Fannie Freddie Delinquencies Soar (and they are going to get much worse)

On Tuesday, Fannie Mae and Freddie Mac reported Mortgage Delinquencies Rose 50% in a Month.

Fannie Mae and Freddie Mac mortgage delinquencies among the most creditworthy homeowners rose 50 percent in a month as borrowers said drops in income or too much debt caused them to fall behind, according to data from federal regulators.

The number of so-called prime borrowers at least 60 days behind on mortgages owned or guaranteed by the companies rose to 743,686 in January, from 497,131 in December, and is almost double the total for October, the Federal Housing Finance Agency said in a report to Congress today.

Of all borrowers who ended up in default, 34 percent told Fannie and Freddie they were earning less money, about 20 percent cited excessive debt as a reason for missing mortgage payments, and 8.1 percent blamed unemployment, FHFA said.

Those are pretty nasty numbers.

Mark Hanson (aka Mr. Mortgage) at The Field Check Group said "We saw this coming well in advance by watching notices of default (NODs)."

GSE Notices Of Default Rate of Change



click on chart for sharper image

Fannie and Freddie data is woefully late. The GSEs are just now reporting January delinquencies.

In the meantime, Mark is tracking actual notice of default data (90-120 days late) for March. If defaults are soaring, it stands to reason that delinquencies will be soaring as well. In this way, someone watching Notices of Default (NODs) is able to know in advance whether or not an upcoming GSE report is going to be bad.

Mark is also tracking California specifically. Please consider the following chart.

Notices Of Default Rate of Change Total Universe (Not just GSEs)



click on chart for sharper image

A key point for the above charts is that Fannie and Freddie loans are now blowing up at a faster rate than the entire universe of loans!

Mark's data is for the west coast, primarily California. However, his assumption is that if his west coast data is bad, the overall numbers for the GSEs will be bad as well.

SB1137 Effect

Note the effect of SB1137, a ridiculous foreclosure prevention act that gave give delinquent payers 30 days grace period before the actual foreclosure process begins. All that bill did was add red tape and delay the inevitable.

CA Foreclosure Prevention Act Coming Up

A new CA law dubbed the CA Foreclosure Prevention Act comes into effect in July that will essentially do the same thing. It's primary purpose is to delay the time between the Notice-of-Default (foreclosure stage 1) to the Notice-of-Trustee Sale (stage 2) by 90-days further delaying the foreclosure process and ultimate end of the foreclosure and housing crisis.

Hanson says, "It is likely we are already seeing unintended consequences of the new law. A certain percentage of the last few month's surge of new loan notice-of-defaults was likely servicers gaming the calendar in order to get borrowers into the foreclosure process prior to the July enactment of the new law."

FHFA Expands Reporting On Homeowner Assistance

Inquiring minds are digging into news that FHFA Expands Reporting On Homeowner Assistance

Since late November, the Enterprises had suspended foreclosure sales and evictions on owner-occupied properties. The suspensions, which ended on March 31, 2009, allowed servicers additional time to work with borrowers in foreclosure who were eligible for the Streamlined Modification Program (SMP). The impact of the suspensions caused completed foreclosure sales and third-party sales to decline 77 percent from the prior three-month average of 16,342 to 3,711 in December, and 79 percent to 3,391 in January. At the same time, loans that were 60+ and 90+ days delinquent increased. All loans 60+ days delinquent increased from 834,831 as of November 30 to 1,229,051 as of January 31, representing an increase of 47 percent over the period. However, prime loans 60+ days delinquent increased by 69.6 percent while nonprime loans increased by 23 percent.

Total Delinquencies

The reported 743,686 in the first widely read article was only Prime loans. The total 60-day and worse delinquent/defaulted loans stood at 1.229 million as of Jan 31st from 834k in November, up 47%. This represents 4.1% of their entire portfolio. This was led by prime that was up 70% while Subprime was up 23%.

Successful loss mitigation is increasing BUT in January only 9k loans were successfully modified. That would have to increase 10 fold to make a dent in the upcoming foreclosure wave.

The multi-month foreclosure suspension that ended on March 31st came at the same time as the new GSE loss mitigation initiative -- but with a 400k increase in distressed loans over the past 2 months and a recent record of 9k mods per month, the broken dam has a lot of water coming over it.

It's no wonder why the Fed is buying Agency MBS. Foreigners are likely a tad worried about now about this trash they were peddled by the trillions carries no explicit guaranty.

