Housing Bubble Bursting?

[DTB]

Part 2-

Which is the better investment- one that goes down to $70 from $100 or up to $112? DEPENDS!!!!!!!!!!!

If you are a trader, than the second one is better since you are looking for the short term gain.






Brad

A trader may prefer the one going down, if he anticipates it. The more volatility the bigger potential on a trade position.

You need movement and you need to know direction.

Otherwise agreed.

 

[Randolph Kinney]

New Commercial Mortgage Index Roiled By Loan Concerns

http://www.bloomberg.com/apps/news?pid=20601009&sid=apnWxqgz1oZg&refer=bond

April 24 (Bloomberg) -- A new index of derivatives tied to commercial mortgage bonds may be roiled by concerns that the underlying loans represent the ``peak of aggressive underwriting,'' Citigroup Inc. analysts said.


The third version of the so-called CMBX index is likely to cost investors between $70,000 and $90,000 more a year to protect lower-rated bonds in the index from default, Citigroup analysts led by Darrell Wheeler in New York said in a note last week. The credit-default swap index is widely used to speculate on the ability of property owners to repay their debt.


The increase in price comes after Moody's Investors Service this month stoked concerns about risk in the $797 billion market for bonds backed by mortgages on apartment buildings, offices and other commercial properties. Moody's said April 11 it would require more protection for investors before rating new issues because of a ``steady erosion in underwriting quality.''


That declining quality is ``likely to focus the market's attention exactly on those deals that the CMBX.3 references,'' the Citigroup analysts said.
The new index, based on $3.4 billion in securities, is scheduled to begin trading tomorrow.


``The new index will likely trade wider both because of the perceived reduction in underwriting quality and increased leverage and also because of an increase in hedging demand that typically flows to the on-the-run index,'' said Carl Bell, team leader for structured credit at Putnam Investments LLC in Boston, which manages $63 billion in fixed-income assets.

The perceived risk of bonds in the current indexes started rising in February as some hedge funds and other investors that were betting on a deteriorating housing market began speculating on the commercial mortgage market.


A credit-default swap based on $10 million in debt included in the lowest investment-grade portion of CMBX.2 is up by $140,000 since late February to $215,830 today, according to composite prices from London-based Markit Group Ltd., the index administrator. To protect similar-rated bonds in the CMBX.3, it may cost investors $310,000 based on ``indicative levels'' of last week, the analysts said in the April 20 note.


At that level, the low-rated portion of the index would be trading as if it were downgraded to junk, or to BB+ from BBB- on the Standard & Poor's scale, the Citigroup analysts said.

 

[moh malekpour]

Subprime `Liar Loans' Fuel Housing Bust With $1 Billion Fraud

http://www.bloomberg.com/apps/news?pid=20601109&sid=aonxuz3OYwLg&refer=home

Cheating on mortgage applications is so widespread and so seldom punished that it's fueling an increase in foreclosures that will prolong the housing slump, said Robert W. Russell, counsel to the director of the Office of Thrift Supervision, which oversees savings and loans.

Borrowers and brokers commit fraud when they exaggerate the applicant's income, qualifying the borrower for a home he otherwise couldn't afford. Such fraud robbed lenders of an estimated $1 billion last year, according to data collected by the Washington-based Mortgage Bankers Association and the Federal Bureau of Investigation.

``Misstatements about employment and income are being made every day,'' Russell said. ``The brokers are just putting down on paper what the underwriters would require. There are borrowers providing false information as well.''

Loans that require little or no documentation of income soared to $276 billion, or 46 percent, of all subprime mortgages last year from $30 billion in 2001, according to estimates from New York-based analysts at Credit Suisse Group. Homebuyers with those loans defaulted at a 12.6 percent rate in February, compared with 1.5 percent of fully documented prime mortgages, said San Francisco-based First American LoanPerformance, a mortgage consulting group.

A 2006 study cited by the Mortgage Asset Research Institute showed that almost 60 percent of stated income loans were exaggerated by at least 50 percent.

`Liar Loans'

``Everyone calls these loans `liar loans' because we know these people were
lying,'' said Jim Croft, a spokesman at the Reston, Virginia-based Mortgage Asset Research Institute.

