Now we have a bank admitting that a shadow inventory of foreclosed housing exists, and a severe overhang on the former bubble markets will cause even more price declines.
Um, well. There is no need for further analysis.
The analyst was digging for positive spin, and was met with utter clarity and bad news.
Not good.
I wonder how the analyst was evaluating their exposure to any positive housing outlooks after that conference call.
Reality bites, hard.
Buckle up and get ready, cause the roller coaster is picking up speed.
What I don't know and I guess we're just learning over time is whether the same sort of behavioral trends and patterns will spread to other markets or be observed in other markets at the same pace that they have been in California.
At least he doesnt declare it "contained"....
This is going to keep spreading across everything if more and more people decide to foreclose...
"Now we have a bank admitting that a shadow inventory of foreclosed housing exists, and a severe overhang on the former bubble markets will cause even more price declines."
Sounds like these execs have finally started reading Calculated Risk -- better late than never!
Is that the same Cramer who was touting REIT's a week ago?
Well, he's loud so he must be right.
Here is what I'd like to see. An analysis of Time in Home before Negative Equity vs Likely to Walk. I've lived in my current house for years. Its pretty unique and I've grown to like it and its been a hell of an ATM. If I somehow get upside down in the next few years I'll ride it out. We plan to live here for quite some time. but if i had just gotten into a no money down, molding starts peeling off the baseboard 3 months after I moved in McMansion and was upside down after 1-2 years...I'd walk just because i realized how shitty the construction was. And so, they walk. My house was built 60 years before the great depression. It tells me not to worry, we've been here before.
The talking feds and heads seem to be coming around to reality these days. I"m sure its just some weather related blip that will sort itself out.
As long as foreclosures flood the market, prices will keep going down. Demand won't keep up for quite awhile. Motivated sellers (banks) will crush the value of homes for retiring boomers, many who depend on those values. They will be sore losers. I imagine people at the country club are going to be as angry as the boys at the corner bar. Don't trust anyone over 60.
it's almost regardless of how they scored, say, on FICO or other kinds of character, credit characteristics.
What does the prospectus say? "You should not assume that the information in this prospectus or any document incorporated by reference is truthful or complete at any date other than the date mentioned on the cover page of these documents."
Peter Piper picked a peck of pick-a-payments
A peck of pick-a-payments Peter Piper picked
If Wachovia picked a peck of Pick-a-payments
Where's the peck of pick-a-payments Golden West
Financial picked?
At least borrowers that know they are underwater have the correct idea to walk away. Check out this poor guy that has savings confused with not paying for things (from CNN's show Issue #1 today):
'Mark has a question. He asks, "I recently saved up about $20,000." That's good news. "Unfortunately, I have a little over $14,000 in credit card and medical debt. Eight of the accounts are in collections. Three are supposed to fall off my credit report by January 2009. Should I take my savings and pay off the collection accounts or continue to keep it in a savings account?"'
It isn't even LTV anymore. It isn't even CLTV. It isn't even anticipated future after tax valuation.
People don't get it. There is an entire generation exposed to nothing except appreciation in excess of inflation. We are paying for Herr Volker's necessary actions. This is what, some 25 years later? We are also paying for Herr Grenespan's actions some dozen years later and are also now paying for Herr Bernanke's errors in real time.
12th Percentile writes:
Is that the same Cramer who was touting REIT's a week ago?
There was something in the Sunday Times a few weeks ago advising keeping some REITs in your portfolio. How can people be so stupid? What American with enough money to invest doesn't have PLENTY of exposure to real estate?
I sold off some of my SRS at 120 and bought in again at 90.
What percentage of loans over the last 2 or so years were 100% financing? Either 100% on a first, or some type of combo (80/20, 90/10). Where I live, I imagine it was well over 50%. It was what everyone wanted.
Does anybody have these figures?
Not to mention all the properties purchased FHA with 3% down which are already under water. Even the conventional 5% downs and in some areas the 10% downs are already under.
How about the equity lines drawn to 100% within the last few years (when it was allowed)?
It seems by all indications that the sentiment changes at 0 to negative equity. And it doesn't have much to do with Fico scores. So the people how are barely positive today will probably be negative by summertime. And the forecast is for another 10% drop from here. That means it will actually be 20 to 30%. Please save us Ben!
The thing that is amazing to me is that World (Wachovia) is still making NINJA pick-a-pay loans. I know someone who had already ATM-refied three times in successive years with them and had been approved for yet another one a month ago subject to appraisal. And, there was the rub. Turns out the only sales in the neighborhood in the last 8 months were two short sales. But, Wachovia was still making these toxic loans with a 1.75% teaser.
Go ahead. I know two farmers that would rather mow/plow crops than sell at a loss. Yes,there are lots of guys that will do this. But it will get really bad in the second year. I know that NOBODY will put anything in the ground if they can't make money...
Then wait to see how the folling years harvest looks.
even without the 'emphasis added' anyone with more than two brain cells should be able to see that the tsunami is building and will break at the shoreline this summer and fall
I, for one, am preparing to swim
in lieu of that I have stocked up on alcohol, ammo, food and water
It's been a lovely fucking recovery, deliver all final fire on my pos
Bob I think it depends on which side of the table you were on
nades
Yeah, it reminds of the guy who sold about.com just after the peak of the dot-com bubble (his buyers were even dumber.) He had to take stock in the buyer (PrimeMedia), but he worked the deal so that if their stock declined, he got proportionately more shares...
I always had to admire that guy. Hated his Web site, but damn, he knew how to make a sale.
I wonder how much of this has to do with negative equity and how much has to do with negative equity and nothing down...
Has anyone seen anything that splits the two.
My intuition would tell me that the person who put zero down and is down 10% is way more likely to walk than the person who put 10% down and is now negative 10%. I think people feel that if they put money in on the buy they can eventually get it back if they wait this out...
When they bought Golden West, they made a big deal about how sound the lending was, and I believe the average LTV was less than 70%, and I don't think they made any no doc, or even low doc, loans.
A severe, unforseen change in the slope of the downturn in the second half of March. I trust Jeff Immelt. Something(s) changed. I wish I had some idea what.
So now we know we have a non-linear default function as mortgages approach 100% LTV. The government is here to help by guaranteeing 97% LTV mortgages that, at last quarter's rate of depreciation will be under water in about three months time. Compared to this, bridges to nowhere and ethanol subsidies are starting to look pretty good. Get out your checkbooks Mr and Ms taxpayer, this is going to get expensive.
They entered the quarter with ~600 REO (my derived number), took back 1100 (quoted), sold 800 (quoted) and ended the quarter with 900 REO (quoted).
The implication is that they ended the quarter with 50% more than they started with. Not good, but not so bad compared with the number they moved. Should this repeat in the next quarter, they may end up with 1300-1400 REO (swag).
It's more than just negative equity. It is also the relationship of market rental prices to what people are paying in PITI i.e. their mortgage payment.
If these guys are really that dumb, they shouldn't be bankers.
In an economy where the rents were nearer to the mtg payments some of these unfortunate borrowers (by whose hand is irrelevant for this exercise) are dealing with, the default rates would be much lower.
Since when does it take a rocket scientist or a fancy computer program to figure this one out?
Borrower is thinking:
Gee??? I got burned when I bought the house and now I'm paying double to own this piece of crap for what it would cost to rent a house just like the one I am getting so screwed on... Gee I think I will go rent and tell the lender to take this house and shove it up their....
Borrower thinking if rents weren't so low in comparison:
Gee??? If I gotta move and mess up my credit just to save a few hundred a month??? I don't know...??? Uh... if I screw up my credit and have to move... Maybe I should just stay put and pay...??? The kids will have to go to a new school... The wife will be pissed.. A few hundred a month though... Nah... I don't think it is worth it. I guess I'll even mow the lawn today... "Honey!!! Pick up some beer at the store will you? Not the expensive import but the cheaper domestic brand will be fine."
Tell those geniuses to plug the rent vs ownership cost analysis into the artificial intelligence computer model to get accurate readings of borrower risk behavior.
What is shocking is that these clowns find it to be so shocking. But I guess so high up in the ivory towers of this top heavy industry, nobody knew because a silly thing like what market rents might be in a particular locality are poor people's concerns...
I've heard that one of the rules of banking is to know your customers. These guys broke that rule and many others as well.
I eagerly await their demise so that others who can and will do better replace them.
Hey all those foreclosure figures is pretty good. Except they left out the part where a whole bunch of folks are sitting on their houses because listing them is a lost cause.
These Waco guys are thinking there's only foreclosures out there, forgetting the whole rest of the market blocked up behind the logjam. Sooner or later the dam will break, either because people can't wait any longer, or they join the 'walkaway' generation.
For a few years now many REITs have been borrowing just to pay a dividend...
chuckle, chuckle, chuckle.
As I've said before, I worked as a real estate appraiser right out of college handling a lot of big office and commercial buildings in the DC area after that had crashed in the late eighties. I didn't make much money, but i got to learn about people who borrowed a lot and lost more. My family weren't business savvy before my generation in any way. Prior to this job, I just thought rich people must be smart. I was very surprised to be sitting at a table talking to some guy about his strip mall that was in foreclosure that I was trying to appraise and the $20 million he owed on it and realizing that someone had loaned that money to this drooling idiot in a hawaiian shirt unbuttoned with his gut hanging out. It was a good lesson. At that point I decided at some point i was going to get someone to loan me twenty million. If this guy could do it, I should be able to get 200 million.
All conjecture of course...
nades | 04.14.08 - 7:46 pm | #
nades,
I was kinda thinking the same until yesterday. A post by a guy on a gunsite I frequent who was in Columbus mentioned he had put 10% down. He tried a sale at 145k. No go. 5 other FC's on his street. Most sold for 80k. He walked.
He claims to have a good enough job to make the payments but instead just walked. Ooops.
Oh,now that we had some rain I can identify 43 homes that are empty and not FC'd on my 2 mile trip to I75 in the am...
I checked earlier for your report on this call...the "ruthless" borrower topic.
I continue to maintain that a key variable to walking away is the negative equity amount. My speculation is that -$100K is a decisive point for most folks. Watch for the walk rate to increase significantly.
" . . .when a borrower crosses the 100% loan to value . . .their propensity to just default and stop paying their mortgage rises dramatically."
The borrower typically crossed that line twice: once on the day they bought with no money down, and once as they rode down the far side of the 2005 peak prices.
Nowdays, the first and second crossing points tend to be the same day, which explains what's changed.
For some, that means adding an extra cup of water to their soup, watering down their milk, or giving their children soda because it's cheaper than milk, DiChiara said.
Any parent that cannot afford milk then chooses to buy soda should be slapped very hard.
Although food prices have risen a lot, food is still cheap relative to the cost of most housing.
I need to research what percentage of income was spent on food and housing during the great depression and compare it to today.
I think it's likely that the percentage of income spent on housing will decline for many years, while the percentage spent on food continues to rise.
Can someone please explain what "shadow foreclosures" are?
I thought all non-performing assets had to show up on a bank's financial statements?
Jillayne | Homepage | 04.14.08 - 7:59 pm | #
I know what my definition is. They are the 43 homes between my place and I75 that are empty but the FC process hasn't even started yet...If you look through the counties records normally a NOD hasn't even been filed yet...
SweetHomeKilla writes:
From the Inflation Squeeze article barely posted-
For some, that means adding an extra cup of water to their soup, watering down their milk, or giving their children soda because it's cheaper than milk, DiChiara said.
Any parent that cannot afford milk then chooses to buy soda should be slapped very hard.
That's an unbelievable quote. Besides the idiocy of giving soda to a child in place of milk, even at $3.50/gal, milk is still cheaper than Coke, which runs around $1.99/6-pk (or $3.54/gal). Nice way to cut costs.
Frankly, I'm still in the "show me hard evidence of walk-away" camp. I like, on this thread, how everyone screams that dumb people believe everything they're told...of course that's ok when these guys say something you agree with when they have absolutely nothing but conjecture to back it up with.
Does it occur to anyone here that this is a great excuse to shift the blame to borrowers, not the fact that they made a crummy deal and had terrible underwriting standards? I beleive nothing they say, except the fact that they're reporting numbers. Their opinions i will take as being as good as their ability to do due dilligence on a bank they are acquiring.
Again, I maintain that if you're not selling and you can afford the payment, you're just going to sit still. That people do care about a wack to their credit, and the people doing this are not "walking away" but saying they are because they are in deep financial doo-doo. Of course, some will, but I will still maintain it's mostly bravado to cover up a bad decision.
