Firing More Silver Bullets at the Vampire
Just when I thought the the whole subprime genre was disposed of and the intellectual argument slam dunked, along comes one of the biggest disinformation campaigns the scamsters and Pig Men have run yet on the topic. And here I thought and proclaimed that I was ready to go on to more force of light and righteous truth projects, namely exposing the huge worm holes in the Alt A and negative amortization prime mortgage markets. But alas I see the Ministry of Truth (MoT) has circled its wagons around a new subterfuge, namely that trouble is just a contained, cozy, little, 2006 subprime problem. So I must shoot my silver bullets one more time, starting briefly with 2006, then moving on to focus on the extremely vulnerable 2005 vintages that the MoT hopes nobody really notices. It’s a dirty job, but somebody has to do it. Yes, indeed there is a 2006 subprime problem and it hardly looks orderly, little, or cozy. Here are the latest ABX indexes. First is 06-02, and second is 06-01. And no this certainly does NOT look like just a couple hundred billion or just some speculators in Florida issue at all does it?
One of the prevailing myths out there is that 2006 vintage subprimes are the ones blowing up because lending standards for those were much looser. I had heard this enough that even I bought in to it. The reality is quite different however, as this ARM loan attribute comparison indicates. 2005 and 2006 used the same identical FICO scores on average, 622. Both used the same original LTVs of 81%. 2006 had a bit more in stated income liar loans at 46 to 42%, but that’s not enough to make a significant difference. 2006 had more piggybacks loan at 33% to 27%, but that simply means more 2006 vintage HELOC loans could be worse off, not primary mortgages. Both years had a bunch of junk loans heavily concentrated in California, but it’s about the same percentage wise at 32% and 30% respectively.
attribute comparison, click to enlarge:
In fact the only key difference between 2005 and 2006 is that the initial interest rate on the 06′s was higher than 05: 7.92% vs 7.17% . That alone explains much of why ’06 got in trouble quicker, but how does that let 2005 off the hook now? After 24 months most mortgages in the 2005 vintages either need to face a reset at a much higher rate, or refi at a rate even higher (rates have been increased 35-65 bp) than those of 2006. And the ones who actually reset will be nailed at a much, much higher rate (9-11%) than the 7.92% offered initially by the 2006 vintage. I don’t think it really matters though, if refied they just get shoved into 2007 vintages and quickly fail, if not refied they stay in the 05s, reset and also quickly fail.
My next key point is that the big job layoffs underway in real estate Bubble construction, lending, and sales don’t discriminate based on vintages or even credit quality class. These will hit all kinds of debtors including a lot who have 710 FICOs (at least for now). Finally, most of the 2005 vintage housing was purchased near the peak of the market, and are underwater, have no embedded appreciation, or even have negative equity. There is plenty of evidence now that houses in places like California (roughly a third of these subprimes) are down 5-15% since 2005. At least 2006 buyers often got somewhat cheaper house pricing, and may be down much more modestly than most 05s.
And how have the refis been going on the 2005 vintages so far√Ǭ†now that√Ǭ†the√Ǭ†salad days of subprime lending are already√Ǭ†a thing of the past?√Ǭ†Simple matter of presenting the performance factors, and watching it going forward as they hit the rate resets. Factor is the amount still left in the initial securitization pool. Factors on the later 2005 vintages are running well behind the earlier ones, having missed the 4Q, 2006 “lights going off” credit implosion.
NFI 05-01: factor is 43 at month 23, 6.27% are already in foreclosure (FC) and REO at month 23
NFI 05-02: factor is 54 at month 20, 5.62% in FC and REO at month 20
NFI 05-03: factor is 63 at month 16, 4.48% in FC and REO at month 16
NFI 05-04: factor is 69 at month 13, 4.71% in FC and REO at month 13
NEW 05-01: factor is 42 at month 24, 6.01% already in FC and REO
NEW 05-02: factor is 51 at month 21, 5.49% in FC and REO
NEW 05-03: factor is 59 at month 19, 5.27% in FC and REO
NEW 05-04: factor is 63 at month 17; 6.11% in FC and REO
Last week, a San Diego-based subprime lender, Accredited Home Lenders, joined the ranks of such companies by vowing to tighten standards after reports of significant losses last quarter. Rick Sharga of RealtyTrac said he’s noticed the link between the lenders’ stricter regulations and the rate of foreclosure activity. “I think the two go hand-in-hand.”
Takeaway from Credit Suisse’s subprime mortgage report– seems like lots of Riskloves are very slow on the uptake preferring to bleed to death. It’s true whether they are speculators carrying vacant properties, or lenders spewing out money losing loans, or builders with bloated inventories.
“One originator remarked that coupons would have to rise at least 75-100 basis points for them to be able to originate loans profitably. This is a remarkable statement, as it essentially means that the industry isn’t willing to downsize their overhead to the level of originations that they are likely to see if coupons are increased, and would rather attempt to “muddle through” and rely on others to make those difficult reductions.”
Banc of America Securities analyst Daniel Oppenheim said his research shows that an expected increase in buyer traffic in February has not happened so far. He said his traffic index, which polls real estate agents on customer volume, is likely to fall in the month after three consecutive gains. “Agents attributed the easing of traffic to the perception that prices will be lower in coming months,” Oppenheim wrote in a note to investors. “The weather does not appear to be the driver.” The analyst said he expects builders will have to cut prices further before there is a meaningful increase in demand.
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“Ponzi√¢‚Ǩ‚Ñ¢ finance units must increase its outstanding debt in order to meet its financial obligations.√¢‚Ǩ¬ù
- Hyman Minisky
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