9% of All Mortgages in Default/Foreclosure

Posted on September 5th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

For those die-hard Mr Mortgage readers, you already knew this was happening. The ooze is spreading from Subprime to Pay Options, Alt-A, Jumbo Prime and A paper. It is what it is.  It is kind of funny that we have all of these names differentiating the paper grades anyway. It is all nonsense because after so many rounds of downgrades from the raters and between 2005 and 2007 the line bewteen all paper grades becomming so blurred due to all sensibility and risk management leaving the mortgage sector, everything is likely several paper grades lower than its initial ratings anyway. 

My data showed me that subprime defaults were at a plateau (at least temporarily) 4-months ago and Alt-A, led by the Pay Option ARMs spiking around the same time. Being in the mortgage business for 20-years primarily working the West Coast region, logic told me this 2-years ago.

Just remember the implosion order: Subprime, Pay Option, Alt-A, Jumbo Prime and then Prime.  The HELOC Implosion has been ongoing and will accelerate into the Pay Option, Jumbo Prime and Prime implosions because the universes are larger than subprime and more piggy-back financing was used in these paper grades. 

The Pay Option Implosion will kick start the Alt-A and Jumbo Prime implosions as it will bring down values considerably in higher-priced, Pay Option heavy regions. All three will be happening simultaneouslyputting an even greater strain in values. Prime will be the last to blow but will blow, as those 20% down 30-year fixed buyers from 2004-2007 find themselves 30% upside down and it being cheaper to rent.  Remember, a large number of the 20% down crowd went out and stuck 90% to 100% HELOC’s on their homes, making them less than prime now as well. All of these things are happening right now but to nowhere near the degree they will as housing prices continue to fall and we move closer to peak resets for higher grades of ARM paper. -Best Mr Mortgage

Home loan troubles break records again
Friday September 5, 10:56 am ET
By Alan Zibel, AP Business Writer

Delinquencies, foreclosures rise to more than 9 percent of US home loans in second quarter.

 WASHINGTON (AP) — A record 9 percent of American homeowners with a mortgage were either behind on their payments or in foreclosure at the end of June, as damage from the housing crisis continues to mount, the Mortgage Bankers Association said Friday.But the source of trouble in the mortgage market has shifted from subprime loans made to borrowers with poor credit to homeowners who had solid credit but took out exotic loans with ballooning monthly payments.

The problem is also concentrated in a handful of states, the worst being California and Florida. The real estate markets in those two states were fueled by some of the riskiest lending practices and rampant speculation during the housing boom that has turned into a devastating bust.

“That’s clearly the problem,” said Jay Brinkmann, the association’s chief economist. “The national numbers are driven by the two largest states” with the most outstanding home loans.

The latest quarterly snapshot of the market broke records for late payments, homes entering the foreclosure process and for the inventory of loans in foreclosure. The trade group’s records go back to 1979.

The percentage of loans at least 30 days past due or in foreclosure was up from 8.1 percent in the January-March quarter, using figures that were not adjusted for seasonal factors.

New foreclosures were concentrated in eight states: Nevada, Florida, California, Arizona, Michigan, Rhode Island, Indiana and Ohio.

But for the first time since the mortgage crisis started, delinquencies on subprime adjustable-rate loans declined. While more than one out of every five homeowners with a subprime ARM is still in default, that portion dipped 1 percentage point from the first quarter to 21 percent.

What’s driving the delinquency rate up now is the number of homeowners with risky, adjustable-rate prime loans made with little or no proof of the borrowers’ income or assets.

Many of these loans allowed the borrower to pay only the interest on the loan for a fixed period of time. Others gave borrower the option to “pick-a-payment,” adding any unpaid interest to the principal balance.

More than one out of 10 borrowers with a prime adjustable-rate loan is now delinquent or in foreclosure. That portion, 11.3 percent, was up from 9.7 percent in the first quarter and is expected to continue to rise as more homeowners see their monthly payments spike.

15 Responses to “9% of All Mortgages in Default/Foreclosure”

  1. I am sure Wall Street analysts and bankers were “shocked” at this Alt-A news, just as economists were “shocked” at today’s unemployment report. . .as I have said elsewhere and before – don’t these people ever read the paper, talk with friends or venture out of their ivory towers??? If I just took a calculator and tallied up the daily layoff announcements from banks, airlines, GMAC (5000 in one day), 6.1% unemployments would not be a surprise. . .obviously none of these experts ever worked in the mortgage industry either.

  2. Mr. Mortgage, thank you very much for your insightful commentary on the ongoing trainwreck that is our economy. Your excellent written and video research has hopefully saved a couple people I know from taking the homedebtor plunge. Tough titty for everyone else, but that’s what happens when you make the biggest monetary commitment of your life with little to no research, and no heed paid to those other than the salesmen. No pity here for suckers.

  3. Have you written at all about the pending blood bath that second-home/vacation areas are abou to experience in the next couple of years. I figured this summer would be fairly quiet and then next summer and the following would be an absolute massacre in areas like lakes and beaches where middle and upper-middle class families stretched to buy their “dream” home away from home. That home is quickly going to become their bankruptcy nightmare as they learn that one season’s worth of rental income won’t cover their nut. Most of these were interest only loans.

