Forum Replies Created
-
AuthorPosts
-
October 2, 2007 at 3:06 PM in reply to: Now back to our regularly scheduled programming on NOD’s #86745
davelj
ParticipantSo, correct me if I’m wrong but it looks as though we’re going to break the vaunted 1,000/month NOT level for September for the first time here in San Diego County. Congratulations all!
Now, let’s see what impact this will have on prices going forward…
September 23, 2007 at 11:10 AM in reply to: realtors…loan brokers…going into other fields of work #85612davelj
ParticipantI was at the wedding of a friend of mine yesterday. She was a mortgage broker and her firm shut down a couple of months back. She bought a place in 2004 with an ARM and little money down so she’s underwater from an equity standpoint and renting her place out now. She’s now living with her new husband who doesn’t make much money. The cashflow from her condo is negative about $700/month, which isn’t too bad all things considered but she needs to find a job to cover it. They borrowed money for the wedding.
Anyhow, as you’d imagine, a lot of the people at the wedding were in the mortgage industry. One of six that I spoke with still had a job and she wasn’t sure how much longer she’d be employed. One guy – another friend of mine – worked for his father who had built up a mortgage document-related business he started in 1982. For the last 10 years it’s been internet related. They had 60 clients in 2005 and now they’re down to 5. They’re shutting the company down at the end of October. My friend said, “We’ve made it through a couple of these cycles but this one is just too deep. Maybe we’ll bring it back in a few years if things improve.”
davelj
ParticipantPatient renter,
I don’t think you’re completely wrong about the will of our central planners to appear as if they’re trying to “fix” this problem. As the early measures fail I’d imagine there will be others with more veracity that will arise. But…
… I think our central planners are “chasing the market down,” as it were. They’re behind the curve, so to speak, and that’s the nature of central planning. I just think these measures and the measures that follow, etc. will be too little too late to help a whole lot. That’s why I think that ultimately market forces will largely prevail.
Also, I’m not certain that, ultimately, the political will exists to “save” the troubled borrowers. After all, about 30% of the population rents, another 30% or so owns but has no mortgage, and most of the remaining 40% can pay their mortgage. The group that’s having problems, while extremely important as economic agents at the MARGIN, are not a huge voting block, and I don’t think the “rest of us” are as concerned about falling home prices as we are about meeting our mortgage payment and/or paying rent. In other words, I think that some of the central planners’ actions right now are more about the APPEARANCE of “doing something” as opposed to actually wanting to save people. But perhaps I’m just cynical that way…
Of course, I could be wrong. Wouldn’t be the first time…
davelj
ParticipantI still say all of this “activity” on the part of the Fed and Congress is just rearranging the deck chairs.
The Fed lowered rates and mortgage rates haven’t gone down. And if they lower rates again, mortgage rates probably still aren’t going to move down much. Mortgage investors now have a better understanding of the risks involved in the current environment. They are wary of most mortgage paper and the Fed can’t change really change that too much. (Until mortgage investors believe that prices have stopped falling they’re going to be gun shy, regardless of what the Fed does.)
All of this hooplah about raising the conforming mortgage limits is much ado about nothing. Even if the conforming limit gets raised, in order to participate the borrowers will still have to go full doc and cough up a 20% down payment or 10% with PMI (or something of that ilk). Does this really help things a whole lot? Maybe a little bit for some borrowers, but for the majority in trouble it doesn’t help much.
So maybe all of this activity will reduce the ultimate price declines by 5% relative to whatever they would have been otherwise, and perhaps this mess gets spread out over an additional year or two. But, ultimately, the end of the story isn’t going to change much.
Here’s the problem: The loans have already been made and nothing can be done about that. They were made to crappy borrowers at artificially inflated prices and nothing can be done about that. The goose is already cooked. Now it’s just a matter of dealing with this reality and managing the damage. But the gross amount of the damage is going to be hard to manipulate, other than to just spread out the effects a bit. I think when you dig deeper into the various Congressional proposals, etc. you’ll see that they’re not going to help many borrowers very much.
Ultimately, the market’s going to end up sorting most of this mess out, despite the Fed’s and Congress’ intentions. It’s too late. Again, the bad loans are already out there in too great a number for our central planners to change the outcome by much.
davelj
ParticipantI agree with FSD, focus on rents. It gets more to the only two really relevant questions in valuing assets: Where is the cash? How and when do I get it?
Following the rents will also help to cancel out any artificial inflation differentials.
The problem is that when you focus on rents, housing is still ridiculously overvalued… albeit not as much as Shiller’s graph would have us believe.
davelj
ParticipantActually, that’s not a bad idea. There are a lot of hot, formerly employed mortgage brokers out there. Like the drug sales profession, the mortgage broker profession tends to draw in a lot of hot women.
