Housing Bubble Bursting?

[moh malekpour]

How Blind can they be?

http://www.europac.net/newspop.asp?id=8158&from=home

As our phony economy begins to unravel before our eyes, it is amazing how few people can actually see it. The collective wisdom of stock market pundits, economists, and Federal Reserve officials gives the impression that everything is just fine. Although some acknowledge that housing is slowing down a bit, that there are isolated problems with subprime mortgages, and that inflation is not moderating as quickly as they hoped it would (let’s ignore surging oil prices), few can see any grave threats to continued economic expansion, or the bull market in stocks, bonds or real estate.

Earlier this week a CNBC anchor asked a guest if the "economic baton" might now pass from housing to the consumer, much the same way it previously passed from the stock market to housing. I'm not exactly sure where the anchor believes that consumers will now be getting the money to lead us out of the economic morass. With adjustable rate mortgages now re-setting higher, home equity disappearing, credit card debt mounting, personal savings at record lows, and the cost of basic necessities continuing to rise, the consumer is all tapped out. In fact, consumer spending is not just going to slow down; it is going to fall off the edge of a cliff.

With more traditional mortgage lending standards beginning to return, traditional home prices can not be too far off. And for those who may not have noticed, median home prices are still way above traditional levels as determined by yardsticks such as affordability and rent vs. own analysis. In many markets, normal levels may only be half of their current "appraised" values. However, due to the glut of homes that will ultimately hit the market, and the absence of qualified or willing buyers, home prices, at least in the short term, may fall well below normal levels.

 

[Brad Ellis]

Randolph,

From your post, "Gee Moh, it seems like more of the same - Wall Street is purposely causing these subprime lenders to go bust so they can have ALL the subprime business to themselves. Imagine that, suing the very lenders you bought no good loans from because they defaulted. I wouldn't be a bit surprised to learn that credit to these same lenders are being denied.

Wasn't that what Brad and Hank have said that was behind all these subprime lenders going broke?"



On a more sober note, some of this stuff is really just normal operations. We have sued brokers over EPDs/FPDs, sometimes in multiples and I'd bet we had some as large as the $800K+ one that CS is pursuing.

Moh,

I noted the I/O quote from Bllomberg.

So- tell me- when the mortgage on my later Father's place comes up for reset in 2 years and since I will only own it naother few years after that, this means I should NOT do an I/O? Silly for sure.

It NEVER applies to all situations.

Brad

 

[Scott Kibler]

It's not really about the product. It's the application.

I/O's, Option ARM's, stated income, all are useful financial tools that should have a rightful place in a financial professional's quiver.

The problem is the things are too often sold and granted to people who don't understand them and who's situations do not warrant their use by "professionals" who don't really care. Actually last time I refinanced, in 2003, I probably should have taken an Option ARM, it would have made sense for me. I knew it at the time but I didn't have the energy to argue the point with the missus...we got a fixed rate. Conversely my mail-carrier neighbor, wage earner, unsophisticated financially, did get one and has sorely regretted it. When I explained the product to him and showed him the negative am on his statement he liked to puke. He had no idea what he had. Sure he signed the docs but relied on what the "pro" told him.

 

[Randolph Kinney]

Brad, I wonder, an article on the Realtor site http://www.realtor.org/RMODaily.nsf/pages/News2007032603?OpenDocument claims that 50% of subprime loans were stated income loans and that 90% of those subprime loans did not agree with their income tax returns on sampling.

Is that percentage of 50% close to reality on subprime loans are stated income loans?

Also, an article on Bloomberg http://www.bloomberg.com/apps/news?pid=20601206&sid=a8.mgZ_tnbjE&refer=realestat e David Lereah is saying home sales may decline as much as 3 percent a year in the next two years with stricter lending standards and foreclosed homes. He calls it the worst housing slump in 15 years. Lereah said on March 13 that homebuilders would feel "additional pain'' due to problems in the subprime marketplace.

Do you believe David Lereah is talking out of both sides of his mouth? Existing home sales have been rising for the last 3 months according to NAR and he has proclaimed a bottom has been reached already based upon that data. Now he says home sales may decline for the next two years with more foreclosures due to the subprime problems.

 

[Randolph Kinney]

Alt-A Loans Hurt Profits

http://www.bloomberg.com/apps/news?pid=20601103&sid=a21ui1oYB5TA&refer=us

March 30 (Bloomberg) -- M&T Bank Corp., the western New York bank partly owned by Warren Buffett's Berkshire Hathaway Inc., said low bids for the Alt-A mortgages it planned to sell will cut first-quarter profit by $7 million.


Earnings per share will be $1.50 to $1.60, also in part because M&T expects that rising default rates will require it to repurchase some Alt-A loans it previously sold, the company said in a statement. Analysts' estimates for net income currently range from $1.82 a share to $1.90, according to a Bloomberg survey.


Lenders this month have found demand falling for riskier mortgages even apart from so-called subprime ones. A unit of Cleveland-based National City Corp. that makes home equity loans through brokers today undid much of a loosening of guidelines it introduced only Feb. 28, rolling back standards further in some ways, as a result of demand from loan buyers ``evaporating quickly,'' according to an announcement obtained by Bloomberg.

Like Citigroup Inc., it stopped financing home equity loans, which are often used in lieu of down payments on Alt-A mortgages, of more than 95 percent of a home values without proof or a borrower's pay.


