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Tanta: Credit Suisse "Not drinking the Kool Aid"
Submitted by
CalculatedRisk on Mon, 03/12/2007 - 3:19pm (90 comments)
Nice work Tanta, glad to see at least someone outside of the blogosphere isn't guzzling the Kool-aid.
Lereah, Greenspan and that reprehensible CNBC clown Cramer are all going to need some Wild Turkey for theirs after reading this.
Drinking the Kool-Aide;
Subprime concerns as overblown as Y2K, fund manager says - MarketWatch
Many thanks Tanta! I always wondered why the data seemed so hard to come by, or so muted, or so distorted by smoke and mirrors. Now I know why.
Looks like a storm is coming -- Gotta go dig my prairie dog bunker.
How does one think about the background of the demographic "demand" for home ownership--incomes, affordability, employment data, household formation? Maybe the piece in today's WSJ by David Crook will make a few folks reconsider the consequences of home ownership.
Great work Tanta, thanks!
What their conclusion leaves out is that EXISTING homes will see a likewise drop in demand, and a record high level of them are sitting empty. Ultimately, won't that provide a lot of head wind working against stabilization in homebuilding? What I'm getting at it, if their figures are correct on the loss of demand, new home sales are going to fall further than 887,000.
David, I haven't seen the WSJ piece you're referring to; I don't subscribe. But I must say the data on mortgages--and the CS report's as clear a summary as I've seen lately--suggest to me that you can say whatever you want to about household formation and incomes based on various demographic reports, but when it comes time for people to sit down with a loan officer, they don't have a down payment and they don't have sufficient income to qualify for a traditional loan product at a traditional ratio.
It reminds me of the interesting results you can get comparing, say, census/BLS reports of income with analysis of IRS data. Somehow, between the two, some numbers get changed.
Tanta,
The WSJ piece basically shows how a home is often a pretty bad investment, and sometimes a horrible one. They include things like maintenance costs that are usually left out of th emix. But even their evaluation forgets that if you lose the itemized mortgage deduction, you get back the standard deduction, $10,000 for a couple.
It is funny how the psychology changes so quickly.
Actually, Bob, they do look at that. I didn't exerpt that part because there's only so much of a subscription report I feel comfortable exerpting. However, they are in fact trying to account for the "housing chain" issue. Their estimate of the 20% drop in new home sales is the sum of what they're estimating as direct impacts from tightening guidelines (new home purchase applications) and indirect ripple impacts (existing home purchases falling through and therefore cancelling the new home purchase). It's one of the reasons they're looking at REO: it craters the existing home market, which then impacts the new home market by removing those potential new home buyers who can't sell their existing home (or can't sell it for enough). Again, because the point of the report was to look at the homebuilders, they didn't spend any serious time trying to estimate effects on existing home sales separately.
"According to our contacts, homebuyers were primarily qualified at the introductory teaser rate rather than the fully amortizing rate, which for many buyers was the main reason they were even qualified in the first place."
Tanta, in the world as we knew it before Fed and State guidelines to the contrary, or perhaps even today, would this practice have constituted any arguable violation of MBS purchase covenants?
No question that it spills to Alt-A and impacts overall home prices.
What is going to prolong the downturn and increase the cost to the lenders will be that the borrowers of these properties are going to sue the lender & mortgage broker for fraud/ material misrepresentation and predatory lending practices on the loan. Whether their claim is valid or not, this will create tremendous havoc for the lenders.
Their lis pendant will cloud the title to the property and may even stay the foreclosure by some judges
(even though it may be a non-judicial foreclosure). Or at least impair/prolong the REO from getting clean title to sell the asset to mitigate the loss.
This will give the lenders larger losses and not allow them to resale the property. In addition to lenders having to pay more attorney fees to defend the lawsuit.
This is going to be the common guerilla warfare tactic used by borrower to attempt to stay in the property rather than just mailing in the keys.
As we all know once you get in the court system things move at a snails pace, which would be a good thing if you didn't pay the mortgage.
