“Going For Volume” A Mistake: CEO
Some housing bubble news from Wall Street and Washington. “Toll Brothers Inc. said it may post quarterly writedowns as high as $160 million or more, which would handily top its previous estimate for all of 2007. The home builderposted first-quarter home-building revenue of $1.09 billion, down 19% from the year-earlier period.”
“The company said backlog at Jan. 31 was off 30% from a year earlier. Toll’s net signed contracts were valued at $749 million, down 34%. Net of cancellations, first-quarter contracts fell 33% from the first quarter of fiscal 2006. The cancellation rate was 29.8% in the first quarter.”
“‘Toll’s preliminary [first-quarter] results show a continuation of the weak demand that has plagued the builders in recent quarters,’ wrote Nishu Sood at Deutsche Bank. ‘Management’s recent optimism is notably absent following [first-quarter] results that showed continued order declines, elevated cancellation rates and the likelihood of additional significant write-downs,’ he added.”
“Robert Toll, CEO, stated: ‘Because some deals don’t make sense under current market conditions, we have continued to trim our land position. We ended the quarter with approximately 70,000 lots under control compared to our peak of 91,200 at 2006’s second-quarter-end.’”
“According to preliminary fiscal second-quarter figures, Orleans Homebuilders Inc. lost $7.5 million, compared to net income of $15.4 million in the year-earlier quarter. New orders were down 7 percent. Backlog was down by 52 percent and the cancellation rate was 24 percent, up from 21 percent in the year-earlier period.”
“‘The unfavorable market conditions in the housing industry have negatively impacted the company’s new order activity,’ the company said.”
“The company believes that the unfavorable market conditions may continue to have a negative impact on new orders and new order pricing in the near-term, thereby further reducing future revenues, gross margins and net income.”
From CNN World Business. “Europe’s biggest bank, HSBC Holdings, said its charge for bad debts would be more than $10.5 billion for 2006, some 20 percent above analysts’ average forecasts, due to problems in its U.S. mortgage book.”
“HSBC said in a shock trading update late on Wednesday that slowing house price growth was being reflected in accelerated delinquency trends across the U.S. sub-prime mortgage market, particularly in more recent loans.”
From Bloomberg. “‘The impact of slowing house price growth is being reflected in accelerated delinquency trends across the U.S. sub-prime mortgage market,’ HSBC said in the statement. ‘It is clear that the level of loan-impairment provisions to be accounted for as at the end of 2006 in respect of Mortgage Services operations will be higher than is reflected in current market estimates.’”
“‘There will be some doubt about whether this is the big provision or whether it’s a sign of things to come,’ said Tathagata Guha Roy, who helps manage $1 billion for Alliance Trust Plc.”
“HSBC Holdings Plc CEO Michael Geoghegan is shaking up management and tightening lending policies after the bank’s losses from bad home loans in the U.S. increased. HSBC made the mistake of ‘going for volume’ and selling second-lien mortgages, Geoghegan said. The company plans caps on riskier lending, he said.”
“‘The impact of slowing house price growth is being reflected in accelerated delinquency trends across the U.S. sub-prime mortgage market, particularly in the more recent loans,’ the bank said in a statement.”
“‘over 90 percent of the portfolio is working,’ Geoghegan said. ‘We are taking provisions for what might happen.’”
“‘The situation has deteriorated faster than we had expected and given the uncertainty regarding future house price trends and the expected further seasoning of the most recent mortgage book, we put our estimates under review,’ said analysts at Goldman Sachs Group Inc.”
“New Century Financial Corp., which lends money to home buyers with blemished or limited credit histories, said late Wednesday it expects to report a loss for the fourth quarter. Because of accounting errors, the company also must restate results for the first three quarters of 2006. It hopes to have that done by March 1. The mortgage lender said it didn’t properly account for some of the home loans it had to buy back.”
“Like many mortgage lenders, New Century doesn’t keep its loans; it sells the loans to banks and investors. The deals normally have clauses allowing investors to force New Century to buy back a loan if the borrower misses an early payment.”
“Loan repurchases are bad for mortgage lenders because few investors would sell back a loan unless it lost value. Piper Jaffray analyst Robert Napoli said a repurchased loan has typically lost 15 percent to 20 percent of its value.”
“New Century made two accounting mistakes: It didn’t assume more investors would sell back loans, even as loan repurchases surged throughout 2006 amid payment defaults. And, New Century didn’t assume the repurchased loans would be less valuable.”
The LA Times. “New Century said it also would write down the value of the residual interests it retains in loans that have been used to create the mortgage-backed securities that have found eager buyers around the world.”
“As the housing market cooled over the last year, some lenders provided loans on overly easy terms to unqualified buyers, analysts have said. Some of these buyers, particularly those who purchased homes for the first time with low or no down payments, are believed to have stopped paying their mortgages when housing prices declined.”
From MarketWatch. “The company’s methodology for estimating the volume of repurchase claims to be included in the repurchase reserve calculation did not properly consider, in each of the first three quarters of 2006, the growing volume of repurchase claims outstanding that resulted from the increasing pace of repurchase requests that occurred in 2006.”
“Furthermore, the loans in question were repurchased because of early-payment defaults ‘by the underlying borrowers or based on alleged violations of misrepresentations and warranties in connection with the sale of these loans,’ otherwise known as ‘defects.’”
From Reuters. “U.S. mortgage lending practices are ‘out of balance,’ Sen. Christopher Dodd, chairman of the Senate Banking Committee, said. Foreclosure filings were up 42 percent in 2006 from a year ago in large part because of weakness in the subprime mortgage market, Dodd said, citing research from Realty Trac.”
“Dodd said ’subprime credit can be a valuable tool in helping people become homeowners’ but ‘the system is out of balance.’ He said he looked forward to working with brokers, bankers, regulators and Wall Street to ‘restore this balance for the sake of the safety and soundness of the banking system.’”
Some great charts and info here; by region:
http://seekingalpha.com/article/26468
Wow. How come nobody predicted this? Oh wait, we did.
“‘There will be some doubt about whether this is the big provision or whether it’s a sign of things to come,’ said Tathagata Guha Roy, who helps manage $1 billion for Alliance Trust Plc.”
Roy, let me clear up this doubt for you. I have reviewed 21 new loans in the last week, just for fun. 15 of the loans were cash back mortgage fraud. All were 100% 80/20 sub prime loans. Here are some numbers: $14,595,000 in loans for $11,920,000 in house value (and declining value at that). So Roy, you can p*ss off 17.99% of the loan amount BEFORE you get to whether the secondary financing (20%) is worth anything.
Oh, and Roy, three more items of note: 1) these loans are all in one little Sacramento housing tract. There are 150 more housing tracks just like them in Sacramento. 2) house values dropped by 10% in Sacramento in the last 12 months and 3) NONE of these loans have been securitzed in the RMBS markets yet, but they will be in the next few months, so enjoy you “safe” investments.
Roy, one more thing…..we are nearly finished with a web site where an army of bloggers and citizens is going to start reporting mortgage fraud when they see it. This data base will be available to the rating agencies and authorities. You may want to check it out next week at http://www.paladinreports.com before you decide whose loans you want to buy. We already have submissions for the following lenders: New Century (4), First Franklin (2), Option One (3), Wells Fargo, Lime Financial, Bear Stearns (2), Long Beach (aka WAMU) and some of whon you have probably never heard.
Have a nice day,
Paladin
Paladin: Keep up the good work!
contact@alliancetrust.co.uk
Sweet thought. Cut, paste…… and I am sending it now. I hope it gets to Tathagata Guha Roy directly.
A possibly-very minority viewpoint here. Paladin has been doing an outstanding job of exposing fraud in the RE and mortgage business. My belief is that it is not our (other posters’) acceptable (read: Pontious Pilate) function to point Paladin to people to whom to tattle, but to do so ourselves since, de facto, we know the destination office/address.
Paladin remains, along with Ben, the Man.
I do enjoy these analysts who never saw it coming, and are tip-toeing to get a peek at the abyss.
It begs the question, have any of these analysts ever met the sub-prime crowd? And, if so, why do you need elaborate models to be predictive of the risk factor of mortgages issued to them?
If a guy’s credit report says he’s behind on child support, with a heavy cc debt load,complete with a lot of lates and write-offs, and a bk or two in the past, and a spotty employment record, us non-analyst types would not lend this guy 500k for a house on a 100% financing.
Why? Well just because it would strike us as a stupid thing to do.
I’ll venture a guess that us non-analyst types wouldn’t lend this guy $5.00, much less $500K.
Paladin-
Do you have any ballpark ideas on the size of this phenomenon (cashback)?
How random and representative was your selection?
emcee, I think it is mostly happening in the new subdivisions where the builders and flippers are getting creamed. But is is surprising the number of people willing to commit felonies for $50-100,000. I know a little old lady (the original “LOL”) who did a $140,000 cash back sale to get out from under her $600,000 house she bought to flip. The buyer is a New Century previous customer, but used Fremont this time.
In direct answer to your question, I estimate there are about 900 to 1000 cash back fraud transactions in the Sacramento MSA (excluding TXChicks boyfriend, Casey Serin) in the last 6 months. The builders sold 10,000 homes and the resale market did about 20,000 sales in 2006. So really, you are talking about 3.3% of the homes being cash back fraud sales. That is why the sub prime RMBS buyers seem oblivious to the whole issue. If 3.3% of your loans lose 40% of principal, you only dilute your overal return by 1.3%. However, it is the investors refusal to take this reduced return that is creating the disturbance. They force buybacks to the originator, which are much more painful. Their orignation profit might be 5-10%, but they will lose 40% in the buyback cost and fraud markdown. You can’t make that up in volume! (though some try, actually using the phase “outrun buybacks with new originations”)
Of course you know about the Temecula $1.2 billion in mortgage fraud, with 400 borrowers and 5,000 homes? That seems unfathomable to me. We will know more in a little while. Volunteers are e-mailing me weekly to be part of “Paladin’s Posse” (haha) and I am assigning them subdivisions to review and telling them what to look for in fraud. We will have a better idea of the absolute number of fraudulent loans in 6 weeks. Sacramento will be a good barometer of the problem in the west. It is an average place and a good test market.
Paladin, when an Ownit or a New Century go belly up, and they aren’t repurchasing nonperforming loans anymore, is the buyer of the loans just screwed, or is there some sort of re-insurance entity that guarantees the loans?
