Blamo! Aka Prime==Subprime
Front Page news today about another lender faltering. The tune is slightly different however, because this lender deals largely with prime borrows.
Perhaps the bulls were right in February and there is no risk of subprime contagion. The problem is that too many loans in all categories are bad! Looks like the primary difference between loan categories is just the prefix.
Perhaps the bulls were right in February and there is no risk of subprime contagion. The problem is that too many loans in all categories are bad! Looks like the primary difference between loan categories is just the prefix.
Comments
Moody's Says Some `Alt A' Mortgages Are Like Subprime
Moody's Investors Service described some so-called Alt A mortgages as no better than subprime home loans, saying it will change how it rates related securities after failing to predict how far delinquencies would rise.
The ratings firm said today its expectations for losses on Alt A mortgages will rise between 10 percent and 100 percent, depending on whether a loan pool has a lot of debt extended to borrowers with low credit scores and little money for down payments. It's also raising loss expectations when borrowers don't fully document their incomes.
``Actual performance of weaker Alt-A loans has in many cases been comparable to stronger subprime performance, signaling that underwriting standards were likely closer to subprime guidelines,'' Marjan Riggi, Moody's senior credit officer, said in a statement. ``Absent strong compensating factors, we will model these loans as subprime loans.''
Moody's said in a separate statement that its expectations for losses on ``option'' adjustable-rate mortgages, part of the Alt A market, would rise even farther. Initial minimum payments on the loans fail to cover the interest borrowers owe, creating growing balances and possible payment spikes. ...
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After Prime==Subprime is accepted as truth, lookout for other more curious developments. Like...
Prime == Odd
Subprime == Chernoble
Alt A == Joseph Stalin
I'm not so sure about "prime = subprime (or alt-a)". My understanding of prime is not just that the FICO is high, but that the loan terms are also reasonable and that the income is verified. So you don't get stated-income, interest only, negam, teaser ARMs, etc. Subprime, however, is very similar to Alt-A in everything but the FICO - if you can't afford the payment, you can't afford the payment. A good score won't help you.
Therefore, the theory goes, these prime people *could* afford their loans. Sure, their house may go down in value and they may be upside down, but as long as they keep their jobs (which most do, even during a harsh recession) they'll usually keep paying. Sure, some will lose jobs, and some will listen to Kramer and walk out. But will it be a significant percentage? IMO, it will be small.
Personally, I think Alt-A is going to get crushed. Absolutely destroyed. I also hope that prime does fine and I intend on being a prime borrower myself, and want reasonable terms.
I know this thread is a little tongue-in-cheek, and I'm not always the person on this board with the most extreme views, but in this case I believe my statement (Prime == Subprime) is a lot more accurate than anyone is letting on right now.
I did a quick Google search on the definition of subprime
I'm not an economist, but if Google is to be believed
If this is accurate, then the only difference between prime and subprime borrows is that the prime borrows have a history of paying their bills. That's a nice difference, but maybe it's not as significant as we have been lead to believe.
SPECIAL UPDATE - Moody's Puts a Fork In What's Left
Alt-A: No Bid?
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Yep, news of a surprising uptick in pending sales during June. I bet it is in no way related agents and brokers pushing loans through the system at the end of June before the spigot got turned off in July.
I expect these pending sales to come straight out of July. May was the worst month for pending sales since September 2001. My money says July 2007 will beat September 2001.