The loans M&T planned to sell didn't attract the offers the bank expected at a recent auction. M&T cut their carrying value, resulting in after-tax costs of 7 cents a share. The loss on the loan buyback will cut profit by another $4 million, or 3 cents a share.


``Unfavorable market conditions and lack of market liquidity impacted M&T's willingness to sell Alt-A loans in the first quarter,'' the Buffalo, New York-based company said in the statement.

Shares of companies that offer less-risky mortgages including IndyMac Bancorp Inc. have fallen this year partly because investors were concerned Alt-A loans may go sour.

M&T said it plans to keep $883 million of Alt-A home loans instead of selling them because management believes the bids don't reflect their value.

 

[Greg Bell]

oops..another one bites the dust..
Due to well publicized current market conditions affecting the entire mortgage industry, Madison Equity Corporation will no longer be accepting applications nor registrations from our wholesale and correspondent channels. Madison Equity will be transferring our wholesale pipeline to Imperial Lending LLC, who can be contacted at 866-566-3426. Please mention you are a Madison broker.

 

[Randolph Kinney]

After Financing the Housing Boom, Wall Street Shuts Off the Spigot

http://www.realestatejournal.com/buysell/mortgages/20070330-zuckerman.html

By extending generous credit to subprime lenders, Wall Street firms financed the borrowing binge that helped fuel the housing boom. Those firms now are turning off the money spigot. They see more borrowers having trouble paying off those mortgages in a slowing economy, which has made investors less willing to pour money into the sector.

Worries about defaults in slightly less-risky mortgages also have hit shares of companies that specialize in them, including Impac Mortgage Holdings Inc., where loans with overdue payments more than doubled last year, and IndyMac Bancorp Inc.

Subprime lenders sell many of their loans to Wall Street banks, which package them into securities to be sold to bond investors. The appetite for these bonds grew when interest rates were falling and investors wanted high-yield alternatives. The riskier the customer, the higher the interest rate, so subprime bonds were in demand.

An early sign of a chill in that relationship came when subprime lender Ownit Mortgage Solutions Inc. defaulted on its credit line in mid-November. J.P. Morgan Chase & Co. gave the company a month to come up with additional capital, and Merrill Lynch & Co. demanded that Ownit buy back poorly performing loans. Ownit declared bankruptcy within weeks.

By early December, subprime-bond investors were getting nervous. By one measure, the cost of insuring against default on some of the bonds jumped 50% in a week as demand for such protection spiked.

And burned investors and borrowers could sue the Wall Street banks, arguing that they shouldn't have allowed things to get out of hand. A lawsuit seeking class-action status, filed on March 19 in federal court in California, includes Morgan Stanley and Bear Stearns as defendants, alleging that they included false statements in documents describing New Century's plans to sell new preferred shares of itself to the public.

 

[Randolph Kinney]

What next oh FED - CPI vs PCE

The chart below shows the Year/Year growth in the CPI and the PCE (personal consumption expenditure) cores. These indexes have different methods and weights but they are both DOING THE SAME THING. Well, INFLATION is a generalized and ongoing increase in prices, so I guess if you REALLY HAVE IT, it doesn’t matter which index you look at. AND I guess we really have it.

With a weakening economy and GDP growth generated mainly with PCE growth (increased consumer spending is propelling increasing inflation), how serious is the FED about containing inflation?

I would expect that the interest rates investors will demand will eventually price in the "expected" inflation rate if the FED does not follow up with action to match its words of concern about core inflation.

What happened in the 1970's with stagflation? Is this another way to help the ailing housing market?

 

[moh malekpour]

Bank of America Warns of New `Correlation Crisis'

http://www.bloomberg.com/apps/news?pid=20601170&sid=apl3CcA.P81M&refer=home

U.S. homebuilders may trigger a ``correlation crisis'' similar to the credit sell off in 2005 when Ford Motor Co. and General Motors Corp. lost their investment-grade credit ratings, according to Bank of America Corp.'s securities unit.

The ratings cuts to the automakers triggered losses for banks and hedge funds holding the riskiest parts of collateralized debt obligations, securities that package bonds, loans and credit-default swaps and use the income to pay investors.

An increase in the perceived risk of default by homebuilders such as Dallas-based Centex Corp. and Lennar Corp. in Miami could cause similar losses this year, Banc of America Securities LLC analysts Glen Taksler and Jeffrey Rosenberg wrote in a report today. Construction company profits have plunged since the five- year U.S. housing boom ended a year ago. Rising inventories of unsold homes and reluctance by potential buyers wary of falling prices has stifled sales.

``We see increasing risk signals that remind us of the run- up to the 2005 correlation meltdown,'' the analysts wrote in the report titled ``The Correlation Crisis of 2007?''

CDOs are divided into portions of varying levels of risk and return. The riskiest piece, known as the equity tranche, pays the highest yield and is the first to absorb losses when credit quality deteriorates.

 

[Terrel L. Shields]

Noticed some state whose pension fund lost zillions is suing another hedge fund who complains that the suit will slow their efforts to reimburse other investors who lost bets when the hedge bet the wrong direction....

And like the pension fund manager didn't know what he was getting into?

product to him and showed him the negative am on his statement he liked to puke. He had no idea what he had. Sure he signed the docs but relied on what the "pro" told him.

I bet not 1 in 100 borrowers could tell you what interest rate they are paying on their highest credit card let alone the terms of the mortgage. They don't listen, don't understand, and don't want to know. They think that the lender has their best interest at heart hope against all odds.