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The Subprime Auto Loan Meltdown Is Here

February 25, 2016

The Subprime Auto Loan Meltdown Is Here

Debt Loans Auto Loans - Public DomainUh oh – here we go again.  Do you remember the subprime mortgage meltdown during the last financial crisis?  Well, now a similar thing is happening with auto loans.  The auto industry has been doing better than many other areas of the economy in recent years, but this “mini-boom” was fueled in large part by customers with subprime credit.  According to Equifax, an astounding 23.5 percent of all new auto loans were made to subprime borrowers in 2015.  At this point, there is a total of somewhere around $200 billion in subprime auto loans floating around out there, and many of these loans have been “repackaged” and sold to investors.  I know – all of this sounds a little too close for comfort to what happened with subprime mortgages the last time around.  We never seem to learn from our mistakes, and a lot of investors are going to end up paying the price.

Everything would be fine if the number of subprime borrowers not making their payments was extremely low.  And that was true for a while, but now delinquency rates and default rates are rising to levels that we haven’t seen since the last recession.  The following comes from Time Magazine…

People, especially those with shaky credit, are having a tougher time than usual making their car payments.

According to Bloomberg, almost 5% of subprime car loans that were bundled into securities and sold to investors are delinquent, and the default rate is even higher than that. (Depending on who’s counting, delinquency is up to three or four months behind in payments; default is what happens after that). At just over 12% in January, the default rate jumped one entire percentage point in just a month. Both delinquency and default rates are now the highest they’ve been since 2010, when the ripple effects of the recession still weighed heavily on many Americans’ finances.

…click on the above link to read the rest of the article…

Signs of Mortgage Meltdown in Australia

February 23, 2016

Signs of Mortgage Meltdown in Australia

“Not a question of if but when there will be a mortgage crisis.”

Real estate is local – until it isn’t. Cities have their own housing bubbles that implode on their own time. But once contagion spreads to mortgages and banks and infects confidence of real estate investors and homebuyers alike, and once debt levels are so high that they have become unsustainable and can’t be pushed higher, then a real estate bubble suddenly becomes a national economic issue with terrible consequences.

In Australia, which has the highest household debt in the world, “homes are so expensive that nearly half of all mortgages are interest-only.” They’re offered by the biggest banks with loosey-goosey lending standards. And “that is a red flag for imminent disaster.”

“It’s not a question of if but when there will be a mortgage crisis in Australia,” explained Jonathan Tepper, CEO at research firm Variant Perception, on the local 60-Minutes segment, Home Groans, that aired in Australia on Sunday.

He’d predicted the mortgage meltdowns in the US, Ireland, and Spain. And the one word that best describes the Australian housing market? “Insane.”

The flood of interest-only mortgages with sky-high price-to-income ratios is “a sign of Ponzi financing,” he said. And banks are now heavily exposed to these mortgages and any downturn in prices.

The video clip also features a young investor who was named “Australian Property Investor of the Year” in 2012 by a real-estate hype organ, and who now faces bankruptcy. She marveled at just how “easy to get” money had been.

“Banks only look at the balance sheets and the numbers,” she said. “They don’t see the emotional toll they have on people, and they don’t understand the social costs of their business practices.”

…click on the above link to read the rest of the article…

Jingle mail rears its ugly head in Alberta again

February 8, 2016

Jingle mail rears its ugly head in Alberta again

Federal government worried about Albertans making strategic defaults on their mortgages

This tiny hamlet south of Calgary has 27 homes for sale for more than $1 million.

This tiny hamlet south of Calgary has 27 homes for sale for more than $1 million. (Colin Hall/CBC)

One of the big bads from the 1980s is starting to emerge again in Alberta.

Jingle mail — the act of walking away from an underwater mortgage by mailing your keys back to the bank — is a peculiarity of the Alberta residential market and an act of desperation. However, a combination of high debt and lost jobs make it an option in a province going through a significant economic reckoning.

It’s enough of a concern that the federal government is watching the Alberta market closely. Jingle mail, or strategic defaults, weaken the housing market and increase loan losses among Canada’s banks.

