“Visibility Limited” In “Fluid Environment”: CEO
Some housing bubble news from Wall Street and Washington. MarketWatch, “Pulte Homes Inc. swung to a quarterly loss late Wednesday, as the homebuilder took charges to reduce its land inventory in a slumping housing market. The homebuilding pretax income included about $350 million of land-related charges and impairments, the company said.”
“‘Our earnings visibility going forward remains limited due to rapidly changing market conditions and uncertainty regarding possible future land- related charges,’ said CEO Richard Dugas. ‘For the first quarter of 2007, we are providing earnings guidance in the range from break-even to a loss of $.10 per diluted share, exclusive of any additional land-related charges. Given this fluid environment, we are not in a position at this time to provide full-year guidance for 2007.’”
“Pretax margins as a percentage of home settlement revenues for 2006 decreased 880 basis points to 7.2%, reflecting a 600-basis point decline in gross margins from home sales, and lower profitability on land sales. Net new home orders for the fourth quarter were 6,446 homes, valued at $2.1 billion, which represent declines of 34% and 38%, respectively, from prior year fourth-quarter results.”
“Pulte Homes’ backlog as of December 31, 2006, was valued at $3.6 billion (10,255 homes), compared with a value of $6.3 billion (17,817 homes) last year. The cancellation rate, declined to 34.7% in the fourth quarter from 35.8% in the third quarter.”
The Motley Fool. “Fewer homes are selling at lower prices and that’s a margin-crushing disaster for real estate developers like Pulte. For all of 2006, earnings fell to less than half of what Pulte earned in 2005.”
“As a telling sign that homebuilder vision isn’t exactly 20/20, back in June, Pulte was looking to earn between $4.70 a share to $5.00 a share in 2006.”
“Maybe that’s why I’m skeptical when I hear homebuilders call bottom. Backlogs are still diminishing at homebuilders, and cancellations continue. Over at Pulte, the company is closing out the period with a backlog of fewer homes, and at home sale prices that are $5,000 lower, than at this point last year.”
“When will that recovery happen? The only thing I know is that the least credible sources on pegging a turnaround are the homebuilders themselves.”
“The Federal Open Market Committee latest policy statement shows that members are ‘clearly hawkish’ and are ‘proving themselves to be ever so vigilant about inflation,’ said Gregory Miller, chief economist at SunTrust Banks.”
From Bloomberg. “In the year since Ben Bernanke became chairman of the Federal Reserve, the nation’s central bank has led a push by regulators, including the Comptroller of the Currency and the Office of Thrift Supervision, to raise mortgage lending standards, making it tougher for borrowers to get a loan.”
“Reducing the number of people who can secure a mortgage also may threaten the recovery of the U.S. housing market that the National Association of Realtors is predicting for the end of 2007.”
“‘The sub-prime wholesalers who used to be banging on the door have been conspicuously absent in the last few months,’ said Keith Shaughnessy, president Foundation Mortgage Corp.”
“Underwriting standards for sub-prime loans have been too low for at least a year, resulting in loans being issued to borrowers who have little chance of paying them back, Shaughnessy said. That will hurt the insurance companies, pension funds and asset- management firms that are holding some of the U.S.’s $6 trillion of mortgage-backed securities in their portfolios, he said.”
“‘There’s a monster beneath the surface of the financial markets,’ Shaughnessy said. ‘No one knows when or where the credit crisis is going to rear its ugly head.’”
“Investors are demanding an average 1.6 percentage points more than benchmark rates to buy BBB-rated bonds backed by sub- prime mortgages, up from about 1 percentage point in August, data compiled by Barclays Capital show. Investors seek ’significantly’ higher yields to own the securities whose underlying borrowers struggled to meet their obligations within a year of taking the loan, according to Barclays Plc.”
“Since July, when ABX indexes based on 20 sub-prime mortgage securitizations created in the first half of 2006 debuted, the annual cost of credit-default-swap protection on BBB bonds bought with contracts tied to one of the indexes has about doubled to more than 3 percentage points, according to Barclays.”
“The percentage of borrowers as of September who had fallen at least two months behind on sub-prime mortgages taken out last year was the highest ever, twice the average, according to data compiled by UBS AG.”
“FMF Capital Group is a residential mortgage lending company that originates and funds primarily nonconforming or ‘nonprime’ mortgage loans in the United States and sells those mortgage loans to institutional loan purchasers.”
