Alt-A and Option ARMs set for big losses

Consumer credit quality is weakening across the US, especially in the former housing boom states. While over $450 billion in credit writedowns have already been taken by the global financial sector, most of these losses ave been concentrated in the sub-prime area. This looks set to change.

Not surprisingly, it’s the former boom states that are paying the highest price for the correction in the nation’s housing markets. The highest mortgage default rates are in Arizona, California, Florida and Nevada — but they are also very high throughout the industrial Midwest, and in parts of the Northeast corridor around Washington D.C., Long Island, NY, and Rhode Island, Moody’s noted.

While foreclosures in 2006 and 2007 primarily affected speculators and subprime borrowers, a combination of negative equity and a weakening job market is driving a new wave of defaults this year. With national house prices now down 16 percent from their spring 2006 peak, some 9.6 million U.S. homeowners now have mortgage balances that exceed the market value of their home, [Mark] Zandi [chief economist for Moody’s] estimated.

While some are projecting a quick turnaround out of the current doldrums, Moody’s is clearly not nearly as sanguine on the prospects for either housing or the economy.

The company said it expects household credit conditions to continue weakening through much of the remainder of the decade, with another 5 million homeowners at significant risk of default during this period — a total that includes about one-half of the current 10.5 million borrowers with subprime, Alt-A or jumbo option ARM mortgages that are in significant negative equity positions.

In other words: strap yourself in. It could be a very long ride.

Housing Wire

The long and short of it is we are nowhere bottom in housing. Credit quality is deteriorating across the board and that means writedowns outside of sub-prime.

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