Very Interesting Peice about Prime Borrowers

this is part of wave 2, along with cmbs, helocs, and private equity financed LBOs. we can leave out credit cards and recast pressures. banks raised a lot of money and fed has a recapitalization environment engineered right now so banks cushions may be ok for a while. Its a matter of when this wave hits and how prepared the banks are for it. Once we get through that, I think we can start talking about a sustainable healthier banking system. The problem is higher quality and higher priced debt classes. The lower end of the national housing market is seeing the best stabilization/improvement right now. Not the higher end. Move up buyers are not going to be a force for a loong time.

urbandigs, I don't see that banks have marked down the value of these assets at all, especially the ones using accrual accouting. I honestly don't see how the banks have changed their behavior one bit.

You missed the hundreds of billions of writeoffs over the last two years?

further to riversider's comment, mish has an interesting piece on this.

http://globaleconomicanalysis.blogspot.com/2009/09/how-overpriced-is-s-500.html

lorenzonyc

nope, those were the securitized loans(cdo's,etc). Mortgages held as "whole loans" and not securitized are still not marked down. This is huge.

securities were marked down big time. hold loans held in accrual books do NOT have to be marked to market, and rightfully so. Those whole loan books are marked as they the book starts to non perform. Those marks are dislocated from where the bids are. Commercial marks are still not fully adjusted I dont think given the problems in that area. However, bids for cmbs did improve big time over past 6 months.

banks have taken tons of writeoffs, on the securities side, that lorenzo mentions. Plus banks raised a ton of money and may be ok for a 2-4 quarters until more pressures appear. Thing is the environment was rigged for banks to earn their way and to recapitalize - via zirp, credit facilities, FASB accounting rule changes.

So, should this change, and one big thing on radar is FASBs ruling for off balance sheet assets, the environment may change and we need to be prepared how the reaction is.

But the whole loans that you mention do not have to be marked to market, so yes, I see that as a big cloud on the banks BS that will last years. Loan loss provisions for whole loan books are done on a quarterly basis

meant whole loans, hot hold loans

urban digs, i can't disagree more. Marking down based on the loans actually having defaulted is backward looking and assumes that the remaining loans will all perform. The market at this point has a very good handle on how these loans will likely perform and the tradeable market value assumes much higher defaults. If they had to count on these loans to back up deposits they could not.

that doesnt disagree with me. We are in agreement and I stated exactly what you stated in a discussion. Whole loan marks for non performance are managers discretion and backward looking. Yes, future marks have one way to go, which is why the bids are not where the marks are currently carried. But you dont have to mark these books to market so I guess its a matter of how do we define managers discretion to marking these books as they non perform over time.

April 6th - http://www.urbandigs.com/2009/04/mayo_rains_on_equities_parade.html

"Not sure how he confirmed that the whole loans were only marked down to an average of 98 cents on the dollar, but from what I am hearing many of these loans are marked down more and sitting on 'accrual (hold) books', which are marked on the spot based on loan defaults and overall book performance - you are not selling, so mark-to-market is meaningless. By the nature of being a hold book this is nothing new, illegal or other - just how it is. Loan loss provisions are done on a quarterly basis, not as assets stop performing.

If the total loans in the book deteriorated 5%, well then the entire book is remarked down 5% from the previous mark or par. It's backward looking. In this regard, Mike Mayo is correct to assume future adjustments because only the eternal optimist would think that higher quality debt classes are completely unaffected by this slowdown; heck the low bids for these loans are telling you that there is downside risk not priced in properly."

notice the last paragraph!

I disagree that these types of assets can be valued this way. Maybe ok for raw land, but not something like a loan portfolio, especially whre the assets are understandable and easily valued.

ok, i see we agree. u.d.

well that is where accounting comes into play for HTM books

i found this kind of interesting, from the WSJ article, on credit cards:

HSBC Holdings PLC, which was one of the first banks hit by a wave of subprime defaults in the U.S., says its portfolio of prime credit-card loans is performing worse than its subprime group. One reason for the switch, the bank has said, is that many of its subprime borrowers are renters, who have demonstrated a better payment history on their credit cards than prime borrowers, who are homeowners now getting hit by falling house prices.