Buyers Look For Clear Signs The Market Has Bottomed
Some housing bubble news from Wall Street and Washington. “An index of pending sales of existing homes in the U.S. unexpectedly fell to the lowest level in more than four years in April, a further sign the real-estate slump may linger. The index of signed purchase agreements, or pending home resales, fell 3.2 percent to 101.4, the lowest since February 2003, after a revised 4.5 percent decline in March, the National Association of Realtors said today in Washington.”
“The index was down 10.2 percent from April 2006. The index of pending home resales is considered a leading indicator because it tracks contract signings. The National Association of Realtors’ existing-homes sales report tracks closings, which typically occur a month or two later.”
“‘Psychological factors seem to be holding buyers back as they look for clear signs that the market has bottomed,’ said Lawrence Yun, senior economist for the Realtors.”
“Today’s report showed pending resales declined 10.4 percent in the Northeast and 10.2 percent in the West. They increased 2.3 percent in the Midwest and 0.7 percent in the South.”
From Reuters. “Failures among subprime mortgages offered to borrowers with damaged credit is continuing to dampen the home sales market, the trade group said.”
“‘In April, existing-home sales declined in part because some subprime lenders went out of business and disrupted the market,’ said Yun, the NAR senior economist.”
The Star Ledger. “Hovnanian Enterprises Inc. reported yesterday it swung to a loss in the second quarter, giving the homebuilder a third consecutive quarterly loss.”
“Revenue in the first quarter was 1.1 billion, down 29 percent from $1.6 billion in the same period a year ago. The company builds luxury homes in 17 states including California, Florida, New Jersey and New York.”
“‘We are frustrated to report that the housing market has continued to slip further in many loca tions in terms of both sales pace and sales prices,’ said Ara K. Hovnanian, the company’s CEO. ‘The housing market weakened in the latter part of the second quarter, and the slower conditions have continued into May.’”
“Yesterday, Moody’s Investors Services cut its ratings on Hovnanian, saying the homebuild er’s cash flow from operations will likely remain negative amid the ongoing housing-sector slump.”
From Bloomberg. “‘We are not confident that we’ve seen a bottom,’ in the housing market, CEO Ara Hovnanian said in the statement. He said he was confident that the company’s current strategy of lowering prices would boost sales ‘over time.’”
“‘Lower prices offered to buyers to close homes during the quarter also led to a further reduction in margins and a net loss for the quarter,’ Hovnanian said.”
“Homebuilding gross margin, excluding interest, was 16.3 percent in the second quarter, compared with 23.7 percent a year earlier. Hovnanian announced preliminary results for the quarter on May 4 and said it delivered 30 percent fewer than a year earlier. Cancellations fell to 32 percent from 36 percent in the first quarter.”
“Hovnanian reported…about $34 million in pretax charges for land-related write-downs and impairments.”
“‘We’ll continue to monitor conditions in all of our markets, and if the weakness seen in the first few weeks of the third quarter continues, then we may have additional impairments in future quarters,’ Ara Hovnanian, said in a conference call with analysts.”
The Herald News. “Hovnanian and other builders have had to cut prices and offer incentives to buyers. Even so, many new-home buyers have walked away from contracts, often because they can’t sell their own houses.”
“Hovnanian was especially hurt by a market slump in the Fort Myers, Fla., area. After speculation drove up prices in that area, investors pulled out. As a result, inventories have soared and prices have dropped. Earlier this year, Hovnanian took a charge of $93 million related to its Florida losses.”
The Financial Times. “Hedge funds are attacking bank decisions that help delinquent US mortgage borrowers remain in their homes.”
“The funds fear that banks are making concessions on the underlying mortgages to avoid making good on derivatives contracts that pay off in cases of default.”
“International Swaps and Derivatives Association, the derivatives industry body, to act on their concerns, according to a letter seen by the Financial Times.”
“‘ISDA should actively promote an industry solution that assures market participants that no one can engage in practices that are manipulative and prohibited by existing securities laws,’ the funds said.”
“Mortgage brokers and lenders concerned about a regulatory backlash by state officials are warning that weightier rules may force them to turn their backs on many consumers.”
“The worst case scenario isn’t inconceivable, lenders could stop providing credit in some locales, said Kenneth Logan, head of NovaStar Mortgage’s warehouse lending before the company cut the program this year.”
“‘Capital (investor money) will leave’ if regulation goes too far, Logan said, echoing others on a panel assembled by the Mortgage Bankers Association.
“‘There are only two ways to clear out the existing housing inventories: If mortgage interest rates go lower or if sellers lower their prices,’ said Mark Keisel, an executive VP with PIMCO. ‘But it doesn’t look like the Federal Reserve Bank is inclined to lower interest rates too much, and sellers are holding firm.’”
“‘(Housing) inventories,’ he observed, ‘are the best predictor of the future direction of a housing market.’”
“‘There are 3.7 million existing homes for sale in the U.S., which is 20 percent above where it was last year. Inventories are not going down, the number of vacant homes for sale has soared, and you have concessions being handed out by home builders,’ he added.”
“Amy Crews Cutts, deputy chief economist of Freddie Mac says…she isn’t sure how bad the subprime market will get. ‘We’ve never been in a subprime credit cycle like this, because overnight all the liquidity evaporated,’ she explained. ‘Who will service and negotiate these loans if the lenders have gone out of business?’”
“With mortgage fraud up an estimated 30 percent in 2006, Crews Cutts says it’s also unknown what will happen to these homes when the buyers walk away. It could be part a big part of the ‘vacant homes for sale’ story.”
“‘The problem with subprime loans and option ARM loans and interest-only loans is that defaults are going up. But early payment defaults are also high,’ she said.”
“Subprime mortgages originated in 2006 are experiencing a greater number of defaults far earlier in the payment cycle than loans originated in previous years, Crews Cutts pointed out.”
“‘One and a half percent of these loans are going bad in month 14,’ she explained. ‘And the (interest rate) reset hasn’t even happened yet.’”
“What will happen when $1 trillion in adjustable rate mortgages resets in the next year? That, say Crews Cutts and Keisel, will determine whether the real estate slowdown bottoms out this year, next year or at some indeterminate time in the future.”
‘A Coconut Grove-based hard money lending company representing more than $263 million in loans missed its February interest payments to its hundreds of clients.’
“‘Psychological factors seem to be holding buyers back as they look for clear signs that the market has bottomed,’ said Lawrence Yun, senior economist for the Realtors.”
IF i can know the bottom, I can be a billionaire. This guy needs to get a real job.
Lawence Yun. Hum… Wonder if David Learah’s job was outsourced to China?
Yun recently blamed the weather for the low April sales.
I guess a well-founded fear of losing your ass on a depreciating asset qualifies as a ‘psychological factor.’
We have a similar pending, hard-money-lender implosion on the Central Coast.
http://centralcoasthousingbubble.blogspot.com/2007/04/death-watch-alan-little-custom-homes.html
Amy Crew Cutts….I love that name!
I know! It reminds me of my dad.
LOL.
Your dad’s name was Amy? That’s odd.
Army.
Amy is a typo.
These names are somtimes hilarious. The realtor named ‘crooks’ i remember that one.
On some Bravo reality show there’s an RE guy named Slade Smiley.
He said he was confident that the company’s current strategy of lowering prices would boost sales ‘over time.’”
“‘Lower prices offered to buyers to close homes during the quarter also led to a further reduction in margins and a net loss for the quarter,’ Hovnanian said.”
We have the utmost confidence in our strategy of lowering prices. Oh and by the way, last quarter we lost money, but that was because of lower prices.
I guess the deal is, they lose less money by building the house and selling it at a reduced price, than by just abandoning whatever investment they have already made in the land, the infrastructure, the legal work, etc.
Either that or they’re trying the old ’strategy’ of “we lose money on every sale, but make up for it in volume.”
Hmm… that’s a variant of the dotcom strategies circa 1996-2001.
“Gaining eyeballs” at the same time as hemorrhaging cash.
“‘Psychological factors seem to be holding buyers back as they look for clear signs that the market has bottomed,’ said Lawrence Yun, senior economist for the Realtors.”
Psychological factors were greatly responsible for the housing price run-up, so it’s natural that these factors will play a role as prices fall. The “experts” have done a poor job at predicting a bottom and I think more and more people are going to be afraid to pull the trigger on a home purchase in a depreciating market—even on lower price areas like Boise (where I live). Who wants to pay $220k for a starter home when it may be worth $195k by next year? Why not wait for the market to fall further?
It isn’t “psychological factors” that is driving the market down, its logic.
Emotion (greed) was the factor, the psychological factor, that drove the market to irrational highs (along with easy money). But once emotions like greed and euphoria evaporate what’s left is, mostly, logic and reason (among potential buyers).
