Subprime delinquencies higher than reported
Submitted by
CalculatedRisk on Fri, 05/18/2007 - 2:08pm (56 comments)
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Neat trick,
Go to zillow and and narrow the search feature to sales within just the last month (left hand side). Zoom out over a good sized area and move your curser over the yellow flags. All will be recent sales. Look how many sales are below zestimates. If any are well below, then it's likely a forclosure, as they show up in the sales stat, yet it's still an empty house. Pick some newer areas (like East Chula Vista, ca) and youll see most are well below zestimates, and most in the new areas are actually forclosures and still are out there for sale (I know I drove and checked, they are empty and run down...and many were never listed for sale...alot of hidden inventory out there ready to explode).
Regarding the stock market, however, we've reached that point where rationally nothing really matters.
It's the same phenomena that strikes central banks when a given currency is being attacked. Short term rates can be 10%, 100%, 200%, it doesn't matter because the speculators are expecting to make 20-30% ... in a day.
The only thing that can stop the market right now, is the market itself. Not facts or reality.
And while we're on the subject, one more defense o' subprime by an "economist":
So far, fewer than 15 percent of subprime borrowers have been late with their mortgage payments.
And even if 20 percent of subprime mortgages end up in foreclosure, it still leaves the other 80 percent of subprime borrowers cutting their own lawns and, most important, creating wealth in the form of home equity.
Yes, let's clean up the subprime market and help salvage the homes of people suckered by aggressive lending. But let's not forget the subprime market serves poor minorities and that's a good thing.
Marketplace: There's a good side to subprime lending
No, Martha Stewart didn't write that. This is from a Marketplace commentary by one Susan Lee, economist. I hadn't had the pleasure of having heard of one Susan Lee, economist, so I Googled a bit.
What kind of economist would throw around a 20% foreclosure rate and then chatter about placid bouts of lawn mowing in the next breath?
Susan Lee is a columnist and economist living in New York City. She worked as deputy editor at The New York Times Op-Ed Page, as a senior editor and columnist at Forbes, and as a member of the Editorial Board of The Wall Street Journal.
Dr. Lee taught in the economics department at Columbia for several years, and was a John Jay Fellow and a Presidents Fellow at Columbia.
She is the author of several books, including Hands Off: Why Government is a Menace to Economic Health, published in 1996.
The government is a menace to your economic health, but the subprime lenders are here to help you!
95% of the drunken drivers don't get into accidents.
Drunken driving is thus wildly overstated as a risk, and doesn't take into account the happiness being lightly drunk brings.
It's very unfair to negate this right just because a few drunken apples get into accidents.
Incognitus, I think the drunk-driving analogy goes too far the other way.
I don't, actually, oppose all subprime lending on principle. That's because I think it, unlike drunk driving, can actually be managed. You can make subprime lending available on terms that don't result in 20% FC rates, and if you do, well, OK, then you're drunk. But these dolts like this "economist" from Marketplace who seem to think a 20% FC rate is some "natural" failure rate? Even if, for a moment, you were prepared to tolerate that much carnage in your aspiring-homeowner pool (go ahead and dream the American dream, kids! Only 1 in 5 of you will end up in the American nightmare!), how the bloody hell does she think any lender could afford that without charging 21% interest rates?
Martha Stewart probably could have figured out that part.
Tanta- how the hell could they afford that without charging 21% interest rates????? Surely you know better than that. WAL of 2.5 years, 300 bp spread, gives you 750 bp to cover the losses. 20% foreclosure rate with a 37% LGD gives you 740 bp in losses. With current mortgage rates around 6%, you'd only have to charge 9% to cover those losses. Even with a 50% LGD you only need to charge 10%.
The hideously stupid things about Lee's commentary are a) her assertion that if 20% are foreclosures than 80% are successes and b) her claim that homeownership was only for the middle and upper classes before the growth of subprime.
Yes, subprime deserves to exist as much as anything else.