September 10, 2007 at 5:13 PM in reply to: Rumor – is CW reselling properties back to borrowers as short sales? #84100davelj
Participantpepsi,
1. CW doesn’t care about moral hazard in the generic sense. They are trying to survive. They could implement this program and STILL not survive, but moral hazard is not something they’re concerned with right now. They’re just trying to figure out a way to maybe, just maybe, live to fight another day.
(The larger issue is that they will come under pressure from other, more creditworthy borrowers to get better terms and conditions for their mortgages as well. Don’t get me wrong, this strategy would lead to a HUGE mess, but it might be a smaller mess than just “letting the market work,” so to speak.)
2. Forget about “qualifying,” “credit,” etc. These would be irrelevant. The only question in this situation would be, “How can we structure a mortgage that these people can (perhaps) repay?” If CW goes down this road it will be about survival, plain and simple, in the generic sense, not about optimizing the terms and conditions of each individual loan.
Now I’m going to say this again – this will still lead to a messy bloodbath, but it is probably better than just simply foreclosing on everyone and letting the market decimate all concerned. It’s hard to imagine, however, that CW’s balance sheet would survive this strategy.
September 10, 2007 at 5:01 PM in reply to: Innovest posted their August San Diego foreclosure numbers and it ain’t pretty.. #84097davelj
ParticipantFSD, you’re right. The absolute peak is in November of this year. However, April of 2008 is just 10% below the November peak in terms of re-set activity. Thus, I should have said, “the re-sets don’t start to meaningfully decline until the middle of next year.” And subprime re-sets, specifically, don’t start to really show a lot of improvement until late 2008.
September 10, 2007 at 2:26 PM in reply to: Rumor – is CW reselling properties back to borrowers as short sales? #84078davelj
ParticipantAs crazy and bizarre as it sounds, this MIGHT be the best strategy for all concerned. As Mr. Brightside noted, it probably results in the smallest and “easiest” loss for the bank.
The issues are as follows: (1) By doing this “short sale-re sale” strategy CW is still lowering the comps for its REO properties (and other properties, generically), (2) CW still has to take enormous hits to its capital to absorb these losses (and the hits may turn out to be too great), and (3) Are other lenders going to follow suit with a similar strategy.
If I were running CW, this is probably the strategy I’d try to use, which is simply a variant of, “What can we do to keep you in this house so that you can (probably) actually make payments that aren’t completely ridiculous relative to your real income?” It probably means lowering the mortgage by 10%-30% and/or lowering the interest rate somewhat. All of this absolutely sucks for CW, but it’s probably better than the alternatives. Which just goes to show you how screwed up things really are.
I wonder how Bank of America feels about this strategy?
September 10, 2007 at 2:14 PM in reply to: Innovest posted their August San Diego foreclosure numbers and it ain’t pretty.. #84076davelj
ParticipantSo, let’s see, we’re at a run rate of 900+ trustee sales per month right now and the re-sets don’t peak until the middle of next year. So – *add two, carry the one* – we could see 15,000 to 20,000 trustee sales in 2008 if current trends continue. That would be roughly TRIPLE the worst year for trustee sales (1996) from the 90s. To quote Beavis and Butthead, “Huh huh… that would be cool.”
davelj
Participantdavidt1… I don’t much like stocks, in general, right now. And I certainly don’t like CFC very much. But, in full disclosure, even if stocks fell 30% I probably wouldn’t pay much attention (although my interest might get piqued a little bit) as my business is private equity. I prefer to take control positions (co-investing with others) in small, illiquid, private ventures. The risk-adjusted returns on publicly-traded stocks, in aggregate, are not very attractive to me, particularly when you consider that the “control” element is largely absent.
capeman… I confess that I really don’t understand what BAC is doing with this CFC preferred investment. (Or maybe I do understand but I just think they’re nuts.) If they think the company’s going down the tubes and, as a result, are hedging their position, then why bother with the investment at all? There are a lot easier ways to make 7.5% in the lending markets – this deal was a lot of brain damage. Hell, they could make $2 billion worth of high-quality jumbo SFR loans these days and get that yield (or more). No, I think they structured this investment in the manner they did because I think they truly believe that CFC is going to survive this and its stock is going higher (again, I think they’re wrong, but that’s neither here nor there). It’s the only view that makes any sense. If you review the history of preferred shareholders in failed depositories, one thing stands out: they generally lose 100% of their investment. Unless an institution is re-capped, generally everyone – holders of common, preferred, and debt – get completely wiped out and even a few depositors don’t get made whole via the FDIC (due to deposits exceeding the FDIC’s deposit insurance limits). (FYI, where depository “liquidations” are concerned, I can count on one hand the number that have left anything for common or preferred shareholders.) BAC knows this – they’re not that stupid. They must know that if CFC hands the keys to the regulators, their investment is likely to be worthless as preferred or post-conversion common shareholders. Consequently I have to believe that BAC actually thinks CFC’s equity is going to be worth something greater in the future than it is today. Otherwise, again, why bother? I think it’s a bad bet. But, hey, that’s what makes a market. And, anyhow, it could be worse… it could be MY money.
