Thursday, August 20, 2009

Prime Borrower's Roll Over as the Housing Crisis Deepens

All I can say about the most recent housing data is YUCK!

The Mortgage Bankers Association announced today that 13% of all home loans are now delinquent or in foreclosure:

"WASHINGTON — More than 13% of U.S. homeowners with a mortgage are either behind on their payments or in foreclosure as the recession throws more people out of work, the Mortgage Bankers Association said Thursday.

The record numbers in the report are being driven by borrowers with traditional fixed-rate mortgages, rather than the shady subprime loans with adjustable rates that kicked off the mortgage crisis. As of June, more than 4% of borrowers were in foreclosure and about 9% had missed at least one payment.

One in three new foreclosures between April and June was from a prime, fixed-rate loan, up from one in five a year earlier. Last year, subprime adjustable-rate loans caused the largest share of foreclosures."

My Take:

There are no "green shoots" in this report. The numbers here are staggering. Whats most concerning to me is the fact that prime borrower's are now starting to drop like flies. 33% of new foreclosures are prime borrowers versus only 20% a year earlier.

Folks, prime borrowers are not supposed to fail! The default rate on prime borrowers historically has always been under 1%. This is an extremely disturbing trend and it's one that bears watching.

What's most concerning here is the fact that these foreclosures were fixed rate loans. This means there was no adjustment that raised the monthly payment. What this tells you is these prime borrowers flat out COULDN'T AFFORD THE HOUSE!

Its becoming clearly evident that pretty much all of America bought homes that they couldn't afford during the housing bubble.

Most of these loans that are delinquent will eventually get foreclosed on. This will dump even more inventory into the already bloated housing market which will then put even further pressure on prices.

Housing clearly isn't anywhere near the bottom. If the prime borrowers continue to fold like tents it will have a catastrophic effect on the housing market and our economy.

Another Consumer Beatdown

The noose around the consumers neck just got a little tighter as the banks continue to slash credit availability:

"Credit card issuers slashed credit for an estimated 24 million borrowers who paid their bills on time, and a third of those consumers saw some drop in their credit scores during a six-month period, a new study says.

The study, to be released Thursday by Fair Isaac— the creator of the widely used FICO credit score — shows that 8.5 million consumers' scores fell from the end of October 2008 through April 2009 after they had their available credit reduced by an average of $5,100. These consumers had no risk triggers such as a late payment. The typical score drop was "well under 20 points," according to Fair Isaac, with about 500,000 consumers experiencing drops of 40 or more points.

The problem with this analysis, according to John Ulzheimer, president of consumer education for, an information site, is that it "minimizes" the impact of lenders' actions on consumers. When lenders lower credit lines or close accounts, it could affect consumers' utilization ratio — which measures borrowers' debt to available credit — potentially lowering the score.

If a consumer has a credit score of 800, a drop of 20 points would still likely qualify the person for the best rate, experts say. But this same drop for consumers in lower score bands could have a significant impact on what interest rates they get, if they can even qualify for a loan.

"The fact that 8.5 million consumers have seen their scores reduced because of no fault of their own over the past six months is problematic," says Ulzheimer, "especially when you take into account that these people could have seen their limits reduced prior to the study and might see" limits cut further.

The effect of lenders' overall actions, he adds, "is going to be much more than 20 points."

My Take:

How are we supposed to spend ourselves back into prosperity without any credit?

Folks, the fact that banks are hurting your credit score even if you pay your bills on time is a big problem. Maybe we should all say the hell with it and just stop paying our bills if our credit score is going to drop regardless!(sarcasm off).

You gotta wonder:

Are the banks going to have any FICO score qualified borrowers by the time they are done penalizing us for their greedy mistake of lending out too much money?

The Bottom Line

Folks, this whole thing is insane. The Fed's answer to our economic crisis was to provide the banks with liquidity so that they could lend out money and jump start the consumer.

Great idea guys! How's that working so far? Let me answer that Alex: IT"S NOT!.

