2008 April 03 | money blog

03 04 2008

Headed On Vacation, Need Some Help

Posted by: admin in mortgage industry

Hi Gang,

On Saturday I’m headed to Mexico via a nice cruise from San Diego down to Mazatlan, Cabo, et al. I’ll be gone about 10 days. I’m trying to load up some posts in the meantime, but I would love some guest posts while I’m gone.

I’ll open it up to any Blown Mortgage reader. Hit me up with an email with your post and I’ll queue it up while I’m gone. Put your name, business and a link at the bottom so you get some props for your work.

Last year when I went on vacation I had the good fortune of having some amazing guest posts and I’m hoping that luck finds me again for this brief respite.

All submissions considered, but I of course retain final editorial control. Thanks for caring and reading. You guys rock.

Source [blownmortgage]

Continue reading Market stumbles on a black swan

03 04 2008

Market stumbles on a black swan

Posted by: admin in Stocks Money News

Filed under: Merrill Lynch (MER), Books, Bear Stearns Cos (BSC)

Nassim Nicholas Taleb is looking pretty good. In his 2007 book The Black Swan, the futures trader turned philosophy guru warned about the impact that large, fat-tail events can have on financial markets. He has been saying for years that traditional risk management models are inadequate and The Bear Stearns Companies (NYSE: BSC), Merrill Lynch & Co., Inc. (NYSE: MER), and just about everyone else are probably agreeing with him right about now.

The Black Swan has outsold Alan Greenspan’s new book — a testament to the intelligence of readers. With the meltdown in housing, Taleb is finally getting the media attention her deserves.

The latest issue of Bloomberg Markets has a fantastic profile of him, as does Fortune.

So, h ow many people stated their income in your zip state?

03 04 2008

4 out 5 homeowners in my state used stated income

Posted by: admin in mortgage industry

So that’s comforting. According to mortgage data made available by the federal reserve bank of New York 4 out of 5 homeowners in my zip code state who secured their property with an Alt-A loan used stated income to qualify for their mortgage. Actually it’s 83%. And 72% of the loans are ARM loans. That is a jaw-dropping statistic, is it not??? Luckily only about 3% are due to reset in the next 12 months. So we’ve got some time until the bottom drops out of my zip state.

This is the problem people. 80% of folks in my typical state, California, zip code bought their home with stated income. Max out the loan limits, offer modifications, expand FHA, make Fannie and Freddie buy more and leverage their capital. Guess what? It doesn’t matter! Folks in these areas can’t afford their homes. Unless you are planning on forgiving the mortgage debt you are not going to save folks from these exploding mortgages, period, end of story.

Update: Thanks to commenter Robert for pointing out that these numbers are for the state, not just my zip code. While I’ve been accused of using that fact to “spin” my story (also in the comments) I believe it is far scarier that the entire state is built on stated-income loans and not just an outlying, over-priced zip code in Orange County. Now I’m truly convinced that we’re in for much more pain. If 4 out of 5 people are using non-traditional mortgage products and 3 out of 4 people are using ARMs what are they going to qualify for when those ARMs reset and the universe of non-traditional loan products is infinitesimally smaller.

P.S. If you’re a mortgage originator this could be the ultimate farming tool. Check out ARMs due to reset in the next 12 months. Get farm packs from title in those zips with >75% reset rate and cross your fingers people have equity. Free marketing advice - just like that. You’re welcome.

Hat tip to Matt at Inman for the link.

Source [blownmortgage]

Continue reading Closing Bell: Stocks survive Bernanke testimony & weak jobs

03 04 2008

Closing Bell: Stocks survive Bernanke testimony & weak jobs

Posted by: admin in Stocks Money News

Filed under: Cisco Systems (CSCO), eBay (EBAY), Research in Motion (RIMM), Garmin Ltd (GRMN)

While the markets were up at the end of the trading day, there would be no other way to describe the day besides boring. The good news is that boring days are needed after periods of major volatility.