Since only a handful of dopes don’t recognize that the supply of housing greatly exceeds demand and the natural consequence of that reality is falling prices, that portion of the buying public (now emotionally sober) has to factor in the possibility that what they are buying may continue to decline in price. That means that, to protect themselves, they’ll have to do some hard thinking, number crunching and analysis for a change.
Do they really like this property? Will they be happy in it for an extended period of time? What are the possibilities of a forced sale in the near future? How would that impact their decision?
When prices are rising; less thought is needed. When they are clearly falling; lots of thought is needed. It ain’t “psychology” driving the market down, just the reality of supply and demand being (finally) recognized.
The wildcard will be the economy. As prices fall and the market changes further, it’ll be interesting to see how the economy is affected and how people react. If fear of losing a job becomes a more heavily weighted variable in the logic equation, things will get interesting.
Wasn’t it Fat Bastard who said, “The economy slows because of real estate; real estate slows because of the economy. It’s a vicious cycle.”
I heard on the radio that last month wages fell, yet consumer spending was up!? I suppose a plasma tv and a new boat can distract one from housing woes.
From the BEA report:
These lines in that BEA report grabbed my attention (the four numbers across each row are for Jan 07, Feb 07, Mar 07, Apr 07) …
27 Equals: Personal saving -83.8 -95.3 -67.8 -132.8
28 Personal saving as a percentage of
disposable personal income -0.9 -1.0 -0.7 -1.3
Doubling of the negative savings rate over one month’s time? BFD — it’s all good, so long as the stock market keeps hitting new record highs.
This is the “spill-over” from Greenspan’s CHEAP MONEY. When inflation is reducing the value of your money every month, and the return on dollars is below zero, it is a RATIONAL DECISION not to save money, because assets hold greater value. The FED needs to tighten credit and Raise rates to 7%. That will fix it.
I hold hardily agree! Inflation is every where and the Government tells us there is little inflation so they can keep COLA low on the Social Security and Benifits payout and the american people go along with it. What fools we are to take this $hit!!!! AS LONG AS THEIR HOME ATM’S ARE WORKING WE WILL NOT COMPLAIN. OUCH!!!!!!!!
Great post, nicely summarizes things.
Fundamentally similar to what you are saying, jag, but I look at the “bottom” as the place where buying is cheaper than renting. Certainly we are nowhere near it.
real investment happens, when cash on cash is a 12 month proposition.
“Logic” is the psychological factor this time. The last time, the psychological factors were fear and greed.
It isn’t “psychological factors” that is driving the market down, its logic.
It will be in the end. Capitulation is not logical. People give up, even when purchasing is cheaper than renting, or blue-chip stocks are selling at single-digit P/Es. Hopelessness, despair, fear, the inability to go against the popular wisdom.
That’s why it’s so hard to be a contrarian.
you have to be a an
Anti-contrarian.
I can think of 77 non-psychological factors that might be holding prospective buyers back…
http://ml-implode.com/
Bingo. There’s still a lot of dumb money that would like to buy in but now can’t.
That, in a nutshell, is why the market has a lot further to tank. We haven’t even reached the tipping point yet, much yet capitulation, followed by a panicked rush for the exits by sellers who had clung to their delusions about a Spring/Fall/Winter/Summer/Spring “rebound”.
We will hit bottom when all the bubble blogs are dead and the housing bears, who have watched the market like hawks for many years, decide to actually spend time with friends and family — and not spend their lives (hours, each day) sitting at the computer, looking for any miniscule signs that the market **just might** be slowing so that they can buy in.
Guys…it’s us. Too many people right here who are still filled with “irrational exuberance” regarding the housing market. We’re just waiting for the bottom so we can pick up the deals and not lose money — but most of us have hopes to buy in right before prices begin rising again.
The bottom happens when the masses (including the thousands, who are reading/posting on blogs) are convinced there are no deals to be had.
Bubble blogs have been gaining in number and popularity. The inverse of the euphoric housing bubble, yet still a part of the bubble, none-the-less. As long as so many are watching…waiting…hoping, the bubble has not truly burst, IMHO.
Damn! It’s up to 77 now?!
What’s the over/under date for 100?
Let’s see: An index of pending sales of existing homes down 10.2 percent from April 2006, inventory same or higher than a year ago, and many more pending sales fall out of escrow due to lack of funding…. NAR will need more than two hands to find the RE bottom this year.
They should have compared “mapril” to “mapril”, especially due to Easter and the weather. (isn’t that the standard answer?).
The turnaround will happen I’m sure in Junly? Or maybe Julaughust?
How about Septober or Novcember…hehehe….of 2011?
octember
“Hedge funds are attacking bank decisions that help delinquent US mortgage borrowers remain in their homes.”
“The funds fear that banks are making concessions on the underlying mortgages to avoid making good on derivatives contracts that pay off in cases of default.”
And this may in truth be the nail in the coffin, progressing the bust faster than otherwise.
With japanese RE bust, the banks were allowed to keep their nonperforming loans for DECADES which prolonged the downturn.
It IS “different this time.” This time you have the hedgies (who have at least as much clout as the banks) who are looking for blood. Some of the hedgies will implode when all is said and done, but ALL of them THINK that they are hedged appropriately, so they salivate for that cash. they will push the banks to show their losses in order to capitalize on the derivatives.
The same mechanics (”financial innovation”) that aided the meteoric rise can now potentially instigate the comet-like fall.
this could get interesting.
The hedge funds could be the ally of all potential buyers, like me, who are waiting for sanity to return. Let’s hope their clout truly is on a level with the mortgage industry!
“Decades” is a bit of a stretch. The Japanese asset bubble started around 1986, peaked around 1990, and slowly deflated over the next 10 years. Koizumi pushed reforms through in 2002 which finally forced banks to start writing off non-performing loans. Prices are still well below the peak but have not fallen below mid-80’s levels.
But other than that minor quibble, I agree that the Japanese experience is highly illuminating in this context.
“Decades” is a bit of a stretch.
…
Prices are still well below the peak but have not fallen below mid-80’s levels.”
2007 - 1987 = 20 years = 2 decades. Either my math is off, or I am completely missing your point.
With japanese RE bust, the banks were allowed to keep their nonperforming loans for DECADES which prolonged the downturn.
Banks were allowed to keep their non-performing loans only until 2002 (some of these were discharged long before, of course). Assuming most of those NPL occurred near the height of the bubble (1990), that’s at most 1.2 “decades.”
half?
still have a year(s) to go for the good ole USofA bust
It appears setting up a hedge and then collecting on it in case of default, are in fact different skills.
“In this corner, the hedge hogs. In this corner, the FBs.”
Could I have a double-vente order of popcorn, please?
If it comes down to the banks vs the HF’s, take the banks every time.
Hedge funds vs. Banks - kind of like Alien vs. Predator. I love to watch these sharks turning on each other.
One thing to remember about all the Hedges is that a lot of these are private arrangements and are totally illiquid so that even if one thinks he is hedged he may be totally unhedged as the counter party to the transaction may well be worth less or way less than the “Hedger” thinks or thought. At the same time because of the inherent illiquidity of the Hedge transaction, even if it was/is at all marketable, the price may be much much less than envisioned when the “Black Box” calculations were made. All part of the upside down pyramid supporting so many things these days.
just plug it into the enigma machine.
solves it everytime.
“Psychological factors seem to be holding buyers back” said Lawrence “It’s just a flesh wound” Yun, senior economist for the Realtors.
http://paizo.com/image/product/catalog/IMPTYV/IMPTYVMP009_360.jpeg
Would that “psychological factor” be common sense (finally)?
Yes — the remaining subprime lenders are finally coming to their senses about indiscriminately loaning out money to help plankton buy homes they cannot afford.
plankton=strwberry pickers?
A question for someone who understands these financial matters better than me:
Some commentators (I read it on “Calculated Risk”) are taking the line that the banks are doing the borrowers (and themselves) a favor by reworking loans to avoid foreclosure. Do they deserve credit for this, or are they just trying to keep the borrower in the house until the 6 (12?) month period is over and they won’t have to repurchase the mortgage from whoever bought the MBS? After that, they don’t care whether the house goes into foreclosure or not.
Any enlightenment appreciated…
The banks are doing THEMSELVES a favor.
here’s why.
If the homeowner is NOT paying the mortgage, and if the home is worth MORE than is owed to the lender, the lender will foreclose. In doing so, they get all their money back, and can lend it out to someone else.
If a homeowner owes a lender MORE than the house can be sold for, however, then the lender would have to foreclose on the home and then resell it, but they would end up with a loss. That loss has to go on their BOOKS by the way as a loss, and no lender likes that.
Thus, the lender will do a calculation to figure out:
1) how much they will lose if they foreclose the house, sell it for a loss, put the loss on their books.
versus
2) how much they will lose if they rework the loan keeping the borrower paying (albeit less) per month towards the principal. Remember, they can often rework the loan in a way that adds payments to the end of the loan.
