Housing Bubble Accomplices Preparing for Death: Caroline Baum

this clip is made for this great piece from caroline baum. if you havn´t seen it yet ..this is a must see!!!!!!!!!

dieser clip ist wie für diesen bericht von c.baum gemacht. wer den noch nicht kennt ....ansehen!

I first used this analogy in 1999 in writing about the bubble in Internet and technology stocks. The paradigm seems equally applicable to today's burst housing bubble.

First came denial: It isn't a bubble. Banks don't have any exposure to mortgages. Housing is a small sector of the economy. Subprime mortgages are a small segment of the home-loan market.

Then came the Feb. 7 double time-bomb from HSBC Holdings Plc, Europe's biggest bank, and New Century Financial, the No. 2 subprime lender in the U.S., that they were setting aside more money as a cushion against rising loan delinquencies. New Century filed for Chapter 11 bankruptcy protection on April 2, one of more than 40 lenders that have ceased operations or sought buyers since the start of 2006, according to Bloomberg data.



Accountability
Soon the anger set in. Delinquency and foreclosure rates rose. Everyone was shocked, shocked to learn there was risk in risky loans. The press bombarded us daily with tales of shady lenders preying on victimized homeowners who would soon be out on the street for non-payment of mortgage interest.

No one was more upset than our elected representatives. Congress wants blood. Whose is irrelevant.


``Members of Congress want someone to be accountable for sensible lending,'' says Andy Laperriere, a managing director at the ISI Group in Washington.

Let the bargaining begin. With the homeownership rate at 68.9 percent in the fourth quarter, just shy of the all-time high, the potential audience for congressional hearings and potential market for invasive action is huge.
Unfortunately, Congress comes up with some really loopy ideas.

``Ideas that seemed out of the mainstream today may become mainstream in the future,'' Laperriere says.

Options Open
On Tuesday, Bloomberg News reported that the top Democrat and Republican on the House Financial Services Committee, Barney Frank of Massachusetts and Spencer Bachus of Alabama, respectively, said that mortgage-bond investors should be liable for deceptive lending practices.

..Let's hope the committee calls some mortgage-bond investors to testify. If they can be sued for someone else's actions, they aren't going to buy any mortgage bonds. Period.

Higher yields may compensate an investor for increased risk, but they don't offer adequate protection against class- action lawsuits.

Precedent
Chairman Frank might want to call some folks from the state of Georgia, where the enactment of a Fair Lending Act in 2002 rocked the mortgage industry.

The law assigned liability for predatory lending to everyone along the food chain, from lender to securitizer to investor.

The reaction was predictable. Many lenders pulled out of the state, the rating agencies refused to evaluate the pools of home loans and the secondary market dried up.

The law, which took effect in October 2002, was amended the following March ``to address a number of unintended consequences'' and to limit assignee liability.

New Jersey's Home Ownership Security Act of 2002 had to be amended in 2004, too, because ``the market shut down,'' according to Robert Levy, executive director of the Mortgage Bankers Association of New Jersey. The amended law put limitations on assignee liability.

Liability ``does apply to high-cost mortgage loans, which carry more than 4.5 percent in points and fees and an interest rate greater than 8 percentage points over the comparable maturity Treasury,'' he says.

Aligned and Assigned
There is no market for securitized high-cost loans, Levy says, and not many loans originated. Which is probably what Congress is getting at. The common theme to the hearings on subprime lending has been that Wall Street is ``eager to securitize, rate and buy as long as the originators feed the beast,'' Laperriere says. ``Many members of Congress want the major players in the secondary market -- holders of mortgage-backed bonds and the investment banks -- to have their interests more aligned with homeowners.''

It would seem a lot easier to fix the problem at the source, tightening regulations on the lenders themselves.

But hey, we still have two final stages of dying before the bubble is fully exorcised: depression and acceptance. If Congress follows through on its legislative reforms of the subprime market, the housing recession may turn into a depression. If that happens, can the rest of us find acceptance?

disclosure: unlike nowitzki i hate david hasselhoff :-)

Kass: Four to Blame for the Subprime Mess

i´m glad that greenspan is alive and well and that he can/must see that his legacy is going down day by day. i´m pretty sure that when the slump is over in a few year (or longer) that his reputation as "the greatest central banker of all time" will no longer stand.

ich bin wirklich froh das greenspan das noch zu lebzeiten erleben muß. sein vermächtnis wird wohl noch auf jahre wirken. ich bin mir ziemlich sicher das nachdem die scherben irgendwann zusammengekehrt sind seine reputation als angeblich" bester zentralbänker aller zeiten" nicht länger bestand haben wird. bitte unbedingt sein reden lesen.....spätetens da dürfte der lack ab sein.....

There are four main culprits responsible for the expanding subprime debacle that threatens to upset the 'Goldlicks' scenario so many are trumpeting. I've listed them in descending order of importance -- and ranked by school grade!:

Culprit #1: Former Federal Reserve Chairman Alan Greenspan was no smarter than a fifth grader.

Greenspan did two big things wrong.

First, the former Fed chairman took interest rates far too low and maintained those levels for far too long a period in the early 2000s, well after the stock market's bubble was pierced. (Stated simply, he panicked).

The Fed's very loose monetary policy served to encourage the new, marginal and non-traditional home buyer -- the speculator and the investor, not the dweller -- to embark on a speculative orgy in home purchases not seen in nearly a century. ...

