Originally Posted By Mr X I've been watching this unfold now for about a month, ever since New Century Mtg. Co., crashed from $30 a share to around $20 on the news that they would have to "re-state" their income for 2006. New Century is a "subprime" lender that specializes in selling mortgages to deadbeats with bad credit. Now it seems the deadbeats have decided not to pay, since their homes are worth less and less each day. At that time, I mentioned on some stock market boards that I thought I might short sell New Century (you win if the price goes down)...and they all said "no, no...you're too late...it's already at the bottom...you should consider buying". Well, I did nothing, and I regret it because New Century closed Friday at, ready...$3.21 per share! That would have been over a $10,000 profit. Anyway, I was wondering what everyone's thoughts are? Is this just the tip of the iceberg? Have too many people gotten themselves in too deep, and will now be in trouble if they want to (or NEED to) sell? How far will this go? For the record, I'm holding short sales on Countrywide Mtg., American Home Mtg., and Accredited Home Lenders. So far I've made nearly $2,000 profit in a few days, but they really haven't moved much (yet). Accredited is a no-brainer, it's in the same boat as New Century and I had my short request rejected about a hundred times (no shares available to short) before finally getting a small amount. The other two are bets that this will spread upwards to the bigger fish when more news starts coming to light. I expect an extremely long and insightful commentary from SuperDry here, at the very least.
Originally Posted By Mr X By the way, not just looking for stock market stuff here, either...I'd love to hear thoughts from homeowners and others who've been watching their local markets... Any thoughts would be appreciated (just don't want anyone to not post just cause I used a bunch of technical jargon above...I'm turning into a real geek with this stuff as SuperDry can attest to, being the unfortunate recepient of my many market related emails ). Jonvn, you're another guy who's thoughts I'd very much like to hear.
Originally Posted By mrichmondj <a href="http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article1465662.ece" target="_blank">http://business.timesonline.co .uk/tol/business/industry_sectors/banking_and_finance/article1465662.ece</a> The link above discusses the sub-prime problems at HSBC -- Europe's largest bank. This just goes to show that it's not just the fly-by-night lending companies in trouble over this one. In 2007, there is over $1T in ARMs and interest-only mortgages that reset to higher rates. Sub-prime households that used these exotic schemes to finance bigger houses than they can afford will face the option of either 1) significantly increasing their mortgage payments by financing at higher rates and adding the principal payment to their bill, or 2) having to sell their property to get out of the mortgage, or 3) facing foreclosure when they can't figure out how to pay the bills. The refinancing at higher rates takes a lot of disposable income out of the U.S. economy, where consumers are already starting to show signs of weakness (and $3 a gal gas isn't going to help consumers out, either). Most home owners are not likely to see much relief in selling their homes because inventories are already uncomfortably high, making it difficult to sell without cutting the asking price. If you are in a sub-prime mortgage and can't get your asking price, chances are that you still have to cough up money at the end of the transaction just to pay the negative equity in the home. Ther are lots of folks in that boat, and the growing inventory of unsold homes just makes it harder and harder to get full price from a listing. Finally, the skyrocketing number of foreclosures continues to add to the bloated home inventories and puts the lenders in a precarious financial position as well. Most lenders are getting out of the sub-prime business altogether and the "free money" of the past decade is starting to dry up -- which means fewer home buyers out there to buy and increasing supply of homes for sale. Housing prices are going to fall a whole lot further before this is all said and done -- we haven't even discussed the impact of a recession on the whole problem. I recommend a great blog on all sorts of economic topics, including the deteriorating housing market. Link to it here: <a href="http://bigpicture.typepad.com/" target="_blank">http://bigpicture.typepad.com/</a>
Originally Posted By fkurucz Sub-prime and other creative financing have been key in the current housing price run up we have been seeing across the country. And its not just deadbeats. People with good credit have been buying homes in expensive markets using crazy ARM loans that had teaser rates that are starting to expire. With dropping prices and tightening requirements, many of these borrowers are unable to refi their ARMs (which are currently more expensive than fixed rate loans. I think that we are seeing the tip of the iceberg.
Originally Posted By DouglasDubh I think that we'll continue to see a fairly high foreclosure rate for the next few years, but I don't think it's going to get much, much worse, as the "tip of the iceberg" phrase implies.