Some high risk tranch buyers get CDF’s for collateralized default swaps. You formally could buy them for a 2% premium, but they have widened to 8% or higher now. Of course, it all depends on the strength (and willingness) of the insurer to pay you. I have a hunch “fraud” is not covered, which is a big hole to escape thru. You know, fake appraisal, fake w-2, fake wife as a wage earner…..the minor details a mortgage broker might forget to verify……
I’ll take that to mean that, for the most part, they just get screwed. Question 2: Can you confirm what someone else on here once mentioned, that most MBS buyers are foreigners?
Foreigners? I have no idea and would not know how to find that out.
“I’ll take that to mean that, for the most part, they just get screwed.” That is about right. Merrill bought 20% of Ownit for $100 million, then got left holding $165 million of junk paper, trying to get Ownit to buy it back. Ownit went BK. Can you imagine, buying a company you value at $500 million (based on the 20% purchase), only to have it fleece you for $165 million, then disappear. I wonder what team of baboons at Merrill thought up that deal? They are idiots. Almost reminds me of BofA buying Money Tree in the early 90’s.
Don’t the hokey names at least set off a few bells: Money Tree…..Ownit Mortgage. Sheesh.
“Can you confirm what someone else on here once mentioned, that most MBS buyers are foreigners?”
Yep. wallstreetexaminer.com follows this subject. Basically, foreign central banks print money to buy MBSes and Treasuries, suppressing yields and allowing the US consumer to borrow and spend more, thus supporting the foreigners’ export economies.
la investor girl says “I’ll take that to mean that, for the most part, they just get screwed. ”
Keep in mind the house value does not go to zero. There is always a residual value, so preservation of capital is an attractive feature. However, with the decline of housing values, and the advent of mortgage fraud, this is no longer what it was in 2004-2005, when the asset was appreciating. This is what is leading to the force “buy backs” which runs the originators into the ground. And HSBC is only the tip of the iceberg. Wait until the hedge funds wake up. They possibly bought $1 billion of these vehicles and got 90% financing (leverage) from idiots like HSBC. When 10% of the value melts away, they are both (fund and lender) under water, looking to force someone (originator or CDS insurer to pay up. Dominoe time.
I actually suspect that these mortgage frauds tend to cluster. Simply the fact that the fraudulent price on one home becomes the new comp for the fraudulent price on the next home would tend to make it easier to do a bunch of these in one neighborhood than to spread them out evenly. Although I’m sure that there is enough of it to kill most of the subprime lenders, I don’t think that is is fair to generalize from one development. The question is what percentage of developments are characterized by these clusters of fraud? Plenty, I’m sure, but I doubt that all of them are directly impacted, although a fraud cluster will tend to raise prices in the extended area as well.
Great point. Stay tuned. We are going to have an answer soon. The other thing to point out is that only about 40% of the loans are sub prime, so adjust them number by 60% and you get 5.5% of the sub prime loans are fraud, under my formula above. This seems like an enourmous number. Possible, but not probable. Stay tuned.
You’re right about this not being limited to the subprime’s IMHO. The saying is, history doesn’t repeat itself but it does rhyme. 2007’s “It’s just a few subprimes failing” rhymes rather well with 1985’s “It’s just a few state-charttered thrift’s in Ohio and Maryland.”
Scary
I think if every newspaper in every US city send a reporter to cover
frauds in its city, we will see the full impact of frauds on RE price. This is why the bubble gets so huge this time.
hehehe…Wells Fargo, Option 1, WAMU…
Fookin’ sleazebags.
Paladin, thanks for what you’re doing for all of us.
Everyone needs to remember though, that a lot of the sub prime mortgages were sold to people who previously had good credit. Basically, it comes down to this: Speculators are con artists who have never actually WORKED for a living, so they are clueless about what WORKERS can actually afford to pay each month for housing. And since a lot of landlords are also speculators who have never worked for a living, RENTS are just as assininely over-priced as homes for sale.
Put yourselves in a young first-time home buyer’s shoes for a moment. You have good credit, BUT you make a salary of only -– say, $45,000 per year (BEFORE taxes). The lowest rent you could find in a decent neighborhood within a reasonable commuting distance from your workplace, is $1700 per month. Obviously, after income tax deductions, health and dental insurance premium deductions, a $1700 per month rip-off rent, transportation expenses (car payment, car insurance, routine maintenance and repairs — OR public transportation fares), food and grooming supplies, phone bill, electric bill, heating bill, and student loan payment (Did I forget anything?) – you have nothing left over to save for a down payment. On top of that, you don’t already have your own home to “TRADE IN”.
Here are your options: Do you continue to pay ridiculously over-priced rent (which builds equity — AND a tidy profit to boot — for your slimeball landlord and none for yourself -– and can be doubled or even tripled with almost no notice, at the whim of a greedy low-life landlord — thus forcing you to look for a new place to live anyway). Or do you take the risk of buying a ridiculously over-priced home?
Why the hell are even tiny starter homes priced at five times or greater what even median incomes can carry if the buyer doesn’t already have a home to trade in??? And why are rents in even the run-down neighborhoods priced at 60 percent of most renters’ full-time salaries???
The answer: home sellers, speculators, and real estate agents are all allergic to work. They’re all so incredibly freaking lazy and gluttonous that “get rich quick” is the only thing that’ll get their lazy asses up out of a chair.
Aunti — with respect, I think that anyone who grosses $45K can find a rental for well less than $1,700 per month, else they are trying to live in the wrong place.
I pay $2K per month in rent and live among people who gross $200K+.
Auntie, you hit the nail on the head. This is exactly why the prices will revert to the mean. It all has to match up and can not continue as it is. Painful yes, but good medicine in the long run. A return to affordability is the only way out of this mess.
Not so many years ago, I would have thought the same thing, Chip. And in most parts of the country, that would probably still be exactly the case. But if your job is in or near Boston — unless you’re willing to commute a long distance, $1700/mo. is about what you can expect to pay for a one-bedroom in a nondescript neighborhood. If you’re willing to commute at least 40 miles west of Boston, you can find a decent one bedroom in a good neighborhood for around $800 per month, but of course then your transportation expenses eat up the difference and a lot of your time is wasted in commuting.
$45,000 is a common entry-level salary in Eastern Mass for new college grads in a number of different fields — which is why I chose that salary as an example. That’s why our state lost hundreds of thousands of new college grads and skilled laborers between 2003 and 2006. In the beginning of the exodus, some relocated to southern New Hampshire, but that area quickly became too expensive as well. The majority relocated to states in the South where home prices were far lower than in the Northeast, despite the fact that there were plenty of decent-paying high tech jobs in those states. North Carolina was one of the popular relocation destinations for our state’s workers during those years.
A lot of the young workers who chose to stay here now regret having done so.
Prices are plodding along back in the right direction, but at this rate it’d take at least a decade for home prices and rent prices to revert to the mean.
Uh-oh — An evil Russ Whitney commercial just came on TV
A vicious cycle - speculators push prices to the point where anyone with a normal income can’t afford- so everyone with a “normal” income who wanted to buy had to become a speculator themselves with their own mortgage (either by lying or taking on more debt than they could afford), thus pushing prices up even further.
I think that your rental market estimates for Boston are a bit out of whack…… What you describe $1700 for a 1 BR is a prime location in the Back Bay, probably.
I noticed the foreclosure heat map the have seems to be totally out of sync with the Geographic Distribution of House Price Risk in the article. Some of the states with the lowest house price risk have the highest foreclosure rates.
Geographic Distribution of House Price Risk
http://seekingalpha.com/article/26468
Foreclosures
http://seekingalpha.com/article/26319
I think that has been one of TxChick’s points for a while now. I don’t know much about Texas, but back near my home town in the rust belt there are a lot of new houses and townhomes that are going to fall way below the original sale price, and then way below what many on this blog would consider the intrinsic replacement or shelter value.
The geographic risk chart is a forecast, the foreclosures are the present.
And if you combine the two….you have a nationwide housing bubble.
You know, that event that has never and can’t possibly ever happen on that scale…..
I dunno but my sense is those colors are gonna change. First, it’s historical. Also, the DEEP RED states haven’t had the benefit of 20% YoY appreciation to bail them out. What I would like to see is per-capita foreclosure LOSSES DOLLAR DENOMINATED. That should frighten everyone.
They’re gonna need another color for CA before this is all over.
Hello, Sh*t! I’d like to introduce you to my friend Fan.
Amazing isn’t it how none of these highly educated “experts” can see any of this coming, yet a bunch of yahoos on a blog can.
Of course they knew it could happen. They were just gambling that it wouldn’t or that they were “hedged.” Lots of hedge funds saying the same thing.
I guess we will find out how well hedged everybody is….
I’d say nowhere near as well as they thought they were.
I spent some time yesterday reading hedge fund prospectuses for a rich friend. Couldn’t recommend to him that he invest in any of them.
Main theme:
“We are super duper smart and if we aren’t, we’ve hired these Nobel prize economists or superstar programmers and quant geniuses who have concocted a super duper black box or arbitrage strategy so we can sell options [which are overpriced btw - WTF????] at will and take in all this risk-less free money. Oh, we do have to show you our historical returns but please don’t look at 1998 or 2001/2002 when volatility exploded and our returns were negative. Those don’t count.”
Can you believe those two guys from Amaranth (Maounis and that kid trader Brian Hunter) both are talking about starting new funds?
They will bribe pension fund managers into putting billions of other people’s money into their hedge fund. That’s how the game works. Pension funds are the worst.
Txchick,
You should buy your rich friend the book “When Genius Failed”. If after reading that he still wants to invest, at least he will have seen what can happen when people think they are investing “risk free”.
Here is one of my favorite pictorial graphs, with the appropriate quotes inserted into the timeline. The morons running the hedge funds today are relying upon the same misplaced faith in academic intelligence used by the Harvard Economic Society “a few decades ago”:
“… a serious depression seems improbable; [we expect] recovery of business next spring, with further improvement in the fall.” - Harvard Economic Society, November 10, 1929
http://www.gold-eagle.com/editorials_01/seymour062001.html
Neil, pass the popcorn. –PB
Funny that the above posted mentioned Quants. I work as a systems engineer and I support a large cluster to do Quantitative Trading. Another engineer who has been at it for a long time, says you would get better results if you had a bunch of monkey’s playing “Rock-Paper-Scissors” and still get the same results!
Back on topic: I know it’s been mentioned here and there, but has anyone else given serious thought that this whole disaster along with the Dot com fiasco was engineered by the Fed?
(okay maybe that was a rhetorical question)
Poshboy,
Love the chart.
I’m printing it to put up in my office.
But what’s with Yahoo finance running an article on home prices bottoming out mid-year?
This insanity just won’t stop, now will it?
Got popcorn?
Neil
actually there is a paper that proves that quantitive analysis used in trading in forex does very very little to improve results. Basically you would be better off as a naive inestor.
