Chuck Ponzi April 30th, 2007
Discredited David Lereah is leaving the NAR after making blunderous predictions on the future direction of the housing market.
His new home? Move.com.
Time to sell that condo.
He can afford the loss.
Insert pun here:
Chuck Ponzi April 30th, 2007
This morning, Bloomberg tells us that Credit Suisse is being sued by buyers of subprime loans packaged as bonds. This is the next step in our evolution of the credit crunch. With the housing bubble still chugging away on the fumes of credit, the only thing left is to clamp off the funding entirely and kill the beast off through starvation.
The suit, filed in Florida by Bankers Life Insurance Co., is “one of three to five in the pipeline” involving securitizations by Credit Suisse, Switzerland’s second-largest bank, said Dale Ledbetter of Ledbetter & Associates P.A., one of two law firms representing the Bankers Financial Corp. unit.
“We suspect that once people understand what occurred here, there’s going to be a lot more,” Ledbetter said. A total of $302.6 million of bonds were originally issued in the deal.
I concur. Once people understand the implications, the flood of lawsuits will make even the security packagers wary to get involved. Nothing like a little risk in the system to flush out the bad blood.
What are the charges?
Credit Suisse units caused Bankers Life to lose money by overstating how much of losses after foreclosures on the loans insurance would cover; accepting “shoddy, inferior” loans; failing to buy back fraudulent ones; and covering up delinquencies, according to a complaint filed April 23 in Tampa. Payments were being advanced on borrowers’ behalf to “maintain the illusion” defaults weren’t occurring, Bankers Life claims.
Whoah. If true, noone will touch a Credit Suisse bank with a 10 foot pole. Those are some heavy accusations of outright fraud for a company whose livelihood is based on trust in their products.
The natural question asked would be… but Chuck, haven’t you been telling us all along that many of these securities are sold with default insurance when they are packaged? I mean, insurance companies are willing to accept lower returns as long as it is guaranteed, after all state insurance commissions won’t allow risky investments, right?
Good point, readers, except in this case, the insurer denied the claim. Didn’t think that could happen? Think again:
Triad, which provided both loan and pool insurance, failed to pay claims for default loans because it claimed they were fraudulent, without responding to Bankers Life’s requests for more information, the complaint said. Bank of New York failed to report when the claims weren’t being paid, Bankers Life says.
The insurer also claims Credit Suisse misrepresented that the loans were from “highly credible financial institutions” when they were made by smaller lenders; put adjustable-rate loans in pools that borrowers couldn’t later afford; and didn’t pursue foreclosures and insurance claims appropriately.
The next question is the best… will we see any cross-defaults when more of these surface? If so, hold on for the financial ride of a lifetime… it’s gonna be a doozy.
Chuck Ponzi April 27th, 2007
While much has been said about Boomers and their propensity to spend, it would seem that many of that cohort are quite wealthy (especially after the biggest asset bubble of all time), if nothing more than on paper.
It is, however noteworthy to examine some of the cultural and generational differences between Boomers and later generations, namely X’ers and Y’ers. I would suggest that in some ways, they are very much the same. A propensity to consume mixed with a lack of self-control (for the most part) has changed the landscape of America’s economy (roughly 70% of the economy is now consumer-driven. With a ever-more competitive global labor force stirred in with enabling technologies, we see much of the world now competing for lowest-cost solutions. Not only for manufacturing, but of the knowledge based economy as well.
Tanta on Calculated Risk today featured a piece on the generational differences between the soon-to-be retired, and the current consumers that the after generations represent. A good read by many accounts:
Simply put: As consumers become increasingly computer savvy, brokers are finding they are no longer in charge. Those brokers who don’t keep up are in danger of becoming, well, endangered. But it’s not just a matter of disseminating information; the medium is the message. . . .
“They are techno-literate and techno-fused,” says Dallas-based consultant John Ansbach. “Gen X grew up as computers grew up. Gen Y is techno-fused. They don’t know how to do anything without computers. The latch-key effect for both is a profound sense of: I can do it on my own, given the right tools. Gen X and Y-ers believe in their heart of hearts if they had enough coffee and access to the Internet, they could learn to fly the space shuttle.”
