Bits Bucket And Craigslist Finds For December 7, 2006
Please post off-topic ideas, links and Craigslist finds here.
The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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insider stock sales highest since 1987
Stock sales by America’s corporate chieftains exceeded purchases last month by the widest margin since 1987……
plus some other scary record ratios
http://immobilienblasen.blogspot.com/
The market riggers may take today off. A key analyst is throwing cold water on homebuilders:
http://tinyurl.com/y7qxac
FAT CAT PARADE
MORE WALL STREET CEOS WILL JOIN $40M CLUB
http://www.nypost.com/seven/12072006/business/fat_cat_parade_business_roddy_boyd.htm
By RODDY BOYD
CLICK TO ENLARGEDecember 7, 2006 — As news spreads of Lehman Brothers boss Dick Fuld’s $186 million, 10-year payout, Wall Street’s top five chieftains are on track to rake in a combined $200 million in 2006, awash in cash from record trading profits.
Profits at Wall Street’s leading firms are up an average 15 percent across the board from last year’s record levels. So are their stock prices, with even Morgan Stanley - the scene of a bitter, multi-month executive rebellion in 2005 - up more than 28 percent year-to-date.
Executive recruiters and veteran Wall Street pros told The Post that there was little doubt that for the chiefs of Goldman Sachs, Merrill Lynch, Lehman Brothers, a $40 million payday is a distinct possibility.
“I think it is safe to say that this year, most of the leading [Wall Street] CEOs will see their pay in the $40 million or above range,” said a veteran Wall Street executive recruiter.
I am sure Gekko was in there with the chieftans taking some of his fabulous stock market gains off the table?
Fannie Mae restates earnings by $6.3B
“In a filing with the Securities and Exchange Commission, Fannie Mae also said that its board had approved an increase in the company’s quarterly common stock dividend to 40 cents a share, effective this quarter.”
http://money.cnn.com/2006/12/06/news/companies/bc.usa.fanniemae.reut/index.htm?postversion=2006120622
Not only is there no talk of bailout, this company is boosting dividends.
and f raines (AA)(AA) is getting paid fo life,yo
Actually, OFHEO is filing suit against him to reclaim his bonus money - tens of millions of dollars.
Great news; they should also file fraud charges too!
There is something in all of this that I still fail to understand. But perhaps I reveal my ignorance about the finance end of economics:
I understand how people can decide to fill out paperwork for a loan that they have no ability to repay. I understand how a real estate marketing machine could cheer on irrationally-high prices. But what I do not understand is how the ultimate bag-holders - the banks - would ever go along with it. Yes, I have encountered idiots in banking, even at high-levels. But I know many more intelligent people in the field by far. Even the morally repugnant ones are sufficiently self-interested to see a bad deal when presented one. I just can’t imagine any of them saying “Gosh, this guy makes 40k. Let’s loan him a half-mil just for kicks. It’ll work out.”
What is it about the mortgaging system that I fail to understand? This is a sincere question. I am ignorant here. I just don’t get it. How does this happen?
Simple, the banks make money on it whether you pay it back or not. Same deal on credit cards. They make more if you do pay it back, but still make money even if you don’t, they also bear no risk in doing this. Once you begin to understand the mechanics of a loan, this becomes clear. It does not work the way most people think. This forum however is not the place to discuss this, google it and you will be quite surprised. Search on Richard Cornforth, lots comes up.
Try this reasoning instead:
“Gosh, this guy makes 40k. Let’s loan him a half-mil and resell the loan so that it can be packaged up with other sub-prime loans and resold in tranches.”
The banks aren’t the bag holders. The holders of the resold loans are. And the bank took their cut of the money up front of course.
Yep. Some Japanese “investor”, coming from a culture where default is the ultimate ignominy, is foolishly buying up our mortage-backed (ha!) securities. His innocense is touching, but his faith in the US homebuyer (a.k.a. FB) is grossly misplaced. The lenders, for the most part, will have already made their fees on the deal before handing it off to the unsuspecting “investors.”
The entire idea of a loaning money, quantification of risk and the value of a dollar has been obscured by something different. No longer are we encouraged to understand the value of a dollar and save for a rainy day. To the contrary, we’re compelled to throw caution to the wind irrespective of the risk we see looming on the horizon, either in our own personal situation or in a macro sense. Wall St. operates in this exact way. Meeting/exceeding quarterly earnings is what matters. Forget the damage done and the lives destroyed in meeting those earnings expectations. Running an economy using a 90 day look ahead is a sure recipe for disaster. And we’ve been doing it for 25 years now. The music will stop; it’s only a matter of when.
I don’t think just the Japanese is “investing” in this. If you look at the way these loans are set up, they have a return of about 8-10% if they were paid in full at the end of the month. On paper, this looks pretty good compared to other bonds that are available. Coupled with a few hedge funds providing “insurance” from these defaulting, it looks like you have a pretty secure investment. The holder of the MBS looks pretty good to his investors providing A) the default model is correct and not many of these “investments” crater, and B) the hedge fund still exists when you need it after the “investments” turn out to be the Argentine pesos before they collapsed in 2002. With this in mind, don’t be surprised if the “investors” are actually your local municipal or state retirement fund (think CALPERS).
