Cancellations And Defaults Leave Investors ‘Stunned’
More housing bubble news from Wall Street. “Paris G. Reece III, MDC’s CFO, said, ‘Almost all of our markets experienced higher home order cancellations, contributing to lower net home orders per active subdivision in every market except Utah, which has continued to show strength.”
“Similar to the last three quarterly periods, net home orders received in the 2006 first quarter were lower year-over-year in Arizona. The increase in cancellations in this market, as well as in Florida and Virginia, was driven in part by what appears to be the exit of speculators from these markets, along with other factors related to higher mortgage interest rates.”
“‘In addition, an increased supply of homes available to be purchased in these three markets, as well as in Colorado, resulted in an elevated number of order cancellations from prospective homebuyers who were unable to sell their existing homes in a more competitive sales environment.’ MDC’s subsidiaries build homes under the name ‘Richmond American Homes.’”
“Home builder Ryland Group Inc. reported better-than-expected quarterly earnings on Thursday, but new orders fell sharply and the company cut its outlook. Ryland said new orders in the first quarter fell 21 percent from a year earlier, to 4,021.”
“‘People are unable to sell their existing homes for what they thought they might, and are unable to go through with their anticipated purchase of their new home,’ said analyst Rick Murray. ‘So, they end up canceling their contract.’”
The Reno Gazette Journal. “Investors say they are stunned, angry and frustrated at Las Vegas-based USA Capital, a short-term mortgage lender that filed for bankruptcy protection last week. It’s the latest in a series of private lenders who have failed in Las Vegas, including Harley Harmon Mortgage, Interstate Mortgage Group and Global Express Capital.”
“‘Unbelievable,’ investor Rich Maiorana, who invested $50,000 in a USA Capital fund. The bankruptcy filing ‘just makes them look to be terribly dishonest,’ Maiorana said. Phyllis Resler, a widow and great-grandmother has $56,000 invested with USA Capital. ‘Help,’ she said, laughing nervously. ‘I can’t earn and replace what I have at age 69. That will take a lifetime.’”
“Lenard Schwartzer, an attorney for USA Capital, told bankruptcy Judge Linda Riegle on Monday that the company continued making distributions to all of its 3,600 investors even though many borrowers stopped paying interest on their loans.”
From Origination News. “Nearly 2,000 banks and thrifts, 22% of all such institutions, have construction loans on their books that exceed 100% of total capital, and 24 banks have concentrations that exceed 500% of capital, according to A.M. Best & Co. The insurance rating agency also reported that banks in the Southeast have the highest concentrations of construction loans.”
“Over 50% of Georgia and Florida banks have construction loans that exceed total capital, while nine banks in Georgia and three in Florida have construction loans that exceed 500% of capital, the company said. ‘These two states, which had the highest numbers of banks exceeding the 100%, accounted for nearly 18% of the 1,956 banks with construction lending concentrations,’ the rating agency said.”
Thanks to the readers who contributed to this post. I understand the Ryland conference call was interesting. Here is some share buyback info from Ryland.
‘Repurchase of 1,035,000 shares of the Company’s common stock during the first quarter of 2006 or approximately 2.2 percent of our weighted average shares outstanding’
Folks, I have to tell you how on the ball Ben is. He posted the article I sent in less than 2 hours (maybe less than one, I’m not sure).
Ben is THE MAN!!!
buy backs usually sck- especially when you know it’s going to tank
execs selling thiers and “buying back” with investors dough !
Why is it so hard for “investors” to figure this one out? (I guess if they had figured this out, they would not have wasted money buying a stock that is about to tank…)
Nothing wrong with share buybacks - as long as it’s done for the right reasons - it’s a perfectly valid way to return equity to the shareholders if you have nowhere better you can be using that cash.
However if you are doing it to protect your share price long enough for you to dump your personal shares….. it should be criminal IMHO.
I disagree entirely. The correct way to give money to shareholders is through a dividend. Dividend payments have no direct effect on share prices and so are less open to manipulation.
sounds like the banks are in good shape!
