John Hussman: Rumors of the Death of the Credit Crisis Are Greatly Exaggerated

Excerpt from the Hussman Funds' Weekly Market Comment (10/26/09):

Last week, I received several notes quoting the same analyst who suggested that the majority of Alt-A and Option-ARM loans have already been modified, that associated losses have already been taken, and that the “leading indicators” of foreclosure have improved. All of these assertions are fabrication. Indeed, Richard Posner recently highlighted a study by the Federal Reserve (also cited in the Economist), which found that in a very large sample of residential mortgages, only 3 percent of seriously delinquent borrowers received a modification of their mortgage "that reduced their monthly payments in the year after they got into trouble." Only 8 percent of those borrowers received any kind of modification. Meanwhile, it is beyond reason to believe that homeowners would voluntarily modify Option-ARMs before the reset date, when those mortgages currently allow them to arbitrarily choose their payments or pay interest only until that date arrives. According to Fitch, nearly 90% of of Option-ARMs have yet to reset, and of those, about 94% of them have used the minimum monthly payments to allow the loans to “negatively amortize.” This does not seem very supportive of the idea that the problem is behind us.

As for “leading indicators” of delinquency and foreclosure, quite simply, the best leading indicators are high loan-to-value ratios coupled with a dislocation such as job loss, illness, change in family status, or an onerous mortgage reset. Weekly unemployment claims continue to ride well above a half-million new claims a week, and the unemployment rate would be well above 10% but for workers actually leaving the workforce and no longer being counted as unemployed. In order for the unemployment rate to enjoy any sustained decline, we will need to observe job creation sufficient to absorb the typical rate of entry into the work force (about 150,000 workers per month), not to mention any returning workers.

Still, for a few months, we may continue to see a bit more restraint in actual foreclosures than we observe in delinquency statistics, but aside from a slight pullback in September - well within the range of month-to-month statistical noise – foreclosures themselves are also hitting new records.

...

The idea that foreclosures will continue to lag delinquencies because of forbearance assumes that banks will hold the impaired, non-performing mortgages on their books indefinitely as if they were good assets. This may go on for a few months, but will ultimately be unsustainable if delinquencies accelerate, as we can expect from the reset schedule.

In short, rumors of the death of the mortgage crisis appear to be greatly exaggerated.

Comments

[sharkbait:]

Agreed. Modified loans (what few there are) have been shown to still be more likely to end up in default. Sooner or later banks must move to their real balance sheets - not with FASB mark-to-myth accounting as current - the non-performing/toxic/etc. assets. Banks want later, but as more default/foreclose they will have a harder time hiding the problem. Take your medicine. We know you

Oct 26 12:17 PM

[John Galt:]

> "Last week, I received several notes quoting the same analyst
> who suggested that the majority of Alt-A and Option-ARM loans >have already been modified, that associated losses have already >been taken, and that the “leading indicators” of foreclosure have >improved. All of these assertions are fabrication. "

Here are my guesses
A) This analyst was on illegal drugs
B) This analyst was in some way paid by the NAR or banks
C) This analyst was brain washed by watching CNBC 24-7
D) All of the above

Oct 26 02:20 PM

[LasVegas:]

Give me a break. Those who continue to report that there will be re-default after modification is absurd. Lets talk to those that have actually been modified with a lower payment. We can't, because there are no significant numbers of actual modifications done. The only thing the banks did were forbearance agreements, added the late payments to the loans, and raised the payments. Of course they re-defaulted. The banks refused to be pro-active in 2006, when the house of cards started to come down. Now, they are also refusing to be re-active. Congress waits also.

Oct 26 03:59 PM