From the Wall Street Journal:
Mortgage Defaults Start to Spread
New Data Show That Nontraditional Loans Are Beginning
To Haunt Borrowers With Midlevel Credit; Prime Still Fine
By RUTH SIMON and JAMES R. HAGERTY
March 1, 2007
The mortgage market has been roiled by a sharp increase in bad loans made to borrowers with weak credit. Now there are signs that the pain is spreading upward.
At issue are mortgages made to people who fall in the gray area between “prime” (borrowers considered the best credit risks) and “subprime” (borrowers considered the greatest credit risks). A record $400 billion of these midlevel loans — which are known in the industry as “Alt-A” mortgages — were originated last year, up from $85 billion in 2003, according to Inside Mortgage Finance, a trade publication. Alt-A loans accounted for roughly 16% of mortgage originations last year and subprime loans an additional 24%.
The catch-all Alt-A category includes many of the innovative products that helped fuel the housing boom, such as mortgages that carry little, if any, documentation of income or assets, and so-called option adjustable-rate mortgages, which give borrowers multiple payment choices but can lead to a rising loan balance. Loans taken by investors buying homes they don’t plan to occupy themselves can also fall into the Alt-A category.
Borrowers who take out Alt-A mortgages are considered less risky than subprime borrowers because of their higher credit scores. But as the housing market cooled and loan volume declined, some lenders lowered their standards for Alt-As. Now a rising number of borrowers who took out these loans are running into trouble.
Data from UBS AG show that the default rate for Alt-A mortgages has doubled in the past 14 months. “The credit deterioration has been almost parallel to what’s been happening in the subprime market,” says UBS mortgage analyst David Liu. The UBS report contrasts with testimony Federal Reserve Board Chairman Ben Bernanke gave to Congress yesterday. “Our assessment is that there’s not much indication that subprime issues have spread into the broader mortgage market,” Mr. Bernanke said.
…
The UBS study found that the problems are greatest for Alt-A borrowers who took out interest-only adjustable-rate mortgages, which allow borrowers to pay interest and no principal in the loan’s early years, with 3.71% of interest-only ARMs originated in 2006 at least 60 days past due. As in the subprime sector, the riskiest loans are those made to home buyers who put little, if any, money down and don’t document their income or assets.As delinquencies rise, some investors who bought lower-rated securities backed by these mortgages are likely to face losses, according to Mr. Liu of UBS. While defaults are expected to be lower than in the subprime sector, so are the reserves set aside to cushion bond investors against such losses.
Defaults are much lower for option ARMs. But the problems with these loans could be “backloaded,” says Mr. Liu, because borrowers with these loans are still making the minimum payment.
Glenn Costello, a managing director at Fitch Ratings Inc. in New York, expects the foreclosure rate for Alt-A loans to ultimately be only 10% to 20% of the rate for subprime borrowers.
Yet investor concerns about Alt-A loans are rising, according to Walter N. Schmidt, a mortgage investment strategist at FTN Financial Capital Markets in Chicago. A report from mortgage analysts at Barclays Capital in New York this week pointed to fraud as one reason for early defaults on Alt-A loans. The mortgage industry is battling a rash of cases in which borrowers, loan officers and appraisers collude in providing false information to induce lenders to advance more money than homes are worth.
From IndyMac CEO Michael Perry:
IndyMac Issues 2006 Annual Shareholder Letter, Updating 2007 Forecast
2006 was a challenging year in the mortgage banking industry. Industry loan volumes of $2.5 trillion were 34 percent below 2003’s historic high level and 17 percent lower than in 2005. Mortgage banking revenue margins declined further after sharp declines in 2005, and net interest margins continued to compress, as the yield curve inverted with the average spread between the 10-year Treasury yield and the 1-month LIBOR declining from 89 basis points in 2005 to negative 31 basis points in 2006. To cap it off, the housing industry slowed down significantly, increasing loan delinquencies and non-performing assets and driving up credit costs for all mortgage lenders.
Roubini and others have laid out the case for where Alt-A is headed, but I’m going off topic here for a moment.
As I sat down to go through the headlines I hear from the other room “spring has sprung for the housing market.”
It was the Today show and they were actually talking about Boston, which is a disaster.
They then gave some vague info about prices going down in most places and and actually gave some info about the plummet in new home sales and then sat down with Barbara Corcoran who spouted much of the typical crap, she of course noted “the bonuses on Wall Street,” as something that will lift the market.
Be sure not to wait, now’s the time to buy!!
These people are really twisted.
I have to add,
Corcoran put everything on market psychology and talked about prices skyrocketing as people came back to the market.
I know she’s a saleswoman, but really that level of dishonesty (even if she’s deluded) is really disgusting.
The funny thing is, she’s so dense that she thinks only the buyers are hearing her. What does she think the reaction of a seller coming in to this market is going to be?
“But as the housing market cooled and loan volume declined, some lenders lowered their standards for Alt-As.”
Lowered their standards?? Fraud??
OK, the Alt-A’s have a better credit rating than the subprime. Is the abuse and greed any different?? How about able to afford a 500k house but get s*cked into the hype and “buy” a 800k house with an I/O. There is a misconception that this bust is isolated to the low income, many have a conviction that its all about the subprime. Defaults are occuring all across the board. You can call it Subprime, Alt-A, Prime, etc… I call it the biggest RE bust ever. Maybe approaching the 4th or 5th mile of a 26 mile marathon??
BCB,
I agree. Many make the assumption that subprime loans are exlusive to low-income groups, but that just isn’t the case. I can understand why people jump to that conclusion. It runs along the same lines as the assumption that the “rich” never get foreclosed on.
jb
But as the housing market cooled and loan volume declined, some lenders lowered their standards for Alt-As.
Interesting.
I just read a short presentation from Washington Mutual describing their strategy for dealing with a cooling housing market. As the volume of mortgage originations drop, they are going to increasingly focus on “higher margin” products. Their strategy is to more intensely focus on Alt-As, Option ARMs and Subprime loans. I would have thought lenders would finally start scaling back these high risk loans. I guess not.
