‘A Cautionary Tale Of What Can Go Wrong’
Some housing bubble news on the lending front. “Annaly Capital Management, Inc.today reported $852 million face amount of securities were sold, resulting in a realized loss of $1.2 million. In addition, the Company had a loss on other-than-temporarily impaired securities as of June 30, 2006 of $20.1 million. Of the $20.1 million, $15.7 million resulted from further declines in the value of securities classified as other-than-temporarily impaired at March 31, 2006.”
“Michael Farrell, CEO, commented, ‘The two additional 25 basis point increases to the Fed Funds rate during the second quarter brought the total to 425 basis points over the 17 meetings since June 30, 2004. Market conditions, therefore, continued to be a challenge for strategies such as ours as the protracted sell-off in the front end of the yield curve pressured the value of our assets and raised our cost of funds relative to the yield on our assets.’”
“MFA Mortgage Investments, Inc. today reported a net loss available to common stockholders of $21.8 million for the second quarter ended June 30, 2006. Stewart Zimmerman, MFA’s CEO said, ‘As previously indicated, increases in the target federal funds rate have increased the cost of MFA’s liabilities at a more rapid pace than the yield on its assets, negatively impacting portfolio spreads.’”
“Mr. Zimmerman continued, ‘MFA undertook a further repositioning of its portfolio in the second quarter of 2006. This repositioning consisted of the sale of approximately $1.035 billion of MBS with realized losses of approximately $24.7 million. This MBS sale was predicated on a number of factors, including the negative impact of Federal Reserve tightening, increasing inflationary pressures from higher capacity utilization..and the relatively flat and at times inverted yield curve.”
“Increased lending in a slowing housing market helped New Century Financial Corp., one of the largest U.S. subprime mortgage lenders, boost quarterly profit 11 percent, but earnings rose less than expected. Profit rose despite ‘a very challenging market environment,’ said CEO Brad Morrice. Delinquencies rose and Morrice said New Century is seeing ‘isolated’ markets where home prices are flat or declining.”
“Referring to the earnings shortfall, he said: ‘If we had sold all the loans we originated, we would have more than made up the difference.’”
From MarketWatch. “It is becoming increasingly obvious that financial advisers, real estate experts and parents will someday point to what is happening in the mortgage market today and use it as a cautionary tale of what can go wrong when a buyer stretches to get too much house during a market that seems invincible.”
“‘There is no apples-to-apples comparison from the kind of mortgage someone could get a year ago and what they can get today,’ said Anthony Hsieh, president of LendingTree.com. ‘As rates rise on adjustables, there are steps people can take to reduce the sticker shock, but they’re probably not going to be too happy with what they have to swallow now.’”
“‘People’s choices are only going to get uglier, and plenty of people are on their way to trouble. For everyone who has avoided this trouble, they’re going to look back someday, when their kids are looking for a mortgage and are tempted to stretch too far by using an ARM, and have stories to tell about how they saw a time when everything that could go wrong with that strategy did go wrong,’ said Greg McBride, senior editor at Bankrate.com.”
The Washington Post. “In a new sign of the continued deterioration in the housing market, applications for home loans plunged to a four-year low last week. Lenders ‘are seeing their volumes down, not just for purchases but also for refinancing,’ said Jay Brinkmann, a financial economist with the Mortgage Bankers Association.”
“‘It’s pretty bad,’ said Christopher Cruise, who trains mortgage brokers and is based in Rockville. ‘The problem is that the high was so high and the low is so low. Now it’s not just the end of the refinancing boom, but people aren’t buying either. There’s been a real drop off in purchases.’”
“Cruise said attendance at some of his classes has dropped by 50 percent, and he has canceled some classes for lack of interest. ‘It’s causing some pain for some people,’ Brinkmann said, adding that declining loan volumes are cutting into lender profits. ‘Some will go off to a different field,’ Brinkmann said. ‘They may need to go out to find a different line of work to support their lifestyles if the income is no longer there.’”
Wow, Annally was one of Bill Fleckenstein’s favorite longs a few years back. Wonder if he bailed out.
