Mortgage Crisis Spirals, and Casualties Mount

[Walter Yannis]

New York Times (http://www.nytimes.com/2007/03/05/business/05lender.html?em&ex=1173330000&en=690cec2cf5c2a475&ei=5087%0A)

March 5, 2007
Mortgage Crisis Spirals, and Casualties Mount

By JULIE CRESWELL and VIKAS BAJAJ
Even in affluent Orange County, Calif., the growing wealth of executives and brokers in the booming mortgage industry was hard to miss.

For Kal Elsayed, a former executive at New Century Financial, a large lender based in Irvine, driving a red convertible Ferrari to work at a company that provided home loans to people with low incomes and weak credit might have appeared ostentatious, he now acknowledges. But, he says, that was nothing compared with the private jets that executives at other companies had.

“You just lost touch with reality after a while because that’s just how people were living,” said Mr. Elsayed, 42, who spent nine years at New Century before leaving to start his own mortgage firm in 2005. “We made so much money you couldn’t believe it. And you didn’t have to do anything. You just had to show up.”

Just as the technology boom of the late 1990s turned twenty-something programmers into dot-com billionaires, and leveraged buyouts a decade earlier turned Wall Street bankers into Masters of the Universe, the explosive growth in subprime lending turned mortgage bankers and brokers into multimillionaires seemingly overnight.

Now an escalating crisis in the market, which seemed to reach a new crescendo late last week, is threatening a wide band of people. Foremost are the poor and minority homeowners who used easy credit to buy houses that are turning out to be too expensive for them now that mortgage rates are going up, but the pain is also being felt widely throughout the business world.

Large companies that bought subprime lenders during the boom, like H&R Block and HSBC, are now scrambling to sell them or scale back their exposure. Many investors are also likely to suffer: Wall Street firms made billions in fees, commissions and trading revenue from packaging and selling subprime mortgages to them as bonds.

New Century has emerged as a poster child for the lenders that rode that boom to the top and are now in free fall. The company disclosed on Friday that federal prosecutors and securities regulators were investigating stock sales and accounting errors. The latter could jeopardize billions of dollars in financing for the company, which issued $39.4 billion in subprime loans in the first nine months of last year.

Weakening home prices and rising default rates have rocked the subprime business. But for those who cashed out before the market turned, the ride up was particularly sweet. The three founders of New Century, for example, together made more than $40.5 million in profits from selling shares in the company from 2004 to 2006, according to an analysis by Thomson Financial. They collected millions of dollars more in dividends, salaries, bonuses and perks.

The company said in a statement yesterday that the founders were “still significant shareholders,” noting that they collectively owned about 7 percent of the company at the end of last year.

New Century’s stock price, which seemed to mirror the trajectory of the subprime business, peaked at nearly $66 a share in December of 2004 and traded in the $40s most of last year; on Friday, it was trading at $11 a share after the market closed. In a series of sales from August to November, two of the company’s founders sold shares for an average price of about $40 a share, for a total profit of $21.4 million.

It is not known whether the stock sales by the founders are among the sales being examined by federal investigators. Some of them had been part of scheduled stock sales that are often used by executives to diversify their portfolios. But some of the sales occurred on the same day that the executives entered the plans. A New Century spokeswoman, Laura Oberhelman, said that executives declined further comment.

The founders’ stock also rose in the social circles of southern California, the epicenter of the boom in subprime. Five of the 10 biggest providers of subprime mortgages last year had their headquarters in the region.

Robert K. Cole, 60, a co-founder who retired as chairman and chief executive last year, lives in a 6,100-square-foot oceanfront home in Laguna Beach that is valued at tens of millions of dollars and was once owned by the chief executive of Pimco Advisors, the giant bond trading and management firm. Edward F. Gotschall, 52, another co-founder who is vice chairman of the board, donated $3 million for an expanded trauma center at Mission Hospital that will be named for him and his wife Susan.

The executives from New Century are by no means alone in cashing in on the bonanza, and they do not appear to have scored the biggest profits. That title may be claimed by Angelo R. Mozilo, the chief executive of Countrywide Financial, the nation’s largest stand-alone mortgage company and one of the largest subprime lenders last year. He reaped more than $270 million in profits from sales of stock and the exercise of stock options from 2004 to the start of this year, according to the Thompson analysis.

Of course, most of the 500,000 people who work in the mortgage industry did not cash in so grandly. The wealth was concentrated among executives, loan officers and brokers, because the greatest rewards were meted out in the form of commissions, bonuses and stock awards.

“In the hot times, it was not unusual to see a broker make a million bucks,” said Guy Cecala, publisher of Inside Mortgage Finance, a trade publication. “You can carry that up further to people who ran the companies. The whole business revolves around personal compensation.”

The hot times are clearly over.

New Century’s disclosure of the federal investigations on Friday was the most serious in a string of shocks to have rocked the industry in the last three months.

A handful of lenders have sought bankruptcy protection, several have been acquired and a few have been shut down. Also on Friday, Fremont General, a top-five lender, said it planned to leave the business.

