Subprime Mortgage Market In “Turmoil”
Some housing bubble news from Wall Street, Washington and Business Week. “BusinessWeek has learned that federal investigators have opened a broad criminal probe into lending practices, some financial transactions, and other dealings at Beazer Homes USA. The North Carolina field offices of the Federal Bureau of Investigation, the Internal Revenue Service, and the Justice Dept. have recently opened a joint investigation into the company over such matters.”
“Investigators, however, are not limiting their probe to possible mortgage fraud. ‘There’s all sorts of potential fraud issues here,’ FBI spokesman Ken Lucas told BusinessWeek. ‘We’re looking at all types of [potential] fraud associated with Beazer—corporate, mortgage, investments.’”
From MarketWatch. “‘Beazer Homes has been in contact with the U.S. Attorney’s Office and, at this time, there have been no allegations of any wrongdoing,’ the company said in a press release.”
“Several major home builders also operate finance companies to aid customers in buying their houses. Those businesses and the broader home-lending industry have been under scrutiny lately as defaults among the riskiest of those loans, called subprime, have spiked.”
The Associated Press. “The Charlotte Observer reported last week that the company had an unusually high rate of foreclosures in many developments around North Carolina’s largest city. The paper reported that of the 2,900 Beazer homes built in Mecklenburg County between 1997 and 2006, at least 388 have foreclosed - a rate above 13 percent.”
“Nationally, fewer than 3 percent of buyers lose homes to foreclosure, the paper said. In its series, The Observer documented four examples where the income and debts of borrowers were misstated on their applications for government-insured loans.”
The New York Times. “New Century Financial, the troubled subprime mortgage company, could file for bankruptcy protection as early as the end of this week, people briefed on the company’s plans said yesterday.”
“In the last week, banks that provided it with credit lines totaling $17.4 billion started repossessing or selling the collateral that backs those debts. Barclays Capital, for instance, has taken ownership of mortgages with a face value of $900 million. Morgan Stanley, which lent the company $265 million this month, is auctioning $2.48 billion worth of loans this week, and Natixis Real Estate Capital is auctioning $800 million in loans.”
“‘The one reason they haven’t filed for bankruptcy yet is that they believe they can still pull off a transaction with someone coming in and acquiring them,’ said Jeffrey K. Garfinkle, a partner with a law firm in Irvine, Calif., that has represented the company in the past but no longer does so. ‘But it is really late in the game.’”
“The Securities and Exchange Commission and the United States attorney’s office in Santa Ana, Calif., are investigating trading in the company’s shares and accounting errors.”
“Furthermore, regulators in several states including California, New York and Ohio have restricted the company from making new mortgages because it was unable to fund loans after closing. Those sanctions will limit the number of potential bidders for the company’s assets.”
From Reuters. “New Century’s franchise value has largely been destroyed, and the subprime lender has gone too far down the bankruptcy path to reverse course, according to a Merrill Lynch & Co. analyst.”
“Kenneth Bruce said potential acquirers of all or part of New Century are likely to be scared away as the Irvine, California-based lender’s loans get sold and amid a flurry of regulatory and legal actions.”
“‘The business is broken,’ Bruce wrote. ‘New Century has gone too far down the path of bankruptcy to reverse course. The value of its franchise was largely destroyed, once it failed to close loans in its pipeline.’”
“Washington Mutual Inc.’s subprime bonds are suffering from some of the worst rates of delinquency among securities in benchmark indexes, according to JPMorgan Chase & Co. research.”
“Delinquencies of 60 days or more on loans supporting WaMu’s Long Beach Mortgage LBMLT 2006-1 issue jumped 1.78 percentage points according to monthly reports published this week, to 19.44 percent, JPMorgan data shows.”
From Bloomberg. “GMAC LLC said losses at its Residential Capital home mortgage division, which lends to borrowers with weak credit, will hurt profit this year as defaults and foreclosures surge.”
“GMAC is making changes at the mortgage unit, also known as ResCap, to limit losses, the company said in a slide presentation included in a Securities and Exchange Commission filing today. GMAC said it’s ’sharply’ cutting non-prime mortgage lending and expanding efforts to cut losses from bad loans.”
“The ResCap unit posted a fourth-quarter operating loss of $651 million, compared with profit of $118 million a year earlier, GMAC said March 13. ResCap made $6.9 billion of ‘nonprime’ loans in the fourth quarter, a 43 percent decline from the same period in 2005.”
The Philadelphia Inquirer. “Fulton Financial Corp. said it might have to buy back from an investor up to $22 million in risky home mortgages that went bad during the first three months of scheduled payments.”
“Most of the problem loans, made by a Virginia subsidiary of Fulton, were so-called 80/20 mortgages. Such loans exploded in popularity during the real estate boom, but they left some borrowers owing more than their houses were worth when the real estate market slowed.”
“The high failure rate of 80/20 loans, which require no independent verification of the borrower’s income, is a significant factor in the turmoil nationally in the subprime mortgage market.”
“Subprime mortgage backed securities from 2006 may be the ‘worst-performing in recent history,’ with delinquencies on the underlying debt ‘consistently higher’ than in the prior five years, Standard & Poor’s said.”
“About 13 percent of mortgages made last year to people who have poor or bad credit are delinquent, S&P analysts Michael Stock and Scott Mason said in a report yesterday, with 6.65 percent of the total classified as ’seriously delinquent,’ or more than 90 days late.”
“‘It was the layering of risk,’ Stock said. ‘There is no equity in the home, no income verification and a first-time homebuyer.’”
“In almost 29 percent of subprime mortgages, a second loan was taken out simultaneously, meaning that homeowners were ‘in laymen’s terms, borrowing their down payment,’ Stock said.”
“Almost eight out of 10 borrowers in 2006 had low- documentation loans where lenders didn’t require proof of the borrowers’ income, S&P said in the report.”