It’s that old saying:
If you can’t pay back a $100K loan, you have a big problem.
If you can’t pay back a $100M load, the bank has a big problem.
This is bad. This has S&L crisis from about 20 years ago written all over it. History really does repeat itself.
But Christine researched this!
So new house orders are getting pulled back faster than the skin on Jack Welch’s wife’s face. (She’s on CNBC right now. Good lord, that is some awful plastic surgery.)
I’m not feeling sorry for the homebuilders. According to Toll, they’ve been raking in $92K per house.
http://www.philly.com/mld/philly/business/14351168.htm
>>Richmond American Homes>USA Capital fund
Richmond American Homes
These guys had no problem with selling an investor 5 houses at at time and using cooked income/rent numbers in their financing arm to get the loans approved. Then they sold the loans off effectivley removing all danger of default to MDC. Strong Hall of shame/fraud candidate.
USA Capital fund
Another dangerous investment scheme that suckered in widows and the elderly on the 12% interest they were paying out by making even riskier high interest loans to poor credit risk home buyers. No one noticed in the fine print that they might not get their money back. A Ponzi like scheme that was bound to fail, should be criminally investigated.
I visited a Richmond American development in AZ a couple weeks ago. Their realtor is showing us a spec home that I told my wife was too expensive. This guy hears me and immediately says “na, just go neg-am, everyone is doing it”. After explaining to him how ridiculous neg-am mortgages are, he goes on to tell me how Arizona property will never go down, that it’s a retirement state, and that we don’t need an economy or jobs to sustain the market. LOL.
The problem with this is that places become retirement areas BECAUSE they are cheap. People could sell their expensive homes where the jobs were and move someplace cheap. If it’s nearly as expensive as where they came from, there’s no reason for retirees to move there.
Great point. I argue this about FL all the time.
What about the “Sunshine Tax” and Arizona isn’t making any more land”?
LOL! Those realtors are dumber than an empty box of rocks. The sales manager has them memorize a few lines, put on a tie and turns ‘em loose. This scheme works OK as long as the buyers are dumber than the agents are… But really, how likely is that now, since the real dumb ones already have 4-5 upside-down neg-AM properties and they’re tapped out… Unless the agent manages to talk himself into some more properties…
LOL! Those realtors are dumber than an empty box of rocks. The sales manager has them memorize a few lines, put on a tie and turns ‘em loose. This scheme works OK as long as the buyers are dumber than the agents are…
LMAO…Brilliant comment, AZ!!!!!!!!!
So true, one of my friend just got an offer for his overpriced house after 5 months on the market. Can you guess from whom? Another Realtor!
I know real estate professionals who invested with USA Capital. Unlike the average investor, they had the knowledge to know which individual deals offered by USA Capital were good and which were not.
Could you invest like that with USA Capital? Or did you just buy into their fund and allow USA to make the deals?
If you could pick and choose deals to invest in, why in the world would USA Capital need to file for BK? Presumably, the risk would have been effectively doled out only to those in the bad loans, and everyone else would be fine.
http://www.reviewjournal.com/lvrj_home/2006/Apr-18-Tue-2006/business/6912207.html
Beautiful. Some were direct investments in mortgages, some were in Funds. Looks like comingling of funds was common–classic Ponzi scheme.
Could you invest like that with USA Capital? Or did you just buy into their fund and allow USA to make the deals?
Yes, you could. They would offer individual projects and you could select which ones you wanted to invest in. Some were 1st liens, some were 2nd, etc.
As I read today…The $50 million the USA Captial Bankruptcy attorney wants returned to the bankrupt creditors, was a result of an illegal act in Nevada Law. “You may not use corporate non-Trust assets to pay Trust obligations.”
Oooops…
I also undersatand that the investors are not CURRNETLY willing to return their $50,000,000 in interest payments….Maybe they prefer 1 on 1, face to face with the Judge, and maybe then they explain how they reinvested the money in NEW and now non paying TD- land bank assets.
