I posted this nearly two years ago on Capitol Hill Blue...few were willing to listen.Submitted by Republicae on Sat, 09/27/2008 - 07:45
The Recession in 2007 will be brought about not only by a general housing bust, but in particular, by the sub- prime sector of the mortgage market. The sub-prime sector is one of the riskiest types of mortgages and it also happens to have had explosive expansion in the last few years. This has been a huge boom for the mortgage/housing industry and caused the loosening of credit standards, which in turn fed the housing boom. Indeed, so many lenders have been so reckless with lending qualifications that this low- quality paper makes up about $2.5 Trillion in the market today. Add to that the fact that there was such a feeding frenzy in housing that millions of people, with no experience whatsoever, got into the Real Estate Investment boom. Most of those people, especially those within the last year to year and a half, thought that they would be able to flip those homes with ease, but it has proven more difficult then they thought and now they hold mortgaged properties which are eating into their disposable income, causing, in many cases, deepening financial stress.
On top of all that, in 2005 alone almost a third of all new mortgages were interest only; over 40% of all first-time homebuyers (another high-risk group) got 100% LTV mortgages (no money down). Now, add the Option-ARMS which carry a potential for negative amortization and the fact that 10% of all homeowners have zero equity left in their homes and it's a recipe for a very hard landing.
Investment Bank UBS just released the following: "Subprime mortgages originated in 2006 could end up having more defaults than any previous year, according to research conducted by investment bank UBS. About 8% of all loans originated this year are at least 60 days delinquent, up from 4.5% a year ago. Foreclosure rates have doubled in the past year as well. Comparing loans of similar age, 2006 vintage loans are performing worse than loans originated in 2004 or 2005, and are on track to match or top the worst years, 2000 and 2001, according to UBS. The problem is especially bad on mortgages originated with less-than-full documentation, which had a 60-day or more delinquency rate of 3.57%. The comparable delinquency rate on fully documented loans originated this year is 2.01%."
We are already seeing the beginning of the problems in the Sub-Prime market, with Sub-Prime Lenders facing financial difficulties. That is the sector to watch. When you see that sector slide toward failure then the rest of the housing market will follow, then the effects will be felt throughout the economy.
The problem is multiplied and can easily become systemic as the consequences of a down-turn in housing combined with a general recession could lead to a bust in the (MBS) Mortgage Backed Securities market which could easily trigger some severe losses in the GSEs: FannieMae/FreddieMac (which are already on shaky ground).