In many of these cases the Lender will be paying/settling with the borrower to move out of the property.
You're joking. The Wall Street Journal managed to discover that your average single-family home is a money sink?
We've talked a lot about the horrors of the DTIs used during the boom, and less about the issue of reserves after closing, but that's actually been a big problem, too. It goes right to the heart of your point about "forgetting" things like maintenance. Take a first-time homebuyer, who isn't exactly used to having to shell out cash to pay the plumber when something goes wrong, put them into a house with no reserves after closing, and then just watch the loan fall apart when some normal home-owning drama occurs like a faulty furnace or broken appliance or the dreaded toddler-flushing-the-towels fiasco. Sure, it's less of an immediate problem with new construction (assuming the construction was both decent and warranted, ahem), but my own experience with these things is that putting first-time buyers in (at least some) new subdivisions just exposes them to too much pressure to furnish and landscape the joint in the same way the (older, richer) neighbors do. Renters, of course, know how expensive it is to buy furniture. They have a tendency to blow it when it comes to paint, wallpaper, carpet, the dreaded "window treatments," and other stuff you don't invest in with a rental.
But there was the media all those years, encouraging them to believe that all that stuff was an "improvement" instead of just "maintenance." You're sure right that the psychology changes quickly.
would this practice have constituted any arguable violation of MBS purchase covenants?
Depends on whether the MBS agreements were smart enough to address the issues in the underwriting guidelines.
Some were; some weren't. Remember that in most of these cases of private issue pools, the guidelines are written by the Wall Street buyer. In some cases, the guidelines are written by the originator, but are then submitted to the buyer and signed off on as part of the contract. So if the guidelines in question require qualifying at something other than the start payment, and the originator didn't do that, it's buyback time. If the guidelines allowed that, and then the loan predictably went bad early, it can just go back as an EPD. If it went bad after the EPD period, that's where you see the Street firms hiring Clayton (or other due diligence firms) to pick through the loan files trying to find something else that's arguably a contract violation, so that they can be put back. The Street hates to admit that its guidelines were ever stupid in any respect.
That's actually something to bear in mind with all the reports we're seeing lately of different lenders tightening guidelines. That may be coming from the lenders themselves; it may also be coming from Wall Street (as investor or as warehouse lender) to the lender and then to the brokers.
This is going to be like a neutron bomb. The only thing left standing will be the houses.
Analysts Focus on Numbers, Miss the Big Picture
Blogger: Page not found
Even with Lehman's estimate of $225 Billion in Mortgage Defaults with no fall in home prices, the general economy will surely feel it.
And the window treatments. I suspect those will be like cockroaches, impervious to any radiation or biological weaponry known to our corner of the universe. Future archaeologists will uncover the remains of these homes, long vacant before they were covered by the sands of time, and will ask themselves, "What's that shit hanging over the windows?"
CR
Great stuff! Thank goodness you and Tanta aren't drinking the cool-aid. You guys just keep grinding your axes.
So Tanta has a "secret" Credit Suisse report that says 565,000 foreclosed homes plus an additional 135,000 are coming on the market in 2 to 6 months?
Mark Whitehouse in the WSJ quotes Lehman Brothers as estimating that foreclosures will bring 15 to 20K houses per month on to the market in 2008. This is a far cry from the secret Credit Suisse forecast. Mark also points out that the consumer purchasing power of the people affected by sub prime only represent 8% of consumer purchasing power. He further points out that the effect will only be seen in frothy markets like Florida and California and in depressed markets like Detroit, Cleveland, and Atlanta.
Last week my daughter and her husband listened to our negative comments about the housing market here in Cincinnati, but went ahead and put their house on the market anyway. They sold it yesterday.
I'm sorry that I let your axe grinding affect my advise to them.
Jim
Tanta, No no no!!!
Where were you during the 1990s CA bust? The window treatments disappear... along with light & plumbing fixtures, appliances, carpeting... and even the electrical panels & perhaps in cases even the copper piping and wiring. Those new double and triple pane windows might even vanish before the lender has a chance to notice.
