Why housing defaults matter

The US has a problem in over-leverage. The banks are leveraged on a capital ratio of 1:12.5, in other words, they keep some 8% in reserves. If a bank has 10% reserves, housing defaults that would decrease their reserves by 3% would put the bank in seizure territory. If the company is public, the stocks will go to zero when seized.

Looking at the following graph, we can see how quickly the default rate has jumped 2% in over a year. Say, 2% defaults result in decrease of reserves by .75% on average, then it only takes 6% of homes defaulting to get the 3% decrease in reserves. We have some major problems.

Housing default (source: calculated risk)

Bank problem list is at 767, up from 653 in March. This problem list has NEVER decreased. More banks seem to be eligible every time I see the FDIC's press release. They are slow-walking the bank seizure process.

If by now the banks can't get their housing delinquencies under control, this year, another wave of foreclosures is going to happen due to the second wave of housing interest rate resets. I doubt anyone believes with another wave of resets happening that the default rate will get lower.


As you can see, the loans which will experience payshocks start increasing around now, through June and July, then pretty much into next year and into 2012. Option Arms default rates are just as bad as subprime.

Banks will write these assets off..and when they do, rest assured their reserves will decrease, and stock prices will go down. Either that or we will have another 5 trillion of QE by the Fed.

Malaysia property bubble in the making?

This is a conundrum that I've been debating. I've yet to see very many housing articles, data, and research seriously critiquing the housing market here.

When I look information such as household income to price, I see a lot of houses overpriced. Consider the average household income is RM4000. How can they afford houses that run in the RM270 to RM300 per sq. ft range. I see young people going for new properties running at RM400, RM500+ per sq ft price. Not only that, the standard down payment here is 10%. Most people can't put up the 20% equity.

In fact, I've been hearing that consumers can get around that 10% down payment with a measly 3% down payment (7% covered by the contractor)! A lot of the practices such as option arms, almost no down payment, and interest rate resets into the second and third year that doomed the US are prevalent here. People should use the low rate period to pay down the amortization on the house and instead are spending it on consumer goods as evidenced by the growth in consumer loans and consumption.

The government isn't doing much to curb the risk although they mentioned that they are concerned. We have the housing capital gains tax supposedly to cool down the market. But we all know the main purpose of the tax is for revenue. There are far more effective ways on clamping down on the housing market. For one, increase the down payment and ban all these shady teaser rates and zero down payment ideas.

Prime Mortgages downgraded

From Marketwatch:

S&P said it lowered ratings on 102 classes from 33 U.S. prime jumbo residential mortgage-backed securities that were issued from 1998 to 2004. The rating agency also affirmed ratings on 669 classes from 32 of the downgraded deals, as well as 34 other deals.

"The downgrades reflect our opinion that projected credit support for the affected classes is insufficient to maintain the previous ratings, given our current projected losses," S&P said in a statement.

Oops, looks like subprime isn't the only problem, the whole housing market is!