Chuck Ponzi March 28th, 2007

Some time ago, I wrote an article about Orange County’s real-estate led economy. (Remember how strong that economy was, and how it made sure that 15% was “in the bag”?)

Back then, I stated:

17% of Orange county’s employment base is Real-estate related. This represents the highest number, and the highest share of total jobs occupied by real estate on record. We have often heard that the 1990’s bust of housing caused by job-losses in the manufacturing sector; we are more diversified out of manufacturing since then and it doesn’t represent the same risk. Pish-posh. We are out of manufacturing and much heavier in real estate.

Now, Bloomberg backs up my prediction with their own story:

In Irvine, where just nine months ago office vacancies approached a three-year low, home prices were at an all-time high, and unemployment was less than the national average, at just 3.6 percent, the unraveling subprime mortgage market is ruining the recent prosperity.

Hometown lenders including New Century and Ameriquest Mortgage Co. already have fired more than 3,000 people, house and condominium prices are down 17 percent since June and office vacancy rates are poised to double this year, said John McDermott, regional manager for Orange County at commercial real estate broker Sperry Van Ness.

“It’s a huge engine that has been shut off,” McDermott said. “I don’t know where the new influx of jobs are if you take the lending market out of the equation.”

The entire story is a fantastic read about where we are headed (and we haven’t even had much of the layoffs yet:

“There are going to be massive layoffs and maybe something worse than that,” Ellis said. “You wonder what impact it’s going to have on other companies as well.”

Cracks in the mortgage market began to appear last year. U.S. subprime borrowers fell behind on their payments at the highest rate in four years during the fourth quarter, according to data compiled by the Washington-based Mortgage Bankers Association.

The Center for Responsible Lending in Durham, North Carolina, expects the foreclosure rate for subprime loans to exceed 22 percent in California metropolitan areas including Irvine, Merced, Bakersfield, Vallejo-Fairfield, Fresno, Stockton, Santa Ana, Anaheim and Riverside.

But, but, but, we’re immune here in OC. Who sounds like a whiny little complainer now?

Reminds me of a comment I got last year:

How does it feel paying those increasing rents? I have made $750,000 in real estate appreciation in the last 7 years, I am sure glad I did listing(sic) to a F*$&% idiot like yourself.

Feels pretty darn good right about now (BTW, my blog only started 2 years ago, so I don’t know how I could have lost him money). Rents go down in a recession. Good luck, all.

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Chuck Ponzi March 28th, 2007

With recent talk from Senator Dodd about a bailout for the “little man”,  we’re left to ponder who a bailout would really help or hurt, who pays, and who benefits from it.

Luckily, the guys over at Wharton (which, surprisingly have more credibility than some anonymous guy with a blog) have given the media world some soundbites to play over and over again.

We began speaking of Moral Hazard once the downturn started.  When you fix someone else’s problem, you create an incentive for that person to do the thing that caused the problem… they’ll just get bailed out again.

From Wharton’s school of Business:

“I think that for the moment, they should probably leave it alone,” says Joseph Gyourko, professor of real estate and finance at Wharton, warning that bailouts can make people more reckless in the future. “We don’t want to introduce moral hazard …. We don’t understand this very well right now, so any regulation is probably going to be wrong or imprecise.”

In fact, he says, the market is already correcting the problem. Lenders have dramatically cut their offerings of the most hazardous products –such as loans that require no down payment or proof of the borrower’s income, or those which allow borrowers to decide for themselves how much to pay each month.

Ken Thomas, a lecturer on finance at Wharton, argues that people and institutions that make risky choices are usually best left to suffer the consequences. “When we had the last big financial meltdown with stocks in 2001, did we consider bailing out those who lost money in the dot-com crash?” he asks. “We try to have markets regulate, not the government. Markets do a much better job.”

What we are seeing right now is that the markets are reacting to better information than they previously had.  Like Newton’s 3rd law of motion:  For every action there is an equal and opposite reaction.  In Economics, we say “There’s No Such Thing As A Free Lunch”

Besides, who would a bailout help?  Certainly not homeowners.  How could you weed out who where truly in trouble, and who were opportunists?  Wouldn’t that saving create a need that you would later need to feed?  What about my free lunch too?  Would I (as a taxpayer) need to pay for someone else’s indiscretion?  What about the money I lost in the stock market in 2001, can I get a refund there too?   For those subprime homeowners… many of them came to the table with bad credit and no cash.  So, they’re leaving with bad credit and no cash, is their life that much worse off, and is that our collective problem that they cannot manage money?

On the other hand, lenders wouldn’t lose a penny.  They were the ones who recklessly took risks and offered the loans to the higher credit risk for a higher return.  A bailout would only serve to line their pockets for taking outsized risks.  There’s a reason that it’s called risk in the first place.

