cryptogon.com

The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, the National Association of Realtors reported.

“It’s a blood bath,” said Mark Kiesel, executive vice president of Newport Beach, California-based Pacific Investment Management Co., the manager of $668 billion in bond funds. “We’re talking about a two- to three-year downturn that will take a whole host of characters with it, from job creation to consumer confidence. Eventually it will take the stock market and corporate profit.”

…

New-home sales will decline 33 percent from 2005’s peak to the end of this year, according to the Realtors’ group, exceeding the 25 percent three-year drop in 1991 that helped spark a recession.

…

The investment banks, insurance companies, pension funds and asset-management firms that hold some of the U.S.’s $6 trillion of mortgage-backed securities have yet to suffer the full effect of subprime loans gone bad, said David Viniar, Goldman’s chief financial officer. Subprime mortgages, given to people with bad or limited credit histories, account for about $800 billion of the market.

“I continue to believe that we haven’t seen the bottom in the subprime market,” Viniar said on a June 14 conference call with reporters. “There will be more pain felt by people as that works through the system.”

He didn’t return calls this week seeking additional comments.

…

Homebuilding stocks are down 20 percent this year after falling 20 percent in 2006, according to the Standard & Poor’s Supercomposite Homebuilding Index of 16 companies. Before last year, the index had gained sixfold in five years.

“There isn’t a recovery about to happen,” said Ara Hovnanian, chief executive officer of Hovnanian Enterprises Inc., the Red Bank, New Jersey-based homebuilder. The company’s stock tumbled 42 percent this year through yesterday.

The share of people taking out all types of adjustable-rate home loans averaged 29 percent during the past three years, compared with the 17 percent average of the prior three years, according to data compiled by Mclean, Virginia-based Freddie Mac.

Higher fixed mortgage rates and stricter lending standards mean some of those borrowers won’t be able to refinance into fixed- rate loans. Many of them have seen their home’s value drop even as their interest rates adjust higher.

“When all these people see their mortgage payment and it’s up 40 or 50 percent, they’re going to say, ‘We can’t stay in this house,'” Pimco’s Kiesel said. “And there are millions of people in this situation.”

…

The recent increase in mortgage rates is the biggest spike since 2004. The change means buyers can afford 8 percent less house than they could five weeks ago, Kiesel said.

“Prices are going lower,” he said.

…

In addition to their primary mortgages, homeowners had $913.7 billion of debt in home equity loans in 2005, more than double the $445.1 billion in 2001, according to a paper by former Federal Reserve Chairman Alan Greenspan and James Kennedy on equity extraction issued by the Fed three months ago.

About a third of that money, extracted as home values surged 53 percent from 2000 to 2005, was used to buy cars and other consumer goods, according to the paper. The interest rate on those loans doubled to 8.25 percent in 2006 from 4 percent in 2003.

…

Homebuyers who got an adjustable-rate mortgage, a so-called ARM, in 2004 have seen their rate climb by about 40 percent. That’s enough to add $288 to the monthly payment for a $300,000 mortgage. The average adjustable rate last week was 5.75 percent, an 11-month high, according to Freddie Mac.

…

Making it harder for those people to buy houses is going to create trouble all the way up the housing chain as people who own starter homes find it more difficult to sell their real estate and buy bigger properties, said Neal Soss, chief economist at Credit Suisse Holdings USA Inc. in New York.

…

Measured annually, the national median price for a previously owned home hasn’t dropped since the Great Depression in the 1930s, according to Lawrence Yun, an economist with the trade group. This year it probably will fall 1.3 percent, Yun said.

The share of mortgages entering foreclosure rose to 0.58 percent in the first quarter, the highest on record, from 0.54 percent in the final three months of 2006, the Mortgage Bankers Association said in a report last week. Subprime loans going into default rose to a five-year high of 2.43 percent, up from 2 percent, and late payments from borrowers with poor credit histories rose to almost 13.8 percent, the highest since 2002.

Prime loans entering foreclosure increased to 0.25 percent, the highest in a survey that goes back to 1972. That’s a sign that even the most creditworthy borrowers are being squeezed, Roubini said.

…

“We have a lot of people, even prime borrowers, who are at the edge because they either bought with no equity, they have an ARM that’s seen a rate spike, or they used their house like an ATM and turned their equity into cash,” Roubini said. “Many of those people are under water today, and if they have to sell, it’s going to drag down values in their neighborhood.”

…

“A lot of people went out on a limb to pay the record high prices for homes, and they’re in trouble now,” he said.

Borrowers who got loans with so-called teaser rates are in the biggest bind, according to Shilling. Prices surged a record 12 percent in 2005, spurring buyers to “stretch” to qualify for bigger loans by using interest-only ARMs or so-called option ARMs with low introductory payments.