Check out that list... McAllen TX at 6.98 ... now that's a garden spot, let me tell you. I had a friend move down there to support a plant right across the border in Reynosa. Used to cross over every morning like he was driving thru a toll booth on the Tri State.
They didn't stay long though. His wife wasn't happy there. No Ikea.
Maybe CR or Tanta knows this, but what at national deliquincy rate would we be likely to see problems in the banking industry? Also, is the deliquincy rate creeping up or ramping up quickly?
Actually it's a national bump of 15% (.3 on top of 2.03 last December). I'll admit 15% is still a relatively small number, we are also just at the beginning of this.
Charts, it's really hard to say what a delinquency rate means, especially a national average, in the absence of other information. Remember that "delinqency" means late payments, not losses. It's a leading indicator, and what it generally indicates is loss 12 months or so in the future. Of course that depends on whether you're talking a 30-day delinquency, which "leads" the longest, or a 90-day or NOD, which is nearer-term loss.
As MaxedOutMama pointed out on an earlier thread, the big wild card here is also the "vintage" going delinquent. "Normal" or "historical" experience is that most delinquencies occur in years 3-7 of a given vintage of loans. If you see increasing delinqency in more recent vintages, you have a much more serious indication of future loss than you would on a more seasoned vintage.
Because why? Because "delinquency" in and of itself may predict frequency of loss, but not severity of loss. An "old" loan that goes into foreclosure generally has more equity build-up, either through amortization or appreciation or both, to reduce the severity of the loss. Also, if you're talking about securitized loans, unexpected (above average) losses in the early years are a big problem because those new loans were supposed to be building up excess spread and overcollateralization. If--again, if--recent vintage delinquencies coincide with slower prepayments in the weakest credit tier (say, because of credit rationing on the "nontraditional" side) but same or stronger prepayments in the strongest credits because of low prime interest rates--you get serious impacts on credit support.
You also want to know what loan type is delinquent. The loss severity on a first lien mortgage might be 10%, but on a second lien more likely 100%. If the loan's an IO or neg am, the "recent vintage" problem gets turbo-charged, since you don't even have the minimal amortization you would have in recent vintages of standard loans. (And there are those of us convinced that the more IOs or neg am you have, the more cruddy appraisals you have, since the evidence suggests that people are using these products to "stretch" too hard.) The speculators, investment properties, and second homes always go first, as it were, so you want to know what percent of delinquecies are principal residences--when it gets there, you're in more trouble. Finally, you want to look at loan size. Jumbo loans tend to have very high credit quality, but they can also distort averages. One 10% loss on a large jumbo eats way more credit enhancement than one 10% loss on the smallest loan in the pool.
For a bank-owned whole loan portfolio, the "credit enhancement" issue applies to loss reserves and capital requirements.
And yes, the best data is not publically available for free on the web. Nonetheless, I'll see what I can find.
Similar to dryfly and McAllen, I thought it was interesting to see Fayetteville, Springdale Arkansas on the list.
I grew up there and my parents still live there. The area is booming job wise. The unemployment rate was around 2%. Wal-Mart is headquartered there as well as rapidly growing trucking companies. And, from what I could see, it was experiencing a massive amount of housing and other construction. Also, the area had a huge influx of immigrant labor to take jobs with Tyson, a large food processor.
Just anecdotally indicates to me that it is not job loss that is leading this, but the looser lending practices.
Interesting to me, CR, that you and Tanta had pegged these practices as one of the factors a long while ago.
Also, your other theme "how much the housing related job loss" will exacerbate the decline has yet to play out.
The flip side of that WSJ report was that looser lending practices have been continuing in recent months.
You've got to think there's been some high yield leveraging racket going on with all these exotic loans - which have been pretty reliable so far. I wonder if we'll see hedge fund blow ups or some sort of bond market crash from the rising defaults.
I was just about to email that link to CR, great minds...
This is yet another inflection point, you have economists admitting loose lending can in itself lead to increases in delinquencies given a merely flat housing market. Just as you had them admitting for the first time last month that prices were likely to actually fall for the foreseeable future.