“About $540 billion of bonds backed by subprime mortgages made in 2006 are outstanding, making up more than a third of all securities derived from such loans, according to Bear Stearns Cos. the biggest U.S. underwriter of mortgage bonds.”
“Collateralized debt obligations, known as CDOs, helped fuel the recent housing craze by purchasing some of the riskier parts of the MBS market that other investors avoided.”
“But now that the housing market is slowing, analysts are scrambling to figure out if the value of CDOs is going to be badly dented by their exposure to the subprime market.”
“Many CDOs will be protected against excessive subprime exposure by the fact that their bond pools typically contain instruments other than subprime residential MBS, according to Moodys analyst John Park.”
“Other common holdings in CDO portfolios are prime residential MBS, commercial MBS, auto loan securities, credit card securities and real estate investment trust instruments. However, in recent weeks traders have wondered whether the subprime MBS meltdown will spread to securities based on auto and credit card loans issued to borrowers with below-average credit profiles. If so, CDOs may not enjoy as much protection from diversification.”
“New York Fed President Timothy Geithner said last week that, even the more sophisticated participants in the markets ‘find the risk management challenges associated with these instruments daunting. This raises the prospect of unanticipated losses.’”
The Financial Times. “US authorities stepped up investigations on Tuesday into possible fraud by companies in the high-risk mortgage market. The Securities and Exchange Commission told Congress it had set up an enforcement unit to probe possible fraud involving subprime mortgage lenders.”
“‘To the extent that these loans are securitised and to the extent that they become part of problems, fraud or accounting problems related to that, we want to be there as enforcers,’ said Christopher Cox, chairman of the SEC.”
“Other common holdings in CDO portfolios are prime residential MBS, commercial MBS, auto loan securities, credit card securities and real estate investment trust instruments. However, in recent weeks traders have wondered whether the subprime MBS meltdown will spread to securities based on auto and credit card loans issued to borrowers with below-average credit profiles. If so, CDOs may not enjoy as much protection from diversification.”
It looks like many types of lending lowered their underwriting guidelines over the past few years. WSJ had an article where even commercial financing quality has gone way down.
protection- many on this bb have pointed out there’s as much as .000000000000000000000005% in actual cash reserves and insurance on these mbs thingys
These loans are going bad within in months of closing…that’s nothing but FRAUD. People are stealing money. And congress wants to help them out.
I’d take issue that some of them are people. Some appear be the first generation in their families walking upright.
txchick57-
Can you provide a good link to the DJIA which is realtime?
PS- How come every time I pay my storage, your monstrous stainless range comes to mind? ;-P
hey bantering:
I read your response to my post regarding homebuilder cashflow situations yesterday.
I didn’t mean to offend (not sure how I did, I assume my post came off too preachy?) but sometimes the intended tone is lost when an idea/thought is posted. My true goal was debate, not condescention. (and to me debate is highly important, because I see this board and others as critical to developing my wealth preservation plan)
So, please accept my apologies for my tone.
I still maintain that HBs MAY not be able to drop prices as far as we would assume.
No worries Inspector. I enjoy reading your posts, and will continue to. You may be right that some of these big builders are unable to cut prices further. If that is indeed the case, I would have to believe that they grossly mismanaged funds. But those Bob Toll lifestyles don’t come cheap!
glad we’re ok.
It’s not stainless, it’s enameled. Gorgeous thing but I’m starting to wonder if I’ll ever use it.
http://www.lacornue.com/fr/chateau_44.html
and the Yahoo finance home page gives you real time on the indices.
Wow, now THAT’S a range! And here I was was, insinuating you would even consider something so meretricious as a stainless appliance. Curses!
Thanks for the info.
If you can’t convince the husband to go to gourmet cooking school maybe you should adopt a second husband.
The Hummer/Escalade of stoves?
Now you’ll have to buy a billion dollar house to go with it.
Do those dials on front work the stereo system?
“These loans are going bad within in months of closing…that’s nothing but FRAUD. People are stealing money. And congress wants to help them out.”
The fraudsters and refi junkies seem to be the ones crying the loudest too. Check OcRenters blog for the lowdown on one of the “victims” featured here yesterday.
Speaking of fraud, anybody heard from Paladin lately? I’ve dropped by his website a couple of times lately to make a contribution but it still just has the “under construction” message. Am I going to the wrong site?
I think Paladin decided against the site because it took too much time & money and because another (mtg broker or realtor, IIRC) is doing something similar.
Personally, I’d like to see Paladin’s site, but wish him the best, regardless.
http://mortgagefraudwatchlist.org/
This is why Forcing Real Estate Agents to REFUND all of their commision checks back to the bank if the loan goes bad in the first year….makes sense……..
If the agent doesn’t commit the fraud who else will? The broker…well he is an agent too…….. It will thin out the ranks real fast.
Their commission checks go right up their nose. Maybe the banks can recover some traces of coke from realtor’s urine, like the way crack addicts drink their urine to get high from the crack that the pee contains.
HEY they can file bankruptcy just like the “Homeownah”
Imagine telling your wife i commited mortage fraud just to keep up our lavish lifestyle… what will the wifey do????
So, who defaluts on their mortgage, but keeps paying their credit card on time? This tsunami of debt is just starting to crest.
It’s in the MEW. When home prices were increasing people were able to refi or heloc their credit card balances away. With home prices falling, the equity extraction exit door is shut and cc default risks are increasing. Unless cc limits or incomes increase, consumer spending will also suffer further down the road.
I wondered about that as well. Intuitively I’ve always assumed that you would default on your credit cards before your mortgage, but when you consider that a lot of folks can flat out see that they won’t be able to pay the mortgage and will either sell or lose the house in the near future, it may actually make sense for them to keep paying the credit cards to keep the credit lines open. Same thing would apply to a car loan, I suppose. If you’re going to have to move, you sure don’t want to have to walk to your new apartment….
