Here are some very interesting facts on the latest trend in Alt-a
mortgages that have been in the news as of late. The following charts
were culled from my mortgage default model which was built primarily
from date gathered from the FDIC and the NY Fed.
As you can see, the current trend still has subprime at a significantly
higher charge off, delinquency and foreclosure rate than Alt-A loans.
The issue is that the Alt-A loans are usually written for a much larger
amount than the subprime loans, hence the losses from Alt-A shall be
Let's delve deeper into the Alt-A market... Click any of the graphs below to enlarge.
As you can see, Alt-A loans are a very small minority of the loan
market, but since they are written on considerbly larger principals
than subprimes, the potential losses will hit harder. In addition, they
peaked in popularity at the exact top of the housing bubble...
See"If Anybody Bothered to Take a Close Look at the Latest Housing Numbers...", and in particular the shape of the bubble peak.
The average origination of the Alt-A loan in the use sits right atop that crest. You see where we have went from there...
As if the Case Shiller graph doesn't drive this point home hard enough,
the average and mean CLTVs for Alt-A loans AT ORIGINATION hover around
82% to 93%. Those are loans written at the top of the bubble. What do
you think happened a few years later???
This is the state of Alt-A loans as of November! Nearly all of them
are underwater. Some are totally sunk! We're talking 150%, 175% LTVs.
and that is statewide, not anecdotal high end cases!!! If
you are not familiar with Alt-A loans Option ARMs which are a subset of Alt-A, they allow you to pay less than
the amount necessary to amortize the loan, resulting in negative
amortization. That means as time goes on, your outstanding principal
gets bigger, not smaller. Many loans have a cap on this neg am amount
wherein if it hits a certain level, the loan goes fully amortizing.
What are the chances of this happening??? Well, you tell me.
California is such a strong contributory force to credit losses in
the Alt-A category that it literally needs to be removed just to see
what the other states are doing. Whoa!!!
This leads to a very important point. Exotic mortgage products were
popular in CA and FL and NV becuase home prices outpaced rents and
incomes. Home prices have come down, but they are still out of
equilibrium with incomes, net assets, and rents. Unemployment is weigh
up and household net worth is way down. Combine that with a dearth of
available financing from the banks and the near total absence of loan
exotica and there is only one way for house prices to travel. This fact
has been masked and concealed by the Fed ZIRP policy, by trillions of
dollars of securities purchases, primarily MBS, and by other
ill-planned stimulus measures such as the $8k tax credit.
The chart below illustrates the seasonal ebbs of month to month price
changes. On a month to month basis, we see hills in the spring and
summer and valleys in the fall and winter. During the onset of the
bursting of the (first) bubble, this cycle was compressed, but was
still there. and lasted throughout the bubble. With the onset of the
government stimulus (ex. housing credits and MBS market manipulation),
the peaks were significantly exacerbated. Now we are entering into the
winter months again, and guess what's happening, as has happened nearly
every winter cycle before. The only difference is that this dip is
extraordinarily steep! I would also like to add that the month to month
price changes coincide exactly with the S&P 500 move downward and
upward for 2008 and 2009, to the MONTH! What a coincidence, huh? If
this relationship holds,,,, well you see what direction the month to
month lines are going and how steep they are, don't you?
As you can see when we drill down into the month to month numbers,
improvements either weaken significantly or disappear into numbers that
show further declines - and this is in the face of government bubble
blowing! Also, be aware that the Case Shiller index is a three month
average that is lagged. So a leveling off of values from a previous
increase actually means that material negative inputs have entered the
equation. If the housing prices don't spike higher in November and
December, expect the index to fall. As housing falls, it puts even more
pressure on credit quality.
This results in total risk to banks skyrocketing, despite many members
of bank management saying that they believe things will peak in 2010.
Every year since 2006, banks and home building management have
proclaimed unsubstantiated optimism that flies in the face of what I
have researched! Reference this excerpt from American Banker:
Over the past few months, Wells has been relatively
upbeat about the portfolio. Chairman and Chief Executive John Stumpf
said at a Goldman Sachs conference last month that it has been
performing better than expected.
"I don't think they would
have made the statements they did unless you saw continued
improvement," said Joe Morford, an analyst at RBC Capital Markets.
Much of this optimism is a function of the banking sector's gradually
improving expectations for consumer credit losses. Wells now expects
them to peak before midyear.
That would allow the bank to take some accounting gains on the impaired portion of a major portfolio.
After writedowns, modifications and repayments, the Pick-a-Pay
portfolio's carrying value is down to $88 billion. And negative
amortization, the bete noire of the portfolio, has been dropping.
In Wells' prerecorded third-quarter earnings call in October, Howard
Atkins, Wells' chief financial officer, raised the prospect that,
beginning in the fourth quarter, Wells could begin "recapturing a
portion of the life-of-loan purchase accounting marks" it took on the
Bush and other analysts said this quarter is likely too soon for Wells
to "declare victory" on Pick-a-Pay — because of both macro concerns
about the housing market and the difficulty of predicting how the $50
billion unimpaired portion of the portfolio will perform.
While those loans are still performing according to plan, she said, "If
they're over-reserved, they're going to stay over-reserved over the
next couple quarters."
I remind my subscribers to keep in mind what Wells has in their
portfolio and how that class of assets have been performing according
to the NY Fed and the FDIC.
All subsribers can download the data that generated these graphs here:
Non-subscribers can view my historical analysis of Wells here:
- If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? Pt 4 - Wells Fargo
Doo-Doo bank drill down, part 1 - Wells Fargo
How hard does CA hit the 2nd liens?
- Wells Fargo reports in a few hours and I wonder how forthcoming they will be with their credit losse
- I've Been Warning About Wells Fargo Since Spring of '08 - The Doo Doo
I see Alt-A losses from banks being very, very significant. There is
absolutely no way the Fed can allow rates to increase without literally
destorying both those that wrote and hold these products and the
mortgagees that need to pay them!
So banks are doing well. Of course they are! FASB has allowed them to
absolutely ignore everything in all of the charts you see above.
For more on this, see "How Regulatory Capture Turns Doo Doo Deadly".
Other banks to look at with suspect portfolios:
JP Morgan Chase
(Free Preview) JPM Public Excerpt of Forensic Analysis Subscription
Bank of America
The Government Stress Test
All subsribers can download the data that generated these graphs here: Alt-A loans and credit trends - December 2009.
Click here to subscribe.
The sheet contains a LOT of data to slice and dice, and is broken down
by state, so you can actually back into your favorite bank's
propsective portfolio performance if they give a geographic break up,
like Wells. See the following screen shots. Click to enlarge...