(Continued from a previous post here)
Unfortunately, while the financial markets seem to be calming, the economy as a whole is not as steady. As seen in the chart, the subprime resets peaked in Q1 09 declining to relative insignificance by Q4 09. The impact of these resets is yet to be seen in the current market as homeowners with fewer options seek refinancing in a market unfriendly to more complex borrowers. Looking at the chart, the most important thing to note is that the number of resets continues to rise as Option ARMs and Alt-A resets triple and quadruple over the next three years. The impact of payment shock on homeowners used to paying at either a teaser rate or interest only will compound demand for refinance or force further foreclosure. Inside Mortgage Finance, a trade publication, estimates there are almost 3 million households represented by this data.
This is germane to the argument about warehouse lending because of the significance of its scarcity in the market. Since it cannot absorb $32 billion in shortfall, the market will force hard choices based not only on credit or capacity to repay – but more likely on the profitability of the transaction.
In origination, that will mean focusing resources on the loans that are easiest to process and quickest to produce with the lowest risk. For self-employed borrowers, investors, retirees and emerging markets, that is not going to be great news. Specifically, the self-employed and investors, aka small business owners/engine of the economy, made wide use of the relaxed documentation requirements of Alt-A and the cash flow benefits of Option ARMs. Already struggling in a recessed economy, many conscientious small business owners will receive their inability to refinance their personal mortgage loan as a body blow to their business enterprise.
Next segment Tuesday…