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 much larger.
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, the 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 impaired portfolio.
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...