Small Banks' Reckoning Day Is Coming

Does anyone believe Bernanke that the economy is on the way to recovery...... I cannot wait for the delinquency rates 12 month from now ( especailly in the condo segment ) . More from Mish Four Dozen Georgia Banks On Problem List , Phoenix Commercial Real Estate Financier Files Bankruptcy & the WSJ BofA, LaSalle Pact Boosts Problem-Loan Load via Calculated Risk

Diese Thematik ist in Deutschland bisher nicht sonderlich behandelt worden. In unsere Schlagzeilen schaffen es meist nur die großen Investmentbanken und die Bankentitel die sich im S&P 500 tummeln. Mindestens ebenso bedeutend ist aber für das volkswirtschaftliche Bild was sich unter dem Radar bei den regionalen Instituten abspielt. Und hier droht die "Auffanggesellschaft" FDIC ( vergleichbar mit dem Bankensicherungsfonds ) eine fast nicht zu meisternde Aufgabe. Kein Wunder das hier seit Monaten verzweifelt Restrukturierungs und Abwicklungsexperten angeheurt werden um mit den Bankenpleiten fertig zu werden. Schon fast mitleidig zu beobachten wie die Fed und Bernanke hier die Wirtschaft schon wieder auf dem aufsteigenden Ast sehen. Ich hoffe eindringlich das dies wider besseren Wissen geschieht. Bin mir nach den bisherigen permanenten Fehleinschätziungen dieser Clowns da nicht so sicher. Mehr zu diesem Thema gibt es mal wieder vom unermüdlichen Mish Four Dozen Georgia Banks On Problem List & Phoenix Commercial Real Estate Financier Files Bankruptcy sowie dem WSJ BofA, LaSalle Pact Boosts Problem-Loan Load via Calculated Risk. Man darf sich schon einmal auf den Chart in 12 Monaten freuen.....

Small Banks' Reckoning Day Is Coming WSJ

Billions in Troubled Construction Loans Promise to Pose Test for Regional Lenders

According to the Federal Deposit Insurance Corp., $45.4 billion of the $631.8 billion in construction loans outstanding at the end of the first quarter were delinquent ....

Scores of banks were already suffering headaches by the end of the first quarter, according to a review by The Wall Street Journal of FDIC-filed reports by 6,919 banks that make construction loans. The smallest banks, those with total assets of less than $5 billion, faced the biggest problems ...

Nearly one in three of the banks analyzed -- or 2,182 -- had construction-loan portfolios that exceeded 100% of their total risk-based capital, a red flag to regulators, although it doesn't mean the bank is in danger of failing. ...

Even more alarming, 73 of those banks had construction-loan delinquency rates of more than 25%. Executives at all of the banks that responded to questions acknowledged the problems but expressed confidence they had the capital to weather the storm. ....

In 2007 and the first quarter of this year, U.S. banks wrote down just 0.7% of their residential construction and land assets as bad debt, according to Zelman & Associates, a research firm. Over the next five years that figure could rise to 10% and 26%, which would amount to about $65 billion to $165 billion, Zelman projects. ....

> Enjoy the must see clip from Asia on how the landscape/skyline can look like after the bubble has burst.....

> Das nachfolgende Video zeigt eindrucksvoll wie es demnächst wohl auch in einigen Teilen der USA aussehen dürfte.....

Here is one hot candidate for a ghost tower Bangkok stlye..... Leaning Tower of Padre

Hier ein ganz heißer Kandidat für die US Version ..... Leaning Tower of Padre

About 1 in 11 Mortgageholders Face Loan Problems

"Contained" :-) ...... No wonder the market was up yesterday......

Kein Wunder das der Markt gestern so freundlich war....... Jeder der denkt das die Krise im US Finanzsektor überstanden ist sollte sich die nachfolgende Grafik sehr genau ansehen. Finanztitel sollte man nach wie vor nicht mal mit der Kneifzange anfassen.

About 1 in 11 Mortgageholders Face Loan Problems NYT


grösser/bigger

The Flexible Friend.....Some Credit Card Data

Thank god the credit crisis and the recession that never started are already over.....But i assume it´s hard even for a bull trying to explain the already sky high delinquency rate.... Nice to see that the Fed ( just a few weeks ago ) and other central banks are willing to take the securitized credit card debt as collateral. Lets hope the haircut will be big enough and the way too often toxic waste won´t be rolled over indefintely.......... This post ECB Concerned Over Swap-O-Rama Exit Strategy from Mish is showing that there are already schemes in place to "design" securities to limit the haircut & to make them available as collateral . One more reason to be bullish on gold.... Especially when you take a look at this graph Federal Reserve Balance Sheet

Gottseidank ist die Kreditkrise und die nicht eingetroffenen Rezession bereits vorbei....... Dann aber sollten die bereits jetzt astronomischen Rückstandsraten bei den Kreditkarten selbst für die Daueroptimisten aber für noch mehr Beunruhigung sorgen. Immerhin ist es gut zu wissen das zur Not die Fed ( erst seit einigen Wochen ) und andere Zentralbanken auch die verbrieften Kreditkartenforderungen als Sicherheit akzeptieren. Bleibt nur zu hoffen das die angenommenen Risikoabschläge ausreichend sein werden und das diese oft fragwürdigen Papiere nicht auf alle Ewigkeit prolongiert werden ..... Wie dieses Posting ECB Concerned Over Swap-O-Rama Exit Strategy von Mish zeigt hat es nicht lange gedauert bis die Marktteilnehmer Strategien entwickelt haben um dieses System zu Ihren Gunsten zu nutzen. Wenn man das mit einem Blick auf die grafische Darstellung der FED Bilanz kombiniert hat man leicht einen gewichtigen Grund mehr langfristig eine bullishe Meinung zum Gold zu haben....UPDATE: Das paßt wie die Faust auf Auge.....Zentralbanken können auch bankrottgehen FAZ & Sind Verbraucherkredite der nächste Krisenherd? FT Deutschland
Credit-Card Firms May Look Alluring, But Threats Loom WSJ
The quickest way to pay top dollar for something you don't need is to make an impulse buy on your credit card. Investors eyeing shares in credit-card companies as a quick way to profit from an economic recovery should also resist the temptation to buy right now.

A growing feeling that stand-alone credit-card lenders will weather the economic slowdown has started to lift shares in firms like American Express Co., Discover Financial Services and Capital One Financial Corp.

But recent credit-card data indicate that none of the big card companies -- including the large card units at banks like Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co. -- are in the clear. Rising defaults could weigh on earnings for longer than expected.

Since the credit crisis began, investors have expected rising charge-offs -- the term given for losses caused by defaults -- at credit-card companies. Two big negatives were identified: Job losses and, for many borrowers, a sharply reduced ability to use home-equity loans to pay off more expensive card balances.

