RMBS space should begin quaking any moment. I will note down at the 20% number we are talking serious damage to almost all of the adjustable rate loans sold...so if you can't maintian an orderly market you get killed by the appraiser on the refi and mail the keys back to the adj loan boys- or cram them down into a sizeable loss as the get adjusted into a makeable fixed vs jinglemail.
I remember the early 90s- sold my mreits stuff this summer as it seemed to be peaking. alpha seeking fools will find nothing but losses as far as the eye can see.
Moral of the story- if you have an arm and want to keep the house- get to the bank before appraisers get the new lower comps from the first wave of foreclosures. Commenting from the other article- if three to five percent of the 50 million with mortages get foreclosed- that is still an additional million houses on a very soft market. If these are not done preforeclosure, but instead on the courthouse steps for whatever they bring....consider the hottest markets may get the coldest- as was what happened in the late 80s through the early 90s-
Ready for a bit of a Phoenix meltdown?
The eventual resurection is a given- but money flown away to default heaven is not restored to the losers.
Hang on tight- here comes the downside on the roller coaster....
I went through Cagan's report very quickly and I'm not sure if this is additional defaults or total defaults. Also, what would that number (if it's the total) of defaults translate into in terms of a default rate?
I'm east coast, but I'm trying to get a picture of what the foreclosure landscape is going to look like nationwide and get some kind of notion as to how the overall economy should fair in 07.
Kinda hard to analyze or comment on this guy's work, when we don't know the level he's using for residential values. Ok, values drop 5%, go down one line. Drop from where? Are we already down 5% from his base line?
winjr, I wondered about that myself. Looks like he's using value at origination of loan. Here's the link for the paper that goes with the slideshow. I haven't really read it yet.
Thank you and all the other commenters for getting an answer to the question I asked yesterday. This is a great blog and the commenters here often raise the level of the discussion rather than lower it, which is something truly amazing.
I saw a graph a while back that projected how long it would take for the housing market to revert to mean under several assumptions of depreciation over years. I don't recall where I saw it. Can anyone point me to it?
In reading the paper another fact that struck me like a truck is that nearly TWENTY million mortgages were written in 2004-2005. Ten percent going south would imply two million repo houses over the next three years. Remeber some fixed will go bad too with low equity cushions.
I am beginning to believe the fed is going to have to lower rates to ease the pain of the hot to not regions and to cushion this with higher inflation- can the $ live with 4%inflaiton for a decade?
I'm hoping someone can answer this question for me. How come no one seems to be surprised that Countrywide reported a provision for loan losses in the third quarter that was well below the average they posted in Q1 and Q2?
The provision was $38MM for the quarter, $163MM for the first 9 months. Delinquencies are up on a YOY basis, so is the allowance - so maybe further provisions were unnecessary. Its obvious that foreclosures are up across the country and partcularly in California, but CFC didn't provide charge off information. It seems to me that management should be anticipating greater credit deterioration. I'm cynical but it has crossed my mind that they'd prefer to up the provision in a quarter when the MSR asset is up and contributing to the bottom line - like Q2. Is the provision just subjective? No analysts seemed to mind during the call.
I read through his paper, and found that the home values were determined as of 09/05, using some new-fangled computer proprietary model. Ok, whatever.
In other words, values were determined at the very peak of the market. Har!
Ok, let's drop down TWO lines now, to see just how many folks are in trouble!
Also, his conclusion kinda misses the mark. He focuses on the dollar amount of losses, assuming they'll be easily absorbed. Maybe, maybe not, but this doesn't consider ripple, unwinding-of-position effects, either. What he doesn't consider, and much more important, (as noted by a few posters above), is how these defaults will engorge an already bloated housing market.
I am beginning to believe the fed is going to have to lower rates to ease the pain of the hot to not regions and to cushion this with higher inflation- can the $ live with 4%inflaiton for a decade?
I'd say 'no'. I believe you correctly identified the 'rock' (as in 'between a rock and a hard place').
I do not believe the dollar can take a 4% plus on going inflation rate...
