Mortgage Business Fundamentals Continue To Deteriorate
Some housing bubble reports from Wall Street and Washington. “Zacks Equity Research, Chicago, has made H&R Block its ‘Bear of the Day,’ a stock expected to underperform the markets over the next three to six months. Block is the parent of Option One Mortgage Corp., and recently reported earnings of $490.4 million ($1.49 per share) for its fiscal year, down from $623.9 million ($1.88 per share) for the prior year.”
“Zacks said, ‘as expected, earnings in fiscal year 2006 were at the low end of previous guidance. Competition remains intense in the tax business, while fundamentals in the mortgage business continue to deteriorate.’”
“A top lawmaker on Wednesday said he asked the U.S. Justice Department to investigate whether former Fannie Mae executives perjured themselves in testimony before his subcommittee in 2004. ‘The accounting fraud at Fannie was despicable and demands punishment, but these men also had an opportunity to come clean, swearing an oath to tell the truth, which I believe the evidence shows they clearly and arrogantly flouted,’ said Richard Baker of Louisiana.”
“Under U.S. code, the punishment for making false statements before Congress is up to five years in prison.”
“Legislative action has been stalled in the Senate over the issue of limiting Fannie and Freddie Mac’s massive holdings of mortgage-backed securities. The White House supports such limits, arguing that a crisis at either company could ripple through financial markets and the U.S. housing market.”
“But there are signs the administration may not be willing to wait for congressional legislation to reform the giant housing lender. Tuesday, Treasury Undersecretary Randal Quarles said his agency will review the process it uses to approve requests by the mortgage companies to issue debt.”
“Secretary Alphonso Jackson said separately on Tuesday that the Department of Housing and Urban Development would probe whether Fannie and Freddie Mac are improperly holding billions of dollars in assets and liabilities.”
“Federal Reserve Board Governor Susan Schmidt Bies said consumers so far appear to be handling the gradual re-setting of adjustable rate mortgages, which raise their payments. She said some industry evidence indicates that delinquencies for these types of loans ‘may be on the uptick,’ adding that delinquency rates for loans issued in 2005 in most cases are higher than those for comparable loans issued in prior years.”
“‘Some industry observers believe that the increase in delinquencies for loans issued in 2005 is directly related to the continued easing of underwriting standards and the increased use of risk layering practices,’ such as accepting less documentation for loan applications and failing to assess a borrower’s ability to cope with a higher interest rate, she said.”
“Bies reiterated her concerns that real estate loan concentrations are high relative to capital, especially for smaller banks with assets of $100 million to $1 billion. The concentration level for these banks is about 400 percent of total capital, or twice the level of the late 1980s and early 1990s, a period of considerable loan loss problems in the banking industry.”
I somehow filled out a form and it was sent to some mortgage folks. They are desperately trying to reach me. I put a voice mail phone number only, so they will never get me. One dude from Quicken Loan has tried multiple times for 2 wks. If they were busy, they would just go to the next dude. Methinks this guy has a small and dried up pool. Guess he will be saying “Do you want fries with that Big Mac” real soon.
Glengary Glen Ross anyone?
wow, i got the first comment.
I seek quality, personally. Timing can be a but an adjutant to quality and only as long as it is not at the expense of content. “Gold will go down.” Gee, makes me a rocket scientist right?
Schmidt-Bies [Fed Gov] said consumers so far appear to be handling the gradual re-setting of adjustable rate mortgages.
Gee, May data compiled in April says rates adjusting in June haven’t proven a problem. All I can say is:
“When you drive with the rearview mirror and go off a cliff the last thing you will see is everything looking up.”
That’s fine. I hope he is right. I hope every current mortgate-holder will be able to pay their high mortgages to keep the property tax base high, particularly since my income comes out of state coffers.
Personally, I think interest rate hikes alone will be enough to collapse prices, even without a flood of inventory coming from the anticipated foreclosures.
Here is an article link, that disagree:
Soros may be onto something there - which is why he’s a billionaire and most of us are not. The idea that we can have rampant inflation soaked up into money sponges does pose a serious problem for the Fed and other central banksters: How can they maintain control of the money system globally. The answer: They won’t be able to. It’s only a matter of “when” it all falls apart. Real estate most bulnerable -says SOROS
http://www.bloomberg.com/apps/news?pid=10001013&sid=ao2i6D5m8NsE&refer=commodity_futures
Yeah, and you blew it. How embarrassing. Fortunately, Robert is covering for you.