In this market, even foreclosures are having a hard time. So many lenders recognize that their loss in foreclosing the loan will be MORE than their loss if they let the borrower stay and make payments.
Foreclosures are expensive for banks. They have to get a lawyer to bring foreclosure proceedings, then they take over ownership so have to pay to maintain the house, then they have to pay a realtor when the house finally sells, and often foreclosures come at a discount because they’re “as is”. So the lender can lose a lot on a foreclosure.
HERES AN EXAMPLE (simplified but essentially correct)
Lender lends out $300k to a FB in an option ARM scenario. it is now reset time, and the FB can’t pay the reset monthly payment. The loan is now raised to $320k due to negative amortisation, and the lender figures the home is “worth” $270k. (a 10% drop). They also figure that the downturn will last 2 years.
If they sell:
270k - 320k (loan amt) - 16.2k realtor fees - 5k lawyer fees = $71,200 loss. (that must be reported to the books)
if the refinance:
perhaps the loan was 5% jumping to 7%, so a 2% difference.
2% x 320k = $6,400.
anticipated duration of downturn (per the BANK): 2 years:
$6400 x 2 = $12,800.
So the loss over 2 years by foreclosing would be: $71,200
loss by refinancing: $12,800. (and they don’t have to put the loss on their books)
this is simplistic, but correct in a general way.
even better for the bank, in refinancing, they can add FEES and penalties to the above (and just add it to the mortgage) so they may not be that far behind, and can even come out ahead!
hooray!
Thanks for your explanation, which I followed. But the question that arises next is “Why are the hedge funds unhappy with this arrangement?” Have they shorted the lenders, anticipating that their reported losses will drive down their share price? Since the banks won’t have to report their losses, their share price stays up, and the hedge funds lose their shorts?
“Thanks for your explanation, which I followed.”
You’re welcome. remember, it’s a bit oversimplified but I think it’s pretty accurate.
“But the question that arises next is “Why are the hedge funds unhappy with this arrangement?” Have they shorted the lenders, anticipating that their reported losses will drive down their share price? Since the banks won’t have to report their losses, their share price stays up, and the hedge funds lose their shorts?”
this is more difficult, but remember we have many different players with different goals.
When something is sold, there is a BUYER and a SELLER. The BUYER obviously has different thoughts on the thing sold compared to the SELLER.
So example, if I sell stock, I believe that the stock is fair valued, and that my money is best elsewhere. if I buy stock, in general I think it has room to appreciate in value over time.
If I SHORT stock, then I think that the value will fall.
thus, the person who buys stock has different hopes for the fate of the stock compared to a person who shorts it.
this is similar to the CDS market. There are people buying and selling the CDS, and they thus have different goals.
So example, let’s say that you have Clouseau international. We hold $10,000,000 in MBS originated from Wells Fargo. We are worried that the MBS sold to us are crap, and we don’t want to have any risk to this, so we decide to buy a CDS from “CDS Insurance corp”.
The terms are that we pay CDS Insurance Corp quarterly installments of $200,000 over 5 years for this protection.
This will reduce our eventual return, but we feel it’s worth it. If my MBS loses value within 5 years, then CDS Insurance corp has to pay my company (Clouseau international) the amount we lost.
Now, lets say that the MBS has lost value. Then CDS Insurance will pay my company money. then Clouseau International is the “winner” and CDS Insurance is the “loser”
Let’s say it keeps it’s value the whole time. Then Clouseau international is the “loser” (because we paid $200k each quarter for “nothing) and CDS Insurance is the “winner”.
Now, a few years in, we are worried that our MBS has actually lost value, but the Banks are using accounting tricks to hide this from us. IN this case, we would be mad, because we would want our insurance from CDS Insurance. In this case, I as CEO of Clouseau International would be very angry about the “hidden losses”. So I would pressure the various regulators to get it “right”.
It is more complex though, because CDS can be sold and resold, often by hedgies.
I’m sorry, but I can’t easily explain this. But basically, OTHER companies will then buy and trade these CDS… and the CDS value is directly related to the underlying “value” of the original MBS and creditworthiness of the lender, etc.
Thus, if the MBS is not “worth” as much or the lender has done accounting tricks, half of the people who own the CDS will be upset and half will be happy.
Kind of like a stocks. Enron was a crap company. The people long on Enron stock were happy with the faked financials arrangement. The people short Enron stock were unhappy with that arrangement.
hope this helps
HIC
silly freaks
They owned derivatives issued by the bank that pay off for the loss when the bank writes down the loan. No write down means no payout.
I am not clear on this now. That seems to be the way loans USED to be made where banks were actually concerned about the borrower paying back a loan. Today, when the banks make a mortgage loan it is bundled off into a mortgage backed security. By doing so, the bank is off the hook if the lender doesn’t make payment. That’s why money was so easy to get in the bubble era because the bank is not responsible for the default. No, Clouseau?
the banks keep some of the loans in their portfolio. those are the ones they are considering reworking.
They are not considering reworking the “seasoned” MBS loans. Those belong to the investor, and are likely too complex to rework, without the investor’s approval.
again, this is so complicated that I doubt many banks/lendors/investors understand it, much less me.
HIC
the other issue at hand:
the banks need the MBS holders if they are to keep funding their loans. So they are scrambling because they want to bleed the golden goose dry, but not kill it.
so they will likely scramble to find a way to rework the loans with investor approval in a way that will limit losses and also perhaps INCREASE earnings/gains if possible.
but again, this is the stick point, and why it may be required to have a huge entity (i.e. Federal Govt) buy all this crap, because nobody else wants it, or can afford it.
but remember as well, not everybody wants “to play”. Many people feel that they are “covered” by their Credit Default Swaps… so even if the MBS loses value, they’re “ok”
but the problem is that there are so much shenanigans, that nobody really knows “where the buck stops”.
So many BIG players out there are going to find out that they THOUGHT they were covered, but their counterparty went out of business, thus they eat the loss.
(it would be like if you had fire insurance, then had a fire, and found out that Allstate went out of business… your insurance is worthless)
Thus, many people are “swimming naked” but don’t know it due to unknown counterparty risk
risk is risk is risk…
unless its hedged counterparty blind systematic,
wait, thats how we get drugs, right?
I am watching this one to see if the bag holders will get nailed or not. I’m betting they will.
wrong link above. united capital markets … aka john delaney
What is occurring is that owners of higher tranches in CDOs LOVE defaults- especially if mortgage rates are rising. First, the lender (aka servicer) of the MBS usually agrees to pay the principal when the FB either refinances, pays a payment including principal OR defaults. So when a homeowner defaults, the bank (assuming that it was the one who is servicing the loan) has to hand over an amount equal to the entire principal to the CDO, which will go to pay off bonds in the AAA/AA tranche. This constitutes a prepayment, so if interest rates are rising (which is when a bondholder would like prepayment) they make an unexpected profit. So I am guessing that the hedge funds want out of these bonds, and want principal payments as soon as possible.
Derivative securities are even more agitated- sometimes securitizers create ’stripped’ securities… one security that gets all principal payments of the MBS and another security that gets all interest payments of the MBS. The principal bondholders get higher returns the faster the prepayments are made, so they will put pressure on lenders not to block defaults, also.
The rule about returning mortgages to the lender if they default in the first few months is a different issue. Most of these MBSs have already aged past that limit.
However, it may be a moot point, since the political clout at this time of the hedge funds is about 0.0001 of that of banks and FB. Like all with lots of cash, the hedge funds will get their political way up till the moment they take on bigger players. Sorta like the local pimp taking on the mafia.
What is CDO?
CDO = Collaterallized Debt Obligation. It is a derivative bond made up of collections of asset backed securities. In some ways it is like a closed-end mutual fund of mortgage based securities, 2nd mortgage based securities, etc. See
http://en.wikipedia.org/wiki/Collateralized_debt_obligation
@street sense,
HIC broke it down in far greater detail than I could, but basically the answer to your question is “yes”. Without the explosion over the past 10-15 years of MBS/CMOs and the complex array of CDSs (Credit Default Swaps) and a myriad of other mortgage securities derivates, the banks WOULD have cared whether or not the borrower could repay his/her loan, and the recent insanity would have been all but impossible.
And let’s also not forget Greedspan’s 1% –that was another biggie that made reckless lending highly profitable for the banksters and hugely expanded the U.S. credit supply.
Crews Cutts says it’s also unknown what will happen to these homes when the buyers walk away.
It seems like conventional wisdom that foreclosures would lead to faster price declines, because banks aren’t in the “land lord” business. Complications from MBS arrangements and pressure from hedgefunds might make this even more likely.
On the other hand, it seems that with MASSIVE foreclosures looming, lenders are trying even harder to avoid foreclosure.
So I guess the question is which effect dominates? Will lenders refuse to write down the loans on their books and avoid foreclosures, or will they try to sell the house as quick as possible?
