Doom News

Last week I posted a Bloomberg news article supporting
my suspicions that investors are putting bad loans back to the banks at
an increasing rate. I used JP Morgan as a specific example -Banks Swallow Another $30 billion or So
in More Losses as Their Share Prices Surge (Again).

A few
commenters on syndicated sites appeared to have really underestimated
the significance of this development. In the article, it is alleged
that Freddie and Fannie are forcing banks to eat up to $30 billion in
soured mortgages under the warranties and representations clauses of
the sales contract. To highlight the significance of this development,
let me remind all that Fannie and Freddie are benchmarks for mortgage
lending in the US.

(Bloomberg) -- Taxpayer losses from
supporting Fannie Mae and Freddie Mac will top $400 billion,
according to Peter Wallison, a former general
counsel at the Treasury who is now a fellow at the American Enterprise
Institute.

“The situation is they are losing gobs
of money, up to $400 billion in mortgages,” Wallison said in a Bloomberg
Television interview. The Treasury Department recognized last week that
losses will be more than $400 billion when it raised its limit on
federal support for the two government-sponsored enterprises, he said.

 The U.S. seized the two mortgage financiers in 2008
as the government struggled to prevent a meltdown of the financial
system. The debt of Fannie Mae, Freddie Mac and the Federal Home Loan
Banks grew an average of $184 billion annually from 1998 to 2008,
helping fuel a bubble that drove home prices up by 107 percent between
2000 and mid-2006, according to the S&P/Case- Shiller home-price
index.

The Treasury said on Dec. 24 it would
provide an unlimited amount of assistance to the companies as needed for
the next three years to alleviate market concern that the government
lifeline for Fannie Mae and Freddie Mac, the largest source of money for
U.S. home loans, could lapse or be exhausted.

Lax
regulation of Fannie Mae and Freddie Mac led to the mortgage companies
taking on too many risky loans, Wallison said.

“It
turns out it was impossible to regulate them,” he said. “They were too
powerful.” He said no one knows how much will be needed to keep the
companies solvent.

With this in mind, I
want to parse the logic behind my posting the Fanie/Freddie issue in
the first place. This is not about Fannie and Freddie, this is
about all investors they have sold MBS and mortgages to as well as all
insurers they have bought insurance from. The monolines are putting bad
loans back to originators too. The admins of loan pools, CDO's etc.
also wish to minimize their losses. If the banks had to eat a 50% loss
of all of the bad loans they have sold (which is at least a third of
all of the loans sold from '05 to '08) then we are talking significant
numbers. The loss rate on subprime mortgages is nearly 50% now. 

Bloomberg : Real estate
loans at U.S. banks that are at least 90 days overdue or that are
expected to default almost doubled in 12 months to 7.1 percent, according
to December FDIC data. Non- performing
loans for construction and development rose to 16 percent from 8.6
percent. 

...The sale of loans from
failed banks in 2009 brought on average 43 percent of their book value,
according to an FDIC summary. Non-performing loans, those on which the
borrower has defaulted or there is little prospect of repayment, were
sold for 26 percent of their book value on
average.

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 It's Official: The US Housing Downturn
Has Resumed in Earnest, -   If Anybody Bothered to Take a Close
Look at the Latest Housing Numbers... and "A Fundamantal Investor's Peek into the
Alt-A and Subprime Market". For commercial property
values, see  CRE 2010 Overview
2009-12-16 07:52:36 2.85 Mb.

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 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. Click
any graph below to enlarge.

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 (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

Alt-A Loans

• 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 is actually a simple average.

Subprime Loans

• 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
  coastal states.
• 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 went 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.

Reality
is, after all, reality - and it will hit, sooner or later. At that
time we will have a dot.com style moment, except we will be talking
trillions of dollars instead of billions. For more on this, see "How Regulatory Capture Turns Doo Doo
Deadly". 

I have written A LOT on the topic of banking, fraud
and bogus stress testing. The numbers that you see above reveal the
stress tests to be a fraud. as does Barney Frank's admission that
second lien loans essentially have no economic value (more on that
later, I have alleged this for over 2 years now)...

Residential Lending Credit Losses
Worsen as Unstainable Government Support Proves... Unsustainable
...though. Let's glance at the non-conforming loan losses that have
already occurred in comparison to the SCAP projections that
justified the return of TARP in many cases. Recovery rates had the
illus...Monday, 21 December 2009

Welcome to the Big Bank Bamboozle! I
have produced a downloadable PDF which clearly shows exactly how far
off the banks and SCAP bank stress tests are from the
delinquency and foreclosure information that the Federal government
distr... Tuesday, 12 May 2009 About the Politically Malleable FASB,
Paid for Politicians, and Mark to Myth Accounting Rules Johnathan
Weill has an excellent article on Bloomberg today illustrating just how
BS the BS FASB accounting changes regarding mark-to-market really
were. For all of those who wondered why I Thursday, 25 February 2010

Other
banks to look at with suspect portfolios:

JP Morgan Chase

(Free
Preview)  JPM Public Excerpt of Forensic Analysis Subscription 2009-09-22
14:33:53 1.51 Mb

 JPM
Forensic Report (092209) Final- Retail 2009-09-24
03:12:17 130.93 Kb

 JPM
Report (092209) Final - Professional 2009-09-24
03:13:31 550.72 Kb

Bank of
America

 BAC Swap
exposure_011009 2009-10-15 01:02:21 279.76
Kb

PNC Bank

 PNC Report
050508 revised 2008-08-30 06:38:42 711.95
Kb

 PNC
Report_update final - Pro 2008-10-15 13:21:22 590.98
Kb

 PNC
Report_update final - Retail 2008-10-15 13:21:38 337.21
Kb

 PNC SCAP Results recast using FDIC and NY Fed
data - Pro 2009-05-15 07:31:21 455.37
Kb

 PNC SCAP Results recast using FDIC and NY Fed
data - Retail 2009-05-15 07:30:25 395.18
Kb

 PNC
Simulated Government Stress Test 2009-05-01 13:09:19 664.87
Kb

 PNC Stress Test Pro 2009-04-13
02:10:17 3.11 Mb

 PNC Stress Test
Retail 2009-04-13 02:11:08 323.51
Kb

 PNC
Stress Test update - Professional 2009-04-21
15:55:56 3.00 Mb

 PNC
Stress Test update - Retail 2009-04-21 15:53:52 777.50
Kb

 PNC
stress test write up - public lite 2009-07-27
02:37:11 995.30 Kb

Sun Trust

 STI update 2009-09-03
06:33:371.08 Mb

 Sun Trust Bank
Report 2008-08-30 06:39:22 391.89
Kb

 Sun Trust Bank Stress Test Scenario
Analysis – Government Simulation 2009-04-30
03:43:18 665.82 Kb

 Sun Trust Banks Simulated Government Stress Test 2009-05-05
11:37:13 1016.17 Kb

The
Government Stress Test

 The Supervisory Capital
Assessment Program: Design and Implementation 2009-04-30
02:16:44 286.90 Kb

Wells
Fargo 

 WFC
Investment Note 22 May 09 - Pro 2009-05-27 01:56:54 853.53
Kb

 WFC
Investment Note 22 May 09 - Retail 2009-05-27
01:55:50 554.15 Kb

 WFC Off
Balance Sheet Exposure 2009-10-19 04:25:53 258.77
Kb

 WFC Research
Note Sep 2009 2009-09-30 13:01:30 281.29
Kb

All subsribers can download the data that
generated the graphs above here:

• 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. 
  

Click here to subscribe.  The dataset
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...