Housing Environment To Remain Challenging
Some housing bubble news from Wall Street and Washington. MarketWatch, “Home-building bellwether D.R. Horton Inc. early Tuesday said quarterly orders for new homes fell 40% from a year earlier and that it expects to post a loss after impairment charges. ‘Market conditions for new home sales declined in our June quarter as inventory levels of both new and existing homes remained high, and we expect the housing environment to remain challenging,’ said D.R. Horton Chairman Donald Horton in a statement.”
“He said the builder lowered its prices in response to sagging sales. The company expects to see a loss for both the third quarter and the nine months ended June 30, after charges.”
“D.R. Horton said its cancellation rate for the quarter was 38%, up from 32% in the fiscal second quarter. During the company’s last quarterly conference call in April, executives said the historic rate was about 16% to 20%.”
“‘People put a house under contract with a contingency to sell their existing home and then they weren’t able to sell their existing home,’ said Stacey Dwyer, D.R. Horton’s treasurer. ‘Or people who put a house under contract either just changed their mind and decided not to buy right now or find a better deal somewhere.’”
From Dow Jones Newswire. “Horton added that although the company expects to report a profit from operations before impairments for the quarter, ‘we will realize significant asset impairments.’”
“On a regional basis, the value of orders in California dropped 62% to $307.1 million during the third quarter. The value of orders in the Southwest fell 54% to $409.2 million; in the Northeast, the value of orders fell 40% to $308.3 million.”
From Reuters. “‘D.R. Horton was as aggressive as anyone in buying land during the bubble years,’ said Eric Landry, analyst at Morningstar. ‘They bought plenty of land when land prices were dear. Home prices now have declined such that there are several communities that aren’t profitable.’”
From Bloomberg. “D.R. Horton said…the average price for its houses slid 12 percent to $233,672. ‘All these companies face a lot of pressure,’ said Thomas Smith, an equity analyst at Standard & Poor’s. ‘It’s a tidal wave of trouble.’”
“‘We believe housing operating fundamentals are likely to get worse before they get better given still significant levels of oversupply, coupled with first full-quarter impact from the subprime debacle and the corresponding tightening in underwriting standards,’ Robert Stevenson, an analyst at Morgan Stanley, said in a report today.”
“D.R. Horton’s impairment charges will be at least $250 million to $300 million after tax for the quarter, Stevenson estimates.”
From CNN Money. “Home improvement retailer Home Depot cut its 2007 profit outlook Tuesday, citing continued weakness in the home building market and the sales of its supply business.”
“In a conference call with investors and analysts to discuss the company’s financial update, CEO Frank Blake said he felt it was reasonable to project that there was still more of ‘[a housing correction] ahead of us.’”
“Blake warned that the housing market woes could stretch beyond 2007. ‘Housing turnover is one of the key determinants of our business and activity related to it drives about 20 to 25 percent of [customer expenditure],’ Blake said. ‘Housing inventory is now at about 5 million units. It will take time to burn that off. Therefore we expect to see continued headwinds into 2008.’”
“Standard & Poor’s said it may cut the credit ratings on $12 billion of bonds backed by subprime mortgages, prompting investors to dump the securities.”
“‘S&P’s actions are going to force a lot more people to come to Jesus,’ said Christopher Whalen, an analyst at Institutional Risk Analytics. ‘When a ratings agency puts a whole class on watch, it will force all the credit officers to get off their butts and reevaluate everything. This could be one of the triggers we’ve been waiting for.’”
“Investors criticized S&P, Moody’s Investors Service and Fitch Ratings because their ratings on bonds backed by mortgages to people with poor or limited credit don’t reflect the fastest default rate in a decade. Prices of some bonds backed by subprime mortgages have declined by more than 50 cents on the dollar in the past few months while their credit ratings haven’t changed.”
“‘We expect that the U.S. housing market, especially the subprime sector, will continue to decline before it improves, and home prices will continue to come under stress,’ S&P said. ‘Weakness in the property markets continues to exacerbate losses, with little prospect for improvement in the near term.’”
“‘We do not foresee the poor performance abating,’ S&P said. ‘Loss rates, which are being fueled by shifting patterns in loss behavior and further evidence of lower underwriting standards and misrepresentations in the mortgage market, remain in excess of historical precedents and our initial assumptions.’”
“Declines in the ABX index indicate that investors believe the bonds are worth less than their ratings suggest. ‘If you look at where the market was trading these bonds, they weren’t trading like BBB bonds,’ said David Land, a portfolio manager in at Advantus Capital Management, which owns $783 million of mortgage bonds.”
“S&P said it is acting now because many bonds issued in late 2005 and most of 2006 now have ’sufficient seasoning’ to show delinquency, default and loss trends that indicated ‘weak future credit performance.’”
“S&P also said doubt had been cast over some data it used after the Mortgage Asset Research Institute reported mortgage fraud had risen above industry highs.”
“‘The loan performance associated with the data to date has been anomalous in a way that calls into question the accuracy of some of the initial data provided to us,’ S&P said.”
“Standard & Poor’s just drove a huge harpoon into the heart of the mortgage credit bubble and it’s going to take a long time to clean up the mess once the beast finally dies.”
“The bigger news is that S&P isn’t going along with the charade any more. S&P said it would change its methodology for ratings on not only hundreds of billions of dollars in residential mortgage-backed securities, but also on hundreds of billions of dollars in the more complex collateralized debt obligations based on those subprime loans.”
“A lot of debt will be downgraded to junk status. A lot of that debt will have to be sold at fire-sale prices.”
“‘The focus this morning is on S&P and the fact that they have basically put all ratings of pending securitizations on hold. It’s not clear as to why they have taken this action, but while the cloud of uncertainty exists it will weigh on an already fragile market,’ said (a) trader.”
“‘Higher margin requirements for financed ABS and CDO positions and concerns over forthcoming forced CDO liquidations have put further selling pressure on ABX prices,’ said Christopher Flanagan, analyst at JP Morgan, noting the index is frequently used as a hedge for long risk positions.”