Fannie Mae Certificate



click on image for sharper view

MBS Purchase Program

Please consider the MBS Purchase Program.

On Wednesday, March 18, the FOMC announced the expansion of the Federal Reserve's program to purchase agency MBS to a total of $1.25 trillion by the end of the year.

...

Does the agency MBS program expose the Federal Reserve to increased risk of losses?

Assets purchased under this program are fully guaranteed as to principal and interest by Fannie Mae, Freddie Mac, and Ginnie Mae, so the Federal Reserve's exposure to the credit risk of the underlying mortgages is minimal. The market valuation of agency MBS can fluctuate over time based on the interest rate environment; however, the Federal Reserve's exposure to interest rate risk is mitigated by the conservative, buy and hold investment strategy of the agency MBS purchase program.

When did the purchases begin?
Purchases began in early January, 2009 and will continue until the end of 2009.

Defaults and delinquencies are soaring an the Fed has the gall to say there is no risk because the principle is guaranteed by Fannie Mae and Freddie Mac.

Pardon me for asking, but I have two questions:

1. Exactly who is guaranteeing Fannie and Freddie?
2. How the hell does the Fed think it can get away with such a blatant lie about the risks?

Those who think that lie would be hard to top need to think again. Please consider the GSE MORTGAGE BACKED SECURITIES PURCHASE PROGRAM FACT SHEET

Risk. Treasury is committed to protecting taxpayers and will ensure that measures are in place to reduce the potential for investment loss.

Under most likely scenarios, taxpayers will benefit from this program - both indirectly through the increased availability and lower cost of mortgage financing, and directly through potential returns on Treasury�s portfolio of MBS.

Any idea that taxpayers will benefit from gains on the MBS portfolio is complete nonsense and the Fed and Treasury both know it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Leaking and Reeking of Stress

The results of the Geithner's stress test cake walk are going to be announced debated by the general public the stress test participants on Friday.

Please consider Stress-Test Briefings for Lenders to Begin Friday.

Regulators will begin briefing banks Friday about how they fared in government-performed "stress tests," giving lenders an opportunity to debate the findings before they're made public a week later, according to government officials.

The discussions will signal to some banks whether they'll need to seek additional capital, either from private investors or the Treasury Department.

On Tuesday, Treasury Secretary Timothy Geithner said "the vast majority" of banks could be considered well-capitalized. But he also said the impact of the government's efforts to ease the financial crisis so far had been "mixed."

In the stress tests, regulators used some estimates of likely losses on loans that were tougher than observers had expected.

Under a more adverse scenario, which assumes a 10.3% unemployment rate at the end of 2010, banks would have to calculate two-year losses of up to 8.5% on their first-lien mortgage portfolios, 11% on home-equity lines of credit, 8% on commercial and industrial loans, 12% on commercial real-estate loans and 20% on credit-card portfolios, according to a confidential document the Federal Reserve gave banks in February that was viewed by The Wall Street Journal. Regulators are expected to have used other assumptions as well when measuring a bank's strength.

Cake-Walk Scenarios

Note that the adverse scenario assumes a 10.3% unemployment rate at the end of 2010. Hells bells, it's highly likely unemployment far exceeds 10.3% before the end of 2009.

Let's take a look at a table from Jobs Contract 15th Straight Month; Unemployment Rate Soars to 8.5%.

Table A-12



click on chart for sharper image

Let's ignore line U-6, a number I believe is close to the true rate of unemployment and simply look at line U-3, the "official" measure of unemployment.

In December of 2008, unemployment was 7.2. In March it was 8.5. Three or four months from now unemployment will be 9.8, assuming the same pace. However, the pace has been escalating. Add a few more months assuming no escalation in pace and the unemployment rate will be approaching 11% by the end of this year.

In other words, the Treasury's adverse scenario is a complete joke. Moreover, instead of disclosing the results immediately, the results are going to be debated rigged for a week while the Treasury has a week to figure out exactly what they can get away with.

Is this supposed to be believable?

Sobering Stress Test Analysis

The New York Times is commenting on Sobering Numbers Ahead of Stress Test Results.

In a market note Wednesday called �Leaking (and Reeking) of Stress,� two managing directors at Westwood Capital used those figures to run some numbers. They concluded that the government�s worst-case assumptions � what is known as the stress test�s �more adverse� scenario � could imply losses of more than 50 percent in the banks� Tier 1 capital.