You don’t make money speculating by being smarter than the average guy. You make money by being EXACTLY as stupid as the average guy a day earlier than him.
Back on topic: I know it’s been mentioned here and there, but has anyone else given serious thought that this whole disaster along with the Dot com fiasco was engineered by the Fed?
Have you ever considered where these folks worship?
Reserves cut into Bonus’s—-enough said.
I think it’s all about earnings and wall street. they’d rather run the company into the ground and not have to report to wall street that there is shoals until they’re stuck.
I don’t have half the college education these “experts” possess, yet I know how to forecast events based on trends far better than they do. Why do these people even have jobs? Why do other people trust them with their money?
Shameless self-promoters creating their own little cults of personality. Seems a lot people with dough fall for it everytime. Tomorrow’s “experts” are cutting their teeth on today’s follies - ensuring future bubbles and bursts will be all the greater.
They knew it was coming, they just wanted the cash cow to give a little more milk…
I give them credit. They knew it was coming. And they knew better than to tell the truth. They hire shills to do most of the talking. I think it was Keynes who said something like “the challenge of a banker is not to avoid failure, but instead to ensure that when he fails, he does so at the same time and in the same manner as his peers, thus avoiding any blame being placed on himself”. We’re seeing that observation from many decades ago being played out right now right before our eyes.
And of even more interest to me is will this subprime garbage bleed over into prime and will it be the pin that pricks the monster derivatives bubble? My guess is yes, and yes.
And I’ll second that…yes, and yes!
What’s really scary is the realization that all of these official statements are understated. How bad is it, really? To think we’re only in the beginning of Feb and the table that the house of cards sits on is being rocked already.
What’s really scary is the realization that all of these official statements are understated.
yeah it is
From the WSJ article:
http://online.wsj.com/article/SB117088245754201362.html
The bank has stopped making and buying loans where borrower income hasn’t been verified, and it has raised the FICO scores needed for certain loans. “Ensuring the customer can make payment is good for us and good for the customer,” says Mr. Detelich.
Umm… HSBC is out of the no-doc businesses?
Folks. They just declared that credit has tightened in a big way.
March home sales should be very interesting (February home sales should already be in the pipeline… so I’m not sure if this is happening in time to effect this month’s market.)
Got popcorn?
Neil
if HSBC gets out of the no-doc business alltogether the UK housing market will crater; in areas like London, UK even two years ago something like 90% was already liar loans.
So I guess it only applies to the US and even them, it’s probably more PR spin than reality.
Wow.
Great catch, Neil.
Looks like the previews are just about wrapped up. Time for the main feature.
emcee,
The previews are over, but not the cartoon.
Then the main feature. A movie that starts with a very “Saving Private Ryan” intensity bloodbath.
I’m rushing back to the counter to refill the jumbo tub of popcorn.
Got popcorn?
Neil
Neil,
that’s pretty funny.
Liar, liar, house on fire!
Last evening I was thinking about this while switching frenziedly between russ winter and CR blogs. I could not reconcile the bad news regarding sub prime financing with the lack of foreclosing activity (accelerating yes, but still low in absolute terms. I enjoy looking at foreclosure.com, but the current levels seem incompatible with what looks like the meltdown going under way and predicted here long ago) I was working on two hypothesis:
A] We housing bears are hyping the news. This is just another valley in a series of peaks and lows, and we losers will bite the dust again. Or,
B] The meltdown is for real, caused by minimum foreclosures. Thus later this year the situation will be apocalyptic-like, and we’ll have to follow previous advise regarding stocking up on guns, ammo and can food (just kidding).
I sure hope it’s B.
The REIC is working off correct models using faulty data. Low unemployment, low interest rates and a strong (at least GPA) economy should mean home sales. That we have hit a brickwall in spite of the above, and that foreclosures are just beginning to increase is a very, very bad sign. The current talkhead mantra includes the obligitory ‘ If investors sell’… WTF! My bottom line is the question: what would sales volumnes and prices be without the expectation of appreciation of values? Take that away, and where is the bottom? Nobody knows, especially the REIC using outdated models. They will be stunned, as will Wall Street.
“what would sales volumnes and prices be without the expectation of appreciation of values? ”
Very good question. My bet they’d be 40% of peak activity.
Consider this…
“We” are the first people to know often because we’re all personally involved experiencing the inability to purchase a home at current prices.
60% of the population currently owns a house. It’s not in their best interest to believe in a “housing/price bubble” because if they do they’re admiting the price their property is worth is much less than what they think it is.
I’ve never met a person that doesn’t try to sell high and buy low.
The problem for sellers is that buyers can continue to not buy. If the seller needs to sell to have money to eat they’ll have to lower the price. “Invisible Hand” theory for all the econ people out there. Or more simply the law of supply and demand.
As public setiment turns against buying property more and more. Sellers will have a harder and harder time selling.
What’s interesting this time is because of the internet information flows more freely. With website like zillow you can see what people paid for their house. With websites like ziprealty you can see what’s for sale on a map over an entire area. These are things you couldn’t do just 3 years ago!
While I don’t predict a meltdown of the fincial markets like the great depression. I do forsee a significant downturn in the general economy fueled by the drop in home prices.
Why not have a meltdown?
You need a floor, to being able to gauge what a “bottom” is and all of these sub-prime (and the whole financial world is involved) outfits saying they’re closing up shop to spend more time with the family, spells doom for a public that couldn’t afford where they are living, the newer developments being ground zero for all the fun. Unfortunately, the older established neighborhoods are heloced up the wazzoo, so they’ll not escape pain, either.
Human nature being what it is, we love to buy when things are going up, but avoid like the plague when it’s going down.
There’s going to be a lot of downtime~
The reason I don’t think there will be a meltdown is because that are many companies that are posting record profits that are in no way tied to the housing market. These companies (if managed correctly) will have huge cash reserves they can dip into when the slowdown occurs.
The toxic brew that is globalism, will look much how World War 1 started, in a mesh of alliances that seemed like a good idea at the time, but oh, how it got away from us…
Once things spiral out of control, (within 2 weeks?) we’ll be entering untrod ground, financially. A global house of cards, coming apart~
Forgive me if it sounds like a modern day 50th Anniversary model of “Atlas Shrugged”
Who is John Galt?
Isn’t John Galt in a valley in Colorodo plotting how to re-take the US. I wonder if there isn’t a modern day John Galt who can save us?
Rubin & Bernake:
Federal Reserve Chairman Ben Bernanke has found some strong support for his fears of a looming fiscal crisis from an unlikely source: Bill Clinton’s Treasury Secretary Robert Rubin.
Bernanke is a Republican and Bush administration appointee.
In January, Rubin appeared on PBS’s “Charlie Rose” television show, and made some surprising comments — comments I believe should have made major headlines in the business news sector.
Rubin told Rose that the U.S. faces “excruciating decisions” regarding what he sees as an increasingly unsound economy.In his wide-ranging Jan. 22 interview with PBS’s Rose, Rubin asserted that this country is on the “wrong track on almost every front.” Among Rubin’s key points:
Average Americans are facing a troubling “economic insecurity.”
Rubin: “I think we face [huge] challenges. I think we can do very well in what is really a transformed global economic environment with the rise of China and India. But . . . I think we’re on the wrong track on almost every front right now, regardless of how you allocate the political responsibility, and what I’d like to see the new Congress do — and I think they’ve gotten off to a very good start in this respect — is to address those challenges.
“I think we’ve got to re-establish sound fiscal conditions . . . so we have an environment conducive to growth, and also to avoid the dangers that, as [Federal Reserve Chairman] Ben Bernanke said very recently in his congressional testimony, [underlie] unsound fiscal conditions. I think that’s a tremendous threat to the global economy. To our economy and the global economy . . .
“We’re still the leader in the world — but our relative gap over others is beginning to diminish for all kinds of reasons.”
[Editor’s Note: Can Fed Boss Bernanke Avert the Currency Crisis Brewing Over the Dollar?]
The U.S. needs a strong dollar or else “something is going to give” — and that something could include an adjustment of the dollar.
Rubin: “I don’t really think there’s too many question about this — a strong dollar grounded in strong policy is very much in our country’s interest, because [of] the exchange rate. Remember — the exchange rate between the dollar and other currencies is basically a way of expressing the rate at which we take our goods and services and exchange them for the goods and services of other people of other countries. And the more . . . goods and services we can get for the ones that we give, the better off our standard of living will be. Therefore, a strong dollar is very much in our interest . . .
“I think the dollar will do what it wants to do . . . If the current account deficit doesn’t change, then at some point something is going to have to give. It seems to me that it’s very likely there’s going to have to be an adjustment of the dollar. The way to minimize the adjustment that you need is to have sound policy.”
Entitlements are a “fiscal problem” that must be dealt with.
Rubin: “Entitlements are a problem not because people shouldn’t be getting benefits, but because it creates very large fiscal issues. Once you recognize it to be a fiscal problem, then it seems to me what you should do is set up some kind of process, whatever it is, where everything is on the table. And it’s not just the entitlements that are on the table, it’s also our whole tax regime . . .
“What I think is that the president of the United States, the leaders of both parties, and the leaders of both Houses should set up a special process of some sort in which everything is on the table: revenues, spending, and federal programs including all the entitlements. And then they should take joint political accountability for what, Charlie, are going to be excruciatingly difficult political choices. And I have an instinct that our political process isn’t going to be able to make the tough decisions we need to make.”
[Editor’s Note: Profit From the Baby Boomer Crisis]
Our litigation system is broken and needs substantial overhaul to reign in costs and attract investments from aboard.
Rubin: “I believe we have to reform our litigation system . . . We have a system that is vastly more expensive for business and for economic activity with respect to litigation costs than the system in any other market-based economy in the world. Or I suspect any other economy in the world, actually. And it seems to me that what we need to do is have a litigation reform that will continue to give those who have been damaged the opportunity to get redress and appropriate redress, but doesn’t have the enormous excesses that we have in today’s system.”
China and India on the Rise
Rubin and Rose also discussed the rise of China and India.
Rose: “[Rubin’s Deputy Secretary] Larry Summers was right about a year ago when he gave a speech in which he said the rise of China and India is probably the most significant change in the global economic environment since the emergence of the United States over 100 years ago, and arguably even since the industrial revolution . . .
“But as you well know, they have big problems too . . . India, [has] a huge infrastructure problem. They have problems of what to do with the rural poor. In China [it’s] the same thing. There is a huge environmental issue for them . . .”
Rubin: “Those two countries I actually know a little bit about. I even had the opportunity to spend a lot of time with private and public sector leaders from both countries.
