Jumbo Prime: ‘Walk Away’ Loans – More Downgrades Coming

Posted on December 10th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

This story was originally released a couple of weeks ago, but somehow it did not make it to the blog. It goes hand in hand with the Moody’s downgrade of many Bank of America Jumbo Prime deals and cites a 13% delinquency rate. A rate this high represents a total meltdown in the sector that nobody is reporting.

Through my proprietary default and foreclosure research, we have been watching this happen in real-time for months… I have warned many times about this and it is amazing it took this long for somebody to say something. Now that the raters, who never get involved until past the last minute, are reporting such massive default rates, I am going to officially say that the ‘Jumbo Implosion’ is upon us. Sadly, (ex-Countrywide) BofA was one of the better lenders during the bubble years. In my opinion, BofA was much more conservative than Wells Fargo, Citi, Chase, Wachovia or WaMu.

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Jumbo Rates At Multi-Year Highs

AAA Prime, full doc, bank portfolio, and Jumbo 30-year fixed loan rates over the Fannie/Freddie $625k limit for higher value areas have all recently surged again. In actuality, they never really came back, but rates are now between 7.75 and 9% for perfect borrowers, and in many cases you have to put down 25 to 40%.  In some areas, Agency Jumbos from $417 to $625k and FHA Jumbos to $730k are about 7.5%. Either way, Jumbo rates are at multi-year highs.

In my opinion, bank portfolio mortgage loan rates show a bank’s true willingness to take on real estate and consumer exposure. These loans are submitted directly to the bank, underwritten by the bank, come with large down payments or significant equity in the case of a refi, and are only available to perfect borrowers. In addition, they are totally secured by real estate! Jumbo mortgage rates 500 to 600 bps above 10-year money and 700 to 800 bps above the funds rate show a mortgage market that would evaporate if the government was not in charge of 99% of its action through Fannie, Freddie and FHA.

The home-made chart below shows what has happened to mortgage rates vs. the 10-year money rate over the past five years. Notice how actual rates tracked the 10-year very closely during the bubble years. Now, look at what has happened recently – the right side of the chart is nasty.  Fannie/Freddie loans are not even participating after the initial knee-jerk lower a couple of weeks ago.

Analysts are not taking into consideration how much trouble the American economy will be in when those middle to upper class home owners all over the nation see their prices fall as much as lower end homes have. This will happen; it has to.

Unless folks start paying cash and see extra value in million dollar homes, home prices will gravitate to the most available financing, which is still $417k.

We are already seeing this price compression in CA. Even when the lower-priced homes stop falling, the upper end could fall for quite some time and continue to weigh on overall prices. As prices drop and more people go into a severe negative equity position, defaults and foreclosures in Jumboland, which includes Jumbo Prime and Alt-A, will follow the path of Subprime.

More Downgrades to Come

I am hearing that more ratings agency downgrades are on the way in the Jumbo Prime arena – rightfully so.  Believe it or not, as with Pay Option ARMs, much of Jumbo Prime are also ‘walk away’ loans.

These programs offered by most of our nations largest banks allowed a considerable amount of leverage when purchasing or refinancing. In fact, these are the ultimate ‘walk away’ loans, as a household income of $85k per year could legitimately buy a $650k home with 5% down during the bubble years.  With stated, no ratio and no doc available at a slightly higher rate, many didn’t even need $85k. That home is now worth 25-70% less, and borrowers are making the wise decision to walk away given that most of their after-tax income is going towards this quickly depreciating asset.

The greatest volume of Jumbo Prime was on the 5/1, 7/1 and 10/1 interest only product line, with 5/1 being the most popular. Wells Fargo was the west coast leader for this program, and Chase, Citi, WaMu, Wachovia and Countrywide were also significant players.  The 5/1 interest only is fixed for 5-years at a low introductory rate, typically 1.5% or so below a 30-year fixed. Then after 5-years, the rate adjusts higher or lower depending upon the underlying index such as the 1-year T-Bill or LIBOR plus a margin of 2.25-3.25%. Although Pay Options were considered Prime for years, they are not included in this analysis, as they are now in a category of their own.

