Next: The Real Estate Market Freeze

Discussion in 'Financial Cents' started by melbo, Mar 12, 2007.

  1. melbo

    melbo Hunter Gatherer Administrator Founding Member

    If anyone has noticed me to be a grump lately, this has been my largest fear. Now it's here and I am one of the suckers who may sink with this one.

    Next: The real estate market freeze

    As a result of the collapse of the subprime mortgage market, lenders will -- gasp! -- once again require down payments, filling the market with unsold homes and driving down prices.

    March 12, 2007

    By Bill Fleckenstein

    The unraveling of the housing market, the magic bullet that "fixed" our unraveled equity bubble, is the news. Slowly, the popular press is waking up to what I've been discussing for many months now.

    Dropping like subprime flies

    Essentially, the subprime mortgage industry -- which lends to consumers with credit issues -- is gone. Alt A lenders, those one rung up the ladder creditwise, will be next. Together, they comprise approximately 40% of the market. If you were to go down the list of what were once the top 25 subprime lenders, you'd see that only a handful are still standing at this point. The Office of the Comptroller of the Currency recently enacted rules that, in essence, require lenders who provide mortgages using federally guaranteed depositor funds to behave in a somewhat intelligent fashion. Subprime lender Fremont General (FMT, news, msgs), by its own admission, owes its demise in part to that rule change.

    What we don't yet know is the degree of credit-related insanity, which we'll only discover when the tide goes out -- the criminal investigation of New Century Financial (NEW, news, msgs) being one example of the rot that has already been revealed. We also don't yet know the ramifications for the dark-matter universe in collateralized debt obligations (CDOs), credit default swaps (CDSs) and other derivatives-related exotica. But I think it's safe to say that the surprises will be negative -- and large.

    This credit collapse is an unequivocally important event. Because, as I've been writing, the ability of anybody with a pulse to get a loan for any amount is what drove the real estate market, and the real estate market is what drove the economy. Sometime in the next three to six months, the real-estate market will basically just freeze up. Of course, inventories are going to explode and prices will eventually drop rather dramatically as a vicious cycle feeds on itself.

    The down payment makes a comeback

    Since the pendulum swung as far as it could in the direction of reckless lending, which the whole bubble was about, it will now swing back toward the quaint notion of folks being lent only the amount of money they can reasonably be expected to pay back. And, the lenders will want their loans to have a margin of safety, in the form of down payments.

    Sadly, it doesn't take a large imagination to conjure up how underwater many people will be, and how difficult it will be to sell houses -- or purchase them, for that matter -- as lending standards change. Thus, I believe the ingredients for the "next time down" are now at hand.

    In the meantime, patience is required of those of us in that camp. Yes, there have been "fire drills" in the stock market on a handful of days, when folks headed for the exits. But folks have also headed right back into stocks as soon as they appeared to stabilize. Which just shows you that in the aggregate, folks do not understand that the economy was driven by real estate. Nor do they seem to understand that real estate is what will sink the economy.

    Prescient view of a game gone askew

    One who does is Lou Ranieri, sort of the father of the mortgage bond market. In a recent interview, he warned: "This is the leading edge of the storm. . . . If you think this is bad, imagine what it's going to be like in the middle of the crisis." In his opinion, more than $100 billion of home loans are likely to default. ("Just divide $100 billion by the average loan amount and you get a lot of people, a lot of families.") He also expects to see some form of bailout at some point, because "foreclosures in those amounts are politically unacceptable."

    He could be right about the size of the problem. I could see that, although I don't have enough data to say how big it will be. If there is a bailout, that would certainly not be bullish for the dollar, though it would be very bullish for precious metals.

    At the time of publication, Bill Fleckenstein did not own or control shares of companies mentioned in this column.
  2. Bear

    Bear Monkey+++ Founding Member Iron Monkey

    Have you been grumpy lately??????[LMAO]
  3. ghrit

    ghrit Bad company Administrator Founding Member

    Once upon a time, I had an ARM way long ago, and I can see how grumpiness can arise. Learned from that, I did, and escaped with a whole skin. It remains amazing to me that people actually take on mortgages with no limit adjustables and interest only, much less negative equity like are being pushed around here. Hopefully, I'll get situated before the balloon goes up and put my FRNs in land. Now, the only things that raises my grumpiness quotient is balky computers (hard drive crashed at work last Friday) and people in the express grocery lines that write checks for 4.92USD of frozen broccoli. (Oops. Cell phone using drivers is up there too.)
  4. melbo

    melbo Hunter Gatherer Administrator Founding Member


    I don't have risky loans or wierd arms myself. But I am holding RE that is costing me interest right now and a freeze will cause me some headaches.
  5. Clyde

