I don’t make a lot of changes to my 401(k) account. Heck, I barely touch the thing. That&rsquo...
Default isn't just for subprime mortgages anymore
08/05/2009 11:57 am EST
And that's a huge problem for a banking system that was almost brought to its knees when subprime mortgages, those that went to borrowers with the worst credit, defaulted by the truck load.
The dollar volume of prime mortgages in delinquency or default rose 13.8% from March to June, according to a new study by Standard & Poor's. The study only covered mortgages originated by banks, bundled into securities, and then sold to investors. It omitted what are called "conforming" mortgages, backed by federal-government-backed Fannie Mae (FNM) or Freddie Mac (FRE).
The study comes as some Wall Street analysts have started to question recent numbers suggesting that the housing market has either bottomed or moved into recovery. The widely followed S&P/Case-Shiller index of housing prices showed a gain in prices in May from April. That was the first month-to-month increase since 2006. On an annual basis prices declined a seasonally adjusted 2%, leading investors to argue that the housing market was near a bottom.
The problem, though, is that pesky phrase "seasonally adjusted." Efforts to revise the raw data to reflect normal seasonal swings in home buying activity--most home buying takes place in the spring and summer--led to over-stating the price recovery, analysts at Barclays Capital and Bank of America have argued. A more accurate estimate, Barclays calculated, would be that housing prices declined at an annual 10% to 15% rate.
In other words, this market hasn't seen bottom yet.
Coming from different perspectives, it's striking to me that the studies of prime mortgage defaults and seasonal mid-adjustment both agree that the housing market and home prices aren't in recovery yet.
The S&P study of default rates found that defaults by the most troubled mortgage borrowers--those holding subprime and Alt-A mortgages--have stabilized. Non-performing balances for Alt-A mortgages, the risk class just above subprime, rose by just 3.2% in the quarter from March to June. The dollar volume of non-performing subprime mortgages fell 4.2% in the quarter.
Why are defaults and deliquencies on risky subprime and Alt-A mortgages falling or leveling off, respectively, when defaults on mortgages to better credit risks are climbing so quickly? The S&P report theorizes that the most troubled borrowers--those who got no-income-verification mortgages, for example, on what turned out to be truly inadequate incomes--have already gone into default. More credit worthy borrowers with prime mortgages have managed to hold on without defaulting but are now finally going under as long-term unemployment devastates family finances.
The analysts at Bank of America are looking for reports this fall to show that housing prices are still falling at double digit rates and that the housing market hasn't bottomed. "Distressed sales are less seasonal than healthy sales, since distressed borrowers don't have the luxury to time the sale of their home," the July 31 report from Bank of America said.
While home sellers who put up for sale signs on their front lawns in the summer--just to see what kind of offer they might get--take those signs down again in September if they haven't sold, distressed sellers leave them up. That should lead to a higher than normal seasonal supply of houses on the market in the fall and a resumption of declining home prices, the Bank of America report concludes.
Barclays's analysts calculate that U.S. home prices will fall an additional 11% on average before they hit bottom in 2010.
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