I would think that the lenders would get stuck with the loans once the FBs realize that they owe far more than the home is worth (regardless of interest rate) on a home that is 5 times their income and they walk.
Funny seeing the greased pig lenders and Hedgies trying to head for the same hole in the fence at the holding pen in the slaughterhouse. Just the very tip of the tip of the first iceberg on the way to oblivion as the illiquid real estate asset prices start to decline in earnest as and against the bloated equally (or perhaps ultimately) more illiquid debt structures supposedly secured by these same so called assets and their FB purchaser covenants to pay.
Question:
If a 7% interest rate mortgage is magically changed to a 5% interest mortgage overnight, all else being equal, doesn’t that impact the value of that loan far more than $12,800?
I understand if it is simply delaying the increase to 7%, that there would not be a significant difference in value to the note (pretty damn close to $12,800). Are these restructurings “temporary” fixes?
If so, I suspect banks will have continued “fixes” once the current round dries up. Re-inflating this bubble is the only way they will be able to get out without a continued “fixing” of these loans.
If you owe the bank $1000 and you can’t pay that’s your problem.
If you owe the bank $1000000 and you can’t pay that’s their problem.
Old saying from small business owners.
Old saying, yes, but from J. Paul Getty:
“If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.”
–J. Paul Getty
Do they deserve credit for this, or are they just trying to keep the borrower in the house until the 6 (12?) month period is over and they won’t have to repurchase the mortgage from whoever bought the MBS?
the answer to this part of your question is probably “no”. they can’t rework the loan in such a way without triggering clauses in the original MBS agreement, probably triggering a buyback or something similar. (I’m fuzzy on this part of what happens here)
this is also why many people are perplexed as to HOW to rework these loans… the MBS structure makes it difficult to impossible to do this! (when you hear WaMu whine about them not being able to do this, this is why… it will trigger too many subclauses and it gets difficult/confusing)
You’re probably right that reworking the loan would not be as simple as it sounds due to the MBS agreement. However, if the bank believes that it will eventually be forced to keep/buy back the loan anyway (because the buyer is already missing payments), wouldn’t it make sense to go ahead and rework the loan in the hopes of keeping the buyer afloat? Less money is always better than no money.
The problem is that the bank doesn’t buy back “a” loan, it must buy back the entire TRANCH of loans (or security).
thus, if they take 500 loans and package them into an MBS and sell it off, and let’s say 20 are “bad” and 20 is the amount that triggers a buyback, then when they buyback the loans, they buyback all 500, not just the 20 “bad” ones.
in order to rework the loan they often have to rework the whole deal.
Thus, if they see a “bad” loan forming, they can’t just singlehandedly rewrite that loan because they are NOT the ones getting that interest, the investors in the MBS are. So in order to rework that loan, they must ask for permission from the MBS holder. If they do this, then the MBS holder knows that something is up, and will force the bank to buy back everything.
remember, once the MBS is sold to an investor, it is the INVESTOR (not the bank) that owns that, and all payments/interest go to the INVESTOR (not bank). therefore, the bank has no power, without INVESTOR approval.
The buyback clause protects the investor… and the banks desperately want out of that clause, but it’s too late. Hence all the subrpime implosions…
Kind of like this: you go and buy a TV from Best Buy. You take it home, it is yours. You can do whatever you want with it, but Best Buy can’t call you and say “give it back” or “we’re going to change your color TV to black and white”.
within a certain time frame, if the TV sucks, you can go back to Best Buy and say “BUY THIS BACK” and they will do so (we call it a “return” though).
but while you have the TV, it is YOURS and YOURS ALONE. Best Buy has no say.
In this case YOU are the IVESTOR
and Best Buy is the BANK
again, my apologies, because this is NOT what I do for a living, so there are some errors, although I belive my gist is correct.
Wow, they have to buy back the entire tranche? I thought they just had to buy back the non-performing loans. It kinda seems like throwing out the baby with the bathwater, but I guess the percentage of NPL is a good indicator of the future performance of the security.
I believe the lender (bank in this case) can ‘take the loan back’ , cure it, season it (usually 3-12 months after its brought current) and put it back in the pool. Another option is to replace the loan. This is all spelled out in the recource contract with the lenders funding source or in this case the MBS purchaser. If you are certain about a total securitization buyback trigger clause I would like to see an example as that would certainly bankrupt any institution operating on fractional reserve (all of them) and would therefore be a self-defeating clause I would imagin.
The agreements governing the securitized pools allow very little management flexibility for a number of reasons, although it may be possible to take limited steps such as replacing bad loans without reworking the whole pool.
If the governing documents do not allow sufficient flexibility to do what the servicer needs to do, then it is true that the only ways to change the governing documents are to either get all the security owners to agree, or else buy back the entire pool (which may not be possible without getting all the security owners to agree).
The legal costs of unwinding the bad MBS and CDO pools are going to be staggering.
lawyers…
overpaid prima-donnas
OK, I think it is time for some pain and suffering
HISTORY OF AN EXAMPLE REMIC (mortgage-backed security):
2002-22H (a history via nearly unreadable documents. Hee hee).
A large number of mortgages were aggregated from a variety of sources between 2000 and 2002, as delineated in the SEC filing
http://www.secinfo.com/dr66r.3194.htm
Apparently the pool of about $300 million dollars in mortgages was aggregated by Lehman Brothers bank, and a closely related company, Structured Asset Security Corp. derivitized it into a series of tranches, which are described in
http://www.secinfo.com/dr66r.3194.d.htm
An example of one of the carefully-crafted transfers of mortgages to Lehman Bros from GMAC mortgage corp. is at
http://www.secinfo.com/dr66r.3194.t.htm
This describes in detail how REOs will be dealt with, the types of mortgages (30-year fixed and ARMS, 103% LTV at most, if over 80% LTV, the rest must have PMI). For details about how mortgages are transferred from a lender to a securitizer, feast your eyes on that document.
================================
I found bonds from various tranches held by many funds. For instance, Delaware Diversified income fund had about $80k of the 1-A tranche (this is an AAA rated, highest tranche, with a coupon 6.9% interest).
===============================
To trace the history of this issue, go to
https://sf.citidirect.com/
Then (1) Click on the left-hand-side link MBS. (2) Look for Structured Asset Security Corporation 2002-22H in the list and click the link.
The monthly statements labeled Certificate Holders Statement (warning pdf) show a description of each of the tranches and their performance. The statements labeled Loan-Level Data are huge (flat) text files, describing EVERY mortgage in each tranche, with details such as occupancy, loan type, original principal, current interest and FICO scores. These are used for statistical analysis of the tranches.
========================
Whew. If you read through all of those links, you deserve a gold star.
Thank you, AK Ron!
I noticed on page 5 (of 64, IIRC) on this document, it states something to the effect of “full faith and credit of the United States govt. when referring to Fannie & Freddie mortgages. I was under the impression that F&F securities & mortgages were NOT backed by the govt.
http://www.secinfo.com/dr66r.3194.t.htm
Are you familiar with this?
Hi,
Fannie and Freddie are Federally chartered, and have lines of credit from the U.S. Govt, but they are not guarenteed by the full faith and credit of the gov’t. BTW a nice brochure on this subject and on REMICs/CDOs in general is
http://www.freddiemac.com/mbs/docs/about_MBS.pdf
However, some securities from Freddie might be backed by full faith and credit, because FM does handle VA loans, which ARE backed by full faith and credit of the govt (FHA loans, similarly). Thus a FM pass-through of VA mortgages would be gov’t guarenteed because of the guarantee on the underlying mortgage, not on FM.
After all that intricacy, will just repeat that some of us who wrote mortgage notes are awfully glad we never tried to sell the notes to anybody. Re-work has come up many times, fortunately it is not coming up now. I wonder if my borrowers, having read in the newspaper about waves of foreclosures, are more scared of me than I am of them !
“‘Psychological factors seem to be holding buyers back as they look for clear signs that the market has bottomed,’ said Lawrence Yun, senior economist for the Realtors.”
Bullshit. I’m a potential buyer and I’m NOT ‘waiting for the market to bottom’.
I’m simply waiting for “reality to return”. I sense that most other buyers are in the same boat. A 10-20% drop in current home prices is MEANINGLESS when those same homes are overvalued 100-150+%
If I perceive an annual income of $80K how the f*k am I supposed to afford a $700 home without engaging in financial monkey-business?.
I refuse to do that.
If there IS one thing I’m waiting for is for all the speculative azzhats who bought a home using spurious no downpayment, no principal, ARM’s to LOSE THEIR HOMES thru foreclosure.
Because I’m NOT entering the buyers market just to to compete with penniless riff-raff who got a free ticket to purchase homes that they otherwise could NEVER afford.
“Because I’m NOT entering the buyers market just to to compete with penniless riff-raff who got a free ticket to purchase homes that they otherwise could NEVER afford.”