“U.S. credit default swap spreads hit their widest levels this year on Tuesday because of fears of rating downgrades of subprime mortgage securities and weakness in the European credit market, market sources said.”
“‘We’re definitely at our widest for the year,’ said Melody Vogelmann, credit strategist at Barclays Capital.”
The Wall Street Journal. “Moody’s and other credit-rating firms are again taking heat for the meltdown in the subprime-mortgage market.”
“Together with some analysts and academics who believe the rating agencies played a key role in the subprime crisis by giving high ratings to thousands of bonds that fell quickly in value, some short sellers also are wagering that legislators, regulators and disgruntled investors will shake up the existing oligopoly structure and put an end to its fat margins and profits.”
“‘It’s a great business model as long as you can get people to pay for it,’ says James Chanos, president of a New York hedge fund with about $3 billion in assets that specializes in short selling. ‘If they have no predictive power over that which they’re rating, then why bother?’”
“In a paper co-written with Joshua Rosner, an independent research analyst, Prof. Mason argues that the ratings agencies, including Standard & Poor’s Corp. and Fitch Ratings, as well as Moody’s, are deeply involved with investment-bank underwriters in structuring pools of assets, which places them in a more active role than simply publishing opinions on the creditworthiness of the underlying assets.”
“U.S. home sales in 2007 will drop to their lowest level since the start of the five-year housing boom in 2001 as mortgage rates and foreclosures increase, according to a forecast by Freddie Mac.”
“Several risks,- the elevated levels of homes for sale, recent increases in mortgage rates, and rising foreclosures of subprime borrowers, point to continued weakness in the months ahead,’ Freddie Mac Chief Economist Frank Nothaft said in the forecast.”
“‘The recent sharp increase in mortgage rates is tapping the brakes on the housing market just when we had expected to see the bottom of the cycle,’ Nothaft said.”
“More than two million subprime adjustable rate mortgages (ARMs) are poised to reset at much higher rates in coming months, worsening an already suffering housing market.’
“Borrowers who took out hybrid ARMs in 2004 and 2005 to secure low ‘teaser’ rates for the first two or three years of the loan may see their monthly mortgage payments climb by 35 percent or more.”
“‘In October alone more than $50 billion in ARMs will reset,’ according to Mark Zandi, chief economist and co-founder of Moody’s Economy.com. That’s a record, according to Zandi.”
“One of the reasons for the worsening situation, according to Zandi, is that just as the number of subprime ARMs being underwritten was reaching a high, the quality of loans was hitting new lows. ‘There were increasingly poor quality loans made starting in the spring of 2005,’ he said, ‘with the poorest of all made during the fall of 2006.’”
“‘Lenders wanted to keep the pipeline flowing,’ said Zandi, ‘and were hopeful that prices would grow again.’”
“Subprime ARM lending was most common in some of those once red-hot areas. According to Zandi, three quarters of all those loans were made in the California, Nevada, Arizona, Florida and Massachusetts markets. ‘Prices there are falling quickly, particularly in Florida and Las Vegas,’ he said.”
Ben B is on CNBC prattling on about “Phillips Curve”…
Excuse me while I go ingest some Phillips milk of magnesia~
Actually, he is discussing the implications of variations in the public’s expectations of the inflation situation. As a direct result of these ruminations and considerations, the population will generally avoid vacations and gas stations, and consume libations while seeking out new vocations.
For the outsiders: “Expectations” has been the mantra of CB policy for decades. Any other economic measure is really meaningless unless it effects inflationary expectations. I’m sure this is why the FED doesn’t mind dirty doctored data from BLS and other agencies.
“I’m sure this is why the FED doesn’t mind dirty doctored data from BLS and other agencies.”
Their only problem is that today’s dirty doctored data gives rise to tomorrow’s expectations shock.
and consume libations while seeking out new vocations.
ROTFL.
Its always good to be the low cost supplier of libations in a downturn.
Note: Not cheap libations, just able to produce a good product economically (e.g., sky vodka).
Got popcorn?
Neil
Notice Miller High Life’s strategy, as shown by their new commercials? I like it - basically saying that as a supplier they aren’t going to tolerate retailers taking outrageous markups. Most wholesalers (I’m one) get really frustrated by retail-gouging, although we are loathe to even suggest much less set pricing. I have one customer whose tongue-in-cheek motto is “Never knowingly undergouge the customer.” I feel like the preacher in the joke about the overly-zealous confessant: “I don’t believe I woulda told that one.”
clarification: Miller being not just a supplier, but a low-cost supplier.
tim916, you could write lyrics for Primus.
Optimus Primus?
Nah, the band led by Les Claypool.
http://www.primusville.com/home/home.html
I thought it was a Jesse Jackson impersonation. :-0
cant be, all the words are REAL.
In order to do a quality Double J impersonation: you have to slip in words like indoctrinationfide, and lambastical
I see, you have to use strategery to implace key words.
Remember folks, inflation is only a couple of percentage points a year — unless of course you’re talking about irrelevant things like college education, gasoline, or housing. But come on, how important are those things anyway?
Don’t forget food! Who needs to eat a balanced diet? PBJ’s for everyone!
We can always eat melamine enhanced food from China and still make our mortgage payments.
Clarification: “For years, producers of animal feed all over China have secretly supplemented their feed with the substance, called melamine, a cheap additive that looks like protein in tests, even though it does not provide any nutritional benefits, according to melamine scrap traders and agricultural workers here.”
And, since so many people don’t have health insurance, the increasing cost actually affects a decreasing slice of the population - right?
Nice one Tim! BTW is that a Ducati 916?
I took his message to mean, I’m not going to raise rates to help create a new bubble. I’m not going to inflate away the nation’s problems.
Dont you mean: “I’m not going to lower rates”??
ummm, yeah, that’s what I said. The post got changed by cyber space…
Damn all those reverse-psychology spyware programs.
But he also added, it’s not the FEDs job to pop bubbles.