This presentation was just given a month ago, so it’s very recent.
http://media.corporate-ir.net/media_files/irol/10/101159/WEBQ42006HomeLoans.pdf
From Marketwatch:
Core inflation rises 0.3% in January
Core consumer prices rose 0.3% in January, the Commerce Department reported Thursday, pushing the year-over-year increase in inflation further above the Federal Reserve’s target zone. The personal consumption expenditure price index excluding food and energy has now increased 2.3% in the past 12 months, compared with the 1% to 2% range favored by Fed officials. Meanwhile, personal incomes surged 1% in January, the most in a year, as annual bonus payments and stock option gains were realized. Excluding the bonuses and other special factors, incomes rose a trend-like 0.4%, the government said. Consumer spending increased 0.3% in real (inflation-adjusted) terms, the lowest since September. In current dollar or nominal terms, consumption increased 0.5%.
Surprise surprise, personal savings rate came in at a -1.2%.
jb
Yen.
Up.
Screaming.
Where were all the new-found concerns about the lending industry 2 or 3 years ago? Easy credit fueled a mega balloon in RE prices, yet no one that I can think of sounded the alarm.
Now the bloom is off the tulip we have a different story. Everyone from the banks to the agents to the government tax offices was happy to take their cut, and why not? People were taking numbers to overbid on anything standing.
There are many hands in the RE till, no wonder the industry exterts a huge lobbying influence on Washington. The fed and state government have a large vested interest on getting this struggling market back on track, and the amount of disinformation issuing from the media types is laughable (see Lindsey above).
Looks like the cracks in the foundation are widening. Why is anyone surprised?
Subprime does not equal low-income. Its subprime mostly because of your credit score. You will be surprised by the number of doctors, lawyers, even star actors..whoever that have $120k+ salaries but have 600 FICO scores. The reasons they have that type score can range from divorce, stupidity (keeping up with the Jones), etc.
Alt-A borrowers just have slightly better FICO scores.
2X [12]
The industry takes it cue from the fed. Worry about the bubble after it pops. The fed is totally reactive.
Yen chart;
http://futures.tradingcharts.com/chart/JY/37
March futures, not cash.
Clotpol, KL, other realtors:
I have noticed that number of listing on GSMLS has been stuck in 28K – 29K for at least last 2 months.
Is this normal? Which months get most listing during spring season? Is it possible to see how many new listing came every month?
Just wondering whether sellers are postponing puting house on market, or number of houses selling are same as the one coming to the MLS.
I believe Grim had some chart showing total inventory, would be good to see updated one. As well the great thing would be if it showed things like new listing, expired, withdrawn, closed etc…
We should have the February sales/inventory data in the next few days.
My estimates put North Jersey GSMLS inventory up 8% so far this year.
jb
Renting (6)-
Just a classic grab for a bigger slice of a shrinking pie.
When the subprime stuff ends up properly-priced, the margins will be huge (as they used to be in back in the day).
All-
Ok, everyone is looking for the bottom, here’s one clue from someone with 35+ years in real estate and building (also has a PHD in Finance).
Look for the national new home sales number to go to around 800K. That is as low as he’s ever seen it and should be a strong indicator of the national market bottom.
Sorry, he can’t help on NJ, doesn’t know the market.
JM
why is anyone surprised by this? lenders simply threw out the book on underwriting in favor of FICO scores only
they are plenty of no doc option ARMs among prime borrowers too
defaults are doubling in an environment of full employment and the greatest real wage growth in 15 yrs!
this is going to get scary when a recession hits
SG (16)-
Still too early. The Spring season Fred & Ethels won’t put out the sign until things start blooming. Start taking a hard look around the end of March. By the 2nd-3rd week of April, you’ll have a good idea of where inventory levels will settle.
BTW…there wasn’t a Spring market last year, and my best guess is that there won’t be one this year. I think from 1/1/07 to right now will represent some of the highest sales volume of this year.
That’s good news for the holdouts here. When the biggest sales volume comes in the “shoulder” months, that’s a sign of seller capitulation after the traditional selling windows (Spring and Fall markets) have closed.
Lindsey, I saw the Today Show piece on it being a great time to be a buyer as well. Until Nouriel Roubini and his ilk have something they need to advertise, we aren’t going to see anything remotely balanced on the RE market in the MSM. The Today Show needs the ad spending from Coldwell Banker, Century 21, etc. and so they will continue to spin the great time to buy story.
Its unfortunate because I don’t think it serves to make the market move. If anything, the message to sellers is, don’t worry about pricing right anymore because the buyers are back in force.
Clot [21]
I hear that Fred & Ethel start to think about it around ACC tournament time, but don’t take action until after “One Shining Moment”.
Skeptic [20].
I don’t think anybody on this site is suprised unless you are talking about the velocity of this unraveling. Quite frankly, I am a bit suprised that problems are occuring 3-6 months into the loan.
Recession?? Scary?? Akin to Linda Blair {exorcist}??
That’s surprised. Doing too many things at one time.
#20 skeptic Real wage growth? Wage growith has only recently started to pick up,(last 2 quarters of 06).
Prior to that date wages had been flat at best for 5 or 6 years.
Its mostly fraud and stupidly. Its surprising to me when I hear the stories. You have straw buyers who will let someone utilize their good credit score to buy a house (above mkt rates of course making the neighbor think they can get a similar price) just to get $10k out the deal. The person who arranges the deal may make 1 or 2 payments and that’s it.
#19 Bklyn The bottom is nto here yet, the real downturn is fianlly getting under way.
The music has stopped, there are just a few left if you willl int he back of the room that do nto realize that yet.
inventory on GSMLS pretty much holding steady for a couple of weeks now with today’s usual drop at end of month for expirations. i actually expected inventories to rise greater than we’ve seen after the super bowl to present.
Good Quote
“Never keep up with the Joneses. Drag them down to your level. It’s cheaper.”
