Analyst: Another $200 Billion of B&C Losses Possible
An estimated 40% of outstanding subprime mortgage loans could go into default over the next three years based on current economic assumptions, according to Michael Bykhovsky, president of Applied Analytics, San Francisco.
With an estimated loss severity in the range of 50%, that could lead to $200 billion in additional losses related to defaults on subprime credit quality home loans. Mr. Bykhovsky said there are an estimated $1 trillion of subprime home loans outstanding.
Mr. Bykhovsky emphasizes that these projections can change depending upon economic circumstances, but he is skeptical about the term modifications being proposed as part of streamlined efforts to support subprime borrowers.
"It will help, but not hugely. A lot of subprime loans will default anyway," Mr. Bykhovsky said during a press briefing sponsored by Fidelity National Information Services, the parent of Applied Analytics. The briefing was held during the Mortgage Bankers Association's National Mortgage Servicing Conference here.
In fact, based on economic assumptions that include two more years of housing price declines before home prices nationally begin to appreciate again, Applied Analytics anticipates that default rates may not start to trend downward until about 2011.
That dire outlook reflects the impact of declining home values on outstanding subprime mortgage loans, Mr. Bykhovsky said.
Over the next three years, he believes based on current economic assumptions that home prices will drop another 15% in real terms from today's level, nationally. Taking inflation into account that means the total home price decline may be about 25% in real terms from the peak of the market.
"About half of the country is going to be underwater," he said, adding that it is very easy for these homeowners to walk away from their mortgages.
In addition, some Fidelity executives see a cultural change in the way borrowers approach being underwater on their home loans, with an increasing number of borrowers deciding it's in their economic best interest to simply default and let the foreclosure process take its course rather than continuing to pay the monthly mortgage on a home that has declined in value.
Especially in so-called judicial states with long foreclosure timelines, that allows the borrower to remain in their home without making payments until the foreclosure process is completed. Essentially, the stigma associated with losing a home to foreclosure is declining, according to Greg Whitworth, president of the lender processing division of FIS. And the impact of falling home prices is not limited to risky loan products and the subprime end of the credit spectrum.
"It is starting to bleed into loans that were fundamentally sound," he said. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/