CR & Tanta: thank you both. Very informative to the point of I'm not sure I'll sleep well tonight or until this sorts out.
Just for we unitiated a bit of explanation on EPD's: what they are, how they work and why screwing up is the unforgivable sin please ?
Is there any way of knowing the proportion and distribution of S&D's, etc. in the loan pool ? And I suppose speculating about the extent of the derivatives written is useless.
Maybe this'll be where we find out BB's CQ (that's cojones quotient).
Unemployment...Peak Oil...no jobs...recession...soup kitchens...1929...where are the jobs? ...housing crash...my income isn't growing...poverty...depression... Buddy, can you spare a dime?...The Grapes of Wrath...Tobacco Road...outsourcing...globalization...its not fair...Bangladesh...redistribute...where's my BMW?...where's mine...you owe me....I'm not accountable...you are responsible...it takes a village!
So, Tanta, I take it that you are not a part of the feeding at the trough crowd?
Something about housing troughs and the old saying that hogs get slaughtered makes me laugh. I have a feeling that everybody feeding at the trough is about to be slaughtered. Here comes Farmer Credit.
I did a probate fairly recently that was weird. A lot of this stuff gets sent to me by title companies.
Basically what happened is they cut the check from the sale to a person who did not own the property. All along I had made sure in writing that the title company and the lender understood who owned the property legally-speaking, and they went and cut the check to someone who didn't own it.
Very weird. The title company called me up later and said "We are **** out of luck, aren't we?"
I have another one now which is a refi and the lender calls me up to see how things are going yesterday and I say "You do realize that your customer doesn't own the entire property, don't you?" and he says "She doesn't?"
Seems like standards are slipping as everyone rushes to get a deal through.
The @#$# won't hit the fan until we see the 4 wk average new claims for unemployment hit 400k. Then the defaults will crush us. We can speculate about a depression all we want, but so far that talk is cheap and not worth the bits it is taking up in cyberspace. So don't worry,,,be happy.
Meanwhile, back at the sausage factory... That being said, I get emails from a few banks literally encouraging me to commit fraud with their bank, and it's not the AE's, it comes straight from the bank. It's hilarious. Overstating Income
Powerhouse components of real GDP growth included consumption and net exports. Real consumption increased at a 4.4% (thank to all those "tapped-out" consumers) annual rate and net exports added 1.6 percentage points to the real GDP growth rate (the most in ten years). Exports are BODACIOUS.
The core consumption deflator (PCE ex-food and energy) rose at a 2.1% rate and gained 2.3% in 2006 (Q4/Q4). Nominal GDP (aggregate demand) grew at a 5% annual rate in Q4, was up 5.9% versus last year, and surged at a 6.1% rate over the prior two years (6.4% excluding housing).
Bottom Line: Today's robust GDP report shows that the economy remained strong in Q4 and strongly suggests robust growth ahead. We entered 2007 with considerable upward momentum. The weakness has been narrowly confined to housing, it never spread. Housing starts adding to GDP by 2H/07.
CR, unfortunately I've taken a show-me-the-money posture on anything that comes out of Fleck or Roubini's mouth from here on out. When I hear that a couple of their countless predictions of destruction finally pan out I might give them the time of day. I figure I might have to ignore both of them for a indefinitely from now on. They are cardholding members of what I think you referred to as the "doom industry". I'm suprised an even-tempered guy like you would include references to Fleck on your site.
OK, from my Alabama lay person perma bear perspective.
Once risk was under compensated and the capital flowed in. No problem a counter party will take care of problems. Now problems. Risk evaluation is king, at least in the RE loan area. For that matter risk evaluation is dictator killing all, sorta good and bad alike.
Once the idea of losing was secondary to getting some of that capital out the door into some kinda of investment. Now the idea that you might lose some of it starting to take hold. Greed and fear becomes fear and greed.
For those of who have dated and signed yearly financial disaster prophecy books dated from 1990 onward, the question is will this dry up all that liquidity?
Some say that the multiplier effect will happen where the losses will beget more losses, some say that the liquidity will just flow elsewhere like in 2001-2002 into RE.
Vader, if you're a lay person with a perma bear perspective that owns financial disaster books from 1990, you might consider spending your time with a more positive hobby. It sounds like you've been asking the same question for about 15 years, waiting for godot. I don't think macroeconomics or the financial markets are going to tell you the answer. You might consider seeking a therapist. I'm not trying to make fun.
Let's see, Fleckenstien is reduced to conjuring up "staggeringly accurate" imaginary "friends" to support his collapsed rep and the anony blogger here makes a tortured reach for JPM's imprimatur in support of a, ahem, imaginative point.
charts, I posted the Fleck excerpt to put Tanta's comments in perspective (since she was responding to the excerpt). As usual, Tanta provides some excellent insights - and I hope you focus on her comments.
Well the happiest I've been was when a stock I owned went from $15 to .015.
I bought a bunch, and it went to $23.40. Now I am not happy.
Healthsouth Corp if you are interested. Lots of local color involved.
As to depression, woe and what not. My mom just died at 94, with that attitude, and out lived her happy contemporaries.
In any case, be aware of my hyperbolie, the only way I would buy a financial disaster book is at the bargin table and then it is rather silly to buy a book of financial disaster for say 2005 in 2007. Most of those authors I find silly.
However I must admit to my limitations of imagination as to what the vast sums of capital washing over the markets would do.
Wow. I mention Fleck, and it brings out a lot of anger. What's that all about? The same thing happens when I mention Kudlow.
Hey all, they're just people. I've pointed out several times Fleck is a permabear - and Kudlow has become a permabull since getting his head handed to him when he predicted a severe recession in Dec '94.
That doesn't mean you shouldn't read anything they write. Just keep their perspectives in mind.
This piece is about Tanta's comment - not Fleck's. I thought they were insightful, and she agreed to let me post them.
Fleck = Hillary. Kudlow = Cheney. Source credibility is important. Sorry, CR, there's no way around this. Nonetheless, I found Tanta's comments very instructive -- and, of course, entertaining.
Hey CR - I'm with 4shzl... and the more the sockpuppet howls the better it looks.
The best part is Fleck's call is sorta like Nouriel's 4Q ZGDP call a few months ago... we won't have to wait too long to see if Fleck's buddy is in the know or a nobody.
And Tanta's explanation gave us a Cliff Notes primer on a script that is way too long for us to read... thanks again tanta.
If the S&Ds aren't selling at anything close to par... and there are a lot of them... then we see the first real tangible evidence of an 'RE sector credit crunch'...
On the other hand if nothing happens... the stuff keeps selling... then the bulls can & will howl some more.
This isn't like calling a recession 6-8 quarters into the future, a sometimes 'rolling future'... Flecks piece will has a short term acid test quality to it. It either happens or it doesn't.
Personally - I'd love to see tanta weigh in on some more on her informed guestimate of how this would look to us on the outside... with time line. A what to watch for from our outsider position & where the stench would come from... if it ever did.
I wonder how many of the anti-Fleck posters here have Jim Glassman's "Dow 36,000" on their nightstand...with dog-eared pages which they constantly refer to.
I read on marketwatch (I think) where some advisor recommended to a client that they should put their extra money into investments rather than paying off the mortgage...since you can expect a 10% return annually. I remember in '99 folks would put their HELOC into dot com stocks too.
I wonder how many of the anti-Fleck posters here have Jim Glassman's "Dow 36,000" on their nightstand...with dog-eared pages which they constantly refer to.
Probably one copy... because all those posters are the same fricking sockpuppet.
Vader - I wonder if it is real this time? LOL. Not like we've never asked THAT question before.
And sorry to hear about your mom - I lost my father this last fall & he was similar... a great roll model to us 'youngsters'.
He was 'optimistic' in that he knew from personal experience that adversity could be overcome... because he'd had to do it so many times... but 'pessimistic' in that he knew adversity was always out there regardless and that each time it sucked as bad as the last time & was worth avoiding if at all possible.
