The Next Shoe to Drop is Alt A loans and Credit Cards. Thank you Ben.
So now the poor and midle class won't get a break and the next shoe to drop for banks are Alt-A loans and credit card defaults. Defaults on Some `Alt A' Loans Surpass Subprime Ones (Update1)
By Jody Shenn
July 24 (Bloomberg) -- Defaults on some so-called Alt A mortgages packaged into bonds last year are now outpacing those from subprime loans, according to Citigroup Inc.
The three-month constant default rate for 2006 Alt A hybrid adjustable-rate mortgages is 2.3 percent, compared with 2.2 percent for subprime ARMs, New York-based Citigroup analysts led by Rahul Parulekar wrote in a July 20 report. The figures represent the percentage of balances in a mortgage-bond pool expected to default in the next year based on 90-day trends.
The speed at which Alt A hybrid ARMs are being paid off due to home sales or refinancing has also fallen to about the same level as for subprime ARMs, which typically prepay more slowly, the analysts said. Slower prepayments can make the same rates of defaults more damaging by leaving more of the initial balances outstanding to eat into bond-investor protections.
The combination of challenges mean 2006 bonds backed by Alt A mortgages, a credit grade above subprime loans, may need ``lower loss severities to still come out with lower cumulative losses than subprimes,'' the Citigroup analysts wrote.
More than $800 billion of subprime mortgage bonds and $700 billion of Alt A bonds are outstanding, with ARM bonds totaling more than $600 billion and $450 billion, respectively, according to a March report by Zurich-based Credit Suisse Group.
Size of Losses
Severities represent the size of losses incurred after borrowers stop making payments. The losses can include the difference between what a seized home is sold for and the loan amount if a homeowner can't sell or catch up on payments; legal and other foreclosure and sales costs; and reimbursement of advances made for a time in which a borrower isn't paying.
The Citigroup analysts are working on a report related to default severities, Parulekar said yesterday.
The three-month constant default rates were measured with loans in 2006 bonds at an average age of 16 months. The level for the Alt A ARMs was at a record for that point in time. Late payments of at least 60 days, foreclosures and already seized property among all Alt A mortgages in securities issued in 2006 are now at 4 percent, according to data compiled by Bloomberg.
Alt A mortgages, short for Alternative A, are loans that fall just short of the typical underwriting standards of Fannie Mae and Freddie Mac, the two largest mortgage companies. They're usually granted to borrowers with good credit records who seek atypical underwriting or loans, such as reduced proof of their pay, lending on an investment property or so-called option ARMs.
Such flexibilities are given on prime loans if borrowers have enough offsetting positive attributes, like cash for large down payments. Subprime mortgages are given to borrowers with poor or limited credit records or high debt burdens.
Ratings Cuts, Warnings
Moody's Investors Service last week said it may downgrade $316 million of Alt A securities created last year, joining Standard & Poor's in saying it is considering downgrading such bonds. Ratings cuts and warnings by the New York-based services have so far affected more 2006 subprime securities.
Average default rates obscure that ``within things called Alt A, we see a very wide spectrum of credit quality,'' said Andrew Davidson, the head of New York-based Andrew Davidson & Co. Inc., which sells consulting service and risk analytics for mortgage and asset-backed bonds.
Defining Alt A
``That's the problem with Alt A: It's a name that doesn't really have a meaning,'' said Davidson. ``The top end of Alt A is certainly under stress but may not face serious problems.''
The Citigroup analysts used Alt A ARMs with five years of fixed rates for their study. They didn't include so-called option ARMs, a type of loan with minimum payments that produce growing debt in $200 billion of Alt A bonds. Citigroup was the ninth largest underwriter of non-guaranteed mortgage securities in the first half, according to newsletter Inside MBS & ABS.
About 83 percent of balances of the 2006 Alt A ARMs were outstanding by the time the loans reached an average age of 12 months, the report said, compared with 76 percent for loans made in 2003. For 2006 subprime loans, 84 percent of balances remained outstanding, compared with 81 percent for 2003 loans.
Alt-A Loan Defaults Yet To Peak by Broderick Perkins
It's not just the subprime stew that helped slide the housing market into a slough. Housing is also mired in a muskeg of failing "Alt-A" mortgages.
Suffering from the same untried underwriting and difficult to decipher disclosures that swamped subprime borrowers with foreclosures, "Alt-A" loans made in 2006 suffered 90-day or longer delinquency rates 2.5 times higher than those made in 2005 and 4 times higher than those in 2004, according to LoanPerformance data crunched by analysts at Standard and Poors.
The mortgages analyzed included loans that were foreclosed and represent real estate-owned assets, loans that are in foreclosure, and loans in bankruptcy.
"Alt-A" loans, also called "nontraditional" mortgages, are typically offered to borrowers with credit scores between 620 and 700 and include interest-only loans, option ARMs, "no-doc" loans, those requiring little if any income documentation, and others.
"During 2006, lenders became increasingly comfortable with offering higher-risk loans in substantially greater numbers not only to subprime homeowners, but also to Alt-A homeowners," according to the S&P report from four analysts, Mark Goldenberg, Jeff Watson, Michael Stock, and Martin Kennedy.
Now, along with struggling subprime lenders tightening underwriting standards to hold on, surviving nontraditional lenders have dropped or curtailed 100-percent financing and no-doc deals, they require higher credit scores and they have cut maximum loan amounts, ultimately reducing the number of qualifying applicants.