“Today the Board of Directors has accepted the resignation of Edan King as Co-CEO of FMF Capital Group effective January 31, 2007. Robert Pilcowitz will continue to serve FMF Capital Group as CEO and will waive his compensation until further notice.”
“FMF Capital LLC, the operating company, has continued to tighten its mortgage lending guidelines and reduced its corporate staffing levels in response to mortgage industry developments and institutional investor requirements.”
The Daily Advertiser. “Martco is closing its oriented strand board plant here, company officials said. The closure will eliminate about 190 jobs, according to Martco Limited Partnership.”
“In announcing the shutdown, officials noted that in the past six months ‘the nationwide housing market has plummeted and is not expected to rebound in the near future. … Due to continuing low OSB prices and the negative financial impact of OSB operations, Martco OSB plant is ceasing operations, closing its facilities, and reducing its work force.’”
The Oregonian. “Weyerhaeuser announced Wednesday that it would close its Bauman sawmill near Lebanon on March 30, laying off 70 employees. The announcement follows Weyerhaeuser’s decision in December to close two other Oregon mills: a plywood mill in Springfield, which employed 86, and a veneer plant in Coburg, which employed 42.”
“The Bauman mill, built in the late 1940s, produces timber and lumber for residential and commercial construction. It is being permanently closed, Weyerhaeuser spokesman Mike Moskovitz said. ‘I think everybody’s surprised,’ Lebanon City Manager John Hitt said. ‘We hate to see those jobs go.’”
The LA Times. “Members of the Senate Banking Committee said Wednesday that they would quiz the regulator of mortgage finance company Fannie Mae about approving more than $14 million in pay for the current chief executive.”
“The pay for CEO Daniel Mudd was ‘astounding’ since the company has not yet emerged from an accounting scandal that has so far forced the company to restate $6.3 billion in earnings from 2001 to mid-2004, Sens. Chuck Hagel of Nebraska, John E. Sununu of New Hampshire and Mel Martinez of Florida said in a statement.”
“Office of Federal Housing Enterprise Oversight Director James Lockhart defended his agency’s decision to endorse the pay, saying it was ‘comparable’ to pay for heads of similar-size banks and insurance companies.”
“Still, Lockhart said, excessive pay is a concern ‘because excessive compensation can lead to excessive risk-taking, and excessive risk-taking can lead to the kinds of problems they’ve had in the past.’”
‘For the first quarter of 2007, we are providing earnings guidance in the range from break-even to a loss of $.10 per diluted share, exclusive of any additional land-related charges.’
Is he saying they may lose money even with no write-offs?
Some Oregon lumber prices.
That’s what I read it as Ben. The Motley Fool piece was a good find because at least they pointed out that the least credible source for housing info is the builders themselves. These guys aren’t missing earlier forecasts by a little bit. They are missing by huge margins. Sometimes I wonder why anyone gives credence to what comes out of CEOs mouths.
that just showed that these guys aren’t that smart. if they were real smart, they could have averted all the loss. all they have to do is read this blog and face reality, instead of buying into that paradigm shift of re market craps.
A CEO saying anything but good news is like saying, “oh, were we overrun while I was asleep on watch?”
Never gonna happen.
“if they were real smart, they could have averted all the loss.”
Easier said than done. It is hard to guage the collective effect of all other builders on the future profitability of your building plans. And very easy to get fooled by randomness in attempting to assess the situation, especially when the economists who analyze your industry keep saying a soft landing is on the way, market conditions will improve later this year, and, by implication, you should not go overboard cutting back on your building plans.
that’s why i said “real smart”. because real smart people can do things stupid people can not, like “guage the collective effect of all other builders etc.”
I agree with GS. Homebuilders are in business to build homes…bubble or not. They can scale back or ramp up, but in general they should always be building.
“They can scale back or ramp up, but in general they should always be building.”
Or going on vacation for two years…
I love the title of the MF article. Hee, hee.
I don’t know that builders are the least credible. From what I have been reading in these posts, the statements from the builders have been the most sobering. It is the NAR who is clearly the least credible.
The builders were totally caught by surprise when sales abruptly dropped off in Spring of 2006 (I know because I was working for one at the time). They probably really believed their previous forecasts. Now given the cloudiness of their crystal ball, I don’t think anyone would be too surprised if they miss their guidance again.