My view exactly. I only want to compete to buy a house against people with similar financial capabilities. Otherwise, it’s like playing football as a “clean” player when everyone else is using horse steroids. It’s a lose-lose proposition.
Well said, Dan. My sentiments exactly.
Ditto.
–“‘Psychological factors seem to be holding buyers back as they look for clear signs that the market has bottomed,’ said Lawrence Yun, senior economist for the Realtors.”–
Bullshit. I’m a potential buyer and I’m NOT ‘waiting for the market to bottom’.
I’m simply waiting for “reality to return”. I sense that most other buyers are in the same boat. A 10-20% drop in current home prices is MEANINGLESS when those same homes are overvalued 100-150+%
If I perceive an annual income of $80K how the f*k am I supposed to afford a $700 home without engaging in financial monkey-business?.
I refuse to do that.
If there IS one thing I’m waiting for is for all the speculative azzhats who bought a home using spurious no downpayment, no principal, ARM’s to LOSE THEIR HOMES thru foreclosure.
Because I’m NOT entering the buyers market just to to compete with penniless riff-raff who got a free ticket to purchase homes that they otherwise could NEVER afford.
“Because I’m NOT entering the buyers market just to to compete with penniless riff-raff who got a free ticket to purchase homes that they otherwise could NEVER afford.”
and don’t forget about the role “investors” played in this. I want to see them BURN. Then I’ll consider buying….
I liked it even better the second time, well said!
Why is it a “psychological factor” when buyers resist spending more than they need to on housing? Couldn’t it also be that — as with the stock market — investors are learning to watch and read the market a little more carefully? Maybe they learned a thing or two in the past few years? Of course I also wonder where the decreased availability of fast-n-sleazy mortgage dough is in this story…
Always with the stupid questions,
SFR
I read through the local “Good Living” rag to find all the reasons why the “Senior Mortgage Consultant” would recommend 100% mortgages to everyone. Should invest your down payment and take that huge tax benefit, apparently. (My mortgage interest benefits me $750 / yr in tax savings above the standard deduction. Yippee!) Similarly, my 15 year loan is old fashioned, since “The ‘good ole boy’ mentality’ of owning your home outright is a thing of the past.”
He points out that from “an investor’s point of view, the return on investment with 100 percent financing is much greater when the property increases in value”. (Hmm, didn’t mention the ROI would be negative infinity if the value drops though…)
This is in Texas, which is still treading water. A psychological sea change is still a ways off, I fear.
“‘In April, existing-home sales declined in part because some subprime lenders went out of business and disrupted the market,’ said Yun, the NAR senior economist.”
This Lawrence Yun is even better than Liariah. So it’s the ‘lenders’ that went out of business’ fault. I get it.
He’s a L.Y.’er…
We won’t forget that you originated that joke when Yun first spoke, aladinsane.
Nice! We used to have Liareah, LiarRealtor, and LiarRealtwhore. Now we have L.Y.’er.
“‘Psychological factors seem to be holding buyers back as they look for clear signs that the market has bottomed,’ said Lawrence Yun, senior economist for the Realtors.”
Yeah Yun…AIN’T life a Bitch when the poor RUBES STOP GIVING your Gang their Hard Earned MONEY ….without EVEN THINKING about it !
“‘Psychological factors” like the use of reason.
“The worst case scenario isn’t inconceivable”
That’s a hell of a quote.
I’m trying to be really careful what I wish for, but I’m fascinated at some of the quotes from the last few weeks.
“Homebuilding gross margin, excluding interest, was 16.3 percent in the second quarter, compared with 23.7 percent a year earlier. Hovnanian announced preliminary results for the quarter on May 4 and said it delivered 30 percent fewer than a year earlier. Cancellations fell to 32 percent from 36 percent in the first quarter.”
I just love this. 30% less homes sold for 7.5% lower gross margins and a 1/3 cancellation rate. That’s a really attractive business to be in. With cash reserves dwindling, credit lines cut, and credit ratings down, how are these homebuilders going to make it through the next 3 god awful years? It’s really funny to me.
Alex Trebek: “Welcome to Jeapordy! here is your final question from JimmyB: “how are these homebuilders going to make it through the next 3 god awful years?”
Bzzz.
Alex: “Inspector…”
Me: “Alex, that’s simple. borrow money to buy back stock.”
Alex: “Are you sure? That will BK the builders and only enrich the CEOs who are cashing out their stock at record pace.”
Me: “Hmm… for some reason I’m still going to stick with my original answer of “borrow money to buy back stock”, Alex.”
Alex: “surprisingly, you’ve gotten the question correct, you’re the new Jeapordy champion!”
Me: “Thank you! Thank you! I’ll be here all week…”
I’m sorry, Mr. Clouseau. Your answer was not in the form of a question. The correct response is “What is borrow money to buy back stock?”
LOL. I thought of that too, simi, as soon as I started to read HIC’s answer.
“What will happen when $1 trillion in adjustable rate mortgages resets in the next year? That, say Crews Cutts and Keisel, will determine whether the real estate slowdown bottoms out this year, next year or at some indeterminate time in the future.”
WTF? Are these game show hosts or what? Door #1, Door #2, Door #3, YOU DECIDE! I’m not sure of what I’m not sure of. How do these people even get a gig?
too funny, we both used the gameshow analogy at the same time in different ways!
Anyone here have experience buying / assigning tax lein certificates? I am wondering how it would pan out in a declining market with upside-down buyers and failing lenders.
buying the legal means to tie the property up…..
sharky
One of the things that has to be done is to drill the “rule” of 2.5 to 3 times income for housing into people’s minds. All those CA and FL markets where it has gone to 8, 10, 15 times income are just insane. Even AZ is around 4 or 5 now.
If buyers really lived by this rule (like “look both ways before crossing”, and “don’t run with scissors”) there would be nothing the realtors could do to trick buyers into more than they could afford. The buyer would say “I make $50K, show me houses that cost $125 to $150″. If there were none in that price range in that market - no sale. As others have said, there are VERY few people who actually pull down $200k a year - maybe 2% of the population, so how can almost every CA house cost a half million?
How many years would it take for California to normalize if this happened, with sticky prices and stubborn sellers? If the buyers lived by this “golden rule” then noboby could blame them, it would just be common knowledge that that’s what buyers will pay.
I wonder if some kind of youtube public service announcement could be created - “Don’t be a real estate fool, three times income is the buyer’s rule”.
So basically real estate P/E has increased 4-5 fold in the most bubbled markets.
I heard on the radio the other day that a George Mason economist predicted that in 50 years (or maybe 2050, can’t remember) the median house in the DC area will be $14 million and will be 12-14 times the median income.
WTF? Sorry, 12-14 times median income is not sustainable unless you had perpetually historically low interest rates. If there was that much of a housing shortage then we would simply be living multiple families per house or in tiny cracker-boxes.
And, how can an economist even pretend to predict the future 50 years from now? There is absolutely no way to have a clue on the economic factors our area will face in 50 years and no legitimate economist would even try to guess.
This is coming from an economics department that has two nobel laureates. ???
That’s strange. Most of the academics that I read (Roubini, Shiller, Krugman, et al) are bearish on real estate. And they don’t make predictions out further than a few years.
obviously he wasn’t one of them…
I’m guessing that was a way to say this trend will not continue without actually saying this is going to be a crash.
Could be a delicate political dance not to piss off the NAR
People thinking of a bottom are far away.. these are not stocks you sell in seconds.. takes years to get to the bottom.. 3-5years
Pronouncements from “experts” that a bottom is at hand tends to backfire, delaying the time until a bottom is actually reached. It happened in CA from 1990-1996, and so far I see the same happening this time.
Saw this from the AP:
“.. However, Hovnanian is expecting a profit in the fourth quarter of 2007 and in 2008. The company also announced it will discontinue offering earnings guidance because of the uncertainty of the housing market.”
That’s never a good thing. Ceasing to provide guidance usually means “it’s looking really bad - so bad in fact we don’t want to tell you how bad”. Followed by a call by the officers to their brokers to sell everything they can before the dung *really* hits the air circulation device.
“Oh sure we’ll be profitable, but we’re not going to tell you our official results.”
That should raise major red flags right there. I mean, if you’re going to be profitable, wouldn’t you want the world to know? Especially in this industry at this point in time.
Clear Signs?
I would seriously look at steadily reducing inventory - rising at present.
Decreasing foreclosure activity and must sell inventory - rising at present
Improving credit conditions - declining at present.
solid affordability in housing, as in linked to incomes not wierd credit availability.
Some others, but these are highlights.
Another sign: A GDP that doen’t drop from 5.6 to .6 in only one year.
“What will happen when $1 trillion in adjustable rate mortgages resets in the next year? That, say Crews Cutts and Keisel, will determine whether the real estate slowdown bottoms out this year, next year or at some indeterminate time in the future.”
…as we view the mushroom in the distance of all REALTORS and NAR’s hopes…..
