Housing Bubble Bursting?

[Randolph Kinney]

Suprise! Subprime borrowers paying credit card first

A new study finds that, in a shift from the past, subprime borrowers are paying their credit cards before their mortgages

For generations, homebuyers have had one simple rule drilled into their heads: Whatever happens, keep paying the mortgage. If you don't, you risk losing your house and all the equity you've built up in it.

But for many subprime borrowers, that doesn't seem to be the rule of thumb anymore. They are now more likely to be late on their mortgage than on their credit card, according to a new study from Experian Group, the Ireland-based company that maintains a huge database of consumer credit histories.

The significance? One explanation could be that many recent subprime homebuyers simply aren't that worried about losing their homes because they don't have much to lose. Most put down small or zero down payments. If prices have fallen since they bought, they may actually owe more than the house is worth, making it an easy choice to walk away.

At the same time, keeping access to their credit cards has become more important than ever, says Stan Oliai, vice-president of decision sciences for Experian Decision Analytics. "People are using credit cards for everyday items like gasoline and groceries, and to tide themselves over from paycheck to paycheck," says Oliai.

 

[George Hatch]

Randolph,

Regarding your post #3640 (auctioning off Bear Stearns mortgage securities), I think establishing a market value for these underperforming bonds could trigger the equivalent of a run on the banks. Once these investors realize the magnitude of their exposure a lot of them could decide to jump ship. If so, havoc would probably ensue.

That's probably why some of the big shots on Wall Street are considering an attempt to bail out these funds. I think it would end up being a case of throwing good money after bad because the failure of these funds is just the shape of things to come - there will be lots of others going down in short order and nobody has pockets deep enough to bail them all out. Not even the government this time.

 

[Randolph Kinney]

Randolph,

Regarding your post #3640 (auctioning off Bear Stearns mortgage securities), I think establishing a market value for these underperforming bonds could trigger the equivalent of a run on the banks. Once these investors realize the magnitude of their exposure a lot of them could decide to jump ship. If so, havoc would probably ensue.

That's probably why some of the big shots on Wall Street are considering an attempt to bail out these funds. I think it would end up being a case of throwing good money after bad because the failure of these funds is just the shape of things to come - there will be lots of others going down in short order and nobody has pockets deep enough to bail them all out. Not even the government this time.

Merrill Backs Away From Plan to Dump Bear Hedge-Fund Assets, People Say

The latest news out says that Merrill Lynch is now changing its mind to dump.

The securities firms set their sale in motion to reclaim loans to the two hedge funds, which had posted losses of as much as 20 percent by betting on CDOs. A large sale may help confirm that other funds are overvaluing their holdings of similar securities, potentially causing a chain reaction of writedowns causing billions in losses.

``It's an industry issue,'' said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. Hintz was chief financial officer of Lehman Brothers Holdings Inc., the largest mortgage underwriter, for three years before becoming an analyst in 2001. ``How many other hedge funds are holding similar, illiquid, esoteric securities? What are their true prices? What will happen if more blow up?''

Merrill Lynch plans to hold onto the remaining securities for now, one person said, without being more specific.

I suspect that the insiders know that if the losses spread to other funds, the game is over and losses will be catastrophic. It is a total illiquid market for trading second hand CDOs with defaults. The first out to liquidate will be the winners. The last out will have nothing. It truly will be something that only the FED can handle acting as the buyer of last resorts.

 

[Greg Bell]

The links between the seriously worsening housing recession and the financial assets backing the increasingly risky mortgages has now come to an ugly crossroad: there are now concerns about the systemic risk fallout from the collapse of a Bear Stearns hedge fund with large exposure to mortgage backed securities and CDOs.


First, this week’s news on the housing market confirmed that the housing recession is getting much worse: Home builders (NAHB) confidence down to its lowest level since 1991, housing starts falling again, mortgage rates rising further, mortgage applications falling again. These bad news were on top of the previous week’s new of a sharp rise in foreclosures and of falling home prices. So, as even Bernanke has now admitted, the housing recession has not bottomed out and the wealth effects of falling home prices may be more severe than previously expected. Things are getting so bad that Bloomberg used the term “Blood Bath” to describe the housing market in a recent article headline: “Rising Rate Pushes Housing, the Economy to a Blood Bath”:


Second, the worsening of the housing market is reflected by the free fall in the ABX index. The prices for the BBB- tranches of this index are back below the lows that this market experienced in February when the subprime carnage blew up in public. So investors are pricing again the highest probability of sharp upcoming defaults on subprime mortgages.


Third, the recent near default of a Bear Stearns hedge fund with heavy exposure to mortgage backed securities has revealed the dirty secret of the mortgage related CDOs market: these instruments have not – until now – been marked to market. But the upcoming auction of about $800 million of these CDO claims of the Bear Stearns fund seized by Merrill Lynch is now going to reveal the true market price and value of these risky securities.