Credit did deteriorate. Moody's Investors Service reports that, for the card lenders it tracks, the annualized charge-off rate -- which measures defaults as a percentage of loans outstanding -- rose to 6.05% in March from 4.64% a year earlier. The charge-off rate peaked at just over 7% during the 1991 and 2001 recessions, according to Moody's.

Credit-card bulls -- believing that a recession may be avoided -- think charge-offs won't go to recession highs. If so, firms like Capital One could look forward to sharply higher earnings as lower defaults would allow lenders to ease off on the expense of building their loan-loss reserves.

But two key data points indicate defaults climbing higher, not falling fast.

First, card borrowers are starting to pay back less of their outstanding balances each month. Analysts at Oppenheimer & Co. say that a sustained decline in the amount borrowers repay each month, compared with a year-earlier, can be a leading indicator that borrowers will start to fall behind on payments.

Oppenheimer calculates that, for the companies it covers, borrowers paid back 19% of their balance on average in April, down from 19.7% in the year-earlier period. American Express's borrowers paid down 23.8% of their balances in April, down from 25% a year ago, according to Oppenheimer. Conversely, Capital One borrowers paid down 18.5% of their balances last month, up from 17.6% a year earlier.

Also worrisome are data from Moody's suggesting that borrowers are finding it harder to become current on credit-card loans once they fall behind. The ratings firm notes that the amount of loans on which borrowers have skipped three or more payments has started to rise more quickly than loans that have missed one or two. Once borrowers are three payments behind, fewer of them ever catch up.

Federal Reserve data say revolving credit outstanding -- which tracks credit-card balances -- increased 6.7% in the first quarter, compared with the year-earlier period. Borrowers are taking on more debt to support spending through the slowdown.
It's a gamble for card companies to lend more to people who are turning to relatively expensive debt because they're cash strapped.

And it's a bad bet for investors to load up on the card companies taking that gamble.

Wary of Risk, Bankers Sold Shaky Mortgage Debt

The real reason for the mess was that the so called sophisticated investors (institutional investors like pension funds, banks and hedge funds ) have done no research and obviously would be ready to win the casting for the sequel of "dumb & dumber"... Nobody was forced to buy this toxic waste and everybody with common sense ( that´s the problem) could see this coming from a very long distance. And they often call themselves "smart money"......

Niemand von diesen sogenannten institutionellen Investoren wie z.B. Pensionskassen, Banken, Hedge Fonds, Versicherungen, staatlichen Investmentfonds usw. ist gezwungen worden diesen Schrott zu kaufen. Jeder mit gesundem Menschenverstand ( da liegt wohl auch das Problem) konnte schon von weitem erkennen das diese Sache übelst ausgehen muß. Wenn man aber anscheined null Research macht und das Hirn ausschaltet braucht man sich nicht zu wundern wenn die Zeche zu zahlen ist..... Schmunzelt beim nächsten mal also wenn die Medien mal wieder vom "Smart Money" sprechen......


NYT As the subprime loan crisis deepens, Wall Street firms are increasingly coming under scrutiny for their role in selling risky mortgage-related securities to investors.

Many of the home loans tied to these investments quickly defaulted, resulting in billions of dollars of losses for investors. At the same time, many of the companies that sold these securities, concerned about a looming meltdown in the housing market, protected themselves from losses.

One big bank that saw the trouble coming, Goldman Sachs, began reducing its inventory of mortgages and mortgage securities late last year. Even so, Goldman went on to package and sell more than $6 billion of new securities backed by subprime mortgages during the first nine months of this year.

Of the loans backing the Goldman deals for which data is available, nearly 15 percent are already delinquent by more than 60 days, are in foreclosure or have resulted in the repossession of a home, according to data compiled by Bloomberg. The average default rate for subprime loans packaged in 2007 is 11 percent.

“There is a maxim that comes to mind: ‘If you work in the kitchen, you don’t eat the food,’” said Josh Rosner, a managing director of Graham Fisher, an independent consulting firm in New York.

The New York attorney general, Andrew M. Cuomo, has subpoenaed major Wall Street banks, including Deutsche Bank, Merrill Lynch and Morgan Stanley, seeking information about the packaging and selling of subprime mortgages. And the Securities and Exchange Commission is examining how Wall Street companies valued their own holdings of these complex investments.

The Wall Street banks that foresaw problems say they hedged their mortgage positions as part of their fiduciary duty to shareholders. Indeed, some other companies, particularly Citigroup, Merrill Lynch and UBS, apparently did not foresee the housing market collapse and lost billions of dollars, leading to forced resignations of their chief executives.

In any case, the bankers argue, buyers of such securities — institutional investors like pension funds, banks and hedge funds — are sophisticated and understand the risks.

Wall Street officials maintain that the system worked as it was supposed to. Underwriters, they say, did not pressure colleagues on trading desks or in research departments to promote securities blindly.

Nevertheless, the loans that many banks packaged are proving to be increasingly toxic. Almost a quarter of the subprime loans that were transformed into securities by Deutsche Bank, Barclays and Morgan Stanley last year are already in default, according to Bloomberg. About a fifth of the loans backing securities underwritten by Merrill Lynch are in trouble.

As early as January 2006, Greg Lippmann, Deutsche Bank’s global head of trading for asset-backed securities and collateralized debt obligations, and his team began advising hedge funds and other institutional investors to protect themselves from a coming decline in the housing market.

“He was really pounding the pavement,” said one hedge fund trader, who asked not to be identified because it could jeopardize his relationship with Wall Street banks.

Mr. Lippmann’s trade ideas — documented in a January 2006 presentation obtained by The New York Times — were not always popular inside Deutsche Bank, where the origination desk was busy selling mortgage securities. In the fall of 2006, Mr. Lippmann pitched bearish trades to the bank’s sales force at the same time the origination desk was bringing them mortgage deals to sell to clients.

Last year, Deutsche Bank underwrote $28.6 billion of subprime mortgage securities, according to Inside Mortgage Finance, an industry publication. In the first nine months of this year, the bank underwrote $12 billion.

Goldman Sachs also moved early to insulate itself from potential losses. Almost a year ago, on Dec. 14, 2006, David A. Viniar, Goldman’s chief financial officer, called a “mortgage risk” meeting. The investment bank’s mortgage desk was losing money, and Mr. Viniar, with various officials, reviewed every position in the bank’s portfolio.

The bank decided to reduce its stockpile of mortgages and mortgage-related securities and to buy expensive insurance as protection against further losses, said a person briefed on the meeting who was not authorized to speak about the situation publicly.

Goldman, however, did not stop selling subprime mortgage securities. The bank, like other firms, retains a piece of the securities it sells. A Goldman spokesman said the firm was not betting against the mortgage securities it underwrote in 2007.

