Difficult Conditions Worsened In The Second Quarter
Some housing bubble news from Wall Street and Washington. Bloomberg, “Builders in the U.S. unexpectedly started work on more homes last month while permits for future construction fell to the lowest level in a decade, suggesting a recovery from the housing slump may not be quick.”
“Housing starts rose 2.3 percent to an annual rate of 1.467 million, led by an increase in apartment buildings, the Commerce Department said today in Washington. Building permits fell 7.5 percent to a 1.406 million rate.”
“A glut of unsold homes suggests the slump is not over. There were enough homes on the market in May to satisfy 7.1 months’ worth of demand at the current sales pace, the government said last month. The supply of existing homes was 8.9 months, the most in almost 15 years.”
The Associated Press. “Home builder Pulte Homes Inc. said Tuesday it expects to report a hefty loss from continuing operations for the second quarter, due to large charges and a worsening consumer environment.”
“Pulte said Tuesday that it expects to record impairments and land-related charges…to reflect the decreased value of unsold homes on its books and for walking away from deposits on land it no longer wants to buy.”
The Street.com. “The loss comes as Pulte’s orders for the second quarter slid 20% from a year earlier to 7,532 homes. The company closed on 5,938 homes during the period, a drop of 40% over the prior-year quarter.”
“‘The difficult conditions that plagued the homebuilding industry in the first quarter of 2007 worsened in the second quarter, with increased competitive pricing pressures, elevated levels of new and resale home inventory, and weak consumer sentiment for housing affecting the entire industry,’ said Richard Dugas Jr., CEO of Pulte Homes, in a press release.”
“Shares of Novastar Financial Inc. continued plunging Wednesday amid doubt a $150 million injection of cash will be enough to sustain the mortgage lender.”"
“Friedman Billings Ramsey analyst Scott Valentin called the $150 million cash injection a ‘Hail Mary.’ He said he does not think it will be enough ‘to ensure NovaStar’s viability, barring a significant improvement in subprime capital markets conditions.’”
From Reuters. “Alliance Bancorp Inc. has filed for Chapter 7 bankruptcy protection and will liquidate, becoming the latest residential mortgage lender to collapse in the U.S. housing downturn.”
“Alliance differed from most struggling lenders in that it specialized in ‘Alt-A’ home loans, rather than ’subprime’ loans that have caused the greatest problems.”
“JPMorgan Chase & Co. said on Wednesday it tripled the amount set aside for loan losses as even borrowers with good credit defaulted on home equity loans.”
“JPMorgan Chief Financial Officer Mike Cavanagh said losses on home equity loans to prime borrowers, or those with good credit, will steepen, partly because U.S. housing prices have flattened or fallen in some areas.”
“The bank set aside $1.53 billion for loan losses, up from $493 million a year earlier. The increase was driven by higher loss estimates on home equity loans where borrowers had little equity in houses whose values are falling.”
“‘It’s definitely a change in trend that we’re reacting to,’ Cavanagh told reporters.”
“Bear Stearns Cos. told investors in its two failed hedge funds that they’ll get little if any money back after ‘unprecedented declines’ in the value of securities used to bet on subprime mortgages.”
“‘This is a watershed,’ said Sean Egan, managing director of Egan-Jones Ratings Co. ‘A leading player, which has honed a reputation as a sage investor in mortgage securities, has faltered. It begs the question of how other market participants have fared.’”
“Estimates show there is ‘effectively no value left’ in the High-Grade Structured Credit Strategies Enhanced Leverage Fund and ‘very little value left’ in the High-Grade Structured Credit Strategies Fund, Bear Stearns said in a two-page letter.”
“The larger fund, which had $925 million of capital in March, is down about 91 percent this year, according to a person with direct knowledge of the performance, who declined to be identified because the figures aren’t public. It borrowed almost $9 billion, and its remaining debt was taken over by Bear Stearns in the bailout.”
“Douglas Sipkin, an analyst at Wachovia Corp., said today in a note to clients that most securities firms probably reduced the value of their mortgage assets during the first half of the year. Any holders that continue to overvalue CDOs and subprime bonds will have to mark them down to market this quarter, he wrote.”
“Countrywide Financial Corp.’s bonds weakened after the largest U.S. mortgage lender reported a surge in defaults.”
“Countrywide said that pending foreclosures as a percentage of outstanding loans more than doubled in June from a year earlier and delinquencies hit a six-month high.”
“Downey Financial Corp. reported net income for the second quarter of 2007 of $32.7 million, down 32.1% from the second quarter of 2006.”
“CEO Daniel D. Rosenthal commented, ‘The ongoing softening of the housing market, coupled with a challenging interest rate environment, have contributed to continued declines in our loan portfolio and increases in our non-performing loans.’”
