The Rich Are The New Subprime Borrowers

Not so long ago, the mortgage crisis was described as a “subprime crisis.” Pessimistic loss estimates were often said to go too far based on the size of the subprime market. Ben Stein famously said that the stock market sell off was “wildly out of all proportion to the likely damage to the economy from the subprime problems.”

Now, of course, we know that it’s not just a subprime problem anymore. Today Bloomberg describes the crisis in jumbo mortgages.

  • Huge acceleration in foreclosures. The number of U.S. homes valued at more than $729,750 entering foreclosure jumped 127 per cent during the first 10 weeks of this year from the same period of 2008. By comparison, the rate rose 72 per cent for homes valued at less than $417,000.
  • 10% Loss Rate on Securitized Jumbo Loans. About $500 billion of prime-jumbo mortgages are bundled into bonds, according to Memphis, Tennessee-based FTN Financial. In February, JPMorgan Chase analysts almost doubled their projections for losses on those mortgages to as much as 10 per cent because of increasing defaults. For those of you keeping score at home, that’s another $50 billion in losses.
  • Declining Sales. Lots of people stuck with a huge mortgage might want to sell their homes but their are no buyers at prices that will pay off the mortgage. Take California. While sales for all homes in the state increased 2.5 per cent last year from 2007, sales of homes valued at more than $1 million declined 43 per cent to the lowest since 2003.


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