Industry officials say they are seeing an exodus of executives and salespeople as companies fold, cut jobs and push out early leaders.

“Everyone has run for the hills,” said William D. Dallas, whose company, Ownit Mortgage, filed for bankruptcy protection in December after it lost financing from Merrill Lynch and other banks.

For the borrowers of these mortgages, it may become more difficult to refinance if lending standards are tightened significantly. Many are already facing the prospect of payment shock when low, fixed-interest mortgage rates adjust to higher, variable rates.

On Wall Street, big investment banks could lose a significant source of revenue if the appetite for bonds backed by mortgages dries up.

In the last two years many skeptics began warning that the red-hot housing market and adjustable-rate loans would blend into a toxic brew. Last year, subprime loans totaled $600 billion, or about 20 percent of all mortgages, up from $120 billion and 5 percent in 2001, according to Inside Mortgage Finance. More than half of subprime loans have adjustable rates.

Many of the problems that have surfaced thus far are not tied to the resetting of rates. Rather, they stem from a sharp and early spike in the default rates among loans issued last year.

For example, about 13.8 percent of the loans in a group of mortgages New Century sold to investors in April were behind in payments or in foreclosure by January. By comparison, only 6 percent of loans in a pool sold to investors in March 2005 had met that same fate by January 2006.

Investors and regulators fear that the problems will only worsen as so many borrowers have fallen behind so quickly, especially at a time when the overall economy is healthy. The phenomenon suggests that lending standards were significantly weakened last year and that lenders were not as watchful for fraudulent transactions.

For New Century, the early payment defaults pose significant financial problems. In the first nine months of last year, Wall Street banks and investors that it does business with forced it to buy back $469 million in loans it had sold to them, up from $240 million for the same period in 2005.

The company was able to sell back about half of those loans at a discount of 26.5 percent. How it handled the remainder — about $227 million — is now under scrutiny. According to accounting rules the company should have valued the loans on its books for what they were worth today, not their previous face value. But it did not.

If it had, the company would have seen its earnings fall by about $60 million before taxes, wiping out most of its profit in the third quarter, according to Zach Gast, an analyst at the Center for Financial Research and Analysis, a forensic accounting firm.

This is important, because the company’s financing agreements require that it not lose money for any rolling six-month period. On Friday, New Century said it did not expect to make a profit in the six months that ended in December and that it was negotiating with lenders to waive the requirement but has only secured six of 11 waivers it needs.

“They had losses sitting on their balance sheets,” Mr. Gast said.

In August, the company’s chief financial officer, Patti M. Dodge, announced she was stepping down from her post to oversee investor relations, a department that typically reports to the chief financial officer. Taj S. Bindra, a former executive at Washington Mutual, replaced her in November.

For the second time in a decade, New Century finds itself fighting to survive. The firm’s roots were planted at Plaza Home Mortgage Bank where the three founders of New Century — Mr. Cole, a longtime mortgage executive; Mr. Gotschall; and a lawyer named Bradley A. Morrice — worked together. The three formed New Century in 1995 after Plaza was sold to Fleet Mortgage Group, now a part of Washington Mutual.

In the late 1990s, New Century narrowly survived accounting concerns and a scare in the bond market after Russia’ s default in 1998. It pulled through thanks to an investment by U.S. Bancorp, a bank based in Minneapolis.

With interest rates at historic lows, it quickly grabbed a big share of the fast-growing subprime market during the housing boom.

“They walked into a niche industry at a time when everything was lining up perfectly for what they did,” said W. Scott Simon, a managing director at Pimco Advisors. “In 2001, 2002 and 2003 the subprime business was just phenomenally profitable. Home prices kept appreciating and it seemed that no loans ever went bad.”

[Grapple]

“You just lost touch with reality after a while because that’s just how people were living,” said Mr. Elsayed, 42, who spent nine years at New Century before leaving to start his own mortgage firm in 2005. “We made so much money you couldn’t believe it. And you didn’t have to do anything. You just had to show up.”
And that’s what they did, so anyone who showed up and could fog a mirror was given a home loan, the brokers pocketed their fees and sent the mortgage off to the big investment houses who turned it into bonds and they pocketed their fees and the bonds went off to various individual and institutional investors who got a high return so the managers pocketed their fees and they sent of the risk to hedge fund whose managers arranged some deal which covered the risk and pocketed their fees and everyone was happy and rich.

Then the person who got a $300,000 loan on a house that a few years ago only cost $150,000 found out that they could not afford the mortgage on a $30,000 income and the whole deal starts to unravel with the house going into foreclosure and selling at its $150,000 true value, the mortgage company takes a hit, the investment banker takes a hit, the hedge fund does not hedge and the whole scheme is shown to be just another big fraud once the magic home appreciation machine stops creating wealth out of thin air.

[Walter Yannis]

And that’s what they did, so anyone who showed up and could fog a mirror was given a home loan, the brokers pocketed their fees and sent the mortgage off to the big investment houses who turned it into bonds and they pocketed their fees and the bonds went off to various individual and institutional investors who got a high return so the managers pocketed their fees and they sent of the risk to hedge fund whose managers arranged some deal which covered the risk and pocketed their fees and everyone was happy and rich.

