Bankers ‘Don’t Want The Bottom To Fall Out’
Some housing bubble news on the lending front. “Acoustic Home Loans, a nonprime wholesale lender based in Orange, Calif., has gone out of business. Acoustic, founded in 2002, said in a statement posted on its website that it was ‘no longer in business’ as of April 14. The company’s website says Acoustic was the 27th-largest nonprime wholesale originator in the nation.”
“Reliant Home Warranty Corporation (announced today underwriting approval to offer North America’s first 50-Year Amortization program for non-prime high-ratio mortgages. An investment in the Company’s common stock is speculative in nature and involves a high degree of risk. The Company had a net loss of $938,752 for the year ended December 31, 2005(2004-8,455), and working capital deficiency of $161,531(2004-($832)). This raises doubt as to the Company’s ability to continue as a going concern.”
“ECC Capital Corporation, a real estate investment trust (REIT), operates as a subprime mortgage finance company. It primarily originates and invests in residential mortgage loans. ECC Capital was founded in 2004 and is headquartered in Irvine, California. On April 10, 2006, the registrant (announced) that members of its executive management team have offered to take significant reductions in their compensation to help the registrant in its efforts to cut costs.”
“Co-founders Chairman and Co-CEO Steven Holder and President and Co-CEO Shabi Asghar have volunteered to work without salary or bonus for the next twelve months, and other members of the registrant’s senior management team have agreed to significant percentage reductions in their base salaries and/or to return some of their previously granted options to purchase the registrant’s common stock.”
“Fannie Mae has loosened its mortgage approval standards for lower-income borrowers as it strives to meet its government mandated affordable housing goals.”
“Federal regulators are moving toward their potentially final review of proposed guidelines that may restrict some banks’ commercial real estate lending. Bankers are concerned that regulators might require, or perhaps scare, some banks into reducing real estate lending to an extent that it could lead to an economic slowdown.”
“‘We told them we understand that they are concerned about excessive risk,’ Alex Sanchez, president and CEO of the Florida Bankers Association, said of meetings with regulators in Washington, D.C. ‘We also said we don’t want the bottom to fall out of the market.’”
The conference call for ECC is on at this posting. Sounds like a disaster; talk about Wall Street not wanting the subprime paper, making loans at less than cost of funds, ’significantly lower volume,’ etc. These guys do billions in loans.
We told them we understand that they are concerned about excessive risk,’ Alex Sanchez, president and CEO of the Florida Bankers Association, said of meetings with regulators in Washington, D.C. ‘We also said we don’t want the bottom to fall out of the market”
In my best Professor Evil voice,’ yeah right……’
Bubbles don’t have floors.
Bubbles do have floors, but the floors come equipped with trap doors…
I met Mr. Sanchez at an FBA dinner (I think I was the only Democrat in the room). That was a nice experience–a bunch of fat-cat bankers blabbing about how their banks are backing all of these great RE projects in FL. They didn’t like my questions about the capitalization of their institutions or their possible over-exposure to the residential and commercial real estate markets. This was back in Oct. before the bubble was showing signs of bursting. It also didn’t help that I am about 25 years younger than anyone else there and my background is in bankruptcy law. But it was pretty clear to me that they were aware of the risks they were taking and simply didn’t care, nothing like gambling with OPM.
Anyone have any thoughts on shorting FannieMae or FreddieMac? I’m short on HB’s, a few “transports” and have been watching FNM for a spike.
You can’t short them. 93% of the stock is in instutional hands. They sneeze and you are short squeezed out. It ain’t fair or right but then again they are stocks.
Thanks RC.
On topic, I’ve posted this link before and actually saw this process in action in the late 80’s. They’ll also look for conflicts of interest at branches, self-dealing with customers etc.
http://www.financialsense.com/fsu/editorials/mchugh/2006/0311.html
Since you have the guts to short the HBs you might like the topical post I put up this weekend: http://exurbannation.blogspot.com/2006/04/somebody-splain-this-to-me.html
Yeah, I’ve seen that on a site that caters to chart readers. I listened to the guy explain why he thought HB’s were due for a dramatic bounce. Didn’t scare me. I expect them to produce some good 1Q/2Q numbers but think it’s pretty much leftovers and then the fat lady sings.
Ah yes, the “gauntlet”. Be sure to “reserve” my space.
Yep, that’s about how it is.
Great find Fred. I often visit Financial Sense, but hadn’t seen this article yet. Nice piece; almost funny - if you don’t have to experience it first-hand that is.
Let the games begin!
Good short sellers think long term. Fannie and Freddie are good short sales over a 3 year time frame because over that time period serious problems are bound to emerge. Short term, though, the holders of the stocks think they are invulnerable because they’re too big to fail. When the foreclosure rate soars they will eventually thunder South.