This is much like an entry I made some time ago, Boomers, Clueless and Wondering. Not that you would paint the entire generation with the same brush, but there are a number of funny things about many boomers when viewed outside of the little world they created. I once had the generational differences described to me in a management seminar (by a boomer no less) in terms related to the Myers-Briggs Type Indicator system. The instructor identified boomers as being more extroverted, sensing, or some such garbage. I honestly lost interest from that point on because it seemed fruitless to try to compartmentalize an entire generation, much less a single person. So, the irony of the situation was not lost on me. A boomer, describing to me, in boomer terms, how they were different from others. How pathogenically self-obsessed.
So, it was with a little internal chuckling that I read from MSN a recent story titled “Boomers Going Bankrupt“. It seems our favorite extroverts are going bankrupt faster than everyone else:
Americans over the age of 55 are filing for bankruptcy at a faster rate than the general population as growing mortgage debt and higher health care costs make them more vulnerable, a new study shows.
The trend of rising bankruptcies among older Americans is likely to continue for the foreseeable future, according to the study’s authors, John Golmant and Tom Ulrich, researchers at the Administrative Office of the U.S. Courts.
Which, I have to admit makes me sad to know that with all of the wealth that the generation accumulated through stocks and houses, they still can’t pay their bills. There was a great short skit from Saturday Night Live titled Don’t Buy Stuff You Cannot Afford that might just come in handy for that conversation.
All of which is interesting because it seems that the Gen-Y’ers are doing a little better with their own consumption than was previously imagined (Kudos to solvency):
The steepest increase in Chapter 7 filings occurred among people older than 55.
Golmant and Ulrich also found that the median age of those filing for bankruptcy rose to 41.4 in 2002, up from 37.7 in 1994.
The youngest Americans, meanwhile, had a drop in filings, with 4 percent of Americans under the age of 25 filing for protection from creditors in 2002. That fell from 11 percent in 1994.
Which makes me wonder if this entire financial system that the Boomers built (Debt, consumption, mortgaging the future) won’t just someday implode on America. This image reminds me of one of my favorite boomer-era movies endings:
Chuck Ponzi April 25th, 2007
Great read from the San Francisco Left-Leaning-Liberals (LLLs) of SFGate.com
All of the bailout talk has some people writing in:
“As a potential ‘victim’ in the fall of 2005 I was amazed that the mortgage brokers and banks were trying to sell me insane loans in hope of making a sale,” writes Ed Dergosits of Mill Valley. “Now they want relief funds. I say let the banks and the homeowners (like they really own the home) take the loss. They took the gamble. Why should taxpayers bail them out? I am still a second-class ‘renter’ but I do not have to ask for public assistance to pay for my rent.”
And the real reason for bailout talks:
“It’s true that nobody bailed out investors after the Nasdaq bust, but the government has been a serial bailout machine since the 1980s. … I’d love to believe our dear congressmen have the poor ‘victims’ in their hearts, but the cynical part of me thinks otherwise. Have you taken a look at where Chuck Schumer gets his campaign dollars? This won’t be about the borrowers. I smell a bank rescue on the near-term horizon.“
Seems we’ve got some pretty smart people out there. Here’s hoping they make a difference.
Chuck Ponzi April 25th, 2007
Those who follow local novice real estate investors over at the SDCIA (San Diego Creative Investors Association, aka SD Real Estate Investors), know of a frequent poster named Jeff who is a self-proclaimed real estate investor from San Diego. Jeff’s a good guy, if not a bit confrontational, and has become a real estate “investor” only within recent history (bubble time)
In a recent post, he has lamented how some of his investments are not doing well, so let’s revisit some of his investing wisdom:
This entry comes from August 13th last year… only about 8 months ago.
You probably won’t be surprised to know that I invest for appreciation. Many (most?) would say that what I do isn’t even investing…it is gambling. I am used to that–I disagree with it–but I am used to it. If that is your view, then my answer to your question doesn’t matter…any aspect of my investment strategy will not satisfy you…
Now, if I have misunderstood your question, and you are asking instead whether or not I include tax benefits in my monthly calculation of cashflow…I would answer that of course I include them. Tax benefits are real money, money that I see each month in my paycheck. I don’t have to wait for a refinance, or wait for a sale–that money comes every month no matter what.
The government pays me to invest in RE. Isn’t America great!
