C.M.O. 1.13.2010
Credit Market Overview
January 13, 2010
In his 16 years in the Majors, Mark McGuire’s batting average was .263. What is interesting about this number is not Mr. McGuire’s now admitted steroid use; not that it is considered a reasonably good number for a professional baseball player but that just a slightly lower percentage .25 represents the number of people with mortgages that are larger than the current value of their home and is considered a very bad number.
First American CoreLogic stated recently that nearly 10.7MM homeowners had negative equity in their homes and that of those 5.3MM were more than 20% upside down. Of this second number, 520,000 have received a notice of default, according to the Santa Ana, CA based company.
With these numbers in mind, last Friday’s 85,000 reduction in non-farm payrolls would seem to add to the worry of future defaults but employment no longer seems to be the key to paying the mortgage as FACL reported that 588,000 borrowers defaulted last year even though they could pay; double the number in 2007. “The American consumer has had a long-held taboo against walking away from the home, and this crisis seems to be eroding that” was how a report by consulting firm Oliver Wyman described the new phenomenon.
It would also seem that delinquencies and foreclosures are not only for sub-prime borrowers anymore as the Mortgage Bankers Association’s Q309 report showed the number of prime fixed-rate loans entering or in foreclosure at an all time high since the MBA started to record figures in 1972. “The outlook is that delinquency rates and foreclosure rates will continue to worsen before they improve” said the MBA’s chief economist, Jay Brinkman.
It is not certain that the Home Affordable Modification Program which began on March 4, 2009 is having a lasting affect as 44% of loans modified under the program are showing to be 60 days past due with in six months and 59% hit that mark after a year. Appearing before the House Financial Services Committee on 12/8/2009 Laurie Goodman’s, Sr. MD at Amherst Securities, testimony included the following: “The current modification program does not address negative equity, and is therefore destined to fail. It must be amended to explicitly address this problem. And there is no single solution; it is a combination of policy measures. Clearly, the arsenal of solutions must include principal reduction and must explicitly address the loss allocation between first lien investors and second lien investors”.
The problem does not appear to involve only mortgage delinquencies but has metastasized into personal bankruptcies. Filings in Arizona and Nevada, two states at the heart of the housing bubble, have increased 79.6% and 59.5% respectively by the end of Q309. “There is a close relationship between high levels of household debt, including mortgage debt, and bankruptcy filings”, Samuel J. Gerdano, Exec. Dir. of the American Bankruptcy Institute said recently.
MBA mortgage applications are due out this morning at 7:00am. They were reported up 0.5% in the week end 1/1/2010 after being down -22.8% and -10.7% in the two prior weeks.
KB Home (KBH) reported a $91MM pretax loss yesterday as a result of a 27% drop in revenue. KBH posted a profit for the quarter because of the tax law change that allows U.S. homebuilders to carry back losses related to land and home sales for five years, up from the previous two year window. John Tomlinson, an analyst with New York based Majestic Research, said after the announcement, “At the end of the day it really comes down to how many homes people are going to buy, not what kind of tax benefits a builder receives”.
The CDS market took the KBH earnings announcement in stride closing 12bps lower at 266bps yesterday even as the stock lost $0.66 closing at $15.72.
Enjoy the week.
Jim Delaney