I have it from a highly reliable and confidential source that Wachovia has a new division that will prevent this current finanical problem from ever happening again.
The division simply is called: OVERSEEING YIELDS or OY
Even Bernstein and Woodward do not know my source. Please, do not ask!
Columbus is getting that bad?
Joe Six Pack | 04.14.08 - 8:05 pm |
A guy I worked with bought a place in Reynoldsburg a couple of years ago. I want to say he paid 177k or so. He mentioned he isn't going to be able to take a promotion because all the homes selling are priced at 90-105k(and dropping).
I always thought Ohio should have been dropping some. Oh well,I am in bubble central,SW Florida now...
I'm with ipodius. Walking away just because you are upside down is like moving into an apartment then not paying the rent because there is nothing in it for you.
It's one thing if you can't afford the payments, but walking away is just dumb if you think of it as renting.
"Any parent that cannot afford milk then chooses to buy soda should be slapped very hard.
Although food prices have risen a lot, food is still cheap relative to the cost of most housing."
I worked in elementary schools for a while in a low-income district, relatively recently. It was not real uncommon for kids to breakfast on a wholesome bag of Flamin' Hot Cheetos before breakfast.
Why? Both parents worked long hours, were uneducated, and didn't understand basic nutrition. And no, they weren't all from other countries.
I later found out that the Hot Cheeto Breakfast Empire extended all across Central California. Ask a teacher. She'll know.
Frankly, I'm still in the "show me hard evidence of walk-away" camp.
But these are not some bitter (*) bloggers; these are the executives running Wachovia, for crying out loud. What possible motive could they have for overstating the "walk-away" problem? Do you think they want to write-down billions, cut their dividend, and be forced to recapitalize at $24/share? Why?
Wait a minute - I thought that's what pick-a-payment meant. You get to pick which payment you want to make. I guess these people just didn't see a payment they really felt like picking.
I mean, like, really. Isn't that all in the fine print?
Overstating the "walk away" problem is to their advantage since it insulates them from the charge that they made loans that they knew the borrower couldn't afford.
If it's all about negative equity then it's not about lax lending standards. OOPS.
We saw an article here from Denver, from SW Conn., and now from seacoast, NH about rentals soaring. It may be coming to an area near you before too long?
I always thought Ohio should have been dropping some. Oh well,I am in bubble central,SW Florida now...
Chris
Cobradriver | 04.14.08 - 8:10 pm
Chris, the house price in Ohio didn't go up very much. $50,000 house's from 1960 sold for $150,000 in 2005. Same scenario in Florida they sold for $200,000 in 2005.
BTW, are you in Cape Coral? I'm interested in buying a house there. Thoughts? Wait till the end of 2009?
Overstating the "walk away" problem is to their advantage since it insulates them from the charge that they made loans that they knew the borrower couldn't afford.
I suspect they care more about the bottom line than about appearances. Money talks...
From the article:
...what we are seeing is that when equity in the home approaches zero, behavior changes. And that's what the model tries to do is to then take that behavior along with house price depreciation and factor that into future losses.
In other words, they are cutting the dividend and raising capital NOW because they have updated their models to try to reflect reality, including the reality of people "walking away".
Nobody on that conference call gives a damn whose "fault" this is. What the analysts are asking is why Wachovia is doing such shareholder-unfriendly things as chopping the dividend and raising fresh capital at $24/share. And management's answer is that the new model says the old loans are garbage, because the new model incorporates the effect of "walk-aways".
Sounds like a real phenomenon to me. "Hard to quantify", but real.
I still can't figure out why the banks are referring to "ruthless borrowers" (whether it's true or not)? I mean, aren't they basically implanting the idea in everyone's head?
"Gee, I'm upside down and everyone else is bailing - maybe I should too?"
I mean, there are A LOT of people out there that are not smart enough to figure out that it's financial suicide to continue pay on a rapidly declining asset, especially when you have the ruthless put option.
I really don't know what they are complaining about. They collected 6 percent a year front loaded from people who are still sitting on nearly the full purchase price. The owners are looking at paying another 20 to 25 years on a house that is 20 percent less with no signs of ever recouping.
Nemo writes I suspect they care more about the bottom line than about appearances. Money talks...
You're probably right. I just hate moving and can't imagine doing it just because they are upside down. Where are they going? They have to live somewhere. Like I said, if they can't afford the payments then that can be the driver. I have a renters mentality so maybe I'm not getting it.
If you hate the place or think you are going to move anyway, then it might make sense to cut your losses today. You still have to live someplace so when you walk away you end up renting anyway. Why not rent and bet that in 5 or 10 years you'll not lose money.
NEW YORK (Reuters) - Delta Air Lines Inc and Northwest Airlines Corp said on Monday that they have agreed to merge in a deal that would create the world's largest airline.
Delta will acquire Northwest in an all-stock deal. Northwest shareholders will receive 1.25 Delta shares for each Northwest share they own.
The deal creates an airline that will be based in Atlanta and operate under Delta's flag, with over $35 billion in annual revenue and about 75,000 employees.
Delta Chief Executive Richard Anderson will lead the combined airline.
(Reporting by Kyle Peterson; Editing by Gary Hill)
for crying out loud. What possible motive could they have for overstating the "walk-away" problem?
As I said Nemo, because they'd have to like, you know, say "Hey, guess what? We bought that piece of *hit bank and did crappy due dilli on it. So we're cutting the dividend and diluting your shares. Ooops."
Now they get to say "blah blah blah, models, blah blah, and hey, you know, the models show that the behavior changed. You know, like, who'd a thunk that we'd loan these people money and they'd change their behaviors???. So, like, it's not our fault because we couldn't have know this." Right. I'll buy that about as much as I'll buy their stock right now.
And, btw, these people DID pick a payment. They checked the box that said NONE.
Even 700-score FICO people have to think twice when equity goes minus $100k, payments adjust to +2x over prevailing rents, and you are looking at 10+ years before you might be positive again.
Paul writes:
I'm with ipodius. Walking away just because you are upside down is like moving into an apartment then not paying the rent because there is nothing in it for you.
It's one thing if you can't afford the payments, but walking away is just dumb if you think of it as renting.
Bummer with those 38%+ DTI's, if anything doesn't go right, they have to walk. Rent is equivalent to a 28% DTI! For some people, just doing 3 months without overtime or a 2nd job is enough to crush their spirit.
Default rates have always been a function of downpayment/equity. At 25%+ down, the defaults are only due to unavoidable situations. At 20% down, only a few will default.
In good markets, it still usually took 10% down to convince 90%+ to ride out the bad times. We're not in good times. 75% of home buyers in CA put down 2% or less. Why pay double or more of equivalent rent to save no skin?
As noted early in the thread: wally writes:
Guido and Luigi always knew: you got skin in the game, you will make your payments.
Exactly. We're not talking about chump change. For $2k/month, people must walk.
This isn't a "ruthless put." For families with a DTI above 60%, its survival. For those in the 40% to 60% range... it is only going to take a strong breeze to knock them down.
For all the real estate barron who thought they would make it rich... they're realizing they bought a crock.
Sounds like Wachovia gets it and will have a chance of surviving.
If someone thinks they're neg am right now, add in accumulated future interest payments:(
Q: When are the class action guys going to use the CDC toxicity reports on fibreboard in the Katrina trailers to go after the homebuilding industry? Hello, what does everyone think their cardboard houses are floored, roofed and walls structually supported by?
No idea what consumers are thinking, or how much stress they are under. I suspect they see a lot of shuffling around at the top and wonder why it's wrong for them to do the same?
So are folks getting ruthless? They will get ruthless if they start to feel indentured w/ no way out. No mystery there. Happens in marriages everyday.
I'm CERTAIN the 100 bank failures prediction is being overly optimistic. There might be 50 community/state, de novo, and commercial bank failures in Georgia alone over the next 2+ years. Nightmare for the local dentist/doctor/lawyer crowds.
Jingle mail was common after the oil bust in Texas and Oklahoma in the 1980's. Studies have shown since the 1960's that negative equity is the single best predictor of foreclosure. Neither of these things is exactly a secret in banking. The execs at Wachovia are trying to hide their recklessness behind a supposed change in consumer behavior. The ruthless pursuit of self-interest that justifies the executives' paychecks is, of course, a moral failing in their borrowers, and one that no overpaid jerk in pinstripes could possibly have foreseen. You have to understand that the bank stock analysts are like kids around the campfire asking to hear a good story.
Tanta,
Can you help us understand the implications of FHA insurance fraud (Brian's question)
How easy is it to abuse FHA insurance, through inflated appraisals etc.
A lot of you are forgetting that the correlation between negative equity and foreclosure is not a strictly causative one. The is a very large effect of people with remaining equity being able to refinance out of loans they can't pay. Those original loans don't foreclose. The ones that can't be refinanced, the ones held when there's no equity left, are the ones that end up holding the bag. This has nothing to do with borrowers choosing to walk away, ruthlessly or not. It's just how mortgages and refinancing work when there's equity left to tap.
"And that's what the model tries to do is to then take that behavior along with house price depreciation and factor that into future losses. Don?"
Modeling human behavior is impossible, not only because we can't discover all the relevant variables, which is true. But, because there are no constants.
Could Naomi Campbell throwing darts at a board have done worse than your previous model? Don? Don? Don?
Neil, I'm going to make a semantic difference with you...you're describing financial default, not "walk-aways". To me, a walk-away is someone that could make it, but willfully chooses not to. A walk-away would be someone with a good income that decides to mail in the keys because they are now upside-down on the house. I think the idea here is "willfully". Your examples with DTI are financial hardship where they have no choice but to default, and would hang on if they could.
The other "willful" walk-away is an investor that bought with little down and now is upside-down. That is the most risk, in my opinion, and usually why these require higher down payments. But this is a different class than the first one I described.
What the banks are trying to do is conflate these, just like they did to "sub-prime" so that it shifts some of the blame onto consumers, and not accepting that they wrote loans they shouldn't have and their shareholder should be putting their heads on poles outside the main entrance to their main offices. This is where I stand on this.
I detest seeing "walk-aways" as much as I do "sub-prime" as a catch-all for different kinds of behavior. I also think they are doing it to avoid responsibility for writing the crap in the first place and there is NO excuse for that other than greed.
Overstating the "walk away" problem is to their advantage since it insulates them from the charge that they made loans that they knew the borrower couldn't afford.
But it doesn't insulate them from the charge that they made high LTV purchase money loans in states where they knew the loans were essentially non-recourse.
Many "ruthless" defaulters are simply being pragmatic. The banks are surprised that borrowers are pragmatic? Whocouldanode that people would act in their own self-interest, in accordance with the terms of the loans that the banks made?
If I were a shareholder, I'd be screaming for blood...
My question is: What sort of model has a borrower "somewhere north of" 100% LTV with a "cash flow bump" NOT walking away? Isn't that what always happens at first - it's called default. The only difference is that without equity there's no incentive for the borrow to come back to the table to bargin.
I would bet that financial engineering has not changed human nature or even social norms, it's just created more of these situations.
Could Naomi Campbell throwing darts at a board have done worse than your previous model?
Oooo kidbuck, Naomi has that, ummm, anger management thing going on, so maybe you don't want her tossing sharp objects at this time. Try Paris Hilton, Brittney Spears, or Lindsey Lohan.
I'm thinking miniature cows and smaller breeds of pig. Ya'know, critters that can be raised in a backyard. Alpacas are nasty critters by all I've read; and no more useful than sheep...
Question 1, where do you folks see us 1 year from now?
I ask because I can say that within the circle of people I know, I've been and probably still am the tinfoil-hat wearing naysayer when it comes to how we as a country are situated economically.
Question 2, how easy is it for you folks to talk about this stuff with those around you? Are they receptive, or do plenty of people you know still give you that tinfoil treatment?
Many "ruthless" defaulters are simply being pragmatic.
Are they? I rode out the last bust when my house slid 20% and was underwater. Now the market could roll back 40% and I'll still be up because I have no intention of selling it for another 15 years. That's pragmatic. And smart. I'll sell it at the next peak.
Mailing your keys back in 2008 because your house is 25% down is thinking the same way these assclowns think: it's all about what's happening in the next 2 quarters, not what's going to happen in the next few years. If you can afford the payment, you sit tight. That's pragmatic. If you can't afford the payment and never could and have no hope of affording it in the near future, you make a nice arrangement with the bank and call it a day.