For a lot of reasons, I am a half-empty cracked-glass half-empty type person. But I too have succeeded in overcoming adversity.
Actally I am a bit optimistic about the world situation, after a couple hundred years of captialism being exclusivly European and American, it is becoming Eastern. Things once monopolized by the West are available to all. Big changes that happen once in a historical period are upon us.
Now if I can only survive nicely the next few years.
I never bought Glassman and consider myself Bearish. Glassman is as close to a snake oil salesmen as one gets in my opinion. But so seems Fleck and the other cast of Doomsayers. It looks as though Fleck and Roubini types prey on people's fears whether they're conscious of it or not. I believe they speak to people that have issues with social adjustment, dealing with authority and/or trusting others. The recalcitrant types that always want "the good old days back" are prime targets for Fleck and Roubini who constantly search for novel economic developments to trash as dangerous.
Plus Fleck could try stepping out of 1982 and get rid of the Rick Flair haircut.
If you want to know how bad the mortgage market really is listen to what Mr. Mozilo of Countrywide said yesterday at an industry conference.
+++++++++++++++++++++++
Another issue for the industry is that there are too many mortgage lenders. When permissive lending and skyrocketing home values lured home buyers to the mortgage market, lenders jumped in to serve the demand. Now, with too many players in too small a space, Mozilo said as many as 40 or 50 mortgage lenders a day are going out of business or putting themselves up for sale.
+++++++++++++++++++
That's an amazing number. Today's graveyard was Mandalay Mortgage, Concorde Acceptance and Deep Green Financial.
The reason they are going out of business is because the loans are coming back.
It is rumored on the Yahoo CFC site that Fremont and or Argent will be done by the end of this week.
Look at Fremont, they are the #5 lender in the subprime market. They fired 8,000 agents this week. Their stock is trading below book value and looks very weak.
This is isn't about Fleck, Roubini, CR or any other doomsdayer. No intelligent person on this board would make many of the loans that were made. And you didn't need to go to credit school to figure it out.
By April of this year the damage will be overwhelming.The slope of the curve is increasing parabolically. It is very real. The street is not listening to guys like Mozilo or Hovnanian on how bad it really is.
Yes, that guy Fleckenwtein is always all wet. Remember back before the turn of the century when he kept on predicting the NASDAQ was going to crash? But as we all know, it just kept going up, and up, and up ...
Actually, he is all wet in my opinion because if he were actually advising people he would have devised way to profit on the run up and run down with an exit strategy and risk management system in place. If he isn't going to do that then he needs to tell me exactly when something is going to happen, and we all know he can't do that because he's not prescient. Simply saying something is going to crash sometime as it whatever preceeds the crash goes on for years doesn't cut it in my book. It has no practical value. He's a financial gossip columnist with a bearish bent.
In markets getting the right direction is easy (eventually the market will go up, and eventually it will go down). What is difficult is getting the timing correct. Oct 2007 anyone?
Perhaps I can clarify one thing from my perspective: my "shoot the wounded" comment referred to the relationship between lender/investor/security issuers, on the one hand, and correspondent/brokers/producers, on the other. Whatever Fleck is saying, I am not saying that as goes the mortgage business, so goes the larger economy. I do, however, think it's relevant.
Anyone who wants to consider that we are seeing normal "herd-thinning" is free to do so. Anyone who likes that metaphor is free to suggest that it means more prey for the rest of the remaining herd, and is therefore a sign of "health." I, personally, think those Business of the Serengeti metaphors often suggest misleading conclusions, even while I most heartily agree that we've got an "overcapacity" problem in the mortgage business. If I had to choose to solve "overcapacity" by eliminating excess producers or by providing monetary incentives for the industry to make up more "killer apps" for people who really don't need more credit, I would certainly choose the former. The current situation may produce a desired outcome, with some other unintended consequences, but I don't think it's happening because it was conceived that rationally and public-spiritedly.
The point I thought I was making is that it is unusual to see this many lenders forcing loans back through the chain when they know that doing so will put their correspondent out of business. Their correspondents aren't, for the most part, "competitors." They are more properly understood as "suppliers." Big nationwide lender/aggregators have themselves reduced or eliminated their own retail lending operations in favor of wholesale and correspondent operations. They are taking actions that mean not only the disappearance of a steady source of supply, but also the disappearance of whatever remaining "warranties" (or indemnities) those counterparties would have been expected to supply for any loans that have not (or not yet) been repurchased. It's possible that the lenders are just nuts. I think it is more plausible to assume that they know something about how radioactive these repurchased loans are, and how relatively unattractive future investment in new loans is, that makes "total war" with one's suppliers seem rational. I am making this point with my Main Street hat on, not my Wall Street hat. Y'all can argue Wall Street.
Frank, it's important to remember that Fremont did not "lay off" 8,000 employees or pseudo-employees. It cancelled the contract it had with 8,000 independent mortgage brokers. This is, on one hand, "the beauty" of the non-retail business model. They aren't your employees, you don't have to lay them off. If enough other lenders cancel contracts with them, they simply become "failed small businesses."
I do not, for a moment, believe that Fremont was getting fraudulent or other toxic loans from all 8,000. I certainly hope that the suppliers of toxicity were in the 8,000, for Fremont's sake. While I have no inside dope on Fremont, I would bet my Swingline that it, like a whole lot of other lenders, had hugely inflated "approved broker" lists. It is not unusual for Account Executive compensation to include a portion derived from the number of accounts you get approved, regardless (or nearly so) of the production you get out of those accounts. Further, there is the "PowerPoint Effect"--you get to tell our betters on Wall Street all about this huge supply chain you've put together. A large percentage--I would guess the majority--of those brokers probably sent in a loan a year.
Is that good news or bad news? My own view is that anyone with a large number of approved accounts that send only a tiny bit of business, and that has a huge EPD problem, has been functioning in some fashion as lender of last resort. That's the bad news.
If Fremont has got religion and cut all those accounts loose because it wants to do ongoing business with reputable brokers who see it as a first resort, then bully for Fremont. Time will tell, if there is enough time. That is what is worrying me.
The final point I'm focussing on is the question of the "pending" repurchases. As I said, I don't know how many of those are out there. I noticed when I looked at NDE's footnotes that they are managing some of their held-for-sale asset problems by invoking rep-and-warranty repurchase clauses. This disclosure was made in the context of a discussion of reserve calculations. Technically, counting on the originator to take a problem back is not a "loss reserve," and I'm not accusing NDE of that. But I would bet that NDE, like every other wholesaler on the planet, included repurchase/indemnification in its set of assumptions that went into its "historical performance" adjustments to its loss reserves. That's why those contracts have those covenants to start with.
The tail-chasing comes in when you assume that those contractual remedies are worth something precisely because they are, historically, not invoked very often. It's just like margin calls in that respect.
In any case, the EPD phenomenon is "first wave" because, well, it takes about 90 days for those to become obvious. The "second wave" is the stuff that held out a bit longer. The DataQuick numbers CR posted a while ago indicated that the median age of CA loans in NOD status was 15 months. A lot of those were, of course, EPDs. Some, obviously, were not. When I said JPMorgan, as an example, is "not prepared to tolerate" certain problems, I meant simply that they don't look particularly willing to hold the bag if they can find a way to push the stuff somewhere else. But when you get down to trying to put back your nuclear waste, you're talking a longer lag time, if you will.
It's possible Fleck's informant is exaggerating the current bids. I no longer have access to the sort of information that would prove or disprove that. We all have access to some data about loss severity trends, though, and it tells me that nuclear waste dealers have to drop their bids. They don't buy that stuff as a public service.
One more thing: I would like those who love to talk about "risk dispersion" as a positive feature of the current environment to assure me that they do not, in fact, mean "risk elimination." If you think risk has been eliminated, I am not the naif in this conversation. If you think it has been "dispersed," and that this is a good thing, I assume you mean that it has been broken up into smaller chunks and spread out among risk-takers who can absorb their small part in whatever losses may appear.