It continually amazes me to read stories like the USA Capital fund debacle. It happens all the time. How can people be so STUPID to invest such large sums into a single investment. Especially into a fringe player vice an established fund. The allure of the 12-14% returns should be a dead give-away that something is fishy. I guess the old adage keeps proving itself true, that there is a sucker born every minute. I almost don’t feel sorry for the people that got fleeced…greed drove their decision making. Diversify, diversify, diversify….do your research, research, research!
OT, on price shocks:
Stephen Roach Goes Nonlinear
“…the shock can only occur when a relatively small number of investors reach a ‘dictator’ point in Social Choice terms… and force their preference for stability on a system which cannot offer it to them.
“That is to say, there is a run on one of the over extended stores of value. The housing market is the best place to look, because it is already happening. This will express as macro-inflation if it is maintained because as money gets expensive, more people, on the margins, will rent rather than buy. The preference for buying rather than renting has kept CPI down, because it only measures “rent of equivalent structure”. This goes up, macro-inflation goes up, macro-inflation commitments (such as Social Security and interest payments) go up, and the Federal Reserve will be forced to finish their aborted tightening cycle - just as the economy is ready to go into recession.”
‘But we lack a unifying “general equilibrium” framework that pulls it all together. Sure, Nobel Prizes have been awarded to brilliant theoreticians, such as Stanford’s Kenneth Arrow, for making important progress in deepening our understanding of the conceptual context of this problem.’
While Arrow’s math is so complicated that only a few economists understand it, the conceptual flaw of assuming a market is in equilibrium is glaringly obvious to anyone who tries to find an example of his results in the real world. What is needed is a good model of general disequilibrium, and how a bunch of stupid, myopic fools get the economy to that place. At that point, economists will have contributed something of value for understanding the way the world actually functions…
Milage varies, but Benoit Mandebrot’s work on markets shows some promise. It is still very fresh and mostly just shows that markets are vastly more risky that most traditional analysis admits because of the likely hood of corrections and crashes. His recent book discussing all of this is The (Mis)behavior of Markets. It gets a little heavy with math at times, but mostly not. I highly recommend reading this to understand market booms, crashes, corrections, and transitions as well as currently possible which is unfortunately still not all that well.
USA Capital, bankrupt? I’d like to say it’s a surprise.
Off Topic: Australia’s Public debt paid off in full. At least the Australian government is practicing fiscal responsibility, even if the population aren’t : http://www.news.com.au/story/0,10117,18879049-26619,00.html
“Phyllis Resler, a widow and great-grandmother has $56,000 invested with USA Capital. ‘Help,’ she said, laughing nervously. ‘I can’t earn and replace what I have…” Had dearie, had. Imagine that, an agressive investment that went bad. Who will feed her squirrels?
I’m all for personal responsibility but this woman should never been allowed to risk her life savings like this. An honest fund would have made sure she had a substanial net worth before allowing her to invest. Or had a larger investment requirement to exclude the poor.
So you’re proposing they only allow her to invest X % of her assets (
If you look at large investment funds for the really monied they only allow you to invest part of your assets in their funds because of the risk
Without occasional loss, everyone puts there money in the riskiest investments available and you get manias. We need more bankruptcies (or lower overall returns). Those were yielding 12% (in an environment when treasuries were yielding 3%) for a good reason. If you ignore that signal, you better be smart and liquid or you will get slaughtered.
Always remember that no one has the same interest in your money that you do. It’s not the fund manager, fund, or other investment’s job to make sure that everything is suitable for your risk tolerance. Best would be to take a few months and learn about this yourself, next is hire a good advisor. Your broker is probably not a good advisor (unless they have something like CFA after their name, about 10 years experience, and charge several hundred an hour).
You are dead on. Investors have to consider the risk vs reward on any investment. It’s the oldest rule of thumb in investing that there is. Greed often clouds these fools judgement.
Sorry Granny, you should have stayed with CDs. Instead, you got greedy and fell for USA Cap– =Hook, line & sinker. Moron.
