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August 5, 2007 at 9:32 PM in reply to: Conversation with another friend in the “innards” of the mortgage industry #70694August 5, 2007 at 9:32 PM in reply to: Conversation with another friend in the “innards” of the mortgage industry #70809
davelj
ParticipantHe didn’t mention Countrywide, Bear Stearns or Wells Fargo specifically, but they’re all obviously in varying degrees of trouble. I’d say Countrywide has the most risk of the three, followed by Bear Stearns and Wells Fargo, respectively. Wells’ exposure to the mortgage business, while large in an absolute sense, is probably the smallest of the three relative to their total business and balance sheet. But I don’t know what volume of LBO pier exposure Wells has, while we know that Bear Stearns has some and Countrywide practically none. That’s probably not very helpful, but that’s all I know.
HereWeGo, you’re mistaken if you believe this is simply a short-term interest rate issue. It is not. It’s a “risk premium” issue. Here’s the problem: even if the Fed lowers rates to 2% tomorrow, the institutions that made the ridiculous 2/28 and 3/27 subprime loans won’t be loaning out at the 2004-2006 teaser rates (2%-4%). The market won’t take the paper. Those days are over for the foreseeable future. The problem is the risk premium that gets attached to whatever “base” teaser rate the lenders need to charge (to sell the paper) is now considerably higher and will remain so for quite some time. This increased risk premium will offset any decline in funding costs. In other words, short-term rates could plummet but mortgage rates for subprime/non-conforming paper probably won’t budge (that is, unless they go higher). The market has a newfound respect for risk premia and that won’t change anytime soon. Believe me, most of these problems will not “simply disappear.” I think you have a misunderstanding of the problem.
August 5, 2007 at 9:32 PM in reply to: Conversation with another friend in the “innards” of the mortgage industry #70815davelj
ParticipantHe didn’t mention Countrywide, Bear Stearns or Wells Fargo specifically, but they’re all obviously in varying degrees of trouble. I’d say Countrywide has the most risk of the three, followed by Bear Stearns and Wells Fargo, respectively. Wells’ exposure to the mortgage business, while large in an absolute sense, is probably the smallest of the three relative to their total business and balance sheet. But I don’t know what volume of LBO pier exposure Wells has, while we know that Bear Stearns has some and Countrywide practically none. That’s probably not very helpful, but that’s all I know.
HereWeGo, you’re mistaken if you believe this is simply a short-term interest rate issue. It is not. It’s a “risk premium” issue. Here’s the problem: even if the Fed lowers rates to 2% tomorrow, the institutions that made the ridiculous 2/28 and 3/27 subprime loans won’t be loaning out at the 2004-2006 teaser rates (2%-4%). The market won’t take the paper. Those days are over for the foreseeable future. The problem is the risk premium that gets attached to whatever “base” teaser rate the lenders need to charge (to sell the paper) is now considerably higher and will remain so for quite some time. This increased risk premium will offset any decline in funding costs. In other words, short-term rates could plummet but mortgage rates for subprime/non-conforming paper probably won’t budge (that is, unless they go higher). The market has a newfound respect for risk premia and that won’t change anytime soon. Believe me, most of these problems will not “simply disappear.” I think you have a misunderstanding of the problem.
davelj
ParticipantAt times like these I like to reference the old explorer’s wisdom (when bad things happen) that, “the mountain doesn’t know or care that you’re climbing it.” Likewise, your house doesn’t care that you own it, and neither does that stock you bought the other day. They don’t know, don’t care and the prices will move accordingly with the commensurate degree of sympathy and understanding.
davelj
ParticipantAt times like these I like to reference the old explorer’s wisdom (when bad things happen) that, “the mountain doesn’t know or care that you’re climbing it.” Likewise, your house doesn’t care that you own it, and neither does that stock you bought the other day. They don’t know, don’t care and the prices will move accordingly with the commensurate degree of sympathy and understanding.
