The Bankwatch

Tracking the consumer evolution of financial services

First the bad news … | Sub Prime crisis – the next 6 – 12 month view

The simple message here, is that the dollar value of sub prime mortgages (dark grey bars) that are subject to reset [read significant increase in loan payment amount] is still growing, and continues until October 2007 ($33 Bn in October), suggesting bad news still to come. However resets then begin to drop through till end of 2008, when its down to a relative trickle.

The significant dark grey form Jan 2007, through to Dec 2008 will generate a lag effect through 2008, and well into 2009 on the US housing market. [hat tip mypocketchange]

My Pocket Change » Pssst… I Know when the Housing Bubble is Going to Burst!

Let’s focus on the biggest risk loans — the one we were just pondering the fate of — the sub prime loans! These risky loans are colored in dark grey. One quick glance at the graph shows the disturbing news. The second half of ‘07 through the first half of ‘08 has an absolute ton of subprime loans resetting all at once. With the housing market cooling off, these loans are primed for foreclosures and/or owners forced to sell. This is when the housing market will face a serious challenge.

What’s also interesting is how quickly the subprimes loans die out after ’08. They go from the most common loan type (by far) to non-existent! Such boom and bust, transient situations scream caution — but then again, hindsight is always 20/20. The evidence does seem to suggest that the subprime lending fad is a thing of the past.

Relevance to Bankwatch:
The key is that there are $240 Bn worth of mortgages to be reset before the trickle arrives, and what impact that will have on the market. Relative to the US economy, it is probably not so large, and the bigger question, might be the impact on Banks and mortgage lenders, and how that will drive tightening on Bank lending policies over the next two years.

“… the financial squeeze on the US sub-prime borrower is set to
intensify. A total of US$240 billion worth of sub-prime mortgages
(equivalent to 39% of outstanding adjustable-rate sub-prime mortgages)
are scheduled to reset over the next 12-months and US$370 billion (60%)
over the next 18-months (Figure 12). Additionally, loan-to-value ratios
should continue to deteriorate unless we see a significant rebound in
house price inflation (which looks unlikely). Hence, sub-prime mortgage
default trends are set to intensify moving forward.”

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Written by Colin Henderson

September 21, 2007 at 11:19

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  1. […] idea.  In addition, any write down now, will likely require more write-downs later, as the mortgage terms resets (and associated new defaults)  peak in October 2007, and continue at a hectic pace for many […]

  2. […] or partially backed by US sub-prime mortgages.  This follows the dramatic impact from the large scheduled interest rate increases contained in the small print of Adjustable Rate Mortgages in the US.  In simple terms these […]

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