‘Clear Downward Trends Have Emerged’: FNM CEO
Paul Muolo has the latest on the mortgage business. “The phrase “mortgage REIT” has been synonymous with Friedman Billings Ramsey, the investment banking firm that has taken many of these non-prime mortgage lenders public (or has tried to). But now, thanks to a flat yield curve and declining production volumes, many mortgage REITs are suffering as are their shareholders. One joke making the rounds is that things are so bad for REITs right now that FBR’s Eric Billings (the ‘B’ in FBR) may have to enter the witness protection program.”
“On Monday the House Financial Services Committee held its hearing on the long awaited ‘Rudman Report.’ Sen. Warren Rudman (retired) told the committee that Fannie Mae officials ‘manipulated’ accounting rules so they could meet earnings goals (and maximize bonuses) in 1998. Most of the 20 or so elected officials attending the hearing seemed outraged by the behavior of (now former) Fannie executives.”
“I’ve read about half the report and plan on working my way through it in the weeks ahead. From time to time I’ll bring you some neat tidbits from it. Here’s one: an allegation was made that Fannie tracked 20 to 25 employees at the company who ‘can do political harm’ to it. One employee is mentioned as being ‘associated’ with a ‘prominent’ politician. The allegation, though, was not substantiated.”
And Bloomberg has this report on the sector. “The U.S. Federal Reserve’s fight against inflation is taking a bite out of one of Wall Street’s biggest money-makers: the $6.5 trillion market for packaging millions of home loans into tradable bonds.”
“Executives at Lehman Brothers Holdings Inc. and Goldman Sachs Group Inc. said revenue from mortgage bonds in the U.S. is dropping as rising interest rates depress home sales. Lehman, the fourth-biggest U.S. securities firm, is cutting almost 200 jobs at two home-lending units in California. Bear Stearns Cos. Chief Financial Officer Sam Molinaro said that he sees ‘weakness’ for new mortgages across the industry.”
“Since June, home sales fell 10 percent. The drop in sales cut the supply of home loans, which securities firms use to make the bonds, by 65 percent from the 2003 peaks. Average U.S. home prices are stagnating after rising for five straight years. They declined 3 percent to $261,000 in January from an all-time high of $269,000 in August.”
“‘We expect home sales to drop by 8 percent in 2006,’ because investor demand is falling and homes are too expensive for some first-time home buyers, said Daniel Mudd, CEO of Fannie Mae, the largest U.S. provider of mortgage financing. ‘There are clear downward trends that have emerged.’”
“‘We are coming into a challenging part of the cycle,’ said Kevin White, who helps oversee New York-based Lehman’s mortgage-bond group. ‘That’s good for us in the long run because 10 of our competitors will have closed up shop.’”
“Wall Street firms also are facing increased competition from Fannie Mae and Freddie Mac, the nation’s two biggest providers of mortgage financing, which plan to increase their buying and packaging of home loans that don’t conform to insurability standards. Those include loans to people with low credit scores and mortgages to borrowers with good credit but with little documentation of their income.”
“One of (Lehmans) units, Aurora Loan Services LLC, filed a notice in January with California’s Employment Development Department saying it plans to close an office in Irvine, California, with 92 employees. Another subsidiary, BNC Mortgage Inc., also based in Irvine, filed separate notices that it’s dismissing 95 employees.”
Thanks to the reader who passed on the Bloomberg tip.
“One joke making the rounds is that things are so bad for REITs right now that FBR’s Eric Billings (the ‘B’ in FBR) may have to enter the witness protection program.”
I thought FBR was short for F^cked BuyeR…
It stands for Friends, Brothers, & Relatives or the recruiting bench. If Eric Billings enters witness protection it will be over shady PIPEs, insider trading, and hedge fund related activities only related to mortgages due to the fact that they were only taking mortgage reits public.
What could bring them down will be that they liked the shaver so much they bought the company adding a big mortgage reit to their business, and not doing any hedging of rates.
F^cked Borrowers R’us?
“Most of the 20 or so elected officials attending the hearing seemed outraged by the behavior of (now former) Fannie executives.”
Politicians have to “seem outraged” now so when the house of cards collapses, they can distance themselves from the fallout. But will they do anything to try to mitigate the damage? Probably not — anyone who takes corrective action shortly before a crisis unfolds is subject to “pottery barn rules” (you break it, you bought it…).
‘Fannie Mae and Freddie Mac, the nation’s two biggest providers of mortgage financing, which plan to increase their buying and packaging of home loans that don’t conform to insurability standards. Those include loans to people with low credit scores and mortgages to borrowers with good credit but with little documentation of their income.’