How soon we forget.
Hmm I wonder how Full Spectrum Lending is doing these days....Shh!!! someone might be listing!
Jim, congratulations to your daughter and her husband!!! They must have priced it right, that is hard to do in a declining market.
ARM resets will peak during the third-quarter of 2007."
Yeah! That's just in time for the most onerous of the new lending standards to take effect. A few months after that we will be where? That's right, Christmas boys and girls. It's a casual guess at best, but: Jo Blo, who will be sitting on top of his inflated ARM and unable to re-fi, isn't going to be spending much on plasma TV's and electronics next Christmas. In fact, he might not spend much on anything at all except food and his mortgage. The real fun will then be just around the corner in 2008, when the defaults and foreclosures really get going.
Here is a window into where we are now: The inland empire here in SoCal is already being hit hard - you can drive around places like Lake Elsinore, which has seen the most unbelievable BOOM immaginable in the last 3 years, and you can't throw a rock without hitting a house that is for sale. That doesn't count the bajillions of homes the builders are still finishing out and the many empty slabs waiting for a new home to go up. I recently drove around some of the most desirable neighborhoods there and I counted more than 30 homes for sale in about a 10 square block area. That is repeated all across the region. The NAR and our buddy Lereah can spin all they want, but there is no hiding the forest of for-sale signs popping up all over the place. Take the existing inventory of unsold new homes, add in the inventory of 'slightly used" homes, add in much more strict lending standards, and re-setting ARM's and I really think that for even the most optimistic bulls it doesn't paint a pretty picture. What it tells me is that very soon it will get greatly worse out there.
Inflationary depression anyone?
Go to your grocer and observe that beef is now running between $5 and $7 a pound... and consider that this could in all probability be headed higher. Look at the cost of fuel recently.
Inflationary depression anyone?
Jim, you're letting your irritation get ahead of your reading skills.
First of all, the CSFB report isn't a "secret." It is a report provided to people who "pay for it." Neither CR nor I consider it fair to CSFB to repost in its entirety a report that is provided on a subscription basis.
Furthermore, the report does not say "565,000 foreclosed homes plus an additional 135,000 are coming on the market in 2 to 6 months." Read it again. Notice the words "have the potential."
I don't know how Lehman came up with their estimates; I know that Zelman came up with hers by looking at the reports of loans entering foreclosure made by Realty Trac, assuming that some percentage of them will get completed as REO, and assuming that some of those that don't end up completed FCs will escape FC by being "must sells."
Per Realty Trac, 130,500 homes entered the FC process nationwide in January. Even if we assume that monthly number halves for the rest of the year, that's nearly 850,000 homes entering the process for 2007. And you're telling me Lehman estimates completed REO hitting the market in 2008 at 180,000 to 240,000 units? What does Lehman think will happen to the rest of those homes?
And who are "people affected by sub prime"? The subprime borrowers themselves? The builders or owners of the houses they won't buy if they can't get loans? And why is Lehman assuming that the problem is limited to subprime?
I'm delighted that your daughter sold her home. I fail to see what that's got to do with the issue at hand. Some of us have been predicting substantial drops in both volume and price in the existing home market. However, I don't recall ever having suggested that it would drop to zero transactions, in Cinci or anywhere else. So I'm not sure why your daughter's home sale disproves my predictions, CR's, or Zelman's.
NEW CENTURY EXECUTIVES ARE CRIMINALS... This meltdown in one week makes no sense. they must have known and did nothing..just sold their own shares to save their own ass, i hope the feds will deal with a strong hand here..we lost our shares in new for a bunch of criminals
barely, I'm sorry to disagree with you, but I think that the most vindictive, deranged, vicious homeowner wishing to seek maximum revenge on the lender would leave those hideous "jabots" hanging. For a reason.
Low/no documentation loans (stated income loans) represented a staggering 81% of total Alt-A purchase originations in 2006, up significantly from 64% just two years earlier. . . .
Interest only and option ARM loans represented approximately 62% of Alt-A purchase originations in 2006.
