March 12, 2007

Fleckenstein: The subprime mortgage industry is gone. Alt A lenders will be next. And the real estate market will basically just freeze up.

Ignore this advice from Fleck at your own peril. You think the housing crash is ugly today? Just wait six months. This sucker is going into deep freeze, a result of reckless lending drying up overnight.


Meanwhile, my research right now is focused on what companies are going to get crushed during the downfall. All ideas and stats welcome.

As a result of the collapse of the subprime mortgage market, lenders will -- gasp! -- once again require down payments, filling the market with unsold homes and driving down prices.

Dropping like subprime flies Essentially, the subprime mortgage industry -- which lends to consumers with credit issues -- is gone. Alt A lenders, those one rung up the ladder creditwise, will be next. Together, they comprise approximately 40% of the market.

We also don't yet know the ramifications for the dark-matter universe in collateralized debt obligations (CDOs), credit default swaps (CDSs) and other derivatives-related exotica. But I think it's safe to say that the surprises will be negative -- and large.

This credit collapse is an unequivocally important event. Because, as I've been writing, the ability of anybody with a pulse to get a loan for any amount is what drove the real estate market, and the real estate market is what drove the economy.

Sometime in the next three to six months, the real-estate market will basically just freeze up. Of course, inventories are going to explode and prices will eventually drop rather dramatically as a vicious cycle feeds on itself.
One who does is Lou Ranieri, sort of the father of the mortgage bond market. In a recent interview, he warned: "This is the leading edge of the storm. . . . If you think this is bad, imagine what it's going to be like in the middle of the crisis." In his opinion, more than $100 billion of home loans are likely to default.

24 comments:

Anonymous said...

I've heard mixed reviews about Fleckenstein. 100 billion is a big #, but in the greater scheme of things in terms of the trillions of mortgage debt (I've heard either is about 4.7 or 9 trillion can't recall precisely) wouldn't that just be 1-2%? Admittedly, for individuals its a tragedy. Regardless of this, I guess we'll know by summer of 07 what direction all of this is taking?

Anonymous said...

No oil, engine locks up

Pretty easy to understand I'd say

David said...

If Alt A really collapses housing is going to fall like a rock! It would also make a recession almost inevitable. yikes!

GWB said...

100B here another 100B there pretty soon we're talking real money.

veritas_faust said...

In other words:

"It ain't bad yet, but bad is coming."

Anonymous said...

Now how likely would it be for Bush Co. to just let this miserable scenario continue to unfold in broad daylight? Rather, some major geopolitical event/war is in the offing which will give cover to the sub-prime/lending disaster. Will the dollar survive?

Anonymous said...
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Anonymous said...

Oh please, houses are still be bought and sold, people still want to live in a house and the population of the USA is expanding. The real estate market will continue, although at a more normal and historical pace.


Marky Mark

Lisa said...
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Anonymous said...

Are 80/20 loans considered alt-A?

Is the 20% piggyback considered alt-A?

The 20% piggyback...if that goes, then look out. Requiring 10% down will kill the market.

Anonymous said...

Yep here comes the hurricane, first touch of landfall has begun, full blunt of storm to be felt by September. WHEHEHEHHEHEHEHEHEHEHEHEEH

Anonymous said...

If 20 subprime lenders going bankrupt in two months is normal, then I'd hate to see what it looks like when it gets bad

anon#1111 said...

Marky Mark,

Are you psychotic? What has been normal about this monstrous and historic housing bubble? Nothing. And what will be normal about the (ongoing) bust. Nothing.

You may wish to believe that the housing market will simply return to normal, and it may someday. But first there will be a whole lot of pain and suffering equivalent to the euphoria the last several years. Also, it's kind of hard to buy a house at these prices when you don't have nearly enough for a down payment and nobody want to do a %100 LTV anymore.

Anonymous said...

Next stop recession,then depression

Anh said...

NDE is a great short. Definitely. I have Oct put.

"...More than three quarters of the loans IndyMac originated last year
were Alt-A mortgages. Over 90% of Impac's loans were Alt-A in 2006,
Inside Mortgage Finance reported recently...."

http://www.marketwatch.com/news/story/subprime-mortgage-problems-may-spread/story.aspx?guid=%7B664D15E5%2D33EA%2D41AB%2DBAF7%2D116BBF929245%7D&siteid=yhoo&dist=yhoo

Anonymous said...
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borkafatty said...
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chris g said...

I think most of the people who are sanguine about the coming wave of mortgage defaults hasn't seen downward prices in their area yet, or simply doesn't need to sell (if they own a house) anytime soon.

Or maybe they're just delusional.

LauraVella said...

If banks like WaMu and Wells Fargo need cash, does anyone know if they can legally call their loans, (even the prime ones) to cover their sub-prime loans?

I don't know if this is illegal or not, but when instutions are desperate, who knows what they will do?

Anonymous said...

In my case I am not looking to sell anytime soon fortuneately also we didn't buy more than we can afford. Still this credit crash will be bad for all. We are already seeing the beginning with mortgage companies dying and the end of ez AL credit. Homebuilders, furniture makers, appliance makers, flooring companies, auto makers, freight companies are just starting to get pinched as the consumer curbs spending. There will be a recession since all the growth we've had in the last 5 years was a credit balloon.

Anonymous said...

My money staying on the sidelines, till the rental ROI is both stable and positive again.

Time to hibernate now... setting the alarm clock for the year 2015

Anonymous said...

Even though I knew it was coming, it is strange to see the results in your own neighborhood. A family just a block away emptied and moved in the dead of night this month. No good-byes, nothing but the notice on the door TOO SAD.

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