Chuck Ponzi March 20th, 2007

Hot off the presses, (I’m not all that surprised by the development), but People’s Choice Home Loans here in Orange County filed for Chapter 11 bankruptcy protection today.

News Came from Matthew Padilla’s Blog (covered by Mary Milbourn):

The subprime implosion continued today as People’s Choice Home Loan in Irvine became the second Orange County subprime lender to file for bankruptcy. The company filed Chapter 11 bankruptcy papers in federal court in Santa Ana today. Wire services reported that the company listed more than $100 million in assets and liabilities. The company’s website said it has 1,150 employees nationwide.

Also mentioned was ResMae, Ownit, MLN, … hmmm…  ACC laid off 3000…  Sounds like the Spring Smackdown is in full swing.

And, let’s not forget the good news.  Surprising as it may seem, but San Digo based Accredited Home Lenders (LEND) has secured financing for their cash crunch situation.  At 13%… whoah, sounds like the loan sharks are getting sharked themselves.  I wonder if it has a prepayment penalty?

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Chuck Ponzi March 19th, 2007

Embattled Fremont finally gives up the ghost.

Fremont General Corp., the California thrift trying to sell its home-lending business, told the unit’s staff they may be dismissed in two months.

Employees will receive pay and benefits through May 18 unless they take other jobs, Kyle Walker, chief executive officer of the Fremont Investment & Loan subsidiary, told employees on a March 16 conference call.

Matthew Padilla had the story as well:

Dan Hilley, a spokesman for the mortgage company’s Santa Moncia-based parent company, Fremont General, declined to say how many workers are being fired. He said the employees being let go were all sent home on paid leave on March 5. The Brea unit employs 2,400 workers nationwide, he said.

Everyone was wondering where we would find our job losses from in our housing bust… claiming there never would be one because the economy is just too strong.

Nearly a year ago, I said:

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.

Today, Orange County real estate businesses employ practically twice the work force of bosses running factories that make everything from plane parts to computer chips to industrial measuring tools.

And, the income base is much more tied to service production of real-estate jobs that are highly commission weighted as opposed to stable factory work. When the rout happens, the fall will be long and painful.

We are just starting our fall now.  Those jobs tied to service production of real-estate jobs?   Mortgages and real estate agents.

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Chuck Ponzi March 19th, 2007

There is an old saying that if a lie is told enough times, it becomes truth. For the lack of a better term, there is a definite misconception I have seen floating about the internet that has begged for a response from someone - if not in the mainstream media, at least a blogger to attack it. Since noone has bothered to rid themselves of the problem, I guess I’ll do my best at continuing to dispell myths. (Calculated Risk already did some here)

I enjoy a good thriller as much as anyone else. Oftentimes, the truth is stranger than fiction. This myth, however seems to be created by CNN.com and perpetuated (or at least commented on) by one of the most interesting bloggers that I know of. Interesting not because he brings any specific knowledge to the table, but rather that his biting remarks, poor temper, and lack of in-depth research leaves him to be the butt of numerous internet jokes. Yes, we are talking about Larry Nussbaum. His internet presence has been immortalized by other bloggers declaring “You’ve been Nussbaumed” whenever his presence is made known by his constant truthiness comments repeated over and over enough times at least someone must actually believe them now. His most recent article that I have seen floating around is not actually a new one. It originated a number of months earlier, but the basic jist of the article is that there appears to be some uncanny similarity between the NAHB Index and the S&P 500 Index. The following even appears a number of times in different places on the internet accompanied with the following story:

Tucked away in the briefcase of Liz Ann Sonders, chief investment strategist at Charles Schwab & Co., is a chart so scary she’s hesitant to show it to investors. It plots the National Association of Home Builders’ Housing Market index - a monthly measure of builder confidence - against the Standard & Poor’s 500 stock market index, with a one-year lag.