Well, it’s not the Fed’s job to create bubbles; but they’ve certainly been doing a lot of that lately. While I think that the Fed should at least consider popping bubbles, I would be satisfied with them not popping bubbles as long as they worked hard to not create them in the first place.
Well said.
I don’t blame you. He sounded like a freshman in college, trying to speak like his professor-Acedmanic speak! Look it, he is intentionally speaking down to the public by his references to models and varialbles of those models. This is not the way to speak to the public if you intend to educate them.
This is all crap! Greenspan was good at this also. The purpose of his little talk to get you to believe that he is the “all knowing” person behing the screen.
Look, I am not a rocket scientist or even a PHD in economics, however I know when I am getting a “snow Job”!
” he is intentionally speaking down to the public by his references to models and varialbles of those models.”
The utter contempt in which the citizenry of this country is held is really breathtaking. Of course, Ben doesn’t need to concern himself with ordinary Americans, aka labor units, he answers only to the private owners of the Fed.
Well said Spike…. well said.
One of the better participants of this blog said a while back that when the Fed uses the prhase “inflationary expectations” they really mean wage demands. I’d love to see the average citizenry of this country wield some leverage and get those demands met for once. But it will never happen when J6P is competing 20 million people willing to work for $5/hr.
C’mon! We know that the shamnesty bill’s was being proposed so that they could “come out of the shadows”!
“The utter contempt in which the citizenry of this country is held” is a direct result of the past conduct of the citizenry of this country.
See… I think the whole point of the speach was to tell the markets that rates aren’t going to be changed. With all the bad news, Cramer and others would be on TV yelling that the fed HAS to cut rates now so we should all jump into the stock market.
His speach was…. blah, blah, blah, blah, stable interest rates to maintain stable inflation, blah, blah, blah, blah, stable interst rates, blah, blah, balh, stable inflation, blah, blah, blah…
You can have the first “speach” for free. You’re gonna have to throw a quarter in the pot for the other one.
You can have the first “speach” for free. You’re gonna have to throw a quarter in the pot for the other one.
Hey, c’mon. It’s not like he’s a leech, lying in the sand at the beech trying to suck your blood like a juicy peech.
Sheash!
I think he was pretty clear a few years ago “What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply.”
It is quite surprising to me that he would bring up the Phillips curve. Maybe he is trying to drop an open hint to the Wall Street bulls that protracted periods of historically low unemployment normally lead to inflationary pressures and higher interest rates?
Nah. Mr Bernanke is only following the age old formula:
If all else fails, waffle and obfuscate.
Yeah, when I hear that term I think back to guys like William Miller and Arthur Burns (do I even have the names right?) and the period preceding the 70s inflationary run-up. In many ways today feels a lot like 1971 (unpopular war and disaffected youth, long period of low inflation, rah-rah growth, inflationary pressures building, upward pressure on gold, AND people talking about an inflation/growth tradeoff).
If the Fed can think of a higher inflation number than you can, there can be inflationary growth. Unfortunately, since infinity is not an allowable solution, this kind of growth always leads to recession eventually as inflation expectations eventually have to work in reverse - once you get the eventual killer problem of inefficient capital markets caused by the high nominal interests and thus high variability of real returns on capital associated with inflation.
“In many ways today feels a lot like 1971 (unpopular war and disaffected youth, long period of low inflation, rah-rah growth, inflationary pressures building, upward pressure on gold, AND people talking about an inflation/growth tradeoff).”
Inflation is not low at the moment. Headline inflation is low.
Here’s a fine vintage from 1971…
http://www.amazon.com/Fear-Loathing-Las-Vegas-American/dp/0679785892
Yeah, when I hear that term I think back to guys like William Miller and Arthur Burns (do I even have the names right?) and the period preceding the 70s inflationary run-up. In many ways today feels a lot like 1971 (unpopular war and disaffected youth, long period of low inflation, rah-rah growth, inflationary pressures building, upward pressure on gold, AND people talking about an inflation/growth tradeoff).
If the Fed can think of a higher inflation number than you can, there can be inflationary growth. Unfortunately, since infinity is not an allowable solution, this kind of growth always leads to recession eventually as inflation expectations eventually have to work in reverse - once you get the eventual killer problem of inefficient capital markets caused by the high nominal interests and thus high variability of real returns on capital associated with inflation.
seems like a significant number to me……..
change its methodology for ratings on not only hundreds of billions of dollars in residential mortgage-backed securities, but also on hundreds of billions of dollars in the more complex collateralized debt obligations based on those subprime loans.”
S&P is going to be awfully busy in the coming weeks and months downgrading lots of bonds and CDOs.
Cue the sound of law firms hiring extra staff.
“Home-building bellwether D.R. Horton Inc. early Tuesday said quarterly orders for new homes fell 40% from a year earlier and that it expects to post a loss after impairment charges.”
That 40% off from a year earlier figure keeps coming up like a recurring nightmare…
for more excitement try 05 as a basis
I was thinking the same thing. We’re there not some analysts last year who said 07 would a good year for the HBs because 06 will provide EASY YoY comparisons?
I cannot help but notice that *no one* in the REIC compares to 2005… But they should. That was the peak.
Bwaaa haaa haaa ha!
Oops, that came out loud, didn’t it? It seems that every quarter the number of vacant for sale homes shoots up some ungodly amount… To the point that with the construction that *will continue* in Huntsville, Houston, Austin, Charlette NC, and the few other growth markets… the overhang won’t stop growing. But the population will shift. ~1/4 of my coworkers are talking about moving out of state. Now that means ~6% will… but that is still significant.
Got popcorn?
Neil
A new route to work offers an eagle’s view of an unbelievable amount of new construction underway in 92127 (Rancho Bernardo West). Build away, boys!
I’m warning all my customers that buy/sell construction equipment of the construction industry meltdown.
Back in 2005/2006 a person could make a nice wad of cash retailing construction equipment ( dozers, skiploaders, backhoes, etc). Now the contractors/ builders are dumping their equipment at auctions or are going bankrupt. Earthmoving equipment is selling for nothing, with auction yards filled with good low hour units.
