US loan defaults spreading
Oh those hippies over at the wall street journal, always focusing on the negative.. According to this article the discomfort caused by bad loans in the US looks like its starting to spread into the area between ‘prime’ and ’subprime’ loans.
Borrowers who take out Alt-A mortgages are considered less risky than subprime borrowers because of their higher credit scores. But as the housing market cooled and loan volume declined, some lenders lowered their standards for Alt-As. Now a rising number of borrowers who took out these loans are running into trouble.
Data from UBS AG show that the default rate for Alt-A mortgages has doubled in the past 14 months. “The credit deterioration has been almost parallel to what’s been happening in the subprime market,” says UBS mortgage analyst David Liu.
There’s an additional bit at the end of that article hinting at the possibility that at least some of the current US housing market woes may be attributed to fraud: “investor concerns about Alt-A loans are rising, according to Walter N. Schmidt, a mortgage investment strategist at FTN Financial Capital Markets in Chicago. A report from mortgage analysts at Barclays Capital in New York this week pointed to fraud as one reason for early defaults on Alt-A loans. The mortgage industry is battling a rash of cases in which borrowers, loan officers and appraisers collude in providing false information to induce lenders to advance more money than homes are worth.”
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March 1st, 2007 at 4:05 pm
“Any word of tougher standards or is credit still a cinch to get here?”
I’ll harp on this a little more. Just picked up the latest “Real Estate Victoria” rag, and am looking incredulously at an ad for a new mortgage joint. They’re calling themselves “Mortgage Architects”, and their copy reads, “No down payment mortgage. Income verification may not be required. Investment properties. Over 50 lenders to choose from. Pre-approvals. No fee for consultant services.”
Yup. Those no-doc, sub-prime, zero-down loans to speculators have sure-nuff been a great thing for the US of A, so let’s bring’em on in Canada! Yee-haw!
March 1st, 2007 at 1:55 pm
Can anyone tell me the most effective way to short the ABX:HE index?
March 1st, 2007 at 1:19 pm
I just heard a sad but interesting story from one of my clients. Neighbours of hers here in Victoria, a young couple with two small children, wanted to reno and enlarge their 800 square foot house to better accommodate the family. They recently managed to find a “heaven-sent” contractor who said he could do the work for $50,000, without the usual 2 year waiting time. After a few weeks of the guy and his “crew” loafing around, he asked for another $30,000. He dug a big hole for an extension to the basement, and did some foundation and framing work. Then, he said the job would cost $160,000. The innocent and inexperienced couple ponied up the dough. A couple of days later they came home from work/daycare and found all the building materials (slate for the flooring, siding et cetera) gone. The contractor’s phone had been disconnected, and inquiries have since determined that the corporation he ran was a shell and has been dissolved. The couple are devastated, and told my client that they “will be paying this off for the rest of their lives”. Naturally, the minimal work that was done is of shoddy quality and will have to be remediated. I feel for them, but what business does any bank have lending a young couple with little kids $160,000 for a house reno? They got the money quickly with no questions asked, so they must have had a pre-approved line of credit of some sort. This is what happens when lending guidelines are abandoned in wholesale fashion in favour of a casino economy; the scam artists prosper.
March 1st, 2007 at 11:37 am
It’s seems to me that a lot of people lately seem to believe in a perpetual boom economy – they don’t plan for much of a contingency, i.e. layoffs, higher interest rates, etc.. so they go for the max they can ‘afford’ right now with no margin for error.
The results of this are obviously coming home to roost in the US, and they haven’t even hit ‘bad times’ yet.. How many people here are making the same bad financial decisions?
March 1st, 2007 at 11:25 am
“Should be easy?”
In theory, yes. However, my gross annual income is more like $115,000, and after business overhead and taxes I am left with about $60,000 net. So, not so easy after all. Still, I expect there are many out there in similar circumstances to my own who are happily taking all the debt that lenders are willing to offer them. Perhaps I am overly cautious, but better that than in debt over my head.
March 1st, 2007 at 9:18 am
A six figure income-say $140k would qualify you for easily 600k mortgage. Which with 25% down you could comfortably buy a place for 750k. Unless you have massive other cash demands, that would leave about $3200/month for RRSPs,food,car. Should be easy?
March 1st, 2007 at 8:19 am
As an experiment, I just finished applying for a pre-approved, 5 year term, fixed-rate, 25 year amortization mortgage from The Mortgage Centre brokerage around the corner from my office. Now, I’m an aggressive saver with a large down payment and a low 6 figure gross annual income (less massive overhead costs, mind you), but would probably be classified as “Alt-A” because I’m self-employed. Nonetheless, I was cheerfully offered $300,000 (the sum I asked for), and was told that if that wasn’t enough I was qualified for more. So, no apparent lack of easy money still, and I believe that The Mortgage Centre is a sub-prime lender owned by GMAC Finance, which has been a major culprit in this recent credit spree.
Incidentally, the thought of borrowing $300,000 makes me physically sick.
February 28th, 2007 at 10:48 pm
Thanks bcbud for this link. With lenders in the US tightening their standards whats happening in the local lender market? Any word of tougher standards or is credit still a cinch to get here?