This bubble-era mortgage trick could smash major U.S. housing markets, says kjurow
The 2004-07 bubble era in U.S. housing markets was a time of utter madness. Much has been written about it, but almost nothing has been said about the craziest aspect of it — the cash-out re-financing lunacy.
How much extra cash are we talking about? Freddie Mac publishes a quarterly cash-out refinance report. Between 2004 and 2007, homeowners were able to cash-out a total of $964 billion. They were free to spend it on anything, and they did. Freddie Mac's figures include only refinancing of prime first-lien conventional mortgages. They do not include refinancing of second liens nor refinancing of subprime loans.
Los Angeles: the epicenter of the madness Since California was the center of the housing bubble in the U.S., it also became the epicenter for the cash-out refinancing lunacy. Between 2000 and 2007, home prices across California almost tripled. Homeowners used this to turn their rising home value into real spending money.
According to Mortgagedataweb.com, 2.72 million conventional mortgages were refinanced between 2004 and 2007 in the Los Angeles metro alone. How much money was involved? A total of $627 billion in refinanced mortgages was originated. That's right – $627 billion for one metro. Prices were cratering throughout California in 2009. More than 500,000 delinquent homeowners received a default notice that year. According to the California Association of Realtors, nearly half of all sales were either repossessed properties or short sales. DataQuick reported that in February 2009, 58% of all home sales in California were repossessed properties.
Did this desperate strategy prevent home prices from falling further? Not at first. There were simply too many delinquent properties that had not yet been foreclosed. As late as December 2010, 34% of all homes sold in Los Angeles metro and the other four surrounding counties were repossessions. Two months later, 40% of all sales in the state were foreclosed properties. More drastic action was clearly necessary.
Using CoreLogic's search tools and database, Lauffer was able to search more than 1.2 million homes between 2000 and 2009 in Los Angeles County. Through this, he could identify every open mortgage against all these properties during the study period. He selected 100,000 homes purchased between 2002 and 2004 before the bubble reached its peak. From this, he randomly chose 20,000 properties to make his study more manageable.
Why difficult times are still ahead of us In a recent column, I discussed why the massive delinquency of bubble-era non-agency mortgages is a disaster waiting to happen. Comments by quite a few readers showed me they had a hard time understanding how fewer than 4 million mortgages could take down major housing markets.
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