Housing Bubble Bursting?

[Randolph Kinney]

Risk is Spreading Through Financial Markets

Richard Bernstein, Merrill Lynch Chief Investment Strategist, said the following regarding the spread of risk in the financial markets:

• We continue to view the spread of risk in the financial markets like popcorn popping in a microwave. While each kernel pops as an independent event, eventually the result is a bag full of popcorn. Rather than viewing risk as simply being one major event, we believe risk spreads insidiously through the markets as a series of small events which investors generally consider to be immaterial.
• We have been keeping track of the popping kernels, and the total is up to eight by our count. Number 7 was the U.S. levying punitive tariffs on Chinese coated paper and No. 8 was India's central bank tightening in the face of a stock market correction.
• We find the U.S. tariff event to be particularly disturbing, and we are surprised that investors are not more concerned. Consider the following:
  1. Lower-priced Chinese goods may be a prime reason the U.S. consumer has been so "resilient." China's thirst for market share may have done as much to keep the U.S. consumer going as consumers' destruction of their own balance sheets has.
  2. Washington doesn't seem to realize that China's capitalism is not western-style capitalism. China's goal is employment maximization, not profit maximization. That means that tariffs are likely to be unsuccessful. What will Washington do next when China reacts by lowering prices and squeezing margins to maintain market share?
  3. An editorial in the official China Daily newspaper stated that protectionist acts "do nothing to promote the restructuring the U.S. economy needs to reduce its budget and trade deficits." We dislike saying so, but we agree. We have repeatedly argued that responsible fiscal and monetary policies might not be politically expedient, but they are the safest ways to maintain the long-term health of the U.S. economy.
• Overall, it appears as though Washington wants to try to solve the U.S. economy's imbalances through the devaluation of the U.S. dollar and, increasingly, the adoption of trade barriers rather than sound policies. U.S. investors should watch Washington's policies carefully. If the current course continues, investors should be careful not to be the last ones holding purely U.S. dollar assets.

 

[Randolph Kinney]

Hovnanian Has Bigger Loss Than Forecast as Subprime Woes Hurt Home Sales

http://www.bloomberg.com/apps/news?pid=20601103&sid=a8jPHAtaQXLU&refer=us

May 4 (Bloomberg) -- Hovnanian Enterprises Inc., the sixth- largest U.S. homebuilder, reported a wider second-quarter loss than earlier forecast and said the subprime mortgage crisis is exacerbating weakness in the home sales market.


Hovnanian said today it will have a pretax expense of as much as $20 million to cut the value of its property and walk away from deposits on parcels of land it doesn't plan to buy. The company delivered 30 percent fewer homes last quarter than a year ago and saw ``exceptionally high cancellations'' in the Fort Myers-Cape Coral area of Florida.


``The adverse publicity surrounding the subprime market has further damaged home buyers' psychology, resulting in decreased demand and leading to continued use of sales incentives,'' Hovnanian said in the preliminary earnings statement.


At least 50 mortgage lenders have halted operations, gone out of business or sought buyers in the last year amid rising borrower defaults. The crisis has led to tighter lending standards just as home prices are falling and made it more difficult for many buyers to enter the market.

 

[hastalavista]

``The adverse publicity surrounding the subprime market has further damaged home buyers' psychology, resulting in decreased demand and leading to continued use of sales incentives,'' Hovnanian said in the preliminary earnings statement.

"Adverse publicity" or factual news?
It hasn't damaged "home buyer's psychology". It has damaged investors willingness to purchase subprime MBS (and all their various alternate packages).

 

[Randolph Kinney]

New Century to Sell Loans to Ellington Hedge Fund After Six-Party Auction

http://www.bloomberg.com/apps/news?pid=20601208&sid=aFOk3A7ZuWGA&refer=finance

May 4 (Bloomberg) -- New Century Financial Corp., the largest subprime lender in bankruptcy, agreed to sell $170 million of loans to hedge fund Ellington Management Group LLC for less than 30 cents on the dollar.


