Posted on 02/24/2007 5:42:05 AM PST by shrinkermd
Panic has begun to sweep the sub-prime mortgage sector in the United States after the bankruptcy of 22 lenders over the past two months, setting off mass liquidation of housing loans packaged as securities...
...The rapid deterioration could not come at a worse time for British bank HSBC, which has set aside $10.5bn (£5.4bn) to cover bad loans in the US...
...The cost of insuring against default on these loans has rocketed in recent weeks, from 50 basis points over Libor to 1,200, raising fears that a credit crunch could spread to the rest of the property market.
Low-grade BBB-rated securities - measured by the ABX index - have crashed from near par of 100 in early November to 72.5 this week.
Peter Schiff, head of Euro Pacific Capital, said the sector was in an unstoppable meltdown. "It's a self-perpetuating spiral: as sub-prime companies tighten lending they create even more defaults," he said...
...California's ResMae Mortgage filed for bankruptcy last week as it struggled to cope with defaults on a $7.7bn book of sub-prime loans issued last year, while Accredited Home Lenders in San Diego warned that bad debts had reached 7.18pc of its portfolio.
(Excerpt) Read more at telegraph.co.uk ...
Fact-Sub prime lending constitutes about 6% of the overall mortgage lending. Since you are in that business, tell us what % of this 6% are actually turning into non performing assets? It is necessary to know this number in order to put this problem into context.
By the way, my tagline is from the final words of the great Paschal Sermon of +John Chrysostomos:
"Christ is Risen, and you, o death, are annihilated!
Christ is Risen, and the evil ones are cast down!
Christ is Risen, and the angels rejoice!
Christ is Risen, and life is liberated!
Christ is Risen, and the tomb is emptied of its dead;
for Christ having risen from the dead,
is become the first-fruits of those who have fallen asleep.
To Him be Glory and Power forever and ever. Amen!"
The DC market appears to have turned. Suggest you begin searching for a home now if you intend to get good value vs 2 years ago.
It's not quite fair to say the mortage market is in meltdown. More accurate to say the subprime market is fairly very poorly. The potential hit of the entire subprime market is 7 percent of mortgages. As these houses come back onto the market, they can be absorbed, but builders will have to stop buildinig new houses to keep supply from growing. In many places the housing market turned sour because too many developers were building too many houses. The worry is over whether or not the Alternative A market, which is viewed as prime light, has hidden problems.
Sales volume rose 10 percent in January over last year in northern Virginia. The worm has turned.
I need more data before I see this "stabilization" as anything except a dead-cat bounce. Of course I live beyond PW County, where there is a 9.5-month supply of inventory. In the 500K+ range, there's a 3-year supply in my zip code. I am paying $1,750 a month in rent for a house listed for $675K. Who's going to blink first?
I currently see prices being dropped daily on current listings, listings at a higher level than last year and increasing, foreclosures in N. VA increasing at a dramatic level, and builders with more land in the pipeline.
There was a pick up in this market in Winter 2005-2006 from people who thought they were getting "deals", and now those are in foreclosure. There was an assumption that prices would rise in the Spring "as they always do", and thus the panic buying that Winter.
A daily read for me is www.bubbleinfo.com, (great realtor in Carlsbad, CA), and he pointed out a chart a year ago that shows how the "Spring Selling Season" has been getting shorter and shorter for the last several years. There is a flurry of activity in February/March/April, and then it flatlines for the rest of the year.
Care to back up your claim with data?
Here is verbatim from the NVAR website:
The number of units sold in the Greater Northern Virginia region was 2,234 for this past January, a 2.53 percent decline from the 2,294 houses that sold in January 2006.
Across Greater Northern Virginia, 15,925 listings are active on the market, about 19% more than this time last year, when 13,363 homes were available. The average number of days on the market for a home sold in January 2007 was 114, nearly twice the level of 61 days one year ago.
"A total of 1,349 homes sold in January, about 10 percent more than in January 2006, when 1,225 homes sold. This marked the first month-over-the-year increase since May 2005. Active listings were greater by about 18 percent, standing at 6,949 active listings this past January, compared to 5,876 homes available in January 2006. Homes are taking longer to sell, with the average Northern Virginia home in January 2007 staying on the market for 102 days. In January 2006, homes averaged 56 days on the market."
If active listings are up 18%, though, the worm has not turned, because properties are still being absorbed at a lesser rate.
Indeed...unfortunately, I think that over time you're going to find that this isn't just an issue of sub prime lenders running into trouble. Mortgages are bought, sold, and transferred in ways that are unimaginable to the average person who pays a monthly mortgage payment.
"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." - Manuel II Palelologus
"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." - Manuel II Palelologus
I don't know enough about the issue. Can you explain why this article is wrong?
And never forget that the "Maestro" Greenspan in congressional testimony advised the masses to go into ARMs just before he started raising rates.
"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." - Manuel II Palelologus
The inventory of homes has been declining for five months in most jurisdictions. While the inventory is up over January 2006, it has been on a downward slope for some time, depending on jurisdiction. The worm has definitely turned.
