March 13, 2007

Schiff: The house of cards collapses, home prices must collapse, recession an outright certainty

Why people think the biggest financial mania in recorded human history only merits a tiny little readjustment period, I'll never understand. Get off the crack, I'd say, and embrace the new reality - housing is crashing after the biggest bubble ever.

Regression to the mean will happen, must happen, and always happens. Calling bottom is a fools game - yet time and time again, that's what people do and that's what people want to hear.

It just never quite works out like that. Here's Schiff:

The Worst is Far from Over!

by Peter Schiff

As for the likelihood of recession, not only does it seem to be highly probable, but it is more of an outright certainty. With the construction industry shedding 62,000 jobs last month (the most in sixteen years), it is clear that housing is already in recession! The major question is when the overall recession will begin: the second half of "07 or early '08?

The current train wreck unfolding in the sub-prime lending sector provides a good preview as to what will happen to the entire credit-financed bubble economy when the funding dries up. Contrary to the self-serving rhetoric of Wall Street and housing industry shills, the entire mortgage sector is not insulated from sub- prime. In fact, sub-prime is just the tip of the credit iceberg. Beneath the surface lie similar problems in Alt-A and prime loans, where borrowers also relied on adjustable rate mortgages to purchase over-priced homes that they could not otherwise afford.

With the sub-prime market drying up, most first-time home buyers will be unable to buy. Without those "starter-home" buyers, the trade-up buyers (most of whom have the ability to make down-payments and are therefore considered "prime borrowers") will be unable to sell their existing homes, and hence unable to trade up. This brings down the entire house of cards. Home prices must collapse, affecting all homeowners, regardless of their credit ratings.

Since 70% plus of the U.S. economy is based on consumer spending, how can we possibly avoid a recession if the credit well financing much of it runs dry? Since home equity has been the principal asset collateralizing that credit, how can consumers keep borrowing and spending when housing prices fall? I heard one commentator on CNBC claim that the U.S. economy was in great shape except for housing. To me that's like a doctor telling a patient that he is in great health, except for the javelin sticking out of his chest. If housing is going down, there is no way on earth the entire economy does not get caught in its undertow.


cassandra said...

I predicted very much the same thing in an article titled "Soft Landing and Wily Coyote" which I posted on" last October. I emailed the article to various MSM but not one of them replied or published it. It is now obvious to me why they didn't. It could have blown a game in which they also have a skin!

Anonymous said...

Big Banks May Be Chum
Liz Moyer, 03.13.07, 6:00 AM ET

As the sharks circled beleaguered subprime lender New Century Financial Monday, speculation also swirled about which investment banks held the most exposure to the sector.

Wall Street has enthusiastically financed mortgage lenders over the latest real estate boom cycle, providing loans for companies such as New Century to fund new mortgages that the investment firms could buy up, package into bundles of securities and sell to yield-hungry investors. More than $1 trillion of these mortgage-backed securities were sold in the U.S. alone last year.

But in the process of buying the loans and packaging them up, investment banks retain some risk of loss, including accounting items like loans held for sale, loans held for investment, retained interests in the securitizations themselves, and so-called warehouse loans that keep the origination engines at the small mortgage lenders humming.

Bear Stearns has the most exposure to the beleaguered subprime mortgage sector according to those criteria, said CreditSights analyst David Hendler in a research note Monday. It stands to lose as much as 19.6% of estimated earnings per share this year in his doomsday scenario.

Lehman Brothers could lose as much as 12.6% of its 2007 earnings per share for its exposure, according to Hendler's calculations. Merrill Lynch could lose as much as 6.5%, Morgan Stanley 5.4% and Goldman Sachs 4.3%, he wrote in a note Monday.

This worst-case scenario doesn't factor in hedging strategies the banks might have taken to limit these risks. Four of the big investment banks begin reporting first-quarter earnings this week, though, and the signs of stress might show up in their numbers.

New Century's shares were halted after the New York Stock Exchange's opening this morning, after word that most of its major lenders had pulled financing and were accelerating its obligation to pay them back $8.4 billion.

Research analyst Robert Napoli of Piper Jaffray said in a note to clients that "it appears unlikely New Century will get new financing" and that bankruptcy liquidation was a likely outcome. "While this is devastating for New Century and its employees, there is a much-needed reduction of capacity for the subprime mortgage industry," Napoli added.

New Century detailed its struggle to keep up with existing loans and get new financing in a Securities and Exchange Commission filing Monday. As of March 9, all of its lenders under short-term agreements had pulled out or told the company they would, New Century said.

Bank of America was calling in $600 million of loans, Citigroup was calling in $717 million, Credit Suisse $900 million, Goldman Sachs $100 million, Morgan Stanley $2.5 billion and IXIS Real Estate Capital $800 million.

Morgan Stanley had stepped in last week with a $265 million loan but notified New Century March 9 that it was in default. That $265 million loan was used to pay off a margin call by Citi, New Century said.

