WSJ: Mortgage Delinquencies Mount
Submitted by
CalculatedRisk on Tue, 01/23/2007 - 8:25pm (41 comments)
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Maybe we got this wrong, the economy is not good for most folks. The stats are fudged, but loan defaults cannot be fudged.
The stance of economists remind me of weather forecasters sometimes. When the computers forecast a new 10 year temperature high, they will forecast 1 degree less, or maybe just meeting it. They are reluctant to "cross that line" and predict a new event for the record books.
IE - nobody wants to stick their neck out and predict anything less than 0% growth. Even most bears here would have to admit, that the economy does grow most of the time.
Even though job growth remains healthy...
The 21st century has seen the weakest job growth of any "recovery" in ages. Growth barely keeps up with expansion of the workforce, and -- outside of REIC jobs -- it's all government, healthcare & retail. Hardly what would qualify as "healthy".
The job recovery is weaker than the historical averages. This trend was present during the last recovery in the 1990s as well. Automation and globalization are taking their toll on domestic job growth.
I wonder what vader thinks is so special about defaults being fudge proof? Surely these homes can be bought by (developer friends) parties interested in providing a brighter picture to represent a not-too-shabby outlook. [The reality being that the foreclosure numbers are low.]
What of the inverse? Once your development is "nearly all sold" with few "foreclosures", surely its possible to announce a slew of foreclosures and send the stock plummeting at your timing? Can this game be played by a larger party than the developer who cleans up in the volatility and possibly at the end game with a rock bottom stock price?
In the short term, I'd say just about anything can be fudged.
Maybe it really is different this time?
Moody's:
the rise in delinquencies is unusual because it comes at a time when the economy is relatively strong. Even though job growth remains healthy, "the total mortgage delinquency rate is the highest that it's been since the depths of the [2001] recession," says Mark Zandi, chief economist at Moody's
Fed's Kohn
But the current contraction in housing did follow an unusually large run-up in sales and construction and, even more so, in prices relative to the returns on other financial and real assets. Our uncertainty about what pushed home prices and sales to those elevated levels raises questions about how the market will adjust now that expectations of the rate of house price appreciation are being trimmed
I've been lurking on the CFHI forum. Don't feel like wading in there, and I'm not long or short (never heard of CFHI until a few days ago).
This will take at least a year to sort out. Even if the loan losses can be contained to just the "several million" range and all the other collateralization isn't overstated (hah!)
I think they are finished, Arthur Anderson style. Banking is nothing but servicing and reputation. Screw up either, and you are chow mein for a bigger, stronger bank.
How many depositors will kepp their accounts at CFHI? How many of the effective employees will stick around?
There have got to be some sweating bank presidents in other Florida cities now, asking nervous questions to their risk management execs...
Here is a growing trend to counter the trend you cite:
"Bank of America said profit rose a greater-than-expected 47 percent as growth in credit card fees and investment banking offset rising loan losses."
This is the "liquidity" story that might make the MEW story moot.
calmo
In my defense, debts have to be paid sometime. Statistics do not.
Yep loans can be fudged all kinds of ways, but unless you can re finance them, at some point they have to be written off. As long as the bubble increased, bad loans would be paid off by re-fis(maybe even cash out refis) or selling a moving(maybe to a larger mortgage with cash out). The problem did not go away, just put off.
I do, actually, believe in (some) job growth. As tj says, look at the sectors. I spend a lot of time chit-chatting with nurses lately. From a comparison to the median perspective, they're paid OK. (For what they actually do? That would be a different week's theme.) In any case, if you've got an RN, my hospital will hire you. Yesterday. You don't got an RN, you got an RE license, but there it is. If you fog a mirror and display the mildest interest in it, you can get a $5,000 grant for nurse's school in the proverbial heartbeat. In five years or so, that'll start paying your bills. You got a problem with that kind of investment timeframe?
But I and my homies in Credit Policy could raise maximum DTIs faster than the economy could grow jobs to bail them out, and we did. BoA--the very definition of the Smart Money, no?--promptly diversified itself into credit cards by purchasing MBNA, since the one thing somebody paying 40% of pretax income on a mortgage needs is a good credit card.
If you're BoA, you can afford the laughably prohibitive reserves you need to keep for this level of delinquencies and just roll in the late fee gravy. Some disinterested third party will keep handing you happy economic analysis you get to use to apply to your reserve calculation. It would not be prudent, at this time, to look too closely at what the job growth numbers would have to be to keep up with debt service "standards," because nobody with a certain relationship to the SEC wants to make a mockery of those footnotes to the Income Statement.