–Quentin Crisp
One other thing to watch this Spring,a re the annual school budgets that residents vote on in April. Expect more big increases in school spending.
That 50 year old cape with 8K in taxes, is going to be almost 9k in taxes, in mnay towns this year. It cannot go on.
James – thanks for telling me about this site.
I live in Franklin Lakes (renting, renting, I promise). Has anyone looked at the GSMLS for North Haledon recently? There is a townhouse development called Lakeside, I’m familiar with it. There are 12 houses up for sale for ridiculous prices, and a few others FSBO. This is flipper central in NNJ, it’s amazing how badly these people are going to be hurt so badly.
Whatever happend to the concept of “affordability”. Anyone interested in hearing more about the MBS markets today? I work in the business for a large WS firm, couldn’t be more interesting right now.
#28 You will Richard, you will.
Englishman,
Thanks for stopping by, I didn’t know if you knew about this site or not.
jb
It runs along the same lines as the assumption that the “rich” never get foreclosed on.
There are alot of assumptions regarding who would/could be foreclosed on.
KL
Reachard]
Inventory is so last year. The subprime hot topic is credit crunch.
Construction spending and ISM due out in a few moments.
jb
Dow falling…
From MarketWatch:
U.S. Jan. construction spending falls 0.8%
Private residential construction spending fell for the tenth month in a row in January, the Commerce Department said Thursday, as total construction spending dropped 0.8%. Spending on private residential construction products dropped by 1.8% in January, following a 1.0% drop in December and a 1.4% drop in November. The overall drop in construction spending was more than expected. Economists surveyed by MarketWatch had forecast construction spending would fall by 0.5% in January.
ISM comes in postive (in what seems like the usual mixed fashion). From Bloomberg:
U.S. February ISM Manufacturing Index Rises to 52.3 From 49.3
Manufacturing in the U.S. unexpectedly expanded in February, suggesting production may be starting to stabilize.
The Institute for Supply Management’s manufacturing index rose to 52.3 from a January reading of 49.3 that was the lowest since April 2003, the private industry group said today in Tempe, Arizona. Readings of more than 50 signal expansion.
Re: Inventory.
It was the same story last year. Everyone talked Superbowl as the start of the season but jumps in inventory didn’t start to happen until Spring break/Easter/Passover time. Then it leaped and bounded up to double by June.
Looking at Bergen County I see the “biggest” jumps of inventory in April and May.
bergenbubblebust-
#27 totally agree…my source also said it would be about 12-18 months to hit bottom, but I thought the new home sales number was interesting since we hit 937K yesterday.
That means about another 15% drop to go in new home sales. Not sure what the correlation is for existing, but has to be some kind.
JM
Got the Wiki software (MediaWiki) installed and running over at Dreamhost.
http://jamesbednar.com/wiki (this will be moved to a new URL in the near future)
Nothing there yet, but it’s a good first step.
For those interested in contributing, you can try to get familiar with the tool by reading the User Guide found here:
http://meta.wikimedia.org/wiki/Help:Contents
jb
I think from 1/1/07 to right now will represent some of the highest sales volume of this year.
I agree.
I think we had a unique combination of realistic seller, who wisely listed before the spring tidal wave and are motivated to sell. They know the market will continue to deteriorate. At the same time, we had a group of buyers who believe the NAR party line about a “spring rebound” and think they just got the deal of a lifetime by “getting in early” at 5% off peak prices.
This is a short lived phenomenon and won’t last into the spring.
The GSMLS listings are a joke. I have family in the real estate business so I can see all the details. The listings are so inaccurate, always claiming the OLD to be very recent instead of the months the house has been on the market. Lying is part of thier ethos. I see several houses in Franklin Lakes that have been on the market for over a year but it is claimed that they are recently listed.
Hey, idiots, why not try lowering the prices instead??
Good grief.
For those interested in working on/contributing to the wiki:
http://www.jamesbednar.com/wiki/index.php?title=Talk:Main_Page
jb
“Hey, idiots, why not try lowering the prices instead??”
Englishman,
They will, it just takes time. What’s their ultimate choice??
Love to hear your take on the Alt-A and prime market. Taps have been played for the subprime. That’s the subprime as we now know it.
Bitter or Lager??
Cheers.
From Bloomberg:
Countrywide Says Late Payments on Subprime Loans Increased
Countrywide Financial Corp., the biggest U.S. mortgage lender, said borrowers were at least 30 days past due at the end last year on almost a fifth of the subprime loans that it serviced for others.
Delinquencies on “nonprime” loans, those made to borrowers whose credit rating fell short of the highest criteria, widened to 19 percent as of Dec. 31 from 15 percent a year earlier, the Calabasas, California-based lender said in an annual regulatory filing with the U.S. Securities and Exchange Commission. The rate stood at 17 percent at the end of September, according to the company’s last quarterly filing.
Some interesting observation.
See this chart of Homes for Sales starting from 1980 in Northeast.
http://www.economagic.com/em-cgi/charter.exe/cenc25/fsalmon02+1980+2007+0+0+0+290+545++0
The last bubble burst happened from 89 to 93. The number of houses for sale dropped almost in half, i.e. from 110K to 50K. I was thinking while prices are going down, the inventory would be exploding, but seems otherwise. I feel, when prices are going down, less and less folks put up their houses on market. Rationally mind would say, it would be better to sell in 90 then waiting till 93. Is that correct thought process?
Also, other significant aspect is that Inventory peak in 89, was significantly higher (almost double) then today. As Clot mentioned, the inventory did not change from Jan to Dec of 2006 much. One wonders, have we reached the peak in homes for sale?