The phenomenon of shoving it back onto the weakest part of the chain is not exactly inconsistent with the idea that "risk dispersion" will save us from massive systemic problems among lenders, particularly of the depository kind. However, I still have to be convinced that all those high-falutin' it-takes-a-physicist models may not, in the actual playing of the game, turn out to look more like musical chairs. This, we have seen before. And we lived through it. I just want, then, to be told how it's different this time.
"Speaking about the mortgage business at a Citigroup conference on Wednesday, Mr Lewis said: We have said, unequivocally, that our strategy is one of organic growth...We have said were not particularly interested in the wholesale and correspondent business. Finally, weve said we like the product but dont like the business.
We like the sausage, we just hate being on the shop floor when it happens. 'Kay.
In my little know very little mind, I think that the mortgage market will unwind more quickly than many expect because loan risk basicly wen hyperbolic in 2006. The Insanely risky class of '06 with lots of EPDs will join together with the merely risky class reset driven defaults from '05 and mean that in '07 we'll have a model bending default rate. I simply don't think that everyone has properly hedged aginst the default rate we'll see, and even those who have will be reminded of the words "counterparty default"
The the past sure does rhyme, and I think that 2007s "It's only the subprime lenders being thinned from the herd" rhymes wirather nicely with 1985s "It's only STATE charterd thrifts in Ohio and Maryland."
Vader - did you miss the 5 for one reverse split in Healthsouth; split adjusted it is still in the $4-5 range.
If I have enough cash in the bank to repay my mortgage, should I just stop paying it in an effort to persuade the lender to sell it to me at a discount?
Rational Actor, I made a quite fanciful comment a while back on one of the homebuilder threads regarding the joys of a lender having nothing but high-credit quality borrowers left (the metaphor of that day was the "744 FICO"). You're making the same point in a slightly different way. Usually, mere homeowners don't have that kind of leverage--it's the commercial credits who get the "discounts" by threatening to default. But hang in there, and you never know--if there's enough REO flooding your market, and you don't care about potential high cost of future credit after it all does wind down, then by all means call the lender and ask for that discount.
RA: If your lender is trapped like mine in a relationship where they're lending you money at less than 5% for the next decade, it may be advantageous for them to buy it back from you at a discount if short term rates skyrocket in a few years. Good luck finding somebody able to make that deal with you though.
Tanta, there is always a bid- for instance I will buy just about any paper available in Arizona for 15- not pennies on the dollar, but mills;-}
But then I am married to a lawyer and can get discount legal services- well actually it would have been cheaper- never mind.
That is truly beating the former highflyers with a stick. Nothing like debt defying feats!! Followed by the bottom. Oh well, some of us are getting great amusement out of this- the smart one were the ones who sold thier highflying sub operations last year!!!
Tanta,
I don't know if it is ironic or poetic justice, but who would have thunk that the lenders would be "evicted" (going out of business) concomitantly with the borrowers. It looks like a race to the bottom.
Take alook at Deep Green Finanical (relatively small - $1 Billion). They were not a subprime lender. They did HELOC's at 50 basis points below prime on "Stated Income".
At a local level, I overheard some banking officials quietly expressing the possible prospects of citywide re-assessments/re-evals...Downwards.
Didn't that Forward Air Controller in Apocaplypse Now say something to the effect of..."Better get your Folks BACK..This is going to be a BIG ONE!" before the the F-105's dropped the Naplam ?
Tanta and CR, Tanta mentioned a few posts back that she didn't have the contacts to confirm that the S&D and nuclear bids were working out at in the 80's as Fleckstein's source had mentioned and that the players we engaging in scorched earth business tactics in getting rid of the problem loans. Do either of you have any other data that might confirm or debunk this statement? I ask this mainly because if this happens as Tanta suggests it could be the start of some serious ugliness (or "total war" as she stated) in the credit industry and probably a harbinger of a nasty consumer and commercial credit crunch. That being the case it would be good to have additional confirmation of the rumor.
Anyone know what the comp price on the ABX index means? I mean if the current price is "90" and the coupon is fixed, what is 90 exactly? I dont think it is a monetary unit, but instead a percentage but cant wrap my mind around it all yet.
Frank, it's important to remember that Fremont did not "lay off" 8,000 employees or pseudo-employees. It cancelled the contract it had with 8,000 independent mortgage brokers. This is, on one hand, "the beauty" of the non-retail business model. They aren't your employees, you don't have to lay them off. If enough other lenders cancel contracts with them, they simply become "failed small businesses."
Oh hell - there goes the 'birth death model' down the crapper too. How ever are they going to cook the 'jobs' book now?
So a Credit Guy stops by my desk yesterday and wants to hedge his book by buying SPX and Russell variance swaps. He's levered 4 to 1 and claims he's matched-funded most of his assets. Still, he's worried about a 10% hit to his equity if his loans, he buys syndicated paper from JPM and Citi and all the big boys, hiccup. In the process of explaining his biz he catches himself saying, "there is no credit risk in my portfolio." Sure there's not. Anyway, he's a little paranoid and wants to buy protection. The interesting thing is that he's only (only?) levered 4 to 1 on his balance sheet. He can go to 10 to 1 and still be A rated. But who knows how levered the equity he's running is?
Anyway, it's a house of cards. And he knows it. I did, however, ask him what happened after 9/11 to his biz. He said liquidity disappeared (duh). He also said all the dealers called around and decided collectively not to trade. Prices, he said, didn't really do much of anything because none of the dealers would deal.
The bottom line IMO is really nothing too new: most folks haven't lived through a real credit crunch. I'm talking a white-knuckle, are-we-ever-gonna-get-outta-this-mess mess. I think it was only Bear Stearns who refused to contribute to the LTCM unwind liquidity pool. Next time it might be worse.
I don't get the definition of S&D, is it an MI thing, a "defect" thing, or an EPD thing? Also, I don't get that bid that you guys discussed about title transfers. Who thinks that who has title, and who really has title, and why this misunderstanding?
Probert, this whole post started when CR asked me in an email what "scratch and dent" meant. I think he thought Fleck had made that one up, so I hastened to assure him that the term is real, as is nuclear waste. He did ask me if he could post my email, and I really ought to have taken the time to rewrite it, but I didn't. So the confusion is my fault.
We stole the term "scratch and dent" from the furniture stores. Just think of all those sales of "floor models" and "damaged in transit" stuff. My screwed-up MI was intended as an example of the kind of "innocent" (or at least, not "sinister") stuff that can end up in an S&D pool. There are literally hundreds and hundreds of reasons why a loan could be S&D. We've talked so much on this blog about "toxic" and fraudulent loans, I just didn't want anyone to get the idea that S&D is necessarily sinister.
About EPD: there are two kinds of EPD loans, basically. A small fraction of them--I would be surprised to discover more than 20% in any given pool of them--resulted from an unforseen problem that cropped up right after the loan closed, and got resolved so that the loan starts performing again and is comparable to any other loan with a late payment in its history. The reason why EPDs are such hot potatoes is that the rest of them, statistically speaking, involved either fraud or gross negligence in the underwriting, and somewhere between 45-50% end up in FC within a year of origination. So maybe 1 in 5 EPD loans could, eventually, be sold as "scratch & dent." The other 4 out of 5 or so are "nuclear waste."
Now, maybe Fleck's informant didn't use the term "S&D" very precisely--it isn't, of course, a very precise term to start with. But I would, personally, expect bids in the 90s somewhere for most S&D and the 80s somewhere for most NW. So if in fact S&D is getting bids in the 80s, either 1) more people are putting lipstick on a pig by claiming that their NW is really S&D or 2) loss severity is getting so bad, or the models are predicting it to get so bad, that the market in even mildly defective loans is tanking.
What I do not doubt for an instant is that there are boatloads of defective loans out there, mild to hideous, and that those who don't want to hold them are passing them down to those who cannot hold them.
I brought up title as an example of a problem that can be so bad, you can't even get a nuclear waste dealer to touch it.