    I live in DC near Ocean City, MD and I’m just waiting for the bottom to fall out of that market in a serious way. Already this summer, the number of shiny new Ford pickup trucks towing two brand new jetski’s was down to a trickle. All those toys are adding up to one big headache as alot of those people were tied to the housing industry in one way or another (realtor, mortgage, builder, etc…) Way to many people got leveraged on a second home who would have survived this if they only had their primary. It’s going to be a real tradgedy in my opinion. Should and could have been avoided.

  4. Hedgie, I love your posts, but please increase the type size.
    I’m sorry, I’m old, please don’t make me struggle to read the post.
    I am already struggling with the tankage of the American Dream.

  5. What about loan loss reserves on the balance sheets of financial institions? Can you say grossly undervalued. Most have pegged Alt-A and Jumbo and Prime at 99%+ collectable – really? When it hits the fan, financial institutions will be taking direct writedowns since they will not have sufficient reserves. Say bye bye to income/loss smoothing and hello to fist a cuff financial statement reporting.

    Then I hear today that Merrill Lynch is thinking about putting 32 Billion, yes I said it, Billion dollars into an off balance sheet corporation? Did I read that right Mark? If so, did we learn anything from Enron other than how to dupe the common investor. Also, this would make the Enron debacle look small in comparison.

    Kenneth Lay is off somewhere blushing at whats going (I know he’s supposed to be dead, but does anybody really believe that “Kenny Boy” is buried in some cemetary – he is buried though, buried in all the cash he took from his investors.

  6. MM, is it possible to get an aggregate loan size from the Alt A and prime? I guess they’re smaller than Jumbo’s. But with all the HELOC type additions, I am thinking that the dollar amount is rising as the actual number of loans defaulting.

  7. Ruffcut..try pressing Control +

    Mr.Mortgage. Is there a link you know of for Alt-A loan density?

  8. This number came out of left field for me even though I’m a housing-bear. Last time I read into the percentage of home borrowers in default, it was at 2%. The housing-bulls were cheering, “the market is fine because 98% of home owners are paying their mortgages.” I want to say this was roughly three months ago.

    What is the percentage of houses with a mortgage? 50%? (Too conservative?)
    Nearly one in twenty households is in trouble? Crap!

    Ruffcut, you can change the type size easily in your browser. Click somewhere in the browsing window (to give application focus). Then hold Ctrl and push your mouse’s scroll wheel up gradually.

  9. Mr. M – Just received an email from NY Times that gov’t is in process of taking over FNMA and Freddie. Turning into conservitorship.

  10. HousingRealist –
    Sure enough, it’s a conservatorship; here’s the link.


    Abdul Kashif –

    Not Merrill Lynch, it’s Lehman Bros. I will also note that 80% of it is commercial RE; usually it’s RMBS not CMBS. So the other shoe (CRE) is now dropping.

  11. The Fan/Fred bailout is news that I did NOT want to hear, but knew was coming.

    Looks like Bill Gross (PIMCO) will get what he asked for…

    It’s kinda weird watching a slow motion trainwreck coming & know it will injure me even though I’m just a spectator.

  12. Mr Mortgage, I’d like your opinion.

    I live in the way overpriced Seattle-Tacoma metro area; Tacoma to be specific. I have seen house prices drop somewhat, and I’ve seen most of the new high-rise condo projects come to a stop.
    Last year the median household income was just shy of $41K, and the median price was abut $265K… which is obviously too high in terms of the usual 3x to 4x income/house cost ratio we all know. The economy is driven by blue-collar jobs and the port (not nearly the amount of white collar jobs as there are in Seattle).
    Prices have gone down; homes that sold for $400K a couple years ago are down to the low 300’s. But it’s hardly in line with what folks can afford… It’s fairly well established that a $40K income can’t service a $330K mortgage. Prices have got to fall more to even be in the range of acceptable.
    I know the bubble here in the NW isn’t nearly as spectacular as those in Cali/AZ/Fla, etc. But I also know prices ballooned here too.

    So, my rambling aside, how is your outlook for my area? I would love to buy a house, and I’m fortunate enough to afford it. But I’m too nervous to do it. I’m only 26 and don’t want to find myself financially screwed over so early in my life.
    Thanks for your insight, Mr Mortgage.

  13. […] MBS: Have You Ever Seen One? Bill Gross Must Not Have.Fannie/Freddie…Now We Wait For Help or HELL9% of All Mortgages in Default/ForeclosureCountrywide/BofA – A Direct Threat to Borrowers & ShareholdersWachovia, Fitch & ‘The Pay […]

  14. […] Option ARM, Jumbo Prime and Prime. This is why the mortgage bankers association just reported that 9% of all mortgage loans are currently delinquent. That goes far beyond […]

  15. […] go bad to wipe out an amount of wealth equal to the U.S. GDP. Right now, according to some figures, 9% of U.S. mortgages are in […]

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