It turns out that the mood of builders is a terrific stock market bellwether: The correlation between current builder confidence and future stock market returns over the past ten years is downright unnerving.

Not only did the NAHB index presage the start of the post-1994 bull market in stocks, but its decline starting in 1999 foreshadowed the equity market collapse that came the following year. Builder confidence rebounded in November 2001 - a year ahead of the stock market upswing that began in October 2002.

This is concerning from a number of aspects. If it were true, this would represent a significant predictor of future stock market direction.

However, the BigNose.com takes on the trouble and determines that there is perhaps only a cursory and temporary relationship.

If only there were a Sesame Street song “Correlation Is Not Causation”. I bet I’d sing it all the time.

“One of These Things Is Not Like the Others” will just have to do.

Drawing them up myself (now with even more recent data, here is how it looks (previous decade and updated to include current times). There is often too much of a bias to simply reflect our own beliefs (be it bullish or bearish) into the information we read. Minds seeking the truth will be more interested in facts that have been very different from the “expected outcome”

The First one is recreating their baseline to ensure that we have a clear picture of what is going on:

Yep, correlation exists with the base data.  Then, I tried once again the previous 10 years to see if there was a correlation:

None that I can see.

Then, I extended it out to the most recent data:

Sorry, not seeing it anymore.  We have clearly diverged in a statistically significant manner, and I’m just not clear what would cause that if there were some correlation.

Kinda reminds me of this picture at least in part.

I guess you can see what you want to see. To me it just looks like a piece of toast.

The worst part of the entire comparison is that you’re comparing apples and oranges. The NAHB is an absolute measure between 0 and 100. The S&P500 shares no such tether, and frankly with US monetary inflation the way it is, there is really no upper limit. Correlation is definitely NOT causation in this case, nor does it last very long.  Like the normal cheese sandwich that will crumble and get moldy, the CNN article just doesn’t stand the test of time (or history for that matter)

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Chuck Ponzi March 15th, 2007

After nearly 2 years of calling that we have a credit bubble fueling our housing bubble, the North County Times (San Diego) finally admitted that we have a, well, credit bubble.

For years now, North County residents have been wondering how high home prices could climb. Were we seeing a housing bubble?

It turns out, however, that we weren’t asking quite the right question. As the real estate market cools off, it’s becoming apparent that our sky-high housing prices are due in part to a credit bubble.And that bubble has started to pop, as companies offering riskier loans —- typically in the subprime market to borrowers with poor credit —- are experiencing a meltdown. A major subprime lender, Accredited Home Lenders of Rancho Bernardo, has seen its stock price fall by almost 75 percent in less than a year.

Is it any surprise that home prices soared when lenders loosened their credit requirements? Mortgages once termed “exotic” became commonplace in the last three years:

- The no-down payment loan, which let folks buy a home with little risk, borrowing 100 percent of its value.

- The zero-interest loan, which cuts monthly payments by half of that for a traditional mortgage, but which must be refinanced in full after several years.

- The stated-income loan, also known as a “liar loan,” which allowed borrowers to exaggerate their incomes so they could qualify.

- The negative-amortization, adjustable-rate loan, known as a “neg-am ARM,” whose initial interest rate can rise sharply and whose principal loan amount rises rather than decreases over time.

And now, with higher interest rates and a chilling housing market, is it any surprise that some borrowers are struggling to make their payments? Or that lenders who lowered their standards when they screened borrowers are now tightening them and shutting off the subprime spigot?

Although, it’s not clear whether the MSM will really inform anyone who really wanted to know what was going on.

On the other hand there are plenty of people who didn’t want to know who have been trying very hard to cover their eyes, ears, and nose to keep the senses from realizing what most every average person already knew… that it was a bubble and that was no way to rationalize it other than happy-talk and self-delusion.  A sweet, sweet delusion that kept them from thinking about their declining purchasing power, sinking wages, and economic malinvestments.

