“A Trying Time” In The Mortgage Market: CEO
Some housing bubble reports from Wall Street and Washington. The Atlanta Journal Constitution, “The environment clearly is getting a lot harsher for home building. Housing sales nationally have been dropping, while inventories of unsold houses have been climbing. As the housing slide accelerated, Beazer Homes laid off about 1,000 employees, roughly one-quarter of employees, and trimmed other expenses, too.”
“Beazer pulled out of two markets in Indiana, Fort Wayne and Lafayette, and abandoned suburban Memphis. Now, the number of borrowers who cannot make their mortgage payments is climbing. For builders, that is bad in two ways: With regulators more engaged and lending standards tightening, the profitability of originating loans is threatened.”
“A federal grand jury in North Carolina is looking into Beazer’s mortgage lending and other financial practices. A group of Charlotte homeowners alleges in a lawsuit that the company’s mortgage division used unfair practices.”
“Few analysts say Beazer is out of the woods, even if the company has engaged in no wrongdoing. No large builder is immune from the overall market malaise, and that syndrome could persist for a year, said analyst Gregory E. Gieber.”
“Builders like Beazer…probably made their situations worse by continuing to build houses even as sales were sagging, he said. ‘Builders are naturally optimistic. That is what makes them businessmen instead of analysts and reporters.’”
“Beazer too was slow to react, he said. ‘I thought that the company did not recognize the seriousness of the correction that was coming,’ he said.”
From Bloomberg. “The collapse of the subprime mortgage market may push some big U.S. homebuilders toward Chapter 11 beginning next year, according to bankruptcy advisers and lawyers who specialize in the real estate industry.”
“The weakest publicly held builders are staying out of bankruptcy by relying on the profits they made when sales boomed and on the public debt they sold in those years, said Ronald Greenspan, a lawyer and financial adviser to the creditors of four bankrupt subprime mortgage lenders.”
“Homebuilders issued $3.6 billion in public debt in 2005 and 2006, though only $600 million of that comes due this year, Greenspan said.”
“‘There is no sword over the industry’s head yet,’ said Greenspan. ‘That doesn’t mean the industry is not wounded. Instead, the breaking point could come in 2008 or 2009.’”
“The perceived risk of owning the bonds of some of the biggest U.S. homebuilders has increased since a wave of bankruptcies hit the mortgage industry that caters to homebuyers with poor credit histories.”
“Credit default swaps have more than doubled in price since Feb. 1 for the second-biggest builder by revenue, D.R. Horton, Inc.; the fourth biggest, Pulte Homes Inc.; and the biggest luxury home builder, Toll Brothers Inc.”
“The cost of swaps on $10 million worth of Toll Brothers debt, for example, jumped to $136,750 Friday from $58,500 on Feb. 1, according to according to CMA Datavision.”
“Kara Homes Inc., the New Jersey builder known for so-called McMansions, became one of the first major, closely held home builders to file for Chapter 11 protection in October. Such regional builders are likely to precede any of the big public companies into bankruptcy, Kara’s bankruptcy lawyer, David L. Bruck, said.”
“By next year, or the year after, some of the larger companies will be forced to restructure as the housing crunch continues, he said. ‘It’s only a matter of time,’ Bruck said.”
The Star Ledger. “Just a few months ago, the big homebuilders were expressing cautious optimism. Fast forward to this spring, to what should be the prime selling season, and it’s hard to find an optimist. Inventories of unsold homes are high; profits are down. The ’subprime’ lending crisis is reverberating throughout the industry.”
“‘The housing sector is in the midst of a meaningful, multiyear downturn,’ Fitch Ratings said. Moody’s was even more alarmist in downgrading Hovnanian’s debt, saying the company was bleeding cash.”
“Hovnanian is grappling with a cancellation rate of about 35 percent. Larry Sorsby, Hovnanian’s CFOr, said the company’s staff has been reduced by about 20 percent during the last few quarters.”
“One thing home builders have no control over is how news about the housing market impacts the psychology of prospective buyers. ‘Anywhere in the country you can’t open the paper without some negative comment being made about subprime,’ Sorsby said. ‘I think it’s a fair comment to say we’re less optimistic about the bottom being right upon us, primarily because of the subprime issues,’ Sorsby said.”
The Associated Press. “Wachovia Corp said it remains on track to meet its goals from its $24.2 billion acquisition of Golden West, which it acquired in October, though Chief Executive Ken Thompson said ‘it’s a trying time to be a participant in the mortgage market.’”
“Thompson said: ‘Like everyone else, we’re experiencing slowing mortgage originations, and customers are showing a preference for less profitable products.’”
“With Golden West, Wachovia added more than $122 billion in mortgages during the quarter, almost all with adjustable rates.”
From Reuters. “General Electric Co.’s WMC Mortgage subprime lending unit has sharply cut back on lending activity, an executive said on Friday.”