Second, Greenpsan suggested -- at just the wrong time and at the very bottom of the interest rate cycle -- that homeowners retreat from traditional, fixed rate mortgages and turn to more creative and floating rate mortgages -- interest only, adjustable option ARMs, negative amortization, etc.

He said this in February 2004 at a Credit Union National Association 2004 Governmental Affairs Conference:

"American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest-rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home."

thanks to http://themessthatgreenspanmade.blogspot.com/

One year later Greenspan continued the same mantra and cited the social benefits of the financial industry's innovation as reflected in the proliferation of the subprime mortage market.

"A brief look back at the evolution of the consumer finance market reveals that the financial services industry has long been competitive, innovative, and resilient. Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country. With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. The widespread adoption of these models has reduced the costs of evaluating the creditworthiness of borrowers, and in competitive markets cost reductions tend to be passed through to borrowers. Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10% of the number of all mortgages outstanding, up from just 1% or 2% in the early 1990s...(now over 20% )

We must conclude that innovation and structural change in the financial services industry has been critical in providing expanded access to credit for the vast majority of consumers, including those of limited means. Without these forces, it would have been impossible for lower-income consumers to have the degree of access to credit markets that they now have. This fact underscores the importance of our roles as policymakers, researchers, bankers, and consumer advocates in fostering constructive innovation that is both responsive to market demand and beneficial to consumers. "

But even as Greenspan was taking interest rates to levels that encouraged the egregious use of mortgage debt and exhorting the opportunities in creative and variable mortgage financing, there were some smart cookies out there who recognized the risks; here are quotes from two of the smartest who warned of the danger in the mortgage market.

"When I took economics in World War II, and we were studying the Great Depression, one of the reasons given were all the interest-only loans that came due. They were an indication of an economy getting into unsound lending. Ever since then it's been a rule that when you go into interest-only loans, you're very substantially increasing the risk of default. "

-- L. William Seidman. Former Chairman of the Federel Deposit Insurance Corporation and Chairman of the Resolution Trust Corporation

Our own Robert Marcin put it even more precisely (and vividly) in his prescient warning back in mid-2005.

"If Greenspan had a clue (remember, he didn't have one in the tech bubble, or aybe he did), he would jawbone the banking industry to tighten or even strangle lending standards for residential real estate. He should not kill the entire economy to slow the real estate markets. Now that bag people can buy condos in Phoenix with no down payments, maybe the Fed should get involved. You can't expect mortgage bankers to do anything; they get paid to lend money. But like Greenspan's unwillingness to raise margin rates in 1999, I expect him to do nothing until the market declines. Then, the taxpayers will be on the hook for the stupidities of the real estate speculators. Remember, I expect a sequel to the RTC in the future. "

-- Robert Marcin, Making Money Before Housing Crumbles.

Greenspan will go untouched and will continue to give speeches at $200,000 a pop.

Culprit #2: Irrational lenders like Novastar, New Century, Fremont General, Option One, Accredited Home, OwnIt Mortgage Solutions and others were no smarter than a sixth grader.

Many of these mono-line subprime lenders grew from nothing to originating billions of dollars of mortgage loans almost overnight. Their rush to lend and helter skelter growth relied on the candor of the mortgagees and not on common sense, prudent lending or reasonable underwriting standards.

The growth in subprime-only originators was irrational, but the industry will now be rationalized and the marginal lenders will go bankrupt. And, in the fullness of time, the more diversified lenders will benefit from their demise.

Culprit #3: Wall Street was no smarter than a seventh grader.
The role of the brokerage community in the packaging, warehousing and trading of mortgage securities is immense, with about a 60% share of the mortgage financing market. After tax shelter abuses in the early 1980s, junk(y) bonds in the late 1980s, overpriced technology stocks and ludicrous IPOs and disingenuous research reports in the late 1990s, one would think that Wall Street had learned its lesson.

It has not.

Defending the indefensible -- despite the "policing" of the SEC and Gov. Spitzer's initiatives -- remains Wall Street's credo. Time and time again, the major brokerage firms exist for the purpose of selling product (stocks and bonds), not for providing objective research or for the commitment to client's profitability. The higher a market surges, the easier it is for Wall Street to peddle, and package, junk.

The magnitude of the potential gains are always too attractive and tempting particularly as product demand swells into another cycle excess, as it did in subprime. Astonishingly, even the obligatory emergency conference calls intended to persuade investors that all is well were superficial and failed to disclose the inherent conflicts that each and every multiline brokerage has.

thnaks to http://www.itulip.com/

The major brokerages will be litigated against -- again. They will pay large fines but will proceed in business until the next bubble -- which they will also capitalize on.

Culprit #4: The rating agencies were no smarter than an eighth grader.
The little-known secret in the subprime market is that the principal ratings agencies have been lax in their downgrades of subprime paper and securitizations. This should not be considered a surprise, because like their Wall Street brethren, they prosper from the rising tide of credit issuances. In doing so, like a teacher who has turned his back on a boisterous and disobedient class, those recalcitrant agencies -- Moody's, Fitch and S&P -- have ignored the erosion in credit quality and abetted the rush and market share taking of subprime lending.

According to Jim Grant's Interest Rate Observer, downgrades at Moody's were even with upgrades in 2005. In 2006, downgrades/upgrades rose slightly to 1.19 to 1; this compares to the historical downgrade/upgrade ratio of 2.5 to 1. Importantly, until downgrades are issued by the agencies, investors routinely carry their investments at cost, or par -- downgrades force investments to mark to market ... and sell.

