The US subprime mortgage crisis hit Wall Street hard overnight, helping knock the Dow down 242 points as more figures emerged showing that defaults and late payment levels are still rising, even in the full documented prime mortgage area.
A subsidiary of GMAC, owned by buyout group, Cerberus and General Motors, revealed that it had lost $US651 million after providing for losses on subprime loans in the fourth quarter of 2006. The subsidiary earned a profit of $US118 million in the last quarter of 2005.
In Australia, the finance media got off their chairs and finally started chasing a story that had been staring them in the face for a month.
There was a chorus of people saying the Australian situation was different with no and low doc loans treated as “prime” loans here and it’s true our situation is nowhere near as bad as in the US.
But that’s because the US has a longer history of offering no and low doc loans: we only have a few years of these products being available. Last year in the US, subprime (no deposit) loans amounted to an estimated 26% of all new mortgage offerings.
Lenders and their agents relaxed their guard and sold mortgages to people who should never have been allowed to borrow, even at subprime, and they marketed loans with low start up rates and payments, which jumped sharply after six months or a year and became too much for borrowers.
Sliding house prices, job losses (even in the strong labor markets in the US and here) meant that when people fell behind they had to pay penalty rates of interest. That lifted the mortgage rate above 12% and higher.
And, funnily enough, that’s what has been happening in parts of Sydney, Melbourne and Brisbane over the past nine months.
But default rates on low doc no doc loans have doubled in the past year according to a major mortgage insurer. They are currently running at over 5% compared to a normal figure of around 2%.
Mortgage insurers’ payments to lenders claiming on insurance from defaults and the sale of houses at a loss, are running in the millions of dollars a month.
Mortgage insurers say the problems are coming from a combination of heavy selling by mortgage brokers, some dodgy valuations, and poor financial positions of the borrowers. It’s not the lenders, in this case the banks or the originators, it’s the mortgage brokers in the suburbs.
The problems are concentrated in the west and south west of Sydney, the newer suburbs of Melbourne and Brisbane and it is basically people who were late into the housing boom.
Many of the problem loans now being settled through mortgagee in possession sales went bad a year or so ago. It can take nine months or more for a borrower to be classed as defaulting and then more time for the mortgagee to take possession of the house (through court orders) and the sale. Any loss is covered by what’s called mortgage insurance.
There are reports of mortgage insurers chasing property valuers for restitution and obtaining money from the valuers’ own liability insurance.
This notice recently appeared on the website of the NSW Supreme Court: “During 2006, there were 5,368 cases lodged in the Supreme Court’s Possession List – 10% more than the previous year. This filing rate was well down on the dramatic 59% increase in 2005 compared with 2004.”
It is not conclusive, but it gives a good indication that there are an increasing number of potential defaults happening in NSW alone. The situation is not quite as comfortable as the industry is trying to paint it.