davelj
Participant“Those that made some huge cash” fall, generically, into the following (broad) categories:
1. Bought a long time ago and the equity cushion has built up over time (and they didn’t use the equity for toys, etc.);
2. Built up equity in a first home bought a few years back (or more) and traded up to a more expensive house during the bubble but used a lot of equity from the first house for a downpayment;
3. Built up equity in a home (or homes) and sold out during the bubble and moved out of state or are renting;
4. Bought a long time ago but used up their equity for toys, etc.
5. Built up equity in a first home and traded up to a more expensive home during the bubble but didn’t roll over much of the equity built up in the first home (again, toys, “investments,” etc.);
6. Built up equity in investment homes and then flipped these homes and put the equity into MORE “investment homes” spreading out the equity into smaller slivers for each “investment” (i.e., they levered up their early winnings).While there are plenty of people in groups 1-3, who should be fine as this fiasco unfolds, the problem is that those in groups 4-6 were the marginal buyers/borrowers during the bubble. And these folks are dead. And as we can recall from Econ 101, everything important in finance and economics happens “at the margin.” The marginal buyer, in the aggregate, has disappeared and won’t be back for quite some time.
davelj
Participantcapeman,
I NEVER suggested that BAC could not hedge their CFC preferred investment. I merely said that I had read that Mozilo had mentioned that BAC couldn’t SHORT shares to hedge its investment. I readily acknowledged that even if BAC couldn’t short CFC’s shares there were still myriad ways to hedge its preferred position. Having said that, the 8-K filing states specifically that BAC cannot “sell or transfer” CFC common shares for 18 months after conversion. This does NOT say BAC can’t short CFC shares PRIOR to conversion (as I thought Mozilo had suggested), so I must assume that in fact there isn’t a current restriction on BAC’s shorting CFC’s stock. But, again, this is a red herring – I already acknowledged that BAC could find a way to hedge its position even if it couldn’t specifically short CFC’s stock.
Now, you seem to refuse to acknowledge that this deal is NOT a floorless convertible and you have asked me to provide you with the “certain events” language that clears this issue up. So be it, here it is (verbatim) from the 8-K:
************
(f) The Conversion Price shall be subject to adjustment as follows:(i) If the Company shall (1) declare or pay a dividend on its outstanding Common Stock in shares of Common Stock or make a distribution to holders of its Common Stock in shares of Common Stock (other than a distribution of Rights), (2) subdivide its outstanding shares of Common Stock into a greater number of shares of Common Stock, (3) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock or (4) issue by reclassification of its shares of Common Stock other securities of the Company, then the Conversion Price in effect immediately prior thereto shall be adjusted so that a holder of any shares of Preferred Stock thereafter converted shall be entitled to receive the number and kind of shares of Common Stock or other securities that such holder of Preferred Stock would have owned or been entitled to receive after the happening of any of the events described above had such shares of Preferred Stock been converted immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this Section 3(f)(i) shall become effective on the date of the dividend payment, subdivision, combination or issuance retroactive to the record date with respect thereto, if any, for such event. Such adjustment shall be made successively.
(ii) If the Company shall issue any shares of Common Stock, or any rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock (including any distribution of Rights, whether or not currently outstanding, upon the occurrence of any Distribution Date (as defined in the Rights Agreement)), at a price per share that is lower than the then current market price per share of Common Stock (as defined in Section 3(f)(v) below), the Conversion Price shall be adjusted in accordance with the following formula:
( N x P )
AC = C x O + ( M )
O + N
where
AC = the adjusted Conversion Price
C = the current Conversion Price
O = the number of shares of Common Stock outstanding on the
record date
N = the number of additional shares of Common Stock offered
P = the offering price per share of the additional shares
M = the current market price per share of Common Stock on the
record date(Yeah, this formula won’t paste cleanly, but you get the picture)
************That’s the “certain events” language. Clear as day. Now, are you finally willing to admit that this is NOT a floorless convertible? Because that seems to be the real point of your entire discussion on this issue thus far.
Like you, I think CFC is in deep trouble and that its stock is going down. (Although I have no position in the stock and never will.) But I’m not going to try to convince myself of things that just aren’t true (e.g., this is a floorless convertible) in order to convince my brain that I’m right. I’d prefer to stick to the facts.
davelj
ParticipantTheBreeze, the reason relates to leverage and regulatory capital ratios. When CFC goes to the discount window it’s borrowing money, literally. When CFC pays 5.75% on a deposit, the deposit is, well… a deposit. From an income statement perspective, there’s no difference because the rates are similar (as you recognize). But one ratio that regulators look at closely is the ratio of loans to deposits. By raising more deposits – even though they are expensive deposits – CFC can keep its loan-to-deposit ratio at a lower level than if it borrows the funding. All else being equal, the regulators would prefer to see CFC using “deposit funding” – which they consider more “core” in nature – as opposed to “debt funding” – which is more “wholesale” in nature – in order to fund its assets.
-
AuthorPosts