I am not a Fleckenstein fan but I have to give him credit on Annaly Mortgage. He was incredibly long on this company a few years back. But on March 18 2004 he wrote:
“Recently, I decided to sell my Annaly Mortgage Management (NLY, news, msgs) stock. Let me be clear: This is not because of anything at Annaly Mortgage. I still think the people in charge are absolutely terrific. To the extent that I want to have my money managed in the fixed-income arena, they’re the people I want to do it.
I am, however, increasingly concerned about the collateral behind the real estate market. As chronicled on my Web site’s “Housing Hot Potato” series, there are a lot of people who have taken on a lot of debt who maybe shouldn’t have. I am just shocked at the aggressive trolling that finance companies are doing to try to get people to take out money against their houses, or to buy houses. I think the credit structure in this country is as bad as it’s ever been — by some huge factor. That, of course, doesn’t mean that something bad is about to happen. But if something bad does happen, it could get really ugly, and fast.”
But then he added a qualifier: “I am not advocating that anyone else do as I have done, and I might change my mind about this decision later.” I don’t read his column very often so don’t know if he got back in or not.
Good for him. Fleck is one of my favorite people, along with Herb Greenberg. Bears everyone love to hate, although Herb had the good sense to get very long in the fall of 2002.
Both Fleckenstein and Greenberg are smart guys who make good points. Greenberg seems more like a skeptic rather than a pure bear.
TXchick
I found this blog on Bill’s “ask Fleck section” Someone wrote to him about this blog and I was hooked.
txchick,
Are you still long homebuilders? 6% + increase today on some and I wonder if you got out?
have established stops but still long
Why are you long homebuilders? Are you expecting a sucker’s rally? I’ve been reading about people shorting homebuilders and lenders. They say they are doing very well with those moves
Until they get caught up in a [temporary] violent short squeeze and panic . . .
Fits with the cliche of achieving wealth by always selling too early…
Collateral damage.
I was a long time holder of NLY (Annaly Mortgage) - sure did like the 10-12% dividend payments. I saw the writing on the wall however when the yield curve flattened, and bailed when NLY was at 18. Sad to see them in such dire straits, because they were very good at what they did - borrow short term, leverage it 5-10x to buy long term paper, and play on the ARM’s reseting at higher rates. Paid a huge dividend for a couple of years.
A large number of closed end bond funds do the same thing (BKN was one I think), and they were very scary, because they were no where near as good as NLY at it. Probably still all around, as they were popular 3 or 5 years ago, and alot of it got sold to older people (like my parents) as “conservative, high yielding investments” - basically a gamble on the interest rate spread. Luckily, I convinced my parents to bail on these - I have not followed them since, but there is alot of money in them. All of it is at risk!
A great article by Danielle Martino:
http://www.dallasnews.com/sharedcontent/dws/bus/columnists/all/stories/080306dnbusdimartino.1f5015c.html
“When it comes to bubbles, the ironies tend to emerge in hindsight.
Looking back, the book Dow 36,000 marked the top of the bubble hysteria in 2000.
For the housing bubble, the equivalent could be last year’s Are You Missing the Real Estate Boom?, re-christened this year as Why the Real Estate Boom Will Not Bust – and How You Can Profit from It.”
Nice to know that Lierah will go down in history along with Joe Granville in 81 and Glassman in 2000 as the worst calls ever made.
Which bad call did Joe Granville make in 1981? Google and Wikipedia didn’t help.
Granvile was/is a perma-bear. He publishes I think it is called the Granville letter? or report?? Anyway, in late 81 or maybe early 82 he said to “sell everything” as the markets were going to crash. As we all know, 82 started the greatest bull market ever. That ruined his reputation.
http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_currier&sid=ayJ1tcs4oY1A
The thing I remember about Granville is from several years ago after he had lost much of his influence. Granville said he understood the reasons for his past miscalls and had adjusted his strategy accordingly. Because of this, Granville said, it wasn’t fair to include previous results in measuring his performance. Rather it made more sense to begin anew with a clean slate. As if those who lost money following his advice could wipe the slate clean and begin anew. Granville is the poster boy for illustrating the most important rule of investing: Avoid making mistakes so big that you can never recover from them.
tiger - great advice for all of life’s endeavors. i may put this one on the office wall. tx!
