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What Can Cause the Next Mortgage Crisis in the US?

September 17, 2018

What Can Cause the Next Mortgage Crisis in the US?

The soothingly low mortgage delinquency rate is a deceptive indicator: the New York Fed weighs in.

Mortgage delinquencies at all commercial banks in the US inched down to 3.14% in the second quarter, the lowest since Q2 2007, according to the Federal Reserve. But after those soothingly low delinquency rates in 2007, something happened. By Q3 2008, the delinquency rate hit 5.2%, and in Q4 2009, it went over 10%, and stayed in the double-digits until Q1 2013. This was the mortgage crisis. And we’re a million miles away from it, thank God. Or are we?

This chart compares home prices in the US (green, left scale) to delinquency rates (red, right scale). Delinquency rates started surging after home prices started falling. The inflection point is marked by the vertical purple line, labeled “it starts”:

Home prices began falling in 2006. By 2008, some homeowners were seriously “underwater” – they owed more on their house than the house was worth. When they ran into financial trouble because they were in over their heads, or because one of the breadwinners in the household lost their jobs, or because they’d lied on their mortgage application and never had enough income to begin with, or because they were investors who couldn’t make the math work out anymore, or whatever, they were stuck.

In a rising housing market, they would just sell the home and pay off the mortgage. But they couldn’t sell their home because it was worth less than the mortgage, and default was the only option.

The chart above shows the relationship between home prices and delinquencies. In a rising housing market, delinquencies will always be low but are not an indicator of future default risks. But home prices are an indicator of default risk.

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

Why a US-Style Housing Bust & Mortgage Crisis Can Happen in Canada, Australia, and Other Bubble Markets

June 21, 2018

Why a US-Style Housing Bust & Mortgage Crisis Can Happen in Canada, Australia, and Other Bubble Markets

Despite persistent and false memes to the contrary.

When a housing downturn gets big enough, there will be a mortgage crisis, and it will hit banks, shadow banks, and mortgage insurers no matter what the mortgage laws are: that’s what the US mortgage crisis has demonstrated. Yet many industry organs and media outlets in Canada, Australia, and other places with acute housing bubbles are trying to hide behind a false meme about US mortgage laws. What happened there cannot happen here, they say.

So we’re going to debunk this meme.

“Jingle mail” was a phenomenon during the US mortgage crisis when homeowners and small-scale investors, unable or unwilling to make mortgage payments, abandoned the place, figuratively mailing the keys to the bank. This phenomenon took various forms, such as homeowners who stopped making payments but continued to live in the home, sometimes for years, because the foreclosure process was hopelessly bogged down.

All this became a problem only after home prices dropped substantially below the amount people owed on their mortgages, which made it impossible for them to sell the home and pay off the mortgage.

This is rarely a problem in a rising housing market. Default rates are minuscule because it’s easy to sell the home and pay off the mortgage. And during these times, lenders hide behind these low default rates. But these default rates are only low because home prices are rising.

But when home prices drop sharply, after years of low-down-payment requirements and thus little equity cushion, suddenly soaring defaults are a problem that “came out of nowhere.”

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

The Next Debt-Clearing ‘Super Cycle’ Starts Now

November 11, 2015

The Next Debt-Clearing ‘Super Cycle’ Starts Now

We are in the early stages of a great debt default – the largest in U.S. history.

We know roughly the size and scope of the coming default wave because we know the history of the U.S. corporate debt market. As the sizes of corporate bond deals have grown over time, each wave of defaults has led to bigger and bigger defaults.
Here’s the pattern.
Default rates on “speculative” bonds are normally less than 5%. That means less than 5% of noninvestment-grade, U.S. corporate debt defaults in a year. But when the rate breaks above that threshold, it goes through a three- to four-year period of rising, peaking, and then normalizing defaults. This is the normal credit cycle. It’s part of a healthy capitalistic economy, where entrepreneurs have access to capital and frequently go bankrupt.
If you’ll look back through recent years, you can see this cycle clearly…
In 1990, default rates jumped from around 4% to more than 8%. The next year (1991), default rates peaked at more than 11%. Then default rates began to decline, reaching 6% in 1992. By 1993, the crisis was over and default rates normalized at 2.5%. Around $50 billion in corporate debt went into default during this cycle of distress.
Six years later, in 1999, the distress cycle began to crank up again. Default rates hit 5.5% that year and jumped again in 2000 and 2001 – hitting almost 8.7%. They began to fall in late 2002, reaching normal levels by 2003.
Interestingly, the amount of capital involved in this cycle was much, much larger: Almost $500 billion became embroiled in default. The growth in risky lending was powered by the innovation of the credit default swap (CDS) market. It allowed far riskier loans to be financed. As a result, the size of the bad corporate debts had grown by 10 times in only one credit cycle.
The most recent cycle is the one you’re most familiar with – the mortgage crisis.

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

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