The effects of a steadily weakening economy is now pulling prime, or good credit, mortgages into a potential second wave of home mortgage defaults.
The combination of slower than expected economic growth, continued drops in home prices, growing unemployment rate that lifted to a four year high in July.
NY Times-Housing Lenders Fear Bigger 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.
###
The same innovations in credit markets that was praised for expanding home ownership and credit for a broader segment of borrower is now being cited as a poison pill. Restructuring risk from the lender to Wall Street has created a moral hazard, putting less responsibility on the lender for repayment and more incentive to collect ballooning fees and payments.
NY Times-Given a Shovel, Americans Dig Deeper Into Debt
Lenders have found new ways to squeeze more profit from borrowers. Though prevailing interest rates have fallen to the low single digits in recent years, for example, the rates that credit card issuers routinely charge even borrowers with good credit records have risen, to 19.1 percent last year from 17.7 percent in 2005 — a difference that adds billions of dollars in interest charges annually to credit card bills.
Average late fees rose to $35 in 2007 from less than $13 in 1994, and fees charged when customers exceed their credit limits more than doubled to $26 a month from $11, according to CardWeb, an online publisher of information on payment and credit cards.
Mortgage lenders similarly added or raised fees associated with borrowing to buy a home — like $75 e-mail charges, $100 document preparation costs and $70 courier fees — bringing the average to $700 a mortgage, according to the Department of Housing and Urban Development. These “junk fees” have risen 50 percent in recent years, said Michael A. Kratzer, president of FeeDisclosure.com, a Web site intended to help consumers reduce fees on mortgages.
“Today the focus for lenders is not so much on consumer loans being repaid, but on the loan as a perpetual earning asset,” said Julie L. Williams, chief counsel of the Comptroller of the Currency, in a March 2005 speech that received little notice at the time.
###
Fannie Mae and Freddie Mac are putting extreme focus on preventing foreclosures, but is this simple extending the inevitable and possibly artificially extending the mortgage market challenges.
Wall Street Journal-Fannie, Freddie Do More To Prevent Foreclosures
Fannie Mae and Freddie Mac, trying to contain mortgage-default losses, are redoubling efforts to prevent foreclosures.
In some cases, though, these moves may only delay the inevitable, easing pressure on the companies’ finances in the short term without resolving their troubles.
The two U.S.-government-sponsored guarantors of home loans last week said they will increase fees they pay loan-servicing companies for “workouts” that prevent foreclosures. (Servicing companies collect loan payments and handle other administrative tasks.) Freddie also said it will give servicers more time to pursue such workouts.
Both companies emphasized that they want to keep families in homes. But Joshua Rosner, an analyst at the New York research firm Graham Fisher & Co. and frequent critic of the companies, said they were trying to conserve cash. “It seems they would rather pay servicers to keep the losses rolling into the future even if close to a majority of borrowers redefault because they are unable to handle the mortgages,” Mr. Rosner said.
###
Calculated Risk assessment of the scope and scale of this second-order effect emerging in the mortgage market. I tend to agree that it is a smaller portion of the overall credit market, although individual defaults will be larger.
However, I believe demand has already softened home prices in the mid-to-high end markets. This will certainly solidify these trends.
Calculated Risk Opinion on the NY Time Lead Article on Second Wave Prime Mortgage Defaults
I think the second wave of foreclosures will be smaller in numbers, as compared to the largely subprime first wave, but the price of each home will be much higher. And the second wave will impact prices in the mid-to-high end areas, as opposed to the subprime foreclosures impacting prices in the low end areas.
About Bill Rice