Therefore, somebody else will have to make the mockery of the footnotes. I'm from CR, and I'm here to help.
There have got to be some sweating bank presidents in other Florida cities now, asking nervous questions to their risk management execs...
Having been a risk management exec, once, and therefore such an attractive personality to those whose sunny little corner of the G/L actually makes money, I would be prepared to bet a substantial trade ticket that the RMs asked those nervous questions of themselves, a couple of years ago, thought up some plausible-sounding answers to them, assigned various probabilities to them (high, low, nonexistent, dead cert), and then parcelled out the mitigation work to the three-headed dog (policy, pricing, and process, the last one being itself a three-headed dog covering underwriting, quality control, and internal audit). Then the RM went back to her cluttered little cubicle and spent the following years talking to herself like a bag lady while the policy and process heads were lost--the first to insanity (don't require any docs), the second to "expense management" (no doc means never having to pay anybody to read them)--and it all became "priced in."
You can't run a profitable company listening to no one but your RM. You can try to run a company making your pricing people carry everyone else's weight, so to speak. I am not liking the results of that one, either.
CNN
""A vicious cycle may develop in which large deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits," Bernanke said.
"Ultimately, this expansion of debt would spark a fiscal crisis, which could be addressed only by very sharp spending cuts or tax increases, or both," he added.
The Fed chief said whatever budget decisions were taken, tax rates would need to be set at a level that achieved "an appropriate balance of spending and revenues in the long run."
Bernanke said advocates of lower taxes would have to accept lower spending on entitlement programs. Likewise, proponents of more-expansive government programs must recognize the need for higher taxes brought about by higher spending, he added.
"Unfortunately, economic growth alone is unlikely to solve the nation's impending fiscal problems," he said.
President Bush has also warned of the risks of inaction but a plan he offered to shore-up Social Security by allowing workers to invest retirement accounts in stocks and bonds was rejected by Democrats, who argued it would undermine retirement security.
Trustees for the retirement program said last year Social Security would exhaust its assets in 2040, while the trust fund for Medicare, which covers retiree health-care costs, would run dry in just 12 years."
Don't look at that war, peeps! SS will run out of Mr. Greenspan's 20-year old tax hike on working people in 30-odd years and then it will have to live merely on the income it won't have because nobody will be working in 30-odd years. We need legislation to allow people to put money in IRAs, so those banks that are currently offering IRAs get on the right side of the law. Those IRAs, by the way, are going to pay off big time, because the economy always grows and people will always be working. Well, no, we need to put the FICA money into IRAs, not the after-FICA money, 'cause there isn't any after-FICA money after the HELOC payments. It's just that some budgets need more balancing than others, and some IOUs are more equal than others. It's good to read the news. It keeps you informed.
"Growth in credit card fees" is hardly a sign of a healthy economy. High fees and penalties reflect a sub-standard borrower, just as a sub-prime home loan does. A credit-worthy person can get a very low fee card and pay it off almost every month. The main difference between credit card charges and a home loan is is that credit cards ges ugly really fast-just a few months between using the credit card to pay the mortgage and the credit card company calling every day. Credit cards will not save anyone or the economy. It is a last gasp effeort to maintain a lifestyle.
Theme this week-"be happy-don't worry-everything is going to be alright". Notice that the only items mentioned as bright spots in the State of the Union was a "growing economy" and "low unemployment". This is a meme that must be maintained to hold onto the remaining 30%.
One thing folks tend to forget, just because someone owes you money, does not mean that they will pay you back. Pump up those late fees all you want, it means little. At some point folks will know the system is gamed against them and if that happens en mass, Kattie bar the door.
Notice in England, that law abiding nation, a container ship grounded off shore and containers floated ashore. Folks made off with everything from bras to BMWs.
link
IMHO the wolves in capitalism forget frequently that only an orderly society that is mostly voluntarily orderly, is frendly to business.
Via Mish, another lender paid the last late fee: Rose Mortgage. Having been entirely innocent of who that is, I clicked on the link.
Then I clicked on "Contact Us" and then "About Us" and saw the big "We're Hiring!" orange blaze. So I clicked on "Careers." Now that I'm back on my chair:
"We are seeking Loan Officers who primarily generate their own leads and are looking for a faster turnaround time. We work with a variety of programs and investors-that means that you will find a program that works for even your most usual scenario. We offer an efficient in-house processing department that is committed to getting your loan closed quickly. Selected candidates must possess superior customer service skills and the ability to turn leads into funded loans. You must have a complete understanding of the loan process from submission to funding."