SG,
You wouldn’t happen to know what the source for that dataset is, would you?
jb
Lender Woes Go Beyond Subprime
http://www.businessweek.com/investor/content/feb2007/pi20070228_778155.htm?campaign_id=yhoo
While the stocks of some subprime players have been battered, even diversified lenders and big banks have their concerns
by Mara Der Hovanesian
Few are feeling the hangover from housing’s heyday as much as subprime lenders that cater to risky borrowers. The stocks of such players as New Century Financial Corp. (NEW) and NovaStar (NFI) have been slashed, 50% and 63% respectively, since February (see BusinessWeek.com, 2/21/07, “Fears Reignite for Subprime Lenders”). But even diversified lenders and mainstream banks have headaches. Countrywide Financial (CFC) is off 13%, Washington Mutual (WM) has slipped 6%, and Europe’s HSBC (HBC) is down 5% since it revealed that its 2006 charges for bad debts would exceed forecasts by $1.76 billion.
Last year underwriters of all stripes loosened their standards despite a weak housing market. Now adjustable-rate mortgages are resetting to higher rates, and homeowners are falling behind on payments. So some big banks and brokerages are exercising their options to sell risky loans back to their originators, usually small, private mortgage brokers and lenders—and plenty of these smaller outfits have gone belly up.
Even so, big banks’ loans are souring. Bad loans, so-called nonperforming loans that include mortgages, rose 11% in December, 2006, vs. December, 2005, at banks with more than $10 billion in assets, says SNL Financial. Some are setting more money aside or buying extra insurance to cover losses. Countrywide plans to buy insurance on up to $19 billion in loans, roughly a fourth of its portfolio. Others, like Freddie Mac (FRE), are finding religion by instituting tougher underwriting rules.
Der Hovanesian is Banking editor for BusinessWeek in New York.
SG, interesting link. seems we have returned then to an ‘average’ inventory in Northeast then.
SG, I’m seeing a little bit of couch-potato-ism in that chart of yours.
You really need prices to be tempting to get a huge number of people selling. Transaction costs and effort, you know. They follow the market up.
Maybe it’s just the other perspective on your statement that when “prices are going down, less and less folks put up their houses on market.”
BC Bob:
Bitter or Lager??
Cheers.
Pint of lager for me, thanks Bob.
My take on the Alt-A and the rest of the so-called Prime market is this: What does it really matter if someone has a FICO score of 619 or 620? If you get these people into a house they really can’t afford they are going to have to sell or default. Selling is out of the question because they obviously didn’t do anything crazy like put any money down at closing, so their house is worth less than the mortgage loan outstanding.
They say that the market is 15% subprime and 85% prime. So what? That 85% in times of traditional lending standards would really be so much less. How much less? Who knows? Let’s say by a third. The distinction between a subprime borrower and a prime borrower has totally blurred, IMHO.
First bank failure:
http://tinyurl.com/2j85pd
I think that Helicopter Bernanke will lower rates and try to print his way out of the mess that Greenspan made.
“It is impossible to get a number” on big investment bank’s exposure to subprime loans, Richard X. Bove, an analyst with Punk Ziegel & Company, told The Times. “And I don’t think they even know.”
“The cost of insurance against potential bond default on Bear Stearns’s debt, for example, increased 40 percent recently, from about 22 basis points in mid-January to more than 31 on Tuesday, according to Lehman Brothers data.”
“Wall Street now faces risks on two fronts. First, it stands to earn less from originating, packaging and trading mortgage-backed securities. Second, it will have to absorb more of the losses from loans when borrowers are no longer making payments.
http://dealbook.blogs.nytimes.com/2007/03/01/calm-returns-to-the-street-but-another-storm-is-brewing/
Englishman [54],
I agree. Package/term it any way you want. At the end of the day, you’re standing in deep piles.
The Coming Crash!
When is the next stock market crash? The person who knows this answer can become very wealthy, indeed. Let’s review some facts that show that we are in for a long term bear market.
We are in a Credit Bubble
As housing prices have soared to nosebleed heights, homeowners have flocked to home equity credit lines. Basically, this allows you to use your house as an ATM machine. Consumers have been maxing out on credit and spending it on things like large SUV’s, vacations and big screen TVs. Living above your means has never been easier, or as widespread! Of course this money is borrowed, and must be paid back.
http://www.stock-market-crash.net/coming-crash.htm
One other thing: Ameriquest is almost certainly technmically bankrupt right now. It can only stay in business if Citigroup allows it to.
Amazing. Two years ago it was second only to Countrywide in Sub-Prime origination.
Talking of CFC, now let’s see their true position with regard to credit quality of assets and accounting practices……..
Private Nonresidential construction falls for the first time in over a year.
http://www.census.gov/const/C30/release.pdf
>>I think from 1/1/07 to right now will represent some of the highest sales volume of this year.
doubt it but we’ll see.
from 51
“Countrywide plans to buy insurance on up to $19 billion in loans, roughly a fourth of its portfolio.”
With ABX HE BBB/A index crashing, how can anyone hope to take insurance on 1/4th of thier portfolio and still be profitable?
Am i missing something?
njb: no
From Bloomberg:
Construction Spending in U.S. Decreased 0.8% in January
Construction spending in the U.S. fell by the most in three months in January, pulled lower by the biggest decline in homebuilding since July.
Spending on residential and non-residential projects dropped 0.8 percent after a revised 0.6 percent increase in December, the Commerce Department said today in Washington. The government previously estimated a drop in December spending.
Homebuilders are reluctant to start work on new projects as buyers cancel contracts and inventories of unsold homes swell. A report yesterday showing new-home sales fell by the most in 13 years suggests that construction will continue to falter, weighing on economic growth.
“Residential construction spending has been steadily declining since spring 2006, and we expect this trend to continue,” Drew Matus, a senior economist at Lehman Brothers Holdings Inc. in New York, said before the report.
Private residential construction fell 1.8 percent, the 10th straight decline.
—Rationally mind would say, it would be better to sell in 90 then waiting till 93. Is that correct thought process?—
Not really, if you don’t need to move, and you don’t have enough equity in your house to get you 20% down to ‘move up’, why would you sell? How many people in the last 5 years really needed to move? Good for realtors and banks but bad for home prices (inflated).
CF,
Insight, please.