Mortgage loans are priced the way they are because they are backed by more than just an IOU: they are secured by real estate, which the lender can take in foreclosure if the debt isn't paid. In order for this to work, the borrower has to have clear marketable title to the property, in order to pledge it as collateral against the loan. In order for the lender to take it back and then sell it to someone else, to recoup its loss, the courts or the sherriff has to be able to issue a deed conveying title from the old borrower to the lender. If the borrower did not have clear title to start with, the whole thing falls apart. You have, basically, an unsecured loan, or perhaps a loan that was supposed to be a first lien but that in reality is like third or fourth. Would you buy a 90% of value loan that was a third lien?
Lenders get title companies to issue title insurance, that basically guarantees that title is vested in the borrower and can pass lawfully to the lender if need be, and that the lender is in whatever lien position it intended to be in (first or second). If the title company screwed up, the lender can collect on that insurance policy. If the title company was part of a fraud scam, of course, the problem will have to go to criminal court. If the title policy clearly stated that there were problems with title, but the lender closed the loan anyway, that's the huge disaster for the lender.
Gotcha. Thanks a lot for the explanations. By the way, what was the slope that we're slipping on? Did foreclosures cause the secondary market to be worried? Was it the new joint agency lending guidelines leading to tighter standrads, leading, in turn, to Ownit etc' and then that worry slipped into the secondary market?
I think it's a lot of those things together--the "perfect storm" idea comes to mind. Remember that there were, actually, in the boom years, just as many people who couldn't afford their mortgages as there are now. But they had low-standard originators prepared to refi them, low market rate originators able to reduce their payments, and a hot market to sell into if they just wanted out. This "masks" the expected loan performance. Also, the models accepted even rising loss frequency numbers, because the expected loss severity was so low: that, in a nutshell, is why people buy nuclear waste. Loss severity is nearly exclusively a question of the existing home resale market (or the degree of inflation of the original apppraisal, the other side of the coin). So you set the LTV when you made the loan thinking that loss severity would be, say, 25%. Now, looking at the RE market, it's 30%. The loan is no more likely to result in a loss (frequency), but when it does it will hurt worse (severity). And if it is, actually, more likely than you thought, it's double-secret probation.
So the introduction of the guidelines and rising rates start to worsen the performance of the loans you already have, because they close the exits for marginal borrowers, as it were. They also indicate lower future volume of new loans which could offset losses. I think most secondary market participants have felt, or even still feel, that this is a manageable problem.
The existing home market, though, is (I think) introducing the panic level. In a way, it's like those appraisal comps we keep talking about--once a house is sold at a deep discount in your neighborhood, that becomes a "comp" that will impact the value of all the other houses. Banks have to use "observable market price" numbers in their calculations of what an impaired loan is worth, so once a really crappy bid is out there, it's a "comp" of sorts. So it's less a slippery slope than a feedback loop that can go real wicked.
And it's not that you're hearing secondary market participants making long-term bearish predictions about the housing market. You ask, why not hold the loans long enough to emerge on the other side? Either they don't believe their own happy talk--possible--or the groovy business plan they got won't let them wait that long--likely, in my view. You know what happens when you miss guidance for one or two quarters. Raise your hands, all you investors who are ready to wait it out with the lenders.
I'm often amused by homeowners' sense of value. I ask, "What is your home worth?"
"$600,000"
Reply, "Really? And how do you know that?"
To which is usually responded with "oh my appraisal says" or "my neighbor down the street sold for", or "my agent (brother-in-law, mailman, Suzie Orman, fill in the blank) says", etc.
I challenge them by saying, "Not quite. Your home is worth what a willing and ABLE buyer will give you for your home. If you try your best to sell and the best offer you get is, say, $450,000, well, that's the true value of your home."
I know most people understand this as basic commerce 101, but many fail to acknowledge it, and of course that could never happen to them. We'll see...
My simple man fundemental analysis of my local mkt:
Property sells in 1998 for $139k
Same exact property sells in 2005 for $400k.
Close to a triple in 7 yrs right?
I ask:
Did the population increase 3x in 7yrs? (No)
Did people's salaries increase 3x in 7 yrs? (No)
Is the location 3x better? (No)
Is the property somehow 3x better? (No)
Then why on god's green earth should this property be selling for 3x?
I will concede that the population of (newly) enabled BUYERS could have increased 3x or more, but sheesh...
Crude analysis I know, but just another illustration of how far outta whack the mkt (at least around these parts in CA) has gotten to fundamentals
And has anyone else been amused (annoyed) by all the MSM's soothing chant that "the housing mkt has bottomed". How nice of them to pronounce it so! Am I off or hasn't the historical downcycles in CA RE over the last 60 averaged 5-7yrs before it bottoms. And, thanks to that ridiculously brilliant chart that CR posted some time ago showing the divergence btwn incomes and housing prices, we are clearly in way uncharted waters. Seems to reason that the downcycle/correction oughtta be unprecedented as well...
Ooooo... [pinky to mouth] I'm having a Dr. Evil moment.
dryfly writes:
"The best part is Fleck's call is sorta like Nouriel's 4Q ZGDP call a few months ago... we won't have to wait too long to see if Fleck's buddy is in the know or a nobody."
Fleck's buddy was certainly in the know! Didn't have to wait too long for the subprime crisis to begin in earnest.
It's fun to re-visit this old thread over a year later. My favorite posts above were from Frank and Jim A, along with Tanta's many helpful posts.
(Yes, I sometimes wish that discussion topics could be carried on for months and even years...)
The DataQuick numbers CR posted a while ago indicated that the median age of CA loans in NOD status was 15 months. A lot of those were, of course, EPDs. Some, obviously, were not. When I said JPMorgan, as an example, is "not prepared to tolerate" certain problems, I meant simply that they don't look particularly willing to hold the bag if they can find a way to push the stuff somewhere else. But when you get down to trying to put back your nuclear waste, you're talking a longer lag time, if you will.
For the latest perspective on the derivatives front
http://www.eurobondonline.com/abx-HE-BBB-06-2.htm
CR & Tanta: thank you both. Very informative to the point of I'm not sure I'll sleep well tonight or until this sorts out.
Just for we unitiated a bit of explanation on EPD's: what they are, how they work and why screwing up is the unforgivable sin please ?
Is there any way of knowing the proportion and distribution of S&D's, etc. in the loan pool ? And I suppose speculating about the extent of the derivatives written is useless.
Maybe this'll be where we find out BB's CQ (that's cojones quotient).
Unemployment...Peak Oil...no jobs...recession...soup kitchens...1929...where are the jobs? ...housing crash...my income isn't growing...poverty...depression... Buddy, can you spare a dime?...The Grapes of Wrath...Tobacco Road...outsourcing...globalization...its not fair...Bangladesh...redistribute...where's my BMW?...where's mine...you owe me....I'm not accountable...you are responsible...it takes a village!
LOL!!!
Where was this unnamed, "staggeringly accurate" "friend" of Fleck's the past 4 years that he's been calling for the housing led nuclear winter?
Funny stuff!
So, Tanta, I take it that you are not a part of the feeding at the trough crowd?
Something about housing troughs and the old saying that hogs get slaughtered makes me laugh. I have a feeling that everybody feeding at the trough is about to be slaughtered. Here comes Farmer Credit.
I did a probate fairly recently that was weird. A lot of this stuff gets sent to me by title companies.
Basically what happened is they cut the check from the sale to a person who did not own the property. All along I had made sure in writing that the title company and the lender understood who owned the property legally-speaking, and they went and cut the check to someone who didn't own it.
Very weird. The title company called me up later and said "We are **** out of luck, aren't we?"
I have another one now which is a refi and the lender calls me up to see how things are going yesterday and I say "You do realize that your customer doesn't own the entire property, don't you?" and he says "She doesn't?"
Seems like standards are slipping as everyone rushes to get a deal through.