“Last year my wife and I were in India . . . The prime minister invited us for lunch, because we know him from when he was finance minister. They have tremendous challenges, huge challenges; but every time I meet with the public and private sector leaders from those two countries, the sense I come away from with is that these people recognize their problems and they are committed to addressing them.”
[Editor’s Note: Forget China. This Is Asia's Next Tiger.]
Rubin also said the financial capital of the world may be shifting from New York to London due to regulatory pressures in the U.S. He noted: “IPOs aren’t being done in this country . . . Our whole litigation regime causes companies not to want to go public here.”
Surprisingly, Rubin has yet to endorse Sen. Hillary Clinton for the Democratic nomination for president in 2008, even though she was first lady during Rubin’s tenure as Treasury secretary.
He had this to say, however, about Hillary’s likely chief rival for the nomination, Sen. Barack Obama: “I think very well of Obama. I knew Hillary a lot better. I know Obama pretty well too, actually.”
Was there a point here? Did Rubin say anything new?
“Get our house in order”. Wow. Earth shaking.
The point is things are finally be stated in the open by the MSM.
Rubin is a central banker through and through. He is part of the problem.
We also don’t know the extent of foreclosures being delayed as the deep-pocket mortgage holders try to renegotiate terms to avoid a blowup. See Mish’s recent post on “footnote 12.” The companies that are blowing up now are relatively thinly capitalized.
Albert, you are correct. I had dinner with an RMBS analyst in Alta, UT last week and he said they ARE trying to hold the RMBS pools together and aviod foreclosures by dribbling out what little income is available from the teaser rates. They are foregoing the resets to higher rates to keep the pain away. This is simply robbing Peter to pay Paul and just postpones the meltdown and dilutes returns. Plus, the bickering among the bag holders is getting very boisterous and ungentlemanly as they all try to lay a $2.00 claim to a 50 cent piece!
” could not reconcile the bad news regarding sub prime financing with the lack of foreclosing activity (accelerating yes, but still low in absolute terms”
LA county does seem to still have a relatively low number of foreclosures(1392 as of feb 4th) though the deliquency rate was at 11710. Roughly 20-30 new foreclosures per day in LA county. The real Hot spot for foreclosures is riverside county(1292/6356), which should be included as one of the RE meldown regions in USA alongside S florida,Sacto, Phoenix, ect.
What seems to be keeping LA from going ballistic on foreclosures so far is that the entire county’s Housing prices are being propped up by overappraisals and comps being set way too high, which in turn is leading really stupid GF’s to still overpay on properties, whether in the inner s*ithole LA zones or the westside. These way overappraised prices are still enabling many LA homeowners to get out of, or put off, delinquencies via cash out refi’s. There is still a lot of ads on AM radio pushing all manner of loans. The day that LA housing prices stop showing Positive YOY appreciation and go negative is when the foreclosures really take off. The areas which really needs to drop in prices are the inner LA ghetto zones and Ghetto- adjacent areas such as Inglewood,bell,montebello,Sgate,Compton,Wilmington,east LA, SVvalley, Whittier, Downey, Monterrey. Alhambra,ect. These areas are being propped by probable fraudulent overappraissals/cashbacks ect as well as massive toxic loans to immigrant families.
It be B.
I used to work in Pasadena before I moved to Tokyo. A co-worker of mine who is a Pasadena resident told me that the Mayor of Pasadena wants to see an average of 1million for a Pasadena home.
Don’t get me wrong, I love Pasadena, but they have alot of small old houses that I’d have a hard time paying more than 200k for, let alone anything over 500k to over a million for.
Pasadena, it takes a long time to get to the real foreclosures you are interested in seeing. Keep in mind the last bubble popped in June of 1990 and the peak foreclosure market occured in 1995-1996. If you need a bigger or more suitable house, find it in a flipper haven and settle in at 30% of the cost of owning today. Be patient and be comfortable. We have a long way to go. As I mentioned before, I almost bought in Dec 2005. Now I rent a $750,000 flipper flop for $2,000/month (and could get the same house for $1750 today, next door). I own four middle class homes, but needed something bigger, and after reading this blog, had an epiphanay: Dont buy, just RENT for a couple years. Cheaper, no risk of deprectiation, and I am very comfortable with the case of popcorn Neil suggests I keep on hand.
Yeah, I’m sure there is still optimism behind the numbers that are being reported. If they can possibly justify their numbers, they will, which will prolong the slide. I think things will begin to pick up speed now…
Today is the second day in a row that the Wall Street Journal has run pieces on subprimes and defaults.
What do you think about shorting Freemont (FMT) and Accredited Home Lenders Holding (LEND)? These are other pure-play sub-prime. They got spanked today but only by 1/3 as much as New Century (NEW).
Thoughts?
There’s not much room under those stocks right now, and puts will likely be at a higher premium.
Countrywide, on the other hand, might be a nice short/put opportunity. Then again, maybe CFC will be the sole survivor of the subprimes (other than Wells).
Wow, not much room? I remember 2000-2001 when I was shorting JDSU, CSCO and there always seemed to be room for more losses.
I have heard rumblings about a possible Countrywide - BofA merger/acquisition. Being short on a company being acquired is not a lot of fun. I have the battle scars to show for it!
That’s why they were never on my list. AHM was and they are getting creamed today along with NEW. NEW off over $10 today. Talk about a good short.
LEND to announce latest financial results and give guidance Feb14.
FMT to announce Feb28.
I can’t imagine their results/projections a lot better than NEW. NEW got a 30% haircut today, while LEND and FMT only took an 8% hit.
Just shorted 500sh ea. Wish me luck.
Good luck. Send Ben a tithe for good Karma.
Is this the month when Wall Street acknowledges the crash? Or is that only wishful thinking as my housing/lending puts have momentarily stopped bleeding? When do we reach a tipping point in deniability? When all the compartments in the Titanic have been breeched, does the denial still continue for another 4 hours? When we feel the icy water on our feet do we do more than get a little concerned? When does the tipping point occur?
“New Century made two accounting mistakes: It didn’t assume more investors would sell back loans, even as loan repurchases surged throughout 2006 amid payment defaults. And, New Century didn’t assume the repurchased loans would be less valuable.”
Isn’t this like to assuming the sun won’t come up in the morning?
“And, New Century didn’t assume the repurchased loans would be less valuable”
This is stunning. I am not in the business of buying and selling notes but it seems quite obvious to me that once a note comes back the IMPLICATION is that its value has been reduced substantially. Otherwise, why would it come back in the first place?
Maybe it was homesick?
This loan is not “pining for the Fyords.” it’s bleeding in default.
too, too funy, you two
just think, this is one of the largest subprime lenders, what do you think the books of lender #50-100 look like?
It makes perfect sense using 2003-2005 logic. They assumed that housing always goes up 20% a year so even if someone defaulted in the first year the value of the property would be more than what the loan was for and would cover the costs for reselling the property. It was a no lose situation for them, they made money making the loan, they made money selling the loan and if the loan came back the worst that would happen is they would have to resell it for what they had in it. Too bad the party was over last year and no one told them.
This statement (”didn’t assume repurchased loans less valuable”) was also my favorite statement in Ben’s compilation. There’s a delightful discipline in my knowing that the only people who offer to “buy” notes I have written are sharks who want to steal the notes. E.g., if I have written a note at 9% or 10%, the gnats and fleas who send me postcards every week would buy the note only if it gave them a 14% yield. Skroo THEM … One such individual (one of the few I bothered talking to) gave me some alternatives such as selling just the first N years of payments. Somewhere in the conversation he stuck in, “You’d have to …” — to which I retorted that I didn’t HAVE to do any of it and had not initiated the communication about selling my notes. They just assume any private note-holder is desperate to unload.
I don’t understand why somebody would be expected to sell a note at a discount. Shouldn’t they have WRITTEN it at an interest rate that made money considering the expected rate of default? Seems to me that otherwise the lender is subsidizing the rate that he gives the borrower. I don’t understand.
I told you New Century would be next. Weeks ago. You can look it up. Said after the 1/31 announcements things would go down fast.
Good call. NEW is now a complete blood bath and I’m getting paid (again) on that lame pig. Sold my puts today as it will probably now rebound to 25 and then I’ll do the whole thing all over again. Some people are so stupid that they don’t realize that most subprime lenders won’t make it out of this alive.
I hope the last one out tonight at LEND remembers to turn off the lights.
how long till morts price in risk- they’re obviously late !
I loved the comment that was put on here a few weeks ago from a one-time poster who was w/a hedge fund. He said that they had modeled/hedged risk of defaults in the subprime markets in their MBS positions but not the risks of the actual firms going belly up.
And people pay big bucks for this investment “acumen.” Incredible.
People pay big bucks for a couple quarters of blow out results. I work for a semiconductor company and we seldom plan more than a year out. The main focus of management is “how can we get our stock price up”.
We need to get rid of stock options entirely. Managers need to get paid to work and fired without recourse if they don’t. I don’t get independently wealthy the minute I walked in the door for my job, I have a huge vested interest in my company being around in 10 years (or at least till the kids are out of college). Our CEO is so rich, he’s set for life. These guys have no fear, and no real long term vision.
It amazes me that these industry “experts” can’t figure out that a hedge or CDS or anything else is only good if the other party actually has the ability to cover the risk they are taking.
I will repeat my self: “Waiter, a round of counterparty default with just a whiff of systemic risk for my investor friends!”
HFA is crapping his pants right now!
Voodoo economics gone amuck.
Many poor neighbor have had the greatest scam pulled on them. Crooked appraisers ovevalued undesireable neighborhoods 0 % down and extracting equity at same time, and this became comp for the next scam.
Oakland CA is such with little new development homes selling for 130K in 2003 now selling for 600K. You drive throught the neighborhood nothings changed in years.
Speaking of that, did anyone happen to see the A&E episode last week where this Latino family of flippers goes into a TX neighborhood, buys up a bunch of dilapidated homes with large immigrant families living in them as renters, at about $30,000 per house, puts the families up in a hotel or somewhere, then quickly rehabs the houses and sells them back to the Mexican families, at a profit (obviously), arranging the financing and all?
Wait till properties in the hood which have been scamed come to light. Oakland CA is such a place, looking at craigslist SF Bay Area, East bay. Look at Oakland many properties are sold at 600K which were selling for 130K in 2003. Everything matches up zillow, craigslist & comps.
The area has about 2 murders a week. Nothing has changed in years, no new developments.
Case against gangsters will require witness relocation at end of trial.