    Clyde Jet Set Tourer Administrator Founding Member

    New Century Gets Default Claims, Says It Lacks Cash (Update8)
    By Bradley Keoun and Yalman Onaran
    March 12 (Bloomberg) -- New Century Financial Corp., the nation's second-biggest subprime mortgage lender, said it doesn't have the cash to pay creditors who are demanding their money, increasing speculation that the company will go bankrupt.
    The New York Stock Exchange, citing the credit crisis, halted trading of New Century this morning until it decides whether to keep listing the company's securities. Shares of the Irvine, California-based company, already down 90 percent in 2007, lost half their remaining value in pre-market trading, and rivals fell as much as 25 percent today.
    ``They're one step closer to bankruptcy,'' said Bose George, an analyst at Keefe Bruyette & Woods in New York who rates the shares ``market perform.'' ``The only possibility for survival now is for someone, potentially an investment bank, to step in.''
    New Century may be insolvent because too many of its own customers -- most of whom have poor credit histories or heavy debt burdens -- aren't repaying their loans. Bad U.S. subprime mortgages are at a seven-year high, forcing more than two dozen lenders to close or sell operations. Their woes may contribute to more than 1.5 million Americans losing their homes and 100,000 people losing their jobs, according to real estate executives, economists, analysts and a Federal Reserve governor.
    New Century said in a federal filing it doesn't have funds to repay lenders including Morgan Stanley, Citigroup Inc. and Goldman Sachs Group Inc. The creditors want New Century to repurchase all outstanding mortgage loans they financed.
    Shares Plunge
    The company's shares traded for as little as $1.36 in pre- market trading, compared with $3.21 on Friday, a day when the stock hit an eight-year low. The company said March 2 that U.S. prosecutors in Los Angeles are investigating trading in New Century's securities before a Feb. 7 announcement that it planned to restate earnings. Investigators also are examining New Century's failure to properly account for the cost of bad loans.
    ``It's kind of the perfect storm,'' said Vince Arscott, an analyst in the financial institutions group at Fitch Ratings. ``You throw in accounting issues and delayed filings, you throw in a criminal inquiry, and then the whole secondary market is really sour on subprime.''
    Rival lenders including Fremont General Corp., Accredited Home Lenders Holding Co., and NovaStar Financial Inc. have shed more than half their value this year, and Countrywide Financial Corp., the nation's biggest mortgage company, has tumbled 17 percent.
    Ripple Effects
    Accredited, which fell 28 percent today, was ``considered a better player in the space,'' said Matt Howlett, an analyst at Fox-Pitt Kelton in New York. ``But they're not immune to the deplorable conditions in the subprime space. You can't create any value in this market, and the likelihood of a sale, which we thought was really the only exit, just seems more unlikely every day.''
    Fremont, which shut its subprime lending operations last week under pressure from U.S. regulators, lost 16 percent today. NovaStar shed 19 percent and Countrywide declined 2.7 percent.
    Analysts including Merrill Lynch & Co.'s Kenneth Bruce predicted last week New Century will go bankrupt. New Century has used up cash as rising default rates forced it to buy back loans it sold to investors when borrowers didn't make their payments. The company said last week it's in talks with lenders and potential partners about refinancing or ``other alternatives.''
    `No Assurance'
    New Century's financing agreements have so-called cross- default provisions that trigger accelerated payments. Should all of its creditors force it to repurchase their loans, the total obligation would be about $8.4 billion, New Century said today.
    ``Medium, small-size players who were addicted to Wall Street financing are at most risk,'' said David Hendler, an analyst at CreditSights Inc. in New York.
    Talks with lenders are continuing, and New Century can give ``no assurance'' that efforts to refinance the debt will succeed, the company said.
    Standard & Poor's cut New Century's counterparty credit rating today to D, for companies that are in payment default, from CC.
    New Century has received about $975 million of financing from Morgan Stanley. Part of the money from the New York-based securities firm was used to pay Citigroup Inc. about $717 million on March 8, after Citigroup demanded repurchase of its loans, New Century said in today's filing.
    Subprime Loans
    Subprime loans, a term applied to some of the riskiest home mortgages, are made to borrowers unable to qualify under traditional, more stringent criteria. The loans often carry interest rates 2 to 3 percentage points higher than regular mortgages and sometimes have low initial ``teaser'' rates that adjust higher in later years. Some lenders also lowered their standards last year to bolster revenue because slumping home sales had hurt demand.
    The combination made the loans more prone to default, with delinquencies at more than 12 percent in the third quarter, according to the Mortgage Bankers Association. The Washington- based trade group is scheduled to release updated numbers for the fourth quarter tomorrow. Investors are increasingly shunning bonds backed by subprime loans.
    ``It's like a hot potato with these loans, no one wants them,'' Fitch's Arscott said.
    OceanFirst Financial Corp., the holding company for OceanFirst Bank, said today it will revise 2006 earnings because buyers of some of its subprime loans are forcing the company to take them back. Borrowers of the loans -- which the bank offered starting last year through the Columbia Home Loans unit -- are already defaulting, the Toms River, New Jersey-based lender said. The loans offered to cover 100 percent of a home's value.
    Countrywide's Report
    Countrywide said late payments on home loans that it manages for others held steady last month. Loans at least 30 days past due remained at 4.71 percent of total loans serviced, the same as in January, the Calabasas, California-based company disclosed in monthly data released on its Web site. A year earlier, 4.29 percent of those loans were late.
    Jim Shanahan, a senior analyst at Wachovia Capital Markets, cut his rating today on Countrywide to ``underperform'' from ``market perform.''
    ``While the origination and sale of subprime mortgages represents only a small part of the Countrywide story, we are more concerned that the weakness has spread to other sectors of the residential mortgage market,'' Shanahan wrote.
    To contact the reporter on this story: Yalman Onaran in New York at ; Bradley Keoun in New York at .
    Last Updated: March 12, 2007 17:28 EDT
  6. kckndrgn

