Chuck Ponzi June 19th, 2008

I always said we didn’t have a bubble until we had some perp walks.  These are from today thanks to Bloomberg:

Ralph Cioffi

Matthew Tannin:

The NYT has a great piece on the indictments of former Bear Stearns Fund managers.

In an April 22 e-mail from Mr. Tannin — which the indictment said was sent not from Mr. Tannin’s account at Bear Stearns, but from his personal account to the personal e-mail account of Mr. Cioffi’s wife — Mr. Tannin wrote:

the subprime market looks pretty damn ugly… If we believe the [CDOs report is] ANYWHERE CLOSE to accurate I think we should close the funds now. The reason for this is that if [the CDO report] is correct then the entire supbrime market is toast… If AAA bonds are systematically downgraded then there is simply now way for us to make money — ever.

Three days later, Mr. Cioffi and Mr. Tannin hosted a conference call for investors in the funds. This time, his tone was very different.

Lying openly like that to garner more money needs to be treated pretty harshly.  Maybe some in the securitization business can get some religion.  If not, they can always find Jesus in the clink.

• Bubble , Speculation , SubPrime
• Comments(3)

Chuck Ponzi May 13th, 2008

There are 2 must-reads for the future of foreclosures:

1. Calculated Risk has a great visual of projected 2008 foreclosures in “1000 Foreclosures per Day in California”

2008 is off the charts. Anyone calling a bottom at this point doesn’t have the facts straight. Notice of Defaults are projected at over 450K based on Q1 data. You may start to see some houses make sense in pricing, but there’s no doubt we’re going to overshoot fair valuation on the way down this time. No doubt at all.

2. The second one is Mr. Mortgage’s videolog and blog where he recieved California Foreclosure stats from Foreclosure Radar 2 days early. You can alternatively read it here
if you cannot access youtube. (at work, anyone?)

Some great excerpts:

we will have approx 122,000 units slamming the CA auctions over the next 4 months.

That’s over 1000 per day. That’s making the 90’s bust look like a walk in the park. However, when one considers that it is likely that more than half of all purchases within the last 3 years were speculative, the toll is likely largely hitting only those who took excessive risk. Boo Hoo.

Remember to visit Angry Renter. Please be sure to check out ways to contact your local representative to voice your opinion against any kind of government intervention. The invisible hand of the market is in the process of sifting the wheat from the chaff.

In California, renters and homeowners with no mortgage outnumber by a wide margin the number of reckless individuals who overextended themselves. Don’t let yourself be duped into inaction. I’ll post more on specifics later.

• Foreclosures , Speculation , Unintended Consequences
• Comments(2)

Chuck Ponzi May 13th, 2008

This is a travesty.

No mortgage bailout! None at all! Not to striving homeowners, not to the insanely-paid CEOs. Risk has penalties too.

Here’s our typical homeowners:

Here’s the problem with CEOs:

• Bubble , Housing Crash , Psychology , Speculation
• Comments(1)

Chuck Ponzi March 24th, 2008

The following is a copy of a post I made back in November 2005 (nearly 2 1/2 years ago).  Pay close attention to what is supposed to happen next:

from Interest Only - Creative Financing or Harbinger of Deflation?

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

The economists over at Elliott Wave have a great write up about deflation and what causes deflation in a piece titled “What is Deflation and What Causes it to Occur?”

All deflationary periods were marked with the following conditions:
(a) All were set off by a deflation of excess credit. This was the one factor in common.
(b) Sometimes the excess-of-credit situation seemed to last years before the bubble broke.
(c) Some outside event, such as a major failure, brought the thing to a head, but the signs were visible many months, and in some cases years, in advance.
(d) None was ever quite like the last, so that the public was always fooled thereby.
(e) Some panics occurred under great government surpluses of revenue (1837, for instance) and some under great government deficits.
(f) Credit is credit, whether non-self-liquidating or self-liquidating.
(g) Deflation of non-self-liquidating credit usually produces the greater slumps.

From the article: “Self-liquidating credit is a loan that is paid back, with interest, in a moderately short time from production. Production facilitated by the loan - for business start-up or expansion, for example - generates the financial return that makes repayment possible. The full transaction adds value to the economy.”

Credit lent against homes are most definitely non-self-liquidating credit. Unless, you count the opportunity cost of renting as a form of liquidation - however this requires there to be some relationship of rents to monthly payments; something that can’t be said of current market. The relationship of these nonproductive asset backed loans to productive asset backed loans, it would seem is at its peak historically.

Reading this type of semi doom-and-gloom scholarly article makes me think about the many types of financing recently available to the public masses and what impact they might have.

