No Signs Of A Slowdown Or Turnaround
Some housing bubble news from Wall Street and Washington. “IndyMac Bancorp Inc., a big Southern California mortgage specialist, said Tuesday second-quarter profit fell 57 percent as the deepening U.S. housing slump hurt margins and loan volume, and more customers fell behind on payments.”
“Lenders forced the company to buy back $219 million of loans because borrowers missed early payments, up from $48 million a year earlier. IndyMac specializes in ‘Alt-A,’ or ‘Alternative-A,’ mortgages, which fall between prime and subprime in quality.”
The Street.com. “IndyMac’s non-performing assets rose 342% to $516 million, while mortgage loan production fell 12% from first-quarter levels to $22.5 billion.”
“‘We anticipate that the second half of 2007 and 2008 will continue to be challenging for the mortgage and housing markets and for IndyMac,’ IndyMac CEO Michael Perry said. ‘We expect competitive pricing pressures on our [mortgage banking] margins to continue.’”
“‘In addition, we expect that the current, temporary volatility and reduced liquidity in the secondary markets will adversely impact secondary market execution, putting further pressure on MBR margins.’”
The Boston Globe. “Sowood Capital Management, a $3 billion Boston hedge fund launched just three years ago by former Harvard endowment manager Jeffrey Larson, sold most of its holdings in troubled debt markets yesterday after telling investors that it had losses of more than 50 percent this month.”
“Sowood told Bloomberg News last week that it did not hold any subprime mortgage debt in its portfolio. Nonetheless, it said its devalued bond holdings thrust it into a liquidity crisis and it was forced to sell securities to meet margin calls.”
“Last night an investor said Sowood had told clients it had lost 57 percent of its value and was being ‘completely liquidated.’”
“‘A loss of this magnitude in such a short period is as devastating to us as it is to you,’ Larson, said in a letter to investors. ‘We are very sorry this has happened.’”
From Bloomberg. “Shares of MGIC Investment Corp. and Radian Group Inc. tumbled the most since 2002 after the two home- loan insurers said their combined stakes of more than $1 billion in a subprime mortgage company may now be worthless.”
“MGIC and Radian said yesterday ‘unprecedented’ disruptions in mortgage markets this month may have destroyed their stakes, each valued at more than $500 million on June 30. The joint venture has received ‘an unprecedented amount of margin calls from our lenders,’ said today’s statement.”
“‘I’m surprised. It’s a very quick time frame to have that change in valuation,’ Mark Patterson, a managing director at Los Angeles-based NWQ Investment Management, said before C-Bass’s announcement. NWQ was one of the three biggest investors in both MGIC and Radian as of March 31. ‘There’s been incrementally bad mortgage news every day, but the magnitude of this is quite severe.’”
“Climbing monthly payments for borrowers with adjustable-rate mortgages ‘forced many homeowners to default without the ability to refinance their mortgages,’ Radian CEO S.A. Ibrahim said in a conference call July 25.”
From CNBC. “GMAC posted a 63% decline in second-quarter profit Monday, hurt by subprime mortgage losses at its home lending unit. Results included a $254 million loss at Residential Capital LLC, or ResCap, compared with a year-earlier $548 million profit, amid what GMAC called ’severe illiquidity’ in subprime mortgages, or home loans to people with weaker credit.”
“ResCap slashed second-quarter U.S. nonprime mortgage production to $700 million from $6 billion a year earlier. It also kept fewer riskier loans on its balance sheet. GMAC CEO Eric Feldstein nevertheless projected that ‘widespread weakness’ in housing and mortgages will persist this year.”
The Associated Press. “Trading in American Home Mortgage Investment Corp.’s stock remained halted Tuesday. If things grow more dire, Citigroup analyst Donald Fandetti said bankruptcy is possible. In some cases, a company in this situation would sell itself at a big discount to the value of its assets.”
From Smartmoney. “The warehouse debt dealers to whom AHM used to sell its loans, the likes of Deutsche Bank, Wells Fargo and Countrywide Financial, have fewer buyers for their ’structured’ products these days, and none at all interested in anything but the choicest cuts except at 50 cents on the dollar.”
“Such dealers had extended $4 billion in credit to AHM, and with the securities stuck on the originator’s books depreciating by the day, the warehouse crew demanded more collateral. Hence no dividends for AHM shareholders.”
“‘I think this could drag out into the fall,’ says Paul J. Miller of Friedman Billings Ramsey. ‘The issue is that the market is frozen. I don’t know when it’s going to get unfrozen. I think people will get comfortable with credit at some point, but we don’t know how bad it’s going to get. Liquidity crunches like these tend to work themselves out, but we’ve never seen one like this. What’s going to happen is that there will be better mortgages originated, because that’s the only stuff that’s trading.’”
The Daily Telegraph. “Sales of bonds that finance the $US1.2 trillion ($1.42 trillion) US subprime home loan market have ground to a halt, as delinquencies by borrowers continue to rise and credit rating agencies downgrade the securities.”
“‘Moody’s and Standard & Poor’s finally got it into gear, downgrading hundreds of subprime issues and threatening more to come,’ Bill Gross, manager of the world’s biggest bond mutual fund.”
“‘When these loans reset, IO periods are over, what makes you think things are going to go favourably?’ said Darcy Morrison, an analyst at Evergreen Investments. ‘So the (new issue) market is kind of frozen.’”
“‘Rating actions caught the attention of investors who thought that if you bought a ‘AAA’ rated bond that it would stay ‘AAA,’ said Morrison. ‘Who knew it could get dinged as bad as it was.’”
“The market for new subprime bonds ‘has practically ceased activity’ because of the ABX sell-off and wider spreads on the underlying bonds, said Christopher Flanagan, head of ABS research at JPMorgan Securities in New York.”
“Big lenders including Countrywide Financial Corp and Wells Fargo & Co have stopped offering some subprime ARMs that customers with low credit scores may rely on to save their homes. Some 40 per cent of borrowers may no longer be able to refinance before their ARMs reset to higher interest rates, Mr Flanagan wrote in a note.”
The San Francisco Chronicle. “New data seem to confirm fears that Countrywide Financial is not the only lender facing problems with prime home-equity loans. Industrywide, the percentage of prime home-equity loans at least 60 days delinquent has more than doubled to 1.14 percent in May from 0.51 percent in May 2006, according to new data from First American LoanPerformance.”
“Until last week, most analysts weren’t focusing on the home-equity market. Countrywide’s announcement was the first clear evidence that mortgage problems could spread to prime.”
“‘I don’t think (Countrywide’s announcement) should have been a surprise, but up until a month and a half ago, the majority of people were saying this was just a subprime problem,’ says Joshua Rosner, managing director of research firm Graham Fisher & Co.”
“Joseph Mason, an associate finance professor at Drexel University, expects to see more problems with mortgages that were disguised as prime.”
“‘Much of prime is not really prime. The Alt-A base (has) been found to be really subprime. And much of the subprime has turned out to be flat-out fraud,’ Mason says.”
“‘Borrowers over-borrowed, brokers over-lent, investment banks oversold performance and rating agencies overrated (mortgage-backed securities). What we thought was quality was not quality,’ he says.”
“The highest level of defaults in 10 years on subprime mortgages and a $US33 billion pile-up of unsold bonds and loans for funding acquisitions are driving investors away from debt of the New York-based securities firms.”
“‘The market is being driven by fear,’ said Mark Kiesel of California-based Pacific Investment Management, manager of the world’s biggest bond fund.”
“‘They’ve got a problem,’ said Daniel Fuss, vice-chairman of Loomis Sayles & Co. ‘It’s pretty bad. They’re going to have to go back to the private equity people’ to renegotiate their lending commitments, he said.”
“Scott MacDonald, director of research at Aladdin Capital Management, said: ‘Fundamental credit research does not mean anything at all in this environment. People are just trying to get out of the way.’”
The BBC News. “The UK housing market is slowing as interest rates begin to bite, the UK’s biggest homebuilder has said. Taylor Wimpey added that short-term conditions in the struggling US housing market ‘remained difficult to predict.’”
“In the US, the firm said that plunging land values in Florida and California had forced it to write down £60.9m from its books, on top of a £25m provision announced in May.”
“M/I Homes Inc. said Tuesday it flipped to a second-quarter loss, including tens of millions of dollars in write-offs, as delivery of new homes fell by nearly a quarter.”
“The homebuilder posted a loss of $42.6 million compared with the same period a year ago. Included in the second quarter figures are pretax charges of $72.1 million. These include $64.2 million in land-related impairment and abandonment charges.”
“The company, which focuses on the Midwest, Mid-Atlantic and Florida markets, said the ongoing housing slump and falling prices make it difficult to predict demand or margins.”
“Brookfield Homes Corporation today announced financial results for the second quarter ended June 30, 2007: Net income for the three months ended June 30, 2007 was $10 million, compared to $43 million in 2006. The decrease is primarily a result of fewer home and lot sales, and a decrease in the gross margin earned on housing to 18% from 27% for the same period in 2006.”
“Housing revenue for the three months ended June 30, 2007 totaled $155 million, compared to $193 million for the same period in 2006. The decrease in housing revenue is primarily due to fewer home closings during the quarter in the Southland/Los Angeles market.”
From MarketWatch. “Home prices in 15 of 20 major U.S. cities were lower in May compared with the previous May, Standard & Poor’s reported Tuesday. The Case-Shiller 20-city index fell 2.8% compared with a year earlier, S&P said. That’s the biggest decline in the seven-year history of the index.”
“In 10 major cities, prices were off 3.4% from the previous year, the largest decline since 1991.”
“‘At a national level, declines in annual home price returns are showing no signs of a slowdown or turnaround,’ said Robert J. Shiller, chief economist at MacroMarkets LLC., and the co-inventor of the price index.”
Contained?
‘The Australian fallout from the sub-prime loan crisis in the US worsened substantially last night after Macquarie Bank revealed that retail investors faced losses of up to 25 per cent in two of Macquarie’s high-yield investment funds.’
‘Macquarie said last night that two of its funds which were marketed to smaller investors could lose a quarter of their value, or more than $300 million. Analysts have expressed fears that the recent credit crunch in world debt markets, which has driven investors to shun risk, could affect assets that do not have the problems of sub-prime mortgages, where defaults are soaring.’
‘Mr Lucas said the situation in the senior loans market had deteriorated significantly in just the past week. ‘The price movement we have seen in the last week has been unprecedented,’ Mr Lucas said. ‘We didn’t expect this to happen.’
Lucky for Australia they have a tremendous amount of gold and silver they will mine during the metals bull market. Countries with natural resources will fare better than those without in the next five years or so.
Export economies like Australia and Canada are showing strength in their currencies.
Correct me if I’m wrong, but won’t mining, metals, oil, etc. tank *if* we have a global recession as a hangover to this credit bubble?
There is a historic ratio between gold and oil going back over 100 years with the median falling around 15 to one, meaning 15 barrels of oil to purchase one ounce of gold.
Currently the ratio is roughly 8.5 to one when dividing gold at $666 by oil at $78, so I do not expect any weakness in either gold or silver going forward.
