The Second Subprime Bubble Is Bursting, Gundlach Warns

Tyler Durden's picture

Back in the years just before the previous housing bubble burst (not to be confused with the current, even more acute one), one person did the math on subprime, realized that the housing - and credit bubble - collapse was imminent, and warned anyone who cared to listen - almost nobody did. That man was Kyle Bass, and because he had the guts to put the money where his mouth was, he made a lot of money. Fast forward to 2014 when subprime is all the rage again and the subprime bubble is bigger than ever: it may comes as a surprise to some that in 2013, subprime debt was one of the best performing fixed income instruments, returning a whopping 17% in a year when most other debt instruments generated negative returns. And this time, while Kyle Bass is busy - collecting nickels (each costing a dime) perhaps - it is someone else who has stepped into Bass' Cassandra shoes: that someone is Jeff Gundlach.

From Bloomberg:

“These properties are rotting away,” Gundlach, 54, said last week on a conference call with investors, about homes stuck in foreclosure pipelines, adding that it could take six years to resolve defaulted loans made to the least creditworthy borrowers before the real-estate crash. Those residences are a sign of an uneven U.S. recovery, which has left blighted neighborhoods in cities from Los Angeles to Detroit and about 8 million borrowers still owing more on their mortgages than their homes are worth.

But while warning on yet another subprime implosion is nothing new, and many have done it in the past, why this time may be different and far more timely, is because seriously delinquent borrowers are literally soaring, up from 7% in 2012 to 32% currently!

A measure of losses on mortgage debt rose last quarter for the first time since 2011, Fitch Ratings said in a report yesterday. The reversal was driven by an aging pool of loans in the foreclosure process, particularly in states such as Florida and New Jersey which give added legal protections to homeowners against repossessions. 


About 32 percent of seriously delinquent borrowers, those at least 90 days late, haven’t made a payment in more than four years, up 7 percent from the beginning of 2012, according to Fitch analyst Sean Nelson.


“These timelines could still increase for another year or so,” Nelson said, leading to even higher losses because of added legal and tax costs, and a greater potential for properties to deteriorate.

This means that the capacity of lenders to absorb losses is rapidly declining as inbound cashflows slow to a trickle. And not only that, but loss severities, or how much a lender will lose in case of default are also grinding higher:

Loss severities on subprime debt, tied to risky mortgages that inflated the housing bubble, increased to 75.9 percent from 74.1 in the last three months of the year. The severities -- a measure of losses suffered on a liquidated loan -- peaked at 77.1 percent in early 2012 from 12.8 percent at the end of 2006, during the property boom.

Gundlach isn't the only one:

“In 2013, we were very bullish on subprime,” said Anup Agarwal, head of mortgage-backed and structured products at Pasadena, California-based Western Asset  Management. “It was overall a big winner and you saw that reflected in prices.” Agarwal, whose firm managed $443 billion in fixed-income assets as of Sept. 30, has in the past six months turned more negative on subprime and started shifting money into Alt-A securities.


One William Street Capital Management LP, a hedge fund firm with $2.7 billion in assets, is expecting reduced losses as home prices continue to rise, according to a letter sent to investors this month. The investment firm said increased regulations have added to costs for firms that deal with troubled mortgages.


For subprime prices to make sense, recoveries must improve but won’t because of the backlog of loans, Gundlach said.

Gundlach's take home message is simple:

“The housing market is softer than people think,” Gundlach said, pointing to a slowdown in mortgage refinancing, the time it’s taking to liquidate defaulted loans and shares of homebuilders that have dropped 14 percent since reaching a high in May. D.R. Horton Inc., the largest builder by revenue, fell 1.9 percent to $21.54 at 9:43 a.m. in New York trading, extending its drop since May to 22 percent.


The money manager has cautioned investors before about avoiding subprime. In 2012, he said investors can’t assume the “lines will head south” speaking about loss severities for loans and then last year, referred to the debt as being stubborn.

Alas, warnings in a centrally-planned system in which only what the head of the Fed does matters, are lost on everyone: such was the case with Bass, such will be the case with Gundlach for the simple reason that the ever fainter music is still playing, and those whose money comes from furiously shuffling worthless assets back and forth, must dance. Plus by now everyone knows that by the time people actually do listen, it is always too late.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
camaro68ss's picture

something just happend in the last 2 min, market just took a larger crap.

please make it a 3% loss day. Its a great way to start the weekend.

Battleaxe's picture

Will it be a 10% correction, then up to the moon? This seems to be the majority opinion. Nothing else to invest in. Europe is going down.

Or is it straight down from here?

El Vaquero's picture

Only one way to find out.  Wait and see.  A shitstorm is inevitable at this point.  I'd just like to get it over with so that I can get on with things should I make it to the other side. 

Say What Again's picture

All I have to say is that this is turning out to be a great day to be watching the "markets"

nuclearsquid's picture

He is focussing on the wrong bubble.  The banksters just helped SCUSA IPO.  Keep an eye on subprime auto from here on out.

