Chuck Ponzi July 7th, 2008

Anyone who hasn’t seen the charts for Freddie Mac (FRE) should really take a look at them.  This is definitely a crash in the making.  As of this writing, FRE is down 22% today on news that FRE and FNM CDSs have widened 10BPS.  That is quite an increase.

The funny thing is, I remember less than a year ago, discussions about how Freddie Mac and Fannie Mae were well capitalized, preeminently prepared for any disaster, and frankly, as unsinkable as the Titanic.  Little good that has done.  We may be witnessing a historic crash of epic proportions, greater by far than the crash we have seen to date.  To put it in perspective, FRE and FNM have pretty much been the only thing that have kept the real estate market together in the US over the past year.

Consider for a moment this statement regarding the mortgage insurance statistics from the GSEs.

There are more hard numbers available to support MI’s recent surge. MICA, the trade association representing the private mortgage insurance industry, began reporting rising volume monthly after February 2007. For example, mortgage insurers wrote 190 percent more business this year, through April, than in the comparable period of 2006, when subprime/Alt-A were in their heyday.

To put that sort of gain into proper context, consider that even GSE production is only up 160 percent — and they are doing an estimated 80 percent of all new mortgage lending. By inference, MI providers have made huge gains in market share.

Let that sink in for a moment:  GSEs are doing an estimated EIGHTY PERCENT of all mortgage lending, up 160 percent.  IN AN ACTIVELY FALLING MARKET.  Any implied “worst case scenario” imagined last year of the US government bailing out the grossly irresponsible GSE lending facilities is quickly not only becoming a reality, but would represent a necessity unless the entire lending business  in the US becomes STATE OWNED.

State owned lending?

Is that such a bad idea?  I mean, we pretty much have so many controls that we expend an enormous amount of government money in oversight, what’s so wrong with giving the federal government the right to nationalize the largest lenders as they fail?

I’ll write the next part only partially tongue in cheek.

Lending is perhaps one of the great debatable rights of Americans in the 21st century.  We have become so conditioned by its availability to believe that it is owed to us.  We need it, we want it, we should have it.  If we want to create our own financial ruin, and by extension the country’s entire financial ruin, we should be able to do so.  It is our right as Americans.  By this rationale, we should allow all Americans the right to open access to low-cost lending much like clean air, clean water, food and drugs free of harmful contaminants, and an interstate transportation system.

For example, if free enterprise were required to finance our transportation systems, we would be required to pay for every trip we consume on local and long-distance roads.  This is where economics has a hard time playing the role of moral coach, because, frankly, Economics is concerned with the free market and the most efficient method of delivering the utility people desire.  Governments have typically only concerned themselves with PUBLIC NEEDS.  Therefore, the big question is, is real estate lending a PUBLIC NEED?

I am certain that many could make the argument for and against, but perhaps the question needs to be viewed in a longer timeframe.  Is lending STABILITY more important as an ongoing public need to ensure the ability to liquidate lending and homes in an orderly manner?  What controls and insurances should the government provide?  How should the government handle lending standards and manipulation?  Could there be a cross-control against lying using collaboration with the IRS?  What kinds of manipulations would this open up the home lending business to?  Would the government “crowd out” any potential competitors and therefore stifle competition?  Has the current role of home lending harmed the public more than it has helped?

In any case, the general public perception is that home lenders have harmed America, and therefore must be harshly dealt with.  I don’t agree with that.  I personally believe that the problems is on its way to being fixed by the free market, and frankly I’m not happy with the directors of the GSEs getting away with fat pensions, stock options, and the like while the public swallows the bad debt.  On the other hand, it would end, once and for all, the deceptive practices and level the playing field by nationalizing lending.  Frankly put, the government could recapitalize easier than a private entity or a stock-owned entity.

I have to say that I oscillate between incensed outrage and cold acceptance of the reality.  There is no simple answer to that.  Lending has changed forever (hopefully).

• Credit Bubble , Debt , Housing Crash , Lending Standards
• Comments(0)

Chuck Ponzi March 4th, 2008

Rarely does the Chuck Ponzi Law of Unintended Consequences have such colorful supporters being quoted in Bloomberg.  Yesterday, Fed Chief Ben Bernanke suggested in a speech to bankers that the best option might be to reduce loan balances rather than pursuing legal foreclosures.