Like Goldman, Lehman Brothers also started to hedge its huge inventory of home loans in the second quarter of this year, concerned about poor underwriting standards. But Lehman also continued to sell mortgage securities packed with shaky loans, underwriting $16.5 billion of new securities in the first nine months of 2007. About 15 percent of the loans backing these securities have defaulted.

At the center of the boom in mortgages for borrowers with weak credit was Wall Street’s once-lucrative partnership with subprime lenders. This relationship was a driving force behind the soaring home prices and the spread of exotic loans that are now defaulting in growing numbers. By buying and packaging mortgages, Wall Street enabled the lenders to extend credit even as the dangers grew in the housing market.

Not all banks continued to expand their subprime business. Credit Suisse, which had been a major player in 2005, pulled back aggressively, with its underwriting down 22 percent in 2006, compared with 2004.

But other Wall Street banks, pushing to catch these market leaders, reached out to subprime lenders. Morgan Stanley, which expanded its subprime underwriting business by 25 percent from 2004 to 2006, cultivated a relationship with New Century Financial, one of the largest subprime lenders. The firm agreed to pay above-market prices for loans in return for a steady supply of mortgages, according to a former New Century executive.

“Morgan would be aggressive and say, ‘We want to lock you in for $2 billion a month,’” said the executive, who asked not to be identified because he still works with Wall Street banks.

Loans made by New Century, which filed for bankruptcy protection in March, have some of the highest default rates in the industry — almost twice those of competitors like Wells Fargo and Ameriquest, according to data from Moody’s Investors Service.

Fremont General and ResMae, which also had high default rates, were big suppliers of loans to Deutsche Bank. Merrill Lynch had a close relationship with Ownit Mortgage Solutions, which filed for bankruptcy in December. Merrill also acquired another lender, First Franklin, for $1.7 billion in late 2006.

“The easiest way to grab market share was by paying more than your competitors,” said Jeffrey Kirsch, president of American Residential Equities, which buys home loans.

What is clear is that home loans were highly lucrative to Wall Street and its bankers. The average total compensation for managing directors in the mortgage divisions of investment banks was $2.52 million in 2006, compared with $1.75 million for managing directors in other areas, according to Johnson Associates, a compensation consulting firm. This year, mortgage officials will probably earn $1.01 million, while other managing directors are expected to earn $1.75 million.

> Can´t believe that after Ben Stein vs Jan Hatzius this is the second time i´m defending somewhat the banks. :-)

> Kann selber kaum fassen das ich nach Ben Stein vs Jan Hatzius bereits zum zweiten Mal binnen weniger Tage einige Banken verteidige. :-)

Fundamentals, not liquidity conditions, are behind MBS crash

Good luck to all the banks and especially the monoline insurers that still think that the ABX Indices ( see also The AAA Trap via Sudden Debt ) are not reflecting the market price....... But as long as they can convince the auditors.......

Viel Glück all denen die die immer noch glauben das die ABX Indizes ( siehe auch The AAA Trap von Sudden Debt ) nicht den wahren Wert wiederspiegeln..... Aber solange die Buchprüfer diese Zahlen abnehemen......


Fundamentals, not liquidity conditions, are behind MBS crash / FT
Many banks, if not financial institutions in general, would have you believe that the current rout in mortgage-backed debt is largely being driven by irrational fear. A few bad subprime debts buried around the structured universe are scaring buyers out of markets.

But, said CreditSights, in a note to clients on Wednesday, current pricing levels reflect fundamentals, even for the most highly-rated debt. Mortgage securities across the board are overrated and overvalued:

The harsh truth about the outlook for the AAA tranches - necessary downgrades, if not defaults - should put the lie to the argument that current low prices in AAA RMBS tranches - let alone AAA tranches of mezzanine RMBS CDOs - are somehow the victim of poor liquidity conditions, and do not reflect the true fundamentals of the situation.

CreditSights publish the results of a survey they have conducted on “188 individual relatively large RMBS deals”. The outlook, by all accounts, is grim.

Hat tip to Barry Ritholtz who has also more on this topic Financials: Worse than they look?

Dank an Barry Ritholtz der zum Thema ebenfalls treffendes zu sagen hat Financials: Worse than they look?

At root, CreditSights calculate a severity loss ratio for lenders on individual defaulting subprime mortgages based on mortgage market data collected over the past few weeks. The survey results indicate that such loss severity rates on mortgages are “painfully high”. They range from 24 per cent to 55 per cent - with a weighted average at 35 per cent. And they’re expected to rise. For second-lien mortgages - that is, second mortgages on a property, the loss severity rates average 94 per cent.

> By the way MBIA is on the hook if the losses for their RMBS CDO´s are greater than 22-28 percent.........

> Ganz nebenbei bemerkt ist MBIA ab Verlusten von 22-28 % bei Ihren RMBS CDO´s in der Haftung.....

So how do those figures translate into the capital structure of structured mortgage-backed debt? Foreclosure rates are rising higher and higher - which means the number of occasions when the above loss severity ratios have to be applied are increasing.

And it doesn’t look like the blame can be pinned on any particular vintages of MBS. Here’s a graph of foreclosures on vintages since 2004:

According to CreditSights, that should “up-end the idea that the 2004 vintage was perhaps sufficiently seasoned and composed of loans that had enjoyed enough home price appreciation since 2000, to avoid any further erosion.”

As it is, foreclosure rates are hovering at around 13 per cent on 2005 and 2006 mortgage debt. But CreditSights say there is “no end in sight” when it comes to that figure rising.

Consider then the outlook for delinquancy rates - a measure of mortgage loans not yet in foreclosure, but in trouble:

Add the 7 per cent delinquency rate for the 2006 vintage to the 2006 foreclosure rate at 12.6 and it’s already close to 20 per cent.

How then does that translate into the world of structured finance, and those RMBS tranches?

To trigger a default on the most secure subprime RMBS debt - rated AAA, and structured with a typical 18 per cent attachment rate - foreclosure rates would have to reach the 30 per cent.

As can be seen from the results of CreditSights’ survey, that scenario is indeed becoming “less and less unthinkable”. Adding the foreclosure and delinquancy rates takes us close to 20 per cent. Both are set to increase. Then there’s those painfully low severity loss ratios. Add it all together and that AAA debt is far, far, far from safe.

And we haven’t even mentioned prime tranches lower down the structure.

Far from mispricing RMBS, CreditSights even go so far as to suggest that actually, the ABX indices (which list AAA RMBS debt at around 80 cents in the dollar) are throwing up some pretty appropriate figures.

IndyMac Increases Credit Reserves 47 Percent to $1.39 Billion

This number from the top Alt-A originator ( 14 percent) gives a hint how ugly the situation has become beyond subprime.

