Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Yves Smith on "Mortgage Armageddon"Yves Smith summarizes Frank Veneroso's views on why recovery in the mortgage market (and, presumably, for the rest of the economy) will be so very difficult.Sunday, August 16, 2009 Guest Post: Frank Veneroso on Mortgage Armageddon Frank Veneroso was kind enough to write as a result of seeing a guest post "Debtor's Revolt?" by his colleague Marshall Auerback. Veneroso also provided his latest newsletter and gave us permission to post it. It it pretty long (12 pages), I extracted the executive summary and other key bits. Be sure to read the final section, starting with the boldface heading "Why Resolving The Mortgage Armageddon Problem Will Be So Difficult:." (Enjoy!) From Frank Veneroso: 1. Deutsche Bank now predicts that 48% of all mortgaged American homeowners will be "under water" by 2011. 2. One might assume that means that the aggregate loan-to-value ratio of all mortgaged households will be a little less than 100%. 3. I have been focusing first and foremost on the aggregate loan-to-value ratio of all households with mortgages rather than the number of mortgaged homeowners who will eventually be underwater. 4. I calculated that, on mean reversion in house prices, this aggregate loan-to-value ratio would rise to 120% to 125%--a lot worse than what the Deutsche Bank analysis seems to imply. So I studied their analysis to ascertain why I went wrong or why they went wrong. 5. Though their analysis has a somewhat different objective and employs a different methodology, their analysis in fact comes to almost exactly the same conclusion as I have reached: when one focuses not on the share of all homeowners who will be underwater but the aggregate of mortgaged home values that will be under water, on mean reversion in home prices the aggregate loan-to-value ratio will probably be north of 120%. Here is why. 6. Deutsche Bank admits that their data on total mortgage debt is incomplete. Using more complete mortgage data the percent of homeowners under water would be higher and the implied aggregate LTV might be closer to 110% than 100%. 7. Also there is skewing. Those who are underwater have negative equities that exceed in value the positive equities of those who are not underwater 8 There is skewing on more than one account. Because the highest shares of those underwater are in the regions with the highest home values and the greatest percentage home price declines the overall skewing might be very great. And this skewing increases as home prices fall further to the Case Shiller mean. 9. When one factors in this skewing the aggregate loan-to-value ratio of all mortgaged homeowners based on the Deutsche Bank analysis probably rises to 120% or more Read the rest of the post Labels: Deutsche Bank, foreclosures, Frank Veneroso, mortgage banking, mortgage meltdown, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