Yes, and I think the “audit” will uncover much more than $11 Billion in “accounting” errors.
Why short now and pay dividends AND, if the FED lowers there’s likely to be a jump IMO. Maybe in a year, but not me. I just can’t think of a way the government could step away and not bail these chumps out, even given the corruptness and phoney financial statements…
Would you short in the next 6 months at an entry point of $65?
If you look hard enough you can find some REITs or lenders with plenty of exposure and without the USG backing to worry about. I have been spanked on a short when institutional investors own 90%+ of anything - especially when it’s low volatility stuff like pension funds etc that loathe to move their $$$$$ around and take a loss. Deep discount funds are even worse. They seem to ride stocks slowly to $ZERO rather than sell.
The government will most definitely bail them out in the sense that it will go beyond its legal commitment to fork in cash. However, as the problem worsens the quantity of cash needed will exceed the borrowing capacity of the USA. Foreign money will be fleeing the mortgage market, housing will be in a down spiral, and most important - Fannie and Freddie will be unable to generate new loans to stop the implosion. Once the slide begins it is hard to see what can stop it.
I’d bet that at some point in the process, the stronger of the two will be “encouraged” (forced actually) to buy the weaker, to stave off liquidation because of insolvency.
Since you are anonymous, care to share which HB stocks you are short?
TOL, KBH. Will do LEN and RYL and add to TOL/KBH on any earnings bounces. So far so good. See comment above. I like exposure to Phoenix, which is ground zero for the real estate crash, which causes the US economy to tank, which causes a global worldwide recession, which causes the end of the world as we know it. And to think, it all started here in Phoenix!
Take a look at HOV and Meritage. They are pretty exposed to what I consider the risky parts of the country and don’t have the same financial strength of the others. Although, I think that both HOV and Meritage may have already taken a hit . . .
How about shorting the Miami mkt using the new housing futures recently fired up on the (Chicago) Merc?
David Dreman, noted value investor is long FNM and FRE. It would not be good to bet against him as he is a very good value investor and has generated good returns over the last 25 years.
Yes, Mr. Dreman has a great track record. In fact when I was in the market (mostly out after ‘98), I would use a similar strategy - buying low P/E, out-of-favor stocks. Mr. Dreman would be the first to admit that not every one of his stock picks has worked out. I’m sure he has made lots of money on Fannie and Freddie - he has been bullish on them for years. My gut says he’s going to lose a bundle on these two, going forward.
Yah stay away from FNM for a while. If you’re hot to make some short money, may I suggest that HOV (Hovnanian, the 8th-biggest builder) is also very similarly head-and-shoulderish. They busted their 52-week-low on Wednesday I believe and it’s still going down.
I haven’t checked but wouldn’t buying long term puts be safer and cheaper? That is assuming the premiums are not as overvalued as the stocks (lol).
Generally on liquid stocks the premiums on puts only save you the difference between your margin rate and the market makers (you will still have a wider bid ask spread and higher commissions to deal with). The option trader will generally short the stock (and buy a call to hedge the position completely) but he generally has a better margin rate than most little guys. Also, big option traders are typically market makers so they can take advantage of naked shorting (why do you think it is legally specified and exists?) on stocks that are particularly difficult for most people to short. In any case they will make a few cents (per share) on the trade so unless you are in a high margin bracket you probably aren’t saving that much on liquid stocks.
try becn or jaccuzi
Great update. I haven’t heard alot of updates on the Broker-joker industry lately. I would speculate that there has got to be plenty of layoffs in the industry right now.
How can you (Fannie) possibly lower borrowing standard when a homeless person can borrow over $500,000 …
Yes, I wonder how much further you can lower the standards. This is getting ridiculous. As long as values go up they figure they can loan to anyone with a pulse. They are scared to death to see property values fall so they are doing everything they can to prop up prices and keep business rolling in.
Dude there’s nothing left in the tank. The only solution is too drop rates back to the 4% range to keep it going. That’s not going to happen it’s over. Fannie is typically a conservative fixed rate lender they do have adjustables but they are far less violatile(sp?) then what you find on the open market. What they are basically telling you IMO is that they are going to start offering things like option arms, no docs, and look the other way underwriting so they can compete with the others. Looking in between the lines the gov’t has just been assigned the task of the all-american bail out.
i gotta agree…what else can it possibly mean, this ridiculous quote that “Fannie Mae has *loosened* it’s lending standards to meet its government mandated housing affordability goals”? WTF?! In this climate of clearly screwed borrowers and clearly screwed mortgage cos they are pretending the thing to do is *loosen* their standards to make housing more affordable?! Lower prices from the unsustainable laughable levels would making housing more affordable, but that would sink the ship…this is really scary. That bit scared me the most, like FannieMae is indeed being designated as some sort of makeshift vaccination program to lower the casualty count and ensure someone is left capable of buying real estate so the “government mandate” game can continue..wow.
