Next Wave Of Mortgage Defaults Coming

Posted In: Alt-A, Banking Crisis, Credit, Delinquencies, Housing, Mortgages, Subprime, Uncategorized

Think the U.S. housing crisis is nearing an end? Think again, says Vikas Bajaj of the Paris-based International Herald Tribune. Bajaj wrote yesterday:

The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is building with alarming speed.

After two years of upward spiraling defaults, the problems with mortgages made to people with weak, or subprime, credit are showing the first, tentative signs of leveling off.

But with the U.S. economy struggling, homeowners with better credit are now falling behind on their payments in growing numbers. The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A, or alt-A, mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.

So, when should we expect this new tsunami of mortgage defaults to arrive? Bajaj wrote:

While it is difficult to draw precise parallels among various segments of the mortgage market, the arc of the crisis in subprime loans suggests that the problems in the broader market may not peak for another year or two, analysts said…

Bajaj said that prime and alt-A borrowers typically have a 5 to 7-year grace period before having to start making payments toward their principal. By contrast, subprime loan borrowers had a 2 to 3-year introductory period. David Watts, an analyst with CreditSights, told the Tribune that regarding alt-A mortgages:

More delinquencies look like they are on the horizon because so few of them have reset.

Delinquencies in prime and alt-A loans are worrisome for financial institutions because they have more of these types of loans on their books than they do subprime mortgages. Bajaj noted:

During a conference call with analysts last month, James Dimon, the chairman and chief executive of JPMorgan Chase, said he expected losses on prime loans at his bank to triple and described the outlook for them as “terrible.”