Yeah, and you blew it. How embarrassing. Fortunately, Robert is covering for you.
Yield curve is inverted again.
Yep. The 3 month T-Bill at 4.86% and the 6 month T-Bill at 5.14% don’t look too bad. With another rate hike (or 2) coming the yileds should look even better. I am really beginning to think the FED hikes 50 points this month and then pauses for awhile. We’ll see soon enough.
Should be yields. Sorry for the typo.
Funny how the Marketwatch.com folk say that the DJIA went up on a “flight-to-quality” move on the day Treasury bonds from two years out sold off on a jump in yield from 8-11 bps. I thought a flight-to-quality meant that people sold risky assets (like stocks) and bought risk-free assets (like Treasuries). I guess I must have misunderstood my finance professor on the day he covered the concept of flight-to-quality.
http://www.bloomberg.com/markets/rates/index.html
The yield curve now doesn’t make any sense. 3 mo yield at 4.88%, what are they thinking - are we going to get blown-up by Al-Qaeda exactly tomorrow?
I am calling “bulls***” on the bond market.
At the risk of yet-again being labelled a “conspiracy theorist,” I suggest the bond market yield curve offers prima facie evidence of nontraditional government intervention. (I don’t really care — as Forrest Gump’s mother would point out, “Stupid is as stupid does.”)
Yesterday was a great example — commodities and stocks plunged, while the long end of the Treasury bond yield curve stayed flatter than Kansas. It does not make much sense for one risky asset class (long-term Treasuries) to show near-zero volatility on the same day that other inflation sensitive assets (gold) are dropping like a rock, unless some massive weight of market power is freezing those long-term treasury yields in place.
Traditionally (that is, before the long end of the yield curve was fair game for government stabilization policy), one would have seen the long-term bond yields plummet yesterday along with gold and stock prices. But then it would have been altogether too apparent to the untrained eye that the bond market was signaling recession.
Getstucco, I’m with you. What is amazing to me is that no one seems to be fazed at all by the prospect of manipulation in the markets. Basically, the gov’t gets to pick winners and losers in this game. Of course the conduits for this secret gov’t policy, Goldman Sachs to name one, get to rape the unsuspecting public in the name of national security. Unfricking believeable! Of course anyone who even mentions the possibility that gold is manipulated here in the U.S. is labeled a nutjob. Here is what a paper in Dubai had to say about yesterday’s gold rout. http://www.ameinfo.com/88792.html
“Of course anyone who even mentions the possibility that gold is manipulated here in the U.S. is labeled a nutjob.”
Unless such an individual happens to be a historian…
http://en.wikipedia.org/wiki/Black_Friday_(1869)
auger –
My guess is the Fed has decided to let the hedge funds and other speculators who went long into gold take the hit that props up the dollar. Just a guess
Perhaps you are right Stucco. Too many moving parts for me to follow. Here is another point of view that you should consider. http://news.goldseek.com/GoldSeek/1150320293.php
Auger-inn — thanks — that goldseek article is great reading. Very useful hypotheses to keep in the back of or minds. Love this blog - it’s like a poor man’s Ivy League class.
LOL! IMHO there is no quality in bonds or stocks.
Fair enough.
Yeah I haerd that “flight to quality nonsence also!
But IMO– No flight to quality move starts with the DOW @ 11000..
It was a nice “cover story” for the Wall Street Banksters to SHORT into.
BUT the Liqudation of Hedg-e- mony is where the real “ball is bouncing”
Now the rally i spoke of last month in bonds ended…the next move is DOWN below 105 (basis 30yr. contract)…Then a BIG move up..inprice /dwn in yield.
That 50 beep story is gaining Mo…but forget it!..it’s Wall street disinformation
Watch the reaction to the Japan (YEN CARRY TRADE), then the banksters will be in survival mode - Disinformation will be used to profit and escape to suck in the novice dip buyers…
.PS Japan Nikki is 20% off the 2006 highs, and real estate is still dropping 17 years later.(down 70%)……..now they must raise rates to attempt to save the global fiat currency fractional banking system!