That fast turnaround on the unusual scenarios is so helpful for job growth.
"Bank of America said profit rose a greater-than-expected 47 percent as growth in credit card fees and investment banking offset rising loan losses."
This is the "liquidity" story that might make the MEW story moot.
There does seem to be some evidence (based on the last consumer credit report) that consumers are switching over to credit card debt now that MEW is running out.
I guess the record debt burdens and debt servicing costs (along with the negative savings rate) we've got in the US right now is of no consequence... so long as people keep borrowing more money.
Like all the Wall Street folks keep saying "it's OK that consumers are getting deeper in the red than ever before because it's being offset by a big housing bubble".
So foreclosures are already at recessionary levels, and expected to rise significantly higher this year, yet this will have no impact on the economy?
Is this the theme of the week?
Here's a little song that I stole
Can't be bearish, or people will call
you a troll
Don't worry, be happy
In every life we have a bubble
But if you say so, you only get in
trouble
Don't worry, be happy
Don't worry, be happy now
The theme this week was kicked off last month by the people at the Center for Responsible Lending (responsiblelending.org) their report on the subprime market spelled out the coming disaster, but since it wasn't from an investment bank, the businesses pages didn't notice.
This is a meme that must be maintained to hold onto the remaining 30%.
It took me a minute to realize what you were talking about, Neal. My mind was elsewhere. If the president's approval rating drops another point, it will be exactly equal to the usury limit. Coincidence? I hope so, or they'll be raising the limit . . .
This is the "liquidity" story that might make the MEW story moot.
While I agree with charts that there is a bigger liquidity picture than just housing & MEW... And I've been saying pretty much the same thing as he says myself (his above quote) - I would like to clarify...
I don't think anyone (myself or charts, though I won't speak for him) that...
(1) this thing will go on forever, just that it could go on a lot longer, especially if the big boys making the rules decide it is in their interest to keep it going
(2) no one I know is suggesting more CC debt is a good thing... in fact it usually, eventually, turns into a disaster. But as per point #1 it doesn't have to happen immediately or even soon
Liquidity is clearly keeping the game going. And it isn't because little old grannies in Wuhu or Chennai are investing in the American consumer - they aren't - its their state run central banks that are pushing this & they have muscle & stick-to-it-ness that individuals & even large corps don't have.
Setser's latest covers some of this... a good read as always:
Yet more evidence that emerging markets cannot create the financial assets their citizens want to hold
Domestic Chinese savers just dont seem that keen on keeping the dollar share of their portfolio constant. Come on guys, trendy modern economic theory says that a falling dollar is a reason to increase your dollar holdings and the out-performance of the Chinese stock markets is a reason to increase your holdings of US stocks. Get with the program!
[...]
It probably isn't a coincidence though that the gap between the banks deposits and the banks lending roughly matches both China's fx reserve growth and its current account surplus. The savings of the good burghers of Shanghai that are not being lent out in China are being lent to the US, with a bit of help from the central bank.
China, incidentally, isnt atypical. Brazilian private savers havent been willing to shift enough money out of Brazil to offset foreign demand for Brazilian real-denominated assets (and Brazils own current account surplus). That is why Brazils reserves are rising rapidly. They were up $32b in 2006.
Just because its crazy doesn't mean it can't continue for a while longer.
Moodys bought economy.com (Zandi's shop) within the past year or two. Understand, Moodys derives almost 40% of its revenue from structured finance-conflict of interest???
Yikes!
So does continued foreign investment mean that the tapped out consumer will be getting a check from the Bank of China to pay their bills? I think that all it means is that the bifurcation of the economy will intensify - massive failures at middle class and below, massive wealth gains in the upper classes. The stock market will no longer represent the health of the economy, but will represent only the willingness to bid up empty assets because there is little else to buy. The repatriation of the dollar will benefit the investor class, not the broke classes. The meme of a healthy economy can be continued, "on the average" the economy will grow, but it will be the story of Bill Gates on skid road. You can see this effect in the commericail real-estate market, the fundamentals are lousy (lots of vacancies) but construction and selling prices are going up because it can.
Just because its crazy doesn't mean it can't continue for a while longer.
I predicted recession for Q4 06 back in Q2 05. I cop to wrongness. At the same time, I was recommending to a great deal of derision that people hang onto their Freddie Mac MBS and pass on the Alt-As. At the end of the day, we probably all made the same amount of money, given what prepayments and did to your yield and what credit quality did to mine. I cop to a draw. I would, actually, like to know where I went wrong, since I did, I did, I did go wrong. Was my big mistake failing to tell myself that it could go on longer than I thought? That I forgot to allow for randomness?
