Whitney Tilson (right) and Glenn Tongue of T2 Partners have updated and expanded their excellent presentation on the housing and mortgage markets.
We walked through their conclusions on the housing side yesterday.
Here’s the bottom line on the mortgage side:
- We are in the “middle innings” of the mortgage and foreclosure crisis
- Banks have taken less than half of the losses they’ll ultimately have to recognise on all those crappy loans.
- Subprime is old news, but deliquencies on Alt-As, Option ARMs, Prime, Jumbo Prime, and HELOCs (Home Equity Lines Of Credit) are soaring
- Mortgage mods aren’t working
- Foreclosures will continue to soar, especially as a new wave of Alt-A mortgage resets begins to hit later this year.
- The recent signs of stabilisation are the “mother of all head fakes.”
From 2001-2006, lending standards went to hell.
Specifically, you could get a loan just by asking. You didn't have to put money down. You didn't have to produce pay stubs. You didn't have to do anything but fill out a couple of forms and collect your check.
Subprime is old news, but now we've moved on to bigger and better categories:
* Alt-As, $2.5 Trillion (borrowers with good credit but no money)
* Option ARMs, $600 billion (borrowers with no money)
* Prime, $4.5 Trillion (borrowers who were actually qualified at the time but have since been fired)
* Jumbo Prime, $1.5 Trillion (big borrowers who were qualified at the time but have since been fired)
* HELOCS, $1 Trillion (extra loans for folks who couldn't afford their mortgages)
That's about $10 Trillion in all. By comparison, subprime is about $1.5 trillion.
Subprime is still the worst in terms of percentage-of-loans-delinquent.
But Alt-A and Option ARMs will soon give it a run for its money.
And don't forget the most charming feature of many Alt-A's...the reset.
The reason Alt-A's seemed like such a good idea at the time is that they started with a tiny interest rate and payment for a few years. But eventually the rate had to reset. And the bulk of those resets are coming soon.
Now, some of these Alt-A's may already have been foreclosed on and or refinanced. So the curve may not look as bad as this. But a nasty-looking storm is still on the horizon...
'Prime' loans were the bombproof loans.
But it doesn't matter how much income you had when you bought your house if you've since been fired.
Even when you had mortgaged yourself to the gills, someone else was ready to lend you the last little bit of equity remaining in your house in the form of a home-equity loan.
Of course, now your house is worth a lot less. And you're still supposed to pay the loan back. Of course, an increasing number of folks aren't.
No. Because they don't work.
Check out these redefault rates.
They're measured as percentages of modified mortgages that default again...by months from the modification. Six months out, 50% is good.
Lots of reasons, starting with the fact that so many homeowners are so deep underwater.
Why pay sky-high mortgage rates to stay in a house that will never be worth as much as you owe on it? Why not just give it back to the bank and start your new life?
And then there are the other problems w/ mortgage mods: Until banks reduce the amount you owe and not just the payments, you'll stay underwater. And many folks can't even afford the reduced payments, especially if they've recently been fired.
But plenty of Alt-As and subprimes are submerged, too.
The recent moratoriums on foreclosures staunched the bleeding for a while, but we'll soon play catch-up.
T2 estimates total losses of $3.8 trillion for the financial sector.
So far, the banks, et al, have recognised about $1.5 trillion of losses. So they're not quite halfway there.
The amount of losses the banks have recognised so far is the little blue column second from the right.
The tall bars, meanwhile, are a range of estimates about the total losses they will eventually take.
Imagine the red loss line extending twice as far up and to the right...and you'll get a picture of how much more capital the banks need before they'll be healthy again.
The blue line, meanwhile, is the amount of capital the banks have raised to replace the capital they vaporized. Taxpayers provided a lot of it.
Of course, from now on, the taxpayer bailouts will come in the form of subsidized net interest margins rather than cash handouts (taxpayers will lend the banks money at an outrageously cheap rate so they can buy higher-yielding assets with it and sit back and watch the cash roll in).
After a decade or so of taxpayer-subsidies, the banks will be healthy enough to start lending money to taxpayers again.
See that red line? That's the percentage of the value of our houses that we actually own.
In 1945, it was more than 80%. Now it's down to 40%. The blue bars, meanwhile, are the amount of our debt. That, of course, hasn't dropped much. (This is the problem with debt).
In dollar terms, by the way, our current equity in our houses amounts to only $7.5 trillion, down by about half since the peak of the housing bubble.
Remember the 'wealth effect'? Well, now it's working in reverse. We don't just feel poorer. We are poorer. And the impact on our spending from this new reality will continue to clobber the rest of the economy going forward.
So that's an update on the mortgage market. Now check out the state of the housing market >
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