‘Line Between Prime And Subprime Has Become Blurred’
Some housing bubble news from Washington and Wall Street. And Chicago, ” Ken Neumann, president of Warrenville-based Neumann Homes, lashed out at other builders in connection with speculation the company is for sale or on the verge of bankruptcy. The firm is among the 50 biggest builders in the United States, with operations in Wisconsin, Colorado and Michigan as well as Illinois.”
“Neumann recently raised eyebrows in local building circles when the company took the unusual step of auctioning 1,000 acres of land in high-growth suburban areas such as Huntley, Sugar Grove and Montgomery. Builders routinely buy and sell land, but most transactions are through brokers; so the decision to opt for a public sealed bid sale caused speculation that it was a way for the builder to raise fast cash.”
“The auction came on the heels of reports that Neumann early in 2006 had advised some suppliers and subcontractors it would be late making payments. ‘In January, we ran a little bit short of cash, and we called some of our better trade partners, nine in this market area, and only in this market’ to advise them of the situation, Ken Neumann said.”
From Long Beach. “Federal guidelines cap standard, also known as conforming, loans at $417,000. Anything above that is considered a jumbo loan, and it allows lenders to boost interest from between .25 and .5 percent to help cover their increased risk. There are efforts in Congress to boost the cap, and if successful, future California homeowners, or those who refinance, will save between $100 and $200 per month on their mortgages.”
“HR 1461, passed through the House of Representatives, would move up the cap in high-cost areas as much as 150 percent. It’s part of a package aimed at reforming Freddie Mac and Fannie Mae. However, there are those that argue that changing the gap won’t making housing affordable to those who need it most, and that it would put public-private lending authorities Freddie Mac and Fannie Mae in roles they weren’t intended to play.”
“‘It’s a question whether some of these loans fall within the low-and moderate-home buyers’ reach,’ said Steven O’Connor, of the Mortgage Bankers Association, which has taken a position against raising the cap. Boosting the cap in high-cost areas will create a geographic concentration of large loans issued in places like the East Coast, metropolitan areas and California. A slight downturn in the economy, a rise in defaults that increases housing stock could wreak havoc on markets that are already considered overpriced, he said.”
“‘Economies are cyclical, and all those housing markets at various times experience rough patches,’ he said. ‘”Your risk exposure’s going to be greater.’”
From Paul Muolo. “Citigroup is doing away with its CitiFinancial subprime brand. The company will continue funding subprime loans but the name CitiFinancial will be retired. Company official William Magee wrote to us saying ‘the line between prime and subprime has become blurred.’ Citigroup will no longer disclose to NMN (and other trade periodicals) its subprime fundings each quarter.”
“Wall Street is becoming a bear on loan buybacks. One warehouse executive told us recently that sellers are being offered a choice: either repurchase early defaults or the correspondent buyer will renegotiate the price, resulting in what could be a hefty cash payment. Also, sources tell us that loan buybacks played a role in the recent collapse of Acoustic Home Loans.”
“Former OFHEO chief Armando Falcon Jr. said in a speech last week that he didn’t have much of an opinion on whether the GSEs should shrink their portfolios until his last year or two on the job. His official position is now: shrink those babies.”
‘No, the company is not for sale,’ Neumann said Thursday. ‘This is the most profitable year in the company’s history.’
This illustrates the tricky situation for homebuilders with paper profits and poor cash flows. Kudos to the MBA for standing up to people like the CEO of Countrywide on the conforming loan limit.
Haven’t they already raised the limits each year?
1998: 227k
1999: 240k
2000: 253k
2001: 275k
2002: 301k
2003: 323k
2004: 338k
2005: 360k
2006: 417k
That’s around 8.4% increase per year. It seems to me the fed planned out this bubble in advance (at least since 1998).
Seems that way. All they do is make it more and more expensive for buyers. They should return to requiring 20% down and 15 or 30 year terms. That would bring things back to reality and be better for people who actually want to live in their home.
