Fitch: Massive House-Price Losses in Non-Conforming Areas to Come

Posted on July 25th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Fitch Ratings, arguably the only rater with their act together other than Egan-Jones, just finished with its ResiLogic enhancements. Its new mortgage loss model will be released today. In it, its new National, State and MSA-level economic and house price forecasting will make their modeling ‘far more predictive and forward-looking.’  That is a nice way to put it.

BIG PROBLEM – This more micro look at the housing market in the 25 MSA’s that in the past have contained the most ‘non-conforming (Jumbo) lending, is coming up with massive house price losses in key areas with San Diego dropping as much as 47% over the next 5-years! San Francisco is looking at an additional 33%.

These are your heavy Alt-A areas. Fitch is getting ahead of the curve this time around. I have been telling you for a few months now that according to my proprietary data while subprime defaults are falling slightly, Alt-A defaults have been soaring in the past four months led by Pay Option ARMs. Prime defaults have also spiked.

Their estimates are dire, but I feel could still be on the conservative side given the absolute lack of non-conforming financing, massive supply, sales not picking up substantially this summer selling season, over 40% of all sales coming from the foreclosure stock, values only falling for about a year and defaults in Alt-A and Prime mortgages substantially picking up steam.

  • The MSAs represent the 25 areas that have historically exhibited the most non conforming mortgage lending activity. ‘Some MSAs such as San Diego and San Francisco, CA are expected to experience home price declines by as much as 47% and 33% over the next five years, while home prices in MSAs such as San Antonio, TX are expected to appreciate by 7%, over five years,’ said Somerville. The home price forecasts are imbedded in the state and MSA level risk indicators and will be updated quarterly.

ResiLogic’s new model looks to be robust and takes into consideration many of the things that are top on my list of risks. The systems new capabilities include:

  • Introduction of MSA and national macroeconomic risk multipliers;
  • Ability to analyze seasoned loans and to take into account loan payment history and house price changes since loan origination;
  • Additional penalties for loans originated with stated income or no income/no asset documentation programs;
  • Additional penalties for loans originated with second liens;
  • Reduced credit for loans with mortgage insurance

This new model will negatively impact Fitch’s loss assumptions and credit enhancement levels for Residential Mortgage Backed Securities. This is mostly your Prime and Alt-A RMBS and not the subprime, meaning if S&P and Moody’s update their systems, round 2 of the mortgage and housing implosion could kick off with Alt-A and Prime leading the way. – Best Mr Mortgage

Fitch will host a webcast next week to discuss its new U.S. RMBS modeling criteria (separate press release will follow). In the coming months, a commercialized version of ResiLogic (ResiLogic 2.0) will be made available by Fitch Solutions.

Contact: Suzanne Mistretta +1-212-908-0639, Wen Hsu +1-212-908-0633 or Huxley Somerville +1-212-908-0381, New York.

Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278.

Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, ‘’. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.


70 Responses to “Fitch: Massive House-Price Losses in Non-Conforming Areas to Come”

  1. I wouldn’t worry too much about legislation that will retroactively turn non-recourse loans into recourse loans. Not going to happen. Could you imagine the rush to exits if such legislation was proposed? You can safely put any thoughts of this out your minds.

    As to “bought at the wrong time”, yours is a tale that will continue to be told many times over as this massive devaluation continues. In the end, it all comes down to credit rating for sale – how much is your credit rating worth to you? Sounds like you have an ARM, which right now is working to your advantage but that won’t last forever. You may see a low index for another year or so, but eventually your loan index will rise and up go your payments. By that time, you could be another $100K underwater. Rising payments and evaporating value? Bad combo. Particularly in light of the fact that you could probably rent a comparable place for much less outlay per month – am I right?

