Saturday, August 11, 2007

Behind the U.S. Mortgage Mess

See August 11, 2007 Wall Street Journal and Nick Timiraos writing Behind the U.S. Mortgage Mess. It includes:

■ “On Thursday [August 9, 2007], market jitters escalated after French bank BNP Paribas SA said it would freeze some $2.2 billion in three funds because the market for mortgage-backed securities had practically evaporated. That made it impossible for BNP's funds to sell those securities or determine what they were worth.”

■ “What's causing the credit crunch? Growing delinquencies in "subprime" loans, those made to borrowers with poor credit, have hit hedge funds and investors. Lenders in the past few years had been packaging these loans into securities and selling them to investors eager for bigger returns. Delinquencies stayed low at first because U.S. home prices were rising at a rapid clip, and borrowers who fell behind on payments were able to simply refinance their mortgages. But that ended as home prices peaked in most markets in 2006, leading more homeowners to fall behind on payments.”

■ “Could more Americans feel economic pain? While it already has become much harder for subprime borrowers to get a loan, nervous home-mortgage lenders have also begun raising rates or cutting off credit for other types of loans, including Alt-A loans, a grade between prime and subprime. Standard & Poor's said this past week it would downgrade 207 classes of Alt-A mortgage-backed securities.”

• Certain "no-doc" subprime loans didn't require the lender to verify the borrower's income. In extreme cases, lenders offered what was dubbed a "ninja loan" that required no income, no job, and no assets.

• “Homeownership rates rose to a high of 69.2% in 2004, from an average of 65% through the 1990s, according to government statistics.”

• “As a share of all mortgage originations, subprime loans nearly doubled to 19% in 2004 from 9% in 2003, according to Inside Mortgage Finance.”


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