The Economist A recent report by analysts at Credit Suisse estimates that 80% of subprime loans made in 2006 included low "teaser" rates; almost eight out of ten Alt-A loans were "liar loans", based on little or no documentation; loan-to-value ratios were often over 90% with a second piggy-bank loan routinely thrown in. America's weakest borrowers, in short, were often able to buy a house without handing over a penny. Lenders got the demand for loans that they wanted--and more fool them. Amid the continuing boom, some 40% of all originations last year were subprime or Alt-A. But as these mortgages were reset to higher rates and borrowers who had lied about their income failed to pay up, the trap was sprung. A new study by Christopher Cagan, an economist at First American CoreLogic, based on his firm's database of most American mortgages, calculates that 60% of all adjustable-rate loans made since 2004 will be reset to payments that will be 25% higher or more. A fifth will see monthly payments soar by 50% or more. (...) The greatest difficulties threaten borrowers whose house is worth less than their mortgage. Just under 7% of all American homeowners had this "negative equity" at the end of December 2006 estimates Mr Cagan, using a sample of 32m houses. Among recent homebuyers, the share is even higher: 18% of all people who took mortgages out in 2006 now have negative equity. A quarter of all mortgages due to reset in 2008 are in the same miserable state (see chart 2).
A recent report by analysts at Credit Suisse estimates that 80% of subprime loans made in 2006 included low "teaser" rates; almost eight out of ten Alt-A loans were "liar loans", based on little or no documentation; loan-to-value ratios were often over 90% with a second piggy-bank loan routinely thrown in. America's weakest borrowers, in short, were often able to buy a house without handing over a penny.
Lenders got the demand for loans that they wanted--and more fool them. Amid the continuing boom, some 40% of all originations last year were subprime or Alt-A. But as these mortgages were reset to higher rates and borrowers who had lied about their income failed to pay up, the trap was sprung. A new study by Christopher Cagan, an economist at First American CoreLogic, based on his firm's database of most American mortgages, calculates that 60% of all adjustable-rate loans made since 2004 will be reset to payments that will be 25% higher or more. A fifth will see monthly payments soar by 50% or more.
(...)
The greatest difficulties threaten borrowers whose house is worth less than their mortgage. Just under 7% of all American homeowners had this "negative equity" at the end of December 2006 estimates Mr Cagan, using a sample of 32m houses. Among recent homebuyers, the share is even higher: 18% of all people who took mortgages out in 2006 now have negative equity. A quarter of all mortgages due to reset in 2008 are in the same miserable state (see chart 2).
One thing that isn't irrelevant is that analysts are always planning for the last crisis, never the next. And the last crisis in subprime was prepay risk, and between jobs 7 years ago I got to see the inside of one of these places as they went belly-up (did due-diligence work for G/S at a place called GreenTree/Conseco Finance).
I can just see the flunkeys tranching these things saying: "hmmm, interest rates are going to increase, so prepay risk is minimal." Add to this the natural bias of supply-sider neo-lib flunkeys that the economy will always be bright (and many finance people here think this, especially the younger ones) and I bet the duration of these loans was far overestimated.
And of course the longer tranches are now worthless (well, in truth they always were).
I keep hearing about how this knocks into the real estate market; I've yet to see anything substantial on the bond market (truth be told this is likely my fault, I don't read FT or the urinal) but I bet the People Bank of China was holding a lot of those longer duration mortgage-backed securities... Fai de bèn a Bertrand, te lou rendra en cagant
