Reggie Middleton is an entrepreneurial investor who guides a small team of independent analysts, engineers & developers to usher in the era of peer-to-peer capital markets.
1-212-300-5600
reggie@veritaseum.com
Alas, as I update the open source mortgage default model to compare the month of March 2009 with that of April 2009, I see that mortgages have not only continued their downward plunge in economic value, that plunge has significantly accelerated in many cases. There are some indications where the delinquencies have moderated or reversed, but I am assuming the mortgage modification efforts have allowed many banks to reclassify the status of enough delinquent loans to skew the results upwards. The foreclosures in all classes have spiked, and this spike should be even sharper in the upcoming months as the cessation of the moratorium on foreclosures works its way through the system. My thoughts on the effects of mortgage modifications on the delinquency rate is an assumption, and not backed empirically, but I am confident on my bearish perception of those who participated in the biggest ponzi scheme this country has ever known. This ponzi scheme is NOT housing or mortgage based. It is credit and lending based. There was never a subprime crisis, it was an underwriting crisis! That means that what we have seen in the housing and the subprime/Alt A mortgage markets will be replicated in the auto loan, leasing, commercial mortgage, credit card, consumer and commercial loan markets as well. As you can see, I am still very bearish on lenders, and that bearishness is now proving to be more profitable in the manufacturing, services and industrial sectors than in the banking industry.
To explain, the banking industry and Wall Street's foibles have now worked their way down to Main Street. There unwillingness and inability to lend after just lending to practically every entity that should never have received the amount and type of credit that they did receive during a hot asset bubble has created a rash of insolvencies. I have found several insolvent, and near insolvent companies, with significant debt rollover and obligations due within 5 months (I will be releasing previews to these opinions with a week to subscribers). Of course, if the lending markets are as willing to lend as CEOs and government officials contend, and if the economic shoots of recovery are as green as the media and the anti-Reggie pundits allege, then these companies should find fruitful and willing lending markets in which to rollover their debt and finance their obligations. I doubt so very seriously, but then again, I never went for the Green Shoot Sh1t any way. More like Brown Turds of Fertilizer.
Now that banks are officially stingy as hell in the lending department and the securitization industry as the largest source of credit in the world is officially busted, the companies, entities and individuals that they showered with imprudent credit are going to see the insolvent side of hell as:
- this stuff either comes due or;
- the debt service becomes too onerous to meet due to "Alice in Funkyland" business plans and projections, or;
- the rapid deflation of asset prices and subsequent values causes the previously attractive borrower to look as insolvent as they actually are. Remember, equity value actually equals assets minus liabilities. If you loaded up on liabilities, and your assets decrease in value to less than your liabilities, you are worth less than zero - or you can just blame it on short sellers like GGP (see GGP and the type of investigative analysis you will not get from your brokerage house), Bear Stearns (Is this the Breaking of the Bear?) and Lehman Brothers (See "Is Lehman really a lemming in disguise?").
The combination of zombie construction projects still being erected (see Who are ya gonna believe, the pundits or your lying eyes?), a year after the start of a recession during the worst global (and national) credit crisis in history, and an extant glut of housing, apartment, retail, commercial and office space, standing on top of historically near-peak unemployment, form the backdrop to mortgage delinquencies that appear to not even be near their zenith being held by banks that aren't willing to lend.
- America, You have been outright lied to! Bamboozled! Swindled! Hoodwinked! The Worst Case Scenario
- Regarding Housing Price Decline, You Ain't Seen Nothing Yet
Alt A loans:
Source: New York Fed |
I have warned about Alt A loans in the beginning of the year - see The banking backdrop for 2009. As of April 30, 2009 there were nearly 2 mn Alt A loans outstanding, each with an average balance of $321,293, representing $651 bn (down from $658 bn in March 2009) of total Alt A loans (avg FICO score of 705). California with 43.8% of total Alt A loans (avg FICO score of 709) had the largest share of Alt A loans followed by Florida (9.4% of total Alt A with avg FICO score of 700) and New York (5.6% of Alt A loans with avg FICO score of 704).
Alt A Gross Charge off's: The root cause of the credit crisis is still getting worse, net-net!
In April 2009 36.7% of Alt A loans had least one late payment in the past one year, up from 35.8% in March 2009. Florida had the highest percentage of late payments with nearly 49.5% (48.5% in March 2009) of Alt-A loans with at least one late payment over the past one followed by Nevada (45.1%) and California (42.7%).
In April 2009 Alt A loans 30-89 days past due declined to 8.2% compared with 9.1% in March (this may be due to loan modification efforts which have reclassified the status of delinquent loans). Alt A loans 90+ days past due increased by a modest 20 basis points to 8.9% from 8.7% in the month of March. California and Nevada with 11.6% and 10.7% of Alt A loans 90+ days past due had the highest delinquency rates in U.S.
