CHESSNOID

I live in a hard hit state when it comes to foreclosures. We are up there with Florida, Nevada, and Arizona if we aren’t in the lead. According to Bloomberg, just our Los Angeles area has foreclosures has jumped up 4X:

New foreclosures almost quadrupled in Los Angeles and doubled in Miami in the second quarter, with as much as $5 billion worth of loans going bad in L.A. alone, the online real estate data company PropertyShark.com reported.

The number of homes scheduled for auction in Los Angeles rose 14,505 compared with 3,797 in the same period a year earlier, PropertyShark said in a report distributed by e-mail. In Miami-Dade County, the number climbed to 2,677 from 1,282.

In an area less than an hour away from L.A. called the inland empire, there are brand new housing developments that are sitting empty.

“At several properties, there were a significant number of fully built homes sitting vacant along with a large number of additional homes still under construction,” Sandler O’Neill & Partners analyst Aaron Deer wrote today after touring developments in Corona and Ontario. “At one master plan community, the entire development appeared to be vacant — with the exception of crews working on new construction, it was a ghost town.”

Median home prices in both communities have dropped sharply over the last year, declining 33.6% in Corona and 30.3% in Ontario, according to DataQuick Information Systems. In Corona, the median sales price fell nearly $200,000 from May 2007 to May 2008, dropping from $565,000 to $375,000.

I was actually out in Corona last week looking for rental properties to buy with a business partner. We found an area where condos are in the perfect price range meaning rents would actually cover the mortgage payments and the association fees and we would be able to get a positive cash flow. The only issue would be getting loans on rental properties and that there seemed to be over 10% of the units that were bank owned foreclosures or preforeclsoures listed as short sales. In this case about 30-40 units in a 300+ unit complex. On top of that we saw at least 5 for rent signs in this community. Too much competition to rent the units all in the same complex located out in a declining market. I liked the positive cash flow but that does not take into account the months we would not be able to rent it for whatever reason.

Right now another wave of foreclosure will spike up soon since Congress and the President have no idea of what to do to stop the housing crises. These are not the subprimes which have been on the news lately but Alt-A loans or pick a payment option loans. According to Businessweek:

The next wave of foreclosures is expected to gather strength when the million or so option ARMs start resetting in large numbers next spring. But it seems that many of these loans, which allow borrowers to make minimum payments that don’t even cover the accrued interest, are already going delinquent.

According to a recent analysis by Lehman Brothers, option ARMs that originated in 2006 performed about as well as fixed-rate Alt-A debt for the first 12 months. But by the time they were 2 years old, about 2.1% of performing loans were going 60-days delinquent each month. Compare that to a 1.2% of current loans going delinquent with other Alt-A loans. The rate of increase in delinquencies is even beginning to approach that of subprime, which is about 2.5%.

“It’s a better quality borrower but the rate of increase in delinquency is looking closer to subprime than Alt-A,” said Akhil Mago, the head mortgage credit strategist for Lehman Brothers, said.

Strange, right? The loans were generally given to folks with good credit, most of whom are still only making minimum payments.

Looks like these borrowers might simply be giving up on the mortgages because they have less and less of an incentive to keep paying. Option ARMs give borrowers a choice of making a minimum payment that only covers a small portion of the interest, the rest of which is added to the loan balance. With years of unpaid interest accumulating and house prices falling, some homeowners have seen their equity disappear and now owe more than their initial loan balance. The gap between the original loan balance and the value of their home is only widening as home prices fall. Many of these borrowers were given the loans with only a requirement that they “state” their income rather than verify it (The result: Lots of folks exaggerated their salaries). So, these borrowers might only be able to afford the minimum payment, which can increase by 7.5% a year and then more than double when the loan recasts.

These skyrocketing inventory of foreclosures have made it tougher to get financing for homes now. Banks are scrambling to minimize losses such as cutting credit lines. I personally experienced it with all my American Express Cards. You can read all my experiences in my blog. Now banks are trying to draw in all other types of credits especially those tied into real estate. I remember reading about a couple who had their HELOC cut back but now it looks like it is becoming an industry standard. In the Wall Street Journal:

Lenders say they are reducing existing home-equity lines of credit in markets that have been experiencing significant declines in property values.

Banks including Bank of America Corp. and Washington Mutual Inc. say there is a process in place for customers to appeal these decisions. Washington Mutual spokeswoman Sara Gaugl said clients who have had lines decreased often still have access to available credit.

“If the homeowner feels their situation is different, we will listen to them, particularly if they have an independent appraisal that shows their home has been spared from neighboring drops in home value,” Bank of America spokesman David Bradley said.

But, as Ms. Lopez can attest, an appeal doesn’t always bear fruit. Her lender refused to budge, she said.

It is easy to see how this scaling back can make a homeowner — especially one with her debt under control — feel blindsided when the available credit comes up nil, said Greg McBride, senior financial analyst for Bankrate.com.

In fact, at times it seems that “the banks are freezing the HELOCs first, and evaluating case-by-case later,” said Julian D. Hebron, loan consultant and vice president of RPM Mortgage in San Francisco.

One client of his recently had a line frozen, even though he earns a hefty paycheck, has substantial equity in his home and has “perfect” credit.

A reduced credit line can be a challenging situation for those in the middle of a home-improvement project or those who counted on the funds for college tuition.

I really doubt banks are reviewing each loan on a case by case basis. It is probably executed on a policy based more on a zip code by zip code basis. They want to minimize losses and to do that they need to cut credit lines yesterday and in basically all the crazy states with the super housing boom prices. Easy to do if you just do it across the states of California, Florida, Nevada, and wherever else has the most foreclosures.

At this point, the best thing to do is hold on to your cash and stock up on everything that you will need. Definitely become more frugal and live beneath your means. $5 gallon gas may look cheap by the end of the year. Ouch!