Highlights of JPMorgan’s latest forecast for Jumbo mortgage performance and defaults:

Losses on so-called hybrid adjustable-rate mortgages backing 2006 and 2007 prime-jumbo securities will reach 8 percent to 10 percent…Losses on prime-jumbo mortgages with completely fixed rates in “recent vintage” bonds will be lower than losses on hybrid ARMs [as] faster prepayments could prevent many future defaults, keeping losses in the 2 percent range, a decrease from last month’s 2.3 percent to 2.8 percent…The share of Alt-A mortgages underlying bonds at least 60 days late, in foreclosure or already turned into seized properties climbed 1.53 percentage points last month to 22.88 percent [while] Defaults on so-called option ARMs rose 2.47 percentage points to 30.96 percent.

JPMorgan Doubles Prime-Jumbo Mortgage Loss Projection [Bloomberg]

Comments from Plugged-In Readers

  1. Posted by Name

    It is still not clear to me what fraction of the Bay Area housing stock in “fortress” towns and neighborhoods has unsustainable mortgages – I/O’s without sufficient income to pay the fully amortized monthly, etc.
    Can anyone point to statistics?

  2. Posted by FormerAptBroker

    We will never know exactly what percentage of homeowners do not have income to pay the fully amortized debe service. The people who can’t pay with equity will sell, the people just a little under water will have a short sale and the people who are way upside down will just walk away… From 2001 to 2007 a lot of people I know in the city bought places and (after checking the title company web site to see what they paid) it seems like they either put a million dollars down(thanks Mom & Dad) or they put nothing down (thanks 80/20 stated income option ARM)…

  3. Posted by Dude

    I find these numbers staggering. 23% default rate on Alt-A, and 31% on option ARMs. What has the historical default rate across all mortgages been, going back a few decades? Anyone know? I couldn’t find any stats on the net, but I’d guess it’s historically been below 5%.

  4. Posted by Mole Man

    Historically loan default rates are low, subprime default rates are lower still, and swans are white.

  5. Posted by diemos

    Relax dude, relax.
    I’ve been repeatedly assured by the trained professionals on the site that the option arms are a non-issue. That they we’re only used by sophisticated investors to manage their cash-flow. So I’m sure that the 30% who are in default even before the resets begin are just intelligently managing their cash-flow to build up 1st, last and security deposit before they walk away.
    All snark aside here’s another prophecy from diemos, “The final default rate on the 2006 and 2007 option arms will be greater than 70%.”

  6. Posted by Trip

    No, the assurances were that there is no documented, incontrovertible proof that these toxic loans were used by SF buyers therefore they necessarily must not have been used by any.
    Again, all snark aside, I second the predictions that this will be a larger problem than subprime ever was. The problem is moving upmarket. The late, great Tanta at CR had a wonderful piece on this:
    Just speculating, but could this relate to the pretty significant flood of recent expensive listings on the MLS (405 over $1M at last count)?

  7. Posted by tipster

    Trip, that link was hillarious:
    “If subprime was supposed to be about taking a bad-credit borrower and working him back into a good-credit borrower, Alt-A was about taking a good-credit borrower and loading him up with enough debt to make him eventually subprime.”

  8. Posted by EBGuy

    Please people, this is all contained to the 70%+ of home purchasers in the Bay Area who used IO/Option ARMs in 2005. There is nothing to worry about, please pass the puts…

  9. Posted by Kenneth Quinn

    Jumbo mortgage rates normally vary quite a lot. Jumbo mortgage rates are established on the basis of common market rates, Truth in Lending Laws and modification in the Treasure Bill Rates. It has been noticed that jumbo mortgage rates quite a number of times increase much more than a definite limit. These limits are set by Fannie Mae and Freddie Mac programs.

  10. Posted by Rillion

    Well I’ve taken a lesson from the banks and started hording my cash. I had paid off $10k on my HELOC over the two years I’ve had my condo but last week I took it back. Now the only thing I have at risk in my place is the 5% down (which came from selling stock options if I had held them until I changed jobs last year would have been worthless).
    Of course I didn’t have a jumbo loan so my place will never be figured in the numbers above, but if housing prices keep falling I expect a lot of people to just walk away.

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