Many of the things that were supposed to never happen, yoy national price declines, rising delinquencies without job losses, homebuilders building without contracts, etc., are clearly happening. But we still see denial in the failure to connect the dots:
Absent a recession and job losses, the rise in delinquencies is unlikely to have an impact on the national economy, says Doug Duncan, chief economist of the Mortgage Bankers Association. But an increase in bad loans could hurt some local housing markets, "especially if you see home price declines," he says.
Perhaps Mr. Duncan hasn't been reading newspapers, but we clearly have price declines.
This is likely to become a self-sustaining debacle, a flattening of prices and decrease in sales volume lead to a rise in delinquencies and job losses in the homebuilding, real estate and mortgage industries, those exert more downward pressure on prices and sales volume, leading to more job losses and delinquencies, etc.
As it escalates, a wider group of lenders suffer losses and the wider economy dips into recession...
I think in a year or two, this will be as obviously inevitable to the average person as pet.com's demise was (with a little hindsight.)
One think that is likely to make things worse, the WSJ did one of their "economists react" pieces on the CPI yesterday, and even though the headline number was -.5% and core just .2%, many were leaning toward a rate increase. "...either the FOMC is going to have to raise rates more or live with an inflation rate that is above target levels for a long time. -- Joel Naroff, Naroff Economic Advisors"
The Fed is not going to be able to cut rates anytime soon, or it will risk losing it's inflation-fighting credibility, and they'd rather have a resession than risk that.
The Fed is not going to be able to cut rates anytime soon, or it will risk losing it's inflation-fighting credibility, and they'd rather have a recession than risk that.
And as we know, nothing demonstrates your inflation fighting credibility quite like a recession.
Bob, there is also the Fed's deflation-fighting credibility and they might rather bring in BB's helicopters (which have not made an appearance for years --how sobering a few years makes, no?) than risk that. Do recall 9/11 (see we need sobering reminders) that the advice to the President and from his lips to us was: spend.
Dryfly, the Fed is in a box on this one. If housing collapses enough, it will have a recession regardless. And if mortgage rates rise significantly, it will offset the effect of real price drops for homes and keep pushing prices down, thus producing a much faster rate of RE depreciation, more foreclosures, tighter credit, etc. One factor that moves mortgage rates higher are expectations of future inflation. So whatever the Fed is going to do, it is NOT going to inflate in order to offset housing problems, because that is doomed to be a self-defeating strategy.
Kett82, I have always subscribed to the Albus Dumbledore theory of economic analysis, which is that you are much more likely to be forgiven for having been wrong than you are to be forgiven for having been right all along.
"Accredited blamed lower-than-expected loan volumes caused by increased competition and fewer products, lower prices being paid for the loans by investors and a decline in returns on the securities created out of them. The San Diego-based company also said greater-than-expected late payments on loans it made in the last two years will cause it to increase reserves."
Piper Jaffray analyst Robert P. Napoli downgraded Accredited Home Lenders to "Market Perform" from "Outperform," lowering his price target on the stock to $34 from $45.
A little reminiscent of the analysts rating dot-coms as buys all the way to bankruptcy. I'm sure glad they cleaned up all the conflicts of interest in that industry!
Tanta, The quarterly reports of the mortgage insurers MGIC and Radian indicate severity is a bigger issue than delinquency now. The overall flavour of the reports is slow deterioration with management now focused on loss mitigation efforts. My opinion is delinquency rates won't dramatically increase until the overall economy is weaker. (2007?) However,the combination of increasing severity, slowly increasing delinquencies and weak real estate markets creates an environment where previously existing frauds and poor underwriting may be exposed and cause substantial losses in some areas.
vicjim, I'm sure you're right. What I think people don't understand about the mortgage insurers is that they've got a floor under their losses: usual coverage is no more than 78%. Below that, the investor takes it. Also, MI exposure to the recent vintages has been less than in the older stuff (see page 15 of Error 404 | Fannie Mae What ate into MI market share in the last few years was the piggyback loans.
So, basically, my view is that if the MIs are getting nervous, somebody else has it even worse. And may not be telling.