I agree on the 20% down. I would like to see the use of the “creative financing” curbed, but I would also require them to put 20% down as well. This will bring prices down in a hurry if buyers got to bring $60K or more to the table. Eventually, we’ll end up there.
A conforming loan already requires 20% down or PMI just as they always have. However, there has been an explosion in risk capital who were happy to give a secondary loan for 10-20% to a home owner for a slightly higher rate. In a foreclosure/default senario they would lose their entire loan amount before Freddie and Fannie begin a default payment.
The conforming loan is formulated to follow the prices of homes up… ie: they track the average sale price and adjust upward as necessary. I wonder if it will follow prices back down?
exactly the same has been happening in the Netherlands for the last 10 years or so with our version of Fannie and Freddy, with exactly the same arguments from politicians and their RE/mortgage friends, that this is ‘necessary to keep housing affordable for low/medium-income families’.
The only difference is that the limits were increased even more here due to bigger home price increases.
“shrink those babies”
Shrinkage for everyone!!!
“…sellers [of subprime mortgages] are being offered a choice: either repurchase early defaults or the correspondent buyer [of mortgage bundles] will renegotiate the price, resulting in what could be a hefty cash payment.
This is poorly worded. The gist is that mortgage brokers will need to bring a check to the table in order to sell their mortgage bundles. IOW the buyers of risky mortgages are demanding and getting a larger risk premium than the brokers chaged their borrowers. This is the inverted yield curve of the mortgage industry.
But they make up for it in volume!
LOL. Wish I had said that. I suspect that every subprime broker in the country is burning any cash reserves they might/might not have just to meet the payroll. Wanna buy a Humvee cheap?:
http://www.mortgagemadness.info/
Mike needs to lay off the testosterone injections…
this reminds me of the “stewart” commercials from the internet bubble days. “it’s the wave of the future, my man”.
The gist is that mortgage brokers will need to bring a check to the table in order to sell their mortgage bundles.
That’ll teach’em to use sleazebag appraisers…garbage in-garbage out.
This is more like take this crap back or bring a check to the table to cover the stuff you already sold us. Closing off access to capital would have serious implications for a sub prime mortgage lender.
Neumann is not the only HB with a cloudy forecast, according to a new UBS report:
http://tinyurl.com/fo2ub
Posted this yesterday…
During the last RE downturn in the early ’90’s Fannie Mae’s loan limits only rose from $202,300 to $207,000 (2.3%).
It has only gone down once since 1980 from $187,600 to $187,450 (1989 - 1990 (a mere $150).
From 2002 to 2006 it rose 40% from $300,700 to $417,750.
I’ll be curious to see where it is five years from now.
1992 202,300
1993 203,150
1994 203,150
1995 203,150
1996 207,000
Increase + 4700
+2.30%
2002 300,700
2003 322,700
2004 333,700
2005 359,650
2006 417,000
Increase +116300
+40%
wow 4 bad states- a dog named “lucky”
land moves at a 3 to 1 or 4to1 ratio of home prices
Wow — that is a high beta!
I invested in subprime credit card lenders after “bubbles” greenspans last mop up operation (after the internet bubble collapsed on itself). Specifically Providian financial. The previous CEO brazenly thought he had invented a way to gauge and score subprime borrowers that the big 3 credit reporting agencies couldn’t figure out. Revenues grew and grew (pre and during the expanding internet bubble). The banking regulators somehow had no problem with his risky computer formulas when the economy was good. Only when delinquincies (sp) started rising did the regulators finally step in..
Long story short, several credit card lenders went bankrupt, but due to greenspans new mop up operation (lowering rates to 40 year lows and holding them there), he allowed these and other banks to print money to pay off their losses and or settlements (example - JPMorgan Chase, et al, WorldComm and Enron settlements, each of which were / are over $6 Billion).
These mortgage lenders (and in a way the homebuilders) are now in a very very similar situation. Great thing is they have not fallen yet. Providian was a darling of Wall street. It went from $60 / share to $2-4 in a matter of 6 months. These lenders could be a great short play from here. Does anyone have a handy list of subprime lenders? Preferably larger Cap names.
