March 11, 2007

The housing bubble is dead


Anonymous said...

It's just getting started!

Mortgage Fallout Due; Layoffs, Foreclosures?

FINANCE: Much rests with Wall Street; analysts: worse than late ’90s crash
By Mark Mueller

Orange County Business Journal Staff

Irvine tower: New Century set to take more than a third
The spectacular meltdown of the subprime mortgage sector now has turned into a guessing game.

Who’ll be left standing? What will be the fallout on the already weakening housing market? Could new turmoil derail the county’s booming office market? Will layoffs crimp job growth?

“The effects will be felt here on Main Street,” said Kerry Vandell, director of the Center for Real Estate at the University of California, Irvine. “How much is still the question. The hits are going to be real. Some of these companies aren’t just going to cut back, they are going to go away.”

The past few weeks saw a dramatic crash for some of the largest local subprime lenders, which fund home loans to borrowers with imperfect credit.

Irvine-based New Century Financial Corp., the second-largest subprime lender after Britain’s HSBC Holdings PLC, faces a possible bankruptcy filing, analysts speculate. Its shares are off 90% since February with a recent market value of $170 million.

Others are trying to get out of the business.

The Brea-based subprime mortgage arm of Santa Monica’s Fremont General Corp. is shuttered with workers on paid leave. Fremont is in talks to sell the unit but warned there’s no guarantee of a deal.

H&R Block Inc. is looking to offload Irvine-based Option One Mortgage Corp. by the end of the month for a reported $1.3 billion. Analysts are skeptical about the price.

The fate of local subprime businesses with more than 10,000 jobs here hangs in the balance in coming months. Survival, analysts say, is tied to the decisions of large Wall Street investment banks that finance subprime lenders by extending credit and buying and selling loans packaged as bonds.

“In our opinion, the behavior of these lenders is impossible to predict,” wrote Jefferies & Co. analyst Richard Shane in a report last week.

“I don’t know where a (company like) New Century will be in six months,” said Richard Eckert, senior research analyst with Newport Beach’s Roth Capital Partners LLC. “I don’t think they can see that far out right now.”

Nearly 13% of the country’s $10 trillion mortgage market is tied to subprime loans, according to the Washington, D.C.-based Mortgage Bankers Association.

The most popular subprime loan—a fixed teaser rate for two years, followed by a floating 28-year rate—has been a boon for first-time homebuyers, not to mention homebuilders targeting that segment of the market.

Factor in slightly less risky Alt-A loans—in between subprime loans and mortgages for those with solid credit—and a typical Orange County homebuilder could have a minimum of 20% of its business tied to buyers with riskier loans, according to a source familiar with the situation.

If subprime and Alt-A loans fall off dramatically as some predict, the market for starter homes could take a hit.

“It’s not just the marginal homeowner sector,” UC Irvine’s Vandell said. “The effect of (a subprime slowdown) could ripple through the rest of the sector. It could put a logjam on the rest of the mortgage market.”

This isn’t the first time that the subprime industry has crashed.

An industry shakeout played out in 1997 and 1998 and saw the subprime market go from a couple dozen players to just a handful of strong ones. The slowdown was prompted by defaults on Russian bonds and the global currency crisis, which scared investors off riskier deals.

The scenario was similar to what is happing now: bankruptcies and sales, a spurning of mortgage bonds by Wall Street investors and the specter of big companies taking over the market.

By the end of 1998, New Century, along with competitors such as Orange-based Long Beach Financial Corp. and Irvine-based First Alliance Corp., were vying to stay afloat. One lender, FirstPlus Financial Group Inc. of Dallas, let go of nearly 1,300 workers at its Mission Viejo office.

Today, Wall Street investment banks stand to consolidate the industry by taking over the making of loans as a way to secure a steady stream of mortgages to sell as bonds.

The variable: whether the market for mortgages packaged as bonds dries up altogether for a time.

The shakeout this time around stands to be more dramatic than in the late 1990s, according to Roth’s Eckert. For one, the industry is a lot bigger than it was a decade ago.

The shakeout of 1997 and ’98 “only really lasted a few weeks,” he said. “And it just eliminated the worst offenders. That was just a road bump.”

A bigger subprime meltdown came during the early 1990s recession, according to Eckert.

“And none of these guys were around then,” he said.

The full effect of the subprime sector’s meltdown still is to come.

The office market already has absorbed nearly 1 million square feet of former subprime space that was put up for sublease. The giveback had little impact on rents, which continued to rise.

Later this year, New Century is due to move into a $240 million tower under construction at Irvine’s Park Place campus by Los Angeles-based Maguire Properties Inc.

Maguire officials, who couldn’t be reached for this story, have said they expect New Century to fulfill its lease for 190,000 square feet, or about 36% of the building.

But those comments were made prior to New Century’s latest stock collapse.

Maguire faces three scenarios: A regrouped New Century takes the space, puts it up for sublease, or files for bankruptcy and gets out of the lease.

That would leave Maguire to fend for a new big tenant along with developers putting up other Irvine towers.