El Vaquero's picture

It seems like there's subprime everything these days. 

nuclearsquid's picture

coming soon to a FEMA camp near you... SubprimeTM flavored protein rations.

zaphod's picture

And the FED hasn't even started to taper from $85B/month to $75B/month (essentially nothing)

Guess we'll have to put taper plans on hold and maybe even expand QE to $150B/month. You're not against helping people are you? /sarc 

nuclearsquid's picture

From everyone above you:

Thanks for the downvote.


Levadiakos's picture

You just picked a bad day to wear see thru tights

boogerbently's picture

Banks could forgive all home loans.

Peopole would have less debt, banks wouldn't have those negative assets on the books, and they would have a huge tax write-off.

That could be their "fine" for their part in the recession/deception/inequality transgressions.

Levadiakos's picture

Wha chu talkin bout Willis!?

philosophers bone's picture


tvdog's picture

They could have done that in 2008 with the amount of money they gave the banks then.

Boxed Merlot's picture

SubprimeTM flavored protein rations...



You don't think .gov's gonna let all their experience with fannie and freddie go to waste do you?


Future Jim's picture

Mark to fantasy is still the current regulation isn't it? Without mark-to-market, a precipitous crash seems far less likely any time soon.

Future Jim's picture

We also have ZIRP and reduced fractional reserve requirements now. How could a bank ever go bankrupt under such regulations?

What I would hope to learn through ZH is when a change in regulations takes place that would be the setup for the next crash.

max2205's picture

Bens gone so lets start hating on him.....oh wait

eclectic syncretist's picture

Trust me, mark-to-fantasy has had a lot to do with the terminal phase of this extended bull run that now goes back almost four years straight.  Companies have been telling you that they are earning and have a lot more than they really do.  Furthermore, many companies are themselves invested heavily in equities, meaning they have been benefitied by the rising market.  This was especially true in the massive run up to the year 2000, when many companies made more money from their investments than they did from their products.  If company investments start to slide, as it looks like could happen, all that bad accounting will come to light, which will only make equities fall further.  This is the typical business cycle of publically traded companies.

RaceToTheBottom's picture

The benefits of fake accounting have not been taken into account in the valuation of stock prices.  This could be the inpetus to drop it.

Future Jim's picture

But is a crash because of artificially high stock prices really imminent? It has been imminent for years now. Is this time really different?

Wouldn't there be some intentional artificial setup (e.g. a change in regulations), and then an intentional  artificial catalyst like the Lehman collapse, so that insiders can profit by knowing the exact timing of the crash?

It sounds like you are saying the setup this time has already happened and is the artificially high stocks. Then almost any catalyst could pop it. However, there were artificially high stocks in 2007, and it took the regulatory change to mark-to-market to cause the decline and crash. Lehman would not have been bankrupt if it were not for mark-to-market.

Not only did the regulatory change to mark-to-market coincide with the stock market decline in November 2007, but the regulatory change back to mark-to-fantasy coincided with the stock market rise that began in March 2009, which is still ongoing since then.

Parrotile's picture

It's not fraud - the "correct" (i.e. socially acceptable) term is Creative Accounting (and those MBAs are certainly "highly creative" in these respects!)

Parrotile's picture

It is no longer a case of Mark to Fantasy!

More of a case of Mark to Miracle ('cause if any of us are going to get through what's coming, and soon, we will definitely need a miracle!)

midtowng's picture

I don't buy the subprime housing bubble meme. However, that doesn't mean that something isn't rotten in the housing market, and is ready for another correction.

disabledvet's picture

what if "This Time is Different" means "something worse not better" (unlike the Great Moderation days when we hoped it meant something good...but in fact did not)? Seriously uber dollar is supportive of real estate prices PROVIDED the folks pouring their money into the USA still have the money to buy into the safe haven asset.

Sometimes they need to raise capital as well.

And this is what I would call not so much the "Paradox of Thrift" but the "Paradox of a Reserve Currency actually acting like one."

You could argue (as most do now) "the Fed will simply stop Taper."
But doesn't that bring us right back to the problem of "what's the problem again?"

It would be ironic indeed if we ended up getting a liquidity squeeze here.
We've literally printed trillions.
Forget "where is all the money."
Where is any of it? apologize but "bears repeating" as they say.

NotApplicable's picture

It's bastards like these that made the set of tires I just bought waaaaaaaaay overpriced.

That's okay though, as my old '92 Dodge Ram will be set for many more years of operation.

SilverDOG's picture

'99 Nissan Frontier new tire$$$$$$$$ !

Holy Crap.

Literally cost 17% of vehicles value. With less than 100,000 miles on it.

Tires Bitchez !

pursueliberty's picture

Due to nature of my business I purchase a metric shit ton of tires yearly.

Some that I purchase are up close to 75% since 08, some only 40%.  I was in the equipment/cargo/horse trailer business in the early 2000's and could buy a trailer wheel and tire for less than what the tire costs now in every case.  Pretty nuts they would increase that quickly.

TruthInSunshine's picture

Not to pick nits (especially since I agree there's both a re-bubble that's about to burst in both equities and subprime mortgages - as well as some other asset classes) but Michael Burry put more money on the 2007 to 2008 RE MBS short, and made more $$, than Bass ever did.

astoriajoe's picture

Perhaps, but I love the Bass style of condescension that drips from his voice.

