AP: Home Loan Troubles Accelerating

I threw this in a sidebar to one of the Fannie/Freddie pieces yesterday but I think it is important enough to highlight.

First a refresher... many of the same pundits and in fact government officials who assure us everything is fine and dandy and we'll be out of this soon enough (and have been repeating this matra since the first hedge fund explosions in Bear Stearns last summer) have a history. A history we can look up. For example the now infamous statements

U.S. Treasury Secretary Henry Paulson said on Friday the housing market correction appears to be at or near its bottom and that troubles in the subprime mortgage market will not likely spread throughout the economy.

"I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained," he added.

Dateline? April 2007.

Meanwhile bloggers dismissed as worrywarts were writing in 2007

Anyhow, the first "round" of financial issues is probably at this time "priced in" the banks - that being "subprime". While I argue this is only stage 1, and we will have the next rounds of alt A mortgages, and prime mortgages, along with credit cards, along with auto loans, along with student loans - that's a problem for another day as the foreign Middle East/Far East cash infusions has people singing a sweet tune (I believe this is the 9th "this is the bottom!" call by CNBC). While that will be proven to be wrong in my opinion down the road, for "now" the financials seem able to hold a bid.

I was stating that subprime was not the disease but just the symptom of the disease. This was dismissed by the punditry - that seems like ages ago - before the socialization of losses really began, before Soc Gen, 75 basis point cuts in emergency session, before Bear Stearns, before Fannie/Freddie - ah innocent times.

So as we got into 2008 we saw first the beginning stages of Alt A mortgages degradation late this winter (what is an Alt A mortgage? The traditional definition of Alt-A has been loans that have less than full documentation, also referred to as low doc/no doc loans.) [Mar 19: Alt A Mortgages Beginning to Breakdown]

This market is so difficult right now trying to balance the reality of what is happening on Main Street with the current and future political interference into free markets. Some of the news out of the real economy is really scary - I had mentioned last August when "subprime" was the big issue that the mortgage issues will climb the food chain, into Alt A loans and then finally into prime. Subprime is just a convenient label and the weakest credit risks, so they would be the first to go. But not the only - as was conventional wisdom back then i.e. "those darn subprime people are the cause of all this - they never should of had a house in the first place". It is so much bigger than that - a truly stressed consumer up and down the food chain. Here is some "reality" of just how quickly the vintages of Alt A mortgages from 2005-2007 (the worse era of reckless lending) are degrading.

And now we are seeing the evidence of the move up the food chain as the prime mortgages (the "best" credit risks) begin their wave. Repeat: Begin.

be·gin (b-gn) To take the first step in performing an action; start.

Notice how begin is not "6th inning" or "near the end" as the punditry cry out.

Why would people with pristine credit falter? Well, your credit score means little when you were placed into a home that was far above your means ... you can have the best history and best intentions but paying a $3000/mo mortgage on a $42K salary only works during the first 2 years of these exotic mortgages when the interest rate is low. It also doesn't matter what your history is, or your intentions are when you lose a job, or become underemployed (taking part time work or work well below your old salary, after you lose your old job). So we begin the next wave - which ironically is happening as most of the subprime damage is behind us. Now we're moving up the scale to the Alt A's and prime mortgages. And let me say - this is only the beginning of this wave... not the 4th, 6th, or 8th inning.

I keep repeating, this "service economy" American consumer is under duress (ex states where you have mining, agriculture, or energy). Saving $15 a week on gasoline does not change the equation - other than a bit of a psychology boost. A lack of savings rate, which is a national epidemic provides little to no buffer, so as the cost of living, YEAR over YEAR, continues to hit - we'll continue to regress. See, thus far the housing issues have been of the "once in a lifetime" variety - the introduction of wacky loans that allowed people into homes that they should of never been in, at prices that would of never existed, if not for easy money and lax regulation. So we're going through that correction now. That is the pregame show. What we have just begun to bridge is the typical housing correction via recession (regional, not national) - as people's incomes are lost or reduced; we're just entering that stage now.

The U.S. won't be leading the world out of this cycle. The world will be leading us out; that's how it works for a debtor nation with a subprime leadership with a subprime balance sheet.

