I've looked at some of the recent home sales publications for my east coast home town and I'm seeing signs of capitulation by the homebuilders.
Specifically, I see very aggressive discounting, and they're no longer trying to hide it ("Prices slashed on all inventory homes!" etc.)
More ominously, I'm seeing signs that the homebuilders are (I suspect intentionally) undercutting the existing home market and the speculators.
Right now I'm looking at a 3-4 bedroom condo complex with nicer exteriors undercutting last year's sales prices of a 2-3 bedroom condo complex built in 2004. This new complex is virtually next door and contains about 30 new units and many more vacant lots.
To me this looks like it could get really ugly for homeowners who bought in the past couple of years who have any need to move, refinance, or make a distress sale.
Riverpark riverparklife.com has lowered prices, stretched out construction and fallen silent on future plans. Toll was lying when they said they saw a spring rebound, That they have to come out now and say they were lying only speaks to how very bad things are. Basically the HBs are one lie ahead on good news and two lies behind on bad.
Is subprime really not a large part of Tolls market? I thought no doc 100% ltv is almost always a sub prime loan? If so, given the price of houses out here, I would argue that sub prime is a large part of Toll's and almost every builders direct market.
bob, I was quoting the Toll CFO with regards to subprime. It doesn't really matter - directly or indirectly Toll will get hit.
ac, yes, homebuiders will cut sooner and faster than existing home sellers - they need to stay in business, and they are not subject to "sticky prices". Well, they will cut until the market is flooded with REOs - that is a killer for both New and Existing home markets.
Subprime is not directly "a big part of Toll's market", but real estate works like a sequence of chain reactions. If a subprime borrower can't purchase a starter home, the seller can't buy a move-up home, and that seller can't buy a Toll Brothers McMansion.
Its funny how hard this concept is for so many to comprehend, except those here at this blog. The 'housing chain theory' is only as strong as the weakest link - and right now its subprime and its only gonna get worse. Homebuilders will substantially undercut existing homes since they need to pay back their debt and beat each other to the punch. It will keep rolling down hill.
Well, I'm going to read your posts anyway ac, no matter how worthless those anecdotal jottings you think they might be.
Yes, after being subjected to Warsh, anything from you will be lotus blossoms of treasured prose.
"Buyers in the last couple of years" are at risk you think should the house prices continue to sink and I think this might be conservative.
Well, I'm going to read your posts anyway ac, no matter how worthless those anecdotal jottings you think they might be.
I typically dismiss anecdotes and vocally deride them as unscientifical, so I feel that I only deserve the same treatment when I post them. And I'd rather do the deriding myself than fall victim to somebody with a sharper tongue (and it's also good cover for when I just completely make something up).
Apparently Fleck's friend (the one that has been so right on subprime) says there will be fewer subprimes by the end of the week (I could guess that one!)
Also, he is also projecting that the housing market will "just freeze up" in the next three to six months. I'm not sure what that means, but I might have to review my housing projections for 2007 (and I'm not thinking of any upward revisions).
I don't have Fleck's piece, but I remember when housing frooze in the early '80s (that time because of high interest rates). It might get really ugly.
There is never a demand problem, just a pricing problem. So if the housing market is to stay liquid the prices will have to come down, even if that means the homebuilders sell at a loss. I guess it will really depends on how much cash reserves the homebuilders have to determine the lenght of time they can hold out with current pricing. I suspect most homebuilders will be claiming bankrupty before long.
Also, he is also projecting that the housing market will "just freeze up" in the next three to six months. I'm not sure what that means, but I might have to review my housing projections for 2007 (and I'm not thinking of any upward revisions).
Here's my theory on this:
Home prices have increased so much in relation to incomes recently that US homebuyers simply don't qualify to purchase US homes at today's prices. So if "sensible" lending standards make a comeback this year, then yes the housing market should largely freeze up.
The only houses that should be reasonably selling are those that have had their prices reduced 20% or more so the buyer can reasonably be expected to pay off the loan.
I don't see those kind of price reductions occuring anytime soon, hence a possible "freeze up".
Furthermore, we're talking about such huge sums of money that I don't think the US government really has the capital to provide effective assistance to the market through convential means (a $150 billion dollar bailout would make a dent IMO).
Anyone have insight into which financial institutions - banks, brokers, etc who have significant exposure to mortgage lending, MBS assets, CDS counterparty, etc?
I am trying to build a mental picture of the entire mortgage credit liquidity gusher structure.
To stay liquid the housing market also needs tons and tons of easy finance and that is drying up in a hurry. This speaks to Fleck's friend that is "projecting that the housing market will "just freeze up" in the next three to six months." I'm reading this as a complete loss of liquidity on the lending side of the equation.
As a long-time RE bubble watcher, I always assumed that the bubble would simply exhaust itself and implode from the supply (inventory) explosion and/or lack of new demand but I also assumed that funny money would be widely available until the very end. What I didn't expect was the sudden loss of liquidity on the lending side. It made more sense to me that people would wake up and finally realize that RE was insanely overpirced and/or first-time-buyers would be totally priced out of the market.
Now it doesn't even matter how stupid individual buyers are when they go to buy a house and find that they can't qualify anymore. Ouch. A credit crunch can be a real bitch.
WestSideGeorge, the reason that it's actually so hard to answer your question is that things like 100% LTV are precisely where the lines get blurred. It used to be generally true that "prime" meant a FICO score of at least 620-660 and an LTV or CLTV of no more than 95%.
"Affordable Housing" used to be the term we used for borrowers, usually first-time homeowners, at around 80-120% of area median income, buying homes no more expensive than the median for the MSA. These borrowers could have somewhat more marginal credit, say 595 and up, with CLTVs of up to 105% (including financed costs, usually involving a second lien provided by a nonprofit, possibly a bank). These borrowers were classic FHA loan material. Fannie and Freddie also have products designed for this borrower class. The whole point is, they'd never be Toll customers, because these programs were always limited in some way, either by borrower income or by property price, to the "starter home" set. They also carried mortgage insurance out the wazoo.
"Subprime" was anyone with FICOs under 595, and a lot of people under 660. For instance, you can have a fairly high FICO while having recent late payments on your mortgage. That puts you into subprime for more mortgage credit, regardless of your FICO. These borrowers almost never got financing over 90%, and 60-80% was typical. The subprime business historically was refinance, not primarily purchase. The classic subprime borrower was cashing out to pay off other debt, or was refinancing to get out of impending foreclosure.
Then we invented this thing called "Alt-A," which essentially meant a prime-quality FICO score with a whole lot of other risk features, primarily low or no documentation and very high debt to income ratios. We also saw big changes in the subprime market, where LTVs got up to 100%. So, at the end of the day, it's really hard to tell the difference between the lower end of Alt-A and the upper end of subprime. Most of us have come to the conclusion that we're just dealing with a continuum of risk here, not an easy, clear way to bucket things. However, other people will tell you that FICO trumps all, so if you believe that, then the difference between Alt-A and subprime is the borrower's FICO, and the cutoff is somewhere in the low 600s.
I think I've said this before, but dammit if ac can make up anecdotes I can repeat myself. The other factor that can "freeze" a market is legal trouble. Fraud lawsuits, dragging FCs, BKs, sellers unable to convey clear title, borrowers unable to obtain clear title. Tax liens. HOA liens. Lord, every time I read about another one of these ghost-condo-complexes, I think about those "Alt" lenders who were doing spot condo loans without fully-funded HOA operating budgets. Someone brought up inability to get hazard insurance on some of these properties. I wonder how many unpaid contractors are out there slappin' mechanics liens on stuff. This kind of thing can certainly "freeze" a market.
This touches upon a discussion that Aaron and I were having ealier about neg-am loans and specifically FED (First Federal). Supposedly, FED has almost exclusively prime borrowers but on the other hand they also report 70% of their income from neg-am products(?!) I can't get my thinking around this one. How can a neg-am borrower also be a prime borrower? This makes absolutely no sense. Isn't it generally true that a prime borrower is supposed to have the means and creditworthiness to pay back the debt? Neg-am borrowers are going into the loan with no intention (or ability) to pay back the loan.
EPDs/buybacks starting to show in prime mortgages?
"Mortgage Fall-Out Spreading to Prime?
My sources report that several small Orange County, CA based lenders who specialize in prime mortgage financing are facing an exceptional amount of loan repurchases that could severely cripple their ability to operate.
My sources report that Opteum, a mid-size reseller of mortgage debt has repurchase notices out to American Sterling Bank for approximately $25 million. American Sterling focuses primarily on A-paper (prime) mortgages.
Another source reports that Stearns Lending (not affiliated with Bear Stearns); another regional lender is also facing a large number of buy-backs, primarily on its second mortgage products.
If these reports are true it would represent a spread of the mortgage backlash from the subprime market in to the prime mortgage market."
`Jumbo' Mortgage Delinquencies Rise for 6th Month, Moody's Says
March 5 (Bloomberg) -- Late payments and defaults on so-
called prime jumbo U.S. mortgages that have been packaged into
securities rose in December for the sixth straight month,
according to Moody's Investors Service.
The level of such loans delinquent by at least 60 days, in
the foreclosure process or already turned into seized property
rose 0.05 percentage point from a year earlier to 0.35 percent,
the New York-based ratings company said in a report today. The
level climbed 0.02 percentage point from November.
Moody's cuts NEWs servicer rating to SQ4 one from the bottom and keeps it on downgrade watch. (Tanta can put that into plain English) S&P puts servicer rating on a negative watch.
S&P Debt rating to CCC (there are two more levels left on the downside CCC- and default)
S&P kicks NEW's stock out of its SP600 small cap index.
Finally, if any of you were wondering when Mozillo will start braying and telling all who will listen that his stock is undervalued and that the street has overreacted, it appears we have not reached that point yet. He sold another 70K shares today.
I don't have Fleck's piece, but I remember when housing frooze in the early '80s (that time because of high interest rates). It might get really ugly.
Best to all.
Calculated Risk
CR,
I think some of us have been waiting for that. Since there are already areas of the bubble markets (all RE is local)that have already fallen 15 percent in about a year it seems, given the lender issues and rising foreclosures, that prices were going to fall farther and faster than you were predicting.
Did you predict 30 percent drop in median prices over a couple of years?
Sorry if I don't remember but I have a full time job testing software for a large corporation, 3 kids under the age of 7, a wife that suffers migraines 2 times per week, a company I am starting in my spare time (nothing related to RE or software) and I am interviewing for a new position in Northern CA.
Yes, that right..but way up north out of the bay area. My feeling is all of CA is going down....in case people didn't know the bubble hit even most of the nice rural areas because of cash outs and retiree's from So Cal and Bay areas bought property in the Redding/Shasta/Tahoe and Southern Oregon areas.
My feeling is lock in a higher salary now and rent for a couple of years so I am ready to buy at bottom in an area of the country I want to live in.
I still think CA will revert below the 2002 prices due to rabid inventory and
Brian - the only thing I can say in support is that mortgage brokers are complaining about difficulty in placing loans with layered risk features for borrowers with high FICOs on the boards.
The concentration of risk-layered loans in many areas of CA, places in FL, etc is going to create a severe problem. We are not yet halfway through this cycle of tightening of mortgage lending standards.
Darth, "prime" in the context we've been using it has simply collapsed into one of the old-fashioned three pillars of underwriting: willingness to repay, ability to repay, and quality of collateral.
"Willingness to repay" has traditionally been measured by the borrower's credit history (more recently that history has been proxied by a number called a FICO) and the borrower's down payment. Down payment is an issue of "willingness" in the sense that it is intended to hold the borrower to the debt--it's "skin in the game."