Things are going to fall at least 30-40% over the next 3 years….Adjustable Rate/No Principal Paid mortgages will see to that.
Market keeps going up…up…up….all that lovely created out of nowhere “cash” is feeding the beast…. can’t lower interest rates at Fed. since it will signal Weimar-style inflation and the final run on the dollar. Can’t raise interest rates since it will kill any stock market or even the scintilla of a house sale.
How long this steaming crap wagon will continue down the road is anyone’s guess. Something even minor in the daily news but in hindsight may start things off.
Something even minor in the daily news but in hindsight may start things off. ”
GDP down, inflation up, Kuwait depegs from the dollar, bond yields rising, dogs and cats living together…pick your trigger and let’s crash this pig.
“Today’s report showed pending resales declined 10.4 percent in the Northeast and 10.2 percent in the West. They increased 2.3 percent in the Midwest and 0.7 percent in the South.”
Sounds like the higher the regional prices, the bigger the regional pending sales decline.
Now Zoidberg is in charge!
“…as they look for clear signs that the market has bottomed…”
Even W gave up his search for WMD’s in Iraq!
Mortgage brokers and lenders concerned about a regulatory backlash by state officials are warning that weightier rules may force them to turn their backs on many consumers.”
Listen to these lyin’ Sacks ‘O Shite.
Spell it out boys. Say what you’re really thinking.
More government regulation means I can’t reap my previous obnoxious commission sums from screwin’ people to the hilt.
Now I’ll have to get a real job.
Yeah, no $hit. Really awful the way these clowns are being “forced” to “turn their backs” on reckless flippers and obviously unqualified borrowers. How sad that Taco Bell Jeff may not be able to buy his 200th flip house with other people’s money, and keep on pricing families (that just want shelter) right out of the market. What a shame… I’m getting teary eyed just thinking about it.
“Mortgage brokers and lenders concerned about a regulatory backlash by state officials are warning that weightier rules may force them to turn their backs on many consumers.”
Awwww, that’s so sad.
What’s next, drug dealers turning their backs on addicts?
BORROWING MONEY IS NOT A RIGHT, IT’S A FINANCIAL DECISION.
You just burst my bubble. Here I have been assuming all along that the right to borrow money to buy a home I cannot afford was a constitutional right.
“You just burst my bubble. Here I have been assuming all along that the right to borrow money to buy a home I cannot afford was a constitutional right.”
It is…just as foreclosure is the bank’s right…too bad those foreclosures cost them a ton of $$$.
you get that Stucco, buy now or be “not forclosed on” forever…..you might miss out.
the same buyers/money renters will be living in a house in San Diego long after your 100k in savings is paying you a monthly stipend.
Borrowing money….is great for the banks of the federal reserve as money is “created out of thin air” and numbers entered in log book loaned out to the serfs who labor to pay back with their recycled dollars. Why is it the government and its partner, the private federal reserve, have all the fun and profits? O, yes they do keep the value in checked, [dollar lost 98% of value since 1913 start of federal reserve] as inflation eats/destroys the dollars value but now the two income family tries even harder to keep up. Great system for the wealthy and Wall St. boys but someday the average worker will “wake up” but by then it will be to late as the trap was set and the serfs still will have to pay.
While speding so much time reading about the credit (housing) bubble, I’ve come to the conclusion that the credit/debt markets exist to benefit only one class — those who have money and make even more money from loaning it out to morons who work forever to pay it back. In addition to creating an indendured serf class, it causes cost inflation, necessitating the need for ever-rising credit markets, especially for the poor.
What’s amazing is that I (and so many others) failed to see credit/debt for what it is during the previous decades of my lifetime.
There are only two “good” reasons to take on debt:
-One is when you can reasonably assume you can make money by borrowing and paying back the money (to start a business).
-The other reason is for emergencies, like unexpected medical costs, & borrowing money could save your life or property. This isn’t a “good” reason like the first, but at least one can see why it would be compelling to borrow.
Everything else serves to raise costs while pushing the worker bees further into slavery.
indendured = indentured, obviously.
Edit button!!!
“There are only two ways to clear out the existing housing inventories: If mortgage interest rates go lower or if sellers lower their prices”
If you make 40k a year and “buy” a 600k house with a 1% fixed interest rate, the payments would be almost 60% of your PRE-TAX income and that’s just principal and interest you still have to pay for taxes, insurance, maintenance and silly little things like food. I’m going to go with option #2.
scary option 3:
let dollar inflation housing prices back in line with incomes. (in this case incomes raise (tho purchasing power is lost) to match the already inflated hoem prices)
…also known as helicopter drops.
personal income growth -0.1% last month, but money supply growing at 12%. Interesting world we live in.
Incomes down, consumer spending up… thank God for the American will to spend, right? Debt, who cares about stinking debt?
The magic wand of future inflation can make current debt dissapear — POOF!
Bingo! That is the government-sanctioned plan. Of course tomatos will be $30 per pound. Got dirt?
With the stock market going like it is, I am leaning more and more toward the “inflation” side of the inflation/deflation debate. It’s getting downright scary.
I’m on the road and blogging from the front seat of my truck (thanks for the free connection bagel company). At any rate, I thought I would report that it appears as if the entire state of Oregon is for sale. An unholy number of for sale signs, I may take a few pics. I believe the buyer pool is minuscule at this point, when compared to listings. With this much oversupply, lower prices HAVE to be on the way.
I’m tending to agree with you. The high end in Lake O. (where I’m renting) has been sitting for months with no activity.
My old neighborhood had a few “sale pendings” on signs a month ago that led me to believe things were turning up. However, those were just replaced with more inventory.
HousingTracker shows inventory to be 16,783. This is a 62% gain over the same time in 2006. If I remember correctly, 2006 inventory represented a gain of about 50-60% over 2005. These numbers also seem to correlate well with what I measure on Realtor.com and Windermere.com (SFRs and condos).
Close in to Portland (south of Columbia Blvd, north of Sellwood, east of West Hills, west of 82nd Ave.), I measure over 1000 condos for sale.
Oof.
Your bagle truck has wi-fi??
and you can type and drive at the same time? and I thought talking on your cell phone while driving as dangerous…
Yeah, that’s real comforting…someone driving down the road while blogging. A couple of years ago some clown rear-ended me at a red light while trying to read a map & drive at the same time…RIP, common sense.
I’m guessing that Bantering was **parked** in front of a bagel place.
Or are you being your usual sarcastic self, Sammy?
The only things bottoming are the realtors® and mortgage brokers. Sane potential buyers are wearing the stilettos and wielding a big cat o’ nine tails now!
(and not yet buying, of course)
I love it when you talk like that…
Told ya he wouldn’t stay away. Casey speaks:
wish I could say a lot more, but it all came down to choosing between my wife and this blog. In order to keep the marriage I had to kill my 9-month-old baby who was just beginning to walk and talk (meaning the blog starting to produce full-time income). As much as I resented having to make this choice, I love my wife and I want to do the right thing. May God help me move on and help us rebuild our lives in the right way.
Maybe Jeebus will help him now . . .
LOL!
Yesterday: “It will never be back.”
Today: “It will never be back as we knew it.”
So….what delta does “as we knew it” represent?
Wait a second. He’s put in 9 months of actual work and he’s finally got a no-RE, no-BS cash flow generating asset, something that will give his family some desperately needed income? And he shuts it down simply because his wife tells him to?
I smell a rat. Wasn’t she already trying to divorce him anyway? I bet his creditors figured out how to get at his Paypal account.
Something tells me that this marriage won’t last.
I expect to see the blog back within hours. He’s like a heroin addict who can’t leave it alone. Maybe this whole thing was a ploy to turn it into a pay site.
Taking notes, Ben? You hook the masses then make them pay for the fix . . .
Yeah he’s full of it.
If it was producing a full time income the wife would be happy.
What a lying POS.
Creepy….Now it just says “I’m sorry” in a very faint grey. Is it just my browser?
In order to keep the marriage I had to kill my 9-month-old baby who was just beginning to walk and talk (meaning the blog starting to produce full-time income).
As horror-struck as I am at the idea of Casey propagating his genes, if his wife Galina actually bore him a child [that didn't look suspiciously like me], he wouldn’t make idiotic comparisons to “killing his baby.” A blog is just a blog. A baby of his own might actually be the motivation Casey needs to get his priorities straight and start trying to make an honest living.
Banks Sell ‘Toxic Waste’ CDOs to Calpers, Texas Teachers Fund
“Bear Stearns Cos., the fifth-largest U.S. securities firm, is hawking the riskiest portions of collateralized debt obligations to public pension funds.
At a sales presentation of the bank’s CDOs to 50 public pension fund managers in a Las Vegas hotel ballroom, Jean Fleischhacker, Bear Stearns senior managing director, tells fund managers they can get a 20 percent annual return from the bottom level of a CDO.