Then the person who got a $300,000 loan on a house that a few years ago only cost $150,000 found out that they could not afford the mortgage on a $30,000 income and the whole deal starts to unravel with the house going into foreclosure and selling at its $150,000 true value, the mortgage company takes a hit, the investment banker takes a hit, the hedge fund does not hedge and the whole scheme is shown to be just another big fraud once the magic home appreciation machine stops creating wealth out of thin air.

Precisely.

Which leaves the question of when those of us who saw it coming should pounce.

How close are we to bottom?

My guess: we haven't even begun to plumb the depths. :D

[Grapple]

How close are we to bottom?

My guess: we haven't even begun to plumb the depths.
I agree, its not even hit the mortgage business hard yet, the ones which were nothing but a bunch of rented offices have fallen but the big names are getting worried now. So its got a while to go, though with RE it does depend on location, location, location so there could be local deals depending on where you are, some places have never gotten out of the last RE bubble hole. Though most of the present bubble areas are still living on “wishing prices”.

[Macrobius]

I've highlighted a couple of interesting points. 50 Trillion dollars public debt? That has to be a significant part of the lifetime income for EVERY WORKER ALIVE TODAY. In theory, that isn't some kind of significant upper bound, but 'not in *your* mean expected lifetime earnings little boy' is a rather sobering phrase nontheless.

A Fibonacci retracement? You don't want those mathematicians to turn on you....



Markets Hit Bottom: But Will It Last?
BY FRANK BARBERA, CMT

It has been a wild week in the financial markets, with the sub-prime panic, and Asian contagion sweeping global equities. On Tuesday, equities finally found traction with the S&P 500 closing higher by +21.29 to end at 1395.41, and the widely watched Dow Jones Industrials ending up 154.53 at 12,204.94. For at least the time being, the shelling has stopped. The question now becomes, what’s next?

Will the markets recover and go on to new all time highs? Is the Sub-Prime Mortgage debacle simply an overblown ‘small piece’ of bad credit that will now fade into credit market history as a bad idea where we collectively should have known better? And what about the global financial markets which were supposed to offer diversification in a downturn but actually fell harder and farther? Will they recover?

In our view, a classic trend change pattern is now unfolding before our very eyes. It is a pattern that all should pay heed to do because if I am right, it is leading us into the beginning of the next bear market. In truth, on a secular basis, the real bull market ended in 2000, and what we have seen since has been, and likely will be, a series of alternating cyclical bull and bear moves not unlike the 1970’s. You remember ‘That 70’s Show,’ don’t you? A long secular bull market lasting 24 years from 1942 to 1966 followed by 16 years of “giant sideways” activity, which for the Dow took the shape of a side swinging trading range between 1000 and 500?

On the very long-term trend of the stock market, the 1966 peak really exhausted the growth phase that had been intact for two decades. What followed was essentially one ongoing bear market that had alternating phases of smaller ‘bull and bear’ cycles. Sure the market managed to make token new all time highs in the Dow in 1968 and 1973, but did that really amount to much? In the ensuing bear markets of 1969-1970, 1973-1974, investor portfolios were decimated, with the gains of the cyclical bulls entirely and utterly gone. Could we be on the path to a repeat performance in the years ahead? Well, we certainly saw a sustained 25 year bull market from 1975 to 2000, and while the DJIA has recently gone to a nominal new all time high, most averages like the S&P and NASDAQ fell way short. There is an ugly divergence of sorts that hints at a larger stock market “turn.”

To be sure, the financial condition of the US economic system is today, the veritable house of cards. Did you see David Walker on 60 Minutes this weekend? The US Comptroller General is panicked about what he sees as a ‘bleak’ fiscal outlook ahead. The funny thing is, no one is arguing with him -- it is a case of the Emperor with no clothes. Everyone knows he is right, but no one wants to talk about it. In a report issued by the White House entitled “2005 Financial Report of the United States Government,” a report issued directly in front of the Christmas Holiday to assure less readership, it was revealed that the 2005 Deficit was really $760 Billion dollars, not $318.50 Billion as originally reported, that the deficit was not 2.6% of Gross Domestic Product as we were frequently told, but really 6.20% of GDP and growing rapidly. Worse, America’s debts and commitments total north of $50 Trillion dollars, not the $8 Trillion most frequently commented. In 2000, our total debts and commitments totaled $20 Trillion, and those have now more than doubled in the last five years. The 2003 Medicare Drug Bill all by itself added over 8 Trillion dollars in unfunded commitments to American taxpayers. Your share of the National Debt is already $375,000 dollars and has doubled in the last five years. It will soon double again, unless radical change comes to pass. Certainly, these numbers are chilling, and to his credit, Comptroller Walker is sounding the alarm in an attempt to give us all pause as we are running up the national credit card at an unprecedented rate.