• The source of trouble in the mortgage market has shifted from subprime loans made to borrowers with bad credit to homeowners who had solid credit but took out exotic loans with ballooning monthly payments.
• The Mortgage Bankers Association said Friday that more than 4 million American homeowners with a mortgage — a record 9 percent — were either behind on their payments or in foreclosure at the end of June. (again, 1 in 10 people is now late or in foreclosure... every 10th house you pass)
• The percentage of loans at least one month past due or in foreclosure was up from 8.1 percent in the January-March quarter, and up from 6.5 percent a year ago, using figures that were not adjusted for seasonal factors.
• "The problem that policymakers and Wall Street once assured us was 'contained' to subprime mortgages has proven to be anything but," Mike Larson, a real estate analyst with Weiss Research, said in a research note.
• As the economy falters and home prices keep falling, concern is building about a second wave of mortgage defaults flooding the market through 2010. A drop in income — whether through a lost job, divorce, death of a spouse, or health problems — is the No. 1 reason people fall beyond on their mortgages and lose their homes.
• The latest quarterly figures broke records for late payments, homes entering the foreclosure process and for the inventory of loans in foreclosure. The trade group's records go back to 1979. (as I recall from my reading 79-82 was not exactly a rosy time for housing either, and mortgage rates were more than double than they are now - so this is happening with near record historically low interest rates)
• New foreclosures rose from the first quarter in 35 states and Washington, D.C. The biggest increases were in Nevada, Florida, California, Arizona, Michigan, Rhode Island, Indiana and Ohio. (Rhode Island?)
• New foreclosures actually declined in Texas, Massachusetts and Maryland. Both Maryland and Massachusetts recently passed laws to slow the foreclosure process and give borrowers more time to catch up on their payments. (that's important to keep in mind; the numbers would even be worse if not for some states passing new regulations to slow down the process - and once more this is a regional recession - people in Wyoming or Nebraska are not experiencing the same thing someone in Ohio is)
• Almost 500,000 homeowners, or about 1 percent, entered the foreclosure process in the second quarter.
• But for the first time since the mortgage crisis started, delinquencies on subprime adjustable-rate loans declined. (this was phase 1, and these were the first to go bad, and will be the first to "finish off")
• What's driving up the delinquency rate now is the number of homeowners with risky, adjustable-rate prime loans made with little or no proof of the borrowers' income or assets. (Alt A's were intended for people with non typical income streams, or self employed of relatively high wealth. Instead it became a tool to "qualify" anyone with a heartbeat to keep the game going)
• More than one out of 10 borrowers with a prime ARM is now delinquent or in foreclosure. That portion, 11.3 percent, was up from 9.7 percent in the first quarter, and is expected to rise as more homeowners see their monthly payments spike. (remember, "prime" are our best borrowers - but put in the wrong mortgage or with life conditions changing, it really does not matter what your intent to repay is) Many of these loans allowed the borrower to pay only the interest on the loan for a fixed period. Others gave the borrower the option to "pick-a-payment," adding any unpaid interest to the principal balance. [Aug 13: Option ARMs - Who Thought Up These Time Bombs?]
• Defaults on these mortgages, which earned the nickname "liar loans" because borrowers often did not document their incomes, are costing Fannie Mae and Freddie Mac billions of dollars. (correction, this article was written last Friday. Now we can rewrite it to say, "are costing American taxpayers billions of dollars") Worse still, these loans reset to higher monthly payments when borrowers reach maximum debt limits — typically around 10 to 25 percent more than the original loan. (oooh new an interesting fact I did not know)
• And nearly half of these pay-option loans are expected to reset to higher monthly payments by the end of 2010, Fitch said. (but the housing bottom is next spring? or 6 months from now? or wasn't it supposed to be this current summer? I can't keep track of all the pundits predictions of Kool Aid anymore)

Remember, the typical American moves once every 7 years. So figuring that one THIRD of people who bought in the last 5 years are now underwater (owe more than the house is worth) you can see how 2009 is going to turn out. What now if housing prices fall nationally even another 5%? 10%? dare we wonder about 15%?

• Almost one-third of U.S. homeowners who bought in the last five years now owe more on their mortgages than their properties are worth, according to Zillow.com, an Internet provider of home valuations.
• Second-quarter home prices fell 9.9 percent from a year earlier, giving 29 percent of owners negative equity, said Zillow, the Seattle-based service that offers values for more than 80 million homes. For those who bought at the 2006 peak of the housing market, 45 percent are now underwater, Zillow said.
• Almost one-quarter of U.S. homes sold in the past year were for a loss, Zillow said. That contributes to the foreclosure rate because some homeowners can't absorb the loss and end up surrendering their homes to the bank that holds the mortgage.

This is a debacle and sorry, I just cannot be on that bandwagon of housing will be just fine and dandy now that Freddie and Fannie are saved and mortgage rates will drop 1/2 a percent. Or the banks. The issues are so much larger. I truly believe the end game (circa 2009) is the U.S. government buying mortgages directly.

But... that does not mean over antsy investors won't keep piling into financials and homebuilders anticipating the "turn" (which is a lot farther out than they imagine)