First it was the subprime loans that were causing problems for lenders. They were followed by the alt A loans. What is the latest problem child for lender is the formerly known as "insulated" prime jumbo loans: [Parenthetical comments are by author "Tradermark", not me.]
Rising defaults by affluent homeowners are raising the specter of another cloud over banks and investors, which could get stuck with thousands of expensive homes. About 6.9% of prime "jumbo" loans were at least 90 days delinquent in December, according to LPS Applied Analytics, a mortgage-data research firm. The rate was up sharply from 2.6% a year earlier. (hmm, I wonder what happens a year from now when unemployment rate is far higher and savings depleted?)
•Jumbo mortgages average about $750,000 and can run as high as $5 million or more. More borrowers with such loans are being hit by layoffs that are spreading through practically every sector and pay level of the U.S. economy.
•Defaults on jumbo mortgages tend to result in especially steep losses for lenders, because pricier homes are tough to sell in the current market. (just hold out for 2nd half 2009 when the recovery happens – should be easy to sell then)
•Last month, the mounting defaults prompted Moody’s Investors Service to downgrade hundreds of tranches of prime jumbo loans sold to investors as securities. Moody’s has downgraded more than 75% of all prime jumbo loans originated in 2006 and 2007 that carried the top rating of triple-A. (oh, Moody’s – where do I even start with these ratings agencies…)
•From 2002 to 2006, banks originated an average of $557 billion a year in jumbo loans, according to Inside Mortgage Finance, a trade publication.
So will problems with jumbos be as bad as subprime? Some are saying it will be worse. Why?
Jumbo Defaults. This past week, data showed that the delinquency rate for jumbo mortgages — those too big to qualify for backing by the government — at 6.9% of prime loans is more than three times as high as regular conforming loans. That suggests mortgages taken out by the affluent and wealthy, or at least the aspiring or former wealthy, are deteriorating at a faster rate.
Fewer Buyers. When seemingly everyone was getting richer, there was a rising number of buyers. With Richistan evacuating faster than Malibu in a mudslide, the number of potential buyers for $1 million-plus homes is on the decline. At least on the middle and lower end of the housing market, there is a crowd of first-time buyers and discount-seekers ready to take up the slack.
Worst Regions. The regions with the highest-valued properties — New York, California, Nevada — have reported the steepest price declines. That means homes once priced at the top of the national market may take the biggest spill — and have the hardest time recovering.
The Indebted Rich. Many assumed the wealthy were living more within their means than the rest of the population. But they may have been just as leveraged as everyone else — and certainly owe more in dollar terms. From 1995 to 2004, the top 1% of Americans by wealth more than doubled their mortgage and residential debt to $494 billion.
Jumbo loans are a greater percentage of total mortgage debt than subprime- and could end up being the bigger headache.
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twist -
This has been in the works for a long time. I think it was in March 2004 that I was frantically trying to signal Garrett Thornburg through someone I knew in Santa Fe that Fannie’s ’03 10-K would likely present him with problems [2 Early R US
].
However, the bottom line is that the following is no joke, and we are in the process of assessing the damage of all this silly debt (now that rollover has stopped world-wide):
“Donald Trump: first he took Manhattan…”, by Nigel Farndale, Telegraph, August 1, 2008.
There has always been a bit of truth to the old adage “If you owe a thousand your lender is a critical overlord; if you owe a billion he is your staunchest supporter.”
Of course when their staunch support doesn’t turn things around and your debt gets sold off for nothing the new guy will demwnd his pound of flesh.
Igor says: outraged
The WSJ:
W.C. -
Nice dig. Here’s an additional paragraph, which is significant because it indicates that securitization (and therefore what the financial services industry has been using for most of its money supply lately) is broken.
“Why Be a Nation of Mortgage Slaves?”, by Ramsey Su, Wall Street Journal, January 31, 2009.
Of course it’s going to be worse.
The upcoming tidal wave of jumbo Alt A’s and Option Arms were loans whose homeowners “deferred payments”, deferred them for 5 years. Contractually, they could defer up to 10% – 20% – 30% of the loan amount before they HAD to start making a full payment.
If your loan is 10% – 20% – 30% more than when it started, and your property has gone down 30%, uh-oh. Not your uh-oh, the bank’s uh-oh.
The banks have been logging this uh-oh in their “incoming money” column. All this time, they’ve been counting your deferred payment as their income.
The banks don’t have any money, all they have is a bunch of uh-oh’s. That’s why they’re frozen. There’s no way out of this. They’re screwed.
BO’s Big Bank burst of money will just tickle the elephant in the room.
Yes, it’s going to be worse as the Alt A’s and Option Arm defaults come ashore.