Two Huge Mortgage Recast Waves
Credit Suisse put together a chart showing all adjustable rate mortgage recasts in the US. I think this chart clearly illustrates how much danger the real estate market is in. The first big wave on the chart is the result of subprime mortgages recasting/resetting. The subprime lending meltdown has thus far largely been with the subprime mortgage companies. Everyone has heard of the big public lenders like New Century and Accredited Home Loans but most people don't realize that roughly 41 lenders have gone out of business since late 2006. The ones that remain have tightened up their lending standards or stopped doing subprime loans entirely. The real casualties of this whole affair are the subprime borrowers. There are roughly $17.5bb of subprime recasts this month, but that number quickly doubles to $35bb in 8 months. It is going to be a slow, painful unraveling as all of these underwater (assuming home prices remain flat or negative) subprime borrowers realize that they can no longer get "no doc" subprime loans. 
But, the subprime loans aren't the only problem, just the most immediate. Most of that fallout will occur in the next 2 years. The next big wave of recasting loans will be the option ARMS and Alt-A ARMS. We haven't even
begun to talk about these loans yet because the worst will not hit for another 4 years. But, if you assume that the subprime fallout hits real estate prices fairly hard you have to figure that the default rate during the second wave could be even more deadly. Unless the real estate market miraculously turns around and starts to rise many of these borrowers will have to dig themselves out of a mortgage that may be anywhere from 5 to 20% larger than the FMV of their home. Remember this is what happened to homeowners in Japan that bought in during their 1980's real estate boom and subsequent bust. Some homeowners who bought homes in Tokyo 20 years ago are still underwater!! In fact the chart to the right shows that real estate prices in Japan have fallen for close to 17 straight years. I don't write this to scare people, but I do want to note that whenever there is a bubble someone gets stuck with the bill. In this case I have a feeling it won't be contained to just subprime lenders.
Irvine Housing Blog
http://www.irvinehousingblog.com
Source: Wikipedia
Japanese Asset Price Bubble
http://en.wikipedia.org/wiki/Japanese_asset_price_bubble
1 comment:
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