We have not been keeping up on the news the last couple of days. Here are some things that you might have missed.
The first link comes from the Financial Times…..
The issue at stake revolves around so-called delinquency rates, the proportion of people who fall behind on their debt repayments. When American households have faced hard times in previous decades, they tended to default on unsecured loans such as credit cards and car loans first – and stopped paying their mortgage only as a last resort. However, in the last couple of years households have become delinquent on their mortgages much faster than trends in the wider economy might suggest. That is particularly true of the less creditworthy subprime borrowers. MoreÂÂover, consumers have stopped paying mortgages before they halt payments on their credit cards or automotive loans – turning the traditional delinquency pattern on its head. As a result, mortgage lenders have started to face losses at a much earlier stage than in the past.
“In the past, if a household in America experienced financial problems it tended to go delinquent on its credit cards, but kept on paying its mortgage,” says Malcolm Knight, head of the Bank for International Settlements, the central banks’ bank. “Now what seems to be happening is that people who have outstanding mortgages that are greater than the value of their home, or have negative amortisation mortgages, keep paying off their credit card balances but hand in the keys to their house … these reactions to financial stress are not taken into account in the credit scoring models that are used to value residential mortgage-backed securities.”
Anecdotal evidence that this was going on has been piling up for awhile. Now it seems that it may be showing up in broader statistical samples. If this snowballs, housing prices could really drop.
Related to the above is this story from Bloomberg….
Standard & Poor’s said it cut or may reduce ratings on $534 billion of subprime-mortgage securities and collateralized debt obligations, the most sweeping action in response to rising home-loan defaults.
The downgrades may extend bank losses to more than $265 billion and have a “ripple impact” on the broader financial markets, S&P said in a statement today. The securities represent $270.1 billion, or 47 percent, of subprime mortgage bonds rated between January 2006 and June 2007. The New York-based ratings company also said it may cut 572 CDOs valued at $263.9 billion.
The reductions may increase losses at European, Asian and U.S. regional banks, credit unions and government-sponsored enterprises such as Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks, S&P said. Many of those institutions haven’t written down their subprime holdings to reflect a drop in market values and these downgrades may force them to recognize losses, S&P said.
The rating agencies have been downgrading things for awhile now. But doing half a trillion dollars worth in one whack still makes people sit up and take notice.
It is kind of funny that S&P is saying that the rating cut will force banks to recognize losses. The name of the game seems to be avoid having to face up to the facts at all costs. This from Naked Capitalism…..
But it seems that duplicity, um, creativity of various sorts is not only being encouraged but actually endorsed. First we had the Federal Home Loan Banks making massive loans to subprime lenders, particularly Countrywide. Now we have the SEC permitting subprime lenders to engage in what can only be described as misleading accounting.
If a mortgage servicer modifies a loan in a mortgage trust, an off balance sheet entity, in ways not comtemplated by the trust’s charter, the trust dissolves and the loans go back to the lender. But even though loan mods are often the best of the bad choices available when dealing with underwater borrowers, if the servicer does mods in a way that violates the trust charter, that means the poor overstrapped subprime lender has to take more assets onto its already not-so-hot balance sheet.
Enter the SEC with a magic wand. You can have your off balance sheet treatment, meddle with it like it really isn’t off balance sheet, but still keep your preferred accounting treatment.
