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Five Things You Need to Know: Mortgage Woes Stubbornly Persist


If there's one thing we've been able to rely on month-after-month over the past year, it's the worsening of mortgage problems.


Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Mortgage Woes Stubbornly Persist

If there's one thing we've been able to rely on month-after-month over the past year, it's the worsening of mortgage problems. The latest evidence of this is a study conducted by the FDIC for the Wall Street Journal of mortgages issued in 2007 which shows, prime mortgages issued in 2007 are defaulting at three times the rate of 2006.

According to the report, 0.91% of prime mortgages from 2007 were seriously delinquent - in foreclosure or at least 90 days past due - after 12 months. The equivalent figure for 2006 prime mortgages was just 0.33% after 12 months, the article said.

On the one hand, it's easy to become inured to such grim statistics. Someone somewhere can be reliably counted on seemingly every day to drop a new awful mortgage-related statistic. But the important point here is what the study means. Essentially, it shows the combined effect of the housing price downturn and the lax mortgage standards that persisted right up until the end. Most lenders didn't begin tightening standards until late last year - too late, as it turns out, to protect their balance sheets from rising delinquencies.

According to the Journal, some lenders, such as JP Morgan (JPM), had tightened lending standards twice by August of last year. But others, such as Wachovia (WB) didn't really turn the screws on lending standards until the first quarter of this year.

For Wall Street, the tighter lending standards will eventually show up in the form of slowing delinquencies. The problem, from an economic standpoint however, is that for Main Street these tighter lending standards are only now being fully felt...

2. Now, It's Serious

Now, it's serious. The fat is officially in the fire. According to the Wall Street Journal, even the rich are getting their home equity yanked! "Wall Street firm Morgan Stanley (MS) added some of its well-heeled clients to the long list of customers whose lenders have frozen or reduced their home-equity loans," the newspaper said.

Other lenders, such as JP Morgan and Washington Mutual (WM) have also recently moved to reduce available credit to borrowers in declining housing markets.

"According to data from the Federal Deposit Insurance Corp., the nation's lenders held $625 billion in home-equity loans at the end of March, but those balance levels don't include credit that consumers have not tapped,' the article noted.

The point to keep in mind here is these reductions in available credit are only now beginning. The net effect will be yet another anchor on consumer spending as we transition from spenders to savers.

3. The Rusty Saw

Rusty as it may be, there's some truth to the adage that the sharpest rallies occur in bear markets. Yesterday morning Merrill Lynch's David Rosenberg noted that the Nasdaq - "the epicenter of the last bubble burst" - posted three 30%-plus rallies between 2000 to 2002 on the way to a larger 80% collapse.

Meanwhile, technically, the bullish percent indicators we track through Investor's Intelligence show demand in control (albeit in a bear market context) and looking at the S&P 500 in DeMark indicator terms on the daily and weekly charts, we now have a couple of targets to put this bear market rally in context.

In my view the probabilities of a continuation move higher to potentially 1348 over the next few weeks has increased. That level corresponds to a relative retracement level from the recent July low.



Note as well that on a point and figure basis, the move to 1290 broke a triangle, though in the context of a downtrend.

As we noted in Five Things Tuesday, higher equity prices are critical to relieving the first leg of the debt crisis for banks. This will allow banks to recapitalize at the higher levels investors now require, though at some cost to existing shareholders in dilution. Nevertheless, this, not moves in short-term interest rates, is what is meant by another rusty old saw - "don't fight the Fed." Only now, it is don't fight the Feds, meaning the coordination among global central banks, Treasury, monetary and fiscal policies.

Fear works both ways, higher and lower, and The Fear is now concentrated among those who are pursuing the bearish case, not among bulls.

4. Crude's Quiet Bear

It's almost shocking how quiet the move down in Crude has been over the past few weeks. One thing we haven't heard on TV or seen in newsprint is that, since the July peak, crude is down 20% - that's bear market territory.

5. Where Are the Soup Lines?

In response to a recent piece on The Modern Stealth Depression, some of the outraged letters I received asked how in the world someone could claim we are entering a new depression when there are no soup lines, no starving people in the street. Well, the simple answer is that's why it's a stealth depression. Despite the rapid transfer of information across the globe, we still have a way of only seeing what we want to see.

According to the Akron Beacon Journal, demand for food from the Akron-Canton Regional Foodbank increased by 14% year-over-year in the first six months. At the same time, agencies that receive food are reporting an increase of 20% in the number of people being served. Food distribution at the food bank increased by 7% in the second quarter alone.

The figures are out there, you just have to dig beneath Paris Hilton Presidential ad spoofs to find them. In the Sarasota, Florida Herald Tribune today there's an interview with Vicki Escarra, president and CEO of the nation's largest food bank network. The network feeds 25 million people annually through food banks around the country.

Escarra says a survey of the network's 200 food banks in January showed a 20% increase in demand over the prior year. Escarra estimates there are 35 million Americans "living without knowing consistently where their next meal will come from." Escarra said she expects this to be "pretty severe for the next 18 months at least."

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