We will probably get some general idea of what is causing the hold up but you won't get a lot of specifics. We should also get some expectation of when they think they will be done.
Governance in US equity markets are out the window. FNM has not filed financials in a good while yet it is allowed to trade. So too DELL and now all these sub-prime guys.
How are investors to really understand the financial positions of these companies? From their press releases? The SEC and the exchanges are once again turning a blind eye. What a travesty!
It was a nice try for the stock to hold at $15... say good bye to this one... $10 here we come.
There's alot of darkness to NEW.
This whole issue of them having to correct errors relating to how it incorrectly applied Statement of Financial Accounting Standards No. 140 - Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities - stinks to high heaven. After scandals like Enron, how is that New Century and its accountants could fail to include the expected discount upon disposition of loans when estimating its allowance for loan repurchase losses?!?
dryfly, I agree with Brian - no specifics, but I expect both NEW and FMT to essentially say their current financial situation is unclear because of changes in the subprime market. NEW has already warned not to rely on their filings for the last year - so I expect more of the same from them.
And likely trying to negotiate with a major like Citi to avoid litigation?
So much depends on the lack of transparency for the financials to really thrive --I agree with malabar.
"A veteran Sacramento loan broker and past president of the California Association of Mortgage Brokers says the failure of Central Pacific Mortgage is just the tip of the iceberg in the mortgage industry.
Its like a freight train coming at us full bore, said Michael McGee of Winchester-McGee Financial. The type of risk thats been involved in the industry is far beyond anything Ive ever seen.
I was just thinking, and it hurt. Anyway, almost every one of my friends who purchased a home did so in a big way, overextending because they figured on future gains for life. Now, these are smart people with great jobs, good credit etc... but most really pushed it, moving up from the average home to homes 900k - 1.5mil. and nobody did a 30yr fixed because the exotics with options were the thing to do, nobody gets a traditional anymore. Now, some are worried, still hopeful buy worried they don't have the options they planned on and resets are in their future. This is why I see things hitting the B's A's, AA's AAA's you name it, we all overextended not just the poor, we moved up into something we couldn't afford and the sub-prime were our stepping stones. We overextended the same way they did we just had better credit and a little more money.
In the end we knew we could not handle the reset and without the big gains it was just not worth it, so we got out and feel free again. A very good friend is in the process of loosing his home, saved it once, ran out of resources and will now close down his business and go back home. The funny thing is they are ok with it.
Update II - Ivanhoe Mortgage (Central Pacific Mortgage) :
Thats not all.
News10 attempted to contact Central Pacific Mortgage CEO John Courson, who founded the company in 1977.
Calls to the Folsom headquarters are answered with a recorded announcement. A phone number listed for his home in Rancho Murieta is disconnected.
Courson serves on the board of directors for the Mortgage Bankers Association and was appointed by Governor Schwarzenegger to the board of the California Housing Finance Agency.
Company founded in 1977, guy sits on the board of MBA, and did not see this coming?
CR: Do you see Fed/BB cutting rates by 100 bps over a year ?
This is the only thing that can help solve the situation: Send the greenback lower, create inflation while home prices do not rise further.
Is this possible?
This will hurt the consumer by raising all those cheap imports but will help large exporters. On the other hand the consumer is going to benefit from non-declining home prices (in $US terms) and may spark investing in cheap US assets by foreign money a strength in commercial R/E can help the banking system to offset the losses from residential.
Is there another way out of this crisis ? Is there something blocking this solution ?
yal, I expect the next Fed move to be a cut, and I also expect long rates to rise after the cut. That would take the yield curve back to a more normal shape (not inverted).
Next bubble will either come from commercial real estate or LBOs. Financing for both segments is starting to resemble the behavior patterns we saw in subprime.
I've been thinking about this too - not sure I'd call it the 'next bubble' as much as the next shoe dropping.
I believe both CRE market & private equity fund (LBO) markets are well into bubble territory already.
I think it is probably too late for a rate cut to save CRE (given that residential is pretty far along into the tank and if they follow RE like you said, they don't have much time to avoid a fall)...
But wouldn't a sizable rate cut send the private equity folks into a lather? They seem to like to load up on the leverage too.
Doesn't it seem just as likely that the FED will just keep rates right where they are for a while? Seems safer from their perspective as there still seems to be a bit of inflation out there and lowering rates would put more downward pressure on the dollar which would increase import prices (and oil is a big import). We're likely already looking at $3.00 gas (at least) come summer as it is...
yal: Let's say I finally decided to cut some of my bloated American costs so I give First American Corporation a call about outsourcing my back office (and any other function that can be outsourced. who's the boss? who's the boss? yep, that's right.). They have a whole division dedicated to offshoring services. I'm sure a lot of companies could help, but I'll go with them for their name's sake.
Once First American has helped me dump all that dead weight (i.e. the Last Americans), my cost structure is great. More cash flow for the pimp. One interesting wrinkle will be the impact of a dollar devaluation on the cost structure. If the pimp's, uh, I mean platform company's profit margin goes to zero, well... I guess a lot of Chinese have showed up to the state fair and might be headed over to the dunking booth... A pimp in a wet velvet suit is probably not much of a value-add. I would be interested in seeing the degree to which our economy is a nothing but a dunking booth platform. Either way, it should be interesting on how the global imbalances work themselves out, but that is mostly a topic for Brad Setser's blog. Everybody's frontin' these days. Bling bling.
I expect the next Fed move to be a cut, and I also expect long rates to rise after the cut. That would take the yield curve back to a more normal shape (not inverted).
A couple of questions ...
Why do you think the Fed is going to cut rates?
Why do you think LT rates will start rising if the Fed cuts?
With housing affordability at or near historic lows, rising LT rates will send housing prices into an even steeper tailspin.
I look forward to your explaination. Thanks for the great blog.
Corollary to the above. Congress will bail out what needs to be bailed out. The big boys. Citi. Etc.
Tax payers will pay a "surcharge" to keep the big houses aflout. One time deal, only to be repeated over ten years. Not a tax increase. A "surcharge" to restore the banking system to good health.
"You've got to remember" that Bear Stearns, the perennial leader in mortgage bonds, "got into this business at the height of the boom, when you could not lose," Angelo Mozilo, chief executive of Countrywide Financial, said during an interview by phone from his office in Calabasas, California.
Countrywide reporting sharp increases across the board in slo pay late pay is not evidence of the subprime contaign spreading but rather the reality that many loans are mismarked as prime when they shouldn't have been.
How bigger deal is this. I can see the rate is dounling every year but the reate looks small enogh:
"lender said payments were at least 30 days late at the end of 2006 on 2.9% of prime home-equity loans serviced by the company, up from 1.6% a year earlier and 0.8% at the end of 2004. Countrywide said payments were late on 19% of subprime mortgage loans, up from 15.2% at ..."
If the rate of non payment rise by 1.3% (of total) from 1.6% to 2.9% wouldn't we excpect them to raise effective rates by 1.3% ?? (on average)
I looked at mortgage rates for March and they are same as Feb.
yal, mortgage rates don't move in step with delinquencies like that. The "rate increase" was supposed to have been added in at the time these loans were originated, to compensate for the obvious risk they carried.
Remember all those idle discussions we used to have around here on this thing called "risk-based pricing"? Perhaps you weren't a CR regular back in 05-06, when the Baked In Brigade used to drop in frequently to explain to naive people like me that the risk of delinquency and default on those subprimes, those Alts, those second liens, was all priced in, so we were not to worry about it.
Here's my view, in the nutshell:
Certainly some risk was priced into those loans. They wouldn't be exploding at reset if they didn't have 4-6% margins. They wouldn't be in IOs if the rate weren't too high to make amortizing payments a reasonable choice for the borrowers. And, obviously, 80% of them are still performing! That means there's a lot of subprime borrowers making their "baked in" interest payments.
Apparently, either the models were a bit off and not enough price got added for the actual risk, or this mechanism of mitigating the risk-based pricing by playing with the loan structure (the teaser ARM, the IO, the neg am, etc.) did exactly what I, among others, predicted that it would: blow the loan up before anyone ever collected enough of those premium interest rates to offset the model-predicted delinquencies.
