Unless you’re a big fan of flushing money, do not buy subprime or Alt-A-related stocks. There is no bottom yet. And we’re not likely to see improving housing conditions until spring 2008, at the earliest.

Subprime companies are over. Done. Kaput. With another $700 billion in mortgages about to reset this year (half of which are subprime), the worst is far from over for the lending market.

Just ask companies like Countrywide Financial, which just reported that it’s 2006 subprime mortgage defaults could top the company’s 2000 numbers where, according to Reuters, the foreclosure rate sat at 9.89% for the company.

Or watch what’s about to happen to the 375,000 high interest rate loans made to Hispanics, for example.  According to the director of Latino Affairs for the Center for Responsible Living (as quoted by the Washington Post), “nearly 73,000 of them are likely to go into foreclosure.”

Says the Washington Post, “About 1.1 million homes in the United States are expected to go into foreclosure in the next six years, and many native-born Americans are likely to be stuck with burdensome loans. But immigrants are getting hit first in part because their incomes tend to be lower and many have lost construction jobs.”

Investing in Subprime: Spreading Risk

Just as I said on March 6, 2007, subprime lenders are in danger of getting crushed by rising loan defaults. And now Alt-A is at risk, too, as defaults on Alt-A mortgages are rising as quickly as subprime defaults.

While Alt-A loans are less risky that subprime, as soon as the housing market began to cool (and loan volume began to pull back), some Alt-A lenders lowered their lending standards, thereby raising their risk. Over the last 14 months alone, the Alt-A default rate has doubled. (Note: Sub-prime loans are offered to low-income buyers with poor credit. And while Alt-A mortgage lenders do extend monies to borrowers with clean credit, the borrowers don’t have to provide proof of income or assets.)

Says UBS (as quoted by the Wall Street Journal), “The credit deterioration has been almost parallel to what’s been happening in the sub-prime market.” Four hundred billion dollars in Alt-A loans were originated in 2006 alone, accounting for 13.4% of all mortgages offered in 2006. That’s up from the 2.1% of originated 2003 Alt-A loans, according to reports.

The risk is so high that the likes of Bear Stearns, WMC Mortgage, Countrywide and Goldman Sachs are reportedly pulling back from buying Alt-A mortgages sold with no down payments or in a situation where the home’s entire value was refinanced (on about 18% of Alt-A loans made in 2006, consumers borrowed 100% of their home’s value).

Again, I ask those that believe in the mythical housing bottom… Are you kidding me?

Sincerely,
Ian Cooper
March 27, 2007

The Declining Housing Market was originally featured in the Penny Sleuth.