Why We're Still in the Early Innings of the Bursting of the Housing and Credit Bubbles - And Implications for MBIA and Ambac

We’ve been working on nonstop for the past two weeks on a presentation entitled: “Why We Are Still in the Early Innings of the Bursting of the Housing and Credit Bubbles – And the Implications for MBIA and Ambac.” Amherst Securities provided us with some incredible – and very sobering – data that leads us to the following conclusion (see page 19):

In summary, today we are only seeing the tip of the iceberg: an enormous wave of defaults, foreclosures and auctions is just beginning to hit the United States. We believe it will get so bad that large-scale federal government intervention is likely.

Another implication, covered starting on page 57, is that MBIA and Ambac (which remain among our biggest short positions) are in big trouble.

To see the presentation, click here and, once on the web page, click the box on the right that says “Read Whitney Tilson’s Presentation on the Mortgage Crisis & the Implications for Bond Insurers”.

Comments

[User 155868]

You should be ashamed of yourself for being a whore for a linked site. How much are they paying you? Do you get paid by the click? How about balanced and fair reporting? Too lazy to write the article yourself? How about researching both side of the story instead of rehashing somebody else (mostly inacturate) work. I'm done with Seekingalpha. Useless.

2008 Mar 08 05:51 PM

[BxCap]

Great presentation Whitney. Thanks for allowing the average investor the access to such valuable information.

2008 Mar 08 06:03 PM

[BxCap]

Sorry about User 155868. It is obvious that they did not read Bill Ackman's original November 2007 presentation on the monoline insurers. Your presentation approached the situation from a less generalized view and shown the holdings as close to source as possible, leaving no room for doubt.

2008 Mar 08 06:07 PM

[Serge]

Your argument seems to be that real estate prices will experience further downward pressure than what has already been priced in by the equity markets. Are you smarter than the market? I doubt it.

2008 Mar 08 07:34 PM

[Investulator]

Many thanks for your presentation, Whitney.

Yikes! It's easy to become inured to the steady drone of bad news in the financials, until one is presented with such a salient example quantifying how much force is left in this storm.

Interesting would be your thoughts on the potential form and consequence of the massive Federal intervention you portend.

2008 Mar 08 08:02 PM

[Igor The Great]

Look at the performance of TILFX and TILDX before paying any attrention to any of Tilson blogs.

2008 Mar 08 08:05 PM

[GreenInvestor]

Thank you for access to the article. Where does Citigroup fit on Slide 50?

2008 Mar 08 08:54 PM

[Shmoop]

Thanks for a great presentation. Somebody worked very hard to put it together!

Ditto on Citibank as GreenInvestor above. It's missing from page 50 - it probably belongs in the top spot.

2008 Mar 08 09:46 PM

[mavericks]

Though I found the presentation compelling, I do think this is a classic example of talking one's book and trying to take advantage of a dire situation. Perhaps Mr. Tilson is trying to make up for his lack of performance in his mutual funds which have dramatically underperformed the market (though better in '08 since I'm sure he is using some hedging strategies). Still, I get the feeling that if Mr. Tilson were a mortgage broker, he would be knee deep in the muck which now covers our landscape.

2008 Mar 09 10:58 AM

[John Lounsbury]

Does anyone remember the Federal Land Bank? During the great depression, the government took ownership of real estate, largely farms, that went into default. If this housing/credit bubble becomes a catastrophe, the same thing could happen again. In the 1930's to early 40's, some real estate was bought from the government for as little as 10-20% on the dollar (compared to 1920's and 1950's prices).

This would be a great cycle of wealth destruction, followed by a supercycle of wealth creation.

