Mortgage Market A Potential “Fault-line”
Some housing bubble news from Wall Street and Washington. “Countrywide Financial Corp., the biggest U.S. mortgage lender, said payments were late at the end of last year on almost 20 percent of the subprime loans it tracks for other companies and investors who own them. CEO Angelo Mozilo has said the company holds only higher-quality prime loans at its bank and pulled back from subprime lending last year.”
“‘If you look at our market share, we lost some for the first time in years, but it’s all in the subprime area,’ he said in a Feb. 8 interview. ‘We were a dominant player, and now subprime is a pretty small portion of our business.’ One reason was that rivals were paying salespeople in the business too much, and ‘the other reason was we wouldn’t take the toxic waste,’ he said.”
From Business Week. “Big banks’ loans are souring. Bad loans, so-called nonperforming loans that include mortgages, rose 11% in December, 2006, vs. December, 2005, at banks with more than $10 billion in assets, says SNL Financial. Some are setting more money aside or buying extra insurance to cover losses. Countrywide plans to buy insurance on up to $19 billion in loans, roughly a fourth of its portfolio.”
From Reuters. “Rising delinquencies may cause losses within some subprime mortgage bonds rated as high as the ‘A’ rated classes, despite conventional wisdom that only the lowest-rated mortgage securities would be hit, according to UBS Securities data.”
“Among the 20 subprime asset-backed securities in a benchmark index, the ABX 06-2 index, run by Markit Group Ltd., six will likely sustain losses to ‘BBB-’ classes based on UBS calculations, analysts said.”
“Projected losses are so deep on two issues that they may exceed levels of protection included with the higher-rated classes, they said.”
“‘People think the higher rated stuff will be protected because it’s well subordinated’ with lower-rated pieces, said Kevin Jackson, a mortgage strategist at RBC Capital Markets. ‘That’s the assumption people are making, but I agree there could be some problems higher up, at the margin.’”
From Fortune. “When a certain $126,000 subprime loan on a $696,000 house on the West Coast failed to produce a single mortgage payment, alarm bells went off at Clayton Holdings, a company that monitors credit risk.”
“Closer scrutiny revealed other red flags. The borrower’s previous rent payment had been $1,000, compared to the $4,482 she was supposed to be shelling out for both the primary loan and the $126,000 piggyback. And her stated income was $84,000 even though she was an hourly worker at Target.”
“‘We do an autopsy to find out what caused the loss of blood,’ says Keith Johnson, Clayton’s COO. ‘It’s a CSI subprime.’”
“Particularly troubling for investors is the rapidly deteriorating quality of subprime vintages originated in 2005 and 2006, years when lenders were downright promiscuous about who they loaned money to. Serious delinquencies, defined as loans at least 60 days late or in foreclosure or bankruptcy, for a 5-month old loan originated in 2006 is running at almost 4 percent, according to Moody’s, compared to 2.2 percent for a similar loan originated in 2004.”
“‘The scariest part of that statistic is the fact that 2006 borrowers are still in their fixed-rate period. ‘What will they do when their payment starts to rise?’ says Glenn Costello of Fitch Ratings.”
“‘If there is a fault line in the global financial system, it runs through the U.S. mortgage market,’ says economist Mark Zandi. ‘If some hedge fund blows up on a residential mortgage-backed securities investment, that has very different kinds of implications because it is the biggest chunk of the global fixed income market. So the ripples will be more like waves, and it could turn into a tsunami.’”
The New York Times. “Insurance premiums on the potential default of Wall Street bonds have risen sharply, indicating possible concern among bond traders about potential exposure. The cost of insurance against potential bond default on Bear Stearns’s debt, for example, increased 40 percent recently, from about 22 basis points in mid-January to more than 31 on Tuesday, according to Lehman Brothers data.”
“‘It is impossible to get a number’ on big investment bank’s exposure to subprime loans, analyst Richard X. Bove told The Times. ‘And I don’t think they even know.’”
From Origination News. “Ivanhoe Mortgage, a $2 billion-a-year conventional/government lender based in Orlando, Fla., has closed its doors, according to industry officials familiar with the company.”
“IndyMac Bancorp, Inc., the holding company for IndyMac Bank, today released its annual letter to shareholders from Chairman and CEO Michael W. Perry.”
“‘Dear Shareholders: 2006 was a challenging year in the mortgage banking industry. Industry loan volumes of $2.5 trillion were 34 percent below 2003’s historic high level and 17 percent lower than in 2005. Mortgage banking revenue margins declined further after sharp declines in 2005, and net interest margins continued to compress, as the yield curve inverted with the average spread between the 10-year Treasury yield and the 1-month LIBOR declining from 89 basis points in 2005 to negative 31 basis points in 2006.”
“To cap it off, the housing industry slowed down significantly, increasing loan delinquencies and non-performing assets and driving up credit costs for all mortgage lenders.”
“We have seen the return on equitys we are earning on our whole loan and MBS portfolios decline, and even fall below our cost of capital at times for some assets, such that it does not make economic sense for us to grow these portfolios to the extent that we had previously planned.”
From Bloomberg. “Construction spending in the U.S. fell by the most in three months in January, pulled lower by the biggest decline in homebuilding since July. Residential construction fell at an annual rate of 19.1 percent in the fourth quarter and subtracted 1.2 percentage points from economic growth, the government said yesterday.”
“‘There is so much overbuilding in the last few years that we have to work down that inventory,’ Federal Reserve Governor Susan Bies told reporters in Durham, North Carolina on Feb. 20. ‘This could take us a year to two years depending on where the location is.’”
“U.S. banking regulators plan to issue eagerly awaited guidance on the subprime mortgage market as early as Thursday afternoon, two sources familiar with the matter told Reuters on Wednesday.”
“The proposed regulation affecting borrowers with poor credit histories will be issued by agencies, including the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.”
“At issue is whether regulators will force lenders to qualify subprime borrowers based on their ability to make the highest possible monthly payments during the life of the loan, instead of the initial lower rate, according to banking experts.”
“‘The idea would be to have in place some criteria by which institutions would be able to evaluate the effectiveness of their programs and whether or not there are potential safety and soundness and consumer protection issues there,’ one source said. ‘They (the lenders) should already be focusing on that.’”
‘Analysts have been stumped by the apparent resilience of the American economy, which seemed to be bounding ahead at a 3.5 percent pace in the final quarter of last year even as the housing market fell and the Federal Reserve raised interest rates.’
‘The paradox has been solved: the economy was not bounding. The Commerce Department reported yesterday that economic growth inched ahead by 2.2 percent in the fourth quarter of last year, only slightly faster than the 2 percent growth recorded in the third quarter and substantially below the economy’s long-term trend rate of growth.’
‘The downward revision, by 1.3 percentage points, in the preliminary estimate of gross domestic product was almost three times the average adjustment since the early 1980s, which is 0.5 percentage point.’
“The downward revision, by 1.3 percentage points”
Wow, they were only off by 37%! (3.5% -> 2.2%)
That seems like a lot to be ‘revised’.
It’s worse than that: looked at another way, they overestimated by more than 50% (3.5% / 2.2% = 159%).
The way government economic statistics are collected, the hardest thing to do is call a turn.
We’ll have to see what the “rebenchmarked” current employment survey data shows for 2006. New York State will be out March 7th; not sure about the national.