If you want to see who the bagholders are, look in the mirror and your 401k.
How about this? Gee, my competitior is making big bucks making bad loans and securitizing them. And taking all my customers.
I know it’s bad in the end. Do I shut down my lending operation, fire everyone, and have the board fire me for underperforming. Or do I do what everyone else at the Country Club is doing, collect a big bonus, and blame the overall economy when EVERYONE loses money together?
It takes guts to tell the truth and act accordingly, in any industry including finance.
I agree WT. It is incredibly hard to “swim against the tide” in any organization much less banking.
The herd mentality, the “everyone else is doing it” mindset is pervasive. I don’t think its all that much worse today than it has ever been, its just the leverage of really large organizations and the speed with which really bad (but near term profitable) ideas can gain momentum.
Its just like renting when everyone else is buying (even idiots) and bidding everything up mindlessly. How do you buck it?
Since YOU didn’t participate in the run up, YOU must be an idiot….therefor the question is; are you going to REMAIN an “idiot” or join the party?
I once questioned a “genius” in my banking career. It was in the early 90s and rates had been trending down with remarkable consistency. He was running a portfolio investing collatoral from my securities lending efforts. By extending the maturities he was “killing” the market. When I asked him what he’d do if rates turned up he basically told me I was an idiot and had no business questioning his work.
Outcome? I got fired a while later, and nine months later he was fired as well as, when rates “unexpectedly” went up, his billion dollar portfolio supposedly (consisting of virtually no risk) lost the company a 100 million or so.
Moral? The bank loved his performance so they wouldn’t “look a gift horse in the mouth”. The longer he “performed” the less they scrutinized it. The answer is really to do just the opposite; when someone WAY out performs you have to REALLY scrutinize what’s going on.
Unfortunately, that’s conterintuitive, against human nature and very hard to do in any organization that “worships” business heros.
Well, some fo these explanations seem implausible to me, armchair mortgage “expert” that I am (NOT).
To say “Banks just initiate the loan, then sell it to others” seems like a shortsighted explanation. The point is that Banks would never do such a thing unless they believed that there was another entity that would buy it. Thus, my question would just transfer over, and be “Why would there be these other entities that would buy such bad loans”. If we have the smarts, for example, to realize that “japanese financiers can’t conceive of the ignonymity of bad debt”, then wouldn’t japanese financiers also have the intelligence to realize that americans have no such compunctions? The point is that there is an ultimate bag-holder out there. I dont’udnerstand why anyone would volunteer for that role.
The immediately above explanation makes more sense, and is simultaneous more scary by far. It seems to indicate that our economy is ruled by short-term interests, exuding from persons more interested in fitting in to a culture (financial one, in this case) than in making good decisions.
“It seems to indicate that our economy is ruled by short-term interests”
BULLSEYE
The question is: “To what extant do these multiple layers of transaction reduce risk by aggregation, and to what extant do they simply disguise risk and encourage it to be mispriced?” This is IMHO why last year we kept hearing “There has never been a national YoY decline in prices*” You can the severety of losses caused by local market declines by aggregating many markets together. Of course in the face of a NATIONAL credit bubble, this does little to reduce risk, and it can reach systemic proportions.
Keep in mind that a lot of motivations exist at a more personal level - lock in that huge bonus and who gives a monkey if it goes pear shaped two years down the road. This definitely applies to the sellers of MBS. It probably also applies to the buyers. They look good for a few years, collect massive bonuses and waltz off when the chickens come home to roost.
Another point, missed here so far as I have read, is the related to why M3 is no longer reported.
The Fed is monetizing debt, and has been for several years now, at a historically unprecedented pace. How do you think the PPT is being financed? Where are some of these off-shore hedge funds getting the money.
Liquidity was at an all time high, required reserves were at an all time low. The extra money MUST go somewhere. Much of it went to buy MBS’s. Yeah, they hedge the risk, and put a tiny little premium on it, but they have so much extra money that they have to do SOMETHING with, that no one is examining too closely the wisdom of what they are doing.
Until later. Then we will lynch Alan Greenspan, but it won’t solve the problem. But bigger/stronger government will be quite ready to propose a solution. And all these FB’s will have to choose: Accept the government solution, or face the ugly alternatives. Millions of them. Voters. Outraged and scared. What do you think they’ll choose? They’ve already demonstrated that they don’t look too far into the future about the consequences of their choice.
Yup, and the stock bears who let anyone know their opinions in anything other than insider e-mails, later revealed in investigations, also got fired in the late 1990s.
Works both ways. Everyone is dumping money into condos. So why won’t anyone build and finance a spec office building in NYC, where a shortage is reaching a crisis and rents are going through the roof? Because everyone got so burned in the early 1990s, and only an “idiot” would build a building for small business without a big corporate anchor tenant.