2008 Mar 09 11:03 AM

[pochovilla]

A fabulous piece of work by a dedicated team. The work here is totally out of the reach of most analyst organizations. I know the moral of the story is to support short positions. But there chart on page 3 presents an even more revealing story of housing affordability. Using some common sense standards back pre-'97 and calculating Housing affordability by today's stricter standards indicates that $42K pre tax income with $15K down (15%) monthly debt between $400-$800 (car loan that never ends) including closing costs taxes and insurance, a fixed 30 year rate of 6.5-8% and bingo you can afford between $120-171K for a new home, not even the $217K home in the chart. So who will buy those $325K houses? Someone that has $29K for closing and $75.9 K annual income with a 6.5% 30 yr mortgage. THIS IS VERY UGLY BUT REAL

2008 Mar 09 12:46 PM

[Tedspick]

Many websites offer a lot of generalized opinion but the reference suggested in the main posting here is full of remarkable and convincing detail - strongly urge readers to take the time and read the analysis - this is an example why I have learned to appreciate SEEKING ALPHA!

2008 Mar 09 12:58 PM

[mavericks]

Who will buy those $325K homes? Plug in dual income buyers (pretty common) and all of a sudden your model works fine. I live in a metro area of the NW and $250-$450K homes still move very quickly if priced correctly. It's the $500K and above market which is suffering the most.

2008 Mar 09 12:58 PM

[wunderhof]

When the current calender period CDS's expire, can't the insurers decline to re-up? Wouldn't MBIA, Ambac, and the others be able to argue for rescinding the current swaps since the buyers materially misrepresented the default quality of the objects of the coverage? That won't make the bad loans good but it would avoid the catastrophic effects of the bond insurers collapse.

2008 Mar 09 01:04 PM

[chinooking]

i have to agree with mavericks, you absolutely have to figure double income,also 42,000 is a little weak for income.afterall 20% of us work for the gov.and their average is a hell of a lot higher than that

2008 Mar 09 02:49 PM

[jtb3]

Mr. Tilson -

It is clear MBIA and Ambac will take losses. However, it is unfair to not calculate the NPV of the losses. MBIA and Ambac will only have to pay out losses over time (in the case of these mortgages, 30 years or less), not all at once. In the meantime, they will be able to use their "losses incurred but not paid" as float for investment just like any other P&C company. Not to mention, they still are due defferred premium revenue. This again will reduce their "net-net losses." Only by calculating the NPV of the return on float, the actual payment of losses, and deferred premium revenue will you come up with an accurate representation. This value is markedly LESS than your and Ackman's gross and net losses in your presentations.

2008 Mar 09 03:08 PM

[zermux]

There is now a cocktail called "Ambac on the rocks", it is AMerican Bourbon And Coke. After you make it you continue to dilute with coke whenever you feel like it. There is a lot of truth in humour.

2008 Mar 09 03:28 PM

[pochovilla]

Let's try this again for the DINK's.
A $500K home purchase price with 10% down on a 30 yr 6.5% fixed rate with debt to income at 45% requires $69,500 at closing financing a balance of $450K with a monthly income of $11,389 or $137,000 annually. The P3 chart shows 1/1/06- 6/1/07 $40 K annual income and pushing debt to income to 55% + provided borrowing power for a $340K + home. Without all of the detail in the P3 calculation that says $60K annual income could push the borrowing power to $500K.
Does anyone else see the disconnect? Where would a $60K earner get $69,500 for closing? and how long could the charade last when pretax income needs to be over $137K. Let's just forget about the incremental escalating cost of taxes, insurance and utilities that are paid with after tax dollars and become additional burdens within 2-3 years after move-in.

2008 Mar 09 10:36 PM

[Michael Demaray]

Whitney, thank you for your presentation. I have a question regarding page 71 -- the table states that it represents "performing" loans. How is performing defined here? Less than 90 days delinquent? I am trying to square some of the numbers elsewhere with these tables. Thank you.

2008 Mar 09 10:56 PM

[jurp]

Houses have gone from 2 times annual income (philadelphia employed engineer) down to the Long Island Levittown cape cod's for 2.3 starting engineer's annual wage.
Fast forward to today's market the number is 5 times the starting wage.

Therefore, a house is only worth about 150k. Smart people should rent.

2008 Mar 09 11:41 PM