Posted on 03/05/2007 6:29:06 AM PST by RobRoy
America’s mortgage woes are spreading from home loans made to high-risk borrowers to encompass medium-risk recipients too, with potentially far-reaching consequences for US homeowners and their lenders.
Problems with risky sub-prime mortgages have been a focus for lenders, particularly HSBC, which is expected to write off about $11 billion (£5.6 billion) — much of it relating to this area — when it reports its annual results today.
However, lenders in the US face a new threat as defaults on the fast-growing “Alt-A” mortgages, medium-risk policies that stand between sub-prime and prime loans in the credit rankings, are also on the rise.
They have doubled to about 2 per cent in the past year, while 5 per cent of the two million such mortgages issued in 2006 will eventually end in foreclosure, according to David Liu, a mortgage analyst in UBS.
HSBC, Europe’s largest bank, is facing a crisis in its US sub-prime business and this has triggered a cull in the division’s senior management. Rising bad debts forced HSBC to issue its first profit warning in the run-up to its results announcement.
However, HSBC is also a lender in the “Alt-A”, or near-prime market, and while the bank played down the impact of its exposure in that area, the spectre of deteriorating credit quality across more of the US market is likely to be unsettling.
Federal regulators have become so concerned with the state of the sub-prime market — in which a fifth of mortgages issued in 2005 and 2006 are expected to end in repossession — that they are preparing to clamp down on home-loan providers’ lending policies.
The value of new Alt-A mortgages issued reached $400 billion in 2006, compared with just $85 billion in 2003, according to Inside Mortgage Finance. Mr Liu said: “The issues with sub-prime mortgages are clearly spreading and will cause particular problems for the investment banks whose involvement in higher-risk loans has become increasingly significant in recent years.”
As well as lending mortgage providers’ money to issue new home loans, investment banks such as Goldman Sachs, Credit Suisse and Bear Stearns often buy existing mortgages and package them as bonds backed by their interest payments.
The banks could potentially make huge losses on the loans they have made as well as the mortgage-backed bonds they have underwritten as the number of defaults jumps.
Adam Compton, analyst with RCM Investors, said that prime mortgages are far safer because they are made to clients with higher credit ratings and they require proof of income. He said: “The danger is that increasingly lax lending practices on sub-prime and Alt-A mortgages of the last two to three years has led to an artificial demand that could lead to an increase in losses among prime mortgages as well.”
By lending to people who could not really afford repayments, mortgage providers lift prices across the market, Mr Compton says. So, an expected fall in the value of cheaper properties as defaults on risky loans surge will drag down costlier houses’ prices. This will make it harder for borrowers to keep up payments by refinancing mortgages if they lose their job.
It grows.
ping
The US economy is afloat in a sea of cheap loans. Cheap liquitity is the only thing keeping it going. And the sea is starting to drain. Wages for many have not being going up as fast as real inflation, they have been borrowing to get their lifestyles. But the lenders are pulling back. The train wreck cometh.
The real estate market didn't grow at a healthy pace, it just exploded with no way to sustain it. Fortunately, I and my family are all in it for the long term and had bought before the boom.
But so far it IS only about sub prime mortgages. Not a shred of evidence to support it spreading. All we see are phrases such as "possibly", "maybe", "could be","indications are". That said the assumption that every sub prime and Alt-A mortgage will go bad is patently absurd. Even this article says the default rate has DOUBLED (sounds bad, right?) but that doubling brings it to a not so alarming 2%. It has been said that the sub prime market is about 5-7% of all mortgages and the most pessimistic say that upwards of 30% "could" become non performing. Well, 30% of 7% is still only 2.1% of the sub prime loans. Frankly, instead of jumping on the "the sky is falling" band wagon I'll simply wait for some ACTUAL NUMBERS rather then going with baseless speculative opining by people looking for face time on TV.
My income is on an upward spiral. I just might be able to buy discount scrap metal from that train wreck, so to speak.
I am in the same boat, my wife and I are talking about looking for a new house next year. My only concern is selling my existing home to get the equity out. If the market is way down it might be dicy.
I wonder how much of this problem can be laid to eager reassessment of properties and the resulting tax burden? My house payment has gone up $75.00 in two years for taxes, and I just got a reassessment notice stuck in my door. At this rate in 10 years it will surpass Principal + interest.
You crack me up. You remind me of the guys early last summer that said things are not dropping.
You are right. It is not that bad - yet. But wait! The bank fired Sr. management over this. Maybe they know something you don't.
As before, you are like the man falling off a 20 story building and saying, as he passes the 3rd floor, "so far, so good". Except a reasonable person watches the events, understands gravity and knows the guy is three floors from having no opinion whatsoever.
IOW, this is the next phase, jus beginning. And even then, only one of many fronts, one of which seems to be the stock market itself.
Those are good points. Do you believe the numbers are high enough to at least prompt a correction in the marketplace? Enough to "cool" it off so they stop lending shaky money?
I'm investing every thing I've got into my business. It's growing at a rate no real estate could sustain.
Many people made money during the crashes of 1929 and 2000.
They won't all go bad, but a whole lot of those people took out those mortgages fully intending to refinance in a couple of years when the rate resets. If similar mortgage products are no longer available and those people are faced with mortgage payment jumps of 100% or more, what do you think is going to happen?
I'll tell you what I think is going to happen - the Omnibus Federal Home Loan Relief Act of 2009, signed into law by President Clinton, where the Federal Government spends another trillion dollars to subsidize mortgage payments for our "most vulnerable citizens"...yes, the same idiots who overextended themselves will get a bailout. ;)
Indeed. I've been scraping and scratching to keep afloat my entire adult life (and loving every minute of it!), and this is the first time I may actually be poised to take advantage of conditions.
Do you think this relief act is the reason for the boom and the cheap money the past couple of years?
Yet your price of housing (including taxes) is not included in inflation figures. ;)
We have been in MASSIVE tax inflation the last ten years. People wonder where all their money is going. It is going to the government. We are closer to slaves than we realize. Between working, commuting and sleeping, there is very little time left to actually enjoy anything. We are becoming a nation of slaves to the culture and consumerism - destined to produce and consume, taxed all the way.
Government fodder.
Wouldn't be surprising -- the dangers of moral hazard, really.
Even in subprime mortgages, it's not the worst it's ever been - just the worst in the last few years, and the last few years were pretty good.
I want to know what rate of failure is built into the subprime model. 20% doesn't sound high to me. That or more is probably expected. That's why the interest rates are higher. Also, my son had an amazing no down payment ARM, but he refinanced about 2 years ago. Lots of people have adjusted.
Already happening. Subprime lenders have tightened their guidelines to something similar to about 8 years ago before the last boom got started. Which IMHO is a healthy level. Subprime lending will, and should, exist - but it got too aggressive.
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