Dodd, chairman of the Senate Banking Committee, plans to introduce legislation to protect homeowners from foreclosure and to crack down on predatory lenders who pushed high-risk loans on unsuspecting borrowers. Clinton is pushing for a federally mandated “foreclosure timeout” that would give homeowners more time to catch up on their payments, and she wants to curtail the prepayment penalties that make it hard for troubled borrowers to refinance. The National Community Reinvestment Coalition wants the Federal Housing Administration to be given new power to refinance subprime borrowers’ loans, and it wants the federal government to set up a fund for rescuing low-income homeowners.

Senator Dodd, you are treading on thin ice.  Be careful where you step.  The next one could be the wrong one.  Nothing like a good scandal to end one’s political career.  We all know you’re in bed with the financing organizations… all it takes is one false step.

• Credit Bubble , Debt , Lending Standards , Mean Reversion
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Chuck Ponzi March 27th, 2007

There is quite a bit of contention of just how many foreclosures will be a part of the housing/credit bubble unwinding.

Here’s a breakdown of the differing theories:

1.1 Million

Americans borrowed $2.2 trillion from 2004 through 2006 in the form of adjustable loans, which start with low monthly payments that reset to higher rates. As those loans reset, 1.11 million people will lose their homes, according the study by First American CoreLogic, a firm that tracks mortgage risk for the financial services industry.

The figure is significantly less than a widely published number from the Center for Responsible Lending.

1.5 Million

As many as 1.5 million more Americans may lose their homes, another 100,000 people in housing-related industries could be fired, and an estimated 100 additional subprime mortgage companies that lend money to people with bad or limited credit may go under, according to realtors, economists, analysts and a Federal Reserve governor. Financial stocks also could extend their declines over mortgage default worries.

2.2 Million

A new Center for Responsible Lending (CRL) study reveals that 2.2 million American households are likely to lose their homes and as much as $164 billion due to foreclosures in the subprime mortgage market.

The CRL study is the first comprehensive, nationwide review of millions of subprime mortgages originated from 1998 through the third quarter of 2006.

CRL’s research suggests that risky lending practices have triggered the worst foreclosure crisis in the modern mortgage market, projecting that one out of five (19.4%) subprime loans issued during 2005-2006 will fail.

5 Million

But Ackelsberg listed that as one of the myths about subprime borrowing.

Actually only 11 percent of subprimes are made to first time buyers, he says. The majority are homeowners convinced to refinance into inappropriate loans.

The second myth is that subprimes are good credit repair products. The pitch here is that by paying a subprime for a while, borrowers will increase their credit scores and soon transfer into a prime loan. Ackelsberg says there is scant evidence that this happens very often.

According to him, the entire subprime meltdown should come as no surprise to anyone. Subprime mortgage lending was the modern equivalent of a gold rush with home equity the gold. Furthermore, even though foreclosure stats are spiking, they represent subprime loans that have mostly not yet reset.

He guesses that as many as five million foreclosures may occur over the next several years, basically saying, if you think it’s bad now, wait until all those ARMs reset.

How many will there really be? While it’s easy to say that it’s probably somewhere in the middle, that middle area is awfully large between 1.1M and 5M.

• Bubble , Credit Bubble , Inventory
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Chuck Ponzi March 27th, 2007

I always enjoy vintage movies; this one is a great one about the beginnings of housing finance.

Pay special attention to the house that they go to see. I’m pretty confident that this was shot somewhere in the Central West Los Angeles area (perhaps West Hollywood or Miracle Mile?) as the style of houses and timing coincide.

What’s interesting is the affect of inflation on housing prices. The entire purchase price is now the monthly payment for an Option ARM on a similar home.

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Chuck Ponzi March 26th, 2007

Periodically, I like to post these, since they appear on the front page of Yahoo finance… presumably polling some of the “faceless herd” that helps you in deciding where things might be going.  Remember, large numbers of amatuers are almost always better predictors than experts!

What do you think?

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Chuck Ponzi March 22nd, 2007

We already mentioned that Fremont is drowning in its own vomitous loans with a loan shark’s payback, but New Century seems to be hanging on if only by its teeth:

New Century Financial of Irvine said today Barclays Bank agreed to release it from an obligation to take back $900 million in loans.
In return, New Century agreed to give up rights to any loans funded with money from Barclays, and to turn over servicing rights on the loans to a third party approved by Barclays.
The embattled subprime lender expects to lose $46 million on the deal.
Still, the agreement could significantly reduce New Century’s obligations to creditors. It previously reported that investment banks and other creditors are demanding it take back up to $8.7 billion in loans for failing to meet certain funding covenants.