"As underwriting standards have tightened in 2007 and rates of home price appreciation slowed or declined, indebted homeowners who experience financial trouble may have fewer refinancing options and may find it difficult to avoid going into foreclosure," according to S&P.
Fourteen months after origination, 4.21 percent of 2006's Alt-A loans face 90-plus-day delinquencies. The rate is 1.59 percent for 2005 Alt-A loans and 0.91 for 2004 originations, in both cases also after 14 months of existence. The figures exclude pay-option adjustable rate mortgages (ARMs) which allow borrowers, within the terms, to choose a payment amount each month.
S&P says once borrowers hit a 60-day delinquency, there's often no turning back. The old easy-money mortgage market just isn't what it used to be.
Many homeowners fall behind in today's market because they opted for a risky ARM just as the market was cycling to a rising-interest rate environment with flat and falling home prices. With no bail out equity and tighter mortgage money, refinancing is off the table.
"We continue to see migration from 60-plus-day to 90-plus-day delinquencies within the 2006 vintage, suggesting that homeowners who experience early delinquencies are finding it increasingly difficult to refinance or work out problems, as opposed to being able to 'cure' falling behind on payments," according to S&P.
Years in the making, revamped federal guidelines "Interagency Guidance on Nontraditional Mortgage Products" and "Credit Risk Management Guidance For Home Equity Lending" were designed to address the problem.
The regulations may have been too little too late. Lenders not federally regulated slipped under the radar and the feds are still hashing out the disclosures.
The share of failing Alt-A loans reveals most homeowners are slogging through the boggy market, but that could be just dumb luck.
The Federal Trade Commission's recent "Improving Consumer Mortgage Disclosures -- An Empirical Assessment of Current and Prototype Disclosure Forms" indicated today's 30-year-old mortgage disclosures do more to daze than help consumers discern the annual percentage rate (APR), cash due at closing, monthly payment, settlement costs, loan amount, balloon payments, prepayment penalties, and other terms.
Uncertain when the rise in failing loans will peak, analysts continue to rake through the growing mounds of muck.
"We are currently examining how the risk profile clearly increased in the Alt-A market in 2006 as compared with previous years and the impact of that increase on performance," the S&P analysts reported.
Published: July 2, 2007
Credit Card Default Rate Is Climbing E-MAIL PrintSingle-PageSave ShareDiggFacebookMixxYahoo! BuzzPermalink
By SAUL HANSELL Published: March 18, 1997
Over the last three years, Americans have received in the mail more than eight billion offers for credit cards. The good news, for the credit card companies, is that millions of people have taken the cards and borrowed more than ever before. The bad news is that a growing number cannot pay their bills, and in recent months the problem has been getting worse.
Many credit card companies recently tightened their lending standards in hopes of avoiding a plague of defaults and late payments. But instead of improving the situation, the latest moves by the credit card companies appear to be rippling negatively through the industry.
Yesterday, the Advanta Corporation, one of the fastest-growing credit card issuers, said it would lose money in the first quarter because as much as 7.5 percent of its loans outstanding had gone bad. Advanta, long proud of its independence, has hired an investment banker to consider, among other options, selling the company outright.
Advanta's woes reflect a wider trend. Last week, the American Bankers Association said 3.72 percent of credit card borrowers were behind on their payments in the fourth quarter of last year, up from 3.48 percent in the third quarter. By comparison, 3.34 percent of borrowers were behind on payments in the fourth quarter of 1995. And the problems are likely to get worse before they get better, because credit card borrowing has jumped sharply recently as Americans stretched to finance their Christmas and post-Christmas shopping.
Advanta, while perhaps worse off than many of its competitors, is certainly not alone. Earlier this month, the Banc One Corporation became the latest card issuer forced to bail out bonds backed by its credit card loans, because losses were higher than investors in the bonds had expected.
So now the card companies are preparing to get even tougher on customers, imposing higher interest rates and more fees on card users and providing them with fewer goodies. Advanta and others are starting to raise interest rates on riskier customers. They are increasing ''nuisance'' fees -- for being late on payments or going over a credit limit. And new credit card offers will have less attractive terms, such as shortened periods in which low introductory ''teaser'' interest rates apply.
Other credit card companies have been raising fees and cutting back on such giveaways as discounts on new-car purchases or, simply, cash back.
''There is more risk in the system today than a year ago,'' said Alex W. Hart, Advanta's chief executive. The result, he said, is that lenders will try to make card borrowing more expensive in an attempt to maintain their lucrative profit margins.
For the economy, tighter standards for credit cards may well slow spending by hard-pressed consumers, who have relied heavily on cards in recent years to help maintain their living standards. But if consumers cut back and weaken the economy, then credit card losses are likely to go nowhere but up.
While banks have started to tighten their lending standards, the moves have not yet had any effect on overall borrowing, which has continued to climb at a rapid clip. The Federal Reserve said last week that consumer borrowing in January jumped $8.4 billion, to $1.203 trillion, the largest rise in two years, after increasing $3.8 billion in December.
''It's not going to look pretty for a while,'' Moshe Orenbuch, an analyst with Sanford C. Bernstein & Company, said of the industry's situation. ''The streets are littered with companies that have 7 percent loss rates.'' Mr. Orenbuch said that Advanta, long seen as one of the more sophisticated issuers, seemed to have slipped behind the industry leaders.