My beloved profession, never one to miss a golden opportunity, is already gearing up for the expected spike in bankruptcies, cherry picking the best and brightest from other firms to beef up their "restructure" departments:
from that winjr link.
" It also means that struggling companies are more able to refinance their debt and delay fixing operational problems. One sign that the financial system is flush with cash: Business bankruptcy filings through the first nine months of 2006 totaled 14,228, compared with 26,275 in the same period the year before."
If defaults do rise, bankruptcy professionals expect to be very busy. The issuance of U.S. junk bonds, or high-yield corporate debt, has topped $100 billion in three of the last four years, levels not seen since the late 1990s.
Companies have rushed to the bond market to refinance. Buyout funds also are taking advantage of low borrowing rates to raise money for takeovers. About 40 percent of the junk bonds issued since 2004 are rated B- or below and have higher chances of default, Vazza said.
"All the available liquidity is papering over a lot of problems right now," Marwil said.
With companies leveraged to the max, there is little margin for error.
Sounds strangely like the folks that refi'd to avoid problems.
That yield compression on those corporate bonds is awesome, and yet apparently people are still jumping on those things left and right.
I had some for a while, and it's great cashflow when they work as advertised, but I sold them off (notably some Ford bonds), and bought some safer stuff. That's part of the reason I less bearish on tresuries than some people - I see a lot of other people doing that too in the future.
more info
Teaser line
"As risky mortgages and collateralized debt obligations (CDOs) are making headlines, new research by Joseph Mason and Joshua Rosner raises additional concerns that mortgage-linked CDOs could experience significant losses if the U.S. housing market continues to stagnate. Moreover, inadequate transparency in the rapidly-growing private label market and a credit rating industry ill-equipped to recognize the risks of CDOs in the current environment and communicate them accurately to investors could result in a broad financial decline, initiated by a weakening housing industry and aggravated by a retracting credit market. These initial findings stress the urgent need for further, comprehensive research in this area."
From the paper:
The mortgage-backed securities (MBS) market has experienced significant changes over the past
couple of years. Non-agency (private label) securities, which are not guaranteed by the
government or the government sponsored enterprises, now account for the majority of MBS
issued. In this report, we review the rise of collateralized debt obligations (CDOs), the
relaxation of lending standards, and the implementation of loan mitigation practices. We analyze
whether these structural changes have created an environment of understated risk to investors of
MBS. We also measure the efficacy of ratings agencies when it comes to assessing market risk
rather than credit risk. Our findings imply that even investment grade rated CDOs will
experience significant losses if home prices depreciate.
MBS are currently the most mature and complex of consumer structured
finance products. The biggest obstacle that the authors identify is lack of
transparency. Structural changes in the residential mortgage lending industry
including reductions in down-payment requirements, relaxed underwriting
standards, the movement to automated valuation and underwriting systems
largely went unnoticed by MBS investors until only recently. This report
explains that those changes went unnoticed largely because of the existing
complexity and valuation difficulties underlying todays MBS markets.
Living in the UK I see the market here is at least a year behind the US. Every time I see an article saying housing is still affordbale due to another bank producing another innovative product I cringe. I recall this back in 1989. One generation later...
Of course, I don't believe any of it. I'm fully invested in stocks and second homes. Of course, I've leveraged these investments to the max to take advantage of the greatest bull market of all time. All you Cassandra's can just eat crow.
I really am getting sick and tired of all these professional pessimists. Here's some real estate mogul named Bruce Morris who's worried about price declines. Puhleeese!
Structural changes in the residential mortgage lending industry including reductions in downpayment requirements, relaxed underwriting standards, the movement to automated valuation and underwriting systems largely went unnoticed by MBS investors until only recently.
In other words the manufacturers of these products substituted inferior components, charged the same price never telling the consumer and pocketed the difference.
So, what if the MBS holders get in enough trouble to actually collect on their mortgage insurance policies? I know how it works with insuring real things, you can't misrepresent the asset being insured, that's insurance fraud. Will the insurers have similar recourse with their policies? "I'm sorry but we were charging you premiums based upon your policy that said you were loaning prime paper. Upon review of your claim we determined that your portfolio is at best Alt-A and more likely sub-prime. If you look at your policy, payouts are not authorized in cases of negligence or when the holder fails to notify the insurer of material changes in the asset class being insured. Claim denied."
That last link by arbogast, the ocregister post, is real good... Money quote:
By selling now and creating $500,000 of non-taxable profit, that saves me having to earn $1,000,000 to end up with $500,000. I also get to avoid most of the decline I see coming in price. Its a million dollar positive decision no matter how you slice it.
I think a lot of folks are thinking that way... so many in fact that I do think the exits will get jammed if half of them act.
I'd guess very few will be able to execute to anything close to what they believe they can get. One more reason why this selling binge could drag on forever.
