“The Gravy Train Is Over”
Some housing bubble news from Wall Street and Washington. “As troubles continue to roil the market for subprime mortgages, New Century Financial Corp. says that it’s technically in default with several lenders and is under investigation by federal regulators. Analysts cautioned it could spell the end of the Irvine, Calif.-based company, the second-largest player in the subprime industry.”
“‘New disclosure about additional shareholder lawsuits and a criminal investigation by the U.S. Attorney’s office likely reduces the likelihood that a rescue-buyer/liquidity provider will step in to bail the company out,’ Bear Stearns analysts wrote Monday morning.”
From Reuters. “New Century Financial Inc. shares fell more than 60 percent in early Monday trading. ‘We think there is further downside risk, possibly to $0,’ wrote Merrill Lynch & Co. analyst Kenneth Bruce. ‘Bankruptcy seems a likely course of action.’”
“New Century said its survival may be in question if it doesn’t obtain waivers from lenders. It said it is not in compliance with 16 financing agreements totaling $17.4 billion because it didn’t file its annual report on time. It also said just six of 11 lenders have waived a requirement that it be profitable for two straight quarters.”
From MarketWatch. “‘New Century is more likely to enter the death spiral we had feared, as filing delays, financial difficulties, likely restricted liquidity and regulatory/criminal investigations could conspire to limit its options outside of bankruptcy,’ Merrill Lynch analysts wrote early Monday.”
“Analysts at Stifel Nicolaus cut their ratings on shares of several mortgage lenders Monday as more bad news hit the troubled market for subprime mortgages. Aside from New Century’s woes, Fremont General Corp.’s stock plunged after the company said it plans to sell its subprime lending business after it received a proposed cease-and-desist order from the Federal Deposit Insurance Corporation.”
“‘Despite valuations that are well below book value, we see increasing evidence that this industry is now in a downward spiral whereby each negative development fuels additional deterioration in key fundamentals including origination volume, pricing, credit — and most importantly — funding,’ Stifel Nicolaus said.”
“‘With housing prices now falling nationwide … and almost daily evidence that the industry stressed underwriting too far, just how high delinquencies and losses go is very much unknown at this point, largely due to increased prospects for falling housing prices,’ the analysts wrote.”
“‘As credit deteriorates further, we expect underwriting to tighten even more and secondary market demand to remain volatile,’ they added.”
“Countrywide Financial Corp. fell 3% after Lehman Brothers downgraded the mortgage giant to equal weight from overweight on jitters in the subprime mortgage business. ‘Even the best operators can get pulled under by a strong undertow,’ analyst Bruce Harting said.”
From Bloomberg. “‘The rapid high-profile demise of the pure-play subprime lending industry has caused major, real dislocations in the market that should negatively impact the prime-oriented lenders’ earnings over the course of 2007,’ Harting wrote today. ‘Prime loans will see rising default rates as subprime has, due to increasingly weak underwriting in recent vintages.’”
“Shares of Fremont General Corp. fell 24% at the open Monday, plunging as the company said that it intends to sell its subprime residential real-estate lending business. In a statement late Friday, Santa Monica, Calif.-based Fremont General said that the decision was ‘prompted by the company’s receipt on Feb. 27 of a proposed cease-and-desist order’ from the Federal Deposit Insurance Corp.”
National Mortgage News. “Traders and other mortgage executives tell us that secondary market bidders are offering between 15 and 25 cents on the dollar for delinquent HELOCs. We’ve heard the bid prices from three trusted sources. One investment banker said a large California lender wanted 65 cents for a recent pool of bad seconds. Needless to say, the sale never went through.”
“On Thursday one wholesale executive in Southern California told us that his two largest non-prime competitors had just raised their rates by 45 basis points each. This, of course, means that rates are going up for consumers.”
“Who gets hurt? The subprime consumer. Can anything be done about this? No. Some lenders believe credit impaired borrowers have benefited from great rates the past three years. And now, the gravy train is over.”
The Post & Courier. “The Federal Deposit Insurance Corp. has a warning for banks and thrift institutions: The recent slowdown in residential construction could reduce the demand for mortgages and commercial real estate and construction loans, all important factors in loan growth in recent years.”
“While employment and income trends are positive in almost every region, the effects of the slowdown in residential construction are ‘clearly visible,’ said FDIC Chairman Sheila Bair.”
The Register Star. “Matthew Bortoli, president of Quality Metal Finishing Co. in Byron, said there is unease in the manufacturing community.”
“‘There is a little weakness in future orders,’ said Bortoli, whose company employs about 250 workers who make zinc die cast component parts and decorative chrome plating. ‘It seems to be pretty widespread. A lot of it has to do with the slowdown in the housing market.’”
“When asked if he believed it was a cyclical dip or a sign of a larger slowdown in the economy, Bortoli said ‘you always have to worry.’”
“Service industries in the U.S. expanded at the slowest pace in almost four years last month, suggesting the housing slump may be filtering through to the broader economy.” “The Institute for Supply Management’s index of non- manufacturing businesses including banking, construction and retailing fell to 54.3 in February from 59 in January, the Tempe, Arizona-based group said.”
“Homeowners are finding it more difficult to use their equity as a source of cash after the yearlong housing slowdown put an end to rising property prices in many regions. ‘The housing market is unambiguously having a broader impact on the economy, including on the services sector,’ said economist Richard DeKaser.”
The LA Times. “As more Americans default on home loans, federal regulators and members of Congress are looking to place new restrictions on mortgages for people with shaky credit, a move that could make it harder for many people to buy homes or refinance their mortgages.”
“‘We think additional guidance is necessary to address abuses in the market,’ said Kevin Mukri, a spokesman for the Office of the Comptroller of the Currency. ‘But we also want to be careful not to impose a regulatory standard that goes too far’ and freezes out worthy borrowers, he added.”
“‘The challenge for regulators is to firm up standards without cutting off credit to the people who need it most–especially first-time home buyers and minority borrowers,’ said Howard Glaser, a mortgage industry consultant and former U.S. housing official. ‘Striking that balance could prove elusive.’”
“The politicians are not likely to stop anytime soon. Victims of predatory lending can tell heart-wrenching tales, a reality that was on display at a Senate hearing last month.”
“Delores King, a Chicago retiree, recalled how a telemarketer lured her into a mortgage refinance. At the time, she had a monthly payment of $798. Her new loan, which started out at $832, has since adjusted to $1,488 a month. ‘This is more than my entire monthly income,’ she told lawmakers.”
“‘The danger here is that, in an ultimately ironic fashion, the very people you’re trying to help are the ones you hurt the most,’ said Kurt Pfotenhauer, senior vice president with the Mortgage Bankers Association.”
“‘With housing prices now falling nationwide … and almost daily evidence that the industry stressed underwriting too far, just how high delinquencies and losses go is very much unknown at this point, largely due to increased prospects for falling housing prices,’ the analysts wrote.”
The industry stressed underwriting too far? Try not at all.
Whada ya mean. They used the mirror fogging test, didn’t they?
I think by stressed he means they bent the rules too far.
or “stretched”
Well, we do know that someone(s) bent over, and that someone got stretched. We’re still researching the details.
Bent the rules…… Hey, anything for that commission and fees. That’s what it is all about. Lenders, Real Estate clerks, appraisers, escrow agents, all wanted the money “now”. They got it. Did they save it? I think not.
I pulled my money out of Fremont last thursday and got a cashiers check from them.Let’s hope the sucker don’t bounce.Can a cashiers check bounce or am i safe?
good question…
My fiancee’s family has a bunch in their CD’s… They’ve been warned, but don’t like to hear any “inconvienient news.” After I verified it was less than $100k… I figured my job was done.