Remember, I stated:

The other is the physics of a forgiveness. Like Newton’s third law of physics, for every action there is an equal and opposite reaction. If Banks believe that they can lose up to 20 or 30% of the value of a home, they will begin to require borrowers to “self insure” by raising collateral requirements to mitigate their new risk. They will also likely offset the risk through higher risk spreads translating to substantially higher rates with stricter requirements for credit worthiness.

Bloomberg quoted the following:

We could not imagine that the policy response would be to pour napalm on the fire,” said Julian Mann, who helps manage $3.4 billion of bonds at First Pacific Advisors LLC. “I’m going to demand higher and higher rates” to buy mortgage debt if the collateral is altered, he said.

Go Julian.

BTW, banks will get their pound of flesh one way or the other.  The only thing left is for the government to start making housing payments for people.  I’d like a little of that action.  My rent is breaking me here in OC.  I’d also like to take a heloc out against my rental, go to Hawaii, buy a Hummer like my a-hole neighbor and have it paid off by the other taxpayers too.  Only, I realized that as a renter, I pay higher taxes anyway… D’Oh.

I guess the only logical conclusion left is to revert to anarchy if that happens.  I’ve been looking around for a good MAK90 like I used to have in college.  It’s hard to believe how much they’ve gone up in recent years.  Good ole Chinese manufacturing practices.

• Debt , Lending Standards , Lizard Brain , Unintended Consequences
• Comments(6)

Chuck Ponzi February 22nd, 2008

The Chuck Ponzi Law of Unintended Consequences is alive and in full force. I had to whip it out another time when Congress started considering the subprime rate freezes. And now, it rears it ugly head again and I am forced to once again remind people how “helping” most often ends up just hurting people.

Remember the original rule:

If there is any chance that someone can get bailed out by someone else, they will, and you will have to pay for it from your own pocket.

I had to later add:

while you may need to pay for it, anything other than letting the market deal with it efficiently will likely crash it anyway

This time, I’ll have to add the following:

And messing with it will make it crash harder than if you had just kept your stupid nosy butt out of it.

and that’s how I can frame the message to those reading the MSNBC article about “saving” people from their underwater houses.

The current plan to “save” homedebtors is to “forgive” the amount that borrowers are underwater. Meanwhile, the Jeffrey Birnbaum seems to take the tack that we should be poopooing on the stupid lenders for lending that amount in the first place. Naturally, banks are fighting it. In the short run, this “solution” becomes their problem. Unfortunately, in the long run, it becomes everyone’s problem.

The legislation would allow bankruptcy judges for the first time to alter the terms of mortgages for primary residences. Under the proposal, borrowers could declare bankruptcy, and a judge would be able to reduce the amount they owe as part of resolving their debts.

There are at least 2 significant problems with this solution.

1. There is a moral component to paying back what you owe. It is supremely unfair to prudent citizens when gamblers and speculators are saved from their own poor decisions. But, it goes further than that; this bailout encourages more risk taking and gambling - a term referred to as moral hazard. The fear is that open risk taking can create systemic risk that at some later date cannot be bailed out; the captains must go down with the ship.

2. The other is the physics of a forgiveness. Like Newton’s third law of physics, for every action there is an equal and opposite reaction. If Banks believe that they can lose up to 20 or 30% of the value of a home, they will begin to require borrowers to “self insure” by raising collateral requirements to mitigate their new risk. They will also likely offset the risk through higher risk spreads translating to substantially higher rates with stricter requirements for credit worthiness.

Consider who this is attempting to help:

The Democrats and their allies see the plan as an antidote to the recent mortgage crisis, especially among low-income borrowers with subprime loans. The legislation would prevent as many as 600,000 homeowners from being thrown into foreclosure, its advocates say.

The poor? Who would least likely be able to handle an increase in the collateral requirements and interest rates set forth for the purchase of a home? My belief is that if this law is passed, it will severely deepen the housing crisis. Indeed, this will likely make the housing problems a super-crisis; akin to raising interest rates in a deflationary environment. This would mean not only that we would be erasing all of the gains of the bubble, but likely much, much more. If first-time buyers were required to save 20% collateral again, it would literally shut down the first-time homebuyers in Southern California. It would not return to the existing levels for perhaps another generation as the system cleanses itself. All of the increased savings would have a positive effect of actual savings, but it would create a severe recession since consumers would need to retrench and cut off discretionary spending. We could easily see homeownership rates erode by 10% or more over the coming decade of turmoil.

