Displaying items by tag: government

Wednesday, 20 January 2010 23:00

Op-Ed Email from a Subscriber

An op-ed email from a subscriber:

Hi Reggie:

Just a note to say your opinions as expressed in recent posts on
Boombustblog and ZH seem to make a lot of sense!  Have you sent them to the editorial pages of the WSJ or FT?

Also, I'm surprised there has been no discussion about the ethical and political ramifications of banks, etc using Federal funding and guarantees, whether implicit or explicit, to pursue proprietary trading strategies.  That is to say, to the extent that the business of assisting clients in funding economically useful endeavors that help grow the economy in a sustainable manner is being replaced by proprietary trading in a strictly a zero sum game, it seems a dubious path for a nation to follow.  In this situation, as Janet Tavakoli has pointed out, the concept of assisting a "client" in funding economic growth that can be shared throughout the economy is, instead, replaced by having a "counterparty" from whom money can be won through trading schemes.  It would be interesting to see the debate that ensues about whether the economic value of trading exceeds the cost of dividing market participants (including the unwitting ones who depend upon the actions of their pension fund and retirement fund managers) into those who win (e.g. GS) and those who lose.
Wednesday, 20 January 2010 23:00

Op-Ed Email from a Subscriber

An op-ed email from a subscriber:

Hi Reggie:

Just a note to say your opinions as expressed in recent posts on
Boombustblog and ZH seem to make a lot of sense!  Have you sent them to the editorial pages of the WSJ or FT?

Also, I'm surprised there has been no discussion about the ethical and political ramifications of banks, etc using Federal funding and guarantees, whether implicit or explicit, to pursue proprietary trading strategies.  That is to say, to the extent that the business of assisting clients in funding economically useful endeavors that help grow the economy in a sustainable manner is being replaced by proprietary trading in a strictly a zero sum game, it seems a dubious path for a nation to follow.  In this situation, as Janet Tavakoli has pointed out, the concept of assisting a "client" in funding economic growth that can be shared throughout the economy is, instead, replaced by having a "counterparty" from whom money can be won through trading schemes.  It would be interesting to see the debate that ensues about whether the economic value of trading exceeds the cost of dividing market participants (including the unwitting ones who depend upon the actions of their pension fund and retirement fund managers) into those who win (e.g. GS) and those who lose.

Really, I have nothing against bankers. Hey, I'm a born and raised New Yorker, many of my friends are bankers. The problem is that so many people tend to believe the bullshit that bankers say. Now, I can't blame the bankers. After all, its every man (and woman) for themselves. Still, it wouldn't hurt to use a little common sense once in a while. From the FT.com:

Treasury plans strict rules for securitisation

The US Treasury is planning a sweeping overhaul of securitisation markets with tough new rules designed to restore confidence by reducing the incentive for lenders to originate bad loans and flip them on to investors.

The authorities plan to force lenders to retain part of the credit risk of the loans that are bundled into securities and to end the gain-on-sale accounting rules that helped spur the boom of the markets at the heart of the financial crisis.

The aim is to revitalise the markets for securities backed by mortgages and other assets without re-creating the systemic risks that turned boom to bust in 2007. The plan is part of a wider overhaul of regulation to be unveiled on Tuesday.

Really, I have nothing against bankers. Hey, I'm a born and raised New Yorker, many of my friends are bankers. The problem is that so many people tend to believe the bullshit that bankers say. Now, I can't blame the bankers. After all, its every man (and woman) for themselves. Still, it wouldn't hurt to use a little common sense once in a while. From the FT.com:

Treasury plans strict rules for securitisation

The US Treasury is planning a sweeping overhaul of securitisation markets with tough new rules designed to restore confidence by reducing the incentive for lenders to originate bad loans and flip them on to investors.

The authorities plan to force lenders to retain part of the credit risk of the loans that are bundled into securities and to end the gain-on-sale accounting rules that helped spur the boom of the markets at the heart of the financial crisis.

The aim is to revitalise the markets for securities backed by mortgages and other assets without re-creating the systemic risks that turned boom to bust in 2007. The plan is part of a wider overhaul of regulation to be unveiled on Tuesday.

