I feel this month has thrown enough events at the market to force it
to start taking the real fundamentals into consideration. Of course,
battling this ideal is the US Federal Reserve and their QE 2.1 policy.
This should be a time to reflect upon exactly where we stand thus, I
will review my thoughts and observations over the last 30 to 45 days and
then summarize a truly unbiased and independently calculated view of
the downright nasty side effects of the US shadow inventory of
distressed housing. All paying subscribers can download the full shadow
inventory report here: 
Foreclosures & Shadow Inventory. Professional and Institutional subscribers should also download the accompanying data and analysis sheet in Excel – Shadow Inventory.
Over the last few weeks, I have commented on my belief that the big banks who optimistically release reserves
and provisions to pad lagging accounting earnings under the auspices of
increasing credit metrics are simply setting their investors up for a
major reversal which will bang those very same accounting earnings: JP
Morgan’s 3rd Quarter Earnigns Analysis and a Chronological Reminder of
Just How Wrong Brand Name Banks, Analysts, CEOs & Pundits Can Be
When They Say XYZ Bank Can Never Go Out of Business!!! and As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves).
Although accounting earnings (the ink on the paper) have may have
increased some, the economic profits and true value of these entities
are still on the decline. The truth is the truth, no matter which way an
accounting department attempts to spin it. I have also commented on
the obvious scam that the monoline insurers were in their attempt to
insure a million dollars of highly leveraged and over valued assets with
the equivalent of 25 cents – Banks,
Monolines, and Ratings Agencies As The Three Card Monte (Wall)Street
Hustlers! Its a Sucker’s Bet, Who’s Going to Fall for it in QE2?
I have also lamented on the still rapidly deteriorating condition of the residential housing market in the US: The Truth Goes Viral, Pt 1: Housing Prices, Economic Sales and the State of Depression and Yes, Housing Prices Have Much Farther to Fall. We’re Talking Years…
This is in direct contravention to the green shoots based opinions of entities such as the NAR: Pay Attention to the National Association of Realtors and Their Chief Marketing Agent At Your Own Risk! and even the significantly less biased, but still inaccurate Case Shiller index: Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading!
The effects of the declining real estate will go way past mere affidavit scandals: The
Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks
Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!
Recently, my proclamation of the insolvency of Ambac Financial (Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billionn in Equity) rang true with the company’s official filing, which itself was filled with smoke, mirrors and deceptions: Banks,
Monolines, and Ratings Agencies As The Three Card Monte (Wall)Street
Hustlers! Its a Sucker’s Bet, Who’s Going to Fall for it in QE2?
So, where do we stand after this link ridden, event filled 30 days or
so? Well, the bankruptcy of Ambac is telling, for they succumbed to
cash flow issues. They were definitely balance sheet insolvent, but to
fall due to cash flows shows exactly how bad the mortgage market really
is. You see, those CDS contracts were written quite favorably in Ambac’s
favor, allowing extended payout periods and relatively long loss tails
(at least relative to what most may assume). It is not as if a claim
appears and Ambac has to pay out everything the next day. If, even with
the loss tails, assistance, government bubble blowing, ZIRP, and
regulatory agencies officially looking the other way, the insolvent
still fall into bankruptcy, then the proverbial “Houston, we have a
problem!” soundbite is called for.
A few readers have emailed me asking for my opinion of the result of
this slow motion train wreck. Well, outside of everyone staring down
MBIA and its peer group, let’s not forget who Ambac et. al. insured.
Basically, at least in the structured finance space, they worked to
allow banks to move junk assets to unwitting buyers and/or release risk
reserves with a faux AAA or near investment grade rating. In
bankruptcy, I think its fair to say that Ambac is no longer investment
grade – even to S&P and Moody’s!!!
