Default Rate

When you get into too much debt, eventually really bad things start to happen.  This is a very painful lesson that southern Europe is learning right now, and it is a lesson that the United States will soon learn as well.  It simply is not possible to live way beyond your means forever.  You can do it for a while though, and politicians in the U.S. and in Europe keep trying to kick the can down the road and extend the party, but the truth is that debt is a very cruel master and at some point it inevitably catches up with you.  And when it catches up with you, the results can be absolutely devastating. Greece, Italy, Spain and Portugal all tried to just slow down the rate at which their government debts were increasing, and look at what happened to their economies. I have always said that the next wave of the economic collapse would start in Europe and that is exactly what is happening.  So keep watching Europe.  What is happening to them will eventually happen to us.

We Could Offset the Need for the “Sequestration” Budget Cuts By Stopping Nuclear Subsidies

It is common knowledge by now that the US has a student loan problem. Specifically, a subprime-sized, student loan default problem, which as was reported last year, has now surpassed a 23% default rate at "for profit" institutions. Yet as all statistical measures, this one too deals in means and medians: very boring, impersonal metrics. Where the truly stunning data emerge is when one performs a granular college by college analysis of the US higher learning system, which is precisely what the WSJ has done, breaking down some 3500 colleges and universities by annual cost, graduation rate, median amount borrowed and most importantly, student-loan default rate. In this context we feel quite bad for the students who graduate from ICPR Junior College of Puerto Rico (or rather the 52% of them who graduate), with a modest $2,250 in student loans to cover the otherwise manageable tuition of $7,158, as a mindboggling 62% of them end up defaulting on their loans!

"The delinquency rate today on student loans that were originated from 2005-2007 is 12.4 percent. The comparable figure for student loans that were originated from 2010-2012 is 15.1 percent, representing an increase in the delinquency rate by nearly 22 percent....This situation is simply unsustainable and we’re already suffering the consequences,” said Dr. Andrew Jennings, FICO’s chief analytics officer and head of FICO Labs. “When wage growth is slow and jobs are not as plentiful as they once were, it is impossible for individuals to continue taking out ever-larger student loans without greatly increasing the risk of default. There is no way around that harsh reality.”

While the world and their cat believes that Mario Draghi saved the world last year - and continues to do so with his open-ended promise to do "whatever it takes" whatever that means (and the market's "positive contagion"). However, the reality, away from a sovereign-bond implied view of the world - with short-dated Spanish bonds now at 26-month low yields (whereby these bonds are sucked up wholesale by an ever more concentrated and self-satisfying group of European banks) is far different. As these two charts show, not only does Draghi's decision not to lower rates (when inflation and unemployment - both more 'real-world economy'-impacting items) indicate Taylor-Rule-esque that rates need cutting; but while banks get all they want (and more) from his over-flowing cup or collateralization and repo, credit extension in Europe continues to slide ever more negatively. Yes, Draghi saved the banks (for now) but, just as the scariest chart shows, Europe is very far from saved; and for those looking at TARGET-2 imbalances, the risk remains, it has merely shifted to the core.

The credit markets this week already look very different to how they ended last year. As BofAML's Barnaby Martin notes, beta-compression, flatter curves and credit outperformance versus equity have all been abundant themes of late. Relative value is still there, when one looks closely, but is unfortunately not what it used to be. He adds that "things in credit have started to feel a lot like 2007 again," and while he believes the trend is set to continue (though slower) and the liquidity-flooded fundamentals in the high-yield bond market have been holding up well, it is trends in the leveraged loan market, that continue to deteriorate, that are perhaps the only canary in the coal-mine worth watching as global central bank liquidity merely slooshes to the highest spread product in developed markets (until that is exhausted). The rolling 12m bond default rate among European high-yield issuers fell to 1.8% in December, whereas loan default rates rose to 8.5%. With leverage rising, the hope for ever more greater fools continues, even as everyone is forced into the risky assets.

Truly ironic - anyone receiving a REAL business/finance education would be able to run these rudimentary calculations themselves, thereby invalidating the very diploma they are seeking

Today, Spain barely functions as a country. Basic services have shut down. The entire banking system is on life support. And yet banks and the stock market are ralling.