It's only kind of scary when the combination of subprime origination, securitization, CDO packadging, etc, lead to it being possible for an unemployed, assetless, incomeless person to get millions in credit.
This is going to have consequences. And everybody that's rooting for this to continue forgets that those consequences, if they go far enough, will directly steal money from innocent people (depositors).
OK, what does "delinquent by at least one payment" mean?
Does that mean that the most recent payment was not made?
Or does it mean that at some time in the past, at least one payment was late?
Tanta- how the hell could they afford that without charging 21% interest rates?????
Bceaues I maent 12%. All you have to do is read right to left.
I was actually thinking more in terms of APR. Plus, I was exaggerating a little, but not that much.
jus me, this means that the 14.4% includes loans that are currently 30 days late or more. These delinquency numbers are all current, not cumulative.
These guys are amazing, wonder what made the damn light go off?
Treasury Targets Financial Fixes - WSJ.com
risk capital, I'm not a WSJ subscriber, so I can't read the rest of that.
May I guess that what follows is an argument for repealing Sarbox?
one thing is certain, a huge bubble is again forming in the stock market.
in the end there will be pain from this.
For all of you who think the world is coming to an end (like I do). I suggest you sell something short. Trust me, It feels horrible.
Tanta,
wouldn't surrpise me at all.
I only read the first portion as well, which by the way was enough.
The quality of the earnings has gotten atrocious. With many, they are serial restaters. The use of pro-forma and EBITDA makes me want to vomit, there is absolutely no reason that they all cannot report in GAAP and put themselves on a level playing field with everyone else.
The one-time crap is every damn quarter, ex-this, ex-that, adjusted earnings, my ass. The whatever-it-takes-to-hit-the-number crap is prevalent and misleading. Half of the freakin analysts don't understand what they are looking at. The various assumptions are adjusted to meet near-term projections, they blow a quarter and maintain guidance for the remainder of the year (in the case of two retailers today). WTF, these are retailers!!!
I could spend hours, anyway, yes, let's do away with Sarbox!!!
Regarding the subprime argument, and hopefully Tanta can address this: 1) 80% pay their mortgage. 2) $1.2 trillion of subprime loans made 2005-2006, and more than half are refinance loans. 3)Of the 80% paying their mortgage many will have loans about to reset and with no equity left. 4)Chris Cagan keeps saying the reset risk is moderate. 5) conclusion?
Churchill,
I feel much better now that I have given up all hope.
1.2 trillion of subprime loans made 2005-2006, and more than half are refinance loans.
That's the problem with such numbers. I have seen estimates that only about $500-700 billion of those are still outstanding. I'd look it up but it's Friday night and I've been drinking. In any event, a fair number of the 2006 loans refinanced the 2005 loans, and apparently we've already foreclosed more than a few of them. Certainly the subprime volume in 2007 doesn't seem to be at replacement rate.
You get contradictory views on all that. We had Lew Ranieri suggesting that 50% (ex non-owner occupied and outright fraud) were refinanceable to GSE or FHA terms; that's a fair backstop if it's true. I'm struggling to remember why Cagan thought the subprime reset risk was "moderate." My view is that the DTIs on the 05-06 vintage (averaging over 40%) were too high to survive reset regardless of equity, and that the refis will be a problem of finding a fixed rate that will make the DTI work regardless of LTV.
I guess I should read the Cagan thing again. Perhaps tomorrow, over coffee.
Ok, Tanta just one more question. You think the 2006 vintage included refis of 2005 loans. So do a chunk of the 2/28 borrowers refi early? Or are you talking about 1-year teaser rate loans? Thanks. And could you write my next article for me?
The list of official stats that are proving to be widely missing the mark is apparently continuing to grow... delinquencies... unemployment.... housing sales... inflation. Is it back-to-school time for economists or is it time for a bureaucratic house cleaning, or what? I'll grant that nobody can predict the future, but when they cannot even predict the past without multiple corrections it is time to ask some serious questions. Maybe the same marvelous technology is being used that now helps identify and assess the subprime loan applicants?