“‘We curtailed production dramatically during the first quarter,’ said Mark Begor, CEO of GE Money, Americas. ‘We’ve tightened up a lot on our guidelines and really curtailed a lot of the business activities.’”
“He said that the Burbank, California-based WMC unit made just $3.4 billion in new loans during the first quarter, down from $9 billion in the fourth quarter.”
“Fremont General Corp., barred by U.S. regulators from offering mortgages to borrowers with poor credit, said it agreed to sell $2.9 billion of subprime home loans to an unidentified buyer.”
“The company is selling the mortgages, the majority of its remaining subprime loans, at a discount and expects to record a $100 million pretax loss as a result.”
From Fitch Ratings. “While rising mortgage defaults are to be expected during a housing market downturn, the sharp rise in U.S. subprime mortgage defaults is notable.”
“Fitch found that the severe response of the 2006 subprime vintage to the cooling housing market is attributable to high borrower leverage and the widespread use of stated income loan programs.”
“After studying the collateral attributes of early payment default (EPD) loans and comparing them to loans that did not default in the first 12 months after issuance, Fitch found that Fair Isaac Corp. (FICO) scores have become less significant as an early default indicator when other high risk loan attributes, such as piggyback second liens or loans with no-income verification, are present.”
“‘While FICO scores continue to be highly predictive measures of relative credit risk for loans with similar characteristics, FICO scores play a lesser role when additional risk layers are added,’ said Glenn Costello, Managing Director, RMBS, Fitch Ratings.”
“‘In the case of the 2006 vintage delinquencies, additional risk layers that are factoring into the sharply higher delinquencies include high combined loan to value ratios (CLTVs) and stated income loan programs as borrowers with higher FICO scores tend to be highly levered,’ Costello said.”
“In addition, loans made for home purchases have become a much larger percentage of subprime originations as opposed to refinances, which historically made up a majority of subprime pools. ‘The added risk from the higher leverage and stated income feature is driving up default rates for purchase loans,’ said Suzanne Mistretta, Senior Director, Credit Policy, Fitch Ratings.”
National Mortgage News. “A large mortgage brokerage operation in the Pacific Northwest has been tardy paying some of its branches we’re told. At press time, one branch manager said he had not been paid in 18 days. Typically, he gets paid in 48 hours, he told us.”
“In case you missed it: First Horizon of Texas has exited the subprime wholesale niche. An executive there told us the company may re-enter the niche at some point but currently profit margins are much too thin.”
“International investors bought a net $58.1 billion in long-term U.S. securities in February, down significantly from January as demand for mortgage-backed securities fell to a three-year low, a U.S. Treasury Department report showed.”
“U.S. agency bonds, principally backed by home mortgages, saw their lowest net purchases by foreigners in nearly three years in February, as news of troubles in the subprime mortgage sector increased.”
“Purchases of U.S. agency bonds, such as those issued by home loan funding company Fannie Mae, fell to $2.02 billion in February, their lowest level since net sales of $624 million in March 2004.”
“‘It probably is related to general concerns about what’s going on in the mortgage-backed arena,’ said Alan Ruskin, chief international strategist at RBS Greenwich Capital.”
‘The National Association of Home Builders/Wells Fargo index of sentiment fell to 33 from 36 in March, the Washington-based association said today. A reading below 50 means most respondents view conditions as poor.’
‘The tightening of mortgage lending standards in connection with the subprime crisis has shaken the confidence of both consumers and builders,’ David Seiders, chief economist at the NAHB, said in a statement. ‘While we still expect to see some improvements in housing market activity beginning later this year, the downside risks and uncertainties surrounding that forecast are considerable.’
‘Builders in the field are reporting adverse effects on both sales and cancellations at this time, and it remains to be seen how serious these effects will be as we move through the spring home buying season,’ NAHB President Brian Catalde said.’
‘Today’s report showed confidence fell in all four U.S. regions. The index declined to 22, from 27, in the Midwest and to 37, from 40, in the South. It fell to 35, from 37 in the West and to 38, from 39, in the Northeast.’
‘Banc of America Securities WASHINGTON MUTUAL’S APRIL 17 [first-quarter] earnings release kicks off the beginning of the mortgage lenders earnings season for first-quarter 2007, which in our opinion, won’t be pretty.’
‘We believe deteriorating industry fundamentals will lead to significant annual and sequential quarter earnings-per-share declines of 26% on average for the names under our coverage.’
“Credit default swaps have more than doubled in price since Feb. 1 for the second-biggest builder by revenue, D.R. Horton, Inc.; the fourth biggest, Pulte Homes Inc.; and the biggest luxury home builder, Toll Brothers Inc.”
“The cost of swaps on $10 million worth of Toll Brothers debt, for example, jumped to $136,750 Friday from $58,500 on Feb. 1, according to according to CMA Datavision.”
