Subprime 39.8% 30 day delinquency (over 30 days meaning 2
payments late) and prime 7%. Here’s some speculation. I was
CAO for the largest retailer and financier of mobile homes in the ‘80s
(AMEX listed, Fortune 1000). I noted delinquencies climbing in about ’84
and warned the CEO who told me to study it. After studying hundreds of
mobile home loan jackets, payment histories and repo records I found that (and
relying upon memory), a sustained 9% delinquency would ultimately result in the
repossession of upwards of 30% of a portfolio of loans. Out of 100 loans
in a given GNMA mobile home security, 40 would be repossessed. If the CEO
could have fired me without my mandatory reporting to the SEC the circumstances
of my departure, he would have done so. In ’86 that company had its
best sales and earnings year in its history. One year and one month
later, it filed Chapter 11. The reserve for future credit losses was
woefully inadequate. Six months later it was converted to a liquidation.
Granted that I’m talking about mobile homes versus site
built homes, I’d maintain that the situations are hardly dissimilar.
Negative equity (which mobile homes historically due to low down payment and
depreciation) creates incentive to default. The difference between mobile
homes and site fixed homes has always been equity, either by virtue of down payment
or site built appreciation. With subprime, that distinction is
gone. No down payment, no appreciation.
What’s the implication of 39.8% delinquency to
me? The vast vast majority of subprime loans will be foreclosed. If
you consider the population homes rather than the population of home loans, one
home can be foreclosed multiple times. If you looked at 100 mobile homes
that were 39.8% past due 2 payments, many of those homes would be repoed,
resold (under preferred terms and concessions) and then repoed again.
Heck, I was showing some GNMA securities studied at near 100% foreclosure rates;
100 homes in a security and 100 foreclosures (50 homes stick but 50 homes
foreclosed twice for example). I was showing homes that were repoed, resold
and repoed multiple times.
Implication, about every subprime loan will be foreclosed….ultimately.
Forget the ‘1 in 5’ will foreclose BS. Closer to 100% than
20% depending on how you define the population. The ‘work outs’
will show huge re foreclosures which boost the statistics and the ultimate cost.
And the 7% prime delinquency… about 20% of all homes with prime mortgages
will be foreclosed; 20 out of 100 loans. The latter is more a guess than
the subprime. That’s a lot of homes and It’ll happen faster
than most people think. For my former employer it was feast to famine in
a matter of months but it did not have an unlimited checkbook as the US
Treasury (supposedly) has. The Treasury can make the agony that much
longer.
Just an opinion.
http://www.reuters.com/article/gc03/idUSTRE5363EV20090407