"Ability to repay" is measured by the borrower's income, assets, and other debts and expenses.
So you get "prime OA" because you have borrowers with a clean credit record and some kind of down payment--therefore showing "willingness"--but who nonetheless do not have sufficient income or assets--or have too much other debt--to be able to afford to carry a mortgage written on traditional terms. It's the classic, "this guy's a great credit risk, he's just having cash flow problems at the moment." The number of times that turns out to be true is exceeded by the number of times it involves a "check being in the mail." But onward.
So you can see how the delusion has been supported. Some outfit like FED can claim, accurately, to have prime loans in its portfolio, as long as you are willing to define "prime" without reference to ability to repay. Once you do that, it's hard to see how the borrower's vaunted willingness to repay is going to offset the fact that the borrower doesn't seem to have any, um, cash. As I have said before, I've never seen anyone make the monthly nut with their FICO score. But I am an old-fashioned schoolmarmy bitter has-been, so bear that in mind.
Darth, think of it this way. When prices where I live in SF, went from 500k for a 2br crap condo in the city, to 950k for the same condo three years later, it's very easy to figure out. Ive never bought, because when I didnt have the cash for a downpayment, a few years back, I thought, this can't go up much more, so I'll wait. Then, I had the downpayment, yet, noone else was buying with money down here. Which got me to thinking. Who has $ 180k sitting around to drop on a condo downpayment? And who, that does, would be stupid enough to put it down? The answer was, not me. That said, had I not the payment, and somehow decided, "buy now or be priced out forever" (which was the prevailing sentiment the last few years) I'd have gone all in, 100% LTV, and possibly needed to do neg am to be able to outbid the other FBs and be able to afford the payment, RE taxes, etc. Soooooooo..... there is your answer. SF is not the only ridiculously priced market, and there are far more of these ridiculously priced houses than buyers able to afford the fully amortized payment. Thus, a person with a credit score, like myself, that is very high, could end up looking like a subprime all the same. All it takes is an end to the rise in house prices, because once they stop, there's no refi, and the whole jig reverses...which is what we've been seeing just the start of the last year.
FICO means nothing in this market. Repeat it to yourself over and over til it sinks in.
Brian, remember that "scratch & dent" knows no credit grade. Any loan--prime, alt, subprime--can be S&D. Misrepresentation. Inflated appraisal. New construction that never finished per plans and specs. Lord knows what. Never underestimate the ability of a "prime" or "near-prime" lender to be "sloppy." And nobody, just nobody, has any patience any longer with "sloppy." We're getting to the point where any little "scratch" is radioactive.
Tanta and Geoff, thanks for the responses. From this I have learned (to paraphrase Mogambo Guru) that we are so freakin' doomed! But seriously, this is pretty much what I have feared. The sticking points for me are:
1.) "as long as you are willing to define "prime" without reference to ability to repay" Muahahahaha!!!
2.) FICO means nothing in this market.
If these statments are true, and I have every reason to believe that they are, then there is basically no correctly priced risk in the market at all. None.
The real issue, is of the people who are subprime borrowers, based on ability to repay the fully amortized rate out of income, but who are not classified as such, because of a good FICO score, what is the distribution of other assets that might help these people out in the coming pinch. I dont know how to get at those numbers, since I only have two halves...you can look at the SCF and get the distribution of net worth and the reliance on real estate as part of the net worth, and you can get at the FICO scores on the debts (id think), but I dont have a way to know what the net worth looks like for these misclassified subprimes.
A further question is, when faced with a house that is sinking them, do they bail and take the loss, or do they eat their other assets to pay into the house, thinking that it is going to bounce back and not be throwing good $ after bad. I think the they wont figure it out and a lot of money will disappear into the sinkhole, before it becomes evident that the sunk costs arent worth chasing.
There is never a demand problem, just a pricing problem.
Yes and no. If prices decline steadily, something can be reasonable and still not purchased due to expectations of further declines. That's the deflationary spiral.
You know, I'd never say that FICO is meaningless. I don't think it is.
A borrower with a decent FICO score may go down, but she'll go down fighting. She will trade in the Mercedes for the used Corolla. She will eat peanut butter. She will sell the Matchbox car collection. That's how she got that FICO to start with: by being willing to pay her debts. It's her endless misfortune that she was convinced by someone or something that taking on such an onerous house payment was worth it.
Prices are "sticky" and owner-occupants are what we call "persistent." Speculators, second home owners, youngsters who can easily move back in with the folks--they'll fold pretty quickly. Prime credit borrowers will struggle. Frankly, that just makes it all the sadder, as far as I'm concerned. A whole lot of retirement accounts will get liquidated and rainy day funds demolished in order to try to keep up with house payments that will eventually win.
When prices where I live in SF, went from 500k for a 2br crap condo in the city, to 950k for the same condo three years later, it's very easy to figure out. Ive never bought, because when I didnt have the cash for a downpayment, a few years back, I thought, this can't go up much more, so I'll wait. Then, I had the downpayment, yet, noone else was buying with money down here. Which got me to thinking. Who has $ 180k sitting around to drop on a condo downpayment? And who, that does, would be stupid enough to put it down? The answer was, not me.
Geoff, you have pretty much described it to a T !
when faced with a house that is sinking them, do they bail and take the loss, or do they eat their other assets to pay into the house, thinking that it is going to bounce back and not be throwing good $ after bad. I think the they wont figure it out and a lot of money will disappear into the sinkhole, before it becomes evident that the sunk costs arent worth chasing.
On this though, I would differ. Some would do as you say. But mostly, my take is that spending outside of housing is going to take a hit drastically, rather than mass walk-offs. High income people with higher DTI ratios is my reasoning.
IMO the credit bust -- obviously not confined to sub-prime, or even ALT-A -- will spread far beyond the mortgage market. I believe that all forms of consumer credit will eventually take a hit, and sales will suffer accordingly.
Ok, perhaps not meaningless in the strict sense of the word, but meaningless in terms of its relative usefulness in determining how this unfolds for some people.
My previous point was that a person who NORMALLY may pay down reasonable debts that they incurred under reasonable assumptions, may not find this to be reasonable or expected. That may be because they were sold a bag of goods (house prices always go up) or they were too lazy or stupid to figure out the true terms of the loan. But likely, there are some whose behavior will not remain consistent with what their FICO would indicate, because this kind of payment shock never happens to credit cards or auto loans and Id think there is a fair share of these borrowers who didnt realize how it would happen with their mortgage, for whatever reason). When it becomes clear not just that house prices CAN go down, but just how much they are GOING down, FICO will THEN be meaningless.
Right brewster, but you are describing a detour on the map to disaster. Instead of walking, they scrimp, and then consumer spending tanks...obviously then business investment tanks, then jobs, then the rest of what is propping up this economy. No easy way out, although the eventual path will depend on the hit to the savings rate, to net worth, etc.
The comments I made on my blog contained information that I received from employees within each firm. I don't believe any of it is public. However, Opteum did report in its earnings reports that it was facing losses due to its sale of MBS.
Tanta or anyone else qualified to offer an opinion, I am trying to understand why PHH has held up so well in the mortgage bloodbath. I just don't get it. I've been collecting JAN'08 puts.
According to data I have, they were 10 in Mortgage Servicing volume in 1H2006 with 1.6% share and in top 20 in Origination with 1.4% share. They are a year behind in SEC filings. They lost a minimum of $20mill in 2006, and their mortgage hedges were working against them. They are laying off. Management painted a rosy forecast for 2007 on 01/24, but I'm sure that's already been revised downward.
I just don't get it. Are they too under the radar? Is their servicing business going to carry the day? Their hedges suddenly going to flip around and make money? Why is their stock holding up so well? Opinions ...
"During the fourth quarter of 2006, negative results from our servicing hedge reduced our overall results for our mortgage servicing segment. Specifically, in the last two months of 2006, the relationship between mortgage rates and 10-year swap rates tightened by 6 basis points resulting in a negative $20 million impact to the mortgage servicing segment results. Should the spread relationship between swaps and mortgages revert to historical trends, we expect that our hedge position would allow us to recoup this loss in future periods."
Everyone has run for the hills, said William D. Dallas, whose company, Ownit Mortgage, filed for bankruptcy protection in December after it lost financing from Merrill Lynch and other banks.
Many of the problems that have surfaced thus far are not tied to the resetting of rates. Rather, they stem from a sharp and early spike in the default rates among loans issued last year.
Hmmm....better stock up on the popcorn for the reset double feature!
ReductiMat, this is the Fannie Mae position on DTI:
Satisfies basic risk tolerances. This risk assessment should be used when the borrower has a total debt-to-income ratio in the mid-30% range.
Decreases risk. This risk assessment generally should be used when the borrower has a total debt-to-income ratio in the mid-20% range.
Significantly decreases risk. This risk assessment generally should be used when the borrower has a total debt-to-income ratio of 10% or less.
Increases risk. This risk assessment generally should be used when the borrower has a total debt-to-income ratio in the low- to mid-40% range.
Significantly increases risk. This risk assessment generally should be used when the borrower has a total debt-to-income ratio of 45% or greater.
By "decreases risk," they're talking about when an underwriter can use a low DTI as a "compensating factor" to make up for some other risk factor in the loan (such as a higher LTV or something).
In general, Alt-A products allow DTIs of 40-50 and subprime up to 60. Do not ask me how anyone gets by with 60% of pretax income going to debt service, because I dunno.
I know CR has been talking about how commercial lags residential, and backed that argument up with some nice charts and stats. I would point to one other thing today -- the chart of the IYR, the main commercial REIT ETF. Ugly gap below a multi-month uptrend line. If you believe that charts give you advance warning of a fundamental downturn, then that could be significant. Of course, I've been wrong about the direction of this thing for a while, so who knows whether this is just "noise" or a trend change. Chart on my blog if you're intersted...
Probably not noise. I was down 10% on SRPIX a little while back, betting on this too soon. But now, back in the money. Seemed like when Sam Zell took the money and ran on EOP, the party was just about over.
Looks like risk premiums are rising all over the place. If you've been following commercial cap rates, then you probably know there is no place for them to go but up, which spells doom. And this is happening even before the real stuff hits the fan when the job growth for office workers that is baked into those cap rates starts missing very high expectations.
loco. spring market is upon us in washington dc. multiple offers on anything worth anything. you want to buy in chevy chase? break out your escalation clause. you want to buy in georgetown? better bring all cash.
i've been dumbfounded at the strength of the market here. i'm the bearish real estate broker (who still has clients. amazing!) and i'm surprised.
pleasantly surprised.
this is a bifurcated market.
dryfly taught me about tract homes. them suckers are toast.
but you want something nice in kalorama - its gonna cost you a few mil.
Be very careful about what is called CRE these days. Many things called new CRE were actually what the planner class describes as "mixed use," Think of mixed use as a TV with DVD player built in. Twice as likely for something to go wrong with all the worst featurs of both asset classes. I mentioned Riverpark above which is precisely what I am talking about.
The biggest negative indicator for the REITs is that their yields are at historic lows, with very little room for further capital gains in the near to intermediate term. Their value is currently based on sale prices for real estate that are so high there's little possibility of a buyer making money through rent.
I bought some ultra short REIT index shares today.
Robert - when I got out of commercial in 04, all the people in my firm could talk about was chasing the new residential retail mixed stuff, and then there was lowly me, sitting in research telling them by the time they gear up, the market will have just peaked.
I wouldnt be surprised at all if this stuff is showing up in CRE lending.