That might give a hint how bad the situation for several other players is that have bought back shares hand over fist during the past years and are more involed in subprime, havn´t sold their originations etc......

bigger / größer via Calculated Risk

Forecasted Home price depreciation ranging between 6% and 10% is factored into our loss expectations that drive valuation and reserves – average HPI declines expected to be around 9%

Diese Zahlen von dem Top Alt-A Kreditgeber ( 14 %) geben ein paar klare Indizien das neben Subrpime auch andere Segmente massiv an Qualität verlieren.

Das läßt erahnen wie übel es für andere Institute aussehen muß die im Gegensatz zu IndyMac in den letzten Jahren haufenweise Aktien zurückgekauft havben und sinnlose wertvernichtende Übernahmen getätigt haben aussehen mag. Ganz zu schweigen von denen die Ihre Riskiken nicht weiterreichen konnten und noch stärker im Subprime Sektor engagiert waren.....

We Hold Direct Credit Risk On $19.02 Billion Of Total Single Family Loans Serviced In Our Whole Loans And In Non-Investment Grade And Residual Securities

> Watch the large percentage of homebuilder credit costs....

> Man beachte den gewaltigen Anteil der Rückstellungen für die Homebuilder.....

In the call they said that they had claer signs in 2005 that the market for builders has peaked, but they have ignored it. Now they are paying a high price. They have stopped making any loans to builders and have no intend to re-enter the market soon.

Im CC hat das Management zugegeben das bereits Ende 2005 ganz klare Anzeichen für Probpleme bei den Buildern zu erkennen waren. Dummerweise wurden diese ignoriert und es wirde munter weiter verliehen. Nun kommt die Rechnung. Immerhin haben Sie versprochen dieses Segment nicht weiter zu bedienen und bis auf weiteres keine neuen Kredite zu begeben.

IndyMac Bancorp Reports Third Quarter Loss of $202.7 Million, ($2.77) Per Share

• Total pre-tax credit costs were $407.7 million (versus $103.5 million in the second quarter of 2007), or a negative impact on earnings per share (“EPS”) of $3.40.
• Spread widening in the private-label (non-GSE) mortgage secondary market resulted in a loss of gain on sale and MBS securities revenue estimated at $167.2 million pre-tax for the third quarter, or a negative EPS impact of $1.39.
• After surviving the global liquidity crisis in 1998 as a REIT, we purchased a federally chartered thrift and put our entire business inside the thrift, with the result that we have no liquidity issues today, while many mortgage companies have gone bankrupt or recorded massive losses due to liquidity shortfalls.
• We protected and bolstered our capital by not repurchasing any shares since 2002 and, in fact, raised a substantial amount of capital in 2007.
• We held virtually no subprime, closed-end seconds or HELOCs for investment purposes ($112 million, or 0.3 percent of total assets at September 30, 2007).
• We were not a major subprime lender, ranking 32nd among subprime lenders (according to the National Mortgage News 2006 survey). Our subprime volume in 2006 was $2.7 billion, or 0.39 percent of the total subprime market.
• While we originated $43 billion of Option ARMs from 2005 through Q3-07, we sold all but $1.0 billion (held for investment) and $2.6 billion (held for sale), and we retained no non-investment grade or residual securities related to these loans.
• We laid off virtually all Alt-A 2005/2006 credit risk into the secondary market, retaining only $7.0 million in non-investment grade and residual securities from this production.
• We hold no investments in collateralized debt obligations (CDOs) or structured investment vehicles (SIVs) and only hold mortgage backed securities (93.5 percent of the investment grade MBS are rated AAA and AA, none of which have been downgraded).
• We made one of the only successful acquisitions this decade in the mortgage business – Financial Freedom, the largest reverse mortgage lender in the nation – while virtually all other significant acquisitions have produced very poor results.

> Almost all of the new liquidity is coming from the Federal Home Loan Banks ......

> Fast die ganze zusätzliche Liquidität kommt von Seiten der Federal Home Loan Banks ......

Our operating liquidity is at an all time high of $6.3 billion at 9/30/07, up 54% from $4.1 billion at 6/30/07, and we have no reverse repurchase borrowings or extendable assetbacked commercial paper…95% of our borrowings are deposits, FHLB advances and long-term debt

> the next slide shows a nice Level 3 aka "Mark-to-Make-Believe Gains" etc gain. Wonder why they havn´t used an assumption that would have cover the entire loss from the credit costs.......... Maybe they are conservatice.......

> Nebenbei bemerkt zeigt die nächste Grafik das auch hier mal wieder ein nicht ganz unerheblicher Level 3 aka Mark-to-Make-Believe Gains etc Gewinnbestandteil. Schon erfreulich das Sie nicht gleich eine Berechnungsgrundlage berechnet haben die gleich die gesamten Verluste im Zusammenhang mit den Kreditkosten abdeckt...... Evtl. ist IndyMac ja betont konservativ......

I want to highlight the IndyMac Presentation / pdf that is full of details about every aspect of the mortgage market

Ich möchste Euch in diesem Zusammenhang die IndyMac Präsentation / pdf ans Herz legen die vollgepackt mit Details zur aktuellen Verfassung der Hypothekenmärkte ist.

Subprime Shockwaves / Bloomberg Special with Faber, Rogers, Shiller etc..

Excellent summary ! Unfortunately is the quality of the streaming also subprime......Click on the headline to start the video. Quick summary including Syron, Chanos and Faber

Das ganze Debakel klasse zusammengefaßt. Leider paßt sich die Qualität der Übertragung dem Thema an.....Klickt bitte auf die Überschrift um das Video zu starten. Hier die Zusammenfassung der Meinungen von Syron, Chanos und Faber

Debt markets "Another pounding" Economist

Excellent stuff from the Economist ! The irony is that just 2 days after the small bump caused from subprime fears the markets are at new highs. The animal spirit of the market is unbelievable ( at least to me).

Mal wieder wunderbares vom Economist. Die Ironie der ganzen Geschichte ist das nur 2 Tage nachdem es ein kurzes absacken im Zuge der Subprimeproblematik gekommen ist gerade neue Rekorde gefeirt werden. Der sog. "animal spirit" ist wirklich ( zumindest für mich) kaum zu glauben.

Problems in America's housing market begin to undermine confidence in the global credit bubble

WHEN the man approaching you is wearing boxing gloves, it makes sense to duck. The crisis in the American subprime-mortgage market was clearly visible months ago. Too many homebuyers with a poor or non-existent payment record were lent too much money. But when the rating agencies on July 10th finally got round to acknowledging the problem, investors were clobbered. Shares briefly wobbled and the dollar sank. Swap spreads, a measure of risk aversion, reached their highest point since 2003. Credit derivatives, where much of the financial innovation in recent years has taken place, recoiled (see chart). Investors flocked to the haven of Treasury bonds.

