Housing Lenders Worry Of An Even Bigger Second Wave Of Loan Defaults

The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building.

Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults.

The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.

Read the full story here

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Read blogger Adam Hanft's post "Reincarnation Alert! The Depression Generation Is Returning! Meet the Upside-Down Generation"

Comments

[watchTVgetSTUPID]

First time mortgage resets are scheduled to continue en masse until into the first half of 2011. Since resets can really jack up monthly payments and therefor forclosures, don't expect much of a recovery before then.

By then China will be exporting millions of cars to the US and have totally cornered the world electronics business. Expect China to ramp up on their prefabricated home exports by then.

Bottom line is the dollar and US jobs are in trouble and it is doubtful the housing market will recover in time.

[funkalicious]

that should read 2 trillion bailout

[leftLibertarian]

don't worry, the government will bail you out

[axt113]

Only if you're a big bank, if not you're on your own

[ROFLMAO]

I know a couple who just HAD to move into a huge house - but had very little in savings. So they got loans/gifts from their relatives, but it still wasn't enough for the 10% down payment. So they snuck off to a second bank and took out a second mortgage, enough to cover the 10%. Now the first bank was granting them the mortgage on the basis that they put in 10% of their own money - this measure was designed to ensure that a) they were responsible savers, and b) they would have financial equity and therefore a real interest in keeping up the main mortgage. Still, they got the house... and they would have gotten away with the scheme as long as the housing bubble continued, because they could have upped and sold at a profit.
Personally, I paid off my mortgage in the 90s, own my car outright, and pay off my credit cards in full every month. So I am watching the coming financial apocalypse with amused interest, not alarm.

[heal57]

Good for you. We should all be living this way and we'd have a great economy. It will take a long time for people to understand that living without debt is the only way to go. It's a hard lesson. I admire you.

[ILibertine]

I'm sorry, while I blame mortgage companies and all in the route of approving a questionable loan, and do not dispute that terms are made to seem very opaque, it is a stretch for me to regard those who signed their names and obliged their credit for things such as "interest only loans" and other dubious schemes as exonerated from the scope of responsibility. No that it matters, as responsibility seems to be a fading value - so long as your lack of it is colossal enough to warrant a nice, fat federal bailout. If one wanted "in" to a ( too expensive) home so bad that he/she didn't understand what they were obligating themself for, or were contemplating and/or believing promises of never-ending appreciation to the tune of risking solvency, said persons are as guilty as the big lenders. Two to tango.

[controversy101]

What a terrible talking point! According to 'The Failures of Integration' by Sheryll Cashin, sub-prime predators have been in existance years prior to this market crash. One of President Clinton's failures was his deregulating banking and oil industry laws, which now has the American middle income families under attack. The major reason for the housing market crash is bankers and lenders who once stalked minorites only with these rip-off schemes expanded their victims list, including White families and especially elderly families. They don't always prey on those with bad credit. They get most of these victims, who have great credit, through refinancings on homes that are almost paid off. It may take two to tangle, but sometimes you should sit back and see who's exactly leading the way. If you've closed on a house, you know hardly anyone reads every document entirley or throroughly because there was a trust there between the lender and borrower. With no laws regulating the housing/banking industry, that trust was molested.

[Egalitare]

"Molested" was probably the kindest word you could come up with.

The personal responsibility burden on the individual homeowners is about 25% at best. ARMs in and of themselves were not the problem. They've been around for decades now. The "X" factor in this situation was the mass securitization of mortgages. It made the lender side of the equation seemingly risk free: the morgage originator was no longer the gate keeper to a descrete, identifiable collection of properties or looking at the credit-worthiness of any individual prospective borrower. That "financial expert" was reduced to a paperwork clerk who got a commission (more like a flat fee bonus) for each set of completed paperwork.

As you point out, it wasn't the players so much as the rules -- more to the point the LACK OF RULES.

[letsgetsmart]

The most commonly consumed interest only loans in the last decade are thirty year loans that have a fixed rate and an interest only portion for the first five,ten or fifteen years. People that chose the five year variety planned to sell the property. All of these loans convert to a full am fixed rate (the same rate they started with) mortgage at the end of the interest only period. I understand that you feel the consumer has an equal share in our problems but these are A paper products for clients with good credit and incomes. Subprime was not offered interest only loans. When you live in a certain area and appreciation has moved all prices higher and you still want to be a home owner, you have in the past, had to get your loan past the underwriter of the funder. What changed that allowed 100% financing with no money down to subprime consumers that were always turn downs in the past? What reason was behind no money down for everyone? Answer these questions and you will find out who the culprit was.