I'm sure the greed which caused the sub prime problem is limited to that area, and the people who make Commercial loans are immune to such human weakness.
There is never a demand problem, just a pricing problem. So if the housing market is to stay liquid the prices will have to come down, even if that means the homebuilders sell at a loss.
Deductive reasoning says there is also demand problem - last year we lost the speculators, now sub-prime gets its' "face ripped off".
Not sure how to quantify that, but a SWAG (silly wild-&&& guess) says 10-30% ...
Nice to hear the market's bifurcated in DC (and NYC apartments too) dc1000. I imagine one could find similar niche markets even in the depths of The Depression. The lawyers tell us that not everyone suffers in a recession.
Good thing we have such a competent administration to manage our affairs if things really do get froozed up.
Anyone who thinks there are no problems price won't fix had best review the ABX graph.
A long time ago (6 months real time seems like 6 centuries financial time) I talked about the theoretical case where there might be asset products like subprimes that might have -negative- prices. At the time it was laughed off. Now we are seeing notes that would cost more to collect than what can reasonably be collected. 26% off book price for bundles like what got NEW into trouble is close amd this is only the start.
Robert Cote,
That has happened to a lot of recyclable commodities over the years. In the early 90's, our waste plastic was better than the virgin resin in Eastern Europe. I had a client that was selling it over there. Then they caught up with our technology and our waste plastic went back into landfills (this is America, and we have big valleys we can fill in).
That would be interesting to have the same instrument remain intact and tradable in reverse transactions (beyond zero value).
I have a couple of rentals. The family in one of them gave me notice today, they are moving into a 4 BR apartment (understandible - they have 4 kids that little 2 BR house). What they've been waiting for, is their old house to sell back in Buffalo NY.
They got.... $13000. No, I did not leave a zero off.
Bubble mania, didn't sweep over everywhere! This is what prices do, when there are no jobs.
Countrywide Financial Corp. said on Monday that it was granted permission to convert its existing national bank charter to a federal savings bank charter by the Office of Thrift Supervision.
The U.S. mortgage lender said the conversion better aligns the regulatory supervision of the company with its strategic objectives.
It means that OTS and the Fed knew of Countrywide's position as of Nov 06, somewhat in advance of the unraveling. OTS Approves Countrywide Application
Not much help from this non-expert.
IMH - We are not suprime! Also their "tightening count is now up to 20 times, it was 17 on the conference call last week. Will we see hourly tightenings by next week?
Only an anecdote but i know a back office worker in real estate in ohio who is "very very busy with tons of listings since january" and for february the "highest number of closures since the office opened".
She is stressed up and two of her staff have quit.
In January the Realtors there were saying it was "very bad". They had been sent on courses by head office to sell more quickly in a declining market. Seems that is working for them. In November there was talk of offered prices being cut by up to 25% but since then i think it has stabilised?
Even so others are buying it seems at the moment and in quantity.
dc1000,
Brother in law in commercial real estate in DC is busting his ass. Local top guy ran away for more money and the B-I-L can't hire as there is nobody to hire at any salary. B-I-L works for a bigish firm usually in the Boston area.
More anecdote TV story about the heating up of the SF market. Prices going up and multiple offers again. Maybe BS as it was on TV.
Read somewhere that if several hot counties were removed from growth statistics there would be almost no growth in the US over the last several years. The counties were in SF area, NYC, Redmond WA and Wash DC.
That popcorn may get stale waiting for the main event.
Time will tell.
Fleck writes a "Daily Rap" and ask Fleck column every day for subscribers. It costs a whopping $10 per month. You can subscribe at Fleckensteincapital.com if interested. He did not have much more to say about it than what CR posted. Mostly connecting the dots with yen/carry trade and unwinding global liquidity that found its way into sub prime in addition to all other asset classes. Asia markets are putting on a brave face tonight. Perhaps we will see a day or two reprieve from the selling.
"We have a trillion dollars of subprime mortgages, and we're going to have huge defaults," Heebner, 66, said in a telephone interview from his office in Boston. "If you're looking at the housing market, it's not the darkest before dawn, it's the darkest before pitch black."
For recession to occur via subprime you would need to seek it tank the wider economy and not see interest rates fall.
How likely is that?
At the moment there is still out of control inflation as the still lingering worry. Out of control inflation seems hard to believe right now but until the numbers in unemployment begin going up it remains the main Fed worry.......balanced of course with the worry of catastrophic deflation and debt armageddon on the other side.
Dispite all of this rates remain at 5.25 do they not?
Peter Schiff's new book - Crash Proof - this is the biggest oversimplification that I saw of late.
While there are problems in the way world economy works this kind of simplistic analogy is just giving bad names to those who try to see things as they are.
The US has made many contributions to the world. It is actually a net exporter of food. The US indeed consumed much to much but it also generate many things which the world wants.
Yes, there are problems. Yes there is imbalance. But this book is a joke.
The US has made many contributions to the world. It is actually a net exporter of food
I wonder if that would still be the case of the farmers were not subsidised? Or people generally subsidised by artificially low taxation that is maintained by debt increase that gets exported to the rest of the world.
How simplistic is Peters comparison? I mean really really really?
Looks like stated income lending, whether prime or subprime, will be drastically cut back before this is done. That means most purchases will be made at prices that equate to around four times the true income of the buyer.
Q. What is the impact of this on CA home prices?
A. The CA median income for four-person households is $67k. That implies a median home price of $268k. The median home in CA is now around $475k. So that implies a drop of over 40%.
Very simple calculation. Why does no one believe this will happen?
Developers suing speculators for flipping properties in violation of contracts
Subcontractors suing developers for non-payment
Subcontractors suing general contractors for non-payment
Class action lawsuits against single family homebuilders and condo developers for faulty roofing, HVAC, electrical, and plumbing systems
Lawsuits against inspectors for not catching code violations
Condo boards and individual homeowners suing developers for shoddy work
Lawsuits against appraisers for inflated values
Lawsuits against banks when project fundings are halted
Lawsuits over completed condo units being substantially different in size, interior finishings, and quality than how they were represented pre-construction
Lawsuits by anyone and everyone against anyone and everyone over various fraud allegations
Of course we cant forget counter suits by anyone and everyone against anyone and everyone over anything and everything.
It looks like the legal risks are starting to emerge.
It turns out there is someone at the FDIC who knows what underwriting is all about. Unfortunately, it appears he was bound and gagged in the basement until today.
"Credit scoring has had a dynamic impact on lending,''
says Steve Fritts, associate director of risk management policy
at the FDIC in Washington.It's a proxy for capacity and
character,'' two of the three C's'' of credit (the third is
collateral).But it's a limited proxy'' compared with the in-
depth financial analysis and verification of a full
underwriting, he says."
Yal,
Bankrate.com has that info.
If you are actually looking for really good CD rates, you can join The Pentagon's credit union for $25. They frequently have the best rates anywhere.
Goldman Sachs warns of 'dead bodies' after market turmoil
The global currency storm of the past week is starting to infect the corporate bond markets and may prove harder to contain than last year's May sell-off, Goldman Sachs has warned. Jim O'Neill, the bank's chief global economist, said investment firms playing the "carry trade" had been caught on the wrong side of huge leveraged bets against the Japanese yen.
"There has been an amazing amount of leverage on currency markets that has nothing to do with real economic activity. I think there are going to be dead bodies around when this is over," he said. "The yen carry trade has reached 5pc of Japan's GDP. This is enormous and highly risky, as we are now seeing."
But if 1/3 of families don't own homes, and it seems safe to assume they will tend to be on the bottom of the income scale... What is the average family income of homeowners.
Toll may not be heavily exposed to "subprime" buyers of their homes. However, many new home buyers here in so.Cal are "Prime" but have used creative financing to buy. This is just the latest wordsmithing by these charlatans.
By asserting that you have limited "subprime" exposure, Toll is back at trying to manipulate the reality of their present circumstances, and calm the financial community watching this unfold ; buying themselves time,spoon feed the market bad news as gradually as possible.
Many new home, prime buyers, especially higher end buyers, have bit off more than they can chew, and will soon find themselves thrown into the subprime cesspool. At that time, Toll will offer new assurances.
The word ``predatory,'' with all its negative connotations, is popping up elsewhere; specifically, to describe loss- mitigation practices.
There is nothing predatory about ``improving the collectability of the loan,'' says Scott Valentin, managing director, specialty finance research, at Friedman, Billings, Ramsey & Co. in Arlington, Virginia.
Loss-mitigation tactics are fairly standard: Extend the terms of the loan, and if that fails, sell the loan for pennies on the dollar. There's nothing predatory about either. It's loan management. And it's in both parties' self-interest to find terms that can be met because ``no one makes money foreclosing,'' Valentin says.
I'll tell you something: when Caroline Baum and Tanta agree on something, it's gospel.
Like any crisis that went long ignored, you can be sure this will bring out sanctimonious finger pointing by the hypocrits.
That said, I do have a hard time feeling sorry for lenders who feel wrongly maligned. Frankly, this is largely their fault and their motivations were basically greed and self-interest. The phraseology may be inacurate, but they deserve what they get.
If J6P is told by his betters, that he can afford that stupid purchase and or it is his American duty to make that stupid purchase and the airwaves are filled with orders to make stupid purchases, then why is it J6P's fault.
The same is true of loans and mortgages.
That said, unless both parties suffer a lot, one or the other or both will attempt this again in the near future.
BUT the burden is on the elites, who must through punishment this time, education and regulation next time stop the madness.
Or it is like complaining about the heroin addicts walking the streets while the TV is filled with ads for herion.
Bob, of course you're right. However, if CR deleted every post by Tanta except those that didn't involve kicking around lenders, he'd have enough archive space to host the entire Federal Register. As a matter of fact, I only wish I were better at accounting issues, because I think that's clearly the latest big issue in the old "how did this manage to appear profitable for so long?" questions we'll be entertaining ourselves with as it all unwinds. So if I were better at accounting issues, I'd be taking my industry to the woodshed over that in a big way. All I can really do right now is worry about it, and try to deal with the queasy sensations I get whenever I look at these financials. And before somebody starts in on the GSE thing again, let me step right up and admit that the stuff the GSEs were foolin' with was and is about 86% way over my head. They didn't teach me do-squat about "derivatives accounting" back in mortgage banking boot camp. What I'm talking about is the stuff that's elementary enough that even I start to think it's probably bologna. I remember when the NEW announcement regarding its delay in reporting came out. I read it over about ten times, and kept thinking, this can't be. Don't tell me these folks screwed up the old LOCOM problem. That ain't one of those high-falutin' super-duper derivatives-hedging Enron-style accounting games it takes some bunch of rocket scientists to figure out. SO far, from what I can glean from news accounts, they pulled some simple-minded old-fashioned stunt that a 22-year-old regulator fresh out of college with the ink still wet on the CPA could catch without removing the ipod. This leads me to worry, very much, about what everyone else is doing.
So please don't think I'm suggesting that we all start trusting all the lenders. It just seems odd to me that the first line of attack would be over the only practices they have that might, possibly, benefit the Plankon (as Bill Gross puts it) as well as the bigger fish.
Funny, I don't recall Lereah saying anything about the weather in December when the flowers were starting to bloom here in NYC.
"According to David Lereah, Chief Economist of NAR, the declines are as a result of weather disruptions:
We are seeing temporary near-term weather disruptions in much of the country, but there is an underlying pattern of stabilization in the housing market, As a result of these weather disruptions, it may take a couple months for the picture to fully clarify, but a modest recovery is likely. Housing remains a great long-term investment. The rapid shift in January to frigid air in much of the country had a cooling affect on home shopping that went beyond normal seasonal factors, Weather disruptions have continued since.
