St. Valentine’s day massacre

Latest figures out of the Mortgage Bankers Asscociation clearly rang the alarm bells this week on Capital Hill.

The Mortgage Bankers Association says default rates on all outstanding home loans in the US have reached 7.3%, the highest level since modern records began in the 1970s.
The default rate in America’s ‘prime’ mortgage market has hit a record 4%, prompting fears of house prices crashing by 25%. Arrears on “prime” mortgages have reached a record 4%, confounding expectations that middle-class Americans with good credit records would be able to weather the storm.
While sub-prime and close kin “Alt A” total $2,000bn of debt, the prime market in all its forms is roughly $8,000bn. If prime default rates rise on their current trajectory, they could ultimately cause huge financial damage.

Across the pond our friends in Switzerland were obviously drinking excess mortgage koolaid circa 2002-2006:

UBS reported a fourth-quarter net loss of 12.45 billion Swiss francs ($11.23 billion), including a $13.7 billion write-down on investments tied to U.S. mortgage investments. The bank posted its first full-year net loss — 4.4 billion francs — in the 10 years since it emerged from a megamerger between Swiss Bank Corp. and Union Bank of Switzerland in 1997. Write-downs for 2007 were $18.4 billion.
For the first time, UBS provided details of nearly $70 billion in holdings of subprime-mortgage and other problematic securities — an exposure that led analysts to predict more trouble.

Finally, as Rome continues to burn the noise on Capital Hill sounds more and more like a coordinated bailout is in the works:

Bank of America Corp., Citigroup Inc. and four other U.S. lenders will announce steps today to help borrowers in danger of default stay in their homes, according to three people familiar with the plans.

Encouraged by Treasury Secretary Henry Paulson, the banks will offer a 30-day freeze on foreclosures while loan modifications are considered, two people said on condition of anonymity. The initiative, which follows a week of talks with Bush administration officials, will apply to customers who are at least three months late on payments and include prime borrowers, as well as those with poorer credit histories.

Make sure the Swiss are included in the bailout mission.

The banking industry, struggling to contain the fallout from the mortgage debacle, is urgently shopping proposals to Congress and the Bush administration that could shift some of the risk for troubled loans to the federal government.

One proposal, advanced by officials at Credit Suisse Group, would expand the scope of loans guaranteed by the Federal Housing Administration. The proposal would let the FHA guarantee mortgage refinancings by some delinquent borrowers.
Credit Suisse officials have met with senior officials from the Department of Housing and Urban Development, which runs the FHA, and other policy makers to discuss the proposal. The risk: If delinquent borrowers default on their refinanced loans, the federal government would have to absorb the loss.

My comments: Record mortgage defaults of prime residential mortgages will continue to impede commercial bank lending for many quarters to come. And to think most analysts and money managers believed the fiduciaries back in December when they echoed “the worst is behind us”. Fool me once shame on you, fool me twice shame on me.

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