BofA Analyst: Mortgage correction just 'tip of the iceberg'
Robert Lacoursiere, an analyst with Bank of America, is not drinking any corporate Kool Aid. In a recent report, he said losses on home loans will peak in the second half of 2008.
He starts with this:
• Mortgage borrowers are in a weaker position than in the last cycle with less equity cushion, higher levels of income devoted to debt servicing and facing higher rates in the upcoming waves of rate resets.
• Meanwhile softening housing market makes repayment by sales an unlikely option, setting the stage for loss severities last seen in the early ‘90s.
He delves deeper into the reset issue:
According to BofA’s estimates, approximately $515 billion of ARMs are scheduled to reset in ’07, followed by approximately $680 billion in ’08. Furthermore, of these ARMs, we estimate that subprime loans consist of $400 billion (78%) in ’07 and $500 billion (73%) in ’08.
Recently released data from Fannie Mae (FNM) confirms our view that ARM resets will lead to higher rates of credit deterioration, particularly for 2/28 subprime ARMs. ... Of the subprime ARMs that reset in 2006, 76% of borrowers were able to successfully pay off their loan (either through refinancing or selling their home). However, of the borrowers that did not pay off their loan 50% went bad (delinquent, in foreclosure or REO). According to FNM, subprime ARM borrowers facing resets in ’06 on average faced a 250 bps (2.5 percentage points) contract rate increase. Meanwhile, though the data is only as of March ’07, of all the subprime ARMs scheduled to reset in ‘07, already 18% have gone bad (delinquent, in foreclosure or REO) or 29% of loans that have not been paid off. As a larger number of loans will hit the reset throughout the rest of the year and ’08, and due to less favorable market conditions (higher rates, tightened underwriting standards, already stretched borrowers, and home price stagnation) the delinquency ratio will only increase from the 1Q07 level.
Thanks to Bank of America and CalculatedRisk