Even as the previous real estate and credit bubbles continue to deflate. I, and my team, have been going over the bank balance sheets and revenue drivers with a fine tooth comb as of late, and it is absolutely undeniable that they they don't have the asset quality and earnings power to sustain (most of their) current prices, yet many are actually rocketing higher.

This is primarily due to a slew of factors, ex. loosening of accounting standards, ZIRP (Zero Interest Rate Policy), corporate welfare (ex. TARP, PPIP, etc.), the acceptance of trash for collateral assets on the  Fed's balance sheet, QE, the simply flooding the world with money.

I understand the reasoning behind blowing a bubble within a bubble, but I vehemently disagree with its plausibility. The government hopes this bubble can be maintained until the other bubbles finish popping, but if it can't, then you will have a crash even larger than the one you were blowing bubbles in order to avoid. It's the Great Global Macro Experiment, 2.0. Practically none of the fundamental issues that have caused me to be bearish on the industrial, manufacturing, financial and banking sectors have been properly addressed and rectified. The only things that have been addressed are the symptoms caused by the actual disease. GM and Chrysler are being trimmed down, but the macro headwinds will still be there. None of the banks problems have been solved save the liquidity issue born of the fact that they failed to (and rightfully so) trust each other enough to lend interbank. The liquidity issue was a symptom of insolvency, which is still a problem that has been papered over by lies and stress-free stress tests (see Welcome to the Big Bank Bamboozle!). In addition, the securitization market is effectively dead, and to revive it would entail inducing investors to by what we now know are guaranteed losses - that is unless the government can enforce some accountability for those that create, package and sell said securities. But the issue is, if those that sell the securities are to be held responsible for them (the old skin the story), then there will be a lot less securitization going on because there are lot of consumers and corporations that simply shouldn't have been extended credit in the first place. This portends less liquidity, hence lower permanent asset prices. You see, we just can't get back to bubblistic asset pricing without a bubble. This is the government's conundrum. This is why they are (IMO, foolishly) blowing another bubble. Take it from me, the writedowns taken on the bubbled real assets and their derivatives are permanent. Let's move on... 

I am (im)patiently biding my time until this most recent government induced bubble pops, hopefully riding it down profitably. 

The majority of the money is to be made on the upside, but we cannot get to the upside until we allow the downside to play out. The government is simply kicking the can down the road. Once we are allowed to properly deflate asset prices to the point of equilibrium, then the true hard core investing can begin. Until then, I will be short and hedged all the way down.

Even as the previous real estate and credit bubbles continue to deflate. I, and my team, have been going over the bank balance sheets and revenue drivers with a fine tooth comb as of late, and it is absolutely undeniable that they they don't have the asset quality and earnings power to sustain (most of their) current prices, yet many are actually rocketing higher.

This is primarily due to a slew of factors, ex. loosening of accounting standards, ZIRP (Zero Interest Rate Policy), corporate welfare (ex. TARP, PPIP, etc.), the acceptance of trash for collateral assets on the  Fed's balance sheet, QE, the simply flooding the world with money.

I understand the reasoning behind blowing a bubble within a bubble, but I vehemently disagree with its plausibility. The government hopes this bubble can be maintained until the other bubbles finish popping, but if it can't, then you will have a crash even larger than the one you were blowing bubbles in order to avoid. It's the Great Global Macro Experiment, 2.0. Practically none of the fundamental issues that have caused me to be bearish on the industrial, manufacturing, financial and banking sectors have been properly addressed and rectified. The only things that have been addressed are the symptoms caused by the actual disease. GM and Chrysler are being trimmed down, but the macro headwinds will still be there. None of the banks problems have been solved save the liquidity issue born of the fact that they failed to (and rightfully so) trust each other enough to lend interbank. The liquidity issue was a symptom of insolvency, which is still a problem that has been papered over by lies and stress-free stress tests (see Welcome to the Big Bank Bamboozle!). In addition, the securitization market is effectively dead, and to revive it would entail inducing investors to by what we now know are guaranteed losses - that is unless the government can enforce some accountability for those that create, package and sell said securities. But the issue is, if those that sell the securities are to be held responsible for them (the old skin the story), then there will be a lot less securitization going on because there are lot of consumers and corporations that simply shouldn't have been extended credit in the first place. This portends less liquidity, hence lower permanent asset prices. You see, we just can't get back to bubblistic asset pricing without a bubble. This is the government's conundrum. This is why they are (IMO, foolishly) blowing another bubble. Take it from me, the writedowns taken on the bubbled real assets and their derivatives are permanent. Let's move on... 

