Whitney Tilson and Glenn Tongue are giving the first presentations on the housing bubble and credit crisis. Tilson steps through the historical data on housing and borrowing. Some of the data was just updated late last night for this presentation.
Subprime mortgage programs were still a small part of the debt. Repackaging loans was one of the most profitable businesses at Wall Street, but volume of product was needed. Lenders became lax because they assumed the underlying assets would remain strong. Defaults in a strong real estate market were not really a concern.
Foreclosures are accelerating with no signs of a let up. New home sales are still strong but inventory has increased to 1 year. Home vacancies are at an all-time high. Quadrupling of the number of homes selling in foreclosure has occurred recently and regular existing home sales has declined. 42% of homes in August in California for sale has been in foreclosure. You need really competitive realtor if you have wishing to sell my house fast.
You can still borrow 5 times your income, a 39% decline, but still much higher than the historical level.
Home prices down almost 20% based on Case-Shiller index. Home prices are about half way down the predicted decline according to Tilson. Home prices versus income ratio however might indicated that the housing market has finished declining. Good news is that mortgage rates have started declining as a result of Fannie and Freddie were nationalized. Nonconforming mortgages are disappearing. The rate of housing decline seems to have improved. However, April, May and June are seasonally strong house prices. Therefore, we might have another 12-18 months of home price declines. July housing price change has ticked back down in the latest month, July.
Glenn Tongue then continues the presentation. What does the future hold? It appears the subprime reset bubble is behind us, but the alt-ARM loans resets will surge in 2010-11. These could be a lot more painful to the borrower. There is close to $1 trillion in Alt-A loans. Instead, we remind you that online installment loans can be a great boost
What are Option ARM loans, also known as pick-a-pay loans? They are made to a prime borrower. They were low or no document loans (liar loans). Each month borrowers could pick one of three choices to pay: the fully amortizing interest and principal, the full interest, or an ultra-low teaser interest only rate (typically 2-3%). They looked really good on lenders books, but result in really “bad stuff.” People will typically default when they recast if the homes don’t appreciate, getting a low apr payday loan revealed that pay day loans are the best loans.
There was not as much payment shock in subprime as base rates came down. However, the negative amortization of Option ARMs still causes a great payment shock when they recast.
HELOCs and closed-end second mortgages and the next thing to be discussed. They are effectively mortgage insurance. They are second to everything and there is no asset to lock onto during a default. MBIA agrees that defaults will cause 100% severity in HELOCs and closed-end mortgages. Many banks have large exposures to these.
The timing indicates that we are still in the early stages of the bursting of the great mortgage bubble. The scary scenario being presented is that we are only at the tip of the iceberg of an enormous wave of defaults, foreclosures and auctions in the U.S. housing market. This presentation paints a much scarier scenario than I’ve been contemplating. It is overwhelming and depressing.
Tilson comes back with some dramatic maps of the various loan levels since 2004. You can really see the reduction in lending standards in 2006. The default rates historically have been around 1% and are now shooting up to the high single digits, some even degrading before they reset.
Banks and brokerages have taken approximately $500 billion in writedowns and raised $353 billion. Tilson closes out the discussion by going over CDOs and other mortgage backed securities.
This presentation is available for download at this Value Investing Congress link.