Subprime Alarms sounding...

[Nbadan]

Just in case your wondering why the inventory of 'For Sale' homes seems to be rising in your area...

S&P may downgrade $12 bln of subprime securities
Rival rating agency Moody's cuts 399 mortgage-backed securities
By Alistair Barr, MarketWatch
Last Update: 7:09 PM ET Jul 10, 2007


SAN FRANCISCO (MarketWatch) -- Wall Street's two largest rating agencies signaled on Tuesday that problems in the subprime mortgage market aren't going away and will probably get worse as rising delinquencies weigh on U.S. house prices.

Standard & Poor's said it may downgrade $12 billion of subprime residential mortgage-backed securities (RMBS), while rival Moody's Investors Service downgraded 399.

S&P also said it's changing the way it evaluates those securities, partly because of unprecedented levels of misrepresentation and fraud, combined with potentially shoddy initial loan data. The new approach will be applied to new deals and could affect the ratings of other residential mortgage-backed securities, such as those issued this year, the agency noted.

"This will impact everyone along the food chain," said Andy Chow, portfolio manager at SCM Advisors LLC, a $14 billion San Francisco-based investment firm specializing in fixed-income and structured-finance markets.

The announcements were a dramatic sign that subprime mortgage woes aren't going away and could prolong a downturn in the housing market. If that happens, U.S. economic growth could be hit harder and for longer than expected. Indeed, said on Tuesday that a weakening U.S. housing market was affecting earnings more than anticipated just two months ago. See full story.

More specifically, moves by S&P and Moody's on Tuesday could mean that investors with exposure to these securities, and other derivatives linked to them, could face losses. S&P's new approach could also affect subprime mortgage originators and increase interest rates on subprime home loans.
S&P changes

Credit ratings on 612 classes of residential mortgage-backed securities backed by U.S. subprime collateral have been put on CreditWatch with negative implications, S&P said. Beginning in the next few days, the agency said most of these classes will be downgraded.

That covers about $12.078 billion in rated securities, or 2.13% of the $565.3 billion in U.S. RMBS rated by S&P between the fourth quarter of 2005 and the fourth quarter of 2006, the agency noted.

The agency said it's also reviewing ratings of Collateralized Debt Obligations (CDOs) that invested in the RMBS that could be downgraded. (CDOs are a bit like mutual funds that hold asset-backed securities. Many CDOs bought subprime RMBS, helping to fuel the housing boom earlier this decade.)
"It's had an impact on investor psychology," SCM's Chow said. "Even though investors should have known this was coming, the actual visibility of it has changed attitudes."

The ABX indexes, which track derivatives linked to subprime RMBS, also declined. An ABX index linked to BBB- rated tranches of RMBS issued during the second half of 2006 closed at 58.58, down from 61.20 on Monday. ABX indexes linked to AAA and AA rated RMBS also fell.

S&P's changes mean subprime borrowers could end up paying higher interest rates on home loans, Chow added. 'The ongoing weakness in both national and regional property markets will exacerbate losses with little prospect for improvement in the near term.'

— S&P

S&P said it was taking action because losses on the mortgages underlying these securities have risen more than expected and now exceed anything that happened before.

Losses will probably increase as the U.S. housing market especially parts financed with subprime loans continues to decline before it improves, S&P said. Property values will decline 8% on average between 2006 and 2008 and that will exacerbate losses on subprime RMBS, the agency explained.
The resetting of adjustable-rate subprime mortgages and the end of low teaser rates on fixed-rate home loans will also increase subprime RMBS losses, S&P added. Tighter underwriting standards imposed by lenders will leave fewer refinancing options for stretched borrowers, the agency also said.

"The ongoing weakness in both national and regional property markets will exacerbate losses with little prospect for improvement in the near term," the agency said. "Also, many of these transactions will likely encounter additional credit stress from upcoming interest rate and payment resets."
Moody's changes

Moody's said it downgraded 399 residential mortgage-backed securities because of higher-than-expected delinquencies on the underlying home loans. The rating agency also said it put 32 other RMBS under review for possible downgrades for the same reason.

MarketWatch (http://www.marketwatch.com/news/story/sp-moodys-signal-growing-subprime/story.aspx?guid=%7BCB3BF07B%2DBCAA%2D4F55%2DAEF5%2 DF9C22E5D4570%7D)

As more of these sub-prime lenders go kaput people will have to start relying again on more traditional forms of financing, like actually putting some money down, no more interest-only loans, and less ARMs. That will make the buyers market much more narrower even as we continue to build, or over-build, more McMansions and the inventory of homes already on the market grows.