The rating agencies will likely go unscathed because they always do.

amen!

read also

"I Hear Nothing! I Know Nothing!" from tim http://tinyurl.com/2ahvxs

"The Blame Game " from mish http://tinyurl.com/yr9q3m

click on the labels and skip the first/this one to read more

Rapid Rise, Faster Fall / the new century saga / WSJ

i have also listen to the call from november and it was a desaster. the stock was around $40 even after the call.......

i habe mir ebenfalls den call vom november angetan. ein einziges desaster! bin fast irre geworden als die aktien nach dem call immer noch bei 40$ notierte....

take this as an example from the call
The company repurchased 992,500 shares of its common stock during the third quarter of 2006 at an average price of $41.66 per share for an aggregate amount of $41.4 million. Since the inception of the stock repurchase program in November 2005, the company has purchased an aggregate of 2.4 million shares of its common stock in the open market, at an average price of $39.60 per share (today 38$, round about 25% of the shares that new bought back were sold at the same time from insiders)

During the third quarter of 2006, the company issued 2.3 million shares of its 9.75 percent Series B Cumulative Redeemable Preferred Stock at $25 per share and also completed a $50 million private placement of trust preferred securities (thats the new mantra, borrow to buy back stock...../die neue realität. verschulden um aktienzurückzukaufen.....)

the company sold $410.0 million of non-prime mortgage loans during the third quarter of 2006 at an average discount of 12.9 percent of their outstanding principal balances compared with $415.1 million for the second quarter of 2006 at an average discount of 5.0 percent. (this looks like a crash!)

i suggest to read the post from november (including a very good link from russ winter who was on top of the desaster ) when you want to shake your head. http://tinyurl.com/yreyb2


now i know what the shorts from pets.com went through before the bust.

nun weiß ich wie sich die shorts von pets.com vor der implosion gefühlt haben müssen....

the only way to hide the mess would have been an attempt to report in mandarin etc.....wall street and all the analysts have really no excuse

die einzige option wie new century hätte das veschleiern können wäre gewesen wenn die in mandarin berichtet hätten.... wall street und fast alle analysten haben nüchtern betrachtet keine entschuldigung und auf der ganzen linie versagt.



....In November 2006, the Center for Financial Research and Analysis, an accounting research firm in Rockville, Md., flagged concerns about New Century's third-quarter earnings release.

CFRA analyst Zach Gast noted that the company for the first time had lumped together two categories of reserves, one for losses on defaulted loans and a second for losses on real estate that had been acquired through foreclosure. Combining those two categories allowed the company to show a small increase in reserves from a quarter earlier, he wrote. But that masked a decline of 8.7% in the reserve for losses on soured loans, to $191.6 million, he calculated.
Mr. Gast found it curious that New Century was lowering reserves at a time when defaults on subprime loans generally were surging. Had New Century maintained reserves at levels comparable with the second quarter, he estimated, earnings per share would have been at least 50% lower than the $1.12 reported.

At an investor conference on Nov. 28, New Century's co-founder and chief executive, Mr. Morrice, said that despite the subprime area's problems, New Century was "well-positioned to compete and continue to profitably grow market share."

Patti Dodge, an executive vice president, added that the company would continue to enjoy adequate liquidity thanks to "strong relationships with...Wall Street lenders."

dot.com reloaded!

here is a piece from rodger rafter who listened to a new confernce call in 2005.
hier ein wirklich brilliantes teil von rodger rafter der bereits im jahr 2005 nur den kopf geschüttel hat.

"Finanacial Fantasy Land" http://tinyurl.com/2vyr8j ( brilliant)

quote of the day / analyst of the day

i wanted to highlight two things from the marketwatch report.

2 fundstücke von gestern

'For investors the problem with these subprime guys is that they all seem to have problems.'
— Thomas di Galoma, Jefferies & Co.

and then this "smart" analyst from ubs who comes out just a week after he has upgraded the stock ( stock minus 80%). he was one of the fews guys who had ist right sine 2006. what was he smoking when he upgraded it?

und dann noch der analyst von ubs der jetzt nachdem er die aktie von new century heraufgestuft hat auf verkaufen stell (aktie über 80% im minus). dabei war er einer der wenigen die 2006 richtig lagen. was den geritten hat das teil heraufzustufen bleibt wohl sein geheimnis. und evtl. auch seine letzte amtshandlung.....

thanks to http://tickersense.typepad.com/ticker_sense/

"We think bankruptcy is likely," UBS wrote in a note to clients Monday, as it downgraded the stock to reduce from neutral. "If New Century gets temporary relief through a capital infusion, we believe it is only likely to delay, rather than solve its liquidity issues."




great call........ / gute arbeit.....


thanks to http://www.wallstreetfollies.com/

Time for a new logo.....All of New Century's lenders have or plan to halt financing

this is too good to be true, isn´t it? but i have to quote jeff matthews

click on the link and make sure you see read slide 3 !