Can someone explain what exactly is a “credit default swap?”
it’s an insurance policy. PMI and General Re charge too much so banks are selling derivative products to manage risk. they pay you to take on default risk and if the mortgage defaults then you pay them.
few years ago there was little perceived risk and these were cheap. now there is more risk and people that buy CDS’s want to be paid a lot more to take on risk
wow, do they have an 05 , everything’s cool forever number on that $1 ?
Bond insurance. It’s a contract that lets holders of the bonds and swap to trade them for treasuries in a swap for equal face value amounts of treasuries, if a default occurs). So for $136,000/annually (for 5 years) someone will give you treasuries for your similarly dated Toll Bonds.
Those are the standard terms, but you can get other terms. Things like the ABX are the implied price of an asset backed security once the cost of this is included.
The swap allows you to put Toll bonds back to the swap originator for par. Thus if the Toll bonds are trading for 80 cents on the dollar and there is a trigger (default most likely), you can deliver the Toll bonds to the underwriter of the insurance and get back 100 cents on the dollar in cash, versus the current 80 price.
for years you had to go to an insurance company which pooled risk and charged a middle man fee. this is a way to buy insurance via an IPO like instrument and not pay a middleman. very good idea and over time i think it will catch on a lot more since you can sell a CDS to someone else unlike an insurance policy. insurance companies manage their risk by buying insurance from reinsurars like Warren Buffet’s General Re and some swiss company.
the risk is if someone gets too greedy and buys up a lot of these things and there are a lot of defaults then no one gets paid and you get a financial crisis. if these things are spread out it’s OK and you get a soft landing.
of course there are rumors that big insurance companies bought up a lot of these CDS’s along with a few hedge funds. if a big hedge fund goes under than it’s holdings get liquidated and the supply will push financial markets down. doesn’t matter how good your company is, if someone dumps more stock than there are buyers then the price is going to drop
Why did you think Buffett calls derivatives weapons of mass financial destruction? They’re destructive to his groups that provide credit risk insurance.
More importantly, what does it mean? It means the other ‘credit crunch’ shoe is dropping–builder financing. First, subprime borrowers went under. Now, it looks like credit markets are expecting builders to follow…
The National Association of Home Builders’ confidence index is in for the month of April. The results are not good …
* The overall index slumped to 33 this month from 36 in March. In April 2006, the index was at 51.
* All three sub-indices declined. An index measuring present sales dropped 3 points, while an index measuring expectations about futures sales fell by a hefty 6 points. The index measuring prospective buyer traffic dipped 1 point.
Clearly, this is not a good sign for the housing industry. We are now in the midst of the spring home buying season, and most indicators of housing demand and housing supply are heading in the wrong direction. I’ve been saying for a while that we wouldn’t get a lasting recovery in the housing market until at least 2008. This latest reading only confirms my pessimism.
I think 2008 is optimisstic. I’m looking at 2010 at the soonest. Maybe as late as 2012.
Criminy, here in So. Cal (or at least West L.A.) we haven’t even ENTERED the slump. I can’t imagine looking out the other side to EXITING the slump.
The wife went to look at a POS 2+2 condo on Centinela on Sunday that reeked of cigarette smoke but was STILL listed at $610K. She liked it OK but I told her I would only like it at half that price.
possibly 2022. boomers will start retiring soon and the next big workforce growth spurt is going to be 2022. next decade is supposed to be negative workforce growth
Sweet, right as the wife and I enter peak earning potential. Bring on the raises.
It means a huge slump in the S&P 500 in 12 months time:
http://biz.yahoo.com/weekend/ecslump_1.html
So much for their spring bounce. I stopped by a local project’s sales offices a month or so ago and all the builders had propaganda poster boards up with copies of news headlines saying how there would be no hard landing, that it’s just a temporary downturn, etc. I told a sales lady that I was just looking at trends because I think we are looking at a long down turn. She made it a point to say that I should buy now because “all the economists” were predicting an upturn. WTF are you talking about is what I wanted to say in reply, but instead just said that we’ll have to wait and see who is right. She had a real puzzled/annoyed look on her face then. BTW, all prices there were negotiable. Upturn my a$$.
Yeah, but they’re negotiable down, somewhat, from an absolutely insane, idiotic level, right? Negotiable to them seems to mean, “Yeah, we could take $5k off.” When really, we need about $300K to come off a basic SFR or condo to get back to fundamentals.
True. Although “concessions” were $50-100K off. Mind you, this still puts the homes at $600K. There is still a long, long, way to go, as you stated. My main point was that the builders are still delusionally optimistic. Keep building boys, you only help those of us waiting for reality to return.
LIsten to this Wachovia nutjob:
“Thompson said: ‘Like everyone else, we’re experiencing slowing mortgage originations, and customers are showing a preference for less profitable products.’”
