Interest Rate Roundup

Wednesday, August 02, 2006

As the credit cycle turns ...

Two interesting stories on Bloomberg today regarding credit quality in the mortgage arena. I've excerpted the important stuff, and thrown my comments in at the end for good measure ...

* On Asset Backed Securities (ABS) -- which include bundles of second mortgages/home equity loans:

Aug. 2 (Bloomberg) -- Moody's Investors Service said the number of upgrades on U.S. asset-backed bonds last quarter fell to the lowest level in two years, reflecting an increase in mortgage payment defaults.

Upgrades accounted for only 14 of Moody's 113 ratings changes in the second-quarter, a 90 percent plunge from the first quarter and the lowest level since the second quarter of2004, Moody's analyst Zoe Wang said in a report released today ... Downgrades increased 70 percent from the first quarter, with three-quarters of the reductions tied to home equity companies, Wang said.

* On California loans going bad -- big time!:

Aug. 2 (Bloomberg) -- California home-loan defaults rose at the fastest pace in 14 years in the second quarter as slowing price appreciation made it harder for homeowners to sell and payoff mortgages, DataQuick Information Systems said.

Banks and other lenders sent 20,275 default notices to California homeowners in the second quarter, up 67.2 percent froma year earlier and up 10.5 percent from the first quarter, the LaJolla, California-based research company said in a statement today. It was the highest year-over-year increase since DataQuick began tracking defaults in 1992.

Bottom line: When you give loans to anyone with a pulse, you're begging to get hosed. And that's exactly what will likely happen to many mortgage companies and holders of junk mortgage paper. The industry is STILL underestimating the likelihood of a hard landing in real estate, as far as I'm concerned.


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