Fitch – Horrid Alt-A Performance Drivers Revealed

Posted on May 7th, 2008 in Daily Mortgage/Housing News - The Real Story

A Fitch must-read just came out. Other than Egan-Jones, I feel that Fitch is the best rater out there, although they are a little slow at this one. But, then again much faster than S&P, Moody’s, most mutual and hedge funds and 99% of the mainstream press. 

Fitch concluded that ‘high-risk attributes coupled with continued home price declines and the sharp contraction in available NON-AGENCY mortgage capital’ are the primary factors in ‘The Alt-A Implosion’, playing in city near you this very minute.

They cite that in the Alt-A arena, as with subprime, that loans with ‘simultaneous second liens (SSLs, aka piggybacks) are defaulting at very high rates relative to other loans and to history’. They say the ‘performance divide between loans with SSL compared to those without exhibit delinquency levels 71% to 300% higher’. They also say ‘borrowers with perceived equity default at lower rates than those without’. This is the ‘negative equity effect’ I have talked about so many times in the past year.

Fitch says ‘hybrid ARMs are exhibiting the highest rate of delinquency and fixed rate the lowest’. OPTION ARM performance is comparable to that of fixed rates ONLY FOR THE FIRST 12-MONTHS AND THEN DELINQUENCIES QUICKLY APPROACH HYBRID ARM LEVELS BY MONTH 18.

For those of you who are not acknowledging the ‘Alt-A Implosion’ is real and is here, this is more evidence for you. It has been my opinion for a very long time that ‘The Alt-A Implosion will make the Subprime Implosion look like a bad earnings report because Alt-A cuts across all socio-economic boundaries and the loans in most cases are truly exotic.’At least with subprime, the principal mortgage balance does not GROW each month as with the soon-to-be infamous Alt-A Pay Option ARM.’

Below are many stories I have done on the impending Alt-A crisis. You might want to have a look. This story so important and gets so little attention. The US housing market and economy in general likely cannot withstand an all-out Alt-A Implosion, which could be a blow equal or larger than the Subprime Implosion. –Best, Mr Mortgage

MORE MR MORTGAGE STORIES/RESEARCH ON ALT-A

ALT-A Exposed – The Worst Is Yet To Come

The ‘Pay Option ARM Implosion’…Subprime’s Big Brother

Moody’s Hits Lehman Due To ALT-A…Here Comes The ALT-A Crisis!

Lehman’s Dirty ALT-A Exposure Revealed

21 Responses to “Fitch – Horrid Alt-A Performance Drivers Revealed”

  1. […] Read the rest of this great post here […]

  2. Just a sub note, property values are falling in Ireland, Germany, Spain. Asia/ Korea should come along soon too.

    Mr. mortgage do you know about how much of US banks hold worldwide real estate?

    I would assume our big banks like Citigroup, Lehman and Banc Of America have also mortgages from around the world.

  3. great thought…I will have to check up on that.

  4. Mark, you totally rock. You know exactly what’s going on and you have the charisma to bring the message to the masses.

    Did you own real estate in the past or still have real estate? I sold my residence at the peak. Ironically, I’ve used part of the proceeds to short lenders and home builders since then.

  5. John Borchers,

    I am short HSBC (ticker HBC) as a more international play. They are riding high in Asia – for now. I think it’s safe to assume they are as stupid as their peers. In fact, my wife almost went to work for them but was underwhelmed – to say the least – upon meeting senior management.

    The stock is not down that much from its high, relatively speaking. And the options are pretty darn cheap. I am short the stock and own puts both near and far out.

    Bear in mind, I am no fundamental analyst (that’s a plus, right?).

  6. Hey Out at the Paek…wanna date? Haha. I OWNED lots but dumped most in 2005 other than my primary in Nor Cal and two personal vacation props in Nor Cal and Idaho. I pulled out large 6 figures from my heloc in late 2006 and shorted the financials as well. paid it off in spades.

  7. Captious – over the past 14 months, the Yahoo boards were a better source of good info for shorting financials than ANALysts.

  8. One more thing to worry about with the option arm. If I remember correctly, the banks book the whole amount monthly due as income (interest part) when paid, even though they only received 60% of the full payment.

    Does that mean the banks income in 2009-2011 will have to offset the gains from prior periods when the loan go bad???

  9. […] read more […]

  10. Careful with HSBC

    An institution with access to much of China’s sovereign wealth and not under the usual quarter-to-quarter constrictions of many competitors, their capital position is a bit different and can allow them to avoid corrections that other stocks may experience. Make sure that you factor in the fabled Chinese “long view” approach to investing.

    My DD, yours may vary.

  11. And I do spend time there on the msg boards, mining for trade ideas – have in fact for years.

    The fact is, there are savvy short traders, hedgies and whatnot, that do the hard number crunching who then post the info one way or another on the boards. I read it all and form my own conclusions.

  12. Worm is right. I remember reading that the so-called income that at least one bank reported from pay-options (the shortfall in interest paid) was almost equal to their reported profits for the year.

    Take that away and … uh oh.

  13. China is a dictatorship a lot like Walmart. Big multinationals love the place. Democracy is a real pain in the ass. China is runned like a military junta. Pinochet would love the place. That’s what probably is coming soon in the G7 countries. Anyways might get used to it. My next boss will probably be chineese. It would be funny to see Wells Fargo bought by Chineese banks. The 5 biggest banks in the world are from China.

  14. Agreed. Fitch & Egan-Jones are the only ones that have any credibility. S&P & Moody’s reports must be looked at with a ‘jaundiced eye’ (skepticism).

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  20. >>Careful with HSBC

    >>An institution with access to much of China’s sovereign >>wealth and not under the usual quarter-to-quarter >>constrictions of many competitors, their capital >>position is a bit different and can allow them to avoid >>corrections that other stocks may experience. Make sure >>that you factor in the fabled Chinese “long view” >>approach to investing.

    >>My DD, yours may vary.
    TmMike,

    HSBC(Hongkong Shanghi Bank Corp) is not a Chinese bank. It was started by Britishs after the Opium war (1843) in Shanghi, then it fleed to HongKong after the 1949 communist revolution. After Britain agree to return HongKong to China, it delisted in HK stock exchange and move to London stock exchange in a show of non-confidence in the city’s future under Chinese control.

    Consequently, it is no secret that HSBC is not well-liked by Chinese Authority. The idea that it has access to Chinese sovereign wealth is a stretch to me. I am not sure China will bail it out.

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