This will spread fast… Now fast is measured in quarters… but when we look back, its going to seem really fast.
Got popcorn?
Neil
My son has saving in WaMu. Asked if it was under the 100K limit. It is, so I said keep it there. Can’t be too forward looking these days.
Won’t hurt to spread it around. Even if FDIC is insuring the accounts up to $100k, it will take months to get the money, and if SHTF it might be less than the full amount, unthinkable as it may seem right now. Things can change fast.
The FDIC has 99 years to pay out in case of a bank failure. Good luck
And the FDIC is “NO INTEREST” on payouts on failed institutions.
well Neil:
I could be wrong here BUT, a few years ago, I think, the FDIC/ FED rule makers determined if you have more than 1 account under the same name the accounts, more than oone are treated cummulative toward the $150k Maximum. ( I think this is the new uinsured number.
Many institutions would by CD’s from a weak bank / FDIC insured company with $5- 10 million, Wall Street would set up the 10 accounts per million and manager the cash stream upon maturity.
I used to do this from a Company out of Pinellis Fla. But the game ended per above!
I hope you’ve deposited the check somewhere and are not sitting on it. A cashier’s check can certainly bounce, but if you’re in the early exit crowd you should be just fine.
My wife and I have our deposits in an account at Ford Credit, so for the past few years I’ve been maintaining another account so I could cash out and deposit within days if Ford went down. The attraction is that Ford has been paying ridiculous interest rates (currently yields are between 5.9% and 6.22% depending on how much you have with them), the downside was the financial situation in the company. Well, Ford never got in the mortgage game, so this decision looks better and better every day!
The attraction is that Ford has been paying ridiculous interest rates (currently yields are between 5.9% and 6.22% depending on how much you have with them), the downside was the financial situation in the company.
After years and years of producing low quality autos along with poor customer service your bound to have a “financial situation”. No new gf’s to buy your product.
I beat you by about 30 days. I pulled my money when Ben first posted the problems at Fremont Savings and Loan. My cash is sitting pretty at Capital One MM yielding 5.20% (Costco member bonus). So I think or is that another subprimer?
Be careful i don’t believe MM accts are FDIC insured,better check to be safe.
It is not time for
” return on principal”
BUT
“return of principal”
Park your money in a TREASURY BILL MONEY FUND
and sleep at night!
Your going to end up there sooner or later. And besides, do you really know what is underlying these CDO’s ABS’s MBS’s and every other newly engineered (AAA / Aaa) rated portfolio of money maket GARBAGE!!!…..
NO you don’t and most of it is Wall Street’s sludge pawned off to you as liquid and most highly rated….
And how did they BUY the ratings? With a check &
through years of beniegn credit risk (no recessions) and the Modern day money Alchemist false security blanket
- D I V E R S I F I C A T I O N !!
{A portfolio of bad loans is still a lot of bad defaulting loans!}
only if someone will cash it!
Otherwise it is line up for the FDIC insurance!
In light of recent events, don’t forget Kindleberger’s Manias, Panics, and Crashes! From an earlier housingbubble thread:
‘Sixth, at the peak some insiders leave the market, there is “financial distress” and a bankruptcy or the revelation of a swindle leads to the final stage; the rush for liquidity. The panic (or “revulsion”) feeds itself until prices become so low that people are tempted to once again go into less liquid assets, trade is cut off or a lender of last resort convinces the market that there is enough money for all.” [CEOs sell shares and earnings turn down, a trickling of speculator led auctions, conversions reversions, construction project funding withering away, criminal fraudsters, FNM yet to report. Still awaiting credit crunch and FRB and Congressional intervention]’
No longer awaiting credit crunch because of the subprime implosion.
URL: http://thehousingbubbleblog.com/?p=1630
Every time one dies, one more is willing to replace it. Today, an mortgage company AE stopped by, supposedly from an FDIC bank. I didn’t meet w/ him face to face, but he did drop off a flier. They have 100% stated income programs for fixed income borrowers. Retirement benefit is “stated” on the 1003. As long as the borrower(s) has/have a 680 fico score, and 6 months reserves, they can get 100% financing as long as the UW buys the stated income being no more than 45% total DTI. Again, if the borrower is on a fixed income and you can tell how much they receive, why not prove the income?
We all know the answer is well that’s the only way to make the loan happen. Why make a loan happen where the borrower can’t repay it, especially if I am an investor lending to someone where the collateral will have no equity for the next few years made to a borrower that is on a fixed income and more likely to kick the bucket sooner?
“Who gets hurt? The subprime consumer.”
Excuse me, I would think that not allowing subprime consumers (or any consumers, for that matter) to buy houses they can’t afford is doing them a favor.
Not everyone is “entitled” to home ownership.
You’re obviously not running for public office. That’s a pretty narrow minded point of view. Of course everyone is entitled to a house, and a couple of cars and an HDTV and an annual vacation to Maui and lifetime medical care and a comfortable retirement from age 65 on.
Reitrement at 50 sounds better
Of course, Jerry if you happen to be running for public office, you have my vote
It’s right there in the Constitution
3a) Congress shall not abridge the right to own a Hummer.
OT but interesting. The vaults where gold backing the GLD etf are controlled by HSBC. Not exactly a bank I want to trust right now.
When people invest in the gold fund, State Street buys gold on their behalf in the London market. The metal is held in secure vaults managed by HSBC.
That would be one “Hell” of a class action suit. I dare say something like that could impair the monster that is HSBC.
Sounds like a good conspiracy theory, I like it.
Gonna have to make a chin strap for my Tin Foil Hat, don’t wanna lose it in the Tsunami.
Could you please expand on that thought?
Who are we afraid of ? HSBC?
If they hold the gold why is it a problem?
The problem is whether the gold is actually there.
Gold comments:
ETF’s were created by the Central bankers to divert the true demand for the physical. The ETF’s have title to the gold but have you observed a CPA in a inventory count? I have, these school boys couldn’t tell an ingot from a cold roll. The boys behind this scam {to keep gold prices depressed and YOU in their FIAT currency are way slicker than a 2 year flunky from Deloitte!
But for now, all is well, but you better get your hands on the physical on this BIG DECLINE to 450 or lower through 2007.
PS. And when the crooks @ the FED get the govt. to outlaw the ownership of REAL CONSTITUTIONAL MONEY again , don’t be an idiot like our fathers Or grandfathers and turn it in for some fancy shiny new Amero or whatever fractional money system they come up replacing our current currency, the greenback !
If it isn’t, turn the space into rediculously safe low rent housing
Delores King, a Chicago retiree, recalled how a telemarketer lured her into a mortgage refinance. At the time, she had a monthly payment of $798. Her new loan, which started out at $832, has since adjusted to $1,488 a month. ‘This is more than my entire monthly income,’ she told lawmakers.”
CAVEAT EMPTOR
How in the world was she surviving paying more than half her income during the initial period? And how did she ever qualify for even that? Throw her on the streets, I have no pity on the mathematically challenged.
My approach to telemarketers: Give them some sass, then HANG UP! Really, people, it is that simple.
Slim, you are absolutely right. Just hang up on the idiots. Anything worth buying or signing on to is not sold randomly over the phone.
we use caller ID.
If we don’t recognize the number, we don’t answer!
My favorite is when they used to ask me the rate of my (then)current mortgage. I would reply: How is that any of your business?
I was polite until I decided it was time to hang up. And that’s when the telemarketer would hear an unceremonious CLICK!