I believe there are more people out there like this guy (close to 100% equity thinking its time to 'cash out') than people with troubled sub-prime mortgages being FORCED to 'cash in' or move out. But the first group is a lot less visible... the silent sellers.
dryfly,
The U-Haul index, school enrollment and demographics, population out flows and lots more agree with you. I can only hope that in 15 years at the next top all these boomer bonus polices are stil around; Clinton's tax free transactions, California's Prop 13 and one time basis transfer, etc.
dryfly,
The U-Haul index, school enrollment and demographics, population out flows and lots more agree with you. I can only hope that in 15 years at the next top all these boomer bonus polices are stil around; Clinton's tax free transactions, California's Prop 13 and one time basis transfer, etc.
Likely to be a bunch of subprime info on the tape as the day goes on. Novastar reports their Q4 after 4PM EST. Impac, Accredited and Indymac are making presentatations at an investor conference earlier in the afternoon. Stay tuned.
Thanks for the heads-up, Brian. Last time I jumped right on an earnings release at market close it was NEW's and we all got to rock and roll for days. So the question is, should I look out for the NFI release like a good CR Irregular, or ignore it and hope for the best for the economy?
How does default->FC->REO process work for all the different parties: loan servicer, bank who originated the mortgage, investment bank who created MBS, investor who bought MBS. Are there differences for 1st,2nd mortgages, prime, not-prime loans?
I'd like to understand who holds the risk, who makes decisions and who does the job. For instance WFC and CFC have huge servicing portfolios. As I understand they carry no default risk, but they have to carry out all efforts related to the process. Are they being compensated for the effort? Same question about REOs: who does what?
The drop of 13 percent in U.S. residential construction last year was the biggest annual decline since 1991. Sales of existing homes fuels spending for paint and cabinets as many sellers make improvements and buyers remodel.
The company's wholesale division, which makes up 12 percent of sales, supplies homebuilders. Home Depot sales have grown an average of 12 percent the past three years, trailing 18 percent growth at Lowe's.
Excluding 4 cents a share for executive severance, Home Depot said profit would have been 50 cents. Nineteen analysts, on average, estimated earnings of 51 cents, according to a Bloomberg survey.
Sales in older stores fell 6.6 percent. Michael Cox, an analyst with Piper Jaffray, estimated sales in such stores would fall 5 percent.
Note: there may be special issues with HD so wait for Lowes news for conformation.
I haven't followed Novastar as closely as some of the other subprime names, so I won't offer any predictions on what kind of ride they will be on post release. I think the "shock and awe" of the New Century/HSBC pas de deux earlier in the month has removed a lot of the suspense for the moment (and at its lows last week NFI had fallen 50% from its pre Ownit levels so the stock is having a dead cat bounce at the moment.) The news will be what if any outlook they offer for the rest of the year. Given the amount of flux out there, I expect they will punt on a forecast.
Note: there may be special issues with HD so wait for Lowes news for conformation.
HD does have a lot of other problems, but I don't think we need confirmation from Lowes that home improvement stores will suffer in the face of a down housing market.
If Nova doesn't file bankruptcy in their release it will be considered 'bullish' and give the market another reason to go up 100 points tomorrow.
As far as HD goes... ya they got issues. Either they need to hire some more help or hand out pre-programmed GPS as you enter the stores... so you can find their shit.
We've discussed this a bit over at Ben's blog. So many people have their retirement hopes & dreams tied to their equity that it won't take long before they're cutting and running (emphasis on cutting). Along with the builders, they'll help lead the market all the way down.
tj - my take is they will try to sell but won't be able to sell and so many will sit & wait it out. Since many have high equity from buying decades ago... it could be a long wait.
Okay so we know that most subprime lenders are getting crushed, and many other lenders/builders are going to suffer for a while. How exactly would one profit from defaults on the commercial side? Does anyone have a list of the largest commercial lenders or an idea of what their exposure will be?
The PMI Group, Inc. at Goldman Sachs Housing Conference - Final - - insurancenewsnet.com
This is the text transcript of the Credit Quality panel at the Goldman Sachs conference, there are some good quotes in there regarding subprime.
Woohoo! Foreclosures for everyone!
My beloved profession, never one to miss a golden opportunity, is already gearing up for the expected spike in bankruptcies, cherry picking the best and brightest from other firms to beef up their "restructure" departments:
Lawyers ready for a boom in bankruptcy Experts in field believe business cycle will soon yield a surge in defaults - Chicago Tribune
from that winjr link.
" It also means that struggling companies are more able to refinance their debt and delay fixing operational problems. One sign that the financial system is flush with cash: Business bankruptcy filings through the first nine months of 2006 totaled 14,228, compared with 26,275 in the same period the year before."
