The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is building with alarming speed.
After two years of upward spiraling defaults, the problems with mortgages made to people with weak, or subprime, credit are showing the first, tentative signs of leveling off.
But with the U.S. economy struggling, homeowners with better credit are now falling behind on their payments in growing numbers. The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A, or alt-A, mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.
While it is difficult to draw precise parallels among various segments of the mortgage market, the arc of the crisis in subprime loans suggests that the problems in the broader market may not peak for another year or two, analysts said.
Defaults are likely to accelerate because many homeowners' monthly payments are rising rapidly. The higher bills come as home prices continue to decline and banks are tightening their lending standards, making it harder for people to refinance loans or sell their homes. Of particular concern are alt-A loans, many of which were made to people with good credit scores without proof of their income or assets. ...
Delinquencies on mortgages tend to peak three to five years after loans are made, said Mark Fleming, the chief economist at First American CoreLogic, a research firm. Not surprisingly, subprime loans from 2005 appear closer to the end than those made in 2007, for which default rates continue to rise steeply. ...
The resetting of rates on adjustable mortgages, which was a big fear of many analysts in 2006 and 2007, has become less problematic because the short-term interest rates that many of those loans are tied to have fallen significantly as the Federal Reserve has lowered U.S. rates.
Wednesday, August 06, 2008
Bigger Wave of Mortgage Defaults Coming
The International Herald Tribune reports that "a second, far larger wave of U.S. mortgage defaults is building."
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Do we have any idea how many of these Alt-A loans might have been refinanced? The borrowers supposedly have better credit, and lending didn't really tighten up until last Oct or so.
ReplyDeleteIf you think the lenders and the borrowers aren't going to cooperate to refinance as many of these loans as possible, you're delusional.
ReplyDelete"If you think the lenders and the borrowers aren't going to cooperate to refinance as many of these loans as possible, you're delusional."
ReplyDeleteAgreed - the foreclosure process is absurdly expensive. Between the trustees fees, attorneys fees, brokerage fees (if they use a broker to resell it) the banks get absolutely hammered. In probably 90% of cases, the bank is far better off modifying the loan, and eating the shortage than going thru foreclosure. My brother is a lawyer in San Jose - he was pulled off of technology projects to work exclusively on loan modifications - thousands of them.
At the same time, there are so many thousands of others out there that they cant help (dont have the time to get to them). This whole "wave" thing wont be as big as all the bears hope, but it also wont be as small as the bulls think either.
Yes, we have clients who have renegotiated their loans with their lenders. The lender ignored that their home value dropped and they should be upsidedown on their mortgage. Either they didn't want a foreclosure on their hands, the lender figured out a sly way to resell the loan to Fannie Mae or Freddie Mac on the secondary market, or (most probably) both. I write about this and more on my blog at http://web.mac.com/audrab/iWeb/savvyseller/Blog/Blog.html
ReplyDeleteThis article was actually published in the NY Times last week. See the post in Calculated Risk on Friday, 8/1. Many Alt-A were high LTV such that the ones issued in 2005 and later may be underwater and non-refinancable.
ReplyDeleteIn terms of the comments regarding a renegotiation of loans, that would make sense in some instances. The problem may be that the loans of been securitized and re-securitized through CDOs, which would make the process difficult.
Terminator X said...
ReplyDelete"Many Alt-A were high LTV such that the ones issued in 2005 and later may be underwater and non-refinancable."
I asked my bro about that - he says its a non issue. Right now their guidelines is anything in the Alt A universe that is "only" 30% underwater is salvageable (i.e. still cheaper than foreclosure). Apparently they take alot of the principal and piggyback it on the end (i.e. a due on sale sort of thing).
So the original loan is 500K, gets renegotiated to 350K with a 150K second (or third if there is a second). If (years from now) the seller sells for 350K, bank takes the full 350K and the 150K is forgiven. If he sells for 400K, bank takes it all, 100K is forgiven. If he sells for 501K bank takes 500K seller keeps 1K. Either way, problem solved.
"The problem may be that the loans of been securitized and re-securitized through CDOs, which would make the process difficult."
Agreed - he said a few months ago, it was impossible to do this. Now with the CDO's practically worthless, he says they are lining up to get these deals done (the issue again is how many get done before they are too far gone).
"Right now their guidelines is anything in the Alt A universe that is "only" 30% underwater is salvageable (i.e. still cheaper than foreclosure)."
ReplyDeleteGiven that the median decline in CA housing values is 38% June 2007 to June 2008 seems to imply that the majority of these won't be salvageable. True?
"Given that the median decline in CA housing values is 38% June 2007 to June 2008 seems to imply that the majority of these won't be salvageable. True?"
ReplyDeleteDepends on the vintage and the area - so for example, some of the tony areas of LA & particularly the Bay Area are getting worked out... but yes there are huge swaths of CA that are beyond help... The IE is doomed.
I should have said, these tony areas are getting worked out because they arent as bad as much of the rest of the state. Its amazing that once again, the wealthy area are getting a good share of the help while the poorer areas are screwed.
ReplyDeleteThis news doesn't surprise me whatsoever. The housing markets in both the UK and the USA are struggling and showing no sign of "letting up". News from the BBC today reported that house prices are at a level that is 10.5% lower than last year. If you've suffered because of the housing crisis, why not sell and rent back your home and improve your position?
ReplyDelete