(Utterly amazed that people willingly provide financial info to some total stranger on the other end of receiver.)
Utterly amazed that people willingly provide financial info to some total stranger on the other end of receiver.
Not to mention that the stranger is probably in India…
I like my approach better - never answer the phone when the caller ID doesn’t show a familiar name.
Talking to telemarketers can have great entertainment value. I was having dinner at my parents a while back, when the phone rang during prime telemarketing hours. I answered the phone and was given the pitch for vinyl siding. I asked many questions, and after 15 minutes I told the sales person I was interested, and asked if she thought she could call the other 29 condo owners and convince them!
Another time, I received a junk fax from a mortgage company in Florida. I called them up and asked the woman who answered if I could refinance my rental. “Absolutely” she replied. “Do you think my landlord would mind?” I asked innocently.
Mortage Lady: “Wait a minute… do you own the rental, or are you the tenant?”
Me: “I’m renting from my landlord.”
Mortgage Lady: “SIR YOU CAN’T GET A MORTGAGE ON A HOUSE YOU’RE RENTING!”
Me: “But I need the money.”
ML: “Why don’t you ask your landlord for a loan?”
Me: “If I do that, he’ll think I don’t have enough money to pay the rent.”
ML: “I’m sorry, I can’t help you.”
Me: “That’s OK, I just called to waste your time like you wasted my fax paper and ink.”
Since this is a family blog, I can’t repeat her response!
I just say, “Sure I have time, I’m getting an enema right now but I can talk.”
“Hey ouch! Watch it back there that hurt!”
I used to say No Thank you, but that’s just their cue to start on the Plan B Sales Pitch.
Now I just say: “Please put me on your Do Not Call List.” Something legal must kick in because they shut up right away. And they dn’t call you back.
Another great reason to get rid of your land line: telemarketers are not allowed to call cell phones!
They aren’t, but they do.
I have received them, first for mortgage offers beginning about 18 months ago, and recently from realtors.
Maybe a half dozen total.
I’ve always had fun with asking them to please hang on a minute, then setting the phone down and going about my business….
I guess I’m being a contrarian here, but abusing a telemarketer strikes me as kicking a person when they’re down. To do a job like that, you have to be clinging perilously to the very lowest threads of our economy’s tattered fabric…
Don’t forget to add that you want to be placed on their “do not call” list.
“Caveat Emptor!”
When did stealing from the elderly become acceptable behavior?
Why not target single mothers with these suicide loans too? Or, wait, that’s become acceptable too.
“When did stealing from the elderly become acceptable behavior?”
It’s just a continuation of the Enron operating basis, which is alive and well. Anyone remember when the network news shows were playing the tapes of the Enron traders laughing with each other over the phone about how they were screwing over “grandma” in Cali? Can you recall the glee expressed by these turds at the misery they were inflicting on people who were just trying to make ends meet? Made me sick. I’m sure some of the same turds went into subprime.
You can’t cheat an honest (wo)man.
All these people wanted something for nothing.
If I had to chose between protecting the interest of some feeble grandma OR a single mother AND a cold calculating punk subprime broker, I’d chose to protect grandma and the single mother everyday and twice on Sundays.
I disagree.
There are financially ignorant people out there. They heard a deal that was too good to be true, but some didn’t understand that it really IS too good to be true (and thus is not true)
There are COUNTLESS stories of mortgage fraud. Where the people’s documents are changed after the fact and high pressure tactics used as example
Is it that hard to believe that a telemarketer called this woman and promised her a low “fixed” payment which was really a 2 yr IO ARM???
This happened to me. I went to an open house and it had a chart that said “save by buying”. it then had a “comparable rent” and a “comparable purchase”. I asked the realtor who said, the purchase PITI payment was “fixed” rate. I looked more closely and said “hey, this is a 2 yr IO ARM”. And she said, “it’s fixed the first 2 years, and then you can simply refinance into another fixed 2 year loan, so it’s the same thing”.
Obviously this is BS, but do you think 99 year old grandma is going to necessarily know that?
Just because you know something doesn’t mean everybody understands it.
Shoulda kicked the realtor in the crotch.
You are only entitled to buy a home IF you can truly afford it.
“Delores King, a Chicago retiree, recalled how a telemarketer lured her into a mortgage refinance. At the time, she had a monthly payment of $798. Her new loan, which started out at $832, has since adjusted to $1,488 a month. ‘This is more than my entire monthly income,’ she told lawmakers.”
Hmmm, let me see. Where did I put all that pity I used to have for older folks? Can’t seem to find it.
This bring to mind the scene in Wallstreet the movie when Sheen bags the elephant. Instead these guys were bagging sheep.
“Instead these guys were bagging sheep.”
I think they were doing something else with the sheep.
Hey, my mother’s one of those older folks, and she gives telemarketers a much harder time than I do! (Thanks for the fine example, Mom!)
I’m constantly amazed at how everyone assumes old people are always vulnerable. My father, until about two weeks before he died at age 94, was as sharp as a tack and would have unceremoniously told any telemarketer/fly-by-night salesman promoting some financial scheme to go straight to hell.
They’re often lonely, and are hence receptive to a friendly voice giving them attention. Some scammers might call every week for months, slowly building up a relationship.
Help, I’ve fallen and I need 5 and a quarter percent!”
Dude, subprime lenders were the fraudsters. While we’ve been waxing about record low interest rates causing the bubble, they’ve been setting grandma up with 8.5 pct ARMs with prepay penalties etc. Now that grandma’s interest rate is resetting to 10 plus pct and she cannot pay, she is saying eff the fruadster I’m moving in with….
question. WHY did she agree to a loan that immediately started out at more than she was paying? If she was NOT told what her first payment would be, she has legal recourse, and is stupid. If she agreed to the mortgage knowing full well that the first payment would be MORE than her current payment, she is just stupid.
Cash out would be my guess.
Risk to 0 on NEW. Dontcha love it? They can’t see this until the thing completely starbursts? Look at the upgrade/downgrade history on this pig, it’s a riot!
is zero going to happen?
Yeah, that would be my bet. They’ll have to file chapter 11 and it’ll get sold for parts out of bankruptcy (if there is anything worth selling), kind of like those telecom companies a few years back.
And my guess is NEW won’t be the only one going to 0.
I think I read over on Mish’s blog or perhaps is was the xanga site but regardless it was saying that the CEO would borrow a billion dollars for one day each quarter so that the financial statements reflected cash holdings of a billion dollars on hand. Now, is this not fraud? This can’t be legal? Apparently they revealed this on a call last week along with a multitude of other schemes that were designed to hide the true financial position of the company. I hope these pricks go straight to jail.
No, they revealed this in 2005!
as always, everybody went along with it because the stock price went up.
If you short a stock, and it’s value drops to zero, is there still someone there to buy it? Or did you just take you short in the shorts? -
Bear Stearns upgraded NEW last Thursday. Anyone who listened to them lost 60%
Wow - that is truly unbelievable!!! do you know if bear stearns has any business relationship with NEW?
Putting lipstick on a pig doesn’t work very well if the pig dies.
Yeah but what if you short the pig knowing it was near its last oink?
Can you say “SEC” investigation, kids? I knew you could.
Look at the Insider trades of NEW over the last few months especially GOTSCHALL EDWARD F…
http://finance.yahoo.com/q/it?s=NEW
He’s dumped $$millions$$ in stock over the last few months! Whaddaya think? Did he know something everyone else didn’t?
