Housing Bubble Bursting?

[Randolph Kinney]

HSBC to Scale Back U.S. Subprime Mortgage Division

http://www.bloomberg.com/apps/news?pid=20601208&sid=a04KFu4GTblE&refer=finance

March 29 (Bloomberg) -- HSBC Holdings Plc Chairman Stephen Green said the U.S. subprime mortgage services division will be ``run down significantly'' as the world's fourth-biggest bank by market value tries to recover from loan losses.


HSBC is curtailing the sale of so-called second-charge loans, which don't have first claim on assets when a loan isn't repaid, as it tightens credit controls after an increase in defaults at the unit caused U.S. earnings to plunge.


``Whether or not we completely write it off I'm not sure,'' said Green, in reference to the subprime mortgage services unit, speaking to reporters in Kuala Lumpur today.


HSBC had said it would stop buying second-charge loans from other lenders earlier this month, when it reported 2006 results. Still the London-based bank has continued selling its own.


HSBC reported an 87 percent drop in second-half profit in North America as delinquencies on subprime mortgages in the U.S. rose to a four-year high in the fourth quarter. Escalating defaults have touched companies ranging from mortgage lender New Century Financial Corp. to Lehman Brothers Holdings Inc. and General Motors Corp.

 

[Randolph Kinney]

Florida, California, New Jersey Feel Fiscal Crunch as Housing Market Cools

http://www.bloomberg.com/apps/news?pid=20601206&sid=aaxEGhOqB5eg&refer=realestate

March 29 (Bloomberg) -- Florida's tax receipts are falling for the first time since 1975 as a slump in construction and home sales dims the economy of the Sunshine State.


``We've been on a pretty steep incline,'' said Florida State Senate Majority Leader Daniel Webster, a Republican from Winter Garden. ``There was always going to be an end to that, and it's flattened out.''


States from New Jersey to California are getting pinched, just a year after many enacted the biggest spending increases in almost two decades. They're drawing down $16.6 billion from reserves this year -- 29 percent of their total savings -- even as legislators debate tax cuts and plans to expand programs such as government-subsidized health insurance.


``A lot of states are starting to worry,'' said Iris Lav, who follows state budgets for the Center on Budget and Policy Priorities, a nonprofit Washington group that monitors state finances. ``We have yet to see the effects of the bursting of the property bubble.''


States depend on sales and income taxes for about two-thirds of their revenue, according to the National Conference of State Legislatures. A decline in new home sales depresses employment in the construction industry. Falling prices of existing houses also discourage people from borrowing against home equity. The result is lower consumer spending, and less tax revenue.

 

[Hank Henry]

Investors seem to be punishing the entire financial sector for such a small small problem.

Are they looking at it the way you are?

I think it is as Mr. Ellis said.
The sub-prime meltdown is being overblown by the Wall Street Firms so they can force some out of business and buy up others at discounted prices.

Are foreclosures up? You bet. Are EPD's up? Sure, you bet they are. But compared to what? We just came out of a market with unprecedented gains in the housing markets and record low foreclosures. As the market stabilizes, or corrects somewhat, it is only natural for an increase to occur.

 

[Randolph Kinney]

I think it is as Mr. Ellis said.
The sub-prime meltdown is being overblown by the Wall Street Firms so they can force some out of business and buy up others at discounted prices.

Are foreclosures up? You bet. Are EPD's up? Sure, you bet they are. But compared to what? We just came out of a market with unprecedented gains in the housing markets and record low foreclosures. As the market stabilizes, or corrects somewhat, it is only natural for an increase to occur.

Hank, you do have something in common with Brad.

I did take note in the Marketwatch article I published on Indymac, even the analysts are saying the company is hyping its own stock by quoting such statistics the way they did. Investors and industry analysts are not going along with you or Brad in your views of the housing market or damage in the mortgage market.

However, you both are entitled to your opinions; that will not substitute for facts.

 

[Brad Ellis]

Randolph,

Yes it IS low. Frankly, this exposes a very big part of the problem- and the FBR analyst- genius that he is- continues to look at the wrong data.

Is he correct about the 2002-2004 period? Absolutely. Defaults were much lower in that time frame, but...that was a period in which we made 80/20 loans on Alt-A that we stopped doing since, and...our default rate is not materially out of sync with the industry benchmarks and is likely to get back under as we culled some of the riskier products out of the herd, and...

1. Indymac did not pick the time frame- FALP did.
2. FBR (and the street) continues to focus on default rates. But, defaults overwhelmingly get cured and do not result in bad loans. That is why what really matters is the actual loss level.

Here is an example. FBR itself set a price target on our stock of $32 for year end 2007 when it was well below $30 (closed today over $32). We get to measure their performance based upon how well stocks do vs. their estimates or targets- right? If they put that target up about 2 weeks ago (about the right time frame) he will be looking pretty foolish if it gets over $35 in the coming few weeks. Just like these analyses may be harbingers of actual performance, in the end we will always measure projections against the true performance.

Increasing default rates may be harbingers of higher losses. No quarrel with that at all. BUT, how high will those losses be?

How serious would this really be if actual losses doubled? US housing is worth about $17 Trillion according to Kiplinger's Personal Finance. So, if losses doubled to about $16B, it is still a tiny drop in the bucket- except of course to those fims who do nothing but subprime.

And FBR has its own subprime unit- 1st NLC. Interesting, no?

I do not want anyone to think that I have no sympathy for borrowers who were put into unsuitable loans- I was in that position many years ago but I paid off my loan in full. Most of these folks will, too.

In the meantime, Wall St. is giving pretty much everyone a really short haircut (and I am talking about a trimmer buzz cut here) while they continue to sell the securities at levels that are not materially different from what they were 1-2-3 years ago. Let's remember all the motivations at play.

So- will losses rise? Yes, I think so. Will they rise to a level that will substantially impact the economy? Only if Wall St. is successful in talking everyone into a knee-jerk reaction over the hype- and I have said that is possible.

So, I'll continue my efforts to shed light on what actually happens (warts and all) in the hopes that everyone will stop sleep walking and start asking the truly relevant questions and look for real life workable solutions to the actual problems- and those are human problems more than anything.

Brad

 

[Brad Ellis]

Hank,

I feel obliged to warn you that very few in this string are going to accept what I say. If you side with me- ever- they will do everything they can to prove you wrong. Just look at Randolph's response to you,

"However, you both are entitled to your opinions; that will not substitute for facts."

Gee, I thought I had posted the facts? Independent facts. Indisputable facts. Actual hard core data from an independent firm.

Yet we are told it is opinion.

Feeling like Don Quixote? You want to be Sancho Panza or should I take that one?

Brad

 

[Scott Kibler]

Too bad Simpson took a powder.

 

[Randolph Kinney]

Brad, I believe you need to set your benchmarks to be in sync with those that are published on a regular basis by the financial reporting news service.

Everyone knows by now, the loans originated in 2006, be it prime, Alt-A, or subprime, are experiencing extremely high default rates compared to: 1) the predicted or expected default rate. 2) compared to default rates of 2002, 2003, 2004 and 2005.

Looking at the actual statistics for 2006 originated loans, the losses are 10's of billions of dollars. Losses on subprime loans ($600 billion originated in 2006) are estimated to be between 5.25% to 7.75% or much higher depending on declining values of homes in 2007. Using 6.5% as an estimate, that is $39 billion of real losses just on subprime loans. see the link http://www.inman.com/inmanstories.aspx?ID=62624

It is really silly to compare the mortgage losses to $17 trillion as the estimated worth of all housing stock and pretend that means anything. You may find it more realistic and practical to compare how many families are going to loose their homes in 2007 to the total number of houses sold in 2007. That number is going to resonate with the elected officials and lenders who have to deal with the problem of disposing of those homes through short sales or foreclosures.

