As NovaStar fights that courtroom battle, it has become Exhibit A for anyone interested in understanding how loose the lending was among some upstart mortgage companies in the great real estate run-up of this decade. The companys troubles also reveal how willingly investors, regulators and much of Wall Street overlooked mortgage companies questionable practices.
Because NovaStar is not a bank, its operations are not closely monitored by federal and state regulators. That relative lack of regulatory oversight over home mortgage lenders was the subject of heated hearings in the House and the Senate in the last two weeks. Regulators were supposed to be the cops on the beat, protecting hard-working Americans from unscrupulous financial actors, Senator Christopher J. Dodd, the Connecticut Democrat who is chairman of the Senate Banking committee, said last week. Yet they were spectators for far too long.
The U.S. economy has been held up for the last half decade only by the housing and consumption bubbles caused by cheap money. Much of its healthy capitalist tissue has rotted internally, and been replaced by corrupt politically-determined rent-seeking. Only when the cheap money finally disappears, and recession occurs, will we be able to tell the full damage caused by the Enronization of America.
Next up with be the "Blue chip" banks that will have to write-off Alt-A loans or take losses on holdings of mortgage securities (just think what profits will look like if a bank with an ROA of 1.5% reports 0.25% of its risky investment assets going to zero). This is all going to get very messy and makes the S&P appear to be at nose bleed levels given just how much of the index's total net profit amount comes from financials.
This market just doesn't want to crack....even after the ISM figure today. Very frustrating.
This market just doesn't want to crack....even after the ISM figure today. Very frustrating.
Please relax about the market. Last time, in 2000, it took 2 years from top to bottom. We topped just a month ago. 23 month to reach the bottom are in front of us.
Tranquility Fund, run by Saye Capital, a Los Angeles-based firm that's active in the subprime market, lost roughly 8% in February, according to two hedge fund investors who declined to be identified.
Tranquility invested in MBS, but also took short positions on mezzanine tranches of CDOs as a hedge, according to Luke Imperatore, who helps market the fund.
The value of the MBS positions declined, while the mezzanine CDO tranches have yet to reflect the deterioration in the subprime market, he explained.
Greg Miller, a portfolio manager at Saye, declined to comment. It's not clear how well Tranquility did in March, but the fund's fortunes may improve.
Christopher Flanagan, head of global structured finance research at J.P. Morgan Chase, said a lot of hedge funds have been trading different parts of the CDO capital structure.
A common trade is to buy the lowest-rated equity tranche of CDOs and short the slightly higher rated mezzanine part. While the equity tranches are the riskiest, the interest rate they pay is very high and cash flows into these slices are quick, Flanagan explained.
Investors in mezzanine tranches of CDOs have to wait longer for their cash. If there are problems with the underlying collateral, by the time the deal is wound up, there may be little cash left for these parts of the security, he said.
"Equity CDO owners could get hurt, but it's the mezzanine tranches that will be really hurt," he predicted.
Subprime Pullback May Crimp Consumer Spending
By CONOR DOUGHERTY, MIKE SPECTOR and ANA CAMPOY
April 2, 2007; Page A2
With subprime mortgage lenders pulling back, some working-class Americans are already finding it harder to buy a new home or refinance the one they already own. The big question now for the nation's economy: Will it also get harder for these consumers to buy cars, shop at the mall and dine out?
We have yet to see what effect this will have, but negative savings is at 24 months and counting
Of course...you have already pointed this out CR.
Also, reading Milton Friedman over the weekend...interesting to note that you used the helicopter metaphor in the late 60s.
Good to see such a stinko oganization go bellyup. Giving loans to folks who cannot pay back a loan is just wrong and misleading.
Can't wait for this ponzi credit spigot is turned off once and for all. get back to rational sane lending whereby savings and a down payment mean something.
How big this SouthStar was? It seems both brokers and builders are tanking today. It could be on New Century, but I doubt, as NEW was done a while ago.
I don't know.. Countrywide would seem to be the next one. The CEO is trying to bail out in the next year, and the insider selling is frenetic. My bold prediction is that something is rotten in the nation of Countrywide. Nobody gained more off of this ride of the bull, and nobody will lose more when that ride ends.
It is with great regret and sadness that I must announce that SouthStar is ceasing its mortgage lending operations today, April 2, 2007. We are canceling any pending closings and will not close or fund any new loans going forward. All pending loan files will be returned immediately to our customers.