Thx to Danielle for the reminder that there are still many sheep out there who look at the bubble as a case of “boy cries wolf.”
‘ “Just remember,” Mr. Rosenberg warned, “the wolf showed up at the end of the story.”‘
And also remember that sheep are a wolf’s favorite meal…
Speaking of the Lereah book… From Amazon.com
And here’s a review I hope Mr. Lereah reads some day..
“Unlike many of today’s naysayers, this book takes a shot at analyzing the current RE market and it’s future trend by assessing facts. It’s simple for others to write articles claiming a “bubble about to burst” based on an unprecedented “run up”, but this Author backs his assessment with real facts, that quite frankly, set my mind at ease and even may have even motivated me to invest in some more property! Thank you for your efforts Mr. Lereah!! This was money well spent!!!!”
I don’t really believe in hell, but I’m being good on the off chance that I may bump into the guy in a fiery lake some day.
should change their name to “Anally”, which is where they will take it.
‘Some will go off to a different field,’ Brinkmann said. ‘They may need to go out to find a different line of work to support their lifestyles if the income is no longer there.’”
What other industry can these people possibly go to that would support their new lifestyle?
As long as they stay out of the tech field I’m happy. My guess is a number of these people are freeloaders who move from boom to boom. Probably washed out of the tech field in 01/02/03. Good thing WalMart is still growing, but they will have to give up the Hummer.
Hee hee hee! Friend of mine left the tech field in 2000, bailed out selling everything he had in tech stocks. Very good/lucky timing. He decided the real money was in real estate. I guess he was right because last I heard, he was riding the boom in Phoenix, of all places. Now I can only hope that he has changed his tune and has already moved on.
I am aware of office assistants, one in particular, who took on a “second job” as a realtor. Within three months after making her first three commissions, she bought a $600k house in an older neighborhood. She said it needed a lot of work and was the ugliest house on the block, but she was happy.
Of course, if the commissions stop, there’s no way she can make the mortgage payments, let alone any improvements.
My wife was at the Park Bench Cafe in Huntington Beach’s central park.
A long time waiter there (5 yrs) just went into RE as an agent.
Ouch!
My wife didn’t say anything but I would have.
I thought the same thing…the easy-money employment bubble is over for these under-educated slackers.
“Referring to the earnings shortfall, he said: ‘If we had sold all the loans we originated, we would have more than made up the difference.’”
Glad Ben included this little gem. Shows how the FED isn’t in control of mortgage rates. If we hear more stories like this in the near term, expect rates to jump and this slow motion train wreck to happen a little faster.
Red sky in morning, sailor take warning.
Translation: “We couldn’t unload our crappy loans fast enough”. LOL
I don’t think that Mtg companies are allowed to use mark to market accounting on the loans that they hold. They have to accrue profit incrementally.
Whereas, sale of a portfolio takes 30 years of discounted cashflows into account and gets paid today.
So he is saying if they wanted to eat their seed corn or stake they could have made their earnings.
I interpret that as this isn’t the end of the bad news but just the beginning.
Translation #2: “Damn bond holders are wising up and want a risk premium.”
secondary market is starting to price these loans for risk. current second mortgage pricing for an 80/20 investor loan to a prime borrower is approaching 14%, up for 8% 12 months ago. i still think that’s way too low.
“Referring to the earnings shortfall, he said: ‘If we had sold all the loans we originated, we would have more than made up the difference.’”
That comment along with the fact that they posted an 11% profit tells me the gouged the borrower with points and upfront fees and are desperately trying to unload the remaining crap paper.
GS or anyone care to translate this for me?
I was interpreting “sold all the loans we originated” to include the hidden qualification “before they went toxic on us”…
appreciate it!
must have done some serious bait and switch for business to increase while everyone else is in the toilet.
P.S. Even without rising defaults, the value of a loan as an asset decreases in a rising interest rate environment…
unless of course your 2/28 libor is priced at 600 basis points above the 6 month. quite a yield while the borrower is still paying it.
