Monday, January 15, 2007

Home-loan house of cards ready to fall / fleckenstein

i really want to highlight the related links in this post. they are full of excellent data and charts.

ich möchte ausnahmsweise mal gesondert auf die im post verwendeten links hinweisen. diese unterfüttern das gesamtbild mit haufenweise charts und details.

The collapse of the subprime credit market may come this year, with a major subprime lender going broke. The repercussions will haunt us for years. (when you look at the great site from aaron "mortage lender implode-o-meter" ( a must see!!!!!!!!!) you will agree that the collapse is already happening. / guckt euch die seite von aaron und ihr werdet sehen das der markt gerade implodiert.) ......

An optimistic lot, the Goldilocksters have been deaf to the increasing rumblings emanating from an arena that has powered our economy for the past few years: the housing market -- and specifically the financial dark matter/subprime credit spigot that has fueled its epic rise. (more on the topic subprime from russ winter / mehr zum thema subprime von russ winter)

Bird's-eye view of a bitter housing brew
This week brings an update on the deterioration, via comments from two very knowledgeable friends. One of them, a former top executive at a subprime lender (whose chronicling of the unwind has been amazingly accurate and timely), told me that serious issues are developing, and that large companies like New Century Financial
, Accredited Home Lenders and NovaStar Financial will, in his words, "hit the wall" very soon. make sure you read this piece from russ winter on new and nova. he unmasked the scary details / für die ernüchternden detail unbedingt den link von russ winter lesen.)

He writes:
"We had a loan that was FPD (first-payment default) on a home in So Cal. It is a very nice high-end town that had a section of new homes built . . . in the low end of town. Normal homes sold for $1 million in value. In this new seven-home development, (homes) sold for $1.3 million to $1.5 million each. The homes you had to drive through to get to this place were worth $400,000 to $500,000. The market topped out, and now most of the seven homes are vacant -- worth no more than $900,000. Thus, all the lenders are sitting on losses of $400,000 to $600,000. This is just one of many that are happening daily. (make sure you read the jan. report from itulip on the situation in california / für mehr infos den link von itulip lesen.)

"The commentary I am getting from field and legit brokers is that fraud is an out-of-control locomotive. (more on fraud ) Stated-income loans are now finished for all the unemployed people around. We will quickly see cash-out loans curtailed. This vicious cycle has yet to play out. We are in the second inning of the unwinding.

"It is really getting serious. We had a borrower in So Cal who cut and pasted bank-statement copies of Washington Mutual to make it look like he had $400,000 average balances in his account to buy a $1.7 million home. Something did not seem right. Lo and behold, we checked very closely with the bank. The borrower had only $500 in his account. This is also just one of many examples happening daily.

"I am truly worried about the aftermath once it is resolved. It truly becomes a vicious cycle. Each time guidelines are pulled back, fewer buyers can buy homes. Thus, lower property values, and more people underwater. The debt piles up on homeowners' balance sheets, and people consume less.

"This will, and should, take years to play out. (Federal Reserve Chairman Ben) Bernanke will yield to the Lobby and the Street, trying once again to lower rates and allow people to bail themselves out, while in turn allowing the buyout firms of the world to overpay for the companies they buy with easy money. The game is so rigged against honesty, it boggles the mind. I worry about our children having a chance to have a future, at this point."

In the beginning, there was financial darkness
I am not as sure as he is that it will take "years" to play out. The damage will last for years, but the crackup that precedes the big damage will happen this year, I think. Meanwhile, the other friend, a broker who deals in the financial dark matter universe, noted that the risky BBB-minus tranche of the June 2002 ABX.HE (a synthetic version of assets backed by U.S. home loans) just traded at a new low -- down more than eight points from early September.
Its credit-default swap has now blown out to 477 basis points. Although the BBB-minus tranche is just a fraction of the $1 trillion subprime market, it seems impossible to me that a train wreck there will not have ramifications. ......

At the time of publication, Bill Fleckenstein was short New Century Financial. ( so am i)

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