Mortgage Crisis Spreads To Conventional Loans

The sub-prime mortgage crisis was just the tip of the iceberg. Analysts are saying a new wave of foreclosures is on the way. And this time, people who got reasonable home loans and have good credit are falling behind. Madeleine Brand talks to real estate analyst Mike Larson of Weiss Research about how a new wave of defaults is a symptom of a larger trend.

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MADELEINE BRAND, host:

This is Day to Day. I'm Madeleine Brand.

ALEX CHADWICK, host:

I'm Alex Chadwick. Coming up, polo in a working class city in southern California. Water polo. Athletes are training there to play water polo in the Beijing Olympics.

BRAND: But first, you thought the subprime mortgage crisis was bad? Well a new wave of defaults is beginning, this time on mortgages taken out by people with good credit. Some homeowners with so-called Alternative A loans are falling behind on their monthly payments. Mike Larson is an analyst with Weiss Research. It's an investment research company based in Florida. And Mike, first of all, tell us what these Alternative A loans are.

Mr. MIKE LARSON (Analyst, Weiss Research): Sure. Alt A loans are somewhat in-between prime and subprime mortgages on the risk scale. Generally, borrowers have higher credit scores, but they have other things that make their loans riskier. They may want to take out one of these pick-a-payment loans, where you don't have to pay all the principal, or even all the interest due each month. You can get a negative amortization loan, where your balance goes up. Or you may have a high debt-to-income ratio, anything that puts you sort of outside the realm of traditional prime lending, but you're not as risky as a subprime borrower.

BRAND: So now these people are now in trouble? They're falling behind?

Mr. LARSON: Yes, they sure are. A lot of these loans were made on an interest-only basis or, again, one of these pick-a-payment-option ARMs, where many of these borrowers aren't even covering all the principal or interest due each month. Their loan balances are going up with time. That's fine if home prices are rising as well, but when home prices are falling like they are now, many of these borrowers are finding they owe more than their homes are worth, which gives them an incentive to walk away when times get tough.

BRAND: Now, in the New York Times, the head of JPMorgan Chase says he expects losses on prime loans at his bank to triple in the next few months. Is that what we're going to see in other banks?

Mr. LARSON: I think so. I mean, if you look at something like the Mortgage Bankers Association, their delinquency figures. Now, the subprime delinquency rate in the first quarter was up to almost 19 percent from just under 14 percent a year earlier. But the prime delinquency rate is up at 3.7 percent versus 2.6. So you've already seen an increase, and given what we know about what home prices are doing, we're probably going to see that increase further going forward.

BRAND: So do you expect even tighter credit, then?

Mr. LARSON: I think so. We've seen many banks cut back on what they call wholesale lending, meaning the bank is funding mortgages that mortgage brokers are actually taking the paperwork for. A lot of banks are getting out of that business. We're seeing anything that lenders do that is outside of the realm of Fannie Mae, Freddie Mac or FHA mortgages - they're really clamping down on that. They don't want to do as many jumbos, they certainly don't want to do any subprime lending any more. So all of that means when you or I go to shop for a mortgage, it's going to be either harder to find a loan, or we're going to have to pay up more to get one.

BRAND: Now, there's a column in today's Washington Post that really downplays all this bad housing news, and it says that the data show that most Americans really have not experienced significant declines in the value of their homes, that most of the problems are in four states - two of them, you and I are in - in Florida and in California, also Arizona and Nevada. But the rest of the country is doing OK. What are your thoughts on that?

Mr. LARSON: Well, I think, clearly, the problems are the worst in the markets of California and Florida, Nevada, Arizona and some - where you had the biggest speculative run-up. But we're also seeing that the decline in home values broaden out. Certainly not as steep or as deep as some of the declines we've had there but, you know, you look at something like the Case-Shiller Index, for example. All 20 metropolitan areas they survey are now showing year-over-year declines in price. Similar for the quarterly numbers you get out of the National Association of Realtors. A higher percentages of U.S. markets are showing decline. So, while the problem is the worst in those hardest-hit markets, there's still a problem that's spreading into other markets as well.

BRAND: Mike, let me get your big-picture take on this, if you will, because, you know, this just seems to be a problem we keep hearing more and more about and, you know, people were saying, oh, we're going to turn the corner in a couple of months or by the end of the year. What do you think?

Mr. LARSON: Well, I think housing itself has been in its own private recession for more than a year now. And the problem is that that private recession in housing is now spilling over into the broad economy. So, you already had people defaulting because they had high-risk individual mortgages, and because they may have been speculating in homes. That was the first wave of trouble in the industry.

Now you're getting that second wave as a result of rising unemployment, the result of less job creation and, you know, just tighter budgets. And that's what's fueling the secondary wave, added in along with the decline in home prices. You add it all up, and I think the housing market's going to continue to struggle for the remainder of 2008 and probably well into 2009. Hopefully, once we get past that point, the combination of an easing credit crisis, a rebounding economy, and just lower home production, fewer new homes being added to the market, will all work inventory levels down and start to stabilize pricing.

BRAND: Mike Larson is an analyst with Weiss Research; it's an investment research company. Mike, thank you.

Mr. LARSON: Thank you.

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