US Housing Market Isn't Going To Get Better Anytime Soon
We've all read about the subprime disaster and the knock-on effect its had not just in the US but around the globe.
But now that all the bad news is hopefully out of the way surely the US housing market will soon recover, the economy improve and then we can all start to feel better?
Well, things might not be quite that simple. You've probably heard of Alt-A mortgages but maybe don't really know what they are. Why should you? Many of us in the UK didn't have a clue what Fannie & Freddie were twelve months ago either. They were just something we'd heard of. Fannie Mae, isn't that like a US burger chain or something? Fannie & Freddie, Benny & Jerry, ice-cream right?
Well my friends now we know that subprime mortgages are loans given to generally lower paid workers with poor credit ratings. A first step on the property ladder kind of thing.
Loan them whatever they want, we've got the house as security so we're covered, they pay us a bit over the odds, Fannie & Freddie are behind us. Whats to worry about?
Now that that particular pack of cards has collapsed whats next?
Alt-A thats what. Alt-A borrowers are the next step up the ladder from the sub-primers. They have better credit scores. But, and heres the rub, they are what we would call "self certification" mortgages.
Loan them whatever they want, we've got the house as security so we're covered, they pay us a bit over the odds, Fannie & Freddie are behind us. Whats to worry about?
Well you don't have to be Poirot to work the next bit out.
One estimate I've read suggests that 70% of Alt-A borrowers exagerrated their earnings when taking out their loans. And according to the Mortgage Asset Research Institute more than half of those who did tell a little porkie exaggerated their incomes by 50% or more!
How much are we talking about? Around 3 million US borrowers have Alt-A mortgages totalling $1 trillion, compared with $855 billion of subprime loans.
Of that $1 trillion, almost half of those loans were issued in 2006. Back then this type of mortgage was incredibly popular and incredibly easy to get. Many of these were interest free, or set at very low introductory rates for the first three years.
That means that starting in 2009 many Alt-A borrowers are going to be hit with increased mortgage payments once the "freebie" period expires. And we aren't talking about modest increases here, we are talking 4-8 percentage point increases.
Imagine how you would be affected if your mortgage rate went up 4-8 points in one hit. Repayments could double.
This is made all the more sobering armed with the knowledge that right now, BEFORE any increases kick in, almost 16% of secured Alt-A loans issued since January 2006 are already at least 60 days late.
Well, if they can't afford to make the repayments now they certainly better pray for a miracle by 2009.
Wachovia and Washington Mutual were big sellers of Alt-A loans, and had $122 billion and $53 billion, respectively, on their books at the end of the second quarter. Is it any wonder their stocks are under pressure now?
Its impossible to estimate how many write-offs there will be because until the old rates expire nobody has any idea of how well placed, or otherwise, an Alt-A borrower is going to be to meet the extra repayments.
But if 16% are in trouble now, before these kick in, afterwards its got to be what 40%, 50%, more??
Certainly it would appear that foreclosures are going to be around for a good while longer yet. And with a volume of houses like that coming onto the market its hard to imagine house prices recovering any time soon.
With this factor lurking on the horizon & US unemployment at 3.5m and rising, the recent strength of the dollar is somewhat surprising. Maybe it's rally has been overdone? Based on sterling's sudden rise Friday, 3.4 cents in one day it's largest appreciation against the dollar in one day for seven years, maybe the tide is turning?
But now that all the bad news is hopefully out of the way surely the US housing market will soon recover, the economy improve and then we can all start to feel better?
Well, things might not be quite that simple. You've probably heard of Alt-A mortgages but maybe don't really know what they are. Why should you? Many of us in the UK didn't have a clue what Fannie & Freddie were twelve months ago either. They were just something we'd heard of. Fannie Mae, isn't that like a US burger chain or something? Fannie & Freddie, Benny & Jerry, ice-cream right?
Well my friends now we know that subprime mortgages are loans given to generally lower paid workers with poor credit ratings. A first step on the property ladder kind of thing.
Loan them whatever they want, we've got the house as security so we're covered, they pay us a bit over the odds, Fannie & Freddie are behind us. Whats to worry about?
Now that that particular pack of cards has collapsed whats next?
Alt-A thats what. Alt-A borrowers are the next step up the ladder from the sub-primers. They have better credit scores. But, and heres the rub, they are what we would call "self certification" mortgages.
Loan them whatever they want, we've got the house as security so we're covered, they pay us a bit over the odds, Fannie & Freddie are behind us. Whats to worry about?
Well you don't have to be Poirot to work the next bit out.
One estimate I've read suggests that 70% of Alt-A borrowers exagerrated their earnings when taking out their loans. And according to the Mortgage Asset Research Institute more than half of those who did tell a little porkie exaggerated their incomes by 50% or more!
How much are we talking about? Around 3 million US borrowers have Alt-A mortgages totalling $1 trillion, compared with $855 billion of subprime loans.
Of that $1 trillion, almost half of those loans were issued in 2006. Back then this type of mortgage was incredibly popular and incredibly easy to get. Many of these were interest free, or set at very low introductory rates for the first three years.
That means that starting in 2009 many Alt-A borrowers are going to be hit with increased mortgage payments once the "freebie" period expires. And we aren't talking about modest increases here, we are talking 4-8 percentage point increases.
Imagine how you would be affected if your mortgage rate went up 4-8 points in one hit. Repayments could double.
This is made all the more sobering armed with the knowledge that right now, BEFORE any increases kick in, almost 16% of secured Alt-A loans issued since January 2006 are already at least 60 days late.
Well, if they can't afford to make the repayments now they certainly better pray for a miracle by 2009.
Wachovia and Washington Mutual were big sellers of Alt-A loans, and had $122 billion and $53 billion, respectively, on their books at the end of the second quarter. Is it any wonder their stocks are under pressure now?
Its impossible to estimate how many write-offs there will be because until the old rates expire nobody has any idea of how well placed, or otherwise, an Alt-A borrower is going to be to meet the extra repayments.
But if 16% are in trouble now, before these kick in, afterwards its got to be what 40%, 50%, more??
Certainly it would appear that foreclosures are going to be around for a good while longer yet. And with a volume of houses like that coming onto the market its hard to imagine house prices recovering any time soon.
With this factor lurking on the horizon & US unemployment at 3.5m and rising, the recent strength of the dollar is somewhat surprising. Maybe it's rally has been overdone? Based on sterling's sudden rise Friday, 3.4 cents in one day it's largest appreciation against the dollar in one day for seven years, maybe the tide is turning?
