Operating with inadequate capital in relation to the kind and quality
of assets held by FIL;

WOW!

Operating without an accurate, rigorous and properly documented
methodology concerning its allowance for loan and lease losses;

o Operating with a large volume of poor quality loans;

Let the lawsuits begin. Thes guys are done!

Great minds think alike, Crispy!

Seems to me loans issued by FMT are worth a lot less than they were 24 hours ago.

Don't care if they are subprime or not, if part of a fish has rotted you don't want to bargain for he head or the tail, you want to avoid the entire thing.

Wow--is this the "it" we've all been waiting for?

Fremont General Corporation to Exit Sub-Prime Residential Real Estate Lending

Expired

Bankruptcy. There is no other way out.

You can't make an equity purchase with these kinds of legal clouds over the company. There WILL be lawsuits . . . and lots of them.

If there's value to be had, it's through asset purchases . . . if.

So long, FMT.

This was the #5 sub prime lender.

New Century says accounting errors being probed
New Century says accounting errors being probed
| Reuters

Holy shit, it is going to be a bloodbath next week.

So does anyone begin to think I was being funny about bidding mils for bonds? Some of the lowest tranches don't seem to have bids right now, do they?

Liquidity crisis is taking down gold and silver along with the dollar, interesting hedging problem, that.

Your words were so prescient they bore repeating, Geoff.

But man . . . this is staggering. I have only recently come to appreciate the magnitude of exposure that the warehouse lenders will have in all this.

The MBS holders I had already considered. The full extent of this though . . . wow.

Fremont did more than delay -- you guys need to read Housing Wire.

Fremont JUST collapsed.

Page not found : HousingWire || financial news for the mortgage market

I would sure hate to be the Auditor that performed the Sarbanes Oxley Internal Control Review on Fremont; I think he is in for a bad review (no raise for him!). I didn't know Charles Keating was back in the business.

Heck, I would really hate to be the Auditor of Fremont. I heard there was an unusually strong demand for shredders in Southern California for this time of the year. This is going to be Article I of the Lawyers Full Employment Debacle of 2007.

One must recognize that anyone who owes money to Fremont is going to withhold payment for as long as they can to try to squeeze them out of business first. Time for that old Don Meredith tune called "Turn Out the Lights, the Party's Over".

I have to go get busy contacting all my prior friends from the Resolution Trust Corporation, RTC is back and going to get bigger than ever. I am thinking I may have to organize a RTC placement organization. The old RTC only blew about $500 billion of taxpayer money, the new one will blow past that one in first gear.

NEW might get a "going concern opinion"

" New Century also said that a failure to obtain waivers from lenders could prompt its auditors to warn of "substantial doubt" over its ability to remain in business."

From WSJ

NEW Link:

New Century also said that a failure to obtain waivers from lenders could prompt its auditors to warn of "substantial doubt" over its ability to remain in business.

Subprime Troubles Grow - WSJ.com

This will reverberate through the MBS market and be seen in the prices of the lower tranches of the ABX since Fremont has loans in these tranches.

Fremont is first in line only because they are federally regulated. NEW, LEND and the other brokers don't have insured deposits.

It will hit home at Downey (DSL), Washington Mutual and FirstFed (FED). The regulators do not want these loans and if you make them you better put up more than ample loan loss reserves. Unequivocably the regulators will force everyone to increase their reserves, which lowers EPS.

Fremont is toast and is in workout/salvation mode. On Monday their will begin a run on deposits as well. This is a death spiral.

What is utterly amazing to me is that DSL was up today with the market down 120. How Lehman shill analyst can put a buy recommendation on that stock yesterday, in this industry at this time is reminiscent of the Merrill Lynch analyst Henry Blodgett who was touting internet stocks into their collapse.

This will spillover into Alt-A. It is the same haphazard lending pattern & practice.

Interesting -- accross my b school email list came a job posting today for a risk management position to examine the potential financial and credit risks and help mitigate them -- for another big name player in the sub prime market (can't name since these emial posts are not public but it's one of the top 10 lenders).....are there more problems brewing?? More orders from regulators that may be pending??.

Ran my Morningstar stock screener. NEW shows up as a 5 start with a 49% dividend yield. Stewardship grade is C. Business risk is speculative. Fair value estimate is $44. Their analysis last updated on 2-14.

We think New Century's business model and strategy makes sense over the long term, but the firm has to survive the near term for it to have any chance of achieving its potential. We expect the dividend to be significantly cut in the near future, and we think the firm--along with its entire industry--will be struggling to stay alive over the next year or so. For those with ample patience and the intestinal fortitude for high risk, we think an investment in this company could eventually pay off, but we warn that it will probably be a scary, bumpy ride with the potential for catastrophe.