There must have been at some point, a moment when the people of Noah’s time finally realized that the water was getting too deep.  Even if you don’t believe the literal story of the great flood, you must see the allegory of how human pride and filtering of information keeps us from saving ourselves.  Just like in the great flood, there were prophets (Shiller and Krugman et al.) who warned us early enough to take action well in advance of the end of the bubble.  Later on, when the rains came down and the water began to rise (with amatuer bubble bloggers), people laughed and pointed at Shiller and company and bubble bloggers.  “You’ve told us this for years, and you were wrong all along”.  It is only at the point that water is neck-deep that there is a cry that, yes we there was a bubble.

Sadly, many still cannot admit that there was a bubble and that it is bursting.  However, the numbers speak for themselves:

Foreclosures in San Diego County nearly tripled in 2006, to 13,246, from 4,541 in 2005

and

In North County, the company reports, hundreds of properties are in default and heading to foreclosure. In Escondido, 385 properties are in default and 63 are set to be sold at auction. In Oceanside, the figures are 490 properties in default, with 72 going to auction.

What’s startling about many of these pending foreclosures is how many involve loans taken out within the last two years, during the subprime surge.

Many of the loans in default were in the $400,000-$700,000 range. But one is for $1.7 million and another for $1.2 million.

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Chuck Ponzi March 13th, 2007

Word is out. Subprime is folding faster than previously imagined. Next casualty: Accredited Home Lenders (LEND)

Credit Crunch meets Wall Street:

Accredited Home Lenders is facing a liquidity crisis that analysts say could leave it following in the footsteps of New Century.

Accredited, a San Diego-based mortgage company, said early Tuesday it is exploring various strategic options, including raising additional capital, as much of its cash has been used up by margin calls and forced loan repurchases. Shares plunged 62%, dropping $7.06 to $4.34.

Accredited said it has met $190 million in margin calls this year, most of them in the last month. The company said it is seeking waivers on its credit lines and cutting costs through moves including layoffs.

This is how the Credit Event Happens. Hello layoffs, hello lower housing prices. 2007 Spring Smackdown happened exactly as I forecasted.

I am now completely confident in my prior predictions that this is exactly the “Credit Event” that I have been calling for since April 2005. It will continue to spread like wildfire… risk has not been properly priced in and once cross-defaults start happening, we will likely see much more pain.

Back in October 2006, I stated:

The last 10 years were an abberation caused by Easy Al’s credit bubble expansion. It all started in 1995 with the reduction of reserve requirements, effectively quadrupling the money supply without increasing reserves. In fact, banks are in a much more precarious position today than the S&L’s were in the late 80’s. And, this is why I believe we will still see a “credit event” that will cause global liquidity to evaporate quite abruptly.

That prediction would be fulfilled in less than 6 months. It’s not often that you get that lucky. Frankly, noone could know exactly when it would happen, only that it would happen. Next, the contagion will likely spread into other areas including Alt-A and even prime. While some apologists would have us believe otherwise, the reality is that never before has so much been lent on so little.

I’ll leave you with the thinking from the opposing camp:

The subprime sector is too small to have such a big impact, according to Robert Froehlich, who is chairman of the investor-strategy committee at DWS Scudder, a division of Deutsche Bank AG.
“For all this to occur, the subprime-mortgage collapse has to be big enough and important enough to set the wheels in motion. And the fact is that it isn’t,” he wrote in a market commentary Monday. “It will be the most hyped disaster that never occurred since Y2K.”
Froehlich said Monday that, like Y2K, investors are worrying too much about a subprime-fueled disaster that probably won’t happen.
“The subprime-mortgage market is big, but it’s not big enough to push the U.S. economy into a recession by causing a credit crunch,” he added.
During the peak of the industry’s growth in 2004 and 2005, about 3.2 million homes were purchased with a subprime loan, Froehlich estimated. That’s about 2.8% of total U.S. households, he wrote.
If 30% of those subprime homeowners fail to make their payments, fewer than 1 million households would be “out of luck and out on the street,” Froehlich projected.