Scratch and Dent = Crash and Bur
The @#$# won't hit the fan until we see the 4 wk average new claims for unemployment hit 400k. Then the defaults will crush us. We can speculate about a depression all we want, but so far that talk is cheap and not worth the bits it is taking up in cyberspace. So don't worry,,,be happy.
Meanwhile, back at the sausage factory...
That being said, I get emails from a few banks literally encouraging me to commit fraud with their bank, and it's not the AE's, it comes straight from the bank. It's hilarious.
Overstating Income
I bet it won't be so funny later.
MORE QUARTERS AHEAD:
Powerhouse components of real GDP growth included consumption and net exports. Real consumption increased at a 4.4% (thank to all those "tapped-out" consumers) annual rate and net exports added 1.6 percentage points to the real GDP growth rate (the most in ten years). Exports are BODACIOUS.
The core consumption deflator (PCE ex-food and energy) rose at a 2.1% rate and gained 2.3% in 2006 (Q4/Q4). Nominal GDP (aggregate demand) grew at a 5% annual rate in Q4, was up 5.9% versus last year, and surged at a 6.1% rate over the prior two years (6.4% excluding housing).
Bottom Line: Today's robust GDP report shows that the economy remained strong in Q4 and strongly suggests robust growth ahead. We entered 2007 with considerable upward momentum. The weakness has been narrowly confined to housing, it never spread. Housing starts adding to GDP by 2H/07.
VAAAAAAAAAAAAAARRROOOOOOOOOOOOOOOMMM!
"I bet it won't be so funny later."
No, it won't, and there'll be a public record of it too--at brokeroutpost.
CR, unfortunately I've taken a show-me-the-money posture on anything that comes out of Fleck or Roubini's mouth from here on out. When I hear that a couple of their countless predictions of destruction finally pan out I might give them the time of day. I figure I might have to ignore both of them for a indefinitely from now on. They are cardholding members of what I think you referred to as the "doom industry". I'm suprised an even-tempered guy like you would include references to Fleck on your site.
OK, from my Alabama lay person perma bear perspective.
Once risk was under compensated and the capital flowed in. No problem a counter party will take care of problems. Now problems. Risk evaluation is king, at least in the RE loan area. For that matter risk evaluation is dictator killing all, sorta good and bad alike.
Once the idea of losing was secondary to getting some of that capital out the door into some kinda of investment. Now the idea that you might lose some of it starting to take hold. Greed and fear becomes fear and greed.
For those of who have dated and signed yearly financial disaster prophecy books dated from 1990 onward, the question is will this dry up all that liquidity?
Some say that the multiplier effect will happen where the losses will beget more losses, some say that the liquidity will just flow elsewhere like in 2001-2002 into RE.
It will be interesting.
as JPMorgan also impliesthat the Big Dogs have more cooties on the balance sheet than theyre prepared to tolerate. Looks like total war to me.
Tanta: as always thanks for your point of view,
Vader, if you're a lay person with a perma bear perspective that owns financial disaster books from 1990, you might consider spending your time with a more positive hobby. It sounds like you've been asking the same question for about 15 years, waiting for godot. I don't think macroeconomics or the financial markets are going to tell you the answer. You might consider seeking a therapist. I'm not trying to make fun.
Let's see, Fleckenstien is reduced to conjuring up "staggeringly accurate" imaginary "friends" to support his collapsed rep and the anony blogger here makes a tortured reach for JPM's imprimatur in support of a, ahem, imaginative point.
That's a great forward looking bullish indicator.
charts, I posted the Fleck excerpt to put Tanta's comments in perspective (since she was responding to the excerpt). As usual, Tanta provides some excellent insights - and I hope you focus on her comments.
Best to all.
"I'm suprised an even-tempered guy like you would include references to Fleck on your site."
That's a good one!
You're joking, right?
Fleckenstein is a GIANT amongst some that are worshipped around here.
Well I'll give the bears this: My REIT position has gotta do some correctin' - up over 30% per year for EACH of the last 4 years.
Up over 8.5% YEAR TO DATE, as in the last 31 DAYS.
That's just not right. :>)
charts
Well the happiest I've been was when a stock I owned went from $15 to .015.
I bought a bunch, and it went to $23.40. Now I am not happy.
Healthsouth Corp if you are interested. Lots of local color involved.
As to depression, woe and what not. My mom just died at 94, with that attitude, and out lived her happy contemporaries.
In any case, be aware of my hyperbolie, the only way I would buy a financial disaster book is at the bargin table and then it is rather silly to buy a book of financial disaster for say 2005 in 2007. Most of those authors I find silly.
However I must admit to my limitations of imagination as to what the vast sums of capital washing over the markets would do.
Wow. I mention Fleck, and it brings out a lot of anger. What's that all about? The same thing happens when I mention Kudlow.
Hey all, they're just people. I've pointed out several times Fleck is a permabear - and Kudlow has become a permabull since getting his head handed to him when he predicted a severe recession in Dec '94.
That doesn't mean you shouldn't read anything they write. Just keep their perspectives in mind.
This piece is about Tanta's comment - not Fleck's. I thought they were insightful, and she agreed to let me post them.
Best to all.
Fleck = Hillary. Kudlow = Cheney. Source credibility is important. Sorry, CR, there's no way around this. Nonetheless, I found Tanta's comments very instructive -- and, of course, entertaining.
Hey CR - I'm with 4shzl... and the more the sockpuppet howls the better it looks.
The best part is Fleck's call is sorta like Nouriel's 4Q ZGDP call a few months ago... we won't have to wait too long to see if Fleck's buddy is in the know or a nobody.
And Tanta's explanation gave us a Cliff Notes primer on a script that is way too long for us to read... thanks again tanta.
If the S&Ds aren't selling at anything close to par... and there are a lot of them... then we see the first real tangible evidence of an 'RE sector credit crunch'...
On the other hand if nothing happens... the stuff keeps selling... then the bulls can & will howl some more.
This isn't like calling a recession 6-8 quarters into the future, a sometimes 'rolling future'... Flecks piece will has a short term acid test quality to it. It either happens or it doesn't.
Personally - I'd love to see tanta weigh in on some more on her informed guestimate of how this would look to us on the outside... with time line. A what to watch for from our outsider position & where the stench would come from... if it ever did.
Now that would be fun.
I love reading Fleck in my cubicle or while I'm waiting for someone to get their car out of my space at home.
On the other hand if nothing happens... the stuff keeps selling... then the bulls can & will howl some more.
Yep, the story of the last few years. Nothing happened and the stuff kept selling.
I wonder how many of the anti-Fleck posters here have Jim Glassman's "Dow 36,000" on their nightstand...with dog-eared pages which they constantly refer to.
I read on marketwatch (I think) where some advisor recommended to a client that they should put their extra money into investments rather than paying off the mortgage...since you can expect a 10% return annually. I remember in '99 folks would put their HELOC into dot com stocks too.
uber-mortgage guru is right! i didnt understand a lick of that. wiki here i come....
I wonder how many of the anti-Fleck posters here have Jim Glassman's "Dow 36,000" on their nightstand...with dog-eared pages which they constantly refer to.
Probably one copy... because all those posters are the same fricking sockpuppet.
selling S&D's interesting read but not news.
http://www.empmtg.com/marketing_material/Selling_sd_loans0604.pdf
Hayduke I remember that too and like you I'm still trying to deal with the post traumatic stress symptoms.
Vader - I wonder if it is real this time? LOL. Not like we've never asked THAT question before.
And sorry to hear about your mom - I lost my father this last fall & he was similar... a great roll model to us 'youngsters'.
He was 'optimistic' in that he knew from personal experience that adversity could be overcome... because he'd had to do it so many times... but 'pessimistic' in that he knew adversity was always out there regardless and that each time it sucked as bad as the last time & was worth avoiding if at all possible.
Novel concept in today's biz world.
Thanks, dry.
For a lot of reasons, I am a half-empty cracked-glass half-empty type person. But I too have succeeded in overcoming adversity.