It’s a sign of the times when the GSE’s, with their federal backstop, have to stoop to doing subprime business to hold up the stock price.
How do you underwrite subprime loans with little documentation of income? Could this be the mortgage business version of the military’s “Don’t ask — don’t tell” policy?
That surprised looks from politicians that we will see in the coming years are phony. Any politician with a brain knows we have serious problems with debt, cronyims and a declining skilled workforce.
New home buyers won’t be able to afford 600,000+ homes. Check out this link that talks about software engineers in America getting paid up 8 times what their counterparts are paid in other countries.
And it’s not just limited to software engineers. Investment banking, medical services and other industries are being offshore outsourced as well.
“While an American engineer commands a salary of about $80,000, a counterpart in India earns $11,000. In Israel, an engineer earns $38,000 while one in Canada is paid $29,000. Chinese engineers are paid $9,000; in the Philippines, the salary is $7,000, said Vish Mishra, senior venture partner with Clearstone Venture Partners.”
http://weblog.infoworld.com/techwatch/archives/005583.html
WTF? That’s grossly incorrect; our wages are comparable to the US.
Maybe the wages are comparable, but it’s still Canada.
Yea and Dell reported that they will hire over 20K more staff in India, courious how many jobs will be lost in AMER after the hiring starts?
fmn and fre employees will get raises while all others get fired
BIG GOV any way you slice it
“Here’s one: an allegation was made that Fannie tracked 20 to 25 employees at the company who ‘can do political harm’ to it. ”
Cool — a page taken right out of Tricky Dick’s playbook.
Another indication of a down-trend:
During the past 4 yrs. I have been ivolved in over 20 multi-lender transactions in the San Luis Obispo and Sacramento areas. These transactions involve funding small to midsized land developers and builders that pay the lender 10 to 12%. Notice of default has been sent to the borrower/developer of a 25 lot subdivision located at Elk Grove (south of Sacto). This is the first, probably not last, foreclosure proceeding since I started invesing in this market.
well… these guys all read out blogs… so is this what we can count on? The real news and the truth is going to come from these guys telling on the rest of the market?
If so… more power to them, we’ll keep the real stats coming.
I don’t get it . In a downturning market , the government is going to back more , not less, subprime loans ?
They are buying them with other peoples’ money (yours in particular…)
As an oil field moves past its peak production and begins declining, more, less productive wells must be drilled in a futile effort to maintain production levels. The same can be said for the mortage industry.
Ouch! Nothing like the smell of first drawn blood. The sharks are starting to circle.
another victim of the bubble
http://www.dcbubble.blogspot.com
Glad to hear people like these saying things like that. All you have to do is look at the data, to see that the market has almost nothing to stand on. When enough people recoginize it, we’ll see things really start to snowball.
Anyone want to make bets on what is going to happen this spring?
BubbleTrack.blogspot.com
Sharp correction this year in housing market ,20 to 30% down in price in extreme bubble areas , 15 % down on national average price .
Thanks Housing Wizard. Good info for those of us in the areas that did not go crazy. (15%) Not to question anyone but if I can get a home for less than it could be built (which is common out here) ….is there any way that would make sense to buy? I have children and lots of pets. Renting would be sooooooo painful.
I think prices are going to go down alot more , but maybe you can get a deal from a seller that really needs to move if you keep looking . Make lowball offers . If you are going to live in the house long term and your area wasnt a extreme bubble area maybe you can find something that wont decline in the next 5 years .
Please remember Upstarter that these are only opinions on this blog . I’m not a expect , in fact, Im retired and
out of the business world for a while . Im just going by what I have seen in the past , however this market is crazy so anything might happen .
Thanks housing wizard. I understand that.
Two firms letting go of about 100 people each. These are pretty high paid people, especially the ones at the top. This is the start of the snowball for Orange County, CA. Housing market starts having problems = people lose housing related jobs = housing market having even more problems = even more people lose housing related jobs = …….
Any guesses on how long it will take for this to get really ugly? I say Q1 of 2007.
Look out below!
I smell sheer desperation on Capitol Hill. The politicians have all taken Fannie Mae’s funny money. They know how serious the problems are. Taking on sub-prime loans is the last gasp for FNM before it goes under the tide. The Fed. has lost control of the money supply. They are irrelevant right now. The only hope they have is to sell a boatload of very long bonds to foreign holders. Trying to convince foreign governments to buy $3 trillion in 30 year bonds will be a trick though because nobody trusts them (the US gov.) anymore. FNM is trying to play poker with the big boys and is running out of chips. The fed. gov. has so many obligations it knows it cannot afford a bailout of this magnitude. All the fedspeak in the world is not going to change a thing. If BB cannot address this copious liquidity crisis I expect a dollar collapse is imminent.