——-
Yeah, as opposed to more profitable (for you) products that land homebuyers on their ass in the streets 3 years later. What a pr*ck.
stock market is in a nice rally mode. theory is slower growth will lead to a rate cut and save the housing market by letting FB’s refi into another ARM. PPI was good and CPI comes out tomorrow.
oil and food prices seem to have moderated as well as other goods. Uncle Ben said 2% inflation is OK with him and so far it’s around 2.7% this year. not enough to raise rates.
i think the stock market is going to get a nice beyatch slap around August or later in the year. ARM’s will reset, i don’t think we’ll get a rate cut and the economy will slow further.
looking back i think we are repeating the late 1970’s or 1980’s. instead of the boomers driving inflation in the 1970’s we have China. until then i think we have a few months to make some money in stocks
The PPI was good? It was 1.0 % including food and energy.
someone liked it because the market went up that day
The core (ex. food and energy) was up 1.7% yoy. That’s a good number. Of course, if you take out the stuff that goes up, the number’s always going to look good!
I’ve always wondered at the logic of completely removing the volitile food and energy sectors. Why not include them but in some sort of 3 or 4 month moving average instead? After all, since people actually buy food and energy, it has an impact on how they experience inflation.
“Volatile” is wall street newspeak for “bad” (or “likely to disillusion the masses”). For the stock market, it means going down. For inflation numbers, it means going up.
Volatile didn’t become a bad word until they developed computer models that can’t handle volatility.
food and energy go up and down. maybe not on a daily basis but there is a cycle. i’m reading a technical analysis book and there is a chapter on commodities and the author says there are annual up and down cycles depending on if it’s planting season or harvest season. whole foods always has cheaper produce prices in the summertime and it gets expensive in the winter, so there is volatility there and i’ve seen it over several years.
same with oil. there are up and down cycles from a few months to decade long cycles.
once you exlude these and concntrate on the rest you get a good picture because big companies hedge their commodity expenses like in locking in prices for the next several months or years. once you get increases in consumer goods it means companies have pricing power and especially at high utilization levels like now you know it’s real inflation because people are paying high prices just because they want something
Yeah, but what the Fed is doing is looking at the 99 cent store and saying, “yep, prices haven’t changed.” Never mind that we actually need food, energy, and housing to live.
“‘While FICO scores continue to be highly predictive measures of relative credit risk for loans with similar characteristics, FICO scores play a lesser role when additional risk layers are added,’ said Glenn Costello, Managing Director, RMBS, Fitch Ratings.”
Hmmm…when additional risk layers are added….would that include buying at insane multiples of gross income, little or no savings, an ARM reset with a significant increase in monthly payment??
When are people going to face facts?? There are a lot of people in homes they cannot afford. Period. Lenders opened the floodgates, and it should be their problem to deal with. Home values cannot stay where they are.
Agreed! There is in the long term no avoiding the fact that some current owners cannot afford to pay for their homes at the prices they paid, and more importantly the huge disparity between normal incomes and the prices of homes especially in places like San Diego. The chickens are coming home to roost, the party’s over. Prices have to drop significantly if home ownership is to remain a common thing for the future. Truly, would it be a good thing for only 12% of households to be able to afford a median-priced home?
“Fitch found that the severe response of the 2006 subprime vintage to the cooling housing market is attributable to high borrower leverage and the widespread use of stated income loan programs.”
(FICO) scores have become less significant as an early default indicator when other high risk loan attributes, such as piggyback second liens or loans with no-income verification, are present.”
“‘FICO scores play a lesser role”
Almost all of the “crisis” in the mortgage and RE markets so far has come from “sub-prime”, defined by low FICO.
Another sign that the worst is yet to come.
“Almost all of the “crisis” in the mortgage and RE markets so far has come from “sub-prime”, defined by low FICO.”
True, but keep in mind that subprime loans come with shorter teaser periods (1 or 2 years). AltA is typically 3 to 5 years. The avalanche is coming….we’re just not quite there yet.
“(FICO) scores have become less significant as an early default indicator when other high risk loan attributes, such as piggyback second liens or loans with no-income verification, are present.”
You can’t make this $#++ up. To the hard working geniuses at Fitch who published this prescient and timely page turning report: DUH!
LOL. I’m with you on these “experts.” Must be nice getting paid big $ to write reports detailing what anyone with half a brain already knows.
Real estate taxes downfall hitting local governments hard, ‘forcing’ a tax rate hike.
http://www.washingtonpost.com/wp-dyn/content/article/2007/04/15/AR2007041501141.html?nav=hcmodule
There is another side to this.
I’ll bet local governments in bubble markets had a hard time hiring quality workers despite all the tax revenue pouring in, because housing costs outpaced employee wage gains.
But with a big fall in housing prices, new public employees will be happy even with small wage gains, because some might actually be able to afford a house.
Bloomberg:
The National Association of Home Builders/Wells Fargo index of sentiment fell to 33 from 36 in March, the Washington-based association said today.
…
The group’s index of traffic of prospective buyers fell to 27, from 28. Its measure of single-family home sales fell to 33, from 36.
The homebuilders measure of sales expectations for the next six months fell to 44, from 50. The last time the gauge was as low was in October.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aI0OJt_rd2wI&refer=home
Beat it, Beazer…
Next?
