patron,
I think you should change the title of this thread to something like - "hey, I got a real estate story" or "I bought a house and made $10, so it should apply to everyone in the world." Of course, no one bothered to read your original post and the effort you put forth in starting a model.
This is my attempt to help you with a little on topic discussion.
Let us use this example: John and Jane Smith purchased or refinanced their dream home within the last twelve months. They now have a 90% loan. For simplicity sake, let us just say this dream home is $100,000.
John works for HWP and Jane works for LU. Combined, they have one car loan, a little savings and a few miscellaneous small credit card debts. With two kids, John and Jane are comfortable but like most, cannot save much money after paying all expenses.
Jane just received pink slip from LU. Let us see how this plays out and who is affected:
Savings is exhausted. Consuming spending down.
card debts start to build up. The credit card companies start being at risk.
Default on mortgage. If mortgage is sold in pool, then yield of pool goes down. If mortgage is held in a lender's portfolio, then not only the portfolio yield goes down, the lender would also have to set aside a larger reserve for the deliquent loan, reducing their ability to loan more to new borrowers.
Property is finally foreclosed upon. Depending on the state, this could be one year or more, assuming John and Jane did not file bankruptcy.
Now let us take a look at the numbers:
$100,000 = gross asset value.
($7,000) = sales comm and closing cost to the lender.
($12,000) = 12 months lost interest, insurance, property tax.
($2,000) = 2 months holding cost evicting John and Jane from property, who have no incentive to move.
($3,000) = repair and cleaning since John and Jane did not exactly left house in perfect marketable condition.
($4,000) = 4 months holding cost (cost of funds, taxes, insurance, utilities,etc) in reselling property.
($1,000) = overhead for REO department.
The lender is going to end up with $71,000 recovery. (this is very very generous, most lenders cannot come close to this recovery rate)
With a 90% loan, there was mortgage insurance. So someone like MTG paid a claim of $10,000.
In the mean time, the car is probably repossessed. The credit cards and other unsecured lenders probably wiped out.
By now, I am sure you have figured out how important employment is in this scenario. If unemployment rate is low, Jane finds another job and nothing happens. If unemployment rate is low, John and Jane are isolated cases and the lender, the mortgage insurance company, the unsecured lenders just write if off as part of cost of doing business. However, if unemployment is high, John and Jane now represent 5% of all borrowers, we have a serious problem.
By the way, for those who still believe in that location location location BS and not timing timing timing, this is a perfect example. If John and Jane had purchased or refinanced this house in 1989, one of the worst years to buy, they would be hopelessly under water regardless of how well located this property is located. On the other hand, if John and Jane had purchased around 1997 or 1998, the market may just bail them out with a couple of great appreciating year. Even a 10-15% appreciation would have been enough, regardless of how poorly located their property may be.
Now we can focus on what that can make us some money in the STOCK market, in real estate related issues. Do we have a recession coming or are we already on our way to recovery? Is unemployment still going up or stabilized? Are lenders going to be hit hard or the worst over? Are mortgage insurance companies going to be facing record claims? Are new home builders going to sit on costly unsold inventory while paying outstanding construction loans and land draws?
Who are most at risk?
Ramsey |