[heal57]

As far as 'two to tango' please know that signatures were forged on some of these documents; people were told their down payment would be put into the mortgage so that they would be able to better afford it; appraisers were paid by fee schedule; the higher they appraised the house, the more money they got. You have no idea how bad is really is. Many of these people were not looking for big expensive homes, they were guided and pushed into them because it meant more money for commissions. The average person is not financially savy, and were pressured heavily to buy bigger houses. I know, my husband is a retired prominent real estate attorney and he has read many of the documents assisting other lawyers. While there were house flippers, many of these people and investors of these mortgages were just plain swindled.

[ILibertine]

Sure, practices were (and are) unfair, unscrupulous and deceitful. And many get mail offering equity loans to soak up their home value. And many move further out from town, into more substantial and expensive dwellings straining their capacity to make payments that has been a boon to both mortgage lenders and builders. That seems to be the collective rampant march of consumerism that has taken leave of its moorings; and there will always be a marketplace ready to take advantage of this mentality. Perhaps the weaknesses of the educational system are at fault, if too many are unable to make simple computations regarding whether their monthly obligations exceed income. That is not rocket science. Certainly the entire matter has illustrated the complete inadequacy of the government to sufficiently regulate unscrupulous and deceptive practices. Just as certainly, there are victims who unknowingly were engaged in bad deals by modern snake oil salesmen. Regardless, I'll never buy that people were "guided and pushed" into too expensive homes without the buyer bearing some of the responsibility for the deal.

[Chas53]

Economically speaking, we are into "gimmicks", and the subprime market was another manifestation of this phenomenon. My Dad used to say, "son, if anything sounds too good to be true, it is". Meanwhile, loads of inside players in the financial "services" sector have enriched themselves greatly. Where is old Robin Hood when we need him?

[letsgetsmart]

Just about every mortgage loan that was booked in the last eight years had a similar path it took. The public interacted with loan originators who submitted the package to the funders underwriter. This has always been the case. The underwriter is the guardian of the pot of gold so to speak. In the past, the originator and the underwriter worked for the same company. These days, you have a lot of origination firms and even the banks have mortgage divisions that act in a similar fashion. The funders assemble a block of loans which acts like a commodity and travels through the chain into the loan markets and in most cases, ends up in fan/mae or fred/mac. The two parties in the origination have very little to say about how the deal is structured, documented or at what rate it will be contracted and on top of this there are laws regulating how much can be earned by the originator. So it all comes down to law changes way up the ladder that has caused all of this. No funder in their right mind would book a subprime deal with no money down if there was a likely chance that they would have to eat it. What changed above the funder that caused all of this?

[heal57]

What changed is that this was delibrate to make money for a few; they made subprime loans with unbelievable conditions, prepayment penalties, rates going to 12, 14, 16% in a year or two; they then bungled them and sold them to Wall Street who sold to their customers as AAA rated; yes, pension plans, etc. bought into these mortgages lumped together that could never be paid by the borrowers after the first year. Investors were hurt too.. There is a site helping people from foreclosures [no advertising] straight shooting called livinglies.wordpress.com
It's a shame that American business has stooped so low.

[Gary47]

"Stooped so low?" What are you talking about? They didn't "stoop". That's where they live. Always have, always will. That's why they must be regulated - tough and relentlessly. Just another reason to elect progressives and kick republicans to the next outermost planet.

[levelshot]

Maw, I never seen a iceberg turn bottom up before.

[totaldisbelief]

I never realized just how bad American's basic math skills were until subprimetime.

[blindhog]

Come on! When everyone, even lawyers, have trouble reading the fine print in these intentionally deceptive mortgage "contracts", how can you accuse the American public?

[leftLibertarian]

but mummy, they encouraged me to buy a home!!!!

[heal57]

Great point. See livinglies.wordpress.com
It has loads of information and points out what you said; even lawyers don't or won't read the contracts before settlement, or even at settlement. People facing possible foreclosure will find help on that site. It's informational only, no advertising.

[luvobama]

I never realized how greedy some lenders could be. This is 100% their doing. What we have to do now is REGULATE a corrupt industry.

[jimdog1954]

It's not just the lenders. The real estate agents, who work off commission, are partly to blame. They encourage the buyer, using easy credit, no money down, and interest-only loans, to buy as large a house as they THINK they can afford. This increases the real estate agent's commission, while putting the buyer's nuts in a vise. As soon as the economy burps, he falls behind in his payments, and since he has no equity in his house, he walks away. Ownership society my butt.

[rubberstamp]

LET REMEMBER THAT DECLAWING THE REGULATORY SERVICES WAS BUSHES CAMPAIGN PROMISE. (paraphrase) "THE GOAL OF MY ADMINISTRATION IS THAT EVERYONE WILL OWN A HOME!!! "

[Squalish]

You never realized how greedy... some lenders... could be?

