The Great Unwinding, as foretold, is finally here.
Get ready.
Bank's mortgage warning could be bad sign
Just as investors were settling into the comfort of a Goldilocks economy, they are getting a whiff of cold porridge.
HSBC Holdings, a huge British-based bank, alarmed the market this week with the type of news some analysts feared would arise throughout the hot housing market of recent years.
The HSBC announcement also reflected concerns about home equity loans, and adjustable rate mortgages that are repriced with interest rates that some homeowners cannot afford. With defaults on loan payments rising, HSBC is setting aside 20 percent more money than previously thought necessary to cover loans that might not be repaid, putting the total at more than $10 billion.
The news was especially unsettling to bond investors in the subprime market.
"When one of the largest banks in the world adjusts for defaults, it causes you to worry and wonder if maybe this is going to be worse than we expected," said Bryan Whalen, managing director of Metropolitan West Asset Management. "You wonder who's next, whether this will snowball and get bigger," with more lenders encountering trouble.
Because of that uncertainty, investors in the riskiest of mortgage securities--those rated BBB-minus--were demanding a 16 percent higher yield than the previous day, Whalen said.
22 comments:
http://finance.yahoo.com
/q/bc?s=CFHI&t=3m
Commentary: Subprime Hits a Wall
Del.icio.us Digg Technorati by P. Jackson February 10, 2007
Merrill Lynch gets cold feet: Unless you’ve been living under a rock, by far the biggest news of the week came in the form of an acknowledgement from the nation’s third-largest originator, New Century Financial Corporation, that it had not only failed to properly account for the impact of loan repurchases on its financial statements throughout 2006, but had also grossly misestimated the volume of repurchases it would be faced with.
It’s pretty clear at this point that at least one investment firm is tightening the screws on subprime credit. That firm? Merrill Lynch, recently stung by bankruptcies at both Ownit and MLN USA, who were both funded through agreements with the Wall Street giant.
What few have discussed so far about New Century’s troubles is the fact that the subprime giant is named in a master loan purchasing agreement with Merrill Lynch Mortgage Capital, among others, according to records attained by Housing Wire earlier in the week. How much of New Century’s billions of dollars worth of mortgages have been sold off via its Merrill Lynch conduit is unclear at this point, but it’s a safe bet that the number falls somewhere between ‘most’ and ‘a significant’ amount.
The doomsday scenario, at least within the mortgage industry, has never been about homeowners losing their homes. It’s always been about Wall Street getting cold feet. And with Merrill Lynch now pushing back on subprime credit, the question is whether other Wall Street banks — Credit Suisse and Barclays Capital in particular — will follow suit. If that happens, look out below.
Biting the hand that feeds: As subprime loan performance deteriorates, even firms that fund and securitize their own loans are running into problems. Case in point: HSBC, who reported this past week that loan impairments in its U.S. mortgage unit will exceed $10 billion.
The only real difference between the woes ailing both HSBC and New Century is that HSBC owns the source of its pain; HSBC purchased subprime-specialist Household International in 2003.
The award for unintentional comedy goes to: Wells Fargo COO John Stumpf, who displayed a disturbingly brilliant misunderstanding of his own company’s mortgage business earlier this week when he said that the nation’s largest subprime lender won’t run into the same problems affecting HSBC. Stumpf cited the fact that most of the subprime mortgages it issues are sold to Wall Street banks, which then assume the risks.
“They take those risks and they sell that off to investors so we never get into the chain of ownership,” he said. “It’s that simple.” The company sold off more than 72 percent of its loans during the first half of 2006, he said.
Here’s hoping that Wells hasn’t been selling its loans to Merrill Lynch.
Next week: More developments surrounding New Century, interest rate and application volume summaries, and more. Don’t subscribe? Be sure to sign up today to get our email updates delievered direct to your inbox.
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Commentary: Subprime Hits a Wall
SHHHHHHHHHH
After subprime takes it in the rear hard. I think REIT's are next. Public Storage is quite pricey!!!!!
I'm thinking of placing a September put on Fannie Mae or FirstFed tomorrow.
Any HP'er want to add your 2c, convince me one way or the other.
FirstFed was the Cali bank who's taking all those option-arm missed payments straight to their bottom line today, thus wildly overinflating earnings (and driving stock price to record high).