For the record, as that ratio adjusts it always overshoots to somewhere in between the 20 to 30 level on a historic basis so therefore if one was to be conservative based on the current price of oil $78 and using the conservative multiplier of 20 that would render a minimum target of $1560 for gold.
What will cause gold and silver to surge? Continued competitive global currency devalutation, that is ongoing massive money printing by countries to weaken their currencies vs one another.
Either gold will reach $1560/oz or Oil will drop to $44/barrel.
If we have a global recession we will see a drastic reduction in oil demand as people can no longer afford most things.
Could it be Oil that is vastly over priced? Check out this chart
I hope this is not the case because I recently moved 15% of my savings into Gold/Silver, I would hate to see it go down with the houses!
Their are sometimes serious corrections in secular bull markets, but remember gold was up over 25 fold in the 70’s and silver was up over 38 fold in price, so the smart money simply hangs on for the entire ride which ends in a bang to the upside.
Peak Oil will likely be the real “paradigm shift” that changes the old 100-year relationship. I wouldn’t count on $44 PB oil anytime soon.
IMO “Peak Oil” will prove to be the same mirage that oil shortages in the 70s proved to be. Oil is scarce like diamonds. Just ask DeBeers . . . .
The Russians have a thing or two to teach the west.
Got deep well technology?
In a deflationary economy, all things devalue except cash. I know I sound like a broken record, but all the PM Bulls out there better be prepared to see 20% to 50% losses on metals before any turn around. Go To CASH - should be my handle…
“Oil is scarce like diamonds”
Yeah, sure. After all, the Saudi’s report that they have exactly the same amount of oil in the ground as 30 years ago. And the North Sea fields are good to go for centuries.
Look, it’s going to run out. The question is when. Right now, looks like within our lifetime. The Hubbard Curve concept is that the chaos starts as soon as the downward part of the production curve begins, not when you get to the trailing end. There are significant indicators that the top is more or less here - look at production numbers.
the problem with the theory that metals and etc will drop during a recession is that what if rising inflation causes the recession? or what if gov’ts around the world drop money out of helicopters.
Precisely, massive money printing will continue unabated, that is the inflationary cycle with which we find oursleves. You seem to understand this game just fine.
You never give me your money
You only give me your funny paper
And in the middle of fraudulent negotiations
A country breaks down
I could bore you with numbers
And give you my idea of the situation
And in the middle of procrastination
It breaks down
Out of helocs, money spent
See no future, guess you’ll rent
All the money’s gone, nowhere to go
All the hedgies are gonna get the sack
Tuesday morning, no glimpse of black
Housing lorry slow, nowhere to go
But oh that housing feeling, nowhere to go
Oh, that magic feeling
Nowhere to go…
nice, Alad. Are we going to see you in that new TV show w. you might be a redneck guy jeff foxworthy about the missing lyrics?
You could make a million.
The US won’t print our way out of this because that would destroy the bond market which is the only real power the Treasury has. And as a self-serving institution, why commit suicide? Just let the people get crushed in a deflationary wave. The helicopter theory is just plain FALSE! This “inflation” you see is credit inflation IOUs, NOT cash. All credit inflations end in credit deflations, period. You cannot dodge it. Possibly (probably) at the end of the deflation, THEN the government, late to the party as always, will start printing real dollars and run up money inflation.
Gonna keep my amateur status intact… ha
I agree. I think if you look at the historical records, countries with economies heavily based on resources tend to do pretty bad when global recessions hit. The reason their currencies are still doing well is that it takes while for the bad news to filter down the supply chain.
Actually during the 70’s which was the last time the US experienced this type of stagflation (definition…an inflationary period accompanied by rising unemployment and lack of growth in consumer demand and business activity) countries which were exporting natural resources such as gold and silver did quite well as a whole as their mining and resource companies exploded from an equity standpoint during that cycle. Think countries such as South Africa, Canada and Australia.
Resource exporters do well when producers have customers. If the US consumer stops buying from China, Chinese factories will not need the steel, copper and oil that is keeping commodity prices high. I agree that REs are at the end of the bad news chain, and will feel it bad when it does hit them. Canada in particular if oil prices drop - Alberta is supporting their entire economy right now.
Massive money printing is the reason for the inflation, the Russians added 50% to their money supply last year as an example, China is simply another complicating upside factor in a secular bull market in commodities.
Commodity-based economies get hit hard in recessions. Canada will tank, just like it did in the early 80’s. You think you Americans were in a recession then? We fell into a black hole.
This is a stagflationary cycle just like the 70’s with a few different rules and variations Betamax, see my post directly above yours, no need to repeat what was stated as it is already there. Get the 80’s out of your mind and think 70’s instead. That was the last time we experienced this type of rampant inflation and ultimately stagflation as a result.
Even a global recession will only slow demand growth of finite resources, not reverse it.
Correct.
Either gold will reach $1560/oz or Oil will drop to $44/barrel.
If we have a global recession we will see a drastic reduction in oil demand as people can no longer afford most things.
Could it be Oil that is vastly over priced? Check out this chart
I hope this is not the case because I recently moved 15% of my savings into Gold/Silver, I would hate to see it go down with the houses!
….
Just this morning I noticed that Phoenix has gas prices equal to Ohio - the lowest in the country ($2.65 regular). I think that gas demand has cratered here due to the construction slowdown - all those pickup trucks no longer driving out to the job sites. We were usually 10% higher than the national average. Oil demand may well be shrinking now or at least slowing.
That may be true in the US, but sometimes we think too highly of ourselves. As China and India continue to increase the amount of oil consumption on a per capita basis as more of their populations drive cars, etc. this will more than offset any downside consumption from the United States. Remember their are well over 1 billion people in each of China and India and that does not include the rest of the many pockets of Asia which have been industrilizing. That is the ultimate complication for an oil starved world.
deja vu
There is no fundamental reason that the ratio of oil to gold will hold in the future. Oil is being used up, while gold is being hoarded. Oil is essential to every part of our economy and daily lives, while gold is used mostly for jewelry and some minor industrial uses.
This time it is different, right David. I think not, the gold universe is very, very tiny. In fact all of the gold stocks collectively are roughly the size (market cap) of a medium sized European telecom company.
The silver universe is smaller still so the ratio of gold to oil does hold and will hold into the future. Wen oceans of paper money begin to flock in earnest to gold it will fly and most of it is gone from central bank vaults so this secular gold bull market will be tremendous before it is over.
You know, I’ve not seen any of you mention the “safe haven” investment aspect of gold and to a lesser degree, silver. In this article, so many went on about how investors are “shunning risk”. They will go where it is safe.
As for the price of oil, I like the anecdote on Phoenix. Also, for those of us who think “too highly” of ourselves, I suppose that is true. However, it must be noted that a very sizeable portion of the growth in China and India are due to the US - think outsourcing and factory / industrial demand for cheap crap that we buy. if we buy less cheap crap, fewer factories needed. if people cancel their cell phone plans, stop buying computers, etc, who needs Indian tech support? Get the idea? It really is a global economy after all.
Yes people do think too highly of themselves at times and the citizens of the US who think the world will collapse because we get a cold are ignorant.
There is an unbelievable amount of trade back and forth between Japan and China as an example that doesn’t have anything to do with the US and its tiny 300 million person population. For that matter the amount of trade in Asia itself is staggering, think population size and growth.
I know what you are going to say, all growth will disappear when the US gets a cold…Well, you are dead wrong.
“I know what you are going to say, all growth will disappear when the US gets a cold…Well, you are dead wrong. ”
No I’m not. I tried to avoid even making you presume that. I did say that it is a global economy, not a US / China / India economy, after all. But, I should also point out that just under a decade ago, hardly any citizens in China financed anything (yes, even a home), they usually paid cash. I’d have to go back to my undergrad thesis to find the exact number. Then, the trend started reversing, and more and more Chinese citizens were using debt to make purchases. It quickly exploded from homes to cars to regular consumer goods. Hmm, huge escalation of credit creation in a short time. Yep, that makes for solid, strong growth.
So let me get this straight Mr. Undergrad, you want to believe that the Chinese, which are prolific savers, typically saving 50% of their incomes are experiencing growth and industrialization because of credit growth and not because of sound savings policies and reinvestment which is in fact the very basis for sound economic growth according to the Austrian economic growth model.
You need to head back to the classroom
That is EXACTLY what I am telling you. They DO NOT SAVE like they used to. BTW, do you want me to believe that the US growth in the last few years has been based on sound saving principles that is the very basis for sound economic growth according to the Austrian economic growth model? I was being sarcastic when I said their current frame of growth was solid. Thanks for the chuckle.
Chinese personal savings are indeed a good basis for a sound economy. The problem is that China doesn’t have one. Its economic growth has far outstripped what economic fundamentals would justify, just as the American housing market did, and is now tottering (like everyone else) on a hyperleveraged column of inflated speculative value.
If you subtract Chinese-American trade, China actually has a negative balance of payments. It’s not Yankee arrogance to recognize that if American demand falls, or the dollar is devalued, China will take it in the shorts.
>>BTW, do you want me to believe that the US growth in the last few years has been based on sound saving principles
The United States accounts for 31% of world GDP with Japan next in line with 14.1%, meaning these two countries account for 45.2% of total world output.
Germany: 5.5
China: 5.2
Uk: 4.5
France: 4.0
Italy: 3.1
Yes, we’re still pretty significant. Maybe if we get a sniffle the world won’t catch a cold but I’d bet problems here will have meaningful international repercusions for quite a while.
“BTW, do you want me to believe that the US growth in the last few years has been based on sound saving principles”
If you enjoy giving yourself chucklels by making up things I never said then please take your trollish behavior to the Yahoo message boards, I’m sure you will find plenty of friends there.
I did not state that the US economic growth of the last few years was sound, I believe the opposite based on the Austrian economic model.
A friend of mine Dr. Marc Faber believes the US is headed for hyperinflation and I believe a strong case can be made for that happening.
I believe that the US Dollar will not go to zero because it is my belief that the US will merge it’s currency with stronger exporting countries and commodity producing countries such as Canada and Mexico. This would be an “Amero” currency similar to the European attempt at the Euro.
“If you enjoy giving yourself chucklels by making up things I never said then please take your trollish behavior to the Yahoo message boards, I’m sure you will find plenty of friends there.”
Merely reciprocating the relationship, my friend. Don’t be so angry. And don’t call me a troll, I’ve been here a year and a half.
Thomas, thank you for helping to articulate the point that I was trying to make that Florida Watcher was trying to twist.
Not angry, just thought you pretending I stated that US economic growth was sound over the past few years was trollish behavior.
We may disagree on certain points and that’s ok to leave it at that
Oh, gosh no, sorry about that.
Okay, agree to disagree.
Many thanks Chad and certainly a lively debate, you and others made some excellent points about the ramifications of a US slowdown and its impact on China and the world economy, have a good one I’m off for a walk
… off a short pier hopefully. ( geez, and people say I AM wound tight .. !?)
LOL
There are some great points from all of you - there are errors.