I agree with you here. When I read in the article the stmt “I’m skeptical when I hear homebuilders call bottom,” my immediate reaction was, it’s not the homebuilders who continuously call bottom. Not the lenders either. It’s the realtors.
Hey, Pulte, call me a bottom when you have 100,000 homes to sell, fewer qualified buyers, and sub prime lenders going out of business. Who the hell is going to buy your homes? One day after PHM goes up 5% on Jan 31, the bad numbers come out. Must mean a Strong Buy to someone on Wall Street.
The HB’s have their own subprime lending units who will give a loan to anyone who has a pulse. They package these into MBS’s and sell them to the GSE’s. Taxpayers end up holding the bag. That is why we must pressure Congress to either cut the strings with Fannie/Freddie or shut them down
“The only thing I know is that the least credible sources on pegging a turnaround are the homebuilders themselves.”
Nah. The purveyors of new homes sales statistics are the least credible.
Numbers, numbers, smubers…. SO, is Pulte’s backlog of 10,000 homes with a 35 percent cancellation rate mean that 3,500 of these homes are unsold?????
what do they mean by Backlog anyway?
Here is what lumber prices have done. Down about 35% over the last year.
http://quotes.ino.com/chart/?s=CME_LB.H07&v=dmax
Which will allow builders to cut prices that much more in the year to come.
Just over the border from Oregon, in Humboldt County, California, Pacific Lumber Co (PALCO) just filed for bankruptcy. They were buying logs from Oregon .. there might be an added domino effect to lumber jobs in Oregon.
stop that- highly paid gov officials say slump can’t spread to other sectors
WHY did PALCO file? To get out of some obligation? Or because Charles Hurwitz sucked the life (and logs) out of it?
It will take time for the PALCO mess to be revealed beffore anyone knows for sure — but many have noted loud sucking sound.
Yet, despite PALCO’s bankruptcy and the demise of the housing market in most of the country, the Humboldt county MLS this morning shows SFH inventory at 539, the lowest in over a year (it was 798 last July). Some of this is no doubt due to frustrated sellers yanking homes off the market, but there has definitely been an upsurge in home buying among GFs. Two houses in the neighborhood I rent in recently sold and people are moving in. It surprises me to no end. A lady my wife works with recently put a bid on a 12,000 square foot piece of land in Rio Dell (adjacent to the bankrupt PALCO) for $165K (asking price was $185K). The counteroffer came back as $190K. There are a tremendous amount of greedy sellers in Humboldt county, CA, and still a lot of GFs buying property. Will it ever end up here?
Anthony it is different here ya’ know. They aren’t making any more redwood forests!! No matter that the average salary is lower than the national average and unemployment is higher than the national or state averages. These s#%t boxes are made of REDWOOD and there’s no stinking bubble here — so they ain’t giving their houses away!! You didn’t know that?
(Rio Dell … oh man the demographics there are depressing and so is the view).
Excellent site guys. I notice that there are many links related to Central and North Florida but, very few for the real estate bust ground zero (South Florida). If anyone has any news regarding South Florida (specifically Miami-Dade County’s condo market), please share.
http://www.heraldtribune.com/apps/pbcs.dll/article?AID=/20070124/NEWS/701240437
I’ve been reading this blog for months now, and want to thank you for the wealth of knowledge I have gained. I bought a 4 bedroom tract house in Hollywood back in 2000 for $180K. We own our cars, have ample savings, no CC debt or heloc. Traditional 30 year mtg at 5% and put 20% down. Taxes and Insurance total approx. $6000 per year. I hate my neighborhood and desperately want to move. I commute 20 minutes to drive my children to private school (unhappy with local schools). My husband makes a great six figure income. My house is on the market for $425.00. We have plenty of equity and will negotiate. I have the second lowest listing price in the neighborhood. If you were me would you sell and rent (wait out the market) or keep the house and wait out the market?
Sell and be happy. 2nd lowest price isn’t good enough,though, if you ask me. You *must* get ahead of the market.
I would add,
Buy a primary residence if you really like it and want to stay in it for a while. With kids, I find moving them around a lot to be a bit of a pain. But, the beauty of renting (somewhat short term) is that it gives you time to find your favorite house.
I’m with Arwen on renting a primary residence. Invetment properties are another thing and liquidating is a no-brainer even when considering the tax consequences.
In your case - If you sell FIRST (MUST DO) and then use that cash as HARD negotiating leverage, you will probably end up ahead of where you are now, financially speaking.