Since the crisis first began in 2006, developed world equities are still lower, real GDP has struggled to grow above its pre-crisis peak in most countries, core bond yields are sharply lower with peripheral yields higher and with credit yields generally performing well albeit it with fairly extreme volatility. Credit has been helped by the fact that the authorities way of dealing with this crisis to date has been through money printing and liquidity facilities to help prevent mass defaults which, as is is clear in the chart below, has led to a weakening in the normal relationship between GDP and defaults. Just as one of the features of the last 20 years in Japan’s post-bubble adjustment and lost growth period is that defaults have remained very low; it appears as long as money printing props up the debt market, defaults are likely to be much lower than the underlying economic environment suggests they should be. However, as we noted previously, the mark-to-market volatility on the way may just become too much to bear for all but the most long-term bond rotators.

Back in the 1960s, a clever but financially disadvantaged fellow placed a small ad in a national magazine that read something like: Money needed. Please send $1 to the address below. Do it today! No specific need was given, and nothing was promised in return, so that fraud could not later be charged. Yet within a few months, thousands of dollars arrived in his mailbox, a considerable sum in those days. Or so the urban legend goes. A half-century later, many things have changed, but one thing remains unchanged: People still need money, and they have not ceased to innovate ways in which to get it. Clearly there are a lot of new and imaginative ways of moving money around that vie for our attention. Many of them would be considered crowdfunding. Crowdfunding, if thought of merely as the pooling of resources for a common cause, is as old as human groupings. But that isn't the way it's thought of nowadays. The current king of the hill, Kickstarter, launched in April of 2009, has been a great success. So, is crowdfunding the future capital source for every new venture under the sun? Well, probably not... although we can't say for sure, because it does sometimes seem that way as new and imaginative ways of moving money around vie for our attention.

Judging by the media rancor, the fact that the FHA has run out of capital is a stunning shock since besides, housing is in recovery right? Well, there is one simple reason why the FHA is FUBAR and is only going to get worse (cue Geithner Bailout). As the only player left, the FHA has simply been the sole source of mortgage provision to the worst of the worst. The following chart from Chicago Booth's Amir Sufi shows the diabolic-distribution of poor-performing zip codes that the FHA has lent into - even during the crisis.

Whereas earlier today we presented one of the most exhaustive presentations on the state of the student debt bubble, one question that has always evaded greater scrutiny has been the very critical default rate for student borrowers: a number which few if any lenders and colleges openly disclose for fears the general public would comprehend not only the true extent of the student loan bubble, but that it has now burst. This is a question that we specifically posed a month ago when we asked "As HELOC delinquency rates hit a record, are student loans next?" Ironically in that same earlier post we showed a chart of default rates for federal loan borrowers that while rising was still not too troubling: as it turns out the reason why its was low is it was made using fudged data that drastically misrepresented the seriousness of the situation, dramatically undercutting the amount of bad debt in the system.  Luckily, this is a question that has now been answered, courtesy of the Department of Education, which today for the first time ever released official three-year, or much more thorough than the heretofore standard two-year benchmark, federal student loan cohort default rates. The number, for all colleges, stood at a stunning 13.4% for the 2009 cohort. And while it is impossible using historical data to extrapolate with precision what the current consolidated federal student loan default rate is, we do know that there is now $914 billion in federal student loans (which also was mysteriously revised over 50% higher by the Fed just a month ago). Using simple inference, all else equal (and all else has certainly deteriorated), there is now at least $122 billion in federal student loan defaults. And surging every day.

Ladies and gentlemen: meet the new subprime.

The acquisition of CRBC by FMER provides a stark illustration of the fundamental conflict between the Fed’s “dual mandate” and its legal responsibility to supervise the nation’s banks. 

Rolling up community banks with mid-single digit ROEs and flat to up small revenue growth does not strike this analyst as a very compelling opportunity 

Until 1976, all student loans could be discharged in bankruptcy. Until 1998, student loans could be discharged after a waiting period of five years.  In 1998, Congress made federal student loans nondischargeable in bankruptcy, and, in 2005, it similarly extended nodischargeability to private student loans.  Since 2000, student loan debt has exploded, and private student loans have grown even faster. This presents a bigger problem than simply sending people to college who end up unemployed or underemployed. It means that capital is being misallocated. If debt for education cannot simply be discharged through bankruptcy, as other debt can be, private lenders will tend toward offering much more of the nondischargeable debt, and less of dischargeable debt. This means that there is less capital available for other uses — like starting or expanding a business. If the government’s regulatory framework leans toward sending more people to college, more people will go (the number of Americans under the age of 25 with at least a bachelor’s degree has grown 38 percent since 2000) — but the money and resources that they are loaned to do so is money and resources made unavailable for other purposes.