We added 50 million square feet in the 1980s, 4 million in the 1990s — before subtracting the WTC and a ton of space converted to condos. It was what everyone was doing, and then what no one is doing. People sure get paid big bucks in this town to follow the herd. Thinking inside the box seems to be what gets you in the club.
“A sound banker, alas, is not one who forsees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him”.
- John Maynard Keynes
A quote for the ages. Will be much in use next year.
OMG that quote is so disgusting it’s almost beautiful.
Keynes’ quote is right up there with a personal favorite of mine from Mark Twain, “A banker is a fellow who is happy to lend you his umbrella when the sun is shining but then wants it back the minute it begins to rain.”
Does it make sense to not be ruined but keep that fact under your hat so as not to piss off your peers? LOL
All comments above seem to suggest one has to “sell their soul” to achieve financial success. I was wondering if anyone else might expand on some other survival skills during these times of mania.
I’ve come to conclude that they should offer extra credit in college for successfully cheating on tests, to prepare people for the real world.
Public employees are also expected to come up with data and analyses to demonstrate the rightness of the deals that are getting done. Appraisers, accountants, stock analysts, brokers, doctors applying for insurance compensation, insurers looking for accounts, used car salesmen, etc.
I get to tell the truth in my current job. A perk not to be underestimated. But it doesn’t pay as well as jobs with a conflict of interest.
That is easy: Consistently contribute real value. A person who does that will end up being broadly valued.
When I was in college there were a lot of cheaters and some of them did quite well for themselves, but the folks who did really very well indeed, who pushed the boundaries and made products people wanted to buy and formulas beancounters sought out were not the ones who cheated. They are like Winter Shakers, staying for a while, helping out, going through the motions, then moving on as soon as the weather is warm enough for them to be mobile.
Not always Mole Man, I made my firm millions and ended up fired.
Why? My manager was a pathological liar and a narcissist. He took credit for my innovations and absolutely had to get rid of me. And, trust me, when you deal with a low life like this (admittedly they are very rare) they’ll do whatever it takes to satisfy their agenda.
“Contributions” mean nothing to them. If you deal with people of integrity, I agree completely. But, as with everything, the character of the people with which you associate is everything.
“But, as with everything, the character of the people with which you associate is everything.”
An lesson I learned at much expense. When faced with the choice of
(1)doing some exciting work for a lousy boss
OR
(2)doing some average work for a great boss
choose the boss. The work will always sort itself out and become thrilling, the boss will not.
To work for a good man is a blessing. It is really who you work for, rather than what you do, that mostly determine your success. Exceptions to this, are simply that. Exceptions.
banks don’t hold the loans like they used to they package them and securitize them and sell them off, a lot of them bought overseas. banks often have some residual liability if the loans suck but not like they used to.
Speaking of packaging them and sold them off…my sister just got a notice last week that her loan through Flagstar has been sold to Central Mortgage in less than a year. I’m not surprised that Central Mortgage will hold it for about a year, and sell it to someone else.
“Speaking of packaging them and sold them off…my sister just got a notice last week that her loan through Flagstar has been sold to Central Mortgage in less than a year.”
Yeah, Seattle,
Every creditor (I’m including all utilities in that term) we have except for 3 has changed hands in the last few months…. telephone/internet provider, gas/electric company, 401k holder, mortgage holder (2nd time in 4.5 years), credit card holder…Thank God Berkshire Hathaway owns my local bank. I am not comfortable with the names I am now writing checks to as I consider many of them to be predatory. Not sure there is much I can do about it except escalate the payments for earlier pay-off.
I can beat that. My daughter’s loan was sold 3 times in the first 4 months. They double billed the mortgage and FedEx’d threats to foreclose biweekly.She was so cool though the whole thing I would have been a nervous wreck.
he’s right on. the bag holders are too far removed to realize the debt instrument they hold is worthless. the banks are after fees–origination fees in a mortgage that is it. once they get their fees they often package the riskier loans to fannie or freddie in pools of the same type of loans and/or amounts. fannie believes these packaged pool of loans are safe because it is collateralized by home, but in reality the true value of those homes are worth a fraction of the debt instrument. The unknowing or careless investor think she is investing in something else like a derivative or something far removed from resembling a mortgage backed security. Those are the people that are holding the bag.
Good points. You should all see the story in today’s Las Vegas Review. In the story, USA Capital took investors money and then loaned to builders. Now the builders are all belly-up and the invesotrs wnats their money back. Classic example of the investors not having a clue. They just were greedy and saw high potential returns, so they invested. Not a clue about r.e. or markets, cycles, lending, construction, etc.
Generally people are like this. They want the most return and be damned the risk.
My local newspaper did a story about a development issue under discussion. A city council member was quoted as saying, “Nobody has time to read all the paperwork when purchasing a home”. I rest my case about investors and homebuyers.
…and too damn lazy to do the legwork.
