12% of all mortgages and 48% of sub-prime mortgages in default

I'm still waiting for a perp walk of those people who were responsible for the sub-prime debacle, because they had to have known how these loans would end -- badly. According to an AP story, 48% of adjustable-rate, sub-prime mortgages and 12% of all mortgages are in technical default. But now the pain has spread to people who can't pay because their lost their jobs as well as those who bought more home than they could afford:

A stunning 48 percent of the nation's homeowners who have a subprime, adjustable-rate mortgage are behind on their payments or in foreclosure, and that's not the worst of it, new data Thursday showed.

The reckless lending practices in states like Florida, California and Nevada that were the epicenter of the housing crisis are no longer driving up the nation's delinquency rate. Instead, the foreclosure crisis now is being fueled by a spike in defaults in states like Louisiana, New York, Georgia and Texas, where the economies are rapidly deteriorating and thousands are losing their jobs...

A record 5.4 million American homeowners with a mortgage of any kind, or nearly 12 percent, were at least one month late or in foreclosure at the end of last year, the Mortgage Bankers Association reported. That's up from 10 percent at the end of the third quarter, and up from 8 percent at the end of 2007...

The news comes a day after the Obama administration kicked off a new program that’s designed to help up to 9 million borrowers stay in their homes through refinanced mortgages or loans that are modified to lower monthly payments.

Borrowers, however, are being advised to be patient in their efforts to get help because mortgage companies are likely to be flooded with calls...

Meanwhile, debt-strapped homeowners unable to afford their mortgages could get their monthly payments lowered in bankruptcy court under a controversial element of President Barack Obama’s housing rescue plan.

The legislation is part of a broader housing package scheduled for a House vote Thursday. It’s the toughest piece of Obama’s efforts to prevent foreclosures — a stick to go with the many carrots he is offering the mortgage industry to help borrowers afford their home loans.

FHA-backed loans: the new sub-prime disaster?

Never underestimate the power of greed. That seems to be the lesson of a story published in Business Week magazine on former sub-prime mortgage players now simply transitioning their business models to loans backed by the FHA -- and by extension, the U.S. taxpayer. From the story (hat tip: Brian McDonald):

Thousands of subprime mortgage lenders and brokers—many of them the very sorts of firms that helped create the current financial crisis—are going strong. Their new strategy: taking advantage of a long-standing federal program designed to encourage homeownership by insuring mortgages for buyers of modest means.

You read that correctly. Some of the same people who propelled us toward the housing market calamity are now seeking to profit by exploiting billions in federally insured mortgages. Washington, meanwhile, has vastly expanded the availability of such taxpayer-backed loans as part of the emergency campaign to rescue the country's swooning economy...

As a result, the nation could soon suffer a fresh wave of defaults and foreclosures, with Washington obliged to respond with yet another gargantuan bailout.

Click here for full story -- but sit down first!

Fed rate cuts helping sub-prime mortgage resets

It looks like the cuts by the Fed in interest rates have had a calming effect on potential sub-prime mortgage resets. From a story in the L.A. Times:

The great mortgage reset of 2008 isn't turning out quite as advertised.

Thanks to interest rate cuts by the Federal Reserve, payments on sub-prime loans with expiring "teaser" rates are going up only modestly when the loans start adjusting -- by just 1% on average last month, one study found...

Defaults and foreclosures are still rising, however -- it's just that the culprit isn't solely the payment shocks once feared.

Instead, industry experts put most of the blame on tumbling housing prices, which have left many borrowers owing more than their homes are worth after making little or no down payment, taking on second mortgages or sucking their equity dry through refinancings...

Lower short-term interest rates also help certain other adjustable-rate borrowers, including people with home equity lines of credit, which have interest rates at or close to the prime rate. The prime rate, which was 8.25% a year ago, was at 5.25% this week.

Holders of controversial "pay option" mortgages, which allow borrowers to pay so little that the balance rises, also will benefit.

Facing what was shaping up to be the worst wave of foreclosures since the 1930s, the Fed lowered its benchmark rate for short-term loans between banks by 1.25 percentage points in January and by an additional 0.75 of a percentage point March 18.

In response, the index for most sub-prime loans -- a European inter-bank lending rate known as six-month U.S. LIBOR -- fell to 2.4% on March 18, the lowest level in more than three years, a recent Standard & Poor's study noted.

The Federal Reserve cuts were aimed in part at stemming foreclosures and propping up the slumping housing market, which many economists believe has tilted the economy into recession.

But the reduction in interest rates hasn't revived the moribund sub-prime lending market, economist Morici said.

Big investors such as pension funds, burned on mortgage investments, now will buy only those mortgage bonds backed by the safest prime loans or guaranteed by government-sponsored entities. And that, Morici said, has cut off sub-prime lending to potentially worthy borrowers with some credit dings and also loans for self-employed people and others in the "alt-A" loan category between prime and sub-prime...

The Fed also has little control over long-term fixed mortgage interest rates. The average rate on a 30-year fixed-rate mortgage rose to 6.1% after the Fed reduced short-term rates in January because investors feared that the stimulus to the economy might fuel inflation. The rate had moved back down to 5.8% as of Thursday.

Consumer advocates said lower resets were no substitute for the five-year rate freeze that Treasury Secretary Henry M. Paulson Jr. had promoted back in December. Under that plan, many lenders had pledged to leave unchanged the teaser rates for sub-prime borrowers if their payments would become unaffordable because they were rising by 10% or more.

"The important thing for a family getting a [rate freeze] loan modification is that it provides long-term stability," said Kevin Stein, associate director of the California Reinvestment Coalition, who testified last week before the same House subcommittee as Deutsch. "Getting a temporary small increase based on a LIBOR index that can go back up in a few months is not going to do that."

Still, the lower resets are very real for what the industry describes as typical sub-prime borrowers. Their loans might start with an 8% rate for two years, the S&P study noted, then start adjusting twice a year to six-month LIBOR plus 6 percentage points. If LIBOR was 5%, the borrower would pay 11% interest on the loan...

After recent news articles questioned whether banks were properly reporting the interest rates used to calculate LIBOR, it crept back up a bit, to just over 3% last week.

But most sub-prime loans adjust by adding 5.5 or 6 percentage points to the index, meaning adjusted rates would be in the 8.5% to 9% range, not the double digits that had been feared last year when Paulson was promoting a "streamlined modification plan" to freeze the initial interest rates.