Tanta,
you are right, the MI's have been relatively responsible and disciplined this cycle, and as a result have lost significant market share as a result. A big part of their book is now 4-7 years old, meaning there has been significant amortization of the mortgage and appreciation of the underlying property. It will take quite a drop in the price of a house to get to a greater than 100% LTV if the loan is 7 years old. Not sure I would step in front of the stocks right now, but in a year or so MTG and PMI might be interesting stocks to pick up.
"In fact, the number of people falling behind on loans opened in the first six months of 2006 has increased nearly sixfold compared to the same period in 2004 and 2005, according to First American Loan Performance, a San Francisco company that tracks mortgage trends.
"There is something going on with the '06 vintage," said Mark Carrington, product manager for First American. "The '06 vintage, compared to loans of the same period from previous years, are performing much worse."
Well, the '05 vintage has a somewhat sour taste also.
I was lurking on SDCIA, and was fascinated to see the investors comparing price drops around the area. Given that they were talking 2004/2003 in some areas, I wonder if the 2004s are going to prove flawed in six months?
PS: There was one thread on there asking where the "next bubble" was going to appear.
Dirk, agree MI's have been reasonably responsible. However, because of refi's the books are quite current. Eg. Pmi's U.S. book at Dec.30 2005 was 82% less than 3 years old. Agree with Tanta that major problems (if any) will happen in other areas before MI's. My opinion is that the earliest these companies should normally be purchased is 6 months before "real" real estate prices have bottomed which could be 2 or 3 years from now. However, if there is a recession soon, delinquencies will spike, earnings will disappear and it may be profitable to buy the best companies at resulting distress prices.
All said and done; one needs to insure his or her home to be secured. While browsing through the interent for home loans i found a site called Debt Consolidation - Bills.com® Check it out!
Check out that list... McAllen TX at 6.98 ... now that's a garden spot, let me tell you. I had a friend move down there to support a plant right across the border in Reynosa. Used to cross over every morning like he was driving thru a toll booth on the Tri State.
They didn't stay long though. His wife wasn't happy there. No Ikea.
Seriously.
That national bump up of .3 % is really nothing, though. Things seem pretty healthy.
Maybe CR or Tanta knows this, but what at national deliquincy rate would we be likely to see problems in the banking industry? Also, is the deliquincy rate creeping up or ramping up quickly?
Actually it's a national bump of 15% (.3 on top of 2.03 last December). I'll admit 15% is still a relatively small number, we are also just at the beginning of this.
Charts, it's really hard to say what a delinquency rate means, especially a national average, in the absence of other information. Remember that "delinqency" means late payments, not losses. It's a leading indicator, and what it generally indicates is loss 12 months or so in the future. Of course that depends on whether you're talking a 30-day delinquency, which "leads" the longest, or a 90-day or NOD, which is nearer-term loss.
As MaxedOutMama pointed out on an earlier thread, the big wild card here is also the "vintage" going delinquent. "Normal" or "historical" experience is that most delinquencies occur in years 3-7 of a given vintage of loans. If you see increasing delinqency in more recent vintages, you have a much more serious indication of future loss than you would on a more seasoned vintage.
Because why? Because "delinquency" in and of itself may predict frequency of loss, but not severity of loss. An "old" loan that goes into foreclosure generally has more equity build-up, either through amortization or appreciation or both, to reduce the severity of the loss. Also, if you're talking about securitized loans, unexpected (above average) losses in the early years are a big problem because those new loans were supposed to be building up excess spread and overcollateralization. If--again, if--recent vintage delinquencies coincide with slower prepayments in the weakest credit tier (say, because of credit rationing on the "nontraditional" side) but same or stronger prepayments in the strongest credits because of low prime interest rates--you get serious impacts on credit support.