Think of it like this. 7-11 is going to buy “x” amount of merchandise for resale in their stores. Some the merch gets stolen and is a loss but, by and large most is legitimately sold for profit. The cost of the sold items has a built in cost for the stolen items that we all have to pay.
Same thing with mortgages. Not all are goint to fail. They are bundled together and sold in a block. As long as your performing loans cover your loses on the bad ones + money for your profit. Then you are in business.
Big Gulp=McMansion?
Too funny!
“We Bought a 500K Home at the Flea Market”
Ben FYI:
“Georgia Foreclosures Jump 99%” (!)
http://www.ajc.com/business/content/business/stories/2006/12/05/1206bizforeclose.html
Subprime lender Ownit Mortgage shuts down
“Ownit ran out of cash needed to meet its obligations to repurchase loans from investment banks and others who bought them in the secondary market, people in the industry said. The banks, which convert the loan payments into mortgage-backed securities for sale to investors, can force the original lenders to repurchase loans if the mortgage borrowers default.
…
The end came quickly for Ownit.
“We were all working yesterday, assuming we were fine,” Dave Hanthorn, a New Jersey-based employee who sells the firm’s loans to mortgage brokers, said Wednesday evening. “At 5:15 last night we got the call that we were ceasing operations.” He said the company gave no explanation for its funding problems.”
Found another one:
Ownit a victim of sub-prime shakeout
“Ownit Mortgage Solutions, an Agoura Hills-based wholesale lender, has ceased operations and laid off 800 employees nationwide, part of the shakeout in the sub-prime lending business.
One employee, among 300 to lose their jobs in California, said he learned of the company’s demise Tuesday while manning the Ownit booth at a mortgage conference in Las Vegas.
“Suddenly, people were all rushing over and practically throwing their BlackBerries at me,” said Kevin Panet, a marketing and training manager. “The messages they were getting from people at the company said things like, ‘Thanks for the memories.’ ”
…
“The small and mid-sized lenders that specialize in those loans have been facing a lot of pressure lately,” said John Bancroft, managing editor of Inside Mortgage Finance Publications Inc. in New York.
“These are companies that depend almost exclusively on new loans for their earnings. That market grew rapidly in the last 10 years, but it couldn’t last forever,” he said. “Eventually you reach just about every marginally qualified borrower you can.”"
So this is just the first. How long for a few more? Unfortunately, I think the MBS buyers will ignore this wake up call. That’s got to suck, losing one’s job weeks before Christmas. Oops.
This isn’t going to help the ventura counry housing market. Oh,its not enough to exactly hurt it either. Mubble markets inventory tracking shows over 6,500 homes already on the market in Ventura country and Just over 1,100 in pre-forclosure. So 300 people out of a job… won’t budge the statistics much.
But soon we’ll see credit tighten. We all hate the idea of bidding against someone doing an 80/20, soon that will end. Soon being in about 4 months…
Neil
Not the first by a long shot. Try these:
H&R Block’s Net Loss Doubles on Falling Mortgages
The party’s over at Kirkland mortgage company
This number 10 or so. After the 2nd one we jokingly asked Ben to mainatin an REIC deadpool.
Add Harmony mtg, Ameriquest retail closings, ….
There was also one yestarday too - Sebring Capital Partners. These guys are dropping like the slimy scum bag files they are. OC will be killed in this massacre as that “conservative” town is home to many of these liberal lenders!
“A major investor stopped funding Sebring’s loans as a result, forcing the company to seek a buyer, the former employee said. Sebring had to close after a potential acquisition fell through.”
Listen up, people. Everyone is overlooking something here. Right now the price of a house is set by how much a buyer wants to stick his neck out to buy it. Getting a mortgage is no problem.
That is all about to change and when it does, the bottom is literally going to fall out of the market. I can feel it coming. I’ve been predicting this and waiting for it for a long time.
Here is whats happening. All these sub prime, ARM and IO loans were packaged up and sold off on the basis that they were backed by a secure asset (the house) and the future interest payments were going to make up for beginning interest shortfall. I mean what idiot would buy an MBS when it pays less than what one can get for buying government funds !
HOWEVER, as the above quote shows, investors are now figuring out that MBSes aren’t going to return squat ! First of all, everyone has been refinancing their homes before the upward adjustment kicks in. So the investors are never getting the sweet part of the return, only the poor part.
Secondly, they are beginning to realize that the asset that underlies the MBS isn’t worth the stated value ! Remember all the mortgage fraud that was going on ? Well, that directly affects the bondholder if they have to claim assets to get their principle back. Sure, the paper value of the mortgage (and supposedly the house) was $500K. But the appraisal was over stated and there were $50K worth of kickbacks and incentives, so the WAS worth $400K and is only worth $300K sold at an auction. The MBSs don’t have a decent asset behind them !
The third problem is the default rate that appears to be steadily climbing with no end in site. Defaults are already significant and we haven’t seen $100 oil, the ARMs haven’t ratcheted up and the depreciation has only just begun !
