Hardly anyone owns their home in California

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A recent post at California Housing Forecast highlights another insightful report by Credit Suisse analyst Ivy Zelman. Ms. Zelman estimates that 40% of all loans made in 2006 in San Francisco are Interest Only loans. San Diego is tops at 42% and LA is right behind at 39%. This is compared to 23% on average across the country.

In 2006 71% of all mortgages had piggyback seconds on their homes in Los Angeles. Is anyone else freaked out about this? The scary thing about these reports is that interest only loans are only available to people with credit scores in the low Alt-A and up credit buckets. Many of the hard subprime borrowers could not have qualified for interest only loans. This would point to a future deterioration in loan performance in higher credit buckets as equity dwindles and people are upside down in their homes.

Same goes to a lesser extent for the piggy back seconds. While these were available to subprime borrowers many prime borrowers leveraged their good credit history to maximize financing on their homes. In an analysis of my company’s loans originated in 2006 more than 40% of our prime loans (credit ranges 680 – 850) were exotic mortgages (IO, pay option or 2nds). This seems to corroborate Ms. Zelman’s overall numbers (albeit from a much smaller sample size).

What does this portend? I believe it points to a spread of the contagion of delinquencies and foreclosures as seen in subprime and Alt-A buckets. When there is no equity, or negative equity the only reason to keep paying your mortgage is to protect your credit. When there is no investment to be saved, selling or walking away look mighty attractive.