    kckndrgn Monkey+++ Moderator Emeritus Founding Member

    It remains amazing to me that people actually take on mortgages with no limit adjustables and interest only, much less negative equity like are being pushed around here

    Add to that list the insane idea of a "reverse mortgage"!!! Man, I can't believe how aggressively these are being marketed to the elderly and those on a fixed income. Complete with "out of work" actor touting "how great the reverse mortgage" is. :mad:

    Yeah, right, yet one more reason to live a debt free life. 12 more months, give or take a couple of months, and the only debt in my family will be the home.
  7. Bear

    Bear Monkey+++ Founding Member Iron Monkey

    Sorry Melbo... didn't mean to poke fun at a serious situation.... my bad.... Sincere Apologies if required.... and even if they aren't.... not cool on my part....

    Markets are down..... Lots of talk about New Century, the other Subprime lenders and the holders of their "paper"....

    As well as the effects on the "other" mortgage lenders' standards for qualifying....

    Another piece of "Straw" on the back of this poor "Camel"......

    The "snowballing" or "cascading" effect of this on not just the borrowers and the lenders... but all the investors and funds that the "common person" may have their savings and retirement in... will be interesting to watch.... Noticed Vanguard as one of those invested in New Century... lots of 401ks invested in Vanguard....

    Panic can be an ugly thing as everyone rushes the door at the same time to avoid even a "percieved" threat to their hard earned savings and retirement funds.... try hard not to be part of this "herd"....

    I bet the Plunge Protection Team is working pretty hard with all that's going on....

    Watch the "spin" put on this, make your own best decisions and best of luck to all of us.... we certainly will all be affected in some way....

    Our legislators and the media should have been asking harder questions, digging deeper and poking at this "boil" long before this.... but I guess its all about the profits of the few versus the good of the country....NO!!
  8. melbo

    melbo Hunter Gatherer Administrator Founding Member

    [troll] no apologies necessary Bear. I didn't take your comments that way. Was trying to clarify that this will have the potential to reach up and bite those who are not in 'sub-prime' loans or other creative notes.

    My fear is that RE has been the driving force behind the Economy and if/when it truly collapses, I may be in trouble as that's what I do for a living.
  9. melbo

    melbo Hunter Gatherer Administrator Founding Member

    Or maybe there is a fix to all of this after all:

  10. gillman7

    gillman7 Monkey+++

    It is amazing to me that people don't look at the big picture when doing a home loan. I have a 15 yr fixed, and if I went to a 30 year fixed my payment would only be $280 less a month. If you think about that take say $1000 for 15 years or $720 for 30, which would you do.

    15 years - $180,000
    30 years - $259,200

    Doesn't make sense to me......
  11. Pru

    Pru Monkey+++

    Maybe I'm just ignorant, but I don't see how this is a good business plan:

    *Pssst...C'mere Scotty, here's the deal. We're gonna lend hundreds of thousands of dollars to regular individuals and married couples. Yup, just regular folks. But - here's the good part: we're only going to lend the money to people who have had credit trouble.*

    Yeah, that'll work.

    I am all for less legislation, but there's a small part of me that things these ridiculous loans (interest only and/or 50 year) should be outlawed. And, no I've never had anything but conventional myself.