That�s a sobering thought, because Tier 1 capital is one of the most closely watched measures of a financial institution�s ability to weather a storm.

Citing a �confidential document the Federal Reserve gave banks in February,� The Journal reported Wednesday that the government�s more-adverse scenario will assume up to 20 percent losses in banks� credit-card portfolios, 12 percent losses in their commercial real estate holdings and 11 percent losses on home-equity credit lines.

Using the percentages from the story, Daniel Alpert and Jon Messersmith of Westwood did some number crunching of their own.

They pulled together year-end figures from the Federal Deposit Insurance Corporation for 13 banks undergoing stress tests, including Citigroup and Bank of America, and applied the assumed losses to the assets in question.

The result: A combined haircut of about $240 billion among the 13 banks � or about 56 percent of their reported Tier 1 capital as of Dec. 31.

Sobering Indeed

Using cake-walk assumptions, Westwood Capital still came to the conclusion 56% of Tier 1 capital is going to be annihilated. If that doesn't reek, what does?

Geithner's Meaningless Statement

On Tuesday, Treasury Secretary Timothy Geithner said "the vast majority" of banks could be considered well-capitalized.

Geithner's statement is meaningless. If Citigroup, Bank of America, Wells Fargo and a few others in the Stress Test 19 are all insolvent (they are but it will never be reported that way), it will not matter much if every other bank in the country is solvent. Giethner's statement would have meaning if every bank was the same size. They are not.

Week of Leaks

So no, we can prepare for a "week of leaks" starting Friday, where good news lies are spoon fed to the public in a hopeless attempt by the biggest liars on the planet to gain credibility.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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FDIC Woefully Underfunded; Problem Institutions Soar

The latest Quarterly Banking Profile shows something most of us inherently knew: The FDIC is ill prepared for more bank failures.

Deposit Insurance Fund (DIF) Ratio Collapses

Inquiring minds are investigating the Deposit Insurance Fund (DIF) Ratio.

� The DIF Balance Declines by $16 Billion, and Insured Deposits Grow by 4.6 Percent in the Fourth Quarter
� DIF Reserve Ratio Declines to 0.40 Percent
� Twenty-Five Insured Institutions Fail During the Year; Another Five Insured Institutions under the Same Holding Company Receive Assistance

The reduction in the DIF during the quarter was primarily due to $17.6 billion in loss provisions for actual and anticipated insured institution failures. For all of 2008, the DIF balance fell by $33.5 billion (64 percent), primarily because of $40.2 billion in loss provisions.

The DIF�s reserve ratio equaled 0.40 percent on December 31, 2008, which was 36 basis points lower than the previous quarter. During 2008, the reserve ratio decreased by 82 basis points, from 1.22 percent at year-end 2007. The December figure is the lowest reserve ratio for a combined bank and thrift insurance fund since June 30, 1993, when the reserve ratio was 0.28 percent.


Problem Institutions and Failed/Assisted Institutions



click on chart for sharper image

* For 2008, preliminary unaudited fund data, which are subject to change.

** The Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250,000 in setting assessments. Therefore, we do not include the additional insured deposits in calculating the fund reserve ratio, which guides our assessment planning. If Congress were to decide to leave the $250,000 coverage level in place indefinitely, however, it would be necessary to account for the increase in insured deposits to determine the appropriate level of the fund.

*** Prior to 2006, amounts represent sum of separate BIF and SAIF amounts.

**** Five institutions under the same holding company received assistance under a systemic risk determination.

Note the effects of the The Emergency Economic Stabilization Act. The FDIC "temporarily" ups the limit and ignores the effect on DIF. This is ass backwards as the risk of bank failure is high and growing. Ignoring the increased limits is a blatant attempt to hide the fact that DIF is even more underfunded than it looks, and it looks woefully underfunded.

Reserves have plunged, no doubt on their way to negative territory as the number of problem institutions soars. Expect to see requests for more taxpayer bailouts as the FDIC well runs dry.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Freddie Mac Executive Commits Suicide

The New York Times is reporting Executive at Freddie Mac Is Found Dead.

David B. Kellermann, the acting chief financial officer of the troubled mortgage giant Freddie Mac, was found dead Wednesday morning at his home in Northern Virginia, the police said.