SEE!! It *is* different this time!
You know what Bies is actually saying? Fairly soon, if not already, the Fed will be issuing its marching orders for its gestapo examiners unit, who will then storm the banks and strong-arm gobs of additional loan reserves. The heads of many bank presidents will roll, quarterly earnings will take huge hits, and share prices will plunge. Time to short the bank stocks!
“The concentration level for these banks is about 400 percent of total capital, or twice the level of the late 1980s and early 1990s, a period of considerable loan loss problems in the banking industry.”
There it is ! The elephant in the room that nobody is talking about. Sure, it will be a smooth landing. Yep. Except for the foreclosures and bank failures !
Wait till Wall Street figures this out…
Wall Street has been aware of this problem since at least 2002! The risk is and has been in the hedge funds and derivative markets.
How do you unload 100 Trillion dollars of derivative funds? Ain’t gonna happen overnight!
Pimco (caution PDF) February 2004
http://tinyurl.com/hashm
“Wall Street has been aware of this problem since at least 2002! The risk is and has been in the hedge funds and derivative markets.”
There is absolutely NO WAY that Wall Street has priced in massive foreclosures and the partial failing of small banks into their current valuations. It isn’t even on the radar.
As far as the hedgies handling, this, I doubt it. Mortgages generally get wrapped up into some mortgaged backed security that might include a hedge, but not one big enough to handle a small banking failure. And if it does, the hedgee is going to go under.
Wallstreet is not noted for brains, the belief is that the risks have been fully hedged - that is the problem! There are 100 Trillion dollars of derivative products that may have to unwound. And yes the hedgers will go under. for example google LTCM and see what happened when a small hedge went south. Also remember Warren Buffet remarking on how he lost several billions called derivatives “weapons of financial mass destruction”.
I did not state that Wall Street was doing anything (or even at this time could do anything) about the risk. I am pointing out that responsible investors have been pinpointing the risk of easy credit and bubble economy for years - that only a few firms reduced their risk is well understood. That is why I will not even look at buying any stock until November and I will not buy any US Bonds and why I am buying gold.
It brings to mind the era of portfolio insurance, which was a popular concept in the mid-1980s which began to look highly questionable around October 19, 1987…
The hedgies are suffering from hubris. It is blinding them from the absurd notion that the “the best and brightest” can conceive of every possible risk variant in the global economy. All I have to say is that there are plenty of banana peels out there waiting for them to slip on. Its only a matter of time…
Hedgies are fooled by randomness. If they are so rich, how come they aren’t smart?
Does anyone on the blog know if anyone is collecting data on who the ultimate bag holders are for all these sub-prime I/O and ARM loans? Is there a list of institutions and what their exact exposure is? I’d be interested to know — so I can see if my bank is on the list, and if so, get my money out (Yes, I KNOW about FDIC insurance, but I’d rather not be in a bank at the front ranks of bankruptcy).
The bank has to issue a 10Q if it is a publicly traded company. Look at the 10 Q not the 10 K.
Thanks. I take it that’s on the Edgar website? Or OCC?
Good bet: Lots of pensions will be bag holders. Pension plan fiduciaries are not culpable, provided they are making the same dumb mistakes (like loading up on Fannie-backed MBS) the rest of their herd is making.
Got that right! Leona Helmsley’s “little people” will take the gut punch.
I’ve been thinking the exact same thing! My banks are Bank of American and ING Direct. I wonder how much exposure they have?!?!
I’d say ING is waaaaaaaay over exposed. Take a look at the “diversivied” mutal funds they offer. Even their “conservative” funds are overloaded with mortgage/banking/realestate/building. They’ve got the same kind of “diversivification” that dot commers had when they owned Yahoo, Cisco and Sun Micro.
Personally, I think B of A is safe — look at the puny yields on their CDs and money-markets. They don’t seem to be sweating.
Perhaps a cousin?
Here’s a link to Bauer Financial. They make risk assessments on banks.
OT, but funny video for all you Ben Bernanke fans
Every Breath You Take
http://www.youtube.com/watch?v=3u2qRXb4xCU
I saw that! From Yesterdays quote from BB..
