Lobbyists Gone Wild: Homebuilders Continue to Get Pumped Up

Toll Brothers Inc. (TOL) was the belle of the ball yesterday with news of orders surging 42%, cancellations slowing and revenue beating analysts’ estimates. “The improvement in consumer confidence over the past year, the increasing stabilization of home prices, the decline in unsold home inventories and the reduction in buyer cancellation rates suggest that the new home market should be improving. We sense that it is, though slowly,” was how Chairman and Chief Executive Officer Robert Toll put it during the company's earnings conference call yesterday.

Were this pre-2007, there might be something to cheer in TOL’s results although as I write that, pre-2007 would probably have to be pre-2000 as Alan Greenspan’s pedal to the metal approach to monetary policy had distorted everything leading up to the bubble bursting almost as much as letting Lehman Brothers (R.I.P.) fail pushed the fear level as high as the bubble had risen, taking the world’s markets to equal but opposite extremes.

With the passing of the most recent housing related stimulant granting tax breaks to many in the home construction industry already adding support to names in this sector, do TOL’s earnings results offer another example of “lobbyists gone wild” and the continued pandering for votes by Congress? While everyone is worried about Goldman Sachs (GS) and Berkshire Hathaway (BRK.A) buying tax credits from Fannie Mae (FNM) and Freddie Mac (FRE), the homebuilders snaek in and snatch tax loss extensions in broad daylight.

Joe Dear, CIO for CalPERS, might have said it best recently when he derided the roll of lobbyists as “sharks pleading on behalf of swimmers.”

With recent reports that 20% of mortgages guaranteed by the Federal Housing Administration (FHA) in 2007 and 2008 are defaulting, it appears that the corner of the carpet that things are being swept under might have changed but that the sweeping is still going on. Proof that lessons were not learned is shown by similar default rates for the period of 2005-2006 (20%) when the bubble seemed to have gained its own inertia and was sucking mortgages in instead of having to have them pumped out.

In addition to the losses tied to the eventual defaults on the mortgages it guaranteed, the FHA is also suffering from mortgages it invested in. Write downs on $1.04BN in the value of private-label MBS, the kind not backed by any GSE, resulted in the booking of a $165MM loss on these types of securities by the FHA in 3Q09; a veritable one-two punch that will, once again, have the taxpayer being dragged from the ring.

The charade continues as the blame placed on the rating agencies for the alchemy they were paid handsomely to perform now has some issuers going the non-ratings route. It was reported in the WSJ recently that Dallas based Highland Capital is in the process of creating three collateralized debt obligations totaling approximately $500MM and will come to market without the blessing, or curse, of a rating by Moody’s or S&P.

And in the “it’s not just for hedge funds anymore” category, state insurance regulators last Thursday approved a new methodology for judging risk in insurers’ residential mortgage portfolios that eliminates the use of ratings from the Moody’s and S&P crowd.

“We have a model in front of us that is basically broken. We are under an obligation to fix something this is broken,” is how Matti Peltonen, an insurance regulator in New York, put it recently.

Does this all appear a bit surreal, or am I just trying to be too damned logical?

The CDS spreads for the homebuilders and others in the construction supply chain began narrowing in the middle of last week, possibly in anticipation of the extension of the home-buyer credit and tax breaks about to be granted to the builders. The stocks have moved higher accordingly.

Comments

[William Leg...:]

As an aside, nothing increasing by 42% is still nothing. There is no mention of whether the reported increase includes accounting holdovers, a "clever" way to artificially boost the current numbers and jack up the stock price for existing shareholders looking to bail.

Nov 16 04:22 PM