“Some lenders are eliminating what until recently was the most popular type of home-mortgage loan for subprime borrowers, or borrowers with weak credit histories.”
“Countrywide Financial Corp., Option One Mortgage Corp. and Merrill Lynch’s First Franklin Financial unit told employees and mortgage brokers this week that they would no longer offer so-called 2/28 subprime loans.”
“A spokesman for Countrywide, the nation’s largest home-mortgage lender in terms of lending volume, said investors’ demand for such loans is ‘very, very limited.’”
“The benchmark ABX index sank to record intraday lows in nervous trading on Wednesday on concerns over mounting deterioration in assets backed by subprime mortgage securities, traders said.”
“The ABX ‘BBB-’ 07-1 index, which is tied to loans made in last year’s second half, fell to 43 on Wednesday after closing at a record low of 45.02 bid on Tuesday.”
The Wall Street Journal. “Moody’s Investors Service says it is paying a high price for its tough stance on lax lending standards for commercial mortgage-backed securities.”
“The Moody’s Corp. unit said it was passed over and not hired for 75% of the commercial mortgage-backed securities rating assignments issued in the past few months as a result of its requirement that issuers add an extra layer of credit enhancement.”
“Moody’s said issuers are ‘rating shopping,’ meaning they were hiring competitors that would hand out higher ratings on securities.”
“Federal and state banking regulators on Tuesday said they would step up their scrutiny of lenders that make home loans to people with shaky credit, focusing on companies that operate outside federal banking oversight.”
“The pilot program announced by the Federal Reserve, two other federal agencies and state banking officials is scheduled to start in the fourth quarter and affect about 12 lenders. It will be designed to examine firms that account for the majority of subprime loans.”
“The home-mortgage business exploded in recent years, with big Wall Street investment firms buying packages of loans in bulk from banks and other lenders. Critics say the Federal Reserve has been slow to use its authority under a 1994 consumer protection law to crack down on deceptive mortgage practices.”
Down now down 135 points, well I know Tx and I are short, hope all of you are fairing well today
Meant to say Dow now down 135, go bears
Don’t go by me. I’m always short. I haven’t seen a bull market since 1987
Guarantee you the PPT has no orders to keep the market up here, commercials want it lower by options expire in my opinion.
“JPMorgan Chase & Co. said on Wednesday it tripled the amount set aside for loan losses as even borrowers with good credit defaulted on home equity loans.”
I guess they are finally wiseing up and seeing the need for a huge o’ sh@t fund.
By the way Tx we are going to have to get you long the (bull) market in gold and silver. Let me see, what is that line that car salesman use…Oh yeah, what’s it going to take to get you into these bars of gold and silver today?
I have some gold I bought several months ago.
I like the sugar chart right now. Seems to have bottomed.
Aside from your local grocery store - how would one go about buying sugar? Is there an ETF for various commodities like that? Or perhaps indirectly through producers?
Sugar’s probably a decent bet for an economic downturn - people who have more idle time (e.g. after being laid off) go through more candy bars! I would imagine anyhow.
Sugar’s probably a decent bet for an economic downturn - people who have more idle time (e.g. after being laid off) go through more candy bars! I would imagine anyhow.
Don’t forget that if corn prices keep rising, sugar may become cheaper than high-fructose corn syrup. In fact, I would imagine some manufacturers changing over at some point beforehand to be first on the market with the better tasting product.
Actually, farmers in the US have jacked up their plantings of corn to the highest level since the end of WWII. I did a little analysis of the ethanol market here. The gist is that the farm sector is one of the most flexible economic sectors around; shifting crops depending on the market price is easy to do. In fact, maybe a better word to describe the agricultural sector is “volatile.”
Corn is being planted in place of soybeans. Both are used to feed livestock, cattle, hogs, chickens. That is what is bad about this ethanol crazness, in order to have the appearance of independence we are going import soybeans from say South America. Also it’s going to cause speculation in farmland, driving prices for farmland through the roof. And a lot of farmers are going to take on more debt that they can handle. I can see anouther farm crisis happening again, like in the 1980’s.
But doesn’t that mean it’s a buyer’s market now, and we’d all better hurry and ‘invest’ or else be priced out forever?
/sarcasm
Oh yes mr. customer, the Dow is just under 14,000 now and can’t possibly go any lower, this is a steal at this level. This exchange has granite in the bathrooms and marble in the main areas and let’s not forget about location it is close to all the amenities and I hear there are others looking to buy this right now.
You better buy today because stocks only go up and if you don’t buy it someone else will.
Trying to imagine how a realtor would pitch the stock market at these levels, that must have been close
PMs are up; flight from paper.
Gold and silver will be going up for years to come until shortly after all the former home flippers become gold and silver speculators, somewhere into that one must sell their metals and metal stocks, but not until then.
