Last week I posted a Bloomberg news article supporting my suspicions that investors are putting bad loans back to the banks at an increasing rate. I used JP Morgan as a specific example -Banks
Swallow Another $30 billion or So in More Losses as Their Share Prices
Surge (Again).
A few commenters on syndicated sites appeared to have really underestimated the significance of this development. In the article, it is alleged that Freddie and Fannie are forcing banks to eat up to $30 billion in soured mortgages under the warranties and representations clauses of the sales contract. To highlight the significance of this development, let me remind all that Fannie and Freddie are benchmarks for mortgage lending in the US.
(Bloomberg) -- Taxpayer losses from supporting
Fannie
Mae and Freddie
Mac will top $400 billion, according to
Peter Wallison,
a former general counsel at the Treasury who is
now a fellow at the American Enterprise Institute.“The situation is they are losing gobs of money, up to
$400 billion in mortgages,” Wallison said in a Bloomberg
Television interview. The Treasury Department recognized last
week that losses will be more than $400 billion when it raised
its limit on federal support for the two government-sponsored
enterprises, he said.The U.S. seized the two mortgage financiers in 2008 as the
government struggled to prevent a meltdown of the financial
system. The debt of Fannie Mae, Freddie Mac and the Federal Home
Loan Banks grew an average of $184 billion annually from 1998 to
2008, helping fuel a bubble that drove home prices up by 107
percent between 2000 and mid-2006, according to the S&P/Case-
Shiller home-price index.The Treasury said on Dec. 24 it would provide an unlimited
amount of assistance to the companies as needed for the next
three years to alleviate market concern that the government
lifeline for Fannie Mae and Freddie Mac, the largest source of
money for U.S. home loans, could lapse or be exhausted.Lax regulation of Fannie Mae and Freddie Mac led to the
mortgage companies taking on too many risky loans, Wallison
said.“It turns out it was impossible to regulate them,” he
said. “They were too powerful.” He said no one knows how much
will be needed to keep the companies solvent.
With this in mind, I want to parse the logic behind my posting the
Fanie/Freddie issue in the first place. This is not
about Fannie and Freddie, this is about all investors
they have sold MBS and mortgages to as well as all insurers they have
bought insurance from. The monolines are putting bad loans back to
originators too. The admins of loan pools, CDO's etc. also wish to
minimize their losses. If the banks had to eat
a 50% loss of all of the bad loans they have sold (which is at least a
third of all of the loans sold from '05 to '08) then we are talking
significant numbers. The loss rate on subprime mortgages is nearly 50%
now.
Bloomberg
: Real estate loans at U.S. banks that are at least 90 days
overdue or that are expected to default almost doubled in 12
months to 7.1 percent, according to December FDIC data.
Non-
performing loans for construction and development rose to 16
percent from 8.6 percent....The sale of loans from failed banks in 2009 brought on
average 43 percent of their book value, according to an FDIC
summary. Non-performing loans, those on which the borrower has
defaulted or there is little prospect of repayment, were sold
for 26
percent of their book value on average.
In the meantime, the collateral behind these loans are still trending
downward in value after many hundreds of billions of US tax dollars
thrown at the situation! For residential values, see
It's Official: The US Housing Downturn Has Resumed in Earnest, -
If Anybody Bothered to Take a Close Look at the Latest Housing
Numbers... and "A
Fundamantal
Investor's Peek into the Alt-A and Subprime Market".
For commercial property values, see CRE 2010 Overview 2009-12-16 07:52:36 2.85 Mb.
Of course, this data invalidates the findings of the government SCAP
stress tests for US banks (see links towards the bottom of this post).
Now, on to the latest data available for Alt-A and subprime mortgage
performance.
The Facts as reported by the FDIC and the NY Federal Reserve Bank
(their numbers, not mine)
- Foreclosures on First Lien Mortgages increased from 11.5% as of 31st October 2009 to 11.74% as of 31st January, 2010.
- Mortgage charge-off rates on Prime loans and Alt-A loans increased by25bps and 21bps to 7.66% and 12.23% respectively over the same period.
- Delinquency rates for first lien mortgages on the other hand decreased by 7bps to 5.6%, for the quarter ended December 31, 2009.
- While Net Charge-off rates for Alt-A loans increased by 2.12% points q-o-q to 30.49% as on 31st Dec 2009, delinquency rates dropped by27bps over the same period to 12.1%.
- In the case of Subprime loans, Net Charge off rates and Foreclosure rates, both rose to 44.6% and 15.6% respectively during 4Q09, compared to 42.9% and 15.4% during 3Q09.
- Delinquency rates declined from 26.4% in 3Q09 to 25.3% in 4Q09.
- Net charge off rates for HELOCs rose 13bps to 3.34% during 4Q09 whiledelinquency rates had a negligible decline.
- Net charge-off rates and delinquency rates for Business Loans (C&I loans) marginally declined during 4Q09 remaining more or less constant at 2.5% and 4.5% respectively.
Delinquency rates under CRE loans remained steady during 4Q09 at 8.8%
when compared with 3Q09. While delinquency rates for multifamily
loans did not show any drastic changes in 4Q09, net charge-off rates
under construction loans increased considerably from 6.3% in 3Q09 to
8.4% in 4Q09
This is all against a backdrop of what was increasing home prices in many (if not most) MSAs for the quarters in question, which is a definitively positive development for it was the drop in home prices that precipitated much of the financial malaise of the last few years. Click any graph below to enlarge.