Yesterday’s news today. Brought to you by wall street’s finest:
“New Century Financial Inc. shares fell more than 60 percent in early Monday trading. ‘We think there is further downside risk, possibly to $0,’ wrote Merrill Lynch & Co. analyst Kenneth Bruce. ‘Bankruptcy seems a likely course of action.’”
Translation by dipster: “these toxic mortgages are glowing so bright its impossible to ignore. There are no more suckers to pass this hot potato onto. If you bought on our recommendation last month: Congratulation - you are the bagholder!!!”
They are too, as someone pointed out here a few weeks ago.
Your statement is very true…in more ways than one. I’m willing to bet that NEW has a few billion in loans that were originated within the past 60 days that have yet to be sold due to changes in the marketplace.
A new commercial has started airing on the radio here in Chicago. I’ve heard it twice already and it goes a little something like this:
“Experienced real estate investors! In a few weeks, I’m opening up marketing on a new development in Miami Beach!!! You’ve played Monopoly before, and you know who always wins. It’s the person with the most hotels. Well, not everyone can afford to buy an entire hotel, so I’m buying individual rooms. It’s going to be managed by the best hotel managers in the world, so you don’t have to do anything at all. You’ve seen how much they charge for hotel rooms in Miami Beach, now you can collect all that income and sit around doing nothing!!!! Call me at 1-800-XXX-XXXX to set up an appointment!!!”
Oh boy, this will turn out well.
Have you noticed how practically every ad on the radio in Chicago is somehow related to condos or sub-prime finance these days? I’ll be glad when this is over.
I loved the ones where the guy kept saying “It’s not your fault! Money problems can happen to anyone.” and then he offers to solve all your problems with a new mortgage, all you need is to not to have been late on your payments for a couple months. Oh, and by the way, 30 days late doesn’t count as late. Isn’t he just so nice and helpful?
have you ever looked at the ads on this blog???
What ads? I use Firefox w/ Adblock Plus.
J.G. Wentworth!
Aaaaugh!
Lennox Financial folks, the biggest no brainer in history! You can just keep refinancing to you, WITHOUT COST, forever!
I hear that one about 3-4x on the way to and from work…
God I hear that one all the time…whats really weird is that it seems ALL advertising on AM radio the last two years has been NOTHING but morgt ad’s, get rich quick schemes and get out of debt….this can not turn out well…
Yeah, now the Lennox guy is saying, “Refinance before you get buried. It’s the biggest no brainer in the history of Earth”.
I have news for the post 2002 house buyers. They’re screwed. A refi of screwed, is still screwed.
they have one here to sell radio advertizing - another growth industry
Not to mention newspaper adds.
Oh boy… certain aspects of the advertising market are going to take a quick 25% hit. Any bets on how many are ready for that hit? The secondary impact is going to be nuclear.
Got popcorn?
Neil
Yeah, but it’s pronounced “NUKE-YUH-LER.” Our president says so, so I believe it!
Yeah, they’ve had the condo-hotel ads up in NYC too. Hunting the last victims.
If the rooms are so damn profitable, why on earth is the hotel selling them?
And why on earth aren’t the big hotel companies buying them? There must be a reason the developer is selling them one by one rather than all at once to a large corp. Hmmm, could it be that the large corps don’t want them…
Not to get too off-topic, but the big hotel companies rarely actually own the hotels with their name on them. Usually a local owner will contract with the big hotel company to manage/operate/brand the hotel or they will simply contract for the branding and agree to meet minimum standards in regards to appearance, service levels, etc.
If you think about it, it’s a great deal for the big-named hotels. All the development risk is held by someone else and they just sit back and collect royalties and fees while doing the occasional audit.
This condo/hotel phenomena is further pushing the financial risk from the local company to the individual investor and is rarely a good financial decision. The owner is required to furnish the rooms as often as the hotel operator wishes to remodel and is required to buy exactly the furnishings the operator wants, and the owner also pays a significant percentage of room revenue for the convenience of having the room operated for them. Plus, they pay the property tax!
I’m going to go out on a limb and suggest that perhaps you are not in the target demographic.
Which demographic would that be, the stupid one?
Jbunniiii - i’ve never thought of it that way, but you hit the nail on the head.
Hey, it’s an 800 number! Meaning that the advertiser of this scam is paying for the call! So, why not give him a ring (evil grin)?
You guys all need to get XM radio. I know it is an unnecessary cost, but like most people I prefer having tunes or talk radio while I drive, and to me the 40 Cents per day XM costs is well worth it not to listen to Lennox Financial, et al.
Condo-hotels are such a great scam. If I had a little more ambition, I’d start a blog just about them — getting the marketing materials, analyzing them piece by piece, etc — such a terrific scam, and so much material to work with.
Let the historic rush back to the trailer parks begin. Buy stock in manufactured housing.
they sell at huge premiums- Buffet’s way ahead of you
Speaking of Buffett - anyone else notice that Berkshire Hathaway is trading above its value before the “correction” of last week? Guess we know where a bunch of people have been looking for safety in their IRAs and 401ks.
Saved my ass! -
National Mortgage News. “Traders and other mortgage executives tell us that secondary market bidders are offering between 15 and 25 cents on the dollar for delinquent HELOCs. We’ve heard the bid prices from three trusted sources. One investment banker said a large California lender wanted 65 cents for a recent pool of bad seconds. Needless to say, the sale never went through.”
So at this early moment in the collapse, clueless lenders are basically admitting that property values need to decline to somewhere in the 50% - 75% off region. What will it look like 2 years from now. Holy hell!
> clueless lenders are basically admitting that property values need to decline to somewhere in the 50% - 75% off region
Not so fast - they were speaking about HELOCs and second mortgages, which are junior to the primary mortgage. Those two can become unsecured by much smaller declines in the house value than 50% while the primary mortgage is still secured to a large extent.
It would be nice if someone could come up with a product that buys back a set of repackaged loans for 50 cents on the dollar(or whatever) and then sells them to mortgagor for say 70 cents on the dollar. I’d buy mine of that were the case.
Offering 25cents on the dollar implies they are seeking yields north of 30 to 40%. I guess they are starting to realize the risk of these time bombs. Who wants to be stuck holding the 2nd loan hot potato?
Not exactly correct. They’re discounting second trusts (probably the “20s” in the 80/20 split mortgages of the last few years and HELOCs because if the 80/20 arranged 100% financing, or the HELOC went up to the 100% line, a 20% decline in home values would render their loans totally unsecured, endangered by bankruptcy proceedings, and generally very difficult to collect.
This information suggests that lenders think there’s at least a 45% chance of a 20% drop in real estate values, while investors think there’s a 75% chance of a 20% drop in real estate values. On the other hand, other posts have indicated that there aren’t any offers at all for these types of loans, so investors may think there is a 100% chance of at least a 20% drop.
“While employment and income trends are positive in almost every region, the effects of the slowdown in residential construction are ‘clearly visible,’ said FDIC Chairman Sheila Bair.”
Hey, Shelia, if you been checking Ben’s blog for the last 6 months, you would have been able to have 20/20 vision before this thing imploded. Now it’s “clearly visable” to you. PANIC will lead to CAPITULATION, and not a shred of leadership to be had. W
BIG GOV just in time
Federal Deposit Insurance Corp. has a warning for banks and thrift institutions: The recent slowdown in residential construction could reduce the demand for mortgages and commercial real estate and construction loans, all important factors in loan growth in recent years.”
The DOW is up 45 points right now. I can’t fathom why. The services sector jobs report was weak as far as I can tell. Are investors now sure that Ben is going to drop interest rates ? Apparently according to the bond market, its 100% certain. I think with oil at $60 Ben has a surprise for them !
