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The mainstream financial media has led many to believe that the "subprime crisis" has passed. FRB and FDIC data actually show that subrpime credit deterioration is increasing in the face of lowered interest rates through QE/dollar debasing and HAMP government efforts. This is also despite certain bank policies that mask delinquencies, such as lagging the time it takes to mark a loan delinquent. We found Wells Fargo doing this last year with its HELOC portfolio.
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As you can see, every reprieve seen since the crisis started has been followed by a spike in delinquencies. I expect the same to occur for 2010.
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As can be expected, ARMs sport more than twice the delinquency rate as fixed rate loans. The drop in rates has caused a leveling of ARM delinquencies, but it is clear that rates can't remain at zero forever, and the bulk of these loans are close to if not passed the underwater mark. Literally any move by interest rates in the direction of equilibrium (read as the cessation or failure of the Fed's direct intervention in the interest rate markets) will cause a flood of delinquencies and foreclosures that are bound to overwhelm the banks. This is an inevitable occurrence. It is not a matter of if, but a matter of when. The interesting issue is that all of the categories are at currently a level that scream solvency alert!
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The Case Shiller index has shown price increases for the last two quarters. Despite my reservations about its accuracy, the increases have done nothing to stem the onslaught of credit deterioration. As a matter of fact, actual losses are increasing despite the increase (and its requisite rise in recovery values) due to the amount of charge-offs and the rate in whch they are occurring. If you lool closely at the chart, the credit quality deterioration actually picked up as Case Shiller was showing price improvement.
Below are the loss rates by state. Be aware that these are "LOSS RATES", not delinquencies or charge offs. This is what the actual losses will end up being (sans admin and legal costs, which will driver the losses higher). These loss rates are calculated as follows: Overall default rate - Recovery rate (Case Shiller - LTV) = Loss Rate
California, Florida and Nevada have been held up as loss "icons" by the media, but there are pockets of significant loss throughout the country. States such a Wisconson and Michigan are pushing 50% in subprime losses, yet still pale to the near 60% in losses from states such as Florida. I query, "How can a bank with 10% equity, and 90% leverage wither 30% to 60% losses on its loans and still be considered solvent?" For those not versed in these matters, imagine you sold 100 million dollars in stock to the public to start a bank, and borrowed 900 million dollars to write mortgages on $3 billion worth of houses. You consequently take a 50% loss on those mortgages - to the tune of $500 million. How much is that initial $100 million of stack worth, even assuming you can make $30 million dollars a year trading risky assets with inflated spreads? You are now totally insolvent and still owe your investors $300 to $400 million in order for them to break even. Now, imagine that your stock just shot up 300% in price because.... Well, just because. 
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There are many banks that literally specialize in underwriting these (among others) high risk loans in the hardest hit of the areas below. There is no way in hell they are carrying those loans anywhere near their actual value.
A good example of this is PNC Bank. They were running a 41% loss rate in Wisconsin (according to our birds-eye view calculations using FRBNY and FDIC data) in May, and now are exposed to a 45.8% loss rate. Florida is even worse! Many states have seen a 5% INCREASE in LOSS rates. Again, it is no wonder why they aren't returning their TARP monies.
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Realize that the losses graphed above are mostly losses that have not been marked yet by the banks. They are quite significant. For a birds-eye view of the situation, simply apply the state loss metric to your favorite bank's portfolio, on a state by state basis.
This is PNC's granular break down using the government data from May of this year - before the roughly 5% jump in economic losses that we have calculated for the most recent quarter.
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As
you can see, going through each major loan category in PNC's books
reveals a much LESS optimistic scenario than ANY portrayed in their
SCAP take home test results... If one were to factor in the more recent information, the SCAP test and the return of TARP look more like fodder for litigation than any true attempt at solving the banking problem.
Sources: FirstAmerican CoreLogic, LoanPerformance Data, U.S. Census Bureau, and Federal Reserve Bank of New York
(a) Statistics calculated on first-lien and active (includes REO) loans.
(b) Statistics calculated on first-lien, owner-occupied, active (includes REO) loans.
(c) 'Prepayment penalty in force' denotes that the loan age is less than the prepayment penalty term.
(d) Statistics calculated on first-lien, owner-occupied, active (includes REO), variable rate loans.
Let's also revisit some data from "You've Been Bamboozled, Hoodwinked and Lied To! Here's the Proof. What Are You Going to Do About It?"
with which we can compare the assumptions that justified the bank's
return of TARP monies with the actual unfolding of events.
In terms of unemployment, we are already breaching the worst case scenario projection of two years into the future.
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As you can see, the major driver of
future bank credit losses has been woefully underestimated, and thus
the capital requirements of said banks have been woefully
underestimated, among other things.
Below is subscriber content that reveals what the
banks REALLY needed in terms of capital and cushions to whether the
true rate of losses and unemployment to come. You may subscribe here to access this content.
Goldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 Mb
Goldman Sachs Stress Test Retail 2009-04-20 10:08:06 720.25 Kb
MS Simulated Government Stress Test 2009-05-05 11:36:25 2.49 Mb
MS Stess Test Model Assumptions and Stress Test Valuation 2009-04-22 07:55:17 339.99 Kb
PNC SCAP Results recast using FDIC and NY Fed data - Pro 2009-05-15 07:31:21 455.37 Kb
PNC SCAP Results recast using FDIC and NY Fed data - Retail 2009-05-15 07:30:25 395.18 Kb
PNC Stress Test Pro 2009-04-13 02:10:17 3.11 Mb
PNC Stress Test update - Professional 2009-04-21 15:55:56 3.00 Mb
PNC Stress Test Retail 2009-04-13 02:11:08 323.51 Kb
PNC Stress Test update - Retail 2009-04-21 15:53:52 777.50 Kb
PNC stress test write up - public lite 2009-07-27 02:37:11 995.30 Kb
Sun Trust Banks Simulated Government Stress Test 2009-05-05 11:37:13 1016.17 Kb
JPM Public Excerpt of Forensic Analysis Subscription 2009-09-22 14:33:53 1.51 Mb