Total Alt-A loans past due (pro rata share, based on weighted average with weights based on average loan outstanding at each state) stood at 17.1% as of April 31, 2009 compared with 17.7% in March 2009. Although delinquent loans declined marginally by 60 basis points, Alt A loans under foreclosure increased 100 basis points to 9.3% in April 2009. REO loans stood at 3.4% of total loans in April 2009.
Overall 30.5% of Alt-A loans had high risk of default in April 2009 compared with 30.41% in March 2009.
|
Source: New York Fed
Source: New York Fed |
Current LTV:
To predict the current LTV for Alt-A loans we have used LTV at origination in conjunction with housing price decline for each of the states where loan was originated and loan vintage.
As housing prices continued to decline, current LTV for Alt A loans increased to 119% in April 2009 versus 116% in March 2009.
| Alt A loans | |||
| State | LTV at origination | Housing price decline | Current LTV |
| CA | 78% | -39% | 127% |
| FL | 81% | -36% | 128% |
| NY | 77% | -15% | 91% |
| NJ | 79% | -27% | 109% |
| WA | 84% | -6% | 89% |
| VA | 83% | -27% | 113% |
| MD | 82% | -28% | 113% |
| IL | 84% | -23% | 109% |
| AZ | 81% | -45% | 149% |
| MA | 78% | -16% | 93% |
| GA | 87% | -17% | 105% |
| CO | 86% | -9% | 94% |
| NV | 83% | -49% | 164% |
| TX | 86% | -4% | 90% |
| Total | 81% | -25% | 119% |
Source: FDIC, Boom Bust Blog analysis
To determine net charge-offs for Alt-A loans we have considered recovery rate based on historical recovery rates along with current LTV's. The table below presents summary of recovery rates used to determine net charge-offs'.
|
|
Current LTV |
Recovery rate |
Basis |
|
|
|
Greater than |
120% |
8.9 |
(recovery rates during 1990-1991, lowest since 1976) |
||
|
Greater than |
110% |
14.9% |
|||
|
Greater than |
100% |
21.0% |
(average recovery rate since 1976) |
||
|
Greater than |
90% |
28.0% |
|||
|
Less than |
<90% |
35.0% |
(highest recovery rate since 1976) |
||
Source: FDIC, Boom Bust Blog analysis
(The above recovery rates are based on average recovery rates since 1976. These recovery rates could be on a conservative side considering recovery rate for banks declined to 8.9% in 2008, according to latest DIC data.)
Net Charge offs:
| Alt A loans | ||||||
| State | Total Loans past due | Foreclosed Loans | REO loans | Gross Charge offs | Recovery Rate | Net Charge offs |
| CA | 12% | 11% | 5% | 36% | 9% | 32% |
| FL | 9% | 23% | 3% | 42% | 9% | 39% |
| NY | 8% | 8% | 1% | 26% | 28% | 19% |
| IL | 6% | 11% | 4% | 29% | 21% | 23% |
| TX | 3% | 2% | 1% | 11% | 35% | 7% |
| NJ | 7% | 13% | 1% | 30% | 21% | 24% |
| MI | 6% | 4% | 7% | 25% | 9% | 23% |
| MD | 10% | 7% | 3% | 29% | 15% | 25% |
| MA | 8% | 8% | 2% | 26% | 28% | 19% |
| PA | 5% | 4% | 1% | 17% | 15% | 14% |
| OH | 4% | 6% | 2% | 19% | 21% | 15% |
| AZ | 8% | 9% | 5% | 30% | 9% | 27% |
| Total | 17.1% | 9.3% | 3.4% | 30.5% | 20.3% | 26.6% |
Source: New York Fed FDIC, Boom Bust Blog analysis
Overall net charge off for Alt-A loans (cumulative 2 years assuming current delinquent and foreclosed loans turn into expected charge-off over a two year time horizon) is expected to reach as high as 26.6%, up from 25.6% estimated in March 2009. (Primarily off lower recoveries and increased LTV partially offset by marginal decline in delinquencies)
Subprime loans:
As of April 30, 2009 there were nearly 2.56 mn subprime loans outstanding, each with an average balance of $180,999 representing $461 bn of total subprime loans (avg FICO score of 617). Total value of subprime loans declined to $461 bn in April 2009 compared with $467 bn in March 2009.
|
California and Florida together constituted nearly 25.5% and 10.5% of total subprime loans. As of April 30, 2009 nearly 39% of subprime loans in U.S had FICO score less than 600.
|
Subprime Gross Charge off's:
Nearly 64.3% of subprime loans had at least one late payment over the past one year compared with 64.0% in March 2009. This is a phenomenally high number that truly has no precedent that I know of in American history. The real problem is that not only is it horrible, it is getting worse month by month, despite significant government effort and rhetoric to stem the tide.