Fourth, these highly illiquid securities have been priced so far based on unrealistic and distorted credit ratings as the rating industry has been complicit with the mispricing and misrating of these securities: most of these securities have not been re-rated in a way consistent with the rising default rates on subprime mortgages. That is why Wall Street is now in a panic about getting true market values – through an auction - of such securities. Losses for CDOs investors will be massive once these assets are correctly priced to market rather than kept on books based on valuation that do not make any sense as they were based on distorted and obsolete ratings.


Finally, and more seriously, the SEC is now worrying about the “systemic risk” deriving from this Bear Stearns hedge fund collapse and comparisons are being made to the LTCM near collapse in 1998 with worries that the problems of the Bear Stearns hedge fund will lead to contagion to other hedge funds and to their prime brokers. As Bloomberg put it today:



U.S. Securities and Exchange Commission Chairman Christopher Cox said yesterday that the agency's division of market regulation is tracking the turmoil at the Bear Stearns fund. ``Our concerns are with any potential systemic fallout,'' Cox said in an interview. …

The reaction to the Bear Stearns situation is reminiscent of Long-Term Capital Management LP, which lost $4.6 billion in 1998. Lenders including Merrill and Bear Stearns met and agreed to take a stake in the Greenwich, Connecticut-based fund and slowly sold the assets to limit the impact of its collapse. ``We're not surprised to find the principal circle of players is pretty interconnected,'' said Roy Smith, professor of finance at New York University Stern School of Business and former head of Goldman's London office. ``What we're looking for is whether the interconnection creates a negative domino effect: Whether Hedge Fund A creates a problem for other hedge funds, which in turn creates a problem for the prime brokers that are lending to them.''

 

[moh malekpour]

These are all sub prime mortgage backed securities. They can auction them out like auctioning their foreclosed homes and sell them for 10 or 20 cents per dollar. They can liqudate all of them within a day but they got to take a big loss. As soon as one of them start doing it, the rest of them who are holding that kind of secureity are going to do the same. When they finished with subprime backed securities, other mortgage backed securities are also going to follow up and sell their assets with discount.

 

[Couch Potato]

These are all sub prime mortgage backed securities. They can auction them out like auctioning their foreclosed homes and sell them for 10 or 20 cents per dollar. They can liqudate all of them within a day but they got to take a big loss. As soon as one of them start doing it, the rest of them who are holding that kind of secureity are going to do the same. When they finished with subprime backed securities, other mortgage backed securities are also going to follow up and sell their assets with discount.

What makes you think people will pay that much?

 

[Greg Bell]

Someone bought Enron at Ten Cents , One born very minute..

 

[moh malekpour]

What makes you think people will pay that much?

Just assuming that 10-20% of sub prime borroweres are able to keep their homes and pay their mortgage or refinance and pay off their loans. That covers 10 to 20 cents for a dollar.
Bear has $850 million bad sub prime security backed loan. If all those loans were 100% financed, it means Bear is supposed to have $850 million worth of properties somewher around the US . If all those properties default and foreclosed, I am sure they will sell at least at 10-20% of their apprised value for their last sub prime finacing. If the house was apprised at $300000 and had a 100% sub prime financing, it should be worth of something like $30000 or $60000 now even if it is foreclosed.

 

[Randolph Kinney]

Oh no! Someone is catching on to the problem!

U.S. Mortgage Losses May Be the `Tip of the Iceberg,' Bank of America Says

June 22 (Bloomberg) -- Losses in the U.S. mortgage market may be the ``tip of the iceberg,'' Bank of America Corp. analysts said today in a note for clients.

Higher interest rates have yet to affect many home owners who took out adjustable-rate mortgages, the Charlotte, North Carolina-based bank said. Interest payments on about $900 billion of the riskiest subprime home-loans are due to increase this year and next, the analysts wrote.

Bear Stearns Cos., the second-biggest underwriter of mortgage bonds, plans to assume $3.2 billion of loans to stop creditors from taking over assets of one of its hedge funds, people with knowledge of the proposal said. Concern about the collapse of the funds, which made bad bets on mortgage-backed securities, sent bonds and stocks of finance companies lower.

Countrywide Financial Corp. and IndyMac Bancorp Inc., two of the largest U.S. mortgage lenders, may suffer more than other finance companies because they hold mortgages themselves as well as selling them on to investors, the analysts wrote. They may not have set aside enough money to cover losses, said Bank of America, which has a ``sell'' recommendation on both lenders.

 

[Terrel L. Shields]

are now more likely to be late on their mortgage than on their credit card,

in bankruptcy they cannot escape the credit card balance anyway, so why not diss the assets that you can and pay on the ones that does you some good.

the funds, which made bad bets on mortgage-backed securities

do you think they are the only two that bet wrong?

``What we're looking for is whether the interconnection creates a negative domino effect: Whether Hedge Fund A creates a problem for other hedge funds, which in turn creates a problem for the prime brokers that are lending to them.''

My cousin, a financial planner, had a client come with a sad tale. She had invested with a Merril Lynch broker who put her in "diversified" mutual funds. She had about 6 funds, all were related to growth and technology. In the end, a review of the 6 funds found some stocks which were owned by every fund. So much for diversity. She lost about 60% of her portfolio. These funds almost undoubtable made the same kind of mistake on a gargantuan scale.