Jumbo Prime are high-leverage programs that allowed borrowers to buy much more home than they should have. Because Jumbo Prime borrowers had better credit overall, banks were very easy on qualifying. For example, with full-documentation, a 620 credit score could get an 80% $750k first mortgage that allowed a 15% second on top of that, totaling a 95% loan. On top of that, these loans typically qualified at interest only payments. For stated income, the fee was very small, typically .125% in rate, with allowable credit scores around the 660 level. A 50% debt-to-income ratio was typical.  THESE ARE NOT PRIME LOANS, and this goes to show how distorted risk management became.

The entire mortgage and housing blow-up is very linear… Subprime to Alt-A to Jumbo Prime and then Prime conventional. HELOCs blow the entire way up the chain. The defaults in Jumbo Prime have to do with a) the way they were structured with longer teasers such as 5, 7, and 10-years b) the high leverage allowing up to 50% debt-to-income ratios on full-doc and unlimited on stated, no ratio and no doc c) the massive negative equity due to median home prices falling in the biggest Jumbo regions by 25 to 70%.


A 5/1 interest only at 5%, qualifying at interest only payments, means that a $520k loan carried a payment of only $2166 per month. Add in $650 per month for taxes and insurance, and the total is roughly $2,825. With a 15% second of $97,500 at Prime carrying payments of $325 per month and reasonable ‘other debt’ at the time of $400 per month, the total payment out the door would be $3,541 approx. This means a household income of $7,082 per month could buy a $650k home with 5% down. This is not out of the realm of hourly workers or moderate income single worker families .

Now the same home is worth $450k, the borrowers added debt after the loan was funded, and all of their after tax income is going out to debt each month. They can’t save a penny and are going broke just to live in an underwater house. They can rent the same house for $2,500 per month. Their best decision is to walk.

$650k Purchase in 2006 – 95% first/second combo

$2166 per month on a $520k 5/1 interest only Jumbo Prime
$650 taxes and insurance
$325 per month on a $112,500 heloc
$400 other debt
$3500 per month total payments
$7000 per month ($84k per year) needed to qualify

(numbers above are approximate)

Nowadays, the same income buys a $275k to $300k mortgage with 10% down. This shows why housing prices keep falling.

The average note discount at Trustee Sale in CA last month was 45% among the big banks. If these loans were mostly 80% loans at the beginning, this means the homes are being discounted over 55% and still less than 5% sell at auction. The rest go back to the bank as REO properties.

Home values going parabolic in Jumbo regions like CA had much to do with the nation’s past six year’s wealth effect. When a home goes from $300k to $1 million, that equity is extracted and spent. The home in Nebraska going from $100k to $200k was insignificant. This is why when it comes down to housing’s impact on the broader economy, ‘as goes CA so goes the rest of the nation.’ – Best, Mr. Mortgage


Other Related Mr Mortgage Posts

49 Responses to “Jumbo Prime: ‘Walk Away’ Loans – More Downgrades Coming”

  1. http://www.latimes.com/business/la-fi-prime24-2008nov24,0,6174050.story
    But problems with prime loans are increasing as fast or faster [than subprime]. About 7.5% of prime jumbo mortgages … were at least 60 days late or in foreclosure

    All those beach communities who have been mostly insulated are going to start to see stress.

  2. there is no way “BUYING A $650K HOME WITH $85K PER YEAR INCOME – MOST POPULAR IN CA” would translate into a $7k/month after tax income. Even $120k/year income is only about $5k/month after taxes, 401k, health, etc.

    Unless you mean “pre-tax.” But that’s a bogus number, right? you can’t spend money you don’t have & never will.

  3. Maybe “so goes CA as does the rest of the nation” should read “as goes CA so does the rest of the nation” ?

    Thanks for all the great info!