Agree - 100%. Price your property about 5% under the next (accurate) comp and you will get the GF.
SEll…don’t chase the market down, and end up with nothing and stuck in a place you hate. Cut the price enough to generate a serious bid, take it and your equity and get out. And yes, park your tax-free gains in a CD or the like and rent until the costs of buying and renting are more closely correlated.
Most of us posting on this blog have a strong opinion that being a tenant is much cheaper and more sensible than being a homeowner right now. We are a self-selected audience of housing bears, but that doesn’t mean we are wrong. If you get “only” $300K for your house you would still have made a reasonable return. As Arwen says, you probably have to cut your price below ALL the competition to get someone interested. Pretend to be desperate even if you are not. Good luck. Don’t know if you noticed yesterday the article that 3BR in Vero Beach are now being offered by builders at $159K. Vero is a pretty fancy town.
Not fancy where those shacks are located. They are in the bush country, or palmettos.
Why are you selling? If you bought at a fair price and don’t need to move, then ignore the insanity around you. I think it’s a tad bit late to cash in on the bubble now.
I’m afraid if I wait any longer that the bottom will fall out. While I will still be in a position to buy, I will have lost the chance to make a nice gain on my house. My husband has been saying I’m a gloom and doomer. Yesterday, he changed his tune. He has a law practice that specializes in construction litigation and estate work. He has also opened a title company. The attorney’s title fund which insures him sent out an e mail to be very careful about making sure the loans are funded. He also spoke with an attorney who does defaults for banks. The defaults are rolling in so fast that they don’t know what to do.
Foreclosure and bankruptcy attorneys across the nation, who have seen defaults (hence business) up by 50% to 100% during the last year, are still being told to “get ready” by their lenders. Get ready? We’ve doubled foreclosures and they’re saying “get ready?” “Yes,” they confirm “This is only the leading edge of the wave.”
I’m looking for new space and will probably be ready to hire more support staff soon. I feel a chill at the idea that, while we’re going like gangbusters now, there is dramatically more to come. I’ve been at the office six of the last eight weekend days, and it looks like that little picnic is over.
For Miami Condo pricing info (asking prices) the best site I’ve found is Zilbert.Com……right now sellers are hanging tough in terms of list price, but there are several thousand units that are being completed in ‘07 and even more in ‘08……HUGE % of these units bought by speculators and investors and many will not be able to close….vulture funds are forming to scoop at the bottom (mid 2010 IMHO)…..On a side note one of the nicest and first to market bayfront condo’s in the Brikell area of downtown Miami is having problems with folks paying their monthly association fees…..some of this is due to out of the country owners, but even if you own a $2 million unit outright it costs $1500 month for dues and up to $40K per year in taxes, so about $60,000.00 anually in carrying costs…..now if you through in a toxic loan or HELOC then it just gets insane……Three units just went into the Miami Dade Foreclosure court system and this is unusual for JADE as in the past they could have either been sold or equitied up to pay the bills.
MCAA appears to be gone:
http://bakersfieldbubble.blogspot.com
Phones have been disconnected. I wonder if they left the lights on…
Speaking of lights … what is an average utility bill in a McMansion? I know it varies by geography but just wondered. This might be the first summer without AC for many. Hot and sweaty for lots of reasons.
Feed the implode-o-meter. Feed it!
Its a hungry little thing.
Look at calculated risk’s blog. Did you see the link on BBB MBS bonds? Yikes!
(But I admit to stealing the idea and just expanding.)
Or my blog.
http://recomments.blogspot.com/
Got popcorn?
Neil
Yes, I did read your blog and I hadn’t seen the original work, so your expanded model was welcome news to me! Good work Neil. I bookmarked your blog. Thanks.
My sister has a 3300sf in Texas and pays an average of $600/mo in utilities
Imagine what a 4500sf McMansion costs in the Southwest. My guess would be just about $200 for every 1000sf.
We are renting 5000 square feet in Virginia and it’s $300 a month. That’s for both gas and electric. (There are five here, so lots of cooking, dishes, laundry, and electronics). We have two sunrooms, so loads of windows. We keep the house at 70 during the day downstairs. It’s triple-zoned, and we never have more than one heat pump running at a time.
I live in a 3000 sqft TX house, two zones, electric heat pumps. Summer electric bill runs $300 a month. Why so much? $0.11 a kilowatt hour. I just about crapped my pants when I calculated it out. Any where else in the country, I’d pay far less for electricity. That is why it costs your sister so much.