If defaults do rise, bankruptcy professionals expect to be very busy. The issuance of U.S. junk bonds, or high-yield corporate debt, has topped $100 billion in three of the last four years, levels not seen since the late 1990s.
Companies have rushed to the bond market to refinance. Buyout funds also are taking advantage of low borrowing rates to raise money for takeovers. About 40 percent of the junk bonds issued since 2004 are rated B- or below and have higher chances of default, Vazza said.
"All the available liquidity is papering over a lot of problems right now," Marwil said.
With companies leveraged to the max, there is little margin for error.
Sounds strangely like the folks that refi'd to avoid problems.
That yield compression on those corporate bonds is awesome, and yet apparently people are still jumping on those things left and right.
I had some for a while, and it's great cashflow when they work as advertised, but I sold them off (notably some Ford bonds), and bought some safer stuff. That's part of the reason I less bearish on tresuries than some people - I see a lot of other people doing that too in the future.
How Resilient Are Mortgage
Securities to Collateralized
Market Disruptions?
from Hudson Institute
Link
more info
Teaser line
"As risky mortgages and collateralized debt obligations (CDOs) are making headlines, new research by Joseph Mason and Joshua Rosner raises additional concerns that mortgage-linked CDOs could experience significant losses if the U.S. housing market continues to stagnate. Moreover, inadequate transparency in the rapidly-growing private label market and a credit rating industry ill-equipped to recognize the risks of CDOs in the current environment and communicate them accurately to investors could result in a broad financial decline, initiated by a weakening housing industry and aggravated by a retracting credit market. These initial findings stress the urgent need for further, comprehensive research in this area."
From the paper:
The mortgage-backed securities (MBS) market has experienced significant changes over the past
couple of years. Non-agency (private label) securities, which are not guaranteed by the
government or the government sponsored enterprises, now account for the majority of MBS
issued. In this report, we review the rise of collateralized debt obligations (CDOs), the
relaxation of lending standards, and the implementation of loan mitigation practices. We analyze
whether these structural changes have created an environment of understated risk to investors of
MBS. We also measure the efficacy of ratings agencies when it comes to assessing market risk
rather than credit risk. Our findings imply that even investment grade rated CDOs will
experience significant losses if home prices depreciate.
MBS are currently the most mature and complex of consumer structured
finance products. The biggest obstacle that the authors identify is lack of
transparency. Structural changes in the residential mortgage lending industry
including reductions in down-payment requirements, relaxed underwriting
standards, the movement to automated valuation and underwriting systems
largely went unnoticed by MBS investors until only recently. This report
explains that those changes went unnoticed largely because of the existing
complexity and valuation difficulties underlying todays MBS markets.
Living in the UK I see the market here is at least a year behind the US. Every time I see an article saying housing is still affordbale due to another bank producing another innovative product I cringe. I recall this back in 1989. One generation later...
How about this from Bakersfield Bubble? Truly scary...
Bakersfield Bubble: Subprime Blowup Wave #2?
Of course, I don't believe any of it. I'm fully invested in stocks and second homes. Of course, I've leveraged these investments to the max to take advantage of the greatest bull market of all time. All you Cassandra's can just eat crow.
I really am getting sick and tired of all these professional pessimists. Here's some real estate mogul named Bruce Morris who's worried about price declines. Puhleeese!
Lansner on Real Estate : The Orange County Register
I used to think that San Diego was 6 months behind the UK.
In fact, CR had a bunch of UK-related posts in mid 2005 when it seemed UK housing prices had peaked. For instance
http://calculatedrisk.blogspot.com/2005/05/bank-of-america-uk-collapsing-house.html
Structural changes in the residential mortgage lending industry including reductions in downpayment requirements, relaxed underwriting standards, the movement to automated valuation and underwriting systems largely went unnoticed by MBS investors until only recently.
In other words the manufacturers of these products substituted inferior components, charged the same price never telling the consumer and pocketed the difference.
So, what if the MBS holders get in enough trouble to actually collect on their mortgage insurance policies? I know how it works with insuring real things, you can't misrepresent the asset being insured, that's insurance fraud. Will the insurers have similar recourse with their policies? "I'm sorry but we were charging you premiums based upon your policy that said you were loaning prime paper. Upon review of your claim we determined that your portfolio is at best Alt-A and more likely sub-prime. If you look at your policy, payouts are not authorized in cases of negligence or when the holder fails to notify the insurer of material changes in the asset class being insured. Claim denied."
That last link by arbogast, the ocregister post, is real good... Money quote:
By selling now and creating $500,000 of non-taxable profit, that saves me having to earn $1,000,000 to end up with $500,000. I also get to avoid most of the decline I see coming in price. Its a million dollar positive decision no matter how you slice it.
I think a lot of folks are thinking that way... so many in fact that I do think the exits will get jammed if half of them act.