  4. […] Jumbo Prime: ‘Walk Away’ Loans – More Downgrades Coming […]

  5. i think home prices in 5-8 years will amaze people….i bid on many many $1mil properties thru the rtc back in the late 1980’s…the bids were in the $60-80k range. we will see $1,000,000 homes selling for $60,000.

    if people think we will come out of this soon or rally to dow 36,000, they are idiots. we are going to see un-real pain.

  6. I think ou are right hahaha. That didnt sound good. I am not cheering $1 million homes going to $60k – I still own one. Well, it used to be one.

  7. The top of the market is completely linked to the bottom of the market for many reasons – too large of a $ spread between a nice house and a McMansion (why pay 800K when you can buy a nice home for 400K), the same economic forces – soaring unemployment at all levels of the economy (especially high paying financial jobs vanishing). Although a terrible comparison, it reminds me of the implosion of the World Trade Center – the bottom and middle gave out, and the top of the tower came crashing down.

  8. MrM-
    What is considered ‘full doc’? I knew HS dropouts that were ‘loan officers’ and were making 120k+/yr. But only did it for 9mo.

    also, anyone notice 5% of 650k ~= 10% of 300k? The same money is being required as a down, but the total debt/price is changing quite a bit!

  9. With CA Jambo loans tanking PLUS the commercials going down, PLUS the impending credit card writedowns, HELOCs etc. I would really like to see a scenario showing what happens to the balance sheets of the bailed out lenders over the next 8 quarters.

    Are we in for another round of 25 billion here…12 billion there?

    Ken Lewis said that even if the market declined 25% BofA would still make money off the Countrywide deal…yikes.

  10. With CA Jambo loans tanking PLUS the commercials going down, PLUS the impending credit card writedowns, HELOCs etc. I would really like to see a scenario showing what happens to the balance sheets of the BIG bailed out lenders over the next 8 quarters.

    Are we in for another round of 25 billion here…12 billion there?

    Ken Lewis said that even if the market declined 25% BofA would still make money off the Countrywide deal…yikes.

  11. Mr Mortage: Have you written anything on reverse mortgages? My parents are caught up in the destruction of their retirement investments and are left considering options.

    Thanks in advance.

  12. I told my kid last year (22 yrs. old) that the tract house I grew up in off Los Gatos Almaden Road, which sold for $80k in 1980, would likely come close to, if not return to the value of that selling price. It rose to over (3) fold from new in 1968 (brand new, $25k) to the selling price 11 short years later, followed by inter-dimensional valuations up until last year.

    It’s the pendulum swinging back to the mean, but before it stops, it goes waayyy past the mean.

    Non-inflationary (or at least, near ‘normal’) inflationary increases in value would have likely dictated a 2007 valuation of maybe ~$250k for that home last year, instead of $700k. Perhaps even less…

    This is a reality check of unheralded proportions. And it’s happening so fast, one hardly has a chance to assimilate it. Perhaps that’s not such a bad thing.

    Remember the phrase: ‘Shock & Awe’?

    Peace –


  13. Hi Lulla- no I have not. They are such a small part of the problem I have not fired up the research on that due to time. But I have heard similar things. Would you care to explain.

  14. LUlla is saying I believe that her parents are now considering a reverse mortgage because of the depletion of there retirement accounts.

  15. it still bothers me when anyone talks about one entity doing better loans than other entities,


    underwriting won’t matter a bit in the future, will you keep your job or not……

    5% of people have to sell for medical, divorce or job reasons a month, NO MATTER SUBPRIME OR 800 SCORE, we have a 3 year back-up because NO ONE HAS CASH TO BRING TO THE TABLE.

    Just starting guys and when “A” starts really dumping(remember these are the good loans), ALL BANKS ARE EITHER SUPPORTED BY LIFE SUPPORT TAXPAYERS OR GO BUST……..

