Monday, April 14, 2008

Note on "Shadow Foreclosures"

**Update: mp3 of the conference call, along with Volker's now-famous speech to the Economic Club of New York on April 8, is available at http://drop.io/sacrealstats001

Interesting note from the Wachovia conference call today:

Q: Jonathan Adams, Oppenheimer Capital - Analyst: If I look on page 19 of your presentation, it strikes me that there's nothing in the 90 day past due trends that would justify the kind of change that you have made in your outlook. You can pick a different -- a number of different metrics, whether it's the dividend in suggesting that over a broad range of scenarios it wouldn't need to be cut and then five or six weeks later coming to a different conclusion, or it's some other metrics as well. But it just strikes me as difficult to understand how management's view of the environment has changed so dramatically.

Don Truslow, Wachovia Corporation - SEVP, Chief Risk Officer: Well, I guess -- this is Don. One thing that doesn't show on the chart is the level of cures between 90 days and further severities and defaults have been dropping. The severities in the market place when we take a house back, it takes a lower price to get homes sold and our outlook is -- and as I think everybody has been reading, there is an expectation that there's a broad accumulation of foreclosed properties that haven't hit the market yet and perhaps even some shadow foreclosures that haven't emerged as yet. So our concern, looking forward is that -- and again, what we're beginning to see more evidence of and sense more of in the first quarter is that conditions are going to continue to get tougher and there's an overhang of inventory out there that is going to be costly for the industry to work through.

So on the default rates at 90 days, not a dramatic change in pace but it's more the role rates, the propensity to go all the way to foreclosure, the higher severities taken on disposing of properties and then the, just further understanding and recognition that there is an inventory of foreclosed properties building out there that are eventually going to have to get dealt with.
Read the whole thing at Calculated Risk.

11 comments :

Max said...

Another good one:

We're seeing in our portfolio the most significant declines and defaults activity in California and of course it's the largest concentration for us in the pick a payment portfolio by far. What I don't know and I guess we're just learning over time is whether the same sort of behavioral trends and patterns will spread to other markets or be observed in other markets at the same pace that they have been in California. But in essence, it built our correlations in the model to assume that they do.

Ed said...

This is some pretty damning evidence that things are going to get worse.

Perfect Storm said...

Interesting indeed!

Darth Toll said...

"I guess we're just learning over time is whether the same sort of behavioral trends and patterns will spread to other markets"


So I guess the pick-a-payment concept was a bad idea? Give tons of debt to people that can't afford it and have no skin in the game and when prices stop going up they will walk?

Whocouldanode?

Truthfully, I doubt these asshats are ACTUALLY surprised by any of this, although the World Savings thing was likely a very bad idea. If they were surprised then they've been drinking their own Kool-Aid which is even more dangerous.

Deflationary Jane said...
This comment has been removed by the author.
Deflationary Jane said...

What? People with great FICOs and some reserves were lying to stretch into a house they couldn't afford? ZOMG, tell me it isn't true! >; )

/sarcasm off

Ok how many people saw this coming a mile away? **raises her hand**
I expect the fallout from this to be worse then the subprime loans going belly up.

Max said...

Ok how many people saw this coming a mile away? **raises her hand**
I expect the fallout from this to be worse then the subprime loans going belly up.


With declining LTV ratios, "We're all subprime now" anyway. :) I always wondered how people earning $75K/year could afford a $350K house. The answer was simply, they couldn't.

FYI: Fitch said unequivocally today that buying a house now would be a mistake. They see nothing but downside.

DrDoom said...

For those of you interested in watching months of supply as a leading indicator Fitch references it about 18.5 minutes into the presentation Max flagged above. Fitch says Feb national levels are 9.8 months for new and 9.6 months for existing where Fitch says generally accepted equilibrium is 5.5 to 6 months supply.

Max said...

Fitch says generally accepted equilibrium is 5.5 to 6 months supply.

I noticed that too. I wonder if they're just repeating popular wisdom though... Does someone have a primary source that can show why 6 months of inventory is a "balanced" market?

DrDoom said...

I have one. I heard the rule of thumb several times and verified it with the Sacramento market using a combination of Trendgraphix and OFHEO. It is not a theory as to why but just the actual Sacto data through 2007. It is in the form of Excel charts.

I am blog challenged. If you are interested tell me how to post it or send it to you.

Max said...

Sure. Just shoot me an email. My address is in the right-hand column on the main page of the blog.