2 interesting stories on the Calculated Risk blog caught SAW’s eye today. The first quoted a report from Housing Wire that mortgage delinquencies in the US are quickly spreading beyond sub-prime borrowers into prime borrowers. The second is that mortgage insurers are twitchy in anticipation of one or more of them failing.
Essentially increasing numbers of supposedly solvent or ‘affluent’ middle and upper middle class borrowers are now finding they can’t afford their properties. Ed McMahon, Johnny Carson’s sidekick, is the poster boy for this phenomenon. He’s reportedly fending off foreclosure on his multi-million dollar California home, having tapped himself out on a home equity line of credit.
Remember that “prime borrowers” have been hit on 2 fronts:
Firstly, chalk it up to financial inexperience, ignorance, greed, lousy budgeting, a proclivity to take on more debt that can be serviced and the habit of using the home as an ATM machine – while regarding it as the largest asset on the assumption that its value would continue to rise indefinitely.
Secondly, it’s well documented just how greedy mortgage lenders became when sub-prime Adjustable Rate Mortgages initially proved hugely profitable. They quickly pushed the product onto unsuspecting prime borrowers who found themselves downgraded into the sub-prime category, saddled with a mortgage they couldn’t understand or afford.
So, if mortgage defaults are now spreading up the affluence chain, it must mean that the cash flow from their jobs or from their own businesses are patently insufficient. Expect relocations and more SME failures in the US.
The increasing number of defaults would predictably make mortgage insurers twitchy. They are also exposed on 2 fronts: the insurance of individual mortgages; and more ominously, the insurance of the exotic alphabet soup of Collateralized Debt Obligations.
© 2008 Sanjeev Aaron Williams All Rights Reserved
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