It’s time to stop blaming subprime for the growing problems in the world of real estate. The evidence is in and Alt-A is just as bad and prime is now seeing its share of delinqencies. The Wall Street Journal reported last week:
Earnings reports at some regional banks suggested subprime credit problems may be spreading to certain types of prime home loans…Wells Fargo cited higher losses on home-equity loans in the Midwest and in central California. Howard Atkins, Wells’s chief financial officer, said deterioration in certain markets was caused by rising interest rates on some mortgages combined with falling home prices, creating very high loan-to-value ratios that made it difficult for borrowers to refinance out of high-cost loans. The loans, largely made in 2006, represent about 3% of Wells’s home-equity portfolio, which is made up predominantly of prime loans.
On Friday we got this from Goldman Sachs:
Delinquencies on prime and subprime adjustable-rate mortgages in California soared by 78% and 60% respectively, vs. 33% and 24% across the U.S., the bank added, citing recent data from the Mortgage Bankers Association. Median California home prices are still creeping up, and the state’s strong employment trends should support the real estate market. But Goldman is worried that surging prices in the state in recent years weren’t driven by traditional factors such as strong employment and income growth. Instead, the bank reckons an increase in ARM mortgages offered to borrowers who were already stretching to buy high-priced homes fueled the boom.
Prime is deteriorating faster that subprime! As I’ve been saying for quite some time the problem is not the quality of the borrower, it’s the quality of the lenders’ standards. Goldman is right: the loosest lending standards in history – making “impossible loans” – is the problem. So don’t listen to all the talk about subprime; this is a problem that is pervasive within the mortgage market. The latest news in Alt-A and prime is simply the subtle ticking of a time bomb.