And even if 20 percent of subprime mortgages end up in foreclosure, it still leaves the other 80 percent of subprime borrowers cutting their own lawns and, most important, creating wealth in the form of home equity.
Shouldn't that read "creating wealth in the form of mortgage payments to lenders/investors for overpriced homes."
It's the people that keep their homes and make their payments upside down while the market implodes that really take the losses.
They'd be better off going back to the rental.
Interesting-
New York State Subpoenas Appraiser, Broker in Probe (Update3) - Bloomberg.com
14% [?] of all mortgages are subprime. 20% foreclosure equates to 2.5% of all houses.
If we assume that there are 20 houses on every street, we will see 1 foreclosure every 2 streets across the country and that's just subprime!
Now add Alt-A ....
Regarding the stock market, however, we've reached that point where rationally nothing really matters.
Well at least the bond market is starting to wake up - long rates are up almost 20bps in the past couple of weeks. Of course this makes the situation in housing that much worse.
IMO the selloff wasn't enough, though. This private equity bubble could be the real deal, and I think bond holders are underreacting to the threat.
Tanta - Thank you for the clarification on "delinqnet by one payment."
But I'm left sort of amazed. 20% of all subprimes are at least one payment behind RIGHT NOW?
Holy smoke.
Wrong. The home equity for most of them is on the decline. I do expect home prices to fall for the next 2-3 years and then flat for another 4-5 years.
The only way to build home equity in those conditions is to have the 30-year fixed mortgage. Most subprime borrowers have various kinds of wierd loans that do not build any equity whatsoever.
ac-
"Well at least the bond market is starting to wake up - long rates are up almost 20bps in the past couple of weeks. Of course this makes the situation in housing that much worse.
IMO the selloff wasn't enough, though. This private equity bubble could be the real deal, and I think bond holders are underreacting to the threat."
You saw a 20bps move in quality and suggest they are underreacting to the threat.
I would argue that near-term you may see a bigger move in order to move rates across the board, this will in turn likely significantly widen spreads in HY and have a simultaneous effect on private equity & LBO's.
Once the spread blow-out occurs, there will be a flight to quality driving yields down on "quality" and normalizing the markets.
The PE and LBO craze is over, the models will not work in the, what I see to be, normal spread environment in HY.
The equity market will correct, fundamentals will matter, and we will go into recession.
End of the world, no, difficult period yes. This will wash out the excess.
"The Illinois Association of Mortgage Brokers has sent out an alert to its members, warning that if a new proposed amendment passes bankers and brokers will not be able to originate any "stated-income" or "non-income-verification" loans. The trade group fears that if the language (Amendment 3 for HB 1478) passes, loan offices will be held "personally responsible" for their actions and could have their personal assets attached by the state attorney general "
another page
The equity market will correct, fundamentals will matter, and we will go into recession.
In the wake of the dot.com bust the bond market lovingly nurtured the housing bubble into existence (unwittingly, I believe). For their efforts, bond holders were rewarded with the "bond rout of the century" (we're talking 2003 here).
Hopefully they'll learn from the experience.
IMO there's nothing wrong with this economy that a 100bps rate hike couldn't fix.
For all of you who think the world is coming to an end (like I do). I suggest you sell something short. Trust me, It feels horrible.
I'm all for feeling horrible while my bank account grows. Especially if it's at the expense of the greedy.
For example, I'm tempted to load up on some homebuilder puts. Not sure about the timing, but looking at the HGX and XHB indices, they are serious laggards. Down something like 5-10% for the year, while the broader market has been hitting new records daily.
So if the broader market starts to sell off, I expect the homebuilders to lead the race downward. The converse of "a rising tide lifts all boats" is "a receding tide exposes the naked swimmers." At some point fundamentals have to matter ... don't they?
