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  1. barnaby33
    February 11, 2008 @ 6:52 PM

    What is most puzzling is the
    What is most puzzling is the level of complacency. While market consensus seems to recognize that there is a problem, fear of lost opportunities still appears to be much higher than fear of real loss.

    This quote really got me. I would suppose (though I do not know) that it is because you don’t sweat it, if its not your money. Most of the “junk” was sold to Wall St. The local banks may hold some of the toxic crap, but the majority seems to be held in CDOs, many of which are owned by foreigners.

    My second supposition is that these foreigners are shitting the bed, a large part of why our credit market is locked up. Once you take a bite of a shit sandwich, you don’t want a second bite.

    • SD Realtor
      February 11, 2008 @ 10:53 PM

      Rich I really enjoy reading
      Rich I really enjoy reading Ramsey’s stuff… Not sure I agree about the 25% holding cost by the lender but he is much more adept at I in that analysis so who am I to argue…

      One thing that is really irking me…

      Why does everyone presuppose that foreigners are the majority holders of the cdos and such?

      Can you please comment on other domestic entities who have made investments in these vehicles. People don’t seem to acknowledge how much investment there is right here in the good old USA. You probably don’t have to go much further then your own county or state government.

      SD Realtor

      • 4plexowner
        February 12, 2008 @ 5:44 AM

        “Why does everyone
        “Why does everyone presuppose that foreigners are the majority holders of the cdos and such?”

        making this assumption helps people sleep at night

        the toxic trash has actually been sold to pension funds, state and industry retirement funds (think CALPERS), money market funds and college endowment funds here in the US

        these entities don’t have the same reporting requirements as publicly held corporations so they have either not realized the worthlessness of their ‘investments’ or they are keeping their losses under their hats for now

        unless these investment entities are forced to sell or mark their toxic trash to market, it is better for them (and for your ability to sleep at night) if they don’t publicly acknowledge that their ‘investments’ might not be worth what they are saying they are worth

        remember, we are still very early in the great unwinding – at this point Wall Street and our government are still trying to pretend that over $500 trillion dollars worth of derivative paper (MBS, CDO, CDS, SIV, etc) actually has tangible value – they are correct in that paper always has value whether it is for starting fires or wiping your posterior

      • Bugs
        February 12, 2008 @ 8:20 AM

        I just cruised through the
        I just cruised through the pending sales in Oceanside to get a look at all the REOs. Ramsey didn’t mention it, but there are also a number of short sales, too.

        I also went through the YTD closed sales in 92056. Of the 21 homes that have closed escrow so far this year, 12 were REOs. By my count, that’s over 50%. Remember when we were talking about REOs driving the market? We’re already there in Oceanside.

        A few of these pending and closed sales are indicating to 40% losses relative to their prior sales, not counting the holding costs and costs of sale.

        Putting this in perspective, I remember last year when we were debating the merits of trying to get an 1,800 SqFt tract home in Temecula down to $350k. Well, we’re now approaching having that same conversation for equivalent homes in the Rancho Del Oro area of O’side. When considering typical buyers in Temecula, this is a reasonable comparison that is sweetened by the much closer proximity to quality employment and the cooler weather.

        Temeculaguy’s pain train is marching south, and we’ve already booked some 40% losses here in SD County. As I see it, there’s no way we’re going to avoid booking some 60+% losses by the time this is over.

      • sdrealtor
        February 15, 2008 @ 12:00 AM

        Just another piece of
        Just another piece of evidence confirming what I pointed out several weeks ago. The market shifted to a distress driven market a few months back and the rapid price declines followed accordingly. I’ve seen properties in certain categories that have dropped 30% in 5 months because there was absolutely no support for the prices in those areas. For some of these properties I find myself wondering how much lower they can fall.

        How much lower can a 1BR condo in Fire Mountain (Oceanside) fall from the $137K asking price that currently sits on a probate sale there? The monthly carrying costs with 20% down are under $900 at this price. At $100K they would be down to about $700. At $80K they would down under $600.

        I see 3000 sq ft highly upgraded nearly new homes selling in SE Hills for just over $500,000. Will they hit $400,000, $350,000, $300,000? I really have no idea how far they could fall.

        To the contrary, the stronger markets have not seen these dramatic drops and the declines should continue to be slower and more orderly.

      • SD Realtor
        February 12, 2008 @ 11:16 AM

        4plex –
        Exactly… Thank you

        4plex –

        Exactly… Thank you for stating something that I have been trying to put across… The very idea that people think that all of these derivatives are owned by wealthy old men or foreigners is almost as comical as the people at NAR saying buy a home now.