“It has a very high cash yield to it,” Fleischhacker says at the March convention. “I think a lot of people are confused about what this product is and how it works.””
http://tinyurl.com/2sywdm
Arrrgh!
How can there be a 20% return if the original loan doesn’t have a much higher interest rate than that?
In a word, tranching.
$100 loan pool, averaging a 7% interest rate. You have $7 to split up.
You sell the top 80% of the loan to investor A–tell him that 20% of the pool would need to be a complete loss before his principal is touched. You call it the AAA piece and get guys who have more math than common sense skills to put a bunch of charts and graphs on the board. Those borrowers buy off on the hocus-pocus and accept a 5% rate on their investment. Not as good as a treasury, but pretty damn safe.
That 80% gets $4.00 of the $7 in collected interest.
You then play the same game with the next 15%. You tell them that they are in a riskier piece, but that 5% of the loan has to go belly up for them to lose any money. Risky, but 5% losers is pretty extreme, so they should be happy earning 9% on their money. This tranche gets $1.35 of the remaining $3.00.
So, you have $5 left to sell and $1.65 of interest. So, the buyer of the bottom tranche gets 20%. And you have $0.65 left over per year.
Well, pay $0.15 to the servicer (who else would want to get their hands dirty touching all this money), and you still have $0.50 to play with. Hell, let’s make that middle tranche a little bit bigger…how much can that $0.50 service at 9%? $5.55.
Cool, we sold $100 in loans for $105.55. Groovy.
You get the gist. You create a safe investment and get investors to accept a lower rate than the average of the pool, and you create a very risky investment and you can pay them more than the average.
The real science is in the marketing of these tranches. If the salesman is good, the buyers don’t know which way is up, and at the end of the day, the salesman (Wall Street) buys $100 in loans for $105 from the originators and sells them for $115 after chopping them up in these various tranches.
Why do these pension funds buy these tranches? Easy. They have Big Names to fall back on to justify their purchasing decisions. Moody’s or Fitch rated the offering, the loan pool was made up of FICOs of x or higher, and historically that means a default rate of y or lower. There is (er, um, WAS) CYA everywhere.
Too bad that when the game changed, past measures of risk become meaningless. And the CYA is going to be more meaningless as many, many AAA rated tranches lose principal (at a much higher frequency than the old models indicate). What used to be CYA is no longer going to be enough.
This is why Fitch coming out and saying FICOs give less indication of default probability when exotic loans are concerned is a big deal. It makes those exotic loans MUCH more difficult to sell to fiduciaries who previously could fall back on that FICO logic to justify their purchases to their bosses.
My head just exploded.
Jean Fleischhacker
Once again, you gotta love these names. Hey Fleischhacker, do you know Crew Cutts?
“Amy Crews Cutts, deputy chief economist of Freddie Mac says…she isn’t sure how bad the subprime market will get. ‘We’ve never been in a subprime credit cycle like this, because overnight all the liquidity evaporated,’ she explained. ‘Who will service and negotiate these loans if the lenders have gone out of business?’”
One theory: An unannounced bailout will be used to replace all the liquidity and resume qualifying buyers for mortgage loans to buy homes they cannot afford.
It seems way too conspicuous to me that Cerberus is “snapping up” failing companies like Chrysler at the same time it is making inroads to subprime lending. Are they the private partner of the PPT, in charge of preemting the future need for another post-crash mop up operation like the one engineered for LTCM back in 1998?
———————————————————————————-
Cerberus acquired control of the subprime lender Residential Capital last year, when it led an investment consortium that bought a 51 per cent stake in GMAC, the finance arm of General Motors. And in April, Cerberus, which also owns Aegis Mortgage, a subprime lender based in Houston, announced plans to acquire Option One, the troubled mortgage subsidiary of H&R Block.
Taken together, these acquisitions would make Cerberus the biggest subprime lender in the country, far ahead of large mortgage giants like Countrywide, Wells Fargo and others, according to first-quarter lending statistics from Inside Mortgage Finance.
http://www.smh.com.au/news/business/subprimes-wreckage-draws-financiers-smart-and-bold/2007/06/01/1180205514384.html
There’s more where this came from. So long as politicians are espousing the “need” for subprime lending, these kingpins may come out looking smart for snapping up subprime lending opportunities at firesale prices.
——————————————————————————–
JPMorgan quietly climbs subprime ladder
By Tim McLaughlin
Reuters
Thursday, May 31, 2007; 2:55 PM
NEW YORK (Reuters) - JPMorgan Chase & Co. is downplaying its role in subprime lending even as spectacular flameouts in that sector have turned the Wall Street bank into one of the biggest originators of risky mortgages.
http://www.washingtonpost.com/wp-dyn/content/article/2007/05/31/AR2007053101332.html
But there are also stories like this one which offer a glimmer of hope that efforts currently underway to reflate the subprime punchbowl may fail spectacularly…
——————————————————————————
SACRAMENTO
Subprime borrower rescue bill is dead
Envisioned creation of funding pool for refinancing loans
Chronicle Sacramento Bureau
Friday, June 1, 2007
(06-01) 04:00 PDT Sacramento — A bill that would have created a pool of money to help subprime mortgage borrowers facing foreclosures to refinance their loans died in the state Assembly Appropriations committee Thursday.
The measure, AB1538, was introduced by Assemblyman Ted Lieu, D-Torrance (Los Angeles County) in response to potential mass foreclosures of homes financed with controversial loans to consumers with little or subpar credit history.
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/06/01/BAGIPQ5QNS1.DTL
Nice find, GS! Glad to see it. Let’s hope all the “do-gooders” see the folly of their bailout packages & that this foolish idea would simply exacerbate the problems they are “trying to solve”.
I would guess they are preparing for the next cycle and perhaps a bailout of some type. If you can get assets at a low enough price you can take managable risk. Obviously our politicans don’t have the political will to tell people they can’t have certain things….
I guess it pays to be prepared, but isn’t this a bit premature? I mean, we have only seen the very tiniest beginnings of a correction at this point, and nobody can predict what the downstream effect of the subprime collapse will be (despite all-knowing disclaimers to the contrary from some spokesmen).
“Amy Crews Cutts, deputy chief economist of Freddie Mac says…she isn’t sure how bad the subprime market will get.
This name has got to be a joke. But yeah, I’m thinking all of real estate is due for a Crews Cutt.
Also they can generate huge fee income, package off alot of the risk (short term atleast) , pump their earnings and sell off assets when the time is right.
Buyers Look For Clear Signs The Market Has Bottomed
Ha, ha! Sellers are looking for clear signs that the market has bottomed too! Everybody’s waiting, but the sellers ultimately blink as they are the ones that usually have to make a move.
I’m thinking we’ll know the market has bottomed when That Guy finally capitulates and sells his alligator- (you know him, he’s the guy who insists on holding onto his property cause he just KNOWS the market’s about to turn around).
In our area, not before 1Q 2010.
Yeah, I know him alright….Have good weekend phillygal.
“The slowing pace of sales in the past year has irked some homeowners who hoped to sell their houses quickly. Many suburban homes and properties that cost $250,000 or more are sitting on the market longer.”
This was on bens last article and it jumped out at me. ENTITLEMENT.
Sellers are mad they are not going to get as much and its going to take some work to sell the house. Boo Fricking Hoo. This country makes me sick to my stomach at times.
I was reading about the founding of Jamestown (400th anniversary this year); seems the settlers were rich entrepreneurs folk who were not accustomed to working. Half of them ended up dying in the first year. Sorta reminds me of all these entrepreneur new-development settlers looking to make some quick bucks without working. Boo freaking hoo indeed. There’s a story that at least one of the Jamestown settlers resorted to cannibalism….
Too bad all the FBs won’t be reduced to cannibalising each other, though. It would be kinda fun to watch Nigel and Casey try to eat each other.
Yep, we are definitely into the anger stage.
We met with a couple trying to see their home at $290k (down from $300k), and they were hardly willing to negotiate because that is “what they needed” to pay off the heloc’d home loan. They were angry and frustrated and honestly thought there was some sort of conspiracy among RE agents to keep their home from selling (flat rate listing, 3% to buyers agent). Gimme a break! Lower the price morons and someone will buy it! They only had 4 total showings in 5 months! Doesn’t that give you a clue?
OT - These are direct quotes off a local blog
“Look people. There are a few truths in real estate that will always be true.
1) Real estate always goes up. Don’t listen to the numbers that say real estate is going down; that’s just biased spin by a small number of housing bears. Real estate will always go up just like the run will rise tomorrow morning…
3) Location, location, location. This construction boom has truly shown us that any cheap, postage stamp sized piece of land is good enough to build condos. It doesn’t matter if it’s in the ghetto, or a bad area, or surrounded by high power electrical lines, people will buy them no matter where you build it.”
“…you said, “the first and foremost function of my house is to keep a roof over the head of me and my family.”