If you took my advice and have waited for that bigger home purchase, paid your bills, and improved your credit instead, you could be looking at savings in the 10's of thousands of dollars as more and more sellers get desperate...keep waiting...

Will it rival the real estate bust of the 1980's here in Tx? We'll see..

[Nbadan]

Bill Moyers had a good segment on explaining the imminent Sub-prime meltdown:

Bill Moyers - Housing Market Meltdown 1of2 (http://www.youtube.com/watch?v=6q9dC7FQJ1U)

Bill Moyers - Housing Market Meltdown 2of2 (http://www.youtube.com/watch?v=ZggRyJlD8X4&mode=related&search=)

[Nbadan]

In true fashion, Faux News shills make a conspiracy theory out of falling home prices

Real Estate Predictions 2007 (http://www.youtube.com/watch?v=yoZV5jt9puc&mode=related&search=)

[johnsmith]

Ummmm, Dan, do you ever get tired of just posting to yourself?

[Nbadan]

A shaky sub-prime mortage market and record mortgage foreclosure rates obviously don't concern Wall Street...


July 12 (Bloomberg) -- Mortgage foreclosures in the U.S. climbed 87 percent last month as falling home prices and stricter loan standards made it harder for borrowers to make payments.

There were 164,644 loan default notices, scheduled auctions and bank repossessions in June, led by filings in California and Florida, where home prices have plummeted, and Ohio and Michigan, where automotive-related businesses have fired workers. Those four states accounted for half the national total, RealtyTrac, a seller of foreclosure data, said today in a statement.

Foreclosures are soaring amid a glut of properties and as interest rates close to an 11-month high make it more difficult for borrowers to refinance. Defaults may rise further as owners with adjustable rates see their payments soar. The share of people taking out all types of adjustable-rate home loans averaged 29 percent during the past three years, compared with the 17 percent average of the prior three years, according to Freddie Mac data.

--
Homeowners are losing their property as the National Association of Realtors is forecasting the housing slump will persist into next year as builders curtail production. The group yesterday reduced its sales forecast for the seventh consecutive month and said existing home sales will fall 5.6 percent.

Bloomberg (http://www.bloomberg.com/apps/news?pid=20601103&sid=afjq9WCz.Zy8&refer=us)

We are truly living in the new Guilded Age, except this time the rich are using loosely inflated money to gamble on the record stock market, and more specifically, business and home mortgages and loans...meanwhile, middle-class homeowners and young adults with little savings are bled dry by these vultures and put out to pasture....

[BradLohaus]

In true fashion, Faux News shills make a conspiracy theory out of falling home prices

Real Estate Predictions 2007 (http://www.youtube.com/watch?v=yoZV5jt9puc&mode=related&search=)

Ben Stein: said nothing of any substance
Long Haired Guy: said there is nothing wrong with subprime borrowers making interest only payments. Interesting take... :wtf Although he may end up being right about a 10% overall increase in home prices next year; the Fed will keep inflating in the short, medium and long terms.
Slicked Back Hair Guy: same take as long haired guy
Regular Guy: didn't see anything I disagreed with, except with the timing of the events. It won't be next year or anytime soon, except maybe in the subprime sector, but probably not even that.
Woman: same take as regular guy

In a way, everyone was right. The facts that the regular guy put forward are all right, but the long hair/slick hair guys' predictions about continued higher prices will likely be true. This is all cheap credit manufactured by the Fed, like the regular guy said, but he's wrong about one thing, I think - there's room for much more inflation.

He did kind of admit this when he said that the only way home prices will continue to rise is if the price of everything else rises with them - which is exactly what will happen for years to come; then the crash happens when the dollar can't take anymore downward pressure and the international dollar holders start dumping them.

Also, the subprime sector can go down without taking the whole housing market with it. But it would be a preview of the inevitable total meltdown in the next decade or two.

[Nbadan]

the subprime sector can go down without taking the whole housing market with it.

