Monday, August 4, 2008

A must read - Housing Lenders Fear Bigger Wave of Loan Defaults

When possible, I will post articles pertaining to the state of our economy. The reader may find I've posted additional articles to the same thread.

The articles will not necessarily be posted for response, though everyone is invited to respond as always.

My primary reason is to share this information to allow the reader to discern for him/herself the state of our economy and perhaps for the reader to make whatever decisions or preparations they deem necessary.


August 4, 2008

Housing Lenders Fear Bigger Wave of Loan Defaults


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.”


Karen said...

I will tuck a few more things in this thread.


Roubini: Banks Losses Close to $2 Trillion

Monday, August 4, 2008 5:27 PM

The banking and credit crises so far have just been the tip of the iceberg, warns former Clinton White House economist Nouriel Roubini.

"A systemic banking crisis will go on for awhile, with hundreds of banks going belly up," Roubini says

He estimates the financial crisis will lead to credit losses of at least $1 trillion and most likely will be closer to $2 trillion.

"At this point, $1 trillion isn't a ceiling, it's a floor," says Roubini.

In an interview with Barron's, Roubini said bank losses are climbing because they have only written down their subprime loans so far.

They haven't even begun writing down most of their consumer-credit losses, and reserves for those losses are much less than they should have been.

"The banks are playing all sorts of accounting gimmicks not to recognize them," he says.

"There are hundreds of millions of dollars outstanding in home-equity loans that eventually could be worth zero, too."

Roubini gives Federal Reserve Chairman Ben Bernanke poor marks for his handling of the crisis so far. He says the damage was actually done earlier, when the Alan Greenspan Fed lowered interest rates in 2001 following the dot-com bust, and then kept them too low for too long.

Also, Roubini says, the Fed and other regulators took a "reckless" approach to regulating the financial sector.

"The paradox is they're going to the opposite pole now. They are overregulating, bailing out the troubled participants and intervening in every market."

"The regulators should investigate themselves for bailing out Fannie Mae and Freddie Mac, the creditors of Bear Stearns and the financial system with new lending facilities."

"It is privatizing the gains and profits, and socializing the losses, as usual. This is socialism for Wall Street and the rich."

The American taxpayer is going to have to foot the bill, which Roubini says is going to be "huge.

Karen said...

Analysis, planning, forecast and data services for energy producers and consumers.

Jeff Senley said...

This shows all the more reason for us to tighten down expenditures this year.

I also suggest going to the school board and asking them to find some budget cuts for the taxpayers, as they have a notably larger effect on Borough residents.

If that means cutting curriculum, then cut curriculum. I remember a discussion some time ago about a class in "Sports Management" that can likely get de-funded at this point; there are probably others.

Karen said...

Wachovia halts private student loans

Wachovia Corp. stopped accepting applications for private, undergraduate student loans at the close of business Wednesday.

The Charlotte, N.C.-based bank (NYSE:WB) will continue to offer student loans for both graduate and professional education as well as student loans backed by the federal government.

"We are constantly evaluating our organization in the current environment, to ensure that we're doing what's best for our customers, our shareholders and our company, and at this time we thought it was prudent to stop accepting private undergraduate student loans," Wachovia spokeswoman Ferris Morrison said.

Wachovia has about $9.9 billion in student loans on its books, Morrison confirmed.

In April, rival Bank of America Corp. said it would discontinue selling private student loans. At the time, a BofA spokesperson said the bank wanted to focus on government-backed loans to provide a more consistent experience for customers.

Wachovia is the largest bank in the Philadelphia area based on local deposits.