Posted on 02/24/2007 5:42:05 AM PST by shrinkermd
Panic has begun to sweep the sub-prime mortgage sector in the United States after the bankruptcy of 22 lenders over the past two months, setting off mass liquidation of housing loans packaged as securities...
...The rapid deterioration could not come at a worse time for British bank HSBC, which has set aside $10.5bn (£5.4bn) to cover bad loans in the US...
...The cost of insuring against default on these loans has rocketed in recent weeks, from 50 basis points over Libor to 1,200, raising fears that a credit crunch could spread to the rest of the property market.
Low-grade BBB-rated securities - measured by the ABX index - have crashed from near par of 100 in early November to 72.5 this week.
Peter Schiff, head of Euro Pacific Capital, said the sector was in an unstoppable meltdown. "It's a self-perpetuating spiral: as sub-prime companies tighten lending they create even more defaults," he said...
...California's ResMae Mortgage filed for bankruptcy last week as it struggled to cope with defaults on a $7.7bn book of sub-prime loans issued last year, while Accredited Home Lenders in San Diego warned that bad debts had reached 7.18pc of its portfolio.
(Excerpt) Read more at telegraph.co.uk ...
The FOMC should lower interest rates based on market indicators like the yield curve.
Excellent advice.
May I add...
Study long and hard the difference between want and need.
excellent insight
thanks for the post
At my age I'm from an era when getting a mortage was quite a rigorous process. Now it appears to be about as difficult as purchasing a lottery ticket.
http://www.voiceofsandiego.org/articles/2007/02/22/housing/938loans022107.txt
"About 14 percent of the loans outstanding in California as of September are subprime, according to the Mortgage Bankers Association."
"New data for San Diego County reveals that 67 percent of loans made in the first 11 months of 2006 were interest-only or negatively amortized."
Small, but growing.
Also,
"Noncurrent mortgage loans — payments that are more than 90 days late — grew by $3.1 billion in the last three months of 2006 after rising by $974 million in the third quarter, the FDIC said."
http://money.cnn.com/2007/02/22/real_estate/mortgage.reut/index.htm
Defaults are increasing at an exponential rate. Maybe they'll stop soon. Maybe not. We sold our house in 2005, (DC exurb) and it is now on the market for 25% less than we sold it for. I am also cautiously shorting sub-prime lenders.
I agree wholeheartedly that those who extend credit to bad risk borrowers, college students, and the very young deserve to eat their mistakes. There should be no rescue for those who loan to risky borrowers.
On the other hand, there are extremely reputable independent mortgage brokers who use the very same ultimate mortgage lenders as do banks, savings/loans, and credit unions, who will often carry a loan intially, but then sell that loan out to a firm that specializes in mortgages.
When we sold our house in 2005 and were considering buying another, I inquired at various loan agencies (major ones, not fly-by-nights).
They asked if I would go "full doc" or "stated". You pay more on the rate when you go "stated", but that's about it. (Is it illegal?) They said since the rate would be adjusting in two years, I could "just refi". (I am quoting their literal words). I wondered how we would "just refi" if our salaries didn't increase exponentially, or if rates went up, or if lending standards tightened.
Fast forward two years. We've had a 2% salary increase. I'm glad we decided to rent. We saved $150K so far by not buying back in, because the prices in the DC exurbs have dropped by that much in most cases. And that is a fortune to us. Maybe it doesn't mean a lot to the wealthy.
The government is not under any obligation to provide everyone with a home, obviously.
But allowing lending to people like this www.iamfacingforeclosure.com is BAD for everyone.
Now the government will spend our tax dollars to bail out financial institutions.
BAD BAD BAD
And repackaged and sold to investors, like Granny's retired schoolteachers' pension, who will make headlines when her investments fail.
Lost another family to Ditech.
Get the semi-annual report and read it.
That will list the actual securities they own.
Someone tell me why they would make all these loans in the first place. If they want to bet on an ever-rising real estate market they should just buy the property themselves.
Left unsaid in this article is that the sub prime market constitutes just a bit over 6% of the entire mortgage market. It is folly to assume ALL these loans will become non performing. It would be amazing if even 30-40% of them did. So then, taking 35% as an average this would mean that about 2% of the loans would default (35% of 6%). Hardly something that would lead to the calamity some believe.
"However, she warned of a "hidden" problem caused by sellers pulling property off the market. " The percentage of homes where nobody is living in them is at a record level. So the potential for inventory correction is still very high," she said.
I'm not aware there have ever been statistics kept on this phenomenon. Even so, since when is a home pulled from the market relevant in the argument that high inventory causes price erosion. While it is true the market forces dictate high inventory equals lower prices, once a home is pulled from the market, for any reason, it becomes one less home in inventory. As inventory shrinks, prices stabilize and as they shrink further they will rebound keeping in place the cycle that has been apart of the industry since the beginning.
"Nouriel Roubini, economics professor at New York University, says the housing bust is slowly pulling America into recession. He cites a 14.4pc drop in housing starts last month;
And a damn good thing it is happening. For new home builders to continue building in the face of slowing sales would be sheer stupidity. Cutting back to a rate considered normal in new home building just 3-4 years ago will allow inventories to reduce and a new cycle to emerge. Keep in mind that the housing industry as a whole is comprised of 80% existing home sales and 20% new home sales. Since the purchase of a new home is always more expensive then that of an existing home, all things being equal, the majority of new homes bought are by those selling an existing home. As the existing home market turns so then will the new home market improve and it will happen in that order.
"...an expected loss of 600,000 real estate jobs in 2007; a sharp fall in home equity withdrawals - down from 6pc of GDP at the top of the boom; and a squeeze as $1,000bn of mortgages are adjusted upwards this year to higher interest rates.
Many in the RE business are retired folks or those working 2nd jobs. Also, barring ineptness in the extreme almost no one gets fired in RE since they do not collect salary or benefits but work strictly on commission. As for the escalation of ARM payments. it will cause a bit of pain for some but as I said before, it is foolish to believe every rate increase will cause all affected to default. Also many borrowers saw this coming and have already switched to fixed rate loans, which, btw, are as low or lower then they were in the late 1960's.
Personally I think the problem we are facing is exaggerated by at least 50% and possibly more. In the way of our esteemed media, "If it bleeds it leads". After all the hand wringing we have seen about the "collapse" of the housing market last year, it turns out it was the 4th year in history. We all know that investors are taught that the trend is your friend. In keeping with that it is advisable to note that existing home sales have risen 4 of the last 5 months and price erosion has stopped except in those areas that saw out of control increases. In some areas prices have actually started their upward swing.
"Your tagline is a traditional Greek Easter greeting right? There's another one that ends with "Yes Lord He IS the Christ" in translation at least...i think...or so I've been told."
That traditional greeting and response in all Orthodox lands, which we use until the Ascension is:
"Christ is Risen!" to which one replies "Truly He is Risen!"
"Someone tell me why they would make all these loans in the first place. If they want to bet on an ever-rising real estate market they should just buy the property themselves.
The answer is simple.
You make a loan that you know is no good. You sell it off to someone else, and pocket a fat fee.
See you later!
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