A Check Into Creditville: A Not So Nice Place To Call Home
A: So much to talk about. Here are just some headlines working their way around the blogosphere and web today about the credit crisis. Apparently, subprime is contained....to planet earth! Concerns of a spread to Mars & Venus start to hit investors.
New Hitches In Markets May Widen Credit Woes (wsj.com)
A widening array of financial-market problems threatens to trigger a new phase in the global credit crunch, extending it beyond the risky mortgages that have cost banks and investors more than $100 billion in losses and helped push the U.S. economy toward recession.UrbanDigs Related: Here & Here
Problems are cropping up elsewhere in credit markets. Money-market investors in the past have been large buyers of short-term instruments backed by tax-free municipal bonds and student loans. But they have been shunning these instruments -- known by such names as auction-rate securities and tender-option bonds -- because they fear the debt used to back the instruments will default or get downgraded by rating services.
Commercial real estate is another segment of the market that is showing cracks. There were no new offerings of commercial mortgage-backed securities in January, and the cost of protection against default on such securities issued in 2005 and early 2006 has more than tripled, according to Market Group's CMBX index. Goldman Sachs estimates banks could write down $23 billion from CMBS losses this year.
MBA Survey on Delinquencies (via Minyanville)
As pressure mounts on rating agencies to proactively evaluate risky bonds, downgrades will continue to creep up the credit spectrum.Subprime Losses Could Rise To $400 Billion (ft.com)
Prime loans make up almost 80% of the massive mortgage market, and delinquencies are quickly deviating from historical averages. While subprime mortgages continue to make headlines, data from the latest MBA survey on delinquencies for 3Q '07 shows a disturbing trend:
* Prime serious delinquencies (+90 days) are up 14% from 2Q '07
* Subprime serious delinquencies (+90 days) are up 10% from 2Q '07
* Prime ARM foreclosure starts are up 65% from 2Q '07
* Subprime ARM foreclosure starts are up 23% from 2Q '07
Note this is a quarter-on-quarter comparison and a snapshot before the credit crunch began to materially impact the broader economy. Overall prime delinquencies measured 3.1% compared to historical levels of 2.4% and are increasing at a faster rate than subprime delinquencies.
Senior global policymakers have raised projections for the size of subprime-related credit losses in a move that implies financial institutions will have to increase write-offs.UrbanDigs Related: Level 3 Assets
Speaking after the meeting of Group of Seven finance leaders, Peer Steinbrück, German finance minister, said the G7 now feared that write-offs of losses on securities linked to US subprime mortgages could reach $400bn.
Over The Limit (businessweek)
The credit crisis that began rumbling through the mortgage market last summer is now spilling over to the nation's other great expanse of borrowing: credit cards. Banks have extended $740 billion to Americans like the Fitzgeralds, a 15% jump over the past five years. With the economy weakening, delinquencies are rising, particularly in states battered by the housing bust.UrbanDigs Related: Not A Subprime Problem
Banks and other card issuers are lowering credit limits, hiking interest rates, and refusing to approve applications as part of a broad clampdown to prevent more losses. That leaves strapped consumers with few options. Homeowners can no longer turn their equity into cash to pay their bills. The drop in home prices has wiped out billions in equity, and since families can no longer use their abodes as ATMs, debt loads are mounting and borrowers are falling behind on payments.
As with mortgages, banks bundle big chunks of so-called credit-card receivables, essentially consumers' outstanding loan balances. Then they issue bonds backed by the bundles, which are sold to big investors such as pensions and mutual funds. Credit-card securities are a different breed from those financing housing. For one thing, credit-card debt is unsecured. That means if a borrower defaults, there's no tangible asset, such as a house, that can be sold to recoup at least some of the money. And if delinquencies and defaults double or triple from current levels, investors will likely realize losses.
There is something positive I would like to mention. 3-Month LIBOR rates have dropped considerably as the fed, whether directly or indirectly, specifically targeted LIBOR through a series of TAF (term auction facilities) since early December. I wrote about it this when breaking news came out that the fed was in the process of co-ordinating a global effort to normalize the credit markets; read story here. This is one sign of normalization, HOWEVER, and its a big however, we are still adjusting to the fact that these credit problems go way beyond subprime and will ultimately affect securitizations of other debt classes: alt-a, prime, HELOC's, option arms, cosi/cofi, credit cards, auto loans, etc..That is the problem. This is not a subprime problem, but an overall mortgage/debt problem that has resulted from decades of habitual debt mounting and years of lax lending standards, lax underwriting, financial innovations that helped disperse risk, and speculative behavior in housing resulting in unsustainable price gains. This will take time to work out.