I am (im)patiently biding my time until this most recent government induced bubble pops, hopefully riding it down profitably. 

The majority of the money is to be made on the upside, but we cannot get to the upside until we allow the downside to play out. The government is simply kicking the can down the road. Once we are allowed to properly deflate asset prices to the point of equilibrium, then the true hard core investing can begin. Until then, I will be short and hedged all the way down.

Tuesday, 12 May 2009 00:00

Welcome to the Big Bank Bamboozle!

I have produced a downloadable PDF which clearly shows exactly how far off the banks and SCAP bank stress tests are from the delinquency and foreclosure information that the Federal government distributes itself. This document is in response to the Government's release of the official bank stress test results, which I honestly feel is a slap in the face to anybody with two brain cells to rub together. Please reference page 7 of the document hyperlinked above, as well as the individual bank's "adverse scenario" projections for various loan categories (towards the end of the document) over the next two years and compare them to the loan loss snap shots that I have gathered below from last December and March, directly from the Federal Reserve's public web site. There is no need to wait two years when the worst case scenario is here and now.

This is the government's summary findings of the potential "WORST CASE" losses over the next two years for all 19 of the bank holding companies that were subject to the government's stress test.

19_bank_scap_results.gif

 

Here are some highlights of interest from my report to compare and contrast:

 Alt-A loans

  • Nearly 36% of Alt A loans had least one late payment over the past one year. In Florida nearly 48.5% of Alt-A loans had at least one late payment over the past one year followed by Nevada (43.5%) and California (41.6%).
  • Alt A loans 90+ days past due were 8.7% of total loans with California and Nevada having the highest 90+ days loans past due at 11.3% and 10.3% of total loans, respectively.
  •  Overall 30.4% of Alt-A loans are in risk of default based on prorate share (based on weighted average foreclosure / past due loans and REO loans for each state with weights based on average loan outstanding at each state). 
  • Nearly 42.8% of Alt-A loan outstanding were originated on or before 2005 while 35.6% and 21.6% of loans were originated during 2006 and 2007, respectively.  With S&P Case Shiller declining by nearly 19% , 29% and 29% since 2005, 2006 and 2007, respectively most of these loans are currently underwater in view of the fact that average LTV at origination for Alt-A loans was at 81%.
  • Overall net charge off for Alt-A loans (cumulative 2 years assuming current delinquent and foreclosed turn into expected charge-off over a two year time horizon) is expected to reach as high as 23.9% significantly higher than Fed's implied loss rate assumption of 9.5%-13.5% under the adverse case scenario. Fed's adverse case and base case assumption for subprime charge offs is even lower than current loans past due which is at 13.0%.

Subprime Loans
  • Nearly 64% of subprime loans had least one late payment over the past year. In California and Florida nearly 67.1% and 71.8% of subprime loans had at least one late payment over the past one year.
  • Overall 50.2% of subprime loans are in risk of default based on prorate share (based on weighted average foreclosure / past due loans and REO loans for each state with weights based on average loan outstanding at each state).
  • Nearly 48.6% of current subprime loans outstanding were originated on / before 2005 while 36.3% and 15.1% of loans were originated during 2006 and 2007, respectively.  With S&P Case Shiller declining by nearly 19% , 29% and 29% since 2005, 2006 and 2007, respectively most of these loans are currently underwater in view of the fact that average LTV at origination for Alt-A loans was at 84.2%.
  • The current LTV for subprime loans is at 115% with Nevada and Arizona having the highest LTV at 154% and 146%, respectively.
  • Overall net charge offs for subprime loans (cumulative 2 years assuming current delinquent and foreclosed turn into expected charge-off over a two year time horizon) is expected to reach as high as 41.4% significantly higher than Fed's implied loss rate assumption of 21%-28% under the adverse case scenario. The Fed's adverse case and base case assumption for subprime charge offs is even lower than current loans past due which is at 28.9%.