2.2% from 3.5% and it barely made headlines on Wall Street! The street was so easily spooked by the spector of a China downturn that it hardly noticed the housing crash even though Wall Street analysts are clearly now acknowledging the blood in the streets from the mortgage industry meltdown. I believe it will be corrected downward from here to recession by next autumn, when the country will have been in recession for some months.
Whadditellya? There’s always a downward revision.
They purposely prop up the initial number to drive foreign investment in the stock market. Then they weasel out the real number months later, kind of like printing a tiny retraction in the corner of page 4 of the newspaper.
Govt statistics of economic strength are notoriously inaccurate during periods of changing trends. When the economy is expanding they tend to underestimate, resulting in “upward revisions” months later. When the economy is contracting they tend to overestimate, resulting in “downward revisions” months later.
Don’t they sell Tickle-me-Elmo’s at Target? Maybe they should check their inventory levels and restock.
“Closer scrutiny revealed other red flags. The borrower’s previous rent payment had been $1,000, compared to the $4,482 she was supposed to be shelling out for both the primary loan and the $126,000 piggyback. And her stated income was $84,000 even though she was an hourly worker at Target.”
Even on $84,000 a year I wouldn’t even consider a property costing nearly $70,000 as a suitable purchase.
We are almost back to the time of the tulips.
(make that $70,000 into $700,000)
I sort of liked your typo. $70K could possibly be a reasonable price for the house that an hourly Target worker should be buying, provided she makes something more than minimum wage.
A Target worker who has a $4,482 monthly payment. LOL! BTW, the stated income mess started earlier then people think. I was hearing about the overuse of them back in 2002.
84K stated income…..HOW did she qualify for the second loan?
“Even on $84,000 a year I wouldn’t even consider a property costing nearly $700,000 as a suitable purchase.”
Exactly. Not only were the the lenders lied to with a a stated income loan, but they accepted the loan with a (in my opinion) ridiculously low high loan to income ratio ON THE LIED ABOUT INCOME. *Sigh*.
“ridiculously low high” -> “ridiculously high”
Yeup, this loan was approved at over 8X to income, but tacit approval was about 32X to income. I say “tacit” because anybody who had anything to do with this paperwork/file (that would be the very inquisitive, highly educated and well paid professionals at these lending institutions, right? - curiosity is a sign of intelligence, right? - I mean these lending institutions only hire the best graduates in business/finance, right? - I mean the morons that somehow get through their higher education are the finance guys at the used car lots and “facilitating purchases” on $20k cars but are certainly not making decisions on $700k loans, right?) knew exactly what was going on.
Don’t they have to list who their employer is on the loan papers?
People,
I now understand getting a masters degree, becoming an expert in a difficult field, and saving responsibly were foolish. I should have just worked at Target and purchased my dream home and I would have been an instant land owning lord!
If she is in trouble, she’ll be bailed out.
This is a job for TEAM CASEY!
Got popcorn?
Neil
Hey Neil,
Have you been brushing up on your
Casebonics?
example definition:
Team - made up of professionals, bean counters, guru advisers, friends with cash. Led by the Idea Man. The goal of the team is many many sweet deals.
Neil, asked you yesterday, don’t know if you saw it:
Are you a stockholder in ConAgra (parent of Orville Redenbacher) ?
Casebonics - that is hilarious.
I took a very quick look and noted that for the second time in less than a decade (dotcom bomb), I’m one of these in the evolving stage, though I’ve hardly given advice:
“Trainwreck Watchers - not hateful enough to be Haters. Watching out of curiosity or for entertainment. Typically try to give advice for some period of time. The trainwreck watcher inevitably evolves into a Hater when advice is ignored over and over and over.”
Casebonics — I just looked.
Man, was I confused about a Blue Ball. Go ahead and take a guess at what a Blue Ball might be in a stagnant, declining real estate market.
You know, I find it hard to believe that the lenders were “lied to.” Sure, maybe the Target worker was complicit in this. But this lender really only itself to blame. They certainly have/had the capability to find out where this woman lived and worked in the recent past. They just didn’t CARE.
The lenders didn’t care if she was lying. They didn’t care about her income or about anything else. All they cared about were the hefty loan origination fees they collected.
Remember, at the time this loan was written the VAST majority of all people working in any RE related industry believed that house prices would continue to go up and up pretty much forever.
So, if they believed that house prices would go up, it didn’t matter that this and millions of other loans stank on fundamentals. Lenders figured that the sheep could sell or refi and it would just generate more fees and everybody would be happy.
THIS was the mentality until very recently. The whole stated income scam was a wink-wink con to give loans to anybody at all and generate fees. In fact, it was a good deal if the customer couldn’t make payments - that way they’d be forced to refi and generate more lovely fat fees.
There are so many layers before the final lender that all the wrinkles are smoothed out before they ever see it. Little wrinkles like maybe a 520 FICO, or earning less than 25k/year at target. No one care because after they get their fee their skin is no longer in the game.
The oversight is miserable and will burn a lot more than the 27 mortgage lenders who have gone out of business to date.
I wonder if this is not a case of the borrower being a straw buyer….a little cash back, a little fraud….It’s all good.
I wonder if this is not a case of the borrower being a straw buyer….a little cash back, a little fraud….It’s all good.
That was my first thought as well. She probably got cash up front at closing and never even planned on making a single payment.
Oh to add…….and the mortgage broker was probably in on this as well
Print the money, print the money, print the money.Loan it out. Collect the commissions/fees up front never to be returned. Banks/lenders had it made. What a scam. O well I guess it had to come to a end. Am pretty sure the “insiders” put their pocket money somewhere safe. Wouldn’t that be a surprise if they put it in gold/silver bullion? Who will be having the last laugh?
There we go, that is why the regulators took a blinded eye to this “stated income loans”…they needed to pump the money suppply till she ran dry!
Now they know the great money machine has run out of borrowers and unqualified borrowers, its time to tighten the standards, so the money supply shrinks faster.
What we all need to know about our money is this:
1) If all loans were repaid or defaulted on there would be no money.
2) A fractional money lending system requires borrowers to increase the money supply. As the mortgages and other defaults exceed the capacity to lend to others. All assets values will contract.
At 84K supposed income this gal could not have made 54K a year in payments and had enough left over for living expenses and taxes.
Hey, that’s my line.
The market and the analysts are surprised again by more problems at a subprime lender: “The market was surprised by this, as we were as well,” Vincent Arscott, a director at Fitch and the lead analyst on Fremont, said. “In situations like this, companies usually give a reason why they’re delaying filings.”
http://tinyurl.com/ynmg64
I really don’t get the “surprise” aspect on any of this, at all, at this point. What info could they possibly be looking at that would defy all logic and plain sense?
Playstations would be more profitable;-)
That is about the most rediculous story ever. Who approves a loan like this?? Of course it was going to be a scam!
Unbelievable…
Well, yeah, there’s the idiot lender’s side. But what kind of a moron thinks they can swing a $700K house on any salary under 6 figures (let’s not even get into the fact that it was an hourly retail wage)?! And…what kind of arrogant fool thinks they are ENTITLED to own a house like this on that salary?! Lender was stupid; buyer is the root cause of this problem.
Hourly target workers should not be purchasing a house, period. But a $700k house? The lenders screwed up on this one. The risk was more than obvious. They just wanted the fees.
The only problem is that we’re loosing our career employment positions and getting more and more “wallmart clerk” positions. If we go with the idea that only professional employees can own a house, then almost everyone will be renting in the future - ouch.