Hit up your grandkids for the dough. That’s what family is for.
“‘Phyllis Resler, a widow and great-grandmother has $56,000 invested with USA Capital. ‘Help,’ she said, laughing nervously. ‘I can’t earn and replace what I have at age 69. That will take a lifetime.’”
I love it, her first reaction is “help”. What a society we’re turning into.
Yes Ma’am, it will.
And now it’s going to take someone else’s lifetime to support you.
This is a tricky one since I don’t want to see senior’s dying in the streets… but our system now sure as hell is screwed up.
1) Invest in risky asset.
2) Profit? Be rich.
3) Lose? Be taken care of.
4) Work? Be taxed.
“‘Phyllis Resler, a widow and great-grandmother has $56,000 invested with USA Capital. ‘Help,’ she said, laughing nervously. ‘I can’t earn and replace what I have at age 69. That will take a lifetime.’”
It took her 69 years to make 56K?…And she invests it in USA Capital fund?…Dumb and risky…She will be wiping tables at mikey Ds for the rest of her life.
I am sure the prospectus said something along the lines of “disposable net worth of XXX dollars” and she signed a document that said she had that much disposable risk capital available. The investors I feel sorry for are the ones duped into buying the “widow and orphan stocks” like Enron and GPU (Three mile island for the youngsters reading). The problem is to many dollars chasing to few investments resulting in significantly greater risk for the investor than is prudent.
No investing in mortgages is not quite that sophisticated. And from reading these posts not a lot of folks here are quite up to par as far as knowledge is concerned. The vast majority of the information coming off the fingers of the posters here is way off base.
I just noticed that she’s a 69 year old great grandmother, that’s not very much room for 4 generations.
They didn’t tell you she started with $400K at age 60.
She can still work, after all, isn’t 69 the “new” 59. My mom just turned 83 and still works for the state of California (I think she is the oldest worker on the state payroll) doing tax related data entry, sometimes leaving for work at 4am. Incredible. I think her work ethic has kept her young. She is planning her big trip to Italy next summer as her final travel reward before “retiring”.
I hate to say this, but I really think all this overleveraging and overborrowing will somehow be fixed in a relatively benign way due to a variety of market manipulations. I would love to believe that spenders will (finally) be punished and savers justly rewarded, but I’ve resigned myself to the fact that fiscal responsibility is for suckers, as the daredevils will always be bailed out no matter how stupid their risks. The simple fact that Yellen even mentioned being concerned about the housing market and lagging effects of rate hikes in the face of all this BS is enough to tell me that they’ll do whatever it takes to prop this bubble up until the next one comes along…please, please tell me why I’m wrong!
If they do stop raising rates, I will become a true believer that this adminstration and it’s appointees are only concerned with squeezing every last dime out of every American, whether through oil, housing, whatever, to put into the big boys pockets.
fiscal responsibility is for suckersI beg to differ. Reality _always_ wins in the end. We just might not live to see it happen.
But what determines reality, as you see it? Is reality the fact that people have overborrowed? Yes, we know that, but how will that realtiy “win”? Or maybe, and I shudder at the thought, the reality is despite all this bubble talk, homes are truly appreciating atround the actual rate of inflation, which is much higher than we have been led to believe, so many overpriced markets are not really overpriced?
ditto Jaz. to Nikki.
You could be short 3000 tons of gold, all your assets in fiat paper contracts that require payment in same. A new Fed chairman that has only been a college professor, your Drug smuggling Arab princes buying metals and ports with your petro dollars, Chinese communists bent on you destruction as one of your largest creditors linked to your dollar,
like JP Morgan, Goldman Sachs, or Citigp.