In my view, the current real estate related slow-down has far reaching implications. Over the last few years, the real estate centric mechanism of construction workers, real estate agents, mortgage brokers, household improvement, building supplies, homebuilding has been THE primary driver for employment and by default, economic growth. Ex-this driver, which is now clearly rolling into an extended slow down, it is hard to see exactly where future growth engines will be found. CAPEX shows no signs of aggressive growth. Worse, with many consumers borrowing heavily against their homes in the last few years, and taking ownership via suspect mortgage finance, we have to wonder whether or not the financial system is only now seeing the proverbial ‘tip’ of the iceberg. When we look at the carnage in the sub-prime sector in names like Fremont General (FMT), New Century (NEW), Novastar (NFI), Accredited Home (LEND), Indymac (NDE), American Home Mortgage (AHM), American Capital (ACAS) we have to wonder whether or not the contagion will eventually spread -- will MGIC be affected, will Countrywide be affected? Where will it end? My suspicion remains that despite the likely strong rebound in equity markets in the weeks ahead, there will be more pain in these areas in the months ahead, and we have not seen the last of credit related bombshells for this cycle.

[see the link for charts -ed.]
....

Turning to the Equity Markets, it is clear that at last night's close the stock market, and indeed many markets, were pushing multi-year extremes in oversold activity. To suggest that a rally was overdue was to put things mildly. In the case of the Chinese stock market, which ignited the initial spark to this latest round of carry trade unwinding, a strong recovery rally is likely following the recent nearly 24% decline. From its high of $118.04 on January 3rd, the China 25 ETF plunged to a low yesterday of $89.80 under-cutting both the 50 and 100-day moving averages.

Yet, stepping away from the every short term technical damage, we note that this severe setback took place against the larger backdrop of a rising 100-day moving average which closed last night at $97.98. Typically, this type of sharp decline set against the backdrop of a rising medium term moving average is a strong warning of a trend reversal, but only a part in the process of the trend reversal itself. Put another way, tops involve lots of volatility, and they take a lot of time to construct. In the case of the Chinese ETF (FXI), and indeed, the Shanghai Market, odds are high that a recovery rally will closely approach the former highs in coming weeks. For the China 25 ETF, a .618 fibonacci retracement of the most recent decline would target prices back up to the $107 to $109 area, a 10% gain from current levels near $96.75. Assuming the prices ‘bee-line’ toward the strong resistance zone, a top could take an additional 4 to 8 weeks to actually build and finish, which means a more important primary trend decline may not start in earnest until early June. Thus, a note to all stock market bears, time to pull in the claws in the weeks ahead and attempt to trade smaller swings from both sides of the market, long and short.

Moving around Asia, we note that in Japan the 225 Index held its medium term rising trendline over the set back of the last few days and could now be in a position to retest the former highs near 18,300 seen in late February.

In coming months, the ability of this market to remain “healthy” as it is the primary capital market for Asia will be of paramount importance. In the case of most foreign markets, there is no diversification advantage to be gained by allocating money overseas during a down market. History clearly shows that foreign markets tend to under-perform in bear markets. That said, with the strong growth profile developing in Asia, the real reason to own foreign stock markets is there out-performance on the upside during bull market conditions. In this manner, these markets have been consistent over-achievers for quite some time, with the Nikkei 225 a key barometer for the health of greater Asia. If the global economy is to remain on track, Asia ex-China, and likely Japan, will need to improve and gain strength.

Another important market which could still be in position to manage new highs for the cycle is the Hong Kong market measured by the Hang Seng Index. Note in the chart below that to date, the Hang Seng, despite an 8% decline in the last 5 days, is still well above its more important medium term uptrend line. In my view, it would take months of sideways action for this market to actually build a more formidable top.

Here again I would also note that in many respects, this rather nasty decline seen in capital markets over the past week started in Asia with the recovery also starting in Asia last night. Is the global baton of leadership being handed off? Too early to tell, but there is no question that through globalization these markets have now become far more tightly linked and as we have just seen, events overseas can lead and trigger events here at home. A brave new world, to be sure. Turning to European markets, the outlook going forward may bear even closer scrutiny as the widely watched Financial Times Index appears to have completed a five wave advancing pattern. The ‘Kiss of Death’ for the rally? Too early to tell, but momentum levels in most of the European markets appear exhausted with these markets very likely to start surrendering their long string of relative strength leadership.

In the case of the FTSE, which often leads the DJIA at turns, the rising trendline connecting all of the most important lows of the last two years is currently at a reading of 6,050 and will be rising toward the 6,120 level over the next few weeks. Any breakdown in London, or for that matter Paris or Frankfurt, would probably indicate a global slowdown on the way. We will be watching these markets very closely in the weeks ahead. For the Paris CAC-40 Index, the 5,240 zone looks like important support for the weeks ahead, with a recovery rally likely targeting at least the 5,600 zone. The Paris CAC-40 closed Monday evening at 5,385.00.

In the case of the German stock market, the DAX Index, like the FTSE and the CAC, we see what appears to be a completed five wave advancing pattern. This does not mean that these markets cannot closely approach their recent highs in the weeks ahead and indeed, they most probably will. Yet, if the larger macro-global trend is slowing and the expensive Euro is making ECB exports less competitive, these markets will be a good bet for signs of the next leg down. At present, I would next expect any sign of real weakness to make an appearance before the summer, and most likely sometime early Fall 2007. For the time being, where most global markets are concerned, step back, look at the recent range, and think “trading range” for the months ahead.

