Tuesday, April 10, 2007

Subprime? It’s all subprime

Defaults Rise in Next Level of Mortgages

Another reminder to any folks who think that this is an isolated occurence in some faraway market, in some exotiuc asset class. Lending at multiples above 2.5 "income" will get you into this mess. In the US less than 30% of mortgages were ARM ("Interest Only") and at lower multiples than here. It's OVER, Ladies and Gentlemen. Completely Over. The wars being fought are indicative of our impending economic collapse.

Posted by lvmreader @ 07:37 PM (599 views)
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3 thoughts on “Subprime? It’s all subprime

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  • george monsoon says:

    can’t read the article.. it wants me to subscribe first!

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  • Defaults Rise in Next Level of Mortgages

    Published: April 10, 2007
    Some of the problems afflicting mortgages sold to borrowers with weak, or subprime, credit increasingly appear to be cropping up in loans made to homeowners who were thought to be less risky.

    Loan Troubles Are Moving Up the Quality Scale The latest sign of possible further deterioration in the credit market came yesterday as American Home Mortgage, a lender based in Melville, N.Y., said that it would earn less and pay out a smaller dividend because it was being asked to buy back and write down the value of certain loans.

    Those loans are known as Alternative A, or Alt-A, and were made to borrowers with decent credit. Shares in the company tumbled 15.2 percent, to close at $21.92.

    The announcement followed a disclosure last week by M&T Bank, a regional bank based in Buffalo, that it would write down Alt-A loans and no longer sell them because bids for the mortgages came in lower than it had expected.

    Since the subprime mortgage market began deteriorating late last year, investors and analysts have kept a close watch on Alt-A loans, worrying that problems in higher-grade loans would prove to be a greater threat to the housing market and the economy.

    Alt-A loans are made to borrowers with credit ratings that fall between prime and subprime, or to homeowners who have prime credit but are seeking a somewhat riskier loan.

    Such loans made up about 10 percent of all mortgages outstanding at the end of 2006 and made up about 18 percent of home loans written last year, according to Moody’s Economy.com.

    Together, subprime and Alt-A loans account for about 21 percent of loans outstanding and 39 percent of mortgages made in 2006.

    The delinquency rate for Alt-A mortgages remains much lower than the rate for subprime mortgages, but it has been rising. In February, 2.6 percent of Alt-A loans were delinquent by 60 or more days, up from 1.22 percent a year before, according to FirstAmerican LoanPerformance. By comparison, 12.44 percent of subprime loans were delinquent by more than two months, up from 7.84 percent.

    Reports that Wall Street, which made millions of dollars securitizing mortgages in recent years, is becoming more wary of Alt-A by putting loans back to lenders or by bidding less for them could be an indication that default rates will worsen before they improve.

    The problems in subprime mortgages started late last year when big investment banks started returning delinquent loans to lenders. Many of those lenders have since filed for bankruptcy protection.

    “The credit markets were showering the mortgage market with capital, and now that’s just evaporating,” said Mark Zandi, chief economist at Moody’s Economy.com. “The capital markets are going to exacerbate the problem, seemingly.”

    Until recently, mortgage companies had been able to sell loans to Wall Street banks and other investors for a premium that was big enough to cover their costs of making the loans and to make a tidy profit. The banks would then package the loans into pools to be sold as bonds to hedge funds, insurance companies and other investors.

    “Now you are selling at par or lower in some instances,” said Thomas M. McCarthy, a managing director at Carlton Group, a real estate investment firm that brokers the sale of mortgages. “It really throws the business upside down.”

    For American Home Mortgage, the lower prices investors are willing to pay for Alt-A loans will mean that the company will earn from 40 cents to 60 cents a share in the first quarter. Analysts had expected it to earn $1.06 a share, according to a survey by Bloomberg News.

    Beginning in the second quarter, the company, which is structured as a real estate investment trust, will reduce the dividend for its common shares to 70 cents a share, down from $1.12 in the first quarter. The company also said it would write down $484 million in mortgage securities it owns because of the lower prices at which the bonds were now trading.

    Until recently, Alt-A loans were considered by many investors to be only slightly more risky than prime mortgages, and losses in bonds backed by the mortgages were small and rare, said Zach Gast, an analyst at the Center for Financial Research and Analysis.

    “This is a definite sign that at least in the secondary market the subprime issues are spilling over,” he said.

    Default rates have been worst for loans written in 2006, as many mortgage companies loosened lending standards by allowing more borrowers to make no down payments and not verifying that borrowers indeed earned what they claimed they did in mortgage applications. The companies relaxed the rules in an effort to bolster business at a time when interest rates were rising and the housing boom was fading.

    Alt-A loans are also vulnerable to the deterioration in formerly hot housing markets along the coasts and in the Southwest, because they were often used by investors who were buying properties with the intention of quickly reselling them at a profit.

    “Alt-A seems to be located regionally in spots where the market is having a great deal of difficulty, particularly in Las Vegas, Arizona and Florida,” Mr. Zandi said. So far, however, the problems in the housing and mortgage businesses appear to have had only a modest overall impact on the broader economy.

    Still, Mr. Zandi says the true test will come in the next two to three months during the peak of the spring home selling season. He notes that employment in the construction sector, which had grown at a rapid pace during the housing boom, has leveled off in recent months but has not fallen significantly even as construction spending has tumbled.

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