“Don’t worry be happy”
So, what if the short rates stop going up? Most of the damage is already done, just takes a while to surface. The long end will begin to run along anyway and the resets are beginning to hit home now. What’s a soft landing? 5% default, 10% 15%… WHAT? No one has quantified except that the emergency chutes are primed, the medics are on alert and the mortally wounded aircraft is on approach. All that’s left to do is a body count…
I hate to say this, but I really think all this overleveraging and overborrowing will somehow be fixed in a relatively benign way due to a variety of market manipulations. I would love to believe that spenders will (finally) be punished and savers justly rewarded, but I’ve resigned myself to the fact that fiscal responsibility is for suckers, as the daredevils will always be bailed out no matter how stupid their risks. The simple fact that Yellen even mentioned being concerned about the housing market and lagging effects of rate hikes in the face of all this BS is enough to tell me that they’ll do whatever it takes to prop this bubble up until the next one comes along…please, please tell me why I’m wrong!
If they do stop raising rates, I will become a true believer that this adminstration and it’s appointees are only concerned with squeezing every last dime out of every American, whether through oil, housing, whatever, to put into the big boys pockets.
http://baltimorehousing.blogspot.com/
God bless those “big boys”.
market manipulations can’t fix anything they can only delay (and perhaps exacerbate) the day of reckoning.
It’s obvious that Helicopter Ben is singlehandedly supporting the entire stock market today.
GM lost another $300M? Run it up ten percent! Oil is at all time highs? No problem! Ryland gaps down over two percent on a lousy forward-looking statement? Buy it immediately and make it green! Ten-year note up? Then the Housing Index should be up too!
It’s as obvious as the fall of 1999 — absolutely billions of dollars are being generated out of thin air and are being injected directly in the stock market today.
OT, but don’t miss this speech by the head of the OCC today warning AGAIN about the risk of option ARMs and similar loans. First time I’ve seen a regulator speak this aggressively about the product, too:
(warning: PDF link)
http://www.occ.treas.gov/ftp/release/2006-48a.pdf
“Nearly 2,000 banks and thrifts — 22% of all such institutions — have construction loans on their books that exceed 100% of total capital, and 24 banks have concentrations that exceed 500% of capital, according to A.M. Best & Co. The insurance rating agency also reported that banks in the Southeast have the highest concentrations of construction loans. Over 50% of Georgia and Florida banks have construction loans that exceed total capital, while nine banks in Georgia and three in Florida have construction loans that exceed 500% of capital, the company said. “These two states, which had the highest numbers of banks exceeding the 100%, accounted for nearly 18% of the 1,956 banks with construction lending concentrations,” the rating agency said. The A.M. Best report estimates how many banks might be affected by concentration thresholds that federal regulators have proposed for construction and commercial real estate loans. The comment period on the proposed CRE guidance ended April 13.”
Is there a way to find out which banks have loaned more than their entire capital (some more than five times their capital worth?) , especially here in Florida? It would worth knowing which banks are likely to go unde. No wonder the builders of Trump Tower in Tampa can’t find any banks to cough up 200 million in start-up loans. They’re broke, too.
Anton there is a way but don’t bother…they all have!
On average 78% of all bank assets are currently related to real estate….
The small banks are primary lenders to this market it truly the only safe loan. aka “we got the collateral”!
I just wanted to make sure, my bank wasn’t on the list.
“‘Unbelievable,’ investor Rich Maiorana, who invested $50,000 in a USA Capital fund. The bankruptcy filing ‘just makes them look to be terribly dishonest,’ Maiorana said.
And whining about his unwise investment makes Maiorana look terribly stupid.
The people responsible for creating and continuing this messy bubble should be either hanging from a cross or swinging from a rope (cross more painful) and be done on MSNBC for all to see. At least there would be someone to blame (and no more froth).
I stopped by a richmond american development last weekend here in Vegas. I was curious how they were cramming so many shoe boxes per acre. I am not interrested in buying prop atm, but wanted to see tommorows ghettos. Sales ho said nobody buys fixed rate, everyone uses ARM & Neg-AM, and then proceeded to tell me that the development is pretty much all sold (but not built yet….). I had to laugh and pulled Bens site up on the comp in the “sales area” of the 1st model home. Lots of poor folks eyeballing those houses I noticed, i think they have everyone on the train to nowhere now.