This “solution” is quite possibly the worst kind of consequence in itself. It will crash housing markets in high-priced locales and deepen the coming recession throughout the country. I’m a fan of just letting the markets right themselves and sort out the mess itself. Any kind of well intentioned tinkering will only make the problem worse. The time to act is past and cannot be recaptured. The right time to fix the problem was to prevent it in the first place.

Unless the US Government wants to become the lender of last resort (see the discussion of systemic risk) and to personally insure low collateralized mortgages in an inflated market, there is no way this legislation cannot wipe out innovative lending. All of the lending and borrowing participants will have been crowded out by risk aversion.

Let’s hope that our government is aware enough to see what this would do and kill this legislation before it becomes a reality.

Don’t get me wrong, I’m no banksters apologist. They are greedy, self-serving, and destructive. Their moral compass is broken and their money guides their actions. Congress, unfortunately are worse. They work with a corrupt moral compass and other people’s money.

Here’s hoping that if Congress can’t pull their heads out of their collective asses that President Bush has enough sense to wield the necessary veto rights. The very civil liberties of property rights must be protected; both for individual citizens and corporations. Once we take it from one class, we can take it from others; it’s only a matter of time before we find a reason to.

• Housing Crash , Lending Standards , Speculation , Unintended Consequences
• Comments(1)

Chuck Ponzi February 4th, 2008

There is a lot being tossed around about the stimulus package that is being shuttled through the house and senate. One of the proposed amendments is the slackening of the conforming limits, especially in an area of high housing prices. Most other bubble bloggers have stood against this, dismissing it as another affordability enhancing intended vehicle that will only keep prices above what a normal buyer should be able to afford. I’m going to break from that camp for the following reasons:

1. I feel that a seemingly arbitrary limit of access to credit imposed based on a nationwide median price is unfitting for high-cost and high-income regional areas.

2. Affordability is the issue, and indeed, I feel it should be addressed. I would rather see a local median-income based payment cap, along with mandated dti (debt to income) ratios.

3. Even by expanding the current set of available products won’t help the already under water homeowners, nor does it change the economics of the rent/buy equation.  Basically, it has little or no impact to the bubble.  If you can rent long-term in a high-priced area, why shouldn’t you have access to credit?

4.  The bubble was created by speculation and “affordability products”.  While nothing occurs in a vacuum, the bubble is not going to be reinflated without new affordability products and lax lending standards; something that is not going to happen in this environment.

5.  Indeed, I believe that like many speculators caught up in the positive frenzy of the real estate market, it is easy to be caught up in the pessimistic view as it tumbles.  One sign of the bottom is when everyone agrees that the product is no longer worthy of investment, and to be shunned.  We still have a long way to go, but there is no reason to overblow the risks and rewards.

In the end, creating more access to credit does not translate into overpriced homes.  Most of the problems created have already been solved in the debt market; a return to sane underwriting is already underway.  The pricing of housing is inconceivably out of whack, but will plummet for the next 2 or 3 years as the imbalances are worked out.

Besides, the current jumbo market is in disarray, adding sane underwriting to that market while not increasing the GSE’s limits can provide competitive air to the otherwise broken market.

This is not to say that it won’t have its faults… with a limited amount of funding going on, the GSEs will likely need to ration the available funds.  Price, however, is most often the best rationing device one can create.  Any way you look at it, the bubble has burst, nothing will change that.  In case you haven’t noticed, I’m not left-leaning that I believe everyone should be able to afford a house.  For many people, they have no propensity to be natural caretakers for an asset as costly and long-term as owning real estate.  Many of those people are already in homes they can barely afford, or worse, dashing their credit on the rocks of the “American Dream”; which up until 30 years ago was about starting their own business and succeeding financially, not owning a home.  Consider how far we have strayed from the path of free enterprise.

• Debt , Lending Standards , Speculation
• Comments(16)

Chuck Ponzi August 14th, 2007

For those who might have missed it, the OC register did a great piece on a single street in Santa Ana that highlights just how out of hand the subprime lending got in our little Orange County.

While there are plenty of references to how the real estate market moved on the way up, one of the best descriptions is that of the Plankton Theory submitted by Bill Gross (Pimco’s “Bond King”), it is everpresent that the foundation of the housing market lies not only in entry-level homes and buyers, but also in lower-priced communities.  Without that “first house”, there is no property ladder.

However, the reckless lending was aimed directly at “getting people on the ladder”.  No matter how you look at it, these were in many cases people who would have never been able to buy a home, either because their credit, income, or both would not support it.  In many cases, these would-be homeowners have trouble with their day-to-day finances, much less than the kind of commitment required to buy, pay for, and maintain a home in the long-run.  No doubt about it, in the long run, buying a house is generally a smart move, but those who struggle with daily living expenses often do so, not because of their income, but rather their lack of financial restraint.