" i´m not making this up"

http://www.ncen.com/swf/ncen_aniversary_flash3.swf

das ist fast zu schaurig um wahr zu sein. stimmt aber wirklich.

thanks/danke to luigik!

what a surprise.... especially to citigroup who just bought a few million shares a few days ago..... they probably know why they havn´t updated it to 2007...... :-)

muß besonders für die citigroup überraschend kommen. die haben erst vor wenigen tagen noch einige mio aktien erworben..... die issen wohl warum die das logo für 07 noch nicht auf vordermann gebracht haben :-)

NEW in a filing to the Securities and Exchange Commission, said as of March 9, all of the company's lenders under its short-term repurchase agreements and aggregation credit facilities had discontinued their financing with the company or had notified New Century of their intent to do so, and some have also purported to terminate the company's servicing rights. New Century has amended an agreement allowing it to pledge $265 million in additional assets for new financing

logo 2007 !

disclosure: short new

update: shares down over 50% premarket. now halted "news pending"

Crisis Looms in Mortgages / NYT

good summary. too bad that most of the newspaper havn´t done stories like this one in advance. so it is only good reporting but they should have done better ......

when you want more infos please click on the labels at the end of the post. skip the first (this) article and you get older post on the topic

gute zusammenfassung. warum ´die story nicht in den letzten jahren erzählt worden ist muß man die journalisten fragen.

wenn ihr mehr zu den einzelnen punkten lesen wollt bitte am ende des post auf die labels klicken und den ersten (diesen) bericht ignorieren und zum 2. scrollen.

On March 1, a Wall Street analyst at Bear Stearns wrote an upbeat report on a company that specializes in making mortgages to cash-poor homebuyers. The company, New Century Financial, had already disclosed that a growing number of borrowers were defaulting, and its stock, at around $15, had lost half its value in three weeks.

What happened next seems all too familiar to investors who bought technology stocks in 2000 at the breathless urging of Wall Street analysts. Last week, New Century said it would stop making loans and needed emergency financing to survive. The stock collapsed to $3.21.

The analyst’s untimely call, coupled with a failure among other Wall Street institutions to identify problems in the home mortgage market, isn’t the only familiar ring to investors who watched the technology stock bubble burst precisely seven years ago. (looks like this cartoon is proven wrong..../ sieht ganz so aus las wenn dieser cartoon überholt ist.....)

thanks to http://www.wallstreetfollies.com/

Now, as then, Wall Street firms and entrepreneurs made fortunes issuing questionable securities, in this case pools of home loans taken out by risky borrowers. Now, as then, bullish stock and credit analysts for some of those same Wall Street firms, which profited in the underwriting and rating of those investments, lulled investors with upbeat pronouncements even as loan defaults ballooned. Now, as then, regulators stood by as the mania churned, fed by lax standards and anything-goes lending.

Investment manias are nothing new, of course. But the demise of this one has been broadly viewed as troubling, as it involves the nation’s $6.5 trillion mortgage securities market, which is larger even than the United States treasury market. ....

“The regulators are trying to figure out how to work around it, but the Hill is going to be in for one big surprise,” .... “This is far more dramatic than what led to Sarbanes-Oxley,” he added, referring to the legislation that followed the WorldCom and Enron scandals, “both in conflicts and in terms of absolute economic impact.”

While real estate prices were rising, the market for home loans operated like a well-oiled machine, providing ready money to borrowers and high returns to investors like pension funds, insurance companies, hedge funds and other institutions. Now this enormous and important machine is sputtering, and the effects are reverberating throughout Main Street, Wall Street and Washington.

Already, more than two dozen mortgage lenders have failed or closed their doors, and shares of big companies in the mortgage industry have declined significantly. Delinquencies on loans made to less creditworthy borrowers — known as subprime mortgages —recently reached 12.6 percent. Some banks have reported rising problems among borrowers that were deemed more creditworthy as well. ....

“I guess we are a bit surprised at how fast this has unraveled!....

Even now the tone accentuates the positive. In a recent presentation to investors, UBS Securities discussed the potential for losses among some mortgage securities in a variety of housing markets. None of the models showed flat or falling home prices, however. ( can you believe this?!?, nicht zu fassen!?!, no wonder ubs also upgraded new century.....)

The Bear Stearns analyst who upgraded New Century, Scott R. Coren, wrote in a research note that the company’s stock price reflected the risks in its industry, and that the downside risk was about $10 in a “rescue-sale scenario.” According to New Century, Bear Stearns is among the firms with a “longstanding” relationship financing its mortgage operation. ....( he is not alone.....)

thnaks to ticker sense http://tickersense.typepad.com/ticker_sense/

Like worms that surface after a torrential rain, revelations that emerge when an asset bubble bursts are often unattractive, involving dubious industry practices and even fraud. ( i think the worms may look like this one.../ die würmer sehen wohl aus wie....)

In the coming weeks, some mortgage market participants predict, investors will learn not only how lax real estate lending standards became, but also how hard to value these opaque securities are and how easy their values are to prop up.

Owners of mortgage securities that have been pooled, for example, do not have to reflect the prevailing market prices of those securities each day, as stockholders do. Only when a security is downgraded by a rating agency do investors have to mark their holdings to the market value. As a result, traders say, many investors are reporting the values of their holdings at inflated prices.

“How these things are valued for portfolio purposes is exposed to management judgment, which is potentially arbitrary,” Mr. Rosner said.

At the heart of the turmoil is the subprime mortgage market, which developed to give loans to shaky borrowers or to those with little cash to put down as collateral. Some 35 percent of all mortgage securities issued last year were in that category, up from 13 percent in 2003.

Looking to expand their reach and their profits, lenders were far too willing to lend, as evidenced by the creation of new types of mortgages — known as “affordability products” — that required little or no down payment and little or no documentation of a borrower’s income. Loans with 40-year or even 50-year terms were also popular among cash-strapped borrowers seeking low monthly payments. Exceedingly low “teaser” rates that move up rapidly in later years were another feature of the new loans.

