Wonder how the storytellers will spin this:
"Lehman Brothers estimates increased payments will send 1.5m subprime borrowers into foreclosure."
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US subprime losses set to mount
By Stacy-Marie Ishmael and Saskia Scholtes in New York
Published: September 25 2007 20:44 | Last updated: September 25 2007 20:44
Losses in the US subprime mortgage market are set to escalate as falling housing prices prevent borrowers with adjustable rate mortgages from refinancing on better terms, data released on Tuesday suggest.
Housing prices in the top 20 US cities fell 3.9 per cent in July from the previous year, the worst performance this decade, according to a composite index compiled by Case Shiller.
Government data showed that sales of US homes in August fell 4.3 per cent to a five-year low.
Analysts expect house prices to decline and predict such a fall could devastate homebuyers who took out subprime mortgages in late 2005 and 2006.
Many of these borrowers took out adjustable-rate mortgages in the belief that rising housing prices would increase their home equity and enable them to refinance their loans before rates rose.
However, falling prices could leave some of these borrowers with negative equity in their homes and make it increasingly unlikely that they will qualify for new mortgages in an environment of tighter lending standards.
“If you’re a subprime borrower with no equity, or even negative equity because the value of your home has fallen, then you’re in a deep spot,” said Christopher Cagan, director of research and analytics at First American CoreLogic, a mortgage risk assessment firm.
Late payments and defaults on subprime mortgages are already four times the historical average. They are set to rise as some 2.5m households face rapidly rising mortgage payments in the next 18 months.
More than $350bn in subprime home loans will shift to higher interest rates, with initial rate increases boosting costs by 30 per cent or more, Credit Suisse says.
Over the life of the mortgage, the rate will continue to rise. The adjustment frequency may be once every five years or as often as once a month, depending on the terms.
Lehman Brothers estimates increased payments will send 1.5m subprime borrowers into foreclosure.
The Federal Reserve’s cut in the overnight rate to 4.75 per cent last week will not necessarily help all subprime borrowers because 73 per cent of adjustable-rate subprime loans are based on the six-month London interbank lending rate.
This is the rate at which banks lend to each other has hovered around 5.1 per cent.
An average subprime adjustable rate mortgage in the last two years would have been offered with a 7 per cent interest rate.
These will initially reset to between 9.45 per cent and 10.85 per cent, according to Deutsche Bank and Loan Performance.
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