Let me rephrase that... I do not believe the Fed can allow the dollar to fall so fast as to result in a long term 4% inflation rate & still fund the deficits as far as the eye can see.
The Fed can allow some 'rebalancing' of the dollar - needs to do this as per the discussions found on Setser's blog - but it can only go so fast for so long before the dollar free falls & inflation explodes (considering all we import).
So I would be very surprised if the Fed eases enough to save all the 'FBs' out there - see Patrick.net for definition of FBs.
OT - For California on Countrywides layoffs : "Many of the jobs to be eliminated are in loan production, and Countrywide is also moving jobs out of California, where it pays higher state income tax rates for workers. "
So even though the layoffs will only number 2500, the effect of relocation on California (specifically Ventura County) could be pronounced.
So even though the layoffs will only number 2500, the effect of relocation on California (specifically Ventura County) could be pronounced.
Cal, do you know where they will move the jobs that is 'cheaper'? I mean where is it sufficiently cheaper to make the hassle worthwhile except possibly Bangalore?
The eventual resurection is a given- but money flown away to default heaven is not restored to the losers.
But this is how we get rid of all the excesses and purge the bad debt a la Austrian economics. I mean it was all fake on paper money anyhow, right? I'm renting (still) and ready for a brand new trough.
Cal, do you know where they will move the jobs that is 'cheaper'? I mean where is it sufficiently cheaper to make the hassle worthwhile except possibly Bangalore?
Arizona or Florida? You could probably get a 20% savings per employee (between taxes and lower salary). I dont think they will relo, I think they will lose the jobs in CA and hire people in "wherever". Taxes and wages are very high in CA, and depending on the number of employees they are abritraging to another state the "hassle" would be negligible to the cost in my WAG opinion.
Dryfly,
Anyplace whose name begins with a vowel or consanant will be cheaper than Ventura County. I cannot think of more than a handful of places where the instantaneous cost of living is more out of whack with the availability of matching jobs. At least the Bay Area has some of those jobs.
Doesn't mean we (VenCo owners) are screwed. So many ]of "us"] are pre 1999 owners and are thus minimally exposed. VenCo is used to corporate relocation. The military, FedEX Kinkos, and soon Amgen (despite their denials). Our minor saving graces are our diversified economy; agriculture, military, tech, services and our unrecognized incubator assets. What is going to be the national lesson learned from us is our efforts at buffering growth. We don't prevent growth but we do make it a protracted process. CFC is just our latest fledgling to leave the nest. Some fly, and others like CFC are doomed to plummet. Heck, Mozillo has extracted $270m plus in the last 3 years. Does anyone think he's stupid for what he does? Why then would anyone believe what he says?
The Marin Independent Journal. Home foreclosures in Marin County were up nearly 60 percent in the third quarter compared with the same period last year, Dataquick reported. Eighty-nine foreclosures were reported in the quarter ending Sept. 30, up 58.9 percent over last year, when there were 56.
The foreclosure numbers were also a steep jump from the second quarter, when 58 were reported. But Marins foreclosure picture was still rosier than most of the other eight counties in the Bay Area, where overall foreclosures surged 89.2 percent in the third quarter.
the The Marin medium home price is in the 950K range.
Anyplace whose name begins with a vowel or consanant will be cheaper than Ventura County.
RC - that's too funny. Ya slower controlled growth is a concept whose time has come.
Arizona or Florida? You could probably get a 20% savings per employee (between taxes and lower salary).
Cal - those folks don't know what cheap is. Look up Sioux Falls South Dakota some time. Plus the workforce there can read and except for the occasional weekend jaunt out to Sturgis in the Black Hills or Mall of America in Minneapolis, has nothing to do but work.
Ventura to Sioux Falls... now that would be culture shock.
Take a look at Ft. Wayne Indiana, median home prices are right at 100K, nice homes with an educated workforce ready to take on any back-office operation...
Arizona or Florida [as examples], you could probably get a 20% savings per employee (between taxes and lower salary) [compared to VenCo].