I detest seeing "walk-aways" as much as I do "sub-prime" as a catch-all for different kinds of behavior. I also think they are doing it to avoid responsibility for writing the crap
Hmmm. My mind thinks more sinisterly than yours. Because I'm thinking that where this is going down the road is tightened legislation to keep people responsible for their loans well after they crash and burn. Kinda like a noose that won't go away.
“... the overarching assumption here is that we're about halfway through the decline in housing prices with the trough expected to occur sometime around the middle of 2009.”
Because I'm thinking that where this is going down the road is tightened legislation to keep people responsible for their loans well after they crash and burn
It would have to be WAY past when this was over, or it would have the exact opposite effect, as people actually DID walk-away as soon as this was introduced in Congress.
hey mp, did conjure reload on some builder shorts?
I got back into a nice RYL position over the last couple of weeks.
Just waiting for the obvious, with all the bad news. After all, there is almost nobody left to lend to, so buyers are getting fewer and farther between;-}
This applies to the stock market too- what I call the keyhole effect, up on shrinking volume;-}
mp, the last downturn was 48 quarters from peak to the first quarter to show gain. Now, we peaked in August of 05 here...what quarter is this? Oh, let me just point out the peak was exponentially more redonkulous than that one too.
Perhaps it's not a ruthless put.
Perhaps it's just that in the past when people hit their financial bump (ex. drop in income, medical bill, etc) they drew on their home equity to get them, through the rough patch.
No equity = no fallback = foreclosure.
ipodius writes:
mp, the last downturn was 48 quarters from peak to the first quarter to show gain. Now, we peaked in August of 05 here...what quarter is this?
STIGLITZ DIDN'T SAY IT WAS GOING TO BE THE WORST RECESSION SINCE THE GREAT DEPRESSION FOR SHITS AND GRINS.
Whirr, I'm not even talking about fraud, I'm just talking about by the book, Barney Frank encouraged, federal mortgage insurance program - lend at 97%, see the collateral decline below par in 3 months time. As a taxpayer, I'm kind of sick of being the patsy in the trade.
Steve: "The execs at Wachovia are trying to hide their recklessness behind a supposed change in consumer behavior. The ruthless pursuit of self-interest that justifies the executives' paychecks is, of course, a moral failing in their borrowers..."
It's all part of what I call "blame the janitor" strategy. It's roots are ancient, being one of the precepts of divine right. As Jacques Barzun explains in "From Dawn to Decadence," if the king "does govern badly and the people suffer, it is because they have sinned and are being punished."
exactly mp, exactly. by the numbers, RE is about 20% through the cycle right now. these jokers that think the bottom is in the next 3 to 4 quarters are dreaming...
If a person has negative equity NOW, they would be financially foolish not to walk away. Strike that....They should NOT walk away, they should continue living there "mortgage free" until they get kicked out and the place gets padlocked. That will be a LONG LONG time nowadays. And the politicians want to make it even longer.
They should save all their money from now until that padlock day. They after they're out with money in their hands they can start to rent and continue to save (as renting is cheaper than owning).
If they're smart, 5 to 7 years from now they can get back into the game. Home prices have hopefully bottomed by then. That's plenty of time to rebuild credit and Fannie Mae along with FHA is OK with a foreclosure or BK that is 5 years in the past.
How can anybody be so naive to think that struggling to make payments now, while being upside down ALREADY, and sticking this mess out will be better for them financially? It will continue to get worse from here. Prices continue to drop and it's getting worse every day. They should start today with a plan to cut their loses.
Eventually, almost everybody in trouble will figure this out. Whoever is last to this party might not be able to join as regulations will eventually step in. Ben help us!!
kidbuck writes:
"Modeling human behavior is impossible..."
Don't try telling that to the faculty at the school of economics. When it comes to believing they are right, they ain't got nothing on a fundamentalist Baptist preacher.
I almost lost a house in Massachusetts in 1989. I had to rent a place to live BEFORE I sold the house. I know it sounds crazy, but I literally couldn't stand sleeping in the place anymore. It was a monument to my failure. It was a reminder, everytime I walked in, that I was a loser.
I was lucky, I sold it before it foreclosed, I was about two months behind and lost 50 grand (sold another piece of land at a firesale price) to write a check at the closing.
PS: I have rented ever since. I am not interested in playing that game anymore.
If "they" don't sort out the credit crunch soon, Conjure and I are convinced that real estate prices will overshoot.
Oh yes, because the only thing that's going to put the floor under this is the availibility of credit for more of the masses. That will satisfy the pent-up demand, ease the inventory, and help to re-fi people that will need rate relief. Now, that's not going to increase prices for quite a while, but it will put a bottom on the market. Frankly, I have no idea what else will.
My tale of being underwater is the same timeframe in the same place. I was lucky and just barely hung on. But my attitude about RE was changed forever, which is why I didn't participate in this insanity and knew it was stupid. People have short memories.
kidbuck writes:
"Modeling human behavior is impossible..."
Don't try telling that to the faculty over at the school of economics. When it comes to believing they talk to God, they ain't got nothing on a fundamentalist Baptist preacher.
I had the chance to look through the Wachovia presentation. Their model to predict loan losses appears to be based on OFHEO's data on price decreases, which indicates somewhere in the neighborhood of 7-8% declines, peak-to-trough. If I am reading their analysis correctly, I think they have grossly underestimated their loss exposure.
I hope that CR, Tanta, or someone with banking experience will review the presentation to see if the Wachovia analysis holds water. On the surface, it looks like they are taking a tame view of the market so they can raise capital. If you plugged 20% losses into the model, I am sure they are very under reserved.
It is NOT when home equity approaches zero that people walk. IT is when they are aware that they were conned by those that were supposed to protect and support and govern. When there is no justice then people walk. In the 80s people suffered through the lack of equity but they didn't feel like suckers, conned into liquifying their homes to fund growth of private firms in China owned in large part by US insiders.
I think Wachovia's hubris and mediocrity is funny as hell. When Wachovia bought into all of this bullshit, CR and his loyal band of commenters built an airtight case against it in one evening.
They did it for nothing and they pegged it dead nuts.
well, i am sure having a great week in the mkts! and my strategy hasn't changed in over a year. short financials, everything RE related, R2K, RTH, QLD. too many targets, too little time.
i do find it interesting how WB was spontaneously levitating last Th and Fri despite general mkt hits. it was like the lone financial positive out there. i was already short a bunch and doubled down Fri AM. stupid me closed out that half Fri PM. can't complain but clearly financials have started the second leg down.
wasn't it Conjure bag who recommended financials right at the top of this last peak?
Furthermore, in the 80s we did not send our jobs to China and so many of these foreclosures are likely not walks but simply related to the fact that people are no longer able to pay their mortgage. Also back then many states didn't even allow home equity loans and people were not encouraged to take on too much debt and overspend. Common sense tells us the foreclosures today are related to poor household balance sheets.
No, I don't really care what others think as long as I feel strongly rooted to reason.
As I moved beyond the more RE focused blogs to ones such as CR because they focused on the overall impact of the RE collapse I found myself being pointed towards a very disturbing thought...namely that we are potentially headed towards times that we'll being lucky to have grandparents to compare notes with.
I guess what I'm trying to ask is: to what degree do folks here feel that the ultimate playout of this mess is going to be, in all essence, a Depression?
my longs continue to be concentrated in oil, glod, ag, nat gas, silver all commodity related. i will only bail when the stocks reach ridiculous PE's, inventories are at highs, and the general public dives in.
kidbuck writes:
"Modeling human behavior is impossible..."
In this case the behavior is real simple. When equity goes to zero the odds that another bank will make an even dumber loan that saves your ass plummets.
This isn't borrower behavior they're modeling, it's just other lenders' models.
The converse of mp's "getting the credit crunch worked out" would be massive capital flight and a bond market dislocation (interest rates spike hard)...that happens color me Really F'ing Scared.
"I guess what I'm trying to ask is: to what degree do folks here feel that the ultimate playout of this mess is going to be, in all essence, a Depression?"
Go back in these comments about two or three years on this and related blogs, and you'll see a strong case was laid out for that scenario. If we don't get there, we'll at least be close.
re: SRS and CRE. i personally think the IB's and big institutional traders are propping the indices. i think i read last nite that 20% of Lehmans equity is in Archstone Smith REIT. think they have an interest in keeping prices up?
i'm beginning to see a breakdown tho in my GGP, URE shorts. now's the time to press your advantage. i bet SRS hits 150 in the next 6 mo.
it's perhaps all in a turn of phrase. I kind of prefer "significant correction which brings fundamentals back into sustainable ratios" to "depression"....
mid size banks have gotten destroyed this last wk. FHN smashed down today to 11.65, DSL smashed to 14.23, CNB to 8.82. RKH also dumping. i'm beginning to feel Un-American via reality-based investing.
Have never done short/option trading but have been studying up and have a Vanguard app that I haven't been able to bring myself to sign and send.
For "shits and grins" - and I never do them simultaneously - I've been following my mortgage lender, First Horizon (FHN). They got killed today - down 11% - and the only thing that I'm sure of doing tomorrow is to review my contract to see who gets teh payments when they go belly up.
Realized other night that they were in the dread CRE > capital crew in the SE US.
Just think that I'm going to sit and keep the powder dry.
idoc writes:
well, i am sure having a great week in the mkts! and my strategy hasn't changed in over a year. short financials, everything RE related, R2K, RTH, QLD. too many targets, too little time.
Yeah me too!! But, you can't just buy and hold. Makes for too many sleepless nights. Take your profits and wait for the dip. Sometimes it takes awhile. Most people don't have the patience and the pros know that. Ruthless bunch!!
The conditions that existed leading up to the last Great Depression in the 1930's are identical to present conditions.
Marriner Eccles' book "Beckoning Frontiers" contains an observation on what caused the Depression in his opinion. Eccles was Chairman of the Fed from '34 to '48 and the building that the Fed occupies bears his name.
Wachovia's definition of walkaways seems to be people who fall behind on their mortgages, have no equity, and don't talk to the bank: somewhere when a borrower crosses the 100% loan to value, somewhere north of that and they presumably run into some sort of cash flow bump, whether it's reduced income or kind of normal things in life that have created past dues before, their propensity to just default and stop paying their mortgage rises dramatically and I mean really accelerates up and it's almost regardless of how they scored, say, on FICO or other kinds of character, credit characteristics.
See, that's always been the trigger for foreclosures before, because when you get behind on a basically unaffordable mortgage and you have no equity, that's when you have to let it go. You can't sell out.
And I can guarantee you that if the folks had one of these low-doc mortgages, a lot of them have a very good reason for not contacting the bank. Anything they say might be used against them.
The thing is, defaults are sort of normal when people lose jobs, take cuts in income, have a bad car accident, a sick kid, etc. If there is sufficient equity in the home, they have an incentive to work with the bank to eventually catch up. But when someone is underwater and they find they can't make payments, the bank is unlikely to be able to help them.
Wachovia's "sudden change in behavior" looks a lot like "normal mortgage modeling" (of the reptilian era) exacerbated by low/no doc lending in which there is likely a high percentage of misstatements on the apps.
This is not a description of ruthless borrowers. It's a description of borrowers with no real alternatives.
The lack of correlation to credit stats makes sense, because truth to be told, adverse life events hit at roughly consistent rates across the credit population.
At this pace, we should know 1 year from now. Either this is yet another economic misadventure that we ultimately "recover" from or we have what those 80 years from now will call an "event".
It having been soo long since we've had an "event", I'd like to get an idea now how things would look should we have one.
I'm just starting to read Galbraith's "The Great Crash of 1929", and so far the parallels are striking. One exception would be how far back folks are psychologically able to "roll the clocks back" in terms of standards of living these days.
One of the striking things in the first part of this book is the mention of how those that worried about the building boom feared it would bring on a depression like they had just seen in 1920! And here we are with 80 years since the GD and "Oh, it just couldn't happen."
Ugh, I'm more than a little buzzed. We'll know in far less than 80 years whether this has been an "event" or not. The 80 years just came up because that's roughly how long it's been since the GD.
I guess it's such a point for me because this is something most people, it seems, perceive as being unable to ever happen again.
It's one thing to belly splash into a real economic downturn with people that can make the "adjustment", but how would the average Joe today react?
What if we are truly looking at some kind of turnign point where it's better to think about buying some nice "hardware" than puts on LEH?
most of my shorts in financial, HB's, CRE have been LONGTERM, held since last Spring. shares of FHN, DSL, FED can't even be gotten anymore which is why i hold. they've been whipping up and down but like i've said many times here before, stick to your convictions!
What you describe is akin to something called the "Kondratieff Wave", or K-wave.
