The subprime mess has been caused by a peculiar circumstance: Early Payment Defaults, primarily of users with no income documentation nor any collateral on the house for year 2006 loans. They're getting two loans, one for the 80% for the bulk of the loan and one for the 20% down payment. An Early Payment Default (loosely defined) is an owner who defaults on their payments within say four months of the close on the loan. The problem has not been with owners having their loans reset. EPDs as a problem seems kinda screwy, I mean, why default on a loan only a few months after getting it? Credit worthiness doesn't deteriorate that fast.
To check more information about the coming credit storm, I figured I'd start with credit cards, since that's the first to thing people are going to let go of, right? Always hold on to the house, right? I haven't really spent much time at this, but let's see what we can find. OK, Capital One (COF) has a delinquency rate lower than all years back to 2002. Citigroup (C) - basically same deal. Bank of America (BAC), no upticks either. So, dump the house and keep the credit card!?
Q: So why would people who show no documented loans, borrowing the full equity amount of the house, skip on their mortgage payments before a few months are out? And why would none of this "mess" seem to show up on seemingly the first thing that should show a problem?
A: Because they're houseflippers who realized the game is up with nothing on the line. They just don't care.
Obviously a sign of a bubble, but it doesn't seem to me to be a real sign of massive credit deterioration. Real credit deterioration would come on top of resetting loans and should be felt in other sectors.
Comments are most welcome, especially if you have data too.