“If you subtract Chinese-American trade, China actually has a negative balance of payments.” Sorry completely False
“The United States accounts for 31% of world GDP ” False
The United States accounts for 28% of world GDP and dropping rapidly - The United States accounted for 31% of world GDP in 2000.
China overtook Germany to become the third largest country in GDP earlier this year. It is expected to pass Japan in the next decade.
60% of all exports out of China are from foreign owned companies.
““If you subtract Chinese-American trade, China actually has a negative balance of payments.” Sorry completely False”
Maybe I’m reading the statistics wrong, but my understanding is that in 2006 (the last full year for which we have information), the U.S. trade deficit with China was $202 billion. The overall Chinese trade surplus was about $170 billion. Doesn’t that mean that China had a negative trade balance of $32 billion, excluding China-U.S. trade?
Maybe the problem was my clumsy use of the phrase “balance of payments,” which includes investment, not just trade. My bad. I meant to refer to trade surpluses, not investment flows.
It is just a different method of accounting. 80% of all trade with China is “pass through”.
e.g. Circuit breakers made in Korea exported to China and the final assembly is exported to the US. We record as “a trade deficit to China”. NOT!
The European block runs a trade deficit of ~ 100B/yr (132B 2005) “In looking at China’s surplus in its trade with the EU, to just apply the current rule of origin does not give one the complete and real picture of interests and balance in our trade.” from “Premier Wen: China strives to maintain trade balance”
http://tinyurl.com/ytnzt2
“…China is the biggest foreign supplier to the 13-nation euro region so far this year. The low labor costs in China make its exports of goods, including electronics, clothes and shoes, cheaper than local merchandise in Europe. EU officials say the weakness of the Chinese yuan against the euro limits the competitiveness of European companies.
The Chinese trade surplus soared 87 percent last month to a record $26.9 billion, exceeding economists’ estimates and supplying ammunition for U.S. lawmakers threatening sanctions unless the yuan appreciates faster. The trade gap with Europe was $10.9 billion in June and $57.4 billion in the first half….”
July 11, 2007
http://tinyurl.com/2gek4e
China did not get 1.4 Trillion dollars just from the US.
They are all dollars! But most countries want out of dollars.
“‘Rating actions caught the attention of investors who thought that if you bought a ‘AAA’ rated bond that it would stay ‘AAA,’ said Morrison. ‘Who knew it could get dinged as bad as it was.’”
I have no idea how these crooks created AAA paper out of a subprime loan. Subprime people got that way by not paying their bills. I guess they expected them to have a change of heart.Shows how desperate the lenders were to loan money.
Got tinfoil?
“I have no idea how these crooks created AAA paper out of a subprime loan.”
Because for the last few years, the foreclosure rate had been so low. The models they used to rate the CDO tranches, etc. seemed to assume that things would continue this way. After all, the ‘equity’ tranche would be cushion enough for any defaults…right?
Failure to recognize they were pulling themselves up by their bootstraps. Even I, 5 years ago, not knowing anywhere near as much as I do about finance, no less international finance, recognized these people were doing anything they could to make loans to earn a commission, especially after 911.
AG-
You mean the 100% financed liar-loan equity?
People are screwed.
http://centralcoasthousingbubble.blogspot.com/
Making AAA paper from subprime loans works like this:
Blend a pool of subprime loans. Calculate the expected default rate — say, 15%. Issue securities based on the cash flow from the mortgages, divided into tranches. Stuff most of the estimated risk into the lowest tranche, by putting them first in line for defaults. That way, if 15% of the loans in the package default, the lowest tranche gets annihilated, but the upper tranches keep swimming along nicely with nary a hiccup.
You run into problems when you’ve underestimated the default rate. If you get excess defaults, it starts hitting the next tranches up the chain, which should progressively lower the rating of the tranches on top.
“‘Rating actions caught the attention of investors who thought that if you bought a ‘AAA’ rated bond that it would stay ‘AAA,’ said Morrison. ‘Who knew it could get dinged as bad as it was.’”
Anyone who thought AAA rated tranches from CDOs/REMICs would be certain to stay AAA was an idiot. When deciding how much of the principal to allot to the AAA tranche, the securitizer (with the input of a rating company, I am sure) put as much as possible into that tranche without losing the AAA rating. That is how they maximized profit from these deals. A moment’s thought tells you that these bonds had to be on the very edge of losing their AAA rating, so that almost ANY downside news would cause the rating to fall. Even a slight but unexpected decrease in the rate of housing price appreciation would have eventually lead to downrating. Generally, companies and countries don’t issue paper to the point that they almost, but don’t quite, put themselves in the precarious position of almost losing their rating. The securitizers did this as a matter of course. Given the other complexities of these bonds (variable maturity date due to prepayment, random interest income due to prepayment), I can’t imagine anyone buying them without automatically dropping them one or two rating levels even in the best of times…
Australia has plenty of gold, no doubt about it…
No water to extract it with, though.
“No water to extract it with, though.”
The predicted gold price increase will make a good business model for piping in salt water from the coast - inland. Just as there are pipes for oil. . .
Gotta use freshwater…
Salt water is a no go.
Oh, how come?
Got fresh water?
Sorry. It was just too tempting…
Heavy machinery and salt water is like matter vs anti matter…
Haven’t you seen a ship or boat? Motors can run using sw to cool.
Have family in Hawaii that go out everyday boating, it’s a BIG deal when they get the boat out of the water to hose it off. Still have major problems with rust, etc. from the sw.
Actually Australia’s newest export. Beachfront condos for wealthy asians. You wouldnt believe the number of condo towers everywhere on Australia’s east coast.
http://www.goldcoastregion.com/phot_gallery_a.html
The bull market in commodities will be dead within 18-24 months, probably sooner. US consumer demand is already shrinking. With rising rates in Europe, they will soon follow. Who the heck will the Asian countries export to then?
I remember Jeremy Grantham who was quoted in the Bloomberg article I listed and who is a disciple of Benjamin Graham along with Warren Buffett talking in a Barron’s article about starting a commodities cycle fund in house because that will be the trend for a long time.
Along with Buffett he is clearly one of history’s greatest investors which is why he manages a paultry 68 billion dollars. Grantham is no fan of commodities, but clearly sees what idiot Greenspan talked about as being a “Supercycle in commodities.”
No the secular bull market in commodities will not be dead for a very, very long time.
you have to start asking yourselves.
Why would the Oracle of Omaha go long on:
1. Rail
2. Kraft
My suspicion is this time aint gonna be different than last time. Think peanut butter, mac-n-cheese, fewer cars on the road……..
it aint gonna be different this time.
We are currently looking at a deflationary collapse of credit. M3 is shrinking by the day, but we can’t really tell since the Fed abolished the report last spring. But it’s clear that with all the deleveraging going on that credit is no longer growing rapidly, if at all in the US. Every failing lender and exploding hedge fund shrinks the money supply that much more. That will filter through quickly to the markets that export to us and have been inflationary due to the dollars we send them.
The Fed can do nothing in the short-term to stop the weakness in the money supply. It took over 2 years of drastic rate cuts to arrest the fall of stocks in 2000-2003. With the credit apparatus so badly damaged, it’s hard to believe that it could happen much faster this time. Plus, they haven’t even started yet.
Buffett is probably looking at a 10-20 year time frame. I won’t bet against him there but I don’t have to. Over the next 12-24 months, it looks like a great bet that commodities will get whacked as money supply growth falters. Commodities are overvalued TODAY due to recent rapid money growth everywhere. There will be plenty of time to get into hard assets once the Fed starts to cut in earnest.
Housing is usually an excellent inflation hedge but not right now. Flood of credit caused it to be overvalued so it will resume the hedge role once price returns to trend. Notice how gold and silver a strongly correlated with stocks. That is very wierd historically speaking. That suggests for now that they are responding to the same monetary influences as every other asset class. Once the correlation turns strongly negative again, maybe metals will be worth buying.
Deron, you make some points that I disagree with you on, however your logic has merit and should you be right my kudos to you.
“Notice how gold and silver a strongly correlated with stocks. That is very weird historically speaking.”
I point this out as a serious question about your entire logic, the entire Ponzi finance is predicated upon low volatility (abnormally low). Hedge funds have been using PMs as vehicles. The funds bought gold, sold stocks, bought Euros, sold Yen, bought stocks … This basket case of finance mismanagement has come unglued. Mssrs. Buffet and Rogers are notorious commodity longs. Mr. Buffet’s father said “The gold standard acted as a silent watchdog to prevent unlimited public spending. I can find no evidence to support a hope that our fiat paper money venture will fare better ultimately than such experiments in other lands. Because of our economic strength the paper money disease here may take many years to run its course… But we can be approaching the critical stage. When that day arrives, our political rulers will probably find that foreign war and ruthless regimentation is the cunning alternative to domestic strife.”
Howard Buffett , U.S. Congressman
Since Mr. Rogers said in Beijing (Sunday July 29, 2007) that the only things he would be long are commodities and Chinese stocks and since Mr. Warren Buffett has applied his father’s ethos to his companies actions since inception, do you think they are acting irrationally to be trying to buy every resource that is offered on the market?
I personally know that Mr. Buffett is trying to buy assets in South Africa. (To aid those of you who are not familiar with my belief, which is; housing was not, is not and never will be an asset, housing is a liability).
Hoz
First, thank you. It’s always a pleasure to discuss our disagreements in a respectful manner. Honestly, I’m not sure we disagree that much except for time frame.
First let me compare my investment horizon with the Sage of Omaha’s. He usually is looking at a multi-year time frame and often a decade or longer. Given the sheer amounts of capital that he has deploy it could hardly be otherwise and his inclinations seem to match that as well. I am more of a swing trader and medium-term investor (3-12 month holding periods are typical for me). The capital that I move around is several orders of magnitude smaller than Mr. Buffett’s so I can move my positions quickly and without any impact on the markets traded.
He is betting on the inflation of paper money over a 10 year time frame and as I said before, I wouldn’t bet against him - especially given the inflationary tendencies of the Fed. I am betting on a 2-3 year deflationary period caused by the implosion of the credit system and much slower growth or even decline of the broad money supply. I don’t see a fundamental inconsistency between those two scenarios.
While the Fed may wish to continue to inflate, the tools they normally use to do so are being blown away even as we speak. The hedge fund and finance company quasi-banks are the most vulnerable here since they have been the most aggressive in leveraging their balance sheets. That has also made them the main conduit for credit inflation. As they falter the credit inflation will stagnate and could reverse.
Even after the blowups end, it will take a while to the credit system to stabilize. Then the Fed will have to reflate the balance sheet of the surviving credit pumps - mostly traditional banks. It will probably take the same form as the 2001-2003 and 1990-1994 periods: deliberate steepening of the yield curve to allow them guaranteed profits from borrowing Fed Funds and lending (buying) T-bonds. Still it will take a few years of profits to fix the balance sheets.
While that is happening, it will be very hard to increase the money supply unless they simply print bills. That will be easy to spot. Confidence of both lenders and borrowers has to be restored and that will take time as well. You can’t put a gun to someone’s head and force them to take a loan or to write one - we’re getting a great illustration of that in mortgage finance right now. At the moment, the issue is not the Fed’s preferences but its available means.
