With plenty of subprime wreckage already in the rearview mirror, there's more just around the bend.
One wants to think that much of this is already priced into the debt and equity markets, but let's revisit what S&P observed this morning in warning of its potential CDO downgrades (via Bloomberg's Mark Pittman):
"We expect that the U.S. housing market, especially the subprime sector, will continue to decline before it improves, and home prices will continue to come under stress,'' S&P said. "Weakness in the property markets continues to exacerbate losses, with little prospect for improvement in the near term.''
Almost 65 percent of the bonds in indexes that track subprime mortgage debt don't meet the S&P ratings criteria in place when they were sold, according to data compiled by Bloomberg.
S&P said today it plans to change the methods it uses to rate existing and new mortgage bonds to reflect the increased likelihood of mortgage defaults and losses.
"We do not foresee the poor performance abating,'' S&P said. "Loss rates, which are being fueled by shifting patterns in loss behavior and further evidence of lower underwriting standards and misrepresentations in the mortgage market, remain in excess of historical precedents and our initial assumptions.''
Yes indeed. Here's CNNMoney's Les Christie on what's next:
More than two million subprime adjustable rate mortgages (ARMs) are poised to reset at much higher rates in coming months, worsening an already suffering housing market.
Borrowers who took out hybrid ARMs in 2004 and 2005 to secure low "teaser" rates for the first two or three years of the loan may see their monthly mortgage payments climb by 35 percent or more.
Remember: the housing market is all about inventories, which remain much too high and will almost surely head higher before they can fall back toward any sort of price-stability equilibrium. More from Christie:
There will be more downward pressure on prices as delinquencies, foreclosures and short sales add inventory to markets.
Another factor is that regulators and lenders are attempting to tighten loan underwriting standards, meaning fewer credit-damaged applicants will get approved, lowering demand for homes.
The tightening mortgage-loan standards could also result in short-term foreclosure spikes. Home owners with resetting ARMs, for example, may not qualify for refinancing under the stricter oversight. That could lock borrowers into unaffordable loans and they could lose their homes.
Another increase in supply, according to Josh Rosner, managing director at financial research firm Graham Fisher & Co, will be from investment properties coming back on the market. There was a precipitous burst of buying homes for investment purposes earlier in the decade. In 2005, about 40 percent of all purchases were of second homes and the majority of these were for investment purposes.
As returns on these investment properties decline, owners will bail out, increasing the listing backlog and depressing prices further. The effect of a foreclosure rise and home price slide on the nation's economy may be hard to predict but it will have an impact.
Channeling John McEnroe in the general direction of Hank Paulson, our "at or near the bottom" man at Treasury: You cannot be serious!
Mark Pittman, "S&P May Cut $12 Billion of Subprime Mortgage Bonds," Bloomberg, July 10, 2007
Les Christie, "Mortgage resets: Record bill coming due; Billions in subprime ARMs will be subject to higher payments," CNNMoney.com, July 9, 2007
Emily Kaiser, "Paulson sees U.S. housing downturn near end," Reuters, July 2, 2007