‘People saying that we can’t make a go of it and mail the keys to the bank.’– Don Campbell, Real Estate Investment Network

“We’re slowly starting to see it in Grand Prairie and Fort Mac,” said Don Campbell, senior analyst with the Real Estate Investment Network.

“People saying that we can’t make a go of it and mail the keys to the bank. In the big cities, not so much because the average sale prices haven’t really dropped much, we haven’t seen the pain yet. But Calgary is getting pretty tight.”

Bruce Alger, an insolvency trustee at Grant Thornton in Calgary, said he is dealing with one such case and has heard of more.

“It’s when you see high-end home prices drop 20 per cent below the peak,” said Alger. “I think there are people considering walking away and I’ve talked to one or two myself.”

Why Alberta is different

Alberta is the only Canadian province to broadly offer non-recourse residential mortgages. Those loans with at least a 20 per cent down payment and thus are not insured by the Canada Mortgage and Housing Corporation (CMHC).

…click on the above link to read the rest of the article…

Meridian credit union offers 1-year mortgage at 1.69%

February 2, 2016

Meridian credit union offers 1-year mortgage at 1.69%

Spring mortgage wars start early, as member-owned lender makes new low offer to homebuyers

Meridian credit union just offered a one-year mortgage at 1.69 per cent.

Meridian credit union just offered a one-year mortgage at 1.69 per cent. (Daniel Munoz/Reuters)

Alternative lender Meridian has launched the first shot in the spring mortgage wars with a one-year fixed mortgage rate of 1.69 per cent.

“As we are quickly approaching the busy spring home buying season, this is the perfect time for people to evaluate their home buying options by getting a pre-approval now,” the credit union said in a release Tuesday announcing the offer.

The deal is the lowest mortgage rate currently on offer from any lenders, for any term, listed on RateSupermarket.ca. It also comes with a so-called 20/20 prepayment ability, which means the borrower is able to pay off 20 per cent of the principal in any given year. The borrower can also increase the monthly payment up to 20 per cent of the original payment plan each year.

Competitive market

The move is a first strike in the battle for market share in the upcoming spring buying season. The big banks have raised their mortgage rates incrementally over the past 12 months in some cases, even as the Bank of Canada has twice slashed its benchmark rate, and yields in the bond market — where the banks borrow from to get money to loan out to mortgage buyers — are also getting cheaper.

In recent years, mortgage lenders have been keen to cut their rates in the lead-up to the busy spring buying season in order to gain market share.

Meridian’s announcement came with a potshot against the big banks, who haven’t passed on the full extent of the last two central bank rate cuts to consumers by lowering their consumer rates by the same amount.

…click on the above link to read the rest of the article…

The Oil Crash Of 2016 Has The Big Banks Running Scared

January 19, 2016

The Oil Crash Of 2016 Has The Big Banks Running Scared

Running Scared - Public DomainLast time around it was subprime mortgages, but this time it is oil that is playing a starring role in a global financial crisis.  Since the start of 2015, 42 North American oil companies have filed for bankruptcy, 130,000 good paying energy jobs have been lost in the United States, and at this point 50 percent of all energy junk bonds are “distressed” according to Standard & Poor’s.  As you will see below, some of the big banks have a tremendous amount of loan exposure to the energy industry, and now they are bracing for big losses.  And the longer the price of oil stays this low, the worse the carnage is going to get.

Today, the price of oil has been hovering around 29 dollars a barrel, and over the past 18 months the price of oil has fallen by more than 70 percent.  This is something that has many U.S. consumers very excited.  The average price of a gallon of gasoline nationally is just $1.89 at the moment, and on Monday it was selling for as low as 46 cents a gallon at one station in Michigan.

But this oil crash is nothing to cheer about as far as the big banks are concerned.  During the boom years, those banks gave out billions upon billions of dollars in loans to fund exceedingly expensive drilling projects all over the world.

Now those firms are dropping like flies, and the big banks could potentially be facing absolutely catastrophic losses.  The following examples come from CNN…

For instance, Wells Fargo (WFC) is sitting on more than $17 billion in loans to the oil and gas sector. The bank is setting aside $1.2 billion in reserves to cover losses because of the “continued deterioration within the energy sector.”