Back in the 50 and 60’s, mechanics, store clerks, and other unskilled labor did purchase homes, although very modest ones. I’d like to see us get back to that level. No more McMansions and learning how to live in smaller spaces with less stuff. It’s not as hard as it seems.
“Hourly target workers should not be purchasing a house, period.”
That is Economic racism - Why shouldn’t an hourly employee buy a house? The problem is that in most of the country it is no longer affordable for these hourly employees to purchase. It is not that these people do not wish to work and have the same hopes and dreams as all of us. It is that these hourly workers have been steadily robbed by the pervasive inflation fostered by the federal reserve banking system.
Hourly workers were (are?) the backbone of this country.
Hoz: I don’t mean to speak for BanteringBear, but I think that his comment was that hourly Target workers should not be purchasing a house - not that no hourly employee should. Clearly, the Target hourly workers are not making high wages, but some hourly workers (e.g., construction workers, mechanics, etc.) make a decent wage and can buy a house in many (though certainly not all) parts of the country if house prices are in line with fundamentals.
Also, WTF is “Economic racism”? Race has nothing to do with this (thus, it’s not racism). If you mean that it’s discriminatory based on economics, then yes it is but the reality is that we’re dealing with an economic decision (to buy a house) that needs to be based on sound economics (i.e., the person needs to be able to actually “afford” the house). Poor people can’t afford houses in most places, so they shouldn’t be buying if they can’t afford it. (It’s like the Steve Martin bit about not buying stuff you can’t afford). If you’re referring to some distinction between hourly vs. salaried workers, then see my comments above about the statement being directed to Target hourly workers (not all hourly workers).
Thanks for understanding my point WaitinginOC. Hoz, have you checked Target wages lately? Get back to me when you can show me they can “afford” a house in this market. And quit your generalizations. I said “Target”, not “all hourly workers”.
Economic racism is the curtailment of those economic opportunities that are preconditions for full participation in all other aspects of American life.
Housing affordability has been curtailed for most minority Americans.
And race does play a big part of this. The lower rungs of the pay ladder are held by minorities, the opportunities are not there.
Bantering Bear - you never wrote “Target”! And in 1993 a Walmart employee could afford to buy a house in most of the midwest - full doc.
My point is that the crisis is ” that these hourly workers have been steadily robbed by the pervasive inflation fostered by the federal reserve banking system.”
This has resulted in economic racism - wage exploitation combined with asset inflation. Is this an intentional policy of the government? I have no idea, but the residents in New Orleans believe that FEMA stands for F**K Every Minority American.
“Hourly target workers should not be purchasing a house, period.”
“Bantering Bear - you never wrote “Target”!”
Might be time to lay off the sauce Hoz.
“Hourly target workers should not be purchasing a house, period.”
Well… NO. At some level, even the marginaly employed should be making a subsistance wage. Unless you’re implying that hourly workers should be homeless, they WILL be spending money on their housing, either as renters or purchasers. It IS true that you can either pay your mortgage or someone else’s. One of the proofs of a RE bubble is that rents WON’T pay the mortgage of a landlord, even if that landlord has access to credit that is unavailable to his tenants. Now people who don’t pay their bills, and can’t save up a down payment don’t “deserve” credit regardless of what their income is. But for people who can, it is a good thing to have credit available to them to so that they may purchase rather than rent their housing.
Jim A. and Hoz. Is it your position that hourly workers at Target can afford a home at todays bubble prices? If so, then I vehemently disagree with you. I believe they cannot, and SHOULD NOT even attempt to buy in this environment. You’re preaching to the choir when it comes to what housing prices SHOULD be. In an environment such as this, hourly Target workers should be renting, not buying. Purchasing is financial suicide. Read the above story provided by Ben if you cannot grasp this.
In principle, hourly wage workers should be able to buy a house. The sad reality, however, is that they do not earn enough to afford decent housing. Nor, for that matter, do most schoolteachers, cops, firemen, and other lower-middle class (by income) workers. That is a fundamental problem in our society. My dad, on a modest carpenter’s salary, was able to buy a nice (albeit small) house in a decent neighborhood, while Mom stayed home to raise the kids (what a concept!). Money was tight - we were so poor, one day a burglar broke into our house, and we robbed him! (drum roll, please). OK, that last bit wasn’t true, but not so long ago, blue-collar people of modest means who avoided taking on debt could afford to own good homes in good neighborhoods. Over the past two decades, however, something in the basic order of things has changed, and is changing still - and not for the better. Those in the lower 80% income bracket are steadily losing ground and seeing their futures as a great cold blank, while corporate swine stick their snouts ever deeper into the trough. This is not a recipe for long-term social and political stablility.
Retail hourly wage = $8.50 per hour @ full time + 10 hours overtime at 1.5 x base = ~$24,000/yr.
@ 5x gross pay = $120,000
@ 7.5x gross = $180,000
@10x gross = $240,000
@20x gross = $480,000
This person should not be buying a house. This person should be investing in things that will improve her skills make her worth more so she can save money to buy a house.
This has nothing to do with ‘racism’ or classism. It has to do with market economics. The same market that does not value this person’s contributions and skills, values the money that investing in RE has brought.
Why can’t she afford a houseon her wages?
If she can’t afford a house, how is it that she could buy one that was priced at 29 times her guestimated yearly earnings?
Read the previous 2000 entries on Ben’s blog.
I have to chime in on Hoz…
Obviously, Hoz is conflating two issues in a manner which doesn’t make sense. (And insofar as they do make sense, Hoz is arguing the illogical side.)
But, if the choices are economic racism, or economic ‘equality,’ I vote for economic racism. I think that is the whole point in collapsing the credit bubble. Discrimination must return to the credit market. No more fogged mirrors.
Bantering bear: NO Stupid levels of credit have pushed house prices into a place where NOBODY should buy. We’re currently experiencing the “credit is too easy” failure mode in the housing market. I’m just saying that there is also a “credit it too tight” failure mode. That’s where the difference in credit availability between landlords and tenants is such that even those with stable jobs who are not profligate with their spending cannot take advantage of the benefits of owner-occupation. This is the sort of problem that “It’s a Wonderful Life,” was propaganda against.
Backstage: There are numerous economic advantages for somebody with a secure job to own their housing. Where is this hourly worker living now? If they’re paying rent on a apartment there should be a condo available that they can afford to make monthly, ammortizing payments on after they’ve saved up a downpayment on. I’m not using “should” to imply some sort of moral imperative, but an economic one. There are enough economic efficiencys in “owner occupation” that the credit market would be expected to enable it.
Hey I want a 120 foot yacht and a leer jet! Bill Gates has a nice big yacht and nice things. This is economic racism too. Where do you draw the line? Obviously, not everyone can afford stuff to one degree or another, so this is not racism it is simple 1 2 3 math. Minimum wage employees have never been able to purchase property, and giving them loans they cannot pay back only further damages their economic outlook by further destroying their credit and self esteem.
At 32x earnings, I could finance Anna Nicole Smiths yacht.
You are right, eastcoaster, the buyer is at fault too.
People these days attempt to do what they can get away with it seems, without consideration whether it is right or wrong. (What would an hourly Target employee have to loose?)
But how can a loan like that happen? I would get a more thorough background check if I attempted to obtain a Macy’s credit card.
And THAT is the root of the problem, my friend
It’s all scam, bag holders are MBS buyers (Chinese, Arabs)
-Realtors, appraisers, loan officers, escrows, lenders all made money
collecting fees and commission.
