Housing Bubble Bursting?

[Randolph Kinney]

The Subprime Loan Machine - Instant Loans Made Possible With Software

http://www.nytimes.com/2007/03/23/business/23speed.html?_r=1&oref=slogin

Through his private software company in Austin, Tex., Mr. Jones and his son, Michael, designed a program that used the Internet to screen borrowers with weak credit histories in seconds. The software was among the first of its kind. By early 1999, his company, Arc Systems, had its first big customer: First Franklin Financial, one of the biggest lenders to home buyers with weak, or subprime, credit.

By 2005, at the height of the housing boom, First Franklin had increased the number of subprime loan applications it processed sevenfold, to 50,000 every month. Since 1999, Mr. Jones’s software has been used to produce $450 billion in subprime loans.

But it was the little-noticed tool of automated underwriting software that made that boom possible.

Automated underwriting software spawned an array of subprime mortgages, like those that required no down payment or interest-only payments. The software effectively helped move what was a niche product only a decade ago into the mainstream.

During the housing boom, speed became something of an arms race, as software makers and subprime lenders boasted of how fast they could process and generate a loan. New Century Financial, second to HSBC in subprime lending last year and now on the brink of bankruptcy, promised mortgage brokers on its Web site that with its FastQual automated underwriting system, “We’ll give you loan answers in just 12 seconds!”

Subprime lenders like automated underwriting because it is cheap and fast. A 2001 Fannie Mae survey found that automated underwriting reduced the average cost to lenders of closing a loan by $916. The software quickly weeds out the very riskiest of applicants and automatically approves the rest.

By mid-2004, Countrywide Financial, a major subprime lender, had used MindBox’s automated underwriting system to double the number of loans it made, to 150,000 monthly.

“Automated underwriting put the credit score on such a pedestal that it obscured the other important things, like is the income actually there,” said Professor Retsinas of Harvard. “Before there was A.U., down payment mattered a lot. Where we’ve crossed the line in recent years is to say, we don’t need down payment.”

 

[Randolph Kinney]

New Home Sales Decline, Home Building Stock Decline

http://www.marketwatch.com/news/story/new-home-sales-sock-builders/story.aspx?guid=%7B0D1B58EC%2DC8BE%2D4258%2D9C1A%2D6BD34F84BFB3%7D

I wonder when some of these smart guys will wake up and see that there is no correlation to the data NAR publishes on existing home sales versus that of new home sales?

NEW YORK (MarketWatch) -- News of an exploding backlog of unsold new homes in the U.S. sent shares of the companies that build those houses sharply lower Monday, and set the stage for more pain ahead as it signaled a weak start to the important Spring selling season.

Just last week, the sector rose after the National Association of Realtors reported that boosted by warm weather earlier in the winter, sales of existing homes unexpectedly rose 3.9% in February, reaching a seasonally adjusted annual rate of 6.69 million units.


Ian Shepherdstown, the chief U.S. economist at High Frequency Economics said Monday that, "this report will counter some of the more gung-ho chat after the strong February existing sales report last week."

On Friday, KB Homes, the latest builder to report earnings, said its first-quarter profit dropped 84% and cautioned that problems in subprime mortgages and imposition of stricter lending standards may put more stress on what's already a wobbly market.

An exchange-traded fund that tracks homebuilders, the iShares Dow Jones U.S. Home Construction Index Fund, is down more than 14% this year, according to investment researcher Morningstar Inc. The sector's shares have been hit by reported losses, write-offs, lower sales, and higher incentives to buyers.

 

[Randolph Kinney]

U.S. stocks fall as new-home sales drop

http://www.marketwatch.com/news/story/us-stocks-fall-new-home-sales/story.aspx?guid=%7B078A5868%2DC6ED%2D4715%2D9034%2D81551504F015%7D

NEW YORK (MarketWatch) -- U.S. stocks fell on Monday after a report that showed new home sales unexpectedly fell to a seven-year low in February fueled concern that a stumbling housing market might derail economic growth.


"The housing number was so far off forecasts that even with the bad weather we saw, it raises a lot of red flags," said Paul Mendelsohn, chief investment strategist at Windham Financial Services.

 

[Steve Owen]

Be smart...

http://articles.moneycentral.msn.co...SmartAboutTheSubprimeScare.aspx?wa=wsignin1.0

here's why the subprime disaster scenario won't play out: The problem is too small to overwhelm all the forces that support continued economic growth

... but don't be stupid...

http://articles.moneycentral.msn.co...SmartAboutTheSubprimeScare.aspx?wa=wsignin1.0

Ultimately this trend can't be sustained. The more money there is in search of higher yields, the higher those buyers will drive prices for high-yielding debt securities, and the lower those yields will fall.

