2007 Mortgages Go Bad Fast
The Wall Street Journal reports that mortgages written in 2007 are going bad much faster than mortgages written in 2005 and 2006.
Mortgages issued in the first part of 2007 are going bad at a pace that far outstrips the 2006 vintage, suggesting that the blow to the financial system from U.S. housing woes will be deeper than many people earlier estimated.
An analysis prepared for The Wall Street Journal by the Federal Deposit Insurance Corp. shows that 0.91% of prime mortgages from 2007 were seriously delinquent after 12 months, meaning they were in foreclosure or at least 90 days past due. The equivalent figure for 2006 prime mortgages was just 0.33% after 12 months. The data reflect delinquencies as of April 30.
So why would they be worse than earlier mortgages? Because the bubble had just about run its course and only the foolish were trying to jump in then. It's Minsky's stage five:
Stage five – Euphoria
The bubble now enters its most tragic stage. Some wise voices will stand up and say that the bubble can no longer continue. They put together convincing arguments based upon long run fundamentals and sound economic logic. However, these arguments evaporate in the heat of the one over-riding fact – the price is still rising. The wise are shouted down by charlatans, who justify insane prices by the euphoric claim that the world is different and this new world means higher prices.
Of course, the “new world” claim is true; the world is different every day, but that doesn’t mean that prices run out of control. The charlatan wins the day and unjustified optimism takes over. At this point, the charlatans bolster their optimism with the cruelest of all lies; when prices finally reach their new long run level, there will be a “soft landing”. The idea of a gentle deceleration of prices calms the nerves.The outsiders are trapped in knowing denial. They know that prices can’t keep rising forever, but they rarely act on that knowledge. Everything is safe so long as they quit one day before the bubble bursts.Those that did not enter the market are stuck in a terrible dilemma. They can not enter but neither can they stay out. They know that they have missed the beginning of the bubble. They are bombarded daily with stories of easy riches and friends making massive profits. The strong stay out and reconcile themselves to the missed opportunity. The weak enter the fire and are damned.
And it was just about this time that the financial markets were running out of other banks or investment houses to sell their garbage to, so they started to hock their CDOs to municipalities, pension funds and other state governments. Everyone was looking to cash in before everything came apart and all that imaginary wealth vanished as fast as it was had been created.
And as the Wall Street Journal points out, the fact that loans made in 2007 are going bad so fast is a very bad sign that it's going to get a lot worst than many have thought. We're still searching for bottom.