But who's to say, at this point, that the loans are actually not performing "as expected"? Let's be clear here: I see lenders who did not reserve sufficiently for losses, and whose profits are lower than 2005's because of dropping volumes, tightening spreads on new loan sales, and higher carry costs. And? Does this really mean that the subprime vintages aren't "paying for themselves"? Further, how would the situation improve by raising rates for new loans? That gets us back to the "credit crunch" problem.
I like to use the same analytical tools on the lender that we have all been using on the borrower. Buncha these companies were living securitization-to-securitization, never paying down the warehouse balance, stating their income on the financials in order to raise capital in the market, selling off productive assets in order to "invest" in RE. You must ask: did "the model" fail because the subprime loans weren't priced adequately, or because the subprime lenders weren't capitalized adequately? Since, realistically, the cost to the consumer can only get so high--you really can't have 100% of pretax income going to the house payment--the industry eventually has to "price in" risk some other way. Like, say, in the share price.
dr strangemoney, First American has been around for a long time. Before they got into offshore outsourcing, they were just a big title company who offered actually useful services to lenders. One of the most useful was the "tax service contract." I mentioned the difficulties with paying RE taxes a few threads ago. FA developed the "tax service contract" idea, wherein the lender would basically pay FA a fee to make sure that RE taxes got paid on the loans, because it was cheaper for FA to do it than the lender, and the tax service contract could be transferred with the loans when they were sold.
I bring this up only because the product was called the First American Real Estate Tax Service. It has been known affectionately as FARETS ever since. And we all know that FARETS are not weasels. They just look a lot alike.
charts, would you be shocked to know that there were those of us to whom it was so known, but not in public?
A few years ago I was representing the sell side in a whole loan deal and the buyer was insisting to my side's trader that the price had to be adjusted to account for the cost of putting new tax service contracts on the loans--that's like $35-45 a pop. The poor trader thought that sounded odd, but like most traders could get backed into a corner pretty quickly by people who start talking about things like real estate taxes. So trader called me, and I lit into buyer like the Wrath of God. The whole idea of RETS--FA's or someone else's--is that they're transferrable. The F%K I'm going to pay for a new one just because the loan's being sold, etc. etc. etc. You will be happy to know that buyer put tail between legs and went into its own corner.
The moral of the story is how long I spent, back at my desk, wondering how many times that trick works in this business, and who's getting a kickback from First American (or one of its competitors) do do it. The "operational efficiency" of separating the trading functions from the ops and credit functions has a lot to answer for: it's "efficient" until the trader gets hosed because there is no ops person at her back reading those deal stips before somebody says "done."
REBear: so they can have a great big party after they're done. "WooHoo, we're all rich!" KoolAid for everyone, but NO balloons and NO popcorn. --Somehow I don't think so.
REBear, my theory is because they think maybe the SEC doc handlers might have started happy hour already, so they'd be already drunk when the filing comes in.
I just discovered this blog 2 month ago and all my financial education is self-taught..... (or more CR+Tanta taught)
Anyhow I was expecting mortgage rates to rise once the ABX fall and once the lenders themselves find out that they have problems. But, I understand your argument that "The "rate increase" was supposed to have been added in at the time these loans were originated.
I understand that risk can be manifested as share price/capitalization but the issue at the end is P&L, cashflow: By now this is no longer a model of future risk.
There are delinquencies in present, there are drops in real-estate prices these are real numbers and they have to be (at least internally) be measured against models and reserve loss and som adjustment need to be made.
How bad is this rate of delinquencies. Have they all been priced in ?
Increasing reserve loss is one but what about the future. If models did not work they need to adjust the models (and also tighten loan requirements).
With the exception of no more sub-prime (i.e FICO 520) 100% LTV loans I did not see any change and I still don't understand why we are not seeing this change.
Few years ago they were operating in an environment of rising R/E prices. What did their models say that prices will fall ? were they so conservative in their models that no adjustment is needed of course not. So I puzzled. I realize they know they can push things to be worse but I don't see even a gentle rate change 10 BPS at the minimum. I cjust compared WMC rate sheets (Feb Vs. March) they are the same. Anyone doing it more professionally than me ?
With the exception of no more sub-prime (i.e FICO 520) 100% LTV loans I did not see any change and I still don't understand why we are not seeing this change.
Well, as far as I'm concerned, the short version of the answer here is that "the models" needed new loans to continue to come in the door. Nobody volunteers for a credit crunch. Every new memo that chips a little bit off the product/underwriting guidelines is equivalent to one more minus sign in a spreadsheet getting fed into the "profitability" model.
We're back to the age-old question of whether a credit crunch is primarily a question of risk-rationing or price-rationing. Right now we seem to be easing into some risk-rationing while attempting to avoid too much price-rationing. If the Baked In Brigade was right, this should be the equivalent of a nice polite orderly line for the exits, and nobody gets crushed; we stop making the super-high-risk loans, at any price, while assuming that the RE price declines are in their "last throes," such that it makes sense to keep originating new volume at accessible pricing for the average borrower.
If I'm right, there will be some lenders standing on the embassy roof waiting for the helicopters.
Let me make a point that I have made before; long-time readers can just skip to the next comment.
It just isn't an RE correction until a handful of subprime lenders go down. They do do that. You build your house on the beach, you get blown away periodically in the storms that always eventually happen. No one except the Santa-believers is particularly shocked by this. This is why, for several months there, you had the booyah trolls popping in from time to time to explain to us all that it's just a couple of under-capitalized subprimers going down, nothing to be surprised by, the market is just clearing, keep your pants on.
One does not see outfits like IndyMac and RFC getting shoved up against the wall in a "normal" subprime blowout. There is subprime and there is subprime; there are also well-capitalized companies with a real business plan as well as the goofballs. The "correction" was not supposed to get as far as some outfit like Fremont, which I remind everyone is a federally-regulated THRIFT. As is NDE. NDE pared off guidelines very early in the cycle, and you notice they're not out of the woods yet. FMT, as we recall, went humming along in Q4, making planned, orderly, responsible changes to its operations and guidelines, and then erupted in January in a sudden panicked guideline change lead by some freaked out AE sending out some semi-literate email. And now there's a 12b-25 on the table.
One could conclude that it may just be way too late for any "guideline changes" to make any difference to anything except investor perceptions of risk. And even that's iffy--we still have the cheerleaders who see every bit of risk tightening as further indication that the mortgage market is "correcting itself" rather than putting a tourniquet on the bloody stump of what used to be their right arm.
CR,
I agree that the valuation issues are at the crux of the delays on reporting. This morning we have LEND and IMH joining the line of students who didn't turn in their assignments on time. You can imagine the conversations going on between the CFOs and the auditors, and in turn the lead audit partner on the account with his risk management group at HQ and they in turn with their outside counsel to figure out what is or isn't covered in the errors and omissions policy. Meanwhile, Bill Lerach (or whomever has arisen to succeed him now that Bill has been exposed as a scammer) has a draft complaint in the word processor for every subprime and alt-a lender that is public (aside from NEW and NFI who have already been served) just waiting for the appropriate shoe to drop so they can start the sprint up the court house steps and beat the other ambulance chasers to the punch. Fear not for the lawyers, whatever happens in the housing market they will keep a roof over their heads.
These Toxic Loans were already default by nature..I mean come on folks..I can see a 1% cap on an ARM reset, but 6%+ caps plus Libor, give me a break. I have been thru and follow my local registry of deeds for forclosures and 90% of the loans were ARMS. Some with Ballon payments at maturity..who in their right mind would put their John Hancock on such a piece of toilet paper? Now dont get me wrong ARMS do work for certin people yes, But the trash laons that have been given out the last 3 years is unreal. Who do you blame? I blame the Lenders and the stupid Borrower..for not reading what is in front of you.
OK, you've convinced me, I'm ready to buy shares in Lexis-Nexis . . . Xerox . . . 3-M (maker of those Post-It charts the Libby jury keeps ordering more of . . .)
Re Fed rate cuts, this is the position many current account doomsayers have over the last several years predicted the Fed would find itself in sooner or later: the need to lower rates because of an economic slowdown, but the need to keep rates up to support the dollar.
You might think they could lower rates and just let the dollar fall. But given that we import just about everything now, that would boost inflation, the Feds biggest bugaboo. Plus, a fall in the dollar could lead to a run on US assets held by foreigners.