Nobody else has said it, so I’ll go…
“Leave It To Beazer”
Thank you, thank you, and if you’re gonna throw something, throw something soft.
Aren’t you guys (Ward) being a “little tough on the Beazer”?
Early Withdrawl? Doesn’t sound American to me! -
“Beazer pulled out of two markets in Indiana, Fort Wayne and Lafayette, and abandoned suburban Memphis….”
They are pulling out of markets, firing people, and taking write downs. Finally, they get it. Lower the price already!
They will do everything they can to keep prices from falling even more. They know that if prices go into a free fall that any buyers left will run for the exits.
Of course, builders are already hosed, even if they slow new construction to a trickle. Being that there is an unprecedented glut of new unaffordable homes prices will collapse in all but a few select markets.
I expect that we will be told that we need to swing the borders wide open, cause we’re gonna need immigrants to buy these houses. After all “only they will buy the houses that Americans won’t buy”
Hahaha, a trickle!
Arn’t they still building like 500k more homes than houshold starts now?
I was amazed when they built 2.2mil on 1.3mil houshold formations a couple years ago.
Just based on the excess vacant inventory (around 2mill) and the 1/2mill now being built coupled with falling demand to buy the REIC is hosed for years. If they drop building by half (to 750k) it will take about 6 years to burn off all this existing inventory.
These rough numbers assume that every new household formed buys a home!!!! It is insane to think that a majority of new households are capable of performing on a new mortgage, unless housing prices drop by like 70% and credit availability remains abundant. Also, how long will it take builders to move from 1.5 builds to 750k (my guess is 2-5 years).
All told an (eduguestimate) optimistic outlook would suggest a bear housing outlook for 8-11 years.
It makes me sick watching MSM talk about the RE bottom!!!! Shit the ride just started, to drivel on about a bottom at this point is infantile!
Forgot about all the inventory (millions?) about to hit the market in the form of foreclosures and REOs!!!
Sheesh guys, this is SOOO much worse than the housing crash in the early 90s. Here in norcal that lasted from about 89′ (top) to 96′97′(bottom).
In 89′ we hit around 23 times rents at the top, in the late 90s we were bellow 10 times rents at the bottom (10 times rents was the standard rule of thumb for value). Today we are well above 30 times rents (450k home rents for $15,000/yr)!!! When these fall back to 10 times rents we will see that 450k home fall to
$150k+any rent increases!!!
Rich, do not forget that so many of the new subdivisions have $400/month in bonds! So that $15,000/year in rent is really $10,200. What does that do to the value? Try $102,000 for the home.
Beazer pulled out of two markets in Indiana, Fort Wayne and Lafayette
I don’t know why anyone would build in Fort Wayne, but having lived in Lafayette Indiana for half a decade I can say that the area is somewhat of a gem hidden in Indiana. The Wabash Valley is very nice. The only problem is that most of the employment in the area is blue collar manufacturing, which is not really a growth industry. Granted, the big employers are all holding their own (Alcoa, Toyota/Subaru, Caterpillar, Wabash National, Chemtura, etc) so the area at least is not in a downturn. But the super high-tech stuff around Purdue University (which is expanding) isn’t going to support thousands of new homes.
When I lived there in the late 90s, you could buy gorgeous mid to late 19th century victorians on huge city lots right in the downtown area for $150k. Most needed some restoration work, so you could go to the other side of the river and find solid mid 20th century homes on large lots for the same price.
Why buy a McMansion on a postage stamp lot on the outskirts of town, especially when the builders were almost certainly trying to grab $250-400k for them???
“‘While FICO scores continue to be highly predictive measures of relative credit risk for loans with similar characteristics, FICO scores play a lesser role when additional risk layers are added,’ said Glenn Costello, Managing Director, RMBS, Fitch Ratings.”
100% financing is the biggest risk factor and will be the primary cause of big foreclosures in the immediate future. When you read the stories about specific families, like the one in the topic of yesterday, look for this. Also see that they mentioned they did not want to make payments and continue to own when prices were dropping. They could probably even make the payments (since they were getting rent on the house.) As home values fall, it causes more people to look at their housing costs , which are double the cost to rent.
Stated income loans should never have been done for 100% financing, or even 95%. Credit scores are fine for car loans, but not for someone who has never had a huge mortgage payment. Lenders will want proof that payments can be made. This means verified income. Then the risk will only be those who will walk away when their equity becomes too negative.
If 95-100% financing is offered in the future, it will be costly. Either much higher rates on the first and second loans, or mortgage insurance, or both.
Regarding home builders, it is simple. Housing prices were artificially pushed up due to aggressive financing which increased the supply of buyers. Now, the supply of buyers who can “afford” to buy is dropping, which is increasing the supply of homes and pushing prices further down.
“When you read the stories about specific families, like the one in the topic of yesterday, look for this. Also see that they mentioned they did not want to make payments and continue to own when prices were dropping.”