“I am pleased to be here to discuss some strategies for helping families, particularly lower-income families, improve their economic and financial well-being. Families today face a financial marketplace that is increasingly complex, with numerous products and service providers from which to choose. Today I will touch on several approaches for helping people of modest means take advantage of these financial opportunities while managing the risks and avoiding possible pitfalls.”
Lets put ‘em in NegAms - way to go Ben!
http://tinyurl.com/ebej7
“a period of considerable loan loss problems in the banking industry.”
Not to mention the S&L industry.
Easing of u/w standards?
That is the understatement of the year.
I think if you have a PULSE, you can get a loan…if they will loan $1M of ’stated income’, how can we say otherwise?
Suzanne, I am confused. What did I blow? I filled out some form by mistake, but insulated myself from having to talk to the loan dudes. THey just hit a voice mail. I have not made any attempt to contact them.
It was a joke, you didn’t blow it.
I was referring to your “first post” — having the honor of first post, and not posting anything other than “first post” !! But it was a joke nonetheless.
“Susan Schmidt Bies said consumers so far appear to be handling the gradual re-setting of adjustable rate mortgages, which raise their payments.”
Get the feeling they will continue to spin this positively so they can continue to raise rates ? I’m betting a lot of people lose their homes and we’ll be told it was expected and “a part of a normal housing cycle” until thing get really bad.
Mo Money,
You know that was the comment that stood out the most in my mind as well. Well yeah, if you force fed me an entire bottle of “ex-lax” I could “handle” it for a WHILE! How long is it going to be before there isn’t any more ballast to throw over the side and FB’s are still losing altitude?
It’s like a cat running into the wall and then giving you that “I meant that” look
its like an enema they tell u to hold it as long as possible
“I’m betting a lot of people lose their homes and we’ll be told it was expected and ‘a part of a normal housing cycle’ until thing get really bad.”
Absolutely.
Mortgage slowdown forces Wells Fargo to consider lending options
This article is the scariest I’ve seen in the past couple months. Not only does it illustrate the old adage “throwing bad money after good,” it suggests that the banks will dig themselves (and the global economy) even deeper into a hole before they finally give up.
Yeah… it pisses me off that Wells is gonna do this.
My other BIG beef with the article:
Wells Fargo is NOT “San Francisco based”. Wells Fargo has been MINNEAPOLIS based for years now, ever since Norwest bought Wells Fargo. (but Norwest decided to take the Wells name…)
The financial reporters can’t even figure out where the national headquarters of one of the largest banks in the nation is located. Yet we’re supposed to believe in what they say.
I read a similar story where they talked about “San Francisco Based Bank of America”. (BofA is based in North Carolina, ever since NationsBank bought them, the same year that Norwest bought Wells)
And then we wonder why reporters don’t even challenge David Liareah on his statements. They can’t even figure out where Wells Fargo is located.
Clouseau
If I remember right, there are many WF banks. At least Weiss’s bank rating lists many - ones in Colorado, Idaho and LA I can recall off the top of my head - and they have different Weiss rating entries.
Even though there is only one WFC corp, it is structured as many banks and each bank is distinct in terms of capitalization and liability and as a regulatory banking unit. At least that’s what I understood by their different treatment by Weiss.
If anyone knows more, I’d appreciate if you share that info. I could be wrong here.
Thanks,
bubba
P.S. Wiess ratings are available in any reasonably run public library.
You can also get the information from Bauer Financial. I looked into Wells Fargo because I thought they were safer than BofA. You are right about the holding company structure. Different states are handled by charters in various states. With Wells Fargo, the chartered bank for Washington State (where I live) is South Dakota. It is rated lower than the Wells Fargo chartered in California so I just stayed where I was.
Wells Fargo still has corporate headquarters in San Francisco. http://finance.yahoo.com/q/pr?s=WFC
Yahoo says San Francisco:
http://finance.yahoo.com/q/pr?s=WFC
The reports of the administration and the congress each trying to be the first to investigate Fannie and Freddie draw a strage analog in my mind to Smoot in 1929.
