Despite the bailouts for Fannie & Freddie and the housing package in the US, defaults and foreclosures are rising rapidly, and not even flattening out. Mortgages in the sub prime category: 8.4% for all sub prime mortgages taken out in 2005 are now in default or foreclosure; for sub prime mortgages taken out in 2007, the default/ foreclosure rate now stands at 16.6% as at June, a pretty sharp hike from May's 15.8%.
The trouble is these high default rates are not just in sub prime but is flowing into other mortgages as well. One rung above sub prime is what they call Alternative-A category. The default/ foreclosure rate here has jumped 300% in April from a year ago to hit 12% (which isn't that far from the sub prime default/ foreclosure rate).
Even some of the prime loans are being hit as well. The default/ foreclosure rate has doubled in April to 2.7% from a year ago.
Even with the bailout packages, housing prices are not likely to do a V-shape reversal but rather a prolonged U-shape reversal. The default rates are going to go much higher before improving. That being the case, consumer spending should see some curtailment. The much weaker oil prices may help ease the burden but it pales into insignificance when a household compares its oil/gas/electricity bill with the ballooning house payments and home equity being erased rapidly.
I think the bigger financials in the US have done most of the needed write downs and recapitalisation, but we shall now see the smaller US regional banks falling like dominos. They are the ones left holding the bag, so to speak. Either the US allows for a wider scope for foreign funds to invest in these banks or we will see another mini meltdown.
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