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.

[BxCap]

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

[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.

[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.

[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.

[Igor TheGreat]

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

[GreenInvestor]

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

[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.

[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.

[jlounsbury59]

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.

[ponchovilla]

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

[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!

[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.

[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.

[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

[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.

[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.

[ponchovilla]

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.

[MichaelDemaray]

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.

[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.

[jjason]

To Whitney, I have figured out what the problems are by reading articles on Seeking Alpha and other news sources. I don't have to download your report or waste my time in Pasadena. I'm going on another vacation. Most of the people shorting stocks benefit from other people's problems. I would make short selling illegal.

There are many, many small businesses in the US that never go public. These businesses provide us with goods and services that we need. It's called CAPITALISM. We do not need short sellers. Short sellers do not produce anything except heartbreak for the poor souls who own stocks in companies that are in trouble.

[beachtango]

Why can't you ever say anything positive about ABK or MBI? Why is everything you say so biased and transparently malicious? At the very least state both sides of argument...theirs and yours! Like the following article by the street.com..:

The embattled Armonk, N.Y.-based bond insurance outfit, which has raised some $2.6 billion in capital from private and public investors to appease Standard & Poor's and Moody's Investors Service, believes that it can snatch up new insurance and reinsurance policies from smaller firms that might be facing runoff -- a process in which they collect fees on policies they already insure, but pursue no new business -- or are otherwise hampered, CEO Jay Brown tells TheStreet.com.

"We have a clear opportunity. A number of companies look like they are going to go into runoff," Brown notes.

For his part, Brown has been scrambling since returning to MBIA as CEO last month to breathe new life into the world's largest bond insurance company. MBIA, the largest financial guarantor, and its next largest rival Ambac Financial(ABK - Cramer's Take - Stockpickr) have been swept up in perhaps the most harrowing financial turmoil the debt insurance sector has experienced in three decades. The guarantors have also been the target of short-selling hedge fund manager Bill Ackman, who has lobbed frequent verbal grenades at the companies through the press and his writings.

"Look at all the companies affected the most and you look at how much capacity the firms that have underwritten insurance. They don't have enough capacity," Brown says. Without being explicit, Brown said a number of the smaller guarantors may be susceptible to falling into runoff.

Still, restoring confidence among shareholders continues to be an uphill battle.

MBIA has so far underwritten "very little new business," according to a recent filing with the Securities and Exchange Commission. But Brown is optimistic that the pall surrounding the company will dissipate in the wake of S&P and Moody's affirming MBIA's pristine triple-A rating last month. The CEO also noted that MBIA wrapped up a public finance insurance deal for a $377 million toll road project. But the insurer will likely face further writedowns next quarter in areas tied to mortgage-tainted securities, including home equity mortgages that have dropped recently.

As a part of its restructuring efforts, MBIA announced late Thursday that it was cutting 48 positions, as it retools its structured finance insurance business. Brown's larger restructuring plan involves splitting up MBIA's more risky structured finance business from its safer, more conservative job of insuring debt for municipalities. The CEO has said the split may take up to five years to complete.

Some of the new staffers MBIA plans to hire in the near term will be part of a strategic financial group that will help the firm achieve its goal of underwriting conservative insurance policies. MBIA plans to steer clear of funky structured debt and staffers in its strategy group will help it figure out ways separate out its structured book of business.

Brown has said publicly that splitting up the structured book from the municipal business should help it secure future funding at attractive rates and help restore the guarantor's image to potential clients. At this point, MBIA is trading at a more than 80% discount to its share price a year ago.

MBIA has been adamant about its view that it has sufficient capital -- about $17 billion -- to pay claims should a deteriorating economy result in debt defaults.

Tilson , I hope you're taking notes...

[beachtango]

Why can't you ever say anything positive about ABK or MBI? Why is everything you say so biased and transparently malicious? At the very least state both sides of argument...theirs and yours! Like the following article by the street.com..:

The embattled Armonk, N.Y.-based bond insurance outfit, which has raised some $2.6 billion in capital from private and public investors to appease Standard & Poor's and Moody's Investors Service, believes that it can snatch up new insurance and reinsurance policies from smaller firms that might be facing runoff -- a process in which they collect fees on policies they already insure, but pursue no new business -- or are otherwise hampered, CEO Jay Brown tells TheStreet.com.

