I wish I had a link to 58 page report: I'd post it and make you all figure out what these guys are up to.
Sadly, it's a research report I got via email.
My first reading of it seems to suggest that Citi did a bunch of high-powered analytics and discovered that loans with high CLTVs and low FICOs suck more than others, and that refi opportunities are going away for those loans, and that just about any book of Alt-A will stink if HPA slows down appreciably.
So I concluded that I must be misreading all these forkin' charts and ramps and vectors and factors, because those conclusions are CAPTAIN OBVIOUS MATERIAL.
There was an interesting quote in the WSJ concerning Countrywide's pay option ARM delinquencies "up to 5.7% from 1.6% a year earlier." An increase of over 350% It does not bode well.
I wasn't surprised by CFC's "prime" problem. I was stunned by how it could have been trivial last quarter and MAYDAY MAYDAY this quarter. Either all those "prime" seconds decided to fall off a cliff at once, or somebody just found the line of bad code in the model that values those residuals . . .
well i doubt all the loans went bad at once. i suspect they just changed their loss assumptions en masse. did u hear Mozilo? Nobody in the entire market expected these loans to go bad. they weren't relying on HPA to make the loans, that's not their business....SATO at CFC very low...
"Nobody in the entire market expected these loans to go bad."
Well, I wasn't expecting to go grey either, but when I did, I didn't slap Grecian Formula on to hide it.
July 25 (Bloomberg) -- Home resales in the U.S. fell for a fourth straight month in June, a sign housing remained mired in the worst slump in 16 years going into the second half.
Purchases last month declined 3.8 percent to an annual rate of 5.75 million, the slowest pace since November 2002, from a revised 5.98 million in May that was less than initially reported, the National Association of Realtors said today in Washington.
Rising borrowing costs are discouraging buyers, leaving a glut of unsold homes on the market and dimming prospects for a quick recovery in housing. Federal Reserve policy makers last week trimmed their economic growth forecast amid persistent weakness in home building.
Higher mortgage rates, tighter lending standards and the absence of home price appreciation have dampened the demand for housing,'' Steven Wood, president of Insight Economics LLC in Danville, California, said before the report.Many buyers have become quite patient, waiting for lower prices.''
Resales were forecast to fall 2.1 percent to a 5.86 million annual rate from a previously reported 5.99 million in May, according to the median estimate of 73 economists in a Bloomberg News survey. Estimates ranged from 5.45 million to 6.12 million.
Sales last month were down 11.4 percent from a year earlier.
Homes for Sale
The supply of homes for sale fell 4.2 percent to 4.2 million, the first decline in inventories this year. At the current sales pace, that represented 8.8 months' worth, the same as at the end of the prior month.
The median price of an existing home rose 0.3 percent last month from a year ago to $230,100, the first increase from year- earlier levels in 11 months, the Realtors group said.
Yesterday Countrywide Financial Corp., the biggest U.S. mortgage lender, cut its profit forecast as a growing number of homeowners fell behind on home-equity loan payments. Chief Executive Officer Angelo Mozilo told investors on a conference call that he expects ``difficult housing and mortgage market conditions to persist'' through the end of the year.
Resales of single-family homes fell 3.5 percent to an annual rate of 5.01 million. Sales of condos and co-ops fell 6.3 percent to a 740,000 rate.
Regional Breakdown
Purchases fell 7.3 percent in the Northeast, 6.8 percent in the West, 2.8 percent in the Midwest and 1.7 percent in the South.
The government is scheduled to report tomorrow on new-home sales. The Commerce Department report may show a 2.7 percent decline for June, according to the median forecast in a Bloomberg survey.
Monthly figures on home resales are compiled from contract closings and may reflect sales agreed upon weeks or months earlier, while new-home sales are recorded when a contract is signed. Sales of existing homes account for about 85 percent of the U.S. housing market, and new-home sales make up the
Snap TIO auction at Treasury for $9 billion, announced and awarded on the same day yesterday - any bets on the auction for another $7 billion announced this morning being awarded this afternoon?
In a healthy liquid market, mispricing of an asset produces an easy arbitrage, and a return to healthy price demand equilibrium can occur. There is an opportunity if you see it.
In the mortgage equity markets though, people only seem to short home builders or maybe venture in the ABX markets to profit from the understanding that the markets are out of whack. Mostly everyone just rubbernecks. There don't seem to be market incentives to prevent the pressure from building and building.
Any ideas? If the mortgage equity markets have mispriced the risk, where is the arbitrage?
While those of us who have been following this story for a long time should not be surprised, I find no joy in watching this thing unfold as I expected.
given the action in the high yield space over the last 3 weeks, it would be surprising if there were not a lot of withdrawels from funds that dabbled in this area come the next exit point, which would be end july for those lucky enough to have monthly liquidity. should this come to pass one would suspect that the next few days are not going to be pretty for spreads.
