Thursday, February 14, 2008

NYTimes: Mortgage Crisis Spreads Past Subprime Loans

The question we always have to ask is "what is priced into the market?" I do believe subprime loans issues are more than priced in at this point. What I don't think is priced in is "the next leg", and issue I was talking about last fall - the move up the food chain to prime borrowers (mortgages) and then the spreading out to other forms of credit (cards, auto loans, student loans etc). I've written a few times that what subprime was to 2007 I believe credit card debt will be to 2008. Subprime is just the tip of the iceberg - the easily visible part. I also believe people severely underestimate in "housing boom states" how widespread the mortgage damage will be to prime borrowers. Cheerleaders, who like to look at trailing data point out that "hey most people are still paying their mortgages" - but this fails to look forward. Everything backward looking was in a "booming" economy (remember Q3 2007 was nearly 5% GDP)? No one wants to think forward and think that most recessions are led by job losses - not vice versa which is the current scenario. How will these borrowers react as we just BEGIN to ENTER a recession? We are just entering the belly of the snake, not just about to exit. That's why this backwards looking analysis and flaming of those who are warning of the issues as fear mongering, is in my opinion - dangerous. So again, these foreclosure and default rates are rising in a supposedly benign (or "strong") economy of mid 2007. The recession had not even started. How will the statistics look in the midst of a full blown consumer recession circa early 80s?

I do not think this is next leg is priced into the market and why I believe this 6 months and rebound scenario is nonsense. Of course I could be 100% wrong, but this is my working theory. And why I sit here daily shaking my head at all these "retail recovery" stories. I just don't think pundits understand how credit extended the average American got themselves the past half decade. Read about Mr Doyle below... and think about how many Mr Doyle's are across the country - who are now underwater on their house and have no options to refinance. Even if Bernanke takes rates to 0%. Did the Mr Doyle's make good choices? No, but that is neither here nor there. We have to deal with the effects of countless Mr Doyle's across the nation. And this is why credit card usage is surging... why 401k hardship withdrawels are surging... why people are using gift cards for buying staples. And why many people will simply be turning in their keys and walking away. <--- this is something by next December you are going to be hearing "shocking news reports of this new trend".

The pundits do not realize, it is *ALL* about housing prices. As they fall, the contraction causes after shocks throughout the system. We have a housing based economy and this 4.5% of GDP is due to housing statistic is an utter joke. This is not your daddy's 1990-91 or 00-01 recession. But we continue to be in denial stage and search for any statistic (government provided of course) to find glimmers of hope that what is happening on the ground in many states (not all states) is simply transitory and will be fixed in half a year. Again, this is going to be a regional recession and some of you are not going to feel much, if anything. To you, this is going to sound like we're talking about another country or continent. But many of our highest populated states and cities are going to be the center of the tsunami.

Now, about 5 months after I began talking about it, it is starting to show up in the mainstream press.
  • The credit crisis is no longer just a subprime mortgage problem.
  • As home prices fall and banks tighten lending standards, people with good, or prime, credit histories are falling behind on their payments for home loans, auto loans and credit cards at a quickening pace, according to industry data and economists.
  • The rise in prime delinquencies, while less severe than the one in the subprime market, nonetheless poses a threat to the battered housing market and weakening economy, which some specialists say is in a recession or headed for one.
  • Until recently, people with good credit, who tend to pay their bills on time and manage their finances well, were viewed as a bulwark against the economic strains posed by rising defaults among borrowers with blemished, or subprime, credit.
  • “This collapse in housing value is sucking in all borrowers,” said Mark Zandi, chief economist at Moody’s
  • But now, with prices falling and lenders clamping down, homeowners with solid credit are starting to come under the same financial stress as those with subprime credit.
  • “Subprime was a symptom of the problem,” said James F. Keegan, a bond portfolio manager at American Century Investments, a mutual fund company. “The problem was we had a debt or credit bubble.”
  • At the end of September, nearly 4 percent of prime mortgages were past due or in foreclosure, according to the Mortgage Bankers Association. That was the highest rate since the group started tracking prime and subprime mortgages separately in 1998. The delinquency and foreclosure rate for all mortgages, 7.3 percent, is higher than at any time since the group started tracking that data in 1979, largely as a result of the surge in subprime lending during the last few years.
  • An example of the spreading credit crisis is seen in Don Doyle, a computer engineer at Lockheed Martin who makes a six-figure income and had a stellar credit score in 2004, when he refinanced his home in Northern California to take cash out to pay for his daughter’s college tuition. Mr. Doyle, 52, is now worried that he will have to file for bankruptcy, because he cannot afford to make the higher variable payments on his mortgage, and he cannot sell his home for more than his $740,000 mortgage.
  • “The whole plan was to get out” before his rate reset, he said. “Now I am caught. I can’t sell my house. I’m having a hard time refinancing. I’ve avoided bankruptcy for months trying to pull this out of my savings.”
  • The problems are most acute in areas that experienced a big boom in housing — California, the Southwest, Florida and other coastal markets — and in the Midwest, which is suffering from job losses in the manufacturing sector.
  • And it is not just first-mortgage default rates that are rising. About 5.7 percent of home equity lines of credit were delinquent or in default at the end of last year, up from 4.5 percent a year earlier (again, in a so called 3-4% GDP year)
  • About 7.1 percent of auto loans were in trouble, up from 6.1 percent (again, in a so called 3-4% GDP year)
  • On Monday, Fitch Ratings, the debt rating firm, reported that credit card companies wrote off 5.4 percent of their prime card balances in January, up from 4.3 percent a year ago. (just getting started on this area)
  • Banks are responding to the rise in delinquencies by capping home equity lines of credit in areas with falling real estate prices. A few credit card companies have also moved to reduce the credit limits of customers they deem more risky.
  • In a conference call with analysts in December, Kenneth Lewis, the chief executive of Bank of America, said more borrowers appear to be giving up on their homes as prices fall, noting a “change in social attitudes toward default.
  • In refinancing their home in 2004, Mr. Doyle and his wife were doing what millions of other homeowners did in the last decade — tapping into the rising value of their homes for home improvements, paying off credit card debt, college tuition and for other spending.
  • The Doyles took advantage of the housing boom by refinancing their home nearly every year since they bought it in 1995 for $275,000.

Again, if you think this is exaggeration or hyperbole simply ask around in the middle class of this country (and upper middle, and lower upper) and find out how many Mr Doyle's there are out there. The house was the ultimate ATM. But this $1200 rebate check coming this summer should fix everything....right?

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