Low documentation loans were established in the 1980s mainly for the self-employed and non-U.S. citizens whose pay was difficult to verify. They can be processed quicker than standard loans and typically cost the borrower an extra quarter point on his mortgage. They were made possible by relaxed lending guidelines, or what Bear Stearns Cos. analyst Gyan Sinha calls ``Hail Mary underwriting

 

[Greg Bell]

And the stock market keeps rising.Wall street is one giant Enron , Quick , buy some Indymac , oops , better wait till friday...

 

[Brad Ellis]

Mike,

Absolutely. Traders do look for movement and will quickly jump on an opportunity to short the stock or buy puts.

Brad

 

[Randolph Kinney]

Moody's May Penalize Subprime Bonds That Cap Changes

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

April 25 (Bloomberg) -- Moody's Investors Service, which rates more than 90 percent of the securities backed by subprime mortgages, may require more protection for investors in bonds that limit the number of underlying loans that can be modified.


The changes, which may include requiring more so-called credit enhancements, would take place ``long before year-end'' if adopted and are in response to forecasts of rising defaults, Warren Kornfeld, co-head of residential mortgage-backed securities at New York-based Moody's, said in an interview.


``Restrictions in a securitization that limit servicers' flexibility to modify stressed loans are generally not beneficial for bondholders,'' Kornfeld said.
Raising the required credit enhancement for subprime mortgage bonds that limit modifications would encourage the creation of securities that permit more loans to be reworked. The alternatives would be to sell more of the debt with lower ratings, cutting into profit margins, or to increase the rates charged to borrowers, which may reduce the amount of new loans.


Subprime mortgage bonds are made up of pools of loans sliced into securities with different maturities and ratings. About $1.45 trillion of subprime mortgages are outstanding, according to Bear Stearns Cos. Delinquencies and defaults on subprime loans in bonds are at a record high, according to UBS AG.

Eight of the 31 subprime-mortgage deals that Credit Suisse Group bond analyst Rod Dubitsky looked at for an April 5 report capped the amount of loan modifications that can be done at 5 percent of either the total loan number or their balances.


Historically, about 4 of 10 borrowers with modified loans eventually default, Dubitsky wrote, based on data from securities created by GMAC LLC's Residential Funding Co.

 

[Brad Ellis]

Moh,

It is just not that simple.

Of course I am aware of Fitch's ratings- and of Moody's and S+P's as well.

Just for the record, all three rate Indymac's paper as investment grade- that is the highest rating.

That said, every type of mortgage is taking a haircut when sold to Wall St. Every type from every lender. NDE is not alone.

And I do not know of a single lender who is projecting increased volume for 2007. Of course, our volume was up 25.9% over the first quarter of last year but no one expects that to continue.

And yes- you have lumped Alt-A into the same bucket as sub-prime in a majority of your posts this year.

Brad

 

[Randolph Kinney]

Greenspan Says Consumers Fund More Spending by Extracting Home-Equity Cash

http://www.bloomberg.com/apps/news?pid=20601068&sid=aIv2WTbby6HQ&refer=economy

April 23 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the share of consumer spending that Americans funded from extracting cash from the value of their homes doubled in the five years to 2005.


The portion increased to 2.1 percent in 2005 from about 1 percent in 2000, Greenspan said in a research paper written with Fed economist James Kennedy, released today by the central bank. Homeowners took out an average of $1 trillion in cash from home equity annually during the period.


The estimates are among hundreds of data compiled by Greenspan and Kennedy to help economists understand how Americans have used cash derived from selling their homes, taking out home equity loans and refinancing their mortgages. At the same time, Greenspan avoided taking sides over whether the extra cash from rising home values has actually increased consumer spending.


Greenspan noted that while JPMorgan Chase & Co. economists find that mortgage equity didn't cause an increase in consumer spending, Goldman Sachs Group Inc. analysis concluded it had a ``statistically significant and economically large effect on consumer spending.''


``Given JPMorgan's view that equity extraction is not a fundamental determinant of consumer spending, I don't find anything there that contradicts that,'' said Michael Feroli, an economist at JPMorgan in New York who used to work at the Fed. ``On the other hand, I'm sure if you were someone who believed it does have a big effect, you would probably say everything here is consistent with that view as well.''

Today's paper is a follow-up to research by Greenspan and Kennedy in 2005 that showed that extraction of home equity accounted for about four-fifths of the increase in mortgage debt. That paper was Greenspan's first since 1996.


