Subprime Loans, The Root of All (Market) Evil
Harry Koza, columnist for Canada’s Globe and Mail, thinks that, contrary to the recent upswing in sentiment, the U.S real estate market is only in the first stage of a “Triple Waterfall Event” that will end in disaster. The root of the problem? The oft-maligned sub prime market. Some stats he serves up: – From…
Harry Koza, columnist for Canada’s Globe and Mail, thinks that, contrary to the recent upswing in sentiment, the U.S real estate market is only in the first stage of a “Triple Waterfall Event” that will end in disaster. The root of the problem? The oft-maligned sub prime market. Some stats he serves up:
– From 1994 through 2003, subprime mortgage lending grew at an annual rate of 25 per cent, up tenfold in nine years.
– As of September, 2006, 80 per cent of all subprime mortgages were Option ARMs which tend to have huge payment hikes in the third year.
– More than $1 trillion of Option ARMs will have payment jumps in 2007.
– In the third quarter of 2006, 12.5 per cent of all subprime loans were already delinquent on their payments after nine months.
– In the past month or so, seven subprime lenders have gone belly up.
Not a new theory, but those numbers are a little scary.
U.S. Housing Has Potential to Blow Up Real Good [Globe & Mail]
Photo from the Nuclear Weapon Archive
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11:40 – If you would like to compare the “blow up” of 2000 with the “blow up” in 1992-94 please go ahead…
2000 was a blip
11:40,
Did the housing market keep going up because it was inexplicably resilient or was it’s ascent saved and enhanced by lower rates and this subprime mess?
If neither, please explain.
7:27,
Where’s that credit used or going to be used? Which sectors of economy?
Wall Street Blew up starting in March 2000. Big bonus cuts and mass layoffs. The housing market kept going up.
5:57 – what’s driving Wall Street?
The currently unlimited supply of credit at prices that do not reflect the risk of where that credit is going to be used. The economic rebound over the past several years has completely altered the risk appetite of financial institutions globally. The Street is currently feeding off the Private Equity community; when people like Blackstone pull in their horns because either a) the shine comes off PE returns and investors stop throwing money at them or b) all the companies they have levered to the hilt can’t pay the debt service it all comes crashing down; M&A slows, banks and credit investors are left holding the bag so in turn restrict the flow of credit, equity slows because there are no more offerings to take the PE guys out of their positions in companies etc etc etc it’s a vicious cycle with bonuses slashed and lay-offs all over the place. That’s when the NYC housing market craps out.
The good news is that it all starts again; the smart guys who stayed liquid pick up distressed assets like overly levered companies at a discount, restructure the debt, sit on them for a couple of years and then we go around again!! And guess what – housing rebounds!!
The credit cycle is going to turn hard at some point – its been a 5-1/2year unprecedented rally – look out below when it does. My bet says we make it through ’07 o.k. but ’08 gets rocky
Home prices in New York City are like traveling to a foreign country and going to a local market and finding that they are selling bananas for $50 a bunch!
Subprime is going down… whether it takes the housing market down with it is the question.
1. Majority of subprime is now option ARMs with teaser rates. That means even if interest rates are the same 3 yrs from the day you buy the home, you’re facing a payment shock. It also means that over time, unless you’re paying *more* than the minimum monthly payments on the bill, you are not building equity in the home.
2. If you look through the collateral statistics of subprime ABS issued last year, it’s astounding how much of it pushes the envelope–limited/no documentation, 100% LTV, negative amortization, etc., etc.
3. The govt is finally waking up to this problem, and putting stricter regulations in place. Good news? Yes, in the sense that *future* lending will be more stringent (accounting wise)… but serious *bad* news for all the subprime borrowers now, who next year or the year after will see a 80% jump in the mortgage rates, will try to refinance out, and find out there ain’t nobody to lend them the money.
4. Furthermore, as subprime lending units go bankrupt/are shut down, this exacerbates point #3.
The only good news for this blogs’ readers is that, compared to Cali, Nevada, Arizona, Florida, Florida (listed twice for emphasis), Boston, N. Virginia… NYC will be less impacted, because of less subprime and stricter state regulations. That said, this is going to be big and will hurt *all* borrowers to some extent, and some home price markets to another extent.
5:05,
What’s driving Wall Street?