Can somebody look up the definition of "moot" before I have to drag a lawyer into this?
Ask, and ye shall receive.... (from Moot Definition | Definition of Moot at Dictionary.com
)
moot1 /mut/
adjective
1.\topen to discussion or debate; debatable; doubtful: a moot point.
2.\tof little or no practical value or meaning; purely academic.
3.\tChiefly Law. not actual; theoretical; hypothetical.
verb (used with object)
4.\tto present or introduce (any point, subject, project, etc.) for discussion.
5.\tto reduce or remove the practical significance of; make purely theoretical or academic.
6.\tArchaic. to argue (a case), esp. in a mock court.
noun
7.\tan assembly of the people in early England exercising political, administrative, and judicial powers.
8.\tan argument or discussion, esp. of a hypothetical legal case.
9.\tObsolete. a debate, argument, or discussion.
Why are my definitions always "obsolete" and "archaic" but nobody else gets the dreaded "colloq."?
Kirk, if you tell me that "colloq." is "archaic" I'll throw my unabridged at you. I own one. It's on a stand.
ac, may I beat everyone to it? NODs are not FCs!!!!!!
Applications, on the other hand, are loans.
I think that due to the bifurcation of the economy, the apparent health of the economy can continue indefinitely, frustrating many predicters of collapse. There could be bread lines on every corner, but if sales are up at Saks does it mean the economy "on the average" is good? Can foreclosures on tract housing be outweighed by sales of mansions on Long Island? Employment, under-employment, where is the reliable benchmark in these numbers? GDP versus inflation increases-who can say what number is right? I'm not sure there will ever be a time when it can be pointed out without plausible refutation that this economy is going down the toilet until it is too late with the flush lever having already been pulled.
Neal, you make an excellent point.
I just don't cop to having predicted "collapse" of the entire economy, although I was certainly caustic about one particular sector. Maybe Kirk needs to set me straight on what "recession" means. My dictionary's too old.
grin - colloq is colloquialism. Which I personally define as regional or subculture slang. Geekspeak is full of colloquialisms, for example - whether the geeks are computer or finance or funerary or...
fwiw, moot for me is always "of little or no practical value or meaning."
And you can throw your unabridged at me. I'll counter with volumes of the OED. Betcha I have more ammo than you (grin).
Holy Lexicon, Batman, it's a dictionary arms race! Betcha don't get that on your average economics blog. What was that award CR just got?
My preferred word for "of little or no practical value or meaning" is mute. That could be obvious. But I'm a nerd, not a geek. There's a distinction without a difference for you.
There is going to be a huge number of units on the market next year, and lots of them vacant, said Carl Van Horn of Market Opportunity Research.
There are about 10,000 condos on the market along South Carolinas Grand Strand, several thousand more than a year ago, according to Tom Maeser, a real estate marketing analyst in Myrtle Beach.
Van Horn said that many of the buyers of coastal property in the past two years have been speculators or investors who purchase a property with the intention of selling it for more in the near term. Continued drop in demand could leave them, as well as developers, with unsold inventory and no cash to pay back their loans.
In the Myrtle Beach area, Tidelands Bank now has 90 percent of its total portfolio in residential and commercial real estate. If the downturn in housing continues, there will be banks out there under stress because developers cant turn enough inventory to service their debt, said Tony Plath, a professor of finance at UNC-Charlotte.
ac, may I beat everyone to it? NODs are not FCs!!!!!!
They shore seem to correlate well, though, don't they?
More seriously, about that definition of recession, I'm thinking Neal's got the germ of something that needs serious thought. Or rather, it's similar to some thoughts I've been having since my regrettable disagreement with CR about the root of it all.
A recession is determined after the event, and is simplistically known when the real GDP was negative for two consecutive quarters.
But 7% or so of GDP today is housing. And government spending is 20 or so percent. And business (as opposed to individual) expenditures has increased over the past few years. And so the economy is "doing good" because government and businesses are spending more, and by the way there's this housing bubble. And intuitively (to me, anyway), everybody spending more than they've got is neither strong nor healthy.
But I'm not sure how to measure it.
Foreclosure looms over more homes
http://www.nctimes.com/articles/2007/01/23/news/californian/riverside/20_30_321_22_07.txt
The (foreclosure) numbers have risen above historical averages but aren't cause for alarm, said Rick Sharga, vice president for marketing at [RealtyTrac]. They reflect a certain amount of catching up from the last three years, when rising real estate values and an especially brisk market allowed financially stretched homeowners to sell their way out of a heavy loan before getting too far behind on their payments, he said.
