Interest Rate Roundup

Tuesday, June 26, 2007

The "well-contained" myth...

The old phrase "well contained" seems to have gained a lot of traction in Washington lately. Inflation? Well-contained. The housing downturn? Well-contained. The subprime meltdow ... er ... minor blip? Well-contained. But the problem is that reality keeps intervening.

The latest example? Bloomberg has a story that leads off this way:

"U.S. borrowers with good credit are increasingly falling behind on payments, a sign that lenders have been offering 'higher risk' loans to people other than subprime borrowers, according to two studies by Standard & Poor's Corp."

The article goes on to point out that delinquencies on prime jumbo mortgages, large loans that don't fall under the conforming loan limits set by Fannie Mae and Freddie Mac, are climbing fast. The delinquency rate on the 2006 crop of those loans is the highest since at least 2000 (for mortgages that are less than 12 months old, or "seasoned.")

Some 4.21% of the Alt A mortgages made in 2006 are either late by 90 days or in default after 14 months of seasoning. That's more than double the 1.59% rate on 2005 mortgages that were that old, and more than five times the rate on 2004 loans.

And the "well contained" delinquency situation in subprime? It's getting worse. Another Bloomberg story recounts how a whopping 14.51% of a key crop of subprime bonds issued in the second half of 2006 were already either being paid late, in foreclosure, or in a position where the underlying property has been seized as of May. That was up 2.15 percentage points from April. The April rate itself was up 1.86 points from March. Almost 18% of the loans made in the first half of 2006 were in a similar situation.

In other words, almost 1-in-5 of these subprime loans is failing within a year and a half of origination. Unbelievable. It's a travesty these junk mortgages ever got made.


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