DFW, TX: 14.5 c/kWh. That’s 3 times what I remember from WA state. As an aerospace engineer, my wife covers her ears every time I rant on the idiocy of burning petroleum for electricity. (We need the high energy density fuels for moving vehicles, damn it!
)
2700 Sq. ft in Michigan—gas and electric is $220 monthly.
Mortgage brokers are getting concerned !
http://forum.brokeroutpost.com/loans/forum/2/90713.htm
tweedle-dee,
Nice dig. By the way, thanks for the tip on the Canadian RE/MAX math miscalculation last week. CP / CBC eventually carried a longish piece explaining the compounding and how the real gains were about 5.3%, not 11%. As far as I know there’s never been a correction posted on the RE/MAX site, though.
The Motley Fool might have just sumized and coined the US Real Estate’s Epitaph with the term Margin-Crushing Disaster…RIP !
The Motley Fool. “Fewer homes are selling at lower prices and that’s a margin-crushing disaster for real estate developers like Pulte. For all of 2006, earnings fell to less than half of what Pulte earned in 2005.”
“Margin-Crushing Disaster”
Is this the new moniker?
“Margin-Crushing Disaster”
Sorry MF but we blew through that stage in the last six months of 2006. Like so many things in life we have moved on and the name of the game in 2007 is BK and I am not talking about the Whopper.
Countrywide Earnings Dip; Neg-Am Surges
Countrywide Financial Corp., Calabasas, Calif., has reported slightly lower fourth-quarter earnings than in the fourth quarter of last year, but also revealed a huge jump in accumulated negative amortization on its payment-option ARM portfolio. According to the lender’s earnings statement, it holds $32.7 billion in option adjustable-rate mortgages on the balance sheet of its bank, a 23% gain from last year. But its option ARMs have accumulated negative amortization of $653 million — a stunning increase of 782% over 12 months. Countrywide earned $622 million in the fourth quarter (down 3%), but had record earnings of $2.67 billion for the year. It funded $124 billion in the fourth quarter (mostly residential), an 8% drop from that of the fourth quarter of 2005. Acquisitions by its capital markets conduit fell 69%, to $2.7 billion. Countrywide now services $1.298 trillion in loans, a 17% increase from a year ago.
Up is down in this industry. As borrowers continue to pay less than their monthly interest, the principal on their loan increases. Since this loan principal is an asset to Countrywide, the value of their asset increases. An increase in assets is considered income. Therefore, negative amortization loans are huge moneymakers for Countrywide and other sub-prime lenders.
Does anyone else see a problem with this picture?
Nope. It’s “accounts payable” and perfectly legit — At least that’s what somebody told me yesterday when I asked about booking neg-am as profit (or assets).
Yes, it is legit, but would you be an investor in a company that earns its “income” by making loans its customers are not paying back?
I think Countrywide would have sold these loans off by now and just services them. Is this data suggesting CFC is keeping these loans on their books?
Countrywide is also a bank now, and they have been keeping more and more mortgages. The debate is whether they are keeping the best because Mozillo is so smart, or keeping the worst because they have to.
“‘There’s a monster beneath the surface of the financial markets,’ Shaughnessy said. ‘No one knows when or where the credit crisis is going to rear its ugly head.’”
“Investors are demanding an average 1.6 percentage points more than benchmark rates to buy BBB-rated bonds backed by sub- prime mortgages, up from about 1 percentage point in August, data compiled by Barclays Capital show’
Finally, after years of being riskloves as far as MBSes go, investors are getting the picture ! This is HUGE. This is the start of the end.
I really doubt investors are getting the picture, in the rest of the world nothing has changed and the appetite for risk is as big as ever; can’t imagine the US is much different.
Locals all excited because bonds are ready to be sold on this big mega mall that is supposed to save the CNY area from itself. I posted some housing blog info countering their comments that material costs couldn’t possibly be as low as they were in 2005…and mentioned the credit bubble expectations….like contraction in consumer spending.
Although that discussion was VERY active, no one touched my comments. Maybe it was more fun to call each other assholes, I don’t know. LOL Somehow I felt like the info I posted was akin to “the sky is falling” for them….and they were afraid to engage the nutjob.
Maybe they should look for a big furniture store as an anchor.
1.6% more interest desired, because subprime defaults might run up to 20% ?
