The Market Ticker

NEWS FLASH - WSJ guy said on CNBC just a few minutes ago that data would show that default rates on ALT-A doubled and Subprime delinquencies are now well north of 10%.

Apparently to be published tomorrow.

UPDATE: The article is real. Page A2 of tomorrow's (April 4th) edition.

Excerpts:

"The First American data show that in January payments were at least 60 days late on 14.3% of "subprime" loans that had been packaged into securities, up from 13.4% in December and 8.4% in January 2006. "

"For Alt-A loans -- a category between prime and subprime that includes many loans that don't require full documentation of the borrower's income or assets -- the late-payment figure rose to 2.6% in January from 2.3% in December and 1.3% in January 2006."

"Subprime lending could decline by as much as 50% this year ..... Alt-A lending also is expected to fall sharply.

Together, subprime and Alt-A accounted for nearly 40% of the U.S. home-mortgage loans originated last year......

Overdue payments and defaults will get worse in the months ahead, warns Mark Zandi, chief economist at Economy.com"

Source: http://online.wsj.com/article/SB117560809027958219-search.html?KEYWORDS=mortgage&COLLECTION=wsjie/6month

The crawler was incomplete, but in many ways, what's in the actual article is far worse than the teaser.

The Subprime delinquency rate, defined as 60 days late or more, is up seventy percent year-over-year as of January, and had a 7% increase in one month!

The ALT-A delinquency rate, defined as 60 days late or more, has doubled year-over-year, and rose thirteen percent in one month!

What's worse, this was back in January! We don't have February or March data yet!

If you're having trouble reading this, let me parse it for you:

The ALT-A mess is coming apart at a rate twice that of the Subprime mess. What's far worse, lenders do not typically expect significantly more than 1% of ALT-A loans - which they claim are all "good credit risks" - to default.

LENDERS' RISK MODELS ARE ALL BASED ON THAT PREMISE, WHICH IS WHY YOU SEE THEM ALL TROTTING OUT FICO SCORES OVER 700 - THE POINT AT WHICH THE THEORETICAL RISK OF A DEFAULT DROPS TO THE 1% LEVEL.

But the current default rate is more than double that, it is accelerating at a terrifying rate, up thirteen percent in one month, and there is no way to know how high this rate will go in the end.

These sorts of events tend to feed upon themselves; your neighbor gets foreclosed upon, his property gets marked down, this causes your house to be reappraised, and now you can't refinance. Your mortgage resets, you try to refi out, and fail to appraise. YOU default. Your NEXT neighbor down has the same thing happen to him after you! This cycle becomes a perverse game of musical chairs where there's only one chair and twenty bagholders!

There is absolutely no way that these losses are "priced in" to either these company's loss models or their stock prices; many if not most issuers - including banks - are leveraged at levels where they simply cannot sustain default rates of two and one half times that of their risk model.

There will be ALT-A lenders that go under as a consequence of these losses. There will be bondholders who will seek redress from the issuers, the big money-center banks, and everyone else who has their hands on this radioactive junk. There will be lawsuits - lots of them. And there will be a major market decline and, in all probability, a very serious recession.

It is a virtual certainty that as the spring turns to summer and the default rate continues to expand, even if the rate of expansion slows, that the damage will continue to spread and bring down more and more of these firms. The fact that we have not yet seen honest appraisals of default rates from these issuers, who have instead chosen to publish old, dated information that in fact misleads shareholders by omitting the most current information is likely to come back to bite many of these firms - hard.

The article also states this about home prices:

"As a result, Mr. Zandi predicts, the median price for sales of previously occupied homes will fall nearly 5% this year, which would mark the biggest national drop since the Depression of the 1930s.

As recently as January, he expected a more modest drop of 2.5%....."

There is no possible way to spin this. What is far worse, we clearly have an accelerating trend and nobody knows where it stops. A 5% YOY decline in average national home prices means that given that some areas still have rising prices, other areas will see declines of 10, 20 or more percentage points.