 

[Randolph Kinney]

http://articles.moneycentral.msn.com/Investing/CompanyFocus/BeSmartAboutTheSubprimeScare.aspx?wa=wsignin1.0

here's why the subprime disaster scenario won't play out: The problem is too small to overwhelm all the forces that support continued economic growth

Steve, from your same article, same author:

• Steer clear of anything housing-related -- the damage isn't over yet. Be especially careful with home builders that have the most exposure to subprime borrowers, like Standard Pacific (SPF, news, msgs) and KB Home (KBH, news, msgs). I'd also take a pass on retailers exposed to the home-building sector like Home Depot (HD, news, msgs) and Lowe's (LOW, news, msgs).
• Don't try to bottom-fish subprime lenders with big exposure to the problem, such as Accredited Home Lenders Holding (LEND, news, msgs) and Fremont General (FMT, news, msgs). There may be more surprises ahead.

That article does not read (to me) like the problem of subprime (specifically) and housing (in general) is too small to overwhelm the economy. Although your quote is accurate in that he said what he said, his opinion is just not consistent with his strategy for investing or investment advice. Either there is a problem or there is not a problem. Today, the market voted that there is problem and the NAR data and opinion was overrun by the reaction to new home sales being alarmingly lower than forecast by the many economist and cheerleaders in the housing industry.

Guess what? No spring rebound in new home sales. Problem?

 

[Randolph Kinney]

Subprime Defaults May Spread to Automobile Loan Bonds, S&P Says

http://www.bloomberg.com/apps/news?pid=20601087&sid=a7etPDiLQq4s&refer=worldwide

March 26 (Bloomberg) -- Bonds backed by automobile loans may be hurt by rising subprime mortgage defaults as people with poor credit struggle with their household debt, according to Standard & Poor's.


Capital One Financial Corp., Wachovia Corp., Wells Fargo & Co., and other lenders have lent more funds to people with bad credit in the past few years to sustain growth, S&P said today in a report by analysts led by Mark Risi. The loans are also for longer terms, increasing the probability of default, the analysts said. About 68 percent of 2006 subprime auto loans were due in five years or more, Risi said.

The worst housing slump in 10 years is pushing down home prices, hampering owners from refinancing. Borrowers with weak or incomplete credit are also vulnerable to the resetting of mortgages at more than the teaser rates they initially paid.


S&P classifies asset-backed car loan securities as prime, non-prime, and subprime, Risi said. About 0.31 percent of the prime loans made in the first quarter of 2006 have defaulted a year later, according to S&P. That compares to 0.8 percent for non-prime and 3.02 percent for subprime car loans.


Prime loans have cumulative losses of less than 3 percent with credit scores of 680 or more and current annual percentage rates of between 0 percent and 7 percent under S&P criteria.


Non-prime pools have net losses of between 3.1 percent and 7.5 percent with credit scores of between 620 and 680 and interest rates of between 8 percent and 13 percent. Subprime securities have net losses above 7.5 percent with borrowers scoring less than 620 and annual percentage rates of more than 13 percent.


Subprime auto bonds are showing a wide disparity in performance depending on the issuer, the analyst said. With some subprime issuers moving further down the credit spectrum and some resisting that trend, ``we are seeing some interesting results from this divergence,'' Risi said. Bondholders cannot tell which subprime auto borrowers are also homeowners, Risi said.


Given a choice between making a car payment or paying the mortgage, consumers react in different ways, Risi said.


``Without much thought, you'd say people wouldn't want to lose their home so they'd first make the house payment,'' Risi said. ``But with a lot of the borrowers struggling to make their house payments, to get any cash, they have to get to work. And that's what they need their car for.''

 

[Steve Owen]

Today, the market voted that there is problem and the NAR data and opinion was overrun by the reaction to new home sales being alarmingly lower than forecast by the many economist and cheerleaders in the housing industry.

Guess what? Today, I made money in the market (just checked). I don't usually follow it on a day to day basis.

Problem? Yeah, there's a sub-prime problem and a larger housing sector problem. There is also low unemployment, low interest rates, some continued investment in capital expenditure, etc., etc. This guy thinks that the sub-prime woes will not overwhelm the economy... to soon to know if he is right. But, his investment strategy does not seem counter to that belief to me.

 

[Randolph Kinney]

Bond Risk in U.S. Rises After New-Home Sales Decline, Default Swaps Show

http://www.bloomberg.com/apps/news?pid=20601009&sid=asdSwKFS0b3o&refer=bond

March 26 (Bloomberg) -- The perceived risk of owning U.S. corporate bonds rose after a government report showed new-home sales unexpectedly fell, according to traders who bet on corporate creditworthiness in the credit-default swap market.