davelj
ParticipantAt times like these I like to reference the old explorer’s wisdom (when bad things happen) that, “the mountain doesn’t know or care that you’re climbing it.” Likewise, your house doesn’t care that you own it, and neither does that stock you bought the other day. They don’t know, don’t care and the prices will move accordingly with the commensurate degree of sympathy and understanding.
davelj
ParticipantWe are at one of those fairly rare moments – “THE MOMENT” – in an economic/credit cycle. While I think it’s unlikely, the bulls could stampede tomorrow and take the market(s) up 2% with the logic(?) that, “things are so bad that the Fed will be forced to lower rates soon, so things will be GRRRRRRRRRRREAT [with deference to Tony the Tiger] in ’08!!” This is the old “good news is good news, and bad news is good news; ergo, all news is good news” weltanshauung. This has been the prevailing bull market thesis for the past few years up until the last two weeks. And make no mistake, it has worked marvelously.
Now comes the test. The market’s been smacked around, the news has been really dire over the last couple of days and the question is: Can the bulls take this thing up or do they throw in the towel? I think we could see a 3%-5% down day tomorrow – a real panic sell-off. There is so much risk that still needs to be offloaded before anyone gets comfortable.
My bet is that we are substantially down tomorrow and then down even more on Tuesday when Bernanke doesn’t lower rates (although I’m sure the “language” will be a bit more dove-ish). But, again, the bulls have been so persistently… well… bullish that it’s hard to keep these nutjobs down. Regardless, it will probably be a very big move in one direction or the other. While I’m not a trader, my preference is for it to be down. But given the persistence of the bulls, in general, nothing surprises me anymore.
davelj
ParticipantWe are at one of those fairly rare moments – “THE MOMENT” – in an economic/credit cycle. While I think it’s unlikely, the bulls could stampede tomorrow and take the market(s) up 2% with the logic(?) that, “things are so bad that the Fed will be forced to lower rates soon, so things will be GRRRRRRRRRRREAT [with deference to Tony the Tiger] in ’08!!” This is the old “good news is good news, and bad news is good news; ergo, all news is good news” weltanshauung. This has been the prevailing bull market thesis for the past few years up until the last two weeks. And make no mistake, it has worked marvelously.
Now comes the test. The market’s been smacked around, the news has been really dire over the last couple of days and the question is: Can the bulls take this thing up or do they throw in the towel? I think we could see a 3%-5% down day tomorrow – a real panic sell-off. There is so much risk that still needs to be offloaded before anyone gets comfortable.
My bet is that we are substantially down tomorrow and then down even more on Tuesday when Bernanke doesn’t lower rates (although I’m sure the “language” will be a bit more dove-ish). But, again, the bulls have been so persistently… well… bullish that it’s hard to keep these nutjobs down. Regardless, it will probably be a very big move in one direction or the other. While I’m not a trader, my preference is for it to be down. But given the persistence of the bulls, in general, nothing surprises me anymore.
davelj
ParticipantWe are at one of those fairly rare moments – “THE MOMENT” – in an economic/credit cycle. While I think it’s unlikely, the bulls could stampede tomorrow and take the market(s) up 2% with the logic(?) that, “things are so bad that the Fed will be forced to lower rates soon, so things will be GRRRRRRRRRRREAT [with deference to Tony the Tiger] in ’08!!” This is the old “good news is good news, and bad news is good news; ergo, all news is good news” weltanshauung. This has been the prevailing bull market thesis for the past few years up until the last two weeks. And make no mistake, it has worked marvelously.
Now comes the test. The market’s been smacked around, the news has been really dire over the last couple of days and the question is: Can the bulls take this thing up or do they throw in the towel? I think we could see a 3%-5% down day tomorrow – a real panic sell-off. There is so much risk that still needs to be offloaded before anyone gets comfortable.
