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TMFDeej (99.47)

Half of the good borrowers from '05 through '07 are now underwater on their homes

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June 17, 2009 – Comments (19) | RELATED TICKERS: BAC , WFC

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.

Deej

19 Comments – Post Your Own

#1) On June 17, 2009 at 8:19 AM, portefeuille (99.78) wrote:

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.

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Typical prices for originally AAA rated prime-jumbo securities climbed to about 82 cents on the dollar on May 7, from about 66 cents March 5, according to Barclays Capital reports. Similar subprime securities from the second half of 2006 fell to about 34 cents, from about 35 cents, based on a credit-default swap index, according to the bank’s reports.

In March, so-called severities, or the amount lost after foreclosures relative to loan sizes, ranged between 70.8 percent and 73.3 percent on average for mortgages underlying the four different ABX index series, according to the bank.

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(from here)

 

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#2) On June 17, 2009 at 8:48 AM, alstry (35.70) wrote:

Why are those numbers unbelievable??  A number of us reality bloggers told you they were this bad.....

but don't fret...it will get a lot worse!!!!!

My suggestion is go back to watching Pig shows....you will be much happier than reading the news.

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#3) On June 17, 2009 at 9:03 AM, portefeuille (99.78) wrote:

#1 more info on the ABX indices is here.

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#4) On June 17, 2009 at 9:31 AM, Retired31B5M (< 20) wrote:

What makes this really suck is that me and my wife are looking at buying a home in S. California.  Should we buy now and risk going underwater?  Or should we wait and risk losing out to higher interest rates?

At the moment anything but a foreclosure seems too risky (assuming we can pick up a foreclosure at a significant discount).

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#5) On June 17, 2009 at 9:34 AM, alstry (35.70) wrote:

If you wait long enough, maybe you can just pay cash!!!!

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#6) On June 17, 2009 at 9:42 AM, portefeuille (99.78) wrote:

Having read the article mentioned in comment #1 above I think it is worth posting it in its entirety since it is fitting here very well (I think. emphasis (bold face) added by me!).

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Amherst Securities Buys Subprime-Mortgage Bonds, Dobson Says

By Jody Shenn

May 14 (Bloomberg) -- Amherst Securities Group, the mortgage-bond specialist that told clients to bet against subprime loans before the market collapsed two years ago, has spent about $150 million buying the securities.

While it’s possible all subprime borrowers will default on their loans, losses on the foreclosures won’t continue “to rise to the sky,” said Sean Dobson, chief executive officer of the Austin, Texas-based firm.

“It’s not unreasonable to expect 100 percent of them to default,” Dobson said yesterday in a telephone interview. “It’s probably unreasonable to expect only 20 cents on the dollar in recovery.”

Subprime securities generally haven’t risen in value in the past two months amid a rally among other types of home-loan bonds without government backing. A price rise for Alt-A and prime-jumbo mortgage securities, reflecting refinancing as mortgage rates plunge, is “overdone,” he said. Refinancing has boosted the value of those securities by returning some of the principal of bonds trading below face value at a faster pace.

Typical prices for originally AAA rated prime-jumbo securities climbed to about 82 cents on the dollar on May 7, from about 66 cents March 5, according to Barclays Capital reports. Similar subprime securities from the second half of 2006 fell to about 34 cents, from about 35 cents, based on a credit-default swap index, according to the bank’s reports.

In March, so-called severities, or the amount lost after foreclosures relative to loan sizes, ranged between 70.8 percent and 73.3 percent on average for mortgages underlying the four different ABX index series, according to the bank.

Loan-to-Value

That won’t rise to 80 percent or more, as many investors assume, because the borrowers who haven’t yet defaulted have different “profiles” from those who have, Dobson said. The characteristics include loan-to-value ratios, property values, loan sizes and why they took out the debt, he said.

About 34.9 percent of subprime mortgages backing securities were at least 60 days delinquent, in foreclosure or already turned into seized property in March, up from 23.7 percent a year earlier, according to Bloomberg data.

Amherst, which recently bought the securities for itself and asset managers that are clients of the advisory business, expects to reap “mid-teen” annual returns on the bonds, Dobson said. Their value may fall about 50 percent if the Obama administration’s modification plan leads to all the underlying loans being reworked, he said.

Partly for that reason, “this is not a big conviction buy,” he said. “We’re treading very carefully.”

Jumbo mortgages are larger than what government-supported mortgage companies Fannie Mae and Freddie Mac can finance, currently from $417,000 in most areas to as much as $729,500. Subprime loans were given to borrowers with poor or limited credit records or high debt burdens. Alt-A mortgages fall between prime and subprime in terms of expected defaults.

