Posted by Ray on August 20, 2009 under Main | 
This has been our main concern for some time, in the residential market, as Prime and Jumbo loans are getting ready to reset in the coming years. This, of course, is if they have not reset already because once the LTV, loan-to-value, reaches a certain point the interest rate automatically can reset. I am going off of memory, but I believe the LTV is about 120% or so that causes these loans to reset. We are there and then some.
Here is a disturbing figure, 1 in 8 homeowners are either delinquent or entering the foreclosure process in America, according to the Mortgage Bankers Association, MBA for short. That is pretty scary to say the least and with unemployment initial claims increasing over the last few weeks this number may increase. The good news is that sub-prime loans are being foreclosed on at a lesser rate than before, eventually everyone will be out of their homes and this number will go to zero soon.
However, we are talking about prime loans, these are fixed rate conforming loans with 20% down and good credit. This, my friends, is a major problem and one that we knew was coming for some time now. What this means is much more bad news in the coming months as many of these loans are securitized. However, the intervention of the government will more than likely lessen the impact of the growing problem, but it will drive the deficit higher, so much for Obama cutting his $1.8 trillion dollar deficit last night.
Here is what Jay Brinkmann, MBA’s Chief Economist, has to say:
“The rise in prime fixed-rate foreclosures can largely be attributed to unemployment” he said.
The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.24 percent of all loans outstanding as of the end of the second quarter of 2009, up 12 basis points from 9.12 percent the first quarter of 2009, and up 283 basis points from 6.41 percent one year ago, the MBA said in its National Delinquency Survey.
The delinquency rate breaks the record set last quarter. The records are based on MBA data dating back to 1972.
So, nothing to see here, just move along as I am sure the media will spin this, somehow. I suspect they will point out that the sub-prime loans are not defaulting as bad anymore, they can’t go beyond zero, and completely ignore the prime mortgage problem. However, add this to commercial real estate, which is down 36% year-over-year a much further decline than residential real estate collapse, then the problems just keeps growing. Again, unemployment is the problem and until that turns we will continue to see further deterioration of the credit markets.
To illustrate this point, corporate defaults are through the roof this year, which is why I sold my high yield funds last week. According to the Financial Times corporate bond defaults reached 201 this year with $453B of debt. Compare that to last year where we had 126 defaults with a total of $433B and I think you can see the problem. The current default rate on high yield bonds is 8.58% this year, so far, and is expected to climb to 14.53% in 2010 taking out the prior record of 12.54% defaults in 1991 when junk bonds blew up big time.
As you can see, everything is fine, no problems at all. The markets are sure to continue its steepest market rally ever rising 49% since march, outpacing the 1929-1933 44% rally. I guess the new normal of a high unemployment, revenue-less, earnings-less, and growth-less recovery means that the markets can have the greatest percentage gain ever, in only 5 months, and should continue forever. I am kidding of course, this thing looks ugly and makes me question what is really going on.
Subscribe to Annuity IQ's Feed
LS Blogs
Sphere: Related Content
Posted by Ray on August 14, 2009 under Main |
Of course the story is really being spun as a ‘good thing’ for lenders who are receiving the keys to commercial property, but even the media admits that it is hurting commercial mortgage backed securities, CMBS. Regardless, I believe this to be the beginning of a very bad trend that will be the 2 of the 1-2 punch for banks.
The residential mortgage market was big, but the commercial mortgage market is even bigger which has me concerned. Since the consumer is not coming back anytime soon it is safe to assume that sales will slump and many businesses will fail. As businesses fail the real estate they occupy is vacant with no income coming in and worthless until the bank can unload it. However, given the depth of this downturn there will not be the level of interested buyers available to pick up this slack.
This will lead to defaults on commercial mortgages and banks getting hurt, but since most of these mortgages were securitized as well then the holders of the paper will get crushed. The way that these tranches of CMBS were divvied up it does not take a high rate of delinquencies for the paper to become relatively worthless. If the securities are worthless than banks and other institutions holding them will be forced to take a loss, kind of.
Since the FASB relaxed the mark-to-market rules the full losses do not have to be realized which is, again, postponing the problem to a future date. Even though they do not have to mark the full loss the shear amount of this paper on the books will make many firms incur significant losses, specifically regional banks who are not ‘too big to fail.’ This just increases my reluctance to even look at a Regions or other regionals at this time.
The CNBC.com story said this over the deterioration of the commercial real estate business;
U.S. values in the second quarter declined by 6.9 percent, easing somewhat from the 10.8 percent drop in the first quarter, IPD said.
