Housing Bubble Bursting?

[Scott Kibler]

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.

What is the average life of the portfolio under which you base these assumptions? Is that based on recent prepay speeds? Subprime loans tended to prepay pretty darn fast in recent years. What do you suppose would be the default rate should the average life double, or triple?

 

[hastalavista]

What is the average life of the portfolio under which you base these assumptions? Is that based on recent prepay speeds? Subprime loans tended to prepay pretty darn fast in recent years. What do you suppose would be the default rate should the average life double, or triple?

Scott-

A very insightful question.
What is the natural rate of pre-pay for sub-prime loans?

 

[Steve Owen]

Brad, please note my post

http://appraisersforum.com/1336012-post2554.html

and elsewhere.

I appreciate your analysis, however. It helps with further detail on something I already intuitively understood.

Randolph,

...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.

My house value is not necessarily impacted by my neighbor's default; but, it could certainly be affected by multiple neighbor's defaults. My ability to obtain financing has not been reduced (at least not yet) and, in fact, mortgage rates were slightly lower in the last few days.

If I decide to sell my house and my neighbor's (single) house is priced way below market because the lender is too dumb to get mv for their foreclosure, then I may have to do something creative. Possibilities include superior marketing, such as pointing out differences between the two properties, superior financing, such as carrying back the blue sky, and/or renting rather than selling.

There are probably neighborhoods where some of this logic will not apply. If you bought a house for 20 percent more than it was worth on an overinflated appraisal with the logic that it was going to appreciate so fast you would still make money. Well, in that case, you are just a little better off than holders of most tech stocks were just before the bubble.

 

[Randolph Kinney]

Brad, New Century is not the only subprime lender to be forced out of business by their warehouse lenders refusing to supply credit. Countrywide does not have that problem.

If the problem is that small as you say it is, then no lender should be out of business because of a "few" buybacks.

If the problem is that small as you say it is, Countrywide share price is not reflecting that.

I believe Wall Street is administering the judgment on the problems of subprime lending. It just does not agree with yours.

 

[hastalavista]

Randolph-

Aren't these your neighbors in San Diego?

SAN FRANCISCO (MarketWatch) - Accredited Home Lenders said Tuesday it has received and paid $190 million in margin calls from its financial backers this year and is looking to raise fresh capital and negotiate waivers on some of its lending covenants.
Accredited shares slumped 52% to $5.50 in early Tuesday trading.
The company said it is "exploring various strategic options, including raising additional capital to enhance liquidity and provide the company with the flexibility to retain or sell originated loans."

 

[Scott Kibler]

Scott-

A very insightful question.
What is the natural rate of pre-pay for sub-prime loans?

Natural is probably not the proper adjective. I imagine that in recent years 18-30 months would be typical. With slowing or no price appreciation and tightening credit; whatever it is it will most definately lengthen.

The only thing that is certain is that the longer any given portfolio lingers, the higher the default rate.

Perhaps Brad could share some IndyMac data with us.

 

[Austin]

http://www.europac.net/schiff-cnbc-3-12-07_lg.asp

 

[Randolph Kinney]

Randolph-

Aren't these your neighbors in San Diego?

Yes, Accredited bought up an sick brother subprime lender last year and between what they did and what it has done, the same thing is happening to Accredited that happened to New Century: warehouse lenders are issuing margin calls. That causes immediate default on all their outstanding credit lines; pay up now.

I believe Brad is totally Pollyanna about the subprime mortgage problems and the lenders that make those loans as a significant part of their business.

 

[Greg Bell]

You will need to be a pollyanna WITH rose colored glasses to view the stock market today.Just the beginning..recession 3rd quarter...

 

[Randolph Kinney]

U.S. stocks fall sharply as subprime bites again

http://www.marketwatch.com/news/story/us-stocks-fall-subprime-bites/story.aspx?guid=%7B5B5999CF%2D0C10%2D4964%2D99EF%2D7B591F5254BF%7D

Dow falls 150 points amid subprime meltdown, weak retail sales

"The subprime issue is a little more contagious than people thought and it is spreading some fear in the market," said Jay Susskind, director of trading at Ryan Beck & Co.

At the same time, investors are also seeing a more direct impact from housing, as lenders to the subprime mortgage market seem to implode under the weight of rising defaults.

Accredited Home Lenders plunged 48% after it said it's seeking more capital and exploring strategic options after paying about $190 million in margin calls since Jan. 1.