I, for one, am very happy that markets have regained their footing, as a new down-cycle with the prospect of derivatives-counter-party issues, debt defaults, and banking system vulnerabilities scares the hell out of me. The sun is back out on Wall Street, and global liquidity flows appear to be returning to normal. This is good news for all of us, as it yields valuable time in which to prepare and rig for what is sure to be foul weather ahead. In the greater scheme of things, this week's global sell off appears to be a warning, the proverbial shot across the bow, and a potential harbinger of more difficult times to come. In the week's ahead, this message should not be forgotten amid the cheerleading voices of a global recovery rally. For most of us, now is a good time to make sure your financial house is in order as the odds are growing that a global maelstrom of immense size and scope is in the making. When, not IF, that downturn really ‘digs in,’ we will all benefit from having had the extra time to prepare.


http://financialsense.com/Market/daily/tuesday.htm (link obsolete in a week)

[MadScienceType]

No worries, America! Your government can make that $50 trillion debt disappear overnight by printing a lot more of this...

http://www.unclesgames.com/images/products/073000000356.jpg

Get ready to bring a wheelbarrow to the convenience store to hold all the cash you'll need to pay for your gas, though.

[Macrobius]

Yeah, but if we are going to bail ourselves out with helicopter money we should check out that other thread, especially the part where the angry moose takes out the helicopter....

Seriously I don't think they'll use hyperinflation this time. I think we will see something along the lines of sacrificing select institutions (warn the insiders about which boat is bad, then sink it, profiting handsomely except for the guys holding the bag, er, the lifeboat). Savage but effective and who's going to cry more than crocodile tears for the poor real estate developers. If the factory workers in the 80s, white and pink collars in the 90s, and tech guys in the 00s didn't get much sympathy will your local land-leech? Americans are still Calvinist enough to believe if you get canned and tossed on the street God must have it out for you. White people make poor victims -- they just aren't convincing in the role. They know it's their fault and everyone else does too. (Which is why plumping for white victimology like David Duke does will not work, politically.)

Whites will not do anything (and thus, there won't be hyperinflation) until enough people fall out of the safety net. We're *almost* there -- health care costs are the wild card, not home ownership. There is nothing particularly unsurvivable about bursting the real estate bubble. It just means people get a dose of realism and fewer people are homeowners than thought they were -- they never were and never would be, so it is just reality estate. Heh.

The real problem as it were is that the party does have to end -- really -- the rest of the world can calculate the lifetime worth of one white dude as a slave, versus the care and feeding of same, and add up all the value of his land and belongings, er, 'The North American Market'. Hocking posterity's income by promising future tax revenues works for a while, since future income streams are infinite, but the rest of the world will eventually balk at the risk. After you reach the point in the storyline 'and then this debt will be paid off by the lifetime incomes of persons not yet born' and probably rather before that point the risk premium will reduce the PV of the FV of the income stream to 'that and two bucks will get you a cup of coffee. If you're quick.' Think of it as the White Race's Yield Curve. What happens if White fertility drops and fails to deliver on the promised slave-babies? Did you ever think of that? The rest of the world has and is certainly not going to count their whiggers before they're hatched.

Which brings us back to Mr. White Guy. So he has a house that is worth what it is worth and no endless supply of trash at Walmart. That's cool until he has to sell his house to pay for his health care. *Then* things begin to look bad for Mr. White. In most cases though, things are still perking along for him, and he is lurching from crisis to crisis and doing OK. The scary number in the above article is -- we are borrowing from foreigners not to pay for our plastic trash and oil to drive it around with -- we bought a TRILLION dollars in DRUGS??? Holy crackhouse Batman! So *that's* what the Baby Boom is up to!

That isn't 50 Trillion dollars to buy bling-bling for the Whiggers. That's 50 Trillion to finance a triangle trade in drugs. That's Iran Contra carried out on a generational scale. Give me your house or Grandad dies in pain rather than nice and easy, capiche? This addiction to the pleasures of life is addiction pure and simple. Life goes on without the feeding tube -- it just gets more painful. For a while. For the baby crop raised on TV and TV wars and TV doctors, Suicide really is Painless.... on a generational scale. Baby. Boom. M.A.S.H. What part don't you understand?

Britney Spears gets it. [1] *She* shaved her head and repented in sackcloth and ashes for killing our sons and for her addictions. What about you?

[1] http://sidthomas.blogspot.com/2007/02/this-weeks-dairy.html

ADDED: Today's cross-postings: http://www.bloglines.com/blog/Macrobius?id=8 'Mortgage Crisis and Fib-onacci Spirals'

[Walter Yannis]

I agree, its not even hit the mortgage business hard yet, the ones which were nothing but a bunch of rented offices have fallen but the big names are getting worried now. So its got a while to go, though with RE it does depend on location, location, location so there could be local deals depending on where you are, some places have never gotten out of the last RE bubble hole. Though most of the present bubble areas are still living on “wishing prices”.