“Cruise said attendance at some of his classes has dropped by 50 percent, and he has canceled some classes for lack of interest.”
Another casualty of the bubble: Decreased demand for mortgage broker training courses…
“Some will go off to a different field,” Brinkmann said. “They may need to go out to find a different line of work to support their lifestyles if the income is no longer there.”
_______________________________________________________
The barrier to entry for these types of jobs was extremely low. That is part of the problem.
If you could talk on a cell phone, had a GlamourShot photo, could talk a line of sh!t and could hold a pencil you were in. You didn’t even need to be able to think on your feet to do this stuff.
Alot of these Realtors(tm) were as usless as tits on a boar-hog before this mess and they will be just as useless afterwards.
Once the pain starts these people will have to learn to DO SOMETHING. Not just sit on their asses and glad-hand their way through puffed up deals while making a fortune as a yesman / middleman.
Before long, people are gonna stop buying stuff like cars, boats and houses. These people will be shit outta luck because most of ‘em have never done anything but sales…they have no expertise to speak of other than a line of sh!t and a quickie way of closing deals.
When recession hits people will be tapped out just paying the bills on the McMansion / SUV’s / Credit Cards. They will not be buying new cars and flipper houses anymore.
I look for some of the younger, more sexually alluring types to go into porn, stripping, etc as a more “physical” means of earning a paycheck.
The older and uglier bullshitters will either be delivering newspapers or working at some lonely kiosk at the mall.
It ain’t gonna be pretty folks.
The sales business is pretty similar to the bar business.
They do well in good times and bad.
In good times the party is on with super premium liquor.
In bad times the drinking is on with well liquor either way the bar makes money.
being one of the older and uglier types, i strongly disagree. the loan officers that got started in the boom of 2002-2003 are toast. money will never, never, ever be as easy as it has been over the past four years. for the “more mature” players the upcoming markets present an opportunity to use their smarts to bail alot of distressed people out of their situation, meatball surgery if you will. it will not be pretty but someone is going to have to sort these mess out. can you say “short sale” .
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“Quick buck artists come and go with every bull market - but it’s the steady players that make it through the bear markets.” - Lou Manheim, “Wall Street”
I’m in Sweden right now and just found out that being a real estate agent here takes a 4 year University degree! Not only do you need to “sell houses” but you need to know all of the laws, all of the financials, etc. The barrier to entry here is real!
From Bill Fleckenstein’s Daily Rap today regarding New Century if anyone is interested:
Turning to the financial-rot department, New Century Financial missed its number slightly, though that’s totally immaterial. What is important: the fact that loans it held for sale ballooned sequentially from $6.3 billion to $9.3 billion. (Of course, that’s on top of the $16 billion or so that New Century holds away from that particular category.) Nevertheless, the company chose not to bump up its loan-loss reserves.
Further questionable developments: “Other income” was up radically year-over-year, and no one seems to have a good handle on exactly what’s in that category. More ominously, FPDs (first-payment defaults) were up considerably. A very knowledgeable friend who’s an insider in the subprime industry said: “That is the single-worst thing you can see in a company — people who never make the first payment. I cannot begin to tell you how bad things are, and getting worse.”
How can you not make the first f’ing payment on your mortgage? How is that even possible?!?
A whie back someone posted a case where some scammers were having a homeless guy sign closing documents on houses. They paid him for his signature, basically. I can’t remember how many houses the guy owned. He didn’t make any payments - he was flat broke.
Sometimes this is fraud. A fraudster seller sells to a fraudster buyer at an overly-inflated fraudster price. Fraudster seller hires a fraudster appraiser to support the inflated fraudster price. Loan gets made, fraudster seller has high quantity of fraudster cash, splits it with fraudster buyer, and the gang-o-fraudsters splits town. Lender or Fannie Mae or Freddie Mac is standing holding their genitals.
You forgot that fraudster buyer rents the house out to poor sucker, taking first+last+deposit up front, and taking however many months of rent while not making any mortgage payments, until a receiver steps in.