Most of the lenders had also canceled servicing agreements and asked New Century to transfer loans it was servicing back to them. "The company and its subsidiaries do not have sufficient liquidity to satisfy their outstanding repurchase obligations," New Century said in its filing.

Anonymous said...

LEND plunges another 43% today. Blood in the streets

Accredited Home Lending plunges; co. seeks more capital

NEW YORK (MarketWatch) -- Shares of Accredited Home Lenders Holdings (LEND : accredited home lendrs hldg com
News , chart , profile , more
Last: 11.40-4.38-27.76%

7:47am 03/13/2007

Delayed quote dataAdd to portfolio
Create alertInsider
Sponsored by:
LEND11.40, -4.38, -27.8%) dropped in pre-market action on Tuesday after the company said it's currently exploring its strategic options. The San Diego mortgage company, which operates in the troubled sub-prime loan category, said it plans to seek additional capital since its available cash resources have been hurt by margin calls under its warehouse and repurchase facilities since the beginning of the year. The company said it's paid about $190 million in margin calls on its facilities since Jan. 1 with two-thirds of that coming since Feb. 15. Accredited Home is also seeking waivers and extensions of certain financial and operating covenants under its credit facilities. The company also said it's pursuing certain restructuring activities, including workforce reductions. In addition, it's continuing to evaluate the impairment of goodwill established in relation to its acquisition of Aames Investment in the fourth quarter, a condition that makes it unlikely the company will be able to file its Form 10-K by March 16, the previously indicated deadline. The stock dropped more than 34% to $7.50 ahead of the opening bell.

Anonymous said...

NEW now for certain going bankrupt.

New Century Gets Default Claims, Says It Lacks Cash (Update8)

By Bradley Keoun and Yalman Onaran

March 12 (Bloomberg) -- New Century Financial Corp., the nation's second-biggest subprime mortgage lender, said it doesn't have the cash to pay creditors who are demanding their money, increasing speculation that the company will go bankrupt.

The New York Stock Exchange, citing the credit crisis, halted trading of New Century this morning until it decides whether to keep listing the company's securities. Shares of the Irvine, California-based company, already down 90 percent in 2007, lost half their remaining value in pre-market trading, and rivals fell as much as 25 percent today.

``They're one step closer to bankruptcy,'' said Bose George, an analyst at Keefe Bruyette & Woods in New York who rates the shares ``market perform.'' ``The only possibility for survival now is for someone, potentially an investment bank, to step in.''

David said...

Listen carefully to what Schiff says, as he is very astute and speaks wisely!

LauraVella said...

I drove past the local Countrywide Loan store here in Reno yesterday- what a zoo! There were so many cars parked outside during lunchtime, they must be giving way loans!

A few doors way, World Saving Bank had no business at all...

On Sunday, We saw about 6-7 open home signs here in SW Reno. This is a first! There is barely one in our area on any given summertime weekend...

Sellers are slowly waking up from their denial slumber...

honica jewinski said...

I wish house prices would quit going up where I live. I'm ready to buy again, this lakefront condo I'm renting is for the birds..........renting sucks.

chris g said...

Dumbasses at Keefe Bruyette & Woods had New Century at "market perform" all the way up until yesterday, then they finally downgrade to "underperform".

Some of these firms are the scum of the earth.

Anonymous said...

were goin back to the stone age

Anonymous said...

We are in a recession already. We have run a chemical business for 35 years and have trucks come in and out all day. These trucks carry every sort of goods, from all over the US.

These truckers have predicted every boom and bust for 35 years. Ever since mid-January they have been coming in half full. Every single trucker says things have slowed down considerably from the past 5 years.

But the recession has started, it will take a while for the media to report it though.

Anonymous said...

Check out and it shows you all the lenders in trouble.

Cory Barnett

Lisa said...

Schiff is dead on. I live in CA, and everyone I know who bought recently has an adjustable mortgage. Most are IO as well. When those loans reset, your 750 FICO score won't help make the payments. The collapse of lending standards means a lot of people are in homes they can't really afford.

I just hope there is NO government bail out for these fools.

Pete said...

New Century almost certaintly getting de-listed by the NYSE:

NYSE Suspends Trading New Century Financial Corporation's Securities
10:43a ET March 13, 2007 (PR NewsWire)
New Century Financial Corporation (NYSE: NEW), a mortgage real estate investment trust (REIT), today announced that the [u]New York Stock Exchange (NYSE) has determined that its common stock (NEW), its 9.125% Series A Cumulative Redeemable Preferred Stock (NEW Pr A) and its 9.75% Series B Cumulative Redeemable Preferred Stock (NEW Pr B) are no longer suitable for continued listing on the NYSE[/u] and will be suspended immediately. The NYSE made this decision based upon the company's recent filings with the Securities and Exchange Commission (SEC) regarding the uncertainty of its current liquidity position.

Following suspension, the company's securities will be quoted on the Pink Sheets under the following ticker symbols:

- Common Stock - NEWC - 9.125% Series A Cumulative Redeemable Preferred Stock - NEWCP - 9.75% Series B Cumulative Redeemable Preferred Stock - NEWCO

New Century has a right to a review of this determination by a Committee of the Board of Directors of the NYSE. Application to the SEC to delist the issue is pending the completion of applicable procedures, including any appeal by the company of the NYSE staff's decision.

E-mail Alerts

To receive e-mail alerts notifying you of the publication of the company's monthly loan production data on its Web site and to receive future press releases, send an e-mail request to Please note that individuals already on the company's e-mail distribution list do not need to submit a separate request.

Veronica Lodge said...

Why people think the biggest financial mania in recorded human history only merits a tiny little readjustment period...?

Dire predictions of the bursting of the housing bubble have been circulating for several years. It was often stated, "The housing bubble can burst at any time, but it never does."

Now, there has been a mild "correction" followed by an upsurge in both stocks and real estate. Many people actually believe that the worst is over.

However, the longer the bubbles inflate, the bigger the crash will be.

JAFO said...

Yes Yes, all this carnage and yet easy credit still available for most who want it. I read a lot of articles about lending standards tightening and yet people I know with poor to mediocre credit are still getting financing for homes they are purchasing at 5-6 times their annual salary with no or VERY small down payments, say 2% of the loan amount.


Anonymous said...

Where do I hang the "Mission Accomplished" banner?

Anonymous said...


Then change view to 5 year chart.

Anonymous said...

Just pulled 75% of my stock market value out today. I'll take a bird in the hand around 5% in my credit union than two in a bush(SM). I think it will be a slow bleed for the next 15-20 months. Although house are still selling in my area(Norfolk Va) a contractor built 4 down the street and 2 are sold.

Anonymous said...

The house of cards is America herself - a big, bloated Vegas. Well the show's up, fatboy.

Corey said...

Today's 250 pt market meltdown is further proof of a housing-driven recession I've been predicting since the beginning of the year. See all the details at

Anonymous said...

we've all made those kinds of errors

Anonymous said...

How can we dance while our beds our burning?

Call your local representatives and demand that Bush and Cheney are impeached NOW! DO IT!

Anonymous said...

Housing prices will never go down is seattle will they?

I Love Broadband over PowerLine said...

a must read

Home builders will feel subprime's pain
Tighter lending standards expected to hit sales, exacerbate inventory glut
By John Spence, MarketWatch
Last Update: 2:54 PM ET Mar 13, 2007

BOSTON (MarketWatch) -- Although it's difficult to gauge home builders' direct exposure to the imploding market for subprime loans, none are likely to be immune to the ripple effects resulting from tighter mortgage lending standards whether they sell to first-time buyers or the high-end luxury market.
"The headwinds from deteriorating credit will impact supply and pricing conditions, as well as incremental demand" in the housing market, wrote Credit Suisse analyst Ivy Zelman in a research note this week.

I Love Broadband over PowerLine said...

Late mortgage payments at 3½ year high
Late mortgage payments shot up to a 3½-year high in the final quarter of last year and new foreclosures surged to a record high as borrowers with tarnished credit histories had trouble keeping up with their monthly payments. •


Corey said...

There are 10 factors that will contribute to a recession in 2007 and guess who's number one?

Anonymous said...

They've given the address, now

I really need to know what city that's in......


Anonymous said...

The bush built supply side easy lending voodoo, without any regulations, is the same as giving a nation full of people no laws whatsoever. ROTFLMFAO

The bush built scheitt sandwich commeth. Prepare. Time is now!

Squiggly said...

"Big banks may be chum"

Here's an anecdote from Bank of America land. My niece and her husband, both newlyweds, were recruited by BoA last year and left their $150K+ brokerage jobs in NYC to work in wholesale mortgage operations in Charlotte, NC. At Christmas both were happy with their cushy new jobs in the BoA tower and the pay raises which let them afford a huge house.

Both of them got layoff notices yesterday.

FlyingMonkeyWarrior said...

Top 10 Factors Leading to Recession in 2007

By; FMW aka Infidel Woman

1. bubble bloggers

2. Fed Bank’s Marketing/Public Relations campaign sucked

3. Secret Ponzi; Word got out

4. Uncle Sam jumped in with his hand out, and that cost of sale was not figured into the Real Estate ROI

5. Food got too expensive to afford a mortgage and eating

6. Had to mail in the keys whist postage was still affordable

7. Banks can not afford home owner insurance on re-possessed houses

8. Too many CEO’s got fired and their 100 million dollar severance check's had to come from somewhere

9. Economist's Crystal Balls broke

10. Fliptards

FlyingMonkeyWarrior said...

Casey Serin, The Fed Bank and The Sub Prime Lenders did not have enough reserves for their leveraged actuality

FlyingMonkeyWarrior said...

OMG, this GIF is priceless.

Title: "A Boom But not a Bust" and the Chart is, well, just copy and paste, look at the Freddie Mac/NAR/Government spin and chuckle.
They never saw this coming and they are all "Surprised" (: