At the end of last week, the Comptroller of the Currency, John C. Dugan, pointed out that changes need to be made in the way mortgage lenders do business as losses from home equity loans continue to mount. A press release from the Office of the Comptroller of the Currency puts the problem into sharp relief:

Home equity loans and lines of credit grew dramatically in recent years, more than doubling, to $1.1 trillion, since 2002. In part, that’s because of the rapid appreciation in house prices, the tax deductibility feature of home equity loans, and low interest rates.

“But another contributing factor was perhaps not so obvious: liberalized underwriting standards,” Mr. Dugan said, in a speech to the Financial Services Roundtable’s Housing Policy Council. “These relaxed standards helped more people to qualify for loans, and more people to qualify for significantly larger loans.”

These relaxed standards included limited verification of a borrower’s assets, employment, or income; higher debt to equity ratios; and the use of home equity loans as “piggyback” loans that helped borrowers qualify for first mortgages with low down payments and without mortgage insurance, resulting in ever-higher cumulative loan-to-value ratios.

Consequently, once house prices began to decline in 2007, home equity lenders began to experience unprecedented losses. While losses have traditionally run at about 20 basis points, or two tenths of a percent of loans, they shot up to nearly 1 percent in the fourth quarter of 2007 and to 1.73 percent in the first three months of 2008.

Looked at in dollar terms, losses on all home equity loans, including HELOCs and junior home equity liens, rose from $273 million in the first quarter of 2007 to almost $2.4 billion in the first three months of 2008 – a nine-fold increase. And the largest home equity lenders are now saying that they expect losses to continue to escalate in 2008 and beyond, Mr. Dugan said.

Many banks are already expressing their losses, and the credit crisis may cause some banks to fail. Indeed, some have already failed.

Tags: home equity loans, home equity, home mortgage loan, mortgage loan blog,
banks fail, HELOCs, mortgage lenders

At the end of last week, the Comptroller of the Currency, John C. Dugan, pointed out that changes need to be made in the way mortgage lenders do business as losses from home equity loans continue to mount. A press release from the Office of the Comptroller of the Currency puts the problem into sharp relief:

Home equity loans and lines of credit grew dramatically in recent years, more than doubling, to $1.1 trillion, since 2002. In part, that’s because of the rapid appreciation in house prices, the tax deductibility feature of home equity loans, and low interest rates.

“But another contributing factor was perhaps not so obvious: liberalized underwriting standards,” Mr. Dugan said, in a speech to the Financial Services Roundtable’s Housing Policy Council. “These relaxed standards helped more people to qualify for loans, and more people to qualify for significantly larger loans.”

These relaxed standards included limited verification of a borrower’s assets, employment, or income; higher debt to equity ratios; and the use of home equity loans as “piggyback” loans that helped borrowers qualify for first mortgages with low down payments and without mortgage insurance, resulting in ever-higher cumulative loan-to-value ratios.

Consequently, once house prices began to decline in 2007, home equity lenders began to experience unprecedented losses. While losses have traditionally run at about 20 basis points, or two tenths of a percent of loans, they shot up to nearly 1 percent in the fourth quarter of 2007 and to 1.73 percent in the first three months of 2008.

Looked at in dollar terms, losses on all home equity loans, including HELOCs and junior home equity liens, rose from $273 million in the first quarter of 2007 to almost $2.4 billion in the first three months of 2008 – a nine-fold increase. And the largest home equity lenders are now saying that they expect losses to continue to escalate in 2008 and beyond, Mr. Dugan said.

Many banks are already expressing their losses, and the credit crisis may cause some banks to fail. Indeed, some have already failed.

Tags: home equity loans, home equity, home mortgage loan, mortgage loan blog,
banks fail, HELOCs, mortgage lenders

As one would expect, delinquencies on subprime mortgages are rising. Additionally, Alt-A mortgages are seeing an increase in delinquencies as well. Reuters reports on the rise in failing home mortgage loans:

Delinquencies for Alt-A mortgages rated between 2005 and 2007 are climbing, with total delinquencies rising as high as 17 percent in some cases, more than 6 percentage points higher than previous estimates, the ratings agency said in a report.

Lower-quality subprime mortgage delinquencies soared as high as 37 percent for mortgages originated in 2006, 4 percentage points higher than previous estimates, S&P said.

What are Alt-A mortgages?

Alt-A mortgages are considered to be lower risk than subprime mortgages. These are mortgages that have more relaxed lending standards than prime mortgages. Alt-A mortgages feature less strenuous income documentation, as well as some higher loan-to-value ratio allowances. These mortgages fall between subprime mortgages and prime mortgages in terms of risk categorization.

Alt-A mortgages were considered good investments — especially in mortgage backed securities — because they have higher interest rates than prime mortgages and less risk than subprime mortgages. Mortgage backed securities include Alt-A mortgages in order to offset some of the risks of subprime mortgages in the security while still prompting a desirable return. Now, though, with the increase in delinquencies, it is reasonable to assume that mortgage backed securities are likely to head even lower.

The fact that home mortgage loans are seeing delinquencies rise in this category of loan is proof that the housing market crisis is moving up the food chain. Indeed, with the economy slowing down and inflation on the rise, it might not be long before we see a signification jump in delinquencies on prime mortgages.

Indeed, loan delinquencies are on the rise in nearly every loan category.

Tags: mortgage loan blog, subprime mortgages, home mortgage loans, Alt-A mortgages,
prime mortgages, mortgage back securities, loan delinquencies