Alt-A Catching Up with B&C Problems
One year after the subprime meltdown roiled the financial markets in August 2007, subprime defaults are still rising and alt-A defaults are rising at an even faster rate.
Problems with Alt-A loans are one reason the government-sponsored enterprises, Fannie Mae and Freddie Mac, are struggling. Both are burdened with large alt-A portfolios that are deteriorating rapidly and driving their credit losses.
Freddie has a $190 billion alt-A portfolio with a serious delinquency rate that has tripled over the past 12 months to 3.72% as of June 30. It was 1.13% a year ago.
The 90-day-or-more past due rate on Fannie's $307 billion alt-A portfolio also has tripled to 3.79% as of June 30.
Alt-A loans comprise only 10% to 11% of the GSE credit guarantee business, but it makes up 50% of their credit losses.
These reduced-documentation loans generally are targeted at self-employed persons with high credit scores. Fannie's portfolio has a weighted average credit score of 719. Freddie's has a weighted average credit score of 724.
But they are called alt-A because the borrowers didn't want to disclose their income or have difficulty documenting their income.
Sam Khater, a senior economist at Loan Performance Core Logic, expects delinquencies on alt-A and subprime loans will continue to climb.
The upward swing in delinquencies and foreclosures began in mid-2007 and it is "still getting worse. It is literally like a 45% angle going up," he said in an interview.
"They are not going to plateau anytime soon," he added, "irrespective of loan modifications or repayment plans."
Loan Performance data show that 28% of subprime loans are 60 days or more past due or in foreclosure as of June 30, up from 15% in June 2007.
Meanwhile, the percentage of alt-A loans 60 days or more past due hit 13.6% in June, up from 3.8% a year ago. The Loan Performance data include some Fannie and Fannie loans along with alt-A loans in private label securities.
Mr. Khater acknowledges that Fannie and Freddie have higher underwriting standards than the Wall Street mortgage conduits that dominated the private label securities market.
Over the past few months, house prices have declined by 10% year-over-year, according to the Loan Performance house price index. On an inflation-adjusted basis, home prices in June fell 16.8% from a year ago.
Meanwhile, the loan tracking firm estimates there will be 2.7 million pre-foreclosure and foreclosure filings this year, up 50% from 2007.
Mr. Khater expects the upswing in delinquencies and foreclosures will continue until house prices stabilize.
He is also worried about the economy, which is weakening. "The big wild card is the economy," the economist said.
Merrill Lynch economist David Rosenberg is predicting the economy is headed for a consumer recession and consumer spending will contract in the third quarter for the first time in 17 years.
"As credit conditions continue to tighten into 2009, as job losses mount and as housing prices continue to be under downward pressure, the consumer is going to be forced into retrenchment of the kind we have not seen since the six-quarter downturn of the mid-1970s," Mr. Rosenberg said in a March 18 economic commentary.
With so many underwater mortgages and so many homeowners struggling to make their payments, the Loan Performance economist is concerned homeowners will give up and walk away so they can keep their credit cards and their car.
In the past, folks paid their mortgage first. "It seems that payment hierarchy has shifted," Mr. Khater said. "Unlike 20 years ago, they use their credit cards to buy food." (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/