I’m warning my retailer customers to switch away from contractor customers (who don’t have any more money) and stock equipment that can be sold to other types of business operations that are not connected to construction.
I always wanted my own earthmover. Simply clear out a few rows of cars for easy mall parking or park that some bitch wherever you want. Good luck towing it away!
Well, unfortunately, you’ll get taken down eventually. Remember that tank in SoCal?
http://youtube.com/watch?v=3vESIVemfG8
Aint the internet great!?
We had a similar chowderhead in Tucson:
http://www.freerepublic.com/focus/f-news/1424861/posts
He didn’t get a lot of sympathy around here.
Stop that, Bots, you’re making me laugh out loud!
I have noticed a trend, in that equipment rental places have their lots PACKED with equipment these days. A year ago there was nothing but open lot around the buildings. This would be in Pinellas County FYI.
I saw this while driving on I-4 between Tampa and Orlando in June, I drove by an auction business and there were acres of construction equipment lined up and idle.
An acquaintance of ours built a gigantic home w/all the necessary amenities to stay ahead of the pack (in a strangly run down neighborhood) He built this after several years of making lots of money moving used construction equipment via an e-bay type set up. Every time I drive by his gated driveway (which has 4 atv’s and assorted other outdoor equipment outside with a painted phone number) I wonder how that mortgage is looking now.
Clearview,
Gotta wonder if some quality iron couldn’t be picked up “dirt cheap” and later exported at a considerable profit, especially considering future exchange rates.
Bernanke makes it clear that he is no Greenspan.
http://biz.yahoo.com/ap/070710/bernanke.html?.v=8
“If investors, consumers and businesses feel confident that the Fed will keep prices stable, the Fed chief suggested, they may be less inclined to act in ways that could aggravate inflation.”
I’ll attempt to translate…
Hey all you guys on Wall Street that hope I’ll ignight another bubble to save you from your past stupid bubbles… NO!
“…feel confident that the Fed will keep prices stable…”
How would they behave if they did not feel confident the Fed will keep prices stable? Would they stop putting money into savings (resulting in a negative national savings rate) and instead speculate in real estate, precious metals and stocks?
I was at a party last weekend and met a Hedge Fund manager. When I asked what he thought of the current economy. He said that there’s a lot of people nervous in NY. When I asked why he thought the Stock Market was going up. He said it was because people don’t think Bernanke/The Fed will increase interest rates. Because money is cheap right now traders are getting crazier and crazier to take advantage of it. He also mentioned that puts are getting more and more expensive. This indicates that people believe the market is going to change in the near future.
I don’t want my money is his fund (not that he’d take it). First stocks are up for two reasons: Private Equity, Private Equity and Private Equity. The first PE puts a premium on all stocks for potential buyout. Secondly, it creates a huge public equity shares shortage by the removing large publicly traded firms from the markets. Thirdly, the buyouts put money back in the hands of fund managers that needs to be reinvested in the ever shrinking pull of public equity.
Not every company is being bought out to go private but their stock prices are still going up. To me what he said makes sense. If you have no threat of the price of money going up it allows you to be crazier with debt.
EVERY company has the potential to be bought out int he current environment. Good, bad and ugly are all fair game for take overs. In the past closely held and poison pills left some out of the party. But the buyout premiums are so high, any and all stake holders can be bought out.
“EVERY company has the potential to be bought out int he current environment.”
Prima facie evidence that BB has not stopped spiking the punchbowl…
Maybe stocks are going because the dollar is going down.
Companies with overseas income will do better, and who wants bonds now anyway?
The only Bonds of which i’m particularily fond…
http://www.youtube.com/watch?v=WMIS0Nw49FA
They aren’t making any more stocks you know….
In an irrationally euphoric market, risky leveraged bets pay off…till the market turns.
Because money is cheap right now traders are getting crazier and crazier to take advantage of it.
Most of the purchasing on the market has been done via margin and nobody wants to receive that call when the market fails. The stock market is the next bubble that will pop.
Yup! Like today, for instance!
‘S&P’s actions are going to force a lot more people to come to Jesus,’
Weak and wounded sinner
Lost and left to die
O, raise your head, for love is passing by
Come to Jesus
Come to Jesus
Come to Jesus and live!
http://www.anysonglyrics.com/lyrics/c/chrisrice/Untitled-Hymn-Come-To-Jesus.htm
Or Allah.
Or Krishna.
Or Buddha.
Let’s not take sides.
“D.R. Horton said…the average price for its houses slid 12 percent to $233,672. ‘All these companies face a lot of pressure,’ said Thomas Smith, an equity analyst at Standard & Poor’s. ‘It’s a tidal wave of trouble.’”
Kilgore: You either surf or you fight.
S&P pulled the plug today on the whole CDO/Housing mess. . .today is a red-letter day. . .from here on out, it’s a new ballgame.
Here is a link to the news about the S&P decreasing the subprime fund bond ratings
I think now things will really start rolling down hill
http://money.cnn.com/2007/07/10/real_estate/Subprime-bond-ratings-to-be-slashed/index.htm?postversion=2007071013
The article is a little confused, but it seems to indicate that a median price decline of 8 percent is predicted nationwide in nominal dollars from 2005 to late 2007 (plus inflation) with a 22 percent decline for homes covered by subprime loans.
Of course, if the delinquency problems eventually affect prime loans as well…
Forgive me, ’cause I’m no financial genius. But I was reading somewhere recently that the REAL bust would occur when the subprime investment packages were downrated, because the various funds had internal rules that allowed them to continue to value these things at basically whatever they felt they were worth unless/until the ratings were dropped — at which point, they would have to sell them (because their rules dictate that they can’t hold investments that are lower grade) and then the value would be more accurately reflective of what the market felt they were worth. Which I believe, when someone tried to sell recently due to the Bear Stearns problem, they were offered less than 15 percent? If this is the beginning of the actual real market devaluation of the subprime funds, then it’s supposed to be pretty disastrous.
