Half of the good borrowers from '05 through '07 are now underwater on their homes
Think that banks are on the mend? Sure they have raised massive amounts of money by diluting their existing shareholders even further, but the toxic er um, excuse me "legacy" assets on their books are continuing to deteriorate.
I personally hate the ratings agencies and I take everything that they say with a huge grain of salt, but John Maudlin shared the following information from Fitch in a recent newsletter that I found interesting.
Fitch (the ratings agency), in a downgrade of yet another 543 mortgage-backed securities of 2005-07 vintage, gives us the following side notes: "The home price declines to date have resulted in negative equity for approximately 50% of the remaining performing borrowers in the 2005-2007 vintages. In addition to continued home price deterioration, unemployment has risen significantly since the third quarter of last year, particularly in California where the unemployment rate has jumped from 7.8% to 11%... The projected losses also reflect an assumption that from the first quarter of 2009, home prices will fall an additional 12.5% nationally and 36% in California, with home prices not exhibiting stability until the second half of 2010.
Those numbers are unbelievable. Half of the good aka performing borrowers from '05 through '07 who are actually current on their existing mortgages are now underwater on their homes. Good grief. I consider myself to be a fairly responsible individual and there's no way that I would pay money to sell my house if I was upside down on it and was forced to move for work or some other reason.
How much could all of the MBS that were issued during the peak of this mess in '05 through '07 actually be worth? I suspect pennies on the dollar. The financial panic that we saw at the end of 2008 when the entire system was teetering on collapse has eased quite a bit. Most major banks probably will not go bankrupt, but how much do you want to bet than continuing losses will force them to do another round of shareholder dilution or to force preferred shareholders to convert to common at some point down the road? My fear of a forced conversion and additional dilution caused me to sell my preferred BofA and Wells Fargo stock and pocket some nice gains after its huge run.