The rapid rise in the amount borrowed against a property’s value shows how willing lenders were to stretch. In 2000, according to Banc of America Securities, the average loan to a subprime lender was 48 percent of the value of the underlying property. By 2006, that figure reached 82 percent.

Mortgages requiring little or no documentation became known colloquially as “liar loans.” An April 2006 report by the Mortgage Asset Research Institute, a consulting concern in Reston, Va., analyzed 100 loans in which the borrowers merely stated their incomes, and then looked at documents those borrowers had filed with the I.R.S. The resulting differences were significant: in 90 percent of loans, borrowers overstated their incomes 5 percent or more. But in almost 60 percent of cases, borrowers inflated their incomes by more than half.

A Deutsche Bank report said liar loans accounted for 40 percent of the subprime mortgage issuance last year, up from 25 percent in 2001.

Securities backed by home mortgages have been traded since the 1970s, but it has been only since 2002 or so that investors, including pension funds, insurance companies, hedge funds and other institutions, have shown such an appetite for them.

Wall Street, of course, was happy to help refashion mortgages from arcane and illiquid securities into ubiquitous and frequently traded ones. Its reward is that it now dominates the market. While commercial banks and savings banks had long been the biggest lenders to home buyers, by 2006, Wall Street had a commanding share — 60 percent — of the mortgage financing market, Federal Reserve data show. .....

The profits from packaging these securities and trading them for customers and their own accounts have been phenomenal.

The issuance of mortgage-related securities, which include those backed by home-equity loans, peaked in 2003 at more than $3 trillion, according to data from the Bond Market Association. Last year’s issuance, reflecting a slowdown in home price appreciation, was $1.93 trillion, a slight decline from 2005.

In addition to enviable growth, the mortgage securities market has undergone other changes in recent years. In the 1990s, buyers of mortgage securities spread out their risk by combining those securities with loans backed by other assets, like credit card receivables and automobile loans. But in 2001, investor preferences changed, focusing on specific types of loans. Mortgages quickly became the favorite.

Another change in the market involves its trading characteristics. Years ago, mortgage-backed securities appealed to a buy-and-hold crowd, ...... “Now it has become much more of a trading market, with a mark-to-market bent.”

The average daily trading volume of mortgage securities issued by government agencies like Fannie Mae and Freddie Mac, for example, exceeded $250 billion last year. That’s up from about $60 billion in 2000.

Wall Street became so enamored of the profits in mortgages that it began to expand its reach, buying companies that make loans to consumers to supplement its packaging and sales operations. In August 2006, Morgan Stanley bought Saxon, a $6.5 billion subprime mortgage underwriter, for $706 million. ( great timing, driving/buying looking in the rear view mirror...../ gutes timing , fahren/kaufen mit tunnelblick in den rückspiegel ist selten gesund......)

And last September, Merrill Lynch paid $1.3 billion to buy First Franklin Financial, a home lender in San Jose, Calif. At the time, Merrill said it expected First Franklin to add to its earnings in 2007. Now analysts expect Merrill to take a large loss on the purchase.....

As prevailing interest rates remained low over the last several years, the appetite for these securities only rose. .... Mortgage securities participants say increasingly lax lending standards in these loans became almost an invitation to commit mortgage fraud. It is too early to tell how significant a role mortgage fraud played in the rocketing delinquency rates — 12.6 percent among subprime borrowers. Delinquency rates among all mortgages stood at 4.7 percent in the third quarter of 2006.



For years, investors cared little about risks in mortgage holdings. That is changing.

“I would not be surprised if between now and the end of the year at least 20 percent of BBB and BBB- bonds that are backed by subprime loans originated in 2006 will be downgraded,” ..

Still, the rating agencies have yet to downgrade large numbers of mortgage securities to reflect the market turmoil. Standard & Poor’s has put 2 percent of the subprime loans it rates on watch for a downgrade, and
Moody’s said it has downgraded 1 percent to 2 percent of such mortgages that were issued in 2005 and 2006. ( this is what it looks like when you wait for the downgrade to come. they are way behind the curve! so sieht das ganze aus wenn man auf die überfälligen downgrades wartet.)

Fitch appears to be the most proactive, having downgraded 3.7 percent of subprime mortgages in the period.

The agencies say that they are confident that their ratings reflect reality in the mortgages they have analyzed and that they have required managers of mortgage pools with risky loans in them to increase the collateral. ..... (read this!http://immobilienblasen.blogspot.com/2007/02/rating-agencies-fallen-asleep-doug-kass.html )


Meeting with Wall Street analysts last week, Terry McGraw, chief executive of McGraw-Hill, the parent of S.& P., said the firm does not believe that loans made in 2006 will perform “as badly as some have suggested.”
Nevertheless, some investors wonder whether the rating agencies have the stomach to downgrade these securities because of the selling stampede that would follow. Many mortgage buyers cannot hold securities that are rated below investment grade — insurance companies are an example. So if the securities were downgraded, forced selling would ensue, further pressuring an already beleaguered market.


Another consideration is the profits in mortgage ratings. Some 6.5 percent of Moody’s 2006 revenue was related to the subprime market.

Brian Clarkson, Moody’s co-chief operating officer, denied that the company hesitates to cut ratings..

Interestingly, accounting conventions in mortgage securities require an investor to mark his holdings to market only when they get downgraded. ( conservative as usual...)So investors may be assigning higher values to their positions than they would receive if they had to go into the market and find a buyer. That delays the reckoning, some analysts say.