The early warning signs of the Fed indulging its usual pecadillos would be rising narrow money if they print bills. That can’t be hidden since it will show up either as bank deposits or retail spending - likely both. If it’s credit rather than currency inflation, it should take longer and show up as rising debt again. In either case, I should be able to see it early and act accordingly.
Here’s where the time frame comes in. I could cover my short postions and move to commodities in hours or at most days, without worrying about moving the market. Warren Buffett has to move much more slowly and still has to worry about trading impact even spreading the trades out over months. If he we’re to wait for the monetary indicators, it would be too late to move more than a fraction of his billions.
So I don’t think he and Mr. Rogers are acting irrationally. They are simply forced to pursue a very long-term strategy, while I am free to trade. I happen to feel that they are likely correct but that there will be considerably better entry points. If we get a 20-30% decline in GLD, they will buy all the way down and back up. I’ll try to bottom tick.
I also wanted to add that the leveraged funds buying of metals will put significant selling pressure on them as margin calls come in. That appears almost certain in a trading time-frame. The question then is whether the Fed even can reflate the economy. There is a substantial chance (10% or so IMO) that they will fail miserably once confidence in the financial system is broken. In that case you really don’t want to own commodities.
I’ve already established which indicators to follow to track their progress. I think that unwittingly, we have internalized the image of the omnipotent Fed. Seem like a bit of financial Stockholm Syndrome to me.
Deron: Thank you.
You said: “I also wanted to add that the leveraged funds buying of metals will put significant selling pressure on them as margin calls come in.”
I’m currently heavy in buillion, but I agree - and I think we’re seeing it now, which is why gold and silver are (unusually) connected to the overall market. We’ll probably see a significant downleg on PM in the next 6 months, and it’ll be a great time to buy. I’m keeping my positions, but not putting any more in until I see downward movement. In the meantime, I’m keeping it in cash - though a dollar crash *would* mean an immediate inflationary spike in all prices (except housing), including PM, and I’ll have bet wrong.
Let me also add this from Jeremy Grantham in case it hasn’t already been posted regarding the coming hedge fund collapses:
Grantham Says Hedge Funds, LBO Funds to Collapse in Credit Rout
By Sree Vidya Bhaktavatsalam
July 31 (Bloomberg) — Jeremy Grantham, the money manager who oversees $150 billion as chairman of Grantham, Mayo, Van Otterloo & Co. LLC, said a credit crisis may force as many as half of hedge funds worldwide to close in the next five years.
The loss of investors’ appetite for risk also may cause at least one global bank and “one or two” of the largest private- equity firms to go out of business, Grantham, known for his pessimistic outlook, said in a July 30 interview from his Boston office. The 68-year-old investor said he’s still bullish on emerging-markets stocks.
Grantham Says Hedge Funds, LBO Funds to Collapse in Credit Rout…Here is the link:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aZdtk8hhjZr4
re: Australia fallout
I see we continue to make friends and spread goodwill globally.
When do all these mounting losses end up passed on to the man on the street? I do not cheerfully remember the dotcom bust-out and the pathology of finance markets that was in bed with it. Is it me, or do all these events like the above scream to get ready for some serious SHTF?
I often ask this question and even the talking heads of various investment banks say it is complex or words to that effect. I think the Fed knows as does Treasury Dept.
A lot of execs I speak with seem to have an attitude such as this:
“Screw it, we’re so far in we can hardly prepare for a crash, might as well make as much as we can before we go under.”
“Screw it, we’re so far in we can hardly prepare for a crash, might as well make as much as we can before we go under.”
I’ll bet the pigs and cattle chuckle at the ‘foolish’ farmer. “Whoa. Look at all the food he left out here! Let’s pull a fast one and eat as much as possible!”
What is the chance that people who have considerable equity built up, but that also have taken out a lot of HELOC money, may decide to sell now to ensure they don’t end up underwater as it becomes clear this whole house of cards is falling down?
I’ve decided to keep renting until recent buyers of the last few years are forced to sell at a loss. I’ve decided to not spend more than 2.5 times my income on a mortgage plus property taxes plus home insurance. It will require a 40%+ drop in prices for this to happen. I don’t mind waiting.
Dear DumbQuestion,
Good for you. You will sleep better at night…
MassBubbleGirl
Bingo! More inventory!
In general, human psychology is against this happening. Cashing out dangerously large chunks of a home’s equity is a sign of laziness and irresponsibility, and those who make irresponsible decisions aren’t good candidates for suddenly becoming responsible and rational and acting forcefully.
Excellent point. I guess you are saying they will wait until they ARE underwater before deciding to sell.
They aren’t even capable of making the decision - it will be forced upon them.
First to clarify, once you HELO your house, equity becomes past tense, as in ‘had equity’. This is the missing Dark matter that I think will cause the RE market to crash in on itself and was noted by Countrywide this past week. There are a lot of prime HELO/C homeowners that are stuck because of high LTV in a falling market. I just read that Kansas City has almost 40% of homeowners with LTV 90% or greater. That means none of those homeowners can sell and walk away with any profits.
But here is the real kick in the rear. What if you buy a home today in a bubble market like Miami, have good credit and put 10% down. Sounds like a successful home sale, wrong. If the market keeps correcting, that 10% down will be gone by this time next year and you will be upside down for years to come.
KC is not shocking - it has never been a high growth town, and the silly high-single digit appreciation seen there the past couple years is akin to the 20% seen in Miami - it just doesn’t match with local fundamentals. The locals in KC say “we didn’t have a bubble because values didn’t rise that much” and those in Miami say “everyone wants to live here” but it’s the same bullshit- just coming out of opposite sides of the same mouth
Yea - the same is true for cities in Texas (Houston, Dallas, etc..). Sure, appreciation is in the single digits. But the builders are going crazy with new subdivisions. Everywhere you look, new houses. In Texas, it’s not rapid appreciation that is the problem so much as rapid growth (overbuilding). When the easy financing train slows down, things are going to get really weird around here.
I am planning on selling in order to save my equity (33% and falling) even though I was ignorant enough to buy a little over a year ago.
I bought a townhouse in DC for 350K in November 2004, sold it in March 2006 for 390K (after it already fell 20K-30K from its “peak”) and moved to a college town where I bought a new 260K house on a half acre. I am worried that continued construction will push prices down. I wish I had just rented when I moved here, but was suckered by the belief that 260K was VERY reasonable considering that the same house would have been 650K+ in DC.
Of course, I always thought that the Virginia Tech area was “different”, but this blog has convinced me that no where is “safe”.
I am still trying to do the rent vs mortgage comparisons and it seems like houses in my neighborhood rent for $1200 - $1500/month, and my mortgage is $1250/month + opportunity cost of my 90K of equity. It becomes a tough call on what to do. All I know is that inventory is up and that there is an overabundance of new town-homes and the builders are still going crazy! A house in my neighborhood just sold in less than 2 weeks too! The builder doesn’t seem to be having much trouble moving houses either. (Note, these houses are in the top 15% of the price range for this area)
Does anyone have any advice for me?
If you bought the house as an investment, you’re hosed. If you bought it as a place to live, don’t worry about equity short-term and plan to settle in for the long haul. Hope you got a fixed-rate….
30 year fixed rate at 6.25%
if your mortgage is around rent rate right now, there’s no sense in selling to get your 90k in equity out. You’ll take a loss on the sale most likely, plus probably wind up having to pay realtor fees and closing costs.
If you don’t think you’ll be moving soon, selling isn’t really a great option, and if you like the house, why bother?
Instead, I’d be trying to buy down that mortgage as quickly as possible (while still funding retirement/etc.) The biggest ‘expense’ of a house is the interest, and even padding your payment by a little bit cuts down on how much you pay in interest by a suprising amount.
To echo DFWThomas: not every home needs to be an investment. If you are comfortable with the note, and plan to be there a while (minimum 7-10 years I would say), then there is no need to uproot yourself again. The transaction costs are significant not just financially, but in time, effort and attention.
It is good to see how level headed everyone is around here! I appreciate the advice! My mortgage is about 25% of my monthly budget with my current job so I can handle the note… for now… but if the economy tanks, finding work could change that really quickly (as many people around here point out as they expect more “prime” loans to fail)
I am glad that the people on his blog value time, effort, attention, stress in addition to the “bottom line”. Sometimes perspective is necessary and loosing a little paper money in the short term may not be worth the headache/family stress. (What my wife keeps telling me!)
What are the chances that the Government will attempt to “prop-up” small business through a recession/depression by giving more small business innovative research grants (SBIR)?
Dan, hopefully you’ll check back on this thread as you are speaking my language.
SBIR committees seem picky lately, it depends on the field despite NIH’s “commitment” to encouraging new, young PIs.
Your big R01s seem to be getting funded like clockwork as long as the score is good and it’s a hot specialty. Just prepare yourself for a 20% haircut off the top of the funding.
In the NIH/NSF world, I expect those SBIRs to dry up first. The B in SBIR is what will kill them as sponsored programs funds tighten. They’ll fund project through modular grants and such since they are easier to control but that means you have to be part of the system.
And as always, it’ll come down to the field and speciality.
It is good to see how level headed everyone is around here! I appreciate the advice! My mortgage is about 25% of my monthly budget with my current job so I can handle the note… for now… but if the economy tanks, finding work could change that really quickly (as many people around here point out as they expect more “prime” loans to fail)
I am glad that the people on his blog value time, effort, attention, stress in addition to the “bottom line”. Sometimes perspective is necessary and loosing a little paper money in the short term may not be worth the headache/family stress. (What my wife keeps telling me!)
What are the chances that the Government will attempt to “prop-up” small business through a recession/depression by giving more small business innovative research grants (SBIR)?
the turn is over 10% ,so stay put
your rent ratio is the best I’ve ever seen.
Hard one to call . Add up cost of sale ,cost to move ,verses a potential 20% dump in the overall price in your area . Also consider what type of loan that you have . Do you have a fixed note with no worry about payment increases ? What are the chances that you will get a job tranfer in the course of 5 to 7 years ? Did your area have alot of speculation transactions in the last 3 years or can you find out how many foreclosures are in the pipeline ? Are you stressed by the payment you have and do you want to stay long term in the area ?
I’m not going to sell myself because I can afford the payment I have ,but I know that my house will go down in value for a timespan .In the meantime ,I’m paying off equity with my fixed payments .
I am “self-employed” working on government contracts with contracts currently running out in 1 year unless I can land more work.
I am mostly concerned about drying up of the job market for software engineers. Plus, I make a 25% premium over other jobs in the area because of being self-employed.
I don’t want to move (my wife likes to plant roots and stay), but I am concerned about the potential of being forced out due to changing job markets. No big company to save me!
You’ve got nothing to lose just putting it on the market yourself.
Hard to believe but there are still buyers out there. If you price it somewhat below comparable properties you might get lucky. I’ve known a number of people recently that got very lucky, even in LA and Sarasota.
