Economic Rebalancing

The global economy is horribly out of balance, with the United States going deeper into debt each year as a result of a huge trade gap. This blog describes the process of global economic rebalancing. If you have any comments or questions about the posts here, please don't hesitate to use the comments section.

Thursday, April 12, 2007

Foreclosure Pipeline Update From Novastar

NFI was kind enough to provide their monthly update on the status of their securitizations and the good news is that 30-59 day contractual delinquencies were down on almost all of their issues. The bad news is that's normal for March and that the default levels are still very high. The peak for new delinquencies may have occurred in December, as many subprime borrowers appear to have chosen a lavish holiday season over making their mortgage payments. Those defaults hit the 30+ day threshold in January and 60+ threshold in February. Time will tell whether or not the tightening of credit in March leads to a big enough surge in defaults to top December's levels. The total percentage of borrowers failing to make monthly payments continues to grow steadily as more loan begin defaulting each month.

The following charts show the composition of bad loans for the securitization of December 2005 and the two securitizations of June 2006 as they've grown month by month:



Credit quality in the 12/05 issue was bad enough, and the level of defaults continue to rise. Delinquencies in the June 2006 issues are already twice as high as they were at this stage for the 12/05 issue. One interesting thing to note is that lately NFI has been much quicker to push delinquent loans into and through the foreclosure process in the hopes of raising some cash.

Even more importantly, we should note that Novastar has only just begun to recognize losses on the portfolio. To do so would be to call into question their solvency at a time when they are worried about creditors cutting off funding. Meanwhile the number of homes in the foreclosure process and the number of homes on the books waiting to be sold is ballooning out of control. As long as Novastar avoids selling those homes at a loss they can pretend there has been no hit to earnings. However, the lack of mortgage payments flowing in must be made up for by NFI when they make interest payments to the investors who bought the securities.

Right now, Novastar is facing a liquidity crisis similar to the one that forced New Century into Bankruptcy. Consequently, Novastar is desperately "exploring strategic alternatives" to declaring bankruptcy themselves. It's hard to imagine that anyone will be foolish enough to bail Novastar out of their terrible position.

Let's be perfectly clear here:
1. Cash is tight for the lenders because many borrowers aren't making their payments.
2. It's going to get tighter as the percentage of defaults continues to rise.
3. This is just the first stage, a liquidity crisis that is wiping out many lenders as their creditors scramble to protect themselves.
4. The next stage will cut to the core of the ponzi nature of our financial system.
5. Homes sitting on the books and in the foreclosure process are increasing much faster than they are being sold.
6. The big losses haven't even begun to be recognized yet by mortgage lenders, mortgage insurers and the GSEs.
7. The losses will be massive and spread out over a long period of time as home prices enter a long, steady decline.
8. The liquidity crisis faced right now by the subprime lenders will spread to almost anyone who's solvency is in question.
9. Huge amounts of imaginary wealth will be wiped out in the financial sector and in the greater economy.

During their conference call today Mortgage Insurer MGIC Investment Corp. was pressed on Novastar's condition, and did their best to dodge the issue. MGIC is Novastar's main insurance writer and they maintained that Novastar has been a good customer. That may change soon when Novastar has to start pushing through more loss claims. For now, MGIC is in complete denial, thinking that the market overreacted to the subprime crisis during the first quarter. In addition to primary mortgage insurance, MTG also has large invesments in joint ventures that buy distressed consumer credit receivables (Sherman Financial Services Group) and invest in and service subprime loans (C-BASS). Denial is probably the best way for them to preserve their sanity these days. (The last 10 minutes of the call is the most worth listening to.)

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