In April 2009 subprime loans 30-89 days past due declined to 14.2% over 15.3% in March 200 while loans 90+ days past due remained flat at 14.6% (again, I suspect that loan modification programs that reclassify the status of a loan may be responsible for this reduction). Massachusetts and Tennessee had the highest 90+ days past due at 19.8% and 18.6%, respectively.
Total subprime loans past due declined to 28.2% in April 2009 from 29.8% in March 2009. However, subprime loans under foreclosure increased to 12.6% from 12.1% in the previous month (and I suspect this will spike in the upcoming months as the foreclosure moratorium cessation works its way through the system) while REO loans declined to 5.8% in April 2009 from 6.3% in. March 2009. It will be interesting to see how the increase in unemployment affects these numbers in the upcoming months.
Source: New York Fed |
Overall 49.2% of subprime loans had high risk of default in April 2009 compared with 50.8% in March 2009.
|
Subprime loans 90+ days past due
|
Current LTV:
To predict the current LTV for subprime loans we have used LTV at origination in conjunction with housing price decline for each of the states where loan was originated and loan vintage.
As housing prices continued to decline current LTV for subprime loans increased to 118% in April 2009 from 115% in March 2009.
| Subprime | |||
| State | LTV at origination | Housing price decline | Current LTV |
| CA | 80% | -39% | 130% |
| FL | 83% | -36% | 129% |
| NY | 81% | -15% | 94% |
| IL | 87% | -22% | 112% |
| TX | 84% | -4% | 87% |
| NJ | 81% | -27% | 111% |
| MI | 87% | -43% | 153% |
| MD | 83% | -28% | 115% |
| MA | 82% | -16% | 97% |
| PA | 84% | -26% | 114% |
| OH | 88% | -19% | 108% |
| AZ | 83% | -47% | 155% |
| Total | 84% | -25% | 118% |
Source: FDIC, Boom Bust Blog analysis
To determine net charge-offs for subprime loans we have considered recovery rate based on historical recovery rates along with current LTV's. The table below presents summary of recovery rates used to determine net charge-offs'.
|
|
Current LTV |
Recovery rate |
Basis |
|
|
|
Greater than |
120% |
8.9 |
(recovery rates during 1990-1991, lowest since 1976) |
||
|
Greater than |
110% |
14.9% |
|||
|
Greater than |
100% |
21.0% |
(average recovery rate since 1976) |
||
|
Greater than |
90% |
28.0% |
|||
|
Less than |
<90% |
35.0% |
(highest recovery rate since 1976) |
||
Source: FDIC, Boom Bust Blog analysis
(The above recovery rates are based on average recovery rates since 1976. These recovery rates could be on a conservative side considering recovery rate for banks declined to 8.9% in 2008, according to latest DIC data.)
Net Charge offs:
| Subprime | ||||||
| State | Total Loans past due | Foreclosed Loans | REO loans | Gross Charge offs | Recovery Rate | Net Charge offs |
| CA | 16% | 15% | 11% | 55% | 9% | 2% |
| FL | 13% | 28% | 6% | 59% | 9% | 1% |
| NY | 15% | 15% | 3% | 47% | 28% | 2% |
| IL | 13% | 16% | 8% | 52% | 15% | 1% |
| TX | 10% | 4% | 2% | 32% | 35% | 1% |
| NJ | 15% | 21% | 4% | 54% | 15% | 1% |
| MI | 16% | 6% | 11% | 51% | 9% | 0% |
| MD | 17% | 12% | 7% | 51% | 15% | 0% |
| MA | 20% | 12% | 5% | 52% | 28% | 1% |
| PA | 13% | 8% | 2% | 39% | 15% | 0% |
| OH | 13% | 12% | 5% | 44% | 21% | 1% |
| AZ | 17% | 14% | 11% | 56% | 9% | 0% |
| Total | 28.2% | 12.6% | 5.8% | 49.2% | 16.6% | 41.9% |
Source: New York Fed FDIC, Boom Bust Blog analysis
Overall net charge offs for subprime loans (cumulative 2 years assuming current delinquent and foreclosed loans turn into expected charge-off over a two year time horizon) is expected to reach as high as 41.9%, up from 41.4% estimated in March 2009. (Primarily off lower recoveries and increased LTV partially offset by marginal decline in delinquencies)
Prime mortgage delinquencies appear to be the next shoe to drop:
Source: S&P, Mortgage Banker Association, Bloomberg |
Delinquencies in the U.S continue to increase without any signs of revival. In the month on May 2009, mortgage foreclosures for prime loans increased to 5.94% up from 5.46% in April 2009 and 4.89% in March 2009 while mortgage foreclosures for Alt -A loans spiked to 9.78% from 9.0% and 8.0% in April and March 2009, respectively. Overall mortgage foreclosures in U.S for all loans increased to 10.12% in May 2009 from 9.56% in April 2009 as U.S housing prices continued to decline with S&P Case Shiller index declining 0.60% month-on-month in April 2009 and 2.2% in March 2009. This is actually very bearish, indeed.
