Market alert

Originally from the WSJ: (Temp free link)

Based on current performance, 2006 is on track to be one of the worst ever for subprime loans, according to UBS AG. “We are a bit surprised by how fast this has unraveled,” says Thomas Zimmerman, head of asset-backed securities research at UBS. Roughly 80,000 subprime borrowers who took out mortgages packaged into securities this year are behind on their payments, the bank says.

Predicting losses on these securities is a challenge because there’s little or no historical evidence to show how subprime loans will perform at a time when home prices are falling, says Thomas Lawler, a housing economist in Vienna, Va. An analysis by Merrill Lynch & Co. found that losses on recent subprime deals could be “in the 6% to 8% range” if home prices are flat next year and could rise to the “double digits” if home prices fall by 5%. Falling home prices could trigger losses not only for investors who bought riskier classes of mortgage-backed securities, but also for some holders of A-rated bonds, according to the report.

If only there were a way to discern how many subprime loans had been written in the Charlottesville/Central Virginia market … there will be opportunities to help people out who need it. Subprime loans do serve an important segment of the market. My concern is that they have been marketed and written to those who may not have had any business getting a mortgage. Some people are best suited to rent.

Rates Fall and Applications Rise
Toll Brothers reports record loss

Locally, Toll Brothers does not have a presence (yet), so take their news for what it’s worth in relation to our market.

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  2. JR Jackson December 7, 2006 at 13:04

    Let’s keep in mind that the “history” of subprime loans isn’t particularly long, so it’s hard to say how bad things will get and how bad they currently are, relatively speaking. I dabble in subprime MBS, and loans originated in ’03 and ’04 are performing fairly well. It’s the ’05 and ’06 vintages that stink out loud – likely a result of overcapacity in the mortgage industry resulting in brokers chasing borrowers who have no business qualifying for loans.
    Maybe this will compel brokers to actual document income levels and force borrowers to put some skin in the game. Stated income loans and high CLTV loans are the biggest problem in the subprime market with the ’05/’06 loans. Who would have seen that coming?!?

  3. Jim Duncan December 7, 2006 at 14:28

    I don’t disagree with you at all. We are in uncharted territory right now with regards to the performance of sub-prime borrowers. A lot of those loans in ’05 & ’06 perhaps should never have been written.

    What I expect will happen is that someone or some “consumer advocacy” group headed by a bunch of lawyers will try to assign blame to some/everybody peripherally involved.

  4. JR Jackson December 7, 2006 at 15:15

    Also, the media LOVES to overinflate any small issues that arise in the market. The fact of the matter is that outside of stated income and second lien subprime loans, mortgages are generally performing in line with most expectations. All of the dire predictions about options ARMs and interest-only loans blowing up haven’t come true, except in isolated markets.
    Also don’t forget that bankruptcy reform last October compelled a lot of subprime borrowers to file Ch. 7, leading to very, very favorable credit statistics in the first half of ’06. The numbers had nowhere to go but up.