Just listened to Joseph Mason of Drexel University being interviewed on Bloomberg. He asserted that what Beazer Homes did was in fact no different from what Sears and other ’sub-prime credit card’ lenders have done since 2003. They would issue credit cards to folks with poor credit with the sole intention to move product off the shelf and out of their inventory. Since the product was gone, and they recieved their payment, they were off the hook. The credit problem, being someone else’s, had no effect on their profit margin. Sales go up, profits are high, all is well. He further speculated that the effects of this kind of practice will permeate the entire lending industry before long. Kathleen Hayes was quick to cut him off and issue a disclaimer that Beazer was cooperating with authorities.
He was baaaaaaaaahhhhhddd for the markets.
Pass the popcorn.
The biggest problem is fraud concerning the HUD/FHA loans.
What a way to make money- invest in the debt of the working class. First loan them too much and then raise the rates. maybe it will turn out like that old movie “its a wonderful life” the part were Jimmy Steward died and the old guy owned the town.
Or the Government will try to prevent that and inflate away the debt which is even worse.
Kunstler had an interesting point on that a while back - he said at least Potterville (the name of the dream town) had a thriving downtown, even if it was all pawn shops and adult entertainment. Meanwhile Jimmy Stewart was funding ugly, inefficient, unsustainable suburban sprawl and laying the groundwork for WalMart to destroy local economies. Hope Robert C. isn’t reading this.
Oh,
Korporate Brobdinagians?
What happens if wally world and it’s clones go out of business?
You chased everybody out of town…
Get BIG or get lost, was your mantra.
What then?
“New Century’s most valuable asset is the software platform it uses to make loans”.
Enough said about the fate of New Century.
Isn’t that all a bank is - people and software managing money?
you forgot the money itself…er wait, you’re right, nm
I guess the models said that when the borrowers were tapped out, the lender would get money back in foreclosure. In that sense, falling home values are a kind of karma.
It seems everyone within the industry, and throughout the entire process, was so blinded by greed that they refused to even consider flat to falling home prices. It was common sense that there was an end to the hyperinflation. Otherwise, starter homes would soon approach $1million in some overheated markets. A lot of people deserved to get spanked real hard.
They DID approach and then pass $1mill. in certain markets. California comes to mind.
Roidy
Right up the street from me. How about $1.5 million for a 700 sq ft condo? Perfect for a young couple just starting out. Great schools.
WTF?
Yup, gotta question the folks willing to pay that kind of money.
For fun, I have used some of these rent VERSUS buy calculators on the web. On most of them, you can’t even enter a negative appreciation (I think the one on yahoo is of that type). I wonder if they will change the calculators now that most of the US real estates depreciates
“In that sense, falling home values are a kind of karma.”
Well said. Add bankruptcy and no job to the karma equation. New and other subprime employees are dealing with the ultimate HBB Karma.
we’ve talked about this before, but there are many big-boys out there who feel they’ve appropriately hedged their risk through these instruments (CDO, CDS, etc).
however, now that these aren’t performing, the big boys will learn the hard way about “counterparty risk”.
Sure, you have a CDS with another entity. But if they go under, your CDS is worthless.
Systemic risk.
I think that this time, we may actually have a situation where our entire financial situation will fail. this could truly lead to chaos. A second great depression, perhaps worst than the first.
There are some huge games going on in back rooms somewhere. The central banks are working hard to figure out some sort of “solution”. If there is one.
Ever wonder why Fannie Mae isn’t delisted? Any other company would have been years ago. They’re being unwound slowly. They may even be a “front” now, trying to unwind some of the other too-big-to-fail entities. (like Goldman Sachs, Wells Fargo, etc)
something smells fishy.
“I think that this time, we may actually have a situation where our entire financial situation will fail. this could truly lead to chaos. A second great depression, perhaps worst than the first.”
IMHO (with no supporting statistics) the 1930s nightmare was partially mitigated by the vast numbers of families that had relatives on farms. Not nearly as many current families have relatives on farms and should the economy collapse (~35% chance) - I expect the crisis to be much worse.
Something from the”Old Man’s School”
Lyrics from the song: Migration
Album: Walking Man (1974) James Taylor
Distant hands in foreign lands are turning hidden wheels,
causing things to come about which no one seems to feel.
All invisible from where we stand, the connections come to pass
and though too strange to comprehend, they affect us nonetheless, yes.
Good points, plus people tended to live closer to possible sources of work too. Comparatively speaking there was much less reliance on cars - and all the expenses they entail. Today’s highly specialized careers often involve much commuting - or relocation altogether. Plus, it was easier to hop a trundling freight of wooden boxcars than today’s fast moving double stack container trains.
Wasn’t necessarily easier because railroad cops (like my grandfather) were on patrol.
in the 30’s, cars were new, trains were the main transportation system, horses were common as were harnesses and knowledge of animal husbandry. I asked my wife’s aunt who grew up near Belleville, Ontario “how did you get into town?” The answer was “you didn’t”.
“Sure, you have a CDS with another entity. But if they go under, your CDS is worthless.”
Was there ever any reserve requirements with CDS’s? Seems like buying insurance from a guy without knowing if he has the money to pay up if things go bad. It’s all fun and games until someone loses $100B.
“It’s all fun and games until someone loses $100B.”
There are some really twisted, but damn funny folks on this board! Loved it! Thanks for the laugh. Hard to find when reading these articles…your statement about the $100B is very true.
to me, it’s amazing how stupid that banks are with regards to apraisals. If appraisals are only based on recent comps, then a bank thinking they’ve loaned 90% of the (appraised) value, will have actually loans more than 100% of the value in a rapidly declining market.
How many of them are now marking these loans to market? My guess is very few.
Neil, please some more popcorn over here!