For what it’s worth I really like the way they are grinding the Dow down today, nothing very fast in terms of the decline, more like a slow grind…Very bearish the way they are taking it down today, keeps the dip buyers nibbling all the way down until they realize too late they’ve been had
Gold and silver will be going up for years to come until shortly after all the former home flippers become gold and silver speculators
These chucks are gonna get wiped out.
Those average losses of $20k experienced in the bust of ‘90′/’91 will be mild compared to the amounts to which these huckster investors’s are exposed.
MBS investors might be willing to write off chump change, but the the Hounds of Collection Hell will chase ya down for a quarter million.
Never underestimate these peoples ability to straighten themselves out just in time to jump into the next mania for their next wipeout.
Never underestimate these peoples ability to straighten themselves out just in time to jump into the next mania for their next wipeout.
This debacle is bigger than anybody thinks it is.
Some NAR idiot in the Globe today, was even quoted as sayin’ the market will turn in fall of ‘07.
Fookin’ people are completely delusional.
Worthless BS funds…HUD beggin’ China to buy more of their originated trash…only the beginning.
Since prices went up by a factor of five in many places I expect average losses will be 5 x $20,000.
I expect precious metals to be the third strike to wipe out the foolish and greedy elements of our middle class. Strike one was tech day-trading/investing, strike two was house flipping/investing, and strike three will be precious metals. If you ignore the interim volatility, both up and down, you should do well in PMs over the years. The smart time to liquidate will be when people use credit cards to buy 1/10 oz. wafers and coins sold by Walmart, and 1/2 oz. coins sold by Macys. After all, you can’t lose buying gold. I expect this somewhere out in the 2010-2013 time frame when the USDX is 50 or less.
More importantly, the PM’s and miner’s (HUI, XAU) are up today despite the DOW taking a thrashing. During gold’s sideways consolidation of the past 18 months, many times gold has been hammered when the stock market is suffering. This serves to convince the public that gold is not a safe haven. “Nothing to see here”, etc..
The divergence today, on the heels of the Bear Stearns revelations, the dollar at the edge of its abyss at 80, and the growing realities of inflation in general, suggests that the next upmove in the PM’s is here.
Just in time, also, for the hammer blow that housing is going to take as we enter the fall and winter and the MSM is already in the process of admitting how dismal the spring and summer was.
“despite the DOW taking a thrashing”
Not to be the contrarian here, but how does “down 0.93%” equal “taking a thrashing”?
Right? Someone at work today said, “Wow ~ the DOW really crashed from yesterday!” Crashed?…
all right, AG, it’s not a thrashing. Not yet. Just wait. But with (as of this moment) the HUI up 10 points and the DOW down over a hundred, that is a significant divergence. The miners are showing strength in the face of weak stock sentiment. Every gold bugs dream, of course, is to see the major decoupling occur.
The cheerleaders on Wall Street can put on a happy face, but housing is going down the toilet, so stocks going down is inevitable. To the degree that the DOW has gone “global”, well, they can keep that dog on life support and keep a happy face. But the American economy, with consumer spending 60% of GDP, is doomed by the rot in housing. At some point stocks will have to reflect this reality - certainly the broader measures such as the S&P and NASDAQ. The DOW is only 30 stocks that can be easily goosed when needed.
People who own homes and stocks should take the advice of the Humungous, in the Road Warrior - “Just walk away, and your lives will be spared”.
Take it from the Humungous himself…
http://www.youloveben.com/Thumbnails/Humongous.png
Those guys tied up on the buggy behind him are the knife catchers who bought homes this past spring!
DJIA is not the only thing going down (”gee — look at them perty waterfalls”).
ABX BBB- index is history…
http://www.markit.com/information/affiliations/abx/history
And it’s down intraday even from that graph, from 45 to 43.
Also interesting… BSC announced the bad news, I guess everyone knew it was coming. But it was all the other banks that took it much harder. MS, MER, LEH, GS, JPM all down 2-4%… BX: 28.40, ahem.
Great chart, hope the Dow can learn how to act from that graph
Apparently there is no plunge protection for the ABX indices…
Oh, you mean a free market, been watching the stock market for so long I had forgotten what one looked like
Maybe there is plunge protection after all, at least for AAA and AA tranches. Either that, or risk loves are snapping up the hgiher-rated stuff…
Funny, it looks just like Niagara Falls.
You spoke too soon. Looks like you counted your chicks before the eggs are hatched. Don’t underestimate the big boys of Wall Street.
Price ‘drops’ in san diego are laughable. You can see all the recent price changes at sdlookup.com, most drops are in the $5,000 range on $400,000-$700,000 houses. Actually there’s quite a few price increases as well, when will reality strike?
$5K drop on a $400 - $700K house, that’s a hilarious laugh. Try a 50% drop before I even consider moving to that place next to the border.
When will reality strike..
Reality has struck.