I'd guess very few will be able to execute to anything close to what they believe they can get. One more reason why this selling binge could drag on forever.
I believe there are more people out there like this guy (close to 100% equity thinking its time to 'cash out') than people with troubled sub-prime mortgages being FORCED to 'cash in' or move out. But the first group is a lot less visible... the silent sellers.
This just might be the untold story.
dryfly,
The U-Haul index, school enrollment and demographics, population out flows and lots more agree with you. I can only hope that in 15 years at the next top all these boomer bonus polices are stil around; Clinton's tax free transactions, California's Prop 13 and one time basis transfer, etc.
dryfly,
The U-Haul index, school enrollment and demographics, population out flows and lots more agree with you. I can only hope that in 15 years at the next top all these boomer bonus polices are stil around; Clinton's tax free transactions, California's Prop 13 and one time basis transfer, etc.
Likely to be a bunch of subprime info on the tape as the day goes on. Novastar reports their Q4 after 4PM EST. Impac, Accredited and Indymac are making presentatations at an investor conference earlier in the afternoon. Stay tuned.
Thanks for the heads-up, Brian. Last time I jumped right on an earnings release at market close it was NEW's and we all got to rock and roll for days. So the question is, should I look out for the NFI release like a good CR Irregular, or ignore it and hope for the best for the economy?
Question to Tanta, MOM and/or other expert.
How does default->FC->REO process work for all the different parties: loan servicer, bank who originated the mortgage, investment bank who created MBS, investor who bought MBS. Are there differences for 1st,2nd mortgages, prime, not-prime loans?
I'd like to understand who holds the risk, who makes decisions and who does the job. For instance WFC and CFC have huge servicing portfolios. As I understand they carry no default risk, but they have to carry out all efforts related to the process. Are they being compensated for the effort? Same question about REOs: who does what?
TIA
I have a request for Tanta.
How about another post like "Information is power, which is why you don't get any"?
Talk about rockin' and rollin'.
StillLearning, I'm working on your question.
sunset beach guy, you're my kind of trouble-maker.
Home Depot 4th-Quarter Profit Falls on Housing Slump
Residential Construction
The drop of 13 percent in U.S. residential construction last year was the biggest annual decline since 1991. Sales of existing homes fuels spending for paint and cabinets as many sellers make improvements and buyers remodel.
The company's wholesale division, which makes up 12 percent of sales, supplies homebuilders. Home Depot sales have grown an average of 12 percent the past three years, trailing 18 percent growth at Lowe's.
Excluding 4 cents a share for executive severance, Home Depot said profit would have been 50 cents. Nineteen analysts, on average, estimated earnings of 51 cents, according to a Bloomberg survey.
Sales in older stores fell 6.6 percent. Michael Cox, an analyst with Piper Jaffray, estimated sales in such stores would fall 5 percent.
Note: there may be special issues with HD so wait for Lowes news for conformation.
Tanta,
I haven't followed Novastar as closely as some of the other subprime names, so I won't offer any predictions on what kind of ride they will be on post release. I think the "shock and awe" of the New Century/HSBC pas de deux earlier in the month has removed a lot of the suspense for the moment (and at its lows last week NFI had fallen 50% from its pre Ownit levels so the stock is having a dead cat bounce at the moment.) The news will be what if any outlook they offer for the rest of the year. Given the amount of flux out there, I expect they will punt on a forecast.
Note: there may be special issues with HD so wait for Lowes news for conformation.
HD does have a lot of other problems, but I don't think we need confirmation from Lowes that home improvement stores will suffer in the face of a down housing market.
And Walmart beat earnings and offered an upbeat outlook for Q1.
Wally World did well, but at the expense of the less nimble.
If Nova doesn't file bankruptcy in their release it will be considered 'bullish' and give the market another reason to go up 100 points tomorrow.
As far as HD goes... ya they got issues. Either they need to hire some more help or hand out pre-programmed GPS as you enter the stores... so you can find their shit.
"I haven't followed Novastar as closely as some of the other subprime names"
NFI has been debated here:
Winter (Economic and Market) Watch » 2004 and 2005 Mortgage Vintages: At Peril?
Winter (Economic and Market) Watch » New Century and Novastar: the End of “Glory Days”
This just might be the untold story.
dryfly,
We've discussed this a bit over at Ben's blog. So many people have their retirement hopes & dreams tied to their equity that it won't take long before they're cutting and running (emphasis on cutting). Along with the builders, they'll help lead the market all the way down.
tj - my take is they will try to sell but won't be able to sell and so many will sit & wait it out. Since many have high equity from buying decades ago... it could be a long wait.
Okay so we know that most subprime lenders are getting crushed, and many other lenders/builders are going to suffer for a while. How exactly would one profit from defaults on the commercial side? Does anyone have a list of the largest commercial lenders or an idea of what their exposure will be?