  16. the saying goes, the taller they are the harder they fall, i would guess, the same goes, for the more expensive they are, the harder they will fall”….the REAL pain hasnt even begun and when the top of the market finally throws in the towel (and they will, just a matter of when the kicking can down road policies come to the end of the road)

  17. Mr. Mortgage,

    Did you think the new solution thats floating around of refinancing all loans without an appraisal would fix the problem?

  18. C.C. — I love Los Gatos; visited there the other week over the Holiday — had a latte each morning in the Los Gatos Coffee Company — killer European style cafe.

    Regarding these Jumbo Primes imploding, I’ve got a family member who, with her husband, bought at the peak on the peninsula, and bought way too much house with a 10-year Interest Only loan. Of course to make matters more grave, they added a baby, childcare, a new SUV, a new roof, and other expenses to their already worsening situation. She tells me they only managed to save $5,000 last year, and now she wants another baby. When does it end, people? They’ve got their blinders on. They had to stretch to get into this place, and they were betting on 1) appreciation 2) interest rates (read: the cost of a Jumbo Prime) to remain low and 3) increased pay / promotions. It appears they are screwed on all three bets. But they just keep spending, and spending, and spending. I’ve come to believe it is pathological with many Bay Area educated Gen Xers; most have terrible financial savvy, and even worse spending & debt habits.

  19. By the way, regarding my last post, they bought a 53-year old (now 55-year old) POS for $950k. The floors are uneven, and it needed a new roof. All to keep up with the Joneses in a nice Bay Area peninsula zip code? That home would go for half of that in many nice So Cal (read: Orange County) neighborhoods. It’ll likely be worth 50% off the peak when this debacle is through playing out…..

  20. The cover of Time magazine at this time next year,”2009 The Walk-Away Year”. Maybe we could have an Aerosmith revival of “Walk this way”?

  21. Cobalt has got it right. A fund they were invested in dropped 50% this past year, wiping out a good portion of their nest egg. They are past wage earning age. They have funds for a few years, so they’re thinking of doing the reverse mortgage on their home.

    Just wanted to know if you had an opinion on the pros & cons of reverse mortgages. There is stuff out there on the net, but not sure of the quality.

  22. Mr. M.,

    What is your prediction for what will happen to the libor etc in the next 5 years. Just curious for the people who can’t refi out and are not in default. -J

  23. Very interesting description of the Calif coastal RE market. Here in the Wine country Napa/Sonoma homes listed >500K have little sales velocity. What you describe looks very real for this region..
    Thanks for the information.

  24. B Lulla, interesting question about reverse mortgages. Sounds like something an insurance company would do. What though is the health of a company doing an asset based transaction like a reverse mortgage? Consider a company has been doing reverse mortgages for say the last five years. What has happened to their asset base that they have based the math of this transaction on? What happens if the company that does the transaction goes BK? What then? Does a company doing reverse mergers stand to lose big if house prices keep falling? Is the transaction insured? What is the quality of the insurance company? What is the chance of interruption of monthly income?

    Naturally in normal times we would not have to be asking these questions so seriously but times have changed.

    The state of CA is currently hemorrhaging. Most conspicuous is at the state level budgetary level. But we have city and county problems too. Stick them all in the same room and we have quite a mess developing. A significant difference is that CA bonds have a limited market in comparison to Treasuries. It is very conceivable that with the intense pressure on bonds with Obama lining up to spend trillions on economic bailout on top of everything else bailout that bond demand may hit a wall.

    During the last depression, the government revalued gold and made ownership illegal above $100 in coin. The net effect was that the citizens of all the states got robbed for 69% and the wealth was transferred to the Federal government. History will repeat. The robbery this time around will not come as a gold confiscation but likely in a devaluation of the currency. Now here are the lines from the start of the confiscation of that executive order. Pay attention to the claim. The claim was hoarding money (gold) and not circulating it. How safe are our bank accounts today if we are found to be hoarding money and not circulating it?

