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Wrestling with houses

We must creep, very cautiously, back to the subject of whether the credit markets are pricing in the likely drop in UK house prices - or whether, as the Bank of England contends, the markets have overshot.

The peg is an evocative piece of prose from one Doug French, a VP from a Nevada bank, writing for the Lew Rockwell “anti-state, anti-war, pro-market” website, and picked up by Dealbreaker:

Finally it was post time for the action and the first home went up for bid — just short of 2,600 square feet in southwest Las Vegas. A brand new home, a one-year builder warranty, built by a reputable builder with a nearly 99 percent customer satisfaction rating, the auctioneer emphasized. To listen to the auctioneer, the bidding quickly escalated from the $159,000 starting point. The three young men working the crowd were frantically giving signals to the auctioneer, quickly moving from one attendee to another, and the price of home kept rising. It seemed like a real auction. But it was only real like professional wrestling is real. There were no actual bids on the first house, or the second, or the third. No bidding cards were raised.

The auction company kept up the charade for over 2 hours and for all 46 homes. The auctioneer’s rapid-fire delivery never waned. The young ladies who were there to help winning bidders with their sales contracts stood in the corner and clapped in unison until the very end. And the young tuxedoed gentlemen who worked the floor carried on with their elaborate gestures and signaling, as if it was a choreographed Broadway dance routine.

Only a couple dozen people remained by auction end, and only a handful of homes were actually sold. There were few real bids even at the low starting prices that were only a third the price that similar homes fetched during the boom a couple years ago.

Now to some numbers, courtesy Mike Shedlock at Mish’s Global Economic Trend Analysis. For some months now, he has been tracking a particular pool of Washington Mutual Alt-A mortgages, categorised as WMALT 2007-OC1.

Back in January he noted that 19.3 per cent of the pool was 60 day delinquent or worse. Of that, 13.15 per cent were in foreclosure and 1.83 per cent were owned by the bank.

Through February and March the situation worsened significantly, while by the end of April some 29.07 per cent of the pool was 60 day delinquent, with 13.87 per cent in foreclosure and 6.21 in the hands of the bank.

Mish accepts that this particular Alt-A pool may not be indicative of all Alt-A pools, although he does believe it reflects those pools of “liar loans” in California and Florida, where precious few borrowers were asked for evidence that they could pay their loans back.

But remember this is Alt-A - not subprime - so in the case of WMALT 2007-OC1, triple-A tranches of debt originally covered 92.6 per cent. And in the space of 12 months, almost a third of the constituent mortgages are now in serious trouble.

The suspicion remains that Alt-A remains an unexploded financial bomb. And we still wonder whether the Bank of England, having declared RMBS markets to be ‘wrongly-priced,’ has set itself up for serious embarrassment further down the line.

Even at the best of times, declaring the prices in any financial market to be “wrong” is a high risk strategy.

Related links
WaMu’s suspect mortgage pool — Mish’s GETA
There’s triple A and there’s triple A — FT Alphaville
Financial Stability Report - Bank of England

This entry was posted by Paul Murphy on Wednesday, May 7th, 2008 at 9:11 and is filed under Capital markets. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

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Comments

  1. May 07   16:12 Posted by Carlomagno [report]

    @Stacy-Marie: Thanks but just to be clear I wasn’t making any claims about prime mortgages.

    NB that sub-prime, Alt-A and jumbo loans accounted for over 50% of US mortgage originations in 2006.

    BTW, NY Fed publishes stats about a sample of subprime and Alt-A loans here:

    http://www.newyorkfed.org/regional/US_Mar.xls

    (More stats here: http://www.newyorkfed.org/regional/subprime.html)

    Which, if I read it correctly, indeed suggests that the Alt-A pool Mish is tracking isn’t representative.

  2. May 07   14:22 Posted by Stacy-Marie Ishmael [report]

    @Carlomagno - a snippet from a CreditSights report out of their recent Credit Crisis Conference in NY:

    - The key characteristics of Subprime and Alt-A mortgages are higher original loan-to-values, a greater proportion of non-owner occupied properties, lower FICOs, weaker documentation and greater exposure to mortgage rate resets.

    - We argue that the first three - loan-to-values, non-owner occupied and FICOs - are possible markers of peoples’ propensity to default rather than their being forced to default.

    - Cities with high levels of weak documentation mortgages and adjustable rate mortgages, especially those that have already reset, have higher levels of defaulted and delinquent mortgages.

    - According to our characterization of the five key identifying traits, this suggests that homeowners are being forced to default by payment shocks rather than deciding to default as a result of negative equity.

    -If this is correct, then the stronger financial positions and better documentation of prime mortgages means predictions of subprime like default numbers in prime should be exaggerated.

  3. May 07   11:53 Posted by Carlomagno [report]

    On the Alt-A disaster, check out Mr. Mortgage:

    http://tinyurl.com/3hlt6k

    Also, check out these stats on negative equity in the US:

    http://tinyurl.com/5d45ba

    With a combination of widespread negative equity and a large numbers of option/negative amortisation ARMs still to reset to higher payments, it’s likely that foreclosures will rise for the foreseeable future, putting further downward pressure on prices. The death spiral continues.

  4. May 07   10:49 Posted by harry e [report]

    On John Authers Short View, a graphic was displayed that showed a “correlation between the tightening of bank lending and house prices”.

    Closer inspection of that graphic shows house prices to begin falling shortly before bank standards are tightened…which is contra received wisdom that the credit crunch is causing house prices to fall. Either there are lags in the information that cause this reversal, or it is that banks tighten lending standards when they perceive the assets may not cover their loans at a future point.

    Indeed, house prices in the UK also began to soften according to the Nationwide index at least 2 months ahead of the onset of the credit crunch in August of last year.

    And yes, wrt the article above as asset prices fall, defaults will be absolutely massive in Alt-A and for good measure over here too. Look ahead to even more bank rights issues a year or so out and then finally, a proper bailout by the state.

  5. May 07   10:38 Posted by burnt quant [report]

    What is they typical subprime property and more importantly who is the natural market for these properties?

    Where are they going to get the buying power to purchase them at prices even 20% lower than the peak now that there’s no Alt-A or teaser loans?

    Using conventional credit (i.e. traditional mortgages) what can this market segment pay for their homes? That surely is where there will be support for prices and no higher. And after possibly years of declines who will even want to pay those levels?

    Sequel to subprime is Alt-A, possibly followed by Jumbo loans.

  6. May 07   10:16 Posted by Anonymous [report]

    Let’s see what happens when all the UK “teaser rates” expire this year and next. That is essentially what is happening in the USA, a year ahead of us. And look at the freefalling housing market over there.

  7. May 07   9:46 Posted by zaphod [report]

    Interesting how high fuel prices and water scarcity could affect many of these homeprices. In a real estate downturn the marginal properties can become unsellable, and many of these developments could end up as essentially worthless, if the cost of driving to your job is to great. Since subprime mostly went to low income workes mostly affected by increases in basic living cost, and the developments they bougt into would not be attractive to higher income workes, there could end up being no buyers to these properties.

    Also having a golf course nearby and a swimming pool is no good if water rationing kicks in.

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