Interest Rate Roundup

Thursday, March 01, 2007

The mortgage lending mess

News of the ongoing mess in subprime mortgage lending is everywhere these days. And despite Ben Bernanke's comments yesterday that mortgage delinquency problems are contained to the subprime sector, the data shows delinquencies increasing in the Alt-A market as well. Those are loans that aren't as risky as subprime mortgages, but aren't as high quality as prime mortgages, either. Some stats to consider (from this Wall Street Journal story -- subscription required) ...

* A record $400 billion Alt-A mortgages were originated in 2006, up from just $85 billion in 2003.

* Alt-A loans accounted for 16% of originations last year. Subprime loans were another 24% of the market.

* The default rate on Alt-A loans has doubled in 14 months. About 2.4% were at least 60-days late, below the 10.5% subprime delinquency rate, but well off the lows.

Just in case you missed it, broader quarterly delinquency stats captured by the Federal Reserve are also deteriorating. The chart above shows that the delinquency rate on all residential real estate loans popped up to 1.91% in Q4 2006. That's the highest since Q1 2003. We're well below the levels of the early 1990s, of course. But delinquencies take time to filter through the system and it's likely this indicator will rise for some time to come.

Bottom line: The stage was set for a credit mess during the housing boom. Lenders went hog wild and gave loans to anyone with a pulse. We're now dealing with the fallout, and I believe things will likely get worse before they get better.


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