I have mentioned that I work near a New Century servicing center in Orange County.  It likely employs about 300 people (based on the number of cars there).  Giving up a significant portion of its servicing rights is chewing off the arm to escape… but 900 Million is a lot of money.  Good for them.  Not so good for the OC job economy.   All part of the Spring Smackdown.

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Chuck Ponzi March 21st, 2007

After today’s rousing repeat, of doing nothing, the FED is having one of its final days in the sun.

Change is afoot that has the potential to drown out any discussions of rate cuts in the future.  I’m talking about China’s currency reserves.

China will stop stockpiling its massive foreign exchange reserves, China’s central bank governor Zhou Xiaochuan said in an interview published Tuesday.

“Many people say that foreign exchange reserves in China are [already] large enough,” Zhou told the Emerging Markets magazine, whose latest issue was released at a meeting of the Inter-American Development Bank in Guatemala.

“We do not intend to go further and accumulate reserves,” Zhou said, adding the government will “cut a small piece of reserves” for a new agency to be set up for the management of its massive foreign reserves, which have swollen because of the trade surplus.

He did not say how much money would be passed to the agency.

China’s premier, Wen Jiabao, said last week that plans to form a new agency to invest part of the country’s swollen foreign exchange reserves, the world’s biggest at more than $1 trillion, would not have an adverse impact on the U.S. dollar.

Right,  I guess it all depends on what you consider “adverse impact”.  With the USD just recently testing the 80 mark and accumulation stopping, we may have a hard time selling too many treasuries the the remaining buyers.

Time to monetize that debt, baby!

• Bubble , Credit Bubble
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Chuck Ponzi March 21st, 2007

Not exactly in SoCal (it’s in Sacramento), but you see a trend here:

Former employees of Folsom-based Central Pacific Mortgage are angry over the lack of warning before this week’s sudden layoffs.

As News10 first reported Tuesday, Central Pacific Mortgage and its Florida-based division Ivanhoe Mortgage abruptly closed their doors Monday saying they had no money to meet Wednesday’s payroll.

An estimated 260 people in Folsom, Orlando and in branch operations centers in other parts of the country were told on Monday to clear out their desks by the end of the day.

“The moral thing to do would of been to at least give the little people a fair warning,” said one former Ivanhoe employee by email.

So much for morality… No need to get on a soap box here about bad loans, the employees can do it just fine. I guess it’s just cosmic karma when you issue bad loans.

“It’s like a freight train coming at us full bore,” said Michael McGee of Winchester-McGee Financial. “The type of risk that’s been involved in the industry is far beyond anything I’ve ever seen.”

• Credit Bubble , Lending Standards , SubPrime
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Chuck Ponzi March 21st, 2007

So far, the pain has been felt around the world in Subprimes.

I try to catch all of them in Southern California. This is because much of our booming economy has rested on real estate and lending. SoCal is the grand central station of mortgage lending; much of the world’s transactions pass through here.

Bloomberg reported some time ago about WMC Mortgage’s subprime unit slashing its workforce.

General Electric Co.’s U.S. mortgage unit will curtail lending and fire 460 workers, or 20 percent of staff, amid a rise in defaults by people with poor credit.

GE’s WMC Mortgage, the fifth-biggest subprime lender in the U.S., this week stopped making mortgages without down payments or to borrowers with credit scores below 600. WMC last year had $33 billion in new loan volume, according to industry newsletter Inside B&C Lending.

“We’ve realigned our resources to fit the size of the market,” said Brandie Young, a spokeswoman for Burbank, California-based WMC. The lender is adjusting underwriting policies amid a “fluid market,” she said.

Burbank is off the beaten path for mortgage lenders, but that many jobs can create problems in the short term. Longer term, migration patterns will likely happen because of it. Anyone who still thinks that our economy is booming in SoCal and we are immune to a slowdown need only look at our archives of the past 3 months and at the ml-implode.com site to see that over 40 lenders have imploded since the beginning of the year.

• Credit Bubble , Lending Standards , SubPrime
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Chuck Ponzi March 20th, 2007

Former “America’s Funding Source” closed shop up today.

LoanCity is closed for business. Today March 20, 2007 is the last day we will be funding loans. To our customers, our staff and business partners - we thank you.

Their mission:

LoanCity aims to dominate the wholesale lending industry by offering a full spectrum of products, superior delivery, and innovative processes and technologies that create efficiencies in the lending process.

Not so much anymore.

While this is not headquartered in SoCal, there were substantial offices in Irvine and San Diego. Spring Smackdown again! Lending is getting choked off pretty quickly.

OC Fliptrack, for example reports that Countrywide is charging as much as 11.9% for high risk loans/customers. Escape routes are currently being blocked off, and the flames are licking higher and higher.

• Credit Bubble , Lending Standards , SubPrime
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