As the article notes, about 8.5 percent of subprime loans are delinquent 90 days or more, and about 15 percent were "troubled." For all the hissy fits about "predatory lending" and "fraud" and all the rest of it, there are two problems with having said hissy fit.

One, these are private lenders making private loans, who then repackage those loans to private investors. If they go south, the lenders and investors SHOULD take it on the chin. They make the money, they take the risk.

Two, say you beg the gov't to get involved and regulate those loans out of existence. You know, to save the fools who signed a contract they didn't understand, or who thought they could afford much more of a house than they could. Look at those numbers. Let's go crazy and say a full 20% of those loans fail. If you regulate those loans out of existence, all you've done is skrew 80% of the borrowers who have no other choice but to use subprime loans--no one else will loan them money to buy a home. Certainly not the hand-wringers that whine that it's so wrong that people lose their homes. It isn't wrong, it just is. What is wrong is taking available mortgages away from 80% of a given group, in order to prevent 20% of that group from making poor decisions. That is a net loss, makes home-ownership harder for those who can afford it the least, and drives costs for those people up.

You see, you don't help the poor by looking at the limited choices that they have, and then taking the one they actually chose the hell away from them.


From the NYT:

August 4, 2008
Housing Lenders Fear Bigger Wave of Loan Defaults
By VIKAS BAJAJ

The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building.

Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults.

The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-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.

The mortgage troubles have been exacerbated by an economy that is still struggling. Reports last week showed another drop in home prices, slower-than-expected economic growth and a huge loss at General Motors. On Friday, the Labor Department reported that the unemployment rate in July climbed to a four-year high.

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 tighten 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.

“Subprime was the tip of the iceberg,” said Thomas H. Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. “Prime will be far bigger in its impact.”

In a conference call with analysts last month, James Dimon, the chairman and chief executive of JPMorgan Chase, said he expected losses on prime loans at his bank to triple in the coming months and described the outlook for them as “terrible.”

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 of defaults than those made in 2007, for which default rates continue to rise steeply.

“We will hit those points in a few years, and that will help in many ways,” Mr. Fleming said, referring to the loans made later in the housing boom. “We just have to survive through this part of the cycle.”

Data on securities backed by subprime mortgages show that 8.41 percent of loans from 2005 were delinquent by 90 days or more or in foreclosure in June, up from 8.35 percent in May, according to CreditSights, a research firm with offices in New York and London. By contrast, 16.6 percent of 2007 loans were troubled in June, up from 15.8 percent.

Some of that reflects basic math. Over the years, some loans will be paid off as homeowners sell or refinance, and some homes will be foreclosed upon and sold. That reduces the number of loans from those earlier years that could default. Also, since the credit market seized up last year, lenders have become much more conservative and have stopped making most subprime loans and cut back on many other popular mortgages.

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 to which many of those loans are tied have fallen significantly as the Federal Reserve has lowered rates. The recent federal tax rebates and efforts to modify more loans have also helped somewhat, analysts say.

What will sting borrowers more than rising interest rates, analysts say, is having to pay interest and principal every month after spending several years paying only interest or sometimes even less than that. Such loan terms were popular during the boom with alt-A and prime borrowers and appeared appealing while home prices were rising and interest rates were low.

But now, some borrowers could see their payments jump 50 percent or more, and they may not be able to sell their properties for as much as they owe.

Prime and alt-A borrowers typically had a five- or seven-year grace period before payments toward principal were required. By contrast, subprime loans had a two-to-three-year introductory period. That difference partly explains the lag in delinquencies between the two types of loans, said David Watts, an analyst with CreditSights.

“More delinquencies look like they are on the horizon because so few of them have reset,” Mr. Watts said about alt-A mortgages.

The wave of foreclosures is still rising in states like California, where many homeowners turned to creative mortgages during the boom. From April to June, mortgage companies filed 121,000 notices of default in California, up nearly 7 percent from the first quarter and more than twice as many as in the second quarter of 2007, according to DataQuick, a real estate data firm based in La Jolla, Calif. The firm said the median age of the loans increased to 26 months from 16 months a year earlier.

The mortgage giants Freddie Mac and Fannie Mae, which own or guarantee nearly half of all mortgages, are trying to stem that tide. Last week, they said they would pay more to the mortgage servicing companies that they hire to modify delinquent loans and avoid foreclosures.

Delinquencies in prime and alt-A loans are particularly challenging for banks because they hold more such loans on their books than they do subprime mortgages. Downey Financial, which owns a savings bank that operates in California and Arizona, recently reported that 11.2 percent of its loans were delinquent at the end of June, a big increase from the 6.1 percent that were past due at the end of last year.

The bank’s troubles stem from its $6.2 billion portfolio of so-called option adjustable-rate mortgages, which allow borrowers to pay less than the interest owed on their mortgage in the early years. The unpaid interest is added to the principal due on the loan, so over time borrowers can owe more than the initial loan amount. Eventually, when loans grow by 10 percent or 15 percent, the borrowers are required to start paying both the interest and principal due.

Many borrowers who got these loans during the boom had good credit scores, but many of them owe more than their homes are worth. Analysts believe that many will not be able to or want to make higher payments.

“The wave on the prime side has lagged the wave on the subprime side,” said Rod Dubitsky, head of asset-backed research at Credit Suisse. “The reset of option ARM loans is a big event that will drive the timing of delinquencies.”

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Cordially,
Rush

elrushbo2@theobviousgmail.com
Remove the obvious...

I have no problem with that. The problem occurs when FNMA/FHLMC guarantee these mortgages and imperil their solvency due to underwriting high risk mortgages. Such an event would almost certainly require a taxpayer funded bailout. Let's hope it's not necessary.

As the article notes, about 8.5 percent of subprime loans are delinquent 90 days or more, and about 15 percent were "troubled." For all the hissy fits about "predatory lending" and "fraud" and all the rest of it, there are two problems with having said hissy fit.

One, these are private lenders making private loans, who then repackage those loans to private investors. If they go south, the lenders and investors SHOULD take it on the chin. They make the money, they take the risk.

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I have no problem with that. The problem occurs when FNMA/FHLMC guarantee these mortgages and imperil their solvency due to underwriting high risk mortgages. Such an event would almost certainly require a taxpayer funded bailout. Let's hope it's not necessary.

I would say don't bail them out regardless. That just allows sophisticated investors (banks, institutional investors, et cetera) who know better, off the hook at the expense of those who did not get involved in risky package deals.

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Cordially,
Rush

elrushbo2@theobviousgmail.com
Remove the obvious...

When I was shopping for my current house, the Mortgage companies were talking about numbers for the loan value that I thought were stupidly high. It turns out that I was right. I am not in trouble, but I can see how the lack of guidance would suck some people into unaffordable loans.

The problem is that if the two loan guarantee corporations go broke, loans will probably be more difficult to get than any time since the first was started. I believe the FNMHA was started in the 1930's.

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BOINC WIKI