I think that many hyper-leveraged funds are now worth negative values. The funny thing is a subprime prime mortgage is a hyper-leverage on an asset — and fundies bought hyper-leveraged bonds based on hyper-levarged mortgages. Less than zero will be on the screens of many holdings real quick.
Whoda thought that evang fundies and hedge funds would bring this country to it’s very knees?
“Less than zero will be on the screens of many holdings real quick.”
and coincidentally, here’s the expression of a hedge fund manager today…
http://www.lazydork.com/movies/lessthanzero.jpg
Basically, you’re right. Most pension funds and other similar investors have internal rules that prohibit them buying or holding junk bonds. Hedge funds typically do not have such a prohibition.
The problems will start when pensions and other investors are forced to sell their MBS and CDOs because they are downgraded to junk status. These forced sales will show what the true market price is for these securities (and maybe show an even lower value than a true market value since the sellers are forced to sell at any price - true market value is what a willing buyer and seller would agree to). This will provide new pricing data for these securities, and it will be hard for others not to revalue their holdings based on these new prices.
Currently, most of the investors holding these types of securities have not marked their holdings to market, because these securities are sold so infrequently that there was not really a good market price for them to mark to (so, for the most part, they were marking to model, with the faulty assumptions on which their models were based). Once the downgrades occur, we should see a lot more hand wringing (and references to blood in the streets) like when the Bear Stearns hedge funds imploded.
At this time, we should also start to hear about counter-party risk associated with the credit default swaps. Interesting times ahead.
Ah, counter-party risk.
But I had my massive loss hedged by this defunct firm! I paid them huge money for the hedge (and they paid huge bonuses before going out of business)!
Wouldn’t pension fund bylaws against purchase of junk bonds thereby block investment in hedge funds? I keep reading about pension funds adding allocations of capital to “alternative” asset classes…
I suspect that Moodys and S&P will downgrade very few of the securities to below investment grade. As you noted that would mandate liquidation by a lot of investors.
I also suspect that many, if not most, of the hedge fund managers and investment advisors will alter their pricing models to offset some of the mark down that a ratings downgrade would otherwise indicate. Of course that would be a tricky move legally. But given the choice between big fund withdrawals today, and possible litigation/prosecution tomorrow, I suspect most of the fund managers will take the short-term strategy.
IMO, the ratings agencies are downgrading because they are being used as scapegoats (rightly so, in addition to many more) & risk major lawsuits.
They will have no credibility if these problems are out in the open, with EVERYBODY watching, and they don’t properly rate these MBSs & CDOs. If they have no credibility, they are done.
“In a paper co-written with Joshua Rosner, an independent research analyst, Prof. Mason argues that the ratings agencies, including Standard & Poor’s Corp. and Fitch Ratings, as well as Moody’s, are deeply involved with investment-bank underwriters in structuring pools of assets, which places them in a more active role than simply publishing opinions on the creditworthiness of the underlying assets.”
The key point is the construction of tranches. By their very nature, the rating agencies have to be involved, and they have to be on the very edge of being downgraded. The idea behind tranching is this… suppose we collected together $100 million in debt securities (say, some BBB rated subprime REMIC tranches, etc.) We then want to issue X dollars in bonds that are rated AAA, Y dollars in bonds that are rated A, and we will hold the rest. To maximize our income, we will want to make X as large as possible without losing the AAA rating, and then make Y as possible without losing the AA rating. How do we do that? Most likely by talking with the rating agencies… “Hey, S&P, suppose we issue $80 million in senior tranche and $10 million in mezzannine tranche, with $10 million in first-loss (equity) tranche (which we will keep). Will the two tranches be rated AAA and AA?”
We would keep nudging up X until the senior tranche is as close as possible to losing the AAA rating. Sort of like the Price is Right. So, we have to work very closely with the rating agencies (and, I am sure, they get paid for their ‘assistance’), and the tranches are right on the edge of being downgraded. By necessity, ANY unexpected bad news will cause all such tranches to be downgraded. This is independent of the quality of the underlying securities in the CDO…. if we collected REMICs bonds based on prime, aged mortgages (or even Fed insured mortgages), we would just make the size of the AAA tranche larger, until it was at the edge of losing its AAA rating.
Because of this, I think that this downturn has guaranteed that ALL tranches of all CMOs (based on any kind of mortgage) are going to be downgraded eventually. Of course, they will try to keep attention on the securities that are most likely to show immediate disaster (highly leveraged investments in subprime- the margin calls will force their hand). But ALL of the CMOs are due to be downgraded (possible exception- Ginnie Mae/FHA/VA mortgage-based securities because of the gov’t guarentees- though these even are probably showing some problems due to rising interest rates).
An important question- has it reached the point where any pension fund managers who invest in CMO/mortgage-based securities are abusing their fiduciary responsibilities? Or can they stick with the ‘it’s only subprime that is a problem’ line?
Good points, AKron.
Also, how could the fund managers NOT be abusing their fiduciary responsibility. Everything was predicted here & in other blogs years ago. If **we** knew it, they certainly should have.
YES!
“…at which point, they would have to sell them…”
Look for some kind of PPT-sponsored deus ex machina to circumvent this rule (kinda like how Fannie Mae stays listed on the NYSE despite its inability to produce timely financials)…
Wow, potent implications toward some fast moving changes.
“The bigger news is that S&P isn’t going along with the charade any more.” I would take that to mean that they, til this point, have been willing conspirator.
“S&P said it is acting now because many bonds issued in late 2005 and most of 2006 now have ’sufficient seasoning’ to show delinquency, default and loss trends that indicated ‘weak future credit performance.’” Ah, love this quote! New financial talking point ‘Sufficient seasoning’. Comes right from the kitchen only they weren’t cooking food they were cooking loans.
Yep. And the recipe is:
1. Add 2% teaser rate
2. Mix subprime lenders with borrowers
3. Don’t forget to marinate with “real estate always goes up” spice
4. Leave to cook for as long as possible
5. Explain any burning smell as exotic aroma.
6. Shut door to contain smoke from kitchen
And voila. Subprime haute cuisine.
