Loans

News story forwarded to me from the Tennessean newspaper talks about how mortgage defaults, meaning people are losing their houses and equity from them, at records rates right now. The housing market, variable rate interest rates, an economy with higher prices and more lost jobs around has caused a surge in mortgage loan defaults.

This is a many part problem. Certainly people should be aware that a variable rate can cause unexpected strain, but the job losses in Detroit and other places are another factor. Higher prices from the gas pump to milk have caused strains on many American budgets recently. Higher taxes on cigarettes and other services are adding to that strain.

Here is the article from the Tennessean:

Life woes help feed mortgage defaults
Adjustable rates may cause next lending problem

By ALEX VEIGA
Associated Press

LOS ANGELES — Here’s a scary thought about the latest bad news on housing: A surprising increase in late loan payments and defaults among homeowners with good credit is coming from traditional woes, such as divorces, job losses and unexpected medical bills.

The next and biggest wave of problem loans could come as monthly payments soar for prime and subprime borrowers who took out adjustable-rate loans with little or no documentation, or who used so-called piggyback loans on top of their first mortgages to make up for small down payments, analysts said.

These exotic loans were the only way many borrowers — even those with good incomes and sterling credit histories — could afford to get into the housing market as home prices soared in the past decade. But now those decisions are looking suspect.

That was one of the messages that sent a jolt through the mortgage industry and the stock market Tuesday after Countrywide Financial Corp. reported its second-quarter profit shrank by nearly a third as softening home prices led to rising delinquencies and mortgage defaults.

Countrywide, whose shares have lost 11.7 percent of their value in the past two days, laid part of the blame for the uptick in delinquencies on borrowers with good credit who had taken out prime home equity loans.

Trend could continue

Analysts said the trend could continue, particularly in areas of the country that have been hardest hit by job losses in general or seen a decline in speculation-driven construction, such as South Florida, parts of California and Las Vegas.

“As housing values weaken broadly and the job market slows in these areas that we’re focused on, all borrowers will be touched,” said Mark Zandi, chief economist at Moody’s Economy.com.

He said subprime borrowers, those with spotty credit records, probably will show the greatest number of defaults. “But even prime, fixed-rate first mortgage borrowers will experience more credit problems,” Zandi said.

The problems are expected even though the U.S. unemployment rate is at
4.5 percent, still low by historical standards.

In reporting its earnings, Calabasas, Calif.-based Countrywide, the top U.S. mortgage lender, said it was forced to take impairment charges as it braced for the possibility of more people failing to make their mortgage payments on time. The firm said borrowers becoming unemployed or divorcing were the leading reasons why many borrowers with prime loans were falling behind on payments. And company officials told analysts on a conference call that the uptick in missed payments was not caused primarily to borrowers seeing their loans’ interest rate reset, triggering higher payments.

Still, the mortgage industry anticipates that it could face more defaults in coming months as many adjustable mortgages originated in 2005 and 2006 during the height of the housing market frenzy begin to reset to higher interest rates.

The loans, initially attractive options for buyers because of their cheaper “teaser” interest rates, can adjust higher after as little as two years. Even a small percentage increase can translate into a payment shock.

“The losses are just beginning,” said Christopher Brend ler, an analyst with Stifel Nicolaus & Co. Inc.

“Housing is increasingly a problem, prices are likely to go down, and so these loans underwritten in the best of times will now season in the worst of times,” he said.

The mortgage industry already has tightened lending standards in response to the jump in defaults by subprime borrowers.

“The same problems you saw in the subprime sector that caused the big meltdown in March is now a broader industry problem that’s hitting the prime sector,” Brendler said.

This entry was posted on Sunday, July 29th, 2007 at 6:08 am and is filed under Loan Considerations. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.