    You need to crunch some numbers. If your HELOC was taken out to purchase the home, it is non-recourse. If your home value has dropped to the point where the HELOC is essentially unsecured, I would consider playing chicken with them. If you stop payments, that will get their attention. They won’t foreclose if there is no equity for their loan, so they have two options – negotiate or just let the loan sit indefinitely as non-performing. Personally, I would negotiate a pennies on the dollar payoff and rid yourself of the loan and the payment, and you have just considerably pared down your loss. You may need to go into default on your 1st mortgage to close the deal, as in that circumstance the HELOC is facing a complete wipeout. Big incentive to take something, anything.

    It’s certainly arguable that anyone who is paying substantially more to own then rent, and is also significantly underwater already, is making a poor financial decision by staying put. If I was $200K upside down (and growing, mind you…) and forking out a G or two a month premium over renting a comparable, I would at least be looking to negotiate my way out of a non-recourse 2nd and possibly walking away completely. This market is going down and will be down for years. With a $5K house payment, I could bank about $45K cash before the foreclosure forced me out (approx. 9 months). Maybe even more. And then rent a comparable for what – $2K/month less – for another 3 years. That’s another $72K, for a total of $117K. Plus return on investment – even conservatively you’re probably looking at $130K. So I’ve wrecked my credit but in exchange I have wiped out $200-300K of negative equity and I have $130K cash – so a total net worth increase of $330-430K in about 4 years. Holy s$%^. And guess what – in the 4 years after the foreclosure I would make every other payment on time and have my credit substantially re-built – it would be the only blemish and by then the stigma of foreclosure will have been greatly reduced.

    There are now and will continue to be huge, huge losses. Huge. You can either take it on the chin, get your chicklets knocked down your throat, or you can step aside. You can spend 24/7 debating morality plays, or you can crunch the numbers and make the right business play.

  2. oh brother

    That is some darn good posting. Like you say, we are all basically chained together now and it doesn’t matter who did what, smart or dumb, rich or poor, we are all going over the cliff together.

    As a bystander to this entire mess, I saw what was going on and everybody else saw what was going on and nobody did anything.

    I am most concerned about the economic implications. Not that people lost their life savings, that the banks blew up, that our taxes are going to be higher, the dollar is going to get toasted, but rather what is going to happen on the jobs front from this shakeout. We are in for one heck of a transition back to manufacturing our own stuff again.

  3. Bought at Wrong Time. I am one of those paid up no credit csrd debt people. I agree it’s wrong to stiff the bank. But they nade all the rules, not you, The gov is going to stiff every little guy to bail out the big guys. At this moment the best thing for this country is for all the little guys to save themselves.

  4. dacounselor

    Excellent post, hang out more often.

    Even though you hit the numbers right on and it makes perfect sense, I am afraid that there are going to be too many proud people that take the high road on this and decide to pay as agreed on the loan.

    That high road is going to be tough to swallow when you see all your neighbors who walked that are now living a higher lifestyle than you, while you are still stretching dollars to pay.

    When you signed your loan, you certainly did not agree to bail everybody else out and I am afraid that those that do hang on are going to breed some very bitter, angry people.

    The best way to look at this is that you signed a non recourse loan to begin with. While your loan may have been responsible, it was the banks that made all those other irresponsible loans that crashed your value. Therefore, let the banks that damaged your value take the hit. You might actually be able to sue a bank for crashing your value and get recovery but the banks are not going to be around to prove this is so!


  5. OMG – finally some info Thanks Bert and to DA- I am not that upside down well compared to most. I didn’t buy a 750K row house just a 475k 70’s house. I know many who actually put more than 20% down and are further upside down than me- under bid the one smart thing I did.

    But wouldn’t buying another and letting this one go be smarter? Really you guys are such a huge soure of info- I feel bad for brother- that sucks there were a lot of high end areas that shuld rebound but there were a lot of areas in SD that were perpetrating the high end and will never be the same- can I just say eastlake- otay ranch- etc. Hope you didn’t buy there. I have no idea where in my doc’s recoures or non recourse might be.

    how ironic that bert saw it coming but i bet the banks will claim ignorance.