20%?!? We got median houses that freakin' cost $600k. California income taxes are often 9.3%. Sales taxes are 7.25% and up. Gas costs in the top 10% of the nation and delivers 10% worse mileage. We don't even have a freakin' interstate highway. Really, find anywhere in the nation where more people are less served by the Feds in almost every category. Fer gawds sake we are still paying the temporary obscene National Forest "use tax" experimental fee since renewed twice. It is a miracle we still muddle along.
I wouldn't even ponder a growth business here. I can build experimental aircraft in Colorado like my old boss. I can set up management in Nevada for offshore manufacturing, I can suck up millions in Michigan subsidies. Whatever. California is Massachusetts minus 25 years. Single party politics, bifurcated social strata, demographic divide. The outcome is already baked into the cake.
Seems to be a lot of focus on the impact of resets, and the analysis always seems to conclude "so, 40-50 bn of loan losses and a 1 or 2 % foreclosure rate, nothing to worry about".
Nobody on Wall Street or in the MSM is talking about the loss of $500bn per year of MEW. That's the elephant in the room.
Basically all of our economic growth over the last 5 years can be accounted for by increased government spending (i.e. borrowed money) and MEW (i.e. borrowed money). Using borrowed money to consume today = lower consumption tomorrow. (in my opinion most government expenditure is consumption directly, or ends up as consumption - show me a positive NPV government program)
The impact of lost MEW on the economy and thence on employment will feed into foreclosures. The mortgage reset issue is an added punch in the gut - if you couldn't afford a fixed when you bought, you can't afford it now. And if you have negative equity, you can't refi anyway.
Boy this is going to be fun to watch (if you are on the sidelines(.
If you havent check out the CFC cc call, about 30 minutes in, they talk about how the guidance has affected their current underwriting (not at all, yet) , but the whole call is relatively interesting especially when people are trying to pin them down on credit quality and guidance.
""I don't think there has been any decision where the jobs will be cut at this point in time," company spokesman Rick Simon said. "The analysis is still going on but ... it won't be all in California."
However, an analyst who participated in the earnings conference call but asked not to be identified said he thinks most of the cuts will come in California.
Countrywide has about 18,000 employees in California, including Calabasas, Simi Valley, Agoura, Westlake Village, Thousand Oaks, West Hills, Warner Center, Irvine, Pasadena, Rosemead and Lancaster.
Out-of-state operations are in Tempe and Chandler, Ariz., Dallas-Fort Worth and Tampa, Fla., Simon said.
"When they do rehire - they are growing and there will be an increase in production at some point - those new hires will likely be in states with lower costs," he said. "
My WAG for Ventura County (incl Westlake) is 2500 eventually cut. Probably 1/3rd thru attrition and another third via transfers. Given the past explosive growth in CFC employment these people are also likely their own customers and the most highly leveraged recent purchaser homeowners as well. There's going to be some tough decisions for a two earner family when one is transfered or unemployed. No equity, no prospects and insufficient income or savings. Not just ugly, fugly.
Good thing Mozillo extracted $270 million these last few years. And did you see them drink their own kool-aid yesterday? They are taking on massive debt to repurchase their own shares. A corporate home equity loan so to speak.
I think by the time the downside of the cycle plays out CFC will almost be irellevant, victims of disintermediation. Credit is goinfg to become a lot more transparent and flat thus squeezing their raison d'etre.
A link to different scenarios and how long it will take for the "housing correction" to Bottom out (AKA Bubble bursting) is on Professor Piggingtons website about the San Diego Real Estate Bubble. He states that if home prices simply flatten out it will take 17 years for the full correction to occur, not a likely scenario(see : Japanese housing bubble).
RMBS space should begin quaking any moment. I will note down at the 20% number we are talking serious damage to almost all of the adjustable rate loans sold...so if you can't maintian an orderly market you get killed by the appraiser on the refi and mail the keys back to the adj loan boys- or cram them down into a sizeable loss as the get adjusted into a makeable fixed vs jinglemail.
I remember the early 90s- sold my mreits stuff this summer as it seemed to be peaking. alpha seeking fools will find nothing but losses as far as the eye can see.