Thrust is that there are "seasons" to a credit cycle culminating in a credit collapse caused by the then-current generation forgetting their economic basics. I've read some on it and the psych twist seems to jive, but still not certain that I buy it.
If you're new to the site, you'll find the gamut of folks here. CR goes by the serious recession but not terrible groove whilst others are real god-fearing GD believers. If you're still here reading this, I suggest you pop to the next article and see what CR notes as to severity.
Me? Hoping for just a recession but prepping for a depression.
you sound like a good guy with your daughter and all. when i think of my kids in regards to their financial future (and mine), i will do anything to secure it even if it means shorting US stocks.
I am straining my arm, raising my hand to be the bank's CEO, too!
Gee, my dog is stretch her paw out, too.
People with over 80 and below 100 IQ's will all qualify; that's sad for me; I so too wanted to be Wachovia CEO.
...and the msm media don't comment on what's said! How can anyone not expect so much, much worse, and shortly!?!
"i'm beginning to see a breakdown tho in my GGP, URE shorts"
URE is too thin for me. There's no easy way to exit if you bet wrong. idoc, I'm a 71 year old swing trader. I'd be nuts thinking LONG TERM. That's for you "nestlings" LOL
Only a few comments from people who read the Wachovia presentation, even though they were nice enough to make it publicly available. I didn't get all the way through it. I stopped at the part where a footnote explained that they have a couple of billion in exposure to "highly-rated monoline insurers". Oops, Waldo!
For those who think walking away is going to teach Wall St. a lesson, I don't believe that's so. Most resi deals were 80%+ AAA. Those bonds were all sold, probably to your pension fund. The lower-rated classes got put into CDOs, then the CDO AAAs were usually sold (unless you were C or ML and believed you had created such value you kept them, funding with asset-backed commercial paper). Walking away hits CDOs the worst, as their performance seems to indicate.
homedad,
Thanks for the input, honestely.
I've been reading this blog for some time but it is getting a little bit scary to follow the crumbs where they seem to be going.
On one side, I happily subscribe to the discourse here, because I'm finding no problem with making coin off of SRS, SKF, FXP, what have you. The problem I'm having is carrying this converastion on to 1 scary logical endpoint, that it's time to seriously consider envolving those close to me with a concern for "what if you did see mushroom clouuds when you looked out the window one morning?"
Granted, we're not there yet, but if this "thing" does well and trully break for the average Joe, so much so that the average "Fish Rap", as I've now heard it called(fitting too) says the same, then We Are Fucked.
If that kind of future even begins to be hinted at, than I would be most happy to glean whatever wisdom I could from forums such as this before they got knocked out for "security" reasons.
I type this kind of laughingly, but don't we kind of take this new freedom of exchange for granted? I mean if the fan really did start to hit the shite, would you really be surprised to see forums like this shut down?
We so quickly take for granted a forum for discourse that could be shut down for any # of "plausible" reasons and yet probably belive that we are beyond such things happening.
I just want to start building up an inventory of plan B's.
From the Future, re CFC:
"The Tan Man
Must do a Span
in the Can!"
Hats off to ever started that!
Hedging probably means that they bought protection via credit default swaps from one or more of the bond insurers, so one of MBIA,AMBAC,FGIC,FSA,etc. are the counter-parties. That's the only natural hedge.
Rob Dawg, no, we are not paying for Volcker's actions. We are paying for the combination of Greenspan/Bernanke/contemporary American economic thought (related to Marxist/Leninism/Mao-tsetung Thought, but the first to be rescued are the rich).
Volcker is the guy that made the painful decisions and actions that cemented the demented Greenspan's reputation.
This is an absolutely fascinating conference call. Weird thing is, almost everything they said did not surprise me. It was just just kind of like 'yep... or course... truth continuing to come out
No question this is a much different scenario, I am grateful to have had the opportunity to learn that lesson, and for relatively little money.
I related the story more to reveal what might be driving the "walking" mentality. There are some who may be truly attached to their underwater home. I have had first hand experience in what the process felt like on the inside.
Panic isn't conducive to rational thinking.
Unless things get very very ugly kindascared, we will likely be encouraged to have forums like these as it is the discourse of the marketplace. Without it there is precious little economic activity, and the economic activity is going to keep us alive.
Now we may have monitors, that's certainly possible.
Living in Southern California, none of the people I have met with pick-a-payment loans could actually afford the non-teaser mortgage payment. These mortgages were really pushed to squeeze borrowers into a hot market and I think foolish is a better description of the borrowers than ruthless.
Either the teaser period ends or an AVM says the option arm reached 115% LTV and suddenly default. The borrower may realize what is going to happen a few months in advance but that won't stop a train wreck.
It hard to have a lot of sympathy with people who signed these crazy contracts but the banks should have known better. Why not tell analysts the truth, 'We made a huge bet that prices in California would continue to rise 10% a year and save our borrowers from the stupidity we enabled.
You can't make this stuff up. Yesterday, when Wachoiva came to the confessional, I received in the mail an unsolisited offer of an "approved" $150,000 home equity line at a rate of 5.25%. You can't make this stuff up. Kenny boy, might well check on what the troops are still doing while he is sharing the trauma of his ill timed acquision of World SAvings.
Living in Southern California, none of the people I have met with pick-a-payment loans could actually afford the non-teaser mortgage payment.
Exactly, and this is why I said up-thread that the execs are masking the problem by using "ruthless buyers" wording instead of admitting that they were using these loans to make as much money as possible and get market share knowing full well the people that were taking them out could never afford the properties. Imagine if the CEO admitted that!
So now we have the "walk-away" meme to add to the "subprime" meme. Everyone is now "walk-away" instead of "put in homes they had no chance of actually paying for in the long run".
-$100,000 the breaking point? I fully expect to be that far underwater by 2010, in spite of having put down 20%. Looking back, of course it was stupid not to research the price history of the house and neighborhood and recognize that the huge price run up was unsustainable. But I will be one of those fools who "doggedly" pays the mortgage every month until I can't work anymore. I will take in a roommate if I have to. I'm too old and too stubborn to give up. There may be a couple tough, if foolish, old ladies like me out there to skew the numbers. I don't think you all have figured us into the equation.
The wave of defaults on subprime mortgages, loans made to the least creditworthy home buyers, is spilling into the lower tiers of corporate credit, said Anders Maxwell, managing director of New York-based investment bank Peter J. Solomon Co.,
See? Subprime is spilling over into corporate? WTF does this even mean? More crap and the mis-use of the subprime tag.
Wachovia's "sudden change in behavior" looks a lot like "normal mortgage modeling" (of the reptilian era) exacerbated by low/no doc lending in which there is likely a high percentage of misstatements on the apps.
MOM, i think Wachovia is actually making a different claim than what you're pointing out. their claim (as i read it) is that performance deterioration is accelerating materially when borrowers cross some threshold around 100 LTV, which, historically anyway, actually isn't the case (performance is worse but deterioration is still linear if you control for all other variables).
certainly if you don't control for other variables performance deterioration may accelerate at that threshold because a large percentage of the borrowers that go into a negative equity position earlier may also have other loan attributes that make them more sensitive to HPA (ie high CLTV).
Underwater: I hear you! I have friends who lent a lot of money to their son to buy 3 Phoenix townhouses. He said it was a sure thing and now he's in trouble. Another friend lent his sister-in-law money so she wouldn't lose the house she has owned for 20 years in California. I didn't get to them soon enough. They just didn't know what was happening in the RE market.
I have another acquaintance who's 71 and in fixed investments. The bank's investment counselor had him in investments that were "enhanced". I got to him in time. Last week he brought me a bouquet of flowers as a thank-you. BTW, the counselor lost lots of money in her own account last year. Drank her own Kool-Aid.
"So we ended the quarter with just over 900 homes in inventory originated through the pick a payment channel..."
Pick-a-Payment Channel.
It's like Wachovia is now a property retailer and the Option ARM product was just a supply chain strategy...
I for one expect that this particular "channel" will get a lot fuller as these loans reset to full principal and interest payments at their new negative amortization max-out principal balances.
Thompson needs to go. The annual report stated the dividend was safe and 3 weeks later it was cut. Thompson doesn't know the internal workings of the company. I want to start a trend of suing CEO's and Board's that are incompetent. All of their assets while CEO, etc need to be seized.
" . . .when a borrower crosses the 100% loan to value . . .their propensity to just default and stop paying their mortgage rises dramatically."
As they say on Wall Street, cut your losses and let your profits ride.
The next air pocket is here.
Now we have a bank admitting that a shadow inventory of foreclosed housing exists, and a severe overhang on the former bubble markets will cause even more price declines.
Um, well. There is no need for further analysis.
The analyst was digging for positive spin, and was met with utter clarity and bad news.
Not good.
I wonder how the analyst was evaluating their exposure to any positive housing outlooks after that conference call.
Reality bites, hard.
Buckle up and get ready, cause the roller coaster is picking up speed.
Someday this war's gonna end...
Sounds like they are scared and they should be. I can't believe they purchased World Savings.
OT -We may need some Nixon-era price controls soon...
Expired
What I don't know and I guess we're just learning over time is whether the same sort of behavioral trends and patterns will spread to other markets or be observed in other markets at the same pace that they have been in California.
At least he doesnt declare it "contained"....
This is going to keep spreading across everything if more and more people decide to foreclose...
Just turned off the TV awhile back. Saw CNBC's Cramer selling his trading strategy book. Hard times ahead...
"Now we have a bank admitting that a shadow inventory of foreclosed housing exists, and a severe overhang on the former bubble markets will cause even more price declines."
Sounds like these execs have finally started reading Calculated Risk -- better late than never!
those gomers get to be officers because they can spew excrement.
and that's why i'll never be one. glad of it, too.
Assuming the statements of the Wachovia execs are true, aren't those statements fairly strong evidence of growing borrower "ruthlesness"/
Guido and Luigi always knew: you got skin in the game, you will make your payments.
Too bad all the nerds with the fancy models forgot the basics.
Is that the same Cramer who was touting REIT's a week ago?
Well, he's loud so he must be right.
Here is what I'd like to see. An analysis of Time in Home before Negative Equity vs Likely to Walk. I've lived in my current house for years. Its pretty unique and I've grown to like it and its been a hell of an ATM. If I somehow get upside down in the next few years I'll ride it out. We plan to live here for quite some time. but if i had just gotten into a no money down, molding starts peeling off the baseboard 3 months after I moved in McMansion and was upside down after 1-2 years...I'd walk just because i realized how shitty the construction was. And so, they walk. My house was built 60 years before the great depression. It tells me not to worry, we've been here before.
The talking feds and heads seem to be coming around to reality these days. I"m sure its just some weather related blip that will sort itself out.
Welcome back my friends to the show that never ends, I'm so glad you could attend; welcome back, welcome back.
Please enjoy the showwwwwwwwwwwww!!!!!
DH: Mr. Truslow, Can you please explain why you made 110% LTV
loans to office buildings with
4% cap rate?
Mr. Truslow: Well, we have longstanding relationships with
Ponzi Scheme beserkers which we can not afford to lose.
DH: Mr. Truslow, is it true that you
make hard money loans on CRE disguised in complex Mezzanine structures noone understands?
Mr. Truslow: Which company do you work for and who let you in?
Have any of these assholes ever heard of 20% down?
As long as foreclosures flood the market, prices will keep going down. Demand won't keep up for quite awhile. Motivated sellers (banks) will crush the value of homes for retiring boomers, many who depend on those values. They will be sore losers. I imagine people at the country club are going to be as angry as the boys at the corner bar. Don't trust anyone over 60.
it's almost regardless of how they scored, say, on FICO or other kinds of character, credit characteristics.
What does the prospectus say? "You should not assume that the information in this prospectus or any document incorporated by reference is truthful or complete at any date other than the date mentioned on the cover page of these documents."
LOL!
Peter Piper picked a peck of pick-a-payments
A peck of pick-a-payments Peter Piper picked
If Wachovia picked a peck of Pick-a-payments
Where's the peck of pick-a-payments Golden West
Financial picked?
That Golden West investment will go down as one of the dumbest ass moves of the bubble.
But at least they're honest about the present situation, even if it is of their own making.
At least borrowers that know they are underwater have the correct idea to walk away. Check out this poor guy that has savings confused with not paying for things (from CNN's show Issue #1 today):
'Mark has a question. He asks, "I recently saved up about $20,000." That's good news. "Unfortunately, I have a little over $14,000 in credit card and medical debt. Eight of the accounts are in collections. Three are supposed to fall off my credit report by January 2009. Should I take my savings and pay off the collection accounts or continue to keep it in a savings account?"'