Put an add in the paper and or Craigs list. Describe the property fully, accurately. Don’t have an open house. When/if people call ask them what they’d like to know about the house, be honest. Tell them its a nice house, you don’t want just anyone tromping through it. Create a little mystery about it, hold back the full address. Ask people how much they can put down, how soon they need to close, if they have to sell their first house.
Being mysterious (by accident) worked for me years ago (albeit in a reasonable market). I didn’t waste my time or the time of people who really didn’t want the type of house I had (smallish yard, older neighborhood).
Worst case, you don’t sell. At least by being picky you can avoid wasting your time and get a sense of what the market really is doing in your area.
“..contracts currently running out in 1 year..”
a year is a long time. IMO, selling now is premature.
Finding and developing a recession-resistant side job / hobby / product / service as an income backup is not premature.
Plan for the worst and hope for the best.
It’s time to stop looking for the maximum house you can comfortably afford. Instead, your search should be for the least expensive house/neighborhood that you’d be comfortable in. Call it the Limbo Plan- How low can you go?
Okay, am I missing something here? You say you bought a $260K place, and are only paying $1250pm? You MUST have had something down, to get about $200K financed, which would put you in the ballpark.
Let me ask this: if you say there is an overabundance of supply, and more on the way, then it is very likely rents will drop. Furthermore, are the rents you are comparing to for idential places to yours, where the owner might be trying to cover the mortgage, but can’t? I would say that not only will you lose a bunch of equity soon, but it will take you a very long time to make it back. I’d say sell if you can, invest the money in something that will perform from this point forward, rent (saving yourself the insurance, taxes, and maintenance), and don’t look back. Especially considering your work situation. YOU NEED THAT CAPITAL to make ends meet if you can’t find a job for a while. Let’s do a quick (SIMPLE) comparo, 10 year timeline:
Stay in house: pay $1250pm+ (let’s say $1600 w/taxes, ins, maint) x 12 x 10 + 90000 equity lost = $282,000
Move out and rent: pay $1300pm rent x 12 x 10 -90000 equity saved from sale = $66,000
Even staving off other indicators mentioned that would lean me toward renting, this is a no brainer.
You are correct… I put 33% down (1250 includes taxes/insurance) loan amount is 168K.
I can rent, directly from a local builder, a 2 year old house with the same square footage complete with lawn care for $1200.
I know that prices in the area have risen by 50-60K in the past 3 years and held “flat” for the year.
With all of the talk about people waiting until they were underwater to sell, I thought it would be interesting to see what advice HBBers would have in my situation (generally responsible home owner with no debt outside of mortgage with a “risky” job).
I like the advice of put it on the market with out a realtor and see who bites. People are constantly driving through the neighborhood looking at the new houses.
If prices are flat owning is only a couple hundred more than renting. If prices are going down then owning gets expensive. If rents start going down then that will push prices down. Since the VT shootings enrollment interest at VT has grown tremendously which should mean an influx of new professors and a growing campus.
The high-earners in the area are professors, doctors, and technology/bio-tech startups making 100-150K which would put my house at 2.5 income for these buyers. Could it be possible that this area really is “different” and supported by the fundamentals?
Other thoughts were that if I sell today, wait a few years then I could buy “outright” and have not mortgage. Otherwise I will be paying this mortgage for 30 years!
I guess it all depends upon how “contained” the housing market is.
Dan, you are exactly right on so many points. Consider this. If the high enders in the area can buy your place for 2.5x their income, is your house considered “high end”? If not, then how much more is high end? High end earners want to buy high end homes, nothing less. It does sound like the area might be poised for growth, which is good, but take into account the greater difficulty of getting a mortgage, the influx of new residents not being able to sell their home from another area, etc. Continue with your thought of buying outright in a couple of years. Paying your mortgage off for the next 30 years means you will have over $440K wrapped up in it at the end, not including maintenance, insurance, and all that! Will it be worth it? Would it feel better to purchase for cash, at $150 to $200 in a few years, and have no loan at all, 100% equity? The time you take to sell your home and move is NOTHING compared to the time you would need to wait to build back equity if it went to zero. Do the rentals include utilities at all? Something else to consider.
You fail to consider that in 10 years rent will potentially be 1.6x current and you will have paid $30,000 dollars down on the property, and have the tax advantage of over $100,000 in interest deductions. After 10 years the property will be worth at least 30% more or $60,000. (I believe I can say this due to the fact that rent VS ownership costs are not all that divergent. It is truely a no brainer that short term you will lose. If one has the staying power and wants to build wealth through Real estate then it still can be done over the long term. His area is not the bubble that SOCAL, FL or Las Vegas is and shouldn’t take near the hit. The real question is does one want the long term burdon of Real estate ownership has and this is an individual answer.
Yeah, I’m a pretty big bear but I like his numbers.
The only thing that worries me is how bad his job stability is - folks with no stability either need to rent or have 6 months salary in the bank.
I would say to keep your place if you are planning on staying long term (7 plus years) or are not adverse to being a landlord until the market turns around and your house price has risen back up to current vlue or greater. This advise is only if you have a fixed rate mortgage that pays down your house each month (15 or 30 year fixed). Remember long term you can’t go wrong with Real Estate. Currently long term is much longer then normal. While I would not advise anyone to buy today under this scenerio it does make financial sense to keep you property and continue to live in it. It appears you can rent your home for the same as your payments which will remain fixed over the long term but rents should increase of the long term. If you sold today you would have selling costs and in order to rent another home of similar quality and size you would not pocket much if any money.
I bought in 2004 knowing I had paid too much for my house in SOCAL but I looked at the long term benefits and put 20% down with a 30 year fixed at 5.5%. Today rent prices are increasing in my neighborhood and I can get rent to cover my expenses. I also pay down about $500 on my mortage each month which equates to $6,000 per year in equity built. If one holds the home past the bottom and allows the beauty of time (10+ years) and compounding to come into play you will more then recoup the short to medium term paper losses you will have on your home. If you do not want to hold long term or can’t be a landlord then you should probably sell in order to have the freedom to move around as necessary without the potential headache and short term loss you are about to take. I give this advise as a RE investor who buys and holds property long term and do not have any problems being a landlord.
““The warehouse debt dealers to whom AHM used to sell its loans, the likes of Deutsche Bank, Wells Fargo and Countrywide Financial, have fewer buyers for their ’structured’ products these days, and none at all interested in anything but the choicest cuts except at 50 cents on the dollar.””
The return of the risk premium…
does that mean a loss of revenue for the banks?
“does that mean a loss of revenue for the banks? ”
Er, well, not necessarily. They don’t HAVE to sell the loan, rather, they keep it and assume the risk. But it depends on how the banks book the revenue (recognition). If they sell them, do they book the rev at once? If they keep the loan and assume the risk, do they book rev as the interest comes in? Not sure.
Gain on sale accounting allows securitizers to book most of the profit up front with a small reserve for losses.
Hmm, what about if they kept it to term on their books?
If the loans or bonds are held for investment, then the interest is booked as income when it accrues over the life of the debt. So you can see that gain on sale allows companies to accelerate revenue recognition.
What’s up with AHM? They promised “news” yesterday and still not a peep.
If they would hurry up and implode already then that should send my SRS up something like 0.28% on its own. Shorting the DJ US RE index using SRS has been one of my best-timed choices ever.
Repost from below. AHM just opened at 1.50 down 9.
“AHM just opened at 1.50 down 9.”
HURRY! Going out of business sale! Supplies limited!
Who’s buying this crap?
they have (had) thousands of employees =wow
Almost 8000 employees from the profile on Marketwatch.
Big hurt in Melville, New York where their h.q. is at as far I I could read. Website is still up, though.
Closed at $1.04 - down 90% on the day. Gotta say - I’ve never seen that. Wow.
Novastar (NFI) down 25% on the day. NTR, MTG, RDN all down about 15% on the day. Fremont down 11%. Holy cow - this was a worse day then end of February for the subprime lenders.
Speaking of AHM, can anyone explain why FED goes down every day then goes up “after hours”. Apparently the company is doing buybacks to prop up their stock price, could that be the cause?
AHM finally makes the mainstream news today, dropping from $10 to $1.
It was on Ben blog over the weekend. It pays to read this blog :-).
“‘Rating actions caught the attention of investors who thought that if you bought a ‘AAA’ rated bond that it would stay ‘AAA,’ said Morrison. ‘Who knew it could get dinged as bad as it was.’”
Me.
me to
The MarketWatch headline sees hope for Boston:
Prices have dropped in 15 of 20 major cities; Boston may have bottomed
“New England markets, which were among the first to fall, could be bottoming. Boston has seen prices rise 1.4% in the past two months, but prices are still down 4.3% in the past year.”
OK all you Beantown fencesitters, MarketWatch says it’s safe to break out the checkbooks. Buy now or be priced out forever!
Spent the weekend in North Conway NH.
Despite it being in the heart of tourist season, traffic was sporadic, and there was not one “No Vacancy” sign lit at any of the hotels. You could smell the fear of the merchants.
Yet consumer confidence is at a 6-year high.
Just like the Germans were winning on the Eastern Front in 1945.
The Confidence Board is a Chamber of Commerce type organization, made up of the top business interests. (google it). If Edward Bernays was alive today (Sigmund Freud’s nephew- Father of Public Relations) he would be elated with their propaganda ways. Amazing, people buy into this stuff.
BTW, The National Institute Of Health, and a lot of think tanks are the brain child of Bernays too. A stop loss between business interests,and the general puplic to brainwash the masses.
Are the Confidence Boards the same as Morale Conditioners from “Atlas Shrugged”?
Stuck on page 666 of Atlas Shrugged…
The part where a leader? that is actually the devil incarnate, runs the country into the ground.
We will pay for ’ssshrubery’s misdeeds, the rest of our lives~
Aladin Sane, it is not right to pick on one individual or individual party for this mess. This is not just 6 years in the making. It is just that we notice the effects more now than in the past, this is logarithmic progression.
In the last 50 years there has not been a substantive opposition party to congresses actions. The differences between the “two parties” is one of how much to spend, not where to spend it. The question should have been where do we spend the moneys?
Right, but we all know that when they say prices, they mean median and that increase could just mean that the higher end more expensive homes are still selling but not much else…Mark Zandi said so himself re: median price increases…don’t give much creedance to median…i’m still going to wait, don’t feel compelled to buy…
I think that what is happening is two fold:
1. The kool-aid is still free flowing in MA. It is different here. The level of denial is very high, and MA has a limited amount of new building, with much of it being old POS housing. Demand remains strong as very few of the people buying remember the 1990’s.
2. The bottom end is falling out. Lower priced homes and condos are not sellind due to difficulties in finding subrime mortgages (you would need one if you made 10 and hour, and the cheapest house cost 250K.) Add that to Brilliant planning by Patrick and you see no new loans being funded (stopping foreclosures has that nasty effect).
Ma could be seeing the start of the second leg of the correction where the median shoots up, because the bottom fell out, and very few if any amount of houses are selling. I would tend to take a look at the amount of foreclosures (still rising, implying that people are unable to unload their albatross at what they need to cover the mortgage.) and the price per square foot ( last I checked dropping), more than the median price.
