Friday, July 27, 2007

Prime loans joining default flood

Prime loans joining default flood
Copyright © 2007, Chicago Tribune and The Associated Press
July 27, 2007

Here's a scary thought about the latest bad news on housing: A surprising increase in late loan payments and defaults among homeowners with good credit is so far coming from traditional woes, such as divorces, job losses and unexpected medical bills.

The next and biggest wave of problem loans could come as monthly payments soar for both prime and subprime borrowers who took out adjustable-rate loans with little or no documentation, or who used piggyback loans on top of their first mortgages to make up for small down payments, analysts said.

These exotic loans were the only way many borrowers, even those with good incomes and sterling credit histories, could afford to get into the housing market as home prices soared in the last decade. But now those decisions are looking suspect.

That was one of the messages that sent a jolt through the mortgage industry and the stock market Tuesday after Countrywide Financial Corp. reported that its second-quarter profit shrank by nearly a third as softening home prices led to rising delinquencies and mortgage defaults. Countrywide laid part of the blame for the uptick in delinquencies on borrowers with good credit who had taken out prime home equity loans.

Analysts said the trend could continue, particularly in areas of the country that have been hardest hit by job losses in general or seen a decline in speculation-driven construction, such as South Florida, parts of California and Las Vegas.

"As housing values weaken broadly and the job market slows in these areas that we're focused on, all borrowers will be touched," said Mark Zandi, chief economist at Moody's

The mortgage industry has already tightened lending standards in response to the jump in defaults by subprime borrowers. With fewer first-time buyers entering the market, homeowners in the middle of the market, who tend to be among the most creditworthy borrowers, are having a tougher time selling their homes.

"The same problems you saw in the subprime sector that caused the big meltdown in March is now a broader industry problem that's hitting the prime sector," said Christopher Brendler, an analyst with Stifel Nicolaus & Co.

Zandi and other economists said the housing slump could lead to billions of dollars in losses for Wall Street as it drags on for at least another year and mortgage defaults increase.

The outlook on eroding credit quality in the U.S. mortgage market by Moody's anticipates that more than 1.2 million first mortgage loans will default this year and 1.3 million will follow next year.

That compares with about 900,000 defaults last year and about 800,000 in 2005, said Zandi, who said he thinks hedge fund investors will lose between $100 billion and $125 billion as a result.


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