“Wait till properties in the hood which have been scamed come to light. Oakland CA is such a place,”
I have perused prices in LA Hood areas/zips on Dataquick. Prices in the LA hood areas going from low $400,000’s in the really nasty zips to over $500,000 in the less-delapidated adjacent communities. Zip 90011 just south of DWtn LA is the most run down slimiest ghetto in LA, yet prices averaged $423,000 @ +18% yoy. Ditto for zips 90001,90002(watts),90003,90061,90059, all Nasty LA gang-ridden zones which saw prices for SFH’s going at $400-450,000 range. Note that 90% of housing stock in inner LA is a 50-80 year old 500-900 sqft dilapidated clapboard on 2500/5000 lot,in a densely packed hood brimming with illegals and lower-working class immigrants. Lots of downzoning and conversions into apts.duplexes, triplexes in these graffiti and bullet-ridden gang barrios.
The hoods immediately adjacent to these slumzones such as inglewood,sgate, bell,Hawthorne, Gardena,lynwood,carson,montebello,East LA, wilmington and Harbor city show average prices of around $500,000. These areas are only marginally better than the Scentral LA zips, and are rampant gang and crime ridden zones. Yet check out the prices and 10-30% YOY increases. There is massive overappraisal/mort fraud in these marginal LA hood communities, which has not yet come to light. No Gov’t/lending institution /LA times reporter will go into these hoods and investigate Mort fraud in these gang-infested hoods. There are some nasty homeys in the barrios who do not take kindly to suburban cubicle-gov’t types intruding on their turf. A trashed out car,a an accidental stray bullet, or a good-old fashioned ‘jacking’ will send the message.
‘I have perused prices in LA Hood areas/zips on Dataquick. Prices in the LA hood areas going from low $400,000’s in the really nasty zips to over $500,000 in the less-delapidated adjacent communities.’
Look at Craigs list. SFRs in Northridge and Granada Hills are now in the 4s. If south central adjacent areas are in the 5s then there is definitely some fraud in those #s.
Darwinomics?
Was that me? Hmmm… It’s been so long with the 20-hour days…
I’m merely a fund accountant at a fairly large place in Connecticut but basically I need to update that idea. We are not exposing a great deal of cost basis to these securities - we bought the lower tranches which were almost cost free but yielded something like 20% a year. If we lose those securities… it’s not a huge amount of sweat off our back.
So, it looks like New Century (#2 by $ volume) and HSBC (#3 by $ volume) need to tighten their subprime lending criteria, just as the $1 trillion in resets are getting underway. How many other subprimes are looking at this and saying, “Oh, sh*t! We better tighten up, too.”?
Lots of FBs who were told not to worry about the reset because they could sell or refi are about to learn they were lied to. More NODs and foreclosures are coming.
just wait until HSBC and their friends start to tighten up lending criteria in their home market; I’m sure the writeoff amounts will magically multiply very soon then. Leverage (and the amount of fraud) in Europe is probably even higher than in the US.
Maybe that will finally burst the bubble in the Netherlands. This bubble was built on credit, and taking the credit away will end the ponzi scheme.
Does the Dutch government have enough welfare money set aside to bail out all the FB’s?
no they don’t (at least not if homeprices in Netherlands revert to the historical trendline, which is about 85% down). But I’m sure they will go for a total bailout; the ECB will gladly help them out by printing more euros, because when the Dutch bubble crashes the rest of Europe will happily crash along (thanks to all the highly leveraged Dutch RE investments over the borders).
Wait, you’re telling me they didn’t know not to buy into a rapidly appreciating asset class in Holland? ;-D
What a wonderful reminder, not-a-gator, I do love the particular spring flowers you are calling to mind.
talking about history lessons, did you guys know that the Netherlands had a second tulip bulb bubble a few years ago? Many rich investors lost lots of money investing in a tulip bulb fund with highly inflated valuation (mostly thanks to the Dutch banks that were willing to loan ridiculous amounts of money for this investment). People never learn …
This is what kills me. Maybe it’s because I’m a pessimist but the 1# reason I didn’t buy in ‘00 through today is because I couldn’t afford a fixed mortgage as the prices soared and I didn’t trust that I’d come out on the good side of a voodoo loan. Trusting the market to save you under any circumstances just seemed juevenille. Everyone was telling me I was either too timid or too poor. I’m so looking forward to seeing how many neeked people there are in my city as the water recedes.
“‘The situation has deteriorated faster than we had expected and given the uncertainty regarding future house price trends and the expected further seasoning of the most recent mortgage book, we put our estimates under review,’ said analysts at —>>>Goldman Sachs Group Inc.”
BS…their bonuses depended on keeping the homebuilders and lenders stocks up for the year. The dot.com bubble was just a warm up for the main event… Crashing the housing market. Bloodsucking scum, right to the end.
I hate to say that any one day is a “seminal” day in these markets but I think it’s safe to say that is the day Gabriel’s horn started to blow for the sub-prime lenders.
I appreciate the enlightenment I’ve received on this blog and it has only confirmed the facts that I began to realize during the mania of summer 2005. At this point it’s becoming fairly obvious to the biggest bulls, denial specialists and the uninformed that something has been going dreadfully wrong and that there will be consequences from these short term profit schemes.
Thank you all for making me feel like less of a kook
I know what you mean. Every once in awhile I have doubts about whether I was right about this bubble, and coming here helps me see that I’m not crazy. I have to say, those doubts are fewer and farther between as we see this thing unfold.
Yeah, sometimes I think this exposure to nonstop news erodes my patience and makes me doubtful too. Still, the numbers we are seeing so far only seem to support a general downward trend. Plus, we can’t underestimate the lengths a lot of folks will go to in order to avoid or stave off disaster. They’ll say and do anything to get a chair before the music stops.
I’m thankful for the work that Ben does here as well as some of the other bloggers (Crispy, Max, Mish, Russ, Aaron, and a few more.) Years ago, this kind of crash could have happened with almost no visibility ahead of time. Realtwhores and mortgage companies would have shorn the sheep and virtually nobody except a handful of well-informed insiders would have known what kind of a bloodbath was coming. I consider this the only viable alternative to the massive mis-information campaign spewing forth from the NAR and the MSM. How many have been saved from financial suicide? We may never know.
And you know we’re getting under their skin too because of some of the comments that have been made by Liareah, Swonk, Watts, and the rest of the useless RE permabull cheerleaders. They can all go to hell as far as I’m concerned. Listening to those guy will turn you into a debt serf for life. We’re right, they’re wrong and now we’ve got the momentum.
I have the same doubts sometimes. When I do, I go out and lowball an offer on a home. That seems to get it out of my system.
Mugsy, you are spot on with your sentiment. I came to this site trying to make sense of the market so I could bump a $840,000 rejected offer on a house. I needed to justify raising my price. Wow, was I ever surprised. Terms like affordabilty ratios, income stagnation, rent multiples….etc. Thanks Ben. I would be $200,000 upside down today, 14 months later.
Wow, that is amazing. You (paladin) have been such an enterprising detector of mtg fraud that I pictured you as someone who has known all the answers for years and years.
There, but for the grace of God, go I. To further elaborate, the real estate had extra acreage, zoned to split and create value. But the lots I proforma’d at $250,000 each, would be lucky to get $150,000 today, if they sold at all in the next few years.
I was trying to do a move up in Nov, Dec 04 and Jan 05 when I first saw the darkness and became afraid. The prices on the home(s) that I was looking to buy were going up $125,000 a month. No kidding. I still have all the documentation on the homes over a four month time frame. Needless to say I walked away from the thousands of idiots waiting in line to buy (San Diego - South County).
Chris Dodd’s prepared statement on yesterday’s subprime lending hearing:
http://dodd.senate.gov/index.php?q=node/3731
Makes me very afraid. The borrowers are only cast as “victims,” and Dodd refers to the marvels of “unlocking equity” from homes as an important source of “wealth.” By the end of the statement, I got the feeling his idea of “predatory lending reform” is to institute some kind of grandfather clause protecting all subprime borrowers thus far. Hope I’m wrong…
I think Chris Dodd’s might of read some of the letters posters on this blog wrote to him .
No kidding, lala. Any Congressional Cmte that calls bloody Jesse Jackson as a “witness” is not looking for serious answers to solve a crisis–they are looking for maximum publicity directed towards a certain constituency.
Jackson is a prop hauled up to the Hill to get publicity for Dodd (never a shy one anyway) and for Dodd to look pensive on TV so “we’ll rely up him to solve the nation’s problems” or some such crap. Remember, that tool is running for President, too…
And Jackson’s constituency is not known for their sober business decisions, now are they?
Also, if Dodd was stupid enough to propose upsetting the capitalist apple cart that severly, that bill would get shot down on the Senate floor via a filibuster, or it would get picked apart as it wandered through the Congressional process in both houses and the conference cmte. Something of that magnitude would NOT be a slam dunk, not after all us DC business political types tore apart much smaller bills for much less money at stake.
I forgot Dodd is now chairman of Senate Finance. God help us all; the Connecticut insurance companies now run the country’s finances.
The issue is how would they bail out the FB’s. The problem is that any government solution is going to invite fraud on a more massive scale then anything seen before. If they guarantee the subprime mortgages, then smart FB’s will simply stop paying on their loans. If they cap interest rates on subprime mortgages then lenders will stop making the loans. Any government “solution” that tries to stop market forces will fail because market forces cannot be stopped over the long term (e.g. Soviet Union). Any government intervention at this point will not save the FB’s. It will make the imbalances worse, prolong the agony, and make the inevitable crash that much worse.
Good points, Grant — and simple logic would suggest you’re right. (Though it’s hard, for me at least, not to get spooked sometimes by worst case congressional “do-gooding” scenarios).
The morons FB who took out voodoo loans are the same morons who vote for people like Dodd. He knows where his bread is buttered…
> If they cap interest rates on subprime mortgages then lenders will stop making the loans.
… which would not be the worst thing to happen. One way or the other, suprime is getting reduced and house prices come down.
A cap on credit card interest might also be effective => less credit pushed on gullible consumers by the lenders - good.
A good example of how futile government intervention is can be seen in Zimbabwe, where the government has outlawed inflation. Hmmm, care to guess what the likely outcome of that policy will be ??
They were just taking a lesson from Nixon and his “wage and price controls.”
The real issue is how we got here in the first place — by rubber-stamping bank fraud. In other words, we got here not because of any goverment regulation (which by the way worked great when banks were actually penalized for self-destructively screwing their customers) - but precicely because we abandoned regulation — we let the banking industry do whatever the hell it wanted to — and it proceeded to act like the worlds biggest junkie. If we the financials services biz run wild, you can expect the system will only be as good as the most devious players in it. We need to rewrite the rules of the game after this is done — and give our referees some teeth. When will we learn that having an utterly free market means you just let the worst of the wolves run the show. When they’re done consuming you and then themselves, all your free market will be left to sell is regret.