It is fairly recent news to most lenders (yesterday’s, in fact) that real estate can ever go down in price…
all the comments about ’stupid lenders’ are off the mark
they ALL knew what was coming. thats why you see insiders selling stock and getting MASSIVE bonuses. Keep in mind most people only stay a few years at a job anyway… They must think - why not run company into the ground and pull out cash for youself while you are there? Its SOP in stock market and publicly run companies.
Walmart is sooo honest compared to the typicaly lending/brokering machine. Maybe they should be allowed into banking.
BTW the big push to keep walmart out of banking/lending is probably being financed by wall street/subprime banking.
They know wallmart will kill the fat commission train. These people are so stupid we really DO need walmart giving loans they would be highly unlikely to screw people since they are a huge litigation target unlike Tyrone Doortodoor broker.
No probably about it. The banking industry is very much against Walmart getting into their game and they made that clear to Congress. WM doesn’t mind fighting unions and greens, but the banks were too much and WM gave up its fight for its ILC.
“They must think - why not run company into the ground and pull out cash for youself while you are there?”
If it works for companies, maybe it works for countries as well? Just a thought…
Hoping for a US Treasury drop? This might make it a little harder:
http://www.bloomberg.com/apps/news?pid=20601080&sid=a4fKxrfoAVyU&refer=asia
Briefly, RE in Japan (specifically in Tokyo) is starting to surge again. Some commercial RE areas have gone up 46% in teh last year. This makes it hard for Japan to keep their ZIRP, and they may have to raise.
If they raise, then we can’t cut.
if they raise and we cut, there goes carry trade, there goes equities. if they raise and we hold, carry trade again. if they raise and we raise, there goes housing.
noose tightens.
“Briefly, RE in Japan (specifically in Tokyo) is starting to surge again. Some commercial RE areas have gone up 46% in teh last year.”
So, after a horribly painful 15+ years, nothing was learned, and the speculation resumes?
crazy, huh?
It doesn’t give me much hope for our future.
Really a sad commentary of the human existence.
that said, (i don’t want to mislead) it’s only some areas of commercial RE in Tokyo that are up 46%. Overall commercial RE was up 8.9% in the 3 largest Japanese cities. Residential land was up 2.8%.
But still this will cause the BoJ to think very carefully about their Zero Interest Rate Policy
No, apparently nothing was learned. And nothing is being learned as we speak. Not just Japan, IMHO, the US went insane after 9/11 and the housing bubble has just been part of that insanity. Since 9/11, what has been done financially and governmentally is just the opposite of what should have been done. People should have saved, watched their pennies, renewed ties to their communities, borders should have been slammed shut, immigration of any sort shut down and global business cut way back and domestic business beefed up. People should have treated their fellow Americans with more respect and been more worthy of trust. Corporate financial interests went mad like feral animals.
Since 9/11, it’s just been one massive spin of any and every kind of news. Lies, spin, corruption, moral and financial bankruptcy. Why should the housing bubble be any different?
I feel as if I’ve been wrongly put in an insane asylum, and many of the lunatics are my neighbors, those who agreed to participate in this bubble.
dude its just like b4 9/11 only easier to get away with shenanigans.
cant blame 9/11 on the dot con fiascos. I was in shock how huge that bubble/crash was and such a small resulting recession — turns out the housing bubble saved our ass. Weve been living off nationaly credit card since clinton left office.
Lets not forget Y2K… that happened before 911 ! The hysteria around it was incredible.
Palmetto, as a fellow Floridian (I’m in Tampa), I have to say I agree with your comments on this issue, and am glad I’m not the only one down here who thinks the world has turned into a madhouse. It’s as if our “leaders” are our enemies, and our “enemies” are their friends. Sometimes I seriously wonder if I’m just dreaming all this, because it’s too weird to be believed.
9/II didn’t teach anybody anything, evidently; quite the reverse, it inspired people to new heights of lunacy. I’m especially astonished by the number of Americans, particularly self-proclaimed liberals, bending over backward to accomodate Muslim extremists, when these same extremists believe women should be seen and not heard, and homosexuals should be executed. Where is the logic in this? How is it good for blue collar American workers to have eleven million (actually, I suspect closer to thirty million) illegals doing the jobs they supposed won’t do (at least not for one-dollar an hour and a sandwich for lunch)?
I am not conservative or liberal, so I don’t have a political axe to grind. I’m just incredulous, as my pseudonym indicates.
in LA illegals will get about 10 an hour plus lunch.
10 an hour under table = 15 an hour at a W2 job.
So thats PRETTY DARN GOOD money. btw you cant even find americans to work for 15/20 an hour to do yard work, contruction cleanup etc. I guess welfare pays better?
I’m an advisor for a local fraternity. Every now and then I’ll try to hire some of the young men to help around the warehouse or other simple labor type stuff. They laugh at $10 per hour. Most just ignore me. Bottom line, they’re lazy!
Responding to Incredulous, great comments.
I have just one thing to say with regards to the insanity:
Look how Germany went mad during the Third Reich. We would do well to learn from their history, but it seems as if we are making the same mistakes.
To charliegator: you are dealing with frat boys. They’ve been like that ever since frats existed. Nothing new. Now, at a community college, you might get a different reaction.
Hello Palmetto,
Tampa leads the way for stupidity. I see what I believe to be illegal immigrants doing road landscaping etc. all over town. The mayor of Miami loves illegals, and says we need more. He also goes around the country pushing for amnesty. Needless to say, he’s “Hispanic,” a word invented by the media.
I’ve had some contact with illegals, and most were very nice people, but they were being exploited by their employers to no end. If employers had to really PAY them, and provide full benefits for them and their families, they (employers) might not be so smug.
I don’t need to fall off a roof to know it could be unpleasant, but some people cannot empathize, imagine, or anything else that might prevent learning the hard way. And I’m not even sure that hard learning sticks for most people.
