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Housing Bubble Bursting?

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I've appraised several sub-primes over the last ten years. Not a single one of them has gone into foreclosure. Therefore, the pledge to pay back must not be "essentially no good" in the market I work in.
Steve, I give you that not all subprime mortgages will default. Maybe as much as 20% will default across the nation. The problem is, in many of the neighborhoods that I appraise in, there are short sales and bank owned foreclosure sales that are 25% or more of the market. These destroy value in whole neighborhoods and lower prices by 20% or more.

The point about the pledge to pay back was just that; lenders want the payments, they do not want the asset back only to take a loss on it for the money owed.

I believe I pointed out that the value is not known, when I said there is an asset with some value. That is the difference between this situation and the tech stock situation. In this situation, there is an asset with some value, and there are people in the market who want the asset. In the case of the tech stock bubble, there was no asset at all for many of those companies... and, no history of profit. That is really the main thing I was talking about in my post, and you are probably right about some of the points you made. The fact that this situation is very different than the tech stock situation, in spite of what the article said, does not mean that investors will not lose money... if they make bad decisions, it is obvious they will.
If you want to compare stocks like tech to subprime mortgage lenders, let us look at New Century. Here is the news link that outlines winners and losers.

http://www.marketwatch.com/news/story/winners-losers-new-centurys-troubles/story.aspx?guid=%7BC3C72366%2D6240%2D4CAB%2DB132%2D2760CECB70C6%7D

New Century shareholders may be left with nothing


Some creditors may suffer in possible bankruptcy; execs, big banks winners

Losers
  • Shareholders
    Stock will likely be worth $0 if lender files for bankruptcy, according to Piper Jaffray.
  • Some creditors
    New Century pledged its remaining mortgage portfolio to Morgan Stanley – that may leave less for other creditors like Bank of America, Barclays and Credit Suisse.
  • Home buyers
    Some home owners who took out New Century loans are left with payments that are too high. Refinancing is more difficult now.
Winners
  • New Century executives
    Made millions of dollars each selling stock in previous years when the shares were trading higher.
  • Investment banks
    Could benefit from less competition in the subprime mortgage industry.
  • Citigroup
    Was a creditor, but got most of its New Century loans repaid last week -- ahead of some other banks.
  • Morgan Stanley
    Would likely get New Century’s mortgage portfolio in liquidation, but still has exposure to losses.
As you can see, the shareholder in New Century will be just like a shareholder in a tech stock that went bankrupt; they get nothing!
 
New Century woes may restrict financing for rivals

http://www.marketwatch.com/news/story/new-century-woes-could-disrupt/story.aspx?guid=%7BE98A2754%2DF267%2D4E14%2D81DE%2D58DDEFCA8207%7D

SAN FRANCISCO (MarketWatch) -- New Century Financial Corp.'s troubles could restrict the availability of credit to rivals in the subprime-mortgage industry, analysts said Monday.


Subprime lenders rely in part on big banks known as warehouse lenders to finance their operations. These backers require that such lenders meet certain minimum financial targets; otherwise, they have the right to end the business relationship.

Most subprime lenders sell the loans they originate to investment banks, which then package them up and sell them on again to other investors as mortgage-backed securities.
'Warehouse lenders ... want a margin of safety. They won't give you $100 for a loan that will sell for $99.'
— Zack Gast, Center for Financial Research and Analysis
Because of this, warehouse lenders are asking subprime originators for more margin in return for providing financing, the analyst added. "Across the industry, loans aren't selling at a profit right now. Warehouse lenders see that and they increase the margin requirement on the loans."

As long as subprime-mortgage specialists can meet these extra margin calls, they'll survive in the short term, Gast commented. But over the longer term, originators will have to be able to securitize their loans at a profit.

Many subprime-mortgage lenders have tightened their underwriting standards because of this. Higher-quality loans require less margin and are more likely to command higher prices in a securitization, he said.
 
Subprime bonds sell off sharply

http://www.marketwatch.com/news/story/subprime-lending-index-hit-latest-mortgage-industry/story.aspx?guid=%7B7BA1AED8%2DDD57%2D4B5E%2D9572%2D8C8209BC1F74%7D

NEW YORK (MarketWatch) -- Corporate bonds of subprime-mortgage companies sold off sharply Monday, after besieged New Century Financial Corp. said that its lenders are cutting off its credit lines, while other bad news piled on the troubled sector.


The spread of the benchmark ABX index -- which covers the credits of many of the largest lenders of above prime-rate mortgages to borrowers with low credit ratings -- widened against Treasurys by 31 basis points, according to Thomas di Galoma, head of Treasury trading at Jefferies & Co.

"These are huge moves" in the ABX spreads, said di Galoma. "I think that for investors the problem with these subprime guys is that they all seem to have problems. If one has a problem, it is sure to hit the other ones, one after the other.

"Basically, they are all having liquidity problems," he added. "The community is worried about what kind of financial reports you will be seeing because of subprime lending."
 
bank owned foreclosure sales that are 25% or more of the market. These destroy value in whole neighborhoods and lower prices by 20% or more.