Oh man I hope you are wrong!! This is my greatest fear that some “government program” will be designed to “save” the FB’s.
Please tell me it isn’t so. GS? It isn’t so is it????
The FB voters are greatly outnumbered by voters who have no mortgage and voters who are in prudent 30yr fixed mortgages. Let’s see if those voters are willing to pay up to bail out FB voters who got burned in a speculative activity.
And the people who were dumb enough to lend money to the FBs can probably kick in enough in campaign contributions to try and persuade the congress to prevent these loans from going tango uniform.
There are many ways that could be done. Homeowner directed tax cuts financed with freshly printed money, Fed monetizing the bond market or loan modification programs.
We will all pay for this through much higher inflation due to money printing designed to fix this mess. The only way to avoid being scammed is to buy gold.
Bingo! First prize goes to goldtrader.
I think this is very similar to what is coming in the Netherlands (and in fact, probably most of the anglo-saxon nations). Although homeprices are still rising here, and there is hardly any talk about a housing bubble, there is major talk around phrases like ‘citizens must be able to have absolute faith in government promises’, where the promise that you can afford a home that is FAR beyond your real financial reach is one of the most ones. This ‘promise’ means keeping the ridiculously high 50% HMD, all the stupid housing subsidies and all the free housing put options that exist and probably even inventing more subsidies every year to keep prices rising. Here too the FB’s are depicted as potential ‘victims’ in case home prices or mortgage rates start moving in the wrong direction. Unfortunately, we already have legal precedent for a bailout from a massive lawsuit about stock leasing in the nineties.
The biggest mistake these subprime lenders did was push the originators to pressure appraisers into inflating values and not reporting accurate property conditions, all in the name of volume and commissions. Had they played by the rules, they would have funded 50% less loans, but would not be in this mess. Now they will have to lay off more employees and probably file BK. But they guys arent idiots, they knew what they were doing. They knew that at the end of the day, they just file BK and they still make a killing and ride off into the sunset. The reponsible lenders will be around longer, either because they are diversified (retail lending, credit cards, etc), and most importantly, they only loan 80% of a property’s value, and mak sure they know damn well what the value of the property (collateral) REALLY is. Gee, what a concept. It is my contention that these subprime whores all knew the game of volume and commissions. These guys are after the short term, get rich quick idea of success. It worked for the top dogs of these companies, so long as the bottom feeders (employees) commit a little fraud here and there, ask others to commit fraud for them, and everyone gets paid until the music stops. Now what? Now you have a bunch of sleazy sales people all looking for jobs. And broke borrowers losing their houses. This is sooo just the beginning. Fraud is still dominating my industry. Every other call is from some shady mortgage broker wanting me to pump value, so he can shop his loan to the next great OC subprime lending outfit. After he hangs up with me, he calls the next guy on the list until he gets someone to say yes, maybe the 2nd or third call. There are over 2500 appraisers in Orange County, about 70% have been at this less than 2 years, and are hungry for work. These are the ones who are the busiest right now. They will do “anything” the get work, and the many times dont even know that what they are doing is illegal. During the last down cycle, the number of appraisers was cut in half. I look foward to this again, but there is going to be some serious pain before we get there. It started 12-18 months ago, and is starting to pick up speed. And the Feds havent even gotten to So Cal en mass yet to uncover all the fraud. They are about 9 months behind, but when they arrive you will see everyone (mortgage brokers, agents, appraisers, title offices, loan officers) run for the hills.
Yeah, and the hills they’ll be running to will be our Arizona hills. Aren’t we lucky? More shills coming to our hills.
Thanks for your feed-back OCAppraiser ,I like your posts .
One request for OC Appraiser.
The return key works and we could use some paragraphs to enhance readability.
Same thing happened in the early 90s when Congress introduced the new environmental clean-up laws in the wake of the Superfund sites. These laws made any company that cleaned up a toxic area responsible for ensuring that the area was suitably clean. Sounds sensibile until you learn that the law stated that if environmental laws changed in the future, you were held responsible even though you cleaned up to the acceptable levels at the time.
When this passed Congress, all the major companies got out of government-funded environmental remediation. What was left was a bunch of small companies that would form, do the job, and then disband soon afterwards.
OC Appraiser, I believe the appaisal function should be legislated to be run out of a 3rd party clearinghouse. No lender, broker, borrower or ? can even talk to them. Then, the appaisers job will be to provide a competent appraisal, not hit a phantom value.
At this point I have to agree 100%. It has just gotten too out of hand. Too many unqualified and shady players. I cant for the life of me understand why the holders of all this paper do not scrutinize valuations more. I mean really. These large banks have review appraisers (desk reviewers). These guys are a joke. They are typically brand new appraiser trainees or newly licensed that could not get any real clients. These newbies are the last line of defense??? Give me a break!!
Can you think of another industry that uses such a clearinghouse, mandated by the Feds?
Difficult to do I suspect at 3rd or 4th remove. I suspect for the MBS market to survive at all, we’ll go to 5 year repurchase agreements. but more likely IMHO the MBS market will disappear and then you’ll only have banks lending their own money and private money, leading to a perceived liquidity problem in mortgages. I say perceived, because the amount of liquidity will probably be matched to the risks involved, instead of the excessive overabundence of easy money that we’ve had lately.
OC Appraiser,
How do you see SFR in NPB and Laguna Beach prices doing at this
time?Volume way down from 2003/2004,but median still hanging in. Any guestimate as to what the % drop is from high? Feels like we are 10-15% off, but I can’t verify; more guess than fact.
The thing with Newport and Laguna is that much of the current activity is being done by agents and brokers themselves. Playing music chairs if you will. I look at MLS printouts and public records that tell me the listing agent is the owner, with no potential buyers, other than (other) agents themselves.
Balboa Island has seen much of this type of activity. Inventory on the Island is well over 12 months and the tear down speculation has stopped altogether.
Looking at the purchases over the past 12 months, and I see the same people buying from the very same listing agent. Its really comedic, as they cant find any REAL buyers. Are they price fixing? Or just unlucky gamblers?
I havent looked at much sold product in Laguna, but know that inventory is also sky high, and its such a “special” market, made of many “sub-markets”, that price trends are tough to extract without a lot of research. Research I save for when I actually have a paying assignment in the area.
I think we could see over the next 12 months a price decline of 5-15% on the resale side. Kind of a large range, but Newport and Laguna have many different housing products to choose from, with each product performing much different than others, on the price side.
Things in Newport Coast could get real wild, with some prices being cut 20-30% almost over night, from year ago sales of comparable products. I havent looked in there lately, but It historically see’s some pretty wind price action, as the very well healed are not affected by rates as much, and more on how they “feel” about an investment versus other vehicles within a given market cycle. Real Estate is not exactly the vehicle of choice at this time, regardless of what some area agents might say.
OC Appraiser,
Thanks for your insights. Hope you contribute more often.
CM
“And the Feds havent even gotten to So Cal en mass yet to uncover all the fraud”
“Every other call is from some shady mortgage broker wanting me to pump value, so he can shop his loan to the next great OC subprime lending outfit. After he hangs up with me, he calls the next guy on the list until he gets someone to say yes, maybe the 2nd or third call.”
This is at the heart of the overpriced housing valuations in LA. The Shady Mort brokers are finding equally shady LA appraisers to overvaluate LA homes, which in turn sets the comps for the entire neighborhood, and which is buttressed by zillows equally overestimated LA prices. They can thus secure outlandish loans of $400-500,000 for 80-year old 700 sq ft termite-infested clapshacks in SCentral LA and quickly package these loans to the secondary market/sba’s/new century financials,ect.
It’s too bad that you are based in the OC, because the problem of fraudulent overappraisals has to be 10 times worse in LA, due to LA being the fraud/crime/gang capital
of the USA.
The Fed has not as far as i know even layed a finger on LA RE fraud activity. There are a host of powerful interests in LA which do not want to upset the RE applecart. Civic leaders, LA times, Local REIC, Local revenue-starved municipalities, Minority housing activists.ect. All are deep in the overhyped, overpriced LA housing ponzi scheme and any investigations which shed a bad light on LA RE would ignite an already smouldering LA RE bubble Market into a massive firestorm bubble collapse.
Interesting article considering I am thinking about investion in the Vanguard REIT. I wonder what effect if any this impending collapse will have on the solid REIT like Vanguard. I have been concerned about buying it but wouldn’t you know the value is up 9% year to date.
Apartment REITS will tank in the this year and next, as the unsold housing inventory turns into rentals. Apartments have been selling at 5% cap rates. It is going to be very hard to generate cash flow as rents drop and vacancies rise. Some will actually go underwater. Commercial property REITS may feel it in a couple of years, but there are too many factors to be forecasting that far out.
thanks for the heads up paladin.
Check the diversification of any REIT or REIT fund. The Vanguard is not just an apartment REIT fund. Also, there are some who argue that apartment REITs might do better in some markets with housing prices dropping due to demand for apartments. In any case, stay away from mortgage REITs. (I am a housing market bear and still own some Vanguard)
‘Apartments have been selling at 5% cap rates. It is going to be very hard to generate cash flow as rents drop and vacancies rise’
You are absolutely correct in that. I’ve been following 6-8 unit bldgs in LA for a few years. They were selling well below 5% cap rates 2 years ago but are now about 6-8% with huge amts of inventory coming on the market. This, more than anything spells recession because these prices are based on real economics and not Las Vegas type emotions and stupidity (like SFR prices). Also, the baby boomers are ready to cash out and leave.
So how can we make a little dough off of this inflection point? Buy Gold?, Go all Cash?, buy stocks of publicly traded Collections Companies? (if they exist).
learn to speak Auctioneerese
For Mugsy, and all of us long suffering readers of this blog, headlines from today’s Wall Street Journal and an extra tidbit at the end.
Stocks Fall Sharply
Financial, Housing Stocks
Fall on HSBC Warning,
Toll Brothers Results
By WORTH CIVILS
February 8, 2007 11:44 a.m.
Toll Brothers Orders Fall 33%
As Housing Slump Continues
FAULTY ASSUMPTIONS
In Home-Lending Push,
Banks Misjudged Risk
HSBC Borrowers Fall
Behind on Payments;
Hiring More Collectors
Mortgage Refinancing Gets Tougher
As Adjustable Loans Reset at Higher Rates,
Homeowners Find Themselves Stuck
Due to Prepayment Penalties, Tighter Credit
New Century to Restate
Results for 2006
By a WALL STREET JOURNAL Staff Reporter
February 8, 2007; Page A13
New Century Financial Corp. said it will restate financial results for the first three quarters of 2006 to correct accounting errors regarding the company’s allowance for loan-repurchase losses.
