Of course I’m kidding. The news today is that NEW (New Century Mortgage) has been halted for trading. It seems bankruptcy is imminent. It was just a few days ago that I stated:
I was under the impression that NC is no longer funding loans… a little birdie told me cash flow problems exist.
This was based on an insider tip I got from someone working with NEW. To which, a reader supplied:
No need for a little bird whispering, the NC website has the press release right on their homepage. The following paragraph says it all:
“As a result of its current constrained funding capacity, New Century has elected to cease accepting loan applications from prospective borrowers effective immediately while the Company seeks to obtain additional funding capacity. The company expects to resume accepting applications as soon as practicable, however, there can be no assurance that the company will be able to resume accepting applications.”
However, I wasn’t referring to “applications”, I was referring to “funding”. Applications happen at the beginning, funding happens at the end. A critical difference that makes all the difference. When a company stops starting new loans, they can always restart. When they stop finishing a loan… look out because there is a very, very serious problem behind that. Today we can see that this was the case.
If any are wondering, no, I did not short them after knowing this tidbit. The danger in shorting at these levels is that there could very well be a very stupid Wall Street firm willing to buy the company out and the stock price could spike. There are risks, even in succeeding.
Is NEW toast along with all of the jobs here in OC?
However, it gets worse. How, you may ask, does it get worse than not being able to do what you do as a company?
Well, buying and selling loans is not the only thing that NEW does. It also services loans. There is a large servicing location for NEW in Santa Ana. From the 8K filed today:
Certain of these lenders had also purported to terminate the Company’s servicing rights under the respective financing arrangement, as described in Item 2.04 of this Current Report.
What happens to those “servicing” jobs? The lenders pulling those servicing rights back likely have another outsource partner in lower-cost locales that can do the job just fine, for a lower price. Just how many of these servicing arrangements will be cut is a mystery, but Tanta from the CR blog gives us an expert opinion:
Well, well, well. We’re going to see a real-time demonstration of just how effective the termination of servicing rights clauses are in all those contracts. Looks like everyone who has loans/securities currently serviced by NEW is terminating, meaning that NEW must turn over data and documents to whatever substitute servicer the investor appoints, probably within 60 days. (I didn’t dig through the servicing contracts in EDGAR to see what the exact timeline is on each contract.) BoA, it appears, is taking the servicing itself; the 8-K doesn’t indicate that the other investors have yet appointed a substitute servicer. You can imagine the chaos that will ensue if they all pick different subs, and there’s nobody left working in NEW’s servicing division to handle the transfers. (Actually, what this means is that there will be some mid-level servicing employees at NEW who will be offered “stay bonuses” worth a small fortune; at least some regular old workers are going to make a few bucks out of this, since otherwise their careers are shot to hell.)
And, on top of everything else, this mega-servicing-transfer-cluster-fork is happening at the most vulnerable time in the life of any loan: during nonaccrual/FC/BK proceedings, where a delayed or screwed up legal filing on a loan can spell disaster for the lender.
Asses and elbows, indeed.
What does this mean to Orange County… fewer jobs, more houses for sale, more defaults on the pile.
But, but, but, Subprime is only for poor people with bad credit right?
Wrong. Lansner gives us an inside dish to the extent of “Subprime” in Orange County, it’s almost 1 in 5 of all purchases. When the median is 600K, that’s hardly what I would consider “poor”. Besides, when only 5% of the population can afford the median priced home… that’ going to have a direct hit to already abysmal affordability.
There are already pundits positing that this will not spill over into Alt-A and prime loans.
Which all makes me laugh at the silliness of some main stream media’s cluelessness. Consider for example today’s lead story on Yahoo finance, titled Stable mortgage rates MAY turn the market around. Although, I’m glad the writer at least saved herself the entire embarrassment by emphasizing MAY. Of course, that’s meant in the same way that monkeys MAY fly out of my butt. But they won’t
NEW got 0W3ND today. Even as late as last week, some folks saw this stock bouncing back. Of course, these are folks who didn’t bother to look at the cash flow statements from New.
Chuck,
The permabulls will really need to up the dosage of kool-aid to spin this as anything other than an unmitigated disaster. This is a double whammy: first, the collapse of sub-prime lending removes 20%-25% of the buyers, then the job losses take add fuel to the foreclosure fire. I don’t know how anyone can make a rational argument for either appreciation or stabilization when affordability is at an all-time low and something like NEW happens?
Irvine Renter,
Any day now, I am expecting Gary Watts to flit in with a whirlwind and declare the SoCal market DOA. He’ll revise his projections down to 0% (still optimistic) and rally everyone that “at least we’re not losing money!”
The truth won’t be far behind. I’m already seeing lots of cracks in the housing market. Houses on Zillow for 1M selling for 700K on Ziprealty and so on. Some people NEED to get out and don’t care what happens. Feb transactions are abysmal, and that hasn’t even been impacted by the lending cutoff yet… it’s going to be a terrible year in ’07.
We’re already over 9 months of inventory and growing FAST… we could be at over 15 this year if I had to put an upper limit on it. We’ll be partying like its 1980 again.
Chuck Ponzi
Chuck,
Have you been noticing the foreclosures impacting comps yet? We see foreclosures on the blogs going for 20% reductions and the like, but it doesn’t seem to be impacting asking prices. How many foreclosures have to occur before the realtors or the appraisers step up and say the market is where it is and not where the seller wants it to be?
This won’t happen for a while… I have heard anecdotal finger-in-the air estimations of 20% of available inventory before it impacts pricing, but I think that’s not an accurate measure because it doesn’t take into account velocity. I think it’s more like 1 month of inventory.
When we see more than 1 month of inventory as must-sell (inventory/pendings), then we will have asking prices bifurcating. Financial institutions have significant pressure to reduce non-performing assets, so they must move that inventory.
Those that are not motivated sellers are ALWAYS going to be behind the market by 3 to 6 months… they keep hoping for that “sucker” because “all they needs is one buyer”. Unfortunately, that one buyer is too busy looking at lower-priced houses that need a little work for 15 to 20% less. They concede, little by little, chasing the market down. I know, I did this with a stock once… now I know, once you have decided to sell, just execute the sale; noone knows where it will be tomorrow, but the trend is your friend.
I saw on Lansner’s blog that a broker in AV says we have just over 5 months… uh, not by my math we don’t. We had 1600 sales for 15000 units. That’s quite a bit less, but his numbers may have extenuating factors, such as removing any inventory he doesn’t like to call inventory. Oh, well, you can lead a horse to water…
BTW, appraisers will never step up. They are paid NOT to step up. Realtors don’t step up, because they are paid NOT to step up. It is only the Buyer and the Lender that can (and will) call an end to the craziness.
Chuck,
I’ve visited quite a few model homes in the Inland Empire. Just about every builder has quite a few ‘sold’ buttons on their little toy houses under then glass displays.
Do you think the houses really are done-deal sold or do you think they put the little sold signs on just for show?
I haven’t seen any significant drop in asking prices by KHOV and Lennar and other builders who are posting losses. They offer a few incentives, but do you think that the new home builders ever will lower their asking prices on their new construction in the Inland Empire or do you think they will just hold up construction until the market is more favorable to them in the years to come?
Nate,
I think they think they are sold. It only counts as sold when the buyer closes to me, but as soon as they get someone a contract on the house, they consider it sold. Many of them are just deposits, and we all know that cancellations are about 40% right now, so it’s likely that 40% of them are not “sold” in the sense that you and I are used to.
There are still quite a few fools out there with a lot of money.
Chuck
I spoke with a friend who works at Greenlight Financial in Las Vegas. Clark County, NV to be specific. They have “too many” laws and regulations so they focus on California. Funny how that works. Anyhoo – He said 95% of his loans are for California. Many are desperate, yet many more are acting like nothing is wrong and are still looking for funny money. Of course, he’s working on a bonus schedule and they are … as of today, still offering better pricing for No-Doc loans with credit scores of 620 via EMC Lending, which seems crazy. I listened for a while, then had to go before I lost my mind! It was good to get a broker’s take on things. He’s just counting the numbers until he reaches 25 loans this month to collect his 5k bonus. The good news is that they’re no longer offering 2nd mortgages … ROFLMAO.
I wonder how much more tightening there will be with a deflationary enviroment. It has been 13 yrs since the last one.
In the olde days (90s) when the loan went bad, the house wasn’t shedding value like crazy.
Now????
I just stopped by The Irvine Company’s website to see how things were going for them. Speaking of bubble, I think Joe Davis might live in one. Someone needs to get on this website and update it now! Joe is making himself look like a giant douche bag, (not that he isn’t indeed one). Check out some of these quotes, especially the one from Greenscam!
http://www.irvineranch.com/whybuynow/
I love the “ask an expert” link at the bottom of the page! What a joke! He needs an expert to fix his page!
Met someone yesterday. Couple trying to buy a home. Had credit problems, and thus worked hard to pay off about 60000 in debt. Great job… except they can no longer get a zero down home loan and are stressed out and wondering how long it is going to take to save the 5%. This is starting to really hurt people, unfortunately or fortunately depending how you look at it….
Soon the 5% will be 20% as prices plummet