The subprime, CRE and LBO, bubbles are all symptoms of a larger "financing bubble" that has really found its way into every fixed income asset class - junk bonds, emerging market debt (ask yourself, for all our issues should Greece be able to borrow money more cheaply than the US?), etc, etc. The glut of money has forced any fixed income investor to chase yields, and lending standards have fallen victim to that reach. Subprime just started earlier than the others and reached its peak of absurdity sooner.
What is going on now in CRE, where cap rates are now less than financing costs, is precisely the same thing that happened in subprime in the last two years, ie lenders are now relying solely on increasing collateral value to bail them out. The rent roll on the buildings will not service the debt. The new owners will tell you that they can increase rents - the latest sale in Manhattan needs over $100 ft in rent to service the debt. Something tells me that Bear, Lehman, MS et al are not going to be renting a lot of new space after they finishe laying off mortgage traders, sales people and math PhDs working on the non-linear synthetic inverse floater for the Malaysian mortgage market.
LBOs are a whole 'nother story. The LBO deal used to be, buy the company, sell the planes, get rid of the senior executive vice presidents for global administration, get more efficient in using capital, pay down the debt and then sell it to someone and reap the accued equity value from the paid down debt and some cash flow growth. The model now is, buy the company, use clever financing to lower the cost of capital, borrow more money to pay yourself a nice dividend and then take the company public again, hopefully in 12-18 months or less since you bought it. Most of the value is coming from increased leverage and a more efficient capital structure, not from better operations of the company. A less forgiving capital market is going to cause problems for these deals.
One of the reasons I was confident that subprime was sure to blow up was Ameriquest's sponsorship of the Superbowl. It is generally a great contrary indicator (remember all those dot com ads for the 2000 superbowl).
History is repeating itself with stadium naming rights. From bloomberg:
" ACC Capital Holdings' need for a financial lifeline from
Citigroup Inc. is the latest sign that putting a company's name
on a sports stadium doesn't guarantee its business will thrive.
Ameriquest Mortgage, the Orange, California-based company's
subprime mortgage unit, signed a naming-rights agreement in May
2004 with Major League Baseball's Texas Rangers. The 30-year
contract was valued at $75 million.
As the Rangers prepared for this year's season at Ameriquest
Field, ACC Capital struck an accord with Citigroup. The largest
U.S. bank will become the company's main funder and buyer of
mortgage loans and will have an option to acquire its wholesale-
lending and mortgage-servicing units.
ACC Capital is hoping to avoid the fate of Enron Corp.,
which named the home stadium of baseball's Houston Astros and
then went bankrupt. The field is now called Minute Maid Park."
One share of NFI stock to the first poster who can recall the name of the Baltimore football stadium at the end of the dot-com craze.
I would like to applaud both Tanta and Brian for an outstandingly accurate statement of currrent realities.
Brian, especially, has accurately captured the philosophy of current activity on the street. It is about appearance and SHORT TERM analyst reactions rather than an attention to improving the underlying productivity and opportunities of the companies involved.
The stunningly delusive analysis coming from many analysts at the big three is remarkable for its complete disassociation from reality.
You posted this on one of the threads a day or two ago, and I'm not entirely sure what you are referencing.
"Existing homes were unbelievably bad because of the concentration of price and sales drops in the west. In every region, median and average sales prices were below 2005. The logical conclusion is that those high CLTV loans written in 2005 and resetting in 2007 are mostly underwater which will keep default rates rising. Worse yet, because of bracket compression the 75th percentile loans can be expected to take higher losses than the 50th or 25th percentile."
Can you elaborate a little on the on the bracket compression and percentiles you are referring to? Thanks
If the ticket hustlers in Cleveland are willing to take NFI paper you should be all set. The guys here in NYC all seem to want dollars (though by the time opening day rolls around they may be asking for yen).
MaxedOutMama wrote "The stunningly delusive analysis coming from many analysts at the big three is remarkable for its complete disassociation from reality."
Which big three are you referring to?
"...delusive..."...My belief is that it's quite deliberate - there is a vested, conflict of interest until their stake (personal/company) is not being jeopardized -- Maintain a cheery confidence that all is well until you're out of harm's way...
Goldman, Merrill Almost `Junk,' Their Own Traders Say (Update2)
By Shannon D. Harrington
March 2 (Bloomberg) -- Goldman Sachs Group Inc., Merrill Lynch & Co. and Morgan Stanley, which earned a record $24.5 billion in 2006, suddenly have become so speculative that their own traders are valuing the three biggest securities firms as barely more creditworthy than junk bonds.
These guys have made a lot of money securitizing mortgages over the years in a mortgage boom time,'' said Richard Hofmann, an analyst at bond research firm CreditSights Inc. in New York.The question now is what is the exposure to credit risk and what are the potential revenue headwinds if they're not able to keep that securitization machine humming along.''
That's the question now? I thought the question now is how come this is such a big deal if it's only 15% of their business, like we've been told for all this time.
Have to wonder whether those traders at MS, Merrill and Goldman have just shortened their employment contracts. And a Bloomberg story. I am truly shocked.
From the LEND announcement of not turning in their homework:
"Due to the recent market conditions in the non-prime mortgage industry, the Company is evaluating whether any of the goodwill established in the acquisition of Aames has been impaired. If the Company determines that the goodwill established in the acquisition has been impaired, the Company intends to charge-off such goodwill, resulting in a non-cash charge for the period ended December 31, 2006"
Mind you, this acquisition was done less than 90 days before the end of the year. Could set a new record for shareholder wealth destruction. I'm proposing a new metric for the subprime industry acquisitons - MTTWO - mean time to write off.
Brian -- fantastic post linking the financing booms in residential RE, commercial RE, the LBO market, etc. I couldn't have said it better myself. Now the question becomes: Is the stock market break the first sign of a tighter liquidity environment? Or is it just another hiccup on the road to higher and higher asset values (stocks, Manhattan office property, or anything else)?
I was just thinking, and it hurt. Anyway, almost every one of my friends who purchased a home did so in a big way, overextending because they figured on future gains for life. Now, these are smart people with great jobs, good credit etc... but most really pushed it, moving up from the average home to homes 900k - 1.5mil. and nobody did a 30yr fixed because the exotics with options were the thing to do, nobody gets a traditional anymore.
DJ: its called leverage! Leverage in a thinly traded market like RE creates some nasty side effects.
Brian - in RE downturns the homes for which there is the most demand retain the most value. Sales will always be clustered around at least one price level in an area. Sometimes you see a double hump. In extreme cases, you will see a triple hump. Those humps correspond to affordability and income clusters. You can use the ACS (Census) to verify this.
During a real estate expansion cycle, those clusters spread out in pricing. On the lower end, people who are priced out will settle for something less than they would have preferred, which shifts demand downward in housing quality. On the higher end, people who can qualify feel comfortable extending themselves as much as they possibly can because they expect the value of their purchase to appreciate while their debt will remain the same or decrease.
During a real estate contraction, the low end and the high end houses end up losing the most in value, because there is the lowest overall demand for them. People who are qualified to buy will wait if they have to, save money and buy closer to what they really wanted. (IE Townhouse instead of condo, or detached instead of townhouse.) For higher end demand, people will extend themselves less because getting into extreme debt is not likely to pay them off. (They are buying a home instead of an asset which they will use as a home.)
It starts because of less demand at the extremes, and then the pricing changes reinforce the trend. The only exceptions are in areas in which there is huge pent-up demand relative to pricing.
If you use MRIS Statistics, you can pull reports for DC for years and you can see it yourself in action. MRIS Statistics
Thank you very much for all the great info you have posted. I am sorry for not answering your question earlier. Life has just got me by the throat and keeps on shaking me.
Thanks for the link and the comments. Sorry to hear about all your travails. I'd say have a nice weekend, but it sounds like you will have your hands full. Here's hoping you don't have to go from bulldozers to sand bags.
What killed New Century Financial is the buyback sent from WallStreet. So now they have insurmountable amounts of bad debt they cannot unload in a failing housing market. What are they going to do? Unload these loans and take a hit on each one. I would love to see which properties they lent out on. It would probably read like this:
Seeing as my former $9/hr housekeeper and her field laborer husband qualified for a $400k+ 100% mortgage from Countrywide at terms that reflected prime borrowers I know of at least one loan that is being advertised as prime either on CFCs books or in the resale market that isn't.
