Incoming: Another Significant Wave of Mortgage Defaults

The Fed and Treasury face wave after wave of defaults from the unwinding of the credit bubble. They have lowered interest rates to try and stem the incoming tide of collapse, and in doing so they will trigger inflation and perhaps yet another bubble elsewhere if they can. What will it be? It may be a bubble in certain commodities, and indeed even be an anti-bubble in the dollar and the imposition of draconian domestic measures.

August 4, 2008
Housing Lenders Fear Bigger Wave of Loan Defaults
By VIKAS BAJAJ

The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building.

Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults.

The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.

The mortgage troubles have been exacerbated by an economy that is still struggling. Reports last week showed another drop in home prices, slower-than-expected economic growth and a huge loss at General Motors. On Friday, the Labor Department reported that the unemployment rate in July climbed to a four-year high.

While it is difficult to draw precise parallels among various segments of the mortgage market, the arc of the crisis in subprime loans suggests that the problems in the broader market may not peak for another year or two, analysts said.

Defaults are likely to accelerate because many homeowners’ monthly payments are rising rapidly. The higher bills come as home prices continue to decline and banks tighten their lending standards, making it harder for people to refinance loans or sell their homes. Of particular concern are “alt-A” loans, many of which were made to people with good credit scores without proof of their income or assets.

“Subprime was the tip of the iceberg,” said Thomas H. Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. “Prime will be far bigger in its impact.”

In a conference call with analysts last month, James Dimon, the chairman and chief executive of JPMorgan Chase, said he expected losses on prime loans at his bank to triple in the coming months and described the outlook for them as “terrible.”

Delinquencies on mortgages tend to peak three to five years after loans are made, said Mark Fleming, the chief economist at First American CoreLogic, a research firm. Not surprisingly, subprime loans from 2005 appear closer to the end of defaults than those made in 2007, for which default rates continue to rise steeply.

“We will hit those points in a few years, and that will help in many ways,” Mr. Fleming said, referring to the loans made later in the housing boom. “We just have to survive through this part of the cycle.”

Data on securities backed by subprime mortgages show that 8.41 percent of loans from 2005 were delinquent by 90 days or more or in foreclosure in June, up from 8.35 percent in May, according to CreditSights, a research firm with offices in New York and London. By contrast, 16.6 percent of 2007 loans were troubled in June, up from 15.8 percent.

Some of that reflects basic math. Over the years, some loans will be paid off as homeowners sell or refinance, and some homes will be foreclosed upon and sold. That reduces the number of loans from those earlier years that could default. Also, since the credit market seized up last year, lenders have become much more conservative and have stopped making most subprime loans and cut back on many other popular mortgages.

The resetting of rates on adjustable mortgages, which was a big fear of many analysts in 2006 and 2007, has become less problematic because the short-term interest rates to which many of those loans are tied have fallen significantly as the Federal Reserve has lowered rates. The recent federal tax rebates and efforts to modify more loans have also helped somewhat, analysts say.

What will sting borrowers more than rising interest rates, analysts say, is having to pay interest and principal every month after spending several years paying only interest or sometimes even less than that. Such loan terms were popular during the boom with alt-A and prime borrowers and appeared appealing while home prices were rising and interest rates were low.

But now, some borrowers could see their payments jump 50 percent or more, and they may not be able to sell their properties for as much as they owe.

Prime and alt-A borrowers typically had a five- or seven-year grace period before payments toward principal were required. By contrast, subprime loans had a two-to-three-year introductory period. That difference partly explains the lag in delinquencies between the two types of loans, said David Watts, an analyst with CreditSights.

“More delinquencies look like they are on the horizon because so few of them have reset,” Mr. Watts said about alt-A mortgages.

The wave of foreclosures is still rising in states like California, where many homeowners turned to creative mortgages during the boom. From April to June, mortgage companies filed 121,000 notices of default in California, up nearly 7 percent from the first quarter and more than twice as many as in the second quarter of 2007, according to DataQuick, a real estate data firm based in La Jolla, Calif. The firm said the median age of the loans increased to 26 months from 16 months a year earlier.

