March 30, 2007

Mapping the Problems in Subprime

Let's see. Fed Chairman Ben Bernanke used the word subprime seven times in yesterday's prepared remarks before the Joint Economic Committee of Congress.

Recent hearings in the United States Senate have led to talk of bailouts for subprime borrowers spurring a "Stop the Subprime Bailout" letter writing campaign from long-time Bay Area housing bubble watcher Patrick Killelea at Patrick.net.

[Recall that parts of Northern California had a housing bubble back during the tech boom almost a decade ago - typical home prices had already run up to near a half million dollars in Silicon Valley long before the word subprime entered America's vocabulary.]

In parts of California, the rate of increase in default activity is now growing rapidly, appearing ready to eclipse the 1996 highs that preceded the technology boom. According to this report in the San Diego Union Tribune, last month default notices were up four times from year ago levels and foreclosures tripled.

It appears that higher home prices and larger "equity cushions" are not going to save many California homeowners - it all makes sense when you look at a few maps.

From the online version of Where Subprime Delinquencies are Getting Worse($) in today's Wall Street Journal come the following graphics to help better understand the trend that is now moving west to the Golden State.

The first graphic shows subprime originations as a percent of total loan originations last year - fairly well distributed data with the top ten cities appearing in the table below the map.

The next map shows where the highest percentage of subprime delinquencies occurred during 2006. Again, there is a fairly even distribution across the country with not a single California city showing up in the top ten.

The worst of the subprime problems so far have been in areas where there were lots of subprime loans made, but little appreciation in home prices.

The color red was appropriately saved for the "rate-of-change" map where California takes four of the top five spots and, along with Massachusetts, dominates the top ten - surely a preview of what is to come for these original housing bubble areas where prices had risen to great heights up until last year.

The often heard "they were able to refinance or sell when they got into trouble" seems to no longer be an option for a rapidly increasing number of struggling subprime borrowers in many parts of the California and Massachusetts.