Mozillo is either disingenous or not thinking deeply enough when he says that HPA was not assumed: it was assumed that losses would correspond with historical loss experiences for given loan types/ ficos/ down payments, but since housing has only gone up since the Great Depression, HPA was present in all historical loss data used. It takes a heavy dose of common sense to see that without HPA, all of those expensive models relying on historical data are relatively worthless. For those of us with foresight (apparently not Mozillo or anyone in the mortgage industry) it was obvious several years ago that with a huge disconnect between HPs and incomes, future HPA was called into question and HPD became reasonably possible/likely to occur.
wetzel asks a good question and I have no answer other than, possibly, pricing uncertainties are relatively high in the mortgage equity space for effective arbitrage or at least too high WRT the financial instruments available. That's a sufficiently lame response that I hope someone can do a lot better.
Any idea why inventories are down this month? And how long until some NAR shill is rolled out to proclaim this represents a "bottom" to the market?
I love how they are waiting for the housing market to "recover" where "recover" means: prices to continue to climb so nobody can actually afford to buy a house, much less live in one that they own for any length of time. Amazing how manipulating the language produces strange new "realities" for people! You know, gas prices have dropped lately - how long until they "recover" to higher prices?
From my perspective what appears to be happening in Alt A is that people who are getting in trouble with mortgage payments can not use subprime any longer to bail themselves out of trouble. Now these bad loans which would normally move to Sub Prime are being stuck in Alt-A.
I believe this will continue up the mortgage credit grades as conforming loans will end up getting stuck in MBS pools when Alt A guidelines tighten.
This puts MI companies at greater risk as they will be on the hook for more losses then what they expected as losses mount on Conforming MBS pools.
This also will put more pressure on Conforming Loan MBS pricing as we move forward.
It seems that Freddie and FNMA will be also be impacted as we work throught this process.
good heavens! i thought Alt-A was much higher quality than subprime! Damn u citi, you've destroyed my childlike innocence!
Link to 58 page Rahul Parulekar report ?
Subprime is dead...long live Alt A
I wish I had a link to 58 page report: I'd post it and make you all figure out what these guys are up to.
Sadly, it's a research report I got via email.
My first reading of it seems to suggest that Citi did a bunch of high-powered analytics and discovered that loans with high CLTVs and low FICOs suck more than others, and that refi opportunities are going away for those loans, and that just about any book of Alt-A will stink if HPA slows down appreciably.
So I concluded that I must be misreading all these forkin' charts and ramps and vectors and factors, because those conclusions are CAPTAIN OBVIOUS MATERIAL.
do i still get to say i'm stunned when the downgrades happen?
It depends on what your SATO (Stunned At Origination) was. Apparently low SATO correlates with high SATD (Stunned at Downgrade).
those conclusions are CAPTAIN OBVIOUS MATERIAL.
and yet we were surprised by CFC's 'prime' problem???
There was an interesting quote in the WSJ concerning Countrywide's pay option ARM delinquencies "up to 5.7% from 1.6% a year earlier." An increase of over 350% It does not bode well.
I wasn't surprised by CFC's "prime" problem. I was stunned by how it could have been trivial last quarter and MAYDAY MAYDAY this quarter. Either all those "prime" seconds decided to fall off a cliff at once, or somebody just found the line of bad code in the model that values those residuals . . .
well i doubt all the loans went bad at once. i suspect they just changed their loss assumptions en masse. did u hear Mozilo? Nobody in the entire market expected these loans to go bad. they weren't relying on HPA to make the loans, that's not their business....SATO at CFC very low...
I don't know what you people are talking about, haven't you heard that it's contained. Fed president's Plosser and Poole done told me so.
But then, they may have been referring to their absorbent undergarments.
Slightly OT (as usual). The MSM is finally starting to get it about Rule 140.
"Subprime Mess Fueled by Crack Cocaine Accounting", by Jonathan Weil, Bloomberg, July 25, 2007.
"Nobody in the entire market expected these loans to go bad."
Well, I wasn't expecting to go grey either, but when I did, I didn't slap Grecian Formula on to hide it.
Just another report that confirms the problem of high CLTV and low/no doc loans.
"Nobody in the entire market expected these loans to go bad."
Well, there's a commentary. They still think those shark fins are a submerged '58 DeSoto.
Home Resales in U.S. Fall 3.8% to 5.75 Million Rate (Update1) - Bloomberg.com
July 25 (Bloomberg) -- Home resales in the U.S. fell for a fourth straight month in June, a sign housing remained mired in the worst slump in 16 years going into the second half.
Purchases last month declined 3.8 percent to an annual rate of 5.75 million, the slowest pace since November 2002, from a revised 5.98 million in May that was less than initially reported, the National Association of Realtors said today in Washington.
Rising borrowing costs are discouraging buyers, leaving a glut of unsold homes on the market and dimming prospects for a quick recovery in housing. Federal Reserve policy makers last week trimmed their economic growth forecast amid persistent weakness in home building.
Higher mortgage rates, tighter lending standards and the absence of home price appreciation have dampened the demand for housing,'' Steven Wood, president of Insight Economics LLC in Danville, California, said before the report.Many buyers have become quite patient, waiting for lower prices.''
