Friday, December 07, 2007

Some Perspective on Subprime Mortgages

The graphs in this post were created using data from the Mortgage Bankers Association's (MBA) most recent release on delinquencies and foreclosures, and a previous MBA report here.

Note in the graph above that 34.6% of U.S. homeowners own their houses free and clear of any debt, 50.5% of homeowners have prime mortgages, and 6.1% of homeowners have FHA or VA mortgage. Subprime borrowers make up only 8.5% of all homeowners.

In other words, more than 91 out of every 100 homeowners are NOT subprime borrowers, and only 4.4 out of every 100 homeowners is a borrower with an adjustable subprime mortgage, which are the only mortgage category with delinquency troubles.

For example, consider the graph below that shows the percent of foreclosures started in the third quarter 2007, by mortgage type.

What is very interesting is that subprime fixed mortgages make up a lower percentage of the foreclosures started than either prime ARMs or prime fixed! So it is certainly the case that subprime credit in general is not necessarily a problem, but it is subprime adjustable rate debt that is the real source of the problem.

Bottom Line: 95.6% of homeowners are NOT subprime borrowers with adjustable rate mortgages.


At 12/08/2007 11:45 AM, Blogger MattJ said...

Prime Option ARMs seem like a big problem on the way. Categorizing this as a sub-prime only problem doesn't seem to take into account the recent write downs at Wells Fargo and E-Trade, for example. Both of their troubled portfolios have been described as primarily prime loans.

Have you read Herb Greenberg's latest post?

Most if it is anecdotal, but it makes a lot of sense to me. Any thoughts?

At 12/08/2007 2:33 PM, Anonymous Anonymous said...

The annualized change of prime loans going into foreclosure is greater than subprime loans.

Since the third quarter of 2006, the foreclosure start rates for prime ARMs increased from 0.30 percent to 1.02 percent and the rate for subprime ARMs increased from 2.19 percent to 4.72 percent. The foreclosure starts rate for prime fixed loans increased from 0.13 percent to 0.22 percent and the rate for subprime fixed loans have increased from 0.97 percent to 1.38 percent.

On an annualized basis, the increase in foreclosure starts:

Prime ARM.......240%
Subprime ARM....116%
Prime Fixed..... 69%
Subprime Fixed.. 42%

This is not just a subprime problem.

At 12/10/2007 4:56 PM, Anonymous Anonymous said...

Hi! I work at a foreclosures site. What an insight! I quite agree with your analysis. At this point, we are far deep into the problem to delve into the causes or factors underlying the crisis. It is more relevant is to seek ways to resolve it because foreclosure has sent a strong ripple and affecting other business sectors as well. There is no single perfect solution and not even the government can solve this crisis immediately. But a single step has to be made, then another, until such time the crisis is resolved.

At 12/11/2007 12:49 AM, Anonymous Anonymous said...

This latest perspective follows ina long line of Dr Perry's best.

While I personally still consider this a sub-prime problem, I don't dismiss the effect it can have elsewhere. One obvious area that posp to mind is the markets decrease in up-purchases- by those financially illiterate folks who want to sell perfectly good homes for an upgrade in sq. footage, lawnspace, masterbath, etc. Actually, the decrease is of other foolhardys BUYING.

Anyway, following commentator matthew's link to Greenberg's notes; deligthed to see someone bring up the standard west coast flipper loan, those pay option ARM's. Casually state an undocumented income and borrow 1.7 million to buy 1900 square feet, paint it, then plant the additional 147 square feet of land outside as a $425 worth of japanese garden varieties, perhaps add maybe a $149 plastic koi pond by the entry, then put it back on the market for 2.05 million- sometimes before the first paltry $3200 payment is even due.
Greenberg is correct- noone's bidding, and never will for that loan.

Dr. Perry has accurate data here too though, and it should be considered at length. There's more out there if you need it, and when you put it all together- WHO has mortgages and WHO is foreclosing and WHY, where do THEY live, and yes loan type as well...

It is indeed a sub-prime problem.

At 1/15/2008 9:06 AM, Blogger Unknown said...

I agree with you and believe that with interest rates on a large number of subprime mortgages due to adjust upward during the 2008 period, U.S. legislators and the U.S. Treasury Department are taking action. A systematic program to limit or defer interest rate adjustments was implemented to limit the impact. In addition, lenders and borrowers facing defaults have been encouraged to cooperate to enable borrowers to stay in their homes. Restrictions on lending practices are under consideration. Many lenders have stopped subprime or bad credit mortgages lending or dramatically curtailed it.


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