As for frat boys, I saw a program about how many of them, and their female equivalents, are now posing in pornographic magazines or “acting” in pornographic videos with no embarrassment at all, thinking this is the same as posing in real magazines and “acting” in real films. They even put it in their resumes, and their parents are so proud of them. Yes, the world is insane. Robert Monroe of the Monroe Instutute and out-of-body projection fame wrote over a decade ago that the population was literally going nuts. I won’t go into his explanation, because it sounds crazy, too, but the affiction is real enough, regardless of the cause.
Man Palmetto you said exactly what I’ve thought. It’s like we’ve been living in Shangra La the last couple of years expecting no end in site. 9/11 should have been the end to the “go-go” days but the government, fed and big business kept the party going. And the f*ckin’ borders…dont get me started.
I disagree. You certainly can get U.S. citizens to work for that amount. Last year some alleged impartial grower was going to television stations around the country claiming she couldn’t find anyone to pick her lettuce for 30 bucks or more an hour. Turned out to be a complete fabrication. When push comes to shove, the employers claiming to pay 15 per hour under the table, are actually paying 5-7, no benefits, blah blah. When the workers get sick, they toss them onto public welfare through hospital emergency rooms, so the crooked employers don’t have to pick up the costs. We, the taxpayers, have to, so we, the taxpayers, are subsidizing these cheapskate employers. Given the climate in most of California, why can’t people mow their own lawns, and is cleaning ones own house really that traumatic? I vacuum my apartment every day. Lazy people who want to live like royalty, but not pay for it are not admirable. They’re disgusting.
The above is for Hello Kitty.
Totally concur with Incredulous and Palmetto’s feelings on the current economy (and societal state).
Just the other day, after trying to explain the mortgage market to another Kool-Aid drinker, I was thinking that I’ve gotten stuck in the Twilight Zone.
Nothing makes sense, and when you try to talk to people about it, NOBODY seems to get it (except for those on this blog — thank you!!!).
Let’s all hope it doesn’t get as bad as some of us fear it will.
the 6% a year or whatever the rate is only an average. RE is pretty volatile and always doubles or triples in a few years and then tanks by 50% or so for another 5 years
Since 10% have 90% of the nations wealth…I’m not they give a rip. Yes,chaos,upheavel..Let them eat cake. They can destoy, SS, pensions, unions,and start over. If you have many Millions, or Billions they won’t be feeling pain. They will fly to their Uruguayan estate ,and wait for the great unwind, sipping chardonnay reminiscing about the good old days…
All of this boils down to one simple thing — GREED! Greed made lenders lend money to people they knew could not afford it. Greed made mortgage brokers fast-talk idiots into all sorts of exotic products that let them buy homes they could not afford. Most importantly, all the idiots that bought these stupidly expensive homes with no money down and impossibly low payments were greedy too. I’m glad this market blew up and ended up punishing at least some of these greedy idiots.
True. But greed also made a lot of individuals buy homes they couldn’t afford. And max out their credit cards. And go to Disneyland/Disneyworld every year. And buy granite countertops. And buy $4 cups of Starbucks coffee.
Greed Wasn’t Good
“‘The one reason they haven’t filed for bankruptcy yet is that they believe they can still pull off a transaction with someone coming in and acquiring them,’ said Jeffrey K. Garfinkle, a partner with a law firm in Irvine, Calif., that has represented the company in the past but no longer does so. ‘But it is really late in the game.’”
They are in the first stage-DENIAL. The cycle has offically expanded from F@cked Buyers (FB’s) to F@cked Morgage Originators (FMO’s). next will be F@cked Workers (FW’s) then F@cked Economy (FE).
Many CDOs will be protected against excessive subprime exposure by the fact that their bond pools typically contain instruments other than subprime residential MBS, according to Moodys analyst John Park.”
Oh really? And what would that be? Auto loans, credit card loans, perhaps commercial real estate loans? Of course we know there was no bubble in any of those.
Is credit card debt bundled and sold like mortgages? I (naively) thought it was held by the issuing bank.
I don’t know, I thought I’d read that somewhere it’s done but if it isn’t, I’d be shocked.
Oh its sold alright. Why do I have money in an intermediate term bond fund rather than a short term bond fund? Because the Vanguard Short Term Bond Fund was full of credit card debt, and I did not want it.
I don’t want long term, because the rates are too low to compensate for the risk of inflation.
I’m not thrilled with intermediate term either — car loans in there, along with conforming “investment grade” agency mortgages. Maybe people won’t default on their cars, because they’ll need to live in them.
That’s why I’m sticking with Treasury only stuff. SHY looks safe.
Yup. They’re called asset backed securities. CARS, CARDS, etc. They package car loans and CC loans into securities like MBS but with shorter maturities.
Auto loans, credit card loans, perhaps commercial real estate loans? Of course we know there was no bubble in any of those.
I was listening to CNBC or bloomberg on the radio, and they stated that carloan securities have been doing better than mortgage securities.
The theory: that people can give up their homes and rent or move in with relatives. However, they need their car to get to and from work.
also, the mortgage payments were far out of reach, whereas carloans were doable with effort.
thus, people were defaulting on their homeloans before the carloan, since they needed the car more!
what a concept!
Well people did not put anything down. No skin in the game. I think a lot of the thinking was, hey, I’ll get in this house. It can only go up. Now that homes are not going up, people are defaulting and they’ll simply go back to renting. No loss, except some dings on the credit.
“The theory: that people can give up their homes and rent or move in with relatives. However, they need their car to get to and from work.”
I believe there is a lot of truth in this. You can sleep in your car, but you cannot drive your house. How many people in this country could make it without a vehicle? Many, many areas have a shortage or complete lack of public transportation. We are dependant upon the automobile. This is why I believe a large increase in gasoline prices would do serious damage to the economy.
I think the key word there is “large” increase. Gas prices simply aren’t that big of a factor in most people’s budget. Lots of people in CA have commutes of 50 miles each way. That’s 500 miles/week, 26000/year. Even at just 20 mpg and gas at $3/gal, that’s $3900/yr or $325/month.