The full report, complete with sources and methodology is available here, free of charge. I simply ask that you forward it to your local congressman/woman and/or favorite media personality. The Truth shall set you free (or get you locked up, depending upon which side of the Truth you are on): pdf  BoomBustBlog.com's Realistic Recast of SCAP 2009-05-12 14:52:09

For those of you in the media who may not be familiar with my previous work, I have a strong track record in calling this credit crisis:

  1. The Commercial Real Estate Implosion: I called it in 2007 - "GGP has finally filed Bankruptcy, Proving My Analysis to be On Point Over the Course of 18 Months".
  2. The Investment Bank Implosions: Bear Stearns (Is this the Breaking of the Bear? [Sunday, 27 January 2008]) - and - Lehman Brothers investment banking/CRE implosion connection (Is Lehman really a lemming in disguise? [Thursday, 21 February 2008])
  3. The Mortgage Banking Implosion: I called it in 2004, publicly on the blog in 2007 - Countrywide and Washington Mutual (Yeah, Countrywide is pretty bad, but it ain’t the only one at the subprime party… Comparing Countrywide with its peer)
  4. The Regional Bank Implosion: Spring of 2008 - nearly all of the failed or failing regional banks of significant size (As I see it, these 32 banks and thrifts are in deep doo-doo!)
  5. The Monoline Implosion: 2007-2008 - MBIA (A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton) and Ambac (Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion Market Cap and Follow up to the Ambac Analysis), among others including the residential homebuilders and their abuse of off balance sheet JVs - well in advance. 
I suggest everybody read up on how we got here. I started taking defensive action in 2004, and implemented my offensive actions 2007 - right around the time this blog was started. Read my blog by blow analysis below...
Tuesday, 12 May 2009 00:00

Welcome to the Big Bank Bamboozle!

I have produced a downloadable PDF which clearly shows exactly how far off the banks and SCAP bank stress tests are from the delinquency and foreclosure information that the Federal government distributes itself. This document is in response to the Government's release of the official bank stress test results, which I honestly feel is a slap in the face to anybody with two brain cells to rub together. Please reference page 7 of the document hyperlinked above, as well as the individual bank's "adverse scenario" projections for various loan categories (towards the end of the document) over the next two years and compare them to the loan loss snap shots that I have gathered below from last December and March, directly from the Federal Reserve's public web site. There is no need to wait two years when the worst case scenario is here and now.

This is the government's summary findings of the potential "WORST CASE" losses over the next two years for all 19 of the bank holding companies that were subject to the government's stress test.

19_bank_scap_results.gif

 

Here are some highlights of interest from my report to compare and contrast:

 Alt-A loans

  • Nearly 36% of Alt A loans had least one late payment over the past one year. In Florida nearly 48.5% of Alt-A loans had at least one late payment over the past one year followed by Nevada (43.5%) and California (41.6%).
  • Alt A loans 90+ days past due were 8.7% of total loans with California and Nevada having the highest 90+ days loans past due at 11.3% and 10.3% of total loans, respectively.
  •  Overall 30.4% of Alt-A loans are in risk of default based on prorate share (based on weighted average foreclosure / past due loans and REO loans for each state with weights based on average loan outstanding at each state). 
  • Nearly 42.8% of Alt-A loan outstanding were originated on or before 2005 while 35.6% and 21.6% of loans were originated during 2006 and 2007, respectively.  With S&P Case Shiller declining by nearly 19% , 29% and 29% since 2005, 2006 and 2007, respectively most of these loans are currently underwater in view of the fact that average LTV at origination for Alt-A loans was at 81%.
  • Overall net charge off for Alt-A loans (cumulative 2 years assuming current delinquent and foreclosed turn into expected charge-off over a two year time horizon) is expected to reach as high as 23.9% significantly higher than Fed's implied loss rate assumption of 9.5%-13.5% under the adverse case scenario. Fed's adverse case and base case assumption for subprime charge offs is even lower than current loans past due which is at 13.0%.