....

As you can see, the shareholder in New Century will be just like a shareholder in a tech stock that went bankrupt; they get nothing!

That can certainly happen. Even excess re-lo can affect neighborhood prices.

2nd: The fact that there is an asset back there does not necessarily mean that the stockholders will get the asset. I once lost my entire stake (2 grand) betting on a trucking company that had a good asset base. They took bankruptcy and re-organized... original stock holders got about 5 cents on the dollar.

There are some similarities between the current events and the tech stock bubble.

http://www.nytimes.com/2007/03/11/business/11mortgage.html?th&emc=th

(That may be the story that was posted before) For example,

Now, as then, Wall Street firms and entrepreneurs made fortunes issuing questionable securities, in this case pools of home loans taken out by risky borrowers. Now, as then, bullish stock and credit analysts for some of those same Wall Street firms, which profited in the underwriting and rating of those investments, lulled investors with upbeat pronouncements even as loan defaults ballooned. Now, as then, regulators stood by as the mania churned, fed by lax standards and anything-goes lending.

Still, there are also a lot of differences. One of those differences is that, no matter what happens, people will still need a place to live. In the tech stock crash, many of the offerings were worthless on their face.
 
Steve, I believe the comparison of the subprime lenders to tech stocks is apples and oranges. Sure, people lost money in both as stockholders. However, your house value was impacted by your neighbor's default on their mortgage and subsequent foreclosure sale. Also, your ability to obtain financing on your house has been reduced due to tighter lending requirements. And, should you decide to sell your house, you have to compete with your neighbor's house priced way below what you think yours is worth.

One other bonus to your neighbor's nonpayment of mortgage: your retirement plan holds the mortgage albeit wrapped up with other instruments called a CDO.

As that scenario gets replayed over and over, it ripples throughout the country. We have not seen the worse of it yet. We have a large amount of ARMs that are resetting this year.
 
CDOs May Bring Subprime-Like Bust for LBOs, Junk Debt

http://www.bloomberg.com/apps/news?pid=20601109&sid=ae1pbMY8FCGM&refer=exclusive

March 13 (Bloomberg) -- Bond investors rattled by mounting losses in subprime U.S. mortgages say trouble is brewing in collateralized debt obligations, the same securities that fueled the boom in leveraged buyouts and cut-rate finance.


Sales of CDOs, which package loans, bonds and derivatives into new securities, rose by almost half to $918 billion last year, according to data compiled by JPMorgan Chase & Co. Demand for investments to use in CDOs has helped push risk premiums lower for everything from home loans to high-yield, high-risk bonds, forcing managers to borrow ever more money to maintain returns and stand out from the competition.

Managers of CDOs backed by speculative-grade loans are borrowing as much as 13 times the amount they raise in equity from investors, up from nine to 10 times as recently as late 2005, according to Wriedt. Forty-one percent of the 142 CDOs backed by corporate loans and rated by Moody's Investors Service last year were set up by first-time issuers.
 
Hey dudes:
Had a little accident am in hospital typing with 2 fingers. This morning I listened to congressional hearings held yesterday on gse regulations. Here is a brief summary of testimony:
The good guys in the MBA have things under control and this little problem with the subprimes can be absorbed no problem. All is well that ends well.
Some noticed a conflict in the testimony. The head of the MBA stated that making loans to people that can not pay the money back was the problem and was the source of our little quirk. A rookie congressman noted how this conflicted with the GSE’s mission.
 
Randolph, Moh, Steve,

Frankly, I think we should probably leave New Century out of this for the moment sicne there are apparently criminal charges pending. It is one thing to make a bad loan decision due to lax underwriting standards- quite another to actually break the law. From what I read their problems are much larger than just going out of business.

Someone brought up Countrywide. Now that is a good example I think. They did 2.6B in sub-prime last month- down from 2.8B- right? So, let's put this in perspective.

If we assume they do that volume every month it is $30B. Last year they did a total of over $600B. So, we are talking aobut 5% of the portfolio (up to 6 if we assume their annual volume will go down 20%). So, we have 19% of these going into default- note I said default because the majority of these do cure.

Now, let's further say that 50% will cure- and that is a very low percentage. Let's also assume ultimate losses of 50% of the loan balance (not atypical). So now you have about $6-700 million in actual losses- or about 1/10 of 1%.

Even if every one ended up in foreclosure they would still be at 2% or less. That might not make for a profitable year but it will not close them down. Adn, given that virtually all lenders have greatly restricted their guidelines today, it is not likely to continue for long. And CW's current volume is done under their new tighter guidelines.

So, why all this hand wringing by Wall St.? Actually, that one is easy- just watch what happens by these guys. They will be buying up these firms (most- not all- New Century looks like it is on life support now) but we have already seen deals- ResMae got bought, Option One is being looked at as are Argent/Ameriquest.

If I were on Wall St. I'd be smiling- look at the bargains I could snap up!

Brad
 
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