US mortgage crisis predicted to get worse as home loan defaults soar(won't peak for 2 more years)

US mortgage crisis predicted to get worse as home loan defaults soar

Tom Bawden in New York

America’s mortgage crisis is likely to get considerably worse because the level of fraudulent lending to unsuitable borrowers was much higher than previously estimated, Standard & Poor’s said yesterday.

David Wyss, the ratings agency’s chief economist, said that defaults on high-risk “sub-prime” mortgages would continue to soar as unqualified mortgage-holders struggled to meet their repayments, tightening the credit markets and dragging down the American economy.

The US economy, which grew at 2.9 per cent in 2006, consequently would grow at just 2 per cent this year and next, Mr Wyss said. This compared with estimated growth of 3.6 per cent this year and 3.5 per cent in 2008 in the global economy.

Mr Wyss told a conference in Bombay: “The panic has subsided, but the housing market has not hit bottom yet. Housing prices won’t hit bottom until next summer and the losses won’t peak for another two years, until 2009. We are not halfway through this crisis yet.

“We underestimated the extent to which fraud was occurring in the industry. It looks [as if], based on some surveys that had been done, the extent of frauds increased sharply in 2006.”

The level of fraud increased as lenders sought new customers through increasingly dubious means after a surge in sub-prime home loans in recent years that had left most eligible borrowers with mortgages.

Many brokers and mortgage lenders did not require proof of income and others helped borrowers to forge documents that inflated their salaries, enabling them to take out bigger loans than they could repay.

They largely got away with these practices while house prices were rising, since borrowers could remortgage their properties and pay off the loans with the proceeds. As house prices began to stagnate, and in many areas to fall, this option has been largely closed and the number of defaults has surged.

The number of foreclosures in the United States jumped by 115 per cent to 243,947 in August, from the year before – or one in 510 households, according to RealtyTrac, the housing monitor. A foreclosure is a legal process typically set in motion when a borrower falls 90 days behind on mortgage repayments. About 40 per cent end in a forced sale or repossession of the house, while the bank and borrower reach an alternative repayment schedule in the remaining cases.

As foreclosures rise, house prices inevitably fall further and increase many investors’ losses on mortage-related securities, such as sub-prime-backed bonds. More importantly, consumers account for about two thirds of the economy and declining house prices dent their confidence, making them less likely to borrow and spend.

The effect of the housing slump on consumer confidence was underlined yesterday by new data that showed US retail sales in September rose at the slowest pace in five months.

Sales at stores open for at least a year rose by 2 per cent, from the year before, according to new research by the International Council of Shopping Centers and UBS.

Meanwhile, in a further sign that the fallout from the sub-prime mortgage crisis is set to continue for some time, Thornburg Mortgage yesterday increased the estimate on the loss that it will face on the sale of $22 billion (£10.8 billion) of “high-quality”, adjust-able-rate home loans, from $863 million to $1.1 billion.
[link to business.timesonline.co.uk]