That dude Mark is so subprime it hurts!
It isn't even LTV anymore. It isn't even CLTV. It isn't even anticipated future after tax valuation.
People don't get it. There is an entire generation exposed to nothing except appreciation in excess of inflation. We are paying for Herr Volker's necessary actions. This is what, some 25 years later? We are also paying for Herr Grenespan's actions some dozen years later and are also now paying for Herr Bernanke's errors in real time.
sysin3: Truly! The Jedi knights of BullShit.
That Golden West investment will go down as one of the dumbest ass moves of the bubble.
Bob I think it depends on which side of the table you were on
Thats a lot of payments Rob... I dont think I've got enought!
12th Percentile writes:
Is that the same Cramer who was touting REIT's a week ago?
There was something in the Sunday Times a few weeks ago advising keeping some REITs in your portfolio. How can people be so stupid? What American with enough money to invest doesn't have PLENTY of exposure to real estate?
I sold off some of my SRS at 120 and bought in again at 90.
What percentage of loans over the last 2 or so years were 100% financing? Either 100% on a first, or some type of combo (80/20, 90/10). Where I live, I imagine it was well over 50%. It was what everyone wanted.
Does anybody have these figures?
Not to mention all the properties purchased FHA with 3% down which are already under water. Even the conventional 5% downs and in some areas the 10% downs are already under.
How about the equity lines drawn to 100% within the last few years (when it was allowed)?
It seems by all indications that the sentiment changes at 0 to negative equity. And it doesn't have much to do with Fico scores. So the people how are barely positive today will probably be negative by summertime. And the forecast is for another 10% drop from here. That means it will actually be 20 to 30%. Please save us Ben!
For a few years now many REITs have been borrowing just to pay a dividend...
They had an awful 2007.... I still think their day of reckoning is yet to come...
Especially if there is a hard contraction with the consumer and businesses concurrently....
The thing that is amazing to me is that World (Wachovia) is still making NINJA pick-a-pay loans. I know someone who had already ATM-refied three times in successive years with them and had been approved for yet another one a month ago subject to appraisal. And, there was the rub. Turns out the only sales in the neighborhood in the last 8 months were two short sales. But, Wachovia was still making these toxic loans with a 1.75% teaser.
barely | 04.14.08 - 7:05 pm | #
Go ahead. I know two farmers that would rather mow/plow crops than sell at a loss. Yes,there are lots of guys that will do this. But it will get really bad in the second year. I know that NOBODY will put anything in the ground if they can't make money...
Then wait to see how the folling years harvest looks.
Fucking price controls.
Chris
we are so freaking doomed
even without the 'emphasis added' anyone with more than two brain cells should be able to see that the tsunami is building and will break at the shoreline this summer and fall
I, for one, am preparing to swim
in lieu of that I have stocked up on alcohol, ammo, food and water
It's been a lovely fucking recovery, deliver all final fire on my pos
Well, at least the Wach guys were playing it straight.
Of course, this must be a bottom signal...
Every one go BUY BUY BUY!
I'm going to go soak my head in cold water now.
Cheers,
Bob I think it depends on which side of the table you were on
nades
Yeah, it reminds of the guy who sold about.com just after the peak of the dot-com bubble (his buyers were even dumber.) He had to take stock in the buyer (PrimeMedia), but he worked the deal so that if their stock declined, he got proportionately more shares...
I always had to admire that guy. Hated his Web site, but damn, he knew how to make a sale.
I wonder how much of this has to do with negative equity and how much has to do with negative equity and nothing down...
Has anyone seen anything that splits the two.
My intuition would tell me that the person who put zero down and is down 10% is way more likely to walk than the person who put 10% down and is now negative 10%. I think people feel that if they put money in on the buy they can eventually get it back if they wait this out...
All conjecture of course...
That site has more pop-ups than anything i've been to... hate it too!
I sold off some of my SRS at 120 and bought in again at 90.
Bottomfeeder!
Question: How much do these 2 ASSHATS (thanks BR) get paid for their "strategic monetary planning" and foresight? Jolly good show boys!!!
ades,
When they bought Golden West, they made a big deal about how sound the lending was, and I believe the average LTV was less than 70%, and I don't think they made any no doc, or even low doc, loans.
But that might have been BS.
Asshats is currently my favorite word... every time i see it i think its a f'in riot...
This story sounds a lot like GE's.
A severe, unforseen change in the slope of the downturn in the second half of March. I trust Jeff Immelt. Something(s) changed. I wish I had some idea what.
Jim
So now we know we have a non-linear default function as mortgages approach 100% LTV. The government is here to help by guaranteeing 97% LTV mortgages that, at last quarter's rate of depreciation will be under water in about three months time. Compared to this, bridges to nowhere and ethanol subsidies are starting to look pretty good. Get out your checkbooks Mr and Ms taxpayer, this is going to get expensive.
If I did the math correctly...
They entered the quarter with ~600 REO (my derived number), took back 1100 (quoted), sold 800 (quoted) and ended the quarter with 900 REO (quoted).
The implication is that they ended the quarter with 50% more than they started with. Not good, but not so bad compared with the number they moved. Should this repeat in the next quarter, they may end up with 1300-1400 REO (swag).
It's more than just negative equity. It is also the relationship of market rental prices to what people are paying in PITI i.e. their mortgage payment.
If these guys are really that dumb, they shouldn't be bankers.
In an economy where the rents were nearer to the mtg payments some of these unfortunate borrowers (by whose hand is irrelevant for this exercise) are dealing with, the default rates would be much lower.
Since when does it take a rocket scientist or a fancy computer program to figure this one out?
Borrower is thinking:
Gee??? I got burned when I bought the house and now I'm paying double to own this piece of crap for what it would cost to rent a house just like the one I am getting so screwed on... Gee I think I will go rent and tell the lender to take this house and shove it up their....
Borrower thinking if rents weren't so low in comparison:
Gee??? If I gotta move and mess up my credit just to save a few hundred a month??? I don't know...??? Uh... if I screw up my credit and have to move... Maybe I should just stay put and pay...??? The kids will have to go to a new school... The wife will be pissed.. A few hundred a month though... Nah... I don't think it is worth it. I guess I'll even mow the lawn today... "Honey!!! Pick up some beer at the store will you? Not the expensive import but the cheaper domestic brand will be fine."
Tell those geniuses to plug the rent vs ownership cost analysis into the artificial intelligence computer model to get accurate readings of borrower risk behavior.
What is shocking is that these clowns find it to be so shocking. But I guess so high up in the ivory towers of this top heavy industry, nobody knew because a silly thing like what market rents might be in a particular locality are poor people's concerns...
I've heard that one of the rules of banking is to know your customers. These guys broke that rule and many others as well.
I eagerly await their demise so that others who can and will do better replace them.
Hey all those foreclosure figures is pretty good. Except they left out the part where a whole bunch of folks are sitting on their houses because listing them is a lost cause.
These Waco guys are thinking there's only foreclosures out there, forgetting the whole rest of the market blocked up behind the logjam. Sooner or later the dam will break, either because people can't wait any longer, or they join the 'walkaway' generation.
For a few years now many REITs have been borrowing just to pay a dividend...
chuckle, chuckle, chuckle.
As I've said before, I worked as a real estate appraiser right out of college handling a lot of big office and commercial buildings in the DC area after that had crashed in the late eighties. I didn't make much money, but i got to learn about people who borrowed a lot and lost more. My family weren't business savvy before my generation in any way. Prior to this job, I just thought rich people must be smart. I was very surprised to be sitting at a table talking to some guy about his strip mall that was in foreclosure that I was trying to appraise and the $20 million he owed on it and realizing that someone had loaned that money to this drooling idiot in a hawaiian shirt unbuttoned with his gut hanging out. It was a good lesson. At that point I decided at some point i was going to get someone to loan me twenty million. If this guy could do it, I should be able to get 200 million.
All conjecture of course...
nades | 04.14.08 - 7:46 pm | #
nades,
I was kinda thinking the same until yesterday. A post by a guy on a gunsite I frequent who was in Columbus mentioned he had put 10% down. He tried a sale at 145k. No go. 5 other FC's on his street. Most sold for 80k. He walked.
He claims to have a good enough job to make the payments but instead just walked. Ooops.
Oh,now that we had some rain I can identify 43 homes that are empty and not FC'd on my 2 mile trip to I75 in the am...
Chris
I checked earlier for your report on this call...the "ruthless" borrower topic.
I continue to maintain that a key variable to walking away is the negative equity amount. My speculation is that -$100K is a decisive point for most folks. Watch for the walk rate to increase significantly.
" . . .when a borrower crosses the 100% loan to value . . .their propensity to just default and stop paying their mortgage rises dramatically."
The borrower typically crossed that line twice: once on the day they bought with no money down, and once as they rode down the far side of the 2005 peak prices.
Nowdays, the first and second crossing points tend to be the same day, which explains what's changed.
From the Inflation Squeeze article barely posted-
For some, that means adding an extra cup of water to their soup, watering down their milk, or giving their children soda because it's cheaper than milk, DiChiara said.
Any parent that cannot afford milk then chooses to buy soda should be slapped very hard.
Although food prices have risen a lot, food is still cheap relative to the cost of most housing.
I need to research what percentage of income was spent on food and housing during the great depression and compare it to today.
I think it's likely that the percentage of income spent on housing will decline for many years, while the percentage spent on food continues to rise.
Can someone please explain what "shadow foreclosures" are?
I thought all non-performing assets had to show up on a bank's financial statements?
I guess Wachovia has a scholarship program to pay slow people millions to learn credit 101.
Can someone please explain what "shadow foreclosures" are?
I thought all non-performing assets had to show up on a bank's financial statements?
Jillayne | Homepage | 04.14.08 - 7:59 pm | #
I know what my definition is. They are the 43 homes between my place and I75 that are empty but the FC process hasn't even started yet...If you look through the counties records normally a NOD hasn't even been filed yet...
Chris
Columbus is getting that bad?
SweetHomeKilla writes:
From the Inflation Squeeze article barely posted-
For some, that means adding an extra cup of water to their soup, watering down their milk, or giving their children soda because it's cheaper than milk, DiChiara said.
Any parent that cannot afford milk then chooses to buy soda should be slapped very hard.
That's an unbelievable quote. Besides the idiocy of giving soda to a child in place of milk, even at $3.50/gal, milk is still cheaper than Coke, which runs around $1.99/6-pk (or $3.54/gal). Nice way to cut costs.
Frankly, I'm still in the "show me hard evidence of walk-away" camp. I like, on this thread, how everyone screams that dumb people believe everything they're told...of course that's ok when these guys say something you agree with when they have absolutely nothing but conjecture to back it up with.
Does it occur to anyone here that this is a great excuse to shift the blame to borrowers, not the fact that they made a crummy deal and had terrible underwriting standards? I beleive nothing they say, except the fact that they're reporting numbers. Their opinions i will take as being as good as their ability to do due dilligence on a bank they are acquiring.
Again, I maintain that if you're not selling and you can afford the payment, you're just going to sit still. That people do care about a wack to their credit, and the people doing this are not "walking away" but saying they are because they are in deep financial doo-doo. Of course, some will, but I will still maintain it's mostly bravado to cover up a bad decision.
I have it from a highly reliable and confidential source that Wachovia has a new division that will prevent this current finanical problem from ever happening again.
The division simply is called: OVERSEEING YIELDS or OY
Even Bernstein and Woodward do not know my source. Please, do not ask!
Columbus is getting that bad?
Joe Six Pack | 04.14.08 - 8:05 pm |
A guy I worked with bought a place in Reynoldsburg a couple of years ago. I want to say he paid 177k or so. He mentioned he isn't going to be able to take a promotion because all the homes selling are priced at 90-105k(and dropping).
I always thought Ohio should have been dropping some. Oh well,I am in bubble central,SW Florida now...
Chris
Can someone please translate
I can haz bale-out plez?
into Chinese?
Frustrated Chinese investors hope in vain for government bail-out - MarketWatch
I'm with ipodius. Walking away just because you are upside down is like moving into an apartment then not paying the rent because there is nothing in it for you.
It's one thing if you can't afford the payments, but walking away is just dumb if you think of it as renting.
"Any parent that cannot afford milk then chooses to buy soda should be slapped very hard.
Although food prices have risen a lot, food is still cheap relative to the cost of most housing."