“Sharp correction this year in housing market ,20 to 30% down in price in extreme bubble areas , 15 % down on national average price .”
Hey housing wizard
This seems like what should happen if you look at all the facts but I dont know if some thing so drastic is possible in such a short time. Part of me says it would be great as it would vindicate us housing bears and allow me to buy a house for a realistic price, but on the other hand I dont know what this would do to the economy to see that much wealth disappear so quickly(even if it is dubious wealth). I guess I have mixed emotions.
Make sure the feedback effects have run their course before you do anything rash (like buying a house / catching a falling knife…)
The piece in the second to last sentence is the exact point that a lot of folks don’t understand. Debt is not wealth. The US hasn’t been creating “wealth”. Just the opposite, we have been slowly sending our wealth overseas. When I say wealth, I am speaking of our industrial capacity. If our economy was based on a gold standard, there is no way that Congress could have increased our debt limit. Someone would have had to lend us gold. I don’t see that happening. The same with taxes. If it were a gold standard, do you think the government would let you keep portions of their gold reserves? I doubt it, unless they had the capacity to create a bunch of gold. By “giving” folks a tax break in the form of USD, they simply print more. If you had say 3,000, and they give you a 100 dollar tax break, but print a whole bunch more, what is your total of 3,100 really worth? Did you really get “money” back? Depends how much they printed. By raising the debt limit by 781 billion, that is French for printing that much more money. Wealth isn’t going to disappear. A whole bunch of paper IOUs are going to disappear. Those who are smart enough to cash in the IOUs prior to the collapse will have saved a portion of it. The rest….well, I hope there are some great upcoming episodes of American Idol really interesting sports on Sportscenter.
Yeah, I miss the manual choke on my 1974 Puegot, too.
Moopheus,
You seemed to miss the point. You are reading a blog on the housing bubble. It, along with the other bubbles of the last 20 or so years, wouldn’t have occurred withuout the fiat monetary system in place. Look around at how much time, effort, advertising, TV time, etc is literally “wasted” on what the Fed is going to do with interest rates. If all the wasted “productivity” was put into other endeavors, I don’t think we’d have the deficits we currently have. As has been said many times on the blog, as the housing mess sorts itself out, it is going to change our economy significantly.
Ah but how much productivity would have been lost due to either too little money stock or too much effort extracting resources.
Both gold and fiat money have their drawbacks, I think risk seeking that we are, most of us prefer the lower annual cost but small risk of massive catastrophe that fiat money provides.
The more I learn about finance the more convinced I am that everything is bonds and options. An insurance is little more than a put option. Metalic currency carries a ongoing cost, arguable as to how high but real. Fiat money saves that ongoing cost for protection against inflationary actions. I think most every country (even the Swiss) believes that the ongoing costs of not maintaining a fiat currency are higher than the potential disasters. Granted, since those with resources face essentially all the ongoing costs but would share the burden of an economic collapse perhaps they are poor agents, but good luck solving that problem.
It seems like a market of global currencies would allow people to reduce the risk of collapse in any one currency, if their forecasts were good enough, and would allow monetary systems to range from near gold standard (say more conservative than the Swiss) to highly inflationary (say the Turkish or Italians) with capital and growth moving from system to system.
If the bubbles of the past 20 years could have been prevented by a gold standard, why didn’t it prevent any of the bubbles that occurred when there was a gold standard?
If we’d stayed on the gold standard in the 1970s, perhaps we wouldn’t have had any bubbles–we would have had 35 years of continuous recession instead.
Paper currency is here to stay. Bubbles need to be prevented with regulation of lending rates and practices. Going back to gold makes no sense because the supply of gold and other valuables does not scale with normal growth in world markets.
“Debt is not wealth.”
It is according to my Greenspeak dictionary…
Ok this sharp correction will either happen in this short amount of time , or, houses will just set month after month after month .
Im coming from a lending standpoint , We are going into a tight money market ,verses easy money market , and that will trigger the sharp correction .
This is reality,,, people really should of thought of that when home prices went up 15% -> to even 40% in one year and still keep buying.
Can Bernanke, by stopping interest rate increases, delay the bubble burst? He’s speaking tonight and a lot of people will be listening for any remarks about housing slowdown. You know Wall St, the govt and the Fed don’t want a panic…
“It’s unlikely he’ll break any new ground, particularly with next week’s Fed meeting coming up,” Cardillo said. “But if he were to say anything about the housing market slowing more than has been thought, that might cause some in the market to think that the Fed will only raise rates one more time and then stop.”
