Interest Rate Roundup

Thursday, March 22, 2007

So many mortgage and housing stories, so little time

It's a busy day in mortgage and housing land, with lots of interesting takes on the latest developments. Let me try to get through these things one by one ...

First, Connecticut Democratic Sen. Christopher Dodd lambasted federal regulators yesterday for their failure to get ahead of the subprime mortgage mess before it devolved into a crisis. As I write this, he's holding a hearing on the lending problems, with testimony from mortgage lending officials, regulatory officials, and consumer groups.

Emory Rushton from the Office of the Comptroller of the Currency said before the Senate Banking Committee that:

"It is clear that some subprime lenders have engaged in abusive practices and we share the committee's strong concerns about them" and "We are now confronting adverse conditions in the subprime mortgage market, including disturbing but not unpredictable increases in the rates of mortgage delinquencies and foreclosures.''

You can read more coverage from Bloomberg here.

Second, it's clear that the subprime lending problems are also impacting other parts of the lending business. That includes the Alt-A market. That's where loans are made to borrowers who fall somewhere between prime and subprime, and where many of the funkiest loans (Interest only, option ARMs, etc.) have been made.

According to this story ...

* Lenders are shunning potential home buyers who can't put 5% down or who want to "state" (often translated as: lie about) their income

* Alt-A loans accounted for about 20% of all mortgages last year. Subprime loans were roughly another 20%. 18% of the Alt-A loans made were made at a 100% Loan-To-Value ratio; another 16% featured an LTV of 90% or more.

* While the absolute level of defaults is lower on Alt-A loans than subprime mortgages, the rate at which defaults are rising is roughly equal.

Third, one of the top home builders, KB Home, released its latest earnings report. Profit plunged 84% while sales dropped 19%.

Its cancellation rate did fall, and companywide net orders only slumped 12% year-over-year. That's a smaller decline than some other builders have reported. However, the average price of homes sold declined year-over-year in three out of four U.S. regions -- by as much as 12%, or about $40,000, in the Southwest. And if you exclude the company's French division, you see U.S. orders were actually off by a little more than 18%.

If I had to sum things up, I'd say that as usual, the regulators and the public policy makers are behind the curve. They're trying to crack down on subprime mortgage lending long after most of the junk loans have been made. As a result, it's too late to prevent a surge in delinquencies, foreclosures, and mortgage losses -- they're already "baked in."

Regarding lending standards, it's naive to think that only the subprime sector will get hit by this serious housing downturn. There was plenty of "junk" lending in the near-prime and Alt-A sectors as well. Even prime mortgages are showing a rise in delinquencies because the unprecedented surge in home prices forced all kinds of borrowers to stretch to get into homes -- including those with good credit.


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