You may have read some news stories about how many people who have already lost their homes and attracting state politician's attention.

You can point the finger at Wall Street for the magnitude of the defaults and running mortgage companies out of business. However, it is Wall Street (investors - foreign and domestic) that buy the majority of mortgages in one form or another. It will be Congress and the regulators who will institute new laws and regulations on mortgage brokers and lenders in response to a trivial hyped loan default problem by Wall Street and the financial press.

I suspect the loan volume in 2007 will be off significantly compared to 2006. That is going to have its own impact. You don't need all those people in the real estate and related services, construction, mortgage services, appraisals, and lending institutions geared up for 2006 volume. Some of those people may be the new wave of defaults and foreclosures in 2007.

I believe the contraction is just starting. The pain has not reached it maximum intensity. Hard landing is on the way.

 

[Greg Bell]

Next is car loans...Tip the ole iceberg..
Next, defaulting on a home is more likely and earlier – for those who own a home - than defaulting on an auto loan because most individuals in the US need a car to drive to work. So facing debt servicing stress they are more likely to stop paying their mortgages than stop paying their auto loans as re-possessment of cars by creditors is faster than for homes. Again there are now tens of millions of subprime auto loans in the US. And there is now evidence that such subprime auto loans are also under distress. As reported by Bloomberg today under the title “Subprime Defaults May Spread to Auto Bonds, S&P Says” a study shows a sharp increase in defaults on auto loans:

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 scores 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. ``There could be some fallout from subprime in auto loans,'' Risi said in an interview. ``We don't have much data yet. We're still in collection mode. It's probably going to be hard to say for a while.'' …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. About 71 percent of subprime auto loans in 2006 were used to purchase used cars and 68 percent of those loans are for more than five years, S&P said. Five years before, only 58 percent of subprime loans were for used cars and 33 percent were for more than five years. Subprime auto borrowers who are also homeowners may have ``exposure to affordability products and the related payment shock,'' said Risi.
But it is not just a problem of subprime mortgages, credit cards and auto loans. As reported yesterday by Douglas Kass (who has a column on street.com) there is also now evidence of a sharp increase in delinquency on the subprime loans that finance the purchase of Harley Davidson’s famous motorcycles, or “hogs” in Americana jargon. When default rates almost double in two quarters on Harley’s hogs you know that this subprime problem is a real hog for the economy. As Kass put it in sarcastic but true terms:

Born To Be Wild: The Subprime Contagion Spreads

 

[Steve Owen]

And this just hot off the presses for the New York Times:

http://www.nytimes.com/2007/03/29/business/29scene.html

Brad

The traditional causes of foreclosure, even before there was subprime lending, were job loss, divorce and major medical expenses. And the national foreclosure data seem to suggest that these issues remain paramount. The latest numbers show that foreclosures have been concentrated not in places where real estate bubbles have supposedly been popping, but rather in places whose economies have stagnated — the hurricane-torn communities on the Gulf of Mexico and the industrial Midwest states like Ohio, Michigan and Indiana, where the domestic auto industry has suffered. These do not automatically point to subprime lending as the leading cause of foreclosure problems.

Almost exactly what I said back along about page three, or some such. Folks, fraud, sub-prime products marketed to the wrong people, ARM's and interest only loans, over-appraisal and appraisers being pressured... all of these things are problems. But, the real problem will fly or sink depending on how the rest of the economy performs. If unemployment stays low, inflation stays low, growth continues, but is manageable, and we don't get hit by some new disaster like 911 or Katrina, then all this bubble bursting talk will look like a tempest in a teapot in a few quarters. But, if those things do not happen, then the bubblers will be able to crow and say "I told you so...." As for myself, I don't like trying to predict the future. Worried? Yes, considerably. But, I learned a long time ago not to spend too much time and concern over things I have little control over.