Basically the reason accounting standards are not better are that the folks that it would hurt are those who make the largest contributions to political campaigns.
Professional accountants have wanted to tighten things up for a long time, but politics get involved. The pricing of options is one example, pensions is another. Now it appears we will have another.
Of course, there is the Health South Scandal where it appears that the CEO hired inexperienced accountants and then dominated them, indicating that even the best rules can be bypassed.
That said, unless both parties suffer a lot, one or the other or both will attempt this again in the near future.
My problem with that line of thought, Vader, is that borrowers can't "attempt this again" in the near future, the distant future, or the end of recorded time unless lenders let them. I have worked in the mortgage industry. All kinds of nitwits can walk into the lobby and offer this pitch about this stupid loan they want you to make to them. You can, actually, refuse to make the loan. It's amazing how much power the one with the actual money has.
People who come in asking for a No Doc loan are, generally speaking, hiding something. It generally needs to be hidden, because if it were out on the table, the loan application would make everyone laugh out loud. So sure, such people get limited sympathy from the rest of us when it becomes clear that they are going to lose some money on the home they shouldn't have purchased. But nobody, and I mean nobody, ever put a gun to a lender's head and said that lender had to make No Doc loans.
There were, of course, a number of lenders who concluded that since other people were making No Doc loans, the loans would get made, and if the hesitant lenders stayed out of that market, they'd just lose market share, income, and UBS Warburg gimme caps. I suppose, therefore, there's some sort of extenuating circumstance here (although I have no sympathy for it, particularly). But that's just the other side of the same story we get from the No Doc borrowers: I had to get into the RE market by any means necessary, because otherwise I'd never get into it at all.
End of the day, there's always risk in the mortgage business. But there are real limits to the extent you can be defrauded if you don't want to be defrauded. I still think that the Bank has the fiduciary responsibility to the Plankton to refuse to put them into toxic loans. If the Bank did that, the Bank can damn well try to make it right. Then maybe the next time the American consumer needs to be disabused of this idea that cheap credit for dumb investments is some kind of constitutional right, the Bank will help us do that disabusing.
I guess the way I see it, someone who was given a loan they didn't understand and ultimately couldn't afford, should be allowed to walk away free and clear. Adding the three missed paymensts to their balance isn't going to help this person, it's going to get them in deeper. And I can't help but assume any "mitigation" will include a few new fees tacked on one way or another...
The homeownership rate went up ca. 4%, now it will may well fall by a similar rate because those 3-4 million families are better off renting. The lenders aren't soley responsible for our societies misplaced emphasis on homeownership, but they're the one's who profit the most from it.
So Tanta. In effect you are saying the lending industry needs a mommy that will ask "just because all your friends are doing it doesn't make it right. If they all jumped off a cliff would you follow them?"
You are correct that you cannot defraud an honest bank. Seen one around lately?
Bob, I think the borrowers you're describing probably will walk away free and clear.
But there still are, and will always be, borrowers who lost a job or got sick or got divorced or got the breadwinner sent to Iraq, and they get behind. If they can get back on their feet and start making payments again, I'd rather lend them the money to bring the loan current than foreclose. Until someone presents me with some data that says otherwise, I'm assuming that most of what we're seeing in loss mit is this stuff. To look at some of the desperate postings on the broker boards, there are some "stated" folks out there who are looking to refi at any cost. I'm guessing--just guessing--that that's because their current servicer told them no dice.
Robert, more or less. Did you see that story posted in the comments over the weekend in which the re-litter was quoted as saying that if she didn't sell these folks a house, someone else would? It's the classic excuse for why-otherwise-perfectly-reputable-business-people-get-in-on-the-bottom-feeding.
There are probably a couple of honest banks left. They're small and they're going to be snapped up by the Gorillas, because banking policy in this country for years has been on the order of "let's just roll over and play dead when another megabank wants to merge with another megabank."
That 4% is the number that I've tried not to look at too hard, myself. Except I keep skirting it - starting to encounter it and veering aside - every time I dig into this.
sigh.
I'd bet hard money that we'll see the percentage drop by at least 2 over the next two years (nationwide). I've got a nasty feeling it'll actually go lower -- 5 or 6% below peak -- before the shouting's done.
See, I think that we're going to get a triple-drop. The first two will come from the no-doc investors. Not the no-doc "Honey we can finally own", but the folk who thought they'd get rich through flipping. There are the folk who have flipped their way up to small fortunes but thought the party was going to keep going, so what they DID get is all tied up in assets that suddenly aren't selling. It's also the late-to-the-party flippers, who have a house and decided to grab a second because everyone else was doing it.
First plunge is the first group. They've got no emotional investment, and are just "cutting losses". This drop will take all of a few short months - three to six - once they're convinced they're losing more by holding than dropping. The second group takes over in the six month to year group. They're still more owner than investor, but it is (after all) a second residence, not their home. And the drag of the second mortgage with price going deeper is putting their HOME at risk. So, cut the anchor chain. The delay will be because they're trying to sell - but the loss on a sale will hurt more than a total wipe by mailing in the keys for most of them.
The third group - and the one for which I'll have the most sympathy - is as I already said. No, they probably shouldn't have gotten the loan. And I'm willing to bet that five or ten years from now it's THESE folk that'll get blamed for it all. They're going to be sticky. It's their HOME, finally. But because they bit off more than they can chew (probably with sand of the "of course it's a bit much now, but with the way house prices are appreciating it'll be nothing in a few years" sand in the eyes) it's an anchor chain. And it'll drag at them for the next four years (by which time it'll either sink them or they'll have gotten past the rough).
The US has made many contributions to the world. It is actually a net exporter of food. The US indeed consumed much to much but it also generate many things which the world wants.
According to the WTO, in 2005 the U.S. was a net importer of agricultural products:
If you look at various measures put out by the government that show an ag surplus, it is in ag commodities, which does not include processed food. The WTO includes all types of food in its measure of ag products.
NEW YORK (MarketWatch) -- Countrywide Financial CFO Eric P. Sieracki said the company plans to grow by dominating real estate finance, enhancing earnings stability and diversifying its business mix. Speaking at the 28th annual Institutional Investors Conference, Sieracki said the company's origination market share growth has outpaced the industry but said Countrywide "is not a one-trick pony." Only 9% of the company's fundings come from subprime, he said. He said there may be regional opportunities to grow the company, but didn't set plans for any major acquisitions.
A. The CA median income for four-person households is $67k. That implies a median home price of $268k. The median home in CA is now around $475k. So that implies a drop of over 40%.
Very simple calculation. Why does no one believe this will happen?
David Pearson
David,
Some of us have been saying this.
However, due to the nature of the inventory that is building, size of the bubble, credit tightening, and push to own by the NAR and local Realtor Orgs that propelled the market I think ultimate drop will be larger..at least in real terms.
A. The CA median income for four-person households is $67k. That implies a median home price of $268k. The median home in CA is now around $475k. So that implies a drop of over 40%.
Very simple calculation. Why does no one believe this will happen?
David Pearson
David,
Some of us have been saying this.
However, due to the nature of the inventory that is building, size of the bubble, credit tightening, and push to own by the NAR and local Realtor Orgs that propelled the market I think ultimate drop will be larger..at least in real terms.
Cosmo Dog
David, Cosmo Dog,
Your logic makes a lot of sense. If we look back into the US history, we do find a lot of these sudden and sharp real estate downturns until the FED took over and the government started to manage the economy, particularly after WW2. Ever since then, RE downturns were very mild comparatively. They basically resulted in a nominal flattening of prices over some years until the next boom took off. This resulted in ever less affordable RE prices; they just always rose faster than incomes, particularly after 1982.
If the government/FED did not interfere now and mitigated the RE price & credit crunch, we would indeed see a dramatic price crash, which could spill over into the general economy so strongly as to create a new Great Depression scenario. But they will manage the RE downturn and prevent any big nominal losses, even if it may look scary at times. A public rescue fund will be created, probably including the Resolution Trust Company (RTC). This fund will take over bad loans and foreclosures from banks, so they are still able to lend as the FED lowers the interest rates and supplies any money required. The RTC thereby also reduces inventory from the market before dosing it slowly back in over years to come. This combined will create a similar situation as in the early nineties. I agree that the amount of money at stake in the RE market now clearly overstates that of 1990 the rescue fund and operations will have to be of a greater magnitude.
Thru all these measures a new bubble will be created as well, maybe in the raw materials. As their prices are rising, raw materials including agriculturals and farm land can be borrowed against, thus keeping the credit bubble alive and growing.
While this game cannot last forever and has always ended in a Great Depression style deflationary depression, it is not yet over. Many people have wrongly predicted this end game for over 20 years now, and they will be wrong again. There is one more (more or less) soft landing to follow and one more bubble. After this, all bets are off.
But they will manage the RE downturn and prevent any big nominal losses, even if it may look scary at times.
"They"? "They" are the ones that got us into this mess. If "they" had a clue it wouldn't have happened. "They" are not going to be able to save much at all, and if "they" did try "they" would simply make things worse, not better.
More (worthless) anecdotes:
I've looked at some of the recent home sales publications for my east coast home town and I'm seeing signs of capitulation by the homebuilders.
Specifically, I see very aggressive discounting, and they're no longer trying to hide it ("Prices slashed on all inventory homes!" etc.)
More ominously, I'm seeing signs that the homebuilders are (I suspect intentionally) undercutting the existing home market and the speculators.
Right now I'm looking at a 3-4 bedroom condo complex with nicer exteriors undercutting last year's sales prices of a 2-3 bedroom condo complex built in 2004. This new complex is virtually next door and contains about 30 new units and many more vacant lots.
To me this looks like it could get really ugly for homeowners who bought in the past couple of years who have any need to move, refinance, or make a distress sale.
Subprime, Schmubprime ... That story is sooooo, er, last week. Or today.
Whatever. Anyhow, seems insurers are getting a bit skittish about commercial mortgages, as well:
Markit Homepage
Click on any tranche, and check 'er out. Unlike the ABX indexes, "up" arrows on the CMBX's are "bad", or at least not encouraging.
Riverpark riverparklife.com has lowered prices, stretched out construction and fallen silent on future plans. Toll was lying when they said they saw a spring rebound, That they have to come out now and say they were lying only speaks to how very bad things are. Basically the HBs are one lie ahead on good news and two lies behind on bad.
buy now or be priced out forever.
Is subprime really not a large part of Tolls market? I thought no doc 100% ltv is almost always a sub prime loan? If so, given the price of houses out here, I would argue that sub prime is a large part of Toll's and almost every builders direct market.
bob, I was quoting the Toll CFO with regards to subprime. It doesn't really matter - directly or indirectly Toll will get hit.
ac, yes, homebuiders will cut sooner and faster than existing home sellers - they need to stay in business, and they are not subject to "sticky prices". Well, they will cut until the market is flooded with REOs - that is a killer for both New and Existing home markets.
Best Wishes.
CR Said:
Subprime is not directly "a big part of Toll's market", but real estate works like a sequence of chain reactions. If a subprime borrower can't purchase a starter home, the seller can't buy a move-up home, and that seller can't buy a Toll Brothers McMansion.
Its funny how hard this concept is for so many to comprehend, except those here at this blog. The 'housing chain theory' is only as strong as the weakest link - and right now its subprime and its only gonna get worse. Homebuilders will substantially undercut existing homes since they need to pay back their debt and beat each other to the punch. It will keep rolling down hill.
