Not much needs to be said about how gruesome things have become in the U.S real estate market. On the other hand, there’s been talk about things getting better lately.
T2 Partners LLC, a U.S. research firm, says, “Hold that thought.” There is good news and bad news.
The good news…American subprime rate resets are done with.
The bad news…Alt-A rate resets aren’t.
The worse news…Alt-A delinquencies are soaring.
Worse yet…Prime mortgage delinquencies are soaring.
Will this lead to a second wave of U.S. mortgage defaults?
Many think it will (Here’s an interesting story from an unlikely source). If a 2nd wave does materialize, its side effects could depress Canada’s economy further.
The tie-in with Canadian mortgages is, of course, with interest rates. There are two theories of how this could affect rates.
1) Economists expect Canada to start recovering late this year or next. However, if the U.S. gets bombarded by defaults again, and it impairs our economy, the Bank of Canada may be more cautious than expected in raising rates.
2) Then again, if central bankers continue printing money, inflation could become a dangerous threat. Moreover, if governments keep issuing new debt to pay for economic stimulus, this new supply could further drive up long-term rates. (A story on this)
How much these two theories offset each other is anyone’s guess. Perhaps, for the foreseeable future, short-term rates (and variable/1-year mortgages) will remain lower than normal while long-term rates (e.g., 5-year fixed mortgages) drift higher.
(The above charts are from T2 Partners LLC.)
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Sidebar: U.S rate resets are but one factor that could affect Canadian interest rates over the next 3-4 years. The global economy, supply of new government debt, and commodity prices are examples of the countless other factors. It is this endless and unpredictable array of economic variables that make forecasting mortgage rates near impossible.
Last modified: April 28, 2014
Wasn’t this represented pretty well on that credit suisse chart from early 2008 or so that had all the resets by type on one big chart? I can’t seem to find it now, but I seem to recall knowing that round two of resets was coming over the next year or two.
Oh wait, found it . . .
http://economist.mrwhipper.com/IMFresets.jpg
Rob, Alt-A and Prime mortgage delinquencies are due to higher unemployment figures in the US (approx 9.5%). If the US can turn around its employment figures you should see the last two curves return to normal.
Hi Traciatim,
Thanks for the chart link. With all the recovery news out there, it seemed appropriate to revist this issue–which hasn’t gone away. I also found it interesting that the Alt-A resets in T2’s chart extend longer than, the Credit Suisse data.
Hi Vince,
Thanks for the note. You’re absolutely right that unemployment is a big catalyst for many of these defaults.
In addition, there are other reasons that can’t be as easily corrected, like the magnitude of the rate resets (how much higher people’s payments will be) and the underwriting that went into these mortgages at the time they were issued. For example, a lot of these Alt-A varieties are “liar loans,” and required little or no proof of a borrower’s income.
Even with a US economic recovery there’s appears to be a good number of new defaults on the way. The US Alt-A market is about $1 trillion, versus $855 billion for the subprime market that sparked the debacle we have today.
There’s going to be some degree of fallout here. I just don’t have the precognition to know how much, or how bad.
Geez. Hate to end the week on a down note. We should have saved this story for Monday. :-)
Enjoy the weekend in any case…
-rob
The problem with these alt-A loans is that payments are due to reset/recast to a much higher figure after several (e.g. 5) years. Therefore, a family who can afford the present payment is not unlikely to make it after the reset even if he still has a job. This blogger (not affiliated with me) has a deep knowledge of the US housing/mortgage market:
http://www.doctorhousingbubble.com/the-truth-about-option-arms-pick-a-pay-mortgages-and-alt-a-loans-looking-at-wells-fargo-bank-of-america-and-jp-morgan-we-are-in-the-eye-of-the-469-billion-toxic-mortgage-hurricane-and-silence/
Hi Rob, thank you for your reply. If you examine chart 2, the cumulative reset amount is approximately $250B (I think this is good or better news going into the weekend :)) but what’s interesting is the baseline numbers in the last graph: US Prime-mortgage foreclosures during good times is about 1%, now compare that to approx. 0.3% in Canada ! So even prior to the subprime meltdown the US was already dialing-in worrying numbers. Not long ago I recall the the papers shouting the sky’s falling when Canadian mortgage delinquencies hit approx 0.5%.
1% to 4.5% seems like a big jump to me.