Of course, somehow all the "fair and balanced" types here at CR somehow forgot the flip side of the article.
According to the article, subprime delinquencies are understated because MBS counts many subprime loans as prime.
That then means, by definition, that prime delinquencies are overstated by the same measure. The article points that out.
Um, why didn't that get mentioned? I'm sure it's only a coincidence that it doesn't comport with the "cans of spam are the only assets worth investing in" mentality.
Society's attitude has changed.
It used to be gambling was bad; pay off your debts as quickly as possible; don't charge usurious interest to compensate for risky loans. The attitude has evolved over the decades to -->
As long as I mention somewhere (I don't necessarily have to actually tell you) that certain risky practices MAY be harmful to you, I've satisfied my moral obligations to you and can go ahead and make money off you as I let you practice those risky behaviors.
When there's enough victims, then society's attitude will change back(and the cycle repeats again)...
Caution --> prosperity --> complaceny --> carelessness --> recklessness --> disaster --> Cautio
Um, why didn't that get mentioned? I'm sure it's only a coincidence that it doesn't comport with the "cans of spam are the only assets worth investing in" mentality.
SPAM!
SPAM was launched with much high-profile advertising in mid-1937. It was called ''the Miracle Meat'', and promoted as an anytime meat. In 1940, SPAM was the subject of quite possibly the first singing commercial. The jingle was to the tune of the chorus of ''My Bonny Lies Over The Ocean'', and the lyrics were ''SPAM SPAM SPAM SPAM/ Hormel's new miracle meat in a can/ Tastes fine, saves time./ If you want something grand,/ Ask for SPAM!''. Hormel also sponsored George Burns' and Gracie Allen's network radio show, which included ''Spammy the Pig''. During World War II, sales boomed. Not only was SPAM great for the military, as it required no refrigeration, it wasn't rationed as beef was, so it became a prime staple in American meals. SPAM supported the war effort more directly, too. Nikita Kruschev credits SPAM with the survival of the Russian Army during WWII. During the late 1940s and early 1950s, the Hormel Girls performing troupe advertised SPAM as they performed throughout the country, distributed SPAM door-to-door, and even had a national weekly radio show. Ads proclaimed, ''Cold or hot, SPAM hits the spot!'
Uh, I think that was a thread killer.
Only one question counts (it's in two parts).
Solons: what is the answer?
Absolutely clearly, Bernanke is saying, "Not so much."
ac-
a hike is not the answer, you need a spread blow-out on HY to curb the speculation, you don't need to further the stress on the consumer.
Keith wrote:
"Of course, somehow all the "fair and balanced" types here at CR somehow forgot the flip side of the article."
You would have a point if CR had omitted the word "Subprime" from the title, and named the post "Delinquencies higher than reported". But he didn't--he's pointing out that the subprime only is worse than we thought. The common theme across many posts is that declining lending standards have led to shockingly poor subprime loan quality. And many people, like me, believe that subprime rather than prime borrowing has driven real estate pricing changes. The distribution of delinquincies between prime and subprime does matter.
When all is said and done, we have three junk domestics-
Detnews.com | This article is no longer available online | detnews.com | The Detroit News
and an ailing supply chain-
Auto suppliers face cash crisis | detnews.com | The Detroit News
Terms of use for a Lending Tree Loan:
4 Flexible Payment Options $200,000 loan for $667/month Lender disclosure current as of March 15, 2007.
"Start rate of 1.25% is fixed for the first 30 days with a fixed payment option for the first 12 months. Terms of payment are based on a margin of 3.250% plus the twelve-month average of monthly yields on actively traded United States Securities adjusted to a constant maturity of one year (4.563% as of March 15, 2007). APR of 7.991% and payment of $666.51 per month is based on a 30-year term, $200,000 loan amount at 1.25%, and may change if the index adjusts after the first 30 days. If minimum payment option is selected, deferred interest may accrue. Interest rate quoted assumes a credit score of 620+ with a loan-to-value (LTV) of 80% on a primary residence. The APR and payment will vary based on the specific terms of the loan selected and verification of information and credit. Rates are subject to change without notice. This product may not be appropriate for all borrowers. Please consult a financial advisor to weigh risks and benefits."