It would be interesting to see a breakdown of what percentage of these defaulting loans that are taking down sub-prime lenders are for new homes vs. existing. I know that common sense says people who have to go subprime aren't buying McMansions but I suspect the 2004-2006 period was different.
Outfits like Fremont obviously had no problem originating loans to anybody that could fog a mirror.

Reason being, I have a theory that the builders have overbuilt to the point where new homes above a certain price point (500K?) are now behaving more like cars, i.e. they depreciate the instant the FB moves in. This has some very bad ramifications for the banks and the dopes that bought them, which are now playing out before our eyes.

I've just had a look at NEW analyst recommendations. This is hilarious. On 10/16/2006 (well before the recent drop in stock price), Stifel Nicolaus changed recommendation from Hold to Sell. An the comment is

Symbol Lookup - MarketWatch.

"Says `party is over'."

So true....

At that point, the boatload of people holding option ARMs, neg ams, etc, in the AltA group, have a few options. 1) Refi, if you can 2) walk, 3) sell stock or other assets to keep paying the mortgage

3 raises an interesting possibility:

Most folks don't have that much stock just sitting around... except maybe in their 401Ks/IRAs. Are there any stats available on early distributions from 401Ks and IRAs? I'm suspecting that we'll start a good bit of this.

I've been near a few involuntary returns of houses. The one that stands out the most in my mind is the one ...

The resident carefully sealed every possible source of ventilation he could, except one door. He then obtained a skunk, brought it into the house, and then tossed in a chihuahua. He let the animals out, then carefully closed and caulked the front door.

The house sat, unventilated, for two weeks of summer in Kansas. I was with the crew that went to open the doors (temp work job, strong-back weak-mind labor) not knowing what the resident had left. I have worse memories, but it's definitely in the top ten.

Oh - how do I know it was a chihuahua? That's what the investigators who pieced it all together said he used.

CR-

The NEW filing is out.

I got short some ABX.HE.AA from 07-01 this afternoon around $99. Any guess what it's worth now?

Ron--
"The current RE mess is based on giving folks a variety of 100% LTV loans, so providing additional loans to the same folks on homes that are underwater doesn't solve the basic problem. In fact RE appreciation is heading down so more not less will be upside down."

If the financial system doesn't provide a way for the roughly $1 Trillion of ARM's to be reset at a rate that they can continue to pay, then most will owe far more than they can sell the house for and they will let the bank have it (foreclosure). Banks have on average 1%-2% of their total loan amount set aside as a loan loss reserve. Fremont (FMT) had $6,100 million in loans at 9/30/06 and $185 million in loan loss reserves (or 3.0%) They will be able to foreclose and absorb the associated loss on a finite number of homes before they have depleted their loan loss reserve. Once the Loan Loss Reserve is depleted, Shareholders’ Equity starts getting consumed. While this is going on, the bank puts the kibosh on ANY new loans. In the meantime, layoffs occur, the companies that can expand and hire can’t get the money to do it. (This is exactly what happened in the oil patch states (TX LA OK. I remember there were 600 applicants for an open traffic engineer job in 2 days in 1986.)

The banks may start offering for free (or minimal legal costs $200-$400) interest rate reductions to the people in the ARMS. While the bank may take a loss on the loan, it won’t saddle the bank with a bunch of expense generating REO (real estate owned) with zero interest income. If not, the foreclosures would lock the banking system up, and is the reason the FSLIC and FDIC started enticing banks to marry one another (at that time there were healthy banks on the coasts and defunct banks in the oil patch). By expenses I mean realtors fee, lawn mowing, property taxes, repairing roofs, replacing air conditioners, replacing broken windows, removing skunk odors etc. Put yourself in the bankers’ chair, the more of these houses you sell at lower and lower prices, the more pressure you are putting on the other homeowners that owe you money. This isn’t a money making strategy, it is a survival strategy. The other alternative is for the government to create an entity that will buy the bad loans from banks and share the loss with taxpayers.

Tanta—am I off the deep end here?

All,

Safer than WaMu, that's for sure.
Max | Homepage | 03.02.07 - 7:43 pm | #


I keep waving one of Stumpf's socks under the gang's nose in these postings, but seems like no dog will hunt.
I think Wells can have some exposure here but the connect-the-dots may be a little more drawn out. It'd take an expert in what happens if bank A sells bank B a loan that it made to J6P and it goes belly-up. Under what conditions do they have recourse, and when is it caveat emptor?
If nothing else, I'm getting practice with the HTML tags.