As an engineer, I took classes on the non-nerdy business side of campus because there were women there to look at. Little did I know that this was what all the business majors were doing during class also.
I have always thought that insurance companies were heavy into MBS’s . Insurance Companies have always been big investors in long term loans because in prior lending cycles MBS’s were pretty secure investments .Now I don’t know if Insurance Co. are buying the A paper or the higher risk paper . My guess is that the loan paper marketed to the secondary market has been incorrect on the ratings of these securities in alot of cases .
Seems like nobody was watching for the fox in the chicken-coop. Now the foreclosures are starting to come in giving the secondary market the feedback of the quality of this paper . Like I have said many times ,they were making loans based on real estate going up and covering all sins .
Interesting post on the site Calculated Risk concerning the sub-prime credit markets:
http://calculatedrisk.blogspot.com/
Tanta on “Scratch and Dent” Loans
Note from CR: A friend sent me an excerpt from Fleckenstein’s newsletter yesterday and I forwarded it to Tanta. First, from Fleck:
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.”
I’ve been in the investment business over 25 years, and again, I have rarely seen someone so accurately call a turn in the market as he has done. Remember, we are just now witnessing a change in lending standards, and these will ripple all through the lending food chain, though thus far only small changes have occurred.
And the following are Tanta’s comments:
Thanks for the tidbits–a former colleague of mine used to get Fleck’s newsletter and you could frequently hear some serious snickers from that cubicle—we’d all have to go over and hear what Fleck said this time. Mortgage punks—the Secondary Marketing ones, at least–aren’t, in my experience, mostly permabears, but they’re cynical as the day is long. It comes from constant exposure to the underbelly of the credit monster.
“Scratch and Dent” is a real industry term. The approximate meaning is “loan with incurable defect.” “Curable” is a real industry term and indicates something like a loan that closed with too little MI coverage (a kind of “bad stuff that happens”): you can “cure” that by buying more coverage. If you can’t get the customer to pay for it, though (usually because you didn’t disclose the correct MI on the regulatory docs, and so if you start charging the borrower more MI, you then provide yourself lawsuit or pissy regulator material), the loan has a serious long-term yield problem and qualifies for a “scratch & dent” pool. A loan that once had a 30-day late but then made the last six payments is just “seasoned,” unless the late was EPD (Early Payment Default), in which case the loan, assuming it’s performing again, is S&D. (You can’t “cure” an EPD. It’s the mortgage equivalent of the unforgivable sin.) The stuff the rating agencies call “reperforming” is S&D. 99% of performing loans that are repurchased from an investor are sold by the repurchaser as “S&D.”
The actual industry term for seriously nonperforming loans (in BK, 90 days, nonaccrual, in FC, etc.) is “nuclear waste.”
I suppose you could get someone to take a loan with certain kinds of “misrepresentation” evidenced as S&D or NW—the ones, say, where income has been proven to be “exaggerated” but there is no other evidence of fraud that could mean a payable claim for the property seller or some other party. The ones with incurable title problems? No exit. If nobody can convey title, you can’t foreclose. Your only possible recovery comes from criminal prosecution, if you’re lucky enough not to be an unindicted co-conspirator yourself and therefore have standing in the courts. That will, of course, take longer than a lot of these folks can stay solvent.
Fleck’s informant is saying that scratch & dent is getting nuclear waste bids. This implies that nuclear waste is probably heading for “no bid.” In any case, one is generally made to repurchase a loan at par (you might have to give back any actual premium paid if it’s an EPD, depends on the contract). So passing it off to a junk dealer, in turn, at a bid in the 80s is a painful thing. Hanging on to it, if you’re as thinly capitalized as your average subprime mortgage banker, is out of the question. Hence the “bloodbath.”
If it hits an outfit like Fremont—which is an FDIC-insured thrift and can therefore hang onto this stuff a lot longer than a mortgage banker can—we’ll be out of “thinning the herd” and into “decimation.” One reason it’s so hard to tell at the moment how bad this might get is that it’s hard to tell how many more “pending” repurchases we have out there. The EPD garbage is just the first wave. Every NOD in that big pile you see reported has been most thoroughly examined for other potential rep and warranty “issues” if the investor is any kind of awake, and they seem to be waking up. There used to be this idea that you didn’t push so hard on your correspondents and brokers that you broke their backs—you need a counterparty to keep having a business model. That’s a “normal” downturn idea. The current one seems to be more like “close the gates of mercy, shoot the wounded, and sink the lifeboats.” That does imply—as JPMorgan also implies—that the Big Dogs have more cooties on the balance sheet than they’re prepared to tolerate. Looks like total war to me.
great info, thanks for posting!