Actally I am a bit optimistic about the world situation, after a couple hundred years of captialism being exclusivly European and American, it is becoming Eastern. Things once monopolized by the West are available to all. Big changes that happen once in a historical period are upon us.
Now if I can only survive nicely the next few years.
Hey, I like that! Permabull = Sockpuppet.
Sockpuppet really nails the mind-set, doesn't it?
I never bought Glassman and consider myself Bearish. Glassman is as close to a snake oil salesmen as one gets in my opinion. But so seems Fleck and the other cast of Doomsayers. It looks as though Fleck and Roubini types prey on people's fears whether they're conscious of it or not. I believe they speak to people that have issues with social adjustment, dealing with authority and/or trusting others. The recalcitrant types that always want "the good old days back" are prime targets for Fleck and Roubini who constantly search for novel economic developments to trash as dangerous.
Plus Fleck could try stepping out of 1982 and get rid of the Rick Flair haircut.
If you want to know how bad the mortgage market really is listen to what Mr. Mozilo of Countrywide said yesterday at an industry conference.
+++++++++++++++++++++++
Another issue for the industry is that there are too many mortgage lenders. When permissive lending and skyrocketing home values lured home buyers to the mortgage market, lenders jumped in to serve the demand. Now, with too many players in too small a space, Mozilo said as many as 40 or 50 mortgage lenders a day are going out of business or putting themselves up for sale.
+++++++++++++++++++
That's an amazing number. Today's graveyard was Mandalay Mortgage, Concorde Acceptance and Deep Green Financial.
The reason they are going out of business is because the loans are coming back.
It is rumored on the Yahoo CFC site that Fremont and or Argent will be done by the end of this week.
Look at Fremont, they are the #5 lender in the subprime market. They fired 8,000 agents this week. Their stock is trading below book value and looks very weak.
I am apoplectic that these stocks still levitate. Look at this article from the WSJ. Banks Move Earlier To Curb Foreclosures - WSJ.com
The lenders are doing modifications and anything they can to keep them from going to non-performing and hide them from the auditors and regulators.
JP Morgan has pulled back on its warehouse line lending.
Everyone knows these loans are bad yet the stock market ignores it.
I track REO's. The bank list's are up over 20% this month alone. These are properties that started default 5 months ago. Here is Wells Fargo list
404 Not Found
This is isn't about Fleck, Roubini, CR or any other doomsdayer. No intelligent person on this board would make many of the loans that were made. And you didn't need to go to credit school to figure it out.
By April of this year the damage will be overwhelming.The slope of the curve is increasing parabolically. It is very real. The street is not listening to guys like Mozilo or Hovnanian on how bad it really is.
Yes, that guy Fleckenwtein is always all wet. Remember back before the turn of the century when he kept on predicting the NASDAQ was going to crash? But as we all know, it just kept going up, and up, and up ...
Actually, he is all wet in my opinion because if he were actually advising people he would have devised way to profit on the run up and run down with an exit strategy and risk management system in place. If he isn't going to do that then he needs to tell me exactly when something is going to happen, and we all know he can't do that because he's not prescient. Simply saying something is going to crash sometime as it whatever preceeds the crash goes on for years doesn't cut it in my book. It has no practical value. He's a financial gossip columnist with a bearish bent.
In markets getting the right direction is easy (eventually the market will go up, and eventually it will go down). What is difficult is getting the timing correct. Oct 2007 anyone?
Perhaps I can clarify one thing from my perspective: my "shoot the wounded" comment referred to the relationship between lender/investor/security issuers, on the one hand, and correspondent/brokers/producers, on the other. Whatever Fleck is saying, I am not saying that as goes the mortgage business, so goes the larger economy. I do, however, think it's relevant.
Anyone who wants to consider that we are seeing normal "herd-thinning" is free to do so. Anyone who likes that metaphor is free to suggest that it means more prey for the rest of the remaining herd, and is therefore a sign of "health." I, personally, think those Business of the Serengeti metaphors often suggest misleading conclusions, even while I most heartily agree that we've got an "overcapacity" problem in the mortgage business. If I had to choose to solve "overcapacity" by eliminating excess producers or by providing monetary incentives for the industry to make up more "killer apps" for people who really don't need more credit, I would certainly choose the former. The current situation may produce a desired outcome, with some other unintended consequences, but I don't think it's happening because it was conceived that rationally and public-spiritedly.
The point I thought I was making is that it is unusual to see this many lenders forcing loans back through the chain when they know that doing so will put their correspondent out of business. Their correspondents aren't, for the most part, "competitors." They are more properly understood as "suppliers." Big nationwide lender/aggregators have themselves reduced or eliminated their own retail lending operations in favor of wholesale and correspondent operations. They are taking actions that mean not only the disappearance of a steady source of supply, but also the disappearance of whatever remaining "warranties" (or indemnities) those counterparties would have been expected to supply for any loans that have not (or not yet) been repurchased. It's possible that the lenders are just nuts. I think it is more plausible to assume that they know something about how radioactive these repurchased loans are, and how relatively unattractive future investment in new loans is, that makes "total war" with one's suppliers seem rational. I am making this point with my Main Street hat on, not my Wall Street hat. Y'all can argue Wall Street.
Frank, it's important to remember that Fremont did not "lay off" 8,000 employees or pseudo-employees. It cancelled the contract it had with 8,000 independent mortgage brokers. This is, on one hand, "the beauty" of the non-retail business model. They aren't your employees, you don't have to lay them off. If enough other lenders cancel contracts with them, they simply become "failed small businesses."
I do not, for a moment, believe that Fremont was getting fraudulent or other toxic loans from all 8,000. I certainly hope that the suppliers of toxicity were in the 8,000, for Fremont's sake. While I have no inside dope on Fremont, I would bet my Swingline that it, like a whole lot of other lenders, had hugely inflated "approved broker" lists. It is not unusual for Account Executive compensation to include a portion derived from the number of accounts you get approved, regardless (or nearly so) of the production you get out of those accounts. Further, there is the "PowerPoint Effect"--you get to tell our betters on Wall Street all about this huge supply chain you've put together. A large percentage--I would guess the majority--of those brokers probably sent in a loan a year.
Is that good news or bad news? My own view is that anyone with a large number of approved accounts that send only a tiny bit of business, and that has a huge EPD problem, has been functioning in some fashion as lender of last resort. That's the bad news.
If Fremont has got religion and cut all those accounts loose because it wants to do ongoing business with reputable brokers who see it as a first resort, then bully for Fremont. Time will tell, if there is enough time. That is what is worrying me.
The final point I'm focussing on is the question of the "pending" repurchases. As I said, I don't know how many of those are out there. I noticed when I looked at NDE's footnotes that they are managing some of their held-for-sale asset problems by invoking rep-and-warranty repurchase clauses. This disclosure was made in the context of a discussion of reserve calculations. Technically, counting on the originator to take a problem back is not a "loss reserve," and I'm not accusing NDE of that. But I would bet that NDE, like every other wholesaler on the planet, included repurchase/indemnification in its set of assumptions that went into its "historical performance" adjustments to its loss reserves. That's why those contracts have those covenants to start with.
The tail-chasing comes in when you assume that those contractual remedies are worth something precisely because they are, historically, not invoked very often. It's just like margin calls in that respect.
In any case, the EPD phenomenon is "first wave" because, well, it takes about 90 days for those to become obvious. The "second wave" is the stuff that held out a bit longer. The DataQuick numbers CR posted a while ago indicated that the median age of CA loans in NOD status was 15 months. A lot of those were, of course, EPDs. Some, obviously, were not. When I said JPMorgan, as an example, is "not prepared to tolerate" certain problems, I meant simply that they don't look particularly willing to hold the bag if they can find a way to push the stuff somewhere else. But when you get down to trying to put back your nuclear waste, you're talking a longer lag time, if you will.
It's possible Fleck's informant is exaggerating the current bids. I no longer have access to the sort of information that would prove or disprove that. We all have access to some data about loss severity trends, though, and it tells me that nuclear waste dealers have to drop their bids. They don't buy that stuff as a public service.