To reduce it further, call it $110 (108.3 actually) per month at a nominal $1/gal, so for every $1/gal increase, monthly expenses only go up by $110. That’s simply not enough to make commuters care. They’re presumably making enough money at their job to justify the hellish commute; spending a little more of that income on gas isn’t going to stop them. There could be an economic effect on retailers, but my guess would be that the money would probably come out of entertainment budgets (movies, eating out, going to the baseball game, etc).
Also, my MPG & commute distance assumptions are probably above average; plenty of people drive more efficient cars for shorter distances. IMHO gas would have to hit $10/gal before people would actually change their driving habits.
“IMHO gas would have to hit $10/gal before people would actually change their driving habits.”
LOL! I believe your assumptions are grotesquely inaccurate. Just an extra hundred dollars per month in fuel hits a lot of families pretty hard. It sounds to me like you have this false sense that everybody is swimming in discretionary funds. You might want to look at the negative savings rate before you draw those conclusions. People are losing their homes based on payment increases of just a few hundred per month. Fuel is madatory for many. So when the price goes up, they have to trim somewhere else. This is where the economy starts to suffer. Not only do discretionary purchases go away, but more important items as well. If the choice is between fuel to get to work, or milk, the choice is fuel. I’ve lived around poor people, and I know how tight some budgets are.
Which of my assumptions are inaccurate? 100 miles/day seems really high compared to my 25, but I guess it’s common enough in CA. 20 mpg is probably a reasonable average of cars & SUVs. And I don’t mean to dismiss an extra $100/month as chump change, but if that kind of increase is going to put people on the street, they’re already in trouble. A $500 insurance deductible for a fender bender could bankrupt them. IMHO the negative savings rate is more related to taking on new debt and overspending on discretionary items.
In any case, my point is still valid. People will continue to drive until they absolutely can’t afford to. Expensive gas will have an impact on the greater economy, but it’s not going to stop people from driving until it gets incredibly expensive.
And I don’t mean to dismiss an extra $100/month as chump change, but if that kind of increase is going to put people on the street, they’re already in trouble. A $500 insurance deductible for a fender bender could bankrupt them.
——————–
BINGO! I actually know quite a few families who would have a very difficult time absorbing a $200 increase in monthly expenditures — especially if it continued indefinitely.
And these people make much more than the “median” household income.
You’d be amazed by how many people are living that close to the edge.
“About $540 billion of bonds backed by subprime mortgages made in 2006 are outstanding, making up more than a third of all securities derived from such loans, according to New York-based Bear Stearns Cos. the biggest U.S. underwriter of mortgage bonds.”
The derivatives written on these products by hedge funds (based on previous derivative/bond ratios) total 5.4 Trillion. Ratios have been as high as 100/1 so it could be as high as 54 trillion. Now that is real moneys.
Hey Ben, I remember when I first started reading and posting on this blog, back in ‘05 I think, and how at times it seemed like maybe I should not have sold my house…Things have certainly changed. It’s must be so difficult to pick articles for your blog, now that the MSM is all over this housing fiasco, one that a lot of us saw coming and try to tell others about, oh well, can’t help everyone. If I never said it before, thank you for being a voice of reason, and providing a venue for us to vent and share anecdotes, and a bit of schadenfreude….
“Almost eight out of 10 borrowers in 2006 had low- documentation loans where lenders didn’t require proof of the borrowers’ income, S&P said in the report.”
Holy S%&T.
I was thinking the same thing. If those numbers are correct we have just barely scratched the surface of how bad things are going to get.
That might be a misquote… or the first actual wave of the tsunami.
GE lagging S&P
a sniff of mbs ?
face it ,they’re a bank w some attached businesses
GE’s domestic mortgage exposure is very small and they are purely a wholsesaler (ie, they quickly get rid of what they originate)….well over half of the GECS’s retail revenues come from overseas.
“Almost eight out of 10 borrowers in 2006 had low- documentation loans where lenders didn’t require proof of the borrowers’ income, S&P said in the report.”
This might be a duplicate post… but HOLY S&@T!
“Other common holdings in CDO portfolios are prime residential MBS, commercial MBS, auto loan securities, credit card securities and real estate investment trust instruments.”
Is it just me, or do the risks of all of these seem, err, ummm, somewhat correlated?
Is it just me, or do the risks of all of these seem, err, ummm, somewhat correlated?
The correlation is that the money for these comes from the same pocket, and many of those pockets are becoming empty.
The Consumed-ers
Good one, imploder. Use that a few more times and let’s see how long till you hear it used in the MSM.
“to me, it’s amazing how stupid that banks are with regards to appraisals. If appraisals are only based on recent comps, then a bank thinking they’ve loaned 90% of the (appraised) value, will have actually loans more than 100% of the value in a rapidly declining market.”
I don’t know much about the methodology that appraisers use for valuing houses, but seems that there should be a more sound way than to base it on current comps. What about rental values? Stock valuation is based on future cash flows among other things, and is a reliable way of pricing stocks. So shouldn’t the comps of rental prices also be used in valuing the price of a home? It seems to me a reasonable method to calculate the discounted cash flows of renting the home, expected rate of appreciation (inflation + premium of some sort), and some factor for usage value, and use it in a formula similar to that of valuing securities. We wouldn’t see these horrific jumps if rental prices did not jump or the usage value spiked for some reason. But then there would be a reason for those occurring, and appraisals would keep market prices of houses in check. Any comment on this method?
I think that’s a very good idea. Also, they should be limited as far as appreciation from year to year. Perhaps limited to a certain percentage of appreciation, based on historic trends? Allow the buyer or seller take the hit for the difference (lower price of bring in bigger downpayment).
