Scary Facts on Sub-Prime

With sub-prime lenders dropping like French peasants in the late 1340’s, the same people who said that there was no housing bubble are now claiming that the damage will be contained to only the sub-prime market. I think this is utter, complete and irresponsible nonsense. At the very least, the sub-prime implosion will cause another leg down in the housing market. People are going to be thrown out of their houses en masse (well over 100,000) over the next year or so. There hopes and aspirations of getting the American dream turning into a nightmare. Housing prices are going down this year, more or less across the country, although some markets will hold up while others get crushed. Housing prices will most likely decline again in 2008. The housing ATM is gone, there will be a negative wealth effect, and we may see some slowing in retail sales. Over a hundred thousand people being tossed out of their houses is not an extreme or alarmist position, given the situation. If anything, it is conservative. There is about $825 billion in outstanding sub-prime mortgage debt. If the average size of the mortgage is $200,000, that is apx 4.1 million homes; if 2.0% of those are foreclosed on (assuming the trends do not get worse from here, a dubious proposition at best), then 82,000 houses would be foreclosed on. Assume just three people per household and you have close to a quarter of a million people thrown out of their houses. That also assumes NO foreclosures in either the Alt-A or prime mortgage market. It also assumes that with a huge bulge in ARMs resetting this year and the ability to refinance drying up, that the foreclosure rate does not continue upwards. Now, will a quarter of a million people on the streets sink the U.S. economy? Probably not. Could it be a major social problem? Yes. The U.S. economy is a very resilient animal, and has weathered many storms before. It will survive, but the economic risks are increasing. This morning, the Mortgage Bankers Association released its report on mortgage delinquencies and foreclosures for the fourth quarter of 2006. At the end of the year, 4.95% of all mortgages were at least 30 days past due, up from 4.67% at the end of the 3rd quarter. This almost equals the high seen in the second quarter of 2003 (as the slow takeoff of this recovery was getting underway) of 4.97%. The percentage of all mortgages in the foreclosure process just hit a record high at 0.54%, surpassing the old record of 0.50% set in the second quarter of 2002. Yet things are much worse in sub-prime land where 13.33% are 30 or more days past due, up from 12.56% in the 3rd quarter. Sub-prime ARMs are even worse, at 14.44% delinquent. One out of every 50 sub-prime mortgages is now in some stage of the foreclosure process, and amongst sub-prime ARMs 2.7% are in the process. Without a doubt, the situation has gotten significantly worse since the end of the year, so their first quarter report should make interesting reading (especially if you are a fan of Stephen King novels).