“There are delayed triggers in many of these investment vehicles and that is delaying the recognition of losses,” ... “I do think the unwind is just starting. The moment of truth is not yet here.”

On March 2, reacting to the distress in the mortgage market, a throng of regulators, including the Federal Reserve Board, asked lenders to tighten their policies on lending to those with questionable credit. Late last week, WMC Mortgage, General Electric’s subprime mortgage arm, said it would no longer make loans with no down payments.

Meanwhile, investors wait to see whether the spring home selling season will shore up the mortgage market. ......



good luck ....../ viel glück........
disclosure : short new

to see how bad things are visit aarons / hier die ungeschminkte wahrheit

"mortgage lender implode-o-meter" http://mortgageimplode.com/

hedge funds and new century / subprime

schadenfreude! i´m stunned (not really) that the "smart" money was buying subprime lenders at the top and a big bank like citigroup bought just days before the implosion of new a stake in the lender. it is also weird that new financed and funded a hedge funds where new is the biggest supplier of loans/new businesses.

but after hearing almost every conference call from new shouldn´t be surprised........


schadenfreude pur! ist es nicht erstaunlich das die angeblich so "cleveren" hedge-fonds-manager zu spitzenpreisen in den subprimemarkt eingestiegen sind. zudemm hat citigroup nur tage vor der vollständigen implosion von new einen anteil erworben. ebenso merkwürdig ist es das new einen hedge fonds mitbegründet und finanziert hat der zugleich ein abnehmer von verbrieften krediten von new ist.

nachdem ich diverse cc der letzen jahre von new gehört habe sollte mich das aber eigentlich nicht mehr überraschen.


The Mortgage Mess Spreads

The subprime lending industry is getting hammered, and hedge funds and investment banks are feeling the pain

The canaries in the coal mine are keeling over fast. After years of easy profits, the $1.3 trillion subprime mortgage industry has taken a violent turn.....

Now there's evidence that the pain is spreading to a broad swath of hedge funds, commercial banks, and investment banks that buy, sell, repackage, and invest in risky subprime loans. .... "This is going to be a meltdown of unparalleled proportions. Billions will be lost."

Hedge funds, those freewheeling, lightly regulated investment pools, seem particularly vulnerable.

BusinessWeek has learned that $700 million Carrington Capital and $3 billion Greenlight Capital may have gotten badly burned because of their intricate dealings with New Century Financial, a major subprime lender whose stock has plunged 84% in four weeks amid a Justice Dept. investigations into its accounting. Magnetar Capital, a $4 billion fund formed two years ago, may be on shaky ground, too. The question is, how many others may be suffering? "This is a very opaque industry, so no one really knows,"....

"you should relax less!".... time to panic... :-)

Bigger Losses
Not that big commercial and investment banks will go unscathed. Citigroup

, HSBC , and Countrywide Financial have boosted their estimates of losses and warned of credit troubles. Sanford C. Bernstein analyst Brad Hintz predicts that the subprime meltdown will result in earnings reductions for Bear Stearns , Lehman Brothers , Goldman Sachs , Merrill Lynch , and Morgan Stanley .

Among hedge funds, Greenwich (Conn.)'s Carrington seems particularly vulnerable. Managed by ex-Citigroup banker Bruce M. Rose, the fund was launched in 2003 with $25 million in seed money from New Century, which owns about a 35% equity stake. Such an intimate tie between a lender and a hedge fund is highly unusual, say analysts. Carrington specializes in turning subprime mortgages into sophisticated bonds called collateralized debt obligations (CDOs) and selling them to other investors. Not surprisingly, New Century is one of Carrington's biggest suppliers, providing 17% of the loans in a recent deal. Another major supplier is Fremont General ..

With Carrington on the verge of losing loans from two major providers, the fund, which counts Citigroup as an investor, seems to be in a bind. Rose says he expects the market for subprime loans to pick up again and is in talks with several lenders to buy mortgages. "We have no exposure to New Century as a corporate entity," he says. "Our deals have outperformed just about everything out there." (relatively speaking..../relativ gesehen....)

"Stress Scenario"
One clear loser is David Einhorn, manager of hedge fund Greenlight Capital, who made a big, ill-timed gamble on the subprime sector when he fought his way onto New Century's board last March. Greenlight, which regularly posts double-digit annual gains, is down about 2.5% on the year ( i doubt that this figure is after the implosion ..../ ich bezweifle das die zahl die implosion berücksichtigt...); its stake in New Century, valued at $109 million at the start of the year, has shrunk to $21 million. Einhorn's seat on New Century's board prohibited him from selling even as the lender warned that it would restate most of its 2006 earnings results and said federal prosecutors are investigating its accounting. ( what a genius. he bought right at the top! / genial, zum top gekauft!)

UPDATE: thanks to rodger rafter here is the

official press release which brought einhorn on the board http://tinyurl.com/2pjx46 (hahahaha...)

and today the news that

"Greenlight's president reportedly just resigned from the New Century board" http://www.bloomberg.com/apps/news?pid=20601087&sid=a2gAJQgntS1I&refer=home

Some on Wall Street point out that Magnetar showed bad timing, too, by entering the subprime arena last year just as the underwriting quality of subprime loans began to deteriorate rapidly.... (the underwriting was as poor as the last few years. the only difference was that homes didn´t aprreaciate to cover the mess...../die kreditprüfung war genauso schlecht wie die jahre vorher. voher hat der steigende immopreis diese debakel verschleiert.....)

