"In a surprise announcement late yesterday, HSBC said its
subprime-mortgage problem was worse than previously indicated. It said
the capital it sets aside to cover all bad debts, including the soured
mortgages, would be 20%, or $1.76 billion, higher than analysts’
consensus estimates. "The impact of slowing house price growth is being
reflected in accelerated delinquency trends across the U.S. subprime
mortgage market, particularly in the more recent loans," the bank said."
You can see the HSBC docs here. It turns out that "The percentage of HSBC mortgages more than 60 days past due is climbing. Fraud by borrowers has been higher than expected."
Since its doubtful that HSBC is the only bank that will be increasing its reserves to deal with accelerating foreclosures, let’s consider the parts of the country with the highest concentrations of at risk home prices. Fortunately, PMI has already done the heavy lifting for us: They created a map that depicts the geographic distribution of house price risk for all 50 U.S. states and DC.
Now for your homework assignment: Review the maps below, and consider what lenders and homebuilders have the highest exposures to the weakest areas. I’ll start: Toll Brothers has a high concentration in the mid-Atlantic states.
Geographic Distribution of House Price Risk
chart courtesy of PMI
The color codes rank order the 10 riskiest states in red (11 including
the District of Columbia), followed by the next 10 riskiest states in
tan, white, light blue, and aqua.
The Northeastern states and California top the list, but Florida replaced New York in the top 10, a change from the prior year.
For comparison’s sake, the following map shows the gains in home prices by region.
Data source: Census Division, % change over previous four Qs (as of Q3 ’06)
There are some who claim this data is irrelevant to the stock market; quite frankly, I simply do not understand that thought process (or the lack thereof).
UPDATE February 8, 2007 9:36am
Its a WSJ two-fer: Mortgage Refinancing Gets Tougher
"With rates on many homeowners’ adjustable-rate
mortgages rising, some who would like to refinance into a new loan are
finding they can’t.
In some cases, that is because their loan carries a
prepayment penalty, which would force them to come up with thousands of
dollars if they refinance in the first few years. Such penalties are
common with so-called option adjustable-rate mortgages, which typically
carry a low teaser rate that rises sharply after an introductory period.
Other borrowers are getting caught short by a changing
housing market — one in which home prices have flattened and lenders
are beginning to tighten their standards after a long period of making
mortgages easier and easier to get. The challenges are greatest for
homeowners whose credit has declined since they took out their last
loan and for those who have little if any equity. Some of these
borrowers are still able to refinance but are finding it more costly
than they expected.
These new challenges come at a time when many borrowers who took out
adjustable-rate mortgages are facing higher payments. There are about
$1.1 trillion to $1.5 trillion in ARMs that will face rate increases
this year, according to the Mortgage Bankers Association. The MBA
expects borrowers to refinance as much as $700 billion of those
We are far from done with the economic and market impact of Housing . . .
In Home-Lending Push, Banks Misjudged Risk
HSBC Borrowers Fall Behind on Payments;
Hiring More Collectors
WSJ, February 8, 2007; Page A1
Early Payment Default
PMI releases Winter 2007 Economic and Real Estate Trends report (pdf)
Economic and Real Estate Trends Report
The PMI Group,Winter 2007
PMI’s Winter 2007 Risk Index Reflects Slowing Housing Market
Mortgage Refinancing Gets Tougher
As Adjustable Loans Reset at Higher Rates, Homeowners Find Themselves Stuck Due to Prepayment Penalties, Tighter Credit
WSJ, February 8, 2007; Page D1