The second function should be investment. The third should be the liberation of your untapped equity. Why do you want all your money tied up in your house? wouldn’t you rather have a boat on the Lake or something?”
This guy IS NOT being sarcastic.
sun?
No, “run.”…. Of course “sun.”
I gave him a pass on the typo. I do that all the time too.
I like the Scooby Doo comment better.
“liberation” of untapped equity? That’s a hoot!
“Real estate will always go up just like the run will rise tomorrow morning…”
Scooby-dooby-do…
I love his location, location, location arguement. He contradicts himself by saying you can build anywhere and people will buy. Then why is location important?
Yeah, my brain hurt after that one. Denial, denial, denial………
Now you know why builders keep building even when inventory is sky high. They believe and will continue to believe even after the bank cuts them off. When their broke, living in the back seat of a twenty year old car (because their $40,000 pick-up truck got repo’ed) they will blame the bank for not loaning them 100 grand more for just one more deal.
You must know some builders Duane! I am absolutely amazed at how confident builders are that THEIR homes will sell, even if there are hundreds of unsold new homes on the market.
I suppose you have to build if you are a builder, and provides a powerful incentive to ignore the obvious.
There are a few sensible ones, One guy I know out of Manhatan Mt quit last summer, got into another business. The reason, he got scared. It looked like the 1980’s were going happen again. Around here you have to be 50-70 years old to remember the boom of the 1970’s, and the prolonged “cruch” of the 1980’s. A lot of people moved out of Bozeman in the 1980’s so there is not a lot of memory how bad things can get. Plus there are people that don’t want anybody know about 80’s depression. A book by a local historian dosn’t have a word about it, even though the satisticts she uses clearly show Bozeman’s population stagnated and even declined during that time. Another thing, a lot of contractors are young, less then 40 years old. They never lived through a deep resession like 1979-82. If you try to expain what was like, all you get is a look like your from another planet.
A couple of years back, I flew from MSP to BZN with a local Bozeman developer/landlord. When I asked him about the future of Bozeman RE he said matter of factly, “of course it has to crash.” He knew from experience as he went bankrupt in the 80’s and took another decade to get back on his feet. But the younger crowd is cock-sure that “everyone wants to live here” and therefore RE can only go up.
Bottom line: A lot of people do want to live in Bozeman, but most need a job to make that happen.
I know a professional, private builder who started underwriting all deals a couple of years ago assuming that sales prices all would fall 20%, and only doing new deals if they still made a good profit.
Needless to say, he is currently pretty much out of the market altogether now. It’s lean times for him, but he’ll have a business when things start back up since he’s not saddled with overpriced land.
That sounds like some of the guys that made it through the oil boom. During 1979-81 they didn’t bet on oil at sky high prices, were either very conservitive were they drilled or were not drilling. After 1982, when the crash came they could buy production wells at a discount.
No way that guy’s not being sarcastic. If I had read that directly from a blog, it would seem that an HBB’er was posting it just to make fun of all the morons who were spouting that nonsense on the way up.
It has to be a joke…right?
Isn’t the perfect world for all of us sitting on the sidelines, for the market to correct itself while interest rates stay low? If I can get into a house after a 30% haircut and the 30 year fixed is still hovering around 6, I will be a happy camper.
Better for rates to go through the roof, as prices would drop more quickly. Then you could refinance into a lower rate once interest rates drifted back down to “normal” levels…
Then we’d all be chatting hear for years about how interest rates have to come down eventually….
Yeah, yeah, “here.”
As I tell my wife, if interest rates go through the roof, then those of us with cash will be sitting pretty. Right now I still have to compete with potential buyers that have no dollars and no sense.
And yes, this will also accelerate the much needed “correction”.
Yep. One of the great myths of the Great Housing Bubble: low interest rates are good for buyers.
Low interest rates are only good for current owners, as housing costs will rise to offset the savings of low rates. Everybody’s looking at monthly payments, not cost or or interest rates.
Smart buyers with cash, good incomes & good credit hope for exceedingly high interest rates. That means there’s less money to loan & lenders would be very picky about whom they lend to. That would lead to a smaller buyer pool and lower prices.
The only “good” thing for current & future buyers is LOWER PRICES. We all need to get that through our heads & make it the other “rule” (alluding to the 2.5 or 3X income “rule” mentioned by another poster). This needs to be seared into our minds for all eternity, IMHO.
Shoot, su meri, You will probably be able to buy a house on 1/6 of your net worth in 2012. That’s my own plan. People used to comprehend Personal Finance 101, when they never regarded one’s house as an investment but a place to live.
When the stock market tanked way back….a few years a go it was easy to see because of the instant reporting of the stocks and their value. In this slide or crash or implosion we have MSM and NAR and other manipulating numbers and flat out lying to people, so we have a continuation of the norm of 2005. Regardless of the norm being a bubble economy propped up by ridiculous gains with wild eyed broke buyers tongue hanging out the side of their most signing papers and getting new furniture and flat screens and cars. Kinda like people caught in a lie when you finally catch them and they sigh and shrug their shoulders and say…”ok you got me”. That is when the collective sheeple find out a year too late and say…”hunh what wait when why who where…how this happen?” Then the retarded investigations and what not happen and the proverbial sacrificial lambs are given and the damage starts to show….in this case depending on town and industry can be viewed in a soup line…who knows?
There is no prediction on bottom, it is a new market with new loans…they can’t know and it has just started. For Christ’s sake look at Nasdaq and see how their highs have recovered, this will be brutal twisting figures and lying wont change reality.
Btw….wtf?
“The index was down 10.2 percent from April 2006. The index of pending home resales is considered a leading indicator because it tracks contract signings. The National Association of Realtors’ existing-homes sales report tracks closings, which typically occur a month or two later.”
SO just the signing of the contract indicates a sale…I am confused how many people have not had paperwork go through for what ever reason? Or does this represent contracts that are done deals and people are moving into homes? Just another statistic that doesn’t represent real numbers?
The index of pending home resales is considered a leading indicator because it tracks contract signings.
I wouldn’t trust any NAR data, but in essense this tells how many homes have gone into “pending” MLS status. If this number is down 10% nationally, then existing home sales are going to be way down in the next couple of months even if all of these pending sales do go through. And since a higher and higher percentage of these are not going through, sales will actually be way, WAY down over the next couple of months… like approaching 20% down YOY. And for perspective, last year was down relative to 2005.
I say we have at least another year to get to reasonably normal prices. We have at least two years to get to the bottom. What do you guys think? The bottom in 2, 3, 4, 5, 6, or more years?
My money is on 3-4 years to hit bottom.
My money’s also on a minimum of 3-5 years before bottom. Of course, if there’s a severe recession/depression, or a deluge of failed bailout plans, that could well be prolonged — then the bottom could well be decades away.
Don’t forget the (relatively speaking) wealthy Boomers who might need to sell in order to finance their retirements. Also, as they pass away, their heirs will inherit these homes and choose to live in them, sell them or rent them out…basically adding further downward pressure on prices.
Depending on where. Let’s assume the wealthy boomers pass on the houses to their children, then they go to the children’s children. But then realize that many once upscale areas become slums or industrial areas. Very few areas stay nice and upscale for more than 50 years. I count the narrow strip of beach front property as an exception. Many places in the interior of LA used to be upscale but became slums. So much for “location, location, location!” Better to own a Roth IRA in the S&P 500 index and pass it along to other generations.
The way new houses come on line with the same old huge mark up i think it will take a depression to wake up these sellers. They are all waiting to be picked to dance at the local barn, yet they don’t see that the band didn’t arrive and the buyers aren’t going to ask them to dance?
Good one!
You’re right. New sellers are still listing at 2005 prices and trying to hold firm. They will learn the hard way…
CEO Ara Hovnanian said in the statement. He said he was confident that the company’s current strategy of lowering prices would boost sales ‘over time.’”
Don’t you just love these experts who build homes!!! They are in La La land when it comes to the economy. Affordability is the key and they are totally disconnected. I have more than enough to pay cash for a home but believe me they are way too expensive now and I will not buy until they come down in price and taxes come down accordingly. If everyone would do this prices would adjust real fast.
It amazes me so many people believe the news or the RE agent on pricing or follow their emotions. Ignorance is really expensive!!!!
Quote from earlier:
“I heard on the radio the other day that a George Mason economist predicted that in 50 years (or maybe 2050, can’t remember) the median house in the DC area will be $14 million and will be 12-14 times the median income. ”
Ah, a friend of mine told me that one yesterday, and I wanted to scream. No, no, NO!!! It doesn’t work like that. We can’t have endless housing price increases and flat salaries unless: 1) money has no value (toxic loans, no interest, 1,000 year mortgages with the first 100 years free, etc.) or, 2) the US becomes a banana republic. Now, while I certainly don’t rule out either option, this insanity that such a market with houses costing 12x salary and more is “normal” much less “healthy” is just sickening. These “experts” who say this stuff are liars and/or idiots.