Bingo! This is why all the bailout talk may come to nothing. Given the choice between modified, “affordable” payments on a house that is going down in value by the month or leaving the keys on the counter, I have to believe a lot of FB’s will choose foreclosure.
People only wanted these houses when prices were going up. They’re useless now that prices are going down.
“People only wanted these houses when prices were going up. They’re useless now that prices are going down.”
I would restate your point as ” People could only justify these houses (and prices) when prices were going up. They’re useless now that prices are going down.”
The sacrifices necessary to own these overpriced houses made small sense when prices were rising but now the reality of a depreciating, depreciating asset is impossible to ignore and without skin in the game many will walk. And as more and more FBs walk the culture of “debt responsibility” will change and it will become ACCEPTABLE to walk. After all, these FBers are VICTIMS, right? I read it everyday in the MSM. They couldn’t read the loan terms, they were lied to, they were promised a refi, ad infinitum ad nauseum…
“And as more and more FBs walk the culture of “debt responsibility” will change and it will become ACCEPTABLE to walk.”
When that starts to happen, the market will tank. It will be foreclosures deluxe, which will impact everyone else’s home values as well.
If FB’s decide to walk, I don’t think there’s anything the govt. could do in terms of a bailout that would prevent a true housing meltdown.
NYC learned the lesson of no skin in the game long ago. It gave low and moderate income families homeownership of subsidized units at very low costs. They didn’t feel like owners. They felt like those who had gotten a deal. They went on rent strikes against the common charges needed to maintain the buildings.
back in the 70ies in so california, i had a friend who owed 39,000 on a home and when a forclosure across the street was selling for 23,000, he bought it and let his go back to bank..
wasn’t this co-op city and their $500 million repair bill?
most NYC co-ops require 20% down, 6-18 months of cash or liquid assets after you close and they check your finances even if get a liar loan
“If 95-100% financing is offered in the future, it will be costly. Either much higher rates on the first and second loans, or mortgage insurance, or both.”
My thought exactly. While this story isn’t news to us, it should now be on everyone’s radar screen that Alt-A and Prime are more vulnerable than everyone in the MSM has been spouting.
In any event, there is now evidence that you can’t measure risk with FICO score alone, the type of loan matters too. While obvious to us, now that Fitch has actual documented evidence that it is so, fiduciaries worldwide will need to take into account that risk in their pricing of MBS.
While the train has already left the station for the current wreck, this information will impact how quickly and easily the housing market can pick itself up. If you have a financial interest in the long term strength of housing, this Fitch announcement is bad news.
This statement is a paradigm shift in “official” thinking about mortgage risk, and the announcement just PERMANENTLY tightened credit.
holy crap 22 dead in massacre at virginia tech
http://www.msnbc.msn.com/id/18134671/?GT1=9246
what is going on in this country?
Let me guess: He was shouting “Allahu Ackbar” while he mowed people down. Another case of Sudden Jihad Syndrome?
And if he was, it will be buried by the MSM.
Please, no politicizing this yet.
Let’s just mourn these poor kids, and save our hypothesis for later.
It could have been anyone with a gun, jihadist or not. And I might remind all here that thus far most of these school shootings have been by caucasian American teen boys.
A great day for the gun grabbers.
Would you care to bet on that? In all likelihood it’s a white American dude. Like Mc Veigh. Or the jags from Columbine.
this is a horrible tragedy, don’t let it become a race/religion issue until you have all the facts.
And no, I am not House Inspector Clouseau, we must just think alike
There has been a lot of Sudden Jihad Syndrome going on lately, but the MSM has done a good job of burying it. For instance, the recent mall shooting in SLC was of such nature.
I’ll concede that it might not have been a sudden jihadist (i.e. a non radical muslim who wakes up one day and decides to kill infidels), but I wouldn’t be suprised if it was. I am always suspicious when there is no information regarding the shooter.
They said it was an Asian dude.
That’s what the earlier article said, but subsequent updates have excluded that information. Something tells me that it may have been a speculative statement (not statement of fact), so they are now withholding. They didn’t even mention it in the live press conference when asked directly about the description of the gunman. Guess we have to wait and see.
BayQT~
and that he shot himself in the face and is not easily identifiable.
Latest reports claim he came here from Shanghai, China, on a student visa, and the rampage was triggered after he was jilted by his girlfriend.
http://www.suntimes.com/news/nation/343354,vatech041607.articleprint
Gunman may have been a Chinese student who came to the US last year.
stock market is in a nice rally mode. theory is slower growth will lead to a rate cut and save the housing market by letting FB’s refi into another ARM. PPI was good and CPI comes out tomorrow.
If interest rates fall, why would FBs NEED to refi into another ARM? Shouldn’t their ARMs also fall? Or are we talking about teaser rates that are below market before floating?
