Surge in mortgage delinquencies

From the Wall Street Journal:

More Borrowers With Risky Loans Are Falling Behind (no link)

Americans who have stretched themselves financially to buy a home or refinance a mortgage have been falling behind on their loan payments at an unexpectedly rapid pace.

The surge in mortgage delinquencies in the past few months is squeezing lenders and unsettling investors world-wide in the $10 trillion U.S. mortgage market. The pain is most apparent in subprime mortgages, though there are signs it is spreading to other parts of the mortgage market.

Subprime mortgages are loans made to borrowers who are considered to be higher credit risks because of past payment problems, high debt relative to income or other factors. Lenders typically charge them higher interest rates — as much as four percentage points more than more-credit-worthy borrowers pay — one reason subprime mortgages are among the most profitable segments of the industry.

They also have been among the fastest-growing segments. Subprime mortgage originations climbed to $625 billion in 2005 from $120 billion in 2001, according to Inside Mortgage Finance, a trade publication. Like other types of mortgages, subprime home loans are often packaged into securities and sold to investors, helping lenders limit their risks.

Until the past year or so, delinquency rates were low by historical standards, thanks to low interest rates and rising home prices, which made it easy for borrowers to refinance or sell their homes if they ran into trouble. But as the housing market peaked and loan volume leveled off, some lenders responded by relaxing their lending standards. Now, the downside of that strategy is becoming more apparent.

Based on current performance, 2006 is on track to be one of the worst ever for subprime loans, according to UBS AG. “We are a bit surprised by how fast this has unraveled,” says Thomas Zimmerman, head of asset-backed securities research at UBS. Roughly 80,000 subprime borrowers who took out mortgages packaged into securities this year are behind on their payments, the bank says.

Though delinquency rates on subprime mortgages originated in the past year have soared to the highest levels in a decade, economists don’t expect any significant harm to the nation’s economy or financial systems. But if late payments and foreclosures continue to rise at a faster-than-expected pace, the pain could extend beyond homeowners and lenders to the investors who buy mortgage-backed securities.

Soaring delinquencies are making some lenders more cautious, which is likely to put further pressure on the weak housing market. Yesterday, the National Association of Realtors said that its index for pending home sales for October fell a seasonally adjusted rate of 1.7% from September and was down 13.2% from a year earlier.

Delinquency rates have been rising steadily since the middle of 2005. But the trend has accelerated sharply in the past two to three months, according to an analysis by UBS. The figures don’t include loans that lenders were forced to repurchase because the borrower went into default in the first few months; such repurchases also have increased sharply this year.

In October, borrowers were 60 days or more behind in payments on 3.9% of the subprime home loans packaged into mortgage securities this year, UBS says. That’s nearly twice the delinquency rate on new subprime loans recorded a year earlier.

Predicting losses on these securities is a challenge because there’s little or no historical evidence to show how subprime loans will perform at a time when home prices are falling, says Thomas Lawler, a housing economist in Vienna, Va. An analysis by Merrill Lynch & Co. found that losses on recent subprime deals could be “in the 6% to 8% range” if home prices are flat next year and could rise to the “double digits” if home prices fall by 5%. Falling home prices could trigger losses not only for investors who bought riskier classes of mortgage-backed securities, but also for some holders of A-rated bonds, according to the report.

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37 Responses to Surge in mortgage delinquencies

  1. Pat says:

    Planned layoffs jump 11% in November

    “November’s planned layoffs in the struggling car sector totaled 20,318, which included 12,000 in cuts by Ford (Charts), which announced that 38,000 hourly union workers had accepted its buyout offer, Challenger said.

    In November, Ford dropped from second to fourth in the U.S. auto market as its sales fell 10 percent.

    Year-to-date planned job losses in the auto industry at 151,457 already surpass the previous record total of 133,686 set in 2001, according to Challenger.

    In addition to the auto industry, job cuts in the food, chemical, media and real estate sectors have increased more than 50 percent compared with 2006, Challenger said.”

  2. BklynHawk says:

    There was a great presentation by a financial service sector analyst to the FDIC regarding the group most likely to be in trouble with a coming recession. It basically said that those in the 65% historical homeownership group would be okay.

    It was the additional 5% who would not have qualified for loans in the past and have been added to the homeownership group during this bubble who are going to be in trouble. Looks like the analyst was right. I’ll try to find a link to the presentation. Very interesting stuff…


  3. James Bednar says:

    Patiently waiting for that link…


  4. lisoosh says:

    “We are a bit surprised by how fast this has unraveled,” says Thomas Zimmerman, head of asset-backed securities research at UBS.

