Orange County is just like everywhere else

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In a previous post (LA & OC, We’re Not Special) I highlighted some of the numbers associated with home prices in LA and OC and their declines over the last couple of months:

Local prices fell 0.5 percent between January and December. It’s the fourth straight monthly drop, the longest losing streak since 1997. By S&P’s count, regional prices are 1.9 percent below September’s peak.

This downward price pressure has caused many lenders (including Countrywide and more) to stop offering 100% financing to all but those people with the highest credit scores (which I think is still a huge mistake.) There are some that think these lenders are making a mistake cutting out programs in counties like the OC.

In a recent interview with the OC Register, Laura Pephens, who owns a mortgage banking consulting firm, was asked about the prospect of increased negative-equity foreclosures. Negative equity occurs when homeowners take out a loan for 100% of the property value, then the property depreciates and now the loan is for a greater amount than the home itself. Her comments were:

"What’s going to hurt Orange County is Wall Street’s inability to recognize that Orange County real estate never depreciates on a long-term basis," she said.

While this may be factually true it is almost laughable to suggest that this long-term trend is going to (a) hurt wall street or (b) have any real impact on current homeowners. First for the home owners; only if homeowners choose to ride out a 100% mortgage (usually a combination of a first and a high-rate second mortgage) for the foreseeable future (5, 10, more years?) will they see the home appreciate to a point where making all of those high payments made sense.

Second, Wall Street will not be hurt by cutting off 100% loans to people. They will protect their risk of default which will increase the quality of their loan pools, which will improve the quality of their mortgage backed securities (MBS), which will get them a BETTER price on their offering to investors. They may temporarily see a drop in their ability to develop these pools, but housing debt will be replaced by other debt and will be repackaged and sold. And, when the time is right, when the next housing booms starts they will again offer 100% financing and again people will come flocking to get in on a home with no money down. Wall Street will not lose much over the elimination of 100% loans.