It takes a bit of economic sense to understand a risk premium. A risk premium is an additional amount that a lender expects to compensate them for additional risk. If risk is considered great either a high risk premium is attached or sometimes a transaction cannot take place. We currently have some of the lowest risk premiums in history; interest rates on non-productive assets are at historical lows.

Typically, a lender requires that at some point, principal on the note must be paid back. Interest only loans are an exception to this. Why? And, why have they become popular now?

It’s easy to see why a borrower would want to take on one of these loans; why pay for something now if I can pay later. But, what’s more interesting is why are they so popular for lenders?

Human beings are a fickle bunch. Each one wanting to do something different than the other. Like watching an ant, it runs to and fro, sometimes lost, sometimes productive, but always unpredictable. But, take a step back, and the anthill is an extremely efficient, coordinated jumble of activity. A very predictable bunch. Human financial systems are similar. Each borrower is very unpredictable, but bundle a few thousand together and they suddenly become more predictable; hence the popularity of Mortgage Backed Security Bonds (MBS’s).

BUT… and you knew this was coming… you need to take even a step back to see what is going on in the macro environment. Who has all of this money, and why are they lending it at such low rates. A flat yield curve would signal that lenders see little reason require a larger risk premium for longer-term loans because they expect long-term rates to be about where they are far into the future. How often is the bond market right? Well, that’s for you to decide. Greenspan has even named it a conundrum.

So, this brings me to the title of my post. How could interest only loans signal possible deflation in the future? We already know that low-interest rates can be a signal, but what about creative financing?

Interest only loans cannot be self-liquidating in the short run. When they switch to a liquidating (fully amortized) loan, the payments jump substantially because they do 2 things at once: 1, they begin fully amortizing 2, they adjust to prevailing interest rates. One would expect that people faced with these issues would simply replace the shorter amortizing period with a longer amortizing period at the same rate. Or, they would attempt to liquidate the loan by selling. Since interest-only loans are not self-liquidating in the short run, the bond market is signalling that for the medium-term, interest rates and returns will be low, or that investors are extremely risk-averse to the stock market. The investors feel justified that any possible deflation is offset by the Fed’s moderate inflationary policy, or at least an attempt to prevent deflation. So, MBS investors have signalled that for the medium term (3 to 10 years), that they would rather take their chances with low interest rates AND non-liquidating debt.

Will this truly end as Greenspan has put it? I will leave you with one of his most famous statements on the subject:
“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 prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.“

• Debt , Deflation , Mean Reversion , Speculation
• Comments(5)

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 21st, 2007

Housing bubble apologists often dismissed bubble believers’ concerns out of hand with the following party line: Southern California’s prices only fell last time due to substantial job losses due to the dislocation of the defense industry. (no matter that the Eastern Seaboard had a similarly-timed slide and did not attribute it to the same) Such job losses cannot happen again; the job market is too strong, diversified, and recession proof.

In a number of past posts, I have connected the dots related to current job strength, even while realizing that it was not just the number of jobs, but in particular, the type of jobs that matters when it comes to affordability. Indeed, it is important that the prices of houses are not supported by those that already live in an area, but rather by those who are coming to an area. On the flipside, as an area becomes too expensive, those unable, unwilling to remain, or tempted by their good fortune will sell to realize their gain and move elsewhere. We have already seen San Diego County’s negative growth rate (in spite of a substantially increased housing stock). These moves happen slowly, and reacclimating boiled frogs to lukewarm pots makes them believe they are actually in frigid arctic waters.

What the mainstream media failed terribly to see was that it is exactly the excesses created during the bubble that must be punished in a downturn. First, it was the mantra that Real estate never goes down. Then, it was a “soft patch”. Later, a “Soft Landing”. Then “A souffle’”. All of those jobs due to lending and construction that have paved the way to even higher housing prices have now turned into a vicious downcycle. Remember that the “Zombie Financial Media Awareness Week” is just a few weeks away. Why is it that the media has no memory that bubble blogs were appearing in early to mid 2005, warning of excesses in lending and finance?

Perhaps just as appropriately, one would ask, why are their virtual undead still haunting the pages of major news outlets. Featured writers, no less, that give denial a new face. It might be valuable to read what Wikipedia has to say about denial before visting one of our local train wrecks.

from Wikipedia:

Denial is a defense mechanism in which a person is faced with a fact that is too painful to accept and rejects it instead, insisting that it is not true despite what may be overwhelming evidence. The subject may deny the reality of the unpleasant fact altogether (simple denial), admit the fact but deny its seriousness (minimisation) or admit both the fact and seriousness but deny responsibility (transference). The concept of denial is particularly important to the study of addiction.

After reading that, you might be able to find perhaps even a bit of humor in a piece written by our own lovable village dolt based out of San Diego, George Chamberlain just last week:

Let me begin by passing along my congratulations to the many people who are celebrating the current situation in the housing market. In concert with much of the national and local media, they have been able to artificially construct something that has never —- I repeat, never —- been done before: drive down housing prices at a time when unemployment is low, the economy is booming and consumer confidence is approaching record highs.

A column I wrote about a year ago on the housing market triggered more hate mail than any other topic that I have discussed. I needed to check underneath my car and use a food taster for a couple of weeks after I suggested that the situation was dramatically overstated.

That this level of denial exists, is not prima facie a surprise. That a person so disconnected from reality, even after it is made known to the world can get published can only mean 2 things. Either the editor couldn’t care less about what is being written, or is in similar denial. Not once does the discussion turn to the primary driver of housing prices; job creation. Stagnation can already force prices down with an increasing housing stock; much more with out-migration.

If you read the entire piece, you’ll see that his article exhibits a number of different defense mechanisms. From minimisation to transference to outright denial. One might wonder if he is addicted to house price appreciation. We sure know many San Diegans are addicted… and their only fix is through another equity extraction. Wall Street just shut off the spigot, and it’s very interesting the stages of grief that participants go through as an outsider.

It wasn’t hard to spot where our problems lied, even a year or 2 ago. Jonathan Lansner was able to identify some time ago that housing related to 17% of Orange County’s entire job base. Many observers have noted that a healthy balance is between 6% and 12%. Just to bring us to parity with a healthy balance, we would have to increase our unemployment figures by 5% to 11% of the total workforce. Those are depression-level statistics.

As scary and frightening as they may seem, there are some actions that they everyday person should have done in the past 2 years: (and might still be able to pull off before the slide gains even more steam)

1. Eliminate any speculation that is lending or real estate related: sell any properties, refinance historic-low fixed rates, sell homebuilder or financial stocks, mutual funds, and even banks.

2. Housing-recession proof your career. Find a new one, or develop your business plan to excel when downturns happen.

3. Reduce debt, and raise cash or liquid investments. This one will allow you to ride out any temporary storms as well as purchase property in 3 to 5 years from now when they once again return to appropriate levels.

4. Pay off any adjustable debt, hoard cash. Many people are carrying unhealthy levels of debt. While comical, the man riding the lawnmower in debt up to his eyeballs is all too real in America. Don’t be the person who loses their home to out of control personal expenses.

If George Chamberlain wants positive to come out of this, Southern Californians need to break their cultural pathology and begin to save, invest, and build, rather than consume. Otherwise, there is nothing for us to look forward to. Last time, the scapegoat was the defense industry. This time, it will be the “Subprime Implosion”. Years from now, people will attribute the downturn, not with the excesses that led to it (that would mean assigning the blame to ourselves and our human nature), but with the trigger that collapsed the house of cards we had built.

We have met the enemy and he is us.

• Housing Crash , Psychology , Speculation , SubPrime
• Comments(32)

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.

• Mean Reversion , Psychology , San Diego , Short Sale , Speculation
• Comments(6)

Chuck Ponzi March 6th, 2007

Ever explained to someone that the housing bubble in California is just a blowoff of speculative demand, only to be rebuffed by some pseudo edumuhcashun truthiness about how so many people want to live here, blah blah blah, great weather, blah blah blah, people make a lot of money here, blah blah blah, construction costs, blah blah blah, land use restrictions, blah blah blah and so on blather?

Would you just love to stick something in their face that breaks it down scientifically and proves them all wrong?  Something that shows exactly how much these variables changed the cost of living here?  Wouldn’t you love to get your hands on exactly that piece of information?  Wouldn’t you love to prove in graphs and numbers that the variables they just mentioned had little to no effect on prices, while it was exactly the proliferation of ARMs that did it?

Wouldn’t you love that piece of work to include formulas such as this:

And written by a professor of finance at a California university? 

What if I told you that exactly such a paper exists that delves into California’s history of home prices discussion that includes a detailed explanation of what caused the home price explosion?  It does exist.

Here’s a rundown of the conclusions:

Well, have I whetted your appetite enough to sit through 30 minutes of mind-tearing edumuhcashun to get to the data behind the pretty little graph I pounded out?

Here it is.

• Bubble , Credit Bubble , Debt , Lending Standards , Speculation
• Comments(13)

Chuck Ponzi February 20th, 2007

Last stick-at-the-top discussion was about the ongoing pressure of lending on homebuying… whether there really are any changes taking place.

For this discussion, are there people still flipping houses? Do you see them? Have they listed and relisted several times? Is anyone selling, and who is buying them?

Do you see anyone, or know anyone who is thinking of flipping houses?

I have a work colleague who is anxiously awaiting his a family member’s death so he can take their inheritance and begin “flipping properties in earnest”. Is that sick or what?

What evidence do you see?

• Flipping , SoCal , Speculation
• Comments(0)