Fannie, well, is fannie. And the biggest bagholder I can find. Any other bagholders to consider?
Remember it's the bagholders that'll get killed in this subprime wipeout, not the issuer, even though originations (and origination income) will plummet.
thanks hp'ers. Let's make some money on this implosion.
Keith,
This mess is so intertwined I don't know how you can zero in on one lender. These loans are sliced and diced every which way and sold accross the market. I don't know how can we determing who is holding the bag? I am sure ML and others are trying so hard to hide these loans that we may never know. It would take an army of bean counters to figure it all out.
Any chance you can find a Led Zep video of "When the Levee Breaks" to put up - I think that would be an appropriate tune at this point, compelte with bone crushing drums compliments of Bonzo.
Smug
My CFC PUTs are primed and ready.
I can use the proceeds for a down-payment on a house. Imagine the irony!
:-)
Fannie has an implicit gaurantee from the US Gov, they can do no wrong b/c the taxpayers are sheep that allow their corporately-owned reps to act outside their best interests.
I wouldn't touch FNM. According to NYSE rules it should have been delisted two years ago. It's one of the central pillars of this fraud and if they ever do let it drop, they'll probably find a way to stiff you on the payout. Hell, buying puts on it probably gets your name added to a list somewhere.
Can anybody confirm this?
http://calculatedrisk.blogspot.com/2007/02/fremont-lending-changes.html
Thought I heard a giant popping sound here in CA today.
FWIW, I jumped on JUN $65 puts on FED last Friday. Just in time too, already up 40+%.
Still think there's plenty of room to drop though, I'm holding tight till at least $55.
If you ever have a few days on your hand, I recommend reading every HP post, from the first over a year ago, to the last.
What a story it probably tells.
Kids will study this mania and crash for hundreds of years to come. And for the first time, they can get so much information aobut one subject in one convenient place, written in real time as it happened.
Wow.
And I think they'd be thinking to themselves at about this point in the cycle - "Why didn't HP'ers short the lenders"
he he he
Even I don't have the guts to short stocks generally though. They're all so obviously manipulated.
Nothing to do with real estate or banking, but real cool shit about the origins of the song "When the Levee Breaks".
http://answers.google.com/answers/threadview?id=737304
The news was especially unsettling to bond investors in the subprime market.
------------
How will this effect the interest rates?
Shhh... don't tell JOEY, but with all the mortgage lenders that are going tits up, and now the mega-banks getting hit hard, I think that credit crunch he's talking about is happening or about to happen.
The pace is definitely stepping up now. Housing recession, depression, collapse, call it whatever you want. Its real and its coming to a town near you.
JAFO
implode
I too a long shot chance, but one that bet on an outcome consistent with my convictions about the housing bubble, and I was right. We've all been right if we've been pessimistic about this thing.
I bought 5 Countryslide Feb40 puts for .15 per share each, one week before option expiration, basically about the cheapest you can buy an option for.
I'm not bragging. I want to illustrate how stupidly optimistic the market is about the housing bubble, and how wrong they are, and how they will be paying for it big time.
No one expected CFC to crash to $40 in a week but it's already gone from $45 to $40 and change. Options are already worth .50 per share.
Harvest time for the bubble watchers.
Countrywide Financial Corp. and IndyMac Bancorp., the two biggest independent U.S. mortgage lenders, each fell more than 2 percent. Novastar Financial Inc. fell more than 11 percent to close at $18.31, after earlier hitting a new 52-week lost of $17.65.
Another sector hurt by the troubled subprime mortgage market is mortgage insurance. Companies like PMI Group Inc., Radian Group Inc. and MGIC Investment Corp. underwrite insurance policies that trigger when borrowers miss payments on their mortgages. If mortgage credit worsens, these companies pay out more in insurance claims.
Shares of PMI, Radian and MGIC each fell around 3 percent on Thursday.
Guys, your tips sound pretty good, but sounds late and, for a novice, intimidating. Advice?
No, it's NOT all unwinding. You
think housing isn't a necessity,
and no one wants nice houses.
Foreclosures are still a small
part of the market. No one
KNOWS what it going to happen, but
the subprime mess is just a blip
in financial history, despite
the hype.
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