Incidently, I played Providian on the way up from the crash.. Real bouncy ride, they basically had to sell off their toxic accounts to other companies and very much like the article had to actually pay the buyer money for the risk. They eventually sold to Capitol One I believe. I always sell too soon. Got to learn to hold on to the winners.
The toughest nut to crack in the subprime field is LEND. 52 weeks highs week after f’n week. This will go down - WHEN?? Not sure.
Fits the profile pretty well.. Lots of insider selling. I’d like to find a slightly bigger company to short. Its great too that “lend” is a nasdaq stock. Better volatility.
Why do the actions of citibank remind me of the myth of Cronus? Nothing like eating your own offspring! I can’t wait until citibank is forced to cough up these creations.
Man this is one highbrow group. Exactly correct, they are gathering the children in the root cellar ’cause the storm is approaching.
I love mythology. It tends to remind one that human nature does not change easily or quickly. Of course some folks like to argue that there is no such thing as “human nature”. Usually they are the same ones who like to spout the line ,”It’s different this time!”
http://tinyurl.com/g4c3f
See above link to MarketWatch, Marshall Loeb entitled: America’s borrower-industrial complex
Oops, meant to include a couple of paragraphs from the link I posted above, so here it is:
NEW YORK (MarketWatch) — A fast-rising new book by a provocative conservative shows how the debt explosion is hurting our country
Almost overnight, it has hurtled to the top of the best seller lists. Its title is “American Theocracy,” its author is Kevin Phillips, a former top Republican strategist and leading conservative intellectual, about whom Time magazine once wrote, “in the shoot-from-the-hip world of Washington prognostication, Kevin Phillips stands out like Nostradamus.”
Now his controversial argument, which clearly has struck a chord, is that America is deeply endangered by a combination of three forces:
One: The nation’s global overreach, demonstrated by the so-far-unsuccessful invasion of Iraq.
Two: The surge of militant, fundamentalist, evangelical, right-wing religion in the U.S.
Three: America’s ballooning debt, which has mortgaged the country’s economic health to financial speculation.
The first two points are fascinating enough, but our column focuses on the economy, so what concerns us most is point three: those expanding debts. They may be worse than we imagine, much worse.
“Three: America’s ballooning debt, which has mortgaged the country’s economic health to financial speculation.”
The coming credit crunch/liquidity crisis will eliminate speculation for a while.
Ah finally a *real* conservative, as opposed to the idiots in power
Nothing in his three points hint at conservatism except the global overreach. Conservatism is minimal government, liberalism is maximal government. It is a shame students don’t learn this early on. Reminds me of the phrase “right wing Nazis.” The Nazis were the National Socialist Party and were, quite obviously, about absolute government control of all aspects of life. Anything conservative about that?
Whether or not Loeb is controversial, I see nothing in the quote to prove he is conservative in the political sense.
Conservatism is minimal government, liberalism is maximal government. It is a shame students don’t learn this early on.
Where did you get that? Opinions on the size of government is not per se a liberal/conservative debate. Liberalism and conservatism are more like value systems - liberals value freedom/future, conservatives value tradition/past. For example, I consider myself a liberal, but I don’t have a clear-cut idea on the size of the government simply on the merit that I’m a liberal. It is too technical a question, and the best approach would be of course to find a sound scientific answer, not to engage in our ideological squabbles.
The Nazis were the National Socialist Party and were, quite obviously, about absolute government control of all aspects of life. Anything conservative about that?
Ask any scholar, whether NSP were leftwing or rightwing, you probably going to get a sound “rightwing”. The same can be said about Franko and Moussolini. Several reasons - persecution of people with non-traditional sexual orientation, nationalism (which is a conservative trait, as liberals tend to be cosmopolitan), persecution of communists and Marxists, and in general - suppression of the working class. Why did they describe themselves “Socialist” ? The reason is that socialism was en vogue in the 30’s as many capitalist countries were in economic ruins, and Hitler was a populist at heart. He probably picked the word so it resonates well with the perceived successes of the USSR.
