Housing Bubble Bursting?

[Greg Bell]

WORDS OF WISDOM.HERE IT COMES...

Regarding



* Homebuilders desperate to clear inventory,


* Mortgage brokers wanting to make loans


* Real estate clerks looking for commissions,


* Appraisers looking for work, and


* Desperate homedebtors looking to sell...


Have they figured out yet that the subprime meltdown and credit contraction underway will now severely limit the pool of potential fools (oops, I mean buyers) even more? (Which of course will speed up the pace of the housing crash underway)


(Reuters) - Tougher lending standards stemming from the shakeout in the beleaguered subprime mortgage industry could prevent up to 1.1 million U.S. homebuyers from getting mortgages this year, a Bear Stearns analyst told investors on Friday.



Banks and mortgage companies would sharply scale back lending to two groups: subprime and "Alt-A" borrowers, said Dale Westhoff, Bear Stearns' head of mortgage-backed research.



Consumers with low income and/or spotty credit histories are considered subprime borrowers, while Alt-A borrowers are typically those who fall short of being prime because they lack adequate income documentation.



Westhoff estimated a 30 percent, or $180 billion, contraction in the subprime sector in 2007 from 2006, and forecast a 25 percent, or $100 billion, decline in Alt-A loan production from last year.

"This implies a purchase contraction of 1.1 million borrowers," said Westhoff who was speaking at Bear Stearns mortgage conference here. "That's a non-trivial number."

 

[moh malekpour]

http://www.prudentbear.com/articles/show/1104

Probably the greatest disappointment to a modern man over the age of 50 comes when he looks in the mirror.

We say that not as a man who has just had his vacation in a bathing suit, but as one who has spent the last couple of days reading the financial press. The two are alike in that every time you look, the picture seems to get worse.

A brief summary of the subprime industry’s business model: There is a market, lenders noticed, of people who cannot afford houses and do not qualify for the credit necessary to buy them. On the surface of it, lending money to these people does not seem like a business you would want to take up. But ‘subprime’ borrowers could be decent fish, the sharks reasoned, as long as they could make the mortgage payments. The quants did the math. The strategists looked ahead. Even if the occasional client couldn’t pay up, they had the rising housing market to lift the value of their collateral. And so, a new ‘go-go’ financial industry got going...and pretty soon, its hustlers and entrepreneurs - like the whiz kids of the dotcoms who preceded them - were driving Ferraris and drinking Chateau Petrus.

Subprime lenders did not hedge the risk inherent in lending to weak borrowers. Instead, they sought it out and leveraged it up. Hedge funds seem to have done the same thing - reaching out a little too far in order to grab a few extra points of yield. Now, we wonder who owns the $23 billion of New Century Financial debt...and who owns the rest of the debt in the subprime area? We wonder too, who owned the $2.5 trillion worth of equity value that disappeared last week? Surely, there’s some more ‘big impact’ lurking out there...still waiting to hit someone.

We look in the mirror and hope it isn’t us.

 

[Randolph Kinney]

Credit contagion spreading

My appraisal set for tomorrow (Monday) has just been canceled. Reason? Borrower can't get financing; credit score is 643. Minimum credit score of 680 is required by the lenders that are so far contacted. Looks like this deal is not going to happen until they find buyers with better credit histories.

Just my anecdotal pitch today that a credit crunch is happening and it will get worse as more loans default. Next week, I get new data on foreclosures for 4Q 2006 for San Diego county.

News that Countrywide is no longer lending 100% LTV. It is only the beginning; LTV 95%.

http://biz.yahoo.com/rb/070309/subprime_countrywide.html?.v=2

NEW YORK (Reuters) - Countrywide Financial Corp. (NYSE:CFC - News), the largest U.S. mortgage lender, on Friday told its brokers to stop offering borrowers the option of no-money-down home loans, according to a document obtained by Reuters.

"Countrywide BC will no longer be offering any 100 LTV products as of Monday, March 12."

Countrywide joins other large lenders that will require homeowners to have at least a 5 percent stake in their homes, including Washington Mutual Inc. and General Electric Co.'s WMC Mortgage.

The surge in delinquencies, due to loose underwriting standards and a cooling housing market, has alarmed financial markets in part because it has happened so quickly. The bulk of delinquencies is coming from loans made last year that are as little as one month old, making 2006 perhaps the worst ever in terms of mortgage credit quality, according to analysts at UBS Securities.

 

[Terrel L. Shields]

Even a 5% stake can be borrowed from a relative but at least you have to listen to them yammer if you didn't make good on it.

 

[Randolph Kinney]

Westhoff estimated a 30 percent, or $180 billion, contraction in the subprime sector in 2007 from 2006, and forecast a 25 percent, or $100 billion, decline in Alt-A loan production from last year.

"This implies a purchase contraction of 1.1 million borrowers," said Westhoff who was speaking at Bear Stearns mortgage conference here. "That's a non-trivial number."

That number for contraction in subprime loans may be too conservative however, the point of 1.1 million less homes sold for 2007 should really make NAR nervous.

I am also seeing more FSBOs and Help-U-Sell signs for properties on the market. These are not captured in the NAR statistics as inventory.

 

[OCApp]

It'll be so tragic if lenders get back to...