A dead homeless person.
“Fannie Mae has loosened its mortgage approval standards for lower-income borrowers as it strives to meet its government mandated affordable housing goals.”
And anybody wonders why gold is over $600.00…
Fookin’ world’s gone mad.
Where in california is there really affordable housing? All they have done is made buying a home into making a payment for a lot of people. Interest only 50 year loans are sure going to help a lot folks out I’m sure. Make them go into debt for life to have a roof over your head,come on now. How far can we complicate this?
How About a NEW Life Time loan. Pick any interest rate ,pay what evere you feel is right for the time and spend the rest on your self. It will sure keep the economy going.
Good Idea!!! Write your legislators!
50 yr loans man I would hate to be on the hook for that. I’m going to have too look to see how far that would bring down a payment.
Going from 30 year fixed to 50 year fixed moves your payment roughly 0.9% to 1% per year–this can help a bit on actually getting yourself into a fixed rate product, but won’t ease the pain completely if the whole move is 2-3%.
But just think about inflation on a 50-year time span. You’d be paying it off for cents on the dollar long before the end of the period.
At 6%:
100K @ 15 yrs = $844
100K @ 20 yrs = $716
100K @ 30 yrs = $599
100K @ 40 yrs = $550
100K @ 50 yrs = $526
100K @ 100 yrs = $501
You may draw your own conclusions.
Not gratuitous but hd74man always seems to be right.
To the extent that he agrees with me, anyway.
Off topic, but interesting.
The Grover Beach condo that was put up for Round Robin auction on March 18th/19th has had a note on the website stating that the auction was “successful” but that bids were still “being entertained” in the 350-399k range. I just checked again today, and the information about the Round Robin auction has been removed, and now the condo is being offerred for 374.5k.
This is the guy who rejected a 400k offer last fall because he thought it was worth 450k, and then put it up for auction this spring because he hadn’t gotten any more offers. Now he is rejecting any offers that he may have gotten at the auction, and is holding out for 374k. Seems like he is chasing the market down. Check it out at http://www.ABeachTown.com
lol.. Thanks for the update! Figured it would be sold by now.
In all fairness, there isn’t much one can do when buyers disappear. Even “pricing to sell” won’t always help, and may even backfire, since the buyers will sense weakness, circling like vultures while you’re bleeding.
The only thing that helps is the Lady Luck, but she’s a very busy girl.
You can ALWAYS sell a house if the price is low enough. The reason why there are no buyers is simple enough: The price is too high.
Why would they buy, if they sense that you’re going to foreclose in a month or two?
exactly. there are starting to be houses out there in my market with prices getting closer to approximating realistic, but not yet there. clearly some sellers are trying in their greedy way to “change my thinking” and convince me to buy their houses, but the prices are still too high. It’s not that I’m sitting there wanting to see blood…I’m sitting there worried that the economy around here sucks and I wouldn’t want to lose my dp if things tank deeper. That there was little justifying even 10% year-to-year price increases over the last 3 years and their asking still includes those.
Or that the economy is scaring them and they’d rather keep things flexible.!
Great point Max — there will be a huge shortage of buyers. First, banks are doing backflips now, and there are hardly any fools left to bite -so when they have to tighten, there will be even fewer fools, 2nd, those who have bitten unwisely will likely be permanently out of the housing market, 3rd - flippers/speculators won’t buy in a down market, 4th those who are wise are finicky and waiting for the best bargain. All of this speaks to the rather fast rises in inventories we are all seeing.
I wonder if the district attorney would be interested to know that an auction was held and the results were rigged?
It’s in a lousey area south of Grand Ave. Can’t even see the ocean. Isn’t worth 300k. No wonder the salesman kissed him off when he tried to counter a 400k offer and then tried to grind his agent (nothing personal-just business) What an idiot. Will write the address and try to follow it down this spring. But remember as Appleton-Young says,’Houses always sell better in the spring’.
Heh, zillow.com has it ‘zestimated’ at $442,301.
Then again, the zillow ‘one week change’ in price is listed as -$11,918…enough weeks, and zillow should have it valued at market.
I love the sounds of a snapping financial system in the morning!
recession mentioned.
http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B884C52FA%2D16C8%2D4635%2D820F%2D973137F22ACF%7D&siteid=mktw&dist=
“The numbers “are neither surprising nor alarming,” said David Seiders, chief economist for the builders’ industry group. A reduction in speculative buying “is a positive development,” he said. “Furthermore, we expect solid growth in employment and household income to essentially offset the minor increases” in mortgage rates projected this year.”
