Revision to the mean: 30% drop in prices

Summary:


** 32.6% of new US mortgages and home equity loans in 2005 were interest only, up from 0.6% in 2000

** 43% of first-time home buyers in 2005 put no money down

** 15.2% of 2005 buyers owe at least 10% more than their home is worth

** 10% of all home owners with mortgages have no equity in their homes

** $2.7 trillion dollars in loans will adjust to higher rates in 2006 and 2007


At the end of 2003, 1% of Washington Mutual's (WaMu's) option ARM (adjustable rate mortgage) loans were in negative amortization (the borrowers were borrowing more money each month, not even paying enough to pay the monthly interest charge in full). At the end of 2005, 47% of WaMu's option ARM's were in negative amortization (55% by value of the loans).



WaMu is booking these negative amortization payments as earnings. In prior times, loans where borrowers were making less than the interest payments would be classified as non-performing loans. In January-March, 2005, WaMu booked $25 million in earnings from negative amortization payments. In the same period in 2006, WaMu booked $203 million in earnings from these payments. These borrowers are increasing their mortgage balances as property values have started falling, so the default risk on these loans is extremely high.



Mr. Witter estimates that a simple revision to the mean suggests a 30% drop in residential property values in the US over the next three years. This is without considering in the effect of further increases in energy prices.