Don't Let the Wall Street Journal Scare You

Beware of sheep in wolve's clothing. Today we pick on the Wall Street Journal. Someone at the Wall Street Journal wrote a piece over the weekend that tries to scare you into believing another bank collapse will occur any day now, or in particular, that WFC and JPM are going under before Christmas.

This is such old news, it's sad the WSJ can't find anything better to do than recycle the story with little substance other than innuendo.

For the third straight month, option adjustable-rate mortgages are generating proportionally more delinquencies and foreclosures than subprime mortgages, the scourge of the housing crisis.

...could mean higher-than-expected losses for Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. (JPM), as well as the Federal Deposit Insurance Corp.'s own insurance fund.

R-i-i-i-g-h-t! You can say that about any company any day, can't you? Why do you think the SEC requires the phrase "involve risks and uncertainties and are forward looking" in press releases?

So the obvious question is, does the delinquency proportion change because subprime delinquency and foreclosures have declined so much? We don't know, we haven't been told. The second point obviously presumes these Option ARMs aren't already discounted or had reserves set aside. Is there any data to support that, or is this another type of "If an asteroid strikes the earth..." existential reality?

"The realization of the issues related to option ARMs is just beginning," says Chris Marinac.

Why, because he's fixated on the asteroid belt and sees nothing but trouble? Who the heck is Marinac, anyway? The implication of "realization of the issues ... just beginning" is that nobody saw this coming. How absurd. This is common knowledge in the industry and the internet. There's a famous Credit Suisse mortgage reset calendar floating around the internet for years, originated from the chart on page 47, Exhibit 42 "Adjustable Rate Mortgage Reset Schedule" from the exhaustive report "Mortgage Liquidity du Jour: Underestimated No More" which came out in March 2007, and even updated back in May. Maybe Mr. Marinac hasn't known this for the last two years, but we're highly confident most professionals have.

Now we do have a fact or two in that whole article. Three relevant ones to be exact.

• As of April, 36.9% of [Pick-a-pay] loans were at least 60 days past due, while 19% were in foreclosure
• 33.9% of subprime loans were delinquent as of April, while 14.5% were in foreclosure.
• Wells Fargo holds ... $115 billion of the loans
• [WFC] assigns the loans a value of $93.2 billion

Some facts are just plain wrong. The following relates to some unspecified population that has no indication of it's relevance to the nation as a whole, or the purported facts of this story in particular. Specifically,

"33.9% of subprime loans were delinquent as of April, while 14.5% were in foreclosure."

Actually, according to the official Credit Conditions in the United States:

Only 12.6% were in foreclosure in April (column 26)
Only 28.9% are delinquent (sum of columns 23, 24, 25)
(Source: Subprime Excel Data)

Notice in that excel data: The percentages in the second set of three columns plus the "% current" don't add up to 100% because they don't include loans in foreclosure.

Mathematically, then, we have the following:

• 93.2 / 115 x 100% = 81%
• 100% - 81% = 19% (WFC expected losses)
• 14.5% < 19%

Since we only have Wells Fargo reserve numbers, and we don't have WFC's portfolio data, we really don't know a thing about whether WFC has enough reserves or not. Look again at those delinquency columns (create a sum of columns 23-25 for each row, sort by the summations). A total of 32 states have delinquency rates below the national average. The three lowest delinquencies are in Hawaii, North and South Dakota at about 23%. How is WFC's portfolio distributed around the country? We do know not all delinquencies end in foreclosure, and WFC has discounted their portfolio to practically expect that they will.

WFC discounts their portfolio as if the entire portfolio will be foreclosed at the present rate of Pick-a-pay loans (19%) and that all foreclosures result in 0% recovery. Put another way, you can buy WFC mortgage portfolio for 81 cents on the dollar. That sounds like a bargain! Worse yet, we have nothing at all about JP Morgan's reserves or portfolio allocation. The article says it got some data from a filing. After all that work Eckblad did reading government filings, he can't present any meaningful data from JPM to support the headline and article innuendo. Either he wasn't competent enough to know what to look for, or the data he found didn't support the editorial opinion woven between the lines, so he left it out. Either way, you can't trust this author's expose. He comes out barking, but beneath the covers there's nothing but sheepishness.

"We're just beginning to enter the cycle of resets" on option-ARM loans, says Matt Stadler.

That's perfect, then, isn't it? Interest rates are ripe for refinancing right now. Libor (upon which many ARMs are indexed) has been falling. Resetting them now for another 3 or 5 years is just what we need to buy us time for the economy to turn around. Of course, if the United States of America in 2010 is going to become like the United Soviet Socialist Republic, then indeed, we have a problem. Don't count on it.

You can see that will a little effort, it doesn't take long to show Eckblad's main premise is lacking substance to give it more credibility than a weather report from a quick glance out the window. We hope you aren't paying for that kind of advise, and worse, basing your investment decisions on such shallow insight.