    I'm on pins and needles a bit. We used a bunch of our home equity to purchase land. Like Ghrit's siggy says "Remote locations are cheap insurance." But it still makes me nervous to have so little equity. What if the market tanks right now?

    Well, I know what if...we'll trade the minivan for a travel trailer and live at the property.
  12. Clyde

    Clyde Jet Set Tourer Administrator Founding Member

    Here is the game:

    1) Poor Credit person gets fooied by lender and pays 12% interest
    2) Lender's cost of money 4%
    3) Lenders make 8% on their money an make a huge fee up front that gives them an even greater return.

    Proverbs 22:7

    <sup style="">7</sup> The rich rules over the poor,
    and the borrower (debtor) is the slave (servant) of the lender (master).

    Not to much else to say here. Its simply a game of greed to make the most money possible
  13. melbo

    melbo Hunter Gatherer Administrator Founding Member

    Remember, all of this game is played with "Money" created out of thin air. Each loan creates the 'Money" as it is made. Then you pay interest on it and Launder it back to them. In reality, as absurd as it is, they don't lose much if you don't pay it back. WHen you go to your bank and borrow $300K, you think they go back to the vault for that? Banks loan out 10 times more than they actually have.... Where does it come from? From you when you pay it back.

    It is a very tangled web. Need to read Creature from Jeckyll Island

    The hammer will drop when Joe and Susuie get their next 401K statement. A lot of 401Ks are invested in Vangaurd and Vangaurd was heavy on New Century. Stupid loans or not, we will all feel this one. Stocks are reacting as well.
  14. Clyde

    Clyde Jet Set Tourer Administrator Founding Member

  15. RightHand

    RightHand Been There, Done That RIP 4/15/21 Moderator Moderator Emeritus Founding Member

    Maybe a little off topic but....

    I was thinking that many of the mortgage failures are a result of non-community based mortgage lenders. Local lenders have an investment in the community and a fuller awareness of the local economy. While this is true, I also recall the farm bank failures during the 1980's when small farms and agri-business suffered great losses due to the over-valuation of land. Farms were reposessed and the bank failed nonetheless.

    These are complex issues and the problems are compounded bythose who think that good financial times are going to last forever when we all know it is cyclical. We get raises, we lose our job - we can afford an extravagant vacation, we can't pay the light bill.

    We're not as financially conservative as some of the generations of the past. Maybe it's our view of what constitutes a good life - is it more money????

    Sadly, we live in a culture measures success in terms of dollars and cents. Many years ago, I decided that I would not let my self image be determined by my income and to hell with what anyone else thought of me. My goal is to earn money sufficient to my needs and my needs are simple.

  16. Clyde

    Clyde Jet Set Tourer Administrator Founding Member

    Your comment is not off topic, but here is how the game works.

    A local mortgage broker creates the sub-prime loan and gets it all "teed" up and ready. He finds a sub-prime lender who is willing to take the risk.

    The sub-prime lender funds the loan and charges a higher fee than usual to the borrower. So, suppose the rate he can charge is 12%.

    Borrower is approved for $125,00 maximum loan
    Buyer finds a home for that will require a $100,000 loan.
    Mortgage broker fee: because it was so hard to find the lender, it is $5000
    Lender fee: extra fees due to heavy analysis $5000
    But the home won't appraise...that not problem, find an appraiser who will get the deal done

    New Loan: $110,000 at 12% Interest 30 Year Term (not interest only)
    Pmt: $1,131.47

    Sub-prime lender and broker pocket the $5k a piece and then the sub-prime lender packages a bunch of loans together and sells them to the "market" as a loan package...and makes another fee on the sale.

    Its the extra 10K in fees that these "parasites" were after and they could careless whether the guy pays or fails because they got their money and passed the buck.

    Who is going to guarantee all these loans and make the banks whole?

    YOU AND ME when the .gov decides they can't have all these bank/financial failures and they draft a bail out package. What is a bailout package? When the government assumes (buys or prints money out of thin air) the debts, makes the banks whole for their risky lending practices and we float a debt package for whatever the number so we can add it to the national debt as a "speed" bump in our GDP growth.