Some overheated markets will likely see cuts approaching 50% before this is said and done.

This level of decline will put essentially every mortgage that had an 80-90% LTV and was written in the last two years underwater, and in overheated areas, essentially all mortgages written since 2004 will be for more than the property is worth, even if principle payments are being made.

We have had housing "corrections" before in various local areas - Northern California, for example. But we have never, except possibly during the depression, had mass asset devaluation of homes below the level of the outstanding mortgage balances.

There is simply no way to predict what will happen in this instance, but it is a damn safe bet that it won't be good.

If you are long in the housing or mortgage sector, and, indeed, if you believe in the "Goldilocks Economy", you might want to rethink that decision.

I see absolutely no way that this development does not snowball into a serious market decline in anticipation of what is a near certainty of a severe recessionary environment. Simply put, these asset prices (homes) must be marked to market, and that process is going to screw things up economically in a very serious manner.

This latest article makes it crystal clear - this problem is not confined to the subprime space, it is not going to be "contained", and it is not going to be brushed off by either the consumer or the stock market.

Don't be an Ostrich.

And not just a bit irrational either.

But - this is why its possible to make money in the market! If the market actually priced in risk in an accurate fashion it would not be possible to make money, since the market would have accurately assessed both risk and reward and the price of everything would reflect that.

Of course that's nonsense, which is why you can make money in the market.

Case in point - LEND, which I blogged about last night.

Farallon closed their loan. But their auditor resigned; the company is currently delinquent in their regulatory filings (read: haven't filed quarterly reports on time) and you need an audit to be able to file that.

So what does the market do? Drive the stock up by 20% this morning. Huh?

Guys, what part of "the auditors quit" didn't you bother to read? Oh wait - you were focused on that credit line. Ok. Did you bother to read any of the released data when that was announced? Oh, like, for instance, the part about "no undisclosed material adverse events" occurring?

Now let me ask you a question - let's say you're a banker. And I come into your office and ask for a loan to buy, say, a house.

You ask me for some evidence that I can pay back the loan and request among other things my W2 and Tax Returns. I produce for you instead a hand-written scrawed note that says "I make $100,000 a year."

You look at me with a scrunched look and ask "uh, dude, where's the 1040 and W2?"

I reply "Well, my accountant quit. He said he wanted more information to finish my tax return and I didn't want to give him what he wanted, nor did I want to pay him for the extra work he said he had to do in order to finish the return. So he walked out. I'm sorry, I don't have my tax return - I didn't file it on time and I don't have anyone to finish it for me."

Are you going to loan me the money for the house?

So tell me folks - exactly how is the auditor quitting good news?

Obviously, its not. And obviously, no matter how much money you think you have, when one of the things you promised is that you'll provide accurate financial statements and then you fail to do so, you can expect that you're going to have somewhat serious problems in the near future. In my case, as a taxpayer, I'd expect that the IRS would be pounding on the door fairly soon.

How long before LEND's warehouse lenders come pounding on THEIR door? I'd say its going to happen pretty soon.... and when it does, its likely to be a rather violent event for them.

I've seen this time and time again......

BTW, there is one apparent "good guy" out there in the subprime financial space. That would be "WLT" - Walter Industries. They were absolutely pounded in December, and their balance sheet is somewhat "interesting". Nonetheless, there appears to be opportunity here - while they have been tarred as being a "subprime" lender, in fact nearly all of their loans - while in that space - are fixed-rate obligations. Fixed-rate mortgages have a much lower default risk than adjustables, because the borrower knows what the payments will be for the entire term of the loan up front.

For people on the margins who have shaky credit the fixed-rate mortgage is even more important, because they are the ones who need the ability to budget and plan for their expenses with a high degree of certainty.

In addition Walter is involved in the coal business - and coal, despite the screaming of environmentalists, is a core energy component in our economic picture.

For this reason I have done the contrary thing and recently taken a long position in this company.