Boom2Bust.com

More Mortgage Woes To Follow

According to the Associated Press earlier today, analysts fear the next wave of problem loans as monthly payments soar for both prime and subprime borrowers who took out adjustable rate loans with little/no documentation, or who used piggyback loans on top of their first mortgages to make up the difference for small down payments. Due to soaring U.S. real estate values over the last few years, the use of these exotic loans were the only way many borrowers could afford to buy a home.

Yesterday, Angelo Mozilo, CEO of Countrywide Financial Corp., the biggest U.S. mortgage lender, said, “Softening home prices continued to affect many areas of the country and delinquencies and defaults continued to rise across all mortgage product categories.” Bloomberg noted that the third straight quarterly earnings decline for the lender decline adds to signs that late payments on consumer loans are spreading from subprime borrowers (those with poor/limited credit histories) to people with more reliable repayment records. According to the Associated Press, analysts said the trend could continue, particularly in areas suffering from unemployment or a decline in speculation-driven construction, such as South Florida, parts of California and Las Vegas. Mark Zandi, chief economist at Moody’s Economy.com, told AP that, “As housing values weaken broadly and the job market slows in these areas that we’re focused on, all borrowers will be touched,” Zandi said subprime borrowers, those with poor/limited credit histories, will likely be the source of the greatest number of defaults. “But even prime, fixed-rate first mortgage borrowers will experience more credit problems,” he predicted.

Even though the U.S. unemployment rate is low by historical standards, the mortgage industry anticipates a growing number of defaults in coming months as many adjustable mortgages that originated in 2005 and 2006 (during the housing boom) will begin to reset to higher interest rates. Christopher Brendler, and analyst with Stifel Nicolaus & Co., told the Associated Press that:

The losses are just beginning… Housing is increasingly a problem, prices are likely to go down, and so these loans underwritten in the best of times will now season in the worst of times… The same problems you saw in the subprime sector that caused the big meltdown in March is now a broader industry problem that’s hitting the prime sector.