So what has changed? This line in the terms: "This product may not be appropriate for all borrowers"?
take a look at:
Bloomberg.com:
Government Bonds
while FED and 3 month Libor are 25 bps above last year 5Yr AAA banking and finance are 36 bps below last year.
This means an effective 61 bps (25+36)
30 yr mortgage are also in the same range.
the only thing which is higher are ARM rates 38 bps
there is still a lot to take place in the bond market both treasury and junk......
also there are reposrts that MBS are selling again at Par +1.5% (use to be not selling or par +1%)
I think the only response to this is question is: "Duh!"
"Did Merrill, Morgan Stanley Overpay?
Both Spent Big Money
On Subprime Lenders
Just Before Slowdown
By RANDALL SMITH
May 19, 2007; Page B1
Some of Wall Street's biggest players bet heavily on the subprime mortgage sector last year just as it started to head south. Now, investors are questioning whether the firms overpaid to get into a sector that has become less profitable."
Did Merrill, Morgan Stanley Overpay? - WSJ.com
The fallacy of the "only 20% default leaving 80% happily mowing their lawns" argument is that it ignores leverage. If enough leverage is present in the system, the 20% that default will not leave the other 80% unharmed. Rather, the 80% will also see higher defaults as rates rise and home prices fall.
Think of a sand pile that grows one grain of sand at a time. At the outset, the probability that an additional grain of sand causes a massive slide is zero. As the pile grows and steepens, however, the probability also grows. At some point, the probability that an additional grain will cause a slide becomes effectively 100%.
Leverage is like the sand pile. Layer enough on and the failure of one part of the pile causes the failure of another.
If 20% of sp homeowners default, this can cause levered creditors to dump collateral on the market, reducing home prices. The decline in home prices affects the other 80%, causing some to default, which causes more levered creditors to dump collateral and more declines in home prices.
This is why the "sticky price" hypothesis is so dangerous. Plug it in, and it allows you to expand leverage (steepen the sand pile) without a corresponding increase in risk of collapse. In effect, the assumption has brought us to where we are today.
The prime delinquencies can't rise for as long as prime borrowers that get into trouble can turn into subprime borrowers.
It's the people that keep their homes and make their payments upside down while the market implodes that really take the losses.
They'd be better off going back to the rental. --ecoshift.
And they'd be much better off if they'd never gotten the loan in the first place. This is the other problem with the "then 80% of them are better off" meme. A very high percentage of the loans have features (teaser rates, neg am, preypaymemt* penalties) that mean that they only way that these people can come out ahead is if house prices appreciate ~20%/yr for the life of the loan. They need these loans like they need a hole in the head.
Bringing credit to underserved low income markets is often a good thing. You can even get a Nobel Prize for it. But there is not a one to one correspondence between low wage and bad credit risks. Those of modest means are more likely to have their economic situation shaken by an $800 dollar carubrator than the well off. But some poor people manage to have savings, and plenty of higher income individuals live paycheck to paycheck. No credit scoring system will be perfect at predicting people's future ability/inclination to pay. The subprime market is probably best served by those willing to do extra due dilligence to find those who are likely to perform better in the future than they have in the past. It is ill served by those who view it as a hopper of financialy naïve customers who can be counted to sign anything to get into a house.
*a typo, but I decided to keep it.
hmm there is something i ve been thinking lately. if someone doesnt have to pay anymore a mortgage payment after paying rent he is left with more cash in the hand and he can therefore spend more. so the thing is that after this wave of foreclosures the consumer spending goes higher as the consumer confidence has alredy in the last month (i think i saw something like that in a flesh news on cnn). ofcourse only if he doesnot already have a cc revolving debt.
silly me now writing such optimistic things
and i thought i am a doomster, but it seems there can be a little logic in what i wrote about consumer spending 
Back to this, "the stock market isn't responding to the economic weakness". I really don't get it, but...