In any event, I never do understand the stock market. Seems like the market can use almost any economic news as rational to go in either direction. That’s why I just diversify broadly in broad-based low-fee index funds and don’t stress or pay that much attention.
if we get a .25% rate cut they can refi into a cheaper ARM since they will be adjusting to rates above the fixed rate. no one cares about the next adjustment if this theory comes out true. too many fees involved to be made. right now the ARM rates are too high to refi
i’ve been reading a bunch of technical analysis books since people have been doing scientific research into the stock market and its trends for over a 100 years.
http://www.amazon.com/Technical-Analysis-Financial-Markets-Comprehensive/dp/0735200661
the technicals for the latest rally are OK, but nothing spectacular. not like 2003 or the post katrina rally.
It isn’t te mraket that uses “any explanation” to justify a forward move, it is the media who uses “any explanation” after the fact.
I can’t type!
“With Golden West, Wachovia added more than $122 billion in mortgages during the quarter, almost all with adjustable rates.”
OMG! What the heck were these idiots thinking? That’s going to leave a mark.
They didn’t do $122B of new loans. This number reflects the amount of loans that were at Golden West at the time of the purchase.
That’s the point. They willing acquired all this baggage. What’s more, they were probably wild-eyed and salivating thinking it was a great deal. As a result of the unfolding subprime debacle, heads will roll at Wachovia.
They told Beazer don’t you ever come around here
Don’t wan’t to see your crapboxes, you’d better disappear
The foreclosures are in sight and loans aren’t so clear
So beat it, just beat it
You better run, you better do what you can
Don’t want to see no flood of pissed off buyers, man
Times are tough, you better do what you can
So beat it, but look at all the fb’s you sh*tcanned
Just beat it, beat it, beat it, beat it
Pretty much every homeowner that you sold to is defeated
Showin how funky strong is your fighter
It really matters, who was wronged and not righted
Just beat it…
Thanks.
“Countrywide built up Furash’s unit — assets swelled to more than $80 billion from $75 million six years ago — by diverting mortgages to the bank rather than selling them off to investors. The strategy cut Countrywide’s cost of funding new loans, and the monthly payments from homeowners generated a more predictable stream of income than gains from loan sales”
Am I reading this right- CFC was buying thier own loans. Huh… I am sure that will work out great for them.
If I remember correctly, one of the lenders (can’t remember if it was CFC or not) had put in one of it’s press releases that it could sell the mortgages to itself and make more profit than if they sold it on the open market.
Well duh, that makes the value of what you sold yourself questionable, if it’s higher than fair market value!
just more shenanigans
This cracks me up to no end. Owners were selling their homes to themselves at higher prices via refi, and the banks sold that debt to themselves for HUGE PROFIT!
What could go wrong?
There’s a small town here in SE Utah whose sole economy is based on everyone stealing from each other. Kinda like that?
Actually - it’s a very sensible practice. If more lenders had been doing this, they likely would have been more risk-sensitive in terms of lending standards. That’s the thing that always bugged me the most — many lenders seemed to have so little skin in the game except for the exposure of having early (first year or so?) default loans returned to them.
If people were lending like it was their own effing money, things wouldn’t have gotten out of hand to this degree.
Actually - it’s a very sensible practice
I disagree. It’s a sensible practice to make a loan and keep it on your books.
it’s NOT a sensible practice to create a subsidiary that will then buy all of your loans for MORE than the market will pay for them (in other words, fraudulently overvalue them)- booking this extra cash as “profit” to the parent company, while dumping the toxic waste into the new subsidiary.
then when the loans implode, you BK the subsidiary and the parent company is left whole, unless someone does some digging.
it’s rediculous.
Ah …. I didn’t get the separate nature of the subsidiary the first time around. But, bankrupting the subsidiary only works some outside entity was loaning money to the subsidiary, right? So, are there f’d bondholders/creditors out there for the subsidiary?
There is more to the story the head of the division left the company:
http://www.bloomberg.com/apps/news?pid=20601087&sid=a7eFRNqHFGww&refer=home
Probably to avoid being a scapegoat. Not sure this was a subsidiary, more likely a clever way to hide losses and cash out those juicy stock options at a high price.
Isn’t this is pretty much the same thing that Enron was doing?
Pretty much. If it quacks like a duck.
Kind of summarizing. Because a person pays on their 500$ limit credit card doesn’t mean they can pay a 500K mortgage.
Duh.
Buisness people and math…
But before all this securtization madness, the lenders underwrote that risk, and would make sure they were appropriately sizing the debt to the individual.
Once, however they tried to securitize the loans, they needed a quick and easy way to bucket the loans–FICO score was an accepted measure and was a pretty good indicator of past success (based on “balance sheet lending” underwriting criteria)…viola–we have an accepted measure of risk that fiduciaries can feel good about.
And then underwriting changed so the banks could feed the fiduciaries as much of this crap as they could handle. And with different underwriting (”non-balance sheet lending”), risk inherently goes up at all level of FICO score.
As I stated above, this Fitch news will permanently tighten credit under the new business model of securitization from even where we are today.
