Mortgage excesses in the US

This is scary:

The Concerns of Comptroller of the Currency About the Excesses in the Mortgage Market

Nouriel Roubini | Dec 18, 2006

A colleague in the financial sector pointed to my attention a speech that the Comptroller of the Currency – John Duggan – has recently given where he expressed some serious concerns about the growth of exotic mortgages in the last few years (David Rosenberg of Merrill has made similar points in a recent research note).

Here are some of the alarming statistics that Mr. Duggan has pointed out:

• 5% of mortgage originations in 1994 were sub-prime; that is now up to 20%.
• Interest-only and payment-option ARMS were 2% of loan originations in 2000, they now account for 40%.
• 20% of payment-option ARMs originated in the past two years have loan value greater than home value, a figure that would double to 40% if home prices were to decline another 10%. Thus many mortgage holders have significant negative equity in their homes.
• 50% of the sub-prime market is now made up of ‘stated income’ mortgages where “the borrower pays the lender not to verify the borrower’s stated income on the loan application, making it possible for the borrower to artificially inflate the size of his or her income in order to qualify for a bigger mortgage.”
• A study by the Mortgage Asset Research Institute found that 60% of applications for these ‘stated income’ loans exaggerated income by at least 50%.
• The increase in debt-servicing (“payment shock”) coming from negative ammortization mortgages can be severe: if rates are reset even only by 2 percentage points the payment increase will amount to a near doubling of the amount of the initial monthly payments.

Given the recent rise in default, foreclosures, financial distress in the subprime segment of the mortgage market, these basic facts about the growth of exotic or “monster” mortgages give something to ponder and worry about. And the fact that such concerns are expressed by one of the leading regulators of the US banks suggests that even regulators – who had been effectively “asleep at the wheel” for the last few years while the housing and mortgage bubble was festering – are now getting worried abou the state of mortgage finance.