Mortgage Market Investments Buckle Under Pressure From Housing Slump, Foreclosures
The home mortgage market is beginning to buckle under the weight of the worst U.S. housing market slump in six years, Bloomberg Media reports.
Yields on so-called subprime mortgage securities have risen to 6.52 percent on average from 6.28 percent on September 5, data compiled by Bank of America shows. The yield premium rose to a seven-month high of 1.2 percentage points.
About 3.3 percent of the $160 billion in sub-prime or bad credit mortgages made this year through July have payments that are more than two months late, the highest ever for mortgages in their first year. Housing starts tumbled in October to an annual rate of 1.486 million, the lowest in more than six years.
“The higher delinquencies do set off an alarm for many people and make us more conservative,” said Alex Wei, a Senior V.P. at Delaware Investments in Philadelphia, a company buying more asset- backed bonds with top credit ratings, which are more sensitive to delinquency rates and defaults.
Most sub-prime mortgages — to borrowers with poor or bad credit, or with higher than average personal debt levels — pay fixed rates for the first two to three years and then adjust to market rates. They made up 19 percent of all U.S. mortgages in the first half of 2006.
When the housing market was setting records in sales and prices last year, securities backed by floating-rate subprime lending returned 3.9 percent including reinvested interest, almost double the 1.97 percent gain for investment-grade corporate bonds.
The median home prices of new homes fell by 9.7 percent in September, the biggest drop since 1970, government reports showed. The decline was one reason why the economy slowed to a 2.2 percent annual growth rate in the third quarter from 2.6 percent in the prior three-month period.
Subprime mortgage securities have returned 1.38 percent in the past three months, less than half the 3.42 percent return for corporate debt. The difference between yields on the mortgage bonds and LIBOR widened 0.25 percent in the past three months while the gap for similarly rated corporate debt narrowed 0.05 percent.
The end result is that subprime lenders are paying more in interest on the bonds they sell to fund bad credit home loan products.