  6. btw- my second is is wells fargo, Are you saying deal with them?

  7. oh yeah my questions again can anyone answer:
    ok you are all the professionals- the bill is passed so help me out here:
    Why the dates 2005-5007?
    Doesn’t it seem like there are a ton of loop holes that can be taken advantage of?
    It says something like you can’t have any other leins- so how does a person get rid of the second?

    BTW- I don’t qualify, so don’t hate on me.

  8. Oh Brother, your post partially covers a scenario that I mentioned in a post on July 25th – even the “good” folks who can afford the payments and purchases have no real incentive to stick out as they are so far underwater that continuing to pay on the loan is almost like good money after bad, assuming that you can rent for less than the mortgage payment.

    The government is basically creating a disincentive to actually pay off your obligations for the smart ones who figure it out.

  9. dacounselor – your advice, while going against most of what I believe in how folks should live up to their obligations, is absolutely 100% the right advice in the current situation.

    Those are the types of scenarios that I don’t think the banks and lenders are going to be able to wiggle their way out of and those are the catastrophic situations that they have to hope the Federal government finds a way to pick up the tab because once the “prime” or good borrowers who are underwater figure out or learn how to play the game, the entire death spiral will accelerate

  10. […] Fitch: Massive House-Price Losses in Non-Conforming Areas to Come – …. BIG PROBLEM – This more micro look at the housing market in the 25 MSA’s that in the past have contained the most ‘non-conforming (Jumbo) lending, is coming up with massive house price losses in key areas with San Diego dropping as much as 47% over the next 5-years! San Francisco is looking at an additional 33%. These are your heavy Alt-A areas. … – MR Mortage […]

  11. BertDilbert,

    Yes, this is a mess beyond description. I don’t even know what to call it, as there is no prior event which closely enough matches the current situation. There are certainly similarities and correlations to be drawn, but I believe this is an entirely new animal.

    dacounselor: Thanks for providing REAL knowledge and advice (as opposed to lectures and blame) to those who have asked for help.

    bought at the wrong time: I hope you have found some of the info you are looking for. In regards to the bill – yes, there are tons of loopholes, and yes they will be taken advantage of. It will help SOME homeowners, many of whom really shouldn’t be in their houses in the first place, with or without a new modified mortgage. Expect to see many of those who have been “helped” default later down the road – especially as home values continue to slide, WHICH THEY WILL. However, helping homeowners is NOT the primary purpose of this bill. First and foremost, the purpose of this bill is to PROTECT FANNIE and FREDDIE. Remember, the bill languished for months until the Fannie/Freddie mess came about. Only then did the legislators get off their tails and do something.

  12. thanks bro- but can you answer
    It says something like you can’t have any other leins- so how does a person get rid of the second?

    Yes I know it was only to help the banks- I just can’t see how it will help those who shouldn’t have gotten a loan in the first place- those with stated (ebay) income(that was truly genius).
    The FHA won’t allow for that. Are they going to devalue the property then wipe out the seconds and then issue a loan for the lower amount?
    (sorry if i don’t use mortgage lingo)
    If thats the case then i should walk – thats crap-and brings down the values even further. who is going to appraise these homes?

  13. bought – I’m not so sure that buying another home now and then letting your current home go is the best play. If you believe, as I do, that we have several more years of devaluation ahead of us, then you will be well upside down again on your new purchase. I think the play right now is to rent at a steep discount to owning and horde money for a purchase down the road.

    The potential problem with not going the “buy and bail” route is that your wrecked credit may restrict your options to buy again down the road. However, there are several factors that you will likely have in your favor – first, if you have a ton of cash to bring to the table your credit rating becomes less important. Money talks. In addition, you can rebuild credit fairly quickly these days. Furthermore, I think foreclosures/short sales are going to be more accepted blemishes moving forward. But you really need to sit down and crunch numbers on this – the numbers will tell the story.