Originally Posted By Mr X Thanks for the link... Interesting thing I noticed was that last Tuesday when the market crashed so hard (excuse me, er, "corrected") lenders such as New Century actually didn't do too badly. In fact, New Century stayed flat at $15, and even rose a couple bucks the next day. I think it's a little telling that this big disconnect is occuring. In a parallel way, I think there's a huge disconnect between "lender troubles" and having such a "strong economy". How can both be true? I think forclosures and people getting scared out of their assets will, eventually, make for less spend happy consumers. That's my thoughts anyway. And yes, "tip of the iceberg" certainly sounds right. It's amazing how many stockholders on some of the bigger mortgage messageboards are screaming "WE'RE NOT THE SAME! THIS ISN'T LIKE NEW CENTURY!". Well, seems we'll soon find out. Interestingly, one of my shorts, Countrywide, just anounced LATE Friday (interesting timing) that they would no longer offer 100% (no money down) mortgages starting MONDAY (rather short notice, I'd think...and telling their sales people to close as many 95% as possible TODAY because they couldn't on Monday). To me that seems fishy (plus the CEO is selling more and more shares since the middle of last year). <a href="http://biz.yahoo.com/rb/070309/subprime_countrywide.html?.v=2" target="_blank">http://biz.yahoo.com/rb/070309 /subprime_countrywide.html?.v=2</a> p.s. lastly, I do want to emphasise that I am in NO way offering any advise here...it's just my opinion and I could be completely wrong (so SD, don't run out and short on account of me ). I'm definitely gambling on the "where there's smoke, there's fire" theory.
Originally Posted By Mr X Well, Doug, Federal Reserve Governer Susan Bies had something to say that sounds a bit "tip 'o the iceberg", if you ask me. <a href="http://www.bloomberg.com/apps/news?pid=20601087&sid=a7iLhjv5Z7Pg&refer=home" target="_blank">http://www.bloomberg.com/apps/ news?pid=20601087&sid=a7iLhjv5Z7Pg&refer=home</a> Something about the "beginning of a wave"? p.s. Doug, you have now just become my greatest fiscal indicator...THANK YOU. I'm confident now that I'll make a fortune shorting the market... PLEASE, tell me more!
Originally Posted By DouglasDubh I don't know. These section here sounds a lot like what I just said: <Bies said the problems in the mortgage market are well- contained. ``We're seeing this in a very narrow segment,'' Bies said. ``We're watching for contagion, we haven't seen it.'' Outside of the housing and auto industries, ``the economy is strong,'' Bies said.>
Originally Posted By jonvn My thoughts? You should have shorted when you had the chance. If there are other comanies like this, it's a good opportunity to make some bucks. Looks like it will be another savings and loan scandal. And when you look back at it, how could it have not ended up like this? This is a money making opportunity.
Originally Posted By Mr X I agree Jon. Unfortunately, it's damn difficult to get any short shares for a LOT of these subprime lenders anymore. It took me a week (seriously) of trying to borrow a few shares of Accredited. In fact, at the point that I was contemplating shorting New Century, it's probable that I wouldn't have been able to get any shares anyway.
Originally Posted By Mr X Here's a recent add from Countrywide...talk about responsible lending! "With our 80/20 no down payment loan, you might be able to afford that dream home sooner than you think. Countrywide® is now offering 100% home financing also with a no income documentation option. Our 80/20 no down payment loan allows qualified borrowers with excellent credit to get an 80% first mortgage and a 20% Home Equity Line of Credit to equal 100% financing on their home, not counting closing costs. And with the 80/20 Stated Program, qualified borrowers don't even need to provide W-2's, tax returns, or any documentation of income. Simple." Now, why the heck wouldn't they want to take a gander at some tax returns or ANY documentation of income? Is that responsible? What kind of a customer is that likely to be, anyway? I think I picked the right one to short THIS time anyway.
Originally Posted By Mr X They were thinking that they would attract FORMERLY well-off buyers who have lost their jobs and burned through their savings. I guess. But that's all over. The late night Friday email took care of that (so if you need one of these, anyone, run down to a Countrywide office and beg them to open the doors on a Saturday...Monday will be too late).