Today’s news could have easily been dominated by a rise in weekly jobless claims hitting a high not seen since September 2005, with a reading of 407,000. The market was only looking for 365,000 to 375,000. But taking the center stage were Ben Bernanke, Jamie Dimon, and Alan Schwartz all defending the bailout and buyout Bear Stearns Companies (NYSE: BSC) in front of Congressional hearings for a second day. Below are the unofficial closing prices for today’s US exchange levels

DJIA 12,626.03 (+20.20; +0.16%)
S&P500 1,369.30 (+1.77; +0.13%)
NASDAQ 2,363.30 (+1.90; +0.08%)
10YR-TBond 3.591% (+0.008)
52-week lows

03 04 2008

Real Homes of Genius: Today we Salute you Covina. Banks Learn a Lesson in Mark to Reality and the $300 Billion FHA Bailout.

Posted by: admin in Real-estate news

We are once again firmly in Wonderland and falling deeper into the rabbit hole as the market is responding to negative news as if it just won a Powerball contest. On Monday, UBS AG announced another $19 billion in writedowns putting it firmly in the lead of all those in the writedown 500. […]
Related Posts:
■Real Homes of Genius: Today we Salute you Pico Rivera. $300,000 for an 856 Square Foot Home with 5 Bedrooms?
■Real Homes of Genius: Today we Salute you Buena Park. $511,000 for 864 Square Feet. Even Knott’s Berry Farm is Cheaper!
■Real Homes of Genius: Today we Salute you Stanton.
■Real Homes of Genius: Today we Salute you Cerritos. All 88 Los Angeles County Cities Overpriced.
■Real Homes of Genius: Today we Salute you Pacoima. Zillow says $457,000 but Listed at $225,000?

We are once again firmly in Wonderland and falling deeper into the rabbit hole as the market is responding to negative news as if it just won a Powerball contest. On Monday, UBS AG announced another $19 billion in writedowns putting it firmly in the lead of all those in the writedown 500. The race of course is dominated by investment banks and each writedown simply is a reflection of poorer performing mortgage assets;, aka Real Homes of Genius with sub-prime loans. Yet this is fantastic news somehow and the amazing plan that will turn the market around? Dilution of shares! You really have to enjoy the headline for this article:

And what does this plan further entail?

“To rebuild its cushion against further losses, UBS is seeking shareholder approval to raise $15 billion by selling new shares to existing shareholders in a so-called rights issue. “Our firm turned a page today at the end of a bitter chapter,” said Marcel Rohner, chief executive of UBS. “We will return our company to profitability.”

The write-downs at UBS and Deutsche Bank put financial firms’ total losses on subprime-mortgage investments well above $150 billion — more than halfway to the eventual total of $285 billion forecast by ratings firm Standard & Poor’s. That is based on a total of $1.4 trillion of subprime securities issued from 2005 through the third quarter of last year.”

It seems like a pattern is emerging here. First, if you are a large investment bank facing sub-prime problems you must:

A. Oust your leader with of course a nice severance package

B. Decide to sell more shares and call it “turning around” or some other cheerleading tagline

C. Announce the news in conjunction with horrible news (i.e., $19 billion in writedowns)

D. Add a touch of oregano and the market rallies

E. Rinse and repeat

If all goes bad, you always know that the Federal Reserve will step in and provide a back stop to a total collapse. There isn’t much to lose for those on Wall Street. Yet we now realize fully that the Fed cutting rates is doing nothing except kicking the dollar in the gonads and doing nothing to save the American homeowner. This has been the implication of course, that the rate cuts would somehow inject stability into the market which of course it has not. Now that we realize this hasn’t done much aside from diluting our US Dollar and we are still heading toward a recession, we get the amazing and fantastic $300 billion bailout via the FHA. Let us look at this puppy with closer eyes:

“Program would permit FHA to provide [up to $300 billion] in new guarantees that would help to refinance at-risk borrowers into viable mortgages. In exchange for the acceptance of a substantial write-down of principal, the existing lender or mortgage holder would receive a short payment from the proceeds of a new FHA loan if the restructured loan would result in terms that the borrower can reasonably be expected to pay. The existing lender or mortgage holder will have a cash payment and no further credit exposure to the borrower. This could potentially refinance between 1 and 2 million loans (and help these families stay in their homes), protect neighborhoods and help stabilize the housing market.”

