Is Prime the New Subprime?

Whew!

The Fed dodged a bullet today as the 7 year bond auction saw solid demand. Stocks breathed a big sigh of relief and moved higher on the news. I expect the equity markets to start trading off of the bond market and its treasury auction's over the near term. This could create a very volatile market because the bond market appears to be very nervous right now.

Santelli on CNBC said the next thing to focus on are the long end June 10 and 30 year auctions. It will be interesting to see what the demand is for longer dated bonds after watching the FCB's pile into shorter term treasuries. Lets not forget that the PPIP also launches around the same time.

This should set the stage for some serious market fireworks over the next month.

Is Prime the Next Subprime?

If you look at today's foreclosure data I would say the answer is easy: YES! Bloomberg reported today that there are now more prime foreclosures than subprime for the first time. They also reported that a stunning 9% of all loans are now delinquent:

"May 28 (Bloomberg) -- Mortgage delinquencies and foreclosures rose to records in the first quarter and home-loan rates jumped to the highest since March this week as the government’s effort to fix the housing slump lost momentum.

The U.S. delinquency rate jumped to a seasonally adjusted 9.12 percent from 7.88 percent, the biggest-ever increase, and the share of loans entering foreclosure rose to 1.37 percent, the Mortgage Bankers Association said today. Both figures are the highest in records going back to 1972. Fixed rates rose to 4.91 percent, Freddie Mac said, and an increase in bond yields earlier this week shows rates may continue rising.

Foreclosure Inventory

The inventory of new foreclosures and those already in the process of being foreclosed upon jumped to 3.85 percent, the MBA said. Half the loans now in foreclosure, adding the new and existing defaults, are held by prime borrowers, according to the trade group’s report. About 43 percent are subprime mortgages, and 7.1 percent are Federal Housing Administration loans. A year ago, subprime mortgages accounted for 54 percent of the U.S. foreclosure inventory. Prime fixed rate mortgages accounted for 19 percent of new foreclosures in the year earlier period."

My Take:

Folks, this is horrifying. Prime loans are never supposed to go bust. These borrowers are supposed to be "a lock" for the banks. They are the premier borrowers with the best credit scores. The fact that they are crumbling is extremely worrisome.

I mean hell, if a prime borrower isn't safe then who in the hell is?

Credit counseling companies are seeing a distinct change in callers as prime borrowers go belly up:

"Prime fixed-rate loans have finally leapfrogged those nasty sub primes to take the lead in the race to foreclosure. The foreclosure rate on primes has in fact doubled in the last year

"I got a call yesterday from Scott Scredon at the Consumer Credit Counseling Services in Atlanta. He says they’ve seen a distinct change in callers. “We’re getting calls from engineers and attorneys and post graduate students,” he says. “Many of these people run through their 401Ks and their savings and start living off credit cards and then they call a counseling agency for help. So it’s a new kind of person we’re seeing today, but it’s a sign of the times.”

Continued:

This is nuts. Why are prime borrowers pissing away their retirements in an attempt to keep a bloated overvalued McMansion? These people are nuts! Walk away from the damn house! Why destroy yourself financially for the rest of your life in order to continue to live in one of these crapboxes?

Its not like your ever going to ever pay the loan off. I mean Christ: If you are behind on payments after just 3 years, How in the hell do you think you can continue to make the same payments for the next 27 years.

Your retirement is your nest egg. Don't piss it away by paying back a bunch of greedy bankers that fraudulently put you in a house that's worth half of what you actually paid.

How did this Happen???

Folks its simple, the prime borrower made the same mistake that the subprime borrower did only on a larger scale: They bought a house they couldn't afford!!!

Everyone that got involved in the housing bubble turned into debt whores. It didn't matter if you made $30,000 a month or $3,000 a month. The $30,000/month "prime" buyer bought a house for $1.8 million when they really could only afford $1 million while the subrime borrower paid $300,000 for a house when they could only afford $150,000.

Either way it doesn't make a difference. Neither one can afford the darn house.

How out of control did this mania and our debt loads get? Let's take a look at where we sit historically:

As you can see above, our debt loads are just flat out ridiculous. There is no other way to describe it. Housing and stock wealth have plummeted at a time where the average person holds more debt by far than any other time in our countries history. Meanwhile wages only mildly rose in comparison to the soaring debt loads over the same period. Umm...Can you say DEBT BUBBLE?

How on earth is anyone going to ever pay this debt back? Where is the money going to come from? Mars?

Answer: It won't be paid back. The problem we have here is our economy cannot grow until all of this debt is either paid off or defaulted on. Our consumer led economy simply cannot grow when the consumer doesn't have the ability to spend.

Bottom Line:

This will not end pretty. Whenever bubblevision talks about all of the "cash on the sidelines " come back here and take a look at this chart. Cash is on "the sidelines" because its being used to payoff record debt levels.

The now 9% deliquincy rate on mortgage payments combined with massive foreclosures, record invetories, and higher interest rates will only mean one thing: THE DEATH OF THE HOUSING MARKET AND OUR ECONOMY.

Every week all I hear about on CNBC is how they are signs of recovery. Housing supposedly is stabilizing and the banks balance sheets our now supposed to now be strong.

Gimme a break! How can they say this with a straight face?

If prime mortgages foreclosures continue this trend(and there is no reason to believe they won't) the banks are going to get slaughtered as their loan books become filled with millions of bad loans resulting in billions if not trillions of more $$$ in losses.

Green shoots? All I see is one giant housing weed.