S&P Chief Says Mortgage Crisis to Worsen

October 9, 2007 No Comments »

At a conference Tuesday in Bombay, India, Standard and Poor’s chief economist David Wyss said the mortgage crisis in the United States would likely deteriorate because the level of fraudulent lending to unfit borrowers was markedly higher than originally estimated.

Wyss cited the rise in mortgage defaults on subprime mortgages, blaming loose underwriting standards and soaring home prices for perpetuating the problem far too long.

Though recent media reports would make it appear that much of the worst is behind us, Wyss felt the current state of affairs is just the beginning of a lengthy downward spiral in both the housing market and the U.S. economy as a whole.

“The panic has subsided, but the housing market has not hit bottom yet. Housing prices won’t hit bottom until next summer and the losses won’t peak for another two years, until 2009. We are not halfway through this crisis yet,” Wyss said.

“We underestimated the extent to which fraud was occurring in the industry. It looks [as if], based on some surveys that had been done, the extent of frauds increased sharply in 2006,” he added.

Many borrowers who were extended home loans over the past few years relied upon rising home prices to constantly refinance to lower teaser rates without the worry of actually paying down the principal on their homes (while also gaining home equity).

However, recent fallout in the secondary mortgage market has cut financing options so significantly that many homeowners have either defaulted on their mortgage or foreclosed on their properties.

According to RealtyTrac, foreclosures in the United States skyrocketed by 115 percent from year-ago levels, to 243,947 in August, or one in 510 households.

Foreclosures proceedings typically begin after a borrower falls 90 days behind on their mortgage payment, though less than half typically end in a forced sale or repossession.

Wyss also cited slow growth in the U.S. economy, which grew at 2.9 percent in 2006, and is set to grow at a mere 2 percent this year and next, whereas estimated growth in the global economy is said to be 3.6 percent this year, and 3.5 percent in 2008.

On Monday, Moody’s warned that mortgage-backed bonds created in the first half of 2007 were likely to default at record levels.

And last week, FDIC Chairman Sheila Bair proposed a sweeping solution to freeze “teaser” rates so borrowers wouldn’t be struck by payment shock when mortgage rates reset.

Desperate times, desperate measures…

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