    It’s shocking how surprised they are.

  5. BklynHawk says:

    Here’s the link…

  6. BklynHawk says:

    sorry, here it is…

  7. BklynHawk says:

    One headline and sub-head to a slide from the presentation:

    After Underwriting Standards Relaxed in 1994, Homeownership Expanded Almost 8% or Over 15 Million Households

    We Believe This is the “At Risk” Group

    I think this kind of says it all.


  8. BC Bob says:


    Beat me to the punch.

    Forget (subprime) about watching for a rate cut. Just watch the spreads widen for these mortgages. With the long end already at/near historic lows how will a rate cut help this market??

  9. BklynHawk says:

    One last thought on how that presentation relates to NJ…if you take the 15 million number and apply 2.9% (NJ % of US pop.)…you end up with over 400,000 homeowners at risk in NJ…yes, i know this is a very imperfect calculation, but it gives you an idea of the scale of the potential problem just in NJ…


  10. Take at least 25% off 2005 peak prices says:

    The Phoney loans are getting margins calls.

    And they are shocked?

    The gravy train has derailed. Welcome to lean times baby.

  11. Pat says:


    I’m scared. I’m very scared.

  12. Pat says:

    You know what happens when people who have NOTHING are lent something for a little while?

    A feeling that the thing is theirs. A feeling of confusion, inequity/indignation and then justified retaliation when the thing is taken away.

    Basically, they get really pissed off and start blaming “The Man.” Fifteen million. Let’s hope the demonstrations stay peaceful…but I don’t think “Let them eat cake” is going to cut it this time around.

  13. jayb says:

    If you read the article, some poor lady with an $80,000 mortgage couldn’t make it almost from the get go. And it adds that others are like that too, going into default right away.

    Here’s my two cents: The education system deserves a good chunk of the blame. You’re never taught basic finances at any level. You could finish a PhD without taking any finance classes let alone knowing the difference between mortgages. In school, all my life my friends bitched about the little bit of math they had to take with no idea how important it would be.

    Now you have all these people, most much older than me I’m sure, getting suckered into these loans. How the hell can you buy a house without even an inkling that the math doesn’t quite work out and you could be on the street within a few months.

    My father, with only 4 years schooling in the 60’s in Portugal, was taught basic stuff like math and finances. And here we are the Superpower by comparison.

    Sorry about my own bitching, but I’m going to post this anyway. This stuff pisses me off. Here’s some interesting quotes on education:

    Education is the progressive realization of our ignorance.
    Albert Einstein (1879-1955)

    If a man empties his purse into his head, no man can take it away from him. An investment in knowledge always pays the best interest.
    Benjamin Franklin (1706-1790)

    We are shut up in schools and college recitation rooms for ten or fifteen years, and come out at last with a belly-full of words and do not know a thing. The things taught in schools and colleges are not an education, but the means of education.
    Ralph Waldo Emerson (1803-1882)

  14. youallwanthouses says:

    All this talk makes me think that everybody simply follows the herd. Those who made it are possibly lucky?

  15. BklynHawk says:

    This was a presentation by an analyst from CIBC to the FDIC. I think my simple calc’s up above just gave some kind of framework for understanding what this might mean to NJ. Please explain to me how that is herd mentality.

    BTW, I own a place…not in NJ.


  16. Still Searching says:

    To: BklynHawk,

    Re: #6 link….great information…thanks.

  17. v says:


    I remember reading this report sometime back.

    i think it was SAS or somebody who pointed out that
    69% of the population own homes.
    26% don’t have access to credit.
    64% of the population own homes and have good credit.
    10% have shaky credit.
    ~64 + ~10 + ~26 = ~100.

    If you were to go by this report, a very small percentage of the population (if any) has good credit and don’t own a house. Who is left to buy??

    Bloggers also pointed out that the report doesn’t take into consideration the billions pumped into the economy through refinancing. This factor can push recession probability to much higher than 10%.

  18. chicagofinance says:

    Take at least 25% off 2005 peak prices Says:
    December 5th, 2006 at 10:21 am
    The Phoney loans are getting margins calls.
    And they are shocked?
    The gravy train has derailed. Welcome to lean times baby.

    Booya: the most restrained post of your career. Only caps to start sentences?

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