Wednesday, September 8, 2010

More On Housing...

Per the data reported in this article, 40% of all subprime mortgages are delinquent - LINK According to the data being reported by banks, 16% of prime mortgages are delinquent.  I'm going to run some math using total numbers that are a bit stale, but still relevant enough to prove a point that a large part of the credit crisis in 2008 was fueled by the collapse of the subprime market.  "Prime" time is still to come.

Roughly, the total mortgage market is around $12 trillion, of which $500 billion is subprime and $1 trillion is "Alt-A."  The latter is a fancy label for mortgages which are really subprime but issued based on non-documented input from the borrower and the regulators allowed them be regarded as better quality that subprime.  "Alt-A" are the liar loans.  Finally, the "prime" mortgage market is roughly $10.5 trillion. 

So 40% - or $200 billion - of the subprime market is delinquent or in default.  According to the article 16% of the prime market is delinquent.  That's $1.68 trillion.  The amount of troubled prime mortgages is nearly 7 times the total amount of subprime toxicity.  I don't think that needs any rhetorical commentary.  Alt-A, last time I noticed, was running around 25%, or $250 billion, delinquent. 

Right now the foreclosure rate on prime paper is running a little over 2%.  The real question is, to what extent are banks now dragging their feet on foreclosing on prime mortgages and just how ugly with the prime market bloodbath get?  We all know, or have heard of, people who have not made a mortgage payment in the last year and have yet to be contacted by their bank.  But given all of the mortgage market fraud that we know about - and I'm sure there's plenty we don't - what percentage of prime mortgages should have been classified as subprime/alt-a? Time will certainly tell, but if the foreclosure rate on prime paper approaches 10% - over $1 trillion - which it easily could, the financial system is in serious trouble.  And this doesn't include any analysis of the $3.5 trillion commercial real estate disaster brewing.

And then there's this:  "Scarcity of jobs puts more at risk of foreclosure
The jobs crisis is putting more Americans at risk of losing their homes. One in 10 households has missed at least one mortgage payment, and more than 2 million homes have been repossessed since the recession began. Few expect the outlook to improve until companies start to hire steadily again and layoffs ease.
Here's the article LINK

Again, the numbers cited in that article could be a lot worse if banks were held to formal regulatory standards with regard to declaring delinquencies/defaults/foreclosures. I don't think I need to add any more commentary other than to say that the housing situation in this country is much worse than any of us understands and will likely lead to a much bigger credit crisis in the near future. Perhaps we should be fearing the Ides of October...


  1. Great post Dave. Looking at the Gold and Silver action of the last few days/months the fear is speaking loud and clear.


  2. Thanks Bill. Appreciate the feedback. This move in the metals is definitely climbing the proverbial wall of worry.

  3. By the way Dave I thoroughly enjoy the way you mix the current economic events up in your blog. I know you have a few Blog trolls that whine when you talk of other very important economic issues besides PM's, but I just want to say it is all intertwined, and it works for me and makes for a great read and very enjoyable blog at that.

    All the best


  4. If I was to lend in the prime mortgage market, knowing there is a 16% delinquency rate, I think I would charge around 16% interest, as a ballpark figure. Definitely not anywhere close to 4.5%.

  5. Really appreciate the feedback Bill!

    LOL satch. You and I both would be lending at 16%. But since 98% of all mortgages are now backstopped by the Govt, using Taxpayer money, the interest rate being charges has nearly no aspect of risk reflected in the mortgage rate. It's completely absurd.

  6. You've presented a compelling and factual summary. There is only one natural action to take after understanding this information...