|
Trends in delinquencies - U.S banks
|
Trends in U.S banking industry:
Notice the difference in exposure now as compared to the S&L crisis era (1987 to 1993). We have literally three times as many loans to go bad while the delinquency trend is already about to surpass that era, and we are not even finished this downcycle - not by a long shot!
U.S bank's net interest margin
Source: FDIC
Despite significant government welfare and ZIRP policies, net interest margins (lending related profitability gross of credit issues) are at a 33 year low!
In 2008 total loans (net of unearned income) increased 2.2% to $6,682 bn while delinquent loans (including 30-89 and 90+ days past due) and nonaccrual loans increased by a whopping 74% and 132% to $199 bn and $137 bn. respectively. Delinquent loans as percentage of total loans increased to 2.99% at the end of 2008 while nonaccrual loans increased to 2.0% of total loans. Gross charge-offs as percentage of total loans increased to 1.46% at the end of 2008 while recoveries as percentage of charge offs declined to 9.0% in 2008 compared with 18% in 2007. Resultantly net charge offs increased to 1.33% of total loans from 0.58% in 2007. U.S bank's net interest margin has declined consecutively since early 1990's falling to 2.95% in 2008 from 4.23% in 1993.
Relevant links:
- America, You have been outright lied to! Bamboozled! Swindled! Hoodwinked! The Worst Case Scenario,
- The Real Stress Test Results;
- and Reggie Middleton Releases More Goldman Sachs Secrets that Tim Geithner Might not Share with You!
- as well as The Truth About the Banks Has Been Released: the open source spreadhseet edition;
- Welcome to the Big Bank Bamboozle! and
- The Re-Release of the Open Source Mortgage Default Model]
- Tricky Dick Bank Reporting Schemes - What record earnings are you referring to?]
- § WFC Investment No...
- § WFC Investment No...
- § PNC SCAP Results ...
- § PNC SCAP Results ...
- § BoomBustBlog.com'...
- § Small retail bank 1Q09
- § PNC Simulated Gov...
- § Sun Trust Banks S...
- § MS Simulated Gove...
Contributed Reading:
- Debt - Thoughts On A Global Problem (Part 1),
- Banking out of Control (Part 2)
Recommended Reading - The Asset Securitization Crisis:
- Intro: The great housing bull run - creation of asset bubble, Declining lending standards, lax underwriting activities increased the bubble - A comparison with the same during the S&L crisis
- Securitization - dissimilarity between the S&L and the Subprime Mortgage crises, The bursting of housing bubble - declining home prices and rising foreclosure
- Counterparty risk analyses - counter-party failure will open up another Pandora's box (must read for anyone who is not a CDS specialist)
- The consumer finance sector risk is woefully unrecognized, and the US Federal reserve to the rescue
- Municipal bond market and the securitization crisis - part I
- Municipal bond market and the securitization crisis - part 2 (should be read by whoever is not a muni expert - this newsbyte may be worth reading as well)
- An overview of my personal Regional Bank short prospects Part I: PNC Bank - risky loans skating on razor thin capital, PNC addendum Posts One and Two
- Reggie Middleton says don't believe Paulson: S&L crisis 2.0, bank failure redux
- More on the banking backdrop, we've never had so many loans!
- As I see it, these 32 banks and thrifts are in deep doo-doo!
- A little more on HELOCs, 2nd lien loans and rose colored glasses
- Will Countywide cause the next shoe to drop?
- Capital, Leverage and Loss in the Banking System
- Doo-Doo bank drill down, part 1 - Wells Fargo
- Doo-Doo Bank 32 drill down: Part 2 - Popular
- Doo-Doo Bank 32 drill down: Part 3 - SunTrust Bank
- The Anatomy of a Sick Bank!
- Doo Doo Bank 32 Drill Down 1.5: Wells Fargo Bank
- GE: The Uber Bank???
- Sun Trust Forensic Analysis
- Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street
- Goldman Sachs Forensic Analysis
- American Express: When the best of the best start with the shenanigans, what does that mean for the rest..
- Part one of three of my opinion of HSBC and the macro factors affecting it
- The Big Bank Bust
- Continued Deterioration in Global Lending, Government Intervention in Free Markets
- The Butterfly is released!
- Global Recession - an economic reality
- The Banking Backdrop for 2009
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