Subprime Loans
  • Nearly 64% of subprime loans had least one late payment over the past year. In California and Florida nearly 67.1% and 71.8% of subprime loans had at least one late payment over the past one year.
  • Overall 50.2% of subprime loans are in risk of default based on prorate share (based on weighted average foreclosure / past due loans and REO loans for each state with weights based on average loan outstanding at each state).
  • Nearly 48.6% of current subprime loans outstanding were originated on / before 2005 while 36.3% and 15.1% of loans were originated during 2006 and 2007, respectively.  With S&P Case Shiller declining by nearly 19% , 29% and 29% since 2005, 2006 and 2007, respectively most of these loans are currently underwater in view of the fact that average LTV at origination for Alt-A loans was at 84.2%.
  • The current LTV for subprime loans is at 115% with Nevada and Arizona having the highest LTV at 154% and 146%, respectively.
  • Overall net charge offs for subprime loans (cumulative 2 years assuming current delinquent and foreclosed turn into expected charge-off over a two year time horizon) is expected to reach as high as 41.4% significantly higher than Fed's implied loss rate assumption of 21%-28% under the adverse case scenario. The Fed's adverse case and base case assumption for subprime charge offs is even lower than current loans past due which is at 28.9%.

The full report, complete with sources and methodology is available here, free of charge. I simply ask that you forward it to your local congressman/woman and/or favorite media personality. The Truth shall set you free (or get you locked up, depending upon which side of the Truth you are on): pdf  BoomBustBlog.com's Realistic Recast of SCAP 2009-05-12 14:52:09

For those of you in the media who may not be familiar with my previous work, I have a strong track record in calling this credit crisis:

  1. The Commercial Real Estate Implosion: I called it in 2007 - "GGP has finally filed Bankruptcy, Proving My Analysis to be On Point Over the Course of 18 Months".
  2. The Investment Bank Implosions: Bear Stearns (Is this the Breaking of the Bear? [Sunday, 27 January 2008]) - and - Lehman Brothers investment banking/CRE implosion connection (Is Lehman really a lemming in disguise? [Thursday, 21 February 2008])
  3. The Mortgage Banking Implosion: I called it in 2004, publicly on the blog in 2007 - Countrywide and Washington Mutual (Yeah, Countrywide is pretty bad, but it ain’t the only one at the subprime party… Comparing Countrywide with its peer)
  4. The Regional Bank Implosion: Spring of 2008 - nearly all of the failed or failing regional banks of significant size (As I see it, these 32 banks and thrifts are in deep doo-doo!)
  5. The Monoline Implosion: 2007-2008 - MBIA (A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton) and Ambac (Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion Market Cap and Follow up to the Ambac Analysis), among others including the residential homebuilders and their abuse of off balance sheet JVs - well in advance. 
I suggest everybody read up on how we got here. I started taking defensive action in 2004, and implemented my offensive actions 2007 - right around the time this blog was started. Read my blog by blow analysis below...

I dedicate this article to those loyal readers who tell me that there are times that you can't rely on fundamentals. I respectfully disagree. Over time, 1+1 will always equal 2. As a matter of fact, when people tell me 1+1 = ANYTHING other than 2 is when I start looking for opportunity. That's what I do for a living. See more about my occupation here, "The Great Global Macro Experiment, Revisited". Now is the most appropriate time to make use of the fundamentals. You see, when you are able to master a high level of analysis, you can actually SEE PEOPLE LYING! Lies lay the seeds for significant financial profit, for somewhere behind the lie lays the truth.

The Supervisory Capital Assessment Program: Revisited

We have conducted analysis of Fed's assumption for loan losses for Supervisory Capital Assessment Program by taking into account current delinquencies, foreclosure and charge-off to determine severity of assumptions. Below is the summary findings of the potential "WORST CASE" losses over the next two years for all 19 of the bank holding companies that were subject to the government's stress test (taken from page 7 of the official stress test results).