Read that article. Its great. It inspired me to do a little blog on my blog of near zero readers.
http://recomments.blogspot.com/
Got popcorn?
Neil
I like the map of misery. Thanks.
Nice Read, The whole banker ebionics jive crap does get tiresome .
Fascinating. I remember in the late 1980’s, we people “in the street” were marvelling at how the S&L’s had so many idiots in charge of so much money. And of course they melted down into the RTC. I have been having the same feelings lately about the sub prime market. Why are they not seeing all the stupidity. Fifteen of the last twenty two deals in a subdivision I track have been mortgage fraud. $11,250,000 in loans, of which the “overburden” is currently $2,500,000 (and growing as values drop). Not only with the investor earn nothing, they will lose over 20% of principal. Stupid is as stupid does.
You have probably seen the charts showing the recent spike in foreclosures. On Neil’s site there is a chart showing the dramatic drop in bids for sub-prime. The inverse relationship between these two is remarkably well correlated. My only surprise is that the sub-prime implosion did not anticipate this spike. Financial markets are often good forecasters, but the sub-prime market really did not see this coming and is just now catching up. I suspect that a great many FB’s will not be able to refinance by the spring and forever thereafter, and the pool of future GF/FB’s just got a lot smaller.
Thanks, Irvine…
I put that one in my favorites. Quite informative.
Nice post IrvineRenter…looks like the Leveraged Housing Cat is coming out of the bag with a real Vengeance…Thanks
this just in: LV 1031 holding company may have lost hundreds of millions
http://www.reviewjournal.com/lvrj_home/2007/Feb-01-Thu-2007/business/12320879.html
“(Qualified intermediaries) have millions of dollars of investors’ money, and no one is auditing them?” Wright asked. “How stupid is that? You know sooner or later someone is going to get in there, take the money and run.”
Cue The Steve Miller Band…
http://tinyurl.com/yosqbm
That is one of the most dispicable stories I’ve heard yet.
In so many ways, this credit bubble/economy is so disheartening.
You can do your research, do your homework, and still get totally screwed by unethical people.
i’m sure I’ll hear all about ‘caveat emptor’ but the people in this story HAD to put their 1031 money into an intermediary, and now it looks like they are going to lose their money, lose their tax incentive too.
I know many don’t like regulation, but it is regulation that keeps our markets flowing.
There has to be some sort of backbone of trust in order for markets to work. To me, it seems as though this trust is disintegrating.
anything for a buck in the good ole USA
“Nevada to my best knowledge and understanding is the only state that does anything to regulate intermediaries at all.”
Nevada requires these intermediaries to register and post a $50,000 surety bond. Anderson said she can void the registration of a qualified intermediary that violates rules. The intermediary could demand a hearing on the issue.”
Boy, and Nevada is the only state with “regulations” on the issue– a 50k bond. A nickle says that money is gone and these birds have flown for good.
I’m really surprised to hear that a holding company for 1031 exchanges would be allowed to invest in high risk investments ,so I agree with you on the need for more regulation .
As far as alot of this “Scratch and Dent” paper , I think it’s going to turn into ‘Nuclear Waste ” paper soon.
I would think that the loan notes with incurable title problems would be the Title Company Liability unless Title Companies had small print clauses that they don’t have to pay if the actual borrower they insured was fradulent .
Can you imagine how all these cases could clog up the already burdened Legal system and Courts . Cases take so long to get to trial these days anyway .
i know someone that bought a piece of property that ended up having a lawsuit that pretty much makes it impossible to sell now because of the pending lawsuits in the complex.
MDC is cutting 33% of its workforce. This is from an insider. All areas of the company. Pulte is doing a similar headcount cut. This is good info from insiders. The housing crash is just starting.
Which pretty much guarantees a soft landing later on in 2007, right?
Absolutely, we have our fingers and toes crossed!
good memorys from Dave Graam ex president pulte dc division. is like politics for power of company inside ,mistake hire college kids and now no work .they WERE feeling BIG in company ,ex pulte menber. walk away dec 05 move georgia
From Bloomberg. “In the year since Ben Bernanke became chairman of the Federal Reserve, the nation’s central bank has led a push by regulators, including the Comptroller of the Currency and the Office of Thrift Supervision, to raise mortgage lending standards, making it tougher for borrowers to get a loan.”