Nope. No way, my friend. If we are to have constructive debate, we must agree on the definition of terms. What the contemprary media tries to do, unfortunately successfully, is to blur the distinction.
If we cannot agree on the simple, fundamental distinction between less government and more government, then we are wasting our time trying to communicate further and are (perhaps anyway) boring the readers.
Least government, in its extreme, is anarchy — no government at all. Few people embrace that because it does not foster the basic human need for security.
Most government, in its extreme, is Stalin, Hitler, Pol Pot and Choibal San. Few people embrace that, because life for those who speak up is terminated and for the rest miserable.
All that is left, frustratingly simple for journalists and, I find after many years of study, collectivists, is “where are you” in between these extremes. Now you, as a challenger of my views, might wish to abandon the terms conservative and liberal. OK, I give. Feel better?
In that case, my fellow “whatever,” in the end, what really matters is how much government you want in your life. This is an immutable truth and the basis of all politics.
As a Libertarian, I want the least possible involvement of government in my life, consistent with my values of life (not being killed), liberty (being able to buy a box of cherry bombs and not being locked up), and the pursuit of happiness (grilling steaks and watching movies at a sound level that doesn’t disturb my neighbors).
You, my friend, strike me as a collectivist. You might, perhaps, wish to tax me for some special social purpose of yours. Am I wrong? Whatever your reply, please answer this last question directly.
Cheers.
As for “..ask any scholar” — I am a scholar in this subject, having studied it intently for more than thirty years. The only difference between Nazis and Communists is that Nazis were “national socialists” and the communists were “international socialists,” a pretty thin distinction, given Germany’s invasion of neighboring countries. Bottom line — each wanted the other’s turf. Communism is government control/ownership of all means of production. Fascism is a slightly different form of socialism — private “ownership” but government control of production. Not a particularly outstanding difference, IMO.
Back to you, comrade.
‘Libertarianism’: short for “screw you, I’ve got mine.”
Nope. Short for:
1. If you want it, earn it;
2. If you can’t earn it, go to a charity and not the government.
Come off it.
The Nazis were the National Socialist Party?
FFS, by that logic the Communist Chinese “People’s Republic of China” is Republican.
The National Socialist German Workers Party is the literal translation of the “Nationalsozialistische Deutsche Arbeiterparteitheir,” also known as the NSDAP. It was not intended to be logic.
Of all posters on the board, you, who are in or from the Netherlands, should understand socialism well.
RealtyTrac, an online foreclosure marketplace based in Irvine, Calif., has reported that 323,102 properties nationwide entered some stage of foreclosure in the first quarter, a 38% increase from the level recorded in the previous quarter and a 72% year-over-year increase.
A thought: could this prolong the bubble/create a soft landing?
Aging in Place
The financial challenge of retirement is to make one’s money last while paying health care costs that inevitably increase with age. It is becoming clear that to meet that challenge, many older Americans will need to cash in their home equity. In a report last year, the National Council on Aging, a research and advocacy organization, made a compelling case for expanding the use of specialized loans known as reverse mortgages to help older people pay for the care they need to remain safely at home, even as they become frailer.
The idea is to free up money to improve the quality of daily life, while delaying or averting the need for a nursing home. And since that should also be the nation’s overall goal when it comes to the well-being of the elderly, reverse mortgages have to be regarded as a kind of social policy.
Reverse mortgages are loans that are made to retirees against a portion of their home equity. They require no monthly repayments. Unless a borrower chooses to repay sooner, the loan comes due, with interest, only when the house is sold — such sales are often after the borrowers die. The sums are enormous: about 21 million homeowners are 62 or older and have an estimated $2 trillion in housing wealth. Nearly half of that could be tapped through reverse mortgages.
