The worst of the U.S. sub-prime mortgage crisis is yet to come, according to a new CIBC World Markets report.
The report said the mortgage default rate has surged to unprecedented levels and could reach 25% of all sub-prime mortgages.
The report noted that roughly US$700 billion worth of largely sub-prime mortgages are due and will likely have their rates adjusted upwards by the end of 2008. Most of the mortgages were issued between 2005 and 2006 with a two-year discounted teaser interest rate. The quality of the mortgages has declined each year, and sub-prime mortgages are increasingly finding themselves unable to secure refinancing.
The report stated that the most serious fallout from the crisis is yet to come because the quality of mortgages written in 2006 and the first half of 2007 was far worse due to poor underwriting, reduced prepayment rates and weaker home price appreciation.
Compounding the problem is the drop in U.S. housing prices. Most of the mortgages were made with little or no money down, and at least 25% of variable rate mortgages are now higher than the value of their underlying properties.
If housing prices continue to drop, the negative equity number could affect 40% of sub-prime mortgages.