"We have a clear opportunity. A number of companies look like they are going to go into runoff," Brown notes.

For his part, Brown has been scrambling since returning to MBIA as CEO last month to breathe new life into the world's largest bond insurance company. MBIA, the largest financial guarantor, and its next largest rival Ambac Financial(ABK - Cramer's Take - Stockpickr) have been swept up in perhaps the most harrowing financial turmoil the debt insurance sector has experienced in three decades. The guarantors have also been the target of short-selling hedge fund manager Bill Ackman, who has lobbed frequent verbal grenades at the companies through the press and his writings.

"Look at all the companies affected the most and you look at how much capacity the firms that have underwritten insurance. They don't have enough capacity," Brown says. Without being explicit, Brown said a number of the smaller guarantors may be susceptible to falling into runoff.

Still, restoring confidence among shareholders continues to be an uphill battle.

MBIA has so far underwritten "very little new business," according to a recent filing with the Securities and Exchange Commission. But Brown is optimistic that the pall surrounding the company will dissipate in the wake of S&P and Moody's affirming MBIA's pristine triple-A rating last month. The CEO also noted that MBIA wrapped up a public finance insurance deal for a $377 million toll road project. But the insurer will likely face further writedowns next quarter in areas tied to mortgage-tainted securities, including home equity mortgages that have dropped recently.

As a part of its restructuring efforts, MBIA announced late Thursday that it was cutting 48 positions, as it retools its structured finance insurance business. Brown's larger restructuring plan involves splitting up MBIA's more risky structured finance business from its safer, more conservative job of insuring debt for municipalities. The CEO has said the split may take up to five years to complete.

Some of the new staffers MBIA plans to hire in the near term will be part of a strategic financial group that will help the firm achieve its goal of underwriting conservative insurance policies. MBIA plans to steer clear of funky structured debt and staffers in its strategy group will help it figure out ways separate out its structured book of business.

Brown has said publicly that splitting up the structured book from the municipal business should help it secure future funding at attractive rates and help restore the guarantor's image to potential clients. At this point, MBIA is trading at a more than 80% discount to its share price a year ago.

MBIA has been adamant about its view that it has sufficient capital -- about $17 billion -- to pay claims should a deteriorating economy result in debt defaults.
NEW YORK, March 11 (Reuters) - U.S. bond insurers' losses are likely much lower than what the troubled firms have reported when marking their holdings to market prices, Moody's Investors Service said on Tuesday.

Shares of bond insurers like MBIA Inc (MBI.N: Quote, Profile, Research) and Ambac Financial Group (ABK.N: Quote, Profile, Research), which guarantee payments on roughly $2.4 trillion of debt securities, have fallen precipitously on worries about billions of dollars of claims on mortgage-related bonds they may have to pay out.

In the last six months, Ambac shares have fallen 79.4 percent and MBIA shares have slid 81 percent.

But Moody's approach to rating the guarantors involves trying to determine the "real economic loss" the firms will sustain, as opposed to mark-to-market losses, Moody's analyst Ted Collins said in response to a question on a conference call.

Such loss estimates are "lower than the mark to market that's being recorded," Collins said.

Accounting firms are putting increasing pressure on financial firms to mark their holdings to observable market prices. That has frustrated some firms, which argue that volatile short-term prices can exaggerate actual losses.

If the losses the bond insurers face turn out to be less than expected, that could provide some relief for investors.

Insurers like Ambac have had to write down the value of billions of dollars of credit derivatives, but these write-downs may not necessarily translate into actual losses.

As a result, some players are still confident the firms have enough capital and available funds to pay expected claims.

Tillson, Once again please try to write both sides of stories not just your own...make things interesting at least....

[BamboozledAgain]

Thank you for your hard work, Whitney.

[Kurtis]

MBI just had all it's business taken away by Moody's plan to rate Munis's the same as corporate debt. MBI is but a debt ridden empty hulk. It will be interesting to see how MBI's CEO puts a positive spin on this developement. To all those so called "investors" who are still buying MBI stock it wont be long before they can take that stock and wall paper their room with it. BUYER BEWARE!