Great work CR
Well, I'm going to read your posts anyway ac, no matter how worthless those anecdotal jottings you think they might be.
Yes, after being subjected to Warsh, anything from you will be lotus blossoms of treasured prose.
"Buyers in the last couple of years" are at risk you think should the house prices continue to sink and I think this might be conservative.
Well, I'm going to read your posts anyway ac, no matter how worthless those anecdotal jottings you think they might be.
I typically dismiss anecdotes and vocally deride them as unscientifical, so I feel that I only deserve the same treatment when I post them. And I'd rather do the deriding myself than fall victim to somebody with a sharper tongue (and it's also good cover for when I just completely make something up).
Apparently Fleck's friend (the one that has been so right on subprime) says there will be fewer subprimes by the end of the week (I could guess that one!)
Also, he is also projecting that the housing market will "just freeze up" in the next three to six months. I'm not sure what that means, but I might have to review my housing projections for 2007 (and I'm not thinking of any upward revisions).
I don't have Fleck's piece, but I remember when housing frooze in the early '80s (that time because of high interest rates). It might get really ugly.
Best to all.
Can someone define subprime, alt-a and prime? Are 100% LTV included in all three?
There is never a demand problem, just a pricing problem. So if the housing market is to stay liquid the prices will have to come down, even if that means the homebuilders sell at a loss. I guess it will really depends on how much cash reserves the homebuilders have to determine the lenght of time they can hold out with current pricing. I suspect most homebuilders will be claiming bankrupty before long.
Also, he is also projecting that the housing market will "just freeze up" in the next three to six months. I'm not sure what that means, but I might have to review my housing projections for 2007 (and I'm not thinking of any upward revisions).
Here's my theory on this:
Home prices have increased so much in relation to incomes recently that US homebuyers simply don't qualify to purchase US homes at today's prices. So if "sensible" lending standards make a comeback this year, then yes the housing market should largely freeze up.
The only houses that should be reasonably selling are those that have had their prices reduced 20% or more so the buyer can reasonably be expected to pay off the loan.
I don't see those kind of price reductions occuring anytime soon, hence a possible "freeze up".
Furthermore, we're talking about such huge sums of money that I don't think the US government really has the capital to provide effective assistance to the market through convential means (a $150 billion dollar bailout would make a dent IMO).
^^^ a $150 billion dollar bailout WOULDN'T make a dent IMO (or even a much larger sum)
Anyone have insight into which financial institutions - banks, brokers, etc who have significant exposure to mortgage lending, MBS assets, CDS counterparty, etc?
I am trying to build a mental picture of the entire mortgage credit liquidity gusher structure.
Anthony,
To stay liquid the housing market also needs tons and tons of easy finance and that is drying up in a hurry. This speaks to Fleck's friend that is "projecting that the housing market will "just freeze up" in the next three to six months." I'm reading this as a complete loss of liquidity on the lending side of the equation.
As a long-time RE bubble watcher, I always assumed that the bubble would simply exhaust itself and implode from the supply (inventory) explosion and/or lack of new demand but I also assumed that funny money would be widely available until the very end. What I didn't expect was the sudden loss of liquidity on the lending side. It made more sense to me that people would wake up and finally realize that RE was insanely overpirced and/or first-time-buyers would be totally priced out of the market.
Now it doesn't even matter how stupid individual buyers are when they go to buy a house and find that they can't qualify anymore. Ouch. A credit crunch can be a real bitch.
WestSideGeorge, the reason that it's actually so hard to answer your question is that things like 100% LTV are precisely where the lines get blurred. It used to be generally true that "prime" meant a FICO score of at least 620-660 and an LTV or CLTV of no more than 95%.
"Affordable Housing" used to be the term we used for borrowers, usually first-time homeowners, at around 80-120% of area median income, buying homes no more expensive than the median for the MSA. These borrowers could have somewhat more marginal credit, say 595 and up, with CLTVs of up to 105% (including financed costs, usually involving a second lien provided by a nonprofit, possibly a bank). These borrowers were classic FHA loan material. Fannie and Freddie also have products designed for this borrower class. The whole point is, they'd never be Toll customers, because these programs were always limited in some way, either by borrower income or by property price, to the "starter home" set. They also carried mortgage insurance out the wazoo.
"Subprime" was anyone with FICOs under 595, and a lot of people under 660. For instance, you can have a fairly high FICO while having recent late payments on your mortgage. That puts you into subprime for more mortgage credit, regardless of your FICO. These borrowers almost never got financing over 90%, and 60-80% was typical. The subprime business historically was refinance, not primarily purchase. The classic subprime borrower was cashing out to pay off other debt, or was refinancing to get out of impending foreclosure.
Then we invented this thing called "Alt-A," which essentially meant a prime-quality FICO score with a whole lot of other risk features, primarily low or no documentation and very high debt to income ratios. We also saw big changes in the subprime market, where LTVs got up to 100%. So, at the end of the day, it's really hard to tell the difference between the lower end of Alt-A and the upper end of subprime. Most of us have come to the conclusion that we're just dealing with a continuum of risk here, not an easy, clear way to bucket things. However, other people will tell you that FICO trumps all, so if you believe that, then the difference between Alt-A and subprime is the borrower's FICO, and the cutoff is somewhere in the low 600s.
I think I've said this before, but dammit if ac can make up anecdotes I can repeat myself. The other factor that can "freeze" a market is legal trouble. Fraud lawsuits, dragging FCs, BKs, sellers unable to convey clear title, borrowers unable to obtain clear title. Tax liens. HOA liens. Lord, every time I read about another one of these ghost-condo-complexes, I think about those "Alt" lenders who were doing spot condo loans without fully-funded HOA operating budgets. Someone brought up inability to get hazard insurance on some of these properties. I wonder how many unpaid contractors are out there slappin' mechanics liens on stuff. This kind of thing can certainly "freeze" a market.
Tanta,
This touches upon a discussion that Aaron and I were having ealier about neg-am loans and specifically FED (First Federal). Supposedly, FED has almost exclusively prime borrowers but on the other hand they also report 70% of their income from neg-am products(?!) I can't get my thinking around this one. How can a neg-am borrower also be a prime borrower? This makes absolutely no sense. Isn't it generally true that a prime borrower is supposed to have the means and creditworthiness to pay back the debt? Neg-am borrowers are going into the loan with no intention (or ability) to pay back the loan.
EPDs/buybacks starting to show in prime mortgages?
"Mortgage Fall-Out Spreading to Prime?
My sources report that several small Orange County, CA based lenders who specialize in prime mortgage financing are facing an exceptional amount of loan repurchases that could severely cripple their ability to operate.
My sources report that Opteum, a mid-size reseller of mortgage debt has repurchase notices out to American Sterling Bank for approximately $25 million. American Sterling focuses primarily on A-paper (prime) mortgages.
Another source reports that Stearns Lending (not affiliated with Bear Stearns); another regional lender is also facing a large number of buy-backs, primarily on its second mortgage products.
If these reports are true it would represent a spread of the mortgage backlash from the subprime market in to the prime mortgage market."
Can anyone confirm these reports?
http://blownmortgage.typepad.com/blownmortgage_blog/
Tanta,
This is the key:
"The classic subprime borrower was cashing out to pay off other debt"
under this definition many FICO 660+ are "sub prime"
`Jumbo' Mortgage Delinquencies Rise for 6th Month, Moody's Says
March 5 (Bloomberg) -- Late payments and defaults on so-
called prime jumbo U.S. mortgages that have been packaged into
securities rose in December for the sixth straight month,
according to Moody's Investors Service.
The level of such loans delinquent by at least 60 days, in
the foreclosure process or already turned into seized property
rose 0.05 percentage point from a year earlier to 0.35 percent,
the New York-based ratings company said in a report today. The
level climbed 0.02 percentage point from November.
The swirl around the bowl gets faster and faster:
Moody's cuts NEWs servicer rating to SQ4 one from the bottom and keeps it on downgrade watch. (Tanta can put that into plain English) S&P puts servicer rating on a negative watch.
S&P Debt rating to CCC (there are two more levels left on the downside CCC- and default)
S&P kicks NEW's stock out of its SP600 small cap index.
Finally, if any of you were wondering when Mozillo will start braying and telling all who will listen that his stock is undervalued and that the street has overreacted, it appears we have not reached that point yet. He sold another 70K shares today.
I don't have Fleck's piece, but I remember when housing frooze in the early '80s (that time because of high interest rates). It might get really ugly.
Best to all.
Calculated Risk
CR,
I think some of us have been waiting for that. Since there are already areas of the bubble markets (all RE is local)that have already fallen 15 percent in about a year it seems, given the lender issues and rising foreclosures, that prices were going to fall farther and faster than you were predicting.
Did you predict 30 percent drop in median prices over a couple of years?
Sorry if I don't remember but I have a full time job testing software for a large corporation, 3 kids under the age of 7, a wife that suffers migraines 2 times per week, a company I am starting in my spare time (nothing related to RE or software) and I am interviewing for a new position in Northern CA.
Yes, that right..but way up north out of the bay area. My feeling is all of CA is going down....in case people didn't know the bubble hit even most of the nice rural areas because of cash outs and retiree's from So Cal and Bay areas bought property in the Redding/Shasta/Tahoe and Southern Oregon areas.
My feeling is lock in a higher salary now and rent for a couple of years so I am ready to buy at bottom in an area of the country I want to live in.
I still think CA will revert below the 2002 prices due to rabid inventory and
Brian - the only thing I can say in support is that mortgage brokers are complaining about difficulty in placing loans with layered risk features for borrowers with high FICOs on the boards.
The concentration of risk-layered loans in many areas of CA, places in FL, etc is going to create a severe problem. We are not yet halfway through this cycle of tightening of mortgage lending standards.
And soon, the commercial contraction begins....
Darth, "prime" in the context we've been using it has simply collapsed into one of the old-fashioned three pillars of underwriting: willingness to repay, ability to repay, and quality of collateral.
"Willingness to repay" has traditionally been measured by the borrower's credit history (more recently that history has been proxied by a number called a FICO) and the borrower's down payment. Down payment is an issue of "willingness" in the sense that it is intended to hold the borrower to the debt--it's "skin in the game."
"Ability to repay" is measured by the borrower's income, assets, and other debts and expenses.
So you get "prime OA" because you have borrowers with a clean credit record and some kind of down payment--therefore showing "willingness"--but who nonetheless do not have sufficient income or assets--or have too much other debt--to be able to afford to carry a mortgage written on traditional terms. It's the classic, "this guy's a great credit risk, he's just having cash flow problems at the moment." The number of times that turns out to be true is exceeded by the number of times it involves a "check being in the mail." But onward.
So you can see how the delusion has been supported. Some outfit like FED can claim, accurately, to have prime loans in its portfolio, as long as you are willing to define "prime" without reference to ability to repay. Once you do that, it's hard to see how the borrower's vaunted willingness to repay is going to offset the fact that the borrower doesn't seem to have any, um, cash. As I have said before, I've never seen anyone make the monthly nut with their FICO score. But I am an old-fashioned schoolmarmy bitter has-been, so bear that in mind.