“Washington Mutual Inc.’s subprime bonds are suffering from some of the worst rates of delinquency among securities in benchmark indexes”
Could Wells Fargo be next? A little bird told me that most of Wells underwriting is pretty tight, but what does that matter if millions are underwater due to price corrections. Cause - Effect.
Any chance that Bank of America could be in the same boat and take a hard uppercut as a result? They’ve been giving illegal immigrants credit cards….
Yet another reason why I closed my BofA account.
“Washington Mutual Inc.’s subprime bonds are suffering from some of the worst rates of delinquency among securities in benchmark indexes, according to JPMorgan Chase & Co. research.”
But S&P and Moody still rate 60% subprime backed CDO’s as AAA. And Wall Street is not required to markdown the value of the CDO’s until the bonds are downgraded by the bond rating firms. Is this a scam or not?
S&P & Moody’s are not exactly scams, but I sometimes question their motives. I worked at an investment management company, and they definitely took kindly to the dinners and entertainment when they came to visit. I think in this particular case, however, it’s just that they haven’t gotten around to it. I’ll bet we will see the ratings tumble in the comings months.
“Circuit City Stores Inc. said Wednesday it plans to cut costs by laying off about 3,400 retail workers, or 8.5 percent of its in-store staff, and hiring lower-paid employees to replace them. It is also trimming about 130 corporate information-technology jobs.”
Are people running out of HELOC money to pay for the 1080p LCD?
maybe they should call Ben B to tell them that there’s no spillover-yo
Lower paid? So what are they doing? Replacing $12/hr people with $8/hr people?
8 years ago we bought a Mitsu projection TV. It cost $1300 and I thought “what am I doing?”. Then a few years later I see my neighbors buy $5000 TV’s. I am expecting LCD and Plasma TV’s prices to collapse later this year. I won’t replace the Mitsu until it dies and it costs less to replace it with a flat screen than to fix it.
Circuit City is going down the tubes.
CompUSA is completely exiting California and slashing its open stores.
BestBuy is trying to buy up service providers (like Speakeasy) in order to stem the bloodloss.
The hi-def Tivo box may wind up driving Tivo into BK or acquisition.
You’re absolutely right that people are running out of money for big box electronics. This indicates that people are having to rebalance for their higher mortgage payments and are now “spent”.
GEEZ have you been to CC store….
Who are they going to hire next , ghetto kidz wid da grillz?
In the last month I have been to both a CC and Comp USA store, both in So Cal.
CC: The lack of technical knowledge is truly astounding.
Comp USA: Very good technical knowledge. They even had a Sony rep there to explain the technical aspects of their TVs. This particlular Comp USA is closing from what I hear.
I HAVE been to Best Buy before and its not much better than CC.
comp usa is closing almost all it’s stores in ny area as well
Mine, too.
Mr. Vincent: 1080i (interlaced) LCD is the standard, 1080p (progressive) isn’t
It depends on the set, many do support 1080p now.
When buying a tv, do your research when it comes to the resolution. Many sets are hyped as “1080p” when they actually mean “accepts a 1080p signal, displays in 1080i”.
Someone today was asking for an ancillary play on subprime. Here’s one. Good idea too. I like it.
http://www.thestreet.com/_dm/markets/activetraderupdate/10347201.html
I’m guessing if you dug a little, you could find some ancilliary plays in the boat and in the RV manufacturing industries, as well…
It’s not refi money the article is talking about, it’s the Harley provided financing that is crux of the issue. Unless Winebago has a captive financing arm, it’s a different and probably later trend (although potentially equally juicy).
Shorted HD, and have been getting killed. It’s begun to turn around, but a lesson to be learned: don’t be too early!
Been too early with HBs, lenders, retailers, etc. — been making money, but not as much as if I had waited patiently for the right time to get in the trade.
Time to take stock of what the push to turn America into an Ownership Society has brought:
1) Subprime loans (esp. the American Dream Zero-downpayment Act kind) helped low income households buy homes they could not afford, which is currently resulting in many of them losing their homes.
2) The influx of buyers armed with subprime pushed home prices up to unaffordable levels in many parts of the country, pricing out anyone who was not crazy about taking a suicide loan out of the market.
3) Many non-subprime borrowers will soon find their own exotic loans will leave them in the same situation as the hapless subprime borrowers.
I just hope the folly of demand-side affordability programs does not get ignored in the rush to find subprime scapegoats…
4) An unsellable glut of nearly new homes that will keep prices depressed for years, if not decades.
yeah and you can’t beat the timing - just as the baby boom generation starts retiring and wanting to dump THEIR houses too!
gotta love it
Reverse mortgages will become standard retirement procedure…in the ‘flemish speaking part of The Kingdom of Belgium’ it’s called ‘opeet-hypotheek’, freely translated
‘the eat up mortgage’…
probably okay unless they have some rapacious “heirs” waiting for the money. too bad. They might actually have to work for a living.
“Reverse mortgages will become standard retirement procedure…”
How do you reverse a mortgage when you are underwater?
Hey Chick - don’t be stupid. It’s the baby boomers that are going to buy all of the 2nd and 3rd homes for their vacations. Especially here - every single person in LA and San Fran wants to retire in SLO (at least that what I read in the local paper)
sarcasm off
5) A growing number of marginal homeowners who, while able to afford the laon, can’t keep up with the property maintenance, letting it fall into disrepair and blighting the neighborhood.
“unsellable glut of nearly new homes”
I heard economists Marney Cox (SANDAG) and Alan Gin (USD) in an interview regarding San Diego’s housing situation a day or so back. They seem completely oblivious to the glut of vacant McMansions (used & new) that are hanging over the SD market like the Sword of Damacles. Meanwhile, thousands of families have left town since 2000, with only new births and immigrants to replace them. I don’t think the latter groups will be able to afford McMansions at $500K+ a pop w/o liar loans.
