Some more nuggets from Countrywide Financial’s three hour long conference call with investors yesterday. The company says the recent spike in loan losses is not—as widely expected—due to adjustable rate mortgages resetting at rates too high for borrowers to pay. Company execs said the soaring rates of missed payments by borrowers are due to the typical reasons borrowers default—some kind of change in income, due to job loss, death or disability.
Specifically the company said 60% of its losses are attributable to some sort of lost income, typically layoffs. Another 25% are due to death or divorce or disability of a breadwinner. Another large percentage is due to real estate speculators who bought a property with the hope of flipping it and now can’t sell. That’s particularly true in condos in markets such as Miami and San Diego. The reason most distressed borrowers now can’t make their payments has little to do with their payments going up, says Countrywide chief Angelo Mozilo. Instead, he blames softening home values and tighter regulations on lenders that forced them to cut back on a lot subprime and exotic loan products. “The problem is they can’t either refinance because the value of their homes have gone down, so they are under water, or the program they used to get into the home is no longer available to them,” he says.
A lot of media, including BusinessWeek, reported that large numbers of mortgages would reset at higher rates, potentially forcing huge numbers of borrowers into default. A popular number widely reported was that $1.5 trillion worth of loans was due to reset in 2006 and 2007, according to the researchers at Economy.com. That’s about a quarter of all mortgages outstanding. Mozilo says that in reality more than two-thirds of the borrowers with adjustable mortgages refinanced their loans before their payments spiked. For example, the company notes that only 26% of prime mortgages that were due to reset to higher rates in 2007 are still active. Among subprime loans, 36% are still active. That suggests that most people have, in the words of analyst Samuel Crawford, “refinanced…out of the way of danger.”
Of course it’s easy to blame the media and analysts like Economy.com for suggesting there may be problems with adjustable mortgages. The reality is that even if many folks with toxic loans did refinance, there are still millions of other borrowers getting squeezed right now.