Thursday, February 08, 2007

Mortgage Realization
What I have been saying about exotic mortgages is happening. People with exotic mortgages are having problems making the payments. It is so far limited to the subprime market, but with $1.5 trillion in adjustable rate mortgages due to reset this year the problems could spread beyond subprime borrowers. HBSC announced yesterday that its portfolio of subprime mortgages is in trouble due to high rates of default. (I guess that's what happens with mortgages that don't require income verification. )

Articles here and here highlight the debacle. This should not be a surprise. And don't be surprised when the default rate increases on the non-subprime portfolios. The bankers caused this mess and are going to have to figure it out.

This article presents the big issue for banks. An important take-away:

These new challenges come at a time when many borrowers who took out adjustable-rate mortgages are facing higher payments. There are about $1.1 trillion to $1.5 trillion in ARMs that will face rate increases this year, according to the Mortgage Bankers Association. The MBA expects borrowers to refinance as much as $700 billion of those mortgages.

"The decrease in property values, combined with prepayment penalties, is making it very challenging for people to get out of these loans," says Ed Shanks, an executive vice president with U.S. Bank Home Mortgage, a unit of U.S. Bancorp. U.S. Bank is seeing more loans fall through, particularly in markets such as Arizona, California, Colorado and Ohio, where home values have softened. It could be "the tip of the iceberg," Mr. Shanks says.

This article is talking about all mortgages, not just the subprime loans. The industry expects 50% to 70% of adjustable rate loans coming due this year to be refinanced. That is astounding. If appraised values are down, will these people be able to refinance? Will they have to have additional cash to support a loan to value ratio? These are huge questions for the housing market. If people start walking away from their mortgages the housing market's mild downturn could get severe.

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