At what point does a particular hedge cease to be a hedge? If the cost of a particular investment (ABX in this case) is so great that it outweighs any potential gains made in the investment you are trying to hedge, doesn’t it cease to be a hedge? In this case, wouldn’t the investor seek out an alternative hedge?
As far as I can tell, nobody is forcing an MBS buyer to use this particular form of “insurance”.
Is it really as simple as that?
And if so, does that mean ABX has disconnected from the market at this point (Traders using it to speculate instead of investors using it to hedge).
jb
#61 Why?
thanks cf.
dream/index: sorry to pick on you….but this commentary adds to my opinion that indexing now is a bad idea……for many reasons, but most strikingly, because too many people are indexing now
“The more investors who share an opinion, the more dangerous it is when that opinion gets proved wrong.”
WSJ
AHEAD OF THE TAPE
By JUSTIN LAHART
Bets for Safety Only Left Many At Greater Risk
March 1, 2007; Page C1
[edit]
Correlation is a dirty word among professional money managers. The more their investments move in lock step, the higher the risk that one bad day could put them out of business. So, with the flood of cash into financial markets in recent years making it harder to generate returns, the search for uncorrelated assets has become particularly keen.
But by deliberately investing in assets that have shown little correlation in the past, investors may be making those assets more correlated, says Craig Asche, executive director of the Chartered Alternative Investment Analyst Association. If investors find that, say, Pet Rock and corn-dog prices tend to be uncorrelated and decide to invest in both as a result, they will end up driving prices for the rocks and dogs up together.
What is more, because a diversified portfolio is believed to be inherently less risky, investors have felt emboldened to explore riskier assets in their effort to generate returns. One consequence of that dynamic is that the riskiest financial assets are now showing the highest degree of correlations to one another, Mr. Richards says.
Also driving financial market correlation, says Massachusetts Institute of Technology finance professor Andrew Lo, is that fund managers are, by and large, using similar approaches to investing, and they are applying them across a swath of assets. “You have investors who are now invested in all these different instruments and they all seem to think alike,” he says.
[edit]
The more investors who share an opinion, the more dangerous it is when that opinion gets proved wrong. In this case, the opinion was that a diversified portfolio even of risky assets wasn’t all that risky. On Tuesday, that opinion was left in tatters, and fund managers marched together to cut their exposure to those assets across the board.
James Bednar Says:
March 1st, 2007 at 11:29 am
CF,
Insight, please.
jb
My guess……..you choose the strategy with the highest NPV, or in this case, the least negative NPV :P
grim: use your learnings….asymmetric information, what is being signalled here?
Englishman #54,
That’s some good perspective. Sub-prime defaults are at the forefront right now. What happens when the marginal prime borrowers are defaulting. It’s obviously loosened lending standards are rearing it’s ugly head in the sub-prime market. When it comes home to roost in the prime market, than I would say the proverbial sh!t has hit the fan.
Least negative, good point.
jb
Englishman
Actually today’s article in the WSJ puts subprime at 24% and Alt-A at 16% so prime would be the rest or 60% of loans originated last year. Nevertheless, I have to agree with you to a certain extent in that across the credit spectrum sub-prime to prime, they are all in the same boat if they purchased a property in the last 2 years. The only difference is, the prime borrowers have a life jacket on. They could have mortgage that is worth more than their house (assuming no money down). And if they did put money down, their equity is being eaten up by falling home values.
what is being signalled here?
1) I have to assume the originators, securitizers, and insurers have equal access to default information (EPD, Longer term defaults, etc). Why? At this point they’ve all had exposure to the market. For the sake of this argument, let’s assume that any “insurance” is fairly priced, and not speculative.
2) Insurance is currently very expensive for subprime tranches.
3) Countrywide is the fourth largest subprime lender, so let’s assume their retained portfolio is weighted in the same fashion.
4) Let’s also assume that the ratio of prime/subprime in their retained portfolio has grown as sellers have developed a distaste for subprime.
5) The fact that they are chosing to “insure” only 1/4 of their portfolio means that if the scenario plays out like insurers think it will, they are on the bad side of one hell of a big bet. However, if the insurers are wrong…
6) The question is, who has the better information, the originators/lenders or the insurers?
jb
[75],
Texas hedge.
#75,
JB, I am in the industry, and the sad thing is, no one knows anything. But do not be alarmed, Dr. Bernanke said not too worry.
6) The question is, who has the better information, the originators/lenders or the insurers?
That’s the million (or should I say trillion) dollar question. If you are servicer you obviously see it. If you securitized the product you are seeing how they are performing so I think the information is readily available to all.
Remember the days of the dot.coms who had high multiples, rising stock prices, etc and wasn’t making a dime? Just substitute originators in place of the dot.com. Just like a greedy grubber who is praying for the market to come the same applies to the originators, as Booya Bob likes to say…they are bleeding dry right now. The ones who are diversified like the banks will be able to hold out a little longer than the stand alones.
grim: In response to #6, I bet the originators have better information, but the insurers hold all the cards.
I’ll add that CFC is probably thinking about correlation, and why they would want that insurance. Basically, you need to balance some good and some bad. The good is that they are worried only about the VAR (value at risk) and are hedging (in this case insuring as it is likely largely -NPV). The bad is possibly that (as you point out) the hedge is expensive, and they would actually likely to hedge a whole lot more, but it is too expensive.
As we discussed last week, their return is like a call option. If they blow up the return is zero, but if they hit a home run then $$$$$$$$, so you may as well pile on more risk that necessary in the small chance that you have a blowout on the upside.
To clarify, the CALL is due to the fact that a BLOWUP = 0 not -$$$$$$$$
doh!
Ford Motor reports 13.5% decline in U.S. auto sales for February. Details to follow shortly.
CFC may also be taking into consideration their MSRs which is sort of a hedge against their originations.
From Fortune via CNN/Money:
The risk in subprime
When a certain $126,000 subprime loan on a $696,000 house on the West Coast failed to produce a single mortgage payment, alarm bells went off at Clayton Holdings, a company that monitors credit risk.