Ellington, based in Old Greenwich, Connecticut, won a court- supervised auction, agreeing to pay $58 million for the loans and a batch of mortgage-backed securities, the fund's vice chairman, Larry Penn, said in an interview. Many of the loans are delinquent, and others are ``second-lien'' loans that may be worthless after the first-lien mortgages are satisfied, he said.


``Some are these loans are probably worth close to par, and others are probably worth nothing,'' said Penn, 45, a former Lehman Brothers Holdings Inc. mortgage-trading executive who helped found Ellington in 1994.

``You're hoping obviously that you'll be able to cure the defects of the loans. You might be able to modify the terms with borrowers.''


The auction's results show how far the value of Irvine, California-based New Century's loans tumbled after its April 2 bankruptcy filing. Ellington's bid, which values the loans at 20 cents to 30 cents on the dollar, was still high enough to win an auction that drew five other bidders, including Royal Bank of Scotland Group Plc, said Mark S. Indelicato, a lawyer at Hahn & Hessen in New York who is representing New Century's creditors.

 

[moh malekpour]

An expensive lesson well learned in my younger days comes to mind after reading recent post in this thread. I have lived on a farm most of my life in one of the largest tobacco growing regions in the country. Tobacco is the biggest cash crop that is legal I know of. Back in the 70’s in a good year you could make $2,000 and up per acre and we owned two tobacco farms so I decided to give it a whirl big time.
Here is the lesson and how it relates to this economic bubble issue we are facing: I learned there are two ways to judge a tobacco crop. One is the macro view and the other is the micro view. In the macro view you stand a good distance off and look at the tobacco fields with all the plants in neat rows and all generally appear well. Nothing to worry about, the money is as good as in the bank or so it appears.
Then there is the micro view. That is when you take a hoe and inspects every plant one at the time there being 6,000 plants per acre. That is where the truth lies. The scariest experience I have ever had is walking the tobacco rows. I never could find a decent looking plant out of the 6,000 plants per acre, yet when I stood on the tractor and looked at the field it was a beautiful sight. Which view is correct? I can tell you from vast experience the correct view is the micro-up close and personal view of each plant. A good crop requires 6,000 good plants because the crop is the sum total of all of the plants no matter how the crop looks from a distance.
This is where this housing bubble issue becomes confusing because it is the same principle at play. If you stand back like the NAR, the GSE’s, and other macro viewers do all looks manageable, but when harvest time comes the truth of the matter becomes apparent-we just lost our arse! You can’t have all of these sagas about mortgage companies going belly up while at the same time saying the sum total of the financial crop is manageable because it is just too vast a mess for that to happen. $1.5 trillion is a lot of money and one crop in a life like that will put you into bankruptcy. The problem with farming is that by the time you find out what is happening it is too late to do anything about it. But it ain't too late to never make that mistake again! I have a nice vege garden of manageable size. I give every plant individual attention and weed out the non productive at an early stage. I can't eat the crop but I love to eat home grown tomatoes, melons and such-one at the time.

http://www.nashuatelegraph.com/apps/pbcs.dll/article?AID=/20070504/BUSINESS/205040304

More than 1.1 million homeowners will lose their homes to foreclosure by 2014 because they can’t afford the rising payments on their adjustable-rate mortgages, according to a researcher.

Whether you think that’s a big deal depends on your perspective.

“This is not going to break the economy. It’s better understood as a part of the business cycle,” says Chris Cagan, the mathematician who wrote the foreclosure forecast. That’s the big-picture, or macroeconomic, view.

The up-close, or microeconomic, perspective is more ominous. The biggest losers will be the homeowners who lose their houses and the lenders and investors who fronted them the money. Cagan, a researcher for First American CoreLogic, says the net losses from these foreclosures will total about $100 billion over the next six or seven years.

