Second, far larger wave of U.S. mortgage defaults is building
International Herald Tribune -- The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is building with alarming speed.
After two years of upward spiraling defaults, the problems with mortgages made to people with weak, or subprime, credit are showing the first, tentative signs of leveling off.
But with the U.S. economy struggling, homeowners with better credit are now falling behind on their payments in growing numbers. The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A, or alt-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.
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 are tightening 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.
Much will depend on the course of the economy, particularly unemployment. A weaker job market would push more homeowners toward the financial brink. The U.S. Labor Department reported Friday that the unemployment rate climbed to a four-year high in July. Other downbeat reports last week documented another drop in home prices, slower economic growth than expected and a huge loss at General Motors.
"Subprime was the tip of the iceberg," said Thomas Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. "Prime will be far bigger in its impact."
During 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 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 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," Fleming said, referring to the loans made later in the housing boom. "We just have to survive through this part of the cycle."
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 made sense while home prices were rising and interest rates were low.
But now, payments could jump 50 percent or more for some borrowers, 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 having to start making payments toward their principal. 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," Watts said about alt-A mortgages.
After two years of upward spiraling defaults, the problems with mortgages made to people with weak, or subprime, credit are showing the first, tentative signs of leveling off.
But with the U.S. economy struggling, homeowners with better credit are now falling behind on their payments in growing numbers. The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A, or alt-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.
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 are tightening 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.
Much will depend on the course of the economy, particularly unemployment. A weaker job market would push more homeowners toward the financial brink. The U.S. Labor Department reported Friday that the unemployment rate climbed to a four-year high in July. Other downbeat reports last week documented another drop in home prices, slower economic growth than expected and a huge loss at General Motors.
"Subprime was the tip of the iceberg," said Thomas Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. "Prime will be far bigger in its impact."
During 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 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 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," Fleming said, referring to the loans made later in the housing boom. "We just have to survive through this part of the cycle."
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 made sense while home prices were rising and interest rates were low.
But now, payments could jump 50 percent or more for some borrowers, 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 having to start making payments toward their principal. 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," Watts said about alt-A mortgages.
