This is Just Criminal

On Wednesday stock of Novastar Financial was up almost 11%. The day before the stock of Accredited Home Lenders was up a similar amount. The excuse to pump up the stock in both cases was that the companies had found a way to transfer much of the toxic waste they had created to unsuspecting investors. In the case of Accredited, the company may arrangements to be acquired by Lone Star, a private equity fund. The investors in Lone Star 5, most likely pension plans and public endowments, will be stuck holding the bag for the defaulted loans stinking up Accredited's portfolio (it's so bad that their auditor quit and they still haven't filed their Q1 report with the SEC). In the case of Novastar they managed to complete another securitization for $1.4 billion of their subprime garbage. It's hard to imagine a responsible investor purchasing new Novastar securities after seeing what has been happening in the way of defaults within recent securitizations:



Each line above represents a different securitization over time. The y-axis shows the percentage of loans in the securitization that are at least 60 days delinquent, The x-axis shows shows the age of each securitization. The February 2007 loans are going bad even faster than the amazingly bad 2006 loans.

May was an especially bad month for loans entering the 30-59 day delinquent category. Most of these will add to next months 60+ numbers:



30-59 day delinquencies on the February 2007 securitization rose from 1.44% in April to 2.55% in May as the newer loans are going bad in a hurry.
On the March 2004 securitization they rose from 1.23% in April to 2.94% in May likely as a result of resets of 3 year ARMs resulting in higher payments that can't be met.

Countrywide Financial's Real Estate Owned has reached $1.75 billion dollars as of June 5th (real estate listed for sale on their website). Of course Countrywide is just one of many lenders who are riding a wave of foreclosures and putting off the day when they'll have to recognize the losses.

The sub-prime time bomb has not been contained, and it hasn't difused. It's been getting steadily worse, but the bond market hasn't had a dramatic reaction. This has given Wall St. time to dump toxic securities and companies into the portfolios of public and private pension plans.