You also want to know what loan type is delinquent. The loss severity on a first lien mortgage might be 10%, but on a second lien more likely 100%. If the loan's an IO or neg am, the "recent vintage" problem gets turbo-charged, since you don't even have the minimal amortization you would have in recent vintages of standard loans. (And there are those of us convinced that the more IOs or neg am you have, the more cruddy appraisals you have, since the evidence suggests that people are using these products to "stretch" too hard.) The speculators, investment properties, and second homes always go first, as it were, so you want to know what percent of delinquecies are principal residences--when it gets there, you're in more trouble. Finally, you want to look at loan size. Jumbo loans tend to have very high credit quality, but they can also distort averages. One 10% loss on a large jumbo eats way more credit enhancement than one 10% loss on the smallest loan in the pool.
For a bank-owned whole loan portfolio, the "credit enhancement" issue applies to loss reserves and capital requirements.
And yes, the best data is not publically available for free on the web. Nonetheless, I'll see what I can find.
Dear CR,
Similar to dryfly and McAllen, I thought it was interesting to see Fayetteville, Springdale Arkansas on the list.
I grew up there and my parents still live there. The area is booming job wise. The unemployment rate was around 2%. Wal-Mart is headquartered there as well as rapidly growing trucking companies. And, from what I could see, it was experiencing a massive amount of housing and other construction. Also, the area had a huge influx of immigrant labor to take jobs with Tyson, a large food processor.
Just anecdotally indicates to me that it is not job loss that is leading this, but the looser lending practices.
Interesting to me, CR, that you and Tanta had pegged these practices as one of the factors a long while ago.
Also, your other theme "how much the housing related job loss" will exacerbate the decline has yet to play out.
The flip side of that WSJ report was that looser lending practices have been continuing in recent months.
You've got to think there's been some high yield leveraging racket going on with all these exotic loans - which have been pretty reliable so far. I wonder if we'll see hedge fund blow ups or some sort of bond market crash from the rising defaults.
I was just about to email that link to CR, great minds...
This is yet another inflection point, you have economists admitting loose lending can in itself lead to increases in delinquencies given a merely flat housing market. Just as you had them admitting for the first time last month that prices were likely to actually fall for the foreseeable future.
Many of the things that were supposed to never happen, yoy national price declines, rising delinquencies without job losses, homebuilders building without contracts, etc., are clearly happening. But we still see denial in the failure to connect the dots:
Absent a recession and job losses, the rise in delinquencies is unlikely to have an impact on the national economy, says Doug Duncan, chief economist of the Mortgage Bankers Association. But an increase in bad loans could hurt some local housing markets, "especially if you see home price declines," he says.
Perhaps Mr. Duncan hasn't been reading newspapers, but we clearly have price declines.
This is likely to become a self-sustaining debacle, a flattening of prices and decrease in sales volume lead to a rise in delinquencies and job losses in the homebuilding, real estate and mortgage industries, those exert more downward pressure on prices and sales volume, leading to more job losses and delinquencies, etc.
As it escalates, a wider group of lenders suffer losses and the wider economy dips into recession...
I think in a year or two, this will be as obviously inevitable to the average person as pet.com's demise was (with a little hindsight.)
One think that is likely to make things worse, the WSJ did one of their "economists react" pieces on the CPI yesterday, and even though the headline number was -.5% and core just .2%, many were leaning toward a rate increase. "...either the FOMC is going to have to raise rates more or live with an inflation rate that is above target levels for a long time. -- Joel Naroff, Naroff Economic Advisors"
The Fed is not going to be able to cut rates anytime soon, or it will risk losing it's inflation-fighting credibility, and they'd rather have a resession than risk that.
The Fed is not going to be able to cut rates anytime soon, or it will risk losing it's inflation-fighting credibility, and they'd rather have a recession than risk that.
And as we know, nothing demonstrates your inflation fighting credibility quite like a recession.
Bob, there is also the Fed's deflation-fighting credibility and they might rather bring in BB's helicopters (which have not made an appearance for years --how sobering a few years makes, no?) than risk that. Do recall 9/11 (see we need sobering reminders) that the advice to the President and from his lips to us was: spend.
As expected lots of Ca Central VAlley towns - home of NO lending standards and MASS speculation.
