Real Estate: You ain't seen nothin' yet

BBB- securities, 2007-1 series (NY Times. Click to enlarge.)
Black: Foreclosed, Grey: 60 or more days delinquent, Blue: 30-59 days delinquent

Writing in Saturday's New York Times, Floyd Norris rakes mortgage-backed securities over the coals.

These babies are what caused Bear Stearns severe gastric distress recently. They may not be out of the woods yet.

But even more alarming are the performance of the so-called 2007-1 group. These are securities based on mortgages made in the last six months of 2006 -- the most recent series.

Within that series is a group of securities issued by the Home Equity Asset Trust, that are in trouble just nine months after the securities were issued.

"The problem pool is dominated by mortgages that have balloon payments and properties worth little more than the loans. ...

Most of the mortgages that underlie the 2007-1 series were made as “2-28” loans, whose interest rates reset after two years, rising by as much as six percentage points. The fact so many of the loans are having difficulty a year before the reset suggests that much greater problems could lie ahead. The rating agencies that decided that the lower tranches of these securities were investment grade were using models that may not have underestimated the possibility of falling home prices and the problems that would cause for borrowers. Clearly, some of those trading the ABX indexes think the agencies were too optimistic in their ratings."

To repeat Norris, "The fact that so many of the loans are having difficulty a year before the [interest-rate] reset suggests that much greater problems could lie ahead."

That mean that whatever troubles we are seeing right now are only harbingers of those we will see in 2008, the year those mortgages reset.

Fasten your seat belts, it's going to be a bumpy ride.

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NY Times: "The Homes May Be Solid, but the Loans Look Shaky" -- and chart.

-- Dan Damon

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