Closer scrutiny revealed other red flags. The borrower’s previous rent payment had been $1,000, compared to the $4,482 she was supposed to be shelling out for both the primary loan and the $126,000 piggyback. And her stated income was $84,000 even though she was an hourly worker at Target.
“We do an autopsy to find out what caused the loss of blood,” says Keith Johnson, Clayton’s COO. “It’s a CSI subprime.”
In the past few weeks, the bodies have been piling up fast and furiously. Fallout from subprime mortgages – that is, home loans to borrowers with a blemished credit history – gone bad has wreaked havoc on the industry.
…
But not everyone finds that argument soothing. “If there is a fault line in the global financial system, it runs through the U.S. mortgage market,” says Zandi. “Everyone throws up Amaranth, but that involved a small market with little implication for any other asset class. If some hedge fund blows up on a residential mortgage-backed securities investment, that has very different kinds of implications because it is the biggest chunk of the global fixed income market. So the ripples will be more like waves, and it could turn into a tsunami.”
CFC may also be taking into consideration their MSRs which is sort of a hedge against their originations.
But wouldn’t the value of the MSRs have been factored in (or at least assumed) all along?
jb
Did the BOJ precipitate the sell off in China??
I was under the assumption that the bank was lending at .50. However, the BOJ does show their new basic loan rate to be .75, up from .40, 2/21 meeting. I never heard this over the news wires. As advertised, the overnight call rate was raised to .50.
http://www.boj.or.jp/en/type/release/zuiji07/k070221.pdf
Since there’s a lot of inventory talk here, I’ll give some numbers from Monmouth County.
The publicly available MLS I track shows inventory basically stalled in February, rising just 16 basis points from the Feb. 2 to today (I did not record data for Feb.1). Last year the increase during the month was about 6%.
YOY inventory in Monmouth is up better than 20%, which shows a real slowdown as the year started (Jan. 4) with 28.8% more inventory than 2006.
By the way, if you have nothing better to do, read point # 4 in the BOJ’s release.
I would imagine the MSRs have been taken into consideration.
Only an assumption on my part
You wouldn’t happen to know what the source for that dataset is, would you?
The charting site is called Economagic. They have most widely use economic data series for charting. Here is data used in Northeast homes for sale
http://www.economagic.com/em-cgi/data.exe/cenc25/fsalmon02
From Reuters:
ABX subprime mortgage index rallies on short-covering
The ABX derivatives index rallied sharply on Thursday despite sagging U.S. stocks as traders unwound bets that the index would deteriorate, locking in profits.
“I suspect it is a technical bid (short covering) with the profits going to pay for losses in other markets,” Peter DiMartino, ABS strategist at RBS Greenwich Capital, said in an e-mail.
A trader said: “There’s a lot of short-covering going on, because I think the perception is that (the ABX) was significantly oversold.”
JB,
Not only oversold……margin calls in other areas.
SG,
I’m familiar with Economagic, I was inquiring about the actual source of the “Homes For Sale” data you were graphing (it wasn’t obvious in the link).
In any case, realize when you are graphing “Northeast homes for sale” it is referring to new home inventory, and not existing home inventory.
jb
jb: good point.
The source information is revealed only to paid subscribers. Not sure why.
Anyway, the series does not mentioned whether it is only for new homes or existing homes or both. Here is list of all Housing related series at economagic.
http://www.economagic.com/cenc25.htm
What the heck? From MarketWatch:
Sen. Clinton asks Paulson, Bernanke to act on foreign debt
Clinton seeks reductions in foreign holdings of U.S. debt
Clinton: Foreign holdings make U.S. too dependent
Question for the Board….what would you do, any suggestions?
I have a friend who is simultaneously going through a divorce and needs to sell their house. The house is listed with Foxton’s (don’t ask) and its a 2005 4bd, 2.5 ba, maybe 2700 sq ft, two car garage. Selling for $500K with taxes are around $9300. The price is as low as they can go to break even, any lower and she would have to come to the table with cash. Oh, it was listed back in October (130+ days) with a few visitors but no offers.
I’m thinking….
1) Relist to restart the DOM. Cheap trick
2) Relist with someone other than Foxton’s because I believe with them the lower commission comes with lower experience and work.
3) Get some comps and since its relatively new, price it close to what out there and be prepared to come to the table with cash before the rest of the clowns begin to list.
What the heck? From MarketWatch:
Could be the dems populist streak. The economy was the big sleeper issue in the midterm electrons, with many people concerned about losing jobs to China & India. This is a real big issue in rust belt states, where manufacturing jobs are the only good jobs and they are being quickly replaced by WallMart jobs. Its suspected that the economy put many of the democrats over the top in the closers races.
If foreigners reduce their holdings us US debt, it should devalue the dollar and make US manufacturing more competitive globally, protecting U.S. jobs.
2008 Buyer,
I would do all 3. Of course, going to a full priced agent alone is going to take a bigger bite of the already meager pie.
On issue #2, its not just experiance. Buyer agents often don’t want to show Foxton homes because they don’t get their full 3% cut.
#21 Clot Says:
I agree with Clot here, I think we have already seen the best sales for 2007.
The early birds have caught some rather disgusting worms and are going to be sick in the stomach in a bit.
Clinton [94]:
OK. What domestic spending cuts do you propose?? If none, print and tax our *ss into oblivion??
Does anybody really have to wonder why the world wants to diversify out of US dollars??
OFHEO Released Q4 data
Percent change in NJ = 5.8%
Quartery changes
Newyork/White Plains/NJ MSA = 0.70%
Newark/Union NJ MSA = -0.15%
Edison NJ MSA = -0.09%
http://www.ofheo.gov/media/pdf/4q06hpi.pdf
got subprime?
GM delayed filing it’s 10K until March 16th due to GMAC accounting.
This is gonna stink to high heaven.
Clot,
You said that last year there wasn’t much of a spring selling season.
