Is the worst yet to come, or have we seen it all?

Article source: Louise Tong -

Is the worst yet to come, or have we seen it all?

Too many studies and reports into the causes of the current credit crunch overlook the single most important factor. Whilst the securitisation market is a genuinely beneficial piece of the financial market, Jack Ascher points out clearly that the problem is not the structure but with how the mortgage lenders manage their risk control. The very success of the mortgage market, which brought mortgages products within reach of those individuals’ who previously would not have been able to acquire a home loan, is what drove house prices to unsound levels and what Mr Ascher failed to point out.

Risk models in place were based on a the fact that house prices never fell in the US; whilst this was true the risk model had failed to take into account the new reach that the mortgage market had.

The unforeseeable market that we have seen recently, and the self implicated pain that the market can cause itself means that it is very difficult to accurately forecast the affect the market can have in the future and this will ensure that there still will be inflation in the future.

The financial mess which had been created as a result of the sub prime mortgage crisis, as repossessions have increased in many parts of the country, have greatly propelled the mortgage market into a downwards spiral from which it has yet to emerge and one from which it may not recover for some time.

This might not exactly be the best time to be confronted by the thought of the worst being yet to come. But a New York Times article this week begins with a paragraph that would make one jump out of their skin as it said that the first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building.

The article talks about homeowners who have good credit ratings and how they are rapidly and in escalating numbers starting to fall behind in their monthly mortgage payments. An excerpt from the article says:

“The percentage of mortgages in arrears in the category of loans one rung above sub-prime, 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”.

The paper notes that a key reason for more defaults ahead will be that monthly mortgage payments are rising fast whilst the value of homes in dropping fast in comparison. As Thomas Attenberry, president of the First Pacific Advisors puts it, “Sub-prime was the tip of the iceberg.”

According to Reuters, a recent Government reports indicates that, ““Consumer prices jumped at the sharpest rate in more than a quarter century during June and consumers coping with soaring costs received their smallest income gain in a year.”

Everyone in this situations is probably thinking, “Now what?” Appropriately given the circumstances. If you did happen to drive through a Los Angeles neighbourhood or any other well to do area you may have noticed a significant increase in the number of ‘FOR SALE’ signs on the front lawns of well furnished houses, most of which may not be being repossessed, but some may be for sure and this would be the good end of town.

With the recent goings on in the mortgage market, with the reduction of mortgage products, tightening of lending criteria and the overall lack of cash in the banking system these for sale signs may be in place for sometime.

The housing rescue plan (Troubled Assets Relief Programme) passed by the US Congress and signed into law by President Bush will not have a significant impact on the housing market for sometime. Whilst the defaults and foreclosures continue to escalate the seconds, bigger storm is silently brewing in the distance.