US Securitised Mortgage Market - A Summary

In the previous blog entry, I talked briefly about the state of the US mortgage market and Banks' attitude towards it. Today, I like to give a summary of the former to give better all-round understanding of the issues at hand.

Essentially, the entire US mortgage market is about USD 10 trillion. The securitised portion of it, in other words, those re-packaged and sold to investors is about USD 7 trillion. Of these, about USD3 trillion are considered non-prime assets and they included the Jumbos, the Alt-A and the sub-prime mortgages. To drill it down further, about half of them ie. USD 1.5 trillion was issued during the fraudulent years of 2005-2007. I called them fraud as the practises of the housing brokers, middleman, banks, credit agencies etc were then void of integrity and were over-run with greed. And now, it is payback time...

Looking at the latest US mortgage remittances data, it is a stark reminder of the reality at hand. The crisis is not over and the asset markets will be disappointed.

There was little to cheer about in the survey. Green shoots were certainly choked to death by the brown weeds of despair. In the Jumbo market, delinquencies have hit 15% in some cases and rating agencies generally expect actual losses to touch 7% for mortgages that originated in 2007 (the most permissive period). In the Alt-A sector, the statistics become more frightening with current delinquencies already hitting 40% in the 2007 vintages. Roughly speaking, 4 in 10 borrowers have fallen behind in their mortgage payment. Finally, in the sub-prime market, the total delinquency rate was in excess of 50%.

In all 3 cases, their respective repackaged AAA bonds would be in danger of default. Of course, one could say that this is already priced into the banking system. But the fact remains - the bonds will default.

In the meantime, foreclosures would continue to rise throughout 2009-2010. This would dampen house prices in the US and the negative wealth effect created could curtail spending. This in turn could result in higher unemployment rate and a further increase in the negative wealth effect. In short, the risk of a further slowdown in consumer spending and a rise in the saving rates in US could continue to hurt Asian exporters, well into 2010.

But, do we sense that? No. By the way, I had to queue to get in to the Thai Village Sharksfin on Friday. No recession in Singapore, yet.