From Bloomberg early in the morning you get the usual, inaccurate analyst chatter, such as "Sales of Existing Homes in U.S. Probably Climbed on Tax Credit:"
Sales of U.S. previously owned homes rose in May to the highest level in six months as buyers rushed to beat a June tax-credit deadline, economists said before a report today.
Purchases of existing houses, which are tabulated when a contract closes, increased 6 percent to a 6.12 million annual rate, according to the median of 73 forecasts in a Bloomberg News survey. To receive a government incentive worth as much as $8,000, buyers must have signed contracts by the end of April and need to complete deals by the end of this month.
Credit-induced gyrations will make the underlying health of the market difficult to determine over the next couple of months. A slump in builder shares since early May signals investors are concerned the damage caused by the end of government stimulus, mounting foreclosures and unemployment will exceed the benefits of lower mortgage rates.
Then the actual report comes out: "Existing Home Sales in U.S. Unexpectedly Fell to 5.66 Million Rate in May"
From Bloomberg June 22nd:
Sales of U.S. previously owned homes unexpectedly fell in May, a sign demand was probably pulled into prior months before a June tax-credit deadline.
Purchases of existing houses, which are tabulated when a contract closes, decreased 2.2 percent to a 5.66 million annual rate, figures from the National Association of Realtors showed today in Washington. To receive a government incentive worth as much as $8,000, buyers must have signed contracts by the end of April and need to complete deals by the end of this month.
The decline raises the risk the retrenchment following the expiration of the tax credit will be deeper than anticipated. A slump in builder shares since late April has exceeded the retreat in the broader market on concern the damage from the end of government stimulus, mounting foreclosures and unemployment may cause renewed weakness.
Now, this is the BoomBustBlog version from March of this year, where I made it crystal clear that housing will fall further and significantly. The government incentives are just market interference and pricing distortions, prolonging the pain: "It’s Official: The US Housing Downturn Has Resumed in Earnest."
Let’s take a look at some charts sourced from the upcoming BoomBustBlog subscriber “A Fundamental Investor’s Peek into the Alt-A and Subprime Market” should be released withing 24 hours or so. This release will include all of the raw data necessary for users to run their own calculation and draw their own conclusions.
In the chart above, you can see where CA has made some progress interms of appreciation. CA, FL, and NV account for nearly 50% of nationwide price damage. Let’s take a closer look …
As you can see, even the effects of HAMP and QE in California are starting to wear off. Florida never broke positive ground, it just got worse at a slower pace. California’s housing market may get hit even harder as that state government is literally insolvent – and the effects of that insolvency will probably be taking root in the upcoming quarters in terms of diminished services and government employment.
These illustrated negative facing trends were easily discernable 3 months ago when I dissected the Case Shiller resutls graphically, see "If Anybody Bothered to Take a Close Look at the Latest Housing Numbers…"
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 the government bubble blowing.
Let’s chop the data up using bar graphs that give the reader a greater feel for the seasonality of the moves, and you will still find the latest numbers showing what looks like a downtrend, again …
Remember, the CS index measures matched sales pairs. That means that it attempts to follow the same properties being sold, so the seasonality will mean much less than if one were simply measuring transactions, irrespective of the property. The seasonally adjusted numbers look more positive, but still show a downtrend. Since I could not find the specific methodology on the “de-seasoning,” and I am easily able to discern the seasonal trends over time, I am much more comfortable with the raw index data.
Less than a week later, I expounded on this thesis with “The Reality Check for Bank Investors, Mortgage Investors and Home Buyers.”
In the meantime, the collateral behind these loans are still trending downward in value after many hundreds of billions of US tax dollars thrown at the situation. For residential values, see articles below:
"It’s Official: The US Housing Downturn Has Resumed in Earnest"
- "If Anybody Bothered to Take a Close Look at the Latest Housing Numbers…"
- “A Fundamantal Investor’s Peek into the Alt-A and Subprime Market”
For commercial property values, see CRE 2010 Overview 2009-12-16
Of course, this data invalidates the findings of the government SCAP stress tests for US banks (see links towards the bottom of this post).
Now, on to the latest data available for Alt-A and subprime mortgage performance.
The following informative reports, data sets and spreadsheets from which this post’s findings are derived are available to download for paying subscribers. The Alt-A Report is the full text from which certain data points were culled to create this blog post.
- ALt-A and Subprime Loan Performance Summary for Q4-2009: Details and summarizes both the quarterly performance and changes from last quarter for retail and professional subscribers
Q4-2009 Subprime Data Sheet: For professional and institutional subscribers, presents the full data sets behind the analysis to allow you to run your own numbers.
Q4-2009 Alt-A Data Sheet: For professional and institutional subscribers, presents the full data sets behind the analysis to allow you to run your own numbers.
The Facts as reported by the FDIC and the NY Federal Reserve Bank (their numbers, not mine):
- Foreclosures on First Lien Mortgages increased from 11.5% as of 31st October 2009 to 11.74% as of 31st January, 2010.