    I, Franklin D. Roosevelt, President of the United States of America, do declare that said national emergency still continues to exist and pursuant to said section to do hereby prohibit the hoarding gold coin, gold bullion, and gold certificates within the continental United States by individuals, partnerships, associations and corporations and hereby prescribe the following regulations for carrying out the purposes of the order:

    Section 1. For the purpose of this regulation, the term ‘hoarding” means the withdrawal and withholding of gold coin, gold bullion, and gold certificates from the recognized and customary channels of trade. The term “person” means any individual, partnership, association or corporation.

    Section 2. All persons are hereby required to deliver on or before May 1, 1933, to a Federal Reserve bank or a branch or agency thereof or to any member bank of the Federal Reserve System all gold coin, gold bullion, and gold certificates now owned by them or coming into their ownership on or before April 28, 1933, except the following:

    It is very concievable that a national emergency will arise during the term of Obama requiring some like action of desperation. Gold however will likely be your salvation rather than an available target.

    History will repeat, it may not be the exact same but it will rhyme. Something of value will be “confiscated”. Could be just the value of your currency or it could be something more.

  25. Mr. Mortgage,

    There was a little “flipper” in most who bought a house from 1997 to 2008. Very few bought with the expectation of living in the house for 30 years and having a mortgage burning party. However, prime borrowers who put down significant down payments had a higher proportion of non-flippers than the rest of the buyers.

    But a house is not an investment, it is a choice in shelter. Those who treated it as an investment, will walk early or default and wait for the margin call known as foreclosure.

  26. DTHOMAS – Nobody would buy those loans, the US would be saddled with them forever, they would end up defaulting anyway due to negative equity just like the mortgage mods are today etc etc. This is a disaster of an idea.

  27. MRm thanks for the post. I am one of those people that are walking away (if it doesn’t short sell) from a jumbo 5/1 loan and my friend is going to be doing the same next yr. I just recieved the NOD this past week so we will if a short sale will be able to completed before the trustee sale. We found a place to rent for 2600 a month compared to the 5700 total payments we were paying. The rental is also a better house. I have been wondering how many people are in the same boat that I am, 800k interst only loan on a a property w/ negative equity and losing equity everyday. I guess we will find out next yr

  28. you are not alone Nathan – hopefully by then there is a real plan in place so you can stay.

  29. fedwatcher:

    Ding, Ding, Ding!!!


    Full disclosure: I’m not a ‘home-owner’ Do I even qualify to comment on the prevailing subject matter here? From a standpoint of being part of the ranks going through depreciation Hell right now – no. Cash-positive? Definitely. Gloating? Not even.

    I can remember clearly, being chastised by friends & family – right up until 2007 for not buying a house – tossing my money away renting and thus not being able to avail myself of all the ‘tax-advantages’ and other benefits of ‘owning’ a home.

    Now don’t get me wrong: A Home is a wonderful thing. I grew up in one. The kind where Pop could clearly see the light at the end of his mortgage tunnel and the payments were in line with wages & ‘normal’ inflation and the attendant valuations.

    I came that close… But something in the back of my mind said – the prices were not realistic, nor were the risks associated with those prices.

    Keep in mind, for the past 30 years, it would have been extremely difficult to argue the graphs of steadily increasing ‘home’ appreciation. With what could one argue – that ‘one day’ these unrealistic valuations would return to the mean?

    Yeah. And get laughed right out of the room.

    Perhaps in time, the concept of ‘buying a home’ will again come to mean a place to plant roots, not to cultivate and turn profit. A place where Mom & Dad can start a family and rest their heads at night, without the night-mare of an inescapable and insurmountable mortgage debt load.

    Peace –


  30. I discussed reverse mortgages in my client newsletter, pages 5-6, at http://www.dougthorburn.com/newsletters/31-ThorburnWinter07-08.pdf (Winter ’07-’08 issue). I explained they are an expensive last resort.