“MFA Mortgage Investments, Inc. today reported a net loss available to common stockholders of $21.8 million”
Pretty funny wording. It’s as if the stockholders have a choice of taking or leaving the loss.
Just a note, I live in Rockville (mentioned in the article). Places are sitting much longer here, mainly because asking prices are ridiculous. The sooner we get started on a correction, the better.
I moved here in 2002, and while one could say that was also bubble timeframe, I could buy a decent sized, comfy house on a 1/4 acre walking distance to the middle of town — all as a single guy on a salary of maybe $55K/year……and that was with a 30 year fixed loan, 20% down, and a rate of 5 1/8 % fixed. Since then, I’ve seen my monthly mortgage payment plummet as a fraction of my household income, both due to earning more and getting married.
I’ve done quite a bit of renovation work, too, redoing whole rooms, taking my time, and using the best materials, since we plan to be here for a long time.
A lot of people around here think the housing market has no end. Or that we have an “affordable housing” crisis. Hogwash. “Affordable housing” solves itself, long-term. Housing MUST return in cost to a level people can afford. Or they will simply move away, reducing demand, until it does. A market is made of individuals own single decisions, aggregating into the whole.
The only variable I see as troubling is people’s willingness to contribute an ever-growing percentage of their income to housing itself. There is no steadfast rule that a mortgage payment can be __% thanks to new lending practices. Our American spending habits are sad. What we have we spend. What we don’t have we borrow so we have, then we spend that too.
They say Americans import much more than they export to other countries. NOT SO! Our international trade accounts are BALANCED.
How? Simple, we import gizmos (gas, bikes, autos, cheap electronics and junk food). We export LOANS in the form of MBSs and government notes. Foreigners go for these notes hook-line-n-sinker. They will be sharing the burden to some extent as interest rates and risk premiums rise, their notes will decline in value.
So when in the world are those buying these MBS’s going to stop?! They’ve got to know they’re a bad bet, don’t they?
What makes them keep buying and what will make them stop buying?
Am I right that if they stop, the whole house of cards will fall faster than you can bat an eye?
I could understand on some level that say, China , might keep buying because they have no desire to outright crash our economy (not this month anyway).
But at some point that tricky balance must go haywire it seems and the losses start to outweigh the benefits.
Does anyone have insight as to why these MBS’s are still being bought up so eagerly? Or maybe they’re NOT being bought as eagerly as they once were. Any info. on that?
I’m waiting for this last piece of the puzzle to fall into place. Is that a futile wait?
Thanks in advance for any discussion/insight into this topic.
Maybe the Chinese wonder the same thing, when will we stop buying the junk they make and export to us? We are trading junk.
Making money the old fashioned way is it’s own best reward. Creating a home is far more difficult, thus far more rewarding, than flipping a house.
Long time lurker, posted a few times. Could someone with more smarts (and facts) than me go over to Kevin Drum’s site (http://www.washingtonmonthly.com/) and comment on the Bubble. Someone already referred them here but they just have no clue. Most still believe house prices are still going up. Its in the entry on Greenspan and the coming recession.
Thanks
Buffpilot:
I have already tried that approach in my neck of the woods with support from other OC posters here.
It didn’t work. I have ended up at the point illustrated below.
Don’t try to teach a mule to play the violin. It annoys the mule and sounds horrible.
FYI, after months of silence, SoCalMtnGuy has updated his blog:
http://www.housingbubblecasualty.com
Slightly OT. Three more houses have gone up for sale on my block this week. This is a good neighborhood in NoVA. I’m wondering if we are going to see a spike in inventory now that bubble news is going on in the MSM?
back from vaction sept inventory should be awsome
Yep!
Just spoke to a mortgage agent today for New Jersey. Said they are still buzy but its no longer ARMs, they are busy doing interest only loans and pretty much nothing else.
The last gasp before the very end?
Simmsssays…10 Ways to REALLY Piss Off Your Woman
http://www.americaninventorspot.com/relationship_advice
Many have been wondering why home builder stocks keep rising in the face of bad news. Now we have at least one reason for why:
http://biz.yahoo.com/bizj/060802/1324795.html?.v=3