The mortgage giants Freddie Mac and Fannie Mae, which own or guarantee nearly half of all mortgages, are trying to stem that tide. Last week, they said they would pay more to the mortgage servicing companies that they hire to modify delinquent loans and avoid foreclosures.

Delinquencies in prime and alt-A loans are particularly challenging for banks because they hold more such loans on their books than they do subprime mortgages. Downey Financial, which owns a savings bank that operates in California and Arizona, recently reported that 11.2 percent of its loans were delinquent at the end of June, a big increase from the 6.1 percent that were past due at the end of last year.

The bank’s troubles stem from its $6.2 billion portfolio of so-called option adjustable-rate mortgages, which allow borrowers to pay less than the interest owed on their mortgage in the early years. The unpaid interest is added to the principal due on the loan, so over time borrowers can owe more than the initial loan amount. Eventually, when loans grow by 10 percent or 15 percent, the borrowers are required to start paying both the interest and principal due.

Many borrowers who got these loans during the boom had good credit scores, but many of them owe more than their homes are worth. Analysts believe that many will not be able to or want to make higher payments.

“The wave on the prime side has lagged the wave on the subprime side,” said Rod Dubitsky, head of asset-backed research at Credit Suisse. “The reset of option ARM loans is a big event that will drive the timing of delinquencies.”

US Credit Crisis: There Will Be No Resolution Until There Is Reform

Its good to be aware that we are not the only ones saying things like this. It is a general theme being repeated throughout the international media, if not in the domestic media in the States. There will be no resolution of the credit crisis until there is meaningful systemic reform.

Jul 31, 2008
The Asia Times
Paulson still doesn't get it
By Peter Morici

Once again, we have good news and bad from Wall Street.

US Treasury Secretary Henry Paulson has announced that Citigroup and three other banks will begin issuing covered bonds in an effort to rejuvenate commercial bank mortgage lending and the housing market.

Concurrently, Merrill Lynch announced it is taking yet another big write down on its subprime securities, selling paper with a face value of US$30.6 billion to private equity firm Lone Star for $6.7 billion. It will dilute its common stock 38% through the sale of additional shares to make up the losses.

Paulson's covered bonds would be backed by specific mortgages held by the banks. In essence, these would be large certificates of deposit. Though not necessarily insured, the bonds would be backed by specific assets on the banks books, and the banks would to take steps to ensure these mortgages were good - not the junk Merrill Lynch, Citigroup and others have been hoisting on investors.

Whether the bond market accepts these securities - essentially whether insurance companies, pension funds and other fixed-income investors take the plunge - comes down to trust in the banks. Recent events at Merrill Lynch, Citigroup and others indicate that such trust will require a bold leap of faith.

The basic problem at the big banks is compensation schemes that encourage bank executives to make risky bets that allow them to profit when things go well and to push the losses on bond and stockholders when things go sour. Upon taking over Merrill Lynch, John Thain increased executive bonuses but established a risk management scheme. That hasn't worked.

At Citigroup, chief executive Vikram Pandit is selling off assets to cover losses, but he has not given back the $165 million he took from shareholders in his sale of the Old Lane hedge fund to his employer. The bank subsequently took more than $200 million in losses, yet the Citigroup bonus machine continues to payout to its executives.

USB is under investigation for fraud in the sale of auction rate securities.

It seems hard to find a major bank without some a record of sharp practices.

Paulson is trying to sell trust in the banks with his new covered bonds. It's tough to sell trust in a Wall Street bank these days because there is not much to trust.

An insurance company that buys Paulson's covered bonds will likely be all right, but it is taking an imprudent risk. That should tell you something about the competence of its management, and it would be signal to dump its stock.

Paulson's scheme to reopen the bond market to banks for mortgage lending will only work, if the commercial banks clean up the management practices that caused the subprime crisis, and massive losses imposed on shareholders and bond customers. (and taxpayers, and all holders of US dollars - Jesse)

The federal government is imposing new a regulator on Fannie Mae and Freddie Mac, which will have authority to regulate executive compensation. The Federal Reserve has loaned hundreds of billions to Wall Street banks and securities companies without any real commitments for management reform. The asymmetry is puzzling.

Paulson will only get the mortgage market, housing crisis and economy turned around when he resolves the confidence gap on Wall Street. That requires systemic reform in the business practices and compensation structures. What's good for Fannie and Freddie would be good for Citigroup, Merrill Lynch and the others.