Moral of the story- if you have an arm and want to keep the house- get to the bank before appraisers get the new lower comps from the first wave of foreclosures. Commenting from the other article- if three to five percent of the 50 million with mortages get foreclosed- that is still an additional million houses on a very soft market. If these are not done preforeclosure, but instead on the courthouse steps for whatever they bring....consider the hottest markets may get the coldest- as was what happened in the late 80s through the early 90s-
Ready for a bit of a Phoenix meltdown?
The eventual resurection is a given- but money flown away to default heaven is not restored to the losers.
Hang on tight- here comes the downside on the roller coaster....
I went through Cagan's report very quickly and I'm not sure if this is additional defaults or total defaults. Also, what would that number (if it's the total) of defaults translate into in terms of a default rate?
I'm east coast, but I'm trying to get a picture of what the foreclosure landscape is going to look like nationwide and get some kind of notion as to how the overall economy should fair in 07.
Kinda hard to analyze or comment on this guy's work, when we don't know the level he's using for residential values. Ok, values drop 5%, go down one line. Drop from where? Are we already down 5% from his base line?
winjr, I wondered about that myself. Looks like he's using value at origination of loan. Here's the link for the paper that goes with the slideshow. I haven't really read it yet.
http://www.firstamres.com/pdf/MPR_White_Paper_FINAL.pdf
BTW CR,
Thank you and all the other commenters for getting an answer to the question I asked yesterday. This is a great blog and the commenters here often raise the level of the discussion rather than lower it, which is something truly amazing.
Dear CRers,
I saw a graph a while back that projected how long it would take for the housing market to revert to mean under several assumptions of depreciation over years. I don't recall where I saw it. Can anyone point me to it?
Thanks!
This link shows a good example of "reversion to the mean" on Charles smith's weblog.
charles hugh smith-After the Bubble: How Low Will It Go?
In reading the paper another fact that struck me like a truck is that nearly TWENTY million mortgages were written in 2004-2005. Ten percent going south would imply two million repo houses over the next three years. Remeber some fixed will go bad too with low equity cushions.
I am beginning to believe the fed is going to have to lower rates to ease the pain of the hot to not regions and to cushion this with higher inflation- can the $ live with 4%inflaiton for a decade?
interesting times.
Pretty scary since this only talks about 1st mortgage originations...doesn't even talk about the 2nd aka HELOC (Line of Credit).
I'm hoping someone can answer this question for me. How come no one seems to be surprised that Countrywide reported a provision for loan losses in the third quarter that was well below the average they posted in Q1 and Q2?
The provision was $38MM for the quarter, $163MM for the first 9 months. Delinquencies are up on a YOY basis, so is the allowance - so maybe further provisions were unnecessary. Its obvious that foreclosures are up across the country and partcularly in California, but CFC didn't provide charge off information. It seems to me that management should be anticipating greater credit deterioration. I'm cynical but it has crossed my mind that they'd prefer to up the provision in a quarter when the MSR asset is up and contributing to the bottom line - like Q2. Is the provision just subjective? No analysts seemed to mind during the call.
Any thoughts?
Tanta, thanks for the link.
I read through his paper, and found that the home values were determined as of 09/05, using some new-fangled computer proprietary model. Ok, whatever.
In other words, values were determined at the very peak of the market. Har!
Ok, let's drop down TWO lines now, to see just how many folks are in trouble!
Also, his conclusion kinda misses the mark. He focuses on the dollar amount of losses, assuming they'll be easily absorbed. Maybe, maybe not, but this doesn't consider ripple, unwinding-of-position effects, either. What he doesn't consider, and much more important, (as noted by a few posters above), is how these defaults will engorge an already bloated housing market.
I am beginning to believe the fed is going to have to lower rates to ease the pain of the hot to not regions and to cushion this with higher inflation- can the $ live with 4%inflaiton for a decade?
I'd say 'no'. I believe you correctly identified the 'rock' (as in 'between a rock and a hard place').
I do not believe the dollar can take a 4% plus on going inflation rate...
Let me rephrase that... I do not believe the Fed can allow the dollar to fall so fast as to result in a long term 4% inflation rate & still fund the deficits as far as the eye can see.
