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Subprime Mortgage Crisis Takes Toll on Securities

[Dec 10, 2007.]


A new report indicates that securities backed by subprime mortgages are definitely underperforming. The disappointing news appears to be the result of three primary factors: decreasing home prices, expanded high-risk loan products, and substandard underwriting.

The report is the work of Fitch Ratings, a leading credit rating agency. The report indicates 70% of subprime mortgages were extended to areas where housing prices have plunged in the last year. Subprime loans are those loans that are offered to customers with shaky credit histories. Minorities represent a disproportionate number of subprime loan-holders.

Areas where home prices are declining also have much higher delinquency rates. According to Fitch, the higher the loan-to-value ratio, the worse the performance of the loans.

A number of loans were offered to consumers with limited income and sketchy asset documentation. Unfortunately, while these consumers might have had the best of intentions, they have often been unable to keep up with their monthly mortgage payments.

The situation is actually expected to worsen in the coming months. That's because a number of adjustable-rate mortgages will be resetting to much higher interest rates. As a result, home owners may face jumps of $200-$300 in their monthly mortgage payments.

Fitch reports that this resetting will propel delinquencies and foreclosures "substantially above current levels."
The crisis has become a prime concern on Capitol Hill, where lawmakers are pushing for a plan designed to help consumers avoid foreclosure. A number of industry watchers predict that the current housing crisis will continue until at least the middle of next year.

There is also concern that the housing slump will lead to a national recession. So far, the fallout from the housing crisis has been limited to those industries directly related to the housing industry but, over the coming months, that could change. In an attempt to avert a deeper crisis, the Federal Reserve cut interest rates twice in six weeks. The Fed will meet again in December, but some economists believe that it is unlikely the board will opt for another rate reduction.

Julie Ann Amos
December 10th 2007

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