Contracts based on $10 million in debt in the CDX North America Crossover Index Series 8 rose $2,000 to $143,000 as of 3:35 p.m. in New York, according to Deutsche Bank AG. The index, which includes 35 U.S. and Canadian companies with both investment- and speculative-grade ratings and is used to bet on the ability of companies to repay their debt, is at its widest since a new version of it started trading March 20.


The report stoked concerns that the worst housing slump in more than a decade isn't over and may get worse as defaults and delinquencies among the nation's riskiest borrowers continue to climb. Subprime mortgage borrowers, typically people with limited or poor credit histories, last quarter fell behind on their loan payments at the highest rate in four years.


``Credit investors are nervous and jumpy right now regarding anything related to housing or the subprime market,'' said Mike Mutti, New York-based co-head of corporate credit strategy at Bear Stearns Cos., the biggest U.S. underwriter of mortgage bonds.

 

[Randolph Kinney]

Guess what? Today, I made money in the market (just checked). I don't usually follow it on a day to day basis.

Problem? Yeah, there's a sub-prime problem and a larger housing sector problem. There is also low unemployment, low interest rates, some continued investment in capital expenditure, etc., etc. This guy thinks that the sub-prime woes will not overwhelm the economy... to soon to know if he is right. But, his investment strategy does not seem counter to that belief to me.

I suppose having a strategy that is double-think (the act of holding two contradictory beliefs simultaneously, fervently believing both) to the stated belief in that it denies the impact of housing and mortgages have on the economy.

The humor and irony for those claiming no significant impact on the economy is not confirmed by the data and reaction to that data the various markets are issuing. All those subprime lenders, MBs, etc., are going bankrupt and layoffs are happening in real estate, lending, etc.

I really do appreciate the data concerning unemployment, interest rates, GDP growth, etc. So far, so good - looking into the rear view mirror. What's it going to look like when a real slow down happens for whatever reasons? Housing will get better? Defaults will go down?

Housing is weak for a reason - lack of demand. And it is going to be weaker with a tighter credit requirement. Mortgage defaults are happening for a reason - they can't make the payments. With stagnant and falling home values, they can't refinance their way out of it. And the bulk of ARM resets happen in the second half of 2007. I dunno - double-think to me.

 

[moh malekpour]

http://articles.moneycentral.msn.co...SmartAboutTheSubprimeScare.aspx?wa=wsignin1.0



... but don't be stupid...

http://articles.moneycentral.msn.co...SmartAboutTheSubprimeScare.aspx?wa=wsignin1.0

Steve,
I like your optimism and wishful thinking. The whole article is a wishful thinking and a pitch to invest in some stocks. . It is a kind of financial psychology to motivate people to hang on and be happy for now and everything would be just fine. It has played in the past but how often he can cheer up people when the underneath of the market is really bad. He agrees with everything that has been said and written about the sub-prime and foreclosure problems. The only thing that he tries to wash out is the effect of the sub prime in the economy. He said it is too small to have effect on the economy and the economy is too strong because the corporations are making money and hiring more.
True, that corporations were growing and were hiring more but it was because they had more consumers to buy their products. The consumers were getting cash out from their home refinancing but when they don’t have equity, they cannot borrow anymore and are not going to buy those products from corporations.
The sub prime problem is not a matter of market anymore, it is a matter of politics and if the politician legislate a tight regulation on lenders, it would be a credit crunch and low interest rates is not going to help them.
They are going to legislate a regulation for all lenders to have equal reserve for any defaulting loan. It means that if they got a default from a borrower on any loan, they are required to keep equal of that loan amount in their reserve deposit in the case if that loan goes bad. To do that, lenders have to have most of their capital be deposited in their reserves and have less money available to them for lending. This is irrelevant to the interest rate.
So far, lenders were carry traders. They were borrowing from the Federal Reserve or investors, loan them all without concern of defaults or foreclosures because they could sell those loans and it would be somebody else problems. They still can sell their loans but the government wants that if they sold a loan and it got defaulted, the lender right away deposit equal to that loan in the their reserve in the case if the loan goes bad and the investor returned the loan to the originator, so the lender has enough capital in the reserve to buy the bad loan back and take care of the foreclosure.
Right now, new century has a huge bad sub prime loans that are sold to investors. The investors are trying to send them back to new century but new century has filed for bankruptcy. Who is going to cover that mess?

http://www.businessweek.com/bwdaily...7/db20070326_901985.htm?campaign_id=rss_daily

Don't be fooled by falling foreclosure rates and rising home sales—many parts of the U.S. are still hurting from the housing slowdown