The OC Register takes us down Camile Street in Santa Ana:

A year ago, Angelita Medina Albarran, 47, a garment worker at St. John Knits, took out two loans from Fremont Investment & Loan to cover the entire $600,000 purchase price for 919 W. Camile St., a 1,450-square-foot bungalow. Her five grown children help pay the mortgage – $4,000 a month and scheduled to rise in May.

“La droga,” Medina Albarran said. That’s Spanish for “drug” – Mexican slang for a crippling debt. The people of West Camile Street, she said, are “endrogados” – hooked on debt.

With what happened to Fremont, New Century, and other imploded lenders that reads like the who’s who of subprime lending, it is unlikely that these drug addicts will be getting another fix.  When you consider that these people were paying $400 per square foot to live in one of the worst neighborhoods in Southern California, you can just begin to see the problem.  When I first moved to California in 1999, few places cost $400 per square foot, and only in the poshest neighborhoods (Beverly Hills, Bel Aire, just to name a couple).

This was truly subprime central:

A Register analysis of federal housing data pinpointed West Camile Street as a center of the subprime borrowing binge. In 2005, 75 percent of the home loans in the surrounding census tract were subprime.

That’s the highest concentration of subprime loans in Orange County and one of the densest in California. More than 200 neighborhoods in California, particularly in south Los Angeles and the Inland Empire, were similarly dependent on subprime lending. So were at least three dozen counties in other states.

What this means is that all of the wealth that was “created” in the last few years was primarily created by former entry level buyers selling and buying larger and so on up the food chain.  When these plankton are gone, there is no food for the chain and it dies off.

From April through June a record 17,408 California homes were lost to foreclosure, according to DataQuick Information Systems, a La Jolla real estate tracking company. The Center for Responsible Lending, which opposes predatory lending, estimates that 23 percent of subprime mortgages made in Orange County last year will end in foreclosure. That would be about 2,500 of the 11,000 homes bought with subprime mortgages, or 7 percent of the 36,000 homes bought last year in Orange County.

That would be only a small portion of what the larger problem is.  I wouldn’t be surprised to see 10 to 20% of the homes bought last year to enter foreclosure.  Never before has there ever been this kind of speculation, never before has there been so little to lose put down by buyers.

In a related link, another article trumpets that “OC is Home to many of the Top 10 Subprime Lenders”

Their list is as follows:

1. Argent Mortgage (Orange)

2.  New Century Mortgage (Irvine)

3.  Fremont Investment & Loan (Brea)

4. Option One (Irvine)

5.  National City Bank of Indiana (Indianapolis)

6. Countrywide Home Loans (Calabasas)

7.  Long Beach Mortgage Company (Seattle) a.k.a. WaMu

8.   WMC Mortgage (Burbank)

9.  Ameriquest (Orange)

10. Accredited Home Lenders (San Diego)

While you might marvel  that these top 10 represent over 40% of the subprime market, it is perhaps even more surprising to know that all but 2 are Southern Californian companies.  (although, I might count Long Beach Mortgage as well), but that these 90% of the top 10 by number and volume.  The remainder of the market is perhaps not as concentrated, but make no mistake, lending is the biggest business here.

When we feel the pinch, it will be doubly bad.  Not only were we selling the stuff, we were snorting it too.

Remember, kids, drugs kill.

I’ll leave you with this moment of zen.  21% of the outstanding loans in Orange County are of the subprime variety, and I’d wager a guess at at least that many Alt-A.  Much of those sources of lending are over 10% now, and even Jumbo Prime loans have jumped to rates and spreads not seen since 2000.  Since the median income has not made a substantial move in the past 7 years, you’d be believing a lie if you heard anyone tell you that OC housing prices won’t come down hard.  They will.

• Credit Bubble , Lending Standards , SubPrime
• Comments(10)

Chuck Ponzi August 6th, 2007

The action around MBS’s and other derivatives related to the housing market reminds me of an often quoted speech given by Alan Greenspan.

“This vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent… But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low-risk premiums.”

While he didn’t do enough to prevent asset bubble from forming, at least he understands what the aftermath does.  “newly abundant liquidity can readily disappear”.

It reminds me of a post I made back in the heady days of September 2005, Greenspan’s Interesting Clarity.  Yes, nearly 2 years of blogging ago.