My bet is that we are substantially down tomorrow and then down even more on Tuesday when Bernanke doesn’t lower rates (although I’m sure the “language” will be a bit more dove-ish). But, again, the bulls have been so persistently… well… bullish that it’s hard to keep these nutjobs down. Regardless, it will probably be a very big move in one direction or the other. While I’m not a trader, my preference is for it to be down. But given the persistence of the bulls, in general, nothing surprises me anymore.
davelj
ParticipantThat commentary isn’t LA_Renter’s, it’s from Doug Noland over at Prudentbear.com. I think the confusion is that quotation marks aren’t present in the posts.
davelj
ParticipantThat commentary isn’t LA_Renter’s, it’s from Doug Noland over at Prudentbear.com. I think the confusion is that quotation marks aren’t present in the posts.
davelj
ParticipantThat commentary isn’t LA_Renter’s, it’s from Doug Noland over at Prudentbear.com. I think the confusion is that quotation marks aren’t present in the posts.
davelj
ParticipantNegotiating in this sort of situation is really simple: You’ve got all the power as long as you’re actually willing to move if they don’t grant you the rent you want. Your willingness to move is a function of (a) the availability of a similar rental for an equal or better price and (b) your willingness to bear the cost and hassle of moving. It’s that simple.
If you’ve found another place that you’d be willing to live that’s a better deal then you should move there if your landlord won’t meet the rent you want.
In general, rents are sticky. They move up and down pretty slowly and down, in particular, really slowly (and rarely). Asking for a 10% reduction in rent probably won’t fly at this stage of the cycle, but might fly in a couple of years. I’ve forgotten what the figures were, but I think that even at the bottom of the 1990s recession here in CA, rents only declined by 12% or thereabouts from peak to trough, and that took 6 years. So, asking for a 10% year-over-year reduction in rent probably won’t work (I obviously don’t know the specifics of the situation, however), particularly if the owner is confident they can get someone in there for roughly what you’re paying now. But it never hurts to ask.
Personally, I’d raise the rent on you by 2%-3%. If you move, you move. I’d get a new tenant and just eat a couple of months rent. No biggie. You gotta remember, if you decide to move, it’s going to be expensive and a pain in the arse – and your landlord knows this. But if you’re willing to bear the cost and hassle, move on.
davelj
ParticipantNegotiating in this sort of situation is really simple: You’ve got all the power as long as you’re actually willing to move if they don’t grant you the rent you want. Your willingness to move is a function of (a) the availability of a similar rental for an equal or better price and (b) your willingness to bear the cost and hassle of moving. It’s that simple.
If you’ve found another place that you’d be willing to live that’s a better deal then you should move there if your landlord won’t meet the rent you want.
In general, rents are sticky. They move up and down pretty slowly and down, in particular, really slowly (and rarely). Asking for a 10% reduction in rent probably won’t fly at this stage of the cycle, but might fly in a couple of years. I’ve forgotten what the figures were, but I think that even at the bottom of the 1990s recession here in CA, rents only declined by 12% or thereabouts from peak to trough, and that took 6 years. So, asking for a 10% year-over-year reduction in rent probably won’t work (I obviously don’t know the specifics of the situation, however), particularly if the owner is confident they can get someone in there for roughly what you’re paying now. But it never hurts to ask.
Personally, I’d raise the rent on you by 2%-3%. If you move, you move. I’d get a new tenant and just eat a couple of months rent. No biggie. You gotta remember, if you decide to move, it’s going to be expensive and a pain in the arse – and your landlord knows this. But if you’re willing to bear the cost and hassle, move on.
davelj
ParticipantLand write-downs can, in fact, cause bankruptcy because those write-downs, although they are non-cash, reduce the company’s equity which negatively affects the debt-to-equity ratio, all else being equal. The covenants in the loan agreements between a builder and its lenders stipulate that certain minimum capital ratios remain in place or else funding can be pulled and… whoops!… the builder can be out of business. Generally it’s operational losses that put a builder out of business, but land write-downs have pushed companies over the edge in the past (although it’s an exception to the rule).
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