I think the point is that it's been the sub-prime lenders who have helped fuel the housing boom with financing instruments like NINJA loans and interest-only loans, many times to non-credit worthy borrowers. The original lender doesn't care because he is gonna package these mortgages together anyway and some nuckle-head is gonna invest someone else's retirement money in these risky investments. Then when the whole sceme crashes, when enough borrowers have defaulted on enough loans and no one is buying/renting at over-valued rates, the sub-prime market will require a multi-billion dollar bail-out from of the taxpayers, houses will sit empty void of credit worthy borrowers that will surely follow, and many people will be out billions in retirement money in this mortgage-sub-prime market scheme

[Clandestino]

dan, you never have any original thoughts. esp the shit you said about subprime mortgages.. EVERYONE saw it coming years ago. well, everyone except the dumbasses who bought them. even they had to see, come on ADJUSTABLE rate...you should now wtf adjust means, them coming when they bought them.

people didn't care as long as they got into a house.

i am just glad i won't be hearing every motherfucker talking about "flip this house and i'm going to invest in real estate, etc" by everyone from the janitor to the 12 yr old kid on the street

[Yonivore]

I scrimped, saved, and worked hard to rehabilitate my credit record (from a misspent youth) so that I could qualify for a conventional, fixed-rate, mortgage.

And, as little as I know about lending practices, even I was shaking my head when people started getting these sub-prime ARMs.

Some idiots should remain renters.

[johnsmith]

I scrimped, saved, and worked hard to rehabilitate my credit record (from a misspent youth) so that I could qualify for a conventional, fixed-rate, mortgage.

And, as little as I know about lending practices, even I was shaking my head when people started getting these sub-prime ARMs.

Some idiots should remain renters.

:toast

I've been trying to explain that very thing to Dan for a while now. But he's going through a foreclosure right now and won't listen.

[BradLohaus]

I scrimped, saved, and worked hard to rehabilitate my credit record (from a misspent youth) so that I could qualify for a conventional, fixed-rate, mortgage.

And, as little as I know about lending practices, even I was shaking my head when people started getting these sub-prime ARMs.

Some idiots should remain renters.

It seems like the entire population has it in their minds that homeownership is a right that everyone is entitled to as soon as it's even remotely financially possible. Most homebuyers I know live in houses that, frankly, they shouldn't be able to afford, from small houses to borderline mansions - I guess they all signed on for the biggest house that the bank would allow them to. It looks like that's true all over the country. It's going to be a shame when all of this ends very badly in the future.

[Yonivore]

It seems like the entire population has it in their minds that homeownership is a right that everyone is entitled to as soon as it's even remotely financially possible. Most homebuyers I know live in houses that, frankly, they shouldn't be able to afford, from small houses to borderline mansions - I guess they all signed on for the biggest house that the bank would allow them to. It looks like that's true all over the country. It's going to be a shame when all of this ends very badly in the future.
We'll survive...and, it'll be a buyer's market, eh?

[johnsmith]

We'll survive...and, it'll be a buyer's market, eh?

:lol :lol

[Yonivore]

:lol :lol
I'm saving up to buy a few of those foreclosures and become a landlord.

[BradLohaus]

We'll survive...and, it'll be a buyer's market, eh?

For sure, for anyone who has any money, like the banks and other big money trusts who survive the rampant defaults, and people who have little debt, secure jobs, and large wealth. Unfortunately, not many people fall into those categories.

But the houses won't disappear, and people will still want to live in them. People who bit off more than they could chew will move down a notch or two in housing class, and many will become renters, like they should have been all along. This is all fine for people who want to scoop these houses up, as long as there are enough people with the purchasing power to fill them.

The big problem will be the major decline in new home building, and in construction in general. I read awhile back that everytime a new home is built an average of 30 jobs are created, and there have been ALOT of new homes built in this era. What replaces those jobs in a large recession? Nothing that's nearly sufficient. What happens to all the illegal immigrants in that job market? Unemployment, crime, and general social unrest, just like the rest of the restless unemployed masses.

A meltdown in the entire housing sector would be a vicious cycle. People would lose their houses, more people would become renters, fewer homes would be purchased, causing fewer homes to be built, causing higher unemployment, casuing more people to lose their houses, causing bankruptcies, causing higher unemployment, etc. on a large scale. The Fed knows this better than anybody, which is why they won't let interest rates rise to the point that all of this happens, at least for as long as they have the power to do so, which is far from forever. That helps explain why the Dow is setting record highs while the dollar plunges. New money allows loans to be repaid, and then enters the stock market quickly, while devaluing all money at the same time.

