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Monday, August 04, 2008

Like I've Been Saying

The mortgage crisis still has a ways to go before we even begin to feel its full effects. Not the sort of thing you want to realize when you consider how much bloodletting's been going on already, but them's the facts, ma'am. The subprime meltdown was just the beginning. Deterioration in Alt-A mortgages (which fueled so many Americans buying more house than they could afford, but not nearly as much as they felt they deserved) will hit a wider swath of people, and push many traditionally "creditworthy" folks over the brink.

And unfortunately for them, and the wider economic outlook, these folks will be hit in an environment of shrinking home values, higher interest rates, and tighter credit standards. Which means that far fewer will be able to sell their homes, most will be unable to refinance ballooning mortgage payments into a more manageable loan, and more foreclosures and short sales will add more fuel to the fire. It's all going to spiral downward with wider and wider ripples. Sucks. As Atrios often puts it, "We're all subprime now."

From this morning's NY Times:
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.” [...]

...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.
Hold on to your hats.

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