This decision was brought upon by events that developed toward the end of last week. Two of the primary purchasers of our loans refused to fund pools that were already locked and committed until we reimbursed them up front for all of our existing repurchase obligations something that we were financially unable to do. Another purchaser only bought a portion of loans that they had previously committed to, kicking out a significant portion of loans for various reasons unrelated to underwriting guidelines. We rely on the cash from the sale of these pools to fund our operations. Without the funds from the sale of these loans, we are approaching an insolvency situation. We identified two potential buyers of our company that would have allowed us to continue operating but were notified on Friday and Sunday respectively that this would not be a viable option. This leaves us no choice but to cease operations.
Our first priority is to protect employee compensation: salaries, bonuses, commissions and severance pay. At this point, we cannot guarantee that we will be able to do this but we will make every effort humanly possible.
Senior Managers will be meeting with everyone within the next hour to formulate a plan for the remainder of today.
It is an extremely difficult thing to see a company that you have put in so much effort, time, blood, sweat and tears fail. Personally, it feels to me like the loss of a loved one. The most difficult thing to handle is having to say goodbye to so many wonderful friends and extended family. Mike, Brian and I appreciate everything that you all have done for this company and want to sincerely thank you for your efforts. We should all be very proud of what we accomplished over the years and todays events cannot diminish that.
It has been an honor to work with each of you. I wouldnt have changed anything for the world.
"what happens if you haven't covered your shorts when a company goes BK?"
Congratulations are in order. That's exactly what every short seller wishes will happen and rarely does. So... Before or after you celebrate with the most expensive bottle of your chosing? Normally, the common shares quickly get wiped out and you get to subtract 0 from the short sale entry price.
Wait, bubbles, how does that work? I only once had a short to BK and I would remember not paying gains. I must have done something wrong. The money showed up in my account and the position was closed as I recall.
Wait, bubbles, how does that work? I only once had a short to BK and I would remember not paying gains. I must have done something wrong. The money showed up in my account and the position was closed as I recall.
Crispy...just imagine the hellhole that office is going to be when a giant bunch of employees who are neck deep in RE debt find out that the last paycheck they already spent isnt even going to get direct deposited into their acct. Just add them to the NOD list.
to the guy who asked what happens to his mortgage when the company goes bk. Your loan is sold in a pool of assets sometimes as great as 1 billion dollars to the highest bidder (800 million). once in a blue moon they will auction each loan seperately at a public auction and you could show up and bid on your loan. Public auction is highly unlikely unless we were to go into a depression.
From Bloomberg. M&T Bank Corp. said low bids for the Alt-A mortgages it planned to sell will cut first-quarter profit by $7 million. Lenders this month have found demand falling for riskier mortgages even apart from so-called subprime ones.
A unit of Cleveland-based National City Corp. that makes home equity loans through brokers today undid much of a loosening of guidelines it introduced only Feb. 28, rolling back standards further in some ways, as a result of demand from loan buyers evaporating quickly, according to an announcement obtained by Bloomberg.
Unfavorable market conditions and lack of market liquidity impacted M&Ts willingness to sell Alt-A loans in the first quarter, the company said in the statement.
Short sales are usually treated as capital gains (or losses); holding period is similar to longs except between the time of sale and closing (or asset declared worthless) rather than the time between acquisition and sale.
According to IRS Publication 550: "You do not realize gain or loss until delivery of property to close the short sale. You will have a capital gain or loss if the property used to close the short sale is a capital asset.
Exception if property becomes worthless. A different rule applies if the property sold short becomes substantially worthless. In that case, you must recognize gain as if the short sale were closed when the property became substantially worthless."
There is an exception for constructive sales in the code but that can get a bit more complicated.
Regardless, if you made a profit, you owe tax (surprise, surprise).
I've always thought of short selling gains as being taxed at the short term tax rate, irrespective of how long you held the short... I just pay up ( cancel out against losses too ! ) and be done with it The reality seems to be more complicated. If you can make sense of the irs stuff below, have at it:
On May 3, 2006, you bought 100 shares of Baker Corporation stock for $1,000. On September 3, 2006, you sold short 100 shares of similar Baker stock for $1,600. You made no other transactions involving Baker stock for the rest of 2006 and the first 30 days of 2007. Your short sale is treated as a constructive sale of an appreciated financial position because a sale of your Baker stock on the date of the short sale would have resulted in a gain. You recognize a $600 short-term capital gain from the constructive sale and your new holding period in the Baker stock begins on September 3.
Short-Term or Long-Term Capital Gain or Loss
As a general rule, you determine whether you have short-term or long-term capital gain or loss on a short sale by the amount of time you actually hold the property eventually delivered to the lender to close the short sale.