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Chuck Ponzi March 13th, 2007

I have said before that the bubble won’t have gotten steam until we have a perp walk.

We may just have our first one.

Yahoo Finance tells us:

Subprime mortgage lender New Century Financial Corp.’s problems deepened Tuesday as the New York Stock Exchange took steps to delist its shares and the company disclosed a federal prosecutor in California is conducting a criminal investigation into its accounting errors and trading in its securities.

As if the preceding 3 weeks for the company hasn’t been serious, this is most definitely one of the most serious announcements about the company to date.

Last month, New Century said it lost track of how frequently these borrowers missed payments on their mortgages. Because New Century’s books didn’t reflect how often borrowers defaulted and how likely borrowers were to default in the future, the value of the company’s loan portfolio was overstated.

I hardly think that New Century was alone in the Subprime business on how it conducted itself.  Instead of one large company that folds like Enron, this is like a lot of little Enrons that will likely occupy the national conciousness over the next few years.

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Chuck Ponzi March 12th, 2007

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

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Chuck Ponzi March 10th, 2007

The letter is a bit dated, but the denial is today’s news.  This is written in response to a letter written by Rick Hoffman, President of Coldwell Banker in San Diego that has been endorsed by the President and COO of Coldwell Banker for L.A and O.C.

Her note to it:

In today’s challenging market I found myself to be busting with pride when I read my fellow President’s letter to the editor in the San Diego Tribune this last weekend.  As Realtors we must always be sure to do all we can to set the record straight for our clients and fellow realtors.

I applaud Rick and all the other Realtors that have taken the time to look up and and deliver facts that counter so much of the negative press that our industry has experienced the last couple years.  I felt compelled to share Rick’s letter with you all.

Betty Graham, President and COO

Coldwell Banker Greater LA and OC

The letter to the editor: Continue Reading »

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Chuck Ponzi March 10th, 2007

The Los Angeles Times reports that some borrowers will soon be reeling from their payments that will soon adjust, and because loan standards have tightened, they are finding out that they can no longer qualify for lending.

I have, for some time now, predicted that just this sort of thing would happen.  You see, many mortage brokers put customers into loans they knew the customer would not be able to keep.  This was partly to extract higher commissions, and partly because they believed that when the rate adjusted, the borrower would be coming back to them.  No such luck.  Once the impossibly low lending standards came back to bite investors, they withdrew their funding and marginal programs were axed (for example Countrywide has now cut out 100% ARMs financing completely and replaced them with fixed-rate products.)

This is where the endgame becomes visible.  Take a read from the LA Times’ article:

Continue Reading »

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Chuck Ponzi March 10th, 2007

By now, Fremont’s subprime unit is the gift that keeps on giving. Even after announcing this last week that 5 or 6 would-be “suitors”, the company makes it clear that they may still not be able to get out.

Fremont, a major home lender to people with weak credit, disclosed last week that it planned to leave the subprime mortgage business and agreed to a cease-and-desist order with federal regulators related to improper lending practices.

“No agreement has yet been reached regarding the sale of this business and there is no assurance that the company will be able to enter into any transaction,” Fremont General said in a Securities and Exchange Commission filing Friday.

Faced with not being able to get out, the residential lending unit would be shut down permanently. Just how many employees this impacts is currently unavailable. If you know, email me, as it will be interesting to have some statistics to go along with it. If you recall, employees were sent home this last week on Monday; kinda sounds like the “temporary furlough” Mortgage Lenders Network sent their employees on in January.

On related News, FMF Capital has decided to execute an “orderly wind-down of business” which is business code for fold like a house of cards.

ML Implode-o-Meter gives the juicy details:

Fly by night, much?

And we are left wondering… who’s next?

• Credit Bubble , Lending Standards
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