  19_bank_scap_results.gif

Now, this is supposed to be Armageddon numbers for up to two years into the future. Let's compare this to the data we have gathered from credible sources, and potentially even some incredible sources. The primary source of default and delinquency data was actually the Fed itself, believe it or not, the same guys who gave the stress test in the first place and currently stating that banks are well capitalized!

The table below presents a comparison of the Fed's SCAP (stress test) assumption for cumulative 2 year loss rate and likely two year cumulative expected losses based current trends in charge-off's, foreclosure and delinquency taken in large part from the Fed's public website. When looking at this table, be sure to reference the actual results above, and the definition of Fraud.

The Supervisory Capital Assessment Program

 

Fed 2 yr cumulative loss rate

Current trend

 

 

Base Case

Adverse Case

Net Charge-off rate 1

Foreclosure2

Deliquency3

These scenarios  trends have already breached the worst case scenario

First Lien Mortgages

5 - 6

7 - 8.5

 

8.86%

3.92%

<---------

Prime

1.5 - 2.5

3 - 4

 

4.89%

 

<---------

AltA

7.5 - 9.5

9.5 - 13

19.98%

5.00%

9.69%

<---------

moratriums have temporarily kicked foreclosure filings down the road

 

 

Alt‐A ARM

15.03%

 

 

<---------

 

 

 

   

 

 

Subprime

15 - 20

21 - 28

36.18%

13.7%

21.88%

<--------- (charge offs) moratriums have temporarily kicked foreclosure filings down the road

Second/Junior Lien Mortgages

9 - 12

12 - 16

   

 

 

Closedend Junior Liens

18 - 20

22 - 25

   

 

 

HELOCs

6 - 8

8 - 11

4.00%

 

2.45%

 

 

 

 

   

 

 

C&I Loans

3 - 4

5 - 8

2.70%

 

2.58%

 

 

 

 

   

 

 

CRE

5 - 7.5

9 - 12

>12%

 

5.36%

<----- Trend is already higher than predicted, but current losses in range

Construction

8 - 12

15 - 18

10.24%

 

 

 

Multifamily

3.5 - 6.5

10 - 11

   

1.30%

 

Nonfarm, Nonresidential

4 - 5

7 - 9

   

 

 

 

 

 

   

 

 

Credit Cards

12 - 17

18 - 20

>20%

 

5.56%

<----- Trend is already higher than predicted, but current losses in range

 

 

 

   

 

 

Other Consumer

4 - 6

8 - 12

5.38%

 

3.32%

 

 

 

 

   

 

 

Other Loans

2 - 4

4 - 10

2.15%

 

1.05%

 

 

 

 

 

 

 

 

Notes

         

 

1) Computed for Alt A First Lien Mortgage, Alt A ARM and Subprime based on Fed data for Foerclosure and past due loans adjusted for LTV and housing price change.

 

 

1) HELOC, C&I, Other consumer and Other loans are as of December 31, 2008 representing 2 yr cumulative loss rate and are sourced from FDIC and Federal Reserve. Credit Card charge-off as per Moody's estimate. CRE charge-off's as per Deutsche Bank estimates.

 

 

2) Foreclosure as of March 31, 2009 from Bloomberg except for Subprime foreclosures which is as of December 31, 2008 and is sourced from Mortgage Bankers Association.

 

 

3) Delinquency as of December 31, 2008 sourced from MBA, FIDC and Federal Reserve

 

 

 