-Buyers got cash-back, probably 100K. They’ll abandon the houses.
-Sellers got inflated profit.
-Lenders dumped the loans to MBS buyers. Lenders now close up shop
and vacationing in the Bahamas.
This is beautiful American ingenuity.
Just look at it as a rebate…….
“Closer scrutiny revealed other red flags. …..
So, looking at the Buyers income, job, and current rent is ‘closer scrutiny’…… -
‘It’s a CSI subprime.’”
More like Keystone cops subprime……
“‘If there is a fault line in the global financial system, it runs through the U.S. mortgage market,’ says economist Mark Zandi.
BINGO!
‘If some hedge fund blows up on a residential mortgage-backed securities investment, that has very different kinds of implications because it is the biggest chunk of the global fixed income market. So the ripples will be more like waves, and it could turn into a tsunami.’”
For those more savvy than I, please explain to those who frequent this blog how and why this presents a huge risk of sysyemic meltdown. We have some great minds on this blog, so I won’t attempt it. Many do not realize haw far reaching the MBS mess has become. Delve into this a little, won’t you?
LEVERAGE. It’s a bitch when the market goes against your bets. LTCM ring a bell? With the rise of unregulated dotCom like Hedge Funds (new entrants — anyone including grandma can print their own) we could have several LTCM like situations…
Plus nobody cared about risk since they “insured” the MBS paper with credit default swaps, which are now getting real expensive. I think that’s where the pain will show up.
This brings to mind Warren Buffet’s great quote:
“Its only when the tide goes out that you find out who’s been swimming naked.”
When you go to collect and the insurer is broke… bummer. We’re about to find out just how many companies were skinny dipping for the last FIVE YEARS. This is insane…
So wait… Inventory is still marching up on a nice linear trend (nationally).
Got popcorn?
Neil
Once again, for the sheeple. YOU CANNOT RUN AN ECONOMY ON DEBT, ESP. THIS KIND OF WAAAAAAY OVEREXTENDED DEBT THAT IS ATTACHED TO ADJUSTABLE RATES AND NOT EVEN PAYING THE PRINCIPLE IN MANY CASES. Too many aren’t leveraged, they are way overleveraged.
Unfortunately, may people and companies are going to find out that….
DEBT DOESN’T = Wealth.
They are going to find out that debt is a beeatch when the bill comes due.
YOU CANNOT RUN AN ECONOMY ON DEBT, ESP…
wrong, Gypsy Caravan breath. I predicted the current market conditions in my Second leaflet, 23rd quatrain, 8th verse. Five centuries ago.
——————–Nostradamus
p.s. it’s in the Bible Code too.
Well Phillygal, if we are using Nostradmus and the Bible Code to foresee/project how to run the economy then we are in worse shape then even I could ever have imagined!
do tea leaves work for you?
Tarot cards.
How about entrails of hawk and eagle?
My friend’s Middle Eastern mom reads coffee grounds after the liquid has been consumed. Should I ask her what the grounds say about the economy?
p.s OCDan methinks you’re too young to remember Carnac the Magnificent. that’s where the gypsy breath thing comes from.
No, I remember.
“May the fleas of a thousand camels infest your armpits,” Phillygal.
thank you Carnac
OMG I’m laughing so hard I can’t even remember WTF Ed McMahon used to say
Carnac say Dow 15,000 by Ides of March
LTCM bailout ring a bell?
This ill-advised maneuver gave rise to explosive growth in new hedge funds all eager to share in the Fed’s blanket too-big-to-fail guarantee.
“…why this presents a huge risk of systemic meltdown.”
It was touched on above, but systemic meltdown would occur if there is no party capable of insuring the losses. Almost all of the mortgage backed securities are insured by someone in case of loss. Since these insurers tend to be unregulated hedge funds that so far have not had to pay out any claims, nobody knows if these funds have the capital reserves to cover the losses. Once it becomes apparent that nobody is going to cover these insurance losses, nobody will want to make these loans, and the entire system will collapse.
Creating confidence in this insurance was the entire reason for the creation of Freddie Mac and Fannie Mae. Similar in function to the FDIC, these entities have federal government backing to give investors confidence in the markets they serve. Since sub-prime loans are generally not packaged by these two entities, a catastrophic loss of confidence in these loans is not just possible, but likely. This loss of confidence will disrupt lending and cause a credit crunch, the severity of which is yet to be seen (although it is probably going to be pretty bad).
IrvineRenter: You seem to be a level-headed intelligent person. If I remember correctly, you work in the land side of development, and for a company that is smart (i.e. not paying stupid prices like the builders were). What are your recent observations, and is there any scuttlebutt concerning fear/panic amongst the builders? Thanks!
Insurance is only as good the the solvency of the instution providing it.
Interesting question, and the answer is complicated, but it’s important. The loans that are now going bad are owned by a variety of entities, but a lot of them are owned by hedge funds. Hedge funds don’t play by the same rules as mutual funds, and don’t have to own the loans outright; a lot of them have borrowed money to pay for them (8% from sub-prime loans minus 5% cost of borrowed money = 3% “free” profit.) Depending on what level of leverage the lenders allow, the hedge funds can have far less than 50% of the value of the loans (what a lot of regular people like you and me have to have) on margin.
So, if $1billion of sub-prime loans go bad in some extremely heavily leveraged hedge fund, they could owe for the corresponding $1billion in borrowed money to pay back, but with only, say, $100million in cash sitting around. The sub-prime borrower’s problem has become the hedge fund’s problem–but, and here’s the important point, the hedge fund’s problem has now become their lender’s problem. And who is lending to the hedge funds? Big banks.
At this point, the only apparent problems are with the sub-prime lenders, who are being forced to buy back loans (from the big banks and the hedge funds.) But just wait until the earnings for some of the hedge funds start coming back–and after that, it will be the big banks. There are plenty of negative surprises yet to be had. HSBC may actually have done the right thing by coming clean on their exposure early on–who knows what’s going on with Bear Stearns, or Bank of America, or any one of a huge number of hedge funds. And that’s all without the additional layer of leverage created by credit default “insurance”, which only makes the situation worse, not better.
I’d have to say that Wednesday’s losses are the portend for what’s coming down the pike. The smart money is trying to quietly exit the market. The asians just got ahead of themselves. This bear turn is going to accelerate.
I hate it when people reply to thier own comments but..
BANNER DAY!! NODs in 93552 surpassed previous record in Feb. As of today there are 65 showing beating 61 for Dec. This trend has just turned back up. Until today I thought they might be pushing over the top of the hump. I now expect March to be even worse. (meaning better)
I talk to myself all the time, and more frequently as of late.
Talking to this blog is also a lot like talking to oneself. We are doing classic group-think. But, the facts are confirming that unlike the Bush White House, we have clairvoyance on our side. In the literal sense of the word (seeing clearly).
Google has failed me — what does NOD stand for?
NOD = Notice of Default.
Notice Of Default. That’s the first notice sent by the bank to a borrower after the borrower has failed to make payments. Some NODs get resolved (by the borrower paying up) while others go on to become foreclosures. NODs are a leading indicator for foreclosures, which in turn drive market prices down.
In other words, with NODs at record highs, the downturn in housing is far from over.
Notice of Default (ain’t paid the mortgage)
My colleague hasn’t paid the mortgage since October. Just waiting to be booted out…
Goldilocks is biting the pillow.
Ok, I’m getting a new keyboard from IT now.
LOL, good one.