Other hedge funds that have feasted on mortgage-backed securities will be hit hard if rating agencies start downgrading them, as is widely expected. That would be likely to send their values plummeting. "This is indeed a stress scenario," ( the agencies are way behind the curve. / die ratingagenturen sind viel zu spät dran. read "rating agencies fallen asleep" http://immobilienblasen.blogspot.com/2007/02/rating-agencies-fallen-asleep-doug-kass.html

But those downgrades likely won't come right away. Observers say ratings agencies may rely on some models that don't fully account for the recent explosion in exotic mortgages, Standard & Poor's, .. "Our models are continually adjusted and enhanced." Adds Fitch's Costello: "There's a clear trend that we've expected higher and higher losses."

Commercial and investment banks have many tendrils in the mortgage business, too. They earned fat fees during the housing boom by packaging loans into pools and selling them to investors. That market is shrinking as subprime lenders and investors pull in their horns, leaving banks holding risky loans.

Up the Food Chain
There's also growing talk that many firms, in particular Goldman Sachs, incurred steep losses in trades based on the ABX subprime index. As market makers, the big banks were forced to take the other side of clients' short trades, or bets that the index would fall. When the index plunged 34% in the first 10 weeks of the year, the banks lost. ....

In another case of dreadful timing, Citigroup disclosed on Feb. 28 that it recently upped its stake in New Century to over 5%, adding some 1 million shares just weeks before New Century revealed the investigation by federal prosecutors.

The biggest fear is that the trouble will move up the food chain. The same questionable lending practices that were used for subprime mortgages during the boom were also used for regular, or "prime," mortgages—among them low or zero downpayments, loose loan-to-value ratios, and exotic mortgages with low up-front payments that balloon later.

While subprime loans accounted for 20% of mortgages originated last year, David Liu of UBS estimates that fully 40% of last year's loans are "showing a lot of signs of stress." ......

here the story from roubini "Is the Sub-Prime “Garbage” 6% or Rather 50% of the Mortgage Market? And the Worst Housing Recession in Decades... "http://www.rgemonitor.com/blog/roubini/180573

but not everybody is as dump ......./ aber nicht jeder is ähnlich unclever

Funds Swap Into Subprime Short Plays http://www.thestreet.com/_tscana/newsanalysis/realestate/10343012.html

disclosure: short new , cfc

Bleak houses / who get caught holding the grenade ? / economist

a very nice summary. when you want more details go to the labels. (skip the first post)

nette zusammenfassung. für mehr bitte unter den labels suchen. (den ersten bericht überspringen)

America's riskiest mortgages are set to pop. Where will the shrapnel land?

LAST March, ResMAE, a mortgage lender catering to risky borrowers, cut the ribbon on its new headquarters in Brea, California. The sprawling, 135,000-square-foot building dwarfed the company's 458 local employees. But it fitted the firm's outsized ambitions. Less than a year later the company, rather than its ribbon, was facing the chop. This week it said it had filed for bankruptcy and was selling its assets for a diminutive $19m. (they are not alone... just watch the mortgage lender implode-o- meter from aaron http://mortgageimplode.com/ )

"Brea has been the home of ResMAE from the beginning and we are very proud to be a member of the Orange County business community," said Ed Resendez, President and Co-Chief Executive Officer. "This beautiful, new building will provide us with the space we need as ResMAE continues to grow." (quote.....).march 2006.

They are not the only ones exposed to America's home-loan blues. Citigroup peddles mortgages to risky borrowers through CitiFinancial, its consumer-finance arm. Subprime lenders have also been scooped up by investment banks, including Morgan Stanley, Merrill Lynch and Deutsche Bank, in recent months. ....

Saddled with expensive lending platforms, mortgage-writers were desperate for a new source of revenues. They found two: riskier borrowers and riskier products.

They loosened their lending standards as the demand for loans started to drop in 2004. They also resorted to “alternative” products with enticing terms and off-putting names, such as “negative-amortisation” loans (which set repayments so low that the debt gets bigger) or “hybrid” adjustable-rate mortgages (with low teaser rates that jump after a few years). About 27% of all mortgages made in 2006 were of such non-traditional kinds

Not content with these two moneypots, the more eager lenders began to combine them to make a third. They offered risky products to insecure borrowers. According to the Federal Deposit Insurance Corporation (FDIC), hybrid mortgages made up three-quarters of all new subprime loans in 2004 and 2005. The FDIC reckons many firms underwrote hybrid loans assuming that borrowers would refinance them quickly, before the low introductory rates jumped. But this was a reckless assumption when interest rates were rising and house prices softening.

An over-reliance on unseasoned risk models is also partly to blame for bad underwriting. Subprime and alternative mortgages belong to “uncharted territory”, ...: “You've got to have history for analytics...the fact of the matter is there [isn't history] for the adjustable-mortgage rate business when you've had 17 jumps in US interest rates.”

The pressure to lend did not only come from within. Even as mortgage-writers lured borrowers with soft terms, they were themselves tempted by the strong appetite of investors for riskier assets. Wall Street banks did a roaring trade packaging bunches of subprime loans into mortgage-backed securities, and selling them on to investors, greedy for yields (see chart).