        When one looks into it, these entities are really the ones that are holding a sack of sawdust right now. The amount of domestic investment by entities that really provide sound infrastructure to our society is something that has not been discussed or barely touched on. It is THESE entities that the I believe are FEDs are really trying to protect. There is no easy solution because the problem is so widespread. It is my opinion that because of the widespread investment, there is NOT any possibility of a rip the bandaid off now solution. To many entities will flop and to much of the basic infrastructure will indeed be broke. Thus there HAS to be a way to throttle it back and let it bleed out slower.

      • 4plexowner
        February 13, 2008 @ 5:14 PM

        well, it took me less than
        well, it took me less than 10 minutes to research CALPERS investment portfolio enough to have questions

        “CalPERS began investing in hedge funds in April 2002 with the goal of diversifying its investment portfolio, managing risk, and adding value to the fund.”

        looks like CALPERS has about $10 billion in 25 different hedge funds – without researching what each of the hedge funds is invested in, it is impossible to say that CALPERS does or does not have exposure to derivative paper


        the financial information I found at CALPERS site reminds me of the laws that govern food content labelling – for example, the law allows a manufacturer to state “yellow dye #3” as an ingredient without clarifying what yellow dye #3 is made of – CALPERS is letting us know that they have $10B invested in hedge funds but they don’t tell us what each of the hedge funds is invested in – as always, caveat emptor or, in this case, “Do you know how your retirement money is invested?”

      • SD Realtor
        February 14, 2008 @ 12:01 AM

        4plex I also think there is
        4plex I also think there is another 2nd order effect that is not discussed as well. That is, even without direct exposure to the hedge funds, collateral damage will happen. So Calpers has 10b in hedge funds. However what about investments in other financials or other entities that will go down because of their own investments. You see what I am saying? Implosions are less destructive then explosions and while we have been discussing a potential implosion, I think the effects will be more of an explosion. Again, to me, this is why the govie is going to pull out all the stops to delay or smooth this sucker out. Maybe they can delay it maybe not. Thanks for doing some legwork on the Calpers investment… I would maintain that in the worst case, they would be damaged much more by the hedge fund investment going south.

        SD Realtor

      • barnaby33
        February 14, 2008 @ 4:14 PM

        Here I was all prepared to
        Here I was all prepared to say several European banks were the largest losers so far, but I decided to check with google first. Lo and behold I found this.
        Back of the envelope calculation on losses. Seems like domestic banks are in the lead, when it comes to recognizing losses. I say recognizing because I have a feeling that when all is said and done, foreign banks and foreigners will still be the largest bag holders.


    • Anonymous
      February 12, 2008 @ 8:36 AM

      second bite
      This whole thing

      second bite

      This whole thing is a shit sandwich and everyone one of us will be taking a bite.

      • nostradamus
        February 12, 2008 @ 11:19 AM

        Great article. Thanks
        Great article. Thanks Ramsey!

  2. tickets
    February 12, 2008 @ 4:32 AM

    Ramsey has phrased it right,
    Ramsey has phrased it right, but it’s worth making this point explicit. The fact that these REOs are EPDs, and not because of resets, does not mean that resets won’t be an issue. For a 2005 vintage loan to be REO because of a reset, it would have to stop paying in 2007, a trustee sale in 2008, and couldn’t be an auction until late in 2008 at the earliest. We just aren’t far enough in to know if resets on the 05, 06, and 07 vintages will be a problem or not. The 2004 and earlier vintages got the benefit of the huge price run up in 04 and 05, so the reset issue would never surface with those.

    These stats are sufficient to prove that there is a big problem with or without resets, but they aren’t proof that resets won’t be an issue.

  3. Anonymous
    February 12, 2008 @ 5:36 PM

    Mr. Su,
    Thank you so much

    Mr. Su,

    Thank you so much for these insights. It’s valuable to see this kind of information at the atomic level. The days of the 800 sq foot, 2/1 shack going for > 5X area median household income are hopefully at an end. It sounds like we’re getting there.

    As you say, the junk is tanking. These shacks aren’t anyone’s idea of a dream house, so why burn a huge percentage of take-home income just to maintain these P.O.S.? Just walk away.

    • barnaby33
      February 13, 2008 @ 9:12 AM

      “Why does everyone
      “Why does everyone presuppose that foreigners are the majority holders of the cdos and such?”

      making this assumption helps people sleep at night

      Actually no, I am heavily short XLF through puts. My use of the word foreigners was a potential mis-use of a moniker for the last people to the party, the bagholders. In point of fact foreigners are often the last ones left holding the bag on made-in-amerika scams, but nobody really knows who is holding the crap.

      As to cal-pers, either they are lying or they only hold a very small percentage of assets in MBS, something like 3/10ths of a percent. Thats what they’ve stated in the past 12 months.

      I’ll sleep better at night once this really starts to unravel. Once the public starts seeing the banks come clean about their losses and exposures. Until then its not really relevant who the bag holders are (foreign or domestic).

      On another note I would also like to thank Mr Su for his analysis of the recent REDC auctions.


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