If someone who knows more about banks than I do could help, do the levels stated here imply a great deal of downside exposure for them? Could a significant default rate in exotic markets like California cause a dangerous portion of the paper these guys are holding go bad? Is the portion of that bank’s business compartmentalized to ensure that depositors (or the public via the FDIC) are not left holding the bag?
just to give an uneducated guess, my feelings would be loan standards are probably lower than the last downturn. it’s probably going to be worse.
here is an article from way back when.
#26 L.A. banks strongest in nation, report concludes(Sept 10, 1990)
We have all been wondering about Fannie Mae for quite some time, as it is rather puzzling why they cannot produce financials despite a protracted period over which they should have been delisted from the NYSE for failing to do so…
worth another post.
Inside Wall Street’s Culture Of Risk
on being more aggressive:
(So far, the rewards are justifying the risks: Big investment banks are booking record profits, and their stocks have zoomed, up 64% since 2001. But once-calm global markets are getting rocky as interest rates rise, choking off the easy money. Fears of more rate hikes to come have triggered sell-offs in stocks, bonds, and currencies around the world since early May.
That’s raising the stakes for arguably the biggest game of risk ever to play out on Wall Street. If banks succeed, they’ll rack up even bigger earnings. But if they borrow too much money for their trades or take on more risk than they can manage, the wreckage could be considerable. “A world where huge amounts of leverage have been brought into the system is a dangerous world,” Berkshire Hathaway Inc.’s CEO Warren Buffett observed at his most recent annual meeting. And “as interest rates rise…people will stretch even further and take greater risks,” warns John H. Gutfreund, senior adviser at the investment bank C.E. Unterberg, Towbin and former CEO of Salomon Bros. Andy M. Brooks, head of equity trading at investment manager T. Rowe Price Group Inc. (TROW ), puts it more bluntly: “If people step out too much, they’re going to get whacked.”)
my new additions to my top housing bubble articles.
#31 I Want My Bubble Back!
#32 It’s a renter’s market
#33 Las Vegas project canceled(George Clooney’s Project)
#34 Shiller: Long-Term Perspectives on the Current Boom in Home Prices
#35 ALL BOOMS BUST!
Title
John Law,
Yeah, it reminded me of the drug companies. They turn out drug after drug KNOWING that some of them will have “side effects” not revealed in the clinical trials process. But as long as they get approval they go ahead and market them anyway as long as they have projections that show the profits will exceed the settlements from a class action suit. I’ve seen it over and over (as have most of us).
Well look at the lenders. How many of their CEO’s would want the toxic loans they churn out? Oh hell no! They wouldn’t dream of being put into that kind of dicey financial situation! But in the mean time they are cranking out some major bucks! If the stuff hits the fan well then I guess it does. Now true, they’ll leave a wake of human wreckage but as long as the profits more than broke even with the law suits it’s all good!
Just a quick comment on delinquencies, sub prime lending etc.
In spite of the stereotypical FB sub-prime borrower’s image (which lenders are fine with) the truth I feel will bare out markedly different. One of the reasons there was such an “explosion” in sub-prime lending is b/c lenders took folks that were on a solid path to home OWNERSHIP and put them on a path to poverty. The better your FICO score the more in debt we can put you into! Let’s re-fi that second and pay off some of those bills (knowing all the while they had taken a responsible adult and turned them into a credit junkie!) All across the country FICO scores have been coming down? Yes! In a good economy and a “white hot” RE market fico’s have been coming down. I’m not in the least concerned for those that somehow found a way to get “qualified” into a home but for the folks that previously had sterling credit now in a world of hurt created by their friendly lender I see where there could be some problems for those lenders. (Not that it will come in time to help the former homeowner any!)
Either many will be hurt by the credit binge, or else the mass of FBs will prove to be “too big to fail”, in which case their financial imprudence will be rewarded by a “share-the-wealth” taxpayer-funded bailout of massive proportions. No wonder we have a negative savings rate in this country, given the propensity to reward those who spend themselves into a hole the quickest.
their financial imprudence will be rewarded by a “share-the-wealth” taxpayer-funded bailout of massive proportions
I don’t think so. The federal goverment is in such a hole now that the deficits of the 1990 will look like a small payday cash disrupion. By the time this thing starts snappig left and right, the tax revenues will begin to fall, and we would have to tax ourselves to the tilt to make the bailout even believable.