The Fed can allow some 'rebalancing' of the dollar - needs to do this as per the discussions found on Setser's blog - but it can only go so fast for so long before the dollar free falls & inflation explodes (considering all we import).
So I would be very surprised if the Fed eases enough to save all the 'FBs' out there - see Patrick.net for definition of FBs.
OT - For California on Countrywides layoffs : "Many of the jobs to be eliminated are in loan production, and Countrywide is also moving jobs out of California, where it pays higher state income tax rates for workers. "
So even though the layoffs will only number 2500, the effect of relocation on California (specifically Ventura County) could be pronounced.
his base is a 300K mortgage in Calif?
the medium is over 500K, is there something I am missing?
So even though the layoffs will only number 2500, the effect of relocation on California (specifically Ventura County) could be pronounced.
Cal, do you know where they will move the jobs that is 'cheaper'? I mean where is it sufficiently cheaper to make the hassle worthwhile except possibly Bangalore?
Throw in selling costs and you drop everyone in the chart another line down.
The eventual resurection is a given- but money flown away to default heaven is not restored to the losers.
But this is how we get rid of all the excesses and purge the bad debt a la Austrian economics. I mean it was all fake on paper money anyhow, right? I'm renting (still) and ready for a brand new trough.
Cal, do you know where they will move the jobs that is 'cheaper'? I mean where is it sufficiently cheaper to make the hassle worthwhile except possibly Bangalore?
Arizona or Florida? You could probably get a 20% savings per employee (between taxes and lower salary). I dont think they will relo, I think they will lose the jobs in CA and hire people in "wherever". Taxes and wages are very high in CA, and depending on the number of employees they are abritraging to another state the "hassle" would be negligible to the cost in my WAG opinion.
Dryfly,
Anyplace whose name begins with a vowel or consanant will be cheaper than Ventura County. I cannot think of more than a handful of places where the instantaneous cost of living is more out of whack with the availability of matching jobs. At least the Bay Area has some of those jobs.
Doesn't mean we (VenCo owners) are screwed. So many ]of "us"] are pre 1999 owners and are thus minimally exposed. VenCo is used to corporate relocation. The military, FedEX Kinkos, and soon Amgen (despite their denials). Our minor saving graces are our diversified economy; agriculture, military, tech, services and our unrecognized incubator assets. What is going to be the national lesson learned from us is our efforts at buffering growth. We don't prevent growth but we do make it a protracted process. CFC is just our latest fledgling to leave the nest. Some fly, and others like CFC are doomed to plummet. Heck, Mozillo has extracted $270m plus in the last 3 years. Does anyone think he's stupid for what he does? Why then would anyone believe what he says?
The Marin Independent Journal. Home foreclosures in Marin County were up nearly 60 percent in the third quarter compared with the same period last year, Dataquick reported. Eighty-nine foreclosures were reported in the quarter ending Sept. 30, up 58.9 percent over last year, when there were 56.
The foreclosure numbers were also a steep jump from the second quarter, when 58 were reported. But Marins foreclosure picture was still rosier than most of the other eight counties in the Bay Area, where overall foreclosures surged 89.2 percent in the third quarter.
the The Marin medium home price is in the 950K range.
Anyplace whose name begins with a vowel or consanant will be cheaper than Ventura County.
RC - that's too funny. Ya slower controlled growth is a concept whose time has come.
Arizona or Florida? You could probably get a 20% savings per employee (between taxes and lower salary).
Cal - those folks don't know what cheap is. Look up Sioux Falls South Dakota some time. Plus the workforce there can read and except for the occasional weekend jaunt out to Sturgis in the Black Hills or Mall of America in Minneapolis, has nothing to do but work.
Ventura to Sioux Falls... now that would be culture shock.
Take a look at Ft. Wayne Indiana, median home prices are right at 100K, nice homes with an educated workforce ready to take on any back-office operation...
Dryfly posits:
Arizona or Florida [as examples], you could probably get a 20% savings per employee (between taxes and lower salary) [compared to VenCo].
20%?!? We got median houses that freakin' cost $600k. California income taxes are often 9.3%. Sales taxes are 7.25% and up. Gas costs in the top 10% of the nation and delivers 10% worse mileage. We don't even have a freakin' interstate highway. Really, find anywhere in the nation where more people are less served by the Feds in almost every category. Fer gawds sake we are still paying the temporary obscene National Forest "use tax" experimental fee since renewed twice. It is a miracle we still muddle along.
I wouldn't even ponder a growth business here. I can build experimental aircraft in Colorado like my old boss. I can set up management in Nevada for offshore manufacturing, I can suck up millions in Michigan subsidies. Whatever. California is Massachusetts minus 25 years. Single party politics, bifurcated social strata, demographic divide. The outcome is already baked into the cake.
Just 10 months ago Cagan estimated the reset defaults at 7,000-8,000 in the Orange County Register.
Now the projection is 18,000.
That is an error factor of 2.25.
If his accuracy holds up in 10 months time we will be over 40,000 defaults.
Seems to be a lot of focus on the impact of resets, and the analysis always seems to conclude "so, 40-50 bn of loan losses and a 1 or 2 % foreclosure rate, nothing to worry about".
Nobody on Wall Street or in the MSM is talking about the loss of $500bn per year of MEW. That's the elephant in the room.
Basically all of our economic growth over the last 5 years can be accounted for by increased government spending (i.e. borrowed money) and MEW (i.e. borrowed money). Using borrowed money to consume today = lower consumption tomorrow. (in my opinion most government expenditure is consumption directly, or ends up as consumption - show me a positive NPV government program)
The impact of lost MEW on the economy and thence on employment will feed into foreclosures. The mortgage reset issue is an added punch in the gut - if you couldn't afford a fixed when you bought, you can't afford it now. And if you have negative equity, you can't refi anyway.
Boy this is going to be fun to watch (if you are on the sidelines(.
California is Massachusetts minus 25 years.
Yes but it will still be a warm Massachusetts.
CR,
If you havent check out the CFC cc call, about 30 minutes in, they talk about how the guidance has affected their current underwriting (not at all, yet) , but the whole call is relatively interesting especially when people are trying to pin them down on credit quality and guidance.
Robert,
""I don't think there has been any decision where the jobs will be cut at this point in time," company spokesman Rick Simon said. "The analysis is still going on but ... it won't be all in California."
However, an analyst who participated in the earnings conference call but asked not to be identified said he thinks most of the cuts will come in California.
Countrywide has about 18,000 employees in California, including Calabasas, Simi Valley, Agoura, Westlake Village, Thousand Oaks, West Hills, Warner Center, Irvine, Pasadena, Rosemead and Lancaster.
Out-of-state operations are in Tempe and Chandler, Ariz., Dallas-Fort Worth and Tampa, Fla., Simon said.
"When they do rehire - they are growing and there will be an increase in production at some point - those new hires will likely be in states with lower costs," he said. "
Housing slowdown costs jobs - LA Daily News
My WAG for Ventura County (incl Westlake) is 2500 eventually cut. Probably 1/3rd thru attrition and another third via transfers. Given the past explosive growth in CFC employment these people are also likely their own customers and the most highly leveraged recent purchaser homeowners as well. There's going to be some tough decisions for a two earner family when one is transfered or unemployed. No equity, no prospects and insufficient income or savings. Not just ugly, fugly.
Good thing Mozillo extracted $270 million these last few years. And did you see them drink their own kool-aid yesterday? They are taking on massive debt to repurchase their own shares. A corporate home equity loan so to speak.
I think by the time the downside of the cycle plays out CFC will almost be irellevant, victims of disintermediation. Credit is goinfg to become a lot more transparent and flat thus squeezing their raison d'etre.
Fred,
A link to different scenarios and how long it will take for the "housing correction" to Bottom out (AKA Bubble bursting) is on Professor Piggingtons website about the San Diego Real Estate Bubble. He states that if home prices simply flatten out it will take 17 years for the full correction to occur, not a likely scenario(see : Japanese housing bubble).
Here is the link:
Risks of a Serious Home Price Decline | Piggington's Econo-Almanac | San Diego Housing Bubble News and Analysis
Newbee, from the ridiculously over priced OC, Ca.
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