Thursday, March 15, 2007

Foreclosures:Just the beginning.

National figures point to a rise in foreclosures. Of course this chart represents the entire 8 trillion dollar mortgage industry. The foreclosure rate among sub prime mortgages which represent approximately 20% of the mortgage market is about 5%.
We are increasingly seeing lenders realize that as loans begin to adjust the homeowners are experiencing payment shock, rapidly forcing people into late payments and exacerbating the tight financial situation in middle class households. This is forcing people to desperatly try to refinance their mortgage or put their home up for sale. The amount of homes for sale will dramatically increase as $1.5 trillion dollars of adjustable rate mortgages reset this year and force people to downgrade or leave the dream of home ownership behind altogether. I think the old maxim holds true that things usually get worse before they get better.

Greenspan states subprime risk to spread.

Ex-Fed chair says woes could spill over into other sectors; sees problem of high housing prices rather than mortgage quality.
March 15 2007: 2:16 PM EDT
BOCA RATON (Reuters) -- Former Federal Reserve Chairman Alan Greenspan said on Thursday there was a risk that rising defaults in subprime mortgage markets could spill over into other economic sectors.
Speaking to the Futures Industry Association, Greenspan conceded that it was "hard to find any such evidence" about spillover from housing yet. But he added: "You can't take 10 percent out of mortgage originations without some impact."
Greenspan said the downturn in U.S. housing markets appeared to stem more from high housing prices than from a decline in mortgage quality but said he was not downplaying problems in so-called subprime loans.
He said that subprime woes were "not a small issue" and seemed to result primarily from buyers coming into lofty housing markets late after big price runups that had left them vulnerable to hikes in adjustable mortgage rates.
In his remarks, the ex-Fed chairman declined to comment on interest rates or current Fed policy.

How did this all happen?

The lending community had become complacent with a Wall St investment community that had an enourmous appetite for subprime and ALT-A mortgage paper. The lenders only acting as repackagers would bend guidelines to keep the volume growing. The number of mortgage lenders increased dramatically during 2004-2006 this resulted in no pricing power to compensate the lenders and the Wall St banks that purchased the loans for the added risk. The lenders and banks were scrapping the bottom of the barrel of borrowers during late 2005 and throughout 2006 to keep loan volume growing or stable because every company along the way was selling off the risk to other parties but would reap billions in fee revenue on the deals.

Then the party ended when the defaults finally appeared. Folks who took these loans were told that they could refinance into lower rates when their credit or property values increased. With falling real estate prices and loan programs disappearing by the day this won't happen for millions of families. The punch bowl is being removed and homeowners are waking up to the sober reality of losing their piece of the American Dream.