A simpler way would be to fire up those helicopter engines.
From B Bernake’s speech 13 June 2006
“…a recent study of alternative providers of financial services found the number of nonbank check-cashing establishments doubled in the United States between 1996 and 2001.1 Payday lending outlets, a source of credit that was almost non-existent a decade ago, now number more than 10,000.”
IMHO the growth in the payday loan industry should have been sufficient warning to the Fed that it was doing something wrong.
Wow, profound. I recall when I bought my current house I got a some “counseling” from my Real Estate Agent that I “really should be buying more house”. This was due to my income at the time being abnormally large from where I figured my historical average would be.
She had a whole slew of reasons why I was doing myself and my family a dis-service by buying under what I was capable of given my income and FICO score.
4 years later when I had been unemployed for 6 months, the money I had put into the stock markets was more or less gone, I was unspeakably grateful for my small house and tiny mortgage payment.
I have a suspicion that some of this nonsense that the Realtor was feeding me must have bled over into the mortgage business in recent years. Sad.
This gets my recommendation for post of the day
(the money I had put into the stock markets was more or less gone)
were you not diversified? not just in stocks, but bonds(and from the new studies, commodities/precious metals)? either way, good job on not caving into pressure.
In a word - no. At some point in a young man’s life they might get to thinking they have it figured out. With so many of my friends doing intersting things in what came to be known as the “dot-coms” I was eager to back them up with my money. I did not know enough to get my money away from the bubble. At the time I saw it as helping fund their continued intersting / good projects. I was somewhat puzzled why random joes would want to buy into it at an early stage, but they were. When the whole thing blew it took out the scammers and the people with good ideas alike in many cases.
I am sure there are more than a couple of folks in the current housing market who think they have it figured out. I just hope they have the good fortune to emerge on the other side in workable shape as I was able to.
“At the time I saw it as helping fund their continued intersting / good projects.”
Lots of folks are helping GOOG along with its many good projects these days; in fact, it seems like GOOG is in the business of announcing good projects as often as possible, in order to attract as much help as possible…
The fingerpointing has already begun…..and we haven’t seen the crash yet.
When this market implodes I say we run 24/7 episodes of Good Times. It ran during the early 70’s recession, and JJ was DYNO-MITE!
I can’t believe I watched that show. But I think we need more than JJ.
I say, “Pass the plate of Prozac, please”.
I just got a postcard from Centex. They’ll give us a $15 gas card just for visiting them until July 31. Cool.
What city?
The postcard is issued from Chantilly, VA, but it says either Centex Homes or Fox & Jacobs, so I think it might be nationwide. But one can call ahead I imagine. It says “speak with a Centex Sales Representative soon for more details on this special offer”.
Prices will not drop. These guys wouldn’t lie to us, would they?
The boom is over, but don’t expect big drops in real estate prices, Realtors say
(http://www.sun-sentinel.com/business/local/sfl-zforeign14jun14,0,5732966.story)
The boom is over, but don’t expect big drops in real estate prices, Realtors say
Even Suzanne researched it!!!!!
“We’re in the state of Florida,” said Suzanne Parlick, sales director for Boca Raton-based EB Developers. “Everyone wants to come to Florida.”
I love living in South Florida, but here’s something funny. An (unscientific) survey done in the same newspaper, on the same day, showed 31% already here want to leave, and 32% would leave if it wasn’t so difficult. Suzanne must not be talking to them!
http://www.sun-sentinel.com/news/sfl-pollresults,0,3980493.htmlstory?coll=sfla-home-utility
Suzanne’s job is to get people INTO a house, not out.
Yeah, that’s Wilma’s job!
can someone post this suzanne article?
http://www.sun-sentinel.com/business/local/sfl-zforeign14jun14,0,5732966.story?coll=sfla-business-headlines
What an article! I am almost left speechless. Have not read so much BS in along time.
While we watch this slow-motion crash with impatience, Lereah and his ilk must be watching it with an increasing sense of horror as they realize that nothing they do, no amount of spin, is going to save it.
Oh, the humanity! LOL
Suzanne, thanksforthe clarification. I am just having a laugh at how desperate some of these folks are in trying to stir up loan business.