Language is absolutely critical here. Whether you agree with this plan or not, this is a government sponsored bailout. I realize that this problem does require some solutions but if we are to seriously talk about these issues, let us call them for what they are. Heck, even Chairman of the House Financial Services Committee Barney Frank has this on the proposals:

“FRANK ANNOUNCES NEW ECONOMIC, MORTGAGE AND HOUSING RESCUE PROPOSAL”

So let us go back to the first paragraph. First, the wording on “viable mortgages” is very ambiguous. Does this mean 30 year fixed mortgages? Does this mean new mortgage products? Also, we read that lenders will need to accept “substantial” write-downs of principal to unload mortgages but what is substantial? Does that mean that the government will use independent appraisers to go to properties to accurately assess a value? If they are planning on allowing current appraisers to do the work this leaves the door wide open for more fraud and gaming of the system. Look what they’ve done with the current housing market! This here is extremely important since homes should be valued for their current market value and discounted at current rates.

It is clear even from the first paragraph that this will bailout mortgage holders. What if the property is worthless? There are some areas that simply have no market so how are these going to be valued? There does appear to be some back stops for these contingencies:

“Eligibility Requirements for Existing Loans (Requires All of the Following):

Owner-occupied principal residences only (no investors, speculators or second homes);
[Existing senior loan being refinanced must have been originated between January 1, 2005 and July 1, 2007];
To remove any incentive for borrowers to “purposely default,” the borrower must have had a mortgage debt-to-income ratio of no less that 40 percent as of March 1, 2008, and must certify that he/she has not intentionally defaulted on existing mortgage(s). Regulators can make exceptions for involuntary changes after that date;
Participating mortgage holders/investors must waive any penalties or fees on the existing mortgage and must accept proceeds of the new loan as payment in full;
Existing mortgage holders/investors must accept their losses - taking substantial write-down sufficient to establish a 5 percent loan loss reserve for the FHA, bring the loan-to-value ratio on the new FHA-loan down to no greater than 90 percent of property’s current appraised value, result in a meaningful reduction in mortgage debt service by the borrower, and to pay all up-front fees for the new loan. Accordingly, to qualify, mortgage holders would need to accept a substantial write-down, receiving no more than 85 percent of the property’s current appraised value as payment in full for the existing loans.”

I actually tend to agree with most points however, the main concern I hold is that if we are to use the current infrastructure of oversight, there is huge potential for fraud once again. Unless we have new entities coming in and ensuring appraisals are correct and accurate and verifying owner occupancy and also income, we will once again be going into liar loan territory. There is a lot to gain and lose here and the pressure to commit fraud by institutions is high. Those hungry for commissions will do anything they can to squeeze people into homes once again. If this plan does go through as is, it is incredibly important that stiff penalties and oversight are put over the lenders like a hawk.

Some of the language here is too flexible. What do they mean by purposely default? Do they mean walking away? They have to be more specific here. Also, I’m certain that many investors will fight to keep the penalty fees in since that is a reason many brokers made out like bandits on these mortgages. The more toxic the higher the yield. Now who will be one of the few responsible for this oversight?

“Increased Fraud Prevention/Oversight

The HUD Secretary shall establish independent quality reviews to determine underwriter compliance, and rates of delinquency, claims and losses;
Submit semi-annual reports to Congress; and
HUD Inspector General shall conduct annual audit of the program.”

Bwahaha! You mean Alphonso Jackson who just resigned a few days ago under massive cronyism charges? Interesting how right on the back of this new FHA proposal the HUD Secretary resigns. Oh man we are so screwed.

Real Homes of Genius - Today We Salute you Covina

Let us not forget that there is a ton of junk floating out there. We are nowhere close to seeing the end of sub-prime resets and we haven’t even taken a look at Alt-A or Pay Option ARMs. These are the next ticking time bomb that should hit in 2009 through 2011. The above home just hit the market a few days ago. It is a 3 bedroom 2 bath home in the city of Covina. The home is currently bank owned so fortunately, this would not qualify for the new FHA plan. But let us take a look at the sales history here:

Sale History

01/17/2008: $411,507 *

11/17/2003: $268,000

06/25/2002: $210,000

We can presume that the sale price in January was simply the bank taking the place back. You may be wondering, how can it be that a place that sold for $268,000 in 2003 now has a balance of $411,507 without any sales? Welcome to the next big issue, the home equity line and second mortgage problems. Given that recent data shows that $1.1 trillion in home equity mortgages is out there, and these certainly won’t qualify for the FHA bailout, we have another issue just waiting to fall. This place has a pool listed and one of the pictures shows that it has modern accents to it. Given that the home was built in 1954 I think you can put 2 and 2 together and have an idea where the 2^nd mortgage went. The current price is $370,000 and I’m sure given the 424 other homes for sale in Covina, this place will have stiff competition.