The revised-downward Q4 productivity figure looks juicy - it probably means that the worm has turned and we're looking at recession, IMHO.

I'm looking to buy a nice condo in SoCal in about a year, we'll see how it looks, my guess is that it's going to be a long, painfully slow summer for sellers. Profligates like HSBC will have a book full of bad loans they'll be desparate to dump.

This all took longer than I would have thought - heck, I would have thought we'd be coming out of the downswing by now instead of just starting it, but I always underestimate how long things will take.

Anyway, it's looking bad, which means it's looking GOOD!!:D

[MadScienceType]

That's an interesting take, food for thought.


I think we will see something along the lines of sacrificing select institutions (warn the insiders about which boat is bad, then sink it, profiting handsomely except for the guys holding the bag, er, the lifeboat).

You're probably right, but aren't they running out of institutions to sacrifice? What's the return on outsourcing all the waiters, waitresses, busboys and "sanitation engineers" and all other service industries in this country?

Anyway, you're probably right. I was thinking more along the lines that we'd be the breadbasket of the world, once we're sucessfully and completely de-industrialized. We'd all be slaves, as you pointed out, on the great big global collective farm. How's it feel to be a kulak, Mr. and Mrs. American?

[Macrobius]

The real problem is that when the crisis comes all the spam filters will filter it out, so no one will notice and the prices will keep going up anyway. Hell, maybe its those spam filters that have kept the economy afloat these past few years.

[Walter Yannis]

Banks Go on Subprime Offensive (http://online.wsj.com/article/SB117369890345734007.html?mod=home_whats_news_us)
HSBC, Others Try to Force
Struggling Smaller Players
To Buy Back Their Loans
By CARRICK MOLLENKAMP, JAMES R. HAGERTY RANDALL SMITH
March 13, 2007; Page A3
Amid mounting defaults in the market for subprime mortgages, some big banks and mortgage companies are striking out in their efforts to wrest compensation from originators of those high-risk, high-return loans.

Led by HSBC Holdings PLC, banks and others are trying to force small mortgage lenders to buy back some of the same loans the banks eagerly bought in 2005 and 2006, by enforcing what the industry calls repurchase agreements. Squeezed by the onslaught of defaults, many originators are saying they can't afford to buy back their loans or are pursuing bankruptcy protection.

SUBPRIME BLUES

Yesterday, New Century Financial Corp., one of the nation's biggest subprime-mortgage lenders, said its bank lenders were pulling their funding and that it didn't expect to meet the repayment demands of its creditors. The bank funding allowed New Century to finance loans while waiting to sell them to investors. Last week, under pressure from creditors, the company ceased making new loans.

Subprime mortgages are home loans made to borrowers with weak credit. Subprime-loan originations totaled about $605 billion last year, or about a fifth of the overall market for U.S. home loans, according to trade publication Inside Mortgage Finance.

New Century said yesterday that, starting last Wednesday, it had received a wave of default notices from its major Wall Street creditors, and may owe creditors a combined $8.4 billion for mortgage repurchases. It said if all its lenders demand repurchases, it can't afford to pay. That could force the company into bankruptcy proceedings, where it would join scores of others hurt by the industry meltdown.

A spokeswoman for the Irvine, Calif., company declined to comment on whether it was preparing a bankruptcy filing.

The largest debt listed by New Century, owed to Morgan Stanley, was $2.5 billion. New Century said that after Citigroup Inc. demanded additional collateral of $80.3 million to cover a "margin deficit" on some of the company's debt last Tuesday, Goldman Sachs Group Inc. filed a default notice on Wednesday, seeking repayment of roughly $100 million. In a filing yesterday, New Century also listed outstanding debts of about $900 million to Credit Suisse Group Inc., $800 million to IXIS Real Estate Capital Inc. and $600 million to Bank of America Corp.

A person close to Morgan Stanley said the Wall Street firm believes its debt is "fully collateralized," meaning the value of the assets backing the debt equals or exceeds the debt's face value. Morgan Stanley advanced New Century a fresh $265 million last week but notified the company on Friday it was "discontinuing financing."

On Thursday, the fresh financing from Morgan Stanley was used to help pay back $717 million that New Century owed Citigroup, the company said yesterday. The same day, default notices came in from Bank of America, Citigroup and IXIS.

Robert Napoli at Piper Jaffray said assuming a 20% loss rate on loans it is forced to buy back from its creditors, New Century "would have to absorb $1.6 billion of losses, essentially wiping out shareholders equity." As of Sept. 30, the company listed $25 billion in assets, about $23 billion in liabilities and $2 billion in shareholders' equity.

Although the specifics vary from deal to deal, repurchase agreements obligate the mortgage originator, under some circumstances, to buy back a troubled loan sold to a bank or investor. That obligation sometimes kicks in if the borrower fails to make payments on the loan within the first few months or if there was fraud involved in obtaining the original mortgage. The total volume of mortgages nationwide that might meet those criteria isn't known, but such agreements cover billions of dollars in mortgages.

