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Unemployment And Residential Delinquencies

|Includes:JPMorgan Chase & Co. (JPM), WFC

There are many statistics in the press, which suggest that high unemployment is one of the main cause of housing delinquencies. Unemployment, is a factor but not the main factor. Below is the slide from JP Morgan's recent investor day presentation. It says that about 40% of Mortgages that were on JP Morgan's books either have gone through modifications/short sales, foreclosed and or delinquent for 90 days or more. 40% having gone through some restructuring is a big number. The annual unemployment rate is hovering around 8% per year. Included in this number about 50% is long term unemployed.

The number of modifications, foreclosures or delinquencies far exceeds the number of unemployed people. There are other data available to institutions, which clearly shows some of the exotic type of mortgages are responsible for the bulk of the modifications, short sales etc. This also shows that there are numerous strategic defaults or consumers trying to modify the loans to get favourable terms of payments. Additionally one more factor which never gets mentioned is that in most cases, consumers have not been made to pay for the difference between the house value and mortgage. Either due to state regulations or banks fearing that it could lead to costly PR disaster. This effectively means like consumers are having the call option on house. If the value of the house goes up, consumers get to keep the house and gains and if the value of the house falls, consumers walks away with only the down payment (like option premium) and blemished credit history.

Loss forecasting becomes challenging for outside investors as investors have less visibility on the quality of the book and forecasting the strategic defaults is bound to have a wide range of uncertainity. For the valuation of Real Estate business of Banks from the projected cash flows, discount rate should reflect this additional risk.

Stocks: JPM, WFC