The cumulative defaults rates of conventional mortgages pools from 2007 surpassed those of subprime at 12%.
The Credit Characteristics of these same loan pools between the 2001-2007 were virtually the same, however defaults rates prior to 2003 were 1.5%, well within acceptable rage.
Note, the crisis began when the housing default rates were approaching 6%. Leading to the conclusion, a severe housing bubble would have occurred with or without the influence of subprime loans as was the case in 1979 and 1989.
The Simple Math:
It takes the 30-year mortgage several years to build 10% equity. The average borrower’s housing expense has risen to approximately 50% of an American’s average net income. The combination of the speed in which the 30 year mortgage pays down the principal balance in relationship to a borrower’s Housing Cost To Income ratio has caused a dislocation within our financial system.
History has documented the difficult task the Fed has endured in keeping inflation rates down to an average of 3% a year over the past 4 decades. 3% X 10 years = 30%. This figure is closer to 50% when compounded over 12 years, yet borrower’s household income has only increased on average, a (total) of 6% over 10 years. Question: How will homeowners be able to afford to make their mortgage payments in several years? What will happen to the economy when borrowers can no longer afford to pay their mortgages and as a consequence their disposable income disappears?
Borrowers who believe they will be able to sell their homes in the middle of the next economic contraction should consider, the median average loss of real-estate values for the past three major recessions was over 20%. Thus, there were a significant amount of equity lost between 30-50% recorded nationwide.
MBS volume has doubled each decade since the 70s. *If 10% of borrowers overextend themselves and the volume of MBS doubles within the next 10 years, how catastrophic will the next recession be? “The Simple Math” points toward the 30-year mortgage as being obsolete in our modern day economy.
* 10% percent is the statistical average of homeowners who overextend themselves, approximately the same percentage of defaults which caused the mortgage meltdown.
So What Is The Alternative?
Thankfully, there are a few new fixed income products in development, which appear to be quite promising. One such model is the SIMP 20-Year amortization presently being used by a number of Wealth Management Groups to lure high net worth individuals to their firms with great success.
SIMP's 20-year mortgage produces significantly higher annual yields (as much as 1%) for lenders and bond investors at half the weighted risk average (WRA), with approximately the same monthly mortgage payment as the 30-year mortgage.
We should also develop better risk models that include parameters such as ones outlined here:http://economicgenome.blogspot.com
* 10% percent is the statistical average of homeowners who overextend themselves, approximately the same percentage of defaults which caused the mortgage meltdown.
So What Is The Alternative?
Thankfully, there are a few new fixed income products in development, which appear to be quite promising. One such model is the SIMP 20-Year amortization presently being used by a number of Wealth Management Groups to lure high net worth individuals to their firms with great success.
SIMP's 20-year mortgage produces significantly higher annual yields (as much as 1%) for lenders and bond investors at half the weighted risk average (WRA), with approximately the same monthly mortgage payment as the 30-year mortgage.
We should also develop better risk models that include parameters such as ones outlined here:http://economicgenome.blogspot.com
