Loan delinquency rates rose sharply in the first quarter - 22-May-2008 - Generational Dynamics

Generational Dynamics Web Log for 22-May-2008

Loan delinquency rates rose sharply in the first quarter

This applies to residential mortgages, commercial mortgages, and credit cards

The Fed posted its updated statistical release on delinquency rates yesterday. I decided to comment on it because of another illuminating graphic posted by the Calculated Risk blog:

Loan delinquency rates -- first quarter 2008 -- residential mortgages, commercial mortgages, credit cards <font size=-2>(Source: CalculatedRisk)</font>

Loan delinquency rates -- first quarter 2008 -- residential mortgages, commercial mortgages, credit cards (Source: CalculatedRisk)

Looking at this graphic, each of the three subgraphs tells a story of its own:

Residential real estate (blue): What's striking is how the loan delinquency rates started increasing late in 2004 -- longer ago than I'd realized -- and really took off in 2006.
This is very significant because it's powerful circumstantial evidence of fraud by investment banks, ratings agencies and the "monoline" insurance agencies. These institutions all conspired to collect billions of dollars in fees to create CDOs and other securities that have turned out to be near-worthless.
Now they're claiming that they didn't know that would happen, but their models all depended on the real estate bubble and on homeowners paying off their mortgage loans. By 2007, it was undeniably and abundantly clear that the delinquency rate was surging well beyond the limits permitted by their computerized models, and yet 2007 was the time when they were most aggressively selling these near-worthless securities. The obvious implication from these circumstantial facts is that they knew that they were selling worthless securities, but they continued to do so anyway in order to collect the fat commissions, bonuses and fees.
This is going to be a very big deal.

Commercial real estate (red): A lot of pundits are saying today the kinds of things they used to say about residential real estate -- that there's no problem, that commercial real estate is built on solid business considerations, unlike the emotional residential real estate market, that people have to have stores and offices somewhere, etc., etc.
But this graph clearly shows that commercial delinquency rates really took off early in 2006, and the the climb is accelerating. Thus, commercial real estate problems are running about 1½ years behind residential real estate problems.
Incidentally, you don't have to look at a computer screen to realize this. Just drive around your neighborhood and look at the numbers of vacancies in strip malls. In most parts of the country today, that will tell you what the pundits should already know.
Another relevant fact is that this graph shows 12% delinquency rates in 1991, much higher than for the other two categories. This is where the business vs emotional part comes in. People don't like to leave their homes because doing so messes up their families. But if you own an office or a store as a business investments, and you're losing money, then it's no problem at all to walk away. And so, expect the commercial real estate delinquency rate to, once again, surge much higher than the other two categories.

Credit cards (green): These delinquencies spurted early in 2006, but only really took off in mid-2007, so they're probably a little behind commercial real estate delinquencies. But expect them to increase sharply in the last half of 2008.

It's worthwhile emphasizing again -- pundits who say that the worst is over are lying, most likely to cover up their own complicity. All the credible trend evidence points to sharply worse problems in the next year.

Yesterday I received a phone call from a web site reader. He was born in 1960, putting him on the Boomer / Generation-X cusp, but he was strongly influenced by his grandparents. They lived a very affluent lifestyle in the 1920s, and lost everything after the 1929 crash. They warned him what to watch out for and, unlike most other Boomers and Gen-Xers, he actually took their advice, and is now in a good position financially, and is fully prepared to survive the coming financial disaster. I wish there were more people like him.

He agreed with my descriptions of Boomer stupidity and Gen-Xer nihilism -- how Gen-Xers perpetrated all the fraud that we're seeing, but Boomers are just as much to blame because they allowed the fraud to occur for their own benefit. The current world financial situation is the result of the lethal combination of Boomers being unable to govern or lead, and Gen-Xers having total contempt for anything that came before them, and a nihilistic desire to completely destroy it.

The Calculated Risk article quotes some commentary from Goldman Sachs chief economist Jan Hatzius: Mortgage Credit Deterioration: Broadening and Picking Up Speed:

"The Fed’s first-quarter report on loan performance at commercial banks shows mortgage credit quality deteriorating at an accelerating pace. ...

The rapid pace of deterioration is particularly significant because the mortgage holdings of commercial banks appear to be tilted toward higher-quality loans, with more prime and less subprime. ...

The Fed data suggest that mortgage credit performance outside the subprime sector is deteriorating rapidly. This reinforces our long-standing view that the surge in mortgage defaults is much broader than simply a reflection of poor underwriting standards in specific subprime vintages. We don’t doubt that lax underwriting standards were an important issue. But the main driver of the defaults is the decline in home prices, the increase in negative equity positions, and the resulting inability of borrowers who encounter financial stress to sell or refinance their way out of trouble. Although subprime borrowers are more likely to encounter financial stress than prime borrowers—and the share of negative-equity borrowers who will end up defaulting is therefore much higher in the subprime sector—the qualitative outlook for the trajectory of credit losses in the much larger prime market is not all that different."

This Goldman Sachs opinion makes it clear that the worst is yet to come. The only thing missing from this opinion is the usual mainstream failure to explain that this situation arose because of the stupidity of Boomers and the nihilism and destructiveness of Gen-Xers.

I've estimated that the probability of a major financial crisis (generational stock market panic and crash) in any given week from now on is about 3%. The probability of a crisis some time in the next 52 weeks is 75%, according to this estimate. (22-May-2008) Permanent Link
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Generational Dynamics Web Log for 22-May-2008 Loan delinquency rates rose sharply in the first quarter

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Generational Dynamics Web Log for 22-May-2008
Loan delinquency rates rose sharply in the first quarter