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Monday, December 24, 2012

I told you so

The Fed is wondering why, oh why, does the mortgage spread not respond to their MBS buying efforts? 

For an answer, look at Q3 chargeoffs & delinquencies. Chargeoffs, all banks SA. Delinquencies, all banks SA.

Let's see - US residential mortgage delinquencies at 10.77%, which is the highest since 2010, Q3. It's been increasing for four quarters, and the reason is mostly declining real incomes, plus retirements, plus the end of the funnymoney loans.

Chargeoffs at 1.74% increased from 1.19% the previous quarter, and are the highest in a year and a half (2011 Q1). This increase was so huge that it drove the total loans and leases chargeoff rate up by 4 bps to 1.21% for the first increase in years.

Now chargeoffs follow delinquencies, but some of the chargeoff increase is being forced by sales of REO which force recording of higher losses than previously estimated. Nonetheless, you cannot dismiss this as a oneoff because of the steep continued rise in delinquencies, which will inevitably force a rise in chargeoffs.

But really, the largest banks control most of the mortgage market, so we'll look at chargeoffs and delinquencies for the 100 largest banks. Residential mortgage chargeoffs at 1.99% (+64 bps in one quarter) plus delinquencies at 12.13%, the highest since Q3 2010. In fact, throughout the late great unpleasantness, residential delinquencies at the 100 largest banks have only been higher for three quarters.

If the Fed is still wandering wailing in the wilderness wondering why "policy transmission" doesn't work, it would do well to study these figures. Net Interest Margins at US Banks are quite low:

And we have reached, unsurprisingly, the end to the dizzying rise and fall of the loan loss/total loan ratio:

This means that banks have now to be planning to raise reserves on new lending or tighten lending standards, regardless of whether the Dodd-Frank rules go into effect or are carefully interpreted away. Raising reserves means you have to raise margins.

Hope you're feeling better -- that you've posted this suggests you are! :-)

There's all kinds of risk in the mortgage market that's being hidden via government largesse.
Thanks for pointing this out. All signs point to tightening in credit markets soon.
TJ - Death cannot come too soon, but in the spirit of ancient heroes, I gasp out one last warning:

Don't buy the reverse mortgages!
Merry Christmas!
Are you implying that the head of the nation's banking system has no banking experience?
If I understand the figures correctly, the delinquency rate is almost as bad as Spain's.
"Don't buy the reverse mortgages!"
= = = = =

OK, I'll bite: why not?

If things are gonna get worse later, wouldn't a person want to do whatever-they're-planning-to-do SOONER, before TSHTF?
"Don't buy the reverse mortgages!"
= = = = =

OK, I'll bite: why not?

If things are gonna get worse later, wouldn't a person want to do whatever-they're-planning-to-do SOONER, before TSHTF?
A_Nonny - because reverse mortgages are an investment that is going to go bad!

It is like running up to the owner of a house on fire and trying to buy it from him.
Charles - well, it could be worse. You could have been in a bad car crash and find yourself lying on a gurney, bleeding all over the floor, in an ER, staring up into the kindly eyes of the man who played Doogie Hawser. Don't worry, he would say to you, everything's going to be just fine. You're in good hands.
MoM - LOL.

Reminds me of an old TV commercial - "I'm not a banker, but I play one in government."
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