Does anyone else subscribe to Bill Fleckenstein? His comments on today’s H&R Block announcement, and the way overvalued tech sector, which is going to be mauled once investors “get it”:
Housing ATM: RIP
The housing ATM sprung a rather large leak today when H&R Block announced that it was taking a $102 million loan-loss provision. Why does H&R Block matter, you ask? Because it happens to be the proud owner of something called Option One Mortgage, which is one of the top 10 subprime lenders.
A Lender Learns Its ABCDE(fault)s
The press release says it all: “The company expects to increase the estimated recourse liability primarily as a result of recent increases in loan repurchases from its loan-sale transactions. The increased level of loan repurchases, which have been noted industry-wide, are primarily due to a higher level of repurchase requests from loan buyers, and an increase in early-payment delinquencies [the emphasis is mine].”
That is a mouthful. (Recall that a couple weeks back, I quoted a knowledgeable friend in the industry who said that first-time missed paymentboxscores were starting to scream.) A bigger question is, when will the effect of jingle mail, otherwise known as “short sales” in the industry (not to be confused with what I do for a living), start to impact the mortgage-backed market? And, more importantly, when will the financial dark matter — i.e., CDOs (collateralized debt obligations) and CDSs (credit default swaps) — and the entire superstructure of reckless lending begin to have a problem?
As I’ve said so often, what this housing boom has really been about is a lending bubble. Somewhere, in yet-to-be-revealed nooks and crannies, there are hundreds of billions of bad loans in the process of manifesting themselves. What we don’t know is exactly when that’s going to occur. We also don’t know whether it will be the result of news like what we heard today from H&R Block, or something else, or simply a function of assumptions getting changed in some mathematical model, leading to a rout. Probably, we’ll have to react to what occurs, rather than being able to predict it.
A Brotherhood That’s Bubble-Scarred and Running Scared
In any case, today is a very significant data point, in my opinion, as dots were connected in the financial arena. On the back of HRB, other subprime home lenders like New Century, Novastar Financial, and Accredited Home Lenders were weak. Ditto Countrywide Financial and Capital One; likewise, mortgage insurers MGIC Investment (MTG) and Triad Guaranty. Even the newly respectable Fannie Mae was tagged, along with a couple of big banks, and some smaller institutions that have pursued risky financing policies, such as Downey.
Obviously, the housing bubble has burst. The ramifications are starting to be felt, with the decline in consumer spending just starting. We’re now seeing stories about this everywhere. And, it’s only inning 1 of this ballgame. It doesn’t take a genius to see where this is heading.
You Connect the Dots, We’ll Connect the DRAMs
Nevertheless, the rest of the tape was more or less oblivious this morning. Of course, there was a party in technology, because everyone knows that none of these tech products get sold to the consumer, do they? In fact, the stocks of those very companies with the most consumer exposure were exactly the ones being chased the hardest. But regardless of how dreamy-eyed the bulls get, they are not going to be able to save the day this time. The only unknown is, when they get mauled. – Fleckenstein, 8/25/06
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