Last year, I noticed a big uptick in “for sale” and “open house” signs in July and August – August, in particular.
Maybe the summer is “it” right now?
An interesting note in OFHEO release. They have tried to see price rise/fall for City, Suburb & Exurb communities. They report following.
The empirical findings suggest that, during the first five years of this decade, appreciation rates were quite similar for close-in and more distant homes. During that period, suburban and Exurban appreciation closely resembled urban appreciation in each of the eight metropolitan areas studied.
In the latest year, the same uniformity does not exist. In five of the eight markets, the recent deceleration has had similar effects in urban and suburban communities, but urban and suburban price trends have diverged sharply in New York, Los Angeles, and Miami. Although the cause of the different trends in the latter group of cities is not entirely clear, it may be related to the absence of affordable housing in the suburbs.
So, in NY, suburbs are decelarating faster then city core.
SG,
“So, in NY, suburbs are decelarating faster then city core.”
That fits well with the price drops we are seeing.
Lowball (55)-
The worst-disguised conspiracy in American history: Helicopter Ben & Paulson, hired hit-men…doing a 1-2 on the dollar and dumping the corpse in the river. Dollar going to 0! De facto currency the only safe haven.
Dollar going to zero, export our problems…voila! Problem solved (or buck passed).
We have gone from a safe-haven nation of full faith and credit to being a pack of liars. And nobody’s gonna call us on it.
Englishman (54)-
Two categories of mortgage borrower now:
1. Solvent
2. Insolvent
For data guys like myself, following are HPI index numbers for Newark/Union NJ MSA for last 2 years.
2005
1 215.29
2 224.08
3 231.33
4 239.89
2006
1 244.7
2 249.26
3 252.3
4 251.93
The HPI number shows decline only in the last quarter.
Note: OFHEO HPI is calcualted using only conforming loans and also includes refinancing.
Really cool google map meshup site for Local information.
http://www.neighboroo.com/
I have a theory on the negative savings rate.
I think a lot of 20 and 30 something are very over extended on their houses. Just like the hourly target employee who has a 680k house.
I think a lot of these peoples parents are having to make payments for them, which is contributing to the negative savings rate. when the people at the top of the pay scale are having to use their disposable income to bail out their children, we have a big problem.
Lindsey,
Just wanted to thank you for all the Monmouth County info you release.
Renting (97)-
A better agent- at a higher commish rate- SHOULD cost the seller LESS in net dollars. That good agent ought to be able to bring a better buyer flow and negotiate a better deal.
Truly good agents charge more because they put more money in their clients’ pockets.
However, your friend needs to invest some time in interviewing and checking references and results. An agent who calls himself “top producer” and litters the nabe with trinkets is usually not the best choice.
scribe (102)-
All that July/Aug activity last year were the Spring sellers who got poleaxed.
Hell, a lot of them are still on the market…or planning their big comeback this Spring.
“full faith and credit”
Clot[105],
Back the currency with something of real tangible value?? Allow our creditors the right to demand dollars or some other fiat currency?? Something with true intrinsic value?? Checks and balances?? You better stay in Jersey, they don’t want you hanging around Washington.
“Hell, a lot of them are still on the market…or planning their big comeback this Spring.”
Like Roger Clemens, make a big splash in June??
chicagofinance Says:
March 1st, 2007 at 11:35 am
dream/index: sorry to pick on you….but this commentary adds to my opinion that indexing now is a bad idea……for many reasons, but most strikingly, because too many people are indexing now
Chifi, I always welcome your perspective and thoughts, so I don’t consider anyone sharing wisdom as picking a bone with me in any way.
As I mentioned previously, I don’t think indexing has caught onto more than 10% of retail investors. Doesn’t that put me in the minority?
Main St. investors are always fed the bull that their mutual funds will outperform their respective benchmark. For a regular investor like me, I want to capture returns of different markets in the cheapest, most tax-efficient way possible.
Focused ETFs are an example of indexing going really bad, because Wall St. is slicing and dicing the market and skinning the cat bald.
Most mutual fund returns stink net of fees and taxes, so yeah, lets sell ETFs and get individuals to trade ETFs like stocks, so the brokerage dough keeps rolling in. Sorry, I need to fund my retirement, not some broker’s.
Being a proponent of indexing (at the very least the core of my portfolio), I do think very highly of a handful of fund companies that offer value. Some that come to mind are are Dodge & Cox, Bridgeway, Fairholme, LongLeaf Partners.
My portfolio construction is thinking of large cap index funds being Jupiter. I consider some actively managed funds that offer atleast ‘some’ value as the satellites orbiting it. Construct a portfolio of a big planet and satellites, use the gravitation (volatility) among the planet and satellites to rebalance to keep risk in check.
Investing can be as boring as watching paint try if we want it to be.
Clotpoll (106):
Very good.
And the percentage Solvent is dropping, causing, of course, the percentage insolvent to increase.
Seroiusly chaps, I give you flipper central for the whole of NJ:
Magnolia Way, North Haledon. It’s not a very long road, maybe 60-70 townhouses in all. 12 are for sale (on GSMLS and FSBO) and most of the rest probably want to be. High non-occupancy as well, not many lights on at night.
How about this for North Haledon: 4Bd/2.5Ba end unit $815K.
NORTH HALEDON!!!!!!
Christ on a bike!!
Thanks for the suggestions….my expertise is more on mortgage industry side.
JB #43, your Wiki logs and publishes the IP address of contributors.
:(
SOrry, post above should read Investing can be as boring as watching paint dry if we want it to be.
I can turn that off… I think…
From MarketWatch:
Subprime lending guidelines seen early as Friday
Banking regulators may release guidelines about subprime loans as soon as Friday, according to a person familiar with the matter, in a move designed to address growing concerns about that segment of the mortgage market.
Companies that specialize in these types of loans — which are offered to borrowers who fail to meet the strictest lending standards — have suffered as housing prices stopped rising and interest rates climbed from record lows.
Details of the guidance weren’t available from regulators late Thursday.