1. full doc loans
1a. qualfying borrowers at the actual interest rate rather than start rate
on ARMs
2. at least 5% down
3. P.M.I. rather than piggyback loans
4. requiring impound accounts (taxes and insurance) on 80% or greater LTVs
5. requiring at least 3 month payment reserves
6. savings account seasoning or at least tracing where the savings came
from (to prevent undisclosed down payment gifts or borrowing)
7. responsible/reasonable front and rear end lending ratios like 33%/38% max
8. approved appraiser lists requiring several years experience (i know this one
won't be popular, lol)
9. actually reviewing appraisals to determine if the value makes sense b4
making the loan
10. if the loan is for an income property, checking to see if the borrower owns
other rentals as well.
11. etc. etc. etc.

 

[Randolph Kinney]

Subprime credit crunch to a generalized credit crunch

http://www.rgemonitor.com/blog/roubini/

Nouriel Roubini is an economist and has a blog with an interesting commentary dated March 9 about the coming financial train wreck. He states that the wreckage in the subprime mortgage market is affecting CDO market and the CDOs are affecting RMBS market.

We also have the beginning of a much broader credit crunch among many other mortgages that could have severe macroeconomic effects.

First, are the growing distress, defaults and foreclosures only a problem among subprime mortgages or will they become soon a big problem among a wider range of mortgages?

Second, will the current subprime credit crunch become a generalized credit crunch that will hit a much large fraction of mortgage lenders and borrowers?

Third, what is the role of a possible disruption in the CDO market in transmitting the subprime carnage and credit crunch to a broader range of mortgage credit risks (see ABX and TABX) and to the overall RMBS market? I.e. could the RMBS market end up in a seizure if the CDO market is disrupted?

Now, after all this mess the conventional wisdom - that was altogether wrong and missed the boat on the housing recession, on the subprime mess, on the ABX collapse, on the subprime credit crunch - is telling us today that subprime is a niche problem and that other mortgages are fine, that there is only a minor credit crunch in subprime that will have no effect on other mortgages, that there is no problem in the CDO and RMBS market, that the macro effects of the subprime disaster will be between tiny and non-existent, that the economy will have a happy soft landing. Since the conventional wisdom completely missed the boat since the last summer on all the main developing disasters why should we believe it now that it has lost all credibility?

 

[hastalavista]

Randolph-

I think the Saturday WSJ had a similar article. As I recall, the gist was:
Big get-together in Monaco regarding the international credit market. A Citi Grandee was there and said many investors were "surprised" at the high-level of sub-prime loans that were being found in their CDO's.

This is what Schiller's book, A New World Order was professing: That for almost any risk, there is a willing investor and that if the risk can be properly packaged, the risk will be spread so thin as not to significantly hurt any one individual.

I guess my question is how thin can one slice the baloney before it is an acceptable risk (harmless)? Apparently, not thin enough in the CDO market. (Or, as measured by investors willing to purchase sub-prime now).

 

[Randolph Kinney]

Randolph-

I think the Saturday WSJ had a similar article. As I recall, the gist was:
Big get-together in Monaco regarding the international credit market. A Citi Grandee was there and said many investors were "surprised" at the high-level of sub-prime loans that were being found in their CDO's.

This is what Schiller's book, A New World Order was professing: That for almost any risk, there is a willing investor and that if the risk can be properly packaged, the risk will be spread so thin as not to significantly hurt any one individual.

I guess my question is how thin can one slice the baloney before it is an acceptable risk (harmless)? Apparently, not thin enough in the CDO market. (Or, as measured by investors willing to purchase sub-prime now).

Way back when ... I was a student of statistics and probability ... a win or a reward was classified as a payout exceeding the risk or probability of an outcome. For example, if the odds of rolling a 12 on a pair of honest die is one out of 36 and your payout for rolling a 12 is 30 to 1, you did not win because of the risk taken. Given enough rolls of the dice, you will prove the mathematical probability of 1 out 36 rolls will be a 12 and you will be a net looser.

Likewise, the reward (higher interest coupon) on a subprime mortgage is less than what is proving to be the assigned risk. The real risk is much higher than the reward and the assigned risk. No matter how thin you slice it, you have a net loss.

The idea of investing in more than one stock to diversify risk works so long as the majority of stocks in the entire market of stocks do not decline all at once. The idea of investing in subprime mortgages through CDOs works so long as the the risk of default does not rise above the assigned risk, all at once. And like we saw in the financial markets, commodities market, and currencies market, they all were moving against the favorable momentum that had built up. There was a coupling of risk in one market to the other (hedge funds in action). And the world watched in amazement as the volatility wave ran from one market to the other, to one country to another.

It is not over yet. Subprime lenders are going out of business because they don't have enough equity to pay back the investor's claim on defaulted loans. That means the investor is taking the loss. You might guess any investors left who are willing to buy subprime mortgages are going to demand higher interest rates and tighter credit controls and more due diligence before accepting the proven risk level of default (we don't know what it is yet because it ain't over yet).

Those CDOs that are tainted have lost their liquidity. Currency swaps, interest rate swaps, bundling and blending debt back securities are going to slow until the carry trade and subprime mortgage settle out. Big lenders are not reporting real time what their exposure is to delinquent loans. Countrywide is interesting to watch because they were the largest lender of Alt-A or subprime loans.

 

[JSmith43]

Subprime lenders are going out of business because they don't have enough equity to pay back the investor's claim on defaulted loans.

I'm pretty sure that correspondent agreements could be negotiated having terms that, if followed, would lead to a delivery of loans without recourse, just because of subsequent default on the part of the borrower.

I wonder if some of these brokers didn't negotiate shrewdly enough, or were they just willing to take easy off the shelf agreements with warranties up the ying yang, using Ch 11 as a parachute?