It's been my contention for almost two years now that we're headed for a depression, and every time some hard truths manage to slip out it just reinforces that belief. This data is beyond damning. 64% "liar" loans?? 62% IO/OA??? Neutron bomb is right.
Will the last one out of the REIC please turn out the lights?
Happy talk from a NPR marketplace interview. [most of the report was more realistic]
"But Diane Swonk of Mesirow Financial argues the economy is less dependent on housing than it was.
DIANE SWONK: We now have trade helping us out, exports picking up keeping our factories humming even as housing market side of the equation is no longer placing that demand on the factories. Commercial construction activity is picking up. "</i>
marketplace
Good work and houses do sell even in busts, but for anyone or group to say house prices aren't going down is basically going to be eating those words soon.
House prices will have the biggest drop since the great dperession when prices literally melted away.
I enjoy the green kool-aide powder that makes my lips, tongue and teeth green. Please forward me some if you've got it.
Seriously, I truly appreciate this site/thread. Being in the realty "biz" I cringe every time I log on but damn if there isn't some serious koolaide drinking happening right before my/our eyes. I've been in the real estate brokerage business since 1989 and at least can claim one down cycle. Oh and it was a doozy. I just wish I was smart enough to buy more than one property at the bottom.
Being a "devils advocate" throughout my career I have advised more than 1 client as to why he/she/they should not buy this particular house, this location, this time, this financing etc.
Okay, so here is the reason I am writing. I have seen realtors price homes lately so far above reality it makes me laugh. These people are doing a terrible disservice to their clients. How about $200K over the last sale which occured at the peak? Here, have another glass of green koolaide on me. Furthermore, even banks are clueless this time. I've got a cash ready client ready, willing, and able to purchase a property in an outer area of SD County in which the bank is owed ridiculously more than the property is worth. Okay, so how about receiving a counter offer $5K above the realtor list price? For all intents and purposes our offer was decent and realistic. So here we are ready to make a realistic sale in a difficult market and the bank is so far from reality it's laughable. I guess we'll just need to wait a few months for it to come BOMK as a "Bank Owned Foreclosure" for less than we are offering ... strange and crazy times indeed.
How can I have 1.3 million new starts but only 887k sales?
Going off a bit on a tangent, but hopefully more than just tangentially related:
There's lots of articles out there now about how the middle class is getting hit with the AMT (Alternative Minimum Tax). Basically when you get hit with AMT lots of your deductions go away including the deduction for property tax ( does the deduction for mortgage interest also go away under AMT?). I read one of these articles a few days back which said that a couple making $75K with a two kids could easily end up in AMT-land.
So I wonder if some of those Alt-A folks bought a house thinking that they could afford it based on all of the new tax deductions they would get only to find out that they ended up in AMT where most deductions are lost. That could put a huge crimp in a budget.
Somewhat Off Topic:
The last story on The News Hour tonight is about subprime.
As you were ...
Lou Mozilo of Countrywide is selling his options at an alarming rate.
link from Aaron Krowne's ML-Imploder:
Insider Stock Trades - Countrywide Financial Corp (CFC)
I don't know about you folks but I can't stop this very cold feeling deep inside.
I was in Colorado Springs when it was the foreclosure capital of the country. A lot of pain, high unemployment, starts ground to a halt for several years, but no depression.
I'm in the slow multi-year economic deterioration camp.
I don't know about you folks but I can't stop this very cold feeling deep inside
Later, I was working for a dot.com in Seattle: 1998-2001. I had that same feeling. Now I'm feeling old because everything is coming around again.
Jim - Lehman's lunatic optimism won't hold up to reality. There's no axe to grind here. At least, I don't have one. Tanta surely doesn't. CR is retired.
I won't make money either way, and if I had my druthers, none of this would be happening. But it is happening.
Perhaps you should wonder what kind of axe Lehman is grinding?
Jim,
I think Tanta and CR have been indicating that they think the housing market would continue to decline. If I were interested in selling an asset and I thought it would be worth less in 6 months, I'd sell it today.