    Its legalized racketeering and highway robbery.:mad:[soap]:mad:[soap]:mad:[soap]:mad:[soap][soap][soap][soap][soap][soap][soap][soap][soap][soap][soap][soap][soap][soap][soap][soap][soap][soap][soap][soap][soap][soap][soap][soap]:mad::mad::mad::mad::mad::mad::mad::mad::mad::mad::mad::mad::mad::mad::mad::mad::mad:[beat]
  17. RightHand

    RightHand Been There, Done That RIP 4/15/21 Moderator Moderator Emeritus Founding Member

    I have several friends who have experienced personal cash flow difficulties and were forced to go to a mortgage broker (Fairbanks) as you describe. A couple late payments resulted in excess fees. Fairbanks accounts was so poor, they were unable (or refused) to account for some of the payments made and the application of funds. Two friends ended up in foreclosure even though they had paid many thousands of dollars to become current.

    The brokers prey on the financially weak.

    Thanks for the mortgage primer Clyde. Most informative.
  18. melbo

    melbo Hunter Gatherer Administrator Founding Member

    SO it sounds like a good time to build that ark if you don't have one
  19. monkeyman

    monkeyman Monkey+++ Moderator Emeritus Founding Member

    Maybe Im blind and dumb or maybe I just see things in a whole diffrent way but heres a couple of thoughts I had when reading over this.

    First off, while it was mentioned several times on how the risky loans pay off to the lenders in the form of fees and such, one thing I noticed missing in regards to the pay off if the borower cant pay is the colateral. Since we are talking about RE loans here, most all of them I know of are backed by the RE the loan is made for, if there is one thing more valuable than PMs its RE. Everyone has to have some place to be and there just isnt a lot of new land being created. So the borrower defaults on the loan, they already payed several $K for fees and maybe the first few years of payments, then the lender forecloses on the property, keeps the monies paid and has the RE to turn around and sell to cover all monies still owed and under most lending contracts, a good bit more if they sell the RE for a good enouph amount. So they really cant loose unless they lend well over the value of the RE AND the borrower defaults early in the loan AND they cant sell the RE for the inflated price they loaned on it.

    The other thing that kept occuring to me was the opprotunities that this would create for those who do have the money and/or credit to still be able to buy RE. When all of these places are foreclosed on that isnt just a financial concept, it means that the folks that lived there are now booted out and need a place to live but have their credit screwed to a point they cant get a loan to buy any place and since their credit score is low the only land lords likely to even rent to them (for a few times the mortgage payments) is likely to be slum lords. The only loans or financing that would be effected by the new regulations, as I understand it, would be if they were backed by monies deposited in FDIC banks. So If you own a bunch of properties then you can now rent them out to this explodeing market if you choose to, but being a landlord comes with a lot of head aches, so sell them. There are now a lot of folks who need a place to live, they cant borrow money to buy a place, there isnt much available to rent with less than great credit unless they want to live in a slum around the corner from the projects BUT here you are with a decent property thats available for them to buy owner financed, with all intrest payed to you of coarse and of coarse since they are a high risk they dont get any great bargians on the rate or over all price and the payments will also have to include insurance premiums and taxes to protect you untill it is payed for but they can be makeing payments knowing that in 20-30 years they will own it and in the mean time they have a place to live. Make sure a good lawyer makes up your contracts and protects your intrests, if they leave or get say 90-120 days in rears on payments, they are evicted and loose all equity and you get a new buyer in to start again at full price. Knowing that its now 'their' house and not just that place they are renting the folks tend to also not trash the properties and they are responsible for all maintanance.

    So if it burns, you get paid. If they pay it off you get paid. If 2 'buyers' leave or default after 10 years each on 20 year contracts and the third pays it off then you dont JUST get paid, you get paid DOUBLE. I knew a guy who had bought a few mobile homes and sold each of them about 10 times this way and made about 8-10 times the market value of each of them while being supported the rest of his life while other people (the buyers) took care of the maintanance on them and paid him. Another I knew had done VERY well for himself by doing the same thing with middle class houses. The market may just be opening up for this type of thing with upper middle class homes now. I know the upper middle class homes in a lot of markets are also the hardest to find as rentals such as for business folks who have to transfer for work and know they will be transfering again in a couple years and dont WANT to buy a place for 2 years.

    I can also say first hand that folks who cant get a loan are often more than willing and expect to pay more and get crappy terms in order to have the opprotunity to work toward something thats their own and will be greatful even if you are screwing them with the terms just to get a shot at being able to get it. To me it looks like this could create a LOT of opprotunities for anyone willing and able to look at it from the angle of the needs that it creates.

    It could also make it easier for some folks to buy land if they are looking to buy from saveings since it will be harder for sellers to unload unwanted properties and so they are likely to sell for far less especialy if its for cash.
  20. E.L.

    E.L. Moderator of Lead Moderator Emeritus Founding Member

    Housing loans are sold over and over these days, nothing is community based anymore. NO!! I give all of the business I can to my local home town bank.
survivalmonkey SSL seal warrant canary