Declines were sharpest in office properties, down 7.8 percent, with industrial properties — warehouse and distribution centers — falling 7.5 percent and apartment building values off by 5.8 percent. Retail properties, such as shopping centers and malls, recorded the shallowest decline, at 5.1 percent.
Year-to-date office and industrial property led the decline, each down 18.2 percent. Apartment building values fell 16.5 percent. Retail was down 14.1 percent.
This problem is not just in the US it is also in the UK as well, which makes this another global problem. While the story frames this significant decline as ‘less bad’ you have to consider that the 6.9% decline in the second quarter was in addition to the 10.8% decline in the first quarter which is a sharp contraction. To soft peddle this decline is simply irresponsible as this is just one of the many other shoes to drop. Unfortunately this shoe has already dropped, but has not hit the floor yet so we do not know the full extent of the damage this will cause.
This 17% total 2009 decline is much greater than the 2008 commercial real estate decline. This is déjà vu of 2008 with residential real estate, if we want to make a comparison. This should make everyone a little nervous as the economy is, at best, simply leveling out and far from any uptrend contrary to popular belief.
Subscribe to Annuity IQ's Feed
LS Blogs
Sphere: Related Content
Posted by Ray on July 28, 2009 under Economy, Main |
This is a major problem since consumer spending is 70% of GDP and the longer consumers saves, which is good, versus spend the longer the economy may remain in a slump. This combined with reduced credit available is not helping the bulls case. in fact, the spin is that consumer confidence is not indicative of how consumers behave, which is a 180 degree turn from the last positive reading which was proclaimed as “the return of the consumer.”
The index came in at 46.6 versus 49 reported last month and, more important in my opinion, consumer expectations decreased as well. Consumer expectations was reported at 62 versus the last reading of 65.5 which is a pretty substantial drop. What is the reason for this drop in confidence and expectations? Jobs.
The hope of a jobless recovery is an oxymoron at best and a foolish belief unless you do fancy footwork with the economic numbers, which is the norm nowadays. Unemployment is going to rise, we know this, and confidence will remain low as long as those 500K a week numbers continue to pour in. The good news is that the weekly unemployment numbers cannot continually come in at 500k a week, eventually there will be no one left to fire, sorry, layoff or right size.
The spin is unreal and I cannot help to think that perhaps things are better than I think, then I look at the numbers again and statements like this; “Consumers continued to rate current conditions unfavorably in July. Those saying business conditions are “bad” increased to 46.3 percent from 45.3 percent, however, those saying conditions are “good” increased to 9.1 percent from 8.1 percent. (emphasis mine on this ultra low “positive number) Consumers’ assessment of the labor market deteriorated further. Those claiming jobs are “hard to get” increased to 48.1 percent from 44.8 percent (emphasis mine), while those claiming jobs are “plentiful” decreased to 3.6 percent from 4.5 percent. (emphasis mine, who could be saying jobs are plentiful?)
Commercial mortgage backed securities are also off the charts for defaults, up 585% from one year ago to $28.65 billion and the 10th straight month of increases for defaults. Why this is not talked about is beyond me, but I guess it doesn’t fit into the view of the media as part of the recovery we are in. What effect will these defaults have is what many are wondering and my answer is none.
With government backstops on everything there will be no repercussions of defaults, which is crazy. This ultimately means 2 things:
1. We really do not know how bad things are; and
2. How much is this really going to cost th taxpayers? This is why we need to audit the Federal Reserve.
The free markets are anything but free with guarantees on everything and the ban on short selling, through SEC rules and the fact that banks are not lending out securities to short. This is the greatest orchestrated recovery I think the world has ever seen, but the repercussions will be emense.
While equities will do OK, I guess until the top line numbers actually mean something, but the dollar will suffer. like it or not the Fed is printing money and monetizing the debt. All of the money we are borrowing will devalue the dollar and countries will stop buying our debt. I know, every expert says where can they go, the dollar is the most liquid and, laughably, “stable” asset they can buy.
The fact is they can buy the Euro, it is getting deep enough to be realistic in the near future, they can buy commodities, other hard assets and in China’s case more companies. The fact is the dollar is getting risky, in my opinion, simply because of our debt load. I know everyone says inflation is not the problem, and it isn’t know, but what is a problem is devaluation which has the same effect as inflation.
In short, consumers saving their money is good and the pundits should realize this. A society built on debt is dumb and should not ben encouraged, but that is what out government is doing.
Subscribe to Annuity IQ's Feed
LS Blogs
Sphere: Related Content