I think you might want to reexamine your thought process.
Now, I am short homebuilders. I think residential construction is in trouble for a lot of the same reasons you kids do.
That said, the average single-family-detached is not a money sink, for a single, simple reason: the preposterously generous tax subsidy.
The government is forgiving taxes on the mortgage interest deduction alone in volume that will hit $100B a year pretty soon, and that goes right into the pockets of homeowners. Moreover, poor renters pay out post-tax dollars. Homeowners collect implicit income from their homes in rental equivalence, which is never taxed. Oh, and the 1997 tax change turned homes into cap-gains shelters, while we poor renters have to pay taxes on all of our interest, dividend and capital gains.
Now, current prices are extended. Despite that, as I have posted elsewhere, I actually simulated the rent-vs-own with a toy monte carlo at summer-2005 San Francisco prices versus our delicious, local rent control. Rent beat own -- but only two thirds of the time.
Those tax breaks are absolutely huge.
MOM,
Could you ever envision The Fed or one of the GSE's initiating a broad examination of loan origination documents and/or procedures at lenders with high defaults? It seems the devil's in the details as always and when the real pain starts, there's going to be a call for some kind of action.
Thanks,
MOM,
Could you ever envision The Fed or one of the GSE's initiating a broad examination of loan origination documents and/or procedures at lenders with high defaults? It seems the devil's in the details as always and when the real pain starts, there's going to be a call for some kind of action.
Thanks,
Jim - congratulations on your daughter's good fortune. FYI for the future, it is widely considered bad juju to brag about making a real estate sale before close of escrow.
bofiz - You're half correct (I hope). The MI deduction does get chopped with the AMT, but the idea that AMT-affected families need to take out Alt-A mortgages should, in itself, be considered a sign that the credit models in the market need to be recalibrated.
It comes back to my first rule of financial analysis: if the only reason to do something is for a tax advantage, don't do it.
Ken,
Good rule. I had a client who wanted to lease cars for his business. He had a friend who told him "you get a better tax deduction". I told him you get a tax deduction every time you make a bad decision. I also told him that if he really needed a deduction, I could send him a higher bill.
albrt: "...it is widely considered bad juju to brag..."
Tanta: "Extremism in the search for correlation is no vice!"
Oh, wow! We've gone from Karma, toad bones and ground-up dog balls, to talk about juju. The next thing you know, we'll all be sticking pins in David Lareah dolls. Whatever.
And, yes, Jim. I think your daughter and son-in-law are fortunate, too. I know some people who were saved a hell of a lot of money because of this blog.
"What's that shit hanging over the windows?"
SWAGS.
The real-estate-as-good investment madness goes all the way to the top. My neighbor is a highly-paid investment counselor to Silicon Valley execs and engineers, and for the last two years she's been trying to persuade her clients out of investing in real estate. But they keep telling her, "It's the safest investment ever...."
Maybe the WSJ will convince them.
It comes back to my first rule of financial analysis: if the only reason to do something is for a tax advantage, don't do it.
Ken that is excellent advice!
IRVINE - New Century Financial Corporation moves headquarters and senior staff to Dubai
mp, it has always been about sticking pins in relitter dolls. The graphs, charts, data, long tedious analyses and shit are just window-dressing.
I didn't mean to imply that I think it is not worthwhile to own a home just because they're money sinks. Children are money sinks, too, and I'm told the thrill of the tax advantages of engendering dependents wears off by 3:00 a.m. or so on about day three. I wouldn't know; I am a cat person. They are merely tuna sinks. Yet I have it on good authority that children are OK kinds of things. Surely houses can't be that bad.
I simply consider them places to live. Until we get over this idea that homes are financial Swiss Army knives, with credit cards, retirement accounts, granite counterops, and a good corkscrew basically built in, we're just going to be a crazy economy. I can't really see why juju is considered any crazier.
"if the only reason to do something is for a tax advantage, don't do it."
Glory! Hallelujah! Amen!
Am I expressing my complete and total agreement forcefully enough?