Denial’s false reality might theoretically last forever..
Perhaps these listings have no choice, they owe the banks that much, or more.
The wishing price list will soon move over to the foreclosure list, then REO list and finally auction list
When foolish home owners can no longer pay. Soon they will run out of cash flow and then thousands will “walk away” from their houses as there is “no” equity to save. Only a real fool would continue to pay for a negatitive, loan balance that is going up each month verses the continued down turn/value of their house. Perhaps, 3rd grade math will kick in now? We’ ll see.
This one from Reuters;
http://tinyurl.com/3bff2c
“July 18 (Reuters) - Brokerage firm Punk Ziegel & Co. on Wednesday downgraded major U.S.-based brokerages and banks, saying the financial system is growing at a pace that cannot be sustained by growth in the economy.”
“Housing starts rose 2.3 percent to an annual rate of 1.467 million, led by an increase in apartment buildings, the Commerce Department said today in Washington. Building permits fell 7.5 percent to a 1.406 million rate.”
“A glut of unsold homes suggests the slump is not over.”
Isn’t the level of new home sales under 1m/year these days? The 1.467 level of starts and 1.406 level of permits suggest the glut of unsold homes will continue to grow into the bust.
We’ve discussed this b4. New home sales pace is approx. 895,000 per year. Starts continue to outpace that number - I believe the starts include condos, but the sales numbers might be only single family. Still, I believe builders are building faster than they sell off existing stuff contributing to the inventory problem. Same thing is happening with Ford, GM and Chrysler . . . they keep building cars and storing them on giant lots near LV. Stupid, Stupid, Stupid!
Good news is employment numbers remain good
Giant lots near LV? What do you mean by LV? Las Vegas?
Yep, Vegas. Was there in April this year, rows upon rows of identical brand new Ford Mustangs. I wouldn’t think they are future rental units. Maybe Hollywood was going to use them for some movie production.
Also, how many components that go into new homes have been overproduced in the past few years. Sure they were “sold” and contributed to GDP during those years, . . . but what happens now?
The mustangs are being converted into Shelby Cobra Mustangs. Shelby and Ford have a joint venture. They come shipped from Ford with standard and semi-standard parts. Shelby makes the final customizations. Wouldn’t mind having one.
Not to disagree that the Big 3 build excess inventory and store them on giant lots. Check out Willow Run Airport outside Ann Arbor, Michigan some time.
(Not sure if my first posting posted)
The mustangs are part of joint venture between Ford and Shelby. Shelby has a conversion plant next to the speedway where they convert near stock Ford Mustangs into Shelby Cobra Mustangs. I wouldn’t mind having one of those.
Not to say they don’t run their factories and fill parking lots. Ford uses Willow run airport outside Ann Arbor to store lots of vehicles.
They make it up on volume, don’t you know that?
It’s no secret that Chrysler was filling every single empty lot they could find in the Detroit area with unsold cars last year. But I haven’t heard anything about Ford or GM doing the same. Do you have some sources?
I actually think Ford is going to end up being the winner in the industry in 5 years. They’ve received a ton of criticism for “giving up” market share. But think about it - while the Toyotas and Hyundais have been spending billions building new factories and increasing capacity dramatically, Ford borrowed a ton of cheap money (with their unwanted factories as collateral) and got busy turning themselves into a company that will be profitable while selling dramatically fewer cars. The fact that all their recent models have won quality awards sure helps warranty costs too…
So, if the US economy is headed in the direction most here on this blog are predicting, what do you think is going to happen to the US car market? That’s right, fewer sales. How much money is Toyota going to earn if their brand-new truck factory is running at 50% capacity?
Brian:
I don’t know anything of lots full of cars but I do know that all dealerships are pretty desparate to sell cars.
I was looking to trade the Honda last weekend and they were all over me to sell me a car but ultimately would not even give me KBB for the Honda which has been maintained by the book so I walked on them all.
My reason for doing so is that I’m fairly certain that anything I buy now and finance (even at 0%) for five years won’t be worth anything (if prices drop on new cars, which I expect given what I saw) even if still running in five years.
All of the dealerships were offerring me new cars for what used are being offerred on Carmax and other used dealerships. I also noticed some serious pricey used models coming down in price. Tempting but not low enough for me to stick to budget.
So, I’m going to ride the CRV into the ground.
If any of you know of an honest and good mechanic that can service Hondas in NoVa let me know. I’ll be a loyal customer if he tells me what NEEDS to be done as opposed to the dealership which tells you that everything needs to be done.
Novasold
Novasold,
Try Alberto Valdes in Arlington, 525.8834, was my mechanic for many years before we left town, very honest & very good.
New home sales are for single units only. Starts include all types of dwellings from single home to apartmetns. You have to dig through the data to get new home starts.
“The Moody’s Corp. unit said it was passed over and not hired for 75% of the commercial mortgage-backed securities rating assignments issued in the past few months as a result of its requirement that issuers add an extra layer of credit enhancement.”
“Moody’s said issuers are ‘rating shopping,’ meaning they were hiring competitors that would hand out higher ratings on securities.”
Is that any different than mortgage brokers and realTurds shopping for an appraiser? Oops… That’s right… Everyone on Wall Street is worthy of high praise and integrity. Lies, deceipt and theft only happens on Main street.
“Moody’s said issuers are ‘rating shopping,’ meaning they were hiring competitors that would hand out higher ratings on securities.”
Is it just me, or does this sound achingly similar to what housing appraisers have been saying?
I just posted that thought but it hasn’t shownup yet. Nevertheless, the lack of integrity extends all the way to GoldmanSux. It’s isn’t just on Main street.
“achingly similar to what housing appraisers have been saying”
Exactly.
“Alliance Bancorp Inc. has filed for Chapter 7 bankruptcy protection…differed from most struggling lenders in that it specialized in ‘Alt-A’ home loans, rather than ’subprime’”
Other than the FICO score of the mortgagees, how are they any different than the other lenders? Increasing foreclosures are not about the FICO score, don’t “experts” get it yet?
It’s all about no money down, adjustable rates, neg-am, “stated income”, lack of affordability, and stable to falling home prices.
“even borrowers with good credit defaulted on home equity loans.”
*Ahem*, it’s not about FICO.
FICO + HPA, it’s all good.
“FICO + HPA”
Gotta love that model!
It works well until it doesn’t.
“step up their scrutiny of lenders that make home loans to people with shaky credit”
And yet again with the FICO…
Other than FICO??
FICO is god .. lay your offerings upon his altar, and pray for forgiveness.
How long do you think it will be before they decide that FICO means nothing? That it’s just a number and we don’t have to worry about it any more? Anything to be able to give people money and keep them buying, right?
FICO already means nothing, in the sense that it guarantees nothing and offers no protection to a lender. Hard-money lenders know this.
So I guess we can short the dotcoms that offer FICO scores?
First example of subprime contagion in Alt-A lending. Many more to soon follow.
“Alliance Bancorp Inc. has filed for Chapter 7 bankruptcy protection…differed from most struggling lenders in that it specialized in ‘Alt-A’ home loans, rather than ’subprime’”
Bogus shoddy appraisal work aided and abetted by a corrupt lending system has compromised all housing related asset portfolio’s from SubP to AltA. Doesn’t matter what type of paper your holding, if the underlying physical backing asset is a piece of fiction.
I’ll bet there isn’t a derivative or hedge fund formula anywhere which has a risk factor to reflect the reality of the level of the horrid and demented underwriting which has taken place over the last 4 years.
No sophisticated formula needed:
Take your 100% MTG for 100K, it’s worth about 50K.
The risk factor is about 50%, if you can buy the garbage up at 50% of note value you will be able to sell it again. It’s not worthless, it just has dramatically dropped in value.
it’s worth about 50K.
Who says?
Some derivative hedge guy lookin’ in a computer screen?
Might be a place with environmental contamination warranting a $200k EPA mandated cleanup-or loaded with lead paint that requires a $100k abatement.
What’s the risk factor now?
I’ll bet there isn’t a derivative or hedge fund formula anywhere which has a risk factor to reflect the reality of the level of the horrid and demented underwriting which has taken place over the last 4 years.
“horrid and demented”
That’s a beautiful turn of phrase, there.
RE: “horrid and demented”
Hunter S. Thompson at his finest.
You can make 20K a year and have an 800 FICO; that in no way makes your MTG “good” paper when you have a 200,000 dollar note hanging out there.
The thing they really should couple with the rating is the income level of the borrower. With FICO, home price (percentage financed), and income of the borrower I think that you can pretty accurately rate stuff in the MBS market. However, to put someone into A paper who has an 80/20 at 8X income with an 800 FICO is nuts!
“It’s all about no money down, adjustable rates, neg-am, “stated income”, lack of affordability, and stable to falling home prices.”
It’s also all about lenders letting folks buy at ridiculous multiples of their income. Used to be a max of 3x. Now, most CA buyers are at 6x plus. In the long term, it’s just not affordable.
“Moody’s said issuers are ‘rating shopping,’ meaning they were hiring competitors that would hand out higher ratings on securities.”
Appraiser shopping, rate shopping, it’s all good.
Accountant shopping.
And in government, public policy consultant shopping (tell ‘em what they want to hear).
This, of course, is over and above lawyers and salesmen.
Or, in presentation form:
Tell them what you’re going to tell them about what they want to hear.
Tell them what they want to hear.
Tell them what you told them about what they want to hear.
LOL
BB anouces stagflation
greenspin was much more fun to watch
On the one hand Moody’s tries to give the impression that they’re impartial and suffer from no conflict-of-interest, and then they come out and say flatly that their requirements for credit-worthiness are hurting their business.
Clearly, from their own statements alone, there is a massive and unacceptable level of conflict-of-interest.
Once again — those who analyze CAN NEVER BE IN THE MARKET.
One would think we learned this incredibly obvious lession after the dot-com boom where we saw dozens of banks giving ‘buy’ ratings on securities, when those very same banks were underwriting the IPO’s.
Moody’s also says they never give reccomendations (LOL! As if a rating isn’t a reccomendation!) . They know full well that the people they sell their ratings to are actively buying, and basing their buying decisions on their ratings. They can try to be ‘clever’ and deny that this isn’t a reccomendation, but they aren’t kidding anyone. They advise, and they directly (and massively) benefit from their advice. Impartiality has never, ever been part of the game.
“One would think we learned this incredibly obvious lession after the dot-com boom”
HA! I plan to make my fortune in the next ten to twenty years by capitalizing on others lack of memory and hindsight. It’s ALWAYS “different this time” (just like it was the last time, and the time before, and the time before…)
“Estimates show there is ‘effectively no value left’ in the High-Grade Structured Credit …‘This is a watershed,’ said Sean Egan, managing director of Egan-Jones Ratings Co. ‘A leading player, which has honed a reputation as a sage investor in mortgage securities, has faltered. It begs the question of how other market participants have fared.’”
That question is one that the players are working very hard to avoid answering. If you mark these paper products to market billions (trillions?) of dollars have been vaporized. What effect will this have on investor psychology, the economy, etc?
Well, you could just move up the sell-by date on the meat a couple of days, right? Somebody will grab it off the shelf, no harm done, I guess.
There seems to be a whole herd of elephants hiding under the housing market’s living room rug these days.
Imagine the stench of a herd of elephants hiding under the living room rug.
“Alliance differed from most struggling lenders in that it specialized in ‘Alt-A’ home loans, rather than ’subprime’ loans that have caused the greatest problems.”
Is Alt-A contained?
“Is Alt-A contained?”
That will be the *new* mantra…
Looks like Alt-A was Alliance’s greatest problem.
Containment my ass.
My guess is that problems in Alt-A will dwarf Subprime in due time. Subprime borrowers were only able to “speculate” on a primary residence. Alt-A ,on the other hand, has borrowers who bought multiple properties and abused the system to no end. They also generally bought higher price points so the losses should be greater in magnitude. When those chickens start to hatch look out below.
Subprime borrowers also would have purchased homes at a lower average price compared to Alt-A purchases. Thus the value at risk is greater (at least on average) in the Alt-A segment.
And think of the fewer dollars earned on the alt-a paper paying lower interest rates. Less reserves to cushion the fall.
ETA
summer, 2008
“Moody’s Investors Service says it is paying a high price for its tough stance on lax lending standards for commercial mortgage-backed securities.”
“The Moody’s Corp. unit said it was passed over and not hired for 75% of the commercial mortgage-backed securities rating assignments issued in the past few months as a result of its requirement that issuers add an extra layer of credit enhancement.”
Similar problem here to that faced by honest appraisers. No act of honesty goes unpunished in a housing market where deregulation has run amok.
What cracks me up is they insist on talking about 10-to-1 leveraging. It’s not. Bear was leveraged at about 15-to-1 and others are, according to hushed whispers, leveraged even more heavily.
A 10% decline on 15x leveraging can result in a staggering loss. A 95% decline against 15x leveraging is absolutely mind-boggling. Using the Bear Stearns examples of about $1.4 billion in “principal,” there could be a call on twenty billion dollars ($1.4 x 15 = $21 bn leveraged; $1.4 bn x.05 = $70 mn new “principal” x 15 = $1.05 bn supported leverage; call should be for about $20 bn). This is just for this one set of funds at Bear Stearns.
Now do people believe me when I say the losses will be measured in hundreds of billions of dollars?
If BS was so heavily leveraged, how could the value of their Enhanced Leveraged Fools Funds have a floor value of 0c? Or to put it another way, who eats the underwater leverage shortfall?
The lenders (IBs) who loaned the HF the money. Which is why we saw the lenders earlier grabbing the collateral to sell.
whoever wrote the loan eats it. the reason the investment banks make the hedge funds separate companies is so that if they blow up their is no one for the loan-writers to go after (like an LLC).
But by lending money to their fund when no arm’s length lender would ever have done so, I believe Bear Stearns demonstrated that they did not fundamentally see the fund as an arm’s length entity, thus removing the shelter they would have had from its creditors. There actions belie the structure fiction, and they should become liable for its debts.
If the less leveraged fund was around 5x and more leveraged over 10x, the losses should be a bit over twice as large. 91% losses in the one fund should be close to 200% losses in the highly leveraged fund. Roughly $630 mil lost by investors and an equal loss taken by the lenders. No wonder BS didn’t want to make a loan to keep this fund afloat.
Wait a minute — I believe the 95% decline is in investor’s equity, not the underlying security. Right? With 15 to 1 leverage, investors are wiped out with a 7% decline, with further declines hitting the lenders.
If the underlying assets fell by 95%, then the investors are the last thing we need to worry about here.
That was my understanding as well.
Now do people believe me when I say the losses will be measured in hundreds of billions of dollars?
Hundred billion here, hundred billion there…
Was talking to coworkers today about where to move our 401k’s to avoid losing 60% of it like many did in 2001/2002 … I’m young and only have three years put into it so I’m not too concerned. Some coworkers had 20 + years invested into a hoped for soon retirement, so I feel sorry for them. It should be interesting …
I too have this problem; all the funds in one of my plans are terrible and I was thinking of rolling it over into an IRA. That got me thinking that I could possibly avoid losses if I held onto the 401K check for a few months before depositing it into the IRA. Yeah, I may not get a couple hundred bucks in interest over the time period, but it would be much better than losing thousands if I deposited early and it crashed.
Don’t hold on to the rollover since you only have a specified time before you incur a tax penalty. Instead just keep it in cash for a while if you expect a near-term stock decline.
Definitely - you need to do a direct rollover to make the switch as tax-painless as possible. But if you plan to leave large amounts of cash in your IRA account, you probably should just put them into 3-month treasury bills.
I know that by default any cash I leave in my IRA gets automatically moved to a money market account after a few days. I have no idea what that money market account is invested in.
Most IRAs will have an insured CD option. I’d deposit the check right away.
As I remember you MUST transfer the money directly from your 401k to your new IRA, and I think if you hold the money for even a second outside either account (e.g. if the check is made out to you rather than to the IRA custodian), you must pay taxes on it. Be careful and check this out yourself to make sure.
“Countrywide Financial Corp., Option One Mortgage Corp. and Merrill Lynch’s First Franklin Financial unit told employees and mortgage brokers this week that they would no longer offer so-called 2/28 subprime loans.”
“A spokesman for Countrywide, the nation’s largest home-mortgage lender in terms of lending volume, said investors’ demand for such loans is ‘very, very limited.’”
And the tightening continues. Plus, the federal guidance goes into effect on Sep. 1, I think. And the states are now looking at implementing the federal guidance. All this just as the wave of resets is approaching.
Ahh got it !
Since the FB’s can no longer refi and heloc to get spending money we need to force them out of their homes into cheaper apartments so they can rent and keep on spending.
Brilliant !
Do you have a link for that?
It’s the “lender’s” link above. Here it is, too.
http://www.startribune.com/535/story/1308897.html
Wait a minute — wa-ait a minute! I thunked the subprime problem was contained!
FINANCIAL STOCKS
Bear Stearns fund woes rattle financial sector
By Greg Morcroft, MarketWatch
Last Update: 1:17 PM ET Jul 18, 2007
NEW YORK (MarketWatch) — Shares of U.S. financial stocks fell on Wednesday after news that two leveraged credit funds run by Bear Stearns have suffered almost total losses.
The news prompted a downgrade of the top five brokerage firms and the country’s three largest banks. See full story.
Merrill Lynch (Last: 83.29-2.91-3.38% 2:00pm 07/18/2007), Goldman Sachs (Last: 214.65-4.75-2.16% 2:00pm 07/18/2007) , Lehman Brothers, (Last: 71.06-2.00-2.74% 2:00pm 07/18/2007) Bear Stearns (Last: 138.74-1.17-0.84% 2:00pm 07/18/2007) and Morgan Stanley (Last: 70.43-2.42-3.32% 2:00pm 07/18/2007) all fell.
Among the big banks, Citigroup (Last: 51.04-1.42-2.71% 2:00pm 07/18/2007) , Bank of America (Last: 48.81-0.99-1.99% 2:00pm 07/18/2007) and J.P. Morgan (Last: 48.27-1.65-3.31% 2:00pm 07/18/2007) fell.
In the broader financial sector, the Amex Securities Broker/Dealer Index (Last: 254.80-6.12 -2.35% 2:20pm 07/18/2007) fell 1.1%, the Philadelphia Bank Sector Index (Last: 112.90-2.56 -2.22% 2:20pm 07/18/2007) fell 1% and the S&P Insurance Index (Last: 397.02-4.54 -1.13% 2:19pm 07/18/2007) fell 0.5%.
Dick Bove, an analyst at Punk Ziegel, cut his ratings Wednesday on the five top U.S. brokerage firms to sell and said the apparent meltdown of two hedge funds run by Bear Stearns is likely an industrywide problem.