Greenlight is still advertizing on the financial channel no doc loans and while I was typing my answering machine recorded a cold call from a mortgage lender stating they had a one week special refi at 1%.
I love how money.cnn.com always has the “Mortgage rates have fallen again!” advertisement even when we’ve watched them shoot up, then creep up further.
A lot of these companies must be desperate to keep bringing in clients to keep the revenue stream going, and I’ve been amazed that you could still get toxic loans from ANYWHERE. I’m guessing the S&P downgrading show that’s just getting started will REALLY put the nails in the coffin of truely toxic loans.
I just saw an ad for Redlight mortgages. 20% down, income documentation, fixed rate.
…smirk. They have to do something with the pre-bought air time.
I stand by my prediction that 25% down, excluding FHA, will be required in the darkest days of this downturn.
Got popcorn?
Neil
I got one of those in the mail. The fine print say to qualify you need a FICO of 720, and they will do LTV of 70% on a primary, owner occupied residence.
How many refi’s will qualify under those requirements? How many homeowners like me who would qualify are there who need or want to refi?
I would say ZERO is the answer to both.
Notice how there are way fewer online mortgage ads online Yahoo Google and the rest are going to be hurting I’d say just 3 months ago 1 in 4 ads were mortgage related now like 1 in 10 and dropping.
Hmmm, ad revenue drops, and stock price falls. Nope, no spillover at all.
“Declines in the ABX index indicate that investors believe the bonds are worth less than their ratings suggest…”
Worth less or worthless?
Worthless, definitely worthless.
IIRC, the ABX index will overestimate the actual status of mortgage-based securities, due to survivor bias. I once read the prospectus of ABX (yawn…snnnnnxxx…snore…) and, I recall that it had procedures in place for replacing securitizers/lenders who fail to regularly submit information on the status of their securities. So, it may be that defaulting and bankrupt lenders will be systematically replaced in the pool that is used to define the ABX values. A short seller of ABX might be a bit miffed about this…. If this is right, the ABX will be increasingly rosy compared to the situation in the streets. Sort of like Fox reporting on Iraq…
“‘The loan performance associated with the data to date has been anomalous in a way that calls into question the accuracy of some of the initial data provided to us,’ S&P said.”
They aren’t called liar loans for no reason. Of course the data they had was flawed, mortgage fraud has been rampant.
is it me or does the market seems priced for
1. oil heading back to the 50’s
2. housing to turn up any minute
3. war to end tomorrow
Well, that seems to be the way it is priced, but not the way it SHOULD be priced.
It must take massive helicopter drops to keep that pricing in LaLa Land.
Ben makes this entry, and the S&P drops .5% in minutes.
The timing coincided with the PPT manager’s bathroom break
Actually, I just went long yesterday afternoon. That’s the signal that the market is about to crash.
Kid you not, back in Sept of 2006, I bought a bunch of short positions/puts & look what happened. Literally, the next day everything shot up & has kept doing so until today (right after I went long).
**I** am the buy/sell signal!
“If investors, consumers and businesses feel confident that the Fed will keep prices stable, the Fed chief suggested, they may be less inclined to act in ways that could aggravate inflation.”
——————————————-
wanna bet Kitco ignores this? time to exchange gold for cash..
so much for all the useless handwringing about helicopters…
got deflation?
I don’t understand your reasoning.
I also don’t understand your reasoning. Rhetoric about containing inflation without follow-up action is inflationary.
Well put, Stucco.
Correct Stucco….watch what BB does, not what he prattles about in a lecture hall….
helicopter drops at night are coming.
And even if BB follows a tighter-than-HBB-expected line, I feel he’s a one-termer. Doesn’t have the Volcker/Greenspan gravitas - no Congress(wo)men will feel any worry about putting an inflater in charge and sending him to the brown pastures of High Plains State U., where he can be chairman of the Econ. Dept., which appears to be a better job fit for him.
Note: I realize the Pres appoints the Chairman, but Congress must approve and if Congress and Pres are of same party (likely to be - D) certainly Congress can gets its way.
That’s a mighty big “If.” Personally, I don’t feel confident that the Fed will keep prices stable. They monkey with the numbers all of the time, and simply ignore food and gas prices (people don’t actually buy food or gas, do they?) when looking at their “preferred” measure of inflation.
Now, if the Fed would actually take action instead of merely trying to talk down inflation, maybe I would have a little more confidence. But until the Fed actually acts in way that shows that it is and will be tough on inflation, I simply don’t have confidence in them. That being said, I guess I am acting irrationally since I continue to save money instead of spending it and going into debt despite my belief that inflation is too high and will remain too high.
Anyone remember the young couple that had been featured in CNN Money from Visalia California? They were wanting to relocate back to New York and she was the deed holder. They got caught in a lottery during the buying process, Lenar homes, and were trying to unload their place for $369,000. Well it finally sold for $280,000. I feel more sorry for the new buyers than the loss the last owners took.
http://www.zillow.com/Charts.htm?chartDuration=1year&testAds=false&zpid=64680883
Did that include cash back to the buyer?
Pretty zesty Zestimate ($340K)… sure, it just gained $60K in value! Thereby pointing out the weaknesses of Zillow’s algorythms.
I’ve seen Al Gore try and dance. White boy’s got no rhythm to speak of.
I’ve seen Al Gore try and dance. White boy’s got no rhythm to speak of.
Al Gore’s rhythm. Ha!
God I love corn.
A Fool explains subprime. I almost spit my lunch out on this one.
‘As Buffett aptly said, “Price is what you pay; value is what you get.” Just like a stock, property is undervalued at one price, fairly valued at another price, and overvalued at yet another. The goal is to buy the first, avoid the second, and sell the third. Maintain this discipline all the time, and you will never have to worry about what cycle of the market you’re in.’
http://www.fool.com/investing/value/2007/07/10/the-skinny-on-subprime.aspx
I think we know why gold jumped yesterday…. some people knew S&P was going to kill the value of a dollar today by destroying the equity fund pnozi scheme. Heck, even the chinese knew since they let the Yuan slip a lot more than usual last night.