The executive apparently committed suicide by hanging himself, according to people with knowledge of the investigation.

Mr. Kellermann, 41, had been Freddie Mac�s chief financial officer since September. He was named to the position when the federal government seized the company and ousted its top executives last fall. In recent weeks, according to neighbors and company officials, Mr. Kellermann had received a bonus of about $800,000. Such bonuses � which totaled $210 million for executives at Freddie Mac and its sibling company Fannie Mae � caused some controversy earlier this month, and some lawmakers called for them to be rescinded.

According to neighbors, Mr. Kellermann hired a private security firm after reporters came to his house to ask about his bonus. The Associated Press reported that Mr. Kellermann and his wife had a daughter.

Some neighbors told The A.P. that Mr. Kellermann had lost a noticeable amount of weight under the strain of the job, and some said they suggested to him he should quit to avoid the stress.

Mr. Kellermann was also involved in recent tense conversations with the company�s federal regulator over its public disclosures. Freddie Mac executives wanted to emphasize to investors that the company was being run for the benefit of the government, rather than shareholders.

The company�s regulator, the Federal Housing Finance Authority, had reportedly pushed to play down that language.

Freddie Mac was (and still is) being run the same way nearly all public corporations are run: For the benefit of the top executives not the benefit of shareholders.

There is no other explanation for executive pay, bonuses, stock options and other perks that all cause massive shareholder dilution over time.

Countrywide CEO Angelo Mozilo took out $1 billion in stock options and pay while running the company into the ground. Now taxpayers have to clean up the mess. Greed is everywhere you look. I cannot begin to list it all.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Chicago Natural Resources Expo April 24-25

Please join me at the Chicago Natural Resources Expo on April 24-25 for a discussion about gold, silver, hard assets, inflation, currencies (or whatever else is on your mind) and to meet with various natural resource company executives.

For all the deflationists in the crowd, I am pleased to announce the magic words: "It's free".

There is no cost for those who pre-register to attend the conference. The Expo is held at the Rolling Meadows Holiday Inn and Convention Center in Rolling Meadows, IL. The Holiday Inn is located at 3405 Algonquin Road, Rolling Meadows, IL 60008. The hotel can be contacted at 847-259-5000. It is a two day event that starts on a Friday afternoon, and ends on Saturday afternoon. Friday afternoon begins with Mickey Fulp and his presentation "Junior Resource Stocks, A Primer for the Lay Investor", beginning at 2:30pm. The Exhibition Hall, featuring some of the top companies in the resource industry, opens at 4pm. A buffet which includes jumbo shrimp, and smoked sockeye salmon, is served at 5pm. Following the buffet, company presentations begin. Friday night features a Q & A Session hosted by Rich Radez and a panel of industry experts, the discussion is based on topics that are fueled by the audience's interests.

The event resumes on Saturday morning. Attendees enjoy a continental breakfast, and browse the exposition hall learning about companies. In the meantime, individual company presentations begin in the presentation hall. These presentations are a great way to hear each company's story. Lunch buffet is served around noon, and accompanied by the second panel discussion. After lunch, presentations and expositions continue for the remainder of the day.

I will be on a panel Friday evening and Saturday afternoon for lunch along with Jay Taylor, Clyde Harrison, and others. Lunch is free too (but you do have to put up with listening to me on the panel).

Those in New York may wish to consider attending the New York Hard Assets Investment Conference May 11-12. I will not be at that conference.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Deflation Returns To U.K.

Inquiring minds are reading Deflation returns to Britain for first time since 1960.

Deflation returned to Britain for the first time in nearly five decades last month as prices measured by the retail price index (RPI) were lower than the same time a year ago.

David Kern, chief economist at the British Chambers of Commerce (BCC), said: "The RPI is in negative territory and fell by more than expected. Deflationary pressures could make the recession worse in the short-term, despite quantitative easing and the huge budget deficit posing inflationary pressures over the medium-term.

The Office for National Statistics said the RPI was 0.4% lower in March than it had been in March 2008. That was the first negative reading since March 1960, when Harold Macmillan was prime minister and John F Kennedy was running for the US presidency.

On the government's preferred consumer price index measure, which excludes housing and mortgage costs, inflation was still comfortably in positive territory, at 2.9%. CPI is much higher here than the 0.6% figure for the eurozone and economists say the falling pound has pushed up some import prices, delaying the drop in the CPI.