Example.
Even though you do not own any stock of the Ace Corporation, you contract to sell 100 shares of it, which you borrow from your broker. After 13 months, when the price of the stock has risen, you buy 100 shares of Ace Corporation stock and immediately deliver them to your broker to close out the short sale. Your loss is a short-term capital loss because your holding period for the delivered property is less than 1 day.
Special rules. Special rules may apply to gains and losses from short sales of stocks, securities, and commodity and securities futures (other than certain straddles) if you held or acquired property substantially identical to property that sold short. But if the amount of property you sold short is more than the amount of that substantially identical property, the special rules do not apply to the gain or loss on the excess.
So is there a bigger fish out there? Who's next is more interesting to me than the post mortem here.
Back reading here again. There are no bullish blogs out there I found worth reading. They're all trying to sell something.
Chapter 11. 3200 employees reduced.
Where's the contrarian guy, who a month ago decided buying NEW at $15 was a wise idea, against the prevailing wisdom of the voices here?
the CDO engine has stopped:
Subprime Mortgage Bond Sales Plunge in First Quarter (Update1) - Bloomberg.com
As NovaStar fights that courtroom battle, it has become Exhibit A for anyone interested in understanding how loose the lending was among some upstart mortgage companies in the great real estate run-up of this decade. The companys troubles also reveal how willingly investors, regulators and much of Wall Street overlooked mortgage companies questionable practices.
Because NovaStar is not a bank, its operations are not closely monitored by federal and state regulators. That relative lack of regulatory oversight over home mortgage lenders was the subject of heated hearings in the House and the Senate in the last two weeks. Regulators were supposed to be the cops on the beat, protecting hard-working Americans from unscrupulous financial actors, Senator Christopher J. Dodd, the Connecticut Democrat who is chairman of the Senate Banking committee, said last week. Yet they were spectators for far too long.
NYT
The U.S. economy has been held up for the last half decade only by the housing and consumption bubbles caused by cheap money. Much of its healthy capitalist tissue has rotted internally, and been replaced by corrupt politically-determined rent-seeking. Only when the cheap money finally disappears, and recession occurs, will we be able to tell the full damage caused by the Enronization of America.
he Enronization of America
Next up with be the "Blue chip" banks that will have to write-off Alt-A loans or take losses on holdings of mortgage securities (just think what profits will look like if a bank with an ROA of 1.5% reports 0.25% of its risky investment assets going to zero). This is all going to get very messy and makes the S&P appear to be at nose bleed levels given just how much of the index's total net profit amount comes from financials.
This market just doesn't want to crack....even after the ISM figure today. Very frustrating.
Please relax about the market. Last time, in 2000, it took 2 years from top to bottom. We topped just a month ago. 23 month to reach the bottom are in front of us.
Either Full Spectrum Lending, or Wells-Fargo will be the next.
CR,
I suspect this will be of interest to many here:
Who's winning, and who will lose in subprime shakeout - MarketWatch
Here's an excerpt:
Tranquility Fund, run by Saye Capital, a Los Angeles-based firm that's active in the subprime market, lost roughly 8% in February, according to two hedge fund investors who declined to be identified.
Tranquility invested in MBS, but also took short positions on mezzanine tranches of CDOs as a hedge, according to Luke Imperatore, who helps market the fund.
The value of the MBS positions declined, while the mezzanine CDO tranches have yet to reflect the deterioration in the subprime market, he explained.
Greg Miller, a portfolio manager at Saye, declined to comment. It's not clear how well Tranquility did in March, but the fund's fortunes may improve.
Christopher Flanagan, head of global structured finance research at J.P. Morgan Chase, said a lot of hedge funds have been trading different parts of the CDO capital structure.
A common trade is to buy the lowest-rated equity tranche of CDOs and short the slightly higher rated mezzanine part. While the equity tranches are the riskiest, the interest rate they pay is very high and cash flows into these slices are quick, Flanagan explained.
Investors in mezzanine tranches of CDOs have to wait longer for their cash. If there are problems with the underlying collateral, by the time the deal is wound up, there may be little cash left for these parts of the security, he said.
"Equity CDO owners could get hurt, but it's the mezzanine tranches that will be really hurt," he predicted.
I think the market will tend to stay up as all that sloshy liquidity looks for someplace new to slosh into.
Ben, I still haven't seen my helicopter here - where IS it?
Ben, I still haven't seen my helicopter here - where IS it?
Ben has a new stealth helicopter cloaked in inflation-fighting rhetoric.