And for desert.
http://www.youtube.com/watch?v=9uz4_jBc-oE
Got Scotch?
grubs
Ahhhhhhhhh………………………
Really cool to listen to it while scrolling through Ben’s posts. Thanks for that, grubner!
in 1992 my friend rented a bank building and they never billed him for rent
A bank? NOT charging for something? Quick, tell me the name of this bank. I’d like to do business with it…
It was probably called the…..RTC. I had a friend who owned a $7,000,000 building in 1994 and his bank was taken over by the RTC. He quit making the payments for 9 months and the RTC sold him his $4,000,000 loan back for $2,400,000.
And by the way, I now rent the larger house I needed…..from a stuck flipper. His wife was complaining how she has to add $3500 to my $2000 rent check every month just to make the loan payment. They paid $750,000 in early 2006, sat vacant 6 months and let me rent it. The latest comp is $500,000.
I pray to the east, in Ben’s direction, 5 times a day!
“And the ‘BubbleSitter of the Week Award’ goes to…. paladin!”
[clapping, cheering, whoops of laughter and joy, music]
I must say that it warms my heart to hear stories like these - just another bitter and greedy renter.
Sold 9/05, rented a new home from a greedy fb who thought he was going to make a mint. The lease was so detailed that we were not allowed to wash the car in the driveway in the back alley. Anyway when our one year lease ended we moved right next door for $500 less per month. Our old rental is still vacant.
I rent for 29% of the cost of owning walking distance to the beach from a long-time owner who doesn’t want to sell.
That is a great rent story Desmo. I’ve had some good ones but that is hard to top. Sure we’ll be earing more of those in the coming months.
(Amazing isn’t it how none of these highly educated “experts” can see any of this coming, yet a bunch of yahoos on a blog can.)
Perhaps because we aren’t being paid to close our eyes. And who is to say that people in these organizations didn’t see it coming? Shut up or get fired, because if we listened to you we’d have to shut down the business.
There are times when the sales department runs things, because they are the ones bringing money in. And there are times when the finance, compliance and legal departments run things, to try to stop money from flowing out. Things just changed. Too late.
maybe some of us had parents who often repeated “caveat emptor”
The yield on NEW is now 35%. I wonder how long until they cut their dividend?
What good is their divi if they are chapter 11?
it was only down 30% today
i was on the yahoo board to read what the posters were saying some guy is bragging he bought 10k shares at 21.65 and will make money on the dividend
Must suck to be him. The stock closed at 19.24 hes already down $24,000.00
Great move. It closed at 19.24!!!
Yeah, he lost 11.1% in stock value, but hey, his dividend rate will rise. Oh, yeah, what dividend. The are no earnings from which to pay a dividend. They are booking a loss for the year…..
The dividend is toast. It’s always the very first thing to happen when cash flow and/or liquidity crisis pops up. With all the notes coming back and NEW isn’t capitalized to handle it, I don’t know if they’ll scrap the div or file CH11 first but doubt it’ll take long either way.
The Bulls kept saying “Not one can predict the future”…How wrong they were.
The Bears knowing the fundemental in RE and Finance did predict correctly the downturn that is currently happening. So far
DA Bears have been hitting the mark each quarter for 2-3 years. I have been seeing the bubble in Northern California (Bay Area) since 2000. I expect prices to do down around far more then other areas.
The removal of stock option indulgence (too few IPO’s in the future) will not be able to fuel the same buying boom as we saw in 1999-2000. Not to mention all the other market forces will put extra pressure on easy money. The housing bubble in SF Bay area need to deflate really fast. Otherwise local employers will leave due to high unsustanible costs. Renters and homeowners alike will suffer in a major way.
We are in the midst of a wealth redistrbution. The money is going to the crooks, look at places like Oakland check last 10 Years history and you would think it had become a desireable place to live.
This has to be remedied first as part of deflating the bubble.
At least the money is going to the people crooks, not the CEO crooks. Or the GS crooks. One million bonus for GS,
one million for Hassan,
http://www.columbusdispatch.com/emailme/emailme.php?story=245041
one million for Papa Guillermo
http://bubbletracking.blogspot.com/2007/02/fraudera-ranch-its-family-affair.html
and 1.2 billion for the Philippino nurses
http://www.nctimes.com/articles/2007/01/06/news/californian/20_44_381_5_07.txt
Did anyone see any announcements of layoffs at NEW or HSBC? I could find none.
The noose tightens…From today’s the Daily Reckoning…
Meanwhile, more bad news comes from the housing market. In Orange County, CA, tax officials are having a hard time collecting. Property tax payments are getting later and later, says the local paper.
HSBC Summary -
875 Full time employees now in the restructuring/workout group to help Subprime Borrowers.
Some interesting tidbits of info:
Approx. $1 Trillion in Subprime/Alt-A/Alt-B/A Minus ARM’s (85% of the Subprime paper which is 2/28’s) are resetting between 2007 - 2009.
When Subprime lenders first rolled out IO on the ARM’s, many had IO Period = Fixed Period. They all talked about the payment shock and eventually went to 5 year or 10 year IO terms. But the billions that were written in the meantime will have some nice payment shock.
When some of these 2/28’s were written in 2004 & 2005, 6 Mo LIBOR was at historic low’s (it touch as low as 1.15% for about 15 minutes). Today 6 Mo LIBOR is 5.39%.
The average Margin on Subprime 2/28’s is somewhere close to 4.50% (some are over 5% and closer to 6%.
Almost all Subprime lenders have a 3/1/7 or 3/1/6 cap Structure. So as these reset at 3.000% above the start rate and become 6 month ARM’s - the Borrowers in at 5.50% + are now facing 8.50%+ - some of it changing from IO to Fully Amortized payments.
The worst part is that anyone in authority knew it was going to hurt, but they relied on the market to “churn” these Borrowers. Unfortunately alot of these Borrowers cannot refi because 1) The value of their home has not increased enough to allow it, 2) They were Subprime borrowers to begin with and have continued to amass debt (forcing reduced doc scenarios) or continued to accrue late payments (affecting their FICO score ) or even worse - BOTH.
And then there’s the looming question, the great mystery:
Just how widespread is the cashback mortgage fraud phenomenon? The dramatic increase in buybacks is an interesting data point in this regard.
It looks rampent enough to have pushed up market values in some areas of OC by $200k. See OCrenter’s excellent blog.
I repeat my previous statements. Down payments are going to quickly go from being a quaint idea to mandatory where anything above a starter home will require 25% down.
First time? Let me tell you about our FHA offerings…
California, Florida, Pheonix, Denver, and DC are going to get creamed. My friends who are consultants are starting to get panicy. Something has changed in the last 90 days and its suddenly harder to get work here in the South bay part of LA… I don’t know why… just who is calling me. (Its the wrong time in the fiscal year to be seeing this too…) Sometimes the cuts in the consultants happens right before a big move or layoffs. I’m hearing rumors about both, but I have no facts to offer today.
Got popcorn?
Neil
But is it an iceberg or an ice cube? I suspect the former, but there’s no direct data at this point.
I can’t wait to see the data compiled by paladin. That should be very interesting.
emcee,
It could very well be an ice cube.
Unfortunately, I won’t know until at best days before its public knowledge about layoffs or moves. Cest la vie.
The Maytag layoffs are brutal. Job losses from Kodak, GM, Ford, soon Crysler, and very soon the mortgage industry. Ouch.
Got popcorn?
Neil
Is Alt-A performance tracked separately? Will that be the next chapter?
Crispy: Can you explain what a 3/1/7 cap structure means? I don’t have any experience in these things, and I’m always trying to learn (just for the sake of knowledge - no plans to ever get involved in this stuff). TIA.
3% - first adjustment
1% - each successive adjustment
7% - maximum adjustment
how does it work?
example: John Doe has a subprime 3/27 ARM with a 3/1/7 margin, initial rate is 6.00%, the typical index used would be the 6 month libor, assume the margin (or add-on) would be at least 5% (low for a subprime loan), the rate will adjust every six months, let’s say Mr. Doe got his loan 1/04, and it’s adjustment time, here’s how the rate will change over time
3/04 (pmts 1-36) - 6.00%
3/07 (pmts 37-42) - 9.00% (fully indexed rate is 5.40% (6 mo LIBOR) + 5.00 = 10.40%)
9/07 (pmts 43-48) - 10.00% (still less than fully indexed rate)
3/08 (pmts 49-54) - 10.40%
If Mr. Doe hasn’t improved his credit in those first three years, he will either have to refi into another subprime loan or maybe he can’t refinance at all, if he couldn’t handle the 6% payment, how will he handle the 9% and above? Or maybe he does improve his credit, but he borrowed 100% and his property didn’t appreciate or maybe even went down in value, now he can’t pay, can’t refi, and can’t sell, hence the term f@cked borrower
In addition, New Century Financial (down $8.61 to $21.55, Charts) warned that it didn’t account correctly for some of the home loans it had to buy back, sending shares 28 percent lower.
—————————————————————————
Ooopsie! Man this would have been a great stock to short!
`It’s kind of a watershed moment where the magnitude of the problems really is starting to come to the surface,” said Brian Horey, general partner at Aurelian Partners LP in New York, which has sold short shares of New Century. “If you could fog a mirror, you could get a loan.”
New Century, the second-largest subprime lender, said late yesterday it probably lost money in the last quarter, will need to restate 2006 earnings, and won’t make as many loans this year as it had previously forecast.
HSBC, the world’s third-largest bank by market value, announced a management shakeup today after setting aside $1.76 billion more than analysts estimated to cover bad loans in 2006. Shares of the London-based bank fell as much as 2.6 percent, the most in eight months.
Shares dropped as much as 7.7 percent at Fremont General Corp. and 13 percent at Fieldstone Investment Corp.
The damage spread to stocks of other companies including H&R Block Inc., which is trying to sell its Option One home lending unit. The shares fell as much as 3.6 percent. Washington Mutual Inc., the nation’s biggest thrift, lost as much as 2.8 percent.
Countrywide Financial Corp. and IndyMac Bancorp Inc., ranked No. 1 and No. 2 among independent mortgage lenders, dropped as much as 4 percent.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aE_Kw1.DmD7s&refer=home
these are all peewee cramer pics-interesting show tonight !
Cramer has already started to distance himself from this mess. In Nov/06 & Dec 06 he was saying subprime lenders.
Here we go. This is the start. Folks will look back on this day as the definitive turning point. I’ve got my popcorn.
Posters on this blog have made similar statements many times, but this time it has some credibility. Good call Kurt.