- Mortgage charge-off rates on Prime loans and Alt-A loans increased by 25bps and 21bps to 7.66% and 12.23% respectively over the same period.
- Delinquency rates for first lien mortgages on the other hand decreased by 7bps to 5.6%, for the quarter ended December 31, 2009.
- While Net Charge-off rates for Alt-A loans increased by 2.12% points q-o-q to 30.49% as on 31st Dec 2009, delinquency rates dropped by 27bps over the same period to 12.1%.
- In the case of Subprime loans, Net Charge off rates and Foreclosure rates, both rose to 44.6% and 15.6% respectively during 4Q09, compared to 42.9% and 15.4% during 3Q09.
- Delinquency rates declined from 26.4% in 3Q09 to 25.3% in 4Q09.
- Net charge off rates for HELOCs rose 13bps to 3.34% during 4Q09 while delinquency rates had a negligible decline.
- Net charge-off rates and delinquency rates for Business Loans (C&I loans) marginally declined during 4Q09 remaining more or less constant at 2.5% and 4.5% respectively.
- Delinquency rates under CRE loans remained steady during 4Q09 at 8.8% when compared with 3Q09. While delinquency rates for multifamily loans did not show any drastic changes in 4Q09, net charge-off rates under construction loans increased considerably from 6.3% in 3Q09 to 8.4% in 4Q09.
- Credit cards had a better quarter with net charge off rates and delinquency rates showing marginal improvements in 4Q09. Net charge off rates declined from 10.2% in 3Q09 to 9.5% in 4Q09, while delinquency rates declined from 6.6% to 6.4% over the same period.
- Other consumer loans showed a healthier 2.7% net charge off rate in 4Q09 as against 3.2% in the previous quarter. Delinquency rate in this segment also improved marginally, declining by 19 bps to 3.5% in 4Q09.
- Net charge-off rates and delinquency rates for other loans marginally increased. While net charge off rates increased from 1.7% in 3Q09 to 1.8% in 4Q09, Delinquency rates remained constant at 1.1% over 4Q09.
This is all against a backdrop of what was increasing home prices in many (if not most) MSAs for the quarters in question, which is a definitively positive development for it was the drop in home prices that precipitated much of the financial malaise of the last few years.
The direction of home prices has a very high correlation with foreclosures and delinquency rates (as well as unemployment), not to mention the trillion dollars or so of direct and indirect fiscal and monetary stimulus. While the delinquency data definitely shows a positive uptrend, when taken in light of what it took to get it and its correlation to home prices and employment (you must read "Are the Effects of Unemployment About To Shoot Through the Roof?"), I believe we are definitely in a wait and see scenario with a potentially negative outlook.
In analyzing the performance of Alt-A and subprime loans, it is best to look at things against the backdrop of housing prices for the comparable period. As you can see, the trend for pricing is down for both the last quarter and December of 2009, and from my anecdotal research and extrapolation from the data sets will be down Q1-2010 as well as for some time after that. Thus, it is fair to say that the collateral behind these loans will continue to be challenged. As a result of this in combination with stubbornly high unemployment, there will probably be a decent amount of pressure on delinquencies. Things have not gotten better from a fundamental or macroeconomic perspective, thus at this point I do not see a sustainable upward trend. As I stated earlier, we are in a wait and see mode.
As you can see, the residential housing uptrend is now apparently over, and we are resuming the downward decent.
Let’s look at the improvement in delinquencies and losses as compared to home prices in the grand scheme of things, a birds-eye view so to speak …
Now, hopefully all can see what I mean in terms of the recent downtick in 30 delinquencies.
Loss Severity and Potential Loss Severity According to the Most Recent Data Points:
- Total loan value of Alt A loans declined from $615 bn in 3Q09 to $590 bn in 4Q09, maintaining an average FICO score of 705 in both quarters.
- In 4Q09, nearly 43% of Alt A loans had least one late payment over the past year, while 3Q09 had nearly 40.7% of such loans. In Florida nearly 57.2% of Alt-A loans had at least one late payment over the past year in 4Q09 followed by Nevada with 53.9% and California with 48.7%. The percentages were comparatively lower in 3Q09 at 54.5%, 50.9% and 46.5% respectively.
- Nearly 8.2% of Alt A loans were 30-89 days past due during 4Q09, marginally higher when compared to 8.1% in 3Q09. During 4Q09, Rhode Island and West Virginia witnessed the highest delinquencies with 11.1% and 10.6% of loans 30-89 days past due, respectively.
Alt A loans 90+ days past due increased to 12.1% of total loans in 4Q09 compared to 10.1% in 3Q09. Nevada and California had the highest 90+ days loans past due at 18.4% and 16.9% of total loans, respectively in 4Q09.
