There has been more evidence in recent days that the bad-debt plague is speading into the vast market for “prime” mortgages. Although the percentage of prime loans that are likely to go bad is much smaller than that for sub-prime and Alt A, the market is vastly larger. If the weakness continues to spread, therefore, it’s easy to see how the $500 billion that the financial system has already written off with rapidly rise to the $1 to $2 trillion that Nouriel Roubini and others are predicting.
Some anecdotal stats from today’s WSJ’s piece:
Mortgages issued in the first half of 2007 are going bad at a pace that far outstrips the 2006 vintage… An analysis prepared for The Wall Street Journal by the Federal Deposit Insurance Corp. shows that 0.91% of prime mortgages from 2007 were seriously delinquent after 12 months, meaning they were in foreclosure or at least 90 days past due. The equivalent figure after 12 months was just 0.33% for 2006 prime mortgages…
Data on other classes of mortgages suggest the same trend. Freddie Mac reported Wednesday that 1.38% of the 2007-vintage loans it purchased were seriously delinquent after 18 months compared with 0.38% of 2006 loans at the same point in their life. Freddie Mac generally purchases loans made to creditworthy borrowers.
Last month, J.P. Morgan Chase & Co. said it expects losses on prime mortgages that weren’t securitized and remain on its books to triple from current levels. The increase in bad loans is driven mostly by jumbo mortgages originated in the second half of 2007, a company spokesman said.
Until these bad loans are fully digested, “foreclosures will remain at record highs, the financial system will be under severe stress and the broader economy will sputter,” said Mark Zandi, chief economist of Moody’s Economy.com. One piece of good news, he said, is that loans originated in the fourth quarter of 2007 and early 2008 appear to be performing better.
The culprit? Lenders didn’t really tighten standards until mid-2007.
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