First Lien Mortgage

Mortgage foreclosure rate stood at 8.86% as of March 31, 2009 with US home foreclosure filings increasing 46% to 341,180 as of March 31, 2009 over last year. This number is significantly understated due to the fact that many, if not most, of the largest lenders were either under or just exiting a moratorium on foreclosures in the US. This moratorium, or more accurately, the lack thereof, will cause an extreme spike in foreclosure fillings in the upcoming months. As U.S housing prices continue to decline (with S&P Case Shiller Index declining 5% in 2009 in the first two months) mortgage forecloses and delinquencies are expected to reach additional historical peaks resulting in higher loan losses for banks on real estate loans.  The Fed's 2 year cumulative loan loss rate for Alt A loans (7.5%-9.5%) appear overly optimistic and is even lower than current delinquency as of December 31, 2008 (9.69%).  Based on the Fed's data (that's right, this data is sourced directly from the Fed itself, which explicitly contradicts the data that the Fed released for its stress tests) for Loan losses for Alt -A loans as of March, 2009 (for loans past due and current foreclosures) adjusted for recovery based on LTV taking into consideration price decline and original LTV, 2 yr cumulative losses for Alt A is expected to reach 19.98% which is significantly higher than Fed's adverse case of 9.5-13% - nearly twice as much! The Alt-A category is probably one of the most dangerous for the banks, for this is expected to literally explode over the next 24 months (and is in part masked by moratoriums), as is confirmed through our independent research and, ironically, through the Fed's data itself! I strongly suggest that those who are interested in this mosy on over to Mr. Mortgage's blog, for a peek at what is "really" happening in regards to foreclosures in California - see "4-23 March Final Loan Default Wrap-up". This is the man that sounded the trumpet along with myself regarding Lehman Brother's RE exposure.

Now, in case my bold font and italics are wasted on some of you, let me state this again. The Fed says X through the stress test assumptions, and now the results, yet if you simply surf over to the other side of the government's own web sites, they offer actual default and foreclosure rates (among other data), that are considerably more dire than they asked you (the tax payer and investor) to believe is credible and "not that bad". My previous post requested that BoomBustBlog readers consider the technical and legal definitions of Fraud - see "Preparations for Monday's and Tuesday's Articles". Keep this in mind as we move forward.

I dedicate this article to those loyal readers who tell me that there are times that you can't rely on fundamentals. I respectfully disagree. Over time, 1+1 will always equal 2. As a matter of fact, when people tell me 1+1 = ANYTHING other than 2 is when I start looking for opportunity. That's what I do for a living. See more about my occupation here, "The Great Global Macro Experiment, Revisited". Now is the most appropriate time to make use of the fundamentals. You see, when you are able to master a high level of analysis, you can actually SEE PEOPLE LYING! Lies lay the seeds for significant financial profit, for somewhere behind the lie lays the truth.

The Supervisory Capital Assessment Program: Revisited

We have conducted analysis of Fed's assumption for loan losses for Supervisory Capital Assessment Program by taking into account current delinquencies, foreclosure and charge-off to determine severity of assumptions. Below is the summary findings of the potential "WORST CASE" losses over the next two years for all 19 of the bank holding companies that were subject to the government's stress test (taken from page 7 of the official stress test results).

  19_bank_scap_results.gif

Now, this is supposed to be Armageddon numbers for up to two years into the future. Let's compare this to the data we have gathered from credible sources, and potentially even some incredible sources. The primary source of default and delinquency data was actually the Fed itself, believe it or not, the same guys who gave the stress test in the first place and currently stating that banks are well capitalized!

The table below presents a comparison of the Fed's SCAP (stress test) assumption for cumulative 2 year loss rate and likely two year cumulative expected losses based current trends in charge-off's, foreclosure and delinquency taken in large part from the Fed's public website. When looking at this table, be sure to reference the actual results above, and the definition of Fraud.

The Supervisory Capital Assessment Program

 

Fed 2 yr cumulative loss rate

Current trend

 

 

Base Case

Adverse Case

Net Charge-off rate 1

Foreclosure2

Deliquency3

These scenarios  trends have already breached the worst case scenario

First Lien Mortgages

5 - 6

7 - 8.5

 

8.86%

3.92%

<---------

Prime

1.5 - 2.5

3 - 4

 

4.89%

 

<---------

AltA

7.5 - 9.5

9.5 - 13

19.98%

5.00%

9.69%

<---------

moratriums have temporarily kicked foreclosure filings down the road

 

 

Alt‐A ARM

15.03%

 

 

<---------

 

 

 

   

 

 

Subprime

15 - 20

21 - 28

36.18%

13.7%

21.88%

<--------- (charge offs) moratriums have temporarily kicked foreclosure filings down the road

Second/Junior Lien Mortgages

9 - 12

12 - 16

   

 

 