Shouldn’t have awakened the bear.
clever!
that’s hot
Yeah, papa bear likes it hot.
CSI: SUBPRIME…New series on CBS investigating all of the bubble loans made to CSI’s in Miami, Las Vegas and New York.
That would be too funny! Already, cases relating to the housing bubble are showing up on those court/judge TV shows.
Has anyone else seen these?
No, but Suze Orman is starting to admit the folly of double mortgages, and stuff like that.
I would guess that prime (’A'?) loans from 2005-2006 would be in trouble sometime in the next few years as well. My view is that there was an unusually high number of “no money down” loans (either 100% loans, or 80/20 ‘piggybacks’) made during those years. I would have to assume that a good many of the ‘prime’ first time buyers in Cali could only afford to buy such high-priced homes by using no money down loans, along with interest only or option-ARM loan programs.
In other words, I would suspect that even the top tier of mortgage loans would be at risk, because many of the people with good to excellent credit scores could only afford to buy by using risky loan programs (100% financed, I/O, Option-ARM). This wasn’t a problem as long as house prices were rising, as the ultimate ‘out’ was to sell the house for a profit. In today’s housing climate, however, that out doesn’t exist (especially for those that bought in 2005 or 2006).
I expect to see even prime mortgage defaults to go up in the near future (1/2 year to a year).
My buddy is representing a listing priced at around 550k. He currently has 6 offers for the home. EVERY one of them is 100% financing. I guess the silver lining is that none of the offers is at asking.
If 100% financing goes away, its “goodbye sales, hello plummeting prices”!
Gee, I guess coming up with 110K, in this case 20% down, is a little much to ask the sheeple.
Sarcasm off.
I agree. The creidt “histories” used to come up with credit scores were based on a time period of greater band/lender restraint. Some people had good credit histories only because they were never given an adequate chance to self sestruct. Now with the lenders going suicidal a lot of previously “good” risks will be having trouble too.
They used old rules to predict credit risk without considering how the rule changes themselves would change the outcome.
“They used old rules to predict credit risk without considering how the rule changes themselves would change the outcome.”
B-I-N-G-O!
h - e - i - s - e - n - b - e - r - g - ?
“They used old rules to predict credit risk without considering how the rule changes themselves would change the outcome.”
Very apt observation.
If down payments are required, regardless of credit score, only those with financial discipline (I’ll leave rich parents out of this) can buy a house. Those without that discipline are selected against in a normal market, simply by virtue of the fact that they have not saved the down.
Take away the need for a down payment, all of a sudden, that one inherent benchmark for financial discipline is gone. Credit score now rules, regardless of whether it represents true financial discipline.
You made a good point - a lot of upper middle class / rich 20 something year olds bought houses in years past with no money down - their parents simply pitched in for the down payment. One nice thing about the 80/20 loan is it levels the playing field for the lower middle class. I feel that if these loans were managed effectively and only given to people that could truly pay them, the 80/20 would be a blessing and an equalizing force in our country - similar to public university / community college education.
Unfortunately, these loans are offered to any warm body. I hope this loan program is revised not eliminated.
One nice thing about the 80/20 loan is it levels the playing field for the lower middle class. I feel that if these loans were managed effectively and only given to people that could truly pay them, the 80/20 would be a blessing and an equalizing force in our country
I completely disagree. 80/20, as well as option-ARMs, I/Os, NINAs, SISAs, etc. do not increase “affordability” for working-class people –they do the exact OPPOSITE. These loans simply allow innumerate morons to “qualify” based on teaser rates, so they can bid house prices to the sky –and shove truly qualified buyers to the curb.
Back when such loans were restricted to an extremely small, wealthy, financially savvy sub-set of borrowers (upper 1%) and demanded higher risk premiums, they were perfectly fine. But those days are long over.
I’m on HARM’s side. Lower middle class people might have to await early middle age to buy their own houses, but a down payment can be saved if the loose loans are eliminated (because prices will retreat to where regular folks CAN save the down).
Completely agree Harm. These loans are going to make homeowners renters again. Not the foundation of real estate we want.
In every case, every one of them our office has closed, the 100% loan borrower increased the sales price of the home to offset the seller paying for their closing costs. What about when they were involved in multiple offers and then increased the price again to fulfill the financing program of nothing down.
People blow this off as normal. What happens in a flat market or one that reverses. It is going to hurt a boat load of borrowers. Can I control it being in escrow ? No. But do I care? Hell yes. Hell. fricken’ yes.
This loan program has been one of THE PRIMARY drivers of the markets across the country. Nobody is paying attention to what the downside of this program could produce. Hope I’m wrong.
I love all the above points…very good observations.
From what I’ve read here, I’d gather the regulators felt they were eliminating a hurdle to their institution’s sales numbers/market share. They simple chose to ignore that pesky risk issue….eliminating any weight it once had in the decision process.
Right, “sales numbers/market share” became the name of the game. I’m a slightly embittered former banker who saw a very solid company slowly succumb to the sales-at-any-cost disease. I got out 10 years ago–I’m glad I did.
Excellent points. If I was suicidal, I could have been one of those FBs. Wife and I both have outstanding credit scores in the high 700s-low 800s, above median income for our area, no debt besides one car, and some cash in the bank. But coming up with a meaningful down payment when the median is $600K? You must be out of your mind. I see alot of our “homeowning” neighbors are pretty much the same demographics as us (early 30s), but they “bought” their townhome and zip around in a beemer, lexus, or acura. Unless mom and dad gave them the $, they almost have to be 100% financing. I know for a fact the people next door are, at a $700K price! Based on recent resales, they are at least $100K underwater and I just laugh! I also shake my head and wonder when reality will finally strike.
When these guys sink the economy, make sure you’re not on their boat.
Don’t worry, I don’t even acknowledge them. Best of all, they drive a Hummer!
The problem is that so few have any savings that Greespam had to puch for lower rates to stimulate the economy, IN HIS MIND and TO LINE HIS POCKETS.
You see, housing was/is the last major source of big buying for anyone (excepting the very wealthy who can spend 2.35 million on a baseball card or yacht). Housing was the last major gasp for the exconomy on a major playing field. What, you honestly didn’t think Target iPods were going to carry this economy, did you.
So, to get homw ownership (debtorship) higher, the hurdles had to be removed. However, as more than one astute blogger has written, they were there to weed out those who were not deemed to be a good risk. Banks didn’t care because they made their fees and sold these debts off.
However, there was a reason that people weren’t just given 150K to buy a home in the past. That all changed with this bubble.
In the coming year and next few, we are going to find out just how bad this whole mess really is.
I, however, will not feel bad for this economy when I can buy a nice home here in South OC for 250K and put down 50K. That would leave me a mortgage just a thread over 3x my income and I would still have money left over and no debt. All with my wife staying home. Not too bad.
IMO that’ll be a nice house, too.
Once the bust has emptied everyone’s home equity, stock holdings, and pension funds… what’s left? The MSM mantra’s been invest, invest, invest… so nobody’s really holding cash any more.
“I would have to assume that a good many of the ‘prime’ first time buyers in Cali could only afford to buy such high-priced homes by using no money down loans, along with interest only or option-ARM loan programs.”
Absolutely! I live in CA, and everyone I know who bought recently put down (at most) 5%, then 80% IO 1st mortgage and 15% 2nd mortgage. They all admit they couldn’t afford their payments once the loan resets, so the plan is to re-fi or sell. Good luck with that.
My experience of Bay Area friends as well, in the past couple of years.
