By Fester:
The mortgage crisis so far has been driven by sub-prime borrowers defaulting. This is due to a combination of factors. First, mortgage underwriting on the whole sucked hard core for most/all of this decade. This allowed for a lot of loans to be made that never should have been made. Secondly, the quality assurance incentive structure was beyond perverse; it was obscene. No one could make money by saying no, so no one said no. Third, subprime by definition is composed of people who are closer to the economic edge than the prime population. Any slowdown, or disruption or minor crisis will first be seen among the most vulnerable. Finally, adjustable rates tend to reset faster for subprime mortgages than for prime mortgages, so the initial move off the teaser payment will be seen first in subprime than in prime.
However subprime was not systemically different from other sectors of the mortgage and housing markets. The same problems with underwriting, quality assurance, misguided incentives, lack of reserves and reset shock will impact all segments of the mortgage market. It would be surprising if these systemic problems did not impact the Alt-A and prime markets. However the New York Times is acting shocked that Alt-A is in trouble:
Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults.
The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.
If the New York Times or any other large newspaper looked at and reported on a Credit Suisse report from the first quarter of 2007, and reproduced the following graph, no one would have been surprised [h/t Irving Housing Blog:
The first month is January, 2007 and we see a local maxima of resets and subprime volume for the winter of 2008 and then a local minima around the winter of 2009. At that point, subprime fades away in volume as the pre-crisis loans have either been refinanced, reset, or seized. However the true bubble loans in Alt-A and Option ARMS push for another local maxima in the summer of 2009 and then trend upwards for the next couple of years.
When one looked at this chart in 2007, one had to conclude that unless magical economic ponies were emerging from the ass of Ben Bernacke, George Bush, or the Flying Spaghetti Monster, there would be multiple waves of mortgage crisis as too many loans made during the bubble never made any sense, and that any shock (of which the credit crunch qualifies as one) would make it impossible for a significant portion of people to pay their mortgages.
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