Why were investors so slow to react? It seems they have been consistently blindsided by how widespread the subprime problems have become—as well as complacent about the potential spillover into other areas of the debt markets

At first, investors thought the subprime issue was confined to a few lenders, but the forthright website http://www.lenderimplode.com/ suggests that 97 of them have now been hit. Then they thought that defaults would be confined to a few states in the Midwest but the crisis has spread to heavily populated California and Florida.

The second delay was caused by the way that mortgages had been repackaged and sold. Initially they were bundled into residential mortgage-backed securities or RMBSs; Moody's, a rating agency, downgraded 399 of these bonds, while Standard & Poor´s, a rival, indicated it was preparing to downgrade some 612 bonds, worth $12 billion. These bonds are only a small portion of the mortgage-related market.

The RMBSs are in turn divided up and placed in instruments called collateralised debt obligations or CDOs. These were sold to a wide range of investors, depending on their tolerance for risk. One set of securities, known as an equity tranche, pays the highest returns but is the first to suffer if the underlying bonds default; other securities offer a much lower yield but a triple-A credit rating, because a lot of defaults would be needed to trigger losses.

The result of this process has, in theory, helped the market. Bank failures have been at the heart of most financial crises. But instead of the banks taking the first hit from mortgage defaults, the pain will be spread round the financial system.

However, nobody knows where the risk now lies. Many of these securities are illiquid, so regular prices are not available. Indeed, highly rated CDO tranches may still be owned by banks that do not have to put a value on these securities. They may not recognise the problem until they are forced to by auditors or by ratings downgrades. On July 11th Moody's said it may cut its ratings on tranches of 91 CDOs worth about $5 billion. “My initial analysis suggests we could see massive cumulative losses into the double-A tranches of many RMBS-backed CDOs,” says Mr Rosner. (Double-A tranches, as their name suggests, are just below triple-A.) .....

> Here the up to date charts from AAA to BBB-

This problem cropped up when two hedge funds run by Bear Stearns, an investment bank, got into trouble in June. The Bear funds had borrowed to enhance returns, and in doing so had to post collateral with lenders, known as prime brokers. When things went wrong, one of the brokers, Merrill Lynch, tried to sell its collateral but soon stopped when it transpired it was only succeeding in driving prices sharply lower. Eventually, Bear Stearns pledged some of its own money to fill the gap.

But prime brokers may also be shrinking the investor pool by increasing the margin that funds must put up when buying CDO assets; according to Matt King of Citigroup, the margin requirement on paper rated at the lowest level of investment grade has risen from 10-20% to 50%. That is bound to discourage some hedge funds.

All this may reduce the pool of potential mortgage investors. This effect may be reinforced by other developments. In recent years, there has been a concerted effort to increase the share of homeowners in America from the post-war average of around 63% to 70%. Lending standards were relaxed and deposits were no longer required. The extreme was reached with so-called NINJA loans (borrowers needed no income, job or assets). The influx of new buyers pushed up house prices, which made lenders even more eager.

But as the rating agencies have now discovered, fraud played a part too. Everybody had an incentive to do a deal, almost regardless of the homebuyers' ability to repay; the buyer hoping for a quick profit, the real-estate agent and mortgage broker hoping for a fee. And the banks did not need to be as concerned about creditworthiness as they used to be, given they would be quickly selling the loan.

Now that defaults have shot up, particularly on loans taken out last year, lending standards are being tightened. That will reduce the number of potential buyers and put downward pressure on prices.
Many homeowners are already in trouble. Figures from MacroMavens, an economic consultancy, suggest that 23% of adjustable-rate mortgages, covering loans with a value of $693 billion, are already in negative equity, where the loan is worth more than the property. But the full impact of defaults may not be felt until the low “teaser” rates on mortgages expire and push up borrowing costs. These teaser loans were done on a “two and 28” basis (with low rates applying for the first two years, and higher rates for the next 28). So the worst news from the 2006 vintage may not be felt until 2008.
Nor does default necessarily mean the end of the road. Few lenders want to foreclose, a process that takes ages, incurs massive costs and often causes the departing residents to trash the house. It is better to agree on a quick sale. But too much selling will force prices lower, weakening the rest of the portfolio.

> Much more details and a bigger version at real estate charts

>How big the problem already is and how slow the banks are offloading the properties shows the example of Countrywide. Dimitris from the Countrywide Foreclosures Blog has put up a breathtaking chart.......

> Wie schwerwiegend die Probleme der Banken inzwischen sind die ganzen Immobilien am Markt zu platzieren zeigt der o.g. Link von Countrywide.....

So it may take a while for the property of struggling borrowers to trickle onto the market. Jeffrey Kirsch of American Residential Equities, a company specialising in buying delinquent loans, says foreclosing a property can take more than three years. He doubts the housing market will bottom out until the first quarter of 2009.

The current fear is not so much that the housing market could drive America into recession, although that could still happen. The worry is more that credit conditions may get tighter. The spread paid by higher-risk European firms has increased by almost a percentage point since mid-June. Investors are shying away from some loans being offered to finance leveraged buy-outs. A slowdown in such private equity-driven bids would hit the stockmarket.

Richard Bernstein, a Merrill Lynch strategist, says excessive lending has been fuelling the growth in financial markets in recent years. But he fears that now liquidity is drying up. That means no cushion when the punch lands.

Disclosure: Short KBW Mortgage Finance Index (including Countrywide)

Number of the Day.....Late Debt Payments

The numbers for the 2nd quarter should be even worse........Click on the headline to read more.

Die Zahlen für das 2. Quartal sollten noch schlechter ausfallen......Klickt auf die Überschrift um mehr zu lesen.

More Americans fall behind on debt payments

WASHINGTON (MarketWatch) -- More Americans fell behind on their debt payments in the first quarter than at any time since the 2001 recession, despite fewer delinquencies on credit-card debts, the American Bankers Association reported Tuesday.

Delinquencies of all types of consumer loans rose to 2.42% in the first quarter from 2.23% in the fourth quarter, led by higher rates of late payments for real-estate loans. It's the highest delinquency rate for the bankers' composite delinquency index since the second quarter of 2001.
Delinquencies on home-equity loans rose to 2.15% from 1.92%. Delinquencies on property-improvement loans rose to 1.61% from 1.29%. Mobile-home loans saw their rate of delinquencies rise to 2.94% from 2.82%.