I could see an argument that in certain bubble areas putting a downpayment on a house is a poor decision. Why have $ in the game when no one else does?
In fact, when I read stories like those on BMIT where a large part of the neighborhood got in for $0 down, then Heloced the property to get $ out, and are now defaulting, I’d think of myself as quite the chump for having $ at risk.
Me too. My SO and I have worked our tails off to save 20% down on a Bay Area house. But we sure as heck won’t be putting our cash into this market until most people have a lot more skin in the game.
I should amend my statement above in response to Lisa. I do know people who’ve put down more than 5% on homes in the recent past — all of them valued customers at the Bank of Mom and Dad. But even unearned windfalls can go bye-bye in a declining market — or so I’ve heard
Alt-A is the next shake-down, followed by huge cracks in A-paper money. I saw too much of this stuff to know it’s not safe, not even close.
nnv,
You oughta read Tanta’s posts over at CR. Like you say, it’s not just the lack of standards… nobody gave a damn about verifying anything on these loans.
every mort on a home 04 or later is sub-prime and sub-merged
I would suspect that even the top tier of mortgage loans would be at risk, because many of the people with good to excellent credit scores could only afford to buy by using risky loan programs (100% financed, I/O, Option-ARM).
Honestly, even if I had a perfect credit score and a fixed 30-year mortgage with payments I could easily afford, I would very seriously consider walking away from the mortgage if the house value tanked by 20% or more. I doubt that I’m the only one.
For this reason, I would consider EVERY mortgage issued in the past couple of years in the bubble markets to be potentially at risk of default.
…assuming I had made little or no downpayment of course, as is the preferred style these days.
Exactly. The formerly-standard 20% downpayment was recognized as a deterrent to default, as well as an LTV cushion. But those were the days when banks still took themselves seriously…
“But those were the days when banks still took themselves seriously…”
LOL. Amazing what a crock they are today. Anyone here abandon their large mega-corporation bank? If so, where did you go? I’m seriously considering getting out of WaMu because I know they have lots of residential exposure.
Logical, even if unethical.
Per my understanding, killer credit combined with a toxic loan is the very definition of “Alt-A”. The problem with “Prime” is that those borrowers will be just as far underwater as the “Sub-prime”, and equity — not income, not credit — is the best indicator of whether a borrower will default.
I mentioned this a couple of days ago, but a realtor friend told me that in LA’s Westside practically all transactions are done with IO mortgages. The houses are just too expensive.
Debt on Bear Stearns is getting hard to insure? That must mean that smaller and shakier operations are effectively priced out of the debt insurance; effectively out of business?
Let’s see, subprime borrowers need to sell their over-priced POSs. Banks are making it harder and harder to get a sub-prime liar’s loan. A classic catch-22 situation. Maybe it’s time to stock up on more ammo and make sure all the ol’ guns are in working order, because the s**t’s gonna be hitting the fan real soon!
Let’s see, subprime borrowers need to sell their over-priced POSs
And I can guarantee you, the houses backing these toxic loans really, really are; worn-out, run-down, functionally and economically obsolete P’sOS!!!
I like how everyone is focussing on the short term with the sub prime mortgages. Those loans have another 20 years of opportunity for failure in front of them. Those same mortgages are going to on an overpriced house, paid for by over extended homeowners until the market returns to a reasonable home price/earnings ration. We are not out of the woods by any means. We’ve only just entered the forest !
Everyone thinks they can sell off their risky mortgage company holdings and the problem will go away. HA ! These same loans on the same houses are going to keep failing and failing until the market gets in line. There is no way around it.
The only question is do we want a quick failure or a long drawn out failure ?
(Again) IMO we’ll have both. Sort of like Iraq… “Shock & Awe” followed by a long, slow bleed.
UPDATE 1-ABX subprime mortgage index rallies on short-covering
Thu Mar 1, 2007 11:21AM EST
By Neil Shah
NEW YORK, March 1 (Reuters) - The ABX derivatives index rallied sharply on Thursday despite sagging U.S. stocks as traders unwound bets that the index would deteriorate, locking in profits.
“I suspect it is a technical bid (short covering) with the profits going to pay for losses in other markets,” Peter DiMartino, ABS strategist at RBS Greenwich Capital, said in an e-mail.
A trader said: “There’s a lot of short-covering going on, because I think the perception is that (the ABX) was significantly oversold.”
The ABX 2007-1 “BBB-minus” index, which contains subprime mortgage ABS issues from the second half of 2006, was trading about 5 points higher at 69 to 70 compared with 64.46 on Wednesday, a 7.8 percent rise. The ABX 06-2, which is linked to loans originated in the first half of 2006, was trading at 70 to 71 from 66.23 on Wednesday.
The ABX index is used by investors to hedge their subprime mortgage risks.
Hedge fund managers and other players who have long expressed a bearish view on the U.S. subprime mortgage sector by buying ABX protection may now be selling to lock in profits, the trader said.
© Reuters 2007. All rights reserved.
“‘It is impossible to get a number’ on big investment bank’s exposure to subprime loans, analyst Richard X. Bove told The Times. ‘And I don’t think they even know.’”
The geniuses who created derivatives are about to get a taste of reverse leverage. Even monkeys fall out of trees.
“The geniuses who created derivatives are about to get a taste of reverse leverage. Even monkeys fall out of trees.”
LOL. They are going to have a lingering bitter taste for some time.
http://www.youtube.com/w/Monkey-butt-aint-nice?v=5W4AeXeayro&search=monkey%20butt
It’s one thing to fall out of the tree…but when there’s a pack of unfed Hyena’s below it might end with a different result.
I suppose it’s nice to know, or at least I should point out… that I was picking unfairly on Merrill with regard to this issue recently.
Now it’s easier.
I can call almost all of their peers a bunch of clowns, too.
It’s VERY comforting to know that investment banks don’t know (or is it don’t want to know, or don’t want to tell?) about their investment exposure. And our 401Ks are in the hands of these people!
Excellent point and everyone, inc. my family, should do due diligence, esp. with sizeable cash in the bank. Sure there is FDIC, but if you need that money in a crunch you might just be waiting a year to get that gubmint check.
Yeah, gotta delay it far enough out to properly inflate it’s value away…
“Federal Reserve Governor Susan Bies told reporters in Durham, North Carolina on Feb. 20. ‘This could take us a year to two years depending on where the location is…..” Hey, Susan, let me hear your reasoning for this 1 to 2 year assumption. The logic at Ben’s Blog doesn’t give me that kind of rosie outlook, but maybe you have better info as a Fed Chair. Give it up, Susie!!!
The talking mouthpieces at the fed, NAR etc are trying to calm the markets right now. I dont believe one word they say.
Its common sense to me - I see a dump in my area selling for 650k that should be 300k and its pretty easy for me to figure out what is going to happen.
GM delays filing it’s 10K until March 16th . . . . this story rolled out around 10:30, haven’t seen anybody mention it yet.
Delayed due to accounting in GMAC, which just so happens to do a great deal of mortgage klending, no?
Here’s a link to an article, though I originally read it elsewhere:
http://money.cnn.com/2007/03/01/news/companies/gm_delay.reut/?postversion=2007030110
I thought GM sold off GMAC?
sold 50% to cerberus for $14B . . . but you always need to look at the fine print . . . who knows what the terms of the deal were?
The terms allowed Cerberus to look into the loans and reject what didn’t pass the smell test. Rumors are $1.5B stank. Truth? I don’t know.