It takes markets a while to come to the conclusion the free money game is over. I find it funny that China and Japan are more centered on fundamentals than we are.
Not any more. Seing more head-fakes than Majic Johnson driving the lane. Some HB’s down 5% today. FUGLY!
Sorry about the “j” Magic, but it has been a while since you’ve been in the headlines.
The DOW is up 45 points right now. I can’t fathom why. The services sector jobs report was weak as far as I can tell. Are investors now sure that Ben is going to drop interest rates ? Apparently according to the bond market, its 100% certain. I think with oil at $60 Ben has a surprise for them !
It takes markets a while to come to the conclusion the free money game is over. I find it funny that China and Japan are more centered on fundamentals than we are.
Take a look at the open interest tables for March index options. Your answer is probably there.
I wonder if it makes sense now to short some of the regional thrifts with big mortgage exposure in the bubble regions; so far, many of their stock prices have been immune to the downturn. Reading corporate reports on them, a fair number reduced their bad loan debt in the last couple of quarters. Whaddya guess that this will change soon?…
“Service industries in the U.S. expanded at the slowest pace in almost four years last month, suggesting the housing slump may be filtering through to the broader economy.” “The Institute for Supply Management’s index of non- manufacturing businesses including banking, construction and retailing fell to 54.3 in February from 59 in January, the Tempe, Arizona-based group said.”
“Homeowners are finding it more difficult to use their equity as a source of cash after the yearlong housing slowdown put an end to rising property prices in many regions. ‘The housing market is unambiguously having a broader impact on the economy, including on the services sector,’ said economist Richard DeKaser.”
Nothing that wasn’t predicted here a year and a half ago.
yep, its been discussed here ad nauseum. I just cannot understand how the whole equity=income way of thinking came about. I’m still in my early 30s and people never used to “cash out” their equity. When I finally get a chance to buy my home, I plan to have that sucker paid off so that I can maybe relax a little in my golden years. So many people out there are effed and don’t even know it yet. This is getting real interesting, really quick. Neil might want to buy his own movie theatre popcorn machine!
Wife and I bought a nice house in a dead market, SoUtah, in 2003. We took the cash from a CA home sale and put a big down on a this house and invested the rest.
Everyone of our friends from CA jumped on us, “having house equity is stupid”, for wasting our money. Most of them are now in deep financial trouble. Two weeks ago one called and asked if we would co-sign for a loan, “I just need alittle help for a couple of months”.
Note to self: It’s time to get some new friends and maybe change our phone number.
“having house equity is stupid”
Yep, and yet the same idiots will tell you that when it comes time to retire, they will sell the house and use the proceeds to move somewhere cheaper and retire. Hello? If you don’t have any equity, you don’t have any proceeds!
This is what comes of failing to pay attention during 5th grade arithmetic because “I’m never going to have to use this in real life.”
having house equity is stupid”
If having equity is stupid, where does co signing for a FB rank?
In my best star trek voice:
Cap’n, the popper just can’t pop any faster.
I too don’t understand extracting equity…
Even sillier, we have a coworker here threatening to quit unless he gets the position he wants. As he figures it, his home is now worth $1.5M and thus he can job hop (out of state) and live the good life.
This has a long way to go,
Neil
Man! I hope your employer doesn’t fall for that crap. An old boss of mine did the same thing and guess what? They let him walk out the door. LOL!! Worked out nicely for me, though.
Does that idiot realize that anyone can be replaced? Ultimatums don’t always work. He’d better check ALL of his ducks to make sure they are in a row.
BayQT~
We put out an APB to all our clients regarding the Sub-prime turmoil and how we’ve had closings delayed: said, We will not record a transaction until we are funded in full (we are an escrow state which is a bit different from our east coast colleagues who do it differently). A few weeks ago we had two transactions fail to fund on time (New Century loans). Response: ‘oh, you must of had a slow funder’. Another response, “solid lines and solid company.”
Right now I’m thinking about all those purchases ready to close in the next week or two who are financed by a New Century among others. If a were an agent, I would want to start having financing contingencies in place for clients—if possible.
Having their financing fall through, and not being able to qualify with another lender, could be the best gift these subprime borrowers might ever receive, though they may not think so now.
It’s like having the guillotine get stuck right before it gets to your neck. Why would you want them start over again? Ah, no thanks, I’ve changed my mind.
“Delores King, a Chicago retiree, recalled how a telemarketer lured her into a mortgage refinance. At the time, she had a monthly payment of $798. Her new loan, which started out at $832, has since adjusted to $1,488 a month. ‘This is more than my entire monthly income,’ she told lawmakers.”
THis is one telemarketer that will definitely be smoking a turd in hell.
Why?
Delores obviously refinanced and took out cash - otherwise why refinance when the monthly payment will go UP not DOWN. She then failed to read the mortgage docs.
Greedy people who expect something for nothing (a $400K house for $500 a month) get what they deserve.
This is what happens when EVERYBODY is on Commission…….ethics and morals sink into the Gutter!………It happens in any business.
I wish i could learn to be a scumbag i could have made so much money hustling old ladies into crap loans. I have 2 friends who were trying to get me into the biz…now they both own homes with no mortgage.
Of course they are back working at their old jobs…………..
a Strip Joint DJ! LOL!
a Strip Joint DJ! LOL!
That’s the cool thing about paying off your mortgage - you can afford to take a job that you actually like and which benefits society, instead of being a useless parasite such as a mortgage broker.
Or worse, a Realtor™.
Re: scumbags who’ve cashed out
http://www.nytimes.com/2007/03/05/business/05lender.html?ref=business
“Homeowners are finding it more difficult to use their equity as a source of cash after the yearlong housing slowdown put an end to rising property prices in many regions. ‘The housing market is unambiguously having a broader impact on the economy, including on the services sector,’ said economist Richard DeKaser.”
My question is - “Are they really?” It seems like banks are all too anxious to hand out home equity loans / lines of credit to any warm body out there. Sure they need an appraisal - but at least on the mortgage the banks are willing to take a fudged appraisal. The basic point is - are banks giving more scrutiny to appraisals lately or are they willing to take what ever number come in as in times past? It should be noted that many appraisers in recent years have indicated there has been pressure form time to time to cook the numbers and make the loan work.
From finance.yahoo.com:
Treasury Secretary Henry Paulson launched a tour of Asia today as the region entered a second week of market turmoil. Paulson is expected to discuss the region’s falling stocks and the yen’s rising strength against the dollar with Japanese Prime Minister Shinzo Abe in Tokyo. Later in the three-day trip, Paulson is expected to talk with Chinese leaders about the need to strengthen their undervalued currency to help reduce their country’s huge trade gap with the U.S. (AP in Yahoo! Finance) Despite global stock-market volatility, Paulson said on the eve of his trip that he was “feeling good about the U.S. economy.”
Really - what is there to “discuss” about stock markets and currency? Why can’t markets just their thing w/o gov’t interference? Obviously worried about the carry trade, IMO.
“Paulson is expected to talk with Chinese leaders about the need to strengthen their undervalued currency to help reduce their country’s huge trade gap with the U.S.”
That’s OUR need, the Chinese don’t “need” to do anything they don’t want to do, and Paulson should know that. Here’s where we find out what Paulson is really made of and I have a feeling he’ll be met with lots of smiles and “Ah, so, Ah, so” and they’ll turn around and stick it to him.
Any thoughts? Can Paulson really get China to see things his way?
Or is Paulson’s international “clout” more of myth?