MARKETWATCH FIRST TAKE
S&P finally says subprime is mostly junk
Commentary: New methodology is death knell for the troubled industry
Hedgies to investers: “So long, suckers!”
BwaHaHaHaHAA!
The next shoe to drop: WHO STOLE MY PENSION???
“A lot of debt will be downgraded to junk status. A lot of that debt will have to be sold at fire-sale prices. A lot of pension funds and hedge funds that once thrived on the high returns they could get from investing in subprime junk will now lose a lot of money.”
“The next shoe to drop”
It’s more like dominoes _ _ _ _ _ _//////////
It’s more like dominoes _ _ _ _ _ _//////////
I think you mispelled that - _ _ _ _ _ _/|||||||||
In a paper co-written with Joshua Rosner, an independent research analyst, Prof. Mason argues that the ratings agencies, including Standard & Poor’s Corp. and Fitch Ratings, as well as Moody’s, are deeply involved with investment-bank underwriters in structuring pools of assets, which places them in a more active role than simply publishing opinions on the creditworthiness of the underlying assets.”
Just like the dot-com boom with the analysts (Jack Krugman comes to mind). These folks need JAIL time. Fines don’t do the trick… Gitmo might.
Got a link?
http://online.wsj.com/article/SB118403059118261648.html?mod=hps_us_at_glance_markets
Moodys & S.&P. are filling the dance card, in a desperate attempt to not be andersonized, if you know what I mean and I think you do…
“‘Lenders wanted to keep the pipeline flowing,’ said Zandi, ‘and were hopeful that prices would grow again.’”
Greedy lenders = Loses for consumers, pension funds, investors and the housing industry! Who will be their next victim?
The U.S. macroeconomy.
Oh please! The entire country is filled with greedy ghouls - lenders, borrowers, pensioners, investors, the REIC - who want a free lunch, to have their cake and eat it too, to not have to work for a living.
No slave working his a$$ off so you can sit on yours = no retirement.
No lender willing to lend you more than you can ever hope to pay back = back to the white trash trailer park/barrior/ghetto where you belong.
Oh, and don’t bother to post re: ‘I paid into social security/pension/retirement fund all along.’ Sorry sap - the money’s gone and/or the yield isn’t there to support your sorry butt. Don’t give up your day job.
Contain this…
S&P Puts Subprime-Backed Debt
On Notice of Possible Downgrade
By ANUSHA SHRIVASTAVA
July 10, 2007 3:11 p.m.
Standard & Poor’s said it expects the majority of the 612 classes of mortgage-backed securities it put under review Tuesday to be downgraded “beginning in the next few days.”
In a press release, the rating agency also said it is reviewing the credit ratings of collateralized debt obligations — complex securities that have been under the spotlight since two Bear Stearns Cos. hedge funds stumbled recently — that contain any of the affected mortgage bonds facing downgrade.
CDOs are structured financial products that are backed by collateral such as subprime mortgage bonds.
The announcement about the potential downgrades sent shivers through the credit markets, as such action could spark broader selling of these mortgage bonds and a repricing of these assets that are difficult to trade.
http://online.wsj.com/article/SB118408289722162161.html?mod=hps_us_at_glance_markets
Question for anyone who thinks he (she) knows: Will a move by S&P to report the ugly truth about subprime MBS cause more subprime hedge funds to blow up?
OK everyone, I need to smile. I just got back from a trip to Colorado, and I am pissy. Before I say anything, let me just say I am in NO WAY considering buying anything for many years. With that out of the way, I’m pissy because there is a town in CO that my wife and I love - Frisco (and all of Summit County really) - where the wishing prices are still increasing compared to last year. For Dillon Valley condos, I’m seeing increases of 10%+ since last April. In Frisco, there was a FSBO townhome - I forgot the specifics, I already burned the flyer - but I believe 2 bed, 2 bath, single garage, definitely UNDER 2Ksf2, plain vynyl siding, etc, for $489K, $489K!!!! This place would have brought $200K OR less just 5 years ago. Funny thing, the flyer said, “Won’t last long, I’ve already had three offers in two weeks!” Excuse me, but then why not take one? Oh, under $450K? Next. Oh, can’t get financing? Next. I hope they burn. PLEASE HELP IMPROVE MY MORALE!!
For the Colorado challenged, Summit county is ski resort country (Boulder is cheap by comparison, but you can’t ski in Boulder).
Overpriced? Sure. But as long as there are wealthy bozos who want a condo out that way, it will be expensive.
Argghh. That didn’t help. I hope the “wealthy bozos” are fleeting, MEW cretins that need to get out of their “investment property”.
Test
Hmm, that’s one’s OK, I wonder where a couple of my others went.
Is it because I said pissy?
They’re going to need a Bigger Fan.
There is a Ton of $hit about to hit IT and that is only the 1st installment
Good thing Google and Apple stock always go up…
The DOW is heading down. It will be interesting to see what happens in the morning! Financials are going to take a big hit. All housing stocks will get hit some more. Any bets?
Yes, interesting indeed. Down about 145 on the DOW as of this minute.
I bet the PPT will contain the selloff currently underway, through a deluge of liquidity and with the aid of many noise traders who believe the stock market always goes up.
Sorry GS, There is not as much liquidity as one would believe. Liquidity started drying up a couple of months ago. First place I noticed ripples was in insufficient funding for LBO debt on proposed take unders.
The liquidity ripples have been turning into waves, soon to be whitecaps and then ?
In related news, the company I work for is growing by leaps and bounds (100% increase in one year). Yet, we have a liquidity crisis. There are two principle reasons for this.
1. Hiring new employees (a couple more than needed) to meet demand.
2. INFLATION in our prices paid to producers.
It’s funny when a business has $4MM a week in receivables and nothing left over. Makes my forecasting hairy.
It is scary when you cannot get financing on accounts receivable and future promises.
sounds more like a working capital crisis.
