Peddling Fear

This week, John Mauldin's Investor Insight continues to address the subprime crisis, albeit with a guest author. This weeks episode of The Perils of Pauline spends a rather inordinate amount of time rehashing last weeks explanations of "this mess and how we got into it" in order to arrive at:

However, we have no idea exactly how long this might last. And there is reason to suspect that the present equilibrium is quite delicate.

The Federal Deposit Insurance Corp (FDIC) noted that delinquent loans have increased $6.4 billion in Q2. The number of overdue mortgage payments increased 10%. That turns out to be the largest quarterly increase since Q4 1990. RealtyTrac notes that foreclosures are now running 93% higher than one year ago.

Now consider that the underlying cause of the recent turmoil has not been addressed. Estimates put the peak of the sub-prime resets that started this all somewhere between Q4 2007 to Q1 2008.

That sounds pretty serious, doesn't it? $6.4 billion is a tidy sum, made even more tension inducing by the reference to peak resets occuring between Q4 2007 and Q1 2008. I did find it a little odd that a link wasn't provided, so I went in search of the source:

Provisions for loan losses registered a sizable increase. Insured banks and thrifts set aside $11.4 billion in loan-loss provisions during the quarter, the most since the fourth quarter of 2002. Second-quarter loss provisions were $4.9 billion (75.3 percent) more than the industry set aside in the second quarter of 2006.

Troubled real estate loans continue to accumulate. The amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) grew for the fifth quarter in a row, rising by $6.4 billion (10.6 percent). Loans secured by real estate accounted for most of the growth. Noncurrent residential mortgage loans increased by $3.1 billion (12.6 percent), and noncurrent real estate construction and development loans rose by $2.2 billion (39.5 percent).

Hmm, so we're five quarters into a seven or eight quarter event with delinquencies having risen to a $6.4 billion rate and a rough road ahead. Sounds perilous. Except... farther down in the release one finds this:

Insured deposit growth slowed. The amount of deposits insured by the FDIC had its smallest increase in 15 quarters as large banks turned to foreign deposits, which are not insured, to fund their asset growth. Total deposits at FDIC-insured institutions increased by $140.1 billion (1.8 percent), as deposits in foreign offices grew by $143.3 billion (11.9 percent), and deposits in domestic offices declined by $3.2 billion (0.05 percent).

So, dum furriners dumped an extra $143.3 billion into uninsured deposits while smart 'Murricans carefully deposited an additional $140.1 billion into insured accounts for a net gain in deposits of $280.2 billion for the quarter. Hmmm... don't these people know there's a crisis?

What about the RealtyTrac data? Well, what about it?

Doug Duncan, chief economist for the Mortgage Bankers Association, agrees there is a problem but said the RealtyTrac data is wrong.

"They were triple counting. What they were doing is they were recording each action on an individual property," Duncan said. "They are damaging the industry from a public policy standpoint."

You can test the hypothesis that RealtyTrac is peddling to a truly limited audience by going to the RealtyTrac site and reflecting for a moment upon what FREE means - and to whom it is targeted. Then try the MBA Site. T'ain't much FREE there but they aren't shooting for the ill informed "Flip This House" group, either.

There is no question concerning the "truth" of the assertion that there is a tranch, perhaps two tranches, of mortgage backed securities that have a risk level which will only be completely ascertained at about mid-year 2009. The problem which I continue to have is in supposing that the total amount of money involved is truly significant. When the tech bubble popped, more than a few vapor-ware peddlers vanished - their stock certificates only had the value of scrap paper. As this real estate bubble continues to deflate, the houses will still be there and the people who lost some of them will still be laying out a fair portion of their income to pay the cost of shelter.

The truly interesting aspect of this is what may happen in China if we actually do head into a recession. If Walmart and Home Depot actually do catch a bad case of sniffles, then the Chinese economy is going to come down with pneumonia.