  31. This will be the second wave of house price declines. Until there is new and agressive liquidity in the Jumbo lending market the more expensive properties will be drawn down toward the current 417k max socialized loan amount. Loan modifications will also be a leading contributor to continuing price declines because 70% or more of the Mods will either never happen or if they do the borrowers will default due to the fact that not paying your mortgage has become tottaly ethical and endorsed by almost every polition across both party lines.In the last debate between Obama and McCain, Obama suggested that there be no more foreclosures until 09′. Eventually the public got the message that the economy is heading straight down–not paying your mortgage was in “Vougue” and was convinced to please cancell all plans of spending any money this holiday season so the political talking heads can be right with their predictions.

  32. Susan,

    Go re-read the article because you apparently did not understand what he indicated. The lack of understanding the garbage being sold to people like you is a pretty key aspect of this whole crash. You would think seeing the houses double in value in 4 years would have been another indicator. But you know us humans seem not to pay attention to history.

    Here is what Mr M wrote:

    $650k Purchase in 2006 – 95% first/second combo

    $2166 per month on a $520k 5/1 interest only Jumbo Prime
    $650 taxes and insurance
    $325 per month on a $112,500 heloc
    $400 other debt
    $3500 per month total payments
    $7000 per month ($84k per year) needed to qualify

    That is 3500 a month payments (Ruff estimate)

    84k a year (With no taxes removed) is 7000 X 12.

    In other words. Use yer head and stop with the knee-jerk reactions.

  33. You mean get laughed at on national TV like Peter Schiff?

  34. […] Full Analysis Here […]

  35. The Walk Away in a non recourse world is essentially the average joe’s bailout. Except Joe’s credit will be munched for a while. But who cares at this point as credit’s pretty much going away anyway. Why cant we all be like the CEO’s that just go from company to company destroying them and no one seems to care??

  36. Back in 2002-3 a friend of mine decided he wanted to be a real estate mogul. He lives outside of Sacramaento. He went out in 2002-3 and bought several duplexes totaling 28 units. At the time he also owned a 12 unit aprtment complex in OH. At the time I told him he was nuts. He worked full time and was buying units like crazy. I haven’t kept in touch with him but can somone tell me what you think happend to this guy?

    Could it be possible he is now reting ALL the units to walk away homeowners? But aren’t the values of ALL the properties worth several hundreds of thousands LESS.

    I don’t live in CA but just wondering? The banks just kept giving out the loans to no avail.

  37. Incredible work as always Mr. M!

  38. Mr. Mortgage – Walk Away would have been the best option for the Debt Slave and the Tax Payer if that asshole Paulson not guarantee all that FNM & FRE Junk

    Walk Away is really the fairest deal = Borrowers can do what every fucking company in America does in bad times stiff their lenders. This would teach the lender / investor and the borrower gets their credit destroyed for awhile = so some pain on their side.

    Home prices collapse quickly as walk ways add supply eventually a bottom would get hit and then NEW LOANS AT THE NEW PRICE would get made by smarter lenders.

    Paulson has so fucked up this market that 1) Shitty Investors / Lenders got rewarded 2) Tax Payers are going to hate Walk Away folk because we now get stuck with the tab 3) New Lenders won’t come in because the PRICES ARE STILL TO HIGH and 4) The Owners are iven false hope of recovery so they dig a bigger hole by trying to hang on when they should walk away.

    It’s Called a FREE MARKET they should try it sometime

  39. A great interview with Elizabeth Warren: http://www.npr.org/templates/player/mediaPlayer.html?action=1&t=1&islist=false&id=98123372&m=98125398

    Nothing we don’t already know here, but it is nice to know that the Chairman of the Congressional Oversight Committee is aware how screwed we are.

  40. Hey the press is finally talking about the Tsunami coming!
    this is a first!


  41. Why didn’t anyone look at replacement value before spending more than a house is worth? They would have known it was a bubble.