Big Brother's picture

The Big Short was a good read.  ISBN 978-0-393-3382-9.

He read many prospectucuses (a dry 6-font read) and determined that many sub-prime lenders were at risk having their loans defaulted upon.  So he convinced Deutch Bank to write him some CDS's against the MBS representing these loans.  His fund went down a bit just before it sky-rocketed.


StandardDeviant's picture

So how could we (mostly) retail investors short it this time around?

Just had a look at Gundlach's DoubleLine Funds page, but I don't see anything that looks like it's short subprime.

Flying Wombat's picture

Great read from Dave Kranzler:  "Something Ominous May Be Coming At Us"

NoDebt's picture

"This is it!  This is the big one!  You hear that, Elzabeth?  I'm comin' to join you, honey!"

- Fred Sanford

Just about as believable from him as it is coming from the markets today.

camaro68ss's picture

No one’s going to want a position over the weekend with this market

HoofHearted's picture

I've been in my position since the summer. We bought farmland with an orchard, and a house that will work for my family. We've been working the land, cutting firewood, and have pasture for our animals. I cashed the 401k, got into gold, guns, many magazines for each firearm, and a lot of ammo. I've bought three more sniper rifles this week because the prices were right, especially since the sellers just wanted little green pieces of paper. It feels like the deflationary suck is here. I've surrounded myself with good people. Whatever happens on the Street happens.

Did I overpay for my house and land? Maybe, but I had to have time to get things settled. This is your warning. Sell that dumb ass paper. Get into something real. Ol' Yellen will come to the rescue with lots more paper. Don't wait until Monday. Get out and get into tangible assets. 

And part of me is saying I shouldn't really be in gold. A barbarous relic may be needed for these barbarous times, but I'd really rather have something more useful. The pasture probably could fit another cow or two. I could make a second chicken coop and double both egg and chicken production. I really should have the rabbit hutch completed by now and be breeding those suckers.

SilverDOG's picture





Probably only 3-5 years before your production capability, with inflation, will erase all YOUR debt.

Property as such #1 long term asset, and liability.

Liability being, those in subprime with soft hands, no tools, land, money, or food.

Watch Venezuela... coming soon to a town near you.

cynicalskeptic's picture

One problem with bewing out in the country and self sufficient - coming from a couple people who lived through the mess in Yugoslavia.  If you're out in the boonies you're an easy target for the bands of roving bandits and paramilitary types who WILL outgun you.  They said you were better off in the city than the country for that reason.  If you had German Marks - or alternative means of payment - you could get what you needed.

exi1ed0ne's picture

I always planned on buying some land and putting solar, wind, etc on it with gothermal.  Then one day I saw someone hat put up a wind turbine and drove out to get a look at it.  It was in that moment I realized that it was a "I have things you want, please take them" billboard.  Now I'm looking at land countours, saddles, and other patches of land that would conceal a modest dwelling.  They can't take your shit if they can't find your shit.

El Vaquero's picture

That's the problem.  There are so many potential triggers for the pending shitstorm and there have been so many potential crises that have been averted that it has turned into a boy crying wolf issue.  Yet, the system is seriously distorted and unsustainable.  Eventually, the wolf will appear, and most everybody will be taken totally off guard.  I make no claims of being able to predict when that will happen, but I will point out that I see some canines.  Whether they're wolves, dogs, foxes or coyotes, we'll find out. 

NotApplicable's picture

I've realized that with every avoided collapse I see, the underlying "things" weren't really as real as I believed them to be. In other words, it's not so hard to "kick the can" if the can is fake as well.

Given that, this shit is likely a long way from being over.

El Vaquero's picture

Ultimately, it comes down to US access to oil.  While there may be a respite (crashing equities sends $$ to treasuries, bail-ins, and raiding things like 401ks,) the only way to keep this ponzi going on at this point is to print more, which will eventually destroy US access to oil.  So, do we make it through the full gamut of manipulations (IMO, raiding retirement accounts is the last one,) before this all collapses, or do we have some other financial crisis that hastens it?  Or do we have some other unexpected crisis that is the death knell?  Food suddenly tripling in price in the face of Obamacare could cause very large problems, especially if the price increase were caused by mother nature rather than the Fed. 

americanspirit's picture

El Vaquero - I see them too and believe that I've positively identified them -they are hyenas - carrion eaters.

max2205's picture

3:30 ramp may come earlier....3 ish

SheepDog-One's picture

Scores of E*Trade babies out there mashing the panic sell button, and much to their suprise, NO BUYERS....gotta love it.

stocktivity's picture

Many of these "babies" have never seen a bear market. Margin at all time highs. A potential "Black Friday" if we dip another 500 points the final hour will set up a panic on Monday.

SAT 800's picture

Do you remember Black Monday in 1987; ?. That was a real humdinger. Be nice if we had another one this Monday. But I suppose we couldn't call it Black Monday, this time; racist, doncha know?