I occasionally frequent prosper for some peer to peer lending. Here is “featured” loan request from a FB that is really in trouble.
“Who Am I
I am a 42 year old father of 3 children, married for 15 years. I am currently employed as a sales representative for a small well established company. My wife is primarily a stay-at-home mom but also does computer software work from home and runs an eBay business.
What Will I Do With This Loan
I will use this loan to help refinance our current 1st and 2nd mortgages. We refinanced 3 years ago with a 1st loan that had a prepayment penalty that just expired. We started the refinance process but had to stop when our appraisal came back lower than anticipated. All the foreclosures in the area and in our state (Colorado) have decreased home values dramatically. We will use this loan to pay down our 2nd mortgage so that we can refinance both mortgages with a much better rate that will drop our monthly payments by 1/3″.
Needless to say, his loan is not getting much traction at Prosper. As the banks strengthen lending standards, I suspect more and more of these folks are likely to look for loans on Prosper.
Oh well.
They won’t get any money from me, either.
I get about one loan request per month. Turned down five of last six.
‘over 90 percent of the portfolio is working,’ Geoghegan said.
Sure, as of right this moment . . . . Is this guy Baghdad Bob?
What he meant, “We are crossing our fingers and toes, holding our breath, clicking our heels together, hoping, praying that our stupidity isn’t manifested any more than what it already has been.”
This is getting very, very, very, very U G L Y…….
and it is only 4 days removed from the superbowl!
who has the new inventory numbers
Informal tracking is still showing invnetory slowly increasing (a trickle really)…no dams bursting yet (at least here).
I’m seeing new FSBO’s sprouting like wild irises here in Gainesville. This year will be quite a ride.
“The mortgage lender said it didn’t properly account for some of the home loans it had to buy back.”
LMAO!
Oh, and by the way, when I said months ago that loan fraud was orders of magnitude higher than the $1B which was being bandied about, I think I’ve been proven right there, too. HSBC alone has $10.6 billion in bad loans in 2006? What about the rest of the sector?
Got popcorn, whiskey, gunpowder, and supplied laid in. Now it’s time for grand drama. Stay tuned.
“New Century made two accounting mistakes: ….New Century didn’t assume the repurchased loans would be less valuable.”
How are you in the mortgage business, (hell how are you in ANY business,) and not be able to know that in advance.
The same day you admit to not knowing that in advance, is the same day you should close up shop. I mean, what other industry basic knowledge are you maybe missing?
……only if you believe you are invincable from defaults and foreclosures because the underlying asset is rising 20%/year in value. It was…..in 2004-2005.
In the “duh” category, downgrades are next:
Fitch Updates U.S. Subprime RMBS Prepayment Assumptions
Tuesday February 6, 5:25 pm ET
http://biz.yahoo.com/bw/070206/20070206006379.html?.v=1
NEW YORK–(BUSINESS WIRE)–Amid slowing subprime prepayment speeds that have accompanied slower home price growth, Fitch Ratings has lowered its prepayment assumptions by 10% for U.S. subprime mortgages.
Fitch uses these assumptions when rating deals with senior-subordinate/overcollateralization (senior-sub/OC) structures that are typical in subprime securitizations. Fitch also uses these assumptions to rate Net Interest Margin (NIM) securitizations.
When does CountryWide report earnings? I would love to short them!
Good short would be FED.
Yeah, there’s something fishy about the upticks on CountryWide. Every time they report bad news, the prices rise. I’d hesitate to short them unless I could carry it for as long as it takes for the others to go belly-up first. Even then, if it survives while the others fail, it may not fall far enough to make the return worth the risk.
Cramer said to buy CountryWide. Cramer’s record is spotty.
I just found my new Offer Letter format.
———————————————————————–
“Robert Toll, CEO, stated: ‘Because some deals don’t make sense under current market conditions, …
————————————————-
add in, … “So, I will offer (fill in $$$ that makes sense) for your POS house.”
I wonder if this is good news for ING. No wonder they have been somewhat more conservative with their interest savings rates than HSBC….which has always led the rates in savings for while now.
After reading this thread I got curious and poked around the Countrywide and New Century websites. In the case of Countrywide I was actually surprised at the amount of disclosure given to FB’s, i.e.–An interest only loan will only maximize cash flow in the short term. So sure these loans are toxic crap but I lay the blame mostly at the feet of overextended FB’s who had to have the stucco boxin Los Banos or wherever whether or not they could afford it.
I could easily grasp what donwnside of the loans they were offering from their own disclosure.
I agree with you. Most of the blame should be laid at the feet of the borrower. However, prudence would dictate that lenders think about worst case scenarios, such as collapsing housing bubbles, and lend only the amount will not be lost in a downturn. lenders were (maybe still are) lending $800,000 for a $400,000 house, no money down. I guess one can afford to be generous when it’s other people’s money.
400000 homes going forr 800000 is occuring in the less desirable areas. Currently in San Francisco Bay Area I don’t see much difference in prices between good neighborhoods with good schools and the hood where drive by shootings are common.
This has to be remedied as part of the correction. How would you like to buy a 600K home with neighbors who bought 4 years ago making 50 K income and bought a 130K house.
This correction in stock market also has to be part of the equation.
you misunderstand me. Here is Santa Barbara 2/2 800sq ft homes were selling for $800,000 in 2005. Today those homes are selling for $665,000. In 2008 they will be selling for $400,000. What I meant was lenders were loaning $800,000 to people In 2005 to buy homes that will deflate to $400,000.
Here’s an example: Home sale 3953 Carol Ave, Santa Barbara (North La Cumbre) 12/28/2006. 3 bed 2 bath 1108 sq ft detached on small lot, $665,000.
Home sale 3915 Carol Ave (three houses away from 3953 Carol) 2/20/2004 3 bed 1 bath 988 sq ft detached on small lot, $826,000.
The problem is that people in the SF Bay Area are still gulping the kool aid. My wife’s friend is relocating out of state (job related). Their Walnut Creek home sold in two days for $1.3M.
No doubt about it. I’ve got lots friends looking to buy in sf and marin right now. I am a believer in the bear fundamentals at work in the larger market but the coming storm has not yet thrown clouds over the city from what I can discern and probably not the more desireable suburbs like Walnut Creek either.
“…he looked forward to working with brokers, bankers, regulators and Wall Street to ‘restore this balance for the sake of the safety and soundness of the banking system.’”
Kinda too late, don’t you think?
What do the 2 biggest A$$E$ on wall street say about this Kudlow & Cramer.
I am sure Kudlow will explain it as a fringe problem.
HSBC analyst comments:
The Household acquisition had raised doubts among analysts, who questioned whether HSBC had over-exposed itself in the United States.
Investment banks have cut earnings estimates for HSBC by 5 to 8 percent.
JP Morgan downgraded its rating to underweight from neutral - the second cut this year. The investment bank said the higher-than-estimated provision charges will amount to about 8 percent of the group’s full-year pretax earnings in 2005.
Goldman Sachs said HSBC’s provision may not be enough to account for the impaired loans for 2007, which are likely to expand.
Merrill Lynch reiterated a “sell” rating. “We downgraded HSBC to `sell’ in early January, highlighting the vulnerability of the bank’s share price to negative news flow on the US consumer finance market and consequent earnings downgrade,” it said.
Kenny Tang Sing-hing, associate director of Tung Tai Securities, said: “The focus of the market will now be on whether HSBC’s impaired loans will continue to expand in the year.
“HSBC could have a better outlook as soon as the US housing market shows relief.”
I have this site primarily to thank for making money instead of losing it this past year. I began researching in the summer of 2005 to do some add’l real estate investment, noticed instead the cracks beginning to appear and instead shorted homebuilder stocks on 8/1/05. I since have covered them at a profit and replaced them with LEND and NEW both bought in mid-30s. Those shorts went up to around 50-60, but I never covered. Had thought about adding more, but didn’t, too bad. Covered 400 shares of NEW today at 22 late this a.m. thinking it’d bottomed for a bit. Still have the LEND 800 shares short and a couple weeks ago I added a 3rd short FICC, 4000 shares which is up 17%. Well down in reality, but up for a short. Bottom line, I made around $7,000 today. Happy day. Our friends too thought we were nuts for passing on real estate in 2005. Thanks Ben!
Do what I do, and send a little money Ben’s way to show your gratitude. It takes a lot of time and cost for Ben to keep this blog going for us.
“Toll Brothers Inc. said it may post quarterly writedowns as high as $160 million or more, which would handily top its previous estimate for all of 2007. The home builderposted first-quarter home-building revenue of $1.09 billion, down 19% from the year-earlier period.”
Uh, this means their stock price should be going up soon, because they are getting more profitable, right???
Right, GS!
“HSBC Holdings Plc CEO Michael Geoghegan is shaking up management and tightening lending policies after the bank’s losses from bad home loans in the U.S. increased. HSBC made the mistake of ‘going for volume’ and selling second-lien mortgages, Geoghegan said. The company plans caps on riskier lending, he said.”
NPR’s Marketplace tonight had the HSBC saga as its top story. Apparently an army of rocket science financial quants with whiz bang financial models and computers aren’t quite as adept at anticipating the effects of subprime lending as a ragtag band of bloggers wearing tinfoil hats.
BwaHaHaHaHAAAA!
“Dodd said ’subprime credit can be a valuable tool in helping people become homeowners’ but ‘the system is out of balance.’ He said he looked forward to working with brokers, bankers, regulators and Wall Street to ‘restore this balance for the sake of the safety and soundness of the banking system.’”
How will they restore balance? Purchase 2.7m vacant homes with taxpayer dollars? Or is there some other rebalancing scheme underway?
HSBC claims they underestimeated the risk in subprime lending and in particular failed to contemplate possible problems with stated income loans
Hint: when someone is working as a fry cook and claims to be making 300k a year - its usually a dead give-a-away there is a problem
.
From CNN World Business. “Europe’s biggest bank, HSBC Holdings, said its charge for bad debts would be more than $10.5 billion for 2006, some 20 percent above analysts’ average forecasts, due to problems in its U.S. mortgage book.”
THIS IS THE CLEAREST SIGN to date that it has begun…HSBC and many other banks will suffer huge, if not unsustainable losses…all these big mortgage companies will fold…it is going to severely adversely impact the economy…give it a year…
schilling, bitter?
crush
Lots of these subprimers are going to be turning the keys in and running - and why not - since many have near zero down on the property in the first place - they got nothing to lose
That 1800 dollar a month payment in some cases is going to reset to 2400 dollars or more and when these borrowers realize its going to be 5 to 10 years or more to get out of a negative equity situation - they will run
Same thing happened in Houston in the mid 1980’s - at that time via no down VAs and FHA’s