But observers believe regulators will tighten standards for such loans.
“I’ve heard the guidance will focus on underwriting based on the fully indexed rate on subprime loans,” said Zack Gast, a financial-services analyst at the Center for Financial Research & Analysis. Such a move would mean that lenders won’t be able to select borrowers based on certain rates.
“The effect of that would be to make demand for subprime mortgages lower. Fewer people would be able to buy these mortgages,” Gast said.
OT but a nice evening read…..Berkshire’s just released Annual Report.
http://www.berkshirehathaway.com/letters/2006ltr.pdf
If you’ve never read one of Buffett’s letters, I recommend it. The candor and straightforwardness is refreshing.
jb
Field trip to the shareholder meeting next year?
jb
I can afford 1/100th of one of those shares.
I would imagine that since CFC service 9% of all subprime loan, their statistic is fairy accurate representation of the subprime universe.
Countrywide Says Late Payments on Subprime Loans Rose (Update1)
By Will Edwards and Jody Shenn
March 1 (Bloomberg) — Countrywide Financial Corp., the biggest U.S. mortgage lender, said payments were late at the end of last year on almost 20 percent of the subprime loans it tracks for other companies and investors who own them.
Delinquencies of at least 30 days on “nonprime” loans, those made to borrowers whose credit rating fell short of the highest criteria, widened to 19 percent as of Dec. 31 from 15 percent a year earlier, the Calabasas, California-based lender said in an annual regulatory filing with the U.S. Securities and Exchange Commission. The rate stood at 17 percent at the end of September, according to the company’s last quarterly filing.
=======================
Rational people will prevail among all this insanity. Have made bundles bucking these schmucks.
BOOOOOOOOOOOOOOOYAAAAAAAAAAAAAAA
Bob
It’s a friggen mess….and good old printing press al is out chattering about potential reession in order to knock down interest rates to protect his tarnished legacy. I sense many are pointing the finger at printing press al and he is gett’en worried.
Hang in their savers you MUST be rewarded for your discipline and patience. These other dopes need to be taught a serious lesson in restraint.
Bring on this housing massacre. lots of grumpy miserable folks losing sleep.
BOOOOOOOOOOOOOOYAAAAAAAAAAA
Bob
Englishman,
They don’t discriminate, B-Share holders can come too.
jb
Dream (122)-
Thanks for Buffett’s letter. As it does every year, it made my day.
Just to think…Berkshire was created via reverse merger. Now, reverse mergers are the fiefdom of sham Chinese companies that want US stock market exposure.
James: I understand but that would just make me feel like a second class citizen!
Sting (130)-
Hey…these ARE the same people who sell insurance on TV with two English-speaking cavemen. There’s no such thing as a second-class citizen in that world.
Grim’s idea of how to have fun……
http://www.youtube.com/watch?v=MfAYqezZvMI
Welcome back BOOYAH Bob, you were missed.
#105 Clotpoll Says:
“We have gone from a safe-haven nation of full faith and credit to being a pack of liars.”
——————————————-
I take my hat off to you, Clot!
Mao, Lenin and other ‘social engineers wannabes via central planning’ got it backwards and are now spinning in their graves for not using ‘Greenspan’s easy credit’ to erode morality and financial freedom, thus creating their “new man”.
Nikkeid again?
http://finance.yahoo.com/q?s=%5EN225
Lowroller (134)-
Aahh…Greenspan’s too easy a target. Lots of the fingerpointing at him is revisionism of the worst sort. He is us.
And I certainly can’t put myself on a high horse, either. All I’m doing the last few days is trading around this wreck and looking for an edge.
We’ve all acquired a taste for hot money and easy debt. As Buffett said today, though: at some point the piper must be paid.
James Bednar Says:
March 1st, 2007 at 5:14 pm
If you’ve never read one of Buffett’s letters, I recommend it. The candor and straightforwardness is refreshing.
jb
Errrrr…sorry for being cynical, but he kind of actively courts such an image.
Do you remember Bill Gates from 15 years ago? People described leaving Microsoft as burned out empty husks.
Do you remember Guiliani before he got cancer, then 9/11? I distinctly remember seeing him outside Shea Stadium at the Press Gate. Upon noticing him, I turned, clicked my heels and stood at attention and waived my arm “Sieg Heil”. He smiled.
Think the same of this ruthless man. I admire him, but do not wish to emulate him or genuflect.
This is more my style:
http://www.youtube.com/watch?v=G-atayKxLr4
Or…
http://www.youtube.com/watch?v=OqOaw0HmHLw
To those of you familiar with mortgage financing –
Are fresh appraisals made when a mortgage is refinanced? What about when a fully amortized loan is financed?
thanks
Bear (140)-
Yes.
thanks clot.
Add Hillary to Lowball’s “social engineers wannabes via central planning”.
WTF was she getting at today? Does she even believe the garbage she spews? You can smell her disingenuous opportunism thru the TV.
Yeah, I’m sure Hillary’s great idea of restricting capital flows would be working great right about now.
This woman is dangerous.
ChiFi (137)-
When was the last time you slept? May be time for a Scotch and milk.
“Yeah, I’m sure Hillary’s great idea of restricting capital flows would be working great right about now.”
Clot,
How does she feel about leverage??
As you are well aware, her trading prowess ran a stake of approx $1,000 into approx $100,000. I guess she realized a lot of folks had a hankering for a steak?? Amazing how she visioned this before many experienced cattle traders, her timing was impeccable. Chalk it up to her keen reading of cattle on feed reports,technical support/resistance and breakouuts, and of course seasonal trends. No restricting of capital flows from Refco, Memphis to Arkansas.
James Bednar Says:
March 1st, 2007 at 8:29 pm
Or…
http://www.youtube.com/watch?v=OqOaw0HmHLw
grim: you are the kid at 1:16 that runs into the real estate placard…..
OK time for some warm scotch and milk
“OK time for some warm scotch and milk”
thats warm milk and cognac.
;)
SAS