But if Cerberus is making a $1.5B lower cash payment to GM… that will rock their world.
Got popcorn?
Neil
I wonder if the auditors of GM/GMAC and Fremont are trying to avoid another Arthur Andersen situation and questioning adequacy of loss provisions and perhaps I/O accounting (which is already b.s.) on delinquent accounts.
Freemont quitted Ernst & Young and went with Grant Thornton back on Aug 2006. Guess the accountants can’t get the number to come out right, so now the delay. Someone gets to sign that report.
Can Fremont trade that “neg arm” earnings? Or maybe paying the
accountants with neg-arm money
Well they’re used to shopping for asessors who can “hit the numbers,” why not accounting firms?
Maybe ms bies means that mosy fb’s will be in foreclosure in 2 years.everything is tightening.loan standards,appraisals,available #.full bore credit squeeze this year,certainly by september and probably sooner because things are accellerating very quickly.2 year inventory levels would not surprise me by mid june.
2-year inventory levels by June would be akin to catastrophe. At that point the homebuilders might as well give up the ship for good, esp. since credit is/will be tightening. Less qualified buyers + 2 years’ inventory = SLOOOOOOOOOOOOOOOOOW market and economy.
“‘It is impossible to get a number’ on big investment bank’s exposure to subprime loans, analyst Richard X. Bove told The Times. ‘And I don’t think they even know.’”
I hope our retro-conomist friends take a moment to step away from the charts and algorithms and take a glimpse at the present…ly unfolding carnage .
Emergency message as follows:
From: Subprime Lenders
To: Federal Gov’t
Housing Racket UNDER heavy attack…Send Bodybags..LOTS of them.
FIRE for Effect…OUR position….Over
End of transmission…
Pretty funny!!
To: Subprime Lenders
From: Federal Gov’t
Sorry boys, your on your own…all our people are involved in emergency Spin Ops…Plus you are on the Big Guy’s #@*^ list right now, since we will probably have to change the name of his Homeland Security Dept. to Rentland Security, all because of you !…Over
OT, but has anyone ever watched Alan Greenspan on TV and noticed that, when he gives his pronouncements, he has these thick, blubbery lips that produce a buildup of spittle? I know it’s kind of gross, but it fascinates me to watch, because I’m always wondering when a gob is going to drop. So far, it hasn’t happened. One time a buddy and I placed bets as to whether it would happen or not. I was betting it would, and I lost.
He’s simply demonstrating the concept of ‘localized patches of froth’ for the media.
funny! lol!
lordy, skooch, I just got back from work and saw your comment on my post and I’m killin’ myself laughing here.
LOL indeed! Damn there’s some good stuff posted today!
OT: New OFHEO data out today. I have all the graphs up here:
http://www.housedata.info/
TY
Great work, I always appreciate your site.
“‘If there is a fault line in the global financial system, it runs through the U.S. mortgage market,’ says economist Mark Zandi. ‘If some hedge fund blows up on a residential mortgage-backed securities investment, that has very different kinds of implications because it is the biggest chunk of the global fixed income market. So the ripples will be more like waves, and it could turn into a tsunami.’”
So I am curious about the fixed income exposure, as many people consider this investment very safe. Does anybody think or know if funds like TIAA-CREF fixed income are really exposed to this? Is it easy to look up in a prospectus? What do you even look for? I am educated professional, but for #@$%’s sake how much work do I have to do to protect myself?
I thought that’s what you pay all these financial yahoos to do. Sucks to not be able to trust anybody. I have more than a full time job. If your supposed to always “do your own due diligence”, then in my opinion a large chuck of the financial service sector is comprised of a bunch of worthless leeches.
Sorry, but I just got really pissed reading this post.
then in my opinion a large chuck of the financial service sector is comprised of a bunch of worthless leeches.
This is more true than you could possibly know. There is no “if” so I cut it out of your quote!
It is the thing that is truly saddening. In the end the only financial service sector professional that can be of much help to the average joe is a certified financial planner that you pay BY THE HOUR, and NOT by commissions. The rest have conflict of interests.
Thank god for blogs. Helps you to learn it yourself.
As for your first question: a LOT of the “fixed income” stuff is heavy into MBS, which in times past were relatively stable but boring fixed income instruments. Welcome to the sucky side of a mania.
I have one Roth IRA account I CAN’T switch due to various tax reasons, and it is fixed income, but I looked at it and it has treasuries, highly rated corporate bonds (from like GE, etc) as well as Ginnie. Can’t escape it. Sucks. (luckily for me, it’s only $2,000 which is why I can’t roll it anywhere, it’s below the $3000 threshold and I can’t contribute to Roths anymore)
there will be LOTS of starving elderly people at the end of this. People who planned and were prudent, but brought down by collateral damage.
It will not end with MBS. It will start there. It will then leapfrog into some Hedgies which will then drag down or seriously threaten some big banks (I’m guessing Washington Mutual as example) as well as some ibanks (perhaps a Lehman?). Voila, systemic risk.
Imagine, you’re nearly wiped out of your investments, your bank is threatened (how long does it take to get your money from FDIC????), we’re in a recession so your job is unsecure.
Save up cash. Have it in multiple VERY DIFFERENT banks. Have no debt. Have a little cash AT HOME just in case. Get your financial houses in order.
This could be big. Or maybe not!
HIC
” Have no debt.”
Housing Inspector, if things really go south, what difference does it make? If a person is cash poor, but has good credit, they should be cashing those promo checks from the credit card companies fast as they can and putting the green under the mattress. If the sh+t really hits the fan, who cares about a credit rating. Gotta eat. If a person has nothing to take, the credit card companies will look for bigger fish to fry.
>> ” Have no debt.”
No one chasing you
The big financial houses might have an interesting run. Will the GS head honchos be forced to repay their bonuses when the CDS markers are called?
Red,
Now you see how all the 20 somethings who were barely able to get out os high school and college wind up with mega bonuses at Christmas. Most of these talking heads, I wouldn’t trust with my lunch money, let alone 100s of K’s or millions.
Just yesterday I was watching MSN and I have come to realize that I detest, that may not be strong enough, that clown Dylan (sp?) Ratigan. This guys makes Kuntlow look like a bear. I don’t think Ratigan could cheer for this economy any harder than he does.
Well, it guys like his ilk running many of these firms.
I do have to agree that even if the worst is a serious recession, I would “hide” money under the matress. Most ATMs only allow $300/day. If things really dry up, it could go to $300/week, or just $100/day.
“Sucks to not be able to trust anybody. I have more than a full time job. If your supposed to always “do your own due diligence”, then in my opinion a large chuck of the financial service sector is comprised of a bunch of worthless leeches.”
Amen, Red Pill, that’s the point I’ve been trying to make and the point that the worthless leeches don’t get. In the long run, fiat money is worthless save for the trust and confidence that people put in it, because that’s all it is. That’s why it is called “fiat”. And that’s why, despite any charts and theories and mathematical formulas anyone can show me, despite the hawkings by Cramer and others of his ilk, despite the denial of the pundits, in the end, when people become disgusted because their trust has been betrayed one too many times, the money has been made completely worthless and the system has been broken beyond repair. That’s where we are at today, IMHO. We’ve reached critical mass as to the gaming, fraud and dishonesty in the system.
I’ll be far harsher in my assessment of the situation: it’s like watching a bunch of necrophiliacs in the middle of a desperate gang bang.
There’s a saying on Wall Street: “The house made money, the broker made money, two outta three ain’t bad.”