[PixelPusher]

For sure, for anyone who has any money, like the banks and other big money trusts who survive the rampant defaults, and people who have little debt, secure jobs, and large wealth. Unfortunately, not many people fall into those categories.

But the houses won't disappear, and people will still want to live in them. People who bit off more than they could chew will move down a notch or two in housing class, and many will become renters, like they should have been all along. This is all fine for people who want to scoop these houses up, as long as there are enough people with the purchasing power to fill them.
It's amazing how deeply the 50's postwar boom continues to effect our society. Baby Boomers and their progeny are still fixated on the "Amerian Dream" of a blue collar joe who could afford to buy a home and send his 2.5 kids through college on a single income. Many people still regard it as "the norm" or "the way it should be" when it's really just a historical anomaly.

[johnsmith]

The big problem will be the major decline in new home building, and in construction in general. I read awhile back that everytime a new home is built an average of 30 jobs are created, and there have been ALOT of new homes built in this era. What replaces those jobs in a large recession? Nothing that's nearly sufficient. What happens to all the illegal immigrants in that job market? Unemployment, crime, and general social unrest, just like the rest of the restless unemployed masses.



Industrial construction (power plants, cement plants, refineries, etc.) is absolutely booming right now and will continue to do so for the next ten or so years. There will be plenty of construction jobs out there when the home building market really slows down.

[L.I.T]

I think the point is that it's been the sub-prime lenders who have helped fuel the housing boom with financing instruments like NINJA loans and interest-only loans, many times to non-credit worthy borrowers. The original lender doesn't care because he is gonna package these mortgages together anyway and some nuckle-head is gonna invest someone else's retirement money in these risky investments. Then when the whole sceme crashes, when enough borrowers have defaulted on enough loans and no one is buying/renting at over-valued rates, the sub-prime market will require a multi-billion dollar bail-out from of the taxpayers, houses will sit empty void of credit worthy borrowers that will surely follow, and many people will be out billions in retirement money in this mortgage-sub-prime market scheme

While I wouldn't term guys who handle funds and invest in sub-prime backed securities "knuckle-heads", that's a fairly good assumption. However, the bigger worry has to be teased out even further; a sub-prime collapse will not be isolated to the real estate market alone. Investment houses and proprietary portfolios will invest a portion of their funds in this high-risk investments as alternatives to other risky investments; lets say invest in US sub-prime investments versus investing in emerging market funds. Portfolios, like retirement funds, who have very demanding return requirements will typically be investors in these type of securities (less so the general investor). A collapse in sub-prime negatively affects the returns on those funds. Imagine if a hedge fund was using their sub-prime securities as part of their short-long strategy. A non-technical term for that would be: "Yikes".

Another factor is, what do the original lenders use the funds from the sale of the securities? Likely, invest in stocks, US government bonds etc etc. We're already seeing larger investment firms running towards US government bonds.

All of this then feeds into the larger worries of inflation and a slow-down in the US economy. Why then does this become a worry? Rising inflation, equals rising interest rates equals rising interest rates around the world: imagine all of the variable rate securities, lending agreements etc etc. that are pegged to the LIBOR rate or the Fed funds rate. Again: "Yikes".

Or, the US economy could continue to do what it does, be resilient. The up-tick and strengthening nature of emerging markets/China/India/Europe will help offset any weakness in the US economy.

Well, we can hope.

[Nbadan]

Another factor is, what do the original lenders use the funds from the sale of the securities? Likely, invest in stocks, US government bonds etc etc. We're already seeing larger investment firms running towards US government bonds.

Welcome to the American economy and stock market. We don't ask where you got the money, hell, we don't care, just go out there and spend like a good consuming American should...

Meanwhile...

http://bp2.blogger.com/_8m7jYiLM_DI/Rpe0btD_rtI/AAAAAAAAAPI/ytA8lomU7-4/s1600/MEWQ306.jpg

People continue to bleed money out of over-valued homes...

[Nbadan]

but, but, they are saving and investing those cash-outs right?

Wrong...

http://bp2.blogger.com/_8m7jYiLM_DI/Rpe1jtD_rwI/AAAAAAAAAPg/60TE3vBdeBM/s1600/debt.png

[Nbadan]

Bastard investors are moving their own money, and other well-connected money, into safer investments least affected by a crash of the sub-primes and are leaving ill-informed investors and pensions out to dry...