Tanta, I agree completely. Some time ago, I told the story of one my teachers. His father was a Bethlehem Steel vp (a REAL vp). Anyway, he bought a house around 1920 and was required to put down 50% on a five year loan. Also had to deposit 5% of his annual income into an account at the same bank to ensure the home would be maintained. The father asked if he could have a ten-year term on the loan. The response: "We're running a bank, not a charity."
Just kidding
It was pretty funny, VennData, although I personally might have snickered harder if it had been:
DUBAI - Halliburton announces it is in violation of all lender covenants, bankruptcy likely
Well, Tanta, I follow what you're saying, but think that some of this happened because few people now have a sense of home. They move around so much that their house is no longer a "home".
They have no emotional or any other kind of attachment to the place.
The best part of that WSJ article on why a home is usually a bad investment --- it is already the most emailed article, not just today, but in the month of March.
"Wake up; time to die." Leo
Anyone have New Century's payroll? Where are these people supposed to find jobs paying anything close to what they were making?? "The OC" may see a few more homes, bimmers & benz for sale very soon.
Ok, so the Alt-A paper is next. But, the report says they don't reset in large numbers until late in the year. This gives the helicopter pilot, BB, some time to chart a new course, for a "soft landing" presumably. The course includes 3 or 4 stops for 25bpt rate cuts, which might afford the Alt-A folks a little more rope?
Accredited Home May Raise Money, Reduce Workforce
Accredited Shares Fall, New Century Trading Suspended (Update6) - Bloomberg.com
March 13 (Bloomberg) -- Accredited Home Lenders Holding Co., a U.S. mortgage lender, said it's exploring ``strategic options,'' including raising additional capital, after margin calls reduced its cash.
The company said it may reduce its workforce further and added that it's unlikely to file its annual report by March 16 as it had planned, according to a statement on Business Wire.
``Accredited's available cash resources have been affected primarily by margin calls under its warehouse and repurchase facilities since January 1,'' the company said in the release.
Kass: Subprime's Siren Call | Page 3 of 7 | Financial Advisor Update | Financial Articles & Investing News | TheStreet.com
and the 2 pages before it.
Does anyone have good ideas for shorts, such as in the REIT industry ?
Are apartment REITs going to suffer or benefit from the decline in housing ?
what do you think will home builders go down more ?
Will banks such as WM, WB, WFC going to feel the pain ?
Is GS too big to fail ? will it just go down in stock price ?
Thanks for your suggestions.
Disclosure: I am short FED, DSL , BKUNA, HRB, WM (a little) and have puts on the above + FMT, CFC, NEW, LEND and SPG
isn't CSFB a sell side broker? Things must be worst than Ivy Zellman says, otherwise she would be silenced by now.
Accredited Pursuing Strategic Options
SAN DIEGO--(BUSINESS WIRE)--Accredited Home Lenders Holding Co. (NASDAQ:LEND) (Accredited or Company) announced today that it is currently exploring various strategic options, including raising additional capital to enhance liquidity and provide the Company with the flexibility to retain or sell originated loans based on an assessment of the best overall return. Accrediteds available cash resources have been affected primarily by margin calls under its warehouse and repurchase facilities since January 1, 2007, all of which have been met to date, as well as ongoing loan repurchases. The Company reported that it has paid approximately $190 million in margin calls on its facilities since January 1, 2007. Approximately two-thirds of those margin calls have been received and paid since February 15, 2007.
In addition, Accredited is seeking waivers and extensions of waivers of certain financial and operating covenants under its warehouse and repurchase facilities, including waivers relating to required levels of net income. The Company has been operating under various waivers under these facilities since December 31, 2006. There can be no assurance that the Company will be successful in receiving any of the required waivers.
Accredited also reported that it is pursuing certain cost restructuring initiatives, including further workforce reductions.