>But here comes the "bright" spot with potential for a good "spin doctor" :-)

>Aber hier kommt die "gute" Nachricht. Sollte genügen um den Spindoctor damit zu beauftragen :-)

Delinquencies of credit-card debts fell to 4.41% of all accounts from 4.56% in the fourth quarter

Mortgage Rate Rise Pushes U.S. Housing, Economy to `Blood Bath'

nothing really new but a nice summray. from "home sweet home" to "blood bath" in 24 month....always good to remember that this cover is just 2 years old and marked the peak....

nichts richtig neues aber eine erstklassige Zusammenfassung der aktuell trüben Lage. Das inzwsischen brühmte Cover im Sommer 2005 hat ziemlich genau das Top im Markt getroffen...

The worst is yet to come for the U.S. housing market.

The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, according to the National Association of Realtors. ...

Confidence among U.S. homebuilders fell in June to the lowest since February 1991, according to the National Association of Home Builders/Wells Fargo index released this week.

Housing starts declined in May for the first time in four months, the Commerce Department reported yesterday. New-home sales will decline 33 percent from 2005's peak to the end of this year, according to the Realtors' group, exceeding the 25 percent three-year drop in 1991 that helped spark a recession. `Economic Recession'
``It's not just a housing recession anymore, it looks more and more like an economic recession,'' said Nouriel Roubini, a Clinton administration Treasury Department director and economic adviser who now runs Roubini Global Economics in New York.

Goldman Sachs Group Inc., the world's biggest securities firm, and Bear Stearns Cos., the largest underwriter of mortgage-backed securities in 2006, said last week that rising foreclosures reduced their earnings. Bear Stearns said profit fell 10 percent, and Goldman reported a 1 percent gain, the smallest in three quarters. Both firms are based in New York.

The investment banks, insurance companies, pension funds and asset-management firms that hold some of the U.S.'s $6 trillion of mortgage-backed securities have yet to suffer the full effect of subprime loans gone bad, said David Viniar, Goldman's chief financial officer. Subprime mortgages, given to people with bad or limited credit histories, account for about $800 billion of the market.
Homebuilder Stocks
Homebuilding stocks are down 20 percent this year after falling 20 percent in 2006, according to the Standard & Poor's Supercomposite Homebuilding Index of 16 companies. Before last year, the index had gained sixfold in five years.

``There isn't a recovery about to happen,'' said Ara Hovnanian, chief executive officer of Hovnanian Enterprises Inc., the Red Bank, New Jersey-based homebuilder. The company's stock tumbled 42 percent this year through yesterday.

The share of people taking out all types of adjustable-rate home loans averaged 29 percent during the past three years, compared with the 17 percent average of the prior three years, according to data compiled by Mclean, Virginia-based Freddie Mac.

Higher fixed mortgage rates and stricter lending standards mean some of those borrowers won't be able to refinance into fixed-rate loans. Many of them have seen their home's value drop even as their interest rates adjust higher.

`Millions of People'
``When all these people see their mortgage payment and it's up 40 or 50 percent, they're going to say, `We can't stay in this house,''' Pimco's Kiesel said. ``And there are millions of people in this situation.''

The average U.S. rate for a 30-year fixed mortgage was 6.74 percent last week, up from 6.15 percent at the beginning of May, according to Freddie Mac, the second-largest source of money for home loans. That adds $116 a month to the payment for a $300,000 loan and about $42,000 over the life of the mortgage.

The recent increase in mortgage rates is the biggest spike since 2004. The change means buyers can afford 8 percent less house than they could five weeks ago, Kiesel said.

``Prices are going lower,'' he said.
The housing sector will push the U.S. economy into recession unless the Federal Reserve cuts its benchmark rate at the first surge in unemployment, said Kiesel, who expects the Fed to reduce rates.

Home Equity Loans
In addition to their primary mortgages, homeowners had $913.7 billion of debt in home equity loans in 2005, more than double the $445.1 billion in 2001, according to a paper by former Federal Reserve Chairman Alan Greenspan and James Kennedy on equity extraction issued by the Fed three months ago.

About a third of that money, extracted as home values surged 53 percent from 2000 to 2005, was used to buy cars and other consumer goods, according to the paper. The interest rate on those loans doubled to 8.25 percent in 2006 from 4 percent in 2003.
If the Federal Reserve lowers the rate it charges for overnight lending to banks, that would cut the prime rate that moves in tandem with it and reduce the interest on many types of adjustable home loans, including home equity mortgages.


Boom and Bust
Homebuyers who got an adjustable-rate mortgage, a so-called ARM, in 2004 have seen their rate climb by about 40 percent. That's enough to add $288 to the monthly payment for a $300,000 mortgage. The average adjustable rate last week was 5.75 percent, an 11-month high, according to Freddie Mac.

Roubini predicts the decline in U.S. home sales will last at least another 12 months, reducing the median house price by 5 percent this year and next. That would take home prices back to 2004, when the national median was $195,200.

The primary cause of the 1990 to 1991 recession was a real estate boom and bust similar to the past seven years, Roubini said. A real estate ``bubble'' in the mid-1980s led to speculative buying and lower credit standards that resulted in widespread foreclosures, he said. The defaults triggered a credit crunch that turned into an economic recession in the spring of 1990, said Roubini, who is an economics professor at New York University's Stern School of Business.

He put the chance of a recession this year at ``50-50,'' above former Fed chief Greenspan's 33 percent estimate. A recession is a decline in gross domestic product for two consecutive quarters.

A Fed survey of senior loan officers issued in April said that 45 percent of lenders had restricted ``nontraditional'' lending, such as interest-only mortgages, and 15 percent had tightened standards for the most creditworthy, or prime, borrowers. More than half had raised standards for subprime borrowers, according to the survey.


The median U.S. price for a previously owned home fell 1.4 percent in the first quarter from a year earlier, the third consecutive decline, according to the National Association of Realtors. Before the third quarter of 2006 prices hadn't dropped since 1993. The quarterly median may dip another 2.4 percent in the current period, the Chicago-based industry trade group said in its June forecast.

Increase in Foreclosures
The share of mortgages entering foreclosure rose to 0.58 percent in the first quarter, the highest on record, from 0.54 percent in the final three months of 2006, the Mortgage Bankers Association said in a report last week. Subprime loans going into default rose to a five-year high of 2.43 percent, up from 2 percent, and late payments from borrowers with poor credit histories rose to almost 13.8 percent, the highest since 2002.
thanks to http://www.recharts.com/rt/RT_1.html

Prime loans entering foreclosure increased to 0.25 percent, the highest in a survey that goes back to 1972. That's a sign that even the most creditworthy borrowers are being squeezed, Roubini said.

``We have a lot of people, even prime borrowers, who are at the edge because they either bought with no equity, they have an ARM that's seen a rate spike, or they used their house like an ATM and turned their equity into cash,'' Roubini said. ``Many of those people are under water today, and if they have to sell, it's going to drag down values in their neighborhood.''


