The Next Wave of Foreclosures
As financial markets stagger from one low to the next, it’s easy to forget that the subprime mortgage debacle—which has been blamed for kick starting the contagion—still has a ways to run.
More than half a million mortgages, worth about $110 billion, will have their intro “teaser” interest rates reset over the next six months, according the latest available data from First American CoreLogic, a mortgage industry research group.
The majority of these mortgages—about three quarters of them—will likely spring to 10 percent interest, which will be unaffordable for many borrowers, said Guy Cecala from Inside Mortgage Finance.
“None of these loans are sustainable at 10 percent. Nobody in their right mind would continue to pay them at 10 percent,” Cecala said.
There is a total of $337 billion of subprime mortgages still outstanding, according to First American. Virtually all of these loans were made during the subprime frenzy of 2004, 2005 and 2006, and most reset to higher interest rates two or three years after they were created.
“But nobody ever intended that the loans would ever reset,” said Cecala. “In fact, they were always set up so that somebody would refinance.”
The problem could be particularly acute since, as FDIC chief Sheila Bair recently noted, the government’s big bailout contains no provisions to address foreclosures. Meanwhile, now that credit has dried up, it will be hard for homeowners to refinance.
The mere fact that interest rates will leap does not necessarily mean that foreclosures will follow. Only a fifth of subprime mortgages that have already reset have gone into some sort of bankruptcy or foreclosure process, according to data provided to us by the Department of Housing and Urban Development.
There are, however, some indications that many of these mortgages may go bad.
A large number of borrowers still on the low “teaser” rates are already falling behind on payments—one in seven is between 30 and 90 days late, according to HUD. The figures are worse for mortgages whose rates have already changed—more than a fifth of those are behind. These borrowers have not yet gone into foreclosure, but if they do not start to make repayments, they might.
The new rates are calculated by adding six percent to the bank lending rate—LIBOR—which is currently about four percent, adding up to 10 percent.
“We’re not particularly well set up to deal with the resets,” Cecala said. “Why don’t we just freeze them? That seems like a no-brainer.”
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1 comments
larry lynch
Oct. 17, 2008, 7:54 p.m.
As I recall the USA wasn’t in a war in 1929 when Wall St had a correction which became a world wide depression. FDR didn’t take office till March, 1933. Getting the New Deal made into law took time & some of the New Deal, such as NRA, had to be ended because the Supreme Court didn’t approve of it. It was a long & difficult recovery. Many said that the depression didn’t end in the USA till late 1942 when US industry was converted into 100% war production.
We’re in the early stage of the recession/depression which the melt down of 9/15/08 triggered & we have a couple of wars in Iraq & Afghanistan which are very costly & are being fought with borrowed money. We’re borrowing from the Chinese. It’s possible that the Chinese won’t lend us money to aid mortgage holders who face forclosure if we keep borrowing to fight W’s wars. We might have to get used to the Chinese telling us, the USA, how we are to use the Chinese money. This will be an interesting situation.
Other stories in todays, 10/17/08, PRO-PUBLICA tell of AIG lobbying to liberalize restrictions on the use of bail-out money & AIG’s expensive junkets have some in the US Congress upset. Eric Umansky writes of banks holding cash infusions & not lending the money out at once. The Chinese could demand to see how the USA uses money it borrows from China from now on or not grant the USA loans or buy US paper. We could have the Chinese telling Wells, Fargo; AIG; Citigroup, et al how to use Chinese money & when to use it. That could mean in-house supervision by agents of the Chinese who’d look at the books closely. The Chinese, not the bank or a US agency, could determine the value of an assett. That will be a new level of discipline by a foreign body. This could be a new learning experience for US firms & government bodies.
The Chinese or other bodies & nations from whom the USA borrows money or to whom the USA sells bonds & other instruments, aka paper could start offering the USA take it or do without our money deals shortly. People & nations won’t be humbly standing in line to loan the USA money or buy our paper from now on. To negotiate a sale of paper or to borrow money will require new skills from those who represent US interests. This will be a new learning experience which some will spin as a unique opportunity. Others will compare it to being in receivership & being kept on a short, tight leash with the possibility of being muzzled by agents of another nation.
The next few years may be interesting as in the Asian curse, “May you live in interesting times.”.
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