Tanta, what did you think of it? I read it as a face-saving exercise, particularly with reference to the following questions upon which the public is invited to comment:
"1. The proposed qualification standards are likely to result in fewer borrowers qualifying for the type of subprime loans addressed in this Statement, with no guarantee that such borrowers will qualify for alternative loans in the same amount. Do such loans always present inappropriate risks to lenders or borrowers that should be discouraged, or alternatively, when and under what circumstances are they appropriate?
2. Will the proposed Statement unduly restrict the ability of existing subprime borrowers to refinance their loans and avoid payment shock? The Agencies also are specifically interested in the availability of mortgage products that would not present the risk of payment shock.
3. Should the principles of this proposed Statement be applied beyond the subprime ARM market?"
MOM, I printed the damned thing and took it out onto the patio with a pencil. (It's that warm here in DC today.) So I sure startled a flock of geese when I started yelling "Haloscanned! You jokers are HALOED!"
They want comments, by cracky, there're gonna get comments. I suggest we start working out a process whereby the CR Irregulars who want to participate in this can start sharing ideas with each other.
We could start with the idea that they're actually, apparently, worried that any new guidance would impact a lender's ability to refi a current subprime customer out of a toxic loan. Well, you dumbasses, put something in the guidance that says that the one acceptable "extenuating circumstance" for not qualifying a borrower at fully-indexed fully-amortized fully-documented is that the borrower is currently in a toxic loan (as defined in the guidance), and so as long as the lender can prove that 1) there is still a commitment to homeownership on the borrower's part and 2) the new loan is a clear improvement to the borrower's ability to repay and 3) nobody took this as an opportunity just to extract more fees, it's acceptable. WHY IS THIS SO HARD?
And, yes, I can think of ways one could document "continued commitment to homeownership." Show a credit report that proves that the borrower is not in trouble because of consumer-debt loading after the original loan closure. Show a payment history where the borrower wasn't in trouble until the rate increases came into play. Show evidence that the borrower was current on the mortgage before the mortgage being refinanced--i.e., show that you had a perfectly good homeowner who got refi'd into a toxic loan, not a marginal homeowner wannabee who shouldn't have purchased. All this kind of stuff is easy to demonstrate.
But noooo, they're worried about making the guidance too firm because it might prevent someone from taking a borrower out of an exploding ARM. So they're willing to risk continuing to originate junk in order to prevent anyone from making some limited amounts of lemonade. ACK.
PR: Face-saving...the appearance of a professional, responsible and diligent body...reacting, (rather than responding?), to circumstances that suggest some irresponsibility, some lack of due diligence --horrors, lack of professionalism on their part in the past.
~Is it ok if we rein you? ASAP or within 60 days whichever is more convenient. Hard to believe they have this much time, just to get feedback on tougher guidelines.
Mind you, this acquisition was done less than 90 days before the end of the year. Could set a new record for shareholder wealth destruction. I'm proposing a new metric for the subprime industry acquisitons - MTTWO - mean time to write off.
Ya and at the end of the year we should have an awards banquet & give the winners a trophy. Something like a gold plated replica of a 'wood chipper'... call the awards 'The Chippies'...
I nominate Tanta as inaugural MC, but since the 'metric' was Brian's idea maybe he co-hosts.
I just want to know where the buffet table is and is hot dish any good.
And Brian - I agree with the LBO-Equity Fund comments you left above. Very good.
Question, how close do you think we are to that end game?
I ask because I work for a few of these guys (independent biz development & commissioned sales)... and I strongly get the feeling their earnings are NOT keeping up with their own cost of capital either.
I don't know that for a fact since I don't see the books (they are privately held). But I see the stuff they buy & see the stuff they sell & know the cost inputs & margins... and from what I see it is like your CRE example... they are counting on appreciation & IPO or repurchase (new LBO) to save them.
Tanta - my first reaction is that the agencies want the bankers to play "Answer Senator Leahy". I think one major concern is setting up different rules for non-depositories and depositories.
We'll see. The last rounds of comments were utterly fascinating, and this should elicit a lot more. Only Congress can institute regulation of non-depositories, because the states aren't getting the job done.
Still, nothing excuses banks making bad loans to borrowers. Nothing.
and so as long as the lender can prove that 1) there is still a commitment to homeownership on the borrower's part and 2) the new loan is a clear improvement to the borrower's ability to repay and 3) nobody took this as an opportunity just to extract more fees, it's acceptable. WHY IS THIS SO HARD?
Well Item 3 might take the whole Justice Dept to enforce but otherwise a good set of suggestions.
One other condition might be that a 'work-out' with the existing lender was thoroughly explored & not possible... and that should a new exotic re-fi be offered that workout terms (set of future contingencies) be made available up front (could include things like future gain sharing). Flippers would love that.
I think one major concern is setting up different rules for non-depositories and depositories
Will the 'non-depositories' survive this without getting beaten up?
With todays news about Goldman et al, are the banks going to eat the REIC for lunch? The financial companies could get burnt at the mortgage business, leaving RE at the mercy of the banks. Ain't the banks itching to get into RE?
Hard to tell how close we are to the end. The LBO thing tends to end with more of a bang than a whimper, real estate is usually the opposite. The LBO cycle usually ends when a big deal fails - think the UAL deal that failed in 1990 or the Sealy Mattress LBO bond sale that failed to take out the bridge loan (earning the deal the moniker "burning bed"). (Just to show you where we are on the risk spectrum this time around we now have "bridge equity")
People were certainly falling all over themselves to lend money to CRE up until this week. Usually it takes a few deals to go bad before credit starts to contract at the margin, and then if the excesses have been bad enough it starts to snowball from there. That's what happened in subprime starting last summer - the EPDs started to increase and by labor day a few MBS buyers stepped back and things have gone down hill ever since. Keep an eye on employment and the amount of space leased.
Risk is a word the credit markets are reacquainting themselves with this week, but it is hard to judge whether this is enough to get everyone to sober up or just a bomb scare that clears the bar for 20 minutes. If I had to guess, I'd guess this may be the end of the cycle because the yen carry trade looks like it is unwinding. That was certainly a major source of liquidity at the margin. The removal of that will cause a system wide repricing of risk. All that said, booms tend to go on much longer than rational people can imagine (hence the warning to short sellers - the market can stay irrational longer than you can stay solvent) - just look at subprime.
MoreBubbly: Companies with similar gaps between their actual rankings and ratings implied by credit-default swap levels have outperformed their peers 87 percent of the time over a one-year horizon, he said. Because an active credit swaps market has existed for less than a decade, that percentage is based on only 37 observations, Munves at Moody's said.
At the same time, the same companies had an above-average risk of being downgraded, with about 22 percent of them having their ratings cut, he said.
Maybe they have one of those "file one SEC form, get one Free cards" and they are sharing with FMT?
I am anxiously awaiting these two filings.
CR - is it possible these two filings will say 'nothing'? That we will know no more about what is going on inside the companies than before?
Or do they really have to give good reasons & evidence to boot (more than a note from 'Mom').
Just asking.
We will probably get some general idea of what is causing the hold up but you won't get a lot of specifics. We should also get some expectation of when they think they will be done.
Governance in US equity markets are out the window. FNM has not filed financials in a good while yet it is allowed to trade. So too DELL and now all these sub-prime guys.
How are investors to really understand the financial positions of these companies? From their press releases? The SEC and the exchanges are once again turning a blind eye. What a travesty!
It was a nice try for the stock to hold at $15... say good bye to this one... $10 here we come.
There's alot of darkness to NEW.
This whole issue of them having to correct errors relating to how it incorrectly applied Statement of Financial Accounting Standards No. 140 - Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities - stinks to high heaven. After scandals like Enron, how is that New Century and its accountants could fail to include the expected discount upon disposition of loans when estimating its allowance for loan repurchase losses?!?
Now this delay... stinky, stinky.
dryfly, I agree with Brian - no specifics, but I expect both NEW and FMT to essentially say their current financial situation is unclear because of changes in the subprime market. NEW has already warned not to rely on their filings for the last year - so I expect more of the same from them.
Best Wishes.
And likely trying to negotiate with a major like Citi to avoid litigation?
So much depends on the lack of transparency for the financials to really thrive --I agree with malabar.
Update II - Ivanhoe Mortgage (Central Pacific Mortgage) :
Bakersfield Bubble
"A veteran Sacramento loan broker and past president of the California Association of Mortgage Brokers says the failure of Central Pacific Mortgage is just the tip of the iceberg in the mortgage industry.
