by Calculated Risk on 5/16/2008 12:38:00 AM

From Bill Fleckenstein's Daily Rap: HELOCs: The New Subprime (Here is Fleck's Site for the Daily Rap):

Note: excerpted with permission.

The following is from Fleck's source: "The Lord of the Dark Matter"

"A couple of us tuned into Dexia's conference call yesterday, looking for clues on HELOCs. We got plenty, and they were important. In February Dexia said the absolute worse case loss for their monoline subsidiary FSA was going to be $125 million. Yesterday, they added $195 million to that. The reason given on the conference call for the poor guidance is that the servicer on their wrapped HELOC portfolio, Countrywide, had such a backlog that FSA didn't get the news that delinquencies were skyrocketing until very recently.

There is no doubt that US mortgage servicers are swamped right now, but I think there is a bigger story here, which ties in with BAC quietly announcing their HELOC loss estimates have gone up from a 2.0% to 2.5% range to 'over 2.5%.' Servicer backlogs could well be the reason why so many CEOs and CFOs are running around telling investors they are not seeing deteriorations in HELOC delinquencies.

The truth is their data is wrong. The market has, obviously, taken the view that the worst of the writedowns are behind us, and if anything it's now just a macroeconomic problem we face. I think that's dead wrong. We're now entering the phase where the macro impacts earnings, but also the stage where real cash losses start to hit the banks (subprime and Alt-A is primarily a mark-to-market issue, but HELOCs are going to be large, outright losses). Once WAMU, WFC, BAC and JPM start to get data through on how rapidly their HELOC portfolios are deteriorating, watch the losses pile up. I'm talking realised losses, not mark-to-market writedowns."
emphasis and link added

Watch HELOCs closely! Fleck's source nailed subprime last year, as an example on January 30, 2007:

Turning to the subprime industry, once again I heard from my friend who has been staggeringly accurate. He continues to feel that things are about to really get worse. In an email to me, he wrote: "Scratch and dent loans are killing everybody. Bids that were 92 or 93 are now low to mid-80s. It is a bloodbath, and is pressuring even strong companies to buckle. NO ONE is making any money in the market right now. We are at a point of no return for many. The next two weeks will be wild."

Note: A wild two weeks indeed as subprime blew up in early February.