Why we have a long way to go: This will keep us busy in 07/08. Some large percentage of these homeowners were counting on a refi in 07 based on home price appreciation to get into a better product and will not be able to pay the reset payments. With flat/falling housing prices and tighter credit, this ain't happening and as people start to go delinquent over the next 12-15 months, the cycle will be self-sustaining.
And this year $1 trillion in adjustable-rate mortgages are due to reset before Dec. 31.
And this will keep us busy in 08/09 since 2006 might have been the worst year of all and the fallout of these loans will go into late 08/09
In 2006, according to UBS, interest- only loans, 40-year mortgages and option-adjustable-rate mortgages comprised more than 75 percent of Alt-A issuance. These loans often have little documentation of a borrower's income and rack up higher mortgage debt against the value of the underlying collateral (i.e., the house). UBS said that 76 percent of adjustable-rate interest- only loans written in 2006 had low documentation, while 57 percent had loan-to-value ratios greater than 80 percent. No surprise, then, that 3.16 percent of these loans are already delinquent by two months or more.
And from CSFB, more exciting data on Alt-A
The overall share of prime conventional loans has declined from an estimated 66% of total purchase dollar originations in 2002 to 45% last year. The GSEs’ share loss has been largely attributed to the proliferation of “exotic†mortgage products such as high CLTV loans, low/no documentation mortgages and interest-only/negative amortization loans, which the GSEs have typically chosen to limit their exposure to given the high risk profiles of these products.
[T]he Alt-A market has expanded from just 5% of total originations in 2002 to approximately 20% in 2006. Although the credit profile of Alt-A borrowers is stronger than that of the subprime market (717 average FICO score for Alt-A borrowers versus 646 for subprime), we believe that there is considerable risk associated with the lax underwriting standards and exotic mortgage products utilized in this segment of the market in recent years, both in the form of continued credit deterioration and reduced incremental demand resulting from tightening lending standards.
• The combined loan to value on Alt-A purchase originations was 88% in 2006, with 55% of homebuyers taking out simultaneous seconds (piggybacks) at the time of purchase.
• Low/no documentation loans (stated income loans) represented a staggering 81% of total Alt-A purchase originations in 2006, up significantly from 64% just two years earlier. . . .
• Interest only and option ARM loans represented approximately 62% of Alt-A purchase originations in 2006.
• . . . 1-year hybrid ARMs represented approximately 28% of Alt-A purchase originations in 2006, setting the stage for considerable reset risk.
• Investors and second home buyers represented 22% of Alt-A purchase originations last year, which is the largest non-owner occupied share among the various segments of the mortgage market.
In the past five years, subprime purchase originations have more than doubled in share to approximately 20% of the total in 2006. Over this time period, subprime lenders eased underwriting standards in an effort to gain market share. . . . . In the third quarter of 2006, the Mortgage Bankers’ Association reported that 12.6% of subprime loans were delinquent.
• 2006 subprime purchase originations posted an alarming 94% combined loan-to-value, on an average loan price of nearly $200,000.
• Roughly 50% of all subprime borrowers in the past two years have provided limited documentation regarding their incomes.
• In 2006, 2/28 ARMs represented roughly 78% of all subprime purchase originations according to data from Loan Performance. According to our contacts, homebuyers were primarily qualified at the introductory teaser rate rather than the fully amortizing rate, which for many buyers was the main reason they were even qualified in the first place.
All from Calculated Risk