Storm Clouds on Horizon: Early Stage Delinquencies Up

Zero Hedge

A review of the 3rd Quarter FDIC Regulatory data reveals a disturbing counter trend to the recent drop in early stage delinquencies. Early Stage is defined here as loans 30-89 days past due. Across almost all loan portfolios, the 3rd Quarter delinquency number is higher than the Q2 figures.

Looking at 1-4 Family First Liens (which make up 23.44% of all Bank Loans) we see what appears to be a “peak” in the 4th Quarter of 2008 with a nice drop in the first half of 2009:

The increase in Q3 from 3.03% to 3.20% represents a worsening of 5.61% in the rate and should raise concerns that perhaps the worst may not be behind us. A review of the 90+ delinquency rate on the same portfolio shows a steady increase:

Banks are stacking up late stage delinquencies in an attempt to manage charge offs. Having managed loan delinquencies I can attest that these two charts come as no surprise. As collection managers fight off late stage delinquencies they have to move more and more collectors to the “back end”. Almost without fail, these are the best collectors which can have the biggest impact.

What happens is that as you back fill the early stage collectors with the new hires you end up having poorer effort on beating down that number. It can quickly become a death spiral creating the very problem you are trying to solve. Little discussion has been made of the vast army of collectors that banks must be hiring. As with any large wave of hiring it can be many quarters before they can start to have an impact.

More detail on the 1-4 Family First Liens as well as the other loan portfolios can be found at www.wlmlab.com.

Looking at the top 11 Loan Portfolios, which make up nearly 95% of all bank loans, we can see that the 3rd Quarter increase is almost universal:

The top 7 loan portfolios representing 90.30% of all loans on the books of U.S. banks had an increase in their Early Stage delinquency rate. This is a disturbing reversal of recent performance and could portend an increase in charge offs in early 2010.

The table below details the top bank lenders Early Stage delinquency rates for 1-4 Family First Liens:

Citigroup, Inc. had both the biggest deterioration in their Early Stage delinquency rate as well as the highest rate of the Top 5. To learn more about Citigroup’s performance click here.

Looking at Early Stage delinquency rates for Commercial RE we see a mixed bag among the Top 5:

Wells Fargo & Company jumped from 1.24% to 1.93% – an alarming 55.65% increase in the rate. Bank of America had a 15.71% drop and has the lowest rate of any of the Top 5.

The Early Stage delinquencies are much like the Canary in the Coal Mine. When those numbers decline then we can anticipate lower bank charge offs. The recent reversal in the Top 7 loan portfolios lead me to believe that we have much more bad news on the way.

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