John Dugan Snap Shots on Mortgage Risks
I watched an interview on CNBC that kind of says it all about financial news coverage. I am sure you will winch when you watch it. The discussion centered around the Center for Responsible Lending’s study that expects one in five subprime loans to go into foreclosure. Readers of this blog ought to be well informed on the facts, so my purpose today is simply to allow you to observe the outrageous diversionary tactics used in this interview by the industry’s shill, the managing director of asset backed securities research for FBR, Michael Youngblood. Essentially, he just sabotaged the interview, and tries to cast vague dispersions on the methodology of the study. Methodology attacks are common diversionary tactics, along with only responding to questions, as opposed to answering them. Youngblood employs this second “communication” tactic as well. Try as I may, I didn’t get a thing from Youngblood’s pompous try and dazzle ‘em spin, other than one revealing inference he made about the industry’s prior experience with subprimes: just fine. The CRL’s spokeperson retorted to this with the obvious, there has been an historic explosion in housing prices that’s bailed even the worst borrowers out. Fed, I might add by subprime loans.
Finally, Youngblood just blatantly misleads viewers about the size of (or definition of ? playing “methodology games here are we?) the subprime market, which he pulls out of his ass as $600 billion, or 6% of the total mortgage market. Fortunately for the discerning, others offer data as well. The Mortgage Bankers Association, a trade group that represents the lending industry, estimates that subprime loans account for 14 percent of the total number of mortgages outstanding (see this reference in the CRL link above). But even the MBA numbers understates the facts, especially as it relates to the Bubble years of 2003-2006. There were $350 billion subprime loans originated in 2003, $550B in 2004, $625B in 2005, and $437B through 3Q, 06. That√¢‚Ǩ‚Ñ¢s $1.962 trillion (close to 18% of total) by my math, and it was used by many to buy or refinance housing at or near the peak in prices. John Dugan, cited below, indicates they are now 20% of originations.
In fact, perhaps CNBC would now serve it viewers well by lining up John Dugan, Comptroller of the Currency to shed light on the issue? He spoke with considerable clarity recently on the subprime and other toxic mortgages markets, and here are some bullet points that the Youngbloods of the world ought to put in their Kool-Aid and drink. Incidentally here are some projections this “researcher” put out in early 2006 on housing prices. Wonder what his model looks like now, and what FBR is doing with this dead fish’s notions? Can only imagine, but back to reality and John Dugan, his key take away is that these mortgages are not the tiny market implied by the canard, underwriting standards are far looser than before, and as importantly, a large percentage are underwater on their equity.
-5% of mortgage originations in 1994 were sub-prime; that is now up to 20%.
-Interest-only and payment-option ARMS were 2% of loan originations in 2000, they now account for 40%.
-20% of payment-option ARMs originated in the past two years have loan value greater than home value, a figure that would double to 40% if home prices were to decline another 10%. Thus many mortgage holders have significant negative equity in their homes.
-50% of the sub-prime market is now made up of √¢‚ǨÀústated income√¢‚Ǩ‚Ñ¢ mortgages where “the borrower pays the lender not to verify the borrower√¢‚Ǩ‚Ñ¢s stated income on the loan application, making it possible for the borrower to artificially inflate the size of his or her income in order to qualify for a bigger mortgage.”
-A study by the Mortgage Asset Research Institute found that 60% of applications for these ‘stated income’ loans exaggerated income by at least 50%.
-The increase in debt-servicing (“payment shock”) coming from negative amortization mortgages can be severe: if rates are reset even only by 2 percentage points the payment increase will amount to a near doubling of the amount of the initial monthly payments.
On the risk taking and spread watch is this update on emerging market credit spreads. In the wake of the Thailand turbulence they have hit all time lows (see chart below). Also is part of the answer as to what Bully is doing with his recycled stock options windfall, crowding it into the flavor du jour: emerging market debt.
Investors measure the risk of emerging market debt by comparing their yields with those of US Treasuries, seen as the safest sovereign bonds. As measured by JPMorgan’s EMBI+, a benchmark indicator, that spread fell on Wednesday to 172 basis points – one basis point is equal to 1/100th of a percentage point – over US Treasuries, equalling a record low hit last in May.
For the week ending December 13, investors poured a net $686m into emerging market bond funds. That brought inflows for the year above $6bn, exceeding 2005’s record $5.7bn inflow, said EPFR.
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