In Blow to Housing, Risky Mortgage Losses Seen Rising
Posted by Ray on July 6, 2009 under cnbc, Main, Markets | 
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Contrary to someone’s opinion things are not as good as he would like them to think. According to CNBC Standard and Poor’s, S&P, said this today; “Standard & Poor’s Monday boosted its expectations for losses on risky loans backing U.S. mortgage securities to as much as 40 percent, suggesting a darkened outlook for the troubled housing market.”
The numbers are staggering; “S&P boosted loss projections for subprime loans made at the peak of the market in 2006 and 2007 to 32 percent and 40 percent from 25 percent and 31 percent, respectively.
For 2005 loans, loss projections rose to 14 percent from 10.5 percent. For Alt-A loans, which were made to borrowers that provided reduced proof of their ability to repay, loss projections for 2006 and 2007 mortgages rose to 22.5 percent and 27 percent from 17.3 percent and 21 percent, respectively. S&P expects Alt-A loans from 2005 to post losses of 10 percent, up from its previous estimate of 7.75 percent.
Loss severities, which include the costs to foreclose and liquidate a home and declines in property value, are expected to rise to 70 percent for 2006 and 2007 subprime bonds and 60 percent for Alt-A bonds issued in those years, S&P added.”
This is the cause of the problem and until this gets under control there is no recovery. If banks are going to loose money, which they are, they will not lend money out. Especially if banks have to boost their TCE and tier 1 capital. What should make everyone sick, including S&P, is the fact that these are AAA rated bonds which are presumably “safe” investments.
The fact that prime, alt-A and jumbo mortgages are blowing up, or soon will in some cases, is adding to the problem. When pristine debtors cannot pay their bills we have a serious problem and this is how unemployment comes into the picture. As unemployment rises so will delinquencies and this will lead to foreclosures and lower home prices.
Adding insult to injury, the new minimum payments on credit cards, which we talked about a day or so ago, will lead to credit cards and auto loans going into default. We read a lot, a couple of books a week on top of the news, and T2 Partners had a good book talking about mortgages and why this is not over. In short, we have a ton of jumbo mortgages due to reset and they will cause more pain in the housing sector.
We are coming to the end of this, but only if we get employment up. Other modification programs and bailouts will not work. Furthermore, the last thing we need is another stimulus package Mr. Obama and Mr. Biden.
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