Darth, think of it this way. When prices where I live in SF, went from 500k for a 2br crap condo in the city, to 950k for the same condo three years later, it's very easy to figure out. Ive never bought, because when I didnt have the cash for a downpayment, a few years back, I thought, this can't go up much more, so I'll wait. Then, I had the downpayment, yet, noone else was buying with money down here. Which got me to thinking. Who has $ 180k sitting around to drop on a condo downpayment? And who, that does, would be stupid enough to put it down? The answer was, not me. That said, had I not the payment, and somehow decided, "buy now or be priced out forever" (which was the prevailing sentiment the last few years) I'd have gone all in, 100% LTV, and possibly needed to do neg am to be able to outbid the other FBs and be able to afford the payment, RE taxes, etc. Soooooooo..... there is your answer. SF is not the only ridiculously priced market, and there are far more of these ridiculously priced houses than buyers able to afford the fully amortized payment. Thus, a person with a credit score, like myself, that is very high, could end up looking like a subprime all the same. All it takes is an end to the rise in house prices, because once they stop, there's no refi, and the whole jig reverses...which is what we've been seeing just the start of the last year.
FICO means nothing in this market. Repeat it to yourself over and over til it sinks in.
Brian, remember that "scratch & dent" knows no credit grade. Any loan--prime, alt, subprime--can be S&D. Misrepresentation. Inflated appraisal. New construction that never finished per plans and specs. Lord knows what. Never underestimate the ability of a "prime" or "near-prime" lender to be "sloppy." And nobody, just nobody, has any patience any longer with "sloppy." We're getting to the point where any little "scratch" is radioactive.
Dammit Tanta! always one step ahead and 100% more articulate. (but seriously, thanks for the best posts on the web)
credit tightening.
Where are all those 1st time buyers going to get 150k for a down on a 750k starter home?
Tanta and Geoff, thanks for the responses. From this I have learned (to paraphrase Mogambo Guru) that we are so freakin' doomed! But seriously, this is pretty much what I have feared. The sticking points for me are:
1.) "as long as you are willing to define "prime" without reference to ability to repay" Muahahahaha!!!
2.) FICO means nothing in this market.
If these statments are true, and I have every reason to believe that they are, then there is basically no correctly priced risk in the market at all. None.
Darth Toll,
Yeah, you pretty got it alright...
The real issue, is of the people who are subprime borrowers, based on ability to repay the fully amortized rate out of income, but who are not classified as such, because of a good FICO score, what is the distribution of other assets that might help these people out in the coming pinch. I dont know how to get at those numbers, since I only have two halves...you can look at the SCF and get the distribution of net worth and the reliance on real estate as part of the net worth, and you can get at the FICO scores on the debts (id think), but I dont have a way to know what the net worth looks like for these misclassified subprimes.
A further question is, when faced with a house that is sinking them, do they bail and take the loss, or do they eat their other assets to pay into the house, thinking that it is going to bounce back and not be throwing good $ after bad. I think the they wont figure it out and a lot of money will disappear into the sinkhole, before it becomes evident that the sunk costs arent worth chasing.
pretty much...need to proof read better.
There is never a demand problem, just a pricing problem.
Yes and no. If prices decline steadily, something can be reasonable and still not purchased due to expectations of further declines. That's the deflationary spiral.
You know, I'd never say that FICO is meaningless. I don't think it is.
A borrower with a decent FICO score may go down, but she'll go down fighting. She will trade in the Mercedes for the used Corolla. She will eat peanut butter. She will sell the Matchbox car collection. That's how she got that FICO to start with: by being willing to pay her debts. It's her endless misfortune that she was convinced by someone or something that taking on such an onerous house payment was worth it.
Prices are "sticky" and owner-occupants are what we call "persistent." Speculators, second home owners, youngsters who can easily move back in with the folks--they'll fold pretty quickly. Prime credit borrowers will struggle. Frankly, that just makes it all the sadder, as far as I'm concerned. A whole lot of retirement accounts will get liquidated and rainy day funds demolished in order to try to keep up with house payments that will eventually win.
Here is the latest from PIMCO.
PIMCO - Global Central Bank Focus- March 2007 "The Plankton Theory Meets Minsky"
This is right in line with the "chained reaction".
Today was a another incredible day for anyone short any or all the financial dogs.
When prices where I live in SF, went from 500k for a 2br crap condo in the city, to 950k for the same condo three years later, it's very easy to figure out. Ive never bought, because when I didnt have the cash for a downpayment, a few years back, I thought, this can't go up much more, so I'll wait. Then, I had the downpayment, yet, noone else was buying with money down here. Which got me to thinking. Who has $ 180k sitting around to drop on a condo downpayment? And who, that does, would be stupid enough to put it down? The answer was, not me.
Geoff, you have pretty much described it to a T !
when faced with a house that is sinking them, do they bail and take the loss, or do they eat their other assets to pay into the house, thinking that it is going to bounce back and not be throwing good $ after bad. I think the they wont figure it out and a lot of money will disappear into the sinkhole, before it becomes evident that the sunk costs arent worth chasing.
On this though, I would differ. Some would do as you say. But mostly, my take is that spending outside of housing is going to take a hit drastically, rather than mass walk-offs. High income people with higher DTI ratios is my reasoning.
OPINIONS...
IMO the credit bust -- obviously not confined to sub-prime, or even ALT-A -- will spread far beyond the mortgage market. I believe that all forms of consumer credit will eventually take a hit, and sales will suffer accordingly.
Ok, perhaps not meaningless in the strict sense of the word, but meaningless in terms of its relative usefulness in determining how this unfolds for some people.
My previous point was that a person who NORMALLY may pay down reasonable debts that they incurred under reasonable assumptions, may not find this to be reasonable or expected. That may be because they were sold a bag of goods (house prices always go up) or they were too lazy or stupid to figure out the true terms of the loan. But likely, there are some whose behavior will not remain consistent with what their FICO would indicate, because this kind of payment shock never happens to credit cards or auto loans and Id think there is a fair share of these borrowers who didnt realize how it would happen with their mortgage, for whatever reason). When it becomes clear not just that house prices CAN go down, but just how much they are GOING down, FICO will THEN be meaningless.
Hi Tanta,
A quick question. In your first post you stated, "[...]very high debt to income ratios".
Roughly speaking, what is a very high debt to income ratio? Is there a number out there, or is this a, "It Depends" type answer?
Regardless of the answer, thanks for all the edu-muh-cation you (and all the others) provide here. Great stuff.
Right brewster, but you are describing a detour on the map to disaster. Instead of walking, they scrimp, and then consumer spending tanks...obviously then business investment tanks, then jobs, then the rest of what is propping up this economy. No easy way out, although the eventual path will depend on the hit to the savings rate, to net worth, etc.
Hi Brian,
The comments I made on my blog contained information that I received from employees within each firm. I don't believe any of it is public. However, Opteum did report in its earnings reports that it was facing losses due to its sale of MBS.
Morga
Tanta or anyone else qualified to offer an opinion, I am trying to understand why PHH has held up so well in the mortgage bloodbath. I just don't get it. I've been collecting JAN'08 puts.
According to data I have, they were 10 in Mortgage Servicing volume in 1H2006 with 1.6% share and in top 20 in Origination with 1.4% share. They are a year behind in SEC filings. They lost a minimum of $20mill in 2006, and their mortgage hedges were working against them. They are laying off. Management painted a rosy forecast for 2007 on 01/24, but I'm sure that's already been revised downward.
I just don't get it. Are they too under the radar? Is their servicing business going to carry the day? Their hedges suddenly going to flip around and make money? Why is their stock holding up so well? Opinions ...
"During the fourth quarter of 2006, negative results from our servicing hedge reduced our overall results for our mortgage servicing segment. Specifically, in the last two months of 2006, the relationship between mortgage rates and 10-year swap rates tightened by 6 basis points resulting in a negative $20 million impact to the mortgage servicing segment results. Should the spread relationship between swaps and mortgages revert to historical trends, we expect that our hedge position would allow us to recoup this loss in future periods."
Everyone has run for the hills, said William D. Dallas, whose company, Ownit Mortgage, filed for bankruptcy protection in December after it lost financing from Merrill Lynch and other banks.
Many of the problems that have surfaced thus far are not tied to the resetting of rates. Rather, they stem from a sharp and early spike in the default rates among loans issued last year.
Hmmm....better stock up on the popcorn for the reset double feature!
Frank's PIMCO link really sums it up. The market is seeing this now too, all the home builders took a disproportionate hit today.
Within a month or two, maybe less, the herd may well change direction (I can hear the quotes, "we're all bubbleheads now!"
Then us true contrarians will have to start thinking of buying beat up homebuilders and banks... well, maybe towards next fall...
ReductiMat, this is the Fannie Mae position on DTI:
Satisfies basic risk tolerances. This risk assessment should be used when the borrower has a total debt-to-income ratio in the mid-30% range.
Decreases risk. This risk assessment generally should be used when the borrower has a total debt-to-income ratio in the mid-20% range.
Significantly decreases risk. This risk assessment generally should be used when the borrower has a total debt-to-income ratio of 10% or less.
Increases risk. This risk assessment generally should be used when the borrower has a total debt-to-income ratio in the low- to mid-40% range.
Significantly increases risk. This risk assessment generally should be used when the borrower has a total debt-to-income ratio of 45% or greater.
By "decreases risk," they're talking about when an underwriter can use a low DTI as a "compensating factor" to make up for some other risk factor in the loan (such as a higher LTV or something).
In general, Alt-A products allow DTIs of 40-50 and subprime up to 60. Do not ask me how anyone gets by with 60% of pretax income going to debt service, because I dunno.
tj & the bear
Yep, the CC will be next.
OT but... is this important?.. Ruth's Chris replaces NEW on S&P SC 600
CNNMoney.com: 404 Page Not Found
MOM said:
And soon, the commercial contraction begins....
I know CR has been talking about how commercial lags residential, and backed that argument up with some nice charts and stats. I would point to one other thing today -- the chart of the IYR, the main commercial REIT ETF. Ugly gap below a multi-month uptrend line. If you believe that charts give you advance warning of a fundamental downturn, then that could be significant. Of course, I've been wrong about the direction of this thing for a while, so who knows whether this is just "noise" or a trend change. Chart on my blog if you're intersted...
Interest Rate Roundup: Interesting action in COMMERCIAL R.E. shares
Probably not noise. I was down 10% on SRPIX a little while back, betting on this too soon. But now, back in the money. Seemed like when Sam Zell took the money and ran on EOP, the party was just about over.
Looks like risk premiums are rising all over the place. If you've been following commercial cap rates, then you probably know there is no place for them to go but up, which spells doom. And this is happening even before the real stuff hits the fan when the job growth for office workers that is baked into those cap rates starts missing very high expectations.
loco. spring market is upon us in washington dc. multiple offers on anything worth anything. you want to buy in chevy chase? break out your escalation clause. you want to buy in georgetown? better bring all cash.
i've been dumbfounded at the strength of the market here. i'm the bearish real estate broker (who still has clients. amazing!) and i'm surprised.
pleasantly surprised.
this is a bifurcated market.
dryfly taught me about tract homes. them suckers are toast.
but you want something nice in kalorama - its gonna cost you a few mil.
god bless the fed government!
Be very careful about what is called CRE these days. Many things called new CRE were actually what the planner class describes as "mixed use," Think of mixed use as a TV with DVD player built in. Twice as likely for something to go wrong with all the worst featurs of both asset classes. I mentioned Riverpark above which is precisely what I am talking about.
Bailey: No fall turnaround for houses, either. Next.
Mike_in_Fl,
The biggest negative indicator for the REITs is that their yields are at historic lows, with very little room for further capital gains in the near to intermediate term. Their value is currently based on sale prices for real estate that are so high there's little possibility of a buyer making money through rent.
I bought some ultra short REIT index shares today.
Robert - when I got out of commercial in 04, all the people in my firm could talk about was chasing the new residential retail mixed stuff, and then there was lowly me, sitting in research telling them by the time they gear up, the market will have just peaked.