Ah, yes, America is great. Land of opportunity. And tax breaks. Can’t forget the tax breaks.
His compadre Ronald Starr came to his rescue at one point on Aug 11, 2006 with the following gems of wisdom:
 You also have to understand that the value of houses is not based on the amount for what they will rent. That might be true of income properties. But single family houses are not income properties. Their prices or values are determined simply by the supply and demand of the buyers, mostly owner-occupant type people.
And, the higher the value of the SFH properties, the lower is the ratio of the rent to value of the properties.  So, one house that I own in OK is probably worth about $35K and I get $475/month rent. A house in CA that I own is probably worth about $325-350K and the market rental value is perhaps $1400. Worth ten times as much, rent of less than three times as much. That is the way things work. That is why people who want positive cash flow need to be thinking of buying lower-cost properties, probably under $150K. My recommendation is look for those under $75K.
Don’t feel too badly if you really don’t understand things yet at only 18 years of investing. It took me about 23 or 24 years to understand. And then I had to spend over a year communicating on internet boards such as this one so I could learn from other people. That and trying to answer the questions asked, which forced me to think really hard.
Ah, yes, the old supply and demand argument. Rents don’t matter, only supply and demand. Rents have nothing to do with demand… we should remember that. Mental note to self… there is no such thing as fundamental value, only demand value. Gets difficult to hold for long when your properties are hungry. When asked how he is feeding his alligator by Gekko, he responded:
This is all covered, in detail, earlier in the thread…
The short answer is I “feed it” the same way I purchased it–with 100% borrowed funds.
Truly gems of wisdom.  A comparison to another investing genius would serve us well, back from Jeff on February 27, 2007
I am also astonished whenever someone mentions Buffet as the end all God of investing–and offer this “rule” as if it were a law. The problem with this “law” is that Mr. Buffet has lost money MANY times and is in fact having a terrible year–the fund he is currently managing has recently “lost” against its benchmark for several months to a year. Right now Mr. Buffet is losing money.
The truth that all investors know is that there is risk to any investment, and that the highest risks are associated with the highest gains. Even Mr. Buffet knows this…
Ah, yes, that little bugger risk, huh? The one we said wasn’t priced into the market?
This one’s from January 8, 2007:
Debt juggling is just fine, I have had to hit my “back up” cash reserves twice lately to cover vacancies–each time for 5k. Ouch. Without those darn vacancies I would be about break even…
Change in perspective or approach? I can say that I adamantly wish I hadn’t bought any houses in Cape Coral! If only I would of known that they were going to be the worst performing. Except for them, I would say that I am batting a thousand. All my other houses have gone up remarkably and cost me very little each month.
Then the slide begins: (February 15, 2007)
Anyway, I don’t have any updates yet with real numbers, but I can tell you what I have been telling my friends lately. I am not batting 1000. I didn’t really expect to, but admitting it anyway was hard. My three houses in Cape Coral are going to end up being HUGE mistakes…they have lost thousands of dollars in equity and are losing $1000 a month while I rent them. While all mistakes are mine, in my defense I was clearly the victim of some pretty unscrupulous “businessmen.” The builder took over two years to build my house (ONE isn’t even done YET!). Now normally that wouldn’t be a problem on pre-construction, but according to the contract I signed as an absolute beginner I have to pay the construction interest while they sit on their butts. Dang. Also, these houses actually went UP 50k each in the first few months I owned them (if I coulda sold), but over the last year have lost greater than 50k. If the builder would of built on time, I could of made 100k or more. Also, the lender said I wouldn’t have to re-qualify my construction to perm loan, but since the builder went over the 12 month period, I DID have to re-qualify and couldn’t…so that cost me ANOTHER 10k (times 3). And so on…basically I am going to lose a LOT of money these negative cashflow houses…
And I would of bailed on these houses–took my loses–if I hadn’t been given assurances by several professionals that I could get Go-zone depreciation bonuses on these houses. Turns out that is unlikely (not absolutely sure STILL), so sticking with them was an even bigger mistake.
On the flip side, every other purchase I made that year was a good one. So not counting the Cape Coral homes I am WAY ahead. My two SLC houses probably have increased 120k all by themselves. Still, those CC houses really burn my hide…
Anyway, am I happy I did it? You bet. I’ll be even happier in 20 years when I retire with 8 million in equity (assuming 6% appreciation).
