Another edition of our new series: Blog Spotlight.
We put together a short list of excellent but somewhat overlooked
blog that deserves a greater audience. Expect to see a post from a
different featured blogger here every Thursday evening,
around 7pm.
Next up in our Blogger Spotlight: Russ Winter’s Economic & Market) Watch. A brief background: Russ was a broker for major firms in the Pacific NW for fifteen years in the late 70s and 80s. Moved on to land development, and vintage apartment ownership. He is now semi-retired and a cashed out bear, hunkered down in the Portland, Oregon area, watching the world go around.
This week’s topic: Understanding Consumer Ponzi Finance
Ponzi’ finance units must increase outstanding debt in order to meet its financial obligations.”
-Hyman MinskyCredit Suisse on a monthly basis puts out one of the most data filled reports in the biz on mortgage and consumer finance. A careful reading of the latest issue, enables one to piece together the nature of the American asset Bubble consumer financing Ponzi scheme. A look at the following chart on housing cash out refinancings, clearly illustrates Joe Soccer Mom’s (JSM) largely unrestrained ability (so far), to effectively service their old debts and continue spending, with new debt. That’s true even with the kind of extremely low levels of cash in the bank, that I pointed out in my blog on demand deposits, earlier this week.
What JSM has done throughout the whole post 911 period, is regularly
extract large amount of housing equity, both to live on, and also to
pay down more expensive consumer debt. Note in the next chart, that
consumer debt is now growing at a modest mid-single digit rate.
However, it is the final chart that gives the answer as to why, the
payment or pay back rate on consumer debt is at historically high
levels, because large home equity cash outs are used to pay it down,
with 2006 being the largest “liquefaction” year yet.
In 2006, Freddie Mac economists estimate a record $336.1 billion in
total cash out activity, with $26.9 billion used to pay off second
mortgages (or HELOCs). No doubt a chunk was also used to pay down
credit card and other consumer debt. But, that doesn’t mean total HELOC
and card debt is dropping, as other JSMs are building it back up as a
stop gap, until their next supposed refi, which for the average
consumer is now every 3.4 years. This wash, rinse, repeat refi cycle is
up from every 2.6 years just one year ago, which at first blush
suggests this gambit is fading? But not to be outdone, JSM just took an
extra large loan amount above his old balance to make up for any delay.
Note in first chart, that Credit Suisse estimates 4Q, 2006 and 1Q,
2007 cash outs, are going to be a modest 17% lower than the 2006
levels. Of course, this presumes that lenders will continue to ignore
declining collateral, and that the biggest wild-card of all, credit
spreads will stay minuscule. Incidentally, this is what five year
floating rate spreads looks like on credit card asset backed
securities, largely nonexistent.
On the micro level, Credit Suisse provided some October credit card
results from the large securitized trust pools. In case the holders
haven’t noticed, although not quite getting out of hand, because of the
residual of 2006’s cash outs, delinquencies are ticking up steadily
higher already. Perhaps these tiny, no foul smell spreads should be
called into question? Examples, and I’ve started first with Brazil
American credit cards, working down through mid-prime Bully Wannabee
and then prime Bully like cards. All, but First USA are slipping, but
the subprime Brazil American cardholders seem to be sliding the most.
That could be because the subprime mortgage market is getting tighter, as that first foot is dropping on Ponzi finance.Metris: 2Q, 2006: 7.55% October: 8.59%
MBNA: 2Q, 2006: 4.19% October: 4.47%
Capital One: 2Q, 2006: 3.36% October: 3.82%
Discover: 2Q, 2006: 3.55% October: 3.77%
Citibank: 2Q, 2006: 3.03% October: 3.25%
First USA: 2Q, 2006: 3.19% October: 3.16%
Chase: 2Q, 2006: 2.90% October: 2.97%
American Express: 2.30% October: 2.56%
A glance at the three year fixed auto spreads, is starting to show
the subprime and mid-prime spreads slightly widen, but it still looks
like the Riskloves feel everything is well in hand. Delinquency and
foreclosures for one of the key Ponzi enablers, CFC is included to
gauge the merits of that.And some recent 60 day plus auto delinquency numbers:
Westcorp: Oct. 05: 0.69% Oct. 06: 0.84%
Americredit: Oct. 05: 2.4% Oct. 06: 2.2%
Capital One: Oct. 05: 2.00% Oct. 06: 2.19%
The macro question is, how can this benign “risk free” environment
continue if Ponzi equity extraction from declining housing values
abates at all? And even worse, what happens if large layoffs spread
into the real estate and construction areas of the economy. And sorry
to repeat myself, but the chart on new housing permits and actions taken by Home Depot looks quite ominous on that score.
very good choice!
I second jmf’s comment: Excellent choice!
Of course, hardly a word of what Winter talks about makes it way on Wall Street. Can’t imagine how bad it’ll be if only half of what he say happens soon.
It could be ugly…
I would think you have to take into account other asset values (ie. equities and home prices) in order to get a bigger picture.
This alone paints a pretty dire picture. But much of today’s wealth to service that debt is tied up in ones home and other investments, as positive or negative as that may be.
I wrote a blog (see Triumph of Hope over Experience) on the asset side of the equation, including a link to the Cagan study (First American Title). It ain’t that pretty, once you account for 5-10% (or more) price declines off of ’05 levels.
Hi Russ,
Subprime loans will be in a tremendous amount of hurt going forward. Most everyone knows this. But what isn’t shown in your charts is that they represent a small piece of the mortgage pie.
For example, according to Christopher Cagan earlier in the year – “But Cagan said the risk won’t be that great. Using data from LoanPerformance–a real estate research firm that was acquired by First American last year–he found that the ARMs most at risk of default were those with low initial “teaser” rates of 2 percent or less and whose borrowers had less than 15 percent equity. This pool represented about $70 billion in potential losses out of $1.8 trillion in ARMs issued in the last two years.”
Also, I was reading your blog (Triumph of Hope over Experience) and don’t see how it addresses the asset side (ie. wealth increase from home prices & equities) of the consumer.
Michael,
There were $350 billion subprime loans originated in 03, $550B in in 04, and $625B, and $437B through 3Q, 06. Even if you account for some of the early vintage refiing, you are talking about $1.75 Trillion, or about 16-17% of the mortgage market. And it also very highly concentrated in Bubble locales where real estate weakness is the greatest.
Further, as I state in that blog, trouble is spreading to the mid prime market, not just subprime. In time I feel even prime will be impacted, it’s a daisy chain, especially if a credit seizure kicks in (which I anticipate).
Russ, thanks for the additional info!
The regulators are starting the war drums as well. First the Feds released final guidance on non-traditional lending that was much stricter then the industry had anticipated and now North Carolina (the first state to pass predatory lending laws) just released guidelines and stricter limits on the sale of nontraditional loans. These guidelines tend to hold a lot of weight when best practices issues come up as a matter of law.
It’s a closing the door after the tractor has left the barn (or something like that), but the current business model of the mortgage lending industry is under threat from many directions.
http://www.nccob.org/NCCOB/Mortgage/Nontraditional+Mortgage+Guidance.htm
This should get you to the page at the North Carolina Banking Commissioners web site that has the new guidelines. It is near the top -the 2nd pdf down (below the press release).
It looks similar to the Fed guidelines, but is important because as the states pass these guidelines it closes gaps in the regulatory environment.