Neg-ams in San Diego

Downward pressure on house prices in San Diego has been in part caused by foreclosures. In the last few months, the supply of new foreclosures on the market has been reduced to a trickle. Mortgage modifications are getting increasingly popular. In a mortgage modification, lender agrees to lower the principal or the interest rate for a delinquent borrower and/or to transfer the modified loan to FHA. Jim the Realtor has a number of comments on this subject.

There's a catch. The lender will not reduce the principal much lower than the market value, and the borrower must qualify for a modified mortgage, fully documenting his income, with strict income limits.

And that's what brings us to neg-ams. A negative amortization loan is the one where monthly payment is insufficient to cover all interest accrued, making the principal grow rather than shrink over time. Neg-am borrowers' houses are way bigger and more expensive than they can realistically afford. Even after 30+% principal reductions, they are very unlikely to be able to pay modified mortgages. In addition, many neg-am borrowers were "investors" (owners of multiple non-owner-occupied properties), these obviously aren't getting any modifications. Areas with high densities of neg-ams will continue to produce foreclosures well into 2009 and possibly 2010. So, it's good to know where they are. Unfortunately, this kind of information is not readily available. We have to improvise.

I went through a database of all foreclosures that took place in San Diego County between July and November. There were approximately 10,000 of them. For every foreclosure, public sources give us 1) the initial loan amount, 2) the delinquency amount ( sum of all missed payments when the loan was declared in default ), 3) "sale amount" - the amount which the bank hopes to recover through foreclosure. #3 includes the balance on the loan on the day the borrower stopped paying, missed payments, late fees, and legal fees incurred by the bank. By subtracting #2 from #3, we can estimate the balance.

Inspection of the data quickly reveals a pattern. Half of all foreclosures have #3-#2 in the range between 101% and 104% of the initial balance. These are well known subprime interest-only loans. The bank needs to get back full amount loaned, and probably 1-4% of loan balance in legal fees.

Another big group of foreclosures has #3-#2 between 107% and 115% of the initial balance. These loans have lower interest rates. In this group, there's a noticeable correlation between the "sale amount" and the age of the loan. Loans in this category tend to grow 4-5% a year - the characteristic feature of a neg-am.

Overall, approximately a quarter of all foreclosures since July appear to have been caused by a neg-am. Neg-ams are everywhere. They are somewhat overrepresented in South Bay (44% of foreclosures in 91914, 37% in 91913, 32% in 92154). 92154 (San Ysidro) had the largest absolute number of suspected neg-ams in the dataset. 92037 (La Jolla) and 92109 (Pacific Beach) had relatively few foreclosures, but many of these were neg-ams. Weak prices in these areas should be expected to continue for some time, despite modification efforts.

Here's a random example of negative amortization. On 5/17/2006, Michael Ghanayem bought a 1,827 sf unit D102 in Seahaus condo complex in La Jolla, two blocks from the beach, for $1,090,000 with 10% down. Two months later, he refinanced into a $990,000 loan from "No Red Tape Mortgage" (later adding a $250k second from WaMu). On 11/17/2008, the condo was repossessed by the bank. Sale amount was $1,143,400. In two years, loan balance has grown at least 10%.

Here's another one. On 12/10/2003, Therese Ghanayem bought a house in a gated community in Santaluz (7378 Los Brazos) for $823,500. On 7/12/2005, the house was refinanced into two loans with Countrywide, $995k and $350k. First loan ended up in foreclosure on 8/15/2008. Sale amount was $1,133,294.

Both Seahaus D102 and 7378 Los Brazos are currently bank-owned and off the market. It's not clear what happened to Michael & Therese Ghanayem. With more than half a million tax-free dollars pulled out just from these two properties using cash-out refis, they can probably afford to retire in the Caribbean. (Incidentally, Michael is a 1998 Mt. Carmel High alumnus. That makes him 28 or so today.) But I digress.

Rural areas appear to have escaped this problem to some degree. Ramona (92065), north Escondido (92026), El Cajon (92020, 92021) have considerable numbers of foreclosures caused by "old-fashioned" subprime loans, but neg-am percentages in all these are below 20%.