The direction of home prices has a very high correlation with foreclosures and delinquency rates (as well as unemployment), not to mention the trillion dollars or so of direct and indirect fiscal and monetary stimulus. While the delinquency data definitely shows a positive uptrend, when taken in light of what it took to get it and its correlation to home prices and employment (must read Are
the Effects of Unemployment About To Shoot Through the Roof?), I believe we are definitely in a wait and see scenario with a potentially negative outlook.
In analyzing the performance of Alt-A and subprime loans, it is
best to look at things against the backdrop of housing prices for the
comparable period. As you can see, the trend for pricing is
down for both the last quarter and December of 2009, and from my anecdotal research and
extrapolation from the data sets will be down Q1-2010 as well as for
some time after that. Thus, it is fair to say that the collateral behind
these loans will continue to be challenged. As a result of this in combination with stubbornly high unemployment, there will probably be a decent amount of pressure on delinquencies. Things have not gotten better from a fundamental or macroeconomic perspective, thus at this point I do not see a sustainable upward trend. As I stated earlier, we are in a wait and see mode.
As you can see, the residential housing uptrend is now apparently over, and we are resuming the downward decent.
Let's look at the improvement in delinquencies and losses as compared to home prices in the grand scheme of things, a birds-eye view so to speak...
Now, hopefully all can see what I mean in terms of the recent downtick in 30 delinquencies.
Loss Severity and Potential Loss Severity According to the Most Recent Data Points
Alt-A Loans
- Total loan value of Alt A loans declined from $615 bn in 3Q09 to $590 bn in 4Q09, maintaining an average FICO score of 705 in both quarters.
- In 4Q09, nearly 43% of Alt A loans had least one late payment over the past year, while 3Q09 had nearly 40.7% of such loans. In Florida nearly 57.2% of Alt-A loans had at least one late payment over the past year in 4Q09 followed by Nevada with 53.9% and California with 48.7%. The percentages were comparatively lower in 3Q09 at 54.5%, 50.9% and 46.5% respectively.
- Nearly 8.2% of Alt A loans were 30-89 days past due during 4Q09, marginally higher when compared to 8.1% in 3Q09. During 4Q09, Rhode Island and West Virginia witnessed the highest delinquencies with 11.1% and 10.6% of loans 30-89 days past due, respectively.
Subprime Loans
- Compared to 3Q09 when almost 66% of subprime loans had least one late payment over the past one year, 4Q09 fared worse with an increase in the category to 67.1%.
- This is a very interesting tidbit that many probably did not realize. The total value of subprime loans outstanding drifted from $421 bn in 3Q09 to $403 bn in 4Q09 with a constant average FICO score of 616 in both quarters. California and Florida together constituted nearly 24% and 11% of total subprime loans followed by New York and Illinois. Despite these demographics, in Florida and New Jersey nearly 75.9% and 74.5% of subprime loans had at least one late payment over the past year. It appears as if the California/Florida coastal state combo are no longer the loss leaders in the subprime malaise. It is getting worse, and it is spreading!
- As of December 31, 2009, 15.9% of subprime loans were 30-89 days past due, an improvement from 16.4% recorded as of September 30, 2009 (I sense this mostly due to the acceptance of short sales by the lender, which will end up as losses through the income statement – eventually). Mississippi and North Carolina witnessed the highest delinquencies with 19.7% and 19.5% of loans 30-89 days past due, respectively. Loans 30-89 days past due for California and Florida stood comparatively better at 11.6% and 11.9%, respectively. Again, the malaise is spreading outward and beyond the highly damaged coastal states.
- At the national level, Subprime loans 90+ days past due worsened materially and significantly in 4Q09 at 20.2% compared to 17.7% in 3Q09. Nevada and Massachusetts having the highest 90+ days past due at 27% and 26.5% of total loans, respectively California and Florida were stood at 24.6% and 18.7%, respectively as of December 31, 2009. Again, the malaise is spreading outward and beyond the highly damaged coastal states.
- Total loans past due for subprime stood at 34.3% as of December 31, 2009 compared to 32.9% in September 30, 2009. Foreclosed and REO loans stood at 13.9% and 3.7% (the REO numbers are highly suspect due to many reports on the ground indicating that banks are refusng to take back delinquent properties), respectively in 4Q09 as compared to 13.5% and 2.3% in the previous quarter. Overall, in 4Q09, 54.3% of subprime loans are in risk of default based on pro rata share (based on weighted average foreclosure / past due loans and REO loans for each state with weights based on average loan outstanding at each state), a deterioration compared to 3Q09 share of 52.6%.
- As of December 31, 2009, nearly 49.5% of current subprime loan outstanding were originated on / before 2005 while 35.2% and 15.3% of loans were originated during 2006 and 2007, respectively. These percentages stood 49.2%, 35.5% and 15.2% respectively as of September 30, 2009. With S&P Case Shiller declining by nearly 17% , 28% and 28% since 2005, 2006 and 2007, respectively most of these loans are still underwater and there has not been much improvement in view of the fact that average LTV at origination has been constant at 84% in 4Q09. As seen from the table below, the current LTV for subprime loans is at 111%, with Michigan and Arizona having the highest LTV at 147% and 141%, respectively (again, the malaise is spreading outward and beyond the highly damaged coastal states). LTV for Subprime loans remained more or less constant compared to 3Q09, due to the short-lived upward blip in home prices.
