This following was excerpted from Whitney Tilson s presentation to the Value Investing Congress in Pasadena, California on May 5, 2010. Whitney Tilson is the founder and Managing Partner of T2 Partners LLC and the Tilson Mutual Funds.]
Two years ago, we stood up here on this exact stage and delivered a very downbeat presentation on the US housing market. We return today to provide an update...and a new forecast.
In early May of 2008 housing prices had already been declining for two years. The Bear Stearns hedge funds had blown up a year earlier. NovaStar and New Century Financial had also blown up a year earlier. The subprime crisis was well upon us. And many, many people thought that this was going to be contained to subprime.
But we announced that the data led us to believe the contrary and we delivered our analysis in a presentation entitled, "Why We re Still in the Early Innings of the Bursting Housing and Credit Bubbles." We concluded that things were terrible and that there was no sign of a bottom. Obviously, that forecast was on target.
So where are we today?
Two thirds of American homes have mortgages – 56 million mortgages outstanding. A little over half are owned or guaranteed by government entities. 35% are held on the balance sheets of banks and thrifts, and 15% are so-called private label securities that went to Wall Street. This last piece was the sub-prime stuff that was some of the very worst mortgage debt ever written.
It s very easy to get complacent about the mortgage market, as housing prices have stabilized and foreclosures have stabilized, you know, we don t have to worry about that anymore. But I d argue to the contrary, let me show you why.
Fourteen percent of America s 56 million mortgages are already delinquent or in foreclosure. So if you multiply 56 million by 14%, that means that 7.8 million people right now are not paying their mortgages. 7.8 million homeowners have been delinquent for 30, 60 or 90 days...or are in foreclosure already. 91% of the people who are currently not paying are never going to get back to current, according to recent statistics. So that means that of 7.8 million people not paying their mortgage, 7.2 million are never going to get back. So that s a problem. 7.2 million homes. 7.2 million mortgages will go into foreclosure...eventually.
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