Monday, August 04, 2008

Subprime Mess was the Tip of the Iceberg?

There is a compelling story in today's NY Times covering the rapid deterioration in mortgages to those with good credit. While this is not news to anyone following the markets closely, the news that good credit risks are suddenly falling behind on payments is likely to gain traction with the mainstream press.

"Defaults are likely to accelerate because many homeowners’ monthly payments are rising rapidly. The higher bills come as home prices continue to decline and banks tighten their lending standards, making it harder for people to refinance loans or sell their homes. Of particular concern are “alt-A” loans, many of which were made to people with good credit scores without proof of their income or assets.
Subprime was the tip of the iceberg,” said Thomas H. Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. “Prime will be far bigger in its impact.”

In a conference call with analysts last month, James Dimon, the chairman and chief executive of JPMorgan Chase, said he expected losses on prime loans at his bank to triple in the coming months and described the outlook for them as “terrible.”

Prime and alt-A borrowers typically had a five- or seven-year grace period before payments toward principal were required. By contrast, subprime loans had a two-to-three-year introductory period. That difference partly explains the lag in delinquencies between the two types of loans, said David Watts, an analyst with CreditSights."

There are going to be a number of people that will continue to blame others (Wall Street, the lenders, real estate agents, appraisers, etc), but with prime and Alt-A borrowers more of the blame lies with with the borrowers themselves. By default a good credit customer should be more financial astute than a subprime borrower. So, when a prime borrower chose to buy a $650,000 3bdrm house in CA with an interest only, negative amortization loan (resulting in a $2,800 mth payment for 4 yrs) instead of a more prudent decision to buy a $350,000 house with 20% down and a 30yr fixed rate (resulting in a similar $2,800/mth payment) there is no one to blame but themselves.

Like most debt financed items in our country -cars, boats, houses, college - people remain obsessed with "What's my payment" rather than understanding the true cost of borrowing.


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