The Housing Chronicles Blog: Subprime loans only the first to default?

Monday, December 10, 2007

Subprime loans only the first to default?

As also noted in the L.A. Land blog, it seems that defaults in the subprime mortgage sector are only the first wave of others to follow. According to a mortgage insider named Mark Hanson who regularly emails Herb Greenberg, a blogger on mortgages for MarketWatch:

The Government and the market are trying to boil this down to a ’sub-prime’ thing, especially with all constant talk of ‘resets’. But sub-prime loans were only a small piece of the mortgage mess. And sub-prime loans are not the only ones with resets. What we are experiencing should be called ‘The Mortgage Meltdown’ because many different exotic loan types are imploding currently belonging to what lenders considered ‘qualified’ or ‘prime’ borrowers. This will continue to worsen over the next few of years. When ‘prime’ loans begin to explode to a degree large enough to catch national attention, the ratings agencies will jump on board and we will have ‘Round 2′. It is not that far away...

Sub-prime aren’t the only kind of loans imploding. Second mortgages, hybrid intermediate-term ARMS, and the soon-to-be infamous Pay Option ARM are also feeling substantial pressure. The latter three loan types mostly were considered ‘prime’ so they are being overlooked, but will haunt the financial markets for years to come. Versions of these loans were made available to sub-prime borrowers of course, but the vast majority were considered ‘prime’ or Alt-A. The caveat is that the differentiation between Prime and ALT-A got smaller and smaller over the years until finally in late 2005/2006 there was virtually no difference in program type or rate...

To get housing moving again in Northern California, either all the exotic programs must come back, everyone must get a 100% raise or home prices have to fall 50%. None, except the last sound remotely possible.

Personally, I always thought a good rule of thumb was to (a) multiply your income by 3 and then (b) multiply that total by .8 to figure out what you could comfortably afford in a home purchase. Sure, that could mean a condo or a townhome or a single-family home in a borderline area instead of a detached home in a nice neighborhood, but why not befriend people with the yards and just bring a nice bottle of wine?

No comments: