An Amorphous Blob Of Trouble
Some housing bubble news from Wall Street and Washington. Bloomberg, “MGIC Investment Corp., the largest U.S. mortgage insurer, said second-quarter profit plunged 49 percent as it paid more in claims. MGIC, which protects banks against defaults on home loans, said losses climbed 61 percent to $235.2 million.”
“‘We know California is a developing problem. We know Florida is a developing problem,’ said Geoffrey Dunn, analyst at Keefe Bruyette & Woods Inc. ‘It’s simply the amplitude that’s the surprise in the quarter. We’re going to need help from management and a lot more color on specifically what happened.’”
The Sydney Morning Herald. “Investors in the collapsed $320 million Basis Yield fund could receive less than 50c in the dollar from distressed asset sales, making Basis Capital and its investors the first Australian casualties from the subprime mortgage meltdown in the US.”
“In a letter sent by Basis Capital to unit holders on Wednesday, the previously highly-rated fund manager said Basis Yield’s master fund, the Cayman Islands-registered Basis Alpha Yield, had been unable to pay margin calls on loans.”
“The note warned: ‘Basis Capital assesses that enforcement action by the financiers of the master fund at distressed sale prices would result in a reduction in the net asset value of the units for the Basis Yield Fund to below half of the level as at May 31.’”
“Basis Alpha Yield invests primarily in complex collateralised debt obligations, or CDOs, which do not have an easily established market price.”
The Sacramento Business Journal. “National mortgage company IndyMac Bancorp Inc. started the second phase of its expansion into Austin, Texas, and plans to nearly double its employees there by year’s end.”
“About 8 percent of the loans in its portfolio are in delinquency. Many of the jobs opening up this year at the Austin servicing center will be focused on dealing with delinquent loans and foreclosures, said J.K. Huey, IndyMac’s senior VP of home loan servicing.”
From Reuters. “Troubles in mortgageland may get worse before they get better, especially for the so-called ’subprime’ borrowers whose spotty credit histories put them into more costly loans.”
“‘It’s an amorphous blob of trouble,’ says Keith Gumbinger of HSH Associates, a mortgage research firm. ‘And there’s more pain to come.’”
“In the first quarter of this year, roughly one of every 41 subprime loans was entering foreclosure, and more than one of every six were delinquent, according to the Mortgage Bankers Association. Those are the worst mortgage default statistics since the Great Depression.”
“And it’s likely to get worse because the 2006 crop of mortgages, which will start resetting next year, were of a particularly low quality.”
“Federal Reserve Chairman Ben Bernanke said on Thursday that subprime mortgage losses could hit $100 billion and threaten consumer spending.”
“‘The credit losses associated with subprime have come to light and they are fairly significant,’ Bernanke told the Senate Banking Committee in a second day of testimony. ‘Some estimates are in the order of between $50 billion and $100 billion of losses associated with subprime credit problems,’ he said.”
From MarketWatch. “Senators pressed Bernanke to respond to news earlier in the week that Bear Stearns Cos. told investors in two of its specialty hedge funds, which had invested in derivatives based on mortgage-backed securities, that the two funds were almost worthless.”
“Bernanke said these were ‘market innovations’ and ’sometimes there are bumps’ in the new-product road.”
“‘We’ll see how this works out,’ Bernanke said.”
“In addition, Bernanke told members of the Senate Banking Committee that the pain and suffering felt from foreclosures and delinquencies will ‘likely get worse before they get better.’”
“Bernanke, under fire from lawmakers for the Fed’s failure to step in earlier to address the factors underlying the nation’s housing bubble, said the Fed and other regulators will soon issue stronger rules to protect consumers.”
The Associated Press. “Under pressure from Congress to combat problems in the market for subprime loans given to people with spotty credit, Bernanke highlighted the Fed’s efforts to tighten protections in the troubled home loan market in a midyear economic report to Congress.”
“Bernanke told the House Financial Services Committee that the Fed is examining new rules in several areas including restrictions on so-called ‘liar loans,’ limitations on financial penalties for borrowers who make early payments and a mandate that lenders require set-aside payments for subprime borrowers’ property taxes and homeowners’ insurance.”
“‘The recent rapid expansion of the subprime market was clearly accompanied by deterioration in underwriting standards and, in some cases, by abusive lending practices and outright fraud,’ Bernanke said.”
From CNN Money. “Despite government calls for tougher regulation in the subprime mortgage market, brokers and lenders don’t seem to be getting their guidance from Washington. Instead, they’re turning to Wall Street.”
“‘It’s more the market that’s been dictating what kinds of loans are made. Lenders are reacting to what investors will buy,’ said Steve Habetz, a mortgage broker in Connecticut.”
“When regulators tightened subprime lending guidance in late June to try to curtail risky practices that led to record foreclosures, all it did was reinforce a trend that Wall Street had started long before.”
“David Wyss, chief economist for Standard and Poor’s, which rates the bonds backed by subprime and other mortgage loans, said Wall Street stopped buying the loans since early spring, long before the Fed released its guidelines.”
‘”The market has been way ahead of the Fed,’ he said. ‘If anything, it has overreacted.’”
“Doug Duncan, chief economist for the Mortgage Bankers Association, agreed with Wyss. ‘For more than six months there’s been tightening,’ he said.”
“Washington Mutual Inc, one of the largest U.S. mortgage lenders, on Wednesday said it will stop offering some popular home loans for subprime borrowers, after rising defaults caused losses to mount.”
“CEO Kerry Killinger said that effective immediately, Seattle-based WaMu will require full documentation of income and assets from prospective subprime borrowers, eliminating riskier ’stated income’ loans.”
“WaMu will also no longer offer subprime adjustable-rate mortgages with initial fixed terms of fewer than five years. This eliminates so-called 2/28 and 3/27 loans.”
“The home loans unit posted a $37 million loss. Overall loan volume fell 24 percent. WaMu set aside $372 million for credit losses, up 66 percent. Net charge-offs more than doubled to $271 million. Killinger citing housing market deterioration.”
“WaMu now plans to set aside $1.5 billion to $1.7 billion this year for credit losses, up from its prior $1.3 billion to $1.5 billion forecast.”
“CIT Group Inc. said on Wednesday it was exiting the mortgage business and posted a surprise second-quarter loss, as the commercial and consumer lender became the latest to bail out of the struggling home loan sector.”
“CIT CEO Jeff Peek…cited poor returns in mortgages as a reason for shedding the business. CIT posted a second-quarter net loss of $134.5 million. The company said it incurred a loss…on the exit from its home lending and construction business, after lowering the fair-market value of a mortgage portfolio worth more than $11 billion.”
“Standard and Poor’s Rating Services dropped the other shoe Thursday, announcing it would downgrade 418 classes of U.S. residential mortgage backed securities (RMBS) backed by second-lien collateral. The rating agency said it acted because of the poor payment histories for these loans.”
“The action covered second-mortgage loans, such as home equity loans (HELs) and home equity lines of credit (HELOCs).”
“The original total balance of all the loans being downgraded came to about $3.8 billion. That represents 6.1 percent of the approximately $62 billion in U.S. RMBS backed by second-lien collateral that S&P rated from the beginning of January 2005 through the end of January 2007.”
“The dollar amount of all mortgages extended during that period came to about $2.5 trillion, but the downgrades are expected to have more of an impact than the numbers might indicate.”
“‘It’s going to be more severe [than last week's action],’ said S&P’s chief economist, David Wyss.”
The Prescott Herald. “Subprime borrowers are having growing problems making their mortgage payments, and there has been evidence of outright fraud in some low-documentation loans.”
“The issue was raised last week when Standard & Poor‘s and Moody‘s Investors Service, the two largest bond-rating agencies, reported that billions of dollars worth of subprime mortgage-backed bonds issued last year were performing worse than they expected and will likely continue to deteriorate as the housing market continues to decline at least into early 2008.”
“David Wyss, Standard & Poor‘s chief economist, said that housing prices should continue to drop in parts of the country well into next year, and some of the biggest bubble spots could see price drops of up to 20 percent, putting subprime borrowers in a tough spot if they can‘t make their mortgage payments.”
“…and a lot more color on specifically what happened.”
Bugs: “eh Daffy, the analysts illustrators need more color”
Daffy: “hey Bugs, the only thing left in the box is…Blood Red”
“It’s simply the amplitude that’s the surprise in the quarter. We’re going to need help from management and a lot more color on specifically what happened.”—-Geoffrey Dunn, analyst at Keefe Bruyette & Woods Inc.
Being an analyst means knowing a thousand ways to say “I’m clueless”.
“Federal Reserve Chairman Ben Bernanke said on Thursday that subprime mortgage losses could hit $100 billion and threaten consumer spending.”
I think this is a very conservative estimate. I heard some people think it will be double big bens figure.Consumers will continue to spend because they don’t know hwta lese to do with themselves.Consumeing is the hobby of americans.When they get bored they run to walmart or the mall for gratification.things sure have changed from when I grew up.
“Bernanke said these were ‘market innovations’ and ’sometimes there are bumps’ in the new-product road.”
100 Billion dollar bumps. Some pothole, Ben.
Here is a little “tin foil” tidbit from http://www.urbansurvival.com
My friend Bart over at “Now and Futures” (which regularly posts the M-3 reconstructed figure I’ve mentioned to you many times), sent me a mind boggling email yesterday which is compelling and frightening:
“I just happened across some “interesting” data in the current H8 Fed report
( http://www.federalreserve.gov/releases/h8/Current/ ) . A new entry suddenly appeared in line 34 (almost at the bottom) of the most recent report called “Securitized real estate loans”.
The balance, under the section called “Large Domestically Chartered Banks”, is blank in all prior weeks that I’ve searched and this week its $1.211 trillion… as if by magic.
I do know something about interpreting the Fed, and it strikes me that it’s *possible* (no guarantees of course) that since they are now “securities” that the Fed could bail out the real estate and derivatives mess… if needed.”
Having read a lot of Fed reports, I admit that I hadn’t seen anything that related to the ongoing collapse of marginal real estate securities, so I clicked over to the report and went sniffing around for ‘line 34′.
Turns out there are actual two references. One set is for large domestically chartered banks, adjusted for mergers, while the other is for small, domestically chartered banks.
You have to scroll down to page 13 of the report: The “new line” says that the week of July 4, the size of the Big Bank securitized real estate loans was $1,211.0 billion, i.e.. $1.211 trillion, and I don’t see that this is a total which includes the $653.7 billion of MBO’s (line 31).
Same kind of thing for the Small Banks - except the numbers are a lot smaller: “Only $270.9 billion in MBO’s, and “only” $41.1 billion in securitized real estate loans.
Still, thanks to the Fed report, looks like securitized real estate loans are $1,252.1 trillion and MBO’s they track are $924.6 worth of MBO’s.
Maybe we need to update the saying of the late Senator Everett Dirksen, who if I recall correctly said “A million here, a million there, pretty soon you’re talking real money…” Today, it’s more like a trillion here, a trillion there, pretty soon you’re talking real money…
“Wow, Bart…great catch.” Along with M3 reconstructed going up at 13.5%, I mean.
“When they get bored they run to walmart or the mall for gratification.”
I had this conversation with a friend whose wife always wants to go “shopping” on the weekend. He made this exact observation.
Also, there was a story in today’s Oregonian about how an outside shopping mall called Bridgeport Village gets about 4 million visitors a year! I had already despised this place due to the number of Paris Jrs. running around there, the amount of high end shops there, and the traffic it’s generated. It’s really sad that America’s pastime is now shopping.
Yeah, it’s an interesting place to people-watch. All the yuppies from Lake Oswego (formerly Sucker Lake!) seem to gravitate there. On the upside, the theater does have Sicko playing - the only place in Washington County. Fortunately, my wife is not a shopper… otherwise, she wouldn’t be my wife.
Kinda like she shops til you drop, huh?
Fortunately, my wife is not a shopper… otherwise, she wouldn’t be my wife.
Same here.
I was over at the Bridgeport Mall last Saturday and it was jampacked. Took 15 minutes of waiting just to get a parking spot. Major crowds, all decked out. If I were single, that woulda been the place to be.
(formerly PDXrenter)
I avoid shopping as much as possible.
In fact, I like to refer to my grocery store visits as “Search and Destroy Missions.” Meaning that I know what I want, I know where it is, now it’s time to pay for it, and then I’m outta here!
Savers are fifth columnists.
Shop. Spawn. Die.
“‘It’s an amorphous blob of trouble,’
Heh. I guess that makes us an amorphous blog of trouble. And do they have to besmirch the Blob’s good name?
HBB = housing bubble blob…
Whatever happened to the souffle?
got flushed down the ole toilet with the rest of Greenspan’s froth.
“CEO Kerry Killinger said that effective immediately, Seattle-based WaMu will require full documentation of income and assets from prospective subprime borrowers, eliminating riskier ’stated income’ loans.”
“WaMu will also no longer offer subprime adjustable-rate mortgages with initial fixed terms of fewer than five years. This eliminates so-called 2/28 and 3/27 loans.”
What about down payment? Will that be required? If so, how much 5, 10, 15, 20%???
I don’t know about you but I’m having a heck of a time coming up with 20% down to buy a low-low-low end shack in Southern California. Saving up $120K is H A R D !!!!!!!!!!!!
Then rent, relocate or wait for that house to drop to $150k then you could pratically buy it with cash!
“MGIC Investment Corp., the largest U.S. mortgage insurer, said second-quarter profit plunged 49 percent as it paid more in claims. MGIC, which protects banks against defaults on home loans, said losses climbed 61 percent to $235.2 million.”
“‘We know California is a developing problem. We know Florida is a developing problem,’ said Geoffrey Dunn, analyst at Keefe Bruyette & Woods Inc. ‘It’s simply the amplitude that’s the surprise in the quarter. We’re going to need help from management and a lot more color on specifically what happened.’”
Uh, you were insuring mortgages for which borrowers had absolutely no ability to pay down from the get go. Nuff said bonehead.
“a lot more color on specifically what happened.’””
I believe he should be ordering more pens/toner with RED ink.
A mortgage insurer surprised… Gee… that will loosen credit… NOT!
Again, I’m not buying until its hard to get a mortgage. I’ll qualify and I have no desire to compete with the sheeple. Fellow HBB’ers? Sure. We’ll laugh at the sellers. The second an idle property gets multiple bids, I withdraw. That trick won’t work on me. If one of you outbids me… congratulations. See winner’s curse.
I’ll wait until the curse has a low premium. 
http://en.wikipedia.org/wiki/Winner%27s_curse
Got popcorn?
Neil
By the time I am ready to buy Chelsea Clinton and Jenna Bush will be running against each other for the Presidency.
One of my favorite comments ever!
Personally, I already know who I’m voting for, and she should have plenty of capital to finance her bid. Avenue Capital should do well when the SHTF.
One of the best suggestions of late taken directly
from this blog is to add a conditional statement
to your written offer that states “every additional 3rd party bid
triggers an automatic 5% decrease
to original offer”.
Gotta love that popcorn!
What if you can’t qualify for a mortgage or refuse to pay the high interests? I would be saving for a 100% downpayment. How much you got saved so far? You should be able to get a nice house for $100k or even $50k in many places by 2010. Im saving up.
“you were insuring mortgages for which borrowers had absolutely no ability to pay down from the get go”
But…but…but…out models assumed that house prices would always go up! Stupid models!
Economic models are notoriously incapable of predicting turning points…
I wonder if they can deny claims on fraudulant loans ? That ought to be a hoot.
That would end this house of cards *really* quick…
Is that legal? How is the insurance structured?
Got popcorn?
Neil
I don’t have any basis for this whatsoever, but I would guess the insurance is non-rescindable. Even if that isn’t the case and there is a respresentations clause, it seems like documentation on a lot of these questionable loans was so bad (missing income information, etc.) that I’m not sure they could point to a misrepresentation as the basis for rescission. Short of rescission, there are probably few, if any, exclusions. Otherwise, the insurance wouldn’t sell. Besides, why bother with exclusions when you know home values are going up and you’ll never actually have a loss?
The D&O and E&O markets are getting ridiculously loose as well. Terms have gotten downright stupid. Goldilocks is not confined to the credit and stock markets.
That angle is old news. About 6 months ago MGIC was sued by a mortgage co over not paying out on fraudulent loans.
I bet the mortgage co ran out of money before they complete the legal process.
“And it’s likely to get worse because the 2006 crop of mortgages, which will start resetting next year, were of a particularly low quality.”
Oh no, that can’t be accurate - all the “experts” are predicting a recovery for housing next year. ; )
2006 was the year the fraudsters rode the bull to the end. Billions and billions of surprises are starting to show up. $800,000 loans on $500,000 houses (2005 bubble value). Those houses will be dropping 30-40%, making them worth $300,000. The only problem will be they still have an $800,000 loan! Oh oh.
What a mess! Home owners will “walk”. A few might continue to pay on a up side loan waiting for the big market to turn up, perhaps 10 years from now. Foreclosed houses will kill the market and loan standards will be set higher now. The bean bag buyers are all gone. Reality, here we come.
“David Wyss, Standard & Poor‘s chief economist, said that housing prices should continue to drop in parts of the country well into next year, and some of the biggest bubble spots could see price drops of up to 20 percent, putting subprime borrowers in a tough spot if they can‘t make their mortgage payments.”
I’ll start looking around after 20 percent drops… but there will be no rush to buy, as about that time, many sheeple will just be waking up to the fact that ‘real estate is a terrible investment,’ and the market will be drowning in inventory…
“price drops of up to 20 percent, putting subprime borrowers in a tough spot”
Exactly. Causing prices therefore to drop further.
40%
Roidy
Get, I’m starting to see short sales listed on the MLS in Merced, CA with 20% cuts already - and a number have been there for months. And these are basically non-distressed sales, where the bank is simply eliminating future carrying costs. The good stuff @ 40/50% off is yet to come. So early and so far to go.
Please help me out here.
“In the first quarter of this year, roughly one of every 41 subprime loans was entering foreclosure, and more than one of every six were delinquent, according to the Mortgage Bankers Association. Those are the worst mortgage default statistics since the Great Depression.”
The delinquencies (1 in 6) are either not being foreclosed upon or have been NOD’d and not yet Lis Pendens. Sound correct?
The 1-6 number is what alarms me. The banks are either in denial or there is one huge tidal wage coming soon when these go Lis Pendens.
Correct?
the number being thrown around last month was that one in five would end up in foreclosure (and presumably back to the lender as there was no equity). from the front lines i can tell you that the public has not gotten a clue that things have changed. i say no nine times out of ten. btw, colorado has made it a felony, per se, to do a stated income for a w-2 borrower. with subprime gone, alt-a eliminated, who is left? borrowers with income, a down payment and clean credit, good luck with that one.
Well, back in March I heard subprime default rate at 12% (1 in 8), then everyone sputtered and gasped and someone finally said 14% (1 in 7), so it’s not too big of a stretch that someone is now saying 16.6% (1 in 6).
When the ARM reset dust settles, I’d be shocked if the default rate doesn’t hit 20%. And I’m talking about hand-of-God work to keep it that low (at least of subprimes originated 2004-2007).
Well then if they’ve been saying it since March can we then assume that the banks are not foreclosing on anywhere near 100% of the delinquencies or are there new delinquencies equal to every new foreclosure.
Haven’t we read that the NOD to foreclosure rate is pushing 40 to 50%? With 1 in 6 defaulting that’s a foreclosure rate of 14%. And that is a ton of lost REO’s to shallow. Or did I read this wrong?
“Investors in the collapsed $320 million Basis Yield fund could receive less than 50c in the dollar from distressed asset sales, making Basis Capital and its investors the first Australian casualties from the subprime mortgage meltdown in the US.”
This is the most recent hedge fund collapse to register on the Hedge Fund Failometer…
http://wasatchecon.blogspot.com/2007/06/hedge-fund-failometer.html
“Creditors said Basis missed margin calls – demands for additional loan collateral.”
Bugs: “eh, Daffy…Yosemite Sam is pounding at the door”
Daffy: “Hey Bugs…He’s a yellin’ about Taz…say’s he’s gonna shoot that foreign varmit for spinning up all his money”
Bugs: “Tell’em there’s a fella on the phone from ACME Bank…eh, and he don’t sound too happy”
LOL
This is the Aussie hedge fund in the news a few weeks ago that kept investors from cashing out. Obviously, you don’t do that unless you’re under severe pressure yourself. Like French employment law, if you make it impossible to get out, nobody will want to get in. Look for similar issues with the other 15-20 funds that are trying to lock their investors in.
Same deal as with Bear Stearns - losses, margin calls, collateral seizures, possible auctions. The Yield Fund with the biggest trouble reported a loss of 14% for June which they blamed on subprime. Interestingly, their Pacific Rim Fund, which has only 17% exposure to the US was also down 9% in June - another clue that this is way beyond being “contained” to subprime, or mortgages or even the US as a whole.
http://www.ft.com/cms/s/8a8117b6-3563-11dc-bb16-0000779fd2ac.html
Basis Capital has taken down almost all of the info on their website but fortunately, I checked it when this first started to smell. After the US, the largest positions in their Pac Rim Fund were Australia, China, Indonesia and the Philippines - all 10% or larger. China aside, SE Asia accounted for over half of the investments. More than 85% of the fund was in corporate and government bonds (mostly corporates) - not related to consumer debt at all. For losses of the magnitude this fund has taken, it’s clear that most of it had to come from this sector. They simply didn’t have enough exposure to US or consumer debt to cause that. The Pac Rim Fund has also gotten margin calls.
Bond and loan markets are in deep kimchee. The bill for several years of lunacy seems to be coming due.
“This is the Aussie hedge fund in the news a few weeks ago that kept investors from cashing out.”
As grandpa was fond of saying, “Literature is life.” Enjoy the catacombs, investers…
But to these words I hearkened in vain for a reply. I grew impatient. I called aloud –
“Fortunato!”
No answer. I called again –
“Fortunato!”
No answer still. I thrust a torch through the remaining aperture and let it fall within. There came forth in return only a jingling of the bells. My heart grew sick — on account of the dampness of the catacombs. I hastened to make an end of my labour. I forced the last stone into its position; I plastered it up. Against the new masonry I reerected the old rampart of bones. For the half of a century no mortal has disturbed them.
In pace requiescat!
The Cask of Amontillado
–Edgar Allan Poe–
Yes, for the love of God Amontillado.
http://www.literature.org/authors/poe-edgar-allan/amontillado.html
wouldn’t 05 have been a better year to exit- sales slowed in july 05
why wait ?
“Federal Reserve Chairman Ben Bernanke said on Thursday that subprime mortgage losses could hit $100 billion and threaten consumer spending.”
I guess subprime is not contained any more…
LOL….I knew you were going to say that!
“Federal Reserve Chairman Ben Bernanke said on Thursday that subprime mortgage losses could hit $100 billion and threaten consumer spending.”
Ben is more optimistic than I am on the subprime losses. Much more optimistic. This is going to start happening fast. But when? A few more months of slow… then a little quicker… then GET OUT OF THE WAY.
Got popcorn?
Neil
Ben is more optimistic than I am on the subprime losses. Much more optimistic. This is going to start happening fast. But when? A few more months of slow… then a little quicker… then GET OUT OF THE WAY.
But when? Resets begin October 2007, massive foreclosures Starting Jan/Feb 2008 and convictions and prison time for mortgage fraud there shortly after.
Well, this is just the first shot across the bow for MGIC. Consider the business model: they insure low or no down payment mortgages. They are automatically selecting for high risk right there. The alternative to using their insurance is a piggyback second mortgage. So their portfolio has essentially the same risk characteristics as piggyback second mortgages with a heavy skew to alt-A and subprime - yuck!
Confession: I am drunk on schadenfreude this morning. Giddy as a boy on Christmas morn. Yippee kiyay, motherf*****.
Confession: I am drunk on schadenfreude this morning. Giddy as a boy on Christmas morn. Yippee kiyay, motherf*****.
LMAO! Much more to go in this show. Movie’s only begun.
Check out the Zits comic strip today
Got popcorn?
ROTFL
I saved that image. You had better believe it will show up on my blog for some schadenfreude article! Thanks for the heads up.
http://www.arcamax.com/zits
It is a schadenfreude day…
Oh… we’re still in the previews… better spend the 50 cents on the supersize.
Got lots of popcorn?
Neil
Neil,
What is the link to your blog?
Thanks.
Just click on his name.
FYI, putting links in the URL section of the log-in will reduce the chance of it being flagged as spam.
Yep or
http://recomments.blogspot.com
Thanks.
Lending speculation is hitting small-time hard money lenders in California.
http://centralcoasthousingbubble.blogspot.com/
A question for those in the know…
When computing Loan-To-Value amounts on commercial residental construction, what do hard money lenders use as the “value”? The current market value of the land? Or the perceived value of the development when it’s all built out?
I other words, are builders borrowing, say 80% of the value of the blank land, and using that to build, or are they borrowing 80% of what they and the lenders think the tract will be worth, after houses are built?
The reason I ask, is that first trust deed investors are told that these are safe investments, because of the collateral (real estate) backing them up. However, if the collateral is the blank land, and the amount loaned out is based on the *completed* project, then these investors are basically NAKED until the project gets completely built out and refinanced or sold.
“The reason I ask, is that first trust deed investors are told that these are safe investments, because of the collateral (real estate) backing them up. However, if the collateral is the blank land, and the amount loaned out is based on the *completed* project, then these investors are basically NAKED until the project gets completely built out and refinanced or sold.”
There are controls over the fund for the duration of the project so that the exhaustion of the loan ammount coincides with completion of the project. If the project doesn’t meet the goals set forth in initial appraisals the investors collateral is just as weak as it would be had the money been stolen.
I believe there are some pending lawsuits with this particular lender in which funds were distributed, but the work was never completed.
In any case, the bag holders are locals. Greed got the best of them.
LTV on construction projects is based on appraised value as if the project was completed. When times are tough and lenders are nervous the LTV is 70 or less; when times are good and lenders are foolish the LTV is 80 plus. You’re right, the lenders hold the risk in construction and development lending. This is especially true when the loans are non-recourse. That’s why builders continue to build properties that they won’t be able to sell.
Generally, what I’ve seen is that LTC (loan to cost) seldom exceeds 80-85%, with caps based on appraised value of ~70-75%. Maybe I haven’t seen the most aggressive lenders. Included in these loans are typically repayment guarantees, although non-recourse became more and more common this last cycle.
Practically speaking, what happens usually is all the equity comes in for a project up front. So what this can/does mean is that the leverage on the initial land purchase is 60% or less of the purchase price. I’ve seen some projects where the land is purchased entirely by equity, and the bank then lends the vertical construction dollars subject to the parameters above (max 80% LTC, 70% LTV).
“I other words, are builders borrowing, say 80% of the value of the blank land, and using that to build, or are they borrowing 80% of what they and the lenders think the tract will be worth, after houses are built?”
They are borrowing a lot more than that. I gather as much from the general rule that lenders will not lend more than 4x the total equity of a builder. Actually, I’ll bet they don’t do LTV since this is a commercial loan, instead they have to review the business plan and decide whether the money is a good investment. (also, back in the days when I was working with industrial borrowers, even for commercial RE lenders tended to loan 70% LTV or less).
“They are borrowing a lot more than that.”
Um, I mean way more than the value of the land. That is particularly true in most of Alaska, where the house construction and materials (and subdivision development) costs way more than the land. If the lenders only lent the value of the land, it would be too little for construction.
“Lending speculation is hitting small-time hard money lenders in California.”
I thought those hard-money guys usually come with stones and sticks.
The ones in Fresno and Stockton use AK47.
“Bernanke said these were ‘market innovations’ and ’sometimes there are bumps’ in the new-product road.”
I’m sure the clowns on the hill bit right in to that tasty Bullshit sandwich that Burnhackey served up. Oh, and yes 100 billion dollars is really not a big deal when we look at the big picture, we’ll just sweep that under a rug. I could not sit there and listen to that crap. Or perhaps I could since they vote themselves a handsome raise each year!
I’m sorry, but if these were such untested (ie - high risk) “innovations” wouldn’t you think there’d be more clinical-trial-type investigations before they were released en masse?
I guess I’m just being a simpleton here…….
Not a chance, it’s not like the an FDA approval process. Got to get in as fast as possible or the return wouldn’t be worth the risk, in their eyes.
Bernanke said these were ‘market innovations’ and ’sometimes there are bumps’ in the new-product road.”
Here’s your classic, “What no bread?” Well-why don’t they eat cake.
mentality.
Wonder if all the investor’s who just got wiped out, think it’s just a bump in the road.
There’s gotta be a bazillion lawsuits gettin’ cranked up.
Ain’t no way the garbage underwriting for the mortgage loans backin’ the CDO’s ever any sort of regulatory or disclosure standard.
Speaking of price inflation and exchange rates…
Int’l space station ticket price climbs
By MIKE SCHNEIDER, Associated Press Writer
http://news.yahoo.com/s/ap/20070719/ap_on_sc/space_tourists
“The cost of flying to the international space station aboard a Russian Soyuz spaceship has increased from $25 million earlier this year to $30 million. Trips planned in 2008 and 2009 will cost $40 million.
“It’s mostly because of the fallen dollar,” Eric Anderson, president and CEO of Space Adventures, said Wednesday. His company brokers the trips with Russia’s space agency.
A U.S. dollar currently is worth about 25 1/2 Russian rubles, compared with 32 rubles in 2002.”
Off topic and off housing bubble, but interesting:
“NASA is going to rely on the Soyuz vehicles to deliver astronauts to the space station between the end of the shuttle program in 2010 and the expected first manned flight in 2015 of the next-generation spacecraft, Orion”
If you believe that Orion will be ready by 2015. Then I have a house to sell to you.
Despite the relentless drip of horrible news on the credit front, tepid earnings barely meeting lowered forecasts, weakest dollar evah, etc. DOW keeps going up…
Every single MSM outlet has their DOW 14k+ close special edition primed and ready to go. They already have the quotes from the “experts” and their charts and the layout. It’s a foregone conclusion. Let’s just get it over with so the selloff can begin in earnest.
The stock market always goes up on Congressional testimony day…
trailing stops are a beautiful thing
As I see it, a weak dollar is excellent news for US multinationals. If most of their trade is abroad(mine is), then the repopulation of foreign currency at better ROI for the $ inflates their revenue without doing much.
For some multinationals that export. Not for multi nationals such as McDonalds. Since most US Multi Nationals that export are importing “pass through” items e.g. engines from Europe exported as a complete tractor. “Pass through” items cost more. US companies will see more cash flow but smaller profits.
An example in Poland is Coca Cola importing water purification systems from Germany to supply its new plant there because the American manufactured water purifiers are only 10% less expensive and half a world away. Poland’s economy is growing at 6%, Germany’s exports to Poland have jumped 20% and the US exports to Poland have gone up 3%. The Zloty has appreciated 7% against the Euro so far this year.
It is a world wide party, but we aren’t invited.
Well, I guess we’ll have to put away our party dresses and drag out the sackcloth and ashes.
It’s gonna be hard to learn to be wallflowers after we’ve been the prom queens for so long.
“WaMu now plans to set aside $1.5 billion to $1.7 billion this year for credit losses, up from its prior $1.3 billion to $1.5 billion forecast.”
That is 1.5 BILLION that didn’t have to be lost. Was it really worth the loanshark fees you guys raked in ? Are any heads going to roll or is it typical pass the buck time ?
I just have 2 questions to ask of you fine people.
First, since when did it make any sense to leverage yourself as these clowns all did in the hedgies (what 8 to 1 or 9 to 1) to pull off some of these gains?
and…
Second, once again, when did it ever make sense to think leverage is capital, esp. at these numbers. Okay, I understand there are times it makes sense, like a realistic mortgage or a car loan. However, these guys are clowns. Sure, I get a group of millionaires to put a billion and all of sudden I have 9 billion. I just don’t get these hedge funds, but I guess I am not alone since these clowns are slowly, but surely, getting their financial heads handed to them.
What I meant to say about No.2 question is since when did debt ever equal black? I thought debt had to be repaid. Obviously, no one thought these funds could go broke.
They were picking up pennies in front of a steamroller and got caught.
Its the fees they earn on Other People’s Money and the profit participation if the gamble aka investment goes according to plan.
Heads I win, tails you lose.
It only makes sense because investors bought into the plan. As long as you assume that par value is solid (default rates stay within their historic norms), an investor could justify lots of leverage because they were essentially leveraging a AAA rated bond.
The hedge fund managers collected 2% and 20% with little risk of their own, so why wouldn’t they leverage up if mortgage banks were willing to give them the money?
The fallacy about the whole thing is that default rates could generally only be assumed to be constant IF, AND ONLY IF, underwriting standards are held constant. Of course, there are lots of other factors that come into play, but this is the most glaring problem.
If you weaken underwriting standards, then you have weaker loans, and increased defaults once underwriting standards can’t get any lower (stopping the home price appreciation).
The short answer to your question:
1. Investors (both debt and equity into the hedge funds) engaged in CYA investing–if everyone else is doing it, and S&P and Moody’s rate the bonds AAA, then I (the decision maker) won’t get fired.
2. Hedge Fund Managers happily took the money, leveraged as much as the investors would allow to maximize their 20% carried interest—if it worked.
“mortgage banks” should be “investment banks”…proofread, proofread, proofread.
RW
Just to compound the errors, “historic norm” was defined as the last 5-10 years since many of the subprime and alt-A products were nearly or completely non-existent prior to that. Of course, that was a period of nearly uninterrupted boom in residential. So the implicit assumption was history=latest bull market. The products had never been stress tested at all.
The answer to both questions is never. But the last time they seemed to make as much sense as from 2000-2005 was the late 1920s. Margin lending allowed even the little guy to go 10:1.
Look ahead. If you’re OK now, but won’t be next year when your mortgage resets, don’t wait. Start shopping for a better loan now. If necessary, take drastic action: Hold garage sales, take in roommates, moonlight, borrow money from your snobby brother-in-law.
Like any of those are going to cover a $400 a month reset.
Note to self: don’t loan money to any of my in-law bagholders. They might have read this article, because I’m a snobby bitter renter.
From the Reuters article: Those are the worst mortgage default statistics since the Great Depression.
Everything is fine. Nothing to see here. It’s all good.
Not only that, we also currently have the longest protracted period of negative household savings rates (on a national level) since the Great Depression. Go Fed!
FRANK: … and, by the way, I would throw in here the savings rate. People lament the absence of a savings rate. When only 3.8 percent of the population has gotten any real increase in their wages, in their take-home pay in the last five years, what is it people expect them to save? Canceled stamps? People can’t save money if at the end of the month they don’t have any, if their wages have not come up.
So with all that, the conclusion that the main danger facing us now, or the more important one, is inflation troubles me. Because I think at best this current situation of increasing inequality, with all of its negative social and economic and political consequences, stays as is, and could get worse.
http://www.washingtonpost.com/wp-srv/business/transcripts/bernanke_071807.html
“Many of the jobs opening up this year at the Austin servicing center will be focused on dealing with delinquent loans and foreclosures, said J.K. Huey, IndyMac’s senior VP of home loan servicing.”
See? Real estate is a growth industry!
“Bernanke, under fire from lawmakers for the Fed’s failure to step in earlier to address the factors underlying the nation’s housing bubble, said the Fed and other regulators will soon issue stronger rules to protect consumers.”
Yeah, he should have just stepped in 2002 and pushed Greenspan on his ass and said “I’m takin’ over here now suckers!” then this wouldn’t be all of Bernankes fault. What a bum. It’s Ben’s fault. What a friggin’ loser. This guys worthless, he could have just taken over right there and he just stood aside and let this happen, and here it is 5 years later and we’re just watching it all go down and he could have done something about it. He could have just shouted even louder at the time than Ron Paul who’s been shouting about this for years, everyone would have come to their senses like when the Wicked Witch of the West gets water thrown on her, and here he just sat on his hands. LOL
“the Fed and other regulators will soon issue stronger rules to protect consumers.”
Any day now…after all, what’s the rush, the disaster is already upon us.
I sent $100 to Ron Paul’s campaign yesterday. Must say, it felt good. Among a field of candidates lifted straight out of TS Eliot’s “Hollow Men,” Dr. Ron Paul is a shining beacon of integrity, intelligence, and principle, unlike the irreflective smirking chimp currently presiding over our downfall. Cheering from the sidelines isn’t good enough - active involvement and support is the only thing that will allow Ron Paul to challenge the political whores and swindlers sponsored by the incorporated global plantation.
“‘We know California is a developing problem. We know Florida is a developing problem,’ said Geoffrey Dunn, analyst at Keefe Bruyette & Woods Inc. ‘It’s simply the amplitude that’s the surprise in the quarter. We’re going to need help from management and a lot more color on specifically what happened.’”
You want to know what happened? Look no further than this blog - we’ll clear it up for you. It’s like this: you lent insane amounts of money to people with a demonstrated inability to competently handle their financial affairs. Color that money gone. Now, much like a Bowery bum when he realizes the bottle’s empty and there’s nothing left, you’re screwed. There it is, plain and simple. The next time you need more “color on what’s happening,” feel free to check in with us again.
Sammy is on a roll!
IndyMac’s expansion into Austin comes at a cost:
The Pasadena Star News reports: (http://www.pasadenastarnews.com/news/ci_6419570)
IndyMac bank lays off 400 workers
Housing slowdown blamed for reduction
By Kevin Smith Staff Writer
Article Launched: 07/19/2007 11:28:52 PM PDT
PASADENA - In the face of an increasingly tough mortgage market, IndyMac Bancorp. announced Thursday it is laying off about 400 employees, roughly 4 percent of its total work force.