Because the banks are so deep in debt, all they have done is hoard the bailout money in an attempt to dig themselves out of insolvency. Meanwhile, as the pigmen sit and count their money, Rome continues to burn as the the American people increasingly suffer.

As long as the money flows into the banks instead of to the people, this economy is going to continue and tank. The numbers speak for themselves: 13% delinquency rates on mortgages, 9.4% unemployment, and 576,000 new jobless claims as of today(which was above expectations).

This country is going to see a revolution if things continue down this path.

I am amazed at how the market continues to climb the wall of worry and move higher. Pretty soon they are going to realize that this wall is as tall as the Hoover Dam! Look out below when the market comes to this conclusion.

I bought a few PUTS on the SPY at the close today after seeing today's data. Today's move higher looks tired and the news just keeps getting worse.

Disclosure: Short the S&P via SPY PUTS.


Anonymous said...

The day President Woodrow Wilson signed the Federal Reserve Act, it was the beginning of the end for America!

"I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men." -Woodrow Wilson, after signing the Federal Reserve

This secretive cartel (Federal Reserve) is the largest holder of US debt.

flipdippy said...

brave men tell the truth

we are so frakked

most depressin' read in months

Jeff said...


Your link got cutoff

Can you post again?

Minton Mckarkquey said...

Anon - totally agree. The Founders were warning everyone of national banks and credit and we all just screwed ourselves for the convenience. Great quote.

Jeff said...


I just read a piece that scared the living daylights out of me.

Wait until you see this chart tomorrow.

Futes down -3...hmmm

Tom said...

HI Jeff

I bought Spy march puts today also. Let's see what happens I bought in the morning so I know you got a better price.

Chris said...

Jeff and Others,
This is a few months old but well worth a listen, Bill Black really nails the corruption in DC and why we are where we are today.

Ben said...

if he regretted it so much after he signed it then why the hell did he sign it in the first place? Maybe it wasn't his choice whether or not to sign it.....

Jeff said...


Looking good so far.

Futures are falling off a cliff..-7.50

We have seen this game before and watched the market rally back.

Expiration tomorrow.

Setting up for an interesting day tomorrow

Jeff said...


I LOVE Bill Black.

A true patriot who has already cleaned up a banking crisis

Thanks for sharing.

I wish they would replace Sheila Bair with him

Herb said...

Wilson was a strange person. Ph.d, President of Princeton, and avowed racist, yet obsessed with world peace.

Anonymous said...

Banks are pulling credit because they are running out cash deposits and they are afraid of being shutdown by FDIC.

Anonymous said...

Very perplexed with the markets continuance march upwards. Can we really less that because the news is "less" bad that we are digging our way out of this recession. OK, we are not in that freefall panic that we were in, according to the market but maybe we had climbed so high that we are like a sky diver, still falling fast but so high up it doesn't feel like it. That freefall feeling before was us just being pushed out of the plane. It will still hurt like hell when you hit the ground if your parachute doesn't open. I really like analogies.

Anonymous said...

Sorry for my second sentence. I meant to say: Because the news coming out is "less" bad that everyone wants to believe we are all better now. TGIF!!

Jeff said...


Yeah there was a big article about tht FDIC in the NYT this morning around The FDIC trying to find buyers for banks.

"Faced with a growing wave of bank failures, the Federal Deposit Insurance Corporation is taking extraordinary steps to attract buyers for troubled institutions to keep the fund that makes depositors whole from being drained...

For the F.D.I.C., led by Sheila C. Bair, it is critically important to keep the insurance fund full because confidence in the banking system depends in part on depositors knowing they will get their money back."

Jeff said...

Anon 2

I hear you.

MArkets are so unpredictable right now. Metals up big. Dollar down HUGE this morning after showing signs of strength last night.

Overnight, the futures were in the opposite direction.

Europe had some positive growth numbers that rallied the markets.

Its Opex so it could be very volaitle this morning.

Lets see what happens!