Housing Implosion
March 21, 2008
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Report: Alt-A Delinquency Rate Nearing 18 Percent
Both subprime and Alt-A borrower delinquencies continued to rise during February, with Alt-A delinquencies rising from 15.94 percent in January to 17.40 percent. According to a report released Thursday by risk management and due diligence provider Clayton Holdings, Inc., subprime delinquences now represent an eye-opening 33.14 percent of loans on a UPB basis, as well.
Delinquencies going up are one thing; but the continued drop in housing prices is having a more ominous effect on many investors, lenders, and insurers, as loss severity creeps upward. Alt-A loss severity, in fact, is now even approaching average severity numbers for subprime across all collateral. Clayton reported that subprime first lien average loss severity increased to 45.80 percent in February, up from 42.56 percent in January; Alt-A first lien average severity rose to 36.66 percent, in contrast.
Loss severity refers to the loss a lender is forced to take during foreclosure, as a percentage of unpaid principal balance.
http://www.housingwire.com/2008/03/20/report-alt-a-delinquency-rate-nearing-18-percent/
A vicious cycle. As more owners fall underwater, the more houses foreclosed. As more houses foreclosed, the further prices fall. The further prices fall, the more lenders lose on each mortgage.
If the above figures are accurate, it is likey that just subprime and AltA losses could exceed $1 Trillion dollars. Prime loans are starting to default at an increasing rate as well. Once we pool all loans of the current $12 trillion dollar mortgage and Heloc market, we could easily be looking at over $2.5 trillion in loan losses (that doesn't include the wealth effect losses of $7-10 Trillion).
It is incredible that some people say we are approaching the end of the cycle. We have just begun and we are seeing figures we have never seen before. In Florida, it is not uncommon to see sales at 50% below peak pricing. Not too much different in parts of CA and AZ. And the economy is just beginning to slow.
The job cuts are just starting. Citi and Goldman each announced laying off 10% of its investment bankers in the last couple days-2000 each. Mortage Finance companies have reduced staff by hundreds of thousands over the past year. CA and other states are also likely going to be laying off hundreds of thousands due to budget shortfalls. Contruction related layoffs are likely to climb in the millions (6-8 million workers and factoring a 50% slowdown).
The above will bring lower sales and tax revenues likely causing further slowdown. The problem now is that we have shipped a bunch of productive jobs overseas. Many of the jobs that remain are service jobs that are very vulnerable to an economic slowdown.
We have tons of debt. Declining income. And a system that is cracking under its own weight.
Here is a headline from Roubini that pretty much sums it up:
The Worst Financial Crisis Since the Great Depression is Getting Worse…and the Need for Radical Policy Solutions to the Crisis Nouriel Roubini | Mar 19, 2008
It is now clear that the US and global financial markets are experiencing their worst financial crisis since the Great Depression. And in spite of desperate and radical actions by the Fed this crisis is getting worse.
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