From what I can tell, the “bigger wave of loan defaults” by prime mortgage borrowers that has Vikas Bajaj so worried consists entirely of two relatively small segments of the market: a) alt-A loans and b) option ARMs.
Say, wait a minute. . . . Credit problems in both areas are well-known by now, aren’t they? Deterioration in alt-As has already led to the third-largest bank failure in the country’s history, while imploding option ARMs caused the collapse of Wachovia’s stock price and the ouster of its CEO. This is new news?
Bajaj seems to be confusing the option ARM market with the prime mortgage market overall. Bad idea! Traditional 30-year prime loans, whether fixed- or adjustable-rate, don’t reset, don’t negative amortize, and can be readily refinanced. Which is to say, they don’t carry the risks that has Bajaj so agitated. His selection of Downey Financial as poster child for ailing prime lenders is nuts: Downey’s book consists almost entirely of option ARM loans, 90% of which are secured by properties in California.
If alt-A and option ARM problems have spread to traditional 30-year fixed- and variable-rate loans, Bajaj fails to mention it. Likely reason why: those loans continue to hold up fine, if the chart accompanying the Times’s story is to be believed:
Moral of story: “contagion” of subprime credit problems to prime, long anticipated by nearly everyone, still has yet to occur. . . .