Either the market is expecting the US economy to improve soon or it's betting on the rest of the world picking up demand slack from a US slowdown.
China (India, Indonesia, Australia, Eastern Europe...) isn't getting the memo, or at least it's taking a long time to get there. This latency could be long enough, say 1-1/2 more years, that the US economy could improve at the time they wind down?
Or, in the bearish case, the US consumption engine drying up fills all the global inventory channels and we get simultaneous economic weakness globally.
The question is, is the US consumer the elephant that slows down and is big enough to stop the parade? I think commodities, since they are in a fierce speculative bubble, might be the leading indicator that gives the answer???
barely, on what do you state that commodities are bubble? you know if i look on the value of dollar vs. euro and other currencies 5 years ago compared to today the price of oil is without question justifiable. in example of mine small country US dollar has fallen 50+% over the last years. it used to trade 1 dollar for 50 crowns now its 24 crowns.
i have many friends programers who used to work as independent contractors for US companies but quit i think in 2002 or 2003 when the dollar has fallen 30% against our currency within 12 months.
revro, With all due respect, commodities are priced in dollars (for the most part) in the commodities futures markets. Yen and Yuan track the dollar (another problem). When they are priced in Crowns or Forint or whatever, maybe they won't look like a bubble, but for now, let's agree the increases have been unsustainable.
Commodities aren't "priced" in US$ - that's US-centric nonsense. They are priced in all convertible currencies simultaneously.
And US$ prices of commodities can certainly keep going up if the US$ keeps declining against other world currencies. That's not a bubble any more than rising prices in Zimbabwe $ is a bubble.
well Barely you just prove my point
, because commodities are priced in dollars, if there are more dollars to buy the same or shrinking amount of commodities the amount of dollars to buy these commodities rise.
commodities are not the cause of bubble, the increase in amount of fiat money is.
in europe where there is 100% fuel tax + value added tax of cca 20-30% i think in use you cal it sales tax, the fuel is rising too but not so much as in US. the price in my country is like 5,75usd for gallon, austria can be cca 5,5usd per gallon.
AC wrote
IMO the selloff wasn't enough, though. This private equity bubble could be the real deal, and I think bond holders are underreacting to the threat.
It may be that the selloff is partially compensated by the PBoCh growing apetite for bonds.
revro, Of course fiat is raging, but commodities are rising disproportionately faster than other assets or other measures. There is an availability squeeze for say CU, but in my opionion speculation is responsible for a premium that accounts for the huge commodity jumps.
Rampant Speculation => BUBBLE.
yogurt, seriously, do you believe that? Once the size of the US economy shinks to 1/50 of the world economy, then I'll agree. Until then, it doesn't matter what currency you price commodities in, they get converted to dollars before sale in the bulk of tranactions. Look at consumption. Where are the futures trading markets that set prices? What currency are the quotes in? I am not suggesting it will stay that way forever. Could be turning... as I type this note...
stock markets have buyers and seller.
here is an observation:
There are now no sellers. Only buyers.
You should not ask why people are buying ?
You should ask - why (most) people are not selling ?
Most people are not selling since they wait for "their stock" to become the next LBO.
this is an explnation I hear - is it true ? somehow I don't think it is because if people are waiting for an LBO they would not be selling at +7% but wait for +20%, 50% 80%
This is not a fundamentally based market environment acrossed asset classes.
This creates tremendously difficult conditions reminiscent of recent past environments.
How soon we forget.
I think the simple explanation is that LBO and all those private equity deals are draining shares from float at the same time when carry trade and account deficit are bringing more dollars.
It's just simple supply-demand schema, nothing complicated...
But outside the USA there are raging bubbles almost everywhere.