I wouldnt be surprised at all if this stuff is showing up in CRE lending.
David Lereah Watch
the reic is getting mighty defensive lately.
Bob - must be reading my mind (or my posts) hehe. Did you go SRS, or SRPIX? 4% up on the latter just today.
I'm sure the greed which caused the sub prime problem is limited to that area, and the people who make Commercial loans are immune to such human weakness.
There is never a demand problem, just a pricing problem. So if the housing market is to stay liquid the prices will have to come down, even if that means the homebuilders sell at a loss.
Deductive reasoning says there is also demand problem - last year we lost the speculators, now sub-prime gets its' "face ripped off".
Not sure how to quantify that, but a SWAG (silly wild-&&& guess) says 10-30% ...
Let the spring freeze begin!
Do not ask me how anyone gets by with 60% of pretax income going to debt service.
A lot of cash flow positive investment real estate would do it. PITI = 900/mo; rent = 1000/mo.
Nice to hear the market's bifurcated in DC (and NYC apartments too) dc1000. I imagine one could find similar niche markets even in the depths of The Depression. The lawyers tell us that not everyone suffers in a recession.
Good thing we have such a competent administration to manage our affairs if things really do get froozed up.
Any news on Pacific Mortgage in SoCal? I have a family member who recently started working there as a loan officer.
Anyone who thinks there are no problems price won't fix had best review the ABX graph.
A long time ago (6 months real time seems like 6 centuries financial time) I talked about the theoretical case where there might be asset products like subprimes that might have -negative- prices. At the time it was laughed off. Now we are seeing notes that would cost more to collect than what can reasonably be collected. 26% off book price for bundles like what got NEW into trouble is close amd this is only the start.
Wachovia Correspondent shut down as of today. THis is the first news I have heard about A/Alt-A banks besides maybe Impac shutting down.
Wachovia Correspondent Shut down
The Economist on sub-prime. I don't believe a subscription is required.
Premium content | Economist.com
WaMu no longer buying subprime loans???? Ameritrust shuts down?
Ameritrust Shut Down
Robert Cote,
That has happened to a lot of recyclable commodities over the years. In the early 90's, our waste plastic was better than the virgin resin in Eastern Europe. I had a client that was selling it over there. Then they caught up with our technology and our waste plastic went back into landfills (this is America, and we have big valleys we can fill in).
That would be interesting to have the same instrument remain intact and tradable in reverse transactions (beyond zero value).
Oh no! We're not done with ancedotes.
I have a couple of rentals. The family in one of them gave me notice today, they are moving into a 4 BR apartment (understandible - they have 4 kids that little 2 BR house). What they've been waiting for, is their old house to sell back in Buffalo NY.
They got.... $13000. No, I did not leave a zero off.
Bubble mania, didn't sweep over everywhere! This is what prices do, when there are no jobs.
Freemont website - before and after:
Bakersfield Bubble
Business & Financial News, Breaking US & International News | Reuters.com
Countrywide Financial Corp. said on Monday that it was granted permission to convert its existing national bank charter to a federal savings bank charter by the Office of Thrift Supervision.
The U.S. mortgage lender said the conversion better aligns the regulatory supervision of the company with its strategic objectives.
It means that OTS and the Fed knew of Countrywide's position as of Nov 06, somewhat in advance of the unraveling.
OTS Approves Countrywide Application
Not much help from this non-expert.
IMH - We are not suprime! Also their "tightening count is now up to 20 times, it was 17 on the conference call last week. Will we see hourly tightenings by next week?
Impac Mortgage Holdings, Inc. Clarifies Position as an Alt-A Lender and Misconceptions
where is the Fleck article about less subprimes by the end of the week + housing freezing? All I see is this, and i can't find it in there:
How housing ills killed the bull - MSN Money
what is layered risk
what is Wachovia correspondent
This blog is addictive!
Only an anecdote but i know a back office worker in real estate in ohio who is "very very busy with tons of listings since january" and for february the "highest number of closures since the office opened".
She is stressed up and two of her staff have quit.
In January the Realtors there were saying it was "very bad". They had been sent on courses by head office to sell more quickly in a declining market. Seems that is working for them. In November there was talk of offered prices being cut by up to 25% but since then i think it has stabilised?
Even so others are buying it seems at the moment and in quantity.
dc1000,
Brother in law in commercial real estate in DC is busting his ass. Local top guy ran away for more money and the B-I-L can't hire as there is nobody to hire at any salary. B-I-L works for a bigish firm usually in the Boston area.
More anecdote TV story about the heating up of the SF market. Prices going up and multiple offers again. Maybe BS as it was on TV.
Read somewhere that if several hot counties were removed from growth statistics there would be almost no growth in the US over the last several years. The counties were in SF area, NYC, Redmond WA and Wash DC.
That popcorn may get stale waiting for the main event.
Time will tell.
Probert,
Fleck writes a "Daily Rap" and ask Fleck column every day for subscribers. It costs a whopping $10 per month. You can subscribe at Fleckensteincapital.com if interested. He did not have much more to say about it than what CR posted. Mostly connecting the dots with yen/carry trade and unwinding global liquidity that found its way into sub prime in addition to all other asset classes. Asia markets are putting on a brave face tonight. Perhaps we will see a day or two reprieve from the selling.
"We have a trillion dollars of subprime mortgages, and we're going to have huge defaults," Heebner, 66, said in a telephone interview from his office in Boston. "If you're looking at the housing market, it's not the darkest before dawn, it's the darkest before pitch black."
philly.com: Philadelphia local news, sports, jobs, cars, homes
But Heebner does not see a recession and sees there is room for rents to move up.
The guy is a successful fund manager
Interesting analogy from Peter Schiff's new book - Crash Proof
Home: Crash Proof - Peter Schiff.
Does Mr Heebner don't see connection between sub-prime and mortgages to investmnt banks ????
what does he see that i mis ?
For recession to occur via subprime you would need to seek it tank the wider economy and not see interest rates fall.
How likely is that?
At the moment there is still out of control inflation as the still lingering worry. Out of control inflation seems hard to believe right now but until the numbers in unemployment begin going up it remains the main Fed worry.......balanced of course with the worry of catastrophic deflation and debt armageddon on the other side.
Dispite all of this rates remain at 5.25 do they not?
Peter Schiff's new book - Crash Proof - this is the biggest oversimplification that I saw of late.
While there are problems in the way world economy works this kind of simplistic analogy is just giving bad names to those who try to see things as they are.
The US has made many contributions to the world. It is actually a net exporter of food. The US indeed consumed much to much but it also generate many things which the world wants.
Yes, there are problems. Yes there is imbalance. But this book is a joke.
Highest CD rate:
Does anyone know where can I find who pays the most for CDs?
I think this will be a good indication which banks are in trouble.
You might try E Trade bank
6 month CD @ 5.25% They also have a regular savings 5%.
I wonder if that would still be the case of the farmers were not subsidised? Or people generally subsidised by artificially low taxation that is maintained by debt increase that gets exported to the rest of the world.
How simplistic is Peters comparison? I mean really really really?
A realy truely "must read":
PIMCO - Global Central Bank Focus- March 2007 "The Plankton Theory Meets Minsky"
Looks like stated income lending, whether prime or subprime, will be drastically cut back before this is done. That means most purchases will be made at prices that equate to around four times the true income of the buyer.
Q. What is the impact of this on CA home prices?
A. The CA median income for four-person households is $67k. That implies a median home price of $268k. The median home in CA is now around $475k. So that implies a drop of over 40%.
Very simple calculation. Why does no one believe this will happen?
http://globaleconomicanalysis.blogspot.com/
over at Mish's blog he notes:
Litigation Items
It looks like the legal risks are starting to emerge.
Tanta,
It turns out there is someone at the FDIC who knows what underwriting is all about. Unfortunately, it appears he was bound and gagged in the basement until today.
"Credit scoring has had a dynamic impact on lending,''
says Steve Fritts, associate director of risk management policy
at the FDIC in Washington.It's a proxy for capacity and
character,'' two of the three C's'' of credit (the third is
collateral).But it's a limited proxy'' compared with the in-
depth financial analysis and verification of a full
underwriting, he says."
As Housing Goes Bust, Lenders Become Predators?: Caroline Baum - Bloomberg.com
Looks like the bulls will get bragging rights today.
Major World Indices - Yahoo! Finance
Yal,
Bankrate.com has that info.
If you are actually looking for really good CD rates, you can join The Pentagon's credit union for $25. They frequently have the best rates anywhere.
Goldman Sachs warns of 'dead bodies' after market turmoil
The global currency storm of the past week is starting to infect the corporate bond markets and may prove harder to contain than last year's May sell-off, Goldman Sachs has warned. Jim O'Neill, the bank's chief global economist, said investment firms playing the "carry trade" had been caught on the wrong side of huge leveraged bets against the Japanese yen.
"There has been an amazing amount of leverage on currency markets that has nothing to do with real economic activity. I think there are going to be dead bodies around when this is over," he said. "The yen carry trade has reached 5pc of Japan's GDP. This is enormous and highly risky, as we are now seeing."
Goldman Sachs warns of 'dead bodies' after market turmoil - Telegraph
David,
But if 1/3 of families don't own homes, and it seems safe to assume they will tend to be on the bottom of the income scale... What is the average family income of homeowners.
Remember: lies, damn lies and statistics...
Toll may not be heavily exposed to "subprime" buyers of their homes. However, many new home buyers here in so.Cal are "Prime" but have used creative financing to buy. This is just the latest wordsmithing by these charlatans.
By asserting that you have limited "subprime" exposure, Toll is back at trying to manipulate the reality of their present circumstances, and calm the financial community watching this unfold ; buying themselves time,spoon feed the market bad news as gradually as possible.
Many new home, prime buyers, especially higher end buyers, have bit off more than they can chew, and will soon find themselves thrown into the subprime cesspool. At that time, Toll will offer new assurances.
Pending home sales down 4.1% vs expectations of -1.2%. Things look ugly in the South. Must be Florida.
The word ``predatory,'' with all its negative connotations, is popping up elsewhere; specifically, to describe loss- mitigation practices.
There is nothing predatory about ``improving the collectability of the loan,'' says Scott Valentin, managing director, specialty finance research, at Friedman, Billings, Ramsey & Co. in Arlington, Virginia.
Loss-mitigation tactics are fairly standard: Extend the terms of the loan, and if that fails, sell the loan for pennies on the dollar. There's nothing predatory about either. It's loan management. And it's in both parties' self-interest to find terms that can be met because ``no one makes money foreclosing,'' Valentin says.
I'll tell you something: when Caroline Baum and Tanta agree on something, it's gospel.
Tanta,
Like any crisis that went long ignored, you can be sure this will bring out sanctimonious finger pointing by the hypocrits.
That said, I do have a hard time feeling sorry for lenders who feel wrongly maligned. Frankly, this is largely their fault and their motivations were basically greed and self-interest. The phraseology may be inacurate, but they deserve what they get.
If J6P is told by his betters, that he can afford that stupid purchase and or it is his American duty to make that stupid purchase and the airwaves are filled with orders to make stupid purchases, then why is it J6P's fault.
The same is true of loans and mortgages.
That said, unless both parties suffer a lot, one or the other or both will attempt this again in the near future.
BUT the burden is on the elites, who must through punishment this time, education and regulation next time stop the madness.
Or it is like complaining about the heroin addicts walking the streets while the TV is filled with ads for herion.