Its like a freight train coming at us full bore, said Michael McGee of Winchester-McGee Financial. The type of risk thats been involved in the industry is far beyond anything Ive ever seen.
I was just thinking, and it hurt. Anyway, almost every one of my friends who purchased a home did so in a big way, overextending because they figured on future gains for life. Now, these are smart people with great jobs, good credit etc... but most really pushed it, moving up from the average home to homes 900k - 1.5mil. and nobody did a 30yr fixed because the exotics with options were the thing to do, nobody gets a traditional anymore. Now, some are worried, still hopeful buy worried they don't have the options they planned on and resets are in their future. This is why I see things hitting the B's A's, AA's AAA's you name it, we all overextended not just the poor, we moved up into something we couldn't afford and the sub-prime were our stepping stones. We overextended the same way they did we just had better credit and a little more money.
In the end we knew we could not handle the reset and without the big gains it was just not worth it, so we got out and feel free again. A very good friend is in the process of loosing his home, saved it once, ran out of resources and will now close down his business and go back home. The funny thing is they are ok with it.
Its all relative...
Update II - Ivanhoe Mortgage (Central Pacific Mortgage) :
Thats not all.
News10 attempted to contact Central Pacific Mortgage CEO John Courson, who founded the company in 1977.
Calls to the Folsom headquarters are answered with a recorded announcement. A phone number listed for his home in Rancho Murieta is disconnected.
Courson serves on the board of directors for the Mortgage Bankers Association and was appointed by Governor Schwarzenegger to the board of the California Housing Finance Agency.
Company founded in 1977, guy sits on the board of MBA, and did not see this coming?
How clueless are these people?
CR: Do you see Fed/BB cutting rates by 100 bps over a year ?
This is the only thing that can help solve the situation: Send the greenback lower, create inflation while home prices do not rise further.
Is this possible?
This will hurt the consumer by raising all those cheap imports but will help large exporters. On the other hand the consumer is going to benefit from non-declining home prices (in $US terms) and may spark investing in cheap US assets by foreign money a strength in commercial R/E can help the banking system to offset the losses from residential.
Is there another way out of this crisis ? Is there something blocking this solution ?
Part 2: Would serious cuts in short term rates send the long term rates to the sky ? creating an even more inverted curve ?
yal, I expect the next Fed move to be a cut, and I also expect long rates to rise after the cut. That would take the yield curve back to a more normal shape (not inverted).
Best Wishes.
CR - Brian posted on another thread... LINK
Next bubble will either come from commercial real estate or LBOs. Financing for both segments is starting to resemble the behavior patterns we saw in subprime.
I've been thinking about this too - not sure I'd call it the 'next bubble' as much as the next shoe dropping.
I believe both CRE market & private equity fund (LBO) markets are well into bubble territory already.
I think it is probably too late for a rate cut to save CRE (given that residential is pretty far along into the tank and if they follow RE like you said, they don't have much time to avoid a fall)...
But wouldn't a sizable rate cut send the private equity folks into a lather? They seem to like to load up on the leverage too.
CR: Tnx.
Yes, of course. I got it mixed up. Long bonds to go down would return the curve to normal.
Doesn't it seem just as likely that the FED will just keep rates right where they are for a while? Seems safer from their perspective as there still seems to be a bit of inflation out there and lowering rates would put more downward pressure on the dollar which would increase import prices (and oil is a big import). We're likely already looking at $3.00 gas (at least) come summer as it is...
yal: Let's say I finally decided to cut some of my bloated American costs so I give First American Corporation a call about outsourcing my back office (and any other function that can be outsourced. who's the boss? who's the boss? yep, that's right.). They have a whole division dedicated to offshoring services. I'm sure a lot of companies could help, but I'll go with them for their name's sake.
Once First American has helped me dump all that dead weight (i.e. the Last Americans), my cost structure is great. More cash flow for the pimp. One interesting wrinkle will be the impact of a dollar devaluation on the cost structure. If the pimp's, uh, I mean platform company's profit margin goes to zero, well... I guess a lot of Chinese have showed up to the state fair and might be headed over to the dunking booth... A pimp in a wet velvet suit is probably not much of a value-add. I would be interested in seeing the degree to which our economy is a nothing but a dunking booth platform. Either way, it should be interesting on how the global imbalances work themselves out, but that is mostly a topic for Brad Setser's blog. Everybody's frontin' these days. Bling bling.
CR,
Don't you think the Feds are worried enough about wages to keep rates steady for another meeting or two at least?
Lurker
Renting a 1650 sqft house with a 2+ car garage for 1k next to a 1300 sqft house...sans garage for sale 259k!
CR,
A couple of questions ...
With housing affordability at or near historic lows, rising LT rates will send housing prices into an even steeper tailspin.
I look forward to your explaination. Thanks for the great blog.
yal and CR,
I personally believe that there is ENORMOUS pressure on the Fed NOT to cut rates.
Any cut in rates now will produce a real run on the dollar. Argentina, one might say.
I think all that Bernanke thinks about is Argentina...and the phone calls from his counterpart in China warning him not to cut rates.
They're stuck.
My prediction: Bernanke will be talking about the threat of inflation when there are bread lines a mile long.
Corollary to the above. Congress will bail out what needs to be bailed out. The big boys. Citi. Etc.
Tax payers will pay a "surcharge" to keep the big houses aflout. One time deal, only to be repeated over ten years. Not a tax increase. A "surcharge" to restore the banking system to good health.
Sort of like the "surcharge" for the Iraq war.
Both courtesy of Alan Greenspan.
Proof in the Countrywide filing that problems are spreading to prime;
The Wall Street Journal Online - WSJ.com Log In
arbogast: Maybe they can add another field to the W2.
Too Big Too Fail Insurance $103.25
or maybe instead just an Orwellian...
Risk Insurance $103.25
Of course, somebody might ask questions so it should just be shortened to ...
RI $103.25
Of course, we will need to privatize the handling of risk insurance fees to ensure efficiency in underwriting your insurance against risk.
"You've got to remember" that Bear Stearns, the perennial leader in mortgage bonds, "got into this business at the height of the boom, when you could not lose," Angelo Mozilo, chief executive of Countrywide Financial, said during an interview by phone from his office in Calabasas, California.
Search - Global Edition - The New York Times
and now the same Bear Stearns is issuing upgardes to all mortgage lenders..... they are fighting the shorts. going to be interesting.
Countrywide reporting sharp increases across the board in slo pay late pay is not evidence of the subprime contaign spreading but rather the reality that many loans are mismarked as prime when they shouldn't have been.
New Century upgraded at Bear Stearns
Last Update: 4:19 PM ET Mar 1, 2007
IIS 7.5 Detailed Error - 404.0 - Not Found...
Sub-prime lender New Century to delay annual report
Thu Mar 1, 2007 11:00pm ET14
Business & Financial News, Breaking US & International News | Reuters.com...
Question to Tanta:
How bigger deal is this. I can see the rate is dounling every year but the reate looks small enogh:
"lender said payments were at least 30 days late at the end of 2006 on 2.9% of prime home-equity loans serviced by the company, up from 1.6% a year earlier and 0.8% at the end of 2004. Countrywide said payments were late on 19% of subprime mortgage loans, up from 15.2% at ..."
If the rate of non payment rise by 1.3% (of total) from 1.6% to 2.9% wouldn't we excpect them to raise effective rates by 1.3% ?? (on average)
I looked at mortgage rates for March and they are same as Feb.
robert cote,
you have got to be kidding...
that comment of yours was truly ignorant.
yal, mortgage rates don't move in step with delinquencies like that. The "rate increase" was supposed to have been added in at the time these loans were originated, to compensate for the obvious risk they carried.
Remember all those idle discussions we used to have around here on this thing called "risk-based pricing"? Perhaps you weren't a CR regular back in 05-06, when the Baked In Brigade used to drop in frequently to explain to naive people like me that the risk of delinquency and default on those subprimes, those Alts, those second liens, was all priced in, so we were not to worry about it.
Here's my view, in the nutshell:
I like to use the same analytical tools on the lender that we have all been using on the borrower. Buncha these companies were living securitization-to-securitization, never paying down the warehouse balance, stating their income on the financials in order to raise capital in the market, selling off productive assets in order to "invest" in RE. You must ask: did "the model" fail because the subprime loans weren't priced adequately, or because the subprime lenders weren't capitalized adequately? Since, realistically, the cost to the consumer can only get so high--you really can't have 100% of pretax income going to the house payment--the industry eventually has to "price in" risk some other way. Like, say, in the share price.
dr strangemoney, First American has been around for a long time. Before they got into offshore outsourcing, they were just a big title company who offered actually useful services to lenders. One of the most useful was the "tax service contract." I mentioned the difficulties with paying RE taxes a few threads ago. FA developed the "tax service contract" idea, wherein the lender would basically pay FA a fee to make sure that RE taxes got paid on the loans, because it was cheaper for FA to do it than the lender, and the tax service contract could be transferred with the loans when they were sold.
I bring this up only because the product was called the First American Real Estate Tax Service. It has been known affectionately as FARETS ever since. And we all know that FARETS are not weasels. They just look a lot alike.
Thank god the product wasn't titled a First American Realty Tax Service, Tanta.
charts, would you be shocked to know that there were those of us to whom it was so known, but not in public?
A few years ago I was representing the sell side in a whole loan deal and the buyer was insisting to my side's trader that the price had to be adjusted to account for the cost of putting new tax service contracts on the loans--that's like $35-45 a pop. The poor trader thought that sounded odd, but like most traders could get backed into a corner pretty quickly by people who start talking about things like real estate taxes. So trader called me, and I lit into buyer like the Wrath of God. The whole idea of RETS--FA's or someone else's--is that they're transferrable. The F%K I'm going to pay for a new one just because the loan's being sold, etc. etc. etc. You will be happy to know that buyer put tail between legs and went into its own corner.
The moral of the story is how long I spent, back at my desk, wondering how many times that trick works in this business, and who's getting a kickback from First American (or one of its competitors) do do it. The "operational efficiency" of separating the trading functions from the ops and credit functions has a lot to answer for: it's "efficient" until the trader gets hosed because there is no ops person at her back reading those deal stips before somebody says "done."
hmmm. Why would someone schedule a filling on a Friday evening?
REBear: so they can have a great big party after they're done. "WooHoo, we're all rich!" KoolAid for everyone, but NO balloons and NO popcorn. --Somehow I don't think so.
REBear, my theory is because they think maybe the SEC doc handlers might have started happy hour already, so they'd be already drunk when the filing comes in.
Hi Tanta,
Tnx for the explanation.
I just discovered this blog 2 month ago and all my financial education is self-taught..... (or more CR+Tanta taught)
Anyhow I was expecting mortgage rates to rise once the ABX fall and once the lenders themselves find out that they have problems. But, I understand your argument that "The "rate increase" was supposed to have been added in at the time these loans were originated.
I understand that risk can be manifested as share price/capitalization but the issue at the end is P&L, cashflow: By now this is no longer a model of future risk.
There are delinquencies in present, there are drops in real-estate prices these are real numbers and they have to be (at least internally) be measured against models and reserve loss and som adjustment need to be made.
How bad is this rate of delinquencies. Have they all been priced in ?
Increasing reserve loss is one but what about the future. If models did not work they need to adjust the models (and also tighten loan requirements).
With the exception of no more sub-prime (i.e FICO 520) 100% LTV loans I did not see any change and I still don't understand why we are not seeing this change.
Few years ago they were operating in an environment of rising R/E prices. What did their models say that prices will fall ? were they so conservative in their models that no adjustment is needed of course not. So I puzzled. I realize they know they can push things to be worse but I don't see even a gentle rate change 10 BPS at the minimum. I cjust compared WMC rate sheets (Feb Vs. March) they are the same. Anyone doing it more professionally than me ?
With the exception of no more sub-prime (i.e FICO 520) 100% LTV loans I did not see any change and I still don't understand why we are not seeing this change.
Well, as far as I'm concerned, the short version of the answer here is that "the models" needed new loans to continue to come in the door. Nobody volunteers for a credit crunch. Every new memo that chips a little bit off the product/underwriting guidelines is equivalent to one more minus sign in a spreadsheet getting fed into the "profitability" model.
We're back to the age-old question of whether a credit crunch is primarily a question of risk-rationing or price-rationing. Right now we seem to be easing into some risk-rationing while attempting to avoid too much price-rationing. If the Baked In Brigade was right, this should be the equivalent of a nice polite orderly line for the exits, and nobody gets crushed; we stop making the super-high-risk loans, at any price, while assuming that the RE price declines are in their "last throes," such that it makes sense to keep originating new volume at accessible pricing for the average borrower.
If I'm right, there will be some lenders standing on the embassy roof waiting for the helicopters.
Let me make a point that I have made before; long-time readers can just skip to the next comment.
It just isn't an RE correction until a handful of subprime lenders go down. They do do that. You build your house on the beach, you get blown away periodically in the storms that always eventually happen. No one except the Santa-believers is particularly shocked by this. This is why, for several months there, you had the booyah trolls popping in from time to time to explain to us all that it's just a couple of under-capitalized subprimers going down, nothing to be surprised by, the market is just clearing, keep your pants on.
One does not see outfits like IndyMac and RFC getting shoved up against the wall in a "normal" subprime blowout. There is subprime and there is subprime; there are also well-capitalized companies with a real business plan as well as the goofballs. The "correction" was not supposed to get as far as some outfit like Fremont, which I remind everyone is a federally-regulated THRIFT. As is NDE. NDE pared off guidelines very early in the cycle, and you notice they're not out of the woods yet. FMT, as we recall, went humming along in Q4, making planned, orderly, responsible changes to its operations and guidelines, and then erupted in January in a sudden panicked guideline change lead by some freaked out AE sending out some semi-literate email. And now there's a 12b-25 on the table.
One could conclude that it may just be way too late for any "guideline changes" to make any difference to anything except investor perceptions of risk. And even that's iffy--we still have the cheerleaders who see every bit of risk tightening as further indication that the mortgage market is "correcting itself" rather than putting a tourniquet on the bloody stump of what used to be their right arm.
CR,
I agree that the valuation issues are at the crux of the delays on reporting. This morning we have LEND and IMH joining the line of students who didn't turn in their assignments on time. You can imagine the conversations going on between the CFOs and the auditors, and in turn the lead audit partner on the account with his risk management group at HQ and they in turn with their outside counsel to figure out what is or isn't covered in the errors and omissions policy. Meanwhile, Bill Lerach (or whomever has arisen to succeed him now that Bill has been exposed as a scammer) has a draft complaint in the word processor for every subprime and alt-a lender that is public (aside from NEW and NFI who have already been served) just waiting for the appropriate shoe to drop so they can start the sprint up the court house steps and beat the other ambulance chasers to the punch. Fear not for the lawyers, whatever happens in the housing market they will keep a roof over their heads.
These Toxic Loans were already default by nature..I mean come on folks..I can see a 1% cap on an ARM reset, but 6%+ caps plus Libor, give me a break. I have been thru and follow my local registry of deeds for forclosures and 90% of the loans were ARMS. Some with Ballon payments at maturity..who in their right mind would put their John Hancock on such a piece of toilet paper? Now dont get me wrong ARMS do work for certin people yes, But the trash laons that have been given out the last 3 years is unreal. Who do you blame? I blame the Lenders and the stupid Borrower..for not reading what is in front of you.
OK, you've convinced me, I'm ready to buy shares in Lexis-Nexis . . . Xerox . . . 3-M (maker of those Post-It charts the Libby jury keeps ordering more of . . .)
Re Fed rate cuts, this is the position many current account doomsayers have over the last several years predicted the Fed would find itself in sooner or later: the need to lower rates because of an economic slowdown, but the need to keep rates up to support the dollar.
You might think they could lower rates and just let the dollar fall. But given that we import just about everything now, that would boost inflation, the Feds biggest bugaboo. Plus, a fall in the dollar could lead to a run on US assets held by foreigners.
Dryfly,
The subprime, CRE and LBO, bubbles are all symptoms of a larger "financing bubble" that has really found its way into every fixed income asset class - junk bonds, emerging market debt (ask yourself, for all our issues should Greece be able to borrow money more cheaply than the US?), etc, etc. The glut of money has forced any fixed income investor to chase yields, and lending standards have fallen victim to that reach. Subprime just started earlier than the others and reached its peak of absurdity sooner.
What is going on now in CRE, where cap rates are now less than financing costs, is precisely the same thing that happened in subprime in the last two years, ie lenders are now relying solely on increasing collateral value to bail them out. The rent roll on the buildings will not service the debt. The new owners will tell you that they can increase rents - the latest sale in Manhattan needs over $100 ft in rent to service the debt. Something tells me that Bear, Lehman, MS et al are not going to be renting a lot of new space after they finishe laying off mortgage traders, sales people and math PhDs working on the non-linear synthetic inverse floater for the Malaysian mortgage market.
LBOs are a whole 'nother story. The LBO deal used to be, buy the company, sell the planes, get rid of the senior executive vice presidents for global administration, get more efficient in using capital, pay down the debt and then sell it to someone and reap the accued equity value from the paid down debt and some cash flow growth. The model now is, buy the company, use clever financing to lower the cost of capital, borrow more money to pay yourself a nice dividend and then take the company public again, hopefully in 12-18 months or less since you bought it. Most of the value is coming from increased leverage and a more efficient capital structure, not from better operations of the company. A less forgiving capital market is going to cause problems for these deals.
I have no doubt that cutting rates will:
One of the reasons I was confident that subprime was sure to blow up was Ameriquest's sponsorship of the Superbowl. It is generally a great contrary indicator (remember all those dot com ads for the 2000 superbowl).
History is repeating itself with stadium naming rights. From bloomberg:
" ACC Capital Holdings' need for a financial lifeline from
Citigroup Inc. is the latest sign that putting a company's name
on a sports stadium doesn't guarantee its business will thrive.
Ameriquest Mortgage, the Orange, California-based company's
subprime mortgage unit, signed a naming-rights agreement in May
2004 with Major League Baseball's Texas Rangers. The 30-year
contract was valued at $75 million.
As the Rangers prepared for this year's season at Ameriquest
Field, ACC Capital struck an accord with Citigroup. The largest
U.S. bank will become the company's main funder and buyer of
mortgage loans and will have an option to acquire its wholesale-
lending and mortgage-servicing units.
ACC Capital is hoping to avoid the fate of Enron Corp.,
which named the home stadium of baseball's Houston Astros and
then went bankrupt. The field is now called Minute Maid Park."
One share of NFI stock to the first poster who can recall the name of the Baltimore football stadium at the end of the dot-com craze.
I would like to applaud both Tanta and Brian for an outstandingly accurate statement of currrent realities.
Brian, especially, has accurately captured the philosophy of current activity on the street. It is about appearance and SHORT TERM analyst reactions rather than an attention to improving the underlying productivity and opportunities of the companies involved.
The stunningly delusive analysis coming from many analysts at the big three is remarkable for its complete disassociation from reality.
Brian - PSINet
Do I get tickets to a Cleveland game?
Hey MOM,
You posted this on one of the threads a day or two ago, and I'm not entirely sure what you are referencing.
"Existing homes were unbelievably bad because of the concentration of price and sales drops in the west. In every region, median and average sales prices were below 2005. The logical conclusion is that those high CLTV loans written in 2005 and resetting in 2007 are mostly underwater which will keep default rates rising. Worse yet, because of bracket compression the 75th percentile loans can be expected to take higher losses than the 50th or 25th percentile."
Can you elaborate a little on the on the bracket compression and percentiles you are referring to? Thanks
mort_fin,
We have a winner.
If the ticket hustlers in Cleveland are willing to take NFI paper you should be all set. The guys here in NYC all seem to want dollars (though by the time opening day rolls around they may be asking for yen).
I almost peed myself watching this vid..Absolutly hilarious parody of the current housing finance market!!.
immobilienblasen
MaxedOutMama wrote "The stunningly delusive analysis coming from many analysts at the big three is remarkable for its complete disassociation from reality."
Which big three are you referring to?
"...delusive..."...My belief is that it's quite deliberate - there is a vested, conflict of interest until their stake (personal/company) is not being jeopardized -- Maintain a cheery confidence that all is well until you're out of harm's way...
Goldman, Merrill Almost `Junk,' Their Own Traders Say (Update2) - Bloomberg.com
Goldman, Merrill Almost `Junk,' Their Own Traders Say (Update2)
By Shannon D. Harrington
March 2 (Bloomberg) -- Goldman Sachs Group Inc., Merrill Lynch & Co. and Morgan Stanley, which earned a record $24.5 billion in 2006, suddenly have become so speculative that their own traders are valuing the three biggest securities firms as barely more creditworthy than junk bonds.
Which big three are you referring to?
Mama Rating Agency, Papa Rating Agency, and Baby Rating Agency.
Goldilocks doesn't seem to like anybody's porridge.
These guys have made a lot of money securitizing mortgages over the years in a mortgage boom time,'' said Richard Hofmann, an analyst at bond research firm CreditSights Inc. in New York.The question now is what is the exposure to credit risk and what are the potential revenue headwinds if they're not able to keep that securitization machine humming along.''
That's the question now? I thought the question now is how come this is such a big deal if it's only 15% of their business, like we've been told for all this time.
Have to wonder whether those traders at MS, Merrill and Goldman have just shortened their employment contracts. And a Bloomberg story. I am truly shocked.
From the LEND announcement of not turning in their homework:
"Due to the recent market conditions in the non-prime mortgage industry, the Company is evaluating whether any of the goodwill established in the acquisition of Aames has been impaired. If the Company determines that the goodwill established in the acquisition has been impaired, the Company intends to charge-off such goodwill, resulting in a non-cash charge for the period ended December 31, 2006"
Mind you, this acquisition was done less than 90 days before the end of the year. Could set a new record for shareholder wealth destruction. I'm proposing a new metric for the subprime industry acquisitons - MTTWO - mean time to write off.
DJ,
Where do you live?
Brian -- fantastic post linking the financing booms in residential RE, commercial RE, the LBO market, etc. I couldn't have said it better myself. Now the question becomes: Is the stock market break the first sign of a tighter liquidity environment? Or is it just another hiccup on the road to higher and higher asset values (stocks, Manhattan office property, or anything else)?
I was just thinking, and it hurt. Anyway, almost every one of my friends who purchased a home did so in a big way, overextending because they figured on future gains for life. Now, these are smart people with great jobs, good credit etc... but most really pushed it, moving up from the average home to homes 900k - 1.5mil. and nobody did a 30yr fixed because the exotics with options were the thing to do, nobody gets a traditional anymore.
DJ: its called leverage! Leverage in a thinly traded market like RE creates some nasty side effects.
Brian - in RE downturns the homes for which there is the most demand retain the most value. Sales will always be clustered around at least one price level in an area. Sometimes you see a double hump. In extreme cases, you will see a triple hump. Those humps correspond to affordability and income clusters. You can use the ACS (Census) to verify this.
During a real estate expansion cycle, those clusters spread out in pricing. On the lower end, people who are priced out will settle for something less than they would have preferred, which shifts demand downward in housing quality. On the higher end, people who can qualify feel comfortable extending themselves as much as they possibly can because they expect the value of their purchase to appreciate while their debt will remain the same or decrease.
During a real estate contraction, the low end and the high end houses end up losing the most in value, because there is the lowest overall demand for them. People who are qualified to buy will wait if they have to, save money and buy closer to what they really wanted. (IE Townhouse instead of condo, or detached instead of townhouse.) For higher end demand, people will extend themselves less because getting into extreme debt is not likely to pay them off. (They are buying a home instead of an asset which they will use as a home.)
It starts because of less demand at the extremes, and then the pricing changes reinforce the trend. The only exceptions are in areas in which there is huge pent-up demand relative to pricing.
If you use MRIS Statistics, you can pull reports for DC for years and you can see it yourself in action.
MRIS Statistics
Thank you very much for all the great info you have posted. I am sorry for not answering your question earlier. Life has just got me by the throat and keeps on shaking me.
Those huge Red Candles on GS,MER on Wed are beginning to look like insiders within the industry knew what going on and are heading for the exits.
MOM,
Thanks for the link and the comments. Sorry to hear about all your travails. I'd say have a nice weekend, but it sounds like you will have your hands full. Here's hoping you don't have to go from bulldozers to sand bags.
Subprime Guidance available:
http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070302/default.htm
What killed New Century Financial is the buyback sent from WallStreet. So now they have insurmountable amounts of bad debt they cannot unload in a failing housing market. What are they going to do? Unload these loans and take a hit on each one. I would love to see which properties they lent out on. It would probably read like this:
Compton Property Assessed Value: $450,000
Buyer Income: $90,000
Buyer Employment: Target
Loan-to-Value:\t110%
Yup, subprime is imploding and will only continue to do so.
Dr. Housing Bubble
Doctor Housing Bubble Blog
robert cote,
you have got to be kidding...
that comment of yours was truly ignorant.
realist | 03.02.07 - 5:58 am | #
Seeing as my former $9/hr housekeeper and her field laborer husband qualified for a $400k+ 100% mortgage from Countrywide at terms that reflected prime borrowers I know of at least one loan that is being advertised as prime either on CFCs books or in the resale market that isn't.
Tanta, what did you think of it? I read it as a face-saving exercise, particularly with reference to the following questions upon which the public is invited to comment:
"1. The proposed qualification standards are likely to result in fewer borrowers qualifying for the type of subprime loans addressed in this Statement, with no guarantee that such borrowers will qualify for alternative loans in the same amount. Do such loans always present inappropriate risks to lenders or borrowers that should be discouraged, or alternatively, when and under what circumstances are they appropriate?
2. Will the proposed Statement unduly restrict the ability of existing subprime borrowers to refinance their loans and avoid payment shock? The Agencies also are specifically interested in the availability of mortgage products that would not present the risk of payment shock.
3. Should the principles of this proposed Statement be applied beyond the subprime ARM market?"
Make sure everyone emails in to support the guidance!
MOM, I printed the damned thing and took it out onto the patio with a pencil. (It's that warm here in DC today.) So I sure startled a flock of geese when I started yelling "Haloscanned! You jokers are HALOED!"
They want comments, by cracky, there're gonna get comments. I suggest we start working out a process whereby the CR Irregulars who want to participate in this can start sharing ideas with each other.
We could start with the idea that they're actually, apparently, worried that any new guidance would impact a lender's ability to refi a current subprime customer out of a toxic loan. Well, you dumbasses, put something in the guidance that says that the one acceptable "extenuating circumstance" for not qualifying a borrower at fully-indexed fully-amortized fully-documented is that the borrower is currently in a toxic loan (as defined in the guidance), and so as long as the lender can prove that 1) there is still a commitment to homeownership on the borrower's part and 2) the new loan is a clear improvement to the borrower's ability to repay and 3) nobody took this as an opportunity just to extract more fees, it's acceptable. WHY IS THIS SO HARD?
And, yes, I can think of ways one could document "continued commitment to homeownership." Show a credit report that proves that the borrower is not in trouble because of consumer-debt loading after the original loan closure. Show a payment history where the borrower wasn't in trouble until the rate increases came into play. Show evidence that the borrower was current on the mortgage before the mortgage being refinanced--i.e., show that you had a perfectly good homeowner who got refi'd into a toxic loan, not a marginal homeowner wannabee who shouldn't have purchased. All this kind of stuff is easy to demonstrate.
But noooo, they're worried about making the guidance too firm because it might prevent someone from taking a borrower out of an exploding ARM. So they're willing to risk continuing to originate junk in order to prevent anyone from making some limited amounts of lemonade. ACK.
PR: Face-saving...the appearance of a professional, responsible and diligent body...reacting, (rather than responding?), to circumstances that suggest some irresponsibility, some lack of due diligence --horrors, lack of professionalism on their part in the past.
~Is it ok if we rein you? ASAP or within 60 days whichever is more convenient. Hard to believe they have this much time, just to get feedback on tougher guidelines.
Mind you, this acquisition was done less than 90 days before the end of the year. Could set a new record for shareholder wealth destruction. I'm proposing a new metric for the subprime industry acquisitons - MTTWO - mean time to write off.
Ya and at the end of the year we should have an awards banquet & give the winners a trophy. Something like a gold plated replica of a 'wood chipper'... call the awards 'The Chippies'...
I nominate Tanta as inaugural MC, but since the 'metric' was Brian's idea maybe he co-hosts.
I just want to know where the buffet table is and is hot dish any good.
And Brian - I agree with the LBO-Equity Fund comments you left above. Very good.
Question, how close do you think we are to that end game?
I ask because I work for a few of these guys (independent biz development & commissioned sales)... and I strongly get the feeling their earnings are NOT keeping up with their own cost of capital either.
I don't know that for a fact since I don't see the books (they are privately held). But I see the stuff they buy & see the stuff they sell & know the cost inputs & margins... and from what I see it is like your CRE example... they are counting on appreciation & IPO or repurchase (new LBO) to save them.
I don't see how they get saved.
Any ideas?
Tanta - my first reaction is that the agencies want the bankers to play "Answer Senator Leahy". I think one major concern is setting up different rules for non-depositories and depositories.
We'll see. The last rounds of comments were utterly fascinating, and this should elicit a lot more. Only Congress can institute regulation of non-depositories, because the states aren't getting the job done.
Still, nothing excuses banks making bad loans to borrowers. Nothing.
"Goldman, Merrill almost junk"
Goldman, Merrill Almost `Junk,' Their Own Traders Say (Update2) - Bloomberg.com
and so as long as the lender can prove that 1) there is still a commitment to homeownership on the borrower's part and 2) the new loan is a clear improvement to the borrower's ability to repay and 3) nobody took this as an opportunity just to extract more fees, it's acceptable. WHY IS THIS SO HARD?
Well Item 3 might take the whole Justice Dept to enforce but otherwise a good set of suggestions.
One other condition might be that a 'work-out' with the existing lender was thoroughly explored & not possible... and that should a new exotic re-fi be offered that workout terms (set of future contingencies) be made available up front (could include things like future gain sharing). Flippers would love that.
I'm sure they will love to hear from us.
Goldman, Merrill Almost `Junk,' Their Own Traders Say
So who's more likely right, the traders or Moody's?
Hm...
I think one major concern is setting up different rules for non-depositories and depositories
Will the 'non-depositories' survive this without getting beaten up?
With todays news about Goldman et al, are the banks going to eat the REIC for lunch? The financial companies could get burnt at the mortgage business, leaving RE at the mercy of the banks. Ain't the banks itching to get into RE?
Dryfly,
Hard to tell how close we are to the end. The LBO thing tends to end with more of a bang than a whimper, real estate is usually the opposite. The LBO cycle usually ends when a big deal fails - think the UAL deal that failed in 1990 or the Sealy Mattress LBO bond sale that failed to take out the bridge loan (earning the deal the moniker "burning bed"). (Just to show you where we are on the risk spectrum this time around we now have "bridge equity")
People were certainly falling all over themselves to lend money to CRE up until this week. Usually it takes a few deals to go bad before credit starts to contract at the margin, and then if the excesses have been bad enough it starts to snowball from there. That's what happened in subprime starting last summer - the EPDs started to increase and by labor day a few MBS buyers stepped back and things have gone down hill ever since. Keep an eye on employment and the amount of space leased.
Risk is a word the credit markets are reacquainting themselves with this week, but it is hard to judge whether this is enough to get everyone to sober up or just a bomb scare that clears the bar for 20 minutes. If I had to guess, I'd guess this may be the end of the cycle because the yen carry trade looks like it is unwinding. That was certainly a major source of liquidity at the margin. The removal of that will cause a system wide repricing of risk. All that said, booms tend to go on much longer than rational people can imagine (hence the warning to short sellers - the market can stay irrational longer than you can stay solvent) - just look at subprime.
"So who's more likely right, the traders or Moody's?"
We'll find out. DOWN SCOPE!
MoreBubbly: Companies with similar gaps between their actual rankings and ratings implied by credit-default swap levels have outperformed their peers 87 percent of the time over a one-year horizon, he said. Because an active credit swaps market has existed for less than a decade, that percentage is based on only 37 observations, Munves at Moody's said.
At the same time, the same companies had an above-average risk of being downgraded, with about 22 percent of them having their ratings cut, he said.
Anyone looking at the short end of the yield curve today? There's a lot of money moving around.
doc,
Because an active credit swaps market has existed for less than a decade, that percentage is based on only 37 observations, Munves at Moody's said.
I have a feeling there will be a lot more observations in the next few years with which they can test their models.
I just want to know where the buffet table is and is hot dish any good.
Tanta's the hot dish! Smart is always sexy.