[seahorse]

Interesting article and accompanying blog on the subprime lending industry going down the toilet. Check out the chart graphing out the apparent collapse (in the last couple of days) of the lower rated bonds.
Subprime Lending Collapse

[Jack]

Yikes! I've seen gentler curves during a crash.

Interesting that this isn't widely reported. But I suppose that might interfere with the cornucopian worldview.

[FoxV]

you should remove the question mark from the title. Subprime lending is going the way of the doodoo.

What is also fun about this is that Ford and GM are subprime burrowers. Imagine the interest rates they're going to get hit with (GM is also a very heavy subprime lender as well, so they're getting a double shaft out of this).

Does anybody know how much this will translate into rate hikes from prime lenders. Lenders that survive this will have to get their money back from somewhere. So that means Joe Middle Class is going to get hammered (no matter what the fed does).

You guys are actually lucky because you have 30yr fixed mortgages down there. We canucks typically only have 5 year fixed, my term comes up Dec 2008 (7 and 10 year terms came out just after I locked in )

[pup55]

Bloomberg

$this->bbcode_second_pass_quote('', 'D')oes anybody know how much this will translate into rate hikes from prime lenders

[Kingcoal]

Hmm, if credit dries up you know what that means - deflation.

[pup55]

$this->bbcode_second_pass_quote('', 'd')eflation.

[vision-master]

Sure glad I have a small mortgage of 4.75% fixed. Wish I didn't have any mortgage as I'd be in even better shape for life after the crash.

[FoxV]

$this->bbcode_second_pass_quote('Kingcoal', 'H')mm, if credit dries up you know what that means - deflation.

[EnergyHog]

A few places have been tracking the number of lenders going under. I have a tally on my site (now at 18), also ml-implode.com.

[fireplaceguy]

Great link! What follows on the heels of this collapse may be even more interesting: Soon we'll be seeing the effects of bankruptcy "reform" on all the families who were suckered into those ARM's, balloon notes, interest only and sub-prime high rate loans...

Bankruptcy rights are actually a cornerstone of the free enterprise system. Prior to the US Constitutiion we had Orwellian debtor's prisons - if you were in debt you could be jailed until you paid your debts(!). In this legal climate the risk of failure would (and did) keep most people from trying anything new.

Today we're in the arguably biggest pickle mankind has ever been in - namely our swollen population's utter dependence on dwindling hydrocarbon reserves. We face the challenge of replacing a soon to be obsolete international infrastructure with something sustainable, and I would argue that we need all the risk takers and innovators we can find.

It is at this moment in history that lenders got the plum they lobbied for - the bankruptcy "reforms" that took effect in 2005. It's now more difficult, expensive, time consuming (and in some cases no longer even possible) for people to discharge debt through a bankruptcy filing.

We could spend years vainly arguing about regulation of lending practices and bankruptcy code revisions, and pass myriad laws in an equally vain effort to fashion a system that was fair to all. However, the free market has one of the most elegant solutions already built in - if you're stupid enough to lend money to people who are conspicuously unable to repay, you lose!

In effect, the 2005 bankruptcy reform was an attempt at legislated immunity for bad lending practices - both the risk and liablility for such practices has been partially transferred from the lender (where it belongs) to the consumer.

While we haven't returned to the days of debtor's prisons, we have taken several steps in the wrong direction. The economy is less efficient now, and that's not desirable. What stifling effect this has on future innovation will be difficult to measure, but it's now there below the surface, creating drag...

Peachy.

[PrairieMule]

The market is bad enough for me to for me to look for another gig. Especially in Bank Of America absorbs us. The ranks sure have thinned out here.

Some callous folks can make a fast buck when times are good, but the model just wasn't built to last.

[PrairieMule]

Correct, we have been assured that it was talk of "Alliance" and the talks went south. I dunno.

[PenultimateManStanding]

sounds like the beginning of the end. crap.

[Daculling]

$this->bbcode_second_pass_quote('pup55', '')$this->bbcode_second_pass_quote('', 'd')eflation.

[threadbear]

$this->bbcode_second_pass_quote('Kingcoal', 'H')mm, if credit dries up you know what that means - deflation.

[threadbear]

Don't understand the banker's jargon in this article, but some of you probably do, so you can tell us layment what they mean if you think it merits translation. I get some of the gist, and it sounds scary. Same with derivatives--I'm lost after the first couple of sentences. It would be great if anyone here knows a little bit about them if they could 'splain it to us financetards.

From Calculated Risk--website:

Fleck’s informant is saying that scratch & dent is getting nuclear waste bids. This implies that nuclear waste is probably heading for “no bid.” In any case, one is generally made to repurchase a loan at par (you might have to give back any actual premium paid if it’s an EPD, depends on the contract). So passing it off to a junk dealer, in turn, at a bid in the 80s is a painful thing. Hanging on to it, if you’re as thinly capitalized as your average subprime mortgage banker, is out of the question. Hence the “bloodbath.”

If it hits an outfit like Fremont—which is an FDIC-insured thrift and can therefore hang onto this stuff a lot longer than a mortgage banker can—we’ll be out of “thinning the herd” and into “decimation.” One reason it’s so hard to tell at the moment how bad this might get is that it’s hard to tell how many more “pending” repurchases we have out there. The EPD garbage is just the first wave. Every NOD in that big pile you see reported has been most thoroughly examined for other potential rep and warranty “issues” if the investor is any kind of awake, and they seem to be waking up. There used to be this idea that you didn’t push so hard on your correspondents and brokers that you broke their backs—you need a counterparty to keep having a business model. That’s a “normal” downturn idea. The current one seems to be more like “close the gates of mercy, shoot the wounded, and sink the lifeboats.” That does imply—as JPMorgan also implies—that the Big Dogs have more cooties on the balance sheet than they’re prepared to tolerate. Looks like total war to me.

http://calculatedrisk.blogspot.com/2007 ... loans.html

[Kingcoal]

Deflation wouldn't affect everything in the same way. Many things are already deflated to almost nothing. Example: consumer products. Those products might go actually up in value as the companies who make them go under.

On the other hand, real estate, wages, etc, would probably severely depreciate.

[threadbear]

$this->bbcode_second_pass_quote('Kingcoal', 'D')eflation wouldn't affect everything in the same way. Many things are already deflated to almost nothing. Example: consumer products. Those products might go actually up in value as the companies who make them go under.

On the other hand, real estate, wages, etc, would probably severely depreciate.

[cynicalheretic]

Probably gethomemart

[seahorse]

The bad debt story just keeps getting worse - meaning, not a bottom yet in the US housing market as the rosy analyst would tell you. Check this out:

HSBC warns U.S. bad debts on the rise
$this->bbcode_second_pass_quote('', 'W')orld's third-largest bank sees provisions for bad debt rising $1.76 billion
By Simon Kennedy, MarketWatch
Last Update: 8:29 AM ET Feb 8, 2007


LONDON (MarketWatch) -- Banking giant HSBC warned that its bad debt charges are set to rocket by around $1.76 billion as the slowing U.S. housing market leaves customers unable to pay their mortgages.
HSBC (HBCHSBC Hldgs Plc

HBC ) (UK:HSBA: news, chart, profile) , in an unprecedented statement to the market, said bad debt charges for the group as a whole will be 20% higher than the average analyst forecast of $8.8 billion, taking the total charge for the year to around $10.56 billion.
The warning from the world's third-largest bank comes ahead of the group's annual results, due to be published in early March, and follows a December trading update that was already bearish on U.S. mortgage debt.
Shares in the banking group fell 1.9% in London.
The problem is with HSBC's portfolio of sub-prime mortgages, which it snapped up in 2005 and 2006, before the U.S. housing slowdown began to bite.
Delinquencies on those loans are now on the rise as the stall in house prices has left customers with fewer refinancing options, HSBC said.
More customers are also set to fall into arrears in the coming months and years as their adjustable rate mortgages reset to reflect the rise in U.S. interest rates, causing payments to climb sharply.
Chief financial officer Douglas Flint told analysts on a conference call that the impairment charge covers customers that it expects won't be able to keep pace with a "payment shock" when their rates increase in 2007 and 2008.
He added the firm has been as conservative as possible and that most of the charge relates to so-called second-lien mortgages, where the borrower has another mortgage that has first call on any collateral.
"This a material negative surprise for HSBC. Moreover, the timing of this news is also surprising as this is the first time in our memory that the bank has pre-announced material information so close to a formal results announcement," said John-Paul Crutchley, an analyst at Merrill Lynch.
Robert Sage, an analyst at Bear Stearns, said the increasing bad debt implies group operating profit will be around 7% lower than the average forecast of $22.06 million.
The warning is not the first time HSBC has raised concerns over its U.S. operations.
The bank said delinquencies were a problem for its mortgage business in November and noted in its December pre-close trading statement that the housing market had deteriorated further. See archived story.
Analysts questioned whether the warning highlights a flaw in HSBC's credit scoring process.
CEO Michael Geoghegan agreed the analytics used to predict the performance of its mortgage book could have been stronger, though he added those predictions need to be based on the historical performance of the market.
"But there wasn't any history for adjustable rate mortgages after something like seventeen interest rate rises," he said.
The warning will again focus attention on HSBC's acquisition record, including the 2003 deal to buy Household Financial for around $15 billion, analysts said.
James Hutson, an analyst at Keefe, Bruyette & Woods, said the announcement is "terrible for sentiment."
"Most importantly, investors will further question the premium rating for such low growth," said Hutson, who added the announcement will hurt confidence in the bank's corporate governance.
Other lenders in the U.S. market have also experienced rising bed debts.
Washington Mutual said in January that its mortgage business lost $122 million in the fourth quarter, highlighting the weak sub-prime mortgage market. See archived story.
HSBC said Geoghegan is personally coordinating the group's response to the problem, and added that other segments of the business have performed in line with its latest expectations.