All levels of housing are being impacted. If you have equity in your home, want to sell so you can move up to a ‘bigger and better’ home, you need someone to buy your original house, yes?
Ain’t happening anymore.
What I have seen are a lot of people who owned their homes for along time, and bought in the mid ‘90 buy a new home without selling their old one. Also lots of recent buyers have brand new toys in their lawns with for sale signs. I see a nice jet sky every time I come to work, and I am temted to stop and inquire. When they need to sell the thing for food, it will be time to buy. Help out a starving FB.
Just bought a guitar from a starving FB. Been strummed once or twice. When I was giving it a test drive, I broke into “I Drink Alone” - George Thorogood
Good times…. For one of us, at least.
one bourbon, one scotch…one beer…
“one bourbon, one scotch…one beer…”
It’s a song about Jingle Keys
“I tell the landlady I got a job, I’m gonna pay the rent
She said “Yeah?” I said “Oh yeah”
And then she was so nice,
loh’ she was lovy-dovy
So I go in my room, pack up my things and I go,
I slip on out the back door and down the streets I go
She a-hollerin’ about the front rent, she’ll be lucky to get any back rent,
she ain’t gonna get none of it…”
I’m passing four homes for sale close to Weston center every day, two of them have been for sale for over a year and one recently pulled off the market. However, the third home got a sale pending within weeks of listing and has had a sale pending sign for about three months. I guess the prospective buyers can’t sell.
In addition, two houses that I followed in Wayland:
#1 OLP $625k, on the market for about 18 months multiple price cuts SOLD $490k 03-2007. Previous owner paid 475k in 05-2003
#2 OLP $1065k, on the market for about 12 months multiple price cuts Listing pulled $769k 05-2007. Previous owner paid about 300k in 1997.
I want to buy as soon as possible but I’ll wait until prices come down! I guess 2010 give or take a year if I only can convince my wife to wait that long.
The small recent increase in month-month median prices is not just slanted by the subprimes but also seasonal. EVERY year has median prices peaking in summer when the best pickings of the spring crop are harvested.
Mass is not the land of Honest Abe. Mortgage fraud is rife. I sometimes lurk on the deeds-and-mortgage sites following up on houes that interest me. A house down the road from me, tax-assessed around 700 has a 1.8M mortgage! I found a crook in Cambridge that has been buying a 800k house every year for the last 5 with very creative mortgaging and docs from Wochester County? and now has +4M mortgage on perhaps $3M worth of properties.
Mass has not yet reached the 1/2-way point of the downturn.
Something similar happened in UK property bust in early 90’s. The much reduced quantity of new buyers would bypass the entry level housing.
I’ve been following this guy. http://bostonreb.com/blog/ Seems like a decent guy despite being a realtor. He posts weekly stats on the Boston condo market. It does seem like business is bustling in Boston but the burbs are not doing so well according to other reports. I don’t know why people are buying in Boston nor if it will last but there is action.
A lot Kool-Aid drinkers will be in deep $hit…
My wife met a stay-at-home mom at one of my kids summer camp.
She and her husband just bought a house for 1.4M.
They have a 1st mortgage of 1M and a 2nd mortgage of 200K.
Gosh! What kind of income do you need to afford the monthly payments?
The husband must be making megabuck$.
For a while I thought I had to rethink the Boston market. At the end of May and through June things sold and for sale signs seemed to moderate. Couldn’t understand it.
But the last month I’ve seen more signs sprout and more places just sit. The median here, as in other places, is misleading. Its skewed higher because only the really well qualified can buy and they tend to favor the upper end of the market.
My bet is that inventory will grow substantially through the end of the year between the those being reset, foreclosures and those who hoped to wait out a “dip” who now find themselves in a really crappy market.
Oh, to echo the comment about North Conway being dead, I continue to see similar signs….people not at golf courses, not at reasonably popular restaurants, not even at the beaches I’ve been going to for twenty years in the middle of hot, summer, weather. At least not at the levels I recall.
I think we’re in a recession.
For the last 2 years I have been bringing my lunch to work, as I am tired of crappy food. Over the weekend we went looking for new containers, as the old ones are getting ratty.
We first went to target and there were none. After that we went to Stop and Shop ( a local stupid market) and then to shaws (the other local stupid market). In none of these we could find the “sandwich” containers. Me thinks that maybe a lot of worker bees are getting stretched, and are packing lunches instead of eating out. Same goes for students. It is easier to give them 10 a day to eat lunch, but if you pack their lunch you save about $8 per day, or around 160 a month…
That can go to cover that ARM reset….
pinch a penny- Try a Dollar Tree or 99 Cent type store. I found some workable plastic lunch solutions for myself there. Its all from China anyway, so why overpay.
Is Kimberly Blanton now working for Marketwatch?
My kevlar gloves are not in yet. Me thinks mw wait.
“Some 40 per cent of borrowers may no longer be able to refinance before their ARMs reset to higher interest rates, Mr Flanagan wrote in a note.”
40 percent. WOW.
Wow is right . I would guess they can’t refinance because they couldn’t qualify for the first note to begin with and their equity is down .
How often are we going to hear a borrower say ,”But they promised me I could just refinance down the road before my payments adjusted up ,and I couldn’t afford not to buy now ,cause real estate always goes up .”
“There are true prime credits in the economy, not what has been marketed as prime. The market overall is charging a premium for all credits because of the difficulty in sorting out what is truly prime and what is marketed as such.”
So there you have it. After everyone could borrow even if the money would never be paid back, no one can borrow even if the money will be easily paid back.
Just think about how much money people in finance get paid to generate this oscillating stupidity.
Indeed. I have friends that work in finance and it amazes me how dead wrong so many of their budgets, estimates, theories, etc are. Quantitative analysis is fine and dandy, but it helps if you retain some common sense. I can think of one way they can “sort out” the prime from the crap: look at incomes (not the stated type) and weigh it against the loan amount. If the loan amount is several times income, that loan is crap. Of course this would probably eliminate half of the bubble buyers and the creditors would end up messing their drawers if they faced reality. Wouldn’t want to do that now would we?? I’m looking forward to the days of old when prices were reasonable and buyers had to have some skin in the game. Bring on the crash!
I interviewed for a new finance job yesterday, and I told my interviewer that it is not all about quantitative analysis, but many qualitative factors go into making the decision as well. (of course it was more eloquent than this)
He seemed impressed.
“Sowood told Bloomberg News last week that it did not hold any subprime mortgage debt in its portfolio….”
Sowood is the canary in the credit crunching contagion coal mine.
It has officially spread from sub-prime.
one less buyer for Deveaney’s yacht.
Yep, all corporate credits - junk bonds and leveraged loans for the most part. But it’s still “contained” according the the Ministry of Truth.
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_baum&sid=a_57fqtQdwxU
Funny stuff.
I LOVE Caroline Baum! One of the few voices of reason. I hope she is right in her opinion that Bernanke is no Greenspan, aka “Bubble Boy.”
“One can imagine him making an elaborate argument that the only reason the core CPI is above 2 percent is ‘because CPI housing costs are based on imputed rents, not actual prices,’ Carson said.”
God, what a farce. Why don’t they just back housing out of the core CPI altogether, and end the fiasco of pretending that the damn thing isn’t a totally massaged number?
“IndyMac’s non-performing assets rose 342% to $516 million, while mortgage loan production fell 12% from first-quarter levels to $22.5 billion.”
Uh-oh! Mortgage loan production is still 88% of first quarter levels. They’re still pumping out massive amounts of future foreclosures! Until income is verified, the rot continues….
The non-performing assets of $516M probably have market value of $250M ?
And more to come next quarters.
Great way with words, Bear:
“Massive amounts of future foreclosures!”
OMG! CNBC reporting AHM opens 85% down!!!!
According to company release - huge margin call. No longer can fund loans. Will liquidate company.
……..they are history.
Add another one to the Implode-o-meter list.
American Home Mortgage (AHM) just reopened down 9 at 1.50.
How much capital of their stockholders went down the rabbit hole on this on AHM?
Yahhhh…..subprime is contained…..Alt-A is contained…soon it will be the plain Jane 30 year mortgage that is “contained”.
NYSE is still celebrating and going apecrap everyday like drunken raped apes.
Nothing going on here little people, just keep moving on.
Bugs: “eh Daffy, who’s putting all this chicken coop poop down my rabbit hole?”
Daffy: “Hey, Bugs…some shifty looking guy’s from ACME Waste Management… just stuck a hose from their septic tank truck down into your rabbit hole”
Foghorn: “I say Son, you know this means WAR!”
‘Going apecrap everyday like drunken raped apes.’
Now THERE is an image that is guaranteed to linger in the mind.
I saw CNBC this morning I don’t know the guests name but he said inflation data was fixed.
Ron Insana said “No one would buy bonds” if inflation data was fixed.
At which point the guest mentioned only foreign governments buy bonds.
The Boston Globe. “Sowood Capital Management, a $3 billion Boston hedge fund launched just three years ago by former Harvard endowment manager Jeffrey Larson, sold most of its holdings in troubled debt markets yesterday after telling investors that it had losses of more than 50 percent this month.”
Dang it… I know I put that $1.5 Billion somewhere.
When will the hedge fund investors panic? How long can they watch Hedge fund after hedge fund close before they decide to pull out a little cash for a gulfstream or to keep feeding the “high end housing boom” that is still going on?
I think by end October we’ll have hit the wall. This won’t be pretty. What happens in the next few months determines the severity of the downturn. Hopefully congress is on vacation when everything falls apart.
Got popcorn?
Neil
Like your favorite endosperm, they’ll begin popping uncontrollably!
Yes Neil, we can only hope Congress is out when the feces hits the rotating blades…..only time the Republic is safe when these mokes are gone from the scene.
Making more popcorn everyday,
“only time the Republic is safe when these mokes are gone from the scene.”
I’ll confess, as a confirmed Republican, not to be particularly impressed with the current crop of officeholders. I’m concerned, though, that the same civilizational tides that have corrupted Republican officeholders have applied equally to the other side.
Keep in mind that the dot.com bubble and the Enron/Tyco/Global Crossing misconduct (as opposed to their denouements occurred under a Democratic administration, which itself was a little less than “the most ethical in history”.) I fear that something is going seriously wrong with our society across the board, and partisan cheerleading is just going to set us up for disappointment under President Clinton 2.0. We’ll still get the shaft; it’ll just be applied by different special interests. (And we’ll continue to get shafted by the permanent government, which roundly screws everybody, in pursuit of its own entrenchment, regardless of who’s nominally in charge of the bureaucracy.)
er…disregard, please. I misread your post re: the particular identity of aforementioned “mokes.” It’s everybody. I agree.
Ah hell . . . who’reya gonna pick to run the world: the Gambinos or the Genoveses? Same diff.