Where does this lead us? Well… we’re acting a bit like the japanese in our debt lending by accepting low risk premiums, and the longer this goes on, the greater the risk to all participants, lenders and borrowers. If liquidity were to be suddenly shored up by investors demanding a greater return for thier risk, or if percieved risk were to suddenly jump, borrowing would become much more difficult for buyers. Interest rates will increase accordingly. Even established buyers might not be able to purchase homes due to restricted risk premiums; all of which will only serve to slow the real estate market and put the power of purchasing into well qualified buyers.

It has been my assertion that the housing bubble was caused not by low interest rates, but by excess liquidity that banks could only farm out by lowering lending standards. It was this easy credit that was extended to a whole set of the population that had never before been entrusted with credit; this caused “neverending” demand. Much like college students that max out their first credit card, only to find that the payments exceed their income, many of today’s buyers will be unable to make payments in the future.

Our little “deflationary concern” may soon turn into a financial meltdown since problems tend to spiral: Increases of forced sales trigger lower prices, which triggers lower spending and more foreclosures; lower spending triggers more layoffs; foreclosures trigger financial losses for banks and MBS holders; financial losses triggers less liquidity; less liquidity triggers higher interest rates; which triggers more defaults on ARMs and HELOCs… the list of effects could go on forever. Our economy is increasingly dependent on house price appreciation, but 2 things keep these trees from growing to the sky.
1. Credit has limits, since some risk premium must be attached to borrowing money, and interest must be charged. Investor sentiment is everything here.
2. Even a leveling off will decrease construction jobs that will kick-off the above process, so increasing growth is necessary to keep the merry-go-round going.

As you can see, it is easier to predict WHAT is going to happen, opposed to WHEN it is going to happen.  It was surprising to me that the housing boom ended with a consumer-led paring back of purchases, as I had expected the lending environment to tighten considerably before it did.  What this likely means is that while it postphoned the inevitable crash, it will likely only amplify the severity of the downturn.  As they say, the bigger they are, the harder they fall.

However, not trying to be a Monday morning quarterback, but had the FED raised rates twice more as I had hoped they would, they would have had an additional half-point lowering room when the credit event happened.  The fact that they did not either says that they did not understand the extent of the credit market’s problems and attendant risk mongering, or they simply believed (and perhaps still do) believe that the credit markets can self-correct without affecting unemployment, or currency attractiveness.  It may be that with the weakness exhibited by the currency, Ben B. should likely be raising rates when the world is calling for cutting them.  It’s always easier to get out in front of the problem than cleaning up after the mess, but when has the Federal reserve done that since Paul Volker?

• Credit Bubble , Debt , Lending Standards , Psychology
• Comments(2)

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.

• Credit Bubble , Debt , Lending Standards , SubPrime
• Comments(4)

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.

• Bubble , Credit Bubble , Lending Standards
• Comments(6)

Chuck Ponzi April 2nd, 2007

Not as if everyone didn’t expect this, but New Century has filed for Chapter 11 Bankruptcy protection.

As always, I am interested in the impact on the local economy… as it is central to my forecast for Orange County’s housing debacle.

Subprime mortgage lender New Century Financial Corp. filed Monday for Chapter 11 bankruptcy protection, and said it would fire 3,200 workers, or 54 percent of its work force, to better position the company for a possible sale.

And, cutting off the arm to escape:

New Century said it has agreed to sell its loan servicing business to Carrington Capital Management LLC and its affiliate for about $139 million, subject to the approval of the bankruptcy court.

There’s not much left of this company to reorganize. Might as well make it a Chapter 7 and be done with it. I guess all we need now is to sell the new office chairs and give up the commercial office space in Irvine…

I recently heard some rumblings of how commercial RE was going to save our sorry butts in OC… not here, not now.

************************Update 04-02-2007 5:45PM**************************************

Just found out that Matthew Padilla has the inside scoop on Layoffs for New Century:

500 from Today.

I suppose many more to come.

Best quote:

Jack Kyser, chief economist with the Los Angeles County Economic Development Corp., which also covers Orange County, said buyers are interested in parts of New Century, but no one is likely interested in the brand or company as a whole.

“What do people think of when you say New Century?,” Kyser said. “There’s no value in the company name anymore.”

You can say that again. New Century has turned into a certain liability for other companies similarly named.

• Bubble , Credit Bubble , Lending Standards , SubPrime
• Comments(2)

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
• Comments(7)