Subprime Deflation Spreads to Hog Market

Our old friend John Mauldin:

“As I have written for months, the problem is not just in the subprime loans, but extends to the level between prime and subprime, known as Alt-A loans. Alt-A loans were just 5% of the market back in 2002, yet were 20% last year. 81% of those loans were low- or no-documentation loans last year…Roughly 50% of all subprime borrowers in the past two years have provided limited documentation regarding their incomes.

“Remember the study I quoted last week from the Mortgage Asset Research Institute, which looked at low/no-documentation loans? 60% of the borrowers exaggerated their incomes by 50% or more!”

[Slipping standards, dear reader…tisk, tisk.]

“It stands to reason, then, that many borrowers simply will not be able to make their payments when the reset comes due, thus the prediction that as many as 20% of the subprime mortgages written in the last two years will default.

“Indeed, the subprime meltdown is now spreading to other parts of the mortgage and credit markets: Near prime and risky mortgages (option ARMS) are now in trouble and they accounted for over 50% of mortgage originations in 2005-2006; subprime auto loans and subprime credit cards are in trouble; bank loans to home builders are in trouble; and bank lending to non-residential construction will soon also show cracks as the CMBX – the indices showing the cost of insuring against commercial real estate default – has sharply fallen, signaling a much higher risk of default even in this market segment.”

All this suggests that consumers have less money to spend. And that means deflation…

Yes, it seems that even the market in hogs is deflating.

The reports:

“Thirty-day delinquencies (and loss trends) in Harley-Davidson’s receivables book offer a clear picture that credit-quality issues are broadening… a pattern of deterioration that we first began to see in subprime mortgage loans during the first half of 2006.

Harley-Davidson’s 30-Day Delinquencies

4Q2006 5.18%
3Q2006 4.46%
2Q2006 3.61%
1Q2006 3.69%
4Q2005 4.83%
3Q2005 4.07%
2Q2005 3.66%
1Q2005 3.60%

Source: Lehman Bros.
“…Harley’s finance subsidiary (HDFS) funded almost half of Harley-Davidson’s motorcycle loans. Like subprime mortgage loans, HDFS’ hog loans are pooled and securitised to institutional buyers. Unfortunately – in credit trends and terms – HDFS is also beginning to look more and more like New Century…”

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

Bill Bonner

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