Data Triangulation

A post by Annaly Capital Management from last night.

Connecting two data events from the last 24 hours serves as a reminder to policy makers that if they really want to improve the housing finance system in the United States they should first work on improving the jobs picture.

First, Fannie Mae released its quarterly earnings last night, August 5. Behind the headline event—that the company will be asking for a smaller amount of capital from the Treasury in order to maintain positive net worth—is the news of generally improving credit trends. In the second quarter, the percentage of loans in Fannie’s single-family book of business that are seriously delinquent (90+ days delinquent) fell from 5.47% to 4.99%. The graph below, from the always useful credit supplement to the earnings release, sets forth the serious delinquency rate of Fannie Mae’s overall single-family book, with breakouts for selected states.

The company attributed the improvement to “the home retention and foreclosure alternative workouts that the company completed, as well as a higher volume of foreclosures.” If we understand that sentence correctly, it means that Fannie Mae is working assiduously on its mortgage credit problem (a problem that is not unique to Fannie Mae, by the way). Loans stay in the seriously delinquent bucket until there is a resolution, and Fannie Mae has been stepping up its resolution activity. Not only is it apparently removing loans from the seriously delinquent bucket at a faster pace (its real estate-owned portfolio continues to rise, and currently stands at 129,310 up from 109,989 at the end of the first quarter 2010 and 62,615 a year ago), but the quality of the remaining loans in the broader portfolio have a better credit profile. The graph below, also from the credit supplement, shows how the recent vintages are performing better than 2006 and 2007 originations.

In its second quarter 2010 10Q, Fannie Mae looked ahead and stated its estimation that the credit-loss pig may be almost through the python: “Since the beginning of 2009, we have reserved for or realized approximately $100 billion of credit losses on single-family loans, almost all of which are attributable to single-family loans that we purchased or guaranteed from 2005 through 2008. While loans we acquired in 2005 through 2008 will give rise to additional credit losses that we have not yet realized, we estimate that we have reserved for the substantial majority of these losses.” Eventually, the Agency stated, as the need to draw on Treasury for credit losses recedes, it will likely be replaced by the need to draw from Treasury to fund preferred dividend payments.

The second data point is this morning’s jobs numbers. Non-farm payroll growth underwhelmed again—the headline number fell 131 thousand and last month was revised down from -125 thousand to -221 thousand—and the unemployment rate held steady at 9.5% (thanks again to a decline in the worker population). As the Fannie Mae numbers illustrate, we are still witnessing the deflationary effects of the decline in underwriting standards of 2005 to 2008, but the baton of misery will continue to be carried by the poor jobs picture. The graph below shows the relationship between delinquency rates in mortgages and credit cards and the unemployment rate. Any good news on the credit front, whatever the source, will likely be more than offset by further drops in home prices and a continuing weak jobs picture. The correlation between the delinquency rate in mortgages and the unemployment rate since 1991 and through 2010 Q1 is 78%; since the end of the last recession it is 91%.