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Housing Bubble Bursting?

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Will turbulence in America's subprime mortgage market spread?

http://www.economist.com/finance/displaystory.cfm?story_id=8829612
LAST November the American publisher of those bright-yellow books that claim to help “dummies” master everything from trigonometry to anger management released “Flipping Houses for Dummies”. It promised to teach would-be property moguls how to “lay the foundation for successful flipping and bring home the bucks”. Four months later, it is the seemingly indomitable housing market that has flipped. One of its main engines of growth, the subprime-mortgage industry, is in free-fall. Where it lands is anyone's guess
Lenders, intent on keeping fees flowing as the housing market began to cool in 2004, pulled an ever wider swathe of Main Street America into the housing market. They lowered underwriting standards and offered a bevy of “affordability” products like extra-long-term or “interest-only” mortgages (in which principal payments are deferred for a time) and loans with low teaser interest rates, known as hybrid mortgages, that balloon after a few years. Indeed, most subprime mortgages written in the past three years were “risk-layered”, using a combination of various inducements to make a mortgage more attractive to borrowers but also much riskier.
The “FICO” credit scores on which mortgage lending often relies did not capture this risk layering. Scores were probably inflated. David Hendler of CreditSights, a research firm, says around 40% of a FICO score is based on repayment history—but these records were The effects of a dramatic slowdown, or credit crunch, in the subprime and the Alt A market could spread. The stock of unsold homes would remain unsold longer, crimping house prices. Consumer spending might slow. Investors might shy away from securities backed by prime mortgages and other assets, not just subprime ones, pulling liquidity out of the market..
 
New Century bankruptcy likely, Merrill says

http://www.marketwatch.com/news/story/new-century-bankruptcy-likely-merrill/story.aspx?guid=%7B047B9F7F%2D8599%2D4324%2D8CB4%2DBBA5DEDD7CE1%7D

New Century is a big subprime lender. Countrywide was also big in the less than prime lending. Fremont General was big in subprime. With a number of the subprime lenders out of business or severely cutting their exposure to the subprime lending (along with FED policy shift in new standards for ARMs), this end of the real estate market is in deep, deep trouble without the loose standards for making loans and lenders willing to make those loans.

Demand for real estate is falling and has fallen. The source of demand (easy credit) and buyers (speculators, investors, second home, subprime) are removed or being eliminated. That is reflected by the declining sales volume, declining sales prices, and increasing vacant homes. Now add to that the rising short sales and foreclosures. Investors in real estate mortgages are demanding higher yields and a reluctance to accept subprime, which will affect demand for real estate.

I won't say a bubble was formed or that a bubble is being deflated. I will say that real estate has lost its shining and its ability to attract more buyers even with concessions, price reductions and buy downs. The bigger fool is getting hard to find.

Let us all hope that the economy does not go negative with a job loss recession. If it does, we just may call today the good times. :ph34r:
 
Let us all hope that the economy does not go negative with a job loss recession. If it does, we just may call today the good times. :ph34r:

Ahhhh yes....that last wild card that nobody likes to think about.

Does anyone know how many jobs were created over the past 5 years that have been a direct result of the real estate boom, and how many of those jobs are going to vanish?

There aren't too many greener pastures left to run to in the real estate biz.
 
Subprime Mortgage Bonds Extend Drop as Dealers Cut CDO Funding

http://www.bloomberg.com/apps/news?pid=20601009&sid=aQOqLN4_DTV4&refer=bond

Here comes the sudden collapse of value for subprime paper and the contagion will spread as holders of CDOs take a hit. If that is large enough, hedge funds, pension plans, whoever holds them, will take losses. As losses grow, panic may spread as they dump their distressed holdings along with more liquid assets to raise cash to cover losses and redemptions.

March 9 (Bloomberg) -- Subprime mortgage bonds are falling in part because Wall Street dealers are lending less money to managers of collateralized debt obligations that buy the securities, according to investors.


"The dealers were caught off guard by the speed of the collapse and were still trying to aggressively' encourage the creation of new CDOs before pulling back", said Peter Schendel, who helps manage $100 million in asset- and mortgage-backed bonds at hedge fund Good Hill Partners LP in Westport, Connecticut.


The drop in demand caused yields on subprime mortgage bonds with the lowest investment-grade ratings to double to 8 percentage points over benchmark rates last month, according to New York-based Lehman Brothers Holdings Inc. The rates consumers with bad credit pay on home loans fluctuate with the yield that bond investors demand to own securities backed by the mortgages.

About $173 billion of CDOs backed mainly by U.S. subprime mortgage bonds and related derivatives were created last year, according to JPMorgan.
 
