I spoke yesterday with a financial advisor who remarked on the subprime mortgage crisis using past tense. More indications emerge today that he will be adopting present and future tenses to talk about the lending crisis, no doubt:
– President Bush today announced measures designed to mitigate the wave of defaults, including expansion of an FHA program to include 80,000 additional households. According to a March, 2007 equity research report of the housing lending industry compiled by Credit Suisse, FHA and VA loans as a percent of the market have dropped from 28% in 1990 to 17% in 2000, and 7% in 2006. There are structural and funding issues in place that will undermine a simple fix. Listen to NPR’s analysis here.
– Residential lending has been in my professional peripheral vision, but a couple of items from the Credit Suisse report merit particular comment. The report notes that interest-only (IO) and negative-amortization loans as a percentage of total purchase mortgage originations rose from 2% in 2000 to 29% in 2005, and 23% in 2006. Roughly one of four mortgages originated in the last two years are structured with static or increasing principal.
– What will be long-term consequences? We have a significant clue about the answer to that question in the graphic at the top of this post, which represents the par amount of adjustable-rate loans scheduled to have rates reset over the coming four to five years. The data reflect January, 2007 figures; it appears that over $40 billion will hit reset dates this month and for several to come. What happens when resets occur? An article in yesterday’s Christian Science Monitor provides a helpful glimpse.
Dealing with the mortgage crisis and its damage is going to require some serious barn-raising in the coming years.