Originally Posted By mrichmondj I would start looking outside the strictly sub-prime market for other opportunities. There are a lot of big financial names that got sucked into this business. There's been some murmur on Wall Street that GM's financing arm, GMAC, has a lot exposure to sub-prime mortgage financing. This episode is going to spread to places in the corporate world that a lot of folks didn't expect. I suspect by the time it is all said and done we'll have a real estate market that looks an awful lot like what happened in Japan during the early '90s. Lots of money down the drain there.
Originally Posted By Mr X I have been looking seriously into GM actually (nice find, rich). Also trying to turn up other little unhit zones that might start to experience the effects. Any and all thoughts or suggestions would be great, I'm in heavy research mode right now.
Originally Posted By Mr X Tell me if you think this theory of mine is totally crazy... <a href="http://economicdespair.blogspot.com/" target="_blank">http://economicdespair.blogspo t.com/</a> Okay, the FIRST blog is good news for my CFC short, but the second one really caught my attention. Here's my crazy theory. Homeowners who bought too much house are starting to realize how scary their situation might become (or already is), thus pounding the pavements to make sure they have jobs (or maybe even, second jobs?)... So Wall Street "relaxes" on this pleasantly surprising news that the jobless rate is not so bad. The Fed relaxes too, and talks of cutting rates abates. Thus bringing more pressure on the lenders, who are already in a bind and taking some drastic measures to cut back on their irresponsible lending. So housing gets worse, but the Fed doesn't bail them out. Eventually, everything comes to a head? Well, that's where my theory ends because as long as people are working...I suppose nothing too bad will happen right?
Originally Posted By SuperDry <<< <a href="http://economicdespair.blogspo" target="_blank">http://economicdespair.blogspo</a> t.com/ Okay, the FIRST blog is good news for my CFC short, but the second one really caught my attention. >>> Please identify the blogs you're referring to by headline - it would appear that the ordering on the page changes as new ones are added.
Originally Posted By Mr X Sorry...the one about Countrywide (my short) is "mortgage lending standards"... The other one is "bad news - unemployment is down".
Originally Posted By SuperDry <<< "With our 80/20 no down payment loan, you might be able to afford that dream home sooner than you think. Countrywide® is now offering 100% home financing also with a no income documentation option. Our 80/20 no down payment loan allows qualified borrowers with excellent credit to get an 80% first mortgage and a 20% Home Equity Line of Credit to equal 100% financing on their home, not counting closing costs. And with the 80/20 Stated Program, qualified borrowers don't even need to provide W-2's, tax returns, or any documentation of income. Simple." Now, why the heck wouldn't they want to take a gander at some tax returns or ANY documentation of income? >>> Within the industry, these types of loans are called "liars' loans." They know that the figures being given are (how do I say this politely?) exaggerated. That was the only thing that allowed the situation to continue as far as it did. What happened was very predictable. Standards were relaxed over time, to the point where many borrowers were getting 100% financing with interest-only ARMs with teaser rates and stated income. Short of going to negative amortization loans, how could things get any looser? The gradual reduction in lending standards is the only thing that allowed housing in certain markets to get as high as they did (such as CA where the median housing price is something like 10x the median household income). In many cases, purchasers' entire incomes went to pay the note, with all other living being put on credit cards whose balances accumulated. But not to worry: every 18-24 months, they simply refinanced their houses, resetting the ARM timer and folding the accumulated credit card debt into the house. It works just great, as long as the housing market keeps going up. But when the music stops, not everyone will have a chair to sit on.
Originally Posted By SuperDry I think that Countrywide, WaMu, GMAC, and many of the other lenders that did sub-prime lending for a portion of their business will eventually come out okay, although there's still probably a lot of room for a temporary dip. They still have plenty of normal business that they do such that the sub-prime problem will not put them out of business. The lenders that are primarily sub-prime lenders are the ones really in trouble. What absolutely kills me about this is it was just about two weeks ago that I predicted that all of this was going to happen, including saying "Hey, you know what, we really should short the sub-prime lenders." I have some involvement in the periphery of the mortgage industry in a couple of ways, so I know some of the things that have been going on. On some level, I knew the music was eventually going to stop. The thing that made me think that it was about to happen was the HSBC announcement from a couple of weeks ago that they were making a substantial increase in their bad loan reserves for their sub-prime lending, and that this was causing problems with their quarterly numbers. At the time, I had the discussion with more than one person (including Mr X via PM) along the lines of "now would be a good time to short the other sub-prime lenders" but I chickened out. Had I done it, I would have made a fortune.