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#7) On June 17, 2009 at 9:47 AM, alstry (35.70) wrote:

Unfortunately, most models don't factor Alstrynomics into the equation....as a result, it is why Alstry has been far more accuate than the ratings agencies.

What most models failed to account for is American wages must be cut at least 50% in order to simply enter the relm of being competitive in a global basis.....and since most Americans live paycheck to paycheck.....most will get zombulated.

If wages get cut 50% and commodity prices remain intact....expect home prices to drop between 70-80% from peak to trough.

In places with heavy job losses like Detroit....expect declines of 90% and higher!!!!

If reality bothers you, my suggestion is bury yourself in T.V.

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#8) On June 17, 2009 at 9:48 AM, portefeuille (99.78) wrote:

So the danger (for the mortgage bond holders) is not so much falling house prices but the Obama administration being "too easy" on the home owners. Interesting ...

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#9) On June 17, 2009 at 9:56 AM, alstry (35.70) wrote:

Actually, the problem is 75-90% of America will go bankrupt with the massive wage cuts and job losses ahead....Obama will be forced to enact extra-judical proceeds to make the process more efficient.....

If we didn't pay welfare we would already be FAR EXCEEDING The Great Depression unemployment rates!!!!

Zombulation is not a theory....it is a state of existence....and few can escape the Zombulator....especially when Obama must tax you everything you have to protect you from the Evil Meanies!!!!

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#10) On June 17, 2009 at 9:59 AM, TMFDeej (99.47) wrote:

Ignore

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#11) On June 17, 2009 at 10:04 AM, TMFDeej (99.47) wrote:

Hey port.  Thanks for reading.  I personally would be very, very hesitant to purchase any mortgage related securities at this point.  On a similar note, I certainly do not want exposure to any companies or banks that have significant exposure to mortgages on their books in my personal portfolio.

In my opinion, the anslysts, like that moron Dick Bove who has been calling BofA a "Buy" all the way down, are being way too optimistic about the losses that banks will take on their assets and about their earning power going forward.  Yes, the yield curve is steep right now, but banks do not have anywhere the earning power today that they had during the prime of securitization and leverage.

Deej

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#12) On June 17, 2009 at 10:23 AM, FreundInvesting (30.05) wrote:

This is what Alstry and all other bears have been saying for a while now (including me). The next leg down will be brutal, and the level of stock market capitulation will be astonishing. That's when you know it's time to buy.

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#13) On June 17, 2009 at 10:36 AM, alstry (35.70) wrote:

Freund,

Most people prefer to ignore the problem than deal with it....they simply can't fathom that we have a living standard in America that simply can't be sustained on our dwindling revenues.....

That our entire economy is one big Dot.com valuation and we are all about to be Zombulated......it is a very interesting psychological experiment to watch people's reactions when the KNOW Alstry is right....but they simply can't get their heads there.

In the end, chance favors the prepared mind.....PREPARE!!!!!

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#14) On June 17, 2009 at 11:00 AM, kaskoosek (97.72) wrote:

FreundInvesting

I am not so sure.

Monetary and fiscal policicies are two huge unkowns.

 

I think that guys like Faber and Rogers have the right to be scared. 

 

 

 

 

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#15) On June 17, 2009 at 12:32 PM, FreundInvesting (30.05) wrote:

kaskoosek

I don't know why people are scared of inflation... how can you have inflation when no-one can afford inflated prices? Granted, inflation will be an issue once we stop losing wages/jobs/home values, but I don't see that happening for a few years at least. Just my $.02

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#16) On June 17, 2009 at 1:00 PM, JGus (29.45) wrote:

Deej - Did you see that 41% of ALL HOMEOWNERS with a mortgage are now underwater...regardless if they bought from '05-'07 or not. And, of course, that number will continue to rise!

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#17) On June 17, 2009 at 4:58 PM, dwot (99.50) wrote:

And people are bullish on the economy because?....

Nuts...

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#18) On June 17, 2009 at 9:00 PM, tonylogan1 (28.65) wrote:

Retired31B5M - At least wait to see what happens with California's budget woes... (and maybe a little longer for interest rates to rise)

Federal government is unlikely to bail out CA, since they will vote for Obama no matter what he does, so no sense in wasting money on a state that will just make swing states mad.

Unless you are planning on living in an undesirable area, don't even buy foreclosed homes yet.

If you don't mind being a slumlord, there is a rising market in buying foreclosed homes in bad areas and renting them out to multifamilies. Just take the revenue from that and use it for rent in a nice neighborhood where property costs are dropping fast.

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#19) On June 20, 2009 at 9:52 PM, portefeuille (99.78) wrote:

more on mortgage-backed bonds from ftalphaville here.

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