They’re not watching them, they’re watching American Idol. Maybe next month when they open their statements (if it doesn’t get misplaced under People Magazine) you might see some stir out of their slumber. Give it 3 months. People need to accidentally go through their statements 2 months after recieving them being that they were on vacaction too and didn’t really “get around to it.” Then another week after one of them hears it on the 7o’clock news, then a few days making it’s way around the office water cooler, then another week on a memo board on the fridge before they finally decide to give their broker a call. Of course that’ll be on a Friday at 5p and the broker’s closed so the monday after that, if they remember. If no reaction then it may be forgotten about til April 14th, 2008 at 11:33pm.
Yes Neil, OCTOBER
Agreed, October. This thing is really picking up speed now.
I’ve had the funniest feeling since early Spring that it was absolutely imperative to have our credit card debt paid down by October which we are on track to do. After this, one car loan that will be paid off a year and a half early (2.5 years of payments vs 4 years) and about 5800 in student loans. Eek indeed!
“Home prices in 15 of 20 major U.S. cities were lower in May compared with the previous May, Standard & Poor’s reported Tuesday. The Case-Shiller 20-city index fell 2.8% compared with a year earlier, S&P said. That’s the biggest decline in the seven-year history of the index.”
“In 10 major cities, prices were off 3.4% from the previous year, the largest decline since 1991.”
However, the NAR has assured us that all real estate is local so this is all just a coincidence.
“‘Borrowers over-borrowed, brokers over-lent, investment banks oversold performance and rating agencies overrated (mortgage-backed securities). What we thought was quality was not quality,’ he says.”
Nicely summed.
I was in NY in February 2007 on business. Just for grins, I went to see the Director of Loan Survellience at C-Bass to discuss the loan fraud going on in the sub prime and Alt-A loan brokering on the west coast. I showed him a portfolio of bogus loans over encumbering the assets by 150%. The LTV fraud on 23 loans totaled $4,025,000, before you even factored in the borrower’s ability to pay. I suggested I could save them TENS of millions of dollars by opening up a west coast survellience office and reject the bogus loans out of the pools they bought, before they purchased them. I got a very nice, “Thank you for stopping by, but we know what we are doing. Our servicing group knows how to handle borrowers in default and our credit analysis models are better than anyone in the industry.”
I guess I should have said I could save them HUNDREDS of millions of dollars in losses. Sheesh. Half a billion in losses flushed down the drain for each investor. Hey Gomer: “Surprise, surprise, surpise”.
what is C-Bass?
C-Bass is the company owned by MGIC and Radian, the one that was worth $1 billion last week and is worth nothing today. It stands for Credit Based Asset Servicing and Securitization.
They had very, very big egos on their 19th floor Madison Avenue offices………………until yesterday. Nothing like losing a billion dollars to put you in your place….
One more item about C-Bass: They kept the high risk tranches and sold the rest to investors. That is why their net worth of $1 billion evaporated “overnight”. But keep this in mind. They only had the top 3% of the loan tranche in the pools. If the sub prime loans they banded together and sold to investors is worth less then 97% of the “face value”, there are a lot of other investors who will soon realize they are left holding the bag! Let’s see, 120% financing, asset loses 30% of value, chip in another 10% in foreclosure costs, 7% in resale and holding costs….poof, the value of the $1 in the pool is about 44% of the original offering. Hmmm, C-Bass lost $1 billion on the top 3%, so some other investors must have lost about $11 billion on their tranches. I bet you will see a lot of fighting over who takes the losses when and how. A mess years in the unraveling. A billion here, a billion there, pretty soon…..
cool- tell his boss !
Good to have you back among us, Paladin!
AZ, Thank you. I am often here reading, but not posting much. My real efforts are mostly behind the scenes now. There is a lot going on, but now that sub prime has melted down, I don’t need to be so public in my work. I am keeping a journal and will post it, or a link to it, when all the dust clears. You will have fun reading it. Some real nominees for the Darwin Borrower’s Awards.
But I don’t want to wait that long. It could take a while for all the dust to clear, and fully reveal the blood sloshing in the streets. Why not just post a teaser, for those of us with ADD?
“I am keeping a journal and will post it”
Methinks that you should do a book. I’d buy it.
Good to have you back and great story. The C-Bass losses of $1B is a good start. F’em.
Paladin,
just for fun,you should contact carolyn baum at bloomberg with that story…I bet she’d love it.
Evidently, it is Caroline Baum. Done. We will see what happens now.
Paladin,
Would you be interested in doing something … spectacular with the information you’re finding? I’m an OC attorney with a pet project brewing. More if you’re interested.
Thomas, I am always interested in doing something spectacular. Why, I just fell off a ladder yesterday and it was spectacular! Seriously, I am open to your proposal. You may reach me at paladin@paladinreports.com . I will respond.
“reject the bogus loans out of the pools they bought, before they purchased them. I got a very nice, “Thank you for stopping by, but we know what we are doing.”
BWAH HAH HAH HAH HA HA HA HA HA HA!
Well, at least you tried, Paladin. Nice business idea though.
At this point, despite the schadenfreude, I’m actually beginning to hope this perfect storm won’t be as bad as I think it might be.
Count on it being as bad as you think it might be .
Oh man, run for the hills!!!!
Worse…
Credit Suisse ARM reset chart
plus
“Some 40 per cent of borrowers may no longer be able to refinance before their ARMs reset”
equals
“very bad”
American Home misses margin calls; shares plunge
Mortgage lender hires advisers for ‘orderly liquidation of assets’
http://www.marketwatch.com/News/Story/Story.aspx?guid=%7BBEECDD93%2D41EB%2D4E49%2DAA5E%2DFAEA3A434B44%7D&siteid=mktw
“American Home Mortgage emphasized that it is seeking the course of resolution, in this environment, that is least disruptive to its business and to the many thousands of home buyers to whom it has committed to provide mortgages.”
Sounds like many thousands fewer sales if they are not successful.
This is potentially huge news. These guys (used to) have 2.5% of the American mortgage market
It is huge news…AHM was a mortgage REIT dealing with Alt-A loans, not subprime. It was also one of the biggest employers on Long Island…so you got your Alt-A carnage and your unemployment.
WOW. Its shares fell almost 90%.
AHM shares should have fallen 100%. Debt holders are screwed but equity holders are really screwed.
I wonder how many of the 7500 employees will have jobs next week? Or will their paycheck bounce?
If you miss margin call the East Coast establishment will sell you out @ 2 PM.
classic
Remind me of the 1987 chronology. Wasn’t it:
Bond market crash in the spring.
Indexes peak in the summer, with fewer and fewer stocks leading them higher.
Crash in the fall?
Two months to October.
Linus:
“Dear WT Economist,
Please come and join Sally, Snoopy, Woodstock & I in the Great Pumpkin Patch this Halloween…We can all watch as the Great Pumkin raises in the sky and showers downs many gifts to all the children below…”
Yours truly,
Linus
PS,
Bring your own chair, Bugsy will be providing “Neil’s Buttered Derivative Popcorn” for all who show up.
Glad I moved everything to cash after the 14k Dow
Hit the button at 14K myself….. Feels good, don’t it?
i actually moved all my ira, roth ira and 401k out of everything monday. put my 401k in the safest thing we have and bought as much SRS as I could with everything else at the low today and closed pretty happy. Thanks HBB for helping me make some money. Will be donating if the crash continues to make me some more money this week.
I’ve been tracking these companies and others in a sort of dead pool since September 28, 2006 and have been updating it for the seminar next week. Here’s the current status:
Lender 9/28/06 7/31/07
NEW (New Century) 39.50 Delisted at 1.90
AHM (American Home) 34.96 1.20 (halted)
MTG (MGIC Investment) 60.18 6.71
LEND (Accredited Home) 32.00 10.15
FMT (Fremont) 14.00 5.98
NFI (Novastar) 29.65 10.31
NDE (Indymac) 41.57 Delisted old
IMB (Indymac Bank) 21.77
Ameriquest XX
Mortgage Lenders Network XX
CFC (Countrywide) 34.89 28.62
WFC (Wells Fargo) 36.09 34.18
WM (Washington Mutual) 43.44 38.00
TMA (Thornburg Mortgage) 25.74 25.15
NCC (National City) 36.96 29.51
Billions of market cap have been lost. Consolidation abounds!
Just a minor question have you looked at MERS?
“MERS was created by the mortgage banking industry to streamline the mortgage process by using electronic commerce to eliminate paper. Our mission is to register every mortgage loan in the United States on the MERS® System.
Beneficiaries of MERS include mortgage originators, servicers, warehouse lenders, wholesale lenders, retail lenders, document custodians, settlement agents, title companies, insurers, investors, county recorders and consumers.
MERS acts as nominee in the county land records for the lender and servicer. Any loan registered on the MERS® System is inoculated against future assignments because MERS remains the nominal mortgagee no matter how many times servicing is traded. …”
http://www.mersinc.org/index.aspx
Things are really rolling now!
It’s all downhill and the wagon brakes quit working!
Last weekend I checked out a new development way east of Phoenix, halway to Glode, a ghost town it was. The older development next to it had over 30 homes for sale. One one street 6 unoccupied homes for sale. In the sales office I asked the salesman if they had any incentives? He took my price sheet and cut the price on every home by 30 to 50 thousand dollars and offered me 10k in incentives. The developer next to him offered to pay my mortgage for 6 months and buy my old house. Even though I like the area, most scenic area in the valley and close to the Mogollon Rim, I told him when they drop the prices another 50K call me. He said he would contact me this week……..blah blah blah.
OT ALERT!
Can anyone tell me what the lender demand is for mortgages on “second” homes? I live in a resort town where nearly 50% of the residential real estate is owned by people whose permanent residence is out of state.
Just wondering if qualifying for a second home mortgage is getting harder and if that spells trouble for the the local real estate market.
— Hiding out in NM
Who discloses it’s going to be a second home? You just apply for a mortgage saying you’re moving to that house, then just don’t sell your house you live in, who’s gonna check.
yeah, but you may be setting yourself up for major problems of various sorts, inlcluding licensing your vehicles, etc., and some places have higher taxes for second homes, etc. Check it out carefully.
I have a friend who is considering in tapping into his HELOC to start a restaurant business. Do you guys think it is a good idea?
I have mixed feelings about it. But, he tells me that he needs to take some risk to make things happen for him and his family.
I think the question of whether it’s a good time to start a restaurant is a tough business decision in the best of times. The industry is hard, with low profit margins unless there is some catch or gimmick for the place and it happens to hit a trend at *just* the right time (think microbreweries). Otherwise, the industry is very sensitive to overall economic conditions, which seem to be deteriorating quickly. Reassess the situation next week.
I don’t think this is a good time to be getting into the restaurant business, based on what I’ve seen out and about lately. I certainly wouldn’t bet the house on it. Of course, we’re rather bearish around here.
Also to consider, does your friend have experience in the restaurant biz? That’s a tough business and a huge workload even in the best of time. Not a good side business unless you can afford to have someone else run it.
Might want to consider a… Gourmet Soup Kitchen
Saturday & Sunday: All you can eat: “Neil’s Buttered Derivative Popcorn”
ROTFLMAO!!
Without him having a good business plan as to why he will succeed, it is a stupid fecking idea.
