Interest Rate Roundup

Tuesday, December 12, 2006

a cornucopia of mortgage credit warnings

One major housing boom enabler was ridiculously easy lending. When interest rates started to rise in 2004, and the mortgage business started cooling, lenders didn't pull back. Instead, they offered more and more exotic forms of loans in order to keep the party going. Now that housing is sinking, we're seeing defaults surge across the board.

One example: Countrywide Financial reported its November operational results this morning. The portfolio delinquency rate climbed to 4.57% from 4.43% in October. More importantly, if you exclude last fall's hurricane-influenced jump (11/05 and 12/05 DQs rose as borrowers in hurricane-affected regions fell behind on their mortgages in droves), you find that's the highest DQ rate since December 2002. The servicing portfolio's foreclosure rate is 0.60%, up from 0.43% a year earlier and the worst in any month going back to April 2002.

I warned we were staring a major loan loss problem in the face several times in the past year, including in this column from back in July. Other warnings are now popping up all over the place. Here's one from Bloomberg, quoting Fitch as saying mortgage-backed and asset-backed debt, particularly in the subprime world, will perform poorly next year. Losses on subprime mortgage bonds issued in 2000 are about 5.5% to date. Fitch says cumulative losses over the life of 2006 securitized subprime loans will top 7% -- the worst performance EVER.

The Wall Street Journal also has a couple more stories on the topic today, one titled "Double Trouble for Mortgage Shares: Dual-Loan Borrowers Pose Added Risk" and another "Debt Investors' Double Burden." And several government officials weighed in at a housing market conference put together by the Office of Thrift Supervision. AP summarizes the comments here.


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