Bakersfield Bubble
Dryfly, the Fed is in a box on this one. If housing collapses enough, it will have a recession regardless. And if mortgage rates rise significantly, it will offset the effect of real price drops for homes and keep pushing prices down, thus producing a much faster rate of RE depreciation, more foreclosures, tighter credit, etc. One factor that moves mortgage rates higher are expectations of future inflation. So whatever the Fed is going to do, it is NOT going to inflate in order to offset housing problems, because that is doomed to be a self-defeating strategy.
Kett82, I have always subscribed to the Albus Dumbledore theory of economic analysis, which is that you are much more likely to be forgiven for having been wrong than you are to be forgiven for having been right all along.
Might want to check out this: Expired
Looks like lending is still pretty loose in subprime mortgage land.
Bloomberg re: Accredited Meltdown:
"Accredited blamed lower-than-expected loan volumes caused by increased competition and fewer products, lower prices being paid for the loans by investors and a decline in returns on the securities created out of them. The San Diego-based company also said greater-than-expected late payments on loans it made in the last two years will cause it to increase reserves."
- Bloomberg.com
Piper Jaffray analyst Robert P. Napoli downgraded Accredited Home Lenders to "Market Perform" from "Outperform," lowering his price target on the stock to $34 from $45.
A little reminiscent of the analysts rating dot-coms as buys all the way to bankruptcy. I'm sure glad they cleaned up all the conflicts of interest in that industry!
Tanta, The quarterly reports of the mortgage insurers MGIC and Radian indicate severity is a bigger issue than delinquency now. The overall flavour of the reports is slow deterioration with management now focused on loss mitigation efforts. My opinion is delinquency rates won't dramatically increase until the overall economy is weaker. (2007?) However,the combination of increasing severity, slowly increasing delinquencies and weak real estate markets creates an environment where previously existing frauds and poor underwriting may be exposed and cause substantial losses in some areas.
vicjim, I'm sure you're right. What I think people don't understand about the mortgage insurers is that they've got a floor under their losses: usual coverage is no more than 78%. Below that, the investor takes it. Also, MI exposure to the recent vintages has been less than in the older stuff (see page 15 of Error 404 | Fannie Mae What ate into MI market share in the last few years was the piggyback loans.
So, basically, my view is that if the MIs are getting nervous, somebody else has it even worse. And may not be telling.
Tanta,
you are right, the MI's have been relatively responsible and disciplined this cycle, and as a result have lost significant market share as a result. A big part of their book is now 4-7 years old, meaning there has been significant amortization of the mortgage and appreciation of the underlying property. It will take quite a drop in the price of a house to get to a greater than 100% LTV if the loan is 7 years old. Not sure I would step in front of the stocks right now, but in a year or so MTG and PMI might be interesting stocks to pick up.
From Sonoma Pressdemocrat
about foreclosure's
"In fact, the number of people falling behind on loans opened in the first six months of 2006 has increased nearly sixfold compared to the same period in 2004 and 2005, according to First American Loan Performance, a San Francisco company that tracks mortgage trends.
"There is something going on with the '06 vintage," said Mark Carrington, product manager for First American. "The '06 vintage, compared to loans of the same period from previous years, are performing much worse."
Well, the '05 vintage has a somewhat sour taste also.
I was lurking on SDCIA, and was fascinated to see the investors comparing price drops around the area. Given that they were talking 2004/2003 in some areas, I wonder if the 2004s are going to prove flawed in six months?
PS: There was one thread on there asking where the "next bubble" was going to appear.
Dirk, agree MI's have been reasonably responsible. However, because of refi's the books are quite current. Eg. Pmi's U.S. book at Dec.30 2005 was 82% less than 3 years old. Agree with Tanta that major problems (if any) will happen in other areas before MI's. My opinion is that the earliest these companies should normally be purchased is 6 months before "real" real estate prices have bottomed which could be 2 or 3 years from now. However, if there is a recession soon, delinquencies will spike, earnings will disappear and it may be profitable to buy the best companies at resulting distress prices.
All said and done; one needs to insure his or her home to be secured. While browsing through the interent for home loans i found a site called Debt Consolidation - Bills.com® Check it out!