I doubt it. Remember Plaza Accord of the 80s? When the US and EU forced Japan to strengthen their currency? That crushed the Japanese economy for over a decade. I think the Chinese have learnt that lesson.
Good point. But does Paulson have any leverage? Can he threaten to limit trade or some such other device?
Personally I’d like to see Chinese products disappear from store shelves, but that’s just me. They’re VERY expensive, because they either don’t work or obsolesce way too fast (as in breakage).
I disagree with you. I love the Chinese product. (I heard they’re now planning to export the new Chinese car, Cheri. I might actually pick one up when they come) Not only is China shipping over goods at an amazingly low price, but they are also financing the US government to run in a deficit; to wit, 1.2 Trillion dollars in US Treasury, probably will reach 2 trillion by mid 08 or so.
The US leverage are the threat to (1) implement extrememly tight trade policies, and (2) to inflate away the worth of Chinese holding, and the temptation of that China could buy a lot more of US assets.
To the threats they will just laugh their ass off. “Sure, you can do that; wanna cripple your own economy in the process? Be our guest” (of course, in much more diplomatic terms).
There is something to the incentive. China is pretty intersetd in buying US corporations nowadays. BUT the problem is that US is way to suspicious to sell them anything they want. (e.g. Unicol). Certainly technology and energy are off limits. So what’s left? Is China really interested in buying American companies that make sewing patterns?
” I love the Chinese product.”
To each his own. I guess we’ve had very different experiences. I’ve learned the hard way that if you can’t trust someone with a small transaction, don’t go for the bigger transaction. So if the Chinese screws I bought at Home Depot stripped within seconds of application, no way in hell I’m going near a car. Bad enuf I’ve probably got a ton of Chinese repair parts in the car I’ve got.
Always shocks me we ever did business with them in the first place.
Palmetto, I’m with you mostly on the dismal quality of Chinese products. My biggest beef are the toys. I’ve learned the hard way not to even open some of the gifts my kids get for their b-days so I can take them right back to the store and exchange for something good (Europeans still make good toys). Their knives are awful. Having said that, I have to say some of the textiles are really good and I hear they make excellent musical instruments and really well priced. I guess they need a couple more decades. In the meantime, no one can sell me a Chinese made can opener, thank you very much.
IMO, the USA will turn to protectionism against China and Japan. There really is no other way to deal with them. Yes, it will be a painful adjustment, but better to keep and grow what little industry is left than sell it out to the Chinese.
Personally, I think it should be made illegal for any government controlled economic entity to buy US assets (other than T-bills of course). That would eliminate pretty much any Chinese company from buying USA businesses.
To heck with the consequences, we need to put an end to the global corporate raiders. They don’t give a care for anything but the bottom line. First it was our factories now it’s our white collar jobs through global labor arbitrage. Better to stick it to them now before there is nothing left. Afterall, they have been sticking it to USA labor for decades now.
I’m also with you guys on the poor quality of Chinese products. When/if we buy a house, there will be no Chinese light fixtures. We have them in our apartment and they are crap - bulbs hard to screw in, burn out quickly, quit working, etc. Other products that come to mind are shoes, furniture, and jeans.
The “Cherry” care will not come to the US. Apparently they’ve stolen tons of patented ideas. They’ll end up with over 100 lawsuits of patent infringement upon the landing of the first car on US soil….
I looked at an upgraded co-op unit in south OC online. Everything looked great until I saw the “2 for $12″ light fixtures from HD, made in China. Made me wonder what other shortcuts were taken.
> I have a feeling he’ll be met with lots of smiles and “Ah, so, Ah, so” and they’ll turn around and stick it to him.
Last time he was there they lectured him and Bernanke on Chinese history for half an hour, first. IIRC
Paulson knows this. He’s just getting the bugger from King George to do something, anything! Distract the masses! Pay no attention to the man behind the curtain!
Japanese say “ah, so”, not Chinese. It means “Oh, really?” or “Uh huh.”
Except when you are talking to the honorable gaijin you actually say “Aa, sou desu ka.”
“The Gravy Train is Over”
aka
“Brutha, can you spare me a subprime?”
We’ll soon see guys at traffic intersections with cardboard signs reading “Will work for subprime loan.”
Lots of other bad news out there too: AMD missed their numbers, RIM restating $250MM and CEO “voluntarily” resigned over options . . .
Why is this market smiling?
“Who gets hurt? The subprime consumer. Can anything be done about this? No. Some lenders believe credit impaired borrowers have benefited from great rates the past three years. And now, the gravy train is over.”
BS! They get f’d either way.
I’ve always wondered about the subprimes locked into ARMs, etc that cannot get out now (even with penalty) due to tightening credit standards.
I guess these higher rates they’ll be stuck with will offset the bloodbath about to occur.
Not only is the gravy train over, but some of the “cars” are defective:
http://www.azcentral.com/arizonarepublic/local/articles/0305house0305.html
wow didnt see this coming…
Freemont is done……….stopped funding deals as of this morning.
Oops . . . that smile appears to be fading. All three major indices now in the red. That makes more sense.
From Brokers Universe:
I just received a call from an AE about New Century…
They told me that New Century had declared Bankruptcy just a short while ago (15-30 minutes). Can anyone confirm this? Would this mean that they are ceasing operations as well? I don’t want to cause any panic, but I have a few loans with them and wanted to search for some answers.
by MThomas800 March 5, 2007
http://www.brokeruniverse.com/grapevine/thread/?thread=369988
I don’t think they have declared BK yet since the stock is still trading. It would have been suspended.
I agree. I also think this comment is not true.
It is just funny how many of have been following these brokers chat rooms for a year now and how right they have been…
“I don’t want to cause any panic, but I have a few loans with them and wanted to search for some answers.”
Translation: I am sh*tting my pants right now trying to figure out how to pay my $1.5mil OC house payment and my Mercedes payment this month…and Payless already hired another assistantt manager to replace me…
Payless already hired another assistantt manager to replace me…
bahhahahaha
If you think the overall market is holding up absurdly well, what about CFC and WM? These are two stocks that really should be in crisis. Instead, WM is not that far away from an all-time high and CFC has moved down ever so slowly after the bogus B of A takeover rumour. True, I hold puts in both, but even so you have to admire how resilient these stocks are being.
As with so much in this world, I really don’t understand it!
They’re considered potential survivors of this mess.
CFC is jockeying for position when Stage 5 is reached.
Fives Stages of a Project:
1) Wild Enthusiasm
2) Unmitigated Disaster
3) Search for the Guilty
4) Persecution of the Innocent
5) Honor and Glory for the Uninvolved
CSCO survived the telco meltdown but they are still less than 33% of their former high. The party has just begun. I’m sure they will both survive, but will not be unscathed. I think CFC will see the mid-20s and WM will drop at least 10 points before this is over.
Although they are steeped in the mortgage lending business, they are not 100 pct pure subprime lenders like some of the recent crash and burners.
Not even Warren Buffet is going to escape this unscathed. Survivors will have lots of scars for a while.
By WM, I assume you’re referring to WAMU? Why should WAMU be in danger?
“SRS” is on fire. +$5.90 today.
Wamu’s and CFC’s subprime portfolios are no more than 10% of their overall porfolios, wamu’s is even less, they only originate them through their crappy long beach, maybe that is the reason why they are not going down as much.
I have CDs at WAMU and don’t spend a second worrying about them.
I wonder what percentage of originations subprimes were? How many of those bad loans will the HSBCs of the world force them to buy back? How many can they buy back before they go BK?