Niche meaning:
The niche in classical architecture is an exedra or an apse that has been reduced in size, retaining the half-dome heading usual for an apse.
Don’t be a horse’s apse and use the wrong words~
“In case you missed it: First Horizon of Texas has exited the subprime wholesale niche. An executive there told us the company may re-enter the niche at some point but currently profit margins are much too thin.”
“‘In the case of the 2006 vintage delinquencies, additional risk layers that are factoring into the sharply higher delinquencies include high combined loan to value ratios (CLTVs) and stated income loan programs as borrowers with higher FICO scores tend to be highly levered,’ Costello said.”
————————————————————–
trouble in the higher FICOs. not just a subprime problem which are the lower FICOs. just like we have been saying on this board for many months, prime borrowers are overleveraged with HELOCs and refi’s
Not to mention 100% LTV mortgages.
Did prime buyers use down payments these past 7 years? I doubt I would have had I been in the game.
Why throw cash at a house when by the time the ink was dry on the loan docs it was “worth” X percent more.
It’s getting UGLY out there.
You can feel the bad vibes.
It occurs to me that since what we are most concerned with here — the price of resale homes and apartments — adjusts very slowly, and the data available for it (median price of homes that sell) is unreliable, we really only get a sense of what is happening from the financial situation of public companies tangentally related — homebuilders and mortgage brokers. It’s the only up-to-the-minute information there is.
can some one explain me how stock market holding up with all thse RE bust. some thing fishy? are we(bloggers) over reacting to the subprime problem. may be it is not a big problem after all.
Global savings glut, follow the $. Housing is now out of vogue, where will the money flow? I think we’re seeing that it’s the stock market for the time being.
Problem is you are looking at the stock market in the short-term, check back in two or three years.
FBs deciding to mail in the keys and walk away is the only way we avoid a significant recession. Otherwise, they will have no discretionary funds to spend and our economy goes into free-fall mode, which leads to job loss, which leads to…ok…enough. I think we all get the picture.
Will FBs be smart enough to recognize this as a smart move early enough? I’m not so sure.
So your credit scores take a hit. As the housing market will take more than seven years to fully unwind, the FB’s credit will have plenty of time to mend itself.
Nationals: A “smart move” costs. Costs in terms of employability (background check), same for trying to rent.
Trying to dodge a judgment can be hell on the nerves. Then there’s that 1099 when the bank writes off your loan (”forgiveness” accrues to a FBer as interest) - and the IRS is one customer you don’t dodge easily.
The ‘06 bankruptcy laws means that if you make more than the median income and there is any chance that you can pay some portion back, that you will be on a repayment plan with unreal pittance allowances for rent and life’s other necessities. 5 years, I believe - and a very scary prospect, depending on where you live. Not everybody is comfortable working in the underground economy or is even able to choose that - may work well enough for construction and landscaping, not so great for a hospital position…or government…or corporate…
The people who will come out of this in the best shape will be sociopaths and others ‘easy liars’ who just don’t give a crap. And people with very little ego on the line. Who knows what kind of indentured existence the rest may agree to, to stave off - essentially - loss of face. For one more day.
Arizona Slim reporting from Tucson: Yesterday, I went to the big Home and Garden show at the convention center. While floor traffic was just as heavy as it always was, I noticed a lot of exhibitors had that bored look. As in, no one was stopping by to visit them. The mortgage and real estate exhibitors looked especially bored.
Has anyone else seen anything like this at their local home show?
Slim, glad you went - you saved me the hassle - I did a little drive thru the 3 year old completed KB Home development at Camp Lowell and Columbus/Swan - my guesstimate that about 8% of these places were up for sale——supply situation looks very healthy at Vail (just played Del Lago last week) and at Cortaro (played The Pines two weeks ago)——these edge of town communities have big existing inventory plus new construction still on-going——from radio ads sounds like the new builds continue at Valencia/Kolb/Fwy —-Sahaurita and Madera—–feels to me like the $225-$300 priced, new-4 yr category must be swamped—-yet the building continues—–then I see the Long Realty adds over the weekend and apparently everything Central/North of River/Foothills is worth $800k and up…..really surprising how much is avail. priced between $1.5 to $2.5million….are there that many low end and high end buyers in the Old Pueblo?….I just have not witness alot of volume or discounts….your thoughts?
I’m not seeing a lot of discounting. Yet. But, boy, the local inventory sure is on the rise, isn’t it?
Things that make you say “WTF?”
Saw this on HGTV yesterday. McMansions being built with Snoring Rooms!!!!
Ah yes . . . we already have specialty rooms for wine storage, wine tasting, theatre, office, games, crafts, outdoor kitchen, humidor, etc., etc. Now you can get a marriage saving “snoring room”.
Where I come from, it’s called either a spare bedroom, guest room, sofa, or the doghouse!
Hey, can I have one of those put into my house? Except, in my case, let’s call it the barking room, because I’d really like to block the sounds spewing out of my neighbors’ yard dogs.