- Total Alt A loans past due stood at 16.3% of total loans as of December 31, 2009 (30-89 days past due loans and 90+ days past due loans) compared to 14.6% as of September 30, 2009. Additionally, in 4Q09, 11.5% of Alt-A loans were under foreclosure, marginally higher than 3Q09 share of 11.1%. Share of REO loans were 3.0% in 4Q09, compared to 3.2% in 3Q09. There was an increase in the share of “Alt-A loans in risk of default based on pro-rata share” (based on weighted average foreclosure / past due loans and REO loans for each state with weights based on average loan outstanding at each state) from 34.3% in 3Q09 to 36.6% in 4Q09.
- As of December 31, 2009, approximately 43.3% (43.0% as of September 30, 2009) of Alt-A loan outstanding originated on or before 2005 while 35.0% (35.2% as of September 30, 2009) and 21.7% (21.8% as of September 30, 2009) of loans were originated during 2006 and 2007, respectively. With S&P Case Shiller declining by nearly 17% , 28% and 28% since 2005, 2006 and 2007, respectively, most of these loans are still underwater and there has not been much improvement in view of the fact that average LTV at origination for Alt-A loans has been constant at 81% in 4Q09 as well. To estimate current LTV for Alt-A loans we have used housing price decline for each of these states (based on S&P Case Shiller Index with weights based on percentage of loan origination for each year) and LTV at origination to determine current LTV. As seen from the table below current LTV for Alt A loans in U.S is at 111.5% with California and Florida (which together account for 53% of Alt-A loans) having one of the highest LTV ratio at 115% and 126%, respectively. LTV for Alt A loans remained more or less constant compared to 3Q09.
Note: The “total” line isactually a simple average.
- Compared to 3Q09 when almost 66% of subprime loans had least one late payment over the past one year, 4Q09 fared worse with an increase in the category to 67.1%.
- This is a very interesting tidbit that many probably did not realize. The total value of subprime loans outstanding drifted from $421 bn in 3Q09 to $403 bn in 4Q09 with a constant average FICO score of 616 in both quarters. California and Florida together constituted nearly 24% and 11% of total subprime loans followed by New York and Illinois. Despite these demographics, in Florida and New Jersey nearly 75.9% and 74.5% of subprime loans had at least one late payment over the past year. It appears as if the California/Florida coastal state combo are no longer the loss leaders in the subprime malaise. It is getting worse, and it is spreading!
- As of December 31, 2009, 15.9% of subprime loans were 30-89 days past due, an improvement from 16.4% recorded as of September 30, 2009 (I sense this mostly due to the acceptance of short sales by the lender, which will end up as losses through the income statement – eventually). Mississippi and North Carolina witnessed the highest delinquencies with 19.7% and 19.5% of loans 30-89 days past due, respectively. Loans 30-89 days past due for California and Florida stood comparatively better at 11.6% and 11.9%, respectively. Again, the malaise is spreading outward and beyond the highly damaged coastal states.
- At the national level, Subprime loans 90+ days past due worsened materially and significantly in 4Q09 at 20.2% compared to 17.7% in 3Q09. Nevada and Massachusetts having the highest 90+ days past due at 27% and 26.5% of total loans, respectively California and Florida were stood at 24.6% and 18.7%, respectively as of December 31, 2009. Again, the malaise is spreading outward and beyond the highly damaged
- Total loans past due for subprime stood at 34.3% as of December 31, 2009 compared to 32.9% in September 30, 2009. Foreclosed and REO loans stood at 13.9% and 3.7% (the REO numbers are highly suspect due to many reports on the ground indicating that banks are refusng to take back delinquent properties), respectively in 4Q09 as compared to 13.5% and 2.3% in the previous quarter. Overall, in 4Q09, 54.3% of subprime loans are in risk of default based on pro rata share (based on weighted average foreclosure / past due loans and REO loans for each state with weights based on average loan outstanding at each state), a deterioration compared to 3Q09 share of 52.6%.
- As of December 31, 2009, nearly 49.5% of current subprime loan outstanding were originated on / before 2005 while 35.2% and 15.3% of loans were originated during 2006 and 2007, respectively. These percentages stood 49.2%, 35.5% and 15.2% respectively as of September 30, 2009. With S&P Case Shiller declining by nearly 17% , 28% and 28% since 2005, 2006 and 2007, respectively most of these loans are still underwater and there has not been much improvement in view of the fact that average LTV at origination has been constant at 84% in 4Q09. As seen from the table below, the current LTV for subprime loans is at 111%, with Michigan and Arizona having the highest LTV at 147% and 141%, respectively (again, the malaise is spreading outward and beyond the highly damaged coastal states). LTV for Subprime loans remained more or less constant compared to 3Q09, due to the short-lived upward blip in home prices.
Note: The “total” line is actually a simple average.
As can be seen from the chart below (3Q-09), there are still plenty of losses to be taken in these loan categories.
So banks are doing well, after all, their stock prices have gone up over 100% from last year’s lows, right? You see, I am a fundamental investor, and the fundamentals say many of the banks are nothing but big, black, sinkholes.
The stock market has decided to “all of a sudden(ly)” disagree with this assessment. I wonder why? Of course, FASB has allowed them to absolutely ignore everything in all of the charts you see above.
Disclosure: No positions