NBUser.com Subprime In Sheep's Clothing - Powered by Discuz!NT Archiver

cloud_zhou - 2008/5/12 13:33:00

Maurna Desmond 05.08.08, 12:50 PM ET Personal credit scoresused to be a pretty accurate indicator of the odds that Americanborrowers would pay off their mortgage loans. But in the past fewmonths--far too late to do anything about it--lenders are finding thatthe amount of equity people have in their homes is a better determinantfor the risk of default. That is a ticking time bomb as U.S. home prices weaken in the wake of the subprime loan crisisbecause it means that relatively affluent borrowers might not stickaround once their equity turns negative, potentially beginning avicious circle of home abandonments that push down prices and encouragenew defaults. "What the whole industry is seeing is a higher correlation betweenhigher loan-to-value ratio and the likelihood of default," said TerryFrancisco, a vice president at Bank of America. "In previous cycles,the correlation had been between FICO scoresand default," he said. FICO scores, developed by Fair Isaac, have beenwidely used in determining the creditworthiness of individuals. A booming real estate market, which encouraged loose mortgageunderwriting helped fuel overheated housing prices in markets likeSouthern Florida, Southern California, Las Vegas and Phoenix. While the problem with subprime mortgages is well known and likely to be largely played out, their upscale cousins, known as Alt-Aloans, are now threatening creditors with a new default spree. Alt-Aborrowers had respectable FICO scores, but they bought mortgages thatdid not conform to the high standards of the prime market. Often Alt-Aloans were for expensive properties and were taken out by borrowers whodid not care to document their income or pony up the once-standard20.0% downpayment. In March, 67.0% of outstanding nonprime loan balances in the UnitedStates were Alt-A, the New York Federal Reserve Bank said, more thantwice the level of subprime mortgages. That works out to $935.0 billionin Alt-A loans, or about 10.0% of all American mortgage debt, accordingto research firm First American CoreLogic. Lenders liked Alt-A loans during the boom because they came withhigher fees and interest rates than prime mortgages but from borrowerswith better credit than those taking subprime loans. It seemed an idealcompromise between risk and return. Now, however, Alt-As are beginning to default in ways eerily reminiscent of their subprimebrethren. They are just beginning to buckle because they typically camewith low introductory rates of three to seven years rather than thetwo- and three-year teasers on subprimes. The height of Alt-A borrowingcame in 2005 and 2006, so these rotten eggs are just beginning to hatch. According to trade publication Inside MBS & ABS, in2004, Alt-A loans represented just 8.4% of mortgages originated in theUnited States, while subprime loans accounted for double thatpercentage, 19.3%. In 2005 and 2006, however, Alt-A market shareburgeoned to 15.4% and 17.7%, respectively, while subprime's heldsteady at 21.6% and 21.7%. Once the subprime crisis hit, lots of lending dried up, includingAlt-A mortgages. In the first quarter of this year, only 0.1% of U.S.mortgage loans issued fell into that category. Lenders wildly miscalculated returns on Alt-A mortgages, and thecredit agencies are quickly setting the record straight. In late Aprilalone, more than $50.0 billion of Alt-A-backed securities weredowngraded by credit-rating agencies Moody's and Standard & Poor's. Many Alt-A borrowers bet that their homes would appreciate enoughduring the teaser period that they could refinance and use the gains tohelp pay off their mortgages. But, with prices falling, many of theseborrowers will end up with houses they cannot afford and mortgages thatare larger than the values of their homes. (See: "American Housing Market Still Sliding") In a report published May 7, Fitch analyst Suzanne Mistretta wrotethat delinquencies on recent Alt-A loans are "up across the boardrelative to earlier vintages" and that multiple liens, in whichborrowers took second loans to cover down payments and the like,seriously increased the rate of delinquency. At least a quarter ofAlt-A loans are in this risky category. It gets worse. At the height of the boom, Alt-A borrowers also choseterms that allowed them to defer building equity in their homes inexchange for lower payments, a major driver of mortgage default. Fitchreported that interest-only products represented roughly 40.0% of 2006and 2007 Alt-A fixed rate mortgages issued, up fivefold from 2005. Unlike subprime folk with expired teasers who have been puttingcapital into their homes for months and perhaps years, many Alt-Aborrowers with years left on their payment-lite teaser periods aregoing to wake up one day to homes that have hugely deteriorated inprice and have little if any equity in them. That is the exact recipefor foreclosure that bank insiders and credit analysts are warningabout. Mark Zandi of Moody's Economy.com estimates that, by the end ofJune, 21.0% of all first-mortgage holders in the United States, or 10.6million homeowners, will have zero or negative equity in their homes. For now, Alt-A loans are performing better than subprime mortgages.The risk, however, is that generally well-heeled Alt-A borrowers willadopt the same flippant attitude to paying their debts as lenders didin evaluating them. An additional pressure: 23.7% of Alt-A loans werenot taken out for primary residences are often considered investmentsand have a higher rate of foreclosure. Only 8.7% of subprime mortgageswere for absentee landlords, according to the New York Federal ReserveBank. A new wave of defaults could add to the downward pressure on U.S. home prices and extend their slide for months to come. Banks and investors don't like to talk about Alt-A defaults. Onereason is because none of them have come forward with a plan ofmanaging the issue that doesn't start with "write" and end with "down."

jmh007 - 2008/5/18 20:31:00

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cloud_zhou - 2008/5/26 13:15:00

原帖由 jmh007 于 2008-5-18 20:31:00 发表 One way to pump up the US housing market, might be to loose theimmigration policy, which has been in tight control since 911. As newimmigrants have a need for house to setup home - if the investmentrequired for immigration would be set at a "proper" level. Tax discountfor new immigrants will be even helpful. Ifthe US government would be willing to adopt its policy to save itseconomy, some 2 mil. new citizens from China might solve the crisis. Just a wild guess ^_^

I think the new immigration policy is coming on its way right now. Depend on election, they might just create a new category for rich investors who willing to buy their way to America.

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