"7.5% of the mortgage market is sub-prime." The shift in mortgage structures over the last 6 years has been incredible. To dismiss the market dynamics by citing that number as if it's stagnant is deceitful.

MOM, only playing Sebastian here but, maybe your change has come about due to the amount of time you spend reading and posting on this blog?

Nope, Napoleon. Unfortunately it's due to what I am seeing elsewhere. Freight figures, consumer credit, retail sales. Talk to me all you want about a mfrg rebound, but when shipments of metal are declining I'll preserve my individual doubts. Maybe we are importing more components, as Dryfly says. Ok, but in that case a mfrg rebound has less diffusive effect than I would expect from history, thus laying more weight on the consumers' shoulders.

I mean, if I were just reporting what I see on the street I'd really be going "eeek". When I was a little kid, my father, who was a physicist and engineer who had an electronics company that supplied mostly equipment to US auto mfrs for a while, taught me to predict recessions by looking at ground-level consumer activity. It worked for him and it has worked for me. According to that way of doing it, we are in the first inning of what looks to become a rather tenacious consumer-led recession. According to the supermarket index, this is set to be the worst of my lifetime.

I still believe that there is a pony in this economic pile of dung somewhere, but it's beginning to look like it will take a lot more digging to exhume it. In the end, Asians are going to turn around and invest internally in the US. And in the end, small businesses will take off. I await the beginning of that end with great anticipation.

I value this blog highly because of the mix of views and participants. At this time, it is giving me a slightly more positive outlook than my own individual experience and calculations would suggest.

Maybe that's not why most people come here, but I need my optimism laced with a healthy dose of reality, or I have difficulty swallowing it. And I prefer my realism laced with a healthy dose of optimism, because basically optimism is realistic for an American. For me, this is a Goldilocks blog. I can't stand the "aiiiieeee-death destruction-depression" stuff on a lot of the others even if they do make good points and offer some good perspectives.

Btw, look at light truck sales. If that doesn't look recessionary!!!!

Maybe the Chicago Fed devoted all the time and effort it felt the problem deserved?

Bloomberg reports that half of the foreclosures are in only four states (which came as a surprise even to me). The problem is also heavily concentrated among borrowers who were already of lesser credit-quality anyway.

This a not major threat to the general housing market, the overall economy, the bond market, the stock market or anyone in the mainstream. If it was, there would be an inverted yield-curve, rising spreads, significant job-loss, poor earnings growth, collapsing manufacturing, and all the other indications of serious economic stress. There wouldn't be "mixed" signals, there would be multiple confirming "bad" signals.

Sebastian

D, 15 Bn of securities cannot be backing more than 15Bn of debt.

Which doesn't matter anyway, because the problem is a lot larger than thew 15 bn that got downgraded.

Plus, the real problem is not the $200bn debt that was taken and can't be repaid. The real problem happens IF 2 trillion of debt doesn't get created in the future.

Now, DsR has a point there imo. To which I would add that the authors of CFL's little exercise in bad faith make as little reference to the existence of a broader economy whose state might have some effect on mortgage delinquencies as is possible, given the apparent frame to which they seem to feel they must adhere.

That frame has only one set of agents: mortgage borrowers, who are of two main types, prime and subprime, with Alt-A types relegated to the margin. The types are delineated by inherent properties of downpayment, documentation, and credit score.

The only active agent type is the subprime borrower, who was activated by "falling interest rates" in the early 1990s some time. This is one of two, or maybe three, references to dynamics of the broader economy in the Letter. These activated subprime borrowers, through the magic of "automated credit checking and underwriting procedures" and "credit scoring systems", found themselves in possession of mortgaged homes at rates heretofore never seen.

But these were, after all, subprime borrowers, so along with "declining or flat house prices and rising interest rates" (there's that pesky economy again), delinquency rates have done what delinquency rates will do under those circumstances. They have done a bit more of them in Indiana and Michigan, among the States in the Chicago Fed district, where there have been "slowdowns in the manufacturing sector" (enough with the economics, already) and where in any case there seem to have been more subprime types to begin with.

Something about being a subprime type exposes the borrower to a thing called an ARM reset. Presumbably an ARM reset is a problem, because Freddie Mac, which normally sells ... oh, here it is ... "mortgage-backed securities," wants to help some of them, somehow. Some other people are pursuing a strategy of raising money, which they think will help others of the subprime types.

This thing is so ... full of it .. that it literally sent me near an anxiety attack, running around in my mind chasing all the things that are wrong with it —or more accurately, obviousl incomplete. I'm sorry, but these guys are probably PhDs in economics. I will spare them the embarrassment of looking them up for now. But I don't care if your thesis was on 17th century Asian silk markets, you're supposed to have enough intellectual integrity to do a more thorough job than this Letter, given even just a week or two notice.