Resales were forecast to fall 2.1 percent to a 5.86 million annual rate from a previously reported 5.99 million in May, according to the median estimate of 73 economists in a Bloomberg News survey. Estimates ranged from 5.45 million to 6.12 million.
Sales last month were down 11.4 percent from a year earlier.
Homes for Sale
The supply of homes for sale fell 4.2 percent to 4.2 million, the first decline in inventories this year. At the current sales pace, that represented 8.8 months' worth, the same as at the end of the prior month.
The median price of an existing home rose 0.3 percent last month from a year ago to $230,100, the first increase from year- earlier levels in 11 months, the Realtors group said.
Yesterday Countrywide Financial Corp., the biggest U.S. mortgage lender, cut its profit forecast as a growing number of homeowners fell behind on home-equity loan payments. Chief Executive Officer Angelo Mozilo told investors on a conference call that he expects ``difficult housing and mortgage market conditions to persist'' through the end of the year.
Resales of single-family homes fell 3.5 percent to an annual rate of 5.01 million. Sales of condos and co-ops fell 6.3 percent to a 740,000 rate.
Regional Breakdown
Purchases fell 7.3 percent in the Northeast, 6.8 percent in the West, 2.8 percent in the Midwest and 1.7 percent in the South.
The government is scheduled to report tomorrow on new-home sales. The Commerce Department report may show a 2.7 percent decline for June, according to the median forecast in a Bloomberg survey.
Monthly figures on home resales are compiled from contract closings and may reflect sales agreed upon weeks or months earlier, while new-home sales are recorded when a contract is signed. Sales of existing homes account for about 85 percent of the U.S. housing market, and new-home sales make up the
So all these models were based on the idea that 'real estate always goes up'? That's almost as funny as "First, assume a can opener."
Snap TIO auction at Treasury for $9 billion, announced and awarded on the same day yesterday - any bets on the auction for another $7 billion announced this morning being awarded this afternoon?
EHS inventory dropped 182k even though NSA sales were only 30k more than last month.... I bet that gets revised up next month.
What is this "Alt-A" of which you speak?
The problem is contained to the non-prime arena.
In a healthy liquid market, mispricing of an asset produces an easy arbitrage, and a return to healthy price demand equilibrium can occur. There is an opportunity if you see it.
In the mortgage equity markets though, people only seem to short home builders or maybe venture in the ABX markets to profit from the understanding that the markets are out of whack. Mostly everyone just rubbernecks. There don't seem to be market incentives to prevent the pressure from building and building.
Any ideas? If the mortgage equity markets have mispriced the risk, where is the arbitrage?
Reported on CNBC "Cerberus Withdrawing Financing Deal for Automotive Portion of Chrysler Buyout"
I think most saw this coming
In the meantime, the S.F. Chron reports that foreclosures in the BA have "skyrocketed"
Foreclosures go through the roof
While those of us who have been following this story for a long time should not be surprised, I find no joy in watching this thing unfold as I expected.
given the action in the high yield space over the last 3 weeks, it would be surprising if there were not a lot of withdrawels from funds that dabbled in this area come the next exit point, which would be end july for those lucky enough to have monthly liquidity. should this come to pass one would suspect that the next few days are not going to be pretty for spreads.
Mozillo is either disingenous or not thinking deeply enough when he says that HPA was not assumed: it was assumed that losses would correspond with historical loss experiences for given loan types/ ficos/ down payments, but since housing has only gone up since the Great Depression, HPA was present in all historical loss data used. It takes a heavy dose of common sense to see that without HPA, all of those expensive models relying on historical data are relatively worthless. For those of us with foresight (apparently not Mozillo or anyone in the mortgage industry) it was obvious several years ago that with a huge disconnect between HPs and incomes, future HPA was called into question and HPD became reasonably possible/likely to occur.
wetzel asks a good question and I have no answer other than, possibly, pricing uncertainties are relatively high in the mortgage equity space for effective arbitrage or at least too high WRT the financial instruments available. That's a sufficiently lame response that I hope someone can do a lot better.
Interesting:
From my perspective what appears to be happening in Alt A is that people who are getting in trouble with mortgage payments can not use subprime any longer to bail themselves out of trouble. Now these bad loans which would normally move to Sub Prime are being stuck in Alt-A.
I believe this will continue up the mortgage credit grades as conforming loans will end up getting stuck in MBS pools when Alt A guidelines tighten.
This puts MI companies at greater risk as they will be on the hook for more losses then what they expected as losses mount on Conforming MBS pools.
This also will put more pressure on Conforming Loan MBS pricing as we move forward.
It seems that Freddie and FNMA will be also be impacted as we work throught this process.
We all knew the REO and the NegAm loans (many in Alt A) would start to get booked at some point. Perhaps we are seeing that start to trickle in.
Floodgate will open sooner or later.
Considering the publics debt positions then it makes a lot of the prime into crap too.
The inventory + credit shocks + REO will lead to more REO.
Got a lond long way to go here. At least 4 more years.
Laurie Goodman (UBS) says "their competitor" is "behaving badly" by making those comments. Go get 'em Laurie, I say. I have ALT A loans to sell...