HELOC it and give it to me. I’ll show him some risk and what happens.
80% of restaurants fail within 2 years. It’s a tough biz.
“he needs to take some risk to make things happen for him and his family. ”
When 5% sucks and money needs to grow fast and nothing seems risky enough, go for the restaurant start-up.. or head for a casino.
resturaunt= worst investment idea ever.
however, the franchise model works if location is good, and you want to pour in 80 hr weeks.
Shares of American Home Mortgage (AHM) had a 52-week high of $36.40 and are now at a 52-week low of $1.04. At it’s 52-week high, the market value of the company’s stock was $2 billion. Today, it’s just $52 million.
That’s gotta hurt!
It is kind of weird, but at $1.04 it has become a hedging stock against the stocks in similar rafts that have not dropped. I expect a bounce unless it declares BK. Using AHM as the purchase of a stock|stock hedge results in a Sharpe’s ratio ~1.27.
wow! i read these posts every day and there is some really great information to be had here. I have a question, perhaps someone could help? I own some land in the Hudson Valley in Ny and I am thinking of building a small house there but am hesitant because the costs of building a house are substantial ($200 per square foot approx). With a downturn in the housing market will the costs of building a new house (not a mcmansion) come down as well? I would imagine there will be more and more builders out of work. Perhaps if I wait a year or two I could make some substantial savings?
I’m waiting just to have work done on my house.
You want to be doing the contractor a favor, not the other way around. And you want to see who survives. The good ones will be left, the bad one’s will go poof (perhaps with your deposit).
“substantial” is vague.. if cost cutting is a priority it’s best to wait, imo.
I think that waiting will help in a couple of ways. Building material costs should decrease with less demand. Costs for contractors and subs should also decrease as the contractors are struggling to make ends meet. The weak and economically troubled contractors should get weeded out (you do not want your contractor to be in dire financial straits - he will be robbing Peter to pay Paul, and you could end up with liens even though you paid the GC if he doesn’t pay the subs). You should be able to select good contractors (as they won’t be busy, you should be able to have your pick - go with good, established contractors). Also, some of the building materials (I’m thinking of lumber, specifically) should be of better quality (with the mad rush of building during the last few years, there have been reports that some of the wood that was being sold might have been a little too green).
You can also take the time to get all of your plans together and schedule construction for a time that is better from a weather perspective. Having plans (architectural, engineering, etc.) done ahead of time will allow you to get a much more accurate quote from contractors, and will also allow you to have the contractor perform some value engineering (basically a process of looking at the plans and seeing if there are some cost savings that they can accomplish by making some minor changes).
These are JHMO. Good luck with your project.
thanks waiting. some really good advice!
Yes on the substantial savings, but also, why do you want to build the house? To live in? Is your job secure to ride out a recession, or might you find yourself wanting to move to get a job?
Also, how will a downturn affect the neighborhood? Would you still want to live there? I find this the most annoying part of this bubble. I’m going to have to wait so long to figure out how the neighborhood deterioration is going to play out.
Thank you much for your responses, I really appreciate it!
Polly-Yes the house is to live in, no the neighborhood will not detoriorate, it is an established country (exurbia) property (3.5 acres)with a State Park bordering it, I am going to pay for the house almost outright (I have saved over the years) as I do not like giving money to loan sharks. It will be a small house, 800 sq ft, with room for additional expansion if I decide I can afford a larger residence. However I am of the mind of living with less, using solar power, fewer possessions. These large homes in my estimation are a joke and an unwise use of natural resources. No wonder we’re in so much trouble as a nation, we are living well beyond our means. We must conserve!
$200 a sq ft and you already own the land? You must be planning some kind of mansion. Builders in this area are putting up nice but basic homes (brick front colonials, no granite counters, not much hardwood or tile) for about $100 a sq ft INCLUDING the lot.
“…but am hesitant because the costs of building a house are substantial ($200 per square foot approx).”
You’ll never get your money back at those construction costs. You should be getting $150/sq ft for quality work. $200 a square foot seems way out there to me.
Probably costs will go down with the housing downturn, but there is a chance that dollar devaluation could send lumber, cement, copper etc. into the stratosphere.
BTW I always get ‘culture shock’ when I hear someone in the Lower 48 say they are building a house. In Alaska, that means you pounded the nails yourself (like my first place)…
tell ya the truth akron I am going to be pounding nails along with the contractor as a construction worker all the way through the process. Yes the cost of 200 per square foot is really expensive but thats what it costs in a place that is so close to NYcity. I am hoping to bring down the price to, as you indicate, quality work for 150 per square ft. These costs are indicative of living in the ny metropolitan area.
I got bumped from the last 2 short spec positions today. Normally for me this means I take another look at long positions. I’m really a bit tremulous about taking any longs at this point. Anybody have a good reason for me to believe another rally is coming?
BTW, good to see another post by Paladin. You can lead a horse to water…
From the SF Chronicle:
“‘Much of prime is not really prime. The Alt-A base (has) been found to be really subprime. And much of the subprime has turned out to be flat-out fraud,’ Mason says.”
*******
Welcome to the Alt-A Bay Area!
How about this?
People lose their homes to foreclosure, those houses finally sell bringing prices down whereupon people who couldn’t/wouldn’t buy before now jump into the market when affordable and everyone’s back to buying refrigerators and coffee tables again.
Same houses, same money, different people.
I am not one of the “financial experts” around here, so tell me what’s wrong with this.
I think we are in rough agreement.
Homes will be sold. It’s simply a matter of price. However, the consumption of the other items will change as well.
Same houses, less money, different people.
Loose lending standards=anyone can get money for anything=expensive housing, granite counters, plasma TVs, Sub-Zero refrigerators, travertine tile floors.
Tighter lending standards=people can get money for their house only if they can prove that they can repay it=cheaper houses, formica counters, no new TV, basic GE refrigerators, linoleum floors.
People will still spend money. Just less of it, on different things.
It’s equivalent to one poster above that was talking about storage containers for lunch. People will still eat lunch. They just will make themselves a $2 sandwich, not spend $10 on the take-out.
I don’t think anything is necessarily wrong with your analysis. It will simply take time, and people (FBs and lenders) will take losses along the way. The key is affordability - we have a long ways to go to get there, and a few months of foreclosures are not going to do it. Also, don’t forget the effects of tighter lending and psychology. Tighter lending will keep a lid on the number of people who can obtain a loan, thus keeping demand in check. And, mass psychology moves rather slowly. It will take awhile before Joe Sixpack realizes that real estate is a terrible investment. When we finally hit the bottom, it will take time for Joe Sixpack to recover from his fear and be willing to buy real estate again.
It will happen - it’s just a question of how long until we get there, and how much damage is done along the way. The longer it plays out, the more damage that will likely be done. Remember, real estate came back after the Great Depression. I’m not predicting that we will have another depression (not saying that we won’t either - although I think stagflation may be more likely), just pointing out that real estate will move through its cycle and, yes, eventually (how ever long that is) people will be buying again.
This may have accelerated the stock market’s decline into the close:
http://www.marketwatch.com/news/story/fed-wont-ride-rescue-upset/story.aspx?guid=%7B265C021C%2D7EA7%2D401D%2DA60A%2D724EA859E758%7D
Fed won’t ride to rescue of markets: Poole
By Greg Robb, MarketWatch
Last Update: 1:52 PM ET Jul 31, 2007
WASHINGTON (MarketWatch) - Financial markets understand that the Federal Reserve won’t respond quickly to a typical market upset such as last week’s sharp stock sell-off, St. Louis Fed President William Poole said Tuesday.
The Fed should only act “in due time” if evidence accumulates that the market drops could undo price stability or low unemployment, or when financial market developments threaten market processes themselves, Poole said.
Last week’s cumulative drop was the worst in four years for the Dow Jones Industrial Average. At the same time, trading in credit markets and Treasurys led to concerns about a possible credit crunch. See Market Snapshot.
Analysts are now debating how the Fed will address the turmoil in its policy statement, to be released after its meeting next Tuesday.
In his speech, Poole said the best policy for the Fed is to be cautious and try to understand the reasons for the market turmoil.
If the Fed is “overactive” in responding to market developments, this would set precedents to destabilize markets in the future, he said.
“If the market believes that the Fed is always primed to adjust policy, then market participants will spend more time trying to second-guess the Fed than trying to understand what is happening to business and household behavior,” Poole said in a speech prepared for delivery at the University of Missouri. Read the full text.
Poole said he was speaking only for himself, but his views add to the growing sense that the Fed under new chairman, Ben Bernanke, is trying to move away from the so-called “Greenspan Put.”
That phrase was coined after Bernanke’s predecessor, Alan Greenspan, pumped up the money supply in order to stabilize the markets after the stock crashes of 1987 and 1989, the demise of Long Term Capital Management in 1998, and the bursting of both the tech and the stock bubbles back in 2000. Read Kellner commentary on ‘Greenspan put’
Poole said that his philosophy about the Fed’s relationship with markets was grounded in the teachings of Milton Friedman.
But Poole said that well-anchored inflation expectations play a key role. This allows long-term rates to move in response to new information while short-term rates stay constant.
“The central bank can hold its policy rate relatively steady and rely on market adjustments in long rates to do much of the stabilization work,” Poole said.
“When new information arrives, most of the time the central bank can wait for market responses and the passage of time to clarify what is happening,” Poole said.
Poole said last week’s volatile trading “was a perfect illustration” for the market. “The Fed doesn’t know, and market participants do not know either, the full implications of last week’s stock market declines and increases in risk spreads,” Poole said.
“Market reactions last week may be overdone, or perhaps not,” he said. “I’m not saying that the Fed should ignore what happened last week - we need to understand what is happening.”
But Poole added that the Fed must not let uncertainty over policy to add to existing uncertainty.
“The market understands, I believe, that the Fed will act in due time if and when evidence accumulates that action would be appropriate,” he said.
In some cases, like the terrorist attack of 9/11, a quick Fed policy response would be helpful, he said, but added that “a typical market upset, such as last week’s, is not at all like 9/11.”
Sorry about the formatting. The important part is that a regional Fed hed sed they won’t bail out stocks, the economy maybe but not just for stocks.
I do not care if every word is mis speled. Poole is the only Fed member that has been against lowering rates and now keeping rates low. He has been warning of inflation for years.
Thanks for posting, Deron - interesting to see.
Especially this, since second guessing the Fed has been relatively “easy” for such a long time for market participants:
““If the market believes that the Fed is always primed to adjust policy, then market participants will spend more time trying to second-guess the Fed than trying to understand what is happening to business and household behavior”
And it appears, at the very least, that many hedgies and banker Pig Men failed to understand “business and household behavior” as they relate to housing.
Looks like the markets understand, at least for the moment. DOW baasically fell apart in the afternoon, with a wonderful slide at the end. The PPT’s efforts in the morning seem to have failed for the day. This past week has shaped up to be a real wake-up call, and I am enjoying it! No, housing/the market/whatever the Bubble of the week is does NOT always go up!
Oh, and welcome back to Paladin - good to have you back.