Well, I have identified a bank with around $32 billion of insured
exposure to these guys (of course on a highly levered basis). I am
having my guys run the numbers and will get a reworked report out to
subscribers as soon as possible. In the meantime, let’s take a look at
why I feel more than just a bank with $32 billion in levered, bankrupted
monoline exposure is due to have problems…
Shadow inventory
The market’s inability to absorb the excess volume has created
excessive “shadow inventory” that consists primarily of distressed,
foreclosed and bank REO properties, but do contain several other
categories of property as well. Most references to shadow inventory do
not include the disgruntled existing home owner that has had to
temporarily take their property off of the market due to weak demand,
nor the new construction that has turned to rental waiting for the
market to firm. As any sign of a firming market returns, there will be a
deluge of supply to meet it, thereby throwing the supply/demand balance
back to the supply side. We are doubtful that an actual housing
recovery has commenced other than a short term reaction to government
bubble blowing without the organic means to be self sustaining sans
government assistance, and recent housing price data corroborates our
conclusions. What has been referred to in the media as the “fledgling
recovery” continues to remind us that we will not find equilibrium until
the shadow inventory is exhausted and the excess problem loans are
purged from the system. Foreclosed sales account for nearly a
quarter of total national housing sales with an average discount of
c26%. That number surpasses 55% in some states! Any foreclosure
moratorium (such as the defacto ones we have now or the legislated one
we had last year) further exacerbate the situation as pent-up
foreclosures re-enter the market, compounding the problems at hand.
According to S&P, the principal balance of distressed homes is
roughly $460bn and account for nearly one-third of the outstanding
non-agency residential mortgage-backed securities (RMBS). This is a
very large number in relation to the tangible equity of the entities
that hold these securities on their balance sheets on a leveraged basis.
This also fails to take into account the full spectrum of the shadow
inventory system, which has grown astronomically since the real
estate/credit bubble has popped, mainly due to:
a) High delinquency and foreclosure rates which continue to mount;
b) Low cure rates, illustrating the failure of loan modification programs;
c) Longer liquidation times with delinquencies outstripping foreclosures
d) and, the combination of these three factors continuing to deteriorate in unison
We have quantified shadow inventory using the number of delinquent
and foreclosure loans provided by Lender Processing Services and have
applied delinquency cure rates these loans. Please keep in mind that
this does not include the several prominent, yet harder to quantify,
contributors to shadow inventory mentioned above. We have assumed a 25%
cure rate for 30 day delinquent loan which have 3.4% delinquency rate,
10% cure rate for 60 day delinquent loan which have 1.4% delinquency
rate, 0.5% cure rate for 90 day delinquent loan which have 4.4%
delinquency rate and 0% cure rate for foreclosed loans. This gives a
weighted average cure rate of 7.7%, broadly in-line with the
historically optimistic Fitch, with estimates of 6.6% back in 2009 and
2.3% below data compiled by Lender Processing Service. Of the 13%
delinquent and foreclosed units, we expect 12% of units to eventually
liquidate. Overall this gives us total shadow inventory of 6.45m units.
To put that into perspective, existing home sales total around 4.1m
units implying the overhang is approximately 1.56x per year of existing
home sales. We estimate that it would take about 6.2 years
to clear the shadow inventory if foreclosure sales account for 25% of
sales (7.8 years and 5.2 years if foreclosure sales account for 20% and
30% of existing home sales, respectively).
It is important to note that these figures only encompass loans that
are already delinquent and does not includes loans which are current now
but will go delinquent in the future and REO’s held by banks.
All paying subscribers can download the full shadow inventory report here: Foreclosures & Shadow Inventory. Professional and Institutional subscribers should also download the accompanying data and analysis sheet in Excel – Shadow Inventory.
I have supplied the raw data and empirical analysis to allow pro and
institutional subscribers to get a full and accurate snapshot of the
residential housing market. This includes a more granular application of
our analysis on a state by state basis in the SCAP bank stress
test template, and by region in the housing price and charge off
templates through the following models:
House price data, 2nd Quarter 2010
Reggie-
Do you ever get, let a link to your stories at Patrick.net....You have great stuff on housing that would fit right in over there but I never see your public stories linked there
Ooh ooh...does it rhyme with shitty?
Good read Reggie, I can't wait to see who that bank is and what others are waiting in the shadows. As I've always said, this issue has been festering and it's starting to come to the surface now.
Reggie
Have you looked at Capital equipment leasing as a potentially large trouble area on bank balance sheets?
soon enough i'll be able to buy a whole town, become mayor, and give myself a huge salary!