This is an absolute no win situation for the MBS buyers. These people won’t stay stupid for long. You can expect that in the next months the market for MBSes is going to totally dry up at the current rates, if not for any rate !
Whereas currently most buyers can get a mortgage, in the future mortgages are going to be very hard to qualify for. And you can imagine the devastation that will wreak on the market !
And to top it off, its a vicious circle. First the MBSers realize the problem and they start selling or they stop buying them. That dries up the credit for the banks. That hikes the mortgage rate or decreases the liquidity for potential homebuyers. That decreases the number of buyers and increases inventory. That forces buyers to drop prices. Which puts more people under water and makes more people unemployed. Which makes more foreclosures, which kills the MBS people even more !
We are in for a massive, massive correction here.
Reply to this comment
Maybe I need to say more here.
Most financial mania run until the credit tightens. The current housing bubble appears to be an exception to the case because credit didn’t seem to tighten much, if at all. And if you listen to some of the housing bulls, you can see they keep saying that the economy is doing well and people still have jobs and the mortgage rates are still historically low, so IN THEORY the bubble should continue. It actually appears as though people got wise to the bubble and RESTRAINED themselves and that is what started the downturn.
However, the real downturn won’t happen until the credit dries up. That is when the market will collapse like you have never seen before. That is why Buffet says “you don’t see who is swimming naked until the tide goes out”. People, the tide hasn’t gone out yet !
Remember when the dot com bubble crashed ? It was April. Why was that important ? People had to sell stocks to cover their taxes. Day traders made money, they had to sell. Liquidity started the dot com sell off.
Well, liquidity is going to start the REAL sell off in housing. The sell off we’ve seen thus far has just been balking buyers. Liquidity hasn’t entered the picture yet. As I explained above, when the MBS buyers back out of the market and banks have to underwrite the new mortgages themselves and house prices are falling by 20% per year, THAT is when you will see a mortgage liquidity crunch and THEN you will see who has CASH to buy a house and who doesn’t !
The days of IOs, ARMS, Subs and zero down are OVER. The new rules will be 25-50% down and an interest rate that gives the MBS people a decent return. And expect lenders to fully scrutinize the deal and the value of the home. 25% down won’t be enough if the price of houses is falling 20% per year.
It is going to get very, very scary out there in the near future.
Here is someone else saying the same thing.
http://wallstreetexaminer.com/blogs/winter/?p=157#more-157
Now this is interesting.
http://www.inman.com/inmannews.aspx?ID=59875
“and there is no evident credit crunch, now or on the horizon.”
In other words they don’t see that the MBS buyers will smarten up and tighten credit. That is where they are WRONG !
And when the MBS buyers do smarten up, the bottom is going to fall out.
Good points.
tweedle-dee (not dumb…),
Last year I posted some of Dr. Kurt Richebacher’s predictions, including a coming full-on collapse of the global credit market. Doesn’t sound quite so far-fetched now, does it?
“That’s got to suck, losing one’s job weeks before Christmas. Oops. ”
These people lost their “job” a long time ago, they just realized it today!
“Suddenly, people were all rushing over and practically throwing their BlackBerries at me,” said Kevin Panet, a marketing and training manager. “The messages they were getting from people at the company said things like, ‘Thanks for the memories.’ ”
This sounds so familiar….where did I hear this before? Oh yeah, that’s right, during the last bubble implosion ONLY SIX YEARS AGO.
Apologies for the caps. I’m simply floored this happened again so quickly…
How much would one of these “practically thrown” Blackberries go for on eBay?
I am still holding out for one of those neat-o Hermann Miller aeron chairs.
So it begins……
And so it ends…
It was the best of times, it was the worst of times…
I think the most significant quote from that article is:
“The banks, which convert the loan payments into mortgage-backed securities for sale to investors, can force the original lenders to repurchase loans if the mortgage borrowers default.”
Uh, nope you can’t do it if they are out of business. I wonder if anyone in the banks or MBS buyers have really thought about what happens when the subprime ‘originators’ go belly up.
Exactly.
It’s called “counter-party risk,” and isn’t much of an issue when the price of the underlying asset is going up 20 percent per year.
Yeah, if an underwater owner is simply able to toss the keys in the driveway, shouldn’t the lender be free to simply toss the building keys in the parking lot?
Ha ha. Ownit got Pwned!
The end came quickly for Ownit.
“We were all working yesterday, assuming we were fine,” Dave Hanthorn, a New Jersey-based employee who sells the firm’s loans to mortgage brokers, said Wednesday evening. “At 5:15 last night we got the call that we were ceasing operations.” He said the company gave no explanation for its funding problems.”
I’m not a rocket scientist, but I think I would know the default rate of the stuff I was packaging and selling off. Then I would know ahead of time whether the company’s days were numbered or not. How clueless is this idiot.
Trusting in the Triumph of Hope over Experience:
http://wallstreetexaminer.com/blogs/winter/?p=157#more-157
Superb stuff as always.