Yes, it is indeed a WC crisis. If you retain all your earnings, you can only grow so fast. Above that rate, external financing is needed. The factors you mentioned play a role, certainly, but you often just can’t grow that fast without outside financing.
But can’t liquidity be printed to replace whatever has dried up? And if not, then why?
I think the FED is finally afraid of a dollar crash.
Subprime woe is back…but when did it ever leave?
FINANCIAL STOCKS
Brokers fall as subprime woe back with a vengeance
By Greg Morcroft, MarketWatch
Last Update: 3:52 PM ET Jul 10, 2007
NEW YORK (MarketWatch) — Shares of major U.S. brokerage firms took a beating on Tuesday as fears about a meltdown in the subprime mortgage market spooked investors
http://www.marketwatch.com/News/Story/brokers-fall-subprime-woe-back/story.aspx?guid=%7B4D9AB151%2DC185%2D4DFC%2D9906%2D2F7699B67275%7D&dist=RNPullDown
I’ve been looking up any house I see for RENT in the clerk of court website. If I see on the contract that they state they are living in the house and aren’t investors, I notify the one holding the mortgage (because the person should be paying a higher interest rate) and I notify the tax collector, because they should be paying higher taxes : ).
Nasty! I like it >; )
How do you do this, and what area are you in? I’m intrigued.
This might affect the taxes but I doubt the lender will do anything.
Some properties that were legitimately owner occupied sometimes become rentals.
Unless you can prove they blatantly lied on the loan application, I don’t see the lenders doing anything.
Interesting side note, again another douche bag foreclosure in Cali left behind their animals. This one was in the pool a 3 foot gator,…..nice. I really would like to throw these ass clowns in a roomy box and let them starve to death slowly, I bet it would suck…..just a guess.
“In todays Applied Mathematics class we’ll look at this graph:”
http://www.sddt.com/Finance/graphs/9416cabac7bb678d4694cda4956.png
“Can anyone tell me what it shows? Yes, David?”
DL: “Real estate always goes up!”
“No, sit down and be quiet. Yes, Ben?”
BB: “The subprime mess is contained!”
“No no no. Yes, Karevoll?”
JK: “The San Diego market has stabilized. There’s no indiscernible trend.”
“Idiot! No, this is an exponential function. Like the growth of bacteria or destruction of a falling house of cards.”
As usual, you can get the historic perspective by putting in 1982 as start year:
http://www.sddt.com/Finance/EconomicIndicators.cfm
Analyze this, Karevoll!
That is stunning. Hard to believe that anyone could look at that graph (starting in 1982) and calmly bleat “Subprime is contained.”
Given the population and consequent increase in number of housing units, if things flattened now it would be slightly better than 1985 and 1990s.
Or nuke-a-ler(as our pres would say) chain reaction detonation.
OK, so does anyone want to bet that today marks a major turning point w/ the newfangled S&P commitment to coming clean on subprime asset carnage?
Right now, the financial powers that be, are stacking every media outlet they can with their message: “Remain calm, all is well!” As my Father told me many years ago; “Banking is the biggest confidence game there is”.
Yes, GS. I think today’s happenings are BIG news. Of course, I’ve thought many things were big news the past few years (Freddie & Fannie blow-ups, yuan revaluing, initial subprime “crisis”, etc., etc…).
Let’s hope it finally gets done.
“Prof. Mason argues that the ratings agencies, including Standard & Poor’s Corp. and Fitch Ratings, as well as Moody’s, are deeply involved with investment-bank underwriters in structuring pools of assets, which places them in a more active role than simply publishing opinions on the creditworthiness of the underlying assets.”
Again, this is hardly news to anyone who read “Fiasco” nearly ten years ago…
Houston a growth market? Residential sales are slowing here also.
http://tinyurl.com/2wowxx
It wouldn’t surprise me if Mr. Nutting of Marketwatch is reading this blog. His article below could have been written by a bunch of the posters here. The tone and frankness is stunning for the MSM.
http://tinyurl.com/3888cj
“A lot of debt will be downgraded to junk status. A lot of that debt will have to be sold at fire-sale prices. A lot of pension funds and hedge funds that once thrived on the high returns they could get from investing in subprime junk will now lose a lot of money.
S&P’s announcement is a death warrant for the subprime industry. No longer will mortgage brokers be able to help buyers lie their way into a home. Fewer stressed homeowners will be able to refinance their mortgage, thus extending and exacerbating the housing bust.
“We do not foresee the poor performance abating,” S&P said.
Prices will fall, and foreclosures will rise. More mortgage fraud will be uncovered as the tide goes out.
And hedge funds will have to find another way to beat the market — if they survive this blow, that is. “
Great article from WSJ’s Justin Lahart on the Bears Stern Zombie funds. Dead, but still walking around. 3.2 Million spent to keep it walking, but why?? To buy time, and time is money, time to shuffle things around and move money around. Also, to forestall the start of another economic depression. By now they have figured that the 600 million invested per square acre in Detroit on refi’s to soon to be layed off auto workers who gladly spent it all on new stainless steel kitchens are not going to pay it back and are in foreclosure. No matter how thinly you spread the risk around to different peoples’ 401K’s, if the “investment” is 100% negative it is still a big loss. If you invested $100,000 of your retirement monies in this fund, I think they will give you $3,000 for it today. Did people know that their retirements depended on lower income and uneducated people doing the right thing when handed a $100,000 windfall??
http://online.wsj.com/article/SB118299432485350979.html?mod=rss_Ahead_of_the_Tape
Correction, I meant to say that $600,000,000 was doled out in Detroit per square mile, not per square acre. Try to get the link if I can.
Here is the link:
http://online.wsj.com/public/article_print/SB118047548069017647.html
“The bankers, in turn, transformed a large chunk of the subprime loans into highly rated securities…. The investors cared much more about the broader qualities of the securities… “You have no time to look really deeply at every single borrower,” says Michael Thiemann, chief investment officer at Collineo Asset.”
Of course the joke now is that 100% of the borrowers were/are in bad shape and 100% of the loans are Zombies- dead, but still walking around.