The Company continues to evaluate impairment of the goodwill established in its acquisition of Aames Investment Corporation (Aames) in the fourth quarter of 2006. In light of this evaluation, along with work that must be completed for the Companys year-end audit, it is unlikely that the Company will file its Annual Report on Form 10-K by March 16, 2007 as previously contemplated in its Notification of Late Filing on Form 12b-25 filed with the Securities and Exchange Commission on March 1, 2007.
MPG is a good short. NEW century financial is a big client of theirs almost 7% of total square footage.
And oh ya Real estate ownership is crap. that is why I am going to put all my money into it after the crash or a few years( whichever comes first)
What about MTG, RDN, PMI & TGIC as shorts?
OT (kindof): This evening I saw a preview to world news tonight on ABC and Peter Jennings mentioned the troubles at New Century and what it might mean to your house prices.... "stay tuned"
Anyway...watched the whole thing and NO New Century story....you think someone told them to pull it?
I don't know about the PMI/TGIC - I know banks have been taking away biz from them. It is a possibilty. I have few puts on MTG.
here is the bull case for SPG:
Expired
My view is that dividend (rate-cap) is too low but the analysts say it will go higher.....
btw, what does "Drinking cool-aid" means and how it is used (such as in Toll conf call) and by Tanta ? I don't get it (sorry for my english)
Peter Jennings ?
Yes TGIC,FED, CFC, MTG, all shorts
Do not play the stock market without
a good newsletter. Bill Fleckenstein has good shortsale recomendations. However do not play with real money for the first few years. Play with fake money and build-up your confidence first otherwise you will lose( Guaranteed)
Peter Jennings...may be more alive than the subprime market in a few months.
"Drinking the cool-aid" is a reference to the mass suicide of the followers of Jim Jones in 1978. See Jim Jones - Wikipedia, the free encyclopedia
i.e. Belief in a story that anyone with a bit of sense should recognize as crazy.
yal: what does "Drinking cool-aid" means and how it is used
Jonestown, Guyana, 1978. Mass suicide. Kool-Aid.
And About Jim Cramer. He is a typical Bull. Going the wrong direction with great confidence. I bet he cheated his way through college. All his recomendations will be short candidates in a matter of weeks.
Jim Cramer job is to push IPOs.
Jim Cramer is in "talking-up your book" mode....he bought a lot of defaulted real estate in the past couple of years on the premise that it's different this time...and time will certainly tell!
dozens of charts from bill cara!
a must see!!!!
Bill Cara: The why and how America is in trouble, Mon., Mar. 12, 2007, 10:33 PM
Lama asked, "Could you ever envision The Fed or one of the GSE's initiating a broad examination of loan origination documents and/or procedures at lenders with high defaults?"
At depositories, loan review is a basic part of examinations. Most banks have an internal independent audit team and/or hire an outside team to do it too. It includes reviewing the documents, looking at the loans on the system, tracing payments, checking APRs, etc. SOP is to choose a statistically significant sample and go through it. New products are often chosen for heightened review.
For new products I do this myself - I get the bank to load sample loans and verify that everything is correct, and of course go through the alphabet soup of regulations to ensure all documentation and required disclosures are being done correctly, plus add any disclosures I consider necessary to shut out FTC-type claims.
continued
continued
Then there's another step involved in safe operations, and that is to verify that your loan officers are verbally following the strait and narrow path. For example, Babs the Borrower's Nightmare's representations about no interest on negative amortization for five years is also a legal nightmare for the lender. Stewart Financial got pasted not so much for its docs as for what its loan officers told borrowers. Citi got a 70 million dollar fine for its bad practices a while ago. I was so thankful after having to deal with incessant questions about "why can they do it while we can't?"
If class action suits are filed against these lenders, it's a reasonable expectation that discovery will include some of these types of reviews. If you are alleging that a firm consistently followed some sort of illegal or highly misleading practice and you can come up with a group of borrowers saying the same thing, it's not at all unlikely that a court will order that documents and records be rendered for review.
I would bet that there are tremendous alligators lurking in some of these shops. The quality of lending varies immensely between different institutions in all segments of the industry. If you want to do it well, you need to follow a consistent program of oversight and review. With the go-go environment of recent years, I am sure that has not been done everywhere.