 

[Randolph Kinney]

Lost another one - client going down

This is too said. I got a phone call tonight. I have a good client who is a mortgage broker and Realtor. She has had only one property that she sold, plus financing this year. Her income is way down this year. She had bought a house for her mother-in-law to live in back in 2005. Now the mother-in-law cannot make the payments. She can't make both her own payment ($4,600 per month) and the mother-in-law payment ($3,600 per month).

It looks like she is going to lose both houses. She bought her house in 2006 with ARM financing that resets next March and has a $22,000 prepayment penalty. Her house has gone down $100,000+ in value. The mother-in-law's house has gone down $60,000 in value. Refinancing is not going to work.

She is now trying to come to the final decision of when to tell the banks. It is the calm before the storm.

It is one thing to read news stories and look at statistics of short sales and foreclosures. It is quite another to know some one, personally, that is going down. It is really becoming disparate for the Realtors and mortgage brokers. Refinancing deals have all but dried up. People have resets coming and they want to refi but can't because they are up-side-down in their mortgage.

If anyone has any doubt that things are bad in California, let me confirm to you it is bad. And it is going to get worse as these foreclosures continue rising faster than what 1Q 2007 data indicates.

 

[Brad Ellis]

Denis,

I think there is some element of truth in his statement.

While there is no doubt that it is a fact that sub-prime is a problem, there is certainly a portion of this that is hype and that creates the adverse publicity.

F/Cs may increase for a year but, frankly, the markets do know how to deal with it and recover from it.

Only if the F/C situation gets past such a level will it turn out be only fact and not partially hype.

As they say, this too shall pass. (or at least I hope so!)

Brad

 

[Randolph Kinney]

"Adverse publicity" or factual news?
It hasn't damaged "home buyer's psychology". It has damaged investors willingness to purchase subprime MBS (and all their various alternate packages).

Denis, it should be very interesting going through the summer months to see how sales compare to last year. If subprime financing is not that big of a force in the sale of real estate, then we should see a major pick up from the spring selling season.

All the shorts sales and foreclosures should be easily absorbed by real buyers this summer, absent the speculators and investors, and home values will stabilize.

How's that? Any one believe that? :new_all_coholic:

 

[Randolph Kinney]

Subprime defaults made worse by securitization

http://www.marketwatch.com/News/Sto...DADC5-3315-4D00-97BA-6D6F91543C58}&siteid=nbk

OMAHA, Neb. (MarketWatch) -- Rising defaults in the subprime mortgage business have been exacerbated by securization of these loans, Berkshire Hathaway Chairman Warren Buffett said on Saturday during the company's annual meeting. Subprime mortgages are offered to poorer people with blemished credit records. The loans are often packaged up and sold on again to investors as mortgage-backed securities. "Once you package those things and sell them through major investment banks, discipline leaves the system," Buffett said. Subprime borrowers have been missing their first and second monthly payments recently, he noted. "That shouldn't happen. Securitization has made the problem worse," he added. A slowing housing market has triggered turmoil in the subprime mortgage business this year. Legislators have been discussing possible new regulations to deal with the crisis, including making investors in mortgage-backed securities more responsible for future delinquencies.

 

[Randolph Kinney]

Can Subprime Mortgage Problems Crash the Car Business?

http://www.businessweek.com/autos/content/may2007/bw20070502_662106.htm?chan=autos_autos+index+page_top+stories

Auto sales have been struggling for years but now that the housing market is stalling, things could get even worse.

The housing slump has been placing some weight on the U.S. economy this past year. Last Friday, the federal government reported that overall economic growth slowed to a sluggish 1.3 percent rate in Q1 of 2007, marking the weakest performance in four years.


And so, it seems like a fairly easy and obvious prediction to make: that the housing market slowdown in many parts of the country, coupled with variable-rate mortgages resetting to fully indexed rates for millions of homeowners, will have a negative impact on automobile sales. Late last month, General Motors Vice Chairman Bob Lutz became perhaps the first high-profile car industry executive to make that connection "official."