There is a great new tool out by the New York Fed that uses data from Loan Performance to show mortgage market data across the U.S. This is a very useful tool and may run a bit slow given that I’m sure many are using it:

I went ahead and ran the program on Covina and the results do not look promising:

Share in foreclosure: 10.8%

Share ARMs resetting in 12 mos: 43.2%

Share low or no documentation: 47.5%

Share ARMs: 73.8%

And how we are close to a bottom with the above statistics is beyond me. Today we salute you Covina with our Real Homes of Genius Award.

Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information

Via [DrHousingBubble]

03 04 2008

The Big Squeeze - Countrywide Limits Broker Compensation

Posted by: admin in mortgage industry

Countrywide issued a communication to its brokers today limiting compensation on all loans to Countrywide to 4 points, including yield spread premium (back points or YSP). While 4 points may seem egregious to some, it is the first step at banks actively restricting total compensation to brokers above and beyond traditional federal and state guidelines.

The following is an Important Message regarding Broker Compensation.

Dear Valued Business Partner:

Consistent with evolving industry standards within the wholesale lending environment, Countrywide^®, America’s Wholesale Lender^® will be modifying the current Broker Compensation Policy for all broker-originated loan transactions. Effective Thursday, April 3, 2008 at 8:00 p.m. (PT), the maximum allowable total broker compensation will be set at 4% - which includes Yield Spread Premium (YSP) plus any additional points and fees charged by the broker to the borrower.*

Broker compensation limits do not include discount points paid to the lender to reduce the borrower’s interest rate, lender fees, broker credits to the borrower or pass-through fees paid to a third party for actual services rendered.

Impact to Pipeline

Loans currently in the pipeline must be in “Docs Out” status, as reported on CWBC, by Thursday, April 3, 2008 at 8:00 p.m. (PT) or will be subject to the new Broker Compensation Policy. In addition, pipeline protected loans under the old Broker Compensation Policy must fund no later than Wednesday, April 30, 2008.

If you have questions regarding this new policy, please contact your Countrywide Account Executive.

Thank you for your business.

As a wise man once said, the beat goes on…

Source [blownmortgage]

03 04 2008

Ignore random market noise and focus on lesser known names

Posted by: admin in Goog news

Filed under: Google (GOOG), Apple Inc (AAPL), U.S. Steel (X), Technical Analysis, Las Vegas Sands (LVS), Lehman Br Holdings (LEH), Bear Stearns Cos (BSC), Stocks to Buy

Google (NASDAQ: GOOG) this, Apple Inc (NASDAQ: AAPL) that, will Lehman Brothers Holdings (NYSE: LEH) follow Bear Stearns (NYSE: BSC) — bleh, all hotly debated, all random market noise! Noise that you must learn to ignore.

The financial media — envious of the fat profits generated by such entertainment-based businesses as World Wrestling Entertainment Inc (NYSE: WWE), Las Vegas Sands Corp. (NYSE: LVS) and Wynn Resorts (NASDAQ: WYNN) — has brainwashed you into believing that in order to make money in the stock market, you must keep up to date with every single headline and development in the business world. Hogwash!

I have no problem with financial entertainment, but I do take issue with all these media outlets making their content out to be useful to investors. I’ve repeatedly echoed this theme in articles like this and I don’t expect this industry to change anytime soon, but I am going to keep preaching so you will better understand how low your chances of success are if you bet on the most popular — hence the most efficient — topics du jour. Unless you are George Soros or Warren Buffett or a few other wealthy elderly men, there is always somebody better informed and more intelligent than you are. Hence, you are always at a disadvantage.

To combat this, I stick to the much derided — and highly inefficient — world of microcaps and smallcaps where my competition is just a bunch of manipulators and suckers; meaning, I often have the upper hand.