One more thing: I would like those who love to talk about "risk dispersion" as a positive feature of the current environment to assure me that they do not, in fact, mean "risk elimination." If you think risk has been eliminated, I am not the naif in this conversation. If you think it has been "dispersed," and that this is a good thing, I assume you mean that it has been broken up into smaller chunks and spread out among risk-takers who can absorb their small part in whatever losses may appear.
The phenomenon of shoving it back onto the weakest part of the chain is not exactly inconsistent with the idea that "risk dispersion" will save us from massive systemic problems among lenders, particularly of the depository kind. However, I still have to be convinced that all those high-falutin' it-takes-a-physicist models may not, in the actual playing of the game, turn out to look more like musical chairs. This, we have seen before. And we lived through it. I just want, then, to be told how it's different this time.
BoA:
"Speaking about the mortgage business at a Citigroup conference on Wednesday, Mr Lewis said: We have said, unequivocally, that our strategy is one of organic growth...We have said were not particularly interested in the wholesale and correspondent business. Finally, weve said we like the product but dont like the business.
We like the sausage, we just hate being on the shop floor when it happens. 'Kay.
FT.com / Financials - BofA to pursue ‘organic’ growth strategy
In my little know very little mind, I think that the mortgage market will unwind more quickly than many expect because loan risk basicly wen hyperbolic in 2006. The Insanely risky class of '06 with lots of EPDs will join together with the merely risky class reset driven defaults from '05 and mean that in '07 we'll have a model bending default rate. I simply don't think that everyone has properly hedged aginst the default rate we'll see, and even those who have will be reminded of the words "counterparty default"
The the past sure does rhyme, and I think that 2007s "It's only the subprime lenders being thinned from the herd" rhymes wirather nicely with 1985s "It's only STATE charterd thrifts in Ohio and Maryland."
Vader - did you miss the 5 for one reverse split in Healthsouth; split adjusted it is still in the $4-5 range.
If I have enough cash in the bank to repay my mortgage, should I just stop paying it in an effort to persuade the lender to sell it to me at a discount?
Rational Actor, I made a quite fanciful comment a while back on one of the homebuilder threads regarding the joys of a lender having nothing but high-credit quality borrowers left (the metaphor of that day was the "744 FICO"). You're making the same point in a slightly different way. Usually, mere homeowners don't have that kind of leverage--it's the commercial credits who get the "discounts" by threatening to default. But hang in there, and you never know--if there's enough REO flooding your market, and you don't care about potential high cost of future credit after it all does wind down, then by all means call the lender and ask for that discount.
RA: If your lender is trapped like mine in a relationship where they're lending you money at less than 5% for the next decade, it may be advantageous for them to buy it back from you at a discount if short term rates skyrocket in a few years. Good luck finding somebody able to make that deal with you though.
Tanta, there is always a bid- for instance I will buy just about any paper available in Arizona for 15- not pennies on the dollar, but mills;-}
But then I am married to a lawyer and can get discount legal services- well actually it would have been cheaper- never mind.
That is truly beating the former highflyers with a stick. Nothing like debt defying feats!! Followed by the bottom. Oh well, some of us are getting great amusement out of this- the smart one were the ones who sold thier highflying sub operations last year!!!
Tanta,
I don't know if it is ironic or poetic justice, but who would have thunk that the lenders would be "evicted" (going out of business) concomitantly with the borrowers. It looks like a race to the bottom.
Take alook at Deep Green Finanical (relatively small - $1 Billion). They were not a subprime lender. They did HELOC's at 50 basis points below prime on "Stated Income".
And we haven't even seen the HELOC monster yet.
Lastly, it nice to see that our government is just figuring it out.
Lawmakers review untraditional loans - Los Angeles Times
This would definitely put the last nail in the coffin for not only marginal lenders but marginal borrrowers as well.
At a local level, I overheard some banking officials quietly expressing the possible prospects of citywide re-assessments/re-evals...Downwards.
Didn't that Forward Air Controller in Apocaplypse Now say something to the effect of..."Better get your Folks BACK..This is going to be a BIG ONE!" before the the F-105's dropped the Naplam ?
Tanta and CR, Tanta mentioned a few posts back that she didn't have the contacts to confirm that the S&D and nuclear bids were working out at in the 80's as Fleckstein's source had mentioned and that the players we engaging in scorched earth business tactics in getting rid of the problem loans. Do either of you have any other data that might confirm or debunk this statement? I ask this mainly because if this happens as Tanta suggests it could be the start of some serious ugliness (or "total war" as she stated) in the credit industry and probably a harbinger of a nasty consumer and commercial credit crunch. That being the case it would be good to have additional confirmation of the rumor.
Thanks.
Wow Tanta,
You really know your stuff! Thanks for making it entertaining too.
Nigel
Anyone know what the comp price on the ABX index means? I mean if the current price is "90" and the coupon is fixed, what is 90 exactly? I dont think it is a monetary unit, but instead a percentage but cant wrap my mind around it all yet.
I've wondered the same thing... The logical thought is 90 means 90% of face value.
Whatever it is, the Y2007 subprime debt is about to crack 90 as well.
Tanta -- thanks very much for your cheerful contribution to my education in mortgage matters. CR -- great thread -- thanks.
Tanta
You'll love this
Overstating Income
Frank, it's important to remember that Fremont did not "lay off" 8,000 employees or pseudo-employees. It cancelled the contract it had with 8,000 independent mortgage brokers. This is, on one hand, "the beauty" of the non-retail business model. They aren't your employees, you don't have to lay them off. If enough other lenders cancel contracts with them, they simply become "failed small businesses."
Oh hell - there goes the 'birth death model' down the crapper too. How ever are they going to cook the 'jobs' book now?
So a Credit Guy stops by my desk yesterday and wants to hedge his book by buying SPX and Russell variance swaps. He's levered 4 to 1 and claims he's matched-funded most of his assets. Still, he's worried about a 10% hit to his equity if his loans, he buys syndicated paper from JPM and Citi and all the big boys, hiccup. In the process of explaining his biz he catches himself saying, "there is no credit risk in my portfolio." Sure there's not. Anyway, he's a little paranoid and wants to buy protection. The interesting thing is that he's only (only?) levered 4 to 1 on his balance sheet. He can go to 10 to 1 and still be A rated. But who knows how levered the equity he's running is?
Anyway, it's a house of cards. And he knows it. I did, however, ask him what happened after 9/11 to his biz. He said liquidity disappeared (duh). He also said all the dealers called around and decided collectively not to trade. Prices, he said, didn't really do much of anything because none of the dealers would deal.
The bottom line IMO is really nothing too new: most folks haven't lived through a real credit crunch. I'm talking a white-knuckle, are-we-ever-gonna-get-outta-this-mess mess. I think it was only Bear Stearns who refused to contribute to the LTCM unwind liquidity pool. Next time it might be worse.
"That's an amazing number. Today's graveyard was Mandalay Mortgage, Concorde Acceptance and Deep Green Financial.
The reason they are going out of business is because the loans are coming back."
That is not true in all cases and is not true in the cases listed above.
That is not true in all cases and is not true in the cases listed above.
Then why are they going out? And don't parrot the null set answer... 'cause they ain't makin' mo-nay. Why aren't they making money? What spooked them?
Tanta,
I don't get the definition of S&D, is it an MI thing, a "defect" thing, or an EPD thing? Also, I don't get that bid that you guys discussed about title transfers. Who thinks that who has title, and who really has title, and why this misunderstanding?
The rest I understand.
Probert, this whole post started when CR asked me in an email what "scratch and dent" meant. I think he thought Fleck had made that one up, so I hastened to assure him that the term is real, as is nuclear waste. He did ask me if he could post my email, and I really ought to have taken the time to rewrite it, but I didn't. So the confusion is my fault.