It's going to swoop in for the killing blow before anybody realizes what's happening.
Can you say "negative nominal interest rates"?
This is the key for me consumer spending
WSJ article here: WSJ Error Page - WSJ.com
Subprime Pullback May Crimp Consumer Spending
By CONOR DOUGHERTY, MIKE SPECTOR and ANA CAMPOY
April 2, 2007; Page A2
With subprime mortgage lenders pulling back, some working-class Americans are already finding it harder to buy a new home or refinance the one they already own. The big question now for the nation's economy: Will it also get harder for these consumers to buy cars, shop at the mall and dine out?
We have yet to see what effect this will have, but negative savings is at 24 months and counting
Of course...you have already pointed this out CR.
Also, reading Milton Friedman over the weekend...interesting to note that you used the helicopter metaphor in the late 60s.
Best regards,
Southstar, another subprime lender just ceased operations today. I received an email from our rep, which I posted on my blog.
Morga
Good to see such a stinko oganization go bellyup. Giving loans to folks who cannot pay back a loan is just wrong and misleading.
Can't wait for this ponzi credit spigot is turned off once and for all. get back to rational sane lending whereby savings and a down payment mean something.
How big this SouthStar was? It seems both brokers and builders are tanking today. It could be on New Century, but I doubt, as NEW was done a while ago.
So Southstar could be important?
I don't know.. Countrywide would seem to be the next one. The CEO is trying to bail out in the next year, and the insider selling is frenetic. My bold prediction is that something is rotten in the nation of Countrywide. Nobody gained more off of this ride of the bull, and nobody will lose more when that ride ends.
What happens to a loan if the underwriter goes underwater?
I have mortgage with IndyMac. They are on the short list of companies next to falter.
What would happen to my loan?
It's about time.
BTW what happens if you haven't covered your shorts when a company goes BK?
What would happen to my loan?
You don't have to pay it back, you get to have your house for free...
jb
Southstar memo to employees:
Dear Employees:
It is with great regret and sadness that I must announce that SouthStar is ceasing its mortgage lending operations today, April 2, 2007. We are canceling any pending closings and will not close or fund any new loans going forward. All pending loan files will be returned immediately to our customers.
This decision was brought upon by events that developed toward the end of last week. Two of the primary purchasers of our loans refused to fund pools that were already locked and committed until we reimbursed them up front for all of our existing repurchase obligations something that we were financially unable to do. Another purchaser only bought a portion of loans that they had previously committed to, kicking out a significant portion of loans for various reasons unrelated to underwriting guidelines. We rely on the cash from the sale of these pools to fund our operations. Without the funds from the sale of these loans, we are approaching an insolvency situation. We identified two potential buyers of our company that would have allowed us to continue operating but were notified on Friday and Sunday respectively that this would not be a viable option. This leaves us no choice but to cease operations.
Our first priority is to protect employee compensation: salaries, bonuses, commissions and severance pay. At this point, we cannot guarantee that we will be able to do this but we will make every effort humanly possible.
Senior Managers will be meeting with everyone within the next hour to formulate a plan for the remainder of today.
It is an extremely difficult thing to see a company that you have put in so much effort, time, blood, sweat and tears fail. Personally, it feels to me like the loss of a loved one. The most difficult thing to handle is having to say goodbye to so many wonderful friends and extended family. Mike, Brian and I appreciate everything that you all have done for this company and want to sincerely thank you for your efforts. We should all be very proud of what we accomplished over the years and todays events cannot diminish that.
It has been an honor to work with each of you. I wouldnt have changed anything for the world.
Kirk Smith
President
SouthStar Funding
othing changes if you are short and it goes into bk, stock continues to trade until common is cancelled.
"what happens if you haven't covered your shorts when a company goes BK?"
Congratulations are in order. That's exactly what every short seller wishes will happen and rarely does. So... Before or after you celebrate with the most expensive bottle of your chosing? Normally, the common shares quickly get wiped out and you get to subtract 0 from the short sale entry price.
ac,
Congrats!
Don't cover and you won't have to pay any cap gains!
Wait, bubbles, how does that work? I only once had a short to BK and I would remember not paying gains. I must have done something wrong. The money showed up in my account and the position was closed as I recall.
Wait, bubbles, how does that work? I only once had a short to BK and I would remember not paying gains. I must have done something wrong. The money showed up in my account and the position was closed as I recall.
I think Snoop Dogg might say something like "Who's subprime now, bitch?!"