And if that niche is too volatile for you — as it is for those of you with heart conditions — I suggest focusing on stocks breaking out of their trading ranges, or those making new highs. Yesterday, I highlighted 20 stocks, only five of which I thought looked worthwhile and today let’s add three more stocks to that list. United State Steel Corporation (NYSE: X), Weatherford International (NYSE: WFT) and Illumina Inc (NASDAQ: ILMN), all of which are breaking out to new highs. If you keep your stop losses tight with charts like those, it’s tough to go wrong.

Timothy Sykes writes the blog timothysykes.com, is a former hedge fund manager, star of the TV show Wall Street Warriors and author of the book, An American Hedge Fund: How I Made $2 Million as a Stock Operator & Created a Hedge Fund

Continue reading Oil execs on Capitol Hill

03 04 2008

Oil execs on Capitol Hill

Posted by: admin in Stocks Money News

Filed under: Politics, Oil

Yesterday, the Washington Post reports that oil executives were marched up to Capitol Hill for their ritual slaughter before elections in November. But nothing will come out of it. Is this merely political posturing? Will the politicians actually do anything to force companies to ease consumers’ pain at the pump? Should they? Yes, No, and No.

It is merely political posturing. Politicians can’t afford to cut into the profits from the oil companies because the oil companies are partially responsible for financing their re-election campaigns. Politicians will not actually force the companies to do anything to ease consumers’ pain. Some - such as Massachusetts legislators - are talking about ways to increase consumer’s pain by raising gasoline taxes.

One oil executive said: “Consumers have the choice to drive less.” I think this is a ridiculous, insulting statement. It makes as much sense as saying to oil executives that they have the choice of giving their annual salaries and other compensation to charity. It is theoretically possible, but it is not in their self-interest. Therefore it won’t happen.

03 04 2008

Parallel Universe: Housing Still Hurting on Main Street while Wall Street Celebrates.

Posted by: admin in Real-estate news

What is occurring right now is reminiscent of what occurred after the subprime worries of February of 2007 dissipated for a few months. During this time, a few high profile companies such as New Century Financial started showing problems in their subprime portfolios and caused the DOW to drop 415 points. In this […]
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■The Psychology of a Crashing Housing Market: Sending in Your Home Keys Just Got Easier.
■Short Sale Report Volume 3: Another Week and Another Record. SoCal Short Sales up over 12,000.
■Riding in the Short Bus of Housing: Southern California Short Sale Numbers. 1 in 10 Homes is a Distress Sale.

What is occurring right now is reminiscent of what occurred after the subprime worries of February of 2007 dissipated for a few months. During this time, a few high profile companies such as New Century Financial started showing problems in their subprime portfolios and caused the DOW to drop 415 points. In this timeframe we also had Countrywide come out and state that 40 to 50 subprime units were failing on a daily basis (who would of thought that less than one year later they would be saved by Bank of America, a luxury the smaller outfits didn’t have). It seemed like we were heading much lower. Yet the market bottomed and started up once again nearly unabated until August of 2007. Let us look at the DOW since 2007:

As you can see, from February until August the market rallied. In this period we had many subprime outfits failing and the press on housing was finally starting to get a bit more realistic. Yet the market still rallied. Ben Bernanke issued a statement saying that subprime problems were “contained” and confidence once again was boosted. That is until the credit markets seized up in August. You have to love some of the quotes being said at this time and during the bubble euphoria. The reason I bring this up is that technically it looks like we are having a bear market rally like the one we saw after the February news abated. The only difference this time is that people on the street are having a hard time reconciling good news on Wall Street with their own bottom line. If they are to watch CNBC they must feel like they live in an alternate reality. Is energy not at all time highs? Housing prices are still going down. Food prices are still increasing. What reality are they living in? Before the credit crunch of August, the minor downturn in February of 2007 seemed like a temporary dip for Joe and Susie Public.

Let us now look at some history of previous U.S. recessions:

Recession	Duration	Worst Quarter
Jan - July 1980	6 months	-7.8
July 81 - Nov 82	16 months	-6.4
July 90 - March 91	8 months	-3
March 2001 - Nov 2001	8 months	-1.4

The reality is that we are in a recession that most likely started in December or January. Of course we won’t know officially until we have quarterly GDP data but I think if you ask any person on the street, they can easily tell you that the economy is contracting in some form. Just look at state budgets. If you look at the above, it seems that the pattern for quarterly downturns has diminished as time goes by. We also see this effect with CPI information. My take on this is that so much of the government data unfortunately does not reflect the expectations of what the average American is living. For example, how is it possible not to include actual energy and food costs in the CPI? Or what about using owners equivalent of rent instead of mortgage payments? You also get the unbelievable data spinning regarding not counting those not looking for work in unemployment data because they’ve given up. Pretty soon, we’ll have zero percent inflation and no unemployment yet people won’t be working and everything will cost more. And you wonder why there is so much confusion out there.