Figures from the Bank of England show that a third of firms have agreed pay freezes in recent months and some have cut pay. Workers at Honda's car plant in Swindon were recently told they will have to take a 10% pay cut this year, after a similar announcement by Toyota to its workers in Derby.

"The inflation data do little to dispel expectations that interest rates are set to stay at 0.5% for an extended period and that the Bank of England could eventually extend its quantitative easing programme," said Howard Archer, economist at IHS Global Insight. "The danger of an extended, deep recession still outweighs inflation risks."

RPI vs. CPI



The Retail Price Index (RPI) includes housing while the Consumer Price Index (CPI) does not. Chart courtesy of UK National Statistics. Click here for information on the 2009 CPI RPI Basket of Goods and Services. Click here for Additional UK Government Price Statistics.

U.K. RPI vs. U.S. Case Shiller CPI

The RPI is closer to the Case-Shiller CPI and the US government reported CPI.

Case-Shiller-CPI (CS-CPI) vs. CPI-U



click on chart for sharper image.

For more on the CS-CPI please see CS-CPI Negative 5.0% Third Straight Month.

Flashback June 30, 2008

Please consider what I said about 10 months ago in Deflationary Hurricanes to Hit U.S. and U.K.

.....
Avoid A Recession?

It will be hard for the US and UK to avoid a depression.

What started as a tropical storm called "Subprime" has intensified in magnitude to engulf Alt-A, HELOCs, credit cards, commercial real estate, municipal bonds, corporate bonds, and the stock market, just as baby boomers are headed for retirement.

If you prefer, you can think of this as Many Hurricanes, Many Eyes.

Barclays Capital said in its closely-watched Global Outlook that US headline inflation would hit 5.5pc by August and the Fed will have to raise interest rates six times by the end of next year to prevent a wage-spiral. "We're in a nasty environment," said Tim Bond, the bank's chief equity strategist. "There is an inflation shock underway."

This is not Bizarro World, nor it is 1970.

If Barclays is betting on six interest rates hikes in the US with its own money it will likely get carted out in a coffin. Property values are crashing, unemployment is rising, wages are falling, global wage arbitrage is king, and most importantly Peak Credit Has Arrived.

It is impossible to get inflation out of that mix. Bernanke could cut interest rates to zero tomorrow and it would not cause inflation, at least as properly defined: a net expansion of money and credit. Banks are strapped for cash. They cannot lend. Businesses do not want to borrow. There is overcapacity everywhere. The Shopping Center Economic Model Is History.

I struggle to see how anyone can get inflation out of that mix. Last Thursday when the stock markets were in a freefall, I asked Is The Inflation Scare Over Yet? Well, I guess it's not.

And so here we are. Deflation has returned to the U.K. I need to add The U.K. to my Deflation Has Gone Global list.

In retrospect we see that Bernanke did cut rates to to zero and as predicted it did not cause inflation. And in case you missed it, please consider Bernanke's Deflation Preventing Scorecard.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Biggest Budget Deficit In UK History Coming Up

My dear Darling. What have you done?

Inquiring minds are pondering the Record U.K. Deficit, Limiting Room for Stimulus.

Chancellor of the Exchequer Alistair Darling today will deliver a U.K. budget with what may be the biggest deficit on record, limiting his ability to counter the worst recession since World War II.

The shortfall this year may jump to 160 billion pounds ($232 billion), or 11 percent of gross domestic product, according to a survey of 24 economists conducted by the Treasury. Darling, who estimated an 8 percent gap in November, will announce his figures to Parliament at 12:30 p.m. in London.

�The U.K.�s fiscal position is worsening so rapidly that any stimulus measures in the budget are likely to be modest,� said Michael Saunders, chief western European economist at Citigroup Inc. �When it is most needed, fiscal policy will not be able to act. This is a major policy failure.�

Last month, Brown retreated from calls for a new fiscal stimulus after Bank of England Governor Mervyn King said the Treasury should be �cautious� about the deficit, which Citigroup says is the biggest in more than a century, excluding the two world wars.

Darling has said Britain�s economy won�t bounce back before next year, later than he anticipated in November, when the Treasury forecast a contraction of no more than 1.25 percent this year. The median forecast of analysts surveyed by the Treasury now is for a drop of 3.7 percent of GDP, the worst since modern growth records began in 1948.

Those who think the US is a basket case need only to look at the UK to find a bigger one.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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