Very few of these lenders hold the subprime loans on their books–which is exactly why things got so crazy. Without facing the risk directly, they didn’t worry too much about underwriting the borrower’s ability to pay back. And on the other end, the buyers thought they didn’t need to take the underwriting risk because they had these buyback provisions.
No one thought they were taking risk, yet everyone was.
BK was prepackaged for some subprime lenders.
From Minyanville:
REITS and REIT preferreds (reits ARE real estate, ya know!)
I have noted here before that REITS were overvalued from every metric I knew of.
Mr. Zell (my comment: also Trammell Crow) saw it too and top-ticked this market with his EOP sell.
Now, I am seeing list after list of REIT preferreds and corporates for sale.
This is how a credit crisis/contagion develops. It starts with the lowest quality (sub prime) and spreads to higher and higher quality preferreds.
I continue to avoid corporates and am down to my last preferred issue . . .
and that nasty TX beyatch continues to hold REIT shorts and puts
Zell still has Equity Residential, I wonder how that one works out. My wife’s best friend works there and loves it; everyone there is apparently a nice person. She just worries about what will happen if it becomes a 100% profit-driven company.
TIIIIMMMMMBEEEEEEEERRRRRRR!!!! I wonder when the first prime lender gets into trouble publicly. All I hear about on CNBC is that the problems haven’t spread into the prime lending sector, yet. That is when all he double hockey stick is going to break loose!
Why would you worry about your CD’s, aren’t they FDIC insured?
Ever tried to get your money back from the FDIC?
I couldn’t even get a car title back in 1989.
Oh sorry, I have no experience with them. I would have thought that they would automatically reimburse any customer with an savings/CD up to $100K. I should have realized it’s not that simple whenever the government is concerned.
By the way TXchick, I really enjoy reading your posts and insight. I have a very good friend in Houston who tells me that you can buy a nice house there with a pool and a bit of land for around $200K. Can that possibly be true?
Houston was cheap when I lived there. In 2003, we bought a brand new 2300 sf, 4 BR, 2.5 bath, almost all brick, 2 story house on 1/4 acre in Pearland, TX for $195,000. Pearland is about 15 miles SW from Houston.
Our house was not one of these shoddy vinyl boxes they throw up elsewhere. They use a lot of brick in the homes in Texas. Our house had granite countertops, tile backspash, 25 foot vaulted ceiling, GE Profile appliances, in wall oven, ceramic tile flooring throughout, porcelein tubs, surround sound prewiring, dual level air conditioning, etc. In 2005, we sold the house for $200,000. They build so many houses down there I doubt the prices are much higher. The property taxes are high…about $5400 for our house. However, all the schools were brand-new, near our house, and there is no income tax. I don’t think you can beat the quality of life in Texas. When I moved back to the Northeast for my job, I found some new houses that were of similar size to ours for $350-400k, but they weren’t the same quality. They use all vinyl siding and they charge you for everything in the book. The standard features were vinyl flooring, cheap appliances, no ceiling fans or recessed lighting. By the time you add the stuff you got included in Texas, you’re looking at $500K.
Thanks. You just spared me my usual rant.
And anyone who is from GB or has lived there would probably want to hang themselves after spending one summer in Houston.
Houston has quite a large ex-Pat Brit community. I like Houston, but only inner loop (610). You get used to the Summers.
February 2007 sales numbers for Northern Colorado just came out:
All home sales down 12.02% YTD, New home sales down 29.73% YTD. Median prices down in most markets except Republic of Boulder.
This nugget stunned me the most: Zero homes sold (out of 259 on the market in Ft. Collins, Loveland and Windsor) that were listed for $659,000 or more. I would guess a majority of them are empty too.
Doesn’t that mean that technically the months supply of houses about $659k is infinite?
link? tia.
http://realtytimes.com/rtmcrcond/Colorado~Loveland~bjjohanningmeier
These are February only numbers (down 20% overall and 45% for new) - I have been tracking monthly since July 2006. Don’t have inventory levels.
i have family in Loveland. Supposedly it’s California equity locusts that were buying up the RE. I was there last year marvelling at the $600,000 and up homes. Even walked through one that was just about finished.
Wife and I looked at homes in NC around Raleigh. A $350,000 home there is like $1 million around Fort Collins. Take a guess why. Absolutely no reason for such expensive housing there. OK area but nothing special.
Of course because HP, AMD and a bunch of other high tech companies are there or moving there everyone has greed and dollar signs in their eyes to take the money of people moving into the area
I think that “equity locusts” is too kind a moniker. I have begun to call them “equity rats”. (I hope the world’s rats don’t sue me for defamation)
Don’t hold back Mugsy … tell us how you really feel about equity locust. My town would pay them to move here (Redwood forest land).
Where is BoulderBo? He called the NEW news a few months back.
Active Trader Update
Subprime’s Next Victims: Hedge Funds
By Doug Kass
Street Insight Contributor
The fallout in the subprime market won’t be limited to the originators of these risky mortgages — the next area to keep an eye on is hedge funds.
First, it’s clear we haven’t seen the worst of the subprime wreakage and that we’ll soon see the hurt spread to the prime-mortgage arena, as I’ve argued recently.
Indeed, delinquency data are deteriorating — and at a rapid clip. The largest originator of home loans in the U.S., Countrywide Financial (CFC) , reported sharp rises in delinquencies in its prime mortgage loans. Surprisingly, at year-end 2006, Countrywide’s subprime delinquencies were approaching 20%. That’s nearly twice the rate reported by the subprime industry in November.
The low volatility, liquidity-driven, see-no-evil, hear-no-evil investor mentality of the last several years has introduced a degree of investor complacency rarely seen. It also has led to a far more leveraged hedge fund community — not necessarily by the hedge funds themselves, but by a core base of hedge fund sponsors and investors, the fund of funds industry.
It is my view that the next shoe to drop could be the disintermediation of funds out of the dominant investor class of our time, the hedge fund industry. The source of that disintermediation could be, like portfolio insurance in October 1987, something that few have addressed: the forced hedge fund liquidations emanating from the increasingly dangerous leveraged role of the fund of funds industry.
The fund of funds industry has ridden the wave of hedge fund asset growth. Funds of funds provide high net-worth individual investors and institutional investors with access to a diversified portfolio of hedge funds. The funds of funds charge a fee, on top of the traditional hedge fund fee, which is defended as ameliorating risk and generating excess returns by selecting the “best of class” hedge fund investors in each asset class — long/short, arbitrage, distressed, market neutral, emerging market, event-driven, macro and even short-selling.
The fund of funds industry has played a huge role in providing capital into hedge funds. Based on the availabIe data, I estimate that funds of funds provide approximately one-third of all assets to hedge funds.
Like mortgage originators such as Novastar (NFI) and New Century (NEW) , which offered mortgages with little money down and even less documentation, many funds of funds have utilized a similarly aggressive technique to differentiate themselves and try to deliver superior returns. Encouraged by low volatility and a healthy stock market — characterized by a relatively orderly advance — many have goosed their clients’ investments in hedge funds by the use of debt.
In North America, banks like RBC Capital Markets have been prominent leveragers of investors’ capital into hedge funds. But the real devotees of leverage lie abroad, particularly in the fund of fund departments of the private banks of Switzerland, which routinely leverage the capital of their investors (and for themselves) between 1.5 times to three times. Every significant hedge fund has an offshore fund to complement a domestic fund, which attracts non-U.S. investors from the fund of funds industry.
The risks are clear.