Here’s what the head of the Boston fed. has to say about housing. Looks like a “soft-landing” might not be so certain after all…
http://www.marketwatch.com/News/Story/Story.aspx?guid=%7BC3A6E113%2D5C56%2D4FB3%2D84DE%2D7F1B075D48C5%7D&siteid=mktw&dist=
It may noy be certain, but my gut feeling is that Bernanke will go to any lengths possible to attempt to make the soft landing scenario come true…
Just an opinion, but I don’t think he can stop raising rates. BB has bigger problems than the housing bubble, believe it or not.
I don’t know. See, the housing bubble going the other way has many consequences.
Severe job losses in the housing related segment
Rather than extracting $$$ from home ATMs, homeowners that took ARMs will actually not only NOT be adding to consumer spending, but will pull back below where they would otherwise be willing/able to spend as they will face more income devoted to servicing debt. Dramatically slower consumer spending at a time when the auto business is already in miserable shape.
Leads to sever declines in furniture sales, home improvement…
The collections and asset disposal business job growth might
We actually should call it the credit bubble. The credit bubble is a two edged sword. On the one side it increases consumer spending which drives economic growth and tax revenues. On the other side it takes a lot of foreign investment out of T-Bills, etc. which the government desperately needs to keep running. If the government does not get some of this loose liquidity off the streets it will lead to rampant inflation and further the needs of the fed to print more money. This is a perilous place to be. They have been fighting an economic recession for so long that they have only postponed and increased they inevitable pain. The housing bubble is just a symptom of bigger problems.
I think despite what the big guys are starting to say, local areas will try to deny it as long as they can. The papers in my area are in complete denial. Silence is the operative word… despite the fact that there is data that says Sonoma is headed for a beating. Both papers… the Press Democrat and especially the Index Tribune are riddled with real estate advertisements… and they are absolutely silent on the real state of real estate. I predict that by the time news from the multiple ground zeros hits the air- people will already have known what bus already hit them.
To AZ_BubblePopper:
Don’t know what’s happening in your area but here in Monterey County I am astounded daily by the number of new cars appearing on the city streets. The only thing that I can figure is that they are all lease cars and maybe their old leases are up.I need to ask someone and find out what is happening. (Salinas has one of the lowest per capita incomes in the nation and one of the higest median housing rate.) Something is really wrong with this picture but I think that things will become clearer in the coming months.
From tales of a Seattle real estate investor:
http://seattlerei.blogspot.com/2006/03/new-irons-in-fire.html
“We’re also going to get involved in a interesting program managed by a mortgage brokerage. It’s called “Pick your House”, and it targets wannabe home owners whose credit is not yet at a point where home ownership is practical. Working with a mortgage broker, they determine how much they can afford for a payment. Then, an agent is looped in, showing the client homes within their budget. Once a home is picked, the investor is brought in to purchase the home, who in turn leases it to the client, and offers a 1,2 or 3 year option to purchase it. The houses shown to the client are ones where financing and 10% - 20% down by the investor will cash flow $100-$200 per month.”
So, you put down 20%, perhaps $50k, and it cash flows $100/mo.
You missed the best part:
“Another activity we’re going to start doing next weekend, is to join a ‘caravan’ led by our agent, and visit developments (both houses and condos) that are in their early stages. The strategy here is to buy properties in the pre-construction phase, where the only committment is a 5% deposit of the sales price into escrow, and then profit off of the appreciation that builds during the construction period. Condos are often better plays, since they take longer to develop, allowing more time for appreciation.”
Is Seattle still appreciating?
Sounds suspiciously like Islamic banking.
—Bear Stearns and Lehman rode the U.S. housing boom from 2000 to 2005 as the top two underwriters of new mortgage securities,…..
no wonder there profits last quarter were off the charts? where is hedgefund who argued innocently about financial sector’s avoidance (largely) of this..
derivatives/mbs/cds/ will magnify losses and fed is helpless.
and outsourcing continues with a vehemence.
obviously, world will look very different 2-3 yrs from now.
Yeah,
I guess we all are going to be surprised when we finally find who the bagholders are. With 97Trillion derivatives market, I am sure that there are some black sheep there. As buffet says “Only when the tide goes away, you find out who all have been swimming naked”. This tide is going out faster than anyone of us saw 6 months ago.
Who ever say this market crash was going to be pretty . I have never seen one in which anyone was spared . Im going to loose money/equity myself because I bought in mid 2005 . I just accept the fact and move on . Sure Im concerned , but we cant have a society based on credit/housing bubbles and fake markets . Im almost game for a sharp correction .
More puzzling stock price movements today in the housing sector; big HBs generally have dropped by over 2%, while FNM is remarkably bouyant…
http://tinyurl.com/c47e9