We stole the term "scratch and dent" from the furniture stores. Just think of all those sales of "floor models" and "damaged in transit" stuff. My screwed-up MI was intended as an example of the kind of "innocent" (or at least, not "sinister") stuff that can end up in an S&D pool. There are literally hundreds and hundreds of reasons why a loan could be S&D. We've talked so much on this blog about "toxic" and fraudulent loans, I just didn't want anyone to get the idea that S&D is necessarily sinister.
About EPD: there are two kinds of EPD loans, basically. A small fraction of them--I would be surprised to discover more than 20% in any given pool of them--resulted from an unforseen problem that cropped up right after the loan closed, and got resolved so that the loan starts performing again and is comparable to any other loan with a late payment in its history. The reason why EPDs are such hot potatoes is that the rest of them, statistically speaking, involved either fraud or gross negligence in the underwriting, and somewhere between 45-50% end up in FC within a year of origination. So maybe 1 in 5 EPD loans could, eventually, be sold as "scratch & dent." The other 4 out of 5 or so are "nuclear waste."
Now, maybe Fleck's informant didn't use the term "S&D" very precisely--it isn't, of course, a very precise term to start with. But I would, personally, expect bids in the 90s somewhere for most S&D and the 80s somewhere for most NW. So if in fact S&D is getting bids in the 80s, either 1) more people are putting lipstick on a pig by claiming that their NW is really S&D or 2) loss severity is getting so bad, or the models are predicting it to get so bad, that the market in even mildly defective loans is tanking.
What I do not doubt for an instant is that there are boatloads of defective loans out there, mild to hideous, and that those who don't want to hold them are passing them down to those who cannot hold them.
I brought up title as an example of a problem that can be so bad, you can't even get a nuclear waste dealer to touch it.
Mortgage loans are priced the way they are because they are backed by more than just an IOU: they are secured by real estate, which the lender can take in foreclosure if the debt isn't paid. In order for this to work, the borrower has to have clear marketable title to the property, in order to pledge it as collateral against the loan. In order for the lender to take it back and then sell it to someone else, to recoup its loss, the courts or the sherriff has to be able to issue a deed conveying title from the old borrower to the lender. If the borrower did not have clear title to start with, the whole thing falls apart. You have, basically, an unsecured loan, or perhaps a loan that was supposed to be a first lien but that in reality is like third or fourth. Would you buy a 90% of value loan that was a third lien?
Lenders get title companies to issue title insurance, that basically guarantees that title is vested in the borrower and can pass lawfully to the lender if need be, and that the lender is in whatever lien position it intended to be in (first or second). If the title company screwed up, the lender can collect on that insurance policy. If the title company was part of a fraud scam, of course, the problem will have to go to criminal court. If the title policy clearly stated that there were problems with title, but the lender closed the loan anyway, that's the huge disaster for the lender.
Gotcha. Thanks a lot for the explanations. By the way, what was the slope that we're slipping on? Did foreclosures cause the secondary market to be worried? Was it the new joint agency lending guidelines leading to tighter standrads, leading, in turn, to Ownit etc' and then that worry slipped into the secondary market?
I think it's a lot of those things together--the "perfect storm" idea comes to mind. Remember that there were, actually, in the boom years, just as many people who couldn't afford their mortgages as there are now. But they had low-standard originators prepared to refi them, low market rate originators able to reduce their payments, and a hot market to sell into if they just wanted out. This "masks" the expected loan performance. Also, the models accepted even rising loss frequency numbers, because the expected loss severity was so low: that, in a nutshell, is why people buy nuclear waste. Loss severity is nearly exclusively a question of the existing home resale market (or the degree of inflation of the original apppraisal, the other side of the coin). So you set the LTV when you made the loan thinking that loss severity would be, say, 25%. Now, looking at the RE market, it's 30%. The loan is no more likely to result in a loss (frequency), but when it does it will hurt worse (severity). And if it is, actually, more likely than you thought, it's double-secret probation.
So the introduction of the guidelines and rising rates start to worsen the performance of the loans you already have, because they close the exits for marginal borrowers, as it were. They also indicate lower future volume of new loans which could offset losses. I think most secondary market participants have felt, or even still feel, that this is a manageable problem.
The existing home market, though, is (I think) introducing the panic level. In a way, it's like those appraisal comps we keep talking about--once a house is sold at a deep discount in your neighborhood, that becomes a "comp" that will impact the value of all the other houses. Banks have to use "observable market price" numbers in their calculations of what an impaired loan is worth, so once a really crappy bid is out there, it's a "comp" of sorts. So it's less a slippery slope than a feedback loop that can go real wicked.
And it's not that you're hearing secondary market participants making long-term bearish predictions about the housing market. You ask, why not hold the loans long enough to emerge on the other side? Either they don't believe their own happy talk--possible--or the groovy business plan they got won't let them wait that long--likely, in my view. You know what happens when you miss guidance for one or two quarters. Raise your hands, all you investors who are ready to wait it out with the lenders.
"...those who don't want to hold them are passing them down to those who cannot hold them."
Brilliant! Absolutely brilliant!
I would like to christen this Tanta Corollary #5 to billygoat observation #10:
"too many people buying too many things they don't need with money they don't have"
or
"those who shouldn't have bought unable to pass down to those who can't"
or maybe everyone has
"done so much for so long with so little that now we can just about do anything for nothing"
... or something like that
Tanta... you make the boys here swoon... I gotta Tanta crush :_)
My lil' riff on value:
I'm often amused by homeowners' sense of value. I ask, "What is your home worth?"
"$600,000"
Reply, "Really? And how do you know that?"
To which is usually responded with "oh my appraisal says" or "my neighbor down the street sold for", or "my agent (brother-in-law, mailman, Suzie Orman, fill in the blank) says", etc.
I challenge them by saying, "Not quite. Your home is worth what a willing and ABLE buyer will give you for your home. If you try your best to sell and the best offer you get is, say, $450,000, well, that's the true value of your home."
I know most people understand this as basic commerce 101, but many fail to acknowledge it, and of course that could never happen to them. We'll see...
My simple man fundemental analysis of my local mkt:
Close to a triple in 7 yrs right?
I ask:
Then why on god's green earth should this property be selling for 3x?
I will concede that the population of (newly) enabled BUYERS could have increased 3x or more, but sheesh...
Crude analysis I know, but just another illustration of how far outta whack the mkt (at least around these parts in CA) has gotten to fundamentals
And has anyone else been amused (annoyed) by all the MSM's soothing chant that "the housing mkt has bottomed". How nice of them to pronounce it so! Am I off or hasn't the historical downcycles in CA RE over the last 60 averaged 5-7yrs before it bottoms. And, thanks to that ridiculously brilliant chart that CR posted some time ago showing the divergence btwn incomes and housing prices, we are clearly in way uncharted waters. Seems to reason that the downcycle/correction oughtta be unprecedented as well...
Ooooo... [pinky to mouth] I'm having a Dr. Evil moment.
Great lesson folks.
I clicked over to here from a PeakOil thread.
Fascinating to hear about banking issues from insiders.
I'm really impressed at the writing level.
dryfly writes:
"The best part is Fleck's call is sorta like Nouriel's 4Q ZGDP call a few months ago... we won't have to wait too long to see if Fleck's buddy is in the know or a nobody."
Fleck's buddy was certainly in the know! Didn't have to wait too long for the subprime crisis to begin in earnest.
It's fun to re-visit this old thread over a year later. My favorite posts above were from Frank and Jim A, along with Tanta's many helpful posts.
(Yes, I sometimes wish that discussion topics could be carried on for months and even years...)
The DataQuick numbers CR posted a while ago indicated that the median age of CA loans in NOD status was 15 months. A lot of those were, of course, EPDs. Some, obviously, were not. When I said JPMorgan, as an example, is "not prepared to tolerate" certain problems, I meant simply that they don't look particularly willing to hold the bag if they can find a way to push the stuff somewhere else. But when you get down to trying to put back your nuclear waste, you're talking a longer lag time, if you will.