…click on the above link to read the rest of the article…

The Echo Bubble in Housing Is About to Pop

September 28, 2015

The Echo Bubble in Housing Is About to Pop 

And here’s the knife in the heart of the Echo Housing bubble: declining household income.

The Federal Reserve-induced Echo Housing Bubble is finally starting to roll over, and the bubble’s pop won’t be pretty. Why is the bubble finally popping now?

All the factors that inflated the Echo Housing bubble are running dry. These include:

— unprecedented low mortgage rates

— FHA mortgage approvals for anyone who fogs a mirror

— frantic cash buying by Chinese millionaires desperate to get their money out of China

— the Federal Reserve buying up trillions of dollars in mortgages

— lemming-like buying of housing for rentals by everyone from Mom and Pop to huge hedge funds.

The well’s gone dry, folks. There isn’t going to be another push higher or a third housing bubble after this one pops.

Let’s start with the basics: demographic demand for housing and the price of housing. There are plenty of young people who’d like to buy a house and start a family (a.k.a. new household formation), but few have the job or income to buy a house at today’s nosebleed level–a level just slightly less insane than the prices at the top of Bubble #1.


Charts courtesy of Market Daily Briefing)

It’s considered bad form to describe today’s prices as insane. It tends to hurt the feelings of everyone who’s counting on the Echo Bubble to 1) make them even richer or 2) bail them out of the hole they fell into after Housing Bubble #1 popped.

Exhibit B is the insanely low mortgage rate, which has finally reversed course and is notching higher after 30 years of going lower. Why are today’s rates insane? Risk. Mortgages are intrinsically risky. People who are terrific credit risks lose their jobs, experience horrendous medical crises, get divorced, etc., and the net result is a default that is unexpected.

…click on the above link to read the rest of the article…

Largest “Alternative” Mortgage Lender in Canada Plunges, Denies “Systemic Problem” in Housing Market

July 15, 2015

Largest “Alternative” Mortgage Lender in Canada Plunges, Denies “Systemic Problem” in Housing Market

Home Capital Group, Canada’s largest non-bank mortgage lender, focuses on “alternative” mortgages, as they’re called euphemistically, that is high-profit mortgages to risky borrowers with dented credit or unreliable incomes, such as self-employed folks or new immigrants, who don’t qualify for mortgage insurance and were turned down by the banks. They include subprime.

Its stock plunged almost 20% on Monday in Toronto. On Tuesday, it dropped another 4% to close at C$32.74, the lowest since September 2013, and down 41% from the halcyon days last November.

Analysts went into a wild and belated scramble to lower their ratings on the stock. It has been the fourth most shorted stock in Canada, with 20% of its free float shorted, according to Bloomberg. Those folks made a bundle over the last two days.

Friday after hours, when no one was supposed to pay attention, the company issued astatement ahead of its second quarter earnings report on July 29 that shocked analysts:

In the second quarter, originations of high-margin uninsured mortgages had plunged 16% from a year ago, to C$1.29 billion. And originations of lower-margin insured single-family mortgages had plummeted 55% to C$280 million.

A warning sign flaring up in Canada’s majestic housing market where prices have soared for years, in an economy rattled by the oil price crash and other issues, and now likely in a technical recession?

No way.

“We think this is an HCG-specific growth issue,” Royal Bank of Canada analyst Geoffrey Kwan wrote to clients, “not an early signal of rising losses or broader housing stress.” However, he did expect industry mortgage loan growth to “slow in the next 2-3 years.”

Just not yet.

The company blamed some changes it had made: It had terminated some of its 4,000 or so mortgage brokers, “which caused an immediate drop in originations,” according to the statement.

It suddenly decided to use a “conservative approach to growing its residential mortgage business.” What had spooked it? What does Home Capital know that we don’t? It didn’t say.