Should the markets’ recent swoon develop into something more severe, funds of funds that use leverage (especially of a Swiss-kind) will quickly liquidate. The reason I believe liquidations might occur more quickly than generally anticipated is that European banks and fund of funds investors are not sticky — their investment attention disorder kicks in more quickly than others.
Isn’t it funny (and ironic) how the aforementioned fund of funds situation is eerily reminiscent of the egregious use of debt in the mortgage market over the last decade?
Well, maybe it won’t prove that funny.
——————————————————————————–
At time of publication, Kass and/or his funds was short CFC, although holdings can change at any time.
txchick, you just made my day!
I know this isn’t exactly on topic, but I am a person who does not own real estate (whew!) although I do own quite a bit of stock and I am wary of the market right now. The “experts” keep saying that the market is going to hold steady at its new corrected level until investors get an indication of how the housing market and mortgage industry is doing. As someone who deeply believes in the housing bubble, this has me very worried about a significant and devastating market decline. My question is, if I were to move out of the market, what do all of you think is a “safe” place to move money to – bonds, cash, commodities, foreign markets? Is there a safe place for investments if the housing market drags down the greater economy?
The only “safe” place is probably:
1) cash
2) US Treasuries.
This is where many people are putting their money. All other asset classes have some form of risk.
That said, there IS a risk to cash and Treasuries as well: inflation. Cash/Treasuries do not typically yield much more than inflation, thus your inflation adjusted returns can be poor. but it’s better to make 5% in Treasuries with 7% inflation, than to LOSE 10% of your stock portfolio with 7% inflation.
Most people looking for “safety” go to cash and Treasuries. You can get a treasurydirect.com account within minutes. Very simple.
Gold bugs will tell you that it is safe as well. It will never lose all of its value, but it is a speculative investment and does have risk (note that Gold folk lost a lot last week too.)
Most people looking for “safety” go to cash and Treasuries.
You said it. People have no concept that Uncle Sam isn’t safe, so that’s the knee-jerk reaction.
Gold? Generally no more than a commodity investment-wise, but comes into it’s own only in times of severe economic crises. Unfortunately, that’s where we’re headed, so I’ve got mine.
Got to love these investors, now they sneak in the area’s they wanted to flip in at about mid-night so nobody will see who they are, look at the nightmare house they can’t sell and leave after 5 minutes. I say why sneak in and then i realize these are the same sneaks who got these little money down, no income loans,of course they don’t want to be noticed?
Can someone explain?
http://www.marketwatch.com/news/story/new-century-allow-hedge-fund/story.aspx?guid=%7B9A22429D%2D0759%2D471F%2DB4AB%2D259AB7DE0141%7D&siteid=yhoo&dist=yhoo
Century Financial said on Monday that $3 billion hedge-fund firm Greenlight Capital dropped its planned proxy contest in return for permission to lift its stake in the struggling subprime mortgage lender to nearly 20%.
20% of zero is still zero. This is just a distraction IMO.
If you check Google Finance pages (finance.google.com) for HBs & subprime lenders, this blog shows up amont the links with a small excerpt from ben’s postings. Ben have you noticed any uptick from visitors coming in via Google Finance?
Imagine where housing sales volume would be without subprime in 2005 and 2006. Some estimates claim subprime made up 20 pct of all purchases in 2005 and 2006. Now, add to that scenario all the defaulting subprime inventory making its way back to the market. Then and only then will you get a sense of what is ahead for 2007 and 2008.
“Now is the winter of our discontent made glorious summer” - Richard III
Everything is unfolding as predicted…only faster.
Schadenfreude for everyone!
Isn’t it ironic how the medicine they come up with to cure the sub-prime illness will actually kill the patient. Tightening the lending standards will push more FBs into foreclosure because they can’t sell their house or refinance. I wonder what they will come up with next. Dropping interest rates will make the Dollar drop, causing real interest rates (not the Fed-rate) to go up. Again: the opposite effect of what was intended.
When I heard last week that New Century is showing losses for 3 quarters last year, I knew that this is a problem for their warehouse lenders. That is what is meant by default with their lenders. When a MB shows 2 quarters of losses, they risk losing their warehouse lines. When this happens they cannot fund new loans. All the bad press on subprime will make these banks more cautious and accelerate the demise of some subprime lenders.
Good point Sensible Lender. The warehouse lender plays a crucial role in the mortgage bank’s operations. In my opinion, warehouse lenders are a part of their operations. New Century wouldn’t be able to function without them. They received waivers from some of their warehouse lenders, but there’s still a lot of unanswered questions about the impact of the market changes on NEW’s operating and financial positions. A mortgage bank shouldn’t loan a borrower money unless that borrower can demonstrate an ability to repay the loan. The same concept applies to the mortgage bank. Warehouse lenders are going to be hard-pressed to loan a mortgage bank money to fund a loan when there’s doubt about the mortgage bank’s ability to borrow/repay those funds. To be honest, I wouldn’t be surprised if NEW files for bankruptcy this week. Without their warehouse lines, NEW is pretty much insolvent.
The San Diego foreclosure forum has finally updated the numbers (Jan. ‘07)
http://www.foreclosureforum.com/stats.html
The interesting thing is that not only are the trustee deed numbers going through the roof, but the percentage of notices of defaults that result in a forced sale has been steadily rising for the last year. It’s now 32% up from 10% a year ago (3% in Feb. ‘05). The all time high was 57% in Jul.’97.
Just had a telephone call for the ages. A guy I know who manages pension investments for a pretty darn large local gubbmint entity, just called to congrat me on the short call and then tossed this little ditty out (re subprime). “I don’t know how these banks can lend at sub-prime interest and make any money.”
Huh??
After I picked myself up off the floor I politely advised him that subprime referred to the credit quality of the borrowers, not the interest rates that the lenders were making.
And this person is running money. Scary.
“gubbmint entity”
txchick57……….I’ve read much of your astute observations so I’m a bit amazed that this shocked you. I don’t know how it is in Texas but in Massachusetts you aren’t hired by the treasury for your financial accumen but for your political connections.
Are things (or expectations) really different down there in this regard?
The treasurer of Orange County; prior to it going bk, did not have a college degree, never was in the investment business….never had a business.
TX,
OMFG, now that’s scary. I’m curious, what was his response after you politely educated him?
Just hee-haw like you’d expect in Dallas.
OMG !!
wow.
you should have told him that “subprime” meant that they lend out of a submarine. This allows them to charge HIGHER rates for things since they’re on maritime law.
my goodness.
He must have been reading Bob Citron’s Treatise on Investing Public Funds for High Returns.
that explains a lot…
Not exactly on topic, but since we’re talking stock market news, anyone notice the action in COMMERCIAL real estate shares today? The iShares Dow Jones U.S. Real Estate Index Fund, or IYR, is the ETF that holds major commercial REITs — apartment companies, office building owners, and the like.
Today, it’s gapping below a long-term uptrend. This is the first sign of real technical weakness in this ETF in a long time, in my humble opinion. The chart is at my blog, http://interestrateroundup.blogspot.com
We be shorting those weeks ago, homey
You go ghetto super girl!
Are you the guy who did the rap about the housing market last week? I was trying to remember that, thought it was very funny.
My view on apartment REITs (somewhat outdated), for what it’s worth …
http://www.moneyandmarkets.com/press.asp?rls_id=486&cat_id=25&
hi mike,
your post on reits back in early or mid 2006 was one of the best i´ve read on this topic.
thanks!
went also short. but way earlier than txchick. got almost killed from the eop news on the position .i should really pay more attention to charts etc.
but after last week and the break yesterday my position looks much better.