I worked in elementary schools for a while in a low-income district, relatively recently. It was not real uncommon for kids to breakfast on a wholesome bag of Flamin' Hot Cheetos before breakfast.
Why? Both parents worked long hours, were uneducated, and didn't understand basic nutrition. And no, they weren't all from other countries.
I later found out that the Hot Cheeto Breakfast Empire extended all across Central California. Ask a teacher. She'll know.
Again, I maintain that if you're not selling and you can afford the payment, you're just going to sit still.
Ditto.
"It was not real uncommon for kids to breakfast on a wholesome bag of Flamin' Hot Cheetos before breakfast. "
I meant, "before school."
ipodius --
Frankly, I'm still in the "show me hard evidence of walk-away" camp.
But these are not some bitter (*) bloggers; these are the executives running Wachovia, for crying out loud. What possible motive could they have for overstating the "walk-away" problem? Do you think they want to write-down billions, cut their dividend, and be forced to recapitalize at $24/share? Why?
(*) heh heh
Life is just completely unfair to Wachovia. I mean, the guys at WaMu did a dividend cut + massively dilutive offering and got a 30% pop last week.
What's next, the market won't reward Citi with a 15% pop for their writedowns the way UBS got it for their $19B writedown last week?
Just flat out unfair.
TCA | 04.14.08 - 8:07 pm |
Just buy whole milk and water it down. I grew up in a large family. You have to cut corners where possible.
Chris
Wait a minute - I thought that's what pick-a-payment meant. You get to pick which payment you want to make. I guess these people just didn't see a payment they really felt like picking.
I mean, like, really. Isn't that all in the fine print?
If Chris/Cobra Driver is right, then when must the banks disclose their foreclosures, shadows and all, to regulators AND ALSO shareholders?
Cobradriver writes:
TCA | 04.14.08 - 8:07 pm |
Just buy whole milk and water it down. I grew up in a large family. You have to cut corners where possible.
Two gallons of milk at Sam's Club runs well under $4. Milk is still cheap compared to just about anything else.
Overstating the "walk away" problem is to their advantage since it insulates them from the charge that they made loans that they knew the borrower couldn't afford.
If it's all about negative equity then it's not about lax lending standards. OOPS.
Cobradriver, this article is for you:
Fosters.com - Dover NH, Rochester NH, Portsmouth NH, Laconia NH, Sanford ME
Housing out of reach: New survey shows soaring rental costs in the Seacoast
We saw an article here from Denver, from SW Conn., and now from seacoast, NH about rentals soaring. It may be coming to an area near you before too long?
Cobra,
"Just buy whole milk and water it down. I grew up in a large family. You have to cut corners where possible."
My parents gave me powdered milk in the 70's. Taste like sh#t, but still better than soda by a long shot.
Cheers,
And tyhese bozos are surprised. They allowed deadbeats to bid up houses to phioney levels with little or no money down. DUUUHHHH!
what do you think happens?
There is a reason why 20% down should be a minimum amount down!
20-30% down will devastate home prices.
BRING IT ON!
This "BITTER" renter is all smiles. How's it going homedebtors????
I always thought Ohio should have been dropping some. Oh well,I am in bubble central,SW Florida now...
Chris
Cobradriver | 04.14.08 - 8:10 pm
Chris, the house price in Ohio didn't go up very much. $50,000 house's from 1960 sold for $150,000 in 2005. Same scenario in Florida they sold for $200,000 in 2005.
BTW, are you in Cape Coral? I'm interested in buying a house there. Thoughts? Wait till the end of 2009?
Paul --
Overstating the "walk away" problem is to their advantage since it insulates them from the charge that they made loans that they knew the borrower couldn't afford.
I suspect they care more about the bottom line than about appearances. Money talks...
From the article:
...what we are seeing is that when equity in the home approaches zero, behavior changes. And that's what the model tries to do is to then take that behavior along with house price depreciation and factor that into future losses.
In other words, they are cutting the dividend and raising capital NOW because they have updated their models to try to reflect reality, including the reality of people "walking away".
Nobody on that conference call gives a damn whose "fault" this is. What the analysts are asking is why Wachovia is doing such shareholder-unfriendly things as chopping the dividend and raising fresh capital at $24/share. And management's answer is that the new model says the old loans are garbage, because the new model incorporates the effect of "walk-aways".
Sounds like a real phenomenon to me. "Hard to quantify", but real.
Ilovealpacas.com
Wow, I just saw a commercial for this site. This commercial is exactly what's wrong with America. It's gotta be on youtube.
I still can't figure out why the banks are referring to "ruthless borrowers" (whether it's true or not)? I mean, aren't they basically implanting the idea in everyone's head?
"Gee, I'm upside down and everyone else is bailing - maybe I should too?"
I mean, there are A LOT of people out there that are not smart enough to figure out that it's financial suicide to continue pay on a rapidly declining asset, especially when you have the ruthless put option.
I really don't know what they are complaining about. They collected 6 percent a year front loaded from people who are still sitting on nearly the full purchase price. The owners are looking at paying another 20 to 25 years on a house that is 20 percent less with no signs of ever recouping.
Nemo writes I suspect they care more about the bottom line than about appearances. Money talks...
You're probably right. I just hate moving and can't imagine doing it just because they are upside down. Where are they going? They have to live somewhere. Like I said, if they can't afford the payments then that can be the driver. I have a renters mentality so maybe I'm not getting it.
If you hate the place or think you are going to move anyway, then it might make sense to cut your losses today. You still have to live someplace so when you walk away you end up renting anyway. Why not rent and bet that in 5 or 10 years you'll not lose money.
Misery loves company:
NEW YORK (Reuters) - Delta Air Lines Inc and Northwest Airlines Corp said on Monday that they have agreed to merge in a deal that would create the world's largest airline.
Delta will acquire Northwest in an all-stock deal. Northwest shareholders will receive 1.25 Delta shares for each Northwest share they own.
The deal creates an airline that will be based in Atlanta and operate under Delta's flag, with over $35 billion in annual revenue and about 75,000 employees.
Delta Chief Executive Richard Anderson will lead the combined airline.
(Reporting by Kyle Peterson; Editing by Gary Hill)
Copyright 2008 Reuters
for crying out loud. What possible motive could they have for overstating the "walk-away" problem?
As I said Nemo, because they'd have to like, you know, say "Hey, guess what? We bought that piece of *hit bank and did crappy due dilli on it. So we're cutting the dividend and diluting your shares. Ooops."
Now they get to say "blah blah blah, models, blah blah, and hey, you know, the models show that the behavior changed. You know, like, who'd a thunk that we'd loan these people money and they'd change their behaviors???. So, like, it's not our fault because we couldn't have know this." Right. I'll buy that about as much as I'll buy their stock right now.
And, btw, these people DID pick a payment. They checked the box that said NONE.
Even 700-score FICO people have to think twice when equity goes minus $100k, payments adjust to +2x over prevailing rents, and you are looking at 10+ years before you might be positive again.
Paul writes:
I'm with ipodius. Walking away just because you are upside down is like moving into an apartment then not paying the rent because there is nothing in it for you.
It's one thing if you can't afford the payments, but walking away is just dumb if you think of it as renting.
Bummer with those 38%+ DTI's, if anything doesn't go right, they have to walk. Rent is equivalent to a 28% DTI! For some people, just doing 3 months without overtime or a 2nd job is enough to crush their spirit.
Default rates have always been a function of downpayment/equity. At 25%+ down, the defaults are only due to unavoidable situations. At 20% down, only a few will default.
In good markets, it still usually took 10% down to convince 90%+ to ride out the bad times. We're not in good times. 75% of home buyers in CA put down 2% or less. Why pay double or more of equivalent rent to save no skin?
As noted early in the thread:
wally writes:
Guido and Luigi always knew: you got skin in the game, you will make your payments.
Exactly. We're not talking about chump change. For $2k/month, people must walk.
This isn't a "ruthless put." For families with a DTI above 60%, its survival. For those in the 40% to 60% range... it is only going to take a strong breeze to knock them down.
For all the real estate barron who thought they would make it rich... they're realizing they bought a crock.
Sounds like Wachovia gets it and will have a chance of surviving.
Got Popcorn?
Neil
So are folks getting ruthless? They will get ruthless if they start to feel indentured w/ no way out. No mystery there. Happens in marriages everyday.
Jingle mail was common after the oil bust in Texas and Oklahoma in the 1980's. Studies have shown since the 1960's that negative equity is the single best predictor of foreclosure. Neither of these things is exactly a secret in banking. The execs at Wachovia are trying to hide their recklessness behind a supposed change in consumer behavior. The ruthless pursuit of self-interest that justifies the executives' paychecks is, of course, a moral failing in their borrowers, and one that no overpaid jerk in pinstripes could possibly have foreseen. You have to understand that the bank stock analysts are like kids around the campfire asking to hear a good story.
Tanta,
Can you help us understand the implications of FHA insurance fraud (Brian's question)
How easy is it to abuse FHA insurance, through inflated appraisals etc.
A lot of you are forgetting that the correlation between negative equity and foreclosure is not a strictly causative one. The is a very large effect of people with remaining equity being able to refinance out of loans they can't pay. Those original loans don't foreclose. The ones that can't be refinanced, the ones held when there's no equity left, are the ones that end up holding the bag. This has nothing to do with borrowers choosing to walk away, ruthlessly or not. It's just how mortgages and refinancing work when there's equity left to tap.
"And that's what the model tries to do is to then take that behavior along with house price depreciation and factor that into future losses. Don?"
Modeling human behavior is impossible, not only because we can't discover all the relevant variables, which is true. But, because there are no constants.
Could Naomi Campbell throwing darts at a board have done worse than your previous model? Don? Don? Don?
Neil, I'm going to make a semantic difference with you...you're describing financial default, not "walk-aways". To me, a walk-away is someone that could make it, but willfully chooses not to. A walk-away would be someone with a good income that decides to mail in the keys because they are now upside-down on the house. I think the idea here is "willfully". Your examples with DTI are financial hardship where they have no choice but to default, and would hang on if they could.
The other "willful" walk-away is an investor that bought with little down and now is upside-down. That is the most risk, in my opinion, and usually why these require higher down payments. But this is a different class than the first one I described.
What the banks are trying to do is conflate these, just like they did to "sub-prime" so that it shifts some of the blame onto consumers, and not accepting that they wrote loans they shouldn't have and their shareholder should be putting their heads on poles outside the main entrance to their main offices. This is where I stand on this.
I detest seeing "walk-aways" as much as I do "sub-prime" as a catch-all for different kinds of behavior. I also think they are doing it to avoid responsibility for writing the crap in the first place and there is NO excuse for that other than greed.
Overstating the "walk away" problem is to their advantage since it insulates them from the charge that they made loans that they knew the borrower couldn't afford.
But it doesn't insulate them from the charge that they made high LTV purchase money loans in states where they knew the loans were essentially non-recourse.
Many "ruthless" defaulters are simply being pragmatic. The banks are surprised that borrowers are pragmatic? Whocouldanode that people would act in their own self-interest, in accordance with the terms of the loans that the banks made?
If I were a shareholder, I'd be screaming for blood...
My question is: What sort of model has a borrower "somewhere north of" 100% LTV with a "cash flow bump" NOT walking away? Isn't that what always happens at first - it's called default. The only difference is that without equity there's no incentive for the borrow to come back to the table to bargin.
I would bet that financial engineering has not changed human nature or even social norms, it's just created more of these situations.
Could Naomi Campbell throwing darts at a board have done worse than your previous model?
Oooo kidbuck, Naomi has that, ummm, anger management thing going on, so maybe you don't want her tossing sharp objects at this time. Try Paris Hilton, Brittney Spears, or Lindsey Lohan.
Ilovealpacas.com
I'm thinking miniature cows and smaller breeds of pig. Ya'know, critters that can be raised in a backyard. Alpacas are nasty critters by all I've read; and no more useful than sheep...
Question 1, where do you folks see us 1 year from now?
I ask because I can say that within the circle of people I know, I've been and probably still am the tinfoil-hat wearing naysayer when it comes to how we as a country are situated economically.
Question 2, how easy is it for you folks to talk about this stuff with those around you? Are they receptive, or do plenty of people you know still give you that tinfoil treatment?
Many "ruthless" defaulters are simply being pragmatic.
Are they? I rode out the last bust when my house slid 20% and was underwater. Now the market could roll back 40% and I'll still be up because I have no intention of selling it for another 15 years. That's pragmatic. And smart. I'll sell it at the next peak.