Crispy...just imagine the hellhole that office is going to be when a giant bunch of employees who are neck deep in RE debt find out that the last paycheck they already spent isnt even going to get direct deposited into their acct. Just add them to the NOD list.
Don't cover and you won't have to pay any cap gains!
Not quite. You have to report the income on the sale. It may no longer be offset by cost of goods sold other than the transaction cost itself.
I'm not sure if profits from short sales are ever eligible for capital gains treatment. Does somebody know?
to the guy who asked what happens to his mortgage when the company goes bk. Your loan is sold in a pool of assets sometimes as great as 1 billion dollars to the highest bidder (800 million). once in a blue moon they will auction each loan seperately at a public auction and you could show up and bid on your loan. Public auction is highly unlikely unless we were to go into a depression.
regarding Southstar's size, website pegs wholesale loan production at $6.3 billion in 2006:
southstar.com
From Bloomberg. M&T Bank Corp. said low bids for the Alt-A mortgages it planned to sell will cut first-quarter profit by $7 million. Lenders this month have found demand falling for riskier mortgages even apart from so-called subprime ones.
A unit of Cleveland-based National City Corp. that makes home equity loans through brokers today undid much of a loosening of guidelines it introduced only Feb. 28, rolling back standards further in some ways, as a result of demand from loan buyers evaporating quickly, according to an announcement obtained by Bloomberg.
Unfavorable market conditions and lack of market liquidity impacted M&Ts willingness to sell Alt-A loans in the first quarter, the company said in the statement.
Short sales are usually treated as capital gains (or losses); holding period is similar to longs except between the time of sale and closing (or asset declared worthless) rather than the time between acquisition and sale.
According to IRS Publication 550: "You do not realize gain or loss until delivery of property to close the short sale. You will have a capital gain or loss if the property used to close the short sale is a capital asset.
Exception if property becomes worthless. A different rule applies if the property sold short becomes substantially worthless. In that case, you must recognize gain as if the short sale were closed when the property became substantially worthless."
There is an exception for constructive sales in the code but that can get a bit more complicated.
Regardless, if you made a profit, you owe tax (surprise, surprise).
Where's the contrarian guy, who a month ago decided buying NEW at $15 was a wise idea, against the prevailing wisdom of the voices here?
Depending on how many shares he bought, he's either (listed in increasing order):
Geoff, I can't resist here...from your hellhole reference:
I rode the jetstream, I hit the top
I'm eating steak and lobster tails
The sauna's drafty, the pools too hot
The kitchen stinks of boiling snails.
The taxman's coming, the butler quit
This ain't no way to be a man
I'm going back to where I started
I'm flashing back into my pan.
It's better in a hell hole
You know where you stand in a hell hole
Folks lend a hand in a hell hole
Girl get me back to my hell hole.
Breaking news
Thornton Resigns as Auditor of Fremont, Accredited (Update3)
Thornton Resigns as Auditor of Fremont, Accredited (Update3) - Bloomberg.com
I've always thought of short selling gains as being taxed at the short term tax rate, irrespective of how long you held the short... I just pay up ( cancel out against losses too !
) and be done with it The reality seems to be more complicated. If you can make sense of the irs stuff below, have at it:
Publication 550 (2008), Investment Income and Expenses
Example.
On May 3, 2006, you bought 100 shares of Baker Corporation stock for $1,000. On September 3, 2006, you sold short 100 shares of similar Baker stock for $1,600. You made no other transactions involving Baker stock for the rest of 2006 and the first 30 days of 2007. Your short sale is treated as a constructive sale of an appreciated financial position because a sale of your Baker stock on the date of the short sale would have resulted in a gain. You recognize a $600 short-term capital gain from the constructive sale and your new holding period in the Baker stock begins on September 3.
Short-Term or Long-Term Capital Gain or Loss
As a general rule, you determine whether you have short-term or long-term capital gain or loss on a short sale by the amount of time you actually hold the property eventually delivered to the lender to close the short sale.
Example.
Even though you do not own any stock of the Ace Corporation, you contract to sell 100 shares of it, which you borrow from your broker. After 13 months, when the price of the stock has risen, you buy 100 shares of Ace Corporation stock and immediately deliver them to your broker to close out the short sale. Your loss is a short-term capital loss because your holding period for the delivered property is less than 1 day.
Special rules. Special rules may apply to gains and losses from short sales of stocks, securities, and commodity and securities futures (other than certain straddles) if you held or acquired property substantially identical to property that sold short. But if the amount of property you sold short is more than the amount of that substantially identical property, the special rules do not apply to the gain or loss on the excess.
-K