That's a new one. Higher than historical, but don't worry, it's just a catch up.
Yes, I see "mute" frequently used for that purpose. It has me grinding teeth when I do as all the definitions are rooted in the essence of "mute" being silent - unable to speak or make sound. But it's a petty thing, and so on this moot point I tend to remain mute.
"In the Myrtle Beach area, Tidelands Bank now has 90 percent of its total portfolio in residential and commercial real estate."
Since we are on 'words'... The Japanese term 'Kamikaze' is something like 'divine wind'?
Kamikaze
神風 | かみかぜ | Kamikaze
Literally "divine wind" or "wind from the gods" that blew the invading Mongolian fleet off course, saving Japan from invasion in the 13th century. Also the name of the suicide bombers of Japan's imperial armed forces during World War II.
LINK
I believe it comes from the fact Genghis Khan's attempts to invade Japan were thwarted by a major typhoon... not unlike the Spanish Armada & Elizabethan England.
So to you Low Country Developers... keep making those hurricane insurance premium payments, keep driving those big'ol SUVs and pray for a little divine wind...
If < 10% of Americans are on some sort of subsistence-enhancing transfer payment and that number goes to < 20%, will that really change anything?
They'll just get another Ronald Reagan to tell them it's a 'Shining' City not a 'Sh*tty' one. ...and get them to 'believe in themselves,' 'believe in America,' 'believe in your future....' then raise the Social Security taxes on them - and the other > 20% thru < 90% too - so what are you worrying about?
...or maybe a folksy ole, straight-walkin, tough-talkin' Texan.
Not to beat this 'liquidity' thing to death but I think what 'Neal' and 'Kirk' said above and also what 'a' posted at the end of the previous thread (#)... all tie together.
There is a bifurcation & it is real and it is BODACIOUS to steal somebodies favorite descriptor... it is focused around financial engineering & it is driven by 'liquidity'... And if you look real hard you can see its shadow... like here:
From MSN Money Central stock report 1230 ET entry...
It is worth noting that, while it is not all that unusual to see a shift in sentiment as earnings season progresses, today's reaction is fairly dramatic. No where is the renewed focus on good news versus bad more evident than in Yahoo! (YHOO 28.98 +2.02), which still posted a disappointing 61% plunge in Q4 profits and warned of lower revenue this year. Nasdaq +29.16 at 2460.57
In the earlier 1200 they give all the rah-rah reasons we expect to hear (will hear) from BODACIOUS himself why the market is up... except in there is this nugget:
Yahoo is up 6.1% as investors applaud news that an earlier than anticipated roll-out of its Panama ad search technology will be help it close the gap with rival Google (GOOG 491.70 +12.65). Sun is up 7.2% after announcing a $700 mln private placement transaction with KKR Private Equity Investors.
Now you can think the market is up because America is BODACIOUS... Or that 'Panama' is ahead of schedule - I can't prove either wrong.
But I personally think the market is 'up' because hot money from sources like KKR (and many others like it we won't see reported) is pushing the buy/sell line toward buy & heavily so.
I'd bet the likes of KKR & their clients have a bit of 'leverage' behind them too... just a skosh, maybe.
And while $700 mln is 'nothing'... there a many firms out there like KKR and they have money to burn too. It all adds up to a lot of activity.
I do contract work with a few companies 'owned' by equity firms - they are NOT tight with the purse strings when it comes to capital & expansion.
I'm not saying it is sustainable - just saying, at least for now, it is there.
VennData (such a clever tag!) gets a bad impression from the State of the Union address and grinds us with it.
Lemmesee, 40% voted last time so not likely even that number took it in. Let's be generous and assume that a third of voters paid it some attention. Of that number, those with short attention spans likely never got to the end of the President's Delivery, not to mention Webb's reply. Many may have gotten the impression from the tumultuous applause that this administration was superlative...and left it at that: better not fail my commander who is doin such a heck of a job.
But this flagrant display of successful political status is at odds with the political and economic reality that Webb's speech details.
A recession is determined after the event, and is simplistically known when the real GDP was negative for two consecutive quarters.
Okay, then let's define "real GDP". As you should all know, the nominal GDP is inflation-adjusted to arrive at the real GDP. HOWEVER, they just don't calculate inflation the way they used to...
Take a moment to visit John William's Shadow Government Statistics site and you'll see that the "classic" inflation formula would put the GDP negative since 2005Q3.