Resetting loans offer no reprieve

From Reuters:

Mortgage delinquencies seen peaking in 2008

The credit quality of U.S. mortgages is set to weaken substantially through the remainder of 2007 and well into next year, with delinquencies peaking in mid-2008, Moody’s said on Thursday.

Delinquencies will peak at 3.6 percent of all mortgage debt outstanding in the summer of 2008, up from 2.9 percent in this year’s first quarter, according to the study by the consulting firm based in West Chester, Pennsylvania.

“This will result in substantial financial damage,” Mark Zandi, chief economist of Moody’s, said during a teleconference after the release of the study.

Subprime, “Alt-A”, jumbo interest-only and option adjustable-rate mortgages, or ARMs, account for about 25 percent of all mortgage debt outstanding, or around $2.5 trillion. Of that amount, approximately $1.4 trillion is at serious risk of default, he said.

Of those mortgages, about $460 billion should actually end up defaulting some time this year or in 2008 and of that, $113 billion will be a loss to investors after recovery efforts are made, said Zandi.

That’s more pessimistic than Federal Reserve Chairman Ben Bernanke, who last week estimated losses between $50 and $100 billion.

The deterioration of mortgage credit quality can partly be blamed on falling U.S. house price prices, with all parts of the housing market experiencing declines. The high-end of the market, however, is holding up a bit better than the middle- and low-end, said Zandi.

The erosion of mortgage credit quality will also be due to the fact that many borrowers will soon be facing measurably higher mortgage payments. October will be the peak reset month when about $50 billion worth of mortgages will be adjusted to reflect higher interest rates, he said.

“As the resetting mounts, that will put significant financial pressure on many of the subprime borrowers and this pressure is already very intense,” he said.

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2 Responses to Resetting loans offer no reprieve

  1. Jay says:

    It would seem we are experiencing a spike in divorces, job losses and unexpected medical bills. At least if you believe the following AP report on mortgage problems:

    from AP via Yahoo Finance:

    Analysts Say Mortgage Woes May Worsen
    Wednesday July 25, 7:25 pm ET
    By Alex Veiga, AP Business Writer

    Lenders’ Prime Mortgage Woes Are a Sign of Even Bigger Problems to Come, Analysts Say

    LOS ANGELES (AP) — Here’s a scary thought about the latest bad news on housing: A surprising increase in late loan payments and defaults among home owners with good credit is so far coming from traditional woes, like divorces, job losses and unexpected medical bills.


  2. James Bednar says:

    From the WSJ:

    Economists React: ‘Housing Is Bust’

    I can’t see clearly now, the rain has not gone… The median price of a newly built home … is now down 15% at an annual rate since the turn of the year. If we were to replace the owners’ equivalent rent series in the CPI with new home prices, then the headline inflation rate would be 1.5% right now and the core would be 0.5%. –David A. Rosenberg, Merrill Lynch

    The collapse in new home sales in the West — where affordability issues are dramatically worse than in the other areas — has been the worst of any region, with the June level of sales at a more than twelve-year low after having plunged 57% from the peak quarterly sales rate hit in 2005Q3. –Morgan Stanley Research

    Sales fell sharply in the Northeast and West but surprisingly rose in the South. A shift to the low-priced South could explain part of the 2.2% year-to-year decline in median prices. –Michelle Meyer, Lehman Brothers

    For the quarter, new home sales actually rose 13% annualized after a 44% annualized drop in the first quarter; however, this small recovery does not necessarily imply stabilization in sales. First, quarterly swings of this magnitude are not uncommon in the volatile new home sales number. Second, changing cancellation rates are likely adding to the volatility. –Abiel Reinhart, J.P. Morgan Chase

    Yet another downward revision – the 15th month in a row — to initial estimates further undermines the credibility of these data. Thanks to cancellations and serial overestimation of initial estimates, “true” new home sales are almost certainly much lower (and inventories higher) than these data show… Bad as these data are, we continue to warn that much worse is to follow. The underlying imbalance between supply and demand is still likely worsening. And the more prices fall, the more a corrosive deflationary psychology will grip the housing market. –Richard Iley, BNP Paribas

    Builders have made only trivial progress in reducing the absolute number of homes for sale, so with activity declining expect further pressure on prices and, hence, their margins. We’ll say it again: Housing is bust, and wishful thinking cannot unbust it any time soon. Expect worse ahead. –Ian Shepherdson, High Frequency Economics

    New home sales are likely to turn around before existing home sales because builders, since they have money tied up in unsold properties, are more willing to budge on price and non-price incentives than homeowners are. –Patrick Newport, Global Insight

    Falling prices and sales incentives that are not included in official price data do not appear to be underpinning sales. –Steven Wood, Insight Economics

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