Russ, you got it goin’ on.
I don’t understand the securitization dynamics all that well either, but I’m amazed that there are still buyers for sub-prime portfolios. Isn’t the writing on the wall visible to even the most passive overseas investors?
I mean, the most you can possibly get from these things is the interest and principal being paid by the FBs, minus the hefty layered fees of the originating lender and the various middlemen. And the higher the yield, the more likely the borrowers will default. I simply can’t believe the risk-return ratio on these things can possibly pencil out, and I’m baffled as to why anyone is still buying them.
They hedge them.
this spells infection of the highly dubious derivatives market i.e. default swaps … could be a recipe for dun dun dunna:
systemic financial failure
Yes, but the hedge has gotten significantly more expensive this week. Spreads on the ABX BBB tranche (the ABX is the mortgage-backed credit derivative) widened out over 100 basis points this week alone.
Nobody really does. The guys that trade and hedge these MBS “products” are focused on relative rates of return and hedging costs vs. failure rate. They don’t see (or care about) the big picture at all.
The whole thing is going to blow up at some point.
What’s the counter-party risk on these hedges? Are hedge funds making “heads I win, tails I go under after paying myself big bonuses and you lose” bets?
I’m not a finance guy, but it seems to me that hedge funds are what Enron was — an unregulated futures and options market. Real futures and options markets impose rules on their members to ensure they are adequately capitalized, and back up the contracts collectively if someone goes under and cannot pay.
An attempt to describe an MBS hedge on subprime loans:
1)Purchase MBS
2)Strip MBS into 2 parts - part one is interest only with no buyback provision - interest is fixed for 15 years; part 2 - YTM no interest; call date 15 years.
3) buyer of part 1 - strips interest thru addtl derivatives from 1 year to 10 year
4) buyer of part one insures interest - currently 50 basis points.
5) Traditional spread on this transaction was 300 - 500 basis points, currently the spread is under 200 basis points.
6) If all goes well buyer of part one has picked up loose change of 50 basis points
1a) These derivatives are treated differently for tax purposes. There is no interest received, but the same type of derivatives are generated.
From 1 MBS bond - 10 derivatives were created, in theory another set of derivatives could be fractioned, but the potential profit would approach 0.
The risk is not so much the default of the original borrowers, the risk is increased volatility that results in default of the derivatives with the spread going back to 500 basis points. See LTCM
Isn’t the writing on the wall visible to even the most passive overseas investors?
I keep harking back to that excellent Businessweek article. Even if the FB pays the interest-only or neg-am option amount, the mortgage bank is allowed record that the fully amortized amount was paid. That’s why all those sub-prime lenders reported so much “profit.” Could it be that the foreign investors think those loans are being paid in full just fine, and so they don’t know it’s a risk?
txchick57, but what happens when/if the “hedges” don’t work out?
What if you can no longer find a hedge?
I know, but that’s what the theory is.
Yeehaw. Got a buck thirty off the Trolbert short. Guess the husband gets to eat this weekend
You called that superbly yesterday, let’s hope it goes for a while.
Than you’d better hide…
Hedge or hide
So these brokers make bad loan after bad loan, taking their fees, and then a few repurchases put them out of business. Where do the people that bought the bad loans go next? Somebody has to pay. Who has the deep pockets to pay back the money they lost? If the MBS market cannot find a deep pocket expect that market to freeze up.
from today’s Milwaukee paper:
Metro Milwaukee home builders logged another slow month in November, industry tracker MTD Marketing Services LLC reported today.
Communities issued 148 one- and two-family building permits in Milwaukee, Waukesha, Washington and Ozaukee counties, a 32% drop from a year earlier.
This year has been marked by the lowest production levels in seven years, though what’s being built is bigger and more expensive than ever, MTD data shows.
http://tinyurl.com/ydchpk
Folks, heard a blurb about the US losing in supreme court over currency dicriminating against the blind. They apparently are going to use different size bills. My question is makes all the cash dispensing mechanisms (atm, video games, soda machines) hat both accept and diperse dollar bills. That might be a stock to play if it hasnt already.
Jesus, could i pls proofread my own comments, sorry for the headache reading that.
My guess is that it will soon be a convenient time for the U.S. to have to change the look of their currency anyway. Perhaps a bit too convenient on the timing? Tin foil hat off now.
That is not true. The only decision has been to begin investigating the issue. More likely would be a system of bumps, abbraisions, or cut outs but no one really knows because the whole idea is completely new. That is why the next step is study. Anyone wanting to stay on top of this really needs to be nimble because it feeds into all the other currency printing and exchanging issues. The idea that US currency will suddenly change size has no merit.