Alan Gin is worthless. I would bet he’s bought and paid for by the REIC. Total hack.
hang in ,the universal, socialist shthole healthcare folks will vote for will end the ownership society completely
Our healthcare system ranks dead last among industrialized countries. If we make massive improvements one day we “might” be on par with other socialized systems.
BTW, for an “ownership” society I don’t see many people actually owning anything. Owing yes. Owning no.
That’s 100% untrue. The only way you can make that claim is if you’re counting how many people get free healthcare (a horrible metric). In terms of quality and leadership, we’re #1 by a mile.
Absolute baloney. By any statistic you care to look at, the US has among the unhealthiest population of any industrialized country.
I recently read a report that US whites in fact are less healthy overall than UK whites (whites only were compared to keep it apples to apples). US health spending is 15% of GDP. UK is 7%.
Take a look
Quit drinking that Kool-Aid.
Joe Momma and yogurt are correct. The U.S. lags, in many cases severely, other industrialized nations with socialized healthcare.
Too many Kook-Aid drinkers can’t see the painfully obvious conflict of interest in a FOR-PROFIT healthcare system. Ummm…hello!????
Since housing is so expensive, just like healthcare, we should have a government-run universal housing system too. It will be cheap and efficient Soviet-style.
BTW - If you want to see what government healthcare looks like, go to you local county hospital’s emergency room. Ask the people there how long they’ve been waiting in the emergency room - if they can speak English. Some have to sit there for over 24 hours before seeing a doctor. The hospital workers don’t care because the patients don’t have a choice of where to go or who to see.
In most socialized healthcare systems, people DO, in fact, have choices. You are always free to pay out-of-pocket for care or to buy insurance.
Illegal immigrants & their effects on our healthcare system have **nothing** to do with socialized medicine. That’s a whole ‘nother issue, altogether.
New Centry do us all a favor as we hear enough bad news about housing and close your crooked doors forever along with your buddies?
Actually I think its entertaining to watch them circling the drain. That said, it will get old soon and I look forward to the final splat.
Buyer-subsidy programs? I hadn’t really heard about this wrinkle until a good John Spencer column in today’s Denver post:
“Programs such as Ferguson’s Payout One and Falcon Marketing Group give prospective homebuyers large sums of money before loans close. The funds come with almost no strings.
Buyers don’t have to repay the cash so long as they purchase homes from specified sellers for specified prices. Sellers pay off the front money at closing, along with commissions. ”
…
“One buyer-subsidy program, DpFunder, hires would-be homebuyers to enroll prospective sellers in an “Owner’s Alliance.” Buyers collect a taxable “commission” for convincing sellers to join the alliance. The alliance then charges the sellers membership fees to cover the commission, plus profits. John Wyatt of DpFunder said the buyer’s commission is a fee-for-service that differs from PayoutOne, which Wyatt calls “hiding money.” ”
http://www.denverpost.com/spencer/ci_5534748
how can that be legal ?
yikes
“fee-for-service” so is prostitution and bribery.
OT…
Ben,
I just read the OCRegister piece with opinions from You Rich and Patrick. Gratz on the recognition.
It read rather mild, the individual with me at Lunch today commented after reading it that your opinion was quite mild not really saying there would be a downturn. I had to point out to him that you noted that Mortgages/prices “would return to historical means”, and that would represent a 50% haircut on OC prices.
Anywho, just wondering if you watered down your statements or if they selected the answers they wanted for their article. I understand if you used the venacular most use on the Blog that they than attempt to discredit screaming Nut Job.
Am glad to see the CDO discussion picking up on the Blog, it’s the world vehicle for Borrowing. It will be interesting to see how quickly it can recover from a flat tire.
OCBear….Nut Job and proud of it
Went looking for article on the OCRegister web sight, I can’t find it. Article is entitled “3 Bloggers’ Views”.
“If I were the President of this land, you know I declare total war on the pusher man.”
When all of this is over and we start over again, I hope I’m not a slave.
New rules:
No credit of any kind.
No credit cards.
No auto loans.
No mortgages. Cash only. All of the financial games that are played in this country will be illegal. You have the F&%#ing money or you don’t. Case closed.
Pay your share of subprime debt
By: ANN PERRY - Staff Writer
Think the subprime mortgage mess doesn’t affect you?
http://www.nctimes.com/articles/2007/03/27/business/perry/3270765344.txt
GS,
This is the real sad fall-out in this mess……ty for the post
US FDIC says subprime parties will not go unscathed
Wed Mar 28, 2007 4:10pm ET148
By John Poirier
WASHINGTON, March 28 (Reuters) - The long list of participants in the subprime mortgage crisis will not go unscathed in sharing the pain but should work together to find solutions to the problem, a U.S. banking regulatory official said on Wednesday.
“I believe there is more than enough blame to go around,” Sara Kelsey, general counsel of the Federal Deposit Insurance Corporation, said.
In a speech to a group of financial professionals, Kelsey sounded off a long list of market participants who are likely to learn a “hard lesson” from what regulators, lawmakers and the lending industry expect is a tsunami of defaults and foreclosures over the next years.
The pain starts with borrowers and then mortgage brokers and bankers to brokerage firms, parties involved in securitizing mortgages, domestic and foreign investors, and insurance companies, she said.
The list also includes pension funds, mutual funds and hedge funds, as well as banks that provided money to each of the market participants, she added.
http://today.reuters.com/news/articleinvesting.aspx?type=bondsNews&storyID=2007-03-28T201040Z_01_N28371720_RTRIDST_0_USA-SUBPRIME-FDIC.XML&pageNumber=0&imageid=&cap=&sz=13&WTModLoc=InvArt-C1-ArticlePage2
Here is a rather grim article on the future of real estate in this country - by a real estate insider, no less !
http://safehaven.com/article-7237.htm
Hmm…looks like fraud big time. What a shock!
I know I know. It’s always the buyer’s fault!
LOL