Hat tip to Johnny Lay for pointing this out to me. From the Tom Brown's Bankstocks.com :

Permit me to point to some seemingly arcane (but in fact highly significant) numbers we have lately received as evidence that the worst-case scenarios concerning cumulative subprime losses being thrown around by the rating agencies, among others, are exaggerated. 

Yes, you heard that right: the housing world has big problems, but it’s not coming to an end, after all. 

The piece you are about to read is a follow-up to an article we posted here in February that noted, first of all, that if you want to get an early read on changes in credit quality in subprime, don’t pay attention to the number too many mortgage-industry watchers obsess over: the past-60-day delinquency rate. It is a lagging indicator of changes in credit quality.

Instead, look at two other metrics: 1) the inflows, in dollars, of newly delinquent loans, and 2) the roll-rates of problem loans from early-stage delinquency, to later-stage, to foreclosure. And on those numbers, I said at the time, the subprime picture seems to be showing signs of improvement. In particular, I made the point that dollar inflows to early-stage delinquency buckets had been falling for months.

Well, make no mistake about my position. I am a super bear and a short seller, for now. I am also a full-time investor. I will not short stocks that I feel won't go down in price. It's bad for the net worth, if you know what I mean. As for my opinion on Mr. Lay's opinion... Too many pundits harp on today's credit crisis being caused by the subprime debacle, or even worse yet calling it the "subprime crisis." It is far from such a thing. It is an asset securitization crisis, and far more shoes are dropping other than subprime. Thus, even if subprime were to get better, the banking industry will not, at least for the time being.

Now, as for the actual merits of the arguments set forth, I have found evidence to the contrary. Banks are not reporting late payments, delinquencies and charge offs at the rates that they were because, well,,,,, they are just not reporting them. That doesn't mean they are not occurring. The banks would rather not take the accounting and valuation hit. That does not make the bank more valuable for the loan is still defaulting, it is just that it looks a whole lot better on paper. Unethical??? Maybe. Factual??? You can bet your sensitive little tush!

Here is a little quip from the fine print in the reporting of my 32 bank Doo-Doo list: From April 1, 2008 onwards, "this particular bank on the doo-doo list has changed its home equity charge-off policy to 180 days from 120 days previously (the widely accepted industry standard). Amid current deteriorating credit markets with residential sector showing no signs of recovery, it is quite understandable that the bank has changed the policy in a bid to defer recognition of provision and charge-offs."

You see, sometimes you have to get past the indices, graphs and charts and dig down a bit deeper.

• The Coalition of the Ailing  »
• Today Might Have Market the Bottom or Top of ... Something  »
• Oil-Rich SWF Countries Also Feeling Some Pain  »
• Deposit Insurance: Variation Across Countries  »
• Credit Markets Get Even Scarier  »

Reggie Middleton

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