The lowdown on US sub-prime & Housing

The US Mortgage Market - Overexposed and Overrated

The title above links to a very informative article on the state of the US mortgage market. It's quite a long article so if you can't be arsed to read it, I have summarized a few of the main points below.


On the Sub-prime market

• The amount of mortgage lenders that were no longer in business, in bankruptcy or had been bought at distressed prices was 26 in February. Today it is 74.
• About 25% of the mortgages on new homes in 2006 were sub-prime.
• Whilst sub-prime mortgages are not considered investment-grade securities, through the alchemy of securitization and CDO's approximatey 91% are repackaged as AAA or AA investment grade bonds.
  
• Up to 20% of sub-prime mortgages originated in 2005 and 2006 are expected to default and go into foreclosure however CDO's assume less than 1% will default. (hmmm someones not going to be happy)
  
• By the end of 2002 foreign investors owned $235 billion in mortgage backed securities by the middle of 2006 it was $850 billion.
  
• Whilst AAA mortgage backed securities have performed as expected, several BBB rated tranches have lost 25% of their value in 6 months.
• Other than mortgage banks there has not been much damage. Several major institutions have suffered write-downs but their enormous profitability has enabled them to absorb the losses.
  
• With no real systemic distress evident it seems the claim that "its different this time" because the risk has been highly diversified and distributed among many market participants has been a fair call.

On the Housing market

• The housing data is much softer than what is being reported from official channels. An independent analyst has sales down 22% in the year to April 2007 versus the official 9%.
  
• For new home sales the census bureau does not subtract cancellations thus making them look rosier than they are re- the 16% rise in new home sales for April.
• While total foreclosures, at all stages, are up 60-70% over last year so far, foreclosure notices - the front end of the process, when a mortgage is typically 90 days delinquent - are 127% higher so far than in 2006.
  
• Foreclosed homes being resold by banks or lenders are hitting the housing market with an average price drop of 30% nationally.

The article also quoted the commentary by THE BIG PICTURE on the new home sales data that I quoted in a earlier post a few days ago.