“I do not view this as a Bear Stearns problem, but a systemic one,” Bove said. “This opens investors to sizable losses which, at this moment, simply cannot be calculated. … The brokers should be sold at once.”
http://www.marketwatch.com/news/story/bear-stearns-fund-woes-rattle/story.aspx?guid=%7BA2A39217%2DFDC8%2D4405%2D89AB%2DCC75BF5FEA95%7D
I pull in resolution and begin
To doubt th’equivocation of the fiend
That lies like truth.
“This could force a wide variety of other holders of subprime mortgage securities and CDOs to meaningfully revalue their holdings,” Bove said in an interview Tuesday. “That would cause significant declines in book value and stock prices.”
CDO is short for collateralized debt obligation, which is a bit like a mutual fund. CDOs have been among the biggest buyers of riskier parts of subprime mortgage-backed securities.
Moreover, CDOs have been among the fastest-growing debt instruments in recent years and are widely held by banks, brokerage firms, hedge funds and insurers, Bove said.
CDO volume has grown 500%, Bove said in his Wednesday research note.
“The free markets are going to force a revaluation of the unique instruments,” he said. “While revaluation happens there will be some turmoil. Funds will be withdrawn from the markets and the prices of the stocks of the companies in question will fall.” End of Story
Greg Morcroft is MarketWatch’s financial editor in New York.
http://www.marketwatch.com/news/story/punk-ziegel-analyst-tells-investors/story.aspx?guid=%7BB6CDDAA8%2D0966%2D407D%2D8AD1%2DA3ACB3263D56%7D
…“This opens investors to sizable losses which, at this moment, simply cannot be calculated.
Bugs: “eh Daffy, quick close the “gates”
Daffy: ” Hey Bugs, it seems like everything has …”went dark”
Dick Bove, an analyst at Punk Ziegel, cut his ratings Wednesday on the five top U.S. brokerage firms to sell and said the apparent meltdown of two hedge funds run by Bear Stearns is likely an industrywide problem.
“I do not view this as a Bear Stearns problem, but a systemic one,” Bove said. “This opens investors to sizable losses which, at this moment, simply cannot be calculated. … The brokers should be sold at once.”
Do you feel lucky, Punk? Well, do ya?
BZH: Down and downer…
http://www.marketwatch.com/tools/quotes/intchart.asp?symb=BZH&time=20&freq=1&comp=&compidx=aaaaa%7E0&compind=&uf=0&ma=&maval=&lf=1&lf2=&lf3=&type=2&size=1&txtstyle=&style=&submitted=true&intflavor=basic&origurl=%2Ftools%2Fquotes%2Fintchart.asp
Test.
“The home-mortgage business exploded in recent years, with big Wall Street investment firms buying packages of loans in bulk from banks and other lenders. Critics say the Federal Reserve has been slow to use its authority under a 1994 consumer protection law to crack down on deceptive mortgage practices.”
(shaking head) IMHO it’s time to raise interest rates. I know many may argue against this, but it’s the only way to stop the insanity. I still see way to many loan ads on television, billboards, internet, and print media.
I’d love to see the fed inact the 1994 law, but Bush has the bus keys, and sadly, don’t think that’s going to happen.
Brent crude now $78.45, a quarter below the all-time high. Got oil?
We have reached maximum containment.
‘The “adjustment” in housing has spread to the financial sector as well, Bernanke said’
http://tinyurl.com/37mjkj
I almost smashed my TV when Heli Benny said “adjustment” this morning.
Yeah. Like those Bear Stearns hedge funds which “adjusted” to zero.
All right - which one of you from this blog wrote in to the Pulte message board on Yahoo? Some funny comments -
90% loss is absolutely mindblowing, can you imagine getting that statement?
OT but any HBB from denver that can recommend a place downtown for dinner where one could have an actual conversation?
Actual conversation? What kind of ambiance is that? Rialto Cafe isn’t bad. McCormick’s at The Oxford Hotel has good seafood for Colorado.
Dear Client…
http://online.wsj.com/public/resources/documents/WSJ071707_Bear_Stearns_Co.pdf
Dear Client of Bear, Stearns & Co. Inc.
…
The preliminary estimates show there is effectively no value left for the investors in the Enhanced Leverage Fund and very litle value left for the investors in the High-Grade Fund as of June 30, 2007.
…
Our highest priority is to continue to earn your trust and confidence each and every day, consistent with the Firm’s proud history of achievement. As always, please contact us if we can be of service.
“‘This is a watershed,’ said Sean Egan, managing director of Egan-Jones Ratings Co. ‘A leading player, which has honed a reputation as a sage investor in mortgage securities, has faltered. It begs the question of how other market participants have fared.’”
Hilarious. Only in finance does “genius” fail every five years.