They are always the enemy. You have money, they want it. It’s that simple.
Clouseau is right–it’s even worse than you think.
Apart from conflicts of interest, here are a couple more flies in the ointment of “professional” money management:
(a) I’ve performed and managed financial analysis (for the “house” itself, not for individuals), and I discovered there are very few people who understand accounting and quantitative analysis well enough to be worth hiring. During this gig, I reported to a PhD in Econ, who reported to another PhD in Econ. We all agreed that it’s impossible to measure bank profits unambiguously and definitively.
(b) You as an individual can manage your portfolio more nimbly than most funds, precisely because your portfolio is small. You can “rebalance” it completely in a day or two, but no fund of any size can do that.
But I’m not so gloomy in one way: I haven’t spread my cash over several banks to stay under the FDIC’s $100k limit. I believe Helicopter Ben when he says he’ll print however much money is needed to prevent that kind of crash. Of course that could set a liquidity trap, but oh well, you can’t have everything…
I believe Helicopter Ben when he says he’ll print however much money is needed to prevent that kind of crash.
IOW, your money will be safe, it just won’t be worth anything.
My oh my, so much bad news. I can only find solice in the fact that the Home Builders’ stock is kicking butt today.
Go figure……………
some of this is shorts taking profits. part of it may be “buying the dip” by the knifecatchers as well.
dead cat bounce my friend.
Home Builder’s stock Today is about as helpful as the Lookouts on the Titanic counting the available iceburgs AFTER they WACKED the Big ONE !
Whatever Floats your boat
Outlook for DC Area, anyone suspect if the great fall hitting Cali or Florida will do its number in NorthernVA/Dc area? Prices are not really moving.
-Lost
Prices have started to go… the numbers from MRIS in Loudon and Arlington County don’t look great:
Loudoun County, VA
* Median Price: $420K
* Median Sales Price YoY: -10.4%
* Average Sales Price YoY: 0%
* Total Units Sold YoY: -5%
* Average Days on Market YoY: 119%
* Active Listings YoY: 4%
Arlington County, VA
* Median Price: $435K
* Median Sales Price YoY: -16.8%
* Average Sales Price YoY:-15.4%
* Total Units Sold YoY: 3%
* Average Days on Market YoY: 61%
* Active Listings YoY: 16%
I’m also in DC (and yes, renting for the forseeable future.) The decline has been delayed primarily by the fact that, unlike Florida or California, there actually are jobs here. Also, DC has a LOT of above-average income people (lawyers, politicians, lobbyists, lawyers, diplomats, consulate staff, and, oh yes, more lawyers) who have no problem dropping massive cash on a (often second or third) home.
That said, the condominium tidal wave is about to hit Northern Virginia and Maryland, with literally thousands upon thousands of units hitting simultaneously this spring. With thousands of units already languishing on the market, prices are going to come down, although it’s going to take some time. I would expect serious declines, but not for a few months yet, and possibly not until later in the year.
Well I live in College Park and there is a TON of invisible inventory in my neighborhood. Empty houses with no for sale sign out front. It’s gonna get ugyl ’round here.
“‘We do an autopsy to find out what caused the loss of blood,’ says Keith Johnson, Clayton’s COO. ‘It’s a CSI subprime.’”
—————————————————————————-
I have this mental image of a bunch of industry banking exec’s standing around scratching their heads wondering what went wrong! Brilliant!
Like it’s so f*cking hard to figure out what happened. I can tell this guy has rocket scientist written all over him. Maybe he would have earned his money if he figured it out before it happened.
wonder how fast these “insurnace” rates are changing
DUI DUI DUI
Some are setting more money aside or buying extra insurance to cover losses. Countrywide plans to buy insurance on up to $19 billion in loans, roughly a fourth of its portfolio.”
LUI, maybe?
Mr. Mozillo, you are cited for Lending Under the Influence of a Bubble. How do you plead?
The policies are getting very expensive. Bill Fleckenstein posted on 1/15/07 the following:
Meanwhile, the other friend, a broker who deals in the financial dark matter universe, noted that the risky BBB-minus tranche of the June 2002 ABX.HE (a synthetic version of assets backed by U.S. home loans) just traded at a new low — down more than eight points from early September. (For a review and the key definitions, please see my September column “Voodoo debt and the coming recession.”) Its credit-default swap has now blown out to 477 basis points. Although the BBB-minus tranche is just a fraction of the $1 trillion subprime market, it seems impossible to me that a train wreck there will not have ramifications. Here is how this friend described where he thinks we are — and what comes next:
So in January, the BBB- tranch premium jumped almost 5%. And it has become more expensive sense then. The value of the ABX HE 07-01 BBB- bonds have dropped from $97 to $67 in 60 days.
The Financial Doctors doing THIS autopsy after their Butchered Housing ‘Operation” will conclude that the patient MOVED and we didn’t KILL him. “It WAS the Patients Fault !
Definitely another case of self-inflicted housing suicide while we fought skillfully and valiantly to breath life into his American Dream.
Roll in the next victim…#*=@…Ooops ..next Housing patient Please !
Alan Greenspan (remember him?) says the U.S.
economy might go into recession before the end of 2007.
He may be right. The subprime mortgage market is getting whacked hard. And when people can’t buy at the bottom, it weakens the whole market structure.
Prices fall.
Jobs are lost.
Spending declines.
What we’re seeing so far is that people who can afford to do so are taking their houses off the market. This creates an invisible inventory of empty houses that will probably hold down prices for many months to come.
Steadily, but surely, the millwheel of a correction will grind away.
It’s interesting that Greenspan finally makes a nonambiguous prediction that will boost his reputation/legacy because it will likely come true. Now Bernacke has to cheerlead and mislead.
From Fortune. “When a certain $126,000 subprime loan on a $696,000 house on the West Coast failed to produce a single mortgage payment, alarm bells went off at Clayton Holdings, a company that monitors credit risk.”
“Closer scrutiny revealed other red flags. The borrower’s previous rent payment had been $1,000, compared to the $4,482 she was supposed to be shelling out for both the primary loan and the $126,000 piggyback. And her stated income was $84,000 even though she was an hourly worker at Target.”
A lot more of this kinda crap out there.
Wait until the loan biz swamp water recedes a bit more.
Yeah, just wait. If all those bulls think this is isolated story, then I have a bridge to sell them (pun intended)! By the end of this year, the story will be so big that radio stations won’t be looking to pay off bills, but make monthly mortgage payment to help people in the spirit of the season.
“One reason was that rivals were paying salespeople in the business too much, and ‘the other reason was we wouldn’t take the toxic waste,’ he said.”
Does US environmental law govern trade in subprime debt?
I wonder how many Chinese would be MBS buyers read this site ?
The Dow dodged another bullet this morning. Soon the stock buyers listening to Kudlow and Kramer will dry up and things won’t rebound like they are these days.
Mark my words: sooner or later a big bank is going to take a hit on prime mortgages and the cat will be out of the bag. Right now everyone is in denial.
I’m not sure how many Chinese have purchased these products.
I have heard that in the first half of last year, the Taiwanese were big buyers of this paper. However, I can definitively state that my boss here in Hong Kong does not hold any of this paper…
I subscribe to the Paul Tudor Jones investment philosophy:
“If investors spent 90% of their time on the money that they have at risk rather than 90% of their time on ‘pie in the sky’ ideas of how much money they are going to make, they’d be incredibly successful investors.”