Bwahahahahah! This guy should do stand-up.
What solid growth in employment and household income would he be referring too.
In the Real Estate industry…;-)
More banking regulators, staffing up at the 2007 RTC incarnation, BK attorneys and debt counseling…
How do you make a sound of a FART???
* No proof of income or employment
* No business license
* No proof of cash on hand or in a bank account
* No minimum seasoning of cash to close
Disregard Debt Ratio – We do!
Mattress Money – (Basically no Problem)
That’s the way Fannie is going I just got that in my email from a lender.
Please, please, please tell me you’re joking!!! Right???
I get a variation of that from different lenders daily
BRING ON THE FANNIE AZZ-WHOOPIN!!
Now let me get this straight:
The Fed is Raising The Rate…
…as Fannie Mae is Lowering It’s Standards…
Isn’t that kinda like taking a needle full of heroin to calm one down…
…and following it directly with a needle full of methamphetamine?
I mean, are we COMING or GOING HERE?
Amazing.
Doesn’t this look JUST LIKE JAPAN?
Somewhere in South Korea, Alan Greenspan is looking at what Fannie Mae is doing, and shaking his head, sadly…
This is going to end very, very badly.
Auction I’ve gotten to the point where I stop at all your comments cuz they are so SPOT ON!
>This is going to end very, very badly.
Yup, with emphasis on the “very, very”.
Two related items:
‘Anworth Mortgage Asset Corporation announced today that its board of directors declared a quarterly common stock dividend of $0.02 per share for the first quarter of 2006.’ I believe that’s a cut.
From the ECC press release after the conference call.
‘The fourth quarter was difficult for us as whole loan sales pricing
for our production declined significantly through the end of the year,
driving the large loss we experienced during the fourth quarter,’ said CEO
Shabi Asgha..Throughout 2005, ECC Capital experienced a decline in whole loan prices, in particular during the fourth quarter. During the fourth quarter of 2005, credit market conditions required additional credit enhancements that negatively impacted the prices at which ECC Capital could sell loans.’
‘The decline in sales prices reflected, in part, normal seasonal trends, as well as a need to reduce higher levels of held-for-sale inventory retained while selecting mortgage loans for securitization.’
‘Depending on the extent ECC Capital is required to utilize these
sources of liquidity, its ability to pay a dividend may be negatively
impacted. On February 27, 2006, ECC Capital announced a revision to its
dividend policy and that it would not pay a dividend for the first quarter
of 2006.’
‘At December 31, 2005, total delinquencies were less than 5% and serious
delinquencies (greater than 90 days) were 1.5%.’
“Fannie Mae has loosened its mortgage approval standards for lower-income borrowers as it strives to meet its government mandated affordable housing goals.”
I don’t subscribe to the website where this quote came from. However, I was so irritated by the idea that they’re handing out even more idiot money that I checked the Fannie Mae website to see what bright new idea for “loosened standards” they’ve come up with. However, I didn’t see anything recent (as in this year). Anyone know what the quote refers to?
I wouldn’t short. I lost my shirt last year shorting the homebuilders. Too dangerous when fighting the governement. I think there is a strong case for them to keep this all afloat by intervention to hell with the currency and the gold price. I would rather buy small amount of puts going forward.
I would agree. The puts have been extremely volatile and there are a lot of short squeezes. Nothing is a slam dunk.
They are sure to get slaughtered… the question is when.
I do own some KBH/TOL Puts, but I have learned to take my profits a few percentage points at a time and jump back in when it is pumped up.
The HBs seem to rise on when a Fed member farts in their general direction and fall only slowly afterwards.
Am I just cynical, or does anyone else find it mighty convenient that these companies are going out of business? Take Acoustic. Starts out just as the whole suicide loan business goes crazy, makes a ton of money for its employees I’m sure, and then goes out of business right before the sh!t hits the fan. Or Warranty, a loss for 2005 which should have been a really great year. It’s like they knew the jig was up, so it was time to run the company into the ground, paying as much in commissions to its employees as possible.
And what happens to loans bundled into MBS that have recourse provisions? Is going bankrupt just a way to avoid that?
It looks like the rats are already manning the life boats.
He went to the same B-school as GW Bush.
Maybe they should run for President.
Re: Home Builders Index
“Other than the two months just after the 9/11 attacks, the index has not been at 50 or below at any time in the past 10 years. “
“Fannie Mae has loosened its mortgage approval standards for lower-income borrowers as it strives to meet its government mandated affordable housing goals.”
At the end of the day, this lowering of standards will bottom out with forgivable loans, in the form of taxpayer-funded free money and a financial planning lesson in the wisdom of dumbly following the herd.
yo “affordable” means taxpayer bailout
ready homie