    As for looking in your loan docs to determine recourse v. non-recourse, there is no need to do so if both loans were taken out to purchase the home. If you took out that HELOC as the 20% of and 80/20 100% financing deal, it’s non-recourse by law. Period.

    Bert brings up a great point about people who should probably get a game of chicken going with their lender but won’t, mostly playing the morality card against themselves and/or avoiding the stigma of a foreclosure. It is a public record, after all. There will be those who just stay put and take the bloody pummeling right in the face. That’s their choice. I think as we go forward and things get worse that the calculators are going to start coming out and the numbers are going to tell most people what to do. The numbers just do not lie. Most every man has his price and if someone can erase hundreds of thousands of dollars of negative net worth and immediately begin stashing large quantities of cash due to a much lower monthly outlay, they are going to have a tough time refraining from doing so. Bert is right that some will stay the course and take a vicious and unecessary bloody beating in the name of morality or obligation. So be it. Others are going to let go, move on and begin building wealth and security for themselves and their families.

  14. Brother,

    We bought our first home early in 2006 in S. California. What city or area are you in? I’m in N. County and my home value has taken a LOSS of 4% so far and that is good news (very good news thus far). However, who knows what will happen 3 – 5 years from now. We purchased at $630K with a 7/1 ARM and HELOC 2nd. We have great credit and this is an A paper loan. Our debt to equity is just under 30% and our income is approaching $200K per year. We can afford this home. Am I upset about the dropping home values in the surrounding neighboorhoods? Sure, because that is what sets the market. But, we aren’t selling anytime soon. This house is not an ‘investment’ in the traditional sense, but an investment in life, family and the pursuit of a home 3 miles from the beach. Now, if our neighboorhood value drops to to 20 – 30% sure it would be a hard pill to swallow. My fingers are crossed that the value holds, but how many hits can one take before crumbling into a pile of stucco and wood. What do I do? Lock in a 15/30 traditional mortgage? Wait until 2013 to refi? Go into foreclosure on purpose and bank roll $200K in 2 – 3 yrs and look for a distressed buyer selling their home closer to the beach or on the beach?

    They say, buy a modest home in the best neighboorhood you can afford and so far our neighboorhood is holding up. Make no mistake about it, if our values slide….i will be slinging %&*#! all over this forum =P

  15. Here’s Chas. Hugh Smith’s view of reality:

    Depressing graphs and charts. Like me, he’s an optimist. Forget his last paragraph – NOTHING can be done to prevent the planned Outcome.

  16. PS ‘The Empire of Debt’


    We’re in Silicon Valley, South County. We’ve lost 30%, not counting improvements. Despite 20% down, our mortgage is under water. Foreclosures are increasing. Inventory is up. For the forseeable future, the local market has nowhere to go but down.

    As for you… there are much more knowledgeable people out there than I. I don’t pretend to know everything, and I certainly can not predict the future. Otherwise, I wouldn’t be in this situation.

    I am not in a position where I MUST make a decision. Therefore I will watch and wait. In time, the picture will become more clear.

  18. Oh Brother,

    I hope a story book ending comes your way. I used to live in Silicon Valley when the cherry trees dominated the open fields – South County near IBM/Cottle Rd. I moved in 2004 for a business opportunity in S. Cal and so far all has worked out. Believe it or not, the market here was at the time 20% – 30% less than Silicon Valley when we bought. If you are able to move from the SI Valley, I would recommend N. County. There is a home that is 3400 sq feet, custom built, ranch style in a 4.3 acre lot in Olivenhein. 4 bedrooms and 3 baths. This area is similar to Los Gatos, Saratoga and parts of Santa Barbara. List price is $730K. A few things I don’t miss are: Sirens, Graffiti, Crime, traffic. Sure we have the 5 here, but it really is not that bad if you learn the ‘routes’.

  19. […] especially in CA where according to DataQuick  the median price is off 32% since last summer.  Fitch echoed  similar sentiment last […]

  20. […] Fitch: Massive House-Price Losses in Non-Conforming Areas to Come […]

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