Closedend Junior Liens

18 - 20

22 - 25

   

 

 

HELOCs

6 - 8

8 - 11

4.00%

 

2.45%

 

 

 

 

   

 

 

C&I Loans

3 - 4

5 - 8

2.70%

 

2.58%

 

 

 

 

   

 

 

CRE

5 - 7.5

9 - 12

>12%

 

5.36%

<----- Trend is already higher than predicted, but current losses in range

Construction

8 - 12

15 - 18

10.24%

 

 

 

Multifamily

3.5 - 6.5

10 - 11

   

1.30%

 

Nonfarm, Nonresidential

4 - 5

7 - 9

   

 

 

 

 

 

   

 

 

Credit Cards

12 - 17

18 - 20

>20%

 

5.56%

<----- Trend is already higher than predicted, but current losses in range

 

 

 

   

 

 

Other Consumer

4 - 6

8 - 12

5.38%

 

3.32%

 

 

 

 

   

 

 

Other Loans

2 - 4

4 - 10

2.15%

 

1.05%

 

 

 

 

 

 

 

 

Notes

         

 

1) Computed for Alt A First Lien Mortgage, Alt A ARM and Subprime based on Fed data for Foerclosure and past due loans adjusted for LTV and housing price change.

 

 

1) HELOC, C&I, Other consumer and Other loans are as of December 31, 2008 representing 2 yr cumulative loss rate and are sourced from FDIC and Federal Reserve. Credit Card charge-off as per Moody's estimate. CRE charge-off's as per Deutsche Bank estimates.

 

 

2) Foreclosure as of March 31, 2009 from Bloomberg except for Subprime foreclosures which is as of December 31, 2008 and is sourced from Mortgage Bankers Association.

 

 

3) Delinquency as of December 31, 2008 sourced from MBA, FIDC and Federal Reserve

 

 

 

First Lien Mortgage

Mortgage foreclosure rate stood at 8.86% as of March 31, 2009 with US home foreclosure filings increasing 46% to 341,180 as of March 31, 2009 over last year. This number is significantly understated due to the fact that many, if not most, of the largest lenders were either under or just exiting a moratorium on foreclosures in the US. This moratorium, or more accurately, the lack thereof, will cause an extreme spike in foreclosure fillings in the upcoming months. As U.S housing prices continue to decline (with S&P Case Shiller Index declining 5% in 2009 in the first two months) mortgage forecloses and delinquencies are expected to reach additional historical peaks resulting in higher loan losses for banks on real estate loans.  The Fed's 2 year cumulative loan loss rate for Alt A loans (7.5%-9.5%) appear overly optimistic and is even lower than current delinquency as of December 31, 2008 (9.69%).  Based on the Fed's data (that's right, this data is sourced directly from the Fed itself, which explicitly contradicts the data that the Fed released for its stress tests) for Loan losses for Alt -A loans as of March, 2009 (for loans past due and current foreclosures) adjusted for recovery based on LTV taking into consideration price decline and original LTV, 2 yr cumulative losses for Alt A is expected to reach 19.98% which is significantly higher than Fed's adverse case of 9.5-13% - nearly twice as much! The Alt-A category is probably one of the most dangerous for the banks, for this is expected to literally explode over the next 24 months (and is in part masked by moratoriums), as is confirmed through our independent research and, ironically, through the Fed's data itself! I strongly suggest that those who are interested in this mosy on over to Mr. Mortgage's blog, for a peek at what is "really" happening in regards to foreclosures in California - see "4-23 March Final Loan Default Wrap-up". This is the man that sounded the trumpet along with myself regarding Lehman Brother's RE exposure.

Now, in case my bold font and italics are wasted on some of you, let me state this again. The Fed says X through the stress test assumptions, and now the results, yet if you simply surf over to the other side of the government's own web sites, they offer actual default and foreclosure rates (among other data), that are considerably more dire than they asked you (the tax payer and investor) to believe is credible and "not that bad". My previous post requested that BoomBustBlog readers consider the technical and legal definitions of Fraud - see "Preparations for Monday's and Tuesday's Articles". Keep this in mind as we move forward.
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