Yet despite an upsurge in reverse mortgages since 2000 — to about 180,000 altogether — the loans have never really caught on. They’re readily available, mostly through the Federal Housing Administration. But the obstacles are daunting.
An F.H.A. mortgage requires a hefty insurance premium that protects the lender in case the value of the house declines. And planning for long-term care is something most Americans don’t do because, as surveys show, they don’t believe they’ll ever need it. They should be so lucky. Only one-fourth of the homeowners 62 and older have no disabilities. The rest have limitations that range from relatively mild to severe conditions. More than one-third of the nation’s old people fall each year, and of those, some 30 percent suffer injuries that make it difficult for them to remain at home.
Perhaps the biggest reason reverse mortgages aren’t used more widely is the lack of a high-profile, concerted partnership among government, private and nonprofit sectors to promote them for what experts call “aging in place.” Some states have initiatives to link reverse mortgages and home-based care. But both the states and the federal government need to enact comprehensive incentives — and consumer protections — to encourage people to use reverse mortgages to pay for services that will allow them to grow old at home.
At their most basic, the inducements would involve waiving the upfront costs for people who use the loans to pay for health care. Perhaps the most powerful incentive would be to allow people who use reverse mortgages for home-based care to shield some assets from the Medicaid estate recovery process, which states use to recoup some of the money spent on Medicaid patients after the patients die.
Reverse mortgages are bound to become a social norm as the broad middle class of aging Americans begins to face a financial squeeze. The sooner there is debate, planning and action to link reverse mortgages to aging in place, the better the chances for an outcome that benefits the nation’s elderly, and the nation at large.
Anecdotally I can say that at my local Wells Fargo branch, there is a prominent table set up with lots of info in regards to reverse mortgages and aimed directly at the first wave of boomer retirees. Man oh man how ugly can this get! Ugh and double ugh.
Don’t you just love the financial economy? Might as well just count grains of sand and call that an industry…..
Trouble, I think. Lender buybacks require lender cash. Where will the lenders get this cash to accomplish the buybacks? Nobody knows. The lenders are effectively mortgaged to the hilt with 2% reserves. Any more than 2% loan buybacks means the lenders themselves need to borrow to stay solvent, right?
Neumann’s “cash crunch” may have another component to it. A buddy of mine bought a house out in Sugar Grove. Right across the street Neumann was nearing the “trim out” stage on three “built to order” homes. There is now “safety tape” surrounding all three. Turns out Neumann filled in a “low spot” in the field to build on and did not do a very good job with the fill. The houses have settled so unevenly you need a seatbelt to keep from sliding off of the toilet. Probably going to have to tear them down and start over. I’m sure that little screw up will cost ‘em a mil or so-if they can reuse the lots.
Meanwhile, Sugar Grove (50 W) is the very end of the continous Chicago sprawl. Every foot further west opens up build sites all the way to Iowa on the other side of the state. If the buyers haven’t figured out yet that there is absolutely no friggin reason to spend serious money on the land their house is sitting on they will soon…when they try to commute to Chicago and figure out that they have to get up at 4AM to be able to reach the Loop by 9AM.
Sugar Grove would be a great place to live if you need to work from home or go no further east than Aurora. On the upside however, you could flip the bird at Neumann’s home office as it’s right off I-88.
The GSE portfolio’s they want to “shrink” are investment portfolios. Not the credit guaranteeing portfolios which could sink the companies.
There is much concern about “interest rate risks” in the portfolios, which are managed with derivatives (interest rate swaps, swaptions, etc.). But the credit risk is there even if the interest rate risk is sold off. The credit risk can’t be reduced unless the GSEs just shrink their business. It’s tending the other way with the gov’t trying to get each “lower income” person a house. The GSEs even have “lower income” ‘goals’ they have to meet.
If the GSEs go under because their relatively average size mortgages fail, then it’ll be the great depression. The funding for all mortgages will dry up. China and Japan will lose money both on the dollar (which would plunge) and on capital losses. I hope I live though that. It would be comical.