The art of securitisation, as it is called, adds liquidity to the market and allows risks to be parcelled out to those most eager to bear them. Over the past few years, it has also freed up cash for more lending and earned banks pots of money. But it may have made a wobbly subprime market even wobblier. Banks are traditionally supposed to know a bit about the borrowers on their books. But in many cases, their loans did not stay on their books long enough for them to care. Mortgages were written for a fee, sold to investment banks for a fee, then packaged and floated for another fee. At each link in the chain, the fees mattered more than the quality of the loans, which could always be passed on. “This was classic market failure,” ...... “The private sector wanted fees and got them, and they did not much care what happened afterwards.”

Some banks do get caught holding the live grenade. FDIC reckons that depository institutions hold $3 trillion of mortgages. Much of this is higher-quality stuff, but not all. ...... Banks that write mortgages are also contractually obliged to buy back securitised loans if their underwriting is shown to be shoddy or if the loans sour too quickly. That is what felled ResMAE and is hurting Accredited Home Lenders Holding, a San Diego lender.

Burnt palms
Diversified banks will not meet the same fate. Many big ones, notes Howard Mason of Sanford Bernstein, a research outfit, were careful not to mix risky products with risky borrowers. Wells Fargo, for instance, sells most of its alternative mortgages to “prime” customers. ......

( WFC well, the percentage has doubled to over 20%! yoy.......and the $ size isn´t insignificant...../ immerhin hat sich der suprimeanteil auf jahressicht auf 20% verdoppelt..und die schiere $ summeist eh gewaltig. (wells fargo) here is different/another view on wells fargo http://calculatedrisk.blogspot.com/2007/02/wells-fargo-and-subprime-loans.html

Should loan losses climb, investors in mortgage-backed securities will also get burnt, especially those holding the riskier, higher-yielding bonds. Financial engineers worked their mysterious magic with these securities, turning the junkiest mortgages into high-grade, sometimes AAA-rated, securities. They could do this only with the blessing of credit-ratings agencies, which made a profitable business out of rating these securities.

But critics say the agencies got complacent, and doubt the pooled loans were sufficiently diverse, or sliced up with sufficient art truly to have dispersed risk. One possible blind spot is that the dodgiest mortgages all behave similarly in times of stress. Another is that it is hard to avoid heavy exposure to mortgages from California, the biggest market in America, where alternative products were popular. (just read this and you know that they are behind the curve.../ bitte das durchlesen und man sieht das die spät dran sind....

http://immobilienblasen.blogspot.com/2007/02/rating-agencies-fallen-asleep-doug-kass.html

No one quite knows in whose hands these little bombs will ultimately explode. The hope is that the risks are widely and thinly spread. The fear is that they all sit in the lap of a few big hedge funds. But the real casualties may be homeowners, who often took out risky loans they could barely afford or did not understand. ......

The Eliot Spitzer of the housing downturn may be about to start his charge.

endgame for new century / new ?!

a big restatement for 3 quarters and a massive warning for the fourth quarter. if you have the guts you can read the press release here http://tinyurl.com/yqkeya . i´ve hard almost every call from them since 2005 and was shocked by perma optimism from management. i can smell lawsuits .......

verkehre bilanzen für 2006 und ne fette warnung. oben könnt ihr die presseerklärung nachlesen. ich habe von denen seit 2005 jeden call gehört und konnte den daueroptimismus des managements nicht fassen. nun kommen sicher saftige klagen auf die zu..........



the cannot offer a date when the are able to file the final results and are proud that they still have 350 mio$ in cash and liquidity. well, with billions of loans coming back to new century this number could not be enough. and remember, they praised almost every month their strong loan production...

bisher können die kein genaues datum nennen wann ne bilanz vorgelegt werden kann. immerhin sind sie stolz das sie noch 350 mio$ in cash und liquidität vorhalten. bei mrd von austehenden krediten können die in rekordzeit weg sein. man sollte zudem in erinnerung rufen wie jeden monat die starken kreditproduktionszhalen vom management abgefeiert worden sind.




good to know that in the last call from november!!!! management has this to say
as jeff matthews http://jeffmatthewsisnotmakingthisup.blogspot.com/ (great blog!) would say

"i´m not making this up"

http://immobilienblasen.blogspot.com/2006/11/new-century-warns-again.html (make sure you read the full link. amazing! bitte den ganzen link lesen)

The company repurchased 992,500 shares of its common stock during the third quarter of 2006 at an average price of $41.66 per share for an aggregate amount of $41.4 million.

Since the inception of the stock repurchase program in November 2005, the company has purchased an aggregate of 2.4 million shares of its common stock in the open market, at an average price of $39.60 per share (today 38$, round about 25% of the shares that new bought back were sold at the same time from insiders) now well under 30$!!!!!!! well done!



company is authorized to repurchase over the next 12 months 5 million shares, which represents approximately 9 percent of the company's outstanding common stock as of October 31, 2006. ( they can bury this one......)

During the third quarter of 2006, the company issued 2.3 million shares of its 9.75 percent Series B Cumulative Redeemable Preferred Stock at $25 per share and also completed a $50 million private placement of trust preferred securities (thats the new mantra, borrow to buy back stock...../die neue realität. verschulden um aktienzurückzukaufen.....)

disclosure: short new

here are the latest details on credit quality from new via russ winter
http://wallstreetexaminer.com/blogs/winter/?p=417#more-417

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" http://ml-implode.com/ ( 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 http://wallstreetexaminer.com/blogs/winter/?p=301#more-301 / 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 http://wallstreetexaminer.com/blogs/winter/?p=317#more-317 / 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 http://www.itulip.com/forums/showthread.php?t=817 / 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 http://www.mortgagefraudblog.com/ ) 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)