I nominate the newer $10.00 Bill as the ugliest banknote in our history…
We only just caught on to the idea (the rest of the world had done it 10 years ago) that if you use bizzare color schemes, it helps defeat the ease in which a current color copier can counterfeit currency~
Great article on plummeting prices in FL:
http://www.nytimes.com/2006/12/06/business/06leonhardt.html?_r=2&ref=business&oref=slogin&oref=login
Most comments are in line with this blog. However, hail to Howard for not getting it in the reader comments to this article:
As the owner of 3 properties on Palmer Ranch in Sarasota, I am seeing those same decreases. The list prices at The Isles on Palmer Ranch, where we bought a townhouse in March, at the top of the cycle, have recently been cut 20 percent. However, it is still a great area, and with something like 1,000 people a day moving to Florida, the current oversupply should be taken up fairly quickly.
http://www.nytimes.com/2006/12/06/business/06leonhardt-response.html
I picture Don Lapre and Carleton Sheets mingling with you
and sharing their secrets of wealth in this one:
http://tinyurl.com/yeehfr
People just dont realise what supply and demand is …
Stock tips are stock tips when you tell 1 person. This stock is going up soon, buy it works great for 1 person even if its true. Tell it to everyone under the freaking sun, and the first one to buy it will get in good and potentially have it sky rocket, and he could (if he is smart) unload it a few weeks later when the others are buying. Promptly we have a bubble and the second half is filled with losses.
So people looking for income properties bought condos and guess what, so did a whole million people, so they all fought for a piece of the pie and drove up each others prices. Then there is the income part - where you sell it. Now again they all are fighting for the same piece of pie again. And guess what, here the lower price is usually the winner. So they are all fighting to lose more. Or rental, and same thing.
Cool.
Cow_tipping.
I have a question about the credit system in this country.
I have always lived within my means for my 35 years on this planet. I have never had a BK, generally pay my bills on time, never been late paying rent. A couple of minor collections in the past. I don’t use credit cards *ever* unless I’m forced to for example by rental car companies.
I make around 70K or more.
A few years back I applied for a mortgage at a few different places and was denied by all of them. Other than the couple/few minor collections, as far as I could tell the main reason was that I WAS NOT A DEBTOR.
My question to all of you then is, why am I being punished for being a responsible citizen and living within my means?
Catch-22. You have demonstrate you’ve paid off a loan to get a loan. Simple solution: use your credit card to pay for everything that you would normally buy and pay off the balance in full every month. That gives you a “credit history” but you won’t have to pay any interest on your charges. My .02 cents.
Thanks for the advice. I am aware of, and have considered that option, and I know it would bring up my score.
What I’m getting at is why should that make me a better credit risk than somebody who lives within their means and pays their rent and bills on time? If I do what you suggest, wouldn’t it make me even more likely to pay my mortgage on time than someone who only gets a credit card to willfully manipulate the system?
If the system was truly fair(as in “Fair Isaac”), shouldn’t we reward those who hitherto have acted responsibly and assume that when they do ask to borrow, especially for a mortgage, that they have every intention and ability to make the payments?
I wonder what would happen if I got an initiative on the ballot in my state making it illegal for any credit bureau or lending institution to hold lack of debt against you in any way shape or form providing that you have verifiable income source, pay your bills, and save.
See I would almost buy the whole “lack of repayment history” argument, except that it is my understanding that they give you a higher credit score if you only make the minimum payments.
I could understand this requirement for issuing a credit card or raising the limit on one. But can we agree that if you are responsible and live entirely within your means that this shouldn’t be held against you when applying for a mortgage?
One could argue that a mortgage is a debt just like a credit card, so the same rules should apply. But it isn’t. Current bubble pricing absurdity aside, the mortgage is backed by a real asset which the bank can forclose on and likely recover the entire loan amount.
Again, I think this is wrong. Especially when a “cheap” trick(the previous poster’s suggestion) can be used to circumvent it.
From my POV, this requirement servers only one real prupose: to generate more business/transactions for the credit card companies.
In effect, I am being forced against my will to do business with an entity(or entities) which I despise, just to get a mortgage.
That’s gotta be a violation of anti-trust or RICO laws or something.
So what do you guys think about my ballot initiative idea?
I love your initiative and would vote for it in Arizona.
I’d vote for it in NY. I have a special hatred for the credit reporting agencies…as a former victim of identity theft, I learned the hard way how lazy and indifferent these folks are. Even following the provisos of the Fair Credit Act barely motivates them to investigate fraud. Given the clout they hold over individual Americans, they really are a sleazy bunch.
Also, I did want to point out that the ridiculously low lending standards of the last few years, as illustrated on this blog many times over, in my mind prove that primary lenders don’t give a rats ass about “demonstrating you’ve paid off a loan.”
Therefore I can only assume that the real reason for this requirement is to condition people to borrowing to pay monthly expenses.
It’s wrong to punish people who live within their means, and that’s exactly what’s going on here.
I have a relative who is probably the richest person in the whole family. A decade or so back, he decided that he wanted to buy a home after renting for a few years out of college. So he bid on a home that went for something like $250 with 175k of his own cash down, mortgaging the rest. Mind you, he managed to get this $175k by NOT using credit cards. Ever. He never took out debt. Paid cash for cars, and so on.
