Sunday, March 11, 2007
Is this the beginning of the end
Of the seven year bull market in bonds?
Not too many people have been lending on real estate at 12.6%. The lenders are taking a bath on these loans. Real lossses will be even greater, because you have to subtract the effects of inflation on cash flows from mortgage payments. The mortgage companies may benefit somewhat by the massive appreciation of home prices over the last six years. They may be able to break even on some foreclosures on older loans. Newer loans? Forget it.
Nice reporting, that.
Looks like bonds will be under pressure. Real estate will be under pressure. International stocks will be under pressure (actually, already are). Growth stocks will be under pressure. Is this the Perfect Storm?
I can't wait.
Splash, out
Jason
Delinquencies on loans made to less creditworthy borrowers — known as subprime mortgages — recently reached 12.6 percent. Some banks have reported rising problems among borrowers that were deemed more creditworthy as well.
Not too many people have been lending on real estate at 12.6%. The lenders are taking a bath on these loans. Real lossses will be even greater, because you have to subtract the effects of inflation on cash flows from mortgage payments. The mortgage companies may benefit somewhat by the massive appreciation of home prices over the last six years. They may be able to break even on some foreclosures on older loans. Newer loans? Forget it.
At the heart of the turmoil is the subprime mortgage market, which developed to give loans to shaky borrowers or to those with little cash to put down as collateral. Some 35 percent of all mortgage securities issued last year were in that category, up from 13 percent in 2003.
Looking to expand their reach and their profits, lenders were far too willing to lend, as evidenced by the creation of new types of mortgages — known as “affordability products” — that required little or no down payment and little or no documentation of a borrower’s income. Loans with 40-year or even 50-year terms were also popular among cash-strapped borrowers seeking low monthly payments. Exceedingly low “teaser” rates that move up rapidly in later years were another feature of the new loans.
The rapid rise in the amount borrowed against a property’s value shows how willing lenders were to stretch. In 2000, according to Banc of America Securities, the average loan to a subprime lender was 48 percent of the value of the underlying property. By 2006, that figure reached 82 percent.
Mortgages requiring little or no documentation became known colloquially as “liar loans.” An April 2006 report by the Mortgage Asset Research Institute, a consulting concern in Reston, Va., analyzed 100 loans in which the borrowers merely stated their incomes, and then looked at documents those borrowers had filed with the I.R.S. The resulting differences were significant: in 90 percent of loans, borrowers overstated their incomes 5 percent or more. But in almost 60 percent of cases, borrowers inflated their incomes by more than half.
A Deutsche Bank report said liar loans accounted for 40 percent of the subprime mortgage issuance last year, up from 25 percent in 2001.
Nice reporting, that.
Looks like bonds will be under pressure. Real estate will be under pressure. International stocks will be under pressure (actually, already are). Growth stocks will be under pressure. Is this the Perfect Storm?
I can't wait.
Splash, out
Jason
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