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Private Sector to Government: Don't Lean on Me


With the recovery in bank earnings, the government is getting more aggressive in its financial demands.

Yesterday's Wall Street Journal included an article stating that House Financial Services Committee Chairman Barney Frank had sent a letter last week to the four biggest US banks demanding that the banks take "immediate steps to write down second mortgages." While couched in good for the consumer rhetoric, his argument is that with one in four American homeowners underwater, most home equity and second mortgage loans have no collateral.

While I don't necessarily disagree with Chairman Frank's perspective, I think there are two additional pieces of information that need to be added to fully frame the story.

The first piece may be best told by this chart from the most recent FDIC Quarterly Banking Profile; it shows that while First Lien Mortgage delinquencies continue to rise, the delinquencies on Closed-End Junior Lien Mortgages and Home Equity Lines of Credit are at worst flat.

Click to enlarge

To me this chart reveals a remarkable change in consumer credit behavior in which borrowers are opting to pay down/keep current more expense subordinated mortgage debt at the expense of their first mortgage. (And, to be clear, the same pattern holds for credit card debt -- where delinquencies there have peaked (albeit I believe temporarily) as well.
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Position in SPY, SH, SRS, and JPM.
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