Foreclosures Creeping Up the Economic Ladder

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I recently wrote that San Diego's more upscale housing sub-markets aren't out of the woods just yet. One of my arguments concerned the behavior of the region's more creditworthy borrowers: it's not that they stayed away from risky loans during the boom, just that the types of loans they tended to get took longer to reset than the subprime loans that are currently blowing up all over the county's less expensive neighborhoods.

For a visual I point you to the mortgage reset chart hosted on the always-informative Calculated Risk economics blog. While I suspect that San Diego was a little ahead of the nationwide figures represented on the chart, the fact remains that the types of risky loans often taken out by the well-heeled have barely begun to reset. (This March article offers a more in-depth treatment of the afore-linked chart and the topic of Option ARMs, mortgages that can cause particular trouble upon recast given their negative-amortization payment schemes).

Now a bit of evidence for higher-end mortgage distress is starting to trickle in. The blog Housing Wire features two recent examples. One involves a study performed by an asset disposition company showing that its California foreclosure sale rate for properties over $417,000 has increased almost eight-fold from a year ago. (No San Diego-specific info, unfortunately). The article suggests that non-subprime foreclosures are just beginning their climb at this point.

Another Housing Wire report from back in March shows that even by then, delinquency rates on Alt-A mortgages (riskier loans made to borrowers with good credit) had risen to a hefty 17.4 percent.

Interestingly, the March report contends that for Alt-A loans -- most of which took the form of stated income mortgages, aka "liar loans" -- resets aren't the problem at all:

...[N]ote that very few Alt-A borrowers are staring down a pending reset throughout 2008. Yet they are defaulting in droves anyway.

While non-industry media are incorrectly and inexplicably zeroing in on rate resets as the driver behind the recent spike of Alt-A borrower defaults, most industry experts that have spoken with Housing Wire have suggested that as many as 70 percent of Alt-A loans originated in recent years have been fraudulent.