ARMed and Dangerous....

[JayB]

The Wall Street Journal reports on credit conditions and subprime borrowers. "Despite high debt levels, consumers have been making good on their loans for the past several years. Defaults and late payments at credit-card and mortgage companies remain low. But what seems clear is that credit indicators have bottomed and started to worsen."

 

"Bill Ryan, an analyst for the independent financial research firm Portales Partners, has been on the lookout. Since the home has replaced the credit card as the consumer's ATM of choice in recent years, the proper place to look for early warnings signs is from delinquent mortgages, he reasons. And the likely area for those would be the subprime sector, which caters to high-risk folks."

 

"The 2005 data through September reveal that these mortgages are faring worse than in comparable periods in each of the three previous years. This year, 6.23% of the loans are delinquent, on average, in their first nine months, a rate not surpassed until the 20th month for 2004 mortgages. By September 2004, that year's mortgages had a delinquency rate of only 3.72%."

 

"The conclusion seems obvious: These folks were among the last to get mortgages during a great boom, and laggards tend to be worse credit risks. They flocked to short-term, floating-rate mortgages, interest-only loans and loans that require little documentation."

 

"Home prices don't need to fall a great deal to wreak havoc. They simply need to stall, and a big source of extra spending green dries up. Keep in mind that most of these mortgages were two-year hybrids, which have a fixed rate for two years and then float for the remaining 28. If rates rise during the first two years of the mortgage, at the end of that period the monthly payments would shoot up and lead to payment shock. The only out is to refinance, but that's impossible if the home's value hasn't risen. This year, rates have risen and, predictably, home prices mostly have stalled or gone down."

 

"At around 24 months into the 2003 mortgages mortgages, just when the popular two-year ARMs were resetting to higher rates, delinquencies shot up. At 24 months, the percentage of folks 30 days late on their payments was 10.2%. Six months later, the delinquencies had spiked to 16.6%."

 

"What makes this so troubling is that the dollar amount of two-year ARM mortgages was much smaller in 2003 than in 2004 or this year. Mark Agah, another analyst at Portales, estimates that there were about $220 billion in two-year ARMs in 2003. That soared to about $400 billion last year and should be around $440 billion this year. That means at the two-year point for the 2004 mortgages, we are likely going to see a lot more mortgage problems."

[Dr_Flash_Amazing]

Wow, that's really, stupendously fascinat...

[sexual_chocolate]

Cash in hand at the auctions baby, pennies on the dollar, pennies on the dollar....

 

Ain't it great?

[cj001f]

Lessons can be learned down under (Sydney down 10% from the peak 2 years ago). Has put a hurt on quite a few people.

[JayB]

Interesting things happen when banks sell the mortgages that they originate to quasi-government entities with access to capital at sub-market rates, then sell them to investors who invest in them due to the assumption that no matter what happens to the underlying mortgages, the US government will step-in and take care of them. If I heard correctly, the US congress has just passed legislation authorizing GNMA and FNMA to buy mortgages that are both larger, and of lower quality - but the PRC and the petrostates don't seem to mind at the moment.....

[JayB]

Lessons can be learned down under (Sydney down 10% from the peak 2 years ago). Has put a hurt on quite a few people.

 

All they need to do is refinance with the no-doc hybrid-option ARM based on a wink-and-nod appraisal and they'll be just fine.

[cj001f]

All they need to do is refinance with the no-doc hybrid-option ARM based on a wink-and-nod appraisal and they'll be just fine.

Some of just put a few more dollars in the pokies and hope for the best. A rather similar strategy...

 

I don't believe, on average, the US market has the same prevelence of rental/investment properties held by small investors or level of consumer debt, but I wouldn't be surprised if their market weren't very similar to the overheated coastal states. A 1000 sqft townhome runs about $800k US in Sydney nowadays, and their condo market looks like ours. Home prices have stabilized and may be poised for growth. Hopefully we shall be so lucky.