Subprime mortgage woes may be spreading

http://www.marketwatch.com/news/story/subprime-mortgage-problems-may-spread/story.aspx?guid=%7B664D15E5%2D33EA%2D41AB%2DBAF7%2D116BBF929245%7D

SAN FRANCISCO (MarketWatch) - Problems in the subprime mortgage business may be spreading to other parts of the home loan market.

Losses are creeping up on so-called Alt-A loans, which are considered less risky than subprime mortgages, but may have lower credit quality than "prime" loans.

That's sparked concern among investors in companies such as IndyMac Bancorp, Impac Mortgage Holdings, Countrywide Financial, and even General Motors.

The popularity of Alt-A mortgages exploded in recent years. A record $400 billion of these loans were originated in 2006. They accounted for 13.4% of all mortgages offered last year, up from 2.1% in 2003, according to industry publisher Inside Mortgage Finance.

More than 80% of Alt-A mortgages that were securitized in 2006 were low-documentation, stated-income loans, according to Inside Mortgage Finance. That's up from 68% in 2005.

In California, which has seen some of the biggest gains in home prices this decade, 86% of all mortgages offered in the fourth quarter were low-documentation loans.

IndyMac, the largest Alt-A mortgage lender, has slumped 32% so far this year. Impac, a smaller rival, is down almost 40%.

More than three quarters of the loans IndyMac originated last year were Alt-A mortgages.
 
Fed is beginning to feel the pain

http://www.bloomberg.com/apps/news?pid=20601087&sid=ae6vaLjTNitA&refer=home

It must be really bad if the Fed begins to feel the pain.
The nation's banks are just beginning to feel the pain of defaults on risky mortgages they made at low introductory rates when housing prices were soaring, U.S. Federal Reserve Governor Susan Bies said.
Bies, who has been the Fed's top banking policy official in her tenure at the U.S. central bank, said today banks are likely to see more missed payments and foreclosures as consumers with weak credit histories begin to face higher monthly mortgage payments.
``What's happening is the front end of this wave of teaser- rate loans that are coming into full pricing,'' Bies said at a risk-management forum in Charlotte, North Carolina. ``So what we're seeing in this narrow segment is the beginning of the wave. This is not the end, this is the beginning
 
Rising Subprime Mortgage Defaults Add to Unsold Homes Inventory

http://www.bloomberg.com/apps/news?pid=20601206&sid=aC9LdDcv4.Wc&refer=realestate

``We estimate that the effect of looser lending standards could translate into another 533,000 homes coming onto the market as borrowers default -- an unwelcome phenomenon given the existing supply surplus,'' Sarah Rowin and Frank Lee of bond research firm CreditSights wrote in a March 1 report.


The glut of homes on the market has led potential buyers to hold off purchases on expectations that prices will fall. Tighter lending standards may also hurt the housing recovery as people who could previously qualify for a mortgage can't get one now.
 
Subprime Mortgage Meltdown

http://www.twincities.com/mld/twincities/16864220.htm

A story of a mid-west subprime mortgage lender forced out of business because of mortgage buyback demands and causes for early defaults.

Like Maribella, many were hit hard by a wave of investors, such as investment banks, hedge funds and pension funds, asking the companies to buy back bad loans that defaulted almost as soon as they were made. So far, the turmoil largely has been confined to subprime lenders, although defaults appear to be rising in so-called Alt-A mortgages, loans a notch above subprime but still below prime.

The subprime industry barreled into action during the housing boom, offering a slew of mortgage products including 100 percent financing, adjustable rate mortgages with low teaser rates, and loans with little or no income documentation. Subprime loans are 13.56 percent of the $10.03 trillion U.S. mortgage market, or $1.36 trillion, according to the Mortgage Bankers Association. That's about 5.77 million mortgages.

Lenders forced to take back loans can go back to the mortgage broker responsible for them and try to refinance them. They also can try to sell them to scratch-and-dent loan buyers for anywhere from 50 to 90 percent of the original value.

White said Maribella employees who bought home loans from mortgage brokers diligently checked documents for fraud. FBI agents trained his staff on fraud detection, White said. Nonetheless, people lied about incomes and inflated home values. He estimates that about 5 percent of his buybacks involved some kind of fraud.

As Maribella closes down, White's ongoing traditional mortgage business is adjusting to tightening lending standards across the board, not just for subprime loans. But other small traditional prime lenders may go by the wayside as the restrictions shrink the pool of potential buyers, he said.

"A day doesn't go by that I don't get guideline restrictions from investors," White said. "Products are going away every single day."
 
Lenders forced to take back loans can go back to the mortgage broker responsible for them and try to refinance them
Fine if they want to force the lender to take them back...not so fine if they sue the appraiser who made the deal work...
 
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