The norm is for inventory to decline in the winter months.
Also, those properties aren't off the market because they've been sold. They're off because sellers gave up trying to get what they think they are "worth".
See, the entire subprime market is based on securitization. Not on the lenders actually holding the loan on their own books through its entire life. They would not have the capital to do the volumes they do, for one thing. They wouldn't lend to half as many poorly qualified borrowers, on the other.
What they do instead is charge several percent of the loan value in "points", which means a few thousands on each loan rolled into the mortgage amount and kept by the issuer. Then they take a bundle of thousands of the loans and park them in an off balance sheet vehicle - typically a financial trust. Those pay full face value for the loans.
They get the fund to do so by selling mortgage backed securities (MBS) against the loan pool - but all this is in the off balance sheet trust, mind. The MBS are made palatable to banks and mutual funds by first carving them up into "tranches", based on seniority of claim against the loan pool.
For example, the largest tranch might have 60 to 80% of the principle value, and first claim to anything actually paid out by the loan pool - giving it an investment grade credit rating, sometimes AAA even. The next tier shoots for the lowest investment grade rating. The top 10% or so is "toxic waste" - junk credit leftovers. The last are sometimes retained by the trusts or sold back to the initial lenders as unsellable. The lenders themselves are financed by both bank borrowings and selling REIT stock to investors. Sometimes the waste is instead parked in junk bond mutual funds.
So the money flows from banks or mutual funds buying RBSs, to the off balance sheet trusts, to the mortgage lender, to the mortgage lendee, to the house construction company. And the beauty of it is, everyone in the chain except the mutual fund holders expects somebody else to take any resulting hit if the credits go bad. As long as house prices were rising 15% per year, there was little fear, because it was assumed if the loan did go bad the house could just be sold and would cover the loan amount, or all but the top, "toxic" tranch.
What has happened in the last 6-9 months is first, house prices stopped rising. Second, new activity dried up, reducing the cash coming from the loan process pipeline coming into the lenders (their points etc). The mortgage brokers themselves then became illiquid - they need cash to fund their recently issued loans, but their own profitability was dropping, making them poor credits for new rounds of bank loans. Simultaneously, their REIT stock prices began plummeting. (Look at the chart of NEW e.g.)
But the real difficulties began to appear as the upper tranches in the trusts starting getting "blown out". The MBS holders started aggressively using provisions in the MBS contracts allowing non-performing loans to be forced back into lenders hands for collection - particularly for in process stuff. (Typically the contracts specify that a loan that defaults within 6 or 9 months of being parked in the trust can be "unbought" - a "lemon law" in effect).
As these came back to the mortgage brokers, their credit ratings imploded. Illiquid to begin with, they then could not make payments on their existing bank loans and the smaller ones began declaring bankruptcy. Bankruptcy is a scramble to get paid ahead of other creditors, and banks exercise plenty of leverage trying to get paid first. They aggressively attached assets in the trusts and such, or grabbed in process MBS collateral and sold it for whatever it would fetch this instant, to get out.
In turn this has revealed that the modern "rocket science finance" of the securitizations are vastly less sound than Wall Street pretended, and could get people to believe as long as house prices were going straight up and money was gushing into the whole industry. You are now seeing a classic "repudiation" of the credit given, not to the end home buyers, but to asset backed securities (ABS).
Right now it is focused in the subprime mortgage ABS market, but the issue is general. ABS was the hot new financial product of the last 10 years. They are used for car loans, credit cards, etc - in addition to housing. They create the illusion that any credit, however dodgy, can be instantly made liquid, and the problem of tracking or collection or enforcement parked with "somebody else". What actually happens is nobody does that work, at all.
Most housing is not affected by any of this. Most people bought long before the run up of the last 5 years, have equity, notes they can afford, etc. But this is a typical Wall Street story of a new finance vehicle created under boom conditions being underpriced (for its risks I mean), that goosing demand and leading to overuse, and the cost only appearing later after the stuff has been around long enough for some to go sour naturally and for the whole market to face non-boom conditions.
That is a world class post JasonC. Thanks. You should pull it together, expand it and, then, publish it in some form or another. It is very hard for a non-professional or non-sophisticated investor to understand what is actually happening.
Excellent advice... When I was shopping for a house (about 16 years ago), a Realtor told me that I could afford a monthly mortgage payment of $XXX dollars... I informed her that I could afford a payment of substantially LESS than that amount, by about $350 a month! And am I glad I did so. It's allowed me save some money for my retirement, but more importantly, it's allowed me to keep my house! Even with refinancing the mortgage at a rate nearly 2.5% less than the rate I originally got, due to property tax and (to a lesser extent) increases in the cost of homeowners insurance, my monthly mortgage payment has gone from $385 to $645 a month. Happily, my income as increased along the way, so it's affordable for me. But had I gone with what the Realtor suggested, I wouldn't have been able to afford to keep my house.
Mark
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