Adjustable Rates
Some owners are selling their homes at ``fire sale'' prices to avoid foreclosure after seeing their adjustable mortgage rates spike, said Lawrence White, an economics professor at the Stern School of Business.

``Prices will continue to soften for as long as we have distressed sellers,'' White said. Some regions of the U.S. could see price declines of 10 percent in the next six to 12 months, he said. The slump probably won't cause a recession, he said.

``It's not going to be the 1929 stock-market disaster, with people jumping out of buildings, but there is going to be widely dispersed pain for the next few quarters,'' he said.

The biggest problem is volatile home prices, said Gary Shilling, head of A. Gary Shilling & Co., an economic forecasting company in Springfield, New Jersey. Shilling put the chance of a recession this year at 75 percent.

``A lot of people went out on a limb to pay the record high prices for homes, and they're in trouble now,'' he said.

`Exploding ARMs'
Borrowers who got loans with so-called teaser rates are in the biggest bind, according to Shilling. Prices surged a record 12 percent in 2005, spurring buyers to ``stretch'' to qualify for bigger loans by using interest-only ARMs or so-called option ARMs with low introductory payments.

Some have payments based on interest rates as low as 1 percent. At the end of an introductory period, the rate can more than quadruple, leading them to be called ``exploding ARMs,'' he said. Some loans allow borrowers to choose how much they want to pay, with the balance added to the loan's principle, making it possible to owe more than the home's purchase price.

``Homeowners with adjustable-rate mortgages are getting squeezed on all sides,'' said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago. Real estate taxes have surged along with home prices, and many U.S. homeowners saw their property insurance double after Hurricane Katrina ravaged Louisiana and Mississippi, she said.

disclosure: short several hombuilder, lender

Delinquencies Subprime, Prime, Total

click on the headline to read the entire story

klickt bitte auf die Überschrift um die vollständige Geschichte zu lesen

The delinquency rate on prime loans rose in the first quarter to 2.58% from 2.25% a year earlier. For subprime loans, the rate increased to 13.77% from 11.5%.

Delinquency rates on prime adjustable-rate mortgages rose to 3.69% from 2.3% a year earlier. On subprime ARMs, the rate climbed to 15.75% from 12.02%

> and when looking at this graph it should be clear which trend the delinquency rate will take......

> und bei Betrachtung dieser Grafik sollte klar sein welche Richtung die probplematischen Kredite einschlagen werden.....

CompuCredit’s Charge-offs Jump 81% in First Quarter

more proof that things are worsening.....

ein beispiel mehr dafür das die dinge sich in den usa nicht gerade bessern.....

hat tip to Regis!

CompuCredit’s Charge-offs Jump 81% in First Quarter

Net charge-offs for credit card issuer CompuCredit Corp. – which specializes in issuing cards to consumers at the lower end of the FICO scoring range – totaled $86.1 million in the three months ended March 31, and the net charge-off ratio was 13.4%.

>shocking to see the stock down over 9% on bad news.....

>merkwürdig ne aktie nach schlechten news auch mal 9% einbrechen zu sehen.....

First-quarter 2006 net charge-offs for the Atlanta-based company were 81% lower at $47.6 million and the net charge-off ratio was 8.1%.

First-quarter 2007 delinquencies in the 30+ day bucket totaled $454.1 million, up 33.6% from $340 million a year earlier. Delinquencies in the 60+ day bucket reached $350 million, rising 36.8% from $255.9 million during the same quarter of 2006.

CompuCredit on Tuesday reported a first-quarter managed net loss of $9.5 million, compared with $54.8 million of managed earnings in the first quarter of 2006. Total interest income was $86.1 million in the March quarter, up 49.7% from $57.6 million in the year-ago quarter.


“Factors adversely affecting our results included lower-than-expected fee assessments due to lower-than-expected delinquencies, the timing and extent of our marketing efforts, and the final transitional effects of discontinuing billing finance charges and fees on credit card accounts that become over 90 days delinquent,” Chairman and CEO David G. Hanna explained.

>read the bold part above twice! to bad that he isn´t mentioning the massiv write-downs..... the nar should hire the guy.....

>lest den fett gedruckten part oben bitte zweimal !? dreist hier nicht die massiven abschreibungen zu nennen.....

In spite of the “unexpected loss,” Hanna is confident of strong results for the remainder of the year, he told analysts during the company’s conference call late Tuesday. “We remain happy with the fundamentals and underlying credit quality of our business,” he added.

>pure comedy....

Still Renting / PIMCO / Hall of Fame

once more excellent stuff from pimco. mark kiesel was right in the past and it his current outlook seems aslo be spot on.

einmal mehr eine tolly analyse von pimco. mark kiesel war einer der wenigen die in der vergangenheit richtig lagen und ich denke auch seine aktuelle beschreibung trifft ziemlich genau zu.


One question my friends and colleagues have asked me repeatedly over the past six months is: Are you still renting? Yes! I sold my house over a year ago and continue to rent.

Back in late 2005, I became anxious about my investment in the “American Dream,” after spending a considerable amount of time and effort researching several factors that I felt would influence housing prices. At the time, I was nervous about housing and ended up selling my house in early 2006 after owning for eight years, and then, upon closing, published For Sale, our U.S. Credit Perspectives, June 2006 publication. A year ago, I suspected housing prices were set to take a sharp turn for the worse and more “For Sale” signs were coming.

Based on the current outlook for housing, I will likely be renting for one to two more years. While many factors that influence housing prices have turned negative, I suspect we have not yet hit bottom. In fact, housing prices should head lower throughout the rest of this year and next year as well. Why? Housing inventories remain high, delinquencies and foreclosures are set to rise as homes purchased over the past few years by speculators and individuals with teaser-rate and adjustable-rate mortgages come back on to the market, affordability is low, and sentiment and risk appetite has shifted negatively. Most importantly, the availability of credit is set to take a turn for the worse as lenders tighten credit standards.

This is all great news for renters and buyers who are patient. Over time, housing prices and interest rates should decline, resulting in improved affordability. This adjustment, however, will take time and occur over a period of years, not months. Housing is illiquid and prices are sticky. As a result, potential buyers should exercise patience and not jump back into the housing market too early. A year ago, I described the state of the U.S. housing market as “the next NASDAQ bubble.” The NASDAQ took over 2 ½ years to go from peak to trough. I suspect that housing prices could display a similar pattern, and we are still over a year away from the bottom. Given these risks, I prefer renting versus owning, and an investment strategy which favors defense versus offense.

Unwinding the Housing Bubble
Housing was an asset bubble influenced by bullish sentiment, robust risk appetite and speculation, lack of fundamental analysis, cheap money, inflated appraisals and easy lending standards. These factors helped to drive housing prices up to new levels and the unwinding of these conditions is expected to drive housing prices down. Never before have we witnessed so many people lever-up real estate with so little money down or “skin in the game.” This growth in mortgage debt and risk appetite helped fuel consumer spending and corporate profits. As such, the unwinding of this bubble will have broad consequences for the overall economy.

As the housing bubble unwinds, what are the implications for the overall economy and credit spreads? The U.S. economy will likely experience sub-par economic growth for the next year as declining housing prices lead to weaker consumer spending, slower corporate profit growth, a decline in business investment and less job creation. This environment favors reducing credit risk, especially to cyclical industries and lower-quality sectors of the market. As lending standards tighten and risk appetite turns more conservative, housing prices are likely to face a further leg down.

What’s the big picture? Declining housing prices will lead to a pullback in job creation and a sharp slowdown in corporate profit growth, causing the Fed to lower short-term interest rates by the end of this year. Despite lower short-term rates, mortgage rates may not follow downward, because more cautious lenders will charge higher spreads relative to Treasuries. In addition, credit spreads should widen as consumers rein in their risk appetite for housing and investors turn more cautious on the outlook for the U.S. economy. We will now turn to an analysis of the supply and demand factors influencing housing. These factors should help to illuminate the future path of housing prices over the next year.

Inventory
On the supply side, the inventory of new and existing homes available for sale remains near all-time highs (Chart 1). The homebuilder industry helped contribute to today’s record inventories through its bullish sentiment and aggressive land purchases over the past several years. Unfortunately, homebuilders have little incentive to stop building once they have purchased land for development. In hindsight, homebuilders bought too many lots over the past few years, expecting that the run-up in land prices would continue for several more years. Given that undeveloped land is less valuable than developed land, homebuilders went through the process of getting zoning approvals on their land and started the build-out process in order to monetize their investments.

Even when prices appeared to have peaked over a year ago, homebuilders continued to commit to new developments and communities. Meanwhile, even in the face of large discounts and concessions, housing order rates have fallen more precipitously than most expected, resulting in inventories remaining stubbornly high. Undeveloped land cannot be monetized without a completed home. The cost of carry, including completion guarantees, provides strong incentives for builders to keep building. Unfortunately, housing is like a supertanker, which takes time to slow down. In addition, homebuilders have little incentive to stop building when a home is incomplete, even if economic conditions soften. All of these factors help to ensure that once projects are started, they are completed, and also help to explain why homebuilders’ inventories have remained elevated despite aggressive incentives such as –10% to –15% price discounts.

The housing market faces potential new supply from other sources as well. First, a large portion of incremental housing demand over the past several years has come from speculators and investors. With housing prices now falling in most of the markets where speculative activity was strongest, yesterday’s marginal buyer is becoming today’s marginal seller. Not surprisingly, the inventories in highly speculative regions such as Florida, California, Phoenix and Las Vegas, have risen sharply. In some of these over-heated markets, supply represents several years of demand. Not surprisingly, homeowner vacancies are soaring (Chart 2). This trend may even accelerate as recent speculators with low initial equity, and negative future equity, choose to walk away from paying monthly mortgage payments on a losing investment, especially factoring in the cost of 4-5% real estate commissions.

Another source of new supply will likely come from rising delinquencies which will eventually turn into more foreclosures. A growing segment of recent homebuyers have bought homes using teaser-rate, adjustable-rate, and no-money-down or low-money-down mortgages. As adjustable-rate mortgages reset upward, the housing market will likely see increased foreclosures involving individuals who can’t afford the new reset rate on their mortgage. The total inventory of homes in foreclosure has risen to 437,041 homes, a +39% increase over the past year.1 The problem is not only in the subprime category, as delinquencies for both prime and subprime loans are rising (Chart 3).

In fact, the market’s primary focus on subprime ignores a major issue, which is that Alt-A and prime borrowers will also face “sticker shock” when adjustable-rate mortgages reset upward. Lehman Brothers estimates $421 billion of ARMs will reset in 2007 ($308 billion subprime and $113 billion prime) and $542 billion of ARMs will reset in 2008 ($349 billion subprime and $193 billion prime).2 Clearly, this is not just a subprime issue, but rather an ARM reset issue as both subprime and prime borrowers potentially are forced to put homes back on the market with almost $1 trillion of ARMs resetting over the next two years. What impact will this have on housing? According to a study published last month by First American CoreLogic, a total of 1.1 million foreclosures with losses of about $112 billion will occur over a period of six years or more with roughly 500,000 homes going into foreclosure over the next two years.3

größer/bigger http://www.smugmug.com/photos/136440158-O.png

Rising foreclosures will result in homes coming back on the market not only at a time when current inventories are near record levels, but also when pent-up demand for housing is low. Easy lending standards and innovations in the mortgage market over the past several years brought forward future housing demand. People who would have qualified for a mortgage in the future were given a mortgage today. Why? Lenders, hungry for yield, relaxed their underwriting standards and provided cheap money. Naturally, consumers took the bait, and levered-up with record low down payments. In fact, 46% of homes purchased in the U.S. last year had less than a 5% down payment.4 Over time, homeowners with little capital at risk and negative home equity will likely walk away from homes under water. For all these reasons, housing inventories are likely to remain high over the next few years.

Affordability and Risk Appetite
On the demand side, housing affordability remains near 20-year lows due to a sharp run-up in housing prices (Chart 4). While mortgage rates have come down slightly over the past few quarters, housing remains unaffordable for a large group of new potential buyers. This buyers’ strike will continue until prices fall and/or mortgage rates decline. Given that homebuilders can’t control the absolute level of mortgage rates, we should expect buying incentives to remain elevated over the next several quarters. Given the strong incentives for buying a new home, owners of existing homes who are forced to sell will likely be forced to lower their asking prices.

We know from the NASDAQ bubble that once risk appetite changes, prices can shift violently in the other direction. Housing is different from equities because it is much less liquid; therefore price adjustments take more time. In a down housing market, the gap between buyers and sellers widens, and volumes fall. Buyers pull back and sellers take time to realize their listing prices are too high. Eventually, housing prices in entire neighborhoods will get reset downward by the weakest hand. Just as prices went up and everyone in the neighborhood applauded the newest neighbor who bought at the top, prices will likely start to fall as financially-stretched home owners and speculators sell, and are forced out of the market. As this process unfolds, risk appetite for housing should take a sharp turn for the worse. This year’s weak start to the traditionally strong spring selling season suggests we have indeed entered the “buyer’s strike” phase of the cycle.

Credit Availability, Lending Standards and Appraisals
A major headwind for housing in the near future will be more restrictive credit availability. Lenders are already increasingly asking for income verification and higher down payments. Countrywide changed their no down-payment lending policy last month, and is now requiring homeowners to have at least a 5% stake in their homes.5 Other lenders are following Countrywide’s lead, which will result in a smaller pool of pote