by Calculated Risk on 12/15/2005 11:07:00 AM

The Orange Country Register sponsored a roundtable on real estate this week. The participants included "economists, real estate executives, consultants, a researcher and a broker" and the comments were unsurprisingly mostly positive.

This discussion of exotic loans was interesting:

... the panelists weighed in on risks and benefits of creative financing, prospects of widespread foreclosures, and solutions to the housing crunch.

The prevalence of easy money is a concern, and much of it originates in Orange County, according to Scott Simon, who heads the mortgage investment team at the Pimcobond firm in Newport Beach.

"This is the hub of creative credit in the world," Simon said.

Simon said some lenders have dramatically increased the amount of interest-only loans they make in recent years. The trend has helped increase the percentage of Americans who own homes, but has led to a number of buyers borrowing too much, he said.

A day of reckoning for some buyers could be in the offing, according to Simon and some other panelists.

Several panelists said homeowners most at risk of foreclosure are those who bought homes since 2003, have no equity, and have adjustable mortgages with very low rates. Most buyers before 2003 have built up a fat cushion of home equity to fall back on if mortgage rates rise, they said.

The number of homeowners at risk of foreclosure probably is in the range of 7,000 to 8,000, said Chris Cagan, director of research and analytics with First American Real Estate Solutions in Santa Ana. That total would represent 7 percent to 8 percent of local buyers over the past two years, he said.

Cagan said that if all of those at risk defaulted, it would add about two months' supply of homes for sale to the market, not enough to sink it.

I think there will be additional factors impacting the economy if housing prices flatten. Not only will some recent buyers be at risk of foreclosure, but there will be less employment in RE related industries and less equity extraction to fund consumer spending and home improvement projects.