Ah yes, beautiful compounding of real estate gains… to the moon!
Unfortunately, his alligators are proving to be hungrier than thought and are in the process of eating him alive:
Well…as many of you know I own three terrible houses in Cape Coral Florida. Through a series of misjudgments and being taken advantage of (and lied to), I am losing ~$1000 on month on each of these houses when they are rented. I am just sick about them and often cannot sleep–like now.
Anyway, what should I do?
I have been hitting my personal residence HELOC for the negatives, but can only take that so far. I would just like to “walk away” from these homes but of course I am too embarrassed to do that (so far) and I suspect it is not an option anyway…
I go round and round with what to do on these properties…at first I say hold until the market returns and keep borrowing on my HELOC, then I say no way that is too expensive, sell. But when I think about selling I think about the ~45k loss for each house! I will have to make payments on that ~135k loss for 30 years! So I think about “walking away,” but then I think about the credit score hit I will take and how many years that will follow me–so I go back to the hold until the market turns solution. Around and around…I am dizzy thinking of it.
If nothing more than a textbook description, this is what goes on in the mind of investors who cannot separate emotion from investment judgements. It’s that escalating commitment problem where they assume that the sunk costs are still being felt. Sunk costs are sunk costs. They are gone. They will never return.
Anyone have any advice right now other than to just go short-sale and dump the alligators and sell all his properties? Or, is this just another Casey Serin, but older with more responsibilities?
Chuck Ponzi April 23rd, 2007
The OC Register reports that which many of us in Southern California has already noticed:
In just three years, the enrollment in 19 Orange County school districts has dropped by a combined 17,725 students. That’s enough students to fill about 10 high schools, or 30 elementary schools.
And some educators, who attribute the trend to young families escaping the county’s high housing prices, are predicting even sharper declines in years to come.
Good thing everyone wants to live here, otherwise one might think people are leaving.
Realtors (whoever that is) have a great opportunity to tell us why it’s not a problem:
Meanwhile, realtors and other educators say this trend is part of a cycle, easily reversed by everything from increases in new housing developments to changes in birth rates.
Ah… that’s all. Just have more babies. Seems our new immigrants aren’t having enough is the real problem:
Michael Caruso, the president of the Orange County Realtors Association, said blaming the housing market for the loss of school enrollment might be a bit deceiving since the overall population in the county isn’t actually decreasing.
“We are not seeing any flight away from Orange County,” Caruso said. “It has more to do with our neighborhoods simply growing up.”
Caruso said that between 1988 and 1995, the county saw a boom in new housing developments, which attracted scores of young families. The children from those families are now grown up and about to leave high school or are already in college, Caruso said.
“This is a pretty normal cycle,” he said. “Soon, after the Orange County housing market improves, we should see another growth spurt.”
Good thing, we don’t need children. They’re just crybabies anyway.
Chuck Ponzi April 20th, 2007
DR Horton is doing what I have predicted builders would do: offset falling housing prices by building more, not less (as housing bulls suggested). Their reported earnings fell 85%. Not much of a surprise.
Here comes the best quote, related to DR Horton’s cancellation policy:
Unlike other home builders, Horton said it has no plans to weed out potential buyers who may not be able to qualify for a loan in order to bring down the cancellation rate.
“As I’ve said to all our salespeople, if a buyer is warm and has a pulse, we want to put them on paper,” he said.
You could tell the whole story in that single phrase.
Chuck Ponzi April 20th, 2007
Now that Option One has been on the selling block for some time, it seemed like H&R Block would never be able to get out of its subprime mess. The subprime smearout has had far-reaching implications for the local economy. I think we’re all interested in how Option One’s new overlords will treat the underlings. It seems that Cerberus Capital Management has purchased Option One $300 million less than tangible net assets. Yahoo reports:
H&R Block Inc. will sell its troubled Option One Mortgage Corp. subsidiary to an affiliate of Cerberus Capital Management LP, the finance management company said Friday, in a continued shakeout of the subprime lending market.
OOMB Acquisition Corp., a newly formed company, will pay $300 million less than the value of Option One’s tangible net assets, which were valued at $1.27 billion on Jan. 31.
H&R Block will also receive an “earnout” representing half of Option One’s loan origination sales for 18 months after the deal closes, which is expected in the company’s second quarter, ending Oct. 31. The earnout is capped at $300 million.
That seems like a very expensive price for one of the worst underwriters of Neg-am products. Someone at Cerberus must think that the subprime mess is nearly blown over. I don’t think so, and I think there are significant liabilities that go along with the entire business model.
With Bear Stearn’s announcement yesterday effectively capping Neg-Am products at 110% of original value, that may prompt others to follow suit (hat-tip to Calculated Risk). I believe the cap at OO is 120%. Can someone clarify if that is wrong? **Updated**
Any way you look at it, Alt-A is beginning to show cracks. Yahoo tells us more:
Don’t expect a quick recovery from the subprime mortgage debacle.
That’s the view of well-known value investor Robert Rodriguez. A rare switch-hitter in the fund industry, he runs both a stock and bond fund: FPA New Income, a $1.8 billion fixed-income fund (one of Money’s 70 recommended funds) and $2.2 billion FPA Capital, a small value fund (currently closed to new investors), which both have solid long-term records.
Rodriguez is a contrarian who buys issues that are out of favor on Wall Street, and he keeps a sharp eye on risk. When he cannot find compelling bargain, or when he sees economic problems mounting, he lets cash build up in his portfolios. Recently, cash made up a hefty 40 percent of assets in both FPA Capital (FPPTX and FPA New Income (FPNIX.
“We see significant risks, so I’m in preservation mode,” said Rodriguez.
Topping Rodriguez’s list of worries is the collapse of the subprime mortgage market, where he first saw problems emerging two years ago. “Starting in 2004, it’s has been one of the worst mortgage underwriting cycles that I’ve seen in my career,” says Rodriguez. “Lending standards deteriorated as more and more groups got access to credit even though they didn’t qualify.”
Right now, the economic consensus is that the subprime fallout will cause only a temporary economic downturn. It’s a view that Rodriguez does not share.
“It’s still early in the cycle to know how things will turn out. But I think the notion that we won’t have a major economic readjustment is really optimistic.”
I think we all envy optimists, but optimism can be fatal if you ignore the risks and warning signs. We hope that Option One’s new owner can bring their company into some semblance of an organized entity. Good luck to them.
Chuck Ponzi April 17th, 2007
After my last post, one might believe that real estate agents have no other opinion than the mantra of “housing prices only go up”. For those ill-informed and those lacking true experience in a down market (or at least studied one out more than attending a Gary Watts cheerleading session), there is little to convince them outside of the crushing pressure of the future markets.
On the other hand, there are agents who will actually flourish in the coming real estate bubble pop. These hardened souls know the importance of negotiation, and have experience to back it up. Agents like these are well worth their six percent. I came across just one of these recently. I have only had brief contact with his business partner Lina, but after reading his website, I am convinced he’s at least going to maintain his business while many others like our aforementioned Mr. Pannatoni are going to scramble. Embracing change is key to managing it.
Turning to his site, we read:
The Return Of The Short Sale
If you lived in the Shadowridge area or anywhere else in California about fifteen years ago and owned a home, you probably remember short sales – they are back.
A recent report from Sacramento sounds eerily similar to the 1990-1996 California real estate bust, except this time, home prices are multiples of what they were back then, therefore….so will be the drop!
I have been talking about inflated home values and financing foolishness for several years now. In 2000 or so, there were the 125% loans, scary, but home values began marching upwards as real estate looked attractive to the folks who had chased the .coms.
Folks wanted to grow what they had made or rebuild what they had bled in the stock markets.Greenspan had raised interest rates decimating investments that were already overvalued causing a mass exodus from the equity markets into real estate. Then rates dropped again and property values begin to rise further. Builders who were behind on keeping up with housing demand began to build like mad. In addition, the folks to begin to, once again, speculate in real estate just as they did in the stock market. It was easy because of technology and the web.
Day trade this stock….flip this house!
Now, the folks who can really afford to own a home, are seemingly leaving California in droves. We have lots of people coming but not the type who can afford to buy these homes. These new citizens are more likely to use our social services and put a burden on our resources.
I don’t know if the statistics show it (I haven’t bothered to check), I just know the termite inspector we use told me 18 months ago that 3 out of 5 of the homeowners who he is doing inspections for, are leaving the state. And this continues.
With so many homes at such high prices and so few buyers, what happens?
The 35% property value drop that we saw between 1991 and 1994, that’s what happens.
Thirty Five Percent. That was pretty much the price drop we saw across southern California during that period. There were pockets that did better, there always are. But, pretty much across the board in southern California, the home prices dropped by 35% or more.
I remember, I was selling foreclosures and doing short sales for homeowners in the Shadowridge area during that time. By the way, what was your real estate agent doing back then? This would be a good question to ask them, before you list your home for sale of course!
The possibility of a short sale arises when you need to sell your house, but you owe more than it’s worth - like a fully-financed new car being driven off the dealer’s lot, you are “upside-down” on your loan as soon as your tail lights have crossed the curb.
That is exactly what has happened to thousands of homeowners who, for a variety of reasons, should never have bought homes but did. Most of them putting no money down. Many of these homeowners are also investors who own more than one home. Speculating on real estate just like they did in stocks.
Here’s the rub. If, for one reason or another, these homeowners must sell, then they are faced with a few choices, none of which are very appealing:
-Sell the house, and pay the difference to the lender…right
-Walk away, and give the house back to the lender…the lender doesn’t want it but will foreclose if they must or,
-Make a deal with the lender so they don’t wind up with another foreclosure.
I specialized in this sort of thing in the 1990s; luckily for many, I have dusted off my short sale notebook and am now helping people hand their homes back to their lender with the least amount of hassle.
I am becoming a very busy guy.
I have no doubt he is going to be a very busy guy. San Diego County is encountering its share of short sales now.
Thirty Five Percent was a lot back then, and it’s even more now. He could be spot on with his predictions, even if it is just a “back of the napkin” calculation.
Chuck Ponzi April 11th, 2007
This is the kind of stuff that we’ll laugh about in a few years. Spurious logic, and a complete lack of verifiable information, but KoolAid galore. Here, forever immortalized in print for future generations to remind us just how clueless some people are:
It was with great disappointment that I read the latest Jonathan Lansner diatribe on how the sky is falling as it pertains to the Orange County real estate market [”Investment watcher predicts O.C. recession,” Marketplace, April 11]. Since Lansner, CEO/Chief strategist for Ero Pacific Capital Peter Schiff, and others have consistently made similar predictions for years, during a time when property values doubled in this area, I’d have to consider their opinions at least suspect.
Both Lansner and Schiff, as well as UCLA and Chapman College representatives have all been predicting the bursting of the real estate “bubble” year after year. They have all been consistently wrong and have probably cost the would-be homeowners, who held off due to these dire and inaccurate predictions, untold thousands of dollars in returns on a sensible real estate investment, and the subsequent appreciation (not to mention the significant tax deductions.)
For those foolish enough to listen to them, and who held off purchasing a home, it may be too late. Many will probably never be able to afford a home in Orange County now thanks to the doom and gloomers. Particularly offensive was Schiff’s advice: “When everyone in real estate is waiting tables (or in jail) and your neighbors think you are crazy for even considering real estate, then it will be time to buy.” I have spent much of my life in Southern California real estate. I do my best to provide accurate advice and handle my clients with professionalism and courtesy. Schiff’s broad-brush stereotyping of thousands of hard-working real estate professionals reflects much more on his reputation than ours. I still consider O.C. real estate an outstanding long-term investment, and history unerringly proves me correct.
The primary cause of the recent (and temporary) slow down in this market, in my opinion, is due to the piling on of media and pundits that must feed the fears of their readers on a daily basis in order to stay in business. Schiff’s prediction of a 50 percent decrease in O.C. home values is beyond ridiculous. Despite what Schiff and other fear mongers predict, the law of supply and demand hasn’t stopped working and the whole world still wants to live in Orange County.
Mark Panattoni
That’s how idiots get printed.
It leaves me wondering. Is it the media that is causing all of those foreclosures too? What about inventory, affordability, and job losses, is that media too? Heck, why don’t we throw in AIDS, Heart Disease, and Colorectal Cancer too?
Thanks, OC Register, you just made my day.
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