HSB is dispatching lawyers to U.S. courts to try to collect from mortgage originators, fighting over often-small amounts in a myriad of cases. A few weeks ago, the British bank had a lawyer in Atlanta at the bankruptcy hearing of American Freedom, a mortgage seller that operated from an Atlanta suburb and advertised loans on its Web site called getfree.com. HSBC has demanded American Freedom buy back two loans totaling $255,000 because the borrowers didn't make initial payments.

The first meeting for American Freedom creditors was held March 2 in the federal bankruptcy building in downtown Atlanta. American Freedom President Tamara Burch's lawyer, and Ms. Burch herself, who barely spoke above a whisper, both said American Freedom faced a slew of repurchase requests.

An HSBC spokeswoman said the bank doesn't comment on pending litigation.

Such demands are helping speed up the sudden downturn in the subprime-mortgage business. Banks like HSBC bought mortgages from ever-smaller brokers and originators to increase their loan volume when the subprime mortgage industry was booming in 2005 and 2006.

HSBC's borrowers included people who couldn't make their first mortgage payments as well as people who misrepresented their income or employment on their mortgage applications, interviews and HSBC's court filings show.

When it is unable to claim its money or believes it will be unable to, HSBC must write off the loans. In 2006, the bank said the loan-impairment cost totaled $6.68 billion for its main U.S. consumer finance business. That was 34% higher than in 2005. The bank has said it may take two to three years to work through its problem loans.

HSBC's top finance chief acknowledges the difficulties in trying to enforce repurchase agreements. "It's proving quite difficult in the sense that many of the parties...don't have the wherewithal" to repurchase the loans, said HSBC Finance Director Douglas Flint.

In one case, HSBC sued a Michigan mortgage company, LFM Services Inc., to force it to buy back five loans HSBC purchased in 2005, according to court documents filed this month in federal court in Illinois. LFM has refused HSBC's repurchase request, the documents show.

Several loans went to what bank executives call "straw borrowers," people who obtain the loan for another home buyer. One borrower, who HSBC said lied about his income in loan documents, turned out to be a straw borrower for a man whose real-estate dealings are being investigated by the Federal Bureau of Investigation, according to court documents. The FBI didn't return telephone calls for comment.

LFM head David Piccinini said, in an interview, that he, too, was defrauded. He said he bought the loans from brokers who wrote the contracts with straw men. "I did not originate these loans. I am a collective victim along with HSBC of fraud that has been perpetrated on me," he said.

American Freedom, Marietta, Ga., made $10 million in revenue in 2005 by originating loans and taking a fee, before selling them on to investors such as HSBC and mortgage-finance company Countrywide Financial Corp. Both of those companies are demanding buybacks of at least some of those loans, court documents show. Countrywide couldn't be reached for comment.

[Grapple]

Led by HSBC Holdings PLC, banks and others are trying to force small mortgage lenders to buy back some of the same loans the banks eagerly bought in 2005 and 2006, by enforcing what the industry calls repurchase agreements. Squeezed by the onslaught of defaults, many originators are saying they can't afford to buy back their loans or are pursuing bankruptcy protection.
That’s why its been a joke, the whole idea of massed repurchase of these debts by the sub-primes, they have little in the way of assets and usually just have leased offices. In fact these sub-primes would not even exist without the money they got from the big banks and the bonds they sold and they were specifically set up to be low asset, high debt, limited liability corps. And all the money they made went off in expenses, salaries or commissions and I think it will be hard to get that money back. You can’t get blood from a stone and you can’t get money from a limited liability corp who has no assets.

[Walter Yannis]

http://www.foxnews.com/story/0,2933,258542,00.html


WASHINGTON — A national crisis in the home mortgage industry cast a dark shadow that stretched from Wall Street to Main Street as foreclosures hit a record high in the last quarter of 2006, and the number of Americans failing to make their monthly mortgage payment hit a 3 1/2-year high during the same period.

The Mortgage Bankers Association, in its quarterly snapshot of the mortgage market released Tuesday, reported that the percentage of payments that were 30 or more days past due for all loans tracked jumped to 4.95 percent in the October-to-December quarter.

The association's survey covers 43.5 million loans.

That marked a sharp rise from the third-quarter's delinquency rate of 4.67 percent and was the worst showing since the spring of 2003, when the late-payment rate climbed to 4.97 percent.

The percentage of mortgages that started the foreclosure process in the final quarter of last year rose to 0.54 percent, a record high. The previous high, 0.50 percent, occurred in the second quarter of 2002 as the economy was recovering from the blows of the 2001 recession.

The nationwide percentage of mortgages now in foreclosure rose to 1.19 percent.

[Walter Yannis]

That’s why its been a joke, the whole idea of massed repurchase of these debts by the sub-primes, they have little in the way of assets and usually just have leased offices. In fact these sub-primes would not even exist without the money they got from the big banks and the bonds they sold and they were specifically set up to be low asset, high debt, limited liability corps. And all the money they made went off in expenses, salaries or commissions and I think it will be hard to get that money back. You can’t get blood from a stone and you can’t get money from a limited liability corp who has no assets.