The bank refused to give him a mortgage for the house, stating that he was risky because he had little credit history. The fact that he had a six-figure income and no other debt save the impending mortgage didn’t matter. No dice. No mortgage. He had to go back to his landlord pleading that he show that he paid rent, get records of paying bills and so on. It was a real mess.
My first reply seems to have gotten lost. Apologies if it suddenly shows up and gets duplicated, but here it is:
Thanks for the advice. I am aware of, and have considered that option, and I know it would bring up my score.
What I’m getting at is why should that make me a better credit risk than somebody who lives within their means and pays their rent and bills on time? If I do what you suggest, wouldn’t it make me even more likely to pay my mortgage on time than someone who only gets a credit card to willfully manipulate the system?
If the system was truly fair(as in “Fair Isaac”), shouldn’t we reward those who hitherto have acted responsibly and assume that when they do ask to borrow, especially for a mortgage, that they have every intention and ability to make the payments?
I wonder what would happen if I got an initiative on the ballot in my state making it illegal for any credit bureau or lending institution to hold lack of debt against you in any way shape or form providing that you have verifiable income source, pay your bills, and save.
See I would almost buy the whole “lack of repayment history” argument, except that it is my understanding that they give you a higher credit score if you only make the minimum payments.
I could understand this requirement for issuing a credit card or raising the limit on one. But can we agree that if you are responsible and live entirely within your means that this shouldn’t be held against you when applying for a mortgage?
One could argue that a mortgage is a debt just like a credit card, so the same rules should apply. But it isn’t. Current bubble pricing absurdity aside, the mortgage is backed by a real asset which the bank can forclose on and likely recover the entire loan amount.
Again, I think this is wrong. Especially when a “cheap” trick(the previous poster’s suggestion) can be used to circumvent it.
From my POV, this requirement servers only one real prupose: to generate more business/transactions for the credit card companies.
In effect, I am being forced against my will to do business with an entity(or entities) which I despise, just to get a mortgage.
That’s gotta be a violation of anti-trust or RICO laws or something.
So what do you guys think about my ballot initiative idea?
SR,
you can actually get an FHA loan using alternative credit. Bascially, you can show that you have paid the utilities, rent, etc. on-time. And you can use that as your credit. You just need to borrow within the FHA limits for your area.
Banks don’t want to have to work determine if your a good risk. The wasnt to use a FICO score to determine this. The answer is to find a bank that will do a manual underwriting. There are lots of rich people that have crappy or no FICO score, in fact, people that don’t use debt are generally in pretty good financial shape. A quality lender should have no problem manually underwriting a loan for you.
Good advice, let me add that in order to raise your credit score you should only use one third of your available credit. Let’s say your limit is $1500, then you should only charge around $500.
It’s not true that you have to carry a balance or make minimum payments to raise your score.
criminal probe of US Muni bond market:
http://www.bloomberg.com/apps/news?pid=20601103&sid=awq77C8cUwZA&refer=us
http://www.zillow.com/postings/MakeMeMove.htm
I love the smell of desperation, in the afternoon~
Ben, you may need to start considering the effect of the commercial real estate bubble as clearly the momentum is now in that sector. Big bubble potential. A new US record was just set in NYC.
http://www.nypost.com/seven/12072006/business/tower_ale_on_5th_business_lois_weiss.htm
TOWER $$$ALE ON 5TH
$1.8B RECORD AT 666
By LOIS WEISS
December 7, 2006 — Real estate giant Tishman Speyer Properties is selling 666 Fifth Ave. to the Kushner Companies for $1.8 billion, the most ever paid for a single building in the U.S., sources told The Post.
The silver, 41-story building is home to the NBA store, Hickey Freeman mens’ shop, and the Grand Havana Club, which is perched in its penthouse. Office tenants include the Orrick law firm and Citigroup, which has its sign on the roof.
“It just continues to show the strength of the New York investment market and they are not making any more buildings on Fifth Avenue,” said Steve Siegel of CB Richard Ellis who was not involved in the deal. “There is probably a lot of unrealized upside in the rent roll.”
Tishman Speyer had originally planned to sell its partner’s 95 percent share in the building, but decided to sell 666 Fifth outright.
Buzz about bidding for the building, which was set to start this week, and rumblings of the preemptive purchase bounced around law firm Fried Frank’s holiday party Tuesday night at Cipriani’s.
Kushner Companies will pay a whopping $1,200 per foot for 666 Fifth.
————————————–
that’s crazy money/sf for a commercial building. Equivalent to mid range residential luxury condominiums.
———————————————-
The previous largest single asset sale was the Met Life Building at 200 Park Ave., which was purchased for $1.72 million, or $600 a foot, by Tishman Speyer.
Luckily, by all evidence, this bubble can keep on inflating into the indefinite future… NOT!
Just a thought…wondering how a State like New Hampshire will fare when the shakeout is done. NH has no income tax, but garnishes a massive amount of taxes from property owners. Seems like lean times ahead for the “live free or die” State.