 

…click on the above link to read the rest of the article…

 

 

Shadow mortgage lending on the rise as house prices soar

July 9, 2015

Shadow mortgage lending on the rise as house prices soar

Shadow lending represents about 4 to 5 per cent of Canada’s mortgage market

Canada’s housing boom is increasingly driving homebuyers to seek mortgages from private lenders, who demand rates that can be more than five times higher than those charged by the nation’s banks.

Canadian house prices have risen 36 per cent since June 2009, according to the Teranet-National Bank house price index. At the same time, Canadian banks have become more conservative and regulators are making it harder to lend, giving rise to an alternative market, including Canadians who refinance their own homes at low rates and then use the money to become mortgage lenders themselves.

Some analysts say a housing investment is increasingly risky because the pace of price increases has vastly outstripped wage growth, all amid a time of historically low interest rates and record debt levels. If and when interest rates rise, the concern is that consumers would have little ability to increase their payments, because they have so much debt.

“The risk arises if the unintended consequence of regulation is to push out the risk profile of the less regulated sector, and to encourage it to grow quickly at the same time,” said Finn Poschmann, vice-president of policy analysis at the C.D. Howe Institute.

“In dollar terms it is not a huge part of the economy (but) my concern is that we pay attention, because small problems sometimes get unexpectedly large, and quickly so.”

Mortgage broker Lou Perrotta said that in terms of volume, 20 per cent to 30 per cent of the mortgages he puts together are now privately financed, typically because borrowers are declined for a bank loan for reasons like a low credit rating or unsteady income. That represents about $4 million to $5 million of the $20 million of mortgage business he does annually, he said.

 

…click on the above link to read the rest of the article…

Hidden In Fannie and Freddie

June 19, 2015

Hidden In Fannie and Freddie

With another financial crisis fast approaching the cause of the ‘08 crash hasn’t been settled. Austrians generally line up on the side of the all-powerful Fed having lowering interest rates below what the market would produce, sending capital into malinvestments: In this case, too many subdivisions of houses and other real estate. When the Fed hit the brakes in ‘06, raising its fed funds rate, housing peaked and the party was brought to an abrupt and painful end as the value of mortgage backed securities melted down.

I’ve given this talk plenty of times, most recently for The Nassau Institute in the Bahamas.

Screen Shot 2015-05-31 at 11.52.24 AMThe visual of fed funds combined with Las Vegas land and housing prices on top of a busted subdivision aerial photo is worth a thousand words.

There is another part of the story touted by Austrians such as Tom Woods and Tom DiLorenzo that government required banks to provide mortgages to those who couldn’t afford them through the force of the Community Reinvestment Act (CRA).  Predictably, these borrowers couldn’t or wouldn’t pay and their mortgages turned into toxic paper that led to Wall Street’s almost demise.

Because of my experience in the non-bailed-out part of the banking sector, I’ve always doubted the CRA-did-it thesis. CRA seemed easy for the little bank I worked for as we made a number of development and construction loans for entry-level housing and even received credit for a loan made on a building where X-rated movies and sex toys were sold. These loans were made for economic reasons with no thought to CRA.

But Peter Wallison’s book Hidden In Plain Sight has changed my mind. Wallison is no tin foil hat wearer, being the Arthur F. Burns Fellow at the American Enterprise Institute and serving as a member of the 2010 Financial Crisis Inquiry Commission (FCIC). 

…click on the above link to read the rest of the article…

 

Mortgage approvals fall to 17-month low in November | Money | The Guardian

January 2, 2015

Mortgage approvals fall to 17-month low in November | Money | The Guardian.

The number of mortgages approved for house purchases fell to a 17-month low in November, in a further sign of a housing market slowdown in the autumn.

A total of 59,029 home loans were approved for purchases during the month, according to figures from the Bank of England, below the average of 63,191 recorded over the previous six months and down by more than 22% on the 76,574 offered in January.

The seasonally adjusted figures from the Bank show that approvals fell in spring as new rules on mortgage affordability came into force, then picked up over the summer months, before dipping again in the autumn.

The rules, which require lenders to carry out tougher checks on borrowers’ incomes and outgoings before they grant a loan, were introduced to prevent a return to the sometimes reckless lending seen in the run up to the housing market peak in 2007.

…click on the above link to read the rest of the article…

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