    That is why I built my own house. It helped to have an engineering background. I read books on house design, learned AutoCAD and did my own drawings, hired the subcontractors and managed the job full time. I built a house for the future with autoclaved aeraeted concrete that has super low utility bills, low insurnace premiums and practically no maintenance. It’s fire proof, storm and termite pooof and will last centuries. All for less than paying the bubble price.

    Do your homework people. Think for yourself. Do research and get facts.

    Unfortunately this housing bubble collapse destroyed our economy. Our country is bankrupt. We will be years getting over the depression that just started.

  42. In this country we have non-recourse loans, so walking away is often the smartest thing to do. But if you did a refinance, make sure and check the fine print. Some refis are recourse loans and they can come after you for years. Be careful!! Check out gloomboom.com – it will make your day!

  43. od- thanks for that link. its nice to see in the mainstream press what the bloggers have been saying for a couple years.

  44. Doug, thanks for your link.

    And thanks to all.

  45. Heck, prices are even falling here in Palo Alto. We’ve been looking around for a few months, but it is paying to be patient. Some recent homes have been sold at as much as 200k of the initial listed price. Some have been on market without sale for months which is unreal for PA.

  46. I was wondering also if the prices would finally go down in Palo Alto.
    Looking at Zillow, prices seem really flat, maybe the fall is not reflected yet in the stats.


    Do you think that rental prices will also eventually suffer here?
    Would be good to move to a similar house at 20% less next year 😉

  47. This is great stuff. However, it appears. MR. Mortgage does not respond to questions. If he did, I should beg for an explanation as to why the coast has not decreased. You say in your example that the real price for these homes was set by the availability of cheap money, alt-a, interest only, liar and ninja loans. (and they were, I lived there and knew these people) Further, we keep getting told the cheap money is gone, no one qualifies for loans, Jumbo loans are 9%. Then why have these prices not declined the same as with the inland area. They were all funded with liar-loans. The minute that dried up, these homes should have collapsed. Instead, I contine to see prices at or near their peak. specificially Newport, Laguna, ect.

    Any intelligent response would be appreciated.

  48. Guy1 – I have covered this in detail dozens of times over the past year. The Coast is getting it indeed. There are very few sales going off in areas other than subprime epicenters – people want distressed properties.

    90% of all foreclosures that have gone off so far have been of the subprime variety because the foreclosure process is a year or so. Alt-A and Jubo DEFAULTS which began surging early summer have not resulted in actual foreclosures YET to any great degree but they will begin in a month or so and get really heavy right about when the Spring selling seasons comes around.

    Couple surging defaults and foreclosures with no mortgage money over $625k available under 7.5% full doc and no cheap money rom $417,001 to $625k and you are perfectly set-up for a subprime epicenter repeat in the higher priced areas. It has to happen. There is no way around it.

    Also keep in mind that while Subprime 2/28 and 3/27 mostly originated between 2005-2007 caused severe problems upon reset most Alt-A, Jumbo Prime and Pay Options are on 5-year reset schedules – the heaviest origination years were from 2003-2007 so do the math – add 5 years. The Alt-A, Pay Options and Jumbo Prime have had time on their side this entire time paying very low payments, renting their home while their value keeps falling. They are now stuck as well.

    We are on the leading edge of a major wave that will take housing all over the state of CA down to historic levels of 1 o 4 times median household incomes. Most coastal regions still sit at 6 to 12x.

  49. Guy1

    A quick response would be that those in more affluent neighborhoods have more assets to draw on, prolonging time to default. Just a theory, but I am sure there are other items.

    One I spoke to utilized a gain from another house and used the gain as a larger down payment. That said, he has a reset coming that he is not looking forward to. As the resets kick in, we may have a day of reckoning before us. I would reckon that the more affluent areas are all move up buyers and not first timers, unlike inland which would likely have more first timers.

    On many occasions Mr. M has stated also that the Jumbo is the third wave, perhaps he could expound on that.

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