It's Not a Subprime Problem

Submitted by Rich Toscano on June 28, 2007 - 1:57pm

A recent Bloomberg article illustrates why people who think that foreclosures will be confined to subprime mortgages are in for a rude awakening. Says the article:

U.S. homeowners with good credit are increasingly falling behind on mortgage payments, a sign lenders have been offering "higher risk" loans outside the so-called subprime market, Standard & Poor's Corp. said today.

Rising late payments and defaults on so-called Alt A mortgages made last year are "disconcerting" and delinquent borrowers appear to be "finding it increasingly difficult to refinance" or catch up on their payments, S&P analysts said today in a statement.

I covered the distinction between subprime mortgages and what S&P calls "higher risk" loans back in March, and again in April, but the vast majority of analysts continue to act as if the problems are limited to subprime loans. So I'm going to use the latest Bloomberg piece as an excuse to revisit the topic yet again.


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Submitted by tolak on June 29, 2007 - 2:15am.

This is anecdotal, but I'm beginning to see distress from Alt-A friends. They make very nice salaries but are genuinely worried about a coming reset and prospects of refinancing and selling in this market. I feel for them.

Submitted by DaCounselor on June 29, 2007 - 10:45am.

"High risk mortgages" are those that have features that increase the likelihood of the borrower being unable -- or unwilling -- to make the payments at some point in the future."

The "unwillingness" factor is a good point and should not be overlooked. Just because someone can absorb a re-cast payment does not mean they will. A quick tabletop analysis of the net savings of renting instead of paying higher re-cast payments, factored in with falling values, may lead some owners (in particular those with 100% financed non-recourse loans) to simply stop making their mortgage payments (perhaps afer a game of chicken with the lenders - "lower the interest rate and payments or I will walk") Saving 6 months (or more) of housing costs while their home goes through foreclosure and then saving substantially every month by renting may be an attractive option and offset the downside of the credit-smashing foreclosure.

Submitted by rubshop30 on July 19, 2007 - 5:39am.

I see this as a stalled market with Sellers unwilling to go down on their prices. This bubble is just in the beginning stages. Who can afford a house payment of 4,000 a month? The middle class?? This means your paying 48,000 a year and this does not include taxes. The experts say inflation is in control?? When a person goes from paying 1,500 a month 8 years ago to 4,000 or more now boy is this not a big deal? A family with an income of 100,000 would have a hard time paying this much and still have fun!

The foreclosures are starting to hit the market their numbers are rising and when banks put them up in the market then the vultures come in and bid low and low and the banks sooner or later have to sell.

Sooner or later a house that sold for 600,000 is auctioned off for 300,000 or less. It now becomes a comp. for the price of housing and thats when the rude awakeing starts to hit. A buyer says to himself this house just sold at auction for 300,000 and Joe is asking 600,000 for his house, who is the fool??? This thing is going to fall it is in a stall mode right now don't buy wait 6 months or more probably 2 years this thing is comming!!! I feel it and as an investor darn straight I'll give you 200,000 cash for a house that you paid 600,000.

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