Mailing your keys back in 2008 because your house is 25% down is thinking the same way these assclowns think: it's all about what's happening in the next 2 quarters, not what's going to happen in the next few years. If you can afford the payment, you sit tight. That's pragmatic. If you can't afford the payment and never could and have no hope of affording it in the near future, you make a nice arrangement with the bank and call it a day.
I detest seeing "walk-aways" as much as I do "sub-prime" as a catch-all for different kinds of behavior. I also think they are doing it to avoid responsibility for writing the crap
Hmmm. My mind thinks more sinisterly than yours. Because I'm thinking that where this is going down the road is tightened legislation to keep people responsible for their loans well after they crash and burn. Kinda like a noose that won't go away.
“... the overarching assumption here is that we're about halfway through the decline in housing prices with the trough expected to occur sometime around the middle of 2009.”
HAHAHAHAHHHAAHAHAHAH!
Because I'm thinking that where this is going down the road is tightened legislation to keep people responsible for their loans well after they crash and burn
It would have to be WAY past when this was over, or it would have the exact opposite effect, as people actually DID walk-away as soon as this was introduced in Congress.
hey mp, did conjure reload on some builder shorts?
I got back into a nice RYL position over the last couple of weeks.
Just waiting for the obvious, with all the bad news. After all, there is almost nobody left to lend to, so buyers are getting fewer and farther between;-}
This applies to the stock market too- what I call the keyhole effect, up on shrinking volume;-}
Someday this war's gonna end...
mp, the last downturn was 48 quarters from peak to the first quarter to show gain. Now, we peaked in August of 05 here...what quarter is this? Oh, let me just point out the peak was exponentially more redonkulous than that one too.
KindaScared, some people have to go down with the ship. It's part of natural balance and population control.
Why care how they regard you?
Or, are you one of those driven by others?
An mp3 of the webcast now available through my blog: Note on "Shadow Foreclosures"
Volker's speech is also there.
Honest to god, sometimes i want to hop a plane, take the elevator to the executive suite, and dope slap all of them a la the Three Stooges.
Perhaps it's not a ruthless put.
Perhaps it's just that in the past when people hit their financial bump (ex. drop in income, medical bill, etc) they drew on their home equity to get them, through the rough patch.
No equity = no fallback = foreclosure.
ipodius writes:
mp, the last downturn was 48 quarters from peak to the first quarter to show gain. Now, we peaked in August of 05 here...what quarter is this?
STIGLITZ DIDN'T SAY IT WAS GOING TO BE THE WORST RECESSION SINCE THE GREAT DEPRESSION FOR SHITS AND GRINS.
NEITHER DID CONJURE.
Whirr, I'm not even talking about fraud, I'm just talking about by the book, Barney Frank encouraged, federal mortgage insurance program - lend at 97%, see the collateral decline below par in 3 months time. As a taxpayer, I'm kind of sick of being the patsy in the trade.
Steve: "The execs at Wachovia are trying to hide their recklessness behind a supposed change in consumer behavior. The ruthless pursuit of self-interest that justifies the executives' paychecks is, of course, a moral failing in their borrowers..."
It's all part of what I call "blame the janitor" strategy. It's roots are ancient, being one of the precepts of divine right. As Jacques Barzun explains in "From Dawn to Decadence," if the king "does govern badly and the people suffer, it is because they have sinned and are being punished."
"no more useful than sheep..."
Hey. watch it!!!! Some of my best "friends" are sheep.
"Watch for the walk rate to increase significantly."
These boots are made for walking,
and that's just what they'll do,
one of these days these boots are going to walk all over you.
exactly mp, exactly. by the numbers, RE is about 20% through the cycle right now. these jokers that think the bottom is in the next 3 to 4 quarters are dreaming...
If a person has negative equity NOW, they would be financially foolish not to walk away. Strike that....They should NOT walk away, they should continue living there "mortgage free" until they get kicked out and the place gets padlocked. That will be a LONG LONG time nowadays. And the politicians want to make it even longer.
They should save all their money from now until that padlock day. They after they're out with money in their hands they can start to rent and continue to save (as renting is cheaper than owning).
If they're smart, 5 to 7 years from now they can get back into the game. Home prices have hopefully bottomed by then. That's plenty of time to rebuild credit and Fannie Mae along with FHA is OK with a foreclosure or BK that is 5 years in the past.
How can anybody be so naive to think that struggling to make payments now, while being upside down ALREADY, and sticking this mess out will be better for them financially? It will continue to get worse from here. Prices continue to drop and it's getting worse every day. They should start today with a plan to cut their loses.
Eventually, almost everybody in trouble will figure this out. Whoever is last to this party might not be able to join as regulations will eventually step in. Ben help us!!
If "they" don't sort out the credit crunch soon, Conjure and I are convinced that real estate prices will overshoot.
kidbuck writes:
"Modeling human behavior is impossible..."
Don't try telling that to the faculty at the school of economics. When it comes to believing they are right, they ain't got nothing on a fundamentalist Baptist preacher.
Here's a great article on the problem...
http://www.auroraadvisors.com/articles/LogicOfLifeReview.pdf
FWIW
I almost lost a house in Massachusetts in 1989. I had to rent a place to live BEFORE I sold the house. I know it sounds crazy, but I literally couldn't stand sleeping in the place anymore. It was a monument to my failure. It was a reminder, everytime I walked in, that I was a loser.
I was lucky, I sold it before it foreclosed, I was about two months behind and lost 50 grand (sold another piece of land at a firesale price) to write a check at the closing.
PS: I have rented ever since. I am not interested in playing that game anymore.
Just sayi
Walking away is kind of Joe Sixpack's one opportunity to screw Wall Street back.
You almost hate to see him waste it.
If "they" don't sort out the credit crunch soon, Conjure and I are convinced that real estate prices will overshoot.
Oh yes, because the only thing that's going to put the floor under this is the availibility of credit for more of the masses. That will satisfy the pent-up demand, ease the inventory, and help to re-fi people that will need rate relief. Now, that's not going to increase prices for quite a while, but it will put a bottom on the market. Frankly, I have no idea what else will.
"If they're smart, 5 to 7 years from now they can get back into the game."
Actually, much sooner than that. With so many vacant homes, lenders will be pining for buyers.
I almost lost a house in Massachusetts in 1989.
My tale of being underwater is the same timeframe in the same place. I was lucky and just barely hung on. But my attitude about RE was changed forever, which is why I didn't participate in this insanity and knew it was stupid. People have short memories.
kidbuck writes:
"Modeling human behavior is impossible..."
Don't try telling that to the faculty over at the school of economics. When it comes to believing they talk to God, they ain't got nothing on a fundamentalist Baptist preacher.
Here's a great article on the problem...
Aurora Advisors, Inc. - Management Consulting ar...fLifeReview.pdf
I had the chance to look through the Wachovia presentation. Their model to predict loan losses appears to be based on OFHEO's data on price decreases, which indicates somewhere in the neighborhood of 7-8% declines, peak-to-trough. If I am reading their analysis correctly, I think they have grossly underestimated their loss exposure.
I hope that CR, Tanta, or someone with banking experience will review the presentation to see if the Wachovia analysis holds water. On the surface, it looks like they are taking a tame view of the market so they can raise capital. If you plugged 20% losses into the model, I am sure they are very under reserved.
It is NOT when home equity approaches zero that people walk. IT is when they are aware that they were conned by those that were supposed to protect and support and govern. When there is no justice then people walk. In the 80s people suffered through the lack of equity but they didn't feel like suckers, conned into liquifying their homes to fund growth of private firms in China owned in large part by US insiders.
I think Wachovia's hubris and mediocrity is funny as hell. When Wachovia bought into all of this bullshit, CR and his loyal band of commenters built an airtight case against it in one evening.
They did it for nothing and they pegged it dead nuts.
All Hail, CR!
well, i am sure having a great week in the mkts! and my strategy hasn't changed in over a year. short financials, everything RE related, R2K, RTH, QLD. too many targets, too little time.
i do find it interesting how WB was spontaneously levitating last Th and Fri despite general mkt hits. it was like the lone financial positive out there. i was already short a bunch and doubled down Fri AM. stupid me closed out that half Fri PM. can't complain but clearly financials have started the second leg down.
wasn't it Conjure bag who recommended financials right at the top of this last peak?
Furthermore, in the 80s we did not send our jobs to China and so many of these foreclosures are likely not walks but simply related to the fact that people are no longer able to pay their mortgage. Also back then many states didn't even allow home equity loans and people were not encouraged to take on too much debt and overspend. Common sense tells us the foreclosures today are related to poor household balance sheets.
idoc, if you're going to be long anything in this market, financials are a good candidate.
As I have said before, Conjure and I are not day traders or bottom feeders.
to mp,
No, I don't really care what others think as long as I feel strongly rooted to reason.
As I moved beyond the more RE focused blogs to ones such as CR because they focused on the overall impact of the RE collapse I found myself being pointed towards a very disturbing thought...namely that we are potentially headed towards times that we'll being lucky to have grandparents to compare notes with.
I guess what I'm trying to ask is: to what degree do folks here feel that the ultimate playout of this mess is going to be, in all essence, a Depression?
mp
my longs continue to be concentrated in oil, glod, ag, nat gas, silver all commodity related. i will only bail when the stocks reach ridiculous PE's, inventories are at highs, and the general public dives in.
kidbuck writes:
"Modeling human behavior is impossible..."
In this case the behavior is real simple. When equity goes to zero the odds that another bank will make an even dumber loan that saves your ass plummets.
This isn't borrower behavior they're modeling, it's just other lenders' models.
KindaScared, in my opinion, possible but unlikely. It will probably be a very nasty recession. A lot of folks will think it's a depression.
KS,
The converse of mp's "getting the credit crunch worked out" would be massive capital flight and a bond market dislocation (interest rates spike hard)...that happens color me Really F'ing Scared.
"I guess what I'm trying to ask is: to what degree do folks here feel that the ultimate playout of this mess is going to be, in all essence, a Depression?"
Go back in these comments about two or three years on this and related blogs, and you'll see a strong case was laid out for that scenario. If we don't get there, we'll at least be close.
re: SRS and CRE. i personally think the IB's and big institutional traders are propping the indices. i think i read last nite that 20% of Lehmans equity is in Archstone Smith REIT. think they have an interest in keeping prices up?
i'm beginning to see a breakdown tho in my GGP, URE shorts. now's the time to press your advantage. i bet SRS hits 150 in the next 6 mo.
it's perhaps all in a turn of phrase. I kind of prefer "significant correction which brings fundamentals back into sustainable ratios" to "depression"....
mid size banks have gotten destroyed this last wk. FHN smashed down today to 11.65, DSL smashed to 14.23, CNB to 8.82. RKH also dumping. i'm beginning to feel Un-American via reality-based investing.
Have never done short/option trading but have been studying up and have a Vanguard app that I haven't been able to bring myself to sign and send.
For "shits and grins" - and I never do them simultaneously - I've been following my mortgage lender, First Horizon (FHN). They got killed today - down 11% - and the only thing that I'm sure of doing tomorrow is to review my contract to see who gets teh payments when they go belly up.
Realized other night that they were in the dread CRE > capital crew in the SE US.
Just think that I'm going to sit and keep the powder dry.
idoc writes:
well, i am sure having a great week in the mkts! and my strategy hasn't changed in over a year. short financials, everything RE related, R2K, RTH, QLD. too many targets, too little time.
Yeah me too!! But, you can't just buy and hold. Makes for too many sleepless nights. Take your profits and wait for the dip. Sometimes it takes awhile. Most people don't have the patience and the pros know that. Ruthless bunch!!
The conditions that existed leading up to the last Great Depression in the 1930's are identical to present conditions.
Marriner Eccles' book "Beckoning Frontiers" contains an observation on what caused the Depression in his opinion. Eccles was Chairman of the Fed from '34 to '48 and the building that the Fed occupies bears his name.
Might want to check it out Kinda Scared...
Escariot writes:
"I know it sounds crazy, but I literally couldn't stand sleeping in the place anymore. It was a monument to my failure."
What strikes me is the stark contrast between your attitude and that of these titans of Wall Street.
Do you think James Cayne lost any sleep over his collosal failure?
idoc:
I understand how you feel. intellectually get the reason/purpose for shorting, but I just don't have the kind of make up for that.
That was point of my post the other night re does the Paulsen Put extend to the lower level banks...if so, I could see buying long FHN.
If not - and mp's probably right - then they're hosed.
Where's Tanta?
