Mortgage Default Rates: Exuberance Fades Fast
June 5, 2006
Over the past week, we asked risk pros to estimate just�how�understated are corporate and retail default levels. The general consensus is "a lot," yet few of the respondents are comfortable describing the degree of "exuberance" which still prevails even as the Fed funds rate closes in on six percent.
Last week, our colleagues at Daily Bankruptcy News reported that in the first quarter of �06, home mortgage foreclosures in Illinois rose 32% over the last quarter of �05. In Michigan and Ohio foreclosures have risen 91% and 39%.
Says DBN: "In the first quarter, home foreclosures in California were up 33.6%. Last month we reported how home foreclosures in Massachusetts are 44% higher than last year and up 90% from 2004. 'Experts' say that the crunch won't hit until 2007 and 2008 when mortgages reset on home owners who at that time may lack equity to allow refinancing."
Regarding these cheery statistics, one�restructuring pro in New York�tells�the IRA: "I figure that foreclosures are returning to a more normal rate from a depressed rate because home owners previously were able to refinance their way out of trouble. No more. The real shit will hit the fan when home prices fall and selling the house won't cover either the owner or the lenders. Foreclosures are being held in check now by ability to sell for a price that will cover the mortgage debt."
Of interest, the Q1 2006 statistics from the FDIC continue to present a placid picture of bank credit quality. Loan-loss provisions at the largest US banks were $234 million (3.8 percent) lower, in response to a sharp reduction in losses on consumer loans, according to the latest Quarterly Banking Profile. Net loan losses for all banks totaled $5.5 billion in the first quarter, a decline of $1.7 billion (23.4 percent) from the level of a year earlier.
But few�of the risk mavens�we
surveyed last week believe such rosy indicators.
"I don't think people appreciate how much excess money there is sloshing about in the system that needs to get mopped up," one risk manager told the IRA. "BOJ's ZIRP and an accommodative Fed have really done a number on us. The recent market turmoil is simply a teaser of what lies ahead. Rising interest rates can do some of the work mopping-up excess liquidity, but what you are really going to need is a serious (downward) repricing of assets. Unfortunately, you need to destroy paper wealth."
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