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Housing Implosion

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March 21, 2008 – Comments (5)

Report: Alt-A Delinquency Rate Nearing 18 Percent

Both subprime and Alt-A borrower delinquencies continued to rise during February, with Alt-A delinquencies rising from 15.94 percent in January to 17.40 percent. According to a report released Thursday by risk management and due diligence provider Clayton Holdings, Inc., subprime delinquences now represent an eye-opening 33.14 percent of loans on a UPB basis, as well.

Delinquencies going up are one thing; but the continued drop in housing prices is having a more ominous effect on many investors, lenders, and insurers, as loss severity creeps upward. Alt-A loss severity, in fact, is now even approaching average severity numbers for subprime across all collateral. Clayton reported that subprime first lien average loss severity increased to 45.80 percent in February, up from 42.56 percent in January; Alt-A first lien average severity rose to 36.66 percent, in contrast.

Loss severity refers to the loss a lender is forced to take during foreclosure, as a percentage of unpaid principal balance.

http://www.housingwire.com/2008/03/20/report-alt-a-delinquency-rate-nearing-18-percent/

A vicious cycle.  As more owners fall underwater, the more houses foreclosed.  As more houses foreclosed, the further prices fall.  The further prices fall, the more lenders lose on each mortgage.

If the above figures are accurate, it is likey that just subprime and AltA losses could exceed $1 Trillion dollars.  Prime loans are starting to default at an increasing rate as well.  Once we pool all loans of the current $12 trillion dollar mortgage and Heloc market, we could easily be looking at over $2.5 trillion in loan losses (that doesn't include the wealth effect losses of $7-10 Trillion).

It is incredible that some people say we are approaching the end of the cycle.  We have just begun and  we are seeing figures we have never seen before.  In Florida, it is not uncommon to see sales at 50% below peak pricing.  Not too much different in parts of CA and AZ.  And the economy is just beginning to slow. 

The job cuts are just starting.  Citi and Goldman each announced laying off 10% of its investment bankers in the last couple days-2000 each.  Mortage Finance companies have reduced staff by hundreds of thousands over the past year.  CA and other states are also likely going to be laying off hundreds of thousands due to budget shortfalls.  Contruction related layoffs are likely to climb in the millions (6-8 million workers and factoring a 50% slowdown).

The above will bring lower sales and tax revenues likely causing further slowdown.  The problem now is that we have shipped a bunch of productive jobs overseas.  Many of the jobs that remain are service jobs that are very vulnerable to an economic slowdown.

We have tons of debt.  Declining income.  And a system that is cracking under its own weight.

Here is a headline from Roubini that pretty much sums it up:

The Worst Financial Crisis Since the Great Depression is Getting Worse…and the Need for Radical Policy Solutions to the Crisis                 Nouriel Roubini | Mar 19, 2008

It is now clear that the US and global financial markets are experiencing their worst financial crisis since the Great Depression. And in spite of desperate and radical actions by the Fed this crisis is getting worse.

5 Comments – Post Your Own

#1) On March 21, 2008 at 11:11 AM, FourthAxis (< 20) wrote:

"A vicious cycle.  As more owners fall underwater, the more houses foreclosed.  As more houses foreclosed, the further prices fall.  The further prices fall, the more lenders lose on each mortgage."

...and when these things happen, even people who can afford to pay their mortgage begin to think; "but why should I?"

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#2) On March 21, 2008 at 11:21 AM, ymkmkrz (< 20) wrote:

Now that is a scary thought

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#3) On March 21, 2008 at 11:51 AM, mandrake66 (54.13) wrote:

My understanding is that the next two months (April and May) will be the ones with the greatest number of adjustable rate mortgage resets. We'll be peaking over the next two months in the number of homeowners seeing their monthly bill shooting up to some level they can't afford. The worst mortgages written in 2006/2007 are about to crash over us like a wave. Fasten your seatbelt.

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#4) On March 21, 2008 at 11:54 AM, abitare (72.47) wrote:

Nouriel Roubini: The Housing Debate: "it is not going to be okay"

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#5) On March 21, 2008 at 11:57 AM, abitare (72.47) wrote:

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=32807&t=01007146184382914537

Nouriel Roubini: The Housing Debate: "it is not going to be okay"

Nouriel Roubini: The Housing Debate: "it is not going to be okay"

Monday, January 14, 2008 | 02:30 PM

Highlight Nouriel Roubini speaks at: 

33:51 -  "the contagion has been been massive"

39:16 - "consequences are going to be severe...it's NOT going to be okay, it will be dramatic lots of people are going to lose jobs, including lots of people here"

PROFESSOR NOURIEL ROUBINI --->

Nouriel Roubini, professor of economics at New York University's Stern School of Business, is calling it the worst housing recession since the days of the Great Depression. Roubini said he believes that a U.S. economic recession began in late 2007 and "is going to be much more severe" than economic recessions earlier this decade and in the early 1990s, with credit problems spreading across the financial system and impacting all forms of home loans, commercial real estate loans and even auto loans, among other forms of financing.

If prices fall 30 percent from the peak, that would represent about $6 trillion in lost value and millions of homeowners with negative equity, he said.

 

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