I really wonder what has changed then - maybe it is no longer possible to get a loan if you are dead or if you are a dog?
It’s still OK to be dead or to be a dog, but dead dogs no longer qualify.
How about cats?
Its insane the kind of helocs banks were giving to housecats on their kitty condo’s - and these animals didn’t even have an income. They just figured they could make payments from equity increases.
Stupid cats.
hey my dog has good credit, but she rents
Wanna bet that HELOC’s weren’t part of the BB package?
“Pulte Homes Inc. swung to a quarterly loss late Wednesday, as the homebuilder took charges to reduce its land inventory in a slumping housing market. The homebuilding pretax income included about $350 million of land-related charges and impairments, the company said.”
Who could have possibly foreseen this breaking development?
“The Federal Open Market Committee latest policy statement shows that members are ‘clearly hawkish’ and are ‘proving themselves to be ever so vigilant about inflation,’ said Gregory Miller, chief economist at SunTrust Banks.”
Rod Tidwell: This is what I’m gonna do or you : God bless you, Jerry. But this is what you gonna do for me? Jerry?
Jerry Maguire: Yeah, what can I do for you, Rod? You just tell me what can I do for you?
Rod Tidwell: It’s something very personal, a very important thing. Hell! It’s a family motto. Are you ready Jerry? I wanna make sure you’re ready, brother. Here it is: Show me the money. SHOW! ME! THE! MONEY! Jerry, it is sucha apleasure to say that! Say it with me one time, Jerry.
Jerry Maguire: Show you the money.
Rod Tidwell: No, no. You can do better than that! I want you to say it brother with meaning! Hey, I got Bob Sugar on the other line I bet you he can say it!
Jerry Maguire: Ye, ye, no, no, no. Show you the money.
Rod Tidwell: No! Not show you! Show me the money!
Jerry Maguire: Show me the money!
Rod Tidwell: Yeah! Louder!
Jerry Maguire: Show me the money!
Rod Tidwell: I need to feel you Jerry!
Jerry Maguire: Show me the money! Show me the money!
‘hawkish’, I keep reading this about the ECB gangsters as well on a daily basis, especially from ‘economists’ and other ‘financial experts’. Probably keeping real rates around minus 7% qualifies as being hawkish on inflation nowadays
It is simple incantation, the power of recitation and belief.
What is the gold market making of the Fed meeting’s hawkish announcement?
http://www.marketwatch.com/tools/marketsummary/
latest report from fl:
as i am in construction in miami, have a fairly good idea where it is going..
layoffs are still a bit distant..
a fair number of highrises are on HOLD.
residentials are getting redesigned, but construction has stalled to 25% of the speed in prior yrs. New work has dwindled considerably.
Many are hoping things will turn around by mid year.
Have a friend who just bought 2400 sq ft home/5550 sq ft land in broward county/ok area, for 360k (asking was 390 w/ 10k closing cost waived)
still 2+ yr inventory and it has bumped up nicely last few weeks..
conclusion: spring+summer bad season will whack the market down..
“‘There’s a monster beneath the surface of the financial markets,’ Shaughnessy said. ‘No one knows when or where the credit crisis is going to rear its ugly head.’”
I like the analogy
With Pulte homes earnings you would expect the stock to go down for no other reason than given the reduced earnings and same PE it should self correct. But to my surprise it was up most of the day and is up for the week.
This is the kind of action which is likely to force people off the fence and jumping into buy a home. To this end I have read on several Yahoo Home builder message boards that Hedge funds are delibrately holding up stock price. The guys posting are short the stock.
I am neither long or short the home builder or lender stocks. I was brought up to believe nobody could corner the market to that extent.
It’s not exactly a corner, but it is one of the longest running short squeezes I ever heard about.
Don’t extended short squeeze occur on fundamentals.
I think the homebuilders will ultimately get a PE of 15. Historically it has been 10, because hope dies slowly and people will remember the bubble days of the hombuilder stocks.
Over the next couple of qtrs the stocks will crash and hopefully it coincides with 2007 home selling season.
‘Given this fluid environment, we are not in a position at this time to provide full-year guidance for 2007.’
It sounds to me like the fluid has frozen into solid form…
Foreclosures leap in Kentucky
http://www.state-journal.com/news/article/1550372