Including repayment of non-mortgage debt, such as credit card loans, the cash financed 2.9 percent of consumer spending from 2001-05 compared with 1.1 percent from 1991-2000, the authors said.

 

[Brad Ellis]

Moh,

Another part of your post,

"Regarding your finance 101. I look at the P/E (price to earning) ratio of the company and that is the best way to find out about any company's performance. If the ratio is lower than the industry standard, it means that company is under performing. Long-term investment is old fasion investment and no body is doing it any more with so much market volatility.
We still got to wait and see what kind of regulation the Fed is going to impose on mortgage bankers so it is foolish to go for long term investment when a Fed policy can change the whole performance of the industry. Besides the possible Fed regulatory reform, there are two other episodes that may come out. I-the ability to sell those Alt-A loan packages to the secondary bmarket. 2-the possiblity of buying back those already sold Alt- loan packages and stick with them."

The first part of that can be so wrong it is laughable.

1) If the P/E is lower than the industry average then the stock is underperforming? Not always at all. Investors look at OVERALL return- NOT JUST the stock price. I had an REIT for almost 20 years (bought out 10 years ago by another and redeemd a few years ago). The price pretty much never moved but I got a cash on cash return of 20% per year. It's P/E was always below the industry average, Why, because investors looking for stock price growth pay only marginal attention to P/E today. Instead they look at a different ratio- the PEG (price/earnings growth). P/E ratios have been somewhat out of favor in many sectors since the dot.com bust where the P/E ratios of firms were enormous even when they made little money. The PEG, on the other hand, looks at projected earnings. If, over a 3 year period, for example, the earnings double, the P/E could stay exactly the same while the stock price doubles.

2) Long term investments are old fashioned? I think NOT. Warren Buffet is a long term investor and the street follows him like a puppy dog- and for good reason. His performance is stellar. I follow him too. And, most important, it is the very market volatility that drives traders to become investors. It works exactly opposite to what you are suggesting.

But, I'll agree with you that regulatory action can take a toll on an industry's performance. Usually the legislature gets it wrong but it will have an impact. But, it will not be Washington that will decide on whether or not particular mortgages sell for premiums or discounts. It will be Wall St. and they will vote with dollars- just as they have always done.

Right now, Alt-A is under attack, not just because they know the risk is higher but because they see the opportunity to profit from this scenario. If they were truly worried about the risk they would clamp down like they did on sub-prime- but they have not. They simply are paying less for the paper and still charging the ultimate investors the same premiums- it is the shelf where the profits are- and they are enormous.

That is why Cerebus bought Option One- the shelf. They will make a ton of money from this- not because the paper is any better- Option One's paper quality has not changed but the spread has increased dramatically.

Finally, if you really want to know how the street views any particular stock, look at the longer term options spreads. For NDE, for example, you will see the long term calls open interest - 2008 and beyond- looking pretty tasty. I'm actually thinking of jumping in myself. Open interest on the calls for various strike prices, while they change daily of course, look like calls are vastly exceeding puts. That means the overall market is expecting substantial increases in stok prices in the future periods. Current troubles are well known to the market but the savvy investors and traders look beyond that.

So, I can profit by buying the stock (which I did) and waiting. In the meantime I am earning about 6% in a dividend (and yes, that is projected to continue at that level). If the call guys are right in 2008 then I may see another 20% on top of that. 16% is not bad at all and most traders would salivate at such a return not to mention investors.

Brad

 

[Randolph Kinney]

That is why Cerebus bought Option One- the shelf. They will make a ton of money from this- not because the paper is any better- Option One's paper quality has not changed but the spread has increased dramatically.

H&R Block tried for more than 6 months to sell Option One at $1.3 Billion. Before that, they tried selling it for $1.5 billion but soon realized after another financial quarter, more write downs on the loans and buybacks, that no one would be interested. Finally H&R Block found Cerebus who is paying $800 million for Option One.

Lets face it Brad, H&R Block was happy to get rid of Option One and it will take a write off doing so of more than Option One's book value and the magnitude of that loss will wipe out any earnings for H&R Block for year 2007.

Cerebus may indeed make money eventually. However, if they had to sell Option One again on today's market, they would be taking a loss too.