drove the home-ownership rate to a peak of 69% of all U.S. households by 2004, up from 64% a decade earlier.
Prices in many areas began to go parabolic in '04, at the time the Fed began to raise rates. Affordability became a problem in some markets, and cash-out refinancings began to slow. On Wall Street, however, where the securitization of mortgages had become a huge profit center, the demand for new mortgage product was unrelenting. Mortgage brokers and other loan originators were also getting rich off the business, and thus were eager to oblige. By 2005 the mortgage industry had began churning out new "affordability" products that featured low "teaser" rates in the early years of a mortgage to keep monthly payments low. Long-sacrosanct down-payment and family debt-to-income requirements were jettisoned. Other products enabled borrowers to repay interest only in the early years of a loan, while so-called option ARMs added the unpaid portion of monthly interest to the principal balance.
Come 2006, many lenders were scraping the bottom of the barrel to find new borrowers, some of whom, by fibbing about their annual income and net worth, often with the connivance of mortgage brokers, secured "liar loans." As greed gave way to fraud, both borrowers and lenders came to believe that ever-rising home prices would cure any defects in the underwriting process.
All this helps explain the seemingly aberrant behavior of many homeowners once prices started down in 2006. Borrowers with 100% loan-to-value mortgages, particularly after including first and second mortgages and home-equity lines of credit, began defaulting, sometimes mailing their keys, or "jingle mail," to their loan servicers. Why keep paying, after all, once the value of a property has slumped below that of the debt against it? Better to live rent-free until the foreclosure notice arrives. Such behavior also was rampant in Texas in the mid-1980s, when the oil boom went bust.
Delinquencies, defaults and foreclosures hit the housing market with a rapidity and virulence unmatched in previous cycles, pushing total loans past-due and foreclosure rates to unprecedented highs. As a consequence, the current residential real-estate cycle has been front-end-loaded relative to past bear markets, which suggests the pain, though excruciating for many, may be shorter-lived than in the past. Early mortgage defaults have blunted the negative impact of subprime-mortgage-rate resets, which peaked in the spring, and are likely to curb the effect of interest-rate resets on option ARMs and other affordability products, expected to peak between 2009 and 2011. Many of these mortgages already are in the foreclosure pipeline, which will lessen the overhang of foreclosed properties in the future.
THERE ARE SIGNS THAT THE PRESSURE on home prices from foreclosures may wane in the months ahead, says Tom Brown of Bankstocks.com, who studied the performance of the dozens of subprime-mortgage securities that make up the ABX indexes. Precipitous declines in these now-infamous indexes, which track the value of the underlying securities, forced financial institutions around the globe to mark their own subprime assets to market, forcing many to write down billions of dollars, and seek new capital.
The performance of the ABX indexes covering the four crummiest subprime vintages -- those securitized from the second half of 2005 to the first half of 2007 -- shows that the rate of early-stage, or 31- to 60-day, delinquencies has been falling for the past six to eight months, says Brown, depending on the newness of the vintage. This is key, he adds, as today's early delinquencies are the raw material for tomorrow's foreclosures. Fewer delinquencies will eventually mean less of an inventory overhang in the housing market.
Likewise, Brown notes a decline in the percentage of early delinquencies that advance to later states. Both developments tell him the cumulative-loss assumptions on these mortgages made by both the credit-rating agencies and Wall Street could prove far too pessimistic.
One can draw a similar conclusion from the delinquency-inflow trends of other types of mortgages, be they loans backed by home-equity lines of credit or second-lien mortgages from the bubble years. Many have performed horribly, but the rate of inflow of new delinquencies suddenly has dropped in recent months.
An ebbing tide of new delinquencies strongly hints that the worst may soon be over for the housing market, at least in terms of burdensome supply. The pig, in other words, is well along the python's alimentary canal.
In hindsight, the housing bust hasn't been nearly as calamitous as depicted in the media, or as Wall Street's woes might suggest. Yes, people have lost their homes, but more than a few were mendacious mortgage applicants and mere speculators, who eagerly sought out 100% margin loans, only to fold just as quickly when prices turned against them.
It is important to remember, as well, that even after a steep drop in the S&P/Case-Shiller Indices, long-term buyers in the top 20 U.S. metro markets have seen their properties appreciate by 70% since 2000. Home prices often take five to 10 years to recover fully from severe declines such as this. But at least the available data suggest the scary dive in home prices soon will be over.