By Grace Wong, CNNMoney.com staff writer
July 13 2007: 12:37 PM EDT



LONDON (CNNMoney.com) -- The dollar hit a record low against the euro this week, but the bigger story for many currency watchers was the greenback's slip against the yen.

That's because a sharp rise in the yen could have nasty consequences for millions of investors around the world. The dollar slid to a one-month low of ¥120.96 yen on Wednesday, raising concerns that a strengthening of the Japanese currency could put billions of dollars worth of low-cost yen loans in peril.

<snip>

For years, investors have been borrowing at Japan's super-low interest rates and selling yen to buy investments in higher-yielding currencies - a trading bet known on Wall Street as the "yen carry trade."

A big, sustained rebound in the yen could jeopardize those trades, Laidi said. "The yen is a funding currency. When it rallies, it makes the repayment of those yen loans more expensive, even though interest rates are low," he said. Traders attributed the yen's jump against the dollar this week to problems in the subprime mortgage market in the United States, which caused some investors to seek safer places for their assets - and exit the yen carry trade.

CNN (http://money.cnn.com/2007/07/13/markets/dollar_yen_carry/)

[L.I.T]

Bastard investors are moving their own money, and other well-connected money, into safer investments least affected by a crash of the sub-primes and are leaving ill-informed investors and pensions out to dry...

By Grace Wong, CNNMoney.com staff writer
July 13 2007: 12:37 PM EDT



CNN (http://money.cnn.com/2007/07/13/markets/dollar_yen_carry/)

Exactly. That shit's about to collapse. So, do not fear, a lot of so-called high-end investors are going to suffer as well, especially the ones who piss-poor investment groups sold on currency carry-trades as "arbitrage" investments.

It's what I always tell people, arbitrage is a myth, nothing more. The biggest worry again, isn't the collapse of the carry-trade. It's what they invested the funds into. Hell, people who invested in yen were looking for the quick buck anyway. You want to do a carry-trade? Do it on the swiss franc.

[xrayzebra]

I'm saving up to buy a few of those foreclosures and become a landlord.

Don't it is not worth the headaches. Buy them, fix them
up and sell them. Unless you have lots of houses
apartments and can afford a manager to hardass the
tenants when they get behind. But if you do become a
landlord be prepared to spend a lot of time and effort
cleaning up when the tenants leave.

[Nbadan]

NEW YORK (AFP) - Wall Street firm Bear Stearns has told investors in a hedge fund it manages that the fund's value has been wiped out following losses of billions of dollars tied to mortgage securities.

The investment bank and brokerage said in a letter to investors, obtained by AFP Wednesday, that its Enhanced Leverage Fund, has "no value left" while another hedge fund it runs had "very little value left."

The funds had previously amassed a total of over 20 billion dollars in investments, largely with money obtained from investors, some Bear Stearns executives and other banks, according to media reports.

<snip>

The two Bear Stearns' funds, which also included the High-Grade Fund, floundered after risky securities bets related to subprime mortgages soured.

Such mortgage loans, granted to Americans with patchy credit records, have been plagued in recent months by late payments and a rising tide of home foreclosures amid a year-long housing market slump.

Yahooooooo (http://news.yahoo.com/s/afp/20070718/bs_afp/uscompanyfinance)

Pension funds, school endowments, and charities in pursuit of easy money are turning to these risky investments and potentially putting their funds in jeopardy. Currently, about 20 percent of pensions invest in hedge funds.

[Nbadan]

Federal Reserve chairman Ben Bernanke has warned that the crisis in the US sub-prime lending market could cost up to $100bn.

In a second day of testimony to Congress, Mr Bernanke said credit losses associated with sub-prime mortgage failures were "significant".

Wall Street is nervous about the exposure of banks and other lenders to the riskier sub-prime market.

BBC (http://news.bbc.co.uk/2/hi/business/6906914.stm)

If Bernanke is saying the losses will cost up to $100 billion, then the real cost will be closer to $1 trillion. The hedge fund market is capped at over $2 trillion.

[Wild Cobra]

I've pretty much stayed out of this debate, but I think it's just another market that will fall hard after being overhyped with initial profits and commercials. The interest rates I know less of, but the housing aspect of it will fall. I think the same will happen with the commercialized incucing of gold prices.

Regardless, the housing market and associated sub prime loans are a small enough part of the economy, we shouldn't see but a small dent should the worse happen.