We need realism Pres. Obama:
End the Wars
Cut spending
Tax the overly wealthy
National Planning within WTO rules to support US industry and business
Fire the wispy wasp and appoint Reggie Middleton Sec. of Treas.
Realism starts when you stop asking it of puppets.
You know I was at the mall the other day and the Christmas music was already playing. They played the same song over and over and over again...Jingle mail, Jingle mail, Jingle all the way, oh what fun to is to leave and never fucking pay..hey!
Housing will hit bottom when property taxes (increases courtesy of public sector unions) represent 25% of take home pay for the average working stiff. Already in Florida, seniors on fixed incomes are being significantly squeezed with higher costs for medical premiums, groceries and property taxes, with no COLA on government checks.
No COLA? Well, let them drink Sprite!
as I understand it, rock bottom had been found, the squatters are taking over.
http://covert2.wordpress.com
the deceptions will always continue on, it's the nature of fiat economics.
http://covert2.wordpress.com
Reggie, the brakes have been put on REO sales. We were doing 3-5 cleanouts/mo plus additional remedial services (mold, asbestos, heating oil tanks, etc.) on another 2-3. In October we did one measly $960 job. With none scheduled this month - around $50K of bids out. The Realtors who do these for a living are sucking wind big time.
only a dozen?
I'm a little doubtful.
Currently, I am a renter. Looks like I will have to wait before picking up my dream home for pennies on the dollar.
Not long. Keep an eye on rates.
So...should I hold on to SKF? Or do I risk getting POMO'ed and QE'd to death?
Reggie, you beast! You give a gal the vapors.
Great ID
I like the way Reggie slaps up beaucoup data to support his position...
BTW: "The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!" is a really informative post.
Interesting you point out after Japan's Rug Sweeping Operation... none of Japan's big banks are in the world top 20...
"I have also lamented on the still rapidly deteriorating condition of the residential housing market in the US."
Don't lament it, rejoice in it. It brings closer the day our fascist clerks will be unemployed and homeless. That brings the revolution that much closer. Rejoice rejoice.
"then the proverbial “Houston, we have a problem!” soundbite is called for."
Why is it a problem? It's delovely.
"As any sign of a firming market returns,"
This will not happen, since the entire housing finance system is a Ponzi scheme. If you buy a house right now, you are buying into a Ponzi scheme. The courts CANNOT clear out this problem, because it runs smack into the determination of the U.S. to hide bad debt, which determination, in turn, sustains the Ponzi scheme. Why don't you see that there's no way out, Pollyanna?
And 2015-2018 is the 'bottom'. At which point we most likely move sideways for a decade.
You are so wrong. We already had the bottom, back in march 2009. The year 2018, if anytthing, is probably the next major top.
And RAX is the mother of all short squeezes.
http://abetterwaytotradestocks.blogspot.com/2010/11/rax-next-mother-of-a...
Beanie, between you and Reggie, I will take his work anyday. Besides don't you realize prices are being propped up through a variety of means (home purchase tax credits, foreclosure fraud denial, shadow inventory, etc.)?
Problem is, everything you are saying is already priced in the market. What isn't priced in yet is the organic growth of the economy. Everybody thinks it's due to QE1 and QE2, but I beg to differ and we will be surprised to find out next year that it wasn't due to QE at all.
I don't know who Reggie is, but I'd short him.... so I'm long the market.
Your logic is off. If all of the growth is organic and not due to QE1 or QE2, then why implement QE at all and take the risk of stoking inflaction. The architects of QE themselves side with me and are in disagreement with your thesis, or there wouldn't be QE!
LOL.
On a more serious note, the fraudclosure + IRS lien issue I think is going to end up slowing foreclosures even more. This recognition has gotten mainstream enough that the local Nashville coverage for public radio indicated that October 2010 existing home sales were down 33% vs. October 2009, but prices were up 7%. Hence the importance of tracking both.
From what I've seen, any rising prices are indicative of higher-priced homes entering the distressed/foreclosed category, not because of any increase in real-estate values.
Prices and economic activity are still going down, so you know we haven't hit bottom yet.
Popo, Economically:
"You're turning Japanese
I think you're turning Japanese
I really think so..."