What world are you living in?

We have to regulate the industry where it uses dishonest practices. But greed? Greed is their sole charter charter - the sworn duty of private executives is to increase shareholder value, by any means necessary/possible.

At some point, people rating the profitability of financing houses/mortgages failed to do their job (their *only* job). The traditional solution is to allow these people to be fired & go on to become janitors, a natural market feedback mechanism.

The only thing preventing a gambler (or a bank) from betting 10:1 on every horse in the Kentucky Derby (or loaning money to anyone with a mailing address) is knowledge of the consequences. If we take away the consequences (business failure, foreclosures), then they lose their sanity in a manner that no amount of legislation can fix. In the long run, the solution to excess greed & corruption has to be reality(and potential business failure), not some type of monster regulation. People need to perform due diligence because it's important to them, not because they're statutorily required to.

The only thing necessary to assist those who borrowed above their means is strong individual bankruptcy protections. It punishes predatory lending, keep banks honest, and keep people from lapsing into debt slavery. Bring them back, and banks self-regulate.

How we mesh that shortterm with the "Too big to fail" phenomenon is a sticky situation that requires amoral, pragmatic answers.

[rapriffmaster]

Subprime was the top snowflake ON the tip of the giant glacier that creates the icebergs.

[rubberstamp]

THE REPUBLICAN RECESSION!!

[axt113]

Trickling down on the average American

[wpiv926]

Voters will remember who got them into this mess in November - the Republicans. They will pay a very heavy price.

[axt113]

You'd think so wouldn't you, but they have plenty of smears left in their bag

[Gary47]

Most republican voters don't care, as long as Democratic women ain't havin' abortions, and they can stick their manger in the public square at Christmas.

[Robert59]

Let's give credit where it's due.
A round of applause for Huffpo's Bonddad. He broke this story months ago using a chart from Credit Suisse.
Is Bonddad great or what? Perhaps Cramer should call him the next time he needs advice.
This story breaking now is symptomatic of Wall Street and the media with their heads in the sand waiting until after the election in November before they say the R word (recession).

[rubberstamp]

THE REPUBLICAN RECESSION!!

[CitizenInformed]

I sure wish all homeowners well.
It does seem though like an economic crisis of some sort has been necessary to wake the sleeping Elephant called the USA. People were broke in 2004, but still re-elected an administration that very clearly did not have citizens' interests in mind. Maybe people will pay attention this year and not make the same mistake with McSame...that's if the majority doesn't get hung up on stupid, like subscribing to last week's McSame ads.

[PDAGUY9]

Question - Why aren't mortgage companies renegotiating these adjustable rate loans with the homeowners? It isn't profitable to foreclose, so why not just re-underwrite these mortgages to a fixed and affordable cost?

[DXM]

Because in far too many cases the originators of the loans no longer own the mortgage note. They've packaged them into various types of securities that have been sold off to investors (who aren't typically loan originators) who are left holding the bag. Frequently the originators made their quick buck and passed the notes along with the (criminally under-defined) risk to someone else. This has been one of the reasons so many investment banks etc. have been so hard hit by this subprime melt down. The whole system is in desperate need or (re)regulation to prevent this from happening again.

[totaldisbelief]

these mortgages have changed hands so many times that no one can produce the deed to the property

[Robert59]

You summed up the problem quite eloquently.

[leftLibertarian]

In most parts of the country, houses are overpriced and it's time for a correction way downward.

[Egalitare]

But just how quickly does that correction have to occur?

Let me stipulate first that there may be no "soft landing" fix to this problem. But this 2nd wave of foreclosures should really have us coming to some consensus about how to minimize the damage to homeowners. These were not "newbies" to the mortgage market: this new set of victims were either current homeowners looking to refinance or trading up houses. The paperwork looked the same to them, and resets? No problem: a lot of these people had been re-financing every 6-12 months, getting better rates every time. So a reset that kicks in 3-4 years down the road? It wasn't going to happen in their experience: they were going to re-fi this ARM as soon as some shorter term financial deadline loomed - new car, kitchen remodel, etc.

And then the subprime crisis caused their lenders to put them on hold. Just temporarily, you understand because there was a "firewall" around subprime: it couldn't possibly affect the rest of the debt market. No need to be concerned.

Oops!!

[pigsatthetrough]

Main Street talking about their Depression,
Wall Street still talking about Euphoria
Now is this the BiPolar, oops, BiPartisan divide, or what?
Don't bail out those who have no health insurance, that's Socialism,
But bail out the greedy bankers and lenders, that's Capatilism.
Like the sign says, "I'll vote for change".