Putting a number on prospective job losses from the meltdown also is a matter of speculation.

Roughly 2,100 mortgage-related layoffs have been reported in the county in the past year, according to state employment figures.

During the boom years of the county’s housing market—2002 to 2006—the number of local jobs tied to “financial activities” rose from 110,000 to 139,000. A breakdown of those jobs is hard to determine, but it is reasonable to assume many were related to the subprime sector, said Esmael Adibi, director of the A. Gary Anderson Center for Economic Research at Chapman University in Orange.

Adibi is forecasting an overall loss of 1,000 jobs in financial activities this year, as larger subprime losses drag down growth in other areas. It’s the first sign of annual job losses in the sector since 1999.

“The more important question coming from the (sector’s) troubles is: Is this going to put more pressure on the local housing market? I think it will,” Adibi said.

There’s the prospect of fire sales on home foreclosures. That could have a real dampening effect on home prices, which, so far, only have seen modest declines in the past year.

“When risk rears its ugly head, someone ends up taking the hit, there’s a real effect,” Vandell said. “People are going to lose their homes because of this.”

Anonymous said...

heart-rending, indeed

the real peyton manning said...

I see what you're getting at here Kieth, except the singing fat lady isn't all that fat. I think this this performance is more appropriate for the end of the housing bubble.

WhiteTower said...

I hope you're not saying the "fat lady has sung" -- she was a total babe.


I thought she was supposed to be fat?

Anonymous said...

genius before idiocy

beauty before filth

love before greed

pearls before swine

so long and thanks for all the fish

Anonymous said...

Keith, you have the wrong video.

Change the title: "Der Housingbbble ist tod!".

Das End der Housingbubble ist Wagnerische.

So change the video!

The battle cry of the bubble bloggers in triumph

And in memory, the ultimate Liebestod---the love-death---of the great housing bubble

skianddive said...

How beautiful...

Metroplexual said...

I am reminded of Shawshank and what Red said. Wow she is perhaps the finest opera babe ever. Oh and Keith Rosanne Barr is more appro pos.

Anonymous said...

Kieth, Thank you for being so kind as to find such an attractive opera singer to fulfill the apropo idiom to toll the death knell of the housing/credit bubble. It takes some of the sting out of it all.

keith said...

I thought some of you would like that - she's my favorite diva - angela gheorghiu

Economic Despair said...

A beautiful piece of music, now tainted by its association with the housing bubble

Anonymous said...

She's not fat, I'd tap that, but I prefer to not hear that music, aauughgh.

whatdo i know said...

Sorry....I'm not sure which is more painful......listening to opera music or paying way too much on an adjustable rate mortgage for a rapidly depreciating mcmansion!

Stuck in So Pa said...

Thanks for the link Keith, I love ALL types of music (even opera)and she's a hottie!

Anonymous said...

Class and beauty!

Find that in any Rap or Hip Hop!

That was inspiringly beautiful!

a.creampuff said...

"It ain't over 'til the fat lady sings" is a Yogi Bera quote meaning you can't tell the outcome of a ballgame until the final inning. Since Kate Smith's recording of "God Bless America" was often played at the close of a game, it's assumed he was referring to her. Surely you guys knew this and forgot it.

foxwoodlief said...

The housing bubble is dead? Not until it pops, which hasn't happened yet. Define pop? When prices fall to the historic mean or below. Far from that point. The AZ Republic printed their "bubble" report and showed that even with some price declines during the 4th quarter of 2006 almost all Maricopa county prices showed an increase with Tonopah going up double digits in 2006, again showing that even in over-built Phoenix the market is so large that there are sub-markets within markets. Again, one shoe does not fit all!

Lower prices? Do you really think they will? The builders say they'll lower prices by lowering "quality" and that isn't a price reduction. Just because a McDonald's cheeseburger cost the same for the past ten years doesn't mean it hasn't gotten smaller!

I think Austin is a good model of the future. They had their bubble run-up in 1990-2000 then the bust, lots laid off, lots of lost stock options, lots of homes went into foreclosure (mostly on the fringes and lower priced). Some areas you couldn't give homes away, other areas flat-lined for price, other areas continued to move up in price, and those who didn't have to sell....didn't as they weren't going to "give away their homes." Six years of stagnation and now the market has moved up some as prices appear lower (people never consider those Texas taxes) than other places now.

I'd say the biggest threat are those buyers who bought more than they could afford with those creative loans but for most with fixed loans or maybe ten year ARMs, they'll sit it out.

The house bubble dead? Not yet, maybe soon. Deflation or inflation, where will Bernake take us. For the man who said he'd drop dollars from helicopters before he'd allow deflation.....

Anonymous said...

Now that is talent, easy on the ears and eyes!


natural Ability!

A True gift!

What a pleasure!

Unlike anything else out there today!

Anonymous said...

Classic, as music is suppose to be!

Anonymous said...

Listen up fity, snoop, chili peppers!

You couldn't carry this womans sheet music!