Wachovia's definition of walkaways seems to be people who fall behind on their mortgages, have no equity, and don't talk to the bank:
somewhere when a borrower crosses the 100% loan to value, somewhere north of that and they presumably run into some sort of cash flow bump, whether it's reduced income or kind of normal things in life that have created past dues before, their propensity to just default and stop paying their mortgage rises dramatically and I mean really accelerates up and it's almost regardless of how they scored, say, on FICO or other kinds of character, credit characteristics.
See, that's always been the trigger for foreclosures before, because when you get behind on a basically unaffordable mortgage and you have no equity, that's when you have to let it go. You can't sell out.
And I can guarantee you that if the folks had one of these low-doc mortgages, a lot of them have a very good reason for not contacting the bank. Anything they say might be used against them.
The thing is, defaults are sort of normal when people lose jobs, take cuts in income, have a bad car accident, a sick kid, etc. If there is sufficient equity in the home, they have an incentive to work with the bank to eventually catch up. But when someone is underwater and they find they can't make payments, the bank is unlikely to be able to help them.
Wachovia's "sudden change in behavior" looks a lot like "normal mortgage modeling" (of the reptilian era) exacerbated by low/no doc lending in which there is likely a high percentage of misstatements on the apps.
This is not a description of ruthless borrowers. It's a description of borrowers with no real alternatives.
The lack of correlation to credit stats makes sense, because truth to be told, adverse life events hit at roughly consistent rates across the credit population.
MoM:
Adverse Life Event = ALE
Works for me.
At this pace, we should know 1 year from now. Either this is yet another economic misadventure that we ultimately "recover" from or we have what those 80 years from now will call an "event".
It having been soo long since we've had an "event", I'd like to get an idea now how things would look should we have one.
I'm just starting to read Galbraith's "The Great Crash of 1929", and so far the parallels are striking. One exception would be how far back folks are psychologically able to "roll the clocks back" in terms of standards of living these days.
One of the striking things in the first part of this book is the mention of how those that worried about the building boom feared it would bring on a depression like they had just seen in 1920! And here we are with 80 years since the GD and "Oh, it just couldn't happen."
Escariot-
Not to seem insesitive but 50k is NOTHING compared to what is currently going on in the bubble states.
Some people are losing 500k.
This is NOTHING like the 90's.
Ugh, I'm more than a little buzzed. We'll know in far less than 80 years whether this has been an "event" or not. The 80 years just came up because that's roughly how long it's been since the GD.
I guess it's such a point for me because this is something most people, it seems, perceive as being unable to ever happen again.
It's one thing to belly splash into a real economic downturn with people that can make the "adjustment", but how would the average Joe today react?
What if we are truly looking at some kind of turnign point where it's better to think about buying some nice "hardware" than puts on LEH?
Hog wash Hog Wash!!!
most of my shorts in financial, HB's, CRE have been LONGTERM, held since last Spring. shares of FHN, DSL, FED can't even be gotten anymore which is why i hold. they've been whipping up and down but like i've said many times here before, stick to your convictions!
homedad43
the Paulson Put will NOT extend to all banks. the mkt is telling you that.
KindaScared:
What you describe is akin to something called the "Kondratieff Wave", or K-wave.
Thrust is that there are "seasons" to a credit cycle culminating in a credit collapse caused by the then-current generation forgetting their economic basics. I've read some on it and the psych twist seems to jive, but still not certain that I buy it.
If you're new to the site, you'll find the gamut of folks here. CR goes by the serious recession but not terrible groove whilst others are real god-fearing GD believers. If you're still here reading this, I suggest you pop to the next article and see what CR notes as to severity.
Me? Hoping for just a recession but prepping for a depression.
idoc @ 1121:
Yep, figured that one out now.
Sometimes it takes me awhile.
No soy inteligente. Muy guapo, pero no inteligente. Como Senor Paulsen.
homedad
you sound like a good guy with your daughter and all. when i think of my kids in regards to their financial future (and mine), i will do anything to secure it even if it means shorting US stocks.
I am straining my arm, raising my hand to be the bank's CEO, too!
Gee, my dog is stretch her paw out, too.
People with over 80 and below 100 IQ's will all qualify; that's sad for me; I so too wanted to be Wachovia CEO.
...and the msm media don't comment on what's said! How can anyone not expect so much, much worse, and shortly!?!
"i'm beginning to see a breakdown tho in my GGP, URE shorts"
URE is too thin for me. There's no easy way to exit if you bet wrong. idoc, I'm a 71 year old swing trader. I'd be nuts thinking LONG TERM. That's for you "nestlings" LOL
Only a few comments from people who read the Wachovia presentation, even though they were nice enough to make it publicly available. I didn't get all the way through it. I stopped at the part where a footnote explained that they have a couple of billion in exposure to "highly-rated monoline insurers". Oops, Waldo!
For those who think walking away is going to teach Wall St. a lesson, I don't believe that's so. Most resi deals were 80%+ AAA. Those bonds were all sold, probably to your pension fund. The lower-rated classes got put into CDOs, then the CDO AAAs were usually sold (unless you were C or ML and believed you had created such value you kept them, funding with asset-backed commercial paper). Walking away hits CDOs the worst, as their performance seems to indicate.
homedad,
Thanks for the input, honestely.
I've been reading this blog for some time but it is getting a little bit scary to follow the crumbs where they seem to be going.
On one side, I happily subscribe to the discourse here, because I'm finding no problem with making coin off of SRS, SKF, FXP, what have you. The problem I'm having is carrying this converastion on to 1 scary logical endpoint, that it's time to seriously consider envolving those close to me with a concern for "what if you did see mushroom clouuds when you looked out the window one morning?"
Granted, we're not there yet, but if this "thing" does well and trully break for the average Joe, so much so that the average "Fish Rap", as I've now heard it called(fitting too) says the same, then We Are Fucked.
If that kind of future even begins to be hinted at, than I would be most happy to glean whatever wisdom I could from forums such as this before they got knocked out for "security" reasons.
I type this kind of laughingly, but don't we kind of take this new freedom of exchange for granted? I mean if the fan really did start to hit the shite, would you really be surprised to see forums like this shut down?
We so quickly take for granted a forum for discourse that could be shut down for any # of "plausible" reasons and yet probably belive that we are beyond such things happening.
I just want to start building up an inventory of plan B's.
From the Future, re CFC:
"The Tan Man
Must do a Span
in the Can!"
Hats off to ever started that!
crabs of steel,
I caught that too. They have a fully hedged their CDO exposure. Who are their counter-parties?
I wouldn't touch this bank with a ten foot pole
peconic,
Hedging probably means that they bought protection via credit default swaps from one or more of the bond insurers, so one of MBIA,AMBAC,FGIC,FSA,etc. are the counter-parties. That's the only natural hedge.
regards, crabs
Rob Dawg, no, we are not paying for Volcker's actions. We are paying for the combination of Greenspan/Bernanke/contemporary American economic thought (related to Marxist/Leninism/Mao-tsetung Thought, but the first to be rescued are the rich).
Volcker is the guy that made the painful decisions and actions that cemented the demented Greenspan's reputation.
This is an absolutely fascinating conference call. Weird thing is, almost everything they said did not surprise me. It was just just kind of like 'yep... or course... truth continuing to come out
Downsouth
No question this is a much different scenario, I am grateful to have had the opportunity to learn that lesson, and for relatively little money.
I related the story more to reveal what might be driving the "walking" mentality. There are some who may be truly attached to their underwater home. I have had first hand experience in what the process felt like on the inside.
Panic isn't conducive to rational thinking.
Unless things get very very ugly kindascared, we will likely be encouraged to have forums like these as it is the discourse of the marketplace. Without it there is precious little economic activity, and the economic activity is going to keep us alive.
Now we may have monitors, that's certainly possible.
Living in Southern California, none of the people I have met with pick-a-payment loans could actually afford the non-teaser mortgage payment. These mortgages were really pushed to squeeze borrowers into a hot market and I think foolish is a better description of the borrowers than ruthless.
Either the teaser period ends or an AVM says the option arm reached 115% LTV and suddenly default. The borrower may realize what is going to happen a few months in advance but that won't stop a train wreck.
It hard to have a lot of sympathy with people who signed these crazy contracts but the banks should have known better. Why not tell analysts the truth, 'We made a huge bet that prices in California would continue to rise 10% a year and save our borrowers from the stupidity we enabled.
Hey, careful how you catagorize those officers.
Thanks
Gomer
You can't make this stuff up. Yesterday, when Wachoiva came to the confessional, I received in the mail an unsolisited offer of an "approved" $150,000 home equity line at a rate of 5.25%. You can't make this stuff up. Kenny boy, might well check on what the troops are still doing while he is sharing the trauma of his ill timed acquision of World SAvings.
Living in Southern California, none of the people I have met with pick-a-payment loans could actually afford the non-teaser mortgage payment.
Exactly, and this is why I said up-thread that the execs are masking the problem by using "ruthless buyers" wording instead of admitting that they were using these loans to make as much money as possible and get market share knowing full well the people that were taking them out could never afford the properties. Imagine if the CEO admitted that!
So now we have the "walk-away" meme to add to the "subprime" meme. Everyone is now "walk-away" instead of "put in homes they had no chance of actually paying for in the long run".
Either the teaser period ends or an AVM says the option arm reached 115% LTV and suddenly default.
#
You don't know what you're talking about.
These loans recast provision is based off the percentage (105, 110, 15, 120, whatever) the current balance is over original balance NOT current LTV.
Tarted up cluelessness driving misinformed agendas is way too commonplace on this message thread.
-$100,000 the breaking point? I fully expect to be that far underwater by 2010, in spite of having put down 20%. Looking back, of course it was stupid not to research the price history of the house and neighborhood and recognize that the huge price run up was unsustainable. But I will be one of those fools who "doggedly" pays the mortgage every month until I can't work anymore. I will take in a roommate if I have to. I'm too old and too stubborn to give up. There may be a couple tough, if foolish, old ladies like me out there to skew the numbers. I don't think you all have figured us into the equation.
Re: The "behavior" of buyers has changed.
No it hasn't, characteristics of the population have changed.
This is just another version of the rationale whocoodanode.
Check this out:
The wave of defaults on subprime mortgages, loans made to the least creditworthy home buyers, is spilling into the lower tiers of corporate credit, said Anders Maxwell, managing director of New York-based investment bank Peter J. Solomon Co.,
See? Subprime is spilling over into corporate? WTF does this even mean? More crap and the mis-use of the subprime tag.
Wachovia's "sudden change in behavior" looks a lot like "normal mortgage modeling" (of the reptilian era) exacerbated by low/no doc lending in which there is likely a high percentage of misstatements on the apps.
MOM, i think Wachovia is actually making a different claim than what you're pointing out. their claim (as i read it) is that performance deterioration is accelerating materially when borrowers cross some threshold around 100 LTV, which, historically anyway, actually isn't the case (performance is worse but deterioration is still linear if you control for all other variables).
certainly if you don't control for other variables performance deterioration may accelerate at that threshold because a large percentage of the borrowers that go into a negative equity position earlier may also have other loan attributes that make them more sensitive to HPA (ie high CLTV).
we are seeing is that when equity in the home approaches zero, behavior changes.
I think the first people who ever lent money figured this out about 5,000 years ago.
Underwater: I hear you! I have friends who lent a lot of money to their son to buy 3 Phoenix townhouses. He said it was a sure thing and now he's in trouble. Another friend lent his sister-in-law money so she wouldn't lose the house she has owned for 20 years in California. I didn't get to them soon enough. They just didn't know what was happening in the RE market.
I have another acquaintance who's 71 and in fixed investments. The bank's investment counselor had him in investments that were "enhanced". I got to him in time. Last week he brought me a bouquet of flowers as a thank-you. BTW, the counselor lost lots of money in her own account last year. Drank her own Kool-Aid.
You have lots of company.
Pricing happens on the margin. To some that may be obvious, but if chewed on for a bit longer you'll always find room to appreciate another spoonful.
Pricing happens on the margin...
"So we ended the quarter with just over 900 homes in inventory originated through the pick a payment channel..."
Pick-a-Payment Channel.
It's like Wachovia is now a property retailer and the Option ARM product was just a supply chain strategy...
I for one expect that this particular "channel" will get a lot fuller as these loans reset to full principal and interest payments at their new negative amortization max-out principal balances.
Be in cash.
Thompson needs to go. The annual report stated the dividend was safe and 3 weeks later it was cut. Thompson doesn't know the internal workings of the company. I want to start a trend of suing CEO's and Board's that are incompetent. All of their assets while CEO, etc need to be seized.