Deutsche Bank Recognizes the Depth and Width of "A" Paper Crisis to Come

Summary
The depth of the "Alt A" mortgage crisis is coming home to roost. We are likely to see the depreciate creep (or flood as the case may be) is going to hit the areas that the subprime loans barely touched.
Analysis

Deutsche Bank (DE:DBK), while prompting new concern about the severity of the "A" paper mortgage crisis, is simply being forthright about the depth and width of the problem. Other lenders have been avoiding the truth as a means to avoid panic and to prevent further declines in their respective stock prices.

The "subprime crisis", while bad, was nothing compared to the potential crisis looming within the "A" paper and "Alt A" paper markets. I have been shouting from the mountaintops that the Option-ARM portfolios outstanding pose a substantial threat to our recovery. Negatively amortizing loans, combined with sharp declines in value, combined with lender hesitance to embrace loan mod options, combined with nominal loan mod options for this particular product, combined with the communal shamelessness of "walking away", are all conspiring to create the perfect storm for the real estate markets and banks.

Option-ARM's aside, as the article explains, we are seeing the creep of depreciation in more affluent communities and those where values were the highest at the peak of the market. The community mood is such that people are willingly walking from properties as a business decision, without the shame that that accompanied foreclosure in the past: "Why pay for a million dollar home that is worth $600,000.00?" Furthermore, "The value is not likely to come back for ten or more years!" In the communities that have been hardest hit, the latter point is even more valid than in the "Heartland". People in California, Florida, Las Vegas, etc., are certainly more nomadic than other regions of the country. These nomads are not willing to wait out the markets. The problem is that the population's, portfolios, and aggregated net worth of these nomadic areas is a substantial percentage of the country’s overall wealth. Thus, as the saying goes, "where California, et al, goes, so goes the country".

Of course, the unfortunate homeowner's who bought in the few years prior to the real estate run are going down with the ship.

The bankers who recognize the depth of the problem and openly address it will likely come out on top. Loss mitigation solutions, further consolidation of troubled banks, and real bleeding are necessary to get things back to equilibrium. I personally believe that is will be three years before we can foreclose, negotiate, or sell the inventory of houses that will be necessary for the market to start rising again.

Joe Chatham
President
Chatham Mortgage Partners Inc
805-496-3000 x1