Tanta, Yes that is the one. It is one I will think about for many years. Like a question posed (and answered) in Zen and the Art of Motorcycle Madness. A South Indian monkey is fooled into putting his hand into a small hole drilled in a coconut to grasp some rice inside. Of course grasping the rice he cannot withdraw his hand, and is caught. The question is "What general, not specific, advice, can you give the monkey?" The answer is "The problem is not so large and the solution is not so small." I have thought about that one for 20 years, and I think your comment will last as long.

94121 & Brewster,

I am assuming you mean WFC from an investment. I know that WFC's CEO Stumpf says they do not drink from the poor lending standards cup. I don't know enough about him to stand up for him. But let's take a look at Fremont’s (FMT) insider trading over the last 6 months.
Total shares bought 10,000
Total shares sold 627,517
So the mgmt of FMT sold 62 shares for every one they bought.

Let's take a look at Wells Fargo insider trading for the last 6 months.
Total shares bought 0, nada, zip
Total shares sold 188,273
(source: Yahoo Finance)

While they may say the right things, they aren’t speaking very loudly with their own money.

With real estate values deteriorating (except in Dave Lereah's hood), an inverse yield curve, and unemployment claims creeping upward, there is no compelling story to own stock in WFC (and all the banks for that reason). As the subprime story drifts upward to the Alt-A market, many banks are going to be guilty by association and the market will whack all their stock prices.

Countrywide says their laundry doesn’t stink either. Let’s take a closer look. They post their real estate owned (REO) on their website by state. The number of REO homes in California only posted for sale on their website:
12/27/06 360
1/27/07 546
3/1/07 738
Look at the rate in increase in REO and these are $200k+ homes. What would it look like if we throw another 100k unemployed on the barby in CA? Just for grins, lets look at CFC insider trading for last 6 months.
Total shares bought 0, nada, zip
Total shares sold 7,697,910
(source: Yahoo Finance)

BINGO! Holy Frijole Batman that is a ratio! Many will say Mozilo is a great CEO with superior systems. His money tells me he is scared of losing everything. Oh wait a minute, he is only diversifying his portfolio. Riiighhhtt.

It's rather like CR's point a few threads ago about Merrill: at that point you'd be talking about catastrophe on such a scale that nobody would have time for small beer issues like delinquent mortgages.

somehow I think America would survive just fine if Merrill went BK.

I noticed that one of the statements was that Fremont had:

"Operating in violation of Section 23B of the Federal Reserve Act, in that FIL engaged in transactions with its affiliates on terms and under circumstances that in good faith would not be offered to, or would not apply to, nonaffiliated companies."

Fremont's retail loans run through brokers. There isn't enough information to be sure, but doesn't that sound like some of the executives had their own mortgage brokerages that may have been running bad paper to Fremont, pocketing the profits and effectively "looting" the company? That makes federal regulators really unhappy, similar to the bad old S&L days.

I'd like to hear opinions on how likely it is that the subprime meltdown will prove contagious and impact corporate debt, junk bonds, etc. If a problem develops, what will it look like? And if it happens do we need a trigger event, or will it just be a long slow slide?

MP
I stopped arranging chairs in early December. Since then, very aggressively short on financials. Shops like MER and Sterling Financial have my interest & other money movers, too. Simply put, ya gotta book the real numbers (all public companies now have tight SOX) and this is creating some difficulties in the backrooms where financial pictures are painted.
I have also taken a position that interest rates are going to go up (government index bonds but not munies 'cause these will drop with no, or less tax revenue even tho they may have spent tons of dollars building infastructure for land now no longer to be developed in the near term). I think we are going to have a short term liquidity squeeze - more yen less dollars to cover the carry trade, credit worthy and risk spreads, and "I dont want your S++T at any price" psych, and evaporating asset values.
I really do not know how to play the outcome of wave of foreclosures to come. If you look at LA for example there are 12k preforeclosures. In Sacto last year there were 7k places sold under foreclosure. Shun certian retail and buy adult beverages, maybe.

o Marketing and extending adjustable-rate mortgage ("ARM") products to subprime borrowers in an unsafe and unsound manner that greatly increases the risk that borrowers will default on the loans or otherwise cause losses to FIL, including (1) ARM products that qualify borrowers for loans with low initial payments based on an introductory rate that will expire after an initial period, without adequate analysis of the borrower's ability to repay at the fully indexed rate, (2) ARM products containing features likely to require frequent refinancing to maintain affordable monthly payment or to avoid foreclosure, and (3) loans or loan arrangements with loan-to-value ratios approaching or exceeding 100 percent of the value of the collateral;

o Making mortgage loans without adequately considering the borrower's ability to repay the mortgage according to its terms;

I wonder how many FDIC banks etc are in compliance with these rules?