A recent Wharton study Aggressive Lending in Real Estate Markets (404 File Not Found
suggests that easy credit (as manifested by the use of ARMS) has been a principal contributor to past housing booms.
The authors modeled data (mortgage originations/post boom price declines) from the 1990 Los Angeles bust and determined that: the proportion of ARMS at the top of the market had a significant impact on the subsequent negative demand shock ... and that for each 1% increase in share of ARMS in 1990, the price decline increased by 1.3%.
The authors note that the 1990 era ARMS were the plain vanilla variety, not the exotic ARMS being used today.
I guess well have to wait a little to see how the exotics influence the regression.
I love the CR blog. it is serious and the comments section is usually smart. One of the great examples of the wonderful power of the blogoshere.
Funny, though, how the advertisements on the CR blog (new this month I think for CR) are for all sorts of non-conforming mortgages that CR and Tanta are speaking about.... Shows that the credit id not drying up that fast, probably prolonging the gutting of the US housing market.
"but when it comes time for people to sit down with a loan officer, they don't have a down payment and they don't have sufficient income to qualify"
True. If wishes were horses....
"Peter Jennings...may be more alive than the subprime market in a few months."...
OOOPS! LOL
You can tell I don't watch it that much I ment eeerrr 'whats-his-name
Ok, time for a (slightly) contrarian voice relative to the perma-bearishness displayed above.
A) Granted that overall underwriting standards have gotten weaker. I'm not exactly in the sub-prime mortgage arena, but I'm at one remove and I'll accept that claim, having argued in its favor with my own bosses.
B) Granted that the ultimate driver of home pricing is the market clearing price based on supply and demand, and increased foreclosure means more supply just as demand is weakening.
C) Still, the excerpts from Zelman's report (as quoted above) make it look like her projections are ex ano, that is, yanked out of her butt. What's the justification for the "base case" numbers? Why is 50% of the sub-prime market "at risk"? Why not 30%, or 70%? Where are the 25% alt-A and 10% prime reductions coming from? Is that based on some estimate of income "liars"? If so, where's it coming from? Her case, it appears to me, gets very weak when it comes time for the projections. YMMV.
Wow. The ABS issuers line in the report on page 14 takes a turn for the vertical at 2003. That must have been when somebody on Wall Street thought they had invented a Perpetual Money Machine!
BG, I left out long parts of Zelman's analysis for several reasons (it's a 67-page report). Part of what I left out I indicated as "The report then summarizes the current situation of guideline tightening and regulatory changes that are contracting the mortgage market (a familiar list of items to CR readers)." We have, in fact, been looking collectively at a lot of the specifics of guideline changes, linking those to what stats are available about new purchase loan profiles, and trying to come up with estimates about how much of the purchase money loan market will be chopped out by those guideline and regulatory changes. Of course Zelman's is, at the end of the day, an estimate. What else would it be? I know of no one who has a perfectly scrubbed real-time database of the entire purchase money mortgage market, plus all the guidelines of every participant historically and currently, from which one could build a model that could determine the contraction with a scientific degree of precision. This problem applies to the bull case as well as the bear case.
I thought it was clear from the parts I exerpted that she's looking at, say, the percent of new home purchase loans that are stated income, then looking at the ways that lenders are backing off stated income loans (in guideline tightening or via regulatory guidance), and therefore making her estimates of what the reductions in purchase money financing will be. If you can suggest a better way of making such estimates, I'd like to hear about it.
Completely off topic but as I was reading the post, what did I notice out of the corner of my eye on the right hand side? An ad by a friend of mine, who I ride horses with, drink with and party with. Just keep reading blogs and someone you know will pop up.
Thanks Tanta and Cr.
Great blog. I have advised my son in law to read your blog, but to go light on the comments section. He has some skin in the RE game and some of that skin may be burnt or brused in the next couple of years. He is young and can recover and what with a bit of learning from CR and Tanta and some of the learning from that burnt or brused skin he may do a better job on the next RE bubble.
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