Peter Morici is a professor at the University of Maryland School of Business and former chief economist at the US International Trade Commission.

The Mortgage Crisis Is a Replay of the TechBubble, Enron, the S&L Crisis...

When will we stop allowing the organized looting of our country by a relatively small number of greedy and unscrupulous men?

S&P emails slammed mortgage debt products
Sat Aug 2, 12:36 PM ET
by Jim Marshall

CHICAGO (Reuters) - Analysts at Standard & Poor's Rating Services warned against mortgage-related debt products in internal e-mails that, in one case, called the complex financial deals "ridiculous," the Wall Street Journal reported in its weekend edition.

The Journal cited a draft revision of a U.S. Securities and Exchange Commission report on bond-rating firms that was first released on July 8.

In one email message, an S&P analyst called a mortgage or structured finance deal "ridiculous" and wrote "we should not be rating it."

In another email, an S&P manager said ratings agencies were helping to create an "even bigger monster -- the CDO (collateralized debt obligation) market. Let's hope we are all wealthy and retired by the time this house of card falters."

Rating agencies struggled with the growth of asset-backed securities and saw breaches in their conflict-of-interest policies, according to the report released early last month on an industry blamed for helping contribute to the subprime mortgage crisis.

An SEC examination "uncovered serious shortcomings," SEC Chairman Christopher Cox said when the report was released, adding that the problems are being fixed.

The SEC spent 10 months looking at the biggest ratings firms: Moody's, Standard & Poor's and Fimalac SA's Fitch Ratings.

A spokesman for Standard & Poor's, a unit of McGraw-Hill Companies Inc (MHP.N), was not immediately available to comment on the Journal report.

A Review of the Gold Bull - 2 August 2008

Here is a long term view of this gold bull market back to the major upturn. Note the periodic corrections and consolidations.

Things happen for a reason. The reason there are corrections and consolidations in these long term trends is that there are contrary opinions among traders which engage the push and pull of the market. Also, and importantly, different traders have different positions operating on different timeframes and different agendas.

Within a long term trend there are opportunities to squeeze the shorts and shake out the weak hands on the long side. With 8000 desperate hedge funds out there, and ten or more outsized banks flush with hot money and a shrinking pool of opportunities, we can expect more short term volatility as traders try to set up gambits, squeezes and traps. There is also a bias among the central banks against gold, which is the antithesis of an arbitrary power to determine the value of money. This is at the root of their greatest policy error. For all the reason noted, the bigger players will shove against the price trend when they can, but as is obvious from the chart they cannot resist the pressure of a valid trend indefinitely at least while markets function.



Here is a closer look with a simpler line. Again note the corrections. Charts are not modern art. They are symbolic representations of reality. Of course at some point the long bull trend will end, but until then it will often correct and consolidate. It is our task to try and set some reasonable criteria to see what is happening as closely to when it happens. As the progress of the trend proceeds we buy weakness and sell strength as best we can, managing leverage and our emotions above all.



Here is a look at the same closeup but on a percentage basis. Note the wavering, the push and pull of the bulls and bears, the big trading desks and the small speculators and funds. We have friends and acquaintances who abhor gold, because they think that they have missed the bull trend and wish to see it fail, so that they might be proven 'correct.' The only correct thing to do in trading and investing is to make a profit fairly, with justice.



Here is a closeup view, the daily chart which we post every day. Although we cannot be sure, it does look as though we are closer to the end of this correction than the beginning, and that we are testing some strong support. The dollar is also at a key juncture in its countertrend rally. The FOMC will make their August policy statement next Tuesday 5 August. This will probably be a decisive moment. Gold has strong support at 875 and 860. The dollar has strong support at 68.

We will not be surprised to see gold test the psychological barrier of 900 severely. That does not matter. It does not change the trend. When the market realizes that the test is over and the trend is in control again the move higher may be impressive. This is the same for all bull markets, whether they be gold, oil, swiss francs, euros, silver, whatever. Bear markets have a slightly different character, although the bear market in the dollar is being managed artificially so as to even its decline. Bear markets are normally more violent than bull markets.

Let's see what happens.