I'm no expert, but doesn't it seem somewhat strange that there hasn't been a major problem in the derivatives market?

Surely HSBC et al. put off some of this risk, no?

[Grapple]

I'm no expert, but doesn't it seem somewhat strange that there hasn't been a major problem in the derivatives market?
I am not an expert either but I think what has not happened yet is that the bonds that the subprimes mortgages were turned into have not been downgraded yet. Until that happens then the derivatives still look good on paper and as you know as long as the numbers look good everyone will pretend that reality is good.

Also all the news is still pushing the idea that the bad loans were only in the sub-prime market and involve poor people who the markets don’t care about since they don’t have much disposable income anyway. However a lot of these loans were to people with good credit rating but who bought more expensive houses then they could afford and this will hit the prime market and its bonds as well.

[PennDutch]

I am not an expert either but I think what has not happened yet is that the bonds that the subprimes mortgages were turned into have not been downgraded yet. Until that happens then the derivatives still look good on paper and as you know as long as the numbers look good everyone will pretend that reality is good.

Also all the news is still pushing the idea that the bad loans were only in the sub-prime market and involve poor people who the markets don’t care about since they don’t have much disposable income anyway. However a lot of these loans were to people with good credit rating but who bought more expensive houses then they could afford and this will hit the prime market and its bonds as well.

This a huge mess. I would be very careful of any retirement investments in the "guaranteed" interest category. I would find out what the exposure is to this mortage-real estate collapse. You might want to cut your losses and look at a money market, a muni fund or something like that until the air clears.

The price of gasoline, natural gas, & fuel oil has to have a big effect on real estate---all the White flight etc.

[Jack Bauer]

Precisely.

Which leaves the question of when those of us who saw it coming should pounce.

How close are we to bottom?

My guess: we haven't even begun to plumb the depths. :D

IMHO the whole U.S. economy is becoming more and more like a three-card monte. Certainly the stock market is. I'm surprised a Warren Buffet, with his m.o., can still thrive in today's stock market which has hundreds of billions of dollars of worthless stock hyped and dumped in coordination with spam email sent to hundreds of millions of email accounts.

p.s.- when I see the name of shisters in various financial scams, I often see as many Dagos as Yids. Just an observation.

[PennDutch]

IMHO the whole U.S. economy is becoming more and more like a three-card monte. Certainly the stock market is. I'm surprised a Warren Buffet, with his m.o., can still thrive in today's stock market which has hundreds of billions of dollars of worthless stock hyped and dumped in coordination with spam email sent to hundreds of millions of email accounts.

p.s.- when I see the name of shisters in various financial scams, I often see as many Dagos as Yids. Just an observation.


The Italian stallions are going to get burnt in this mortage-real estate collapse. Most big Italian bread is in the grocery-food, construction & shopping centers, and some in banking-lending. What did Michael say, "my father never trusted Hyman Rothstein". :p

I'm generally bullish, but this triangulation, of war, high energy prices, and low interest rates wasn't forseen---higher interest rates or higher taxes are on the way. The government cannot just print money, regardless of what anyone tells you. The government can only borrow or raise taxes, or a combination of both. Either way we are headed for shit...then there is our disaster of a trade policy! :eek:

[Walter Yannis]

The government cannot just print money, regardless of what anyone tells you. The government can only borrow or raise taxes, or a combination of both. :eek:

Ultimately that's true, but I think that the lesson of the past 15 years might well turn out to be that rising productivity caused by technological advancement (e.g. office IT apps & the internet, deregulation of the trucking and communications industry) let the Feds get away with inflating the currency and gunning credit for a long, long time.

They're still stealing the wealth, it's just that nobody really misses it because it's newly created and they haven't noticed it before.

But now productivity is slowing down and may have stopped, and that means the chickens will come home to roost.

IMHO.

[Grapple]

The government cannot just print money, regardless of what anyone tells you. The government can only borrow or raise taxes, or a combination of both
There is another thing that they can do. Give the green light to more individual debt. For example you bring in some poor Mexican illegal, give them a job as a house framer, give them a credit card and suddenly thousands of dollars of individual debt is now created and can be spent to keep the economy going. Or push the idea that houses are an investment so that Mr and Mrs Smith take out a mortgage on a “second home” which creates even more debt money which is then used to pay the Mexican illegal house framer who uses it to pay on this credit cards so he has “good credit” which means he can take out a mortgage and “buy” a house using a sub-prime loan which creates even more debt money and is used to pay the Realtor, House Builder, Local Government taxes who then use that to pay their monthly loan bill so they can get more credit and go deeper into debt

[Factotum]

There is another thing that they can do. Give the green light to more individual debt. For example you bring in some poor Mexican illegal, give them a job as a house framer, give them a credit card and suddenly thousands of dollars of individual debt is now created and can be spent to keep the economy going.

It's actually quite ingenious. Unlike money, which can be saved if people are feeling insecure, credit is use or lose. In the extreme, consumer confidence and business confidence are no longer variables, only the speculative mood of the financial markets. The purest form of capitalism, in a way. This could be one reason why macroeconomic volatility has been lower in recent years.