Bob, of course you're right. However, if CR deleted every post by Tanta except those that didn't involve kicking around lenders, he'd have enough archive space to host the entire Federal Register. As a matter of fact, I only wish I were better at accounting issues, because I think that's clearly the latest big issue in the old "how did this manage to appear profitable for so long?" questions we'll be entertaining ourselves with as it all unwinds. So if I were better at accounting issues, I'd be taking my industry to the woodshed over that in a big way. All I can really do right now is worry about it, and try to deal with the queasy sensations I get whenever I look at these financials. And before somebody starts in on the GSE thing again, let me step right up and admit that the stuff the GSEs were foolin' with was and is about 86% way over my head. They didn't teach me do-squat about "derivatives accounting" back in mortgage banking boot camp. What I'm talking about is the stuff that's elementary enough that even I start to think it's probably bologna. I remember when the NEW announcement regarding its delay in reporting came out. I read it over about ten times, and kept thinking, this can't be. Don't tell me these folks screwed up the old LOCOM problem. That ain't one of those high-falutin' super-duper derivatives-hedging Enron-style accounting games it takes some bunch of rocket scientists to figure out. SO far, from what I can glean from news accounts, they pulled some simple-minded old-fashioned stunt that a 22-year-old regulator fresh out of college with the ink still wet on the CPA could catch without removing the ipod. This leads me to worry, very much, about what everyone else is doing.
So please don't think I'm suggesting that we all start trusting all the lenders. It just seems odd to me that the first line of attack would be over the only practices they have that might, possibly, benefit the Plankon (as Bill Gross puts it) as well as the bigger fish.
Funny, I don't recall Lereah saying anything about the weather in December when the flowers were starting to bloom here in NYC.
"According to David Lereah, Chief Economist of NAR, the declines are as a result of weather disruptions:
We are seeing temporary near-term weather disruptions in much of the country, but there is an underlying pattern of stabilization in the housing market, As a result of these weather disruptions, it may take a couple months for the picture to fully clarify, but a modest recovery is likely. Housing remains a great long-term investment. The rapid shift in January to frigid air in much of the country had a cooling affect on home shopping that went beyond normal seasonal factors, Weather disruptions have continued since.
CR's and Greenspan's probability recession percentage are pretty close:
Link
Basically the reason accounting standards are not better are that the folks that it would hurt are those who make the largest contributions to political campaigns.
Professional accountants have wanted to tighten things up for a long time, but politics get involved. The pricing of options is one example, pensions is another. Now it appears we will have another.
Of course, there is the Health South Scandal where it appears that the CEO hired inexperienced accountants and then dominated them, indicating that even the best rules can be bypassed.
That said, unless both parties suffer a lot, one or the other or both will attempt this again in the near future.
My problem with that line of thought, Vader, is that borrowers can't "attempt this again" in the near future, the distant future, or the end of recorded time unless lenders let them. I have worked in the mortgage industry. All kinds of nitwits can walk into the lobby and offer this pitch about this stupid loan they want you to make to them. You can, actually, refuse to make the loan. It's amazing how much power the one with the actual money has.
People who come in asking for a No Doc loan are, generally speaking, hiding something. It generally needs to be hidden, because if it were out on the table, the loan application would make everyone laugh out loud. So sure, such people get limited sympathy from the rest of us when it becomes clear that they are going to lose some money on the home they shouldn't have purchased. But nobody, and I mean nobody, ever put a gun to a lender's head and said that lender had to make No Doc loans.
There were, of course, a number of lenders who concluded that since other people were making No Doc loans, the loans would get made, and if the hesitant lenders stayed out of that market, they'd just lose market share, income, and UBS Warburg gimme caps. I suppose, therefore, there's some sort of extenuating circumstance here (although I have no sympathy for it, particularly). But that's just the other side of the same story we get from the No Doc borrowers: I had to get into the RE market by any means necessary, because otherwise I'd never get into it at all.
End of the day, there's always risk in the mortgage business. But there are real limits to the extent you can be defrauded if you don't want to be defrauded. I still think that the Bank has the fiduciary responsibility to the Plankton to refuse to put them into toxic loans. If the Bank did that, the Bank can damn well try to make it right. Then maybe the next time the American consumer needs to be disabused of this idea that cheap credit for dumb investments is some kind of constitutional right, the Bank will help us do that disabusing.
Tanta,
I guess the way I see it, someone who was given a loan they didn't understand and ultimately couldn't afford, should be allowed to walk away free and clear. Adding the three missed paymensts to their balance isn't going to help this person, it's going to get them in deeper. And I can't help but assume any "mitigation" will include a few new fees tacked on one way or another...
The homeownership rate went up ca. 4%, now it will may well fall by a similar rate because those 3-4 million families are better off renting. The lenders aren't soley responsible for our societies misplaced emphasis on homeownership, but they're the one's who profit the most from it.
So Tanta. In effect you are saying the lending industry needs a mommy that will ask "just because all your friends are doing it doesn't make it right. If they all jumped off a cliff would you follow them?"
You are correct that you cannot defraud an honest bank. Seen one around lately?
Bob, I think the borrowers you're describing probably will walk away free and clear.
But there still are, and will always be, borrowers who lost a job or got sick or got divorced or got the breadwinner sent to Iraq, and they get behind. If they can get back on their feet and start making payments again, I'd rather lend them the money to bring the loan current than foreclose. Until someone presents me with some data that says otherwise, I'm assuming that most of what we're seeing in loss mit is this stuff. To look at some of the desperate postings on the broker boards, there are some "stated" folks out there who are looking to refi at any cost. I'm guessing--just guessing--that that's because their current servicer told them no dice.
Robert, more or less. Did you see that story posted in the comments over the weekend in which the re-litter was quoted as saying that if she didn't sell these folks a house, someone else would? It's the classic excuse for why-otherwise-perfectly-reputable-business-people-get-in-on-the-bottom-feeding.
There are probably a couple of honest banks left. They're small and they're going to be snapped up by the Gorillas, because banking policy in this country for years has been on the order of "let's just roll over and play dead when another megabank wants to merge with another megabank."
Bob,
That 4% is the number that I've tried not to look at too hard, myself. Except I keep skirting it - starting to encounter it and veering aside - every time I dig into this.
sigh.
I'd bet hard money that we'll see the percentage drop by at least 2 over the next two years (nationwide). I've got a nasty feeling it'll actually go lower -- 5 or 6% below peak -- before the shouting's done.
See, I think that we're going to get a triple-drop. The first two will come from the no-doc investors. Not the no-doc "Honey we can finally own", but the folk who thought they'd get rich through flipping. There are the folk who have flipped their way up to small fortunes but thought the party was going to keep going, so what they DID get is all tied up in assets that suddenly aren't selling. It's also the late-to-the-party flippers, who have a house and decided to grab a second because everyone else was doing it.
First plunge is the first group. They've got no emotional investment, and are just "cutting losses". This drop will take all of a few short months - three to six - once they're convinced they're losing more by holding than dropping. The second group takes over in the six month to year group. They're still more owner than investor, but it is (after all) a second residence, not their home. And the drag of the second mortgage with price going deeper is putting their HOME at risk. So, cut the anchor chain. The delay will be because they're trying to sell - but the loss on a sale will hurt more than a total wipe by mailing in the keys for most of them.
The third group - and the one for which I'll have the most sympathy - is as I already said. No, they probably shouldn't have gotten the loan. And I'm willing to bet that five or ten years from now it's THESE folk that'll get blamed for it all. They're going to be sticky. It's their HOME, finally. But because they bit off more than they can chew (probably with sand of the "of course it's a bit much now, but with the way house prices are appreciating it'll be nothing in a few years" sand in the eyes) it's an anchor chain. And it'll drag at them for the next four years (by which time it'll either sink them or they'll have gotten past the rough).
Darn. Didn't manage to skirt it that time.
The US has made many contributions to the world. It is actually a net exporter of food. The US indeed consumed much to much but it also generate many things which the world wants.
According to the WTO, in 2005 the U.S. was a net importer of agricultural products:
Trade Profiles
If you look at various measures put out by the government that show an ag surplus, it is in ag commodities, which does not include processed food. The WTO includes all types of food in its measure of ag products.
NEW YORK (MarketWatch) -- Countrywide Financial CFO Eric P. Sieracki said the company plans to grow by dominating real estate finance, enhancing earnings stability and diversifying its business mix. Speaking at the 28th annual Institutional Investors Conference, Sieracki said the company's origination market share growth has outpaced the industry but said Countrywide "is not a one-trick pony." Only 9% of the company's fundings come from subprime, he said. He said there may be regional opportunities to grow the company, but didn't set plans for any major acquisitions.
Let us welcome our new mortgage overlord.
Q. What is the impact of this on CA home prices?
A. The CA median income for four-person households is $67k. That implies a median home price of $268k. The median home in CA is now around $475k. So that implies a drop of over 40%.
Very simple calculation. Why does no one believe this will happen?
David Pearson
David,
Some of us have been saying this.
However, due to the nature of the inventory that is building, size of the bubble, credit tightening, and push to own by the NAR and local Realtor Orgs that propelled the market I think ultimate drop will be larger..at least in real terms.
Q. What is the impact of this on CA home prices?
A. The CA median income for four-person households is $67k. That implies a median home price of $268k. The median home in CA is now around $475k. So that implies a drop of over 40%.
Very simple calculation. Why does no one believe this will happen?
David Pearson
David,
Some of us have been saying this.
However, due to the nature of the inventory that is building, size of the bubble, credit tightening, and push to own by the NAR and local Realtor Orgs that propelled the market I think ultimate drop will be larger..at least in real terms.
Cosmo Dog
David, Cosmo Dog,
Your logic makes a lot of sense. If we look back into the US history, we do find a lot of these sudden and sharp real estate downturns until the FED took over and the government started to manage the economy, particularly after WW2. Ever since then, RE downturns were very mild comparatively. They basically resulted in a nominal flattening of prices over some years until the next boom took off. This resulted in ever less affordable RE prices; they just always rose faster than incomes, particularly after 1982.
If the government/FED did not interfere now and mitigated the RE price & credit crunch, we would indeed see a dramatic price crash, which could spill over into the general economy so strongly as to create a new Great Depression scenario. But they will manage the RE downturn and prevent any big nominal losses, even if it may look scary at times. A public rescue fund will be created, probably including the Resolution Trust Company (RTC). This fund will take over bad loans and foreclosures from banks, so they are still able to lend as the FED lowers the interest rates and supplies any money required. The RTC thereby also reduces inventory from the market before dosing it slowly back in over years to come. This combined will create a similar situation as in the early nineties. I agree that the amount of money at stake in the RE market now clearly overstates that of 1990 the rescue fund and operations will have to be of a greater magnitude.
Thru all these measures a new bubble will be created as well, maybe in the raw materials. As their prices are rising, raw materials including agriculturals and farm land can be borrowed against, thus keeping the credit bubble alive and growing.
While this game cannot last forever and has always ended in a Great Depression style deflationary depression, it is not yet over. Many people have wrongly predicted this end game for over 20 years now, and they will be wrong again. There is one more (more or less) soft landing to follow and one more bubble. After this, all bets are off.
"Where did all this money come from?"
General Custer
But they will manage the RE downturn and prevent any big nominal losses, even if it may look scary at times.
"They"? "They" are the ones that got us into this mess. If "they" had a clue it wouldn't have happened. "They" are not going to be able to save much at all, and if "they" did try "they" would simply make things worse, not better.
Instead of Eric P. Sieracki, CFO, substitute "Eric P. Sieracki, Underpants Gnome".
His press statement makes much more sense in that light.
NB. For those of you who do not get business insight from 'South Park', the Underpants Gnomes have a three-step business plan: