Troubles are surfacing with loans made to better-off U.S. homebuyers in a worrying trend that indicates what’s been termed “The subprime crisis” may need to be rebadged “The housing crisis” and eventually maybe just “The crisis.”
While signs are tentative so far, credit rating downgrades and payment delinquencies are happening more frequently in what is called the “Alt-A” mortgage loan market, the slice just above subprime in creditworthiness.
The upshot is more pain for investors in mortgages, less appetite for other risky credits, such as leveraged buyouts, falling U.S. house prices, and the big one, a threat to consumption in the United States.
In the past week, both Moody’s and S&P have announced downgrades and reviews for downgrades for securities backed by Alternative-A loans, which are typically made to borrowers with less proof of their finances than prime borrowers or who have small credit problems in their past.
Delinquencies on Alt-A have been rising faster than for subprime, though at much lower levels. Between January and March, delinquencies for Alt-A rose by 17 percent, to 3.05 percent of loans, while subprime deliquencies rose by about 3.5 percent, to 14.83 percent, according to First American LoanPerformance data.
Fitch Ratings, too, has said it is “very concerned” about Alt-A loans, especially those with low early repayments which aren’t even sufficient to pay all of the interest.
The idea that problems in subprime were contained and would not spread to the general economy has been maintained by U.S. central bankers and policy makers. It has also been the market’s central assumption and underpinned the dizzying rise of stocks to new highs.
If Alt-A follows the path of subprime, there will be more forced sellers of U.S. houses, less available finance to buy that increased supply and an ever-growing number of homeowners who will realise, even if they are “prime” borrowers, that their largest single asset is worth less than they thought.
The U.S. economy has been the beneficiary of a self-reinforcing cycle in recent years, as easy credit and rising house prices combined to fuel economic and consumer confidence, making lenders and borrowers alike think the tide would continue to rise and float everyone over the risks they had taken on.
But signs of weakness in U.S. housing are weakening that trust, according to Robert Shiller, an economics professor at Yale, whose S&P/Case-Shiller Home Price index is showing a yearly loss of 2.1 percent.
“This is likely to eventually have a greater impact on the economy than we now see in subprime and Alt-A, for it can have an effect on general economic confidence,” said Shiller.
Subprime may have been the first area to roll over, but pain has, is and will continue to spread to the Alt-A and Prime sectors of the U.S. housing market,” RBS credit strategist Bob Janjuah said in a research note on Monday.
And while Alt-A losses are still modest in percentage terms, the overall numbers are huge, with estimates of Alt-A lending at $386 billion in 2006, as against $640 billion in subprime.
If, or perhaps when, this all translates into a retrenchment by the U.S. consumer, the damage could be very large.