Let us look at one indicator that reflects market distress, monthly foreclosure filings:

*Click to enlarge.

The trend is clearly moving up and we are still hovering around record rates. And this in light of every imaginable concoction of bailouts including the Hope Now Alliance and others that are now waiting in the pipeline. Advance talks are now on their way about the government purchasing bad mortgages; interesting how the government isn’t looking to purchase good mortgages. We also know that the market’s current rally isn’t based on economic fundamentals but on recent historical rate cuts and the bailing out of a Wall Street Investment firm, Bear Stearns.

It seems like everyone is wiping the sweat from their forehead and saying, “that was a close one! If it weren’t for the government we’d be running around in leotards like cavemen.” How ironic that a firm like JP Morgan and Chase took on a $30 billion non-recourse loan from the Fed to bailout Bear Stearns. Let me ask you this, a company such as JP Morgan with a market capitalization of $161 billion, why in the world did they need that non-recourse loan? In fact, they have $123 billion in equity on their balance sheet. So tell me again why they “needed” the $30 billion from the Fed? Many that are bellowing out a sigh of relief fail to realize that the main culprit of this mess, the housing market, is still fundamentally in a major correction. All that has been done is a prolonging of the inevitable correction. Except now, the government is taking ownership of more and more of the toxic mortgages. The more time that goes by, the more shoveling of bad debt will the public be eating. Let us take a look at the jumbo market for the 1^st half of 2007 before caps were raised:

As you can see, the purpose of raising caps was to shift risk from one side of the private balance sheet onto the public domain, most likely by Fannie Mae and Freddie Mac. Given, that most of these new conforming jumbo products that started this month are not interest only or Option ARMs, but how risky will these new loan products be? We keep hearing how well conforming loans have done in this housing crisis and how poorly large toxic jumbo products have done so now instead of stopping these horrible products cold, we have now institutionalized them? Forget about all this temporary rhetoric. When has anything been temporary with government? Also, the reason the conforming loan portfolios have done better is because they, uh conformed to standards! Now, we’ll just arbitrarily lift caps to $729,500 and come what may.

If you want proof of this parallel universe, today’s home sales number says it all:

“Home sales rise on biggest-ever price drop

NEW YORK (CNNMoney.com) — A record plunge in prices of existing homes produced only a modest increase in sales in February, according to the latest reading on the battered housing market by an industry trade group released Monday.

The National Association of Realtors reported that sales by homeowners rose 2.9% in February to a seasonally adjusted annual pace of 5.03 million, up from January’s reading of 4.89 million. It was the first month-over-month rise of the annualized pace since July.

The median price of a home sold during the month fell 8.2% to $195,900 from $213,500 a year earlier - the largest year-over-year price drop on record. Before the start of the current housing slump, it had been 11 years since prices declined, when compared with the same period a year earlier.”

Of course the market is taking this as good news but a drop in prices will again hurt the bottom line of builders and sellers. This is good news however for future home buyers. The issue was never about whether owning a home is a good investment. It was about prices becoming dislocated from local area economic fundamentals. The fact that sales rose because prices dropped tells you something. People need to drop prices and sales will come! Is it really that hard to understand? No need for bazooka loan products or Wizard of Oz bailouts since all that is needed is for home prices to reflect market fundamentals. Yes I know, too big to fail right? The fear of plunging into the Alice in Wonderland debt rabbit hole. Many are still in withdrawal and are hoping that the credit dope of interest only and Option ARM mortgages will once again rear their ugly heads. Not likely. Prices will continue to come down and as they do, sales will slowly start to pick up. Eventually both universes will cross and stay on one single path.

Update: The Case-Shiller 20-City Index shows a year over year drop in housing of a record 10.7 percent. Also, Consumer Confidence dropped from 76.4 in February to 64.5 in March. Again, this simply points to the major disconnect from Wall Street to Main Street.

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